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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended SEPTEMBER 30, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period __________________
Commission File No. 0-9539
S E A R C H C A P I T A L G R O U P, I N C.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1356819
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
700 NORTH PEARL, SUITE 400
PLAZA OF THE AMERICAS
NORTH TOWER, LOCK BOX 401
DALLAS, TEXAS 75201-7490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 965-6000
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. [ ]
AS OF JANUARY 8, 1996, THERE WERE 8,696,141 OUTSTANDING SHARES (WITH AN
AGGREGATE MARKET VALUE OF $9,783,159) OF REGISTRANT'S $.01 PAR VALUE COMMON
STOCK, AND THE AGGREGATE MARKET VALUE OF SHARES HELD BY NON-AFFILIATES OF THE
REGISTRANT WAS $6,686,593 (BASED ON THE AVERAGE OF THE HIGH AND LOW SALE PRICE
AND 5,943,638 SHARES HELD BY NON- AFFILIATES).
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PART I
ITEM 1. BUSINESS
GENERAL
Search Capital Group, Inc. (herein called "Search" and together with its
consolidated subsidiaries called the "Company") is an industry specific
financial services company specializing in the purchase, management, and
securitization of used motor vehicle receivables. These receivables are
secured by medium-priced, used automobiles and light trucks which typically
have been purchased by consumers with substandard credit histories at retail
prices ranging from $5,000 to $10,000. The Company purchases these receivables
from a network of unaffiliated new and used automobile dealers (the "Dealer
Network") at discounts ranging generally from 40% to 55% of total unpaid
installments, which installments include both principal and interest. The
members of the Dealer Network generate the receivables and offer them for sale
on a non-exclusive basis to the Company. See "Principal Business."
Prior to November 1994, the Company financed its receivables purchasing
business primarily through the private and public sale of securitized,
interest-bearing notes (the "Notes") issued by wholly owned subsidiaries
organized specifically for this purpose (the "Fund Subsidiaries") and through
reinvestment of operating cash flow. Each offering of Notes was issued by a
newly organized subsidiary without recourse to Search or its other
subsidiaries. See "Financing." The Notes offered by each of the Fund
Subsidiaries were not rated by a national credit agency.
After November 1994, due primarily to higher than expected losses in
the collection of its receivables, the Company temporarily abandoned its
securitization activities. In the first half of 1995, the Company developed a
reorganization strategy. In August 1995, pursuant to that strategy, Search's
existing Fund Subsidiaries filed for protection and reorganization under
Chapter 11 of the Bankruptcy Code. See "Subsidiary Bankruptcy Filings." These
Fund Subsidiaries and Search, as a co-proponent are attempting to complete a
plan of reorganization in these bankruptcy proceedings. See "Joint Plan of
Reorganization." On November 30, 1995, Search obtained $3,000,000 of interim
funding commitments from Hall Financial Group, Inc. ("HFG") that were necessary
to continue Search's operations pending completion of the plan of
reorganization. Search intends to expand and re-focus its receivables
purchasing activities upon completion of the plan of reorganization. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEVELOPMENT OF PROBLEM AND REORGANIZATION STRATEGY
In July 1994, management of the Company initially announced unanticipated
adverse trends in the collection and repossession rates for its motor vehicle
receivables. Search's stock price sharply declined, and Search was sued in a
class action suit asserting securities fraud. See "Item 3. Legal Proceedings."
In November 1994, Search's President and Chief Executive and its independent
auditing firm resigned. See "Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure." At that time, new interim
management determined to sharply reduce all receivables purchasing activities
for the Company while attempting to evaluate and, if necessary, modify or
remedy purchasing and collection procedures. In December 1994, the Company's
interim management and new independent auditing firm determined that the
Company should change its basic accounting principle by adopting SFAS 114
effective for the fourth quarter of its fiscal year ended September 30, 1994.
This change caused the Company to recognize substantial losses for fiscal year
1994 resulting in a capital deficit for the Company. As a consequence, in
March 1995, Search's Common Stock was delisted from trading on the NASDAQ Stock
Exchange.
Under the Company's new President, who was appointed in January 1995,
the Company resumed normal levels of receivables purchasing activities but at
the same time tightened certain purchasing procedures where permitted.
Management was constrained from any substantial changes in purchasing criteria
for receivables purchased for its public Fund Subsidiaries due to restrictions
set forth in the trust indentures governing the indebtedness of those
subsidiaries. While collection and repossession rates on newly purchased
receivables have improved in 1995, the Company has been unable to recover
sufficiently to earn a profit in any quarter of 1995.
During the first calendar quarter of 1995, it became apparent to the
Company's management that the Company's Fund Subsidiaries would be unable to
satisfy in full their respective Notes upon maturity. Rather than abandon the
holders of the Notes (the "Noteholders") to recover whatever might eventually
be recovered through collection of receivables, management determined to
attempt to reorganize Search and its Fund Subsidiaries by converting the Notes
into Search equity, re-focusing the reorganized Company's purchasing activities
toward higher quality receivables and using the new equity of
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the reorganized Company to obtain new debt financing for future growth. In May
1995, the Company announced a preliminary outline of a plan to convert the
approximately $68 million debt owed by its Fund Subsidiaries into equity in
Search. To this end, the Company engaged the investment banking firm of Alex.
Brown & Sons to develop a formal detailed plan of debt-to-equity conversion.
To facilitate the development of this plan, the Company also formed an ad hoc
committee of Noteholders (the "Ad Hoc Committee") in all eight of its Fund
Subsidiaries to review the proposals of Alex. Brown & Sons and provide input
and recommendations for the plan.
SUBSIDIARY BANKRUPTCY FILINGS
History of Bankruptcy Proceedings. In order to effect the debt-to-equity
conversion plan proposed by Alex. Brown & Sons and supported by the Ad Hoc
Committee, the Company caused each of the Fund Subsidiaries to file for
protection and reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Accordingly, on August 14, 1995, Automobile Credit Finance, Inc., Automobile
Credit Fund 1991-III, Inc., Automobile Credit Finance 1992-II, Inc., Automobile
Credit Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit
Finance V, Inc., Automobile Credit Finance VI, Inc. and Automobile Credit
Partners, Inc. (collectively the "Bankrupt Subsidiaries"), which are
wholly-owned subsidiaries of Search, each filed a petition in the U.S.
Bankruptcy Court in the Northern District of Texas, Dallas Division ("Court"),
seeking protection under Chapter 11 of the U.S. Bankruptcy Code ("Code"). These
cases have been consolidated as one case for administrative purposes (Case No.
395-34981-RCM-11). Search has not sought protection under the Code but is a
proponent, together with the Bankrupt Subsidiaries, of a joint plan of
reorganization of the Bankrupt Subsidiaries (the "Joint Plan"). On August 25,
1995, an organizational meeting was held by the U.S. Bankruptcy Trustee to
select a committee to represent the Noteholders during the bankruptcy
proceedings. This committee, as chosen by the U.S. Bankruptcy Trustee, is
known as the official Creditors Committee (the "Committee") and is comprised of
eleven individuals who hold Notes issued by the Bankrupt Subsidiaries or who
represent Noteholders. The Committee has retained a law firm to represent
them.
To date, through a series of cash collateral hearings through which the
Court monitors the use of funds during the bankruptcy proceedings, the Court
has allowed the Bankrupt Subsidiaries to continue operating in the ordinary
course of business. Subsequent to the formation of the Committee, the
Committee, as well as some Noteholders not on the Committee, filed with the
Court formal objections to the Joint Plan as originally proposed in August 1995
by the Company and the Bankrupt Subsidiaries. Search commenced negotiations
with the Committee to attempt to obtain the Committee's approval of the terms
of the Joint Plan. In October 1995, Search reached a preliminary agreement of
understanding with the Committee. This preliminary agreement was subject to
the completion of detailed documentation and required that significant
amendments be made to the terms of the Joint Plan as originally filed with the
Court. In December 1995, Search and the Committee filed an agreed form of the
Joint Plan with the Court. Search and the Committee also reached agreement on
the form of the related disclosure statement (the "Disclosure Statement"),
which describes the terms of the Joint Plan, Search, the Bankrupt Subsidiaries
and the rights of the Noteholders and other claimholders in the bankruptcy
proceedings. The Disclosure Statement was approved by the Court in December
1995. The Disclosure Statement, together with a copy of the consensual Joint
Plan and ballots for registering votes for acceptance or rejection of the Joint
Plan, were mailed in late December 1995 to the Noteholders and other
claimholders in the Bankrupt Subsidiaries. The final date for voting on
confirmation of the Joint Plan is expected to occur in late January 1996.
Confirmation and Effectiveness of Joint Plan. Final effectiveness of
the Joint Plan as to each Bankrupt Subsidiary is dependent on its confirmation
by the Court, which will occur, if at all, after a vote of the Noteholders, who
hold essentially all of the indebtedness of the Bankrupt Subsidiaries. The
Noteholders of each Bankrupt Subsidiary will be entitled to vote for or against
the Joint Plan, with respect to claims represented by their Notes, as a
separate creditor class. A class of Noteholders (i.e. the Noteholders of a
particular Bankrupt Subsidiary) will be deemed to have accepted the Joint Plan
if votes for acceptance are received from Noteholders in that class (i) holding
Notes representing at least two-thirds in amount of the Notes of such class
voting on the Joint Plan and (ii) comprising more than one-half in number of
Noteholders in the class voting on the Joint Plan. The final terms of the
Joint Plan, if they differ in any material fashion from the proposed terms,
will be contingent on, among other things, approval by Search's Board of
Directors. Confirmation of the Joint Plan is also conditioned on the approval
by Search's shareholders of an increase in the authorized number of shares of
Search's Common Stock and Preferred Stock to levels adequate to meet the
requirements of the proposed Joint Plan.
JOINT PLAN OF REORGANIZATION
There can be no assurance that the Joint Plan as to each Bankrupt
Subsidiary will become effective or that the Joint Plan as to each Bankrupt
Subsidiary will be confirmed on essentially the same terms as described below.
Consequently, the following summary should not be relied upon as an accurate
description of the final, confirmed Joint Plan for each of the
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Bankrupt Subsidiaries. Upon final confirmation, the Company will file a Form
8-K Current Report with the Securities and Exchange Commission in which the
final terms will be described.
Plan Options for Secured Claims of Noteholders. If confirmed with
respect to a particular Bankrupt Subsidiary, the Joint Plan, as currently
proposed, provides that Noteholders voting to accept the Joint Plan may choose
one of two options (the "Plan Options"). Under one of the Plan Options (the
"Search Equity Option"), the Noteholders would receive with respect to the
secured portion of their claims the issuance by Search of a combination of
shares of Common Stock and shares of a new series of Convertible Preferred
Stock ("New Preferred Stock") and cash dividends accrued on their New Preferred
Stock from July 1, 1995 to the effective date of the Joint Plan. Under the
other Plan Option (the "Collateral Option"), the Noteholders would receive with
respect to the secured portion of their claims distributions of the proceeds of
the continued collection or the sale of the motor vehicle receivables securing
their Notes. As to any one Bankrupt Subsidiary, the selection by the
Noteholders of either Plan Option would be implemented on a Noteholder-by-
Noteholder basis. If the Joint Plan is confirmed as to a Bankrupt Subsidiary,
those Noteholders of that Bankrupt Subsidiary who vote against the Joint Plan
will not be entitled to select between the Search Equity Option and the
Collateral Option but will receive treatment under the Search Equity Option.
If the Joint Plan is not confirmed as to a Bankrupt Subsidiary, that Bankrupt
Subsidiary will continue to conduct its business in the ordinary course,
although the exclusivity period with respect to proposal of a reorganization
plan in its bankruptcy proceedings will terminate.
Search Equity Option. Under the Search Equity Option, as currently
proposed, the pro rata portion of the assets of the Bankrupt Subsidiaries
attributable to Noteholders electing the Search Equity Option will be
transferred to Search. Search would ultimately issue, subject to adjustment to
prevent dilution, to the former Noteholders electing the Search Equity Option
0.2823 shares of New Preferred Stock and 0.3109 shares of Common Stock for each
$1.00 of a Noteholder's secured claim. The number of shares to be issued will
be adjusted on a fully diluted basis to be determined by agreement of the
financial advisors of the Company and the official Creditors Committee of the
Bankrupt Subsidiaries as of effectiveness of the Joint Plan or, if no
agreement can be reached, by the Court. Such adjustment will be made to the
extent necessary so that the Noteholders would receive New Preferred Stock and
Common Stock equal to 75% of the value of all shares of New Preferred Stock,
Common Stock, 12% Preferred Stock, other warrants, stock options and rights
then outstanding, or agreed to be issued by the Company, as if all of the
Noteholders had elected the Search Equity Option. No adjustment would be made
as a result of any securities of the Company obtained by HFG under the Funding
Agreement, or any Warrants to be issued for unsecured claims. See "HFG
Funding Agreement."
Collateral Option. Under the Collateral Option, a pro rata share of
the assets of the Bankrupt Subsidiaries attributable to Noteholders electing
the Collateral Option will be transferred to a newly established trust (the
"Noteholders Trust") to be held for the benefit of such Noteholders. These
assets consist primarily of cash, motor vehicle receivables and repossessed
motor vehicles. The transferred cash net of a pro rata share of administrative
expenses will be immediately distributed to the Noteholders. The trustee will
collect the motor vehicle receivables held by the Noteholders Trust and make
regular distributions to the Noteholders. In the alternative, the motor
vehicle receivables will be sold by the trustee to the highest bidder if the
trustee estimates that their sale proceeds would be greater than the present
value of the collection proceeds from the Notes. The net proceeds from the
sale will be distributed to the Noteholders.
Determination of Secured Claims of Noteholders. With respect to each
Bankrupt Subsidiary, the total amount of the allowed secured claims for the
Noteholders of that Bankrupt Subsidiary will equal 120% of the present value
(the "Present Value") of the Bankrupt Subsidiary's "Net Cash Flow," using a 15%
discount rate. The "Net Cash Flow" for each Bankrupt Subsidiary is the
estimated periodic cash distributions that would be made by the Bankrupt
Subsidiary to its Noteholders assuming it continued to collect its receivables
at the historical average collection rate experienced by Search and the
Bankrupt Subsidiaries in the collection of their receivables. The Present
Value has been determined as of August 1, 1995. The total Present Values for
all Bankrupt Subsidiaries is $44,367,048.
Unsecured Claims of Noteholders. The unsecured portion of the claims
of the Noteholders consists of the difference, (i.e. $16,077,204) between
total principal and interest due the Noteholders of $69,317,661, and the amount
of the secured claims of $53,240,457. All Noteholders of Bankrupt Subsidiaries
for which the Joint Plan is confirmed, with respect to the unsecured portion of
such Noteholders' claims, and any other holders of unsecured claims against
such Bankrupt Subsidiaries, will receive from Search a pro rata share of five
year warrants to purchase an aggregate of 5,000,000 shares of Common Stock (the
"Warrants"). The exercise price of the Warrants will be $2.00 during the first
year and increase by $0.25 per year over the term of the Warrants. All
Warrants not exercised prior to expiration will be redeemed by Search at a
price of $0.25 per Warrant.
The Joint Plan also requires the establishment of a trust (the
"Litigation Trust") for the benefit of the holders of unsecured claims of
Bankrupt Subsidiaries for which the Joint Plan is approved. The trust will be
established with a total
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funding of $350,000 to be supplied pro rata from the confirming Bankrupt
Subsidiaries. The Litigation Trust will be authorized to pursue any claims and
causes of action of each Bankrupt Subsidiary for which the Joint Plan is
approved. Any proceeds will be distributed pro rata to unsecured claim
holders. The Litigation Trust will automatically terminate if the Common Stock
trades at an average price of $2.50 per share for 30 consecutive trading days
during the first year following effectiveness of the Joint Plan.
Terms of New Preferred Stock. As a condition to confirmation of the
Joint Plan, the Board of Directors must establish a new series of Preferred
Stock to be designated as the "9%/7% Senior Convertible Preferred Stock" (the
"New Preferred Stock"). The New Preferred Stock would rank on a parity with
the 12% Preferred Stock as to rights to dividends and liquidation preferences.
The Joint Plan, as currently proposed, specifies certain of the basic
preferences, rights and powers of the New Preferred Stock. The final terms of
the New Preferred Stock will be established by Search's Board of Directors in
the Certificate of Designations to be filed with the Delaware Secretary of
State. Any material changes in the Joint Plan may result in changes in the
terms of the New Preferred Stock.
Dividends. Holders of the New Preferred Stock would be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available therefor, dividends at a per annum rate of (i) $0.315 per share until
the end of the twelfth (12th) full calendar quarter following payment of the
first dividend on the New Preferred Stock ("9% End Date"), and (ii) $0.245 per
share after the 9% End Date. Dividends on the New Preferred Stock would accrue
from July 1, 1995, which was the date through which the Bankrupt Subsidiaries
have paid accrued interest to the Noteholders. The dividends would be payable
quarterly, with the first payment being due 20 days following the date that the
Court's confirmation of the Joint Plan becomes final. The Company may pay
dividends through distributions of Common Stock under certain circumstances.
Conversions. Holders of outstanding shares of the New Preferred Stock
would be able to elect at any time to convert their shares into Common Stock.
The conversion ratio would be 2.0 shares of Common Stock for each share of New
Preferred Stock. In addition, up to 50% of the outstanding shares of New
Preferred Stock could be mandatorily converted into shares of Common Stock at
the option of Search if its Common Stock trades (i) at a price of $4.25 per
share or higher on any 20 trading days in a period of 30 consecutive trading
days between the second and third anniversaries of the effective date of the
Joint Plan, or (ii) at a price of $3.50 or higher on any 20 trading days in a
period of 30 consecutive trading days after the third anniversary of the
effective date of the Joint Plan. Finally, on the seventh anniversary of the
effective date of the Joint Plan, all of the outstanding shares of New
Preferred Stock would be mandatorily converted into shares of Common Stock.
Liquidation Rights. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of Search, the holders of the New
Preferred Stock would be entitled to be paid $3.50 per share plus all accrued
and unpaid dividends thereon before any distribution or payment is made to the
holders of Common Stock.
Voting Rights. Each share of New Preferred Stock will be entitled to
exercise the same voting rights as holders of Common Stock and will have one
vote per share. Upon effectiveness of the Joint Plan, subject to any lenders'
negotiated rights to appoint new board members, the initial board of directors
of Search will consist of eight members, which will include the six current
members of Search's Board of Directors and two additional directors selected by
Search from qualified director nominees submitted by the Committee. The
duration of the terms of the two new directors will be three years for one
director and two years for the other director. These two new members will be
appointed to membership on the Compensation Committee of the Board for a one
year period after the effective date of the Joint Plan, and approval of the
Compensation Committee will be required for the issuance, granting terms and
conditions of all warrants, stock options, bonuses and forms of compensation
for certain of Search's officers and directors for the same period. If Search
is in default in the payment of the first two quarterly dividends following the
effective date of the Joint Plan or any four consecutive quarterly dividends on
the outstanding New Preferred Stock, the holders of outstanding New Preferred
Stock would be automatically entitled to an additional vote per share and given
the right to elect two-thirds of Search's Board of Directors. The affirmative
vote or consent of the holders of more than 66-2/3% of all outstanding shares
of New Preferred Stock, voting as a separate class, would be required (i) to
amend, alter or repeal any provision of the Certificate of Designations
establishing the New Preferred Stock to adversely affect the relative rights,
preferences, qualifications, limitations or restrictions of the New Preferred
Stock or (ii) to effect any reclassification of the New Preferred Stock. The
affirmative vote or consent of the holders of more than 50% of all outstanding
shares of New Preferred Stock, voting as a separate class, would be required to
approve any merger of Search with another company when Search is not the
surviving entity or any sale of more than 50% of Search's assets.
Subsequent Issuances of Securities. Search will be prohibited from
issuing Preferred Stock in the future that is pari passu with the New Preferred
Stock unless at the time of such issuance all dividends due and payable on the
New Preferred Stock have been paid in full. Search would also be prohibited
from issuing preferred or common stock or warrants or any other form of
security to any of its affiliates for consideration that does not equal or
exceed the fair market value of such security, as determined by an independent
third party. Search could, nevertheless, issue options or warrants to new or
existing
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directors or management if such options or warrants are approved by the
Compensation Committee. Search could also issue Common Stock upon the exercise
of outstanding warrants or options but may not amend or modify such warrants or
options without the approval of the Compensation Committee. If Search issues
any security for consideration less than its fair market value, the number of
shares of Common Stock, New Preferred Stock and Warrants issued under the Joint
Plan will be immediately and appropriately adjusted, and the conversion price
of the New Preferred Stock and the exercise price of the Warrants shall be
adjusted to take into account the dilution in value of the security holdings of
Noteholders caused by such below fair market issuance of Search's securities.
HFG FUNDING AGREEMENT
HFG Loan. On November 30, 1995, Search entered into a Funding
Agreement with Hall Financial Group, Inc. ("HFG"). Pursuant to the Funding
Agreement, HFG agreed to make three loans totaling $3,000,000 to Search, which
are represented by three promissory notes payable by Search to HFG (the "HFG
Notes"). "HFG Note I" is in the original principal amount of $1,284,487. "HFG
Note II" is in the original principal amount of $715,513. "HFG Note III" is in
the original principal amount of $1,000,000. HFG Notes I and II bear interest
at the rate of 12% and mature on the earlier of the effective date of the Joint
Plan or 90 days after their execution unless extended for 60 days by Search, in
which case the interest rate increases to 14%. HFG Note III bears interest at
the rate of 6% and matures in one year. HFG Notes I and III have been fully
funded. HFG Note II will only be funded if necessary to payoff the Company's
loan from General Electric Credit Corp. ("GECC") and if certain conditions are
met. See "Financing--Line of Credit." Search paid HFG commitment fees of
$20,000 in connection with the HFG Loan.
The HFG Notes are secured by approximately $5,900,000 in motor
vehicle receivables owned by Search and its subsidiary, Search Funding Corp.,
2,250,000 shares of Common Stock held as treasury stock by one of Search's
subsidiaries, and 100% of the stock of Search's non-bankrupt subsidiaries,
Search Funding Corp., Automobile Credit Acceptance Corp., Automobile Credit
Holdings, Inc., and Newsearch, Inc. (collectively, the "Non-Bankrupt
Subsidiaries").
Conversion of HFG Notes. HFG Notes I and III are convertible at the
option of HFG into shares of Search's Common Stock after confirmation of the
Joint Plan or after a specified period following the execution of the HFG Notes
if confirmation has not occurred during that period. During the first 30
trading days after confirmation of the Joint Plan, the conversion price for
these HFG Notes will be the lesser of $.93 per share or 65% of the price
determined using the same formula used to determine the number of shares issued
to Noteholders under the Joint Plan. If the Joint Plan is not confirmed or
following the first 30 trading days after the Joint Plan's confirmation, the
conversion price will be a price per share equal to 60% of the average bid
price for the previous 30 trading days. HFG Note III may be prepaid by Search
on the 31st trading day after the Joint Plan's confirmation by issuing to HFG
shares of Search's Common Stock in number equal to the HFG Note III balance
divided by 60% of the average bid price for the Common Stock during the prior
30 trading days. The shares issued with respect to HFG Note III will be
restricted from resale for a period of 12 months except that 25,000 shares may
be resold per month on a cumulative basis during such 12 month period. The
conversion option with respect to HFG Note I is limited to 2,500,000 shares of
Search's Common Stock less the shares required to satisfy the conversion option
or the stock prepayment feature of the HFG Note III.
HFG Warrants. Pursuant to the Funding Agreement, Search has issued to
HFG a warrant (the "HFG Warrant") to purchase 3,000,000 shares of Common Stock
at an exercise price of $2.00 per share. The HFG Warrant expires on November
30, 2000. Under the HFG Warrant, HFG has the right to require the Company to
effect the registration under the Securities Act of 1933 (the "1933 Act") of
the shares purchasable by HFG under the HFG Warrant as well as the shares that
HFG may obtain upon conversion of the HFG Notes. HFG will also have the right
to require Search to register such shares if Search proposes to register any of
its securities under the 1933 Act. In the event of the registration of HFG's
shares under the 1933 Act, Search will be obligated to indemnify HFG and its
affiliates from losses or liabilities arising out of untrue statements of
material fact contained in the registration statement or related prospectus.
Covenants. Pursuant to the Funding Agreement, Search is obligated to
amend its Certificate of Incorporation and bylaws as necessary to assure that
HFG has the right to elect one director to Search's Board if HFG converts HFG
Note III into Common Stock. Search is also obligated to maintain a collateral
coverage ratio of pledged motor vehicle receivables (excluding receivables with
delinquencies exceeding 60 days) to debts evidenced by the HFG Notes of not
less than 1.5 to 1. Without HFG's prior express written consent, the Funding
Agreement prohibits Search from issuing additional shares of Common Stock
(except to comply with the Joint Plan and for certain other planned share
issuances), issue additional warrants or rights to acquire shares of Common
Stock, amend its Certificate of Incorporation, modify its current loan
agreement with GECC, transfer any property among Search or its Non-Bankrupt
Subsidiaries for less than fair value, transfer any of the
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collateral securing the HFG Notes, grant any junior security interest in such
collateral or file any voluntary petition under the Bankruptcy Code.
Amendment to Funding Agreement. The Funding Agreement originally
required HFG to make certain loans to the Bankrupt Subsidiaries upon completion
of the Joint Plan. Search and the Committee have determined not to include any
funding of the Bankrupt Subsidiaries in the latest version of the Joint Plan.
Search and HFG have agreed to an amendment to the Funding Agreement that
provides HFG the option to purchase, in its sole discretion, Common Stock, New
Preferred Stock, and Warrants for a purchase price equal to 80% of the Present
Value attributable to such securities for purpose of their issuance to
Noteholders under the Joint Plan, less an amount equal to the accrued dividends
attributable to the New Preferred Stock that is received by HFG. HFG would be
entitled to purchase securities in an amount up to a maximum of $6,000,000 in
Present Value, which the Company estimates would represent a purchase price
payable by HFG of approximately $4,426,000. The proceeds of any shares so
purchased will be paid to Search. Under the Funding Agreement, as amended,
Search will give HFG the right to elect another director if HFG purchases
$1,000,000 Present Value of such securities, it converts HFG Note I into at
least 1,000,000 shares of Common Stock or HFG exercises the HFG Warrants. HFG
will also have registration rights for such securities similar to those
provided by the HFG Warrants.
EFFECTS OF COMPLETION OF JOINT PLAN ON COMPANY
If the Joint Plan is confirmed, as currently proposed, with respect to
each of the Bankrupt Subsidiaries, an aggregate of approximately $69,320,000 of
indebtedness of the Bankrupt Subsidiaries represented by the Notes would be
canceled. Following effectiveness of the Joint Plan, the Company's
indebtedness is expected to be limited to the indebtedness owed to GECC and to
HFG.
The Bankrupt Subsidiaries for which the Joint Plan is confirmed will
be dissolved following effectiveness of the Joint Plan. The assets of such
Bankrupt Subsidiaries will be transferred either to Search or to the
Noteholders Trust, with $350,000 to be deposited in the Litigation Trust. The
total assets to be transferred to Search or the Noteholders Trust,
respectively, will depend on the relative amounts of indebtedness of
Noteholders electing the Search Equity Option or the Collateral Option. The
assets transferred to the Noteholders Trust would be removed from the
consolidated financial statements of the Company. The Company may also lose
any servicing rights and fee revenue with respect to the motor vehicle
receivables transferred to the Noteholders Trust. The Noteholders Trust may
engage the Company or another servicing entity to service and collect its motor
vehicle receivables. The assets transferred to the Company would be received
free and clear of any liens or restrictions. The current restrictions in the
trust indentures governing the indebtedness represented by the Notes would be
eliminated through cancellation of the indentures upon effectiveness of the
Joint Plan.
If the Joint Plan is not confirmed as to any Bankrupt Subsidiary, the
assets and indebtedness of that Bankrupt Subsidiary would remain on the
consolidated financial statements of the Company.
EFFECTS OF COMPLETION OF JOINT PLAN ON EXISTING COMMON SHAREHOLDERS
As of August 14, 1995, the Bankrupt Subsidiaries owed to the Noteholders
an aggregate of approximately $69,320,000 in principal and accrued interest
represented by the Notes. The Company estimates that the aggregate secured
claims and unsecured claims of Noteholders of all Bankrupt Subsidiaries are
approximately $53,240,457 and $16,077,204, respectively. Consequently, the
Company estimates that confirmation of the Joint Plan, as proposed, may require
the issuance by Search to the Noteholders of (i) up to an aggregate of
16,551,850 shares of Common Stock and 15,031,648 shares of New Preferred Stock,
and (ii) Warrants to purchase up to an aggregate of 5,000,000 shares of Common
Stock. Assuming the confirmation of the Joint Plan, as currently proposed, for
all of the Bankrupt Subsidiaries and assuming that Noteholders holding 25%, 50%
or 75% of the secured claims of all Noteholders receive the treatment provided
in the Search Equity Option, the following table illustrates the estimated
number of shares of Common Stock and New Preferred Stock and Warrants that
would be issued by Search to Noteholders.
<TABLE>
Estimated Amounts to be
Issued Percentage of Secured Claims of Noteholders
- -------------------------- -----------------------------------------------
25% 50% 75%
--------- --------- ----------
<S> <C> <C> <C>
Common Stock (1) 4,138,000 8,276,000 12,414,000
New Preferred Stock 3,758,000 7,516,000 11,274,000
Warrants 5,000,000 5,000,000 5,000,000
</TABLE>
(1) Assumes no adjustments to prevent dilution
6
<PAGE> 8
The primary adverse effect of the effectuation of the Joint Plan and the
HFG transactions on existing shareholders would be the dilution of their voting
power from the issuance of shares of New Preferred Stock and Common Stock.
Assuming all Noteholders elected the Search Equity Option and HFG purchased all
of the Common Stock and New Preferred Stock that it has the right to purchase
under the amendment to the Funding Agreement, those shareholders owning Common
Stock outstanding prior to the issuance of such shares to HFG and under the
Joint Plan would own approximately 32% of the outstanding shares of Common
Stock and 20% of the total outstanding shares of Common Stock and New Preferred
Stock following such issuance. Holders of the New Preferred Stock would be
able to vote their shares ( one vote per share) on all matters submitted to the
vote of holders of Common Stock. If the dividend obligations on the New
Preferred Stock were in arrears, holders of New Preferred Stock would be
entitled to two votes per share. Search's existing shareholders would own none
of the newly issued shares of New Preferred Stock.
Effectiveness of the Joint Plan and the HFG transactions would benefit
Search's existing shareholders primarily by causing an increase in the
Company's net worth as a result of HFG's investment and cancellation of the
Notes, by eliminating any interest expenses attributable to the Notes issued by
the Bankrupt Subsidiaries and by removing the existing restrictions on the
Company's use of the cash flow from assets transferred to it. The Company's
net loss per share may ultimately become a profit and book value per share
should also have a corresponding increase. In addition, the annual dividend
requirements on the shares of New Preferred Stock would be substantially less
than the aggregate debt service requirements of the Notes and would disappear
upon any mandatory conversion of the New Preferred Stock. While the Notes have
stated maturities ranging from December 31, 1994 to June 30, 1998, Search would
have no obligation to redeem the shares of New Preferred Stock. Any dividends
on outstanding shares of Common Stock would be restricted if the dividend
obligations on the New Preferred Stock were in arrears. However, the Board may
not now legally declare any dividends on the Common Stock and does not
currently contemplate declaring any dividends on Search's Common Stock in the
foreseeable future after completion of the Joint Plan. If a liquidation of
Search were to occur, the liquidation preferences resulting from contributed
assets of any outstanding shares of New Preferred Stock and 12% Preferred Stock
(as well as any other series of Preferred Stock that the Board elects to issue
with a liquidation preference) would have to be satisfied in full prior to any
liquidating distributions to the holders of Common Stock.
PRINCIPAL BUSINESS
The Dealer Network. The Company established the Dealer Network for the
purpose of originating motor vehicle receivables through the sale of used
automobiles and light trucks. All dealers are unaffiliated with the Company,
and each dealer enters into a membership agreement with the Company and uses
Company-approved contract forms. Under the terms of the membership agreement,
a dealer is not obligated to offer to sell any minimum number of receivables to
the Company, and the Company is under no obligation to purchase any receivables
from the dealer. Before inclusion of any dealer in the Dealer Network, the
dealer is initially visited and inspected by Company personnel and follow-up
visits are also performed on an ongoing basis, generally every 60 days, by the
Company's marketing representatives.
The Dealer Network is comprised of dealers franchised by vehicle
manufacturers and independent dealers. To qualify for membership in the Dealer
Network, each independent dealer must have been in business at least two years,
be in good standing with regulatory and auto-association authorities (as
verified by the Company), and meet certain credit standards. The Company
verifies that an independent dealer meets these standards through a credit
bureau or Dun & Bradstreet report. Franchise dealers automatically qualify for
membership in the Dealer Network.
Membership in the Dealer Network can be terminated at the Company's
discretion. Monthly, each dealer is reviewed by the Company's personnel to
determine the quality and performance of receivables the Company purchased from
the dealer. Additionally, the number of receivables submitted by each Dealer
to and purchased by the Company are reviewed. The decision to terminate a
dealer from the Dealer Network is made on a case-by-case basis depending on the
past performance of the dealer. The majority of dealers terminated from the
Dealer Network are terminated for failure to submit a receivable to the Company
within a 90 day period. The Company terminated approximately 500 dealers in
fiscal year 1995 for this reason. Other factors considered in making the
decision to terminate a dealer include: high delinquency or repossession rates
for the dealer's receivables, a low acceptance rate by the Company of
receivables submitted by the dealer and any breaches by the dealer of its
membership agreement with the Company. The Company terminated the membership
of approximately 295 dealers in fiscal year 1995 based upon these other
factors.
Dealers communicate and negotiate receivable sales transactions directly
with the Company's centralized purchasing personnel via facsimile shortly after
the receivable's origination. The receivable purchase decision is typically
communicated to the dealer in approximately one hour, and if the receivable is
purchased, documentation of such
7
<PAGE> 9
purchase is completed generally in one week. The Company pays the dealer for
the sale of the receivable after receipt and review of the original receivable
contract and other required documents and after verification procedures are
completed
The Company believes that the services it provides to used car dealers
improve their financial efficiency by enabling them to turn their working
capital more frequently. The dealers forego some future profits on each
transaction in exchange for an immediate return of their invested capital,
avoidance of collection expenses and elimination of any collection risks.
Currently, the Company is purchasing receivables from dealers located
primarily in metropolitan areas in Arizona, Florida, South Carolina, Texas,
Oklahoma, Georgia, and Tennessee. The Company's principal market focus has
been in the southern and southwestern states such as those listed above, where
"self-help" repossession laws promote efficient collection efforts with respect
to defaulted receivables, and where milder climates generate higher collateral
values for used vehicles. See "Regulation."
Receivables Purchasing Procedures and Criteria. Since September 1994, the
Company has purchased receivables only for the Fund Subsidiaries. In November
1995, the Company's new interim management determined to sharply reduce all
receivables purchasing activities for the Company while attempting to evaluate
and, if necessary, modify or remedy purchasing and collection procedures. In
January 1995, the Company's new President caused the Company to resume normal
levels of receivables purchasing activities but at the same time tightened
certain purchasing procedures where permitted. Management was constrained from
any substantial changes in purchasing criteria for receivables purchased for
its public Fund Subsidiaries due to restrictions set forth in the trust
indentures governing the indebtedness of those subsidiaries.
The indentures established specific criteria with respect to the price,
purchase discount, term, downpayment, installments and interest rate for the
receivables it purchases and also with respect to price, cost to the dealer,
average wholesale value, age, mileage and make of the motor vehicles securing
such receivables. The Company believes that the most significant of these
criteria are as follows:
o The average purchase price of a receivable may not exceed 53% of the
total remaining unpaid installments of the receivables;
o The average purchase price for a receivable may not significantly
exceed the approximate average wholesale value and/or the dealer's
actual cost for the underlying financed vehicle;
o The receivable generally must have an original term of 36 months or
less;
o The age of each financed vehicle may not generally exceed eight years
for automobiles or nine years for trucks;
o The obligor on the receivable is required to make a down payment in
cash plus a net trade-in allowance of at least 25% of the dealer's
cost in the financed vehicle;
o The interest rate on the receivable must not violate any applicable
usury laws; and
o The dealer's actual cost for a financed vehicle generally must be
greater than $2,000 and less than $6,200.
Generally, to satisfy these credit criteria, an obligor must provide
verifiable personal references, must have a valid driver's license, must have
been a resident of the local area of receivable origination for a minimum of
one year, must have verifiable current employment and credit history and must
be at least 18 years of age.
During 1995, the Company has attempted to tighten its purchasing procedures
and the application of the criteria beyond that required by the indentures.
For example, the Company has commenced to adjust the purchase prices offered to
dealers for receivables based on the perceived credit risk of the obligor and
the wholesale vehicle value, to verify directly with obligors customer purchase
satisfaction, downpayment amounts and credit information, to monitor through
the ANMS receivable transactions from dealers whose receivables have
historically lower collection rates and to reject receivables from known credit
abusers. In addition, the Company commenced more strictly to apply the
foregoing credit criteria.
The Company's receivables purchasing personnel review each receivable for
compliance with the foregoing criteria, utilizing standard and supporting
documentation provided via facsimile by the selling dealer and national
computerized databases that automatically interact with the Company's
proprietary Auto Note Management System Software ("ANMS"). The Company
verifies, by reference to published wholesale vehicle value guides, the average
wholesale prices of the underlying vehicles. In most instances, the Company
performs this pre-purchase due diligence and processes purchases within one
hour, thereby assisting the dealer in the timely sale of the underlying
vehicle. This
8
<PAGE> 10
one hour turnaround time is considered by the Company to be an important
competitive factor, and the Company constantly monitors its turnaround time
through its ANMS. The Company acquires less than half of the receivables
offered by dealers in the Dealer Network. In a typical receivable purchase by
the Company, a dealer will make a profit of approximately $900 on a vehicle
which cost the dealer $4,000 and was held in its inventory less than 30 days.
While the Company purchases groups of receivables, it typically purchases
individually selected receivables. Purchasing receivables from dealers on an
individual basis in accordance with the Company's purchasing criteria enables
the Company to more readily control conformity to collateral and credit
requirements and compliance with applicable laws and regulations.
The Company's underwriting strategy differs markedly from many of its
competitors. Many of the Company's competitors usually make only bulk
purchases of receivables and/or retain recourse against the selling dealer for
mere non-payment of the receivable through quasi-loan arrangements, dealer
holdbacks or reserve accounts or other collection collateral or guaranties. As
a result of the assumption from the dealer of more collection risk and its
purchase of individual receivables, the Company is able to purchase receivables
at greater discounts than these competitors. The purchase and credit criteria
and verification procedures also differ from competitor to competitor, although
the variations are smaller for those competitors directly competing with the
Company in its market niche. Unlike the Company, certain other competitors
will only purchase "seasoned" receivables, i.e. receivables that have existed
and performed in an acceptable manner for a period of time.
Receivables Servicing and Collections. Upon purchase of each receivable,
the Company instructs each obligor to remit payments directly to the Company's
post office box, utilizing preprinted payment coupon booklets. Payments may
also be made in person at the Company's offices or via Western Union Quick
Collect service or through Ace Cash Express. Though the Company's collections
operations are based at the Company's home office in Dallas, Texas, the Company
operates branch collections offices in the following cities: Garland, Texas;
Arlington, Texas; Houston, Texas; Memphis, Tennessee.
The Company has a staff of collection personnel that monitor payments of
the receivables and contacts obligors via telephone when payments are
delinquent. Collections personnel generally have (i) a minimum of one year
collection experience, (ii) the ability to obtain corrective action on
delinquent accounts and (iii) knowledge and ability to comply with state and
federal debt collection laws. Generally, if at least three semi-monthly
payments are past due and the obligor fails to make any payments, including
partial payments, for a period of 30 days, the receivable is subject to
enhanced collection efforts, including intensified telephone and written
contacts aimed at identifying the likelihood and expected amount of payment on
the receivable. At any time thereafter, the Company may (i) contract with an
independent third party repossession company to locate and peacefully repossess
the motor vehicle securing the receivable or (ii) seek and obtain an order of a
court of competent jurisdiction for turnover of the motor vehicle. The
decision to repossess a motor vehicle is made on a case-by-case basis by a
collections unit manager. Factors considered by these unit managers include
recent payments and willingness on the part of the obligor to commit to payment
upon a date certain. Any delays in repossession expose the Company to the risk
of reduced resale value for the vehicle due to additional mileage and the
possibility of damage or lack of necessary maintenance or repairs to the
vehicle.
The Company's collection and repossession activities are administered
through its ANMS. The Company's ability through the ANMS to relationally
cross-reference receivable collection statistics against vehicle, dealer,
customer and geographic data enables the Company to monitor receivables and
adjust purchase procedures and prices.
Following repossession, the Company sells each repossessed vehicle on a
wholesale basis to dealers at an unaffiliated motor vehicle auction at the
highest available bid. During the period from October 1994 until December
1995, the Company sold many of its repossessed vehicles directly to consumers
at used car lots operated by the Company. The sale of the vehicles in this
manner, rather than on a wholesale basis, created another receivable with
associated risks of default and payment delays. Because the profits generated
by these lots was not sufficient to justify their existence, the Company had
closed all three of its retail lots as of December 31, 1995, which will result
in reduction of direct costs and general and administrative expenses in future
periods. The Company currently holds approximately 726 receivables originated
through these retail lots.
The Company, in the past, subcontracted with LSI Financial Group ("LSI") to
provide collection and repossession services with respect to approximately 5%
of the Company's motor vehicle receivables. In September 1995, the Company
transferred all collection and repossession services previously performed by
LSI to its own collections department and now services all receivables itself.
9
<PAGE> 11
Expansion into Other Credit Markets. Following completion of the Joint
Plan, the Company anticipates implementation of a program that would expand its
operations into higher credit-rated receivables. This expansion would continue
to target borrowers with sub-standard credit histories; however, it would focus
on borrowers with increased job and residence stability, higher income, and
re-established positive credit. If implemented, receivables purchased under
the new program would carry interest rates ranging from approximately 18% to
25%. The receivables purchased would be secured primarily by automobiles up to
6 years in age, having been driven no more than (i) an average of 25,000 miles
per year and (ii) having 80,000 total miles. Participating dealers would be
primarily franchised dealers and some independent dealers.
The Auto Note Management System (ANMS). Since its inception, the Company
has pursued a strategy of developing in- house, receivable purchase and
collection operating systems utilizing personal computer-based software and
hardware. The Company's current ANMS and related systems are connected with
outside databases, such as national credit bureaus, wholesale vehicle valuation
guides, and major dealers. These systems contribute to the Company's ability
to satisfy the Dealer Network's needs by enhancing the Company's ability to
meet its targeted one-hour receivable processing commitment. In addition, the
Company's ability to relationally cross-reference receivable collection
statistics against vehicle, dealer, customer and geographic data enables the
Company to monitor receivables and adjust purchasing activities and criteria
according to such comparative statistics. The Company maintains a full-time
staff of personnel who develop and maintain the ANMS.
RECEIVABLES CHARACTERISTICS
General. Set forth below is a summary of pertinent statistics regarding
the average active receivable in the Company's portfolio of motor vehicle
receivables, as of September 30, 1995 and September 30, 1994. The contracts
are segregated into individually purchased receivables and bulk receivable
purchases. Bulk receivable purchases are evaluated and purchased as a group
under different purchasing criteria, including customer payment history.
AVERAGE RECEIVABLE CHARACTERISTICS FOR INDIVIDUAL RECEIVABLE PURCHASES
<TABLE>
<CAPTION>
As of As of
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Dealer's vehicle cost $3,609 $4,411
Purchase price to customer of underlying vehicle $8,026 $7,859
Dealer's profit on receivable sale $959 $931
Age of vehicle 5.9 Years 4.8 Years
Wholesale value of vehicle $4,640 $4,409
Down payment (including net trade-in credit) $1,588 $1,577
Receivable term 31.6 Months 30.5 Months
APR 24.2% 24.3%
Semi-monthly payment $150 $145
Receivable balance (principal and unearned interest) $9,549 $9,242
Purchase price for receivable $4,969 $4,699
Receivable cost as % of receivable balance 51.67% 50.8%
Receivable discount as % of receivable balance 48.33% 49.2%
</TABLE>
AVERAGE RECEIVABLE CHARACTERISTICS FOR BULK PURCHASES
<TABLE>
<CAPTION>
As of As of
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Purchase price to customer of underlying vehicle $5,716 $4,718
Age of vehicle 8.5 Years 8.42 Years
Down payment (including net trade-in credit) $1,292 $1,140
Receivable term 22.05 Months 22.3 Months
Semi-monthly payment $121 $110
Receivable balance (principal and unearned interest) $5,274 $3,441
Purchase price for receivable $2,955 $2,066
Receivable cost as % of receivable balance 55.01% 60.0%
Receivable discount as % of receivable balance 44.99% 40.0%
</TABLE>
10
<PAGE> 12
At September 30, 1995, the Company had an aggregate of 12,128 motor vehicle
receivables in its portfolio with an aggregate total unpaid balance of
$66,677,000, including $13,106,000 in unearned interest and $18,623,000 in
credit loss allowance. In vehicles held for resale, the Company had a total of
599 vehicles having an estimated value of approximately $601,000. As of
September 30, 1995, 586 of the total 12,128 receivables were bulk receivables
and $1,712,000 of the total $66,677,000 represented unpaid installments on bulk
receivables. The Company's average recorded investment in impaired loans was
$14,737,000 and $10,724,000 for the fiscal years ended September 30, 1995 and
1994, respectively.
Seasonality. The Company's operations are seasonably impacted by higher
delinquency rates during certain holiday periods.
Delinquency, Repossession and Collections. The following tables set forth
certain information regarding the Company's motor vehicle receivables, from
inception (April 1, 1991) through September 30, 1995. There can be no
assurance that the future performance of the receivables purchased by the
Company, including future delinquency and loss experience, will be similar to
that set forth in the following tables.
MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES
<TABLE>
<CAPTION>
As of September 30, 1995 As of September 30, 1994
(Dollars in thousands) ---------------------------------------- -----------------------------------------
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
----------------------- ----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current to 60 days past due 9,805 $53,758 80.6% 14,726 $104,117 77.7%
61-180 days past due(2) 1,696 9,182 13.8% 3,069 21,240 15.8%
181+ days past due(2) 627 3,737 5.6% 1,200 8,746 6.5%
All Active Receivables 12,128 $66,677 100.0% 18,995 $134,103 100.0%
</TABLE>
(1) Includes unearned income.
(2) Active receivables exclude 599 and 821 accounts that have been
reclassified to vehicles held for resale at September 30, 1995, and
September 30, 1994, respectively.
PERFORMANCE OF MOTOR VEHICLE RECEIVABLES
<TABLE>
<CAPTION>
(Dollars in thousands) From Inception From Inception From Inception
Through Through Through
September 30, 1995 September 30, 1994 September 30, 1993
------------------ ------------------ ------------------
<S> <C> <C> <C>
Collections (1) $102,766 $55,781 $16,300
Net Repossession Proceeds (2) $27,377 $16,427 $4,295
Net Losses on Repossessions (3) $21,377 $ 8,628 $ 1,348
Ratio of Net Losses to Original Receivables Cost 31.1% 26.8% 18.9%
Number of Repossessions 15,543 8,270 1,821
Ratio of Repossessions to Total Receivables (Units) 45.9% 29.0% 18.7%
Average Age of Receivables (4) 13.51 Months 10.5 months 7.9 months
</TABLE>
(1) Total receivable collections include installments received on receivables
prior to repossession but exclude net repossession proceeds.
(2) Represents net proceeds from sales of 1,798, 6,449 and 7,273 repossessed
vehicles through September 30, 1993, 1994 and 1995, respectively.
(3) The term "Net Losses" represents total collections (including repossession
proceeds) less the initial cost of receivables related to the repossessed
vehicles.
(4) Based on period from purchase of contract receivable up to contract term,
excluding bulk purchases.
The percentage of contractually delinquent accounts has decreased from
September 30, 1994 to September 30, 1995. At the end of September 30, 1995,
19.4% of the Company's active contracts were at least 61 days contractually
delinquent compared to 22.3% at September 30, 1994. The decrease in accounts
at least 61 days contractually delinquent is due to increased collection
efforts, tightened credit criteria and the Company's charge-off policy
implemented in June of 1995. Since implementation of the policy, the Company
has charged-off 1,321 accounts with remaining contractual balances of
$8,235,000.
The net cumulative losses on repossessions were $1,396, $1,043 and $740 per
repossession for the years ending September 30, 1995, 1994 and 1993,
respectively. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation--Results of Operations".
11
<PAGE> 13
FINANCING
See the discussion of the financing provided by HFG under "HFG Funding
Agreement" above.
Until November 1994, the Company financed its receivables purchasing
activities through public and private sales of unrated, asset-backed debt
securities by its Bankrupt Subsidiaries. Unlike more common securitizations,
the Company did not seek a rating of these asset-backed securities by any
rating agencies.
Each Bankruptcy Subsidiary filed, on August 14, 1995, a petition in the
U.S. Bankruptcy Court in the Northern District of Texas, Dallas Division
seeking relief under Chapter 11 of the U.S. Bankruptcy Code ("Code") See
discussion under "Subsidiary Bankruptcy Filings." The following table sets
forth certain information regarding the Note indebtedness of each Bankrupt
Subsidiary; these notes and related interest are prepetition and subject to
compromise under the Plan of Reorganization.
DESCRIPTION OF NOTES OF BANKRUPT SUBSIDIARIES
<TABLE>
<CAPTION>
Original Interest Interest Sinking Fund Private
Offering Principal Accrual Payment Commencement or
Entity Name Completion Amount ($) Rate Rate Maturity Date Public
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Automobile Credit Fund 91-III, Jan. 1992 1,000,000 21% 15% (4) 3/31/95 (3) 3/31/94 (1) Private
Inc. ("ACF 91-III")
Automobile Credit Finance, Inc. May 1992 5,000,000 18% 15% (4) 12/31/94(3) 12/31/93 (1) Public
("ACF")
Automobile Credit Partners, Inc. May 1992 1,000,000 21% 15% (4) 4/30/95 (3) 4/30/94 (1) Private
("ACP")
Automobile Credit Finance 1992- Dec. 1992 10,000,000 15% 15% (4) 12/31/95 12/31/94 (1) Public
II, Inc. ("ACF 92-II")
Automobile Credit Finance III, July 1993 15,000,000 15% 15% (4) 4/30/96 4/30/95 (1) Public
Inc. ("ACF III")
Automobile Credit Finance IV, Dec. 1993 10,000,000 14% 14% (4) 12/31/96 9/30/95 (1) (2) Public
Inc. ("ACF IV")
Automobile Credit Finance V, Inc. Oct. 1994 19,872,000 12% 12% (4) 12/31/97 9/30/96 (1) (2) Public
("ACF V")
Automobile Credit Finance VI, Dec. 1994 10,675,000 12% 12% (4) 6/30/98 6/30/97 (1) (2) Public
Inc. ("ACF VI")
</TABLE>
(1) See Note 5 to consolidated financial statements.
(2) Quarterly principal payments are required after sinking fund commencement.
(3) On the December 31, 1994 maturity date for ACF, there was $3,175,000 in
the ACF sinking fund to be applied to obligations of $5,406,000. ACF's
insufficient cash balance constituted a default under its indenture
agreement between the Company and Texas Commerce Bank National Association
("Trustee"). As of September 30, 1995, ACF had $359,000 in remaining
principal and interest on its receivables and owed $1,506,000 on its
Notes.
On the March 31, 1995 maturity date for ACF 91-III, there was $538,000 in
cash to be applied to obligations of $1,195,000. ACF 91-III's
insufficient cash balance constituted a default. As of September 30,
1995, ACF 91-III had $216,000 in remaining principal and interest on its
receivables and owed $590,000 on its Notes.
On the April 30, 1995 maturity date for ACP, there was $525,000 in cash to
be applied to obligations of $1,180,000. ACP's insufficient cash balance
constituted a default. At September 30, 1995, ACP had $180,000 in
remaining principal and interest on its receivables and owed $610,000 on
its Notes.
(4) Effective on the earlier of August 14, 1995, which was the date of filing
the bankruptcy petition for the Bankrupt Subsidiaries, or the date of
default, the Company ceased accruing interest on the Notes. See Note 2 to
the Consolidated Financial Statements.
Each of the Bankrupt Subsidiaries originally contracted with the Company
for receivables purchasing and collecting services through its maturity date.
The Notes of the respective Bankrupt Subsidiaries are secured by the
receivables that were purchased using the net proceeds of the offering and the
subsidiary's excess cash flow after payment of interest and allowed expenses.
Each public Bankrupt Subsidiary's excess cash flow must be deposited after the
sinking fund commencement date into a sinking fund held by an independent
trustee for repayment of its Notes at maturity. The Notes issued by each of ACF
92-II, ACF III, ACF IV, ACF V and ACF VI may be redeemed in full by each such
Bankrupt Subsidiary at any time after the commencement of the sinking fund.
Before investing in the purchase of receivables, each Bankrupt Subsidiary
paid its offering and organizational fees and costs out of the gross sales
proceeds from its Notes. These fees and costs were limited to a percentage of
the gross sales proceeds, as follows:
12
<PAGE> 14
<TABLE>
<CAPTION>
Bankrupt Subsidiary Maximum Organizational %
- ------------------- ------------------------
<S> <C>
ACF 90-I, ACF 91-II, ACF 91-III, ACP, ACF , ACF 92-II 15.0%
ACF III 12.5%
ACF IV 13.5%
ACF V 10.7%
ACF VI 8.0%
</TABLE>
Fees to the Company; Bankrupt Subsidiary Operations. Under the terms of
the indentures, the Company may collect servicing fees, purchasing fees and
investor relations fees from the Bankrupt Subsidiaries. Under the existing
cash collateral orders of the Court in the bankruptcy proceedings of the
Bankrupt Subsidiaries, the Bankrupt Subsidiaries are allowed to pay these fees.
Each Bankrupt Subsidiary pays servicing fees to a Search subsidiary for each
receivable that has not been assigned for repossession. Servicing fees were
$21.80 per receivable that has not been assigned for repossession in calendar
year 1994 and were $22.30 in calendar year 1995. In addition, ACF III, ACF IV,
ACF V, and ACF VI pay to a Search subsidiary a purchasing fee of $125 per
receivable purchased by the subsidiary and a monthly investor relations fee of
1/12 of 0.5% of the outstanding principal amount of its Notes.
Under the terms of the indenture agreements (that have not to date been
rejected in the bankruptcy proceedings), the net cash flow generated from the
collection of the receivables held by each Bankrupt Subsidiary, after payment
of interest and allowed expenses, must either be reinvested in the purchase of
additional receivables or retained in a sinking fund account for payment of the
respective Notes. For information regarding the results of operations and
financial condition of each of the Bankrupt Subsidiaries, see the discussion
under "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Line of Credit. On June 17, 1994, Search and its wholly-owned subsidiary,
Search Funding Corp. ("SFC"), entered into an agreement for a line of credit
with General Electric Capital Corporation ("GECC"). The line of credit
initially had a maximum borrowing commitment of $20,000,000 and was limited to
a percentage of eligible contracts held by SFC. The line of credit is secured
by all of SFC's assets and is guaranteed by Search. Search and SFC were to
comply with various restrictive covenants that required the maintenance of
certain financial ratios and other financial conditions. Search has not been
in compliance with interest or equity coverage ratios since fiscal year 1994.
In January 1995, SFC signed an agreement with GECC to revise the
restrictive covenants and to eliminate any future advances under the line of
credit. SFC is required to remit cash receipts of all pledged contracts to
GECC until the line of credit is repaid. Interest is accrued daily at the
average of the one month London Interbank Offered Rates ("LIBOR") for the
preceding month plus 5.1%. As of September 30, 1995 and September 30, 1994,
LIBOR was 5.89% and 4.70% and the interest rate on the line of credit was
10.99% and 9.80%, respectively. SFC recorded $250,000 and $85,000 in interest
expense to GECC during 1995 and 1994, respectively.
On March 22, 1995, GECC advised Search that Search and SFC were in default
of various provisions of the original loan agreement and the January 1995
agreement. As a result of these defaults, GECC declared that the outstanding
balance as of that date of $2,600,074 was due and payable in full on or before
April 28, 1995. Search and GECC established a pay-out plan which requires a
minimum payment of $500,000 per quarter. SFC is required to remit cash
receipts of all pledged contracts until the line of credit is repaid. As of
December 19, 1995, the line had a balance due of $615,000. Subject to certain
conditions, HFG has committed to lend sufficient funds to payoff amounts owed
to GECC if necessary. See "HFG Funding Agreement".
Future Financings. After completion of the Joint Plan, the Company
presently intends to pursue future financings through lower-cost debt
financings from traditional financial sources such as banks. Since the
Company's inception, the effective interest rate, inclusive of front-end
offering costs, incurred by the Company from its securitization activities, has
fallen from a high of 29.7% to 16.2% at September 30, 1995. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Bankrupt Subsidiary Activities."
COMPETITION
The Company has numerous competitors engaged in the business of buying new
and used motor vehicle receivables at a discount. The Company in the past had
few competitors that purchased receivables from high credit risk individuals
that purchased medium-priced, used motor vehicles in the Company's current
primary geographic markets consisting of the metropolitan areas of Arizona,
Georgia, Florida, South Carolina, Oklahoma, Tennessee and Texas.
13
<PAGE> 15
Assuming confirmation of the Joint Plan, the Company intends to purchase
receivables whose obligors have somewhat lower credit risk than obligors of
receivables previously purchased by the Company. The Company expects to
encounter more competition in the purchase of such lower risk receivables. See
"Principal Business - Expansion Into Other Credit Markets." The Company
competes to some extent with providers of alternative financing services, such
as floor plan lines of credit from financial institutions, lease financing and
dealer self-financing, and certain purchasers of receivables for higher-priced,
used motor vehicles. National or regional rental car companies, finance
companies, used car companies, auction houses, dealer groups or other firms
with equal or greater financial resources than the Company could elect to
compete with the Company in its market. These competitive factors could have
a material adverse effect upon the operations of the Company.
REGULATION
Numerous federal and state consumer protection laws impose requirements
upon the origination and collection of consumer receivables. State laws impose
finance charge ceilings and other restrictions on consumer transactions and may
require certain contract disclosures in addition to those required under
federal law. These requirements impose specific statutory liabilities upon
creditors who fail to comply with their provisions. In addition, certain of
these laws make an assignee of such contract liable to the obligor thereon for
any violations by the assignor. The Company's ANMS verifies the accuracy of
disclosure for each receivable that it purchases; however, the Company, as an
assignee of such receivables, may be unable to enforce some of its receivables
or may be subject to liability to the obligors under some of its receivables if
such receivables do not comply with such laws.
In the event of default by an obligor on a receivable, the Company has all
the remedies of a secured party under the Uniform Commercial Code ("UCC"). The
UCC remedies of a secured party include the right to repossession by self-help
means, unless such means would constitute a breach of the peace. Unless the
obligor voluntarily surrenders a vehicle, self-help repossession, by an
individual independent repossession specialist engaged by the Company, is the
method usually employed by the Company when an obligor defaults. Self-help
repossession is accomplished by retaking possession of the motor vehicle. If a
breach of the peace is likely to occur, or if applicable state law so requires,
the Company must obtain a court order from the appropriate state court and
repossess the vehicle in accordance with that order. None of the states in
which the Company presently does or intends to do business has state laws that
would require the Company, in the absence of a probable breach of peace, to
obtain a court order before it attempts to repossess a motor vehicle.
In most jurisdictions, including those states in which the Company
presently does or intends to do business, the UCC and other state laws require
the secured party to provide the obligor with reasonable notice of the date,
time, and place of any public sale or the date after which any private sale of
the collateral may be held. Unless the obligor waives his rights after
default, the obligor has the right to redeem the collateral prior to actual
sale by paying the secured party the unpaid installments (less any required
discount for prepayment) of the receivable plus reasonable expenses for
repossessing, holding, and preparing the collateral for disposition and
arranging for its sale, plus in some jurisdictions, reasonable attorneys' fees,
or, in some states, by payment of delinquent installments.
HISTORY AND DISCONTINUANCE OF OIL AND GAS BUSINESS
The Company's predecessor was initially incorporated as Search Natural
Resources, Inc., a Minnesota corporation, on June 20, 1979, and, in order to
change its state of incorporation, was merged with and into the Company, a
Delaware corporation, in August 1988. From its inception until 1991, when it
disposed of most of its properties, the Company's primary business was the
acquisition, exploration, development and sale of oil and gas properties.
EMPLOYEES
As of November 30, 1995, the Company had 136 employees, of which 55 were
engaged in receivables purchasing and collections, 44 in the repossession and
resale of repossessed vehicles, 31 in administration and 6 in senior
management. The Fund Subsidiaries do not have any employees. None of the
Company's employees is represented by a labor union.
14
<PAGE> 16
ITEM 2. PROPERTIES
On October 28, 1992, ACAC entered into a sixty month lease for office
facilities with a basic monthly rental obligation of $13,450. This lease was
modified in 1994 to expand the office facilities from approximately 16,000
square feet to approximately 23,000 square feet at a revised monthly rental
obligation of $22,057. With six months notice ACAC may cancel the lease at the
end of the thirty-sixth month with the payment of the unamortized up-front
costs associated with the premises, as defined in the lease agreement,
otherwise the lease is non-cancelable. Rental expense for 1995, 1994, and 1993
was approximately $284,000, $212,000 and $117,000, respectively.
During the year, the Company opened four remote collection facilities,
these leases expire through 1999. The lease expense for fiscal 1995 total
approximately $20,000.
Search signed three car lot leases at the beginning of fiscal 1995. The
leases were in Dallas, TX and a suburb of Atlanta, GA and had terms of 12 to 24
months. These lots were used to process and sell repossessed vehicles directly
to consumers. During the fiscal year ended September 30, 1995, Search closed
the Georgia lot and one of the lots in Dallas. Subsequent to year-end, Search
adopted a formal plan to close the remaining car lot and related make-ready
facility by January 1, 1996. See related discussion in Item 1 Principal
Business.
ITEM 3. LEGAL PROCEEDINGS
BANKRUPTCY OF FUND SUBSIDIARIES
On August 14, 1995, Automobile Credit Finance, Inc., Automobile Credit Fund
1991-III, Inc., Automobile Credit Finance 1992-II, Inc., Automobile Credit
Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit
Finance V, Inc., Automobile Credit Finance VI, Inc. and Automobile Credit
Partners, Inc., which are wholly-owned subsidiaries of the Company, each filed
a petition in the U.S. Bankruptcy Court in the Northern District of Texas,
Dallas Division ("Court"), seeking protection under Chapter 11 of the U.S.
Bankruptcy Code ("Code"). These cases have been consolidated as one case for
administration (Case No. 395-34981-RCM-11). See the discussion under the
caption "Fund Subsidiary Bankruptcy Filings" in "Item 1 Business" for a more
detailed description of the bankruptcy proceedings.
SHAREHOLDER CLASS ACTION LAWSUIT
On July 7, 1994, a class action civil lawsuit was filed against Search,
certain of its officers and directors, one of its former accounting firms and
the lead underwriter and one of its principals involved in the issuance of
Search's Common Stock. This action was filed in the United States District
Court for the Northern District of Texas, Dallas Division, and is styled Ellen
O'Shea, et al v. Search Capital Group, Inc., et al. Civil Action No.
3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in
John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action
No. 3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc., et al,. Civil
Action No. 3:94-CV-1494-J, respectively, were also filed. The above cases were
consolidated in September 1994 under Civil Action No. 3:94-CV-1428- J (the
"Class Action Suit").
The Class Action Suit was filed on behalf of all purchasers of Search's
Common Stock during the period beginning December 10, 1993 and ending through
July 5, 1994, which was the date that Search made a public announcement
regarding lower earnings. The Class Action Suit contends that Search made
misstatements in its registration statements concerning Search's computerized
system, accounting methodologies used by Search, collectibility of its
receivables and repossession rates of autos that secured its receivables. The
plaintiffs also complained of allegedly false public filings, press releases
and reports issued during 1994. The plaintiffs sought damages, rescission ,
punitive damages, pre-judgment interest, fees, costs, equitable relief and/or
injunctive relief and such other relief as the court may deem just and proper.
15
<PAGE> 17
Search's management and counsel for the plaintiffs have entered into a
stipulation of settlement (the "Settlement") of the Class Action Suit. This
Settlement was initially filed with the court on August 4, 1995, and an amended
version of the Settlement was filed on November 13, 1995. No objections to the
Settlement have been received to date. The Settlement provides for the payment
by Search of $287,500 upon approval of the Settlement ($100,000 has already
been deposited in an escrow account maintained by the plaintiff's lawyers), and
the issuance by Search of its Common Stock with a value of $2,612,500 or cash.
The settlement provides that the number of shares of Common Stock to be issued
to the Class shall be computed using the average of the bid/ask price of the
last 30 days ending generally on the date that the Settlement becomes final
prior to the date of distribution of the shares.
Final effectiveness of the Settlement is conditioned upon court
certification of the class of plaintiffs for the Settlement and court approval
of the fairness of the Settlement. On January 5, 1996, the Court concluded
hearings on the issue of Settlement. The Company believes the Court will rule
quickly and in favor of the Settlement and certification of class as proposed.
Search believes that the Settlement is fair and equitable to the class of
plaintiffs and will ultimately be approved. A final, non-appealable order
approving the Settlement is a condition precedent to the implementation of the
Search Equity Option under the Joint Plan.
OTHER LITIGATION
In December 1993, Automobile Credit Acceptance Corp. ("ACAC"), a subsidiary
of Search, was joined as a defendant in a pending civil action filed in the
153rd Judicial District Court, Tarrant County, Texas, styled Autostar
Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corporation,
Cause No. 153-144940. The plaintiff in this action alleges the existence of a
partnership between the plaintiff and another defendant and seeks damages,
actual and exemplary, and an injunction for alleged conversion and
misappropriation of certain property, including computer programs, allegedly
owned by Autostar. In the petition, the plaintiff alleges that ACAC wrongfully
assisted its co- defendant and tortiously interfered with the plaintiff's
contracts and business and has claimed, as damages, $250,000. ACAC believes
that these allegations are without merit. ACAC has filed a general denial and
has pending a motion for partial summary judgment. Discovery in this case is
ongoing and no opinion can be given as to the final outcome of the lawsuit.
On January 6, 1995, in a civil action filed in the 134th Judicial District
Court, Dallas County, Texas, styled Innovative Office Systems, Inc. v.
Automobile Credit Acceptance Corp., Cause No. 95-00180-C, plaintiff filed suit
against ACAC alleging damages of approximately $60,000.00 for breach of two
lease agreements and for attorneys' fees. In the petition, the plaintiff
alleges that ACAC breached two office equipment leases. Search believes that
these allegations are without merit and is vigorously contesting this lawsuit.
ACAC has filed a general denial and discovery in this case is ongoing.
Currently, no opinion can be given as to the final outcome of the lawsuit.
On January 9, 1996, Search received notice from plaintiffs that a suit had
been filed on December 21, 1995 against Search, certain of its former officers
and directors, and certain underwriters of three of the Fund Subsidiaries.
The case is styled Janice and Warren Bowe, et. al. vs. Search Capital Group,
Inc., et. al., Cause No. 1:95CV 649GR and was filed in the Federal District
Court for the Southern District of Mississippi. The plaintiffs allege
violations of the securities laws by the defendants and seeks unspecified
damages, rescission, punitive damages and other relief. The plaintiffs also
seek establishment of a class of plaintiffs consisting of all persons who have
purchased Notes issued by three of the Fund Subsidiaries. The Company believes
the suit is without merit and intends to vigorously defend itself and may seek
equitable remedies, including injunctive relief, in the Bankruptcy Court that
has jurisdiction over the Bankrupt Subsidiaries.
There are presently no other material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Effective December 10, 1993, the Company listed its Common Stock on the
NASDAQ National Market System under the symbol "SRCG." Effective March 23,
1995, the Company's Common Stock was delisted by NASDAQ for failure to file its
Form 10-K Annual Report for the fiscal year ended September 30, 1994 and its
Form 10-Q Quarterly Report for the quarter ended December 30, 1994 and for
failure to meet its continued listing criteria for consolidated net tangible
assets.
The following table sets forth for each quarter after fiscal 1993 the high
and low bid and ask prices for the Common Stock prior to December 10, 1993, and
after March 22, 1995, as reported by the National Quotations Bureau, and the
high and low sales prices for the Common Stock after December 9, 1993, and
prior to March 23, 1995, as reported by the National Market System of NASDAQ.
Prior to December 10, 1993, and after March 22, 1995, trading of the Company's
Common Stock in the over-the-counter market has been sporadic and limited.
Prior to December 10, 1993, the quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and do not represent actual
transactions.
<TABLE>
<CAPTION>
Bid Prices Ask Prices NASDAQ
--------------- ---------------- ----------------
Fiscal Years High Low High Low High Low
------------ ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1994
----
Oct. 1-Dec. 9, 1993 8.750 6.000 11.000 8.000
Dec. 10-31, 1993 9.500 8.500
Second Quarter 15.250 8.750
Third Quarter 14.000 8.750
Fourth Quarter 9.750 3.375
1995
----
First Quarter 3.625 1.000
Second Quarter 2.125 1.125 2.375 1.375
Third Quarter 1.875 0.813 2.250 1.063
Fourth Quarter 2.000 1.000 2.250 1.188
1996
----
First Quarter 1.938 1.000 2.125 1.219
</TABLE>
As of December 31, 1995, there were 8,696,141 shares of Common Stock
outstanding and approximately 1,599 holders of record of the Common Stock.
Dividends on the Common Stock may be paid if, as and when declared by the
directors of the Company out of funds legally available therefor. The Company
has never paid dividends on the outstanding Common Stock and the current policy
of the Company's Board of Directors is to retain any available earnings for use
in the operation and expansion of the Company's business. Therefore, the
payment of cash dividends on the Common Stock is unlikely in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a table of selected consolidated financial data for the
fiscal years ended December 31, 1991, and 1992 and the nine month period ending
September 30, 1993 and the fiscal year ended September 30, 1994 and 1995:
<TABLE>
<CAPTION>
9 Months
Year Ended Year Ended Ended Year Ended Year Ended
(In thousands, except per share data) 9/30/95 9/30/94 9/30/93 12/31/92 12/31/91
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest revenue $13,472 $14,054 $7,096 $2,739 $328
Interest expense (1) 11,205 9,968 4,173 1,909 137
Provision for credit losses (2) 3,128 20,180 - - -
------------------------------------------------------------
Net interest income (loss) after provision for
credit losses (861) (16,094) 2,923 830 191
Operating and Other expenses 15,881 9,320 3,075 1,504 542
Settlement expense 2,837 560 - - -
Reorganization expense 315 - - - -
Other income - 24 24 34 13
------------------------------------------------------------
(Loss) from continuing operations (19,894) (25,950) (128) (640) (338)
Discontinued oil and gas segment - - - - (594)
------------------------------------------------------------
Net (loss) (19,894) (25,950) (128) (640) (932)
Preferred stock dividends 240 240 263 206 128
------------------------------------------------------------
(Loss) available to common stockholders $(20,134) $(26,190) $(391) $(846) $(1,060)
============================================================
Loss per share of common stock from continuing
operations $(2.25) $(2.33) $(0.06) $(0.22) $(0.15)
Net (loss) per share of common stock $(2.25) $(2.33) $(0.06) $(0.22) $(0.34)
Weighted average number of common shares
outstanding 8,967 11,258 6,131 3,851 3,146
Operating Data:
Number of active dealers at period end (4) 125 206 126 68 14
Number of receivables at period end 12,128 18,995 6,991 2,962 366
Number of receivables purchased during period 5,328 18,377 6,331 3,452 399
(In thousands) 9/30/95 9/30/94 9/30/93 12/31/92 12/31/91
------- ------- ------- -------- --------
Balance Sheet Data (3):
Contract receivables, net $34,948 $61,823 $29,396 $11,009 $1,280
Total assets 49,922 75,126 44,223 19,912 2,826
Notes payable (prepetition subject to compromise) 69,320 - - - -
Notes payable - 70,768 40,562 18,000 1,923
Total liabilities 75,557 79,502 42,013 18,838 2,286
Shareholders' equity (deficit) (25,635) (4,376) 2,210 1,074 540
</TABLE>
- ----------------------
(1) Includes amortization of offering expenses incurred in connection with Note
offerings of $2,840,000, $2,158,000, $762,000, $306,000, and $30,000
respectively.
(2) The provision for credit losses is first recorded in 1994 because of the
adoption of SFAS 114. See the discussion in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
under the caption "Interest Income and Provision for Credit Losses."
(3) The Company sold substantially all of its oil and gas assets in exchange
for the assumption by the purchaser of the related liabilities in December
1991. These assets and liabilities were therefore not included in the 1991
balance sheet.
(4) Active dealers are those dealers in the Dealer Network who sold receivables
to the Company during the last 30 days of the period, 60 day for 1995.
The Fund Subsidiaries, which are non-recourse to Search and are
debtors-in-possession, have accounted for all transactions related to the
reorganization proceedings in accordance with SOP 90-7. Accordingly, all
prepetition liabilities of the Fund Subsidiaries that are expected to be
impaired under the Joint Plan of Reorganization ultimately approved by the
Bankruptcy Court are reported separately in the consolidating balance sheet as
liabilities subject to compromise (see Note 5 for a description of such
liabilities). Expenses, primarily professional fees resulting from the
reorganization proceedings, are reported separately in the consolidating
statement of operations as reorganization items. Contractual interest
obligations which are relieved from payment as a result of the Chapter 11
proceedings or are not warranted when a Fund Subsidiary is in default are not
accrued.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Except where otherwise indicated, the following discussion relates to the
operations of the Company on a consolidated basis, including its principal
operating subsidiary, ACAC.
18
<PAGE> 20
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 loans 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 portfolio of loans held by each of the Fund Subsidiaries was
considered a separate and distinct pool for treatment under PB 6.) Each of the
Fund Subsidiaries aggregated its loan portfolio into a separate and distinct
pool for collective evaluation under PB6.
Under PB6, the Company recorded an allowance for credit losses upon
acquisition of the installment loans in an amount equal to the difference
between the contractual payments due and the estimated undiscounted future cash
collections. The difference between the undiscounted future cash collections
and the acquisition amount of the installment contracts was amortized to
interest revenue over the period in which payments on the installment contracts
were expected to be collected. Under PB6, if the estimate of the total
probable collections was increased or decreased but still greater than the sum
of the acquisition amount less collections plus the discount amortized to date,
the remaining amount of the discount to be amortized to interest income was
adjusted and amortized over the remaining life of the loans. Accordingly,
changes in estimates of future cash collections were recognized through
prospective yield adjustments.
In the fourth quarter of fiscal 1994, Search elected early adoption of
Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"),
which address the accounting by creditors for impairment of a loan and related
income recognition and disclosures. In accordance with SFAS 114, contracts
receivable are analyzed on a loan-by-loan basis. Search evaluates the
impairment of loans based on contractual delinquency, as well as other factors
specific to the notes receivable. When a concern exists as to the
collectibility of an account, interest income ceases to be recognized. The
notes receivable, once impaired, are collateral dependent; that is once a note
receivable is in default Search looks to the underlying collateral for
repayment of the note receivable. Therefore at impairment Search records an
allowance for credit losses to record the note receivable at the fair value of
the collateral. If the measure of the impaired note receivable is less than the
net recorded investment in the note receivable, Search recognizes an impairment
by creating an additional allowance for credit losses in excess of the initial
allowance provided, with a corresponding charge to provision for credit losses.
The provision for credit losses is adjusted for any differences between the
final net proceeds of an impaired note receivable and its net carrying value.
Search continues to record contract purchases at cost. Contractual finance
charges are initially recorded as unearned interest and amortized to interest
income using the interest method. As noted above amortization of interest
income ceases upon impairment. An initial allowance for credit losses is
recorded at the acquisition of a note receivable equal to the unearned
discount, the difference between the amount financed and the acquisition cost.
The recognition of this initial allowance is recorded as an adjustment to the
provision for credit losses.
The Company reported its results by applying PB6 using a pooled methodology
for fiscal years 1992 and 1993. Differing interpretations of PB 6 are that it
permits the evaluation of impaired loans using either a pooled or a loan-
by-loan methodology. 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.
19
<PAGE> 21
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 recognized 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
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.
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
20
<PAGE> 22
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.
Effective Interest Rates
Interest expense consists of Notes issued by the Fund Subsidiaries and
combines both stated and effective rates. The stated rate reflects the
interest due to be paid to the note holder while the effective rate includes
the amortization of offering costs. The Company's weighted average stated
interest rates and weighted average effective cost of borrowing, after
considering the amortization of offering costs, has been:
<TABLE>
<CAPTION>
9 Months Ended Year Ended Year Ended
9/30/93 9/30/94 9/30/95
------- ------- -------
<S> <C> <C> <C>
Weighted average stated interest rate 15.6% 14.7% 11.7%
Weighted average effective cost of 21.5% 20.2% 16.1%
borrowing
</TABLE>
The stated and effective rates do not reflect anticipated, bankruptcy and
current defaults by the Fund Subsidiaries as discussed in Note 5 of the
accompanying consolidated financial statements.
21
<PAGE> 23
RESULTS OF OPERATIONS
The first payment default chart suggests that when contract purchasing
volume increased in 1994, the quality of the contracts being purchased may have
deteriorated. After analysis of these contracts, the Company realized that the
high number of first payment defaults were due, in part, to (i) Dealers
overstating to the Company the amount of the downpayment made by obligors on
the receivable and (ii) Dealers overstating the value of the automobile
securing the receivable. Obligors, because they had little downpayment
invested in the automobile or because they felt they had paid too high a price
for the automobile, were willing to allow the automobile to be repossessed
rather begin making payments. After year end September 1994, the Company was
able to reduce first payment defaults by being more selective in the contracts
purchased and initiating personal interviews in order to verify amount of
downpayments.
Chart 1 - First Payment Defaults by Quarter Contracts were Booked.
[CHART]
Chart 2 - Number of Contracts Booked by Quarter.
[CHART]
22
<PAGE> 24
Contract purchases increased rapidly during the nine months ended September
1993 and the year ending September 1994. Due to the inadequate collections on
contract receivables, the Company tightened purchasing procedures in January
1995. Total contract collections over the life of a group of loans is
primarily dependent on repossession rates, number of payments received prior to
repossession and repossession proceeds. While eventual repossession rates can
only be forecasted during the life of a group of contracts, the percentage of
contracts that have not made their first payment ("first payment defaults") is
a good indication of the quality of receivable purchased within a specific
period. First payment defaults are more serious than other repossessions
because the differences between repossession proceeds and the cost of the
receivable are not reduced by customer payments prior to repossession.
Comparison of Twelve Month Periods Ended September 30, 1995 and the Twelve
Month Period ending September 30, 1994
The Company purchased 5,328 ($24,830,000, net) contracts during the twelve
months ending September 30, 1995 compared to 18,377 ($88,124,000, net)
contracts purchased during the twelve months ended September 30, 1994. The
decrease in contract purchases of 13,049 or 71% was due to tightened purchasing
procedures, reductions in new funds raised, and a smaller dealer network.
Interest revenue decreased 4% from $14,054,000 to $13,472,000 for the year
ended September 30, 1995 due to decreased contracts receivables. Interest
expense increased 12% from $9,968,000 to $11,205,000 due to increased offering
cost amortization and the fact that the ACF VI debt of $10,675,000 was
outstanding for all of 1995 as compared to a portion of 1994. The increase in
interest expense was somewhat mitigated by ceasing the interest expense accrual
of the Fund Subsidiaries on the Bankruptcy Date or maturity date (whichever
event occurred first). See Note 5 to the consolidated financial statements.
The provision for credit losses decreased 85% from $20,180,000 to
$3,128,000 due to generally adequate allowance established in prior years and
the adequacy of the initial allowance on current year purchases to cover losses
during the twelve months ended September 30, 1995. In addition, purchase
activity was down substantially in 1995 compared to 1994. As most additional
allowances are recorded in the first six months of a contract's life, this
decrease in purchasing activity also had an impact on the decreased provision
for credit losses.
General and administrative expenses increased from $9,320,000 to
$15,881,000. The increase in general and administrative expense is primarily
due to increased repossession, remarketing, and collection costs. During the
years ended September 30, 1995, the Company incurred $1,270,000 of additional
cost in the repossession and remarketing of its as compared to such costs in
1994. The largest increases were in repossession and repair fees which
increased from $1,432,000 to $2,332,000. During the year ended September 30,
1995, the Company repossessed a total of 7,273 accounts compared to 6,449
during the year ended September 30, 1994.
The net loss decreased $6,056,000 from $25,950,000 in fiscal 1994 to
$19,894,000 in fiscal 1995. The decrease in net loss was primarily due to a
decrease in the provision for credit losses of $17,052,000 partially offset by
increases in interest expense of $1,237,000 and general and administrative
expenses of $6,561,000 and increases in settlement and reorganization charges
of $2,592,000.
Comparison of the Nine Month Period Ended September 30, 1993 and the Twelve
Month Period Ended September 30, 1994
Interest revenue, interest margins, net income and operating and investing
cash flows are not comparable between the nine months ending September 30,
1993, and the year ending September 30, 1994, due to the Company's early
adoption of SFAS 114 as well as the difference in periods (nine months versus
twelve months.) See Note 2 to the consolidated financial statements.
The Company purchased 18,377 contract receivables during the fiscal year
ending September 30, 1994, and 6,331 contract receivables during the nine
months ended September 30, 1993.
Interest revenue grew 98% from $7,096,000 for the nine months ended
September 30, 1993, to $14,054,000 for the year ended September 30, 1994, due
to an increase in net contract receivables. Net interest income increased 40%
from $2,923,000 for the nine months ended September 30, 1993, to $4,086,000 for
the year ended September 30, 1994. As a percentage of interest revenue, net
interest margin decreased from 41% to 29% due to higher repossession frequency,
fewer payments being made prior to repossession and lower auction proceeds in
1994.
23
<PAGE> 25
General and administrative expenses increased from $3,075,000 during the
nine months ended September 30, 1993, to $9,880,000 during the year ended
September 30, 1994. This increase was due to continued expansion of the
Company's business (primarily payroll and related expenses) and is
proportionate with increases in contract purchases that grew by 190% between
1993 and 1994.
Net loss for the nine months ended September 30, 1993 was $128,000 compared
to a net loss of $25,950,000 for the year ended September 30, 1994. The
increase was due to deterioration in contract performance and due to the early
adoption of SFAS 114. This loss included $20,180,000 for a provision for
credit losses. See Note 2 to the accompanying consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
During the twelve months ended September 30, 1995, the Company utilized
cash of $10,741,000 in its operations as compared to cash of $1,991,000
generated from operations during the twelve months ended September 30, 1994.
Although the net loss for 1995 decreased $6,056,000 from a net loss of
$25,950,000 for 1994 to a net loss of $19,894,000 for 1995, a significant
portion of the 1994 loss resulted from the provision for credit losses of
$20,180,000, which is a non-cash charge against earnings, while only $3,128,000
was attributable to the provision for credit losses in 1995. Net interest
income declined $582,000 while interest expense increased $1,237,000 over the
prior year. General and administrative expenses increased from $9,320,000 to
$15,881,000, while expense accruals decreased by $1,600,000. The increase in
general and administrative expenditures is due to increased repossession,
remarketing, and collection costs. The Company also incurred additional
expense of $2,592,000 in 1995 related to settlement and reorganization charges.
Neither Search nor any subsidiary or affiliate of Search has guaranteed
repayment of the Fund Subsidiaries' Notes. Proceeds from each Fund
Subsidiary's receivables are restricted to repayment of that Fund Subsidiary's
Notes, the payment of certain allowed expenses, including servicing fees, and
the purchase of additional receivables. Interest on the Fund Subsidiaries'
Notes has not been paid since June 1995 due to the Bankruptcy Proceedings.
During the Bankruptcy Proceedings, the Bankrupt Subsidiaries have continued to
operate under an order from the Bankruptcy Court authorizing the use of
cash-collateral for normal expenditures including servicing fees payable to
ACAC. Upon Confirmation of the Joint Plan, the restricted cash balances of the
Fund Subsidiaries, which approximated $15 million as of January 31, 1996, would
be apportioned to Search and to the Noteholders Trust (based on ballots
electing the Collateral Option), net of administrative expenses of the
bankruptcy proceedings and $350,000 funding for the Litigation Trust.
With respect to each Bankrupt Subsidiary, the Joint Plan of the Bankrupt
Subsidiaries provides that if the Joint Plan is approved, the Noteholders that
vote for the Joint Plan may elect one of two methods that deal with the
collateral securing their Notes. The Search Equity Option generally allows the
Noteholder to receive Search securities in exchange for the release of liens on
collateral and transfer to Search of a proportionate share of the assets of the
Bankrupt Subsidiaries. The Collateral Option allows the Noteholder to have a
proportionate share of assets of the Bankrupt Subsidiaries transferred to a
trust that will collect the remaining receivables and distribute the resulting
cash to the Noteholders. Under this option, a servicer may continue collecting
the receivables or the receivables may be sold. If ACAC is not selected as
servicer, it will not receive servicing fees for the collection of the
remaining receivables.
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
$49,909,000 provided by financing activities during the twelve months ended
September 30, 1994. In 1995, the Company raised only $1,779,000 through note
offerings and repaid $2,429,000 on its line of credit and $5,077,000 on the
notes payable. During 1994 the Company raised $34,693,000 through note
offerings and lines of credit while paying back only $1,000,000. The Company
also received net proceeds of $19,407,000 in 1994 from the sale of stock.
There were no sales of stock in 1995.
If a sufficient number of the Noteholders elect the Search Equity Option
and the Joint Plan is confirmed by the Bankruptcy Court, the amount of
unrestricted cash, contracts receivable and equity available to Search would be
adequate to allow Search to continue operating as a going concern. If an
insufficient number of the Noteholders elect the Search Equity Option or if the
Joint Plan is not confirmed by the Bankruptcy Court, the lack of sufficient
equity would reduce the
24
<PAGE> 26
availability of new financing and result in lower interest revenues to support
Search's current level of operations. Consequently, operations would have to
be reduced or, in the extreme, Search's ability to continue as a going concern
would be jeopardized. Based upon voting through January 29, 1996 on the Joint
Plan, Search believes that the Joint Plan will be confirmed on the March 1,
1996, the confirmation date set by the Bankruptcy Court, and that a sufficient
number of Noteholders will elect the Search Equity Option to allow Search to
continue operations as a going concern.
Voting for the Joint Plan ended on January 29, 1996. In an affidavit
submitted to the Bankruptcy Court, the tabulating agent provided a preliminary
tabulation which indicated that approximately 71% of the Noteholders
representing approximately 80% of the principal amount of the Notes outstanding
had voted on the Joint Plan. Of the ballots received, 99% voted to accept the
Joint Plan. Of the $55.5 million of Notes voted, $10.2 million, representing
18% of the Noteholders and 15% of the Notes outstanding, elected the Collateral
Option. Under the terms of the Joint Plan, the remaining 82% of the
Noteholders and 85% of the Notes outstanding would receive the Search Equity
Option. Such a significant percentage receiving the Search Equity Option would
provide Search with adequate cash, contracts receivable and equity to continue
operations and to provide for future growth.
As a condition precedent to confirmation of the Joint Plan, either a
dismissal or approval by "final order" of the settlement agreement for the
O'Shea shareholder class action litigation (the "Shareholder Class Action") had
to be entered by the U.S. District Court. In February 1996, the U.S. District
Court issued a "Preliminary Order Approving the Proposed Class Settlement".
The Court has preliminarily approved the settlement as "fair, reasonable, and
adequate" and set a date, April 26, 1996, for a further hearing to determine
whether the preliminary order should become final. Since the proponents of the
Joint Plan did not wish to delay the confirmation of the Joint Plan until after
April 26, 1996, they have amended the Joint Plan to replace the requirement for
a final order approving the settlement with a requirement for a preliminary
order approving the settlement. In the event that the Noteholders who have
voted to accept the Joint Plan might wish to change their election of an Option
under the Joint Plan, new ballots were sent in February 1996 to those
Noteholders to give them an opportunity to change their election of a Plan
Option. Additionally, second ballots have been sent to those Noteholders who
did not vote by the January 29, 1996, deadline and to those Noteholders who
voted but did not elect a Plan Option. While the ballots for the amendment and
the second ballots will change the results of the preliminary tabulation,
Search does not anticipate a significant change in the amount of cash,
contracts receivable and equity that it will receive when the Joint Plan is
finalized.
A confirmation hearing for the Joint Plan is scheduled for March 1, 1996.
The Joint Plan could be effective as early as March 12, 1996. While the date
for filing written objections has passed without any objections being filed, if
there are other significant objections to the Joint Plan, confirmation could be
delayed beyond that date.
Search obtained liquidity financing from HFG in November 1995. Repayment
of the HFG financing is due on the earlier of February 27, 1996 or the
effective date of the Joint Plan. The effective date of the Joint Plan will
not occur before the maturity date of the HFG notes; however, the maturity date
can be extended for an additional 60 days at the request of Search. It is not
likely that further sources of liquidity financing will be available pending
confirmation of the Joint Plan. Delays in confirmation of the Joint Plan or
discontinuance or reduction of servicing and management fees currently allowed
under interim cash-collateral orders granted by the Bankruptcy Court beyond the
60 day extension period of the HFG notes would have severe liquidity effects
for Search. If the effective date of the Joint Plan is delayed beyond the 60
day extension period, Search would require further extension of the maturity
date of the HFG notes and would require additional working capital financing to
continue day-to-day operations and servicing of contract receivables.
Upon confirmation of the Joint Plan, HFG has an option to purchase, in its
sole discretion, Common Stock, New Preferred Stock and Warrants in Search for a
price up to $4.4 million. The proceeds of any shares so purchased would be
paid to Search. HFG also has the option to convert a portion of the financing
that HFG provided Search in November 1995 into a maximum of 2.5 million shares
of Common Stock of Search. Search has an option to repay up to $1 million of
the HFG financing in Common Stock of Search. Any such conversion by HFG or
Search would reduce Search's current notes payable liability to HFG.
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 $51,586,000 used
in investing activities during the twelve months ended September 30, 1994.
This change resulted primarily from reduced contract purchases of $63,294,000
plus increased collection proceeds of $13,740,000 less increased restricted
cash balances of $7,935,000.
25
<PAGE> 27
Search has obtained tentative financing commitments for a warehouse line
and a securitization line of credit subject to confirmation of the Joint Plan,
due diligence to be performed by the lender and completion of definitive
documentation. This financing would be utilized for the purchase of contract
receivables after the confirmation of the Joint Plan. The financing as
contemplated would be adequate to fund anticipated future operations of Search.
If the Joint Plan is not confirmed or if the confirmation is delayed, the
lender may decide to withdraw its commitment. Search may be unable to obtain
alternative financing if the Joint Plan is not confirmed.
General
The consolidated financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Bankruptcy proceedings, and the reliance by Search on the cash
flows derived from the Fund Subsidiaries, such realization of assets and
liquidation of liabilities are subject to significant uncertainty.
Recent Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has recently issued
Statement of Financial Accounting Standard ("SFAS") No. 123 - "Accounting for
Stock-Based Compensation" which is required for transactions entered into in
fiscal years that begin after December 15, 1995. An entity may elect to
continue to measure compensation cost using APB Opinion No. 25 "Accounting for
Stock Issued to Employees", however, pro forma disclosures in accordance with
SFAS No. 123 must be included, beginning with all awards after December 15,
1994. The statement requires a fair value based method of accounting for an
employee stock option or similar equity instrument as compared to the intrinsic
value based method of accounting prescribed by APB Opinion No. 25. Search has
not fully evaluated the effects of implementing this statement but expects that
they will not be material. In addition no decision has been made with regard
to applying SFAS No. 123 to transactions prior to December 15, 1995, or
continuing to apply APB Opinion No. 25 for those transactions.
26
<PAGE> 28
Fund Subsidiary Activities
Pertinent information regarding each Fund Subsidiary, as of and for the
year ended September 30, 1995, is summarized below:
<TABLE>
<CAPTION>
Private Public (5)
----------------- ----------------------------------------------------------
(All $ in thousands) ACF 91-III ACP ACF ACF 92-II ACF-III ACF-IV ACF-V ACF-VI
---------- --- --- --------- ------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stated interest rate of debt:
Due monthly 15% 15% 15% 15% 15% 3%/14%(4) 12% 12%
Deferred until maturity 6% 6% 3% - - - - -
------------------- ------------------------------------------------------------
Total stated interest 21% 21% 18% 15% 15% 3%/14%(4) 12% 12%
=================== ============================================================
Effective interest rate on debt (1) 28.5% 28.4% 25.7% 21.6% 20.4% 19.2% 16.0% 15.4%
=================== ============================================================
Balance Sheet as of September 30, 1995:
- --------------------------------------
Unpaid installments $213 $177 $346 $4,033 $9,338 $9,790 $22,748 $12,667
Less unearned interest (71) (59) (118) (1,417) (2,479) (1,653) (3,731) (2,278)
Less allowance for credit losses (95) (79) (158) (1,891) (3,310) (2,206) (4,980) (3,042)
Loan origination costs, net of amortization - - - - 94 87 206 138
------------------- ------------------------------------------------------------
Net receivable $47 $39 $70 $725 $3,643 $6,018 $14,243 $7,485
=================== ============================================================
Sinking fund cash $67 $72 $142 $3,826 - - - -
=================== ============================================================
Total assets (3) $99 $95 $189 $4,698 $7,678 $6,518 $15,253 $8,449
=================== ============================================================
Notes payable, subject to compromise $590 $610 $1,506 $10,000 $15,000 $10,000 $19,872 $10,675
=================== ============================================================
Maturity date 3/31/95 4/30/95 12/31/94 12/31/95 4/30/96 12/31/96 12/31/97 6/30/98
Average contract age in months
For the year ended September 30, 1995:
- -------------------------------------
Interest income $63 $53 $200 $1,263 $2,210 $1,473 $3,262 $1,999
Interest expense (1) (138) (162) (318) (1,846) (2,606) (1,685) (2,652) (1,344)
Provision for credit losses (11) (9) (33) (212) (370) (247) (546) (335)
Other expenses (63) (59) (209) (982) (1,422) (993) (2,388) (1,504)
------------------- ------------------------------------------------------------
Net (loss) $(149) $(177) $(360) $(1,777) $(2,188) $(1,452) $(2,324) $(1184)
=================== ============================================================
Stockholders' equity (capital deficit) at
September 30, 1995 $(544) $(575) $(1,810) $(4,751) $(7,135) $(4,543) $(5,887) $(1,472)
</TABLE>
(1) Stated interest rate of Notes plus amortization of Notes offering costs.
(2) Includes unamortized costs of Notes offerings, cash, and other assets.
(3) Interest was 3% until October 15, 1993 and 14% thereafter.
27
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Pursuant to Instruction 1 of Regulation S-K, Item 304, no disclosure is
required under this item because of prior reports filed with the Securities and
Exchange Commission on Forms 8-K.
28
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Company's
definitive Proxy Statement pursuant to Reg. 14A in connection with the
Registrant's 1996 Annual Meeting of Stockholders and is incorporated herein by
reference thereto.
29
<PAGE> 31
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidating Balance Sheets as of September 30, 1995 and 1994 F-4
Consolidating Statements of Operations for the years ended September 30, 1995, 1994 and F-5
the nine months ended September 30, 1993
Consolidated Statement of Changes in Stockholders' Equity (Capital Deficit) for the F-6
period from January 1, 1993 through September 30, 1995
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1994 and F-7
the nine months ended September 30, 1993.
Notes to Consolidated Financial Statements F-8
</TABLE>
All financial statement schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is included
in the financial statements or the notes thereto.
F-1
<PAGE> 32
[BDO LETTERHEAD]
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders
Search Capital Group, Inc.
Dallas, Texas
We have audited the accompanying consolidating balance sheets of Search Capital
Group, Inc. and Subsidiaries (the Company) as of September 30, 1995 and 1994,
and the related consolidating statements of operations and consolidated
statements of changes in stockholders' equity (capital deficit), and cash flows
for the years then ended. The financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Search Capital
Group, Inc. and Subsidiaries as of September 30, 1995 and 1994, and the results
of operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Search Capital Group, Inc. and its Subsidiaries will continue as a going
concern. As discussed in Notes 2 and 13 to the consolidated financial
statements, the Fund Subsidiaries filed on August 14, 1995, a petition in the
United States Bankruptcy Court for the Northern District of Texas seeking
protection under Chapter 11 of Title 11 of the United States Bankruptcy Code.
Search, the parent company of the Fund Subsidiaries, did not seek the
protection of the Bankruptcy Court; and contemporaneously filed with the Fund
Subsidiaries, as co-proponents, the Joint Plan of Reorganization ("The Plan").
The Plan and related disclosure statement was approved by the United States
Bankruptcy Court December 22, 1995. The Plan will now be submitted to the
creditors for final acceptance and selection of available options, however the
final outcome of the creditors' decision and confirmation of The Plan cannot
presently be determined. These
F-2
<PAGE> 33
[BDO LETTERHEAD]
Page 2
uncertainties raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
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.
As discussed in Note 14 to the consolidated financial statements, the Company
is a defendant in a class action complaint alleging federal securities law
violations, The ultimate outcome of the litigation cannot be presently
determined. Accordingly, no provision for any liability that may result from
litigation or settlement has been made in the accompanying financial
statements.
/s/ BDO SEIDMAN, LLP
Certified Public Accountants
Dallas, Texas
November 15, 1995, except for Notes 2, 6 and 14
which are as of December 30, 1995
F-3
<PAGE> 34
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Search Capital Group, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Search Capital Group, Inc. and
Subsidiaries for the nine months ended September 30, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express our opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the results of operations and cash flows of Search
Capital Group, Inc. and Subsidiaries for the nine months ended September 30,
1993 in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information is presented for purposes of additional analysis of the
consolidated financial statements rather than to present the financial
position, results of operations, and cash flows of the individual companies.
The consolidating information has been subjected to the auditing procedures
applied in the audit of the consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
January 6, 1994
Dallas, Texas
F-4
<PAGE> 35
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidating Balance Sheets
<TABLE>
<CAPTION>
(All numbers in thousands) September 30, 1995 September 30, 1994
------------------------------------------- --------------------------------------------
Fund Subsidiaries
Search & & Eliminations Search &
ASSETS Unrestricted (Debtors-in- Unrestricted Fund Subsidiaries
- ----- Subsidiaries possession) Consolidated Subsidiaries & Eliminations Consolidated
------------ ---------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Contracts receivable $7,365 $59,312 $66,677 $35,255 $98,848 $134,103
Unearned interest (1,300) (11,806) (13,106) (6,785) (20,862) (27,647)
------------------------------------------- --------------------------------------------
Net Contracts Receivable 6,065 47,506 53,571 28,470 77,986 106,456
Allowance for credit losses (2,862) (15,761) (18,623) (12,803) (31,830) (44,633)
Loan origination costs 591 3,163 3,754 518 2,221 2,739
Amortization of loan origination
costs (506) (2,431) (2,937) (331) (1,559) (1,890)
------------------------------------------- --------------------------------------------
Net contract receivables - after
allowance for credit losses &
other costs 3,288 32,477 35,765 15,854 46,818 62,672
------------------------------------------- --------------------------------------------
Cash and cash equivalents 442 - 442 939 - 939
Restricted cash - 8,105 8,105 - 3,586 3,586
Vehicles held for resale 93 508 601 185 506 691
Deferred note offering costs 42 9,011 9,053 42 8,813 8,855
Accumulated amortization (41) (5,950) (5,991) (39) (3,112) (3,151)
------------------------------------------- --------------------------------------------
Deferred note offering cost, net 1 3,061 3,062 3 5,701 5,704
------------------------------------------- --------------------------------------------
Property and equipment 2,126 - 2,126 1,459 - 1,459
Accumulated depreciation (820) - (820) (397) - (397)
------------------------------------------- --------------------------------------------
Property and equipment, net 1,306 - 1,306 1,062 - 1,062
------------------------------------------- --------------------------------------------
Inter-company balance 646 (646) - 752 (752) -
Other assets, net 650 (9) 641 472 - 472
------------------------------------------- --------------------------------------------
Total assets $6,426 $43,496 $49,922 $19,267 $55,859 $75,126
=========================================== ============================================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
------------------------------------------------------
Liabilities Not Subject to Compromise
-------------------------------------
Lines of Credit $1,058 $ - $ 1,058 $3,487 $ - $ 3,487
Notes Payable - - - - 70,768 70,768
Cash overdraft - - - 1,218 - 1,218
Accrued settlement 2,912 - 2,912 560 - 560
Accrued restructuring 214 - 214 - - -
Accounts payable and other 1,804 247 2,051 1,864 122 1,986
liabilities
Accrued interest 2 - 2 5 1,478 1,483
----------------------------------------- -----------------------------------------
Liabilities not subject to compromise 5,990 247 6,237 7,134 72,368 79,502
----------------------------------------- -----------------------------------------
Liabilities Subject to Compromise
---------------------------------
Prepetition notes payable and accrued
interest - subject to compromise - 69,320 69,320 - - -
----------------------------------------- -----------------------------------------
Stockholders' Equity (Capital
-----------------------------
Deficit)
--------
Preferred stock - 12% senior
convertible, $.01 par value,
cumulative, 400,000 shares issued and
outstanding (liquidation preference
of $2,000,000 plus accrued dividends) 4 - 4 4 - 4
Common stock $.01 par value,
20,000,000 shares authorized,
11,697,530 shares issued 117 - 117 117 - 117
Additional paid-in capital 26,766 - 26,766 27,006 - 27,006
Accumulated deficit (25,301) (26,071) (51,372) (14,969) (16,509) (31,478)
Treasury stock at cost, 3,026,389 and
2,526,389 shares, respectively (1,150) - (1,150) (25) - (25)
----------------------------------------- -----------------------------------------
Total stockholders' equity
(capital deficit) 436 (26,071) (25,635) 12,133 (16,509) (4,376)
----------------------------------------- -----------------------------------------
Total liabilities and stockholders'
equity (capital deficit) $6,426 $43,496 $49,922 $19,267 $55,859 $75,126
========================================= =========================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 36
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidating Statements of Operations
<TABLE>
<CAPTION>
Year Ended September 30, 1995 Year Ended September 30, 1994
--------------------------------------------- ----------------------------------------------
Fund
(All dollars in thousands, Subsidiaries
except per share amounts) Search & & Eliminations Search & Fund
Unrestricted (Debtors-in- Unrestricted Subsidiaries
Subsidiaries possession) Consolidated Subsidiaries & Eliminations Consolidated
--------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue $2,949 $10,523 $13,472 $2,921 $11,133 $14,054
Interest expense 252 10,953 11,205 237 9,731 9,968
--------------------------------------------- ----------------------------------------------
Net interest income (loss) 2,697 (430) 2,267 2,684 1,402 4,086
Provision for credit losses 1,365 1,763 3,128 4,757 15,423 20,180
--------------------------------------------- ----------------------------------------------
Net interest income (loss) after
provision for credit losses 1,332 (2,193) (861) (2,073) (14,021) (16,094)
--------------------------------------------- ----------------------------------------------
General and administrative expense 8,513 7,368 15,881 5,996 3,324 9,320
Settlement expense 2,837 - 2,837 560 - 560
Reorganization expense 315 - 315 - - -
--------------------------------------------- ----------------------------------------------
Operating and other expense 11,665 7,368 19,033 6,556 3,324 9,880
Other Income - - - 24 - 24
--------------------------------------------- ----------------------------------------------
Net income (loss) (10,333) (9,561) (19,894) (8,605) (17,345) (25,950)
--------------------------------------------- ----------------------------------------------
Preferred stock dividends (240) - (240) (240) - (240)
--------------------------------------------- ----------------------------------------------
Net loss attributable to common
stockholders $(10,573) $(9,561) $(20,134) $(8,845) $(17,345) $(26,190)
============================================= ==============================================
Net loss per share attributable
to common shareholders $(2.25) $(2.33)
============ ===========
Weighted average number of
common shares outstanding 8,967,000 11,258,000
============ ===========
<CAPTION>
Nine Months Ended September 30, 1993
(See Note 1)
-----------------------------------------------
(All dollars in thousands,
except per share amounts) Search & Fund
Unrestricted Subsidiaries
Subsidiaries & Eliminations Consolidated
-----------------------------------------------
<S> <C> <C> <C>
Interest revenue $433 $6,663 $7,096
Interest expense 196 3,977 4,173
-----------------------------------------------
Net interest income (loss) 237 2,686 2,923
Provision for credit losses - - -
-----------------------------------------------
Net interest income (loss) after
provision for credit losses 237 2,686 2,923
-----------------------------------------------
General and administrative expense 1,362 1,713 3,075
Settlement expense - - -
Reorganization expense - - -
-----------------------------------------------
Operating and other expense 1,362 1,713 3,075
Other Income 24 - 24
-----------------------------------------------
Net income (loss) (1,101) 973 (128)
-----------------------------------------------
Preferred stock dividends (263) - (263)
-----------------------------------------------
Net loss attributable to common
stockholders $(1,364) $973 $(391)
===============================================
Net loss per share attributable
to common shareholders $(0.06)
============
Weighted average number of
common shares outstanding 6,131,000
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 37
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity (Capital Deficit)
For the period from January 1, 1993 through September 30, 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
---------------- ------------------ -------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 (See Note 1) 302,000 $3,000 6,983,664 $69,000 2,526,389 $(25,000)
Issuance of preferred shares for cash 98,000 1,000 - - - -
Issuance of Common shares for cash - - 300,000 4,000 - -
Issuance of common shares for minority - - 4,397,006 44,000 - -
interest in subsidiary
Class B preferred stock dividends ($0.22/share) - - - - - -
Senior preferred stock dividends ($0.60/share) - - - - - -
Net loss - - - - - -
--------------------------------------------------------------------
Balance, September 30, 1993 400,000 4,000 11,680,670 117,000 2,526,389 (25,000)
Conversion of ESOP to Equity - - 485,000 5,000 - -
--------------------------------------------------------------------
Balance, September 30, 1993 with ESOP 400,000 4,000 12,165,670 122,000 2,526,389 (25,000)
Issuance of common shares for cash - - 2,785,000 28,000 - -
ESOP Termination, net of expenses - - (306,152) (3,000) - -
Stock Cancellation - - (2,946,988) (30,000) - -
Senior preferred stock dividends ($.60/share) - - - - - -
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)
Senior preferred stock dividends ($.60/share) - - - - - -
Net loss - - - - - -
--------------------------------------------------------------------
Balance, September 30, 1995 400,000 $4,000 11,697,530 $117,000 3,026,389 $(1,150,000)
====================================================================
<CAPTION>
Additional Total Equity/
Paid-In ESOP Notes Accumulated (Capital
Capital Receivable Deficit Deficit)
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 (See Note 1) $6,312,000 $ - $(5,400,000) $959,000
Issuance of preferred shares for cash 407,000 - - 408,000
Issuance of Common shares for cash 1,121,000 - - 1,125,000
Issuance of common shares for minority (44,000) - - -
interest in subsidiary
Class B preferred stock dividends ($0.22/share) (87,000) - - (87,000)
Senior preferred stock dividends ($0.60/share) (176,000) - - (176,000)
Net loss - - (128,000) (128,000)
----------------------------------------------------------------
Balance, September 30, 1993 7,533,000 (5,528,000) 2,101,000
Conversion of ESOP to Equity 1,178,000 (1,073,000) - 110,000
----------------------------------------------------------------
Balance, September 30, 1993 with ESOP 8,711,000 (1,073,000) (5,528,000) 2,211,000
Issuance of common shares for cash 19,379,000 - - 19,407,000
ESOP Termination, net of expenses (874,000) 1,073,000 - 196,000
Stock Cancellation 30,000 - - -
Senior preferred stock dividends ($.60/share) (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)
Senior preferred stock dividends ($.60/share) (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)
================================================================
</TABLE>
Note - Certain subsidiaries, as discussed in Note 2, are debtors-in-possession.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 38
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(All numbers in thousands)
Twelve Months Twelve Months Nine Months Ended
Ended September Ended September September 30,
30, 1995 30, 1994 1993 (See Note 1)
--------------- --------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(19,894) $(25,950) $(128)
Adjustments to reconcile net loss to cash
used in operations:
Provision for credit losses 3,128 20,180 -
Amortization of deferred offering costs 2,840 2,158 762
Amortization of loan origination costs 1,047 1,728 162
Depreciation and amortization 384 217 76
Changes in assets and liabilities:
Decreases (increases) in other assets, net (86) 60 (85)
Increases in accounts payable and accrued expense 1,840 3,488 640
--------------- --------------- ------------------
Cash provided by (used in) operations (10,741) 1,881 1,427
--------------- --------------- ------------------
INVESTING ACTIVITIES:
Purchase of contract receivables, including
origination fees (24,830) (88,124) (29,002)
Principal payments on contract receivables
including proceeds from sales of vehicles 47,652 33,912 9,598
Purchases of property and equipment (711) (957) (75)
(Increases) decreases in restricted cash (4,519) 3,416 (2,665)
Increase in notes receivables - - (2)
Decrease in notes receivable, related party - 167 -
--------------- --------------- ------------------
Cash provided by (used in) investing 17,592 (51,586) (22,146)
--------------- --------------- ------------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit (2,429) 3,487 -
Notes payable proceeds 1,779 31,206 22,562
Notes payable repayments - prepetition (5,077) (1,000) -
Capital lease (repayments) financing (58) 308 -
Notes payable offering costs (198) (3,455) (2,861)
Proceeds from sale of preferred stock, net of - - 408
expenses
Proceeds from sale of stock, net of expense - 19,407 1,125
Purchase of treasury stock (1,125) - -
Change in ESOP Note Receivable - 196 (4)
Payment of dividends (240) (240) (263)
--------------- --------------- ------------------
Cash provided by (used in) financing activities (7,348) 49,909 20,967
--------------- --------------- ------------------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (497) 204 248
Cash and cash equivalents - beginning 939 735 487
--------------- --------------- ------------------
Cash and cash equivalents - ending $442 $939 $735
=============== =============== ==================
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $9,272 $7,426 $2,931
=============== =============== ==================
</TABLE>
Note - Certain subsidiaries, as discussed in Note 2, are debtors-in-possession.
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 39
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
(CERTAIN SUBSIDIARIES, AS DISCUSSED IN NOTE 2, ARE DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The accompanying consolidated financial statements include the accounts of
Search Capital Group, Inc. and its subsidiaries ("Search") as follows:
<TABLE>
<CAPTION>
Ownership
Subsidiary Percentage
---------- ----------
<S> <C> <C>
Automobile Credit Holdings, Inc. ("ACHI") 100% (a,c)
Automobile Credit Acceptance Corp. ("ACAC") (100% owned by ACHI) 100% (a,c)
Consumer Dealer Autocredit Corporation ("CDAC") (100% owned by ACHI) 100% (a,b,c)
Eight Fund Subsidiaries and two previous Fund Subsidiaries - debtors-in-possession 100%
Newsearch, Inc. 100% (b,c)
Search Funding Corp. ("SFC") 100% (c)
Automobile Wholesaling, Inc. 100% (b,c)
Search Automobile Leasing Corporation 100% (b,c)
</TABLE>
(a) Search had a 52% voting interest in these entities, resulting from
ownership of 50% of the common stock and 100% of the voting preferred stock
of ACHI, until June 30, 1993, at which time Search acquired the minority
interest in ACHI.
(b) Currently inactive.
(c) Unrestricted subsidiaries, which are not debtors-in-possession.
The consolidating statements separate Search and its unrestricted
subsidiaries from the Fund Subsidiaries which are non-recourse. The Fund
Subsidiaries are special purpose corporations which raised money through the
issuance of interest bearing notes for the purchase of contract receivables.
The Fund Subsidiaries, which are debtors-in-possession (see Note 2 for full
discussion of bankruptcy proceedings), have accounted for all transactions
related to the reorganization proceedings in accordance with Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," (SOP 90-7) issued by the American Institute of Certified
Public Accountants in November 1990.
Search and its subsidiaries are collectively referred to as Search. ACAC
is in business to raise capital to be used by the Fund Subsidiaries to
purchase, at a significant discount, retail installment sale contracts
generated by the sale of used automobiles and light trucks. ACAC also services
the contracts on behalf of the Fund Subsidiaries. All significant intercompany
transactions have been eliminated.
Certain reclassifications have been made to prior financial statements in
order to conform with the 1995 presentation. In 1993, Search changed its
fiscal year end to September 30.
F-8
<PAGE> 40
Interest Income and Allowance for Credit Losses
Search's recognition of interest income and allowance for credit losses is
discussed in Note 2.
Loan Origination Costs
Search performs substantially all of the functions associated with
origination of the contracts and capitalizes the related costs. The costs are
amortized by the interest method against income as an adjustment of yield.
Deferred Notes Payable Offering Costs
Costs directly related to notes payable offerings are capitalized and
amortized to expense by the interest method over the contractual terms of the
notes. Deferred offering costs are the commissions, printing, legal,
accounting and other expenditures incurred in issuing the notes to the
investors.
Vehicles Held for Resale
Vehicles held for resale represent estimated collateral value for cars in
Search's possession and are carried at the lower of cost or estimated net
realizable value.
Property and Equipment
Property and Equipment includes assets which are depreciated over 3 year
and 5 year lives and leasehold improvements which are amortized over the
remaining term of the lease.
Net Loss Per Share Attributable to Common Stockholders
The net loss per share attributable to common stockholders has been
computed based on the weighted average number of common shares outstanding
during each period. Common stock equivalents, Class B Convertible and Senior
Convertible Preferred Stock are included in the calculations except when their
effect would be antidilutive.
On July 20, 1994, certain stockholders voluntarily canceled 2,946,988
shares of common stock and warrants to purchase 390,654 shares of common stock.
Had these shares and warrants been canceled at the beginning of the fiscal year
ended September 30, 1994, the common shares outstanding and net loss per share
would have been $(2.95) on a weighted average number of common shares and
equivalents outstanding of 8,893,000.
Income Taxes
Statement of Financial Accounting Standards (SFAS) No. 109, issued by the
Financial Accounting Standards Board in February 1992, required a change in
accounting for income taxes. Search adopted SFAS No. 109 in 1993, and it did
not have a material effect on Search's financial statements.
Statement of Cash Flows
For purposes of reporting cash flows, Search considers short term cash
investments with original maturities of three months or less to be cash
equivalents. Cash held in a Fund Subsidiary is restricted to payment of
allowable expenses and investment in contract receivables until the note
balance of the Fund Subsidiary is paid.
F-9
<PAGE> 41
2. CHAPTER 11 BANKRUPTCY FILING OF THE FUND SUBSIDIARIES AND CONTRACTS
RECEIVABLE
As of September 30, 1995, the Fund Subsidiaries consist of six public and
two private corporations as follows:
Automobile Credit Fund 91-III, Inc. (ACF 91-III) - Private
Automobile Credit Finance, Inc. (ACF) - Public
Automobile Credit Partners, Inc. (ACP) - Private
Automobile Credit Finance 92-II, Inc. (ACF 92-II) - Public
Automobile Credit Finance III, Inc. (ACF III) - Public
Automobile Credit Finance IV, Inc. (ACF IV) - Public
Automobile Credit Finance V, Inc. (ACF V) - Public
Automobile Credit Finance VI, Inc. (ACF VI) - Public
Fund Subsidiaries' restricted cash balance of $8,105,000 at September 30,
1995, is held for reinvestment or in sinking funds to be applied to the
repayment of the Fund Subsidiaries' notes. Use of proceeds from the contracts
receivable is restricted to payment of certain allowed expenses and the
purchase of additional contracts.
At September 30, 1995, contractual maturities of contracts receivables for
Search and unrestricted subsidiaries were as follows:
<TABLE>
<CAPTION>
1996 1997 1998 Total
---------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Future Payments Receivable $5,763,000 $1,591,000 $11,000 $7,365,000
Less Unearned Interest 1,115,000 184,000 1,000 1,300,000
---------- ---------- ------- ----------
$4,648,000 $1,407,000 $10,000 $6,065,000
========== ========== ======= ==========
</TABLE>
At September 30, 1995, contractual maturities of contracts receivable
for Fund Subsidiaries were as follows:
<TABLE>
<CAPTION>
1996 1997 1998 Total
---------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Future Payments Receivable $36,905,000 $19,056,000 $3,351,000 $59,312,000
Less Unearned Interest 8,950,000 2,681,000 175,000 11,806,000
----------- ----------- ---------- -----------
$27,955,000 $16,375,000 $3,176,000 $47,506,000
=========== =========== ========== ===========
</TABLE>
In the opinion of management, a portion of the contracts receivable will be
repaid or extended either before or past the contractual maturity date. In
addition, some contracts will default before maturity. The above tabulation,
therefore, is not to be regarded as a forecast of future cash collections.
Management has determined that the net cash flow from the Fund Subsidiaries
will not be sufficient to fully retire the related Fund Subsidiaries notes
payable as discussed in Note 5, and as part of the Plan of Reorganization
discussed below, the Fund Subsidiaries filed for protection under Chapter 11.
SUBSIDIARY BANKRUPTCY FILINGS
At Search's annual shareholders' meeting, held May 10, 1995, Search
announced a preliminary outline of a plan to convert the approximately $68
million debt owed by the Fund Subsidiaries into equity in the Parent Company
(Search). Search engaged the investment banking firm of Alex. Brown & Sons to
develop a formal detailed plan of debt-to-equity conversion. To facilitate the
development of this plan Search also formed an ad hoc committee of noteholders
in all eight of its Fund Subsidiaries to review the proposals of Alex. Brown &
Sons and provide input and recommendations for the plan.
F-10
<PAGE> 42
In order to consummate the debt-to-equity conversion plan proposed by Alex.
Brown & Sons, it was necessary for each of the Fund Subsidiaries to file for
reorganization under Chapter 11 of the U. S. Bankruptcy Code. These cases have
been consolidated as one case for administration. Search and its unrestricted
subsidiaries have not sought protection under the Code but Search is a
proponent of a joint plan of reorganization of the Fund Subsidiaries ("Joint
Plan"). On August 25, 1995 an organizational meeting was held by the U. S.
Bankruptcy Trustee to select a committee (the "Committee") to represent the
noteholders ("Creditors") during the bankruptcy proceedings. On December 19,
1995, Search, the Fund Subsidiaries and the Committee agreed to a consensual
plan of reorganization (Joint Plan) which was approved by the Court on December
22, 1995.
Final effectiveness of the Joint Plan as to each Fund Subsidiary is
dependent on its confirmation by the Court, which will occur, if at all, after
a vote of the holders ("Noteholders") of outstanding notes issued by the Fund
Subsidiaries ("Notes"). There can be no assurance that the Joint Plan as to
each Fund Subsidiary will become effective or that the Joint Plan as to each
Fund Subsidiary will be confirmed on essentially the same terms as fully
described in the Disclosure Statement. The final terms of the Joint Plan, if
they differ in any material fashion from the proposed terms, will be contingent
on, among other things, approval by Search's Board of Directors and a vote of
Search's shareholders to approve the increase in the authorized number of
shares of Common Stock and Preferred Stock to levels adequate to meet the
requirements of the proposed Joint Plan.
If confirmed with respect to a particular Fund Subsidiary, the Joint Plan,
as currently proposed, provides that Noteholders voting to accept the Joint
Plan may choose one of two options (the "Plan Options"). Under the First Plan
Option (the "Search Equity Option"), the Noteholders would essentially exchange
their Notes for the issuance by Search of a combination of shares of Common
Stock, shares of a new series of Convertible Preferred Stock ("New Preferred
Stock") and dividends accrued at 9% on the New Preferred Stock from July 1,
1995 until the effective date of the Joint Plan. Under the Second Plan Option,
the Noteholders could choose the continued collection or the sale of the
collateral securing their Notes and the distribution to the Noteholders of the
resulting cash proceeds (the "Collateral Option"). As to any one Fund
Subsidiary, the selection by the Noteholders of either Plan Option would be
implemented on a Noteholder-by-Noteholder basis. Noteholders who vote against
the Joint Plan will not be entitled to select between the Search Equity Option
and the Collateral Option but will receive treatment under the Search Equity
Option. A pro rata share of the assets of the Fund Subsidiaries attributable
to Noteholders electing the Collateral Option will be transferred to the
trustee of a newly established trust to be held for the benefit of such
Noteholders. The trustee will collect the motor vehicle receivables held by
the trust and make regular distributions to the Noteholders. In the
alternative, the motor vehicle receivables will be sold by the trustee to the
highest bidder, assuming a sale price greater than the liquidation value of the
receivables. The pro-rata portion of the assets of the Fund Subsidiaries
attributable to Noteholders electing the Search Equity Option will be
transferred to Search. In addition to the New Preferred Stock, the Common Stock
and dividends, the Noteholders will receive with respect to the unsecured
portion of their claims, a pro-rata share of five year warrants to purchase an
aggregate of 5,000,000 shares of Common Stock (the "Warrants"). The exercise
price of the Warrants will be $2.00 during the first year and increase by $.25
per year during the term of the Warrants. All Warrants not exercised prior to
the expiration will be redeemed at a price of $.25 per Warrant.
The Joint Plan also contemplates establishment of a trust ("Litigation
Trust") for the benefit of holders of unsecured claims of Fund Subsidiaries for
which the Joint Plan is approved. The trust will be established with a total
funding of $350,000 prorated among the confirming Fund Subsidiaries. The
Litigation Trust will be authorized to pursue any claims and causes of action
of each Fund Subsidiary for which the Joint Plan is approved. The Litigation
Trust will automatically terminate if the Common Stock trades at an average
price of $2.50 per share for 30 consecutive trading days during the first year
following the effective date of the Joint Plan.
As a consequence of the consummation of the Joint Plan as to any Fund
Subsidiary, the former Noteholders of that Fund Subsidiary who elect the Search
Equity Option would ultimately own shares of Search's Common Stock and New
Preferred Stock. The Notes and the Noteholders constitute essentially all of
the indebtedness and creditors, respectively, of the Fund Subsidiaries. If the
Joint Plan is confirmed, as currently proposed, with respect to each of the
Fund Subsidiaries, an aggregate of approximately $69,320,000 of indebtedness of
the Fund Subsidiaries represented by the Notes would be canceled. The total
assets to be transferred to Search as opposed to a transfer to the Noteholders
F-11
<PAGE> 43
Trust will depend on the relative amounts of indebtedness of Noteholders
electing the Search Equity Option or the Collateral Option.
The Joint Plan and Disclosure Statement describing the terms of the Joint
Plan, Search, the Fund Subsidiaries, the terms of the New Preferred Stock and
the rights of the Noteholders and other claimholders are subject to review and
approval by the Court prior to being mailed to the Noteholders. On December
22, 1995, the Court approved the Joint Plan and Disclosure Statement for
mailing to the Noteholders and other claimholders, together with ballots for
registering their votes for acceptance or rejection of the Joint Plan. The
Noteholders of each Fund Subsidiary will be entitled to vote for or against the
Joint Plan, with respect to claims represented by their Notes, as a separate
creditor class. The Disclosure Statement was mailed to Noteholders on December
29 and 30, 1995, the final date for receipt of ballots on the Plan is January
29, 1996.
The primary adverse effect of the confirmation of the Joint Plan on
existing shareholders would be the dilution of their voting power from issuance
of the shares of the New Preferred Stock, Common Stock and Common Stock
equivalents. The shares of New Preferred Stock would be convertible into
30,063,296 shares of Common Stock. Search's existing shareholders would own
none of the newly issued shares of New Preferred Stock, and the Noteholders
would own none of the outstanding shares of the 12% Preferred Stock. In
addition, the annual dividend requirements on the shares of New Preferred Stock
would be substantially less than the aggregate debt service requirements of the
Notes and would be reduced or disappear upon any conversion of the New
Preferred Stock into Common Stock.
The accompanying financial statements include the cost associated with the
Company's Fund Subsidiaries bankruptcy proceedings and these costs have been
separately disclosed in the statement of operations as a reorganization
expense.
The Fund Subsidiaries, which are debtors in possession, have accounted for
all transactions related to the reorganization proceedings in accordance with
SOP 90-7. Accordingly, all prepetition liabilities of the Fund Subsidiaries
that are expected to be impaired under the joint plan of reorganization
ultimately approved by the Bankruptcy Court are reported separately in the
consolidating balance sheet as liabilities subject to compromise (see Note 5
for a description of such liabilities). Expenses, primarily professional fees,
resulting from the reorganization proceedings, are reported separately in the
consolidating statement of operations as reorganization expense. Contractual
interest obligations which are relieved from payment as a result of the Chapter
11 proceedings are not accrued.
3. ACQUISITIONS
On June 30, 1993, Search acquired the remaining 50% of ACHI's common stock
in exchange for 4,397,006 newly issued restricted common shares and the shares
were recorded at the book value of the minority interest acquired, which
approximated management's estimate of market value. These transactions were
accounted for as a purchase and the operations of CDAC have been consolidated
with those of Search beginning August 31, 1992.
In October 1993 Search purchased 100% of the common stock of Automobile
Credit Partners, Inc. (ACP), a company owned by an officer and director and
principal stockholder of Search. ACP is engaged in the same business and has
been funded in the same manner as the Fund Subsidiaries, and its contracts are
serviced by CDAC. The purchase price was $17,000. This transaction has been
accounted for as a reorganization of entities under common control which is
similar to the pooling of interests method. Accordingly, all assets and
liabilities are recorded at their historical cost and the results of operations
and cash flows have been included from the acquisition date, the date on which
Search had common control.
F-12
<PAGE> 44
4. CHANGE IN ACCOUNTING PRINCIPLE AND ALLOWANCE FOR CREDIT LOSSES
Through the third quarter of fiscal 1994, Search recorded interest revenue
and allowance for credit losses based on AICPA Practice Bulletin 6,
Amortization of Discounts on Certain Acquired Loans ("PB6"). Under PB6, Search
recorded an allowance for credit losses upon acquisition of the installment
loans in an amount equal to the difference between the contractual payments due
and the estimated undiscounted future cash collections. The difference between
the undiscounted future cash collections and the acquisition amount of the
installment contracts was amortized to interest revenue over the period in
which payments on the installment contracts were expected to be collected.
Under PB6, if the estimate of the total probable collections was increased or
decreased but still greater than the sum of the acquisition amount less
collections plus the discount amortized to date, the remaining amount of the
discount to be amortized to interest income was adjusted and amortized over the
remaining life of the loans. Accordingly, changes in estimates of future cash
collections were recognized through prospective yield adjustments.
In the fourth quarter of fiscal 1994, Search elected early adoption of
Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"),
which address the accounting by creditors for impairment of a loan and related
income recognition and disclosures. In accordance with SFAS 114, contracts
receivable are analyzed on a loan-by-loan basis. Search evaluates the
impairment of loans based on contractual delinquency, as well as other factors
specific to the notes receivable. When a concern exists as to the
collectibility of an account, interest income ceases to be recognized. The
notes receivable, once impaired, are collateral dependent; that is once a note
receivable is in default Search looks to the underlying collateral for
repayment of the note receivable. Therefore at impairment Search records an
allowance for credit losses to record the note receivable at the fair value of
the collateral. If the measure of the impaired note receivable is less than the
net recorded investment in the note receivable, Search recognizes an impairment
by creating an additional allowance for credit losses in excess of the initial
allowance provided, with a corresponding charge to provision for credit losses.
The provision for credit losses is adjusted for any differences between the
final net proceeds of an impaired note receivable and its net carrying value.
Search records contract purchases at cost. Contractual finance charges are
recorded as unearned interest and amortized to interest income using the
interest method. As noted above amortization of interest income ceases upon
impairment. An initial allowance for credit losses is recorded at the
acquisition of a note receivable equal to the unearned discount, the difference
between the amount financed and the acquisition cost.
The recorded investment and related allowance for credit losses, excluding
net loan origination costs, are summarized below on a consolidated basis:
<TABLE>
<CAPTION>
As of September 30, 1995
-------------------------------------------------------------------
(Dollars in thousands) Number of Total
Active Unpaid Unearned Net
Receivables Installments Interest Receivables
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Impaired contracts 2,323 $12,919 $ 1,644 $11,275
Unimpaired contracts 9,805 53,758 11,462 42,296
----------- ------------ -------- -----------
Total 12,128 $66,677 $13,106 $53,571
=========== ============ ========
Allowance for credit losses (18,623)
-----------
Contract receivables, net of
allowance for credit losses $34,948
===========
</TABLE>
F-13
<PAGE> 45
<TABLE>
<CAPTION>
As of September 30, 1994
-------------------------------------------------------------------
(Dollars in thousands) Number of Total
Active Unpaid Unearned Net
Receivables Installments Interest Receivables
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Impaired contracts 4,269 $ 29,986 $ 4,968 $ 25,018
Unimpaired contracts 14,726 104,117 22,679 81,438
----------- ------------ -------- -----------
Total 18,995 $134,103 $27,647 $106,456
=========== ============ ========
Allowance for credit losses (44,633)
Contract receivables, net of -----------
allowance for credit losses $ 61,823
===========
</TABLE>
The change in the allowance for credit losses is summarized as follows on a
consolidated basis:
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Balance, beginning of period $44,633 $4,656
Allowance recorded upon acquisition of loans 9,613 37,727
Increase in allowance for credit losses 3,169 20,180
Loans charged off against allowance (38,792) (17,930)
-------- --------
Balance, end of period $18,623 $44,633
======== ========
</TABLE>
Through the use of its Auto Notes Management System, management is able to
evaluate the loan impairment of the contracts receivable on a loan-by-loan
basis.
Prior to adoption of SFAS 114, the Company, as more fully explained below,
only recognized 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
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.
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
F-14
<PAGE> 46
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 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 early adopted SFAS 114 in fiscal 1994 because the measurement of
credit losses provided by this statement is considered preferable.
Most of Search's contracts receivable 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. Search and the Trustee for the Fund Subsidiaries hold vehicle
titles as collateral for all contracts receivable until such contracts are paid
in full.
F-15
<PAGE> 47
5. PREPETITION NOTES PAYABLE AND ACCRUED INTEREST SUBJECT TO COMPROMISE
Notes payable of the Fund Subsidiaries are non-recourse to Search and its
affiliated non-fund subsidiaries. Related terms and interest rates for the
Fund Subsidiaries, all of which are in bankruptcy and default (See Note 4),
consisted of the following:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Notes payable by ACF 91-III, bearing interest at 21%, require
monthly interest payments at 15% through March 31, 1995, at
which time principal and the remaining deferred interest
accrued at 6% was due - in default at maturity date. $590,000 $1,000,000
Notes payable by ACP, bearing interest at 21%, require
monthly interest payments of 15% through April 30, 1995 at
which time principal and the remaining deferred interest
accrued at 6% was due - in default at maturity date. 610,000 1,000,000
Notes payable by ACF, bearing interest at 18%, require
monthly interest payments at 15% through December 31, 1994,
at which time principal and the remaining deferred interest
accrued at 3% was due - in default at maturity date. 1,506,000 5,000,000
Notes payable by ACF 92-II, bearing interest at 15% due
monthly, require payment of principal in full on December 31,
1995. 10,000,000 10,000,000
Notes payable by ACF III, bearing interest at 15% due
monthly, require payment of principal in full on April 30,
1996. 15,000,000 15,000,000
Notes payable by ACF IV, bearing interest at 3% until October
15, 1993 and 14% thereafter due monthly, require payment of
principal quarterly from September 30, 1995 to December 31,
1996. 10,000,000 10,000,000
Notes payable by ACF V, bearing interest at 12% due monthly,
require payment of principal quarterly from October 1, 1996
to December 31, 1997. 19,872,000 19,872,000
Notes payable by ACF VI, bearing interest at 12% due monthly,
require payment of principal quarterly from July 1, 1997 to
June 30, 1998. 10,675,000 8,896,000
---------------------------------------------
68,253,000 70,768,000
Accrued Interest 1,067,000 1,478,000
---------------------------------------------
$69,320,000 $72,246,000
=============================================
</TABLE>
Contracts receivable owned by each Fund Subsidiary are pledged as
collateral for the respective notes payable of each entity.
As of their maturity ACF, ACF 91-III and ACP stopped accruing interest on
the remaining unpaid principal. As these Fund Subsidiaries are in default, it
is currently management's position that the accrual of interest is not
warranted since each Fund Subsidiary will not have sufficient assets to fully
retire the principal portion of the notes.
F-16
<PAGE> 48
The August 14, 1995 bankruptcy filing of the individual Fund Subsidiaries
was an event of default for all of the Fund Subsidiaries under the terms of
their indenture agreements. In accordance with SOP 90-7, contractual interest
obligations which are relieved from payment as a result of the Chapter 11
proceedings are not accrued. Contractual interest on the above obligations
amounts to $12,453,000 which is $1,500,000 in excess of reported interest
expense. Management has presented the noteholders a proposal for a
debt-to-equity exchange more fully described in Note 2 and in the Joint
Disclosure Statement filed with the Bankruptcy Court.
On the December 31, 1994 maturity date for ACF there was $3,175,000 in the
ACF sinking fund to be applied to obligations of $5,406,000. ACF's
insufficient cash balance constituted a default under its indenture agreement
with Search and Texas Commerce Bank National Association ("Trustee"). As of
September 30, 1995, ACF has $346,000 in remaining principal and interest on
receivables and $1,000 in repossessed vehicles.
On the March 31, 1995 maturity date for ACF 91-III, there was $538,000 in
cash to be applied to obligations of $1,195,000. ACF 91-III's insufficient
cash balance constituted a default under its indenture agreement with the
Trustee. As of September 30, 1995, ACF 91-III has $216,000 in remaining
principal and interest on contract receivables.
On April 30, 1995 maturity date for ACP, there was $525,000 in cash to be
applied to obligations of $1,180,000. ACP's insufficient cash balance
constituted a default under its indenture agreement with the Trustee. At
September 30, 1995, ACP has $180,000 in remaining principal and interest on
contracts receivable and $2,000 in repossessed vehicles.
The filing of bankruptcy created a default in each Fund subsidiary not
currently in default at August 14, 1995. The U.S. Bankruptcy Court has granted
the continued use of cash collateral. Under the cash collateral motions, the
Fund subsidiaries continue to pay service and management fee revenue to Search.
Servicing and management fee revenue for Search was $3,064,000, $2,866,000 and
$1,010,000 for the fiscal years ended September 30, 1995 and 1994, and nine
months ended September 30, 1993, respectively, and is included as a reduction
of general administrative expenses in the accounts of Search.
As of December 22, 1995, the consensual joint plan of reorganization was
approved by the U.S. Bankruptcy Court for distribution to noteholders.
Confirmation of the joint plan will be sought from the court after tallying of
the noteholders votes. (See note 4 for further discussion of the Joint Plan of
Reorganization).
6. LINES OF CREDIT
On June 17, 1994, SFC entered into an agreement for a line of credit with
General Electric Capital Corporation ("GECC"). The line of credit initially
had a maximum borrowing commitment of $20,000,000 and was limited to a
percentage of eligible contracts held by SFC. The line of credit is secured by
all SFC assets and is guaranteed by Search.
In January 1995, SFC signed an agreement with GECC to revise the existing
restrictive covenants and to eliminate any future advances under the line of
credit. On March 22, 1995, GECC advised Search that it and SFC were in default
of various provisions of the original loan agreement and the January 1995
agreement. As a result of these defaults, GECC declared the outstanding
balance, as of that date, due and payable. Search, SFC and GECC established a
pay-out plan which requires a minimum payment of $500,000 per quarter. SFC is
required to remit cash receipts of all pledged contracts to GECC until the line
of credit is repaid. As of September 30, 1995, the line had a balance of
$1,058,000. Interest is accrued daily at the average of the one month London
Interbank Offered Rates ("LIBOR") for the preceding month plus 5.1% (10.99% at
September 30, 1995). SFC recorded $253,000 interest expense to GECC during 1995
and $85,000 in 1994.
On November 30, 1995, Search and certain of its non-fund subsidiaries and
affiliates entered into a funding agreement ("Funding Agreement") with Hall
Financial Group, Inc. ("HFG"). Under the terms of the Funding Agreement, HFG
agreed to loan to Search up to $3,000,000, obtained Warrants to purchase up to
3,000,000 shares of
F-17
<PAGE> 49
Search Common Stock for $2.00 per share, and agreed, subject to certain
limitations and restrictions, to a plan funding commitment under which HFG
would loan the Fund Subsidiaries funds for a cash-out option under a plan to be
proposed by Search at an amount equal to 80% of Present Value of the Notes.
The loan is comprised of three notes. Note I is in the amount of
$1,284,487. Note II is in the amount of $715,513. Note III is in the amount
of $1,000,000. Notes I and II bear interest at the rate of 12% and mature on
the earlier of the Effective Date or 90 days after their execution unless
extended for 60 days by Search in which case the interest rate increased to
14%. Note III bears interest at the rate of 6% and matures in one year. Note
I has been fully funded, Note II will only be funded if necessary to payoff the
GECC Line of Credit, and Note III has been fully funded. Notes I and III are
convertible into Search Common Stock up to a total of 2,500,000 shares
including any shares converted in payment of Note III. Note III can be repaid
entirely with Search Common Stock.
The Notes are secured by approximately $5,900,000 in auto receivables owned
by Search and Search Funding Corp., 2,250,000 shares of Search Common Stock
currently held as treasury stock, and 100% of the stock of Search Funding
Corp., Automobile Credit Acceptance Corp., Automobile Credit Holdings, Inc.,
and Newsearch, Inc. HFG is entitled to elect one director to Search's board
upon conversion of Note III and one additional director upon purchase of
$1,000,000 in Net Present Value of Notes under the plan funding commitment.
The Funding Agreement originally required HFG to make certain loans to the
Bankrupt Subsidiaries upon completion of the Joint Plan. Search and the
Committee have determined not to include any funding of the Bankrupt
Subsidiaries in the latest version of the Joint Plan. Search and HFG have
agreed to an amendment to the Funding Agreement that provides HFG the option to
purchase, in its sole discretion, Common Stock, New Preferred Stock, and
Warrants for a purchase price equal to 80% of the Present Value attributable to
such securities for purpose of their issuance to Noteholders under the Joint
Plan, less an amount equal to the accrued dividends attributable to the New
Preferred Stock that is received by HFG. HFG would be entitled to purchase
securities in an amount up to a maximum of $6,000,000 in Present Value, which
the Company estimates would represent a purchase price payable by HFG of
approximately $4,426,000. The proceeds of any shares so purchased will be paid
to Search. Under the Funding Agreement, as amended, Search will give HFG the
right to elect another director if HFG purchases $1,000,000 Present Value of
such securities. HFG will also have registration rights for such securities
similar to those provided by the HFG Warrants.
7. EMPLOYEE STOCK OWNERSHIP PLAN
Effective August 1, 1994, the Board of Directors terminated the employee
stock ownership plan (ESOP). As part of the termination, Search reacquired
from the ESOP 306,152 shares of stock at $3.50 per share in exchange for the
balance of the note receivable plus accrued interest, totaling $1,183,000. The
reacquired shares were canceled on September 29, 1994. The remaining 178,848
shares are allocated to participating employees.
8. STOCKHOLDERS' EQUITY
Preferred Stock
Search is authorized to issue a total of 10,000,000 shares of preferred
stock in series with rights and preferences as designated by the board of
directors. The Preferred shares have voting rights and are convertible into
one share of common stock for each share of preferred stock at the option of
the shareholders. The shares carry a cumulative annual dividend of $0.60 per
share, payable quarterly. Search may convert the shares to common stock or may
redeem the shares at $5.00 per share upon the occurrence of certain events
defined in the terms of the preferred stock designation.
In June 1993, Search designated a new series of preferred stock as 8%
Voting Convertible Preferred Stock. No shares are issued or outstanding as of
September 30, 1994 and 1995.
F-18
<PAGE> 50
In January 1993, Search completed a private placement of $2,000,000 of
Senior Preferred Stock at a price of $5.00 per share. As a result of this
offering, Search obtained net proceeds of $1,755,000, after deduction of
$150,000 of brokers' commissions and $95,000 of expenses related to the
offering. In addition, Search issued warrants to purchase up to 50,000 shares
of Common Stock at $0.375 per share and 100,000 shares of Common Stock at $2.50
per share to certain broker/dealers who assisted in the sale of the Senior
Preferred Stock and certain offerings by Fund Subsidiaries.
Common Stock
During June through August 1993, Search sold 300,000 shares of Search's
restricted common stock in a private placement for $1,200,000. Offering costs
of $75,000 were recorded as a reduction of the proceeds.
In December 1993, Search sold in a public offering 2,760,000 shares of its
common stock for $22,080,000. Offering costs of $2,673,000 were incurred with
the sale. In connection with the offering, Search granted the underwriter
warrants to purchase 240,000 shares of common stock at $9.60 per share.
In February 1994, 25,000 warrants were exercised at a price of $0.375 per
share.
Common Stock Warrants and Employee Stock Options
On August 1, 1994, the Board of Directors adopted, subject to stockholder
approval, the 1994 Employee Stock Option Plan (the "Stock Plan"). The Stock
Plan was approved by Search's stockholders at their annual meeting held in May
1995. Employees of Search or directors of subsidiaries are eligible to
participate in the Stock Plan. As of September 30, 1995, approximately 138
persons were eligible to participate. The Stock Plan expires on July 31, 2004,
although any option outstanding on such date will remain outstanding until it
either has expired or has been fully exercised. The Stock Plan is administered
by the Compensation Committee of the Board. Options granted under the Stock
Plan are not transferable otherwise than by will or by the laws of descent and
distribution. Options are forfeited immediately after an optionee's employment
is terminated for cause or 30 days after the optionee's mental or physical
disability. The options usually vest over a three year period. The Stock Plan
provides that 30 days prior to major corporate events such as, among other
things, certain changes in control, mergers or sales of substantially all the
assets of Search, each option will immediately become exercisable in full. A
total of 1,750,000 shares of Common Stock has been reserved for sale upon
exercise of options granted under the Stock Plan. As of September 30, 1995,
there were 943,500 outstanding options. Certain options issued during the year
ended September 30, 1995, were repriced to reflect the current market prices
at that time.
In October 1994, 100,000 options were issued at $1.4375 to an officer of
Search and in January 1995, 500,000 and 25,000 were issued at $1.625 and $1.875
respectively to two officers of Search. In January an additional 285,500
options at $1.4375 were issued to employees. All were issued at the market
price existing at the time.
In August and September 1994, an additional 19,000 and 10,000 options at
$4.25 and $3.75 (existing market value) respectively were issued to employees.
In August 1994, 2 officers and 5 employees agreed, subject to shareholder
approval of the Option Plan, to the cancellation of their warrants in exchange
for options under the Option Plan at the then current market price of $4.25.
The canceled warrants consisted of 220,000 at $3.00 per share issued in April
1993, 70,000 at $8.75 per share issued in December 1993, and 35,000 at $14.75
per share issued in June 1994.
In August 1993, Search issued warrants to purchase 60,000 shares of common
stock at $5.50 per share to broker/dealers who assisted in the private
placement of common stock.
F-19
<PAGE> 51
9. STOCK PURCHASE AGREEMENT
On May 5, 1995, Search purchased from a director of Search 500,000 shares
of Search's $.01 par value common stock for $2.25 per share. The purchase was
recorded at cost and is reflected as treasury stock. Simultaneously to the
purchase, the director resigned from the Board and gave Search an irrevocable
proxy expiring May 5, 1997 to vote the remaining 800,000 shares of stock held
by a trust controlled by the former director.
10. RELATED PARTY TRANSACTIONS
During 1994 and 1993, Search paid or accrued approximately $156,000 and
$113,000, respectively for fees related to the notes payable offerings
described in Notes 4 and 5 to an individual who owned a minority interest in
ACAC and two of the Fund Subsidiaries until June 1992 and was a director of
Search for a period of time in 1992 and 1993.
In November 1993, Search paid SBM Trust and an officer of Search $131,000
and $32,750, respectively, in settlement of interest and principal on profit
participation notes relating to Search's purchase of Automobile Credit
Acceptance Corporation in 1991.
During the year ended September 30, 1994, Search engaged Brean Murray,
Foster Securities Inc. ("BMFS") to serve as underwriter for Search's public
offering of Common Stock, and co-managing broker-dealer, together with another
independent broker-dealer, for the public offering of asset-backed debt
securities offered in 1994, by Search's subsidiaries, Automobile Credit Finance
V, Inc. and Automobile Credit Finance VI, Inc. The Company paid BMFS
$1,987,000 in connection with the Common Stock offering and $766,000 in
connection with the public offerings of asset-backed debt securities. Also in
connection with its services as underwriter of the Common Stock offering BMFS
was issued warrants to purchase 240,000 shares of Common Stock exercisable for
a period of 5 years at a price of $9.60 per share. BMFS, simultaneously with
its receipt of the warrants, assigned warrants to purchase 113,558 shares to
Mr. A. Brean Murray. Mr. Murray is a director of Search and Chairman of BMFS.
Upon confirmation of the Joint Plan discussed in Note 2, Brean Murray, Foster
Securities, Inc. will receive a $200,000 cash success fee from Search.
Additional related party transactions are described in Notes 3, 7 and 8.
11. INCOME TAXES
Search Capital Group, Inc. and Subsidiaries file a consolidated income tax
return.
The components of Search's net deferred tax asset as of September 30, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Deferred tax asset:
- -------------------------------------------------------
Allowance for credit losses & inventory reserve $800,000 $1,500,000
Net operating loss carryforwards 15,400,000 8,900,000
Other tax credit carry-forwards 90,000 90,000
Valuation allowance (16,290,000) (10,490,000)
------------ ------------
Total deferred tax asset -- --
------------ ------------
</TABLE>
F-20
<PAGE> 52
At September 30, 1995, the Search consolidated tax return group has a net
operating loss carryforward for Federal income tax purposes of approximately
$44,000,000 which will expire, if unused, in the following years:
<TABLE>
<CAPTION>
Years of Expiration Amount
------------------- -----------
<S> <C>
1997 to 2008 $5,400,000
2009 21,000,000
2010 17,600,000
-----------
Total $44,000,000
===========
</TABLE>
Following the acquisition of the minority interest in ACHI on June 30, 1993
(see Note 3), the Search tax consolidated group had a change in ownership as
defined under Section 382 of the Internal Revenue Code, which will limit the
utilization of the net operating loss to approximately $1,000,000 per year on
those NOL losses incurred prior to 1994.
The proposed debt to equity conversion plan as outlined in the Bankruptcy
Plan of Reorganization will have significant tax consequences when the plan in
consummated. Debt Discharge Income of approximately $12,500,000 will be
recognized for income tax purposes. This debt to equity conversion will result
in an ownership change as defined under Section 382 of the Internal Revenue
Code. This ownership change will result in a further limit on the annual the
net operating loss carryforward.
12. COMMITMENTS
On October 28, 1992, ACAC entered into a sixty month lease for office
facilities with a basic monthly rental obligation of $13,450. This lease was
modified in 1994 to expand the office facilities from approximately 16,000
square feet to approximately 23,000 square feet at a revised monthly rental
obligation of $22,057. With six months notice ACAC may cancel the lease at the
end of the thirty-sixth month with the payment of the unamortized up-front
costs associated with the premises, as defined in the lease agreement,
otherwise the lease is non-cancelable. Rental expense for 1995, 1994, and 1993
was approximately $284,000, $212,000 and $117,000, respectively.
During the year, the Company opened four remote collection facilities,
these leases expire through 1999. The lease expense for fiscal 1995 total
approximately $20,000.
Search signed three car lot leases at the beginning of fiscal 1995. The
leases were in Dallas, TX and a suburb of Atlanta, GA and had terms of 12 to 24
months. These lots were used to process and sell repossessed vehicles directly
to consumers. During the fiscal year ended September 30, 1995, Search closed
the Georgia lot and one of the lots in Dallas. Subsequent to year-end, Search
adopted a formal plan to close the remaining car lot and related make-ready
facility by January 1, 1996.
Operating lease commitments by Search are as follows:
<TABLE>
<CAPTION>
Year Ending September 30,
----------------------------------------------------------
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Office leases $323,000 $323,000 $96,000 $18,000
Car lot leases 77,000 - - -
Office equipment leases 104,000 69,000 24,000 -
-------- -------- -------- -------
Total lease commitments $504,000 $392,000 $120,000 $18,000
======== ======== ======== =======
</TABLE>
In addition to the operating leases, Search has one capitalized lease with
payments of $81,000 per year through 1998 and $67,000 in 1999.
F-21
<PAGE> 53
13. LIQUIDITY
Search's management is currently pursuing several options for additional
capital for expansion of Search's current dealer network and additional product
developments including automobile loans to customers with a higher credit
rating. It is anticipated, upon conversion of debt-to-equity (see Note 4),
that Search's liquidity concerns will be eased over the next 12 to 24 months.
However, should the plans of reorganization be delayed or should the Bankruptcy
Court decide to discontinue or reduce the servicing and management fees
currently allowed under collateral orders granted by the Bankruptcy Court and
paid to Search, Search could encounter significant liquidity problems that
would require obtaining an additional line of credit or infusion of equity, or
significantly reducing expenses and restructuring Search's current operation.
Management has explored the option of obtaining an additional infusion of
equity investment. The effect of such an investment currently cannot be
determined. It is anticipated, however, that such an investment would
significantly dilute current stockholders' equity.
14. LEGAL PROCEEDINGS
On August 14, 1995, Automobile Credit Finance, Inc., Automobile Credit
Finance 1991-III, Inc., Automobile Credit Finance 1992-II, Inc., Automobile
Credit Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit
Finance V, Inc., Automobile Credit Finance VI, Inc. and Automobile Credit
Partners, Inc., which are wholly-owned subsidiaries of Search, each filed, on
August 14, 1995, a petition in the U.S. Bankruptcy Court in the Northern
District of Texas, Dallas Division ("Court"), seeking protection under Chapter
11 of the U.S. Bankruptcy Code ("Code"). These cases have been consolidated as
one case for administration (Case No. 395-34981-RCM-11) (See Note 4 for
additional discussion).
On July 7, 1994, a class action civil lawsuit was filed against Search,
certain of its officers and directors, one of its former accounting firms and
the lead underwriter and one of its principals involved in the issuance of
Search's Common Stock. This action was filed in the United States District
Court for the Northern District of Texas, Dallas Division, and is styled Ellen
O'Shea, et al v. Search Capital Group, Inc., et al. Civil Action No.
3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in
John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action
No. 3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc., et al,. Civil
Action No. 3:94-CV-1494-J, respectively, were also filed. The above cases were
consolidated in September 1994 under Civil Action No. 3:94-CV-1428-J (the
"Class Action Suit").
The Class Action Suit was filed on behalf of all purchasers of Search's
Common Stock during the period beginning December 10, 1993 and ending through
July 5, 1994, which was the date that Search made a public announcement
regarding lower earnings. The Class Action Suit contends that Search made
misstatements in its registration statements concerning Search's computerized
system, accounting methodologies used by Search, collectibility of its
receivables and repossession rates of autos that secured its receivables. The
plaintiffs also complained of allegedly false public filings, press releases
and reports issued during 1994. The plaintiffs sought damages, rescission ,
punitive damages, pre-judgment interest, fees, costs, equitable relief and/or
injunctive relief and such other relief as the court may deem just and proper.
Search's management and counsel for the plaintiffs have entered into a
stipulation of settlement (the "Settlement") of the Class Action Suit. This
Settlement was initially filed with the court on August 4, 1995, and an amended
version of the Settlement was filed on November 13, 1995. No objections to the
Settlement have been received to date. The Settlement provides for the payment
by Search of $287,500 upon approval of the Settlement ($100,000 has already
been deposited in an escrow account maintained by the plaintiff's lawyers), and
the issuance by Search of its Common Stock with a value of $2,612,500 or cash.
The settlement provides that the number of shares of Common Stock to be issued
to the Class shall be computed using the average of the bid/ask price of the
last 30 days ending generally on the date that the Settlement becomes final
prior to the date of distribution of the shares.
Final effectiveness of the Settlement is conditioned upon court
certification of the class of plaintiffs for the Settlement and court approval
of the fairness of the Settlement. Search believes that the Settlement is fair
and
F-22
<PAGE> 54
equitable to the class of plaintiffs and will ultimately be approved. A final,
non-appealable order approving the Settlement is a condition precedent to the
implementation of the Search Equity Option under the Joint Plan.
In December 1993, Automobile Credit Acceptance Corp. ("ACAC"), a subsidiary
of Search, was joined as a defendant in a pending civil action filed in the
153rd Judicial District Court, Tarrant County, Texas, styled Autostar
Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corporation,
Cause No. 153-144940. The plaintiff in this action alleges the existence of a
partnership between the plaintiff and another defendant and seeks damages,
actual and exemplary, and an injunction for alleged conversion and
misappropriation of certain property, including computer programs, allegedly
owned by Autostar. In the petition, the plaintiff alleges that ACAC wrongfully
assisted its co-defendant and tortiously interfered with the plaintiff's
contracts and business and has claimed, as damages, $250,000. ACAC believes
that these allegations are without merit because it did not interfere with the
plaintiff's contracts and business and did not obtain in an improper manner any
property belonging, at least in part, to Autostar. ACAC has filed a general
denial and has pending a motion for partial summary judgment. Discovery in
this case is ongoing and no opinion can be given as to the final outcome of the
lawsuit.
Search received notice from plaintiffs that a suit had been filed on
December 21, 1995 against Search, certain of its former officers and
directors, and certain underwriters of three of the Fund Subsidiaries. The
case is styled Janice and Warren Bowe, et. al. vs. Search Capital Group, Inc.,
et. al., Cause No. 1:95CV 649GR and was filed in the Federal District Court for
the Southern District of Mississippi. The plaintiffs allege violations of the
securities laws by the defendants and seeks unspecified damages, rescission,
punitive damages and other relief. The plaintiffs also seek establishment of a
class of plaintiffs consisting of all persons who have purchased Notes issued
by three of the Fund Subsidiaries. The Company has been unable to evaluate the
merit of these claims.
There are presently no other legal proceedings, threatened or pending,
relating to Search which would, in the opinion of management, have a material
impact on earnings or the financial condition of Search.
F-23
<PAGE> 55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements listed in the Index to Financial Statements are
filed as part of this annual report. No financial statement schedules are
required to be filed as part of this annual report because all information
otherwise included in schedules has been incorporated into the Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Search during the quarter ended
September 30, 1995.
30
<PAGE> 56
(c) Exhibits
Exhibit Number Description
- --------------- ----------------------------------------------------------
3.1 Restated Certificate of Incorporation, as amended
(incorporated by reference from Exhibit 3.1 to the Form
S-1 Registration Statement of Search Capital Group, Inc.
(File No. 33- 68524) (the "Search Registration
Statement")).
3.2 Bylaws, as amended (incorporated by reference from
Exhibit 3.2 to the Search Registration Statement).
4.1 Indenture dated as of October 1, 1991 between Automobile
Credit Finance, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 18% Automobile Contract Notes
due December 31, 1994 of Automobile Credit Finance, Inc.
(incorporated by reference to Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance, Inc.
(File No. 33-41872)).
4.2 Indenture dated as of August 1, 1992 between Automobile
Credit Finance 1992-II, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 15% Automobile Contract Notes
due December 31, 1995 of Automobile Credit Finance
1992-II, Inc. (incorporated by reference from Exhibit 4.1
to Form S-1 Registration Statement of Automobile Credit
Finance 1992-II, Inc. (File No. 33-48300)).
4.3 Indenture dated as of December 1, 1992 between Automobile
Credit Finance III, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the 15% Secured Notes due April
30, 1996 of Automobile Credit Finance III, Inc.
(incorporated by reference from Exhibit 4.1 to the Form
S-1 Registration Statement of Automobile Credit Finance
III, Inc. (File No. 33-55070)).
4.4 Indenture dated as of July 1, 1993 between Automobile
Credit Finance IV, Inc., Ameritrust Texas National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due December 31,
1996 of Automobile Credit Finance IV, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance IV,
Inc. (File No. 33-62980)).
4.5 Indenture dated as of February 1, 1994 between Automobile
Credit Finance V, Inc., Texas Commerce Bank National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due December 31,
1997 of Automobile Credit Finance V, Inc. (incorporated
by reference from Exhibit 4.1 to the Form S-1
Registration Statement of Automobile Credit Finance V,
Inc. (File No. 33-73768)).
4.6 Indenture dated as of May 1, 1994 between Automobile
Credit Finance VI, Inc., and Texas Commerce Bank National
Association, as Trustee, and Automobile Credit Acceptance
Corp. with respect to the Secured Notes due June 30, 1998
of Automobile Credit Finance VI, Inc. (incorporated by
reference from Exhibit 4.1 to the Form S-1 Registration
Statement of Automobile Credit Finance VI, Inc. (File No.
33-77932)).
4.7 Warrant to purchase 3,000,000 shares of common stock of
Search Capital Group, Inc. dated as of November 30, 1995
(incorporated herein by reference from Exhibit 4.1 to
the Form 8-K Current Report dated November 30, 1995).
10.1 Employee Stock Ownership Plan for Employees of Search
Natural Resources, Inc. (incorporated by reference from
Exhibit 10.27 to Search Capital Group, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1988 (the "1988 Annual Report")).
10.2 Employee Stock Ownership Trust for Employees of Search
Natural Resources, Inc. (incorporated by reference from
Exhibit 10.28 to the 1988 Annual report).
10.3 ESOP Stock Exchange Agreement dated as of June 30, 1993
between Search Capital Group, Inc., and
31
<PAGE> 57
Exhibit Number Description
- --------------- ----------------------------------------------------------
the Employee Stock Ownership Plan for Employees of Search
Natural Resources, Inc. and Trust (incorporated by
reference from Exhibit 10.1 to Search Capital Group,
Inc.'s Current Report on Form 8-K dated June 30, 1993
(the "1993 Form 8-K")).
10.4 Amended and Restated Security Agreement dated effective
as of June 30, 1993 between Search Capital Group, Inc.
and the Employee Stock Ownership Plan for Employees of
Search Natural Resources, Inc. and Trust (incorporated by
reference to Exhibit 10.2 to the 1993 Form 8-K).
10.5 Amendment to Search Capital Group, Inc. Employee Stock
Ownership Plan (incorporated by reference from Exhibit
10.5 to Search Capital Group, Inc.'s originally filed
Annual Report on Form 10-K for the year ended September
30, 1995).
10.6 Form of Director's Warrant to purchase shares of Common
Stock of Search Capital Group, Inc. (incorporated by
reference from Exhibit 10.16 of Search Capital Group,
Inc.'s Annual Report on Form 10-K for the nine-month
transition period ended September 30, 1993)
10.7 Form of Warrant for Officers and Employees to purchase
shares of Common Stock of Search Capital Group, Inc.
(incorporated by reference from Exhibit 10.17 of Search
Capital Group, Inc.'s Annual Report on Form 10-K for the
nine-month transition period ended September 30, 1993)
10.8 1994 Employee Stock Option Plan of Search Capital Group,
Inc. (incorporated by reference from Exhibit 10.18 of
Search Capital Group, Inc. Annual Report on Form 10-K for
the fiscal year ended September 31, 1994).
10.9 Stock Purchase Agreement between Search Capital Group,
Inc. and Louis Dorfman, Trustee of the SBM Trust
(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).
10.10 Funding Agreement dated November 30, 1995 among Search
Capital Group, Inc., Search Funding Corp., Automobile
Credit Acceptance Corp., Automobile Credit Holdings,
Inc., Newsearch, Inc. and Hall Financial Group, Inc.
(incorporated herein by reference from Exhibit 99.1 to
the Form 8-K Current Report of Search Capital Group, Inc.
dated November 30, 1995 (the 11/95 8-K")).
10.11 Convertible Promissory Note dated November 30, 1995 from
Search Capital Group, Inc. and Search Funding Corp.
payable to the order of Hall Financial Group, Inc. in the
principal amount of $1,284,487.28 (incorporated herein by
reference from Exhibit 99.2 to the 11/95 8- K).
10.12 Promissory Note dated November 30, 1995 from Search
Capital Group, Inc. and Search Funding Corp. payable to
the order of Hall Financial Group, Inc. in the principal
amount of $715,512.72. (incorporated herein by reference
from Exhibit 99.3 to the 11/95 8-K).
10.13 Convertible Note dated November 30, 1995 from Search
Capital Group, Inc. and Search Funding Corp. payable to
the order of Hall Financial Group, Inc. in the principal
amount of $1,000,000.00. (incorporated herein by
reference from Exhibit 99.4 to the 11/95 8-K).
10.14 Newsearch Pledge Agreement dated as of November 30, 1995
between Newsearch, Inc. and Hall Financial Group, Inc.
(incorporated herein by reference from Exhibit 99.5 to
the 11/95 8- K).
10.15 Search Pledge Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from
Exhibit 99.6 to the 11/95 8-K).
10.16 ACHI Pledge Agreement dated as of November 30, 1995
between Automobile Credit Holdings, Inc. and Hall
Financial Group, Inc. (incorporated herein by reference
from Exhibit 99.7 to the 11/95 8-K).
10.17 Search Security Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from
Exhibit 99.7 to the 11/95 8-K).
32
<PAGE> 58
Exhibit Number Description
- --------------- ----------------------------------------------------------
10.18 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).
10.19 ACAC Security Agreement dated as of November 30, 1995
between Automobile Credit Acceptance Corp. and Hall
Financial Group, Inc. (incorporated herein by reference
from Exhibit 99.10 to the 11/95 8-K).
10.20 Letter Agreement between Search and Alex. Brown & Sons,
Inc. dated May 24, 1995 (incorporated by reference from
Exhibit 10.20 to Search Capital Group, Inc.'s originally
filed Annual Report on Form 10-K for the year ended
September 30, 1995).
10.21 Employment Letter Agreement between George C. Evans and
Search dated January 20, 1995 (incorporated by reference
from Exhibit 10.21 to Search Capital Group, Inc.'s
originally filed Annual Report on Form 10-K for the year
ended September 30, 1995).
10.22 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 originally
filed Annual Report on Form 10-K for the year ended
September 30, 1995).
21.1 List of Subsidiaries (incorporated by reference from
annual report on Form 10-K for the fiscal year ended
September 31, 1994).
33
<PAGE> 59
(d) Financial Statements Excluded by Rule 14a-3(b).
None of the Registrant's financial statements are excluded from the annual
report to shareholders by Rule 14a-3(b).
(e) Long-term Debt Instruments Excluded by Item 601 of Regulation S-K.
Pursuant to Item 601(b)(4) of Regulation S-K, there have been excluded from
the exhibits filed pursuant to this report instruments defining the rights
of holders of long-term debt of the Company where the total amount of the
securities authorized under each such instrument does not exceed 10% of the
total assets of the Company. The Company hereby agrees to furnish a copy
of any such instruments to the Commission upon request.
34
<PAGE> 60
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.
Date: February 20, 1996
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George C. Evans
-----------------------------------
George C. Evans Chairman of the Board, President, February 20, 1996
Chief Executive Officer, Chief
Operating Officer and Director
/s/ Robert D. Idzi
-----------------------------------
Robert D. Idzi Senior Vice President, Chief February 20, 1996
Financial Officer and Treasurer
/s/ Andrew D. Plagens
-----------------------------------
Andrew D. Plagens Controller and Chief Accounting February 20, 1996
Officer
/s/ A. Brean Murray
-----------------------------------
A. Brean Murray Director February 20, 1996
/s/ Richard F. Bonini
-----------------------------------
Richard F. Bonini Director February 20, 1996
/s/ Luther H. Hodges
-----------------------------------
Luther H. Hodges Director February 20, 1996
/s/ James F. Leary
-----------------------------------
James F. Leary Director February 20, 1996
/s/ William H. T. Bush
-----------------------------------
William H. T. Bush Director February 20, 1996
</TABLE>
