<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission File Number:
June 30, 1996 0-9539
- ----------------------------------- ---------------------------------
S E A R C H C A P I T A L G R O U P, I N C .
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 41-1356819
- ----------------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
700 North Pearl, Suite 400
Dallas, Texas 75201
-------------------
(Address of principal executive offices, including zip code)
214-965-6000
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at August 9, 1996
- -------------------------------------- --------------------------------
Common Stock, $.01 par value 28,634,870
<PAGE> 2
SEARCH CAPITAL GROUP, INC.
FORM 10-Q/A INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
- ------ ----
<S> <C> <C>
Item 1. Consolidated Financial Statements...............................3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................10
PART II OTHER INFORMATION..............................................17
- -------
Item 1. Legal Proceedings..............................................17
Item 6. Exhibits and Reports on Form 8-K...............................17
SIGNATURES ...............................................................18
</TABLE>
The financial information for the interim periods presented herein is
unaudited. In the opinion of management, all adjustments necessary (which are
of a normal recurring nature) have been included for a fair presentation of the
results of operations. The results of operations for an interim period are not
necessarily indicative of the results that may be expected for a full year or
any other interim period.
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Form 10-Q/A Amendment No. 1 for quarter ended June 30, 1996 contains
certain forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995, which may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "goal," "continue," or comparable terminology, that involve risks
or uncertainties and that are qualified in their entirety by the cautions and
risk factors contained in the Company's 10-K Transition Report for the six
months ended March 31, 1996 and in other Company documents filed with the
Securities and Exchange Commission.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
ASSETS Unaudited Historical Pro forma (Note 3)
- ------ ------------ ------------ ------------------
<S> <C> <C> <C>
Gross contracts receivable (Note 2) $ 30,344,000 $ 37,086,000 $ 37,086,000
Unearned interest (5,621,000) (6,435,000) (6,435,000)
------------ ------------ ------------
Net contracts receivable 24,723,000 30,651,000 30,651,000
Allowance for credit losses (10,506,000) (13,353,000) (13,353,000)
Loan origination costs 3,927,000 3,984,000 3,984,000
Amortization of loan origination costs (3,653,000) (3,578,000) (3,578,000)
------------ ------------ ------------
Net contract receivables - after allowance for
credit losses & other costs 14,491,000 17,704,000 17,704,000
------------ ------------ ------------
Cash and cash equivalents 20,871,000 17,817,000 21,582,000
Vehicles held for resale 356,000 566,000 566,000
Property and equipment, net 988,000 1,062,000 1,062,000
Other assets, net 210,000 197,000 197,000
------------ ------------ ------------
Total assets $ 36,916,000 $ 37,346,000 $ 41,111,000
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C> <C>
Lines of credit $ -- $ 2,283,000 $ --
Accrued settlements 500,000 688,000 688,000
Dividends payable 1,610,000 268,000 268,000
Accounts payable and other liabilities 2,477,000 7,088,000 7,088,000
Accrued interest -- 15,000 --
Redeemable warrants 616,000 593,000 673,000
------------ ------------ ------------
Total Liabilities 5,203,000 10,935,000 8,717,000
------------ ------------ ------------
Stock repurchase commitment (Note 4) 2,078,000 2,078,000 2,078,000
Stockholders' Equity
- --------------------
Convertible preferred stock 174,000 154,000 174,000
Common stock 293,000 248,000 289,000
Additional paid-in capital 83,872,000 79,124,000 85,046,000
Accumulated deficit (53,554,000) (54,043,000) (54,043,000)
Treasury stock (1,150,000) (1,150,000) (1,150,000)
------------ ------------ ------------
Total stockholders' equity 29,635,000 24,333,000 30,316,000
------------ ------------ ------------
Total liabilities and stockholders' equity $ 36,916,000 $ 37,346,000 $ 41,111,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June Three Months Ended June
30, 1996 30, 1995
----------------------- -----------------------
<S> <C> <C>
Interest revenue $ 1,659,000 $ 4,169,000
Interest expense 22,000 2,955,000
------------ -----------
Net interest income 1,637,000 1,214,000
Recovery of (provision for) credit losses 1,382,000 (424,000)
------------ -----------
Net interest income after recoveries of (provisions
for) credit losses 3,019,000 790,000
------------ -----------
General and administrative expense 2,528,000 3,852,000
------------ -----------
Net income (loss) before dividends 491,000 (3,062,000)
------------ -----------
Preferred stock dividends (1,404,000) (60,000)
============ ===========
Net loss attributable to common stockholders $ (913,000) $(3,122,000)
============ ===========
Net loss per share attributable to common stockholders $ (.03) $ (.35)
============ ===========
Weighted average number of common shares outstanding 26,628,000 8,858,000
============ ===========
</TABLE>
4
<PAGE> 5
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 491,000 ($3,062,000)
Adjustments to reconcile net income (loss) to cash used
in operations:
Provision for (recovery) of credit losses (Note 2) (496,000) 424,000
Accretion of warrant debt 22,000 --
Amortization of deferred offering costs -- 681,000
Amortization of loan origination costs 142,000 216,000
Depreciation 134,000 97,000
Changes in assets and liabilities:
Decreases (increases) in other assets 336,000 (440,000)
Increases (decreases) in accounts payable (5,149,000) 722,000
Write off of fixed assets -- 141,000
------------ -----------
Cash used in operations (4,520,000) (1,221,000)
------------ -----------
INVESTING ACTIVITIES:
Purchase of contracts receivable (2,745,000) (6,652,000)
Principal payments on contracts receivables 5,249,000 7,677,000
Proceeds from sales of vehicles 1,273,000 2,595,000
Purchase of property and equipment (61,000) (366,000)
Decrease in restricted cash -- 6,413,000
------------ -----------
Cash provided by investing activities 3,716,000 9,667,000
------------ -----------
FINANCING ACTIVITIES:
Repayments under line of credit (173,000) (703,000)
Notes payable repayments -- (1,615,000)
Capital lease principal payments (15,000) (14,000)
Net proceeds from debt conversion and sale of stock
4,106,000 --
Purchase of treasury stock -- (1,125,000)
Payment of dividends on preferred stock (60,000) (60,000)
------------ -----------
Cash provided by (used in) financing activities 3,858,000 (3,517,000)
------------ -----------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents 3,054,000 4,929,000
Cash and cash equivalents - beginning 17,817,000 1,633,000
------------ -----------
Cash and cash equivalents - ending $ 20,871,000 $ 6,562,000
============ ===========
- ------------------------------------------------------------------------------------------------------
Supplemental Information:
Cash Paid for Interest $ 16,000 $ 2,461,000
============ ===========
</TABLE>
5
<PAGE> 6
SEARCH CAPITAL GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements of Search Capital Group, Inc.
("Search") and together with its subsidiaries ("Company") are unaudited and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission applicable to quarterly reports on Form 10-Q. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures present fairly the financial position
of the Company for the periods presented. The financial statements should be
read in conjunction with the audited consolidated financial statements and
related notes and schedules included in the Company's Form 10-K Transition
Report for the six months ended March 31, 1996.
The consolidated financial statements include the accounts of the
Company. All significant intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to prior periods balances
to conform to current period presentation.
2. CONTRACT RECEIVABLES, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME
The Company records receivable purchases at cost. Contractual finance
charges are recorded as unearned interest and amortized to interest income
using the interest method. As discussed below, amortization of interest income
ceases upon impairment. An initial allowance for credit losses is recorded at
the acquisition of a receivable equal to the difference between the amount
financed and the acquisition cost, which is what the Company estimates to be
fair value. An additional allowance may be recorded at acquisition if it is
determined that the discount recorded as allowance is not adequate to cover
expected losses.
In accordance with SFAS No. 114, receivables are analyzed on a
loan-by-loan basis. The Company evaluates the impairment of receivables
generally based on the receivables' contractual delinquency. The Company
considers receivables that are contractually delinquent 60 days or more or with
respect to which the underlying collateral has been repossessed to be impaired.
When the receivable is considered impaired, interest income ceases to be
recognized. Once impaired, the Company looks to the underlying collateral for
repayment of the receivable. Therefore, at impairment, the Company writes down
the receivable to its estimated net realizable value, which is the fair value
of the underlying collateral if it has been repossessed or the estimated
recoverable cash flow if no repossession has occurred. If the measured amount
of the impaired receivable is less than the Company's net recorded investment
in the receivable, the Company recognizes a charge to provision for credit
losses in the amount of the deficiency and
6
<PAGE> 7
increases the allowance for credit losses by a corresponding amount. The
provision for credit losses is adjusted for any differences between the final
net proceeds from resale of the underlying collateral and the estimated net
realizable value. Generally, the Company charges off a receivable against the
allowance for credit losses at 180 days contractual delinquency, if no
significant payments have been received in the last six months, or, if earlier,
after receipt of the sale proceeds from liquidation of the collateral securing
the receivable. Subsequent proceeds received on a previously charged-off
receivable are recorded as a recovery to the allowance for credit losses. Any
excess of cost paid ("premium") for net receivables acquired is recorded as an
asset and amortized over the life of the related loans acquired as an
adjustment to yield using the interest method.
The following tables set forth certain information related to the
delinquency of the Company's contract receivables as of June 30, 1996 and March
31, 1996.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------------------------------------------------------
% OF
NUMBER OF TOTAL TOTAL
CONTRACTUAL ACTIVE ACTIVE UNPAID UNEARNED NET
DELINQUENCY CONTRACTS (1) CONTRACTS INSTALLMENTS INTEREST RECEIVABLES
----------- -------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Current to 60 days past due 6,524 96% $29,111,000 $5,392,000 $23,719,000
61-over days past due 258 4% 1,233,000 229,000 1,004,000
----- --- ----------- ----------
Total 6,782 100% $30,344,000 $5,621,000 24,723,000
===== === =========== ========== ===========
Allowance for credit losses (10,506,000)
-----------
Receivables, net of allowance for credit losses $14,217,000
===========
Allowance for credit losses as a percent of net receivables 42.5%
===========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------------------------------------------------------
% OF
NUMBER OF TOTAL TOTAL
CONTRACTUAL ACTIVE ACTIVE UNPAID UNEARNED NET
DELINQUENCY CONTRACTS (1) CONTRACTS INSTALLMENTS INTEREST RECEIVABLES
----------- -------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Current to 60 days past due 7,575 95% $34,995,000 $6,055,000 $28,940,000
61-over days past due 421 5% 2,091,000 380,000 1,711,000
----- --- ----------- ---------- -----------
Total 7,996 100% $37,086,000 $6,435,000 30,651,000
===== === =========== ==========
Allowance for credit losses (13,353,000)
===========
Receivables, net of allowance for credit losses $17,298,000
===========
Allowance for credit losses as a percent of net receivables 43.6%
===========
</TABLE>
(1) Excludes 237 and 333 accounts which were reclassified to vehicles held
for resale as of June 30, 1996 and March 31, 1996, respectively.
7
<PAGE> 8
The following tables set forth certain information related to the
contractual maturities of the Company's contract receivables as of June 30,
1996 and March 31, 1996.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
---------------------------------------------------------------
12 MONTHS ENDING JUNE 30,
1999 AND
1997 1998 BEYOND TOTAL
------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Future payments receivable $ 21,334,000 $7,362,000 $1,648,000 $30,344,000
Less unearned interest 4,421,000 1,112,000 88,000 5,621,000
------------- ---------- ---------- -----------
Net contractual maturities $ 16,913,000 $6,250,000 $1,560,000 $24,723,000
============= ========== ========== ===========
Unearned as a percent of gross receivables 18.5%
===========
Weighted Average APR 23.6%
===========
Weighted Average Original Term in Months 33.8
===========
Weighted Average Remaining Term in Months 21.2
===========
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------------------------------------
12 MONTHS ENDING MARCH 31,
1999 AND
1997 1998 BEYOND TOTAL
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Future payments receivable $23,445,000 $11,507,000 $2,134,000 $37,086,000
Less unearned interest 4,886,000 1,450,000 99,000 6,435,000
----------- ----------- ---------- -----------
Net contractual maturities $18,559,000 $10,057,000 $2,035,000 $30,651,000
=========== =========== ========== ===========
</TABLE>
In the opinion of management, a portion of the receivables at June 30,
1996 will be repaid or extended either before or past the contractual maturity
date. In addition, some of those receivables will be charged off before
maturity. The above tabulation, therefore, is not to be regarded as a forecast
of future cash collections.
<TABLE>
<S> <C>
Unearned as a percent of gross receivables 17.4%
====
Weighted Average APR 23.9%
====
Weighted Average Original Term in Months 32.4
====
Weighted Average Remaining Term in Months 19.1
====
</TABLE>
The following table shows the changes in the Company's allowance for
loan losses for the three months ending June 30, 1996 and June 30, 1995.
<TABLE>
<CAPTION>
THREE MONTHS ENDING
June 30, 1996
-------------
<S> <C>
Balance at beginning of period $ 13,353,000
Allowance recorded on acquisition of receivables 307,000
Increase in allowance for loan losses --
Proceeds received on previously charged-off accounts 886,000
Reduction in allowance for credit losses (1,382,000)
Receivables charged off against allowance (2,658,000)
------------
Balance at end of period $ 10,506,000
------------
Net credit losses as a percent of average net receivables 9%
============
</TABLE>
8
<PAGE> 9
The Company's receivables are generally installment receivables having
a fixed annual percentage rate ("APR"). These receivables are predominantly
secured by motor vehicles. The obligors of the Company's receivables are
domestically-based at the time the receivables are originated or purchased by
the Company from a dealer, and the Company has no material amount of foreign
receivables.
Receivables will become nonaccrual status due to their contractual
delinquency exceeding 60 days or due to repossession of underlying collateral.
The Company also considers certain delinquent receivables that are in the
contractual status of less than 60 days past due to be potential problem
receivables. Uncertainty as to overall economic conditions, regional
considerations, and current trends in portfolio growth cause the Company to
review these receivables for potential problems.
The Company considers Texas and Tennessee to be states with receivable
concentrations, because receivables with obligors in each of these states
exceed 10% of total outstanding receivables. Most of the Company's receivables
are due from individuals located in large metropolitan areas of Texas and other
southern and western states. To some extent, realization of the receivables
will be dependent on local economic conditions. The Company holds vehicle
titles as collateral for all motor vehicle receivables until such receivables
are paid in full.
The allowance for credit losses contained a reduction of the provision
for loan losses from prior estimates for the quarters ended June 30, 1996 as
follows (in thousands).
<TABLE>
<CAPTION>
June 30, 1996
-------------
<S> <C>
Provision for loan losses $ --
Reduction in allowance (1,382)
-------
Net effect on statement of operations (1,382)
Less proceeds received on previously charged-off
accounts 886
-------
Non cash (reduction) of credit loss provision $ (496)
=======
</TABLE>
3. TRANSACTIONS WITH HALL AND AFFILIATES
On November 30, 1995, Search entered into a Funding Agreement
("Funding Agreement") with Hall Financial Group, Inc. ("HFG"). Pursuant to the
Funding Agreement, HFG made loans totaling $2,283,000 ("HFG Notes") to Search.
The HFG Notes could, at the election of HFG or its assigns, be converted into a
maximum 2,500,000 shares of Search common stock. Effective April 2, 1996,
Hall/Phoenix Inwood, Ltd. ("HPIL"), as assignee from HFG of the HFG Notes,
fully exercised the rights of the holder of the HFG Notes to convert the Notes
into 2,500,000 shares of Search common stock. Because the conversion price
specified in the HFG Notes for these shares was less than the full amount due
HFG, Search paid to HPIL the remaining portion of the debt evidenced by the HFG
Notes in cash.
The Funding Agreement also provided to HFG the option to purchase
common stock, 9%/7% convertible preferred stock, and warrants. Effective April
2, 1996, HPIL, as assignee of HFG, fully exercised this purchase option by
paying $4,346,000 cash to Search for which Search
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<PAGE> 10
issued 1,638,400 shares of common stock, 2,032,800 shares of 9%/7% preferred
stock, and warrants to purchase 676,000 shares of common stock to HPIL.
Pursuant to the Funding Agreement, HFG was entitled to elect one
director to Search's Board if HFG converted the HFG Notes into common stock and
to elect another director if HFG purchased at least $1,000,000 Present Value of
securities from Search. As a result of satisfaction of these conditions, two
HFG officers were appointed to Search's Board.
4. STOCK CANCELLATION AND STOCK REPURCHASE AGREEMENT
In May 1995, Search purchased from one of its directors 500,000 shares
of Search's common stock for $2.25 per share, market value on that date.
Simultaneously with the purchase, the director resigned from the Board. Search
was also given an irrevocable proxy expiring in May 1997 to vote 812,120 shares
of common stock held by a trust formed by the former director. These shares
held by the trust and an additional 111,216 shares held by an individual
retirement account of the former director were subject to a "put" to the
Company in May 1997 for $2.25 per share, the market value at the date of the
agreement. These shares are shown on the balance sheet outside of permanent
equity at the redemption price. If these redeemable shares were excluded from
net loss per share, the three months ended June 30, 1997 loss per share would
have been $(04).
5. REDEEMABLE WARRANTS
Search is authorized to issue Warrants to purchase up to 10,000,000
shares of common stock pursuant to a warrant agreement dated as of March 22,
1996, as amended. Warrants to purchase 5,000,000 shares are to be issued to
noteholders and other unsecured claim holders under the Joint Plan.
The exercise price per share of the Warrants is $2.25 and increases by
$.25 on March 15 of each successive year through 2000. The Warrants will expire
on March 14, 2001, at which time Search must redeem all unexercised Warrants at
a redemption price of $.25 per share. Because the Warrants must be redeemed if
not exercised, they have been classified outside of permanent equity as debt at
fair value. An accretion to the redemption amount of $1,250,000 will be made
over the term of five years using the interest method.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company specializes in the purchase and servicing 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 generally ranging from
$5,000 to $15,000. The Company generally purchases these receivables from a
network of unaffiliated new and used automobile dealers (the "Dealer Network").
The Company from time to time makes bulk acquisitions of these receivables. The
members of the Dealer Network generate the receivables and offer them for sale
on a
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<PAGE> 11
non-exclusive basis to the Company. Members of the Dealer Network forego some
future profit on each receivable sold to the Company in exchange for an
immediate return of their invested capital. The Company administers its
receivables purchasing, servicing and management activities utilizing its
proprietary Auto Note Management System software. The Company commenced its
used motor vehicle receivables purchasing and servicing business in 1991. The
Company is also planning to expand into other areas of consumer finance in the
near future.
Prior to November 4, 1994, the Company primarily financed the purchase
of used motor vehicle receivables through the private and public sale of
interest-bearing rates (the "Notes) issued by wholly owned subsidiaries
organized specifically for this purpose (the "Fund Subsidiaries") and through
reinvestment of operating cash flow. Until March 1996, the purchasing of
receivables for the Fund Subsidiaries was governed by trust indentures (the
"Trust Indentures") which restricted management's ability to alter its
receivables purchasing criteria. In March 1996, following confirmation of the
Fund Subsidiaries' plan of reorganization, under bankruptcy proceedings the
Notes and the indebtedness represented by the Notes, together with their
related Trust Indentures, were canceled. At that time, the Company implemented
its new purchasing program (the "Preferred Program"). The Preferred Program
continues to focus on the purchasing of used motor vehicle receivables whose
obligors have non-prime credit histories, but places more emphasis on job,
income and residence stability and re-established positive credit of the
obligor than the Company's earlier programs.
The Company anticipates lower repossession rates and higher
repossession sale proceeds as a result of the Preferred Program. The terms of
loans under the Preferred Program generally range from 30 months to 60 months.
RESULTS OF OPERATIONS
Comparison of Three-Month Period Ended June 30, 1996 and 1995
The Company purchased 288 contracts during the three months ended June
30, 1996 compared to 1,491 during the same three months ended June 30, 1995.
The cost of contracts purchases was $2,745,000 ($9,531 per contract) compared
to $6,652,000 ($4,461 per contract) for the three-month periods in 1996 and
1995, respectively. The increase in cost is due to a higher purchase price per
contract under the Preferred Program. The Company expects to continue to see an
increase in its per contract cost under its Preferred Program when compared to
purchases under its old program. The Company is also planning to expand into
other areas of consumer finance.
Interest revenue decreased from $4,169,000 for the three months ended
June 30, 1995 to $1,659,000 for the three months ended June 30, 1996. The
decrease of $2,510,000 or 60% is a result of lower average interest earning net
receivables for the three month period ended June 30, 1996 of $25,073,000
compared to $52,126,000 average interest earning net receivables for the period
ended June 30, 1995.
Interest expense decreased from $2,955,000 to $22,000 for the three
months ended June 30, 1996 compared to the same three-month period ended June
30, 1995. The decrease in
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<PAGE> 12
interest expense is a result of confirmation and effectiveness of the Fund
Subsidiaries' plan of reorganization during the first calendar quarter of 1996.
Additionally, as a result of the plan's effectiveness, the Company paid the
balance owing on its outstanding lines of credit. The accretion to the
redemption value for the Warrants issued in connection with the Plan of
Reorganization is recorded as interest expense.
The provision for credit losses decreased from a loss of $424,000 for
the three months ended June 30, 1996 to a recovery of $1,382,000 for the three
months ended June 30, 1996. The decrease in loss provision is due to sufficient
provisions for losses being made in prior periods to cover current period
losses and collections from previously charged-off accounts. The Company's
remote collections facilities, which were opened during the second calendar
quarter of 1995, have been successful in contacting and collecting some of the
chronically delinquent and charged-off accounts and locating previously
identified skips. In the future, management anticipates a lower amount of
recovery of prior credit losses as these collections decrease. During the three
months ended June 30, 1996, the Company received a one-time settlement of
$115,000 from a car dealer for deficiencies on sales of repossessed cars
purchased from that dealer. Additionally, during the three months ended June
30, 1996, the Company charged off, after sale of repossessed vehicles or upon
determination that the account was not collectible, 962 accounts compared to
1,520 during the three months ended June 30, 1995.
General and administrative expenses decreased from $3,852,000 to
$2,528,000 for the three months ended June 30, 1995, compared to the same
three-month period in June 30, 1996. The decrease in general and administrative
expenses is primarily related to reduced expenses associated with processing
repossessions, personnel cost, and professional fees. The Company closed all
three of its retail lots, which were used to process repossessions, by December
31, 1995. The three-month period ended June 30, 1995 contains general and
administrative expenses, related to these retail lots whereas the three months
ended June 30, 1996 contain none of the same expenses. The Company's employee
count averaged 122 persons for the three months ended June 30, 1995, compared
to 100 persons for the three months ended June 30, 1996.
Preferred stock dividends increased from $60,000 for the three months
ended June 30, 1995 to $1,404,000 for the three months ended June 30, 1996.
This increase in preferred stock dividend is related to the issuance of
17,064,000 shares of the Company's 9%/7% Convertible Preferred Stock upon
confirmation of the Fund Subsidiaries' plan of reorganization. The Company had
outstanding 400,000 shares of its 12% Convertible Preferred Stock outstanding
and no 9%/7% Convertible Preferred Stock during the three months ended June 30,
1995, compared to 400,000 and 17,064,000 shares of 12% Convertible Preferred
Stock and 9%/7% Convertible Preferred Stock, respectively, outstanding during
the three months ended June 30, 1996.
Net loss per share decreased from $(.35) per share for the three
months ended June 1995 to $(.03) per share for the three months ended June 30,
1996. The decrease is due to lower net loss per share attributable to common
stockholders of $2,231,000 and an increased number of weighted average shares
outstanding from 8,858,000 to 26,628,000, for the three months ending June 30,
1995 and 1996, respectively.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's business will have an ongoing requirement to raise
substantial amounts of cash to support its activities. Currently, the principal
cash requirements include amounts to purchase receivables, cover operating
expenses, and to pay preferred stock dividends. The Company has a significant
amount of cash on hand as of June 30, 1996, which it considers adequate to meet
its reasonably anticipated needs. The Company intends to invest a portion of
this cash into receivables. In the future, additional liquidity will be
necessary to support growth of the Company's loan portfolio and operations.
Because the used motor vehicle and consumer finance industry require
the purchase and carrying of receivables, a relatively high ratio of borrowings
to net worth is customary and will be an important element in the Company's
operations. The Company intends to leverage its net worth and any subordinated
debt in the future to enhance its liquidity. Additionally, the Company will
endeavor to maximize its liquidity by diversifying its sources of funds which
will include (a) cash from operations, (b) the securitization of receivables,
(c) lines of credit available from commercial banks, and (d) a subordinated
debt-offering.
The Company has obtained a commitment for a line of credit to purchase
receivables which would then be assigned to special purpose entities for future
securitization. The Company has also received a commitment for a line of credit
to purchase receivables which would remain on its balance sheet. As of August
8, 1996, these commitments are subject to completion of definitive
documentation. The Company is planning to issue up to $25,000,000 in senior
subordinated notes with warrants to purchase common stock. These financings
would be utilized for the purchase of receivables and operations. The Company
believes the financings as contemplated would be adequate to fund anticipated
operations.
OPERATING ACTIVITIES
Principal Sources and Uses of Cash in Operating Activities
The principal source of cash from operating activities is provided by
net interest income. The principal uses of cash in operations are required for
general and administrative expenses, other non-recurring types of expenses and
payments relating to previously accrued expenses.
Comparison of Operating Cash Flows for the Three Months Ended June 30, 1996 to
the Three Months Ended June 30, 1995
During the three months ended June 30, 1996, the Company utilized
$4,520,000 of cash in its operations compared to $1,221,000 of cash being
utilized in operations in the three months ended June 30, 1995. The increase of
$3,299,000 is primarily a result of reduction in expense accruals of $5,150,000
during the three months ended June 30, 1996 compared to an increase in expense
accruals of $708,000 in the same period ended June 30, 1995. The change in
expense accrual of $5,858,000 was offset by an increase in net interest income
of $445,000 and reduced
13
<PAGE> 14
general and administrative expenses of $1,324,000 during the three months ended
June 30, 1996 compared to June 30, 1995, with the non-cash components of
interest income and interest expenses accounted for to $1,761,000 during the
three months ended June 30, 1996, compared to $142,000 during the three months
ended June 30, 1996.
The Company anticipates having negative operating cash flows in the
foreseeable future as it continues to expand its Dealer Network, expand into
consumer finance, and grow its receivable base.
INVESTING ACTIVITIES
Principal Sources and Uses of Cash Provided by Investing Activities
The principal sources of cash from investing activities include cash
from principal payments on receivables and proceeds from the sale of
repossessed vehicles. The principal uses of cash in investing activities
include cash used for purchasing receivables and property and equipment.
Comparison of Investing Cash Flows for the Three Months Ended March 31, 1996 to
the Three Months Ended March 31, 1995.
Cash provided by investing activities decreased $5,951,000 or 62% from
$9,667,000 for the three months ended June 30, 1995 to $3,716,000 for the three
months ended June 30, 1996. The decrease is primarily due to a decrease of
$2,428,000 in principal payments received and a decrease of $6,413,000 in
unrestricted cash partially offset by a decrease of $3,907,000 in new contract
purchases and a decrease in repo proceeds of $1,322,000. Principal payments and
repossession proceeds on receivables were $10,272,000 compared to $6,522,000
for the three months ended June 30, 1995 and 1996, respectively. Purchases of
property and equipment decreased from $366,000 to $61,000 for the three months
ended June 30, 1995 and 1996, respectively.
The Company anticipates encountering negative cash flows from
investing activities in the foreseeable future as is continues to expand its
non-prime automobile receivable base by expanding into more states and greater
market penetration in existing states and expands into consumer finance. It is
anticipated that the Company will begin consumer finance operations during its
third fiscal quarter of 1996.
FINANCING ACTIVITIES
Principal Sources and Uses of Cash Provided by Financing Activities
The principal sources of cash from financing activities are from
borrowings under line of credit agreements, debt offerings proceeds, and sales
of common and preferred stock. The principal uses of cash in financing
activities include cash for the repayment of amounts borrowed under lines of
credit, repayment of debt offerings, and payment of dividends on preferred
stock.
14
<PAGE> 15
During the three months ended June 30, 1996, the Company's financing
activities provided $3,858,000 of cash compared to utilizing cash of $3,517,000
during the same three-month period ended June 30, 1995. The change of
$7,375,000 was caused primarily by proceeds from sale of stock during the three
months ended June 30, 1996 and a lack of a purchase of treasury stock such as
occurred in the three months ended June 30, 1995.
The Company, on July 17, 1996, signed an Asset Purchase Agreement with
U.S. Lending Corporation in Florida to acquire its assets and assume certain
liabilities. The Company will give, in exchange for the assets, a combination
of common stock, 9%/7% preferred stock, and, at U.S. Lending's option, warrants
to purchase common stock. It is anticipated that this transaction will be
accounted for under the purchase method of accounting.
The Company also has completed a transaction on August 6, 1996 with
Dealers Alliance Credit Corporation in Atlanta, Georgia to acquire its assets
and assume liabilities. The transaction requires the Company to assume
approximately $17,500,000 in bank debt under a newly restructured line of credit
and acquire assets of approximately $23,000,000. The Company gave, in exchange
for the net assets, a combination of common stock, 9%/7% preferred stock, and
warrants to purchase common stock. This transaction will be accounted for under
the purchase method of accounting.
The Company's annual dividend requirements on the outstanding shares
of its 12% Preferred Stock and 9%/7% Preferred Convertible Stock, as of June
30, 1996, were $240,000 and $5,350,000, respectively. The annual dividend
requirement on the Company's 9%/7% Convertible Preferred Stock will remain at
the 9% level, or $5,350,000, until March 31, 1999 and then decrease to the 7%
level, or $4,161,000, until March 2003. Any conversion to Common Stock would
reduce these dividend requirements. Additionally, as a result of the
acquisitions noted above, the Company's annual divided requirement for its
9%/7% Preferred Stock will increase to a maximum of $6,864,000 until March 31,
1999 and then decrease to $5,339,000 until March 2003. Any conversion of the
9%/7% Preferred Stock to common stock would reduce these dividend requirements.
The Company anticipates an increase in cash flows from financing
activities due to its anticipated subordinated debt offering, completion and
utilization of warehouse lines, and other debt and stock offerings. The Company
believes its contemplated debt offering and lines of credit will be sufficient
to finance its current operating and investing needs necessary for the growth
of its receivables portfolio and expansion into consumer finance for the
foreseeable future.
Receivable Concentrations
The Company considers Texas and Tennessee to be states with receivable
concentrations because receivables with obligors in each of these states exceed
10% of total outstanding receivables.
15
<PAGE> 16
Inflation
Historical statistics indicate that collateral value, vehicle sales
prices, and receivable interest rates are relatively stable within the
Company's market segment. Significant inflation in prices could adversely
impact the Company's ability to acquire receivables at favorable prices.
General increases in interest rates will result in increases in the Company's
interest expense.
Seasonality
The Company's operations are seasonably impacted by higher delinquency
rates during certain periods, including November and December holiday periods.
Changes in Asset Quality
The Company believes that it is upgrading its credit quality through
higher underwriting and collateral standards compared to prior periods. No
assurance can be given at this time as to whether these new standards will
improve the Company's credit loss experience.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 7, 1994, a class action civil lawsuit was filed against
Search, certain of its officers and directors, one of its former accounting
firms and the lead underwriter and one of its principals involved in the
issuance of Search's common stock. This action was filed in the United States
District Court for the Northern District of Texas, Dallas Division, and was
styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al, Civil Action
No. 3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in
John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action
No. 3:94-CV-1452-J, and Gary Odom v. Search Capital Group, Inc., et al., Civil
Action No. 3:94-CV-1494-J, were also filed. The above cases were consolidated
in September 1994 under Civil Action No. 3:94-CV-1428-J.
On April 26, 1996, the court entered a Final Judgment and Order of
Dismissal approving a settlement (the "Settlement") entered into between Search
and counsel for the plaintiffs. This Settlement was initially filed with the
court on August 4, 1995, and an amended version of the Settlement was filed on
November 13, 1995. The Settlement provided for a cash payment by Search of
$287,000 and the issuance by Search of its common stock with a value of
$2,613,000. As a result of the settlement, Search issued 1,848,000 shares of
its common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed in response to Item 601 of Regulation
S-K.
Exhibit Number Description
- -------------- -----------------------------------------------------------
10.1 Asset Purchase Agreement among U.S. Lending Corporation, as
Debtor-In-Possession and Search Capital Group, Inc. and Search
Funding III, Inc., dated July 17, 1996
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated May 13, 1996,
reporting the shareholder class action suit settlement described in the
Company's Annual Report on Form 10-K for the six-month transition period ended
March 31, 1996.
The Company filed a Current Report on Form 8-K, dated April 17, 1996,
reporting the confirmation and effectiveness of the joint plan of
reorganization for eight of its subsidiaries operating under Chapter 11
bankruptcy proceeding since August 14, 1995.
The Company filed a Current Report on Form 8-K, dated April 1, 1996,
reporting the change in the date of the Company's fiscal year end from
September 30 to March 31.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ GEORGE C. EVANS June 6, 1997
- ---------------------- ------------
George C. Evans Chairman of the Board, Chief
Executive Officer and Director
/s/ ROBERT D. IDZI June 6, 1997
- ---------------------- ------------
Robert D. Idzi Senior Executive Vice President,
Chief Financial Officer and
Treasurer
/s/ ANDREW D. PLAGENS June 6, 1997
- ---------------------- ------------
Andrew D. Plagens Senior Vice President, Controller
and Chief Accounting Officer
18
<PAGE> 19
INDEX TO EXHIBITS
Exhibit Description
Number
------- -----------------------------------------------------------
27.0 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATON EXTRACTED FROM COMPANY'S
10-Q/A FILED JUNE 6, 1997 WITH SECURITIES AND EXCHANGE COMMISSION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,871,000
<SECURITIES> 0
<RECEIVABLES> 24,723,000
<ALLOWANCES> 10,506,000
<INVENTORY> 356,000
<CURRENT-ASSETS> 14,573,000
<PP&E> 2,163,500
<DEPRECIATION> 1,175,466
<TOTAL-ASSETS> 36,916,000
<CURRENT-LIABILITIES> 5,203,000
<BONDS> 0
2,078,000
174,000
<COMMON> 293,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 36,916,000
<SALES> 1,659,000
<TOTAL-REVENUES> 1,659,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (1,382,000)
<INTEREST-EXPENSE> 22,000
<INCOME-PRETAX> (913,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (913,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (913,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
