SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
(Rule 13d-101)
Under the Securities Exchange Act of 1934
(Amendment No. 3)
SEARCH FINANCIAL SERVICES, INC.
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(Name of Issuer)
Common Stock, $.01 par value
9%/7% Convertible Preferred Stock, $.01 par value
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(Title of Class of Securities)
812207 40 5
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(CUSIP Number)
Timothy G. Ewing
Value Partners, Ltd.
c/o Fisher Ewing Partners
Suite 4660 West
2200 Ross Avenue
Dallas, Texas 75201-2790
(214)999-1900
(Name, Address, Telephone Number of Person Authorized to Receive Notices
and Communications)
December 11, 1997
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(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(b)(3) or (4), check the following
box [ ].
Note: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are
to be sent.
Page 1 of 18 Pages
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CUSIP No. 812207-40-5 13D Page 2 of 18 Pages
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1. NAMES OF REPORTING PERSON
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Value Partners, Ltd. 75-2291866
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [X]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS*
WC
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS [ ]
IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
N/A
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6. CITIZENSHIP OR PLACE OF ORGANIZATION
Texas
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7. SOLE VOTING POWER 1,158,376
NUMBER OF --------------------------------------------------------
SHARES 8. SHARED VOTING POWER N/A
BENEFICIALLY --------------------------------------------------------
OWNED BY 9. SOLE DISPOSITIVE POWER 1,158,376
EACH --------------------------------------------------------
REPORTING 10. SHARED DISPOSITIVE POWER N/A
PERSON WITH
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11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,158,376
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES* [ ]
N/A
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.3%
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14. TYPE OF REPORTING PERSON*
PN
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<PAGE>
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CUSIP No. 812207-40-5 13D Page 3 of 18 Pages
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1. NAMES OF REPORTING PERSON
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Fisher Ewing Partners 75-2393946
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [X]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS*
N/A
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS [ ]
REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
N/A
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6. CITIZENSHIP OR PLACE OF ORGANIZATION
Texas
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NUMBER OF 7. SOLE VOTING POWER N/A
SHARES ---------------------------------------------------------
BENEFICIALLY 8. SHARED VOTING POWER 1,158,376
OWNED BY ---------------------------------------------------------
EACH 9. SOLE DISPOSITIVE POWER N/A
REPORTING ---------------------------------------------------------
PERSON WITH 10. SHARED DISPOSITIVE POWER 1,158,376
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11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,158,376
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES* [ ]
N/A
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.3%
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14. TYPE OF REPORTING PERSON*
PN
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<PAGE>
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CUSIP No. 812207-40-5 13D Page 4 of 18 Pages
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1. NAMES OF REPORTING PERSON
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Richard W. Fisher
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [X]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS* N/A
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS [ ]
REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
N/A
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6. CITIZENSHIP OR PLACE OF ORGANIZATION
United States of America
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7. SOLE VOTING POWER N/A
NUMBER OF ---------------------------------------------------------
SHARES 8. SHARED VOTING POWER 1,158,376
BENEFICIALLY ---------------------------------------------------------
OWNED BY 9. SOLE DISPOSITIVE POWER N/A
EACH ---------------------------------------------------------
REPORTING 10. SHARED DISPOSITIVE POWER 1,158,376
PERSON WITH
- --------------------------------------------------------------------------
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,158,376
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES* [ ]
N/A
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.3%
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14. TYPE OF REPORTING PERSON*
IN
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<PAGE>
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CUSIP No. 812207-40-5 13D Page 5 of 18 Pages
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1. NAMES OF REPORTING PERSON
I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS (ENTITIES ONLY)
Timothy G. Ewing
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2. CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [ ]
(b) [X]
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3. SEC USE ONLY
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4. SOURCE OF FUNDS*
N/A
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5. CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS [ ]
REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)
N/A
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6. CITIZENSHIP OR PLACE OF ORGANIZATION
United States of America
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7. SOLE VOTING POWER N/A
NUMBER OF ---------------------------------------------------------
SHARES 8. SHARED VOTING POWER 1,158,376
BENEFICIALLY ---------------------------------------------------------
OWNED BY 9. SOLE DISPOSITIVE POWER N/A
EACH ---------------------------------------------------------
REPORTING 10. SHARED DISPOSITIVE POWER 1,158,376
PERSON WITH
- --------------------------------------------------------------------------
11. AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
1,158,376
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12. CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES* [ ]
N/A
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13. PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
15.3%
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14. TYPE OF REPORTING PERSON*
IN
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<PAGE>
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CUSIP No. 812207-40-5 Amendment No. 3 Page 6 of 18
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This statement on Schedule 13D (the "Statement") relating to shares
of the common stock, $.01 par value (the "Common Stock"), and 9%/7%
Convertible Preferred Stock, $.01 par value ("Convertible Preferred Stock"),
of Search Financial Services, Inc. (the "Issuer") is hereby amended as
follows:
Item 1. Security and Issuer
- ----------------------------
The prior response to Item 1 remains unchanged, except that the Issuer
has changed its name from Search Capital Group, Inc. to Search Financial
Services, Inc.
Item 2. Identity and Background
- --------------------------------
The prior response to Item 2 remains unchanged.
Item 3. Source and Amount of Funds or Other Consideration
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The prior response to Item 3 remains unchanged.
Item 4. Purpose of Transaction
- -------------------------------
Value Partners originally acquired its shares of Convertible
Preferred Stock and Common Stock solely for investment purposes.
However, on December 11, 1997, Value Partners sent a letter to the
Issuer expressing various concerns regarding the Issuer, the Convertible
Preferred Stock and the acquisition of Dealers Alliance Credit Corporation
("DACC"). A copy of the December 11, 1997 letter is attached hereto as
Exhibit 4.
Value Partners is concerned about the inability of the Issuer
to pay dividends on the Convertible Preferred Stock and about the
Issuer's proposal to amend its Restated Certificate of Incorporation
to provide for a mandatory reclassification and conversion of the
Convertible Preferred Stock into Common Stock. In its December 11, 1997
letter, Value Partners states that it will not vote in favor of the
proposed reclassification and that it will take whatever steps are
necessary to block the proposed reclassification. To this end, Value
Partners has requested a list of the holders of the Convertible Preferred
Stock, as well as various Board of Directors' minutes, financial analyses
and other books and records regarding the proposed reclassification.
With respect to the proposed voluntary exchange offer of Common Stock for
Convertible Preferred Stock, Value Partners presently does not intend to
tender its shares but has not yet decided whether to oppose the voluntary
exchange offer.
If the Issuer proceeds with the mandatory reclassification of the
Convertible Preferred Stock, Value Partners currently intends to take
one or more of the following steps to block the reclassification:
(1) purchasing additional shares of Convertible Preferred Stock so that
the Issuer does not receive the two-thirds approval required;
<PAGE>
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CUSIP No. 812207-40-5 Amendment No. 3 Page 7 of 18
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(2) soliciting other holders of the Convertible Preferred Stock to
vote against the reclassification; or (3) pursuing litigation.
In the event the Issuer does not pay dividends on the Convertible
Preferred Stock for four consecutive quarters, then the holders of the
Convertible Preferred Stock will have the right, voting separately as a
class, to elect two-thirds of the Board of Directors of the Issuer. If
four consecutive quarterly dividends are not paid, Value Partners currently
intends to exercise its right to elect directors to the full extent deemed
appropriate at the time. However, since such voting rights will not be
triggered prior to the summer of 1998, no decision has been made by Value
Partners at this time as to how many directors Value Partners will seek to
elect on its own or with the support of other holders of Convertible
Preferred Stock or whom such directors will be.
Value Partners also expressed concerns in its December 11, 1997 letter
about the Issuer securities issued in the DACC acquisition for less than
their fair market value. Under the anti-dilution provisions governing the
terms of the Convertible Preferred Stock, Value Partners believes that the
number of shares of Convertible Preferred Stock need to be immediately
adjusted upward and the conversion price needs to be adjusted downward.
Value Partners also set forth other concerns regarding the acquisition
of DACC, including the purchase accounting adjustments that were made and
then restated. Value Partners has requested various Board minutes,
financial analyses, purchase accounting analyses and other books and
records relating to the acquisition of DACC.
Value Partners may be willing to provide additional funding to the
Issuer, provided that the terms of the Convertible Preferred Stock are
amended to be more favorable to the holders thereof and if certain changes
are made in the senior management of the Issuer. To date, such proposals
have not been finalized by Value Partners and have not been discussed on
a preliminary basis with the Issuer. There can be no assurance that any
such proposals, if finalized, will be viewed favorably by the Issuer.
Other than as set forth above, Value Partners does not have any at
this time specific plans or proposals that relate to, or could result in,
any of the matters referred to in paragraphs (a) through (j), inclusive,
of Item 4 of Schedule 13D.
<PAGE>
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CUSIP No. 812207-40-5 Amendment No. 3 Page 8 of 18
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Item 5. Interest in Securities of the Issuer
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The response to Item 5(a) is hereby supplemented as follows:
(a) Value Partners beneficially owns 444,177 shares of the
Convertible Preferred Stock of the Issuer, which amounts to 18.0% of
the 2,470,124 shares of Convertible Preferred Stock issued and outstanding.
In addition, Value Partners owns 270,022 shares of the Issuer's
Common Stock, which represents 4.0% of the 6,682,886 shares of Common
Stock issued and outstanding as of November 14, 1997. Because each share
of Convertible Preferred Stock is convertible into two shares of Common
Stock, Value Partners is deemed to beneficially own for purposes of Rule
13d-3 an aggregate of 1,158,376 shares of Common Stock, or 15.3% of the
7,571,240 shares of Common Stock that would be issued and outstanding if
Value Partners fully converted its Convertible Preferred Stock into Common
Stock.
None of Fisher Ewing, Mr. Fisher or Mr. Ewing directly owns any
shares of Convertible Preferred Stock or Common Stock. However, since
Fisher Ewing is the general partner of Value Partners and since Messrs.
Fisher and Ewing are the general partners of Fisher Ewing, each of Fisher
Ewing, Mr. Fisher and Mr. Ewing may be deemed to have shared voting and
dispositive power over the shares of Convertible Preferred Stock and Common
Stock directly owned by Value Partners.
The prior response to Items 5(b) through 5(e) remain unchanged.
Item 6. Contracts, Arrangements, Understandings or Relationships with
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Respect to Securities of the Issuer
-----------------------------------
The prior response to Item 6 remains unchanged.
Item 7. Material to Be Filed as Exhibits
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The prior response to Item 7 is hereby supplemented by adding the
following exhibits:
Exhibit 3 Joint Filing Agreement for Schedule 13D
Exhibit 4 Letter Dated December 11, 1997 to Search Financial Services,
Inc.
<PAGE>
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CUSIP No. 812207-40-5 Amendment No. 3 Page 9 of 18
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete
and correct.
VALUE PARTNERS, LTD.
By: Fisher Ewing Partners as General Partner
December 17, 1997 By:/s/ Timothy G. Ewing
--------------------
Timothy G. Ewing
General Partner
FISHER EWING PARTNERS
December 17, 1997 By:/s/ Timothy G. Ewing
--------------------
Timothy G. Ewing
General Partner
December 17, 1997 By:/s/ Richard W. Fisher
---------------------
Richard W. Fisher
December 17, 1997 By:/s/ Timothy G. Ewing
---------------------
Timothy G. Ewing
<PAGE>
EXHIBIT 3
JOINT FILING AGREEMENT
Pursuant to Rule 13d-1(f)(1) under the Securities Exchange Act of
1934, as amended, each of the undersigned hereby enter into this Joint
Filing Agreement dated as of December 17, 1997 and agree that the Schedule
13D to which this Agreement is being filed as an exhibit shall be a joint
statement filed on behalf of each of the undersigned.
VALUE PARTNERS, LTD.
By: Fisher Ewing Partners as General Partner
By:/s/ Timothy G. Ewing
--------------------
Timothy G. Ewing
General Partner
FISHER EWING PARTNERS
By:/s/ Timothy G. Ewing
--------------------
Timothy G. Ewing
General Partner
By:/s/ Richard W. Fisher
---------------------
Richard W. Fisher
By:/s/ Timothy G. Ewing
--------------------
Timothy G. Ewing
<PAGE>
FISHER EWING PARTNERS
Suite 4660 West
2200 Ross Avenue
Dallas, Texas 75201-2790
(214) 999-1900/FAX (214) 999-1901
December 11, 1997
Via Federal Express
- -------------------
Mr. George Evans, Chairman and
Chief Executive Officer
Search Financial Services, Inc.
600 North Pearl Street
Suite 2500
Dallas, Texas 75201-2899
Dear George:
The purpose of this letter is to set forth the concerns of Value
Partners, Ltd. regarding various actions taken by you with respect to
Search Financial 0Services, Inc. ("Search") in general, the preferred
stock and the acquisition of Dealers Alliance Credit Corporation ("DACC")
in particular. This letter also constitutes a written demand pursuant
to Section 220 of the Delaware General Corporation Law that Value Partners,
Ltd. be given the right to inspect various books and records and to make
copies or extracts therefrom. As you are aware, Value Partners is a
stockholder of record of 444,177 shares of Search's 9%/7% Convertible
Preferred Stock (the "Preferred Stock") and 270,021 shares of Search's
common stock.
Concerns About the Preferred Stock
- ----------------------------------
Background
By a Press Release dated August 29, 1997, you, on behalf of Search,
announced that Search is prohibited from paying a cash dividend on its
Preferred Stock. You also state "it has become apparent that investors
and lenders will not allow the continued, unrestricted payment of preferred
stock dividends in cash while they are providing capital and funding for
growth." In effect, you intentionally cast the Preferred Stock in a bad
light when, in fact, you served as Chairman of the Board of Directors of
Search and presided over the confirmation of that certain Third Amended
Joint Plan of Reorganization (the "Plan") of Search's wholly owned
subsidiaries, which Plan authorized the newly-issued Preferred Stock to
holders of secured debt in Search's subsidiaries (the "Subsidiaries").
This Preferred Stock is not some problem inherited by present management
of Search. Nor are its features, including the payment of a cash dividend,
new. Rather, this instrument was created under your leadership as the
centerpiece of the Plan and as a vehicle to compensate secured creditors of
the Subsidiaries. In agreeing to convert secured debt to equity, the holders
of Preferred Stock released valuable collateral to Search and in effect
voted to place their trust in your ability to protect their investment.
Your suggestion that this Preferred Stock is some sort of a nuisance or
hindrance to growth is shocking given the history of this company and your
role in authorizing the creation of the Preferred Stock at a time when the
growth and need for capital that you allude to in your press release was
contemplated.
<PAGE>
Mr. George Evans
December 11, 1997
Page 2
Search emerged from the Chapter 11 of its subsidiaries with a remarkable
opportunity. Virtually all debt was converted to equity and millions of
dollars worth of assets previously subject to the liens of creditors became
available as unencumbered assets of Search. With proper management, Search
should have been able to capitalize on this pristine balance sheet while its
competitors have fallen by the wayside.
Proposed Exchange Offer
-----------------------
In your August 29 Press Release, you stated that "the Company's
management and its financial advisors are exploring the feasibility
and desirability of offering preferred stock holders the opportunity to
exchange their shares of preferred stock for shares of the Company's common
stock and/or cash." This language was again repeated in your October 9,
1997 press release. These releases only served to weaken further the
market's perception of the Preferred Stock, and merely highlight our concern
that management has failed to treat holders of Preferred Stock with any
semblance of fairness.
On November 14, 1997, Search announced that its Board of Directors had
approved an exchange offer whereby preferred stockholders would be able to
exchange each preferred share for four shares of common stock. Search
further announced that it would seek the approval of Search's stockholders
for a reclassification of the Preferred Stock into common stock at the rate
of four shares of common stock for each preferred share. You are proposing
an exchange or reclassification of the Preferred Stock for common stock as
the Preferred trades at just 9.8% of its liquidation value, based upon its
closing price of $2 per share on December 8, 1997. Your attempt to retire
the Preferred Stock at a substantial discount only validates our concerns
and, if carried out, will result in a significant loss to your former
creditors who are holders of the Preferred Stock.
Please be advised that at the present time we have no intention of
voting in favor of the proposed reclassification or of exchanging our
shares of Preferred Stock for common stock. While we may elect to not
oppose a voluntary exchange offer, Value Partners presently does not intend
to tender its shares of Preferred Stock and will take whatever steps are
necessary to block the proposed reclassification of the Preferred Stock into
common stock.
Our current position is based on our loss of confidence in the present
senior management team. We would be more inclined to cooperate with Search
if the Board of Directors had in place management capable of acting in the
best interests of stockholders and if Search could demonstrate some
improvement in operations rather than the poor operating results recently
reported under your tenure as Chief Executive Officer. In this regard, we
note with dismay that less than six months after Search announced that
Anthony J. Dellavechia was promoted to President and Chief Operating Officer,
Search announced on October 16, 1997 that Mr. Dellavechia had stepped down,
together with the departures of other personnel, in order to reduce overhead
expenses. As you stated in a release dated April 28, 1997, Mr. Dellavechia
had "over 35 years' experience in the consumer lending and financial services
industry" and the "operational improvements achieved under Dellavechia's
leadership contributed significantly to the dramatic turnaround Search has
experienced over the last two years." The reversal in fortune of a key
executive you lauded less than six months prior as being instrumental in
Search's "turnaround" confuses us. Has the turnaround been merely illusory?
Recent Loss Not Due to the Preferred Stock
We also note that the operating losses results reported for the September
30, 1997 quarter cannot be blamed on the Preferred Stock. Search's net
interest income increased by only $98,000 or 5.1% over the comparable 1996
quarter, while its general and administrative expenses increased by $1.7
million or 48.6% in the most recent quarter from the comparable 1996 quarter.
When coupled with a $1.5 million provision for credit losses for the
September 30, 1997 quarter, your net loss before dividends skyrocketed to
$4.7 million compared to net income of $464,000 in the September 30, 1996
quarter.
<PAGE>
Mr. George Evans
December 11, 1997
Page 3
We await your immediate response as to whether management has a more
viable plan to redress the impairment in our securities that your actions
have wrought. If we do not receive soon a well-thought-out proposal, we
intend to take all appropriate steps necessary to preserve the value of
our Preferred Stock.
Concerns About the DACC Acquisition
- -----------------------------------
In our May 9, 1997 letter to you, we also raised our concerns regarding
the acquisition of DACC. Based upon your statements and actions, it appears
that Search issued securities as a component of the DACC acquisition worth
far more at that time than the net assets acquired. This exchange has
diluted existing holders of Preferred Stock. Further, to the best of our
knowledge, nothing has been done to remedy this error.
In the preliminary proxy materials for a special stockholders' meeting
filed with the Securities and Exchange Commission ("SEC") on July 19, 1996,
Search disclosed that it had entered into a preliminary agreement to
purchase all the assets of DACC and to assume certain liabilities of DACC.
The preliminary agreement provided for Search to issue 319,257 shares of
preferred stock, 159,629 shares of common stock, and five-year warrants to
purchase 159,629 shares of common stock (as adjusted for the 1 for 8 reverse
stock split). The pro forma information disclosed on pages 25 to 29 of the
preliminary proxy statement showed the following: (1) DACC had net contracts
receivable after loss allowance of $21,675,000 as of March 31, 1996; (2) the
value of the Search securities to be issued was $7,833,000; and (3) the
resulting estimated goodwill was $5,218,000. The preliminary proxy statement
indicated that the number of shares to be issued by Search may change to
reflect changes in market prices or changes in the assets being acquired.
The definitive proxy statement for the special meeting was filed with the
SEC one month later on August 21, 1996 and disclosed that the DACC acquisition
had been completed on August 6, 1996 with no changes in the number of shares
to be issued by Search. However, the pro forma information on pages 25 to
30 showed the following: (1) DACC's net contracts receivable after loss
allowance had substantially declined to $14,302,000; (2) the value of the
securities to be issued by Search had increased to $8,357,000; and (3) the
resulting goodwill had more than doubled to $11,158,000.
The Form 8-K filed on August 20, 1996 with the SEC to report the DACC
acquisition contained the same pro forma information as the definitive proxy
statement filed the next day. Both the Form 8-K and the definitive proxy
statement contained the financial statements of DACC through June 30, 1996.
The Form 10-Q for September 30, 1996 then disclosed on page 10 that the
goodwill relating to the DACC acquisition was approximately $11,300,000
(which is slightly higher than the $11,158,000 shown in the August, 1996
filings) and was being amortized over 15 years. However, the Form 10-Q
stated that Search acquired approximately $23,000,000 of assets from DACC,
which is substantially higher than the $15,870,000 shown in the pro forma
financial statements in the August, 1996 filings. The Form 10-Q contained
no explanation of how the $23,000,000 amount was determined and why it was
substantially higher than the amounts previously disclosed. We assume that
this stated amount of $23,000,000 includes goodwill and intangibles.
The amount of net assets acquired from DACC was then disclosed as being
$21,000,000 on page 12 of the Form 10-Q for December 31, 1996, again with no
explanation of the difference. This Form 10-Q showed goodwill of $10,705,000 at
December 31, 1996, net of $306,000 that had been amortized. Page 12 also
disclosed that the securities issued by Search in the DACC acquisition had
been preliminarily valued at $8,357,000 (i.e., based on market prices), and
then for the first time made the following disclosure:
"The estimated value of the consideration
delivered will be finalized by the end of the
Company's fiscal year. Since it is not unusual
for large equity transactions to have liquidity
adjustments, a discount on the purchase of up to
<PAGE>
Mr. George Evans
December 11, 1997
Page 4
35% of the preliminary estimate of fair value
may be required. Such a reduction would also
result in a reduction in the amount recorded as
excess value."
In the Form 10-K for the fiscal year ended March 31, 1997, Note 4 to the
Consolidated Financial Statements on pages 10-11 of Exhibit 13 states that
the total value of the Search securities issued in the DACC acquisition was
only $4,795,000, which is a $3,562,000 or 42.6% discount from the fair
market value of such securities. There is no explanation or disclosure in
the Form 10-K as to how this value was determined. As a result of this
write-down in the value of Search's securities, the amount of goodwill at
March 31, 1997 was reduced to $6,252,000, net of $450,000 that had been
amortized. Page 8 of Exhibit 13 indicates that the values assigned to the
customer lists and dealer networks intangibles is being amortized over 10 to
15 years, while the remaining goodwill (for contract receivables with a life
of two to three years) is being amortized over 90 months.
Page 11 of the definitive proxy statement filed by Search with the SEC on
February 20, 1996 contained the following disclosure:
"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 downward 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."
The above disclosure is based on the requirements of Section 6.15 of the
Plan and Section 13 of the Certificate of Designation for the Preferred Stock
dated July 11, 1996.
Since the securities issued in the DACC acquisition were issued for
consideration less than their fair market value, the number of shares of
Preferred Stock needs to be immediately adjusted upward and the conversion
price needs to be adjusted downward. Please inform us as to the amount of
the adjustments required and when they will take effect.
In June 1997, Search restated its prior financial statements and amended
its fiscal 1996 Form 10-K and fiscal 1997 Form 10-Qs. The amended Form 10-Q
for September 30, 1996 reduced goodwill at such date to $6,465,000, a decline
of $4,688,000 from the amount previously reported. A similar reduction was
reflected in the amended Form 10-Q for December 31, 1996. The amended Form
10-Qs reflect the issuance of securities by Search in the DACC acquisition at
a 42.6% discount to the fair market value of such securities.
You also retroactively restated DACC's financial statements as of and for
the six months ended June 30, 1996. In the Form 8-K and definitive proxy
materials filed on August 20 and 21, 1996, page F-32 of DACC's financial
statements shows a $7,502,390 allowance for credit losses and page F-33 shows
a net loss for the six months ended June 30, 1996 of $390,431. However, in
the Amendment No. 1 to this Form 8-K filed on June 5, 1997, a $5,100,000
provision for credit losses was added to the Statement of Operations on page
F-33, which increased the net loss on page F-33 and the allowance for credit
losses on page F-32 by a similar amount.
After increasing DACC's allowance for credit losses by $5.1 million as
part of the purchase accounting adjustments, you then reduced the total
allowance for credit losses by $8,791,000 during the fiscal year ended March
31, 1997. See Note 6 to Consolidated Financial Statements on page 13 of
Exhibit 13 to the Form 10-K for March 31, 1997. It was the reduction in the
allowance for credit losses that enabled Search to report net income before
dividends in an amount greater than $1,000,000 for fiscal 1997. This, in
turn, allowed you to receive 62,500 cashless warrants as part of the
September, 1995 amendment to your management contract (as adjusted for the 1
for 8 reverse stock split).
<PAGE>
Mr. George Evans
December 11,1997
Page 5
After increasing DACC's allowance for credit losses by $5.1 million just
before the DACC acquisition and then recovering portions of the allowance
into income shortly before you received your incentive compensation, we now
note that in the September 30, 1997 quarter Search incurred a $1.5 million
provision for credit losses. The explanation for this significant provision
is on page 16 of the most recent Form 10-Q, where you state the provision is
"primarily due to losses in the DACC portfolio." In light of your November 3
, 1997 release that Search only "holds in excess of $3 million of auto loan
receivables acquired in the DACC acquisition" (exclusive of former auto loan
receivables which have been converted to consumer loan receivables), this
$1.5 million provision appears to be very significant.
Demand to Inspect and Copy Books and Records
- --------------------------------------------
Pursuant to Section 220 of the Delaware General Corporation Law, as a
stockholder of record Value Partners hereby makes this written demand under
oath stating the purpose thereof to inspect during the usual hours for
business the books and records listed below, and to make copies or extracts
therefrom:
(1) a copy of all minutes of meetings of the Board of Directors of
Search, or any committee thereof, in which the directors reviewed, discussed
and/or approved the following, whether before or after the acquisition of
DACC: (a) the acquisition of DACC, (b) the value of Search's common stock,
preferred stock and/or warrants issued in the DACC acquisition, (c) the
purchase accounting adjustments to reflect the DACC acquisition, and/or
(d) the amount of the goodwill resulting from the acquisition of DACC;
(2) a copy of any fairness opinion issued by any investment banking firm
with respect to the acquisition of DACC on behalf of Search, including a copy
of the engagement agreement between such firm and DACC;
(3) a copy of any financial analyses prepared by Search's investment
banking firm and presented to Search with respect to the acquisition of DACC,
including a copy of any fairness opinion and/or a copy of the engagement
agreement between such firm and Search;
(4) a copy of any financial analyses prepared by the directors, officers
or employees of Search with respect to the acquisition of DACC;
(5) a copy of any purchase accounting analyses made by Search, or its
directors, officers, employees, investment banker, accountants or other
agents, with respect to the acquisition of DACC;
(6) a copy of any financial statements for DACC prepared as of a date
subsequent to June 30, 1996;
(7) a copy of any analyses made by Search, or its directors, officers,
employees, accountants or other agents, with respect to the following:
(a) the amount of goodwill resulting from the acquisition of DACC, (b) the
allocation of such goodwill to certain intangible assets of DACC, including
customer lists and dealer networks, and/or (c) the appropriate time periods
over which the amount of goodwill should be amortized by Search;
(8) a copy of any analyses made by Search, or its directors, officers,
employees, investment banker, accountants or other agents, regarding the
value of the common stock, preferred stock and warrants issued by Search in
the DACC acquisition, including the bases for the write-down in the value of
such securities from their fair market value;
(9) a copy of any evaluations made by Search, or its directors, officers,
employees, accountants or other agents, subsequent to the DACC acquisition as
to whether any portion of the goodwill resulting from the DACC acquisition
had become impaired or should otherwise be adjusted;
<PAGE>
Mr. George Evans
December 11, 1997
Page 6
(10) a copy of any written correspondence (or notes of telephone calls or
personal meetings) between the SEC and Search (including Search's directors,
officers, employees, accountants, attorneys and other agents) dated on or
after June 30, 1996;
(11) a current list of the holders of the Preferred Stock, in alphabetical
order, setting forth the name and address of each stockholder and the number
of shares registered in the name of each such stockholder;
(12) all information in the possession of Search or its agents and/or
subject to the direction or control of Search and/or which can be obtained
from nominees of any central depository system relating to the breakdown of
all brokerage and financial institutions holding shares for their customers
in street name and a breakdown of holdings which appear on the corporate
stock ledger under the names of any central depository system (e.g.,
Depository Trust Company);
(13) a list of the names, addresses and securities positions of non-
objecting beneficial owners and acquiescing beneficial owners of the
Preferred Stock as of the most recent date available;
(14) the following lists with respect to the Preferred Stock as of the
most recent date available: (a) any Pershing/DLJ omnibus proxy list; (b) any
Philadep omnibus proxy list; (c) any omnibus proxy produced by Bank of New
York or any other bank or broker, listing among other things any respondent
positions; and (d) any other omnibus proxies produced by ADP for client banks
or brokers, listing among other things any respondent positions;
(15) a copy of all minutes of meetings of the Board of Directors of
Search, or any committee thereof, in which the directors reviewed, discussed
and/or approved the proposed exchange offer for the Preferred Stock and/or
the proposed reclassification of the Preferred Stock into common stock;
(16) a copy of the fairness opinion issued by Principal Securities with
respect to the proposed exchange offer for the Preferred Stock and/or the
proposed reclassification of the Preferred Stock into common stock;
(17) a copy of any financial analyses prepared by Principal Securities
with respect to the proposed exchange offer for the Preferred Stock and/or
the proposed reclassification of the Preferred Stock into common stock; and
(18) a copy of any engagement letter or other written agreement between
Search and Principal Securities specifying the compensation to be paid to
Principal Securities.
The purposes of the above request include the following: (i) to protect
the investment of Value Partners in the Preferred Stock, (ii) to ensure that
Search honors the terms of the Preferred Stock, including the anti-dilution
provisions, (iii) to determine whether Search's books and records are being
prepared in a proper and consistent manner, particularly in light of the
numerous adjustments made by Search with respect to its accounting of the
DACC acquisition, (iv) to determine whether Search's periodic reports to
the SEC are being prepared in a proper and consistent manner, (v) to
communicate with holders of the Preferred Stock regarding the recent
operating results of Search, and (vi) to facilitate any solicitation of
proxies or consents by Value Partners in connection with the proposed
reclassification of the Preferred Stock into common stock.
Value Partners will bear the reasonable out-of-pocket costs incurred by
Search in connection with the production of the information for which demand
is made herein.
Please contact me within five business days of the date of this letter
to make appropriate arrangements for the inspection of the above books and
records.
<PAGE>
Mr. George Evans
December 11, 1997
Page 7
If you have any questions regarding the above, please contact either the
undersigned at (214)999-1900 or Timothy B. Matz, Esq. and Gerald F. Heupel, Jr.,
Esq. of Elias, Matz, Tiernan & Herrick L.L.P., counsel to Value Partners, at
(202)347-0300.
Sincerely,
VALUE PARTNERS, LTD.
By: Fisher Ewing Partners as General Partner
By: /s/ Timothy G. Ewing
-----------------------------------------
Timothy G. Ewing
General Partner
Enclosure
cc: Board of Directors of Search
<PAGE>
AFFIDAVIT
STATE OF TEXAS
COUNTY OF DALLAS
Timothy G. Ewing, having been first duly sworn according to law, made an
oath under penalty of perjury that the following facts are true and correct
to the best of his knowledge and belief:
1. Timothy G. Ewing is a General Partner of Fisher Ewing Partners,
which partnership is a general partner of Value Partners, Ltd. (the
"Partnership"); and he is authorized on behalf of the Partnership to execute
the foregoing demand for a stockholder list and books and records and to make
the demands, designations, authorizations and representations contained
therein, and that the matters contained in the foregoing demand for
stockholder list and books and records are true and correct.
2. The stockholder list will be used (a) to solicit proxies or consents
with respect to the proposed exchange offer of common stock of Search
Financial Services, Inc. ("Search") for preferred stock of Search and/or the
proposed reclassification of Search's preferred stock into common stock
(collectively, the "Exchange"), and/or (b) to communicate with stockholders
regarding the operations of Search.
3. The stockholder list information will not be used for any purpose
other than to communicate with or solicit stockholders of Search.
4. No disclosure of any information on the stockholder list will be
made to any person other than the record and beneficial owners of Search's
preferred stock or an employee or agent to the extent necessary to effect
the communication with or solicitation of such stockholders.
/s/ Timothy G. Ewing
------------------------
Timothy G. Ewing
SWORN AND SUBSCRIBED before me this 11th day of December, 1997.
/s/ Caryn L. Merritt
- --------------------------------------------
Notary Public - Signature
Notary Public Commission Expires: 10-22-98
-----------
<PAGE>
