<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) AUGUST 6, 1996
--------------------------------
SEARCH CAPITAL GROUP, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-9539 41-1356819
- ------------------------------ ------------------- -----------------------
(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation) Number) Identification No.)
700 N. PEARL STREET
SUITE 400, L.B. 401
DALLAS, TEXAS 75201-7490
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (214) 965-6000
-----------------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 6, 1996, the Company completed its acquisition of
substantially all of the assets of Dealers Alliance Credit Corp. ("DACC").
DACC's assets consisted primarily of used motor vehicle retail installment
sales contracts, repossessed motor vehicles, cash, and certain furniture and
equipment. As of June 30, 1996, DACC had contracts with total unpaid future
installments of approximately $35 million and net finance receivables of
approximately $14.2 million after reduction for unearned finance charges of
approximately $8.1 million and after an allowance for credit losses of
approximately $12.6 million.
The Company assumed all balance sheet liabilities of DACC, other than
approximately $4.1 million of subordinated debt and warrants and certain other
claims. These liabilities consisted primarily of indebtedness owing to senior
lenders, accounts payable, accrued expenses, an office lease expiring 2002,
service and equipment maintenance agreements and an employment agreement for a
DACC employee. As of June 30, 1996, DACC owed approximately $18 million to its
senior lenders and had accounts payable and accrued expenses of approximately
$0.7 million. The assumed senior debt bears interest at the prime rate plus 1%,
matures on August 2, 1997 and is secured by the contracts purchased from DACC.
The Company must make monthly prepayments of the debt in amounts equal to any
excess of (i) the monthly collections on the purchased contracts over (ii) up to
$475,000 of permitted monthly operating expenses. In addition to assuming the
foregoing liabilities, the Company issued to DACC (i) 766,218 shares of a new
series of preferred stock designated "Series B 9%/7% Convertible Preferred
Stock" (the "Series B Preferred Stock"), (ii) 1,277,030 shares of Common Stock,
and (iii) five-year warrants to purchase 1,277,030 shares of Common Stock at
$2.00 per share (increasing by $0.25 each year). One-half of the securities
issued to DACC were escrowed until May 2, 1997, and the remaining securities
were escrowed until August 3, 1997, to secure certain indemnification
obligations of DACC in favor of the Company under the purchase agreement.
The Company also purchased the subordinated debt owing by DACC and
certain related warrants to purchase DACC stock. All of the debt and warrants
were canceled by the Company as part of the consideration for the transfer of
DACC's assets. The Company issued a total of 1,787,842 shares of Series B
Preferred Stock to the two holders of such debt and warrants. One-fourth of
these shares were escrowed until May 2, 1997, and an additional 25% of these
shares were escrowed until August 3, 1997, to secure certain indemnification
obligations of the holders in favor of the Company.
As a result of the acquisition of DACC and the issuance of the
Company's securities in connection therewith, the total stockholders' equity of
the Company increased approximately $4.6 million. See "Pro Forma Condensed
Consolidated Balance Sheets."
The Company and the recipients of the Company's securities, including
DACC, also entered into shareholders' agreements that require the Company to
file within six months after the closing, and to use best efforts to cause to
become effective within 90 days thereafter, a registration statement with the
Securities and Exchange Commission for the offer and resale of the securities
issued by the Company in this acquisition. The Company will bear all of the
costs of such registration (other than underwriting discounts, commissions and
expenses incurred by the security holders) and up to $40,000 of the fees of
counsel for the security holders.
The terms of the Series B Preferred Stock are similar to the terms of
the Company's existing 9%/7% Convertible Preferred Stock (the "New Preferred
Stock"). According to its terms, the shares of Series B Preferred Stock will
be automatically converted, on a one-for-one basis, into newly issued shares of
New Preferred Stock when certain clarifying amendments to the terms of the New
Preferred Stock are approved by the Company's stockholders and filed with the
Delaware Secretary of State. The Company has filed with the Securities and
Exchange Commission proxy materials with respect to a special stockholders'
meeting called for the purpose of considering such amendments.
-1-
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
INDEX TO FINANCIAL STATEMENTS FOR
DEALERS ALLIANCE CREDIT CORP.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements for the three-month period ended
March 31, 1996 and year ended December 31, 1995
Independent auditors' report F-1
Statements of financial condition F-2
Statements of operations F-3
Statements of common stockholders' deficit F-4
Statements of cash flows F-5
Notes to financial statements F-6
Financial Statements for the year ended December 31, 1994 and
for the period from inception, July 16, 1993, to December 31, 1993
Independent auditors' report F-20
Statements of financial condition F-21
Statements of operations F-22
Statements of common shareholders' deficit F-23
Statements of cash flows F-24
Notes to financial statements F-25
Financial Statements for the three-month period
ended June 30, 1996
Statement of financial condition F-32
Statement of operations F-33
Statement of cash flows F-34
</TABLE>
-2-
<PAGE> 4
[BDO SEIDMAN, LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dealers Alliance Credit Corp.
Atlanta, Georgia
We have audited the accompanying statements of financial condition of Dealers
Alliance Credit Corp. as of March 31, 1996 and December 31, 1995, and the
related statements of operations, common stockholders' deficit, and cash flows
for the three months ended March 31, 1996 and for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Dealers Alliance Credit Corp.
as of March 31, 1996 and December 31, 1995, and the results of its operations
and its cash flows for the three months ended March 31, 1996 and for the year
ended December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations, negative
capital position and notices of default from its principal lenders raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Atlanta, Georgia
May 21, 1996, except for Note 7 /s/ BDO SEIDMAN, LLP
which is as of May 24, 1996
F-1
<PAGE> 5
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF FINANCIAL CONDITION
================================================================================
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Net finance receivables (Note 3) $ 35,125,860 $ 33,686,474
Allowance for credit losses (Note 3) (13,450,000) (14,506,538)
- -----------------------------------------------------------------------------------------------------------------
21,675,860 19,179,936
Cash and cash equivalents 368,767 325,678
Repossessed collateral 437,804 569,556
Furniture and equipment, net 248,940 228,570
Prepaid rent (Note 6) 272,167 327,750
Other assets (Note 6) 647,889 711,832
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 23,651,427 $ 21,343,322
=================================================================================================================
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
LIABILITIES
Revolving credit agreement advances (Note 4) $ 19,250,000 $ 16,850,000
Accounts payable and accrued expenses 1,138,330 1,001,815
Due to related party (Note 11) 19,399 60,111
Senior subordinated notes payable, net (Note 8) 3,486,991 3,460,872
- -----------------------------------------------------------------------------------------------------------------
23,894,720 21,372,798
WARRANTS (Note 8) 563,767 521,945
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK,
$0.01 par value; 200,000 share authorized, 176,313 and
177,630 shares issued and outstanding, net of $24,645 note
receivable from stockholder (Notes 9 and 11) 8,752,971 8,674,880
COMMON STOCKHOLDERS' DEFICIT (Notes 10 and 11)
Common stock, $0.01 par value; 250,000
shares authorized, 9,402 shares issued and outstanding 94 94
Additional paid-in capital - 82,893
Note receivable from stockholder (25,000) (25,000)
Accumulated deficit (9,535,125) (9,284,288)
- -----------------------------------------------------------------------------------------------------------------
Total common stockholders' deficit (9,560,031) (9,226,301)
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 23,651,427 $ 21,343,322
=================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 6
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS Year
ENDED ended
MARCH 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET FINANCE REVENUES
Interest income on finance contracts $1,908,371 $ 5,638,347
Ancillary and other operating income 140,062 326,193
- ----------------------------------------------------------------------------------------------------------------------
Net finance revenues 2,048,433 5,964,540
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE, NET
Interest expense 699,337 1,342,363
Interest income (9,666) (21,048)
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense, net 689,671 1,321,315
- ----------------------------------------------------------------------------------------------------------------------
Finance income before provision for credit losses 1,358,762 4,643,225
Provision for credit losses - (7,415,113)
- ----------------------------------------------------------------------------------------------------------------------
Net finance income (loss) 1,358,762 (2,771,888)
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Employee compensation and related expenses 961,881 2,909,563
General and administrative 390,749 965,659
Consulting and professional fees 219,950 980,117
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,572,580 4,855,339
- ----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (213,818) $(7,627,227)
======================================================================================================================
</TABLE>
Interim results are not necessarily indicative of the results that may be
expected for the entire year.
See accompanying notes to financial statements.
F-3
<PAGE> 7
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 1996
AND YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Note Total
Common Stock Additional receivable common
------------------ paid-in from Accumulated stockholders'
Shares Amount capital stockholder deficit deficit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
at December 31, 1994 9,402 $94 $ 330,574 $ (25,000) $(1,657,061) $(1,351,393)
Compensatory
common stock options - - 39,450 - - 39,450
Preferred stock dividend - - (219,172) - - (219,172)
Preferred stock accretion - - (48,910) - - (48,910)
Warrant accretion - - (19,049) - - (19,049)
Net loss - - - - (7,627,227) (7,627,227)
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
at December 31, 1995 9,402 94 82,893 (25,000) (9,284,288) (9,226,301)
Preferred stock dividend - - (66,280) - - (66,280)
Preferred stock accretion - - (11,810) - - (11,810)
Warrant accretion - - (4,803) - (37,019) (41,822)
Net loss - - - - (213,818) (213,818)
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
at March 31, 1996 9,402 $94 $ - $ (25,000) $(9,535,125) $(9,560,031)
====================================================================================================================
</TABLE>
Interim results are not necessarily indicative of the results that may be
expected for the entire year.
See accompanying notes to financial statements.
F-4
<PAGE> 8
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS Year
ENDED ended
MARCH 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (213,818) $ (7,627,227)
Adjustments:
Provision for credit losses - 7,415,113
Depreciation and amortization 21,568 80,970
Amortization of debt discount and organization fees 62,917 222,212
Compensatory stock options issued to related party - 39,450
Changes in assets and liabilities:
Repossessed collateral 131,752 (511,493)
Other assets 35,321 (1,213,368)
Accounts payable and acrued expenses 136,517 835,542
Due to related party (40,712) 48,254
- ---------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 133,545 (710,547)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of installment contracts receivable (4,966,659) (27,358,521)
Payments received on installment contracts receivable 2,514,695 3,729,126
Purchases of equipment (41,995) (129,685)
Proceeds from sale of assets 3,505 -
- ---------------------------------------------------------------------------------------------------------------
Cash used in investing activities (2,490,454) (23,759,080)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Revolving credit agreement advances 2,400,000 16,850,000
Subordinated debt issuance - 4,000,000
Issuance of preferred stock - 2,972,832
- ---------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 2,400,000 23,822,832
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 43,091 (646,795)
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS at beginning of period 325,678 972,473
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS at end of period $ 368,767 $ 325,678
===============================================================================================================
NON-CASH ACTIVITIES
Accretion of put value of warrants $ 41,822 $ 19,049
Accretion of value of preferred stock 11,810 48,910
Preferred stock dividend 66,280 219,172
</TABLE>
Interim cash flows are not necessarily indicative of the cash flows
that may be expected for the entire year.
See accompanying notes to financial statements.
F-5
<PAGE> 9
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT BUSINESS DESCRIPTION
ACCOUNTING POLICIES
Dealers Alliance Credit Corp. (the
"Company"), is a specialized indirect
consumer finance company engaged in
financing the purchase of used automobiles
by purchasing retail installment sales
contracts ("Installment Contracts")
primarily from independent used automobile
dealers. The Company was incorporated in
the state of Delaware on July 16, 1993.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
NON-REFUNDABLE ACQUISITION DISCOUNT
Generally, Installment Contracts are
purchased from dealers at non-refundable
acquisition discounts ("Discount") from the
principal amounts financed by the
borrowers. Prior to January 1, 1996 when an
Installment Contract was purchased, the
Company allocated to the allowance for
credit losses the portion of the Discount
deemed necessary to absorb estimated future
credit losses for the Installment Contract
portfolio. Any remaining amount was
deferred as unearned acquisition discount
and was amortized to interest income using
the interest method over the term of the
Installment Contract. The entire Discount
related to Installment Contracts purchased
subsequent to December 31, 1995 has been
allocated to the Allowance for Credit
Losses, and no discount revenue recognized.
REVENUE RECOGNITION
Each installment contract requires the
customer to make monthly payments over a
fixed term. The difference between the
total amount of contractual payments and
the principal amount financed represents
unearned finance charges. Unearned finance
charges are amortized and recorded as
interest income using the interest method
over the term and at the interest rate
stated in the Installment Contract. When an
Installment Contract becomes 61 or more
days past due or the customer becomes the
subject of a bankruptcy proceeding, income
recognition is suspended until the
Installment Contract is restored to a
current status.
F-6
<PAGE> 10
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company derives income from product
warranties sold by a third party that are
financed under the Installment Contracts
(ancillary income). That income is
deferred and recorded as unearned
ancillary income and amortized to revenue
using the sum-of-the-digits method, which
approximates the results of the interest
method, over the terms of the underlying
warranty contracts.
Other operating income, which includes
late charges and deferral fees charged to
customers, is recognized as collected.
ALLOWANCE FOR CREDIT LOSSES
Allowance for credit losses is established
through an allocation at the acquisition
date of the Discount based upon
management's estimate of future credit
losses. Commencing January 1, 1996, the
entire discount has been allocated to the
allowance account. Management
periodically evaluates the adequacy of the
allowance for credit losses by reviewing
credit loss experience, delinquencies, the
value of the collateral and general
economic conditions.
If the allowance for credit losses is
insufficient in comparison to the amount
management believes necessary to absorb
potential losses in the Installment
Contract portfolio, the Company first
transfers amounts from the unearned
acquisition discount, to the extent
available, and then, if necessary, a
provision for credit losses is charged
against earnings.
An Installment Contract is charged to the
allowance for credit losses at the
earliest of the time when the automobile
securing the Installment Contract is
repossessed, the payment under the
Installment Contract is 180 days or more
past due, or the Installment Contract is
otherwise deemed to be uncollectible.
REPOSSESSED AUTOMOBILES
A repossessed automobile is recorded at
its estimated realizable value less
estimated costs of disposition. The
Company commences repossession against the
automobile securing a delinquent account
when it determines that additional
collection efforts are not likely to be
successful. Generally, repossession
occurs when a borrower becomes 60 days
delinquent on an Installment Contract.
Upon repossession, the amount due under an
Installment Contract, net of the related
unearned acquisition discount, if any, is
reduced to the estimated realizable value
of the automobile less estimated costs of
disposition through a charge to the
allowance for credit losses.
F-7
<PAGE> 11
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
DEFERRED CONTRACT ACQUISITION COSTS
The Company defers costs directly
associated with the acquisition of
Installment Contracts such as the fees,
commission and dealers incentives and
amortizes such costs using the interest
method as a reduction of interest income
over the term of the Installment
Contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid
investments with original maturities of
three months or less.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at
cost and are depreciated over their
estimated useful lives, ranging from 4 to
6 years, using the straight-line method.
Accumulated depreciation at March 31, 1996
and December 31, 1995 was $75,699 and
$57,579, respectively.
DEFERRED LOAN COSTS
Commitment, placement and other fees and
expenses incurred in connection with the
Company's Revolving Credit Agreement and
Subordinated Debt are deferred, as other
assets, and amortized under the
sum-of-the-years digits method to interest
expense over the terms of the related
agreements.
INCOME TAXES
The Company records income taxes in
accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". Deferred
taxes are recorded based upon temporary
differences between the financial
statement and tax bases of assets and
liabilities using enacted tax rates in
effect for the year in which the
differences are expected to reverse.
Management provides a valuation allowance
for deferred tax assets when they
determine it is more likely than not that
the benefits from such deferred tax assets
will not be realized.
2. FUTURE PROSPECTS The Company's financial statements for the
three months ended March 31, 1996 and for
the year ended December 31, 1995 have been
prepared on a going concern basis, which
contemplates the realization of assets and
settlement of liabilities and commitments
in the normal course of business. The
Company incurred net losses of $213,818
for the three months ended March 31, 1996
and $7,627,227 for the year ended
F-8
<PAGE> 12
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1995 resulting in an
accumulated deficit of $9,535,125 and
$9,284,288 at March 31, 1996 and December
31, 1995, respectively. During 1996, the
Company's principal lenders notified the
Company that the Company was in default of
certain financial convenants of the loan
agreement and subordinated note
agreements. In these circumstances, the
outstanding borrowings become immediately
due and payable upon notification of the
lenders. These matters raise substantial
doubt about the ability of the Company to
continue as a going concern. Management's
plans in regard to these matters are
discussed below. The financial statements
do not include any adjustments that might
result from the outcome of this
uncertainty.
In early March 1996 Company determined
that its portfolio of installment
contracts was not performing as had been
previously estimated and, consequently, a
significant provision for credit losses
and resulting addition to the allowance
for credit losses was required as of and
for the period ended December 31, 1995.
The Company immediately informed its senior
revolving credit lenders ("Senior
Lenders") and subordinated debt lenders
("Subdebt Lenders") of its determination
and that, as a consequence, the Company
would be in default on a number of
covenants contained in the revolving
credit agreement with the Senior Lenders
("Senior Loan") and subordinated note
agreement with the Subdebt Lenders
("Subordinated Loan"). On March 19, 1996
the Senior Lenders notified Company that
events of default had occurred under the
Senior Loan and that Company would not be
permitted to make any additional
borrowings thereunder. On March 22, 1996
the Subdebt Lenders notified Company than
events of default had occurred under the
Subordinated Loan.
Neither the Senior Lenders nor the Subdebt
Lenders have demanded payment in full or
accelerated the maturity of those debts.
However, the Senior Loan expired by its
terms on May 1, 1996 and in accordance
with an agreement with the Senior Lenders
the Subdebt Lenders cannot currently
accelerate the Subordinated Loan. The
Senior Lenders have informed Company that
they will not renew the Senior Loan;
however, for an unspecified period of time
they will permit Company to use most of
its cash collections from its loan
portfolio to operate its business less
interest payments.
F-9
<PAGE> 13
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
On April 2, 1996 Company retained two
investment banking firms to aid and assist
its efforts to recapitalize the Company
through direct investment, sale or merger.
Although the effort to recapitalize is
continuing and the Senior Lenders are
permitting the Company to operate, no
assurance can be given that Company will
be successful in recapitalizing or that
the Senior Lenders will not accelerate the
Senior Debt and foreclose on the portfolio
collateral prior to the time that any
recapitalization is completed.
3. NET RECEIVABLES Generally, the Company's Installment
Contracts have terms of 24 to 36 months.
The net finance receivables balance
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Contractual payments due $ 46,371,288 $ 44,900,063
Unearned finance charges (11,328,861) (11,278,054)
--------------------------------------------------------------------------
Contractual principal balance 35,042,427 33,622,009
Unearned ancillary income (84,662) (93,358)
Deferred contract acquisition
costs, net 168,095 157,823
--------------------------------------------------------------------------
Net finance receivables $ 35,125,860 $ 33,686,474
==========================================================================
</TABLE>
F-10
<PAGE> 14
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Activity in the unearned contract
acquisition discount and allowance for
credit losses accounts for the three
months ended March 31, 1996 and the year
ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
UNEARNED CONTRACT ACQUISITION
DISCOUNT
Balance - beginning of period $ - $ 507,783
Discounts allocated to
unearned acquisition -
discount 1,968,292
Amortized to interest income - (546,402)
Transferred to allowance for -
credit losses (1,376,787)
Related to charge-offs, net - (552,886)
--------------------------------------------------------------------------
Balance - end of period $ - $ -
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Balance - beginning of period $14,506,538 $ 598,120
Discounts allocated to
allowance for credit losses 2,185,597 9,383,810
Transferred from unearned
acquisition discount - 1,376,787
Provision for credit losses - 7,415,113
Charge-offs (3,273,975) (4,283,206)
Recoveries 31,840 15,914
--------------------------------------------------------------------------
Balance - end of period $13,450,000 $ 14,506,538
==========================================================================
</TABLE>
The Company's exposure to credit loss in
the event of non-performance by the
customer is represented by the amount of
the Installment Contract less the
acquisition discount. At March 31, 1996
approximately 32%, 24% and 14%, of the
Company's Installment Contracts were
purchased from dealers located in
Tennessee, Georgia and Texas,
respectively.
F-11
<PAGE> 15
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
4. REVOLVING CREDIT At March 31, 1996 the Company had a $35
AGREEMENT million revolving credit agreement
("Revolving Credit Agreement"), which was
in default, with three banks, which
expired on May 1, 1996. The Company's
obligations under the Revolving Credit
Agreement are secured by substantially all
of the Company's assets. Borrowings under
the Revolving Credit Agreement were $19.25
million and $16.85 million at March 31,
1996 and December 31, 1995, respectively.
Interest on the borrowings under the
Revolving Credit Agreement is payable
monthly based upon the referenced prime
rate (which was 8.25% at March 31, 1996)
plus 2% per annum. For the three months
ended March 31, 1996 interest expense
amounted to $470,600 and consisted of
interest on advances (weighted average
interest rate of 10.25%) under the
Revolving Credit Agreement, amortization of
the Revolving Credit Agreement fees and
expenses. For the year ended December 31,
1995 interest expense amounted to $975,340
and consisted of interest on advances
(weighted average interest rate of 11.5%)
under the Revolving Credit Agreement,
amortization of the Revolving Credit
Agreement fees and expenses, and
amortization of the cost of an option to
purchase an interest rate protection
agreement.
The Revolving Credit Agreement requires
the Company to maintain specified
financial ratios and to comply with other
covenants. At March 31, 1996 the Company
was in default under this agreement due to
failure to maintain these agreed upon
covenants, including the minimum interest
coverage ratio, minimum tangible net worth
and the ratio of charge-offs to average
net finance receivables.
5. INCOME TAXES The Company has incurred net operating
losses since its inception in 1993 and,
accordingly, no provision for income taxes
for the three months ended March 31, 1996
or for the year ended December 31, 1995
has been recorded.
Net operating loss carryovers, which
aggregate approximately $4,345,000 at
March 31, 1996, are available to reduce
future federal and state income taxes and
expire through December 31, 2010.
Deferred taxes reflect the net tax effect
of temporary differences between the
financial reporting bases of assets and
liabilities and the amounts applicable for
income tax purposes.
F-12
<PAGE> 16
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company's net deferred tax assets were
as follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Pre-operating expenses $ 80,000 $ 87,000
Allowance for credit losses 1,718,000 2,348,000
Net operating loss carryover 1,520,000 812,000
--------------------------------------------------------------------------
3,318,000 3,247,000
Less valuation allowance (3,318,000) (3,247,000)
--------------------------------------------------------------------------
Net deferred tax asset $ - $ -
==========================================================================
</TABLE>
6. LEASES AND OTHER OFFICE FACILITY AND EQUIPMENT LEASES
COMMITMENTS
The Company rents its office under a
non-cancellable lease agreement which
terminates in September 2002 and provides
the Company with options, subject to
certain conditions, to lease additional
space in 1996 and 1997. The new lease
requires the Company to reimburse the
landlord for increases over the base year
amounts for certain expenses, such as real
estate taxes, utilities and maintenance.
Upon executing the lease in August 1995
the Company was required to fund $364,000
of future rental payments and $150,000
representing a security deposit. The
unamortized portion of the future rental
payments and the security deposit are
included in "prepaid rent" and "other
assets" at March 31, 1996 and December 31,
1995. The rental prepayment will reduce
future rental payments through March 1997.
Some of the Company's office equipment is
subject to operating leases. The aggregate
rent expense for the office facility and
equipment leases was $58,900 for the three
months ended March 31, 1996 and $74,200
for the year ended December 31, 1995.
DATA PROCESSING AGREEMENT
The Company entered into a five-year
contract, which expires in June 1999, to
receive data processing services. The
contract requires minimum monthly fees for
services rendered.
F-13
<PAGE> 17
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
At March 31, 1996, future minimum payments
for non-cancellable leases, including the
new office lease, and data processing
services were as follows:
<TABLE>
<CAPTION>
Data
Leases Processing
---------------------------------------------------------------------------
<S> <C> <C>
Year ending March 31, 1997 $ 128,000 $218,000
Year ending March 31, 1998 383,400 180,000
Year ending March 31, 1999 360,200 180,000
Year ending March 31, 2000 292,300 45,000
Year ending March 31, 2001 287,700 -
Thereafter 424,500 -
---------------------------------------------------------------------------
Total $1,876,100 $623,000
===========================================================================
</TABLE>
7. CONTINGENCIES Subsequent to March 31, 1996, the
employment by the Company of its then
president and then chief financial officer
was terminated. Each believes they were
dismissed without cause. The Company has
been notified by counsel representing
these two former employees that legal
action may be initiated against the
Company for, among other things, severance
payments, recommendations and release of
non-compete agreements.
8. SUBORDINATED DEBT During 1995, the Company issued $4 million
AND WARRANTS of subordinated debt, which is
subordinated to the Company's Revolving
Credit Agreement and bears interest at 10%
per annum, payable quarterly. The first
issue of $2.5 million occurred on October
16, 1995 and the remaining $1.5 million was
issued on December 20, 1995. The
Subordinated Debt matures October 16, 2000,
unless repayment is required by redemption
of the Preferred Stock or the completion of
an initial public offering.
In connection with the issuance of the
Subordinated Debt the lenders were issued
warrant ("Warrants") to purchase 18,467
shares of the Company's Common Stock for
an exercise price of $0.01 per share.
These Warrant are exercisable immediately
and expire in 10 years. If the Warrants
are outstanding on November 1, 1998,
unless the repurchase feature is otherwise
accelerated, the Warrant holders have the
right, under certain conditions, to
require the Company to repurchase the
Warrants at a price per share determined
by dividing
F-14
<PAGE> 18
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
the largest of: (i) the Company's then fair
value, (ii) 12 times the Company's net
income for the last 4 quarters or (iii) $14
million divided by the number of
fully-diluted shares of common stock and
common stock equivalents then outstanding.
Upon issuance, the $554,139 fair value of
the Warrants was recorded as original issue
discount. The Company incurred costs
aggregating $369,894 in connection with the
Subordinated Debt. Those costs, which are
included in other assets, and the original
issue discount are amortized as interest
expense over the term of the Subordinated
Debt using the interest method. For the
three months ended March 31, 1996 interest
expense for the subordinated debt was
$101,111 and for the year ended December
31, 1995 interest expense was $64,085. The
Warrant is being accreted over a 36 month
period to an estimated repurchase value of
$995,925 through a charge against net
income available for common stockholders.
Subordinated debt consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Principal outstanding $4,000,000 $4,000,000
Less:
Original issue discount, net of
accumulated amortization (513,009) (539,128)
--------------------------------------------------------------------------
$3,486,991 $3,460,872
==========================================================================
</TABLE>
9. REDEEMABLE SERIES A The Company has authorized 200,000 shares
CONVERTIBLE PREFERRED of Series A Convertible Preferred Stock
STOCK ("Preferred Stock"), par value $.01 per
share. Holders of the Preferred Stock are
entitled to cumulative annual stock
dividends of 3% on December 30 of each
year. In December 1993, the Company
received commitments to buy 110,000 shares
(gross proceeds of $5.5 million) of its
Preferred Stock, 60% of which was purchased
in December 1993 with the remaining 40%
purchased in September 1994. The December
1993 closing resulted in the issuance of
66,000 shares of Preferred Stock with
proceeds, net of offering costs, of
approximately $3,120,000. The September
1994 closing resulted in the issuance of
44,000 shares of Preferred Stock, with net
proceeds of approximately $2,196,000.
F-15
<PAGE> 19
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
On January 25, 1995 the Company's Board of
Directors approved an offering of 60,000
shares of Preferred Stock at $50 per share
to current holders of the Company's
Preferred and Common Stock. The offering
("Rights Offering") resulted in the
Company receiving commitments to purchase
the entire 60,000 shares of Preferred
Stock offered. The terms of the offering
provided for two closings. The initial
closing in May 1995 resulted in the
issuance of 30,000 shares of Preferred
Stock (net proceeds of $1,480,780). The
second closing was on July 24, 1995 and an
additional 30,000 shares of Preferred
Stock (gross proceeds of $1,500,000) were
issued.
Each share of Preferred Stock may be
converted into 1 share of Common Stock at
any time at the option of the holder.
Conversion into Common Stock is mandatory
in the event of a qualified initial public
offering of the Company's Common Stock, as
defined ("IPO").
If an IPO does not occur before December
1, 1998, each holder of Preferred Stock
may require the Company to redeem its
Preferred Stock at the greater of the
Common Stock's per share fair market value
or its liquidation preference. Redemption
is mandatory on November 30, 1999 at the
greater of the Common Stock's per share
fair market value on September 1, 1999 or
its liquidation preference. The
liquidation preference aggregated
$8,903,600 at March 31, 1996 and
$8,837,300 at December 31, 1995. For
financial accounting purposes, the
Preferred Stock is accreted to the greater
of its liquidation preference ($50 per
share) or the Common Stock's per share
fair market value. Management believes
the fair market value of its Common Stock
was $50 per share at December 31, 1995 and
December 31, 1994. For financial
accounting purposes, the dividends were
valued at $50 per share and were charged
to additional paid-in capital, to the
extent available, and then to accumulated
deficit.
Holders of Preferred Stock are entitled to
one vote per share on all stockholder
matters. The Company's Shareholders
Agreement provides that all stockholders
vote for an eight member Board of
Directors comprised of four nominees of
the majority Common Stockholder (see
Related Party Transactions), one nominee
of a specified Preferred Stock holder
group, two nominees of the stockholders
other than majority Common Stockholder and
one nominee who is the Company's chief
executive officers. The Shareholders
Agreement terminates upon completion of an
IPO.
The Preferred Stock ranks senior to the
Common Stock with respect to
F-16
<PAGE> 20
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
dividends and liquidation rights.
The provisions of the Revolving Credit
Agreement prohibit the payment of
dividends in cash or property, other than
stock dividends on the Preferred Stock.
10. OPTIONS TO PURCHASE On May 1, 1995, the options to purchase
COMMON STOCK Common Stock granted to certain key
officers of the Company during 1994 were
modified. The modification increased the
number of shares under grant from 17,500 to
25,500. Additionally, the rights of those
grantees under the options vest in their
entirety on December 30, 2000, unless
vesting is accelerated by the Company's
achievement of established operating
performance objectives in 1995 and 1996.
The exercise price per share is $50, which
approximated fair market value per share at
the date of the modification.
On November 30, 1993, a member of the
Board of Directors was granted an option,
which vested immediately, to purchase
2,000 shares of Common Stock at an
exercise price per share of $50, which
approximated fair value per share at the
date of grant, through November 30, 2003.
On May 1, 1995, the option granted to
Chicago Holdings, Inc. ("CHI") (see
Related Party Transactions) in November
1993 to purchase 10,000 shares of Common
Stock at an exercise price of $50 per
share was modified. CHI's option to
purchase those shares vest in its entirety
on December 31, 2000, unless vesting is
accelerated by the Company's achievement
of established operating performance
objectives in 1995 and 1996.
On November 30, 1993, CHI was granted an
option, which vested immediately, to
purchase 10,000 shares of Common Stock. On
May 1, 1995 CHI was granted an option,
which vested immediately, to purchase an
additional 2,500 shares of common stock.
The exercise prices per share of the
options are: $100 during 1996, $150 during
1997 and $200 thereafter through November
30, 2003.
F-17
<PAGE> 21
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company obtained valuations from an
independent party for the Common Stock
options granted to CHI. The appraiser
determined the fair value of CHI options
granted or modified in 1995 was
approximately $39,450 at the date of
grant. The Company recognized a non-cash
compensatory charge for such options in
1995. The fair value of the options
granted in 1993 was not material.
11. RELATED PARTY COMMON STOCK TRANSACTIONS
TRANSACTIONS
Approximately 89.4% (8,401 shares) of the
Company's outstanding Common Stock is
owned by a wholly-owned subsidiary of CHI,
a founder of the Company. The remaining
outstanding shares of Common Stock are
owned by the Company's President and its
Chairman. The Chairman purchased 1
founding share. CHI's subsidiary
purchased 1 founding share, 5,040 shares
of the Company's Common Stock in the
December 1993 closing for $240,005 and
3,360 shares in the September 1994 closing
for $160,003.
In September 1994, the Company's then
President purchased 1,000 shares of Common
Stock for $50 per share, payable $25,000
in cash and $25,000 by a five-year full
recourse promissory note which bears
interest at 6% per annum. This note is
collateralized by a pledge of the
Company's stock owned by the President,
requires partial repayments in the event
that the President earns an incentive
bonus in 1996, 1997 or 1998, and
accelerates if the President ceases to be
employed by the Company.
PREFERRED STOCK TRANSACTIONS
In 1995 the Company's then President, as a
participant in the Rights Offering,
purchased a total of 493 shares of
Preferred Stock at $50 per share payable
$98 in cash and $24,552 by full recourse
promissory notes due on September 1, 1999
which bear interest at 6% per annum. Those
notes are collateralized by a pledge of
the Company's stock owned by the
President, require partial repayments in
the event that the President earns an
incentive bonus in 1996, 1997 or 1998, and
accelerate if the President ceases to be
employed by the Company.
F-18
<PAGE> 22
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In 1995, a wholly-owned subsidiary of CHI,
as a participant in the Right Offering,
purchased 4,138 shares of preferred stock
for a cash price of $206,900 ($50 per
share).
MANAGEMENT ADVISORY AGREEMENT
The Company has a management advisory
agreement with CHI. CHI agreed to provide
accounting, legal and other services for
the Company through November 1996. CHI's
compensation for those services is $125
per hour, together with reimbursement of
out-of-pocket expenses, for actual time
devoted to assisting the Company. The
terms of the agreement also provide for
CHI to make its senior management
available, at the Company's request, for
advisory and consulting services through
November 1, 1998. CHI is also entitled to
a monthly fee of $10,000 for 36 months
commencing after the Company achieves and
continues to be profitable on a monthly
basis. The agreement provides for the
Company's payment of a market rate fee to
CHI if CHI successfully arranges
additional indebtedness for the Company.
For the three months ended March 31, 1996
and the year ended December 31, 1995, CHI
charged the Company $64,800 and $249,200,
respectively, in hourly management fees
and reimbursement of out-of-pocket
expenses. During 1995 CHI charged the
Company $111,280 and $75,000 as fees for
negotiating increases to the Company's
Revolving Credit Agreement and its
Subordinated Debt.
In August 1995, the Company entered into
an advisory agreement, which expires in
four years, with EQ Corporation, a
shareholder of the Company, pursuant to
which EQ Corporation will provide certain
financial advisory services to the
Company. The terms of the agreement
required the Company to prepay all fees,
which amounted to approximately $149,000,
upon execution of the agreement. Such
amount has been included in other assets
and will be amortized to expense over the
term of the agreement.
F-19
<PAGE> 23
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Dealers Alliance Credit Corp.:
We have audited the accompanying statements of financial condition of Dealers
Alliance Credit Corp. as of December 31, 1994 and 1993, and the related
statements of operations, shareholders' deficit, and cash flows for the year
ended December 31, 1994 and the period from July 16, 1993 (date of
incorporation) to December 31, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Dealers Alliance Credit Corp. as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for the year ended December 31, 1994 and the period from July 16, 1993
(date of incorporation) to December 31, 1993 in conformity with generally
accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
February 17, 1995
F-20
<PAGE> 24
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1994 1993
<S> <C> <C>
Net finance receivables $ 3,629,717 $ -
Allowance for credit losses (598,120) -
----------- -----------
Net receivables 3,031,597 -
Cash and cash equivalents 972,473 3,026,389
Repossessed collateral 58,063 -
Furniture and equipment, net 131,411 -
Other assets 67,158 131,507
----------- -----------
$ 4,260,702 $ 3,157,896
=========== ===========
LIABILITIES AND COMMON SHAREHOLDERS' DEFICIT
Accounts payable and accrued expenses $ 166,271 $ 127,265
Due to related party 11,857 148,165
----------- -----------
Total liabilities 178,128 275,430
Series A Convertible Preferred Stock,
$0.01 par value; 200,000 shares authorized,
112,363 and 66,000 shares issued and
outstanding at December 31, 1994 and
1993, respectively 5,433,967 3,120,000
Common Shareholders' Deficit:
Common stock, $0.01 par value; 250,000
shares authorized, 9,402 and 6,302 shares
issued and outstanding at December 31, 1994
and 1993, respectively 94 63
Additional paid-in capital 330,574 299,962
Note receivable from shareholder (25,000) (59,987)
Accumulated deficit (1,657,061) (477,572)
----------- -----------
Total common shareholders' deficit (1,351,393) (237,534)
----------- -----------
$ 4,260,702 $ 3,157,896
=========== ===========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 25
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
REVENUES:
Interest income:
Finance contracts $ 428,450 $ -
Other 81,411 5,794
Ancillary and other operating income 11,501 -
----------- ---------
Total revenues 521,362 5,794
INTEREST EXPENSE 119,787 -
----------- ---------
NET INTEREST INCOME 401,575 5,794
----------- ---------
OPERATING EXPENSES:
Employee compensation and related expenses 864,183 42,218
Other 716,881 441,148
----------- ---------
Total expenses 1,581,064 483,366
----------- ---------
NET LOSS $(1,179,489) $(477,572)
=========== =========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 26
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF COMMON SHAREHOLDERS' DEFICIT
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL COMMON
------------------- PAID-IN FROM ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL SHAREHOLDER DEFICIT STOCK DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 16, 1993 - $ - $ - $ - $ - $ - $ -
Issuance of common stock 6,302 63 299,962 (59,987) - - 240,038
Net loss - - - - (477,572) - (477,572)
----- ----- --------- -------- -------- ------ --------
BALANCE, DECEMBER 31, 1993 6,302 63 299,962 (59,987) (477,572) - (237,534)
Repayment of note receivable
from shareholder - - - 29,987 - - 29,987
Repurchase of common stock
for treasury stock (1,260) - - 30,000 - (61,210) (31,210)
Issuance of shares from
treasury stock 1,000 - 1,421 (25,000) - 48,579 25,000
Treasury stock retired - (3) (12,628) - - 12,631 -
Issuance of common stock 3,360 34 159,969 - - - 160,003
Preferred stock dividend - - (118,150) - - - (118,150)
Net loss - - - - (1,179,489) - (1,179,489)
----- ----- -------- -------- ----------- -------- -----------
BALANCE, DECEMBER 31, 1994 9,402 $ 94 $330,574 $(25,000) $(1,657,061) $ - $(1,351,393)
===== ===== ======== ======== =========== ======== ===========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 27
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
OPERATING ACTIVITIES:
Interest income received - finance contracts $ 291,197 $ -
Interest income - short-term investments 87,205 -
Ancillary and other operating receipts 5,533
Payments for borrowing fees (36,889) (100,000)
Payments for operating expenses (1,683,453) (233,649)
----------- ----------
Net cash used in operating activities (1,336,407) (333,649)
INVESTING ACTIVITIES:
Purchases of finance contracts (3,316,689) -
Principal payments received on finance contracts 374,836 -
Purchases of furniture and equipment (156,463) -
----------- ----------
Net cash used in investing activities (3,098,316) -
FINANCING ACTIVITIES:
Purchase of treasury stock (30,000) -
Proceeds from issuance of common stock 185,003 240,038
Proceeds from issuance of preferred stock, net 2,195,817 3,120,000
Repayment of note receivable from shareholder 29,987 -
----------- ----------
Net cash provided by financing activities 2,380,807 3,360,038
----------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,053,916) 3,026,389
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 3,026,389 -
----------- ----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 972,473 $3,026,389
=========== ==========
RECONCILIATION OF NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Net loss $(1,179,489) $ (477,572)
Depreciation and amortization:
Furniture and equipment 25,051 -
Contract acquisition discount income (158,331) -
Ancillary income (5,969) -
Contract acquisition costs 21,078 -
Decrease (increase) in other assets 58,555 (131,507)
Increase in accounts payable and accrued expenses 39,006 127,265
Increase (decrease) in due to related party (136,308) 148,165
----------- ----------
NET CASH USED IN OPERATING ACTIVITIES $(1,336,407) $ (333,649)
=========== ==========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 28
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993
(DATE OF INCORPORATION) TO DECEMBER 31, 1993
- -------------------------------------------------------------------------------
1. BUSINESS DESCRIPTION
Dealers Alliance Credit Corp. (the "Company") was incorporated in the
state of Delaware on July 16, 1993, and operates from leased office
space in Atlanta, Georgia. The Company is a finance company specializing
in purchasing and servicing sub-prime automobile installment sales
contracts ("finance contracts"), originated by automobile dealers and
secured by the purchased automobiles. The Company began operations on
December 1, 1993. As of December 31, 1994, the Company had purchased
finance contracts from dealers located in seven southeastern states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nonrefundable Contract Acquisition Discount - Generally, finance
contracts are purchased from dealers at nonrefundable contract
acquisition discounts from the principal amounts financed by the
borrowers, "Dealer Discount." The amount of this Dealer Discount, which
includes both credit and yield enhancement, is negotiated by the Company
with the dealer.
When a finance contract is purchased, the Company allocates to the
allowance for credit losses the portion of the Dealer Discount deemed
necessary to absorb estimated future credit losses for the finance
contract portfolio. Any remaining amount is deferred as unearned
contract acquisition discount and is amortized to interest income using
the interest method over the term of the finance contract. When a
specific finance contract is determined to be uncollectible, any
unearned contract acquisition discount related to that contract is
offset against the unpaid contract balance prior to charging the
allowance for credit losses.
Revenue Recognition - Each finance contract requires the borrower to
make monthly payments over a fixed term. The difference between the
total amount of contractual payments and the principal amount financed
represents unearned finance charges. Unearned finance charges are
amortized and recorded as interest income using the interest method over
the term and at the interest rate stated in the finance contract. When a
finance contract becomes 61 or more days past due, income recognition is
suspended until the contractual aging is restored to a current status.
The Company receives commissions from the sale of warranty contracts.
Those commissions are deferred and recorded as unearned ancillary income
and amortized to revenue using the sum-of-the-digits method, which
approximates the results of the interest method, over the terms of the
underlying warranty contracts.
Other operating income, which includes late charges and extension fees
charged to customers, is recognized as collected.
Allowance for Credit Losses - Allowance for credit losses is established
through an allocation of the Dealer Discount based upon management's
estimate of future credit losses. Management believes that the allowance
for credit losses and the related unearned contract acquisition
discounts are adequate to
F-25
<PAGE> 29
absorb potential losses in the portfolio. Management evaluates the
adequacy of the allowance for credit losses by reviewing credit loss
experience, delinquencies, the value of the underlying collateral and
general economic conditions.
If necessary, a provision for credit losses will be charged against
earnings to maintain the allowance for credit losses at an amount
management believes necessary to absorb potential losses in the finance
contract portfolio. Through December 31, 1994, the allocations of Dealer
Discounts to the allowance for credit losses together with unearned
contract acquisition discounts have been adequate to absorb all
estimated credit losses. Accordingly, no provision for credit losses has
been required.
A finance contract is charged to the allowance for credit losses at the
earliest of the month in which the related collateral is repossessed,
the finance contract is six months or more past due, or the finance
contract is otherwise deemed to be uncollectible.
Repossessed Collateral - Repossessed collateral is recorded at its
estimated net realizable value. The Company commences repossession
against collateral when it determines that other collection efforts are
not likely to be successful. Usually repossession occurs before a
borrower has defaulted on two consecutive monthly payments. Upon
repossession, the net amount due under a finance contract is reduced to
the estimated net realizable value of the collateral through a charge to
the related unearned contract acquisition discount with any remaining
amount charged to the allowance for credit losses.
Deferred Contract Acquisition Costs - The Company defers costs directly
associated with the acquisition of finance contracts and amortizes such
costs using the interest method as a reduction of interest income over
the term of finance contracts.
Cash and Cash Equivalents - Cash and cash equivalents include highly
liquid investments with an original maturity of three months or less.
Furniture and Equipment - Furniture and equipment are recorded at cost
and are depreciated over their estimated useful lives, ranging from 4 to
6 years, using the straight-line method. Accumulated depreciation at
December 31, 1994 was $25,051.
Revolving Credit Facility Fees - Commitment and facility fees and
expenses are paid to the Company's lender in accordance with the
provisions of the Company's revolving credit facility. Those deferred
costs are included in other assets and amortized to interest expense
over the term of the facility.
Income Taxes - The Company records income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred taxes are recorded based upon
temporary differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company incurred net
operating losses in 1994 and 1993 and, accordingly, no provision for
income taxes was made for the year ended December 31, 1994 and the
period from July 16, 1993 (date of incorporation) to December 31, 1993.
Postretirement and Postemployment Benefits - The Company does not offer
postretirement or postemployment benefits to its employees. Accordingly,
SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," have no effect upon the Company's financial
position or results of operations.
F-26
<PAGE> 30
3. FINANCE RECEIVABLES
Generally, the Company's finance contracts have terms of 12 to 36 months.
The net finance receivables balance consisted of the following at December
31, 1994:
<TABLE>
<S> <C>
Contractual payments due $ 5,492,830
Unearned finance charges (1,433,492)
-----------
Total finance receivables 4,059,338
Unearned contract acquisition discount (507,783)
Unearned ancillary income (11,741)
Deferred contract acquisition costs, net 89,903
-----------
Net finance receivables $ 3,629,717
===========
</TABLE>
At December 31, 1994 contractual payments due under finance contracts are
scheduled to be received as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1995 $2,342,707
1996 2,096,651
1997 1,049,816
1998 3,656
----------
Total $5,492,830
==========
</TABLE>
The Company's experience has shown that some payments will be received prior
to contractual due dates.
When a finance contract is determined to be uncollectible, the unpaid
account balance due is reduced by the net realizable value of the
repossessed collateral and any remaining unearned contract acquisition
discount. The net amount remaining, if any, is charged to the allowance for
credit losses. Activity in the unearned contract acquisition discount and
allowance for credit losses accounts for the year ended December 31, 1994,
was as follows:
<TABLE>
<CAPTION>
UNEARNED ALLOWANCE
CONTRACT FOR
ACQUISITION CREDIT
DISCOUNT LOSSES
<S> <C> <C>
Balance - beginning of year $ - $ -
Discounts negotiated 703,422 747,441
Amortized to interest income (158,331) -
Charge-offs, net (37,308) (149,321)
--------- ---------
Balance - end of year $ 507,783 $ 598,120
========= =========
</TABLE>
F-27
<PAGE> 31
4. REVOLVING CREDIT FACILITY
The Company has an $8 million revolving credit facility with a bank
("Facility"), which expires on December 31, 1995. Borrowings are
secured by substantially all of the Company's assets. During 1994, the
Company's operations did not require advances under the Facility.
Interest on the borrowings under the Facility is payable monthly based
upon the referenced prime rate, which was 8.5% at December 31, 1994,
plus 2% per annum. Interest expense, which consisted solely of
commitment and facility fees and expenses, for the year ended December
31, 1994 was $119,787. The Facility requires the Company to maintain
specified financial ratios and to comply with other covenants.
In January 1995, the Company acquired an option, exercisable on or
before December 31, 1995, to purchase a contract which would provide
interest rate protection during 1996 and 1997 on various notional
amounts up to $15 million. The option is held for purposes other than
trading. If the Company exercised its option and if the contract's
referenced interest rate exceeds 12% during 1996 and 1997, then the
Company would receive a payment computed using the rate differential
multiplied by the applicable notional amount for that period. The
contract exposes the Company to credit risk through counterparty
nonperformance which risk is mitigated by the counterparty's financial
condition. The Company would not require collateral or other security to
support financial instruments with off-balance sheet credit risk.
5. INCOME TAXES
Net operating loss carryovers, which aggregate approximately
$1,255,000, are available to reduce future federal and state income
taxes and expire in 2008 and 2009.
Deferred tax asset reflects the net tax effect of temporary differences
between the financial reporting bases of assets and liabilities and the
amounts applicable for income tax purposes. The Company's net deferred
tax asset at December 31, 1994 and 1993 was:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Deferred tax asset:
Preoperating expenses $ 116,000 $ 145,000
Allowance for credit losses 34,000
Net operating loss carryover 477,000 36,000
-------- ---------
627,000 181,000
Less valuation allowance (627,000) (181,000)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
</TABLE>
6. LEASES AND OTHER COMMITMENTS
Office Lease - The Company rents its office under a noncancellable
lease agreement with an initial term of four years. The lease requires
the Company to reimburse the landlord for increases over the base year
amounts for certain expenses, such as real estate taxes, utilities, and
maintenance. Some of the Company's office equipment is subject to
operating leases. The aggregate rental expense for the office and
equipment leases was $41,429 for the year ended December 31, 1994 and
$5,984 for the period from July 16, 1993 (date of incorporation) to
December 31, 1993.
Data Processing Agreement - The Company entered into a five-year
contract, which expires in May 1999, to receive data processing
services. The contract requires minimum monthly servicing fees.
F-28
<PAGE> 32
At December 31, 1994, future minimum payments for noncancellable leases
and data processing services were as follows:
<TABLE>
<CAPTION>
DATA
YEAR ENDING DECEMBER 31: LEASES PROCESSING
<S> <C> <C>
1995 $ 41,756 $117,500
1996 41,239 218,000
1997 38,655 184,000
1998 - 180,000
1999 - 75,000
-------- --------
Total $121,650 $774,500
======== ========
</TABLE>
Employment Agreements - The Company has employment agreements with
certain key officers which provide for aggregate base annual
compensation of $426,500 plus bonuses based on certain operating
performance goals in 1995. The agreements expire on various dates
through December 31, 1995 and may be extended by mutual agreement.
Additionally, the agreements require termination payments in the event
of the employee's involuntary termination. At December 31, 1994, the
aggregate amount of the contingent termination obligation was $196,375.
7. SERIES A CONVERTIBLE PREFERRED STOCK
The Company has authorized 200,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock"), par value $.01 per share. In
December 1993, the Company received commitments to buy 110,000 shares
(gross proceeds of $5.5 million) of its Preferred Stock, 60% of which
was purchased in December 1993 with the remaining 40% purchased in
September 1994. The December closing resulted in the issuance of 66,000
shares of Preferred Stock with proceeds, net of offering costs, of
approximately $3,120,000. The September closing resulted in the issuance
of 44,000 shares of Preferred Stock, with net proceeds of approximately
$2,196,000. Holders of the Preferred Stock are entitled to an annual
stock dividend of 3% on December 30 of each year. Additionally, for
financial reporting purposes, the Preferred Stock is accreted to the
greater of the Common Stock's per share fair market value or its
liquidation preference ($50 per share). Management believes the fair
market value of its Common Stock was $50 per share at December 31, 1994.
A stock dividend of 2,363 shares was declared for holders of record as
of December 31, 1994. For financial accounting purposes, that dividend
was valued at $50 per share, or $118,500 and was charged to additional
paid-in capital.
Each share of Preferred Stock may be converted into one share of Common
Stock at any time at the option of the holder. Conversion into Common
Stock is mandatory in the event of a qualified initial public offering
("IPO") of the Company's Common Stock.
If an IPO does not occur before December 1, 1998, each holder of
Preferred Stock may require the Company to redeem its Preferred Stock at
the greater of the Common Stock's per share fair market value or its
liquidation preference. Redemption is mandatory on November 30, 1999 at
the greater of the Common Stock's per share fair market value on
September 1, 1999 or its liquidation preference. The liquidation
preference aggregated $5,618,150 at December 31, 1994.
F-29
<PAGE> 33
Holders of Preferred Stock are entitled to one vote per share on all
shareholder matters. The Company's Shareholders' Agreement provides that
all shareholders vote for a seven-member Board of Directors comprised of
four nominees of the majority Common Stockholder (see Related Party
Transactions), one nominee of a specified Preferred Stockholder group,
and two nominees of the stockholders other than the majority Common
Stockholder.
The Preferred Stock ranks senior to the Common Stock with respect to
dividends and liquidation rights.
8. COMMON STOCK
On December 1, 1993, the Company received commitments to buy 10,500
shares (gross proceeds of $500,000) of its Common Stock (see Related
Party Transactions) of which 60% were purchased in December 1993, with
the remaining 40% purchased at a second closing which occurred in
September 1994. The December closing resulted in the issuance of 6,300
shares of Common Stock, with the Company receiving cash of $240,038 and
a note receivable in the amount of $59,987. In September 1994, the
Company received cash of $160,003 for purchase of the remaining
committed shares of Common Stock.
The provisions of the Facility prohibit the payment of dividends in cash
or property, other than stock dividends on the Preferred Stock.
9. COMMON STOCK OPTIONS
At December 31, 1994, the Company had outstanding options to acquire
shares of the Company's Common Stock, as follows:
<TABLE>
<CAPTION>
DATE NUMBER
OF OF EXERCISE EXERCISE
OPTION HOLDER GRANT SHARES PRICE CONDITION
<S> <C> <C> <C> <C>
Chicago Holdings, Inc. 1993 10,000 $50 (a)
Chicago Holdings, Inc. 1993 10,000 Various (b)
Management 1994 17,500 $50 (c)
Member of the Board
of Directors 1993 2,000 $50 Expires
December,
2003
</TABLE>
(a) Chicago Holdings, Inc. ("CHI") (see Related Party Transactions),
has options to acquire 10,000 shares of the Company's Common
Stock at $50 per share. Those options are exercisable after the
second, third, and fourth years of the Company's operations if
certain financial goals are achieved. Those options expire in
December 2003.
(b) CHI also has vested options, which expire in December 2003, to
acquire an additional 10,000 shares of the Company's Common
Stock. The exercise prices per share of those options are: $75
during 1994, $100 during 1995 and 1996, $150 during 1997, and
$200 thereafter through December 2003.
(c) Management's options to acquire 17,500 shares of the Company's
Common Stock at $50 per share are exercisable after the second
and third years of the Company's operations if financial goals
are achieved.
F-30
<PAGE> 34
10. RELATED PARTY TRANSACTIONS
Common Stock Transactions - Approximately 89.4% (8,401 shares) of the
Company's outstanding Common Stock is owned by a wholly owned subsidiary
of CHI, a founder of the Company. The remaining outstanding shares of
Common Stock are owned by the Company's President and its Chairman.
CHI's subsidiary purchased one founding share, 5,040 shares of the
Company's Common Stock in the December 1993 closing for $240,005, and
3,360 shares in the September 1994 closing for $160,003.
Approximately $60,000 of the $300,000 proceeds from the issuance of the
Company's Common Stock in December 1993 was paid with a 6% note due from
the Company's former President. The note was due in two installments
($29,987 on January 17, 1994 and $30,000 on December 1, 1998).
In connection with the resignation of the Company's former President
during June 1994, the following were consummated: (i) consulting
services of the former President were retained through the end of 1994
for a fee of $75,000, (ii) his stock options were terminated, (iii) his
commitment to acquire additional shares of Common Stock was terminated,
and (iv) his 1,260 shares of the Common Stock were purchased by the
Company, as treasury stock, in exchange for the original purchase price
of $61,210 ($30,000 of cash and the cancellation the above promissory
note).
In September 1994, the Company's new President purchased 1,000 shares of
treasury Common Stock for $50 per share, payable $25,000 in cash and
$25,000 by a five-year promissory note which bears interest at 6% per
annum.
Management Advisory Agreement - The Company has a management advisory
agreement with CHI. CHI agreed to provide accounting, legal, and other
services for an initial term expiring on November 30, 1996. CHI's
compensation for services performed under the agreement is (i) $125 per
hour, together with reimbursement of out-of-pocket expenses, for actual
time devoted to the Company's business, (ii) a transaction structuring
fee of $120,000 (which was paid during 1994), and (iii) a monthly fee of
$10,000 for 36 months commencing after the Company achieves and
continues to be profitable on a monthly basis. The agreement provides
for the Company's payment of a market rate fee to CHI if CHI
successfully arranges additional indebtedness for the Company. During
1994 and 1993, CHI charged the Company $125,875 and $23,875,
respectively, in hourly management fees and $26,806 and $390,815,
respectively, for reimbursement of out-of-pocket expenses.
11. IMPACT OF NEW ACCOUNTING STANDARDS
The Company expects to adopt SFAS No. 107, "Disclosure About Fair Value
Of Financial Instruments," in 1995. Since SFAS No. 107 requires
disclosures only as to the fair value of financial instruments, the
adoption of SFAS No. 107 will have no effect on the Company's financial
position or results of operations.
12. SUBSEQUENT EVENT
On January 25, 1995, the Company's Board of Directors approved an
offering of 60,000 shares of Preferred Stock at $50 per share (gross
proceeds of $3,000,000) to current holders of the Company's Preferred
and Common Stock. The terms of the offering provide for two closings
with proceeds of $1.5 million to be derived from the initial closing.
F-31
<PAGE> 35
DEALERS ALLIANCE CREDIT CORP.
STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS: June 30, 1996
- ------ ------------
<S> <C>
Gross finance receivables $ 34,947,444
Unearned finance charges (8,092,739)
------------
Net finance receivables 26,854,705
Unearned ancillary income (50,578)
------------
Net finance receivables after ancillary 26,804,127
Allowance for credit losses (12,602,390)
Deferred acquisition costs, net 142,816
------------
14,344,553
Cash and cash equivalents 687,806
Repossessed collateral 603,512
Furniture and equipment, net 233,332
Prepaid rent, net 200,243
Subordinated debt issuance costs, net 280,589
Other assets, net 323,007
------------
$ 16,673,042
============
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT:
Revolving credit agreement advances $ 18,000,000
Accounts payable and accrued expenses 671,331
Due to related party 8,017
Senior subordinated notes payable, net 3,513,598
------------
Total liabilities $ 22,192,946
------------
Warrants 563,767
Redeemable Series A Convertible Preferred Stock, $0.01 par value;
200,000 shares authorized, 176,746 issued and outstanding 8,787,972
Common stockholders' deficit:
Common stock, $0.01 par value; 250,000 shares
authorized, 9,402 shares issued and outstanding 94
Additional paid-in capital 0
Note receivable from stockholder (25,000)
Accumulated deficit (14,846,737)
------------
Total common stockholders' deficit (14,871,643)
------------
$ 16,673,042
============
</TABLE>
F-32
<PAGE> 36
DEALERS ALLIANCE CREDIT CORP.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
-----------
<S> <C>
Revenues:
Interest income on finance contracts $ 3,628,051
Ancillary income 99,537
Late charges and other income 139,647
-----------
Total finance revenues 3,867,235
Amortization of deferred contract acquisition costs (138,813)
-----------
Net finance revenues 3,728,422
Interest expense, net (1,428,357)
-----------
Net finance income before provision for credit losses 2,300,065
Provision for credit losses (5,100,000)
-----------
Net finance income (loss) (2,799,935)
-----------
Operating expenses: 2,690,496
-----------
Net loss $(5,490,431)
===========
</TABLE>
F-33
<PAGE> 37
DEALERS ALLIANCE CREDIT CORP.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
-------------
<S> <C>
Operating activities
Net loss $(5,490,431)
Adjustments:
Provision for credit losses 5,100,000
Depreciation and amortization 41,956
Amortization of debt discount and organization fees 204,099
Changes in assets and liabilities:
Repossessed collateral (33,633)
Other assets 235,742
Accounts payable and accrued expenses (330,484)
Due to related party (52,094)
-----------
Cash used in operating activities (325,491)
-----------
Investing activities
Purchases of installment contracts receivable (6,145,407)
Payments received on installment contracts receivable 5,721,516
Purchases of equipment (41,995)
Proceeds from sales of assets 3,505
-----------
Cash used in investing activities (462,381)
-----------
Cash provided by financing activities--revolving credit agreement advances 1,150,000
-----------
Net increase in cash and cash equivalents 362,128
Cash and cash equivalents at beginning of period 325,678
-----------
Cash and cash equivalents at end of period $ 687,806
===========
</TABLE>
F-34
<PAGE> 38
(b) PRO FORMA FINANCIAL INFORMATION.
The following condensed consolidated financial statements of the
Company and its subsidiaries set forth unaudited condensed consolidated balance
sheets as of June 30, 1996 and unaudited condensed consolidated statements of
operations for the six-month transition period ended March 31, 1996 and the
three month period ended June 30, 1996, on an actual historical basis and on a
pro forma adjusted basis to give effect to the purchase of DACC's assets, the
assumption of certain of DACC's liabilities, the issuance by the Company of
Common Stock, Series B Preferred Stock and warrants, and the assumption and
restructuring of DACC's revolving credit agreement in connection therewith.
-3-
<PAGE> 39
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Search Historical DACC Adjustments Pro Forma
------ --------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Gross contracts receivable $ 30,344 $ 34,947 $ 65,291
Unearned interest (5,621) (8,143) (13,764)
-------- -------- --------
Net contracts receivable 24,723 26,804 51,527
Allowance for credit losses (10,506) (12,602)(8) (23,108)
Net loan origination costs 274 -- 274
-------- -------- --------
Net contracts receivable - after 14,491 14,202 28,693
-------- -------- --------
allowance for credit losses and
other costs
Cash and cash equivalents 20,871 688 21,559
Vehicles held for resale 356 604 960
Property and equipment, net 988 233 1,221
Other assets, net 210 946 $ (280)(2) 1,306
430 (4)
Intangible assets -- -- 4,375 (1) 4,375
Goodwill -- -- 2,419 (1) 2,419
-------- -------- -------- --------
Total assets $ 36,916 $ 16,673 $ 6,944 $ 60,533
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Lines of credit $ -- $ 18,000 $ 18,000
Accrued settlements 500 -- 500
Dividends payable 1,610 -- 1,610
Accounts payable and other liabilities 2,477 679 $ 143 (9) 3,299
Senior subordinated notes payable, net -- 3,513 (3,513)(1) --
Redeemable warrants 616 -- 161 (1) 777
-------- -------- -------- --------
Total liabilities 4,587 22,192 (3,209) 24,186
-------- -------- -------- --------
Warrants -- 564 (564)(1) --
Redeemable preferred stock -- 8,788 (8,788)(1) --
Stock repurchase commitment 2,078 -- -- 2,078
-------- -------- -------- --------
2,078 9,352 9,352 2,078
-------- -------- -------- --------
Stockholders' Equity
Preferred stock 174 -- 26 (1) 200
Common stock 293 -- 13 (1) 306
Additional paid-in capital 83,872 -- 4,738 (1) 88,467
Note receivable from stockholders -- (25) 25 (3) --
Accumulated deficit (53,554) (14,846) 14,846 (1) (53,554)
Treasury stock (1,150) -- -- (1,150)
-------- -------- -------- --------
Total stockholders' equity (deficit) 29,635 (14,871) 10,271 34,269
-------- -------- -------- --------
Total liabilities and stockholders' equity $ 36,916 $ 16,673 $ 6,944 $ 60,533
======== ======== ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated
financial statements.
-4-
<PAGE> 40
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Historical
Search DACC Adjustments Pro Forma
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Interest revenue $ 3,541 $ 3,540 $ 7,081
Interest expense (1,306) (1,020) $ (13)(10) (2,339)
-------- -------- -------- --------
Net interest income 2,235 2,520 (13) 4,742
Provision for credit losses (4,982) (6,954) -- (11,936)
-------- -------- --------
Net loss after provision
for credit losses (2,747) (4,434) (13) (7,194)
-------- -------- --------
General and administrative expense (8,098) (2,786) (337)(5) (11,221)
Settlement expense (535) -- (535)
-------- -------- --------
Loss before extraordinary item (11,380) (7,220) (350) (18,950)
Extraordinary gain on discharge of debt 8,709 -- -- 8,709
-------- -------- -------- --------
Net loss (2,671) (7,220) (350) (10,241)
Preferred stock dividends (327) -- $ (402)(6) (729)
-------- -------- -------- --------
Net loss attributable to common
stockholders $ (2,998) $ (7,220) $ (752) $(10,970)
======== ======== ======== ========
Loss per common share before
extraordinary item $ (1.12) $ (1.68)
Gain on extraordinary item 0.83 0.74
-------- --------
Loss per common share $ (0.29) $ (0.94)
======== ========
Weighted average number of common
shares outstanding 10,447 1,277(1) 11,724
======== ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated
financial statements.
-5-
<PAGE> 41
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Historical Historical
Search DACC Adjustments Pro Forma
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Interest revenue $ 1,659 $ 1,819 $ 3,478
Interest expense 22 (878) $ (6)(10) (906)
-------- -------- -------- --------
Net interest income 1,637 941 (6) 2,572
Recovery of (provision for) credit losses 1,382 (5,100) -- (3,718)
-------- -------- -------- --------
Net interest income (loss) after provision for 3,019 (4,159) (6) (1,146)
-------- -------- --------
credit losses
General and administrative expense (2,528) (1,117) (169)(7) (3,814)
Net income (loss) before dividends 491 (5,276) (169) (4,960)
-------- -------- -------- --------
Preferred stock dividends (1,404) -- (201)(6) (1,605)
-------- -------- -------- --------
Net loss attributable to common $ (913) $ (5,276) $ (376) $ (6,565)
======== ======== ======== ========
stockholders
Loss per common share $ (.03) $ (.24)
======== ========
Weighted average number of common
shares outstanding 26,628 1,277(1) 27,905
======== ======== ========
</TABLE>
See accompanying notes to pro forma condensed consolidated
financial statements.
-6-
<PAGE> 42
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited Pro Forma Condensed Financial Statements are based on
the following adjustments and related assumptions:
(1) Record (a) the issuance of 1,277,030 shares of Search's $.01 par value
Common Stock, 2,554,060 shares of Search's $.01 par value Series B
Preferred Stock, and 1,277,030 redeemable warrants to purchase Common
Stock (which are treated as a liability of $161,000), (b) the
elimination of DACC's stock and warrants, and (c) the goodwill and
intangible assets acquired in the DACC acquisition.
(2) Records the writedown of capitalized cost associated with an attempted
offering of securities by DACC.
(3) Records forgiveness of debt owed by stockholder who was employed by
DACC.
(4) Records value associated with accounts in DACC's portfolio previously
charged off.
(5) Records amortization of goodwill and intangible assets recorded on the
acquisition for six month period ended March 31, 1996.
(6) Records payment of dividend on Series B Preferred shares issued in the
acquisition, which were assumed to be issued at the beginning of the
respective periods.
(7) Records amortization of goodwill and intangible assets recorded on the
acquisition for three month period ended June 30, 1996.
(8) Includes loan loss provisions made by DACC through August 7, 1996,
which is considered appropriate for the pro forma presentation.
(9) Records estimated costs of acquisition.
(10) Records interest expense due to accretion of redeemable warrants issued
in connection with the acquisition.
The purchase accounting adjustments to record the acquisition of
DACC's assets and the assumption of DACC's liabilities that were used in the
preparation of the unaudited Pro Forma Condensed Balance Sheet are summarized
below (in thousands):
<TABLE>
<CAPTION>
Actual Pro Forma
As of August 2, 1996 As of June 30, 1996(a)
-------------------- -------------------
<S> <C> <C>
Net contracts receivables .................................. $ 14,380 $ 14,202
Cash and cash equivalents .................................. 753 688
Vehicles held for resale ................................... 284 604
Property and equipment ..................................... 222 233
Custom lists ............................................... 2,175 2,175
Dealer network ............................................. 2,200 2,200
Other assets ............................................... 835 1,096
-------- --------
Total estimated fair value of assets acquired............... 20,849 21,198
-------- --------
Liabilities assumed 18,239 18,679
Fair value of Search equity instruments issued, including
redeemable warrants treated as debt 4,795 4,795
Direct acquisition costs 143 143
-------- --------
Total cost 23,177 23,617
-------- --------
Cost in excess of fair value of net assets acquired and
other identifiable intangibles $ 2,328 $ 2,419
======== ========
</TABLE>
- ----------
(a) Assumes the acquisition occurred on June 30, 1996 and reflects differences
due to changes in assets and liabilities between June 30 and August 2, 1996.
-7-
<PAGE> 43
(C) EXHIBITS.
Exhibit No. Description
- ----------- -----------
2.1 Asset Acquisition Agreement among Search Capital Group, Inc.,
Search Funding IV, Inc. and Dealers Alliance Credit Corp.
dated as of August 2, 1996
2.2 Sub-Debt Acquisition Agreement among Search Capital Group,
Inc., Search Funding IV, Inc., R-H Capital Partners, L.P. and
Kellett Investment Corporation dated as of August 2, 1996
2.3 Escrow Agreement among Search Capital Group, Inc., Dealers
Alliance Credit Corp., Search Funding IV, Inc., R-H Capital
Partners, L.P., Kellett Investment Corporation and U.S. Trust
Company of Texas, N.A., dated as of August 6, 1996
2.4 Search-DACC Shareholders Agreement dated as of August 2, 1996
between Search Capital Group, Inc. and Dealers Alliance Credit
Corp.
2.5 Sub-Debt Shareholders Agreement dated as of August 2, 1996
among Search Capital Group, Inc., R-H Capital Partners, L.P.
and Kellett Investment Corporation
2.6 Debt Assumption Agreement dated as of August 2, 1996 among
Search Capital Group, Inc., Search Funding IV, Inc., LaSalle
National Bank, as Agent, Bank One Chicago, N.A. and Fleet
Capital Corporation
4.1 Certificate of Designation of Series B 9%/7% Convertible
Preferred Stock
-8-
<PAGE> 44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SEARCH CAPITAL GROUP, INC.
By: /s/ Robert Idzi
--------------------------------------
Robert Idzi, Senior Executive Vice
President
Dated: June 4, 1997
