-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IW9/moWgrpBe9UVVAonVjdai4P7QwEuK8OJiNh+XhTRh0RWUkf1ha4Xt5Gh8xJSc wAfYAr/IgVfQ3TM1ULpakA== 0000950134-96-000522.txt : 19960222 0000950134-96-000522.hdr.sgml : 19960222 ACCESSION NUMBER: 0000950134-96-000522 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960221 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEARCH CAPITAL GROUP INC CENTRAL INDEX KEY: 0000318672 STANDARD INDUSTRIAL CLASSIFICATION: ASSET-BACKED SECURITIES [6189] IRS NUMBER: 411356819 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09539 FILM NUMBER: 96523830 BUSINESS ADDRESS: STREET 1: 700 N PEARL ST STE 400 STREET 2: PLZ OF THE AMERICAS NORTH TOWER CITY: DALLAS STATE: TX ZIP: 75201-7490 BUSINESS PHONE: 2149656000 MAIL ADDRESS: STREET 1: 700 N PEARL STE 400,NORH TOWER STREET 2: PLAZA OF THE AMERICAS CITY: DALLAS STATE: TX ZIP: 75201-7490 FORMER COMPANY: FORMER CONFORMED NAME: SEARCH NATURAL RESOURCES INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q PERIOD END 12-31-95 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934 For the quarter ended: Commission File Number: December 31, 1995 0-9539 ----------------- ------ S E A R C H C A P I T A L G R O U P, I N C. --------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware: 41-1356819: -------- ---------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 700 North Pearl, Suite 400, Plaza of the Americas, North Tower, Lock Box 401, ----------------------------------------------------------------------------- Dallas, Texas 75201 -------------------- (Address and zip code of principal executive offices) (214) 965-6000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate the number of shares outstanding of each of the issuer's common stock, as of the latest practicable date: Class ----- Number of Shares Outstanding: Common Stock, $.01 par value February 15, 1996 8,706,981 1 2 PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS
December 31, 1995 (unaudited) September 30, 1995 -------------------------------------------- ------------------------------------------- (all numbers in thousands) Fund Fund Subsidiaries Subsidiaries Search & & Eliminations Search & & Eliminations Unrestricted "(Debtors in Unrestricted "(Debtors in Subsidiaries Possession)" Consolidated Subsidiaries Possession)" Consolidated -------------------------------------------- ------------------------------------------- ASSETS - ------ Gross contract receivables $ 3,609 $ 44,966 $ 48,575 $ 7,365 $ 59,312 $ 66,677 Unearned interest (480) (8,392) (8,872) (1,300) (11,806) (13,106) -------------------------------------------- ------------------------------------------- Net contract receivables 3,129 36,574 39,703 6,065 47,506 53,571 Allowance for credit losses (1,434) (13,540) (14,974) (2,862) (15,761) (18,623) Loan origination costs 591 3,337 3,928 591 3,163 3,754 Amortization of loan origination costs (545) (2,661) (3,206) (506) (2,431) (2,937) -------------------------------------------- ------------------------------------------- Net contract receivables after allowance for credit losses & loan origination costs 1,741 23,710 25,451 3,288 32,477 35,765 -------------------------------------------- ------------------------------------------- Cash and equivalents 855 - 855 442 - 442 Restricted cash - 12,573 12,573 - 8,105 8,105 Vehicles held for resale 220 1,133 1,353 93 508 601 Deferred note offering costs 42 9,011 9,053 42 9,011 9,053 Accumulated amortization (42) (6,687) (6,729) (41) (5,950) (5,991) -------------------------------------------- ------------------------------------------- Deferred note offering cost, net - 2,324 2,324 1 3,061 3,062 -------------------------------------------- ------------------------------------------- Property and equipment 2,236 - 2,236 2,126 - 2,126 Accumulated depreciation (942) - (942) (820) - (820) -------------------------------------------- ------------------------------------------- Property and equipment, net 1,294 - 1,294 1,306 - 1,306 -------------------------------------------- ------------------------------------------- Inter-company balance 428 (428) - 646 (646) - Other assets, net 103 8 111 650 (9) 641 -------------------------------------------- ------------------------------------------- Total assets $ 4,641 $ 39,320 $ 43,961 $ 6,426 $ 43,496 $ 49,922 ============================================ =========================================== LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIT) - ------------------------------------------------------ Liabilities Not Subject to Compromise -------------------------------------- Lines of credit $ 2,280 $ - $ 2,280 $ 1,058 $ - $ 1,058 Accrued settlement 2,912 - 2,912 2,912 - 2,912 Accrued restructuring 260 - 260 214 - 214 Accounts payable and other liabilities 3,050 252 3,302 1,804 247 2,051 Accrued interest 1 - 1 2 - 2 -------------------------------------------- ------------------------------------------- Liabilities not subject to compromise 8,503 252 8,755 5,990 247 6,237 -------------------------------------------- ------------------------------------------- Liabilities Subject to Compromise - ---------------------------------- Prepetition notes payable and accrued interest - subject to compromise - 69,320 69,320 - 69,320 69,320 -------------------------------------------- ------------------------------------------- SHAREHOLDERS' EQUITY (CAPITAL DEFICIT) - -------------------------------------- Preferred stock - 12% senior convertible $.01 par value, cumulative, 400,000 shares issued and outstanding, liquidation preference of $2,000,000 plus accrued dividends 4 - 4 4 - 4 Common stock, $.01 par value, 20,000,000 shares authorized, 11,773,370 shares issued 117 - 117 117 - 117 Additional paid-in-capital 26,776 - 26,776 26,766 - 26,766 Accumulated deficit (29,609) (30,252) (59,861) (25,301 (26,071) (51,372) Treasury stock at cost 3,026,389 shares (1,150) - (1,150) (1,150) - (1,150) -------------------------------------------- ------------------------------------------- Total shareholders' equity (capital deficit (3,862) $39,320 $43,961 $6,426 $43,496 $49,922 -------------------------------------------- ------------------------------------------- Total Liabilities and Shareholders' Equity (Capital Deficit) $4,641 $39,320 $43,961 $6,426 $43,496 $49,922 ============================================ ===========================================
See notes to condensed financial statement 2 3 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended Three Months Ended December 31, 1995 (unaudited) December 31, 1994 (unaudited) ------------------------------------------- ----------------------------------------------- (all dollars in thousands, except per share amounts) Fund Fund Subsidiaries Subsidiaries Search & & Eliminations Search & & Eliminations Unrestricted "Debtors in Unrestricted "Debtors in Subsidiaries Possession" Consolidated Subsidiaries Possession" Consolidated ------------------------------------------- ----------------------------------------------- Interest revenue $253 $2,336 $2,589 $1,283 $3,631 $4,914 Interest expense 36 738 774 83 3,271 3,354 ------------------------------------------- ----------------------------------------------- Net interest income 217 1,598 1,815 1,200 360 1,560 Provision for credit losses 829 4,552 5,381 1,772 4,283 6,055 ------------------------------------------- ----------------------------------------------- Net interest loss after provision for credit losses (612) (2,954) (3,566) (572) (3,923) (4,495) ------------------------------------------- ----------------------------------------------- General and 3,291 1,227 4,518 2,442 1,365 3,807 administrative expense Settlement expense 94 - 94 - - - Reorganization expense 250 - 250 - - - ------------------------------------------- ----------------------------------------------- Operating and other expense 3,635 1,227 4,862 2,442 1,365 3,807 ------------------------------------------- ----------------------------------------------- Net loss (4,247) (4,181) (8,428) (3,014) (5,288) (8,302) ------------------------------------------- ----------------------------------------------- Preferred stock dividends (60) - (60) (60) - (60) ------------------------------------------- ----------------------------------------------- Net loss attributable to common stockholders $(4,307) $(4,181) $(8,488) $(3,074) $(5,288) $(8,362) =========================================== =============================================== Net loss per share attributable to common shareholders $ (0.98) $ (0.90) ============== ============= Weighted average number of common shares outstanding 8,685,000 9,296,000 ============== =============
See notes to condensed financial statements 3 4 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ending Three Months Ending December 31, 1995 (unaudited) December 31, 1994 (unaudited) ----------------------------- ----------------------------- (all numbers in thousands) OPERATING ACTIVITIES: Net loss $(8,428) $(8,302) Adjustments to reconcile net loss to cash used in operations: Provision for credit losses 5,381 6.055 Amortization of deferred offering costs 738 757 Amortization of loan origination costs 269 198 Depreciation and amortization 122 71 Changes is assets and liabilities: Increases (decreases) in accounts payable and accrued expense 1,305 (622) Increases (decreases) in other assets, net 529 53 ------------------- -------------------- Cash provided by (used) in operations (84) (1,790) ------------------- -------------------- INVESTING ACTIVITIES: Purchase of contract receivables, including origination fees (2,934) (6,162) Principal payments on contract receivables including proceeds from sales of vehicles 6,846 9,737 Purchases of property and equipment (110) (181) (Increases) decreases in restricted cash (4,469) (350) ------------------- ------------------- Cash provided by (used in) investing (667) 3,044 ------------------- ------------------- FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit 1,222 (402) Notes payable proceeds - 1,779 Notes payable repayments - prepetition - (2,769) Capital lease (repayments) financing (8) - Notes payable offering costs - (198) Proceeds from sale of stock, net of expense 10 Payment of dividends (60) (60) ------------------- ------------------- Cash provided by (used in) financing activities 1,164 (1,650) ------------------- ------------------- Change in cash and cash equivalents 413 (396) Cash and cash equivalents - beginning 442 939 ------------------- ------------------- Cash and cash equivalents - ending $ 885 $ 543 =================== =================== SUPPLEMENTAL INFORMATION Cash paid for interest $36 $2,975 =================== ===================
NOTE: Certain Subsidiaries, as discussed in Note 2, are debtors-in- possession. See notes to condensed financial statements 4 5 SEARCH CAPITAL GROUP, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. GENERAL INFORMATION The information presented herein includes normal recurring adjustments that Search Capital Group, Inc. (herein called "Search" and together with its consolidated subsidiaries called the "Company") believes are necessary for fair presentation of its financial position and results of operation. During the three months ended December 31, 1995, the Company recorded $344,000 in adjustments related to the closure of it retail lots and reorganization of Fund Subsidiaries. These adjustments are of a nonrecurring nature. Substantially all of the disclosures required for annual financial reports have been omitted. The interim financial statements and related notes are unaudited, and should be read in conjunction with the Company's annual report on Form 10-K for the year ended September 30, 1995. The Company is an industry specific financial services company specializing in the purchase, management, and securitization of used motor vehicle receivables. These receivables are secured by medium-priced, used automobiles and light trucks which typically have been purchased by consumers with substandard credit histories at retail prices ranging from $5,000 to $10,000. The Company purchases these receivables from a network of unaffiliated new and used automobile dealers (the "Dealer Network") at discounts ranging generally from 40% to 55% of total unpaid installments, which installments include both principal and interest. The members of the Dealer Network generate the receivables and offer them for sale on a non- exclusive basis to the Company. See "Principal Business." Prior to November 1994, the Company financed its receivables purchasing business primarily through the private and public sale of securitized, interest-bearing notes (the "Notes") issued by wholly owned subsidiaries organized specifically for this purpose (the "Fund Subsidiaries") and through reinvestment of operating cash flow. Each offering of Notes was issued by a newly organized subsidiary without recourse to Search or its other subsidiaries. See "Financing." The Notes offered by each of the Fund Subsidiaries were not rated by a national credit agency. After November 1994, due primarily to higher than expected losses in the collection of its receivables, the Company temporarily abandoned its securitization activities. In the first half of 1995, the Company developed a reorganization strategy. In August 1995, pursuant to that strategy, Search's existing Fund Subsidiaries filed for protection and reorganization under Chapter 11 of the Bankruptcy Code. See "Subsidiary Bankruptcy Filings." These Fund Subsidiaries and Search, as a co-proponent are attempting to complete a plan of reorganization in these bankruptcy proceedings. The accompanying consolidated financial statements include the accounts of Search Capital Group, Inc. and its subsidiaries ("Search") as follows:
Ownership Subsidiary Percentage ---------- ---------- Automobile Credit Holdings, Inc. ("ACHI") 100% (a, c) Automobile Credit Acceptance Corp. ("ACAC") (100% owned by ACHI) 100% (a, c) Consumer Dealer Autocredit Corporation ("CDAC") (100% owned by ACHI) 100% (a, b,c) Eight Fund Subsidiaries and two previous Fund Subsidiaries - debtors-in- possession 100% Newsearch, Inc. 100% (b, c) Search Funding Corp. ("SFC") 100% (c) Automobile Wholesaling, Inc. 100% (b, c) Search Automobile Leasing Corporation 100% (b, c) (a) Search had a 52% voting interest in these entities, resulting from ownership of 50% of the common stock and 100% of the voting preferred stock of ACHI, until June 30, 1993, at which time Search acquired the minority interest in ACHI. (b) Currently inactive. (c) Unrestricted subsidiaries, which are not debtors-in-possession.
2. SUBSIDIARY BANKRUPTCY FILINGS At Search's annual shareholders' meeting, held May 10, 1995, Search announced a preliminary outline of a plan to convert the approximately $68 million debt owed by the Fund Subsidiaries into equity in the Parent Company (Search). Search engaged the 5 6 investment banking firm of Alex. Brown & Sons to develop a formal detailed plan of debt-to-equity conversion. To facilitate the development of this plan Search also formed an ad hoc committee of noteholders in all eight of its Fund Subsidiaries to review the proposals of Alex. Brown & Sons and provide input and recommendations for the plan. In order to consummate the debt-to-equity conversion plan proposed by Alex. Brown & Sons, it was necessary for each of the Fund Subsidiaries to file for reorganization under Chapter 11 of the U. S. Bankruptcy Code. These cases have been consolidated as one case for administration. Search and its unrestricted subsidiaries have not sought protection under the Code but Search is a proponent of a joint plan of reorganization of the Fund Subsidiaries ("Joint Plan"). On August 25, 1995 an organizational meeting was held by the U. S. Bankruptcy Trustee to select a committee (the "Committee") to represent the noteholders ("Creditors") during the bankruptcy proceedings. On December 19, 1995, Search, the Fund Subsidiaries and the Committee agreed to a consensual plan of reorganization (Joint Plan) which was approved by the Court on December 22, 1995. Final effectiveness of the Joint Plan as to each Fund Subsidiary is dependent on its confirmation by the Court, which will occur, if at all, after a vote of the holders ("Noteholders") of outstanding notes issued by the Fund Subsidiaries ("Notes"). There can be no assurance that the Joint Plan as to each Fund Subsidiary will become effective or that the Joint Plan as to each Fund Subsidiary will be confirmed on essentially the same terms as fully described in the Disclosure Statement. The final terms of the Joint Plan, if they differ in any material fashion from the proposed terms, will be contingent on, among other things, approval by Search's Board of Directors and a vote of Search's shareholders to approve the increase in the authorized number of shares of Common Stock and Preferred Stock to levels adequate to meet the requirements of the proposed Joint Plan. If confirmed with respect to a particular Fund Subsidiary, the Joint Plan, as currently proposed, provides that Noteholders voting to accept the Joint Plan may choose one of two options (the "Plan Options"). Under the First Plan Option (the "Search Equity Option"), the Noteholders would essentially exchange their Notes for the issuance by Search of a combination of shares of Common Stock, shares of a new series of Convertible Preferred Stock ("New Preferred Stock") and dividends accrued at 9% on the New Preferred Stock from July 1, 1995 until the effective date of the Joint Plan. Under the Second Plan Option, the Noteholders could choose the continued collection or the sale of the collateral securing their Notes and the distribution to the Noteholders of the resulting cash proceeds (the "Collateral Option"). As to any one Fund Subsidiary, the selection by the Noteholders of either Plan Option would be implemented on a Noteholder-by-Noteholder basis. Noteholders who vote against the Joint Plan will not be entitled to select between the Search Equity Option and the Collateral Option but will receive treatment under the Search Equity Option. A pro rata share of the assets of the Fund Subsidiaries attributable to Noteholders electing the Collateral Option will be transferred to the trustee of a newly established trust to be held for the benefit of such Noteholders. The trustee will collect the motor vehicle receivables held by the trust and make regular distributions to the Noteholders. In the alternative, the motor vehicle receivables will be sold by the trustee to the highest bidder, assuming a sale price greater than the liquidation value of the receivables. The pro-rata portion of the assets of the Fund Subsidiaries attributable to Noteholders electing the Search Equity Option will be transferred to Search. In addition to the New Preferred Stock, the Common Stock and dividends, the Noteholders will receive with respect to the unsecured portion of their claims, a pro-rata share of five year warrants to purchase an aggregate of 5,000,000 shares of Common Stock (the "Warrants"). The exercise price of the Warrants will be $2.00 during the first year and increase by $.25 per year during the term of the Warrants. All Warrants not exercised prior to the expiration will be redeemed at a price of $.25 per Warrant. The Joint Plan also contemplates establishment of a trust ("Litigation Trust") for the benefit of holders of unsecured claims of Fund Subsidiaries for which the Joint Plan is approved. The trust will be established with a total funding of $350,000 prorated among the confirming Fund Subsidiaries. The Litigation Trust will be authorized to pursue any claims and causes of action of each Fund Subsidiary for which the Joint Plan is approved. The Litigation Trust will automatically terminate if the Common Stock trades at an average price of $2.50 per share for 30 consecutive trading days during the first year following the effective date of the Joint Plan. As a consequence of the consummation of the Joint Plan as to any Fund Subsidiary, the former Noteholders of that Fund Subsidiary who elect the Search Equity Option would ultimately own shares of Search's Common Stock and New Preferred Stock. The Notes and the Noteholders constitute essentially all of the indebtedness and creditors, respectively, of the Fund Subsidiaries. If the Joint Plan is confirmed, as currently proposed, with respect to each of the Fund Subsidiaries, an aggregate of approximately $69,320,000 of indebtedness of the Fund Subsidiaries represented by the Notes would be canceled. The total assets to be transferred to Search as opposed to a transfer to the Noteholders Trust will depend on the relative amounts of indebtedness of Noteholders electing the Search Equity Option or the Collateral Option. The Joint Plan and Disclosure Statement describing the terms of the Joint Plan, Search, the Fund Subsidiaries, the terms of the New Preferred Stock and the rights of the Noteholders and other claimholders are subject to review and approval by the Court prior to being mailed to the Noteholders. On December 22, 1995, the Court approved the Joint Plan and Disclosure Statement for mailing to the Noteholders and other claimholders, together with ballots for registering their votes for acceptance or rejection of the Joint Plan. The Noteholders of each Fund Subsidiary will be entitled to vote for or against the Joint Plan, with respect to claims 6 7 represented by their Notes, as a separate creditor class. The Disclosure Statement was mailed to Noteholders on December 29 and 30, 1995, the final date for receipt of ballots on the Plan is January 29, 1996. Voting for the Joint Plan ended on January 29, 1996. In an affidavit submitted to the Bankruptcy Court, the tabulating agent provided a preliminary tabulation which indicated that approximately 71% of the Noteholders representing approximately 80% of the principal amount of the Notes outstanding had voted on the Joint Plan. Of the ballots received, 99% voted to accept the Joint Plan. Of the $55.5 million of Notes voted, $10.2 million, representing 18% of the Noteholders and 15% of the Notes outstanding, elected the Collateral Option. Under the terms of the Joint Plan, the remaining 82% of the Noteholders and 85% of the Notes outstanding would receive the Search Equity Option. Such a significant percentage receiving the Search Equity Option would provide Search with adequate cash, contracts receivable and equity to continue operations and to provide for future growth. As a condition precedent to confirmation of the Joint Plan, either a dismissal or approval by "final order" of the settlement agreement for the O'Shea shareholder class action litigation (the "Shareholder Class Action") had to be entered by the U.S. District Court. In February 1996, the U.S. District Court issued a "Preliminary Order Approving the Proposed Class Settlement". The Court has preliminarily approved the settlement as "fair, reasonable, and adequate" and set a date, April 26, 1996, for a further hearing to determine whether the preliminary order should become final. Since the proponents of the Joint Plan did not wish to delay the confirmation of the Joint Plan until after April 26, 1996, they have amended the Joint Plan to replace the requirement for a final order approving the settlement with a requirement for a preliminary order approving the settlement. In the event that the Noteholders who have voted to accept the Joint Plan might wish to change their election of an Option under the Joint Plan, new ballots were sent in February 1996 to those Noteholders to give them an opportunity to change their election of a Plan Option. Additionally, second ballots have been sent to those Noteholders who did not vote by the January 29, 1996, deadline and to those Noteholders who voted but did not elect a Plan Option. While the ballots for the amendment and the second ballots will change the results of the preliminary tabulation, Search does not anticipate a significant change in the amount of cash, contracts receivable and equity that it will receive when the Joint Plan is finalized. A confirmation hearing for the Joint Plan is scheduled for March 1, 1996. The Joint Plan could be effective as early as March 12, 1996. While the date for filing written objections has passed without any objections being filed, if there are other significant objections to the Joint Plan, confirmation could be delayed beyond that date. The primary adverse effect of the confirmation of the Joint Plan on existing shareholders would be the dilution of their voting power from issuance of the shares of the New Preferred Stock, Common Stock and Common Stock equivalents. The shares of New Preferred Stock would be convertible into 30,063,296 shares of Common Stock. Search's existing shareholders would own none of the newly issued shares of New Preferred Stock, and the Noteholders would own none of the outstanding shares of the 12% Preferred Stock. In addition, the annual dividend requirements on the shares of New Preferred Stock would be substantially less than the aggregate debt service requirements of the Notes and would be reduced or disappear upon any conversion of the New Preferred Stock into Common Stock. The accompanying financial statements include the cost associated with the Company's Fund Subsidiaries bankruptcy proceedings and these costs have been separately disclosed in the statement of operations as a reorganization expense. The Fund Subsidiaries, which are debtors in possession, have accounted for all transactions related to the reorganization proceedings in accordance with SOP 90-7. Accordingly, all prepetition liabilities of the Fund Subsidiaries that are expected to be impaired under the joint plan of reorganization ultimately approved by the Bankruptcy Court are reported separately in the consolidating balance sheet as liabilities subject to compromise (see Note 5 for a description of such liabilities). Expenses, primarily professional fees, resulting from the reorganization proceedings, are reported separately in the consolidating statement of operations as reorganization expense. Contractual interest obligations which are relieved from payment as a result of the Chapter 11 proceedings are not accrued. 3. CONTRACTS RECEIVABLE, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME In the fourth quarter of fiscal 1994, Search elected early adoption of Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"), which address the accounting by creditors for impairment of a loan and related income recognition and disclosures. In accordance with SFAS 114, contracts receivable are analyzed on a loan-by-loan basis. Search evaluates the impairment of loans based on contractual delinquency, as well as other factors specific to the notes receivable. When a concern exists as to the collectibility of an account, interest income ceases to be recognized. The notes receivable, once impaired, are collateral dependent; that is once a note receivable is in default Search looks to the underlying collateral for repayment of the note receivable. Therefore at impairment Search records an allowance for credit losses to record the note receivable at the fair value of the collateral. If the measure of the impaired note receivable is less than the net recorded investment in the note receivable, Search recognizes an impairment by creating an additional allowance for credit losses in excess of the initial allowance provided, with a corresponding charge to provision for credit losses. The provision for credit losses is adjusted for any differences between the final net proceeds of an impaired note receivable and its net carrying value. The Company records contract purchases at cost. Contractual finance charges are recorded as unearned interest and amortized to interest income using the interest method. Amortization of interest income ceases upon impairment. An initial allowance for credit losses is recorded at the acquisition of a note receivable equal to the unearned discount, the difference between the amount financed and the acquisition cost. The recorded investment and related allowance for credit losses, excluding net loan origination costs, are summarized below for Search and Unrestricted Subsidiaries:
As of December 31, 1995 -------------------------------------------------------------------- Number of Total Active Unpaid Unearned Net Receivables Installments Interest Receivables ----------- ------------ -------- ----------- Impaired contracts 150 $ 546,000 $ 80,000 $ 466,000 Unimpaired contracts 859 3,063,000 400,000 2,663,000 ----- ------------ ----------- ----------- Total 1,009 $ 3,609,000 $ 480,000 $ 3,129,000 ===== ============ =========== Allowance for credit losses 1,434,000 Contract receivables, net of ----------- allowance for credit losses $ 1,695,000 ===========
As of September 30, 1995 -------------------------------------------------------------------- Number of Total Active Unpaid Unearned Net Receivables Installments Interest Receivables ----------- ------------- -------- ----------- Impaired contracts 562 $ 2,658,000 $ 658,000 $ 2,000,000 Unimpaired contracts 1,116 4,707,000 642,000 4,065,000 ----- ------------ ----------- ----------- Total 1,678 $ 7,365,000 $ 1,300,000 $ 6,065,000 ===== ============ =========== Allowance for credit losses 2,862,000 Contract receivables, net of ----------- allowance for credit losses $ 3,203,000 ===========
7 8 The recorded investment and related allowance for credit losses, excluding net loan origination costs, are summarized below for Fund Subsidiaries:
As of December 31, 1995 -------------------------------------------------------------------- Number of Total Active Unpaid Unearned Net Receivables Installments Interest Receivables ----------- ------------ -------- ----------- Impaired contracts 707 $ 3,665,000 $ 672,000 $ 2,993,000 Unimpaired contracts 7,714 41,301,000 7,720,000 33,581,000 ----- ------------ ----------- ------------ Total 8,421 $ 44,966,000 $ 8,392,000 $ 36,574.000 ===== ============ =========== Allowance for credit losses 13,540,000 ------------ Contract receivables, net of allowance for credit losses $ 23,034,000 ============
As of September 30, 1995 Number of Total Active Unpaid Unearned Net Receivables Installments Interest Receivables ----------- ------------- -------- ----------- Impaired contracts 1,761 $10,165,000 $ 2,744,000 $ 7,421,000 Unimpaired contracts 8,689 49,147,000 9,062,000 40,085,000 ----- ----------- ------------ ------------ Total 10,450 $59,312,000 $ 11,806,000 $ 47,506,000 ====== =========== ============ Allowance for credit losses 15,761,000 Contract receivables, net of ------------ allowance for credit losses $ 31,745,000 ============
At December 31, 1995, contractual maturities of contracts receivables for Search and unrestricted subsidiaries were as follows:
1996 1997 1998 Total Future Payments Receivable $3,071,000 $534,000 $4,000 $3,609,000 Less Unearned Interest 429,000 51,000 0 480,000 ---------- -------- ------ ---------- $2,642,000 $483,000 $4,000 $3,129,000 ========== ======== ====== ==========
At December 31, 1995, contractual maturities of contracts receivable for Fund Subsidiaries were as follows:
1996 1997 1998 Total Future Payments Receivable $28,522,000 $13,853,000 $2,591,000 $44,966,000 Less Unearned Interest 6,386,000 1,877,000 129,000 8,392,000 ----------- ----------- ---------- ----------- $22,136,000 $11,976,000 $2,462,000 $36,574,000 =========== =========== ========== ===========
In the opinion of management, a portion of the contracts receivable will be repaid or extended either before or past the contractual maturity date. In addition, some contracts will default before maturity. The above tabulation, therefore, is not to be regarded as a forecast of future cash collections. Management has determined that the net cash flow from the Fund Subsidiaries will not be sufficient to fully retire the related Fund Subsidiaries notes payable as discussed in Note 2, and as part of the Plan of Reorganization discussed above, the Fund Subsidiaries filed for protection under Chapter 11. 8 9 The change in the allowance for credit losses is summarized as follows;
Search and Unrestricted Subsidiaries Fund Subsidiaries Total ------------ ----------------- ----- Balance, at September 30, 1995 $ 2,862,000 $ 15,761,000 $ 18,623,000 Allowance recorded upon acquisition of loans 24,000 1,489,000 1,513,000 Increase in allowance for credit losses 829,000 4,552,000 5,381,000 Loans charged off against allowance (2,281,000) (8,262,000) (10,543,000) ------------ ------------- ------------- Balance, at December 31, 1995 $ 1,434,000 $ 13,540,000 $ 14,974,000 ============ ============= =============
Most of Search's contracts receivable are due from individuals in large metropolitan areas of Texas and other southern and western states. To some extent, realization of the receivables will be dependent on local economic conditions. Search and the Trustee for the Fund Subsidiaries hold vehicle titles as collateral for all contracts receivable until such contracts are paid in full. 9 10 4. PREPETITION NOTES PAYABLE AND ACCRUED INTEREST SUBJECT TO COMPROMISE Notes payable of the Fund Subsidiaries are non-recourse to Search and its affiliated non-fund subsidiaries. Related terms and interest rates for the Fund Subsidiaries, all of which are in bankruptcy and default (See Note 2), consisted of the following:
December 31, 1995 ----------------- Notes payable by ACF 91-III, bearing interest at 21%, require monthly interest payments at 15% through March 31, 1995, at which time principal and the remaining deferred interest accrued at 6% was due - $ 590,000 in default at maturity date. Notes payable by ACP, bearing interest at 21%, require monthly interest payments of 15% through April 30, 1995 at which time principal and the remaining deferred interest accrued at 6% was due - 610,000 in default at maturity date. Notes payable by ACF, bearing interest at 18%, require monthly interest payments at 15% through December 31, 1994, at which time principal and the remaining deferred interest accrued at 3% was due - 1,506,000 in default at maturity date. Notes payable by ACF 92-II, bearing interest at 15% due monthly, require payment of principal in full on December 31, 1995. 10,000,000 Notes payable by ACF III, bearing interest at 15% due monthly, require payment of principal in full on April 30, 1996. 15,000,000 Notes payable by ACF IV, bearing interest at 3% until October 15, 1993 and 14% thereafter due monthly, require payment of principal quarterly from September 30, 1995 to December 31, 1996. 10,000,000 Notes payable by ACF V, bearing interest at 12% due monthly, require payment of principal quarterly from October 1, 1996 to December 31, 19,872,000 1997. Notes payable by ACF VI, bearing interest at 12% due monthly, require payment of principal quarterly from July 1, 1997 to June 30, 1998. 10,675,000 ----------- 68,253,000 Accrued Interest 1,067,000 ----------- $69,320,000 ===========
Contracts receivable owned by each Fund Subsidiary are pledged as collateral for the respective notes payable of each entity. As of their maturity ACF, ACF 91-III and ACP stopped accruing interest on the remaining unpaid principal. As these Fund Subsidiaries are in default, it is currently management's position that the accrual of interest is not warranted since each Fund Subsidiary will not have sufficient assets to fully retire the principal portion of the notes. The August 14, 1995 bankruptcy filing of the individual Fund Subsidiaries was an event of default for all of the Fund Subsidiaries under the terms of their indenture agreements. In accordance with SOP 90-7, contractual interest obligations which are relieved from payment as a result of the Chapter 11 proceedings are not accrued. Management has presented the noteholders a proposal for a debt-to-equity exchange more fully described in Note 2 and in the Joint Disclosure Statement filed with the Bankruptcy Court. On the December 31, 1994 maturity date for ACF there was $3,175,000 in the ACF sinking fund to be applied to obligations of $5,406,000. ACF's insufficient cash balance constituted a default under its indenture agreement with Search and Texas Commerce Bank National Association ("Trustee"). As of December 31, 1995, ACF has $128,000 in remaining principal and interest on receivables. On the March 31, 1995 maturity date for ACF 91-III, there was $538,000 in cash to be applied to obligations of $1,195,000. ACF 91-III's insufficient cash balance constituted a default under its indenture agreement with the Trustee. As of December 31, 1995, ACF 91-III has $96,000 in remaining principal and interest on contract receivables. On April 30, 1995 maturity date for ACP, there was $525,000 in cash to be applied to obligations of $1,180,000. ACP's insufficient cash balance constituted a default under its indenture agreement with the Trustee. At December 31, 1995, ACP has $103,000 in remaining principal and interest on contracts receivable. On December 31, 1995 maturing date for ACF 92 - II, there was $4,502,000 in cash to be applied to obligations of $10,000,000. ACP 1992-II's insufficient cash balance constituted a default under its indenture agreement with Search and Texas Commerce Bank National Association ("Trustee"). As of December 31, 1995, ACF 92-II had $2,381,000 in remaining principal and interest on contracts receivable. The filing of bankruptcy created a default in each Fund subsidiary not currently in default at August 14, 1995. The U.S. Bankruptcy Court has granted the continued use of cash collateral. Under the cash collateral motions, the Fund subsidiaries continue to pay service and management fee revenue to Search. Servicing and management fee revenue for Search was $715,000, 10 11 and $741,000 for the three months ended December 31, 1995 and 1994, respectively, and is included as a reduction of general administrative expenses in the accounts of Search. As of December 22, 1995, the consensual joint plan of reorganization was approved by the U.S. Bankruptcy Court for distribution to noteholders. Confirmation of the joint plan will be sought from the court after tallying of the noteholders votes. (See note 2 for further discussion of the Joint Plan of Reorganization). 5. LINES OF CREDIT On June 17, 1994, SFC entered into an agreement for a line of credit with General Electric Capital Corporation ("GECC"). The line of credit initially had a maximum borrowing commitment of $20,000,000 and was limited to a percentage of eligible contracts held by SFC. The line of credit is secured by all SFC assets and is guaranteed by Search. In January 1995, SFC signed an agreement with GECC to revise the existing restrictive covenants and to eliminate any future advances under the line of credit. On March 22, 1995, GECC advised Search that it and SFC were in default of various provisions of the original loan agreement and the January 1995 agreement. As a result of these defaults, GECC declared the outstanding balance, as of that date, due and payable. Search, SFC and GECC established a pay-out plan which requires a minimum payment of $500,000 per quarter. SFC is required to remit cash receipts of all pledged contracts to GECC until the line of credit is repaid. As of December 31, 1995, the line had a balance of $580,000. Interest is accrued daily at the average of the one month London Interbank Offered Rates ("LIBOR") for the preceding month plus 5.1% (10.98% at December 31, 1995). SFC recorded $22,000 interest expense to GECC during the three months ended December 31, 1995. On November 30, 1995, Search and certain of its non-fund subsidiaries and affiliates entered into a funding agreement ("Funding Agreement") with Hall Financial Group, Inc. ("HFG"). Under the terms of the Funding Agreement, HFG agreed to loan to Search up to $3,000,000, obtained Warrants to purchase up to 3,000,000 shares of Search Common Stock for $2.00 per share, and agreed, subject to certain limitations and restrictions, to a plan funding commitment under which HFG would loan the Fund Subsidiaries funds for a cash-out option under a plan to be proposed by Search at an amount equal to 80% of Present Value of the Notes. The loan is comprised of three notes. Note I is in the amount of $1,284,487. Note II is in the amount of $715,513. Note III is in the amount of $1,000,000. Notes I and II bear interest at the rate of 12% and mature on the earlier of the Effective Date or 90 days after their execution unless extended for 60 days by Search in which case the interest rate increased to 14%. Note III bears interest at the rate of 6% and matures in one year. Note I has been fully funded, Note II will only be funded if necessary to payoff the GECC Line of Credit, and Note III has been fully funded. Notes I and III are convertible into Search Common Stock up to a total of 2,500,000 shares including any shares converted in payment of Note III. Note III can be repaid entirely with Search Common Stock. Search and its non-fund subsidiaries recorded $14,000 in interest expense to HFG in the three months ended December 31, 1995. As of December 31, 1995, the Notes are secured by approximately $3,600,000 in auto receivables owned by Search and Search Funding Corp., 2,250,000 shares of Search Common Stock currently held as treasury stock, and 100% of the stock of Search Funding Corp., Automobile Credit Acceptance Corp., Automobile Credit Holdings, Inc., and Newsearch, Inc. HFG is entitled to elect one director to Search's board upon conversion of Note III and one additional director upon purchase of $1,000,000 in Net Present Value of Notes under the plan funding commitment. The Funding Agreement originally required HFG to make certain loans to the Bankrupt Subsidiaries upon completion of the Joint Plan. Search and the Committee have determined not to include any funding of the Bankrupt Subsidiaries in the latest version of the Joint Plan. Search and HFG have agreed to an amendment to the Funding Agreement that provides HFG the option to purchase, in its sole discretion, Common Stock, New Preferred Stock, and Warrants for a purchase price equal to 80% of the Present Value attributable to such securities for purpose of their issuance to Noteholders under the Joint Plan, less an amount equal to the accrued dividends attributable to the New Preferred Stock that is received by HFG. HFG would be entitled to purchase securities in an amount up to a maximum of $6,000,000 in Present Value, which the Company estimates would represent a purchase price payable by HFG of approximately $4,426,000. The proceeds of any shares so purchased will be paid to Search. Under the Funding Agreement, as amended, Search will give HFG the right to elect another director if HFG purchases $1,000,000 Present Value of such securities. HFG will also have registration rights for such securities similar to those provided by the HFG Warrants. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is an industry specific financial services company specializing in the purchase, management, and securitization of used motor vehicle receivables. These receivables are secured by medium-priced, used automobiles and light trucks which typically have been purchased by consumers with substandard credit histories at retail prices ranging from $5,000 to $10,000. The Company purchases these receivables from a network of unaffiliated new and used automobile dealers (the "Dealer Network") at discounts ranging generally from 40% to 55% of total unpaid installments, which installments include both principal and interest. The members of the Dealer Network generate the receivables and offer them for sale on a non-exclusive basis to the Company. Members forego some future profit on each receivable sold to the Company in exchange for an immediate return of their invested capital. The Company administers its receivables purchasing, servicing and management activities utilizing its proprietary Auto Note Management System software, developed and maintained by full-time Company systems personnel. The Company commenced its used motor vehicle receivables purchasing and servicing business in 1991. RESULTS OF OPERATIONS Since September 1994, the Company has purchased receivables only for the Fund Subsidiaries. In November 1995, the Company's new interim management determined to sharply reduce all receivables purchasing activities for the Company while attempting to evaluate and, if necessary, modify or remedy purchasing and collection procedures. In January 1995, the Company's new President caused the Company to resume normal levels of receivables purchasing activities but at the same time tightened certain purchasing procedures where permitted. Management was constrained from any substantial changes in purchasing criteria for receivables purchased for its public Fund Subsidiaries due to restrictions set forth in the trust indentures governing the indebtedness of those subsidiaries. The indentures established specific criteria with respect to the price, purchase discount, term, downpayment, installments and interest rate for the receivables it purchases and also with respect to price, cost to the dealer, average wholesale value, age, mileage and make of the motor vehicles securing such receivables. The Company believes that the most significant of these criteria are as follows: o The average purchase price of a receivable may not exceed 53% of the total remaining unpaid installments of the receivables; o The average purchase price for a receivable may not significantly exceed the approximate average wholesale value and/or the dealer's actual cost for the underlying financed vehicle; o The receivable generally must have an original term of 36 months or less; o The age of each financed vehicle may not generally exceed eight years for automobiles or nine years for trucks; o The obligor on the receivable is required to make a down payment in cash plus a net trade-in allowance of at least 25% of the dealer's cost in the financed vehicle; o The interest rate on the receivable must not violate any applicable usury laws; and o The dealer's actual cost for a financed vehicle generally must be greater than $2,000 and less than $6,200. Generally, to satisfy these credit criteria, an obligor must provide verifiable personal references, must have a valid driver's license, must have been a resident of the local area of receivable origination for a minimum of one year, must have verifiable current employment and credit history and must be at least 18 years of age. During 1995, the Company tightened its purchasing procedures and the application of the criteria beyond that required by the indentures. For example, the Company has commenced to adjust the purchase prices offered to dealers for receivables based on the perceived credit risk of the obligor and the wholesale vehicle value, to verify directly with obligors customer purchase satisfaction, downpayment amounts and credit information, to monitor through the ANMS receivable transactions from dealers whose receivables have historically lower collection rates and to reject receivables from known credit abusers. In addition, the Company commenced more strictly to apply the foregoing credit criteria. The Company intends to maintain the same level of underwriting criteria related to its current operations until confirmation of joint plan of reorganization. The Company's receivables purchasing personnel review each receivable for compliance with the foregoing criteria, utilizing standard and supporting documentation provided via facsimile by the selling dealer and national computerized databases that automatically interact with the Company's proprietary Auto Note Management System Software ("ANMS"). The Company verifies, by reference to published wholesale vehicle value guides, the average wholesale prices of the underlying vehicles. In most instances, the Company performs this pre-purchase due diligence and processes purchases within one hour, thereby assisting the dealer in the timely sale of the underlying vehicle. This one hour turnaround time is considered by the Company to be an important competitive factor, and the Company constantly monitors its turnaround time through its ANMS. The Company acquires less than half of the receivables offered by dealers in the Dealer Network. In a typical receivable purchase by the Company, a dealer will make a profit of approximately $900 on a vehicle which cost the dealer $4,000 and was held in its inventory less than 30 days. The tightened purchasing criteria coupled with decreases in funds available for reinvestment in contracts caused the volume of contracts purchased to decrease. The Company ceased additional securitization activities during the first fiscal quarter of 1995. As of December 31, 1995, only ACF V and ACF VI were purchasing additional contracts from excess cash flow. While the Company purchases groups of receivables, it typically purchases individually selected receivables. Purchasing receivables from dealers on an individual basis in accordance with the Company's purchasing criteria enables the Company to more readily control conformity to collateral and credit requirements and compliance with applicable laws and regulations. The Company's underwriting strategy differs markedly from many of its competitors. Many of the Company's competitors usually make only bulk purchases of receivables and/or retain recourse against the selling dealer for mere non-payment of the receivable through quasi-loan arrangements, dealer holdbacks or reserve accounts or other collection collateral or guaranties. As a result of the assumption from the dealer of more collection risk and its purchase of individual receivables, the Company is able to purchase receivables at greater discounts than these competitors. The purchase and credit criteria and verification procedures also differ from competitor to competitor, although the variations are smaller for those competitors directly competing with the Company in its market niche. Unlike the Company, certain other competitors will only purchase "seasoned" receivables, i.e. receivables that have existed and performed in an acceptable manner for a period of time. Receivables Servicing and Collections. Upon purchase of each receivable, the Company instructs each obligor to remit payments directly to the Company's post office box, utilizing preprinted payment coupon booklets. Payments may also be made in person at the Company's offices or via Western Union Quick Collect service or through Ace Cash Express. Though the Company's collections operations are based at the Company's home office in Dallas, Texas, the Company operates branch collections offices in the following cities: Garland, Texas; Arlington, Texas; Houston, Texas; Memphis, Tennessee. The Company has a staff of collection personnel that monitor payments of the receivables and contacts obligors via telephone when payments are delinquent. Collections personnel generally have (i) a minimum of one year collection experience, (ii) the ability to obtain corrective action on delinquent accounts and (iii) knowledge and ability to comply with state and federal debt collection laws. Generally, if at least three semi-monthly payments are past due and the obligor fails to make any payments, including partial payments, for a period of 30 days, the receivable is subject to enhanced collection efforts, including intensified telephone and written contacts aimed at identifying the likelihood and expected amount of payment on the receivable. At any time thereafter, the Company may (i) contract with an independent third party repossession company to locate and peacefully repossess the motor vehicle securing the receivable or (ii) seek and obtain an order of a court of competent jurisdiction for turnover of the motor vehicle. The decision to repossess a motor vehicle is made on a case-by-case basis by a collections unit manager. Factors considered by these unit managers include recent payments and willingness on the part of the obligor to commit to payment upon a date certain. Any delays in repossession expose the Company to the risk of reduced resale value for the vehicle due to additional mileage and the possibility of damage or lack of necessary maintenance or repairs to the vehicle. The Company's collection and repossession activities are administered through its ANMS. The Company's ability through the ANMS to relationally cross-reference receivable collection statistics against vehicle, dealer, customer and geographic data enables the Company to monitor receivables and adjust purchase procedures and prices. Following repossession, the Company sells each repossessed vehicle on a wholesale basis to dealers at an unaffiliated motor vehicle auction at the highest available bid. During the period from October 1994 until December 1995, the Company sold many of its repossessed vehicles directly to consumers at used car lots operated by the Company. The sale of the vehicles in this manner, rather than on a wholesale basis, created another receivable with associated risks of default and payment delays. Because the profits generated by these lots was not sufficient to justify their existence, the Company had closed all three of its retail lots as of December 31, 1995, which will result in reduction of direct costs and general and administrative expenses in future periods. The Company currently holds approximately 726 receivables originated through these retail lots. The Company, in the past, subcontracted with LSI Financial Group ("LSI") to provide collection and repossession services with respect to approximately 5% of the Company's motor vehicle receivables. In September 1995, the Company transferred all collection and repossession services previously performed by LSI to its own collections department and now services all receivables itself. Expansion into Other Credit Markets. Following completion of the Joint Plan, the Company anticipates implementation of a program that would expand its operations into higher credit-rated receivables. This expansion would continue to target borrowers with sub-standard credit histories; however, it would focus on borrowers with increased job and residence stability, higher income, and re-established positive credit. If implemented, receivables purchased under the new program would carry interest rates ranging from approximately 18% to 25%. The receivables purchased would be secured primarily by automobiles up to 6 years in age, having been driven no more than (i) an average of 25,000 miles per year and (ii) having 80,000 total miles. Participating dealers would be primarily franchised dealers and some independent dealers. The Auto Note Management System (ANMS). Since its inception, the Company has pursued a strategy of developing in- house, receivable purchase and collection operating systems utilizing personal computer-based software and hardware. The Company's current ANMS and related systems are connected with outside databases, such as national credit bureaus, wholesale vehicle valuation guides, and major dealers. These systems contribute to the Company's ability to satisfy the Dealer Network's needs by enhancing the Company's ability to meet its targeted one-hour receivable processing commitment. In addition, the Company's ability to relationally cross-reference receivable collection statistics against vehicle, dealer, customer and geographic data enables the Company to monitor receivables and adjust purchasing activities and criteria according to such comparative statistics. The Company maintains a full-time staff of personnel who develop and maintain the ANMS. Total contract collections over the life of a group of loans are primarily dependent on repossession rates, number of payments received prior to repossession and repossession proceeds. While eventual repossession rates can only be forecast during the life of a group of contracts, the percentage of contracts that have not made their first payment ("first payment defaults"), is a good indication of the quality of receivable purchased within a specific period. The individual contracts purchased and related first payment default rates are shown below:
Period Contract Quantity First Payment Default Rate Year Ended December 31, 1991 331 2.4% Year Ended December 31, 1992 3,170 7.0% Quarter Ended March 31, 1993 1,945 6.8% Quarter Ended June 30, 1993 1,728 5.9% Quarter Ended September 30, 1993 2,474 9.0% Quarter Ended December 31, 1993 3,361 11.7% Quarter Ended March 31, 1994 4,884 9.1% Quarter Ended June 30, 1994 4,604 11.3% Quarter Ended September 30, 1994 4,122 12.5% Quarter Ended December 31, 1994 1,334 9.3% Quarter Ended March 31, 1995 1,083 5.0% Quarter Ended June 30, 1995 1,491 3.0% Quarter Ended September 30, 1995 1,235 3.2% Quarter Ended December 31, 1995 764 4.1%
The first payment default rates suggests that when contract purchasing volume increased in 1994, the quality of the contracts being purchased may have deteriorated. After analysis of these contracts, the Company realized that the high number of first payment defaults were due, in part, to (i) Dealers overstating to the Company the amount of the downpayment made by obligors on the receivable and (ii) Dealers overstating the value of the automobile securing the receivable. Obligors, because they had little downpayment invested in the automobile or because they felt they had paid too high a price for the automobile, were willing to allow the automobile to be repossessed rather begin making payments. After year end September 1994, the Company was able to reduce first payment defaults by being more selective in the contracts purchased and initiating personal interviews in order to verify amount of downpayments. Comparison of Three Month Periods Ended December 31, 1995, and 1994 During the three months ended December 31, 1995, the Company purchased 764 contracts at a cost of $3,418,000 or $4,474 per contract compared to $6,162,000 or $4,619 per contract in the same period of 1994. The Company purchased no bulks contracts in either three month period. During the three months ended December 31, 1995, the Company recorded interest revenue of $2,589,000 compared to $4,914,000 for the same period in 1994. The 47% decrease in interest revenue is due to a decrease in interest earning gross accounts receivable from 12 13 $79,445,000 to $44,364,000 at December 31, 1995. Interest expense decreased from $3,354,000 to $774,000 for the three months ended December 31, 1994 compared to the three months ended December 31, 1995. This 77% decrease was due to the fund subsidiaries bankruptcy filings at which time these funds ceased accruing interest expense. For the three months ended December 31, 1995, only amortization of deferred offering cost was recorded in the statement of operations. The provision for credit losses decreased from $6,055,000 to $5,381,000 for the three months ended December 31, 1994 and 1995, respectfully. This decrease of $674,000 represents a 11% decrease over the three month period ending December 31, 1994, and is necessary due to continued deterioration of the Company's loan portfolio. General and Administrative expenses increased from $3,807,000 to $4,518,000. The increase in general and administrative expenses reflects increases in car lot and retail facilities operating expenses opened for three months in December 31,1995 compared to one month in the same period in 1994. Subsequent to December 31,1995, the Company closed all remaining car lots and related facilities. The Company recorded $250,000 of special charge related to termination of leases, employment and other costs related to these operations. Net loss increased from $8,302,000 to $8,488,000 for the three months ended December 31, 1994 compared to December 31, 1995. This increase of $186,000 is due to decreased interest revenue of $2,325,000 offset by decreases in interest expense of $2,580,000 and provision for credit losses of $674,000. LIQUIDITY AND CAPITAL RESOURCES Operating Activities During the three months ended December 31, 1995, the Company incurred a cash loss of $84,000 in its operations as compared to a cash loss of $1,790,000 from operations during the three months ended December 31, 1994. Although the cash operating loss for the three months ending December 31, 1995 decreased $1,706,000 from a net loss of $1,790,000 for the same three months in 1994, a significant portion of the 1995 decrease resulted from increases in accrued expenses and accounts payable, which are non-cash charges against earnings. Neither Search nor any subsidiary or affiliate of Search has guaranteed repayment of the Fund Subsidiaries' Notes. Proceeds from each Fund Subsidiary's receivables are restricted to repayment of that Fund Subsidiary's Notes, the payment of certain allowed expenses, including servicing fees, and the purchase of additional receivables. Interest on the Fund Subsidiaries' Notes has not been paid since June 1995 due to the Bankruptcy Proceedings. During the Bankruptcy Proceedings, the Bankrupt Subsidiaries have continued to operate under an order from the Bankruptcy Court authorizing the use of cash-collateral for normal expenditures including servicing fees payable to ACAC. Upon Confirmation of the Joint Plan, the restricted cash balances of the Fund Subsidiaries, which approximated $15 million as of January 31, 1996, would be apportioned to Search and to the Noteholders Trust (based on ballots electing the Collateral Option), net of administrative expenses of the bankruptcy proceedings and $350,000 funding for the Litigation Trust. With respect to each Bankrupt Subsidiary, the Joint Plan of the Bankrupt Subsidiaries provides that if the Joint Plan is approved, the Noteholders that vote for the Joint Plan may elect one of two methods that deal with the collateral securing their Notes. The Search Equity Option generally allows the Noteholder to receive Search securities in exchange for the release of liens on collateral and transfer to Search of a proportionate share of the assets of the Bankrupt Subsidiaries. The Collateral Option allows the Noteholder to have a proportionate share of assets of the Bankrupt Subsidiaries transferred to a trust that will collect the remaining receivables and distribute the resulting cash to the Noteholders. Under this option, a servicer may continue collecting the receivables or the receivables may be sold. If ACAC is not selected as servicer, it will not receive servicing fees for the collection of the remaining receivables. Financing Activities During the three months ended December 31, 1995, $1,164,000 of cash was provided by financing activities compared to $1,650,000 of cash being utilized during the same period in 1994. This increase of cash of $2,814,000 is due to net borrowings under HFG agreements exceeding payments to GECC by $1,222,000 compared to net payments to GECC of $402,000 during the same period in 1994. Additionally, the Company's payment of notes payable, prepetition, exceeded its notes payable proceeds by $990,000 during the same three months ending December 31, 1994. 13 14 If a sufficient number of the Noteholders elect the Search Equity Option and the Joint Plan is confirmed by the Bankruptcy Court, the amount of unrestricted cash, contracts receivable and equity available to Search would be adequate to allow Search to continue operating as a going concern. If an insufficient number of the Noteholders elect the Search Equity Option or if the Joint Plan is not confirmed by the Bankruptcy Court, the lack of sufficient equity would reduce the availability of new financing and result in lower interest revenues to support Search's current level of operations. Consequently, operations would have to be reduced or, in the extreme, Search's ability to continue as a going concern would be jeopardized. Based upon voting through January 29, 1996 on the Joint Plan, Search believes that the Joint Plan will be confirmed on the March 1, 1996, the confirmation date set by the Bankruptcy Court, and that a sufficient number of Noteholders will elect the Search Equity Option to allow Search to continue operations as a going concern. Voting for the Joint Plan ended on January 29, 1996. In an affidavit submitted to the Bankruptcy Court, the tabulating agent provided a preliminary tabulation which indicated that approximately 71% of the Noteholders representing approximately 80% of the principal amount of the Notes outstanding had voted on the Joint Plan. Of the ballots received, 99% voted to accept the Joint Plan. Of the $55.5 million of Notes voted, $10.2 million, representing 18% of the Noteholders and 15% of the Notes outstanding, elected the Collateral Option. Under the terms of the Joint Plan, the remaining 82% of the Noteholders and 85% of the Notes outstanding would receive the Search Equity Option. Such a significant percentage receiving the Search Equity Option would provide Search with adequate cash, contracts receivable and equity to continue operations and to provide for future growth. As a condition precedent to confirmation of the Joint Plan, either a dismissal or approval by "final order" of the settlement agreement for the O'Shea shareholder class action litigation (the "Shareholder Class Action") had to be entered by the U.S. District Court. In February 1996, the U.S. District Court issued a "Preliminary Order Approving the Proposed Class Settlement". The Court has preliminarily approved the settlement as "fair, reasonable, and adequate" and set a date, April 26, 1996, for a further hearing to determine whether the preliminary order should become final. Since the proponents of the Joint Plan did not wish to delay the confirmation of the Joint Plan until after April 26, 1996, they have amended the Joint Plan to replace the requirement for a final order approving the settlement with a requirement for a preliminary order approving the settlement. In the event that the Noteholders who have voted to accept the Joint Plan might wish to change their election of an Option under the Joint Plan, new ballots were sent in February 1996 to those Noteholders to give them an opportunity to change their election of a Plan Option. Additionally, second ballots have been sent to those Noteholders who did not vote by the January 29, 1996, deadline and to those Noteholders who voted but did not elect a Plan Option. While the ballots for the amendment and the second ballots will change the results of the preliminary tabulation, Search does not anticipate a significant change in the amount of cash, contracts receivable and equity that it will receive when the Joint Plan is finalized. A confirmation hearing for the Joint Plan is scheduled for March 1, 1996. The Joint Plan could be effective as early as March 12, 1996. While the date for filing written objections has passed without any objections being filed, if there are other significant objections to the Joint Plan, confirmation could be delayed beyond that date. Search obtained liquidity financing from HFG in November 1995. Repayment of the HFG financing is due on the earlier of February 27, 1996 or the effective date of the Joint Plan. The effective date of the Joint Plan will not occur before the maturity date of the HFG notes; however, the maturity date can be extended for an additional 60 days at the request of Search. It is not likely that further sources of liquidity financing will be available pending confirmation of the Joint Plan. Delays in confirmation of the Joint Plan or discontinuance or reduction of servicing and management fees currently allowed under interim cash-collateral orders granted by the Bankruptcy Court beyond the 60 day extension period of the HFG notes would have severe liquidity effects for Search. If the effective date of the Joint Plan is delayed beyond the 60 day extension period, Search would require further extension of the maturity date of the HFG notes and would require additional working capital financing to continue day-to-day operations and servicing of contract receivables. Upon confirmation of the Joint Plan, HFG has an option to purchase, in its sole discretion, Common Stock, New Preferred Stock and Warrants in Search for a price up to $4.4 million. The proceeds of any shares so purchased would be paid to Search. HFG also has the option to convert a portion of the financing that HFG provided Search in November 1995 into a maximum of 2.5 million shares of Common Stock of Search. Search has an option to repay up to $1 million of the HFG financing in Common Stock of Search. Any such conversion by HFG or Search would reduce Search's current notes payable liability to HFG. Investing Activities During the three months ended December 31, 1995, the Company utilized $661,000 of cash compared to $3,044,000 of cash being provided by investing activities during the same three month period in 1994. This decrease in cash from investing activities of $3,711,000 is due to an increase in restricted cash of $4,119,000 partially offset by an increase in net purchases and principal and repossession proceeds of $337,000. 14 15 Search has obtained tentative financing commitments for a warehouse line and a securitization line of credit subject to confirmation of the Joint Plan, due diligence to be performed by the lender and completion of definitive documentation. This financing would be utilized for the purchase of contract receivables after the confirmation of the Joint Plan. The financing as contemplated would be adequate to fund anticipated future operations of Search. If the Joint Plan is not confirmed or if the confirmation is delayed, the lender may decide to withdraw its commitment. Search may be unable to obtain alternative financing if the Joint Plan is not confirmed. General The consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Bankruptcy proceedings, and the reliance by Search on the cash flows derived from the Fund Subsidiaries, such realization of assets and liquidation of liabilities are subject to significant uncertainty. Effective Interest Rates Interest expense is derived from the Notes issued by Fund Subsidiaries and consists of both stated and effective rates. The stated rate reflects the interest due to be paid to the note holder while the effective rate includes the amortization of offering costs. The Company's weighted average stated interest rates and weighted average effective cost of borrowing, after considering the amortization of offering costs, has been: Weighted average stated interest rate 17.9% 15.6% 14.7% 11.7% Weighted average effective cost of borrowing 24.8% 21.5% 20.2% 16.1%
The stated and effective rates reflect a reduction in interest rate due to interest expense not recorded since the date of filing for bankruptcy and current defaults by the Fund Subsidiaries as discussed in Note 2 of the accompanying consolidated financial statements. Unrestricted Cash Flow Activity For the three months ended December 31, 1995, Search collected $715,000 in Fund servicing fees, loan origination fees, and other fees. This cash flow along with interest and principal from receivables owned by Search, is used to find the general and administrative expenses excluding those of the Funds. INFLATION Historical statistics indicate that collateral value, vehicle sales prices, and receivable interest rates are relatively stable within the Company's market segment. However, significantly changing prices could impact the Company's ability to acquire receivables at favorable prices. Changes in the Company's interest rates can affect Company interest expenses. 15 16 PART II OTHER INFORMATION LEGAL PROCEEDINGS On August 14, 1995, Automobile Credit Finance, Inc., Automobile Credit Finance 1991-III, Inc., Automobile Credit Finance 1992-II, Inc., Automobile Credit Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit Finance V, Inc., Automobile Credit Finance VI, Inc. and Automobile Credit Partners, Inc., which are wholly-owned subsidiaries of Search, each filed, on August 14, 1995, a petition in the U.S. Bankruptcy Court in the Northern District of Texas, Dallas Division ("Court"), seeking protection under Chapter 11 of the U.S. Bankruptcy Code ("Code"). These cases have been consolidated as one case for administration (Case No. 395-34981-RCM-11) (See Note 4 for additional discussion). On July 7, 1994, a class action civil lawsuit was filed against Search, certain of its officers and directors, one of its former accounting firms and the lead underwriter and one of its principals involved in the issuance of Search's Common Stock. This action was filed in the United States District Court for the Northern District of Texas, Dallas Division, and is styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al. Civil Action No. 3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action No. 3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc., et al,. Civil Action No. 3:94-CV-1494-J, respectively, were also filed. The above cases were consolidated in September 1994 under Civil Action No. 3:94-CV-1428-J (the "Class Action Suit"). The Class Action Suit was filed on behalf of all purchasers of Search's Common Stock during the period beginning December 10, 1993 and ending through July 5, 1994, which was the date that Search made a public announcement regarding lower earnings. The Class Action Suit contends that Search made misstatements in its registration statements concerning Search's computerized system, accounting methodologies used by Search, collectibility of its receivables and repossession rates of autos that secured its receivables. The plaintiffs also complained of allegedly false public filings, press releases and reports issued during 1994. The plaintiffs sought damages, rescission , punitive damages, pre-judgment interest, fees, costs, equitable relief and/or injunctive relief and such other relief as the court may deem just and proper. Search's management and counsel for the plaintiffs have entered into a stipulation of settlement (the "Settlement") of the Class Action Suit. This Settlement was initially filed with the court on August 4, 1995, and an amended version of the Settlement was filed on November 13, 1995. No objections to the Settlement have been received to date. The Settlement provides for the payment by Search of $287,500 upon approval of the Settlement ($100,000 has already been deposited in an escrow account maintained by the plaintiff's lawyers), and the issuance by Search of its Common Stock with a value of $2,612,500 or cash. The settlement provides that the number of shares of Common Stock to be issued to the Class shall be computed using the average of the bid/ask price of the last 30 days ending generally on the date that the Settlement becomes final prior to the date of distribution of the shares. Final effectiveness of the Settlement is conditioned upon court certification of the class of plaintiffs for the Settlement and court approval of the fairness of the Settlement. Search believes that the Settlement is fair and equitable to the class of plaintiffs and will ultimately be approved. A final, non-appealable order approving the Settlement is a condition precedent to the implementation of the Search Equity Option under the Joint Plan. In February 1996, the U.S. District Court issued a "Preliminarily Order Approving the Proposed Class Settlement." The Court has preliminarily approved the settlement as "fair, reasonable, and adequate" and set a date, April 26, 1996, for a further hearing to determine whether the preliminary order should become final. In December 1993, Automobile Credit Acceptance Corp. ("ACAC"), a subsidiary of Search, was joined as a defendant in a pending civil action filed in the 153rd Judicial District Court, Tarrant County, Texas, styled Autostar Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corporation, Cause No. 153-144940. The plaintiff in this action alleges the existence of a partnership between the plaintiff and another defendant and seeks damages, actual and exemplary, and an injunction for alleged conversion and misappropriation of certain property, including computer programs, allegedly owned by Autostar. In the petition, the plaintiff alleges that ACAC wrongfully assisted its co-defendant and tortiously interfered with the plaintiff's contracts and business and has claimed, as damages, $250,000. ACAC believes that these allegations are without merit because it did not interfere with the plaintiff's contracts and business and did not obtain in an improper manner any property belonging, at least in part, to Autostar. ACAC has filed a general denial and has pending a motion for partial summary judgment. Discovery in this case is ongoing and no opinion can be given as to the final outcome of the lawsuit. Search received notice from plaintiffs that a suit had been filed on December 21, 1995 against Search, certain of its former officers and directors, and certain underwriters of three of the Fund Subsidiaries. The case is styled Janice and Warren Bowe, et. al. vs. Search Capital Group, Inc., et. al., Cause No. 1:95CV 649GR and was filed in the Federal District Court for the Southern District of Mississippi. The plaintiffs allege violations of the securities laws by the defendants and seeks unspecified damages, rescission, punitive damages and other relief. The plaintiffs also seek establishment of a class of plaintiffs consisting of all persons who have purchased Notes issued by three of the Fund Subsidiaries. The Company has been unable to evaluate the merit of these claims. There are presently no other legal proceedings, threatened or pending, relating to Search which would, in the opinion of management, have a material impact on earnings or the financial condition of Search. 17 ITEM 6 (b.) Reports on Form 8-K. None 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEARCH CAPITAL GROUP, INC. DATE: February 20, 1996 BY: /s/ GEORGE C. EVANS ---------------------------- George C. Evans President, Chief Executive Officer and Director DATE: February 20, 1996 BY: /s/ ROBERT D. IDZI ---------------------------- Robert D. Idzi Senior Vice President, Chief Financial Officer, Secretary and Treasurer DATE: February 20, 1996 BY: /s/ ANDREW D. PLAGENS --------------------------- Andrew D. Plagens Vice President and Controller (Chief Accounting Officer) 19 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1996 OCT-01-1995 DEC-31-1995 13,428 0 48,575 14,974 1,353 3,157 2,236 942 43,961 78,075 0 117 0 4 (34,235) 43,961 0 2,589 0 0 344 5,381 774 0 0 0 0 0 0 (8,488) 0 0
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