-----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, TZ997eUfYOIZbviNbr3S6d+BeUBHrLeNq+gSOaLiQitKSNP/xq81PbdoxeqP7iy+ 0x5AHdCKZfSTKdmWBjL40g== 0000950134-96-003607.txt : 19960723 0000950134-96-003607.hdr.sgml : 19960723 ACCESSION NUMBER: 0000950134-96-003607 CONFORMED SUBMISSION TYPE: PRES14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960815 FILED AS OF DATE: 19960719 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEARCH CAPITAL GROUP INC CENTRAL INDEX KEY: 0000318672 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 411356819 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: PRES14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-09539 FILM NUMBER: 96596675 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 PRES14A 1 PRELIMINARY PROXY MATERIALS FOR SPECIAL MEETING 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] Filed by the Registrant [ ] Filed by a Party other than the Registrant Check the appropriate box: [X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 SEARCH CAPITAL GROUP, INC. (Exact name of registrant as specified in its charter) NOT APPLICABLE (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(j)(2) or Item 22(a)(2) of Schedule 14A [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3) [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11 TITLE OF EACH CLASS OF SECURITIES TO WHICH TRANSACTION APPLIES: ___________________________________________________. AGGREGATE NUMBER OF SECURITIES TO WHICH TRANSACTION APPLIES: _____________________________________________________________. PER UNIT PRICE OR OTHER UNDERLYING VALUE OF TRANSACTION COMPUTED PURSUANT TO EXCHANGE ACT RULE 0-11: _. (Set forth the amount on which the filing fee is calculated and state how it was determined.) PROPOSED MAXIMUM AGGREGATE VALUE OF TRANSACTION: ____________. TOTAL FEE PAID: _____________________________________________. [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. AMOUNT PREVIOUSLY PAID: _____________________________________. FORM, SCHEDULE OR REGISTRATION STATEMENT NO.: _______________. FILING PARTY: _______________________________________________. DATE FILED: _________________________________________________. ================================================================================ 2 PRELIMINARY COPY SEARCH CAPITAL GROUP, INC. 700 NORTH PEARL STREET SUITE 400 DALLAS, TEXAS 75201 August ___, 1996 Dear Shareholders: You are cordially invited to attend a special meeting of shareholders of Search Capital Group, Inc. (the "Company") to be held at 10:00 a.m. local time, August ____, 1996 at the principal executive offices of the Company located at 700 North Pearl Street, Suite 400, Dallas, Texas 75201. At the meeting you will be asked to approve an increase in the number of shares reserved for the Company's 1994 Employee Stock Option Plan and a one-for-six reverse stock split of the Company's Common Stock and Preferred Stock. In addition, you will be asked to approve certain clarifying amendments to the terms of the Company's 9%/7% Convertible Preferred Stock for the purpose of enabling the Company to issue shares of that series in future acquisitions or stock offerings. Finally, you will be asked to transact such other business as may properly come before the meeting. The formal Notice of Special Meeting of Shareholders and Proxy Statement accompanying this letter provide detailed information concerning the matters to be considered and acted upon at the meeting. It is important that your shares be represented at the meeting, whether or not you attend personally. I urge you to sign, date and return the enclosed proxy at your earliest convenience. George C. Evans President and Chief Executive Officer 3 SEARCH CAPITAL GROUP, INC. 700 NORTH PEARL STREET SUITE 400 DALLAS, TEXAS 75201 (214) 954-6403 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST ___, 1996 To the Shareholders of Search Capital Group, Inc. Notice is hereby given that a special meeting of shareholders of Search Capital Group, Inc., a Delaware corporation (the "Company"), will be held at the Company's offices located at 700 North Pearl Street, Suite 400, Dallas, Texas on August ___, 1996 at 10:00 a.m. local time, for the following purposes: 1. to approve an increase in the number of shares of the Company's Common Stock for which options may be granted pursuant to the Company's 1994 Employee Stock Option Plan; 2. to approve certain clarifying amendments to the terms of the Company's 9%/7% Convertible Preferred Stock, which are intended to enable the Company to issue shares of that series in future acquisitions or stock offerings; 3. to approve a one-for-six "reverse" stock split of the Company's Common Stock and Preferred Stock; and 4. to transact such other business as may properly come before the meeting. Only shareholders of record at the close of business on July __, 1996 are entitled to notice of and to vote at the meeting or any adjournment thereof. It is desirable that as large a proportion as possible of the shareholders' interests be represented at the meeting. Whether or not you plan to be present at the meeting, you are requested to sign and return the enclosed proxy in the envelope provided so that your stock will be represented. The giving of such proxy will not affect your right to vote in person, should you later decide to attend the meeting. Please date and sign the enclosed proxy and return it promptly in the enclosed envelope. By Order of the Board of Directors, GEORGE C. EVANS President and Chief Executive Officer Dallas, Texas August ___, 1996 4 PRELIMINARY COPY SEARCH CAPITAL GROUP, INC. 700 NORTH PEARL STREET, SUITE 400 DALLAS, TEXAS 75201 PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST __, 1996 This Proxy Statement is furnished to shareholders of Search Capital Group, Inc., a Delaware corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company for use at a special meeting of shareholders to be held on August __, 1996. Proxies in the form enclosed will be voted at the meeting, if properly executed, returned to the Company prior to the meeting and not revoked. A proxy may be revoked at any time before it is voted either in person at the meeting or by giving prior written notice to the Secretary of the Company. This proxy statement was first sent or given to the Company's shareholders on or about August __, 1996. OUTSTANDING CAPITAL STOCK The record date for shareholders entitled to notice of, and to vote at, the special meeting is July ___, 1996. At the close of business on that date, the Company had issued and outstanding and entitled to receive notice of and vote at the meeting 25,310,489 shares of Common Stock, $.01 par value ("Common Stock"), 400,000 shares of 12% Senior Convertible Preferred Stock (with a liquidation preference of $5.00 per share) ("12% Preferred Stock") and 16,992,767 shares of 9%/7% Convertible Preferred Stock (with a liquidation preference of $3.50 per share) ("New Preferred Stock). No other class of securities of the Company is entitled to notice of, or to vote at, the annual meeting of shareholders. ACTION TO BE TAKEN AT THE MEETING The accompanying proxy, unless the shareholder otherwise specifies in the proxy, will be voted: 1. FOR the approval of an increase in the number of shares of the Company's Common Stock for which options may be granted pursuant to the Company's 1994 Employee Stock Option Plan; 2. FOR the approval of certain clarifying amendments to the terms of the Company's New Preferred Stock; 3. FOR the approval of amendments to the Certificate of Incorporation to effect a one-for-six "reverse" stock split of the Company's Common Stock and Preferred Stock; and 4. In the discretion of the proxy holders, as to the transaction of such other business as may properly come before the meeting. Where shareholders have appropriately specified how their proxies are to be voted, they will be voted accordingly. If any other matter or business is brought before the meeting, the proxy holders may vote the proxies in their discretion. The Board of Directors is not presently aware of any other matters or business to be brought before the meeting. QUORUM AND VOTING The presence, in person or by proxy, of the holders of a majority of the aggregate outstanding shares of Common Stock, 12% Preferred Stock and New Preferred Stock, together as one class, and of a majority of the outstanding shares of the 12% Preferred Stock and the New Preferred Stock (the "Preferred Stock") is necessary to constitute a quorum at the special meeting. The affirmative vote of the holders of a majority of the outstanding shares of Common Stock, 12% Preferred Stock and New Preferred Stock, voting together as one class, and the affirmative vote of the holders of two-thirds of the outstanding shares of New Preferred Stock, voting as a separate class, are necessary to approve the proposed clarifying amendments to the terms of the New Preferred Stock. The affirmative vote of the holders of a majority of the outstanding shares of Common Stock, 12% Preferred Stock and New Preferred Stock, voting together as one class, the affirmative vote 5 of the holders of two-thirds of the outstanding shares of New Preferred Stock, voting as a separate class, and the affirmative vote of the holders of a majority of the outstanding shares of 12% Preferred Stock, voting as a separate class, are necessary to approve the proposed reverse stock split of the Common Stock and the Preferred Stock. The affirmative vote of the holders of a majority of the shares of Common Stock, 12% Preferred Stock and New Preferred Stock represented in person or by proxy at the meeting, voting together as one class, is necessary to approved the proposed increase in the number of shares of Common Stock reserved for the 1994 Employee Stock Option Plan. Each share of Common Stock, 12% Preferred Stock and New Preferred Stock will have one vote on each of the proposals. Shares represented at the meeting but not voted for or against the proposal at the meeting, such as abstentions or "broker non-votes," will be counted in determining a quorum but will have the effect of votes against the proposal. A "broker non-vote" occurs if a broker or other nominee holding shares for a beneficial owner does not have discretionary voting power as to such shares and does not receive specific voting instructions from the beneficial owner. -2- 6 PRINCIPAL HOLDERS OF CAPITAL STOCK The following table sets forth certain information as of July 1, 1996, relating to the beneficial ownership of the Common Stock, 12% Preferred Stock and New Preferred Stock (i) by any person or "group," as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, known to the Company to own beneficially 5% or more of the outstanding Common Stock, 12% Preferred Stock or New Preferred Stock and (ii) by each current director and executive officer of the Company and by all current directors and executive officers of the Company as a group. Except as otherwise indicated, each of the persons named below is believed by the Company to possess sole voting and investment power with respect to the shares of Common Stock, 12% Preferred Stock or New Preferred Stock beneficially owned by such person.
Amount and Nature of Beneficial Ownership(1) Percentage of Class Outstanding Name of Director ------------------------------------------------ ---------------------------------------------- or Executive Officer Number of Number of Number of New or Name and Address Common New Preferred 12% Preferred Preferred 12% of Beneficial Owner Stock Shares(2) Stock Shares Stock Shares Common Stock Stock Preferred Stock - ---------------------- ------------ -------------- ------------- ------------ ----- --------------- Hall Phoenix/Inwood, Ltd. 7,138,378 (3) 2,032,812 -- 30.9% 12.0% -- 750 N. St. Paul Suite 200 Dallas, Texas 75201 Value Partners, Ltd. 2,160,174 (4) 3,057,819 -- 8.5% 18.0% -- 2200 Ross Avenue Suite 4660 W Dallas, Texas 75201 Greg Muns, M.D. -- -- 20,000 -- -- 5% 1319 Shores Circle Rockwall, Texas 75087 Sam Coker Retirement Trust -- -- 20,000 -- -- 5% Rt. 2, Box 50 Millsap, Texas 76066 A. Brean Murray 483,558 (5) -- -- 1.9% -- -- Luther H. Hodges, Jr. 111,000 (6) -- -- * -- -- James F. Leary 102,500 (6) -- -- * -- -- William H. T. Bush 100,000 (7) -- -- * -- -- Richard F. Bonini 122,862 (6) 12,236 -- * * -- George C. Evans 1,000,000 (8) -- -- 3.8% -- -- George C. Evans, as proxyholder for SBM Trust 812,617 (9) -- -- 3.1% -- -- Joe B. Dorman 75,000 (10) -- -- * -- -- Robert D. Idzi 152,000 (11) -- -- * -- -- Anthony J. Dellavechia 100,000 (12) -- -- * -- -- Andrew L. Tenney 75,000 (13) -- -- * -- -- Carolyn Malone 63,960 (14) -- -- * -- -- Andrew D. Plagens 29,500 (15) -- -- * -- -- Timothy G. Vorbeck 50,000 (16) -- -- * -- -- All directors and executive officers as 3,327,507 12,236 -- 11.6% * -- a group (14 persons)
________________________ * Less than 1% -3- 7 (1) The information as to beneficial ownership of Common Stock, 12% Preferred Stock and New Preferred Stock has been furnished by the Company's transfer agent and the respective shareholders, directors and officers of the Company. Each named person or group is deemed to be the beneficial owner of securities that may be acquired by such person or group within 60 days through the exercise of options, warrants and rights, if any, and such securities are deemed to be outstanding for the purpose of computing the percentage of stock beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage of stock beneficially owned by any other person or group. (2) The numbers in the column for shares of Common Stock do not reflect the shares of Common Stock that may be obtained through conversion of the New Preferred Stock or 12% Preferred Stock. Each share of New Preferred Stock or 12% Preferred Stock is convertible into two shares or one share, respectively, of the Common Stock. (3) Includes (i) warrants to purchase 3,000,000 shares of Common Stock at the price of $2.00 per share, on or before November 30, 2000, and (ii) warrants to purchase 676,178 shares of Common Stock at $2.00 per share (increasing $0.25 each year) on or before March 15, 2001. (4) Value Partners, Ltd. is a Texas limited partnership of which Fisher Ewing Partners, a Texas general partnership composed of Richard W. Fisher and Timothy G. Ewing, serves as the general partner. Accordingly, Fisher Ewing Partners, Mr. Fisher and Mr. Ewing may be deemed to share the power to direct the voting and disposition of the shares owned by Value Partners, Ltd. (5) Includes (i) warrants to purchase 10,000 shares, at $8.75 per share, on or before December 20, 1998, (ii) warrants to purchase 113,558 shares at $9.60 per share on or before December 10, 1998, (iii) warrants to purchase 250,000 shares at $1.09 per share on or before June 29, 2005, and (iv) warrants to purchase 50,000 shares at $1.16 per share on or before March 27, 2006. (6) Includes warrants to purchase 50,000 shares at $1.09 per share on or before June 29, 2005 and warrants to purchase 50,000 shares at $1.16 per share on or before March 27, 2006. (7) Represents warrants to purchase 50,000 shares at $1.375 per share on or before August 4, 2005 and warrants to purchase 50,000 shares at $1.16 per share on or before March 27, 2006. (8) Represents (i) warrants to purchase 500,000 shares at $1.09 per share on or before June 29, 2005 and (ii) options issued under the 1994 Employee Stock Option Plan to purchase 500,000 shares of Common Stock at $1.09 per share on or before January 20, 2005, which have vested. (9) Mr. Evans has been designated by the Company's Board of Directors to hold the irrevocable proxy to vote the 812,127 shares held of record by the SBM Trust. He has no other relationship with the SBM Trust. (10) Represents (i) warrants to purchase 25,000 shares at $1.09 per share on or before June 29, 2005, (ii) options issued under the 1994 Employee Stock Option Plan to purchase 25,000 shares of Common Stock at $1.09 per share on or before February 20, 2005, which have vested, and (iii) warrants to purchase 25,000 shares at $1.26 per share on or before March 27, 2006. (11) Represents options issued under the 1994 Employee Stock Option Plan to purchase 102,000 shares at $1.09 per share on or before January 15, 2005, which have vested, and warrants to purchase 50,000 shares at $1.26 per share on or before March 27, 2006. (12) Represents warrants to purchase 50,000 shares at $1.25 per share on or before January 16, 2006 and options issued under the 1994 Employee Stock Option Plan to purchase 50,000 shares at $1.25 per share on or before January 16, 2006, which have vested. (13) Represents warrants to purchase 25,000 shares at $1.25 per share on or before January 16, 2006 and options issued under the 1994 Employee Stock Option Plan to purchase 50,000 shares at $1.26 per share on or before March 27, 2007, which have vested. (14) Represents (i) options issued under the 1994 Employee Stock Option Plan to purchase 5,000 shares at $1.09 per share on or before August 1, 2004, 2,400 shares at $1.09 per share on or before January 15, 2005 and 5,000 shares at $1.26 per share on or before March 27, 2006, and (ii) warrants to purchase 10,000 shares at $1.09 per share on or before June 29, 2005 and warrants to purchase 10,000 shares at $1.375 per share on or about August 4, 2005. (15) Represents options issued under the 1994 Employee Stock Option Plan to purchase 2,000 shares at $4.25 per share on or before August 1, 2004, 2,000 shares at $2.4375 per share on or before January 15, 2005, and 25,000 shares at $1.09 per share on or before June 29, 2005. (16) Represents options issued under the 1994 Employee Stock Option Plan to purchase 50,000 shares at $1.00 per share on or before July 1, 2006. -4- 8 EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information for the fiscal years ended September 30, 1994 and September 30, 1995 and the six-month transition period ended March 31, 1996, regarding the compensation of each individual who served as the Company's Chief Executive Officer during the six-month period ended March 31, 1996, and each of the Company's four most highly compensated executive officers (other than the Chief Executive Officer) who served as an executive officer of the Company at the end of the six-month period ended March 31, 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION --------------------------------------- ------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SAR'S (#) COMPENSATION ($) --------------------------- ----- ---------- --------- ---------------- ----------------- ---------------- George C. Evans, 1996 (1) 150,000 185,000 -- -- -- Pres., CEO, COO 1995 162,734 112,500 -- 1,000,000 (3) -- (from 1/20/95) (2)(5) 1,000,000 (4) Robert D. Idzi 1996 (1) 66,666 35,000 -- 50,000 (7) -- EVP, CFO and Treasurer.(2) 1995 117,308 5,000 -- 204,000 (3) 27,462 (8) Anthony J. Dellavechia 1996 (1) 31,250 25,000 -- 50,000 (7) 26,500(9) Sr. EVP, Operations Director(2) -- 50,000 (6) Joe B. Dorman (2) 1996 (1) 55,833 25,000 -- 25,000 (7) -- SVP, General 25,000 (6) Counsel and Secretary 1995 67,128 -- -- 50,000 (3) -- 50,000 (4) Andrew L. Tenney 1996 (1) 62,499 25,000 -- 25,000 (7) -- EVP and Operations Director (2) 25,000 (6) 1995 79,775 -- -- 50,000 (3) -- 50,000 (4)
____________ (1) The compensation shown for 1996 represents compensation for the six-month transition period ended March 31, 1996. (2) Mr. Evans was elected President, Chief Executive Officer and Chief Operating Officer effective January 20, 1995. In May 1995, Mr. Evans was also elected Chairman of the Board of Directors. Mr. Idzi was elected Chief Financial Officer in October 1994, Treasurer in January 1995, and Executive Vice President in February 1996. Mr. Dellavechia joined the Company as Senior Executive Vice President and Operations Director in January 1996. Mr. Dorman joined the Company as General Counsel in February 1995, was elected Senior Vice President in March 1995 and was elected Secretary in May 1995. Mr. Tenney was elected Operations Director in January 1995, and in May 1995, was elected Executive Vice President. On April 1, 1996, Mr. Tenney resigned as an executive officer of the Company and worked as a consultant to the Company until June 30, 1996. On July 1, 1996, Mr. Tenney assumed the position of Executive Vice President of Marketing. (3) Includes newly granted options as well as replacement options granted in exchange for the cancellation of previously granted options, as follows: for Mr. Evans, 500,000 options granted on January 20, 1995, all subsequently replaced on June 29, 1995 by the 500,000 options which he currently holds; for Mr. Tenney, 25,000 options granted on January 23, 1995, all subsequently replaced on June 29, 1995 by the 25,000 options which he currently holds; for Mr. Idzi, 102,000 options granted on January 15, 1995, all subsequently replaced on June 29, 1995 by the 102,000 options which he currently holds; for Mr. Dorman, 25,000 options granted on February 20, 1995, all subsequently replaced on June 29, 1995 by the 25,000 options which he currently holds. (4) Includes newly granted warrants as well as replacement warrants granted in exchange for the cancellation of previously granted warrants, as follows: for Mr. Evans, 500,000 warrants granted on May 10, 1995, all subsequently replaced on June 29, 1995 by the 500,000 warrants which he currently holds; for Mr. Tenney, 25,000 warrants granted on May 10, 1995, all subsequently replaced on June 29, 1995 by 25,000 warrants which he currently holds; for Mr. Dorman, 25,000 warrants granted on May 10, 1995, all subsequently replaced on June 29, 1995 by 25,000 warrants which he currently holds. (5) In June 1995, the Board determined to issue to Mr. Evans options or warrants (to be determined at a later date) to purchase 1,500,000 shares of Common Stock at a price of $1.375 per share. These warrants or options will be issued to Mr. Evans in 500,000 share portions upon the occurrence of the following conditions: -5- 9 (a) 500,000 shares when the Company earns $1 million before taxes and dividends by the fiscal year ending March 31, 1997; (b) 500,000 shares when the market price of the Company's Common Stock reaches $3.50 per share; and (c) 500,000 shares when the market price of the Company's Common Stock reaches $5.00 per share. (6) Represents options granted on March 27, 1996. (7) Represents warrants granted on March 27, 1996. (8) Relocation reimbursements. (9) Represents consulting fees paid to Mr. Dellavechia during the transition period. The foregoing executive officers receive health and disability insurance benefits which do not exceed 10% of their respective salaries. These benefits are also provided to all other employees of the Company. The Company has no long-term incentive plans, pension plans, or stock appreciation rights plans. The Company adopted, as of August 1, 1994, its 1994 Employee Stock Option Plan, which was approved at its annual meeting of stockholders in May 1995. Certain 1994 Employee Stock Options and warrants to purchase Common Stock, as summarized in the following table, were granted to executive officers in the six-month period ended March 31, 1996. OPTION AND WARRANT GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE NUMBER OF APPRECIATION FOR SECURITIES % OF TOTAL WARRANTS OPTION OR WARRANT UNDERLYING AND OPTIONS GRANTED EXERCISE OR TERM WARRANTS AND TO EMPLOYEES DURING BASE PRICE EXPIRATION ------------------- NAME OPTIONS GRANTED # THE FISCAL YEAR ($ PER SHARE) DATE 5% 10% ---- ----------------- ------------------------- ------------- ---- -- --- George C. Evans -- -- -- -- Robert D. Idzi 50,000 (1) 10.2 1.26 3/27/06 $39,620 $100,406 Anthony J. Dellavechia 50,000 (1) 10.2 1.25 1/16/06 39,306 99,609 50,000 (3) 10.2 1.25 1/16/06 39,306 99,609 Joe B. Dorman 25,000 (1) 5.1 1.26 3/27/06 19,810 50,202 25,000 (2) 5.1 1.26 3/27/06 19,810 50,202 Andrew L. Tenney 25,000 (1) 5.1 1.26 3/27/06 19,810 50,202 25,000 (2) 5.1 1.26 3/27/06 19,810 50,202 - ----------------------
(1) Represents warrants to purchase Common Stock. (2) Represents 1994 Employee Stock Options which vest in 1/3 yearly increments following the date of their grant. (3) Represents stock options granted before the bankruptcy reorganization of the Company's subsidiaries which, as a result of the change in control following the reorganization, are now fully vested. -6- 10 The following unexpired stock options to purchase Common Stock were held by the executive officers of the Company listed below at March 31, 1996. FISCAL YEAR END OPTION AND WARRANT VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN THE MONEY OPTIONS AND WARRANTS AND WARRANTS AT MARCH 31, 1996 AT MARCH 31, 1996 (1) -------------------------------------- --------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- George C. Evans 1,000,000 -- $290,000 -- Robert D. Idzi 152,000 -- 35,580 -- Anthony J. Dellavechia 100,000 -- 13,000 -- Joe B. Dorman 75,000 25,000 9,000 $3,000 Andrew L. Tenney 75,000 25,000 9,000 3,000
____________ (1) Calculated using the fair market value of the Common Stock underlying the options and warrants as of the end of the transition period ($1.38) and the exercise price of the options or warrants. COMPENSATION OF DIRECTORS The Company pays to each director a fee of $750 per month and $1,500 per meeting attended, plus reimbursement of expenses in connection with attending each meeting. In addition, the Company has granted each director warrants to purchase Common Stock. See "Principal Holders of Capital Stock." Messrs. Evans and Leary, who are employees of the Company, do not receive separate compensation for their services as directors, although Mr. Leary, was paid salary and bonus totaling $57,999 during the six-month period ended March 31, 1996. OTHER AGREEMENTS WITH EXECUTIVE OFFICERS Effective January 20, 1995, George C. Evans joined the Company as President, Chief Executive Officer, Chief Operating Officer and a member of the Board of Directors by executing a three-year employment agreement at an annual compensation of $250,000 minimum per year. Mr. Evans is also to receive a bonus ranging from 25% to 100%, as determined by the Board, of annual salary. In June 1995, the Board determined to issue to Mr. Evans options or warrants (to be determined at a later date) to purchase 1,500,000 shares of Common Stock at a price of $1.375 per share. These warrants or options will be issued to Mr. Evans in 500,000 share portions upon the occurrence of the following conditions: (i) 500,000 shares when the Company earns $1 million before taxes and dividends before fiscal year ending March 31, 1997; (ii) 500,000 shares when the market price of the Company's Common Stock reaches $3.50 per share; and (iii) 500,000 shares when the market price of the Company's Common Stock reaches $5.00 per share. On May 1, 1996, Mr. James F. Leary entered into a two-year employment agreement with the Company. During the term of this agreement, Mr. Leary will be paid a salary of $160,000 per year. As of March 31, 1996, no other employee of the Company or its subsidiaries was covered by an employment agreement. EMPLOYEE STOCK OPTION PLAN On August 1, 1994, the Board of Directors adopted, subject to stockholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The Plan was approved by the stockholders on May 10, 1995. The purpose of the Plan is to advance the interest of the Company by providing additional incentives to attract and retain qualified and competent employees, upon whose efforts and judgment the success of the Company (including its subsidiaries) is largely dependent, through the encouragement of stock ownership in the Company by such persons. A total of 1,750,000 shares of Common Stock (subject to adjustment to compensate for the issuance of stock dividends or any recapitalization resulting in a stock split-up, combination or exchange of shares of Common Stock) have been reserved for sale upon exercise of options granted under the Plan. Options covering 1,151,500 shares had been granted under the Plan as of July 1, 1996. -7- 11 CASHLESS WARRANTS The Company also compensates its directors, key employees and some consultants through grants of cashless warrants. The purposes of these warrant grants are similar to those of the Employee Stock Option Plan. The exercise price of these warrants may be paid by the holder either (i) in cash or (ii) by surrender of warrants equal to the cash value of the exercise price. As of March 31, 1996, the Company had outstanding a total of 1,585,000 cashless warrants. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. In September 1993, the Board of Directors established a compensation committee (the "Compensation Committee"). During the six-month period ended March 31, 1996, the Company paid Brean Murray, Foster Securities Inc. ("BMFS") $200,000 for services rendered by it related to the success of the Joint Plan of Reorganization. A. Brean Murray is the chairman of BMFS and served on the Compensation Committee from June 29, 1995 until January 25, 1996. See "Certain Relationships and Related Transactions." REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee (the "Committee") is now comprised of three non-employee directors: Luther H. Hodges, Jr., Chairman, Richard F. Bonini and William H. T. Bush. The Committee regularly reviews the executive compensation policies and practices of the Company and establishes or approves the compensation for executive officers. The Committee also administers the Company's 1994 Employee Stock Option Plan. The Company's primary objective is to maximize stockholder value. To aid in accomplishing this goal, the Committee is guided by two principles in determining executive compensation policies: first, to attract, develop, reward and retain highly talented individuals; and second, to motivate executive officers to perform to the best of their abilities and to achieve both short-term and long-term Company objectives that will contribute to the overall goal of enhancing stockholder value. The Company's executive compensation program consists of two main elements: o Annual compensation, which is comprised of base salary and bonus, and o Long-term incentives that provide a financial opportunity to executive officers through grants of stock options and warrants. The compensation that may be realized by executives through these incentives is tied directly to the value of the Company's Common Stock in the future. The Committee believes that the Company's executive compensation program reflects the fundamental principles described above and provides strong incentives to executives to maximize Company performance. The base salary for Mr. George Evans, Chief Executive Officer, was determined by direct negotiations with Mr. Evans at the time of his employment in January 1995. The Employment Agreement for Mr. Evans specified his salary and the range for his bonus. Of the current Board of Directors, only A. Brean Murray was a member at that time. One of the Committee's members, A. Brean Murray, was a member of the Board at that time. The other members of the Board who participated in the negotiations are no longer members of the Board. During August 1995, the Committee, then composed of Messrs. A. Brean Murray, Luther H. Hodges, Jr. and James F. Leary, met informally to discuss Mr. Evans' performance and compensation. In September 1995, the deliberations of the Committee were presented to the Board of Directors, who approved changes to Mr. Evans' compensation. Prior to this approval, Mr. Leary, who had been elected Vice Chairman, resigned from the Compensation Committee. The Committee and the Board of Directors considered the following matters: his (i) knowledge of the consumer finance industry; (ii) reputation and acquaintances with other persons in the finance industry; (iii) performance in improving Company operations and employee confidence; (iv) performance in hiring competent and experienced executives which could assist in the "turnaround" of the Company; (v) performance in formulating and implementing plans to convert the -8- 12 Company's debt to equity; (vi) performance in dealing with shareholders and Noteholders who, at the time of his initial employment, were hostile toward the Company's former management; (vii) performance in settling the O'Shea shareholder class action litigation; and (viii) performance in assembling a Board of Directors with experience and knowledge in the finance industry. Based on the foregoing evaluation, the Board of Directors, acting on the recommendation of the Committee, approved an increase in Mr. Evans' salary from $250,000 to $300,000 and a bonus of $250,000. Mr. Evans received the bonus in two payments, the first portion of which, consisting of $65,000, was paid at the end of the fiscal year ended September 30, 1995. The remaining $185,000 was to be paid subsequent to and conditioned upon confirmation of the Joint Plan. The Board also promised to grant to Mr. Evans the right to receive warrants or options, at his election, to purchase 1,500,000 shares of Common Stock, based on the future performance of the Company and its Common Stock per share price. The Committee approves the salary of the other executive officers of the Company, including the executive officers named in the Summary Compensation Table. The Committee at the end of each fiscal year reviews incentive bonus awards proposed by Mr. Evans for all of the executive officers other than Mr. Evans. The Committee and Mr. Evans jointly reviewed the individual performances of each executive officer other than Mr. Evans, and the Committee gave significant consideration of Mr. Evans' views on the performance of each such executive officer. The Committee also awards all warrants and 1994 Employee Stock Options to executive officers. Again, such awards are generally proposed by Mr. Evans, and the Committee and Mr. Evans jointly review the individual performances of each executive officer other than Mr. Evans in making the awards. The size of the bonus, option and warrant awards to executive officers were based on subjective factors, including primarily the perceived importance of the individual's contribution to the success of the Company and upon the amount of and value of options and warrants currently held by the individual. The Committee also takes into consideration in granting options and warrants to executive officers the relationship of the number of options and warrants held by each of the executive officers to a subjective rating of the degree of responsibility of the position held by each officer compared to that of the other executive officers. While not having a target ownership level of Common Stock by executive officers, the Committee has endeavored to motivate executives by granting options at levels that present executives with an opportunity for significant gains that are commensurate to gains in stockholder value. During the transition period ended March 31, 1996, bonus, option and warrant awards granted to executive employees were tied to the success of the Fund Subsidiaries' reorganization. Executive officers were granted a number of options and warrants prior to and during the transition period due to the Company's need to conserve cash in order to complete the reorganization of its Fund Subsidiaries, while continuing to attract qualified executive employees notwithstanding the troubled circumstances of the Company. Stock options and warrants are designed to align the interests of the recipients with those of the stockholders of the Company. Stock options and warrants are typically granted by the Company with an exercise price equal to the market price of the Company's Common Stock on the date of grant. The options generally vest over three years, and the warrants immediately vest. In the six-month transition period ended March 1996, the 1994 Employee Stock Options that were granted prior to the effectiveness of the Joint Plan became fully vested as a result of the substantial number of shares of stock that were issued by the Company pursuant to the Joint Plan and the resulting deemed change in control of the Company. In summary, the Committee's executive compensation decisions are generally intended to link a significant portion of the compensation of the Company's executive officers to individual performance and to corporate performance and stock price appreciation. The Committee intends to continue the policy of linking executive compensation to corporate performance and improvement in stockholder value, recognizing that economic factors beyond management's control may result in imbalances for a particular period but that consistent improvement in corporate performance over the long-term will enure to the mutual benefit of the Company's executives and its stockholders. -9- 13 The Compensation Committee of the Board of Directors: Luther H. Hodges, Jr. - Chairman (member from September 6, 1995 to present); Richard F. Bonini (member from June 29, 1995 to present); William H. T. Bush (member from January 25, 1996 to present); James F. Leary (member from June 29, 1995 to September 6, 1995); A. Brean Murray (member from June 29, 1995 to January 25, 1996). PERFORMANCE GRAPH The following graph presents cumulative shareholder return on the Company's Common Stock for the two and one- half years ended March 31, 1996. The Company is compared to the S&P 500 Index and the S&P Financial Index. The graph assumes that $100 was invested in the Company's Common Stock and in each index at the beginning of the measurement period. The data source for all graphs is Bloomberg data service and National Quotation Bureau. COMPARISON OF CUMULATIVE TOTAL RETURN 1993-1996*
SEPTEMBER 30, 1993 SEPTEMBER 30, 1994 SEPTEMBER 30, 1995 MARCH 31, 1996 ------------------ ------------------ ------------------ -------------- Search Common Stock $ 100.00 $ 76.17 $ 18.89 $ 34.12 S&P 500 $ 100.00 $ 100.82 $ 127.34 $ 153.96 S&P Financials $ 100.00 $ 89.91 $ 123.71 $ 154.82
__________________________ * Assumes the reinvestment of any dividends. Due to the sporadic and limited trading of the Company's Common Stock before September 30, 1993, only two and one-half years are shown. -10- 14 INCREASE IN NUMBER OF SHARES RESERVED FOR THE 1994 EMPLOYEE STOCK OPTION PLAN In August 1994, the Board of Directors of the Company adopted, subject to shareholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The Plan was approved by the shareholders of the Company in May 1995. The Board of Directors proposes to increase the maximum number of shares of the Company's Common Stock reserved for issuance upon the exercise of options granted under the Plan from 1,750,000 to 5,000,000. The maximum number of shares is subject to appropriate adjustments upon stock dividends or recapitalizations resulting in a stock split-up, combination or exchange of shares of the Company's Common Stock. The proposed shareholder resolution to approve the necessary amendment to the Plan is set forth in full on Exhibit A to this Proxy Statement. DESCRIPTION OF THE 1994 EMPLOYEE STOCK OPTION PLAN Purpose. The purpose of the Plan is to advance the interest of the Company by providing additional incentives to attract and retain qualified and competent employees, upon whose efforts and judgment the success of the Company (including its subsidiaries) is largely dependent, through the encouragement of stock ownership in the Company by such persons. Unless the context otherwise requires, references to the Company shall mean Search Capital Group, Inc. and any corporation wherein the Company owns, directly or indirectly, 50% or more of the total combined voting power (a "Subsidiary"). Eligibility. Those persons who are employees of the Company or directors of a Subsidiary, but excluding directors of the Company who are not employees of the Company, are eligible to participate in the Plan. As of June 30, 1996, approximately 91 persons were eligible for options under the Plan. Types of Options. The Plan authorizes the granting of incentive stock options ("1994 Incentive Options") to purchase Common Stock to eligible employees of the Company and the granting of nonqualified stock options to purchase Common Stock ("1994 Employee Nonqualified Options") to eligible employees of the Company. Unless the context otherwise requires, the term "1994 Employee Option" includes both 1994 Incentive Options and 1994 Employee Nonqualified Options. Administration. The Plan is administered by the Compensation Committee of the Board of Directors of the Company (the "1994 Employee Plan Administrator"). The 1994 Employee Plan Administrator must consist of at least two members of the Board of Directors, all of whom must be "disinterested persons." Under the Plan, a disinterested person is one who is not eligible at the time it exercises discretion in administering the Plan and has not at any time within one year prior thereto been eligible for selection as a person to whom shares of Common Stock, stock options or stock appreciation rights may be granted pursuant to the Plan or any other plan of the Company in which administrators of such plan use discretion in granting stock options or stock appreciation rights of the Company. The 1994 Employee Plan Administrator in its sole discretion shall determine the employees to be awarded 1994 Employee Options, the number of shares subject thereto and the exercise price thereof, subject to certain limitations. In addition, the determinations and the interpretation and construction of any provision of the Plan by the 1994 Employee Plan Administrator shall be final and conclusive. Granting of 1994 Employee Options. The 1994 Employee Plan Administrator has granted, through July 1, 1996, 1994 Employee Options to the following persons to purchase the following number of shares of Common Stock: -11- 15 NEW PLAN BENEFITS 1994 EMPLOYEE STOCK OPTION PLAN
Name and Position No. of Shares Exercise Price Per Share ($) Expiration Date - ----------------- ------------- ---------------------------- --------------- Executive Officers: George C. Evans 500,000 $1.09 1/20/2005 President, Chief Executive Officer, Director Robert D. Idzi 102,000 1.09 1/15/2005 Senior Vice President, Chief Financial Officer, Treasurer Anthony J. Dellavechia 50,000 1.25 1/16/2006 Senior Executive Vice President, Operations Director Joe B. Dorman 25,000 1.09 2/20/2005 Senior Vice President, General 25,000 1.26 3/27/2006 Counsel and Secretary Andrew L. Tenney 25,000 1.09 1/23/2005 Executive Vice President, 25,000 1.26 3/27/2006 Operations Director All current executive officers 870,500 (as a group) All directors who are not executive 0 officers (as a group) All employees, including all current 281,000 officers who are not executive officers (as a group)
As of July 9, 1996, the closing trading price for the Common Stock was $1.06 per share. Exercise Price of 1994 Employee Options. The 1994 Incentive Options may not be granted with an exercise price per share that is less than the fair market value of the Common Stock at the date of grant. The 1994 Employee Nonqualified Options may be granted with any exercise price determined by the 1994 Employee Plan Administrator. Payment of Exercise Price. The exercise price of a 1994 Employee Option may be paid in cash, certified or cashier's check, by money order, personal check or delivery of already owned shares of Common Stock having a fair market value equal to the exercise price, or by delivery of a combination of cash and already owned shares of Common Stock; provided, however, that if the optionee acquired such stock directly or indirectly from the Company, he or she shall have owned such stock to be surrendered for six months prior to tendering such stock for the exercise of a 1994 Employee Option. One purpose for permitting delivery of Common Stock in full or partial payment of the exercise price is to make it possible for the optionee to exercise his 1994 Employee Option without the need for the sale of Common Stock already owned, for -12- 16 which sale could result in incurring capital gain (or loss) for federal income tax purposes or potential Section 16(b) liability under the Securities Exchange Act as of 1934, as amended (the "Exchange Act"). Special Provisions for 1994 Incentive Stock Options. An employee may receive more than one 1994 Incentive Option, but the maximum aggregate fair market value of the Common Stock (determined when the 1994 Incentive Options were granted) with respect to which 1994 Incentive Options are first exercisable by such employee in any calendar year cannot exceed $100,000. In addition, no 1994 Incentive Option may be granted to an employee owning directly or indirectly stock possessing more that 10% of the total combined voting power of all classes of stock of the Company unless the exercise price is set at not less than 110% of the fair market value of the shares subject to such 1994 Incentive Stock Option on the date of grant and such 1994 Incentive Option expires not later than five (5) years from the date of grant. Awards of 1994 Employee Nonqualified Options are not subject to these special limitations. Transferability of 1994 Employee Options. No 1994 Employee Option granted under the 1994 Employee Plan is assignable or transferable otherwise than by will or by the laws of decent and distribution. During the lifetime of an optionee, his 1994 Employee Option is exercisable only by him or his guardian or legal representative. Exercise of 1994 Employee Options. The 1994 Employee Plan Administrator, in its sole discretion, may limit the optionee's right to exercise all or any portion of a 1994 Employee Option until one or more dates subsequent to the date of grant. The 1994 Employee Plan Administrator also has the right, exercisable in its sole discretion, to accelerate the date on which all or any portion of a 1994 Employee Option may be exercised. The Plan provides that thirty days prior to certain major corporate events such as, among other things, certain changes in control, mergers or sales of substantially all of the assets of the Company (a "Major Corporate Event"), each 1994 Employee Option shall immediately become exercisable in full. Expiration of 1994 Employee Options. The expiration date of a 1994 Employee Option will be determined by the 1994 Employee Plan Administrator at the time of the grant, but in no event will a 1994 Employee Option be exercisable after the expiration of ten (10) years from the date of grant of the 1994 Employee Option. If an optionee's employment is terminated for cause, all rights of such optionee under the Plan cease and the 1994 Employee Options granted to such optionee become null and void for all purposes. The Plan further provides that, in most instances, a 1994 Employee Option must be exercised by the optionee within thirty (30) days after the termination of an optionee's employment with the Company (for any reason other than termination for cause, mental or physical disability or death) if and to the extent such 1994 Employee Option was exercisable on the date of such termination. If the Optionee is not otherwise employed by the Company, his 1994 Employee Option must be exercised within thirty (30) days of the date he or she ceases to be a director of a Subsidiary or one (1) year after such date if optionee shall die. Generally, if an optionee's termination of employment is due to mental or physical disability, the optionee will have the right to exercise the 1994 Employee Option (to the extent otherwise exercisable on the date of termination) for a period of one year from the date on which the optionee suffers the mental or physical disability. If an optionee dies while actively employed by the Company, the 1994 Employee Option may be exercised (to the extent otherwise exercisable on the date of death) within one year of the date of the optionee's death by the optionee's legal representative or legatee. As described above, a 1994 Employee Option becomes exercisable in full thirty (30) days prior to a Major Corporate Event. In anticipation of a Major Corporate Event, however, the 1994 Employee Plan Administrator may, after notice to the optionee, cancel the optionee's 1994 Employee Options on the consummation of the Major Corporate Event. The optionee, in any event, will have the opportunity to exercise his 1994 Employee Options in full prior to such Major Corporate Event. Expiration of the 1994 Employee Plan. The Plan will expire on July 31, 2004 and any 1994 Employee Option outstanding on such date will remain outstanding until it has either expired or has been fully exercised. Adjustments. The Plan provides for adjustments to the number of shares under which the 1994 Employee Options may be granted, to the number of shares subject to the outstanding 1994 Employee Options and to the exercise prices of such -13- 17 outstanding 1994 Employee Options in the event of a declaration of a stock dividend or any recapitalization resulting in a stock split-up, combination or exchange of shares of Common Stock. Amendments. The 1994 Employee Plan Administrator may amend, suspend or terminate the Plan or any 1994 Option at any time subject to stockholder approval in certain instances, provided that such action may not substantially impair the rights of an optionee under an outstanding 1994 Employee Option without the optionee's written consent. The 1994 Employee Plan Administrator may not amend the Plan without further stockholder approval to increase the number of shares of Common Stock reserved for issuance, to change the class of employees eligible to participate in the Plan, to permit the granting of 1994 Employee Options with more than a ten-year term or to extend the termination date of the Plan. Stockholder Approval. Approval of all amendments to the Plan by stockholders of the Company is required by the Company's Board of Directors and as a condition for qualifying the 1994 Incentive Options as such under the Internal Revenue Code of 1986, as amended (the "Code"). Stockholder approval also is one of the conditions of Rule 16b-3, a rule promulgated by the SEC that provides an exemption for the options from the "short-swing profit" recovery provisions of Section 16(b) of the Exchange Act, with respect to the acquisition of 1994 Employee Options by the Company's executive officers and directors and the use of already owned Common Stock as full or partial payment for the exercise price of options granted under the Plan. FEDERAL INCOME TAX CONSEQUENCES Grants of 1994 Employee Options. Under current tax laws, the grant of a 1994 Employee Option is not a taxable event to the recipient optionee, and the Company is not entitled to a deduction with respect to such grant. Exercise of 1994 Employee Nonqualified Options and Subsequent Sale of Stock. Upon the exercise of a 1994 Employee Nonqualified Option, an optionee will recognize ordinary income at the time of exercise equal to the excess of the then fair market value of the shares of Common Stock received over the exercise price. The taxable income recognized upon exercise of a 1994 Employee Nonqualified Option will be treated as compensation subject to withholding, and the Company will be entitled to deduct as a compensation expense an amount equal to the ordinary income that optionee recognizes with respect to such exercise. When Common Stock received upon the exercise of a 1994 Employee Nonqualified Option subsequently is sold or exchanged in a taxable transaction, the holder thereof generally will recognize the capital gain (or loss) equal to the difference between the total amount realized and the fair market value of the Common Stock on the date of the exercise. The character of such gain or loss as long-term or short-term capital gain or loss will depend upon the holding period of the shares following exercise. Exercise of 1994 Incentive Options and Subsequent Sale of Stock. The exercise of a 1994 Incentive Option will not be taxable to the optionee, and the Company will not be entitled to any deduction with respect to such exercise. However, to qualify for this favorable tax treatment of incentive stock options under the Code, the optionee may not dispose of the shares of Common Stock acquired upon the exercise of a 1994 Incentive Option until after the later of two years following the date of grant or one year following the date of exercise. The surrender of shares of Common Stock acquired upon the exercise of a 1994 Incentive Option in payment of the exercise prices of a 1994 Employee Option within the required holding period for incentive stock options under the Code will be a disqualifying disposition of the surrendered shares. Upon any subsequent taxable disposition of shares of Common Stock received upon exercise of a qualifying 1994 Incentive Option, the option generally will recognize long-term or short-term capital gain (or loss) equal to the difference between the total amount realized and the exercise price of the 1994 Employee Option. If a 1994 Employee Option that was intended to be an incentive stock option under the Code does not qualify for a favorable incentive stock option treatment under the Code due to the failure to satisfy the holding period requirement, then the optionee may recognize ordinary income in the year of the disqualifying disposition. The amount realized in the disqualifying disposition shall be the lower of (i) the excess of the amount realized over the exercise price or (ii) the excess of the fair market value of the Common Stock at the time of the exercise over the exercise price. In addition, the optionee shall recognize capital gain on the qualifying disposition in the amount, if any, by which the amount realized in the disqualifying disposition exceeds the fair market value of the Common Stock at the time of the exercise. Such capital gain shall be taxable as long-term or short-term capital gain depending on the optionee's holding period for such shares. -14- 18 Notwithstanding the favorable tax treatment of 1994 Incentive Options for regular tax purposes, as described above, for alternative minimum tax purposes, a 1994 Incentive Option generally is treated in the same manner as a 1994 Employee Nonqualified Option. Accordingly, an optionee must generally include in alternative minimum taxable income for the year in which a 1994 Incentive Option is exercised the excess of the fair market value on the date of exercise of the shares of Common Stock received over the exercise price. If, however, an optionee disposes of Common Stock acquired upon the exercise of a 1994 Incentive Option in the same calendar year as the exercise, only an amount equal to the optionee's ordinary income for regular tax purposes with respect to such qualifying disposition will be recognized for the optionee's calculation of alternative minimum taxable income in such calendar year. PURPOSE AND EFFECT OF INCREASING THE NUMBER OF SHARES RESERVED FOR THE PLAN The Board of Directors believes that, with the Company's potential growth, it will be necessary for the Company to hire additional qualified and competent personnel. The Company believes that the Plan is serving its purpose in helping to attract, retain and reward qualified and competent personnel and in strengthening the commonality of interest between such personnel and the shareholders of the Company. The Board believes that the Plan has contributed to the progress of the Company by providing incentives to its personnel. Intense competition among business firms for qualified and competent personnel makes it important to the Company to maintain an effective compensation program in order to continue to attract, motivate and retain persons necessary to further the Company's growth. Competing compensation programs of other companies make it important that the Company's program continues and has sufficient flexibility. The Board believes that the Plan, as supplemented with additional shares, will continue to assist the Company in meeting the competitive situation created by the varied compensation programs of other companies. The Board believes that the addition of needed personnel may require issuance of options to purchase more shares than are currently reserved for issuance under the Plan. As of June 21, 1996, options had been granted to purchase all but 650,500 of the shares reserved for the Plan. The Board of Directors believes that the Company should not be prevented from issuing options under the Plan for this purpose due to the limited number of available shares under the Plan. In addition, as discussed above under "Executive Compensation--Other Agreements With Executive Officers," the Board of Directors has determined to issue to George Evans either warrants or options under the Plan to purchase 1,500,000 shares of Common Stock. Mr. Evans has the right to determine whether to receive options under the Plan or warrants. If Mr. Evans were to choose options under the Plan, there would not be sufficient shares of Common Stock available under the Plan to accommodate such options to Mr. Evans. The Board believes that the Plan should be amended to accommodate such options. The Board of Directors believes that the increase from 1,750,000 shares to 5,000,000 shares of Common Stock reserved for issuance under the Plan should be sufficient to cover the anticipated needs of the Company for new option grants. In addition to making more option grants available under the Plan, a principal effect of the proposed increase would be to reduce the number of unissued shares of Common Stock available to be issued for other purposes. The Board believes that the Company has available sufficient authorized and unissued or unreserved shares to cover the anticipated needs of the Company for such shares. The proceeds received by the Company from the sale of stock pursuant to options granted under the Plan will be used for the general purposes of the Company, or in the case of the receipt of payment in shares of Common Stock, as the Board of Directors may determine, including redelivery of the shares received upon exercise of options. The Board believes that increasing the number of shares of the Company's Common Stock for which options may be granted under the Plan is in the best interests of the Company and its shareholders. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR ADOPTION OF THE PROPOSED INCREASE IN THE SHARES RESERVED FOR THE PLAN. _______________________ -15- 19 CLARIFYING AMENDMENTS TO TERMS OF 9%/7% CONVERTIBLE PREFERRED STOCK At the special meeting, the shareholders will be asked to approve certain clarifying amendments to the Company's Certificate of Designation for the New Preferred Stock. The proposed shareholder resolution to approve the amendments is set forth in full on Exhibit B attached to this Proxy Statement. PURPOSE The proposed amendments are needed to enable the Company to issue shares of the New Preferred Stock in future acquisitions or stock offerings. The terms of the New Preferred Stock were determined for the purpose of the issuance by the Company in March 1996 pursuant to the Third Amended Joint Plan of Reorganization (the "Reorganization Plan") for eight of the Company's subsidiaries in their Chapter 11 bankruptcy proceedings. These terms are set forth in the "Certificate of Designation" for the New Preferred Stock, which constitutes a part of the Company's Certificate of Incorporation. The Company was a co-proponent of the Reorganization Plan. Because the New Preferred Stock was intended for issuance pursuant to the Reorganization Plan, the terms of the New Preferred Stock in the Certificate of Designation contain references to the Reorganization Plan and other provisions that are not intended for other purposes. In pursuit of the Company's growth plans, the Company has had discussions and reached preliminary understanding with certain companies concerning acquisitions of motor vehicle receivables. In that connection, the Company desires to be able to issue shares of New Preferred Stock. No formal acquisition agreements have been entered into by the Company with any of these companies. See the discussion under "Possible Future Acquisitions" below. The sellers also may desire to obtain shares of the New Preferred Stock because an over-the-counter trading market has developed for the New Preferred Stock. One of the provisions of the Reorganization Plan prohibits the Company from issuing shares of convertible preferred stock which are senior in rights to that of the New Preferred Stock (except that such convertible preferred stock may carry the then current market interest rate, which may be higher or lower than that of the New Preferred Stock). To promote compliance with the prohibition in the Reorganization Plan against issuance of additional series of preferred stock having rights senior to the New Preferred Stock, the Company would like to issue shares of New Preferred Stock rather than another series of preferred stock in such acquisition transactions if they occur. However, the Company will be prevented from doing that due to certain existing ambiguities in the terms of the New Preferred Stock and the provisions of the New Preferred Stock designed for the particular purpose of the Reorganization Plan. Accordingly, the proposed amendments are intended to clarify certain ambiguities in, and to supplement the terms of, the Certificate of Designation to enable the Company to issue shares of New Preferred Stock, on acceptable terms, to new purchasers in stock offerings and to sellers in acquisition transactions. Because of the existence of the public trading market for the New Preferred Stock, shares of that series should have a higher value than shares of a new, different series of preferred stock which has no public trading market. Accordingly, such shares should be more attractive to investors and sellers in acquisitions. EFFECTS The principal effects of the proposed amendments to the Certificate of Designation are summarized as follows: Dividend Record Dates. The proposed amendments clarify and resolve an ambiguity as to the record date for purposes of determining which shareholders are entitled to receive quarterly dividends on the New Preferred Stock. The proposed amendments provide that the record date for such purposes is the close of business on the last day of the calendar quarter. Effective Date. As currently written, the Certificate of Designation fails to define the term "Effective Date," although it is used in several places in the Certificate of Designation. The proposed amendments define the term "Effective Date," in conformity with the intent of the Reorganization Plan, to be the effective date of the Reorganization Plan, which was March 15, 1996. -16- 20 End Date. The proposed amendment seeks to clarify the period during which the holders of the New Preferred Stock are entitled to receive dividends at a rate of $0.315 per share. As currently written, the Certificate of Designation provides that the right to receive dividends at the $0.315 rate terminates at "the end of the 12th full calendar quarter following payment of the first dividend". The first dividend payment on the New Preferred Stock was set aside for payment on the Effective Date. The proposed amendment clarifies these provisions by specifying that March 31, 1999 is the precise date upon which the right to receive such dividends terminates (i.e., the End Date). That date is the end of 12 full calendar quarters after the Effective Date. Shareholders Entitled to Retroactive Payment of Dividends. The proposed amendments clarify and resolve an ambiguity with respect to the commencement date for the accrual of dividends on the New Preferred Stock. As currently written, the Certificate of Designation could be construed to entitle all shareholders of such stock, regardless of when their shares were issued, to receive dividends for the period beginning July 1, 1995 through the Effective Date. The proposed amendments clarify that (i) only those shareholders who were issued stock pursuant to the Reorganization Plan were entitled to the retroactive payment of dividends for the period from July 1, 1995 through the Effective Date, and (ii) dividends on each share of New Preferred Stock not issued pursuant to the Reorganization Plan shall begin to accrue on the date such shares are issued. The amendments also clarify that after the first retroactive dividend payment, the next dividend payment would be for the period from the Effective Date through the end of the next full calendar quarter. This result can be inferred from, but is not clear in, the existing language. Percentage References. The proposed amendments clarify certain percentage references in the dividend provisions (i.e., "9%" and "7%") by indicating that such references are percentages of the $3.50 liquidation preference for the New Preferred Stock. Conditions for Class Vote on Merger. The existing terms provide that the affirmative vote or consent of holders of at least 50% of all outstanding shares of New Preferred Stock is necessary for the Company to merge with another company when thereafter the Company is not the controlling entity. The reference to "controlling entity" is ambiguous. The proposed amendments clarify this standard by specifying that the members of the Board of Directors of the Company immediately preceding the merger must be a majority of the members of the board of directors of the company surviving the merger, whether it is the Company or another company. Mandatory Conversion. The existing terms provide that (i) the Company has the option, if a certain trigger trading price for the Common Stock is reached, to mandatorily convert up to 50% of the shares of the New Preferred Stock issued on the Effective Date into shares of Common Stock, and (ii) all unconverted New Preferred Stock will be mandatorily converted on the seventh anniversary of the Effective Date. The proposed amendments supplement and clarify these terms by adding provisions that address (i) the method of selecting 50% of the shares to be converted, (ii) the manner in which notice of such election is to be provided, (iii) the content of such notice, and (iv) the manner in which certificates of the New Preferred Stock are to be exchanged for certificates of the underlying Common Stock. To enable the New Preferred Stock to be used for purposes other than the Reorganization Plan, the amendments would eliminate the limitation on the 50% mandatory conversion to only those shares issued on the Effective Date so that the Company could mandatorily convert up to 50% of all outstanding shares, whenever they were issued. The proposed amendments further provide that after the effective date of the conversion (i) the accrual of dividends upon the converted New Preferred Stock shall cease; and (ii) all rights of holders of such stock shall cease, except for the right to receive shares of the Common Stock and accrued unpaid dividends. The proposed amendments also clarify (i) the conversion rate for the New Preferred Stock upon the final mandatory conversion on the seventh anniversary of the Effective Date, in accordance with the intent of the existing provisions, and (ii) that the conversion rate for the final mandatory conversion and the trigger prices per share for the initial 50% mandatory conversion are subject to adjustment if and when the normal two-for-one conversion rate for the New Preferred Stock is adjusted for extraordinary transactions, such as stock splits or combinations, as inferred by the existing provisions. Conversion Date. The existing terms of the New Preferred Stock contain a defined term "Conversion Date" that might be interpreted to reference either the final mandatory conversion of all the New Preferred Stock on the seventh anniversary of the Effective Date or the prior mandatory conversion, at the Company's option, of 50% of the New Preferred Stock. The amendments would eliminate the use of this term since it was generally not necessary. In the few instances where continued use of that term or a similar term is necessary, a reference to the "seventh anniversary of the Effective Date" would be substituted, which conforms with the intent of the Reorganization Plan. -17- 21 Effective Dates of Mandatory Conversions. The existing provisions state that the final conversion of all issued New Preferred Stock occurs on the seventh anniversary of the Effective Date while other provisions state that the effective date of the conversion is a date established by the Board of Directors or the date of mailing of the notice. The proposed amendments clarify that the effective date of the final mandatory conversion is the seventh anniversary of the Effective Date. The proposed amendments also cure an ambiguity as to whether the Board may establish an effective date for the initial 50% mandatory conversion by clarifying that it may do so. Accrued Unpaid Dividends. The proposed amendments clarify that the Company must pay through the date of conversion any accrued, unpaid dividends on any New Preferred Stock that is mandatorily converted. The existing terms have provisions to that effect but are unclear as to whether they apply to both the initial 50% and the final mandatory conversions. Market Price; Value of Common Stock Dividend. Several provisions in the existing Certificate of Designation are dependent on the market price or average market price of the Common Stock but fail to contain adequate definitions of those terms. The proposed amendments clarify by providing suitable and consistent definitions of these terms. The amendments also add provisions specifying how the Common Stock should be valued for purposes of any dividend of shares of Common Stock on the New Preferred Stock in a manner consistent with the implications of the existing provisions. The new provisions specify that the Common Stock dividend value will be based on the average market price of the Common Stock for the 20 trading day period ending five days prior to the dividend payment date. The Board believes the adoption of the amendments to the Certificate of Designation for the New Preferred Stock to be in the best interests of the Company and its shareholders. The Board does not believe that the proposed amendments will have any material adverse effects on the shares of New Preferred Stock issued pursuant to the Reorganization Plan. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR ADOPTION OF THE CLARIFYING AMENDMENTS TO THE TERMS OF THE NEW PREFERRED STOCK. AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO AUTHORIZE A REVERSE STOCK SPLIT The Board of Directors has proposed the following amendments (the "Reverse Split Amendments") to the Company's Restated Certificate of Incorporation: (i) amendments to Paragraph FOURTH that would effect a reverse split of the Company's Common Stock on the basis of one new share of Common Stock for each six shares of presently outstanding Common Stock and one new share of Preferred Stock for each six shares of presently outstanding Preferred Stock (the "Reverse Stock Split"), and (ii) related amendments required by the Reverse Stock Split to the terms of the New Preferred Stock and 12% Preferred Stock that would effect proportionate increases in the dividend rates and liquidation preferences per share of the 12% Preferred Stock and New Preferred Stock in the average trading prices for the Common Stock that trigger the Company's redemption and mandatory conversion rights as to the 12% Preferred Stock and the Company's mandatory conversion rights as to the New Preferred Stock (the "Preferred Stock Amendments"). As of July 10, 1996, 25,310,489 shares of Common Stock were issued and outstanding, 3,026,389 shares were held in treasury and 101,663,122 shares were unissued. As of the same date, there were an aggregate of 64,245,979 shares of Common Stock reserved for issuance under the Company's 1994 Employee Stock Option Plan (the "Plan") and upon the exercise of outstanding warrants or the conversion of outstanding shares of 12% Preferred Stock and New Preferred Stock. The proposed shareholder resolution to approve the Reverse Split Amendments is set forth in full on Exhibit C to this Proxy Statement. PURPOSES The primary purpose of the Reverse Split Amendments is to reduce the number of shares of Common Stock and New Preferred Stock outstanding and thereby increase the market prices per share of the Common Stock and New Preferred Stock in order to make the Common Stock and New Preferred Stock eligible for quotation on The Nasdaq Stock Market ("NASDAQ") and to meet the margin requirements for over-the-counter stock. NASDAQ requires that stock have a -18- 22 minimum bid price of $3.00 per share at the time of its initial quotation, if the Company satisfies certain market capitalization and other requirements. Federal Reserve Board regulations specify that an over-the-counter stock must have a minimum average bid price of at least $5.00 per share, in addition to satisfying certain other requirements, to enable broker/dealers, banks and certain other lenders to provide margin loans secured by the Company's stock. As of July 10, 1996, the closing bid prices of the Common Stock and New Preferred Stock were $1.06 and $2.63 per share, respectively, and the closing asked prices were $1.19 and $2.88 per share respectively. There can be no assurance that the prices of the Common Stock and New Preferred Stock after the Reverse Stock Split will actually increase in an amount proportionate to the decrease in the number of outstanding shares or will exceed the minimum bid prices required by NASDAQ or the Federal Reserve Board. In addition, the Board of Directors believes that the present level of per share market prices of the Common Stock impairs the acceptability of the stock by portions of the financial community and the investing public. Theoretically, the number of shares outstanding should not, by itself, affect the marketability of the stock, the type of investor who acquires it or a company's reputation in the financial community, but in practice this is not necessarily the case, as many investors look upon low priced stock as unduly speculative in nature and, as a matter of policy, avoid investment in such stocks. The Board of Directors also believes that the current per share prices of the Common Stock and New Preferred Stock have reduced the effective marketability of the shares because of the reluctance of many leading brokerage firms to recommend low priced stock to their clients. Further, various brokerage house policies and practices tend to discourage individual brokers from dealing in low priced stocks. Some of these policies and practices pertain to the payment of brokers' commissions and to time-consuming procedures which function to make the handling of low priced stocks unattractive to brokers from an economic standpoint. In addition, the structure of trading commissions also tends to have an adverse impact upon holders of low priced stock because the brokerage commission on a sale of low priced stock generally represents a higher percentage of the sales price than the commission on higher priced issues. PRINCIPAL EFFECTS The principal effects of the proposed Reverse Split Amendments would be the following: Based upon 25,310,489 shares of Common Stock, 16,992,767 shares of New Preferred Stock and 400,000 shares of 12% Preferred Stock outstanding on July 10, 1996, the proposed one-for-six Reverse Stock Split would decrease the outstanding shares of each of the Common Stock, New Preferred Stock and 12% Preferred Stock by 83-1/3%, and thereafter approximately 4,218,415 shares of Common Stock, 2,832,128 shares of New Preferred Stock and 66,667 shares of 12% Preferred Stock would be outstanding and held of record by approximately 3,595 holders for the Common Stock, 2,020 holders for the New Preferred Stock and 86 holders of the 12% Preferred Stock. The proposed Reverse Split Amendments would not affect the proportionate equity interest in the Company of any holder of Common Stock or Preferred Stock, except as may result from the provisions for the elimination of fractional shares as described below. The proposed Reverse Split Amendments will not affect the number of authorized shares of Common Stock and Preferred Stock or the registration of the Common Stock or New Preferred Stock under the Exchange Act. The Reverse Stock Split may leave certain stockholders with one or more "odd lots" of the Company's Common Stock or Preferred Stock, i.e., stock in amounts of less than 100 shares. These shares may be more difficult to sell, or require a greater commission per share to sell, than shares in even multiples of 100. As of July 10, 1996, there were outstanding warrants and Plan options to purchase an aggregate of 11,437,678 shares of Common Stock. On that date, options to purchase 598,500 shares of Common Stock remained available for grant under the Plan. All of the outstanding warrants and Plan options include provisions for adjustments in the number of shares covered thereby, and the exercise price thereof, in the event of a Reverse Stock Split. If the proposed Reverse Split Amendments are approved and effected, there would be reserved for issuance upon exercise of all outstanding warrants and options a total of 1,906,280 shares of Common Stock. Each of the outstanding warrants and options would thereafter evidence the right to purchase 16-2/3% of the shares of Common Stock previously covered thereby and the exercise price per share would be six times the previous exercise price. The number of shares available for grant under the Plan would be decreased to approximately 291,667 shares of Common Stock (or 833,333 shares if the separate proposal herein to increase the number of shares covered by the Plan is approved by the shareholders). -19- 23 The terms of the New Preferred Stock currently provide that the Company has the right to mandatorily convert up to 50% of the outstanding shares of New Preferred Stock if Common Stock trading prices exceed $4.25 between March 15, 1998 and March 15, 1999 or $3.50 thereafter. To retain the appropriate relationship between the trigger prices and the actual trading price of the Common Stock, the trigger prices would be increased proportionately if the proposed Preferred Stock Amendments were approved and effected. The new trigger prices would be $25.50 between March 15, 1998 and March 15, 1999 and $21.00 thereafter. The terms of the 12% Preferred Stock provide the Company the rights to redeem all or any part, or to mandatorily convert all, of the 12% Preferred Stock if the trading prices for the Company's Common Stock exceed a trigger price of $6.00 per share. To retain the appropriate relationship between the trigger price and actual trading price of the Common Stock, the trigger price would be increased proportionately to take into account the increased trading prices expected to result from the Reverse Stock Split. The Preferred Stock Amendments, if approved, would amend the Certificate of Designation for the 12% Preferred Stock to increase the trigger price to $36.00 per share. The terms of the New Preferred Stock and the Preferred Stock provide that the holders thereof will have liquidation preferences upon any voluntary or involuntary liquidation of the Company of $3.50 and $5.00 per share, respectively. To retain the total liquidation value payable to the holders of the Preferred Stock upon a liquidation of the Company, these liquidation preferences would be increased proportionately if the proposed Preferred Stock Amendments were approved and effected. The new liquidation preferences would be $21.00 per share for the New Preferred Stock and $30.00 per share for the 12% Preferred Stock. To ensure that holders of the Preferred Stock receive the same dividends on their shares of Preferred Stock following the Reverse Split Amendments, the dividend rates would be increased proportionately if the proposed Preferred Stock Amendments were approved and effected. The dividend rates would be increased from $0.60 to $3.60 per share per annum for the 12% Preferred Stock and, for the New Preferred Stock, from $0.315 to $1.89 per share per annum payable from July 1, 1995 to the end of the twelfth full calendar quarter following payment of the first dividend and from $0.245 to $1.47 per share per annum thereafter. The following table illustrates the principal effects of the proposed Reverse Split Amendments discussed in the preceding paragraphs: -20- 24
Prior to Reverse After Reverse Split Amendments Split Amendments ----------------- ---------------- Number of Shares of Common Stock - -------------------------------- Authorized . . . . . . . . . . . . . . . 130,000,000 130,000,000 Outstanding . . . . . . . . . . . . . . 25,310,489 4,218,415(2) Reserved for future issuance upon exercise of options or warrants . . . 11,437,678 1,906,280 Reserved for issuance in connection with future grants under 1994 Employee Stock Option Plan (1) . . . . . . . . . . . 598,500 99,750 Reserved for issuance upon conversion of 12% Preferred Stock . . . . . . . . . 400,000 66,667(2) Reserved for issuance upon conversion of New Preferred Stock . . . . . . . . 50,978,301 8,496,383(2) Available for future issuance by action of the Board of Directors (after giving effect to the above reservations) . . . . . 41,275,032 115,212,505 Number of Shares of Preferred Stock - ----------------------------------- Authorized . . . . . . . . . . . . . . . 60,000,000 60,000,000 Outstanding . . . . . . . . . . . . . . 17,392,767 2,898,794(2) Available for future issuance by action of the Board of Directors . . 42,607,233 57,101,206 Authorized New Preferred Stock . . . . . 30,000,000 30,000,000 Outstanding New Preferred Stock . . . . 16,992,767 2,832,128(2) Authorized 12% Preferred Stock . . . . . 400,000 400,000 Outstanding 12% Preferred Stock . . . . 400,000 66,667(2) Other Effects - ------------- Redemption/mandatory conversion trigger price for 12% Preferred Stock $6.00 $36.00 Mandatory conversion trigger prices for New Preferred Stock . . . . . . . $4.25/$3.50 $25.50/$21.00 Dividend rate for 12% Preferred Stock . $0.60 $3.60 Dividend rate for New Preferred Stock . $0.315/$0.245 $1.89/$1.47 Liquidation preference for New Preferred Stock . . . . . . . . . . . $3.50 $21.00 Liquidation preference for 12% Preferred Stock . . . . . . . . . . . $5.00 $30.00
_______________________________________ (1) A total of 1,750,000 shares is reserved for issuance under the Plan. The number on this line of the table will also increase if the proposal in this Proxy Statement to increase the number of shares reserved for the Plan to 5,000,000 is approved. The numbers on this line of this table are net of shares issuable upon exercise of outstanding options previously granted under the Plan. (2) Assumes no fractional shares are eliminated. These numbers will actually be less as a result of the fractional shares eliminated in the Reverse Stock Split. -21- 25 Assuming the proposed Reverse Split Amendments are approved, a Certificate of Amendment setting forth the amendments in Exhibit C to this Proxy Statement will be filed with the Secretary of State of the State of Delaware (the "Delaware Secretary of State") as promptly as practicable thereafter. The Reverse Split Amendments and the proposed Reverse Stock Split would become effective upon the date of filing (the "Effective Date"). EXCHANGE OF STOCK CERTIFICATES AND ELIMINATION OF FRACTIONAL SHARE INTERESTS As soon as possible after the Effective Date, holders of Common Stock and Preferred Stock will be notified and requested to surrender their present Common Stock and Preferred Stock certificates for new certificates representing the number of whole shares of Common Stock and Preferred Stock after the Reverse Stock Split. Until so surrendered, each current certificate representing shares of Common Stock or Preferred Stock will be deemed for all corporate purposes after the Effective Date to evidence ownership of Common Stock or Preferred Stock, as the case may be, in the appropriately reduced whole number of shares. American Securities Transfer Company of Denver, Colorado will be appointed exchange agent (the "Exchange Agent") to act for stockholders in effecting the exchange of their certificates. No scrip or fractional share certificates for Common Stock will be issued in connection with the Reverse Stock Split, but in lieu thereof, a certificate or certificates evidencing the aggregate of all fractional shares otherwise issuable (rounded, if necessary, to the next higher whole share) shall be issued to the Exchange Agent or its nominee, as agent for the accounts of all holders of Common Stock or Preferred Stock otherwise entitled to have a fraction of a share issued to them in connection with the Reverse Stock Split. Sales of fractional interests will be effected by the Exchange Agent as soon as practicable on the basis of prevailing market prices of the Common Stock or Preferred Stock on the over-the-counter market at the time of sale. After the Effective Date, the Exchange Agent will pay to such stockholders their pro rata share of the net proceeds derived from the sale of their fractional interests upon surrender of their stock certificates. No service charges or brokerage commissions will be payable by stockholders in connection with the sale of fractional interests, all of which costs will be borne by the Company. FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion of certain federal income tax consequences of the proposed Reverse Stock Split. This discussion does not purport to deal with all aspects of federal income taxation that may be relevant to holders of Common Stock or Preferred Stock and is not intended to be applicable to all categories of investors, some of which, such as dealers in securities, banks, insurance companies, tax-exempt organizations and foreign persons, may be subject to special rules. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and administrative and judicial interpretations as of the date hereof, all of which are subject to change. Holders of Common Stock or Preferred Stock are advised to consult their own tax advisors regarding the federal, state, local and foreign tax consequences of the Reverse Stock Split. The Reverse Stock Split will be a tax-free recapitalization for the Company and its stockholders. The new shares of Common Stock or Preferred Stock in the hands of a stockholder will have an aggregate basis for computing gain or loss equal to the aggregate basis of shares of Common Stock or Preferred Stock held by that stockholder immediately prior to the Reverse Stock Split reduced by the amount of proceeds, if any, received from the sale of fractional interests and increased by any gain recognized on that sale. A stockholder's holding period for the new shares of Common Stock or Preferred Stock will be the same as the holding period for the shares of Common Stock or Preferred Stock exchanged therefor. Stockholders who receive cash for all of their holdings (as a result of owning fewer than six shares of Common Stock or Preferred Stock) will recognize a gain or loss for federal income tax purposes as a result of the disposition of their shares. Although the tax consequences to stockholders who receive cash for some of their holdings are not entirely certain, those stockholders in all likelihood will recognize a gain or loss for federal income tax purposes as a result of the disposition of a portion of their shares of Common Stock or Preferred Stock. Stockholders who do not receive any cash for their holdings will not recognize any gain or loss for federal income tax purposes as a result of the Reverse Stock Split. -22- 26 VOTE REQUIRED The proposed Reverse Split Amendments would effect the Reverse Stock Split and the Preferred Stock Amendments. Approval of the Reverse Split Amendments requires the affirmative vote of a majority of all of the issued and outstanding shares of Common Stock, 12% Preferred Stock and New Preferred Stock, voting together as a single class. Approval of the Preferred Stock Amendments with respect to the Certificate of Designation for the New Preferred Stock requires the affirmative vote of two-thirds of all of the issued and outstanding shares of New Preferred Stock, voting as a separate class. In addition, approval of the Preferred Stock Amendments with respect to the Certificate of Designation for the 12% Preferred Stock requires the affirmative vote of a majority of all of the issued and outstanding shares of 12% Preferred Stock, voting as a separate class. Consequently, the affirmative votes of (i) a majority of all of the issued and outstanding shares of Common Stock, 12% Preferred Stock and New Preferred Stock, voting together as a single class, (ii) two-thirds of all of the issued and outstanding shares of New Preferred Stock, voting as a separate class, and (iii) a majority of all of the issued and outstanding shares of 12% Preferred Stock, voting as a separate class, will be required for approval of the Reverse Split Amendments. The Board of Directors reserves the right to abandon the proposed Reverse Split Amendments without further action by the stockholders at any time prior to the filing of the amendments with the Delaware Secretary of State notwithstanding authorization of the proposed amendments by the stockholders. The foregoing summary of the Reverse Split Amendments is qualified in its entirety by reference to the complete text of the proposed amendments, which is set forth as Exhibit C to this Proxy Statement. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR ADOPTION OF THE REVERSE SPLIT AMENDMENTS. _______________________ OTHER BUSINESS The Company is not aware of any business to be acted upon at the special meeting other than that which is explained in this Proxy Statement. In the event that any other business calling for a vote of the shareholders is properly presented at the meeting, the holders of the proxies will vote your shares in accordance with their best judgment. SUBMISSION OF SHAREHOLDER PROPOSALS Any shareholder who wishes to present a proposal for action at the 1997 annual meeting of shareholders and who wishes to have it set forth in the proxy statement and identified in the form of proxy prepared by the Company, must deliver such proposal to the Company at its principal executive offices, no later than November 1, 1996, in such form as is required under regulations promulgated by the SEC. ANNUAL REPORT The Company's Form 10-K Report on the transition period ended March 31, 1996 is enclosed herewith and incorporated herein by reference. FUTURE ACQUISITIONS ACQUISITION OF ASSETS FROM DEALERS ALLIANCE CREDIT CORPORATION The Company has entered into a preliminary agreement to purchase all the assets of Dealers Alliance Credit Corporation ("the DACC"). DACC's assets consist primarily of used motor vehicle retail installment contracts, repossessed motor vehicles, cash, and certain furniture and equipment. As of March 31, 1996, DACC's contracts had total unpaid future installments of approximately $46 million. The DACC had net finance receivables of approximately $22 million after reduction for unearned finance charges of approximately $11 million and after an allowance for credit losses of approximately $13 million. The Company will assume all balance sheet liabilities of DACC, other than approximately $4 million of subordinated debt and certain claims by two former officers. These liabilities consist primarily of indebtedness -23- 27 owing to senior lenders and accounts payable and accrued expenses. As of March 31, 1996, DACC owed approximately $19 million to its senior lenders and had accounts payable and accrued expenses of approximately $1 million. In addition to assuming the foregoing liabilities, the Company will issue 2,544,060 shares of a new series of Preferred Stock whose terms mirror the Company's New Preferred Stock, 1,277,030 shares of Common Stock and five-year warrants to purchase 1,277,030 shares of Common Stock at $2.00 per share (increasing by $0.25 each year). If the proposed clarifying amendments to the terms of the New Preferred Stock are approved by the Company's shareholders, the Company will be obligated to offer to exchange shares of New Preferred Stock for the shares of the new series of Preferred Stock issued to DACC or its shareholders in the acquisition. The preliminary agreement, as amended, calls for a closing no later than July 26, 1996. The Company and DACC are in the process of negotiating a definitive acquisition agreement. The number of shares to be issued by the Company may change if the closing occurs after July 26, 1996, depending on the then market prices for the Company's stock and any changes in the assets being acquired. For more information regarding DACC, see the audited financial statements of DACC attached to this Proxy Statement. ACQUISITION OF ASSETS FROM U.S. LENDING CORPORATION The Company has entered into an Asset Purchase Agreement with U.S. Lending Corporation ("USLC"), a company subject to Chapter 11 bankruptcy proceedings. Pursuant to the Asset Purchase Agreement, the Company agreed to purchase all of USLC's used motor vehicle retail installment sales contracts and repossessed motor vehicles, and a portion of USLC's cash on the closing date. In consideration for the transfer of assets, the Company will issue shares of its Common Stock and New Preferred Stock based on a purchase price to be determined at the closing equal to the cash received from USLC, 59% of the total unpaid installments of USLC's active contracts, plus the wholesale value of USLC's repossessed vehicles. The number of shares of Common Stock and New Preferred Stock will equal 100% and 25%, respectively, of the purchase price divided by specified prices for the New Preferred Stock and Common Stock. The prices for the New Preferred Stock and Common Stock will be fixed at $2.538 and $1.057 per share, respectively, if USLC's disclosure statement for its plan of reorganization is filed in the bankruptcy court on or before August 2, 1996. If not, the prices will equal the average closing bid and asked prices for the 30 trading days preceding the closing if traded on the over-the-counter market or the average closing prices for the 30 trading days prior to the closing if traded on The Nasdaq Stock Exchange. The Company is also obligated to issue additional shares of New Preferred Stock and Common Stock if it collects more than 59% of the total unpaid installments on USLC's active contracts, based on the same purchase price formula, unless USLC elects to receive at the closing five-year warrants to purchase Common Stock at $2.00 per share (increasing by $0.25 per year). The number of shares of Common Stock purchasable under the warrants will equal 20% of the total Common Stock equivalents represented by the New Preferred Stock and Common Stock issued at the closing. USLC projects that it will have, at the end of August 1996, active contracts having total unpaid installments of approximately $3.1 million, approximately $2.9 million cash (after netting projected fees, claims, and deposits) and $24,000 in approximate wholesale value of vehicles. Assuming these amounts at the closing, the Company would be required to issue 1,872,734 shares of New Preferred Stock and 1,124,172 shares of Common Stock, and warrants to purchase 973,928 shares of Common Stock if USLC elects to receive warrants. Approval by the Company of the proposed clarifying amendments to the terms of the New Preferred Stock are a condition to the closing of the Company's purchase from USLC. Over the period from February 1993 through May 1995, USLC's historical credit losses on its portfolio of contracts as a percentage of the outstanding contracts receivable were approximately 26%. The Company believes USLC's historical financial statements are not indicative of the performance of the assets being acquired and would not be useful to investors. Because the Company is acquiring assets and not USLC's business, USLC's financial statements are not presented in this Proxy Statement. The Company does not intend to resume USLC's underwriting or servicing activities. Servicing of USLC's contracts will be transferred to the Company's existing Dallas, Texas facility. As a consequence, the expenses of USLC reflected in its prior financial statements may not be indicative of the Company's future expenses with respect to the acquired assets. The Company's financial condition, liquidity and capital resources will be improved immediately by the acquired cash and over time by the collection of the contracts acquired from USLC. The Company does not expect to have any substantial increase in general and administrative expenses as a result of the acquisition and, consequently, expects to have improved operating results from the increased revenues resulting from the collection of the contracts acquired from USLC. -24- 28 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 March 31, 1996 and unaudited condensed consolidated statements of operations for the fiscal year ended March 31, 1996, on an actual historical basis and on a pro forma adjusted basis to give effect to the consummation of (i) the purchase of DACC's assets, the assumption of certain of DACC's liabilities, the issuance by the Company of Common Stock, New Preferred Stock and warrants, and the assumption and restructuring of DACC's revolving credit agreement, (ii) the purchase of USLC's assets and the issuance by the Company of Common Stock New Preferred Stock and warrants, and (iii) certain debt conversions and equity investments by Hall Phoenix/Inwood, Ltd. ("HPIL") that occurred in April 1996. -25- 29 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 1996 (UNAUDITED) (IN THOUSANDS)
Pro Forma Adjustments -------------------------------------------- Historical DACC (a) USLC (l) HPIL (n) Pro Forma ---------- ---------- ---------- ---------- ---------- ASSETS ------ Gross contracts receivable $ 37,086 $ 46,371 $ 5,386 -- $ 88,843 Unearned interest (6,435) (11,414)(b) 1,077 -- (18,926) ---------- ---------- ---------- ---------- ---------- Net contracts receivable 30,651 34,957 4,309 -- 69,917 Allowance for credit losses (13,353) (13,450) (1,131) -- (27,934) Net loan origination costs 406 168 -- -- 574 ---------- ---------- ---------- ---------- ---------- Net contracts receivable - 17,704 21,675 3,178 -- 42,557 ---------- ---------- ---------- ---------- ---------- after allowance for credit losses and other costs Cash and cash equivalents 17,817 369 2,485 $ 3,443 24,114 Vehicles held for resale 566 438 80 -- 1,084 Property and equipment, net 1,062 249 -- -- 1,311 Other assets, net 197 272 -- 322 791 Goodwill -- 5,218(d) -- -- 5,218 ---------- ---------- ---------- ---------- ---------- Total assets $ 37,346 $ 28,221 $ 5,743 $ 3,765 $ 75,075 ========== ========== ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Lines of credit $ 2,283 $ 19,250 -- (2,283) $ 19,250 Accrued settlements 688 -- -- -- 688 Accounts payable and other liabilities 7,356 1,138 -- -- 8,494 Accrued interest 15 -- -- (15) -- ---------- ---------- ---------- ---------- ---------- Total liabilities 10,342 20,388 -- ($ 2,298) 28,432 ---------- ---------- ---------- ---------- ---------- Stockholders' Equity -------------------- Preferred stock 154 26(c) 23(m) 20 223 Common stock 259 13(c) 11(m) 41 324 Additional paid-in capital 81,784 7,794(c) 5,709(m) 6,002 101,289 Accumulated deficit (54,043) -- -- -- (54,043) Treasury stock (1,150) -- -- -- (1,150) ---------- ---------- ---------- ---------- ---------- Total stockholders' equity 27,004 7,833 5,743 6,063 46,643 ---------- ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity $ 37,346 $ 28,221 $ 5,743 $ 3,765 $ 75,075 ========== ========== ========== ========== ==========
See accompanying notes to pro forma condensed consolidated financial statements. -26- 30 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)
Pro Forma Adjustments Six Months Ended --------------------------------------- March 31, 1996 DACC (e) USLC (o) Pro Forma ---------------- -------- -------- --------- Interest revenue $ 3,541 $ 3,554 $ 660 $ 7,755 Interest expense 1,306 813(f) -- 2,119 -------- -------- -------- -------- Net interest income (loss) 2,235 2,741 660 5,636 Provision for credit losses 4,982 -- (g) -- 4,982 -------- -------- -------- -------- Net interest income (loss) after provision for credit losses (2,747) 2,741 660 (654) -------- -------- -------- -------- General and administrative expense 8,098 1,700(h) 108(r) 9,906 Goodwill amortization -- 522(i) -- 522 Settlement expense 535 -- -- 535 -------- -------- -------- -------- Operating and other expense 8,633 2,222 108 10,963 -------- -------- -------- -------- Income (loss) before extraordinary item (11,380) 519 552 (10,309) Extraordinary gain on discharge of debt 8,709 -- -- 8,709 -------- -------- -------- -------- Net income (loss) (2,671) 519 552 (1,600) Preferred stock dividends (327) (402)(j) (357)(p) (1,086) -------- -------- -------- -------- Net income (loss) attributable to common stockholders $ (2,998) $ 117 $ 195 $ (2,686) ======== ======== ======== ======== Common stock dividends $ 0 $ 0 $ 0 $ 0 ======== ======== ======== ======== Income (loss) per common share before extraordinary item $ (1.12) $ 0.09 $ 0.17 $ (0.89) Gain on extraordinary item 0.83 -- -- 0.68 -------- -------- -------- -------- Income (loss) per common share $ (0.29) $ 0.09 $ 0.17 $ (0.21) ======== ======== ======== ======== Weighted average number of common shares outstanding 10,447 1,277(k) 1,131(q) 12,855 ======== ======== ======== ========
See accompanying notes to pro forma condensed consolidated financial statements. -27- 31 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED) (a) Represents the assets purchased and liabilities assumed from DACC, as though the transaction had occurred on March 31, 1996. Except as otherwise noted, each line item adjustment is taken directly from a corresponding line item in the audited Statement of Financial Condition for DACC as of March 31, 1996 or the related Note 3 to Notes to Financial Statements. Excluded from the adjustments are the following line items from DACC's balance sheet which represent either liabilities not assumed or assets that have no value to the Company: Other assets $ 647,889 Due to related party 19,399 Senior subordinated notes payable, net 3,486,991 Warrants 563,767 Redeemable Series A preferred stock 8,752,971
(b) Represents unearned finance charges of $(11,328,861) plus unearned ancillary income of $(84,662), as set forth in Note 3 to DACC's Notes to Financial Statements. (c) Represents the issuance of 2,544,060 shares of $0.01 par value preferred stock valued at $2.54 per share and 1,277,030 shares of $0.01 par value common stock valued at $1.06 per share. (d) Goodwill is derived from the total value of issued stock less the net assets (assets less liabilities) acquired from DACC:
As of March 31, 1996 -------------------- Total assets $ 23,003,000 Goodwill 5,218,000 ------------ $ 28,221,000 ============ Total liabilities $ 20,388,000 Stockholders' equity 7,833,000 ------------ $ 28,221,000 ============
(e) Represents the revenues and expenses attributable to the assets purchased and liabilities assumed from DACC as though the transaction had occurred on October 1, 1995. Except as otherwise noted, each line item is the sum of (x) the corresponding line item in the audited Statement of Operations of DACC for the three months ended March 31, 1996 plus (y) an estimate of the line item for the fourth quarter of 1995 derived from the corresponding line item in DACC's audited Statement of Operations for the year ended December 31, 1995. (f) Represents interest on DACC's revolving credit agreement and excludes interest on senior subordinated notes payable which the Company will not assume. (g) Assumes sufficient provisions for credit losses at the time of the Company's acquisition. (h) Represents estimated general and administrative expenses after taking into account a reduction of operations at DACC's facilities. Without reduction, these expenses would have been $2,788,000. Reduction in personnel, occupancy, consulting, professional and data processing expenses have been and will be made. Additionally, non-recurring costs have been eliminated. (i) Represents amortization of goodwill over 60-month period. (j) Represents six months of dividends at a rate of $0.315 per annum per share on 2,544,060 new shares of 9%/7% Convertible Preferred Stock issued in the acquisition from DACC. -28- 32 (k) Represents number of new shares of Common Stock issued in the acquisition from DACC. (l) The numbers in this column represent estimates by the Company of the assets purchased from USLC as though the purchase had occurred on March 31, 1996. Each line item adjustment, except as otherwise noted, is based on unaudited information supplied by USLC. (m) Based on the purchase price formula for USLC's assets, the Company would have issued approximately 2,263,000 shares of $0.01 par value 9%/7% Convertible Preferred Stock and approximately 1,131,000 shares of $0.01 par value Common Stock. The excess over par value would be recorded as additional paid in capital. (n) The adjustments in this column are for the following transactions with HPIL which occurred in April 1996, assuming that the transactions occurred on March 31, 1996. No pro forma adjustments have been made to the statements of operations for these transactions.
HPIL Conversion (1) HPIL Purchase (2) Total ------------------- ----------------- ------------ Cash $ (653,000) $ 4,096,000 $ 3,443,000 Other assets 72,000 250,000 322,000 Interest payable (15,000) -- (15,000) Line of credit (2,283,000) -- (2,283,000) Preferred stock -- 20,000 20,000 Common stock 25,000 16,000 41,000 Additional paid in capital 1,692,000 4,310,000 6,002,000
(1) In April 1996, HPIL exercised its rights to convert a portion of the indebtedness owed to it by the Company into shares of Common Stock. The Company paid the remaining unpaid portion of the debt of $653,000 in cash. Pending final determination of the conversion price for the Common Stock, an other asset of $72,000 was recorded. As a consequence, accrued interest of $15,000 and the line of credit of $2,283,000 were paid. The Company issued 2,500,000 shares of Common Stock at $.01 par value with the excess over par value recorded as additional paid in capital. (2) In April 1996, HPIL paid $4,096,000 in cash to the Company and $250,000 into escrow and purchased 2,032,800 shares of $0.01 par value 9%/7% Convertible Preferred Stock and 1,638,400 shares of $.01 par value Common Stock. The excess over par value was recorded as additional paid in capital. (o) The numbers in this column represent estimates by the Company of the revenues and expenses attributable to the assets purchased from USLC as though the purchase had occurred on October 1, 1995. Each line item adjustment, except as otherwise noted, is based on unaudited information supplied by USLC. (p) Represents six months of dividends at a rate of $0.315 per annum per share on the estimated 2,263,000 shares of 9%/7% Convertible Preferred Stock issued in the acquisition from USLC. (q) Represents estimated number of new shares of Common Stock issued in the acquisition from USLC. (r) Represents the Company's estimate of maximum expenses for a remote bad debt collection office, which the Company expects to establish in Florida to collect past due contracts purchased from USLC. -29- 33 INDEPENDENT PUBLIC ACCOUNTANTS The independent accounting firm of BDO Seidman, L.L.P. has served as auditors for the Company and its subsidiaries for the transition period ended March 31, 1996 and has been selected to so serve for the fiscal year ending March 31, 1997 until and unless changed by action of the Board of Directors. A representative of BDO Seidman, L.L.P. is expected to be present and available at the special meeting of shareholders to respond to appropriate questions and will be given an opportunity to make a statement, if desired. MISCELLANEOUS The accompanying proxy is being solicited on behalf of the Board of Directors of the Company. The expense of preparing, printing and mailing the proxy and the material used in the solicitation thereof will be borne by the Company. In addition to the use of the mails, proxies may be solicited by directors and regular officers and employees of the Company by means of personal interview, telephone or telegram. Arrangements may also be made with brokerage houses and other custodians, nominees and fiduciaries for the forwarding of solicitation materials to the beneficial owners of stock held of record by such person, and the Company may reimburse them for reasonable out-of-pocket expenses of such solicitation. BY ORDER OF THE BOARD OF DIRECTORS George C. Evans Chairman of the Board Dallas, Texas August ___, 1996 -30- 34 INDEX TO FINANCIAL STATEMENTS FOR DEALERS ALLIANCE CREDIT CORP. Financial Statements for the three-month period ended March 31, 1996 and year ended December 31, 1995 Independent auditors' report F-2 Statements of financial condition F-3 Statements of operations F-4 Statements of common stockholders' deficit F-5 Statements of cash flows F-6 Notes to financial statements F-7 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-21 Statements of financial condition F-22 Statements of operations F-23 Statements of common stockholders' deficit F-24 Statements of cash flows F-25 Notes to financial statements F-26
F-1 35 [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. May 21, 1996, except for Note 7 /s/ BDO SEIDMAN, LLP which is as of May 24, 1996 F-2 36 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF FINANCIAL CONDITION ================================================================================
MARCH 31, December 31, 1996 1995 - ----------------------------------------------------------------------------------------------------------------- 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 =================================================================================================================
See accompanying notes to financial statements. F-3 37 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF OPERATIONS ================================================================================
THREE MONTHS Year ENDED ended MARCH 31, 1996 December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------- 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) ======================================================================================================================
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 38 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT THREE MONTHS ENDED MARCH 31, 1996 AND YEAR ENDED DECEMBER 31, 1995 ================================================================================
Note Total Common Stock Additional receivable common ------------------ paid-in from Accumulated stockholders' Shares Amount capital stockholder deficit deficit - -------------------------------------------------------------------------------------------------------------------- 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) ====================================================================================================================
Interim results are not necessarily indicative of the results that may be expected for the entire year. See accompanying notes to financial statements. F-5 39 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF CASH FLOWS ================================================================================
THREE MONTHS Year ENDED ended MARCH 31, 1996 December 31, 1995 - --------------------------------------------------------------------------------------------------------------- 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
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-6 40 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-7 41 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-8 42 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-9 43 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-10 44 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:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- 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 ==========================================================================
F-11 45 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:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- 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 $ - $ - ==========================================================================
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- 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 ==========================================================================
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-12 46 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-13 47 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ The Company's net deferred tax assets were as follows:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- 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 $ - $ - ==========================================================================
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-14 48 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:
Data Leases Processing --------------------------------------------------------------------------- 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 ===========================================================================
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-15 49 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:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- 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 ==========================================================================
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-16 50 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-17 51 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-18 52 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-19 53 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-20 54 [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-21 55 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1994 AND 1993 - --------------------------------------------------------------------------------
ASSETS 1994 1993 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 =========== ===========
See notes to financial statements. F-22 56 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 - -------------------------------------------------------------------------------
1994 1993 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) =========== =========
See notes to financial statements. F-23 57 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 - -----------------------------------------------------------------------
NOTE COMMON STOCK ADDITIONAL RECEIVABLE TOTAL COMMON ------------------- PAID-IN FROM ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL SHAREHOLDER DEFICIT STOCK DEFICIT 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) ===== ===== ======== ======== =========== ======== ===========
See notes to financial statements. F-24 58 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 - --------------------------------------------------------------------------------
1994 1993 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) =========== ==========
See notes to financial statements. F-25 59 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-26 60 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-27 61 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: 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 ===========
At December 31, 1994 contractual payments due under finance contracts are scheduled to be received as follows:
YEAR ENDING DECEMBER 31, 1995 $2,342,707 1996 2,096,651 1997 1,049,816 1998 3,656 ---------- Total $5,492,830 ==========
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:
UNEARNED ALLOWANCE CONTRACT FOR ACQUISITION CREDIT DISCOUNT LOSSES 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 ========= =========
F-28 62 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:
1994 1993 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 $ - $ - ========= =========
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-29 63 At December 31, 1994, future minimum payments for noncancellable leases and data processing services were as follows:
DATA YEAR ENDING DECEMBER 31: LEASES PROCESSING 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 ======== ========
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-30 64 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:
DATE NUMBER OF OF EXERCISE EXERCISE OPTION HOLDER GRANT SHARES PRICE CONDITION 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
(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-31 65 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-32 66 EXHIBIT A PROPOSED AMENDMENT TO 1994 EMPLOYEE STOCK OPTION PLAN RESOLVED, that the following amendment to the Company's 1994 Employee Stock Option Plan is hereby adopted and approved in all respects: 1. The first sentence of subsection (a) of Section 3 of the 1994 Employee Stock Option Plan is amended to read in its entirety as follows: "Subject to adjustments provided in Section 10 the Company may grant to Eligible Persons from time to time Options to purchase an aggregate of up to Five Million (5,000,000) Shares from Shares held in the Company's treasury or from authorized and unissued Shares." A-1 67 EXHIBIT B PROPOSED AMENDMENTS TO THE CERTIFICATE OF DESIGNATION FOR 9%/7% CONVERTIBLE PREFERRED STOCK 1. Section 3 of the Certificate of Designation for 9%/7% Convertible Preferred Stock shall be amended in its entirety to read as follows: "SECTION 3. Dividends. The holders of the Convertible Preferred Stock shall be entitled to receive, out of any funds legally available, non-cumulative dividends at the annual rate of $0.315 [$1.89]* per share (i.e., 9% of $3.50 [$21.00]* liquidation preference) per annum until March 31, 1999 (the "End Date") and there after at the rate of $0.245 [$1.47]* per share (i.e., 7% of $3.50 [$21.00]* liquidation preference) per annum from the day following the End Date. Dividends with respect to those shares of Convertible Preferred Stock issued pursuant to the Third Amended Joint Plan of Reorganization (the "Plan") of the Corporation and its subsidiaries in the Chapter 11 bankruptcy proceedings styled In re Automobile Credit Finance 1991-III, Inc., Automobile Credit Finance, Inc., Automobile Credit Partners, Inc., Automobile Credit Finance 1992-II, Inc., Automobile Credit Finance III, Inc., Automobile Credit Finance IV, Inc., Automobile Credit Finance V, Inc., and Automobile Credit Finance VI, Inc., Case Nos. 395-34981-RGM-11 through 395-34988-SAF-11, U.S. Bankruptcy Court, Northern District of Texas, Dallas Division (the "Bankruptcy Proceedings"), will begin to accrue from July 1, 1995. In connection with the issuance by the Corporation of any shares of Convertible Preferred Stock pursuant to the Plan, the Corporation will pay in cash the dividends that accrued on such shares from July 1, 1995 through the effective date of the Plan, which is March 15, 1996 (the "Effective Date"). Thereafter, the initial quarterly payment of dividends on the shares issued pursuant to the Plan will be based on the accrual period from the Effective Date to the end of the first full calendar quarter following the Effective Date. The Corporation may not pay dividends on the Convertible Preferred Stock except in cash until all accrued dividends have been paid by the Corporation in cash on the Convertible Preferred Stock for the period beginning with the Effective Date and ending with the first anniversary of the Effective Date. After the accrued dividends have been paid in cash by the Corporation for such period, dividends will continue to be paid entirely in cash unless the Corporation is prohibited from paying the dividends entirely in cash by Delaware law (the state of its incorporation) or by the terms of any loan agreement of $5,000,000 or more. If the Corporation is prevented from paying a dividend entirely in cash, it will pay a dividend in the form of a mixture of cash and common stock of the Corporation ("Common Stock") to the extent possible under Delaware law and any applicable loan agreement, or if necessary, entirely in Common Stock, provided the average market price per share of the Common Stock is $.50 [$3.00]* or greater for the 20 trading day period ending five days prior to the date of payment of the Common Stock dividend. The value of any shares of Common Stock paid out as a dividend on the Convertible Preferred Stock shall be based on the average market price of the Common Stock for the 20 trading day period ending five days prior to the date of payment of the Common Stock dividend. For purposes of this Section, the market price of the Corporation's Common Stock shall be determined by using the closing sales price as reported by Nasdaq, if the Common Stock is quoted by Nasdaq, or any national stock exchange on which the Common Stock is listed for trading (or if such stock is only traded over-the- counter, the average of the closing bid and asked prices). If there is no established market for the Common Stock, the market price shall be the fair market value of the Common Stock as determined by the good-faith judgment of the Board of Directors. __________________________________ *Note: Numbers in brackets will be substituted for immediately preceding numbers if Reverse Split Amendments proposed in the Proxy Statement are approved by the shareholders. B-1 68 If a dividend upon any shares of the Convertible Preferred Stock, or any other outstanding stock of the Corporation ranking on a parity with the Convertible Preferred Stock, or any other outstanding stock of the Corporation ranking on a parity with the Convertible Preferred Stock as to dividends, is in arrears, no stock of the Corporation standing on a parity with the Convertible Preferred Stock as to dividends may be purchased or otherwise acquired for any consideration by the Corporation except pursuant to an acquisition made pursuant to the terms of one or more offers to purchase all of the outstanding shares of the Convertible Preferred Stock and all stock of the Corporation ranking on a parity with the Convertible Preferred Stock as to dividends (which offers shall describe such proposed acquisition of all such parity stock). Unless otherwise declared by the Board of Directors or required by this Certificate of Designation, no dividends shall accrue or cumulate for any calendar quarter (or portion thereof) during which a liquidation, dissolution or winding up of the Corporation occurs." 2. Section 4 of the Certificate of Designation for 9%/7% Convertible Preferred Stock shall be amended to read in its entirety as follows: "SECTION 4. Dividend Payment Dates; Accrual Periods. Except to the extent otherwise provided by Section 3 above, quarterly dividends on each share of Convertible Preferred Stock (a) shall accrue from the date of issuance of such share through the last day of the calendar quarter in which the share was issued and thereafter from the first day of each calendar quarter through the last day of such calendar quarter, and (b) shall be paid on the 15th day of the month following the end of each calendar quarter to the holder of record of such share at the close of business on the last day of the calendar quarter." 3. The third paragraph of Section 9 of the Certificate of Designation for 9%/7% Convertible Preferred Stock shall be amended to read in its entirety as follows: "Upon the seventh anniversary of the Effective Date, the number of persons constituting the Board of Directors shall be reduced by the number of Directors then in office elected pursuant to this Section 9, the term of office of said Directors so elected shall end, and holders of the Convertible Preferred Stock shall be divested of their special class voting rights in respect of subsequent elections of Directors." 4. The fifth paragraph of Section 9 of the Certificate of Designation for 9%/7% Convertible Preferred Stock shall be amended to read in its entirety as follows: "Prior to the seventh anniversary of the Effective Date, the Corporation will not, without the affirmative vote or consent of holders of at least 50% of the outstanding shares of Convertible Preferred Stock, voting as a single class (i) merge with another company when the members of the Board of Directors of the Corporation immediately prior to the merger do not constitute a majority (x) of the members of the Board of Directors of the Corporation if it survives the merger or (y) of the board of directors of the surviving company if the Corporation does not survive the merger, and (ii) sell more than 50% of the Corporation's assets." 5. Subsection (g) of Section 10 of the Certificate of Designation for 9%/7% Convertible Preferred Stock shall be amended to read in its entirety as follows: "(g) Mandatory Conversion. The Corporation may, at its option, call for the mandatory conversion, in whole or in part, of up to fifty percent (50%) of the issued and outstanding shares of Convertible Preferred Stock under the following conditions: (i) the Corporation's Common Stock trades at a market price of $4.25 [$25.50]* per share or higher on each of any 20 trading days in a period of 30 consecutive trading days, beginning with the first day following the second anniversary of the Effective Date and ending on the third anniversary of the Effective Date, or (ii) the Corporation's Common Stock trades at a market price of $3.50 [$21.00]* per share or higher on each of any 20 trading days in a period of 30 consecutive trading days, beginning with the first day following the third anniversary of the Effective Date and ending on the day immediately preceding the Final Conversion Date (as defined herein). The B-2 69 trigger prices per share of $4.25 [$25.50]* and $3.50 [$21.00]* shall be subject to adjustment by the Board of Directors if and when, and in appropriate proportion to, any adjustment to the conversion rate of the Convertible Preferred Stock is made pursuant to subsection 10(c) hereof. In the event the Corporation elects to call for the conversion of a portion of the Convertible Preferred Stock issued and outstanding pursuant to clause (i) or (ii) above, then the Corporation shall select the shares to be converted to the effect that to the extent practicable each holder of shares of the Convertible Preferred Stock shall have a pro rata portion of his or her shares converted. The Corporation shall cause a notice of the mandatory conversion pursuant to the immediately preceding paragraph to be mailed, postage prepaid, to the holders of the Convertible Preferred Stock at their respective addresses appearing on the share transfer records of the Corporation. The Board of Directors may elect to specify an effective date for such conversion ("Effective Conversion Date"), which date may be no later than sixty (60) days after the Board meeting or consent at which the Corporation's election to convert was duly adopted. If no Effective Conversion Date is specified by the Board of Directors, the Effective Conversion Date shall be the date of the initial mailing of the required notice. Such notice shall set forth the number of shares of the Convertible Preferred Stock that are mandatorily converted as of the Effective Conversion Date with respect to each holder thereof, and the address of the place where such shares of the Convertible Preferred Stock shall be exchanged, upon presentation and surrender of the certificates representing such shares, and the certificates representing the shares of Common Stock shall be delivered. The dividends on the shares of Convertible Preferred Stock called for conversion shall cease to accrue on the Effective Conversion Date. Any notice which is mailed in the manner provided herein shall be conclusively presumed to have been duly given, whether or not the holder of the shares of the Convertible Preferred Stock receives such notice, and failure to duly give such notice by mail, or any defect in such notice, to any holder of shares of the Convertible Preferred Stock shall not affect the validity of the conversion thereof into Common Stock. Consequently, as of the close of business on the Effective Conversion Date, all shares of the Convertible Preferred Stock called for conversion, regardless of whether notice of conversion is actually received by the holder, shall automatically be deemed to be the shares of Common Stock into which such shares could have been voluntarily converted by the holders thereof. As of the close of business on the Effective Conversion Date, the Convertible Preferred Stock called for conversion shall be deemed to cease to be outstanding or to accrue dividends, the persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the registered holders of such Common Stock and all rights of any holders of the Convertible Preferred Stock called for conversion shall thereupon be extinguished except the right to receive the Common Stock in exchange therefor and any accrued and unpaid dividends thereon. Holders of the Convertible Preferred Stock called for conversion must surrender the certificates representing such stock in order to receive the Common Stock into which such Convertible Preferred Stock has been converted. The Corporation shall be obligated to pay, within 30 days after the Effective Conversion Date, any accrued and unpaid dividends on the shares of Convertible Preferred Stock called for conversion, to the holders who, on the Effective Conversion Date, held such shares of Convertible Preferred Stock. Any previously unconverted Convertible Preferred Stock shall be automatically and mandatorily converted on the seventh anniversary of the Effective Date (the "Final Conversion Date"). For the purpose of the conversion on the Final Conversion Date, each share of Convertible Preferred Stock shall be convertible into a number of shares of Common Stock which shall equal the lesser of (i) three (which number shall be subject to adjustment by the Board of Directors if and when, and in the same proportion as, any adjustment in the conversion rate of the Convertible Preferred Stock is made pursuant to subsection 10(c) hereof), or (ii) the result of dividing the $3.50 [$21.00]* liquidation preference for the Convertible Preferred Stock by the market price of the Common Stock as reported at the close of business __________________________________ * Note: Numbers in brackets will be substituted for immediately preceding numbers if Reserve Split Amendments proposed in the Proxy Statement are approved by the shareholders. B-3 70 on the Final Conversion Date (or if such date is not a trading day, on the first trading day immediately preceding the Final Conversion Date). The Corporation shall cause a notice of such mandatory conversion on the Final Conversion Date to be mailed, postage prepaid, to the holders of record of the Convertible Preferred Stock at their respective addresses appearing on the share transfer records of the Corporation. Such notice shall set forth a statement that all outstanding shares of the Convertible Preferred Stock shall be automatically and mandatorily converted as of the Final Conversion Date and the address of the place where such shares of Convertible Preferred Stock shall be exchanged, upon presentation and surrender of the certificates representing such shares, and the certificates representing the shares of Common Stock shall be delivered. The dividends on such shares shall cease to accrue on the Final Conversion Date. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the shares of the Convertible Preferred Stock receives such notice, and failure to duly give such notice by mail, or any defect in such notice, to any holder of shares of the Convertible Preferred Stock shall not affect the validity of the conversion thereof into Common Stock. Consequently, all issued shares of the Convertible Preferred Stock, as of close of business on the Final Conversion Date, regardless of whether notice of conversion is actually received by the holder, shall automatically be deemed to be the shares of Common Stock into which such shares are converted. As of the close of business on the Final Conversion Date, the Convertible Preferred Stock shall be deemed to cease to be outstanding or to accrue dividends, the persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the registered holders of such Common Stock and all rights of any holders of the Convertible Preferred Stock shall thereupon be extinguished except the right to receive the Common Stock in exchange therefor and any accrued and unpaid dividends thereon. Holders of the Convertible Preferred Stock must surrender the certificates representing such stock in order to receive the Common Stock into which such Convertible Preferred Stock has been converted. The Corporation shall be required to declare and pay all cumulated unpaid dividends that accrue through the Final Conversion Date as soon as practicable following the Final Conversion Date. After the conversion of all issued shares of the Convertible Preferred Stock, all shares of the Convertible Preferred Stock shall be canceled, the Convertible Preferred Stock shall not be reissued and shall be deemed canceled and shall revert to authorized but unissued Preferred Stock of the Corporation, undesignated as to series, and the number of shares of Preferred Stock which the Corporation shall have authority to issue shall not be decreased by such conversion. For purposes of this subsection (g), the market price of the Corporation's Common Stock shall be determined by using the closing sales price as reported by Nasdaq, if the Common Stock is quoted by Nasdaq, or any national stock exchange on which the Common Stock is listed for trading (or if such stock is only traded over-the-counter, the average of the closing bid and asked prices). If there is no established market for the Common Stock, the market price shall be the fair market value of the Common Stock as determined by the good-faith judgment of the Board of Directors." B-4 71 EXHIBIT C PROPOSED AMENDMENTS TO RESTATED CERTIFICATE OF INCORPORATION RESOLVED, that the following amendments to the Company's Restated Certificate of Incorporation are hereby adopted and approved in all respects: 1. The first paragraph of Paragraph FOURTH of the Restated Certificate of Incorporation is hereby amended to read in its entirety as follows: "FOURTH. The aggregate number of shares of all classes of stock which the Corporation shall have the authority to issue is One Hundred Ninety Million (190,000,000), of which One Hundred Thirty Million (130,000,000) shares shall be Common Stock, of the par value of $.01 per share, and Sixty Million (60,000,000) shares shall be Preferred Stock, of the par value of $.01 per share. At the effective time of this amendment to the Restated Certificate of Incorporation of the Corporation, each six (6) issued and outstanding shares of Common Stock of the Company ("Old Common Stock") shall be combined into one (1) share of validly issued, fully paid and nonassessable Common Stock of the Corporation ("New Common Stock"), and each six (6) issued and outstanding shares of Preferred Stock of the Company ("Old Preferred Stock") shall be combined into one (1) share of validly issued, fully paid and nonassessable Preferred Stock of the Corporation ("New Preferred Stock"). No scrip or fractional shares shall be issued by reason of this amendment. Each certificate that represented shares of Old Common Stock shall thereafter represent the number of shares of New Common Stock into which the shares of Old Common Stock represented by such certificate shall be combined and reclassified; provided, however, that each person holding of record a stock certificate or certificates that represented shares of Old Common Stock shall receive, upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of New Common Stock to which such person is entitled. Each certificate that represented shares of Old Preferred Stock shall thereafter represent the number of shares of New Preferred Stock into which the shares of Old Preferred Stock represented by such certificates shall be combined and reclassified; provided, however, that each person holding of record a stock certificate or certificates that represented shares of Old Preferred Stock shall receive, upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of shares of New Preferred Stock to which such person is entitled." 2. The first paragraph of Section 5 of the Certificate of Designation for the 12% Senior Convertible Preferred Stock is hereby amended to read in its entirety as follows: "The 12% Preferred Stock shall not be redeemable at the option of the Corporation prior to September 30, 1994 (the "Initial Redemption Date"). The Corporation may at any time redeem all or any part of the 12% Preferred Stock at the option of the Corporation if for any ninety (90) day period commencing after the Initial Redemption Date the average of the following prices exceeds $36.00 per share: (i) the average of the high bid and low asked prices of the Corporation's Common Stock if the Common Stock is traded over-the-counter, (ii) the closing trading price for the Common Stock if traded on NASDAQ, or (iii) the reported closing price for the Common Stock if traded on any national or regional stock exchange (the "Triggering Event"). The redemption price will be $5.00 per share plus an amount equal to all accrued and unpaid dividends on such shares." 3. Section 2 of the Certificate of Designation for 12% Senior Convertible Preferred Stock is hereby amended to read in its entirety as follows: "SECTION 2. Number of Shares. The number of shares of 12% Preferred Stock is 400,000 of the par value of $0.01 per share with a liquidation preference of $30.00 per share which number of shares the Board of Directors may increase or decrease but may not decrease below the number of shares of the series then outstanding." C-1 72 4. The first sentence of Section 3 of the Certificate of Designation for 12% Senior Convertible Preferred Stock is hereby amended to read in its entirety as follows: "The holders of 12% Preferred Stock shall be entitled to receive out of any funds legally available, if, as and when declared by the Board of Directors, cumulative dividends in cash at the rate of $3.60 per share per annum payable quarterly but no more." 5. The first paragraph of Section 6 of the Certificate of Designation for 12% Senior Convertible Preferred Stock is hereby amended to read in its entirety as follows: "SECTION 6. Liquidation Rights. The holders of 12% Preferred Stock shall, in case of any voluntary or involuntary liquidation, dissolution or winding up of the affairs (a "Liquidation") of the Corporation, be entitled to receive in full out of the net assets of the Corporation before any amount shall be paid or distributed among the holders of the Common Stock or any other shares ranking junior to the 12% Preferred Stock, an amount equal to $30.00 per share plus in each case an amount equal to all accrued and unpaid dividends. If upon any Liquidation of the Corporation, the assets available for distribution to the holders of 12% Preferred Stock and any other stock of the Corporation which shall then be outstanding and which shall be on a parity with the 12% Preferred Stock upon Liquidation (hereinafter in this paragraph called the "Total Amount Available") shall be insufficient to pay the holders of all outstanding shares of 12% Preferred Stock and all other such parity stock the full amounts (including all dividends accrued and unpaid) to which they shall be entitled by reason of such Liquidation of the Corporation, then there shall be paid to the holders of the 12% Preferred Stock in connection with such Liquidation of the Corporation, an amount equal to the product derived by multiplying the Total Amount Available times a fraction, the numerator of which shall equal the number of outstanding shares of 12% Preferred Stock multiplied by $30.00 plus any accrued and unpaid dividends thereon and a denominator of which shall be the total amount which would have been distributed by reason of such Liquidation of the Corporation with respect to the 12% Preferred Stock and all other stock ranking on a parity with the 12% Preferred Stock upon Liquidation then outstanding had the Corporation possessed sufficient assets to pay the full amount which the holders of all such stock would be entitled to receive in connection with such Liquidation of the Corporation." 6. Section 2 of the Certificate of Designation for 9%/7% Convertible Preferred Stock is hereby amended to read in its entirety as follows: "SECTION 2. Number of Shares. The number of shares of Convertible Preferred Stock is 30,000,000 with the par value of $0.01 per share and a liquidation preference of $21.00 per share plus any declared but unpaid dividends, after payment of all debts of the Company, which number of shares the Board of Directors may increase or decrease but may not decrease below the number of shares of the series then outstanding." 7. The first paragraph of Section 3 of the Certificate of Designation for 9%/7% Convertible Preferred Stock is hereby amended to read in its entirety as follows*: "SECTION 3. Dividends. The holders of the Convertible Preferred Stock shall be entitled to receive, out of any funds legally available, non-cumulative dividends at the annual rate of $1.89 (9%) per share per annum payable from July 1, 1995, to the end of the 12th full calendar quarter following payment of the first dividend ("End Date") and thereafter, at the rate of $1.47 per share (7%) per annum from the day following the End Date until conversion pursuant to Section 10(g) of this Certificate of Designation (the "Conversion Date"), but no later than the seventh anniversary of the End Date." 8. The last sentence of the second paragraph of Section 3 of the Certificate of Designation for 9%/7% Convertible Preferred Stock is hereby amended to read in its entirety as follows: "If the Corporation is prevented from paying a dividend entirely in cash, it will pay a dividend in the form of a mixture of cash and common stock of the Corporation ("Common Stock") to the extent possible under Delaware law and any applicable loan agreement, or if necessary, entirely in Common Stock, provided the average closing price of the Common Stock is $3.00 or greater for the 20 day period ending 5 days prior to the date of payment of the Common Stock dividend." 9. The first paragraph of Section 6 of the Certificate of Designation for 9%/7% Convertible Preferred Stock is hereby amended to read in its entirety as follows: "SECTION 6. Liquidation Rights. If the Company is liquidated, the Convertible Preferred Stock will have a preference as to liquidation proceeds (proceeds from the disposition of assets less C-2 73 payment of all debts) in the amount of $21.00 per share plus all accrued and unpaid dividends, if any, after payment of all debts of the Company. If upon any liquidation of the Corporation, the assets available for distribution to the holders of the Convertible Preferred Stock and any other stock of the Corporation which shall then be outstanding and which shall be on a parity with the Convertible Preferred Stock upon liquidation (hereinafter in this paragraph called the "Total Amount Available") shall be insufficient to pay the holders of all outstanding shares of the Convertible Preferred Stock and all other such parity stock the full amounts (including all dividends accrued and unpaid) to which they shall be entitled by reason of such liquidation of the Corporation, then there shall be paid to the holders of the Convertible Preferred Stock in connection with such liquidation of the Corporation, an amount equal to the product derived by multiplying the Total Amount Available times a fraction, the numerator of which shall equal the number of outstanding shares of the Convertible Preferred Stock multiplied by $21.00 plus any accrued and unpaid dividends thereon and a denominator of which shall be the total amount which would have been distributed by reason of such liquidation of the Corporation with respect to the Convertible Preferred Stock and all other stock ranking on a parity with the Convertible Preferred Stock upon liquidation then outstanding had the Corporation possessed sufficient assets to pay the full amount which the holders of all such stock would be entitled to receive in connection with such liquidation of the Corporation." 10. The first two paragraphs of subsection 10(g) of the Certificate of Designation for 9%/7% Convertible Preferred Stock is hereby amended to read in their entirety as follows*: "(g) Mandatory Conversion. The Corporation may, at its option, call for the conversion, in whole or in part, of up to one-half (50%) of the number of shares of Convertible Preferred Stock issued as of the Effective Date under the following conditions: (i) the Corporation's Common Stock trades at $25.50 or higher on each of any 20 trading days in a period of 30 consecutive trading days, beginning with the first day following the second anniversary of the Effective Date and ending on the third anniversary of the Effective Date, or (ii) the Corporation's Common Stock trades at $21.00 per share on each of any 20 trading days in a period of 30 consecutive trading days, beginning with the first day following the third anniversary of the Effective Date and ending on the day immediately preceding the Conversion Date. For purposes of this section, price of the Corporation's Common Stock shall be determined by using the closing bid price as reported by NASDAQ or comparable national exchange. The conversion prices shall be subject to adjustment in the same manner as the conversion rate is adjusted, as discussed herein. Any previously unconverted Convertible Preferred Stock (which shall be a minimum of fifty percent (50%) of the Convertible Preferred Stock) shall be convertible by Search on the seventh anniversary of the Effective Date. The Convertible Preferred Stock shall be convertible into Common Stock at a fraction which has as its denominator the market price of the Common Stock at the time of conversion, and which has as its numerator the $21.00 liquidation value of the Convertible Preferred Stock; provided, however, that in no event shall the ratio so expressed be higher than 3 to 1." __________________________________ * Note: See Exhibit B to this Proxy Statement for the provisions of Sections 3 and 10(g) if the clarifying amendments to the terms of the 9%/7% Convertible Preferred Stock are approved by the shareholders. The amendments to be effected by the Reverse Split Amendments are reflected in brackets in the text of such clarifying amendments. C-3 74 SEARCH CAPITAL GROUP, INC. 700 North Pearl Street Suite 400, L.B. 401 Dallas, Texas 75201-7490 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Mr. George C. Evans and Mr. A. Brean Murray, and each of them, as proxies with full power of substitution and revocation, and appoints them to represent and vote, as designated on the reverse side, all of the shares of Common Stock, 12% Senior Convertible Preferred Stock or 9%/7% Convertible Preferred Stock of Search Capital Group, Inc. which the undersigned is entitled to vote at the special meeting of shareholders of Search Capital Group, Inc. to be held on August ___, 1996, or at any adjournment thereof. MARK HERE FOR ADDRESS CHANGE AND NOTE NEW ADDRESS BELOW: [ ] _________________________ PLEASE MARK, SIGN, DATE AND RETURN _________________________ THIS PROXY PROMPTLY USING THE _________________________ ENCLOSED ENVELOPE Continued and to be signed on reverse side 75 [x] PLEASE MARK VOTES AS IN THIS EXAMPLE. This proxy when properly executed will be voted in the manner directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3. 1. ADOPTION OF THE PROPOSED AMENDMENT TO THE 1994 EMPLOYEE STOCK OPTION PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER TO 5,000,000. [ ] FOR [ ] AGAINST [ ] ABSTAIN 2. ADOPTION OF THE PROPOSED AMENDMENTS TO THE CERTIFICATE OF INCORPORATION TO CLARIFY THE TERMS OF THE 9%/7% CONVERTIBLE PREFERRED STOCK. [ ] FOR [ ] AGAINST [ ] ABSTAIN 3. ADOPTION OF THE PROPOSED AMENDMENTS TO THE CERTIFICATE OF INCORPORATION TO EFFECT A 1-FOR-6 REVERSE STOCK SPLIT OF COMMON STOCK AND PREFERRED STOCK. [ ] FOR [ ] AGAINST [ ] ABSTAIN 4. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING. Please sign exactly as name appears here. When shares are held by joint tenants, both should sign. Dated:___________________,1996 ______________________________________________________________________________ Signature ______________________________________________________________________________ Signature if held jointly When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by president or other authorized office. If a partnership, please sign in partnership name by authorized person. -----END PRIVACY-ENHANCED MESSAGE-----