-----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, VOV3xpr7yKb0QQKeO1C411609EpPXXTUaPmTtwO/9tuGA/mptRGIK9wYy+xHQojf hsdlZdBMkeCW1LI1rZtBlw== 0000950134-97-004483.txt : 19970610 0000950134-97-004483.hdr.sgml : 19970610 ACCESSION NUMBER: 0000950134-97-004483 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19970606 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEARCH FINANCIAL SERVICES 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: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-09539 FILM NUMBER: 97620567 BUSINESS ADDRESS: STREET 1: 600 N PEARL STREET STREET 2: SUITE 2500 CITY: DALLAS STATE: TX ZIP: 75201-2899 BUSINESS PHONE: 2149656000 MAIL ADDRESS: STREET 1: 600 N PEARL STREET STREET 2: SUITE 2500 CITY: DALLAS STATE: TX ZIP: 75201-2899 FORMER COMPANY: FORMER CONFORMED NAME: SEARCH CAPITAL GROUP INC DATE OF NAME CHANGE: 19930910 FORMER COMPANY: FORMER CONFORMED NAME: SEARCH NATURAL RESOURCES INC DATE OF NAME CHANGE: 19920703 10-Q/A 1 AMENDMENT TO FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A AMENDMENT NO. 1 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: June 30, 1996 0-9539 - ----------------------------------- --------------------------------- S E A R C H C A P I T A L G R O U P, I N C . ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 41-1356819 - ----------------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 700 North Pearl, Suite 400 Dallas, Texas 75201 ------------------- (Address of principal executive offices, including zip code) 214-965-6000 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding Class at August 9, 1996 - -------------------------------------- -------------------------------- Common Stock, $.01 par value 28,634,870 2 SEARCH CAPITAL GROUP, INC. FORM 10-Q/A INDEX
PART I FINANCIAL INFORMATION PAGE - ------ ---- Item 1. Consolidated Financial Statements...............................3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................10 PART II OTHER INFORMATION..............................................17 - ------- Item 1. Legal Proceedings..............................................17 Item 6. Exhibits and Reports on Form 8-K...............................17 SIGNATURES ...............................................................18
The financial information for the interim periods presented herein is unaudited. In the opinion of management, all adjustments necessary (which are of a normal recurring nature) have been included for a fair presentation of the results of operations. The results of operations for an interim period are not necessarily indicative of the results that may be expected for a full year or any other interim period. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q/A Amendment No. 1 for quarter ended June 30, 1996 contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which may be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "goal," "continue," or comparable terminology, that involve risks or uncertainties and that are qualified in their entirety by the cautions and risk factors contained in the Company's 10-K Transition Report for the six months ended March 31, 1996 and in other Company documents filed with the Securities and Exchange Commission. 2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets
June 30, March 31, 1996 1996 ASSETS Unaudited Historical Pro forma (Note 3) - ------ ------------ ------------ ------------------ Gross contracts receivable (Note 2) $ 30,344,000 $ 37,086,000 $ 37,086,000 Unearned interest (5,621,000) (6,435,000) (6,435,000) ------------ ------------ ------------ Net contracts receivable 24,723,000 30,651,000 30,651,000 Allowance for credit losses (10,506,000) (13,353,000) (13,353,000) Loan origination costs 3,927,000 3,984,000 3,984,000 Amortization of loan origination costs (3,653,000) (3,578,000) (3,578,000) ------------ ------------ ------------ Net contract receivables - after allowance for credit losses & other costs 14,491,000 17,704,000 17,704,000 ------------ ------------ ------------ Cash and cash equivalents 20,871,000 17,817,000 21,582,000 Vehicles held for resale 356,000 566,000 566,000 Property and equipment, net 988,000 1,062,000 1,062,000 Other assets, net 210,000 197,000 197,000 ------------ ------------ ------------ Total assets $ 36,916,000 $ 37,346,000 $ 41,111,000 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Lines of credit $ -- $ 2,283,000 $ -- Accrued settlements 500,000 688,000 688,000 Dividends payable 1,610,000 268,000 268,000 Accounts payable and other liabilities 2,477,000 7,088,000 7,088,000 Accrued interest -- 15,000 -- Redeemable warrants 616,000 593,000 673,000 ------------ ------------ ------------ Total Liabilities 5,203,000 10,935,000 8,717,000 ------------ ------------ ------------ Stock repurchase commitment (Note 4) 2,078,000 2,078,000 2,078,000 Stockholders' Equity - -------------------- Convertible preferred stock 174,000 154,000 174,000 Common stock 293,000 248,000 289,000 Additional paid-in capital 83,872,000 79,124,000 85,046,000 Accumulated deficit (53,554,000) (54,043,000) (54,043,000) Treasury stock (1,150,000) (1,150,000) (1,150,000) ------------ ------------ ------------ Total stockholders' equity 29,635,000 24,333,000 30,316,000 ------------ ------------ ------------ Total liabilities and stockholders' equity $ 36,916,000 $ 37,346,000 $ 41,111,000 ============ ============ ============
See accompanying notes to consolidated financial statements. 3 4 Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June Three Months Ended June 30, 1996 30, 1995 ----------------------- ----------------------- Interest revenue $ 1,659,000 $ 4,169,000 Interest expense 22,000 2,955,000 ------------ ----------- Net interest income 1,637,000 1,214,000 Recovery of (provision for) credit losses 1,382,000 (424,000) ------------ ----------- Net interest income after recoveries of (provisions for) credit losses 3,019,000 790,000 ------------ ----------- General and administrative expense 2,528,000 3,852,000 ------------ ----------- Net income (loss) before dividends 491,000 (3,062,000) ------------ ----------- Preferred stock dividends (1,404,000) (60,000) ============ =========== Net loss attributable to common stockholders $ (913,000) $(3,122,000) ============ =========== Net loss per share attributable to common stockholders $ (.03) $ (.35) ============ =========== Weighted average number of common shares outstanding 26,628,000 8,858,000 ============ ===========
4 5 Condensed Consolidated Statements of Cash Flows (Unaudited)
THREE MONTHS THREE MONTHS ENDED ENDED JUNE 30, 1996 JUNE 30, 1995 ------------- ------------ OPERATING ACTIVITIES: Net income (loss) $ 491,000 ($3,062,000) Adjustments to reconcile net income (loss) to cash used in operations: Provision for (recovery) of credit losses (Note 2) (496,000) 424,000 Accretion of warrant debt 22,000 -- Amortization of deferred offering costs -- 681,000 Amortization of loan origination costs 142,000 216,000 Depreciation 134,000 97,000 Changes in assets and liabilities: Decreases (increases) in other assets 336,000 (440,000) Increases (decreases) in accounts payable (5,149,000) 722,000 Write off of fixed assets -- 141,000 ------------ ----------- Cash used in operations (4,520,000) (1,221,000) ------------ ----------- INVESTING ACTIVITIES: Purchase of contracts receivable (2,745,000) (6,652,000) Principal payments on contracts receivables 5,249,000 7,677,000 Proceeds from sales of vehicles 1,273,000 2,595,000 Purchase of property and equipment (61,000) (366,000) Decrease in restricted cash -- 6,413,000 ------------ ----------- Cash provided by investing activities 3,716,000 9,667,000 ------------ ----------- FINANCING ACTIVITIES: Repayments under line of credit (173,000) (703,000) Notes payable repayments -- (1,615,000) Capital lease principal payments (15,000) (14,000) Net proceeds from debt conversion and sale of stock 4,106,000 -- Purchase of treasury stock -- (1,125,000) Payment of dividends on preferred stock (60,000) (60,000) ------------ ----------- Cash provided by (used in) financing activities 3,858,000 (3,517,000) ------------ ----------- CHANGE IN CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents 3,054,000 4,929,000 Cash and cash equivalents - beginning 17,817,000 1,633,000 ------------ ----------- Cash and cash equivalents - ending $ 20,871,000 $ 6,562,000 ============ =========== - ------------------------------------------------------------------------------------------------------ Supplemental Information: Cash Paid for Interest $ 16,000 $ 2,461,000 ============ ===========
5 6 SEARCH CAPITAL GROUP, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements of Search Capital Group, Inc. ("Search") and together with its subsidiaries ("Company") are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures present fairly the financial position of the Company for the periods presented. The financial statements should be read in conjunction with the audited consolidated financial statements and related notes and schedules included in the Company's Form 10-K Transition Report for the six months ended March 31, 1996. The consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior periods balances to conform to current period presentation. 2. CONTRACT RECEIVABLES, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME The Company records receivable purchases at cost. Contractual finance charges are recorded as unearned interest and amortized to interest income using the interest method. As discussed below, amortization of interest income ceases upon impairment. An initial allowance for credit losses is recorded at the acquisition of a receivable equal to the difference between the amount financed and the acquisition cost, which is what the Company estimates to be fair value. An additional allowance may be recorded at acquisition if it is determined that the discount recorded as allowance is not adequate to cover expected losses. In accordance with SFAS No. 114, receivables are analyzed on a loan-by-loan basis. The Company evaluates the impairment of receivables generally based on the receivables' contractual delinquency. The Company considers receivables that are contractually delinquent 60 days or more or with respect to which the underlying collateral has been repossessed to be impaired. When the receivable is considered impaired, interest income ceases to be recognized. Once impaired, the Company looks to the underlying collateral for repayment of the receivable. Therefore, at impairment, the Company writes down the receivable to its estimated net realizable value, which is the fair value of the underlying collateral if it has been repossessed or the estimated recoverable cash flow if no repossession has occurred. If the measured amount of the impaired receivable is less than the Company's net recorded investment in the receivable, the Company recognizes a charge to provision for credit losses in the amount of the deficiency and 6 7 increases the allowance for credit losses by a corresponding amount. The provision for credit losses is adjusted for any differences between the final net proceeds from resale of the underlying collateral and the estimated net realizable value. Generally, the Company charges off a receivable against the allowance for credit losses at 180 days contractual delinquency, if no significant payments have been received in the last six months, or, if earlier, after receipt of the sale proceeds from liquidation of the collateral securing the receivable. Subsequent proceeds received on a previously charged-off receivable are recorded as a recovery to the allowance for credit losses. Any excess of cost paid ("premium") for net receivables acquired is recorded as an asset and amortized over the life of the related loans acquired as an adjustment to yield using the interest method. The following tables set forth certain information related to the delinquency of the Company's contract receivables as of June 30, 1996 and March 31, 1996.
AS OF JUNE 30, 1996 ------------------------------------------------------------------------ % OF NUMBER OF TOTAL TOTAL CONTRACTUAL ACTIVE ACTIVE UNPAID UNEARNED NET DELINQUENCY CONTRACTS (1) CONTRACTS INSTALLMENTS INTEREST RECEIVABLES ----------- -------------- --------- ------------ ---------- ------------ Current to 60 days past due 6,524 96% $29,111,000 $5,392,000 $23,719,000 61-over days past due 258 4% 1,233,000 229,000 1,004,000 ----- --- ----------- ---------- Total 6,782 100% $30,344,000 $5,621,000 24,723,000 ===== === =========== ========== =========== Allowance for credit losses (10,506,000) ----------- Receivables, net of allowance for credit losses $14,217,000 =========== Allowance for credit losses as a percent of net receivables 42.5% ===========
AS OF MARCH 31, 1996 ------------------------------------------------------------------------ % OF NUMBER OF TOTAL TOTAL CONTRACTUAL ACTIVE ACTIVE UNPAID UNEARNED NET DELINQUENCY CONTRACTS (1) CONTRACTS INSTALLMENTS INTEREST RECEIVABLES ----------- -------------- --------- ------------ ---------- ------------ Current to 60 days past due 7,575 95% $34,995,000 $6,055,000 $28,940,000 61-over days past due 421 5% 2,091,000 380,000 1,711,000 ----- --- ----------- ---------- ----------- Total 7,996 100% $37,086,000 $6,435,000 30,651,000 ===== === =========== ========== Allowance for credit losses (13,353,000) =========== Receivables, net of allowance for credit losses $17,298,000 =========== Allowance for credit losses as a percent of net receivables 43.6% ===========
(1) Excludes 237 and 333 accounts which were reclassified to vehicles held for resale as of June 30, 1996 and March 31, 1996, respectively. 7 8 The following tables set forth certain information related to the contractual maturities of the Company's contract receivables as of June 30, 1996 and March 31, 1996.
AS OF JUNE 30, 1996 --------------------------------------------------------------- 12 MONTHS ENDING JUNE 30, 1999 AND 1997 1998 BEYOND TOTAL ------------- ---------- ---------- ----------- Future payments receivable $ 21,334,000 $7,362,000 $1,648,000 $30,344,000 Less unearned interest 4,421,000 1,112,000 88,000 5,621,000 ------------- ---------- ---------- ----------- Net contractual maturities $ 16,913,000 $6,250,000 $1,560,000 $24,723,000 ============= ========== ========== =========== Unearned as a percent of gross receivables 18.5% =========== Weighted Average APR 23.6% =========== Weighted Average Original Term in Months 33.8 =========== Weighted Average Remaining Term in Months 21.2 ===========
AS OF MARCH 31, 1996 ------------------------------------------------------------- 12 MONTHS ENDING MARCH 31, 1999 AND 1997 1998 BEYOND TOTAL ----------- ----------- ---------- ----------- Future payments receivable $23,445,000 $11,507,000 $2,134,000 $37,086,000 Less unearned interest 4,886,000 1,450,000 99,000 6,435,000 ----------- ----------- ---------- ----------- Net contractual maturities $18,559,000 $10,057,000 $2,035,000 $30,651,000 =========== =========== ========== ===========
In the opinion of management, a portion of the receivables at June 30, 1996 will be repaid or extended either before or past the contractual maturity date. In addition, some of those receivables will be charged off before maturity. The above tabulation, therefore, is not to be regarded as a forecast of future cash collections. Unearned as a percent of gross receivables 17.4% ==== Weighted Average APR 23.9% ==== Weighted Average Original Term in Months 32.4 ==== Weighted Average Remaining Term in Months 19.1 ====
The following table shows the changes in the Company's allowance for loan losses for the three months ending June 30, 1996 and June 30, 1995.
THREE MONTHS ENDING June 30, 1996 ------------- Balance at beginning of period $ 13,353,000 Allowance recorded on acquisition of receivables 307,000 Increase in allowance for loan losses -- Proceeds received on previously charged-off accounts 886,000 Reduction in allowance for credit losses (1,382,000) Receivables charged off against allowance (2,658,000) ------------ Balance at end of period $ 10,506,000 ------------ Net credit losses as a percent of average net receivables 9% ============
8 9 The Company's receivables are generally installment receivables having a fixed annual percentage rate ("APR"). These receivables are predominantly secured by motor vehicles. The obligors of the Company's receivables are domestically-based at the time the receivables are originated or purchased by the Company from a dealer, and the Company has no material amount of foreign receivables. Receivables will become nonaccrual status due to their contractual delinquency exceeding 60 days or due to repossession of underlying collateral. The Company also considers certain delinquent receivables that are in the contractual status of less than 60 days past due to be potential problem receivables. Uncertainty as to overall economic conditions, regional considerations, and current trends in portfolio growth cause the Company to review these receivables for potential problems. The Company considers Texas and Tennessee to be states with receivable concentrations, because receivables with obligors in each of these states exceed 10% of total outstanding receivables. Most of the Company's receivables are due from individuals located in large metropolitan areas of Texas and other southern and western states. To some extent, realization of the receivables will be dependent on local economic conditions. The Company holds vehicle titles as collateral for all motor vehicle receivables until such receivables are paid in full. The allowance for credit losses contained a reduction of the provision for loan losses from prior estimates for the quarters ended June 30, 1996 as follows (in thousands).
June 30, 1996 ------------- Provision for loan losses $ -- Reduction in allowance (1,382) ------- Net effect on statement of operations (1,382) Less proceeds received on previously charged-off accounts 886 ------- Non cash (reduction) of credit loss provision $ (496) =======
3. TRANSACTIONS WITH HALL AND AFFILIATES On November 30, 1995, Search entered into a Funding Agreement ("Funding Agreement") with Hall Financial Group, Inc. ("HFG"). Pursuant to the Funding Agreement, HFG made loans totaling $2,283,000 ("HFG Notes") to Search. The HFG Notes could, at the election of HFG or its assigns, be converted into a maximum 2,500,000 shares of Search common stock. Effective April 2, 1996, Hall/Phoenix Inwood, Ltd. ("HPIL"), as assignee from HFG of the HFG Notes, fully exercised the rights of the holder of the HFG Notes to convert the Notes into 2,500,000 shares of Search common stock. Because the conversion price specified in the HFG Notes for these shares was less than the full amount due HFG, Search paid to HPIL the remaining portion of the debt evidenced by the HFG Notes in cash. The Funding Agreement also provided to HFG the option to purchase common stock, 9%/7% convertible preferred stock, and warrants. Effective April 2, 1996, HPIL, as assignee of HFG, fully exercised this purchase option by paying $4,346,000 cash to Search for which Search 9 10 issued 1,638,400 shares of common stock, 2,032,800 shares of 9%/7% preferred stock, and warrants to purchase 676,000 shares of common stock to HPIL. Pursuant to the Funding Agreement, HFG was entitled to elect one director to Search's Board if HFG converted the HFG Notes into common stock and to elect another director if HFG purchased at least $1,000,000 Present Value of securities from Search. As a result of satisfaction of these conditions, two HFG officers were appointed to Search's Board. 4. STOCK CANCELLATION AND STOCK REPURCHASE AGREEMENT In May 1995, Search purchased from one of its directors 500,000 shares of Search's common stock for $2.25 per share, market value on that date. Simultaneously with the purchase, the director resigned from the Board. Search was also given an irrevocable proxy expiring in May 1997 to vote 812,120 shares of common stock held by a trust formed by the former director. These shares held by the trust and an additional 111,216 shares held by an individual retirement account of the former director were subject to a "put" to the Company in May 1997 for $2.25 per share, the market value at the date of the agreement. These shares are shown on the balance sheet outside of permanent equity at the redemption price. If these redeemable shares were excluded from net loss per share, the three months ended June 30, 1997 loss per share would have been $(04). 5. REDEEMABLE WARRANTS Search is authorized to issue Warrants to purchase up to 10,000,000 shares of common stock pursuant to a warrant agreement dated as of March 22, 1996, as amended. Warrants to purchase 5,000,000 shares are to be issued to noteholders and other unsecured claim holders under the Joint Plan. The exercise price per share of the Warrants is $2.25 and increases by $.25 on March 15 of each successive year through 2000. The Warrants will expire on March 14, 2001, at which time Search must redeem all unexercised Warrants at a redemption price of $.25 per share. Because the Warrants must be redeemed if not exercised, they have been classified outside of permanent equity as debt at fair value. An accretion to the redemption amount of $1,250,000 will be made over the term of five years using the interest method. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company specializes in the purchase and servicing of used motor vehicle receivables. These receivables are secured by medium-priced, used automobiles and light trucks which typically have been purchased by consumers with substandard credit histories at retail prices generally ranging from $5,000 to $15,000. The Company generally purchases these receivables from a network of unaffiliated new and used automobile dealers (the "Dealer Network"). The Company from time to time makes bulk acquisitions of these receivables. The members of the Dealer Network generate the receivables and offer them for sale on a 10 11 non-exclusive basis to the Company. Members of the Dealer Network forego some future profit on each receivable sold to the Company in exchange for an immediate return of their invested capital. The Company administers its receivables purchasing, servicing and management activities utilizing its proprietary Auto Note Management System software. The Company commenced its used motor vehicle receivables purchasing and servicing business in 1991. The Company is also planning to expand into other areas of consumer finance in the near future. Prior to November 4, 1994, the Company primarily financed the purchase of used motor vehicle receivables through the private and public sale of interest-bearing rates (the "Notes) issued by wholly owned subsidiaries organized specifically for this purpose (the "Fund Subsidiaries") and through reinvestment of operating cash flow. Until March 1996, the purchasing of receivables for the Fund Subsidiaries was governed by trust indentures (the "Trust Indentures") which restricted management's ability to alter its receivables purchasing criteria. In March 1996, following confirmation of the Fund Subsidiaries' plan of reorganization, under bankruptcy proceedings the Notes and the indebtedness represented by the Notes, together with their related Trust Indentures, were canceled. At that time, the Company implemented its new purchasing program (the "Preferred Program"). The Preferred Program continues to focus on the purchasing of used motor vehicle receivables whose obligors have non-prime credit histories, but places more emphasis on job, income and residence stability and re-established positive credit of the obligor than the Company's earlier programs. The Company anticipates lower repossession rates and higher repossession sale proceeds as a result of the Preferred Program. The terms of loans under the Preferred Program generally range from 30 months to 60 months. RESULTS OF OPERATIONS Comparison of Three-Month Period Ended June 30, 1996 and 1995 The Company purchased 288 contracts during the three months ended June 30, 1996 compared to 1,491 during the same three months ended June 30, 1995. The cost of contracts purchases was $2,745,000 ($9,531 per contract) compared to $6,652,000 ($4,461 per contract) for the three-month periods in 1996 and 1995, respectively. The increase in cost is due to a higher purchase price per contract under the Preferred Program. The Company expects to continue to see an increase in its per contract cost under its Preferred Program when compared to purchases under its old program. The Company is also planning to expand into other areas of consumer finance. Interest revenue decreased from $4,169,000 for the three months ended June 30, 1995 to $1,659,000 for the three months ended June 30, 1996. The decrease of $2,510,000 or 60% is a result of lower average interest earning net receivables for the three month period ended June 30, 1996 of $25,073,000 compared to $52,126,000 average interest earning net receivables for the period ended June 30, 1995. Interest expense decreased from $2,955,000 to $22,000 for the three months ended June 30, 1996 compared to the same three-month period ended June 30, 1995. The decrease in 11 12 interest expense is a result of confirmation and effectiveness of the Fund Subsidiaries' plan of reorganization during the first calendar quarter of 1996. Additionally, as a result of the plan's effectiveness, the Company paid the balance owing on its outstanding lines of credit. The accretion to the redemption value for the Warrants issued in connection with the Plan of Reorganization is recorded as interest expense. The provision for credit losses decreased from a loss of $424,000 for the three months ended June 30, 1996 to a recovery of $1,382,000 for the three months ended June 30, 1996. The decrease in loss provision is due to sufficient provisions for losses being made in prior periods to cover current period losses and collections from previously charged-off accounts. The Company's remote collections facilities, which were opened during the second calendar quarter of 1995, have been successful in contacting and collecting some of the chronically delinquent and charged-off accounts and locating previously identified skips. In the future, management anticipates a lower amount of recovery of prior credit losses as these collections decrease. During the three months ended June 30, 1996, the Company received a one-time settlement of $115,000 from a car dealer for deficiencies on sales of repossessed cars purchased from that dealer. Additionally, during the three months ended June 30, 1996, the Company charged off, after sale of repossessed vehicles or upon determination that the account was not collectible, 962 accounts compared to 1,520 during the three months ended June 30, 1995. General and administrative expenses decreased from $3,852,000 to $2,528,000 for the three months ended June 30, 1995, compared to the same three-month period in June 30, 1996. The decrease in general and administrative expenses is primarily related to reduced expenses associated with processing repossessions, personnel cost, and professional fees. The Company closed all three of its retail lots, which were used to process repossessions, by December 31, 1995. The three-month period ended June 30, 1995 contains general and administrative expenses, related to these retail lots whereas the three months ended June 30, 1996 contain none of the same expenses. The Company's employee count averaged 122 persons for the three months ended June 30, 1995, compared to 100 persons for the three months ended June 30, 1996. Preferred stock dividends increased from $60,000 for the three months ended June 30, 1995 to $1,404,000 for the three months ended June 30, 1996. This increase in preferred stock dividend is related to the issuance of 17,064,000 shares of the Company's 9%/7% Convertible Preferred Stock upon confirmation of the Fund Subsidiaries' plan of reorganization. The Company had outstanding 400,000 shares of its 12% Convertible Preferred Stock outstanding and no 9%/7% Convertible Preferred Stock during the three months ended June 30, 1995, compared to 400,000 and 17,064,000 shares of 12% Convertible Preferred Stock and 9%/7% Convertible Preferred Stock, respectively, outstanding during the three months ended June 30, 1996. Net loss per share decreased from $(.35) per share for the three months ended June 1995 to $(.03) per share for the three months ended June 30, 1996. The decrease is due to lower net loss per share attributable to common stockholders of $2,231,000 and an increased number of weighted average shares outstanding from 8,858,000 to 26,628,000, for the three months ending June 30, 1995 and 1996, respectively. 12 13 LIQUIDITY AND CAPITAL RESOURCES General The Company's business will have an ongoing requirement to raise substantial amounts of cash to support its activities. Currently, the principal cash requirements include amounts to purchase receivables, cover operating expenses, and to pay preferred stock dividends. The Company has a significant amount of cash on hand as of June 30, 1996, which it considers adequate to meet its reasonably anticipated needs. The Company intends to invest a portion of this cash into receivables. In the future, additional liquidity will be necessary to support growth of the Company's loan portfolio and operations. Because the used motor vehicle and consumer finance industry require the purchase and carrying of receivables, a relatively high ratio of borrowings to net worth is customary and will be an important element in the Company's operations. The Company intends to leverage its net worth and any subordinated debt in the future to enhance its liquidity. Additionally, the Company will endeavor to maximize its liquidity by diversifying its sources of funds which will include (a) cash from operations, (b) the securitization of receivables, (c) lines of credit available from commercial banks, and (d) a subordinated debt-offering. The Company has obtained a commitment for a line of credit to purchase receivables which would then be assigned to special purpose entities for future securitization. The Company has also received a commitment for a line of credit to purchase receivables which would remain on its balance sheet. As of August 8, 1996, these commitments are subject to completion of definitive documentation. The Company is planning to issue up to $25,000,000 in senior subordinated notes with warrants to purchase common stock. These financings would be utilized for the purchase of receivables and operations. The Company believes the financings as contemplated would be adequate to fund anticipated operations. OPERATING ACTIVITIES Principal Sources and Uses of Cash in Operating Activities The principal source of cash from operating activities is provided by net interest income. The principal uses of cash in operations are required for general and administrative expenses, other non-recurring types of expenses and payments relating to previously accrued expenses. Comparison of Operating Cash Flows for the Three Months Ended June 30, 1996 to the Three Months Ended June 30, 1995 During the three months ended June 30, 1996, the Company utilized $4,520,000 of cash in its operations compared to $1,221,000 of cash being utilized in operations in the three months ended June 30, 1995. The increase of $3,299,000 is primarily a result of reduction in expense accruals of $5,150,000 during the three months ended June 30, 1996 compared to an increase in expense accruals of $708,000 in the same period ended June 30, 1995. The change in expense accrual of $5,858,000 was offset by an increase in net interest income of $445,000 and reduced 13 14 general and administrative expenses of $1,324,000 during the three months ended June 30, 1996 compared to June 30, 1995, with the non-cash components of interest income and interest expenses accounted for to $1,761,000 during the three months ended June 30, 1996, compared to $142,000 during the three months ended June 30, 1996. The Company anticipates having negative operating cash flows in the foreseeable future as it continues to expand its Dealer Network, expand into consumer finance, and grow its receivable base. INVESTING ACTIVITIES Principal Sources and Uses of Cash Provided by Investing Activities The principal sources of cash from investing activities include cash from principal payments on receivables and proceeds from the sale of repossessed vehicles. The principal uses of cash in investing activities include cash used for purchasing receivables and property and equipment. Comparison of Investing Cash Flows for the Three Months Ended March 31, 1996 to the Three Months Ended March 31, 1995. Cash provided by investing activities decreased $5,951,000 or 62% from $9,667,000 for the three months ended June 30, 1995 to $3,716,000 for the three months ended June 30, 1996. The decrease is primarily due to a decrease of $2,428,000 in principal payments received and a decrease of $6,413,000 in unrestricted cash partially offset by a decrease of $3,907,000 in new contract purchases and a decrease in repo proceeds of $1,322,000. Principal payments and repossession proceeds on receivables were $10,272,000 compared to $6,522,000 for the three months ended June 30, 1995 and 1996, respectively. Purchases of property and equipment decreased from $366,000 to $61,000 for the three months ended June 30, 1995 and 1996, respectively. The Company anticipates encountering negative cash flows from investing activities in the foreseeable future as is continues to expand its non-prime automobile receivable base by expanding into more states and greater market penetration in existing states and expands into consumer finance. It is anticipated that the Company will begin consumer finance operations during its third fiscal quarter of 1996. FINANCING ACTIVITIES Principal Sources and Uses of Cash Provided by Financing Activities The principal sources of cash from financing activities are from borrowings under line of credit agreements, debt offerings proceeds, and sales of common and preferred stock. The principal uses of cash in financing activities include cash for the repayment of amounts borrowed under lines of credit, repayment of debt offerings, and payment of dividends on preferred stock. 14 15 During the three months ended June 30, 1996, the Company's financing activities provided $3,858,000 of cash compared to utilizing cash of $3,517,000 during the same three-month period ended June 30, 1995. The change of $7,375,000 was caused primarily by proceeds from sale of stock during the three months ended June 30, 1996 and a lack of a purchase of treasury stock such as occurred in the three months ended June 30, 1995. The Company, on July 17, 1996, signed an Asset Purchase Agreement with U.S. Lending Corporation in Florida to acquire its assets and assume certain liabilities. The Company will give, in exchange for the assets, a combination of common stock, 9%/7% preferred stock, and, at U.S. Lending's option, warrants to purchase common stock. It is anticipated that this transaction will be accounted for under the purchase method of accounting. The Company also has completed a transaction on August 6, 1996 with Dealers Alliance Credit Corporation in Atlanta, Georgia to acquire its assets and assume liabilities. The transaction requires the Company to assume approximately $17,500,000 in bank debt under a newly restructured line of credit and acquire assets of approximately $23,000,000. The Company gave, in exchange for the net assets, a combination of common stock, 9%/7% preferred stock, and warrants to purchase common stock. This transaction will be accounted for under the purchase method of accounting. The Company's annual dividend requirements on the outstanding shares of its 12% Preferred Stock and 9%/7% Preferred Convertible Stock, as of June 30, 1996, were $240,000 and $5,350,000, respectively. The annual dividend requirement on the Company's 9%/7% Convertible Preferred Stock will remain at the 9% level, or $5,350,000, until March 31, 1999 and then decrease to the 7% level, or $4,161,000, until March 2003. Any conversion to Common Stock would reduce these dividend requirements. Additionally, as a result of the acquisitions noted above, the Company's annual divided requirement for its 9%/7% Preferred Stock will increase to a maximum of $6,864,000 until March 31, 1999 and then decrease to $5,339,000 until March 2003. Any conversion of the 9%/7% Preferred Stock to common stock would reduce these dividend requirements. The Company anticipates an increase in cash flows from financing activities due to its anticipated subordinated debt offering, completion and utilization of warehouse lines, and other debt and stock offerings. The Company believes its contemplated debt offering and lines of credit will be sufficient to finance its current operating and investing needs necessary for the growth of its receivables portfolio and expansion into consumer finance for the foreseeable future. Receivable Concentrations The Company considers Texas and Tennessee to be states with receivable concentrations because receivables with obligors in each of these states exceed 10% of total outstanding receivables. 15 16 Inflation Historical statistics indicate that collateral value, vehicle sales prices, and receivable interest rates are relatively stable within the Company's market segment. Significant inflation in prices could adversely impact the Company's ability to acquire receivables at favorable prices. General increases in interest rates will result in increases in the Company's interest expense. Seasonality The Company's operations are seasonably impacted by higher delinquency rates during certain periods, including November and December holiday periods. Changes in Asset Quality The Company believes that it is upgrading its credit quality through higher underwriting and collateral standards compared to prior periods. No assurance can be given at this time as to whether these new standards will improve the Company's credit loss experience. 16 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 7, 1994, a class action civil lawsuit was filed against Search, certain of its officers and directors, one of its former accounting firms and the lead underwriter and one of its principals involved in the issuance of Search's common stock. This action was filed in the United States District Court for the Northern District of Texas, Dallas Division, and was styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al, Civil Action No. 3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action No. 3:94-CV-1452-J, and Gary Odom v. Search Capital Group, Inc., et al., Civil Action No. 3:94-CV-1494-J, were also filed. The above cases were consolidated in September 1994 under Civil Action No. 3:94-CV-1428-J. On April 26, 1996, the court entered a Final Judgment and Order of Dismissal approving a settlement (the "Settlement") entered into between Search and counsel for the plaintiffs. This Settlement was initially filed with the court on August 4, 1995, and an amended version of the Settlement was filed on November 13, 1995. The Settlement provided for a cash payment by Search of $287,000 and the issuance by Search of its common stock with a value of $2,613,000. As a result of the settlement, Search issued 1,848,000 shares of its common stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed in response to Item 601 of Regulation S-K. Exhibit Number Description - -------------- ----------------------------------------------------------- 10.1 Asset Purchase Agreement among U.S. Lending Corporation, as Debtor-In-Possession and Search Capital Group, Inc. and Search Funding III, Inc., dated July 17, 1996 27.0 Financial Data Schedule (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K, dated May 13, 1996, reporting the shareholder class action suit settlement described in the Company's Annual Report on Form 10-K for the six-month transition period ended March 31, 1996. The Company filed a Current Report on Form 8-K, dated April 17, 1996, reporting the confirmation and effectiveness of the joint plan of reorganization for eight of its subsidiaries operating under Chapter 11 bankruptcy proceeding since August 14, 1995. The Company filed a Current Report on Form 8-K, dated April 1, 1996, reporting the change in the date of the Company's fiscal year end from September 30 to March 31. 17 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEARCH CAPITAL GROUP, INC. SIGNATURE TITLE DATE - --------- ----- ---- /s/ GEORGE C. EVANS June 6, 1997 - ---------------------- ------------ George C. Evans Chairman of the Board, Chief Executive Officer and Director /s/ ROBERT D. IDZI June 6, 1997 - ---------------------- ------------ Robert D. Idzi Senior Executive Vice President, Chief Financial Officer and Treasurer /s/ ANDREW D. PLAGENS June 6, 1997 - ---------------------- ------------ Andrew D. Plagens Senior Vice President, Controller and Chief Accounting Officer 18 19 INDEX TO EXHIBITS Exhibit Description Number ------- ----------------------------------------------------------- 27.0 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATON EXTRACTED FROM COMPANY'S 10-Q/A FILED JUNE 6, 1997 WITH SECURITIES AND EXCHANGE COMMISSION. 3-MOS MAR-31-1997 APR-1-1996 JUN-30-1996 20,871,000 0 24,723,000 10,506,000 356,000 14,573,000 2,163,500 1,175,466 36,916,000 5,203,000 0 2,078,000 174,000 293,000 0 36,916,000 1,659,000 1,659,000 0 0 0 (1,382,000) 22,000 (913,000) 0 (913,000) 0 0 0 (913,000) (.03) (.03)
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