-----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, KOiWNd+4A93ZFa6lBnJkaTuvx5XHIvXkbVUTQ8PhzKqHGnzRmcws+IjStXUFgHps 8zsDUGKsQuwr52KgJGIGoA== 0000950134-97-000810.txt : 19970221 0000950134-97-000810.hdr.sgml : 19970221 ACCESSION NUMBER: 0000950134-97-000810 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970210 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09539 FILM NUMBER: 97523035 BUSINESS ADDRESS: STREET 1: 700 N PEARL ST STE 400 STREET 2: PLZ OF THE AMERICAS NORTH TOWER CITY: DALLAS STATE: TX ZIP: 75201-7490 BUSINESS PHONE: 2149656000 MAIL ADDRESS: STREET 1: 700 N PEARL STE 400,NORH TOWER STREET 2: PLAZA OF THE AMERICAS CITY: DALLAS STATE: TX ZIP: 75201-7490 FORMER COMPANY: FORMER CONFORMED NAME: SEARCH NATURAL RESOURCES INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q FISCAL YEAR ENDIND DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: December 31, 1996 0-9539 SEARCH CAPITAL GROUP, INC. --------------------------------------------- (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 January 31, 1997 - ------------------------------ ------------------------------- Common Stock, $.01 par value 3,293,124 2 SEARCH CAPITAL GROUP, INC. FORM 10-Q 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..............................................13 PART II OTHER INFORMATION................................................................21 Item 1. Legal Proceedings................................................................21 Item 2. Changes in Securities............................................................20 Item 4. Submission of Matters to a Vote of Security Holders..............................23 Item 6. Exhibits and Reports on Form 8-K.................................................24 SIGNATURES .................................................................................26
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 for quarter ended December 31, 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 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets
Unaudited Audited ----------------- ---------------- December 31, 1996 March 31, 1996 ----------------- ---------------- ASSETS Gross contracts receivable (Note 2) $ 74,766,000 $ 37,086,000 Unearned interest (14,045,000) (6,435,000) ---------------- ---------------- Net contracts receivable 60,721,000 30,651,000 Allowance for credit losses (10,445,000) (13,353,000) Net loan origination costs 451,000 406,000 ---------------- ---------------- Net contracts receivable - after allowance for credit losses & other costs 50,727,000 17,704,000 ---------------- ---------------- Cash and cash equivalents 15,697,000 17,817,000 Vehicles held for resale 592,000 566,000 Property and equipment, net 1,509,000 1,062,000 Goodwill, net (Note 4) 10,705,000 -- Notes receivable and other assets, net 478,000 197,000 ---------------- ---------------- Total assets $ 79,708,000 $ 37,346,000 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Lines of credit $ 36,725,000 $ -- Accrued settlements 500,000 688,000 Dividends payable 1,503,000 268,000 Accounts payable and other liabilities 1,976,000 7,088,000 Accrued interest 298,000 15,000 Notes payable 5,014,000 2,283,000 ---------------- ---------------- Total liabilities 46,016,000 10,342,000 ---------------- ---------------- Stockholders' Equity Preferred stock 201,000 154,000 Common stock 263,000 259,000 Additional paid-in capital 86,081,000 81,784,000 Accumulated deficit (52,853,000) (54,043,000) Treasury stock -- (1,150,000) ---------------- ---------------- Total stockholders' equity 33,692,000 27,004,000 ---------------- ---------------- Total liabilities and stockholders' equity $ 79,708,000 $ 37,346,000 ================ ================
See accompanying notes to consolidated financial statements. 3 4 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
Nine Months Ended Nine Months Ended December 31, 1996 December 31, 1995 ----------------- ----------------- Interest revenue $ 7,036,000 $ 7,367,000 Interest expense 1,163,000 5,542,000 -------------- -------------- Net interest income 5,873,000 1,825,000 Recovery of (provision for) credit losses 4,611,000 (3,172,000) -------------- -------------- Net interest income (loss) after recoveries of (provisions for) credit losses 10,484,000 (1,347,000) -------------- -------------- General and administrative expense 9,294,000 13,178,000 Settlement -- 2,931,000 Reorganization -- 565,000 -------------- -------------- Operating and other expense 9,294,000 16,674,000 -------------- -------------- Net income (loss) before dividends 1,190,000 (18,021,000) Preferred stock dividends 4,458,000 180,000 -------------- -------------- Net loss to common stockholders $ (3,268,000) $ (18,201,000) -------------- -------------- Primary net loss per share attributable to common stockholders $ (.96) $ (16.67) ============== ============== Weighted average number of common shares outstanding (Note 6) 3,419,000 1,092,000 ============== ============== Three Months End Three Months Ended December 31, 1996 December 31, 1995 ----------------- ------------------ Interest revenue $ 3,138,000 $ 2,589,000 Interest expense 873,000 774,000 -------------- -------------- Net interest income 2,265,000 1,815,000 Recovery of (provision for) credit losses 1,173,000 (5,381,000) -------------- -------------- Net interest income (loss) after recoveries of (provisions for) credit losses 3,438,000 (3,566,000) -------------- -------------- General and administrative expense 3,372,000 4,518,000 Settlement -- 94,000 Reorganization -- 250,000 -------------- -------------- Operating and other expense 3,372,000 4,862,000 -------------- -------------- Net income (loss) before dividends 66,000 (8,428,000) Preferred stock dividends 1,512,000 60,000 -------------- -------------- Net loss to common stockholders $ (1,446,000) $ (8,488,000) -------------- -------------- Primary net loss per share attributable to common stockholders $ (.42) $ (7.83) ============== ============== Weighted average number of common shares outstanding (Note 6) 3,442,000 1,084,000 ============== ==============
See accompanying notes to consolidated financial statements. 4 5 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended Nine Months Ended December 31, 1996 December 31, 1995 ----------------- ----------------- OPERATING ACTIVITIES: Net income (loss) $ 1,190,000 $ (18,021,000) Adjustments to reconcile net income (loss) to cash used in operations: Provision for (recovery of) credit losses (2,562,000) 3,172,000 Amortization of deferred offering costs 24,000 2,129,000 Amortization of loan origination costs 357,000 884,000 Amortization of Goodwill 306,000 -- Depreciation 325,000 375,000 Changes in assets and liabilities: Decreases (increases) in other assets 962,000 466,000 Increases (decreases) in accounts payable (4,552,000) 5,043,000 -------------- -------------- Cash used in operations (3,950,000) (5,952,000) -------------- -------------- INVESTING ACTIVITIES: Purchase of contracts receivable (32,856,000) (16,921,000) (Increase) in loan origination fee (403,000) (174,000 Principal payments on contracts receivables including proceeds from sales of vehicles 15,190,000 30,706,000 Proceeds from sales of vehicles 2,704,000 1,233,000 Purchase of property and equipment (772,000) (464,000) Decrease in restricted cash -- 6,413,000 -------------- -------------- Cash provided by investing activities (16,137,000) 20,793,000 -------------- -------------- FINANCING ACTIVITIES: Borrowings under line of credit 27,213,000 1,700,000 Repayments under lines of credit (8,504,000) (1,695,000) Notes payable proceeds 14,000 -- Notes payable repayments -- (1,690,000) Deferred offering costs (90,000) -- Capital lease principal payments (46,000) (68,000) Net proceeds from sale of stock 4,346,000 12,000 Loans for stock purchases (1,099,000) -- Purchase of treasury stock (4,000,000) (1,125,000) Payment of dividends on preferred stock (3,221,000) (180,000) -------------- -------------- Cash provided by (used in) financing activities 14,613,000 (3,046,000) -------------- -------------- CHANGE IN CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents (5,474,000) 11,795,000 Cash and cash equivalents - beginning 17,817,000 1,633,000 Net cash acquired 3,354,000 -- -------------- -------------- Cash and cash equivalents - ending $ 15,697,000 $ 13,428,000 ============== ============== - --------------------------------------------------------------------------------------------- SUPPLEMENTAL INFORMATION: Cash Paid for Interest $ 881,000 $ 3,725,000 ============== ==============
5 6 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR APRIL 1, 1996 THROUGH DECEMBER 31, 1996 (Unaudited)
Preferred Stock 12% Preferred Stock 9% Common Stock Shares Amount Shares Amount Shares Amount ----------------------------------------------------------------------------------------- Balance at March 31, 1996 400,000 4,000 15,031,648 150,000 25,875,219 259,000 ========================================================================================= Debt Conversion - Hall Financial Group 2,500,000 25,000 Additional Investment - Hall Financial Group 2,032,800 20,000 1,638,400 16,000 Stock Investment - Alex. Brown & Sons, Inc. 211,702 2,000 Acquisition - DACC 2,554,060 26,000 1,277,030 13,000 Conversion of 9%/7% Preferred to Common (79,454) (1,000) 158,908 2,000 Treasury Stock Purchase - Hall Financial Group One-for-Eight "Reverse" Split (350,000) (17,096,672) (27,703,602) Acquisition - U.S. Lending 271,867 22,000 231,066 18,000 Retirement of Treasury Stock (254,100) (20,000) (895,599) (72,000) Preferred Dividends Year-to-Date Income ----------------------------------------------------------------------------------------- Balance at December 31, 1996 50,000 4,000 2,460,149 197,000 3,293,124 263,000 =========================================================================================
See accompanying notes to consolidated financial statements. 6 7
Preferred 9% Common Treasury Stock Treasury Stock Paid In Accumulated Grand Shares Amount Shares Amount Capital Deficit Total - --------------------------------------------------------------------------------------------------------------------------------- - - - 3,026,389 (1,150,000) 81,784,000 (54,043,000) 27,004,000 ================================================================================================================================= 1,692,000 1,717,000 4,310,000 4,346,000 150,000 152,000 8,065,000 8,104,000 (1,000) - 2,032,800 (20,000) 4,138,400 (8,980,000) (9,000,000) (1,778,700) (6,269,190) - 4,597,000 4,637,000 (254,000) 20,000 (895,599) 10,130,000 (10,058,000) - (4,458,000) (4,458,000) 1,190,000 1,190,000 - --------------------------------------------------------------------------------------------------------------------------------- - - - - 86,081,000 (52,853,000) 33,692,000 =================================================================================================================================
7 8 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES 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, in all material respects, the financial position of the Company for the periods presented. During the nine months ended December 31, 1996, the Company recorded adjustments which it considers not of a normal recurring nature. These adjustments include a gain related to the closure of the Company's retail lots and related make-ready facility of $124,000, the reduction of an amount previously reported as a liability under a terminated warranty program in the amount of $136,000, and reversal of previously recorded non-cash expenses associated with a self-funded insurance program in the amount of $36,000. These 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 contract purchases at cost with any premium paid recorded as an acquisition cost and amortized over the remaining life of the related loans. Generally, an initial reserve is recorded for any acquisition discount, which is the difference between the amount financed at the time of acquisition and the acquisition cost. Contractual finance charges are initially recorded to unearned interest and recorded to interest income using the interest method. The Company evaluates the impairment of loans based on contractual delinquency and other factors. Reserves are established for impaired loans to reduce the net receivable to the lower of cost or estimated net realizable value. Interest income is not recognized on loans where the contractual delinquency exceeds sixty days or concerns otherwise exist regarding the collectibility of the account. Reserve requirements in excess of the initial reserve are provided, as needed, through a charge to the provision for credit losses. Recorded reserves in excess of anticipated losses are recorded as reductions in the allowance for loan losses. 8 9 Most of the Company's contracts receivable are due from individuals in metropolitan areas of southern and western states. To some extent, collection of the receivables will be dependent on local economic conditions. In the opinion of management, a portion of the receivables will be repaid or extended either before or past the contractual maturity date. Therefore, the tabulations below should not be regarded as a forecast of future cash collections nor indicators of future performance. CONTRACTUAL DELINQUENCIES The following tables set forth certain information related to the contractual delinquency of the Company's receivables as of December 31, 1996 and March 31, 1996.
As of December 31, 1996 -------------------------------------------------------------------------- Number of Total Contractual Active % of Total Unpaid Unearned Net Delinquency Contracts _ Active Installments Interest Receivables ------------ ------------ ------------ ------------ ------------ Current to 60 days past due 10,425 92% $ 68,540,000 $ 12,929,000 $ 55,611,000 61-over days past due 1,170 8% 6,226,000 1,116,000 5,110,000 ------------ ------------ ------------ ------------ ------------ Total 11,595 100% $ 74,766,000 $ 14,045,000 60,721,000 ============ ============ ============ Allowance for credit losses (10,445,000) ------------ Receivables, net of allowance for credit losses $ 50,276,000 ============
As of December 31, 1996 -------------------------------------------------------------------------- Number of Total Contractual Active % of Total Unpaid Unearned Net Delinquency Contracts _ Active 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 ============
(1) Excludes 342 and 333 accounts which were reclassified to vehicles held for resale as of December 31, 1996 and March 31, 1996, respectively. 9 10 ALLOWANCE FOR LOAN LOSSES The following table shows the changes in the Company's allowance for loan losses for the nine months ending December 31, 1996.
NINE MONTHS ENDING DECEMBER 31, 1996 ------------------ Balance at beginning of period $ 13,353,000 Allowance recorded on acquisition of loans 7,560,000 Provision for loan losses 333,000 Recovery of prior credit losses 2,308,000 Reduction in allowance for credit losses (6,097,000) Loans charged off against allowance (7,012,000) ------------ Balance at end of period $ 10,445,000 ============
GENERAL CONTRACT CHARACTERISTICS The following sets forth certain general information related to the contract receivables of the Company as of December 31, 1996 and March 31, 1996.
AS OF AS OF DECEMBER 31, 1996 MARCH 31, 1996 ---------------------- ----------------- Unearned interest as a percent of gross receivables 18.78% 17.35% Allowance for loan losses as percent of net receivables 17.20% 43.56% Average original loan amount $7,940 $6,997 Average net receivable remaining balance $5,237 $3,833 Weighted average APR 22.71% 23.81% Weighted average original term in months 40.40 32.42 Weighted average remaining term in months 30.60 19.09
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 312,500 (2,500,000 shares on a pre-split basis) 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 312,500 (2,500,000 shares on a pre-split basis) shares of Search Common Stock. 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 issued 204,800 (1,638,400 shares on a pre-split basis) shares of Search Common Stock, 254,100 10 11 (2,032,800 shares on a pre-split basis) shares of 9%/7% preferred stock, and warrants to purchase 84,500 (676,000 shares on a pre-split basis) shares of Common Stock to HPIL. Pursuant to the Funding Agreement, HFG was entitled to elect one director 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 as directors of Search. On October 16, 1996, the two directors and HPIL filed suit against Search seeking access as directors to certain of Company's books and records. On October 24, 1996, Search initiated legal action against the two directors and HPIL. On November 21, 1996, Search, the two directors and HPIL entered into a settlement agreement. As a result of the agreement, Search paid HPIL $4,000,000 in cash and executed a $5,000,000, 14% subordinated debenture to repurchase from HPIL all of its 517,422 shares of Common Stock, 254,102 shares of preferred stock, warrants to purchase Common Stock and to settle all claims against Search. The parties also agreed to dismiss all litigation and mutually release each other, and the two directors resigned from Search's Board. See "Liquidity and Capital Resources." 4. ACQUISITIONS Effective November 25, 1996, Search Funding III, Inc. ("SFIII"), a wholly-owned subsidiary of Search, completed its acquisition of certain assets of U.S. Lending Corporation ("USLC"). USLC conducted purchasing and servicing of used motor vehicle receivables in Deerfield Beach, Florida. USLC had been operating under Chapter 11 of the Federal Bankruptcy Code. The acquisition was accounted for under the purchase method of accounting. Accordingly, results of operations related to the acquired assets have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the assets acquired based upon their estimated fair value. Search purchased USLC's net assets valued at $4,819,000 for 231,066 (1,848,528 shares on a pre-split basis) shares of Common Stock, 271,867 (2,174,936 shares on a pre-split basis) shares of 9%/7% Convertible Preferred Stock, and warrants to purchase 154,960 (1,239,680 shares on a pre-split basis) shares of Common Stock. The assets acquired were approximately $3,500,000 in cash, gross receivables of $2,200,000, and repossessed vehicles with an aggregate wholesale value of approximately $78,000, and an undetermined amount of delinquent accounts and foreclosure deficiency balance. Effective August 2, 1996, Search Funding IV, Inc. ("SFIV"), a wholly-owned subsidiary of Search, acquired all of the assets and assumed certain liabilities of Dealers Alliance Credit Corporation ("DACC"). DACC conducted purchasing, and servicing of used motor vehicle receivables in Atlanta, Georgia. DACC had purchased loans from over 1,000 new and used car dealers primarily in Georgia, Texas, Tennessee, and Florida. The acquisition was accounted for under the purchase method of accounting. Accordingly, results of operations related to the acquired assets have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the net assets acquired based upon their estimated fair value, for which Search delivered 159,629 (1,277,030 shares on a pre-split basis) 11 12 shares of Common Stock, 319,258 (2,554,060 shares on a pre-split basis) shares of 9%/7% Convertible Preferred Stock, and warrants to purchase 159,629 (1,277,030 shares on a pre-split basis) shares of Common Stock preliminarily valued at $8,357,000, in addition to assuming certain indebtedness. The estimated value of the consideration delivered will be finalized by the end of the Company's fiscal year. Since it is not unusual for large equity transactions to have liquidity adjustments, a discount on the purchase of up to 35% of the preliminary estimate of fair value may be required. Such a reduction would also result in a reduction in the amount recorded as excess value. The excess of preliminary gross value given over fair value of the net assets acquired of approximately $11,300,000 is being amortized over fifteen years on the straight line method. Under the terms of the transaction, SFIV assumed approximately $17,500,000 in bank debt under a restructured line of credit and acquired net assets of approximately $21,000,000. The Company plans to use the DACC facilities as a regional marketing branch for southeastern states, a collection center, and as a full service consumer loan facility. The Company evaluates the recoverability and remaining life of its excess value and determines whether the excess value should be completely or partially written-off or the amortization period accelerated. The Company will recognize an impairment of excess value if undiscounted estimated future operating cash flows of the acquired business are determined to be less than the carrying amount of the excess value. If the Company determines that the excess value has been impaired, the measurement of the impairment will be equal to the excess of the carrying amount of the excess value over the amount of the undiscounted estimated future operating cash flows. If an impairment of excess value were to occur, the Company would reflect the impairment through a reduction in the carrying value of excess value. 5. LINE OF CREDIT On September 11, 1996, Search Funding II, Inc. ("SFII"), a wholly-owned subsidiary of Search, entered into a revolving Line of Credit Agreement (the "Line") with Hibernia National Bank (HNB). The Line bears interest at the prime rate plus one percentage point, or 9.25% as of January 31, 1997. The Line has a maximum commitment of $25,000,000 and is limited to a percentage of eligible contracts held by SFII. The Line is secured by all SFII assets and expires on September 11, 1999. Search has guaranteed the Line. Search and SFII must comply with covenants that require the maintenance of certain financial ratios and other financial conditions. 6. REVERSE STOCK SPLIT Effective November 15, 1996, the Company effected a one-for-eight reverse split of its outstanding shares of Preferred and Common Stock. The split reduced the number of Search's Common Stock from 24,496,470 shares to 3,062,059 shares outstanding, the outstanding shares of 9%/7% Convertible Preferred Stock from 17,506,254 shares to 2,188,282 shares outstanding, and the outstanding shares of 12% Senior Preferred Stock from 400,000 to 50,000 shares. Accordingly, all share and per share amounts have been restated to give effect to the reverse split. See Item 2 of Part II for further discussion of the effects of the reverse split. 12 13 7. RELATED PARTY INFORMATION A director of the Company is a principal in a securities firm which will receive fees for its services to be rendered in connection with obtaining potential subordinate debt and senior debt financing for the Company. It is estimated that the Company will pay a marketing fee of $60,000 which will be credited against a placement fee of 3.0% related to the subordinated debt offering and a .375% agency fee for the senior debt. A director of the Company is a managing director of an investment banking firm retained by the Company to act as its financial advisor. The Company is obligated to pay $50,000 per year under this agreement to the firm. 8. OTHER The Company is currently in negotiations to restructure the terms of its potential obligation to purchase 101,516 shares from a trust formed by a former director of the Company and 13,000 shares from the former director under stock purchase agreements dated May 5, 1995. The trust and the director, at their option, can elect to have the Company purchase the shares of stock at $18.00 per share. 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 members of the Dealer Network generate the receivables and offer them for sale on a 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 from time to time makes bulk acquisitions of these receivables. The Company administers its receivables purchasing, servicing, and management activities utilizing a receivables management system developed by Norwest Financial Information Systems Group, Inc. in conjunction with the Company's proprietary Auto Note Management System software. The Company commenced its used motor vehicle receivables purchasing and servicing business in 1991. The Company opened its first consumer finance office on November 1, 1996, in Baton Rouge, Louisiana. The Company intends to be fully operational in its two Puerto Rico consumer finance locations by the end of its fiscal year. The Company plans to open consumer loan branches in Texas, Oklahoma, Georgia, and Tennessee in the near future. These offices will 13 14 make and collect retail sales finance loans, second mortgage real estate loans, and other consumer loans. 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 notes (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 Chapter 11 of the bankruptcy code, 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. If the Company is unable to select the proper dealers, purchase contracts with obligors which meet its credit criteria, and realize collection proceeds in adequate amounts, the repossession rate and sale proceeds could be higher and lower, respectively. The terms of loans under the Preferred Program generally range from 30 months to 60 months. RESULTS OF OPERATIONS Comparison of Nine-Month Periods Ended December 31, 1996 and 1995 The Company purchased 845 contracts under its new Preferred Program in non-bulk transactions during the nine months ended December 31, 1996 compared to 3,354 contracts under its prior program in non-bulk transactions during the nine months ended December 31, 1995. The cost of these contract purchases was $8,726,000 ($10,327 per contract) compared to $16,464,000 ($4,908 per contract) for the nine-month periods in 1996 and 1995, respectively. The Company purchased 2,603 contracts in bulk purchase transactions at a cost of $24,966,000 ($9,591 per contract) during the nine months ended December 31, 1996 compared to 112 contracts purchased in bulk purchase transactions at a cost of $513,000 ($4,580 per contract) for the nine months ended December 31, 1995. The increase in cost of contracts purchased in non- bulk transactions of $5,419 is due to a higher purchase price per contract under the Preferred Program generally due to a lower-mileage vehicle, higher credit quality customers and higher wholesale and retail value per vehicle. The increase in cost of contracts purchased in bulk purchase transactions of $5,011 is due to the Company purchasing contracts that involve higher credit quality obligors or higher-value vehicle collateral than the contracts previously purchased by the Company, or both. The Company expects to continue to see an increase in its per-contract cost under its Preferred Program when compared to purchases under the prior program. 14 15 Interest revenue decreased from $7,367,000 for the nine months ended December 31, 1995 to $7,036,000 for the nine months ended December 31, 1996. The decrease of $331,000, or 4%, is primarily a result of higher average interest earning net receivables for the nine month- period ended December 31, 1995 of $45,372,000 compared to $35,529,000 average interest earning net receivables for the nine-month period ended December 31, 1996. Interest expense decreased from $5,542,000 for the nine months ended December 31, 1995 to $1,163,000 for the nine months ended December 31, 1996. The decrease of $4,379,000, or 79%, is primarily a result of lower debt levels after confirmation of the Fund Subsidiaries' plan of reorganization during the first calendar quarter of 1996. The provision for credit losses decreased from $3,172,000 for the nine months ended December 31, 1995 to a recovery of $4,611,000 for the nine months ended December 31, 1996, due primarily to increased recoveries from previously charged-off accounts and reduced provision requirements. During the nine-month period ended December 31, 1996, the Company recovered $2,308,000 of proceeds from accounts previously charged off compared to $228,000 for the nine months ended December 31, 1995. 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. Additionally, the acquisition of DACC provided the Company with a new pool of deficiency balances to collect, of which the Company collected approximately $688,000 since the acquisition of DACC's assets effective August 2, 1996. In the future, management anticipates a lower amount of recovery of prior credit losses as these collections decrease. During the nine months ended December 31, 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. During the nine months ended December 31, 1996, the Company reduced its allowance for loan losses by $2,895,000 to reflect lower than anticipated loan losses from certain loans. Additionally, during the nine months ended December 31, 1996, the Company increased its allowance for loan losses by $333,000 to reflect an increase in anticipated loan losses from certain loans. General and administrative expenses decreased from $13,178,000 for the nine months ended December 31, 1995 to $9,294,000 for the nine months ended December 31, 1996. The decrease of $3,884,000, or 29%, is primarily related to reduced expenses associated with processing repossessions, personnel cost, and professional fees. The Company closed all three of its retail lots and its related make-ready facility, which were used to process repossessions, by December 31, 1995. The Company's employee count averaged 124 persons for the nine months ended December 31, 1996 compared to 143 persons for the nine months ended December 31, 1995. Preferred stock dividends increased from $180,000 for the nine months ended December 31, 1995 to $4,458,000 for the nine months ended December 31, 1996. The increase of $4,278,000 is related to the issuance of 1,879,000 shares of the Company's 9%/7% Convertible Preferred Stock upon confirmation of the Fund Subsidiaries' plan of reorganization, 319,000 shares of 9%/7% Convertible Preferred Stock in connection with the acquisition of 15 16 assets of DACC, and 271,000 shares of 9%/7% Convertible Preferred Stock in the acquisition of assets of USLC. The Company had 50,000 shares of its 12% Convertible Preferred Stock outstanding and no 9%/7% Convertible Preferred Stock outstanding during the nine months ended December 31, 1995, compared to 50,000 and an average of 2,170,000 shares of 12% Convertible Preferred Stock and 9%/7% Convertible Preferred outstanding during the nine months ended December 31, 1996. Comparison of Three-Month Periods Ended December 31, 1996 and 1995 The Company purchased 336 contracts in non-bulk transactions under the Preferred Program during the three months ended December 31, 1996 compared to 760 contracts in non- bulk transactions under its prior program during the three months ended December 31, 1995. The cost of non-bulk contract purchases was $3,650,000 ($10,863 per contract) compared to $3,722,000 ($4,897 per contract) for the three-month periods in 1996 and 1995, respectively. The Company purchased 1,505 bulk contracts at a cost of $15,249,000 ($10,132 per contract) during the three months ended December 31, 1996 compared to 112 bulk contracts at a cost of $513,000 ($4,580 per contract) during the three-month period ended December 31, 1995. The increase in cost in non-bulk contracts of $5,966 per contract is due to a higher purchase price per contract under the Preferred Program compared to the Company's prior program. The Company expects to continue to see an increase in its per-contract cost under its Preferred Program when compared to purchases under the prior program. The increase in cost per bulk contract of $5,552 per contract is due to a generally higher credit quality customer and/or collateral than what was previously purchased by the Company, or both. The Company expects to continue to see an increase in its non-bulk and bulk contract cost under its Preferred Program when compared to non-bulk and bulk purchases under the prior program. Interest revenue increased from $2,589,000 for the three months ended December 31, 1995, to $3,138,000 for the three months ended December 31, 1996. The increase of $549,000, or 21%, is primarily a result of higher average interest earning net receivables for the three-month period ended December 31, 1996, of $52,086,000 compared to $38,662,000 average interest earning net receivables for the three-month period ended December 31, 1995. Interest expense increased from $774,000 for the three months ended December 31, 1995 to $873,000 for the three-month period ended December 31, 1996. The increase in interest expense is a result of the Fund Subsidiaries not recognizing interest expense, other than the offering cost amortization, during the period subsequent to their filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code in August 1995 and borrowings under lines of credit after the reorganization. The Company anticipates an increase in the amount of interest expense in the foreseeable future due to continued utilization of its credit line to fund contract purchases and to pay interest on its current and contemplated borrowings. The provision for credit losses decreased from $5,381,000 for the three months ended December 31, 1995 to a recovery of $1,173,000 for the three months ended December 31, 1996, due primarily to increased recoveries from previously charged-off accounts and the reduction in the provision for credit losses. During the three-month period ended December 31, 1996, the 16 17 Company recovered $561,000 of proceeds from accounts previously charged off compared to $228,000 for the three months ended December 31, 1995. 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. Additionally, the acquisition of DACC provided the Company with a new pool of deficiency balances to collect, of which the Company collected over $250,000 in the three months ended December 31, 1996. In the future, management anticipates a lower amount of recovery of prior credit losses as these collections decrease. During the three months ended December 31, 1996, the Company reduced its allowance for loan losses by $735,000 to reflect lower-than-anticipated loan losses from certain loans. Additionally, during the three months ended December 31, 1996, the Company increased its allowance for credit losses by $333,000 to reflect an increase in anticipated loan losses from certain loans. General and administrative expenses decreased from $4,518,000 for the three months ended December 31, 1995 to $3,372,000 for the three months ended December 31, 1996. The decrease of $1,146,000, or 25%, is primarily related to reduced expenses associated with processing repossessions, personnel cost, and professional fees. The Company closed all three of its retail lots and a related make-ready facility, which were used to process repossessions, by December 31, 1995. The Company's employee count averaged 142 persons for the three months ended December 31, 1996 compared to 127 persons for the nine months ended December 31, 1995. Preferred stock dividends increased from $60,000 for the three months ended December 31, 1995 to $1,512,000 for the three months ended December 31, 1996. The increase of $1,452,000 is related to the issuance of 1,879,000 shares of the Company's 9%/7% Convertible Preferred Stock upon confirmation of the Fund Subsidiaries' plan of reorganization, 319,000 shares of 9%/7% Convertible Preferred Stock in the acquisition of DACC, and 271,000 shares of 9%/7% Convertible Preferred Stock in the acquisition of USLC. The Company had 50,000 shares of its 12% Convertible Preferred Stock outstanding and no 9%/7% Convertible Preferred Stock during the three months ended December 31, 1995, compared to 50,000 and an average of 2,170,000 shares of 12% Convertible Preferred Stock and 9%/7% Convertible Preferred Stock, respectively, outstanding during the three months ended December 31, 1996. LIQUIDITY AND CAPITAL RESOURCES General The Company will be required to raise substantial amounts of cash to support its operating, financing, and investing activities. Currently, the Company's principal cash requirements are to purchase receivables and originate loans, cover operating expenses, pay preferred stock dividends, and pay interest on its line of credit. The Company has a significant amount of cash on hand as of December 31, 1996, which it considers adequate to meet its reasonably anticipated needs. The Company intends to invest a portion of this cash into non-prime automobile and consumer receivables. In the future, additional liquidity will be necessary to support growth of the Company's loan portfolios and operations. 17 18 Because the used motor vehicle and consumer finance industries require the purchase, origination, 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 it is anticipated will include (a) cash from operations, (b) the securitization of receivables, (c) lines of credit available from commercial banks and other financing sources, and (d) subordinated debt-offerings. The Company is continuing preparation of a private placement memorandum to issue $25,000,000 to $50,000,000 of senior subordinated notes with warrants to purchase Common Stock. Additionally, the Company is discussing with several commercial lenders, including investment banking firms, banks, and finance companies, arrangements for them to provide additional financing, which would be utilized for the purchases of receivables and/or the purchases of other operating entities. The Company is currently reviewing term sheets regarding two such facilities. The Company is also seeking several additional participants to expand its $25,000,000 line of credit with Hibernia Bank. As of December 31, 1996, the Company had approximately $24,000,000 outstanding under its line with Hibernia Bank. The Company has terminated negotiations with respect to its previously announced commitment for a warehouse line of credit. The Company intends to evaluate and pursue acquisition opportunities that the Company anticipates will enable it to grow its receivable base. The Company will consider all forms of financing available to it with respect to any particular acquisition, including additional borrowings and sales or exchanges of equity or debt securities. The Company's ability to acquire additional portfolios and companies is dependent on its obtaining additional financing. 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 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 Nine Months Ended December 31, 1996 to the Nine Months Ended December 31, 1995 During the nine months ended December 31, 1996, the Company utilized $3,950,000 of cash in its operations compared to $5,952,000 of cash being utilized in operations in the nine months ended December 31, 1995. The decrease of $2,002,000 is primarily a result of reduction in expense accruals of $4,552,000 related to the Fund Subsidiaries' plan of reorganization during the nine months ended December 31, 1996 compared to an increase in accruals of $5,043,000 in the same period ended December 31, 1995. The change in offering cost amortization of 18 19 $2,105,000 was due primarily to the confirmation of the Fund Subsidiaries' plan of reorganization. Additionally, the provision for credit losses was $3,172,000 in the nine months in 1995 compared to a recovery of $2,562,000 in the nine months in 1996. The Company anticipates having negative operating cash flows in the foreseeable future as it continues to expand its Dealer Network and consumer finance operations to 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 and other collateral. The principal uses of cash in investing activities include cash used for purchasing receivables, making consumer loans, and purchases of property and equipment. Comparison of Investing Cash Flows for the Nine Months Ended December 31, 1996 to the Nine Months Ended December 31, 1995. Cash used by investing activities increased by $34,881,000 from $20,793,000 for the nine months ended December 31, 1995 to a use of $16,137,000 for the nine months ended December 31, 1996. The increase is primarily due to a increase of $15,935,000 in contract purchases, and a decrease of $13,467,000 in principal payments on contracts receivable. The Company anticipates encountering negative cash flows from investing activities in the foreseeable future as it continues to expand its non-prime automobile receivable base by expanding into more states and greater market penetration in existing states and continues its expansion into consumer finance. 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, sales of equity securities, and subordinate debt offerings. 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. Comparison of Financing Cash Flows for the Nine Months Ended December 31, 1996 to the Nine Months Ended December 31, 1995. During the nine months ended December 31, 1996, the Company's financing activities provided $14,613,000 of cash compared to utilizing cash of $3,046,000 during the same nine-month period ended December 31, 1995. The change of $17,659,000 was caused primarily by 19 20 borrowings exceeding payments under its line of credit and proceeds from sale of stock during the nine months ended December 31, 1996. The Company's acquisition of assets from DACC required the Company to assume approximately $17,450,000 in bank debt. The terms of the loan require the Company to repay the loan by August 1997. Any portion not retired would require refinancing under existing terms or terms more or less favorable to the Company or a cash payment from existing cash on hand to liquidate the loan. Currently, the Company anticipates having to refinance or liquidate a portion of the loan at its maturity date. Management is evaluating several possible options. Since the date of acquisition, the Company has reduced the balance on the loan by $5,662,000, or 32%, to $11,788,000 as of January 31, 1997. During this same period of time, the collateral base has decreased from approximately $25,600,000 in gross contracts receivable and inventory to $18,283,000, or 28.5%. On November 21, 1996 the Company purchased shares of its Common Stock and 9%/7% Convertible Preferred Stock and warrants for the purchase of Common Stock from HPIL for $9,000,000. The Company paid $4,000,000 in cash and executed a $5,000,000, 14% subordinated debenture. Interest is payable monthly. Through February 3, 1997, the Company had paid HPIL a total of $140,000 in interest. The interest rate increases by 1% per annum every six months until it reaches 17%. The maturity date is November 21, 2000, but must be repaid in full earlier if the Company sells more than $20,000,000, or in a proportionate amount if the Company sells less than $20,000,000 in equity or debt securities. The Company's annual dividend requirements on the outstanding shares of its 12% Preferred Stock and 9%/7% Preferred Convertible Stock, as of December 31, 1996, were $240,000 and $6,200,000, respectively. The annual dividend requirement on the Company's 9%/7% Convertible Preferred Stock will remain at that level until March 31, 1999, and then decrease to $4,822,000 until March 2003. Any conversion of Preferred Stock to Common Stock would reduce these dividend requirements. Payment of the dividend on the 9%/7% Convertible Preferred Stock in cash may be restricted under some of the Company's debt agreements. If payment of dividends in cash is restricted, the Company may be able to pay the dividend in the Company's Common Stock under specific circumstances. During the nine months ended December 31, 1996, the Company implemented a loan program for its directors and certain officers to finance the purchase of the Company's common and preferred stock in open-market transactions. The loans bear interest at the prime rate and require quarterly interest payments and mature at the end of three years. As of December 31, 1996, the Company had advanced $1,099,000 to ten of the eligible participants to fund stock purchases. Currently, the maximum allowed to be funded for any participant is $150,000. During the nine months ended December 31, 1996, the Company recorded $39,000 of interest revenue from participants under this program. The loans are evidenced by notes from participants and the Company holds the stock as collateral under security agreements. 20 21 The Company is currently in negotiations to restructure the terms of its potential obligation to purchase 101,516 shares from a trust formed by a former director of the Company and 13,000 shares from the former director under stock purchase agreements dated May 5, 1995. The trust and the director, at their option, can elect to have the Company purchase the shares of stock at $18.00 per share. This purchase would require cash on unless an additional source is available. The Company will seek to increase its cash flows from financing activities through one or more of the following: anticipated subordinated debt offering, completion and utilization of warehouse lines, and debt and stock offerings. The Company will require additional cash flow to grow its receivable base and expand into consumer finance, and it is anticipated it will look to financing activities to provide this liquidity. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS During the three months ended December 31, 1996, Search settled the litigation between it, Craig Hall, Larry E. Levey, and Hall Phoenix/Inwood, Ltd. reported in Search's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. On November 21, 1996 the parties reached a compromise and settlement agreement whereby Search gave HPIL $4,000,000 in cash and a $5,000,000 subordinated debenture. Both parties have agreed to dismiss all litigation and mutually release each other. Messrs. Hall and Levey have resigned from the Board of Directors of the Company and, along with HFG and HPIL, have agreed that for a period of five years, they will refrain from taking substantially any action with respect to the Registrant. See Note 3 of Notes to Condensed Financial Statements in Part I, Item 1, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," Liquidity and Capital Resources in Part I, Item 2 for further discussion. ITEM 2. CHANGES IN SECURITIES Certain clarifying amendments to the Certificate of Designation for the Company's 9%/7% Convertible Preferred Stock and a one-for-eight "reverse" split of the Company's Common Stock, 12% Senior Convertible Preferred Stock and 9%/7% Convertible Preferred Stock and Series B 9%/7% Preferred Stock were effected on November 22, 1996. The principal effects of the clarifying amendments to the terms of the Certificate of Designation for the 9%/7% Convertible Preferred Stock are as follows: 1. Specify that the record date for purpose of determining stockholders entitled to receive quarterly dividends on the 9%/7% Convertible Preferred Stock is the close of business on the last day of the calendar quarter; 21 22 2. Define Effective Date as used in the Certificate of Designation as March 15, 1996; the effective date of the Fund Subsidiaries' plan reorganization; 3. Specifies March 31, 1989 as the end date of the period during which the 9% dividend rate is applicable; 4. Clarify that (i) only those holders 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 9%/7% Convertible Preferred Stock not issued pursuant to the reorganization plan shall begin to accrue on the date such shares are issued; 5. Specify that the members of the Board of Directors of the Company immediately preceding a 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, for the requirement that a merger be approved by the holders of at least 50% of the outstanding shares of 9%/7% Convertible Preferred Stock not to apply; 6. Supplement and clarify the provisions of the Certificate of Designation regarding mandating conversion by adding provisions that address (i) the method of selecting the 50% of the shares to be converted, (ii) the manner in which notice of the conversion is to be provided, (iii) the content of such notice, and (iv) the manner in which certificates for 9%/7% Convertible Preferred Stock are to be exchanged for certificates of the underlying Common Stock; 7. Clarify that the 50% mandatory conversion applies to all outstanding shares of 9%7% Convertible Preferred Stock regardless of when they were issued; 8. Provide that after the effective date of the conversion (i) the accrual of dividends upon the converted 9%/7% Convertible Preferred Stock will cease and (ii) all rights of holders of such stock will cease, except for the right to receive shares of the Common Stock and accrued, unpaid dividends; 9. Clarify (i) the conversion rate for the 9%/7% Convertible Preferred Stock upon the final mandatory conversion on the seventh anniversary of the Effective Date and (ii) that the conversion rate for the final mandatory conversion and the trigger prices per share for the initial 50% mandatory conversion were subject to adjustment if and when the normal two- for-one conversion rate for the 9%/7% Convertible Preferred Stock was adjusted for extraordinary transactions, such as stock splits or combinations, as initially inferred from the existing provisions. The amendments also clarify that the Company will pay through the date of conversion any accrued, unpaid dividends on any 9%/7% Convertible Preferred Stock that is mandatorily converted. 22 23 Several provisions in the initial Certificate of Designation were dependent on the market price or average market price of the Common Stock, but failed to contain adequate definitions of those terms. The amendments provide suitable and consistent definitions of these terms. The amendments also add provisions specifying how the Common Stock is to be valued for purposes of any dividend payable on the 9%/7% Convertible Preferred Stock in shares of Common Stock. The new provisions specified 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 principal effects of the one-for-eight "reverse" split amendments are as follows: 1. The one-for eight "reverse" stock split decreased the number of outstanding shares of the Common Stock, 9%/7% Convertible Preferred Stock, Series B Preferred Stock, and 12% Preferred Stock by 87.5%. The split did not affect the proportionate equity interest in the Company of any holder of Common Stock, 9%/7% Convertible Preferred Stock, 12% Senior Convertible Preferred Stock or and Series B Preferred Stock. Certain terms of the 9%/7% Convertible Preferred Stock, 12% Preferred Stock, and Series B Preferred Stock were increased proportionately to retain the appropriate relationship between conversion rates, dividends rates, redemptions prices, conversion trigger prices, and liquidation prices. Upon effectiveness of the clarifying amendments to the Certificate of Designation for the 9%/7% Convertible Preferred Stock, each issued and outstanding share of Series B 9%/7% Convertible Preferred Stock was automatically converted into one share of 9%/7% Convertible Preferred Stock. On January 10, 1997, Search filed a Certificate of Elimination of Series B 9%/7% Convertible Preferred Stock with the Delaware Secretary of State canceling and eliminating the Series B 9%/7% Convertible Preferred Stock. Shares of that series have reverted to the status of authorized but unissued shares of preferred stock undesignated as to series. On November 19, 1996 the Company issued warrants to purchase 11,250 shares of the Common Stock to one of its directors for services to be rendered as a director. These warrants were exempt from registration pursuant to Section 4, (2) of Securities Act of 1933, as amended. The warrants expire on 11/19/06 and are exercisable at $9.00 per share of Common Stock. On November 25, 1996 the Company issued 231,066 shares of its Common Stock, 271,867 shares of its 9%/7% Convertible Preferred Stock, and warrants to purchase 194,960 shares of Common Stock in exchange for approximately $5,500,000 in assets from USLC. These securities are exempt from registration pursuant to Section 1145 of the Federal Bankruptcy Code. The warrants expire on March 14, 2001 and are exercisable at $16.00 to $24.00 per share. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 15, 1996, the Company held a special meeting of its stockholders to vote on the following items: 23 24 Item 1. 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 from 1,750,000 shares to 5,000,000 shares; Item 2. Approval of certain clarifying amendments to the terms of the Company's 9%/7% Convertible Preferred Stock; and Item 3. Approval of amendments to the Company's Restated Certificate of Incorporation to effect an one-for-eight "reverse" stock split of the Company's Common Stock, 9%/7% Convertible Preferred Stock, 12% Senior Preferred Stock, and Series B Preferred Stock. The following table shows the voting with respect to these items.
For Against Abstentions Broker Non-Votes --- ------- ----------- ---------------- Item 1 22,859,382 14,744,565 990,828 2,280 Item 2 42,474,924 9,861,576 758,283 1,550 Item 3 43,630,265 11,634,673 466,716
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 - -------- -------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of Search Capital Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Transition Report on Form 10-K for the transition period ended March 31, 1996. Restated Certificate of Incorporation of Search Capital Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Transition Report on Form 10-K for the transition period ended March 31, 1996. 3.2 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (the "9/30/96 Form 10-Q")) 3.3 Certificate of Designation Series B 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the 9/30/96 Form 10-Q. 3.4 Certificate of Correction to the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the 9/30/96 Form 10-Q) 3.5 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.4 to the 9/30/96 Form 10-Q) 24 25 Exhibit Number Description - -------- -------------------------------------------------------------------- 3.6 Certificate of Amendment to Certificate of Designation of Series B 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.5 to the 9/30/96 Form 10-Q) 3.7 Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-3, Registration No. 333-20551) 3.8 Certificate of Elimination of Series B 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 4.8 to the Company's Registration Statement on Form S-3, Registration No. 333-20551) 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K, dated November 21, 1996, reporting the events described in Part I, Item 1. The Company filed a Current Report on Form 8-K, dated November 25, 1996 reporting the acquisition of substantially all of the assets of U.S. Lending Corp. 25 26 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 February 7, 1997 - --------------------------- -------------------- George C. Evans Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer and Director /s/ Robert D. Idzi February 7, 1997 - --------------------------- --------------------- Robert D. Idzi Senior Executive Vice President, Chief Financial Officer and Treasurer /s/ Andrew D. Plagens February 7, 1997 - --------------------------- --------------------- Andrew D. Plagens Vice President, Controller and Chief Accounting Officer
26 27 Exhibit Number Description - -------- -------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of Search Capital Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Transition Report on Form 10-K for the transition period ended March 31, 1996. Restated Certificate of Incorporation of Search Capital Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Transition Report on Form 10-K for the transition period ended March 31, 1996. 3.2 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (the "9/30/96 Form 10-Q")) 3.3 Certificate of Designation Series B 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to the 9/30/96 Form 10-Q. 3.4 Certificate of Correction to the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the 9/30/96 Form 10-Q) 3.5 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.4 to the 9/30/96 Form 10-Q) 3.6 Certificate of Amendment to Certificate of Designation of Series B 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.5 to the 9/30/96 Form 10-Q) 3.7 Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-3, Registration No. 333-20551) 3.8 Certificate of Elimination of Series B 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 4.8 to the Company's Registration Statement on Form S-3, Registration No. 333-20551) 27 Financial Data Schedule EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE SHEET AND STATEMENT OF OPERATIONS FOR QUARTER ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10-Q. 1 9-MOS MAR-31-1997 APR-1-1996 DEC-31-1996 15,697,000 0 60,721,000 10,445,000 592,000 16,289,000 2,933,000 1,425,000 79,708,000 4,277,000 5,000,000 201,000 0 263,000 0 79,708,000 0 7,036,000 0 0 0 (4,611,000) 1,163,000 (3,268,000) 0 (3,268,000) 0 0 0 (3,268,000) (.96) (.96)
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