-----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, VGXyD9ZaPl1asRarYbR0ZhhcMAi7MM0hqXnSZFfBOAh5nMyGbBiW7ePZ6QT0nwU0 fjOGxFnmx/eayW+/15gxlw== 0000950134-97-004444.txt : 19970606 0000950134-97-004444.hdr.sgml : 19970606 ACCESSION NUMBER: 0000950134-97-004444 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960806 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970605 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-09539 FILM NUMBER: 97619577 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 8-K/A 1 AMENDMENT NO. 1 TO FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) AUGUST 6, 1996 -------------------------------- SEARCH CAPITAL GROUP, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 0-9539 41-1356819 - ------------------------------ ------------------- ----------------------- (State or other jurisdiction (Commission File (I.R.S. Employer of incorporation) Number) Identification No.) 700 N. PEARL STREET SUITE 400, L.B. 401 DALLAS, TEXAS 75201-7490 - ---------------------------------------- ---------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (214) 965-6000 ----------------------------- NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On August 6, 1996, the Company completed its acquisition of substantially all of the assets of Dealers Alliance Credit Corp. ("DACC"). DACC's assets consisted primarily of used motor vehicle retail installment sales contracts, repossessed motor vehicles, cash, and certain furniture and equipment. As of June 30, 1996, DACC had contracts with total unpaid future installments of approximately $35 million and net finance receivables of approximately $14.2 million after reduction for unearned finance charges of approximately $8.1 million and after an allowance for credit losses of approximately $12.6 million. The Company assumed all balance sheet liabilities of DACC, other than approximately $4.1 million of subordinated debt and warrants and certain other claims. These liabilities consisted primarily of indebtedness owing to senior lenders, accounts payable, accrued expenses, an office lease expiring 2002, service and equipment maintenance agreements and an employment agreement for a DACC employee. As of June 30, 1996, DACC owed approximately $18 million to its senior lenders and had accounts payable and accrued expenses of approximately $0.7 million. The assumed senior debt bears interest at the prime rate plus 1%, matures on August 2, 1997 and is secured by the contracts purchased from DACC. The Company must make monthly prepayments of the debt in amounts equal to any excess of (i) the monthly collections on the purchased contracts over (ii) up to $475,000 of permitted monthly operating expenses. In addition to assuming the foregoing liabilities, the Company issued to DACC (i) 766,218 shares of a new series of preferred stock designated "Series B 9%/7% Convertible Preferred Stock" (the "Series B Preferred Stock"), (ii) 1,277,030 shares of Common Stock, and (iii) five-year warrants to purchase 1,277,030 shares of Common Stock at $2.00 per share (increasing by $0.25 each year). One-half of the securities issued to DACC were escrowed until May 2, 1997, and the remaining securities were escrowed until August 3, 1997, to secure certain indemnification obligations of DACC in favor of the Company under the purchase agreement. The Company also purchased the subordinated debt owing by DACC and certain related warrants to purchase DACC stock. All of the debt and warrants were canceled by the Company as part of the consideration for the transfer of DACC's assets. The Company issued a total of 1,787,842 shares of Series B Preferred Stock to the two holders of such debt and warrants. One-fourth of these shares were escrowed until May 2, 1997, and an additional 25% of these shares were escrowed until August 3, 1997, to secure certain indemnification obligations of the holders in favor of the Company. As a result of the acquisition of DACC and the issuance of the Company's securities in connection therewith, the total stockholders' equity of the Company increased approximately $4.6 million. See "Pro Forma Condensed Consolidated Balance Sheets." The Company and the recipients of the Company's securities, including DACC, also entered into shareholders' agreements that require the Company to file within six months after the closing, and to use best efforts to cause to become effective within 90 days thereafter, a registration statement with the Securities and Exchange Commission for the offer and resale of the securities issued by the Company in this acquisition. The Company will bear all of the costs of such registration (other than underwriting discounts, commissions and expenses incurred by the security holders) and up to $40,000 of the fees of counsel for the security holders. The terms of the Series B Preferred Stock are similar to the terms of the Company's existing 9%/7% Convertible Preferred Stock (the "New Preferred Stock"). According to its terms, the shares of Series B Preferred Stock will be automatically converted, on a one-for-one basis, into newly issued shares of New Preferred Stock when certain clarifying amendments to the terms of the New Preferred Stock are approved by the Company's stockholders and filed with the Delaware Secretary of State. The Company has filed with the Securities and Exchange Commission proxy materials with respect to a special stockholders' meeting called for the purpose of considering such amendments. -1- 3 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. INDEX TO FINANCIAL STATEMENTS FOR DEALERS ALLIANCE CREDIT CORP.
Page ---- Financial Statements for the three-month period ended March 31, 1996 and year ended December 31, 1995 Independent auditors' report F-1 Statements of financial condition F-2 Statements of operations F-3 Statements of common stockholders' deficit F-4 Statements of cash flows F-5 Notes to financial statements F-6 Financial Statements for the year ended December 31, 1994 and for the period from inception, July 16, 1993, to December 31, 1993 Independent auditors' report F-20 Statements of financial condition F-21 Statements of operations F-22 Statements of common shareholders' deficit F-23 Statements of cash flows F-24 Notes to financial statements F-25 Financial Statements for the three-month period ended June 30, 1996 Statement of financial condition F-32 Statement of operations F-33 Statement of cash flows F-34
-2- 4 [BDO SEIDMAN, LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT Board of Directors Dealers Alliance Credit Corp. Atlanta, Georgia We have audited the accompanying statements of financial condition of Dealers Alliance Credit Corp. as of March 31, 1996 and December 31, 1995, and the related statements of operations, common stockholders' deficit, and cash flows for the three months ended March 31, 1996 and for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dealers Alliance Credit Corp. as of March 31, 1996 and December 31, 1995, and the results of its operations and its cash flows for the three months ended March 31, 1996 and for the year ended December 31, 1995 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's recurring losses from operations, negative capital position and notices of default from its principal lenders raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Atlanta, Georgia May 21, 1996, except for Note 7 /s/ BDO SEIDMAN, LLP which is as of May 24, 1996 F-1 5 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF FINANCIAL CONDITION ================================================================================
MARCH 31, December 31, 1996 1995 - ----------------------------------------------------------------------------------------------------------------- ASSETS Net finance receivables (Note 3) $ 35,125,860 $ 33,686,474 Allowance for credit losses (Note 3) (13,450,000) (14,506,538) - ----------------------------------------------------------------------------------------------------------------- 21,675,860 19,179,936 Cash and cash equivalents 368,767 325,678 Repossessed collateral 437,804 569,556 Furniture and equipment, net 248,940 228,570 Prepaid rent (Note 6) 272,167 327,750 Other assets (Note 6) 647,889 711,832 - ----------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 23,651,427 $ 21,343,322 ================================================================================================================= LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT LIABILITIES Revolving credit agreement advances (Note 4) $ 19,250,000 $ 16,850,000 Accounts payable and accrued expenses 1,138,330 1,001,815 Due to related party (Note 11) 19,399 60,111 Senior subordinated notes payable, net (Note 8) 3,486,991 3,460,872 - ----------------------------------------------------------------------------------------------------------------- 23,894,720 21,372,798 WARRANTS (Note 8) 563,767 521,945 REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK, $0.01 par value; 200,000 share authorized, 176,313 and 177,630 shares issued and outstanding, net of $24,645 note receivable from stockholder (Notes 9 and 11) 8,752,971 8,674,880 COMMON STOCKHOLDERS' DEFICIT (Notes 10 and 11) Common stock, $0.01 par value; 250,000 shares authorized, 9,402 shares issued and outstanding 94 94 Additional paid-in capital - 82,893 Note receivable from stockholder (25,000) (25,000) Accumulated deficit (9,535,125) (9,284,288) - ----------------------------------------------------------------------------------------------------------------- Total common stockholders' deficit (9,560,031) (9,226,301) - ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 23,651,427 $ 21,343,322 =================================================================================================================
See accompanying notes to financial statements. F-2 6 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF OPERATIONS ================================================================================
THREE MONTHS Year ENDED ended MARCH 31, 1996 December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------- NET FINANCE REVENUES Interest income on finance contracts $1,908,371 $ 5,638,347 Ancillary and other operating income 140,062 326,193 - ---------------------------------------------------------------------------------------------------------------------- Net finance revenues 2,048,433 5,964,540 - ---------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE, NET Interest expense 699,337 1,342,363 Interest income (9,666) (21,048) - ---------------------------------------------------------------------------------------------------------------------- Total interest expense, net 689,671 1,321,315 - ---------------------------------------------------------------------------------------------------------------------- Finance income before provision for credit losses 1,358,762 4,643,225 Provision for credit losses - (7,415,113) - ---------------------------------------------------------------------------------------------------------------------- Net finance income (loss) 1,358,762 (2,771,888) - ---------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Employee compensation and related expenses 961,881 2,909,563 General and administrative 390,749 965,659 Consulting and professional fees 219,950 980,117 - ---------------------------------------------------------------------------------------------------------------------- Total operating expenses 1,572,580 4,855,339 - ---------------------------------------------------------------------------------------------------------------------- NET LOSS $ (213,818) $(7,627,227) ======================================================================================================================
Interim results are not necessarily indicative of the results that may be expected for the entire year. See accompanying notes to financial statements. F-3 7 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT THREE MONTHS ENDED MARCH 31, 1996 AND YEAR ENDED DECEMBER 31, 1995 ================================================================================
Note Total Common Stock Additional receivable common ------------------ paid-in from Accumulated stockholders' Shares Amount capital stockholder deficit deficit - -------------------------------------------------------------------------------------------------------------------- BALANCE, at December 31, 1994 9,402 $94 $ 330,574 $ (25,000) $(1,657,061) $(1,351,393) Compensatory common stock options - - 39,450 - - 39,450 Preferred stock dividend - - (219,172) - - (219,172) Preferred stock accretion - - (48,910) - - (48,910) Warrant accretion - - (19,049) - - (19,049) Net loss - - - - (7,627,227) (7,627,227) - -------------------------------------------------------------------------------------------------------------------- BALANCE, at December 31, 1995 9,402 94 82,893 (25,000) (9,284,288) (9,226,301) Preferred stock dividend - - (66,280) - - (66,280) Preferred stock accretion - - (11,810) - - (11,810) Warrant accretion - - (4,803) - (37,019) (41,822) Net loss - - - - (213,818) (213,818) - -------------------------------------------------------------------------------------------------------------------- BALANCE, at March 31, 1996 9,402 $94 $ - $ (25,000) $(9,535,125) $(9,560,031) ====================================================================================================================
Interim results are not necessarily indicative of the results that may be expected for the entire year. See accompanying notes to financial statements. F-4 8 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF CASH FLOWS ================================================================================
THREE MONTHS Year ENDED ended MARCH 31, 1996 December 31, 1995 - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (213,818) $ (7,627,227) Adjustments: Provision for credit losses - 7,415,113 Depreciation and amortization 21,568 80,970 Amortization of debt discount and organization fees 62,917 222,212 Compensatory stock options issued to related party - 39,450 Changes in assets and liabilities: Repossessed collateral 131,752 (511,493) Other assets 35,321 (1,213,368) Accounts payable and acrued expenses 136,517 835,542 Due to related party (40,712) 48,254 - --------------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities 133,545 (710,547) - --------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of installment contracts receivable (4,966,659) (27,358,521) Payments received on installment contracts receivable 2,514,695 3,729,126 Purchases of equipment (41,995) (129,685) Proceeds from sale of assets 3,505 - - --------------------------------------------------------------------------------------------------------------- Cash used in investing activities (2,490,454) (23,759,080) - --------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Revolving credit agreement advances 2,400,000 16,850,000 Subordinated debt issuance - 4,000,000 Issuance of preferred stock - 2,972,832 - --------------------------------------------------------------------------------------------------------------- Cash provided by financing activities 2,400,000 23,822,832 - --------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 43,091 (646,795) - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS at beginning of period 325,678 972,473 - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS at end of period $ 368,767 $ 325,678 =============================================================================================================== NON-CASH ACTIVITIES Accretion of put value of warrants $ 41,822 $ 19,049 Accretion of value of preferred stock 11,810 48,910 Preferred stock dividend 66,280 219,172
Interim cash flows are not necessarily indicative of the cash flows that may be expected for the entire year. See accompanying notes to financial statements. F-5 9 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ 1. SUMMARY OF SIGNIFICANT BUSINESS DESCRIPTION ACCOUNTING POLICIES Dealers Alliance Credit Corp. (the "Company"), is a specialized indirect consumer finance company engaged in financing the purchase of used automobiles by purchasing retail installment sales contracts ("Installment Contracts") primarily from independent used automobile dealers. The Company was incorporated in the state of Delaware on July 16, 1993. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NON-REFUNDABLE ACQUISITION DISCOUNT Generally, Installment Contracts are purchased from dealers at non-refundable acquisition discounts ("Discount") from the principal amounts financed by the borrowers. Prior to January 1, 1996 when an Installment Contract was purchased, the Company allocated to the allowance for credit losses the portion of the Discount deemed necessary to absorb estimated future credit losses for the Installment Contract portfolio. Any remaining amount was deferred as unearned acquisition discount and was amortized to interest income using the interest method over the term of the Installment Contract. The entire Discount related to Installment Contracts purchased subsequent to December 31, 1995 has been allocated to the Allowance for Credit Losses, and no discount revenue recognized. REVENUE RECOGNITION Each installment contract requires the customer to make monthly payments over a fixed term. The difference between the total amount of contractual payments and the principal amount financed represents unearned finance charges. Unearned finance charges are amortized and recorded as interest income using the interest method over the term and at the interest rate stated in the Installment Contract. When an Installment Contract becomes 61 or more days past due or the customer becomes the subject of a bankruptcy proceeding, income recognition is suspended until the Installment Contract is restored to a current status. F-6 10 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ The Company derives income from product warranties sold by a third party that are financed under the Installment Contracts (ancillary income). That income is deferred and recorded as unearned ancillary income and amortized to revenue using the sum-of-the-digits method, which approximates the results of the interest method, over the terms of the underlying warranty contracts. Other operating income, which includes late charges and deferral fees charged to customers, is recognized as collected. ALLOWANCE FOR CREDIT LOSSES Allowance for credit losses is established through an allocation at the acquisition date of the Discount based upon management's estimate of future credit losses. Commencing January 1, 1996, the entire discount has been allocated to the allowance account. Management periodically evaluates the adequacy of the allowance for credit losses by reviewing credit loss experience, delinquencies, the value of the collateral and general economic conditions. If the allowance for credit losses is insufficient in comparison to the amount management believes necessary to absorb potential losses in the Installment Contract portfolio, the Company first transfers amounts from the unearned acquisition discount, to the extent available, and then, if necessary, a provision for credit losses is charged against earnings. An Installment Contract is charged to the allowance for credit losses at the earliest of the time when the automobile securing the Installment Contract is repossessed, the payment under the Installment Contract is 180 days or more past due, or the Installment Contract is otherwise deemed to be uncollectible. REPOSSESSED AUTOMOBILES A repossessed automobile is recorded at its estimated realizable value less estimated costs of disposition. The Company commences repossession against the automobile securing a delinquent account when it determines that additional collection efforts are not likely to be successful. Generally, repossession occurs when a borrower becomes 60 days delinquent on an Installment Contract. Upon repossession, the amount due under an Installment Contract, net of the related unearned acquisition discount, if any, is reduced to the estimated realizable value of the automobile less estimated costs of disposition through a charge to the allowance for credit losses. F-7 11 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ DEFERRED CONTRACT ACQUISITION COSTS The Company defers costs directly associated with the acquisition of Installment Contracts such as the fees, commission and dealers incentives and amortizes such costs using the interest method as a reduction of interest income over the term of the Installment Contracts. CASH AND CASH EQUIVALENTS Cash and cash equivalents include liquid investments with original maturities of three months or less. FURNITURE AND EQUIPMENT Furniture and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 4 to 6 years, using the straight-line method. Accumulated depreciation at March 31, 1996 and December 31, 1995 was $75,699 and $57,579, respectively. DEFERRED LOAN COSTS Commitment, placement and other fees and expenses incurred in connection with the Company's Revolving Credit Agreement and Subordinated Debt are deferred, as other assets, and amortized under the sum-of-the-years digits method to interest expense over the terms of the related agreements. INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred taxes are recorded based upon temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Management provides a valuation allowance for deferred tax assets when they determine it is more likely than not that the benefits from such deferred tax assets will not be realized. 2. FUTURE PROSPECTS The Company's financial statements for the three months ended March 31, 1996 and for the year ended December 31, 1995 have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred net losses of $213,818 for the three months ended March 31, 1996 and $7,627,227 for the year ended F-8 12 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ December 31, 1995 resulting in an accumulated deficit of $9,535,125 and $9,284,288 at March 31, 1996 and December 31, 1995, respectively. During 1996, the Company's principal lenders notified the Company that the Company was in default of certain financial convenants of the loan agreement and subordinated note agreements. In these circumstances, the outstanding borrowings become immediately due and payable upon notification of the lenders. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are discussed below. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In early March 1996 Company determined that its portfolio of installment contracts was not performing as had been previously estimated and, consequently, a significant provision for credit losses and resulting addition to the allowance for credit losses was required as of and for the period ended December 31, 1995. The Company immediately informed its senior revolving credit lenders ("Senior Lenders") and subordinated debt lenders ("Subdebt Lenders") of its determination and that, as a consequence, the Company would be in default on a number of covenants contained in the revolving credit agreement with the Senior Lenders ("Senior Loan") and subordinated note agreement with the Subdebt Lenders ("Subordinated Loan"). On March 19, 1996 the Senior Lenders notified Company that events of default had occurred under the Senior Loan and that Company would not be permitted to make any additional borrowings thereunder. On March 22, 1996 the Subdebt Lenders notified Company than events of default had occurred under the Subordinated Loan. Neither the Senior Lenders nor the Subdebt Lenders have demanded payment in full or accelerated the maturity of those debts. However, the Senior Loan expired by its terms on May 1, 1996 and in accordance with an agreement with the Senior Lenders the Subdebt Lenders cannot currently accelerate the Subordinated Loan. The Senior Lenders have informed Company that they will not renew the Senior Loan; however, for an unspecified period of time they will permit Company to use most of its cash collections from its loan portfolio to operate its business less interest payments. F-9 13 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ On April 2, 1996 Company retained two investment banking firms to aid and assist its efforts to recapitalize the Company through direct investment, sale or merger. Although the effort to recapitalize is continuing and the Senior Lenders are permitting the Company to operate, no assurance can be given that Company will be successful in recapitalizing or that the Senior Lenders will not accelerate the Senior Debt and foreclose on the portfolio collateral prior to the time that any recapitalization is completed. 3. NET RECEIVABLES Generally, the Company's Installment Contracts have terms of 24 to 36 months. The net finance receivables balance consisted of the following:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- Contractual payments due $ 46,371,288 $ 44,900,063 Unearned finance charges (11,328,861) (11,278,054) -------------------------------------------------------------------------- Contractual principal balance 35,042,427 33,622,009 Unearned ancillary income (84,662) (93,358) Deferred contract acquisition costs, net 168,095 157,823 -------------------------------------------------------------------------- Net finance receivables $ 35,125,860 $ 33,686,474 ==========================================================================
F-10 14 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ Activity in the unearned contract acquisition discount and allowance for credit losses accounts for the three months ended March 31, 1996 and the year ended December 31, 1995 was as follows:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- UNEARNED CONTRACT ACQUISITION DISCOUNT Balance - beginning of period $ - $ 507,783 Discounts allocated to unearned acquisition - discount 1,968,292 Amortized to interest income - (546,402) Transferred to allowance for - credit losses (1,376,787) Related to charge-offs, net - (552,886) -------------------------------------------------------------------------- Balance - end of period $ - $ - ==========================================================================
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES Balance - beginning of period $14,506,538 $ 598,120 Discounts allocated to allowance for credit losses 2,185,597 9,383,810 Transferred from unearned acquisition discount - 1,376,787 Provision for credit losses - 7,415,113 Charge-offs (3,273,975) (4,283,206) Recoveries 31,840 15,914 -------------------------------------------------------------------------- Balance - end of period $13,450,000 $ 14,506,538 ==========================================================================
The Company's exposure to credit loss in the event of non-performance by the customer is represented by the amount of the Installment Contract less the acquisition discount. At March 31, 1996 approximately 32%, 24% and 14%, of the Company's Installment Contracts were purchased from dealers located in Tennessee, Georgia and Texas, respectively. F-11 15 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ 4. REVOLVING CREDIT At March 31, 1996 the Company had a $35 AGREEMENT million revolving credit agreement ("Revolving Credit Agreement"), which was in default, with three banks, which expired on May 1, 1996. The Company's obligations under the Revolving Credit Agreement are secured by substantially all of the Company's assets. Borrowings under the Revolving Credit Agreement were $19.25 million and $16.85 million at March 31, 1996 and December 31, 1995, respectively. Interest on the borrowings under the Revolving Credit Agreement is payable monthly based upon the referenced prime rate (which was 8.25% at March 31, 1996) plus 2% per annum. For the three months ended March 31, 1996 interest expense amounted to $470,600 and consisted of interest on advances (weighted average interest rate of 10.25%) under the Revolving Credit Agreement, amortization of the Revolving Credit Agreement fees and expenses. For the year ended December 31, 1995 interest expense amounted to $975,340 and consisted of interest on advances (weighted average interest rate of 11.5%) under the Revolving Credit Agreement, amortization of the Revolving Credit Agreement fees and expenses, and amortization of the cost of an option to purchase an interest rate protection agreement. The Revolving Credit Agreement requires the Company to maintain specified financial ratios and to comply with other covenants. At March 31, 1996 the Company was in default under this agreement due to failure to maintain these agreed upon covenants, including the minimum interest coverage ratio, minimum tangible net worth and the ratio of charge-offs to average net finance receivables. 5. INCOME TAXES The Company has incurred net operating losses since its inception in 1993 and, accordingly, no provision for income taxes for the three months ended March 31, 1996 or for the year ended December 31, 1995 has been recorded. Net operating loss carryovers, which aggregate approximately $4,345,000 at March 31, 1996, are available to reduce future federal and state income taxes and expire through December 31, 2010. Deferred taxes reflect the net tax effect of temporary differences between the financial reporting bases of assets and liabilities and the amounts applicable for income tax purposes. F-12 16 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ The Company's net deferred tax assets were as follows:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- Deferred tax asset: Pre-operating expenses $ 80,000 $ 87,000 Allowance for credit losses 1,718,000 2,348,000 Net operating loss carryover 1,520,000 812,000 -------------------------------------------------------------------------- 3,318,000 3,247,000 Less valuation allowance (3,318,000) (3,247,000) -------------------------------------------------------------------------- Net deferred tax asset $ - $ - ==========================================================================
6. LEASES AND OTHER OFFICE FACILITY AND EQUIPMENT LEASES COMMITMENTS The Company rents its office under a non-cancellable lease agreement which terminates in September 2002 and provides the Company with options, subject to certain conditions, to lease additional space in 1996 and 1997. The new lease requires the Company to reimburse the landlord for increases over the base year amounts for certain expenses, such as real estate taxes, utilities and maintenance. Upon executing the lease in August 1995 the Company was required to fund $364,000 of future rental payments and $150,000 representing a security deposit. The unamortized portion of the future rental payments and the security deposit are included in "prepaid rent" and "other assets" at March 31, 1996 and December 31, 1995. The rental prepayment will reduce future rental payments through March 1997. Some of the Company's office equipment is subject to operating leases. The aggregate rent expense for the office facility and equipment leases was $58,900 for the three months ended March 31, 1996 and $74,200 for the year ended December 31, 1995. DATA PROCESSING AGREEMENT The Company entered into a five-year contract, which expires in June 1999, to receive data processing services. The contract requires minimum monthly fees for services rendered. F-13 17 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ At March 31, 1996, future minimum payments for non-cancellable leases, including the new office lease, and data processing services were as follows:
Data Leases Processing --------------------------------------------------------------------------- Year ending March 31, 1997 $ 128,000 $218,000 Year ending March 31, 1998 383,400 180,000 Year ending March 31, 1999 360,200 180,000 Year ending March 31, 2000 292,300 45,000 Year ending March 31, 2001 287,700 - Thereafter 424,500 - --------------------------------------------------------------------------- Total $1,876,100 $623,000 ===========================================================================
7. CONTINGENCIES Subsequent to March 31, 1996, the employment by the Company of its then president and then chief financial officer was terminated. Each believes they were dismissed without cause. The Company has been notified by counsel representing these two former employees that legal action may be initiated against the Company for, among other things, severance payments, recommendations and release of non-compete agreements. 8. SUBORDINATED DEBT During 1995, the Company issued $4 million AND WARRANTS of subordinated debt, which is subordinated to the Company's Revolving Credit Agreement and bears interest at 10% per annum, payable quarterly. The first issue of $2.5 million occurred on October 16, 1995 and the remaining $1.5 million was issued on December 20, 1995. The Subordinated Debt matures October 16, 2000, unless repayment is required by redemption of the Preferred Stock or the completion of an initial public offering. In connection with the issuance of the Subordinated Debt the lenders were issued warrant ("Warrants") to purchase 18,467 shares of the Company's Common Stock for an exercise price of $0.01 per share. These Warrant are exercisable immediately and expire in 10 years. If the Warrants are outstanding on November 1, 1998, unless the repurchase feature is otherwise accelerated, the Warrant holders have the right, under certain conditions, to require the Company to repurchase the Warrants at a price per share determined by dividing F-14 18 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ the largest of: (i) the Company's then fair value, (ii) 12 times the Company's net income for the last 4 quarters or (iii) $14 million divided by the number of fully-diluted shares of common stock and common stock equivalents then outstanding. Upon issuance, the $554,139 fair value of the Warrants was recorded as original issue discount. The Company incurred costs aggregating $369,894 in connection with the Subordinated Debt. Those costs, which are included in other assets, and the original issue discount are amortized as interest expense over the term of the Subordinated Debt using the interest method. For the three months ended March 31, 1996 interest expense for the subordinated debt was $101,111 and for the year ended December 31, 1995 interest expense was $64,085. The Warrant is being accreted over a 36 month period to an estimated repurchase value of $995,925 through a charge against net income available for common stockholders. Subordinated debt consisted of the following:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- Principal outstanding $4,000,000 $4,000,000 Less: Original issue discount, net of accumulated amortization (513,009) (539,128) -------------------------------------------------------------------------- $3,486,991 $3,460,872 ==========================================================================
9. REDEEMABLE SERIES A The Company has authorized 200,000 shares CONVERTIBLE PREFERRED of Series A Convertible Preferred Stock STOCK ("Preferred Stock"), par value $.01 per share. Holders of the Preferred Stock are entitled to cumulative annual stock dividends of 3% on December 30 of each year. In December 1993, the Company received commitments to buy 110,000 shares (gross proceeds of $5.5 million) of its Preferred Stock, 60% of which was purchased in December 1993 with the remaining 40% purchased in September 1994. The December 1993 closing resulted in the issuance of 66,000 shares of Preferred Stock with proceeds, net of offering costs, of approximately $3,120,000. The September 1994 closing resulted in the issuance of 44,000 shares of Preferred Stock, with net proceeds of approximately $2,196,000. F-15 19 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ On January 25, 1995 the Company's Board of Directors approved an offering of 60,000 shares of Preferred Stock at $50 per share to current holders of the Company's Preferred and Common Stock. The offering ("Rights Offering") resulted in the Company receiving commitments to purchase the entire 60,000 shares of Preferred Stock offered. The terms of the offering provided for two closings. The initial closing in May 1995 resulted in the issuance of 30,000 shares of Preferred Stock (net proceeds of $1,480,780). The second closing was on July 24, 1995 and an additional 30,000 shares of Preferred Stock (gross proceeds of $1,500,000) were issued. Each share of Preferred Stock may be converted into 1 share of Common Stock at any time at the option of the holder. Conversion into Common Stock is mandatory in the event of a qualified initial public offering of the Company's Common Stock, as defined ("IPO"). If an IPO does not occur before December 1, 1998, each holder of Preferred Stock may require the Company to redeem its Preferred Stock at the greater of the Common Stock's per share fair market value or its liquidation preference. Redemption is mandatory on November 30, 1999 at the greater of the Common Stock's per share fair market value on September 1, 1999 or its liquidation preference. The liquidation preference aggregated $8,903,600 at March 31, 1996 and $8,837,300 at December 31, 1995. For financial accounting purposes, the Preferred Stock is accreted to the greater of its liquidation preference ($50 per share) or the Common Stock's per share fair market value. Management believes the fair market value of its Common Stock was $50 per share at December 31, 1995 and December 31, 1994. For financial accounting purposes, the dividends were valued at $50 per share and were charged to additional paid-in capital, to the extent available, and then to accumulated deficit. Holders of Preferred Stock are entitled to one vote per share on all stockholder matters. The Company's Shareholders Agreement provides that all stockholders vote for an eight member Board of Directors comprised of four nominees of the majority Common Stockholder (see Related Party Transactions), one nominee of a specified Preferred Stock holder group, two nominees of the stockholders other than majority Common Stockholder and one nominee who is the Company's chief executive officers. The Shareholders Agreement terminates upon completion of an IPO. The Preferred Stock ranks senior to the Common Stock with respect to F-16 20 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ dividends and liquidation rights. The provisions of the Revolving Credit Agreement prohibit the payment of dividends in cash or property, other than stock dividends on the Preferred Stock. 10. OPTIONS TO PURCHASE On May 1, 1995, the options to purchase COMMON STOCK Common Stock granted to certain key officers of the Company during 1994 were modified. The modification increased the number of shares under grant from 17,500 to 25,500. Additionally, the rights of those grantees under the options vest in their entirety on December 30, 2000, unless vesting is accelerated by the Company's achievement of established operating performance objectives in 1995 and 1996. The exercise price per share is $50, which approximated fair market value per share at the date of the modification. On November 30, 1993, a member of the Board of Directors was granted an option, which vested immediately, to purchase 2,000 shares of Common Stock at an exercise price per share of $50, which approximated fair value per share at the date of grant, through November 30, 2003. On May 1, 1995, the option granted to Chicago Holdings, Inc. ("CHI") (see Related Party Transactions) in November 1993 to purchase 10,000 shares of Common Stock at an exercise price of $50 per share was modified. CHI's option to purchase those shares vest in its entirety on December 31, 2000, unless vesting is accelerated by the Company's achievement of established operating performance objectives in 1995 and 1996. On November 30, 1993, CHI was granted an option, which vested immediately, to purchase 10,000 shares of Common Stock. On May 1, 1995 CHI was granted an option, which vested immediately, to purchase an additional 2,500 shares of common stock. The exercise prices per share of the options are: $100 during 1996, $150 during 1997 and $200 thereafter through November 30, 2003. F-17 21 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ The Company obtained valuations from an independent party for the Common Stock options granted to CHI. The appraiser determined the fair value of CHI options granted or modified in 1995 was approximately $39,450 at the date of grant. The Company recognized a non-cash compensatory charge for such options in 1995. The fair value of the options granted in 1993 was not material. 11. RELATED PARTY COMMON STOCK TRANSACTIONS TRANSACTIONS Approximately 89.4% (8,401 shares) of the Company's outstanding Common Stock is owned by a wholly-owned subsidiary of CHI, a founder of the Company. The remaining outstanding shares of Common Stock are owned by the Company's President and its Chairman. The Chairman purchased 1 founding share. CHI's subsidiary purchased 1 founding share, 5,040 shares of the Company's Common Stock in the December 1993 closing for $240,005 and 3,360 shares in the September 1994 closing for $160,003. In September 1994, the Company's then President purchased 1,000 shares of Common Stock for $50 per share, payable $25,000 in cash and $25,000 by a five-year full recourse promissory note which bears interest at 6% per annum. This note is collateralized by a pledge of the Company's stock owned by the President, requires partial repayments in the event that the President earns an incentive bonus in 1996, 1997 or 1998, and accelerates if the President ceases to be employed by the Company. PREFERRED STOCK TRANSACTIONS In 1995 the Company's then President, as a participant in the Rights Offering, purchased a total of 493 shares of Preferred Stock at $50 per share payable $98 in cash and $24,552 by full recourse promissory notes due on September 1, 1999 which bear interest at 6% per annum. Those notes are collateralized by a pledge of the Company's stock owned by the President, require partial repayments in the event that the President earns an incentive bonus in 1996, 1997 or 1998, and accelerate if the President ceases to be employed by the Company. F-18 22 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ In 1995, a wholly-owned subsidiary of CHI, as a participant in the Right Offering, purchased 4,138 shares of preferred stock for a cash price of $206,900 ($50 per share). MANAGEMENT ADVISORY AGREEMENT The Company has a management advisory agreement with CHI. CHI agreed to provide accounting, legal and other services for the Company through November 1996. CHI's compensation for those services is $125 per hour, together with reimbursement of out-of-pocket expenses, for actual time devoted to assisting the Company. The terms of the agreement also provide for CHI to make its senior management available, at the Company's request, for advisory and consulting services through November 1, 1998. CHI is also entitled to a monthly fee of $10,000 for 36 months commencing after the Company achieves and continues to be profitable on a monthly basis. The agreement provides for the Company's payment of a market rate fee to CHI if CHI successfully arranges additional indebtedness for the Company. For the three months ended March 31, 1996 and the year ended December 31, 1995, CHI charged the Company $64,800 and $249,200, respectively, in hourly management fees and reimbursement of out-of-pocket expenses. During 1995 CHI charged the Company $111,280 and $75,000 as fees for negotiating increases to the Company's Revolving Credit Agreement and its Subordinated Debt. In August 1995, the Company entered into an advisory agreement, which expires in four years, with EQ Corporation, a shareholder of the Company, pursuant to which EQ Corporation will provide certain financial advisory services to the Company. The terms of the agreement required the Company to prepay all fees, which amounted to approximately $149,000, upon execution of the agreement. Such amount has been included in other assets and will be amortized to expense over the term of the agreement. F-19 23 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Dealers Alliance Credit Corp.: We have audited the accompanying statements of financial condition of Dealers Alliance Credit Corp. as of December 31, 1994 and 1993, and the related statements of operations, shareholders' deficit, and cash flows for the year ended December 31, 1994 and the period from July 16, 1993 (date of incorporation) to December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Dealers Alliance Credit Corp. as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the year ended December 31, 1994 and the period from July 16, 1993 (date of incorporation) to December 31, 1993 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP February 17, 1995 F-20 24 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1994 AND 1993 - --------------------------------------------------------------------------------
ASSETS 1994 1993 Net finance receivables $ 3,629,717 $ - Allowance for credit losses (598,120) - ----------- ----------- Net receivables 3,031,597 - Cash and cash equivalents 972,473 3,026,389 Repossessed collateral 58,063 - Furniture and equipment, net 131,411 - Other assets 67,158 131,507 ----------- ----------- $ 4,260,702 $ 3,157,896 =========== =========== LIABILITIES AND COMMON SHAREHOLDERS' DEFICIT Accounts payable and accrued expenses $ 166,271 $ 127,265 Due to related party 11,857 148,165 ----------- ----------- Total liabilities 178,128 275,430 Series A Convertible Preferred Stock, $0.01 par value; 200,000 shares authorized, 112,363 and 66,000 shares issued and outstanding at December 31, 1994 and 1993, respectively 5,433,967 3,120,000 Common Shareholders' Deficit: Common stock, $0.01 par value; 250,000 shares authorized, 9,402 and 6,302 shares issued and outstanding at December 31, 1994 and 1993, respectively 94 63 Additional paid-in capital 330,574 299,962 Note receivable from shareholder (25,000) (59,987) Accumulated deficit (1,657,061) (477,572) ----------- ----------- Total common shareholders' deficit (1,351,393) (237,534) ----------- ----------- $ 4,260,702 $ 3,157,896 =========== ===========
See notes to financial statements. F-21 25 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - -------------------------------------------------------------------------------
1994 1993 REVENUES: Interest income: Finance contracts $ 428,450 $ - Other 81,411 5,794 Ancillary and other operating income 11,501 - ----------- --------- Total revenues 521,362 5,794 INTEREST EXPENSE 119,787 - ----------- --------- NET INTEREST INCOME 401,575 5,794 ----------- --------- OPERATING EXPENSES: Employee compensation and related expenses 864,183 42,218 Other 716,881 441,148 ----------- --------- Total expenses 1,581,064 483,366 ----------- --------- NET LOSS $(1,179,489) $(477,572) =========== =========
See notes to financial statements. F-22 26 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF COMMON SHAREHOLDERS' DEFICIT YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - -----------------------------------------------------------------------
NOTE COMMON STOCK ADDITIONAL RECEIVABLE TOTAL COMMON ------------------- PAID-IN FROM ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL SHAREHOLDER DEFICIT STOCK DEFICIT BALANCE, JULY 16, 1993 - $ - $ - $ - $ - $ - $ - Issuance of common stock 6,302 63 299,962 (59,987) - - 240,038 Net loss - - - - (477,572) - (477,572) ----- ----- --------- -------- -------- ------ -------- BALANCE, DECEMBER 31, 1993 6,302 63 299,962 (59,987) (477,572) - (237,534) Repayment of note receivable from shareholder - - - 29,987 - - 29,987 Repurchase of common stock for treasury stock (1,260) - - 30,000 - (61,210) (31,210) Issuance of shares from treasury stock 1,000 - 1,421 (25,000) - 48,579 25,000 Treasury stock retired - (3) (12,628) - - 12,631 - Issuance of common stock 3,360 34 159,969 - - - 160,003 Preferred stock dividend - - (118,150) - - - (118,150) Net loss - - - - (1,179,489) - (1,179,489) ----- ----- -------- -------- ----------- -------- ----------- BALANCE, DECEMBER 31, 1994 9,402 $ 94 $330,574 $(25,000) $(1,657,061) $ - $(1,351,393) ===== ===== ======== ======== =========== ======== ===========
See notes to financial statements. F-23 27 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - --------------------------------------------------------------------------------
1994 1993 OPERATING ACTIVITIES: Interest income received - finance contracts $ 291,197 $ - Interest income - short-term investments 87,205 - Ancillary and other operating receipts 5,533 Payments for borrowing fees (36,889) (100,000) Payments for operating expenses (1,683,453) (233,649) ----------- ---------- Net cash used in operating activities (1,336,407) (333,649) INVESTING ACTIVITIES: Purchases of finance contracts (3,316,689) - Principal payments received on finance contracts 374,836 - Purchases of furniture and equipment (156,463) - ----------- ---------- Net cash used in investing activities (3,098,316) - FINANCING ACTIVITIES: Purchase of treasury stock (30,000) - Proceeds from issuance of common stock 185,003 240,038 Proceeds from issuance of preferred stock, net 2,195,817 3,120,000 Repayment of note receivable from shareholder 29,987 - ----------- ---------- Net cash provided by financing activities 2,380,807 3,360,038 ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,053,916) 3,026,389 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,026,389 - ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 972,473 $3,026,389 =========== ========== RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Net loss $(1,179,489) $ (477,572) Depreciation and amortization: Furniture and equipment 25,051 - Contract acquisition discount income (158,331) - Ancillary income (5,969) - Contract acquisition costs 21,078 - Decrease (increase) in other assets 58,555 (131,507) Increase in accounts payable and accrued expenses 39,006 127,265 Increase (decrease) in due to related party (136,308) 148,165 ----------- ---------- NET CASH USED IN OPERATING ACTIVITIES $(1,336,407) $ (333,649) =========== ==========
See notes to financial statements. F-24 28 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - ------------------------------------------------------------------------------- 1. BUSINESS DESCRIPTION Dealers Alliance Credit Corp. (the "Company") was incorporated in the state of Delaware on July 16, 1993, and operates from leased office space in Atlanta, Georgia. The Company is a finance company specializing in purchasing and servicing sub-prime automobile installment sales contracts ("finance contracts"), originated by automobile dealers and secured by the purchased automobiles. The Company began operations on December 1, 1993. As of December 31, 1994, the Company had purchased finance contracts from dealers located in seven southeastern states. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nonrefundable Contract Acquisition Discount - Generally, finance contracts are purchased from dealers at nonrefundable contract acquisition discounts from the principal amounts financed by the borrowers, "Dealer Discount." The amount of this Dealer Discount, which includes both credit and yield enhancement, is negotiated by the Company with the dealer. When a finance contract is purchased, the Company allocates to the allowance for credit losses the portion of the Dealer Discount deemed necessary to absorb estimated future credit losses for the finance contract portfolio. Any remaining amount is deferred as unearned contract acquisition discount and is amortized to interest income using the interest method over the term of the finance contract. When a specific finance contract is determined to be uncollectible, any unearned contract acquisition discount related to that contract is offset against the unpaid contract balance prior to charging the allowance for credit losses. Revenue Recognition - Each finance contract requires the borrower to make monthly payments over a fixed term. The difference between the total amount of contractual payments and the principal amount financed represents unearned finance charges. Unearned finance charges are amortized and recorded as interest income using the interest method over the term and at the interest rate stated in the finance contract. When a finance contract becomes 61 or more days past due, income recognition is suspended until the contractual aging is restored to a current status. The Company receives commissions from the sale of warranty contracts. Those commissions are deferred and recorded as unearned ancillary income and amortized to revenue using the sum-of-the-digits method, which approximates the results of the interest method, over the terms of the underlying warranty contracts. Other operating income, which includes late charges and extension fees charged to customers, is recognized as collected. Allowance for Credit Losses - Allowance for credit losses is established through an allocation of the Dealer Discount based upon management's estimate of future credit losses. Management believes that the allowance for credit losses and the related unearned contract acquisition discounts are adequate to F-25 29 absorb potential losses in the portfolio. Management evaluates the adequacy of the allowance for credit losses by reviewing credit loss experience, delinquencies, the value of the underlying collateral and general economic conditions. If necessary, a provision for credit losses will be charged against earnings to maintain the allowance for credit losses at an amount management believes necessary to absorb potential losses in the finance contract portfolio. Through December 31, 1994, the allocations of Dealer Discounts to the allowance for credit losses together with unearned contract acquisition discounts have been adequate to absorb all estimated credit losses. Accordingly, no provision for credit losses has been required. A finance contract is charged to the allowance for credit losses at the earliest of the month in which the related collateral is repossessed, the finance contract is six months or more past due, or the finance contract is otherwise deemed to be uncollectible. Repossessed Collateral - Repossessed collateral is recorded at its estimated net realizable value. The Company commences repossession against collateral when it determines that other collection efforts are not likely to be successful. Usually repossession occurs before a borrower has defaulted on two consecutive monthly payments. Upon repossession, the net amount due under a finance contract is reduced to the estimated net realizable value of the collateral through a charge to the related unearned contract acquisition discount with any remaining amount charged to the allowance for credit losses. Deferred Contract Acquisition Costs - The Company defers costs directly associated with the acquisition of finance contracts and amortizes such costs using the interest method as a reduction of interest income over the term of finance contracts. Cash and Cash Equivalents - Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. Furniture and Equipment - Furniture and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 4 to 6 years, using the straight-line method. Accumulated depreciation at December 31, 1994 was $25,051. Revolving Credit Facility Fees - Commitment and facility fees and expenses are paid to the Company's lender in accordance with the provisions of the Company's revolving credit facility. Those deferred costs are included in other assets and amortized to interest expense over the term of the facility. Income Taxes - The Company records income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred taxes are recorded based upon temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company incurred net operating losses in 1994 and 1993 and, accordingly, no provision for income taxes was made for the year ended December 31, 1994 and the period from July 16, 1993 (date of incorporation) to December 31, 1993. Postretirement and Postemployment Benefits - The Company does not offer postretirement or postemployment benefits to its employees. Accordingly, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," have no effect upon the Company's financial position or results of operations. F-26 30 3. FINANCE RECEIVABLES Generally, the Company's finance contracts have terms of 12 to 36 months. The net finance receivables balance consisted of the following at December 31, 1994: Contractual payments due $ 5,492,830 Unearned finance charges (1,433,492) ----------- Total finance receivables 4,059,338 Unearned contract acquisition discount (507,783) Unearned ancillary income (11,741) Deferred contract acquisition costs, net 89,903 ----------- Net finance receivables $ 3,629,717 ===========
At December 31, 1994 contractual payments due under finance contracts are scheduled to be received as follows:
YEAR ENDING DECEMBER 31, 1995 $2,342,707 1996 2,096,651 1997 1,049,816 1998 3,656 ---------- Total $5,492,830 ==========
The Company's experience has shown that some payments will be received prior to contractual due dates. When a finance contract is determined to be uncollectible, the unpaid account balance due is reduced by the net realizable value of the repossessed collateral and any remaining unearned contract acquisition discount. The net amount remaining, if any, is charged to the allowance for credit losses. Activity in the unearned contract acquisition discount and allowance for credit losses accounts for the year ended December 31, 1994, was as follows:
UNEARNED ALLOWANCE CONTRACT FOR ACQUISITION CREDIT DISCOUNT LOSSES Balance - beginning of year $ - $ - Discounts negotiated 703,422 747,441 Amortized to interest income (158,331) - Charge-offs, net (37,308) (149,321) --------- --------- Balance - end of year $ 507,783 $ 598,120 ========= =========
F-27 31 4. REVOLVING CREDIT FACILITY The Company has an $8 million revolving credit facility with a bank ("Facility"), which expires on December 31, 1995. Borrowings are secured by substantially all of the Company's assets. During 1994, the Company's operations did not require advances under the Facility. Interest on the borrowings under the Facility is payable monthly based upon the referenced prime rate, which was 8.5% at December 31, 1994, plus 2% per annum. Interest expense, which consisted solely of commitment and facility fees and expenses, for the year ended December 31, 1994 was $119,787. The Facility requires the Company to maintain specified financial ratios and to comply with other covenants. In January 1995, the Company acquired an option, exercisable on or before December 31, 1995, to purchase a contract which would provide interest rate protection during 1996 and 1997 on various notional amounts up to $15 million. The option is held for purposes other than trading. If the Company exercised its option and if the contract's referenced interest rate exceeds 12% during 1996 and 1997, then the Company would receive a payment computed using the rate differential multiplied by the applicable notional amount for that period. The contract exposes the Company to credit risk through counterparty nonperformance which risk is mitigated by the counterparty's financial condition. The Company would not require collateral or other security to support financial instruments with off-balance sheet credit risk. 5. INCOME TAXES Net operating loss carryovers, which aggregate approximately $1,255,000, are available to reduce future federal and state income taxes and expire in 2008 and 2009. Deferred tax asset reflects the net tax effect of temporary differences between the financial reporting bases of assets and liabilities and the amounts applicable for income tax purposes. The Company's net deferred tax asset at December 31, 1994 and 1993 was:
1994 1993 Deferred tax asset: Preoperating expenses $ 116,000 $ 145,000 Allowance for credit losses 34,000 Net operating loss carryover 477,000 36,000 -------- --------- 627,000 181,000 Less valuation allowance (627,000) (181,000) --------- --------- Net deferred tax asset $ - $ - ========= =========
6. LEASES AND OTHER COMMITMENTS Office Lease - The Company rents its office under a noncancellable lease agreement with an initial term of four years. The lease requires the Company to reimburse the landlord for increases over the base year amounts for certain expenses, such as real estate taxes, utilities, and maintenance. Some of the Company's office equipment is subject to operating leases. The aggregate rental expense for the office and equipment leases was $41,429 for the year ended December 31, 1994 and $5,984 for the period from July 16, 1993 (date of incorporation) to December 31, 1993. Data Processing Agreement - The Company entered into a five-year contract, which expires in May 1999, to receive data processing services. The contract requires minimum monthly servicing fees. F-28 32 At December 31, 1994, future minimum payments for noncancellable leases and data processing services were as follows:
DATA YEAR ENDING DECEMBER 31: LEASES PROCESSING 1995 $ 41,756 $117,500 1996 41,239 218,000 1997 38,655 184,000 1998 - 180,000 1999 - 75,000 -------- -------- Total $121,650 $774,500 ======== ========
Employment Agreements - The Company has employment agreements with certain key officers which provide for aggregate base annual compensation of $426,500 plus bonuses based on certain operating performance goals in 1995. The agreements expire on various dates through December 31, 1995 and may be extended by mutual agreement. Additionally, the agreements require termination payments in the event of the employee's involuntary termination. At December 31, 1994, the aggregate amount of the contingent termination obligation was $196,375. 7. SERIES A CONVERTIBLE PREFERRED STOCK The Company has authorized 200,000 shares of Series A Convertible Preferred Stock ("Preferred Stock"), par value $.01 per share. In December 1993, the Company received commitments to buy 110,000 shares (gross proceeds of $5.5 million) of its Preferred Stock, 60% of which was purchased in December 1993 with the remaining 40% purchased in September 1994. The December closing resulted in the issuance of 66,000 shares of Preferred Stock with proceeds, net of offering costs, of approximately $3,120,000. The September closing resulted in the issuance of 44,000 shares of Preferred Stock, with net proceeds of approximately $2,196,000. Holders of the Preferred Stock are entitled to an annual stock dividend of 3% on December 30 of each year. Additionally, for financial reporting purposes, the Preferred Stock is accreted to the greater of the Common Stock's per share fair market value or its liquidation preference ($50 per share). Management believes the fair market value of its Common Stock was $50 per share at December 31, 1994. A stock dividend of 2,363 shares was declared for holders of record as of December 31, 1994. For financial accounting purposes, that dividend was valued at $50 per share, or $118,500 and was charged to additional paid-in capital. Each share of Preferred Stock may be converted into one share of Common Stock at any time at the option of the holder. Conversion into Common Stock is mandatory in the event of a qualified initial public offering ("IPO") of the Company's Common Stock. If an IPO does not occur before December 1, 1998, each holder of Preferred Stock may require the Company to redeem its Preferred Stock at the greater of the Common Stock's per share fair market value or its liquidation preference. Redemption is mandatory on November 30, 1999 at the greater of the Common Stock's per share fair market value on September 1, 1999 or its liquidation preference. The liquidation preference aggregated $5,618,150 at December 31, 1994. F-29 33 Holders of Preferred Stock are entitled to one vote per share on all shareholder matters. The Company's Shareholders' Agreement provides that all shareholders vote for a seven-member Board of Directors comprised of four nominees of the majority Common Stockholder (see Related Party Transactions), one nominee of a specified Preferred Stockholder group, and two nominees of the stockholders other than the majority Common Stockholder. The Preferred Stock ranks senior to the Common Stock with respect to dividends and liquidation rights. 8. COMMON STOCK On December 1, 1993, the Company received commitments to buy 10,500 shares (gross proceeds of $500,000) of its Common Stock (see Related Party Transactions) of which 60% were purchased in December 1993, with the remaining 40% purchased at a second closing which occurred in September 1994. The December closing resulted in the issuance of 6,300 shares of Common Stock, with the Company receiving cash of $240,038 and a note receivable in the amount of $59,987. In September 1994, the Company received cash of $160,003 for purchase of the remaining committed shares of Common Stock. The provisions of the Facility prohibit the payment of dividends in cash or property, other than stock dividends on the Preferred Stock. 9. COMMON STOCK OPTIONS At December 31, 1994, the Company had outstanding options to acquire shares of the Company's Common Stock, as follows:
DATE NUMBER OF OF EXERCISE EXERCISE OPTION HOLDER GRANT SHARES PRICE CONDITION Chicago Holdings, Inc. 1993 10,000 $50 (a) Chicago Holdings, Inc. 1993 10,000 Various (b) Management 1994 17,500 $50 (c) Member of the Board of Directors 1993 2,000 $50 Expires December, 2003
(a) Chicago Holdings, Inc. ("CHI") (see Related Party Transactions), has options to acquire 10,000 shares of the Company's Common Stock at $50 per share. Those options are exercisable after the second, third, and fourth years of the Company's operations if certain financial goals are achieved. Those options expire in December 2003. (b) CHI also has vested options, which expire in December 2003, to acquire an additional 10,000 shares of the Company's Common Stock. The exercise prices per share of those options are: $75 during 1994, $100 during 1995 and 1996, $150 during 1997, and $200 thereafter through December 2003. (c) Management's options to acquire 17,500 shares of the Company's Common Stock at $50 per share are exercisable after the second and third years of the Company's operations if financial goals are achieved. F-30 34 10. RELATED PARTY TRANSACTIONS Common Stock Transactions - Approximately 89.4% (8,401 shares) of the Company's outstanding Common Stock is owned by a wholly owned subsidiary of CHI, a founder of the Company. The remaining outstanding shares of Common Stock are owned by the Company's President and its Chairman. CHI's subsidiary purchased one founding share, 5,040 shares of the Company's Common Stock in the December 1993 closing for $240,005, and 3,360 shares in the September 1994 closing for $160,003. Approximately $60,000 of the $300,000 proceeds from the issuance of the Company's Common Stock in December 1993 was paid with a 6% note due from the Company's former President. The note was due in two installments ($29,987 on January 17, 1994 and $30,000 on December 1, 1998). In connection with the resignation of the Company's former President during June 1994, the following were consummated: (i) consulting services of the former President were retained through the end of 1994 for a fee of $75,000, (ii) his stock options were terminated, (iii) his commitment to acquire additional shares of Common Stock was terminated, and (iv) his 1,260 shares of the Common Stock were purchased by the Company, as treasury stock, in exchange for the original purchase price of $61,210 ($30,000 of cash and the cancellation the above promissory note). In September 1994, the Company's new President purchased 1,000 shares of treasury Common Stock for $50 per share, payable $25,000 in cash and $25,000 by a five-year promissory note which bears interest at 6% per annum. Management Advisory Agreement - The Company has a management advisory agreement with CHI. CHI agreed to provide accounting, legal, and other services for an initial term expiring on November 30, 1996. CHI's compensation for services performed under the agreement is (i) $125 per hour, together with reimbursement of out-of-pocket expenses, for actual time devoted to the Company's business, (ii) a transaction structuring fee of $120,000 (which was paid during 1994), and (iii) a monthly fee of $10,000 for 36 months commencing after the Company achieves and continues to be profitable on a monthly basis. The agreement provides for the Company's payment of a market rate fee to CHI if CHI successfully arranges additional indebtedness for the Company. During 1994 and 1993, CHI charged the Company $125,875 and $23,875, respectively, in hourly management fees and $26,806 and $390,815, respectively, for reimbursement of out-of-pocket expenses. 11. IMPACT OF NEW ACCOUNTING STANDARDS The Company expects to adopt SFAS No. 107, "Disclosure About Fair Value Of Financial Instruments," in 1995. Since SFAS No. 107 requires disclosures only as to the fair value of financial instruments, the adoption of SFAS No. 107 will have no effect on the Company's financial position or results of operations. 12. SUBSEQUENT EVENT On January 25, 1995, the Company's Board of Directors approved an offering of 60,000 shares of Preferred Stock at $50 per share (gross proceeds of $3,000,000) to current holders of the Company's Preferred and Common Stock. The terms of the offering provide for two closings with proceeds of $1.5 million to be derived from the initial closing. F-31 35 DEALERS ALLIANCE CREDIT CORP. STATEMENT OF FINANCIAL CONDITION JUNE 30, 1996 (UNAUDITED)
ASSETS: June 30, 1996 - ------ ------------ Gross finance receivables $ 34,947,444 Unearned finance charges (8,092,739) ------------ Net finance receivables 26,854,705 Unearned ancillary income (50,578) ------------ Net finance receivables after ancillary 26,804,127 Allowance for credit losses (12,602,390) Deferred acquisition costs, net 142,816 ------------ 14,344,553 Cash and cash equivalents 687,806 Repossessed collateral 603,512 Furniture and equipment, net 233,332 Prepaid rent, net 200,243 Subordinated debt issuance costs, net 280,589 Other assets, net 323,007 ------------ $ 16,673,042 ============ LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT: Revolving credit agreement advances $ 18,000,000 Accounts payable and accrued expenses 671,331 Due to related party 8,017 Senior subordinated notes payable, net 3,513,598 ------------ Total liabilities $ 22,192,946 ------------ Warrants 563,767 Redeemable Series A Convertible Preferred Stock, $0.01 par value; 200,000 shares authorized, 176,746 issued and outstanding 8,787,972 Common stockholders' deficit: Common stock, $0.01 par value; 250,000 shares authorized, 9,402 shares issued and outstanding 94 Additional paid-in capital 0 Note receivable from stockholder (25,000) Accumulated deficit (14,846,737) ------------ Total common stockholders' deficit (14,871,643) ------------ $ 16,673,042 ============
F-32 36 DEALERS ALLIANCE CREDIT CORP. STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Six Months Ended June 30, 1996 ----------- Revenues: Interest income on finance contracts $ 3,628,051 Ancillary income 99,537 Late charges and other income 139,647 ----------- Total finance revenues 3,867,235 Amortization of deferred contract acquisition costs (138,813) ----------- Net finance revenues 3,728,422 Interest expense, net (1,428,357) ----------- Net finance income before provision for credit losses 2,300,065 Provision for credit losses (5,100,000) ----------- Net finance income (loss) (2,799,935) ----------- Operating expenses: 2,690,496 ----------- Net loss $(5,490,431) ===========
F-33 37 DEALERS ALLIANCE CREDIT CORP. STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Six Months Ended June 30, 1996 ------------- Operating activities Net loss $(5,490,431) Adjustments: Provision for credit losses 5,100,000 Depreciation and amortization 41,956 Amortization of debt discount and organization fees 204,099 Changes in assets and liabilities: Repossessed collateral (33,633) Other assets 235,742 Accounts payable and accrued expenses (330,484) Due to related party (52,094) ----------- Cash used in operating activities (325,491) ----------- Investing activities Purchases of installment contracts receivable (6,145,407) Payments received on installment contracts receivable 5,721,516 Purchases of equipment (41,995) Proceeds from sales of assets 3,505 ----------- Cash used in investing activities (462,381) ----------- Cash provided by financing activities--revolving credit agreement advances 1,150,000 ----------- Net increase in cash and cash equivalents 362,128 Cash and cash equivalents at beginning of period 325,678 ----------- Cash and cash equivalents at end of period $ 687,806 ===========
F-34 38 (b) PRO FORMA FINANCIAL INFORMATION. The following condensed consolidated financial statements of the Company and its subsidiaries set forth unaudited condensed consolidated balance sheets as of June 30, 1996 and unaudited condensed consolidated statements of operations for the six-month transition period ended March 31, 1996 and the three month period ended June 30, 1996, on an actual historical basis and on a pro forma adjusted basis to give effect to the purchase of DACC's assets, the assumption of certain of DACC's liabilities, the issuance by the Company of Common Stock, Series B Preferred Stock and warrants, and the assumption and restructuring of DACC's revolving credit agreement in connection therewith. -3- 39 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS)
Search Historical DACC Adjustments Pro Forma ------ --------------- ----------- --------- ASSETS Gross contracts receivable $ 30,344 $ 34,947 $ 65,291 Unearned interest (5,621) (8,143) (13,764) -------- -------- -------- Net contracts receivable 24,723 26,804 51,527 Allowance for credit losses (10,506) (12,602)(8) (23,108) Net loan origination costs 274 -- 274 -------- -------- -------- Net contracts receivable - after 14,491 14,202 28,693 -------- -------- -------- allowance for credit losses and other costs Cash and cash equivalents 20,871 688 21,559 Vehicles held for resale 356 604 960 Property and equipment, net 988 233 1,221 Other assets, net 210 946 $ (280)(2) 1,306 430 (4) Intangible assets -- -- 4,375 (1) 4,375 Goodwill -- -- 2,419 (1) 2,419 -------- -------- -------- -------- Total assets $ 36,916 $ 16,673 $ 6,944 $ 60,533 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Lines of credit $ -- $ 18,000 $ 18,000 Accrued settlements 500 -- 500 Dividends payable 1,610 -- 1,610 Accounts payable and other liabilities 2,477 679 $ 143 (9) 3,299 Senior subordinated notes payable, net -- 3,513 (3,513)(1) -- Redeemable warrants 616 -- 161 (1) 777 -------- -------- -------- -------- Total liabilities 4,587 22,192 (3,209) 24,186 -------- -------- -------- -------- Warrants -- 564 (564)(1) -- Redeemable preferred stock -- 8,788 (8,788)(1) -- Stock repurchase commitment 2,078 -- -- 2,078 -------- -------- -------- -------- 2,078 9,352 9,352 2,078 -------- -------- -------- -------- Stockholders' Equity Preferred stock 174 -- 26 (1) 200 Common stock 293 -- 13 (1) 306 Additional paid-in capital 83,872 -- 4,738 (1) 88,467 Note receivable from stockholders -- (25) 25 (3) -- Accumulated deficit (53,554) (14,846) 14,846 (1) (53,554) Treasury stock (1,150) -- -- (1,150) -------- -------- -------- -------- Total stockholders' equity (deficit) 29,635 (14,871) 10,271 34,269 -------- -------- -------- -------- Total liabilities and stockholders' equity $ 36,916 $ 16,673 $ 6,944 $ 60,533 ======== ======== ======== ========
See accompanying notes to pro forma condensed consolidated financial statements. -4- 40 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical Historical Search DACC Adjustments Pro Forma ---------- --------- ----------- --------- Interest revenue $ 3,541 $ 3,540 $ 7,081 Interest expense (1,306) (1,020) $ (13)(10) (2,339) -------- -------- -------- -------- Net interest income 2,235 2,520 (13) 4,742 Provision for credit losses (4,982) (6,954) -- (11,936) -------- -------- -------- Net loss after provision for credit losses (2,747) (4,434) (13) (7,194) -------- -------- -------- General and administrative expense (8,098) (2,786) (337)(5) (11,221) Settlement expense (535) -- (535) -------- -------- -------- Loss before extraordinary item (11,380) (7,220) (350) (18,950) Extraordinary gain on discharge of debt 8,709 -- -- 8,709 -------- -------- -------- -------- Net loss (2,671) (7,220) (350) (10,241) Preferred stock dividends (327) -- $ (402)(6) (729) -------- -------- -------- -------- Net loss attributable to common stockholders $ (2,998) $ (7,220) $ (752) $(10,970) ======== ======== ======== ======== Loss per common share before extraordinary item $ (1.12) $ (1.68) Gain on extraordinary item 0.83 0.74 -------- -------- Loss per common share $ (0.29) $ (0.94) ======== ======== Weighted average number of common shares outstanding 10,447 1,277(1) 11,724 ======== ======== ========
See accompanying notes to pro forma condensed consolidated financial statements. -5- 41 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical Historical Search DACC Adjustments Pro Forma -------- -------- ----------- --------- Interest revenue $ 1,659 $ 1,819 $ 3,478 Interest expense 22 (878) $ (6)(10) (906) -------- -------- -------- -------- Net interest income 1,637 941 (6) 2,572 Recovery of (provision for) credit losses 1,382 (5,100) -- (3,718) -------- -------- -------- -------- Net interest income (loss) after provision for 3,019 (4,159) (6) (1,146) -------- -------- -------- credit losses General and administrative expense (2,528) (1,117) (169)(7) (3,814) Net income (loss) before dividends 491 (5,276) (169) (4,960) -------- -------- -------- -------- Preferred stock dividends (1,404) -- (201)(6) (1,605) -------- -------- -------- -------- Net loss attributable to common $ (913) $ (5,276) $ (376) $ (6,565) ======== ======== ======== ======== stockholders Loss per common share $ (.03) $ (.24) ======== ======== Weighted average number of common shares outstanding 26,628 1,277(1) 27,905 ======== ======== ========
See accompanying notes to pro forma condensed consolidated financial statements. -6- 42 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The unaudited Pro Forma Condensed Financial Statements are based on the following adjustments and related assumptions: (1) Record (a) the issuance of 1,277,030 shares of Search's $.01 par value Common Stock, 2,554,060 shares of Search's $.01 par value Series B Preferred Stock, and 1,277,030 redeemable warrants to purchase Common Stock (which are treated as a liability of $161,000), (b) the elimination of DACC's stock and warrants, and (c) the goodwill and intangible assets acquired in the DACC acquisition. (2) Records the writedown of capitalized cost associated with an attempted offering of securities by DACC. (3) Records forgiveness of debt owed by stockholder who was employed by DACC. (4) Records value associated with accounts in DACC's portfolio previously charged off. (5) Records amortization of goodwill and intangible assets recorded on the acquisition for six month period ended March 31, 1996. (6) Records payment of dividend on Series B Preferred shares issued in the acquisition, which were assumed to be issued at the beginning of the respective periods. (7) Records amortization of goodwill and intangible assets recorded on the acquisition for three month period ended June 30, 1996. (8) Includes loan loss provisions made by DACC through August 7, 1996, which is considered appropriate for the pro forma presentation. (9) Records estimated costs of acquisition. (10) Records interest expense due to accretion of redeemable warrants issued in connection with the acquisition. The purchase accounting adjustments to record the acquisition of DACC's assets and the assumption of DACC's liabilities that were used in the preparation of the unaudited Pro Forma Condensed Balance Sheet are summarized below (in thousands):
Actual Pro Forma As of August 2, 1996 As of June 30, 1996(a) -------------------- ------------------- Net contracts receivables .................................. $ 14,380 $ 14,202 Cash and cash equivalents .................................. 753 688 Vehicles held for resale ................................... 284 604 Property and equipment ..................................... 222 233 Custom lists ............................................... 2,175 2,175 Dealer network ............................................. 2,200 2,200 Other assets ............................................... 835 1,096 -------- -------- Total estimated fair value of assets acquired............... 20,849 21,198 -------- -------- Liabilities assumed 18,239 18,679 Fair value of Search equity instruments issued, including redeemable warrants treated as debt 4,795 4,795 Direct acquisition costs 143 143 -------- -------- Total cost 23,177 23,617 -------- -------- Cost in excess of fair value of net assets acquired and other identifiable intangibles $ 2,328 $ 2,419 ======== ========
- ---------- (a) Assumes the acquisition occurred on June 30, 1996 and reflects differences due to changes in assets and liabilities between June 30 and August 2, 1996. -7- 43 (C) EXHIBITS. Exhibit No. Description - ----------- ----------- 2.1 Asset Acquisition Agreement among Search Capital Group, Inc., Search Funding IV, Inc. and Dealers Alliance Credit Corp. dated as of August 2, 1996 2.2 Sub-Debt Acquisition Agreement among Search Capital Group, Inc., Search Funding IV, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation dated as of August 2, 1996 2.3 Escrow Agreement among Search Capital Group, Inc., Dealers Alliance Credit Corp., Search Funding IV, Inc., R-H Capital Partners, L.P., Kellett Investment Corporation and U.S. Trust Company of Texas, N.A., dated as of August 6, 1996 2.4 Search-DACC Shareholders Agreement dated as of August 2, 1996 between Search Capital Group, Inc. and Dealers Alliance Credit Corp. 2.5 Sub-Debt Shareholders Agreement dated as of August 2, 1996 among Search Capital Group, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation 2.6 Debt Assumption Agreement dated as of August 2, 1996 among Search Capital Group, Inc., Search Funding IV, Inc., LaSalle National Bank, as Agent, Bank One Chicago, N.A. and Fleet Capital Corporation 4.1 Certificate of Designation of Series B 9%/7% Convertible Preferred Stock -8- 44 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SEARCH CAPITAL GROUP, INC. By: /s/ Robert Idzi -------------------------------------- Robert Idzi, Senior Executive Vice President Dated: June 4, 1997 -----END PRIVACY-ENHANCED MESSAGE-----