Here's why:
* Gerund: A gerund is a verb form ending in "-ing" that acts as a noun.
* Gerund Phrase: A gerund phrase is a gerund plus any modifiers or objects that go with it.
In this sentence, "looking" is the gerund, and "on the ground next to the car" modifies it, explaining where they were looking. The whole phrase acts as the object of the verb "found".