<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SEARCH FINANCIAL SERVICES INC.
(FORMERLY KNOWN AS SEARCH CAPITAL GROUP, INC.)
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 6141 41-1356819
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
ELLIS A. REGENBOGEN, ESQ.
EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL
600 NORTH PEARL STREET SEARCH FINANCIAL SERVICES INC.
SUITE 2500 600 NORTH PEARL STREET, SUITE 2500
DALLAS, TEXAS 75201 DALLAS, TEXAS 75201
(214) 965-6000 (214) 965-6000
(Address, including zip code and telephone (Name, address, including ZIP code and
number, including area code, of telephone number, including area code,
registrant's principal executive offices) of agent for service)
</TABLE>
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With copies to:
DARYL B. ROBERTSON, ESQ. ROBERT D. DRINKWATER, ESQ.
BRACEWELL & PATTERSON, L.L.P. BRUNINI, GRANTHAM, GROWER & HEWES, PLLC
500 NORTH AKARD STREET 1400 TRUSTMARK BUILDING
SUITE 4000 248 EAST CAPITOL STREET
DALLAS, TEXAS 75201 JACKSON, MISSISSIPPI 39205
(214) 740-4000 (601) 948-3101
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AT THE EFFECTIVE TIME OF THE PROPOSED MERGER (THE "MERGER") OF A WHOLLY OWNED
SUBSIDIARY OF SEARCH FINANCIAL SERVICES INC. ("SEARCH") WITH AND INTO MS
FINANCIAL, INC. ("MSF"), AS DESCRIBED IN THE AGREEMENT AND PLAN OF MERGER,
DATED AS OF FEBRUARY 7, 1997 (THE "MERGER AGREEMENT"), ATTACHED AS ANNEX A TO
THE JOINT PROXY STATEMENT/PROSPECTUS FORMING A PART OF THIS REGISTRATION
STATEMENT, WHICH SHALL OCCUR AS PROMPTLY AS PRACTICABLE AFTER THIS REGISTRATION
STATEMENT BECOMES EFFECTIVE AND THE SATISFACTION OF ALL CONDITIONS TO THE
CLOSING OF THE MERGER.
-----------
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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===============================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount To Be Offering Price Aggregate Offering Amount of
To Be Registered Registered Per Unit Price Registration Fee
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<S> <C> <C> <C> <C> <C>
Common Stock, $.01 par value per 3,859,474 (2) $3.16723 (3) $12,223,840 (3) $4,190.06 (5)
share (1) 337,550 (4) $4.75 (4) $1,603,362 (4)
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(1) This Registration Statement relates to securities of the Registrant
issuable to holders of Common Stock and options to purchase Common
Stock of MS Financial, Inc., a Delaware corporation ("MSF"), in
connection with the proposed merger of a wholly-owned subsidiary of
the Registrant with and into MSF.
(2) Represents the maximum number of shares of Common Stock expected to be
issued in connection with the merger described herein.
(3) Estimated solely for the purpose of calculating the registration fee
under Rule 457(f)(1) based on the average of the high and low prices
reported on The Nasdaq National Market of $1.171875 for the common
stock of MSF on June 23, 1997.
(4) Represents the maximum number of shares of Common Stock that may be
issued upon the exercise of outstanding options held by certain MSF
existing and former officers and directors and estimates of offering
prices based on the average of the high and low price reported on The
Nasdaq National Market of $4.75 for the common stock of Search on June
20, 1997 for purposes of calculating the registration fee under Rule
457(h)(1).
(5) Pursuant to Rule 457(b), the registration fee is reduced by the
$3,259.35 paid on March 13, 1997, upon the filing under the Securities
Exchange Act of 1934 of preliminary copies of the proxy materials for
the Registrant and MSF included herein. Therefore, the registration
fee payable upon the filing of this Registration Statement is $930.71.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY
ITEMS IN FORM S-4
PROSPECTUS
(INFORMATION ABOUT THE TRANSACTION)
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1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................................... Available Information; Incorporation of
Certain Documents by Reference; Table of
Contents
3 Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information......................................... Summary; Risk Factors; Selected Historical
and Pro Forma Consolidated Financial
Information; Comparative Per Share Data;
Comparative Market Price Data; Pro Forma
Combined Condensed Financial Information;
The MSF Special Meeting--Record Date Voting
Rights; The Merger--Certain Federal Income
Tax Consequences; --Regulatory Approvals;
--Federal Securities Law Compliance;
--Absence of Dissenters' Rights
4. Terms of the Transaction...................................... Summary; The Merger; The Merger Agreement;
The Stockholders Agreement; Description of
Search Capital Stock; Comparison of the
Rights of Search Common Stock and Holders of
MSF Common Stock
5 Pro Forma Financial Information............................... Summary; Pro Forma Combined Condensed
Financial Information
6. Material Contacts with the Company Being
Acquired...................................................... The Merger; The Merger Agreement; The
Stockholders Agreement
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters................. Not Applicable
8. Interests of Named Experts and Counsel........................ Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities................ Not Applicable
(INFORMATION ABOUT THE REGISTRANT)
10. Information with Respect to S-3 Registrants................... Not Applicable
11. Incorporation of Certain Information by
Reference..................................................... Not Applicable
12. Information with Respect to S-2 or S-3
Registrants................................................... Incorporation of Certain Documents by
Reference; Summary; Risk Factors; The
Merger; The Merger Agreement; The
Stockholders Agreement; Description of
Search Capital Stock; Search Financial
Services Inc.; Consolidated Financial
Statements of Search
</TABLE>
2
<PAGE> 3
<TABLE>
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13. Incorporation of Certain Information by
Reference..................................................... Incorporation of Certain Documents by
Reference
14. Information with Respect to Registrants Other
than S-2 or S-3 Registrants................................... Not Applicable
(INFORMATION ABOUT THE COMPANY BEING ACQUIRED)
15. Information with Respect to S-3 Companies..................... Not Applicable
16. Information with Respect to S-2 or S-3
Companies..................................................... Not Applicable
17. Information with Respect to Companies Other
than S-2 or S-3 Companies..................................... Summary; Selected Historical and Pro Forma
Financial and Operating Data; Comparative
Market Price Data; The Special Meetings; Pro
Forma Combined Condensed Financial
Information; MS Financial, Inc.;
Consolidated Financial Statements of MSF
(VOTING AND MANAGEMENT INFORMATION)
18. Information if Proxies, Consents or Authorizations
Are to be Solicited............................................ Incorporation of Certain Documents by
Reference; Summary; The Special Meetings;
The Merger--Interests of Certain Persons in
the Merger; --Absence of Dissenters' Rights;
MSF--Management; --Director and Executive
Compensation; --Security Ownership of
Certain Beneficial Owners and Management;
Description of Search Capital Stock
19. Information if Proxies, Consents or Authorizations
Are not to be Solicited or in an Exchange Offer............... Not Applicable
</TABLE>
3
<PAGE> 4
MS FINANCIAL, INC.
715 S. PEAR ORCHARD ROAD, SUITE 300
RIDGELAND, MS 39157
(601) 978-6737
June 27, 1997
Dear Stockholder:
A Special Meeting of Stockholders of MS Financial, Inc. ("MSF") will
be held at the Le Meridien Hotel located at 650 North Pearl Street, Dallas,
Texas on Monday, July 28, 1997 at 10:00 a.m., local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal (the "Merger Proposal") to adopt the Agreement and Plan of Merger, as
amended (the "Merger Agreement"), providing for the merger (the "Merger") of a
wholly-owned subsidiary of Search Financial Services Inc. ("Search") with and
into MSF. Pursuant to the Merger Agreement, among other things, each share of
common stock, par value $.001 per share ("MSF Common Stock"), of MSF
outstanding at the effective time of the Merger will be converted into the
right to receive a fraction (the "Exchange Ratio") of a share of common stock,
par value $0.01 per share, of Search ("Search Common Stock") based on the
average closing sales price per share of Search Common Stock for the 10 trading
days ending on the fifth business day before the Special Meeting (the "Average
Search Trading Price"). The Exchange Ratio will equal the quotient of $1.63
(the "Per Share Amount") divided by the Average Search Trading Price, but may
not be more than 0.37 nor less than 0.28. As a result of the Merger, MSF will
become a wholly-owned subsidiary of Search and the stockholders of MSF will
become stockholders of Search.
Bear, Stearns & Co. Inc., the investment banking firm retained by the
MSF Board of Directors to act as its financial advisor in connection with the
Merger, has rendered its opinion to the effect that the Merger is fair to the
public stockholders of MSF from a financial point of view.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE
TRANSACTIONS RELATED THERETO AND HAS DETERMINED THAT THEY ARE IN THE BEST
INTERESTS OF MSF AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD
OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERGER
PROPOSAL.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by MSF stockholders at the Special Meeting and a proxy
card. The Joint Proxy Statement/Prospectus more fully describes the proposed
Merger.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY.
Sincerely,
James B. Stuart, Jr.
Chairman of the Board
<PAGE> 5
SEARCH FINANCIAL SERVICES INC.
600 NORTH PEARL STREET, SUITE 2500
DALLAS, TX 75201
(214) 965-6000
June 27, 1997
Dear Stockholder:
A Special Meeting of Stockholders of Search Financial Services Inc.
("Search") will be held at the offices of Search located at 600 North Pearl
Street, Dallas, Texas on Monday, July 28, 1997 at 10:00 a.m., local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal (the "Merger Proposal") to adopt the Agreement and Plan of Merger, as
amended (the "Merger Agreement"), providing for the merger (the "Merger") of a
wholly-owned subsidiary of Search with and into MS Financial, Inc. ("MSF").
Pursuant to the Merger Agreement, among other things, each share of common
stock, par value $.001 per share ("MSF Common Stock"), of MSF outstanding at
the effective time of the Merger will be converted into the right to receive a
fraction (the "Exchange Ratio") of a share of common stock, par value $.01 per
share, of Search ("Search Common Stock") based on the average closing sales
price per share of Search Common Stock for the 10 trading days ending on the
fifth business day before the special meeting of MSF's stockholders to be held
to consider the Merger Proposal (the "Average Search Trading Price"). The
Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount")
divided by the Average Search Trading Price, but may not be more than 0.37 nor
less than 0.28. The Merger Agreement also provides that all outstanding
options to purchase shares of MSF Common Stock will be assumed by Search and
become options to purchase Search Common Stock. As a result of the Merger, MSF
will become a wholly-owned subsidiary of Search, and the stockholders of MSF
will become stockholders of Search.
Alex. Brown & Sons Incorporated, the investment banking firm retained
by the Search Board of Directors to act as its financial advisor in connection
with the Merger, has rendered its opinion to the effect that the Exchange Ratio
is fair to Search from a financial point of view.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE
TRANSACTIONS RELATED THERETO AND HAS DETERMINED THAT THEY ARE IN THE BEST
INTERESTS OF SEARCH AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERGER
PROPOSAL.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by Search stockholders at the Special Meeting and a
proxy card. The Joint Proxy Statement/Prospectus more fully describes the
proposed Merger.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU
HAVE PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE
REPRESENTED AND VOTED AT THE SPECIAL MEETING.
Sincerely,
George C. Evans
Chairman of the Board
and Chief Executive Officer
<PAGE> 6
MS FINANCIAL, INC.
715 S. PEAR ORCHARD ROAD, SUITE 300
RIDGELAND, MS 39157
(601) 978-6737
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, JULY 28, 1997
Notice is hereby given that a Special Meeting of Stockholders of MS
Financial, Inc. ("MSF") will be held on Monday, July 28, 1997, at 10:00 a.m.,
local time, at the Le Meridien Hotel located at 650 North Pearl Street, Dallas,
Texas for the following purposes:
(1) To consider and vote upon a proposal (the "Merger
Proposal") to approve and adopt the Agreement and Plan of Merger,
dated as of February 7, 1997, as amended ("Merger Agreement"), among
MSF, Search Financial Services Inc. ("Search"), and Search Capital
Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Search ("Merger Sub"), and the transactions contemplated
thereby, pursuant to which Merger Agreement, among other things, (i)
Merger Sub will be merged with and into MSF, following which MSF will
become a wholly-owned subsidiary of Search (the "Merger"), (ii) as a
result of the Merger, each share of common stock, par value $.001 per
share, of MSF ("MSF Common Stock") outstanding at the effective time
of the Merger (other than shares held in MSF's treasury or owned by
Search or any subsidiary of Search or MSF) will be converted into the
right to receive a fraction (the "Exchange Ratio") of a share of
common stock, par value $.01 per share, of Search ("Search Common
Stock") based on the average closing sales price per share of Search
Common Stock for the 10 trading days ending on the fifth business day
prior to the Special Meeting (the "Average Search Trading Price"),
which Exchange Ratio will equal the quotient of $1.63 (the "Per Share
Amount") divided by the Average Search Trading Price, but may not be
more than 0.37 nor less than 0.28, and (iii) all outstanding options
to purchase MSF Common Stock will be assumed by Search and become
options to purchase Search Common Stock; and
(2) To transact such other business that may properly
come before the Special Meeting or any postponements or adjournments
thereof.
Only stockholders of record at the close of business on June 25, 1997
are entitled to notice of and to vote at the Special Meeting, or at any
postponements or adjournments thereof. The affirmative vote of the holders of a
majority of the outstanding shares of MSF Common Stock is required for the
approval of the Merger Proposal.
Under the Delaware General Corporation Law, stockholders of MSF will
not have the right to assert dissenters rights in connection with the proposed
Merger. See "The Merger--Absence of Dissenters' Rights" in the Joint Proxy
Statement/Prospectus accompanying this notice.
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON,
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY
IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE
UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR
PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME
BEFORE IT IS VOTED.
Ridgeland, Mississippi
June 27, 1997
BY ORDER OF THE BOARD OF DIRECTORS,
James B. Stuart, Jr.
Chairman of the Board
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
<PAGE> 7
SEARCH FINANCIAL SERVICES INC.
600 NORTH PEARL STREET, SUITE 2500
DALLAS, TX 75201
(214) 965-6000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MONDAY, JULY 28, 1997
Notice is hereby given that a Special Meeting of Stockholders of
Search Financial Services Inc. ("Search") will be held on Monday, July 28,
1997, at 10:00 a.m., local time, at the offices of Search located at 600 North
Pearl Street, Dallas, Texas, for the following purposes:
(1) To consider and vote upon a proposal (the "Merger
Proposal") to approve and adopt the Agreement and Plan of Merger,
dated as of February 7, 1997 ("Merger Agreement"), among Search, MS
Financial, Inc., a Delaware corporation ("MSF"), and Search Capital
Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Search ("Merger Sub"), and the transactions contemplated
thereby, pursuant to which Merger Agreement, among other things, (i)
Merger Sub will be merged with and into MSF, following which MSF will
become a wholly-owned subsidiary of Search (the "Merger"), (ii) as a
result of the Merger, each share of common stock, par value $.001 per
share, of MSF ("MSF Common Stock") outstanding at the effective time
of the Merger (other than shares held in MSF's treasury or owned by
Search or any subsidiary of Search or MSF) will be converted into the
right to receive a fraction (the "Exchange Ratio") of a share of
common stock, par value $.01 per share, of Search ("Search Common
Stock") based on the average closing sales price per share of Search
Common Stock for the 10 trading days ending on the fifth business day
prior to the special meeting of MSF's stockholders to be held to
consider the Merger Proposal (the "Average Search Trading Price"),
which Exchange Ratio will equal the quotient of $1.63 (the "Per Share
Amount") divided by the Average Search Trading Price, but may not be
more than 0.37 nor less than 0.28, and (iii) all outstanding options
to purchase MSF Common Stock will be assumed by Search and become
options to purchase Search Common Stock; and
(2) To transact such other business that may properly
come before the Special Meeting or any postponements or adjournments
thereof.
Only stockholders of record at the close of business on May 30, 1997
are entitled to notice of and to vote at the Special Meeting, or at any
postponements or adjournments thereof. The affirmative vote of the holders of a
majority of the outstanding shares of Search Common Stock, Search's 12% Senior
Convertible Preferred Stock and Search's 9%/7% Convertible Preferred Stock,
voting together as one class, that are represented in person or by proxy and
entitled to vote at the Special Meeting is required for the approval of the
Merger Proposal.
Under the Delaware General Corporation Law, stockholders of Search
will not have the right to assert dissenters rights in connection with the
proposed Merger. See "The Merger--Absence of Dissenters' Rights" in the Joint
Proxy Statement/Prospectus accompanying this notice.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF SEARCH
COMMON STOCK THAT YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL
MEETING IN PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN
IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE
IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN
WITHDRAW YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT
ANY TIME BEFORE IT IS VOTED.
Dallas, Texas
June 27, 1997
BY ORDER OF THE BOARD OF DIRECTORS,
George C. Evans
Chairman of the Board
and Chief Executive Officer
<PAGE> 8
JOINT PROXY STATEMENT
OF
SEARCH FINANCIAL SERVICES INC.
AND
MS FINANCIAL, INC.
SEARCH FINANCIAL SERVICES INC. PROSPECTUS
This Joint Proxy Statement/Prospectus is being furnished by MS
Financial, Inc., a Delaware corporation ("MSF"), and Search Financial Services
Inc., a Delaware corporation ("Search"), in connection with the solicitation of
proxies for use at the respective special meetings of the stockholders of MSF
and Search, or at any adjournments or postponements thereof, for the purposes
set forth herein. The special meeting of stockholders of MSF (the "MSF Special
Meeting") will be held at 10:00 a.m., local time, on Monday, July 28, 1997, at
the Le Meridien Hotel located at 650 North Pearl Street, Dallas, Texas. MSF's
telephone number is (601) 978-6737. The special meeting of stockholders of
Search (the "Search Special Meeting") will be held at 10:00 a.m., local time, on
Monday, July 28, 1997, at the offices of Search located at 600 North Pearl
Street, Dallas, Texas 75201. Search's telephone number is (214) 965-6000.
Prior to May 19,1997, Search's name was "Search Capital Group, Inc." This
Joint Proxy Statement/Prospectus and the respective forms of proxies are first
being mailed to stockholders of MSF and Search on or about June 27, 1997.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of
Search with respect to up to 3,859,474 shares of Search common stock, par value
$0.01 per share ("Search Common Stock"), to be issued in connection with the
merger (the "Merger") of Search Capital Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Search ("Merger Sub"), with and
into MSF pursuant to the Agreement and Plan of Merger, dated as of February 7,
1997, as amended (the "Merger Agreement"), among Search, Merger Sub and MSF.
Pursuant to the Merger Agreement, among other things, each share of
common stock, par value $.001 per share ("MSF Common Stock"), of MSF
outstanding at the effective time of the Merger will be converted into the
right to receive a fraction (the "Exchange Ratio") of a share of Search Common
Stock, based on the average closing sales price per share of Search Common
Stock for the 10 trading days ending on the fifth business day before the MSF
Special Meeting (the "Average Search Trading Price"). The Exchange Ratio will
equal the quotient of $1.63 (the "Per Share Amount") divided by the Average
Search Trading Price, but may not be more than 0.37 nor less than 0.28.
Search and MSF will publicly announce the Exchange Ratio promptly
after it is determined. Stockholders of MSF or Search may call the Secretary
of MSF at (601) 978-6694 or the Investor Relations Department of Search at
(800) 725-6673 for the Exchange Ratio amount beginning four business days prior
to the MSF Special Meeting date. Stockholders may revoke or submit proxies by
sending the revocation or proxy via facsimile to (601) 978-6601, if to MSF, or
to (214) 965-6104, if to Search. Stockholders are urged to call MSF or Search
at the appropriate phone number to be advised of the Exchange Ratio.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/ PROSPECTUS. MSF STOCKHOLDERS AND SEARCH STOCKHOLDERS ARE STRONGLY
URGED TO READ AND CAREFULLY CONSIDER THIS JOINT PROXY STATEMENT/PROSPECTUS IN
ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS"
BEGINNING ON PAGE 20.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JUNE 27, 1997.
1
<PAGE> 9
TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
NO AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CAUTIONARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Cash Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
COMPARATIVE MARKET PRICE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
THE SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Times, Places and Dates of the Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Purpose of the MSF Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Purpose of the Search Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Record Dates; Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Proxies; Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Terms of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Prior Adjustments to Per Share Amount and Exchange Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
MSF's Reasons for the Merger; Recommendations of the MSF Board . . . . . . . . . . . . . . . . . . . . . . . 34
Opinion of MSF's Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Search's Reasons for the Merger; Recommendations of the Search Board . . . . . . . . . . . . . . . . . . . . 39
Opinion of Search Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Interests of Certain Persons in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Certain Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Federal Securities Law Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Absence of Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Management and Operations Following the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Restructuring of MSF's Line of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Exchange of Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Treatment of MSF Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Business of MSF Pending the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Search Management Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Solicitation of Other Proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
2
<PAGE> 10
<TABLE>
<S> <C>
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Termination; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
THE STOCKHOLDERS AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Agreement to Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Covenants of the Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Transfer Restrictions; Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Standstill Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Indemnification; Escrow Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
DESCRIPTION OF SEARCH CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Search Authorized Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Search 9%/7% Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Search 12% Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Section 203 of the Delaware General Corporation Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
COMPARISON OF THE RIGHTS OF HOLDERS OF
SEARCH COMMON STOCK AND MSF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SEARCH FINANCIAL SERVICES INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 64
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
MS FINANCIAL, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 76
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Principal and Other Stockholders of MSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Management of MSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
</TABLE>
ANNEX A AGREEMENT AND PLAN OF MERGER, AS AMENDED
ANNEX B OPINION OF BEAR, STEARNS & CO. INC.
ANNEX C OPINION OF ALEX. BROWN & SONS INCORPORATED
ANNEX D CONSOLIDATED FINANCIAL STATEMENTS OF MS FINANCIAL, INC.
ANNEX E CONSOLIDATED FINANCIAL STATEMENTS OF SEARCH FINANCIAL SERVICES INC.
ANNEX F SEARCH'S FORM 10-K TRANSITION REPORT (AS AMENDED) FOR THE PERIOD ENDED
MARCH 31, 1996
3
<PAGE> 11
AVAILABLE INFORMATION
Search and MSF are each subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by Search and MSF with the Commission
can be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material also can be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission, including Search and MSF. The address
of such Web site is http://www.sec.gov. In addition, material filed by MSF can
be inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
Search has filed with the Commission a Registration Statement on Form
S-4 (together with any amendments thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the securities to be issued pursuant to the Merger Agreement. This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. Statements contained in this Joint Proxy Statement/Prospectus or in
any document incorporated by reference in this Joint Proxy Statement/Prospectus
as to the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference. Copies of the Registration
Statement and the exhibits and schedules thereto may be obtained, upon payment
of the fee prescribed by the Commission, or may be examined without charge at
the public reference facilities of the Commission described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Search pursuant
to the Exchange Act are incorporated by reference in this Joint Proxy
Statement/Prospectus:
1. Search's Transition Report on Form 10-K (as amended) for the
transition period ended March 31, 1996 ("Search's Annual
Report");
2. Search's Current Reports on Form 8-K dated August 6 (as
amended), September 27, November 21 and November 25, 1996 and
February 7, April 14, May 1 and May 16, 1997;
3. Search's Quarterly Reports on Form 10-Q (as amended) for the
quarters ended June 30, September 30 and December 31, 1996;
and
4. The description of the Search Common Stock contained in the
Registration Statement on Form 8-A filed with the Commission,
including any amendments or reports filed for the purpose of
updating such information.
This Joint Proxy Statement/Prospectus includes a copy of Search's
Annual Report as Annex F. Search's Annual Report contains additional
information concerning Search and its business which should be reviewed in
connection with the Merger Proposal.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY
REFERENCE WHICH ARE NOT DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED ON WRITTEN OR ORAL
REQUEST, WITHOUT CHARGE, IN THE CASE OF DOCUMENTS RELATING TO SEARCH, DIRECTED
TO SEARCH FINANCIAL SERVICES INC., 600 NORTH PEARL STREET, SUITE 2500, DALLAS,
TEXAS 75201 (TELEPHONE NUMBER (800) 725-6673), ATTENTION: INVESTOR RELATIONS,
OR, IN THE CASE OF DOCUMENTS RELATING TO MSF, DIRECTED TO MS FINANCIAL, INC.,
715 SOUTH PEAR ORCHARD ROAD, SUITE 300, RIDGELAND, MISSISSIPPI 39157 (TELEPHONE
NUMBER (601) 978-6737), ATTENTION: SECRETARY. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY JULY 21, 1997.
4
<PAGE> 12
Search has supplied all information contained in this Joint Proxy
Statement/Prospectus relating to Search and its subsidiaries, and MSF has
supplied all information contained in this Joint Proxy Statement/Prospectus
relating to MSF and its subsidiary.
Unless the context otherwise requires, "Search" refers to both Search
Financial Services Inc. and its consolidated subsidiaries, and "MSF" refers to
both MS Financial, Inc. and its consolidated subsidiary.
NO AUTHORIZATION
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SEARCH, MSF
OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SEARCH OR
MSF SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
CAUTIONARY STATEMENT
This Joint Proxy Statement/Prospectus contains certain forward looking
statements, as defined in the Private Securities Litigation Reform Act of 1995,
with respect to the financial condition, results of operations and business of
Search following the consummation of the Merger. These forward looking
statements involve certain risks and uncertainties. Factors that may cause
actual results to differ materially from those contemplated by such forward
looking statements include, among others, matters discussed herein under "Risk
Factors" as well as the following: (1) expected cost savings from the Merger
not being fully realized; (2) delinquency rates and losses with respect to
MSF's loan portfolio following the Merger being greater than expected; (3)
competitive pressure in the used motor vehicle receivables industry increasing
significantly; (4) costs or difficulties related to the integration of the
businesses of Search and MSF being greater than expected; (5) unforeseen
litigation; (6) adverse changes in governmental and regulatory matters; (7)
Search's ability to retain MSF's marketing representatives and dealer
relationships; (8) effects from changing MSF's underwriting criteria to
Search's underwriting criteria; and (9) general economic conditions, either
nationally or in the states in which the combined company will be doing
business, being less favorable than expected.
5
<PAGE> 13
SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. Reference is made to, and this
summary is qualified in its entirety by, the more detailed information
contained, or incorporated by reference, in this Joint Proxy
Statement/Prospectus and the Annexes hereto. Unless otherwise defined herein,
capitalized terms used in this summary have the respective meanings ascribed to
them elsewhere in this Joint Proxy Statement/Prospectus. Stockholders are
urged to read this Joint Proxy Statement/Prospectus and the Annexes hereto in
their entirety. See "Risk Factors" for certain information that should be
considered by stockholders.
THE COMPANIES
Search . . . . . . . . . . . Search is a financial services company
specializing in the purchase and management of
used motor vehicle receivables, typically
those owed by consumer obligors who do not
qualify for traditional financing. Search
purchases its receivables either through the
purchase of individual receivables from
franchise and independent automobile and
light duty truck dealers ("Dealers") who
originate them in the sale of their vehicles
or through bulk purchases of receivables from
Dealers and other finance companies. The
Company also engages in consumer lending
activities. The principal executive offices
of Search are located at 600 North Pearl
Street, Suite 2500, Dallas, Texas 75201 and
its telephone number is (214) 965-6000. See
"Search Financial Services Inc.," Search's
Annual Report attached as Annex F and
Search's Consolidated Financial Statements
attached as Annex E for more information
regarding Search.
MSF . . . . . . . . . . . . . MSF is a specialized consumer finance company
engaged in the purchase and servicing of
installment contracts originated by
automobile dealers. MSF acquires installment
contracts principally from franchise dealers
in connection with their sale of used and new
automobile and light duty trucks to approved
non-prime consumers. MSF also generates
revenue from commissions which it receives
from the sale of insurance and other
ancillary products sold in conjunction with
the installment contracts purchased by MSF
through its branch offices. The principal
executive offices of MSF are located at 715
South Pear Orchard Road, Suite 300,
Ridgeland, Mississippi 39157 and its
telephone number is (601) 978-6737. See "MS
Financial, Inc."
Merger Sub . . . . . . . . . Merger Sub was recently organized by Search
for the purpose of effecting the Merger. It
has no material assets and has not engaged in
any activities except in connection with the
proposed Merger. The principal executive
offices of Merger Sub are located at 600
North Pearl Street, Suite 2500, Dallas, Texas
75201 and its telephone number is (214)
965-6000.
THE SPECIAL MEETINGS
Times, Places and Dates of the
Special Meetings . . . . . . The MSF Special Meeting will be held at 10:00
a.m., local time, on Monday, July 28, 1997 at
the Le Meridien Hotel located at 650 North
Pearl Street, Dallas, Texas 75201. The
Search Special Meeting will be held at 10:00
a.m., local time, on Monday, July 28, 1997 at
the offices of Search located at 600 North
Pearl Street, Dallas, Texas 75201. See "The
Special Meetings--Times, Places and Dates of
Special Meetings."
Purposes of the Special
Meetings . . . . . . . . . . At the MSF Special Meeting and the Search
Special Meeting (collectively, the "Special
Meetings"), stockholders will be asked to
consider and vote upon proposals to adopt and
approve the Merger Agreement and the
transactions contemplated thereby, including
the Merger. A copy of the Merger Agreement is
attached to this Joint Proxy
Statement/Prospectus as Annex A. See "The
Special Meetings--Purpose of the MSF Special
Meeting" and "--Purpose of the Search Special
Meeting."
6
<PAGE> 14
Record Dates; Voting Rights . Holders of record of MSF Common Stock at the
close of business on June 25, 1997 (the "MSF
Record Date") will be entitled to notice of,
and to vote at, the MSF Special Meeting and
at any adjournment or postponement thereof.
There were issued and outstanding 10,431,010
shares of MSF Common Stock as of the MSF
Record Date, held by approximately 1,200
stockholders of record. Under the Delaware
General Corporation Law (the "Delaware Law")
and MSF's Second Amended and Restated
Certificate of Incorporation, the adoption
and approval of the Merger Agreement and the
transactions contemplated thereby by the
stockholders of MSF requires the affirmative
vote of the holders of at least a majority of
the outstanding shares of MSF Common Stock.
As of the MSF Record Date, 8,080,421 shares
of MSF Common Stock (approximately 77% of the
shares of MSF Common Stock outstanding as of
the MSF Record Date) were entitled to be
voted by the directors and officers of MSF
and their affiliates. See "The Special
Meetings--Record Dates; Voting Rights."
MS Diversified Corporation, MS Financial
Services, Inc. and Golder Thoma Cressey
Rauner Fund IV, L.P. (collectively, the
"Principal Stockholders"), the holders of
8,040,000 shares of MSF Common Stock, or
approximately 77% of the shares of MSF Common
Stock outstanding on the MSF Record Date,
have agreed to vote their shares of MSF
Common Stock in favor of the Merger at the
MSF Special Meeting and have granted a proxy
to vote their shares to Merger Sub. When
these shares of MSF Common Stock are voted at
the MSF Special Meeting in favor of the
adoption and approval of the Merger Agreement
and the transactions contemplated thereby,
the affirmative vote of holders of additional
shares of MSF Common Stock will not be
required to adopt and approve the Merger
Agreement and the transactions contemplated
thereby. See "The Stockholders Agreement."
Holders of a majority of the shares of MSF
Common Stock, represented in person or by
proxy, will constitute a quorum at the MSF
Special Meeting. Each holder will be
entitled to cast one vote for each share of
MSF Common Stock held. See "The Special
Meetings--Record Dates; Voting Rights."
Holders of record of Search Common Stock,
Search's 12% Senior Convertible Preferred
Stock ("Search 12% Preferred Stock") and
Search's 9%/7% Convertible Preferred Stock
("Search 9%/7% Preferred Stock") at the close
of business on May 30, 1997 (the "Search
Record Date") will be entitled to notice of,
and to vote at, the Search Special Meeting
and at any adjournment or postponement
thereof. There were issued and outstanding
3,016,444 shares of Search Common Stock,
50,000 shares of Search 12% Preferred Stock
and 2,456,098 shares of Search 9%/7%
Preferred Stock as of the Search Record Date.
Under the Delaware law and Search's Amended
and Restated Certificate of Incorporation,
the adoption and approval of the Merger
Agreement and the transactions contemplated
thereby by the stockholders of Search
requires the affirmative vote of the holders
of at least a majority of the outstanding
shares of Search Common Stock, Search 12%
Preferred Stock and Search 9%/7% Preferred
Stock (the "Search Capital Stock"), voting
together as one class, that are represented
in person or by proxy at the Search Special
Meeting. As of the Search Record Date, 94,823
shares of Search Capital Stock (approximately
1.7% of the shares of Search Capital Stock
outstanding as of the Search Record Date)
were entitled to be voted by the directors
and officers of Search and their affiliates.
See "The Special Meetings--Record Dates;
Voting Rights."
Holders of one-half of the outstanding shares
of Search Capital Stock, represented in
person or by proxy, will constitute a quorum
at the Search Special Meeting. Each holder
will be entitled to cast one vote for each
share of Search Capital Stock held. See "The
Special Meetings--Record Dates; Voting
Rights."
7
<PAGE> 15
THE MERGER
Terms of Merger . . . . . . . If the Merger is approved and consummated,
each share of MSF Common Stock outstanding
at the date and time (the "Effective Time")
that the Merger becomes effective (other than
shares held in MSF's treasury or owned by
Search or any subsidiary of Search or MSF)
will be converted into the right to receive a
fraction (the "Exchange Ratio") of a share of
Search Common Stock, based on the average
closing sales price per share of Search
Common Stock for the 10 trading days ending
on the fifth business day prior to the date
of the MSF Special Meeting (the "Average
Search Trading Price"). The Exchange Ratio
will equal the quotient of $1.63 (the "Per
Share Amount") divided by the Average Search
Trading Price, but may not be more than 0.37
nor less than 0.28. No fractional shares of
Search Common Stock will be issued and cash
will be paid in lieu of any such fractional
shares. See "The Merger Agreement--Conversion
of Shares."
MSF STOCKHOLDERS SHOULD CONSIDER THAT THE
EXCHANGE RATIO WILL BE FIXED ON THE FIFTH
BUSINESS DAY PRIOR TO THE DATE OF THE MSF
SPECIAL MEETING, BUT THE MARKET VALUE OF THE
SHARES OF SEARCH COMMON STOCK THAT HOLDERS OF
MSF COMMON STOCK WILL RECEIVE IN THE MERGER
MAY INCREASE OR DECREASE PRIOR TO THE
EFFECTIVE TIME BECAUSE THE MARKET PRICE OF
SEARCH COMMON STOCK IS SUBJECT TO
FLUCTUATION. IN ADDITION, BECAUSE OF
FLUCTUATIONS IN THE MARKET PRICE OF SEARCH
COMMON STOCK, THE MARKET VALUE OF SEARCH
COMMON STOCK THAT HOLDERS OF MSF COMMON STOCK
WILL RECEIVE IN THE MERGER MAY INCREASE OR
DECREASE FOLLOWING THE MERGER.
Prior Adjustments to Per Share
Amount and Exchange Ratio . . Under the Merger Agreement prior to its
amendment on June 25, 1997, the Per Share
Amount and the maximum and minimum Exchange
Ratios were $2.00 and 0.46 and 0.34,
respectively. The Merger Agreement required
the Per Share Amount and maximum and minimum
Exchange Ratios to be decreased under certain
circumstances. In general, the Per Share
Amount was to be decreased if the
stockholders' equity shown on the unaudited
financial statements of MSF for the last
month (or, in certain circumstances, the
second month) ending before the Effective
Time, subject to certain adjustments,
decreased. No adjustment would have been
made if the adjusted decrease in
stockholders' equity was $2.1 million or
less. The maximum and minimum Exchange
Ratios would have been decreased in
proportion to any decrease in the Per Share
Amount. See "The Merger--Prior Adjustments
to Per Share Amount and Exchange Ratio."
Search and MSF originally contemplated that
the Effective Time would occur prior to June
30, 1997 and that the foregoing adjustments,
if any, would be based on MSF's financial
information as of April 30, 1997. Because of
unavoidable delays, and to allow additional
time for consummation of the Merger, Search
and MSF agreed, on June 25, 1997, to an
amendment of the Merger Agreement. Under the
amendment, the outside date for consummation
of the Merger was extended from June 30 to
August 15, 1997, the Per Share Amount and
minimum and maximum Exchange Ratios were
fixed at $1.63 and 0.28 and 0.37,
respectively, and the foregoing adjustment
provisions of the Merger Agreement were
deleted. These amounts are approximately what
would have resulted under the adjustment
provisions of the original, unamended Merger
Agreement using financial information for MSF
as of April 30, 1997. Accordingly, no further
adjustments to the Per Share Amount or
minimum or maximum Exchange Ratios are
expected to be made prior to the Effective
Time. See "The Merger--Prior Adjustments to
Per Share Amount and Exchange Ratio."
8
<PAGE> 16
MSF's Reasons for the Merger;
Recommendations of the Board
of Directors of MSF . . . . . After taking into consideration various
factors, the MSF Board has determined that
the Merger is in the best interests of MSF
and its stockholders and recommends adoption
and approval of the Merger Agreement and the
transactions contemplated thereby. For a
discussion of the factors considered by the
MSF Board in reaching its decisions to
approve and adopt the Merger Agreement and
the transactions contemplated thereby,
including the Merger, and to recommend that
the MSF stockholders vote FOR the proposal to
adopt and approve the Merger Agreement and
the transactions contemplated thereby,
including the Merger, see "The Merger--MSF's
Reasons for the Merger; Recommendations of
the MSF Board of Directors."
Search's Reasons for the Merger;
Recommendations of the Board
of Directors of Search . . . After taking into consideration various
factors, the Search Board has determined that
the Merger is in the best interests of Search
and its stockholders and recommends adoption
and approval of the Merger Agreement and the
transactions contemplated thereby. For a
discussion of the factors considered by the
Search Board in reaching its decisions to
approve and adopt the Merger Agreement and
the transactions contemplated thereby,
including the Merger, and to recommend that
the Search stockholders vote FOR the proposal
to adopt and approve the Merger Agreement and
the transactions contemplated thereby,
including the Merger, see "The
Merger--Search's Reasons for the Merger;
Recommendations of the Search Board."
Opinion of Bear, Stearns
& Co. Inc. . . . . . . . . . Bear, Stearns & Co. Inc. ("Bear Stearns") has
delivered its written opinion to the MSF
Board to the effect that, as of the date of
its opinion, the Merger is fair to the public
stockholders of MSF from a financial point of
view. A copy of such opinion, which sets
forth the assumptions made, matters
considered, and limits on the review
undertaken by Bear Stearns in arriving at its
opinion is attached to this Joint Proxy
Statement/Prospectus as Annex B and should be
read in its entirety. See "The
Merger--Opinion of MSF's Financial Advisors."
Bear Stearns and Search have had discussions
regarding potential securitization
transactions by Search in the future with
Bear Stearns' assistance.
Opinion of Alex. Brown &
Sons Incorporated . . . . . . Alex. Brown & Sons Incorporated ("Alex.
Brown") has delivered its written opinion to
the Search Board to the effect that, as of
the date of its opinion, the Exchange Ratio
is fair to Search from a financial point of
view. A copy of such opinion, which sets
forth the assumptions made, matters
considered, and limits on the review
undertaken by Alex. Brown in arriving at its
opinion is attached to this Joint Proxy
Statement/Prospectus as Annex C and should be
read in its entirety. See "The
Merger--Opinion of Search's Financial
Advisors."
Interests of Certain Persons
in the Merger . . . . . . . . In considering the recommendation of the MSF
Board to approve and adopt the Merger
Agreement and the transactions contemplated
thereby, including the Merger, MSF
stockholders should be aware that the
executive officers of MSF and certain members
of the MSF Board have interests in the Merger
that are in addition to the interests of MSF
stockholders generally, and that the members
of the MSF Board having such interests
participated in the discussion, deliberation
and voting of the MSF Board with respect to
the Merger Agreement. See "The
Merger--Interests of Certain Persons in the
Merger."
Ownership of Shares of MSF Common Stock;
Election of New Search Director. Three of the
directors of MSF also serve as officers of MS
Diversified Corporation ("MSD"). MSD and its
wholly-owned subsidiary, MS Financial
Services, Inc.,
9
<PAGE> 17
collectively own 41.4% of the outstanding MSF
Common Stock. Two other directors of MSF are
affiliated with Golder, Thoma, Cressey,
Rauner, Inc. ("Golder Thoma"). Golder
Thoma's affiliate, Golder Thoma Cressey
Rauner Fund IV, L.P., owns 35.7% of the
outstanding MSF Common Stock. Together these
five directors form a majority of the members
of the MSF Board. In addition, Search has
agreed that Mr. James B. Stuart, Jr., who is
Chairman of MSF and President and Chief
Executive Officer of MSD, will become a
director of Search following the Merger.
Acceleration of Options. The officers and
directors of MSF hold options to purchase MSF
Common Stock issued under the MSF Amended and
Restated Employees' Equity Incentive Plan and
the MSF Non-Employee Directors Stock Option
Plan (the "MSF Plans"). As a result of the
Merger and the terms of their options, at the
Effective Time, all of these options will
become fully exercisable, to the extent not
previously exercisable, to purchase Search
Common Stock. See "The Merger
Agreement--Treatment of MSF Stock Options."
Employment Agreements. Several of MSF's
officers have employment contracts with MSF.
Under the terms of each of these contracts,
the officer is entitled to certain severance
payments, after the Effective Time, if the
officer's employment is terminated without
cause, or if he resigns because there is a
material reduction in the officer's salary or
benefits, the officer is required to be based
more than 25 miles from MSF's present
executive offices, or the officer is removed,
not reelected to his position with MSF or is
assigned duties inconsistent with his duties,
responsibilities and status with MSF. The
severance payments are generally one-year's
base salary. The employment contract for
MSF's former Chief Executive Officer, who
resigned effective February 28, 1997,
provides that he will receive cash severance
payments for a one-year period so long as he
complies with certain noncompete covenants.
MSF, with the consent of Search, has agreed
that the former Chief Executive Officer may
exercise certain stock options issued under
one of the MSF Plans for up to one year after
his resignation.
Indemnification; Insurance. Under the Merger
Agreement, Search has agreed that the
Surviving Corporation's Certificate of
Incorporation and Bylaws will be no less
favorable with respect to indemnification of
officers, directors, employees, fiduciaries
and agents than MSF's current Second Amended
and Restated Certificate of Incorporation and
Bylaws. In addition, Search has agreed not
to amend or repeal in any manner that would
diminish their effect the provisions of the
Surviving Corporation's Certificate of
Incorporation and Bylaws providing for
indemnification of individuals who at any
time prior to the Merger were directors,
officers, employees, fiduciaries or agents of
MSF for a period of three years after the
Merger for all matters other than this Joint
Proxy Statement/Prospectus, for which the
period will be four years following the
Merger. Under the Merger Agreement, Search
has agreed that the Surviving Corporation
will use reasonable efforts, subject to
certain cost limitations, to maintain in
effect for three years after the Merger MSF's
current directors' and officers' liability
insurance coverage with respect to matters
occurring prior to the Effective Time.
Accounting Treatment . . . . The Merger will be accounted for by Search
under the purchase method of accounting in
accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations," as
amended. See "The Merger--Accounting
Treatment."
Certain Federal Income Tax
Considerations . . . . . . . The Merger is intended to constitute a
reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986,
as amended (the "Code"), so that no gain or
loss would be recognized by MSF stockholders
with respect to the receipt of Search Common
Stock in exchange for their shares of MSF
Common Stock in the Merger (except with
respect to any cash received in lieu of
fractional shares of Search
10
<PAGE> 18
Common Stock). Search and MSF have received
an opinion of counsel to the effect that the
Merger will constitute a reorganization
within the meaning of Section 368(a) of the
Code. Under the Merger Agreement, it is a
condition precedent to the obligation of each
of Search and MSF to consummate the Merger
that the opinion be updated as of the
Effective Time. For a further discussion of
certain of the federal income tax
consequences of the Merger, see "The
Merger--Certain Federal Income Tax
Considerations." See also "The Merger
Agreement--Conditions to the Merger."
Absence of Dissenters'
Rights . . . . . . . . . . . Neither holders of MSF Common Stock nor
holders of Search Capital Stock will be
entitled to dissenters' rights under the
Delaware Law in connection with the Merger.
See "The Merger--Absence of Dissenters'
Rights."
Management and Operations
Following the Merger . . . . Pursuant to the Merger Agreement, upon
consummation of the Merger, the officers of
Merger Sub immediately prior to the Effective
Time will be the initial officers of the
Surviving Corporation. One MSF officer will
be appointed an Executive Vice President of
Search. One MSF director will be elected to
the Search Board.
Following the Merger, Search intends to
consolidate the operations of Search and MSF
that provide similar services to realize
operating efficiencies and expense savings.
No final determination regarding these
matters has been made. Search intends to
retain MSF's branch locations and operations,
including the purchase of receivables for the
account of MSF utilizing Search's
underwriting guidelines. Following the
Merger, Search will continue to review the
operations of MSF to determine whether
additional operating efficiencies and
consolidations of operations can be
implemented, including consolidation of
branch office operations with facilities of
Search that are located in close proximity
and the consolidation of all of MSF's
headquarters operations, after October 1997,
with the similar operations of Search in
Dallas, Texas or at other, smaller facilities
in the Jackson, Mississippi area. See "The
Merger--Management and Operations Following
the Merger."
Treatment of MSF Stock
Options . . . . . . . . . . At the Effective Time, each outstanding
option to purchase shares of MSF Common Stock
under the MSF Plans will become fully
exercisable and will be assumed by Search.
Each MSF option assumed by Search under the
Merger Agreement will continue to have, and
be subject to, the same terms and conditions
set forth in the MSF Plans immediately prior
to the Effective Time, except that (i) such
option will be exercisable for that number of
whole shares of Search Common Stock equal to
the product of the number of shares of MSF
Common Stock that were purchasable under such
option multiplied by the Exchange Ratio,
rounded up or down to the nearest whole
number of shares of Search Common Stock, and
(ii) the per share exercise price for the
shares of Search Common Stock issuable upon
exercise of such assumed option will be equal
to the quotient determined by dividing the
exercise price per share of MSF Common Stock
at which such option was exercisable
immediately prior to the Effective Time by
the Exchange Ratio, and rounding the
resulting exercise price up to the nearest
whole cent. See "The Merger
Agreement--Treatment of MSF Stock Option."
11
<PAGE> 19
THE MERGER AGREEMENT
Surrender of Certificates . . If the Merger becomes effective, Search will
mail a letter of transmittal with
instructions to all holders of record of MSF
Common Stock as of the Effective Time for use
in surrendering their stock certificates in
exchange for certificates representing Search
Common Stock and a cash payment in lieu of
fractional shares. Certificates should not be
surrendered until the letter of transmittal
is received. See "The Merger
Agreement--Exchange of Share Certificates."
Conditions to the
Merger . . . . . . . . . . . Consummation of the Merger is subject to the
satisfaction or, where legally permissible,
waiver of a number of conditions, including,
but not limited to (i) the adoption of the
Merger Agreement by the requisite vote of the
stockholders of MSF and Search, (ii) the
absence of any court order or law which makes
the Merger illegal or otherwise prohibits the
consummation of the Merger, (iii) the
continuing accuracy in all material respects
of the representations and warranties made in
the Merger Agreement on and as of the
Effective Time, (iv) the receipt by Search of
accountants' "cold comfort" letters with
respect to the financial statements of MSF
and its subsidiary and certain other matters,
(v) the execution of amendments by MSF,
Search and MSF's lenders to MSF's line of
credit, and (vi) the absence of any pending
or threatened litigation against Search, MSF
or their respective officers or directors
that could have a material adverse effect on
Search or MSF. See "The Merger
Agreement--Conditions to the Merger."
Termination . . . . . . . . . The Merger Agreement may be terminated at any
time prior to the Effective Time by mutual
consent of Search and MSF, or by either party
if (i) the Effective Time has not occurred by
August 15, 1997, (ii) there exists any order,
decree, ruling or other action prohibiting
the transactions contemplated by the Merger
Agreement, (iii) the other party has breached
any representation, warranty, covenant or
agreement in the Merger Agreement such that
the related closing conditions would not be
satisfied, and such breach has not been
promptly cured, or (iv) the stockholders of
Search or MSF fail to approve and adopt the
Merger Agreement and the Merger. Search may
also terminate the Merger Agreement if (i)
the MSF Board withdraws, modifies or changes
its recommendation of the Merger Agreement or
the Merger in a manner adverse to Search or
resolves to do so, (ii) the MSF Board
recommends to MSF's stockholders any Business
Combination Transaction (as defined in "The
Merger Agreement--Termination; Amendment") or
resolves to do so, (iii) a tender offer or
exchange offer for 50% or more of the
outstanding shares of MSF Common Stock is
commenced and the MSF Board fails to
recommend against the stockholders of MSF
tendering their shares in such tender offer
or exchange offer, or (iv) MSF files a
petition for reorganization in bankruptcy or
becomes the subject of an involuntary
bankruptcy petition that is not rejected
within 30 days. In addition, MSF may
terminate the Merger Agreement if (i) the
Search Board withdraws its recommendation of
approval of the issuance of additional shares
of Search Common Stock pursuant to the Merger
or resolves to do so or (ii) in the exercise
of its good faith judgment as to its
fiduciary duties under the Delaware Law, the
MSF Board in good faith determines, after
consultation with its financial advisors and
legal counsel and duly considering the
written advice of such legal counsel, that
termination is required by such fiduciary
duties by reason of a proposal that either
constitutes a Business Combination
Transaction or may reasonably be expected to
lead to a Business Combination Transaction.
See "The Merger Agreement--Termination;
Amendment."
Alternative Proposal Fee;
Expenses . . . . . . . . . . In connection with termination of the Merger
Agreement, upon the occurrence of certain
events, (i) MSF would be required to pay
Search a fee of $700,000 (which amount is
inclusive of all expenses incurred by Search
related to the Merger) and
12
<PAGE> 20
(ii) Search would be required to pay MSF a
fee of $250,000 (which amount is inclusive of
all expenses incurred by MSF related to
Merger). Upon the occurrence of certain
other events, Search or MSF would be required
to pay to the other its expenses only. See
"The Merger Agreements--Fees and Expenses."
THE STOCKHOLDERS AGREEMENT
General . . . . . . . . . . . The Stockholders Agreement provides, among
other things, that each Principal Stockholder
will vote (or cause to be voted), at the MSF
Special Meeting or any other meeting of MSF
stockholders, the shares of MSF Common Stock
held by such stockholder in favor of (i) the
Merger, (ii) the execution and delivery by
MSF of the Merger Agreement and the approval
of the terms thereof and (iii) each of the
other actions contemplated by the Merger
Agreement, and against (a) any action or
agreement that would result in a breach by
MSF of the Merger Agreement, (b) unless
agreed in advance by Search, any
extraordinary corporate transaction, such as
a business combination, involving MSF or its
subsidiary, or any sale, lease or other
transfer of a material amount of assets of
MSF, its subsidiary or any securitization
trust sponsored by MSF (a "Securitization
Trust") or a reorganization,
recapitalization, dissolution or liquidation
of MSF, its subsidiary or any purchase of MSF
Common Stock from a MSF stockholder (an
"Alternate Transaction"), and (c) certain
changes in the structure, capitalization,
business or governance of MSF. In addition,
each Principal Stockholder has granted to,
and appointed, Merger Sub and an officer of
Merger Sub as such Principal Stockholder's
irrevocable proxy and attorney-in-fact (with
full power of substitution) to vote the
shares of MSF Common Stock in accordance with
the provisions of the Stockholders Agreement.
See "The Stockholders Agreement--Agreement to
Vote."
In the Stockholders Agreement, the Principal
Stockholders have agreed to certain
covenants, including that no such stockholder
shall (i) solicit or respond to any inquiry,
proposal or offer by any person (other than
Search or an affiliate of Search) with
respect to MSF that constitutes or could
reasonably be expected to lead to an
Alternate Transaction, or (ii) sell, encumber
or otherwise transfer or dispose of such
Principal Stockholder's shares of MSF Common
Stock or any interest therein, or (iii)
pursue any claim of such stockholder against
MSF or any of its directors or officers. The
Principal Stockholders have also agreed to
release any claims that they may have against
MSF and its directors and officers at the
closing of the Merger. See "The Stockholders
Agreement--Covenants of the Stockholders."
Indemnification; Escrow
Arrangements . . . . . . . . Each Principal Stockholder has agreed to
indemnify Search, Merger Sub and the
Surviving Corporation from certain
liabilities and losses. To secure this
indemnification obligation, the Principal
Stockholders have agreed to place in escrow
shares of Search Common Stock having a value,
based upon the Average Search Trading Price,
of $2,500,000, for at least 12 months from
the Effective Time. These shares will be
released in increments of 25% commencing on
the first anniversary of the Effective Time
and continuing every six months thereafter.
Under certain circumstances, Search may
request the Principal Stockholders to
increase the value of the shares to be placed
in escrow by up to $1,000,000. The Principal
Stockholders have also agreed to place in
escrow additional shares of Search Common
Stock having a value, based upon the Average
Search Trading Price, of $2,300,000 to secure
MSF's representation that it will receive an
income tax refund of $6,300,000. The shares
will be released from escrow quarterly in
proportion to the amount of the refunds
received by MSF over $4,000,000. If any
portion of the refund is not received by the
first anniversary of the closing of the
Merger, the remaining Search Common Stock in
the tax escrow will revert to Search. See
"The Stockholders Agreement--
Indemnification; Escrow Arrangements."
13
<PAGE> 21
OTHER MATTERS
Comparison of Stockholder
Rights . . . . . . . . . . . See "Comparison of the Rights of Holders of
Search Common Stock and MSF Common Stock" for
a summary of the material differences between
the rights of holders of Search Common Stock
and MSF Common Stock.
RISK FACTORS . . . . . . . . STOCKHOLDERS SHOULD CAREFULLY EVALUATE
CERTAIN RISK FACTORS RELATED TO THE COMBINED
COMPANIES AFTER THE MERGER. SEE "RISK
FACTORS."
14
<PAGE> 22
SELECTED HISTORICAL AND PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
The following selected historical information of Search and MSF has
been derived from their respective historical consolidated financial
statements, and should be read in conjunction with the historical consolidated
financial statements of Search and the related notes thereto, included in Annex
E to this Joint Proxy Statement/Prospectus, and the historical consolidated
financial statements of MSF and the related notes thereto, included in Annex D
to this Joint Proxy Statement/Prospectus. The selected pro forma combined
financial information is derived from the pro forma combined condensed
financial statements, which are included on pages 55 through 58 in this Joint
Proxy Statement/Prospectus, and should be read in conjunction with such pro
forma statements and the notes thereto.
The pro forma information and the related notes thereto are provided
for informational purposes only. The pro forma information presented is not
necessarily indicative of the consolidated financial position or results of
operations of Search as they may be in the future or as they might have been
had the Merger been effected on the assumed dates.
15
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL INFORMATION
SEARCH FINANCIAL SERVICES INC. AND SUBSIDIARIES
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
9 Months 9 Months Year Year 6 Months 6 Months Year
Ended Ended Ended Ended Ended Ended Ended
9/30/92 9/30/93 9/30/94 9/30/95 3/31/95 3/31/96 3/31/97
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Interest revenue $1,493 $7,096 $14,054 $13,472 $8,694 $3,541 $10,004
Interest expense (708) (4,173) (9,968) (11,205) (6,437) (1,306) (2,306)
Reduction of (provision for)
credit losses -- -- (20,180) (3,128) (5,337) (4,982) 7,017
-----------------------------------------------------------------------------
Net interest income (loss) after
provision for credit losses 785 2,923 (16,094) (861) (3,080) (2,747) 14,715
General and administrative expense 663 3,051 9,296 15,881 7,221 8,098 13,392
Settlement expense -- -- 560 2,837 -- 535 40
Reorganization expense -- -- -- 315 -- -- --
Other income 338 -- -- -- -- -- --
-----------------------------------------------------------------------------
Income (loss) before
extraordinary item 460 (128) (25,950) (19,894) (10,301) (11,380) 1,283
Extraordinary gain on
discharge of debt -- -- -- -- -- 8,709 --
-----------------------------------------------------------------------------
Net income (loss) 460 (128) (25,950) (19,894) (10,301) (2,671) 1,283
Preferred stock dividends 123 263 240 240 120 327 6,154
-----------------------------------------------------------------------------
Income (loss) attributable to
common stockholders $337 $(391) $(26,190) $(20,134) $(10,421) $(2,998) $(4,871)
=============================================================================
EARNINGS (LOSS) PER SHARE
OF COMMON STOCK(1):
Income (loss) before
extraordinary item $0.72 $(0.48) $(18.64) $(17.96) $(8.96) $(8.96) $(1.45)
Gain on extraordinary item -- -- -- -- -- 6.67 --
------------------ ----------------------------------------------------------
Net income (loss) $0.72 $(0.48) $(18.64) $(17.96) $(8.96) $(2.29) $(1.45)
=============================================================================
Weighted average number of
common shares outstanding 460 766 1,407 1,121 1,162 1,306 3,366
BALANCE SHEET (AT PERIOD END):
Net contracts receivable $6,565 $29,396 $61,823 $34,948 $76,655 $30,651 $51,689
Total assets 14,147 44,223 75,126 49,922 59,985 37,346 69,523
Notes payable (prepetition
subject to compromise) -- -- -- 69,320 -- -- --
Notes payable and lines of credit 11,774 40,562 70,768 1,058 69,160 2,283 38,311
Total liabilities 12,208 42,013 79,502 75,557 74,783 10,935 42,917
Stock repurchase commitment -- -- -- 2,078 -- 2,078 2,078
Stockholders' equity (deficit) 1,939 2,210 (4,376) (27,713) (14,798) 24,333 24,528
</TABLE>
- -------------------------------------
(1) In November 1996, Search effected a 1-for-8 reverse stock split. All
references in the financial information to the number of shares
outstanding and per share amounts have been retroactively adjusted to
reflect the reverse split.
16
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL INFORMATION
MS FINANCIAL, INC. AND SUBSIDIARY
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Year Year Year Year 3 Months 3 Months
Ended Ended Ended Ended Ended Ended Ended
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 3/31/96 3/31/97
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT:
Interest and fee income on installment
contracts and securitizations $6,880 $6,514 $10,008 $12,449 $14,909 $1,645 $4,440
Other interest income 2 13 4 100 70 18 13
Interest expense (2,048) (1,193) (2,441) (3,587) (5,371) (373) (2,208)
--------------------------------------------------------------------
Net interest income before loss provisions 4,834 5,334 7,571 8,962 9,608 1,290 2,245
Provisions for possible losses on
installment contracts (749) (924) (685) (826) (20,103) (250) (4,342)
Provision for impairment of amounts
due under securitization -- -- -- -- (3,000) -- --
Provision for possible losses on
repossessed automobiles -- -- -- -- (2,800) -- --
--------------------------------------------------------------------
Net interest income (loss)
after loss provisions 4,085 4,410 6,886 8,136 (16,295) 1,040 (2,097)
Insurance commissions earned 155 667 1,456 1,823 1,329 361 81
Gains on securitizations 633 2,134 2,492 7,072 -- -- --
Service fee income 222 862 1,235 1,951 2,668 864 371
Experience refund on insurance policy -- 900 900 -- -- -- --
Other income 217 349 627 760 753 257 22
Operating expenses (3,152) (4,271) (6,589) (9,340) (15,104) (3,098) (3,419)
Income tax (expense) benefit (748) (1,890) (2,622) (3,901) 4,635 (216) --
--------------------------------------------------------------------
Income (loss) from continuing operations 1,412 3,161 4,385 6,501 (22,014) (360) (5,042)
Income from operations of discontinued
subsidiary, net of income taxes 1,070 -- -- -- -- -- --
--------------------------------------------------------------------
Net income (loss) $2,482 $3,161 $4,385 $6,501 $(22,014) $(360) $(5,042)
====================================================================
EARNINGS (LOSS) PER SHARE:
From continuing operations $0.15 $0.34 $0.47 $0.65 $(2.11) $(0.03) $(0.48)
From operations of discontinued
subsidiary, net of income taxes 0.12 -- -- -- -- -- --
--------------------------------------------------------------------
Net income (loss) $0.27 $0.34 $0.47 $0.65 $(2.11) $(0.03) $(0.48)
====================================================================
Weighted average shares outstanding 9,332 9,332 9,332 9,932 10,433 10,452 10,430
BALANCE SHEET (AT PERIOD END):
Total assets $28,422 $32,902 $60,222 $49,718 $101,435 $91,015
Notes payable 15,111 15,046 36,043 -- 75,813 71,442
Total liabilities 17,865 19,184 42,119 4,734 79,681 73,852
Stockholders' equity 10,557 13,718 18,103 44,984 21,754 17,163
</TABLE>
17
<PAGE> 25
SEARCH AND MSF
SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
MSF Fiscal Fiscal Year DACC Fiscal Year
Search Fiscal Year Ended Ended Operations for Ended
Year Ended December 31, March 31, 1997 Period Between March 31, 1997
March 31, 1997 1996 Pro Forma April 1, 1996 and Pro Forma
Historical Historical Combined(1) August 2, 1996(2) Combined(3)
---------- ---------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net interest income $7,698 $9,608 $17,306 $1,256 $18,562
Net income (loss) before dividends and taxes 1,283 (26,649) (25,493) (7,490) (32,983)
Net income (loss) to common stockholders (4,871) (22,014) (27,012) (7,490) (34,502)
Net income (loss) per share of common stock(4) (1.45) (3.75) (4.74)
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1997
----------------- At March 31, 1997
Search Historical MSF Historical Pro Forma Combined(5)
----------------- -------------- ---------------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET:
Net receivables--after allowance for credit
losses and other costs $47,308 $74,019 $121,327
Total assets 69,523 91,015 161,806
Total liabilities 42,917 73,852 117,518
Stockholders' equity 24,528 17,163 42,210
</TABLE>
- ----------------------------
(1) Pro forma to give effect to the Merger as if it had occurred as of
April 1, 1996.
(2) Represents the results of operations of Dealers Alliance Credit Corp.
("DACC"), whose assets and business were acquired by Search effective
August 2, 1996.
(3) Pro forma to give effect to the Merger and the acquisition of DACC as
if they had occurred as of April 1, 1996.
(4) Per share information assumes an Exchange Ratio of 0.37. See
"Comparative Per Share Data."
(5) Pro forma to give effect to the Merger as if it had occurred as of
March 31, 1997.
18
<PAGE> 26
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Search and MSF and combined per share data on an unaudited pro forma basis
giving effect to the Merger using the purchase method of accounting. This data
should be read in conjunction with the selected historical and pro forma
financial data, the pro forma combined condensed financial statements and the
separate historical consolidated financial statements of Search and MSF, and
notes thereto, included elsewhere in this Joint Proxy Statement/Prospectus or
incorporated herein by reference. The unaudited pro forma combined financial
data are not necessarily indicative of the operating results that would have
been achieved had the Merger occurred at the beginning of the periods presented
and should not be construed as representative of future operations. The pro
forma combined amounts per share of Search Common Stock were based on the pro
forma combined condensed financial statements included in "Pro Forma Combined
Condensed Financial Information" assuming three different Exchange Ratios.
Equivalent pro forma combined amounts per share of MSF Common Stock are
calculated by multiplying the pro forma income (loss) per Search share and pro
forma book value per Search share by three different Exchange Ratios so that
the per share amounts are equated to the respective values for one share of MSF
Common Stock.
<TABLE>
<CAPTION>
SEARCH (1) MSF
--------------------------------------- ------------------------------------
PRO EQUIVALENT
HISTORICAL FORMA HISTORICAL PRO FORMA (2)
---------- -------------------------- ---------- ------------------------
0.37 0.33 0.28 0.37 0.33 0.28
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book value per common share at
March 31, 1997 (3) .............................$ 7.69 $ 5.98 $ 6.36 $ 6.90 $ 1.65 $2.21 $ 2.10 $ 1.93
Earnings (loss) per common share for the
fiscal year ended March 31, 1997 (4). $(1.45) $(4.74) $(5.02) $(5.44) $(2.11) $(1.75) $(1.66) $(1.52)
Market value per share at
February 6, 1997 (5)..........................$5.25 $1.375 $ 1.94 $ 1.73 $ 1.47
</TABLE>
- ---------------------------------
(1) All per share amounts have been adjusted for the one-for-eight stock
split effected by Search in November 1996.
(2) MSF Equivalent Pro Forma per share data represents the respective
Search Pro Forma per share data for a particular Exchange Ratio
multiplied by that Exchange Ratio.
(3) Historical book value per common share is computed by dividing
stockholders' equity for Search or MSF (less, in the case of Search,
the dollar amount shown on the balance sheet for convertible preferred
stock) by the number of shares of common stock outstanding at the end
of each period for Search or MSF, respectively. Pro forma book value
per common share is computed by dividing pro forma stockholder's
equity (less the dollar amount shown on Search's balance sheet for
convertible preferred stock) by the pro forma number of shares of
common stock outstanding at the end of the period. The liquidation
preference of Search's preferred stock is not taken into account in
these calculations.
(4) The historical earnings (loss) per common share for MSF are for its
fiscal year ended December 31, 1996.
(5) Based on closing prices reported by NASDAQ or in the over-the-counter
market, as applicable, on February 6, 1997, the day prior to public
announcement of the Merger.
CASH DIVIDENDS
Search and MSF have not declared or paid any cash dividends on their
respective common stock during the periods noted above and do not intend to
declare or pay any cash dividends on common stock in the foreseeable future.
Any future determination as to declaration and payment of cash dividends will
be made at the discretion of their respective Boards of Directors and subject
to any restrictions in credit agreements and under the terms of any outstanding
preferred stock. The Merger Agreement also limits the ability of MSF to
declare dividends. Search has paid all required dividends on its preferred
stock.
19
<PAGE> 27
COMPARATIVE MARKET PRICE DATA
Search Common Stock has traded on The Nasdaq Stock Market's National
Market ("NASDAQ") since March 10, 1997. Prior thereto, it traded in the
over-the-counter market. MSF Common Stock is traded on NASDAQ. Prior to July
21, 1995, MSF Common Stock was not traded on any recognized market. MSF's
fiscal year ends on December 31.
The table below sets forth, for the fiscal quarters indicated, the
high and low sales prices of Search Common Stock (since March 10, 1997) and MSF
Common Stock as reported on NASDAQ and high and low bid prices of Search Common
Stock as reported in over-the-counter market (prior to March 10, 1997), in each
case based on published financial sources. Prices for the Search Common Stock
prior to November 22, 1996 are adjusted to reflect a one-for-eight reverse
stock split effected on that date. Over-the-counter market prices reflect
inter-dealer transactions or quotations, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
SEARCH MSF
-------------------- -------------------
COMMON STOCK COMMON STOCK
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
CALENDAR YEAR 1995:
First Quarter . . . . . . . . . . $17 $9 -- --
Second Quarter . . . . . . . . . $15 $6-1/2 -- --
Third Quarter . . . . . . . . . $16 $8 $13-7/8 $11
Fourth Quarter . . . . . . . . . $15-1/2 $8 $12-1/2 $5-3/8
CALENDAR YEAR 1996:
First Quarter . . . . . . . . . $13 $8 $7-1/8 $4-3/8
Second Quarter . . . . . . . . . $12-1/2 $8-1/2 $7-5/8 $5-7/8
Third Quarter . . . . . . . . . $9-1/2 $6-1/4 $6-1/4 $2-5/8
Fourth Quarter . . . . . . . . . $8 $4 $3-5/8 $0-5/8
CALENDAR YEAR 1997:
First Quarter . . . . . . . . . $6-5/8 $5 $1-5/8 $1-1/4
Second Quarter (through
June 23, 1997) . . . . . . . $5-3/8 $3-1/4 $1-9/16 $1-1/8
</TABLE>
On February 6, 1997, the last full trading day prior to the execution
and delivery of the Merger Agreement and the public announcement thereof, the
closing price of Search Common Stock was $5-1/4 per share in the
over-the-counter market and the closing price of MSF Common Stock was $1-3/8
per share on NASDAQ.
On June 20, 1997, the closing price of Search Common Stock was $4-7/8
per share on NASDAQ. On June 23, 1997 the closing price of MSF Common Stock
was $1-7/32 per share on NASDAQ. Since March 10, 1997, the closing sales
prices of the Search Common Stock have ranged from $3-1/4 to $6-5/8. From
February 1, 1997 until March 10, 1997, when the Search Common Stock began
trading on Nasdaq, the closing sales prices of the Search Common Stock ranged
from $5 to $6-3/8.
Because the market price of Search Common Stock is subject to
fluctuation, the market value of the shares of Search Common Stock that holders
of MSF Common Stock will receive in the Merger may increase or decrease prior
to the Merger. MSF STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION
FOR SEARCH COMMON STOCK AND MSF COMMON STOCK.
20
<PAGE> 28
RISK FACTORS
On a pro forma basis for the twelve-month period ended March 31, 1997,
it is estimated that MSF accounted for approximately 53% of the combined
revenues of Search and MSF. See "Pro Forma Combined Condensed Financial
Information." Following the Merger, MSF is expected to continue to account for
a significant portion of the total revenues of Search on a consolidated basis.
Stockholders should be aware that, in addition to general market conditions in
the industry, the operating results of Search following the Merger will be
influenced by a variety of factors, as described below.
The following risk factors should be considered carefully by the
holders of MSF Common Stock and Search Common Stock in evaluating whether to
approve and adopt the Merger Agreement and the transactions contemplated
thereby, including the Merger. These factors should be considered in
conjunction with the other information included and incorporated by reference
in this Joint Proxy Statement/Prospectus.
Potential Failure to Achieve Anticipated Benefits from the Merger.
Search believes that integration of the operations of Search and MSF will offer
opportunities for long-term efficiencies in operations and that such
integration should positively affect future operating results of Search. The
management and Board of Directors of Search believe that the integration of
MSF's business operations with Search's business operations can be effected in
a manner that will enhance the value of the two companies. However, such
integration will present difficult challenges for Search's management due to
the size of MSF's business and operations relative to Search's business
operations and the increased time and resources required in management's
integration effort.
Also, following the Merger, in order to maintain and increase
profitability, among other things, Search will need to successfully integrate
and streamline overlapping functions of the two companies. Search's ability to
successfully integrate MSF's business and operations with Search's business and
operations is dependent upon a number of factors, including the adequacy of
Search's capital resources and Search's ability to retain and integrate
existing MSF management and other key employees, to convert and adapt
information and other operational systems, and to retain existing MSF dealers.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations.
In light of the foregoing factors and uncertainties, there can be no
assurance that Search will be able to successfully integrate MSF's business and
operations. Furthermore, there can be no assurance that the process of
effecting the integration of MSF's business operations into Search's can be
effectively managed to realize the operational efficiencies and profitability
anticipated as a result of the Merger. Also, failure to successfully integrate
MSF's business and operations could adversely affect Search's results of
operations and financial condition.
Potential Inability to Repay MSF's Revolving Line of Credit. As of
May 31, 1997, the outstanding balance under MSF's revolving credit facility
(the "MSF Revolving Credit") with its primary bank lenders (the "MSF Lenders")
was $65.1 million. In November 1996, MSF notified the MSF Lenders that it was
in violation of certain covenants under the MSF Revolving Credit. MSF paid a
default rate of interest of 11.25% on the MSF Revolving Credit from November
22, 1996 through March 16, 1997 and incurred fees of $562,500 in connection
with the restructuring of the MSF Revolving Credit that occurred in December
1996. In February 1997, the MSF Lenders, Search and MSF agreed to the terms of
a further restructuring of the MSF Revolving Credit. Under these terms, which
became effective March 17, 1997, the restructured line of credit (the
"Restructured Credit Facility") would continue in effect following the Merger,
but MSF would be required to reduce the outstanding balance by $25,000,000
within six months after the Effective Time and satisfy in full the outstanding
balance by the first anniversary of the Effective Time. Search has agreed to
guarantee the Restructured Credit Facility after the Merger. Search intends to
make the payments required by the Restructured Credit Facility through
collections on MSF's receivables and through capital obtained by Search from
the sale of debt or equity securities or other financing sources, including one
or both of securitization transactions or the private placement of $35 million
in senior subordinated notes. See "--Necessity of Additional Funding." If MSF
has insufficient collections on its receivables and if Search is unable to
obtain funds from these sources, MSF and Search may be unable to make the
required payments under the Restructured Credit Facility. There can be no
assurance that, in that event, the MSF Lenders will extend or refinance the
Restructured Credit Facility or will not seek to enforce their remedies against
Search and MSF. Such remedies include acceleration of indebtedness,
foreclosure on receivables collateral and other debt collection proceedings.
Several of the MSF Lenders have indicated to MSF and Search that they currently
have no intention of extending or refinancing the Restructured Credit Facility.
See "The Merger--Restructuring of MSF's Line of Credit."
Necessity of Additional Funding. The purchase of receivables and the
making of consumer loans requires Search and MSF to raise significant amounts
of funds from various sources, including banks, finance companies and other
lenders.
21
<PAGE> 29
There can be no assurance that lenders will provide sufficient credit on terms
Search or MSF will find acceptable. Search has, however, signed a letter of
intent with an affiliate of a large Wall Street investment firm with respect to
a $100 million, two-year revolving warehouse line of credit facility. The
letter of intent is subject to certain conditions, including negotiation and
execution of mutually acceptable definitive facility documents and completion
of due diligence. Search's planned financing sources also include (i) a
private placement of $35,000,000 of seven-year senior subordinated notes with
warrants to purchase Search Common Stock that Search commenced in April 1997
with a view towards its completion during the 30 days following the Effective
Time, and (ii) securitization of its and MSF's receivables. Because of an
increase in its contract delinquencies in 1996, MSF was unable to complete a
securitization transaction in 1996 or access its warehouse credit facility.
Search or MSF will be required to provide adequate collateral in order to
securitize its installment contracts. This collateral may be in one or more of
several forms, including third party insurance, cash collateral accounts,
over-collateralization and subordinated investment funds. The costs of
providing such collateral for a securitization program may outweigh the
benefits that can be obtained from the securitizations. Because of the
increase in its contract delinquencies and the provisions for possible losses
on its contracts in 1996, MSF exceeded certain delinquency and loss triggers in
its existing securitizations. Consequently, at December 31, 1996, the funding
of cash collateral accounts related to MSF's securitizations required deferral
of any payment to MSF of the excess cash flow generated by its securitized
receivables. Search's prior securitizations were not successful due to lower
than expected collection rates on its receivables and lower than expected
recoveries on the sale of repossessed vehicles, and required a reorganization
of eight of its subsidiaries pursuant to Chapter 11 bankruptcy proceedings that
were completed in March 1996. Since that time, Search's management has
instituted a new receivables program that places more emphasis on obligors with
job and residence stability, higher income, and re-established positive credit
histories. Search expects that the program will result in lower repossession
rates, higher average collections and less administrative expenses for its
receivables. Although Search has begun discussions with potential purchasers
of its subordinated notes, there can be no assurance that the offering will be
successfully completed. There also can be no assurance that funding will be
available to Search or MSF through securitizations or, if available, that such
funding will be on terms acceptable to them. Even if available, there can be
no assurance that the future borrowing or securitization activities of Search
or MSF will be profitable. See "Search Financial Services Inc.--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"MS Financial, Inc.--Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Possible Volatility of Search Common Stock Price. The market price of
Search Common Stock may be subject to significant fluctuations in response to
operating results, announcements by competitors and other factors. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to the
operating performance of individual companies. These market fluctuations, as
well as general economic conditions, may adversely affect the market price of
the Search Common Stock. In addition, fluctuations in the closing sale price
of the Search Common Stock prior to the fifth business day before the MSF
Special Meeting may affect the Exchange Ratio. See "Comparative Market Price
Data" and "The Merger--Terms of the Merger."
Lack of Historical Profits. Search does not have a history of
profitable operations. Although Search had net income before dividends of
$1,283,000 for the fiscal year ended March 31, 1997, it had a net loss of
$2,671,000 for the six month transition period ended March 31, 1996 and a net
loss of $4,871,000 after preferred stock dividends for the fiscal year ended
March 31, 1997. In addition, Search had net losses of $19,894,000 and
$25,950,000 for the years ended September 30, 1995 and 1994, respectively. For
the year ended December 31, 1996, MSF had a net loss of $22,014,000, and for
the three months ended March 31, 1997, MSF had a net loss of $5,042,000. There
can be no assurance that the businesses of the combined companies will be
profitable in the future. See the Consolidated Financial Statements of Search
in Annex E and the Consolidated Financial Statements of MSF in Annex D.
Risks in Motor Vehicle Receivables Purchasing and Consumer Finance
Businesses. Search and MSF face all of the risks inherent in the motor vehicle
receivables purchasing business and in the consumer finance business. There
can be no assurance that Search and MSF will properly evaluate the receivables
that they purchase or that Search will properly evaluate the borrowers to whom
it makes consumer loans. There can be no assurance that Search and MSF will be
able to purchase sufficient receivables and that Search will be able to make a
sufficient number of consumer loans to profitably employ their capital and
borrowed funds. Search and MSF purchase receivables whose obligors, and Search
makes loans to consumers who, do not qualify for traditional financing as a
result, among other things, of poor credit history, lack of steady employment
and/or low income. These individuals generally have higher percentage default
rates than individuals with better credit histories. The annual percentage
rates on the receivables of MSF and Search range generally from 16% to 36%. In
addition, the vehicles securing Search's and MSF's receivables are subject to
deterioration in value due to the passage of time or usage by the obligor, and
Search's loans to consumers may be unsecured. Search and MSF have limited
historical information related to the quality of receivables they are
purchasing under Search's new receivables purchasing
22
<PAGE> 30
program. There can be no assurance that their efforts to purchase higher
credit quality receivables will be successful or profitable. In addition,
Search has little history in the consumer loan business. Substantial
unexpected delinquencies or charge-offs on its receivables or loans could have
a material adverse effect on Search's results of operations.
For the year ended September 30, 1994, Search made a provision for
credit losses of $20,180,000 as a result of unexpected delinquencies and losses
on its receivables. For the same reason, MSF made a total provision for
possible losses on its receivables and repossessed automobiles of $22,903,000
for the year ended December 31, 1996, and made an additional provision at March
31, 1997 of $4,342,000. As of March 31, 1997, Search had an allowance for
credit losses of $5,854,000. See Notes to Consolidated Financial Statements of
Search contained in Annex E. Search's provisions for credit losses were 144%,
23%, 141% and 18% of Search's operating revenues for the year ended September
30, 1994, the year ended September 30, 1995, the transition period ended March
31, 1996 and the fiscal year ended March 31, 1997, respectively. The higher
relative provisions for credit losses for the year ended September 30, 1994 and
the transition period ended March 31, 1996 were primarily due, respectively, to
Search's initial financial difficulties that arose in July 1994 and the
bankruptcy reorganization of Search's subsidiaries that was confirmed in March
1996. See the Consolidated Financial Statements of Search in Annex E, Search's
Annual Report in Annex F and the Consolidated Financial Statements of MSF in
Annex D. There can be no assurance that the total provisions for losses of the
combined companies are sufficient to cover any losses that may result from the
foregoing risks. A general economic downturn could adversely affect the
ability of obligors and borrowers to make payments to Search and MSF on their
receivables and loans.
Risk that Acquisitions Will Not Occur or be Profitable. Search
intends to continue to pursue its current growth strategy, which includes
acquiring portfolios of non-prime used motor vehicle receivables and other
non-prime used motor vehicle finance companies. There can be no assurance that
Search will be able to make profitable acquisitions or successfully integrate
any businesses that it acquires into its operations without substantial costs,
delays or other problems. In addition, there can be no assurance that any
acquired businesses will be profitable at the time of their acquisition or will
achieve profitability that justifies the investment therein or that Search will
be able to realize expected operating and economic efficiencies following such
acquisitions. Acquisitions may involve a number of special risks, including
adverse effects on Search's reported operating results, devotion of
management's attention, increased burdens on Search's management resources and
financial controls, dependence on retention and hiring of key personnel,
unanticipated problems or legal liabilities and amortization of acquired
intangible assets, some or all of which could have a material adverse effect on
Search's results of operations.
Exposure from Debt Leverage. Search intends to borrow substantial
funds to finance its operations. As Search's debt leverage increases, its
vulnerability to adverse general economic conditions and to increased
competitive pressures will also increase. See "--Necessity of Additional
Funding."
Potential Adverse Effects of Unasserted Claims Against MSF. There can
be no assurance that third parties will not bring claims with respect to MSF's
past operations. The Principal Stockholders have agreed to indemnify Search
and MSF against liabilities and losses that may result from claims under the
securities laws or claims based upon the same events or occurrences as have
been alleged in the litigation discussed in the first paragraph of Note 14 of
the Notes to Consolidated Financial Statements of MSF to the extent such claims
exceed $400,000. See MSF's Consolidated Financial Statements in Annex D. The
Principal Stockholders also have agreed to place in escrow at least $2,500,000
in value of the Search Common Stock received by them in the Merger, based upon
the Average Search Trading Price, to secure such indemnification obligation.
No claims to which this indemnification obligation would apply have been
asserted as of the date of this Joint Proxy Statement/Prospectus and there can
be no assurance that, if any such claims are asserted, the value of the shares
of Search Common Stock held in escrow will equal or exceed the amount of the
claim. The Principal Stockholders are entitled to receive 25% of their escrowed
shares 12 months after the Effective Time and an additional 25% every six
months thereafter, subject to any pending indemnification claims. In addition,
while claims may have to be satisfied by Search or MSF in cash, their rights to
indemnification are limited to the shares of Search Common Stock held in
escrow. See "The Stockholders Agreement--Indemnifications; Escrow Agreements."
Possible Adverse Consequences of MSF Securitization Defaults. As of
the date of this Joint Proxy Statement/Prospectus, MSF is in default of its
securitization agreements with respect to its MS Auto Grantor Trust 1994-1 and
MS Auto Grantor Trust 1995-1 (the "Securitization Trusts"). As a consequence,
the trustees of the Securitization Trusts have the right to terminate their
servicing agreements with MSF. If the trustees elect to exercise that right,
MSF will cease receiving applicable servicing fees with respect to the
receivables that it services for the Securitization Trusts. During 1996, MSF
earned total servicing fees of $2,668,000 from the Securitization Trusts.
There can be no assurance that Search and MSF will be able to cure these
defaults or renegotiate MSF's agreements with respect to these securitizations.
See
23
<PAGE> 31
"MS Financial, Inc.--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital
Resources--Securitization Programs."
Failure to Maintain MSF's Dealer Relationships and Retain MSF's
Marketing Personnel. One of Search's primary reasons for the acquisition of
MSF is MSF's network of motor vehicle dealers from which it purchases
receivables and MSF's marketing department responsible for maintaining dealer
contacts. See "The Merger--Search's Reasons for the Merger; Recommendations of
the Search Board." MSF has recently begun to apply Search's stricter
underwriting criteria in its receivables purchasing activities and plans to
continue to apply those criteria after the Merger. See "The Merger
Agreement--Business of MSF Pending the Merger." There can be no assurance
that, following the Merger, MSF will be able to maintain its dealer network or
purchase from its dealer network receivables satisfying Search's underwriting
criteria at the volume expected by Search and MSF's marketing personnel. In
addition, there can be no assurance that MSF's marketing personnel will remain
as employees following the Merger. The failure of MSF's marketing department
and dealer network to generate sufficient suitable receivables for purchase by
MSF may have an adverse effect on the combined results of operation of Search
and MSF.
Potential Adverse Effects of Increases in Interest Rates. While the
automobile receivables purchased by Search and MSF in most cases bear interest
at fixed rates ranging generally between 16% and 36%, often near the maximum
rates permitted by law, Search and MSF will finance their purchases of a
substantial portion of such receivables by incurring indebtedness with floating
interest rates. The current interest rates on borrowings by Search and MSF are
approximately prime plus 1%. Search's interest costs will increase during
periods of rising interest rates. Such increases may decrease Search's and
MSF's net interest margins and thereby adversely affect Search's and MSF's
profitability.
Failure to Establish and Maintain Profitable Dealer Relationships.
Search and MSF plan to expand their receivables purchasing activities by
re-establishing relationships and establishing new relationships with Dealers.
Dealers often already have favorable secondary financing sources, which may
restrict Search's and MSF's ability to develop Dealer relationships and delay
their growth. Competitive conditions in Search's and MSF's markets may result
in a reduction in the price discounts available from or fees paid by Dealers
and a lack of available receivables, which could adversely affect Search's
profitability and its growth plans.
Reliance on Information Processing Systems. The businesses of Search
and MSF depend upon their ability to store, retrieve, process and manage
significant amounts of information. Interruption, impairment of data
integrity, loss of stored data, breakdown or malfunction of their information
processing systems caused by telecommunications failure, conversion
difficulties, undetected data input and transfer errors, unauthorized access,
viruses, natural disasters, electrical power outage or disruption or other
events could have a material adverse effect on the businesses of Search and
MSF.
Risks from Geographic Concentration. Currently, Search and MSF are
purchasing receivables whose obligors are located primarily in Texas and
certain southeastern states. Although Search expects to expand their
operations to other geographic areas, including initially certain northeastern
and midwestern states, the performance of Search and MSF may be adversely
affected by regional or local economic conditions. Search may from time to
time make acquisitions in regions outside of its current operating areas.
There can be no assurance that Search's expansion into new geographic areas
will generate operating profits.
Importance of Qualified Personnel. Search plans to expand its
businesses. The success of this strategy is dependent upon Search's ability to
hire and retain qualified managers and other personnel. Search's management
believes that Search will be able readily to attract qualified personnel from
its competitors, from its acquired businesses and from other companies in
related businesses.
Risk of Loss of Key Officer. Search's future success depends in some
measure upon its Chief Executive Officer who has significant experience in the
consumer finance business. An unexpected loss of services of this officer
could have a material adverse effect upon Search. Search does not currently
maintain key person life insurance on the Chief Executive Officer but intends
to seek such coverage. Search has an employment agreement with its Chief
Executive Officer that expires in 2000.
Competition. Search and MSF have numerous competitors engaged in the
business of buying non-prime motor vehicle receivables and in making consumer
loans. Many of these competitors have significantly greater financial
resources and staff than Search. Some of these competitors may generally be
able or willing to accept more risk in their activities than
24
<PAGE> 32
Search and MSF. Competition may reduce the number of suitable receivables
offered for sale to Search and MSF and increase the bargaining power of Dealers
with which Search and MSF seek to do business. These competitive factors could
have a material adverse effect upon the operations of Search and MSF. The
barriers to entry in the industry are low. Search believes that the primary
methods of competition in the industry are through Dealer relationships,
receivables purchasing criteria, purchase price discounts, marketing,
receivables purchase response time, and purchase agreement provisions,
including dealer recourse, reserves or commissions.
Rigorous Governmental Regulation. Numerous federal and state consumer
protection laws impose requirements upon the origination and collection of
consumer receivables. These federal laws and regulations include, among
others, the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal
Trade Commission Act, the Fair Credit Reporting Act, the Fair Indebtedness
Collection Practices Act, the Magnuson-Moss Warranty Act and the Federal
Reserve Board's Regulation Z. Search believes that it maintains all licenses
and permits required for its current operations and is in substantial
compliance with all applicable federal, state and local laws. There can be no
assurance, however, that Search will be able to maintain all requisite licenses
and permits.
State laws regulate, among other things, the interest rate chargeable
on, and terms and conditions of, motor vehicle retail installment loans. These
laws also impose restrictions on consumer transactions and require loan
disclosures in addition to those required under federal law. These
requirements impose specific statutory liabilities upon creditors who fail to
comply with their provisions. As consumer finance companies, Search and MSF
are subject to various consumer claims and litigation seeking damages and
statutory penalties based upon, among other theories of liability, usury,
wrongful repossession, fraud and discriminatory treatment of credit applicants.
The Federal Trade Commission ("FTC") has adopted a
holder-in-due-course rule which has the effect of subjecting persons who
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the purchaser could assert against
the seller of the goods and services. Another FTC rule requires that all
sellers of used vehicles prepare, complete and display a "Buyer's Guide" which
explains the warranty coverage (if any) for such vehicles. Failure of the
Dealers to comply with state and federal credit and trade practice laws and
regulations could result in consumers having rights of rescission and other
remedies that could have an adverse effect on Search and MSF.
The failure to comply with legal requirements applicable to its
business could have a material adverse effect on Search's results of
operations. Further, the adoption of additional, or the revision of existing,
laws and regulations could have a material adverse effect on Search's business.
Industry Considerations. In recent periods, several major used car
finance companies have announced major downward adjustments to their financial
statements, violations of loan covenants, related litigation and other events.
In addition, one of these companies has filed for bankruptcy protection. These
announcements have had and may continue to have a disruptive effect on the
market for securities of non-prime automobile finance companies, are expected
to result in a tightening of credit to the non-prime markets and could lead to
enhanced regulatory oversight. Furthermore, companies in the used car
financing market have been subject to an increasing number of lawsuits brought
by customers alleging violations of various federal and state consumer credit
and similar laws and regulations. MSF has recently settled a lawsuit involving
these kinds of claims. See "MS Financial, Inc.--Legal Proceedings." There can
be no assurance that similar claims will not be asserted against Search or MSF
in the future or that their operations will not be subject to enhanced
regulatory oversight.
Potential Adverse Effects of Litigation. Search and certain of its
former officers and directors are defendants in a case styled Janice and Warren
Bowe, et. al. vs. Search Capital Group Inc., et. al., Cause No. 1:95CSV649BR,
filed in the Federal District Court for the Southern District of Mississippi
(the "Bowe Action"). The plaintiffs, who are former holders of notes issued by
three of Search's subsidiaries, allege that the registration statements
pursuant to which the notes were sold contained material misrepresentations and
omissions of fact with respect to collection rates on contracts, repossession
rates, Search's accounting controls and computer systems, the operating results
and financial condition of Search and its subsidiaries and the ability of the
subsidiaries to pay the notes at the projected rates of return, and were,
therefore, materially false and misleading in violation of the securities laws.
The plaintiffs seek unspecified damages, rescission, punitive damages and other
relief. The plaintiffs also seek establishment of a class of plaintiffs
consisting of all persons who have purchased notes issued by the three
subsidiaries. While Search believes the suit is without merit and has been
vigorously defending itself, it has also sought to reach a negotiated
settlement of all claims of all potential class members in the Bowe Action that
would also include a settlement of all claims of the litigation trust (the
"Litigation Trust") established under the plan of reorganization of eight of
Search's subsidiaries for the purpose, among other things, of pursuing
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<PAGE> 33
causes of action of the former holders of notes issued by those subsidiaries
who assigned their claims related to the Bowe Action to the Litigation Trust.
While a settlement agreement in principle subject to a number of
conditions was reached in March 1997 that would have required Search to pay
$350,000 in cash and issue shares of Search Common Stock having a value of
$1,375,000, Search suspended further negotiations because of the decline in the
market price of the Search Common Stock during the first half of May. Search
intends to resume negotiations when the market price of the Search Common Stock
recovers to its pre-May trading range, but there can be no assurance that the
other parties will be willing to resume negotiations or that a settlement on
terms acceptable to Search will be concluded. The court had dismissed the
plaintiffs' motion for class certification, without prejudice and subject to
renewal and final disposition pending the outcome of settlement discussions.
Search has a reserve of $500,000 related to the Bowe Action. A settlement or
judgment in excess of this reserve could adversely affect Search.
Absence of Developed Public Market for Search Common Stock. Although
the Search Common Stock has been quoted on NASDAQ since March 10, 1997, trading
volume is volatile. No assurance can be given that a more active and
widespread trading market will develop for the Search Common Stock. There can
be no assurance that Search Common Stock can be sold without considerable
delay, if at all. If a more active and widespread market does develop, the
prices may be highly volatile. The Commission's rules may apply to impose
certain risk disclosure requirements and suitability standards on
broker-dealers who effect transactions in low price stocks. These rules may
have a negative impact on trading markets for low price stocks. Consequently,
if the Search Common Stock should be traded at low prices, no assurances can be
given that there will continue to be any market for the Search Common Stock.
Factors such as those discussed herein may have a significant effect on the
market price of the Search Common Stock. See "Comparative Market Price Data."
Lack of Dividends on Common Stock. Search has not paid dividends on
the Search Common Stock and does not expect to pay dividends on the Search
Common Stock for the foreseeable future. Furthermore, Search may not pay
dividends on the Search Common Stock while any accrued dividends on shares of
preferred stock remain unpaid. To date, Search has paid all required dividends
on its preferred stock, which are currently approximately $1,500,000 each
quarter. Search's preferred stock dividends constitute a substantial cash
outflow that may have a material adverse effect on Search's future financial
condition and the future market value of the Search Common Stock. See
"Description of Search Capital Stock."
Senior Rights of Preferred Stock. Search's Restated Certificate of
Incorporation, as amended (the "Certificate"), authorizes the issuance of
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Search Board. Accordingly, the Search
Board is empowered, without stockholder approval, to issue shares of preferred
stock that have preferences over the Search Common Stock with respect to the
payment of dividends, liquidation, conversion, voting or other rights which
could adversely affect the voting power and ownership interests of holders of
Search Common Stock. The issuance of shares of preferred stock or the issuance
of rights to purchase such shares could have the effect of discouraging,
delaying or preventing a change in control of Search. There are currently
issued and outstanding 2,456,098 shares of Search's 9%/7% Convertible Preferred
Stock and 50,000 shares of Search's 12% Senior Convertible Preferred Stock.
These shares have rights that are superior to the rights of holders of Search
Common Stock with respect to dividends, liquidation, conversion and voting
which could adversely affect the rights of holders of Search Common Stock. See
"Description of Search Capital Stock."
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<PAGE> 34
THE SPECIAL MEETINGS
TIMES, PLACES AND DATES OF THE SPECIAL MEETINGS
The MSF Special Meeting will be held at 10:00 a.m., local time, on
Monday, July 28, 1997, at the Le Meridien Hotel located at 650 North Pearl
Street, Dallas, Texas. The Search Special Meeting will be held at 9:00 a.m.,
local time, on Monday, July 28, 1997, at the offices of Search located at 600
North Pearl Street, Dallas, Texas.
PURPOSE OF THE MSF SPECIAL MEETING
At the MSF Special Meeting, stockholders of MSF will be asked to
consider and vote upon a proposal to adopt and approve the Merger Agreement and
the transactions contemplated thereby, including the Merger. A copy of the
Merger Agreement is attached to this Joint Proxy Statement/Prospectus as Annex
A.
PURPOSE OF THE SEARCH SPECIAL MEETING
At the Search Special Meeting, stockholders of Search will be asked to
consider and vote upon a proposal to adopt and approve the Merger Agreement and
the transactions contemplated thereby, including the Merger.
RECORD DATES; VOTING RIGHTS
Stockholders of MSF of record at the close of business on June 25, 1997
(the "MSF Record Date") will be entitled to notice of and to vote at the MSF
Special Meeting and at any adjournment or postponement thereof. There were
issued and outstanding 10,431,010 shares of MSF Common Stock as of the MSF
Record Date, held by approximately 1,200 stockholders of record.
Stockholders of Search of record at the close of business on May 30,
1997 (the "Search Record Date") will be entitled to notice of and to vote at
the Search Special Meeting and at any adjournment or postponement thereof.
There were issued and outstanding 3,016,444, 50,000 and 2,456,098 shares,
respectively, of Search Common Stock, Search 12% Preferred Stock, and Search
9%/7% Preferred Stock, as of the Search Record Date.
Under the Delaware General Corporation Law (the "Delaware Law") and
MSF's Second Amended and Restated Certificate of Incorporation, the adoption
and approval of the Merger Agreement by the stockholders of MSF requires the
affirmative vote of the holders of at least a majority of the outstanding
shares of MSF Common Stock. As of the MSF Record Date, 8,080,421 shares of MSF
Common Stock (approximately 77.5% of the shares outstanding as of the MSF
Record Date) were entitled to be voted by the directors and officers of MSF and
their affiliates.
Under the Delaware Law, the adoption and approval of the Merger
Agreement by the stockholders of Search requires the affirmative vote of the
holders of at least a majority of the outstanding shares of Search Common
Stock, Search 12% Preferred Stock, and Search 9%/7% Preferred Stock, voting
together as a class, that are represented in person or by proxy and entitled to
vote at the Search Special Meeting. As of the Search Record Date, 94,823 shares
of Search Common Stock, Search 12% Preferred Stock, and Search 9%/7% Preferred
Stock (approximately 1.7% of the shares outstanding as of the Search Record
Date) were entitled to be voted by the directors and officers of Search and
their affiliates.
MS Diversified Corporation, MS Financial Services, Inc. and Golder
Thoma Cressey Rauner Fund IV, L.P. (collectively, the "Principal
Stockholders") have entered into a Stockholders Agreement, dated as of February
7, 1997, with Search (the "Stockholders Agreement") pursuant to which the
Principal Stockholders have agreed to vote their MSF Common Stock in favor of
the Merger. See "The Stockholders Agreement." The Principal Stockholders
beneficially owned as of the Record Date an aggregate of 8,040,000 shares of
MSF Common Stock, constituting approximately 77% of the shares of MSF Common
Stock outstanding on the Record Date. When these shares of MSF Common Stock are
voted at the MSF Special Meeting in favor of the adoption and approval of the
Merger Agreement and the transactions contemplated thereby, including the
Merger, the affirmative vote of holders of additional shares of MSF Common
Stock will not be required to adopt and approve the Merger Agreement and the
transactions contemplated thereby, including the Merger.
Holders of a majority of the shares of MSF Common Stock entitled to
vote at the MSF Special Meeting, represented in person or by proxy, will
constitute a quorum. Each holder will be entitled to cast one vote for each
share of MSF Common Stock held.
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<PAGE> 35
Holders of a majority of the shares of Search Capital Stock,
represented in person or by proxy and entitled to vote at the Search Special
Meeting, will constitute a quorum. Each holder will be entitled to cast one
vote for each share of Search Capital Stock held.
PROXIES; REVOCATION OF PROXIES
Shares of MSF Common Stock and Search Capital Stock represented by
properly executed and unrevoked proxies will be voted at the MSF or Search
Special Meeting, as the case may be, in accordance with the directions
contained therein. If no direction is made in a properly executed and
unrevoked proxy, the shares represented by such proxy will be voted FOR the
adoption and approval of the Merger Agreement, and the transactions
contemplated thereby. Any MSF or Search stockholder is empowered to revoke a
proxy at any time before its exercise. A proxy may be revoked by filing with
the Secretary of MSF or Search, as the case may be, a written revocation or a
duly executed proxy bearing a later date. Any written notice revoking a proxy
for the MSF Special Meeting should be sent to: MS Financial, Inc., 715 S. Pear
Orchard Road, Suite 300, Ridgeland, Mississippi 39157, (601) 978-6737,
Attention: Secretary, or hand delivered to the Secretary at or before the
taking of the vote at the MSF Special Meeting. Any written notice revoking a
proxy for the Search Special Meeting should be sent to: Search Financial
Services Inc., 600 North Pearl Street, Suite 2500, Dallas, Texas 75201, (214)
965-6000, Attention: Secretary, or hand delivered to the Secretary at or before
the taking of the vote at the Search Special Meeting. Any MSF or Search
stockholder may attend the MSF or Search Special Meeting, as the case may be,
and vote in person, whether or not he has previously given a proxy.
MSF and Search will bear their respective costs of soliciting proxies
from MSF and Search stockholders. In addition to soliciting proxies by mail,
directors, officers and employees of MSF and Search may solicit proxies by
telephone, by courier service, by telegram or in person, each without receiving
additional compensation therefor. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries (collectively,
"Fiduciaries") to forward solicitation materials to the beneficial owners of
shares of MSF Common Stock, Search Common Stock, Search 12% Preferred Stock and
Search 9%/7% Preferred Stock held of record by such persons, and arrangements
may be made with Fiduciaries to obtain authority to sign proxies. MSF and
Search will reimburse such Fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection therewith.
Shares represented at the meetings but not voted for or against a
proposal, such as abstentions or "broker non-votes," will be counted in
determining a quorum and will have the same effect as votes against the
proposal. A "broker non-vote" refers to shares represented at the MSF or
Search Special Meeting in person or by proxy by a broker or nominee where such
broker or nominee (i) has not received voting instructions on a particular
matter from the beneficial owners or persons entitled to vote and (ii) does not
have discretionary voting power on such matter.
MSF STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
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<PAGE> 36
THE MERGER
GENERAL
The Merger Agreement provides for a business combination between
Search and MSF in which a wholly owned subsidiary of Search would be merged
with and into MSF and the holders of MSF Common Stock would be issued shares of
Search Common Stock. As a result of the Merger, MSF would become a wholly
owned subsidiary of Search. The discussion in this Joint Proxy
Statement/Prospectus of the Merger and the description of the principal terms
of the Merger are subject to and qualified in their entirety by reference to
the Merger Agreement, a copy of which is attached to this Joint Proxy
Statement/Prospectus as Annex A.
EFFECTIVE TIME
If the Merger Agreement and the transactions contemplated thereby are
approved and adopted by the requisite vote of the stockholders of Search and
MSF and the other conditions to the Merger are satisfied or waived (if
permissible), the Merger will be consummated and effected at the time a
Certificate of Merger is filed with the Secretary of State of Delaware or at
such later time as the parties to the Merger Agreement agree and specify in
such Certificate of Merger. The Merger Agreement provides that Search and MSF
will cause the effective time of the Merger (the "Effective Time") to occur as
promptly as practicable, but in no event later than the first business day
(unless the parties agree to another date) following the satisfaction or, if
permissible, wavier of all the conditions set forth in the Merger Agreement.
The Merger Agreement may be terminated prior to the Effective Time by either
Search or MSF in certain circumstances, whether before or after approval and
adoption of the Merger by the stockholders of Search and MSF. See "The Merger
Agreement--Termination; Amendment."
TERMS OF THE MERGER
If the Merger is approved and consummated, then at the Effective Time
Merger Sub will be merged with and into MSF, which will be the Surviving
Corporation. In the Merger, each share of MSF Common Stock outstanding at the
Effective Time (other than shares of MSF Common Stock held in MSF's treasury or
owned by Search or any subsidiary of Search or MSF) will be converted into the
right to receive a fraction (the "Exchange Ratio") of a share of Search Common
Stock based upon the average of the closing sales price per share of Search
Common Stock for the 10 trading days ending on the fifth business day prior to
the date of the MSF Special Meeting (the "Average Search Trading Price").
The Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount")
divided by the Average Search Trading Price, but may not be more than 0.37 nor
less than 0.28, subject to adjustment downward in certain circumstances.
Neither Search nor MSF has the right to terminate the Merger Agreement based on
the Average Search Trading Price. No fractional shares of Search Common Stock
will be issued, and cash will be paid in lieu of any such fractional shares.
The following table illustrates how the total number of shares of
Search Common Stock to be received by MSF's stockholders, and the value thereof
(based on the Average Search Trading Price), will vary based on different
assumed amounts for the Average Search Trading Price.
<TABLE>
<CAPTION>
AVERAGE SEARCH TOTAL SHARES OF TOTAL VALUE OF
TRADING PRICE EXCHANGE RATIO SEARCH COMMON STOCK SEARCH COMMON STOCK
-------------- -------------- -------------------- -------------------
<S> <C> <C> <C>
$6.50 .28 2,920,682 $18,984,000
5.88 .28 2,920,682 17,174,000
5.00 .33 3,442,233 17,211,000
4.35 .37 3,859,473 16,789,000
4.00 .37 3,859,473 15,438,000
3.00 .37 3,859,473 11,578,000
</TABLE>
If the Average Search Trading Price is between $5.88 and $4.35, MSF's
stockholders will receive approximately the same value of Search Common Stock
(i.e. ranging from $17,211,000 to $16,789,000) in the Merger, regardless of the
actual Average Search Trading Price. If the Average Search Trading Price is
above or below that range, MSF's stockholders will receive a different total
value of Search Common Stock in the Merger.
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<PAGE> 37
Search and MSF will publicly announce the Exchange Ratio promptly
after it is determined. Stockholders of MSF or Search may call the Secretary
of MSF at (601) 978-6694 or the Investor Relations Department of Search at
(800) 725-6673 for the Exchange Ratio beginning four business days prior to the
MSF Special Meeting date. Stockholders may revoke or submit proxies by sending
the revocation or proxy via facsimile to (601) 978-6601, if to MSF, or to (214)
965-6104, if to Search.
MSF STOCKHOLDERS SHOULD CONSIDER THAT THE EXCHANGE RATIO WILL BE FIXED
ON THE FIFTH BUSINESS DAY PRIOR TO THE DATE OF THE MSF SPECIAL MEETING, BUT THE
MARKET VALUE OF THE SEARCH COMMON STOCK THAT HOLDERS OF MSF COMMON STOCK WILL
RECEIVE IN THE MERGER MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE TIME
BECAUSE THE MARKET PRICE OF SEARCH COMMON STOCK IS SUBJECT TO FLUCTUATION. IN
ADDITION, BECAUSE OF FLUCTUATIONS IN THE MARKET PRICE OF SEARCH COMMON STOCK,
THE MARKET VALUE OF THE SEARCH COMMON STOCK THAT HOLDERS OF MSF COMMON STOCK
WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE FOLLOWING THE MERGER.
PRIOR ADJUSTMENTS TO PER SHARE AMOUNT AND EXCHANGE RATIO
Under the Merger Agreement prior to its amendment on June 25, 1997,
the Per Share Amount and the maximum and minimum Exchange Ratios were $2.00 and
0.46 and 0.34, respectively. The Merger Agreement originally provided for a
reduction in the total consideration payable by Search in the Merger if MSF's
stockholders' equity declined below certain levels, subject to certain
adjustments to MSF's stockholders' equity to be made if MSF incurred certain
costs, MSF received certain anticipated income tax refunds, the delinquency
rate on MSF's receivables increased above a specified level or the amount of
MSF's receivables that were or should have been charged off in 1997 exceeded a
specified level. These adjustments were negotiated at the request of MSF as an
alternative to the condition to Search's obligation to consummate the Merger
that MSF not have experienced a material adverse change in its financial
condition or results of operations prior to the Effective Time. The
adjustments were intended to adjust the aggregate Merger consideration paid by
Search for significant decreases in MSF's stockholders' equity and significant
changes in MSF's delinquency and loss experience during the period prior to the
Effective Time but not for anticipated decreases due to identified costs and
fees to be paid by MSF or increases due to anticipated tax refunds. To effect
any required reduction, the Per Share Amount and the maximum and minimum
Exchange Ratios were to be decreased if, at the Effective Time, the unaudited
financial statements of MSF for the last month (or, in certain circumstances,
the second month) ending before the Effective Time (the "Most Recent Financial
Statements") showed that MSF's stockholders' equity decreased. If there was an
adjusted decrease in stockholders' equity of $2,100,000 or less, no adjustment
to the Per Share Amount would have been made. If the adjusted decrease was
more than $2,100,000 but less than $3,100,000, 50% of such decrease would have
been applied to the calculation of an adjusted Per Share Amount, and if the
amount of such decrease was $3,100,000 or more, 100% of such decrease would
have been applied to the calculation of an adjusted Per Share Amount. There
was no limit on the amount by which the consideration to be received by the MSF
stockholders could have been reduced as a result of these adjustments.
Search and MSF originally contemplated that the Effective Time would
occur prior to June 30, 1997 and that the foregoing adjustments, if any, would
be based on MSF's financial information as of April 30, 1997. Because of
unavoidable delays, and to allow additional time for consummation of the
Merger, Search and MSF agreed, on June 25, 1997, to an amendment of the Merger
Agreement. Under the amendment, the outside date for consummation of the
Merger was extended from June 30 to August 15, 1997, the Per Share Amount and
minimum and maximum Exchange Ratios were fixed at $1.63 and 0.28 and 0.37,
respectively, and the foregoing adjustment provisions of the Merger Agreement
were deleted. These amounts are approximately what would have resulted under
the foregoing adjustment provisions of the original, unamended Merger Agreement
using financial information for MSF as of April 30, 1997. Accordingly, no
further adjustments to the Per Share Amount or minimum or maximum Exchange
Ratios are expected to be made prior to the Effective Time.
BACKGROUND OF THE MERGER
From time to time prior to October 1996, members of Search management
and MSF management had various contacts, principally at industry conferences,
during which they discussed matters of common interest, including the progress
of the companies' respective businesses.
On October 9, 1996, Mr. George C. Evans, Chairman, President and Chief
Executive Officer, Mr. James F. Leary, Vice Chairman, Finance, and Mr. Robert
D. Idzi, Senior Executive Vice President and Chief Financial Officer, of
Search, met in Chicago with Mr. Philip Canfield, an associate of Golder, Thoma,
Cressey, Rauner, Inc. at a meeting arranged and attended by representatives of
Tri-River Capital Group for the Search representatives to introduce themselves
to Mr. Canfield
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<PAGE> 38
and to commence discussions regarding a possible acquisition of MSF by Search.
The parties discussed generally the status of MSF's business, its financing
needs and the possible interest of the Principal Stockholders in an acquisition
transaction.
On October 13, 1996, Mr. Evans met with Mr. James B. Stuart, Jr.,
Chairman of the Board of MSF and President and Chief Executive Officer of MS
Diversified Corporation ("MSD"), and Mr. Canfield at Mr. Stuart's home in
Jackson, Mississippi to further discuss the business of MSF and the possibility
of Search acquiring MSF. Messrs. Evans and Stuart also discussed other
possible business relationships between Search and MSF, including the purchase
by Search of retail installment sales contracts owned by MSF. As a result of
this meeting, Search and MSF executed a confidentiality agreement dated October
15, 1996.
At a meeting of the Board of Directors of Search on October 17, 1996,
Mr. Evans reviewed with the other directors of Search the possible acquisition
of motor vehicle retail installment sales contracts having a net receivable
balance of approximately $25 million from MSF as a first step towards the
possible acquisition of MSF.
On October 21, 1996, Search and MSF executed a letter of intent for
Search to purchase from MSF non-prime motor vehicle installment sales contracts
having a net receivable balance of approximately $25 million, subject to
definitive documentation and approval by the Boards of Directors of both
companies. The letter of intent stated that it was the intention of Search and
MSF promptly following closing of the portfolio acquisition to commence good
faith negotiations with respect to the acquisition of MSF by Search.
During the weeks of October 20 and 27, 1996, representatives of Search
conducted a due diligence review of MSF's loan portfolio for the purpose of
identifying motor vehicle installment sales contracts that Search might be
interested in purchasing from MSF.
On November 4, 1996, Search Funding Corp., a wholly-owned subsidiary
of Search, and MSF entered into a Motor Vehicle Installment Sales Contract
Assignment and Purchase Agreement pursuant to which Search Funding Corp.
acquired from MSF non-prime motor vehicle installment sales contracts with a
net receivable balance of approximately $15 million. On November 4, 1996,
Search and MSF also executed a letter of intent for Search to purchase from MSF
additional motor vehicle retail installment sales contracts totaling
approximately $10 million in net receivables, subject to definitive
documentation, approval of the Boards of Directors of both companies and
receipt by Search of financing for the purchase of these additional
receivables. This letter of intent also stated the intention of Search and MSF
promptly to commence good faith negotiations with respect to the acquisition of
MSF by Search.
On November 7, 1996, Messrs. Evans and Idzi and a consultant to Search
met with Mr. Philip J. Hubbuch, Jr., Vice Chairman and Chief Executive Officer
of MSF, in Jackson, Mississippi to conduct further business due diligence
regarding MSF and to begin discussions regarding the structuring of an
acquisition of MSF by Search, including consideration of whether cash, Search
securities, or both, would be offered to stockholders of MSF and the
consideration preferences of the Principal Stockholders.
On November 12, 1996, Search and MSF entered into a letter of intent
providing Search the opportunity to perform a due diligence review of MSF. The
letter of intent provided Search with a 45-day due diligence period by the end
of which Search was to prepare and deliver to MSF a proposed definitive
agreement for Search to acquire MSF. This letter of intent provided Search
with a 45-day right of first refusal with respect to any acquisition of MSF or
stock of MSF to which MSF was a party. The letter of intent also set forth the
parties' agreement that Search would purchase newly-originated motor vehicle
installment sales contracts offered to it by MSF on mutually acceptable terms.
On November 13, 1996, Messrs. Stuart and Canfield and Mr. Vann R.
Martin, President and Chief Operating Officer of MSF, and Messrs. Evans, Leary
and Idzi met separately on behalf of MSF and Search, respectively, with
representatives of the MSF Lenders in Chicago to review the November 12 letter
of intent, Search's financial condition and recent results of operation,
Search's ability to acquire MSF and other financial and procedural aspects of
an acquisition of MSF by Search, including the terms upon which MSF's revolving
credit facility with the MSF Lenders could be continued following an
acquisition.
On November 15, 1996, Mr. Evans and Mr. Anthony J. Dellavechia, Senior
Executive Vice President, Operations Director of Search, met in Jackson,
Mississippi with Mr. Martin and other representatives of MSF to negotiate the
terms under which Search would purchase newly-originated motor vehicle
installment sales contracts from MSF.
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<PAGE> 39
On November 18, 1996, MSF announced that its year-to-date loss and
inability to complete a securitization caused it to violate certain covenants
of its revolving credit facility, that it was unable to make any more
borrowings under that facility and that it was negotiating for waivers or
amendments to the relevant loan documents. MSF also announced that it had
retained Bear Stearns to provide financial advice to it on financing and
strategic alternatives and that it was evaluating various financing
alternatives, as well as a merger with, or possible sale of MSF or its assets
to, another company.
During the period from November 19, 1996 through December 6, 1996, Mr.
Dellavechia, Mr. Andrew L. Tenney, Executive Vice President, Marketing, Mr.
Timothy G. Vorbeck, Executive Vice President, Operations, Mr. Karman Wallace,
Senior Vice President, Mr. Joe B. Dorman, Senior Vice President, Mr. Lucien
Daniel Vandergrift, Vice President, Collections, and other representatives of
Search conducted an extensive business due diligence review of MSF's motor
vehicle installment sales contract portfolio. During this period, Search also
provided MSF with a legal due diligence checklist and Search continued its
business and financial due diligence review of MSF.
On December 9 and 10, 1996, Messrs. Evans and Dellavechia met with
MSF's marketing personnel to discuss a possible acquisition and the effects of
utilizing Search's underwriting criteria rather than MSF's criteria following
an acquisition. They also visited MSF's collection facility in Mobile,
Alabama.
On December 12, 1996, after MSF had obtained the consent of the MSF
Lenders, Search Funding Corp. and MSF entered into the agreement contemplated
by the November 12, 1996 letter of intent between Search and MSF for Search
Funding Corp. to purchase newly-originated motor vehicle installment sales
contracts from MSF on an ongoing basis.
On December 20, 1996, Search sent to the agent bank for the MSF
Lenders the terms Search desired for continuation of MSF's revolving credit
facility following an acquisition of MSF.
Between October and December 1996, representatives of Search, MSF,
Alex. Brown and Bear Stearns had discussions regarding the financial aspects
and alternative structures of a transaction that might be acceptable to Search,
MSF and the Principal Stockholders, including discussions regarding a merger
transaction in which MSF stockholders would have a limited right to elect to
receive cash in lieu of shares of Search Common Stock, a possible two-step
transaction involving purchase of the shares owned by the Principal
Stockholders prior to a merger, a purchase of the assets of MSF, and different
ranges for the Per Share Amount and the maximum and minimum Exchange Ratios. A
transaction involving a limited right to elect cash was not pursued because of
limits that Search would have imposed on the aggregate amount of cash available
and the per share cash amount. Neither a two-step transaction nor an asset
purchase transaction was pursued because the parties believed that such
transactions would be more complicated to structure and, ultimately, would take
longer to complete. The Per Share Amount and the maximum and minimum Exchange
Ratios were the result of negotiation between Search and MSF and their advisers
of these and other terms of the Merger Agreement.
On December 23, 1996, Mr. Evans proposed to Mr. Stuart that Search
acquire MSF for a combination of stock and cash having an aggregate value of
approximately $21.3 million, with MSF stockholders electing to receive Search
stock receiving $2.04 in Search Common Stock and MSF stockholders electing cash
to receive $1.43 in cash for each share of MSF Common Stock, subject to
proration in the event more than $5 million in cash would otherwise be payable.
The offer was subject to approval by both companies' Boards of Directors,
completion of legal due diligence, adjustment for serious deterioration of
MSF's portfolio and other customary conditions. Search also presented to MSF a
letter of intent setting out these proposed terms. The letter of intent
contemplated a definitive agreement being executed by January 6, 1997 and,
among other things, would have prevented MSF from soliciting or considering
alternative business combination proposals. MSF did not sign the letter of
intent to preserve its ability to seek and consider alternative transactions
with third parties.
On December 27, 1996, Search's counsel distributed to MSF, MSF's
counsel and Bear Stearns an initial draft of the Merger Agreement.
On December 30, 1996, Mr. Ellis A. Regenbogen, Executive Vice
President and General Counsel of Search, and representatives of Search's
counsel went to MSF's offices in Jackson, Mississippi to continue their legal
due diligence investigation of MSF. Mr. Hubbuch reviewed with them the matters
covered in the legal due diligence checklist previously provided to MSF of
which he had knowledge and with respect to which documents had not previously
been provided to Search, including various matters in litigation and pending
employment, workers compensation and other claims. MSF also made additional
documents available for review and continued to provide numerous documents, and
responded to due diligence inquiries, from that date until the signing of the
Merger Agreement.
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On December 30 and 31, 1996, representatives of MSF and Bear Stearns
went to Search's offices in Dallas, Texas to continue their due diligence
investigation of Search.
On January 6, 1997, the Board of Directors of Search met to review the
proposed acquisition of MSF and the terms therefor, including that the
acquisition might be structured as an all stock transaction if that was
acceptable to the Principal Stockholders.
On January 7, 1997, MSF's counsel provided to Search's counsel
comments on the first draft of the Merger Agreement on behalf of MSF and the
Principal Stockholders. Counsel for Search, MSF and MSD held a conference
telephone call on January 13, 1997 to review those comments and attempt to
identify open business and legal issues. Also on January 7, 1997, Mr. Canfield
went to Search's offices in Dallas, Texas to continue MSF's due diligence
investigation of Search.
On January 9, 1997, Messrs. Evans, Leary and Idzi made a presentation
at the offices of Bear Stearns in New York City to representatives of the MSF
Lenders and their counsel, Bear Stearns and the Principal Stockholders.
On January 14, 1997, MSF's counsel commenced its legal due diligence
investigation of Search. Search provided MSF's counsel access to its
facilities in Dallas, Texas, to legal due diligence materials and information
at its headquarters there and to Search's outside counsel responsible for
pending litigation matters.
On January 14, 1997, the Board of Directors of MSF met in Dallas to
review the status of the ongoing acquisition negotiations with Search. At that
meeting, MSF's counsel and financial advisors extensively reviewed and
explained the proposed transaction and MSF's alternatives. Mr. Evans met after
the Board meeting with Messrs. Stuart and Canfield and Mr. Harold A. Hogue, a
director of MSF and Vice President and Chief Financial Officer of MSD, to
discuss open issues regarding the acquisition.
On January 16, 1997, counsel for the MSF Lenders circulated to
representatives of the MSF Lenders, Search, MSF, the Principal Stockholders and
their respective counsel and financial advisors, a preliminary draft of a term
sheet regarding proposed amendments to the agreement regarding MSF's revolving
credit facility, including the terms on which that facility would be available
to MSF after the Merger.
On January 17, 1997, a revised draft of the Merger Agreement and a
first draft of the Stockholders Agreement were distributed by Search's counsel
to Search, MSF and the Principal Stockholders and their counsel and financial
advisors.
On January 17 and 20, 1997, Search and MSF, respectively, provided to
representatives of the MSF Lenders and their counsel their proposed changes to
the proposed term sheet. Between January 20 and February 7, 1997, numerous
telephone conversations took place between Mr. Idzi, Mr. Hogue and
representatives of the MSF Lenders during which the terms of the term sheet
were negotiated. During this period, counsel for the MSF Lenders also
distributed several revised preliminary drafts of the term sheet and conducted
a legal due diligence review of Search.
Between January 15 and January 31, 1997, Messrs. Evans, Stuart,
Canfield, Hogue, Idzi and Regenbogen, counsel for Search, MSF and the Principal
Stockholders and representatives of Alex. Brown and Bear Stearns had several
telephone conference calls in which some or all of them participated to
negotiate the definitive terms of the Merger Agreement and the Stockholders
Agreement, including provisions for an adjustment of the consideration payable
if MSF's stockholders' equity at closing of the Merger was less than a
specified amount or certain other events occurred. A number of revised drafts
of such agreements were circulated during this time period.
On January 31 and February 1, 1997, Mr. Regenbogen and counsel for
Search, MSF, the Principal Stockholders and a representative of Bear Stearns
met at Search's offices in Dallas, Texas to continue to negotiate the terms of
the Merger Agreement and the Stockholders Agreement and to identify remaining
open issues. Mr. Evans participated in part of those meetings to facilitate
the resolution of open issues.
On February 1 and 2, 1997, Mr. Evans discussed with Messrs. Stuart and
Canfield the remaining open issues in the Merger Agreement and the Stockholders
Agreement and his proposal for adjustment of the consideration payable in the
Merger to account for certain matters identified during the course of Search's
due diligence investigation of MSF and to provide for additional adjustments in
certain circumstances.
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Messrs. Evans, Stuart, Hogue and Canfield continued to negotiate and
resolve these matters by telephone on February 3 and 4 and at Search's offices
in Dallas, Texas. On February 5, 1997, Messrs. Stuart, Hogue, Canfield, Idzi
and Regenbogen met with counsel for Search, MSF and the Principal Stockholders
and a representative of Bear Stearns to complete the negotiation of the Merger
Agreement and the Stockholders Agreement.
On February 6, 1997, the Board of Directors of Search met by
conference telephone to discuss the Merger and drafts of the Merger Agreement
and Stockholders Agreement and to vote on whether to approve those agreements
and the issuance of shares of Search Common Stock pursuant to the Merger. The
Board of Search unanimously approved those matters, with Mr. Barry Ridings, a
Managing Director of Alex. Brown, abstaining because of Alex. Brown's role as
financial advisor to Search in connection with the Merger. Representatives of
Search's counsel and financial advisors participated in the meeting.
On February 7, 1997, the Board of Directors of MSF met to discuss the
Merger and the revised draft of the Merger Agreement and to vote on whether to
approve the Merger and adopt the Merger Agreement. Following extensive,
detailed presentations by MSF's counsel and financial advisors regarding the
terms of the transaction, information relating to Search and MSF's
alternatives, the MSF Board unanimously approved the Merger and adopted the
Merger Agreement. Representatives of MSF's counsel and financial advisor
participated in the meeting.
On February 7, 1997, Search, MSF and the Principal Stockholders
exchanged by facsimile their respective signatures to the Merger Agreement and
the Stockholders Agreement. Later that day, Search and MSF announced the
execution of the Merger Agreement.
On February 19, 1997, Search, Merger Sub, MSF and the MSF Lenders
signed the term sheet relating to the continuation of MSF's revolving credit
facility.
On June 25, 1997, Search, MergerSub and MSF amended the Merger
Agreement to extend the outside Effective Time from June 30 to August 15, 1997,
to eliminate the provisions requiring adjustments of the Per Share Amount and
minimum and maximum Exchange Ratios and to fix the Per Share Amount and minimum
and maximum Exchange Ratios at reduced amounts from those set forth in the
original Merger Agreement.
MSF'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE MSF BOARD
Since 1992, MSF has financed its operations principally through a
revolving credit facility and annual sales of loans in securitization
transactions involving insurance provided by a third party surety company.
During 1996, MSF's loan delinquencies increased dramatically and exceeded
levels specified in the agreements related to MSF's existing securitizations.
Because of its concerns about MSF's portfolio, the surety company which had
provided insurance for MSF's prior securitizations declined to insure a
securitization transaction that MSF had scheduled for September 1996.
MSF recorded a $6.7 million provision for loan losses in excess of the
normal provision in the third quarter of 1996 to reflect a revaluation of MSF's
portfolio. This addition contributed to the $4.2 million loss reported by MSF
for the nine month period ended September 30, 1996. The loss resulted in MSF's
default under certain covenants in its $90 million revolving credit facility.
Throughout September and October 1996, MSF unsuccessfully attempted to
complete a securitization transaction and to renegotiate the terms of its
revolving credit facility. By mid October, MSF had reached the limit of its
revolving credit facility.
On October 25, 1996, the Company engaged Bear Stearns to explore MSF's
financial and strategic alternatives. Bear Stearns investigated the
feasibility of raising additional capital but concluded that it was unlikely
that sufficient additional capital could be raised to satisfy MSF's liquidity
requirements. Accordingly, the MSF Board concluded that a sale of MSF was in
the best interests of MSF's stockholders.
With Bear Stearns' assistance, the MSF Board identified and contacted
a number of firms that the Board believed were the most likely buyers of MSF.
In addition, MSF announced in its Quarterly Report on Form 10-Q filed with the
Commission on November 14, 1996 that it was considering a sale. Various
meetings were held between MSF representatives and representatives of firms
expressing an interest in MSF. Following these meetings, MSF solicited formal
indications of interest from the potential buyers. With Bear Stearns'
assistance, the MSF Board considered the indications of interest and concluded
that the consideration offered by Search was more attractive than the
consideration proposed by any other party
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that had been identified, and that Search had a significant likelihood of being
able to consummate an acquisition within the time frame imposed by the MSF
Lenders.
In the course of its deliberations, the MSF Board reviewed a number of
factors relevant to the Merger and Merger consideration. In particular, the
MSF Board considered (i) the potential value to be achieved through the
combination of MSF's and Search's operations, (ii) the alternatives available
to MSF, (iii) information concerning Search's business prospects, financial
condition and performance, operations and management ability; (iv) the current
financial market conditions, and (v) historical and potential market prices for
Search's shares.
The MSF Board also considered a number of potentially negative factors
in its deliberations concerning the Merger, including (i) the loss of control
of future operations of MSF after the Merger, (ii) the risk prior to or
following consummation of the Merger that the trading price of Search's Common
Stock may drop below the level used in establishing the Merger consideration,
(iii) the risk that benefits sought to be achieved in the Merger will not be
achieved, (iv) Search's lack of established credit sources, and (v) the other
risks described above under "Risk Factors."
The principal factors considered by the MSF Board in negotiating the
Exchange Ratio were (i) the anticipated value of MSF's net assets upon
liquidation and the relative trading prices of the Search Common Stock and MSF
Common Stock over the recent months prior to execution of the Merger Agreement,
(ii) MSF's business prospects, (iii) the historic and anticipated financial
results for Search and MSF, (iv) valuations of MSF and Search, (v) the premium
that the $2.00 Per Share Amount represented over the trading price of MSF, (vi)
an analysis of the combined companies' pro forma financial statements and the
potential savings and synergies that might be created by the Merger, and (vii)
the terms and conditions of the Merger Agreement.
At a meeting of the MSF Board held on February 7, 1997,
representatives of Bear Stearns presented a financial analysis of the proposed
transaction and advised that, in its opinion, the proposed transaction was fair
to the public stockholders of MSF from a financial point of view. Based upon
the MSF Board's analysis and the recommendation and advice of Bear Stearns, the
MSF Board unanimously approved the Merger and authorized submission of the
Merger to a vote of MSF's stockholders.
After MSF's management and Search's management reached a tentative
compromise on the adjustments to the Per Share Amount and minimum and maximum
Exchange Ratios, the MSF Board held a meeting on June 24, 1997 to consider the
proposed compromise and amendment to the Merger Agreement. Representatives of
Bear Stearns, taking into account the reduced Per Share Amount and minimum and
maximum Exchange Ratios, reaffirmed the prior advice of Bear Stearns that the
proposed transaction, as amended, was fair to the public stockholders of MSF
from a financial point of view. Based upon the MSF Board's analysis and the
advice of Bear Stearns, the MSF Board approved the compromise and amendment of
the Merger Agreement and reaffirmed its approval of the Merger.
After taking into consideration all of the factors set forth above,
the MSF Board determined that the Merger was in the best interests of MSF and
its stockholders and that MSF should proceed with the Merger at this time. The
potential individual interests of the officers and directors of MSF and Search,
except for their interests as stockholders, were not considered by the MSF
Board in making this determination.
OPINION OF MSF'S FINANCIAL ADVISOR
MSF retained Bear Stearns by letter agreement dated October 25, 1996
to act as financial advisor to evaluate financing and strategic alternatives.
Bear Stearns was selected because of its reputation as a nationally recognized
investment banking firm with substantial experience in financial advisory and
capital raising, and because Bear Stearns had a previous relationship with MSF,
including acting as underwriter for three asset-backed securitization
transactions for a wholly-owned, single purpose subsidiary of MSF. As part of
the advisory assignment, MSF requested that Bear Stearns provide an opinion as
to the fairness of the Merger from a financial point of view to the public
stockholders of MSF. No limitations were imposed by MSF upon Bear Stearns with
respect to the investigations made or procedures followed by it in rendering
its opinion. On February 7, 1997, Bear Stearns advised MSF's Board of
Directors that the Merger was fair, from a financial point of view, to the
public stockholders of MSF. On June 24, 1997, Bear Stearns advised MSF's Board
of Directors that the Merger, as amended, was fair, from a financial point of
view to the public shareholders of MSF. Bear Stearns confirmed its opinion in
writing as of the date of this Joint Proxy Statement/Prospectus (the "Bear
Stearns' Fairness Opinion").
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THE FULL TEXT OF THE WRITTEN BEAR STEARNS' FAIRNESS OPINION DATED THE
DATE HEREOF, WHICH SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEWS UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS JOINT
PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE, AND SHOULD
BE READ IN ITS ENTIRETY. THE SUMMARY OF THE BEAR STEARNS' FAIRNESS OPINION SET
FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPINION. THE
BEAR STEARNS' FAIRNESS OPINION DISCUSSED HEREIN IS NOT A CONDITION TO
CONSUMMATION OF THE MERGER.
Bear Stearns' Fairness Opinion is directed only to the fairness of the
Merger, from a financial point of view, to MSF's public stockholders and does
not constitute a recommendation to any MSF stockholder as to how such
stockholder should vote at the MSF Special Meeting. Bear Stearns and Search
have had discussions regarding potential securitization transactions by Search
in the future with Bear Stearns' assistance. No agreements or understandings
have been reached between Search and Bear Stearns as to any securitization
transaction.
The consideration to be paid by Search in the Merger was determined as
the result of negotiations between the respective representatives and
management of MSF and Search. Each holder of MSF Common Stock will receive a
fraction of a share of Search Common Stock equal to the Exchange Ratio for each
share of MSF Common Stock. The Exchange Ratio will equal the quotient of the
Per Share Amount divided by the Average Search Trading Price, but may not be
more than 0.37 nor less than 0.28. At June 23, 1997, Search's stock price of
$4.88 per share would have produced an Exchange Ratio of approximately 0.33.
For purposes of rendering the Bear Stearns' Fairness Opinion, Bear
Stearns: (i) reviewed the Joint Proxy Statement/Prospectus in substantially the
form to be sent to stockholders, including a copy of the Merger Agreement; (ii)
reviewed the Fourth Amended and Restated Loan Agreement dated May 1, 1996 and
the First Amendment to such Fourth Amended and Restated Loan Agreement dated
December 16, 1996; (iii) reviewed MSF's Annual Report to Stockholders and
Annual Report on Form 10-K for the fiscal years ended December 31, 1995 and
December 31, 1996, its Prospectus for Common Stock dated July 21, 1995, its
Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and
September 30, 1996, and March 31, 1997, and its unaudited preliminary financial
results for the periods ended April 30, 1997 and May 31, 1997; (iv) reviewed
Search's Annual Report to Shareholders and Transition Report on Form 10-K for
the period ended March 31, 1996, its Quarterly Reports on Form 10-Q for the
periods ended June 30, September 30 and December 31, 1996, its audited
financial results for the year ended March 31, 1997, its Proxy Statement dated
August 19, 1996, and Joint Plan of Reorganization confirmed by United States
Bankruptcy Court, Northern District of Texas, Dallas Division, in Case No.
395-34981-RCM-11; (v) reviewed certain operating and financial information
provided to Bear Stearns by MSF's management relating to MSF's business and
prospects; (vi) reviewed certain operating and financial information, including
certain projections for the combined companies that assume cost savings,
provided to Bear Stearns by Search's management relating to Search's business
and prospects; (vii) met with certain members of MSF's senior management to
discuss MSF's operations, historical financial statements, future prospects and
possible impact to MSF of not consummating the Merger; (viii) met with certain
members of Search's senior management to discuss Search's operations,
historical financial statements and future prospects; (ix) visited MSF's
facilities in Ridgeland, Mississippi; (x) visited Search's facilities in
Dallas, Texas; (xi) reviewed the historical prices and trading volumes of the
MSF Common Stock and Search Common Stock; (xii) reviewed publicly available
financial data and stock market performance data of companies which Bear
Stearns deemed generally comparable to MSF and Search; (xiii) reviewed the
terms of recent acquisitions of companies which Bear Stearns deemed generally
comparable to MSF; (xiv) considered the results of Bear Stearns' conversations
with various prospective acquirors of MSF, including the indications of
interest received from certain of such prospective acquirors; and (xv)
conducted such other studies, analyses, inquires and investigations as Bear
Stearns deemed appropriate.
In conducting its review and arriving at Bear Stearns' Fairness
Opinion, Bear Stearns relied upon and assumed the accuracy and completeness of
the financial and other information regarding MSF and Search provided to Bear
Stearns by MSF and Search or publicly available, and Bear Stearns did not
independently verify such information. With respect to the projected financial
results of MSF and Search and the combined companies, Bear Stearns assumed that
such results have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of Search as to
the expected future performance of MSF and Search. Bear Stearns did not assume
any responsibility for the information or projections provided to Bear Stearns
and further relied upon the assurances of the management of MSF and Search that
they were unaware of any facts that would make the information or projections
provided to Bear Stearns incomplete or misleading. In arriving at its opinion,
Bear Stearns did not perform or obtain any independent appraisal of the assets
of MSF or Search.
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The following is a summary of the analyses performed by Bear Stearns
in connection with its opinion rendered on June 24, 1997 (which are
substantially the same types of analyses performed by Bear Stearns in
connection with the Bear Stearns' Fairness Opinion):
Financial Statement Review of MSF. Bear Stearns reviewed MSF's Annual
Report on Form 10-K for the fiscal years ended December 31, 1995 and December
31, 1996, the IPO prospectus dated July 21, 1995, and its quarterly reports on
Form 10-Q for the periods ended March 31, June 30, and September 30, 1996, and
March 31, 1997. Bear Stearns noted that net income declined from $6.5 million
for the twelve months ended December 31, 1995 to a loss of $22 million for the
year ended December 31, 1996. Management also provided Bear Stearns with
information that indicated that the net loss for the five months ended May 31,
1997 was $5.6 million. The number of contracts delinquent for over thirty
days as a percentage of the total serviced portfolio increased from 12.1% as of
December 31, 1995 to 18.7% as of December 31, 1996. Delinquencies decreased to
9.4% of the total serviced portfolio as of May 31, 1997. Repossessions totaled
14.7% for the five months ended May 31, 1997, or approximately 35% on an
annualized basis, up from 17.3% for the year ended December 31, 1996.
Analysis of MSF Management Forecasts. Bear Stearns reviewed certain
internal financial forecasts prepared by the management of MSF. Such forecasts
showed continued negative financial results, including net losses and declining
book value.
Stock Trading Analysis for MSF. Bear Stearns reviewed and analyzed
the historical trading prices and volume for the shares of MSF Common Stock on
a daily basis from July 21, 1995 to June 23, 1997. Bear Stearns also compared
the historical trading prices of MSF Common Stock and certain companies with
operations that for purposes of analysis may be considered similar to MSF (the
"Peer Company Composite Index"), also on a daily basis from June 21, 1996 to
June 23, 1997. The Peer Company Composite Index is composed of the following
companies: Aegis Consumer Funding Group, Inc., AmeriCredit Corporation,
Consumer Portfolio Services, Inc., Eagle Finance Corp., First Merchants
Acceptance Corporation, General Acceptance Corporation, Monaco Finance, Inc.,
NAL Financial Group, Inc., and TFC Enterprises, Inc. Bear Stearns noted that
MSF Common Stock significantly underperformed the Peer Company Composite Index
during the comparison period.
Stock Trading Analysis for Search. Bear Stearns reviewed and analyzed
the historical trading prices and volume for the shares of Search Common Stock
on a daily basis from April 1, 1996 to June 23, 1997. Bear Stearns also
compared the historical trading prices of Search Common Stock to the Peer
Company Composite Index on a daily basis from December 31, 1996 to June 23,
1997. Bear Stearns noted that Search Common Stock outperformed the Peer
Company Composite Index during the comparison period. Search Common Stock
commenced trading on NASDAQ on March 10, 1997. Prior to that date, it traded
on the OTC Bulletin Board.
Comparable Company Analysis for MSF. Using publicly available
information, Bear Stearns compared the financial performance and stock market
valuation of MSF with two peer groups. The first peer group is comprised of
auto finance companies with weak historical performances: Aegis Consumer
Funding Group, Inc., Eagle Finance Corp., General Acceptance Corporation,
Monaco Finance, Inc., NAL Financial Group, Inc., and TFC Enterprises, Inc. (the
"Weak Peer Group"). The second peer group is comprised of auto finance
companies with stronger historical financial performances: AmeriCredit
Corporation and Consumer Portfolio Services, Inc. (the "Strong Peer Group").
Bear Stearns compared the ratio of trading price to last twelve months earnings
per share ("EPS"), to 1997 estimated EPS, and to book value for MSF to the
values for the two peer groups. For the Weak Peer Group, only NAL Financial
Group, Inc. had a meaningful price to last twelve months ratio of 2.2x, and a
price to estimated 1997 EPS of 2.4x. For the Strong Peer Group, Bear Stearns
calculated a range of price to last twelve months EPS ratios of 11.3x to 17.3x
and a median ratio of 14.3x, and a range of price to estimated 1997 EPS ratios
of 9.8x to 14.2x and a median ratio of 12.0x. Since MSF reported a loss in the
last twelve months and expected a loss in 1997, these multiples are not a
meaningful means of comparison. MSF's price to book value was calculated at
0.6x as compared to a range of 0.3x to 2.0x and a median of 0.9x for the Weak
Peer Group and a range of 2.5x to 2.9x and a median of 2.7x for the Strong Peer
Group.
Comparable Company Analysis for Search. Using publicly available
information, Bear Stearns compared the financial performance and stock market
valuation of Search with the Weak Peer Group and the Strong Peer Group. Bear
Stearns compared the ratios of trading price to last twelve months EPS, 1997
estimated EPS (provided by the management of Search), and book value for
Search, pro forma for the acquisition of MSF, to the values for the two peer
groups. Due to the large amount of preferred equity issued by Search during
its restructuring, these ratios were not considered a meaningful method of
comparison with the peer groups.
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Comparable Acquisition Analysis. Bear Stearns compared the proposed
Merger to past acquisitions of companies which it deemed comparable to MSF.
These acquisitions included (acquiror/target): Search/U.S. Lending Corp.,
Search/Dealers Alliance Credit Corp., Southern National Corporation/Regional
Acceptance Corporation, Bay View Capital Corporation/CTL Credit, Inc., Fidelity
Acceptance Corp./Century Acceptance Corporation, Inc., KeyCorp/AutoFinance
Group, Inc., and First American Corp./Tennessee Credit Corp. (the "Auto Finance
Merger Group"). Bear Stearns compared the ratios of premium to receivables,
price to earnings and price to book value for the proposed transaction to the
median values for the Auto Finance Merger Group. Bear Stearns calculated a
range of price to earnings ratios of 5.6x to 42.5 x and a median value of 12.6x
for the Auto Finance Merger Group, and a range of premium to receivables ratio
of 0.2% to 119.2% and a median value of 13.4%, as compared to 1.2% for the
Merger. Because MSF reported a net loss, the price to earnings ratio is not
meaningful. Bear Stearns also calculated a price to book ratio of 1.0x for the
Merger as compared to a range of 1.0x to 4.4x and a median of 1.3x for the Auto
Finance Merger Group.
Bear Stearns' opinion on February 7, 1997, Bear Stearns' opinion on
June 24, 1997, and the Bear Stearns' Fairness Opinion, were based solely upon
the information available to it and economic, market, and other conditions as
they existed as of the dates of such opinions. Events occurring thereafter
could materially affect the assumptions used in preparing the opinions.
In connection with rendering its opinion on February 7, 1997, its
opinion on June 24, 1997, and the Bear Stearns' Fairness Opinion, Bear Stearns
performed a variety of financial analyses. The evaluation of the fairness,
from a financial point of view, is a subjective one based on the experience and
judgment of Bear Stearns, and not merely the result of mathematical analysis of
financial data. Accordingly, Bear Stearns believes that its analyses must be
considered as a whole and that considering portions of such analyses or certain
of the factors considered by Bear Stearns without considering all such analyses
and factors could create an incomplete view of the process underlying the
opinion. In its analyses, Bear Stearns made numerous assumptions with respect
to business, market, monetary and economic conditions, industry performance,
business and economic conditions, and other matters, many of which are beyond
Bear Stearns' and MSF's control. Any estimates contained in Bear Stearns'
analyses are not necessarily indicative of future results or actual values,
which may be significantly more or less favorable than such estimates. No
company used in the above analyses as a comparison is identical to MSF.
Accordingly, an analysis of the results of the foregoing is not mathematical;
rather, it involves complex considerations and judgments concerning differences
in financial and operating characteristics of the companies and other factors
that could affect the public trading value of the companies to which MSF is
being compared. The analyses performed by Bear Stearns are not necessarily
indicative of actual values or actual future results, which my be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Bear Stearns' analysis of the fairness, from a
financial point of view, of the Merger to MSF public stockholders. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future.
Based upon these analyses, Bear Stearns has delivered its opinion that
the Merger is fair, from a financial point of view, to the public stockholders
of MSF.
Fees. The letter agreement dated October 25, 1996 (including the
revision dated November 21, 1996), under which MSF retained Bear Stearns to act
as financial advisor, included provisions for fees to be payable in connection
with any acquisition of MSF. The engagement letter provides that if the Merger
is consummated, then MSF shall pay Bear Stearns a cash fee equal to $475,000
plus 3% of the amount by which the total consideration paid exceeds $15 million
(against which any opinion fee or retainer fee will be credited). MSF paid
Bear Stearns a retainer fee of $125,000 following the execution of the
engagement letter and $250,000 at the time Bear Stearns informed the MSF Board
that Bear Stearns was prepared to render the Bear Stearns' Fairness Opinion.
In addition, MSF has agreed to reimburse Bear Stearns for its reasonable
out-of-pocket costs and expenses incurred in connection with the services
rendered to MSF pursuant to the letter agreement. MSF also agreed to pay all
out-of-pocket expenses (including, without limitation, fees and expenses of
Bear Stearns' counsel) in connection with any testimony provided by Bear
Stearns relating to Bear Stearns' Fairness Opinion. Pursuant to this letter
agreement, MSF has agreed to indemnify Bear Stearns, its affiliates and their
respective partners, directors, officers, agents, consultants and employees and
controlling persons against certain expenses and liabilities, including
liabilities under the federal securities laws.
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SEARCH'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SEARCH BOARD
The Search Board believes that the following are reasons for the
stockholders of Search to vote FOR approval and adoption of the Merger
Agreement and the transactions contemplated thereby, including the Merger, and
considered each of them to be material in its decision to approve and adopt the
Merger Agreement and the transactions contemplated thereby, including the
Merger.
The Search Board believes that the terms of the Merger are fair to,
and the Merger is in the best interests of, Search and its stockholders.
Accordingly, the Search Board has approved the Merger Agreement and the
Stockholders Agreement. In forming this belief, the Search Board consulted
with Search's management, as well as Search's outside legal counsel and its
financial advisors, and considered the following factors:
1. the opportunity the Merger presents to expand substantially
Search's portfolio of motor vehicle installment sales
contracts;
2. the opportunity that acquisition of MSF's marketing personnel
and its existing dealer relationships presents to increase
substantially the number and dollar volume of motor vehicle
installment sales contracts purchased by Search from dealers
on an ongoing basis;
3. the increase in Search's stockholders' equity that will result
from the Merger and the opportunity to obtain financing for
future growth of Search's business through leveraging of that
additional equity;
4. the opportunity that a larger portfolio of receivables
presents for consummating an offering of notes securitized by
those receivables, resulting in a lower overall cost of
borrowing;
5. the Merger will result in a combined company that will have
total assets and stockholders' equity in excess of Search
alone, resulting in an enhanced ability to secure financing on
favorable terms, thereby increasing Search's ability to pursue
growth through acquisitions and internal loan generation;
6. the capability of Search's existing management, supported by
MSF's management, to manage the combined operations of Search
and MSF profitably, including the operating efficiencies that
can be derived from the elimination of duplicate overhead
functions and the overall reduction in Search's general and
administrative expenses as a percentage of revenues that would
result from realizing the operating efficiencies;
7. Search's need for greater size to provide greater market
strength and recognition in an increasingly competitive
marketplace and the inability of Search to increase its loan
purchasing volume as rapidly as desired on its own;
8. the availability of the Restructured Credit Facility to MSF
for a one-year period following the Merger; see
"--Restructuring of MSF's Line of Credit;"
9. the presentation of Alex. Brown delivered to the Search Board
at its February 6, 1997 meeting regarding various financial
and other considerations deemed relevant to the Search Board's
evaluation of the Merger and Alex. Brown's opinion to the
effect that, as of February 6, 1997, the Exchange Ratio is
fair to Search from a financial point of view. See "--Opinion
of Alex. Brown & Sons Incorporated;" and
10. the terms and structure of the Merger, including the
provisions of the Merger Agreement and the Stockholders
Agreement regarding adjustment of the consideration issuable
in the Merger in certain circumstances related to MSF's
financial performance and the performance of its loan
portfolio and the limited indemnification of Search against
certain contingent liabilities. See "The Merger Agreement--
Adjustment to Exchange Ratio" and "The Stockholders
Agreement--Indemnification; Escrow."
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<PAGE> 47
The Search Board also considered the risks that MSF's contingent liabilities
could exceed the amounts for which Search is indemnified in respect of those
liabilities, that any such liabilities would have to be satisfied by Search or
MSF in cash while their right to indemnification was limited to recovery of
shares of Search Common Stock held in escrow pursuant to the Stockholders
Agreement and that there is no assurance Search and MSF will be able to meet
the repayment obligations of the Restructured Credit Facility within one year
after the Effective Time as will be required. See "Risk Factors--MSF's
Revolving Line of Credit" and "--MSF's Contingent Liabilities."
After taking into consideration all of the factors set forth above,
the Search Board determined that the Merger was in the best interests of Search
and its stockholders and that Search should proceed with the Merger.
After Search's management and MSF's management reached a tentative
compromise on the adjustments to the Per Share Amount and minimum and maximum
Exchange Ratios, the Search Board held a meeting on June 25, 1997. The Search
Board considered and approved the proposed compromise and amendment of the
Merger Agreement and reaffirmed its prior determination that the Merger was in
the best interests of Search and its stockholders.
OPINION OF SEARCH FINANCIAL ADVISOR
Search retained Alex. Brown to act as its financial advisor in
connection with the Merger and related matters. Alex. Brown was selected to
act as Search's financial advisor based upon its qualifications, expertise and
reputation, as well as Alex. Brown's prior investment banking relationship and
familiarity with Search. Alex. Brown regularly publishes research reports
regarding the financial services industry and the businesses and securities of
publicly owned companies in that industry.
On February 6, 1997, at the meeting at which the Search Board approved
the Merger Agreement, Alex. Brown delivered a verbal opinion to the Search Board
that, as of such date, the Exchange Ratio, as set forth in the Merger
Agreement, was fair to Search from a financial point of view, subject to
execution of the Merger Agreement. Alex. Brown's verbal opinion was confirmed
in a letter dated February 6, 1997 following execution of the Merger Agreement
(the "Opinion"). Pursuant to the Merger Agreement, each share of MSF Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares held in MSF's treasury or owned by Search or any subsidiary of
Search or MSF) will be converted into the fraction of a share of Search Common
Stock equal to the Exchange Ratio, which, pursuant to the Merger Agreement as
executed on February 6, 1997, was not to be more than 0.46 nor less than 0.34
and would have been subject to adjustment downward in certain circumstances.
No limitations were imposed by the Search Board upon Alex. Brown with respect
to the investigations made or procedures followed by it in rendering the
Opinion.
THE FULL TEXT OF THE OPINION, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX C
AND IS INCORPORATED HEREIN BY REFERENCE. SEARCH STOCKHOLDERS ARE URGED TO READ
THE OPINION IN ITS ENTIRETY. THE FOLLOWING SUMMARY OF THE OPINION IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In rendering the Opinion, Alex. Brown (i) reviewed the Merger
Agreement as executed on February 6, 1997, (ii) reviewed certain publicly
available business and financial information concerning Search and MSF, and
certain internal financial analyses and other information furnished to Alex.
Brown by Search, (iii) held discussions with members of senior management of
Search regarding the past and current business operations, financial condition,
and future prospects of Search and MSF, (iv) reviewed the reported price and
trading activity for Search Common Stock and MSF Common Stock and compared
certain financial and stock market information for each of Search and MSF with
similar information for certain other financial services companies, the
securities of which are publicly traded, (v) reviewed the financial terms of
certain recent business combinations in the financial services' industry which
Alex. Brown deemed comparable in whole or in part, and (vi) performed such other
studies and analyses as Alex. Brown considered appropriate.
Alex. Brown relied without independent verification upon the accuracy
and completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its Opinion. With respect to the financial
forecasts reviewed by Alex. Brown in rendering its Opinion, Alex. Brown assumed
that such financial forecasts were reasonably prepared on bases reflecting the
best currently available estimates and judgments of the management of Search as
to the future financial performance of Search and MSF. Alex. Brown did not
make an independent evaluation or appraisal of the assets or liabilities of
Search or MSF nor was it furnished with any such appraisal.
On June 26, 1997, Alex. Brown delivered a letter to the Search Board
advising the Search Board that Alex. Brown is of the view that the
modifications to the Exchange Ratio effected by the June 25th amendment to the
Merger Agreement, had they been made prior to February 6, 1997, would not have
caused Alex. Brown to change its view expressed in the Opinion that the
Exchange Ratio was fair, as of February 6, 1997, from a financial point of view
to Search.
In reaching that conclusion, Alex. Brown reviewed the June 25th
amendment to the Merger Agreement and conducted such other review and analysis
as it deemed necessary for the purposes of its June 26th letter. At the
direction of Search, Alex. Brown has not performed the review and analysis that
it would consider necessary to pass on the fairness, from a financial point of
view, to Search of the revised Exchange Ratio as of June 26, 1997 and, as such,
Alex. Brown does not address in any manner the fairness, from a financial point
of view, to Search of the revised Exchange Ratio in the light of developments
since February 6, 1997 relating to either Search or MS Financial specifically
or market and economic conditions generally. However, as stated in Alex.
Brown's June 26th letter, the delivery of that letter is predicated on the
Company's representation that no facts or circumstances have arisen (including
any changes in the financial condition, earnings, cash flows and prospects of
either the Company or MS Financial since the delivery of the Opinion as
compared to the financial condition, earnings, cash flows and prospects of
either the Company or MS Financial for periods ending prior to delivery of the
Opinion) that materially detract from the financial condition, earnings, cash
flows and prospects expected by the Company's senior management to result from
the combined entity by virtue of the Merger as previously discussed with Alex.
Brown.
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<PAGE> 48
The summary set forth below does not purport to be a complete
description of the analyses performed by Alex. Brown in connection with its
Opinion. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and, therefore,
such an opinion is not readily susceptible to summary description. Accordingly,
notwithstanding the separate factors discussed below, Alex. Brown believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, could create an incomplete view of the evaluation process
underlying its Opinion. No one of the analyses performed by Alex. Brown was
assigned a greater significance than any other. In performing its analyses,
Alex. Brown made numerous assumptions with respect to industry performance,
business and economic conditions and other matters, many of which are beyond
Search's or MSF's control. The analyses performed by Alex. Brown are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses do not purport to be
appraisals or to reflect the prices at which businesses actually may be sold.
All references to the Merger Agreement and the Exchange Ratio in the following
summary refer to the Merger Agreement prior to its amendment on June 25, 1997
and the Exchange Ratio as defined prior to such amendment.
Analysis of Selected Acquisition Transactions. In preparing the
Opinion, Alex. Brown analyzed certain selected merger and acquisition
transactions for automobile finance companies based upon the acquisition price
relative to book value, last twelve months' ("LTM") earnings and managed
portfolio, and the premium to market price. The market price premium is
measured against the market price of the common stock one month prior to the
acquisition announcement. The analysis included a review and comparison of the
mean multiples represented by a sample of recently effected or pending
automobile finance company acquisitions nationwide announced since January 1,
1995 (a total of 6 transactions) ("National Transactions").
The relative multiples implied by the Exchange Ratio (based on a $2.00
implied per share value to MSF stockholders as of February 6, 1997) and the
National Transactions, respectively, are provided in the following table:
<TABLE>
<CAPTION>
Purchase Price to
-----------------------------------------------------------------------------
LTM
Earnings Managed Receivables Market
Per Share Book Value Portfolio (Gross) Premium
--------- ---------- ----------------- -------
<S> <C> <C> <C> <C>
CONSIDERATION ($2.00 PER SHARE) NM 111.1% 23% 53%
NATIONAL TRANSACTIONS
AVERAGE 27.3X 384% 86% 40%
HIGH 34.6X 592% 146% 65%
LOW 12.7X 132% 13% 28%
</TABLE>
The results of this analysis were discounted due to the small sample size,
along with the fact that most companies acquired had positive LTM earnings and
were performing substantially better than MSF from a financial perspective.
Contribution Analysis. Alex. Brown also determined the contribution
by MSF of key historical balance sheet items at December 31, 1996 (including
gross receivables, receivables net of allowance for loan loss reserves &
unearned income, total servicing portfolio, assets and equity) to the resulting
pro forma entity, as compared to the implied value contributed by Search in
stock that would be received by MSF stockholders in the aggregate as a result
of the Merger (based on an implied Exchange Ratio as of February 6, 1997).
The relative levels of contribution by MSF in these selected areas and
the implied value contributed by Search in stock to be received by MSF
stockholders, in the aggregate, are presented in the following table:
<TABLE>
<CAPTION>
BALANCE SHEET ITEMS MSF CONTRIBUTION
------------------- ----------------
<S> <C>
Gross Receivables 62.4%
Net Receivables 60.2%
Servicing Portfolio 70.4%
Assets 54.3%
Equity 38.9%
IMPLIED VALUE CONTRIBUTED IN
STOCK BY SEARCH 29.5%
</TABLE>
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<PAGE> 49
Impact on Search Stockholders. Based on pro forma financial
projections developed by the management of Search, including cost savings,
along with the Exchange Ratio that MSF stockholders could receive as part of
the Merger Agreement, Alex. Brown was able to determine the expected effect of
the transaction to the current stockholders of Search Common Stock. This pro
forma analysis indicated that the transaction would likely result in a minor
increase in earnings per share for Search's fiscal year ending March 31, 1998,
and minor increases in book value and tangible book value per share as of
December 31, 1996.
Asset Value Analysis. Alex. Brown estimated the asset value of MSF
assuming (i) various collectability assumptions on MSF's gross receivables,
ranging from 55%-75%, and (ii) that cash, other assets and total liabilities
assumed are valued at 100% of their respective book values. The range of
collectability assumptions used reflected a variety of scenarios regarding the
credit quality of MSF's gross receivables. This analysis indicated that the
market value of the Search Common Stock to be issued to the stockholders of MSF
in the Merger is within the range of implied asset values of MSF.
Analysis of Selected Publicly Traded Companies. In preparing the
Opinion, Alex. Brown, using publicly available information, compared selected
financial information, including book value, LTM earnings and managed
receivables, for Search, MSF and selected groups of automobile finance
companies.
The first selected group consisted of "C" and "D" credit grade
automobile finance company lenders with weak historical performances, including
Eagle Finance Corp. (EFCW), General Acceptance Corp. (GACC), Jayhawk Acceptance
Corporation (JACC), Mercury Finance Inc. (MFN), Monaco Finance, Inc. (MONFA),
NAL Financial Group Inc. (NALF), and TFC Enterprises Inc. (TFCE) (the "Weak
Peer Group"). The second selected group consisted of "C" and "D" credit grade
automobile finance company lenders with stronger historical performances,
including Americredit Corp. (ACF), Consumer Portfolio Services, Inc. (CPSS),
First Merchants Acceptance Corporation (FMAC), and National Auto Credit (NAK)
(the "Strong Peer Group"). Since Alex. Brown's initial evaluation, First
Merchants Acceptance Corporation announced a material downward revision to its
historical net income and equity. Alex. Brown analyzed the relative multiples
implied by the market price of Search Common Stock, MSF Common Stock and the
mean market price of the common stock of the Weak Peer Group and the Strong
Peer Group, as of February 5, 1997, to the selected financial information
listed above. Alex. Brown calculated the mean price to LTM earnings of 5.1x
for the Weak Peer Group and 12.0x for the Strong Peer Group. Since both Search
and MSF reported a loss in the last 12 months, these multiples are not a
meaningful means of comparison. Alex. Brown calculated a mean price to book
value of 152% for Search, 61% for MSF, 102% for the Weak Peer Group, and 207%
for the Strong Peer Group. Alex. Brown calculated a mean price to managed
receivables of 68.3% for Search, 5.9% for MSF, 27.1% for the Weak Peer Group,
and 53.0% for the Strong Peer Group.
The results of this analysis were discounted for several reasons,
including (i) the divergent multiples reflected due to the distressed nature of
many of the companies in the group, (ii) Search Common Stock traded on the OTC
Bulletin Board prior to March 10, 1997, and (iii) Search did not have an
earnings estimate from the Institutional Brokers Estimate System International,
Inc. ("I/B/E/S").
Historical Stock Trading Analysis. In preparing the Opinion, Alex.
Brown reviewed the trading prices and volumes for the MSF Common Stock and
Search Common Stock and the relationship between price movements of the MSF
Common Stock and Search Common Stock and the price movements of the common
stock of the Peer Group. This analysis indicated that both Search Common Stock
and MSF Common Stock underperformed relative to the Peer Group.
Compensation of Financial Advisor. Pursuant to the terms of an
engagement letter dated May 16, 1996, as amended, Search has agreed to pay
Alex. Brown a fee of $175,000 upon consummation of the Merger. Search has also
agreed to pay Alex. Brown a fee of $50,000 for issuance of the Opinion.
Whether or not the Merger is consummated, Search also has agreed to pay all of
Alex. Brown's reasonable out-of-pocket expenses, including fees and
disbursements of counsel, incurred by Alex. Brown in carrying out its duties
under its engagement, and to indemnify Alex. Brown and certain related persons
against certain liabilities relating to or arising out of its engagement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the MSF Board to approve and
adopt the Merger Agreement and the transactions contemplated thereby, including
the Merger, stockholders should be aware that the executive officers of MSF and
members of the MSF Board have interests in the Merger that are in addition to
the interests of MSF stockholders generally, and that the members of the MSF
Board having such interests participated in the discussion, deliberation and
voting of the MSF Board with respect to the Merger.
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<PAGE> 50
Ownership of Shares of MSF Common Stock; Election of New Search
Director. Messrs. Carl Herrin, James B. Stuart, Jr. and Harold A. Hogue, who
are directors of MSF, also serve as Chairman of the Board, President and Chief
Executive Officer and Vice President and Chief Financial Officer of MSD,
respectively. MSD and its wholly-owned subsidiary, MS Financial Services,
Inc., collectively own 41.4% of the outstanding MSF Common Stock. Messrs.
Philip A. Canfield and Carl D. Thoma, who are directors of MSF, also serve as
an associate and principal, respectively, of Golder, Thoma, Cressey, Rauner,
Inc. ("Golder Thoma"). Golder Thoma's affiliate, Golder Thoma Cressey Rauner
Fund IV, L.P., owns 35.7% of the outstanding MSF Common Stock. Together these
five directors form a majority of the members of the MSF Board. In addition,
Search has agreed that Mr. Stuart, who is Chairman of MSF, will become a
director of Search following the Merger.
Acceleration of Options. The officers and directors of MSF hold
options to purchase MSF Common Stock under the MSF Amended and Restated
Employees' Equity Incentive Plan and the MSF Non-Employee Directors Stock
Option Plan (the "MSF Plans"). As a result of the Merger and the terms of
these options, at the Effective Time, all of these options will become fully
exercisable, to the extent not previously exercisable, to purchase Search
Common Stock. See "The Merger Agreement--Treatment of MSF Stock Options."
Options held by directors other than Mr. Stuart will terminate three months
following the Effective Time. As of February 7, 1997, the officers and
directors of MSF held options to purchase an aggregate of 847,228 shares of MSF
Common Stock at a weighted average price of $5.56 per share (at exercise prices
ranging from $2.50 to $12.00 per share), of which options to purchase 370,734
shares were exercisable at a weighted average price of $3.85.
Employment Agreements. Several of MSF's officers have employment
contracts with MSF. Under the terms of each of these contracts, the officer is
entitled to certain severance payments after the Effective Time if the
officer's employment is terminated without cause, or if the officer resigns
because there is a material reduction in the officer's salary or benefits, the
officer is required to be based more than 25 miles from MSF's present executive
offices, or the officer is removed, not reelected to his position with MSF or
is assigned duties inconsistent with his duties, responsibilities and status
with MSF. The severance payments are generally one-year's base salary. The
employment contract for MSF's former Chief Executive Officer, who resigned
effective February 28, 1997, provides that he will receive cash severance
payments for a period of one year so long as he complies with certain
noncompete covenants. MSF, with the consent of Search, has agreed that the
former Chief Executive Officer may exercise certain stock options issued under
one of the MSF Plans for up to one year after his resignation.
Indemnification; Insurance. Under the Merger Agreement, Search has
agreed that the Surviving Corporation's Certificate of Incorporation and Bylaws
will be no less favorable with respect to indemnification of officers,
directors, employees, fiduciaries and agents than MSF's current Second Amended
and Restated Certificate of Incorporation and Bylaws. In addition, Search has
agreed not to amend or repeal in any manner that would diminish their effect
the provisions of the Surviving Corporation's Certificate of Incorporation and
Bylaws providing for indemnification of individuals who at any time prior to
the Merger were directors, officers, employees, fiduciaries or agents of MSF
for a period of three years after the Merger for all matters other than this
Joint Proxy Statement/Prospectus, for which the period will be four years
following the Merger. Under the Merger Agreement, Search has agreed that the
Surviving Corporation will use reasonable efforts, subject to certain cost
limitations, to maintain in effect for three years after the Merger MSF's
current directors' and officers' liability insurance coverage with respect to
matters occurring prior to the Merger.
The MSF Board of Directors was aware of these interests but did not
consider them to be significant or of a nature that would affect the
objectivity of any director's determination that the Merger was in the best
interests of all of the MSF stockholders.
ACCOUNTING TREATMENT
The Merger will be accounted for by Search under the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations," as amended. Under this method of accounting, the
aggregate Merger consideration will be allocated to MSF's assets and
liabilities based on their estimated fair values at the Effective Time, and the
results of operations of MSF will be included in the results of operations of
Search only for periods subsequent to the Effective Time.
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<PAGE> 51
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain of the principal federal
income tax considerations associated with the Merger under the Code to holders
who hold shares of MSF Common Stock as capital assets. As it is not feasible to
describe all of the tax consequences associated with the Merger, each
stockholder should consult his or her tax advisor with respect to the tax
consequences of the Merger applicable to his or her specific circumstances. In
particular, the following discussion does not address the potential tax
consequences applicable to MSF stockholders who are dealers in securities, who
acquired their MSF Common Stock through stock option or stock purchase programs
or other employee plans or otherwise as compensation, who are subject to
special treatment under the Code (such as insurance companies, tax-exempt
organizations, financial institutions, nonresident alien individuals or foreign
entities), or who hold shares of MSF Common Stock in a hedging transaction or
as part of a straddle or conversion transaction, nor any potential tax
consequences applicable to the holders of options to purchase MSF Common Stock
assumed by Search in the Merger. The following summary is based on the Code,
applicable Treasury Regulations, judicial authority and administrative rulings
and practice, all as of the date hereof. There can be no assurance that future
legislative, judicial or administrative changes or interpretations will not
adversely affect the statements and conclusions set forth herein. Any such
changes or interpretations could be applied retroactively and could affect the
tax consequences of the Merger to MSF, Search and their respective
stockholders. Furthermore, the following discussion addresses only certain
federal income tax matters and does not consider any state, local or foreign
tax consequences of the Merger or other transactions described in this Joint
Proxy Statement/Prospectus.
Neither Search nor MSF has requested or will request any ruling from
the Internal Revenue Service in connection with the Merger. However, the Merger
has been structured with the intention that it qualify as a reorganization
under Section 368(a) of the Code. Search and MSF have received an opinion from
Haynes & Boone L.L.P. ("Haynes & Boone") that the Merger will qualify as a
reorganization under Section 368(a) of the Code. Such tax opinion is subject to
certain assumptions and qualifications and is based, among other things, on
representations and assumptions relating to certain facts and circumstances of,
and the intentions of the parties to, the Merger, which assumptions have been
made with the consent of MSF and Search. Such opinion is not binding on the
Internal Revenue Service and does not preclude it from adopting a contrary
position. Haynes & Boone will render an update to the opinion at the Effective
Time. If such opinion update is not received, the Merger will not be
consummated unless the condition requiring its receipt is waived. Search and
MSF currently anticipate that such opinion update will be delivered and that
MSF will not waive the condition requiring receipt of such opinion update.
Qualification of the Merger as a reorganization depends on compliance
with certain technical requirements of federal income tax law, including, among
others, the requirement that a continuity of proprietary interest be maintained
by the stockholders of the merged corporation. In order for this requirement to
be satisfied, the stockholders of MSF must not, pursuant to a plan or intention
existing at or prior to the Merger, dispose of so much of either (i) their
shares of MSF Common Stock in anticipation of the Merger or (ii) the Search
Common Stock received pursuant to the Merger such that the holders of shares of
MSF Common Stock, as a group, would no longer have a significant equity
interest in the MSF business being conducted by the combined companies after
the Merger. It is the position of the Internal Revenue Service that the
continuity of interest requirement generally will be considered satisfied if
the stockholders of the merged corporation receive in the aggregate (and have
no plan to dispose of) stock of the acquiring corporation equal in value to at
least 50% of the value of all of the formerly outstanding stock of the acquired
corporation as of the effective date of the reorganization, and a decision of
the United States Supreme Court indicates that continuity of interest in the
range of 40% is sufficient.
With the exception of cash paid in lieu of fractional shares, the
Merger Agreement provides that all of the consideration paid by Search to MSF
stockholders in exchange for their MSF Common Stock pursuant to the Merger will
consist of Search Common Stock. Furthermore, pursuant to the Stockholders
Agreement, the Principal Stockholders are obligated to give a representation
that each such stockholder has no plan to sell, transfer or otherwise dispose
of or convey the Search Common Stock received by it pursuant to the Merger.
Satisfaction of the continuity of interest requirement, however, depends in
part on actions that may be taken by MSF stockholders either before or after
the consummation of the Merger over which neither MSF nor Search has any
control. Accordingly, there can be no assurance that the continuity of interest
requirement will be satisfied with respect to the Merger. If the continuity of
interest requirement (or any other requirement for reorganization treatment
under the Code) is not satisfied, the Merger will not be treated as a
reorganization and material adverse tax consequences will result to MSF and
some or all of the holders of MSF Common Stock.
Tax Consequences to MSF Stockholders. Assuming the Merger is treated
as a reorganization under the Code, the following federal income tax
consequences, among others, generally will apply to MSF stockholders:
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<PAGE> 52
(i) No gain or loss will be recognized by a holder of MSF
Common Stock with respect to the receipt of Search Common Stock in
exchange for such MSF Common Stock pursuant to the Merger (except with
respect to any cash received in lieu of fractional shares of Search
Common Stock);
(ii) The aggregate tax basis of the Search Common Stock
received by each MSF stockholder will be the same as the aggregate tax
basis of the MSF Common Stock surrendered in the Merger, decreased by
the amount of any tax basis allocable to fractional shares of Search
Common Stock in lieu of which cash will be paid;
(iii) The holding period of the Search Common Stock
received by each MSF stockholder will include the period for which the
MSF Common Stock surrendered in exchange therefor was considered to be
held, provided the MSF Common Stock so surrendered is held as a
capital asset at the Effective Time; and
(iv) Payment received by holders of MSF Common Stock in
lieu of fractional shares of Search Common Stock will be treated as
payment in redemption of such fractional shares and, provided that the
redeemed interest is held as a capital asset at the Effective Time,
will generally result in the recognition of capital gain or loss by
such holders measured by the difference between the amount received
and the tax basis allocable to such fractional shares.
Irrespective of the reorganization status of the Merger, a recipient
of shares of Search Common Stock will recognize income if and to the extent any
such shares are considered to be received in exchange for services or property
(other than MSF Common Stock). All or a portion of such income may be taxable
as ordinary income. Gain also will be recognized if and to the extent an MSF
stockholder is treated as receiving (directly or indirectly) consideration
other than Search Common Stock in exchange for his or her MSF Common Stock.
Tax Consequences to Search and MSF. Assuming the Merger is treated as
a reorganization under the Code, generally no gain or loss will be recognized
by Search, Merger Sub or MSF as a result of the Merger. The Merger will not
have any tax consequences for Search stockholders.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT A COMPLETE
DESCRIPTION OF ALL POTENTIAL TAX CONSEQUENCES THAT MAY OCCUR AS A RESULT OF THE
MERGER. MSF STOCKHOLDERS SHOULD THEREFORE CONSULT THEIR TAX ADVISORS REGARDING
THE FEDERAL TAX CONSEQUENCES OF THE MERGER, THE HOLDING AND DISPOSING OF SEARCH
COMMON STOCK RECEIVED IN THE MERGER, THE EXERCISE OF ANY OPTIONS TO PURCHASE
MSF COMMON STOCK ASSUMED IN THE MERGER AND THE TAX CONSEQUENCES OF THE MERGER
ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER JURISDICTION.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of Search Common Stock received by MSF stockholders in the
Merger will be freely transferable, except that shares of Search Common Stock
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of MSF are restricted as described herein. Rule 145
promulgated under the Securities Act regulates the disposition of securities of
"affiliates" of MSF in connection with the Merger.
As a condition to the Merger, unless waived, MSF must deliver to
Search a letter (the "Affiliate Letter") identifying all persons who are
"affiliates" of MSF for purposes of Rule 145 under the Securities Act and use
its best efforts to cause each person who is identified in the Affiliate Letter
as an "affiliate" (an "Affiliate") to deliver to Search, at least 30 days prior
to the Effective Time, a written agreement (an "Affiliate Agreement") in which
the Affiliate agrees not to sell, transfer or otherwise dispose of Search
Common Stock issued to the Affiliate in the Merger except (i) pursuant to a
registration statement under the Securities Act, (ii) in a transaction
permitted under Rule 145, or (iii) in a transaction exempt from the
registration requirements of the Securities Act. After the Effective Time, and
so long as necessary to permit the Affiliate to sell the Search Common Stock
pursuant to Rule 145, Search will agree to use its best efforts to file all
reports required under the Exchange Act and the regulations thereunder in order
to permit the Affiliate to sell, transfer or otherwise dispose of the Search
Common Stock under Rule 145. Search will issue appropriate stock transfer
instructions to the transfer agent for the shares of Search Common Stock that
are to be received by such Affiliate and will place restrictive legends on the
certificates evidencing Search Common Stock.
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Pursuant to the Stockholders Agreement, the shares of Search Common
Stock to be received by the Principal Stockholders will be subject to
restrictions on sale, transfer or other disposition and the Principal
Stockholders will have certain registration rights. See "The Stockholders
Agreement--Transfer Restrictions; Registration Rights."
ABSENCE OF DISSENTERS' RIGHTS
Holders of MSF Common Stock and Search Common Stock will not have
dissenters' rights under the Delaware Law with respect to the Merger.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Directors and Officers of Search. The nine individuals currently
serving as directors of Search are Messrs. George C. Evans, Richard F. Bonini,
William H. T. Bush, Frederick S. Hammer, Luther H. Hodges, Jr., James F. Leary,
A. Brean Murray, Douglas W. Powell and Barry W. Ridings. Search has agreed to
elect James B. Stuart, Jr., Chairman of the Board of MSF and President and
Chief Executive Officer of MSD, to the Search Board for a term expiring at the
1999 annual meeting of the stockholders of Search, effective at the Effective
Time. The officers of Search will not change as a result of the Merger, except
that Search intends to elect Mr. Vann R. Martin, President and Chief Operating
Officer of MSF, as an Executive Vice President of Search.
Directors of the Surviving Corporation. In accordance with the Merger
Agreement, Mr. Robert D. Idzi, the sole director of Merger Sub, will be the
sole director of the Surviving Corporation. MSF has agreed to deliver to
Search, at the Closing, the resignations of the directors of MSF.
Officers of the Surviving Corporation. Pursuant to the Merger
Agreement, upon consummation of the Merger, the officers of Merger Sub
immediately prior to the Effective Time will be the initial officers of the
Surviving Corporation.
Operations. Following the Merger, Search intends to consolidate the
operations of Search and MSF that provide similar services to realize operating
efficiencies and expense savings. As of the date of this Joint Proxy
Statement/Prospectus, no final determination regarding these matters has been
made. However, Search currently intends to retain MSF's branch locations and
operations, including the purchase of receivables for the account of the
Surviving Corporation utilizing Search's underwriting guidelines. It also
currently intends to maintain MSF's headquarters in Jackson, Mississippi
through the expiration of the sublease for those headquarters on October 31,
1997 and to maintain MSF's collection facility in Mobile, Alabama. Following
the Merger, Search will continue to review the operations of MSF to determine
whether additional operating efficiencies and consolidations of operations can
be implemented, including consolidation of branch office operations with
facilities of Search that are located in close proximity and the consolidation
of all of MSF's headquarters operations with the similar operations of Search
in Dallas, Texas or at other, smaller, facilities in the Jackson, Mississippi
area. Search reserves the right to take any such actions and effect any such
changes it deems desirable.
RESTRUCTURING OF MSF'S LINE OF CREDIT
As of May 31, 1997, the outstanding balance under the MSF Revolving
Credit was $65.1 million. In November 1996, MSF advised the MSF Lenders that
it was in violation of certain covenants under the MSF Revolving Credit.
Effective December 16, 1996, MSF and the MSF Lenders reached an agreement to
restructure the MSF Revolving Credit. Under the restructured MSF Revolving
Credit, MSF was obligated to make certain mandatory prepayments on the MSF
Revolving Credit, the due dates of which were extended until February 7, 1997.
On February 19, 1997, the MSF Lenders, Search, Merger Sub and MSF entered into
a letter agreement specifying the terms of certain agreements that the parties
agreed to execute and deliver ("Term Sheet") to further restructure the MSF
Revolving Credit. In addition, the MSF Lenders consented to the execution by
MSF of the Merger Agreement and the consummation of the transactions
contemplated therein. The provisions of the Term Sheet were incorporated into
an amended loan agreement, which was further amended as of May 15, 1997.
Pursuant to the Term Sheet, as amended, MSF and the MSF Lenders
amended the agreements governing the MSF Revolving Credit to provide that MSF's
obligations will be payable in full on the earlier of June 30, 1997, the
Termination Date specified in the MSF Revolving Credit documents, or the
closing date of the Merger. The amount of the aggregate advances that may be
outstanding under the MSF Revolving Credit were reduced from $90,000,000 to
$75,000,000. Advances will only be made by the MSF Lenders for the purchase of
motor vehicle receivables that comply with Search's
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underwriting criteria or payment of expenses that are within an agreed cash
budget. MSF will be required to reduce the MSF Revolving Credit by the amount
of any proceeds from income tax refunds, and any prepayment from federal income
tax refunds will permanently reduce the amount of the MSF Revolving Credit.
The MSF Lenders also required the institution of a lock box account for
collection of the proceeds from MSF's receivables, with all proceeds to be
applied as a mandatory prepayment of the MSF Revolving Credit on a daily basis.
MSF is required to maintain the effectiveness of its collection operations in
Jackson, Mississippi and Mobile, Alabama. MSF may continue to sell motor
vehicle installment sales contracts originated by it prior to the Merger to
Search Funding Corp. in accordance with its December 12, 1996 letter agreement
with Search and Search Funding Corp. Search may also lend money to MSF for the
purpose of purchasing motor vehicle installment sales contracts by MSF, but
this indebtedness, and any liens in favor of Search on the motor vehicle
installment sales contracts purchased by MSF with these funds, will be
subordinated to the indebtedness represented by, and the liens securing, the
MSF Revolving Credit. Any material amendments to the Merger Agreement will
require the prior written consent of the MSF Lenders. If the Merger is
terminated for any reason, Search will be obligated, if requested by the MSF
Lenders, to service MSF's receivables for a period of 90 days following the
termination and Search will purchase all receivables acquired by MSF after the
effective date of the amendments to the MSF Revolving Credit.
On the closing date of the Merger, under the Term Sheet, the
agreements governing the MSF Revolving Credit will be amended to provide that
MSF will have available a revolving loan facility in an aggregate amount equal
to the outstanding principal balance of the MSF Revolving Credit on the closing
date of the Merger (the "Restructured Credit Facility"). Search will guarantee
MSF's obligations to repay the Restructured Credit Facility. Under the
Restructured Credit Facility, MSF will be entitled to receive additional
advances to the extent of any difference between the borrowing base, as
determined from time to time, and the outstanding principal balance of the
Restructured Credit Facility. These advances may be used to pay operating
expenses in the ordinary course of business and to purchase motor vehicle
installment sales contracts. The Restructured Credit Facility will bear
interest at the prime rate plus one percent per annum and will terminate on the
earlier of the first anniversary of the Effective Time, any prepayment in full
of the Restructured Credit Facility and any date on which the MSF Lenders
accelerate payment of the Restructured Credit Facility, at which time all
outstanding balances will be payable in full. MSF will make principal payments
on the Restructured Credit Facility on a weekly basis in an amount equal to all
collections with respect to its motor vehicle installment sales contracts and
repossessed vehicles. On the six month anniversary of the Effective Time, the
commitment of the MSF Lenders under the Restructured Credit Facility will be
permanently reduced by $25,000,000 plus a proportionate reduction of certain
"overadvance" amounts owed by MSF at the Effective Time. MSF must repay the
outstanding balance to the extent it exceeds the reduced commitment amount.
Any net proceeds from restructuring of MSF's existing securitization
transactions or from income tax refunds received by MSF must be employed to
make mandatory prepayments of the Restructured Credit Facility and will
permanently reduce the amount of the Restructured Credit Facility. Mandatory
prepayments of the Restructured Credit Facility must also be made in the amount
of any proceeds from sales or other dispositions of motor vehicle installment
sales contracts and other collateral, but these prepayments will not
permanently reduce the amount of the Restructured Credit Facility. If the
outstanding principal balance of the Restructured Credit Facility exceeds the
borrowing base, MSF will be required to make additional prepayments or cause
additional eligible receivables to be transferred to MSF for inclusion in the
borrowing base, in either case in an amount sufficient to eliminate the excess.
The Restructured Credit Facility will be secured by a first priority security
interest in all of MSF's assets. If, upon termination of the Restructured
Credit Facility, any balance remains outstanding, MSF has agreed to pay the MSF
Lenders a refinancing fee equal to five percent of the outstanding balance on
such date. In addition, MSF has agreed to pay to the MSF Lenders a $350,000
fee on the earlier of the full repayment of the Restructured Credit Facility,
the termination of the Restructured Credit Facility or the first anniversary of
the closing date of the Merger.
Effectiveness of the Restructured Credit Facility is subject to the
following conditions: (i) consummation of the Merger; (ii) receipt of all
necessary consents and approvals from all third parties for the consummation of
the Merger and the execution of the amendments to the MSF Revolving Credit; and
(iii) receipt of all necessary consents and approvals from Search's existing
lenders and of any reasonably required intercreditor agreements.
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THE MERGER AGREEMENT
The following summarizes the material terms of the Merger Agreement,
which is attached hereto as Annex A and incorporated by reference herein.
Stockholders of Search and MSF are urged to read the Merger Agreement in its
entirety for a more complete description of the terms of the Merger.
EXCHANGE OF SHARE CERTIFICATES
As promptly as practicable after the Effective Time, Search will send
to each stockholder of record of MSF as of the Effective Time a Letter of
Transmittal and other transmittal materials for use in exchanging certificates
of MSF Common Stock for certificates of Search Common Stock. The transmittal
materials will contain information and instructions with respect to the
surrender of MSF Common Stock certificates in exchange for new certificates
representing Search Common Stock and cash in payment for any fractional shares
resulting from the exchange. Certificates should not be surrendered until the
Letter of Transmittal is received. Pending delivery to Search of MSF Common
Stock certificates, any dividends on the Search Common Stock to be issued as a
result of the Merger that are payable prior to the delivery of such
certificates will be held by Search. Such dividends will be paid, without
interest, to the persons entitled thereto upon delivery of such MSF Common
Stock certificates to Search.
Fractional shares of Search Common Stock will not be issued in the
Merger. Instead, each stockholder of MSF who would otherwise be entitled to a
fractional share will receive, at the option of Search, cash equal to (i) the
product of such fraction multiplied by the Average Search Trading Price or (ii)
the proceeds of any sale of such fractional share which shall be made by the
Exchange Agent, as agent of the holder. If Search elects to have the Exchange
Agent sell such fractional shares, Search shall pay all brokers' commissions
associated with such sales.
TREATMENT OF MSF STOCK OPTIONS
At the Effective Time, each outstanding option to purchase shares of
MSF Common Stock under the MSF Plans will become fully exercisable and will be
assumed by Search. Each MSF option assumed by Search under the Merger
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the MSF Plan immediately prior to the Effective Time,
except that (i) such option will be exercisable for that number of whole shares
of Search Common Stock equal to the product of the number of shares of MSF
Common Stock that were purchasable under such option multiplied by the Exchange
Ratio, rounded up or down to the nearest whole number of shares of Search
Common Stock, and (ii) the per share exercise price for the shares of Search
Common Stock issuable upon exercise of such assumed option will be equal to the
quotient determined by dividing the exercise price per share of MSF Common
Stock at which such option was exercisable immediately prior to the Effective
Time by the Exchange Ratio, and rounding the resulting exercise price up to the
nearest whole cent.
BUSINESS OF MSF PENDING THE MERGER
Pending the consummation of the Merger, subject to the limitations of
a budget approved by the MSF Lenders, and except as expressly required or
permitted by the Merger Agreement or as otherwise consented to or approved in
advance by Search in writing, MSF has agreed that MSF and its subsidiary will,
among other things, (a) conduct their business in the ordinary course and in a
manner consistent with past practice as in effect between July 1, 1996 and
December 31, 1996 and not introduce any new method of management, operation or
accounting, (b) use commercially reasonable efforts to preserve substantially
intact their business organization, to keep available the services of their
current officers, employees and consultants and to preserve their current
relationships with customers, suppliers, lenders and other persons with which
they have significant business relations, (c) maintain their respective
properties and facilities, including those held under leases, in as good
working order and condition as at present, ordinary wear and tear excepted, (d)
perform in a timely manner all of their obligations under the Merger Agreement,
all related documents and all other material agreements relating to or
affecting any of their respective assets, (e) keep in full force and effect
present insurance policies or other comparable insurance coverage, (f) use all
commercially reasonable efforts to maintain and preserve the goodwill
associated with their respective businesses, and their respective relationships
with customers and others having business relations with them, (g) maintain
compliance with all material permits and laws, (h) maintain present debt and
lease instruments and not enter into new or amended debt or lease instruments,
and (i) inform Search immediately if any event occurs that may have a material
adverse effect upon MSF and its subsidiary, taken as a whole.
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In addition, MSF has agreed that MSF and its subsidiary will not take
any of the following actions without the prior written consent of Search: (a)
amend any of their respective Certificates of Incorporation or Bylaws; (b) (i)
declare or pay any dividend, or make any other distribution in respect of any
of their respective stock, (ii) split, combine or reclassify any of their
respective capital stock, (iii) issue or authorize the issuance of any shares
of capital stock, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest, or (iv) purchase, redeem or otherwise acquire or retire for
value any shares of their respective stock except that MSF may issue shares of
MSF Common Stock pursuant to options outstanding on the date of the Merger
Agreement and pursuant to the MSF Plan; (c) incur or agree to incur any
indebtedness other than under its existing loan agreement or make any
significant capital expenditures, enter into any other contract or commitment
involving a significant expenditure, or guarantee any indebtedness of a third
party; (d) except in the ordinary course of business consistent with past
practice, (i) increase the compensation payable or to become payable to any
officer, director, stockholder, employee or agent, (ii) make any bonus or
management fee payment to any such person, (iii) make any loans or advances to
any person other than travel or entertainment advances in the ordinary course
of business to employees and directors, (v) grant, or enter into any agreement
providing for, any severance or termination pay or (vi) in any other manner
increase the compensation payable, or fringe benefits provided, to any of such
persons; (e) directly or indirectly make or cause to be made any payment to an
affiliate in excess of the amount or terms of previous payments made in
accordance with past practice or enter into any new agreement with any
affiliate; (f) create or assume any mortgage, pledge or other lien or
encumbrance upon any assets or properties except in the ordinary course of
business; (g) sell, assign, lease, pledge or otherwise transfer or dispose of
any property or equipment, except in the ordinary course of business consistent
with past practice; (h) acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise), any
business or the start-up of any new business, or otherwise acquire or agree to
acquire any assets that are material, individually or in the aggregate, to MSF
and its subsidiary taken as a whole; (i) merge or consolidate or agree to merge
or consolidate with or into any other corporation; (j) waive any material
rights or claims; (k) commit a breach (or take any action that with notice or
the passage of time, or both, would cause a breach) of, or amend or terminate,
any agreement, permit, license or other right; (l) enter into (i) any material
contracts or (ii) any other transaction outside the ordinary course of business
consistent with past practice or prohibited under the Merger Agreement; or (m)
either (i) commence a lawsuit other than for routine collection of finance
contracts or (ii) settle or compromise any pending or threatened litigation
which would result in a material adverse effect upon MSF and its subsidiary,
taken as a whole.
If MSF wishes to take any action otherwise prohibited by the Merger
Agreement, it must notify Search in writing of its intended prohibited action,
provide Search with a justification for the taking of such action and request
Search's consent to such prohibited action. Search will have two business days
from receipt of such notice and information it may reasonably request regarding
such prohibited action to consent to or deny such request. If Search does not
respond to MSF's request by the end of such time period, Search will be deemed
to have consented to such action.
SEARCH MANAGEMENT ASSISTANCE
MSF has agreed to (i) cause its President to consult with Search's
President and Chief Executive Officer or Senior Executive Vice President,
Operations Director (the "Search Senior Executives") regarding MSF's day-to-day
operations, (ii) allow the Search Senior Executives and certain other senior
executives of Search to observe and participate in the day-to-day operations of
MSF, (iii) allow Search to monitor and evaluate MSF's collection activities,
policies and procedures, and (iv) implement those collection policies,
procedures and practices as are agreed upon by MSF's President and either of
the Search Senior Executives. MSF has also agreed not to change its existing
policies and procedures or to implement any new policies and procedures without
the prior written approval of one of the Search Senior Executives. Search and
MSF have agreed that MSF's President and the Search Senior Executives will
cause an analysis of MSF's portfolio of owned motor vehicle installment sales
contracts to be conducted to determine the amount of any additional reserves or
charges to be recognized prior to the Effective Time.
For Search's assistance as described above and in more detail in the
Merger Agreement, MSF has agreed to pay Search a fee of $100,000 per month.
Payment of this fee will not be taken into account in determining whether
adjustment of the Per Share Amount and the maximum and minimum Exchange Ratios
is required. See "The Merger--Prior Adjustments to Per Share Amount and
Exchange Ratio."
SOLICITATION OF OTHER PROPOSALS
Pending the consummation of the Merger or termination of the Merger
Agreement in accordance therewith, neither MSF nor its subsidiaries will,
directly or indirectly, solicit, initiate or encourage the submission of any
proposal or offer from
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any person relating to any acquisition of all or any material portion of the
assets of, or any equity interest in MSF, its subsidiary or any Securitization
Trust, or any merger, consolidation, share exchange, business combination or
other similar transaction with MSF, its subsidiary or any Securitization Trust,
or participate in discussions or negotiations regarding, or provide any
information to any person with respect to, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, any effort or
attempt by any other person to do or seek any of the foregoing.
Notwithstanding the foregoing, MSF is not prohibited from (a) participating in
discussions or negotiations with, or furnishing information to, any person or
entity that submits an unsolicited written acquisition proposal to the MSF
Board pursuant to a confidentiality agreement substantially similar to that
then in effect between MSF and Search, if the MSF Board, after consultation
with its independent legal and financial advisors and taking into consideration
the advice of such advisors, determines in good faith that such action is
required for the MSF Board to comply with its fiduciary duties to stockholders
imposed by Delaware law. MSF shall advise Search orally and in writing of any
request for information or acquisition proposal, or any inquiry with respect to
or which could result in an acquisition proposal, the material terms and
conditions of such request, acquisition proposal or inquiry, and the identity
of the person making the same, and shall keep Search apprised of related
developments.
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to the satisfaction or waiver of
various conditions, including (i) the approval and adoption of the Merger
Agreement and the Merger by the requisite votes of the stockholders of MSF and
Search, (ii) the absence of any restrictive court orders or any other legal
restraints or prohibitions, and of any governmental proceedings, preventing the
consummation of the Merger, and the absence of any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger which makes the consummation of the Merger illegal,
(iii) the representations and warranties of Search and MSF being true and
correct in all material respects on and as of the Effective Time, (iv) Search
and MSF having performed or complied in all material respects with all
agreements and covenants required by the Merger Agreement to be performed or
complied with by them on or prior to the Effective Time, (v) the receipt of
evidence by Search and MSF from the other party that such party has obtained
all necessary third party consents, (vi) the receipt by Search of accountants'
"cold comfort" letters with respect to the financial statements of MSF and its
subsidiary and certain other matters, (vii) the execution by MSF, Search and
the MSF Lenders of agreements with respect to the Restructured Credit Facility,
(viii) the receipt by Search and MSF of the updated tax opinion of Haynes and
Boone, (ix) the continued effectiveness of the Stockholders Agreement, (x) the
continued effectiveness of the Registration Statement, and (xi) the absence of
any pending or threatened litigation against Search, MSF or their respective
officers or directors that could have a material adverse effect on Search or
MSF. Although the Merger Agreement permits waiver of each of the foregoing
conditions, certain conditions are required to be satisfied by applicable law,
rules or regulation, including items (i), (ii) and (x) in the foregoing
sentence. Search and MSF will reschedule the Meetings and resolicit votes from
their respective stockholders if the companies determine to waive receipt of
the updated tax opinion of Haynes and Boone.
TERMINATION; AMENDMENT
The Merger Agreement may be terminated and the Merger may be abandoned
prior to the Effective Time, either before or after its approval by the
stockholders of MSF and Search, under the circumstances specified therein,
including (i) by mutual written consent duly authorized by the Boards of
Directors of Search and MSF; (ii) by either Search or MSF, if the Merger shall
not have been consummated by August 15, 1997 and if the terminating party has
not caused the failure of the Merger to be consummated on or before such date
by its own willful failure to fulfill any of its material obligations under the
Merger Agreement; (iii) by Search, if (1) there has been a breach by MSF of
any of its representations and warranties under the Merger Agreement or (2)
there has been a willful breach on the part of MSF of any of its covenants or
agreements contained in the Merger Agreement such that the conditions set forth
in Articles 2 and 6 of the Merger Agreement will not be satisfied, and, in both
cases, such breach has not been promptly cured after notice to MSF; (iv) by
MSF, if (1) there has been a breach by Search or Merger Sub of any of their
respective representations and warranties under the Merger Agreement or (2)
there has been a willful breach on the part of Search or Merger Sub of any of
their respective covenants or agreements contained in the Merger Agreement such
that the conditions set forth in Articles 2 and 6 of the Merger Agreement will
not be satisfied, and, in both cases, such breach has not been promptly cured
after notice to Search and Merger Sub; (v) by either Search or MSF, if there is
a final non- appealable order in effect preventing consummation of the Merger or
there is any action taken, or any law or order enacted or promulgated, by any
governmental authority which would make consummation of the Merger illegal; (vi)
by Search, if the MSF Board shall have withdrawn, modified or changed its
recommendation of the Merger Agreement or the Merger in a manner adverse to
Search or shall have resolved to do so, the MSF Board shall have recommended to
the stockholders of MSF any merger, consolidation, share exchange, business
combination or other similar transaction (other than the Merger), or any sale,
lease or other disposition of 25% or
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more of the assets of MSF and its subsidiary, or the acquisition by any person
or group of beneficial ownership of 50% or more of the shares of MSF Common
Stock (a "Business Combination Transaction"), or a tender offer or exchange
offer for fifty percent (50%) or more of the outstanding MSF Common Stock is
commenced and the MSF Board fails to recommend against acceptance of the tender
offer or exchange offer; (vii) by Search, if Section 262 of the Delaware Law is
applicable to the Merger and more than 10% of the MSF Common Stock issued and
outstanding immediately prior to the Effective Time shall constitute dissenting
shares; (viii) by MSF, if the Board of Directors of Search shall have withdrawn
its recommendation of approval of the issuance of additional shares of Search
Common Stock pursuant to the Merger or shall have resolved to do so; (ix) by
MSF, if, in the exercise of its good faith judgment as to its fiduciary duties
under the Delaware Law, the MSF Board of Directors in good faith determines
(after consultation with its financial advisers and Delaware counsel and duly
considering the written advice of such legal counsel) that such termination is
required by such fiduciary duties by reason of a proposal that either
constitutes a Business Combination Transaction or may reasonably be expected to
lead to a Business Combination Transaction (a "Business Combination Transaction
Proposal"); (x) by either Search or MSF, if the stockholders of MSF or Search
shall have failed to approve and adopt the Merger Agreement and the Merger; and
(xi) by Search if either MSF or its subsidiary shall have filed a petition for
liquidation or re-organization in bankruptcy, or have become the subject of an
involuntary bankruptcy petition, which involuntary petition is not rejected by
a court having jurisdiction over such proceedings within 30 days of the filing
thereof.
The Merger Agreement may be amended by an agreement in writing among
the parties thereto at any time prior to the Effective Time; provided, however,
that, after approval of the Merger by the stockholders of MSF, no amendment may
be made which would reduce the amount or change the type of consideration into
which each share of MSF Common Stock will be converted upon consummation of the
Merger.
FEES AND EXPENSES
Except as described below, all fees and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
will be paid by the party incurring such expenses, whether or not the Merger is
consummated.
Search and MSF will share equally all fees and expenses, other than
attorneys' fees, incurred in relation to the printing and filing of this Joint
Proxy Statement/Prospectus, and any amendments or supplements thereto. MSF has
agreed to pay Search a fee (the "Search Fee") of $700,000 in immediately
available funds, which amount is inclusive of all expenses, if (i) the Merger
Agreement is terminated by Search as described in clause (vi) or by MSF as
described in clause (ix) under "--Termination; Amendment" above, in which case
the Search Fee will be paid on the business day immediately following such
termination, or (ii) the Merger Agreement is terminated as a result of the
failure of the stockholders of MSF to approve the Merger and a proposal for a
Business Combination Transaction Proposal shall have been made prior to such
termination, and any Business Combination Transaction involving MSF is
thereafter consummated within 18 months of such termination, in which case the
Search Fee will be paid on the business day immediately following such
consummation. Search will be entitled to receive its expenses in immediately
available funds in the event that this Agreement is terminated by Search as
described in clauses (iii) and (vi) or by MSF as described in clause (ix) under
"--Termination; Amendment" above.
Search has agreed to pay MSF a fee (the "MSF Fee") of $250,000 in
immediately available funds, which amount is inclusive of all expenses, if the
Merger Agreement is terminated by MSF as described in clause (viii) under
"--Termination; Amendment" above; provided, that Search will not be obligated
to pay any or all of the MSF Fee if Search's stockholders do not approve the
adoption of the Merger Agreement and the Merger.
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THE STOCKHOLDERS AGREEMENT
The following paragraphs summarize, among other things, the material
terms of the Stockholders Agreement, which is filed as an exhibit to the
Registration Statement.
AGREEMENT TO VOTE
The Stockholders Agreement provides, among other things, that, at any
meeting of stockholders of MSF or in connection with any written consent of
stockholders, each Principal Stockholder shall vote (or cause to be voted)
during the time the Stockholders Agreement is in effect, the shares of MSF
Common Stock held of record or beneficially by such Principal Stockholder, as
follows:
(1) In favor of the Merger, the adoption, execution and delivery
by MSF of the Merger Agreement and the approval of the terms thereof and each
of the other actions contemplated by the Merger Agreement and the Stockholders
Agreement and any actions required in furtherance thereof;
(2) Against any action or agreement that would result in a breach
in any material respect of any covenant, representation or warranty or any
other obligation or agreement of MSF under the Merger Agreement;
(3) Except as otherwise agreed to in writing by Search, against
any of the following actions (an "Alternate Transaction"): (i) any
extraordinary corporate transaction, such as a merger, consolidation or other
business combination involving MSF its subsidiary; (ii) a sale, lease or
transfer of a material amount of assets of MSF or its subsidiary or a
reorganization, recapitalization, dissolution or liquidation of MSF, its
subsidiary; or any Securitization Trust, or a reorganization,
recapitalization, dissolution or liquidation of MSF or its subsidiary, or any
purchase or redemption of MSF Common Stock, from the Principal Stockholder or
any other Principal Stockholder; and
(4) Against (i) any change in the majority of the MSF Board; or
(ii) any material change in the present capitalization of MSF, any amendment to
MSF's Restated Certificate of Incorporation; or (iii) any other material change
to MSF's corporate structure or business.
In addition, each Principal Stockholder has granted to, and appointed,
Merger Sub and an officer of Merger Sub as such Principal Stockholder's
irrevocable proxy and attorney-in-fact (with full power of substitution) to
vote the shares of MSF Common Stock in accordance with the provisions of the
Stockholders Agreement.
COVENANTS OF THE STOCKHOLDERS
During the term of the Stockholders Agreement, each Principal
Stockholder has agreed not to (i) solicit, initiate or encourage (including by
way of furnishing information) or respond to any inquiries or the making of any
proposal by any person (other than Search or any affiliate of Search) with
respect to MSF or any Securitization Trust that constitutes or could reasonably
be expected to lead to an Alternate Transaction , and, if any Principal
Stockholder receives any such inquiry or proposal, then such Principal
Stockholder shall promptly inform Search of the terms and conditions, if any,
of such inquiry or proposal and the identity of the person making it, and each
Principal Stockholder will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
theretofore with respect to any of the foregoing, or (ii) (a) offer for sale,
sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or
enter into any contract, option or other arrangement or understanding with
respect to or consent to the offer for sale, sale, transfer, tender, pledge,
encumbrance, assignment or other disposition of, any or all of such Principal
Stockholder's shares of MSF Common Stock or any interest therein, (b) except as
contemplated by the Stockholders Agreement, grant any proxies or powers of
attorney, deposit any shares of MSF Common Stock into a voting trust or enter
into a voting agreement with respect to any shares of MSF Common Stock, or (c)
take any action that would make any representation or warranty of such
Principal Stockholder contained in the Stockholders Agreement untrue or
incorrect or have the effect of preventing or disabling such Principal
Stockholder from performing such Principal Stockholder's obligations under the
Stockholders Agreement. Each Principal Stockholder has agreed to cause MSF to
comply with its non-solicitation covenant set forth in the Merger Agreement.
See "The Merger Agreement--Solicitation of Other Proposals." Each Principal
Stockholder will exercise such rights as it has as a stockholder of MSF and
will cause its representative on the MSF Board to exercise such rights as they
have as Directors of MSF to cause MSF to observe and perform all of its other
covenants and obligations under the Merger Agreement in a timely manner.
52
<PAGE> 60
Prior to two years after the Effective Time, no Principal Stockholder
shall, directly or indirectly, (i) solicit or attempt to induce any employee of
Search or MSF to leave the employment of either such employer, or (ii) solicit
or otherwise encourage any customer, client, borrower, lender, supplier,
vendor, or dealer of MSF, Search or any subsidiary of Search or MSF to cease or
discontinue doing business with either MSF or Search or any subsidiary of
Search or MSF.
TRANSFER RESTRICTIONS; REGISTRATION RIGHTS
Each of the Principal Stockholders has agreed that it will not
transfer or permit any transfer of all or part of the Search Common Stock
received by the Principal Stockholder pursuant to the Merger for a period of
180 days from and after the Effective Time (the "Lock-Up Period"). The
Principal Stockholders have also acknowledged that, as affiliates of MSF and/or
Search, they may not transfer, or make any offer or agreement to transfer, any
shares of Search Common Stock that they acquire in connection with the Merger
except (i) in a transaction permitted pursuant to Rule 145 promulgated under
the Securities Act or (ii) pursuant to a valid registration statement under the
Securities Act. Search has agreed that from and after the end of the Lock-Up
Period and for so long as necessary in order to permit each Principal
Stockholder to sell the Search Common Stock held by it pursuant to Rule 145,
Search will use its reasonable efforts to file on a timely basis all reports
required to be filed by it pursuant to the Exchange Act and the rules and
regulations thereunder.
Search has agreed to provide certain registration rights to the
Principal Stockholders. At any time after the end of the Lock-Up Period, any
Principal Stockholder that is subject to Rule 145 in respect of the Search
Common Stock acquired by such Principal Stockholder pursuant to the Merger, or
holds at least 5% of the issued and outstanding shares of Search Common Stock,
may request registration of some or all of such Principal Stockholder's shares
of Search Common Stock for offer and sale under the Securities Act. The
Principal Stockholders collectively will be entitled to request one such
registration. In addition, beginning with the end of the Lock-Up Period and
continuing until such time as a Principal Stockholder is either no longer
subject to Rule 145 or owns less than 5% of the issued and outstanding shares
of Search Common Stock, at any time that Search intends to file a registration
statement under the Securities Act for purposes of a public offering (excluding
registration statements relating to employee benefit plans and corporate
reorganizations), Search is required to provide such Principal Stockholder with
at least 20 days notice of the filing of such registration statement and to
allow such Principal Stockholder an opportunity to include in the registration
statement all or part of such stockholders' Search Common Stock. If Search
receives a proper demand for registration, Search is required, within 15 days
after receipt of such demand, to notify the requesting Principal Stockholder in
writing of Search's intent to proceed to do one of the following: (i) proceed
with the filing of the registration statement within 30 days from the date of
such notice, (ii) if Search reasonably concludes that the filing of a
registration statement would require disclosure of material information which
Search has a bona fide business purpose for preserving confidential, Search
shall so notify the requesting Stockholder and may delay the registration but,
in any event, shall file the registration statement within 60 days from the
date of such notice; or (iii) in lieu of proceeding with the registration,
Search shall have the right to purchase, or cause a third party designated by
Search to purchase, all, but not less than all, of the Principal Stockholders'
Search Common Stock identified in the demand registration request. The
purchase price shall be in cash and in an amount agreed to by the parties and
such purchase must be consummated within 30 days from the date of such notice.
If, however, the parties are unable to agree on the purchase price within 15
days from the date of notice, Search must proceed to register the securities
under clauses (i) or (ii) above.
STANDSTILL COVENANTS
Until the earlier of (i) two years after the Effective Time or (ii)
when the amount of Search Common Stock owned by the Principal Stockholder is
less than 5% of all the issued and outstanding Search Common Stock, each
Principal Stockholder has agreed, for itself and its affiliates, not to engage
in certain proscribed actions, either alone or in concert with others,
including the following: (a) acquire, directly or indirectly, any additional
securities of Search other than Search Common Stock which such Principal
Stockholder acquires pursuant to the Merger or which Search issues to an
affiliate as part of an employment or other arrangement with Search or Merger
Sub; (b) make or in any way participate in, directly or indirectly, any
solicitation of proxies; (c) take any action to form, join or in any way
participate in a "group," within the meaning of Section 13(d)(3) of the
Exchange Act; (d) vote its shares for the election of any director to the
Search Board not approved by management of Search; (e) publicly propose any
transaction with respect to Search or any Search affiliate, including but not
limited to a tender offer for voting securities of Search; (f) solicit,
encourage, entertain or discuss with any person any proposal with respect to
Search or any Search affiliate, including but not limited to a business
combination or other transaction with, or a change of control of, Search or any
Search affiliate; (g) make, solicit, encourage, discuss or participate in a
tender offer for or exchange offer for any Search securities; (h) acquire, offer
to acquire or agree to acquire, directly or indirectly, all or a substantial
portion of the assets of Search and/or any Search affiliate; (i) arrange, or in
any way participate in or encourage, directly or indirectly, any financing for
the purchase, exchange, acquisition or transfer of any
53
<PAGE> 61
assets of Search or any Search affiliate; (j) call, or seek to call, any
meeting of Search's stockholders, noteholders, securities holders and/or other
creditors; (k) announce any intention to do or enter into any agreement with
any other person to do any of the proscribed actions; or (l) communicate with
any of Search's creditors regarding Search or any Search affiliate, file or
initiate the filing of any bankruptcy petition against Search or any Search
affiliate or take any other action which has a material negative effect on
Search's financial condition.
INDEMNIFICATION; ESCROW ARRANGEMENTS
Each Principal Stockholder has agreed to indemnify Search, Merger Sub
and the Surviving Corporation from certain liabilities and losses. To secure
this indemnification obligation, the Principal Stockholders have agreed to
place that number of shares of Search Common Stock to be delivered to them
pursuant to the Merger Agreement having a value, based upon the Average Search
Trading Price, equal to $2,500,000 into an escrow fund (the "Escrow Fund") to
be held pursuant to the terms of an Escrow Agreement, the form of which is
filed as an exhibit to the Registration Statement. The portion of the Escrow
Fund to be delivered for the account of each Principal Stockholder will be
equal to the ratio that the Merger consideration received by that Principal
Stockholder bears to the aggregate Merger consideration received by all the
Principal Stockholders. Commencing 12 months from the Effective Time and
continuing every six months thereafter, the escrow agent will transfer to the
Principal Stockholders, pro rata, an amount equal to 25% of the original number
of shares of Search Common Stock constituting the Escrow Fund not reserved for
any indemnification claims. If Search, acting in a commercially reasonable
manner, believes it is necessary to increase the size of the Escrow Fund prior
to the Merger based on the likelihood or magnitude of liabilities, losses and
other claims for which it is entitled to indemnification by the Principal
Stockholders, it may request the Principal Stockholders to increase the Escrow
Fund by up to $1,000,000. If the Principal Stockholders agree to the proposed
increase, additional Search Common Stock will be contributed to the Escrow Fund
at the Effective Time. If they are unable to agree with Search as to the
amount of the increase, the parties may submit the disagreement to arbitration
in accordance with the terms of the Stockholder Agreement.
To secure the representation that MSF will receive an income tax
refund of $6,300,000, the Principal Stockholders have agreed to place that
number of shares of Search Common Stock to be delivered to them pursuant to the
Merger Agreement having a value, based upon the Average Search Trading Price,
equal to $2,300,000 into a tax holdback fund to be held by the escrow agent
pursuant to the Escrow Agreement (the "Tax Holdback Fund"). The portion of the
Tax Holdback Fund to be delivered for the account of each Principal Stockholder
will be equal to the ratio that the Merger consideration received by that
Principal Stockholder bears to the aggregate Merger consideration received by
all of the Principal Stockholders. Shares of Search Common Stock held in the
Tax Holdback Fund will be released from escrow quarterly in proportion to the
amount of income tax refunds received by MSF or the Surviving Corporation over
$4,000,000. Upon receipt by the Surviving Corporation of the full $6,300,000
of income tax refunds, the escrow agent will make the final distribution;
provided, however, that if any portion of the income tax refund has not been
received by the first anniversary of the closing of the Merger, unless such
date has been extended or accelerated by mutual agreement, all the remaining
Search Common Stock held in the Tax Holdback Fund on that date will revert to
Search. Any income tax refund received after such reversion will be paid to
the Principal Stockholders in either cash or Search Common Stock.
TERMINATION
The Stockholders Agreement and the obligations of each Principal
Stockholder thereunder will terminate on the first to occur of (a) termination
of the Merger Agreement in accordance with its terms (the "Termination Date")
or (b) if the Merger is consummated, the third anniversary of the Effective
Time. Notwithstanding the foregoing, (a) the standstill covenants will
terminate on the earlier of (i) two years after the Effective Time, or (ii) as
to any Principal Stockholder, when the amount of Search Common Stock which that
Principal Stockholder owns is less than five percent (5%) of all of the issued
and outstanding Search Common Stock, and (b) the provisions relating to the
indemnification and escrow arrangements will terminate upon full distribution
of the Escrow Fund pursuant to the terms of the Stockholder Agreement and the
Escrow Agreement.
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<PAGE> 62
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The Merger will be accounted for under the "purchase" method of
accounting which requires the purchase price to be allocated to the acquired
assets and liabilities of MSF on the basis of their estimated fair values as of
the date of acquisition. Consequently, upon consummation of the Merger, the
combined company will establish a new accounting and reporting basis for the
acquired assets and liabilities which will be reflected in the future
consolidated financial statements of Search. The following pro forma combined
condensed balance sheet and statements of income (collectively, the "Pro Forma
Financial Information") present the combined historical financial statements of
Search and MSF adjusted to give effect to the Merger on a pro-forma purchase
accounting basis. The unaudited Pro Forma Combined Condensed Balance Sheet at
March 31, 1997 was prepared based upon the respective consolidated balance
sheets of MSF and Search at March 31, 1997, as if the acquisition of MSF had
occurred on March 31, 1997. The unaudited Pro Forma Combined Condensed
Statements of Income give effect to the acquisition as if it occurred on April
1, 1996 and includes adjustments directly attributable to the acquisition and
expected to have a continuing impact on the combined company. The unaudited
Pro Forma Combined Condensed Statements of Income were prepared based upon the
audited consolidated statements of income of MSF for the fiscal year ended
December 31, 1996 and of Search for the fiscal year ended March 31, 1997.
Because the Pro Forma Financial Information has been prepared based on
estimated fair values, amounts actually recorded may change upon determination
of the total purchase price and additional analysis of individual assets and
liabilities assumed.
The Pro Forma Financial Information and related notes are provided for
informational purposes only. The Pro Forma Financial Information presented is
not necessarily indicative of the consolidated financial position or results of
operations of Search as they may be in the future or as they might have been
had the Merger been effected on the assumed dates. The Pro Forma Financial
Information should be read in conjunction with the historical consolidated
financial statements of Search, and the related notes thereto, presented in
Annex E to this Joint Proxy Statement/Prospectus, and the historical
consolidated financial statements of MSF, and the notes related thereto,
presented in Annex D to this Joint Proxy Statement/Prospectus. See
"Consolidated Financial Statements of MSF."
The unaudited Pro Forma Condensed Financial Information reflects
preliminary purchase accounting adjustments. Estimates relating to the fair
value of certain assets, liabilities and other items have been made as more
fully described in the Notes to the unaudited Pro Forma Condensed Financial
Information. While Search's management has made an initial appraisal and
evaluation of MSF's financial condition as of the date of execution of the
Merger Agreement, final purchase adjustments, which may include adjustments to
additional assets, liabilities and other items, will be made on the basis of
the final appraisals and evaluations of MSF's financial condition as of the
Effective Time and, therefore, will differ from those reflected in the
unaudited Pro Forma Condensed Financial Information. Any variations of the
Average Search Trading Price between $5.88 and $4.35, which would result in
variations of the Exchange Ratio within the range of 0.28 to 0.37, will not
have a significant impact upon the value of Search Common Stock to be issued to
the stockholders of MSF in the Merger. The unaudited Pro Forma Condensed
Financial Information assumes that the Exchange Ratio is 0.37. See "The
Merger--Terms of the Merger."
The unaudited Pro Forma Condensed Consolidated Statements of Income
and explanatory notes presented also show the impact on the historical results
of operation of Search of the acquisition of the assets and business of Dealers
Alliance Credit Corp. ("DACC") completed as of August 2, 1996 (the "DACC
Acquisition"). The DACC Acquisition is reflected net of pro forma adjustments
in the unaudited Pro Forma Condensed Consolidated Statements of Income as if it
had occurred on April 1, 1996. Because the DACC Acquisition was closed prior
to March 31, 1997, it is reflected in the Search historical balance sheet at
March 31, 1997.
The combined company expects to achieve certain benefits from the
Merger including operating cost savings and revenue enhancements. The pro
forma earnings, which do not reflect any direct costs, potential savings or
revenue enhancements which are expected to result from the consolidation of
operations of Search and MSF, are not indicative of the results of future
operations. No assurances can be given with respect to the ultimate level of
expense savings and revenue enhancements to be realized.
55
<PAGE> 63
SEARCH AND MSF
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
At March 31, 1997 At March 31, 1997
Historical Pro Forma
-------------------------- ---------------------------
Search MSF Adjustments Combined
------ --- ----------- --------
<S> <C> <C> <C> <C>
ASSETS
Gross contracts receivable $ 62,325 $ 97,972 (c) $160,297
Unearned interest (10,636) (25,169)(c) (35,805)
Amounts due under securitizations -- 7,580 (c) 7,580
-------- -------- --------
Net contracts receivables 51,689 80,383 132,072
Allowance for losses (5,854) (6,364) (12,218)
Net loan origination costs 1,473 -- 1,473
-------- -------- --------
Net contracts receivable - after allowance
for credit losses & other costs 47,308 74,019 121,327
Cash and cash equivalents 12,249 4,296 16,545
Vehicles held for resale 1,196 3,048 4,244
Property and equipment, net 1,608 1,497 3,105
Intangibles, net 6,252 -- $ 1,268 (a) 7,520
Other assets, net 910 8,155 -- 9,065
-------- -------- -------- --------
$ 69,523 $ 91,015 $ 1,268 $161,806
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS EQUITY:
Lines of credit $ 23,715 $ -- $ 23,715
Note payable 9,596 71,442 81,038
Accrued settlements 540 -- 540
Accounts payable and other liabilities 2,760 2,410 $ 750 (b) 5,919
Subordinated note payable 5,000 -- -- 5,000
Accrued interest 271 -- -- 271
Redeemable warrants 1,035 -- -- 1,035
-------- -------- -------- --------
Total liabilities 42,916 73,852 750 117,518
Stock repurchase commitment 2,078 -- 2,078
-------- -------- -------- --------
Convertible preferred stock 201 -- 201
Common stock 252 11 (11)(b) 292
39 (b)
Additional paid in capital 78,047 27,660 (27,660)(b) 95,690
17,642 (b)
Unrealized gain on securities
available for sale -- 450 (450)(b) --
Accumulated deficit (52,760) (8,684) 8,684 (b) (52,761)
Treasury stock -- (2,274) 2,274 (b) --
-------- -------- -------- --------
Total stockholders' equity 25,740 17,163 518 43,422
Notes receivable - stockholders (1,212) -- -- (1,212)
-------- -------- -------- --------
Net stockholders' equity 24,528 17,163 518 42,210
-------- -------- -------- --------
Total $ 69,523 $ 91,015 $ 1,268 $161,806
======== ======== ======== ========
</TABLE>
56
<PAGE> 64
- -----------------------
(a) The acquisition will be accounted for using the purchase method of
accounting, and, accordingly, the purchase price will be allocated to
the assets purchased and the liabilities assumed based upon the fair
values at the date of acquisition. The following table sets forth a
preliminary determination and allocation of the purchase price.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Merger exchange of shares and options (Per Share Amount
of $1.63 times 10,431,010 outstanding shares of MSF
Common Stock plus the value associated with assumed
options of $678,000) $17,681
Assumption of MSF debt 73,852
Transaction costs and expenses 750
-------
Pro forma purchase price $92,283
=======
The preliminary allocation of the pro forma purchase price is as
follows:
Net receivables after allowance and amounts due under
securitizations $74,019
Cash and cash equivalents 4,296
Inventory 3,048
Property, plant and equipment, net 1,497
Other assets 8,155
-------
Identifiable assets $91,015
=======
Cost in excess of fair value of net assets acquired $ 1,268
=======
</TABLE>
The allocation of the purchase price noted above is preliminary based
on information as of May 28, 1997. Any potential claims which may
arise from the Merger will be included in the final purchase price
allocation.
The excess of cost over the fair value of net assets acquired of
$1,268,000 includes both identifiable and unidentifiable intangible
assets. As of June 13, 1997, the final valuation of intangible assets
had not been made. Search will have the final values assigned upon
completion of its evaluations and due diligence process. The
identifiable intangible assets will be capitalized and amortized over
a period not to exceed the estimated useful lives of the assets.
Generally, Search believes that the values assigned will be allocated
to the existing dealer network and the customer list of MSF which
Search will acquire in the Merger. Search estimates that the average
term for amortizing these assets will be 10 years.
(b) The following table describes the adjustments to the pro forma balance
sheet:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Estimated accrued transaction costs and expenses $750
Elimination of MSF Common Stock (11)
Search Common Stock issued (3,859,000 x $0.01) 39
Elimination of MSF paid in capital (27,660)
Search paid in capital ($17,003,000 - $39,000 + $678,000) 17,642
Elimination of MSF unrealized gain on sale of securities (450)
Elimination of MSF accumulated deficit 8,684
Elimination of MSF treasury stock 2,274
--------
Cost in excess of fair value of net assets acquired $ 1,268
========
</TABLE>
(c) Gross contracts receivables include only installment contracts
receivable owned by MSF. All installment contracts receivable held
under MSF's Securitization Trusts are shown as net amounts due under
securitizations.
57
<PAGE> 65
SEARCH AND MSF
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal Year DACC Fiscal Year
Search Fiscal MSF Fiscal Ended Operations for Ended
Year Ended Year Ended March 31, 1997 Period Between March 31, 1997
March 31, 1997 Dec. 31, 1996 Pro Forma April 1, 1996 and Pro Forma
Historical Historical Adjustments Combined August 2, 1996 Combined
---------- ---------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest revenue $ 10,004 $ 14,909 $ 24,913 $ 2,240 $ 27,153
Other interest income -- 70 70 -- 70
Interest expense (2,306) (5,371) (7,677) (984) (8,661)
-------- --------- -------- ------- --------
Net interest income 7,698 9,608 17,306 1,256 18,562
Reduction of (provision for)
credit losses 7,017 (25,903) (18,886) (6,800) (25,686)
-------- --------- -------- ------- --------
Net interest income (loss)
after provision 14,715 (16,295) (1,580) (5,544) (7,124)
Other income -- 4,750 4,750 -- 4,750
General and administrative expense (13,392) (15,104) $(127)(d) (28,623) (1,946) (30,569)
Settlement expense (40) -- -- (40) (40)
-------- --------- ----- -------- ------- --------
Net income (loss) before dividends
and taxes 1,283 (26,649) (127) (25,493) (7,490) (32,983)
Income tax benefit -- 4,635 -- 4,635 -- 4,635
Preferred stock dividends (6,154) -- -- (6,154) -- (6,154)
-------- --------- ----- -------- ------- --------
Net income (loss) to common
stockholders $ (4,871) $ (22,014) $(127) $(27,012) $(7,490) $(34,502)
======== ========= ===== ======== ======= ========
Net income (loss) per share of
common stock $ (1.45) $ (3.75) $ (4.74)
======== ======== ========
Weighted average common and
common equivalent shares
outstanding 3,366 (a) 3,859 (b) 7,225 59 (c) 7,284
======== ===== ======== ======= ========
</TABLE>
- ------------------------
(a) Restated to reflect the 1-for-8 reverse stock split.
(b) Represents the estimated number of shares of Search Common Stock to be
issued in the Merger based on an assumed Exchange Ratio of 0.37.
(c) Represents adjustment to calculation of weighted average common and
common equivalent shares outstanding assuming shares issued in the
DACC acquisition were outstanding from April 1, 1996.
(d) Represents amortization of net intangible assets ($1,268,000) over a
10-year period.
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<PAGE> 66
DESCRIPTION OF SEARCH CAPITAL STOCK
As of the date of this Joint Proxy Statement/Prospectus, the
authorized capital stock of Search consists of 130,000,000 shares of Search
Common Stock and 60,000,000 shares of preferred stock, par value $0.01 per
share ("Search Authorized Preferred Stock") of Search. The following
description of the Search Common Stock and Search Authorized Preferred Stock is
a summary which does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Search
Restated Certificate of Incorporation. For a discussion of significant
differences between Search's Restated Certificate of Incorporation and Bylaws,
as amended and restated, and MSF's Restated Certificate of Incorporation, as
amended, and Amended and Restated Bylaws, see "Comparison of the Rights of
Holders of Search Common Stock and MSF Common Stock."
COMMON STOCK
As of the Search Record Date, there were 3,016,444 shares of Search
Common Stock outstanding. As of the same date, there were outstanding various
warrants and options to purchase a total of 1,176,899 shares of Common Stock.
In addition, the Company is obligated to issue 146,381 shares of Search Common
Stock pursuant to the settlement of certain litigation in April 1996. The
Company has committed to issue warrants and options to purchase an additional
750,000 shares of Search Common Stock.
Holders of shares of Search Common Stock are entitled to one vote per
outstanding share on all matters to be voted on by stockholders. There is no
cumulative voting for the election of directors. Subject to the preferences
that may be applicable to any outstanding Search Authorized Preferred Stock,
holders of Search Common Stock are entitled to receive ratably such dividends
as may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution, or winding up of Search,
the holders of Search Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Search Authorized Preferred Stock. Holders of Search Common Stock
have no preemptive rights and have no rights to convert their Search Common
Stock into any other securities. The outstanding shares of Search Common Stock
are, and the Search Common Stock to be outstanding immediately following
consummation of the Merger will be, validly issued, fully paid and
nonassessable.
SEARCH AUTHORIZED PREFERRED STOCK
The Search Board has the authority to cause Search to issue up to
60,000,000 shares of Search Authorized Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series, without any further vote or action by
the stockholders of Search. The issuance of Search Authorized Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
Search without further action by the stockholders of Search. The issuance of
Search Authorized Preferred Stock could decrease the amount of earnings and
assets available for distribution to the holders of Search Common Stock or
could adversely affect the rights and powers, including the voting power, of
the holders of the Search Common Stock. In certain circumstances, such issuance
could have the effect of decreasing the market price of the Search Common
Stock.
In accordance with this power, Search's Board of Directors has
designated and established (i) a series consisting of 400,000 shares designated
as the "12% Senior Convertible Preferred Stock" (the "Search 12% Preferred
Stock") and (ii) a series consisting of 30,000,000 shares designated as the
"9%/7% Convertible Preferred Stock" (the "Search 9%/7% Preferred Stock").
SEARCH 9%/7% PREFERRED STOCK
Dividends. Holders of Search 9%/7% Preferred Stock are entitled to
receive, out of funds legally available therefor, non-cumulative dividends at a
per annum rate of (i) $2.52 per share until March 31, 1999 ("End Date"), and
(ii) $1.96 per share after the End Date. Search is required to pay in cash the
dividends accruing prior to March 15, 1997 and thereafter to the extent
Delaware law or the terms and conditions of any loan agreement for a loan of
$5,000,000 or more do not limit or prevent the payment by Search of cash
dividends on Search 9%/7% Preferred Stock. To the extent that Search's right
to pay cash dividends is limited or prevented, Search may pay the dividends in
the form of Search Common Stock so long as the average closing trading price
for a share of Search Common Stock is $4.00 or greater during the 20 trading
day period ending five days prior to the payment of such dividend. The
dividends are payable on or about the 15th day of the month following the end
of each quarter to holders of record as of the last day of the calendar
quarter. Search may not make any
59
<PAGE> 67
dividend or distribution (other than a dividend payable in Search Common Stock
or other junior capital stock) on, or purchase or redeem, any Search Common
Stock or other capital stock that ranks junior to Search 9%/7% Preferred Stock
unless all accrued and unpaid dividends on Search 9%/7% Preferred Stock have
been paid or declared and set aside for payment.
Conversions. Holders of outstanding shares of Search 9%/7% Preferred
Stock may elect at any time to convert their shares into shares of Search
Common Stock. The conversion ratio is two shares of Search Common Stock for
each share of Search 9%/7% Preferred Stock. The conversion ratio will be
proportionately adjusted upon any stock dividend on Search Common Stock, any
stock split, reverse stock split, stock combination or reclassification of
Search Common Stock or any merger, consolidation or combination of Search with
any other entity.
Up to 50% of the outstanding shares of Search 9%/7% Preferred Stock
could be mandatorily converted into shares of Search Common Stock at the option
of Search, at a rate of two shares of Search Common Stock for one share of
Search 9%/7% Preferred Stock, if shares of Search Common Stock trade (i) at a
price of $34.00 per share or higher on any 20 trading days in a period of 30
consecutive trading days between March 16, 1998 and March 15, 1999 or (ii) at a
price of $28.00 per share or higher on any 20 trading days in a period of 30
consecutive trading days after March 15, 1999. Finally, on March 15, 2003, all
of the outstanding shares of Search 9%/7% Preferred Stock will be mandatorily
converted into shares of Search Common Stock. For the latter mandatory
conversion, each share of Search 9%/7% Preferred Stock will be convertible into
a number of shares of Search Common Stock equal to the lesser of (y) three or
(z) the result of dividing the liquidation preference per share for Search
9%/7% Preferred Stock by the market price of Search Common Stock as reported at
the close of business on March 15, 2003. For any mandatory conversion, holders
of the converted Search 9%/7% Preferred Stock would also be entitled to receive
any accrued and unpaid dividends on their converted shares.
Liquidation Rights. If Search is liquidated, the holders of Search
9%/7% Preferred Stock are entitled to be paid $28.00 per share plus all accrued
and unpaid dividends thereon before any distribution or payment is made to the
holders of Search Common Stock or any other capital stock of Search ranking
junior to Search 9%/7% Preferred Stock. If, upon any liquidation of Search,
the amounts payable with respect to Search 9%/7% Preferred Stock and any other
stock of Search ranking on a parity with Search 9%/7% Preferred Stock cannot be
paid in full, the holders of such stock share ratably in any such distribution
of assets in proportion to the respective full preferential amounts to which
they would otherwise be entitled. After payment of the full preferential
amount to which the holders of Search 9%/7% Preferred Stock would be entitled
upon any liquidation, dissolution or winding up, they would have no right or
claim to any of the remaining assets of Search.
Voting Rights. Each share of Search 9%/7% Preferred Stock has the
same voting attributes and characteristics as do the shares of Search Common
Stock, which is one vote per share. If Search defaults in the payment of any
four consecutive quarterly dividends on outstanding Search 9%/7% Preferred
Stock, the holders of outstanding Search 9%/7% Preferred Stock would be
automatically entitled to an additional vote per share and given the right to
elect immediately at an emergency meeting of shareholders, which Search must
hold within thirty days after any such failure, such additional directors as
equals two-thirds of Search's Board of Directors determined after such
election.
The affirmative vote or consent of the holders of at least 66-2/3% of
all outstanding shares of Search 9%/7% Preferred Stock, voting as a separate
class, is required (i) to amend, alter or repeal any provision of the
Certificate of Designations establishing the Search 9%/7% Preferred Stock to
adversely affect the relative rights, preferences, qualifications, limitations
or restrictions of the Search 9%/7% Preferred Stock or (ii) to effect any
reclassification of the Search 9%/7% Preferred Stock. The affirmative vote or
consent of the holders of at least 50% of all outstanding shares of Search
9%/7% Preferred Stock, voting as a separate class, is required to approve (x)
any merger of Search with another company when Search's Board members do not
constitute a majority of the board of directors of the surviving company or (y)
any sale of more than 50% of Search's assets. In addition, the Delaware Law
provides that the vote of the holders of a majority of the outstanding shares
of any series of Search Authorized Preferred Stock, voting separately as a
class, is required in order to (i) increase or decrease the par value of such
series of shares or (ii) change the powers, preferences, or special rights of
such series of shares so as to affect them adversely.
Ranking. Search 9%/7% Preferred Stock ranks on a parity with the
Search 12% Preferred Stock and senior to Search Common Stock as to rights to
dividends and liquidation preferences.
Subsequent Issuances of Search Authorized Preferred Stock. Search is
prohibited from issuing Search Authorized Preferred Stock in the future that is
pari passu with Search 9%/7% Preferred Stock unless at the time of such
issuance all dividends due on Search 9%/7% Preferred Stock have been paid in
full. Search is also prohibited from issuing convertible
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Search Authorized Preferred Stock which is senior in rights to Search 9%/7%
Preferred Stock except that such convertible Search Authorized Preferred Stock
may carry a then-current market interest rate, which may be higher or lower
than that of Search 9%/7% Preferred Stock. Search is also prohibited from
issuing preferred or common stock or warrants or any other form of security to
any of its affiliates for consideration that does not equal or exceed the fair
market value of such security, as determined by an independent third party.
Search may, nevertheless, issue options or warrants to new or existing
directors or management if such options or warrants are approved by the
Compensation Committee. Search may also issue shares of Search Common Stock
upon the exercise of outstanding warrants or options but may not amend or
modify such warrants or options without the approval of the Compensation
Committee. If Search issues any security for consideration less than its fair
market value, the number of shares of Search 9%/7% Preferred Stock will be
immediately and appropriately adjusted, and the conversion price of Search
9%/7% Preferred Stock will be adjusted downward, to take into account the
dilution in value of the security holdings of former creditors of its former
bankrupt Subsidiaries caused by such below fair market issuance of Search's
securities.
Other Rights. Search 9%/7% Preferred Stock is not subject to
redemption by Search or at the election of the holders thereof. Search 9%/7%
Preferred Stock does not have any preemptive or sinking fund rights.
SEARCH 12% PREFERRED STOCK
Dividends. Holders of the Search 12% Preferred Stock are entitled to
receive, when and as declared by the Board of Directors of Search out of funds
legally available therefor, cash dividends at a per annum rate of $4.80 per
share payable quarterly on the first day of January, April, July and October of
each year to holders of record as of a date fixed by the Board of Directors of
Search which is not more than 60 days prior to the date the dividend is paid.
Unpaid dividends on the Search 12% Preferred Stock cumulate and must be paid or
set aside for payment before any distribution, in cash, stock or other property
(other than in Search Common Stock), is made to holders of Search Common Stock
or any other stock ranking junior to the Search 12% Preferred Stock.
Liquidation Rights. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of Search, the holders of the Search 12%
Preferred Stock are entitled to be paid $40.00 per share plus all accrued and
unpaid dividends thereon before any distribution or payment is made to the
holders of Search Common Stock or any other capital stock of Search ranking
junior to the Search 12% Preferred Stock. If, upon any liquidation,
dissolution or winding up of Search, the amounts payable with respect to the
Search 12% Preferred Stock and any other capital stock of Search ranking on a
parity with the Search 12% Preferred Stock cannot be paid in full, the holders
of such stock will share ratably in any such distribution of assets in
proportion to the respective full preferential amounts to which they would
otherwise be entitled. After payment of the full preferential amount to which
the holders of Search's 12% Preferred Stock are entitled upon any liquidation,
dissolution or winding up, they will have no right or claim to any of the
remaining assets of Search. The merger or consolidation of Search into or with
any other corporation or the merger of any other corporation into it, or the
sale, lease or conveyance of all or substantially all of the property or
business of Search, will not be deemed to be a dissolution, liquidation, or
winding up, voluntary or involuntary.
Optional Redemption by Search. At any time following the occurrence
of a Triggering Event, the Search 12% Preferred Stock is redeemable, in whole
or in part, at the option of the Company at a redemption price equal to $40.00
per share plus all accrued and unpaid dividends thereon. A "Triggering Event"
will occur in the event that there shall have been a period of 90 consecutive
days for which the average of any of the following prices exceeds $48.00 per
share: (i) the average of the high bid and low asked prices for the Search
Common Stock if the Search Common Stock is traded over-the-counter, (ii) the
closing trading prices for the Search Common Stock if traded on NASDAQ, or
(iii) the reported closing price for the Search Common Stock if traded on any
national or regional stock exchange. Notice of redemption will be sent to each
holder of the Search 12% Preferred Stock to be redeemed at the address shown on
the share transfer records of Search not less than 30 nor more than 60 days
prior to the redemption date, which shall be specified therein. If less than
all the outstanding shares of Search 12% Preferred Stock are to be redeemed,
Search must redeem such shares either by lot or pro rata based on the
respective numbers of shares held by the holders of the Search 12% Preferred
Stock.
Voting Rights. Holders of the Search 12% Preferred Stock have one
vote for each share held, and may generally vote along with the holders of
Search Common Stock and not as a separate class upon each and any matter
submitted to a vote of the shareholders of Search. In addition, the Delaware
Law provides that the vote of the holders of a majority of the outstanding
shares of any series of Search's preferred stock, voting separately as a class,
is required in order to: (a) increase or decrease the par value of such series
of shares, or (b) change the powers, preferences, or special rights of such
series of shares so as to affect them adversely. If Search is in default in
the payment of six full quarterly dividends (whether or not
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consecutive) on any outstanding Search 12% Preferred Stock, whether or not
earned or declared, the number of directors constituting Search's Board of
Directors will be increased by two and the holders of all outstanding Search
12% Preferred Stock, voting separately as a class, will be entitled to elect
the additional two directors until all dividends in arrears have been paid, at
which time the term of office of the two additional directors will end and the
number of directors constituting the Search Board will be reduced by two.
Conversion Rights. Holders of the Search 12% Preferred Stock may
elect at any time to convert their preferred shares into Search Common Stock.
The conversion ratio is one share of Search Common Stock for each share of
Search 12% Preferred Stock. This conversion ratio is subject to adjustment
upon any share dividend on the Search Common Stock, any stock split, stock
combination or reclassification of the Search Common Stock or any merger,
consolidation or combination of Search with any other corporation or
corporations. In addition, all of the outstanding shares of Search 12%
Preferred Stock may be mandatorily converted into shares of Search Common Stock
at the option of Search following the occurrence of a Triggering Event.
Other Rights. The Search 12% Preferred Stock has no preemptive or
sinking fund rights.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Search is subject to the provisions of Section 203 of the Delaware
Law. This statute generally prohibits, under certain circumstances, a Delaware
corporation whose stock is publicly traded, from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation or bylaws not to be governed by this Delaware law (Search has not
made such an election), (ii) prior to the time the stockholder became an
interested stockholder, the board of directors approved either the business
combination or the transaction which resulted in the person becoming an
interested stockholder, (iii) the stockholder owned at least 85% of the
outstanding voting stock of the corporation (excluding shares held by directors
who were also officers or held in certain employee stock plans) upon
consummation of the transaction which resulted in a stockholder becoming an
interested stockholder or (iv) the business combination was approved by the
board of directors and by two-thirds of the outstanding voting stock of the
corporation (excluding shares held by the interested stockholder). An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 15% or
more of the corporation's outstanding voting stock. The term "business
combination" is defined generally to include mergers, consolidations, stock
sales, asset based transactions, and other transactions resulting in a
financial benefit to the interested stockholder.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc., Denver, Colorado serves as
the transfer agent and registrar for Search's Common Stock.
COMPARISON OF THE RIGHTS OF HOLDERS OF
SEARCH COMMON STOCK AND MSF COMMON STOCK
As a consequence of the Merger, the stockholders of MSF will become
stockholders of Search. The following is a summary of material differences
between the rights of holders of Search Common Stock and the rights of holders
of MSF Common Stock. As each of Search and MSF is organized under the laws of
Delaware, these differences arise from various provisions of Search's Restated
Certificate of Incorporation, as amended ("Search's Certificate of
Incorporation"), and Bylaws ("Search's Bylaws") and MSF's Second Amended and
Restated Certificate of Incorporation ("MSF's Certificate of Incorporation"),
and Amended and Restated Bylaws ("MSF's Bylaws").
The following summary does not purport to be a complete statement of
the rights of MSF's stockholders under MSF's Certificate of Incorporation and
MSF's Bylaws as compared with the rights of Search's stockholders under
Search's Certificate of Incorporation and Search's Bylaws, or a complete
description of the specific provisions referred to herein. The summary is
qualified in its entirety by reference to the governing corporate instruments,
including the aforementioned instruments, of MSF and Search.
Stockholder Approval of Certain Business Transactions. MSF's
Certificate of Incorporation provides that the affirmative vote both of (i) the
holders of shares constituting 66-2/3% of the voting power of MSF and (ii) the
holders of the majority of MSF Common Stock at the time outstanding (who shall
vote separately as a class) shall be required to approve
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any merger or consolidation of MSF or a subsidiary thereof with or into any
beneficial owner of more than 10% of MSF's outstanding voting stock (an
"Interested Stockholder"), certain dispositions of assets to Interested
Stockholders, certain issuances or transfers by MSF or a subsidiary thereof of
securities of such corporations to Interested Stockholders, or certain other
extraordinary transactions by MSF (a "Business Transaction"). Any such
Business Transaction need not be approved by holders of shares constituting
66-2/3% of the voting power of MSF if: (1) two-thirds of MSF's Board of
Directors approved the Business Transaction or (2) certain conditions of the
Business Transaction have been met relating to, among other things, the value
of the consideration provided for such Business Transaction, the timing of such
Business Transaction, the payment of dividends on MSF's capital stock and a
proxy or information statement is mailed to the MSF security holders in
connection with the Business Transaction.
Neither Search's Certificate of Incorporation nor Search's Bylaws
contain similar provisions. However, the Search 12% Preferred Stock and Search
9%/7% Preferred Stock have special voting rights with respect to certain
extraordinary corporate transactions. See "Description of Search Capital
Stock."
Action of Stockholders by Written Consent. Pursuant to Search's
Bylaws, any action which may be taken at a meeting of Search's stockholders may
be taken by written consent of the holders of Search's outstanding capital
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares of such stock
entitled to vote thereon were present and voted.
MSF's Certificate of Incorporation provides that no action shall be
taken by MSF's stockholders except at an annual or special meeting of
stockholders and any action required or permitted to be taken at such meeting
may be taken by written consent of the holders of outstanding stock having not
less than 80% of the votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote were present and
voted.
Special Meetings of Stockholders. Pursuant to Search's Bylaws, a
special meeting of stockholders of Search may be called at any time by the
Chairman of the Board, the President, the Board of Directors or at the request
in writing of stockholders of Search holding not less than one-half of the
votes that all stockholders are entitled to cast at a particular meeting.
MSF's Bylaws provide that a special meeting of the stockholders of MSF may be
called by the Board of Directors pursuant to a resolution approved by a
majority of the entire Board of Directors, the Chairman of the Board, the
President, the Vice Chairman and Chief Executive Officer or, by the holders of
not less than 25% of the votes at that meeting.
Quorum of Stockholders. The bylaws of Search provide that 50% of the
outstanding shares entitled to vote constitutes a quorum for the transaction of
business at any meeting of Search's stockholders. The bylaws of MSF provide
that one-third of the outstanding shares entitled to vote constitute a quorum
for the transaction of business at any meeting of MSF's stockholders.
Preferred Stock. Search is authorized to issue 60,000,000 shares of
preferred stock in one or more series, with the Search Board having the
authority to designate the powers, preferences and authorized number of shares
of each series. Search has designated and established two series of preferred
stock, the first consisting of 400,000 shares of Search 12% Preferred Stock and
the second consisting of 30,000,000 shares of Search 9%/7% Preferred Stock.
See "Description of Search Capital Stock." To the extent required by 11 U.S.C.
Section 1123(a)(6), Search's Certificate of Incorporation prohibits the
issuance of any non-voting capital stock.
MSF is authorized to issue 5,000,000 shares of preferred stock in one
or more series, with the MSF Board having the authority to designate the
powers, preferences and authorized number of shares of each such series. The
MSF Board has not elected to designate any series of preferred stock.
Liability of Management; Indemnification. Both Search's Bylaws and
MSF's Bylaws provide for the indemnification of directors and officers of the
respective corporations to the fullest extent authorized by Delaware Law.
MSF's Bylaws permit MSF to extend this right of indemnification to all
employees and agents of MSF. Search's Bylaws provide that this right to
indemnification may be extended to any authorized representative of Search if
the Search Board so chooses. However, under Search's Bylaws, the Search Board
may elect, by a majority of directors present at any meeting of the Search
Board, to exclude any person from indemnification.
Amendments to Certificates of Incorporation. MSF's Certificate of
Incorporation requires the affirmative vote of at least two-thirds of the
outstanding capital stock of MSF entitled to vote upon the election of
directors to alter, amend or repeal MSF's Certificate of Incorporation.
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Search's Certificate of Incorporation may be amended in accordance
with Delaware law, subject to the special voting rights of the Search 12%
Preferred Stock and Search 9%/7% Preferred Stock. See "Description of Search
Capital Stock."
Amendments to Bylaws. Pursuant to MSF's Bylaws and Certificate of
Incorporation, MSF's Bylaws may be adopted, altered, amended or repealed by MSF
stockholders at any meeting of MSF stockholders, by the affirmative vote of
holders of note less than two-thirds of the outstanding shares of stock
entitled to vote on the election of directors. Search's Bylaws and Certificate
of Incorporation do not have similar provisions, and according to the Delaware
Law, Search's Bylaws may be adopted, amended, altered or repealed by the
majority vote of the Search Capital Stock represented and entitled to vote at a
meeting of Search's stockholders.
SEARCH FINANCIAL SERVICES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Search and its subsidiaries (the "Company") are involved in the
purchase, origination and servicing of used motor vehicle and other consumer
receivables. The Company's motor vehicle receivables are secured by used
automobiles and light trucks which typically have been purchased by consumers
with substandard credit histories at retail prices generally ranging from
$5,000 to $15,000. The Company generally purchases these receivables from a
network of unaffiliated new and used automobile dealers (the "Dealer Network").
The members of the Dealer Network generate the receivables and offer them for
sale on a non-exclusive basis to the Company. The Company's acquisition in
August 1996 of the assets of Dealers Alliance Credit Corp. ("DACC") enhanced
the Dealer Network by providing new dealers as well as establishing a presence
for the Company in the southeastern United States non-prime motor vehicle
finance market. The Company from time to time makes bulk acquisitions of motor
vehicle receivables. During fiscal 1997, the Company began administering its
receivables purchasing, servicing and management activities utilizing a
receivables management system (the "Norwest System") developed by Norwest
Financial Information Systems Group, Inc. The Company uses the Norwest System
in conjunction with the Company's proprietary Auto Note Management System
software. The Company commenced its used motor vehicle receivables purchasing
and servicing business in 1991.
The Company opened its first non-automobile consumer finance office on
November 1, 1996 in Baton Rouge, Louisiana and, at March 31, 1997, had
established a total of eight non-auto consumer branch offices in Texas,
Oklahoma, Louisiana, Tennessee and Puerto Rico. Non-auto consumer loans
include retail sales finance loans, second mortgage real estate loans, and
other consumer loans that may be secured or unsecured. The Company expects to
continue its diversification and expansion in the consumer finance area by
establishing 10 to 12 more offices during the fiscal year ending March 31,
1998.
Prior to November 1994, the Company primarily financed the purchase of
used motor vehicle receivables through the private and public sale of
interest-bearing notes (the "Notes") issued by wholly-owned subsidiaries
organized specifically for this purpose (the "Fund Subsidiaries") and through
reinvestment of operating cash flow. Until March 1996, the purchasing of
receivables for the Fund Subsidiaries was governed by trust indentures (the
"Trust Indentures") which restricted management's ability to alter its
receivables purchasing criteria. In March 1996, following confirmation of the
Fund Subsidiaries' plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code, the Notes and the indebtedness represented by the Notes,
together with the related Trust Indentures, were canceled. At that time, the
Company implemented its new receivables purchasing program (the "Preferred
Program"). The Preferred Program continues to focus on the purchasing of used
motor vehicle receivables whose obligors have non-prime credit histories, but
places more emphasis on job, income and residence stability and re-established
positive credit of the obligor than the Company's earlier program.
The Company finances purchases under the Preferred Program with
internally generated funds and other funds borrowed at interest rates lower
than what were previously incurred. The Company anticipates lower repossession
rates and higher repossession sale proceeds as a result of the stricter credit
criteria of the Preferred Program. If the Company is unable to select the
proper dealers, purchase contracts with obligors who meet its credit criteria,
and realize collection proceeds in adequate amounts, the repossession rate and
sale proceeds could be higher and lower, respectively, than anticipated. The
terms of receivables under the Preferred Program generally range from 30
months to 60 months.
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Results of Operations
Comparison of Twelve-Month Period Ended March 31, 1997 to the
Six-Month Period Ended March 31, 1996
Contract Purchasing Activity. The Company purchased 1,284 contracts
under its new Preferred Program in non- bulk transactions during the twelve
months ended March 31, 1997, compared to 1,169 contracts purchased under its
prior program in non-bulk transactions during the six months ended March 31,
1996. The cost of these contract purchases for the twelve-month period ended
March 31, 1997 was $13,395,000 ($10,424 per contract) compared to $5,471,000
($4,680 per contract) for the six-month period ended March 31, 1996. The
Company purchased 2,603 contracts in bulk purchase transactions at a cost of
$24,966,000 ($9,591 per contract) during the twelve months ended March 31,
1997, compared to 41 contracts purchased in bulk purchase transactions at a
cost of $69,000 ($1,683 per contract) during the six months ended March 31,
1996. The increase in the per contract cost of contracts purchased in non-bulk
transactions of $5,752 under the Preferred Program is generally due to newer
and lower-mileage vehicle, higher credit quality customers and higher wholesale
and retail values per vehicle. The increase in the cost of contracts purchased
in bulk purchase transactions of $7,908 is due to the Company purchasing
contracts that involve higher credit quality obligors or higher value vehicle
collateral than the contracts previously purchased by the Company, or both.
The Company expects to continue to see an increase in its per contract cost
under its Preferred Program when compared to purchases under the prior program.
The Company's acquisitions of assets from DACC and U.S. Lending Corp. ("USLC")
provided the Company with approximately 4,150 contracts with aggregate balances
of $28,100,000, or an average balance of $6,771 per contract.
Financial Results. Interest revenue increased to $10,004,000 for the
twelve months ended March 31, 1997 from $3,541,000 for the six months ended
March 31, 1996. Average interest earning net receivables for the six-month
period ended March 31, 1996 were $34,790,000, compared to average interest
earning net receivables of $41,065,000 for the twelve months ended March 31,
1997. The Company's acquisitions during the year increased the company's
average interest earning net receivables which in turn increased the Company's
revenue. Consummation of the acquisition of MSF will provide the Company with
a substantially larger receivable portfolio which will generate interest
revenue and a portfolio of securitized assets for which the Company expects to
receive servicing fees. The acquisitions completed during fiscal 1997 provided
over 70% of the growth in the Company's receivables portfolio.
Interest expense increased from $1,306,000 for the six months ended
March 31, 1996 to $2,306,000 for the twelve months ended March 31, 1997. The
six months ended March 31, 1996 included interest expense related to a
terminated line of credit and the amortization of offering costs on Fund
Subsidiary debt. The twelve months ended March 31, 1997 included interest
expense related to the Company's current line of credit and term note.
Interest expense is expected to increase as the Company enters into additional
financing transactions to expand its receivables portfolio. The outstanding
principal balance of the indebtedness assumed by the Company in connection with
its acquisition of the assets of DACC (the "DACC Debt"), which is required to
be repaid by August 1997, averaged $13,078,000 for the portion of the
twelve-month period ended March 31, 1997 following the acquisition. Interest
expense includes the accretion in the value of the warrants issued in
connection with the fund Subsidiaries plan of reorganization and the
acquisition of the assets of DACC and USLC. The outstanding principal balance
of the Company's line of credit with Hibernia National Bank averaged
$19,395,000 during the twelve-month period ended March 31, 1997.
The provision for credit losses decreased from $4,982,000 for the six
months ended March 31, 1996 to a reduction of prior provisions for credit
losses of $7,017,000 for the twelve months ended March 31, 1997, due primarily
to increased recoveries from previously charged-off accounts and reduced
provision requirements from the Company's portfolio of lower credit quality
loans. During the twelve-month period ended March 31, 1997, the Company
recovered $2,448,000 of proceeds from accounts previously charged off compared
to recoveries of $2,296,000 for the six months ended March 31, 1996. The
Company's remote collections facilities, which were opened during the second
calendar quarter of 1995, have been successful in contacting and collecting
chronically delinquent and charged-off accounts and locating accounts which had
never previously paid. Additionally, the acquisitions of assets of DACC and
USLC provided the Company with additional deficiency balances to collect, of
which the Company collected approximately $425,000 during the fiscal year ended
March 31, 1997. In the future, management anticipates lower recoveries of
prior credit losses as these collections decrease and the portion of the
Company's portfolio represented by non-auto consumer loans, which traditionally
have lower charge off rates, increases. During the twelve months ended March
31, 1997, the Company received a settlement of $245,000 from a car dealer for
deficiencies on sales of repossessed cars purchased from that dealer. During
the twelve months ended March 31, 1997, the Company reduced its allowance for
loan losses by $8,791,000, $2,448,000 of which was due to recovery proceeds and
the remaining $6,343,000 of which was a non-cash reduction to reflect lower
than anticipated losses from loans purchased under the Company's prior
purchasing program. The Company expects to have lesser
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reductions in the future due to lower cash recoveries on previously charged-off
accounts and a receivable base which is more predictable as to loss rates and
collectibility. During the twelve months ended March 31, 1997, the Company
increased its allowance for loan losses by $1,774,000 to reflect an increase in
anticipated losses from loans acquired in bulk purchase transactions and from
DACC and USLC.
The Company's annual chargeoffs, expressed as a percent of average net
receivables decreased from 36% for the six-month period ended March 31, 1996 to
30% for the year ended March 31, 1997. The decrease is attributable primarily
to the significant change in the Company's receivable portfolio from March 31,
1996 to March 31, 1997. As of March 31, 1996, all of the Company's loans were
of a lower credit quality than loans being purchased under the Preferred
Program. As of March 31, 1997, these lower credit quality loans had decreased
to less than 15% of the total outstanding loans. New originations under the
Preferred Program and bulk purchases of receivables offset the liquidation of
the old, lower credit quality loans and represent approximately 85% of the
total outstanding loans as of March 31, 1997. The Company's bulk acquisitions
resulted in provision requirements of over $1,000,000 during the year ended
March 31, 1997.
The allowance for credit losses as a percent of net outstanding
receivables has decreased from 44% as of March 31, 1996 to 11% as of March 31,
1997. The decrease is primarily attributable to the significant change in the
Company's loan portfolio from March 31, 1996 to March 31, 1997. All the
Company's loans as of March 31, 1996 were purchased under its prior purchasing
program for lower credit quality loans. As of March 31, 1997, only
approximately 15% of the Company's portfolio was represented by those loans.
The remainder of the portfolio was compiled of new originations under the
Company's Preferred Program and the receivables acquired in bulk purchases from
Eagle and MSF and the receivables acquired in the acquisitions of DACC and
USLC.
General and administrative expenses increased from $8,098,000 for the
six months ended March 31, 1996 to $13,432,000 for the twelve months ended
March 31, 1997. Expenses associated with processing repossessions and
personnel costs have been reduced on an annualized basis, and confirmation of
the Fund Subsidiaries' plan of reorganization has substantially eliminated the
professional fees related to the reorganization. The Company closed all three
of its retail lots and its related make-ready facility, which were used to
process repossessions, by March 31, 1996. The additional offices the Company
expects to open for its consumer lending operations will increase the Company's
occupancy and personnel costs. The Company plans to open between 10 and 12
offices during fiscal 1998. Most of these offices will be staffed with three
to four personnel. It is anticipated that these offices will be located in the
southwestern United States.
During the six months ended March 31, 1996, the Company recorded a
gain of $8,709,000 related to the extinguishment of debt of its Fund
Subsidiaries and $535,000 in accruals primarily associated with the Bowe
Action. During the year ended March 31, 1997, the Company accrued $40,000 for
settlement of certain claims.
Preferred stock dividends increased from $327,000 for the six months
ended March 31, 1996 to $6,154,000 for the twelve months ended March 31, 1997.
The increase of $5,827,000 is related to the issuance of 1,879,000 shares of
the Company's 9%/7% convertible preferred stock upon confirmation of the Fund
Subsidiaries' plan of reorganization, 319,000 shares of 9%/7% convertible
preferred stock in connection with the acquisition of assets of DACC and
272,000 shares of 9%/7% convertible preferred stock in connection with the
acquisition of assets of USLC.
The Company does not have a provision for income tax expenses for the
year ended March 31, 1997 as its income is completely offset by the utilization
of its net operating loss carry-forwards of approximately $54,000,000.
Comparison of the Period Ended March 31, 1996 to the Six Months Ended
March 31, 1995
The Company changed its fiscal year from September 30 to March 31 in
order to start a new fiscal year reflecting the Fund Subsidiaries
reorganization which was effective March 15, 1995. Therefore, the comparison
below compares the six months ended March 31, 1996 to the comparable six months
ended March 31, 1995.
Contract Purchasing Activity. The Company purchased 1,169 contracts,
at a cost of $5,471,000, during the six months ending March 31, 1996 compared
to 2,417 contracts, at a cost of $10,670,000, during the six months ending
March 31, 1995. The decrease in contracts purchased of 1,248, or 52%, is a
result of a decrease in the amount of funds available for reinvestment in
contracts due to more Fund Subsidiaries being restricted from purchasing
contracts in 1996 than during the six-month period in 1995. Virtually all of
the contracts purchased during both periods were purchased under the criteria
contained in the Trust Indenture for each Fund Subsidiary. Effective March 15,
1996, the Trust Indentures were canceled and all new originations are now under
the Preferred Program.
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<PAGE> 74
Financial Results. For the six months ended March 31, 1996, the
Company had interest revenue of $3,541,000 compared to $8,694,000 for the six
months ended March 31, 1995. The decrease in interest revenue of $5,153,000,
or 59%, is due to a decrease in average net interest earning receivables from
$61,100,000, for the six months ended March 31, 1995, to $34,790,000, for the
six months ended March 31, 1996.
Interest expense decreased $5,131,000, or 80%, from $6,437,000 for the
six months ended March 31, 1995 to $1,306,000 for the six months ended March
31, 1996. The decrease in interest expense is due primarily to termination of
interest accrual on the debt of the Fund Subsidiaries as of the date of filing
for Reorganization, August 15, 1995, or the debt's maturity date, whichever
occurred first. See Note 2 of the Notes to Search's Consolidated Financial
Statements included in Annex E. The decrease in interest expense was partially
offset by the increase in interest expense associated with outstanding lines of
credit.
The provision for credit losses decreased $355,000, or 7%, from
$5,337,000 for the six months ended March 31, 1995, to $4,982,000 for the six
months ended March 31, 1996. The decrease in the provision for loan losses is
due to adequate provisions for loan losses being provided in prior periods.
General and administrative expenses increased $877,000 or 12% from
$7,221,000 to $8,098,000. The increase in general and administrative expense
is due to higher costs associated with repossessing vehicles and legal and
administrative costs associated with effecting the Fund Subsidiaries plan of
reorganization.
Net loss for the six months ended March 31, 1996 was $2,998,000
compared to $10,421,000 for the six months ended March 31, 1995. The decrease
in net loss is due primarily to $8,709,000 of gain on extraordinary items
related to extinguishment of the debt of the Fund Subsidiaries. See Note 2 of
Notes to Search's Consolidated Financial Statements included in Annex E.
Liquidity and Capital Resources
General
The Company will be required to raise substantial amounts of cash to
support its operating, financing and investing activities. Currently, the
Company's principal cash requirements are to purchase receivables and originate
loans and to pay operating expenses, preferred stock dividends and interest and
principal on its indebtedness. The Company will be required to pay in full the
outstanding balance of the DACC Debt on August 2, 1997. If the Merger is
completed, the Company will be required to reduce certain revolving credit
indebtedness owed by MSF, which was $68 million at April 30, 1997, by $25
million within six months and to repay this debt in full within one year after
the Merger. Additionally, the Company was required to repurchase stock from a
former director of the Company and a trust established by the director for
$2,078,000 on May 8, 1997. The Company has a significant amount of cash and
cash equivalents as of March 31, 1997, but this will not be sufficient to repay
the DACC Debt, cover negative operating cash flows which the Company is
experiencing, meet annual dividend requirements, currently over $6,000,000 for
the fiscal year ending March 31, 1988, and pay the debts of MSF to the extent
required if the Merger is completed. Additionally, the Company anticipates
using cash on hand to fund the cash portion of any settlement of the Bowe
action that may be finalized. The Company intends to invest a portion of its
cash into non-prime automobile and consumer receivables. Additional liquidity
will be necessary to support growth of the Company's loan portfolios and
operations.
Because the used motor vehicle and consumer finance industries require
the purchase, origination and carrying of receivables, a relatively high ratio
of borrowings to net worth is customary and will be an important element in the
Company's operations. The Company will seek to leverage its net worth and any
subordinated debt in the future to enhance its liquidity. Additionally, the
Company will endeavor to maximize its liquidity by diversifying its sources of
funds to include (a) cash from operations, (b) the securitization of
receivables, (c) lines of credit from commercial banks and other financing
sources, and (d) subordinated debt offerings.
The Company has commenced a private offering to accredited investors
of up to $35,000,000 of seven-year senior subordinated notes with warrants to
purchase shares of Search Common Stock. A portion of the proceeds would be
used to repay the outstanding balance of the DACC Debt and the Company's
outstanding $5,000,000 of subordinated debt. The Company has also signed a
letter of intent with respect to a $100 million, two-year revolving warehouse
line of credit facility. The letter of intent is subject to certain
conditions, including negotiation and execution of definitive facility
documents and completion of due diligence by the lender. This lender has
agreed to loan the Company up to $4,000,000 that would be used
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to pay operating expenses, repay a portion of the DACC Debt or fund
acquisitions. The loan is subject to completion of definitive loan
documentation. Additionally, the Company is discussing with several commercial
lenders, including banks and finance companies, arrangements for them to
provide additional financing which would be utilized for purchases of
receivables and/or operating entities. The Company is also seeking additional
participants to expand its $25,000,000 line of credit with Hibernia National
Bank. As of March 31, 1997, approximately $23,715,000 was outstanding under
this line of credit.
Search has entered into the Merger Agreement with MSF pursuant to
which MSF will become a wholly-owned subsidiary of Search (the "Merger").
Pursuant to the Merger Agreement, each outstanding share of common stock of MSF
will be converted at the effective time of the Merger into the right to receive
a fraction (the "Exchange Ratio") of a share of Search Common Stock determined
by reference to the average price per share of the Search Common Stock for the
10-day trading period ending on the fifth business day prior to the special
meeting of stockholders of MSF at which the Merger Agreement will be considered
for adoption (the "Average Trading Price"). The Exchange Ratio will equal
$2.00 (the "Per Share Amount") divided by the Average Trading Price, subject to
a maximum of .46 and a minimum of .34. The Per Share Amount and the maximum
and minimum Exchange Ratios are subject to a downward adjustment in certain
circumstances.
The Merger is subject to customary conditions, including stockholder
approval and the finalization of acceptable arrangements with MSF's lenders.
Approval of the Merger by MSF's stockholders requires the affirmative vote of a
majority of the outstanding shares of MSF Common Stock. Pursuant to a
Stockholders Agreement dated as of February 7, 1997, MSF's principal
stockholders, which together own approximately 77% of MSF's outstanding common
stock, have agreed to vote their shares in favor of the Merger.
If the Merger Agreement is terminated under certain conditions, MSF
may be obligated to pay Search a fee of $700,000. Further, the Merger
Agreement calls for a monthly fee of $100,000 payable to MSF to Search for
operational assistance to MSF prior to consummation of the Merger. Such
operational assistance fee is to be applied against the termination fee
described above, if applicable. If the Merger Agreement is terminated under
other conditions, Search may be obligated to pay MSF a fee of $250,000. For
the year ended December 31, 1996, MSF reported interest income of $14,909,000,
a net loss of $22,014,000 and a net loss per share of $2.11 At March 31, 1997,
MSF had gross contracts receivable of approximately $98 million and an
additional approximately $33 million of gross contracts receivable that it
serviced.
The Company intends to evaluate and pursue acquisition opportunities
that the Company anticipates will enable it to grow its receivable base. The
Company will consider all forms of financing available to it with respect to
any particular acquisition, including additional borrowings and sales or
exchanges of equity or debt securities. The Company's ability to acquire
additional portfolios and companies is dependent on its obtaining additional
financing.
Principal Source and Uses of Cash in Operating Activities
The principal source of cash from operating activities is provided by
net interest income. The principal uses of cash in operations are for general
and administrative expenses, non-recurring expenses and payments relating to
previously accrued expenses.
Comparison of Operating Cash Flows for the Twelve Months Ended March
31, 1997 to the Six Months Ended March 31, 1996 and for the Six Months
Ended March 31, 1996 to the Twelve Months Ended September 30, 1995
During the twelve months ended March 31, 1997, the Company utilized
$5,947,000 of cash in its operations compared to $4,141,000 of cash being
utilized in operations during the six months ended March 31, 1996. The
increase of $1,806,000 is primarily due to a decrease in accounts payable and
accrued expenses of $5,290,000 and a reduction in the provision for credit
losses of $4,569,000 for the twelve months ended March 31, 1997 as compared to
a decrease in accounts payable and accrued expenses of $449,000 and an increase
in the provision for credit losses of $4,982,000 for the six months ended March
31, 1996. Additionally, the Company had a non-cash gain from the conversion of
debt to equity of $8,709,000 in the six-month period ended March 31, 1996.
During the six months ended March 31, 1996, the Company utilized cash
of $4,141,000 in its operations as compared to cash of $10,741,000 used during
the twelve months ended September 30, 1995. The net loss for the six months
ended March 31, 1996 decreased to $2,671,000 from a net loss of $19,894,000 for
the year ended September 30, 1995. A significant portion of the decrease in
loss from 1995 to 1996 resulted from the extraordinary gain on debt
extinguishment.
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General and administrative expenses decreased from $15,881,000 to $8,098,000,
while settlements and reorganization expenses decreased by $2,617,000 from
$3,152,000 to $535,000. The decrease in general and administrative
expenditures is due to there being only six months included in the 1996 fiscal
period compared to twelve months included in the 1995 fiscal period.
The Company anticipates having negative operating cash flows in the
foreseeable future as it continues to seek to expand its Dealer Network and
consumer finance operations in order to grow its receivable base. The Company
will be required to cover any negative operating cash flows from its cash on
hand, from the possible financing sources referred to under "General" if
available, or from other sources until the Company's receivable base is large
enough to cover operating expenses.
Principal Sources and Uses of Cash Provided by Investing Activities
The principal sources of cash from investing activities are principal
payments on receivables and proceeds from the sale of repossessed vehicles and
other collateral. The principal uses of cash in investing activities are for
purchasing receivables, making consumer loans and purchases of property and
equipment.
Comparison of Investing Cash Flows for the Twelve Months Ended March
31, 1997 to the Six Months Ended March 31, 1996 and for the Six Months
Ended March 31, 1996 to the Twelve Months Ended September 30, 1995
Cash used by investing activities increased by $32,620,000 from cash
provided by investing activities of $20,423,000 for the six months ended March
31, 1996 to cash used in investing activities of $12,197,000 for the twelve
months ended March 31, 1997. The increase is primarily due to an increase of
$35,272,000 in contract purchases and is partially offset by a corresponding
increase in collections of $11,481,000.
During the twelve months ended September 30, 1995, the Company's
investing activities provided cash of $17,592,000 as compared to cash of
$20,423,000 provided by investing activities during the six months ended March
31, 1996. This change resulted primarily from reduced contract purchases of
$19,359,000 and an increase in unrestricted cash of $12,624,000, partially
offset by a decrease in collection proceeds of $29,731,000. Upon confirmation
of the Fund Subsidiaries' plan of reorganization, $21,600,000 in cash was
released from the Fund Subsidiaries to Search.
The Company anticipates encountering negative cash flows from
investing activities in the foreseeable future as it continues to seek to
expand its non-prime automobile receivable base by expanding into more states
and increasing market penetration in existing states and continues its
expansion into consumer finance.
Principal Sources and Uses of Cash Provided by Financing Activities
The principal sources of cash from financing activities are borrowings
under line of credit agreements, subordinated and other debt offering proceeds
and sales of equity securities. The principal uses of cash in financing
activities include repayment of amounts borrowed under lines of credit,
repayment of other indebtedness, purchase of treasury stock and payment of
dividends on preferred stock.
Comparison of Financing Cash Flows for the Twelve Months Ended March
31, 1997 to the Six Months Ended March 31, 1996 and for the Six Months
Ended March 31, 1996 to the Twelve Months Ended September 30, 1995
The Company's financing activities provided $9,193,000 of cash during
the twelve months ended March 31, 1997 compared to cash of $1,093,000 during
the six-month period ended March 31, 1996. The increase of $8,100,000 was
primarily due to borrowings under the Company's lines of credit exceeding
repayments. The Company paid $4,724,000 in preferred stock dividends during
the twelve-month period compared to $120,000 for the six months ended March 31,
1996. The increase is attributable to the preferred shares issued in
connection with the Fund Subsidiaries' plan of reorganization.
During the twelve months ended September 30, 1995, the Company
utilized cash of $7,348,000 in its financing activities as compared to cash of
$1,093,000 provided by financing activities during the six months ended March
31, 1996. In 1995, the Company raised only $1,779,000 through Note offerings
and repaid $2,429,000 on its line of credit and $5,077,000 of the Notes
payable. During the six months ended March 31, 1996, the Company had net
borrowings of $1,225,000 under lines of credit, did not raise any funds through
Note offerings and did not repay any of the Notes payable. Because of the Fund
Subsidiaries' reorganization, no payments were made on the Fund Subsidiaries'
Notes and the
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Company's indebtedness to General Electric Capital Corp. was settled in full
after confirmation of the Fund. Subsidiaries' plan or reorganization.
The Company's acquisition of assets from DACC required the Company to
assume the DACC Debt of approximately $17,450,000, $9,596,000 of which remained
outstanding at March 31, 1997. The Company is required to repay the
outstanding balance by August 1997. Any portion not repaid will require
refinancing under existing terms or terms more or less favorable to the
Company. The Company anticipates having to refinance a portion of the loan at
its maturity date unless it has completed its subordinated debt offering or has
an alternative source available.
The Company's bulk purchases from Eagle Finance Corp. and MSF were
financed with borrowings under its line of credit with Hibernia National Bank
and from cash on hand. The Company had $23,715,000 outstanding under this line
at March 31, 1997.
In November 1996, the Company purchased shares of Search Common Stock
and Search 9%/7% convertible preferred stock and warrants to purchase Search
Common Stock from HPIL for $9,000,000 as part of a settlement agreement. The
Company paid $4,000,000 in cash and executed a $5,000,000 subordinated note
bearing interest, payable monthly, at an initial rate of 14%. The interest
rate increases by 1% every six months until it reaches 17%. The maturity date
is November 21, 2000, but the note must be repaid in full earlier if the
Company sells for cash more than $20,000,000, or by a proportionate amount if
the Company sells for cash less than $20,000,000, in equity or certain debt
securities.
The annual dividend requirements on the outstanding shares of 12%
Preferred Stock and 9%/7% Preferred Stock, as of March 31, 1997, were $240,000
and $6,200,000, respectively. The annual dividend requirement on the 9%/7%
Preferred Stock will remain at that level until March 15, 1999, and then
decrease to $4,822,000 until March 2003, assuming no additional shares are
issued. Any conversion of Preferred Stock to Common Stock would reduce these
dividend requirements. Payment of the dividend on the 9%/7% Preferred Stock in
cash may be restricted under some of the Company's debt agreements. If payment
of dividends in cash is restricted, the Company may be able to pay the dividend
in Search Common Stock under specific circumstances.
In July 1996, the Company implemented a loan program for its directors
and senior executive officers to finance the purchase of shares of Search
Common Stock and 9%/7% Preferred Stock in open market transactions. The loans
are evidenced by promissory notes from the borrowers, bear interest at the
prime rate, payable quarterly, and mature three years from the date made. The
shares of stock purchased with the proceeds of the loans are pledged to the
Company as security for the loans. The aggregate amount of these loans
outstanding at March 31, 1997 was $1,212,255. During the twelve months ended
March 31, 1997, the Company recorded $39,000 of interest revenue from
participants under this program.
Receivable Concentrations
The Company considers Texas and Tennessee to be states with receivable
concentrations because receivables with obligors in each of these states exceed
10% of total outstanding receivables.
Inflation
Historical statistics indicate that collateral value, vehicle sales
prices, and receivable interest rates are relatively stable within the
Company's market segment. Significant inflation in prices could adversely
impact the Company's ability to acquire receivables at favorable prices.
General increases in interest rates will result in increases in the Company's
interest expense.
Seasonality
The Company's operations are seasonably impacted by higher delinquency
rates during certain periods, including November and December holiday periods.
Changes in Asset Quality
The Company believes that it is upgrading its credit quality through
higher underwriting and collateral standards compared to prior periods. No
assurance can be given at this time as to whether these new standards will
improve the Company's credit loss experience.
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Recent Accounting Pronouncement
Information as to recent accounting pronouncements is contained in
Note 9 and 15 of the Notes to Search's Consolidated Financial Statements
included in Annex E.
FINANCIAL STATEMENTS
The audited consolidated financial statements of Search and its
subsidiaries for the fiscal year ended March 31, 1997 and six month transition
period ended March 31, 1996, together with the report of BDO Seidman, LLP
thereon dated May 23, 1997 and notes thereto, are included as Annex E to this
Joint Proxy Statement/Prospectus. The audited consolidated financial
statements of Search and its subsidiaries for the year ended September 30,
1995, together with the report of BDO Seidman, LLP thereon dated May 10, 1996
and notes thereto, are included in Search's Annual Report included as Annex F
to this Joint Proxy Statement/Prospectus.
MS FINANCIAL, INC.
BUSINESS
General
MSF is a specialized consumer finance company engaged in the purchase
and servicing of retail installment contracts ("Installment Contracts")
originated principally by manufacturer-franchised dealerships ("Franchise
Dealer") which sell new and used automobiles and light trucks to borrowers with
limited credit history, low income or past credit problems ("Non-prime
Consumer"). MSF also generates revenues from commissions on the sale of credit
life insurance, credit accident and health insurance, and extended service or
warranty contracts ("Ancillary Products").
MSF commenced operations in 1984 and achieved significant growth until
the third quarter of 1996, reaching a maximum of 23 branch offices in 11 states
and 10 regional marketing offices in eight states. At April 30, 1997, MSF's
dealer network consisted of approximately 1,032 dealers in 14 states, and MSF's
net portfolio of managed Installment Contracts was $100.2 million.
During 1996, the amount of MSF's delinquent receivables as a
percentage of total receivables increased dramatically to 18.0% at September
30, 1996. This resulted in MSF's inability to maintain acceptable sources of
credit necessary for normal business operations. Since October 1, 1996, MSF's
sources of liquidity have not been adequate to allow MSF to purchase any
significant number of Installment Contracts. See "--Management's Discussion
and Analysis of Financial Condition and Results of Operations." At December
31, 1996, delinquent receivables as a percentage of total receivables were
19.3%.
Business Strategy
Prior to 1996, MSF believed it had implemented a successful business
strategy based on its (i) understanding of the automotive finance business,
(ii) substantial experience with Franchise Dealers' Non-prime Consumer
financing requirements, (iii) ability to evaluate credit risks associated with
the Non-prime Consumer market, and (iv) methods of receivables servicing and
collection. The principal components of this business strategy included (i)
developing and retaining experienced management personnel, (ii) developing and
expanding its branch office network around a cluster of urban centers, (iii)
utilizing centralized credit functions and advanced management information
systems, (iv) developing strong dealer relationships, and (v) providing
economical and flexible financing structures.
MSF's management believes it can identify some of the reasons for the
increase in delinquencies and losses that occurred beginning in late 1995 and
continued throughout 1996. Some portion of the increase appears to be
attributable to macroeconomic factors which affected the subprime market
generally. MSF's management also believes that the decline in the quality of
its owned and managed portfolio was, in part, attributable to increased
competition in the subprime market which resulted in MSF's management being
pressed into the lower end of the range of acceptable credit criteria.
Finally, MSF experienced management and turnover problems in its
collection/customer service department during 1996 which caused MSF's
collection efforts to be less effective than in years past.
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MSF intends to operate within the current confines of available
liquidity until the Merger can be consummated with Search. The completion of
the Merger is projected to occur in June 1997. After the Effective Time of the
Merger, Search, as the controlling party of MSF, would then assume the role of
determining MSF's business strategy on an ongoing basis.
Installment Contracts Acquisition Program
Along with a number of other finance companies purchasing Installment
Contracts owed by Non-prime Consumers, MSF experienced a dramatic increase in
delinquencies on Installment Contracts in 1996 which ultimately resulted in a
devaluation of its owned and managed portfolio and a loss of customary
financing sources. Since early October, 1996, MSF's financing sources have not
been adequate to continue normal business operations.
Historically, MSF has marketed its services through three programs: a
branch office network; a central marketing program; and a regional marketing
program.
Branch Network. The branch office network reached a high of 23
offices during 1996. After closing 12 offices during 1996, MSF currently
maintains 11 branch offices divided into two regional divisions (East and West)
located in five states.
The following table sets forth the locations of MSF's branch offices
as of April 30, 1997.
Branch Office Locations (by Regional Division)
<TABLE>
<CAPTION>
East West
---- ----
<S> <C>
Atlanta, GA Dallas, TX
Greensboro, NC Duncanville, TX
Memphis, TN Houston, TX (North)
Charlotte, NC Houston, TX (South)
Winston-Salem, NC Tulsa, OK
Oklahoma City, OK
</TABLE>
MSF's branch office personnel directly assist the dealership in
completing the paper work necessary to complete the sale of the vehicle and the
Installment Contract. In connection with that service, MSF's personnel have
direct contact with the consumer and market Ancillary Products to the consumer.
MSF publishes a schedule of acceptable interest rates and purchases Installment
Contracts meeting its criteria at a fixed discount (typically a net discount to
the dealer of 7.6% for branch office purchases). Prior to July 1, 1996, after
payment of the cost of repossession loss insurance which MSF remitted to the
insurance carrier, the amount of the discount retained by MSF was one percent.
Since July 1, 1996, MSF has retained the amount previously paid for
repossession loss insurance which increased the average net discount to MSF to
7.6% on purchases by branch offices.
Central Marketing Program. MSF also purchases Installment Contracts
from its Ridgeland, Mississippi office on an indirect basis from dealers.
These are typically dealers who have done business with other MSD affiliates.
In the central marketing program, the dealers fax a loan application to MSF's
headquarters. Any required negotiations to improve credit terms prior to
funding an Installment Contract takes place directly between MSF's underwriting
personnel and personnel at the dealership. If acceptable terms can be reached,
the contract is closed at the dealership by the dealer's personnel. To the
extent any Ancillary Products are sold, the dealer retains any commission
income. Installment Contracts meeting MSF's published interest rate and credit
criteria purchased through the Central Marketing Program are purchased at a
fluctuating discount based on the term of the Installment Contract. The
discount ranges from 3.75% to 7.5%, subject to a minimum discount of $450. MSF
has established arrangements with some dealers that allow the dealer to
participate in a portion of the interest paid by the consumer. Otherwise,
these transactions are nonrecourse to the dealer. The discount was used by the
dealer or MSF on behalf of the dealer to purchase repossession loss insurance
prior to July 1, 1996. After MSF discontinued repossession loss insurance (see
below) MSF retained the discount, which has averaged approximately 6.75%.
Regional Marketing Program. Beginning in November 1995, MSF converted
four of its branches into regional marketing programs. These programs were
chosen in areas where MSF believed it was not economical to operate a branch
office either because of the competitive environment or due to geographic
limitations or both. The program consists of a
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sales representative establishing relationships with dealers located in their
market areas and soliciting Installment Contracts on an indirect basis.
Dealers close the contract, sell any Ancillary Products to the customers and
retain the commissions. MSF's personnel do not negotiate the contracts or have
any contact with the customer. This program allows the regional marketing
representative to cover a larger geographic area since the customer does not
come into the branch office to close the contract. Branch office personnel
also establish relationships with dealers beyond their normal range of
operations and offer the regional marketing program to these dealers.
Installment Contracts meeting MSF's published interest rate and credit criteria
purchased through the Regional Marketing Program are purchased at a fixed $750
discount, which averages 6.91% of the amount financed. These transactions are
nonrecourse to the dealers, and the dealer does not participate in any interest
paid on these contracts. After MSF discontinued repossession loss insurance,
the $750 discount used to pay the repossession loss insurance premium was
retained by MSF.
During 1996, MSF closed nine regional offices and, at December 31,
1996, had its only regional office in Raleigh, North Carolina.
Dealer Relationships. MSF primarily markets its financing program to
Franchise Dealers because it believes that the quality and value of used cars
sold by Franchise Dealers are generally higher than those sold by independent
dealers. Except for one dealer partially owned by a director of MSF that
generated approximately 5.8% of MSF's Installment Contracts outstanding as of
December 31, 1996, no dealer accounted for more than 2.7% of MSF's total number
of Installment Contracts. For the years ended December 31, 1994, 1995, and
1996, the Company had approximately 632, 781 and 1,059 active dealers,
respectively.
Each dealer with which MSF establishes a financing relationship enters
into a non-exclusive written dealer agreement with MSF (a "Dealer Agreement")
governing the purchase of Installment Contracts from such dealer. The Dealer
Agreement sets forth the general terms upon which Installment Contracts will be
purchased by MSF, but does not obligate the dealer to sell, or MSF to purchase,
any particular Installment Contract. MSF monitors the number and tracks the
performance of Installment Contracts purchased from each dealer to identify
problem dealers at an early stage and take corrective actions against possible
adverse trends in loss ratios with respect to such dealers.
<TABLE>
<CAPTION>
Number of Active Dealers by State As of December 31,
- --------------------------------- --------------------------------------
1994 1995 1996(1)
---- ---- ----
<S> <C> <C> <C>
Alabama 8 11 12
Georgia 96 93 113
Indiana 2 22 39
Kentucky 14 21 29
Mississippi 82 74 93
North Carolina 59 90 140
Ohio 18 45 70
Oklahoma 51 75 115
Tennessee 86 96 119
Texas 193 228 284
Virginia 9 22 25
Other 14 4 20
---- ----- ------
Total 632 781 1,059
</TABLE>
- ------------------
(1) MSF has been unable to purchase any significant number of Installment
Contracts since October 1, 1996.
Repossession Loss Insurance. Prior to July 1, 1996, MSF insured
against a portion of the losses on its Installment Contracts with a
repossession loss policy underwritten by MS Casualty Insurance Company, a
subsidiary of MSD ("MS Casualty"). Under that program, at the time of
financing, the dealer paid MS Casualty a premium for an insurance policy
covering default losses. When an insured vehicle is repossessed, any credit
loss of up to $7,000 per vehicle is covered by MS Casualty and, subject to any
loss deductibles applied by MSF, paid with respect to the Installment Contract.
The total liability of MS Casualty for all repossession losses with respect to
each policy year could not, however, exceed the product of $600 times the
number of repossession loss policies purchased through MSF during such policy
year. In addition, MSF was eligible for an experience refund that allowed MSF
to recapture any profits from positive underwriting experience after paying an
administrative fee on the repossession policies. MSF earned no experience
refund in 1995 or 1996. As of July 1,
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<PAGE> 81
1996, MSF discontinued the repossession loan program and, instead, reduced the
purchase price paid dealers for Installment Contracts or retained a portion of
the discount previously used to pay the insurance premium.
Credit Evaluation and Purchasing Procedures. MSF applies uniform
underwriting standards in purchasing Installment Contracts. These standards
have been developed and refined over several Installment Contract cycles (i.e.,
where MSF has experienced the full maturities of several generations of
48-month Installment Contracts) during MSF's 12 year history. The two most
important criteria used in evaluating an Installment Contract are the degree of
the applicant's creditworthiness and the collateral value of the vehicle.
After MSF completes its credit analysis, it advises the dealer of its
decision to reject or conditionally approve the Installment Contract.
Turnaround time in the automotive finance business is a significant competitive
factor, and MSF typically completes its initial credit decision in an average
of 1-1/2 hours. Substantially all approved credit applications are approved
"conditionally," pursuant to which MSF's acceptance is subject to the consumer
and the dealer agreeing on certain provisions.
Once the terms of the financing are agreed upon, the financing
documents are approved by MSF's home office. The dealer then delivers all
documentation required under the Dealer Agreement to MSF, including proof of
title indicating MSF's lien, an odometer statement confirming the vehicle's
mileage and proof that the automobile is insured, with MSF designated as loss
payee. When MSF has received the final credit and other documents from the
dealer, MSF remits funds to the dealer.
MSF believes that the decline in the qualify of its owned and managed
portfolio was, in part, attributable to increased competition in the subprime
market which resulted in MSF being pressed into the lower end of the range of
acceptable credit criteria. In October 1996, MSF tightened its credit
standards. At this point, MSF does not have adequate data to determine whether
Installment Contracts purchased since October 1996 will perform significantly
better than the Installment Contracts purchased prior to that date. Pursuant
to the Merger Agreement, MSF agreed to begin purchasing Installment Contracts
which satisfy Search's underwriting criteria or are otherwise approved by
Search.
Ancillary Products. Prior to MSF's acquisition of an Installment
Contract, the dealer and/or MSF's branch office personnel may also offer
Ancillary Products to the consumer. MSF acts as an agent for MS Life Insurance
Company, a subsidiary of MSD, and MS Casualty in connection with the sale of
many of the Ancillary Products and receives a commission on the sale of such
products sold through its branch offices. MSF does not receive commissions on
the sale of any Ancillary Products in either the central or regional marketing
programs. During 1996, the Company's total earned revenues from the sale of
Ancillary Products were $1.3 million, or 6.4% of the total revenues, as
compared to the 1995 amounts of $1.8 million, or 7.5% of total revenues.
Contract Profile. During the years ended 1994, 1995 and 1996, MSF
purchased 6,463, 8,768 and 10,352 Installment Contracts, respectively, with
principal balances of $65.4 million, $87.0 million, and $110.8 million,
respectively. Of the $110.8 million purchased in 1996, $99.9 million were
purchased during the first nine months of the year. As of December 31, 1996,
the average unpaid principal balance per contract was $7,870 and the average
initial principal balance was $10,539. The initial contract term ranged from
12 to 60 months, and the average initial term was 49 months for all loans
outstanding at December 31, 1996. The annual percentage rate ("APR") paid by
consumers for contracts originated in 1996 ranged from 16.0% to 36.0%. MSF's
weighted average APR of Installment Contracts purchased in 1996 was 20.7%.
During the first quarter of 1997, MSF purchased 109 Installment Contracts with
a principal balance of approximately $1.3 million. The weighted average APR of
Installment Contracts purchased during the period was 20.5%.
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<TABLE>
<CAPTION>
At December 31, At March 31,
----------------------------------- ------------
1994 1995 1996 1997
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
New Car Portfolio
Installment Contracts 1,129 690 904 11
Principal amount financed $15,244 $ 9,208 $ 13,102 $ 170
Weighted average initial APR 17.7% 18.2% 18.2% 18.5%
Used Car Portfolio
Installment Contracts 5,334 8,078 9,448 98
Principal amount financed $50,184 $77,765 $ 97,726 $1,109
Weighted average initial APR 21.4% 21.0% 21.0% 20.8%
Total Portfolio
Installment Contracts 6,463 8,768 10,352 109
Principal amount financed $65,428 $86,973 $110,828 $1,279
Weighted average initial APR 20.4% 20.7% 20.7% 20.5%
</TABLE>
Contract Servicing and Administration
MSF's centralized Installment Contract servicing and administration
activities have been specifically tailored to servicing loans to Non-prime
Consumers. The Company's servicing and administration departments, which are
located at its corporate headquarters near Jackson, Mississippi, (i) monitor
the Installment Contracts and the related collateral, (ii) account for and post
all payments received, (iii) respond to customer inquiries, (iv) take all
necessary action to maintain the security interest granted in the financed
automobile, (v) investigate delinquencies and communicate with the borrowers to
obtain timely payments, (vi) pursue deficiencies on Installment Contracts, and
(vii) when necessary, contract with third parties to repossess and dispose of
the financed automobile. During 1996, MSF experienced unusually high turnover
in its customer service department which contributed to the higher
delinquencies and losses experienced during the year. Also, as a result of the
shortage of experienced sub-prime customer service representatives, in November
1996, the Company opened a customer service center in Mobile, Alabama to
support the main office collection efforts.
Competition
The non-prime credit market is highly fragmented, consisting of many
national, regional and local competitors, and is characterized by relative ease
of entry. Existing and potential competitors include well-established
financial institutions, such as banks, savings and loans, small loan companies,
leasing companies and captive finance companies owned by automobile
manufacturers and others. MSF believes that increased regulatory oversight and
capital requirements imposed by market conditions and governmental agencies
have limited the activities of many banks and savings and loans in the
Non-prime Consumer credit market. MSF also believes that captive finance
companies generally focus on new car financing. As a result, the Non-prime
Consumer credit market is primarily serviced by smaller finance organizations
that solicit business when and as their capital resources permit. MSF
estimates, based on available information, that its managed portfolio
represents less than 1% of the Non-prime Consumer automobile finance market in
the United States and believes that no competitor controls more than 2% to 3%
of this market.
Regulation
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. Numerous federal
and state consumer protection laws and related regulations impose substantive
disclosure requirements upon lenders and servicers involved in automobile
financing. MSF is also subject to various states' insurance regulations in
connection with the sale of insurance policies.
MSF believes that it is in substantial compliance with all applicable
material laws and regulations. Adverse changes in the laws or regulations to
which MSF's business is subject, or in the interpretation thereof, could have a
material adverse effect on MSF's business. Because MSF generally charges the
highest finance charges permitted by state law, reductions in statutory maximum
rates could directly impair operating results.
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<PAGE> 83
Employees
At April 30, 1997, MSF had 114 full-time employees, none of whom was
covered by a collective bargaining agreement. Of such employees, 85 were
located in MSF's headquarters near Jackson, Mississippi or in MSF's service
center in Mobile, Alabama and 29 were located in MSF's branch or regional
offices. MSF considers its employee relations to be good.
PROPERTIES
MSF's executive offices are located in Ridgeland, Mississippi,
immediately north of Jackson, Mississippi, where it leases 13,176 square feet
pursuant to a sublease expiring in December 1997. MSF also leases 3,106 square
feet in an adjacent building.
As of April 30, 1997, MSF maintained 11 branch offices and one
regional office. Generally, these offices range from 200 to 1,300 square feet,
and monthly rental rates for such offices range from $445 to $1,953 per month.
The average initial term of such leases is 12 to 24 months. MSF does not
consider the rental cost of its branch and regional marketing offices to be a
material component of its overall cost structure.
In October 1996, MSF opened a customer service office in Mobile,
Alabama, consisting of 4,670 square feet leased for $1,100 per month for the
first six months and $2,200 per month thereafter through September 1997.
LEGAL PROCEEDINGS
Beginning in June 1995, MSF was named as a defendant in a number of
lawsuits filed in the District Court of Harris County, Texas. In certain of
these cases, plaintiffs sought class action certification. In January 1997,
the Company entered into a settlement agreement covering the pending cases
which requires MSF to pay $375,000 prior to July 1, 1997. The terms of the
settlement require the Company to release any deficiency claims against the
plaintiffs.
On January 15, 1997, MSF was named as a defendant in a lawsuit filed
by Telluride Funding Corp. ("Telluride") in the U.S. District Court for the
Southern District of New York. In its complaint, Telluride asserts claims for
unpaid fees due it in connection with MSF's warehouse line of credit entered
into in April 1995. Plaintiff seeks damages in the amount of $437,500, plus
interest, cost and attorney's fees. At this time, MSF is unable to predict the
outcome of this litigation, but it intends to vigorously defend this
proceeding. MSF has filed a declaratory judgment action against Telluride in
Mississippi State Court requesting a determination of the parties' rights and
obligations under the letter agreement relating to the warehouse line of
credit. At this time, MSF is unable to predict the outcome of this litigation.
MSF is involved, from time to time, in routine litigation incidental
to its business. However, MSF believes that it is not a party to any other
material pending litigation which, if decided adversely to MSF, would have a
significant negative impact on its business, income, assets or operations. MSF
is not aware of any other material threatened litigation which might involve
MSF.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following management's discussion and analysis provides
information regarding MSF's consolidated financial condition as of March 31,
1997 and 1996 and December 31, 1995 and 1996, and its results of operations for
the three month periods ended March 31, 1997 and 1996 and the years ended
December 31, 1994, 1995 and 1996. The management's discussion and analysis
should be read in conjunction with the Selected Historical and Pro Forma
Consolidated Financial and Operating Data and MSF's Consolidated Financial
Statements and the notes thereto, appearing elsewhere in this registration
statement. The ratios and the percentages provided below are calculated using
the detailed financial information contained in MSF's Consolidated Financial
Statements, the notes thereto and the other consolidated financial data
included therewith.
Overview. MSF is a specialized consumer finance company engaged in
the purchase and servicing of Installment Contracts originated by automobile
dealers. MSF acquires Installment Contracts principally from Franchise Dealers
in connection with the sale of used and new automobiles and light duty trucks
to approved Non-prime Consumers. MSF also generates revenue from commissions
which it receives from the sale of Ancillary Products sold in conjunction with
the Installment Contracts purchased through its branch offices.
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<PAGE> 84
Historical Development and Growth. From its inception, until late
1996, MSF experienced significant growth in its Managed Portfolio, corporate
structure and operations. This growth resulted from the development of a
branch office network, the regional marketing program and the implementation of
a securitization program, and it has been facilitated by the creation of an
independent corporate administrative infrastructure.
Branch Office Network. In 1990, MSF began expanding its business by
opening branch offices in the Midwest, Southeast and Southwest regions of the
United States and servicing dealers in these regions. These branch offices
develop and improve relationships with dealers and customers, generate
Installment Contract applications and produce commission and fee income through
the sale of Ancillary Products. This commission and fee income typically
offsets each particular branch office's operating expenses within 12 months of
its opening. As a result of MSF's branch office expansion, the volume and
number of Installment Contracts in MSF's Managed Portfolio have grown
significantly in the last several years. The number of branch offices reached
a high of 23 in October 1996. Due to a lack of production and profitability,
and to reduce MSF's overhead, a total of twelve branches were closed during the
fourth quarter of 1996. During 1994, 1995, 1996 and the first quarter of 1997
under this program, MSF purchased Installment Contracts totaling $41.0 million,
$65.5 million, $55.7 million and $428 thousand, respectively.
Central Marketing Program. In 1984, MSF began purchasing Installment
Contracts from MS Diversified Corporation ("MSD") affiliated dealers located
principally in Mississippi and Tennessee. During 1996 MSF serviced
approximately 45 affiliated dealers in Mississippi, Tennessee and Alabama.
During 1994, 1995, 1996 and the first quarter of 1997 under this program, MSF
purchased Installment Contracts totaling $24.4 million, $21.1 million, $17.1
million and $104 thousand, respectively.
Regional Marketing Program. In 1995, MSF initiated a regional
marketing program from four locations. Sales representatives develop
relationships with dealers in their market areas to generate Installment
Contract applications. Under this program, the contract is closed at the
dealership, and the dealer sells any ancillary products and retains the
commissions. During 1996, MSF closed nine regional offices, and at April 30,
1997, had only one remaining office located at Raleigh, N.C. During 1995, 1996
and the first quarter of 1997 under this program, MSF purchased Installment
Contracts totaling $365 thousand, $38.0 million and $747 thousand,
respectively.
Use of Securitizations. In 1992, MSF began selling interests in pools
of its Installment Contracts to investors through the annual issuance of
triple-A rated, asset-backed securities ("Securitization"). These transactions
provided a significant source of MSF's funding. Securitizations also allowed
MSF to (i) lock in the interest rate spread on the underlying Installment
Contracts by obtaining a fixed rate of interest on the Securitization, (ii)
record a gain or loss on the sale of the Installment Contracts, (iii) receive
residual income attributable to excess cash flows on the Installment Contracts
if and when payments on the Installment Contracts are received, and (iv)
receive income from servicing the Installment Contracts. This residual income
and service fee income is discussed below under "Results of
Operations--Interest and Fee Income on Installment Contracts and
Securitizations" and "--Service Fee Income," respectively. MSF's last
securitization was closed in September 1995.
Administrative Development. Prior to 1994, MSD provided most of MSF's
executive and administrative services, including its accounting, payroll, data
processing, human resource management and computer system maintenance and
development services. Between 1993 and 1994, MSD began to charge MSF
progressively higher administrative and other fees for these services as MSF
expanded its operations.
Beginning in January 1994, many of the individuals who had performed
these executive and administrative functions for MSF became full-time employees
of MSF. Some services, such as payroll processing, mainframe computer usage
and software maintenance and development, however, continued to be performed by
MSD under a cost sharing contractual arrangement. As of January 1, 1995, MSF
assumed responsibility for its own payroll processing and recruited personnel
from MSD's management information systems ("MIS") department to form MSF's own
MIS department. All remaining fee arrangements between MSF and MSD were
discontinued at this time, other than those relating to MSF's use of MSD's
mainframe computer.
The following table sets forth information with regard to MSF's growth
in personnel, branch offices and Installment Contract origination. Also set
forth is information regarding portfolio growth, borrowing levels and cost of
funds.
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<PAGE> 85
<TABLE>
<CAPTION>
Three Months
Ended
Year ended December 31, March 31,
----------------------------------- ---------
1994 1995 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Number of Branch and Regional Marketing Offices
Total at period end 23 24 12 11
Average for the period 17 23 21 11
Company Personnel
Executive 5 5 3 2
Headquarters operations, including Mobile office 48 80 94 86
Branch offices 58 54 35 29
--- --- --- -----
Total at period end 111 139 132 117
============================================
Originated Installment Contracts (000's)
Central marketing program $ 24,449 $ 21,130 $ 17,120 $104
Branch offices 40,979 65,478 55,746 428
Regional marketing program 365 37,962 747
-------------------------------------------------
$ 65,428 $ 86,973 $110,828 $1,279
=================================================
Net Managed Portfolio (000's)
Total at Period End $ 88,789 $120,318 $130,371 $104,966
Average for the period 73,505 106,309 142,753 117,595
Owned installment and other contracts (000's)
Total at period end $ 48,852 $ 22,398 $ 86,972 $ 72,804
Average for the period 39,406 58,903 72,261 82,279
Revolving credit facility balances (000's)
Total at period end $ 36,043 -- $ 75,813 $ 71,442
Average for the period 30,213 $ 40,488 52,653 73,705
Average interest rate paid 8.1% 8.9% 10.2% 12.0%
</TABLE>
Results of Operations (dollars in thousands, except as noted)
Comparison of Three Months Ended March 31, 1996 to Three Months Ended
March 31, 1997
Interest and Fee Income on Installment Contracts and Securitizations.
Interest and fee income on Installment Contracts and Securitizations represent
interest and fee income on owned Installment Contracts, interest income on the
retained subordinated interest in securitized Installment Contracts and the
residual income attributable to excess cash flows on Securitizations. This
income increased by $2,795 or 169.9% from $1,645 for the three months ended
March 31, 1996 to $4,440 for the three months ended March 31, 1997. This
increase is primarily due to the 166.4% increase in average principal balance
of owned loans from $30,887 in the first quarter of 1996 compared to $82,279 in
the first quarter of 1997. Also, MSF was unable to complete a Securitization
transaction which contributed to the increase in the owned portfolio. These
increases were partially offset by a decrease in residual income attributable
to excess cash flows on Securitizations which decreased from $38 in the first
quarter of 1996 to $0 in the first quarter of 1997. This reduction in
recognized residual income is primarily the result of reduced cash flow from
the Securitizations which in turn was caused primarily by increased
delinquencies during the last half of 1995 and throughout 1996, particularly
the last six months of 1996, which slowed the excess cash flows from these
securitized portfolios. Residual income attributable to excess cash flows on
Securitizations is recognized based on actual and expected cash flows and the
estimated rate of return on the recorded investment.
Interest Expense. Interest expense increased by $1,835 or 492.0%,
from $373 for the three months ended March 31, 1996 to $2,208 in the comparable
quarter of 1997. This increase is primarily due to a 544.9% increase in
average borrowings from $11,429 for the quarter ended March 31, 1996 to $73,705
for the quarter ended March 31, 1997. The revolving credit facility was not
reduced by proceeds from a Securitization transaction during 1996 as it was at
the end of
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<PAGE> 86
the year of 1995, which resulted in the average amount outstanding under the
credit line increasing by $62,276. Also contributing to the increase was an
increase in the interest rate on the revolving credit facility associated with
the restructuring the revolving credit facility as a result of MSF's rising
delinquency and loss rates at the end of 1996.
Provision for Possible Losses. The provision for possible losses
increased by $4,092 from $250 for the three months ended March 31, 1996 to
$4,342 for the three months ended March 31, 1997. The allowance for possible
losses on Installment Contracts increased from 1.1% of the Net Managed
Portfolio for the quarter ended March 31, 1996 to 6.1% for the quarter ended
March 31, 1997. This significant increase is substantially the result of MSF's
rising delinquencies and loss rates on Installment Contracts and the total
utilization of the aggregate loss limits and available reserves at MS Casualty.
A valuation allowance was not previously considered necessary because of MSF's
insurance arrangement with MS Casualty and the relatively lower level of
repossessed automobiles in prior periods. The allowance is intended to cover
losses on owned Installment Contracts as well as securitized Installment
Contracts after taking into account loss reserves and other amounts available
at MS Casualty.
Insurance Commissions. Insurance commissions represent commission and
fee income earned on insurance and other ancillary products sold by the branch
offices. This income decreased by $280, or 77.6%, from $361 for the three
months ended March 31, 1996 to $81 for the period ending March 31, 1997,
primarily as the result of a large decrease in Installment Contract
originations from branch offices. In addition, there has been an increase in
the number of repossessions during the first quarter of 1997, as compared to
the first quarter of 1996. At the time of repossession, any unearned
commission is used to reduce the carrying balance of the loss account. As a
result, there has been a decrease in unearned commission and commission
amortized to income during the quarter. MSF anticipated that as a percent of
total revenue, commission income would decrease since it anticipated that its
portfolio growth would come primarily from the regional marketing program,
where MSF retains no commission on the sale of ancillary products.
Service Fee Income. Service fee income represents amounts received by
MSF to collect and administer Installment Contracts previously sold into
Securitizations. These fees decreased by $493, or 57.1%, from $864 for the
quarter ended March 31, 1996 to $371 for the quarter ended March 31, 1997.
This decrease was due to a 57.2% decrease in the average balance of securitized
Installment Contracts being serviced by MSF comparing the averages for the
three month periods ending March 31, 1996 and March 31, 1997.
Other Income. Other income is primarily comprised of miscellaneous
fee income generated by the branch offices. Other income decreased by $235, or
91.4%, from $257 for the quarter ended March 31, 1996 to $22 for the quarter
ended March 31, 1997 due to a decrease in title fee income and other
miscellaneous income.
Operating Expenses. Operating expenses increased by $321 or 10.4%
from $3,098 for the quarter ended March 31, 1996 to $3,419 for the quarter
ended March 31,1997 primarily due to increased legal and professional fees
associated with the proposed merger between MSF and Search. In addition,
during the quarter ended March 31, 1997, MSF also had a loss on sale of
Installment Contracts sold to Search of $39.
Net Loss. As a result of the factors discussed above, net loss
increased by $4,682 from $360 for the quarter ended March 31, 1996 to $5,042
for the quarter ended March 31, 1997.
Comparison of 1995 to 1996
Interest and Fee Income on Installment Contracts and Securitizations.
Interest and fee income on Installment Contracts and Securitizations increased
by $2,460 or 19.8%, from $12,449 in 1995 to $14,909 in 1996. Fee income
includes late charges and extension fees which amounted to $927 and $1,623 in
1995 and 1996, respectively. The increase in interest income is primarily due
to a 22.7% increase in average owned Installment Contracts outstanding during
1996. The increase in owned Installment Contract balances results primarily
from a 27.4% increase in the principal balance of Installment Contracts
acquired during 1996. In addition, in 1996, MSF failed to complete a
Securitization, which contributed to the increase in owned portfolio. These
increases were partially offset by a decrease in residual income attributable
to excess cash flows on Securitizations which decreased 83.9% from $422 in 1995
to $68 in 1996. This reduction is primarily the result of reduced cash flow
from the Securitizations which was caused primarily by increased delinquencies
during the last half of 1995 and throughout 1996. Residual income attributable
to excess cash flows on Securitizations is recognized based on actual and
expected cash flows and the estimated rate of return on the recorded
investment.
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<PAGE> 87
Interest Expense. Interest costs increased by $1,784, or 49.7%, from
$3,587 in 1995 to $5,371 in 1996. As a percentage of interest and fee income,
interest expenses increased from 24.4% in 1994, to 28.8% in 1995 and 36% in
1996. This increase in the amount of interest expense and the ratio of
interest expense to interest and fee income resulted from increases in average
borrowings outstanding under the revolving credit facility over those periods.
During 1996, the revolving credit facility was not reduced by proceeds from a
Securitization during 1996 which resulted in the average amount outstanding
under the credit line increasing to $52.7 million in 1996 from $40.5 million in
1995. The remainder of the increase in 1996 relates to an increase in the
interest rate on the revolving credit facility for the last two months of 1996,
which increased interest expense approximately $363, and the other costs
associated with restructuring the debt ($563). The revolving credit facility
was restructured in December as a result of MSF's rising delinquency and loss
rates. During the third quarter of 1995, MSF completed a Securitization which
resulted in $73.2 million in proceeds and received an equity infusion through
the completion of an initial public offering of $21.4 million. The net
proceeds were used to repay MSF's revolving credit facility which in turn
reduced MSF's interest cost for the last quarter of 1995.
Provisions for Possible Losses. The provision for possible losses on
Installment Contracts increased by $19,277 from $826 in 1995 to $20,103 in
1996. The allowance for possible losses on Installment Contracts increased
from 1.3% of the Net Managed Portfolio in 1995 to 7.7% in 1996. This
significant increase is substantially the result of MSF's rising delinquencies
and loss rates on Installment Contracts and the total utilization of the
aggregate loss limits and available reserves at MS Casualty. At the end of
MSF's 1995 calendar year, a loss development methodology was utilized that
considered what proportion of MSF's losses were developing after specific time
frames based on month of loan origination. Based on that static pool loss
development, and considering the insurance that MS Casualty provided MSF,
allowance levels were established. MSF utilized this approach exclusively
through the second quarter of 1996. Beginning in the third quarter of 1996, in
consideration of MSF's rising delinquency rates, MSF began supplementing the
previously existing methodologies with additional methodologies that better
considered the rising delinquency and loss rates. MSF management believed
that, with the trend in delinquencies, the previous methodology would not
consider the negative trends in the portfolio fast enough. Accordingly, two
additional methods were developed.
The first supplemental method is based on delinquency information by
year of origination. A probability of loss factor is estimated for each
delinquency category by year of origination and a percentage of loan dollar
loss factor is established for each year. The probability of loss factor
represents the ratio of accounts that went into repossession status to the
total accounts to reach delinquent status for each delinquency category. The
percentage of loan dollar loss factor represents the percentage of actual total
loss expected to the remaining balance on those loans. These factors are
applied to each delinquency category for each year and then totaled to
calculate the required allowance.
The second supplemental method considers both historical loss rate and
delinquencies. Delinquent balances are accumulated by month of origination and
by number of days delinquent. Those delinquent balances are then expressed as
a percentage of the remaining balance of loans originated in the applicable
month. Then the delinquency percentages are multiplied by the annual
probability of loss and percentage of loss factors to calculate a risk weighted
delinquency percentage for each category. A total risk weighted delinquency
rate is then calculated by totaling the risk weighted delinquency percentage
for each category. This rate is then averaged with the next year loss
percentage by month of origination. The next year loss percentage represents
the estimated losses to be realized in the next year to the remaining balance
using the historical loss development approach used by MSF in prior years. The
average expected loss rate by month of origination is multiplied by the
remaining balance of loans by month of origination and the results are totaled
to calculate the required allowance.
At December 31, 1996, management provided an allowance for possible
losses on repossessed automobiles of $2.8 million. A valuation allowance was
not previously considered necessary because of MSF's insurance arrangement with
MS Casualty and the relatively lower level of repossessed automobiles in prior
periods. The allowance takes into account management's estimate of a 55%
recovery rate on sales of repossessed vehicles. Also, at the end of 1996, MSF
recorded a provision for impairment of amounts due under securitizations of
$3.0 million. This provision was deemed necessary because the deterioration in
performance of MSF's sold portfolio has dramatically reduced the amount of
residual income attributable to excess cash flows expected to be received under
the 1995 Securitization.
As reported in MSF's press release dated September 3, 1996 and in
MSF's Form 8-K dated September 12, 1996, MSF had a breakdown in its extension
granting process that was identified and rectified timely. MSF became aware
that as of June 30, 1996, documentation of extensions and internal controls
related to extensions fell below MSF's standards. In September 1996,
independent auditors hired by MSF's lenders conducted a review of MSF's
extension policies. At the direction of MSF's audit committee, MSF's
independent auditors periodically audited extension practices beginning in
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September 1996. Search reviewed MSF's extension practices in March 1997. The
foregoing reviews followed a substantial revision of MSF's extension policies
in November 1996. Assuming the Merger is effected with Search, Search employs
an internal auditor who will, among other things, be charged with the
responsibility of monitoring MSF's extension practices to ensure compliance
with established policies and procedures. MSF believes that these periodic
reviews and continued monitoring to be performed by Search's internal auditor
will be adequate to ensure material compliance with MSF's established policies
and procedures.
Because of the breakdown in MSF's extension granting process, certain
negative trends in MSF's loan portfolio were not apparent as fast as management
would have preferred. MSF's delinquency experience (61 days and greater)
increased dramatically in the last two quarters of the calendar year but showed
improvement by the end of the first quarter of 1997. Specifically, such
delinquencies for the gross managed portfolio were as follows:
<TABLE>
<CAPTION>
Percentage of Percentage of
Number of Principal
Contracts Amount
---------------- --------------
<S> <C> <C>
March 31, 1996 3.9% 3.9%
June 30, 1996 3.5% 3.7%
September 30, 1996 9.7% 9.9%
December 31, 1996 8.8% 9.5%
March 31, 1997 4.3% 5.1%
</TABLE>
Management of MSF believes that the substantial loan loss provisions
made in the third and fourth quarters of 1996 were made timely with the best
information available and in consideration of management's loss expectations at
the time.
Insurance Commissions. Insurance commissions decreased by $494, or
27.1%, from $1,823 in 1995 to $1,329 in 1996, primarily as the result of a
14.9% decrease in Installment Contract originations from branch offices. In
addition, there has been an increase in the number of repossessions during
1996. At the time of repossession, any unearned commission is used to reduce
the carrying balance of the loss account. As a result, there has been a
decrease in unearned commission during the year. Also, in the fall of 1995,
MSF reduced emphasis on selling other Ancillary Products in an effort to make
the offerings more favorable to automobile dealers without increasing credit
risk to MSF. MSF anticipated that as a percent of total revenue, commission
income would decrease since it anticipated that its portfolio growth would come
primarily from the regional marketing program, where MSF retains no commission
on the sale of Ancillary Products.
Gains on Securitizations. During 1996, MSF did not complete a
Securitization. However, during 1995, MSF completed a $90.0 million
Securitization which resulted in a net gain on sale of $7.1 million. For
further information, see the discussion at "Liquidity and Capital
Resources--Securitization Programs."
Service Fee Income. Service fee income on Installment Contracts owned
by Securitization Trusts increased by $717, or 36.8%, from $1,951 in 1995 to
$2,668 in 1996, due primarily to the 37.3% increase in the average balance of
securitized Installment Contracts being serviced by MSF.
Other Income. Other income is primarily comprised of miscellaneous fee
income generated by the branch offices. Other income decreased by $7, or 1.0%,
from $760 in 1995 to $753 in 1996. This decrease is due to a reduction in
title fee income and other miscellaneous income.
Operating Expenses. Operating expenses increased $5,764, or 61.7%,
from $9,340 in 1995 to $15,104 in 1996, partially due to a 24.2% increase in
the average number of personnel during the year and other expenses associated
with higher contract origination volume. MSF expanded the customer service
department by opening a customer service center in Mobile, Alabama, adding to
the yearly expenses with startup costs and personnel. In addition, during the
year MSF has incurred ongoing legal fees of $1.6 million, a significant portion
of which related to defending lawsuits. For further information, see the
discussion under "MS Financial, Inc.--Legal Proceedings." Also, at the end of
1996, MSF accrued the expenses associated with the potential settlement of
various lawsuits in the state of Texas. The amount of this accrual totaled
$375,000. Also, during 1996, the Company expensed the remaining carrying value
of the cost of acquiring the Installment
81
<PAGE> 89
Contract origination program due to the uncertainties associated with its value
as a result of MSF's substantial 1996 net loss. The carrying amount expensed
totaled $257,000. Previously, this asset was being amortized on a
straight-line basis over ten years.
Net Income. As a result of the factors discussed above, net income
decreased by $28,515 from $6,501 in 1995 to a loss of $22,014 in 1996.
Comparison of 1994 to 1995
Interest and Fee Income on Installment Contracts and Securitizations.
Interest and fee income on Installment Contracts and Securitizations increased
by $2,441, or 24.4%, from $10,008 in 1994 to $12,449 in 1995. The increase in
interest income is primarily due to a 49.5% increase in average owned
Installment Contracts outstanding during the year. The increase in owned
Installment Contract balances results primarily from an 32.9% increase in the
volume of Installment Contracts acquired during 1995. These increases were
partially offset by a decrease in residual income attributable to excess case
flows on Securitizations which decreased 70.6% from $1,434 in 1994 to $422 in
1995. This reduction in recognized residual income is primarily the result of
reduced cash flow from the Securitizations, which in turn was caused primarily
by increased delinquencies during the last half of 1995. Residual income
attributable to excess cash flows on Securitizations is recognized based on
actual and expected cash flows and the estimated rate of return on the recorded
investment.
Interest Expense. Interest costs increased by $1,146, or 46.9%, from
$2,441 in 1994 to $3,587 in 1995. This increase is primarily due to a 34.0%
increase in average borrowings under the revolving credit facility to fund the
acquisition of Installment Contracts. Also, interest rates were higher during
the first half of 1995 compared to the first half of 1994, which is when the
bulk of MSF's borrowing were outstanding. During the third quarter of 1995,
MSF completed a Securitization, which resulted in $73.2 million in proceeds,
and received an equity infusion through the completion of initial public
offering of $21.4 million. The net proceeds were used to repay MSF's revolving
credit facility which in turn reduced MSF's interest cost.
Provision for Possible Losses on Installment Contracts. Provision for
possible losses on Installment Contracts increased by $141, or 20.6%, from $685
in 1994 to $826 in 1995. The allowance for possible losses on Installment
Contracts decreased from 1.5% of the Net Managed Portfolio in 1994 to 1.3% in
1995. The increase in the allowance was primarily attributable to a $1,184
valuation allowance that was recorded through a reduction in the recorded gain
on the 1995 Securitization completed during the third quarter offset by an
increase in losses charged to the valuation allowance account. The valuation
allowance in intended to cover uninsured losses and is set at a level
considered to be adequate to cover the expected future losses on the existing
Installment Contract portfolio after taking into account available reserves and
aggregate loss limits at MS Casualty to cover outstanding contracts. Increases
in the allowance are primarily based on the level of Installment Contracts,
historical loss experience and, to a lesser extent, current economic
conditions, operating practices and other factors which management deems
relevant. Losses on securitized Installment Contracts are limited to amounts
recorded as investment in the subordinated trust certificates and amounts due
under Securitizations.
Insurance Commissions. Insurance commissions increased by $367, or
25.2%, from $1,456 in 1994 to $1,823 in 1995, primarily as the result of a
59.8% increase in Installment Contract originations from branch offices.
However, commissions on the sale of Ancillary Products have decreased as a
percentage of total revenues from 1994 to 1995 due to MSF's decision in July of
1995 to discontinue offering guaranteed asset protection ("GAP") policies.
Also, in the fall of 1995, MSF reduced emphasis on selling other Ancillary
Products in an effort to make the offerings more favorable to automobile
dealers without increasing credit risk to MSF. MSF anticipates that as a
percentage of total revenue, commission income will continue to decrease in the
coming years since it anticipates that portfolio growth will come primarily
from the regional marketing program, from which MSF retains no commission on
the sale of Ancillary Products.
Gains on Securitizations. Gains on Securitizations increased by
$4,580, or 183.8%, from $2,492 in 1994 to $7,072 in 1995. This increase was
attributable to MSF's increase of 157.1% in total Installment Contracts sold
under Securitizations from $35,004 in 1994 to $90,000 in 1995, and an overall
improvement in efficiencies due primarily to the larger size of the 1995
Securitization. The 1995 gain on the Securitization was reduced by $1,250 of
realized losses on hedging transactions and is net of a valuation allowance of
approximately $1,184.
Service Fee Income. Service fee income increased by $716, or 58.0%,
from $1,235 in 1994 to $1,951 in 1995, due primarily to the 49.2% increase in
the average balance of securitized Installment Contracts being serviced by MSF.
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<PAGE> 90
Other Income. Other income increased by $133, or 21.2%, from $627 in
1994 to $760 in 1995 due primarily to a 59.8% increase in the dollar volume of
Installment Contracts originated through branch offices, which was partially
offset by a 38.7% decrease in title fee income in several branch offices and
certain nonrecurring items in 1994.
Operating Expenses. Operating expenses increased $2,751, or 41.8%,
from $6,589 in 1994 to $9,340 primarily due to a 43.7% growth of average
employees from 1994 to 1995. In addition, MSF had increased expense related to
the additional reporting requirements commencing after the completion of its
initial public offering during 1995.
Net Income. Net income increased by $2,116, or 48.3%, from $4,385 in
1994 to $6,501 in 1995. The increase was primarily the result of a 35.7%
increase in the number of Installment Contracts purchased during the year and
the large increase in the gain on Securitization of $4,580 from $2,492 in 1994
to $7,072 in 1995.
Quarterly Financial Data and Earnings
During 1996, MSF experienced a significant deterioration of portfolio
performance as shown by the increase in delinquencies quarter over quarter. As
a result of this deterioration, during the third and fourth quarters of 1996
and the first quarter of 1997, MSF increased the provision for losses on
Installment Contracts to $7.0 million,$12.5 million, and $4.3 million,
respectively. Also, as a result of higher losses during 1996, MSF recorded a
provision for possible losses on repossessed automobiles of $2.8 million at
year end. A valuation allowance was not previously considered necessary
because of MSF's insurance arrangement with MS Casualty. However, at year end,
the policy limits had been reached. In addition, at December 31, 1996, MSF
recorded a provision for impairment of amounts due under securitizations of
$3.0 million. This provision was deemed necessary because of the deterioration
of the performance of MSF's sold portfolio. These increases resulted in a
large net loss for both the third and fourth quarters.
During the third and fourth quarters of 1995, MSF did complete a $90.0
million Securitization which resulted in MSF recognizing a gain on sale of $5.4
million in the third quarter and $1.7 million during the fourth quarter.
The following tables set forth selected consolidated financial data
and earnings information for MSF on a quarterly basis for 1995, 1996 and the
first quarter of 1997.
83
<PAGE> 91
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED
3/31/96 6/30/96 9/30/96 12/31/96 3/31/97
------------------------------------------------ ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Number of contracts acquired during
period (not in thousands) 3,149 3,366 2,898 939 109
Principal amount of contracts acquired
during period $ 32,339 $ 34,979 $ 32,543 $ 10,967 $ 1,279
Net Managed Portfolio - end of period $133,277 $150,024 $163,837 $ 130,371 $104,966
Net Managed Portfolio - average
during period $126,008 $142,106 $157,769 $ 149,848 $117,595
Average principal balance of securitized
Installment Contracts during period $ 93,520 $ 78,120 $ 64,399 $ 52,807 $ 40,041
Average principal balance of owned
Installment Contracts during period $ 30,887 $ 62,071 $ 91,948 $ 104,138 $ 82,279
Net interest income before loss provisions $ 1,290 $ 2,535 $ 2,821 $ 2,962 $ 2,245
Net interest spread $ 1,272 $ 2,511 $ 2,809 $ 2,946 $ 2,232
Provision for possible losses on
installment contracts $ 250 $ 331 $ 7,009 $ 12,513 $ 4,342
Provision for impairment of amounts
due under securitizations -- -- -- $ 3,000 --
Provisions for possible losses
on repossessed automobiles -- -- -- $ 2,800 --
Net income (loss) $ (360) $ 142 $(3,986) $(17,810) $(5,042)
Net income (loss) per share $ (0.03) $ 0.01 $ (0.38) $(1.71) $ (.48)
Weighted average shares outstanding 10,452 10,856 10,427 10,428 10,430
Delinquency rate - end of period (1) 7.5% 8.3% 18.0% 19.3% 10.1%
Loss rate - annualized average for the period(1) 1.1% 1.1% 0.3% 22.0% 19.4%
Total assets $78,178 $108,987 $130,037 $101,435 $ 91,015
Notes payable $26,500 $60,000 $ 83,000 $75,813 $ 71,442
Total liabilities $34,779 $65,428 $ 90,459 $79,681 $ 73,852
Stockholder's equity $43,399 $43,559 $ 39,578 $21,754 $ 17,163
</TABLE>
84
<PAGE> 92
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
3/31/95 6/30/95 9/30/95 12/31/95
--------------------------------------------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Number of contracts acquired during
during period (not in thousands) 2,375 2,726 1,709 1,958
Principal amount of contracts
acquired during period $ 23,421 $ 26,394 $ 16,942 $ 20,216
Net Managed Portfolio - end of
period $ 98,629 $110,984 $112,407 $120,318
Net Managed Portfolio - average
during period $ 93,102 $105,040 $111,966 $115,903
Average principal balance of
securitized Installment
Contracts during period $ 38,616 $ 33,152 $ 45,405 $ 93,618
Average principal balance of owned
Installment Contracts during period $ 53,667 $ 72,023 $ 86,843 $ 23,080
Net interest income before loss provisions $ 2,024 $ 2,751 $ 3,117 $ 1,070
Net interest spread $ 2,018 $ 2,749 $ 3,090 $ 1,005
Provision for possible losses on
installment contracts $ 159 $ 357 $ 171 $ 139
Provision for impairment of amounts
due under securitizations -- -- -- --
Provision for possible losses
on repossessed automobiles -- -- -- --
Net Income $ 595 $ 781 $ 4,306 $ 819
Earnings per share $ 0.06 $ 0.08 $ 0.40 $ 0.07
Weighted average shares outstanding 9,332 9,332 10,882 11,227
Delinquency rate - end of period (1) 5.1% 6.9% 9.1% 12.6%
Loss rate - annualized average for the period(1) 0.7% 0.6% 2.0% 1.5%
Total assets $ 77,474 $ 97,122 $ 51,939 $ 49,718
Notes payable $ 51,793 $ 70,543 -- --
Total liabilities $ 58,776 $ 77,642 $ 6,653 $ 4,734
Stockholders' equity $ 18,698 $ 19,480 $ 45,286 $ 44,984
</TABLE>
- -----------------------------
(1) Percentages are based on the gross amount scheduled to be paid on each
Installment Contract, including unearned finance charges and other
charges.
Installment Contract Loss Experience
On all installment contracts with a purchase date on or prior to July
1, 1996, dealers purchased repossession loss insurance from MS Casualty, an
insurance company rated A- by A.M. Best & Co. For these contracts, MS Casualty
retains the premiums paid by dealers and is obligated to pay MSF up to $7,000
per vehicle upon repossession of the financed vehicle for claims made under the
policies; provided, however, that MS Casualty's aggregate liability for all
repossession losses during any policy year may not exceed the product of $600
and the number of automobiles contracted during that policy year. At the end
of 1996, substantially all amounts available under the insurance arrangement
with MS Casualty have been recovered by the Company. Effective July 1, 1996,
MSF discontinued repossession loss insurance and began retaining this premium,
which averaged $729 per Installment Contract and 6.43% of the amount financed..
Accordingly, MSF will be bearing all of the risks of loss on installment
contacts originated subsequent to July 1, 1996. Through the first quarter of
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<PAGE> 93
1997, MSF has experienced increased delinquency, losses and repossessions, as
shown in the following credit loss/repossession experience and delinquency
tables. As a result of higher losses and delinquencies, MSF substantially
increased its allowance for possible losses on Installment Contracts during the
third and fourth quarters of 1996 and the first quarter of 1997.
MSF regularly reviews the adequacy of its allowance for possible
losses on installment contracts. This allowance is set at a level considered
to be adequate to cover the expected future losses on the existing installment
contract portfolio after taking into account reserves and available loss limits
of MS Casualty for outstanding contracts. Increases in the allowance are
primarily based on the level of installment contracts, increases in delinquency
trends, historical loss experience and, to a lesser extent, current economic
conditions, operating practices and other factors which management deems
relevant.
MSF's charge-off policy is based on a contract-by-contract review of
delinquent installment contracts. MSF generally charges off an installment
contract at the time the collateral is repossessed and sold at auction,
although certain installment contracts may be charged-off sooner if management
determines them to be uncollectible. Also, beginning in December 1996, any
account which reaches 150 days contractually delinquent is charged off.
The following table summarizes MSF's Installment Contract and
repossession loss experience:
<TABLE>
<CAPTION>
CREDIT LOSS/REPOSSESSION EXPERIENCE (1)
--------------------------------------------------------------
THREE THREE
YEAR ENDED DECEMBER 31, MONTHS MONTHS
--------------------------------- ENDED ENDED
1994 1995 1996 3/31/96 3/31/97
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average Gross Managed Portfolio $95,826 $139,959 $192,765 $163,583 $165,431
Average month-end number of
Installment Contracts 9,907 13,693 17,749 16,200 15,105
Repossessions settled as a percentage of
average month-end number of
Installment Contracts outstanding (2) 7.7% 11.2% 17.3% 3.74% 8.59%
Gross Charge-offs (3) $ 2,288 $ 6,355 $ 21,336 $ 2,920 $ 9,059
Recoveries (4) 417 407 405 112 951
Claim Payments from MS Casualty (5) 1.315 4,200 9,288 2,378 68
------- -------- -------- -------- --------
Net Charge-offs (6) $ 556 $ 1,748 $ 11,643 $ 430 $ 8,040
======= ======== ======== ======== ========
Net Charge-offs as a percentage of average
gross Managed Portfolio outstanding 0.6% 1.2% 6.0% 1.1% 19.4%
==== ==== ==== ==== =====
Experience refund (7) $ 900 $ -- $ -- $ -- $ --
- --------------------------
</TABLE>
(1) All amounts and percentages are based on the gross amount scheduled to
be paid on each Installment Contract, including unearned finance
charges and other charges. The information in the table includes
Installment Contracts previously sold through Securitizations which
MSF continues to service.
(2) Repossessions settled as a percentage of average month-end number of
Installment Contracts outstanding have not been annualized for the
quarters presented.
(3) Gross charge-offs include principal, late charges, and repossession
expenses and are net of insurance (other than repossession loss
insurance) claims and rebates and proceeds from the sale of
repossessed financed vehicles.
(4) Recoveries are collections net of attorney fees and court costs.
(5) Refers to claims paid for repossession losses under the MS Casualty
repossession loss insurance policies maintained on the vehicles under
Installment Contracts, net of recoveries.
(6) Net charge-offs equal gross charge-offs minus recoveries and insurance
claim payments.
(7) Represents amounts refunded to MSF pursuant to its agreement with MS
Casualty which allows MSF to recapture any profits from positive
underwriting experience after paying an administrative fee on the
repossession loss insurance policies.
86
<PAGE> 94
Installment Contract Delinquency Experience
MSF considers an Installment Contract to be delinquent if the borrower
fails to make any payment in full on or before the due date as specified by the
terms of the Installment Contract. MSF typically initiates contact with
borrowers whose payments are not received by the due date within eight days of
the due date. The period-end delinquencies on MSF's Gross Managed Portfolio
set forth in the table below are not necessarily representative of average
delinquencies during the periods indicated.
<TABLE>
<CAPTION>
Delinquency Experience at December 31,
-----------------------------------------------------------------------------
(dollars in thousands)
1994 1995 1996
------------------------ ------------------------ ------------------------
Number of Number of Number of
Contracts Amount Contracts Amount Contracts Amount
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Owned Installment Contracts
Portfolio 4,925 $55,349 1,310 $18,428 8,140 $115,318
Period of delinquency
31-60 days 134 1,336 60 629 753 10,634
61-90 days 45 475 28 304 356 5,055
91-119 days 18 231 27 266 168 2,444
120 days or more 35 393 131 1,660 205 2,983
------ ------- ------- ------- ----- --------
Total delinquencies 232 2,435 246 $2,859 1,482 $21,116
====== ======= ======= ======= ===== ========
Total delinquencies as a
percent of the portfolio 4.7% 4.4% 18.8% 15.5% 18.2% 18.3%
====== ======= ======= ======= ===== ========
Securitized Installment
Portfolio 5,979 $56,506 13,195 $135,000 7,424 $55,592
Period of delinquency
31-60 days 189 1,965 1,001 10,461 785 6,103
61-90 days 77 923 242 2,813 296 2,437
91-119 days 22 250 153 1,839 175 1,620
120 days or more 44 514 118 1,307 172 1,695
------ ------- ------- ------- ----- --------
Total delinquencies 332 3,652 1,514 $16,420 1,428 $11,855
====== ======= ======= ======= ===== ========
Total delinquencies as a
percent of the portfolio 5.6% 6.5% 11.5% 12.2% 19.2% 21.3%
====== ======= ====== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
DELINQUENCY EXPERIENCE AT MARCH 31,
--------------------------------------------------------------
(DOLLARS IN THOUSANDS)
1996 1997
----------------------------- ---------------------------
Number of Amount Number of Amount
Contracts (in thousands) Contracts (in thousands)
--------- ---------
<S> <C> <C> <C> <C>
Owned Installment Contracts
Portfolio 4,244 $62,388 7,411 $94,813
Period of delinquency
31-60 days 99 1,380 397 5,188
61-90 days 41 461 123 1,709
91 days or more 69 759 211 3,020
------ -------- ----- -------
Total delinquencies 209 $ 2,600 731 $ 9,917
====== ======== ===== =======
Total delinquencies as a
percent of the portfolio 4.9% 4.2% 9.9% 10.5%
====== ======== ===== =======
Securitized Installment Contracts
Portfolio 11,727 $110,402 5,743 $39,799
Period of delinquency
31-60 days 469 4,825 200 1,542
61-90 days 224 2,402 87 724
91 days or more 285 3,050 143 1,467
------ -------- ----- -------
Total delinquencies 978 $ 10,277 430 $ 3,733
====== ======== ===== =======
Total delinquencies as a
percent of the portfolio 8.3% 9.3% 7.5% 9.4%
====== ======== ===== =======
</TABLE>
87
<PAGE> 95
Delinquent contracts and gross charge-offs increased throughout 1996.
Though MSF worked diligently to reduce those trends, turnover in the customer
service department, management and staff have impeded MSF's ability to
rehabilitate delinquent loans and thus have resulted in higher delinquencies,
repossessions and chargeoffs. In addition, management of MSF believes there
has been a general deterioration in the credit quality for nonprime consumer
credit obligations as is evidenced by national trends in delinquencies for
those consumers.
MSF has taken numerous steps to improve its delinquency ratios and
charge-offs. During 1996, MSF adopted a new, more stringent credit scoring
system and tightened its credit standards. In July, MSF installed a credit
scoring system developed by independent consultants. This scoring system was
developed with historical information based on the performance of loans that
MSF purchased from January 1, 1993 through June 30, 1994. This system
incorporated demographic information of the customer and places heavy emphasis
on the previous and current credit history of the application. Each applicant
was required to meet a minimum qualifying score and satisfy normal underwriting
criteria. Changes made to the credit criteria included reducing advance rates
on new vehicles from 115% to 100% of invoice plus tax, title, and license,
reducing the payment to income ratio from 25% to 20% of gross income, allowing
only 50% of any manufacturer's rebate to apply to the down payment, and tieing
the term of Installment Contracts more tightly to minimum NADA trade-in values
and certain mileage restrictions.
In the first quarter of 1997, MSF changed its underwriting criteria to
match those of Search. The changes included requiring a minimum annual income
of $12,000, increasing the maximum debt to income ratio from 42% to 50% of
gross income, requiring a three-year traceable residence and employment
history, requiring each applicant to have a minimum high credit of $1,000 paid
or paying satisfactorily within the last twelve months and eliminating all
vehicles with more than 80,000 miles or which are older than six years.
During the third quarter of 1996, MSF's management reorganized certain
functional areas and reassigned responsibilities to place more emphasis on
collection efforts. During October 1996, MSF opened a second customer service
office in Mobile, Alabama. Management believes this customer service office
will allow MSF to hire more experienced personnel. As a result of these steps,
along with an increased level of repossessions and chargeoffs, MSF's
delinquency has decreased from 19.3% at December 31, 1996 to 10.1% at March 31,
1997.
Pursuant to the terms of MSF's Securitization Trusts, once average
delinquencies exceed 10% on the 1994 Securitization and 12% on the 1995
Securitization for any two consecutive months, MSF could be replaced as
servicer. MSF exceeded these amounts at August 31, 1996 for the 1994 and 1995
Securitization. Delinquencies reached a high of 16.2% for the 1994
Securitization at December 31, 1996 and 21.6% for the 1995 Securitization at
October 31, 1996.
Liquidity and Capital Resources (dollars in thousands, except as noted)
General. MSF requires capital primarily for the purchase of
Installment Contracts and for working capital. In the past, MSF has financed
these requirements with borrowing under a revolving credit facility and
warehouse facility and through MSF's Securitization program.
During 1996, MSF suffered substantial losses and, accordingly,
substantial reductions in stockholders' equity. These negative financial
trends resulted from material increases in delinquencies and losses on owned
and serviced Installment Contracts. As a result, MSF is facing a severe
liquidity problem because of (i) the lack of availability of funds under MSF's
revolving credit facility; (ii) the termination of MSF's warehouse facility;
(iii) MSF's inability to complete a Securitization in 1996; and (iv) the delay
of payments to MSF under MSF's prior Securitization programs. MSF has been
unable to solve its liquidity problems and, on February 7, 1997, executed the
Merger Agreement with Search, which, if consummated, will result in MSF
becoming a wholly-owned subsidiary of Search, and MSF's former stockholders
becoming stockholders of Search. If the Merger with Search is not consummated,
MSF will likely be forced to liquidate its portfolio of Installment Contracts
through normal collections and/or sales and cease operating as a going concern,
unless alternative financing sources are available to MSF.
Cash Flows From Operating, Investing and Financing Activities. As
shown on the Consolidated Statements of Cash Flows, cash and cash equivalents
increased by $566 in 1996, to $1,454 at December 31, 1996. The increase
reflected $74,597 net cash provided by financing activities, primarily from
increased borrowings under MSF's Revolving Credit Facility, and $4,645 net cash
provided by operating activities, offset by $78,676 net cash used in investing
activities. The net cash used in investing activities was primarily $109,796
in Installment Contracts purchased, offset by $15,595 in repayment on
Installment Contracts and the $14,427 proceeds from sale of Installment
Contracts. The net cash provided
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<PAGE> 96
by operating activities of $4,645 includes net income (loss), adjusted for
various noncash charges to income, as well as changes in certain balance sheet
items. Cash and cash equivalents increased to $4,296 at March 31, 1997
principally due to a decrease in the volume of Installment Contracts purchased.
Revolving Credit Facility. The revolving credit facility, which
provides funds to purchase Installment Contracts and for working capital,
previously consists of a three-year revolving facility of up to $45.0 million
and a 364-day revolving facility of up to $45.0 million. If not extended or
renewed, the 364-day facility could have been converted into a two-year term
facility. The maximum amount available under the revolving credit facility was
limited to a borrowing base principally consisting of 90% of the net adjusted
amount of eligible Installment Contracts. The revolving credit facility is
secured by substantially all of MSF's assets other than the accounts owned by
MS Auto Receivables Company.
As of May 31, 1997, MSF had an outstanding balance of $65.1 million on
the MSF Revolving Credit facility bearing a rate of interest of 9.5%.
In November 1996, MSF advised its lenders that it was in default under
certain covenants under the agreements governing the revolving credit facility.
Effective December 16, 1996, MSF and its lenders reached an agreement to amend
these agreements. The amended agreements redefined eligible loans and reduced
the advance rate from 90% to 85% of eligible loans. The amendments obligated
MSF to make certain mandatory prepayments by January 31, 1997, increased the
interest rate and imposed a $562,500 restructuring fee. The lenders agreed to
extend the prepayment date to February 7, 1997. On February 19, 1997, the
lenders, Search and MSF entered into a letter agreement specifying the terms of
certain agreements that the parties agreed to execute and deliver (the "Term
Sheet"). In addition, the lenders consented to the execution by MSF of the
Merger Agreement and the consummation of the transactions contemplated therein.
The provisions of the Term Sheet were incorporated into an amended loan
agreement which was further amended as of May 15, 1997.
Under the Term Sheet, as amended, Search, MSF and the lenders agreed
to amend the agreements governing the revolving credit facility pending
consummation of the Merger to provide that MSF's obligations will be payable in
full on the earlier of June 30, 1997, the facility Termination Date or the
closing date of the Merger. The amount of the advances under the revolving
credit facility were reduced from $90,000,000 to $75,000,000. Advances will
only be made for Installment Contracts that comply with Search's underwriting
criteria, are within an agreed cash budget and are purchased from dealers in
the ordinary course of business. MSF will be required to reduce the revolving
credit facility by the amount of any proceeds from income tax refunds, and any
prepayments from federal income tax refunds will permanently reduce the amount
of the MSF Revolving Credit facility. The lenders also required the
establishment of a lock box account for collection of the proceeds from MSF's
receivables, with all proceeds to be applied as a mandatory prepayment of the
facility on a daily basis. MSF is required to maintain the effectiveness of
its collection operations in Ridgeland, Mississippi and Mobile, Alabama. MSF
may continue to sell Installment Contracts originated by it prior to the Merger
to Search in accordance with its December 12, 1996, letter agreement with
Search Funding Corp. Search may also lend money to MSF for the purpose of
purchasing Installment Contracts by MSF, but this indebtedness, and any liens
in favor of Search on the Installment Contracts purchased by MSF with these
funds, will be subordinated to the indebtedness represented by, and the liens
securing, the revolving credit facility. The Term Sheet also specifies that
any material amendments to the Merger Agreement will require the prior written
consent of the lenders. If the Merger is terminated for any reason, Search
will be obligated, if requested by the lenders, to service MSF's receivables
for a period of 90 days following the termination, and Search will purchase all
receivable acquired by MSF since the effective date of the amendments to the
revolving credit facility. The Term Sheet also specifies that Search and
Merger Sub must agree to enter into certain additional amendments to the
revolving credit facility to be effective at the Effective Time of the Merger.
On the closing date of the Merger, under the Term Sheet, the
agreements governing the revolving credit facility will be amended to provide
that MSF will have available a revolving credit facility in an aggregate amount
equal to the outstanding principal balance of all of the receivables on such
date. Search will agree to guarantee MSF's obligations to repay the facility.
Under the amended facility, MSF will be entitled to receive additional advances
to the extent of any difference between the borrowing base, as determined from
time to time, and the outstanding principal balance of the amended facility.
These advances may be used to pay operating expenses in the ordinary course of
business and the purchase cost of new Installment Contracts. The loan will
bear interest at prime plus one percent per annum and will terminate on the
earlier of the first anniversary of the Effective Time, any prepayment in full
of the loan and any date on which the lenders accelerate payment of the
facility at which time all outstanding balances will be payable in full. MSF
will make principal payments on the amended facility on a weekly basis in an
amount equal to all collections with respect to its motor vehicle receivables
and repossessed vehicles. All proceeds will be deposited in a lock box or
blocked account collaterally assigned to the lenders. On the six-month
anniversary of the Effective Time, the commitment under the facility will be
permanently
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<PAGE> 97
reduced by $25,000,000 plus a proportionate reduction of certain "over advance"
amounts owed by MSF at the Effective Time. MSF must repay the outstanding
balance to the extent it exceeds the reduced commitment amount. Any proceeds
from restructuring of MSF's existing securitizations or from income tax refunds
must be employed as mandatory prepayments of the loan and will permanently
reduce the commitment amount. Mandatory prepayments must also be made in the
amount of any proceeds from sales or other dispositions of Installment
Contracts and other collateral. MSF will be required to deliver weekly
borrowing base certificates. If the outstanding principal balance of the loan
exceeds the borrowing base, MSF will be required to make additional prepayments
or cause additional eligible receivables to be transferred to MSF for inclusion
in the borrowing base, in either case, in an amount sufficient to eliminate the
excess. The facility will be secured by a first priority security interest in
all of MSF'S assets. If, upon termination of the facility, any balance remains
outstanding, MSF has agreed to pay the lenders a refinancing fee equal to five
percent of the outstanding balance on such debt. In addition, MSF has agreed
to pay to the lenders a $350,000 fee on the earlier of the full repayment of
the amended facility, the termination of the facility is subject to the
following conditions: (i) consummation of the Merger; (ii) receipt of all
necessary consents and approvals from all third parties for the consummation of
the Merger and the execution of the amendments to the revolving credit
facility, and (iii) receipt of all necessary consents and approvals from
Search's exiting lenders and of any reasonably required intercreditor
agreements.
Warehouse Facility. MSF, through a special purpose subsidiary,
established a $50.0 million structured "warehouse" revolving credit
securitization facility.
The warehouse facility was structured like a Securitization. However,
unlike a typical Securitization, (i) the Installment Contracts sold are not
intended to be held to maturity but are instead to be "warehoused" for up to 12
months pending their later sale in a Securitization, (ii) the pass-through
interest rate is floating, and (iii) MSF's sale of the Installment Contracts is
accounted for as a financing rather than a sale.
Loans made pursuant to the warehouse facility are insured by Financial
Security Assurance, Inc. ("FSA").
In September 1996, FSA advised MSF that it would not insure any loans
made pursuant to the warehouse facility on terms which were acceptable to MSF,
effectively terminating the availability of this facility. See "MS Financial
Inc.--Legal Proceedings" for a description of certain claims made against MSF
for fees payable under the warehouse facility.
Securitization Programs. In 1992, MSF began selling interests in
pools of its Installment Contracts to investors through the issuance of
triple-A rated, asset-backed securities. The net proceeds from these periodic
Securitizations were generally used to pay down outstanding loans under the
revolving credit facility and the warehouse facility, thereby making such
facilities available for the purchase of additional Installment Contracts.
During 1994 and 1995, MSF securitized $35.0 million and $90.0 million,
respectively, of MSF's Installment Contracts, for an aggregate of $125.0
million. The average APR on Installment Contracts securitized in 1994 and 1995
was approximately 20.6%.
In each of its Securitizations, MSF sold its Installment Contracts to
a special purpose subsidiary corporation ("SPC"), which then sold the
Installment Contracts to a newly formed grantor trust in exchange for
certificates of beneficial interests in the trust. In the 1994 Securitization,
the certificates consisted of $1.75 million in subordinated certificates
retained by MSF and $33.25 million in senior certificates sold to investors.
MSF did not retain any portion of the certificates issued in connection with
the Securitization closed in 1995. The holders of such certificates are
entitled to a proportionate amount of monthly principal reductions in the
underlying Installment Contracts and interest at a fixed pass-through rate each
month. As a credit enhancement for each Securitization, FSA issued an
insurance policy which guarantees principal and interest payments due to the
holders of that portion of the certificates sold to investors. MSF services
the Installment Contracts sold to the trust and receives a monthly fee at a
base rate of 3.75% per annum, plus certain late fees, prepayment charges and
similar fees received on securitized Installment Contracts. The service fee of
3.75% is considered reasonable based on the expense of servicing subprime
Installment Contracts.
The Securitization transactions allow MSF to repurchase loans when the
balances have been reduced to a level not greater than 10% of the original pool
balance.
Gains from the sale of Installment Contracts in Securitizations have
provided a significant portion of MSF's revenues. SFAS No. 77 requires that
the gain be calculated as the difference between the sales price and the net
receivables, less any necessary accrual for recourse provisions. The specific
methodology for the gain calculation for these transactions is provided by EITF
Issue No. 88-11 and is described as follows: (i) sales price for any senior
certificates is calculated as the proceeds received; and (ii) the recorded
investment in the loans is the net carrying value under the simple interest
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<PAGE> 98
methodology and is allocated between the senior and subordinate certificates
based on the relative fair values of those portions at the date of sale. If
excess servicing is retained, a portion of the recorded investment is allocated
to excess servicing based on its relative fair value.
To allocate the recorded investment in the loans, the fair value of
the senior certificates is determined to be the sales price. The fair value of
the subordinate certificates is determined based on the original terms of the
portion retained, estimating prepayments and discounting such cash flows using
a discount rate which reflects the term, risk and other considerations. The
fair value of the excess servicing is calculated (i) using cash flow
projections of payments to be received assuming prepayments, (ii) less payments
to the senior certificate holders, (iii) less payments for servicing fee,
standby servicing fee and surety premiums to the certificate insurer, (iv) plus
an estimate of interest to be earned on the collection account and
subordination spread account and (v) less payment to the subordinate
certificate holders.
Prepayment levels used in the original projections for MSF's
Securitizations were 1.5 ABS (absolute prepayment speed). This estimate was
derived by MSF's financial advisors based on historical performance of similar
loans. MSF's tracking models were updated monthly for actual performance
within each Securitization. The formulae in the models would recalculate the
projections continuing to apply the 1.5 ABS assumption to future months.
Although MSF did not recalculate a revised prepayment speed, per se, at
December 31, 1996, adjustments were made to the 1995-1 Securitization model to
incorporate the faster prepayment speeds observed in the life cycles of the
three prior Securitization models.
The interest rate paid to investors in MSF's Securitizations was fixed
upon the close of each Securitization and ranged from 4.66% on 1993-1, to 6.75%
on 1994-1, to 6.2% on 1995-1.
The collection account and subordination spread account are trustee
accounts for the accumulation of funds until remittance in accordance with
terms of the agreement. Cash flows after payment of the senior certificates
and after payment of fees and expenses are used to fund a subordination spread
account held by the trustee. This account is provided for the benefit of the
certificate insurer and would be used by the trustee to fund any shortfalls to
the senior certificate holders. Once this account is funded, all remaining
cash goes to MSF as collections on subordinate certificates and as interest
differential. At the end of the Securitization, the funds in the subordination
spread account go to MSF. The fair value of cash flows is calculated using the
expected net cash flows to MSF, discounted at a rate of approximately 12%.
Once the recorded investment in the loans has been allocated, gain is
recorded as the difference between the sales price for the senior certificates
and the allocated basis in the senior certificates. The subordinate
certificates are recorded at their allocated basis, and the excess servicing is
recorded at its allocated basis. Prior to January 1, 1997, the subordinated
certificates and the excess servicing were carried by MSF in its financial
statements at their historical cost. Since MSF's adoption of SFAS No. 125
effective January 1, 1997, these assets are carried at their fair value. MSF
also nets expenses incurred in the Securitization against the gain calculation.
In MSF's financial statements, the subordinated certificates are
classified as "Retained portion of contracts sold in securitizations", the
excess servicing (interest differential) and cash used to fund the collateral
accounts are classified as "amounts due under securitizations." The simple
interest balance of installment contracts sold is removed from installment
contracts owned and shown as installment contracts sold in Note 4 to MSF's
Consolidated Financial Statements. From the income statement side, the gain on
sale is shown as such on the income statement, and earnings from the retained
subordinated certificates and amounts due under securitizations are classified
as interest and fee income on installment contracts and securitizations. MSF
does not recognize earnings on amounts due under securitizations until cash is
received by MSF.
As disclosed in Note 5 to MSF's Consolidated Financial Statements, MSF
is contingently liable on the securitized receivables for losses attributable
to default. In accordance with SFAS No. 77, MSF accrues those estimated losses
at the time the loans are sold. In MSF's financial records, those losses
affect MSF's ability to fully collect the amounts shown in Note 4 as retained
portion of installment contracts sold and amounts due under securitizations.
However, as disclosed in Note 5, such risk of accounting loss does not exceed
amounts recorded as assets in the consolidated balance sheet. Nonetheless,
when MSF believes that amounts to be received are less than the recorded amount
of the asset based on discounted cash flows, an impairment loss is taken and
the asset written down.
In 1996, MSF exceeded certain delinquency and loss triggers in the
outstanding Securitizations. As a consequence, excess cash flow otherwise
payable to MSF from the Securitizations was retained within the Securitizations
as additional collateral for the certificate holders. Pursuant to the terms of
the Securitization documents, in October 1996 FSA increased
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the premiums on the policies issued to insure the certificates. Because of the
violation of the delinquency and loss triggers, FSA has the right to remove MSF
as servicer.
In September 1996, FSA advised MSF that it would not insure the MSF
Securitization planned for September, and MSF was unable to complete a
Securitization in 1996.
Loan Sales. During November 1996, MSF sold approximately $15 million
in loans to Search for approximately $14.4 million. $13.5 million of the
proceeds were used to reduce the balance outstanding under the revolving credit
facility. During the first quarter of 1997, MSF sold Installment Contracts of
$728 thousand to Search for $689 thousand. MSF has no continuing interest in
these loans or loan repurchase obligations.
Interest Rate Exposure and Hedging Strategy. Increase in interest
rates generally result in increases in MSF's expenses and, to the extent not
offset by increases in the volume of Installment Contracts purchased, can lead
to decreases in profitability. MSF's borrowings under the revolving credit
facility and the warehouse facility are at variable rates. Installment
Contracts bear interest at fixed rates which are generally at or near the
maximum rates permitted by law. Higher interest rates increase MSF's borrowing
costs, and such increased borrowing costs generally cannot be offset by
increases in the rates with respect to Installment Contracts purchased.
Historically, other than pursuant to Securitizations, MSF had not
entered into hedging transactions to limit its exposure to short-term interest
rate fluctuations. In 1995, however, MSF entered into $80.0 million notional
amount of U.S. Treasury interest rate futures contracts that closely paralleled
the average life and the net amount of the senior certificates issued to
investors in connection with the 1995 Securitization. The accumulated loss on
the contracts of $1.25 million was paid at the settlement of the contracts and
included in the measurement of the gain on the Securitization transaction.
Inflation
Increase in inflation generally results in higher interest rates.
Higher interest rates generally result in increases in MSF's expenses and, to
the extent not offset by increases in the volume of or interest rates of
Installment Contracts purchased, can lead to decreases in its profitability, as
described above.
Seasonality and Quarterly Fluctuations
Although MSF's operations do not fluctuate seasonally or quarterly,
its revenues and net income have, historically, been higher in the quarters in
which it completes a Securitization. However, no assurances can be made that
MSF's revenue and net income will be higher in future periods in which MSF
completes a Securitization.
SELECTED FINANCIAL DATA
Certain selected financial data for MSF appears under the captions
"Summary--Selected Historical and Pro Forma Consolidated Financial and
Operating Data" and "Summary--Comparative Per Share Data" in this Joint Proxy
Statement/Prospectus.
FINANCIAL STATEMENTS
The audited consolidated financial statements of MSF and its
subsidiary for the years ended December 31, 1994, 1995 and 1996, together with
the report of KPMG Peat Marwick L.L.P. thereon dated February 24, 1997 and
notes thereto, are included as Annex D to this Joint Proxy
Statement/Prospectus. The unaudited consolidated financial statements of MSF
and its subsidiary for the periods ended March 31, 1997 and 1996 are included
in Annex D to this Joint Proxy Statement/Prospectus.
PRINCIPAL AND OTHER STOCKHOLDERS OF MSF
The following table sets forth certain information regarding
beneficial ownership of MSF Common Stock, as of March 10, 1997, by (i) each
director of MSF, (ii) MSF's executive officer, (iii) each person known to MSF
to be the beneficial owner of more than 5% of the outstanding MSF Common Stock,
and (iv) all directors and executive officers of MSF as a group. Unless
otherwise indicated, the persons named below have, to the knowledge of MSF,
sole voting and investment power with respect to the shares beneficially owned
by them.
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<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- ------------------------ ---------------- ----------------
<S> <C> <C>
MS Diversified Corporation 4,320,000 (1) 41.4%
715 South Pear Orchard Road
Suite 400
Ridgeland, Mississippi 39157
Golder, Thoma, Cressey, Rauner, Inc. 3,720,000 (2) 35.7%
6100 Sears Tower
Chicago, Illinois 60606
James B. Stuart, Jr. 4,680 (3) *
Philip A. Canfield 3,000 (3) *
Carl Herrin 1,000 (3)*
Harold A. Hogue 33,838 (4) *
Robert P. Plummer 1,500 (5) *
Reed Bramlett 1,000 (3) *
Bruce L. Miller 1,000 (6) *
Carl D. Thoma 1,000 (3) *
Vann R. Martin 116,926 (7) 1.1%
All directors and executive officers as a group
(9 persons) 163,944 1.5%
</TABLE>
- -----------------------------------
* Indicates less than 1%.
(1) Includes 3,070,000 shares held by MS Financial Services, Inc., a
wholly-owned subsidiary of MSD.
(2) Represents shares held by Golder Thoma Cressey Rauner Fund IV, L.L.P.
("GTCR IV"). Golder, Thoma, Cressey, Rauner, Inc. serves as the
general partner of Golder, Thoma, Cressey, Rauner IV, L.L.P., which in
turn serves as the general partner of GTCR IV.
(3) Includes or represents options to purchase 1,000 shares at $12 per
share.
(4) Includes options to purchase 1,000 shares at $7.3125 per share and
options to purchase 19,558 shares at $2.50 per share.
(5) Includes options to purchase 1,000 shares at $5.25 per share.
(6) Represents options to purchase 1,000 shares at $5.25 per share.
(7) Includes options to purchase 15,645 shares at $12 per share and 95,820
shares at $2.50 per share.
MANAGEMENT OF MSF
Business Experience. MSF's sole remaining executive officer, Vann R.
Martin, President and Chief Operating Officer, will continue as an executive
officer of MSF following the Merger and is expected to be appointed Executive
Vice President of Search. Mr. Martin, age 41, has been with MSF and its
predecessors since inception and has served as President and Chief Operating
Officer of MSF and its immediate predecessor since 1989.
One director of MSF, James B. Stuart, Jr., MSF's Chairman of the
Board, will be appointed as a director of Search following the Merger. Mr.
Stuart, age 69, has served as President and Chief Executive Officer of MSD
since December 1995. From 1983 to December 1995, he served as Senior Vice
President of MSD and President of MS Loan Center, Inc., a consumer loan
subsidiary of MSD.
Compensation. The following table sets forth the compensation paid by
MSF for services rendered for the fiscal years ended December 31, 1996,
December 31, 1995 and December 31, 1994, to Mr. Martin.
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<PAGE> 101
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
------------------------------ UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) (1) ($)(2)
--------------------------- ---- ---------- --------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Vann R. Martin 1996 131,827 -- -- 7,000
President and Chief Operating Officer 1995 120,000 48,000(3) 97,780 7,870
1994 100,000 40,000 146,664 7,750
</TABLE>
- ----------------------------------
(1) Under the Employee's Equity Incentive Plan, Mr. Martin was granted
options for the purchase of (a) up to 146,664 shares of MSF Common
Stock at an exercise price of $2.50 per share in 1994, (b) up to
19,556 shares of MSF Common Stock, respectively, at an exercise price
of $2.50 per share in January 1995, and (c) up to 78,224 shares of MSF
Common Stock at an exercise price of $12.00 per share in July 1995.
(2) Reflects amounts contributed by MSF under MSF's Profit Sharing 401(k)
Plan and Trust paid by MSF and/or its subsidiaries, plus director's
fees paid by a subsidiary of MSF.
(3) Bonus for 1995 services was paid in 1996. No bonus was earned for
1996.
Exercisability of Options at Fiscal Year End. The following table
sets forth information concerning the number of unexercised stock options held
by Mr. Martin at December 31, 1996. No options were exercised by Mr. Martin in
1996 or were "in-the-money" at December 31, 1996.
AGGREGATE FISCAL YEAR END OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING
UNEXERCISED
OPTIONS AT FY-END(#)
--------------------
NAME EXERCISABLE/UNEXERCISABLE
---- -------------------------
<S> <C>
Vann R. Martin 78,222/166,222
</TABLE>
Employment Agreement. MSF's amended and restated employment agreement
with Mr. Martin provides that he will be entitled to receive an annual base
salary of $120,000, subject to periodic increases by the Board of Directors,
and will be eligible for an annual bonus of up to 40% of his annual base
salary. In addition, he is also eligible to participate in all present and
future fringe benefit plans of MSF including option, profit-sharing, insurance
and similar plans. The employment agreement with Mr. Martin states that he
will be provided with one year of severance pay in the event he is terminated
or resigns with good reason following a change of control of the Company.
Further, the employment agreement provides that he will be prohibited from
competing with the business of MSF during the period he is receiving severance
pay. The employment agreement shall continue until his earlier death,
retirement at age 65, removal or permanent disability.
LEGAL MATTERS
The validity of the issuance of the shares of Search Common Stock to
be issued in connection with the Merger will be passed upon for Search by
Bracewell & Patterson, L.L.P., Dallas, Texas. Haynes & Boone, L.L.P., special
counsel to MSF, will render an opinion with respect to certain federal income
tax consequences of the Merger. See "The Merger--Certain Federal Income Tax
Considerations."
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EXPERTS
The consolidated financial statements set forth in Annex E and Annex F
to this Joint Proxy Statement/Prospectus for the fiscal year ended March 31,
1997, the transition period ended March 31, 1996 and the fiscal year ended
September 30, 1995 have been audited by BDO Seidman, LLP, independent auditors,
as stated in their reports, which are incorporated herein by reference and have
been so incorporated in reliance on the reports of such firm, given on their
authority as experts in accounting and auditing.
The financial statements of DACC, as of and for the three months ended
March 31, 1996 and as of and for the fiscal year ended December 31, 1995,
incorporated in this Prospectus by reference from the Company's Form 8-K
Current Report, as amended, dated August 6, 1996 have been audited by BDO
Seidman, LLP, independent certified public accountants, as stated in their
reports, which are incorporated herein by reference, and have been so
incorporated in reliance upon such reports given upon the authority of that
firm as experts in accounting and auditing.
The consolidated financial statements of MSF and subsidiaries as of
December 31, 1996 and December 31, 1995, and for each of the years in the
three-year period ended December 31, 1996, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report
of KPMG Peat Marwick LLP covering the December 31, 1996 consolidated financial
statements of MSF contains an explanatory paragraph that states that MSF's
material increases in delinquencies and losses on owned and serviced
installment contracts, substantial net loss and reduced availability of
financing raise substantial doubt about the entity's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Stockholders who intend to present proposals at Search's 1997 Annual
Meeting of Stockholders, which Search currently expects to hold in July 1997,
are required to deliver their proposals to Search at its principal executive
offices a reasonable time before the solicitation of proxies for that meeting
is made, for inclusion in the proxy statement and form of proxy relating to
that meeting. All proposals must comply with the applicable requirements of
the federal securities laws and Search's Bylaws.
OTHER MATTERS
MSF's Board does not intend to bring any matters before the MSF
Special Meeting other than those specifically set forth in the Notice of
Special Meeting and it does not know of any matters to be brought before the
MSF Special Meeting by others. If any other matters properly come before the
MSF Special Meeting, it is the intention of the persons named in the
accompanying proxies to vote such proxies in accordance with the judgment of
the MSF Board.
Search's Board does not intend to bring any matters before the Search
Special Meeting other than those specifically set forth in the Notice of
Special Meeting and it does not know of any matters to be brought before the
Search Special Meeting by others. If any other matters properly come before
the Search Special Meeting, it is the intention of the persons named in the
accompanying proxies to vote such proxies in accordance with the judgment of
the Search Board.
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ANNEX A
AGREEMENT AND PLAN OF
MERGER
BY AND AMONG
SEARCH CAPITAL GROUP, INC.,
SEARCH CAPITAL ACQUISITION CORP.,
AND
MS FINANCIAL, INC.,
DATED AS OF FEBRUARY 7, 1997
<PAGE> 104
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. PLAN OF REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . 1
(a) The Merger . . . . . . . . . . . . . . . . . . . . . . 1
(b) Effects of the Merger . . . . . . . . . . . . . . . . . 1
(c) Certificate of Incorporation . . . . . . . . . . . . . 1
(d) Bylaws . . . . . . . . . . . . . . . . . . . . . . . . 1
(e) Directors and Officers . . . . . . . . . . . . . . . . 2
1.2. Conversion of Securities . . . . . . . . . . . . . . . . . . . 2
(a) Capital Stock of Newco . . . . . . . . . . . . . . . . 2
(b) Cancellation of Certain Shares of Capital Stock of MS
Financial . . . . . . . . . . . . . . . . . . . . . . . 2
(c) Conversion of Capital Stock of MS Financial . . . . . . 2
(d) Maximum and Minimum Exchange Ratio . . . . . . . . . . 2
(e) Adjustment of Exchange Ratio . . . . . . . . . . . . . 2
(f) Fractional Shares . . . . . . . . . . . . . . . . . . . 2
(g) Adjustments for Financial Changes . . . . . . . . . . . 3
(h) Adjustment of Exchange Ratio . . . . . . . . . . . . . 4
1.3. Exchange of Certificates . . . . . . . . . . . . . . . . . . . 4
(a) Exchange Agent . . . . . . . . . . . . . . . . . . . . 4
(b) Exchange Procedures . . . . . . . . . . . . . . . . . . 4
(c) Distributions with Respect to Unexchanged Shares of MS
Financial Stock . . . . . . . . . . . . . . . . . . . . 4
(d) Termination of Exchange Fund . . . . . . . . . . . . . 5
(e) No Liability . . . . . . . . . . . . . . . . . . . . . 5
(f) Withholding Rights . . . . . . . . . . . . . . . . . . 5
(g) No Further Ownership Rights in Capital Stock of MS
Financial . . . . . . . . . . . . . . . . . . . . . . . 5
(h) Lost, Stolen or Destroyed Certificates . . . . . . . . 5
1.4. Stock Transfer Books . . . . . . . . . . . . . . . . . . . . . 5
1.5. Stock Options and Other Rights to MS Financial Stock . . . . . 5
1.6. Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . 6
2. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1. Certificate of Merger Filing; Closing Time . . . . . . . . . . 6
2.2. Documents to be Delivered at Closing by MS Financial . . . . . 6
2.3. By Search/Newco . . . . . . . . . . . . . . . . . . . . . . . 7
3. REPRESENTATIONS AND WARRANTIES OF MS FINANCIAL . . . . . . . . . . . 8
3.1. Due Organization . . . . . . . . . . . . . . . . . . . . . . . 8
3.2. Authorization; Validity . . . . . . . . . . . . . . . . . . . 8
3.3. No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.4. Permits and Intangibles . . . . . . . . . . . . . . . . . . . 9
3.5. Capital Stock of the Company . . . . . . . . . . . . . . . . . 9
3.6. Transactions in Capital Stock . . . . . . . . . . . . . . . . 9
3.7. Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.8. Predecessor Status; etc. . . . . . . . . . . . . . . . . . . . 10
3.9. Spin-off by the Company . . . . . . . . . . . . . . . . . . . 10
3.10. Financial Statements . . . . . . . . . . . . . . . . . . . . . 10
3.11. SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.12. Liabilities and Obligations . . . . . . . . . . . . . . . . . 11
3.13. Accounts and Notes Receivable . . . . . . . . . . . . . . . . 11
3.14. Finance Contracts . . . . . . . . . . . . . . . . . . . . . . 12
3.15. Offices, FTC; Warranties . . . . . . . . . . . . . . . . . . . 13
3.16. Environmental Matters . . . . . . . . . . . . . . . . . . . . 13
(a) Hazardous Material . . . . . . . . . . . . . . . . . . 13
(b) Hazardous Materials Activities . . . . . . . . . . . . 13
</TABLE>
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<TABLE>
<S> <C> <C>
(c) Permits . . . . . . . . . . . . . . . . . . . . . . . . 14
(d) Environmental Liabilities . . . . . . . . . . . . . . . 14
3.17. Real and Personal Property . . . . . . . . . . . . . . . . . . 14
3.18. Significant Car Dealers, Material Contracts and Commitments . 14
3.19. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.20. Compensation; Employment Agreements . . . . . . . . . . . . . 15
3.21. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 15
3.22. Employee Matters . . . . . . . . . . . . . . . . . . . . . . . 16
3.23. Conformity with Law; Litigation . . . . . . . . . . . . . . . 16
3.24. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
3.25. Government Contracts . . . . . . . . . . . . . . . . . . . . . 17
3.26. Absence of Changes . . . . . . . . . . . . . . . . . . . . . . 17
3.27. Bank Accounts Powers of Attorney . . . . . . . . . . . . . . . 19
3.28. Relations with Governments . . . . . . . . . . . . . . . . . . 19
3.29. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.30. Opinion of Financial Advisor . . . . . . . . . . . . . . . . . 19
3.31. Vote Required . . . . . . . . . . . . . . . . . . . . . . . . 19
3.32. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.33. Absence of Claims Against Company . . . . . . . . . . . . . . 19
3.34. Complete Copies of Materials . . . . . . . . . . . . . . . . . 19
3.35. Compliance with Laws of Delaware . . . . . . . . . . . . . . . 20
3.36. Hart-Scott-Rodino Filing . . . . . . . . . . . . . . . . . . . 20
3.37. Review of Search . . . . . . . . . . . . . . . . . . . . . . . 20
4. REPRESENTATIONS OF SEARCH AND NEWCO . . . . . . . . . . . . . . . . . 20
4.1. Due Organization . . . . . . . . . . . . . . . . . . . . . . . 20
4.2. Authorization; Validity of Obligations . . . . . . . . . . . . 20
4.3. No Conflicts; Required Filings and Consents . . . . . . . . . 21
4.4. Permits and Intangibles . . . . . . . . . . . . . . . . . . . 21
4.5. Capitalization of Search and Ownership of Search Stock . . . . 21
4.6. SEC Filings; Financial Statements . . . . . . . . . . . . . . 22
4.7. Absence of Certain Changes or Events . . . . . . . . . . . . . 23
4.8. Conformity with Law; Litigation . . . . . . . . . . . . . . . 23
4.9. Ownership of Newco; No Prior Activities . . . . . . . . . . . 23
4.10. Vote Required . . . . . . . . . . . . . . . . . . . . . . . . 23
4.11. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.12. Transactions in Capital Stock . . . . . . . . . . . . . . . . 24
4.13. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.14. Complete Copies of Materials . . . . . . . . . . . . . . . . . 24
4.15. Hart-Scott-Rodino Filing . . . . . . . . . . . . . . . . . . . 24
4.16. Review of Company . . . . . . . . . . . . . . . . . . . . . . 24
4.17. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.1. Access to Information; Confidentiality . . . . . . . . . . . . 25
5.2. Conduct of Business by MS Financial . . . . . . . . . . . . . 26
5.3. Prohibited Activities . . . . . . . . . . . . . . . . . . . . 26
5.4. No Solicitation of Transactions . . . . . . . . . . . . . . . 27
5.5. Notification of Certain Matters . . . . . . . . . . . . . . . 28
5.6. Cooperation in Obtaining Required Consents and Approvals . . . 28
5.7. Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . 28
5.8. Registration Statement; Proxy Statement . . . . . . . . . . . 28
5.9. Stockholders Meetings . . . . . . . . . . . . . . . . . . . . 29
5.10. Appropriate Action; Consents; Filings . . . . . . . . . . . . 30
5.11. Obligations of Newco . . . . . . . . . . . . . . . . . . . . . 30
5.12. Public Announcements . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
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<TABLE>
<S> <C> <C>
5.13. Delivery of SEC Documents . . . . . . . . . . . . . . . . . . 31
5.14. Further Action . . . . . . . . . . . . . . . . . . . . . . . . 31
5.15. Indemnification . . . . . . . . . . . . . . . . . . . . . . . 31
5.16. Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.17. Tax Reorganization . . . . . . . . . . . . . . . . . . . . . . 33
5.18. Search Stock . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.19. Directorship . . . . . . . . . . . . . . . . . . . . . . . . . 33
6. CONDITIONS TO THE MERGER. . . . . . . . . . . . . . . . . . . . . . . 33
6.1. Conditions to the Obligations of Each Party . . . . . . . . . 33
6.2. Conditions to the Obligations to Search and Newco . . . . . . 34
(a) Representations and Warranties; Performance
of Obligations . . . . . . . . . . . . . . . . . . . . 34
(b) No Litigation . . . . . . . . . . . . . . . . . . . . . 34
(c) Consents and Approvals . . . . . . . . . . . . . . . . 34
(d) Cold Comfort Letter . . . . . . . . . . . . . . . . . . 34
(e) Bank Financing . . . . . . . . . . . . . . . . . . . . 34
(f) Insurance . . . . . . . . . . . . . . . . . . . . . . . 34
6.3. Conditions to the Obligations of MS Financial . . . . . . . . 35
(a) Representations and Warranties; Performance
of Obligations . . . . . . . . . . . . . . . . . . . . 35
(b) No Litigation . . . . . . . . . . . . . . . . . . . . . 35
(c) Consents and Approvals . . . . . . . . . . . . . . . . 35
7. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.1. Termination . . . . . . . . . . . . . . . . . . . . . . . . . 35
7.2. Effect of Termination . . . . . . . . . . . . . . . . . . . . 36
7.3. Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.4. Successors and Assigns . . . . . . . . . . . . . . . . . . . . 36
7.5. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 36
7.6. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 37
7.7. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 37
7.8. Specific Performance; Remedies . . . . . . . . . . . . . . . . 37
7.9. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
7.10. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 38
7.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . 38
7.12. Absence of Third Party Beneficiary Rights . . . . . . . . . . 38
7.13. Mutual Drafting . . . . . . . . . . . . . . . . . . . . . . . 39
7.14. Further Representations . . . . . . . . . . . . . . . . . . . 39
7.15. Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . . 39
7.16. Survival of Certain Clauses . . . . . . . . . . . . . . . . . 39
8. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
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<PAGE> 107
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made as of
February 7, 1997, by and among (i) Search Capital Group, Inc., a Delaware
corporation ("Search"), (ii) Search Capital Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Search ("Newco"), and (iii) MS
Financial, Inc., a Delaware corporation ("MS Financial").
BACKGROUND
A. MS Financial is a Mississippi-based consumer finance company
engaged in the financing and servicing of non-prime automobile installment
loans; and
B. The respective Boards of Directors of Search, Newco and MS
Financial deem it advisable and in the best interests of Search, Newco and MS
Financial and their respective stockholders that Newco merge with and into MS
Financial (the "Merger") pursuant to this Agreement and the applicable
provisions of the Delaware Statutes.
C. This Agreement is intended as a plan of reorganization within the
provisions of Section 368(a) of the Code.
D. Some of the capitalized terms set forth below are defined in
Article 8 below.
NOW, THEREFORE, in consideration of the foregoing premises, which are
incorporated herein by reference, and of the representations, warranties,
covenants and agreements herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are acknowledged by all
parties, the parties hereto, intending to be legally bound, agree as follows:
1. PLAN OF REORGANIZATION.
1.1. The Merger.
(a) The Merger. At the Effective Time, Newco shall be merged
with and into MS Financial pursuant to this Agreement and the Delaware
Statutes, the separate corporate existence of Newco shall cease and MS
Financial shall continue as the surviving corporation of the Merger (the
"Surviving Corporation").
(b) Effects of the Merger. The Merger shall have the effects
provided therefor by the Delaware Statutes. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time
(i) all the rights, privileges, powers and franchises, of a public as
well as of a private nature, and all property, real and personal, and
all debts due on whatever account, including without limitation
subscriptions to shares, and all other choses in action, and all and
every other interest of or belonging to or due to MS Financial or Newco,
shall be vested in the Surviving Corporation without further act or
deed, and all property, rights and privileges, powers and franchises and
all and every other interest shall be thereafter as effectually the
property of the Surviving Corporation as they were of MS Financial and
Newco immediately prior to the Effective Time, and (ii) all debts,
liabilities, duties and obligations of MS Financial and Newco shall be
the debts, liabilities, duties and obligations of the Surviving
Corporation.
(c) Certificate of Incorporation. At the Effective Time, the
Amended and Restated Certificate of Incorporation of MS Financial shall
be the Certificate of Incorporation of the Surviving Corporation, until
thereafter amended in accordance with the terms of the Certificate of
Incorporation of the Surviving Corporation and the Delaware Statutes.
(d) Bylaws. From and after the Effective Time, the Bylaws of
Newco as in effect immediately prior to the Effective Time shall be the
Bylaws of the Surviving Corporation until thereafter amended in
accordance with the terms of the Bylaws and Certificate of Incorporation
of the Surviving Corporation and the Delaware Statutes.
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(e) Directors and Officers. The directors of Newco
immediately prior to the Effective Time shall be the initial directors
of the Surviving Corporation, each such director to hold office in
accordance with the Certificate of Incorporation and Bylaws of the
Surviving Corporation until a successor to such director is elected and
has qualified or until such director's death, resignation, removal or
disqualification. The officers of Newco immediately prior to the
Effective Time shall be the initial officers of the Surviving
Corporation, each such officer to hold office in accordance with the
Bylaws of the Surviving Corporation until a successor to such officer is
duly elected or appointed and qualified, or until such officer's death,
resignation, removal or disqualification.
1.2. Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of Search, Newco, MS Financial or
any stockholder of Newco or MS Financial, the shares of capital stock of each
of Newco and MS Financial shall be converted as follows:
(a) Capital Stock of Newco. Each share of Newco Stock issued
and outstanding immediately prior to the Effective Time shall be
converted into and become one validly issued, fully paid and non-
assessable share of common stock of the Surviving Corporation.
(b) Cancellation of Certain Shares of Capital Stock of MS
Financial. All shares of capital stock of MS Financial that are owned
directly or indirectly by Search, Newco, MS Financial or the Subsidiary
of MS Financial immediately prior to the Effective Time (as treasury
shares or otherwise) shall be canceled and no stock of Search or other
consideration shall be delivered in exchange therefor.
(c) Conversion of Capital Stock of MS Financial. Subject to
Sections 1.2 (d), (e), (f), (g) and (h), each share of MS Financial
Stock issued and outstanding immediately prior to the Effective Time
(other than shares to be canceled pursuant to Section 1.2(b) and
Dissenting Shares, if any), shall automatically be canceled and
extinguished and converted, without any action on the part of the holder
thereof, into the right to receive that number of shares of Search
Common Stock as equals the Exchange Ratio. At the Effective Time, all
such shares of MS Financial Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist,
and each holder of a Certificate shall cease to have any rights with
respect thereto, except the right to receive the shares of Search Common
Stock to which such holder is entitled under this Section 1.2(c).
(d) Maximum and Minimum Exchange Ratio. Notwithstanding the
provisions of Section 1.2(c) above and except for any adjustment made
pursuant to Sections 1.2(e), (g) and (h) in no event will the Exchange
Ratio exceed 0.46 or be less than 0.34.
(e) Adjustment of Exchange Ratio. Subject to the provisions
of Section 5.18 hereof, if, between the date of this Agreement and the
Effective Time, the outstanding shares of Search Common Stock, or,
subject to compliance with Section 5.3 below, MS Financial Stock, shall
have been changed into a different number of shares, or a different
class, by reason of any reclassification, recapitalization, split up,
stock dividend, stock combination or exchange of shares, then the
Exchange Ratio shall be correspondingly adjusted.
(f) Fractional Shares. No certificates or scrip evidencing
fractional shares of Search Common Stock shall be issued, but in lieu
thereof each holder of shares of MS Financial Stock who would otherwise
be entitled to receive a fraction of a share of Search Common Stock
shall, at the option of Search, either receive from Search an amount of
cash equal to the Valuation Period Market Value multiplied by Exchange
Ratio multiplied by the fraction of a share of Search Common Stock to
which such holder would otherwise be entitled, as soon as practicable
after the Effective Time, or the Exchange Agent shall sell in the open
market all such fractional share interests, as agent of the holder, and
remit such proceeds to the holder. If Search elects to have the
Exchange Agent sell such fractional shares, Search shall pay all
brokers' commissions associated with such sales.
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<PAGE> 109
(g) Adjustments for Financial Changes.
(i) Notwithstanding the provisions of Sections 1.2(c)
and (d), the Per Share Amount and the maximum and minimum Exchange Ratio
figures in Section 1.2(d) shall be adjusted as set forth in Section
1.2(g)(ii) if, at the Effective Time, the unaudited financial statements
of MS Financial for the last month ending before the Effective Time
(provided, however, that if the Effective Time is on or before the 15th
day of a month, then the unaudited financial statements for the second
month before the Effective Time shall govern) (the "Most Recent
Financial Statements")) prepared in accordance with GAAP and MS
Financial's past practice but adjusting stockholders' equity in
accordance with (A), (B) and (C) below (as so adjusted, the "Adjusted
Stockholders' Equity"), show that stockholders' equity is less than the
stockholders' equity shown on the Current Balance Sheet.
(A) The actual stockholders' equity reflected on
the balance sheet included in the Most Recent Financial
Statements (the "Adjustment Balance Sheet") shall be
adjusted to reflect (1) that no decrease in stockholders'
equity shall be made for the aggregate $2,995,500 in costs
shown on Schedule 1.2(g), (2) no increase in the amount of
stockholders' equity shall be made for the first
$2,300,000 of income tax refunds in excess of $4,000,000,
and (3) no decrease in stockholders' equity shall be made
for the payments required by Section 5.16(f) below. The
actual stockholders' equity on the Adjustment Balance
Sheet shall be further adjusted in the event that KPMG
requires any changes to stockholders' equity as a result
of requiring changes in the "Allowance for Losses" account
shown on the Current Balance Sheet, but adjusted for
unearned discount (as so adjusted, "Allowance for Losses")
against the "Notes Receivable --C.A.R.S." account shown on
the Current Balance Sheet, but adjusted for unearned
discount (as so adjusted, "Net Managed Receivables"). In
the event of a KPMG required change, no increase in such
Allowance for Losses shall be subtracted from
stockholders' equity and no decrease in such Allowance for
Losses shall be added to stockholders' equity. (As
reflected in the Current Balance Sheet, the Allowance for
Losses was $12,567,932 against Net Managed Receivables of
$132,742,638, for a ratio of 9.5%.)
(B) If the Delinquency Rate Percentage for the
month to which the Most Recent Financial Statements relate
exceeds by 25% or more the Delinquency Rate Percentage for
December 1996 (which was 19.3%), stockholders' equity
shall be adjusted by an amount equivalent to 50% of the
income statement net after tax effect of charging off all
Finance Contracts reflected in the "Notes Receivable --
C.A.R.S." account that are 91 days or more contractually
past due, first, by charging the Allowance for Losses
shown on the Adjustment Balance Sheet for the dollar
amount of such charge-offs and, second, by debiting the
Provision for Losses account on the statement of income
included in the Most Recent Financial Statement (the
"Adjustment Income Statement") by an amount sufficient to
restore the ratio of the Allowance for Losses (less the
amount of additional changes required by KPMG as of
December 31, 1996 as discussed in paragraph (A) above) to
Net Managed Receivables to 9.5%.
(C) If, for the period between January 1, 1997
and the end of the month to which the Most Recent
Financial Statements relate, the total amount of Net
Managed Receivables charged off, and that should have been
charged off, by MS Financial (other than charge-offs made
pursuant to paragraph (B) above) according to GAAP and MS
Financial's general accounting practices in place between
July 1, 1996 and December 31, 1996, exceeds $7 million,
stockholders' equity shall be adjusted by an amount
equivalent to 50% of the income statement net after tax
effect of debiting the Provision for Losses account on the
Adjustment Income Statement by an amount sufficient to
restore the ratio of the Allowance for Losses (less the
amount of additional changes required by KPMG as of
December 31, 1996 as discussed in paragraph (A) above) to
Net Managed Receivables to 9.5%.
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<PAGE> 110
(ii) The formula for calculating the Per Share Amount
adjustment is as provided in this Section 1.2(g)(ii). If the Adjusted
Decrease in Stockholders' Equity (as defined below) is $2,100,000 or
less, no adjustment to the Per Share Amount shall be made. If the
Adjusted Decrease in Stockholders' Equity is more than $2,100,000 but
less than $3,100,000, then 50% of such decrease shall be applied to the
following calculation of the Adjusted Per Share Amount. If the Adjusted
Decrease in Stockholders' Equity is $3,100,000 or more, then 100% of
such decrease shall be applied to the following calculation of the
Adjusted Per Share Amount. For purposes of this Section 1.2(g),
"Adjusted Decrease in Stockholders' Equity" shall be equal to
stockholders equity as shown on the Current Balance Sheet less the
Adjusted Stockholders' Equity multiplied by the applicable percentage
(50% or 100%) required by the foregoing; provided, that the Adjusted
Decrease in Stockholders' Equity shall be zero if the Adjusted
Stockholders' Equity is greater than the stockholders' equity on the
Current Balance Sheet. The dollar amount of the Adjusted Decrease in
Stockholders' Equity shall then be divided by the total number of shares
of MS Financial Stock to be exchanged in the Merger, the resulting
decimal number shall be subtracted from the otherwise applicable Per
Share Amount, and the resulting figure shall become the adjusted Per
Share Amount (the "Adjusted Per Share Amount") to be used in the Merger.
The formula for calculating the adjusted maximum and minimum Exchange
Ratio figures is as follows: the figures in Section 1.2(d) shall be
multiplied by a fraction, the numerator of which is the Adjusted Per
Share Amount and the denominator of which is the Per Share Amount prior
to any adjustment.
(h) Adjustment of Exchange Ratio. In the event that the
adjustments provided for in Section 1.2(g) are made, the Adjusted Per
Share Amount (rounded to the nearest hundredth of a share) shall replace
the Per Share Amount in the calculation of the Exchange Ratio to be made
pursuant to the definition of Exchange Ratio.
1.3. Exchange of Certificates.
(a) Exchange Agent. At or before the Effective Time, Search
shall deposit, or shall cause to be deposited, with the Exchange Agent
for the benefit of the holders of shares of MS Financial Stock, for
exchange in accordance with this Article 1, through the Exchange Agent,
the Exchange Fund. The Exchange Agent shall, pursuant to instructions
from Search, deliver the Search Common Stock and any cash contemplated
to be distributed pursuant to this Article 1 out of the Exchange Fund.
The Exchange Fund shall not be used for any other purpose.
(b) Exchange Procedures. As soon as reasonably practicable
after the Effective Time, Search will instruct the Exchange Agent to
mail to each holder of record of a Certificate, (i) a letter of
transmittal which shall specify that delivery shall be effected, and
that risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent and shall be
in such form and have such other customary provisions as Search may
reasonably specify and (ii) instructions for use in effecting the
surrender of such holders' Certificates in exchange for certificates
evidencing shares of Search Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such
letter of transmittal, duly executed, and such other customary documents
as may be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration and the Certificate so surrendered shall forthwith be
cancelled. Subject to Section 1.3(h), under no circumstances will any
holder of a Certificate be entitled to receive any part of the Merger
Consideration until such holder shall have surrendered such Certificate.
In the event of a transfer of ownership of shares of MS Financial Stock
which is not registered in the transfer records of MS Financial, the
Merger Consideration may be paid in accordance with this Article 1 to
the transferee if the Certificate evidencing such shares of MS Financial
Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 1.3(b) (but subject to Section 1.3(h)),
each Certificate shall be deemed at any time after the Effective Time to
evidence only the right to receive upon such surrender the Merger
Consideration. No interest shall be paid on the Merger Consideration.
(c) Distributions with Respect to Unexchanged Shares of MS
Financial Stock. No dividends or other distributions declared or made
after the Effective Time with respect to Search Common Stock with
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<PAGE> 111
a record date after the Effective Time shall be paid to the holder of
any unsurrendered Certificate with respect to the shares of Search
Common Stock constituting the Merger Consideration with respect to such
unsurrendered Certificate, until the holder of such Certificate shall
surrender such Certificate to the Exchange Agent (or Search, after
termination of the Exchange Fund in accordance with Section 1.3(d)).
Subject to the effect of applicable laws, following surrender of any
such Certificate, there shall be paid to the holder of such Certificate,
in addition to the Merger Consideration, without interest, the amount of
dividends or other distributions with a record date after the Effective
Time theretofore paid with respect to the whole shares of Search Common
Stock constituting the Merger Consideration, with respect to such
Certificate.
(d) Termination of Exchange Fund. Any portion of the Exchange
Fund which remains undistributed to the holders of MS Financial Stock
for one year after the Effective Time shall be delivered to Search, upon
demand and, subject to Section 1.3(e), any holders of MS Financial Stock
who have not theretofore complied with this Article 1 shall thereafter
look only to Search for the Merger Consideration to which they are
entitled.
(e) No Liability. Neither Search nor the Surviving
Corporation shall be liable to any holder of shares of MS Financial
Stock for any shares of Search Common Stock or cash (or dividends or
distributions with respect thereto), delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(f) Withholding Rights. Search shall be entitled to deduct
and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of shares of MS Financial Stock such amounts as
Search is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign
tax law. To the extent that amounts are so withheld by Search, such
withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of MS Financial Stock in
respect of which such deduction and withholding was made by Search.
(g) No Further Ownership Rights in Capital Stock of MS
Financial. All Merger Consideration issued or paid upon the conversion
of shares of MS Financial Stock in accordance with the terms hereof
shall be deemed to have been issued or paid in full satisfaction of all
rights pertaining to such shares of MS Financial Stock.
(h) Lost, Stolen or Destroyed Certificates. In the event any
Certificate(s) shall have been lost, stolen or destroyed, the Exchange
Agent shall cause payment of the Merger Consideration to be made in
exchange for such lost, stolen or destroyed Certificate(s) upon the
making of an affidavit of that fact by the holder thereof; provided,
however, that Search may, in its reasonable discretion and as a
condition precedent thereto, require the owner of such lost, stolen or
destroyed Certificate(s) to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made
against Search with respect to the Certificate(s) alleged to have been
lost, stolen or destroyed.
1.4. Stock Transfer Books. At the Effective Time, the stock transfer
books of MS Financial shall be closed and there shall be no further
registration of transfers of shares of MS Financial Stock thereafter on the
records of MS Financial. If, after the Effective Time, Certificates are
presented to MS Financial for any reason, they shall be canceled and exchanged
as provided in Section 1.3.
1.5. Stock Options and Other Rights to MS Financial Stock.
(a) All Company Options outstanding at the Effective Time
shall remain outstanding following the Effective Time. At the Effective
Time, the Company Options shall, by virtue of the Merger and without any
further action on the part of MS Financial or the holder thereof, be
assumed by Search in such manner that Search (i) is a corporation
"assuming a stock option in a transaction to which Section 424(a)
applied" within the meaning of Section 424 of the Code or (ii) to the
extent that Section 424 of the Code does not apply to any such Company
Options, would be such a corporation were Section 424 of the Code
applicable to such Company Options. From and after the Effective Time,
all references to MS Financial in the MS
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Financial Stock Option Plans and the applicable stock option agreements
issued thereunder shall be deemed to refer to Search, which shall have
assumed the MS Financial Stock Option Plans as of the Effective Time by
virtue of this Agreement and without any further action. Each Company
Option assumed by Search shall be exercisable upon the same terms and
conditions as under the applicable MS Financial Stock Option Plan and
the applicable option agreement issued thereunder, except that (A) each
such Company Option shall be exercisable for, and represent the right to
acquire, that whole number of shares of Search Common Stock (rounded up
or down to the nearest whole share) equal to the number of shares of MS
Financial Stock subject to such Company Option multiplied by the
Exchange Ratio, and (B) the option price per share of Search Common
Stock shall be an amount equal to the option price per share of MS
Financial Stock subject to such Company Option in effect immediately
prior to the Effective Time divided by the Exchange Ratio (the option
price per share, as so determined, being rounded upward to the nearest
full cent). No payment shall be made for fractional interests.
(b) The MS Financial Employee Stock Purchase Plan shall be
canceled in accordance with its terms immediately prior to the Effective
Time.
1.6. Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the
contrary, and only in the event that a stockholder of MS Financial is
entitled to exercise rights under Section 262 of the Delaware Statutes
with respect to the Merger, then any Dissenting Shares held by such
holder shall not be converted into or represent the right to receive the
Merger Consideration. If stockholders of MS Financial are not entitled
to exercise rights under Section 262 of the Delaware Statutes with
respect to the Merger, this Section 1.6 shall be inapplicable. A holder
of Dissenting Shares shall be entitled to receive payment of the fair
value of such holder's Dissenting Shares in accordance with the
provisions of Section 262 of the Delaware Statutes, except that all
shares of MS Financial Stock held by stockholders who shall have failed
to perfect or who effectively shall have withdrawn or lost their rights
to appraisal of such shares of MS Financial Stock under Section 262 of
the Delaware Statutes shall not be considered Dissenting Shares and
shall be governed by the provisions of this Agreement applicable to the
conversion of MS Financial Stock other than Dissenting Shares.
(b) MS Financial shall give Search (i) prompt notice upon
receipt by MS Financial, at any time prior to the Effective Time, of any
demand for appraisal of shares of MS Financial Stock in accordance with
Section 262 of the Delaware Statutes and withdrawals of any such notice
and (ii) the opportunity to participate in all negotiations and
proceedings with respect to demands for appraisal under Section 262 of
the Delaware Statutes. MS Financial shall not, except with the prior
written consent of Search, or as required by the Delaware Statutes, make
any payment with respect to any demands for the appraisal of shares of
MS Financial Stock or offer to settle or settle any such demands.
2. CLOSING.
2.1. Certificate of Merger Filing; Closing Time. As promptly as
practicable, and in no event later than the first business day following the
satisfaction or, if permissible, waiver of the conditions set forth in Article
6 (or such other date as may be agreed upon in writing by the parties hereto),
the parties hereto will cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger"), together with any required
officers' certificates and/or other required filings, with the Secretary in
such form as is required by, and executed in accordance with, the relevant
provisions of the Delaware Statutes. The Merger shall become effective at the
Effective Time. Immediately prior to the filing of the Certificate of Merger,
the Closing will be held at the offices of Search in Dallas, Texas, or such
other place as the parties may agree.
2.2. Documents to be Delivered at Closing by MS Financial. At the
Closing the following documents, in a form satisfactory to Search, acting
reasonably, and fully executed by the appropriate party or parties thereto,
shall be delivered to Search by MS Financial:
(a) A Closing Certificate signed by the President of MS
Financial stating (i) that the representations and warranties in Article
3 of this Agreement are true and correct in all material respects as of
the Closing, with corrections to any representations and warranties that
have changed since the date of
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this Agreement, (ii) that all of the terms, covenants, agreements and
conditions of this Agreement and such Related Documents required to be
complied with, performed or satisfied by MS Financial prior to the
Closing have been complied with, performed or satisfied by MS Financial
in all material respects.
(b) Copies of the resolutions adopted by the Board of
Directors of MS Financial and the stockholders of MS Financial
authorizing the execution and delivery of this Agreement and the
consummation of the Transactions, duly certified as of the Closing by
the Secretary of MS Financial;
(c) Corporate good standing certificates dated within ten (10)
days of Closing of MS Financial and its Subsidiary, with respect to each
state in which either MS Financial or its Subsidiary does business or is
qualified to do business, and incumbency certificates for MS Financial
and its Subsidiary dated as of the Closing Date;
(d) All consents or approvals required to (i) avoid default
under any material contracts to which MS Financial or any of its
Subsidiaries is a party, or (ii) avoid any penalties imposed by any
Governmental Authority and (iii) to consummate the Transactions;
(e) Evidence of the cancellation of the MS Financial Employee
Stock Purchase Plan;
(f) The Most Recent Financial Statements, together with all
other information necessary to make the calculations provided for in
Section 1.2(g) and (h);
(g) All other documents required to be delivered by MS
Financial which are listed on the Closing Checklist;
(h) The resignations of all of the existing officers and
directors of MS Financial's Subsidiary and the resignations of the
directors of MS Financial; and
(i) The certification by MS Financial's Secretary on this
Agreement pursuant to Section 251 of the Delaware Statutes stating that
a majority of the outstanding stock of MS Financial entitled to vote on
this Agreement has been voted for the adoption of this Agreement.
2.3. By Search/Newco. At the Closing, the following documents, in a
form satisfactory to MS Financial, acting reasonably, and fully executed by the
appropriate party or parties thereto, shall be delivered to MS Financial by
Search and Newco:
(a) Closing Certificates for Search and Newco signed by their
Presidents stating (i) that the representations and warranties in
Article 4 of this Agreement are true and correct in all material
respects as of the Closing, with corrections to any representations and
warranties that have changed since the date of this Agreement, and (ii)
that all of the terms, covenants, agreements and conditions of this
Agreement and the Related Documents required to be complied with,
performed or satisfied by Search and Newco, respectively, prior to the
Closing, have been complied with, performed or satisfied by Search and
Newco in all material respects, provided that if any change is made
based upon the occurrence of a Search Material Adverse Effect, MS
Financial shall have the rights set out in Section 7.1 of this
Agreement.
(b) Copies of the resolutions adopted by the Boards of
Directors of Search and Newco authorizing the execution and delivery of
this Agreement and the consummation of the Transactions, duly certified
as of the Closing by the Secretary of Search and Newco, respectively;
(c) Corporate good standing certificates from the State of
Delaware for Search and Newco, each such certificate dated within ten
(10) days of Closing, and an incumbency certificate for each of Search
and Newco dated as of the Closing Date;
(d) All consents or approvals required to (i) avoid default
under any material contracts to which Search or Newco is a party or (ii)
avoid any penalties imposed by any Governmental Authority and (iii)
consummate the Transactions;
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(e) All other documents required to be delivered by Search or
Newco which are listed on the Closing Checklist;
(f) Written evidence reasonably satisfactory to MS Financial
that the Exchange Agent has been given instructions regarding the
issuance of shares of Search Common Stock pursuant to this Agreement and
has been provided with cash sufficient to make payment for fractional
shares as required by this Agreement or is authorized to accumulate
fractional shares and sell same in accordance with Section 1.2(f); and
(g) The certification by Newco's Secretary on this Agreement
pursuant to Section 251 of the Delaware statutes stating that a majority
of the outstanding stock of Newco entitled to vote on this Agreement has
been voted for the adoption of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF MS FINANCIAL.
To induce Search and Newco to enter into this Agreement and consummate
the Transactions, MS Financial represents and warrants to Search and Newco as
set forth below.
3.1. Due Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation. The Company has the requisite corporate power to carry on its
business as it is now being conducted. The Company is duly qualified as a
foreign corporation and is in good standing in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be
so qualified or in good standing would not, individually or in the aggregate,
have a Company Material Adverse Effect. Schedule 3.1, contains a list of all
jurisdictions in which the Company is authorized or qualified to do business as
a foreign corporation. The Company has delivered to Search true, complete and
correct copies of the Restated Certificate of Incorporation and Bylaws of the
Company. The Restated Certificate of Incorporation and Bylaws are in full
force and effect and have not been amended, modified, revoked, terminated or
cancelled or in any other manner varied from the documents delivered to Search.
The Company's Restated Certificate of Incorporation and Bylaws are collectively
referred to as the "MS Charter Documents." The Company has made available to
Search true, complete and correct sets of the minute books of the Company, and
the copies thereof delivered to Search are complete and accurate copies of all
materials included therein for the periods covered thereby. The Company is not
in violation of any provision of the MS Charter Documents.
3.2. Authorization; Validity. The Company has all requisite corporate
power and authority to execute and deliver this Agreement and all of the
agreements and documents referred to on the Closing Checklist (the "Related
Documents") to which the Company is a party and, with respect to the Merger,
upon the adoption of this Agreement by MS Financial's stockholders in
accordance with this Agreement, the Related Documents and the Delaware
Statutes, to perform its obligations pursuant to the terms of this Agreement
and all of the Related Documents to which the Company is a party and to
consummate the Transactions. The execution and delivery by the Company of this
Agreement and the Related Documents to which the Company is a party and the
performance by the Company of its obligations under this Agreement and such
Related Documents have been duly and validly authorized by the Board of
Directors of the Company and by all other necessary corporate action other than
adoption of this Agreement by the holders of a majority of the then outstanding
shares of MS Financial Stock and the filing and recordation of the Certificate
of Merger as required by the Delaware Statutes. This Agreement has been, and
the Related Documents to which the Company is a party will be, duly and validly
executed and delivered by the Company and are, or upon their execution will be,
legal, valid and binding obligations of the Company enforceable against the
Company in accordance with their terms, except as such enforceability may be
limited by principles of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of Law governing specific performance, injunctive relief or other
equitable remedies.
3.3. No Conflicts; Compliance.
(a) The execution, delivery and performance of this Agreement
and the Related Documents by the Company, and the consummation of the
Transactions, will not:
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(i) conflict with, or result in a breach or violation
of, any of the MS Charter Documents;
(ii) except as disclosed in Schedule 3.3(a)(ii),
conflict with, or result in a default (or would constitute a
default but for any requirement of notice or lapse of time or
both), or require the consent of any third party, under any
document, agreement or other instrument or obligation, including,
without limitation, those relating to the Warehouse Loans and the
Securitization Trusts, to which the Company is a party or by
which the Company or any assets of the Company are bound or
affected, other than conflicts or defaults which would not,
individually or in the aggregate, have a Company Material Adverse
Effect, or result in the creation or imposition of any lien,
charge or encumbrance on any of the Company's properties, other
than liens, charges, or encumbrances which would not,
individually or in the aggregate, have a Company Material Adverse
Effect;
(iii) except as disclosed in Schedule 3.3(a)(iii),result
in any impairment of, or give to any other Person any right of
termination, amendment, acceleration or cancellation with respect
to, any permit, license, franchise, contractual right or other
authorization of the Company material to MS Financial and its
Subsidiary taken as a whole; or
(iv) violate any Law to which the Company is subject or
by which any assets of the Company are bound or affected, the
violation of which would have a Company Material Adverse Effect.
(b) Except as disclosed in Schedule 3.3(b), the execution and
delivery of this Agreement by the Company do not, and the performance of
this Agreement by the Company will not, require any consent, approval,
authorization or permission of, or filing with or notification to, any
Governmental Authority except (i) for applicable requirements, if any,
of the Exchange Act, the Securities Act, and Blue Sky Laws, and filing
and recordation of the Certificate of Merger as required by the Delaware
Statutes, (ii) such notice as is necessary to comply with HSR, and (iii)
where failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, would not prevent or
delay consummation of the Merger, or otherwise prevent MS Financial from
performing its obligations under this Agreement.
3.4. Permits and Intangibles. The Company owns or holds all Material
Permits, and Schedule 3.4 contains a list of all Material Permits. The
Material Permits are valid, and the Company has not received any notice that
any Governmental Authority intends to modify, suspend, cancel, terminate or not
renew any Material Permit. Except as disclosed on Schedule 3.4, the Company is
not in conflict with, or in default or violation of, (i) any Law applicable to
the Company or by which any property or asset of the Company is bound or
affected, (ii) any of the Material Permits or (iii) any note, bond, mortgage,
indenture, contract, agreement, lease, or other instrument or obligation to
which the Company is a party or by which the Company or any property or asset
of the Company is bound or affected except as would not have a Company Material
Adverse Effect. The Transactions will not result in a default under or a breach
or violation of, or adversely affect the rights and benefits afforded to the
Company by, any Material Permit.
3.5. Capital Stock of the Company. The authorized capital stock of MS
Financial consists of 50,000,000 shares of MS Financial Stock, 10,429,926
shares of which are issued and outstanding, 374,000 shares of which are held as
treasury shares, and 5,000,000 shares of preferred stock, par value $.001 per
share, none of which is issued or outstanding. The authorized capital stock of
the Subsidiary and its par value are indicated on Schedule 3.5 hereto. All of
the issued and outstanding shares of the capital stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and not
subject to preemptive rights. All of the issued and outstanding shares of the
capital stock of the Company and any other securities sold by the Company and
the Securitization Trusts were offered, issued, sold and delivered by the
Company in compliance with all applicable state and federal Laws concerning the
issuance, offer and sale of securities. Further, none of such shares was
issued in violation of any preemptive rights.
3.6. Transactions in Capital Stock. Except as set forth on Schedule
3.6, no option, warrant, call, subscription right, conversion right or other
contract or commitment of any kind exists of any character, written or oral,
which may obligate the Company to issue or sell any shares of capital stock or
other equity interests. Except
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as set forth on Schedule 3.6, the Company has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any of its equity
securities or any interests therein or to pay any dividend or make any
distribution in respect thereof.
3.7. Subsidiary. Except as listed in Schedule 3.7, the Company does
not presently own, of record or beneficially, or control, directly or
indirectly, any capital stock, securities convertible into capital stock or any
other equity interest in any corporation, association or business entity, nor
is the Company, directly or indirectly, a participant in any joint venture,
partnership or other noncorporate entity. The only Subsidiary of MS Financial
is MS Auto Receivables Company. MS Financial owns all of the capital stock of
MS Auto Receivables Company.
3.8. Predecessor Status; etc. Schedule 3.8 sets forth a listing of
all names of all predecessor companies of the Company during the five-year
period immediately preceding the date hereof, including without limitation the
names of any entities from whom the Company has acquired material assets.
Except as specified in Schedule 3.8, the Company has not at any time during the
five-year period immediately preceding the date hereof been a Subsidiary or
division of another corporation or a part of an acquisition which was later
rescinded.
3.9. Spin-off by the Company. Except as disclosed in Schedule 3.9,
there has not been, nor does there exist any agreement in respect of, any sale
or spin-off of material assets of either the Company, or any Affiliate of the
Company, within the past two years and there are no plans for any such sale or
spin-off.
3.10. Financial Statements. Schedule 3.10 includes (a) true, complete
and correct copies of the Company's audited Consolidated Balance Sheet as of
December 31, 1995 (the end of its most recent completed fiscal year for which
audited financial statements are available), and audited Consolidated
Statements of Income, Cash Flows and Stockholders' Equity for the three years
ended December 31, 1995 (collectively, the "Reviewed Financials") and (b) true,
complete and correct copies of the Company's unaudited Consolidated Balance
Sheet (the "Current Balance Sheet") as of December 31, 1996 (the "Balance Sheet
Date"), and unaudited Consolidated Statement of Income for the twelve month
period ended December 31, 1996 (the "Current Income Statement"; the Current
Balance Sheet and the Current Income Statement are sometimes referred to
collectively as the "Unaudited Financials;" and together with the Reviewed
Financials, the "Company Financial Statements"). The Company Financial
Statements have been prepared in accordance with GAAP throughout the periods
indicated (except as may be indicated in the notes thereto), subject, in the
case of the Unaudited Financials, to year-end audit adjustments and to the
omission of footnote information. The balance sheets included in the Company
Financial Statements and each of the statements of income, cash flows and
stockholders' equity included in the Company Financial Statements present
fairly in all material respects the consolidated financial position, results of
operations, cash flows and changes in stockholders' equity of MS Financial and
its consolidated Subsidiary as at the respective dates thereof and for the
respective periods indicated therein (subject, in the case of the Unaudited
Financials, to year-end audit adjustments). Since December 31, 1996, there
have been no material changes in the Company's accounting policies.
3.11. SEC Filings.
(a) MS Financial has timely filed all Company SEC Reports and
has delivered true and complete copies thereof to Search. The Company
SEC Reports, and all similar SEC filings and reports for the
Securitization Trusts, (i) were prepared in all material respects in
accordance with the requirements of the Securities Act and the Exchange
Act, as the case may be, and the rules and regulations thereunder and
(ii) did not, at the time they were filed (or at the effective date
thereof in the case of registration statements), contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made,
not misleading. MS Financial's Subsidiary is not currently required to
file any form, report or other document with the SEC under Section 12 of
the Exchange Act.
(b) The information supplied by the Company for inclusion in
the Registration Statement and the Proxy Statement shall not, at (i) the
time the Registration Statement is declared effective, (ii) the time the
Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to the stockholders of MS Financial and Search, (iii) the
time of each of the MS Financial Stockholders Meeting and the Search
Stockholders Meeting, and (iv) the Effective Time, contain any statement
which, at such time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact, or omit
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to state any material fact required to be stated therein, or necessary
in order to make the statements therein not false or misleading or
necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the MS Financial Stockholders
Meeting and the Search Stockholders Meeting which shall have become
false or misleading. If at any time prior to the Effective Time any
event or circumstance relating to the Company, or their respective
officers or directors, is discovered by the Company which should be set
forth in an amendment or a supplement to the Registration Statement or
Proxy Statement, Company shall promptly inform Search and cooperate with
Search in the preparation, filing and mailing of an appropriate
amendment or supplement. Notwithstanding the foregoing, the Company
makes no representation or warranty with respect to any information
supplied by Search or any of its representatives in the Proxy Statement.
All documents that the Company is responsible for filing with the SEC in
connection with the Transactions will comply as to form and substance in
all material respects with the applicable requirements of the Securities
Act and the rules and regulations promulgated thereunder and the
Exchange Act and the rules and regulations promulgated thereunder.
(c) MS Financial has heretofore furnished to Search complete
and correct copies of all amendments and modifications (if any) that
have not been filed by MS Financial with the SEC to all agreements,
documents and instruments previously filed by MS Financial as exhibits
to the Company SEC Reports and currently in effect.
(d) Except for the transactions described in Schedule 3.11(d),
all transactions involving the Company that are required to be disclosed
in the Company SEC Reports in accordance with Item 404 of Regulation S-K
promulgated under the Securities Act have been so disclosed, and since
January 1, 1996 the Company has not entered into any transactions that
would be required to be disclosed in future public filings under the
Exchange Act pursuant to such Item which have not already been disclosed
in the Company SEC Reports filed prior to the date hereof.
3.12. Liabilities and Obligations.
(a) Except as disclosed in Schedule 3.12, the Company is not
liable for or subject to any liabilities except for:
(i) those liabilities reflected on the Current Balance
Sheet and not previously paid or discharged;
(ii) those liabilities disclosed in any Company SEC
Report filed by the Company after December 31, 1996;
(iii) those liabilities arising in the ordinary course of
business consistent with past practice such as was in place
between July 1, 1996 and December 31, 1996; and
(iv) those liabilities that would not, individually or
in the aggregate, have a Company Material Adverse Effect.
For purposes of this Section 3.12, the term "liabilities" shall include without
limitation any direct or indirect liability or obligation, indebtedness,
guaranty, endorsement, claim, loss, damage, deficiency, cost, expense,
obligation or responsibility, either accrued, absolute, contingent, mature,
unmature or otherwise and whether known or unknown, fixed or unfixed, choate or
inchoate, liquidated or unliquidated, secured or unsecured.
(b) The Company has no liability for sale or other excise
taxes that would be accelerated due to the Merger.
3.13. Accounts and Notes Receivable. Schedule 3.13 contains an
accurate list, as of a date not more than two business days prior to the date
hereof, of the accounts and notes receivable of the Company (including without
limitation receivables from and advances to employees and the Stockholders, but
excluding those applicable to Finance Contracts) which includes all aging of
all accounts and notes receivable, but excluding those applicable to Finance
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Contracts, showing amounts due in 30-day aging categories. The Company knows
of no defenses to the accounts receivable or notes receivable.
3.14. Finance Contracts. Each Finance Contract acquired by the
Company, whether or not pursuant to a Car Dealer Agreement, including all
Related Security under such Finance Contract
(a) has been fully performed by Company and, to the best of
the Company's knowledge, the Car Dealer party thereto,
(b) is an installment sale agreement or other deferred payment
obligation providing for the retention of a first lien or security
interest in the underlying personal property to secure payment of the
obligation evidenced thereby and such lien has been, or, in the case of
Finance Contracts purchased in the last 60 days, is in the process
(which process is being timely and properly pursued consistent with
industry standards and legal requirements) of being duly perfected in
accordance with applicable Law,
(c) is owned by the Company and the Company owns all rights to
receive all amounts payable thereunder, except for the rights of Lenders
and trustees of the Securitization Trusts disclosed on Schedule 3.14(c);
(d) is in one of the forms attached as Schedule 3.14(d), or,
to the Company's best knowledge, is otherwise in full compliance with
all applicable Laws, except where such non-compliance is immaterial and
would not invalidate the Finance Contract or the Company's rights (after
the Merger) to enforce full performance of same by the related obligor;
(e) except as required by applicable law, does not impose any
obligation upon Company or any other Person, which, if not performed,
would give rise to any right of offset, counterclaim or other defense on
the part of the related obligor to any amount payable by it under the
Finance Contract,
(f) except as disclosed in Schedule 3.14(f), is free of any
dispute, adverse claim, counterclaim, offset or defense (including,
without limitation, the material breach of (i) any warranty by the Car
Dealer of the goods covered by such Finance Contract or (ii) any service
contract, extended service warranty or like agreement by such Car
Dealer) of the obligor or such other Person or entity as may have
guaranteed or secured the obligations of the obligor (except for (y) the
insolvency of such obligor or such other Person or entity as may have
guaranteed or secured the obligations of the obligor and (z) the right
of an obligor to receive a rebate of the unearned finance charge in the
event of payment in full prior to maturity) except for (1) the interest
of the obligor in the goods sold pursuant to such Finance Contract, (2)
the security interests created in favor of such Car Dealer and the
Company, and (3) mechanics' or similar statutory liens subordinate to
such security interests resulting from actions of the obligor,
(g) to the best of the Company's knowledge does not, and the
Company has received no claims that it does, contravene any Laws
applicable thereto and no party thereto has at any time violated any
such Laws with respect thereto,
(h) grants to the respective Car Dealer and assigns to Company
a valid, enforceable and perfected first priority security interest in
and to such Finance Contract and such Related Security which is free and
clear of any adverse claims subject to the exceptions stated in clause
(f) above,
(i) has no effective financing statement or lien notation on
any certificate of title or other instrument similar in effect covering
all or any part of such Finance Contract or Related Security, which
would give the Person filing, named on or entitled to the benefit of
such statement or instrument priority senior to or pari passu with
Company, on file in any recording office or is otherwise effective
except such as may be filed in favor of the Car Dealer or Company and
collaterally assigned to the Senior Bank Lender,
(j) requires Company to be named as loss payee or beneficiary
(as may be applicable) under any insurance policy with respect to such
Finance Contract, and entitles Company to the benefits of such insurance
policy,
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(k) refers to motor vehicles, including any equipment sold and
financed in connection with the Finance Contract, which to the extent
required under applicable Law, are duly registered and licensed and are
or, in the case of Finance Contracts purchased in the last 60 days will
timely and properly be the subject of a certificate of title issued in
the name of the obligor which indicates a security interest therein held
by the Company, in the appropriate form and in compliance with all
appropriate procedures as may be necessary under applicable Law to cause
a perfected and first priority security interest to exist in favor of
the Company to secure the obligations of such obligor under such Finance
Contract;
(l) if purchased from a Car Dealer from which Company has
purchased five (5) or more Finance Contracts, was validly assigned to
Company by a Car Dealer in connection with a Car Dealer Agreement in
substantially the form of one of the forms set forth in Schedule 3.14(l)
and Car Dealer Assignment in substantially one of the forms of
assignment contained in Schedule 3.14(l) or appearing at the bottom of
the second page of each of the forms of the Finance Contract contained
in Schedule 3.14(d), free and clear of all liens and adverse claims and
(i) to the best of the Company's knowledge, constitutes a legal, valid
and binding obligation of such Car Dealer enforceable against such Car
Dealer in accordance with its terms, and (ii) pursuant to which Company
is in physical possession of such Finance Contract and all writings
comprising such Related Security; and
(m) contains representations and warranties from the Car
Dealer to Company with respect to such Finance Contract under the Car
Dealer Assignment related thereto all of which are to the best of the
Company's knowledge true and correct.
3.15. Offices, FTC; Warranties.
(a) Each of the Company's offices is and has been operated as
a licensed location in any jurisdiction requiring such license in
conformity with all such licensing and other Laws applicable to the
purchase of Finance Contracts, and the sale of insurance coverage
related thereto, including, without limitation, Motor Vehicle Retail
Installment Sales Acts, Sales Finance Agency Acts, or any other Law
regulating the business of acquiring Finance Contracts and the sale of
insurance coverage related thereto, except where any failure would not
have a Company Material Adverse Effect. The Company is familiar with
the Federal Trade Commission's used car rule and, to the best of the
Company's knowledge, based on "as is" sheets provided by Car Dealers,
its Car Dealers are in compliance with such rule.
(b) Each Finance Contract has been originated by a Car Dealer
pursuant to a Car Dealer Agreement that, to the best of the Company's
knowledge, is enforceable in accordance with its terms against such Car
Dealer. To the extent that the Finance Contracts finance so-called
"extended warranty plans," or "service contracts" to the best of the
Company's knowledge, such plans are in substantial compliance with all
applicable consumer credit Laws, including any and all special insurance
Laws relating thereto.
3.16. Environmental Matters.
(a) Hazardous Material. The Company does not have any
liability for claims arising out of events involving underground storage
tanks, or any substance that has been designated by any Governmental
Authority or by applicable Law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without
limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all
substances listed as hazardous substances pursuant to the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended, or defined as a hazardous waste pursuant to the United States
Resource Conservation and Recovery Act of 1976, as amended, and the
regulations promulgated pursuant to said Laws, but excluding office and
janitorial supplies properly and safely maintained (a "Hazardous
Material") present in, on or under any property, including the land and
the improvements, ground water and surface water thereof, that the
Company has at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company does not have
any liability for claims arising out of events involving the
transportation, storage, use, manufacture, disposal of, release of, or
exposure of its employees or others to Hazardous Materials in violation
of any Law in effect on or before the Closing Date, nor from the
disposal of, transportation, sale, or manufacture of any product
containing
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a Hazardous Material (collectively, "Company Hazardous Materials
Activities") in violation of any Laws promulgated by any Governmental
Authority in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. The Company currently does not hold, and is not
required to hold, any environmental approvals, permits, licenses,
clearances and consents (the "Environmental Permits") necessary for the
conduct of the Company's Hazardous Material Activities and other
business of the Company as such activities and business are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding,
revocation proceeding, amendment procedure, writ, injunction or claim is
pending, or threatened concerning any Environmental Permit, Hazardous
Material or any Company Hazardous Materials Activity. The Company is
not aware of any fact or circumstance which could involve the Company in
any environmental litigation or impose upon the Company any material
environmental liability.
3.17. Real and Personal Property. Schedule 3.17 sets forth an accurate
list of all owned and leased real property, all personal property included in
"Furniture and Fixtures" and "Leasehold Improvements" on the Current Balance
Sheet and all other personal property owned or leased by the Company with a
value in excess of $5,000 (a) as of the Balance Sheet Date and (b) acquired
since the Balance Sheet Date, including in each case a true, complete and
correct copy of the lease for each item of equipment with an annual rental
payment of $5,000 or more and all real properties on which are situated
buildings, warehouses, workshops, garages and other structures used in the
operation of the business of the Company and also including an indication as to
which assets are currently owned, or were formerly owned, by any Stockholder or
business or personal Affiliates of the Company or any Stockholder. To the best
knowledge of the Company, all leases set forth on Schedule 3.17 are in full
force and effect and constitute valid and binding agreements of the Company
and, to the best knowledge of the Company, of the other parties thereto in
accordance with their respective terms. All fixed assets used by the Company
that are material to the operation of its business are either owned by the
Company or leased under an agreement listed on Schedule 3.17. Schedule 3.17
includes true, complete and correct copies of all title reports and title
insurance policies received or owned by the Company that are still in effect.
Schedule 3.17 also includes a summary description of all plans or projects
involving the opening of new operations, expansion of any existing operations
or the acquisition of any real property or existing business, to which
management of the Company has made any material expenditure in the two-year
period prior to the date of this Agreement, which if pursued by the Company or
the Surviving Corporation would require additional material expenditures of
capital.
3.18. Significant Car Dealers, Material Contracts and Commitments.
(a) Schedule 3.18 includes a complete and accurate list of all
Car Dealers that originated $50,000 or more in Finance Contracts during
1996. Schedule 3.18 also contains an accurate list of all material
contracts, commitments, leases, instruments, agreements, licenses or
permits to which Company is a party or by which it or its properties are
bound (including without limitation contracts with directors, employees,
any of the Stockholders, Car Dealers, joint venture or partnership
agreements, real estate leases, equipment leases, software licenses,
contracts with any labor organizations, loan agreements, servicing
agreements, securitization agreements, indemnity or guaranty agreements,
bonds, mortgages, options to purchase land, liens, pledges or other
security agreements) (i) as of the Balance Sheet Date and (ii) entered
into since the Balance Sheet Date (collectively, the "Material
Contracts"). The Company has made available to Search true, complete
and correct copies of the Material Contracts and all amendments thereto.
Except to the extent set forth on Schedule 3.18, (w) none of Company's
Car Dealers has canceled or substantially reduced or is currently
attempting or threatening to cancel or substantially reduce its sale of
Finance Contracts to the Company, (x) the Company has complied with all
of its commitments and obligations and is not in default under any of
the Material Contracts and no notice of default has been received with
respect to any of the Material Contracts and (y) there are no Material
Contracts that were not negotiated at arm's length with third parties
not Affiliated with Company or any officer, director or Stockholder of
Company and (z) the Company has no knowledge that any of the Material
Contracts will not be complied with by the parties thereto.
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(b) Each Material Contract is valid and binding on the
Company, is in full force and effect, is, to the best of the Company's
knowledge, enforceable against the parties thereto (other than the
Company) in accordance with its terms and is not subject to any default
(or event that, with notice or the passage of time, or both would
constitute a default) thereunder by any party obligated to Company
pursuant thereto. The Company has used its best efforts to fully comply
in all material respects with the provisions of each Material Contract.
Company has used its best efforts to obtain, or will obtain prior to the
Closing, all necessary consents, waivers and approvals of parties to any
Material Contracts as are required in connection with any of the
Transactions, or as are required of any Governmental Authority or other
third party in order that any such Material Contract remain in effect
without modification after the Merger and without giving rise to any
default or right of termination, cancellation or acceleration or loss of
any right or benefit thereunder. All Company Third Party Consents are
listed on Schedule 3.18.
3.19. Insurance. Schedule 3.19 sets forth an accurate list of all
insurance policies carried by the Company and all insurance loss runs or
workmen's compensation claims received for the past two policy years. The
Company has delivered to Search, prior to the date of this Agreement, true,
complete and correct copies of all current insurance policies, all of which are
in full force and effect. All premiums payable under all such policies have
been paid and, to the best of the Company's knowledge, the Company is otherwise
in full compliance with the terms of such policies (or other policies providing
substantially similar insurance coverage). Such policies of insurance are of
the type and in amounts customarily carried by similarly situated Persons
conducting businesses similar to that of the Company. The Company does not
know of any threatened termination of or material premium increase with respect
to, any of such policies. The Company maintains insurance adequate to
indemnify all of its officers and directors for any liability arising from
events that occurred prior to Closing and such insurance shall remain effective
notwithstanding the Merger.
3.20. Compensation; Employment Agreements. Schedule 3.20 hereto sets
forth an accurate list of all officers, directors and key employees of the
Company, as of the date hereof, all employment agreements with such officers,
directors and key employees and the rate of compensation (and the portions
thereof attributable to salary, bonus and other compensation, respectively) of
each of such Persons as of (a) the Balance Sheet Date and (b) the date hereof.
The Company has provided to Search true, complete and correct copies of all
employment, management, severance and other compensation or benefit contracts,
commitments and arrangements with Persons listed on Schedule 3.20.
3.21. Employee Benefit Plans.
(a) All employee benefit plans, programs and policies (whether
formal or informal, and whether maintained for the benefit of a single
individual or more than one individual) maintained or contributed to by
the Company for the benefit of any current or former employee of the
Company or in which such employees are entitled to participate are
listed in Schedule 3.21 (the "Benefit Plans"). Copies of all such
written Benefit Plans, written descriptions of all such oral Benefit
Plans, and all other documentation relating to such Benefit Plans have
been delivered or made available to Search. The Company does not sponsor
and has not participated in any "defined benefit plan" as defined in
Section 3(25) of ERISA.
(b) Each Benefit Plan and the operation and administration
thereof complies, and has at all times complied, in all material
respects with the requirements of all applicable Laws including without
limitation the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and the Code. (a) Each Benefit Plan which is an
employee pension benefit plan as defined in Section 3(2) of ERISA and is
intended to qualify under section 401(a) of the Code so qualifies and
has received a favorable determination letter from the Internal Revenue
Service that it is so qualified and nothing has occurred since the date
of such letter to affect the qualified status of such Plan, and each
trust which forms a part of any such plan is tax-exempt under section
501(a) of the Code, (b) no liability has been incurred or is expected to
be incurred under Title IV of ERISA to any party with respect to any
Benefit Plan, or any other plan presently or heretofore maintained or
contributed to by the Company, any predecessor to the Company or any
entity that is or at any time was a member of a controlled group, as
defined in Section 412(n) (6) (B) of the Code, which includes or
included the Company ("Controlled Group Member"), and no fact exists or
event has occurred that would reasonably be expected to give rise to any
such liability, (c) neither the Company nor any Controlled Group Member
has incurred any liability for any tax imposed under section
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4971 through 4980B of the Code or civil liability under section 502(i)
or (1) of ERISA, (d) no Benefit Plan is a multi-employer plan within the
meaning of section 3(37) of ERISA, (e) no Benefit Plan provides health
or death benefit coverage beyond the termination of an employee's
employment, except as required by Part 6 of Title I of ERISA or section
4980B of the Code, (f) no material "reportable event" (within the
meaning of section 4043 of ERISA) has occurred with respect to any
Benefit Plan or any plan maintained by a Controlled Group Member since
the effective date of said section 4043, (g) no suit, actions or other
litigation (excluding claims for benefits incurred in the ordinary
course of plan activities) have been brought against or with respect to
any Benefit Plan, and (h) all contributions to Benefit Plans that were
required to be made under such Benefit Plans have been made as of the
Balance Sheet Date, and all benefits accrued under any unfunded Benefit
Plan will have been paid, accrued or otherwise adequately reserved in
accordance with GAAP as of such date and the Company will have performed
by the Closing Date all material obligations required to be performed as
of such date under Benefit Plans.
(c) The Company and the Subsidiary have not incurred any
liability under, and have complied in all respects with, the Worker
Adjustment Retraining Notification Act and no fact or event exists that
could give rise to liability under such act, except for such
occurrences, noncompliances and liabilities as would not, individually
or in the aggregate, have a Company Material Adverse Effect.
3.22. Employee Matters. The Company is not bound by or subject to (and
none of its respective assets or properties is bound by or subject to) any
arrangement with any labor union. No employee of the Company is represented by
any labor union or covered by any collective bargaining agreement and no
campaign to establish such representation is in progress. There is no pending
or threatened labor dispute involving the Company and any group of its
employees nor has the Company experienced any labor interruptions over the past
three years that resulted in a Company Material Adverse Effect and the Company
considers its relationship with its employees to be good.
3.23. Conformity with Law; Litigation. (a) The Company has not
violated any Law or any Order of any Governmental Authority having jurisdiction
over it other than violations which would not have a Company Material Adverse
Effect. (b) Except as described in Schedule 3.23, there are no claims,
counterclaims, actions, suits, investigations or other proceedings, pending or
threatened, against or affecting the Company, or seeking to delay or prevent
consummation of the Merger, at law or in equity, or before or by any arbitrator
or any Governmental Authority having jurisdiction over it and no notice of any
claim, counterclaim, action, suit or proceeding, whether pending or threatened,
has been received. (c) There are no judgments, orders, injunctions, decrees,
stipulations or awards (whether rendered by a Governmental Authority or by
arbitration) against the Company or against any of its properties or
businesses.
3.24. Taxes.
(a) Other than as set forth on Schedule 3.24(a), the Company
has timely filed or will timely file all requisite federal, state and
other Tax returns, reports and forms ("Returns") for all periods ended
on or before the Closing Date, other than Returns with respect to which
the failure to file would not result in penalties, fines, or other
payments totaling more than $5,000 in the aggregate.
(b) Other than as set forth on Schedule 3.24(b), there are no
examinations in progress or claims against the Company for Taxes for any
period or periods and no notice of any claim for Taxes, whether pending
or threatened, has been received.
(c) The amounts shown as accruals for Taxes on the Current
Balance Sheet are sufficient for the payment of all Taxes, whenever
determined, for all fiscal periods ended on or before that date.
(d) The Company has a taxable year ended on December 31.
(e) The Company currently utilizes the accrual method of
accounting for income tax purposes and such method of accounting has not
changed in the past five years.
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(f) The Company has paid or has fully accrued for all Taxes
and will have withheld with respect to its employees all federal and
state income taxes, FICA, FUTA and other taxes required to be withheld,
whenever determined, with respect to periods ending on or before the
Closing Date.
(g) Copies of (i) any Tax examinations, (ii) extensions of
statutory limitations for the collection or assessment of Taxes and
(iii) the Returns of the Company for the last three (3) fiscal years are
included as part of Schedule 3.24(g).
(h) There are (and as of immediately following the Closing
there will be) no liens, pledges, charges, claims, security interests or
other encumbrances of any sort ("Liens") on the assets of the Company
relating to or attributable to Taxes (excluding current year property or
ad valorem taxes).
(i) None of the Company's assets are treated as "tax exempt
use property" within the meaning of Section 168(h) of the Code.
(j) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the
provisions of this Agreement, covering any employee or former employee
of the Company that, individually or collectively, could give rise to
the payment of any amount that would not be deductible pursuant to
Section 280G, 404 or 162 of the Code.
(k) The Company has not filed any consent agreement under
Section 341(f)(2) of the Code or agreed to have Section 341(f)(2) of the
Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by the Company.
(l) The Company is not a party to a tax sharing, tax indemnity
or allocation agreement nor does the Company owe any amount under any
such agreement.
(m) The Company is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code.
(n) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal
income tax deductions is accurately reflected on the Company's tax books
and records.
(o) The Company has not taken or agreed to take any action
that would prevent the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code.
3.25. Government Contracts. The Company is not a party to any
governmental contracts subject to price redetermination or renegotiation.
3.26. Absence of Changes. Since December 31, 1996, except as disclosed
in Schedule 3.26 or agreed to by Search in writing, there has not been:
(a) any event giving rise to a Company Material Adverse
Effect,
(b) any damage, destruction or loss (whether or not covered by
insurance) adversely affecting the properties or business of the Company
that would have a Company Material Adverse Effect,
(c) any change in the authorized capital of the Company or in
its outstanding securities or any grant of any options, warrants, calls,
conversion rights or commitments,
(d) any declaration or payment of any dividend or distribution
in respect of the capital stock or any direct or indirect redemption,
purchase or other acquisition of any of the capital stock of the
Company,
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(e) any increase in the compensation, bonus, sales commissions
or fee arrangements payable or to become payable by the Company to any
of its officers, directors, Stockholders, employees, consultants or
agents other than in the ordinary course of business and in accordance
with and consistent with past practices,
(f) any work interruptions, labor grievances or claims filed,
or any similar event or condition of any character, which would result
in a Company Material Adverse Effect,
(g) any sale or transfer, or any agreement to sell or
transfer, any asset, property or right of the Company having an original
cost of $5,000 or more to any Person, including without limitation the
Stockholders and their Affiliates,
(h) any cancellation, or agreement to cancel, any indebtedness
or other obligation owing to the Company, including without limitation
any indebtedness or obligation of any Stockholders or any Affiliate
thereof, provided that the Company may negotiate and adjust bills in the
course of good faith disputes with customers in a manner consistent with
past practice,
(i) any plan, agreement or arrangement granting any
preferential rights to purchase or acquire any interest in any of the
assets, property or rights of the Company or requiring consent of any
party to the transfer and assignment of any such assets, property or
rights,
(j) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets
outside of the ordinary course of business of the Company,
(k) any waiver of any material rights or claims of the
Company,
(l) any breach, amendment or termination of any Material
Contract,
(m) any transaction by the Company outside the ordinary course
of business,
(n) any capital expenditure or commitment by the Company,
individually or in the aggregate, exceeding $5,000 other than those
listed on Schedule 3.26(n),
(o) change in the accounting methods or practices (including
any change in depreciation or amortization policies or rates) by the
Company or the revaluation by the Company of any of its assets,
(p) any creation or assumption by the Company of any mortgage,
pledge, security interest or lien or other encumbrance on any asset,
other than those listed on Schedule 3.26(p),
(q) any entry into, amendment of, relinquishment, termination
or nonrenewal by the Company of any contract, lease transaction,
commitment or other right or obligation requiring aggregate payments by
the Company in excess of $50,000, other than those listed on Schedule
3.26(q),
(r) loan by the Company to any Person or entity, incurring by
the Company of any indebtedness (excluding indebtedness under the Fourth
Amended and Restated Loan Agreement dated as of May 1, 1996 among MS
Financial, Fleet Bank, N.A., as Agent, and the Banks party thereto, as
amended by the First Amendment to the Fourth Amended and Restated Loan
Agreement dated as of December 16, 1996 by and among MS Financial, Fleet
Bank, N.A., as Agent, and the Banks party thereto and proposed to be
further amended pursuant to the Bank Loan Term Sheet (the "MS Loan
Agreement") guaranteeing by the Company of any indebtedness or debt
securities of others or issuance or sale of any debt securities of the
Company,
(s) the commencement or notice or threat of commencement of
any lawsuit or proceeding against or investigation of the Company or any
of its affairs not otherwise disclosed on Schedule 3.23, or
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(t) agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a)
through (s) (other than agreements with Search regarding the
Transactions), or
(u) any change of servicer or notice of an impending change of
servicer for any of the Securitization Trusts.
3.27. Bank Accounts Powers of Attorney. Schedule 3.27 sets forth an
accurate list, as of the date of this Agreement, of:
(a) the name of each financial institution in which the
Company has any account or safe deposit box;
(b) the names in which the accounts or boxes are held;
(c) the type of account; and
(d) the name of each Person authorized to draw thereon or have
access thereto.
Schedule 3.27 also sets forth the name of each Person, corporation, firm or
other entity holding a general or special power of attorney from the Company
and a description of the terms of such power.
3.28. Relations with Governments. The Company has not made, offered or
agreed to offer anything of value to any governmental official, political party
or candidate for government office and it has not taken any action that would
cause the Company to be in violation of the Foreign Corrupt Practices Act of
1977, as amended, or any Law of similar effect.
3.29. Disclosure. No representation or warranty by the Company
contained in this Agreement contains any untrue statement of a material fact or
omits to state any material fact necessary to make any statement herein not
misleading.
3.30. Opinion of Financial Advisor. MS Financial has received the
opinion of Bear, Stearns & Co. ("Bear Stearns") on the date of this Agreement
to the effect that the Merger is fair from a financial point of view to MS
Financial's stockholders as of the date thereof. As soon as practicable after
the date of this Agreement, MS Financial will deliver a written copy of such
opinion to Search dated as of the date of the Proxy Statement and such written
opinion will be attached to the Proxy Statement. A copy of the Bear Stearns
engagement letter dated October 25, 1996, as amended by the letter agreement
dated November 21, 1996 (the "Engagement Letter"), has previously been
delivered to Search.
3.31. Vote Required. The affirmative vote of the holders of a majority
of the then outstanding shares of MS Financial Stock is the only vote of the
holders of any class or series of capital stock of MS Financial necessary to
adopt this Agreement and consummate the Transactions.
3.32. Brokers. No broker, finder or investment banker (other than Bear
Stearns) is entitled to any brokerage, finder's or other fee or commission in
connection with the Transactions based upon arrangements made by or on behalf
of MS Financial. The Engagement Letter is the only agreement pursuant to which
Bear Stearns will be entitled to any payment relating to the Transactions.
3.33. Absence of Claims Against Company. To the best knowledge of the
Company, the Stockholders have no claims against the Company.
3.34. Complete Copies of Materials. The Company has delivered to
Search true, correct and complete copies (or summaries) of each agreement,
contract, commitment or other document that is referred to in the Schedules or
that has been requested by Search or its counsel in writing.
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3.35. Compliance with Laws of Delaware. Without limiting any of the
other representations or warranties contained herein, MS Financial shall comply
with all provisions of the Delaware Statutes applicable to the Transaction,
including but not limited to Section 262 thereof.
3.36. Hart-Scott-Rodino Filing. The Company will file any and all
documentation, notices and responses, and will cooperate with Search with
respect to any and all filings, notices and responses, to Governmental
Authorities necessary to comply with HSR and to obtain the pre-clearance for
the Merger to be effectuated.
3.37. Review of Search. Without in any way affecting the importance,
scope or effectiveness of, or impacting its reliance on, any other provision of
this Agreement, and without acknowledging the accuracy or completeness of any
materials provided to it, the Company acknowledges that it has had a full
opportunity to request from Search and Newco all information concerning Search
and Newco that the Company deems relevant to its decision to enter into this
Agreement and to consummate the Transactions, and has reviewed the information
provided by Search and Newco.
4. REPRESENTATIONS OF SEARCH AND NEWCO.
To induce MS Financial to enter into this Agreement and consummate the
Transactions, each of Search and Newco represents and warrants to MS Financial
as follows:
4.1. Due Organization. Search and Newco are corporations duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Search and Newco have the requisite corporate power to carry on
their respective businesses as they are now being conducted. Search and Newco
are duly qualified as foreign corporations and are in good standing in each
jurisdiction where the character of either of their properties owned or held
under lease or the nature of their respective activities makes such
qualification necessary, except where the failure to be so qualified or in good
standing would not, individually or in the aggregate, have a Search Material
Adverse Effect. Search and Newco have delivered to MS Financial true, complete
and correct copies of their Certificates of Incorporation and Bylaws. The
Certificates of Incorporation and Bylaws are in full force and effect and, as
of the date of this Agreement, have not been amended, modified, revoked,
terminated or cancelled or in any other manner varied from the documents
delivered to MS Financial. The Certificate of Incorporation and Bylaws are
collectively referred to as the "Search Charter Documents." Search and Newco
have made available to MS Financial true, complete and correct sets of their
minute books. Neither Search nor Newco is in violation of any provision of the
Search Charter Documents.
4.2. Authorization; Validity of Obligations. Search and Newco have
all requisite corporate power and authority to execute and deliver this
Agreement and the Related Documents and, with respect to the Merger and the
issuance of the shares of Search Common Stock in connection with the Merger, if
required by the rules of the NASD, upon the approval thereof by Search's
stockholders in accordance with those rules, the Search Charter Documents, this
Agreement and the Delaware Statutes, to perform their respective obligations
pursuant to the terms of this Agreement and the Related Documents to which they
are a party and to consummate the Transactions. The execution and delivery of
this Agreement and such Related Documents by Search and Newco and the
performance by each of Search and Newco of their respective obligations under
this Agreement and such Related Documents have been duly and validly authorized
by the respective Boards of Directors of Search and Newco, and by all other
necessary corporate action other than approval of the issuance of Search Common
Stock pursuant to the Merger by holders of a majority of the total votes cast
with respect thereto by the stockholders of Search at the Search Stockholders
Meeting pursuant to the Delaware Statutes, the Search Charter Documents and the
rules of the NASD, and the filing and recordation of the Certificate of Merger.
This Agreement has been, and the Related Documents to which either Search or
Newco is a party will be, duly and validly executed and delivered by Search
and/or Newco, as the case may be, and will be, legal, valid and binding
obligations of Search and/or Newco enforceable against Search and/or Newco in
accordance with their terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of Law
governing specific performance, injunctive relief or other equitable remedies.
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4.3. No Conflicts; Required Filings and Consents.
(a) The execution, delivery and performance of this Agreement
and the Related Documents, the consummation of the Transactions and the
fulfillment of the terms hereof and thereof will not:
(i) conflict with, or result in a breach or violation
of, the Search Charter Documents;
(ii) conflict with, or result in a default (or would
constitute a default but for any requirement of notice or lapse
of time or both) under any document, agreement or other
instrument to which either Search or Newco is a party, or result
in the creation or imposition of any lien, charge or encumbrance
on any of Search's or Newco's properties pursuant to (y) any Law
to which either Search or Newco or any of their respective
property is subject, or (z) any judgment, order or decree to
which Search or Newco is bound or any of their respective
property is subject, other than such as would not individually or
in the aggregate have a Search Material Adverse Effect;
(iii) result in termination of, or give to any other
Person any right of termination, amendment, acceleration or
cancellation with respect to any permit, license, franchise,
contractual right or other authorization of Search or Newco
material to Search and its Subsidiaries, taken as a whole; or
(iv) violate any Law to which Search or Newco is subject
or by which any assets of Search or Newco are bound or affected
the violation of which would have a Search Material Adverse
Effect.
(b) The execution and delivery of this Agreement by Search and
Newco do not, and the performance of this Agreement by Search and Newco
will not, require any consent, approval, authorization or permission of,
or filing with or notification to, any Governmental Authority except (i)
for applicable requirements, if any, of the Exchange Act, the Securities
Act, and Blue Sky Laws, and filing and recordation of the Certificate of
Merger with the Secretary as required by the Delaware Statutes (ii) such
notice as is necessary to comply with HSR and (iii) where failure to
obtain such consents, approvals, authorizations or permits, or to make
such filings or notifications, would not prevent or delay consummation
of the Merger, or otherwise prevent Search or Newco from performing its
obligations under this Agreement.
4.4. Permits and Intangibles. Search and Newco own or hold all Search
Material Permits. The Search Material Permits are valid, and neither Search
nor Newco has received any notice that any Governmental Authority intends to
modify, suspend, cancel, terminate or not renew any Search Material Permit.
Except as disclosed on Schedule 4.4, neither Search nor Newco is in conflict
with, or in default or violation of, (i) any Law applicable to Search or Newco
or by which any property or asset of Search or Newco is bound or affected, (ii)
any of the Search Material Permits or (iii) any note, bond, mortgage,
indenture, contract, agreement, lease, or other instrument or obligation to
which Search or Newco is a party or by which Search or Newco or any property or
asset of Search or Newco is bound or affected except as would not have a Search
Material Adverse Effect. The Transactions will not result in a default under,
or a breach or violation of, or adversely affect the rights and benefits
afforded to Search or Newco by, any Search Material Permit.
4.5. Capitalization of Search and Ownership of Search Stock.
(a) The authorized capital stock of Search consists of
130,000,000 shares of Search Common Stock and 60,000,000 shares of
Preferred Stock. 3,181,861 shares of Search Common Stock, 50,000 shares
of 12% Senior Convertible Preferred Stock and 2,456,098 shares of 9%/7%
Convertible Preferred Stock were outstanding on January 31, 1997. At
that date, warrants and options to purchase 751,649 shares of Search
Common Stock were outstanding and Search was obligated to issue an
additional 146,381 shares of Search Common Stock and Search had
committed to issue warrants and options to purchase an additional
817,500 shares of Search Common Stock. A total of 7,968,294 shares of
Search Common Stock were reserved for issuance upon conversion of the
outstanding shares of 12% Senior Convertible Preferred Stock and 9%/7%
Convertible Preferred Stock. The authorized capital stock of Newco
consists of 1,000 shares of Common Stock, all of which are outstanding
and outstanding owned beneficially and of record by Search.
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All of the issued and outstanding shares of the capital stock of Search
and Newco have been duly authorized and validly issued, are fully paid
and nonassessable and not subject to preemptive rights. All of the
issued and outstanding shares of the capital stock of Search and Newco
were offered, issued, sold and delivered by Search or Newco, as the case
may be, in compliance with all applicable state and federal laws
concerning the issuance, offer and sale of securities. Further, none of
such shares was issued in violation of any preemptive rights.
(b) The shares of Search Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute,
the Search Charter Documents or any agreement to which Search is a party
or by which Search is bound and will, when issued, be registered under
the Securities Act, the Exchange Act and applicable Blue Sky Laws,
unless exempt therefrom.
4.6. SEC Filings; Financial Statements.
(a) Search has filed all Search SEC Reports. The Search SEC
Reports (i) were prepared in all material respects in accordance with
the requirements of the Securities Act and the Exchange Act, as the case
may be, and the rules and regulations thereunder and (ii) did not, at
the time they were filed (or at the effective date thereof in the case
of registration statements), contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of
the circumstances under which they were made, not misleading. No
Subsidiary of Search is currently required to file any form, report or
other document with the SEC under Section 12 of the Exchange Act.
(b) The information supplied by Search for inclusion in the
Registration Statement and the Proxy Statement shall not, at (i) the
time the Registration Statement is declared effective, (ii) the time the
Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to the stockholders of Search and MS Financial, (iii) the
time of the MS Financial Stockholders Meeting or the Search Stockholders
Meeting, and (iv) the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omit to state
any material fact required to be stated therein or necessary in order to
make the statements therein not false or misleading or necessary to
correct any statements in any earlier communication with respect to the
solicitation of proxies for the MS Financial Stockholders Meeting and
the Search Stockholders Meeting which shall have become false or
misleading. If at any time prior to the Effective Time any event or
circumstance relating to Search or any Search Subsidiary, or their
respective officers or directors, should be discovered by Search which
should be set forth in an amendment or a supplement to the Registration
Statement or Proxy Statement, Search shall promptly inform MS Financial.
Notwithstanding the foregoing, Search and Newco make no representation
or warranty with respect to any information supplied by MS Financial,
the Stockholders, or any of their representatives which is contained in
the Proxy Statement. All documents that Search is responsible for
filing with the SEC in connection with the Transactions will comply as
to form and substance in all material aspects with the applicable
requirements of the Securities Act and the rules and regulations
promulgated thereunder and the Exchange Act and the rules and
regulations promulgated thereunder.
(c) Search has heretofore furnished to MS Financial complete
and correct copies of all amendments and modifications (if any) that
have not been filed by Search with the SEC to all agreements, documents
and instruments previously filed by Search as exhibits to the Search SEC
Reports and currently in effect as of the date of this Agreement.
(d) Each of the consolidated financial statements (including,
in each case, any notes thereto) contained in the Search SEC Report for
the transition period ended March 31, 1996 and the unaudited
consolidated financial statements of Search and its consolidated
Subsidiaries for the six months ended September 30, 1996 were prepared
in accordance with GAAP (except as may be indicated in the notes thereto
and except that financial statements included with interim reports do
not contain all GAAP notes to such financial statements) and each fairly
presented in all material respects the consolidated financial positions,
results of operations and changes in stockholders' equity and cash flows
of Search and the
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consolidated Subsidiaries as at the respective dates thereof and for the
respective periods indicated therein (subject, in the case of unaudited
statements, to normal and recurring year-end adjustments which were not
and are not expected, individually or in the aggregate, to have a Search
Material Adverse Effect). Since September 30, 1996, there have been no
material changes in Search's accounting policies.
(e) Except for the transactions described in Schedule 4.6(e),
all transactions involving Search or any of its subsidiaries that are
required to be disclosed in the Search SEC Reports in accordance with
Item 404 of Regulation S-K promulgated under the Securities Act have
been so disclosed, and between September 30, 1996 and the date of this
Agreement, neither Search nor any of its subsidiaries has entered into
any transactions that would be required to be disclosed in future public
filings under the Exchange Act pursuant to such Item which have not
already been disclosed in the Search SEC Reports filed prior to the date
hereof.
4.7. Absence of Certain Changes or Events. Since September 30, 1996
and prior to the date of this Agreement, except (a) as contemplated by, or
disclosed pursuant to, this Agreement or any Schedule to this Agreement, (b)
disclosed by Search to MS Financial in writing on the date hereof, or (c)
disclosed in any Search SEC Report, Search and its subsidiaries have conducted
their businesses only in the ordinary course and in a manner consistent with
past practice and, since September 30, 1996, there has not been (i) any event
or events (whether or not covered by insurance), individually or in the
aggregate, having a Search Material Adverse Effect other than changes or
effects affecting the non-prime automobile finance industry generally, (ii) any
material change by Search in its accounting methods, principles or practices,
or (iii) any entry by Search or any Search Subsidiary into any commitment or
Transaction material to Search or the Search Subsidiaries, except in the
ordinary course of business and consistent with past practice.
4.8. Conformity with Law; Litigation.
(a) Search and Newco have not violated any Law or any Order of
any Governmental Authority having jurisdiction over either of them other
than violations which would not have a Search Material Adverse Effect.
(b) Except as disclosed in any Search SEC Report, there are no
claims, counterclaims, actions, suits, investigations or other
proceedings, pending or, to the best of Search's and Newco's knowledge,
threatened, against or affecting Search or Newco, or seeking to delay or
prevent consummation of the Merger, at law or in equity, or before or by
any arbitrator or any Governmental Authority having jurisdiction over
either of them and no notice of any such claim, counterclaim, action,
suit or proceeding, whether pending or threatened, has been received by
either of them. Except as disclosed in any Search SEC Report, there are
no judgments, orders, injunctions, decrees, stipulations or awards
(whether rendered by a Governmental Authority or by arbitration) against
Search or Newco or against any of either of their properties or
businesses having a Search Material Adverse Effect.
4.9. Ownership of Newco; No Prior Activities.
(a) Newco was formed solely for the purpose of engaging in the
Transactions.
(b) As of the date hereof and the Effective Time, except for
obligations or liabilities incurred in connection with its incorporation
or organization and the Transactions and except for this Agreement and
any other agreements or arrangements, contemplated by this Agreement,
Newco has not and will not have incurred, directly or indirectly,
through any subsidiary or Affiliate, any obligations or liabilities or
engaged in any business activities of any type or kind whatsoever or
entered into any agreements or arrangements with any Person.
4.10. Vote Required. The affirmative vote of the holders of a majority
of the outstanding shares of Search Common Stock and Preferred Stock voted is
the only vote, if any, of the holders of any class or series of capital stock
of Search necessary to approve the issuance of shares of Search Common Stock to
the stockholders of MS Financial pursuant to the Merger.
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4.11. Brokers. No broker, finder or investment banker (other than
Alex. Brown & Sons Incorporated and Tri-River Capital Group) is entitled to any
brokerage, finder's or other fee or commission in connection with the
Transactions based upon arrangements made by or on behalf of Search or Newco.
4.12. Transactions in Capital Stock. Except as set forth in Section
4.5(a), the Search SEC Reports and, as contemplated by this Agreement, as of
the date of this Agreement, no option, warrant, call, subscription right,
conversion right or other contract or commitment of any kind exists of any
character, written or oral, which may obligate Search to issue or sell any
shares of capital stock or other equity interests. Except as set forth in the
Search SEC Reports filed prior to the date of this Agreement or in Schedule
4.12, neither Search nor Newco has any obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interests therein or to pay any dividend or make any distribution in respect
thereof.
4.13. Disclosure. No representation or warranty by Search or Newco
contained in this Agreement contains any untrue statement of a material fact or
omits to state any material fact necessary to make any statement herein or
therein not misleading.
4.14. Complete Copies of Materials. Except as set forth in Schedule
4.14, Search and Newco have made available to MS Financial true and complete
copies (or summaries) of each agreement, contract, commitment or other document
which pertains to Search or Newco, or to which Search or Newco is a party, and
which is referred to in the Closing Checklist or in the Schedules, or that has
been requested in writing by MS Financial or its counsel.
4.15. Hart-Scott-Rodino Filing. Search and Newco will file any and all
documentation, notices and responses, and will cooperate with MS Financial with
respect to any and all filings, notices and responses to Governmental
Authorities necessary to comply with HSR or required by Law and to obtain the
pre-clearance for the Merger to be effectuated.
4.16. Review of Company. Without in any way affecting the importance,
scope or effectiveness of, or impacting its reliance on, any other provision of
this Agreement, and without acknowledging the accuracy or completeness of any
materials provided to it, Search acknowledges that it has had a full
opportunity to request from the Company, all information concerning the Company
that Search deems relevant to its decision to enter into this Agreement and to
consummate the Transactions and that it has reviewed such information as has
been provided to it.
4.17. Taxes.
(a) Search and Newco have timely filed or will timely file all
requisite Returns for all periods ended on or before the Effective Time.
(b) There are no examinations in progress or claims against
Search or Newco for Taxes for any period or periods and no notice of any
claim for Taxes, whether pending or threatened, has been received.
(c) The amounts shown as accruals for Taxes on Search's
current balance sheet are sufficient for the payment of all Taxes,
whenever determined, for all fiscal periods ended on or before that
date.
(d) Search has a taxable year ending on March 31 in each year.
(e) Search and Newco currently use the accrual method of
accounting for income tax purposes and such method of accounting has not
changed in the past five years.
(f) Search and Newco have paid or have fully accrued for all
Taxes and will have withheld with respect to its employees all federal
and state income taxes, FICA, FUTA and other taxes required to be
withheld, whenever determined, with respect to periods ending on or
before the Closing Date.
(g) Copies of (i) any Tax examinations and (ii) extensions of
statutory limitations for the collection or assessment of Taxes are
included as part of Schedule 4.17.
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(h) There are (and as of immediately following the Closing
there will be) no liens, pledges, charges, claims, security interests or
other encumbrances of any sort ("Liens") on the assets of Search or
Newco relating to or attributable to Taxes (excluding current year
property or ad valorem taxes).
(i) None of Search's or Newco's assets are treated as "tax
exempt use property" within the meaning of Section 168(h) of the Code.
(j) Search and Newco have not filed any consent agreement
under Section 341(f)(2) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as
defined in Section 341(f)(4) of the Code) owned by Search or Newco.
(k) Neither Search nor Newco is or has been at any time, a
"United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code.
(l) Search's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal
income tax deductions is accurately reflected on Search's tax books and
records.
(m) Neither Search nor Newco has taken or agreed to take any
action that would prevent the Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code.
5. COVENANTS.
5.1. Access to Information; Confidentiality.
(a) Between the date of this Agreement and the Effective Time,
Search and MS Financial will, and each will direct its Subsidiaries to,
afford to the other and its officers and authorized representatives
access to (i) all of their sites, properties, books and records,
including, without limitation, in the case of MS Financial, the records
of the Securitization Trusts, and (ii) such additional financial and
operating data and other information as to their respective businesses
and properties as each may from time to time reasonably request,
including but not limited to verification of the other party's
compliance with all of the terms and conditions of this Agreement and
access to employees, customers and vendors for due diligence inquiry.
Each of Search and MS Financial will cooperate and will direct its
Subsidiaries to cooperate with the other and its representatives in the
preparation of any documents or other material which may be required in
connection with this Agreement. The representations, warranties,
covenants and obligations as set forth in this Agreement shall not be
affected or modified in any manner whatsoever by any due diligence
inquiry. In addition, any due diligence inquiry shall not be a defense
to any breach of any of the representations, warranties, covenants or
obligations contained herein.
(b) Each of the Company, on the one hand, and Search and Newco
on the other hand, agrees that it will not disclose any confidential or
proprietary information which it obtains or acquires regarding the other
or its Subsidiary to any Person, firm, corporation, association or other
entity for any purpose or reason whatsoever, except to authorized
employees or other authorized representatives of the respective parties
and to counsel, lenders, secured creditors, underwriters, investment
bankers and other advisers; provided, that such advisors agree to the
confidentiality provisions of this Section 5.1(b), subject to Section
5.1(c) below.
(c) The confidentiality obligations of a party hereto shall be
terminated regarding any confidential or proprietary information
obtained or acquired if (i) such information becomes known to the public
generally through no fault of the receiving party, (ii) disclosure is
required by Law or the order of any Governmental Authority under color
of Law, or (iii) the disclosing party reasonably believes that such
disclosure is required in connection with the defense of a lawsuit
against the disclosing party; provided, that prior to disclosing any
information pursuant to clause (i), (ii) or (iii) above, such party
shall, if possible, give prior written notice thereof to the other party
and provide the other party with the opportunity to contest such
disclosure.
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5.2. Conduct of Business by MS Financial. Subject to the limitations
of that certain budget approved pursuant to the Bank Loan Term Sheet, between
the date hereof and the Effective Time, unless otherwise contemplated by this
Agreement, including, without limitation, the provisions of Section 5.16, or
agreed to by Search in writing, MS Financial will, and will cause its
Subsidiary, to:
(a) carry on their respective businesses only in the ordinary
course of business consistent with past practice as was in effect
between July 1, 1996 and December 31, 1996 and not introduce any new
method of management, operation or accounting;
(b) use all commercially reasonable efforts to preserve
substantially intact its business organization, to keep available the
services of its current officers, management and marketing employees and
to preserve its current relationships with dealers, suppliers, lenders,
and other Persons with which any of them has a significant business
relationship;
(c) maintain their respective properties and facilities,
including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(d) perform in a timely manner all of their obligations under
this Agreement and the Related Documents to which they are a party and
all other material agreements relating to or affecting any of their
respective assets, the failure of which to perform would, when
aggregated with all other agreements not performed, have a Company
Material Adverse Effect.
(e) keep in full force and effect present insurance policies
or other comparable insurance coverage;
(f) use all commercially reasonable efforts to maintain and
preserve the goodwill associated with their respective businesses, and
their respective relationships with customers and others having business
relations with them;
(g) maintain compliance with all Material Permits and Laws;
(h) maintain present debt and lease instruments and not enter
into new or amended debt or lease instruments; and
(i) inform Search immediately if any event occurs that may
have a Company Material Adverse Effect.
5.3. Prohibited Activities. Without the prior written consent of
Search, between the date hereof and the Effective Time, MS Financial will not,
and will cause its Subsidiary not to:
(a) amend any of the MS Charter Documents;
(b) (i) declare or pay any dividend, or make any other
distribution (whether in cash, stock or property) in respect of any of
their respective stock whether now or hereafter outstanding, (ii) split,
combine or reclassify any of their respective capital stock, (iii) issue
or authorize the issuance of any shares of capital stock, or any
options, warrants, convertible securities or other rights of any kind to
acquire any shares of capital stock, or any other ownership interest
(including, without limitation, any phantom interest), or (iv) purchase,
redeem or otherwise acquire or retire for value any shares of their
respective stock (including without limitation the right to acquire any
shares and any phantom interest), except that MS Financial may issue
shares of MS Financial Stock pursuant to Company Options outstanding on
the date of this Agreement and pursuant to the MS Financial Employee
Stock Purchase Plan; (MS Financial acknowledges that any such a
prohibited occurrence which relates to the distribution of MS Financial
stock could affect Search's compliance with the relevant securities laws
in the distribution of the Search Common Stock);
(c) incur or agree to incur any indebtedness other than under
the MS Loan Agreement or make any capital expenditures in excess of
$5,000 in the aggregate other than those listed in Schedule 5.3(c),
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enter into any other contract or commitment involving an expenditure in
excess of $5,000 (other than to purchase Finance Contracts), or
guarantee any indebtedness of a third party;
(d) except in the ordinary course of business consistent with
past practice, (i) increase the compensation payable or to become
payable to any officer, director, stockholder, employee or agent, (ii)
make any bonus or management fee payment to any such Person, (iii) make
any loans or advances to any Person other than travel or entertainment
advances in the ordinary course of business to employees and directors,
(iv) adopt or amend any employee benefit plan, (v) grant, or enter into
any agreement providing for, any severance or termination pay or (vi) in
any other manner increase the compensation payable, or fringe benefits
provided, to any of the aforesaid Persons;
(e) directly or indirectly make or cause to be made any
payment to an Affiliate other than in accordance with existing
agreements and then only in accordance with past practices or enter into
any new agreement with any Affiliate;
(f) create or assume any mortgage, pledge or other lien or
encumbrance upon any assets or properties whether now owned or hereafter
acquired except pursuant to the MS Financial Debt in the ordinary course
of business;
(g) sell, assign, lease, pledge or otherwise transfer or
dispose of any property or equipment, except in the ordinary course of
business consistent with past practice;
(h) acquire or negotiate for the acquisition of (by merger,
consolidation, purchase of a substantial portion of assets or otherwise)
any business or the start-up of any new business, or otherwise acquire
or agree to acquire any assets that are material, individually or in the
aggregate, to MS Financial and its Subsidiary taken as a whole;
(i) merge or consolidate or agree to merge or consolidate with
or into any other corporation;
(j) waive any material rights or claims ;
(k) commit a breach (or take any action that with notice or
the passage of time, or both, would cause a breach) of, or amend or
terminate, any agreement, permit, license or other right;
(l) enter into (i) any material contracts or (ii) any other
transaction outside the ordinary course of business consistent with past
practice or prohibited hereunder;
(m) either (i) commence a lawsuit other than for routine
collection of Finance Contracts or (ii) settle or compromise any pending
or threatened litigation which would result in a Company Material
Adverse Effect;
(n) take, or agree (in writing or otherwise) to take, any of
the actions described in Sections 5.3(a) through (m) above, or any
action which would make any of the representations and warranties of MS
Financial contained in this Agreement untrue and result in a Company
Material Adverse Effect.
(o) If MS Financial wishes to take any action otherwise
prohibited by paragraphs (a) through (n) of this Section 5.3, it must
notify Search in writing as provided for in Section 7.9 of its intended
prohibited action, provide Search with a justification for the taking of
such action and request Search's consent to such prohibited action.
Search shall have two business days from receipt of such notice and
information it may reasonably request regarding such prohibited action
to consent to or deny such request. If Search does not respond to MS
Financial's request by the end of said time period, Search shall be
deemed to have consented to such action.
5.4. No Solicitation of Transactions. Neither MS Financial, nor its
Subsidiary shall, directly or indirectly, through any officer, director,
employee, agent or otherwise, solicit, initiate or encourage the submission of
any proposal or offer from any Person relating to any acquisition or purchase
of all or any material portion of the
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assets of, or any equity interest in, MS Financial, Subsidiary of MS Financial
or any Securitization Trust, or any merger, consolidation, share exchange,
business combination or other similar transaction with MS Financial, the
Subsidiary of MS Financial or any Securitization Trust, or participate in any
negotiations or discussions regarding, or furnish to any other Person any
information with respect to, or otherwise cooperate in any way with, or assist
or participate in, facilitate or encourage, any effort or attempt by any other
Person to do or seek any of the foregoing; provided, however, that nothing
contained in this Section 5.4 shall prohibit the Board of Directors of MS
Financial from authorizing MS Financial or the Board's other designees to
review, or to furnish information to, or entering into discussions or
negotiations with, any Person in connection with an unsolicited proposal in
writing by such Person to acquire MS Financial pursuant to a merger,
consolidation, share exchange, business combination or other similar
transaction or to acquire all or substantially all of the assets of MS
Financial or any of its Subsidiaries received by the Board of Directors of MS
Financial after the date of this Agreement, if, and only to the extent that,
(a) the Board of Directors of MS Financial, after consultation with its
independent legal and financial advisors and taking into consideration the
advice of such advisors, determines in good faith that such action is required
for the Board of Directors of MS Financial to comply with its fiduciary duties
to stockholders imposed by Delaware Law and (b) prior to furnishing such
information to, or entering into discussions or negotiations with, such Person,
MS Financial (i) gives Search as promptly as practicable prior oral and written
notice of MS Financial's intention to furnish such information or begin such
discussions and (ii) receives from such Person an executed confidentiality
agreement on terms no less favorable to MS Financial than those contained in
the Confidentiality Agreement between Search and MS Financial dated October 15,
1996. MS Financial shall notify Search promptly if any proposal or offer, or
any inquiry or contact with any Person with respect thereto, is made and shall,
in any such notice to Search, indicate in reasonable detail the terms and
conditions of such proposal, offer, inquiry or contact. MS Financial agrees
not to release any third party from, or waive any provision of, any
confidentiality or standstill agreement to which MS Financial is a party. MS
Financial immediately shall cease and cause to be terminated all existing
discussions or negotiations with any Persons conducted heretofore with respect
to any of the foregoing.
5.5. Notification of Certain Matters. Each party hereto shall give
prompt notice to the other parties hereto of (a) the occurrence or non-
occurrence of any event the occurrence or nonoccurrence of which would be
likely to cause any representation or warranty of it contained herein to be
untrue or inaccurate in any material respect at or prior to the Closing and (b)
any material failure of such party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by such party
hereunder. The delivery of any notice pursuant to this Section 5.5 shall not,
without the express written consent of the other parties be deemed to (x)
modify the representations or warranties hereunder of the party delivering such
notice, (y) modify the conditions set forth in Article 6, or (z) limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
5.6. Cooperation in Obtaining Required Consents and Approvals. For
all consents and approvals which MS Financial is required to obtain pursuant to
this Agreement, Search shall cooperate and provide to MS Financial such
documentation or other information as MS Financial shall reasonably request.
For all consents and approvals which Search is required to obtain pursuant to
this Agreement, MS Financial shall cooperate and provide to Search such
documentation or other information as Search shall reasonably request.
5.7. Tax Returns. MS Financial shall timely file, and shall cause its
Subsidiary to timely file, subject to any permissible extensions, all federal
and state income tax returns due before the Effective Time for taxable periods
ending on or prior to the Closing and have paid or will pay all Taxes
attributable to such periods, subject to any permissible extensions. Such
returns will be prepared and filed in accordance with applicable Law and in a
manner consistent with past practices and shall be subject to review by Search.
5.8. Registration Statement; Proxy Statement.
(a) As promptly as practicable after the execution of this
Agreement, Search shall prepare a Registration Statement including
therein a combined Proxy Statement and Prospectus, in connection with
the registration under the Securities Act of the shares of Search Common
Stock to be issued to the stockholders of MS Financial pursuant to the
Merger. Search shall send the Registration Statement to MS Financial
for MS Financial's review and comment prior to the filing of the
Registration Statement and Proxy Statement with the SEC. As promptly as
practicable, MS Financial shall review and approve the contents of the
Registration Statement and Proxy Statement, as they may be revised, its
approval not to be unreasonably withheld or delayed. As promptly as
practicable, Search shall file the Registration Statement in the form
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approved by MS Financial with the SEC. Search and MS Financial each
shall use all reasonable efforts to cause the Registration Statement to
become effective as promptly as practicable, and, prior to the effective
date of the Registration Statement, Search shall take all or any action
required under any applicable federal or Blue Sky laws in connection
with the issuance of shares of Search Common Stock pursuant to the
Merger. Each of MS Financial and Search shall pay its own expenses
incurred in connection with the Registration Statement, Proxy Statement,
MS Financial Stockholders Meeting and Search Stockholders Meeting,
including, without limitation, the fees and disbursements of their
respective counsel, accountants and other representatives, except that
MS Financial and Search each shall pay one-half of any printing, filing
and other fees and expenses incurred in connection with the Registration
Statement. MS Financial shall furnish all information concerning MS
Financial and the Stockholders as Search may reasonably request in
connection with such actions and the preparation of the Registration
Statement and Proxy Statement. As promptly as practicable after the
Registration Statement shall have become effective, Search, if required,
and MS Financial shall mail the Proxy Statement to their respective
stockholders. The Proxy Statement shall include the recommendations of
the Boards of Directors of Search, if required, and MS Financial in
favor of the Merger, unless otherwise prohibited by the applicable
fiduciary duties of such directors, as determined by such directors in
good faith after consultation with and duly considering the written
advice of independent legal counsel, subject to Section 5.4.
(b) No amendment or supplement to the Proxy Statement or the
Registration Statement will be made by Search or MS Financial without
the approval of the other, which shall not be unreasonably withheld.
Search and MS Financial each will advise the other, promptly after it
receives notice thereof, of the time when the Registration Statement has
become effective or any supplement or amendment has been filed, the
issuance of any stop order, the suspension of the qualification of the
Search Common Stock issuable in connection with the Merger for offering
or sale in any jurisdiction, or any request by the SEC for amendment of
the Proxy Statement or the Registration Statement or comments thereon
and responses thereto or requests by the SEC for additional information.
(c) Search shall promptly prepare and submit to the NASD an
application for quotation of the shares of Search Common Stock issuable
in the Merger on NASDAQ, and shall use its reasonable best efforts to
obtain, prior to the Effective Time, approval for the quotation of such
Search Common Stock on NASDAQ, subject to official notice of issuance.
MS Financial shall cooperate with Search with respect to such
application.
(d) MS Financial, Search and Newco each hereby (i) consents to
the use of its name and, on behalf of its Subsidiaries and Affiliates,
the names of such Subsidiaries and Affiliates and to the inclusion of
financial statements and business information relating to such party and
its Subsidiary and Affiliates (in each case, to the extent required by
applicable securities laws) in the Registration Statement and the Proxy
Statement, (ii) agrees to use all reasonable efforts to obtain the
written consent of any Person or entity retained by it which may be
required to be named (as an expert or otherwise) in the Registration
Statement or the Proxy Statement, and (iii) agrees to reasonably
cooperate, and agrees to use all reasonable efforts to cause its
Subsidiary and Affiliates to reasonably cooperate, with any legal
counsel, investment banker, accountant or other agent or representative
retained by any of the parties specified in clause (i) above in
connection with the preparation of any and all information required, as
determined after consultation with each party's counsel, to be disclosed
by applicable securities laws in the Registration Statement or the Proxy
Statement.
5.9. Stockholders Meetings. MS Financial shall call and hold a
meeting of its stockholders (the "MS Financial Stockholders Meeting") as
promptly as practicable for the purpose of voting upon the adoption of this
Agreement. If required by the rules of the NASD, Search shall call and hold a
meeting of its stockholders (the "Search Stockholders Meeting") as promptly as
practicable for the purpose of voting upon the approval of the issuance of
additional shares of Search Common Stock pursuant to the Merger. MS Financial
and Search shall use all reasonable efforts to hold the respective MS Financial
Stockholders Meeting and Search Stockholders Meeting on the same day and as
soon as practicable after the date on which the Registration Statement becomes
effective. MS Financial and Search shall use all reasonable efforts to solicit
from their respective stockholders proxies in favor of the adoption of this
Agreement in the case of MS Financial, and in favor of the issuance of
additional shares of Search Common Stock pursuant to the Merger in the case of
Search, and shall take all other action reasonably necessary or
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advisable to secure the vote or consent of stockholders required by the
Delaware Statutes to obtain such approvals (including unanimously recommending
such approval), unless otherwise necessary and mandatory under the applicable
fiduciary duties of the directors of MS Financial or Search, as determined by
such directors in good faith under applicable Law after consultation with and
duly considering the written advice of independent legal counsel, subject to
Section 5.4.
5.10. Appropriate Action; Consents; Filings.
(a) MS Financial and Search shall use their best reasonable
efforts to (i) take, or cause to be taken, all appropriate action, and
do, or cause to be done, all things necessary, proper or advisable under
applicable Law or required to be taken by any Governmental Authority or
otherwise to consummate and make effective the Transactions as promptly
as practicable, (ii) obtain from any Governmental Authority any
consents, licenses, permits, waivers, approvals, authorizations or
orders required to be obtained or made by Search or MS Financial or any
of their Subsidiaries in connection with the authorization, execution
and delivery of this Agreement and the consummation of the Transactions,
including, without limitation, the Merger, and (iii) as promptly as
practicable, make all necessary filings, and thereafter make any other
required submissions and responses to inquiries as promptly as possible,
with respect to this Agreement and the Merger required under or by (A)
the Securities Act and the Exchange Act, and any other applicable
federal securities or Blue Sky Laws, (B) the rules and regulations of
the NASD, (C) the Delaware Statutes, (D) HSR and the Federal Trade
Commission and the Antitrust Division of the Department of Justice, and
(E) any other applicable Law or Governmental Authority; provided, that
Search and MS Financial shall cooperate with each other in connection
with the making of all such filings and responses, including providing
copies of all such documents to the non-filing party and its advisors
prior to filing or responding to inquiries and, if requested, accepting
all reasonable additions, deletions or changes suggested in connection
therewith. MS Financial and Search shall use reasonable best efforts to
furnish to each other all information required for any application or
other filing to be made pursuant to any applicable Law (including all
information required to be included in the Proxy Statement and the
Registration Statement) in connection with the Transactions.
(b) Each of Search and MS Financial shall give (or shall cause
their respective Subsidiaries to give) any notices to third parties, and
use, and cause their respective subsidiaries to use, their reasonable
best efforts to obtain any third party consents, (i) necessary to
consummate the Transactions, (ii) disclosed or required to be disclosed
in the Schedules hereto, or (iii) required to prevent a Company Material
Adverse Effect or a Search Material Adverse Effect from occurring prior
to or after the Effective Time.
(c) In the event that Search or MS Financial shall fail to
obtain any third party consent described in subsection (b) above, it
shall use all reasonable efforts, and shall take any such actions
reasonably requested by the other party, to minimize any adverse effect
upon MS Financial and Search, their respective Subsidiaries, their
respective stockholders, and their respective businesses resulting, or
which could reasonably be expected to result after the Effective Time,
from the failure to obtain such consent.
(d) From the date of this Agreement until the Effective Time,
each party shall promptly notify the other parties of any pending, or to
the best knowledge of the first party, threatened, action, proceeding or
investigation by or before any Governmental Authority or any other
Person (i) challenging or seeking material damages in connection with
the Merger or the conversion of MS Financial Stock into Search Common
Stock pursuant to the Merger or (ii) seeking to restrain or prohibit the
consummation of the Merger or otherwise limit the right of Search or,
the knowledge of such first party, Newco or any other Search Subsidiary
to own or operate all or any portion of the businesses or assets of MS
Financial or its Subsidiary, which in either case is reasonably likely
to have a Company Material Adverse Effect prior to the Effective Time,
or a Search Material Adverse Effect (including the Surviving
Corporation) after the Effective Time.
5.11. Obligations of Newco. Search shall take all action necessary to
cause Newco to perform its agreements, covenants, and obligations under this
Agreement and to consummate the Merger on the terms and subject to conditions
set forth in this Agreement. This obligation of Search shall terminate at the
Effective Time.
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5.12. Public Announcements. Search and MS Financial shall consult with
each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the Transactions and shall not
issue any such press release or make any such public statement prior to such
consultation. The parties have agreed on the text of a joint press release by
which Search and MS Financial will announce the execution of this Agreement.
5.13. Delivery of SEC Documents. Each of MS Financial and Search shall
promptly deliver to the other true and correct copies of any report, statement
or schedule filed by it with the SEC subsequent to the date of this Agreement.
5.14. Further Action. At any time before or after the Effective Time,
and from time to time, each party to this Agreement agrees, subject to the
terms and conditions of this Agreement, to take such actions and to execute and
deliver such documents as may be necessary to effectuate the purposes of this
Agreement at the earliest practicable time.
5.15. Indemnification.
(a) The Certificate of Incorporation of the Surviving
Corporation and its Subsidiary shall contain provisions that acknowledge
and agree that the provisions relating to limitation on liability that
are set forth in the MS Charter Documents as of the date of this
Agreement shall remain effective for a period of four years from the
Effective Time with respect to individuals who at any time prior to the
Effective Time were directors, officers, employees, fiduciaries or
agents of MS Financial or any of its Subsidiaries in respect of actions
or omissions occurring at or prior to the Effective Time, including,
without limitation, the Transactions, and the Surviving Corporation
shall not amend (in any manner that would materially diminish the effect
of such provisions) or repeal such provisions for a period of four years
from the Effective Time.
(b) The Surviving Corporation shall use reasonable efforts to
maintain in effect for three years from the Effective Time the current
directors' and officers' liability insurance coverage listed, and
identified as such, in Schedule 5.15(b) (provided, that the Surviving
Corporation may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are not
materially less advantageous to such officers and directors) with
respect to individuals who at any time prior to the Effective Time were
directors, officers, employees, fiduciaries or agents of MS Financial in
respect of actions or omissions occurring at or prior to the Effective
Time (including, without limitation, the matters contemplated by this
Agreement); provided, however, that in no event shall the Surviving
Corporation be required to expend pursuant to this Section 5.15(b) more
than $332,500 in the aggregate, including any amounts paid prior to the
Effective Time by MS Financial, for such coverage.
(c) If the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other Person and shall
not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of
its properties and assets to any Person other than in the ordinary
course of business or as part of a securitization transaction, then, and
in each such case, proper provision shall be made so that the successors
and assigns of the Surviving Corporation, or at Search's option, Search,
shall assume the obligations of the Surviving Corporation set forth in
this Section 5.15.
(d) The Certificate of Incorporation and Bylaws of the
Surviving Corporation shall contain provisions with respect to
indemnification and advancement of expenses no less favorable than those
that are set forth in the MS Charter Documents as of the date of this
Agreement, which provisions shall not be amended, repealed or modified
in any manner that would diminish their effect, for a period of three
years from the Effective Time for all matters other than the Proxy
Statement described in Section 5.8 above, and for a period of four years
from the Effective Time with respect to said Proxy Statement, with
respect to individuals who at any time prior to the Effective Time were
directors, officers, employees, fiduciaries or agents of MS Financial in
respect of actions or omissions occurring at or prior to the Effective
Time (including, without limitation, the matters contemplated by this
Agreement).
(e) The obligations of the Surviving Corporation under this
Section 5.15 shall not be terminated or modified in such a manner as to
adversely affect any director, officer, employee, fiduciary or
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agent to whom this Section 5.15 applies without the consent of each
affected director, officer, employee, fiduciary and agent (it being
expressly agreed that the directors, officers, employees, fiduciaries
and agents to whom this Section 5.15 applies shall be third-party
beneficiaries of this Section 5.15).
(f) Notwithstanding the foregoing, any obligation of the
Surviving Corporation relating to indemnification shall be subject to
such liability first being satisfied out of the directors' and officers'
liability insurance coverage referred to in Section 5.15(b) and second
any Merger Consideration held in escrow pursuant to the Stockholders
Agreement dated of even date herewith between the Stockholders and
Search (the "Stockholders Agreement"), if applicable, and third, and
then only to the extent that the insurance does not fully cover such
liability, shall the Surviving Corporation be responsible for such
indemnification obligations.
5.16. Operations. Between the date hereof and the Effective Time,
subject to the fiduciary duties of MS Financial's Board of Directors, MS
Financial will use its best efforts to conduct its business utilizing its
current personnel and current operating policies and procedures subject to the
following provisions:
(a) Beginning at the first to occur of either the expiration
or termination of the HSR waiting period, or, if an HSR filing is not
required, the execution of this Agreement, MS Financial shall cause its
President to consult with Search's President and Chief Executive Officer
or Senior Executive Vice President - Operations Director on a daily
basis regarding the Company's day-to-day operations, including, without
limitation, implementation of such marketing, servicing, collection and
administrative policies, procedures and programs as such officers of
Search shall approve, and take any and all suggestions into account with
respect the operations of MS Financial and its Subsidiary. Except with
regard to matters provided for in subsections (b), and (d) below, MS
Financial shall not be required to implement any suggestion made by
Search's personnel, but agrees to take such suggestions into account
with respect to the Company's operations. In addition, MS Financial
agrees to permit Search's President and Chief Executive Officer, its
Senior Executive Vice President - Operations Director, its Executive
Vice President - Operations and its Executive Vice President - Marketing
access to MS Financial and its Subsidiary and to the operations of MS
Financial and its Subsidiary in order to observe and participate in the
day-to-day operations of MS Financial and its Subsidiary.
(b) No Finance Contracts will be purchased by MS Financial or
its Subsidiary unless such Finance Contracts meet Search's underwriting
criteria, a copy of which is included in Schedule 5.16, or are otherwise
approved by either the President and Chief Executive Officer or the
Senior Executive Vice President - Operations Director of Search. Search
shall cause its Subsidiary, Search Funding Corp., to abide by the letter
agreement contained in Schedule 5.16, pursuant to which it agrees to
purchase Finance Contracts that meet Search's underwriting criteria from
MS Financial.
(c) MS Financial will allow Search to monitor and evaluate MS
Financial's collection activities, policies and procedures. Beginning
at the first to occur of either the expiration or termination of the HSR
waiting period, or, if an HSR filing is not required, the execution of
this Agreement, MS Financial agrees to implement those collection
policies, procedures and practices as shall be agreed upon by MS
Financial's President and either the President and Chief Executive
Officer or Senior Executive Vice President - Operations Director of
Search and to take any and all suggestions into account with respect to
the operations of MS Financial and its Subsidiary. Such individuals
will cause an analysis of Finance Contracts owned by MS Financial to be
conducted to determine the amount of any additional reserves or charge-
offs to be recognized prior to the Effective Time.
(d) MS Financial agrees not to change any existing policies or
procedures and not to implement any new policies or procedures without
the prior written approval of Search's President and Chief Executive
Officer or Senior Executive Vice President - Operations Director.
(e) Day-to-day operations and operating policies and
procedures will be the responsibility of MS Financial's President. No
salary or other compensation increases other than pursuant to Section
5.3(d) or employee terminations will be made by MS Financial without the
approval of MS Financial's President,
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who will first consult with the President and Chief Executive Officer or
the Senior Executive Vice President - Operations Director of Search.
(f) For Search's assistance as set forth in this Section 5.16,
MS Financial shall pay Search $100,000 per month, payable on or before
the first business day of each month. This fee shall be included in
Search's Expenses unless previously paid. Any payments made pursuant to
this Section 5.16(f) shall be credited against the Search Fee and shall
not be taken into account when making the calculations required by
Section 1.2(g). The fee shall be pro rated for the month in which this
Agreement is executed and shall be payable with respect to that month
within three business days of the date of this Agreement; and a similar
pro ration for the month in which this Agreement is terminated shall be
made and any excess portion shall be credited to the Search Fee and/or
Search's Expenses, or refunded to the Company by Search if no Search Fee
or Expenses are payable pursuant to the terms of Article 7 below.
5.17. Tax Reorganization. After the date of this Agreement, Search
will not, prior to the Effective Time, and will not permit the Surviving
Corporation after the Effective Time, to take any action inconsistent with the
guidelines provided to Search by MS Financial prior to the Effective Time, and
accepted by Search, acting reasonably, regarding spin-offs and other corporate
transactions that might affect the qualification of the Transaction as a
reorganization qualifying under the provisions of Section 368(a) of the Code.
5.18. Search Stock. Search shall not, between the date of this
Agreement and the Effective Time, change the outstanding shares of Search
Common Stock into a different number of shares, or a different class, by reason
of any reclassification, recapitalization, split-up, stock dividend, stock
combination or exchange of shares without the prior written consent of MS
Financial, which consent shall not be unreasonably withheld.
5.19. Directorship. The Board of Directors of Search shall elect
James Stuart Jr. to the Board of Directors of Search for a term expiring at the
1999 annual meeting of the stockholders of Search, effective at the Effective
Time.
6. CONDITIONS TO THE MERGER.
6.1. Conditions to the Obligations of Each Party. The obligations of
MS Financial, Search and Newco to consummate the Merger are subject to the
satisfaction of the following conditions:
(a) this Agreement and the Transactions shall have been
approved and adopted by (i) the affirmative vote of the stockholders of
MS Financial in accordance with the Delaware Statutes and MS Financial's
Restated Certificate of Incorporation, and (ii) if required by the rules
of the NASD, the stockholders of Search in accordance with the Delaware
Statutes, Search's Restated Certificate of Incorporation and the rules
of the NASD;
(b) the Registration Statement shall have been declared
effective, no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceeding for that
purpose shall have been initiated or threatened by the SEC;
(c) no Governmental Authority shall have issued, enacted,
promulgated, enforced or entered any order, stay, decree, judgment or
injunction (each an "Order") or Law which is in effect and has the
effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger and the other Transactions;
(d) the waiting period applicable to the Merger under the HSR
Act shall have expired or been terminated;
(e) Search and MS Financial each shall have received an
opinion of Haynes & Boone, LLP, reasonably satisfactory in form and
substance to Search and MS Financial, to the effect that the Merger will
be treated for federal income tax purposes as a reorganization
qualifying under the provisions of Section 368(a) of the Code, which
shall be dated on or about the date that is two business days prior to
the date the
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Proxy Statement is first mailed to stockholders of MS Financial and
which shall be updated as of the Effective Time;
(f) the Stockholders Agreement shall be in full force and
effect at the Effective Time;
(g) MS Financial shall have delivered to Search, prior to the
expiration or termination of the HSR pre-clearance waiting period, a
letter identifying all persons who are anticipated to be, at the time of
the MS Financial Stockholders Meeting, Affiliates of MS Financial for
purposes of Rule 145 under the Securities Act. MS Financial shall have
used its best efforts to cause each Person who is identified as an
Affiliate in such letter to deliver, on or before the date which is 30
days prior to the Effective Time, a written agreement in connection with
restrictions on Affiliates under Rule 145 in substantially the form of
Schedule 6.1(g); and
(h) on or before February 19, 1997 (i) Search and MS Financial
shall have entered into the Bank Loan Term Sheet on terms acceptable to
Search and MS Financial and (ii) MS Financial shall receive from the
Senior Bank Lenders such Lenders' consent to the provisions of this
Agreement and the consummation of the Transactions by MS Financial. A
copy of the Bank Loan Term Sheet shall be attached hereto as Exhibit
6.1(h) after the Bank Loan Term Sheet is fully executed.
6.2. Conditions to the Obligations to Search and Newco. The
obligations of Search and Newco to consummate the Merger are subject to the
satisfaction of, or waiver by Search and Newco, at or before the Closing, of
the following further conditions:
(a) Representations and Warranties; Performance of
Obligations. All of the representations and warranties of MS Financial
contained in this Agreement shall be true, correct and complete in all
material respects on and as of the Effective Time with the same effect
as though such representations and warranties had been made on and as of
such time, and all of the terms, covenants, agreements and conditions of
this Agreement shall have been complied with, performed or satisfied by
MS Financial, in all material respects,
(b) No Litigation. No Order issued by any Governmental
Authority limiting or restricting the Company's conduct or operation of
its businesses following the Merger shall be in effect, nor shall any
proceeding brought by a Governmental Authority seeking any such Order be
pending. There shall be no action, suit, claim or proceeding of any
nature pending, except as set forth on Schedule 3.23, or threatened
against Search, Newco or MS Financial or its Subsidiary, their
respective properties or any of their officers or directors that could
have a Company Material Adverse Effect.
(c) Consents and Approvals. All necessary Company Third Party
Consents relating to the consummation of the Transactions shall have
been obtained.
(d) Cold Comfort Letter. Search shall have received from MS
Financial "cold comfort" letters of KPMG Peat Marwick L.L.P. of the kind
contemplated by the Statement of Auditing Standards with respect to
Letters for Underwriters promulgated by the American Institute of
Certified Public Accountants (the "AICPA Statement") dated the date on
which the Registration Statement shall become effective and the
Effective Time, respectively, and addressed to Search, in connection
with the procedures undertaken by it with respect to the financial
statements of MS Financial and its Subsidiaries contained in the
Registration Statement and the other matters contemplated by the AICPA
Statement and customarily included in comfort letters relating to
transactions similar to the Merger.
(e) Bank Financing. MS Financial, Search and MS Financial's
lenders shall have entered into the Acquisition Date Amendment
Documents, as that term is defined in the Bank Loan Term Sheet included
in Schedule 6.2(f), and there shall have been no Event of Default, as
such term is defined in the Acquisition Date Amendment Documents.
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(f) Insurance. The current directors' and officers' liability
insurance policy maintained by MS Financial shall have been continued on
a "tail" basis on terms reasonably acceptable to Search for a period of
three years after the Effective Time with respect to matters occurring
prior to the Effective Time.
6.3. Conditions to the Obligations of MS Financial. The obligations
of MS Financial to effect the Merger are subject to the satisfaction of, or
waiver by MS Financial of, the following conditions at or before the Closing:
(a) Representations and Warranties; Performance of
Obligations. All of the representations and warranties of Search and
Newco contained in this Agreement shall be true, correct and complete,
so as not to give rise to any Search Material Adverse Effect, on and as
of the Effective Time with the same effect as though such
representations and warranties had been made on and as of such time, and
all of the terms, covenants, agreements and conditions of this Agreement
shall have been complied with, performed or satisfied by Search and
Newco in all material respects.
(b) No Litigation. There shall be no action, suit, claim or
proceeding of any nature pending or threatened against Search, Newco or
MS Financial or its Subsidiary, their respective properties or any of
their officers or directors that could have a Company Material Adverse
Effect or a Search Material Adverse Effect, or which would prohibit the
Transactions.
(c) Consents and Approvals. All necessary Search Third Party
Consents relating to the consummation of the Transactions shall have
been obtained and made.
7. GENERAL.
7.1. Termination. This Agreement may be terminated, and the
Transactions may be abandoned, at any time prior to the Effective Time,
notwithstanding any requisite approval and adoption of this Agreement and the
Transactions, as follows:
(a) by mutual written consent of the Boards of Directors of
Search and MS Financial;
(b) by either Search or MS Financial if the Effective Time
shall not have occurred on or before June 30, 1997; provided, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose material misrepresentation, breach of
warranty or failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Effective Time to
occur on or before such date;
(c) by (i) Search if there is or has been a breach, failure to
fulfill or default on the part of the Company of any of its
representations and warranties contained herein or in the due and timely
performance and satisfaction of any of the covenants, agreements or
conditions contained herein, such that the conditions set forth in
Articles 2 and 6 would not be satisfied, and such default or failure
shall not have been cured or shall not reasonably be expected to be
cured before the Closing, and (ii) MS Financial if there has been a
Search Material Adverse Effect or is or has been a breach, failure to
fulfill or default on the part of Search or Newco of any of its
representations and warranties contained herein or in the due and timely
performance and satisfaction of any of the covenants, agreements or
conditions contained herein, such that the conditions set forth in
Articles 2 and 6 would not be satisfied, and such default or failure
shall not have been cured or shall not reasonably be expected to be
cured before the Closing;
(d) by either Search or MS Financial if there shall be a final
nonappealable order in effect preventing consummation of the Merger, or
there shall be any action taken, or any Law or Order enacted,
promulgated or issued or deemed applicable to the Merger by any
Governmental Authority which would make consummation of the Merger
illegal (provided, that the right to terminate this Agreement pursuant
to this subsection (d) shall not be available to any party which has not
complied with its obligations under Sections 5.10, 3.35, 3.36 and 4.14;
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(e) by Search, if (i) the Board of Directors of MS Financial
shall have withdrawn, modified or changed its recommendation of this
Agreement or the Merger in a manner adverse to Search or shall have
resolved to do so, (ii) the Board of Directors of MS Financial shall
have recommended to the stockholders of MS Financial any Business
Combination Transaction or resolved to do so, or (iii) a tender offer or
exchange offer for 50% or more of the outstanding shares of capital
stock of MS Financial is commenced, and the Board of Directors of MS
Financial shall have failed to recommend against the stockholders of MS
Financial tendering their shares in such tender offer or exchange offer;
(f) by Search, if Section 262 of the Delaware Statutes is
applicable to the Merger and Dissenting Shares represent more than ten
percent (10%) of the MS Financial Stock issued and outstanding
immediately prior to the Effective Time;
(g) by MS Financial, if the Board of Directors of Search shall
have withdrawn its recommendation of approval of the issuance of
additional shares of Search Common Stock pursuant to the Merger or shall
have resolved to do so;
(h) by MS Financial, if, in the exercise of its good faith
judgment (subject to Section 5.4) as to its fiduciary duties under the
Delaware Statutes, the Board of Directors of MS Financial in good faith
under applicable Law determines (after consultation with its financial
advisers and legal counsel and duly considering the written advice of
such legal counsel) that such termination is required by such fiduciary
duties by reason of a proposal that either constitutes a Business
Combination Transaction or may reasonably be expected to lead to a
Business Combination Transaction (a "Business Combination Transaction
Proposal"); provided that any termination of this Agreement by MS
Financial pursuant to this Section 7.1(h) shall be conditioned on MS
Financial paying the full Search Fee required by Section 7.7 hereof;
(i) by either Search or MS Financial, if the stockholders of
MS Financial or Search shall have failed to approve and adopt this
Agreement, the Merger and the Transactions at meetings duly convened
therefor;
(j) by Search if either MS Financial or its Subsidiary shall
have filed a petition for liquidation or re-organization in bankruptcy,
or have become the subject of an involuntary bankruptcy petition, which
involuntary petition is not rejected by a court having jurisdiction over
such proceedings within 30 days of the filing thereof; and
(k) by Search if KPMG has not completed its annual audit of
the Company and issued its opinion with respect to such audit by March
10, 1997 or such later date to which Search and MS financial may agree.
7.2. Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1, this Agreement shall become void and, except
as herein provided, there shall be no liability or obligation on the part of
any party hereto or its officers, directors or stockholders. Notwithstanding
the foregoing sentence, (a) the provisions of this Section 7.2 and Sections
5.1(b) and Article 7 shall remain in full force and effect and survive any
termination of this Agreement, and (b) MS Financial as one party, and Search
and Newco as one party, shall remain liable to the other for any breach of this
Agreement by such party prior to this Agreement's termination.
7.3. Cooperation. MS Financial, and Search and Newco shall each
deliver or cause to be delivered to the other at the Closing, and at such other
times and places as shall be reasonably agreed to, such additional instruments
as the other may reasonably request for the purpose of effectuating this
Agreement.
7.4. Successors and Assigns. This Agreement and the rights of the
parties hereunder may not be assigned (including by operation of law) without
the written consent of all parties.
7.5. Entire Agreement. This Agreement (which includes the Schedules
hereto) and the confidentiality agreement dated October 15, 1996 between Search
and MS Financial set forth the entire understanding of the parties hereto with
respect to the Transactions. It shall not be amended or modified except by a
written instrument duly
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executed by each of the parties hereto. Any and all other previous agreements
and understandings between or among the parties regarding the subject matter
hereof, whether written or oral, are superseded by this Agreement.
7.6. Counterparts. This Agreement may be executed in any number of
counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument. This Agreement shall become binding when one or more counterparts
taken together shall have been executed and delivered (which deliveries may be
by telefax) by the parties.
7.7. Fees and Expenses.
(a) MS Financial shall pay Search a fee (the "Search Fee") of
Seven Hundred Thousand ($700,000) in immediately available funds, which
amount is inclusive of all Expenses, if:
(i) this Agreement is terminated pursuant to Section
7.1(e) or (h), in which case the Search Fee will be paid on the
business day immediately following such termination; or
(ii) this Agreement is terminated pursuant to Section
7.1(i) as a result of the failure of the stockholders of MS
Financial to approve the Merger and a Business Combination
Transaction Proposal shall have been made prior to such
termination, and any Business Combination Transaction involving
MS Financial is thereafter consummated within 18 months of such
termination, in which case the Search Fee will be paid on the
business day immediately following such consummation.
(b) Search shall be entitled to receive its Expenses in
immediately available funds in the event that this Agreement is
terminated either by Search pursuant to Section 7.1(c) or (e) or by MS
Financial pursuant to Section 7.1(h).
(c) Search shall pay MS Financial a fee (the "MS Financial Fee")
of Two Hundred Fifty Thousand Dollars ($250,000) in immediately
available funds, which amount is inclusive of all Expenses, if this
Agreement is terminated pursuant to Section 7.1(g); provided that
nothing in this Section 7.7(c) shall obligate Search to pay any or all
of the MS Financial Fee if Search's stockholders do not approve the
adoption of this Agreement and the Transactions after Search's Board of
Directors has approved the same.
(d) No termination of this Agreement pursuant to Section
7.1(c) shall prejudice the ability of a non-breaching party to seek
damages from any other party for any breach of this Agreement,
including, without limitation, attorneys' fees and the right to pursue
any remedy at law or in equity. If Search is required to file suit to
seek the Search Fee and it ultimately succeeds on the merits, it shall
be entitled to receive (in addition to the Search Fee or any other
Expenses) all expenses, including, without limitation, attorneys' fees
and expenses, which it has incurred in enforcing its rights under
Section 7.2. If MS Financial is required to file suit to seek the MS
Financial Fee and it ultimately succeeds on the merits, MS Financial
shall be entitled to receive (in addition to the MS Financial Fee) all
expenses, including, without limitation, attorneys' fees and expenses,
which it has incurred in enforcing its rights under Section 7.2.
(e) Except as set forth in this Section 7.7 and Section
5.8(a), all costs and expenses incurred in connection with this
Agreement and the Transactions shall be paid by the party incurring such
expenses, whether or not any transaction contemplated thereby is
consummated. Notwithstanding the foregoing, MS Financial shall pay to
or incur Expenses from only those Persons listed on Schedule 7.7(e),
provided that such Persons may not include legal counsel to the
Stockholders.
7.8. Specific Performance; Remedies. Each party hereto acknowledges
that the other parties will be irreparably harmed and that there will be no
adequate remedy at law for any violation by any of them of any of the covenants
or agreements contained in this Agreement, including without limitation, the
confidentiality obligations set forth in Section 5.1(b) and (b). It is
accordingly agreed that, in addition to any other remedies which may be
available upon the breach of any such covenants or agreements, each party
hereto shall have the right to obtain injunctive relief
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to restrain a breach or threatened breach of, or otherwise to obtain specific
performance of, the other parties' covenants and agreements contained in this
Agreement.
7.9. Notices. Any notice, request, claim, demand, waiver, consent,
approval or other communication which is required or permitted hereunder shall
be in writing and shall be deemed given if delivered personally or sent by
facsimile transmission (with confirmation of receipt), by registered or
certified mail, postage prepaid, or by recognized courier service, as follows:
If to Search or Newco to: Search Capital Group, Inc.
700 N. Pearl Street
Suite 400, L.B. 401
Dallas, Texas 75201-2809
Attention: George C. Evans,
Chairman, President & CEO and
Ellis Regenbogen, Executive Vice
President and General Counsel
Facsimile No.: 214-965-6098
With a copy to: Riezman & Blitz, P.C.
120 S. Central, 10th Floor
St. Louis, Missouri 63105
Attention: Richard M. Riezman
Facsimile No.: 314-727-6458
If to MS Financial: MS Financial, Inc.
715 S. Pear Orchard Road
Suite 300
Ridgeland, MS 39157
Attn: Phillip J. Hubbuch, Jr.
Facsimile No.: 601-856-1611
With a copy to: Brunini, Grantham, Grover & Hewes, PLLC
1400 Trustmark Building
248 East Capitol
Jackson, MS 39201
Attn: Robert D. Drinkwater, Esq.
Facsimile No.: 601-960-6902
or to such other address as the Person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such
notice, request, claim, demand, waiver, consent, approval or other
communication shall be deemed to have been given as of the date so delivered,
transmitted by facsimile, mailed or dispatched and, if given by any other
means, shall be deemed given only when actually received by the addressees.
7.10. Governing Law. This Agreement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
Delaware applicable to contracts made and to be performed wholly in that State.
7.11. Severability. If any provision of this Agreement or the
application thereof to any Person or circumstances is held invalid or
unenforceable in any jurisdiction, the remainder hereof, and the application of
such provision to such Person or circumstances in any jurisdiction, shall not
be affected thereby, and to this end the provisions of this Agreement shall be
severable.
7.12. Absence of Third Party Beneficiary Rights. No provision of this
Agreement is intended, nor will be interpreted, to provide or to create any
third party beneficiary rights or any other rights of any kind in any client,
customer, Affiliate, shareholder, employee, partner of any party hereto or any
other Person or entity.
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7.13. Mutual Drafting. This Agreement is the mutual product of the
parties hereto, and each provision hereof has been subject to the mutual
consultation, negotiation and agreement of each of the parties, and shall not
be construed for or against any party hereto.
7.14. Further Representations. Each party to this Agreement
acknowledges and represents that it has been represented by its own legal
counsel in connection with the Transactions contemplated by this Agreement,
with the opportunity to seek advice as to its legal rights from such counsel.
Each party further represents that it is being independently advised as to the
tax consequences of the Transactions contemplated by this Agreement and is not
relying on any representation or statements made by the other party as to such
tax consequences.
7.15. Amendment; Waiver. This Agreement may be amended by the parties
hereto at any time prior to the Effective Time by execution of an instrument in
writing signed on behalf of each of the parties hereto; provided, that after
the approval and adoption of this Agreement and the Transactions by the
stockholders of MS Financial, no amendment may be made that would reduce the
amount or change the type of consideration into which each share of MS
Financial Stock shall be converted upon consummation of the Merger. At any
time prior to the Effective Time, any party may (a) extend the time for the
performance of any obligation of any other party, (b) waive any inaccuracy in
the representations and warranties of any other party and (c) waive compliance
with any agreement or conditions contained herein. Any extension or waiver by
any party of any provision hereto shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
7.16. Survival of Certain Clauses. None of the representations,
warranties, covenants and indemnities made by MS Financial, Search or Newco in
or pursuant to this Agreement or in any document delivered pursuant to this
Agreement and the Related Documents shall survive the Effective Time or any
termination of this Agreement pursuant to Section 7.1 except as follows: the
agreements set forth in Section 5.1(b), 5.15, and Sections 7.2 through 7.16
shall survive the Effective Time and shall remain in effect indefinitely.
8. DEFINITIONS.
When a capitalized term is used in this Agreement and such term is not
defined elsewhere in this Agreement, such term shall have the meaning ascribed
to it pursuant to the following provisions of this Article 8:
8.1. "Acquisition Date Amendment Documents" is defined in Section
6.2(f).
8.2. "Adjusted Decrease in Stockholders' Equity" is defined in Section
1.2(g)(i).
8.3. "Adjusted Per Share Amount" is defined in Section 1.2(g)(ii).
8.4. "Adjusted Stockholders' Equity" is defined in Section 1.2(g).
8.5. "Adjustment Balance Sheet" is defined in Section 1.2(g)(i).
8.6. "Adjustment Income Statement" is defined in Section 1.2(g)(i).
8.7. "Affiliate" means each "Affiliate" or "associate" of the
applicable Person (as such terms are defined in Rule 12b-2 under the Exchange
Act as of the Effective Time), whether or not such Person is such an Affiliate
or Associate as of the Effective Time, and each officer and director of such
Person.
8.8. "Agreement" is defined in the preamble.
8.9. "AICPA Statement" is defined in Section 6.2(e).
8.10. "Allowance for Losses" is defined in Section 1.2(g).
8.11. "Balance Sheet Date" is defined in Section 3.10.
8.12. "Bank Loan Term Sheet" means the bank loan term sheet included as
Exhibit 6.1(h) hereto.
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8.13. "Benefit Plans" is defined in Section 3.21(a).
8.14. "Blue Sky Laws" means state securities or "blue sky" laws.
8.15. "Business Combination Transaction" means any of the following
involving MS Financial or its Subsidiary: (1) any merger, consolidation, share
exchange, business combination or other similar transaction (other than the
transactions contemplated hereby); (2) any sale, lease, exchanges, transfer or
other disposition (other than a pledge or mortgage) of 25% or more of the
assets of MS Financial and the Subsidiary, as applicable, taken as a whole, in
a single transaction or series of transactions; or (3) the acquisition by a
Person or entity or any "group" (as such term is defined under Section 13(d) of
the Exchange Act and the rules and regulations thereunder) of beneficial
ownership of 50% or more of the shares of MS Financial Stock, as applicable,
whether by tender offer, exchange offer or otherwise.
8.16. "Business Combination Transaction Proposal" is defined in Section
7.1(h).
8.17. "Car Dealer" means any retail vendor of motor vehicles with which
MS Financial or its Subsidiary has an agreement pursuant to which MS Financial
or its Subsidiary purchases Finance Contracts from such vendor.
8.18. "Car Dealer Agreement" means any agreement between the Company
and a Car Dealer, substantially in the form of Schedule 3.14(l).
8.19. "Car Dealer Assignment" means any assignment substantially in the
form of Schedule 3.14(l).
8.20. "Certificate of Merger" is defined in Section 2.1.
8.21. "Company Hazardous Materials Activities" is defined in Section
3.16(b).
8.22. "Certificate" means a stock certificate or certificates which
immediately prior to the Effective Time evidenced outstanding shares of MS
Financial Stock (other than Dissenting Shares, if any, and shares to be
canceled pursuant to Section 1.2(b)).
8.23. "Closing" means a closing held at the offices of Search in
Dallas, Texas, or such other place and time as the parties may agree.
8.24. "Closing Checklist" means the list of documents to be delivered
or provided in connection with the Transactions, in the form of Schedule 8.24
hereto.
8.25. "Closing Certificate" means the certificates described in
sections 2.2(a) and 2.3(a) hereof.
8.26. "Closing Date" shall mean the date upon which the Closing is to
occur.
8.27. "Code" means the Internal Revenue Code of 1986, as amended.
8.28. "Company" means MS Financial and its Subsidiary.
8.29. "Company Material Adverse Effect" means any change, effect, or
circumstance that is, individually or when taken together with all other
changes, effects and circumstances that have occurred prior to the date of
determination of the occurrence of the Company Material Adverse Effect, is or
is reasonably likely to be material and adverse to the condition (financial or
otherwise), operations, properties, results of operations, or business or
prospects of MS Financial and its Subsidiary, taken as a whole, or would
materially impair the ability of MS Financial and its Subsidiary, taken as a
whole, to perform its obligations under this Agreement or impede the
consummation of the Transactions.
8.30. "Company Options" means options to acquire MS Financial Stock
under the MS Financial Stock Option Plans.
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8.31. "Company Third Party Consents" means all consents of Persons not
party to this Agreement required to be obtained by MS Financial to prevent any
breach of this Agreement by MS Financial or to consummate the Transactions.
8.32. "Company SEC Reports" means all forms, reports and documents
required to be filed by MS Financial with the SEC since January 1, 1995.
8.33. "Controlled Group Member" is defined in Section 3.21(b).
8.34. "Current Balance Sheet" is defined in Section 3.10.
8.35. "Current Income Statement" is defined in Section 3.10.
8.36. "Delaware Statutes" means the Delaware General Corporation Law,
as amended.
8.37. "Delinquency Rate Percentage" means, with respect to a calendar
month Period, the fraction, expressed as a percentage, equal to the sum of the
aggregate outstanding principal balance of Finance Contracts owned and/or
serviced by the Company that are past due as of the end of such month for more
than 30 days divided by the aggregate outstanding principal balance of Finance
Contracts owned and/or serviced by the Company as of the end of such calendar
month.
8.38. "Determination Date" means the date that is five business days
prior to the date of the MS Financial Stockholders Meeting or, if that date is
not a NASDAQ trading day, the NASDAQ trading day immediately preceding that
date.
8.39. "Dissenting Shares" means any issued and outstanding shares of MS
Financial Stock which are held by stockholders of MS Financial who have not
voted in favor of the Merger and who are entitled to file, and have filed, with
MS Financial, in full compliance with Section 262 of the Delaware Statutes,
prior to the taking of the vote of the stockholders of MS Financial on the
Merger, a written notice of intent to demand appraisal of such shares of MS
Financial Stock.
8.40. "Effective Time" means the date and time of the filing of the
Certificate of Merger with the Secretary, or such later time as may be
specified in the Certificate of Merger filed with the Secretary.
8.41. "Engagement Letter" is defined in Section 3.30.
8.42. "Environmental Permits" is defined in Section 3.16(c).
8.43. "ERISA" is defined in Section 3.21(b).
8.44. "Exchange Act" means the Securities and Exchange Act of 1934, as
amended.
8.45. "Exchange Agent" means American Securities Transfer, Inc.
8.46. "Exchange Fund" means certificates evidencing the shares of
Search Common Stock, issuable pursuant to Section 1.2 and an estimated amount
of cash required to be delivered pursuant to Article 1 in exchange for
fractional shares of Search Common Stock.
8.47. "Exchange Ratio" shall mean the number of shares of Search Common
Stock having a value equal to the Per Share Amount, determined as of the
Determination Date except as otherwise provided in Sections 1.2(d), (e), (g)
and (h) The number of shares having a value equal to the Per Share Amount
determined as of the Determination Date shall be determined by dividing the Per
Share Amount by the Valuation Period Market Value.
8.48. "Expenses" means all out-of-pocket expenses and fees actually
incurred or accrued by Search, Newco or MS Financial, as applicable, or on
their respective behalf in connection with the Transactions prior to the
termination of this Agreement (including, without limitation, all fees and
expenses of counsel, financial advisors,
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banks or other entities providing financing to Search (including financing,
commitment and other fees payable thereto), accountants, environmental and
other experts and consultants, and all registration fees and expenses and all
printing and advertising expenses) and in connection with the negotiation,
preparation, execution, performance and termination of this Agreement, the
structuring of the Transactions, any agreements relating thereto, and any
filings to be made in connection therewith.
8.49. "Finance Contract" means a motor vehicle installment sales
contract assigned to MS Financial or owned by a Securitization Trust that is
secured by title to, security interests in, or liens on a motor vehicle under
applicable provisions of the motor vehicle or other similar Law of the
jurisdiction in which the motor vehicle is titled and registered by the
purchaser at the time the contract is originated.
8.50. "GAAP" means United States generally accepted accounting
principles applied on a consistent basis.
8.51. "Governmental Authority" shall mean any United States (federal,
state or local) or foreign (to the extent having any jurisdiction over the
parties or the Transactions) government, or governmental, regulatory or
administrative authority, agency, department, board, bureau, instrumentality
commission or court of competent jurisdiction.
8.52. "Hazardous Material" is defined in Section 3.16(a).
8.53. "HSR" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (Antitrust Improvements Act) Pub.L. 94-435, Sept. 30, 1976, 90 Stat. 1383,
as amended.
8.54. "KPMG" means KPMG Peat Marwick L.L.P.
8.55. "Law" means statutes, rules, regulations, ordinances, orders,
judgments or decrees of any Governmental Authority.
8.56. "Liens" is defined in Section 3.24(h).
8.57. "Material Contracts" is defined in Section 3.18(a).
8.58. "Material Permits" means licenses, franchises, consents,
approvals, orders, permits and other governmental authorizations, including
without limitation titles (including without limitation motor vehicle titles
and current registrations), fuel permits, certificates, trademarks, trade
names, patents, patent applications and copyrights, necessary to conduct the
businesses of MS Financial or its Subsidiary and the failure of MS Financial or
its Subsidiary to hold or possess would have a Company Material Adverse Effect.
8.59. "Merger" is defined in the preamble.
8.60. "Merger Consideration" means certificates evidencing the number
of whole shares of Search Common Stock and cash (in lieu of fractional shares)
to which a holder of MS Financial Stock is entitled as the result of the
Merger.
8.61. "Most Recent Financial Statements" is defined in Section
1.2(g)(i).
8.62. "MS Financial" is defined in the preamble.
8.63. "MS Charter Documents" is defined in Section 3.1.
8.64. "MS Financial Employees' Equity Incentive Plan" means the MS
Financial Amended and Restated Employees' Equity Incentive Plan substantially
in the form of Schedule 8.63 hereto.
8.65. "MS Financial Fee" is defined in Section 7.7(c).
8.66. "MS Financial Stock" means the common stock of MS Financial, par
value $.001 per share.
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8.67. "MS Financial Stock Option Plans" means the MS Financial
Employees' Equity Incentive Plan and the Non-Employee Directors Stock Option
Plan.
8.68. "MS Financial Stockholders Meeting" is defined in Section 5.9.
8.69. "MS Loan Agreement" is defined in Section 3.26(r).
8.70. "Net Managed Receivables" is defined in Section 1.2(g).
8.71. "Non-Employee Directors Stock Option Plan" means the stock option
plan substantially in the form of Schedule 8.70 hereto.
8.72. "NASD" means the National Association of Securities Dealers, Inc.
or any successor entity.
8.73. "NASDAQ" means the NASD Automated Quotations -National Market
System.
8.74. "Newco" is defined in the preamble.
8.75. "Newco Stock" means the common stock of Newco, par value $.01 per
share.
8.76. "Order" is defined in Section 6.1(c).
8.77. "Per Share Amount" means $2.00, or such amount adjusted pursuant
to Section 1.2(e) or Section 1.2(g) if such an adjustment is to be made.
8.78. "Person" means any individual, firm, corporation, partnership or
other entity, including without limitation, any "person" or "group" within the
meaning of Section 13(d) under the Exchange Act.
8.79. "Proxy Statement" means the proxy statement, which may be a joint
proxy statement, to be sent to the stockholders of Search, if required, and MS
Financial.
8.80. "Registration Statement" means a registration statement on Form
S-4 (together with all amendments thereto) filed by Search in respect of the
issuance of Search Common Stock pursuant to this Agreement.
8.81. "Related Documents" is defined in Section 3.2.
8.82. "Related Security" means all security documents, including,
without limitation, Uniform Commercial Code Financing statements, evidencing a
security interest in a Finance Contract.
8.83. "Returns" is defined in Section 3.24(a).
8.84. "Reviewed Financials" is defined in Section 3.10.
8.85. "Search" is defined in the preamble.
8.86. "Search Charter Documents" is defined in Section 4.1.
8.87. "Search Common Stock" means the common stock of Search, $.01 par
value per share.
8.88. "Search Fee" is defined in Section 7.7(a).
8.89. "Search Material Adverse Effect" means any change, effect or
circumstance that, individually, or when taken together with all other changes,
effects and circumstances that have occurred prior to the date of determination
of the occurrence of the Search Material Adverse Effect (i) is or is reasonably
likely to be material and adverse to the condition (financial or otherwise),
operations, properties, results of operations, business or prospects
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of Search, or (ii) would or is reasonably likely to impair Search's ability to
perform its obligations under this Agreement or impede the consummation of the
Transactions.
8.90. "Search Material Permits" means licenses, franchises, consents,
approvals, orders, permits and other governmental authorizations, including
without limitation titles (including without limitation motor vehicle titles
and current registrations), fuel permits, certificates, trademarks, trade
names, patents, patent applications and copyrights, necessary to conduct the
businesses of Search or its Subsidiaries and the failure of Search or its
Subsidiaries to hold or possess would have a Search Material Adverse Effect.
8.91. "Search SEC Reports" means all forms, reports and documents
required to be filed by Search with the SEC since December 31, 1993.
8.92. "Search Stockholders Meeting" is defined in Section 5.9.
8.93. "Search Third Party Consents" means all consents of Persons not
party to this Agreement required to be obtained by Search or Newco to prevent
any breach of this Agreement by Search.
8.94. "SEC" means the Securities and Exchange Commission.
8.95. "Secretary" means the Secretary of State of the State of
Delaware.
8.96. "Securities Act" means the Securities Act of 1933, as amended.
8.97. "Securitization Trusts" means MS Auto Grantor Trust 1995-1, MS
Auto Grantor Trust 1994-1, and MS Auto Grantor Trust 1993-1.
8.98. "Senior Bank Lender" means the lenders referred to in the Bank
Loan Term Sheet.
8.99. "Stockholders" means MS Diversified Corporation, MS Financial
Services, Inc., and Golder Thoma Chessy Rauner IV, L.P.
8.100. "Stockholders Agreement" is defined in Section 5.15(f).
8.101. "Subsidiary" means, with respect to any Person, an Affiliate
controlled by such person directly, or indirectly through one or more
intermediaries.
8.102. "Surviving Corporation" is defined in Section 1.1(a).
8.103. "Tax" means any tax or similar governmental charge, import or
levy (including without limitation income taxes, franchise taxes, transfer
taxes or fees, sales taxes, use taxes, gross receipts taxes, value added taxes,
employment taxes, excise taxes, ad valorem taxes, property taxes, withholding
taxes, payroll taxes, minimum taxes or windfall profit taxes) together with any
related penalties, fines, additions to tax or interest imposed by any
Governmental Authority.
8.104. "Transactions" means the Merger and all other actions or events
described or required by this Agreement.
8.105. "Unaudited Financials" is defined in Section 3.10.
8.106. "Valuation Period Market Value" means the average of the closing
prices of a share of Search Common Stock, as quoted on NASDAQ for the 10 NASDAQ
trading days immediately preceding and including the Determination Date or, if
the Search Common Stock is not quoted on NASDAQ, the average of the high bid
and low ask prices of a share of Search Common Stock as quoted in the over-the-
counter market for such 10 trading day period.
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8.107. "Warehouse Loans" means loans pursuant to the transaction entered
into pursuant to that certain Repurchase Agreement dated as of April 1, 1995
between the Company and Telluride Funding Corp. and certain other related
documents, as such may be amended, modified, supplemented, extended, renewed or
replaced, in connection with which Financial Security Assurance Inc. issued a
financial guaranty insurance policy.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of
the day and year first above written.
SEARCH CAPITAL GROUP, INC.
By: /s/ George C. Evans
----------------------------
Name: George C. Evans
Title: Chairman, President and
Chief Executive Officer
SEARCH CAPITAL ACQUISITION CORP.
By: /s/ Robert D. Idzi
----------------------------
Name: Robert D. Idzi
Title: Senior Executive Vice President
MS FINANCIAL, INC.
By: /s/ Vann R. Martin
----------------------------
Name: Vann R. Martin
Title: President and Chief
Operating Officer
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June 25, 1997
MS Financial, Inc.
700 S. Pear Orchard Road
Ridgeland, MS 39157
Gentlemen:
This letter confirms our agreement that the Agreement and Plan of
Merger by and among us dated as of February 7, 1997 (the "Merger Agreement") is
amended as follows:
1. Sections 1.2 (g) and (h) of the Merger Agreement and all
references to Sections 1.2 (g) and (h) in the Merger Agreement are
deleted;
2. Section 1.2 (d) of the Merger Agreement is amended to read in
its entirety as follow:
"(d) Maximum and Minimum Exchange Ratio. Notwithstanding the
provisions of Section 1.2 (c) above and except for any adjustment made
pursuant to Section 1.2 (e), in no event will the Exchange Ratio exceed
.37 or be less than 0.28."
3. Sections 2.2 (f), 8.2, 8.3, 8.4, 8.5, 8.6, 8.10, 8.37, 8.61 and
8.70 of the Merger Agreement are deleted;
4. Section 7.1 (b) of the Merger Agreement is amended by changing
the date referenced therein from "June 30, 1997" to "August 15, 1997";
and
5. Section 8.77 of the Merger Agreement is amended to read in its
entirety as follows:
"8.77. "Per Share Amount" means $1.63, or such amount adjusted
pursuant to Section 1.2 (e) if such an adjustment is to be made."
Please acknowledge your agreement to the foregoing by signing this
letter in the space provided below.
Sincerely,
SEARCH FINANCIAL SERVICES INC.
By: /s/ GEORGE C. EVANS
--------------------------------
George C. Evans
Chairman of the Board and
Chief Executive Officer
<PAGE> 153
Letter: MS Financial, Inc.
June 25, 1997
Page 2
SEARCH CAPITAL ACQUISITION CORP.
By: /s/ ROBERT D. IDZI
-------------------------------
Robert D. Idzi
Senior Executive Vice President
Agreed:
MS FINANCIAL, INC.
By: /s/ JAMES B. STUART, JR.
-------------------------------
James B. Stuart, Jr., Chairman
The undersigned acknowledge (1) their agreement to the foregoing
amendments to the Merger Agreement (the "Amendment"), (2) that the Stockholders
Agreement dated as of February 7, 1997 by and among Search Financial Services,
Inc. and the undersigned (the "Stockholders Agreement") remains in full force
and effect and (3) that all references in the Stockholders Agreement to the
Merger Agreement shall be to the Merger Agreement as amended by the Amendment.
MS FINANCIAL SERVICES, INC.
By: /s/ JAMES B. STUART, JR.
-------------------------------
James B. Stuart, Jr.
MS DIVERSIFIED CORPORATION
By: /s/ JAMES B. STUART, JR.
-------------------------------
James B. Stuart, Jr., President
GOLDER, THOMA, CRESSY, RAUNER
FUND IV, L.P.
By: GTCR IV, L.P., its General Partner
By: Golder, Thoma, Cressy, Rauner,
Inc., its General Partner
By: /s/ DONALD J. EDWARDS
-------------------------------
Donald J. Edwards
Its: Principal
<PAGE> 154
ANNEX B
1997
--------
MS Financial, Inc.
715 S. Pear Orchard Road
Ridgeland, Mississippi 39157
Dear Sirs:
We understand that MS Financial, Inc. ("MSF") and Search Financial Services
Inc. ("Search") have entered into an Agreement and Plan of Merger (the "Merger
Agreement") dated February 7, 1997 and amended on June 25, 1997, pursuant to
which MSF will become a wholly-owned subsidiary of Search (the "Transaction").
Upon consummation of the Transaction, each share of MSF common stock will be
converted into $1.63 of Search common stock, based upon the average trading
price of Search common stock for the ten business days ending five business
days before the meeting of the MS Financial stockholders to agree to the
Transaction. The conversion ratio is subject to a collar such that the
conversion ratio shall not exceed 0.37 or be less than 0.28. You have provided
us with the joint proxy/prospectus statement (the "Proxy Statement"), which
includes the Merger Agreement among MSF and Search, in substantially final form
to be sent to the stockholders of MSF and Search. We understand the
Transaction will require approval of the stockholders of MSF and Search.
You have asked us to render our opinion as to whether the Transaction is fair,
from a financial point of view, to the public stockholders of MSF.
In the course of performing our review and analyses for rendering this opinion,
we have:
1. reviewed the Joint Proxy Statement/Prospectus;
2. reviewed the Fourth Amended and Restated Loan Agreement dated May 1,
1996, and the First Amendment to Fourth Amended and Restated Loan
Agreement dated December 16, 1996;
3 . reviewed MSF's Annual Report to Shareholders and Annual Report on Form
10-K for the fiscal year ended December 31, 1995 and December 31,
1996, its Prospectus for Common Stock dated July 21, 1995, its
Quarterly Reports on Form 1O-Q for the periods ended March 31,
June 30, September 30, 1996 and March 31, 1997, and its unaudited
preliminary financial results for the periods ended April 30, 1997 and
May 31, 1997;
4. reviewed Search's Annual Report to Shareholders and Transition Report
on Form 10-K for the fiscal year ended March 31, 1996, its Quarterly
Reports on Form 10-Q for the periods ended June 30, September 3O and
December 31, 1996, its audited financial results for March 31, 1997,
its Proxy Statement dated August 19, 1996, and Joint Plan of
Reorganization confirmed by in the United States Bankruptcy Court,
Northern District of Texas, Dallas Division, in Case No.
395-34981-RCM-11;
<PAGE> 155
MS Financial, Inc.
1997
- -------------,
Page 2
5. reviewed certain operating and financial information, provided to us
by management, relating to MSF's business and prospects;
6. reviewed certain operating and financial information, including
certain projections for the combined companies that assume costs
savings, provided to us by Search's management, relating to Search's
business and prospects;
7. met with certain members of MSF's senior management to discuss MSF's
operations, historical financial statements, future prospects and
possible impact to MSF of not consummating the Transaction;
8 met with certain members of Search's senior management to discuss
Search's operations, historical financial statements and future
prospects
9 . visited MSF's facilities in Ridgeland, Mississippi;
10. visited Search's facilities in Dallas, Texas;
11. reviewed the historical prices and trading volumes of the common
shares of MSF and Search;
12. reviewed publicly available financial data and stock market
performance data of companies which we deemed generally comparable to
MSF and Search;
13. reviewed the terms of recent acquisitions of companies which we deemed
generally comparable to MSF;
14. considered the results of our conversations with various prospective
acquirors of MSF, including the indications of interest received from
certain of such prospective acquirors; and
15. conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
In the course of our review, we have relied upon and assumed, without
independent verification, the accuracy and completeness of the financial and
other information provided to us by MSF and Search. With respect to MSF's and
Search's projected financial results, that assume certain synergies for the
combined companies, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
managements of MSF and Search as to the expected future performance of MSF and
Search, respectively. We have not assumed any responsibility for the
independent verification of such information or projections provided to us and
we have further relied upon the assurances of the managements of MSF and Search
that they are unaware of any facts that would make the information or
projections provided to us incomplete or misleading. In arriving at our
opinion, we have not performed any independent appraisal of the assets or
liabilities of MSF and Search. Our opinion is necessarily based on economic,
market and other conditions, and the information made available to us, as of
the date hereof.
Based on the foregoing, it is our opinion that the Transaction is fair, from a
financial point of view, to the public stockholders of MSF.
We have acted as financial advisor to MSF in connection with the Transaction
and will receive a fee for such services, payment of a significant portion of
which is contingent upon the consummation of the Transaction.
<PAGE> 156
MS Financial, Inc.
1997
- -------------,
Page 3
It is understood that this letter (i) is intended for the use of the Board of
Directors of MSF and may not be disseminated, quoted or referred to at any time
without our prior written consent and (ii) does not constitute a recommendation
to any stockholder as to how such stockholder should vote on the proposed
Transaction. Notwithstanding the previous sentence, Bear Steams expressly
consents to the inclusion of this letter in its entirety as an exhibit to the
proxy materials or the resulting Form S-4 distributed in connection with the
Transaction.
Very truly yours,
BEAR, STEARNS & CO. INC.
By:
------------------------------
Managing Director
DBR/klh
<PAGE> 157
ANNEX C
ALEX. BROWN
AMERICA'S OLDEST INVESTMENT BANKING FIRM
ESTABLISHED 1800
February 6, 1997
Board of Directors
Search Capital Group, Inc.
700 N. Pearl Street, Suite 400
Dallas, TX 75201
Dear Members of the Board of Directors:
MS Financial, Inc. ("MS Financial"), Search Capital Group, Inc.
("Search" or "the Company") and Search Capital Acquisition Corp., a Delaware
Corporation and a wholly-owned subsidiary of Search (the "Merger Sub"), have
entered into an agreement and plan of merger dated as of February 7, 1997 (the
"Agreement"). Pursuant to the Agreement, the Merger Sub shall be merged with
and into MS Financial (the "Merger"), and each share of MS Financial's common
stock issued and outstanding immediately prior to the effective time of the
Merger will be converted into an amount of shares (the "Exchange Ratio") of
common stock of Search with a value equal to $2.00 per share held; however, at
no time will the Exchange Ratio exceed 0.46x or be less than 0.34x. We have
assumed, with your consent, that the Merger will qualify as a tax free
transaction for federal income tax purposes. You have requested our opinion as
to whether the Exchange Ratio is fair, from a financial point of view, to
Search.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors of
Search in connection with the transaction described above and will receive a
fee for our services, a portion of which is contingent upon the consummation of
the Merger. We have provided financial advice to Search historically, including
bankruptcy restructuring as well as merger and acquisition advisory services.
Alex. Brown currently holds Search common stock received as compensation for
prior services, and at present, an Alex. Brown employee is a member of the
Board of Directors of Search. Alex. Brown also served as the lead-managing
underwriter in MS Financial's July 24, 1995 initial public offering of its
Common Stock. Alex. Brown maintained a market in the Common Stock of MS
Financial until mid-1996, and regularly publishes research reports regarding
the auto finance and consumer industries and the businesses and securities of
publicly traded companies in such industries. In the ordinary course of
business, Alex. Brown may actively trade the securities of both MS Financial
and Search for our own account and the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
In connection with this opinion, we have reviewed certain publicly
available financial information and other information concerning MS Financial
and Search and certain internal analyses and other information furnished to us
by Search. We have also held discussions with the members of the senior
management of Search regarding the businesses and prospects of Search and MS
Financial and the joint prospects of a combined company. In addition, we have
(i) reviewed the reported prices and trading activity for the common stock of
both MS Financial and Search, (ii) compared certain financial and stock market
information for MS Financial and Search with similar information for certain
other auto finance companies whose securities are publicly traded, (iii)
reviewed the financial terms of certain recent business combinations which we
deemed comparable in whole or in part, (iv) reviewed the terms of the Agreement
and certain related documents, and (v) performed such other studies and
analyses and considered such other factors as we deemed appropriate.
<PAGE> 158
We have not independently verified the information described above and
for purposes of this opinion have assumed the accuracy, completeness and
fairness thereof. With respect to the information relating to the prospects of
MS Financial and Search, we have assumed that such information reflects the
best currently available judgments and estimates of the management of Search as
to the likely future financial performances of Search and MS Financial and of
the combined entity. Alex. Brown was not involved in any discussions with the
management of MS Financial regarding this transaction or the prospects of a
combined company. In addition, we have not made nor been provided with an
independent evaluation or appraisal of the assets or liabilities of MS
Financial and Search, nor have we been furnished with any such evaluations or
appraisals. We are not expressing our opinion as to the value of Search's
common stock when issued pursuant to the Merger or the prices at which Search's
common stock will trade subsequent to such issuance. Our opinion is based on
market, economic and other conditions as they exist and can be evaluated as of
the date of this letter.
Our advisory services and the opinion expressed herein were prepared for
the use of the Board of Directors of Search and do not constitute a
recommendation to any stockholder as to how such stockholder should vote. We
hereby consent to the inclusion of this opinion in its entirety as an exhibit
to any proxy or registration statement distributed in connection with the
Merger.
Based upon and subject to the foregoing, it is our opinion that, as of
the date of this letter, the Exchange Ratio is fair, from a financial point of
view, to Search.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ J. ADAM HITT
----------------------------------
Name: J. Adam Hitt
Managing Director
-2-
<PAGE> 159
ANNEX D
MS FINANCIAL, INC.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report D-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 (audited) and D-3
March 31, 1997 (unaudited)
Consolidated Statements of Operations, years ended
December 31, 1994, 1995 and 1996 (audited) and three-month periods
ended March 31, 1996 and 1997 (unaudited) D-4
Consolidated Statements of Stockholders' Equity, years
ended December 31, 1994, 1995 and 1996 (audited) and three-month period
ended March 31, 1997 (unaudited) D-5
Consolidated Statements of Cash Flows, years ended
December 31, 1994, 1995 and 1996 (audited) and three-month periods
ended March 31, 1996 and 1997 (unaudited) D-6 - D-7
Notes to Consolidated Financial Statements D-8 - D-31
</TABLE>
D-1
<PAGE> 160
Independent Auditors' Report
The Board of Directors and Stockholders
MS Financial, Inc.:
We have audited the accompanying consolidated balance sheets of MS Financial,
Inc. and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MS Financial, Inc.
and subsidiary at December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to
the consolidated financial statements, the Company experienced in 1996 material
increases in delinquencies and losses on owned and serviced installment
contracts, a substantial net loss, and reduced availability of financing.
These matters 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 accompanying consolidated financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern.
/s/ KPMG Peat Marwick LLP
Jackson, Mississippi KPMG Peat Marwick LLP
February 24, 1997, except for the
last paragraph of note 3 which
is as of June 25, 1997
D-2
<PAGE> 161
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1995 and 1996 (Audited) and
March 31, 1997 (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets
------
December 31,
------------------ March 31,
1995 1996 1997
---- ---- -----------
(unaudited)
<S> <C> <C> <C>
Cash and cash equivalents $ 888 1,454 4,296
Installment contracts 22,398 86,972 72,803
Amounts due under securitizations 19,720 9,784 7,580
--------- --------- ---------
42,118 96,756 80,383
Allowance for possible losses (1,602) (10,062) (6,364)
--------- --------- ---------
Installment contracts and amounts due
under securitizations, net 40,516 86,694 74,019
--------- --------- ---------
Property and equipment, net 1,211 1,561 1,497
Repossessed automobiles, net of valuation allowance of $2,800 in 1996 1,388 2,933 3,048
and $2,500 (unaudited) in 1997
Installment contract origination program acquisition cost,
net of accumulated amortization of $537 in 1995 346 -- --
Income taxes receivable 223 6,234 5,636
Deferred income taxes 1,022 -- --
Other assets 4,124 2,559 2,519
--------- --------- ---------
Total assets $ 49,718 101,435 91,015
========= ========= =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Notes payable $ -- 75,813 71,442
Collections due investors 5 27 --
Dealer reserve and holdback accounts 290 222 171
Unearned commissions 1,695 987 469
Accounts payable and accrued expenses 2,744 2,632 1,770
--------- --------- ---------
Total liabilities 4,734 79,681 73,852
--------- --------- ---------
Stockholders' equity:
Preferred stock, par value $.001 per share, 5,000,000
shares authorized, none outstanding -- -- --
Common stock, par value $.001 per share, 50,000,000 shares
authorized, 10,800,000 shares issued and outstanding 11 11 11
Additional paid-in capital 27,660 27,660 27,660
Unrealized gain on securities available for sale -- -- 450
Retained earnings (accumulated deficit) 18,373 (3,641) (8,683)
--------- --------- ---------
46,044 24,030 19,438
Treasury stock, 174,000, 371,610 and 370,074 (unaudited) (1,060) (2,276) (2,275)
shares of common, at cost
--------- --------- ---------
Total stockholders' equity 44,984 21,754 17,163
--------- --------- ---------
Commitments and contingencies
$ 49,718 101,435 91,015
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
D-3
<PAGE> 162
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 1994, 1995 and 1996 (Audited) and
Three-Month Periods ended March 31, 1996 and 1997 (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three-month
periods ended
Years ended December 31, March 31,
----------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest and fee income on installment contracts
and securitizations $ 10,008 12,449 14,909 1,645 4,440
Other interest income 4 100 70 18 13
Interest expense (2,441) (3,587) (5,371) (373) (2,208)
-------- -------- -------- -------- --------
Net interest income before loss provisions 7,571 8,962 9,608 1,290 2,245
Provision for possible losses on installment contracts 685 826 20,103 250 4,342
Provision for impairment of amounts due under securitizations -- -- 3,000 -- --
Provision for possible losses on repossessed automobiles -- -- 2,800 -- --
-------- -------- -------- -------- --------
Net interest income (loss) after loss provisions 6,886 8,136 (16,295) 1,040 (2,097)
-------- -------- -------- -------- --------
Other income:
Insurance commissions 1,456 1,823 1,329 361 81
Gains on securitizations 2,492 7,072 -- -- --
Service fee income 1,235 1,951 2,668 864 371
Experience refund on insurance policy 900 -- -- -- --
Other income 627 760 753 257 22
-------- -------- -------- -------- --------
Total other income 6,710 11,606 4,750 1,482 474
-------- -------- -------- -------- --------
Operating expenses:
Salaries and employee benefits 3,398 5,046 6,942 1,598 1,447
Loss on sale of installment contracts -- -- 81 -- 39
Legal, professional and accounting fees 478 660 2,171 343 864
Office supplies and telephone expense 887 1,053 1,630 336 318
Rent and other office occupancy expense 510 684 936 197 241
Direct loan servicing expenses 301 562 624 171 159
Travel and entertainment expense 499 649 770 188 93
Advertising and other promotional expenses 131 97 293 58 21
Other operating expenses 385 589 1,657 207 237
-------- -------- -------- -------- --------
Total operating expenses 6,589 9,340 15,104 3,098 3,419
-------- -------- -------- -------- --------
Income (loss) before income taxes 7,007 10,402 (26,649) (576) (5,042)
Income tax expense (benefit) 2,622 3,901 (4,635) (216) --
-------- -------- -------- -------- --------
Net income (loss) $ 4,385 6,501 (22,014) (360) (5,042)
======== ======== ======== ======== ========
Net income (loss) per share $ .47 .65 (2.11) (.03) (.48)
======== ======== ======== ======== ========
Average shares and common equivalent shares outstanding 9,332 9,932 10,433 10,452 10,430
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-4
<PAGE> 163
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1995 and 1996 (Audited)
and Three-Month Period ended March 31, 1997 (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
gain (loss) Retained
Additional on securities earnings
Common paid-in available (accumulated Treasury
stock capital for sale deficit) stock Total
------- ------- ------------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 9 6,222 -- 7,487 -- 13,718
Net income -- -- -- 4,385 -- 4,385
------- ------- ----- ------- ------- -------
Balance, December 31, 1994 9 6,222 -- 11,872 -- 18,103
Proceeds of initial public offering of
2,000,000 shares of common
stock, net of offering costs of
$877 2 21,438 -- -- -- 21,440
Purchase of 174,000 shares of
common stock -- -- -- -- (1,060) (1,060)
Net income -- -- -- 6,501 -- 6,501
------- ------- ----- ------- ------- -------
Balance, December 31, 1995 11 27,660 -- 18,373 (1,060) 44,984
Purchase of 200,000 shares of
common stock -- -- -- -- (1,225) (1,225)
Proceeds from sale of 2,390 shares
of treasury stock under Stock
Purchase Plan -- -- -- -- 9 9
Net loss -- -- -- (22,014) -- (22,014)
------- ------- ----- ------- ------- -------
Balance, December 31, 1996 11 27,660 -- (3,641) (2,276) 21,754
Proceeds from sale of 1,536 shares
of treasury stock under Stock
Purchase Plan -- -- -- -- 1 1
Recognition of unrealized loss on
securities available for sale at
adoption of SFAS No. 125 -- -- (347) -- -- (347)
Unrealized gain on securities
available for sale -- -- 797 -- -- 797
Net loss -- -- -- (5,042) -- (5,042)
------- ------- ----- ------- ------- -------
Balance, March 31, 1997 (unaudited) $ 11 27,660 450 (8,683) (2,275) 17,163
======= ======= ===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
D-5
<PAGE> 164
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996 (Audited)
and Three-Month Periods ended March 31, 1996 and 1997 (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three-month
periods ended
Years ended December 31, March 31,
--------------------------- ------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,385 6,501 (22,014) (360) (5,042)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Provision for possible losses on installment contracts 685 826 20,103 250 4,342
Provision for impairment of amounts due
under securitizations -- -- 3,000 -- --
Provision for possible losses on repossessed automobiles -- -- 2,800 -- --
Provision for deferred income taxes 70 186 1,022 -- --
Depreciation and amortization 241 321 723 98 105
Gains on securitizations (2,492) (7,072) -- -- --
Loss on sale of installment contracts -- -- 81 -- 39
Changes in operating assets and liabilities, net (1,662) 504 (1,070) 849 (986)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 1,227 1,266 4,645 837 (1,542)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Installment contracts originated (63,855) (83,077) (109,796) (31,663) (1,577)
Installment contracts repaid, including repossession
proceeds 10,181 16,711 15,595 1,342 10,437
Proceeds from securitizations 33,248 81,560 -- -- --
Proceeds from sale of installment contracts -- -- 14,427 -- 728
Repayment of amounts due under securitizations 2,205 2,425 1,681 180 --
Investment in MS Auto Credit, Inc. (500) -- -- -- --
Repurchase of installment contracts sold in
1992 and 1993 securitizations (4,349) -- -- -- (794)
Surety premiums paid under securitizations (273) (248) (356) -- --
Capital expenditures (720) (693) (727) (195) (40)
Proceeds from sale of investment in MS Auto Credit, Inc. -- -- 500 -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities (24,063) 16,678 (78,676) (30,336) 8,754
-------- -------- -------- -------- --------
</TABLE>
(Continued)
D-6
<PAGE> 165
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Three-month
periods ended
Years ended December 31, March 31,
---------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 21,440 -- -- --
Proceeds from notes payable 50,750 56,050 93,100 26,500 --
Repayments of notes payable (29,753) (92,093) (17,287) -- (4,371)
Purchase of treasury stock -- (1,060) (1,225) (1,225) --
Proceeds from sale of treasury stock -- -- 9 -- 1
Net change in pending advances under notes payable 1,903 (1,903) -- 3,462 --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 22,900 (17,566) 74,597 28,737 (4,370)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 64 378 566 (762) 2,842
Cash and cash equivalents, beginning of period 446 510 888 888 1,454
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period $ 510 888 1,454 126 4,296
======== ======== ======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,653 3,649 3,558 114 2,115
======== ======== ======== ======== ========
Income taxes $ 3,818 4,077 266 137 89
======== ======== ======== ======== ========
Noncash investing activity:
Repossession of automobiles $ 6,367 17,272 37,989 7,862 11,742
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
D-7
<PAGE> 166
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1994, 1995 and 1996 (Audited)
and March 31, 1996 and 1997 (Unaudited)
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Business
The consolidated financial statements include the accounts of MS
Financial, Inc. (the Company) and its wholly-owned subsidiary,
MS Auto Receivables Company (MARCO). All significant
intercompany accounts have been eliminated in consolidation.
The Company's principal business activity is to purchase, resell to
investors and service retail automobile sales contracts.
Several of the dealers from whom the Company purchases such
retail sales contracts are affiliates of stockholders of MS
Diversified Corporation (MS Diversified). Retail sales
contracts are purchased from dealers located principally in the
Southeast, Southwest and Midwest regions of the United States.
(b) Unaudited Interim Financial Statements
The unaudited interim financial statements have been prepared in
conformity with generally accepted accounting principles and
include all adjustments which are, in the opinion of management,
necessary to a fair presentation of the results for the interim
period presented. All such adjustments are, in the opinion of
management, of a normal recurring nature and those necessary for
the adoption of new accounting pronouncements. Results for the
three-months ended March 31, 1997 are not necessarily indicative
of results to be expected for the full year.
(c) Income Recognition
Interest income from installment contracts is recognized using the
interest method adjusted for estimated prepayments of the
installment contracts. Prepayments are estimated based on
historical performance of the Company's loan portfolio. Accrual
of interest income does not cease for delinquent installment
contracts because any amounts are immaterial to the financial
statements due to the short delinquency period allowed before
repossession of the underlying collateral or charge-off of the
installment contract balance. At December 31, 1996, the Company
had charged-off all installment contracts, including delinquent
interest, that were at least 150 days delinquent.
(Continued)
D-8
<PAGE> 167
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Interest income from securitizations is recognized using the
interest method based on actual and expected cash flows and the
estimated rate of return on the recorded investment. For each
securitization, the Company periodically evaluates amounts due
under securitizations for impairment based on expected
discounted cash flows, as revised for actual cash flows through
the evaluation date. As a result of such analyses, the Company
recognized a $3.0 million impairment in 1996 on amounts due
under its 1995 securitization.
Insurance commissions are recognized as income using methods which
approximate the method indicated:
Credit life insurance - interest method
Accident and health insurance - relation to anticipated claims
Warranty extension insurance - straight-line
Installment contract extension fees are recognized when collected.
During 1995, the Company began deferring collection of extension
fees from certain borrowers and adding those fees to the
installment contract balance. Such deferred extension fees are
recorded as deferred income and are recognized when collected
after the full repayment of the installment contract.
Deferrable costs on the origination of installment contracts are
not material and are expensed when incurred. Servicing fee
income is recognized when earned.
(d) Securitization Transactions
Sales of installment contracts under securitization transactions
are recognized under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 77, "Reporting by Transferors
for Transfers of Receivables with Recourse." Gains on
securitization transactions are calculated based on the
difference between the sales price and the allocated basis of
the installment contracts sold. The investment in installment
contracts is allocated between the portion sold and the portion
retained based on the relative fair values of the portion sold
and the portion retained on the date of sale. In estimating
fair values, the Company considers prepayment and default risks
and discounts estimated cash flows at interest rates that are
commensurate with the risks involved and consistent with rates a
non-affiliated purchaser may require. All anticipated costs,
including estimated recourse obligations, associated with the
securitizations are offset against the gain recognized.
D-9 (Continued)
<PAGE> 168
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(e) Allowance for Possible Losses on Installment Contracts
The allowance for possible losses is intended to cover losses on
owned installment contracts, as well as securitized installment
contracts. Losses on securitized installment contracts are
limited to amounts recorded as investment in the subordinated
trust certificates and amounts due under securitizations.
Provisions for possible losses on installment contracts are
charged to income in amounts sufficient to absorb any
repossession expenses, delinquent interest and unpaid
installment contracts balances in excess of the insurance
provided by MS Casualty Insurance Company (MS Casualty - see
note 8). Credit loss experience, contractual delinquency of
installment contracts, the value of underlying collateral,
repossession loss insurance and other factors are
considered by management in assessing the adequacy of the
allowance for possible losses on installment contracts.
(f) Property and Equipment and Repossessed Automobiles
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is provided for furniture and
fixtures using the straight-line method over the estimated
useful lives of the related assets which range from five to six
years. Leasehold improvements are depreciated using the
straight-line method over the lives of the leases which range
from seven to eight years.
Repossessed automobiles are carried at the lower of cost (unpaid
installment contract balance) or fair value, less the costs of
disposition. In determining fair value, management considers
the estimated selling price of the automobile, repossession loss
insurance proceeds from MS Casualty and rebates on credit life
insurance, other insurance and extended warranties. At December
31, 1996, management provided an allowance for possible losses
on repossessed automobiles of $2.8 million. A valuation
allowance was not previously considered necessary because of
expected reimbursements under the Company's insurance
arrangement with MS Casualty (see note 8) and the relatively
lower levels of repossessed automobiles in prior periods.
(g) Installment Contract Origination Program Acquisition Cost
The cost of acquiring the installment contract origination program
was being amortized on a straight-line basis over ten years.
During 1996, the remaining carrying value of this intangible
asset ($257 thousand) was expensed because of the uncertainties
associated with its value as a result of the Company's
substantial 1996 net loss.
D-10 (Continued)
<PAGE> 169
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Prior to December 1993, the results of the Company's operations
(including its predecessor) were included in MS Diversified's
consolidated income tax returns and income taxes were allocated
to and provided for by the Company (including its predecessor)
as if it filed separate income tax returns. MS Diversified has
agreed to hold the Company harmless from any deficiency if any
tax return filed by the Company, or any tax return filed by MS
Diversified on behalf of the Company, for any period prior to
December 1993 was not true and correct in all material respects
in accordance with all applicable tax laws then in effect.
(i) Cash Equivalents
The Company considers highly liquid investments with original
maturities of three months or less to be cash equivalents.
(j) Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income
(loss) for the period by the weighted average number of common
shares outstanding plus common stock equivalent shares issuable
upon exercise of stock options. Stock options issued prior to
the Company's initial public offering of stock are treated as
outstanding for all periods presented.
(k) 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.
(Continued)
D-11
<PAGE> 170
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the
allowance for possible losses on installment contracts, the
carrying value of amounts due under securitizations and the
valuation of repossessed automobiles. The Company believes that
the allowance for possible losses on installment contracts is
adequate. While the Company uses available information to
recognize losses on installment contracts, future adjustments to
the allowance may be necessary based on changes in economic
conditions. The Company also believes that discounted cash flows
will be adequate to recover the Company's carrying value of
amounts due under securitizations and the carrying value of
repossessed automobiles. It is reasonably possible that the
expectations associated with these estimates could change
in the near term (i.e., within one year) and that the effect of
any such changes could be material to the consolidated financial
statements.
(l) Reclassifications
Certain prior period amounts have been reclassified to conform with
the 1996 presentation.
(m) Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 125). SFAS No. 125
requires that an entity recognize the financial and servicing
assets it controls and the liabilities it has incurred and
derecognize financial assets when control has been surrendered
and derecognize liabilities when extinguished. Standards are
provided by this statement for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This statement is generally effective for transfers
and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be
applied prospectively. The Company plans to adopt SFAS No. 125
in its 1997 consolidated financial statements.
Management of the Company believes that SFAS No. 125 will have a
material impact on its future financial statements, particularly
in those periods when the Company completes a securitization
transaction (see note 5). SFAS No. 125 will modify the
Company's gain on securitization calculation, principally by
allowing the Company
(Continued)
D-12
<PAGE> 171
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
to establish a servicing asset or liability for installment
contracts sold based on relative fair values. Subsequently, the
Company will be required to amortize its servicing asset or
liability in proportion to and over the period of net servicing
income or net servicing loss. The servicing asset or liability
will then be assessed for impairment or increased obligation
based on its fair value. Finally, the Company's retained interest
in securitizations will be measured like investments in debt
securities available-for-sale or trading and adjustments to fair
value will be reflected as a component of stockholders' equity for
available-for-sale debt securities or as a component of net income
or loss for debt securities held for trading. The Company is not
aware of any other significant matters that might result from the
adoption of SFAS No. 125. The impact of adopting SFAS No.
125 at January 1, 1997 was to reduce stockholders' equity by
$347 thousand to reflect the unrealized loss on the Company's
retained interest in securitizations (including the interest
differential) as a component of stockholders' equity.
(2) Liquidity
As reflected in the accompanying 1996 consolidated financial
statements, the Company has suffered substantial losses and,
accordingly, substantial reductions in stockholders' equity.
These negative financial trends have resulted from material
increases in delinquencies and losses on owned and serviced
installment contracts. As a result, the Company is facing a severe
liquidity problem because of (i) the lack of availability of funds
under the Company's revolving credit facility (see note 7); (ii)
the lack of availability of funds under the Warehouse Facility (see
note 7); (iii) the Company's inability to complete a securitization
in 1996; and (iv) the delay of payments to the Company under the
Company's prior securitization programs (see note 5).
To address the Company's liquidity problem, the Company engaged an
investment banker to advise the Company on alternatives, formed a
board committee to assist in addressing financial issues,
renegotiated the terms of its revolving credit facility, sold $14.5
million of its installment contracts, reduced the number of its
employees, scaled back the extent of its operations and is pursuing
the merger of the Company (see note 3).
There can be no assurance that the Company's efforts to alleviate its
liquidity problems and restore its operations will be successful.
If the Company is unsuccessful in its efforts, it may be unable to
meet its obligations, which raises substantial doubt about the
Company's ability to continue as a going concern. If the Company is
unable
(Continued)
D-13
<PAGE> 172
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
to continue as a going concern and is forced to liquidate assets
to meet its obligations, the Company may not be able to
recover the recorded amounts of such assets. The Company's
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
(3) Merger Agreement
On February 7, 1997, the Company entered into an agreement and plan of
merger (the Agreement) with Search Capital Group, Inc. (Search).
The Agreement, if consummated, will result in the Company becoming
a subsidiary of Search through the mutual exchange of common stock.
Under the Agreement, each stockholder of the Company would receive
between .34 and .46 shares of Search common stock for each share of
the Company's common stock, subject to adjustment in certain
events. The exchange ratio will be determined based on the market
price of Search's common stock during a prescribed valuation period
preceding the Company's stockholder vote on the merger and an
assumed $2.00 per share value of the Company's common stock,
subject to adjustment in certain events. Among other conditions,
the Agreement is subject to the filing of certain documents with,
and approval of such documents by, the Securities and Exchange
Commission and the affirmative vote of a majority of the Company's
stockholders and Search's stockholders.
If the Agreement is terminated under certain conditions, the Company may
be obligated to pay a fee to Search of up to $700 thousand.
Further, the Agreement calls for a monthly fee of $100 thousand
payable to Search for operational assistance to be provided by
Search to the Company between February 7, 1997, and consummation of
the merger. Such operational assistance fee is to be applied
against the termination fee described above, if applicable.
Effective June 25, 1997, the Boards of Directors of Search and the
Company agreed to amend the merger agreement so that each
stockholder of the Company would receive between .28 and .37 shares
of Search common stock, subject to adjustment in certain events.
Further, the exchange ratio will be determined based on the market
price of Search's common stock during a prescribed valuation period
preceding the Company's stockholder vote on the merger and an
assumed $1.63 per share value of the Company's common stock,
subject to adjustment in certain events.
D-14 (Continued)
<PAGE> 173
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Installment Contracts and Amounts Due Under Securitizations
-----------------------------------------------------------
A summary of installment contracts and amounts due under securitizations
at December 31, 1995 and 1996 and March 31, 1997 (unaudited) follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1995 1996 1997
---- ---- ---------
(unaudited)
<S> <C> <C> <C>
Gross automobile installment contracts $ 158,461 177,655 142,005
Unearned finance charges (38,143) (47,284) (37,039)
--------- --------- --------
Net automobile installment contracts 120,318 130,371 104,966
Installment contracts sold (99,382) (44,053) (32,585)
--------- --------- --------
20,936 86,318 72,381
Retained portion of installment contracts
sold in securitizations 1,328 585 356
Other consumer installment contracts, net 134 69 66
--------- --------- --------
Installment contracts 22,398 86,972 72,803
Amounts due under securitizations 19,720 9,784 7,580
--------- --------- --------
42,118 96,756 80,383
Allowance for possible losses (1,602) (10,062) (6,364)
--------- --------- --------
Installment contracts and amounts
due under securitizations, net $ 40,516 86,694 74,019
========= ========= =========
</TABLE>
At December 31, 1996, contractual maturities of installment contracts owned
were (in thousands):
<TABLE>
<CAPTION>
Portion Other
Automobile retained of consumer
installment installment installment
contracts contracts contracts
owned sold owned Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997 $ 29,664 204 69 29,937
1998 26,152 176 -- 26,328
1999 18,392 124 -- 18,516
2000 9,141 61 -- 9,202
2001 2,969 20 -- 2,989
------- ------- ------- -------
$ 86,318 585 69 86,972
======== ======= ======= =======
</TABLE>
(Continued)
D-15
<PAGE> 174
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
It is the Company's experience that a substantial portion of the
installment contracts portfolio is either repaid or extended before
contractual maturity dates. Further, the Company periodically
sells installment contracts to investors and experiences
repossessions and losses on its installment contracts. Therefore,
the above tabulation is not to be regarded as a forecast of future
cash collections. At December 31, 1995 and 1996, the Company had
$5.1 million and $8.7 million of gross amounts due under
installment contracts which had one or more payments delinquent
more than 90 days.
A summary of amounts due under securitizations at December 31, 1995 and
1996 and March 31, 1997 (unaudited) follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------- March 31,
1995 1996 1997
---- ---- ----
(unaudited)
<S> <C> <C> <C>
1996 $ 14,055 -- --
1997 7,667 6,188 3,050
1998 1,755 5,382 4,436
Later years 392 -- 1,662
-------- -------- --------
23,869 11,570 9,148
Less: amounts representing interest at
14.6%, 14.5% and 19.6%, respectively (4,149) (1,786) (1,568)
-------- -------- --------
Present value of estimated future net cash receipts $ 19,720 9,784 7,580
======== ======== ========
</TABLE>
Amounts due under securitizations represent the present value of
estimated future cash flows for the interest differential on the
installment contracts sold, net of surety premiums and other costs.
A summary of transactions affecting amounts due under securitizations
follows (in thousands):
<TABLE>
<CAPTION>
Three-month
periods ended
Years ended December 31, March 31,
----------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,943 6,272 19,720 19,720 9,784
Cash received (2,490) (2,815) (1,571) (663) --
Earnings recognized 1,434 422 68 33 7
</TABLE>
D-16 (Continued)
<PAGE> 175
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
<TABLE>
Three-month
periods ended
Years ended December 31, March 31,
----------------------------- ----------------
1994 1995 1996 1996 1997
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Recognition of amounts due under:
1994 securitization 3,684 -- -- -- --
1995 securitization -- 17,513 -- -- --
Repurchase of installment contracts sold
in 1992 and 1993 securitizations (1,757) -- -- -- (693)
Advances on delinquent payments -- (1,729) (4,967) (1,472) (1,914)
Impairment writedown -- -- (3,000) -- --
Unrealized gain on securities
available for sale -- -- -- -- 469
Other, net 458 57 (466) 168 (73)
------- ------- ------- ------- -------
Balance at end of year $ 6,272 19,720 9,784 17,786 7,580
======= ======= ======= ======= =======
</TABLE>
Transactions in the allowance for possible losses on installment
contracts follow (in thousands):
<TABLE>
<CAPTION>
Three-month
periods ended
March 31,
Years ended December 31, ----------------
--------------------------------- 1996 1997
1994 1995 1996 ------- -------
---- ---- ---- (unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 1,211 1,340 1,602 1,602 10,062
Charge-offs and repossession expenses (2,288) (6,355) (21,336) (2,920) (9,059)
Recoveries, principally insurance proceeds,
net of deductibles of $330, $1,195 and
$828 (see note 8) 1,732 4,607 9,693 2,490 1,019
------- ------- ------- -------- -------
Net charge-offs and repossession
expenses (556) (1,748) (11,643) (430) (8,040)
Provision for recourse obligation on 1995
securitization -- 1,184 -- -- --
Provision for possible losses on installment
contracts 685 826 20,103 250 4,342
------- ------- ------- ------- -------
Balance at end of year $ 1,340 1,602 10,062 1,422 6,364
======= ======= ======= ======= =======
</TABLE>
(Continued)
D-17
<PAGE> 176
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) Installment Contract Sales and Securitizations
The Company periodically sells to investors automobile installment
contracts purchased from automobile dealers and assigned to the
Company. During 1994 and 1995, $35 million and $90 million,
respectively, of installment contracts were sold in transactions
whereby the installment contracts were transferred to trusts in
which beneficial ownership interests were purchased by investors in
the form of trust certificates. The Company purchased the
subordinated portion of the trust certificates in the 1994
transaction. The Company remains contingently liable on the
installment contracts sold, principally for losses attributable to
default and prepayment risks. Under SFAS No. 77, the installment
contracts purchased by outside investors are accounted for as sales
and the corresponding net gains are recognized in the Company's
consolidated financial statements. The Company's risk of
accounting loss does not exceed amounts recorded as assets in the
consolidated balance sheets as a result of the Company's
securitization transactions.
If delinquencies on installment contracts sold in securitizations exceed
certain predefined levels, the funding of cash collateral accounts
that are held in trust for the benefit of the senior certificate
holders is increased. The increase in the cash collateral accounts
is funded with cash flows from the securitized installment
contracts that otherwise would be forwarded to the Company.
Further, the Company can be replaced as servicer by the issuer of
the Company's financial guaranty insurance policy (see below).
During 1996 these restrictive covenants were exceeded on the
Company's 1993, 1994, and 1995 securitizations and the funding of
the respective cash collateral accounts was increased as described
above. At December 31, 1996, the cash collateral accounts for the
1994 and 1995 securitizations remained underfunded by approximately
$10.5 million. This underfunding, which decreases as the principal
balance of the installment contracts securitized decreases, will
continue to defer cash available to the Company from the
securitizations until certain reduced levels of delinquencies are
achieved for specified time periods or required cash has been
provided to fully fund the cash collateral accounts. Additionally,
the Company has not been notified, nor does management expect for
the Company to be notified, of any request for the Company's
replacement as servicer on the installment contracts sold.
In March and May of 1995, the Company entered into $80 million of U. S.
Treasury interest rate futures that hedged the securitization which
was consummated in September, 1995. Accordingly, the accumulated
loss on the contracts of $1.25 million was paid at settlement of
the contracts and included in the measurement of the gain on the
securitization transaction.
(Continued)
D-18
<PAGE> 177
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Company obtains a financial guaranty insurance policy for the benefit
of the senior certificate holders from an unrelated party.
Distributions under the subordinated certificates are pledged to
the issuer of the financial guaranty insurance policy and the stock
of MARCO is pledged on a junior-lien basis to further secure the
financial guaranty insurance policy.
At December 31, 1995 and 1996, the Company was servicing for third
parties installment contracts totaling approximately $99.4 million
and $44.1 million, respectively. Of these amounts, $98.8 million
and $44.0 million, respectively, represented the aggregate
uncollected principal balance of installment contracts sold in
securitizations. The Company remains contingently liable for loans
serviced for third parties. The Company services these installment
contracts and receives a service fee based on a percent of the
outstanding principal balance.
At December 31, 1995 and 1996, the Company held approximately $1.3
million and $585 thousand of subordinated trust certificates
arising from prior securitizations. These certificates are
classified as installment contracts and amounts due under
securitizations in the accompanying balance sheets and are carried
at amortized cost as the Company has the positive intent and
ability to hold these securities to maturity. These securities are
not due at a single maturity date because principal repayments are
dependent on the cash flows of the underlying installment
contracts. The following table reflects the carrying value and
estimated fair value of these securities (in thousands):
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Estimated
value gains losses fair value
----------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
December 31, 1995 $ 1,328 - (75) 1,253
=========== ===== === ======
December 31, 1996 $ 585 - (19) 566
=========== ===== === ======
</TABLE>
Fair values have been estimated using anticipated cash flows discounted
at rates a buyer of comparable certificates may require.
(Continued)
D-19
<PAGE> 178
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) Property and Equipment
A summary of property and equipment at December 31, 1995 and 1996
and March 31, 1997 (unaudited) follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------- March 31,
1995 1996 1997
------- ------- -------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements $ 92 94 94
Furniture and fixtures 1,724 2,448 2,488
------- ------- -------
1,816 2,542 2,582
Less accumulated depreciation (605) (981) (1,085)
------- ------- -------
Property and equipment, net $ 1,211 1,561 1,497
======= ======= =======
</TABLE>
(7) Notes Payable
Notes payable consist of borrowings under a revolving credit facility
with several commercial banks. This agreement, as amended December
16, 1996, provides for borrowings of up to $90 million; however,
the agreement requires a mandatory reduction of the total facility
to $65 million effective January 31, 1997. The borrowing base for
the commitment is generally equal to 85% of the net amount of
eligible installment contracts, as defined. At December 31, 1996,
the Company was over-advanced approximately $16.5 million based on
the borrowing base formula. Advances under the revolving credit
facility are secured by all assets of the Company. The final
maturity of the facility, as amended December 16, 1996, is April
30, 1997. As described below, the revolving credit facility is
expected to be amended further.
In consideration of the pending merger described in note 3 and
noncompliance with certain provisions of the revolving credit
facility occurring subsequent to December 31, 1996, the Company and
the banks involved entered into a letter agreement and consent
dated February 19, 1997 that is intended to effectively amend the
revolving credit facility described above. Under this agreement,
the maturity of the revolving credit facility is extended to the
earlier of May 15, 1997, the merger closing date or repayment of
amounts due under the facility. Further, the aggregate commitment
is reduced from $90 million to $75 million. The Company can
request advances under the facility as long as the aggregate
advances do not exceed $75 million and the over-advance (as
described above) does not exceed $20 million. Additionally, the
interest rate on the facility is reduced to the prime rate plus 100
basis points (9.25% on February 19, 1997).
(Continued)
D-20
<PAGE> 179
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The agreement also provides for certain amendments to the facility to be
entered into on the merger closing. These amendments are expected
to provide for the refinancing of outstanding advances, a $25
million mandatory reduction of the commitment plus a proportionate
reduction of the over-advance six months after the effective date
of the merger, interest at the prime rate plus 100 basis points
(1%), an additional fee to the banks of $350 thousand, and an
extended maturity to the earlier of the first anniversary of the
merger closing date, repayment of the then outstanding advances or
any date that the repayment of the advances is accelerated under
the agreement.
Under the agreement in effect at December 31, 1996, interest was payable
at the prime rate plus 300 basis points (11.25% at December 31,
1996). This rate of interest constitutes the default rate as
defined in the agreement and is the contractual rate of interest
from November 22, 1996 and continuing until the aggregate advances
do not exceed $50 million and the over-advance does not exceed $5
million. Previously, the rate of interest was substantially lower
and varied under a series of formulas based on the prime rate or
LIBOR. The higher rate of interest was imposed under the revolving
credit facility based on certain events of default that occurred in
the fourth quarter of 1996, principally because of the Company's
increasing delinquencies and losses on its owned and serviced
installment contracts. The weighted average interest rate under
the revolving credit facility was 8.1%, 8.9% and 10.2%,
respectively, during 1994, 1995 and 1996.
The Company was required to pay a restructuring fee of 625 basis points
(.625%) on the full amount of the commitment in three equal
installments on the last business day of November, 1996, December,
1996 and January, 1997. The agreement contains certain restrictive
covenants relative to delinquencies, capital expenditures,
indebtedness, dividends and certain other items. Under these
covenants the Company is presently unable to pay dividends on its
common stock and does not expect to be able to pay dividends in the
near future. At December 31, 1996, management believes the Company
was in compliance with these restrictive covenants.
Also, prior to the fourth quarter of 1996, the Company had available a
$50 million "warehouse" revolving credit securitization facility
(the Warehouse Facility). The Warehouse Facility allowed the
Company to transfer pools of installment contracts for a term
securitization. Accordingly, the Company was required to
repurchase installment contracts that had been in the Warehouse
Facility for more than twelve months. Transfers of installment
contracts under the Warehouse Facility were accounted for as
financing transactions. Advances under the Warehouse Facility were
secured by the transferred installment contracts and interest was
computed based on
D-21 (Continued)
<PAGE> 180
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
the 30-day LIBOR rate. The initial commitment was through April
1996, but was automatically extended monthly with a final
termination date of May 5, 2000, unless a party to the agreement
objected to the extension or the agreement was otherwise
effectively canceled. In the fourth quarter of 1996, the Company
was informed by a party to the Warehouse Facility that this
financing source was no longer available to the Company as a result
of certain events of default occurring on the Company's prior
securitization transactions.
(8) Related Party Transactions
The Company had agreements with MS Diversified for human resources and
data processing services. The Company reimbursed MS Diversified
generally on a fee basis determined annually, and such fees were
intended to approximate the cost of obtaining comparable services
from unaffiliated parties. Subsequent to December 31, 1994, the
Company initiated its own human resources and data processing
departments and discontinued these agreements with MS Diversified.
The Company does continue to share certain computer hardware with
MS Diversified. Company management believes that expenses
reflected in the consolidated statements of operations under these
agreements with MS Diversified are not materially different from
the costs that would have been incurred by the Company if such
services had been provided by an unrelated party. The Company
reimbursed MS Diversified approximately $381 thousand in 1994, $170
thousand in 1995 and $268 thousand in 1996, for these services.
Direct expenses incurred by MS Diversified on behalf of the Company are
allocated to the Company based on the actual costs incurred. MS
Diversified billed the Company $1.9 million and $140 thousand for
costs incurred during 1994 and 1995, respectively. There were no
expenses incurred by MS Diversified on behalf of the Company in
1996. The Company had a payable balance to MS Diversified of $1
thousand at December 31, 1994.
The Company leases office space from MS Diversified pursuant to a
sublease entered into in December 1993 and expiring in December
1997. In 1994, 1995 and 1996, the Company paid MS Diversified an
aggregate of $159 thousand, $170 thousand and $174 thousand,
respectively, for this sublease. The Company has the option to
renew the sublease for up to three additional terms of five years
each, at prescribed increasing rates.
(Continued)
D-22
<PAGE> 181
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
For installment contracts originated prior to July 1, 1996, MS Casualty
insured the Company against loss on retail automobile sales
contracts, subject to a limitation of $7 thousand per vehicle.
Additionally, the total liability of MS Casualty for all contracts
insured during a policy coverage year could not exceed the product
of $600 and the number of automobile contracts written during that
year. During 1996, the Company recovered from MS Casualty
substantially all amounts due under the insurance arrangement.
Additionally, effective July 1, 1996, the Company discontinued the
practice of insuring its installment contracts with MS Casualty and
began purchasing such installment contracts at a discount. Claim
payments received by the Company from MS Casualty under this
insurance arrangement aggregated $1.3 million, $4.2 million and
$9.3 million in 1994, 1995 and 1996, respectively.
While the insurance arrangement described above did not require the
Company to apply a deductible on each claim, the Company
periodically elected to apply a deductible to selected claims and
absorb certain losses on the installment contracts. Company
management believes that this process altered the timing of
charge-offs on installment contracts, but did not alter the
ultimate amount of losses to be incurred by the Company. Had the
Company filed all claims for the full amount of the loss, amounts
available from MS Casualty under the insurance arrangement would
have been reduced and the Company's allowance for possible losses
on installment contracts would have been greater at December 31,
1995; however, management believes that the Company's 1995 and 1996
provision for possible losses on installment contracts would have
been unchanged.
Premiums for such insurance coverage were based on a percentage of the
amount financed and were either paid by the automobile dealers at
the time the installment contracts were purchased by the Company or
withheld from the loan proceeds to the dealers and paid by the
Company. Premium payments to MS Casualty by either the Company or
the dealers for such insurance coverage aggregated $4.3 million,
$5.7 million and $4.4 million in 1994, 1995 and 1996, respectively.
At December 31, 1995, the Company had a payable balance of $394
thousand to MS Casualty for payment of such premiums. At December
31, 1995, the Company had a receivable balance from MS Casualty of
$1.0 million for losses insured under this arrangement. The Company
shared in the profitability of this insurance arrangement with MS
Casualty based on a contractual determination of profitability
consistent with standard insurance industry practices. The Company
recorded experience refund income on the MS Casualty insurance
contract of $900 thousand in 1994. No experience refund was earned
in 1995 or 1996.
(Continued)
D-23
<PAGE> 182
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
MS Life Insurance Company, also a subsidiary of MS Diversified, insures
the borrowers against loss under credit life insurance and accident
and health insurance. MS Dealer Service Corporation and United
Service Protection Corporation, also related companies, insure the
borrowers against loss under warranty extension insurance. The
Company is named as loss payee on the various insurance policies.
Premiums for such insurance are financed in the retail sales
contract. During 1994, 1995 and 1996, premiums totaling $7.0
million, $6.7 million and $7.5 million, respectively, for such
insurance were financed in the retail sales contracts. During
1994, 1995 and 1996, the Company received $263 thousand, $327
thousand and $506 thousand of proceeds under the credit life and
accident and health insurance policies. At December 31, 1995, the
Company had payable balances to these companies of $138 thousand.
At December 31, 1996, the Company had a receivable balance from
these companies of $82 thousand.
Through May 1995 MS Byrider Sales, Inc., a related company, reimbursed
the Company for its share of certain officers' salaries. In May
1995, in contemplation of the Company's initial public offering of
stock in July 1995, the officers resigned their positions at MS
Byrider Sales, Inc. The Company purchased 350 shares of 7%
cumulative preferred stock of MS Auto Credit, Inc., a 26% voting
interest, for $500 thousand on December 28, 1994. MS Auto Credit,
Inc. is a subsidiary of MS Byrider Sales, Inc. The preferred
shares had a liquidation preference of $500 thousand, but otherwise
had the same rights and benefits as the common shares of MS Auto
Credit, Inc. Accordingly, this investment was accounted for using
the equity method of accounting and is included in other assets in
the December 31, 1995 balance sheet. During 1996, the Company sold
its preferred stock investment in MS Auto Credit, Inc. to MS
Diversified for $500 thousand cash plus the value of accrued
dividends.
The Company also had a $500 thousand line of credit with MS Auto Credit,
Inc. At December 31, 1995, no advances were outstanding under this
credit agreement. This line of credit matured in 1996.
In 1994, 1995 and 1996, the Company purchased an aggregate of $6.7
million, $6.9 million and $3.4 million, respectively, in
installment contracts from two dealers partially owned by a
director of the Company. In 1994, 1995 and 1996, the Company
purchased an aggregate of $24.4 million, $21.1 million and $17.1
million of installment contracts from affiliates of stockholders of
MS Diversified.
(Continued)
D-24
<PAGE> 183
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(9) Income Taxes
The current and deferred components of income tax expense (benefit)
follow (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
1994:
Federal $ 2,208 62 2,270
State 344 8 352
------- ------- -------
$ 2,552 70 2,622
======= ======= =======
1995:
Federal $ 3,217 161 3,378
State 498 25 523
------- ------- -------
$ 3,715 186 3,901
======= ======= =======
1996:
Federal $(5,433) 885 (4,548)
State (224) 137 (87)
------- ------- -------
$(5,657) 1,022 (4,635)
======= ======= =======
</TABLE>
Income taxes recovered by the Company as a result of the 1996 operating
loss are to be used by the Company to reduce advances under the
revolving credit facility described in note 7. Income tax expense
(benefit) differs from the amount computed by applying the Federal
income tax rate of 35% to income before income taxes as a result of
the following (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 2,453 3,641 (9,327)
Increase (reduction) in income taxes resulting from:
State income taxes, net of Federal benefit 229 340 (57)
Nondeductible expenses 21 22 140
Change in valuation allowance for
deferred tax assets -- -- 5,427
Other, net (81) (102) (818)
------- ------- -------
Income tax expense (benefit) $ 2,622 3,901 (4,635)
======= ======= =======
</TABLE>
(Continued)
D-25
<PAGE> 184
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as
of December 31, 1995 and 1996 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for possible losses on
installment contracts $ 598 1,209
Valuation allowance on repossessed automobiles -- 1,044
Accrued compensated absences 32 50
Unearned commissions 632 368
Deferred compensation 36 3
Accrual for litigation settlements -- 198
Net operating loss carryforward -- 3,971
Alternative minimum tax credit carryforward -- 303
------- -------
Total gross deferred tax assets 1,298 7,146
Valuation allowance -- 5,427
------- -------
Net deferred tax asset 1,298 1,719
------- -------
Deferred tax liabilities:
Installment contracts and amounts due
under securitizations (247) (1,190)
Unearned finance charges (11) (365)
Property and equipment (18) (134)
Other -- (30)
------- -------
Total gross deferred tax liabilities (276) (1,719)
------- -------
Net deferred tax asset $ 1,022 --
======= =======
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the level of taxable loss in 1996 and
uncertainties for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more
likely than not that the Company will not realize the benefits of
these deductible differences and has fully offset the net deferred
tax asset with a valuation allowance. Future changes in the
valuation allowance will be recorded as a component of net income
or loss on the statement of operations.
D-26 (Continued)
<PAGE> 185
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
During 1996, the Internal Revenue Service commenced and completed a
review of the Company's 1994 Federal tax return. The results of
this examination resulted in an additional assessment of $94
thousand, including interest, which was accrued by the Company in
1996.
(10) Commitments
The Company leases office space under operating lease agreements with MS
Diversified and unrelated parties which expire, subject to renewal
options, from 1996 to 1998.
The following is a summary of future minimum lease payments under the
leases (in thousands):
<TABLE>
<S> <C>
1997 $ 250
1998 36
1999 4
------
$ 290
======
</TABLE>
Rent expense for office space under lease agreements totaled $296
thousand for 1994, $377 thousand in 1995 and $402 thousand for
1996.
(11) Employee Benefit Plans
During 1994, the Company adopted a 401(k) plan for substantially all of
its employees. Under the Company's 401(k) plan, employees may
elect to contribute from 2% to 16% of monthly base pay, with the
Company providing matching contributions of one-half of employee
contributions up to 6% of monthly base pay. Total expense under
the plan amounted to $40 thousand in 1994, $75 thousand in 1995 and
$111 thousand in 1996.
The Board of Directors of the Company has adopted an employees' equity
incentive plan (the Employees' Plan) under which the Company has
reserved 1,177,776 shares of common stock for issuance. Stock
options, restricted stock and performance awards or any combination
thereof may be granted to officers, employees and consultants of
the Company. The Compensation Committee of the Board of Directors
in its sole discretion determines the recipients and the amounts of
all awards. Options granted vest over a five year period. Each
option granted expires ten years from the date of grant. The
option exercise price must be equal to the fair value of the
Company's common stock on the date of grant.
D-27 (Continued)
<PAGE> 186
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
In May 1995, the Board of Directors of the Company adopted a Non-employee
Directors' Stock Option Plan (the Directors' Plan). Under the
Directors' Plan, non-employee directors may be granted options to
purchase common stock. An aggregate of 50,000 shares of common
stock are reserved for issuance under the Directors' Plan. The
Directors' Plan provides for the automatic grant of an option to
purchase 5,000 shares of common stock to each director at the
commencement of his or her initial term of service on the Board,
exercisable at the rate of 1,000 shares on each of the first five
anniversaries of the initial date of grant. Each option granted
expires ten years from the date of grant. The option exercise
price must be equal to the fair value of the Company's common stock
on the date of grant.
The following table summarizes the Company's option activity:
<TABLE>
<CAPTION>
Employees' Plan Directors' Plan
----------------------- -------------------------
Average price Average price
per share Shares per share Shares
------------- ------ -------------- ------
<S> <C> <C> <C> <C>
Granted during 1994 and outstanding
at December 31, 1994 $ 2.50 586,664 -- --
Granted during 1995 10.05 396,120 $11.33 35,000
--------- ---------
Outstanding at December 31, 1995 5.54 982,784 11.33 35,000
Granted during 1996 5.25 20,000 5.25 10,000
Expired during 1996 -- -- 12.00 (5,000)
--------- ---------
Outstanding at December 31, 1996 $ 5.53 1,002,784 $ 9.73 40,000
====== ========= ====== =========
Shares exercisable at
December 31, 1996 $ 4.40 313,890 $11.22 6,000
====== ========= ====== =========
</TABLE>
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123
provides accounting and reporting standards for stock-based
employee compensation plans and also applies to transactions in
which the Company acquires goods and services from nonemployees in
exchange for the Company's equity instruments. SFAS No. 123
defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all employee stock
compensation plans.
Entities electing to remain with the accounting treatment outlined in APB
Opinion No. 25, "Accounting for Stock Issued to Employees" are
required to make pro forma disclosures of net income and net income
per share, as if the fair value based method
D-28 (Continued)
<PAGE> 187
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
had been adopted. The Company accounts for its stock based
compensation plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation costs for
the plans been determined consistent with SFAS No. 123, the
Company's net income (loss) and net income (loss) per share would
have been adjusted to the following pro forma amounts for options
issued during the respective year shown below (in thousands, except
per share data):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net income (loss):
As reported $ 6,501 (22,014)
Pro forma 6,091 (22,938)
Net income (loss) per share:
As reported .65 (2.11)
Pro forma .61 (2.20)
======= =======
</TABLE>
The fair value of each option grant is estimated on the date of grant
using an option pricing model with the following weighted average
assumptions used for grants in 1995 and 1996: risk-free investment
rate of 6.74% in 1995 and 6.28% in 1996, no expected dividends,
expected life of ten years, and expected volatility of 60% in both
years.
In May 1995, the stockholders of the Company adopted a Stock Purchase
Plan (the Stock Purchase Plan) which covers 200,000 shares of
common stock. Beginning in 1996, eligible employees can purchase
common stock at a discount by participating in quarterly Stock
Purchase Plan offerings in which payroll deductions may be used to
purchase shares of common stock. Common stock issuable under the
Stock Purchase Plan must be shares reacquired by the Company.
(12) Business and Credit Concentrations
During the normal conduct of its operations, the Company engages in the
extension of credit to automobile consumers through dealers. The
risks associated with these credits include economic, competitive
and other risks. A substantial portion of the risk is limited due
to the number of customers and their dispersion throughout eleven
principally southeastern states; however, operations are
concentrated in one industry. In 1995, approximately 33%, 23% and
19% of the amount of installment contracts originated were
originated in Texas, Mississippi and North Carolina, respectively.
In 1996, approximately 36%, 16% and 20% of the amount of
installment contracts originated were originated in Texas,
Mississippi and North Carolina, respectively. No other state
represented more than 10% of the total originations in 1995 and
1996. Management believes that the securitization of the
installment contracts does not change the nature of credit risk
concentration.
D-29 (Continued)
<PAGE> 188
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(13) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company
disclose estimated fair values for its financial instruments.
Because no market exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions and
other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in
assumptions significantly affect the estimates and, as such, the
derived fair value may not be indicative of the value negotiated in
an actual sale and may not be comparable to that reported by other
companies.
In addition, the fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated
business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains
and losses can have a significant effect on fair value estimates
and have not been considered in the estimates. Fair value
estimates, methods and assumptions for significant financial
instruments are set forth below (in thousands):
<TABLE>
<CAPTION>
Carrying Estimated
value fair value
--------- ----------
<S> <C> <C>
December 31, 1995
-----------------
Installment contracts $22,398 23,966
======= =======
Amounts due under securitizations $19,720 20,363
======= =======
December 31, 1996
-----------------
Installment contracts $86,972 80,152
======= =======
Amounts due under securitizations $ 9,784 9,456
======= =======
</TABLE>
Installment Contracts
The fair values are estimated for loans in bankruptcy status and
the retained portion of installment contracts sold in
securitizations by discounting projected gross cash flows using
an interest rate that is commensurate with the risks involved
and consistent with rates a non-affiliated purchaser may
require. The fair values for performing loans and delinquent
loans are estimated as a discounted value of the amount due.
The discount factors for delinquent loans are based on the
number of payments delinquent.
D-30 (Continued)
<PAGE> 189
MS FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Amounts Due Under Securitizations
The fair values are estimated for amounts due under securitization
by discounting projected gross cash flows using an interest rate
that is commensurate with the risks involved and consistent with
rates a non-affiliated purchaser may require.
(14) Contingencies
The Company is a defendant in litigation in which the plaintiffs contend
that the Company's practice of selling and financing of ancillary
products is unlawful. The plaintiffs also contend that the Company
required the plaintiffs to purchase one or more ancillary products
as a condition of purchasing the plaintiffs' installment contracts.
The plaintiffs seek unspecified actual, statutory and exemplary
damages, cancellation of finance charges under their installment
contract, recovery of finance charges previously paid, prejudgment
and post judgment interest and attorneys' fees. Although the
Company denies any liability or fault with respect to these
allegations, the Company agreed to a tentative net cash settlement
of $375 thousand in January 1997, if such settlement is paid by
July 1, 1997 ($425 thousand if paid afterwards). During 1996, the
Company accrued $375 thousand as a liability based on the tentative
settlement agreement. Management anticipates that the settlement
will be finalized under these terms prior to July 1, 1997.
On January 15, 1997, an action was commenced against the Company to
recover certain fees pursuant to the Warehouse Facility discussed
in note 7. The plaintiff seeks to recover $438 thousand, plus
interest costs, attorneys fees and other costs incurred by the
plaintiff as a result of the Company's alleged breach of contract.
In the opinion of management, this litigation will not have a
material effect on the Company's results of operations or financial
condition.
In addition, in the normal course of business, the Company is subject to
various other pending and threatened litigation. In the opinion of
management, the ultimate outcome of the matters will not have a
material impact on the Company's financial statements.
D-31
<PAGE> 190
ANNEX E
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Certified Public Accountants' Report E-2
Consolidated Balance Sheets as of March 31, 1997 and March 31, 1996 E-3
Consolidated Statements of Operations for the year ended March 31, 1997, the six months E-4
ended March 31, 1996, and the year ended September 30, 1995
Consolidated Statement of Changes in Stockholders' Equity (Capital Deficit) for the year E-5
ended March 31, 1997, the six months ended March 31, 1996 and the year ended September 30,
1995
Consolidated Statements of Cash Flows for the year ended March 31, 1997, the six months E-6
ended March 31, 1996, and the year ended September 30, 1995
Notes to Consolidated Financial Statements E-7
</TABLE>
E-1
<PAGE> 191
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Stockholders
Search Financial Services Inc.
(f/k/a Search Capital Group, Inc.)
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Search
Financial Services Inc. (f/k/a Search Capital Group, Inc.) and its subsidiaries
(the "Company") as of March 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity (capital deficit),
and cash flows for the year ended March 31, 1997, the six months ended March
31, 1996, and the year ended September 30, 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 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, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Search Financial Services Inc. (f/k/a Search Capital Group, Inc.) and its
subsidiaries at March 31, 1997 and 1996, and the results of their operations
and cash flows for the year ended March 31, 1997, the six months ended March
31, 1996, and the year ended September 30, 1995 in conformity with generally
accepted accounting principles.
/s/ BDO SEIDMAN, LLP
----------------------------
BDO Seidman, LLP
Dallas, Texas
May 23, 1997
E-2
<PAGE> 192
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
ASSETS
- ------
Gross contracts receivable (Note 6) $62,325 $37,086
Unearned interest (10,636) (6,435)
------- -------
Net contracts receivable 51,689 30,651
Allowance for credit losses (5,854) (13,353)
Loan origination costs 5,852 3,984
Amortization of loan origination costs (4,379) (3,578)
------- -------
Net contract receivables - after allowance
for credit losses & other costs 47,308 17,704
------- -------
Cash and cash equivalents 12,249 17,817
Vehicles held for resale 1,196 566
Deferred note offering cost, net of depreciation
and amortization of $1,672 and $1,141 in 1997
and 1996, respectively 155 -
Property and equipment, net 1,608 1,062
Intangibles, net of $450 amortization in 1997 (Note 4) 6,252 -
Other assets 755 197
------- -------
Total assets $69,523 $37,346
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Lines of credit (Notes 6 & 8) $23,715 $ -
Note payable (Note 7) 9,596 2,283
Accrued settlements (Notes 16 & 17) 540 688
Accounts payable and other liabilities 2,760 7,356
Subordinated note payable (Note 7) 5,000 -
Accrued interest 271 15
Redeemable warrants (Notes 2 & 4) 1,035 593
------- -------
42,917 10,935
------- -------
Stock repurchase commitment (Note 10) 2,078 2,078
------- -------
Stockholders' Equity (Note 9)
- --------------------
Convertible Preferred stock 201 154
Common stock 252 248
Additional paid-in capital 78,047 79,124
Accumulated deficit (52,760) (54,043)
Treasury stock - (1,150)
------- -------
Total stockholders' equity 25,740 24,333
Notes receivable - stockholders (Note 11) (1,212) -
------- -------
24,528 24,333
Total liabilities and stockholders' equity $69,523 $37,346
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
E-3
<PAGE> 193
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands except per share data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, 1996 Year Ended
March 31, 1997 (Note 1) September 30, 1995
-------------- ---------------- ------------------
<S> <C> <C> <C>
Interest revenue $10,004 $ 3,541 $13,472
Interest expense 2,306 1,306 11,205
------- ------- --------
Net interest income 7,698 2,235 2,267
Reduction of (provision for) credit losses
(Note 6) 7,017 (4,982) (3,128)
------- ------- --------
Net interest income (loss) after reduction
of (provision for) credit losses 14,715 (2,747) (861)
------- ------- --------
General and administrative expense 13,392 8,098 15,881
Settlement expense 40 535 2,837
Reorganization expense - - 315
------- ------- --------
Operating and other expense 13,432 8,633 19,033
------- ------- --------
Income (loss) before extraordinary item 1,283 (11,380) (19,894)
Extraordinary gain on discharge of
debt (Notes 2 & 7) - 8,709 -
------- ------- --------
Net income (loss) 1,283 (2,671) (19,894)
Preferred stock dividends 6,154 327 240
------- ------- --------
Net loss attributable to common
stockholders $(4,871) $(2,998) $(20,134)
======= ======= ========
$ (1.45) $ (8.96) $ (17.96)
Loss per common share before
extraordinary item
Gain on extraordinary item - 6.67 -
------- ------- --------
Loss per common share (Notes 9 & 10) $ (1.45) $ (2.29) $ (17.96)
======= ======= ========
Weighted average number of
common shares outstanding 3,366 1,306 1,121
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
E-4
<PAGE> 194
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Statement of Changes in Stockholders' Equity (Capital Deficit) (Notes 3 and 9)
For the year ended March 31, 1997, six months ended March 31, 1996 and year
ended September 30, 1995 (In Thousands except per share amounts)
<TABLE>
<CAPTION>
Treasury Stock
---------------------- --------------------- ------------------- ---------------------
Preferred Stock-12% Preferred Stock-9%/7% Common Stock Preferred Stock-9%/7%
---------------------- --------------------- ------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 50,000 $ 4 - $ - 1,462,191 $ 117 - $ -
-------------------------------------------------------------------------------------------------
Stock purchase at May 5, 1995 - $ - - $ - - $ - - $ -
Stock repurchase commitment - - - - (115,418) (9) - -
Preferred stock dividends - - - - - - - -
Net loss - - - - - - - -
-------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 50,000 $ 4 - $ - 1,346,773 $ 108 - $ -
-------------------------------------------------------------------------------------------------
Exercise of options - $ - - $ - 4,480 $ 1 - $ -
Class action suit settlement - - - - 231,000 18 - -
(Note 16)
Reorganization (Note 2) - - 1,878,956 150 1,514,375 121 - -
Preferred stock dividends - - - - - - - -
Net loss - - - - - - -
-------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996 50,000 $ 4 1,878,956 $ 150 3,096,628 $248 - $ -
-------------------------------------------------------------------------------------------------
Debt conversion - Hall Financial
Group, Inc. (Note 5) - $ - - $ - 312,500 $ 25 - -
Additional investment - Hall
Financial Group, Inc. (Note 5) - - 254,100 20 204,800 16 - -
Investment - Alex. Brown & Sons,
Incorporated - - - - 26,462 2 - -
Acquisition - Dealers Alliance
Credit Corp. (Note 4) - - 319,257 26 159,629 13 - -
Conversion of 9%/7% preferred to
common - - (13,755) (1) 27,511 2 - -
Stock repurchase - Hall
Financial Group, Inc. (Note 5) - - - - - - 254,100 (20)
Acquisition - U.S. Lending
Corporation (Note 4) - - 271,867 22 231,066 18 - -
Retirement of treasury stock - - (254,100) (20) (895,599) (72) (254,100) 20
Preferred stock dividends - - - - - - - -
Net income - - - - - - - -
-------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 50,000 $ 4 2,456,325 $197 3,162,997 $252 - $ -
=================================================================================================
<CAPTION>
Treasury Stock
------------------------
Common Stock Stockholders'
------------------------ Paid-In Accumulated Equity
Shares Amount Capital Deficit (Capital Deficit)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1994 315,799 $ (25) $ 27,006 $(31,478) $ (4,376)
---------------------------------------------------------------------------------
Stock purchase at May 5, 1995 62,500 $ (1,125) $ $ - $ (1,125)
Stock repurchase commitment - - (2,069) - (2,078)
Preferred stock dividends - - (240) - (240)
Net loss - - - (19,894) (19,894)
---------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 378,299 $ (1,150) $24,697 $(51,372) $(27,713)
---------------------------------------------------------------------------------
Exercise of options - $ - $ 10 $ - $ 11
Class action suit settlement
(Note 16) - - 2,595 - 2,613
Reorganization (Note 2) - - 52,149 - 52,420
Preferred stock dividends - - (327) - (327)
Net loss - - - (2,671) (2,671)
---------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1996 378,299 $ (1,150) $ 79,124 $(54,043) $ 24,333
---------------------------------------------------------------------------------
Debt conversion - Hall Financial
Group, Inc. (Note 5) - $ - $ 1,692 $ - $ 1,717
Additional investment - Hall
Financial Group, Inc. (Note 5) - - 4,310 - 4,346
Investment - Alex. Brown & Sons,
Incorporated - - 150 - 152
Acquisition - Dealers Alliance
Credit Corp. (Note 4) - - 4,521 - 4,560
Conversion of 9%/7% preferred to
common - - (1) -
Stock repurchase - Hall
Financial Group, Inc. (Note 5) 517,300 (8,980) - - (9,000)
Acquisition - U.S. Lending
Corporation (Note 4) - - 4,463 - 4,503
Retirement of treasury stock (895,599) 10,130 (10,058) - -
Preferred stock dividends - - (6,154) - (6,154)
Net income - - - 1,283 1,283
---------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 - $ - $ 78,047 $(52,760) $ 25,740
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
E-5
<PAGE> 195
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended Year Ended
March 31, 1997 March 31, 1996 September 30, 1995
-------------- ----------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,283 $ (2,671) $(19,894)
Adjustments to reconcile net income (loss) to
cash used in operations:
Provision for (reduction of) credit losses (7,017) 4,982 3,128
Accretion of warrant debt 122 - - -
Amortization of deferred offering costs 60 1,221 2,840
Amortization of loan origination costs 868 641 1,047
Amortization of goodwill and intangibles 450 - -
Depreciation and amortization 531 262 384
Extraordinary gain on discharge of debt - (8,709) -
Loss on disposition of fixed assets - 112 -
Changes in assets and liabilities:
Decreases (increases) in other assets, net (246) 470 (86)
Increases (decreases) in accounts payable
and accrued expense (5,290) (449) 1,840
---------- --------- --------
Cash used in operations (9,239) (4,141) (10,741)
---------- --------- --------
INVESTING ACTIVITIES:
Purchase of contract receivables including
origination fees (39,042) (5,471) (24,830)
Principal payments on contract receivables
including proceeds from sales of vehicles 30,993 17,921 47,652
Purchases of property and equipment (856) (132) (711)
(Increases) decreases in restricted cash - 8,105 (4,519)
---------- --------- --------
Cash provided by (used in) investing (9,135) 20,423 17,592
---------- --------- --------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit 15,295 1,225 (2,429)
Notes payable proceeds - - 1,779
Notes payable repayments - - (5,077)
Capital lease repayments (67) (24) (58)
Notes payable offering costs (215) - (198)
Proceeds from sale of stock, net of expense 4,346 - -
Proceeds from exercise of options - 12 -
Notes receivable - stockholders (1,212) - -
Purchase of treasury stock (4,000) - (1,125)
Payment of dividends (4,724) (120) (240)
---------- --------- --------
Cash provided by (used in) financing activities 9,423 1,093 (7,348)
---------- --------- --------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (8,951) 17,375 (497)
Net cash acquired (Note 4) 3,383 - -
Cash and cash equivalents - beginning 17,817 442 939
---------- --------- --------
Cash and cash equivalents - ending $ 12,249 $ 17,817 $ 442
========== ========= ========
SUPPLEMENTAL INFORMATION (Note 20):
Cash paid for interest $ 2,050 $ 71 $ 9,272
========== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 196
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
General. The accompanying consolidated financial statements include
the accounts of Search Financial Services Inc. (f/k/a Search Capital Group,
Inc.) ("Search") and its subsidiaries (the "Company") as follows:
Automobile Credit Holdings, Inc.
Automobile Credit Acceptance Corp. ("ACAC")
Consumer Dealer Autocredit Corporation
Newsearch, Inc.
Search Capital Acquisition Corp.
Search Financial Services Company
Search Financial Services of Florida, Inc.
Search Financial Services of Georgia, Inc.
Search Financial Services of Louisiana, Inc.
Search Financial Services of Oklahoma, Inc.
Search Financial Services of Puerto Rico, Inc.
Search Financial Services of Tennessee, Inc.
Search Financial Services of Texas, Inc.
Search Mortgage Services of Tennessee, Inc.
Search Funding Corp. ("SFC")
Search Funding II, Inc.
Search Funding III, Inc.
Search Funding IV, Inc.
Search Funding V, Inc.
During fiscal 1997, the special purpose subsidiaries of Search which
raised money through the issuance of interest bearing notes for the purchase of
contract receivables (the "Fund Subsidiaries") were dissolved. The balance
sheet as of March 31, 1996 and the statements of operations and cash flows for
the periods ended March 31, 1996 and September 30, 1995 include the Fund
Subsidiaries in the consolidation (see note 2).
In 1996, the Company changed its fiscal year end to March 31.
Effective May 16, 1997, the name of Search was changed from Search Capital
Group, Inc. to Search Financial Services Inc.
In November 1996, the Company effected a 1-for-8 reverse stock split.
All references in the financial statements and notes to the number of shares
outstanding, the number of shares subject to warrants and options and per share
amounts have been retroactively restated to reflect the reverse split.
Basis of Consolidation. The consolidated financial statements include
the accounts of the Company, after elimination of all significant intercompany
accounts and transactions, and have been prepared in accordance with generally
accepted accounting principles.
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, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Contracts Receivable, Allowance for Credit Losses, and Interest
Income. The Company records receivables purchased at cost. Contractual
finance charges are recorded as unearned interest and amortized to interest
income using the interest method. An initial allowance for credit losses is
recorded at the acquisition of a receivable equal to the difference between the
amount financed and the acquisition cost, which is what the Company estimates
to be fair value. The Company considers all of its contracts receivable to be
consumer installment loans to
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<PAGE> 197
individuals. In accordance with Statement of Financial Accounting Standards
No. 114 ("SFAS No. 114"), these receivables are reviewed individually for
impairment generally using the receivable's contractual delinquency or
repossession status. All receivables which exceed 60 days contractual
delinquency or with respect to which the underlying collateral has been
repossessed are considered impaired. Once impaired, a receivable is placed on
nonaccrual status and written down to its net realizable value, and no interest
income is recognized until the receivable returns to nonimpaired status.
Therefore, at impairment, the Company writes down the receivable to its
estimated net realizable value, which is the fair value of the underlying
collateral if it has been repossessed or the estimated recoverable cash flow if
no repossession has occurred. If the measured amount of the impaired
receivable is less than the Company's net recorded investment in the
receivable, the Company recognizes a charge to provision for credit losses in
the amount of the deficiency and increases the allowance for credit losses by a
corresponding amount. The provision for credit losses is adjusted for any
differences between the final net proceeds from resale of the underlying
collateral and the estimated net realizable value. All payments received on
impaired receivables are considered a return of principal. Generally, the
Company charges off a receivable against the allowance for credit losses at 180
days contractual delinquency if no significant payments have been received in
the last six months, or earlier after receipt of the sale proceeds from
liquidation of the collateral securing the receivable. Subsequent proceeds
received on a previously charged-off receivable are recorded as a recovery to
the allowance for credit losses. Any excess of cost paid ("premium") for net
receivables acquired is recorded as an asset and amortized over the life of the
related loans acquired as an adjustment to yield using the interest method. All
amounts are stated as gross receivables, which include unearned interest,
unless otherwise indicated.
Loan Origination Costs. The Company performs substantially all of the
functions associated with origination of its receivables and capitalizes the
related costs. The portion capitalized is amortized by the interest method
against income as an adjustment of yield.
Vehicles Held for Resale. Vehicles held for resale represents the
estimated collateral value of motor vehicles in the Company's possession and
are carried at the lower of cost or estimated net realizable value (estimated
auction value less estimated costs to sell at the time of repossession). The
Company classifies a loan as vehicle held for resale upon physically
repossessing the vehicle and until the vehicle is sold at auction. The
deficiency balance, if any, is then charged off.
Deferred Notes Payable Offering Costs. Costs directly related to
notes payable offerings were capitalized and amortized to expense by the
interest method over the contractual terms of the notes. Deferred offering
costs were the commissions, printing, legal, accounting and other expenditures
incurred in issuing the notes to the investors.
Property and Equipment. Property and equipment includes assets which
are depreciated over three-year and five-year lives and leasehold improvements
which are amortized over the remaining term of the lease.
Cost in Excess of Fair Value of Net Assets Acquired and Other
Intangibles. Cost in excess of the fair value of net assets acquired is
amortized on a straight-line basis over 90 months. Other intangibles, which
include customer lists and dealer networks, are being amortized over 10 to 15
years using the straight-line method. The Company continually monitors its
cost in excess of net assets acquired (goodwill) and its other intangibles to
determine whether any impairment of these assets has occurred. In making such
determination with respect to goodwill, the Company evaluates the performance,
on an undiscounted basis, of the underlying businesses which gave rise to such
amounts. With respect to other intangibles, the Company bases its
determination on the performance, on an undiscounted basis, of the related
intangibles.
Net Loss Per Share Attributable to Common Stockholders. The net loss
per share attributable to common stockholders has been computed based on the
weighted average number of shares of Search common stock outstanding during
each period and after deducting preferred stock dividends declared. Common
stock equivalents are included in the calculations except when their effect
would be antidilutive.
Income Taxes. The Company files a consolidated federal income tax
return. The Company uses the asset and liability method to provide for income
taxes under which deferred tax assets and liabilities are recognized for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
E-8
<PAGE> 198
Statement of Cash Flows. For purposes of reporting cash flows, the
Company considers short term cash investments with original maturities of three
months or less to be cash equivalents.
Recent Accounting Pronouncements. In June 1996, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 125). SFAS No. 125 requires that an
entity recognize the financial and servicing assets it controls and the
liabilities it has incurred and derecognize financial assets when control has
been surrendered and derecognize liabilities when extinguished. SFAS No. 125
provides standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. It is generally effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. Management of Company believes that SFAS No. 125 has no current
impact on the Company there exist no significant transactions as contemplated
by SFAS 125; however, SFAS 125 may have a material impact on its future
financial statements, if in those periods the Company completes a
securitization transaction.
2. CHAPTER 11 BANKRUPTCY FILING OF THE FUND SUBSIDIARIES AND CONFIRMATION
OF THE JOINT PLAN OF REORGANIZATION
As of March 31, 1996, the Fund Subsidiaries consisted of six public
and two private corporations as follows:
Automobile Credit Fund 1991-III, Inc. - Private
Automobile Credit Finance, Inc. - Public
Automobile Credit Partners, Inc. - Private
Automobile Credit Finance 1992-II, Inc. - Public
Automobile Credit Finance III, Inc. - Public
Automobile Credit Finance IV, Inc. - Public
Automobile Credit Finance V, Inc. - Public
Automobile Credit Finance VI, Inc. - Public
In August 1995, the Fund Subsidiaries filed for reorganization under
Chapter 11 of the U. S. Bankruptcy Code. Search and its unrestricted
subsidiaries did not seek protection under the Code, but Search was a
co-proponent of a joint plan of reorganization for the Fund Subsidiaries. On
March 4, 1996, the Court entered an order ("Confirmation Order") confirming the
Third Amended Plan of Reorganization (the "Joint Plan") for all of the Fund
Subsidiaries, effective on March 15, 1996 (the "Effective Date").
Total secured claims of all noteholders under the Joint Plan were
$53,240,000, and total unsecured claims were $16,080,000, for total claims of
$69,320,000, which comprised the total of notes payable and accrued interest
due the noteholders (see Note 7). The Joint Plan allowed noteholders to choose
one of two options. Under one of the options (the "Equity Option"),
noteholders received with respect to the secured portion of their claims shares
of Search common stock, shares of a new series of 9%/7% convertible preferred
stock and a cash payment equal in amount as if dividends had been calculated on
the 9%/7% convertible preferred stock from July 1, 1995 to the Effective Date.
Under the other option (the "Collateral Option"), noteholders would receive
with respect to the secured portion of their claims distributions of the
proceeds of the continued collection or sale of the motor vehicle receivables
securing their notes. In accordance with the Joint Plan, the number of shares
issued was calculated as of the Effective Date so that noteholders received
shares of common stock and 9%/7% convertible preferred stock having a value
equal, on a fully diluted basis, to 75% of the value of all shares of 9%/7%
convertible preferred stock, common stock, 12% senior convertible preferred
stock, warrants, stock options and rights then outstanding, or agreed to be
issued by Search (with certain exceptions, including any shares issued to Hall
Phoenix/Inwood Ltd., ("HPIL") under the Funding Agreement referred to in Note
5). At a special stockholders' meeting on March 1, 1996, stockholders of
Search approved amendments to Search's Certificate of Incorporation increasing
Search's authorized capital stock to 130,000,000 shares of common stock and
60,000,000 shares of preferred stock.
Before the Effective Date, Value Partners, Ltd. purchased all of the
secured claims of noteholders who had elected the Collateral Option
(approximately $12,800,000 of original note principal amount) and changed the
election for such secured claims to the Equity Option. The selling noteholders
retained their unsecured claims. As a
E-9
<PAGE> 199
consequence of this transaction, 100% of the secured claims of noteholders
received treatment under the Equity Option.
With respect to the unsecured portion of noteholders' claims, the
noteholders and any other holders of unsecured claims are entitled to receive
from Search a pro rata share of warrants (the "Warrants") to purchase an
aggregate of 625,000 shares of common stock. These Warrants will be issued
after the unsecured claims of non- noteholders are determined by the bankruptcy
court. (see Note 9). The Company is required to redeem all unexercised
Warrants at $2.00 for each share of stock subject to the Warrants in March
2001. The Warrants are considered debt and have been recorded at their
estimated fair value. The accretion from fair value to the redemption amount
is recorded as interest expense over the term of the Warrants using the
interest method.
The Joint Plan required that a trust ("Litigation Trust") be
established for the benefit of the noteholders, with a total funding of
$350,000. The Litigation Trust is authorized to pursue claims and causes of
action of the Fund Subsidiaries and of certain participating noteholders.
Proceeds will be distributed pro rata to noteholders.
On the Effective Date, the net assets of the Fund Subsidiaries were
transferred to Search. The Fund Subsidiaries' notes and the indebtedness
represented by those notes were deemed canceled when the Confirmation Order
became final. The trust indentures for the notes, and all related
restrictions, were also deemed canceled. As a result of the implementation of
the Joint Plan and the cancellation of the notes, a net extraordinary gain from
the extinguishment of debt was reported in the amount of $8,709,000 (see Note
7).
The Fund Subsidiaries accounted for all transactions, where
applicable, related to the reorganization proceedings in accordance with
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" ("SOP 90-7") issued by the American Institute of
Certified Public Accountants.
3. REVERSE STOCK SPLIT
In August 1996, the Board of Directors of Search authorized a
one-for-eight reverse stock split that became effective on November 22, 1996
following stockholder approval. All references in the financial statements and
notes to the number of shares outstanding, the number of shares subject to
warrants and options and per share amounts have been retroactively restated to
reflect the reverse split decreased number of common and preferred shares
outstanding.
4. ACQUISITIONS
In November 1996, Search Funding III, Inc., a wholly-owned subsidiary
of Search, completed its acquisition of certain assets of U.S. Lending
Corporation ("USLC"). USLC conducted purchasing and servicing of used motor
vehicle receivables in Deerfield Beach, Florida. USLC had been operating under
Chapter 11 of the U.S. Bankruptcy Code. The acquisition was accounted for as
an asset purchase. Accordingly, results of operations related to the acquired
assets have been included in the consolidated financial statements since the
date of acquisition. The purchase price was allocated to the net assets
acquired based upon their estimated fair value. Search purchased USLC's net
assets, valued at $4,819,000, for 231,066 shares of common stock, 271,867
shares of 9%/7% convertible preferred stock, and Warrants to purchase 154,960
shares of common stock. The assets acquired were approximately $3,500,000 in
cash, gross receivables of approximately $1,800,000 and an undetermined amount
of delinquent accounts and foreclosure deficiency balance accounts.
In August 1996, Search Funding IV, Inc. ("SFIV"), a wholly-owned
subsidiary of Search, acquired all of the assets and assumed certain
liabilities of Dealers Alliance Credit Corp. ("DACC"). DACC conducted
purchasing and servicing of used motor vehicle receivables in Atlanta, Georgia.
DACC had purchased loans from over 1,000 new and used car dealers, primarily
in Georgia, Texas, Tennessee and Florida. The Company has been using the DACC
facilities as a regional marketing branch for southeastern states, a collection
center and as a full-service consumer loan facility. The acquisition was
accounted for under the purchase method of accounting. Accordingly, results of
operations related to the acquired assets have been included in the
consolidated financial statements since
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<PAGE> 200
the date of acquisition. The purchase price was allocated to the net assets
acquired based upon their estimated fair value. For DACC's net assets, valued
at approximately $21,000,000, Search delivered 159,629 shares of common stock,
319,257 shares of 9%/7% convertible preferred stock, and Warrants to purchase
159,629 shares of common stock with a total value of $4,795,000. In addition,
the Company assumed approximately $17,450,000 in bank debt under a restructured
line of credit.
The calculation of the purchase price and allocation to the acquired
assets of DACC is as follows (in thousands):
<TABLE>
<S> <C>
Net contracts receivable $14,380
Cash and cash equivalents 753
Vehicles held for sale 284
Property and equipment 222
Customer lists 2,175
Dealer network 2,200
Other assets 835
-------
Total estimated fair value of assets acquired 20,849
-------
Liabilities assumed 18,239
Fair value of Search equity instruments issued, including redeemable
warrants treated as debt 4,795
Direct acquisition costs 143
-------
Total cost $23,177
-------
Cost in excess of fair value of net assets acquired and
other identifiable intangibles $ 2,328
=======
</TABLE>
The Company periodically evaluates the recoverability and remaining
life of the excess value and determines whether it should be completely or
partially written-off or the amortization period accelerated. The Company will
recognize an impairment of excess value to the extent that the undiscounted
estimated future operating cash flows of the acquired assets are determined to
be less than the carrying amount of the excess value. If an impairment of
excess value were to occur, the Company would reflect the impairment through a
reduction in the carrying value of such excess value.
The Warrants issued in both the USLC and DACC transactions have
redemption features which require the Company to redeem all unexercised
warrants at $2.00 for each share of stock subject to the Warrants in March
2001. The Warrants are considered debt and have been recorded at their
estimated fair value. The accretion from fair value to redemption amount is
recorded as interest expense over the term of the warrants using the interest
method.
In September 1996, the Company acquired approximately $12,000,000 in
gross receivables from Eagle Finance Corp. for a total cash price of
approximately $9,600,000. In November 1996, the Company acquired approximately
$21,000,000 in gross receivables from MS Financial, Inc. for a total cash price
of approximately $14,400,000. The receivables were purchased at a premium over
the net assets acquired. The premiums are amortized over the life of the
related portfolio as an adjustment to yield using the interest method.
5. TRANSACTIONS WITH HALL AND AFFILIATES
In November 1995, Search entered into a Funding Agreement (the
"Funding Agreement") with Hall Financial Group, Inc. ("HFG"). Pursuant to the
Funding Agreement, HFG made loans totaling $2,283,000 (the "HFG Notes") to
Search. The HFG Notes could, at the election of HFG or its assignee, be
converted into a maximum of 312,500 shares of Search common stock. Effective
April 2, 1996, HPIL, as assignee of the HFG Notes, converted the HFG Notes into
312,500 shares of Search common stock. Because the conversion price
E-11
<PAGE> 201
specified in the HFG Notes for these shares was less than the full amount due
under the HFG Notes, Search paid to HPIL the remaining portion of the debt
evidenced by the HFG Notes ($567,000) in cash.
The Funding Agreement also provided to HFG the option to purchase
common stock, 9%/7% convertible preferred stock, and Warrants. Effective April
2, 1996, HPIL, as assignee of HFG, fully exercised this purchase option by
paying $4,346,000 to Search for 204,800 shares of common stock, 254,100 shares
of 9%/7% convertible preferred stock, and warrants to purchase 484,522 shares
of common stock, including Warrants to purchase 84,522 shares.
Pursuant to the Funding Agreement, HFG designated two nominees who
were elected to Search's Board of Directors.
In October 1996, the two directors filed suit against Search seeking
access as directors to certain of the Company's books and records and Search
initiated legal action against the two directors and HPIL. In November 1996,
the Company, the two directors and HPIL entered into a settlement agreement.
As a result of the agreement, Search paid HPIL $4,000,000 in cash and executed
a $5,000,000 subordinated note (see Note 7) to repurchase from HPIL and the
directors all of their 517,300 shares of common stock, 254,100 shares of 9%/7%
convertible preferred stock and warrants to purchase 484,522 shares of common
stock, including Warrants to purchase 84,522 shares, and to settle all claims
against Search. The parties also agreed to dismiss all litigation and mutually
release each other, and the two directors resigned from the Board of Directors.
The value of the settlement approximated the market value of the securities
acquired by the Company at the date of the agreement. The maturity date of the
subordinated note is November 21, 2000; however, the note must be repaid in full
earlier if the Company sells more than, or in a proportionate amount if the
Company sells less than, $20,000,000 of equity or certain debt securities for
cash (see Note 19).
6. CONTRACTS RECEIVABLE, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME
The Company records receivable purchases at cost. Contractual finance
charges are recorded as unearned interest and amortized to interest income
using the interest method. As discussed below, amortization of interest income
ceases upon impairment. An initial allowance for credit losses is recorded at
the acquisition of a receivable equal to the difference between the amount
financed and the acquisition cost, which is what the Company estimates to be
fair value. An additional allowance may be recorded at acquisition if it is
determined that the discount recorded as an allowance is not adequate to cover
expected losses.
In accordance with SFAS No. 114, receivables are analyzed on a
loan-by-loan basis. The Company evaluates the impairment of receivables
generally based on the receivables' contractual delinquency. The Company
considers receivables that are contractually delinquent 60 days or more or with
respect to which the underlying collateral has been repossessed to be impaired.
When the receivable is considered impaired, interest income ceases to be
recognized. Once impaired, the Company looks to the underlying collateral for
repayment of the receivable. Therefore, at impairment, the Company writes down
the receivable to its estimated net realizable value, which is the fair value
of the underlying collateral if it has been repossessed or the estimated
recoverable cash flow if no repossession has occurred. If the measured amount
of the receivable is less than the Company's net recorded investment in the
impaired receivable, the Company recognizes a charge to provision for credit
losses in the amount of the deficiency and increases the allowance for credit
losses by a corresponding amount. The provision for credit losses is adjusted
for any differences between the final net proceeds from resale of the
underlying collateral and the estimated net realizable value. Generally, the
Company charges off a receivable against the allowance for credit losses at 180
days contractual delinquency, if no significant payments have been received in
the last six months, or, if earlier, after receipt of the sale proceeds from
liquidation of the collateral securing the receivable. Subsequent proceeds
received on a previously charged-off receivable are recorded as a recovery to
the allowance for credit losses. Any excess of cost paid ("premium") for net
receivables acquired is recorded as an asset and amortized over the life of the
related loans acquired as an adjustment to yield using the interest method.
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<PAGE> 202
The Company's receivables, allowance for credit losses and net
receivables after allowance for credit losses, excluding net loan origination
costs, are summarized below on a consolidated basis (in thousands):
<TABLE>
<CAPTION>
Net
Allowance Receivables
Total for After Allowance
Number of Unpaid Unearned Credit for
As of March 31, 1997 Receivables Installments Interest Losses Credit Losses
- --------------------- ----------- ------------ -------- ------ -------------
<S> <C> <C> <C> <C> <C>
Impaired receivables 465 $ 2,269 $ 334 $ 993 $ 942
Unimpaired receivables 8,956 60,056 10,302 4,861 44,893
---------------------------------------------------------------------
Total 9,421 $62,325 $10,636 $ 5,854 $45,835
=====================================================================
As of March 31, 1996
- ---------------------
Impaired receivables(1) 421 $ 2,091 $ 380 $ 1,711 $ -
Unimpaired receivables(1) 7,575 34,995 6,055 11,642 17,298
---------------------------------------------------------------------
Total 7,996 $37,086 $ 6,435 $ 13,353 $17,298
=====================================================================
As of September 30, 1995
- ------------------------
Impaired receivables 2,323 $12,919 $ 1,644 $ 11,275 $ -
Unimpaired receivables 9,805 53,758 11,462 7,348 34,948
---------------------------------------------------------------------
Total 12,128 $66,677 $13,106 $ 18,623 $34,948
=====================================================================
</TABLE>
(1) Status as defined in the previous paragraphs of this Note. Certain
unimpaired receivables may be considered problem loans.
The change in the allowance for credit losses is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
March 31, March 31, September 30,
1997 1996 1995
--------- --------- -------------
<S> <C> <C> <C>
Balance, beginning of period $ 13,353 $18,623 $44,633
Allowance recorded upon purchase of receivables 9,908 2,194 9,613
Increase in allowance for credit losses 1,774 4,982 3,128
Proceeds received on previously charged-off -
accounts 2,448 2,296
Reclassification for inventory value (855) 1,238 (1,809)
Receivables charged off against allowance (11,983) (15,980) (36,942)
Reduction in allowance for credit losses (8,791) - -
-------- ------- -------
Balance, end of period $ 5,854 $13,353 $18,623
======== ======= =======
Net credit losses as a percent of average net
receivables 30% 36% 56%
</TABLE>
The allowance for credit losses contained both a provision for
anticipated loan losses and a reduction of the provision for loan losses from
prior estimates for the year ended March 31, 1997 as follows (in thousands).
<TABLE>
<CAPTION>
March 31, 1997
--------------
<S> <C>
Provision for loan losses $ 1,774
Reduction in allowance (8,791)
--------
Net effect on statement of operations 7,017
Less proceeds received on previously charged-off accounts 2,448
--------
Non cash reduction of credit loss provision $ 4,569
========
</TABLE>
No reconciliation of the credit loss provision is provided for 1996
and 1995 as there was no reduction in the allowance for credit losses in those
years.
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<PAGE> 203
The effect of non-accrual receivables on interest income in each
of the following periods was as follows (in thousands):
<TABLE>
<CAPTION> Six Months
Year Ended Ended Year Ended
March 31 March 31, September 30,
1997 1996 1995
-------- ---------- -------------
<S> <C> <C> <C>
Interest income
As originally contracted $606 $1,480 $ 4,522
As recognized (211) (98) (1,033)
---- ------ --------
Reduction of interest income $395 $1,382 $ 3,489
==== ====== ========
</TABLE>
There were no commitments to lend additional funds to customers whose
loans were classified as non-accrual as of March 31, 1997 and 1996, and
September 30, 1995.
At March 31, 1997, contractual maturities of receivables were as follows (in
thousands):
<TABLE>
<CAPTION>
2001 and
1998 1999 2000 Thereafter Total
-------- --------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Future payments receivable $28,541 $18,710 $11,359 $3,715 $62,325
Less unearned interest 5,424 3,404 1,276 532 10,636
------- ------- ------- ------ -------
Net contracts receivable $23,117 $15,306 $10,083 $3,183 $51,689
======= ======= ======= ====== =======
</TABLE>
In the opinion of management, a portion of the receivables at March
31, 1997 will be repaid or extended either before or past the contractual
maturity date. In addition, some of those receivables will be charged off
before maturity. The above tabulation, therefore, is not to be regarded as a
forecast of future cash collections.
The Company's receivables are generally installment receivables having
a fixed annual percentage rate ("APR"). These receivables are predominantly
secured by motor vehicles, although during the fiscal year ended March 31,
1997, the Company commenced making and acquiring non-auto consumer loans that
may be secured or unsecured. The obligors of the Company's receivables are
domestically-based at the time the receivables are originated or purchased by
the Company from a dealer, and the Company has no material amount of foreign
receivables.
Receivables will become nonaccrual status due to their contractual
delinquency exceeding 60 days or due to repossession of underlying collateral.
The Company also considers certain delinquent receivables that are in the
contractual status of less than 60 days past due to be potential problem
receivables. Uncertainty as to overall economic conditions, regional
considerations, and current trends in portfolio growth cause the Company to
review these receivables for potential problems.
The Company considers Texas and Tennessee to be states with receivable
concentrations, because receivables with obligors in each of these states
exceed 10% of total outstanding receivables. Most of the Company's receivables
are due from individuals located in large metropolitan areas of Texas and other
southern and western states. To some extent, realization of the receivables
will be dependent on local economic conditions. The Company holds vehicle
titles as collateral for all motor vehicle receivables until such receivables
are paid in full.
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<PAGE> 204
7. NOTES PAYABLE AND ACCRUED INTEREST
Notes payable at March 31, 1997 consist of the following (in
thousands):
<TABLE>
<S> <C>
Subordinated note payable to HPIL, bearing interest, due monthly, at 14% through
May 1996, 15% thereafter through November 1997, 16% thereafter
through May 1998 and 17% thereafter; principal due on the earlier of (i)
November 21, 2000 or (ii) the sale by the Company for cash of any equity
securities or subordinated debt, in which event all principal is payable if
at least $20,000,000 is sold or a proportionate portion is payable if
less than $20,000,000 is sold (see Note 5). $ 5,000
Note payable to banks, bearing interest at prime rate plus 1% (9.50% at March 31,
1997), due monthly, requiring monthly principal payments equal to
the positive difference between all cash proceeds received by SFIV during
the month and the sum of all operating expenses incurred by SFIV during
the month, with remaining principal due August 2, 1997, collateralized
by all assets of SFIV totaling $14,479,000 at March 31, 1997 (see Note 4 ). 9,596
-------
Total notes payable $14,596
=======
</TABLE>
During March 1996, as a result of the confirmation of the Joint Plan
(see Note 2), $69,320,000 of debt and accrued interest was extinguished in
exchange for common stock, 9%/7% convertible preferred stock, Warrants and
other provisions of the Joint Plan. The extinguishment of debt resulted in a
net extraordinary gain of $8,709,000. The following table shows the components
of the gain (in thousands):
<TABLE>
<S> <C>
Total Notes and accrued interest $ 69,320
Value of exchange (56,367)
Administrative claims (2,400)
Unamortized debt offering costs (1,844)
---------
Net gain of debt extinguishment $ 8,709
=========
</TABLE>
Certain of the Fund Subsidiaries stopped accruing interest on the
remaining unpaid principal of these notes as of their maturity. As these Fund
Subsidiaries defaulted, it was management's position that the accrual of
interest was not warranted since the Fund Subsidiaries did not have sufficient
assets to fully retire the principal portion of their notes.
The August 1995 bankruptcy filing of the individual Fund Subsidiaries
was an event of default for each of the Fund Subsidiaries under the terms of
its indenture agreement. In accordance with SOP 90-7, contractual interest
obligations, which are relieved from payment as a result of the Chapter 11
proceedings, are not accrued. Therefore, no interest expense was recorded for
the six months ended March 31, 1996. For the year ended September 30, 1995,
contractual interest on the above obligations amounted to $12,453,000 which was
$1,500,000 in excess of reported interest expense (see Note 2).
8. LINES OF CREDIT
In September 1996, Search Funding II, Inc. ("SFII"), a wholly-owned
subsidiary of Search, entered into a revolving credit agreement (the "Line")
with Hibernia National Bank ("HNB"). The Line bears interest at the prime rate
plus 1% (9.50% at March 31, 1997) and is guaranteed by Search. The Line has a
maximum commitment of $25,000,000 and is limited to a percentage of eligible
contracts held by SFII. The Line is secured by all SFII assets totaling
$23,865,000 at March 31, 1997 and expires on September 11, 1999. Search and
SFII must comply with covenants that require the maintenance of a minimum
adjusted net worth of $20,000,000 and a leverage ratio of not more than 5 to 1.
In June 1994, SFC entered into an agreement for a line of credit with
General Electric Capital Corporation ("GECC"). The line of credit initially
had a maximum borrowing commitment of $20,000,000 and was limited to a
percentage of eligible contracts held by SFC. The line of credit was secured
by all SFC assets and was guaranteed by
E-15
<PAGE> 205
Search. The Joint Plan called for Search to fully satisfy its obligation to
GECC. As a result, in March 1996, Search paid GECC $173,000, which included
all principal and interest owing as of that date. This payment fully satisfied
Search's obligation to GECC.
9. STOCKHOLDERS' EQUITY
12% Senior Convertible Preferred Stock. As of March 31, 1997, Search
had issued 50,000 shares of its 12% senior convertible preferred stock. The
12% senior convertible preferred shares have a $.01 par value and a liquidation
preference of $40.00 per share, plus accrued and unpaid dividends. The 12%
senior convertible preferred shares are convertible at the option of the holder
into one share of Search common stock for each share of 12% senior convertible
preferred stock and entitle the holder to one vote per share. The shares carry
a cumulative annual dividend of $4.80 per share, payable quarterly. Search may
cause conversion of the shares to common stock or may redeem the shares at
$40.00 per share, plus accrued and unpaid dividends, upon the occurrence of
certain events specified in the Certificate of Designation for the 12% senior
convertible preferred shares.
9%/7% Convertible Preferred Stock. As of March 31, 1997, Search had
issued, or committed to issue, in connection with the Joint Plan 1,879,000
shares of the 9%/7% convertible preferred stock. During April 1996, Search
issued an additional 254,100 shares of 9%/7% convertible preferred stock in
connection with the HFG transaction. It repurchased these shares in November
1996 (see Note 5). The Company issued 319,257 shares of the 9%/7% convertible
preferred stock in connection with its acquisition of the assets of DACC and
certain indebtedness of DACC and 271,867 shares of the 9%/7% convertible
preferred stock in connection with the acquisition of assets of USLC (see Note
4).
The 9%/7% convertible preferred shares have a $.01 par value and a
liquidation preference of $28.00 per share, plus accrued and unpaid dividends.
The shares carry a non-cumulative annual dividend of $2.52 per share until
March 31, 1999 and $1.96 per share thereafter. The 9%/7% convertible preferred
shares are currently convertible at the option of the holder into two shares of
common stock for each share of 9%/7% convertible preferred stock and entitle
the holder to one vote per share. Search may cause conversion of the shares to
common stock upon the occurrence of certain events specified in the Certificate
of Designation for the 9%/7% convertible preferred stock. Any shares not
converted prior to March 15, 2003 will automatically be converted into no more
than three shares of common stock based on a formula specified in the
Certificate of Designation.
Common Stock. As of March 31, 1997, 3,162,997 shares of the common
stock were outstanding. In addition, at that date there were outstanding
various warrants and options to purchase a total of 1,114,399 shares of common
stock, Search was obligated to issue 146,381 shares of common stock pursuant to
the settlement of certain litigation in April 1996 (see Note 16) and Search had
committed to issue warrants and options to purchase an additional 812,500
shares of common stock, including Warrants to purchase 625,000 shares.
Warrants. Search is authorized to issue Warrants to purchase up to
10,000,000 shares of common stock pursuant to a warrant agreement dated as of
March 22, 1996, as amended. Warrants to purchase 625,000 shares are to be
issued to noteholders and other unsecured claim holders under the Joint Plan
(see Note 2), and Warrants to purchase 314,589 shares of common stock issued in
connection with the acquisition of the assets of DACC and USLC are outstanding
(see Note 4). Warrants to purchase 84,522 shares of common stock, and other
warrants to purchase 375,000 shares of common stock, were repurchased from HPIL
in November 1996 (see Note 5).
The exercise price per share of the Warrants is $18.00 and increases
by $2.00 on March 15 of each successive year through 2000. The Warrants will
expire on March 14, 2001, at which time Search must redeem all unexercised
Warrants at a redemption price of $2.00 per share. Because the Warrants must
be redeemed if not exercised, they have been classified outside of permanent
equity as debt at fair value. An accretion to the redemption amount of
$1,879,000 will be made over the term of five years using the interest method.
Employee Stock Options and Other Common Stock Warrants. On August 1,
1994, the Board of Directors adopted, subject to stockholder approval, the 1994
Employee Stock Option Plan (the "Plan"). The Plan was approved by Search's
stockholders at their annual meeting held in May 1995. Employees of the
Company and directors of
E-16
<PAGE> 206
subsidiaries are eligible to participate in the Plan. As of March 31, 1997,
approximately 160 persons were eligible to participate. The Plan expires on
July 31, 2004, although any option outstanding on such date will remain
outstanding until it either has expired or has been fully exercised. The Plan
is administered by the Compensation Committee of the Board. Options granted
under the Plan generally are not transferable other than by will or by the laws
of descent and distribution. The options usually vest over a three-year
period. A total of 625,000 shares of common stock has been reserved for sale
upon exercise of options granted under the Plan. As of March 31, 1997, options
to acquire approximately 400,000 shares of common stock were outstanding under
the Plan and 118,000 were vested as of March 31, 1997. In addition, Search had
committed to issue to an executive officer of the Company options or cashless
warrants, at the officer's option, for 187,500 shares of common stock upon
certain financial performance or stock price targets being attained.
The Company has issued to non-employee directors, key employees and
certain consultants cashless warrants, the purposes of which are similar to
those of grants of options under the Plan. These cashless warrants are
immediately vested, are exercisable for 10 years, are transferable and are
generally granted at not less than market value at the date of grant. As of
March 31, 1997, cashless warrants to purchase 372,500 shares of common stock
and other warrants (excluding the Warrants) to purchase 31,250 shares of common
stock were outstanding.
During the fiscal year ended March 31, 1997, Search issued options to
employees to purchase 269,625 shares of common stock under the Plan and issued
cashless warrants to purchase 198,125 shares of common stock to non-employee
directors of, and consultants to, Search at average exercise price of $7.20.
During the six months ended March 31, 1996, Search issued options to employees
to purchase 230,000 shares of common stock under the Plan and cashless warrants
to purchase 436,000 shares of common stock to non-employee directors, key
employees and consultants at an average exercise price of $10.08. Certain
options issued during the year ended September 30, 1995 were repriced to
reflect the current market prices at that time.
During the fiscal year ended September 30, 1995, options to acquire
113,813 shares of common stock were issued to officers and employees of the
Company at average exercise price of $12.84.
During the six months ended March 31, 1996, 4,480 warrants were
exercised at an average price of $2.68 per share.
Recent Accounting Pronouncement. The Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), in October 1995 to establish
accounting and reporting standards for stock-based employee compensation plans
such as stock option and restricted stock plans. SFAS 123 defines a fair
value-based method of accounting for compensation expense for stock-based plans
and encourages all entities to adopt that method of accounting.
Entities electing to remain with the accounting treatment outlined in
APB Opinion No. 25, "Accounting for Stock Issued to Employees," are required to
make pro forma disclosures of net income and net income per share as if the
fair value based method had been adopted. The Company accounts for its
stock-based compensation under APB Opinion No. 25 under which no compensation
cost has been recognized. Had compensation costs for stock-based compensation
been determined consistent with SFAS No. 123, the Company's net loss and loss
per common share would have been adjusted to the following pro forma amounts
for options and warrants issued during the periods shown below (in thousands,
except per share data):
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
March 31, 1996 March 31,1997
----------------- -------------------
<S> <C> <C>
Net loss attributable to common stockholders:
As reported $2,998 $4,871
Pro forma 3,418 5,633
Net loss per share
As reported 2.29 1.45
Pro forma 2.62 1.67
</TABLE>
The fair value of each option and warrant grant is estimated on the
date of grant using an option pricing model with the following weighted average
assumptions used for grants in fiscal 1996 and 1997: risk-free investment rate
of
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<PAGE> 207
6.22 in 1996 and 6.37 in 1997, no expected dividends, expected life of ten
years, and expected volatility of 53% in both years.
10. STOCK CANCELLATION AND STOCK REPURCHASE AGREEMENT
In May 1995, Search purchased from one of its directors 62,500 shares
of Search's common stock for $18 per share, market value on that date.
Simultaneously with the purchase, the director resigned from the Board. Search
was also given an irrevocable proxy expiring in May 1997 to vote 101,515 shares
of common stock held by a trust formed by the former director. These shares
held by the trust and an additional 13,902 shares held by an individual
retirement account of the former director were subject to a "put" to the
Company in May 1997 for $18 per share, the market value at the date of the
agreement. These shares are shown on the balance sheet outside of permanent
equity at the redemption price. If these redeemable shares were excluded from
net loss per share, the fiscal 1997, 1996 and 1995 loss per share would be
$(1.49), $(2.48) and $(19.76), respectively. In May 1997, the Company
repurchased all of the shares held by the trust and the director's retirement
account for a total cash price of $2,078,000.
11. RELATED PARTY TRANSACTIONS
In April 1997, the Company commenced a private offering to accredited
investors of up to $35 million of subordinated notes with warrants to purchase
shares of common stock. Inter-Atlantic Securities Corp. ("Inter-Atlantic") is
one of the placement agents for the offering. A director of Search is a senior
partner of Inter-Atlantic. The Company has paid Inter-Atlantic a marketing fee
of $60,000, and has and will continue to reimburse it for expenses it incurs,
in connection with the offering. Pursuant to its agreement with
Inter-Atlantic, if the offering is consummated, the Company will pay
Inter-Atlantic a placement fee equal to 3% of the principal amount of
subordinated notes sold. One-half of the fee will be paid in cash and one-half
will be paid in subordinated notes with warrants.
The Company also engaged Inter-Atlantic to act as its exclusive agent
for raising senior debt in the form of warehousing lines of credit from
securities firms during the fiscal year ended March 31, 1997. For such
services, the Company has agreed to pay Inter-Atlantic a fee equal to .375% of
the principal amount of such senior debt from firms contacted by Inter-Atlantic
on the Company's behalf.
In May 1996, the Company retained Alex. Brown & Sons, Incorporated
("Alex. Brown") to act as the Company's financial adviser for an initial term
of one year. The agreement renews from year-to-year thereafter and provides
for an annual retainer which is credited against compensation with respect to
particular transactions. A director of Search is a Managing Director of Alex.
Brown. The Company paid $288,000 to Alex. Brown in 1996.
Alex. Brown has served as financial advisor to the Company in
connection with the Company's proposed acquisition of MS Financial, Inc. The
Company has agreed to pay Alex. Brown a fee of $175,000 upon consummation of
such acquisition, and to pay Alex. Brown a fee of $50,000 for rendering its
opinion regarding the fairness of the acquisition to the Company from a
financial point of view. Alex. Brown also conducted a valuation of the
securities issued by the Company in its acquisition of certain assets and
liabilities of DACC. The Company agreed to pay Alex. Brown a $75,000 fee
for this valuation analysis.
In July 1996, the Company implemented a loan program for its directors
and senior executive officers to finance the purchase of shares of common stock
and 9%/7% convertible preferred stock in open market transactions. The loans
are evidenced by promissory notes from the borrowers, bear interest at the
prime rate, payable quarterly, and mature three years from the date made. The
shares of stock purchased with the proceeds of the loans are pledged to the
Company as security for the loans. The aggregate amount of these loans
outstanding at March 31, 1997 was $1,212,255.
Consulting fees of approximately $24,000 were paid to a former
director for work relating to potential receivables portfolio purchases in
fiscal 1997.
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<PAGE> 208
Brean Murray & Co., Inc. ("BMCI") received a $200,000 success fee from
Search on March 25, 1996, subsequent to confirmation of the Joint Plan. The
Chairman of BMCI is a director of Search.
Additional related party transactions are described in Notes 9 and 10.
12. INCOME TAXES
The Company does not have a provision for income tax expense for the
year ended March 31, 1997 as its income is completely offset by the utilization
of its net operating loss carry-forwards.
The Company files a consolidated income tax return. The components of
the Company's net deferred tax asset as of March 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax asset:
- -------------------
Allowance for credit losses & $ 1,711 $ 1,260
inventory reserve
Net operating loss carry-forwards 18,394 13,000
Other tax credit carry-forwards 90 90
Accrued settlement costs - 170
Valuation allowance (20,195) (14,520)
--------- ----------
Total deferred tax asset $ - $ -
========= ==========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based
upon the level of taxable losses in the current and prior years and
uncertainties for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will not realize the benefits of these deductible differences and has
fully offset the net deferred tax asset with a valuation allowance. Future
changes in the valuation allowance will be recorded as a component of net
income or loss on the statement of operations.
At March 31, 1997, the Company had a net operating loss carryforward
for Federal income tax purposes of approximately $54,100,000 which will expire,
if unused, in the following years (in thousands):
<TABLE>
<CAPTION>
Years of Expiration Amount
------------------- ------
<S> <C>
2009 $27,200
2010 16,320
2011 4,060
2012 6,520
-------
Total $54,100
=======
</TABLE>
The debt-to-equity conversion effected pursuant to the Joint Plan
resulted in approximately $8,709,000 of debt discharge income in 1996.
Additionally, this debt-to-equity conversion resulted in an ownership change as
defined under Section 382 of the Internal Revenue Code. This has resulted in a
limitation on the utilization of the net operating losses incurred prior to
March 31, 1996 of approximately $3,000,000 per year.
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<PAGE> 209
13. COMMITMENTS
The Company commenced operation of six new leased consumer loan facilities
during fiscal 1997 in Dallas, Texas, Baton Rouge, Louisiana, Atlanta, Georgia,
Carolina, Puerto Rico, Bayamon, Puerto Rico, and Oklahoma City, Oklahoma. The
leases on these facilities expire through 2002.
In May 1997, the Company signed a 58-month lease for its new office
headquarters located in Dallas, Texas. In April 1996, the Company signed a
60-month lease for approximately 6,000 square feet of space in Dallas, Texas to
serve as the Company's collection center.
Total operating lease commitments of the Company are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending March 31,
-------------------------------------------------------------------------------
1998 1999 2000 2001 2002 Thereafter
-------- -------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Office leases $826 $839 $833 $803 $781 $563
Office equipment leases 139 77 9 - - -
---- ---- ---- ---- ---- ----
Total operating leases $965 $916 $842 $803 $781 $563
==== ==== ==== ==== ==== ====
</TABLE>
In addition to the operating leases, the Company has one capitalized
lease with payments of $81,000 per year through 1998 and $67,000 in 1999.
14. CHANGE IN FISCAL YEAR
In 1996, the Company changed its fiscal year end to March 31. The
following table reflects the unaudited comparable period of fiscal 1995 (in
thousands except share data):
<TABLE>
<CAPTION>
Six months ended
March 31, 1995
-----------------
<S> <C>
Interest revenue $ 8,694
Interest expense 6,437
--------
Net interest income 2,257
Provision for credit losses 5,337
--------
Net interest loss after provision for credit losses 3,080
Operating expenses 7,221
--------
Net loss 10,301
Preferred stock dividends 120
--------
Net loss attributable to common shareholders $ 10,421
========
Net loss per common share $ 8.96
========
Weighted average number of common shares 1,162
========
</TABLE>
The adjustments to the March 31, 1995 interim financial statement
consist of only normal recurring adjustments.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. Because no market exists
for a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions and other factors. These estimates are
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<PAGE> 210
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions significantly affect the estimates and, as such, the derived fair
value may not be indicative of the value negotiated in an actual sale and may
not be comparable to that reported by other companies.
In addition, the fair value estimates are based on existing financial
instruments without attempting to estimate the value of anticipated business
and the value of assets and liabilities that are not considered financial
instruments. In addition, the tax ramifications related to the realization of
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates. Fair value estimates
for significant financial instruments are set forth below (in thousands):
<TABLE>
<CAPTION>
Carrying Estimated
value fair value
-------- ----------
<S> <C> <C>
March 31, 1997
Net contracts receivable $51,689 $49,621
======= =======
March 31, 1996
Net contracts receivable $30,651 $26,360
======= =======
</TABLE>
16. SETTLEMENT OF O'SHEA CLASS ACTION LAWSUIT
On July 7, 1994, a class action civil lawsuit was filed against
Search, certain of its officers and directors, one of its former accounting
firms and the lead underwriter and one of its principals involved in the
issuance of Search's common stock. This action was filed in the United States
District Court for the Northern District of Texas, Dallas Division, and was
styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al. In July 1994,
similar actions styled John R. Boyd, Jr., et al. v. Search Capital Group, Inc.,
et al, and Gary Odom v. Search Capital Group, Inc., et al, were also filed.
The above cases were consolidated in September 1994 (the "O'Shea Class Action
Suit").
The O'Shea Class Action Suit was filed on behalf of all purchasers of
Search's common stock during the period beginning December 10, 1993 and ending
through July 5, 1994, which was the date that Search made a public announcement
regarding lower earnings. The O'Shea Class Action Suit contended that Search
made misstatements in its registration statements concerning the Company's
computerized system, accounting methodologies used by the Company,
collectibility of its receivables and repossession rates of autos that secured
its receivables. The plaintiffs also complained of allegedly false public
filings, press releases and reports issued during 1994. The plaintiffs sought
damages, rescission, punitive damages, pre-judgment interest, fees, costs,
equitable relief and or injunctive relief and such other relief as the court
deemed just and proper.
In April 1996, the court entered a Final Judgment and Order of
Dismissal approving a settlement (the "Settlement") entered into between Search
and counsel for the plaintiffs. The Settlement provided for a cash payment by
Search of $287,000 and the issuance by Search of its common stock with a value
of $2,613,000. As a result of the Settlement, Search issued 84,619 shares of
its common stock and is committed to issue an additional 146,381 shares of its
common stock.
17. LEGAL PROCEEDINGS
The Company and ACAC are defendants in a pending civil action filed in
the 153rd Judicial District Court, Tarrant County, Texas, styled Autostar
Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corp., Cause
No. 153-144940. The plaintiff in this action alleges the existence of a
partnership between the plaintiff and another defendant and seeks damages,
actual and exemplary, and an injunction for alleged conversion and
misappropriation of certain property, including computer programs, allegedly
owned by the plaintiff. In the petition, the plaintiff alleges that ACAC
wrongfully assisted its co-defendant and tortiuously interfered with the
plaintiff's contracts and business and has claimed, as actual damages,
$680,000. The Company believes that these allegations
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<PAGE> 211
are without merit and intends to vigorously defend itself at trial, which is
now scheduled in July 1997. No opinion can be given as to the final outcome of
this lawsuit.
The Company and certain of its former officers and directors are
defendants in a case styled Janice and Warren Bowe, et. al. vs. Search Capital
Group, Inc., et. al., Cause No. 1:95CV 649GR, filed in the Federal District
Court for the Southern District of Mississippi. The plaintiffs, who are former
holders of notes issued by three of the Fund Subsidiaries, allege violations of
the securities laws by the defendants and seeks unspecified damages,
rescission, punitive damages and other relief. The plaintiffs also seek
establishment of a class of plaintiffs consisting of all persons who purchased
notes issued by the three Fund Subsidiaries. Although no assurances can be
given, the Company believes it has meritorious defenses to this action and will
defend itself vigorously. The Company has been party to certain settlement
negotiations with discussions of amounts payable by the Company ranging from
reimbursements of expenses to $1,700,000 in cash and stock. However, as of May
23, 1997, negotiations have been suspended with no scheduled resumption. While
the ultimate outcome of this litigation cannot be determined, management has
established a reserve of $500,000 for expenses and losses from this litigation.
There are presently no other legal proceedings, threatened or pending,
relating to the Company which would, in the opinion of management, have a
material impact on earnings or the financial condition of the Company.
18. MERGER AGREEMENT
Search has entered into an Agreement and Plan of Merger dated as of
February 7, 1997 (the "Merger Agreement") with MS Financial, Inc. ("MS")
pursuant to which a wholly-owned subsidiary of Search will merge into MS (the
"Merger"), resulting in MS becoming a wholly-owned subsidiary of Search.
Pursuant to the Merger, each outstanding share of common stock of MS will be
converted at the effective time of the Merger into the right to receive a
fraction (the "Exchange Ratio") of a share of Search common stock determined by
reference to the average price per share of the Search common stock for the
10-day trading period ending on the fifth business day prior to the special
meeting of stockholders of MS at which the Merger Agreement will be considered
for adoption (the "Average Trading Price"). The Exchange Ratio will equal
$2.00 (the "Per Share Amount") divided by the Average Trading Price, subject to
a maximum of .46 and a minimum of .34. The Per Share Amount and the maximum
and minimum Exchange Ratios are subject to downward adjustment in certain
circumstances.
The Merger is subject to customary conditions, including stockholder
approval and the finalization of acceptable arrangements with MS' lenders.
Approval of the Merger by MS' stockholders requires the affirmative vote of a
majority of the outstanding shares of common stock of MS. Pursuant to a
Stockholders Agreement dated as of February 7, 1997, MS' principal
stockholders, which together own approximately 77% of MS' outstanding common
stock, have agreed to vote their shares in favor of the Merger.
If the Merger Agreement is terminated under certain conditions, MS
may be obligated to pay the Company a fee of $700,000. Further, the Merger
Agreement calls for a monthly fee of $100,000 payable by MS to the Company for
operational assistance to MS between February 7, 1997 and the consummation of
the Merger. Such operational assistance fee is to be applied against the
termination fee described above, if applicable. If the Merger Agreement is
terminated under other conditions, Search may be obligated to pay MS a fee of
$250,000. For the year ended December 31, 1996, MS reported interest income of
$14,909,000, a net loss of $22,014,000 and a net loss per share of $2.11.
19. SUBSEQUENT EVENTS
In April 1997, the Company commenced a private offering to accredited
investors of up to $35 million of seven-year senior subordinated notes with
warrants to purchase shares of Search's common stock. Additionally, the
Company has signed a letter of intent to obtain a $100,000,000 warehouse line
of credit with an investment banking firm. In addition to the $100,000,000
warehouse line of credit, the Company is also negotiating a $4,000,000
short-term line of credit with the same investment banking firm.
E-22
<PAGE> 212
20. NONCASH ACTIVITIES
During the 12 months ended March 31, 1997, the Company issued a
$5,000,000 note payable in connection with the purchase of stock from HFG.
Additionally, the Company had an increase in the valuation adjustment for
inventory of $855,000, a decrease of $1,238,000 and an increase of $1,809,000
for the year ended March 31, 1997, six months ended March 31, 1996 and the year
ended September 30, 1995, respectively. On April 2, 1996, HFG converted
$2,283,000 in loans into 312,500 shares of common stock. During the year ended
March 31, 1997, the Company acquired substantially all of the assets of DACC
and USLC in stock transactions, for which the Company received cash,
receivables, fixed assets and assumed certain liabilities (Note 4).
Additionally, Alex. Brown converted fees owed for investment banking services
into common stock during the year ended March 31, 1997.
E-23
<PAGE> 213
ANNEX F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K/A
AMENDMENT NO. 2
(Mark One) [ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended
[X] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Transition Period from
October 1, 1995 to March 31, 1996.
Commission File No. 0-9539
S E A R C H C A P I T A L G R O U P, I N C.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1356819
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
700 NORTH PEARL, SUITE 400
PLAZA OF THE AMERICAS
NORTH TOWER, LOCK BOX 401
DALLAS, TEXAS 75201-7490
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 965-6000
------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
9%/7% CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE
WARRANTS EXPIRING MARCH 14, 2001
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of June 17, 1996, there were 27,208,225 outstanding shares (with an
aggregate market value of $35,914,857) of Registrant's $.01 par value common
stock, and the aggregate market value of shares held by non-affiliates of the
Registrant was $26,541,957 based on the average of the high and low sale price
and 20,107,543 shares held by non-affiliates.
<PAGE> 214
PART I
ITEM 1. BUSINESS
OVERVIEW OF THE COMPANY.
Search Capital Group, Inc. (herein called "Search" and together with
its consolidated subsidiaries called the "Company") is an industry specific
financial services Company specializing in the purchase and management of used
motor vehicle receivables purchased from franchise and independent automobile
and light truck dealers ("Dealers"). The Dealers originate these receivables by
financing the sale of vehicles to purchasers who do not qualify for credit from
traditional lending sources. These receivables generally carry imputed interest
rates in the range of 18% to 26%
The automobile finance industry is the second largest consumer finance
market in the United States totaling $353 billion as of December, 1995,
according to the Federal Reserve Board. Automobile financing is usually
provided by finance companies affiliated with manufacturers and banks, credit
unions and independent finance companies. The financings are generally
segmented according to the type of car sold (new or used) and the credit
characteristics of the borrower (generally, prime or non-prime). Non-prime
borrowers are individuals who, due to either incomplete or imperfect credit
histories, are unable to obtain traditional financing through a bank or one of
the finance companies affiliated with manufacturers. The Company specializes in
financing used cars and trucks to these non-prime borrowers through its
wholly-owned operating subsidiary, Automobile Credit Acceptance Corp.
DESCRIPTION OF HISTORICAL OPERATIONS AND REORGANIZATION OF FUND SUBSIDIARIES.
Prior to November 1994, the Company primarily financed the purchase of
used motor vehicle receivables through the private and public sale of
interest-bearing notes (the "Notes") issued by wholly owned subsidiaries
organized specifically for this purpose (the "Fund Subsidiaries") and through
reinvestment of operating cash flow. Each offering of Notes was issued by a
newly organized subsidiary without recourse to Search or its other
subsidiaries. The Notes offered by each of the Fund Subsidiaries were not rated
by a national credit agency.
After November 1994, due primarily to higher than expected losses in
the collection of its receivables held by these Fund Subsidiaries, the Company,
directed by then existing management, abandoned its Note offering activities
and sharply reduced all receivables purchasing activities while attempting to
evaluate and, where necessary, modify or remedy purchasing and collection
procedures. At the same time, the Company's directors began searching for new
management which could further identify problems, stabilize operations, and
develop a financial plan and strategy for turnaround and future growth. On
January 20, 1995, George C. Evans joined the Company as President, Chief
Executive officer, and a director of the Company. Mr. Evans was appointed
Chairman of the Board of Directors on May 5, 1995. Mr. Evans has over 30 years
of experience in the consumer lending and financial services industry,
including having served as President and Chief Operating Officer of Associates
Financial Services, Vice Chairman of Associates Corporation of North America
and Chairman and Chief Executive Officer of Associates International and its
subsidiaries. During 1995, four other managers who previously held senior
positions in finance, operations, and marketing at Associates Corporation of
North America or its subsidiaries joined Search. For a detailed description of
current management, see Item 10, Directors and Executive Officers of the
Company.
From late 1994, shortly before Mr. Evans joined the Company, until
March 1996, the Company operated under financial constraints and limited
ability to raise new operating capital. The purchasing of receivables for the
Fund Subsidiaries was governed by trust indentures (the "Trust Indentures")
which restricted management's ability to alter its receivables purchasing
criteria in accordance with stricter standards developed by new management. In
addition, the Company's inability to access credit sources due to the
historical losses on the Company's receivables portfolio and limitations on
investment of funds repaid on existing portfolios dramatically reduced the
Company's ability to finance the purchase of new receivables. At the same time,
to improve the quality of the Company's portfolio of receivables purchasing
procedures were tightened and management significantly reduced the number of
Dealers from whom the Company would purchase receivables.
At Search's annual meeting of shareholders, held May 10, 1995, Search
announced a preliminary outline of a plan to convert the approximately $69
million debt owed by the Fund Subsidiaries into equity of Search. On August 14,
1995, in order to consummate the debt-to-equity conversion plan, it was
necessary for each of the Fund Subsidiaries to file for
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<PAGE> 215
reorganization under Chapter 11 of the U. S. Bankruptcy Code. On August 25,
1995, an organizational meeting was held by the U. S. Bankruptcy Trustee to
select a committee (the "Committee") to represent the Noteholders ("Creditors")
during the bankruptcy proceedings. On December 19, 1995, Search, the Fund
Subsidiaries and the Committee agreed to a consensual plan of reorganization.
On March 4, 1996, the Court entered an order (the "Confirmation Order")
confirming the Third Amended Joint Plan of Reorganization (the "Joint Plan")
for all of the Fund Subsidiaries, after sufficient affirmative votes for
confirmation of the Joint Plan were obtained from the holders ("Noteholders")
of the outstanding Notes issued by the Fund Subsidiaries. The Notes and the
Noteholders constituted essentially all of the indebtedness and creditors,
respectively, of the Fund Subsidiaries. The effective date of the Joint Plan
was March 15, 1996 (the "Effective Date").
As a consequence of effectiveness of Joint Plan, on the Effective
Date, the assets of the Fund Subsidiaries (less funding of a litigation trust
and professional fees) were transferred to Search by operation of law on the
Effective Date in exchange for Search Common Stock and 9%/7% Convertible
Preferred Stock and cash to be distributed to the former Noteholders of the
Fund Subsidiaries. Under the Joint Plan, the Notes and the indebtedness
represented by the Notes, together with their related Trust Indentures, were
deemed canceled upon the Effective Date.
OPERATIONS SINCE REORGANIZATION OF THE FUND SUBSIDIARIES.
Except for the historical information contained herein, this Form 10-K
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the section entitled Risk Factors.
Since confirmation of the Joint Plan, the Company has implemented new
programs intended to expand its receivables purchasing operations into higher
credit quality receivables. Although these new programs target the Company's
historical market of purchasers with non-standard credit histories, the Company
intends to focus more on purchasers with job and residence stability, higher
income, and re-established positive credit. Receivables purchased under the new
programs typically carry interest rates ranging from approximately 18% to 26%.
The receivables purchased under the new programs are generally secured by
automobiles up to 6 years in age, having been driven (i) no more than an
average of 25,000 miles per year and (ii) having fewer than 80,000 total miles.
For each receivable purchased pursuant to the new programs, the Company
generally receives an acquisition fee and purchases the receivables at a
discount, ranging from 8% to 12%, depending upon the value and the term of the
receivable which range from 24 to 60 months.
The Company purchases receivables from a network of automobile and
light truck Dealers ("Dealer Network") that originates motor vehicle
receivables through the sale of used automobiles and light trucks. During the
reorganization process, because the Company had abandoned its Note offering
activities and sharply reduced all receivables purchasing activities, it also
experienced a significant reduction in the size of the Dealer Network. The
Company is currently marketing its new programs to Dealers through the efforts
of employees and marketing representatives. The marketing representatives
include both individuals and organizations specializing in the marketing of
financing programs to Dealers.
The Dealers are unaffiliated with the Company. Each Dealer enters into
an agreement with the Company and agrees to use Company-approved contract
forms. Under the dealer agreements, the Company is under no obligation to
purchase any receivables from the Dealer.
It is the Company's goal to market the new programs primarily to
franchise Dealers and qualified independent Dealers. The Company has set
standards for Dealers to qualify as members of the Dealer Network. In most
cases, to qualify for membership in the Dealer Network, each Dealer must have
been in business at least two years, be in good standing with regulatory and
auto-association authorities and meet certain credit standards. The Company
generally verifies that a Dealer meets these standards through credit bureau
reporting services. Franchise Dealers normally qualify for membership in the
Dealer Network.
Membership in the Dealer Network can be terminated at the Company's
discretion. The Company personnel review the receivables submitted by and
purchased from each Dealer. Decisions to terminate a Dealer from the Dealer
Network are made on a case-by-case basis depending on the past performance of
the Dealer and performance of the receivables purchased from such Dealer.
2
<PAGE> 216
Dealers communicate and initiate receivable sales transactions
directly with the Company's centralized purchasing personnel by faxing a
consumer application to the Company. the Company's decision to purchase a
receivable is typically communicated to the Dealer in approximately one hour,
and if the application is approved, documentation is completed generally in one
week. the Company pays the Dealer for the sale of the receivable after receipt
and review of the original receivable contract and other required documents and
after verification procedures are completed.
Historically, the Company's principal market focus has been in the
southern and southwestern states where "self-help" repossession laws promote
efficient collection efforts with respect to defaulted receivables, and where
milder climates generate higher collateral values for used vehicles. See Item
1. Business. "Regulation." However, the Company is currently expanding the
market focus of its new programs in states with laws similar to those states in
which the Company currently operates.
Historically, the Company's receivables purchasing criteria were
governed by the terms of the Trust Indentures governing the Notes. The Trust
Indentures were canceled as of the Effective Date of the Joint Plan, and no
longer govern the criteria the Company uses to evaluate the quality of a
receivable. As of May 31, 1996, 93.2% of the receivables owned by the Company
were purchased using the criteria set forth in the Trust Indentures. The Trust
Indentures established specific criteria with respect to the price, purchase
discount, term, downpayment, installments and interest rate for the receivables
the Company purchases and also with respect to price, cost to the Dealer,
average wholesale value, age, mileage and make of the motor vehicles securing
such receivables. The Company believes that the most significant of these
criteria were as follows:
o The average purchase price of receivables could not exceed 53% of the
total remaining unpaid installments of the receivables;
o The average purchase price for a receivable could not significantly
exceed the approximate average wholesale value and/or the Dealer's
actual cost for the underlying financed vehicle;
o The receivable generally had to have an original term of 36 months or
less;
o The age of each financed vehicle could not generally exceed eight years
for automobiles or nine years for trucks;
o The obligor on the receivable was required to make a down payment in
cash plus a net trade-in allowance of at least 25% of the Dealer's
cost in the financed vehicle;
The new programs also target used vehicle motor vehicle receivables
whose obligors have non-prime credit histories, but place more emphasis on job,
income and residence stability and re-established positive credit of the
obligor. Receivables purchased under the new programs typically carry imputed
interest rates ranging from approximately 18% to 26%. The receivables purchased
under the new programs are generally secured by automobiles up to 6 years in
age, having been driven (i) no more than an average of 25,000 miles per year
and (ii) having fewer than 80,000 total miles. In connection with the new
programs, the Company has established criteria to evaluate the quality of
receivables. the Company believes that the most significant of these criteria
are as follows:
o The obligor must show one year verifiable residence and three years
traceable residence;
o the Company must be able to verify 1 year of employment for each
obligor;
o Obligor must show a positive pay history within the previous two
years;
o Obligor must show gross income of at least $1200 per month;
o The maximum payment for the purchased vehicle cannot exceed 20% of the
obligor's gross income;
o The debt to income ratio of the obligor cannot exceed 50% of gross
income;
o Downpayment must be 10% of the retail selling price of the vehicle.
The Company's receivables purchasing personnel review each receivable
for compliance with the foregoing criteria, utilizing standard and supporting
documentation provided via facsimile by the selling Dealer and national
computerized databases that automatically interact with the Company's
proprietary Auto Note Management System Software ("ANMS"). The Company
verifies, by reference to published wholesale vehicle value guides, the average
wholesale prices of the underlying vehicles. In most instances, the Company
performs this pre-purchase receivable evaluation within one hour, thereby
assisting the Dealer in the timely sale of the underlying vehicle. This one
hour turnaround time is considered by the Company to be an important
competitive factor, and the Company monitors its turnaround time through its
ANMS.
3
<PAGE> 217
The Company's underwriting strategy differs from many of its
competitors. Many of the Company's competitors make only bulk purchases of
receivables and/or retain recourse against the selling Dealer for non-payment
of the receivable through quasi-loan arrangements, dealer holdbacks or reserve
accounts or other collection collateral or guaranties. The purchase and credit
criteria and verification procedures also differ from competitor to competitor.
Certain other competitors will only purchase "seasoned" receivables, i.e.
receivables that have existed and performed in an acceptable manner for a
period of time.
In addition to the purchases of individually selected receivables, the
Company is currently seeking the acquisition of pools of non-prime credit
automobile receivables ("Bulk Purchases") from Dealers or other finance
companies. The Company expects to use the acquisition of Bulk Purchases as a
means of increasing the number of receivables in its portfolio of receivables.
The receivables forming a potential Bulk Purchase are analyzed on both an
individual and a pooled basis using criteria similar to the criteria used to
evaluate loans purchased from Dealers. In addition, the historical performance
of receivables forming a potential Bulk Purchase are analyzed. Individual
receivables that do not meet the Company's credit criteria will be excluded
from the Bulk Purchase, or if a large number of the receivables forming the
potential Bulk Purchase do not meet the Company's credit criteria, the entire
Bulk Purchase may be rejected.
Following the purchase of each receivable, the Company mails a
statement to each obligor a minimum of 5 days before each payment becomes due.
These statements instruct each obligor to remit payments directly to the
Company's post office box. Payments may also be made in person at the Company's
offices or via Western Union Quick Collect(TM) service or through Ace Cash
Express(TM). The Company's collections operations are currently based in
Dallas, Texas and, the Company operates branch collections offices in the
following cities: Garland, Texas; Arlington, Texas; Houston, Texas; and
Memphis, Tennessee.
The Company has a staff of collection personnel that monitor payments
of the receivables and that contact obligors via telephone when payments are
delinquent. Collections personnel generally have (i) a minimum of one year
collection experience, (ii) the ability to obtain corrective action on
delinquent accounts and (iii) knowledge and ability to comply with state and
federal debt collection laws. Generally, if the receivable shows any indication
of default, the receivable is subject to enhanced collection efforts, including
intensified telephone and written contacts aimed at identifying the likelihood
and expected amount of payment on the receivable. At any time thereafter, the
Company may (i) contract with an independent third party repossession firm to
locate and peacefully repossess the motor vehicle securing the receivable or
(ii) seek and obtain an order of a court of competent jurisdiction for turnover
of the motor vehicle. The decision to repossess a motor vehicle is made on a
case-by-case basis by a collections unit manager. Factors considered by these
unit managers include recent payments and willingness on the part of the
obligor to commit to payment upon a date certain. Any delays in repossession
expose the Company to the risk of reduced resale value for the vehicle due to
additional mileage and the possibility of damage or lack of necessary
maintenance or repairs to the vehicle. Company policy does not currently allow
an account's payments to be deferred except in very rare instances and only
with senior management approval.
The Company's collection and repossession activities are administered
with use of the ANMS. The Company's ability through the ANMS to relationally
cross-reference receivable collection statistics to a vehicle, Dealers,
customers and geographic locations assists the Company in monitoring
receivables and adjusting purchase procedures and prices.
Following repossession of a vehicle, the Company generally sells the
vehicle on a wholesale basis at the highest available bid at an unaffiliated
motor vehicle auction. During the period from October 1994 until December 1995,
the Company sold many of its repossessed vehicles directly to consumers at
three used car lots operated by the Company. The sale of the vehicles in this
manner, rather than on a wholesale basis, created a new undiscounted receivable
with associated risks of default and payment delays. The Company closed all
three lots by December 31, 1995.
The Company's current ANMS and related systems are connected with
outside databases, such as national credit bureaus and wholesale vehicle
valuation guides. These systems contribute to the Company's ability to satisfy
the Dealer Network's needs by enhancing the Company's ability to meet its
targeted one-hour receivable processing commitment. During August 1996, the
Company will begin combining the receivable processing capabilities of its ANMS
with a data processing and communications system developed by Norwest Financial
Information Services Group (the "Norwest System"). The Company believes that
the Norwest System will allow the Company to more efficiently expand its
operations into new regions of the United States, as well as provide the
Company with flexibility to expand its operations into other areas of consumer
lending.
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<PAGE> 218
RECEIVABLES CHARACTERISTICS
General. Set forth below is a summary of pertinent statistics
regarding the average active receivable in the Company's portfolio of motor
vehicle receivables, as of March 31, 1996 and September 30, 1995.
AVERAGE RECEIVABLE CHARACTERISTICS
<TABLE>
<CAPTION>
AS OF AS OF
March 31, 1996 SEPTEMBER 30, 1995
-------------- ------------------
<S> <C> <C>
Purchase price to customer of underlying vehicle $8,020 $8,026
Dealer's profit on receivable sale $963 $959
Age of vehicle 5.2 Years 5.9 Years
Wholesale value of vehicle $4,613 $4,640
Down payment (including net trade-in credit) $1,593 $1,588
Receivable term 31 Months 31.6 Months
Annual Percentage Rate 23.9% 24.2%
Semi-monthly payment $150 $150
Original receivable balance (principal and unearned interest) $9,569 $9,549
Purchase price for receivable $4,870 $4,969
Receivable cost as % of receivable balance 51% 52%
Receivable discount as % of receivable balance 49% 48%
</TABLE>
At March 31, 1996, the Company had an aggregate of 7,996 motor vehicle
receivables in its portfolio with an aggregate total unpaid balance of
$37,086,000, including $6,435,000 in unearned interest and $13,353,000 in
credit loss allowance. Additionally, the Company had a total of 333 vehicles
held for resale having an estimated value of approximately $566,000.
Seasonality. The Company's operations are seasonably impacted by
higher delinquency rates during certain holiday periods.
Delinquency. Generally, the Company considers a receivable to be
impaired if the contractual delinquency is greater than 60 days or the
collateral has been repossessed. Once impaired, the Company places the
receivable on nonaccrual status, which stops the recognition of interest
income. The following table breaks out the receivables that the Company
considers unimpaired or accrual status and impaired or nonaccrual status (i.e.,
contractual delinquency is greater than 60 days or repossessed collateral) as
of March 31, 1996 and September 30, 1995.
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<PAGE> 219
<TABLE>
<CAPTION>
MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES
(Dollars in thousands)
AS OF March 31, 1996 AS OF SEPTEMBER 30,1995
----------------------------------------- -------------------------------------------
Total (1) % of Total Total (1) % of Total
Number of Unpaid Unpaid Number of Unpaid Unpaid
Contractual Delinquency Receivables Installments Installments Receivables Installments Installments
----------------------- ----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Accrual Receivables
0 to 30 days past due 6,871 $31,816 86% 8,233 $45,464 68%
31-60 days past due 704 3,179 9% 1,572 8,294 12%
----- ------- ------ ------ ------- -----
Subtotal 7,575 34,995 95% 9,805 53,758 80%
----- ------- ------ ------ ------- -----
Nonaccrual Receivables
61-180 days past due 420 2,091 5% 1,696 9,182 14%
181+ days past due 1 - - 627 3,737 6%
----- ------- ----- ------ ------- -----
Subtotal 421 2,091 5% 2,323 $12,919 20%
----- ------- ----- ------ ------- -----
All Receivables (2) 7,996 $37,086 100.0% 12,128 $66,677 100.0%
===== ======= ===== ====== ======= =====
Vehicles held for resale
@ collateral value 333 $ 566 N/A 599 $ 601 N/A
===== ======= ====== =======
</TABLE>
(1) Includes unearned income.
(2) Active receivables exclude 333 and 599 accounts that have been reclassified
to vehicles held for resale at March 31, 1996 and September 30, 1995,
respectively.
The percentage of contractually delinquent accounts has decreased from
September 30, 1995 to March 31, 1996. At the end of September 30, 1995, 20% of
the Company's active contracts were at least 61 days contractually delinquent
compared to 5% at March 31, 1996. The decrease in accounts at least 61 days
contractually delinquent is due to increased collection efforts and tightened
credit criteria and the Company's charge-off policy implemented in June 1995.
FINANCING
Sale of Asset-Backed Notes by Fund Subsidiaries. Until November 1994,
the Company financed its receivables purchasing activities through public and
private sale of unrated, automobile receivables-backed Notes issued by its Fund
Subsidiaries. Generally, the sale of automobile receivables-backed securities
requires a rating by a rating agency. The Company did not seek such a rating
for its Notes. From 1992 until 1994, the Company sold a total principal amount
of approximately $72,000,000 of Notes through its Fund Subsidiaries. After
November 1994, due primarily to higher than expected losses in the collection
of its receivables held by these Fund Subsidiaries, the Company abandoned its
Note offering activities. See Item 1. Business. "Description of Historical
Operations and Reorganization of Fund Subsidiaries" above.
Financing with Hall Financial Group, Inc. and Affiliates. In November
1995, Hall Financial Group, Inc. ("HFG") provided interim financing of
approximately $2.3 million pending confirmation of the Fund Subsidiaries' Joint
Plan. After the Joint Plan's confirmation, in April 1996, HFG assigned its
rights to its subsidiary, Hall Phoenix/Inwood, Ltd. ("HPIL"), which exercised a
right to convert a portion of the debt into 2,500,000 shares of Search's Common
Stock. Search repaid the remaining $567,000 of debt. In addition, HPIL
purchased from Search 1,638,378 shares of Common Stock, 2,032,812 shares of
9%/7% Convertible Preferred Stock and five-year warrants to purchase, at $2.00
per share (increasing $0.25 per year), 676,178 shares of Common Stock in
consideration for a total cash payment of $4,346,000 to Search.
GECC Line of Credit. Upon confirmation of the Joint Plan, in March
1996, the Company retired the remaining debt of $173,000 owing on its line of
credit from General Electric Credit Corporation.
Effect of Joint Plan. As a result of the confirmation and
effectiveness of the Joint Plan, approximately $69,300,000 of debt owed by the
Fund Subsidiaries to Noteholders was canceled. The assets of the Fund
Subsidiaries (net of a $350,000 deposit to a litigation trust and $2,000,000
escrowed for payment for professional fees), consisting primarily of
approximately $29,000,000 of net receivables and $16,345,000 of cash, were
deemed transferred to Search. Following the effectiveness of the Joint Plan,
consummation of the transactions with HPIL in April 1996 and repayment of the
GECC line of credit, the Company had no borrowed debt, approximately
$31,000,000 in net receivables and approximately $21,600,000 in cash. See "Item
8. Financial Statements and Supplementary Data" and "Liquidity and Capital
Resources."
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<PAGE> 220
Future Financings. The Company presently intends to continue
purchasing receivables and expand its operations into other consumer lending
areas, both of which will require future financing. The Company is currently
pursuing several alternatives to meet its needs for liquidity. These financing
alternatives include subordinated debt financing, securitizations and bank
lines of credit.
COMPETITION
The Company has numerous competitors engaged in the business of buying
new and used motor vehicle receivables at a discount. The Company in the past
had few competitors that purchased receivables from high credit risk
individuals who purchased medium-priced, used motor vehicles in the Company's
then primary geographic markets consisting generally of the metropolitan areas
of Arizona, Georgia, Florida, South Carolina, Oklahoma, Tennessee and Texas.
The Company's new programs target receivables whose obligors have somewhat
lower credit risk than obligors of receivables previously purchased by the
Company. Though the Company expects to market the new programs in a more
diverse geographic region, the Company expects to encounter more competition in
the purchase of such lower risk receivables. The Company competes to some
extent with providers of alternative financing services, such as floor plan
lines of credit from financial institutions, lease financing and dealer
self-financing, and certain purchasers of receivables for higher-priced, used
motor vehicles. National or regional rental car companies, finance companies,
used car companies, auction houses, dealer groups or other firms with equal or
greater financial resources than the Company could elect to compete with the
Company in its market. These competitive factors could have a material adverse
effect upon the operations of the Company.
REGULATION
Numerous federal and state consumer protection laws impose
requirements upon the origination and collection of consumer receivables. State
laws impose finance charge ceilings and other restrictions on consumer
transactions and may require certain contract disclosures in addition to those
required under federal law. These requirements impose specific statutory
liabilities upon creditors who fail to comply with their provisions. In
addition, certain of these laws make an assignee (purchaser) of such contract
liable to the obligor thereon for any violations committed by the assignor
(seller). the Company's ANMS verifies the accuracy of disclosure for each
receivable that it purchases; however, the Company, as an assignee of such
receivables, may be unable to enforce some of its receivables or may be subject
to liability to the obligors under some of its receivables if such receivables
do not comply with various laws and regulations or the seller violated such law
or regulation.
In the event of default by an obligor on a receivable, the Company has
the remedies of a secured party under the Uniform Commercial Code ("UCC"). The
UCC remedies of a secured party include the right to repossession by self-help
means, unless such means would constitute a breach of the peace. Unless the
obligor voluntarily surrenders a vehicle, self-help repossession, by an
independent third-party repossession entity engaged by the Company, is the
method usually employed by the Company when an obligor defaults. Self-help
repossession is accomplished by retaking possession of the motor vehicle. If a
breach of the peace is likely to occur, or if applicable state law so requires,
the Company must obtain a court order from the appropriate state court and
repossess the vehicle in accordance with that order.
In most jurisdictions, including those states in which the Company
presently does or intends to do business, the UCC and other state laws require
the secured party to provide the obligor with reasonable notice of the date,
time, and place of any public sale or the date after which any private sale of
the collateral may be held. Unless the obligor waives his rights after default,
the obligor has the right to redeem the collateral prior to actual sale by
paying the secured party the unpaid installments (less any required discount
for prepayment) of the receivable plus reasonable expenses for repossessing,
holding, and preparing the collateral for disposition and arranging for its
sale, plus in some jurisdictions, reasonable attorneys' fees, or, in some
states, by payment of delinquent installments.
7
<PAGE> 221
EMPLOYEES
As of April 30, 1996 the Company had 98 employees, of which 64 were
engaged in receivables purchasing and collections, 6 dealing with the
repossession and resale of repossessed vehicles, 22 in administration and 6 in
senior management.
RISK FACTORS
The Company faces certain risks associated with the operation of it
business that in some cases have affected, and in the future could affect, the
Company's actual results from operations. These risk factors include, but are
not limited to, the following:
Availability of Funding. The purchase of contracts requires the
Company and/or its subsidiaries to raise significant amounts of funds from
various sources, including banks, finance companies, and other lenders. There
can be no assurance that lenders will provide sufficient credit on terms the
Company will find acceptable. One of the Company's planned financing sources is
expected to be securitizations. There can be no assurance that the Company's
future securitization activities will increase its profitability. Further,
there can be no assurance that funding will be available to the Company through
the issuance of automobile receivables-backed securities or, if available, that
it will be on terms acceptable to the Company.
Defaults on Automobile Receivables/Shift to New Credit Market. The
Company has no historical information related to the quality of receivables it
is currently purchasing under its new receivables purchasing programs. A
significant increase in delinquencies, repossessions, charge-offs or related
receivables could have a material adverse effect on the Company's financial
performance.
Leverage. The ratio of debt to the sum of net worth of the Company may
from time to time be from 5 to 1 to as much as 7 to 1. This degree of leverage
will increase the Company's vulnerability to adverse general economic
conditions and to increased competitive pressures.
Qualified Personnel. The Company plans to commence a consumer finance
business and to expand its automobile receivables purchasing business. The
success of this strategy is dependent upon the Company's ability to hire and
retain qualified managers and other personnel.
Dealers. the Company plans to expand its receivables purchasing
activities by re-establishing relationships and establishing new relationships
with dealers. Dealers often already have favorable secondary financing sources,
which may restrict the Company's ability to develop dealer relationships and
delay the Company's growth. Competitive conditions in the Company's markets may
result in a reduction in the price discounts available from or fees paid by
dealers and a lack of available contracts, which could adversely effect the
Company's profitability and its growth plans.
Key Officers. The Company's future success depends in some measure
upon its Chief Executive Officer who has significant experience in the consumer
financing business. An unexpected loss of services of this officer could have a
material adverse effect upon the Company. The Company does not currently
maintain key person life insurance on the Chief Executive Officer but intends
to obtain such coverage.
Reliance on Information Processing Systems. The Company's Business
depends upon its ability to store, retrieve, process and manage significant
amounts of information. The Company's management information systems, including
servers, networks, databases, backup and other systems essential for receivable
management, are located and maintained in the Company's Dallas, Texas
headquarters. Interruption, impairment of data integrity, loss of stored data,
breakdown or malfunction of the Company's information processing systems caused
by telecommunications failure, conversion difficulties, undetected data input
and transfer errors, unauthorized access, viruses, natural disasters,
electrical power outage or disruption, or other events could have a material
adverse effect on the Company's business financial condition and results of
operations.
Increases in Interest Rates. While the automobile receivables
purchased by the Company in most cases bear interest at a fixed rate near the
maximum rates permitted by law, the Company will finance its purchases of a
substantial
8
<PAGE> 222
portion of such contracts by incurring indebtedness with floating interest
rates. As a result, the Company's interest costs could increase during periods
of rising interest rates, which may decrease net interest margins and thereby
adversely affect the Company's profitability.
Competition. The Company has numerous competitors engaged in the
business of buying new and used motor vehicle receivables at a discount. The
new programs target receivables whose obligors have somewhat lower credit risk
than obligors of receivables previously purchased by the Company. Though the
Company expects to market the new programs in a more diverse geographic region,
the Company expects to encounter more competition in the purchase of such lower
risk receivables. These competitive factors could have a material adverse
effect upon the operations of the Company.
Regulation. Numerous federal and state consumer protection laws impose
requirements upon the origination and collection of consumer receivables. These
federal laws and regulations include, among others, the Truth-in-Lending Act,
the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair
Credit Reporting Act, the Fair Indebtedness Collection Practices Act, the
Magnuson-Moss Warranty Act and the Federal Reserve Board's Regulation Z. The
Company believes that it maintains all licenses and permits required for its
current operations and is in substantial compliance with all applicable
federal, state and local laws. There can be no assurance, however, that the
Company will be able to maintain all requisite licenses and permits. The
failure to satisfy those and other legal requirements could have a material
adverse effect in the operation of the Company. Further, the adoption of
additional, or the revision of existing, laws and regulations could have a
material adverse effect on the Company's business.
The Federal Trade Commission ("FTC") has adopted the
holder-in-due-course rule which has the effect of subjecting persons who
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims and defenses which the purchaser could assert against
the seller of the goods and services. Failure of the Dealers to comply with
state and federal credit and trade practice laws and regulations could result
in consumers having rights of rescission and other remedies that could have an
adverse effect on the Company. The FTC's Rule of Sale of Used Vehicles requires
that all sellers of used vehicles prepare, complete and display a "Buyer's
Guide" which explains the warranty coverage (if any) for such vehicles.
State laws regulate, among other things, the interest rate and terms
and conditions of motor vehicle retail installment loans. These laws also
impose restrictions on consumer transactions and require loan disclosures in
addition to those required under federal law. These requirements impose
specific statutory liabilities upon creditors who fail to comply with their
provisions. As a consumer finance Company, the Company is subject to various
consumer claims and litigation seeking damages and statutory penalties based
upon, among other theories of liability, usury, wrongful repossession, fraud
and discriminatory treatment of credit applicants.
ITEM 3. LEGAL PROCEEDINGS
On July 7, 1994, a class action civil lawsuit was filed against Search,
certain of its officers and directors, one of its former accounting firms and
the lead underwriter and one of its principals involved in the issuance of
Search's common stock. This action was filed in the United States District
Court for the Northern District of Texas, Dallas Division, and was styled Ellen
O'Shea, et al v. Search Capital Group, Inc., et al, Civil Action No.
3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in John
R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action No.
3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc., et al., Civil
Action No. 3:94-CV-1494-J, respectively, were also filed. The above cases were
consolidated in September 1994 under Civil Action No. 3:94-CV-1428-J (the
"O'Shea Class Action Suit").
The O'Shea Class Action Suit was filed on behalf of all purchasers of
Search's common stock during the period beginning December 10, 1993 and ending
through July 5, 1994, which was the date that Search made a public announcement
regarding lower earnings. The O'Shea Class Action Suit contended that Search
made misstatements in its registration statements concerning the Company's
computerized system, accounting methodologies used by the Company,
collectibility of its receivables and repossession rates of autos that secured
its receivables. The plaintiffs also complained of allegedly false public
filings, press releases and reports issued during 1994. The plaintiffs sought
damages, rescission, punitive damages, pre-judgment interest, fees, costs,
equitable relief and or injunctive relief and such other relief as the court
deemed just and proper.
9
<PAGE> 223
On April 26, 1996, the court entered a Final Judgment and Order of
Dismissal approving a settlement (the "Settlement") entered into between Search
and counsel for the plaintiffs. This Settlement was initially filed with the
court on August 4, 1995, and an amended version of the Settlement was filed on
November 13, 1995. The Settlement provided for a cash payment by Search of
$287,000 and the issuance by Search of its common stock with a value of
$2,613,000. As a result of the settlement Search issued 1,848,000 shares of its
common stock.
In December 1993, Automobile Credit Acceptance Corp., a wholly-owned
subsidiary of Search ("ACAC"), was joined as a defendant in a pending civil
action filed in the 153rd Judicial District Court, Tarrant County, Texas,
styled Autostar Solutions, Inc. v. Tim Clothier and Automobile Credit
Acceptance Corp., Cause No. 153-144940. The plaintiff in this action alleges
the existence of a partnership between the plaintiff and another defendant and
seeks damages, actual and exemplary, and an injunction for alleged conversion
and misappropriation of certain property, including computer programs,
allegedly owned by the plaintiff. In the petition, the plaintiff alleges that
ACAC wrongfully assisted its co-defendant and tortiously interfered with the
plaintiff's contracts and business and has claimed, as damages, $750,000. ACAC
believes that these allegations are without merit. Discovery in the case is
still ongoing and no opinion can be given as to the final outcome of the
lawsuit.
On August 14, 1995, the Fund Subsidiaries filed a petition in the U.S.
Bankruptcy Court in the Northern District of Texas, Dallas Division, seeking
protection under Chapter 11 of the U.S. Bankruptcy Code. These cases were
consolidated for joint administration under Case No. 395-34981-RCM-11. On March
4, 1996, the Court entered the Confirmation Order confirming the Joint Plan for
all of the Fund Subsidiaries. The Joint Plan was effective March 15, 1996. See
"Item 1, Business, Description of Historical Operations and Reorganization of
Fund Subsidiaries," and Note 2 to the Notes to Consolidated Financial
Statements in Item 7 for a description of the Joint Plan.
On January 9, 1996, Search received notice from plaintiffs that a suit
had been filed on December 21, 1995 against Search, certain of its former
officers and directors, and certain underwriters of three of the Fund
Subsidiaries. The case is styled Janice and Warren Bowe, et. al. vs. Search
Capital Group, Inc., et. al., Cause No. 1:95CV 649GR, and was filed in the
Federal District Court for the Southern District of Mississippi. The case was
reassigned under Cause No 1:95CSV649BR upon recusal of the judge originally
assigned to this case because of his relationship with certain defendants. The
plaintiffs allege violations of the securities laws by the defendants and seeks
unspecified damages, rescission, punitive damages and other relief. The
plaintiffs also seek establishment of a class of plaintiffs consisting of all
persons who have purchased Notes issued by three of the Fund Subsidiaries.
Although no assurances can be given, the Company believes it has meritorious
defenses to this action and will defend itself vigorously. While the ultimate
outcome of this litigation cannot be determined, management estimates that the
total expenses and losses from the litigation will be at least $500,000, and,
accordingly, management has established a reserve of $500,000 for this
litigation.
There are presently no other legal proceedings, threatened or pending,
relating to the Company which would, in the opinion of management, have a
material impact on earnings or the financial condition of the Company.
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PART II
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a table of selected consolidated financial data for
the fiscal year ended December 31, 1992; the nine month period ending September
30, 1993; the fiscal years ended September 30, 1994 and September 30, 1995 and
the six month period ended March 31, 1996:
<TABLE>
<CAPTION>
6 MONTHS 6 MONTHS YEAR YEAR 9 MONTHS 9 MONTHS YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
(In thousands, except per share data) 3/31/96 3/31/95 9/30/95 9/30/94 9/30/93 9/30/92 12/31/92
-------- -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Interest revenue $ 3,541 $ 8,694 $ 13,472 $ 14,054 $ 7,096 $ 1,493 $ 2,739
Interest expense (1) (1,306) (6,437) (11,205) (9,968) (4,173) (708) (1,909)
Provision for credit losses (2) (4,982) (5,337) (3,128) (20,180) - - -
-------- -------- ---------- -------- ------- ------- -------
Net interest income (loss) after provision
for credit losses (2,747) (3,080) (861) (16,094) 2,923 785 830
Operating and Other expenses 8,098 7,221 15,881 9,296 3,051 663 1,470
Settlement expense 535 - 2,837 560 - - -
Reorganization expense - - 315 - - - -
Other income - - - - - 338 -
-------- -------- ---------- -------- ------- ------- -------
Income (loss) from continuing operations (11,380) (10,301) (19,894) (25,950) (128) 460 (640)
Extraordinary gain on debt discharge 8,709 - - - - - -
-------- -------- ---------- -------- ------- ------- -------
Net income (loss) (2,671) (10,301) (19,894) (25,950) (128) 460 (640)
Preferred stock dividends 327 120 240 240 263 123 206
-------- -------- ---------- -------- ------- ------- -------
Income(loss) available to common stockholders $ (2,998) $(10,421) $ (20,134) $(26,190) $ (391) $ $337 $ (846)
======== ======== ========= ======== ====== ======= ======
Net income (loss) per share of common stock
from continuing operations $ (1.12) $ (1.12) $ (2.25) $(2.33) $ (0.06) $ .09 $ (0.22)
Gain per share on extraordinary item .83 - - - - - -
Net income (loss) per share of common stock $ (.29) (1.12) $ (2.25) $(2.33) $ (0.06) .09 $(0.22)
Weighted average number of common shares
outstanding (4) 10,447 9,296 8,967 11,258 6,131 3,679 3,851
Operating Data:
Number of active Dealers at period end (3) 22 125 125 206 126 51 68
Number of receivables at period end 7,996 15,425 15,425 18,995 6,991 2,222 2,962
Number of receivables purchased during period 1,169 2,771 5,328 18,377 6,331 2,589 3,452
(In thousands) 3/31/96 3/31/95 9/30/95 9/30/94 9/30/93 9/30/92 12/31/92
------- ------- ------- ------- ------- ------- --------
Balance Sheet Data:
Net contracts receivable $17,298 $ 76,655 $ 34,948 $ 61,823 $29,396 $ 6,565 $11,009
Total assets 37,346 59,985 49,922 75,126 44,223 14,147 19,912
Notes payable (prepetition subject to compromise) - - 69,320 - - - -
Notes payable - 69,160 - 70,768 40,562 11,774 18,000
Total liabilities 10,935 74,783 75,557 79,502 42,013 12,099 18,838
Stock repurchase commitment 2,078 - 2,078 - - - -
Stockholders' equity (deficit) 24,333 (14,798) (25,635) (4,376) 2,210 1,939 1,074
</TABLE>
- ----------------------
(1) Includes amortization of offering expenses incurred in connection with
Note offerings of $1,221,000, $1,391,000, $2,840,000, $2,158,000,
$762,000, $230,000 and $306,000, respectively.
(2) The provision for credit losses is first recorded in 1994 because of the
adoption of SFAS 114. See the discussion in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations"
under the caption "Interest Income and Provision for Credit Losses."
(3) Active Dealers are those Dealers who sold receivables to the Company
during the last 30 days of the current period, and the last 60 days of the
fiscal year ended September 31, 1995.
(4) The weighted average common shares outstanding are significantly less than
the outstanding common shares shown on F-5 due to the effective date of
the Joint Plan beginning on March 15, 1996.
11
<PAGE> 225
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS GENERAL
Except where otherwise indicated, the following discussion relates to
the operations of the Company on a consolidated basis.
Interest Income and Provision for Credit Losses
Through the third quarter of fiscal 1994, the Company aggregated pools
of loans and recorded interest revenue and allowance for credit losses for the
pools based on AICPA Practice Bulletin 6, Amortization of Discounts on Certain
Acquired Loans ("PB6"). Under PB6 no credit loss was recognized on a portfolio
of retail installment sales contracts unless the aggregate of the undiscounted
expected future cash flows for that portfolio of loans was less than the
carrying amount of the respective portfolio. Each of the Fund Subsidiaries
aggregated its loan portfolio into a separate and distinct pool for collective
evaluation under PB6. Each portfolio of loans held by each of the Fund
Subsidiaries was considered a separate and distinct pool for treatment under
PB6.
Under PB6, the Company recorded an allowance for credit losses upon
acquisition of the retail installment sales contracts in an amount equal to the
difference between the total future contractual payments and the estimated
undiscounted future cash collections. The difference between the undiscounted
future cash collections and the acquisition amount of the installment contracts
was amortized to interest revenue over the period in which payments on the
receivables were expected to be collected. Under PB6, if the estimate of the
total probable collections was increased or decreased but still greater than
the sum of the acquisition amount less collections plus the discount amortized
to date, the remaining amount of the discount to be amortized to interest
income was adjusted and amortized over the remaining life of the loans.
Accordingly, changes in estimates of future cash collections were recognized
through prospective yield adjustments.
In the fourth quarter of fiscal 1994, Search elected early adoption of
Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"),
which address the accounting by creditors for impairment of a loan and related
income recognition and disclosures. In accordance with SFAS 114, contracts
receivable are analyzed on a loan-by-loan basis. Search evaluates the
impairment of loans based on contractual delinquency, as well as other factors
specific to the receivable. When a concern exists as to the collectibility of
an account, interest income ceases to be recognized. The receivables, once
impaired, are collateral dependent; that is, once a receivable is in default,
Search looks to the underlying collateral for repayment of the receivable.
Therefore, at impairment, Search records an allowance for credit losses to
record the receivable at the fair value of the collateral. If the measure of
the impaired receivable is less than the net recorded investment in the
receivable, Search recognizes an impairment by creating an additional allowance
for credit losses in excess of the initial allowance provided, with a
corresponding charge to provision for credit losses. The provision for credit
losses is adjusted for any differences between the final net proceeds of an
impaired receivable and its net carrying value.
Search continues to record receivable purchases at cost. Contractual
finance charges are initially recorded as unearned interest and amortized to
interest income using the interest method. As noted above, amortization of
interest income ceases upon impairment. An initial allowance for credit losses
is recorded at the acquisition of a note receivable equal to the unearned
discount, the difference between the amount financed and the acquisition cost.
The recognition of this initial allowance is recorded as an adjustment to the
provision for credit losses.
The following table, containing estimates that the Company believes
are reasonably accurate, compares on an unaudited basis how much the provision
for credit losses would have been charged, net of the effect of increased
income, if the Company had accounted for the impairment of loans under PB6 on a
loan-by-loan basis versus the pooled methodology used by the Company. The
amount shown for PB6 on a pooled methodology used by the Company for 1994 is
the amount that the Company would have charged against the provision for credit
losses and the reduction in interest income had the Company reported its
results under that method for fiscal year 1994.
12
<PAGE> 226
<TABLE>
<CAPTION>
(Dollars in thousands) FOR THE YEARS ENDING
----------------------------------------------------------------------------------
(Unaudited) DECEMBER 31, 1992 SEPTEMBER 30, 1993 SEPTEMBER 30, 1994 CUMULATIVE
--------------------- ---------------------- ---------------------- --------------
<S> <C> <C> <C> <C>
PB6 on a net loan-by-loan basis $135 $45 $5,668 $5,848
PB6 on a pooled basis - - 5,259 5,259
---- --- ------ ------
Increase (Decrease) in Credit Losses $135 $45 $ 409 $ 589
==== === ====== ======
</TABLE>
Calculating the provision for credit losses under PB6 on a
loan-by-loan basis and PB6 on a pooled basis would have resulted in a
difference in earnings for those years due to the way that individual amounts
are separated from pooled amounts.
The Company reported its results by applying PB6 using a pooled
methodology for fiscal years 1992 and 1993. Differing interpretations of PB6
are that it permits the evaluation of impaired loans using either a pooled or a
loan-by-loan methodology.
When PB6 is applied on a pooled basis, the excess loan impairment
reserve, arising when the net investment is greater than the amount probable of
collection on individual loans, is netted against the excess unearned interest
and discount of the other loans in the same pool of loans. If there are not
adequate available unearned interest and discount balances in the pool of
loans, the excess over those collective balances would be charged directly to
the provision for credit losses.
When PB6 is applied on a loan-by-loan basis, the excess loan
impairment reserve, arising when the net investment is greater than the amounts
probable of collection on individual loans, is charged directly to the
provision for credit losses and is not netted against unearned interest and
discount for other loans in the pool, thus resulting in a larger direct charge
to the provision for credit losses than would arise on a pooled basis. In
addition, when PB6 is applied on a loan-by-loan basis, the expected future cash
collections on non-impaired loans is greater than the average expected future
cash collections of the pool of loans. This excess of future cash collections
results in an increased unearned discount for non-impaired loans, which is
amortized to interest income on a prospective basis.
Prior to adoption of SFAS 114, the Company, as more fully explained
below, only recorded credit losses when the aggregate of undiscounted expected
future cash flows of a pool of loans did not exceed the carrying amount of the
respective pool. In 1994, credit losses of $5,259,000, which represented the
excess of the carrying amount of the respective pools over the undiscounted
expected future cash flows of the respective pools, would have been recorded
notwithstanding the adoption of SFAS 114.
In accordance with the adoption of SFAS 114, the portion of the
increase in allowance for credit losses (applicable to the $14,921,000 recorded
to reduce individually impaired loans to the fair value of their underlying
collateral), some of which, if any, is attributable to prior years, was
included in current operations of the year of adoption (fiscal 1994), and no
cumulative effect is shown on the statement of operations. The Company is
evaluating impairment of its contract receivables on a loan-by-loan basis since
the adoption of SFAS 114.
The following table, containing unaudited PB6 estimates that the
Company believes are reasonably accurate, compares the provision for credit
losses and reduction in interest income under PB6 and under SFAS 114 for fiscal
year 1994:
<TABLE>
<CAPTION>
(Dollars in thousands) YEAR ENDED SEPTEMBER 30, 1994
-----------------------------------
<S> <C> <C>
Provision for Credit Losses $20,180
PB6:
Interest Revenue Reduction 4,413
Provision for Credit Losses 846 5,259
------ -------
Increases in Losses due to Adoption of SFAS 114 $14,921
=======
</TABLE>
Under SFAS 114, the impairment on a loan in excess of any existing
reserve is charged to the provision for credit losses in the current period.
Therefore, when measuring the provision for credit losses, the primary
difference is the prospective treatment of impairment under PB6 as compared to
the current treatment under SFAS 114. SFAS 114 recognizes
13
<PAGE> 227
all of the impairment into the current period instead of adjusting the
amortization of the remaining unearned interest and discount over the remaining
life of the loan.
Under PB6, when the total probable collections for a loan is greater
than the net investment, any adjustment to the estimated undiscounted
collections is recorded as a reduction to unearned interest and discount, with
the remaining unearned interest and discount being amortized over the remaining
life of the loan, reducing the future yield of the loan. Therefore, under PB6,
credit losses are only recorded when the future expected yield of the loan
portfolio has been reduced to zero and the net investment is greater than the
undiscounted probable collection.
Management elected early adoption of SFAS 114 in fiscal 1994 because
the measurement of credit losses provided by this statement is considered
preferable.
During 1994, the Company expanded its business rapidly purchasing
18,377 contracts compared to 6,331 in 1993. The deterioration in contract
performance in 1994 due to the increase in first payment default rates and
lower repossession proceeds caused the need for a higher loss provision. Under
PB6, some of the impairment would have reduced future interest income over the
life of the remaining loans. Under SFAS 114, the loss was recognized during the
last quarter of 1994 upon conversion to SFAS 114.
RESULTS OF OPERATIONS
Contract Purchasing Activity. Contract purchases increased rapidly
during the nine months ended September 1993 and the fiscal year ended September
1994. Due to the inadequate collections on contract receivables, the Company
tightened purchasing procedures in January 1995. Total contract collections
over the life of a group of loans is primarily dependent on repossession rates,
number of payments received prior to repossession and repossession proceeds.
While eventual repossession rates can only be forecasted during the life of a
group of contracts, the percentage of contracts that have not made their first
payment ("first payment defaults") is a good indication of the quality of
receivable purchased within a specific period. First payment defaults are more
serious than other repossessions because the differences between repossession
proceeds and the cost of the receivable are not reduced by customer payments
prior to repossession.
Chart 1 - Number of Contracts Booked by Quarter
CHART
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<PAGE> 228
Chart 2 - First Payment Defaults by Quarter Contracts were Booked.
CHART
First Payment Default. The changes in first payment defaults suggest
that when contract purchasing volume increased in 1994, the quality of the
contracts being purchased deteriorated. After analysis of these contracts, the
Company realized that the high number of first payment defaults were due, in
part, to (i) dealers overstating to the Company the amount of the downpayment
made by obligors and (ii) dealers overstating the value of the automobile
securing the receivables. Obligors, because they had little downpayment
invested in the automobile or because they felt they had paid too high a price
for the automobile, were willing to allow the automobile to be repossessed
rather than begin making payments. After year end September 1994, the Company
was able to reduce first payment defaults by being more selective in the
contracts purchased and initiating personal interviews in order to verify
amount of downpayments.
Comparison of the Period Ended March 31, 1996 to the Six Months Ended March 31,
1995
The Company changed its fiscal year from September 30 to March 31 in
order to start a new fiscal year reflecting the reorganization effective March
15, 1995. Therefore, the comparison below compares the six months ended March
31, 1996 to the comparable six months ended March 31, 1995.
The Company purchased 1,169 contracts, at a cost of $5,471,000, during
the six months ending March 31, 1996 compared to 2,417 contracts, at a cost of
$10,670,000, during the six months ending March 31, 1995. The decrease in
contracts purchased of 1,248, or 52%, is a result of a decrease in the amount
of funds available for reinvestment in contracts due to more fund subsidiaries
being restricted from purchasing contracts in 1996 than during the six month
period in 1995. Virtually all of the contracts purchased during both periods
were purchased under the criteria contained in the trust indenture for each
fund subsidiary. Effective March 15, 1996, the trust indentures were canceled
and all new originations are now under the Company's new purchasing criteria.
See Item 1. Business. "Operations Since Reorganization of the Fund
Subsidiaries" for a discussion of the Company's new underwriting standards.
For the six months ended March 31, 1996, the Company had interest
revenue of $3,541,000 compared to $8,694,000 for the six months ended March 31,
1995. The decrease in interest revenue of $5,153,000, or 59%, is due to a
decrease in average net interest earning receivables from $61,100,000, for the
six months ended March 31, 1995, to $34,790,000, for the six months ended March
31, 1996.
15
<PAGE> 229
Interest expense decreased $5,131,000, or 80%, from $6,437,000 for the
six months ended March 31, 1995 to $1,306,000 for the six months ended March
31, 1996. The decrease in interest expense is due primarily to termination of
interest accrual on the debt of the fund subsidiaries as of the date of filing
for bankruptcy, August 15, 1995, or the fund's maturity date, whichever
occurred first. See note 5 to the consolidated financial statements. The
decrease in interest expense was partially offset the increase in interest
expense associated with outstanding lines of credit.
The provision for credit losses decreased $355,000, or 7%, from
$5,337,000 for the six months ended March 31, 1995, to $4,982,000 for the six
months ended March 31, 1996. The decrease in the provision for loan losses is
due to adequate provisions for loan losses being provided in prior periods.
General and administrative expenses increased $877,000 or 12% from
$7,221,000 to $8,098,000. The increase in general and administrative expense is
due to higher cost associated with repossessing vehicles and legal and
administrative costs.
Net loss for the six months ended March 31, 1996 was $2,998,000
compared to $10,421,000 for the six months ended March 31, 1995. The decrease
in net loss is due primarily to $8,709,000 of gain on extraordinary Items
related to extinguishment of debt on fund subsidiaries. See Note 5 to the notes
to Consolidated Financial Statements.
Comparison of Twelve Month Periods Ended September 30, 1995 and the Twelve Month
Period Ending September 30, 1994
The Company purchased 5,328 contracts, at a cost of $24,830,000,
during the twelve months ending September 30, 1995 compared to 18,377,
contracts at a cost of $88,124,000 purchased during the twelve months ended
September 30, 1994. The decrease in contract purchases of 13,049, or 71%, was
due to tightened purchasing procedures, reductions in new funds raised, and a
smaller Dealer Network.
Interest revenue decreased 4% from $14,054,000 to $13,472,000 for the
year ended September 30, 1995, due to decreased contracts receivables. Interest
expense increased 12% from $9,968,000 to $11,205,000 due to increased offering
cost amortization and the fact that the ACF VI debt of $10,675,000 was
outstanding for all of 1995 as compared to a portion of 1994. The increase in
interest expense was somewhat mitigated by ceasing the interest expense accrual
for the note debts of the fund subsidiaries as a result of the bankruptcy
petitions or maturity dates (whichever event occurred first). See Note 5 in
Notes to Consolidated Financial Statements.
The provision for credit losses decreased 85% from $20,180,000 to
$3,128,000 due to generally adequate allowance established in prior years and
the adequacy of the initial allowance on current year purchases to cover losses
during the twelve months ended September 30, 1995. In addition, purchase
activity was down substantially in 1995 compared to 1994. As most additional
allowances are recorded in the first six months of a contract's life, this
decrease in purchasing activity also had an impact on the decreased provision
for credit losses.
General and administrative expenses increased from $9,296,000 to
$15,881,000. The increase in general and administrative expense is primarily
due to increased repossession, remarketing, and collection costs. During the
years ended September 30, 1995, the Company incurred $1,270,000 of additional
cost in the repossession and remarketing of vehicles as compared to such costs
in 1994. The largest increases were in repossession and repair fees which
increased from $1,432,000 to $2,332,000. During the year ended September 30,
1995, the Company repossessed a total of 7,273 vehicles compared to 6,449
during the year ended September 30, 1994.
The net loss before dividends decreased $6,056,000 from $25,950,000 in
fiscal 1994 to $19,894,000 in fiscal 1995. The decrease in net loss was
primarily due to a decrease in the provision for credit losses of $17,052,000
partially offset by increases in interest expense of $1,237,000 and general and
administrative expenses of $6,561,000 and increases in settlement and
reorganization charges of $2,592,000.
16
<PAGE> 230
LIQUIDITY AND CAPITAL RESOURCES
Joint Plan of Reorganization
Until November 1994, the Company financed its receivables purchasing
activities through public and private sale of unrated, automobile
receivables-backed notes issued by its Fund Subsidiaries. From 1992 until 1994,
the Company sold a total principal amount of approximately $72,000,000 of notes
through its Fund Subsidiaries. After November 1994, due primarily to higher
than expected losses in the collection of its receivables held by these Fund
Subsidiaries, the Company abandoned its note offering activities. In August
1995, search caused each of the eight Fund Subsidiaries to file for
reorganization under chapter 11 of the U.S. Bankruptcy Code. The Joint Plan of
Reorganization for the Fund Subsidiaries ("Joint Plan") was confirmed and
became effective on March 15, 1996.
As a result of the confirmation and effectiveness of the Joint plan,
approximately $69,300,000 of debt owed by the Fund Subsidiaries to Noteholders
was canceled in exchange for Search Common Stock, 9%/7% convertible preferred
stock, warrants and cash distributed to former Noteholders of the Fund
Subsidiaries. The assets of the Fund Subsidiaries (net of a $350,000 deposit
to a litigation trust and $2,000,000 escrowed for payment for professional
fees), consisting primarily of approximately $29,000,000 of net receivables and
$16,345,000 of cash, were deemed transferred to Search. Following the
effectiveness of the Joint Plan and certain financing transactions (see "Item
1. Business -- Financing"), the Company had no borrowed debt, approximately
$31,000,000 in net receivables and approximately $21,600,000 in cash. See "Item
8. Financial Statements and Supplementary Data" and "Liquidity and Capital
Resources." The Company has redeemable shares that require payment of
approximately $2,078,000 in May 1997. The warrants issued as part of the Plan
of Reorganization and to HPIL, if not exercised by the expiration date of March
2001, may be "put" back to the Company at $.25. The total potential liability
at March 2001 under these warrants is $1,419,000.
General
The Company's business will have an ongoing requirement to raise
substantial amounts of cash to support its activities. The principal cash
requirements include amounts to purchase receivables, cover operating expenses,
and to pay preferred stock dividends. The Company has a significant amount of
cash on hand as of March 31, 1996 which it considers adequate to meet its
reasonably anticipated needs. The Company intends to invest a portion of this
cash into finance receivables. In the future, additional liquidity will be
necessary to support growth of the Company's loan portfolio and operations. The
Company intends to leverage its net equity and subordinated debt in the future.
Search has obtained a commitment for a line of credit to purchase
receivables which would then be assigned to special purpose entities for future
securitization. Search has also received a commitment for a line of credit to
purchase receivables which would remain on Search's balance sheet. These
commitments are subject to completion of definitive documentation. Search is
also pursuing additional banking lines of credit. These financings would be
utilized for the purchase of contract receivables. Search believes the
financings as contemplated would be adequate to fund anticipated future
operations of Search.
The Company's annual dividend requirements on the outstanding shares
of its 12% Preferred Stock and 9%/7% Preferred Convertible Stock, as of May 31,
1996, were $240,000 and $5,375,000, respectively. The annual dividend
requirement on the Company's 9%/7% Convertible Preferred Stock will remain at
the 9% level, or $5,375,000, for the first three years and then decrease to the
7% level, or $4,181,000, for the remaining four-year term. Any conversion to
Common Stock would reduce these dividend requirements.
Operating Activities
During the six months ended March 31, 1996, the Company utilized cash
of $4,141,000 in its operations as compared to cash of $10,741,000 used in
during the twelve months ended September 30, 1995. The net loss for the six
months ended March 31, 1996 decreased from a net loss of $19,894,000 for the
year ended September 30, 1995 to a net loss of $2,671,000 for the six months
ended March 31, 1996. A significant portion of the decrease in loss from 1995
to 1996 resulted from an extraordinary gain on debt extinguishment of
$8,709,000. General and administrative expenses decreased from $15,881,000 to
$8,098,000, while settlements and reorganization expenses decreased by
$2,617,000 from $3,152,000 to $535,000. The decrease in general and
administrative expenditures is due to there being only six monthly periods
included in 1996 compared to twelve monthly periods included in 1995.
17
<PAGE> 231
Investing Activities
During the twelve months ended September 30, 1995, the Company's
investing activities provided cash of $17,592,000 as compared to cash of
$20,423,000 provided by investing activities during the six months ended March
31, 1996. This change resulted primarily from reduced contract purchases of
$19,359,000 and an increase in unrestricted cash of $12,624,000, partially
offset by decreased collection proceeds of $29,731,000. Additionally, upon
completion of the Joint Plan, $21,600,000 in cash was released from the Fund
Subsidiaries to Search.
Financing Activities
During the twelve months ended September 30, 1995, the Company
Utilized cash of $7,348,000 in its financing activities as compared to cash of
$1,093,000 provided by financing activities during the six months ended march
31, 1996. In 1995, the Company raised only $1,779,000 through note offerings
and repaid $2,429,000 on its line of credit and repaid $5,077,000 of the Notes
payable. During the six months ended March 31, 1996, the Company had net
borrowings of $1,225,000 under lines of credit, did not raise any funds through
Note offerings and did not repay any of the Notes payable. Because of the
bankruptcy, no payments were made on the Fund Subsidiaries' Notes Payable and
GECC was settled in full.
Nonaccrual Receivables
The following table sets forth the receivables which are accounted for
on a nonaccrual basis. The Company has no receivables which are both accruing
and contractually past due 90 days or more.
<TABLE>
<CAPTION>
MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES
(Dollars in thousands)
AS OF March 31, 1996 AS OF SEPTEMBER 30,1995
----------------------------------------- -------------------------------------------
Total (1) % of Total Total (1) % of Total
Number of Unpaid Unpaid Number of Unpaid Unpaid
Contractual Delinquency Receivables Installments Installments Receivables Installments Installments
----------------------- ----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Accrual Receivables
0 to 30 days past due 6,871 $31,816 86% 8,233 $45,464 68%
31-60 days past due 704 3,179 9% 1,572 8,294 12%
----- ------- ------ ------ ------- -----
Subtotal 7,575 34,995 95% 9,805 53,758 80%
----- ------- ------ ------ ------- -----
Nonaccrual Receivables
61-180 days past due 420 2,091 5% 1,696 9,182 14%
181+ days past due 1 - - 627 3,737 6%
----- ------- ----- ------ ------- -----
Subtotal 421 2,091 5% 2,323 $12,919 20%
----- ------- ----- ------ ------- -----
All Receivables (2) 7,996 $37,086 100.0% 12,128 $66,677 100.0%
===== ======= ===== ====== ======= =====
Vehicles held for resale
@ collateral value 333 $ 566 - 599 $ 601 -
===== ======= ====== =======
</TABLE>
(1) Includes unearned income.
(2) Active receivables exclude 333 and 599 accounts that have been
reclassified to vehicles held for resale at March 31, 1996 and
September 30, 1995, respectively.
Potential Problem Receivables
Receivables are considered nonaccrual receivables due to their
contractual delinquency exceeding 60 days or due to repossession of underlying
collateral. The Company also considers certain delinquent receivables that are
in the contractual status of less than 60 days past due to be potential problem
receivables based on collections. Uncertainty as to overall economic
conditions, regional considerations, and current trends in portfolio growth
cause the Company to review these accounts for potential problems.
18
<PAGE> 232
Receivables Concentrations
The Company considers Texas and Tennessee to be states with receivable
concentrations because receivables with obligors in each of these states exceed
10% of total outstandings.
Inflation
Historical statistics indicate that collateral value, vehicle sales
price, and receivable interest rates are relatively stable within the Company's
market segment. Significant inflation in prices could adversely impact the
Company's ability to acquire receivables at favorable prices. General increases
in interest rates will result in increases in the Company's interest expense.
Seasonality
The Company's operations are seasonably impacted by higher delinquency
rates during certain periods, including November and December holiday periods.
Changes in Asset Quality
The Company believes that it is upgrading its credit quality through
higher underwriting and collateral standards compared to prior periods. No
assurance can be given at this time as to whether these new standards will
improve the Company's credit loss experience rate.
Recent Accounting Pronouncement
Information as to recent accounting pronouncements is contained in
Note 8 of the Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index at page F-1.
19
<PAGE> 233
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Certified Public Accountants' Report F-2
Consolidating Balance Sheets as of March 31, 1996 and September 30, 1995 F-3
Consolidating Statements of Operations for the six months ended March 31, 1996,
the years ended September 30, 1995 and 1994. F-4
Consolidated Statement of Changes in Stockholders' Equity (Capital Deficit) for
the period from October 1, 1993 through March 31, 1996. F-5
Consolidated Statements of Cash Flows for the six months ended March 31, 1996,
the years ended September 30, 1995 and 1994. F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
All financial statement schedules are omitted because they are not applicable,
not required, or the information required to be set forth therein is included
in the financial statements or the notes thereto.
F-1
<PAGE> 234
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To The Board of Directors and Stockholders
Search Capital Group, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Search
Capital Group, Inc. and its subsidiaries ("the Company") as of March 31, 1996,
and September 30, 1995, and the related consolidated statements of operations,
changes in stockholders' equity (capital deficit), and cash flows for the six
months ended March 31, 1996, and the years ended September 30, 1995 and 1994.
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, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Search Capital Group, Inc. and Subsidiaries as of March 31, 1996, and September
30, 1995, and the results of its operations and its cash flows for the six
months ended March 31, 1996, and the years ended September 30, 1995 and 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements in
1994, the Company elected early adoption of Statements of Financial Accounting
Standards Nos. 114 and 118, thus changing its method of accounting for loan
impairments.
/s/ BDO Seidman, LLP
---------------------------------
BDO Seidman, LLP
Certified Public Accountants
Dallas, Texas
May 10, 1996
F-2
<PAGE> 235
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995
----------------------------------- ------------------
ASSETS Historical Pro forma (Note 3)
------------ -------------------
<S> <C> <C> <C>
Gross contracts receivable (Note 4) $ 37,086,000 $ 37,086,000 $ 66,677,000
Unearned interest (6,435,000) (6,435,000) (13,106,000)
------------ ------------ ------------
Net contracts receivable 30,651,000 30,651,000 53,571,000
Allowance for credit losses (13,353,000) (13,353,000) (18,623,000)
Loan origination costs 3,984,000 3,984,000 3,754,000
Amortization of loan origination costs (3,578,000) (3,578,000) (2,937,000)
------------ ------------ ------------
Net contract receivables - after allowance
for credit losses & other costs 17,704,000 17,704,000 35,765,000
------------ ------------ ------------
Cash and cash equivalents 17,817,000 21,582,000 442,000
Restricted cash (Note 2) -- -- 8,105,000
Vehicles held for resale 566,000 566,000 601,000
Deferred note offering cost, net (Note 1) -- -- 3,062,000
Property and equipment, net 1,062,000 1,062,000 1,306,000
Other assets, net 197,000 197,000 641,000
------------ ------------ ------------
Total assets $ 37,346,000 $ 41,111,000 $ 49,922,000
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Lines of credit (Notes 3 & 6) $ 2,283,000 $ -- $ 1,058,000
Accrued settlements (Notes 14 & 15) 688,000 688,000 2,912,000
Accrued restructuring (Note 2) -- -- 214,000
Accounts payable and other liabilities 7,356,000 7,356,000 2,051,000
Accrued interest 15,000 -- 2,000
Redeemable warrants (Note 8) 593,000 673,000 --
------------ ------------ ------------
Liabilities 10,935,000 8,717,000 6,237,000
------------ ------------ ------------
Prepetition notes payable and accrued
interest - subject to compromise (Notes 2,5) -- -- 69,320,000
------------ ------------ ------------
Stock repurchase commitment (Note 9) 2,078,000 2,078,000 2,078,000
------------ ------------ ------------
Stockholders' Equity (Capital Deficit)
Preferred stock (Note 8) 154,000 174,000 4,000
Common stock (Note 8) 248,000 289,000 108,000
Additional paid-in capital 79,124,000 85,046,000 24,697,000
Accumulated deficit (54,043,000) (54,043,000) (51,372,000)
Treasury stock (1,150,000) (1,150,000) (1,150,000)
------------ ------------ ------------
Total stockholders' equity (capital deficit) 24,333,000 30,316,000 (27,713,000)
------------ ------------ ------------
Total liabilities and stockholders' equity
(capital deficit) $ 37,346,000 $ 41,111,000 $ 49,922,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 236
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended March
31, 1996 Year Ended September Year Ended
(Note 1) 30, 1995 September 30, 1994
------------------------------ ------------------------- -------------------------
<S> <C> <C> <C>
Interest revenue $ 3,541,000 $ 13,472,000 $ 14,054,000
Interest expense 1,306,000 11,205,000 9,968,000
------------ ------------ ------------
Net interest income (loss) 2,235,000 2,267,000 4,086,000
Provision for credit losses 4,982,000 3,128,000 20,180,000
------------ ------------ ------------
Net interest income (loss) after
provision for credit losses (2,747,000) (861,000) (16,094,000)
------------ ------------ ------------
General and administrative expense 8,098,000 15,881,000 9,296,000
Settlement expense 535,000 2,837,000 560,000
Reorganization expense (Notes 2 & 10) -- 315,000 --
------------ ------------ ------------
Operating and other expense 8,633,000 19,033,000 9,856,000
------------ ------------ ------------
Loss before extraordinary item (11,380,000) (19,894,000) (25,950,000)
Extraordinary gain on discharge of
debt (Notes 2 & 5) 8,709,000 -- --
------------ ------------ ------------
Net loss (2,671,000) (19,894,000) (25,950,000)
Preferred stock dividends (327,000) (240,000) (240,000)
------------ ------------ ------------
Net loss attributable to common
stockholders $ (2,998,000) $(20,134,000) $(26,190,000)
============ ============ ============
Loss per common share before
extraordinary item $ (1.12) $ (2.25) $ (2.33)
Gain on extraordinary item 0.83 -- --
------------ ------------ ------------
Loss per common share $ (0.29) $ (2.25) $ (2.33)
============ ============ ============
Weighted average number of
common shares outstanding 10,447,000 8,967,000 11,258,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 237
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Statement of Changes in Stockholders' Equity (Capital Deficit) (Note 8)
For the period from October 1, 1993 through March 31, 1996
<TABLE>
<CAPTION>
Preferred Stock -12% Preferred Stock - 9%/7% Common stock
--------------------------- --------------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1993 400,000 $ 4,000 -- -- 12,165,670 $ 122,000
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common shares for cash -- -- -- -- 2,785,000 28,000
ESOP termination, net of expenses -- -- -- -- (306,152) (3,000)
Stock cancellation -- -- -- -- (2,946,988) (30,000)
12% preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1994 400,000 4,000 -- -- 11,697,530 117,000
------------ ------------ ------------ ------------ ------------ ------------
Stock purchase at May 5, 1995 -- -- -- -- -- --
Stock repurchase commitment -- -- -- -- (923,344) (9,000)
12% preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1995 400,000 4,000 -- -- 10,774,186 108,000
------------ ------------ ------------ ------------ ------------ ------------
Exercise of options -- -- -- -- 35,840 1,000
Class action suit settlement (Note 14) -- -- -- -- 1,848,000 18,000
Reorganization (Note 2) -- -- 15,031,648 150,000 12,115,001 121,000
12% preferred stock dividends -- -- -- -- -- --
9% preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Historical balance at March 31, 1996 400,000 4,000 15,031,648 150,000 24,773,027 248,000
------------ ------------ ------------ ------------ ------------ ------------
PRO FORMA INFORMATION (NOTE 3)
Debt conversion -- -- -- -- 2,500,000 25,000
Additional investment -- -- 2,032,800 20,000 1,638,400 16,000
------------ ------------ ------------ ------------ ------------ ------------
Pro forma balance at March 31, 1996 400,000 $ 4,000 17,064,448 $ 170,000 28,911,427 $ 289,000
============ ============ ============ ============ ============ ============
<CAPTION>
Treasury Stock Stockholders'
--------------------------- Additional ESOP Notes Accumulated Equity
Shares Amount Paid-In Capital Receivable Deficit (Capital Deficit)
------------ ------------ --------------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1993 2,526,389 $ (25,000) $ 8,711,000 $ (1,073,000) $ (5,528,000) $ 2,211,000
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common shares for cash -- -- 19,379,000 -- -- 19,407,000
ESOP termination, net of expenses -- -- (874,000) 1,073,000 -- 196,000
Stock cancellation -- -- 30,000 -- -- --
12% preferred stock dividends -- -- (240,000) -- -- (240,000)
Net loss -- -- -- -- (25,950,000) (25,950,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1994 2,526,389 (25,000) 27,006,000 -- (31,478,000) (4,376,000)
------------ ------------ ------------ ------------ ------------ ------------
Stock purchase at May 5, 1995 500,000 (1,125,000) -- -- -- (1,125,000)
Stock repurchase commitment -- -- (2,069,000) -- -- (2,078,000)
12% preferred stock dividends -- -- (240,000) -- -- (240,000)
Net loss -- -- -- -- (19,894,000) (19,894,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, September 30, 1995 3,026,389 (1,150,000) 24,697,000 -- (51,372,000) (27,713,000)
------------ ------------ ------------ ------------ ------------ ------------
Exercise of options -- -- 10,000 -- -- 11,000
Class action suit settlement
(Note 14) -- -- 2,595,000 -- -- 2,613,000
Reorganization (Note 2) -- -- 52,149,000 -- -- 52,420,000
12% preferred stock dividends -- -- (120,000) -- -- (120,000)
9% preferred stock dividends -- -- (207,000) -- -- (207,000)
Net loss -- -- -- -- (2,671,000) (2,671,000)
------------ ------------ ------------ ------------ ------------ ------------
Historical balance at March 31, 1996 3,026,389 (1,150,000) 79,124,000 -- (54,043,000) 24,333,000
------------ ------------ ------------ ------------ ------------ ------------
PRO FORMA INFORMATION (NOTE 3)
Debt conversion -- -- 1,692,000 -- -- 1,717,000
Additional investment -- -- 4,230,000 -- -- 4,266,000
------------ ------------ ------------ ------------ ------------ ------------
Pro forma balance at March 31, 1996 3,026,389 $ (1,150,000) $ 85,046,000 -- $(54,043,000) $ 30,316,000
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 238
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
March 31, 1996 September 30, 1995 September 30, 1994
--------------------- --------------------- --------------------
<S> <<C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,671,000) $(19,894,000) $(25,950,000)
Adjustments to reconcile net loss to
cash provided by (used in) operations:
Provision for credit losses 4,982,000 3,128,000 20,180,000
Amortization of deferred offering costs 1,221,000 2,840,000 2,158,000
Amortization of loan origination costs 641,000 1,047,000 1,728,000
Depreciation and amortization 262,000 384,000 217,000
Extraordinary gain on discharge of debt (8,709,000) -- --
Loss on disposition of fixed assets 112,000 -- --
Changes in assets and liabilities:
Decreases (increases) in other assets, net 470,000 (86,000) 60,000
Increases (decreases) in accounts payable
and accrued expense (449,000) 1,840,000 3,488,000
------------ ------------ ------------
Cash provided by (used in) operations (4,141,000) (10,741,000) 1,881,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of contract receivables including
origination fees (5,471,000) (24,830,000) (88,124,000)
Principal payments on contract receivables
including proceeds from sales of vehicles 17,921,000 47,652,000 33,912,000
Purchases of property and equipment (132,000) (711,000) (957,000)
(Increases) decreases in restricted cash 8,105,000 (4,519,000) 3,416,000
Decrease in notes receivable, related party -- -- 167,000
------------ ------------ ------------
Cash provided by (used in) investing 20,423,000 17,592,000 (51,586,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit 1,225,000 (2,429,000) 3,487,000
Notes payable proceeds -- 1,779,000 31,206,000
Notes payable repayments -- (5,077,000) (1,000,000)
Capital lease (repayments) financing (24,000) (58,000) 308,000
Notes payable offering costs -- (198,000) (3,455,000)
Proceeds from sale of stock, net of expense -- -- 19,407,000
Proceeds from exercise of options 12,000 -- --
Purchase of treasury stock -- (1,125,000) --
Change in ESOP Note Receivable -- -- 196,000
Payment of dividends (120,000) (240,000) (240,000)
------------ ------------ ------------
Cash provided by (used in) financing activities 1,093,000 (7,348,000) 49,909,000
------------ ------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents 17,375,000 (497,000) 204,000
Cash and cash equivalents - beginning 442,000 939,000 735,000
------------ ------------ ------------
Cash and cash equivalents - ending $ 17,817,000 $ 442,000 $ 939,000
============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 71,000 $ 9,272,000 $ 7,426,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 239
SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES
General. The accompanying consolidated financial statements include the
accounts of Search Capital Group, Inc. ("Search") including its subsidiaries
("the Company") as follows:
<TABLE>
<CAPTION>
Ownership
Subsidiary Percentage
---------- ----------
<S> <C>
Automobile Credit Holdings, Inc. ("ACHI") 100%
Automobile Credit Acceptance Corp. ("ACAC") (100% owned by ACHI) 100%
Consumer Dealer Autocredit Corporation ("CDAC") (100% owned by ACHI) 100% *
Eight Fund Subsidiaries and two previous Fund Subsidiaries 100%
Newsearch, Inc. 100% *
Search Funding Corp. ("SFC") 100%
Automobile Wholesaling, Inc. 100% *
Search Automobile Leasing Corporation 100% *
* Currently inactive.
</TABLE>
The Fund Subsidiaries are special purpose subsidiaries of Search which
raised money through the issuance of interest bearing notes for the purchase of
contract receivables. The Fund Subsidiaries (see Note 2 for discussion of
bankruptcy proceedings) have accounted for all transactions, where applicable,
related to the reorganization proceedings in accordance with Statement of
Position 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," ("SOP 90-7") issued by the American Institute of Certified
Public Accountants ("AICPA") in November 1990.
ACAC raised capital to be used by the Fund Subsidiaries to purchase,
at a significant discount, retail installment sale contracts generated by the
sale of used automobiles and light trucks. ACAC also serviced the contracts on
behalf of the Fund Subsidiaries and will continue to service the contracts for
the Company.
In 1996, the Company changed its fiscal year end to March 31. The
prior year consolidated statements have been formatted to conform with the
1996 presentation.
Basis of Consolidation. The consolidated financial statements include
the accounts of the Company, after elimination of all significant intercompany
accounts and transactions, and have been prepared in accordance with generally
accepted accounting principles.
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, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Contracts Receivable, Allowance for Credit Losses, and Interest
Income. The Company records receivables purchased at cost. Contractual finance
charges are recorded as unearned interest and amortized to interest income
using the interest method. An initial allowance for credit losses is recorded
at the acquisition of a receivable equal to the difference between the amount
financed and the acquisition cost, which is what the Company estimates to be
fair value. The Company considers all of its contracts receivable to be
consumer installment loans to individuals. In accordance with Statement of
Financial Accounting Standards No. 114 ("SFAS No. 114"), these receivables are
reviewed individually for impairment generally using the receivable's
contractual delinquency or repossession status. All receivables which exceed 60
days contractual delinquency or with respect to which the underlying collateral
has been repossessed are considered impaired. Once impaired, a receivable is
placed on nonaccrual status and written down to its net realizable value, and
no interest income is recognized until the receivable returns to nonimpaired
status. Therefore, at impairment, the Company writes down the receivable to
its estimated net realizable value, which is the fair value of the underlying
collateral if it has been repossessed or the estimated recoverable cash flow if
no repossession has occurred. If the new recorded amount of the impaired
receivable is less than the Company's net recorded investment in the
receivable, the Company recognizes a charge to provision for credit losses in
the amount of the deficiency and increases the allowance for credit losses by a
corresponding amount. The provision for credit losses is adjusted for any
differences between the final net proceeds from resale of the underlying
collateral and the estimated net realizable value. All payments received on
impaired receivables are considered a return of principal. Generally, the
Company charges off a receivable against the allowance for credit losses at 180
days contractual delinquency if no significant payments have been received in
the last six months, or earlier after receipt of the sale proceeds from
liquidation of the collateral securing the receivable.
F-7
<PAGE> 240
Subsequent proceeds received on a previously charged-off receivable are
recorded as a recovery to the allowance for credit losses. Any excess of cost
paid ("premium") for net receivables acquired is recorded as an asset and
amortized over the life of the related loans acquired as an adjustment to yield
using the interest method.
Loan Origination Costs. The Company performs substantially all of the
functions associated with origination of the contracts and capitalizes the
related costs. The portion capitalized is amortized by the interest method
against income as an adjustment of yield.
Deferred Notes Payable Offering Costs. Costs directly related to notes
payable offerings were capitalized and amortized to expense by the interest
method over the contractual terms of the notes. Deferred offering costs were
the commissions, printing, legal, accounting and other expenditures incurred in
issuing the notes to the investors.
Vehicles Held for Resale. Vehicles held for resale represents the
estimated collateral value of motor vehicles in the Company's possession and
are carried at the lower of cost or estimated net realizable value (estimated
auction value less estimated costs to sell at the time of repossession). The
Company classifies a loan as vehicle held for resale upon physically
repossessing the vehicle and until the vehicle is sold at auction. The
deficiency balance, if any, is then charged off.
Property and Equipment. Property and equipment includes assets which
are depreciated over 3 year and 5 year lives and leasehold improvements which
are amortized over the remaining term of the lease.
Net Loss Per Share Attributable to Common Stockholders. The net loss
per share attributable to common stockholders has been computed based on the
weighted average number of shares of Search common stock outstanding during
each period and after deducting preferred stock dividends declared. Common
stock equivalents are included in the calculations except when their effect
would be antidilutive.
Income Taxes. The Company files a consolidated federal income tax
return. The Company uses the asset and liability method to provide for income
taxes under which deferred tax assets and liabilities are recognized for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Statement of Cash Flows. For purposes of reporting cash flows, the
Company considers short term cash investments with original maturities of three
months or less to be cash equivalents. Cash held in a Fund Subsidiary was
restricted to payment of allowable expenses and investment in contract
receivables until the note balance of the Fund Subsidiary was satisfied.
2. CHAPTER 11 BANKRUPTCY FILING OF THE FUND SUBSIDIARIES AND CONFIRMATION
OF THE JOINT PLAN OF REORGANIZATION
As of March 31, 1996, the Fund Subsidiaries consisted of six public
and two private corporations as follows:
Automobile Credit Fund 1991-III, Inc. ("ACF 91-III") - Private
Automobile Credit Finance, Inc. ("ACF") - Public
Automobile Credit Partners, Inc. ("ACP") - Private
Automobile Credit Finance 1992-II, Inc. ("ACF 92-II") - Public
Automobile Credit Finance III, Inc. ("ACF III") - Public
Automobile Credit Finance IV, Inc. ("ACF IV") - Public
Automobile Credit Finance V, Inc. ("ACF V") - Public
Automobile Credit Finance VI, Inc. ("ACF VI") - Public
At September 30, 1995, Fund Subsidiaries' cash balances of $8,105,000
were restricted for reinvestment use or held in sinking funds to be applied to
the repayment of the Fund Subsidiaries Notes.
F-8
<PAGE> 241
On August 14, 1995, only the Fund Subsidiaries filed for
reorganization under Chapter 11 of the U. S. Bankruptcy Code. Search and its
unrestricted subsidiaries did not seek protection under the Code but Search was
a co-proponent of a joint plan of reorganization for the Fund Subsidiaries. On
March 4, 1996, the Court entered an order ("Confirmation Order") confirming the
Third Amended Plan of Reorganization ("Joint Plan") for all of the Fund
Subsidiaries, effective on March 15, 1996 ("Effective Date").
Total secured claims of all noteholders under the Joint Plan were
$53,240,000, and total unsecured claims were $16,080,000, for total claims of
$69,320,000, which comprised the total of notes payable and accrued interest
due the Noteholders (Note 5). The Joint Plan allowed noteholders to choose one
of two options. Under one of the options ("Equity Option"), noteholders would
receive with respect to the secured portion of their claims shares of Search
common stock, shares of a new series of 9%/7% convertible preferred stock and a
cash payment equal in amount as if dividends had been calculated on the
preferred stock from July 1, 1995 to the Effective Date. Under the other option
("Collateral Option"), noteholders would receive with respect to the secured
portion of their claims distributions of the proceeds of the continued
collection or the sale of the motor vehicle receivables securing their Notes.
According to the Joint Plan, the number of shares of common stock to be issued
would be calculated as of the Effective Date so that noteholders would receive
preferred stock and common stock equal, on a fully diluted basis, to 75% of the
value of all shares of new 9%/7% preferred stock, common stock, existing 12%
preferred stock, warrants, stock options and rights then outstanding, or agreed
to be issued by Search (with certain exceptions, including any shares issued to
Hall Phoenix Inwood Limited, (HPIL) under the Funding Agreement, see Note 3).
At a special shareholders meeting on March 1, 1996, shareholders of Search
approved two amendments to Search's Certificate of Incorporation, increasing
Search's authorized capital stock to 130,000,000 shares of common stock and
60,000,000 shares of new preferred stock. The Certificate of Incorporation also
was amended to prohibit Search from issuing any non-voting capital stock.
Before the Effective Date, Value Partners, Ltd. ("VPL") purchased all
of the secured claims of noteholders who had elected the Collateral Option
(approximately $12,800,000 of original Note principal amount) and changed the
election for such secured claims to the Equity Option. The selling noteholders
retained their unsecured claims. As a consequence of this transaction, 100% of
the secured claims of noteholders received treatment under the Equity Option.
With respect to the unsecured portion of noteholders' claims, the
noteholders and any other holders of unsecured claims, will receive from Search
a pro rata share of warrants to purchase an aggregate of 5,000,000 shares of
common stock (the "Warrants"). The Warrants will be issued after the unsecured
claims of non-noteholders have been finally determined by the Court. (See Note
8).
The Joint Plan required that a trust ("Litigation Trust") be
established for the benefit of the holders of unsecured claims, including the
Noteholders, with a total funding of $350,000. The Litigation Trust is
authorized to pursue claims and causes of action of the Fund Subsidiaries and
of certain participating Noteholders. Proceeds will be distributed pro rata to
unsecured claim holders. The Litigation Trust cannot pursue any causes of
action during the first year following the Effective Date where tolling
agreements have been executed. The Litigation Trust will automatically
terminate if Search's Common Stock trades at an average price of $2.50 per
share for 30 consecutive trading days during the first year following
effectiveness of the Joint Plan.
On the Effective Date, the net assets of the Fund Subsidiaries were
transferred to Search, and the Fund Subsidiaries are to be liquidated and
dissolved as soon as possible thereafter. The Notes and the indebtedness
represented by the Notes were deemed canceled when the Confirmation Order
became final. The trust indentures for the Notes, and all related restrictions,
were also deemed canceled. As a result of the implementation of the Joint Plan
and the cancellation of the Notes, a net extraordinary gain from the
extinguishment of debt was reported in the amount of $8,709,000 (See Note 5).
The Joint Plan provided that the Board of Directors of Search select
two additional directors from qualified director nominees submitted by the
official Creditors Committee for the Debtors. These new directors have been
selected by the Board, but pursuant to their request, will not be appointed as
directors until Search obtains directors and officers liability insurance
coverage, which Search is pursuing. The duration of the term of one of the new
F-9
<PAGE> 242
directors will be three years, and the duration of the term of the other new
director will be two years. These two new members will also be appointed to
membership on the Compensation Committee of the Board for the one year period
immediately following the Effective Date.
3. PRO FORMA INFORMATION AND TRANSACTIONS WITH HALL AND AFFILIATES
The consolidated pro forma balance sheet as of March 31,1996, contains
the accounts of the Company, after elimination of all significant intercompany
accounts and transactions after giving effect to the following significant
events. Subsequent to March 31, 1996, Search consummated certain of the Hall
Financial Group (HFG) transactions as described below. The transactions are
included in the pro forma balance sheet of the Company as if the transactions
were effective March 31, 1996.
On November 30, 1995, Search entered into a Funding Agreement
("Funding Agreement") with HFG. Pursuant to the Funding Agreement, HFG made
loans totaling $2,283,000 ("HFG Notes") to Search. The HFG Notes could, at the
election of HFG or its assigns, be converted into a maximum 2,500,000 shares of
Search common stock. Effective April 2, 1996, HPIL, as assignee from HFG of the
HFG Notes, fully exercised the rights of the holder of the HFG Notes to convert
the Notes into 2,500,000 shares of Search common stock. Because the conversion
price specified in the HFG Notes for these shares was less than the full amount
due HFG, Search paid to HPIL the remaining portion of the debt evidenced by the
HFG Notes ($567,000) in cash.
The Funding Agreement also provided to HFG the option to purchase
common stock, 9%/7% preferred stock, and warrants Effective April 2, 1996,
HPIL, as assignee of HFG, fully exercised this purchase option by paying
$4,346,000 cash to Search for which Search issued 1,638,400 shares of common
stock and 2,032,800 shares of 9%/7% preferred stock, and warrants to purchase
676,000 shares of common stock to HPIL.
Pursuant to the Funding Agreement, HFG was entitled to elect one
director to Search's Board if HFG converted the HFG Notes into common stock and
to elect another director if HFG purchased at least $1,000,000 Present Value of
securities from Search. These new directors, pursuant to their request, will be
appointed as directors when Search obtains directors and officers liability
insurance, which Search is pursuing. As a result of satisfaction of these
conditions, HFG has designated two HFG officers as its representatives for
appointment to Search's Board.
4. CONTRACTS RECEIVABLE, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME
Through the third quarter of fiscal 1994, the Company recorded
interest revenue and allowance for credit losses based on AICPA Practice
Bulletin 6, "Amortization of Discounts on Certain Acquired Loans," ("PB6").
Under PB6, the Company recorded an allowance for credit losses upon acquisition
of the installment loans ("receivables") in an amount equal to the difference
between the contractual payments due and the estimated undiscounted future cash
collections. The difference between the undiscounted future cash collections
and the acquisition amount of the receivables was amortized to interest revenue
over the period in which payments on the receivables were expected to be
collected. Under PB6, if the estimate of the total probable collections was
increased or decreased but still greater than the sum of the acquisition amount
less collections plus the discount amortized to date, the remaining amount of
the discount to be amortized to interest income was adjusted and amortized over
the remaining life of the receivables. Accordingly, changes in estimates of
future cash collections were recognized through prospective yield adjustments.
In the fourth quarter of fiscal 1994, the Company elected early
adoption of Statements of Financial Accounting Standards Nos. 114 and 118
("SFAS 114"), which address the accounting by creditors for impairment of a
loan and related income recognition and disclosures. In accordance with SFAS
No. 114, receivables are analyzed on a loan-by-loan basis. The Company evaluates
the impairment of receivables generally based on the receivables' contractual
delinquency. The Company considers receivables that are contractually
delinquent 60 days or more or with respect to which the underlying collateral
has been repossessed to be impaired. When the receivable is considered
impaired, interest income ceases to be recognized. Once impaired, the Company
looks to the underlying collateral for repayment of the receivable. Therefore,
at impairment, the Company writes down the receivable to its estimated net
realizable value, which is the fair value of the underlying collateral if it
has been repossessed or the estimated recoverable cash flow if no repossession
has occurred. If the new recorded amount of the receivable is less than the
Company's net recorded investment in the receivable, the Company recognizes a
charge to provision for credit losses in the amount of the deficiency and
increases the allowance for credit losses by a corresponding amount. The
provision for credit losses is adjusted for any differences between the final
net proceeds from resale of the underlying collateral and the estimated net
realizable value. Generally, the Company charges off a receivable against the
allowance for credit losses at 180 days contractual delinquency, if no
significant payments have been received in the last six months, or, if
earlier, after receipt of the sale proceeds from liquidation of the collateral
securing the receivable. Subsequent proceeds received on a previously
charged-off receivable are recorded as a recovery to the allowance for credit
losses. Any excess of cost paid ("premium") for net receivables acquired is
recorded as an asset and amortized over the life of the related loans acquired
as an adjustment to yield using the interest method.
F-10
<PAGE> 243
The Company records receivable purchases at cost. Contractual finance
charges are recorded as unearned interest and amortized to interest income
using the interest method. As noted above, amortization of interest income
ceases upon impairment. An initial allowance for credit losses is recorded at
the acquisition of a receivable equal to the unearned discount, which is the
difference between the amount financed and the acquisition cost.
The recorded investment and related allowance for credit losses,
excluding net loan origination costs, are summarized below on a consolidated
basis:
<TABLE>
<CAPTION>
Net
Allowance Receivables
Total for After
(Dollars in thousands) Number of Unpaid Unearned Credit Allowance for
As of March 31, 1996 Receivables Installments Interest Losses Credit Losses
- --------------------- ----------- ------------ -------- ------ -------------
<S> <C> <C> <C> <C> <C>
Impaired receivables 421 $ 2,091 $ 380 $ 1,711 --
Unimpaired receivables 7,575 34,995 6,055 11,642 17,298
------ ------- ------- ------- -------
Total 7,996 $37,086 $ 6,435 $13,353 $17,298
====== ======= ======= ======= =======
As of September 30, 1995
- ------------------------
Impaired receivables 2,323 $12,919 $ 1,644 $11,275 --
Unimpaired receivables 9,805 53,758 11,462 7,348 34,948
------ ------- ------- ------- -------
Total 12,128 $66,677 $13,106 $18,623 $34,948
====== ======= ======= ======= =======
</TABLE>
The change in the allowance for credit losses is summarized as follows
on a consolidated basis:
<TABLE>
<CAPTION>
March 31, September 30, September 30
(Dollars in thousands) 1996 1995 1994
---------- ------------- ------------
<S> <C> <C> <C>
Balance, beginning of period $ 18,623 $ 44,633 $ 4,656
Allowance recorded upon purchase of receivables 2,194 9,613 37,727
Increase in allowance for credit losses 4,982 3,169 20,180
Receivables charged off against allowance (14,742) (38,792) (17,930)
Recovery of prior credit losses 2,296 -- --
-------- -------- --------
Balance, end of period $ 13,353 $ 18,623 $ 44,630
======== ======== ========
Net credit losses as a percent of average net
receivables 36% 56% 26%
</TABLE>
F-11
<PAGE> 244
The effect of non-accrual receivables on interest income for each of
the three periods presented was:
<TABLE>
<S> <C> <C> <C>
Interest income
As originally contracted $ 1,480 $ 4,522 $ 5,520
As recognized (98) (1,033) (1,922)
------- ------- -------
Reduction of interest income $ 1,382 $ 3,489 $ 3,598
======= ======= =======
</TABLE>
There were no commitments to lend additional funds to customers whose
loans were classified as non-accrual as of March 31, 1996, September 30, 1995
or September 30, 1994.
At March 31, 1996, contractual maturities of receivables were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1998 1999 Total
------- ------- ------ -------
<S> <C> <C> <C> <C>
Future payments receivable $23,445 $11,507 $2,134 $37,086
Less unearned interest 4,886 1,450 99 6,435
------- ------- ------ -------
Net contracts receivable $18,559 $10,057 $2,035 $30,651
======= ======= ====== =======
</TABLE>
In the opinion of management, a portion of the receivables will be
repaid or extended either before or past the contractual maturity date. In
addition, some receivables will default before maturity. The above tabulation,
therefore, is not to be regarded as a forecast of future cash collections.
The Company's receivables are all secured by motor vehicles, have
fixed annual percentage rates ("APR"), and are generally installment
receivables owed by individuals. As of March 31, 1996, the Company had no other
loan types. The obligors are domestically-based at the time a receivable is
purchased by the Company from a dealer. The Company has no material amounts of
foreign receivables.
Receivables will become nonaccrual status due to their contractual
delinquency exceeding 60 days or due to repossession of underlying collateral.
The Company also considers certain delinquent receivables that are in the
contractual status of less than 60 days past due to be potential problem
receivables based on collections. Uncertainty as to overall economic
conditions, regional considerations, and current trends in portfolio growth
cause the Company to review these receivables for potential problems.
The Company considers Texas and Tennessee to be states with receivable
concentrations because receivables with obligors in each of these states exceed
10% of total outstanding receivables.
Through the use of its Auto Notes Management System, management is
able to evaluate the loan impairment of the receivables on a loan-by-loan
basis.
Prior to adoption of SFAS 114, the Company, as more fully explained
below, only recognized credit losses when the aggregate of undiscounted
expected future cash flows of a pool of receivables did not exceed the carrying
amount of the respective pool. In 1994, credit losses of $5,259,000, which
represented the excess of the carrying amount of the respective pools over the
undiscounted expected future cash flows of the respective pools, would have
been recorded notwithstanding the adoption of SFAS 114.
In accordance with the adoption of SFAS 114, the portion of the
increase in allowance for credit losses (applicable to the $14,921,000 recorded
to reduce impaired receivables to the fair value of their underlying
collateral), some of which, if any, is attributable to prior years, was
included in current operations of the year of adoption (fiscal 1994) and no
cumulative effect is shown on the statement of operations.
The following table, containing unaudited PB6 estimates that the
Company believes to be reasonably accurate, compares the provision for credit
losses and reduction in interest income under PB6 and under SFAS 114 for fiscal
year 1994:
F-12
<PAGE> 245
<TABLE>
<CAPTION>
Year Ended
(Dollars in thousands) September 30, 1994
------------------
<S> <C>
Provision for credit losses $20,180
PB6:
Interest revenue reduction $ 4,413
Provision for credit losses 846 5,259
------- -------
Increases in losses due to adoption of SFAS 114 $14,921
=======
</TABLE>
Under SFAS 114, the impairment of a receivable in excess of any
existing reserve is charged to the provision for credit losses in the current
period. Therefore, when measuring the provision for credit losses, the primary
difference is the prospective treatment of impairment under PB6 as compared to
the current treatment under SFAS 114. SFAS 114 recognizes all of the impairment
in the current period instead of adjusting the amortization of the remaining
unearned interest and discount over the remaining life of the receivable.
Under PB6, when the total probable collections for a receivable is
greater than the net investment, any adjustment to the estimated undiscounted
collections is a reduction to unearned interest and discount, with the
remaining unearned interest and discount being amortized over the remaining
life of the receivable, reducing the future yield of the loan. Therefore, under
PB6 credit losses are only recorded when the future expected yield of the
receivable portfolio has been reduced to zero and the net investment is greater
than the undiscounted probable collection.
Management elected early adoption of SFAS 114 in fiscal 1994 because
the measurement of credit losses provided by this statement is considered
preferable.
Most of the Company's receivables are due from individuals located in
large metropolitan areas of Texas and other southern and western states. To
some extent, realization of the receivables will be dependent on local economic
conditions. The Company holds vehicle titles as collateral for all receivables
until such receivables are paid in full.
5. NOTES PAYABLE AND ACCRUED INTEREST
Notes payable of the Fund Subsidiaries at September 30, 1995 and prior
to the final confirmation of the Joint Plan of Reorganization, March 15, 1996
(see Note 2), consisted of the following:
F-13
<PAGE> 246
<TABLE>
<S> <C>
Notes payable by ACF 91-III, bearing interest at 21%, required monthly interest
payments at 15% through March 31, 1995, at which time principal and the
remaining deferred interest accrued at 6% was due - in default at maturity date. $ 590,000
Notes payable by ACP, bearing interest at 21%, required monthly interest
payments of 15% through April 30, 1995 at which time principal and the
remaining deferred interest accrued at 6% was due in default at maturity date.
610,000
Notes payable by ACF, bearing interest at 18%, required monthly interest
payments at 15% through December 31, 1994, at which time principal and the
remaining deferred interest accrued at 3% was due - in default at maturity
date. 1,506,000
Notes payable by ACF 92-II, bearing interest at 15% due monthly, required
payment of principal in full on December 31, 1995. 10,000,000
Notes payable by ACF III, bearing interest at 15% due monthly, required payment
of principal in full on April 30, 1996. 15,000,000
Notes payable by ACF IV, bearing interest at 3% until October 15, 1993 and 14%
thereafter due monthly, required payment of principal quarterly from September
30, 1995 to December 31, 1996. 10,000,000
Notes payable by ACF V, bearing interest at 12% due monthly, required payment of
principal quarterly from October 1, 1996 to December 31, 1997. 19,872,000
Notes payable by ACF VI, bearing interest at 12% due monthly, required payment
of principal quarterly from July 1, 1997 to June 30, 1998. 10,675,000
-----------
Total notes payable 68,253,000
Accrued Interest - prepetition 1,067,000
-----------
Total notes payable and accrued interest $69,320,000
===========
</TABLE>
As a result of the confirmation of the Joint Plan, the above debt and
accrued interest was ultimately extinguished in exchange for common stock,
9%/7% preferred stock, warrants and other provisions of the Joint Plan. The
extinguishment of debt resulted in a net extraordinary gain of $8,677,000. The
following table shows the components of the gain:
Calculation of net extraordinary gain on debt extinguishment
<TABLE>
<S> <C>
Total Notes and accrued interest $ 69,320,000
Value of exchange (56,367,000)
Administrative claims (2,400,000)
Unamortized debt offering costs (1,844,000)
------------
Net gain of debt extinguishment $ 8,709,000
============
</TABLE>
As of their maturity ACF, ACF 91-III and ACP stopped accruing interest
on the remaining unpaid principal. As these Fund Subsidiaries defaulted, it was
management's position that the accrual of interest was not warranted since each
Fund Subsidiary did not have sufficient assets to fully retire the principal
portion of the Notes.
The August 14, 1995 bankruptcy filing of the individual Fund
Subsidiaries was an event of default for each of the Fund Subsidiaries under
the terms of their respective indenture agreements. In accordance with SOP
90-7, contractual interest obligations, which are relieved from payment as a
result of the Chapter 11 proceedings, are not accrued; therefore, no interest
expense was recorded for the six months ended March 31, 1996. For the year
ended September 30, 1995, contractual interest on the above obligations
amounted to $12,453,000 which was $1,500,000 in excess of reported interest
expense. See Note 2.
F-14
<PAGE> 247
6. LINE OF CREDIT
On June 17, 1994, SFC entered into an agreement for a line of credit
with General Electric Capital Corporation ("GECC"). The line of credit
initially had a maximum borrowing commitment of $20,000,000 and was limited to
a percentage of eligible contracts held by SFC. The line of credit was secured
by all SFC assets and was guaranteed by Search.
In January 1995, SFC signed an agreement with GECC to revise the
existing restrictive covenants and to eliminate any future advances under the
line of credit. On March 22, 1995, GECC advised Search that it and SFC were in
default of various provisions of the original loan agreement and the January
1995 agreement. As a result of these defaults, GECC declared the outstanding
balance, as of that date, due and payable. Search, SFC and GECC established a
pay-out plan which required a minimum payment of $500,000 per quarter. As of
September 30, 1995, the line had a balance of $1,058,000.
The Joint Plan called for Search to fully satisfy its obligation to
GECC. As a result, on March 18, 1996, Search paid GECC $173,000 which included
all principal and interest owing as of that date. This payment fully satisfied
Search's obligation to GECC.
7. EMPLOYEE STOCK OWNERSHIP PLAN
Effective August 1, 1994, the Board of Directors terminated the
employee stock ownership plan ("ESOP"). As part of the termination, Search
reacquired from the ESOP 306,152 shares of Search common stock at $3.50 per
share in exchange for the balance of the note receivable plus accrued interest,
totaling $1,183,000. The reacquired shares were canceled on September 29, 1994,
and the remaining 178,848 shares were allocated to participating employees.
8. STOCKHOLDERS' EQUITY
12% Senior Convertible Preferred Stock. As of March 31, 1996, Search
had issued 400,000 shares of its 12% preferred stock. The 12% preferred shares
have a $.01 par value and have voting rights and a liquidation preference of
$5.00 per share plus accrued and unpaid dividends. The 12% preferred shares are
convertible into one share of Search's $.01 common stock for each share of 12%
preferred at the option of the shareholder. The shares carry a cumulative
annual dividend of $0.60 per share, payable quarterly. Search may convert the
shares to common stock or may redeem the shares at $5.00 per share upon the
occurrence of certain events defined in the terms of the 12% preferred
Certificate of Designation.
9%/7% Convertible Preferred Stock. On March 1, 1996, the Board of
Directors established a new series of preferred stock, 9%/7% preferred stock,
for the purpose of effecting the Joint Plan. As of March 31, 1996, Search had
issued in connection with the Joint Plan, or committed to issue, 15,031,648
shares of its 9%/7% preferred. During April 1996, Search issued an additional
2,032,800 shares of 9%/7% preferred stock in connection with the HFG
transaction, reflected in the pro forma consolidated balance sheet as of March
31, 1996. See Note 3. The 9%/7% preferred shares, which are essentially pari
passu to the existing 12% preferred stock, have a $.01 par value and have
voting rights and a liquidation preference of $3.50 per share plus all accrued
and unpaid dividends. The shares carry a non-cumulative dividend rate of $.315
per share until the end of the twelfth full calendar quarter following payment
of the first dividend (9% End Date) and $.245 per share after the 9% End Date.
The 9%/7% preferred shares are convertible at any time into common stock in the
ratio of two shares of common stock for each share of 9%/7% preferred.
Conversion may occur upon the occurrence of certain events as defined in the
Certificate of Designation (see Note 2).
Common stock. On March 1, 1996, the stockholders approved an amendment
to Search's Certificate of Incorporation to increase the number of authorized
shares of $.01 par value common stock to 130,000,000 for the purpose of
effecting the Joint Plan. As of March 31, 1996, Search had issued or committed
to issue a total of
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<PAGE> 248
25,875,219 shares of its common stock. Of this amount, 12,115,001 shares were
issued in connection with the Joint Plan (see Note 2), 2,500,000 in connection
with the HFG conversion, 1,638,400 shares in connection with the HFG purchase
(see Note 3) and 1,848,000 shares for the settlement of the class action
lawsuit (see Note 14).
Warrants. During the six months ended March 31, 1996, 35,840 warrants
were exercised at an average price of $0.335 per share. In February 1994,
25,000 warrants were exercised at a price of $0.375 per share.
On March 1, 1996, the Board of Directors authorized Search to issue a
new class of warrants to purchase up to 5,676,178 shares of Common Stock, for
the purpose of effecting the Joint Plan. These warrants are governed by a
warrant agreement dated as of March 22, 1996. Warrants to purchase 5,000,000
shares are to be issued to noteholders and other unsecured claim holders under
the Joint Plan, and warrants to purchase 676,178 shares of Common Stock have
been issued to HPIL, as assignee of HFG, pursuant to the Funding Agreement (see
Note 3).
The exercise price per share of these warrants is initially $2.00 and
increases by $.25 on March 15 of each successive year. These warrants will
expire on March 14, 2001, at which time Search must redeem all remaining
unexercised warrants at a redemption price of $0.25 per warrant. These warrants
are considered "put" warrants and, accordingly, have been classified outside of
permanent equity as debt at fair value. An accretion to the redemption amount
of $1,419,000 will be made over the term of five years and recorded as interest
expense using the interest method.
Common Stock Warrants and Employee Stock Options. On August 1, 1994,
the Board of Directors adopted, subject to stockholder approval, the 1994
Employee Stock Option Plan (the "Plan"). The Plan was approved by Search's
stockholders at their annual meeting held in May 1995. Employees of the Company
or directors of subsidiaries are eligible to participate in the Plan. As of
March 31, 1996, approximately 100 persons were eligible to participate. The
Plan expires on July 31, 2004, although any option outstanding on such date
will remain outstanding until it either has expired or has been fully
exercised. The Plan is administered by the Compensation Committee of the Board.
Options granted under the Plan are not otherwise transferable other than by
will or by the laws of descent and distribution. Options are forfeited
immediately after an optionee's employment is terminated for cause or 30 days
after the optionee's mental or physical disability. The options usually vest
over a three year period. A total of 1,750,000 shares of common stock has been
reserved for sale upon exercise of options granted under the Plan. As of March
31, 1996, there were 2,581,500 outstanding options and/or warrants of which
1,500,000 can be exercised as either options or warrants at the employee's
election. Certain options issued during the year ended September 30, 1995, were
repriced to reflect the current market prices at that time.
During the six months ended March 31, 1996, Search issued 253,000
options to employees and 436,000 warrants under the plan. All were issued at
the market price existing at that time.
In October 1994, 100,000 options were issued to an officer of Search
and in January 1995, 500,000 and 25,000 were issued respectively to two
officers of Search. In January 1995, an additional 285,500 options were issued
to employees. In August and September 1994, an additional 29,000 options were
issued to employees. All were issued at the market price existing at that time.
In August 1994, 2 officers and 5 employees agreed, subject to
shareholder approval of the Plan, to the cancellation of their warrants in
exchange for options under the Plan at the then current market price of $4.25.
The canceled warrants consisted of 220,000 at $3.00 per share issued in April
1993, 70,000 at $8.75 per share issued in December 1993, and 35,000 at $14.75
per share issued in June 1994.
Recent Accounting Pronouncement. The Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("FAS 123") was issued in October
1995 to establish accounting and reporting standards for stock-based employee
compensation plans such as stock option and restricted stock plans. FAS 123
defines a fair value based method of accounting for measuring compensation
expense for stock-based plans and encourages all entities to adopt that method
of accounting. However, FAS 123 also permits entities to continue to measure
compensation expense for stock-based plans using the intrinsic value based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities electing
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<PAGE> 249
to remain with the intrinsic value based method must make pro forma disclosures
of net income and earnings per share as if the fair value based method defined
by FAS 123 was applied.
Under the fair value based method, compensation expense would be
measured as the value of an award under a stock-based plan on the date the
award is granted and would be recognized over the vesting period of the award.
Under the intrinsic value based method, compensation expense is measured as the
excess, if any, of the market price of the stock underlying the award on the
date the award is granted, over the exercise price. Under Search's Plan, awards
have no intrinsic value on the date of the grant as the exercise price equals
the market price on that date. Currently, the Company does not expect to adopt
the FAS 123 fair value based method of accounting for its plan, but intends to
provide the required pro forma disclosures in the March 31, 1997 financial
statements.
9. STOCK CANCELLATION AND STOCK PURCHASE AGREEMENT
On May 5, 1995, Search purchased from a director of Search 500,000
shares of Search's $.01 par value common stock for $2.25 per share. The
purchase was recorded at cost and is reflected as treasury stock.
Simultaneously with the purchase, the director resigned from the Board. Search
was also given an irrevocable proxy expiring May 5, 1997 to vote the remaining
approximately 800,000 shares of stock held by a trust formed by the former
director. These remaining shares held by the trust may be "put" back to the
Company at the expiration date for $2.25 per share, which was the market value
at the date of the agreement. These shares are shown outside of permanent
equity on the face of the balance sheet at the redemption price. If these
redeemable shares were excluded from net loss per share, the fiscal 1996 and
1995 loss per share would be $(.31) and $(2.47), respectively.
On July 20, 1994, certain stockholders voluntarily canceled 2,946,988
shares of common stock and warrants to purchase 390,654 shares of common stock.
Had these shares and warrants been canceled at the beginning of the fiscal year
ended September 30, 1994, the common shares outstanding and net loss per share
would have been $(2.95) on a weighted average number of common shares and
equivalents outstanding of 8,893,000 shares.
10. RELATED PARTY TRANSACTIONS
During the six months ended March 31, 1996 and the year ended
September 30, 1994, the Company paid or accrued approximately $25,000 and
$156,000, respectively for fees related to the Note offerings described in
Notes 4 and 5 and the class action settlement noted in Note 14 to an individual
who owned a minority interest in ACAC and two of the Fund Subsidiaries until
June 1992, and was a director of Search for a period of time in 1992 and 1993.
During the year ended September 30, 1994, Search engaged Brean Murray,
Foster Securities Inc. ("BMFS") to serve as underwriter for Search's public
offering of common stock, and co-managing broker-dealer, together with another
independent broker-dealer, for the public offering of asset-backed debt
securities offered in 1994, by Search's subsidiaries, Automobile Credit Finance
V, Inc. and Automobile Credit Finance VI, Inc. Search paid BMFS $1,987,000 in
connection with the common stock offering and $766,000 in connection with the
public offerings of asset-backed debt securities. Also in connection with its
services as underwriter of the common stock offering, BMFS was issued warrants
to purchase 240,000 shares of common stock exercisable for a period of 5 years
at a price of $9.60 per share. BMFS, simultaneously with its receipt of the
warrants, assigned warrants to purchase 113,558 shares to Mr. A. Brean Murray.
Mr. Murray is a director of Search and Chairman of BMFS. On March 25, 1996,
subsequent to confirmation of the Joint Plan discussed in Note 2, BMFS received
a $200,000 success fee from Search.
Additional related party transactions are described in Notes 7, 8 and
9.
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11. INCOME TAXES
The Company files a consolidated income tax return. The components of
the Company's net deferred tax asset as of March 31, 1996 and September 30,
1995 are as follows:
<TABLE>
<CAPTION>
March 31, September 30, September 30,
1996 1995 1994
------------ ------------- --------------
<S> <C> <C> <C>
Deferred tax asset:
Allowance for credit losses &
inventory reserve $ 1,260,000 $ 800,000 $ 1,500,000
Net operating loss carry-forwards 13,000,000 15,400,000 8,900,000
Other tax credit carry-forwards 90,000 90,000 90,000
Accrued settlement costs 170,000
Valuation allowance (14,520,000) (16,290,000) (10,490,000)
------------ ------------ ------------
Total deferred tax asset -- -- --
------------ ------------ ------------
</TABLE>
At March 31, 1996, the Company's consolidated tax return group has a
net operating loss carryforward for Federal income tax purposes of
approximately $44,100,000 which will expire, if unused, in the following years:
<TABLE>
<CAPTION>
Years of Expiration Amount
------------------- -----------
<S> <C>
1998 to 2008 $ 4,400,000
2009 27,200,000
2010 12,500,000
------------
Total $44,100,000
============
</TABLE>
Following the acquisition of the minority interest in ACHI on June 30,
1993 (see Note 3), the Company's tax consolidated group had a change in
ownership as defined under Section 382 of the Internal Revenue Code, which will
limit the utilization of the net operating loss to approximately $1,000,000 per
year on those NOL losses incurred prior to 1994.
The debt to equity conversion as outlined in the Joint Plan of
Reorganization resulted in approximately $8,709,000 of debt discharge income.
Additionally, this debt to equity conversion resulted in an ownership change as
defined under Section 382 of the Internal Revenue Code. This will result in a
limitation on the utilization of the net operating losses incurred prior to the
debt-to-equity conversion.
12. COMMITMENTS
On October 28, 1992, ACAC entered into a sixty month lease for office
facilities with a basic monthly rental obligation of $13,450. This lease was
modified in 1994 to expand the office facilities from approximately 16,000
square feet to approximately 23,000 square feet at a revised monthly rental
obligation of $22,057. Rental expense for the six months ended March 31, 1996
and the years ended September 30, 1995, and 1994, was approximately $132,000,
$265,000 and $212,000, respectively.
The Company opened four remote collection facilities during fiscal
1995. These leases expire through 1999. Lease expense for the six months ended
March 31, 1996 and fiscal 1995 was $34,000 and $20,000, respectively.
On April 1, 1996, the Company signed a lease for an additional 6,000
square feet of office space located in Dallas, Texas. The Company plans to move
a portion of its existing operations into the facility on July 1, 1996, the
lease commitment date. The lease has a term of sixty six months and an
approximate monthly rental of $5,300. The lease commitments for this lease are
included below in the operating lease commitment schedule.
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<PAGE> 251
Operating lease commitments by the Company are as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
----------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Office leases $377,000 $300,000 $ 96,000 $82,000 $73,000
Office equipment leases 62,000 31,000 7,000 -- --
-------- -------- -------- ------- -------
Total operating leases $439,000 $331,000 $103,000 $82,000 $73,000
======== ======== ======== ======= =======
</TABLE>
In addition to the operating leases, the Company has one capitalized
lease with payments of $81,000 per year through 1998 and $67,000 in 1999.
13. CHANGE IN FISCAL YEAR
In 1996, the Company changed its fiscal year end to March 31. The
following table reflects the unaudited comparable period of fiscal 1995 (in
thousands except per share data):
<TABLE>
<CAPTION>
Six months ended
March 31, 1995
----------------
<S> <C>
Interest revenue $ 8,694
Interest expense 6,437
-------
Net interest income 2,257
Provision for credit losses 5,337
-------
Net interest loss after provision for credit losses 3,080
Operating expenses 7,221
-------
Net loss 10,301
Preferred stock dividends 120
-------
Net loss attributable to common shareholders $10,421
=======
Net loss per common share 1.12
=======
Weighted average number of common shares 9,296
=======
</TABLE>
The adjustments to the March 31, 1995 interim financial statement consist of
only normal recurring adjustments.
14. SETTLEMENT OF O'SHEA CLASS ACTION LAWSUIT
On July 7, 1994, a class action civil lawsuit was filed against
Search, certain of its officers and directors, one of its former accounting
firms and the lead underwriter and one of its principals involved in the
issuance of Search's common stock. This action was filed in the United States
District Court for the Northern District of Texas, Dallas Division, and was
styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al. Civil Action
No. 3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions
in John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil
Action No. 3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc., et al,.
Civil Action No. 3:94-CV-1494-J, respectively, were also filed. The above
cases were consolidated in September 1994 under Civil Action No. 3:94-CV-1428-J
(the "O'Shea Class Action Suit").
The O'Shea Class Action Suit was filed on behalf of all purchasers of
Search's common stock during the period beginning December 10, 1993 and ending
through July 5, 1994, which was the date that Search made a public announcement
regarding lower earnings. The O'Shea Class Action Suit contended that Search
made misstatements in its registration statements concerning the Company's
computerized system, accounting methodologies used by the Company,
collectibility of its receivables and repossession rates of autos that secured
its receivables. The plaintiffs also complained of allegedly false public
filings, press releases and reports issued during
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<PAGE> 252
1994. The plaintiffs sought damages, rescission, punitive damages, pre-judgment
interest, fees, costs, equitable relief and or injunctive relief and such other
relief as the court deemed just and proper.
On April 26, 1996, the court entered a Final Judgment and Order of
Dismissal approving a settlement (the "Settlement") entered into between Search
and counsel for the plaintiffs. This Settlement was initially filed with the
court on August 4, 1995, and an amended version of the Settlement was filed on
November 13, 1995. The Settlement provided for a cash payment by Search of
$287,000 and the issuance by Search of its common stock with a value of
$2,613,000. As a result of the settlement Search issued 1,848,000 shares of its
common stock. The terms of the final settlement have been recorded in the
fiscal 1996 financial statements.
15. LEGAL PROCEEDINGS
In December 1993, ACAC was joined as a defendant in a pending civil
action filed in the 153rd Judicial District Court, Tarrant County, Texas,
styled Autostar Solutions, Inc. v. Tim Clothier and Automobile Credit
Acceptance Corp., Cause No. 153-144940. The plaintiff in this action alleges
the existence of a partnership between the plaintiff and another defendant and
seeks damages, actual and exemplary, and an injunction for alleged conversion
and misappropriation of certain property, including computer programs,
allegedly owned by the plaintiff. In the petition, the plaintiff alleges that
ACAC wrongfully assisted its co-defendant and tortiously interfered with the
plaintiff's contracts and business and has claimed, as damages, $750,000. ACAC
believes that these allegations are without merit and has filed a general
denial and has a pending motion for partial summary judgment. Discovery in the
case is still ongoing and no opinion can be given as to the final outcome of
the lawsuit.
On August 14, 1995, the Fund Subsidiaries filed a petition in the U.S.
Bankruptcy Court in the Northern District of Texas, Dallas Division, seeking
protection under Chapter 11 of the U.S. Bankruptcy Code (see Note 2). These
cases were consolidated for joint administration under Case No.
395-34981-RCM-11. On March 4, 1996, the Court entered the Confirmation Order
confirming the Joint Plan for all of the Fund Subsidiaries. The Joint Plan was
effective March 15, 1996.
On January 9, 1996, Search received notice from plaintiffs that a suit
had been filed on December 21, 1995 against Search, certain of its former
officers and directors, and certain underwriters of three of the Fund
Subsidiaries. The case is styled Janice and Warren Bowe, et. al. vs. Search
Capital Group, Inc., et. al., Cause No. 1:95CV 649GR, and was filed in the
Federal District Court for the Southern District of Mississippi. The case was
reassigned under Cause No 1:95CSV649BR upon recusal of the judge originally
assigned to this case because of his relationship with certain defendants. The
plaintiffs allege violations of the securities laws by the defendants and seeks
unspecified damages, rescission, punitive damages and other relief. The
plaintiffs also seek establishment of a class of plaintiffs consisting of all
persons who have purchased Notes issued by three of the Fund Subsidiaries.
Although no assurances can be given, the Company believes it has meritorious
defenses to this action and will defend itself vigorously. While the ultimate
outcome of this litigation cannot be determined, management estimates that the
total expenses and losses from the litigation will be at least $500,000, and,
accordingly, management has established a reserve of $500,000 for this
litigation.
There are presently no other legal proceedings, threatened or pending,
relating to the Company which would, in the opinion of management, have a
material impact on earnings or the financial condition of the Company.
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<PAGE> 253
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Pursuant to Instruction 1 of Regulation S-K, Item 304, no disclosure
is required under this item because of prior reports filed with the Securities
and Exchange Commission on forms 8-K.
20
<PAGE> 254
\
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name and age of the directors, the
year of the annual meeting of shareholders at which each director's term will
expire and the year of his initial election or appointment as a director.
<TABLE>
<CAPTION>
SHAREHOLDERS ANNUAL
POSITION DIRECTOR MEETING AT WHICH
NAME HELD AGE SINCE TERM WILL EXPIRE
- --------------------- ----------------------------- --- -------- -----------------
<S> <C> <C> <C> <C>
Richard F. Bonini Director (1) 57 1995 1999
Luther H. Hodges, Jr. Director (2) 59 1995 1999
George C. Evans President, Chairman and 61 1995 1998
Chief Executive Officer (3)
A. Brean Murray Director (4) 59 1993 1998
William H. T. Bush Director (5) 57 1995 1997
James F. Leary Director and Vice 66 1995 1997
Chairman - Finance (6)
</TABLE>
(1) Serves as a member of the Executive and Compensation Committees of the
Board of Directors.
(2) Serves as Chairman of the Compensation Committee and a member of the
Audit Committee of the Board of Directors.
(3) Serves as Chairman of the Executive Committee of the Board of
Directors.
(4) Serves as a member of the Audit Committee of the Board of Directors.
(5) Serves as Chairman of the Audit Committee and a member of the
Compensation Committee of the Board of Directors.
(6) Serves as a member of the Executive Committee of the Board of
Directors.
Each of the Directors of the Company is a united states citizen.
During the last five years, none of the Directors (i) has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors), or
(ii) was a party to a civil proceeding of a judicial or an administrative body
of competent jurisdiction that resulted in a final judgment, decree, or final
order enjoining further violations of, or prohibiting activity subject to,
federal or state securities laws or finding any violations of such laws.
Business Histories of Directors
GEORGE C. EVANS, joined the Company as President, Chief Executive
Officer, and Director on January 20, 1995. On May 5, 1995, Mr. Evans became
Chairman of the Board of Directors and Chairman of the Executive Committee of
the Board of Directors. Mr. Evans has over 30 years of experience in the
consumer lending and financial services industry. During 1992 and 1993, Mr.
Evans was President and CEO of Century Acceptance Corporation, a 32-state
operation engaged in consumer and automobile financing. Previously, he served
as President and Chief Operating Officer of Associates Financial Services, Vice
Chairman of Associates Corporation of North America and as Chairman and CEO of
Associates International Subsidiaries, where his responsibilities included
6,000 employees, $3.5 Billion in receivables, with 1,100 branches and annual
earnings in the $100 million range. Prior to Associates, Mr. Evans was employed
by AVCO Financial Services where he rose from Branch Manager to Senior Vice
President.
A. BREAN MURRAY, was elected a Director of the Company in December
1993. Mr. Murray is Chairman of Brean Murray, Foster Securities, Inc., A
privately-held securities firm, and is also Chairman of its affiliate BMI
Capital Corporation, a registered investment advisor. He founded Brean Murray,
Foster Securities Inc. In 1973. Mr. Murray has been in the Securities Industry
since 1963 as a portfolio manager, director of institutional sales, director of
venture capital and corporate finance and chief executive officer. He is a
Director of First Caribbean Corporation, a mortgage banking company in Puerto
Rico. He is a co-founder and Chairman of JABRA Corporation, a private company
that sells hands-free auditory equipment.
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<PAGE> 255
LUTHER H. HODGES, JR., was appointed a director of the Company in May
1995. Mr. Hodges is currently president of the Caroline Co., an investment
partnership in Conway, South Carolina. Mr. Hodges has previously held positions
as Chairman and CEO of Washington Bancorporation and The National Bank of
Washington, chairman of North Carolina National Bank (now known as NationsBank)
and was formerly Under Secretary of the U.S. Department of Commerce and Deputy
Secretary of Commerce. Mr. Hodges currently serves on the boards of numerous
other organizations and corporations, including Phaseout of America. In 1978,
he was a candidate for the United States Senate from North Carolina.
JAMES F. LEARY, was appointed a director of the Company in May 1995
and was named Vice Chairman-Finance of the Company in September 1995. Mr. Leary
has also been an employee of the Company since September 1995. Mr. Leary was a
founder and partner in the Sunwestern Investment Group, an investment advisory
and venture capital management firm. He previously served as director, CFO and
Senior Executive Vice President for Associates Corporation of North America.
From 1964 through 1973 he held various positions at CIT Financial Corporation,
including Assistant Treasurer. Currently, he serves on the boards of several
corporations, including Phaseout of America, Associated Materials, Inc.,
Maxserv, Inc., and certain mutual funds managed by Capstone Asset Management.
RICHARD F. BONINI, was appointed a director of the Company in May
1995. Mr. Bonini is currently a director, Senior Executive Vice President and
Secretary for First Financial Caribbean Corporation, a mortgage banking company
in Puerto Rico. He also serves as director for the Doral Federal Savings Bank
and the Doral Mortgage Corporation.
WILLIAM H.T. BUSH, was appointed a director of the Company in
September 1995. He served as President of Boatman's National Bank of St. Louis
and as a member of its board of directors and the board of directors of its
parent holding Company, Boatmen's Bancshares, Inc. Until June 1986. In 1986,
Mr. Bush founded the Financial Advisory Firm of Bush-O'Donnell & Company,
specializing in investment management and financial advisory services. He also
serves on the boards of directors of Mississippi Valley Bankshares, Inc.,
INTRAV, Inc., Rite Choice Managed Care, Inc., and Detroit Tool Industries, Inc.
and other civic organizations and served as a surrogate for his brother, former
President George Bush, during the 1988 and 1992 political campaigns. Mr. Bush
is also the uncle of George W. Bush, the current Governor of Texas.
BUSINESS HISTORIES OF EXECUTIVE OFFICERS.
ANTHONY J. DELLAVECHIA, age 60, became associated with the Company in
August 1995 as an independent consultant and in January 1996, was named Senior
Executive Vice President, Operations Director. Mr. Dellavechia has over 30
years experience in the consumer lending and financial services industry. Mr.
Dellavechia served in several executive capacities including Senior Executive
Vice President, Operations Director with Associates Financial Services Company,
Inc., a division of the Associates Corporation of North America, from 1979
until his retirement in 1985. He was named President of U.S. Consumer
Operations in 1983. Prior to Associates, he worked for AVCO Financial Services
from 1957 until 1976 where he began his career as a financial representative
and progressed through the ranks to the position of Area Vice President, in
charge of that Company's largest area.
ROBERT D. IDZI, age 51, joined the Company as Chief Financial Officer
in October 1994. In November 1994, he was elected Senior Vice President, in
December 1994, he was elected Treasurer and in February 1996, he was elected
Executive Vice President. Mr. Idzi served as Vice President, Treasurer, CFO and
Director of Unilease Computer Corporation, which engaged in the leasing of
mainframe computers and peripheral equipment, from 1986 until 1987. From 1987
until 1992, Mr. Idzi was Senior Vice President and Chief Financial Officer of
Equator Holdings, Ltd., a U.S. Based merchant bank subsidiary of the Hongkong
Shanghai Banking Group. A Certified Public Accountant, Mr. Idzi began his
career at the public accounting firm of Price Waterhouse. He received a B.S.
Degree in Accounting from Georgetown University and is a member of the American
Institute of Certified Public Accountants and the Financial Executives
Institute.
JOE B. DORMAN, age 51, joined the Company as General Counsel in
February 1995. In March 1995, he was elected Senior Vice President. Previously,
Mr. Dorman served as Counsel to Electronic Data Systems ("EDS") of Dallas, Texas
from 1990 to 1995. Prior to joining EDS, Mr. Dorman was associated with the
Dallas law firm of Graham, Bright & Smith and the Dallas firm of McKenzie &
Baer. Mr. Dorman has also served as principal and General Counsel for Lease
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<PAGE> 256
Investment Corporation and Intercap Corporation. Mr. Dorman is licensed to
practice law in the State of Texas. He is a Certified Public Accountant and a
Member of the Bar in the State of Texas.
ANDREW L. TENNEY joined Search as Operations Director in January 1995.
In March 1995 he was elected Executive Vice President. Mr. Tenney has over 30
years experience in the consumer lending and financial services industry. Prior
to joining Search, he was Executive Vice President of Century Acceptance
Corporation. Mr. Tenney served as Executive Vice President at ABQ Financial.
Previously, he was employed at Associates Financial Services as Senior Vice
President, Marketing, and Executive Vice President in Consumer Operations.
Before joining Associates, Mr. Tenney was employed by Avco Financial Services
for 16 years rising to the level of Vice President.
CAROLYN MALONE, age 53, was among the Company's original management
staff. As director of human resources, Ms. Malone was promoted to Vice President
in November 1994, and, in January 1995, she was elected Assistant Secretary.
Prior to her affiliation with the Company, she spent 15 years with an oil and
gas exploration entrepreneur and seven years with McCommons Oil Company. For the
past 30 years, her business career has involved human resources, office
management and administration. Ms. Malone attended Del Mar Junior College and
graduated from Corpus Christi School of Business in 1965. Ms. Malone received
her certification as human resource professional from the University of Texas at
Dallas in 1994.
ANDREW D. PLAGENS, age 28, joined the Company in May 1994 as Accounting
Manager. In March 1995, he was promoted to Assistant Controller and Analyst,
effective July 1, 1995, he became Controller of the Company and in January 1996
was promoted to Vice President. Prior to joining the Company, he was employed by
Hein + Associates and Baird, Kurtz & Dobson. Mr. Plagens is a licensed CPA and a
Member of the American Institute of CPA's and the Texas Society of CPA's.
There are no family relationships between any of the directors or
Executive Officers of the Company. Except as already described, none of the
Company's directors hold directorships in any company with a class of
securities registered pursuant to Section 12 of the Exchange Act or pursuant to
the requirements of Section 15(d) of the Exchange Act or any company registered
as an Investment Company under the Investment Company Act of 1940.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Based solely on a review of the copies furnished to the Company and
written representations from the executive officers and directors, the Company
believes that all Section 16(a) filing requirements for the period ended March
31, 1996 applicable to its executive officers, directors and greater than ten
percent (10%) beneficial owners were satisfied, with the exception of the
following:
On January 16, 1996, Anthony J. Dellavechia, an executive officer of
the Company, was granted the option to purchase 50,000 shares of the Company's
Common Stock and warrants to purchase 50,000 shares of the Company's Common
Stock. Mr. Dellavechia reported these transactions along with his initial
statement of ownership with the filing of his Form 5 on April 15, 1996.
On March 27, 1996, Joe B. Dorman, an executive officer of the Company,
was granted the option to purchase 25,000 shares of the Company's Common Stock
and warrants to purchase 25,000 shares of the Company's Common Stock. Mr.
Dorman reported this transaction with the filing of his Form 5 on April 15,
1996.
On March 27, 1996, Robert D. Idzi, an executive officer of the Company,
was granted warrants to purchase 50,000 shares of the Company's Common Stock.
Mr. Idzi reported this transaction with the filing of his Form 5 on April 15,
1996.
On March 27, 1996, Carolyn Malone, a Vice President of the Company in
charge of human resources, was granted the option to purchase 25,000 shares of
the Company's Common Stock and warrants to purchase 5,000 shares of the
Company's Common Stock. Ms. Malone reported this transaction with the filing of
her Form 5 on April 15, 1996.
On January 16, 1996, Karman L. Wallace, an executive officer of the
Company, was granted the option to purchase 25,000 shares of the Company's
Common Stock and warrants to purchase 25,000 shares of the Company's Common
Stock.
23
<PAGE> 257
Mr. Wallace reported these transactions along with his initial statement of
ownership with the filing of his Form 5 on April 15, 1996.
On March 27, 1996, Richard F. Bonini, a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr.
Bonini reported this transaction with the filing of his Form 5 on April 15,
1996.
On March 27, 1996, William H.T. Bush, a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr.
Bush reported this transaction with the filing of his Form 5 on April 15, 1996.
On March 27, 1996, Luther Hodges, Jr., A director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr.
Hodges reported this transaction with the filing of his Form 5 filed on April
15, 1996.
On March 27, 1996, James F. Leary, a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock and,
on March 22, 1996, purchased 1,600 shares of the Company's Common Stock. Mr.
Leary reported these transactions with the filing of his Form 5 on April 15,
1996.
On March 27, 1996, William H.T. Bush, a director of the Company, was
granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr.
Bush reported this transaction with the filing of his Form 5 on April 15, 1996.
The Company believes that no other Forms 3, 4 or 5 for directors,
executive officers or greater than 10% beneficial owners were required to be
filed with the SEC for the six-month transition period ended March 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information for the fiscal years ended
September 30, 1994 and September 30, 1995 and the six-month transition period
ended March 31, 1996, regarding the compensation of each individual who served
as the Company's Chief Executive Officer during the six-month period ended
March 31, 1996, and each of the Company's four most highly compensated
executive officers (other than the Chief Executive Officer) who served as an
executive officer of the Company at the end of the six-month period ended March
31, 1996.
24
<PAGE> 258
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
SECURITIES ALL OTHER
UNDERLYING ----------------
OTHER ANNUAL OPTIONS/SAR'S COMPENSATION (S)
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) (#) ----------------
--------------------------- ---- ---------- --------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
George C. Evans, 1996(1) 150,000 185,000 - - -
Pres., CEO, COO 1995 162,734 112,500 - 1,000,000(3) -
(from 1/20/95) (2)(5) 1,000,000(4)
Robert D. Idzi 1996(1) 66,666 35,000 - 50,000(7) -
EVP, CFO and Treasurer(2) 1995 117,308 5,000 - 204,000(3) 27,462(8)
Anthony J. Dellavechia 1996(1) 31,250 25,000 - 50,000(7) 26,500(9)
Sr. EVP, Operations Director(2) - 50,000(6)
Joe B. Dorman(2) 1996(1) 55,833 25,000 - 25,000(7) -
SVP, General 25,000(6)
Counsel and Secretary 1995 67,128 - - 50,000(3) -
50,000(4)
Andrew L. Tenney 1996(1) 62,499 25,000 - 25,000(7) -
EVP and Operations Director(2) 25,000(6)
1995 79,775 - - 50,000(3) -
50,000(4)
</TABLE>
- ------------------------------------------
(1) The compensation shown for 1996 represents compensation for the six-month
transition period ended March 31, 1996.
(2) Mr. Evans was elected President, Chief Executive Officer and Chief
Operating Officer effective January 20, 1995. In May 1995, Mr. Evans was
also elected Chairman of the Board of Directors. Mr. Idzi was elected
Chief Financial Officer in October 1994, Treasurer in January 1995, and
Executive Vice President in February 1996. Mr. Dellavechia joined the
Company as Senior Executive Vice President and Operations Director in
January 1996. Mr. Dorman joined the Company as General Counsel in February
1995, was elected Senior Vice President in March 1995 and was elected
Secretary in May 1995. Mr. Vandergrift joined the Company in May 1995 and
was elected Senior Vice President in February 1996. Mr. Tenney was elected
Operations Director in January 1995, and in May 1995, was elected
Executive Vice President. On April 1, 1996, Mr. Tenney resigned as an
executive officer of the Company and worked as a consultant from April 1,
1996 to June 30, 1996. On July 1, 1996, Mr. Tenney assumed the position of
Executive Vice President of Marketing.
(3) Includes newly granted options as well as replacement options granted in
exchange for the cancellation of previously granted options, as follows:
for Mr. Evans, 500,000 options granted on January 20, 1995, all
subsequently replaced on June 29, 1995 by the 500,000 options which he
currently holds; for Mr. Tenney, 25,000 options granted on January 23,
1995, all subsequently replaced on June 29, 1995 by the 25,000 options
which he currently holds; for Mr. Idzi, 102,000 options granted on
January 15, 1995, all subsequently replaced on June 29, 1995 by the
102,000 options which he currently holds; for Mr. Dorman, 25,000 options
granted on February 20, 1995 all subsequently replaced on June 29, 1995
by the 25,000 options which he currently holds.
(4) Includes newly granted warrants as well as replacement warrants granted in
exchange for the cancellation of previously granted warrants, as follows:
for Mr. Evans, 500,000 warrants granted on May 10, 1995, all subsequently
replaced on June 29, 1995 by the 500,000 warrants which he currently
holds; for Mr. Tenney, 25,000 warrants granted on May 10, 1995, all
subsequently replaced on June 29, 1995 by 25,000 warrants which he
currently holds; for Mr. Dorman, 25,000 warrants granted on May 10, 1995,
all subsequently replaced on June 29, 1995 by 25,000 warrants which he
currently holds.
(5) In June 1995, the Board determined to issue to Mr. Evans options or
warrants (to be determined at a later date) to purchase 1,500,000 shares
of common stock at a price of $1.375 Per share. These warrants or options
will be issued to Mr. Evans in 500,000 share portions upon the occurrence
of the following conditions:
(a) 500,000 shares when the company earns $1 million before taxes and
dividends by the fiscal year ending March 31, 1997;
(b) 500,000 shares when the market price of the Company's Common Stock
reaches $3.50 per share; and
(c) 500,000 shares when the market price of the Company's Common Stock
reaches $5.00 per share.
(6) Represents options granted on March 27, 1996.
(7) Represents warrants granted on March 27, 1996.
(8) Relocation reimbursements.
(9) Represents consulting fees paid to Mr. Dellavechia during the transition
period.
The foregoing executive officers receive health and disability
insurance benefits which do not exceed 10% of their respective salaries. These
benefits are also provided to all other employees of the Company.
25
<PAGE> 259
The Company has no long-term incentive plans, pension plans, or stock
appreciation rights plans. The Company adopted, as of August 1, 1994, its 1994
Employee Stock Option Plan, which was approved at its annual meeting of
stockholders in May 1995.
Certain 1994 Employee Stock Options and warrants to purchase Common
Stock, as summarized in the following table, were granted to executive officers
in the six-month period ended March 31, 1996.
OPTION AND WARRANT GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL WARRANTS APPRECIATION FOR
UNDERLYING AND OPTIONS GRANTED EXERCISE OR OPTION OR WARRANT
WARRANTS AND TO EMPLOYEES DURING BASE PRICE EXPIRATION TERM
NAME OPTIONS GRANTED # THE FISCAL YEAR ($ PER SHARE) DATE (8) 5% 10%
---- ----------------- --------------- ------------- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
George C. Evans - - - -
Robert D. Idzi 50,000(1) 10.2 1.26 3/27/06 $39,620 $100,406
Anthony J. Dellavechia 50,000(1) 10.2 1.25 1/16/06 39,306 99,609
50,000(3) 10.2 1.25 1/16/06 39,306 99,609
Joe B. Dorman 25,000(1) 5.1 1.26 3/27/06 19,810 50,202
25,000(2) 5.1 1.26 3/27/06 19,810 50,202
Andrew L. Tenney 25,000(1) 5.1 1.26 3/27/06 19,810 50,202
25,000(2) 5.1 1.26 3/27/06 19,810 50,202
</TABLE>
(1) Represents warrants to purchase Common Stock.
(2) Represents 1994 Employer Stock Options which vest in 1/3 yearly increments
following the date of their grant.
(3) Represents stock options granted before the Fund Subsidiaries'
reorganization which, as a result of the change in control following the
reorganization, are now fully vested.
The following unexpired stock options to purchase Common Stock were
held by the executives officers of the Company listed below at March 31, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR END OPTION AND WARRANT VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN THE MONEY OPTIONS AND WARRANTS
AND WARRANTS AT MARCH 31, 1996 AT MARCH 31, 1996
-------------------------------------------- ------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
George C. Evans 1,000,000 - $290,000 -
Robert D. Idzi 152,000 - 35,580 -
Anthony J. Dellavechia 100,000 - 13,000 -
Joe B. Dorman 75,000 25,000 9,000 $3,000
Andrew L. Tenney 75,000 25,000 9,000 3,000
</TABLE>
(1) Calculated using the fair market value of the Common Stock underlying the
options and warrants as of the end of the transition period ($1.38) And the
exercise price of the options or warrants.
COMPENSATION OF DIRECTORS
The Company pays to each director a fee of $750 per month and $1,500
per meeting attended, plus reimbursement of expenses in connection with
attending each meeting. In addition, the Company has granted each director
warrants to
26
<PAGE> 260
purchase Common Stock. See "Principal Holders of Capital Stock."
Messrs. Evans and Leary, who are employees of the Company, do not receive
separate compensation for their services as directors, although Mr. Leary, who
is an employee of search was paid salary and bonus totaling $57,999 during the
transition period.
OTHER AGREEMENTS WITH EXECUTIVE OFFICERS
Effective January 20, 1995, George C. Evans joined the Company as
President, Chief Executive Officer, Chief Operating Officer and a member of the
Board of Directors by executing a three-year employment agreement at an annual
compensation of $250,000 minimum per year. Mr. Evans is also to receive a bonus
ranging from 25% to 100%, as determined by the Board, of annual salary. In June
1995, the Board determined to issue to Mr. Evans options or warrants (to be
determined at a later date) to purchase 1,500,000 shares of Common Stock at a
price of $1.375 per share. These warrants or options will be issued to Mr.
Evans in 500,000 share portions upon the occurrence of the following
conditions:
(a) 500,000 shares when the Company earns $1 million before taxes and
dividends before fiscal year ending march 31, 1997;
(b) 500,000 shares when the market price of the Company's Common Stock
reaches $3.50 per share; and
(c) 500,000 shares when the market price of the Company's Common Stock
reaches $5.00 per share.
On May 1, 1996, Mr. James F. Leary entered into a two-year employment
agreement with the Company. During the term of this agreement, Mr. Leary will
be paid a salary of $160,000 per year.
As of March 31, 1996, no other employee of the Company or its
subsidiaries was covered by an employment agreement.
EMPLOYEE STOCK OPTION PLAN
On August 1, 1994, the Board of Directors adopted, subject to
stockholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The
Plan was approved by the stockholders on May 10, 1995. The purpose of the Plan
is to advance the interest of the Company by providing additional incentives to
attract and retain qualified and competent employees, upon whose efforts and
judgment the success of the company (including its subsidiaries) is largely
dependent, through the encouragement of stock ownership in the Company by such
persons. A total of 1,750,000 shares of Common Stock (subject to adjustment to
compensate for the issuance of stock dividends or any recapitalization
resulting in a stock split-up, combination or exchange of shares of Common
Stock) have been reserved for sale upon exercise of options granted under the
Plan. Options covering 1,122,000 shares had been granted under the Plan as of
March 31, 1996.
CASHLESS WARRANTS GRANTS.
The Company also compensates its directors, key employees and some
consultants through grants of cashless warrants. The purposes of these warrant
grants are similar to those of the Employee Stock Option Plan. The exercise
price of these warrants may be paid by the holder either (i) in cash or (ii) by
surrender of warrants equal to the cash value of the exercise price. As of
March 31, 1996, the Company had outstanding a total of 1,585,000 cashless
warrants.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
In September 1993, the Board of Directors established a compensation
committee (the "Compensation Committee"). The Compensation Committee currently
consists of the following directors: A. Brean Murray, Richard F. Bonini and
James F. Leary. Mr. Leary also serves as an employee of the Company in his
capacity as Vice-Chairman of Finance. In addition, during the six-month period
ended March 31, 1996, the Company paid Murray, Foster Securities Inc. ("BMFS")
$200,000 for services rendered by it related to the success of the joint plan of
reorganization. Mr. Murray is the chairman of BMFS. See, "Certain
Relationships and Related Transactions."
27
<PAGE> 261
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is now comprised of three
non-employee directors: Luther H. Hodges, Jr., Chairman, Richard F. Bonini and
William H. T. Bush. The Committee regularly reviews the executive compensation
policies and practices of the Company and establishes or approves the
compensation for executive officers. The Committee also administers The
Company's 1994 Stock Option Plan.
The Company's primary objective is to maximize stockholder value. To
aid in accomplishing this goal, the Committee is guided by two principles in
determining executive compensation policies: first, to attract, develop, reward
and retain highly talented individuals; and second, to motivate executive
officers to perform to the best of their abilities and to achieve both
short-term and long-term Company objectives that will contribute to the overall
goal of enhancing stockholder value.
The Company's executive compensation program consists of two main
elements:
o Annual compensation, which is comprised of base salary and
bonus, and
o Long-term incentives that provide a financial opportunity to
executive officers through grants of stock options and warrants.
The compensation that may be realized by executives through
these incentives is tied directly to the value of the Company's
Common Stock in the future.
The Committee believes that the Company's executive compensation
program reflects the fundamental principles described above and provides strong
incentives to executives to maximize Company performance.
The base salary for Mr. George Evans, Chief Executive Officer, was
determined by direct negotiations with Mr. Evans at the time of his employment
in January 1995. The Employment Agreement for Mr. Evans specified his salary
and the range for his bonus. Of the current Board of Directors, only A. Brean
Murray was a member at that time. One of the Committee's members, A. Brean
Murray, was a member of the Board at that time. The other members of the Board
who participated in the negotiations are no longer members of the Board.
During August 1995, the Committee, then composed of Messrs. A. Brean
Murray, Luther H. Hodges, Jr. and James F. Leary, met informally to discuss Mr.
Evans' performance and compensation. In September 1995, the deliberations of
the Committee were presented to the Board of Directors, who approved changes to
Mr. Evans' compensation. Prior to this approval, Mr. Leary, who had been
elected Vice Chairman, resigned from the Compensation Committee.
The Committee and the Board of Directors considered the following
matters: his (i) knowledge of the consumer finance industry; (ii) reputation
and acquaintances with other persons in the finance industry; (iii) performance
in improving Company operations and employee confidence; (iv) performance in
hiring competent and experienced executives which could assist in the
"turnaround" of the Company; (v) performance in formulating and implementing
plans to convert the Company's debt to equity; (vi) performance in dealing with
shareholders and Noteholders who, at the time of his initial employment, were
hostile toward the Company's former management; (vii) performance in settling
the O'Shea shareholder class action litigation; and (viii) performance in
assembling a Board of Directors with experience ad knowledge in the finance
industry.
Based on the foregoing evaluation, the Board of Directors, acting on
the recommendation of the Committee, approved an increase in Mr. Evans' salary
from $250,000 to $300,000 and a bonus of $250,000. Mr. Evans received the bonus
in two payments, the first portion of which, consisting of $65,000, was paid at
the end of the fiscal year ended September 1995. The remaining $185,000 was to
be paid subsequent to and conditioned upon Confirmation of the Joint Plan. The
Board also promised to grant to Mr. Evans the right to receive warrants or
options, at his election, to purchase 1,500,000 shares of Common Stock, based
on the future performance of the Company and its Common Stock per share price.
The Committee approves the salary of the other executive officers of
the Company, including the executive officers named in the Summary Compensation
Table. The Committee at the end of each fiscal year reviews incentive bonus
awards proposed by Mr. Evans for all of the executive officers other than Mr.
Evans. The Committee and Mr. Evans jointly reviewed the individual performances
of each executive officer other than Mr. Evans, and the Committee gave
significant consideration
28
<PAGE> 262
of Mr. Evans' views on the performance of each such executive officer. The
Committee also awards all warrants and 1994 Employee Stock Options to executive
officers. Again, such awards are generally proposed by Mr. Evans, and the
Committee and Mr. Evans jointly review the individual performances of each
executive officer other than Mr. Evans in making the awards.
The size of the bonus, option and warrant awards to executive officers
were based on subjective factors, including primarily the perceived importance
of the individual's contribution to the success of the Company and upon the
amount of and value of options and warrants currently held by the individual.
The Committee also takes into consideration in granting options and warrants to
executive officers the relationship of the number of options and warrants held
by each of the executive officers to a subjective rating of the degree of
responsibility of the position held by each officer compared to that of the
other executive officers. While not having a target ownership level of Common
Stock by executive officers, the Committee has endeavored to motivate
executives by granting options at levels that present executives with an
opportunity for significant gains that are commensurate to gains in stockholder
value.
During the transition period ended March 31, 1996, bonus, option and
warrant awards granted to executive employees were tied to the success of the
Fund Subsidiaries' reorganization. Executive officers were granted a number of
options and warrants prior to and during the transition period due to the
Company's need to conserve cash in order to complete the reorganization of its
Fund Subsidiaries, while continuing to attract qualified executive employees
notwithstanding the troubled circumstances of the Company.
Stock options and warrants are designed to align the interests of the
recipients with those of the stockholders of the Company. Stock options and
warrants are typically granted by the Company with an exercise price equal to
the market price of the Company's Common Stock on the date of grant. The
options generally vest over three years, and the warrants immediately vest. In
the six-month transition period ended March 1996, the 1994 Employee Stock
Options that were granted prior to the effectiveness of the Joint Plan became
fully vested as a result of the substantial number of shares of stock that were
issued by the Company pursuant to the Joint Plan and the resulting deemed
change in control of the Company.
In summary, the Committee's executive compensation decisions are
generally intended to link a significant portion of the compensation of the
Company's executive officers to individual performance and to corporate
performance and stock price appreciation. The Committee intends to continue the
policy of linking executive compensation to corporate performance and
improvement in stockholder value, recognizing that economic factors beyond
management's control may result in imbalances for a particular period but that
consistent improvement in corporate performance over the long-term will enure
to the mutual benefit of the Company's executives and its stockholders.
29
<PAGE> 263
PERFORMANCE GRAPH
The following graph presents cumulative shareholder return on the
Company's Common Stock for the five-year period ended March 31, 1996. The
Company is compared to the S&P 500 Index and the S&P Financial Index. The graph
assumes that $100 was invested in the Company's Common Stock and in each index
at the beginning of the measurement period.
The data source for all graphs is Bloomberg data service and National
Quotation Bureau.
COMPARISON OF CUMULATIVE TOTAL RETURN 1993-1996*
GRAPH
* Assumes the reinvestment of any dividends.
(1) Due to the sporadic and limited trading of the Company's Common Stock
before March 31, 1993, only three years are shown.
30
<PAGE> 264
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table sets forth certain information, as of June 17,
1996, relating to the beneficial ownership of the Common Stock, 12% Preferred
Stock (the "12% Preferred Stock") and 9%/7% Preferred Stock (i) by any person
or "group," as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, known to the Company to own beneficially 5% or more of
the outstanding Common Stock or shares of Preferred Stock, and (ii) by each
current director and executive officer of the Company and by all current
directors and executive officers of the Company as a group. Except as otherwise
indicated, each of the persons named below is believed by the Company to
possess sole voting and investment power with respect to the shares of Common
Stock, 12% Preferred Stock or 9%/7% Preferred Stock beneficially owned by such
person.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1) PERCENTAGE OF CLASS OUTSTANDING
NAME OF DIRECTOR OR
EXECUTIVE OFFICER OR NUMBER OF
NAME AND COMMON NUMBER OF NUMBER OF 12%
ADDRESS OF BENEFICIAL STOCK 9%/7% PREFERRED 12% PREFERRED COMMON 9%/7% PREFERRED PREFERRED
---------------------- ------ -
OWNER SHARES STOCK SHARES STOCK SHARES STOCK STOCK STOCK
----- ------ ------------ ------------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Hall Phoenix/Inwood, Ltd. 7,814,556(2) 2,032,812 28.7% 11.9%
750 N. St. Paul, Suite 200
Dallas, Texas
75201-3247
Value Partners, Ltd. 2,150,174 2,667,819 7.9% 15.6%
2200 Ross Ave.
Suite 4660 W
Dallas, TX 75201
Greg Muns, M.D. - 20,000 - 5%
1319 Shores Circle
Rockwall, Texas 75087
Sam Coker Retirement - 20,000 - 5%
Trust
Rt. 2, Box 50
Millsap, Texas 76066
A. Brean Murray 483,558(3) 1.7%
Luther H. Hodges, Jr. 111,000(4) *
James F. Leary 102,500(4) *
William H.T. Bush 100,000(5) *
Richard F. Bonini 122,862(4) 12,236 * *
George C. Evans 1,000,000(6) 3.5
George C. Evans, as 812,127(7) 2.9
holder of the SBM Trust,
irrevocable proxy
Joe B. Dorman 75,000(8) *
Robert D. Idzi 152,000(9) *
Anthony J. Dellavechia 100,000(10) *
Andrew L. Tenney 100,000(11) *
All directors and executive
officiers as a group
(9 person) 3,277,007 12,236 11.0% *
</TABLE>
-------------------------
* Less than 1%
(1) The information as to beneficial ownership of Common Stock, 12% Preferred
Stock and 9%/7% Preferred Stock has been furnished by the Company's
transfer agent and the respective shareholders, directors and officers of
the Company. Each named person or group is deemed to be the beneficial
owner of securities which may be acquired by such person or group within
60 days through the exercise of options, warrants and rights, if any, and
such securities are
31
<PAGE> 265
deemed to be outstanding for the purpose of computing the percentage of
stock beneficially owned by such person or group. Such securities are not
deemed to be outstanding for the purpose of computing the percentage of
stock beneficially owned by any other person or group.
(2) Includes (i) warrants to purchase 3,000,000 shares of Common Stock at
$2.00 per share on or before November 30, 2000, and (ii) warrants to
purchase 676,178 shares of Common Stock at $2.00 per share (increasing
$0.25 each year) on or before March 31, 2001.
(3) Includes (i) warrants to purchase 10,000 shares, at $8.75 per share, on or
before December 20, 1998, (ii) warrants to purchase 113,558 shares at
$9.60 per share on or before December 10, 1998, (iii) warrants to
purchase 250,000 shares at $1.09 per share on or before June 29, 2005,
and (iv) warrants to purchase 50,000 shares at $1.16 per share on or
before March 27, 2006.
(4) Includes warrants to purchase 50,000 shares at $1.09 per share on or
before June 29, 2005 and warrants to purchase 50,000 shares at $1.16 per
share on or before March 27, 2006.
(5) Represents warrants to purchase 50,000 shares at $1.375 per share on or
before August 4, 2005 and warrants to purchase 50,000 shares at $1.16 per
share on or before March 27, 2006.
(6) Represents (i) warrants to purchase 500,000 shares at $1.09 per share
on or before June 29, 2005 and (ii) options issued under the 1994
Employee Stock Option Plan to purchase 500,000 shares of Common Stock at
$1.09 per share on or before January 20, 2005, which vested in Mr. Evans
following the Fund Subsidiaries' reorganization.
(7) Represents 812,127 shares owned of record by the SBM Trust for which Mr.
Evans holds an irrevocable proxy to vote. Mr. Evans has no other
relationship with the SBM Trust.
(8) Represents (i) warrants to purchase 25,000 shares at $1.09 per share on or
before June 29, 2005, (ii) options issued under the 1994 Employee Stock
Option Plan to purchase 25,000 shares of Common Stock at $1.09 per share
on or before February 20, 2005, which vested in Mr. Dorman following the
Fund Subsidiaries' reorganization and (iii) warrants to purchase 25,000
shares at $1.26 per share on or before March 27, 2006.
(9) Represents options issued under the 1994 Employee Stock Option Plan to
purchase 102,000 shares at $1.09 per share on or before January 15, 2005,
which vested in Mr. Idzi following the Fund Subsidiaries' reorganization,
and warrants to purchase 50,000 shares at $1.26 per share on or before
March 27, 2006.
(10) Represents warrants to purchase 50,000 shares at $1.25 per share on or
before January 16, 2006 and options issued under the 1994 Employee Stock
Option Plan to purchase 50,000 shares at $1.25 per share on or before
January 16, 2006, which vested in Mr. Dellavechia following the Fund
Subsidiaries' reorganization.
(11) Represents warrants to purchase 25,000 shares at $1.25 per share on or
before January 16, 2006 and options issued under the 1994 Employee Stock
Option Plan to purchase 25,000 shares at $1.26 per share on or before
March 27, 2007, which vested in Mr. Tenney following the Fund
Subsidiaries' reorganization.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The policy of the Company with respect to transactions with officers,
directors and affiliates is to require that such transactions be (i) on terms
no less favorable to the Company than could be obtained from unrelated third
parties and (ii) approved by a majority of the disinterested directors of the
Company. The following transactions were approved by the Board of Directors of
the Company in accordance with such policy.
Mr. A. Brean Murray is a director of the Company and Chairman of Brean
Murray, Foster Securities Inc. ("BMFS"). In March 1996, the Company paid a
$200,000 cash fee to BMFS for its services related to the success of the Joint
Plan. These services included research and advice to the Company regarding the
feasibility, terms and marketability of securities issued under the Joint Plan,
the advantages and disadvantages of a reverse stock split, the feasibility of
the Company's plans to re-focus its receivables purchasing activities, and the
potential trading markets and values of the Company's stock following the
completion of the Joint Plan. These fees are subject to approval by the Court
pursuant to 11 U.S.C. Section 1129(a)(4).
Pursuant to the Joint Plan, Mr. Frederick S. Hammer will become a
member of the Board of Directors. Mr. Hammer is a principal in Inter-Atlantic
Securities Corp., which will receive a fee for its services to be rendered in
connection with obtaining potential subordinated debt financing for The
Company. Inter-Atlantic will receive the following compensation:
o A marketing fee in the amount of $50,000 after Inter-Atlantic has
produced an offering memorandum to be given to potential investors.
o If subordinated debt financing is obtained, a private placement fee
equal to 4.5% of the gross par amount of subordinated debt. One-half
of the private placement fee will be paid in cash and one-half in
subordinated debt, which will be valued at par and issued on the same
terms as provided to the investors.
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Pursuant to the Funding Agreement ("Funding Agreement") entered into
on November 30, 1995 between the Company and Hall Financial Group, Inc.
("HFG"), HFG made loans totaling $2,283,000 ("HFG Notes") to Search. The
Funding Agreement gave HFG the right to convert the HFG Notes into 2,500,000
shares of the Company's common stock. Further, in connection with the Funding
Agreement, the Company granted to HFG warrants to purchase 3,000,000 shares of
the Company's Common Stock. The grants of these warrants and conversion rights
gave HFG beneficial ownership of approximately 38.7% of Company's common stock,
making HFG an affiliate of the Company.
Effective April 2, 1996, HPIL, as assignee from HFG of the HFG Notes,
fully exercised the rights of the holder of the HFG Notes to convert the Notes
into 2,500,000 shares of Search common stock.
The Funding Agreement also provided to HFG the option to purchase
common stock, 9%/7% Preferred Stock, and warrants. Effective April 2, 1996,
HPIL, as assignee of HFG, fully exercised this purchase option by paying
$4,346,000 cash to the Company for which the Company issued 1,638,400 shares of
common stock and 2,032,800 shares of 9%/7% Preferred Stock, and warrants to
purchase 676,000 shares of common stock to HPIL.
Pursuant to the Funding Agreement, HFG was entitled to elect one
director to the Company's Board if HFG converted the HFG notes into common
stock and to elect another if HFG purchased at least $1,000,000 present value
of securities from the Company. These new directors, Messrs. Craig Hall and
Larry E. Levey, pursuant to their request, will appointed as directors when the
Company obtains directors and officers liability insurance, which the Company
is pursuing. As a result of satisfaction of these conditions, HFG has
designated two HFG officers as its representatives for appointment to the
Company's Board.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The financial statements listed in the Index to Financial Statements
are filed as part of this annual report. No financial statement schedules are
required to be filed as part of this annual report because all information
otherwise included in schedules has been incorporated into the Notes to
Consolidated Financial Statements.
(b) REPORTS ON FORM 8-K
During the quarter ended March 31, 1996 the following reports on Form
8-K were filed by the Company:
On April 3, 1996, the Company filed a report on Form 8-K announcing a
change in its fiscal year end from September 30 to March 31.
On April 18, 1996, the Company filed a report on Form 8-K announcing
the Effective Date of the Joint Plan.
On May 14, 1996, the Company filed a report on Form 8-K announcing the
approval of the shareholders class action suit settlement by U.S. District
Court, Northern District of Texas, Dallas Division.
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<PAGE> 268
(c) EXHIBITS
Exhibit Number Description
- --------------- -------------------------------------------------------------
2.1 Third Amended Joint Plan of Reorganization (incorporated by
reference to Exhibit 2.1 to the April 17, 1996 Form 8-K
Current Report).
2.2 Modification to Third Amended Joint Plan of Reorganization
(incorporated by reference to Exhibit 2.2 to the April 17,
1996 Form 8-K Current Report).
2.3 Order Confirming Third Amended and Supplemented Joint Plan,
Pursuant to 11 U.S.C. ss. 1129 (incorporated by reference to
Exhibit 2.3 to the April 17, 1996 Form 8-K Current Report).
2.4 Chapter 11 Post-Confirmation Order (incorporated by reference
to Exhibit 2.4 to the April 17, 1996 Form 8-K Current
Report).
2.5 Order Regarding Entry Date of Order Confirming Third Amended
and Supplemented Joint Plan Pursuant to 11 U.S.C. ss. 1129
(incorporated by reference to Exhibit 2.5 to the April 17,
1996 Form 8-K Current
Report).
2.6 Order Granting Second Motion for Technical, Non-Material
Modification to the Third Amended and Supplemented Joint Plan
of Reorganization (incorporated by reference to Exhibit 2.6
to the April 17, 1996 Form 8-K Current Report).
3.1 Certificate of Incorporation, as amended to date.
3.2 Bylaws, as amended.
4.1 Warrant to purchase 3,000,000 shares of common stock of
Search Capital Group, Inc. dated as of November 30, 1995
(incorporated herein by reference from Exhibit 4.1 to the
Form 8-K Current Report dated November 30, 1995).
4.2 Certificate of Designation 9%/7% Convertible Preferred
Stock (incorporated by reference to Exhibit 4.1 to the
April 17, 1996 Form 8-K).
4.3 Warrant Agreement dated as of March 27, 1996 between Search
Capital Group, Inc. and American Securities Transfer, Inc.,
as Warrant Agent (incorporated by reference to Exhibit 4.2 to
the April 17, 1996 Form 8-K).
10.1 Form of Director's Warrant to purchase shares of Common Stock
of Search Capital Group, Inc. (incorporated by reference from
Exhibit 10.16 of Search Capital Group, Inc.'s Annual Report
on Form 10-K for the nine-month transition period ended
September 30, 1993)
10.2 Form of Warrant for Officers and Employees to purchase shares
of Common Stock of Search Capital Group, Inc. (incorporated
by reference from Exhibit 10.17 of Search Capital Group,
Inc.'s Annual Report on Form 10-K for the nine-month
transition period ended September 30, 1993)
10.3 1994 Employee Stock Option Plan of Search Capital Group, Inc.
(incorporated by reference from Exhibit 10.18 of Search
Capital Group, Inc. Annual Report on Form 10-K for the fiscal
year ended September 31, 1994).
10.4 Stock Purchase Agreement between Search Capital Group, Inc.
and Louis Dorfman, Trustee of the SBM Trust (incorporated by
reference from Exhibit 10.9 to Search Capital Group, Inc.'s
originally filed Annual Report on Form 10-K for the year
ended September 30, 1995).
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<PAGE> 269
Exhibit Number Description
- -------------- ------------------------------------------------------------
10.5 Funding Agreement dated November 30, 1995 (the "Funding
Agreement") among Search Capital Group, Inc., Search Funding
Corp., Automobile Credit Acceptance Corp., Automobile Credit
Holdings, Inc., Newsearch, Inc. and Hall Financial Group,
Inc. (incorporated herein by reference from Exhibit 99.1
to the Form 8-K Current Report of Search Capital
Group, Inc. dated November 30, 1995 (the 11/95 8-K")).
10.6 Convertible Promissory Note dated November 30, 1995 from
Search Capital Group, Inc. and Search Funding Corp. payable
to the order of Hall Financial Group, Inc. in the principal
amount of $1,284,487.28 (incorporated herein by
reference from Exhibit 99.2 to the 11/95 8-K).
10.7 Promissory Note dated November 30, 1995 from Search Capital
Group, Inc. and Search Funding Corp. payable to the order
of Hall Financial Group, Inc. in the principal amount of
$715,512.72. (incorporated herein by reference from Exhibit
99.3 to the 11/95 8-K).
10.8 Convertible Note dated November 30, 1995 from Search
Capital Group, Inc. and Search Funding Corp. payable to the
order of Hall Financial Group, Inc. in the principal amount
of $1,000,000.00. (incorporated herein by reference from
Exhibit 99.4 to the 11/95 8-K).
10.9 Newsearch Pledge Agreement dated as of November 30, 1995
between Newsearch, Inc. and Hall Financial Group, Inc.
(incorporated herein by reference from Exhibit 99.5 to the
11/95 8-K).
10.10 Search Pledge Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from Exhibit
99.6 to the 11/95 8-K).
10.11 ACHI Pledge Agreement dated as of November 30, 1995 between
Automobile Credit Holdings, Inc. and Hall Financial Group,
Inc. (incorporated herein by reference from Exhibit 99.7 to
the 11/95 8-K).
10.12 Search Security Agreement dated as of November 30, 1995
between Search Capital Group, Inc. and Hall Financial
Group, Inc. (incorporated herein by reference from Exhibit
99.7 to the 11/95 8-K).
10.13 SFC Security Agreement dated as of November 30, 1995
between Search Funding Corp. and Hall Financial Group,
Inc. (incorporated herein by reference from Exhibit 99.9 to
the 11/95 8-K).
10.14 ACAC Security Agreement dated as of November 30, 1995
between Automobile Credit Acceptance Corp. and Hall
Financial Group, Inc. (incorporated herein by reference
from Exhibit 99.10 to the 11/95 8-K).
10.15 First Amendment to the Funding Agreement dated December 31,
1995
10.16 Second Amendment to the Funding Agreement dated March 25,
1996
10.17 Third Amendment to the Funding Agreement dated April 1,
1996.
10.18 Letter Agreement between Search and Alex. Brown & Sons,
Inc. dated May 24, 1995 (incorporated by reference from
Exhibit 10.20 to Search Capital Group, Inc.'s Annual Report
on Form 10-K for the year ended September 30, 1995).
10.19 Employment Letter Agreement between George C. Evans and
Search date January 20, 1995 (incorporated by reference
from Exhibit 10.21 to Search Capital Group, Inc.'s Annual
Report on Form 10-K for the year ended September 30, 1995).
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Exhibit Number Description
- -------------- --------------------------------------------------------------
10.20 Amendment to Employment Agreement of George C. Evans dated
May 10, 1995 (incorporated by reference from Exhibit 10.22 to
Search Capital Group, Inc.'s Annual Report on Form 10-K for
the year ended September 30, 1995).
10.21 Employment Agreement between Search and James F. Leary dated
May 1, 1996.
11.1 Computation of per share earnings (loss)
22.1 List of Subsidiaries (incorporated by reference from Search
Capital Group, Inc.'s Annual Report on Form 10-K for the
fiscal year ended September 31, 1994).
23.1 Consent of BDO Seidman, LLP
27.1 Financial data schedule
28.1 Letter agreement between the Company and Inter-Atlantic
Securities dated May 13, 1996.
(d) FINANCIAL STATEMENTS EXCLUDED BY RULE 14a-3(b).
None of the Registrant's financial statements are excluded from the
annual report to shareholders by Rule 14a-3(b).
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<PAGE> 271
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SEARCH CAPITAL GROUP, INC.
By: /s/ George C. Evans
----------------------------------------
George C. Evans, President and Chief
Executive Officer
Date: May 29, 1997
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacity and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ George C. Evans
- ----------------------------- May 29, 1997
George C. Evans Chairman of the Board, Chief Executive
Officer, Chief Operating Officer and Director
/s/ Robert D. Idzi
- ------------------------------ May 29, 1997
Robert D. Idzi Executive Vice President, Chief Financial
Officer and Treasurer
/s/ Andrew D. Plagens
- ------------------------------ May 29, 1997
Andrew D. Plagens Senior Vice President, Controller and
Chief Accounting Officer
/s/ A. Brean Murray
- ------------------------------ May 8, 1997
A. Brean Murray Director
/s/ Richard F. Bonini
- ------------------------------ May 29, 1997
Richard F. Bonini Director
/s/ Luther H. Hodges
- ------------------------------ May 29, 1997
Luther H. Hodges Director
/s/ James F. Leary
- ------------------------------ May 29, 1997
James F. Leary Vice Chairman of Finance and Director
/s/ William H. T. Bush
- ------------------------------- May 29, 1997
William H. T. Bush Director
</TABLE>
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<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
- ------------------------------- ----------------------------
Frederick S. Hammer Director
/s/ DOUG POWELL
- ------------------------------- May 8, 1997
Doug Powell Director
/s/ BARRY W. RIDINGS
- ------------------------------- May 29, 1997
Barry W. Ridings Director
</TABLE>
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<PAGE> 273
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -------------------------------------------------------------
<S> <C>
11.1 Computation of per share earnings (loss)
23.1 Consent of BDO Seidman, LLP
27.1 Financial data for the transition period ended March 31, 1996
</TABLE>
<PAGE> 274
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law. Section 102(b)(7) of the Delaware
General Corporation Law provides that a certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock) of
the Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law provides as
follows:
"(a) A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of
the corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in subsections (a) and
(b) of this section. Such determination shall be made (1) by a majority vote
of the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (2) if there are no such directors, by
independent legal counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
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amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of directors deems
appropriate.
(f) The indemnification and advancement of expenses provided by or
granted pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) A corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect to
the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the corporation"
shall include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to in
this section.
(j) The indemnification and advancement of expenses provided by,
or granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive
jurisdiction to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any bylaw, agreement, vote
of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance expenses
(including attorneys' fees)."
Restated Certificate of Incorporation. Paragraph ELEVENTH of the
Restated Certificate of Incorporation states that the Company shall, to the
fullest extent permitted by Delaware General Corporation Law, indemnify any and
all persons who it would have the power to indemnify under such law from and
against any and all of the expenses, liabilities or other matters referred to
in or covered by such law and, to the extent permitted under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his director or officer capacity and as to action in another
capacity while holding such office. Such indemnification obligation will
continue as to a person who has ceased to be a director, officer, employee or
agent and inure to the benefit of his heirs, executors and administrators.
Paragraph TWELFTH of the Restated Certificate of Incorporation states
that, to the fullest extent permitted by the Delaware General Corporation Law,
a director of the Company will not be liable to the Company or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Bylaws. Article IX of the Company's Bylaws requires the Company to
indemnify any person who was or is a party, or threatened to be made a party to
any suit or proceeding, by reason of the fact that he or she is or was an
authorized representative of the Company for specified liabilities and expenses
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding,
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<PAGE> 276
he or she had no reasonable cause to believe his or her conduct was unlawful.
The Board of Directors, by vote of a majority of those present at any meeting,
may elect to exclude such person from such indemnification. The indemnified
liabilities and expenses include, but are not limited to, legal fees and
disbursements and amounts of judgments, fines or penalties against an amount
paid in settlement by the indemnified party. The Company may advance any
reasonable expense incurred by the indemnified party prior to the final
disposition of any claim, action, suit or proceeding if it receives an
undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification. These
indemnification rights are in addition to any other indemnification rights to
which the person may be entitled under any agreement, vote of stockholders, the
Restated Certificate of Incorporation, or as a matter of law or otherwise.
The directors and officers of the Company are insured (subject to
certain exceptions and deductions) against liabilities that they may incur in
their capacity as such, including liabilities under the Securities Act, under a
liability policy carried by the Company.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger dated as of February 7, 1997
among the Registrant, Search Capital Acquisition Corp. and MS
Financial, Inc. ("MSF") (included as part of Annex A to the
Joint Proxy Statement/Prospectus)
2.2 Letter agreement dated as of June 4, 1997 among the
Registrant, Search Capital Acquisition Corp. and MSF (included
as part of Annex A to the Joint Proxy Statement/Prospectus)
4.1 Specimen certificate of the Registrant's Common Stock
(incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-68524))
4.2 Restated Certificate of Incorporation of Search Financial
Services Inc. (incorporated by reference to Exhibit 3.1 to
Registrant's Transition Report on Form 10-K for the transition
period ended March 31, 1996 ("1996 10-K"))
4.3 Certificate of Amendment of Certificate of Designation of
9%/7% Convertible Preferred Stock (incorporated by reference
to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (the "9/30/96 Form
10-Q"))
4.4 Certificate of Correction to the Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 to the
9/30/96 Form 10-Q)
4.5 Certificate of Amendment of Certificate of Designation of
9%/7% Convertible Preferred Stock (incorporated by reference
to Exhibit 3.4 to the 9/30/96 Form 10-Q)
4.6 Certificate of Amendment of Restated Certificate of
Incorporation (incorporated by reference to Exhibit 4.7 to
Registrant's Form S-3 Registration Statement (Registration No.
333-20551))
4.7 Loan Agreement dated September 11, 1996 between Search Funding
II, Inc. and Hibernia National Bank
4.8 Commercial Security Agreement dated September 11, 1996 between
Search Funding II, Inc. and Hibernia National Bank
4.9 Commercial Guaranty dated September 11, 1996 between
Registrant and Hibernia National Bank.
4.10 Promissory Note dated September 11, 1996 in the principal
amount of $25,000,000 payable to Hibernia National Bank.
4.11 Other than the indebtedness evidenced by the agreements listed
in Exhibits 4.7 and 4.10 above and Exhibit 10.33 below, none
of the outstanding long-term debt of the Registrant and its
consolidated subsidiaries exceeds ten percent (10%) of the
total assets of the Registrant and its consolidated
subsidiaries, and, except for Exhibit 10.25, copies of the
constituent instruments defining the rights of the holders of
such debt are not included as exhibits to this Registration
Statement. The Registrant agrees to furnish copies of such
instruments to the Commission upon request.
5.1 Opinion of Bracewell & Patterson, L.L.P., counsel to the
Registrant
8.1 Tax Opinion of Haynes & Boone, L.L.P.
10.1 Stockholders Agreement, dated as of February 7, 1997, between
the Registrant and certain stockholders of MSF (incorporated
by reference to Exhibit 2.2 to Registrant's Current Report on
Form 8-K dated February 7, 1997)
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10.2 Form of Escrow Agreement, dated as of February 7, 1997,
between the Registrant, MSF, certain stockholders of MSF and
U.S. Trust Company of Texas, N.A. as escrow agent
10.3 Third Amended Joint Plan of Reorganization (incorporated by
reference to Exhibit 2.1 to Registrant's April 17, 1996 Form
8-K Current Report (the "April 1996 8-K")
10.4 Modification to Third Amended Joint Plan of Reorganization
(incorporated by reference to Exhibit 2.2 to the April 1996
8-K)
10.5 Order Confirming Third Amended and Supplemented Joint Plan,
Pursuant to 11 U.S.C. Section 1129 (incorporated by reference
to Exhibit 2.3 to the April 1996 8-K)
10.6 Chapter 11 Post-Confirmation Order (incorporated by reference
to Exhibit 2.4 to the April 1996 8-K)
10.7 Order Regarding Entry Date of Order Confirming Third Amended
and Supplemented Joint Plan Pursuant to 11 U.S.C. Section
1129 (incorporated by reference to Exhibit 2.5 to the April
1996 8-K
10.8 Order Granting Second Motion for Technical, Non-Material
Modification to the Third Amended and Supplemented Joint Plan
of Reorganization (incorporated by reference to Exhibit 2.6 to
the April 1996 8-K)
10.9 Form of Warrants to purchase shares of Common Stock of
Registrant issued to directors containing a cashless exercise
feature
10.10 1994 Employee Stock Option Plan of Registrant, as amended and
adjusted (incorporated by reference from Exhibit 4.1 of
Registrant's Form S-8 Registration Statement (Registration No.
333-22315))
10.11 Agreement between Registrant and Louis Dorfman, Trustee of The
SBM Trust dated as of May 5, 1995 (incorporated by reference
from Exhibit 10.9 to Registrant's Annual Report on Form 10-K
for the year ended September 30, 1995 (the "1995 10-K"))
10.12 Agreement between Registrant and Sam B. Meyers, Jr. dated as
of May 5, 1995
10.13 Letter Agreement between Registrant and Alex. Brown & Sons,
Inc. dated May 24, 1995 (incorporated herein by reference from
Exhibit 10.20 to the 1995 10-K)
10.14 Letter Agreement and Addenda A, D and E thereto between
Registrant and Alex. Brown & Sons Incorporated dated May 16,
1996
10.15 Employment Letter Agreement between George C. Evans and
Registrant dated January 20, 1995 (incorporated herein by
reference from Exhibit 10.21 to the 1995 10-K)
10.16 Amendment to Employment Letter Agreement of George C. Evans
dated May 10, 1995 (incorporated herein by reference from
Exhibit 10.22 to the 1995 10-K)
10.17 Amendment to Employment Letter Agreement of George C. Evans
dated March 20, 1996
10.18 Amendment to Employment Letter Agreement of George C. Evans
dated February 13, 1997
10.19 Employment Letter Agreement between Registrant and James F.
Leary dated May 1, 1996 (incorporated herein by reference from
Exhibit 10.21 to the 1996 10-K)
10.20 Letter agreement between Registrant and Inter-Atlantic
Securities Corp. dated August 23, 1996
10.21 Letter agreement between Registrant and Inter-Atlantic
Securities Corp. dated September 6, 1996
II-5
<PAGE> 279
10.22 Compromise and Settlement Agreement by and among Craig Hall,
Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp.
and Hall Phoenix/Inwood, Ltd. and Registrant effective as of
November 21, 1996 (incorporated by reference from Exhibit 10.1
to Registrant's Current Report on Form 8-K dated November 21,
1996 (the "November 1996 8-K")
10.23 Mutual Release Agreement effective as of November 21, 1996 by
and among Registrant, George C. Evans, Craig Hall, Larry
Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and
Hall Phoenix/Inwood, Ltd. (incorporated by reference from
Exhibit 10.2 to the November 1996 8-K)
10.24 Standstill Agreement effective as of November 21, 1996 by and
among Registrant, Craig Hall, Larry Levey, Hall Financial
Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood,
Ltd. (incorporated by reference from Exhibit 10.3 to the
November 1996 8-K)
10.25 Subordinated Note dated November 21, 1996 in the principal
amount of $5,000,000 (incorporated by reference from Exhibit
10.4 to the November 1996 8-K)
10.26 Asset Purchase Agreement (the "Asset Purchase Agreement")
among U.S. Lending Corporation, as Debtor-In- Possession,
Registrant and Search Funding III, Inc. dated July 17, 1996
(incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.27 Second Amendment dated November 5, 1996 to the Asset Purchase
Agreement (incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996)
10.28 Asset Acquisition Agreement among Registrant, Search Funding
IV, Inc. and Dealers Alliance Credit Corp. dated as of August
2, 1996 (incorporated by reference from Exhibit 2.1 to
Registrant's Current Report on Form 8-K dated August 6, 1996
(the "August 1996 8-K")
10.29 Sub-Debt Acquisition Agreement among Registrant, Search
Funding IV, Inc., R-H Capital Partners, L.P. and Kellett
Investment Corporation dated as of August 2, 1996
(incorporated by reference from Exhibit 2.2 to the August 1996
8-K)
10.30 Escrow Agreement among Registrant, 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 (incorporated by
reference from Exhibit 2.3 to the August 1996 8-K)
10.31 Search-DACC Shareholders Agreement dated as of August 2, 1996
between Registrant and Dealers Alliance Credit Corp.
(incorporated by reference from Exhibit 2.4 to the August 1996
8-K)
10.32 Sub-Debt Shareholders Agreement dated as of August 2, 1996
among Registrant, R-H Capital Partners, L.P. and Kellett
Investment Corporation (incorporated by reference from Exhibit
2.5 to the August 1996 8-K)
10.33 Debt Assumption Agreement dated as of August 2, 1996 among
Registrant, Search Funding IV, Inc., LaSalle National Bank, as
Agent, Bank One Chicago, N.A. and Fleet Capital Corporation
(incorporated by reference from Exhibit 2.6 to the August 1996
8-K)
10.33 Motor Vehicle Installment Sales Contract Assignment and
Purchase Agreement dated September 27, 1996 between Eagle
Finance Corp. and Search Funding Corp. (incorporated by
reference from Exhibit 2 to Registrant's Current Report on
Form 8-K dated September 27, 1996)
10.34 Motor Vehicle Installment Sales Contract Assignment and
Purchase Agreement dated as of November 1, 1996 between MS
Financial, Inc. and Search Funding Corp. (incorporated by
reference from Exhibit 2.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996)
II-6
<PAGE> 280
10.35 Letter agreement between the Registrant and MS Financial, Inc.
dated November 4, 1996 (incorporated by reference from Exhibit
2.2 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
11.1 Statement re computation of per share earnings (incorporated
by reference to Exhibit 11.1 to Registrant's Transition Report
on Form 10-K dated March 31, 1996)
13.1 Registrant's Transition Report on Form 10-K (as amended) for
the transition period ended March 31, 1996 (included as Annex
F to the Joint Proxy Statement/Prospectus)
23.1 Consent of Bracewell & Patterson, L.L.P. (included in Exhibit
5.1)
23.2 Consent of Haynes & Boone, L.L.P. (included in Exhibit 8.1)
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of BDO Seidman, LLP
23.5 Consent of Bear, Stearns & Co. Inc. (included in the opinion
which appears as Annex B to the Joint Proxy
Statement/Prospectus)
23.6 Consent of Alex. Brown & Sons Incorporated (included in the
opinion which appears as Annex C to the Joint Proxy
Statement/Prospectus)
23.7 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on signature page)
99.1 Form of Proxy Card for Search Common Stock, Search 12%
Preferred Stock and Search 9%/7% Preferred Stock
99.2 Form of Proxy Card for MSF Common Stock
99.3 Consent of James B. Stuart, Jr.
(b) Financial Statement Schedules: None
(c) Report, Opinion or Appraisal: The fairness opinions of Bear,
Stearns & Co. Inc. and Alex. Brown & Sons Incorporated are included in the
Joint Proxy Statement/Prospectus.
II-7
<PAGE> 281
ITEM 22. UNDERTAKINGS
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended (the "Securities Act"),
each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934, as amended, that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this Form S-4, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-8
<PAGE> 282
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on June 25, 1997.
SEARCH FINANCIAL SERVICES INC.
By: /s/ George C. Evans
-------------------
George C. Evans, Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, George C. Evans,
Robert D. Idzi and Ellis A. Regenbogen, or any of them, with full power to act
alone, his true and lawful attorney-in-fact, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact full
power and authority to do and perform each and every act and thing requisite
and necessary to be done as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or any of them may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ George C. Evans Chairman of the Board, Chief June 25, 1997
- -------------------------- Executive Officer and Director
George C. Evans
/s/ Richard F. Bonini Director June 25, 1997
- --------------------------
Richard F. Bonini
/s/ William H. T. Bush Director June 25, 1997
- --------------------------
William H. T. Bush
/s/ Luther H. Hodges, Jr. Director June 25, 1997
- --------------------------
Luther H. Hodges, Jr.
/s/ Frederick S. Hammer Director June 25, 1997
- --------------------------
Frederick S. Hammer
/s/ James F. Leary Director June 25, 1997
- --------------------------
James F. Leary
/s/ A. Brean Murray Director June 25, 1997
- --------------------------
A. Brean Murray
/s/ Douglas W. Powell Director June 25, 1997
- --------------------------
Douglas W. Powell
/s/ Barry W. Ridings Director June 25, 1997
- --------------------------
Barry W. Ridings
/s/ Robert D. Idzi Senior Executive Vice President, June 25, 1997
- -------------------------- Chief Financial Officer &
Robert D. Idzi Treasurer
/s/ Andrew D. Plagens Senior Vice President, Controller June 25, 1997
- -------------------------- and Chief Accounting Officer
Andrew D. Plagens
</TABLE>
II-9
<PAGE> 283
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of February 7, 1997
among the Registrant, Search Capital Acquisition Corp. and MS
Financial, Inc. ("MSF") (included as part of Annex A to the
Joint Proxy Statement/Prospectus)
2.2 Letter agreement dated as of June 4, 1997 among the
Registrant, Search Capital Acquisition Corp. And MSF (included
as part of Annex A to the Joint Proxy Statement/Prospectus)
4.1 Specimen certificate of the Registrant's Common Stock
(incorporated by reference to Exhibit 4.2 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-68524))
4.2 Restated Certificate of Incorporation of Search Financial
Services Inc. (incorporated by reference to Exhibit 3.1 to
Registrant's Transition Report on Form 10-K for the transition
period ended March 31, 1996 ("1996 10-K"))
4.3 Certificate of Amendment of Certificate of Designation of
9%/7% Convertible Preferred Stock (incorporated by reference
to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (the "9/30/96 Form
10-Q"))
4.4 Certificate of Correction to the Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 to the
9/30/96 Form 10-Q)
4.5 Certificate of Amendment of Certificate of Designation of
9%/7% Convertible Preferred Stock (incorporated by reference
to Exhibit 3.4 to the 9/30/96 Form 10-Q)
4.6 Certificate of Amendment of Restated Certificate of
Incorporation (incorporated by reference to Exhibit 4.7 to
Registrant's Form S-3 Registration Statement (Registration
No. 333-20551))
4.7 Loan Agreement dated September 11, 1996 between Search
Funding II, Inc. and Hibernia National Bank
4.8 Commercial Security Agreement dated September 11, 1996
between Search Funding II, Inc. and Hibernia National Bank
4.9 Commercial Guaranty dated September 11, 1996 between
Registrant and Hibernia National Bank.
4.10 Promissory Note dated September 11, 1996 in the principal
amount of $25,000,000 payable to Hibernia National Bank.
4.11 Other than the indebtedness evidenced by the agreements listed
in Exhibits 4.7 and 4.10 above and Exhibit 10.33 below, none
of the outstanding long-term debt of the Registrant and its
consolidated subsidiaries exceeds ten percent (10%) of the
total assets of the Registrant and its consolidated
subsidiaries, and, except for Exhibit 10.25, copies of the
constituent instruments defining the rights of the holders of
such debt are not included as exhibits to this Registration
Statement. The Registrant agrees to furnish copies of such
instruments to the Commission upon request.
5.1 Opinion of Bracewell & Patterson, L.L.P., counsel to the
Registrant
8.1 Tax Opinion of Haynes & Boone, L.L.P.
</TABLE>
<PAGE> 284
<TABLE>
<S> <C>
10.1 Stockholders Agreement, dated as of February 7, 1997, between
the Registrant and certain stockholders of MSF (incorporated
by reference to Exhibit 2.2 to Registrant's Current Report on
Form 8-K dated February 7, 1997)
10.2 Form of Escrow Agreement, dated as of February 7, 1997,
between the Registrant, MSF, certain stockholders of MSF and
U.S. Trust Company of Texas, N.A. as escrow agent
10.3 Third Amended Joint Plan of Reorganization (incorporated by
reference to Exhibit 2.1 to Registrant's April 17, 1996 Form
8-K Current Report (the "April 1996 8-K")
10.4 Modification to Third Amended Joint Plan of Reorganization
(incorporated by reference to Exhibit 2.2 to the April 1996
8-K)
10.5 Order Confirming Third Amended and Supplemented Joint Plan,
Pursuant to 11 U.S.C. Section 1129 (incorporated by reference
to Exhibit 2.3 to the April 1996 8-K)
10.6 Chapter 11 Post-Confirmation Order (incorporated by reference
to Exhibit 2.4 to the April 1996 8-K)
10.7 Order Regarding Entry Date of Order Confirming Third Amended
and Supplemented Joint Plan Pursuant to 11 U.S.C. Section 1129
(incorporated by reference to Exhibit 2.5 to the April 1996
8-K
10.8 Order Granting Second Motion for Technical, Non-Material
Modification to the Third Amended and Supplemented Joint Plan
of Reorganization (incorporated by reference to Exhibit 2.6 to
the April 1996 8-K)
10.9 Form of Warrants to purchase shares of Common Stock of
Registrant issued to directors containing a cashless exercise
feature
10.10 1994 Employee Stock Option Plan of Registrant, as amended and
adjusted (incorporated by reference from Exhibit 4.1 of
Registrant's Form S-8 Registration Statement (Registration No.
333-22315))
10.11 Agreement between Registrant and Louis Dorfman, Trustee of The
SBM Trust dated as of May 5, 1995 (incorporated by reference
from Exhibit 10.9 to Registrant's Annual Report on Form 10-K
for the year ended September 30, 1995 (the "1995 10-K"))
10.12 Agreement between Registrant and Sam B. Meyers, Jr. dated as
of May 5, 1995
10.13 Letter Agreement between Registrant and Alex. Brown & Sons,
Inc. dated May 24, 1995 (incorporated herein by reference
from Exhibit 10.20 to the 1995 10-K)
10.14 Letter Agreement and Addenda A, D and E thereto between
Registrant and Alex. Brown & Sons Incorporated dated May
16, 1996
10.15 Employment Letter Agreement between George C. Evans and
Registrant dated January 20, 1995 (incorporated herein by
reference from Exhibit 10.21 to the 1995 10-K)
10.16 Amendment to Employment Letter Agreement of George C. Evans
dated May 10, 1995 (incorporated herein by reference from
Exhibit 10.22 to the 1995 10-K)
10.17 Amendment to Employment Letter Agreement of George C. Evans
dated March 20, 1996
10.18 Amendment to Employment Letter Agreement of George C. Evans
dated February 13, 1997
10.19 Employment Letter Agreement between Registrant and James F.
Leary dated May 1, 1996
</TABLE>
<PAGE> 285
<TABLE>
<S> <C>
10.20 Letter agreement between Registrant and Inter-Atlantic
Securities Corp. dated August 23, 1996
10.21 Letter agreement between Registrant and Inter-Atlantic
Securities Corp. dated September 6, 1996
10.22 Compromise and Settlement Agreement by and among Craig Hall,
Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp.
and Hall Phoenix/Inwood, Ltd. and Registrant effective as of
November 21, 1996 (incorporated by reference from Exhibit
10.1 to Registrant's Current Report on Form 8-K dated November
21, 1996 (the "November 1996 8-K")
10.23 Mutual Release Agreement effective as of November 21, 1996 by
and among Registrant, George C. Evans, Craig Hall, Larry
Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and
Hall Phoenix/Inwood, Ltd. (incorporated by reference from
Exhibit 10.2 to the November 1996 8-K)
10.24 Standstill Agreement effective as of November 21, 1996 by and
among Registrant, Craig Hall, Larry Levey, Hall Financial
Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood,
Ltd. (incorporated by reference from Exhibit 10.3 to the
November 1996 8-K)
10.25 Subordinated Note dated November 21, 1996 in the principal
amount of $5,000,000 (incorporated by reference from Exhibit
10.4 to the November 1996 8-K)
10.26 Asset Purchase Agreement (the "Asset Purchase Agreement")
among U.S. Lending Corporation, as Debtor-In-Possession,
Registrant and Search Funding III, Inc. dated July 17, 1996
(incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.27 Second Amendment dated November 5, 1996 to the Asset Purchase
Agreement (incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996)
10.28 Asset Acquisition Agreement among Registrant, Search Funding
IV, Inc. and Dealers Alliance Credit Corp. dated as of
August 2, 1996 (incorporated by reference from Exhibit 2.1 to
Registrant's Current Report on Form 8-K dated August 6, 1996
(the "August 1996 8-K")
10.29 Sub-Debt Acquisition Agreement among Registrant, Search
Funding IV, Inc., R-H Capital Partners, L.P. and Kellett
Investment Corporation dated as of August 2, 1996 (incorporated
by reference from Exhibit 2.2 to the August 1996 8-K)
10.30 Escrow Agreement among Registrant, 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 (incorporated by
reference from Exhibit 2.3 to the August 1996 8-K)
10.31 Search-DACC Shareholders Agreement dated as of August 2, 1996
between Registrant and Dealers Alliance Credit Corp.
(incorporated by reference from Exhibit 2.4 to the August 1996
8-K)
10.32 Sub-Debt Shareholders Agreement dated as of August 2, 1996
among Registrant, R-H Capital Partners, L.P. and Kellett
Investment Corporation (incorporated by reference from Exhibit
2.5 to the August 1996 8-K)
10.33 Debt Assumption Agreement dated as of August 2, 1996 among
Registrant, Search Funding IV, Inc., LaSalle National Bank, as
Agent, Bank One Chicago, N.A. and Fleet Capital Corporation
(incorporated by reference from Exhibit 2.6 to the August
1996 8-K)
</TABLE>
<PAGE> 286
<TABLE>
<S> <C>
10.33 Motor Vehicle Installment Sales Contract Assignment and
Purchase Agreement dated September 27, 1996 between Eagle
Finance Corp. and Search Funding Corp. (incorporated by
reference from Exhibit 2 to Registrant's Current Report on
Form 8-K dated September 27, 1996)
10.34 Motor Vehicle Installment Sales Contract Assignment and
Purchase Agreement dated as of November 1, 1996 between MS
Financial, Inc. and Search Funding Corp. (incorporated by
reference from Exhibit 2.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996)
10.35 Letter agreement between the Registrant and MS Financial, Inc.
dated November 4, 1996 (incorporated by reference from Exhibit
2.2 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996)
11.1 Statement re computation of per share earnings (incorporated
by reference to Exhibit 11.1 to Registrant's Transition
Report on Form 10-K dated March 31, 1996)
13.1 Registrant's Transition Report on Form 10-K (as amended) for
the transition period ended March 31, 1996 (included as Annex
F to the Joint Proxy Statement/Prospectus)
23.1 Consent of Bracewell & Patterson, L.L.P. (included in Exhibit
5.1)
23.2 Consent of Haynes & Boone, L.L.P. (included in Exhibit 8.1)
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of BDO Seidman, LLP
23.5 Consent of Bear, Stearns & Co. Inc. (included in the opinion
which appears as Annex B to the Joint Proxy Statement/
Prospectus)
23.7 Consent of Deloitte & Touche LLP
23.6 Consent of Alex. Brown & Sons Incorporated (included in the
opinion which appears as Annex C to the Joint Proxy Statement/
Prospectus)
24.1 Power of Attorney (included on signature page)
99.1 Form of Proxy Card for Search Common Stock, Search 12%
Preferred Stock and Search 9%/7% Preferred Stock
99.2 Form of Proxy Card for MSF Common Stock
99.3 Consent of James B. Stuart, Jr.
</TABLE>
<PAGE> 1
EXHIBIT 4.7
LOAN AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C>
$25,000,000.00 09-11-1996 09-11-1999 536
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
BORROWER: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK
(TIN: 75-2554995) (TIN: 72-0210640)
700 NORTH PEARL STREET 313 CARONDELET STREET
SUITE 400, L.B. 401 POST OFFICE BOX 61540
DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161
================================================================================
THIS LOAN AGREEMENT between SEARCH FUNDING II, INC. ("BORROWER") and HIBERNIA
NATIONAL BANK ("LENDER") is made and executed on the following terms and
conditions. Borrower has applied to Lender for a loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Louisiana Commercial Laws -
Secured Transactions (La.-R.S. 10:9-101, et seq.). All references to dollar
amounts shall mean amounts in lawful money of the United States of America.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached or to be attached to this Loan Agreement
from time to time.
BORROWER. The word "Borrower" means individually, collectively and
interchangeably SEARCH FUNDING II, INC., and all other persons and entities
signing Borrower's Note.
BORROWING BASE. THE WORDS "BORROWING BASE" MEAN THE LESSER OF (A)
$25,000,000.00; or (b) 65% of the aggregate amount of the outstanding
principal and interest owed to Borrower under Borrower's Eligible Paper.
BUSINESS DAY. The words "Business Day" mean a day on which commercial
banks are open for business in New Orleans, Louisiana, excluding Saturdays
and Sundays.
CHATTEL PAPER. The words "Chattel Paper" mean a writing or writings which
evidence BOTH a monetary obligation AND a security interest in, or a lease
of, specific goods as security for payment of the monetary obligation.
Chattel Paper does not include written evidences of unsecured monetary
obligations.
COLLATERAL. The word "Collateral" means and includes individually,
collectively, interchangeably and without limitation all property and
assets granted as collateral security for a Loan, whether real or personal
property, whether granted directly or indirectly, whether granted now or in
the future, and whether granted in the form of a security interest,
mortgage, collateral mortgage, deed of trust, assignment, pledge, crop
pledge, chattel mortgage, collateral chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt, lien,
charge, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise, including all accessions,
additions, replacements, and substitutions and all related accounts,
inventory, contract rights, and general intangibles. The word "Collateral"
includes without limitation all collateral described below in the section
titled "COLLATERAL."
DEBTOR. The word "Debtor" means individually, collectively and
interchangeably each person or entity obligated upon any Chattel Paper and
any grantor of a security interest as security for any Chattel Paper.
ELIGIBLE PAPER. The words "Eligible Paper" mean, at any time, Borrower's
Chattel Paper which Lender, in the reasonable exercise of its credit
judgment, finds acceptable. Unless otherwise agreed to by Lender in
writing, Eligible Paper does not include:
(a) Chattel Paper that does not evidence a security interest in a
motor vehicle.
(b) Chattel Paper that is not encumbered by a first priority perfected
Security Interest, granted in favor of Lender, where first priority
perfection is confirmed by evidence or opinions reasonably acceptable
to Lender.
(c) Chattel Paper that is not free and clear of all security interests,
liens, encumbrances, and claims of third parties, except for Permitted
Liens.
(d) Chattel Paper in which any person or entity (including any
subsidiary or affiliate of Borrower) other than Borrower owns any
interest.
(e) Chattel Paper that evidences a security interest that has not been
perfected within a reasonable time after origination of the Chattel
Paper.
(f) Chattel Paper that is not delivered to Lender within a reasonable
period (as determined by Lender in its sole discretion) after
origination or acquisition by Borrower.
(g) Chattel Paper with three (3) or more cumulative contractual
payments past due.
(h) Chattel Paper with respect to which the Debtor has been granted
more than two (2) extensions during the most recent consecutive
twelve (12) month period.
(i) Chattel Paper of any Debtor who, after incurring the indebtedness
evidenced by the Chattel Paper, has filed or has had filed against
it a petition in bankruptcy, insolvency proceeding, or other
proceeding under any other debtor-in-relief acts; or who has had
appointed a trustee, custodian, or receiver for the assets of such
Debtor; or who has made an assignment for the benefit of creditors
or has become insolvent or fails generally to pay the debts of the
Debtor as such debts become due; or who is in a debt repayment,
consolidation or restructure plan under the auspices, direction or
control of any entity or agency involved in providing credit
rehabilitation or counseling service (including, without limitation,
Consumer Credit Counselors).
(j) Chattel Paper that has been referred to an attorney for
collection.
(k) Chattel Paper that evidences a security interest in any goods that
are in the possession of Borrower or any agent of Borrower.
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09-11-1996 LOAN AGREEMENT PAGE 2
LOAN NO. (CONTINUED)
================================================================================
(l) Chattel Paper that represents a renewal or a restructure of a
monetary obligation, in whole or in part, in which the prior
delinquency of the Debtor was a consideration in the renewal or
restructure.
(m) Chattel Paper not payable in substantially equal monthly
installments until maturity or with a final installment equal to two
or more times the regular monthly installments.
(n) Chattel Paper with respect to which the Debtor is a shareholder,
director, officer, employee or agent of Borrower.
(o) Chattel Paper with respect to which the Debtor is a subsidiary of,
or affiliated with or related to Borrower or any shareholder, director
or officer of Borrower.
(p) Chattel Paper with respect to which the obligations of the Debtor
may be conditional.
(q) Chattel Paper with respect to which the Debtor is not a resident
of the United States, except to the extent such Chattel Paper is
supported by security interests, insurance, bonds, or other assurances
reasonably satisfactory to Lender.
(r) Chattel Paper with respect to which Borrower is or may become
liable to the Debtor for goods sold or services rendered by the Debtor
to Borrower.
(s) Chattel Paper which is subject to any discount (other than
discounts for unearned interest), credit, dispute, counterclaim or
setoff in favor of the Debtor.
(t) Chattel Paper with respect to which Lender, using its reasonable
credit judgment, deems ineligible.
(u) Chattel Paper with respect to which the Debtor is the United States
government or any department or agency of the United States.
(v) Chattel Paper not supported by appropriate documentation as
determined by Lender in its sole, but reasonable, discretion.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean individually,
collectively, and interchangeably any of the Events of Default set forth
below in the section titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the earlier of (a) in
the event an Event of Default occurs, the date Lender demands repayment, in
full, of the aggregate unpaid principal amount of all Advances then
outstanding and all accrued unpaid interest, together with all other
applicable fees, costs and charges, if any, not yet paid, (b) the date of
termination of Lender's commitment to lend under this Agreement, or (c) the
latest stated maturity date of the Note and any renewals and extensions of
the Note (PROVIDED, HOWEVER, THAT LENDER HAS MADE NO COMMITMENT TO, AND IS
NOT OBLIGATED TO, RENEW THE NOTE OR EXTEND THE MATURITY DATE OF THE NOTE).
GRADE D PAPER. The words "Grade D Paper" mean and include all Chattel
Paper for which Borrower sends more than one statement per calendar month
to the Debtor and all Chattel Paper which otherwise conforms to "D paper"
grading standards for the non-prime automobile loan industry.
GRANTOR. The word "Grantor" means and includes individually, collectively,
interchangeably and without limitation each and all of the persons or
entities granting a Security Interest in any Collateral for the
Indebtedness, including without limitation Borrower and each Guarantor
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes individually,
collectively, interchangeably and without limitation, SEARCH CAPITAL GROUP,
INC., and each and all other guarantors, sureties, and accommodation
parties in connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes individually,
collectively, interchangeably and without limitation, any and all present
and future loans, extensions of credit, liabilities and/or obligations of
every nature and kind whatsoever that Borrower may now and in the future
owe to or incur in favor of Lender and its successors or assigns, including
without limitation, Borrower's Indebtedness in favor of Lender under the
Note, whether such loans, extensions of credit, liabilities and/or
obligations are direct or indirect, or by way of assignment, and whether
related or unrelated, or whether committed or purely discretionary, and
whether absolute or contingent, voluntary or involuntary, determined or
undetermined, liquidated or unliquidated, due or to become due, together
with interest, costs, expenses, attorneys' fees and other fees and charges,
whether or not any such Indebtedness may be barred under any statute of
limitations or may be otherwise unenforceable or voidable for any reason.
LENDER. The word "Lender" means HIBERNIA NATIONAL BANK (TIN: 72-0210640),
its successors and assigns, and any subsequent holder or holders of
Borrower's Loan and Note, or any interest therein.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the section titled "LINE OF CREDIT."
LOAN. The words "Loan" and "Loans" mean and include any and all loans and
financial accommodations from Lender to Borrower hereunder whether now or
hereafter existing, and however evidenced, including without limitation
those loans and financial accommodations described herein or described on
any exhibit or schedule attached to this Agreement from time to time, and
further including any and all subsequent amendments, additions,
substitutions, renewals and refinancings of Borrower's Loan.
NOTE. The word "Note" means Borrower's promissory note or notes evidencing
Borrower's Loan obligations in favor of Lender, as well as any substitute,
replacement or refinancing note or notes therefor. The Note initially
evidencing Borrower's Loan obligations in favor of Lender shall be drawn
for the maximum amount of the Borrowing Base, shall provide for interest at
the rate established for the Line of Credit, shall provide for payment, in
full, of all principal interest and other charges by no later than the
Expiration Date, and shall contain such other provisions (including,
without limitation, provisions relating to calculation of interest,
acceleration, default interest, cross-defaults, rights upon default,
payment application, and attorneys' fees) as customarily incorporated by
Lender in its commercial loan notes. ALTHOUGH THE WORD "NOTE" INCLUDES
REFINANCINGS, LENDER IS UNDER NO OBLIGATION TO RENEW THE NOTE OR EXTEND THE
MATURITY DATE OF THE NOTE OR ANY SUBSTITUTE, REPLACEMENT OR REFINANCING
NOTE OR NOTES THEREFOR.
PERMITTED LIENS. The words "Permitted Liens" mean (a) Security Interests
securing Indebtedness owed by Borrower to Lender; (b) liens for taxes,
assessments, or similar charges either not yet due or being contested in
good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers,
or other like liens securing obligations which were incurred prior to
Borrower's acquisition of the property subject to such liens; (d) liens of
materialmen, mechanics, warehousemen, or carriers, or other like liens
arising in the ordinary course of business and securing obligations which
are not yet delinquent or are being contested in good faith; and (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by Lender in writing.
<PAGE> 3
09-11-1996 LOAN AGREEMENT PAGE 3
LOAN NO. (CONTINUED)
================================================================================
RELATED DOCUMENTS. The words "Related Documents" mean and include
individually, collectively, interchangeably and without limitation all
promissory notes, credit agreements, loan agreements, guaranties, security
agreements, mortgages, collateral mortgages, deeds of trust, and all other
instruments, agreements, and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
individually, collectively, interchangeably and without limitation any
agreements, promises, covenants, arrangements, understandings or other
agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
SECURITY INTEREST. The words "Security Interest" mean and include
individually, collectively, interchangeably and without limitation any and
all present and future mortgages, pledges, crop pledges, assignments and
other security agreements directly or indirectly securing the repayment of
Borrower's Loan and Note, whether created by law, contract, or otherwise.
APPLICATION FOR AND PURPOSE OF THE LOAN. Borrower has applied to Lender for a
Loan in the aggregate principal amount of U.S. $25,000,000.00 for working
capital.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows:
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the
initial Advance and any subsequent Advance to or for the account of
Borrower under this Agreement is subject to the following conditions
precedent, with all documents, instruments, opinions, reports, and other
items required under this Agreement to be in form and substance
satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
other Related Documents have been duly authorized, executed, and
delivered by Borrower to Lender, including, without limitation (i) the
Note, (ii) Security Agreements granting to Lender Security Interests
in the Collateral, (iii) Financing Statements perfecting Lender's
Security Interests; (iv) evidence of Insurance as required below; and
(v) any other documents required under this Agreement or by Lender or
its counsel.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may reasonably request.
(c) The Security Interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority, subject
to Permitted Liens, and shall be in full force and effect and Lender
shall have received evidence, acceptable to Lender, of the priority of
Lender's Security Interests in the Collateral as contemplated by this
Agreement.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and shall
be in full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted a review of Borrower's payment records, ledger sheets, and
computer tapes or disks kept to record payment information, and
Borrower's other books, records, and operations, and Lender shall be
satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the other Related Documents as are
then due and payable.
(g) The representations and warranties set forth in this Agreement, in
the other Related Documents, and in any document or certificate
delivered to Lender under this Agreement are true and correct in all
material respects.
(h) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit, as well as
directions for payment from Borrower's accounts, may be requested orally or
in writing by persons authorized, in writing, by Borrower. Lender may, but
need not, require that all oral requests be confirmed in writing. Each
Advance shall be conclusively deemed to have been made at the request of
and for the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, not earlier than noon, New Orleans time, after which all
requests for Advances will be treated as having been requested on the next
succeeding Business Day.
OVERLINES AND OVERADVANCES. In the event the unpaid principal amount of
the outstanding Advances under the Line of Credit ever exceeds
$25,000,000.00 (the maximum amount of the Borrowing Base), Borrower agrees
to pay the excess amount (an "OVERLINE") within two (2) Business Days after
notice from Lender to Borrower. In the event the unpaid principal amount
of the outstanding Advances under the Line of Credit ever exceeds the
Borrowing Base, Borrower agrees to pay the excess amount (an "OVERADVANCE")
within two (2) Business Days after notice from Lender to Borrower.
Overlines and overadvances shall bear interest at the rate stated in the
Note. If not sooner paid, interest on overlines and overadvances shall be
paid on the last day of each month, until the Expiration Date. Upon
request of Lender, Borrower shall execute a promissory note, payable to the
order of Lender, to represent the amount of any overline and any
overadvance; however, Borrower acknowledges and agrees that the records of
Lender and this Agreement shall constitute conclusive evidence, absent
manifest error, of any overline or overadvance and the obligation of
Borrower to repay any overline or overadvance, with interest. All
overlines and overadvances for which Lender has not demanded payment
earlier, and all unpaid and accrued interest on overlines and overadvances
not due and payable earlier, shall be due and payable on the Expiration
Date. BORROWER ACKNOWLEDGES AND AGREES THAT LENDER IS NOT OBLIGATED TO
BORROWER TO FUND ANY ADVANCE THAT WOULD CREATE AN OVERLINE OR AN
OVERADVANCE.
ADVANCES FOR INTEREST AND FEES. Borrower hereby authorizes Lender to make
Advances under the Line of Credit in amounts necessary to pay any and all
fees and charges provided for under this Agreement and in order to pay any
accrued interest due under the Note. Any such Advance may, at the option
of Lender, be funded directly to Lender or deposited into a deposit account
of Borrower maintained with Lender (including a Dominion Account) which
account may then be debited by Lender for the amount of such Advances. If
no Event of Default has occurred, Lender hereby agrees to make all Advances
necessary to pay any and all fees and charges provided for under this
Agreement and in order to pay any accrued interest due under the Note even
if the Advance creates an Overline or an Overadvance, and Borrower agrees
to pay the amount of any such Overline or Overadvance within two (2)
Business Days after notice from Lender to Borrower.
INTEREST. The outstanding and unpaid principal balance under the Note
shall bear interest at the rate stated in the Note. Borrower shall make
payments of unpaid interest accrued on the outstanding and unpaid principal
balance under the Note as provided for in the Note. All unpaid and accrued
interest not due and payable earlier, shall be due and payable on the
Expiration Date.
UNUSED FACILITY FEE. In addition to interest, Borrower agrees to pay to
Lender an unused facility fee on the daily average unused portion of the
Line of Credit [the "unused portion" being the amount by which the maximum
dollar amount of the Note ($25,000,000.00) exceeds
<PAGE> 4
09-11-1996 LOAN AGREEMENT PAGE 4
LOAN NO. (CONTINUED)
================================================================================
the outstanding principal balance due under the Note] from the date of this
Agreement through the Expiration Date, at the rate of 0.070% per annum,
payable for each three (3) calendar month period (each calendar quarter),
in arrears, fifteen (15) days after last day of each calendar quarter. The
first unused facility fee payment is due on OCTOBER 15, 1996, covering the
period beginning on the date of this Agreement through SEPTEMBER 30, 1996.
MANDATORY PRINCIPAL REPAYMENTS. On the Expiration Date, Borrower shall pay
to Lender in full the aggregate unpaid principal amount of all Advances
then outstanding and all accrued unpaid interest, together with all other
applicable fees, costs and charges, if any, not yet paid.
FACILITY CHARGES. Borrower recognizes that Lender has incurred and will
continue to incur certain costs and expenses in connection with
establishing, maintaining, servicing, and administering the credit
facility. To ensure that Lender is able to recover such costs and
expenses, Borrower agrees that, notwithstanding any other provision of this
Agreement, the Note, or the other Related Documents, Lender shall be
entitled to collect the following facility charges, which Borrower hereby
promises and agrees to pay:
COMMITMENT FEE. A commitment fee of $62,500.00 [0.250% of the maximum
dollar amount of the Line of Credit - $25,000,000.00], payable, in
full, with or at the initial Advance of the Loan (Lender acknowledges
that Borrower has paid $10,000.00 of this Commitment Fee, leaving a
balance due of $52,500.00).
MONITORING FEE. A monitoring fee of $1,500.00 per month for each
month or portion of a month during the term of this Agreement. The
monitoring fee for a month is due and payable on the first day of the
following month.
ANNUAL RENEWAL FEE. A annual renewal fee of $62,500.00 [0.250% of the
maximum dollar amount of the Line of Credit - $25,000,000.00],
payable, in full, on each annual anniversary of this Agreement prior
to the Expiration Date.
DUE DILIGENCE EXPENSES. All reasonable expenses incurred by Lender,
including Lender's reasonable attorneys' fees, incurred by Lender for
Lender's due diligence, payable by Borrower upon demand by Lender.
EARLY TERMINATION. Lender agrees that Borrower shall have the right to
terminate this Agreement prior to the Expiration Date upon Borrower (a)
giving Lender ninety (90) days' written notice of termination and
designating a termination effective date, (b) paying Lender, on the
designated termination effective date, the aggregate unpaid principal
amount of all Advances then outstanding and all accrued unpaid interest,
together with all other applicable fees, costs and charges, if any, not yet
paid, AND (c) paying Lender, on the designated termination effective date,
a commitment cancellation charge equal to (i) $500,000.00 [2.000% of the
maximum dollar amount of the Line of Credit - $25,000,000.00] if the early
termination date occurs during the first year after the date of the Note,
(ii) $250,000.00 [1.000% of the maximum dollar amount of the Line of Credit
- $25,000,000.00] if the early termination occurs during the second year
after the date of the Note, and (iii) $0.00 (i.e. without any commitment
cancellation charge) if the early termination date occurs during the third
year after the date of the Note. In the event, after the date of this
Agreement, a renewal or substitute Note is executed to represent the Line
of Credit indebtedness, these commitment cancellation charges shall apply
during the term of the renewal or substitute Note (i.e., the "date of the
Note" for purposes determining commitment cancellation charges shall be the
date of the renewal or substitute Note), unless the renewal or substitute
Note specifically provides otherwise.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the Line of Credit.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower, absent manifest error, unless Borrower
notifies Lender to the contrary within thirty (30) days after Borrower's
receipt of any such statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all
other Loans, obligations and duties owed by Borrower to Lender, Borrower shall
grant to Lender Security Interests in Borrower's present and future Chattel
Paper, accounts, inventory, instruments, documents and general intangibles (the
"COLLATERAL"). Lender's Security Interests in the Collateral shall be
continuing liens and shall include the proceeds and products of the Collateral,
including without limitation the proceeds of any insurance. With respect to
the Collateral, Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's Security Interests in the
Collateral and agrees to deliver possession to Lender of all property
included in the Collateral for which possession by Lender is necessary to
perfect and continue Lender's Security Interests. Lender acknowledges and
agrees that delivery of certificates of title to motor vehicles in which a
security interest has been granted as security for the payment of
Borrower's Chattel Paper are not necessary by law to perfect and continue
Lender's Security Interests in the Collateral. Contemporaneous with the
execution of this Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations. Borrower
hereby appoints Lender as its irrevocable attorney-in-fact for the purpose
of executing any documents necessary to perfect or to continue any Security
Interest. Lender may at any time, and without further authorization from
Borrower, file a carbon, photograph, facsimile, or other reproduction of
any financing statement for use as a financing statement. Borrower will
reimburse Lender for all expenses for the perfection, termination, and the
continuation of the perfection of Lender's Security Interest in the
Collateral. Borrower promptly will notify Lender of any change in
Borrower's name including any change to the assumed business names of
Borrower. Borrower also promptly will notify Lender of any change in
Borrower's Employer Identification Number. Borrower further agrees to
notify Lender in writing prior to any change in address or location of
Borrower's chief executive office or should Borrower merge or consolidate
with any other entity.
DELIVERY AND POSSESSION OF ELIGIBLE PAPER. Borrower shall deliver to
Lender all original instruments representing Eligible Paper. Upon request
of Lender, Borrower shall deliver to Lender all other Eligible Paper
documentation, including, without limitation, all original disclosure
statements, security agreements, financing statements (unless financing
statements are filed in which event Lender will be provided with a copy
showing filing information), and all other supporting documentation. Also,
upon request of Lender, Borrower shall deliver the original certificates of
title to all motor vehicles in which a security interest has been granted
as security for the payment of Borrower's Chattel Paper. With respect to
Borrower, Lender shall be deemed to have exercised reasonable care in the
custody and preservation of all Chattel Paper documents (including
instruments and certificates of title) in the possession of Lender if
Lender takes such action for that purpose as Borrower shall request or as
Lender, in Lender's sole discretion, shall deem appropriate under the
circumstances, but failure to honor any request by Borrower shall not of
itself be deemed to be a failure to exercise reasonable care. Lender shall
not be required to take any steps necessary to preserve any rights in any
Chattel Paper against Debtors or other parties, nor to protect, preserve or
maintain any security interest evidenced by any Chattel Paper.
COLLATERAL SCHEDULES. Concurrently with the delivery of each Chattel Paper
package under this Agreement, Borrower shall execute and deliver to Lender
a statement for each package identifying the current principal balance and
next payment due, and such other information as Lender may request, all in
form and substance satisfactory to Lender. Thereafter and at such
frequency as Lender shall require, Borrower shall execute and deliver to
Lender such supplemental statements and such other matters and information
relating to Borrower's Chattel Paper as Lender may request.
<PAGE> 5
09-11-1996 LOAN AGREEMENT PAGE 5
LOAN NO. (CONTINUED)
================================================================================
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral and all payment and
balance information, all of which records shall be available to Lender or
Lender's representative upon demand for inspection and copying at any
reasonable time. With respect to the Chattel Paper, Borrower agrees to
keep and maintain such balance and payment history records as Lender may
reasonably require, including, without limitation, delinquency information.
REPRESENTATIONS AND WARRANTIES CONCERNING CHATTEL PAPER. With respect to
the Chattel Paper, Borrower represents and warrants to Lender: (a) all
present Chattel Paper of Borrower represents, and all future Chattel Paper
of Borrower will represent, loans acquired by Borrower in the ordinary
course of Borrower's business and in compliance and conformity with all
applicable federal, state and local laws, ordinances, rules, and
regulations, (b) each Chattel Paper represented by Borrower to be an
Eligible Paper for purposes of this Agreement conforms to the requirements
of the definition of an Eligible Paper; (c) all Chattel Paper information
listed on schedules delivered to Lender will be true and correct, subject
to immaterial variance; and (d) Lender, its assigns, or agents shall have
the right at any time to inspect, examine, and review Borrower's records
and to verify and confirm with Debtors the accuracy of such Chattel Paper
information, and Borrower agrees to reimburse Lender for all of Lender's
reasonable out-of-pocket expenses incurred in connection with any such
inspection, examination, or review (excluding personnel costs of Lender or
personnel costs of any independent contractor retained by Lender to conduct
or assist in any such inspection, examination, or review).
RIGHT TO COLLECT CHATTEL PAPER. Borrower may collect amounts due under any
Chattel Paper, subject to the obligation of Borrower to deposit all
collections in a Dominion Account. At any time after any Event of Default
occurs, Lender may exercise its rights to collect the Chattel Paper and to
notify Debtors to make payments directly to Lender for application to the
Indebtedness.
RELEASE OF COLLATERAL. Borrower may apply to Lender for a release of
Collateral from the Security Interests in connection with a sale of
Collateral by Borrower outside of the ordinary course of Borrower's
business or in bulk. Borrower's release application will identify the
Collateral to be sold, the gross sales price, an itemization of sales price
attributed to the Collateral sold if the sale includes property of persons
or entities other than Borrower, the net sale proceeds to be deposited into
the Dominion Account, and such other information as Lender may reasonably
request. Lender agrees to approve a release request if (a) no Overline
shall be created or increased under the Line of Credit after the sale and
the net sales proceeds attributable to the Collateral sold are deposited
into the Dominion Account, (b) no Event of Default has occurred and the
sale will not result in the occurrence of an Event of Default, and (c) the
effect of the sale on the financial condition of Borrower and Guarantors
will not result in a breach of any of the Financial Covenants contained in
this Agreement. Any approval by Lender of a requested release will be
evidenced by a separate writing and shall be effective upon the deposit of
the net sale proceeds attributable to the Collateral sold, in good funds,
into the Dominion Account. Lender agrees to execute all appropriate
release documents for an approved release request and agrees to deliver the
executed release documents to Borrower, or its designee, upon deposit of
the net sale proceeds attributable to the Collateral sold into the Dominion
Account or, if requested by Borrower or the Collateral purchaser, to allow
the executed release documents to be held by an escrow agent pending
deposit of the net sales proceeds attributable to the Collateral sold into
the Dominion Account.
DOMINION ACCOUNT. Borrower shall establish and maintain one or more deposit
accounts with Lender or with a bank designated by Lender ("DOMINION ACCOUNT")
into which Borrower shall deposit, daily, all amounts paid on any Chattel Paper
and from sales of any of the Collateral. All deposits shall be made no later
than the first Business Day after receipt by Borrower. Borrower shall have no
right to draw upon any Dominion Account. On the second Business Day after a
deposit into a Dominion Account, the amount of the deposit shall be drawn from
the Dominion Account by Lender and applied to repayment of the Loan.
LOCK BOX. Borrower agrees to instruct, in writing, all Debtors and others
responsible for making payments on Chattel Paper and other amounts due to
Borrower to make all payments to an address selected by Lender. Lender also
has the independent right, but not a duty, to notify Debtors and others
responsible for making payments on Chattel Paper or other amounts due to
Borrower to make all payments to the address selected by Lender. All payments
received by Lender and all payments received by Borrower will be deposited,
daily, into a Dominion Account. All deposits of payments received by Lender
shall be made to a Dominion Account no later than the first Business Day after
receipt by Lender.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as
of the date of this Agreement and as of the date of each disbursement of Loan
proceeds:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Texas, and
is, or prior to the initial Advance will be, duly qualified to do business
in, and in good standing under the laws of Arizona, Colorado, Florida,
Georgia, Indiana, Kansas, Mississippi, Missouri, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Utah and Virginia. Borrower is not
qualified to do and is not doing business in any other jurisdiction.
AUTHORIZATION. Borrower's execution, delivery and performance of this
Agreement have been duly authorized, and do not conflict with, and will not
result in a violation of, or constitute or give rise to an event of default
under Borrower's Articles of Incorporation or Bylaws, or any agreement or
other instrument which may be binding upon Borrower, or under any law or
governmental regulation or court decree or order applicable to Borrower
and/or its properties. Borrower has the power and authority to enter into
Borrower's Loan and Note and to grant collateral security therefor.
Borrower has the further power and authority to own and to hold all of its
assets and properties, and to carry on its business as presently conducted.
STOCK OWNERSHIP. Borrower is a wholly owned subsidiary of SEARCH CAPITAL
GROUP, INC., a Delaware corporation that is a Guarantor of the Indebtedness
and the owner of all the authorized and issued capital stock of Borrower.
FIDUCIARY OBLIGATION OF BORROWER. Borrower shall act in a fiduciary
capacity as to Lender with regard to receipt and collection by Borrower, in
trust for and on behalf of Lender, of any and all amounts paid on the
Collateral. ALL AMOUNTS PAID ON THE COLLATERAL SHALL BE DEPOSITED INTO A
DOMINION ACCOUNT. Any diversion or use by Borrower of any portion of any
amount paid on the Collateral shall constitute an Event of Default.
FINANCIAL INFORMATION. Borrower's annual audited financial statements
furnished to Lender are and were prepared in accordance with generally
accepted accounting principles, Borrower's other financial statements
furnished to Lender are and were prepared in accordance with generally
accepted accounting principles (with the exception of year-end adjustments
and footnoting), and all fairly present, in all material respects,
Borrower's financial condition and solvency as of the date thereof. To the
best of Borrower's knowledge, Borrower has no contingent obligations or
liabilities that were not disclosed or reserved against in Borrower's
financial statements or in the notes thereto. Since the dates of such
financial statements, there has been no material adverse change in
Borrower's financial condition or business.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title
to all of Borrower's properties free and clear of all security interests,
and has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under, any other name (other than the former names of Borrower
disclosed in this Agreement) for at least the last five (5) years. Lender
recognizes, however, that Borrower may elect not to apply for registration
of a certificate of title to a repossessed motor vehicle in Borrower's name
if, under applicable law, Borrower is allowed to resell the repossessed
vehicle without such registration.
<PAGE> 6
09-11-1996 LOAN AGREEMENT PAGE 6
LOAN NO. (CONTINUED)
================================================================================
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub.L.No.99-499 ("SARA"), the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable federal, state or local laws, regulations, rules
or ordinances adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower agrees,
represents and warrants that: (a) During the period of Borrower's ownership
of Borrower's properties, there has been no use, generation, manufacture,
storage, treatment, disposal, release or threatened release of any
hazardous waste or substance by any person on, under, or about any of the
properties; (b) Borrower has no knowledge of, or reason to believe that
there has been (i) any use, generation, manufacture, storage, treatment,
disposal, release, or threatened release of any hazardous waste or
substance by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any
person relating to such matters; (c) Neither Borrower nor any tenant,
contractor, agent or other authorized user of any of the properties shall
use, generate, manufacture, store, treat, dispose of, or release any
hazardous waste or substance on, under, or about any of the properties; and
any such activity shall be conducted in compliance with all applicable
federal, state, and local laws, regulations, rules and ordinances,
including without limitation those laws, regulations, rules and ordinances
described above. Borrower authorizes Lender and its agents to enter upon
the properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
this Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste. Borrower hereby (i) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(ii) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or not
the same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION. There are no suits or proceedings pending, or to the knowledge
of Borrower, threatened against or affecting Borrower, any Guarantor, or
the assets of Borrower or any Guarantor, before any court or by any
governmental agency, other than those previously disclosed in documents
filed by Borrower or any Guarantor with the Securities and Exchange
Commission and delivered to Lender by Borrower or any Guarantor, which, if
adversely determined, may have a material adverse effect on the financial
condition or business of Borrower or any Guarantor.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any security agreements, or
permitted the filing or attachment of any security interests on or
adversely affecting any of the Collateral directly or indirectly securing
repayment of Borrower's Loan and Note, that would be prior or that may in
any way be superior to Lender's Security Interests and rights in and to
such Collateral, except for Permitted Liens.
BINDING EFFECT. This Agreement, the Note and all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note are
binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance with
their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (a) no Reportable Event
nor Prohibited Transaction (as defined in ERISA) has occurred with respect
to any such plan, (b) Borrower has not withdrawn from any such plan or
initiated steps to do so, and (c) no steps have been taken to terminate any
such plan.
LOCATION OF BORROWER'S REGISTERED OFFICE. The registered office of
Borrower is 700 NORTH PEARL STREET, SUITE 400, L.B. 401, DALLAS, TEXAS
75201-7490, or as Borrower may otherwise notify Lender as required by this
Agreement.
LOCATION OF BORROWER'S CHIEF EXECUTIVE OFFICE. The chief executive office
of Borrower [as pertinent under La.-R.S. 10:9-103(3)(d) and similar
applicable laws] is 700 NORTH PEARL STREET, SUITE 400, L.B. 401, DALLAS,
TEXAS 75201- 7490, or as Borrower may otherwise notify Lender as required
by this Agreement.
LOCATION OF BORROWER'S RECORDS. Borrower maintains an office and keeps its
records concerning any of the Collateral at 700 NORTH PEARL STREET, SUITE
400, L.B. 401, DALLAS, TEXAS 75201-7490, or as Borrower may otherwise
notify Lender as required by this Agreement.
TAX IDENTIFICATION NUMBER. The Tax Identification Number of Borrower is
75-2554995, and this is the only Tax Identification Number used by Borrower
for the last ten (10) years.
TRADE NAMES. Borrower does not operate any of its businesses under any
trade name, nor has Borrower operated any of its businesses under any trade
name for a period of ten (10) years preceding the date of this Agreement,
other than its former names, SEARCH AUTOMOBILE LEASING CORPORATION,
HASSLEFREE FINANCE CORP., and AUTOMOBILE CREDIT FINANCE CORPORATION, SERIES
1994-I.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees
that Lender is relying upon the above representations and warranties in
making the above referenced Loan and extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Loan and Note shall be paid in full, or until
the Expiration Date, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long
as this Agreement remains in effect, Borrower will:
BUSINESS IN OTHER JURISDICTIONS. Promptly inform Lender in writing of
Borrower's election to do business in any jurisdiction other than the
states of Arizona, Colorado, Florida, Georgia, Indiana, Kansas,
Mississippi, Missouri, North Carolina, Ohio, Oklahoma, South Carolina,
<PAGE> 7
09-11-1996 LOAN AGREEMENT PAGE 7
LOAN NO. (CONTINUED)
================================================================================
Tennessee, Texas, Utah and Virginia. Upon request of Lender, Borrower
agrees to execute such financing statements and to take whatever other
actions are requested by Lender to perfect and continue Lender's Security
Interests in the Collateral for any other jurisdiction.
CHANGES IN FINANCIAL CONDITION AND LITIGATION. Promptly inform Lender in
writing of (a) all material adverse changes in the financial condition of
Borrower or any Guarantor, and (b) the threat of, the institution of, or
any adverse determination by final judgment in, any litigation, arbitration
proceeding or governmental proceeding which could reasonably be expected to
involve a claim against Borrower or any Guarantor for more than
$100,000.00.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and review Borrower's books and records at all
reasonable times.
FINANCIAL REPORTS. Prepare all annual financial statements and reports
required to be provided under this Agreement in accordance with generally
accepted accounting principles, applied on a consistent basis and prepare
all other financial statements and reports required to be provided under
this Agreement in accordance with generally accepted accounting principles
(with the exception of year-end adjustments and footnoting), applied on a
consistent basis, and each statement and report shall be certified as being
true and correct, in all material respects, to the best knowledge and
belief, by the chief financial officer of the entity for which the report
was prepared or other officer or person acceptable to Lender.
ANNUAL FINANCIAL STATEMENTS - BORROWER. Without demand or request by
Lender, furnish Lender with, as soon as available, but in no event later
than one hundred twenty (120) days after the end of each fiscal year,
Borrower's fiscal year-end financial statements (including balance sheet
and income statement and a statement of cash flows) audited by a certified
public accountant satisfactory to Lender and accompanied by the unqualified
opinion of the certified public accountant. The certified public
accounting firm of BDO Siedman shall be qualified as a certified public
accountant satisfactory to Lender.
ANNUAL FINANCIAL STATEMENTS - SEARCH CAPITAL GROUP. Without demand or
request by Lender, furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, fiscal year-end financial statements (including consolidated balance
sheet, income statement and statement of cash flows) for Borrower's parent
corporation, SEARCH CAPITAL GROUP, INC., prepared in the form of
consolidated statements for the parent corporation and all of its
subsidiaries, including Borrower, audited by a certified public accountant
satisfactory to Lender and accompanied by the unqualified opinion of the
certified public accountant. The certified public accounting firm of BDO
Siedman shall be qualified as a certified public accountant satisfactory to
Lender.
MONTHLY FINANCIAL STATEMENTS - BORROWER. Without demand or request by
Lender, furnish Lender with, as soon as available, but in no event later
than ten (10) Business Days after the end of each calendar month,
Borrower's month- end financial statements (including balance sheet and
income statement) for the prior month, prepared and certified as correct,
in all material respects, subject to year-end adjustments, to the best
knowledge and belief, by Borrower's chief financial officer or other
officer or person acceptable to Lender.
MONTHLY FINANCIAL STATEMENTS - SEARCH CAPITAL GROUP. Without demand or
request by Lender, furnish Lender with, as soon as available, but in no
event later than ten (10) Business Days after the end of each calendar
month, month-end financial statements (including balance sheet and income
statement) for Borrower's parent corporation, SEARCH CAPITAL GROUP, INC.,
prepared in the form of consolidated statements for the parent corporation
and all of its subsidiaries, including Borrower, for the prior month,
prepared and certified as correct, in all material respects, subject to
year-end adjustments, to the best knowledge and belief, by the chief
financial officer of SEARCH CAPITAL GROUP, INC., or other officer or person
acceptable to Lender.
MONTHLY ACCOUNTS RECEIVABLE AGING REPORTS. Without demand or request by
Lender, furnish Lender with, as soon as available, but in no event later
than ten (10) Business Days after the end of each calendar month, a
schedule of Borrower's accounts receivable (including Chattel Paper) by
account debtor (including Debtors), with aging. Each monthly accounts
receivable report shall be prepared by Borrower and certified as correct,
in all material respects, to the best knowledge and belief, by the chief
financial officer of Borrower or other officer or person acceptable to
Lender, and shall be in form and content acceptable to Lender. The gross
amount of accounts receivable of Borrower shown on monthly accounts
receivable reports must be equal to the amount of accounts receivable shown
on Borrower's monthly financial statements prepared for the same month-end.
BORROWING BASE CERTIFICATES. Without demand or request by Lender, by noon
of each day Borrower makes a request for an Advance under the Line of
Credit, by noon on the Wednesday following a week during which no Advance
under the Line of Credit was requested, and at such other times as Lender
may request, furnish Lender with a Borrowing Base Certificate, in
reasonable detail and in form and content acceptable to Lender, prepared by
Borrower and certified as correct, to the best knowledge and belief, by
Borrower's chief financial officer or other officer or person acceptable to
Lender, identifying the calculation of the Borrowing Base utilizing balance
and eligibility information current as of the date the Borrowing Base
Certificate is furnished to Lender.
WEEKLY RECEIPTS SCHEDULES. Without demand or request by Lender, within
four (4) Business Days after the end of each week and at such other times
as Lender may request, furnish Lender with weekly receipts schedules
identifying, in detail, each Chattel Paper payment included in each
Dominion Account deposit made by Borrower during the prior week. Weekly
receipt schedules shall be prepared by Borrower and certified as correct,
to the best knowledge and belief, by the chief financial officer of
Borrower or other officer or person acceptable to Lender, and shall be in
form and content acceptable to Lender.
TAX RETURNS. Upon request of Lender, furnish Lender with copies of the
most current federal tax returns filed by Borrower and each Guarantor, with
all schedules and supporting documentation.
PUBLIC DOCUMENTS. Without demand or request by Lender, within thirty (30)
days of the filing of each, furnish Lender with copies of the 10-K, 10-Q,
and each other document filed by Borrower or any Guarantor with the
Securities and Exchange Commission.
ADDITIONAL INFORMATION. Furnish such additional information, statements
and reports with respect to the financial condition and business operations
of Borrower and Guarantors as Lender may reasonably request from time to
time.
VEHICLE TITLES. Secure original certificates of title to all motor
vehicles in which a security interest has been granted as security for the
payment of Borrower's Chattel Paper and, upon request of Lender, allow
inspection of all such original certificates of title or deliver possession
of such original certificates of title to Lender, as requested by Lender.
Lender acknowledges that an affiliate of Borrower, rather than Borrower,
may be reflected as the secured party or lienholder on a certificate of
title although the Chattel Paper evidencing the security interest referred
to on such certificate has been assigned to Borrower.
NOTICE TO DEBTORS. Notify, in writing, all present and future Debtors and
others responsible for payment on any Chattel Paper, to send all payments
on Chattel Paper to the Lock Box address selected by Lender.
<PAGE> 8
09-11-1996 LOAN AGREEMENT PAGE 8
LOAN NO. (CONTINUED)
================================================================================
INSURANCE. Maintain public liability insurance in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender. Borrower,
upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be canceled or diminished
without at least thirty (30) days' prior written notice to Lender.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
and (d) the expiration date of the policy.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, on Lender's forms, and in the
amounts and by the guarantors named below:
GUARANTOR AMOUNTS
--------- -------
SEARCH CAPITAL GROUP, INC. UNLIMITED
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's working capital
needs incurred in the ordinary course of Borrower's business.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or properties, income, or profits of Borrower, prior
to the date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of the properties, income,
or profits of Borrower. Provided, however, Borrower will not be required
to pay and discharge any such assessment, tax, charge, levy, lien or claim
so long as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting principles. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against properties, income, or
profits of Borrower.
PERFORMANCE. Perform and comply with all terms, conditions and provisions
set forth in this Agreement and in all other instruments and agreements
between Borrower and Lender in a timely manner, and promptly notify Lender
if Borrower learns of the occurrence of any event which constitutes an
Event of Default under this Agreement.
OPERATIONS. Substantially maintain its present executive and management
personnel; conduct its business affairs in a reasonable and prudent manner
and in compliance in all material respects with all applicable federal,
state and local laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including, without
limitation, compliance with the Americans With Disabilities Act and with
all minimum funding standards and other requirements of ERISA and other
laws applicable to Borrower's employee benefit plans.
CHATTEL PAPER FORMS. Acquire Chattel Paper only on forms of notes,
security agreements, disclosure statements and other documents that are all
in compliance and conformity with all applicable laws, ordinances, rules,
and regulations.
BANKING RELATIONSHIP AND ACCOUNTS. Establish and maintain Lender as the
principal and primary banking establishment of Borrower and all significant
operating accounts of Borrower shall be maintained with Lender.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all collateral for the Loan or Loans and Borrower's other
properties and to examine or review Borrower's books, accounts, ledger
sheets, and records and to make copies and memoranda of Borrower's books,
accounts, ledger sheets, and records. If Borrower now or at any time
hereafter maintains any records (including without limitation computer
generated records and computer programs for the generation of such records)
in the possession of a third party, Borrower, upon request of Lender, shall
notify such party to permit Lender free access to such records at all
reasonable times and to provide Lender with copies of any records it may
request, all at Borrower's expense.
CHANGE OF LOCATION. Immediately notify Lender in writing of any additions
to or changes in the location of Borrower's businesses or Borrower's chief
executive office.
TITLE TO ASSETS AND PROPERTY. Maintain good and indefeasible title to all
of Borrower's assets and properties.
NOTICE OF DEFAULT AND ERISA MATTERS. Forthwith upon learning of the
occurrence of any of the following, Borrower shall provide Lender with
written notice thereof, describing the same and the steps being taken by
Borrower with respect thereto: (a) the occurrence of any Event of Default,
(b) the occurrence or existence of matter or event which, with notice from
Lender and expiration of any applicable cure period, would be an Event of
Default, or (c) the occurrence of a Reportable Event or a Prohibited
Transaction (as defined in ERISA) under, or the institution of steps by
Borrower to withdraw from, or the institution of any steps to terminate,
any employee benefit plan as to which Borrower may have any liability.
OTHER INFORMATION. From time to time, Borrower will provide Lender with
such other information as Lender may reasonably request.
EMPLOYEE BENEFIT PLANS. So long as this Agreement remains in effect,
Borrower will maintain each employee benefit plan as to which it may have
any liability, in compliance with all applicable requirements of law and
regulations.
OTHER AGREEMENTS. Borrower will not enter into any agreement containing
any provision which would be violated or breached by the performance of its
obligations hereunder or under any instrument or document delivered or to
be delivered by it hereunder or in connection herewith.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct, in all
material respects, as of the date of the certificate and further certifying
that, as of the date of the certificate, no Event of Default exists under
this Agreement.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, security agreements, financing statements, instruments, documents
and other agreements as Lender or its attorneys may reasonably request to
evidence and secure the Loans and to perfect all Security Interests.
<PAGE> 9
09-11-1996 LOAN AGREEMENT PAGE 9
LOAN NO. (CONTINUED)
================================================================================
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that as long as
this Agreement remains in effect Borrower shall not, without the prior written
consent of Lender:
GRADE D PAPER ACQUISITIONS. Acquire Grade D Paper other than as a part of
bulk acquisitions of seasoned Chattel Paper pools from entities that have
been actively engaged in the automobile loan industry for at least one (1)
year prior to the acquisition. The value of Grade D Paper included in any
such bulk acquisition may not exceed 15% of the value of the Chattel Paper
acquired.
COMMINGLING OF ELIGIBLE PAPER. Include as Eligible Paper any Chattel Paper
that is not owned solely by Borrower.
ISSUANCE OF SHARES. Issue, sell or otherwise dispose of, any shares of its
capital stock or other securities, or rights, warrants or options to
purchase or acquire any shares or securities of Borrower other than shares
of its capital stock issued as stock dividends; provided, however, that (a)
Borrower shall be allowed to issue its shares and securities to, and
acquire its shares and securities from, its parent corporation, SEARCH
CAPITAL GROUP, INC., and (b) Borrower may also issue its shares and
securities to, and acquire its shares and securities from, others if, after
the transaction, SEARCH CAPITAL GROUP, INC., owns and controls more than
50% of the voting rights for the election of directors.
REDEMPTION OF SHARES. Redeem, retire or repurchase any shares of its
capital stock or other securities, except as permitted under "Issuance of
Shares," above.
INDEBTEDNESS AND LIENS. (a) Create, incur or assume indebtedness for
borrowed money, including capital leases, other than (i) trade debt
incurred in the normal course of business, or (ii) indebtedness to Lender
contemplated by this Agreement, (b) except as allowed as a Permitted Lien
grant a security interest in, or otherwise encumber, any of the Collateral,
(c) sell, transfer, or otherwise alienate any of Borrower's inventory
outside of the normal course of business, or (d) sell, transfer, or
otherwise alienate any of Borrower's Chattel Paper.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) operate under any trade name other than trade names, if any, identified
in this Agreement, (c) cease operations, liquidate, merge, transfer,
acquire or consolidate with any other entity, change ownership, dissolve or
transfer or sell Collateral out of the ordinary course of business, or (d)
purchase or retire any of Borrower's outstanding shares or alter or amend
Borrower's capital structure, except in each case as permitted under
"Issuance of Shares," above.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets other than in the ordinary course of business, (b) purchase,
create or acquire any interest in any other enterprise or entity, or (c)
incur any obligation as surety or guarantor other than in the ordinary
course of business.
FINANCIAL COVENANTS. Borrower covenants and agrees with Lender that as long as
this Agreement remains in effect Borrower and Guarantors shall comply with the
following financial covenants:
DEFINITIONS. For purposes of testing compliance with these Financial
Covenants the following terms shall have the following meanings. Except as
otherwise provided by these defined terms, all computations made to
determine compliance with these Financial Covenants shall be made on a
consolidated basis for SEARCH CAPITAL GROUP, INC., and all of its
subsidiaries, in accordance with generally accepted accounting principles,
applied on a consistent basis, and certified as true and correct, in all
material respects, to the best knowledge and belief, by the chief financial
officer of SEARCH CAPITAL GROUP, INC., or other officer or person
acceptable to Lender.
ADJUSTED NET WORTH. The term "Adjusted Net Worth" shall mean the
Stated Net Worth of SEARCH CAPITAL GROUP, INC, and its subsidiaries, on
a consolidated basis, plus Subordinated Debt, less Intangibles, and
less amounts (a) due from any shareholder, director, officer, employee
or agent of SEARCH CAPITAL GROUP, INC., or of any subsidiary or
affiliate of SEARCH CAPITAL GROUP, INC., or (b) due from any person or
entity (other than a subsidiary) which is affiliated with, or related
to,SEARCH CAPITAL GROUP, INC., or any of its subsidiaries, or any of
the shareholders, officers, or directors of SEARCH CAPITAL GROUP,
INC., or any of its subsidiaries.
DEBT. The term "Debt" shall mean all liabilities of SEARCH CAPITAL
GROUP, INC., and its subsidiaries, on a consolidated basis, INCLUDING
SUBORDINATED DEBT.
INTANGIBLES. The term "Intangibles" shall mean all of the intangible
assets of SEARCH CAPITAL GROUP, INC., and its subsidiaries, on a
consolidated basis, including goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible expenses,
but excluding leaseholds and leasehold improvements.
SUBORDINATED DEBT. The term "Subordinated Debt" shall mean
indebtedness and liabilities of SEARCH CAPITAL GROUP, INC., and its
subsidiaries which have been subordinated by written agreement to the
Indebtedness, and to the indebtedness of any Guarantor to Lender, in
form and substance acceptable to Lender.
STATED NET WORTH. The term "Stated Net Worth" shall mean the total
assets of SEARCH CAPITAL GROUP, INC., and its subsidiaries, on a
consolidated basis, less total Debt.
MINIMUM ADJUSTED NET WORTH. SEARCH CAPITAL GROUP, INC., shall maintain an
Adjusted Net Worth of no less than $20,000,000.00.
MAXIMUM LEVERAGE POSITION. SEARCH CAPITAL GROUP, INC., shall maintain a
leverage position of no more than 5.00 to 1.00, where leverage position is
the result of the following formula:
Debt - Subordinated Debt
------------------------------------
Stated Net Worth + Subordinated Debt
TESTING FREQUENCY. Compliance with Minimum Adjusted Net Worth and Maximum
Leverage Position requirements shall be tested quarterly (based on the
fiscal year of SEARCH CAPITAL GROUP, INC.) based on the then most recent
financial statements of SEARCH CAPITAL GROUP, INC., and its subsidiaries,
on a consolidated basis.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the other Related Documents or any other agreement that Borrower or
any Guarantor has with Lender, (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt, (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the total value
of the Collateral securing any Loan, (d) Borrower or any Grantor seeks, claims
or otherwise attempts to limit, modify or revoke any Security Interest granted
to Lender, or (e) any Guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such Guarantor's guaranty of the Loan or any other loan with
Lender.
<PAGE> 10
09-11-1996 LOAN AGREEMENT PAGE 10
LOAN NO. (CONTINUED)
================================================================================
INSECURITY. Borrower agrees that, even though no Event of Default shall have
occurred, Lender shall have the right to demand, by written notice to Borrower,
full repayment, subject to the provisions of this paragraph, of the aggregate
unpaid principal amount of all Advances then outstanding and all accrued unpaid
interest, together with all other applicable fees, costs and charges, if any,
not yet paid, if (a) Lender in good faith deems itself insecure, or (b) the
results of any annual review by Lender of Borrower's books, records or
operations or the Collateral are not satisfactory to Lender. If such a
repayment demand is made by Lender, even though no Event of Default shall have
occurred, Borrower and Lender agree that, unless and until an Event of Default
occurs, Borrower shall continue to have the right to request and receive
Advances under the Line of Credit, subject to the other terms and conditions of
this Agreement; provided, however, that, sixty (60) days after notice of
Lender's repayment demand under this provision, the percentage of the aggregate
amount of the outstanding principal and interest owed to Borrower under
Borrower's Eligible Paper used to determine the Borrowing Base under the Line
of Credit shall be reduced by five (5) percentage points and shall be further
reduced by an additional five (5) percentage points every thirty (30) days
thereafter. Additionally, after notice of Lender's repayment demand under this
provision, Borrower shall not be obligated to pay any of the commitment
cancellation charges, unused facility fees, or annual renewal fees otherwise
due and payable under this Agreement or any of the Related Documents.
DEPOSIT ACCOUNTS. As collateral security for repayment of Borrower's Note and
all renewals and extensions, as well as to secure any and all other loans,
notes, indebtedness and obligations that Borrower may now and in the future owe
to Lender or incur in Lender's favor, whether direct or indirect, absolute or
contingent, due or to become due, of any nature and kind whatsoever, Borrower
hereby grants Lender a continuing Security Interest in any and all funds that
Borrower may now and in the future have on deposit with Lender or in
certificates of deposit or other deposit accounts as to which Borrower is an
account holder (with the exception of IRA, pension, and other tax-deferred
deposits). Borrower further agrees that Lender may, after an Event of Default
has occurred, apply any funds that Borrower may have on deposit with Lender or
in certificates of deposit or other deposit accounts as to which Borrower is an
account holder (with the exception of IRA, pension, and other tax-deferred
deposits) against the unpaid balance of Borrower's Note and any and all other
present and future indebtedness and obligations that Borrower may then owe to
Lender, in principal, interest, fees, costs, expenses, and attorneys' fees;
provided, however, that the Event of Default prerequisite for application
authority shall not apply to any Dominion Account.
SPECIFIC DEPOSIT ACCOUNT DEBIT AUTHORIZATION. Without any demand or notice
whatsoever, Borrower hereby authorizes Lender to debit any Dominion Account in
order to pay any facility fee or facility charge due under this Agreement, in
order to pay any overline or overadvance, and in order to pay any accrued
interest due under the Note. Without any demand or notice whatsoever, Borrower
hereby authorizes Lender, after an Event of Default occurs, to debit any one or
more of Borrower's other deposit accounts with Lender (with the exception of
IRA, pension, and other tax-deferred deposits) in order to pay any facility fee
or facility charge due under this Agreement, in order to pay any overline or
overadvance, and in order to pay any accrued interest due under the Note.
Borrower hereby waives the right to notice of any account debit effected in
accordance with this authorization, including, without limitation, the notice
provided for under La.-R.S. 6:316, as amended.
EVENTS OF DEFAULT. The following actions or inactions or both shall constitute
Events of Default under this Agreement:
PAYMENT OF DIVIDENDS BY SEARCH CAPITAL GROUP, INC. Should SEARCH CAPITAL
GROUP, INC., pay any dividends on its stock (other than dividends payable
in its stock) unless (a) its Adjusted Net Worth (as defined in the
FINANCIAL COVENANTS section above) exceeds $22,500,000.00, and (b) the
dividend payment will not reduce its Adjusted Net Worth to amount equal to
or less than $22,500,000.00.
DEFAULT UNDER THE NOTE. Should Borrower default in the payment of any
amounts due and payable under the Note.
DEFAULT UNDER DOMINION ACCOUNT OBLIGATIONS. Should Borrower fail to
deposit, into a Dominion Account, any collection made of any amounts due
under any Chattel Paper, or any amount received from the sale of any of
Borrower's inventory, within one (1) Business Day of receipt.
DEFAULT IN PAYMENT OF OVERLINES OR OVERADVANCES. Should Borrower default
in the payment of any Overline or Overadvance within two (2) Business Days
after notice from Lender to Borrower.
DEFAULT UNDER THIS AGREEMENT. Should Borrower violate, or fail to comply
fully with, any of the other terms and conditions of, this Agreement, and
such violation or failure shall not have been remedied within fifteen (15)
days after notice of such violation or failure by Lender to Borrower.
DEFAULT UNDER RELATED DOCUMENTS. Should any Guarantor violate, or fail to
comply fully with, any of the other terms and conditions of, such
Guarantor's guaranty of the Loan, and such violation or failure shall not
have been remedied within fifteen (15) days after notice of such violation
or failure by Lender to Borrower. Should, after expiration of any
applicable cure periods, any event of default occur or exist under any
other Related Document.
OTHER DEFAULTS IN FAVOR OF LENDER. Should Borrower or any Guarantor
default under any other loan, extension of credit, security agreement, or
obligation in favor of Lender, and such default shall not have been
remedied within fifteen (15) days after notice of such default by Lender to
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Guarantor
default (after expiration of any applicable cure periods) under any loan,
extension of credit, security agreement, purchase or sales agreement, or
any other agreement in favor of any other creditor or person involving in
excess of $1,000,000.00, and such default shall not have been remedied
within fifteen (15) days after notice of such default by Lender to
Borrower.
INSOLVENCY. Should the suspension of business, failure or insolvency,
however evidenced, of Borrower or any Guarantor of Borrower's Loan and the
Note occur or exist.
VOLUNTARY READJUSTMENT OF INDEBTEDNESS. Should proceedings for
readjustment of indebtedness, reorganization, bankruptcy, composition or
extension under any insolvency law be brought by Borrower or any Guarantor.
INVOLUNTARY READJUSTMENT OF INDEBTEDNESS. Should proceedings for
readjustment of indebtedness, reorganization, bankruptcy, composition or
extension under any insolvency law be brought against Borrower or any
Guarantor, and such proceedings are not dismissed within sixty (60) days
after commencement.
ASSIGNMENT FOR BENEFIT OF CREDITORS. Should Borrower or any Guarantor file
proceedings for a respite or make a general assignment for the benefit of
creditors.
RECEIVERSHIP. Should proceedings for the appointment of a receiver of all
or any part of Borrower's property, or the property of any Guarantor, be
commenced and such proceedings are not dismissed within sixty (60) days
after commencement, or should a receiver be appointed for all or any part
of Borrower's property, or the property of any Guarantor.
<PAGE> 11
09-11-1996 LOAN AGREEMENT PAGE 11
LOAN NO. (CONTINUED)
================================================================================
DISSOLUTION PROCEEDINGS. Should proceedings for the dissolution or
appointment of a liquidator of Borrower or any Guarantor be commenced by
any person or entity other than Borrower and such proceedings are not
dismissed within sixty (60) days after commencement, or should Borrower or
any Guarantor be dissolved or have a liquidator appointed.
FALSE STATEMENTS. Should any representation or warranty of Borrower or any
Guarantor made in connection with the Loan prove to be incorrect or
misleading in any material respect.
DEFECTIVE COLLATERALIZATION - CHATTEL PAPER. Should any Related Document
granting Lender a Security Interest in any of the Chattel Paper cease to be
in full force and effect (including the failure of any such Related
Document to create a valid and perfected security interest or lien in the
Chattel Paper) at any time for any reason.
DEFECTIVE COLLATERALIZATION - OTHER COLLATERAL. Should any Related
Document granting Lender a Security Interest in any of the Collateral other
than Chattel Paper cease to be in full force and effect (including the
failure of any such Related Document to create a valid and perfected
security interest or lien on such other Collateral) at any time for any
reason, and such condition or failure shall not have been remedied within
fifteen (15) days after notice thereof by Lender to Borrower.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, all
commitments and obligations of Lender under this Agreement or the other Related
Documents or any other agreement immediately will terminate (including any
obligation to make further Loan Advances or disbursements), and, at Lender's
option, all Loans immediately will become due and payable, all without notice
of any kind to Borrower, except that in the case of an Event of Default of the
type described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise.
If any Event of Default shall occur, Lender shall have the right at its sole
option, to accelerate payment of Borrower's Note in full, in principal,
interest, costs, expenses, attorneys' fees, and other fees and charges, as well
as to accelerate the maturity of any and all other loans and/or obligations
that Borrower may then owe to Lender, whether direct or indirect, or by way of
assignment or purchase of a participation interest, and whether absolute or
contingent, liquidated or unliquidated, voluntary or involuntary, determined or
undetermined, due or to become due, and whether now existing or hereafter
arising, and whether Borrower is obligated alone or with others on a "solidary"
or "joint and several" basis, as a principal obligor or as a surety, of every
nature and kind whatsoever, whether any such indebtedness may be barred under
any statute of limitations or otherwise may be unenforceable or voidable for
any reason whatsoever.
If any Event of Default shall occur, Lender shall have the additional right,
again at its sole option, to file an appropriate collection action against
Borrower and/or against any Guarantor, and/or to proceed or exercise any rights
against any Collateral then securing repayment of Borrower's Loan and Note.
Borrower further agrees that Lender's remedies shall be cumulative in nature
and nothing under this Agreement or otherwise, shall be construed as to limit
or restrict the options and remedies available to Lender following any event of
default under this Agreement or otherwise.
If any Event of Default shall occur, Lender shall have the additional right,
again at its sole option, to notify Debtors to make payments directly to Lender
and Lender may remove from the business premises of Borrower, all documents,
files, ledgers, computer tapes and disks, and all other records relating to the
Collateral to facilitate in making direct collections. Borrower shall be
responsible for and pay all reasonable costs and expenses incurred by Lender in
making direct collections, including Lender's internal costs and attorneys'
fees. As soon as practical after receipt of payments directly from Debtors,
Lender shall deposit the collections into a Dominion Account.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
ADDITIONAL DOCUMENTS. Borrower shall provide Lender with the following
additional documents:
CORPORATE RESOLUTION - BORROWER. Borrower has provided or will provide
Lender with a certified copy of resolutions properly adopted by Borrower's
Board of Directors, and certified by Borrower's corporate secretary or
assistant secretary, under which Borrower's Board of Directors authorized
one or more designated officers or employees to execute this Agreement on
behalf of Borrower and to execute the above referenced Note and any and all
Security Agreements directly or indirectly securing repayment of the same,
and to consummate the borrowings and other transactions as contemplated
hereunder, and to consent to the remedies following Borrower's default as
provided herein and under the above referenced Security Agreements.
CORPORATE RESOLUTIONS - GUARANTORS. Borrower has provided or will provide
Lender with certified copies of resolutions properly adopted by the Board
of Directors of each Guarantor (or by a duly organized and authorized
committee of the Board of Directors, if appropriate), and certified by the
corporate secretary or assistant secretary of each Guarantor, under which
the Board of Directors of each Guarantor (or a duly organized and
authorized committee of the Board of Directors, if appropriate) authorized
one or more designated officers or employees to execute the Related
Documents on behalf of each Guarantor, and to consummate the transactions
as contemplated hereunder, and to consent to the remedies provided for
under the Related Documents.
CERTIFICATION. Where required by Lender, Borrower has provided or will
provide Lender with a certificate executed by Borrower's principal or
executive officer, certifying that the representations and warranties set
forth in this Agreement are true and correct, and further certifying that
no Event of Default presently exists under this Agreement, or under
Borrower's Note, or under any Security Agreement directly or indirectly
securing repayment of the same, as of the date hereof.
OPINION OF COUNSEL. Where required by Lender, Borrower has provided or
will provide Lender with an opinion of Borrower's counsel certifying to and
that: (a) this Agreement and Borrower's Note and Security Agreements
constitute valid and binding obligations on the part of Borrower that are
enforceable in accordance with their respective terms; (b) Borrower and
each Guarantor are validly existing and in good standing; (c) Borrower has
authority to enter into this Agreement and to consummate the transactions
contemplated hereunder; (d) each Guarantor has authority to enter into the
Related Documents and to consummate the transactions contemplated
hereunder; and (e) such other matters as may have been requested by Lender
or by Lender's counsel.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought
to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of Louisiana and all Advances and payments to be
made hereunder shall be delivered in Louisiana. Lender and Borrower hereby
waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Borrower against the other. This
Agreement shall be governed by and construed in accordance with the laws of
the State of Louisiana.
<PAGE> 12
09-11-1996 LOAN AGREEMENT PAGE 12
LOAN NO. (CONTINUED)
================================================================================
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower consents to the disclosure of
such information by Lender to any one or more purchasers, or potential
purchasers, and hereby waives any rights to privacy it may have with
respect to such disclosure by Lender, but Borrower specifically reserves
its rights to privacy with respect to any further disclosure or
dissemination of such information by Lender's purchasers or potential
purchasers. Lender agrees to notify Borrower of any sale or transfer of
(a) the Loan in its entirety, and (b) any assignment of the "lead lender"
position if participation interests in the Loan are sold or transferred.
Borrower additionally waives any and all other notices of sale of
participation interests, as well as all notices of any repurchase of
participation interests. Borrower also agrees that the purchasers of any
such participation interests will be considered as the absolute owners of
such interests in the Loans and will have all the rights granted under this
Agreement and under the participation agreement or agreements governing the
sale of such participation interests.
CONTROLLING TERMS. The Related Documents shall contain such terms and
provisions as the parties thereto shall agree (including provisions for
repayment, interest and security) and the terms and conditions of each of
the Related Documents shall be cumulative and in addition to the terms and
provisions of this Agreement, which shall apply to all other Related
Documents. This Agreement and all of the other Related Documents shall be
construed in such a manner as to give full force and effect to all
provisions of this Agreement and the other Related Documents; however, in
the event of any irreconcilable conflict between the terms and provisions
contained in this Agreement and in any of the other Related Documents, the
terms and provisions of this Agreement shall control.
COSTS AND EXPENSES. Borrower agrees to pay, upon demand, all of Lender's
out-of-pocket expenses, including reasonable attorneys' fees, incurred in
connection with the preparation, execution, enforcement and collection of
this Agreement or in connection with the Loans made pursuant to this
Agreement. If an Event of Default occurs, Lender may pay someone else to
help collect the Loans and to enforce this Agreement, and Borrower will pay
that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not there
is a lawsuit, including attorneys' fees for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower
also will pay any court costs, in addition to all other sums provided by
law.
ENTIRE AGREEMENT. This Agreement, the Note, and the other Related
Documents, embody the final, entire agreement of the parties hereto and
supersede any and all prior commitments, agreements, representations, and
understandings, whether written or oral, relating to the subject matter
hereof and may not be contradicted or varied by evidence of prior,
contemporaneous, or subsequent oral agreements or discussions of the
parties hereto. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES TO THIS
AGREEMENT.
MAXIMUM INTEREST RATE. No provision of this Agreement, the Note, or any
other Related Document shall require the payment or permit the collection
of interest in excess of the maximum permitted by applicable law ("THE
MAXIMUM RATE"). If interest in excess of the Maximum Rate is provided for
in this Agreement, in any other Related Document, or otherwise in
connection with the Loan, or is adjudicated to be so provided, the
provisions of this section shall govern and prevail and neither Borrower,
nor any Guarantor or Grantor, shall be obligated to pay the excess amount
of such interest or any other excess sum paid for the use, forbearance, or
detention of Advances made under this Agreement. In the event Lender ever
receives, collects or applies, as interest due and payable under the Note,
any sum in excess of the Maximum Rate, the amount of the excess shall be
applied as a payment and reduction of the principal of the indebtedness
represented by the Note; and if the principal of the indebtedness
represented by the Note has been fully paid, any remaining excess shall
forthwith be paid to Borrower. In determining whether or not interest paid
or payable exceeds the Maximum Rate, Borrower and Lender shall, to the
extent permitted by applicable law, (a) characterize any non-principal
payment as an expense, fee or premium rather than as interest, (b) exclude
voluntary prepayments and the effects thereof, and (c) amortize, prorate,
allocate and spread, in equal or unequal parts, the total amount of
interest throughout the entire contemplated term of the indebtedness
represented by the Note so that interest for the entire term does not
exceed the Maximum Rate.
NOTICES. To give Borrower any notice required under this Agreement, Lender
may hand deliver or mail such notice to Borrower at the address specified
for Borrower in this Agreement, or at any other address that Borrower may
have given to Lender by written notice as provided in this paragraph. To
give Lender any notice under this Agreement, Borrower may hand deliver or
mail such notice to Lender at the address specified in this Agreement, or
at any other address that Lender may have given to Borrower by written
notice as provided in this paragraph. All notices required or permitted
under this Agreement must be in writing and will be considered as given on
the day it is delivered by hand or deposited in the U. S. Mail in the form
and to the address specified in this Agreement.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SOLE DISCRETION OF LENDER. Whenever Lender's consent or approval is
required under this Agreement, the decision as to whether or not to consent
or approve shall be in the sole, but reasonable, discretion of Lender, and
Lender's decision shall be final and conclusive, absent manifest error.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that provision
or any other provision of this Agreement. No prior waiver by Lender, nor
any course of dealing between Lender and Borrower, or between Lender and
any Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE> 13
09-11-1996 LOAN AGREEMENT PAGE 13
LOAN NO. (CONTINUED)
================================================================================
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF SEPTEMBER 11,
1996.
BORROWER:
SEARCH FUNDING II, INC.
By: /s/ Robert D. Idzi
---------------------------------------------------
Robert D. Idzi, Senior Executive Vice President
LENDER:
HIBERNIA NATIONAL BANK
By: /s/ Norm Winters
----------------------------------------------------
Authorized Officer
<PAGE> 1
EXHIBIT 4.8
COMMERCIAL SECURITY AGREEMENT
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,000,000.00 09-11-1996 09-11-1999 855
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
BORROWER/GRANTOR: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK
(TIN: 75-2554995) (TIN: 72-0210640)
700 NORTH PEARL STREET 313 CARONDELET STREET
SUITE 400, L.B. 401 POST OFFICE BOX 61540
DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT is entered into between SEARCH FUNDING II,
INC. (referred to below as "GRANTOR"); and HIBERNIA NATIONAL BANK (referred to
below as "LENDER"). For valuable consideration, Grantor hereby pledges to
Lender and grants to Lender a continuing security interest in the Collateral to
secure Grantor's present and future Indebtedness and agrees that Lender shall
have the rights stated in this Agreement with respect to the Collateral, in
addition to all other rights which Lender may have by law or otherwise.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Louisiana Commercial Laws -
Secured Transactions (La.-R.S. 10: 9-101, et seq.). All references to dollar
amounts shall mean amounts in lawful money of the United States of America.
AGREEMENT. The word "Agreement" means this Commercial Security
Agreement, as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules
attached or to be attached to this Commercial Security Agreement from
time to time.
COLLATERAL. The word "Collateral" means individually, collectively
and interchangeably any and all of Grantor's present and future
rights, title and interest in and to the following described property,
wherever located, together with any and all present and future
additions thereto, substitutions therefor, and replacements thereof:
ALL CHATTEL PAPER, INSTRUMENTS, DOCUMENTS, ACCOUNTS, INVENTORY,
AND GENERAL INTANGIBLES
The Collateral includes any and all of Grantor's present and future
chattel paper, equipment leases, retail installment contracts, notes
and chattel mortgages, notes and security agreements, instruments,
documents, and all other similar obligations and indebtedness that may
now and in the future be owed to or held by Grantor from whatever
source arising, and all monies and proceeds payable thereunder, and
all of Grantor's rights and remedies to collect and enforce payment
and performance thereof, as well as to enforce any guaranties of the
foregoing and security therefor, and all of Grantor's present and
future rights, title and interest in and with respect to the goods or
other property that may give rise to or that may secure any of the
foregoing, including without limitation Grantor's insurance rights
with regard thereto, and any and all present and future general
intangibles of Grantor in any way related or pertaining to any of the
foregoing, including without limitation Grantor's account ledgers,
books, records, files, computer disks and software, and all rights
that Grantor may have with regard thereto.
The Collateral includes any and all of Grantor's present and future
accounts, instruments, documents, notes, and all other similar
obligations and indebtedness that may now and in the future be owed to
or held by Grantor from whatever source arising, and all monies and
proceeds payable thereunder, and all of Grantor's rights and remedies
to collect and enforce payment and performance thereof, as well as to
enforce any guaranties of the foregoing and security therefor, and all
of Grantor's present and future rights, title and interest in and with
respect to the goods, services, and other property that may give rise
to or that may secure any of the foregoing, including without
limitation Grantor's insurance rights with regard thereto, and all
present and future general intangibles of Grantor in any way related
or pertaining to any of the foregoing, including without limitation
Grantor's account ledgers, books, records, files, computer disks and
software, and all rights that Grantor may have with regard thereto.
The Collateral includes any and all of Grantor's present and future
inventory (including consigned inventory), merchandise and other items
of personal property held for sale or lease, no matter where located,
of every type and description, including without limitation any and
all of Grantor's present and future raw materials, components,
work-in-process, finished items, packing and shipping materials,
containers, items held for sale, items held for lease, items for which
Grantor is lessor, goods to be furnished under contract for services,
materials used or consumed in Grantor's business, whether held by
Grantor or by others, and all documents of title, warehouse receipts,
bills of lading, and other documents of every type covering all or any
part of the foregoing, and any and all additions thereto and
substitutions or replacements therefor, and all accessories,
attachments, and accessions thereto, whether added now or later, and
all products and proceeds derived or to be derived therefrom,
including without limitation all insurance proceeds and refunds of
insurance premiums, if any, and all sums that may be due from third
parties who may cause damage to any of the foregoing, or from any
insurer, whether due to judgment, settlement, or other process, and
any and all present and future accounts, chattel paper, instruments,
documents, and notes that may be derived from the sale, lease or other
disposition of any of the foregoing, and any rights of Grantor to
collect or enforce payment thereof, as well as to enforce any
guarantees of the forgoing and security therefor, and all of Grantor's
present and future general intangibles in any way related or
pertaining to the ownership, operation, use, or collection of any of
the foregoing, including without limitation Grantor's books, records,
files, computer disks and software, and all rights that Grantor may
have with regard thereto. Inventory includes inventory temporarily
out of Grantor's possession or custody and all returns on accounts,
chattel paper and instruments.
The Collateral includes all general intangibles, choses in action and
causes of action and all other intangible personal property and rights
of Grantor of every nature and kind, now owned or hereafter acquired,
including without limitation corporate or other business records,
inventions, designs, blueprints, plans, specifications, patents,
patent applications, trade marks, trade names, trade secrets,
goodwill, copyrights, registrations, licenses, franchises, insurance
proceeds, including without limitation insurance covering the lives of
key employees on which Grantor is beneficiary, and any letter of
credit, guaranty, claim, security interest, or other security held or
granted to Grantor to secure payment of any indebtedness.
The word "Collateral" also includes any and all present or future
parts, accessories, attachments, additions, accessions, substitutions
and replacements to and for the collateral. The word "Collateral"
further includes any and all of Grantor's present and future rights to
any proceeds derived or to be derived from the sale, lease, damage,
destruction, insurance loss, expropriation and other disposition of
the collateral, including without limitation, any and all of Grantor's
rights to enforce collection and payment of such proceeds.
ENCUMBRANCES. The word "Encumbrances" means individually,
collectively and interchangeably any and all presently existing and/or
future mortgages, liens, privileges and other contractual and/or
statutory security interests and rights of every nature and kind that,
now and/or in the future, may affect the Collateral or any part or
parts thereof.
EVENT OF DEFAULT. The words "Event of Default" mean individually,
collectively, and interchangeably any of the Events of Default set
forth below in the section titled "Events of Default."
<PAGE> 2
09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 2
LOAN NO. (CONTINUED)
================================================================================
GRANTOR. The word "Grantor" means individually, collectively and
interchangeably SEARCH FUNDING II, INC. Any Grantor who signs this
Agreement, but does not sign the Note, is signing this Agreement
solely to grant a security interest as affecting Grantor's interest in
the Collateral and will not be personally liable to Lender under the
Note except as otherwise provided by contract or by law (e.g.,
personal liability under a guaranty or as a surety).
GUARANTOR. The word "Guarantor" means and includes individually,
collectively, interchangeably and without limitation, each and all of
the guarantors, sureties, and accommodation parties in connection with
the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness
evidenced by the Note, in principal, interest, costs, expenses and
attorneys' fees and all other fees and charges, together with all
other indebtedness and costs and expenses for which Grantor is
responsible under this Agreement or under any of the Related
Documents. In addition, the word "Indebtedness" also includes any and
all other loans, extensions of credit, obligations, debts and
liabilities, plus interest thereon, of Grantor that may now and in the
future be owed to or incurred in favor of Lender, as well as all
claims by Lender against Grantor, whether existing now or later;
whether they are voluntary or involuntary, whether related or
unrelated, whether committed or purely discretionary, due or to become
due, direct or indirect or by way of assignment, determined or
undetermined, absolute or contingent, liquidated or unliquidated;
whether Grantor may be liable individually or jointly with others, of
every nature and kind whatsoever, in principal, interest, costs,
expenses and attorneys' fees and all other fees and charges; whether
Grantor may be obligated as guarantor, surety, accommodation party or
otherwise; whether recovery upon such indebtedness may be or hereafter
may become barred by any statute of limitations; and whether such
indebtedness may be or hereafter may become void or otherwise
unenforceable.
LENDER. The word "Lender" means HIBERNIA NATIONAL BANK (TIN:
72-0210640), its successors and assigns, and any subsequent holder or
holders of the Note, or any interest therein.
NOTE. The word "Note" means the promissory note DATED SEPTEMBER 11,
1996, in the principal amount of $25,000,000.00 from Grantor to
Lender, together with all substitute or replacement notes therefor, as
well as all renewals, extensions, modifications, refinancings,
consolidations and substitutions of and for such promissory note.
PERMITTED LIENS. The words "Permitted Liens" mean (a) liens and
security interests securing Indebtedness owed by Grantor to Lender;
(b) liens for taxes, assessments, or similar charges either not yet
due or being contested in good faith; (c) liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens securing
obligations which were incurred prior to Grantor's acquisition of the
property subject to such liens and security interests; (d) liens of
materialmen, mechanics, warehousemen, or carriers, or other like liens
arising in the ordinary course of business and securing obligations
which are not yet delinquent or are being contested in good faith; and
(e) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by Lender in writing.
RELATED DOCUMENTS. The words "Related Documents" mean and include
individually, collectively, interchangeably and without limitation,
the Loan Agreement between Grantor and Lender dated SEPTEMBER 11,
1996, as amended or modified from time to time ("THE LOAN AGREEMENT"),
and all promissory notes, credit agreements, other loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
collateral mortgages, deeds of trust, and all other instruments,
agreements and documents, whether now or hereafter existing, executed
in connection with the Indebtedness.
CONTINUING SECURITY INTEREST TO SECURE PRESENT AND FUTURE INDEBTEDNESS.
Grantor affirms that Grantor has granted a continuing security interest in the
Collateral in favor of Lender to secure any and all present and future
Indebtedness of Grantor in favor of Lender, as may be outstanding from time to
time set forth above, in principal, interest, costs, expenses, attorneys' fees
and other fees and charges, with the continuing preferences and priorities
provided under applicable law. Grantor agrees that all such additional loans
and Indebtedness will be secured under this Agreement without the necessity
that Grantor agree or consent to such a result at the time such additional
loans are made and Indebtedness incurred, without the further necessity that
the note or notes evidencing such additional loans or Indebtedness refer to the
fact that such notes are secured by this Agreement. Grantor further agrees
Grantor may not subsequently have a change of mind and insist that any such
additional loans or Indebtedness not be secured by this Agreement unless Lender
specifically agrees to such a request in writing.
DURATION. This Agreement shall remain in full force and effect until such time
as this Agreement and the security interests created hereby are terminated and
canceled by Lender under a written cancellation instrument in favor of Grantor.
Lender agrees to deliver a written cancellation instrument to Grantor, at the
request of Grantor, after repayment of the Indebtedness and all obligations of
Lender to Grantor, and of Grantor to Lender, have been fully performed or
otherwise terminated.
DEPOSIT ACCOUNTS. As collateral security for repayment of the Indebtedness and
all renewals and extensions, as well as to secure any and all other loans,
notes, indebtedness and obligations that Grantor may now and in the future owe
to Lender or incur in Lender's favor, whether direct or indirect, absolute or
contingent, due or to become due, of any nature and kind whatsoever, Grantor is
granting Lender a continuing security interest in any and all funds that
Grantor may now and in the future have on deposit with Lender or in
certificates of deposit or other deposit accounts as to which Grantor is an
account holder (with the exception of IRA, pension, and other tax-deferred
deposits). Grantor further agrees that Lender may, after an Event of Default
has occurred, apply any funds that Grantor may have on deposit with Lender or
in certificates of deposit or other deposit accounts as to which Grantor is an
account holder (with the exception of IRA, pension, and other tax-deferred
deposits) against the unpaid balance of any of the Indebtedness; provided,
however, that the Event of Default prerequisite for application authority shall
not apply to any dominion account required to be maintained by Grantor under
any of the Related Documents.
REPRESENTATIONS, WARRANTIES AND COVENANTS OF GRANTOR. Grantor represents,
warrants and covenants to Lender as follows:
ORGANIZATION. Grantor is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Texas. Grantor has its registered office at 700 NORTH PEARL STREET,
SUITE 400, L.B. 401, DALLAS, TEXAS 75201-7490. Grantor's chief
executive office is located at 700 NORTH PEARL STREET, SUITE 400, L.B.
401, DALLAS, TEXAS 75201-7490. Grantor will notify Lender of any
change in the location of Grantor's registered office or chief
executive office.
AUTHORIZATION. Grantor's execution, delivery and performance of this
Agreement have been duly authorized, and do not conflict with, and
will not result in a violation of, or constitute or give rise to any
default under Grantor's Articles of Incorporation or Bylaws, or any
agreement or other instrument which may be binding upon Grantor, or
under any law or governmental regulation or court decree or order
applicable to Grantor and/or its properties.
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such
financing statements and to take whatever other reasonable actions are
requested by Lender to perfect and continue Lender's security interest
in the Collateral. Upon reasonable request of Lender, Grantor will
deliver to Lender any and all of the documents evidencing or
constituting the Collateral, and Grantor will note Lender's interest
upon any and all chattel paper if not delivered to Lender for
possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue the security interest
granted in this Agreement. Lender may at any time, and without
further authorization from Grantor, file a carbon, photographic,
facsimile, or other reproduction of any financing statement. Grantor
will reimburse Lender for all expenses for the perfection,
termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Grantor promptly will notify
Lender before any change in Grantor's name including any change to the
<PAGE> 3
09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 3
LOAN NO. (CONTINUED)
================================================================================
assumed business names of Grantor. Grantor also promptly will notify
Lender of any change in Grantor's Employer Identification Number.
Grantor represents and warrants to Lender that Grantor has provided
Lender with Grantor's correct Employer Identification Number and that
Grantor has no other Employer Identification Numbers. Grantor
promptly shall notify Lender should Grantor apply for or obtain a new
Employer Identification Number.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is
a party, and its certificate or articles of incorporation and bylaws
do not prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. The Collateral that comprises Eligible
Paper under the Loan Agreement is enforceable in accordance with its
terms, is genuine, and complies with applicable state and federal laws
and regulations concerning form, content and manner of preparation and
execution, and, to the best of Grantor's knowledge, all persons
appearing to be obligated on the Eligible Paper have authority and
capacity to contract and are in fact obligated as they appear to be on
the Eligible Paper, free of any offset, compensation, deduction or
counterclaim. To the extent the Collateral consists of accounts,
chattel paper, instruments, or general intangibles that are not
Eligible Paper under the Loan Agreement, such ineligible Collateral is
enforceable in accordance with its terms, is genuine, and complies in
all material respects with applicable state and federal laws and
regulations concerning form, content and manner of preparation and
execution, and, to the best of Grantor's knowledge, all persons
appearing to be obligated on the Collateral have authority and
capacity to contract and are in fact obligated as they appear to be on
the Collateral, free of any offset, compensation, deduction or
counterclaim. At the time any account, chattel paper, instrument or
general intangible becomes subject to a security interest in favor of
Lender, the account, chattel paper, instrument or general intangible
shall be a good and valid account, chattel paper, instrument or
general intangible representing an undisputed, bona fide indebtedness
incurred by the account debtor, for merchandise held subject to
delivery instructions or theretofore shipped or delivered pursuant to
a contract of sale, or for services theretofore performed by Grantor
with or for the account debtor; there shall be no setoffs or
counterclaims against any such account, chattel paper, instrument or
general intangible; and no agreement under which any deductions or
discounts may be claimed shall have been made with the account debtor
except those disclosed to Lender in writing. So long as this
Agreement remains in effect, Grantor shall not, without Lender's prior
written consent, compromise, settle, adjust, or extend payment under
or with regard to any such accounts, chattel paper, instruments or
general intangibles, except in the ordinary course of Grantor's
business.
LOCATION OF COLLATERAL RECORDS. Grantor shall keep all records
concerning the Collateral at Grantor's chief executive office, or at
such other locations as are acceptable to Lender.
TRANSACTIONS INVOLVING COLLATERAL. Grantor shall not sell or
otherwise transfer or dispose of any the Collateral, except for (a)
inventory sold in the ordinary course of Grantor's business, (b)
accounts, chattel paper and instruments collected in the ordinary
course of Grantor's business, and (c) sales of Collateral under terms
and conditions permitted under the Loan Agreement. As long as no
Event of Default has occurred, Grantor may sell inventory, but only in
the ordinary course of its business and only to buyers who qualify as
a buyer in the ordinary course of business, unless Lender has agreed
to release the Collateral sold under the terms of the Loan Agreement.
A sale in the ordinary course of Grantor's business does not include a
transfer in partial or total satisfaction of a debt or any bulk sale.
Grantor shall not pledge, mortgage, encumber or otherwise permit the
Collateral to be subject to any Encumbrance or charge, other than
Permitted Liens, without the prior written consent of Lender. This
includes security interests even if junior in right to the security
interests granted under this Agreement. Unless waived by Lender, all
proceeds from any disposition of the Collateral (for whatever reason)
shall be held in trust for Lender and shall not be commingled with any
other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt,
Grantor shall immediately deliver any such proceeds to Lender for
deposit into the Dominion Account.
RELEASE OF COLLATERAL. Grantor may apply to Lender for a release of
Collateral from this Agreement in connection with a sale of Collateral
by Grantor outside of the ordinary course of Grantor's business or in
bulk in accordance with the terms and conditions of the Loan
Agreement. Lender agrees to allow the requested release in accordance
with the terms and conditions of the Loan Agreement.
TITLE, AUTHORITY, BINDING EFFECT. Grantor represents and warrants to
Lender that it holds good and marketable title to the Collateral, free
and clear of all Encumbrances except for Permitted Liens. Except for
Permitted Liens, no financing statement covering any of the Collateral
is on file in any public office other than those which reflect the
security interest created by this Agreement or to which Lender has
specifically consented. Grantor further represents and warrants that
it has requisite authority to enter into this Agreement in favor of
Lender and to grant to Lender the security interest in the Collateral
as provided herein. Grantor additionally represents and warrants that
this Agreement is binding upon Grantor as well as Grantor's heirs,
successors, representatives, transferees and assigns, and is legally
enforceable in accordance with its terms. The foregoing
representations and warranties and all other representations and
warranties of Grantor under this Agreement shall be continuing and
shall survive the termination of this Agreement.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require,
and insofar as the Collateral consists of accounts, chattel paper,
instruments and general intangibles, Grantor shall deliver to Lender
schedules of such Collateral, including such information as Lender may
require, including without limitation names and addresses of account
debtors and agings of accounts, chattel paper, instruments and general
intangibles. Insofar as the Collateral consists of inventory, Grantor
shall deliver to Lender, as often as Lender shall require, such lists,
descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each
of its subsidiaries or related companies.
REPAIRS AND MAINTENANCE. Grantor shall keep and maintain and shall
cause others to keep and maintain Grantor's inventory in good order,
repair and merchantable condition, subject to the discretion of
Grantor using reasonable business judgment considering the value of
the inventory and costs of repairs and maintenance. Grantor shall
further make and/or cause all necessary repairs to be made to the
Collateral, including the repair and restoration of any portion of
Grantor's inventory that may be damaged, lost or destroyed, subject to
the discretion of Grantor using reasonable business judgment
considering the value of the inventory and costs of repairs and
restoration.
TAXES. Grantor shall promptly pay or cause to be paid when due, all
taxes, local and special assessments, and governmental and other
charges of every type and description, that may from time to time be
imposed, assessed and levied against the Collateral or against
Grantor. Grantor further agrees, upon Lender's request, to furnish
Lender with evidence that such taxes, assessments, and governmental
and other charges have been paid in full and in a timely manner.
Grantor may withhold any such payment or elect to contest any lien if
Grantor is in good faith conducting an appropriate proceeding to
contest the obligation to pay and so long as Lender's interest in the
Collateral is not materially jeopardized.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply
promptly with, and shall cause others to comply with, all laws,
ordinances and regulations of all governmental authorities applicable
to the production, disposition, or use of the Collateral. Grantor may
contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate
appeals, so long as, in Lender's reasonable opinion, Lender's interest
in any of the Collateral that is included in Eligible Paper under the
Loan Agreement, is not jeopardized. Grantor shall not use the
Collateral, and shall not permit others to use the Collateral, for any
purpose other than those previously agreed to by Lender in writing;
but in no event shall any of the Collateral be used in any manner that
would damage, depreciate or diminish its value or that may result in
cancellation or termination of insurance coverage. Grantor
additionally agrees not to do or suffer to be done anything that may
increase the risk of fire or other hazards to the Collateral.
<PAGE> 4
09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 4
LOAN NO. (CONTINUED)
================================================================================
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
Collateral never has been, and never will be so long as this Agreement
remains a lien on the Collateral, used for the generation,
manufacture, storage, transportation, treatment, disposal, release or
threatened release of any hazardous waste or substance, as those terms
are defined in the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.
("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986,
Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and
Recovery Act, 49 U.S.C. Section 6901, et seq., or other applicable
state or Federal laws, rules, or regulations adopted pursuant to any
of the foregoing. The terms "hazardous waste" and "hazardous
substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's
due diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor
becomes liable for cleanup or other costs under any such laws, and (b)
agrees to indemnify and hold harmless Lender against any and all
claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of
the Indebtedness and the satisfaction of this Agreement.
ENCUMBRANCES. Grantor shall not, without the prior written consent of
Lender, grant any Encumbrance that may affect the Collateral, or any
part or parts thereof, nor shall Grantor permit or consent to any
Encumbrance, other than a Permitted Lien, attaching to or being filed
against any of the Collateral in favor of anyone other than Lender.
Grantor shall further promptly pay when due all statements and charges
of mechanics, materialmen, laborers and others incurred in connection
with the alteration, improvement, repair and maintenance of Grantor's
inventory, or otherwise furnish appropriate security or bond, so that
no future Encumbrance, other than a Permitted Lien, may ever attach to
or be filed against any Collateral. Grantor additionally agrees to
obtain, upon request by Lender, and in form and substance as may then
be satisfactory to Lender, appropriate waivers and/or subordinations
of any lessor's liens or privileges, vendor's liens or privileges,
purchase money security interests, and any other Encumbrances, other
than Permitted Liens, that may affect the Collateral at any time.
NOTICE OF ENCUMBRANCES. Grantor shall immediately notify Lender in
writing upon the filing of each attachment, lien or other Encumbrance,
other than Permitted Liens, involving $100,000.00 or more. Grantor
additionally agrees to notify Lender immediately in writing upon the
occurrence of any default, or event that with the passage of time,
failure to cure, or giving of notice, might result in a default under
any of Grantor's obligations that may be secured by any presently
existing or future Encumbrance or that might result in an Encumbrance
affecting the Collateral, other than a Permitted Lien, or should any
of the Collateral be seized or attached or levied upon, or threatened
by seizure or attachment or levy, by any person other than Lender.
BOOKS AND RECORDS. Grantor will keep proper books and records with
regard to Grantor's business activities and the Collateral in which a
security interest is granted hereunder, in accordance with generally
accepted accounting principles, applied on a consistent basis
throughout, which books and records shall at all reasonable times be
open to inspection and copying by Lender or its designated agents.
Lender shall also have the right to inspect Grantor's books and
records, and to discuss Grantor's affairs and finances with Grantor's
officers and representatives, at such reasonable times as Lender may
designate.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS, CHATTEL PAPER AND
INSTRUMENTS. Until an Event of Default has occurred and except as otherwise
provided below with respect to accounts, chattel paper and instruments, Grantor
may have possession and beneficial use of all the Collateral and may use it in
any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral.
Until otherwise notified by Lender, Grantor may collect any of the Collateral
consisting of accounts, chattel paper and instruments. At any time and even
though no Event of Default exists, Lender may exercise its rights to collect
the accounts, chattel paper and instruments and to notify account debtors to
make payments directly to Lender for deposit into the dominion account provided
for in the Loan Agreement. Lender or Lender's agents may also periodically
contact individual obligors and debtors to verify the amounts then owing under
such obligations, to determine whether such obligors and debtors have any
offsets or counterclaims against the accounts, chattel paper and instruments
and/or Grantor, and to inquire about such other matters as Lender may deem
necessary or desirable. If Lender at any time has possession of any
Collateral, whether before or after an Event of Default, Lender shall be deemed
to have exercised reasonable care in the custody and preservation of the
Collateral if Lender takes such action for that purpose as Grantor shall
request or as Lender, in Lender's sole discretion, shall deem appropriate under
the circumstances, but failure to honor any request by Grantor shall not of
itself be deemed to be a failure to exercise reasonable care. Lender shall not
be required to take any steps necessary to preserve any rights in the
Collateral against prior parties, nor to protect, preserve or maintain any
security interest given to secure the Collateral.
ADDITIONAL COVENANTS. Grantor additionally agrees:
NO SETTLEMENT OR COMPROMISE. Grantor will not, without the prior
written consent of Lender, compromise, settle, adjust or extend
payment under any of the Collateral, except in the ordinary course of
Grantor's business.
BOOKS AND RECORDS. Grantor will keep proper books and records with
regard to Grantor's business activities and the Collateral, which
books and records shall at all times be open to inspection and copying
by Lender or its designated agent. Lender shall also have the right
to inspect Grantor's books and records, and to discuss Grantor's
affairs and finances with Grantor at such reasonable times as Lender
may designate.
LOCK BOX. Grantor agrees that Lender may at any time require Grantor
to institute procedures whereby the proceeds and/or payments of any
accounts, chattel paper and instruments subject to this Agreement
shall be paid by the debtors thereof under a lock box arrangement to
Lender, or to Lender's agent, or to one or more financial institutions
designated by Lender. Grantor further agrees that, if no Event of
Default exists under this Agreement, any and all of such funds
received under such a lock box arrangement shall, at Lender's sole
election and discretion, either be (a) paid and/or turned over to
Grantor; (b) deposited into one or more accounts for the benefit of
Grantor (which deposit accounts shall be subject to collateral
assignment and pledge in favor of Lender as provided under this
Agreement); (c) deposited into one or more accounts for the joint
benefit of Grantor and Lender (which deposit accounts shall likewise
be subject to assignment and pledge in favor of Lender as provided
under this Agreement); (d) paid and/or turned over to Lender to be
applied to the Indebtedness in such order and priority as Lender may
determine within its sole discretion; or (e) any combination of the
foregoing as Lender shall determine from time to time. Grantor
further agrees that, should one or more Events of Default exist under
this Agreement, any and all funds received under such a lock box
arrangement shall be paid and/or turned over to Lender to be applied
to principal, accrued interest, costs, expenses, attorneys' fees and
other fees and charges under the Indebtedness, again in such order and
priority as Lender may determine within its sole discretion.
NOTICE TO OBLIGORS. Upon request by Lender, Grantor will immediately
notify individual obligors with regard to the Collateral, advising
such obligors and/or debtors of the fact that Lender has been granted
a security interest in their obligations. In the event that Grantor
should fail to provide such notices for any reason upon request by
Lender, Grantor agrees that Lender may forward appropriate notices to
such obligors and debtors, either in Lender's name or in the name of
Grantor.
ADDITIONAL DOCUMENTS. Grantor shall at any time, from time to time,
one or more times, upon written request by Lender, execute and deliver
such further documents and do any and all such further acts and things
as Lender may reasonably request, within its sole discretion, to
effect the purposes of this Agreement.
<PAGE> 5
09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 5
LOAN NO. (CONTINUED)
================================================================================
VERIFICATIONS. Grantor additionally agrees that Lender or Lender's
agents may periodically contact individual debtors whose Notes,
Instruments and Chattel Paper have been assigned and pledged hereunder
in order to verify the amounts then owing under such obligations, to
determine whether such debtors have any offsets or counterclaims
against Grantor, and such other matters about which Lender may
inquire.
NOTIFICATION OF LENDER. Grantor will promptly deliver to Lender all
written notices, and will promptly give Lender written notice of any
other notices received by Grantor with respect to any matter that
adversely affects the Collateral, as a whole, in a material respect,
and Lender will promptly give like notice to Grantor of any such
notices received by Lender or its nominee.
EXPENDITURES BY LENDER. Grantor recognizes and agrees that Lender may incur
certain expenses in connection with Lender's exercise of rights under this
Agreement. If not discharged or paid when due and not being contested by
Grantor in good faith, Lender may (but shall not be obligated to) discharge or
pay any amounts required to be discharged or paid by Grantor under this
Agreement, including without limitation all taxes, Encumbrances and other
claims, at any time levied or placed on the Collateral. After an Event of
Default has occurred, Lender also may (but shall not be obligated to) pay all
reasonable costs for insuring, maintaining and preserving the Collateral,
including without limitation, the purchase of insurance protecting only
Lender's interest in the Collateral. Lender may further take such other action
or actions and incur such additional expenditures as Lender may reasonably deem
to be necessary and proper to cure or rectify any actions or inactions on
Grantor's part as may be required under this Agreement. Nothing under this
Agreement or otherwise shall obligate Lender to take any such actions or to
incur any such additional expenditures on Grantor's behalf, or as making Lender
in any way responsible or liable for any loss, damage, or injury to the
Collateral, to Grantor, or to any other person or persons, resulting from
Lender's election not to take such actions or to incur such additional
expenses. In addition, Lender's election to take any such actions or to incur
such additional expenditures shall not constitute a waiver or forbearance by
Lender of any Event of Default under this Agreement. All such expenditures for
such purposes, to the extent reasonably incurred for reasonable amounts, will
then bear interest at the rate charged under the Note from the date incurred or
paid by Lender to the date of repayment. All such expenditures for such
purposes, to the extent reasonably incurred for reasonable amounts, shall
become a part of the Indebtedness and, at Lender's option, will be payable on
demand. This Agreement also will secure payment of these amounts. Such right
shall be in addition to all other rights and remedies to which Lender may be
entitled upon the occurrence of an Event of Default.
EVENTS OF DEFAULT. The following actions or inactions or both shall constitute
Events of Default under this Agreement:
DEFAULT UNDER THIS AGREEMENT. Should Grantor violate, or fail to
comply fully with any of the terms and conditions of, or default under
this Agreement, and such violation or failure shall not have been
remedied within fifteen (15) days after notice of such violation or
failure by Lender to Grantor.
DEFAULT UNDER RELATED DOCUMENT. Should any event of default occur
under any Related Document, after expiration of any applicable cure
period.
RIGHTS AND REMEDIES ON DEFAULT. After an Event of Default occurs under this
Agreement, Lender shall have all the rights of a secured party under applicable
law, including, without limitation, those rights available to secured creditors
under the Louisiana Commercial Laws - Secured Transactions (La.-R.S. 10:9-101,
et seq.). In addition and without limitation, Lender may exercise any one or
more of the following rights and remedies:
ACCELERATE INDEBTEDNESS. Lender, at its sole option, may accelerate
the maturity and declare and demand immediate payment in full of any
and all Indebtedness secured hereby in principal, interest, costs,
expenses, attorneys' fees and other fees and charges.
SEIZURE AND SALE OF COLLATERAL IN LOUISIANA. In the event that Lender
elects to commence appropriate Louisiana foreclosure proceedings under
this Agreement after an Event of Default has occurred, Lender may
cause the Collateral, or any part or parts thereof, to be immediately
seized wherever found, and sold, whether in term of court or in
vacation, under ordinary or executory process, in accordance with
applicable Louisiana law, to the highest bidder for cash, with or
without appraisement, and without the necessity of making additional
demand upon or notifying Grantor or placing Grantor in default, all of
which are expressly waived.
CONFESSION OF JUDGMENT. For purposes of foreclosure under Louisiana
executory process procedures, Grantor confesses judgment and
acknowledges to be indebted unto and in favor of Lender, up to the
full amount of the Indebtedness, in principal, interest, costs,
expenses, attorneys' fees and other fees and charges. Grantor further
confesses judgment and acknowledges to be indebted unto and in favor
of Lender in the amount of all additional advances that Lender may
make on Grantor's behalf pursuant to this Agreement, together with
interest thereon, up to a maximum of two (2) times the face amount of
the aforesaid Note. To the extent permitted under applicable
Louisiana law, Grantor additionally waives (a) the benefit of
appraisal as provided in Articles 2332, 2336, 2723 and 2724 of the
Louisiana Code of Civil Procedure, and all other laws with regard to
appraisal upon judicial sale; (b) the demand and three (3) days' delay
as provided under Articles 2639 and 2721 of the Louisiana Code of
Civil Procedure; (c) the notice of seizure as provided under Articles
2293 and 2721 of the Louisiana Code of Civil Procedure; (d) the three
(3) days' delay provided under Articles 2331 and 2722 of the Louisiana
Code of Civil Procedure; and (e) all other benefits provided under
Articles 2331, 2722 and 2723 of the Louisiana Code of Civil Procedure
and all other Articles not specifically mentioned above.
KEEPER. Should any or all of the Collateral be seized as an incident
to an action for the recognition or enforcement of this Agreement, by
executory process, sequestration, attachment, writ of fieri facias or
otherwise, Grantor hereby agrees that the court issuing any such order
shall, if requested by Lender, appoint Lender, or any agent designated
by Lender, or any person or entity named by Lender at the time such
seizure is requested, or any time thereafter, as Keeper of the
Collateral as provided under La.-R.S. 9:5136, et seq. Such a Keeper
shall be entitled to reasonable compensation. Grantor agrees to pay
the reasonable fees of such Keeper, which are hereby fixed at $150.00
per hour, which compensation to the Keeper shall also be secured by
this Agreement in the form of an additional advance as provided
herein.
DECLARATION OF FACT. Should it become necessary for Lender to
foreclose under this Agreement, all declarations of fact, which are
made under an authentic act before a Notary Public in the presence of
two witnesses, by a person declaring such facts to lie within his or
her knowledge, shall constitute authentic evidence for purposes of
executory process and also for purposes of La.-R.S. 9:3509.1, La.-R.S.
9:3504(D)(6) and La.-R.S. 10:9-508, as applicable.
DELIVER COLLATERAL. This provision applies, to the extent applicable,
if and when the Collateral for any reason is located outside the State
of Louisiana following the occurrence of any Event of Default, or
should there be a subsequent change in Louisiana law permitting such
remedies. Lender may require Grantor to deliver to Lender all or any
portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require
Grantor to assemble the Collateral and make it available to Lender at
a place to be designated by Lender. Lender also shall have full power
to enter upon the property of Grantor to take possession of and remove
the Collateral. If the Collateral contains other goods not covered by
this Agreement at the time of repossession, Grantor agrees Lender may
take such other goods, provided that Lender makes reasonable efforts
to return them to Grantor after repossession.
PUBLIC OR PRIVATE SALE OF COLLATERAL. To the extent that any of the
Collateral is then in Lender's possession, Lender shall have full
power to sell, lease, transfer, or otherwise deal with the Collateral
or proceeds thereof in its own name or that of Grantor. Lender may
sell the Collateral at public auction or private sale. Unless the
Collateral threatens to decline speedily in value or is of a type
customarily sold on
<PAGE> 6
09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 6
LOAN NO. (CONTINUED)
================================================================================
a recognized market, Lender shall give or mail to Grantor, or any of
them, notice at least ten (10) days in advance of the time and place
of any public sale, or of the date after which any private sale may be
made. Grantor agrees that any requirement of reasonable notice is
satisfied if Lender mails notice by ordinary mail addressed to
Grantor, or any of them, at the last address Grantor has given Lender
in writing. If a public sale is held, there shall be sufficient
compliance with all requirements of notice to the public by a single
publication in any newspaper of general circulation in the parish or
county where the Collateral is located, setting forth the time and
place of sale and a brief description of the property to be sold.
Lender may be a purchaser at any public sale. Grantor agrees that any
such sale shall be conclusively deemed to be conducted in a
commercially reasonable manner if it is made consistent with the
standard of similar sales of collateral by commercial banks in New
Orleans, Louisiana.
APPOINT RECEIVER. This provision applies if and when the Collateral
for any reason is located outside the State of Louisiana following the
occurrence of any Event of Default, or should Louisiana law change or
be interpreted to permit such a remedy. Lender shall have the
following rights and remedies regarding the appointment of a receiver:
(a) Lender may have a receiver appointed as a matter of right, (b) the
receiver may be an employee of Lender and may serve without bond, and
(c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT AND APPLY REVENUES. Lender shall have the right, at its sole
option and election, at any time, whether or not one or more Events of
Default then exist under this Agreement, to directly collect and
receive all proceeds and/or payments arising under or in any way
accruing from the Collateral, as such amounts become due and payable.
In order to permit the foregoing, Grantor unconditionally agrees to
deliver to Lender, immediately following demand, any and all of
Grantor's records, ledger sheets, and other documentation, in the form
requested by Lender, with regard to the Collateral and any and all
proceeds and/or payments applicable thereto. Lender shall have the
further right, whether or not an Event of Default then exists under
this Agreement, where appropriate and within Lender's sole discretion,
to collect any and all proceeds and payments that may then and/or in
the future be due and owing under this Agreement. Until an Event of
Default has occurred and Lender has exercised the right to accelerate
the maturity of any or all of the Indebtedness, all amounts so
collected and received will be deposited into the dominion account
provided for in the Loan Agreement. All proceeds and/or payments
arising under or in any way accruing from the Collateral directly
collected and received by Lender under this Agreement in excess of the
amounts owed under all of the Indebtedness secured by this Agreement
will be paid by Lender to Grantor by deposit into an account
maintained by Grantor with Lender or as otherwise requested, in
writing, by Grantor.
ADDITIONAL EXPENSES. In the event that it should become necessary for
Lender to conduct a search for any of the Collateral in connection
with any foreclosure action, or should it be necessary to remove the
Collateral, or any part or parts thereof, from the premises in which
or on which the Collateral is then located, and/or to store and/or
refurbish such Collateral, Grantor agrees to reimburse Lender for the
reasonable cost of conducting such a search and/or removing and/or
storing and/or refurbishing such Collateral, which additional expense
shall also be secured by the lien of this Agreement.
SPECIFIC PERFORMANCE. Lender may, in addition to the foregoing
remedies, or in lieu thereof, in Lender's sole discretion, commence an
appropriate action against Grantor seeking specific performance of any
covenant contained herein, or in aid of the execution or enforcement
of any power herein granted.
OBTAIN DEFICIENCY. Lender may obtain a judgment against Grantor for
any deficiency remaining on the Indebtedness due to Lender after
application of all amounts received from the exercise of the rights
provided in this Agreement and any Related Document.
OTHER RIGHTS AND REMEDIES. Have and exercise any or all of the rights
and remedies of a secured creditor under the provisions of the
Louisiana Commercial Laws - Secured Transactions (La.-R.S. 10:9-101,
et seq.), at law, in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Grantor
under this Agreement, after Grantor's failure to perform, shall not
affect Lender's right to declare a default and to exercise its
remedies. Nothing under this Agreement or otherwise shall be
construed so as to limit or restrict the rights and remedies available
to Lender following an Event of Default, or in any way to limit or
restrict the rights and ability of Lender to proceed directly against
Grantor and/or against any Guarantor and/or to proceed against any
other collateral directly or indirectly securing the Indebtedness.
ASSIGNMENT OF INDEBTEDNESS; TRANSFER OF COLLATERAL. Grantor hereby recognizes
and agrees that Lender may assign all or any portion of the Indebtedness to one
or more third party creditors subject to the terms and conditions of the Loan
Agreement. Grantor additionally agrees that any and all of Grantor's other and
future loans, extensions of credit, liabilities and obligations in favor of
such a third party assignee will be secured by the Collateral. Grantor further
agrees that Lender may transfer all or any portion of the Collateral to such a
third party assignee, in which case Lender will be fully released from any and
all of Lender's obligations and responsibilities to Grantor with regard to the
transferred Collateral. Subject to the notice provisions of the Loan
Agreement, any third party creditor to whom the Collateral is transferred will
acquire all of Lender's rights and powers with respect to the transferred
Collateral, with Lender retaining all powers and rights with regard to any of
the Collateral which is not transferred to another party.
PROTECTION OF LENDER'S SECURITY RIGHTS. Grantor agrees to appear in and to
defend all actions or proceedings purporting to affect Lender's security rights
and interests granted under this Agreement. In the event that Lender elects to
defend any such action or proceeding, Grantor agrees to reimburse Lender for
Lender's reasonable costs associated therewith, including without limitation,
Lender's attorneys' fees, which additional costs and expenses shall be secured
by this Agreement.
INDEMNIFICATION OF LENDER. Grantor agrees to indemnify, to defend and to save
and hold Lender harmless from any and all claims, suits, obligations, damages,
losses, costs, expenses (including without limitation, Lender's reasonable
attorneys' fees), demands, liabilities, penalties, fines and forfeitures of any
nature whatsoever which may be asserted against or incurred by Lender, arising
out of or in any manner occasioned by this Agreement or the rights and remedies
granted to Lender hereunder; provided, however, that this indemnity and hold
harmless provision shall not apply to any such claims asserted against Lender
by any participant, transferee, shareholder, officer, director of Lender or a
subsidiary or affiliate of Lender (who is not also a shareholder, officer,
director of Grantor or SEARCH CAPITAL GROUP, INC., or a subsidiary or affiliate
of Grantor or SEARCH CAPITAL GROUP, INC. The foregoing indemnity provision
shall survive the cancellation of this Agreement as to all matters arising or
accruing prior to such cancellation, and the foregoing indemnity provision
shall further survive in the event that Lender elects to exercise any of the
remedies as provided under this Agreement following any Event of Default
hereunder.
EXECUTION OF ADDITIONAL DOCUMENTS. Grantor agrees to execute all additional
documents, instruments and agreements that Lender may deem to be reasonably
necessary and proper, within its sole discretion, in form and substance
satisfactory to Lender, to keep this Agreement in effect, to better reflect the
true intent of this Agreement, and to consummate fully all of the transactions
contemplated hereby and by any other agreement, instrument or document
heretofore, now or at any time or times hereafter executed by Grantor and
delivered to Lender.
<PAGE> 7
09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 7
LOAN NO. (CONTINUED)
================================================================================
INSPECTION; AUDITS. Lender and its agents may periodically enter upon
Grantor's premises at reasonable hours and inspect the Collateral. Lender and
its agents may also periodically conduct audits of the Collateral and may
further inspect and audit Grantor's books and records that in any way pertain
to the Collateral and any part or parts thereof.
APPLICATION OF PAYMENTS. Grantor agrees that all payments and other sums and
amounts received by Lender under the Indebtedness or under this Agreement,
shall be applied: first, to reimburse Lender for its costs of collecting the
same (including but not limited to, reimbursement of Lender's reasonable
attorneys' fees); second, to the repayment of interest on all additional
advances that Lender may have made on Grantor's behalf pursuant to this
Agreement; third, to the payment of principal of all such additional advances;
and finally, to the payment of principal and interest on the Indebtedness then
outstanding, which may be applied in such order and priority as Lender may
determine within its sole discretion.
TAXATION. In the event that there should be any change in law with regard to
taxation of security agreements or the debts they secure, Grantor agrees to pay
any taxes, assessments or charges that may be imposed upon Lender as a result
of this Agreement, subject to the right of Grantor to contest imposition of
such taxes, assessments or charges. Payment by Grantor to Lender of such
taxes, assessments and charges shall not be due and payable as long as the
imposition of same is being contested in good faith by Grantor.
EFFECT OF WAIVERS. Grantor has waived, and/or does by these presents waive,
presentment for payment, protest, notice of protest, notice of nonpayment,
notice of acceleration and notice of intent to accelerate under all of the
Indebtedness secured by this Agreement. Grantor has further waived, and/or
does by these presents waive, all pleas of division and discussion, and all
similar rights with regard to the Indebtedness, and agrees that Grantor shall
remain liable, together with any and all Guarantors of the Indebtedness, on a
"solidary" or "joint and several" basis. Grantor further agrees that discharge
or release of any party who is, may, or will be liable to Lender under any of
the Indebtedness, or the release of the Collateral or any other collateral
directly or indirectly securing repayment of the same, shall not have the
effect of releasing or otherwise diminishing or reducing the actual or
potential liability of Grantor and/or any other party or parties guaranteeing
payment of the Indebtedness, who shall remain liable to Lender, and/or remain
liable to Lender, and/or of releasing any Collateral or other collateral that
is not expressly released by Lender. Grantor additionally agrees that Lender's
acceptance of payments other than in accordance with the terms of any
agreement, or agreements governing repayment of the Indebtedness, or Lender's
subsequent agreement to extend or modify such repayment terms, shall likewise
not have the effect of releasing Grantor, and/or any other party or parties
guaranteeing payment of the Indebtedness, from their respective obligations to
Lender, and/or of releasing any of the Collateral or other collateral directly
or indirectly securing repayment of the Indebtedness. In addition, no course
of dealing between Grantor and Lender, nor any failure or delay on the part of
Lender to exercise any of the rights and remedies granted to Lender under this
Agreement, or under any other agreement or agreements by and between Grantor
and Lender, shall have the effect of waiving any of Lender's rights and
remedies. Any partial exercise of any rights and remedies granted to Lender
shall furthermore not constitute a waiver of any of Lender's other rights and
remedies, it being Grantor's intent and agreement that Lender's rights and
remedies shall be cumulative in nature. Grantor further agrees that, upon the
occurrence of any Event of Default under this Agreement, any waiver or
forbearance on the part of Lender to pursue the rights and remedies available
to Lender, shall be binding upon Lender only to the extent that Lender
specifically agrees to any such waiver or forbearance in writing. A waiver or
forbearance as to one Event of Default shall not constitute a waiver or
forbearance as to any other Event of Default. None of the warranties,
conditions, provisions and terms contained in this Agreement or any other
agreement, document, or instrument now or hereafter executed by Grantor and
delivered to Lender, shall be deemed to have been waived by any act or
knowledge of Lender, Lender's agents, officers or employees; but only by an
instrument in writing specifying such waiver, signed by a duly authorized
officer of Lender and delivered to Grantor.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties
sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND
ACCEPTED BY LENDER IN THE STATE OF LOUISIANA. LENDER AND GRANTOR
HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM BROUGHT BY EITHER LENDER OR GRANTOR AGAINST THE OTHER.
EXCEPT TO THE EXTENT THAT THE APPLICATION OF THE LAW OF ANOTHER STATE
IS MANDATORY, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this
Agreement, and Grantor shall pay the costs and expenses of such
enforcement. Costs and expenses include Lender's attorneys' fees and
legal expenses whether or not there is a lawsuit, including attorneys'
fees and legal expenses for bankruptcy proceedings (and including
efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services.
Grantor also shall pay all court costs and such additional fees as may
be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.
ENTIRE AGREEMENT. This Agreement, the Note, and the other Related
Documents, embody the final, entire agreement of the parties hereto
and supersede any and all prior commitments, agreements,
representations, and understandings, whether written or oral, relating
to the subject matter hereof and may not be contradicted or varied by
evidence of prior, contemporaneous, or subsequent oral agreements or
discussions of the parties hereto. THERE ARE NO ORAL AGREEMENTS
BETWEEN THE PARTIES TO THIS AGREEMENT.
NOTICES. To give Grantor any notice required under this Agreement,
Lender may hand deliver or mail such notice to Grantor at the address
specified for Grantor in this Agreement, or at any other address that
Grantor may have given to Lender by written notice as provided in this
paragraph. To give Lender any notice under this Agreement, Grantor
may hand deliver or mail such notice to Lender at the address
specified in this Agreement, or at any other address that Lender may
have given to Grantor by written notice as provided in this paragraph.
All notices required or permitted under this Agreement must be in
writing and will be considered as given on the day it is delivered by
hand or deposited in the U. S. Mail in the form and to the address
specified in this Agreement.
POWER OF ATTORNEY. At all times and even though no Event of Default
exists, Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do
the following: (a) to demand, collect, receive, receipt for, and
recover all sums of money or other property which may now or hereafter
become due, owing or payable from the Collateral; (b) to execute, sign
and endorse any and all claims, instruments, receipts, checks, drafts
or warrants issued in payment for the Collateral; and (c) to notify
postal authorities to change the address for delivery of mail
addressed to Grantor to such address as Lender may designate. After
an Event of Default has occurred, Grantor hereby appoints Lender as
its true and lawful attorney-in-fact, irrevocably, with full power of
substitution to do the following: (i) to sue for all sums of money or
other property which may now or hereafter become due, owing or payable
from the Collateral; (ii) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor,
to execute and deliver its release and settlement for the claim; and
(iii) to file any claim or claims or to take any action or institute
or take part in any proceedings, either in its own name or in the name
of Grantor, or otherwise, which in the discretion of Lender may seem
to be necessary or advisable. These powers are given as security for
the Indebtedness, and the authorities hereby conferred are, and shall
be irrevocable, and shall remain in full force and effect until
renounced by Lender.
<PAGE> 8
09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 8
LOAN NO. (CONTINUED)
================================================================================
SEVERABILITY. If a court of competent jurisdiction finds any
provision of this Agreement to be invalid or unenforceable as to any
person or circumstance, such finding shall not render that provision
invalid or unenforceable as to any other persons or circumstances. If
feasible, any such offending provision shall be deemed to be modified
to be within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall
remain valid and enforceable.
SOLE DISCRETION OF LENDER. Whenever Lender's consent or approval is
required under this Agreement, the decision as to whether or not to
consent or approve shall be in the sole and exclusive discretion of
Lender, reasonably exercised, and Lender's decision shall be final and
conclusive, absent manifest error.
SUCCESSORS AND ASSIGNS BOUND; SOLIDARY LIABILITY. Grantor's
obligations and agreements under this Agreement shall be binding upon
Grantor's successors, heirs, legatees, devisees, administrators,
executors and assigns. In the event that there is more than one
Grantor under this Agreement, all of the agreements and obligations
made and/or incurred by Grantors under this Agreement shall be on a
"solidary" or "joint and several" basis.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER
11, 1996.
GRANTOR:
SEARCH FUNDING II, INC.
By: /s/ Robert D. Idzi
-----------------------------------------------------
Robert D. Idzi, Senior Executive Vice President
LENDER:
HIBERNIA NATIONAL BANK
By: /s/ Norm Winters
-----------------------------------------------------
Authorized Officer
<PAGE> 1
EXHIBIT 4.9
COMMERCIAL GUARANTY
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$25,000,000.00 09-11-1996 09-11-1999 855
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
BORROWER: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK
(TIN: 75-2554995) (TIN: 72-0210640)
700 NORTH PEARL STREET 313 CARONDELET STREET
SUITE 400, L.B. 401 POST OFFICE BOX 61540
DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161
GUARANTOR: SEARCH CAPITAL GROUP, INC.
700 NORTH PEARL STREET
SUITE 400, L.B. 401
DALLAS, TEXAS 75201-7490
===============================================================================
AMOUNT OF GUARANTY. THE AMOUNT OF THIS COMMERCIAL GUARANTY IS UNLIMITED.
DEFINITIONS. The following terms shall have the following meanings when used in
this Agreement:
AGREEMENT. The word "Agreement" means this Guaranty Agreement as this
Agreement may be amended or modified from time to time.
BORROWER. The word "Borrower" means individually, collectively and
interchangeably SEARCH FUNDING II, INC..
BUSINESS DAY. The words "Business Day" mean a day on which commercial
banks are open for business in New Orleans, Louisiana, excluding Saturdays
and Sundays.
EVENT OF DEFAULT. The words "Event of Default" mean and include each event
that qualifies as an event of default or default event under any of the
Indebtedness in favor of Lender or under any of the Related Documents
(after expiration of any applicable cure period).
GUARANTOR. The word "Guarantor" means individually, collectively and
interchangeably SEARCH CAPITAL GROUP, INC., and all other persons
guaranteeing payment and satisfaction of the Indebtedness as hereinafter
defined.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness of Borrower
evidenced by the Note, in principal, interest, costs, expenses and
attorneys' fees and all other fees and charges arising thereunder, together
with all other indebtedness and costs and expenses for which Borrower is
responsible under any of the Related Documents.
LENDER. The word "Lender" means HIBERNIA NATIONAL BANK [TIN: 72-0210640],
its successors and assigns, and any subsequent holder or holders of the
Indebtedness.
NOTE. The word "Note" means the promissory note DATED SEPTEMBER 11, 1996,
in the principal amount of $25,000,000.00 from Borrower to Lender, together
with all substitute or replacement notes therefor, as well as all renewals,
extensions, modifications, refinancings, consolidations and substitutions
of and for such promissory note.
RELATED DOCUMENTS. The words "Related Documents" mean and include
individually, collectively, interchangeably and without limitation, the
Loan Agreement between Grantor and Lender dated SEPTEMBER 11, 1996, as
amended or modified from time to time ("THE LOAN AGREEMENT"), and all
promissory notes, credit agreements, other loan agreements, environmental
agreements, guaranties, security agreements, mortgages, collateral
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection with
the Loan Agreement.
GUARANTEE OF THE INDEBTEDNESS. GUARANTOR HEREBY ABSOLUTELY AND UNCONDITIONALLY
AGREES TO, AND BY THESE PRESENTS DOES HEREBY, GUARANTEE THE PROMPT AND PUNCTUAL
PAYMENT, PERFORMANCE AND SATISFACTION OF ANY AND ALL OF THE INDEBTEDNESS IN
FAVOR OF LENDER.
CONTINUING GUARANTY. THIS IS A CONTINUING GUARANTY AGREEMENT UNDER WHICH
GUARANTOR AGREES TO GUARANTEE PAYMENT OF THE INDEBTEDNESS IN FAVOR OF LENDER ON
A CONTINUING BASIS. Guarantor's obligations and liability under this Agreement
shall be open and continuous in effect. Guarantor intends to and does hereby
guarantee at all times the prompt and punctual payment, performance and
satisfaction of all of the Indebtedness in favor of Lender. Accordingly, any
payments made on the Indebtedness will not discharge or diminish the
obligations and liability of Guarantor under this Agreement for any remaining
and succeeding Indebtedness of Borrower in favor of Lender.
JOINT, SEVERAL AND SOLIDARY LIABILITY. Guarantor's obligations and liability
under this Agreement shall be on a "solidary" or "joint and several" basis
along with Borrower to the same degree and extent as if Guarantor had been
and/or will be a co-borrower, co-principal obligor and/or co-maker of the
Indebtedness. In the event that there is more than one Guarantor under this
Agreement, or in the event that there are other guarantors, endorsers or
sureties of all or any portion of the Indebtedness, Guarantor's obligations and
liability hereunder shall further be on a "solidary" or "joint and several"
basis along with such other guarantors, endorsers and/or sureties.
DURATION OF GUARANTY. This Agreement and Guarantor's obligations and liability
hereunder shall remain in full force and effect until such time as this
Agreement may be canceled or otherwise terminated by Lender under a written
cancellation instrument in favor of Guarantor (subject to the automatic
reinstatement provisions hereinbelow). It is anticipated that fluctuations may
occur in the aggregate amount of the Indebtedness guaranteed under this
Agreement and it is specifically acknowledged and agreed to by Guarantor that
reductions in the amount of the Indebtedness, even to zero ($0.00) dollars,
prior to Lender's written cancellation of this Agreement, shall not constitute
or give rise to a termination of this Agreement. At the request of Guarantor,
Lender agrees to deliver a written cancellation instrument to Guarantor (which
shall be subject to the automatic reinstatement provisions hereinbelow) after
the Indebtedness has been fully repaid and all obligations of Lender to
Borrower, and of Borrower to Lender under the Related Documents, have been
fully performed or otherwise terminated.
CANCELLATION OF AGREEMENT; EFFECT. Unless otherwise indicated under such a
written cancellation instrument, Lender's agreement to terminate or otherwise
cancel this Agreement shall affect only, and shall be expressly limited to,
Guarantor's continuing obligations and liability to guarantee the Indebtedness
incurred, originated and/or extended (without prior commitment) after the date
of such a written cancellation instrument; with Guarantor remaining fully
obligated and liable under this Agreement for any and all of the Indebtedness
incurred, originated, extended, or committed to prior to the date of such a
written cancellation instrument. Nothing under this Agreement or under any
other agreement or understanding by and between Guarantor and Lender, shall in
any way obligate, or be construed to obligate, Lender to agree to the
subsequent termination or cancellation of Guarantor's obligations and liability
hereunder; it being fully understood and agreed to by Guarantor that Lender has
and intends to continue to rely on Guarantor's assets, income and financial
resources in extending credit and other Indebtedness to and in favor of
Borrower, and that to release Guarantor from Guarantor's continuing obligations
and liabilities under this Agreement would so prejudice Lender that Lender may,
within its sole and uncontrolled discretion and judgment, refuse to release
Guarantor from any of its continuing
<PAGE> 2
09-11-1996 COMMERCIAL GUARANTY PAGE 2
LOAN NO. (CONTINUED)
===============================================================================
obligations and liability under this Agreement for any reason whatsoever as
long as any of the Indebtedness remains unpaid and outstanding, or otherwise.
DEFAULT. Should any Event of Default occur, Guarantor unconditionally and
absolutely agrees to pay Lender the then unpaid amount of the Indebtedness, in
principal, interest, costs, expenses, attorneys' fees and other fees and
charges. Such payment or payments shall be made at Lender's offices indicated
above, immediately following demand by Lender.
GUARANTOR'S WAIVERS. Guarantor hereby waives:
(a) Notice of Lender's acceptance of this Agreement.
(b) Presentment for payment of the Indebtedness, notice of dishonor and of
nonpayment, notice of intention to accelerate, notice of acceleration,
protest and notice of protest, collection or institution of any suit or
other action by Lender in collection thereof, including any notice of
default in payment thereof, or other notice to, or demand for payment
thereof, on any party.
(c) Any right to require Lender to notify Guarantor of any nonpayment
relating to any collateral directly or indirectly securing the
Indebtedness, or notice of any action or nonaction on the part of Borrower,
Lender, or any other guarantor, surety or endorser of the Indebtedness, or
notice of the creation of any new or additional Indebtedness subject to
this Agreement
(d) Any rights to demand or require collateral security from the Borrower
or any other person as provided under applicable Louisiana law or
otherwise.
(e) Any right to require Lender to notify Guarantor of the terms, time and
place of any public or private sale of any collateral directly or
indirectly securing the Indebtedness.
(f) Any "one action" or "anti-deficiency" law or any other law which may
prevent Lender from bringing any action, including a claim for deficiency,
against Guarantor, before or after Lender's commencement or completion of
any foreclosure action, or any action in lieu of foreclosure.
(g) Any election of remedies by Lender that may destroy or impair
Guarantor's subrogation rights or Guarantor's right to proceed for
reimbursement against Borrower or any other guarantor, surety or endorser
of the Indebtedness, including without limitation, any loss of rights
Guarantor may suffer by reason of any law limiting, qualifying, or
discharging the Indebtedness.
(h) Any disability or other defense of Borrower, or any other guarantor,
surety or endorser, or any other person, or by reason of the cessation from
any cause whatsoever, other than payment in full of the Indebtedness.
(i) Any statute of limitations or prescriptive period, if at the time an
action or suit brought by Lender against Guarantor is commenced, there is
any outstanding Indebtedness of Borrower to Lender which is barred by any
applicable statute of limitations or prescriptive period.
Guarantor warrants and agrees that each of the waivers set forth above is made
with Guarantor's full knowledge of its significance and consequences, and that,
under the circumstances, such waivers are reasonable and not contrary to public
policy or law. If any such waiver is determined to be contrary to any
applicable law or public policy, such waiver shall be effective only to the
extent permitted by law.
GUARANTOR'S SUBORDINATION OF RIGHTS. In the event that Guarantor should for
any reason (a) advance or lend monies to Borrower, whether or not such funds
are used by Borrower to make payment(s) under the Indebtedness, and/or (b) make
any payment(s) to Lender or others for and on behalf of Borrower under the
Indebtedness, and/or (c) make any payment to Lender in total or partial
satisfaction of Guarantor's obligations and liabilities under this Agreement,
and/or (d) if any of Guarantor's property is used to pay or satisfy any of the
Indebtedness, Guarantor hereby agrees that any and all rights that Guarantor
may have or acquire to collect from or to be reimbursed by Borrower (or from or
by any other guarantor, endorser or surety of the Indebtedness), whether
Guarantor's rights of collection or reimbursement arise by way of subrogation
to the rights of Lender or otherwise, shall in all respects, whether or not
Borrower is presently or subsequently becomes insolvent, be subordinate,
inferior and junior to the rights of Lender to collect and enforce payment,
performance and satisfaction of Borrower's then remaining Indebtedness, until
such time as the Indebtedness is fully paid and satisfied. In the event of
Borrower's insolvency or consequent liquidation of Borrower's assets, through
bankruptcy, by an assignment for the benefit of creditors, by voluntary
liquidation, or otherwise, the assets of Borrower applicable to the payment of
claims of both Lender and Guarantor shall be paid to Lender and shall be first
applied by Lender to Borrower's then remaining Indebtedness. Guarantor hereby
assigns to Lender all claims which it may have or acquire against Borrower or
any assignee or trustee of Borrower in bankruptcy; provided that, such
assignment shall be effective only for the purpose of assuring to Lender full
payment of the Indebtedness guaranteed under this Agreement.
GUARANTOR'S RECEIPT OF PAYMENTS. If Guarantor should for any reason whatsoever
receive, after any Event of Default occurs, any payment(s) from Borrower (or
any other guarantor, surety or endorser of the Indebtedness) that Borrower (or
such a third party) may owe to Guarantor for any reason, Guarantor agrees to
accept such payment(s) in trust for and on behalf of Lender, advising Borrower
(or the third party payee) of such fact. Guarantor further unconditionally
agrees to immediately deliver such funds to Lender, with such funds being held
by Guarantor over any interim period, in trust for Lender. In the event that
Guarantor should for any reason whatsoever receive any such funds from Borrower
(or any third party), and Guarantor should deposit such funds in one or more of
Guarantor's deposit accounts, no matter where located, Lender shall have the
right to attach any and all of Guarantor's deposit accounts in which such funds
were deposited, whether or not such funds were commingled with other monies of
Guarantor, and whether or not such funds then remain on deposit in such an
account or accounts. To this end and to secure Guarantor's obligations under
this Agreement, Guarantor collaterally assigns and pledges to Lender, and
grants to Lender a continuing security interest in, any and all of Guarantor's
present and future rights, title and interest in and to all monies that
Guarantor may now and/or in the future maintain on deposit with banks, savings
and loan associations and other entities (other than tax deferred accounts), in
which Guarantor may at any time deposit any such funds that may be received
from Borrower (or any other guarantor, endorser or surety of the Indebtedness)
in favor of Lender.
DEPOSIT ACCOUNTS. As collateral security for repayment of Guarantor's
obligations hereunder and under any additional guaranties previously granted or
to be granted by Guarantor in the future, and additionally as collateral
security for any present and future indebtedness of Guarantor in favor of
Lender, Guarantor is granting Lender a continuing security interest in any and
all funds that Guarantor may now and in the future have on deposit with Lender
or in certificates of deposit or other deposit accounts as to which Guarantor
is an account holder (with the exception of IRA, pension, and other
tax-deferred deposits). Guarantor further agrees that, after any Event of
Default occurs, Lender may at any time apply any funds that Guarantor may have
on deposit with Lender or in certificates of deposit or other deposit accounts
as to which Guarantor is an account holder (with the exception of IRA, pension,
and other tax-deferred deposits) against the unpaid balance of any and all
other present and future obligations and indebtedness of Guarantor to Lender,
in principal, interest, fees, costs, expenses, and attorneys' fees.
ADDITIONAL COVENANTS. Guarantor agrees that Lender may, at its sole option, at
any time, and from time to time, without the consent of or notice to Guarantor,
or any of them, or to any other party, and without incurring any responsibility
to Guarantor or to any other party, and without impairing or releasing any of
Guarantor's obligations or liabilities under this Agreement:
(a) Make additional secured and/or unsecured loans to Borrower.
(b) Discharge, release or agree not to sue any party (including, but not
limited to, Borrower or any other guarantor, surety, or endorser of the
Indebtedness), who is or may be liable to Lender for any of the
Indebtedness.
(c) Release, surrender, or abandon, in any manner and in any order, any
collateral directly or indirectly securing repayment of any of the
Indebtedness.
(d) Sell, lease, transfer, or otherwise deal with, in any manner and in
any order, any collateral directly or indirectly securing repayment of any
of the Indebtedness, after an Event of Default occurs.
(e) Alter, renew, extend, accelerate, or otherwise change the manner,
place, terms and/or times of payment or other terms of the Indebtedness, or
any part thereof, including any increase or decrease in the rate or rates
of interest on any of the Indebtedness.
<PAGE> 3
09-11-1996 COMMERCIAL GUARANTY PAGE 3
LOAN NO. (CONTINUED)
===============================================================================
(f) Settle or compromise any of the Indebtedness.
(g) Subordinate and/or agree to subordinate the payment of all or any part
of the Indebtedness, or Lender's security rights in any collateral directly
or indirectly securing any such Indebtedness, to the payment and/or
security rights of any other present and/or future creditors of Borrower.
(h) Apply any payments and/or proceeds to any of the Indebtedness in such
priority or with such preferences as Lender may determine in its sole
discretion, regardless of which of the Indebtedness then remains unpaid.
(i) Take or accept any other collateral security or guaranty for any or
all of the Indebtedness.
(j) Enter into, deliver, modify, amend, or waive compliance with, any
instrument or arrangement evidencing, securing or otherwise affecting, all
or any part of the Indebtedness.
NO IMPAIRMENT OF GUARANTOR'S OBLIGATIONS. No course of dealing between Lender
and Borrower (or any other guarantor, surety or endorser of the Indebtedness),
nor any failure or delay on the part of Lender to exercise any of Lender's
rights and remedies under this Agreement or any other agreement or agreements
by and between Lender and Borrower (or any other guarantor, surety or
endorser), shall have the effect of impairing or releasing Guarantor's
obligations and liabilities to Lender, or of waiving any of Lender's rights and
remedies under this Agreement or otherwise. Any partial exercise of any rights
and remedies granted to Lender shall furthermore not constitute a waiver of any
of Lender's other rights and remedies; it being Guarantor's intent and
agreement that Lender's rights and remedies shall be cumulative in nature.
Guarantor further agrees that any waiver or forbearance on the part of Lender
to pursue Lender's available rights and remedies shall be binding upon Lender
only to the extent that Lender specifically agrees to such waiver or
forbearance in writing. A waiver or forbearance on the part of Lender as to
one Event of Default shall not constitute a waiver or forbearance as to any
other Event of Default.
NO RELEASE OF GUARANTOR. Guarantor's obligations and liabilities under this
Agreement shall not be released, impaired, reduced, or otherwise affected by,
and shall continue in full force and effect notwithstanding the occurrence of
any event, including without limitation any one or more of the following
events:
(a) The death, insolvency, bankruptcy, arrangement, adjustment,
composition, liquidation, disability, dissolution, or lack of authority
(whether corporate, partnership or trust) of Borrower (or any person acting
on Borrower's behalf), or of any other guarantor, surety or endorser of the
Indebtedness.
(b) Any payment by Borrower, or any other party, to Lender that is held to
constitute a preferential transfer or a fraudulent conveyance under any
applicable law, or any such amounts or payment which, for any reason,
Lender is required to refund or repay to Borrower or to any other person.
(c) Any dissolution of Borrower, or any sale, lease or transfer of all or
any part of Borrower's assets.
(d) Any failure of Lender to notify Guarantor of the making of additional
loans or other extensions of credit in reliance on this Agreement.
AUTOMATIC REINSTATEMENT. This Agreement and Guarantor's obligations and
liabilities hereunder shall continue to be effective, and/or shall
automatically and retroactively be reinstated, if a release or discharge has
occurred, or if at any time, any payment or part thereof to Lender with respect
to any of the Indebtedness, is rescinded or must otherwise be restored by
Lender pursuant to any insolvency, bankruptcy, reorganization, receivership, or
any other debt relief granted to Borrower or to any other party to the
Indebtedness or any such security therefor. In the event that Lender must
rescind or restore any payment received in total or partial satisfaction of the
Indebtedness, any prior release or discharge from the terms of this Agreement
given to Guarantor shall be without effect, and this Agreement and Guarantor's
obligations and liabilities hereunder shall automatically and retroactively be
renewed and/or reinstated and shall remain in full force and effect to the same
degree and extent as if such a release or discharge had never been granted. It
is the intention of Lender and Guarantor that Guarantor's obligations and
liabilities hereunder shall not be discharged except by Guarantor's full and
complete performance and satisfaction of such obligations and liabilities; and
then only to the extent of such performance.
LEGAL EXISTENCE. Guarantor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Guarantor is duly
qualified and in good standing as a foreign corporation in each jurisdiction
where in the nature of the business transacted and the property owned by
Guarantor makes such qualification necessary, except where the failure to be so
qualified will not have a material adverse affect on Guarantor. Guarantor's
guaranty of the Indebtedness and this Agreement does not violate Guarantor's
Certificate of Incorporation or Bylaws. Guarantor has taken all corporate
action necessary to authorize the execution, delivery and performance of this
Agreement.
REPRESENTATIONS AND WARRANTIES BY GUARANTOR. Guarantor represents and warrants
that:
(a) Guarantor is the parent corporation and owner of all of the
authorized, issued and outstanding stock of Borrower.
(b) Guarantor has the lawful power to own its properties and to engage in
its business as presently conducted.
(c) Guarantor's guaranty of the Indebtedness and Guarantor's execution,
delivery and performance of this Agreement are not in violation of any laws
and will not result in a default under any contract, agreement, or
instrument to which Guarantor is a party, or by which Guarantor or its
property may be bound.
(d) Guarantor has agreed and consented to execute this Agreement and to
guarantee the Indebtedness in favor of Lender, at Borrower's request and
not at the request of Lender.
(e) Guarantor will receive and/or has received a direct or indirect
material benefit from the transactions contemplated herein and/or arising
out of the Indebtedness.
(f) This Agreement, when executed and delivered to Lender, will constitute
a valid, legal and binding obligation of Guarantor, enforceable in
accordance with its terms.
(g) Guarantor has established adequate means of obtaining information from
Borrower on a continuing basis regarding Borrower's financial condition.
(h) Lender has made no representations to Guarantor as to the
creditworthiness of Borrower.
(i) There are no suits or proceedings pending, or to the knowledge of
Guarantor, threatened against or affecting Borrower, Guarantor, or the
assets of Borrower or Guarantor, before any court or by any governmental
agency, other than those previously disclosed to Lender in documents filed
by Borrower or Guarantor with the Securities and Exchange Commission and
delivered to Lender by Borrower or Guarantor, which, if adversely
determined, may have a material adverse effect on the financial condition
or business of Borrower or Guarantor.
AFFIRMATIVE COVENANTS. Guarantor covenants and agrees with Lender that, so
long as this Agreement remains in effect, Guarantor will:
CHANGES IN FINANCIAL CONDITION AND LITIGATION. PROMPTLY INFORM LENDER OF
(A) all material adverse changes in the financial condition of Borrower or
Guarantor, and (b) the threat of, the institution of, or any adverse
determination by final judgment in, any litigation, arbitration proceeding
or governmental proceeding which could reasonably be expected to involve a
claim against Borrower or Guarantor for more than $100,000.00.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Guarantor's books and records at all
reasonable times.
FINANCIAL REPORTS. Prepare all annual financial statements and reports
required to be provided under this Agreement in accordance with generally
accepted accounting principles, applied on a consistent basis and prepare
all other financial statements and reports required to be provided under
this Agreement in accordance with generally accepted accounting principles
(with the exception of year-end adjustments and footnoting), applied on a
consistent basis, and each statement and report shall be certified as being
true and correct, in all material respects, to the best knowledge and
belief, by the chief financial officer of Guarantor or other officer or
person acceptable to Lender.
<PAGE> 4
09-11-1996 COMMERCIAL GUARANTY PAGE 4
LOAN NO. (CONTINUED)
===============================================================================
ANNUAL FINANCIAL STATEMENTS. Without demand or request by Lender, furnish
Lender with, as soon as available, but in no event later than one hundred
twenty (120) days after the end of each fiscal year, fiscal year-end
financial statements (including consolidated balance sheet, income
statement and statement of cash flows) for Guarantor, prepared in the form
of consolidated statements for Guarantor and all of its subsidiaries,
including Borrower, audited by a certified public accountant satisfactory
to Lender and accompanied by the unqualified opinion of the certified
public accountant. The certified public accounting firm of BDO Siedman
shall be qualified as a certified public accountant satisfactory to Lender
unless and until Lender notifies Guarantor to the contrary.
MONTHLY FINANCIAL STATEMENTS. Without demand or request by Lender, furnish
Lender with, as soon as available, but in no event later than ten (10)
Business Days after the end of each calendar month, month-end financial
statements (including balance sheet and income statement) for Guarantor,
prepared in the form of consolidated statements for Guarantor and all of
its subsidiaries, including Borrower, for the prior month, prepared and
certified as correct, in all material respects, to the best knowledge and
belief, by the chief financial officer of Guarantor or other officer or
person acceptable to Lender.
TAX RETURNS. Upon request of Lender, furnish Lender with copies of the
most current federal tax returns filed by Guarantor, with all schedules and
supporting documentation.
PUBLIC DOCUMENTS. Without demand or request by Lender, within thirty (30)
days of the filing of each, furnish Lender with copies of the 10-K, 10-Q,
and each other document filed by Guarantor with the Securities and Exchange
Commission.
ADDITIONAL INFORMATION. Furnish such additional information, statements
and reports with respect to the financial condition and business operations
of Guarantor as Lender may reasonably request from time to time.
GUARANTOR INFORMATION. Guarantor agrees to keep adequately informed of any
facts, events or circumstances which might in any way affect Guarantor's
risks under this Agreement. Guarantor further agrees that Lender shall
have no obligation to disclose to Guarantor any information or material
relating to Borrower or the Indebtedness.
NEGATIVE COVENANTS. Guarantor covenants and agrees with Lender that as long as
this Agreement remains in effect Guarantor shall not, without the prior written
consent of Lender:
DIVIDENDS. Pay any dividends on Guarantor's stock (other than dividends
payable in its stock) unless (a) Guarantor's Adjusted Net Worth (as defined
in the FINANCIAL COVENANTS section below) exceeds $22,500,000.00, and (b)
the dividend payment will not reduce Guarantor's Adjusted Net Worth to
amount equal to or less than $22,500,000.00.
REDEMPTION OF SHARES. Redeem, retire or repurchase any shares of its
capital stock or other securities if such redemption, retirement or
repurchase would cause Guarantor to be out of compliance with any of the
Financial Covenants provided for in this Agreement.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities other than
those related to financial services, (b) cease operations, liquidate, or
dissolve, (c) merge with any other entity if the members of the board of
directors of Guarantor immediately prior to the merger do not immediately
after the merger constitute a majority of (i) the members of the board of
directors of Guarantor if it survives the merger, or (ii) the board of
directors of the surviving company if Guarantor does not survive the
merger, or (d) sell all or substantially all of Guarantor's assets.
FINANCIAL COVENANTS. Guarantor covenants and agrees with Lender that as long
as this Agreement remains in effect Guarantor shall comply with the following
financial covenants:
DEFINITIONS. For purposes of testing compliance with these Financial
Covenants the following terms shall have the following meanings. Except as
otherwise provided by these defined terms, all computations made to
determine compliance with these Financial Covenants shall be made on a
consolidated basis for Guarantor and all of its subsidiaries, in accordance
with generally accepted accounting principles, applied on a consistent
basis, and certified as true and correct, in all material respects, to the
best knowledge and belief, by the chief financial officer of Guarantor or
other officer or person acceptable to Lender.
ADJUSTED NET WORTH. The term "Adjusted Net Worth" shall mean the Stated
Net Worth of Guarantor and its subsidiaries, on a consolidated basis, plus
Subordinated Debt, less Intangibles, and less amounts (a) due from any
shareholder, director, officer, employee or agent of Guarantor or of any
subsidiary or affiliate of Guarantor, or (b) due from any person or entity
(other than a subsidiary) which is affiliated with, or related to,
Guarantor or any of its subsidiaries, or any of the shareholders, officers,
or directors of Guarantor or any of its subsidiaries.
DEBT. The term "Debt" shall mean all liabilities of Guarantor and
its subsidiaries, on a consolidated basis, INCLUDING SUBORDINATED
DEBT.
INTANGIBLES. The term "Intangibles" shall mean all of the
intangible assets of Guarantor and its subsidiaries, on a
consolidated basis, including goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible
expenses, but excluding leaseholds and leasehold improvements.
SUBORDINATED DEBT. The term "Subordinated Debt" shall mean
indebtedness and liabilities of Guarantor and its subsidiaries
which have been subordinated by written agreement to the
Indebtedness, and to the indebtedness of any Guarantor to Lender,
in form and substance acceptable to Lender.
STATED NET WORTH. The term "Stated Net Worth" shall mean the total
assets of Guarantor and its subsidiaries, on a consolidated basis,
less total Debt.
MINIMUM ADJUSTED NET WORTH. Guarantor shall maintain an Adjusted Net Worth
of no less than $20,000,000.00.
MAXIMUM LEVERAGE POSITION. Guarantor shall maintain a leverage position of
no more than 5.00 to 1.00, where leverage position is the result of the
following formula:
Debt - Subordinated Debt
------------------------------------
Stated Net Worth + Subordinated Debt
TESTING FREQUENCY. Compliance with Minimum Adjusted Net Worth and Maximum
Leverage Position requirements shall be tested quarterly (based on the
fiscal year of Guarantor) based on the then most recent financial
statements of Guarantor and its subsidiaries, on a consolidated basis.
TRANSFER OF INDEBTEDNESS. This Agreement is for the benefit of Lender and for
such other person or persons as may from time to time become or be the holders
of all or any part of the Indebtedness. This Agreement shall be transferrable
and negotiable with the same force and
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09-11-1996 COMMERCIAL GUARANTY PAGE 5
LOAN NO. (CONTINUED)
===============================================================================
effect and to the same extent as the Indebtedness may be transferrable; it
being understood and agreed to by Guarantor that, upon any transfer or
assignment of all or any part of the Indebtedness, the holder of such
Indebtedness shall have all of the rights and remedies granted to Lender under
this Agreement. Guarantor further agrees that, upon any transfer of all or any
portion of the Indebtedness, Lender may transfer and deliver any and all
collateral securing repayment of such Indebtedness (including, but not limited
to, any collateral provided by Guarantor) to the transferee of such
Indebtedness, and such collateral shall secure any and all of the Indebtedness
in favor of such a transferee. Guarantor additionally agrees that, after any
such transfer or assignment has taken place, Lender shall be fully discharged
from any and all liability and responsibility to Borrower and Guarantor with
respect to such collateral, and the transferee thereafter shall be vested with
all the powers and rights with respect to such collateral, except for gross
negligence or willful misconduct.
CONSENT TO PARTICIPATION. Guarantor recognizes and agrees that Lender may,
from time to time, one or more times, transfer all or any part of the
Indebtedness through sales of participation interests in such Indebtedness to
one or more third party lenders. Lender agrees to notify Guarantor of any sale
or transfer of (a) the Indebtedness in its entirety, and (b) any assignment of
the "lead lender" position if participation interests in the Indebtedness are
sold or transferred. Guarantor specifically agrees and consents to all such
transfers and assignments, and waives any and all other notices of sale of
participation interests, as well as all notices of any repurchase of
participation interests. Guarantor additionally agrees that the purchaser of a
participation interest in the Indebtedness will be considered as the absolute
owner of a percentage interest of such Indebtedness and that such a purchaser
will have all of the rights granted under any participation agreement governing
the sale of such a participation interest. Guarantor waives any rights of
offset that Guarantor may have against Lender and/or any purchaser of such a
participation interest, and Guarantor unconditionally agrees that either Lender
or such a purchaser may enforce Guarantor's obligations and liabilities under
this Agreement, irrespective of the failure or insolvency of Lender or any such
purchaser.
NOTICES. To give Guarantor any notice required under this Agreement, Lender
may hand deliver or mail such notice to Guarantor at the address specified for
Guarantor in this Agreement, or at any other address that Guarantor may have
given to Lender by written notice as provided in this paragraph. To give
Lender any notice under this Agreement, Guarantor may hand deliver or mail such
notice to Lender at the address specified in this Agreement, or at any other
address that Lender may have given to Guarantor by written notice as provided
in this paragraph. All notices required or permitted under this Agreement must
be in writing and will be considered as given on the day it is delivered by
hand or deposited in the U. S. Mail in the form and to the address specified in
this Agreement.
ADDITIONAL GUARANTIES. Guarantor recognizes and agrees that Guarantor may have
previously granted, and may in the future grant, one or more additional
guaranties of the Indebtedness in favor of Lender. Should this occur, the
execution of this Agreement and any additional guaranties on the part of
Guarantor will not be construed as a cancellation of this Agreement or any of
Guarantor's additional guaranties; it being Guarantor's full intent and
agreement that all such guaranties of the Indebtedness in favor of Lender shall
remain in full force and effect and shall be cumulative in nature and effect.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENT. No amendment, modification, consent or waiver of any provision
of this Agreement, and no consent to any departure by Guarantor therefrom,
shall be effective unless the same shall be in writing signed by a duly
authorized officer of Lender, and then shall be effective only as to the
specific instance and for the specific purpose for which given.
CAPTION HEADINGS. Caption headings of the sections of this Agreement are
for convenience purposes only and are not to be used to interpret or to
define their provisions. In this Agreement, whenever the context so
requires, the singular includes the plural and the plural also includes the
singular.
ENTIRE AGREEMENT. This Agreement embodies the final, entire agreement of
the parties hereto and supersede any and all prior commitments, agreements,
representations, and understandings, whether written or oral, relating to
the subject matter hereof and may not be contradicted or varied by evidence
of prior, contemporaneous, or subsequent oral agreements or discussions of
the parties hereto. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES TO
THIS AGREEMENT.
GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the substantive laws of the State of Louisiana.
SEVERABILITY. If any provision of this Agreement is held to be illegal,
invalid or unenforceable under present or future laws effective during the
term hereof, such provision shall be fully severable. This Agreement shall
be construed and enforceable as if the illegal, invalid or unenforceable
provision had never comprised a part of it, and the remaining provisions of
this Agreement shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a part of
this Agreement, a provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible and legal, valid and
enforceable.
SUCCESSORS AND ASSIGNS BOUND. Guarantor's obligations and liabilities
under this Agreement shall be binding upon Guarantor's successors, heirs,
legatees, devisees, administrators, executors and assigns.
WAIVE JURY. Guarantor and Lender hereby waive the right to any jury trial
in any action, proceeding, or counterclaim brought by either against the
other.
GUARANTOR AND LENDER ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
AGREEMENT AND AGREES TO ITS TERMS. IN ADDITION, GUARANTOR UNDERSTANDS THAT
THIS AGREEMENT IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
AGREEMENT TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED. NO
FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS AGREEMENT EFFECTIVE.
THIS AGREEMENT IS DATED SEPTEMBER 11, 1996.
GUARANTOR:
SEARCH CAPITAL GROUP, INC.
By: /s/ ROBERT D. IDZI
------------------------------------------------
Robert D. Idzi, Senior Executive Vice President
LENDER:
HIBERNIA NATIONAL BANK
By: /s/ NORM WINTERS
------------------------------------------------
Authorized Officer
<PAGE> 1
EXHIBIT 4.10
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C>
$25,000,000.00 09-11-1996 09-11-1999 536
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------
BORROWER: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK
(TIN: 75-2554995) (TIN: 72-0210640)
700 NORTH PEARL STREET 313 CARONDELET STREET
SUITE 400, L.B. 401 POST OFFICE BOX 61540
DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161
================================================================================
<TABLE>
<S> <C> <C>
PRINCIPAL AMOUNT: $25,000,000.00 INITIAL RATE: 9.250% DATE OF NOTE: SEPTEMBER 11, 1996
</TABLE>
PROMISE TO PAY. SEARCH FUNDING II, INC. ("BORROWER") promises to pay to the
order of HIBERNIA NATIONAL BANK ("LENDER"), in lawful money of the United
States of America the sum of TWENTY-FIVE MILLION AND NO/100 DOLLARS (U.S.
$25,000,000.00) or such other or lesser amounts as may be reflected from time
to time on the books and records of Lender as evidencing the aggregate unpaid
principal balance of loan advances made to Borrower on a revolving line of
credit basis as provided below, together with simple interest assessed on a
variable rate basis at the rate per annum equal to 1.000 percentage point over
the Index provided below (exclusive of any Additional Interest that may be due
under this Note), as the Index under this Note may be adjusted from time to
time, one or more times, with interest being assessed on the unpaid principal
balance of this Note as outstanding from time to time, commencing on SEPTEMBER
11, 1996, and continuing until this Note is paid in full.
LINE OF CREDIT. This Note evidences a revolving line of credit "master note".
Advances under this Note may be requested orally by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower, at Lender's address
shown above, written notice of revocation of their authority: GEORGE C. EVANS,
JAMES F. LEARY, ANTHONY J. DELLAVECHIA, ROBERT D. IDZI, ELLIS A. REGENBOGEN,
and CAROLYN J. MALONE. REQUESTS FOR ADVANCES WILL BE MADE IN ACCORDANCE WITH
THE PROVISIONS CONTAINED IN THE LOAN AGREEMENT BETWEEN BORROWER AND LENDER
DATED SEPTEMBER 11, 1996, AS IT MAY BE AMENDED OR MODIFIED FROM TIME TO TIME
("THE LOAN AGREEMENT"). Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or (b)
credited to any of Borrower's deposit accounts with Lender. The unpaid
principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under
this Note if: (i) Borrower or any guarantor is in default under the terms of
this Note or any agreement that Borrower or any guarantor has with Lender,
including any agreement made in connection with the signing of this Note, (ii)
Borrower or any guarantor becomes insolvent, files a petition in bankruptcy or
similar proceedings, or is adjudged a bankrupt, (iii) there occurs a material
adverse change in Borrower's financial condition or in the financial condition
of any guarantor, or in the total value of the collateral securing repayment of
this Note, or (iv) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guaranty of this Note or any other loan with
Lender.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING
PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON SEPTEMBER 11, 1999. IN ADDITION,
BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING
OCTOBER 1, 1996, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE FIRST DAY
OF EACH MONTH AFTER THAT UNTIL THIS NOTE IS PAID IN FULL. Interest on this
Note is computed on a 365/360 simple interest basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's address
shown above or at such other place as Lender may designate in writing. Unless
otherwise agreed or required by applicable law, payments will be applied first
to accrued unpaid interest, then to principal, and any remaining amount to any
unpaid collection costs.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is THE CHASE
MANHATTAN BANK PRIME COMMERCIAL LENDING RATE (the "INDEX"). The Index is not
necessarily the lowest rate charged by Lender on its loans. If the Index
becomes unavailable during the term of this loan, Lender may designate a
substitute index after notice to Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each day. THE INDEX CURRENTLY IS 8.250% PER ANNUM. THE
INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL
BE AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, RESULTING IN AN INITIAL
RATE OF 9.250% PER ANNUM.
OTHER FEES AND CHARGES. In addition to the principal, interest and other fees
and charges provided for in this Note, Borrower agrees to also pay all other
amounts, fees and charges provided for in the Loan Agreement, including,
without limitation, all overlines, overadvances, interest on overlines and
overadvances, unused facility fees, facility charges and expenses, and
commitment cancellation charges provided for in the Loan Agreement.
PREPAYMENT. Borrower may prepay this Note in full at any time by paying the
then unpaid principal balance of this Note, plus accrued simple interest and
any unpaid charges through date of prepayment. Prepayment of the amounts due
under this Note shall not constitute termination of any agreement between
Borrower and Lender, including, without limitation, the Loan Agreement.
Specifically, Borrower acknowledges and agrees that Lender may be entitled to a
commitment cancellation charge provided for in the Loan Agreement. If Borrower
prepays this Note in full, or if Lender accelerates payment, Borrower
understands that, unless otherwise required by law, any prepaid fees or charges
will not be subject to rebate and will be earned by Lender at the time this
Note is signed.
DEFAULT. The following actions and/or inactions shall constitute default
events under this Note:
DEFAULT UNDER THIS NOTE. Should Borrower default in the payment of any
amounts due and payable under this Note.
DEFAULT UNDER LOAN AGREEMENT. Should any Event of Default occur under the
Loan Agreement (as the term "Event of Default" is defined in the Loan
Agreement).
LENDER'S RIGHTS UPON DEFAULT. Should any one or more default events occur or
exist under this Note as provided above, Lender shall have the right, at its
sole option, to declare formally this Note to be in default and to accelerate
the maturity and insist upon immediate payment in full of the unpaid principal
balance then outstanding under this Note, plus accrued interest, together with
reasonable attorneys' fees, costs, expenses and other fees and charges as
provided herein. Lender shall have the further right, again at its sole
option, to declare formal default and to accelerate the maturity and to insist
upon immediate payment in full of each and every other loan, extension of
credit, debt, liability and/or obligation of every nature and kind that
Borrower may then owe to Lender, whether direct or indirect or by way of
assignment, and whether absolute or contingent, liquidated or unliquidated,
voluntary or involuntary, determined or undetermined, secured or unsecured,
whether Borrower is obligated alone or with others on a "solidary" or "joint
and several" basis, as a principal obligor or otherwise, all without further
notice or demand, unless Lender shall otherwise elect.
<PAGE> 2
09-11-1996 PROMISSORY NOTE Page 2
Loan No. (Continued)
================================================================================
ATTORNEYS' FEES. If Lender refers this Note to an attorney for collection, or
files suit against Borrower to collect this Note, or if Borrower files for
bankruptcy or other relief from creditors, Borrower agrees to pay Lender's
reasonable attorneys' fees.
DEPOSIT ACCOUNTS. As collateral security for repayment of this Note and all
renewals and extensions, as well as to secure any and all other loans, notes,
indebtedness and obligations that Borrower may now and in the future owe to
Lender or incur in Lender's favor, whether direct or indirect, absolute or
contingent, due or to become due, of any nature and kind whatsoever (with the
exception of any indebtedness under a consumer credit card account), Borrower
is granting Lender a continuing security interest in any and all funds that
Borrower may now and in the future have on deposit with Lender or in
certificates of deposit or other deposit accounts as to which Borrower is an
account holder (with the exception of IRA, pension, and other tax-deferred
deposits). Borrower further agrees that Lender may, at any time after a
default event occurs, apply any funds that Borrower may have on deposit with
Lender or in certificates of deposit or other deposit accounts as to which
Borrower is an account holder (with the exception of IRA, pension, and other
tax-deferred deposits) against the unpaid balance of this Note and any and all
other present and future indebtedness and obligations that Borrower may then
owe to Lender, in principal, interest, fees, costs, expenses, and attorneys'
fees.
GOVERNING LAW. Borrower agrees that this Note and the loan evidenced hereby
shall be governed under the laws of the State of Louisiana. Specifically, this
business or commercial Note is subject to La.-R.S. 9:3509, et seq.
INTEREST AFTER DEFAULT. If Lender declares this Note to be in default, Lender
has the right prospectively to adjust and fix the simple interest rate under
this Note, until this Note is paid in full, to 3.000 percentage points in
excess of the interest rate under this Note at the time of default.
MAXIMUM INTEREST RATE. Anything to the contrary contained herein
notwithstanding, no provision of this Note shall require the payment or permit
the collection of interest in excess of the maximum permitted by applicable law
("THE MAXIMUM RATE"). If interest in excess of the Maximum Rate is provided
for in this Note or otherwise in connection with the loan transaction
represented by this Note, or is adjudicated to be so provided, the provisions
of this paragraph shall govern and prevail and neither Borrower, nor any
guarantor, shall be obligated to pay the excess amount of such interest or any
other excess sum paid for the use, forbearance, or detention of Advances made
under this Agreement. In the event Lender ever receives, collects or applies,
as interest due and payable under this Note, any sum in excess of the Maximum
Rate, the amount of the excess shall be applied as a payment and reduction of
the principal of the indebtedness represented by this Note; and if the
principal of the indebtedness represented by this Note has been fully paid, any
remaining excess shall forthwith be paid to Borrower. In determining whether
or not interest paid or payable exceeds the Maximum Rate, Borrower and Lender
shall, to the extent permitted by applicable law, (a) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(b) exclude voluntary prepayments and the effects thereof, and (c) amortize,
prorate, allocate and spread, in equal or unequal parts, the total amount of
interest throughout the entire contemplated term of the indebtedness
represented by this Note so that interest for the entire term does not exceed
the Maximum Rate.
WAIVERS. Borrower and each guarantor of this Note hereby waive demand,
presentment for payment, protest, notice of protest, notice of nonpayment,
notice of acceleration and notice of intent to accelerate, and all pleas of
division and discussion, and severally agree that their obligations and
liabilities to Lender hereunder shall be on a "solidary" or "joint and several"
basis. Borrower and each guarantor further severally agree that discharge or
release of any party who is or may be liable to Lender for the indebtedness
represented hereby, or the release of any collateral directly or indirectly
securing repayment hereof, shall not have the effect of releasing any other
party or parties, who shall remain liable to Lender, or of releasing any other
collateral that is not expressly released by Lender. Borrower and each
guarantor additionally agree that Lender's acceptance of payment other than in
accordance with the terms of this Note, or Lender's subsequent agreement to
extend or modify such repayment terms, or Lender's failure or delay in
exercising any rights or remedies granted to Lender, shall likewise not have
the effect of releasing Borrower or any other party or parties from their
respective obligations to Lender, or of releasing any collateral that directly
or indirectly secures repayment hereof. In addition, any failure or delay on
the part of Lender to exercise any of the rights and remedies granted to Lender
shall not have the effect of waiving any of Lender's rights and remedies. Any
partial exercise of any rights and/or remedies granted to Lender shall
furthermore not be construed as a waiver of any other rights and remedies; it
being Borrower's intent and agreement that Lender's rights and remedies shall
be cumulative in nature. Borrower and each guarantor further agree that,
should any default event occur or exist under this Note, any waiver or
forbearance on the part of Lender to pursue the rights and remedies available
to Lender, shall be binding upon Lender only to the extent that Lender
specifically agrees to any such waiver or forbearance in writing. A waiver or
forbearance on the part of Lender as to one default event shall not be
construed as a waiver or forbearance as to any other default.
SUCCESSORS AND ASSIGNS LIABLE. Borrower's and each guarantor's obligations and
agreements under this Note shall be binding upon Borrower's and each
guarantor's respective successors, heirs, legatees, devisees, administrators,
executors and assigns. The rights and remedies granted to Lender under this
Note shall inure to the benefit of Lender's successors and assigns, as well as
to any subsequent holder or holders of this Note.
CAPTION HEADINGS. Caption headings of the sections of this Note are for
convenience purposes only and are not to be used to interpret or to define
their provisions. In this Note, whenever the context so requires, the singular
includes the plural and the plural also includes the singular.
SEVERABILITY. If any provision of this Note is held to be invalid, illegal or
unenforceable by any court, that provision shall be deleted from this Note and
the balance of this Note shall be interpreted as if the deleted provision never
existed.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. LENDER AND
BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER.
BORROWER:
SEARCH FUNDING II, INC.
By: /s/ Robert D. Idzi
----------------------------------------------------
Robert D. Idzi, Senior Executive Vice President
<PAGE> 1
EXHIBIT 5.1
[BRACEWELL & PATTERSON, L.L.P. LETTERHEAD]
May 8, 1997
Search Capital Group, Inc.
700 North Pearl, Suite 400
North Tower, Lock Box 401
Dallas, Texas 75201
Gentlemen:
We refer to the Form S-4 Registration Statement of Search Capital Group, Inc.,
a Texas corporation (the "Company"), filed with the Securities and Exchange
Commission, and the Joint Proxy Statement/Prospectus contained therein (the
"Registration Statement"), for the purpose of registering under the Securities
Act of 1933, as amended, up to 4,797,800 shares of the Company's Common Stock,
$0.01 par value per share (the "Common Shares"). The Common Shares are to be
issued in connection with the merger (the "Merger") of Search Capital
Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the
Company ("Merger Sub"), with and into MS Financial, Inc., a Delaware
corporation ("MSF"), pursuant to the Agreement and Plan of Merger, dated as of
February 7, 1997 (the "Merger Agreement"), among the Company, MSF, and Merger
Sub.
We have examined copies, certified or otherwise identified to our satisfaction,
of the Company's Restated Certificate of Incorporation and Bylaws, including
any and all amendments thereto, and minutes of applicable meetings of the
stockholders and the board of directors of the Company, or written consents in
lieu of such meetings, together with such other corporate records and
certificates of public officials and of officers of the Company as we have
deemed relevant for the purposes of this opinion. Based upon the foregoing,
and having regard to the legal considerations that we deem relevant, it is our
opinion that:
1. All necessary corporate actions have been taken to authorize the
issuance of the Common Shares in connection with the Merger.
2. Assuming that all relevant corporate actions heretofore taken by
the Company remain in full force and effect, if and when the
Common Shares are issued, sold, and delivered by the Company in
accordance with the terms and conditions of the Merger Agreement
and as
<PAGE> 2
Search Capital Group, Inc.
May 8, 1997
Page 2
contemplated by the Registration Statement, the Common Shares will be
legally issued, fully paid, and nonassessable.
We hereby consent to the reference to us under the caption "Legal Matters" in
the Joint Proxy Statement/Prospectus, which constitutes a part of the
Registration Statement referred to above. We also consent to the inclusion in
the Registration Statement of this opinion as Exhibit 5.1 thereto.
Very truly yours,
/s/ BRACEWELL & PATTERSON, L.L.P.
Bracewell & Patterson, L.L.P.
<PAGE> 1
EXHIBIT 8.1
[LETTERHEAD OF HAYNES AND BOONE, LLP]
May 21, 1997
Search Capital Group, Inc.
700 North Pearl Street, Suite 400
Dallas, Texas 75201
MS Financial, Inc.
715 South Pear Orchard Road, Suite 300
Ridgeland, Mississippi 39157
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 6.1(e) of the Agreement
and Plan of Merger, dated as of February 7, 1997 (the "MERGER AGREEMENT"),
whereby a wholly owned subsidiary ("MERGER SUB") of Search Capital Group, Inc.
("SEARCH") will be merged with and into MS Financial, Inc. ("MSF") and MSF will
become a wholly owned subsidiary of Search (the "MERGER"). Capitalized terms
used in this opinion are defined as set forth in the Merger Agreement. We have
acted as special counsel to MSF in connection with the transactions
contemplated by the Merger Agreement and the Registration Statement.
In rendering this opinion, we have reviewed the Merger Agreement, the
Stockholders Agreement, the Form S-4 Registration Statement, the MS Financial,
Inc. Proxy Statement/Search Capital Group, Inc. Prospectus, and such other
documents and certificates as we have considered necessary for the purposes of
the opinions hereafter set forth. For purposes of rendering this opinion, we
have made the following assumptions:
1. The fair market value of the Search Common Stock and other
consideration received by each MSF stockholder will be
approximately equal to the fair market value of the MSF Common
Stock surrendered in the exchange pursuant to the Merger.
2. There is no plan or intention by the MSF Stockholders who own
5 percent or more of the MSF Common Stock, or to the best
knowledge of the management of MSF, by the remaining MSF
Stockholders, to sell, exchange, or otherwise dispose of that
number of shares of Search Common Stock received in the Merger
that
<PAGE> 2
Search Capital Group, Inc.
MS Financial, Inc.
May 21, 1997
Page 2
would reduce the MSF Stockholders' ownership of Search Common
Stock to a number of shares having a value, as of the date of
the Merger, of less than 50 percent of the value of all of the
formerly outstanding MSF Common Stock as of the same date. For
purposes of this assumption, shares of MSF Common Stock
exchanged for cash or other property or exchanged for cash in
lieu of fractional shares of Search Common Stock will be
treated as outstanding MSF Common Stock on the date of the
Merger. Moreover, shares of MSF Common Stock and shares of
Search Common Stock held by MSF Stockholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the
Merger will be considered in making this assumption.
3. Following the Merger, MSF will hold at least (a) 90 percent of
the fair market value of its net assets, (b) 70 percent of the
fair market value of its gross assets, (c) 90 percent of the
fair market value of Merger Sub's net assets, and (d) 70
percent of the fair market value of Merger Sub's gross assets,
each as held immediately prior to the Merger. For purposes of
this assumption, amounts paid by MSF or Merger Sub to
stockholders who receive cash or other property, amounts used
by MSF or Merger Sub to pay reorganization expenses, and all
redemptions and distributions (except for regular, normal
dividends) made by MSF will be included as assets of MSF or
Merger Sub, respectively, immediately prior to the Merger.
4. Prior to the Merger, Search will own stock in Merger Sub
possessing at least 80 percent of the total combined voting
power of all classes of stock entitled to vote and at least 80
percent of the total number of shares of all other classes of
stock of Merger Sub, in accordance with Code Section 368(c)(1)
("CONTROL").
5. MSF has no plan or intention to issue additional shares of its
Common Stock that would result in Search losing Control of
MSF.
6. Search has no plan or intention to reacquire any of its Common
Stock issued in the Merger.
7. Search has no plan or intention to (a) liquidate MSF, (b)
merge MSF with or into another corporation (c) sell or
otherwise dispose of the MSF Common Stock except for transfers
of
<PAGE> 3
Search Capital Group, Inc.
MS Financial, Inc.
May 21, 1997
Page 3
MSF Common Stock to a corporation controlled by Search, or (d)
cause MSF to sell or otherwise dispose of any of its assets or
any of the assets acquired from Merger Sub, except for
dispositions made in the ordinary course of business or
transfers of assets to a corporation controlled by MSF.
8. Merger Sub will have no liabilities assumed by MSF, and will
not transfer to MSF any assets subject to liabilities, in the
Merger.
9. Following the Merger, MSF will continue its historic business
as a specialized consumer finance company engaged in the
purchase, securitization and servicing of installment contracts
or use a significant portion of its historic business assets in
a business.
10. Search, Merger Sub, MSF, and the stockholders of MSF each will
pay their own expenses, if any, incurred in connection with
the Merger.
11. There is no intercorporate indebtedness existing between
Search and MSF or between Merger Sub and MSF that was issued,
acquired, or will be settled at a discount.
12. In the Merger, shares of MSF Common Stock representing Control
of MSF, as defined in Code Section 368(c)(1), will be
exchanged solely for voting common stock of Search. For
purposes of this assumption, no shares of MSF Common Stock
have been exchanged for cash or other property originating
with Search.
13. At the time of the Merger, MSF will not have outstanding any
warrants, options, convertible securities, or any other type
of right pursuant to which any person could acquire Common
Stock in MSF that, if exercised or converted, would affect
Search's acquisition or retention of Control of MSF.
14. Search does not own, and has not owned during the past five
years, any shares of MSF Common Stock.
<PAGE> 4
Search Capital Group, Inc.
MS Financial, Inc.
May 21, 1997
Page 4
15. None of the parties to the Merger are investment companies as
defined in Code Section 368(a)(2)(F)(iii) and (iv).
16. On the date of Merger, the fair market value of the assets of
MSF will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
17. MSF is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Code Section 368(a)(3)(A).
In rendering this opinion, we have examined and relied upon the representations
and warranties contained in the Merger Agreement, certain representations made
to us both orally and in writing by officers and directors of MSF and certain
representations, warranties and covenants contained in the Stockholders
Agreement. Insofar as this opinion relates to other factual matters, we have
relied upon representations made to us by such officers, directors and
stockholders. Although nothing has come to our attention leading us to
question, or giving us reasonable grounds to question, such information, we have
not made any independent review or investigation of such representations or
warranties and we do not have any basis for believing that the covenants will
not be carried out in accordance with their terms.
The opinions hereinafter expressed are qualified to the extent that the
validity or enforceability of any provisions in the Merger Agreement, the
Stockholders Agreement or any ancillary agreement, or of any rights granted to
any person or entity pursuant to any of those instruments, may be subject to or
affected by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors generally.
We have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
accuracy and completeness of all corporate records made available to us by MSF
and its officers and directors. We have also assumed that the Merger will be
consummated in accordance with the terms of the Merger Agreement, the
Stockholders Agreement and the Form S-4 Registration Statement.
This opinion is based on existing law as contained in the Code, the Treasury
Regulations, administrative rulings and court decisions as of the date hereof.
No assurances can be given that future legislative, administrative or judicial
changes or interpretations will not
<PAGE> 5
Search Capital Group, Inc.
MS Financial, Inc.
May 21, 1997
Page 5
be applied retroactively or that such changes would not adversely affect the tax
consequences of the Merger. Moreover, this opinion only addresses certain
federal income tax consequences set forth herein, and it does not consider any
state, local or foreign tax consequences of the Merger. The issues on which we
render opinions below are discussed in the "Certain Federal Income Tax
Considerations" section of the Form S-4 Registration Statement for Search.
Based on and subject to the foregoing, it is our opinion that the Merger should
be treated as a "reorganization" under Code Sections 368(a)(1)(A) and
368(a)(2)(E) and that the following tax consequences should apply to the MSF
Stockholders, Search, Merger Sub and MSF:
1. The MSF Stockholders will not recognize any gain or loss with
respect to the receipt of the Search Common Stock in exchange
for the MSF Common Stock pursuant to the Merger, except with
respect to any cash received in lieu of fractional shares of
Search Common Stock.
2. The aggregate tax basis of the Search Common Stock received by
each MSF Stockholder will be the same as the aggregate tax
basis of the MSF Common Stock surrendered in the Merger,
decreased by the amount of any tax basis allocable to
fractional shares of Search Common Stock in lieu of which cash
will be paid.
3. The holding period of the Search Common Stock received by each
MSF Stockholder will include the period for which the MSF
Common Stock surrendered in exchange therefor was considered
to be held, provided the MSF Common Stock so surrendered is
held as a capital asset at the Effective Time.
4. The payment received by the stockholders of the MSF Common
Stock in lieu of fractional shares of Search Common Stock will
be treated as a payment in redemption of such fractional
shares and, provided that the redeemed interest is held as a
capital asset at the Effective Time, will result in
recognition of capital gain or loss by such holders measured
by the difference between the amount received and the tax
basis allocable to such fractional shares.
<PAGE> 6
Search Capital Group, Inc.
MS Financial, Inc.
May 21, 1997
Page 6
5. Neither Search, Merger Sub nor MSF will recognize any gain or
loss as a result of the Merger.
Our opinions are based upon our best interpretations of existing sources of law
but such opinions have no binding effect on the IRS or any court. There can be
no assurance that the IRS will not challenge the conclusions or propriety of
any of counsel's opinions and no assurance can be given that counsel's
interpretations will be followed if they become the subject of judicial or
administrative proceedings. Future legislation or regulatory announcements
could have a material and adverse impact on the tax results addressed in this
opinion and could result in changes in the conclusions reached herein. Except
as expressly set forth herein, no opinions are rendered as to any other matters
relevant to the Merger, whether pertaining to federal income taxes or
otherwise.
This opinion is delivered and is effective as of two business days prior to the
date the Proxy Statement is first mailed to the MSF Stockholders. Accordingly,
this opinion is based on matters existing on such date. We hereby consent to
the reference to our Firm and the use of our name in the Registration Statement
under the captions "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS," and "LEGAL
MATTERS," and to the filing of a copy of this opinion with the Securities and
Exchange Commission as Exhibit 8.1 to the Registration Statement.
Very truly yours,
/s/ HAYNES AND BOONE, L.L.P.
Haynes and Boone, L.L.P.
<PAGE> 1
EXHIBIT 10.2
SEARCH-MS FINANCIAL
ESCROW AGREEMENT
This Escrow Agreement, dated as of _______________,1997 (the "Escrow
Agreement"), is entered into by and among Search Capital Group, Inc., a
Delaware corporation ("Search"); and the undersigned holders of shares of the
common stock, $.001 par value, of MS Financial, Inc., MS Diversified
Corporation, a Mississippi corporation ("MSD"), MS Financial Services, Inc., a
Mississippi corporation and a wholly-owned subsidiary of MSD ("MSDSub") and
Golder Thoma Cressy Rauner Fund IV, L.P. (sometimes referred to as "GTCR IV"),
and U.S. Trust Company of Texas, N.A., a national bank ("Escrow Agent"). MSD,
MSDSub and GTCR IV are sometimes collectively referred to as the
"Stockholders".
W I T N E S S E T H:
WHEREAS, MS Financial, Inc. ("MS Financial"), Search and Search's
wholly owned subsidiary, Search Capital Acquisition Corp. ("Newco"), have
entered into an Agreement and Plan of Merger dated February 7, 1997 (as
amended, the "Merger Agreement"), to effect the Merger (as defined in the
Merger Agreement; capitalized terms used herein shall have the same definition
as in the Merger Agreement unless otherwise specifically indicated) of Newco
into MS Financial, which will result in MS Financial being controlled by Search
instead of by the Stockholders, and each outstanding share of MS Financial
Stock will be converted into the right to receive that number of shares of
Search Common Stock, $.01 par value per share ("Search Common Stock"),
specified in the Merger Agreement; and
WHEREAS, Stockholders and Search have entered into a Stockholders
Agreement dated February 7, 1997 (as amended, the "Stockholders Agreement"),
pursuant to which Stockholders and Search agreed to enter into this Escrow
Agreement; and
WHEREAS, Search has agreed to issue the Search Common Stock as an
integral part of the Merger to all of the stockholders of MS Financial,
including but not limited to, the Stockholders; and
WHEREAS, the Stockholders Agreement provides that portions of the
Search Common Stock to be issued as Merger Consideration to the Stockholders
are to be held in escrow pursuant to this Escrow Agreement in order to (i)
guaranty payment of indemnification obligations under the Stockholders
Agreement and (ii) reserve against the possibility that certain anticipated tax
refunds are not received by MS Financial or the Surviving Corporation; and
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<PAGE> 2
WHEREAS, Stockholders and Search desire that Escrow Agent hold the
Search Common Stock in escrow, and Escrow Agent has agreed to do so, on the
terms and conditions set forth in this Escrow Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals, which are
incorporated into this Escrow Agreement as if fully set forth, and for other
good and valuable consideration, the receipt and sufficiency of all of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Establishment of Escrow.
(a)Indemnification Escrow Fund. Search hereby delivers to Escrow
Agent the number of shares (the "Escrow Shares") of Merger Consideration equal
to Two Million, Five Hundred Thousand Dollars ($2,500,000) worth of Search
Common Stock at the Valuation Period Market Value (the "Escrow Fund") to Escrow
Agent to hold in escrow on the terms and conditions set forth herein.
(b)Tax Holdback Escrow. Search hereby delivers to Escrow Agent the
number of shares (the "Tax Holdback Shares") of Merger Consideration equal to
Two Million, Three Hundred Thousand Dollars ($2,300,000) worth of Search Common
Stock at the Valuation Period Market Value (the "Tax Holdback Fund") to hold in
escrow on the terms and conditions set forth herein.
2. Receipt. Escrow Agent hereby acknowledges receipt of the Escrow Fund and the
Tax Holdback Fund and agrees to hold them in escrow in accordance with the
terms of this Escrow Agreement.
3. Charges Against Escrow Fund. The Escrow Fund has been created pursuant to
Section 12.1 of the Stockholders Agreement for the purpose of securing and
providing a source for satisfying any amount to be paid in Escrow Shares by the
Stockholders to Search pursuant to Section 10 of the Stockholders Agreement.
In the event that, and from time to time as, Search determines that it is
entitled to any of the Escrow Shares as indemnification pursuant to the
aforesaid Section 10 of the Stockholders Agreement, Search shall provide a
notice to the Escrow Agent, in substantially the form attached hereto as
Exhibit 1, of such claim (a "Claim") against the Escrow Fund, stating the
method of computation of such Claim, the number of Escrow Shares to satisfy the
amount of such claim, a brief description of the facts upon which such Claim is
based and a reference to the provisions of the Stockholders Agreement in
respect of which such Claim shall have occurred. The Escrow Agent shall mail a
copy of such
-2-
<PAGE> 3
Claim notice via registered or certified mail, return receipt requested, to the
Stockholders. Unless it receives a timely Objection Notice from the
Stockholders pursuant to Section 4 below, the Escrow Agent shall disburse to
Search out of the Escrow Fund the number of Escrow Shares specified in the
notice of the Claim.
4. Dispute of Claim Against Escrow Fund.
(a)The Stockholders (or either of them) shall have the right to
dispute any Claim against the Escrow Fund within the thirty (30) business day
period following delivery of a copy of a Claim notice by delivering to the
Escrow Agent and Search written notice in substantially the form attached
hereto as Exhibit 2 (an "Objection Notice") that the Stockholders dispute the
matter(s) set forth in such Claim notice either with respect to the validity,
the amount, or the number of Escrow Shares of the Claim (or each). Such notice
shall include the basis, with reasonable specificity, of the objection.
(b)Upon timely receipt of an Objection Notice, the Escrow Agent shall
reserve against the Escrow Fund 1.5 times the number of Escrow Shares stated in
the Claim and place such Escrow Shares so reserved in a separate account (in
effect putting a hold on any disbursement of such Escrow Shares) (such shares
so reserved and placed in a separate account being called a "Dispute Fund").
The Escrow Agent shall take no action with respect to the Dispute Fund, except
upon receipt of joint written instructions from Search and the Stockholders in
substantially the form attached hereto as Exhibit 3 or by a final judgment or
decree of any court of competent jurisdiction in accordance with Section 16.7
of the Stockholders Agreement. Upon such instructions or judgment, decree or
award, the Escrow Agent shall promptly follow the instruction therein.
5. Release of Escrow Fund. The Escrow Agent shall release to the respective
Stockholders the number of Escrow Shares as follows: 25% of the Escrow Fund on
the first anniversary after the Effective Time; 25% eighteen months after the
Effective Time; 25% twenty-four months after the Effective Time; and the
remainder thirty-six months after the Effective Time; provided, that any Escrow
Shares in the Dispute Fund, and 1.5 times the number of Escrow Shares specified
in an unresolved Claim made less than thirty (30) days prior to the release
date set forth above, will be withheld from the number of Escrow Shares to be
released on any such date.
6. Tax Holdback Fund.
(a)Charges Against the Tax Holdback Fund. The Tax Holdback Fund has
been created pursuant to Section 12.4 of the
-3-
<PAGE> 4
Stockholders Agreement for the purpose of reserving against the possibility
that MS Financial or the Surviving Corporation do not receive certain
anticipated tax refunds from federal and state taxing authorities. On December
31, 1998 (unless such date is accelerated or extended by mutual agreement of
the parties based on the status of such refunds), any shares of Search Common
Stock remaining in the Tax Holdback Fund (i.e., after releases of any of such
shares pursuant to paragraph (b) below) shall be released to Search pursuant to
joint instructions signed by Search and the Stockholders.
(b) Release of Tax Holdback Fund. As tax refunds in excess of
$4,000,000 are received by MS Financial or the Surviving Corporation, shares of
Search Common Stock held in the Tax Holdback Fund shall be released to the
Stockholders from escrow on no less than a quarterly basis in proportion to
such income tax refunds received, pursuant to joint instructions signed by
Search and the Stockholders.
7. Certificate Legend. The certificates representing the Escrow Fund and the
Tax Holdback Fund shall bear the legend required by the Stockholders Agreement
until said legend is removed pursuant to the terms and conditions of the
Stockholders Agreement. Thereafter, all certificates representing the Search
Common Stock still constituting a part of the Escrow Fund or the Tax Holdback
Fund shall bear a legend substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD,
PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISTRIBUTED OR DISPOSED
OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF
1933 AND THE CONDITIONS SPECIFIED IN THAT CERTAIN ESCROW AGREEMENT
DATED _______________ ___, 1997, TO WHICH AGREEMENT SEARCH CAPITAL
GROUP, INC ("SEARCH"), MS DIVERSIFIED CORPORATION, MS FINANCIAL
SERVICES, INC. AND GOLDER, THOMA, CRESSY, RAUNER FUND IV, L.P. ARE
PARTIES. A COPY OF SUCH AGREEMENT WILL BE MAILED TO THE HOLDER HEREOF
WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT OF A WRITTEN REQUEST
THEREFOR DIRECTED TO SEARCH AT ITS HEADQUARTERS IN DALLAS, TEXAS."
8. Fees. The Escrow Agent is charging for its services hereunder the fees set
forth on Schedule A, attached hereto and incorporated herein. Search shall be
solely responsible for the payment of such fees.
9. Duties. The duties of the Escrow Agent hereunder are only such as are herein
specifically provided, being purely administrative in nature, and the Escrow
Agent shall incur no liability whatsoever except for fraudulent conduct. Other
than
-4-
<PAGE> 5
the obligations of the Escrow Agent set forth in this Escrow Agreement, the
Escrow Agent shall have no other obligations, rights, or duties with reference
to this Escrow Agreement. The Escrow Agent shall not be bound by any
modification of this Escrow Agreement unless in writing and signed by all of
the parties hereto.
10. Uncertainty or Conflict: In the event that the Escrow Agent shall be
uncertain as to its duties or obligations hereunder or shall receive
instructions from any party hereto with respect to any part or all of the
Escrow Fund or the Tax Holdback Fund, which are in conflict with any of the
provisions of this Escrow Agreement, the Escrow Agent shall be entitled to
refrain from taking any action other than to keep safely the Escrow Fund and
the Tax Holdback Fund and any other property so received by it until it shall
be directed by a court as provided in the following Section.
11. Litigation: If (i) the Escrow Agent becomes involved in or is threatened
with litigation for any reason resulting from its capacity as Escrow Agent,
and/or (ii) the Escrow Agent is uncertain as to its duties or obligations
hereunder, the Escrow Agent is hereby authorized to deposit with the U.S.
district court in St. Louis, Missouri the Escrow Fund and/or the Tax Holdback
Fund and notify Stockholders and Search of the same. Thereupon, the Escrow
Agent shall stand fully relieved and discharged of any further duties hereunder
in respect of such action and the matters giving rise thereto except as may be
instructed by said court. In the event Escrow Agent is a party to any
litigation, Stockholders and Search severally agree to reimburse Escrow Agent
on demand for any reasonable out-of-pocket expenses incurred by Escrow Agent in
connection with such litigation.
12. Escrow Agent Replacement. If Escrow Agent resigns as Escrow Agent, the
parties shall have thirty (30) days to select a new Escrow Agent. If the
parties fail to select a new Escrow Agent within said thirty (30) day period,
Escrow Agent shall appoint a successor Escrow Agent. Any successor Escrow
Agent shall agree to be bound by all of the terms and conditions of this Escrow
Agreement.
13. Voting Rights. The respective Stockholders will, subject to the
restrictions set forth in the Stockholders Agreement, retain the right to vote
the Escrow Shares and the Tax Holdback Shares.
14. Termination. Upon disbursement of the entire Escrow Fund and the Tax
Holdback Fund, this Escrow Agreement shall terminate.
-5-
<PAGE> 6
15. Notices. Any notice, request, claim, demand, waiver, consent, approval or
other communication which is required or permitted hereunder shall be in
writing and shall be deemed given if delivered personally or sent by telefax
(with confirmation of receipt), by registered or certified mail, postage
prepaid, or by recognized courier service, as follows:
If to Search
or Newco to: Search Capital Group, Inc.
700 N. Pearl Street
Suite 400, L.B. 401
Dallas, Texas 75201-2809
Attention: George C. Evans, Pres. & CEO
and Ellis Regenbogen, Executive Vice
President and General Counsel
Facsimile No.: 214-965-6098
Telephone No.: 214-965-6000
With a copy to: Riezman & Blitz, P.C.
120 South Central Avenue
St. Louis, Missouri 63105
Attention: Richard M. Riezman, Esq.
Facsimile No.: 314-727-6458
Telephone No.: 314-727-0101
If to
MSD, or MSDSub: Mississippi Diversified Corporation
715 South Pear Orchard Road, Suite 400
Ridgeland, Mississippi 39157
Attention: Tom Ostenson
Facsimile No.: 601-978-6756
With a copy to: Phelps Dunbar, L.L.P.
Suite 500, Mtel Centre
South Lamar Street
Post Office Box 23066
Jackson, Mississippi 39225-3066
Attention: Charles D. Porter
Facsimile No.: 601-360-9777
If to GTCR IV: Golder Thoma Cressy Rauner Fund IV, L.P.
c/o Golder, Thoma, Cressy, Rauner, Inc.
6100 Sears Tower
Chicago, Illinois 60606-6402
Attention: Phil Canfield
Facsimile No.: 312-382-2201
If to Escrow
Agent to: U.S. Trust Company of Texas, N.A.
Ross Avenue, Suite 2700
Dallas, TX 75201
-6-
<PAGE> 7
Attention: William Barber
Facsimile No.: 214-754-1303
or to such other address as the Person to whom notice is to be given may have
specified in a notice duly given to the sender as provided herein. Such
notice, request, claim, demand, waiver, consent, approval or other
communication shall be deemed to have been given as of the date so delivered,
telefaxed, mailed or dispatched and, if given by any other means, shall be
deemed given only when actually received by the addressees.
16. Miscellaneous.
(a) This Escrow Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and
assigns.
(b) This Escrow Agreement may be executed in one or more counterparts,
and each such counterpart shall, for all purposes, be deemed to be an
original, but all such counterparts shall together constitute one and
the same instrument.
(c) If any provision(s) of this Escrow Agreement are held to be
invalid, illegal or unenforceable by a court of competent
jurisdiction, the validity, legality and enforceability of the
remaining provisions of this Escrow Agreement shall not in any way be
affected or impaired thereby.
(d) The obligations and duties of Escrow Agent herein are personal to
Escrow Agent and Escrow Agent may not assign any and/or all of its
obligations or duties hereunder except as set forth herein.
(e) Indemnity. Escrow Agent is hereby severally indemnified by Search
and Stockholders against any liability resulting from the exercise of
its duties under this Escrow Agreement which are not performed
fraudulently or with gross negligence.
* * * * *
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement as of the day and year first above written.
SEARCH CAPITAL GROUP, INC. ("SEARCH")
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
MS DIVERSIFIED CORPORATION ("MSD")
By:
----------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
MS FINANCIAL SERVICES, INC. ("MSDSub")
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
GOLDER THOMA CRESSY RAUNER FUND IV, L.P. ("GTCR IV")
By: GTCR IV, L.P., its General Partner
By: Golder, Thoma, Cressey, Rauner, Inc.,
its General Partner
By:
---------------------------------
Its Authorized Officer
U.S. TRUST COMPANY OF TEXAS, N.A. ("Escrow Agent")
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
-8-
<PAGE> 9
SCHEDULE A
ESCROW AGENT FEES
-9-
<PAGE> 10
Exhibit 1
[date]
NOTICE OF CLAIM FOR INDEMNITY
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201
RE: Escrow Agreement, dated _____________, 1997 (the "Escrow
Agreement"), among Search Capital Group, Inc., a Delaware
corporation ("Search"), Golder Thoma Cressey Rauner Fund IV,
L.P., MS Diversified Corporation, MS Financial Services, inc.
(collectively, the "Stockholders") and U.S. Trust Company of
Texas, N.A.
Subject to Section 5 of the Escrow Agreement, you are hereby
authorized and instructed to disburse ___________ Escrow Shares (as defined in
the Escrow Agreement) from the Escrow Fund (as defined in the Escrow
Agreement), representing a total amount of $_______________, to Search by
reason of the following claim:
This claim is based on the following facts:
[brief description of the method of computation of the Claim,
the facts upon which the Claim is based and a reference to the
provisions of the Stockholders Agreement in respect of which
such Claim shall have occurred]
SEARCH CAPITAL GROUP, INC.
By:
Name:
Title:
-10-
<PAGE> 11
Exhibit 2
[date]
OBJECTION NOTICE
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201
RE: Escrow Agreement, dated _____________, 1997 (the "Escrow
Agreement"), among Search Capital Group, Inc., a Delaware
corporation ("Search"), Golder Thoma Cressey Rauner Fund IV,
L.P., MS Diversified Corporation, MS Financial Services, Inc.
(collectively, the "Stockholders") and U.S. Trust Company of
Texas, N.A.
You hereby are notified that the Stockholders dispute the Claim for
Indemnity set out in the Notice for Claim for Indemnity of Search dated
_________________ ("Claim"). The basis for disputing such Claim is:
[insert a paragraph stating with reasonable specificity the
basis of the objection]
GOLDER THOMA CRESSY RAUNER
FUND, IV., L.P.
By: GTCR IV, L.P., its General Partner
By: Golder, Thoma, Cressey, Rauner,
Inc., its General Partner
By:
Its Authorized Officer
MS DIVERSIFIED CORPORATION
By:
Name:
Title:
MS FINANCIAL SERVICES, INC.
By:
Name:
Title:
-11-
<PAGE> 12
Exhibit 3
[date]
JOINT INSTRUCTIONS FOR DISPUTE RESOLUTION
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201
RE: Escrow Agreement, dated _____________, 1997 (the "Escrow
Agreement"), among Search Capital Group, Inc., a Delaware
corporation ("Search"), Golder Thoma Cressey Rauner Fund IV,
L.P., MS Diversified Corporation, MS Financial Services, Inc.
(collectively, the "Stockholders") and U.S. Trust Company of
Texas, N.A.
You hereby are authorized and instructed to take the following action
with respect to the Dispute Fund (as defined in the Escrow Agreement) that was
created by reason of Search's Notice of Claim for Indemnity dated _____________
_ and the Stockholders' Objection Notice dated __________________:
[Instructions for treatment of the Dispute Fund]
SEARCH CAPITAL GROUP, INC.
By:
Name:
Title:
GOLDER THOMA CRESSY RAUNER FUND, IV., L.P.
By: GTCR IV, L.P., its General Partner
By: Golder, Thoma, Cressey, Rauner,
Inc., its General Partner
By:
Its Authorized Officer
MS DIVERSIFIED CORPORATION
By:
Name:
Title:
MS FINANCIAL SERVICES, INC.
By:
Name:
Title:
-12-
<PAGE> 1
EXHIBIT 10.9
NUMBER 9710______
WARRANT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND
NEITHER THE WARRANTS NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED,
PLEDGED, CONVEYED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR
AN EXEMPTION THEREFROM, UNDER SAID ACT AND THE RULES AND REGULATIONS
THEREUNDER.
SEARCH CAPITAL GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
STOCK PURCHASE WARRANT
This is to certify that, for value received, ____________, or
registered assigns, ("Holder") is entitled to purchase, on or before
____________, 2007, at 5:00 p.m., in the Central Time Zone, __________ shares
of $.01 par value Common Stock ("Stock") of Search Capital Group, Inc. (the
"Company"), at $______ per share, upon presentation of this Warrant and payment
of the purchase price at the office of Search Capital Group, Inc.; SUBJECT,
HOWEVER, TO THE STATEMENT OF RIGHTS OF WARRANTHOLDERS PRINTED ON THE REVERSE
HEREOF, and to which the Holder assents by acceptance of this Warrant.
This Warrant is transferable on the same manner and with the same
effect as in the case of a negotiable instrument payable to a specific person,
subject to compliance with applicable securities laws. By accepting this
Warrant, the Holder hereof agrees that, if and when this Warrant is properly
assigned in blank, the Company may treat any bearer as absolute owner for all
purposes, notwithstanding any notice to the contrary.
This Warrant shall be void unless the subscription right herein
granted is exercised on or before 5:00 p.m., ___________, 2007.
Attest: Search Capital Group, Inc.
By:
- ------------------------- ---------------------------
Secretary George C. Evans
Chairman, President and CEO
CORPORATE SEAL
<PAGE> 2
STATEMENT OF RIGHTS OF WARRANT HOLDERS
1. Reservation of stock. Company covenants that, while this
Warrant is exercisable, it will reserve from its authorized and unissued Stock
a sufficient number of shares to provide for the delivery of Stock pursuant to
the exercise of this and all other similar warrants.
2. Stockholder's rights. Until the valid exercise of this
warrant, the Holder hereof shall not be entitled to any rights of a
stockholder; but immediately upon the exercise of this Warrant and upon payment
as provided herein, the Holder hereof shall be deemed a record holder of the
Stock.
3. Divisibility of Warrant. This Warrant may be divided into
Warrants of one share or multiples thereof, upon surrender at the office of the
Company.
4. Fractional Warrants. Upon the exercise of this Warrant, no
fractions of shares shall be issues; but fractional Warrants will be delivered,
entitling the Holder, upon surrender with other fractional Warrants aggregating
one or more full shares, to purchase such full shares.
5. Payment of Taxes. Search shall pay all expenses and any and
all United States federal, state and local taxes and other charges (and all
foreign taxes and other charges imposed by any jurisdiction otherwise than by
reason of a connection between the Holder and such jurisdiction) that may be
payable in connection with the preparation, issuance and delivery of Warrants
and Stock or other Certificates issuable upon exercise hereof, except that
Search shall not be required to pay any tax based upon income and delivery of
Warrants or Certificates for shares of Stock in a name other than that of the
Holder of this Warrant.
6. Transfer. This Warrant is transferable in the same manner and
with the same effect as in the case of a negotiable instrument payable to a
specific person, SUBJECT TO COMPLIANCE WITH APPLICABLE SECURITIES LAWS. Upon
surrender of this Warrant to Company at the Company's office or agency with the
assignment form annexed hereto as Exhibit 1 ("Assignment Form") duly executed,
funds sufficient to pay any transfer tax, and a legal opinion reasonably
satisfactory to Company that such transfer will not violate any applicable
securities laws, Company shall, without charge, promptly execute and deliver a
new Warrant in the name of the assignee named in such Assignment Form and this
Warrant shall promptly be canceled; provided, however, that upon any such
assignment there shall be filed with the Company the address of the registered
owner of Warrants represented by each new Warrant delivered. If and when this
Warrant is assigned in blank, the Company shall treat the bearer as the
absolute owner of the Warrants represented hereby for all purposes and the
Company shall not be affected by any notice to the contrary. A Warrant, if
properly assigned, may be exercised by an assignee without having a new Warrant
issued.
7. Exercise of the Purchase Rights. The purchase rights set
forth in this Warrant are exercisable by the Holder hereof, in whole or in
part, at any time, or from time to time, prior to the expiration of the term
set forth on the face hereof, by tendering to the Company at its office a
notice of exercise in the form annexed hereto as Exhibit 2 ("Notice of
Exercise"), duly completed and executed. Promptly upon receipt of the Notice
of Exercise and the payment of the purchase price in accordance with the terms
set forth below, and in no event later than twenty-one (21) days thereafter,
the Company shall issue to the Holder a certificate for the number of shares
Stock purchased and shall execute the Notice of Exercise indicating the number
of shares which remain subject to future purchase, if any. The Exercise Price
may be paid at the Holder's election either (i) by cash or check, or (ii) by
surrender of Warrants ("Net Issuance") as determined below. If the Holder
elects the Net Issuance method, the Company will issue Stock in accordance with
the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Stock to be issued to the Holder.
Y = the number of shares of Stock requested to be exercised under
this Warrant.
A = the fair market value of one (1) share of stock.
B = the Exercise Price of one (1) share of stock.
As used herein, current fair market value of Stock shall mean with
respect to each share of Stock:
(i) if traded on a securities exchange, the fair market value
shall be deemed to be the average of the closing prices over a twenty-one (21)
day period ending three days before the day the current fair market value of
the securities is being determined; or
(ii) if actively traded over-the-counter, the fair market value
shall be deemed to be the average of the closing bid and asked prices quoted on
the NASDAQ system (or similar system) over the twenty-one (21) day period
ending three days before the day the current fair market value of the
securities is being determined;
(iii) if at any time the Stock is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
current fair market value of Stock shall be the highest price per share which
was paid by a willing and informed buyer under no compulsion to purchase to a
willing and informed seller under no compulsion to sell as such purchase was
recorded by the "market maker" of the Stock.
8. Adjustment of Shares.
(a) If at any time while this Warrant is outstanding, there shall
be any increase or decrease in the number of issued and outstanding shares of
stock through the declaration of a stock dividend or through any
recapitalization resulting in a stock split-up, combination or exchange of
shares, then, and in such event, appropriate adjustment shall be made in the
number of shares and the exercise price per share thereof then subject to this
Warrant, so that the same proportion of the Company's issued and outstanding
shares shall remain subject to purchase at the same aggregate exercise price.
(b) The Board may change the terms of this Warrant with respect to
the exercise price or the number of shares subject to this Warrant, or both,
when, in the Board's sole discretion, such adjustments become appropriate by
reason of any corporate reorganization transaction.
(c) Except as otherwise expressly provided herein, the issuance by
the Company of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection
with a direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to the number of or
exercise price of shares then subject to this Warrant.
9. Maintenance of Office or Agency. The Company shall at all
times maintain an office or agency in the United States, where this Warrant may
be presented or surrendered for subdivision, combination, registration of
transfer or exchange and where notices and demands may be served upon the
Company in respect of the Warrants. The registrar and transfer agent for this
Warrant shall perform its duties as such hereunder promptly and in good faith.
Such office or agency shall initially be located at 700 N. Pearl Street, Suite
400, L.B. 401, Dallas Texas 75201. The Company shall give the Holder prior
written notice of any change in the address of such office or agency.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY, AND
INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT
GIVING EFFECT TO THE LAWS THEREOF RELATING TO CHOICE OF LAW.
11. Captions. The captions of the sections and paragraphs of this
Warrant have been inserted for convenience only and shall have not substantive
effect.
12. Notices. Any notice, request, demand, consent, or other
communication pursuant to this Warrant shall be given when received and shall
be given in writing, and delivered in person against receipt therefor, or sent
by certified mail, postage as follows:
(a) If to the Company, at: Search Capital Group, Inc., Plaza of
the Americas, 700 N. Pearl Street, Suite 400, L.B. 401, Dallas, TX 75201,
Attn.: Warrant Transfer Agent, or at such other address as it shall hereafter
furnish in writing to the Holder, or
(b) If to the Holder, the address of the Holder as it appears on
the Warrant ledger of the Company.
IN WITNESS WHEREOF, Search Capital Group, Inc. has caused this Warrant
to be signed in its name by its President and its corporate seal to be
imprinted hereon and attested by its Secretary or Assistant Secretary.
Dated: As of the day of , 199 .
------------ --------------------- ----
ATTEST: SEARCH CAPITAL GROUP, INC.
By:
- -------------------------------- ---------------------------
Secretary Name: George C. Evans
Title: Chairman, President and CEO
CORPORATE SEAL
<PAGE> 3
EXHIBIT 1
PURCHASE FORM
(TO BE EXECUTED UPON FULL OR PARTIAL EXERCISE OF WARRANT)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Number 9710__ to purchase ________ shares of $.01
par value Common Stock ("Shares") and herewith tenders payment for such Shares
to the order of Search Capital Group, Inc. (a) in the amount of $__________
____ for __________ shares (b) or the requisite number of Shares as required by
Section 7 of the Statement of Rights of Warrant Holder contained on the reverse
side of the Warrant Number 9710___ for _________ Shares. The undersigned
requests that a Certificate for such Shares be registered in the name of
Holder, whose address is ______________________________________________. If
said number of Shares is less than all of the Shares purchasable under this
Warrant, the undersigned requests that a new Warrant representing the remaining
balance of the shares be issued to and registered in the name of the
undersigned.
Dated: .
-------------------------
Signature:
----------------------------
(Signature must conform in
all respects to name of
Holder as specified on the
face of this Warrant Number
9710___)
<PAGE> 4
EXHIBIT 2
ASSIGNMENT FORM
(TO BE EXECUTED UPON FULL OR PARTIAL SALE OR ASSIGNMENT OF
WARRANT NUMBER 9710____)
FOR VALUE RECEIVED, _____________________ hereby sells, assigns and
transfers unto:
Name
----------------------------------------------------------------------------
(Please type or print in block letters)
Address
-------------------------------------------------------------------------
the right to purchase ___________ Shares Search Capital Group, Inc. Stock
represented by Warrant Number 9710____ to which this Assignment Form is
attached as to which such right is exercisable and does hereby irrevocably
constitute and appoint ___________________________________, attorney, to
transfer the same on the books of Search Capital Group, Inc., with the full
power of substitution in the premises.
Dated: .
-------------------------
Signature:
----------------------------
(Signature must conform in
all respects to name of
Holder as specified on the
face of this Warrant Number
9710___)
<PAGE> 1
EXHIBIT 10.12
ORIGINAL
--------
AGREEMENT
This agreement ("Agreement") dated as of May 5, 1995 is entered into
by and between Search Capital Group, Inc. ("Search"), and Sam B. Myers, Jr.
("Myers").
RECITALS
WHEREAS, Myers is presently Chairman of the Board of Search and has
served Search as a director and officer, at various times since 1985; and
WHEREAS, Search has requested that Myers resign as a member of the
Board of Directors and as an officer of Search Capital Group, Inc., and any of
its subsidiaries; and
WHEREAS, Myers agrees to do so; and
WHEREAS, Search and Myers have reached certain understandings to
facilitate a smooth transition which they wish to memorialize;
NOW, THEREFORE, for the mutual promises recited herein and Ten Dollars
($10.00) and other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged by the parties hereto, and with the intent to be
legally bound hereby, the parties hereto agree as follows:
1. RESIGNATION. Upon execution hereof, Myers shall tender his
resignation as a member of the Board of Directors and as an officer of
Search Capital Group, Inc., and any of its subsidiaries.
2. CONSULTING AGREEMENT.
a. SERVICES. For a period of three months beginning May 15,
1995, Myers agrees to provide consulting services on such
matters as may be referred to him from time to time by the
Chief Executive Officer of Search and as are within Myers'
areas of expertise. Myers shall devote such time, energy, and
attention as is necessary to perform and discharge his duties
and responsibilities hereunder in an efficient, trustworthy
and businesslike manner. Such duties shall be rendered in
Dallas, Texas. Myers will not be required to devote such time
as would unreasonably interfere with Myers' conduct of his
investments and other business interests.
b. COMPENSATION. As compensation, Myers shall be paid a monthly
salary of $12,500, and receive title to the four year old
company car he presently possesses, which the parties agree
has a value of $11,725.
<PAGE> 2
3. MYERS' COOPERATION IN SUITS. Myers shall continue to cooperate with
and assist Search, to the extent that Myers' time reasonably permits,
in the defense of the O'Shea Class Action Suit or any other suit
brought against Search that relates to the period of time when Myers
was an officer, director, shareholder and or employee of Search.
4. INDEMNIFICATION.
a. Search shall indemnify Myers in the event he was or is a party
or is threatened to be made a party to any threatened,
pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (other than
an action by or in the right of Search), by reason of the fact
that he is or was a director, officer, employee, or agent of
Search or he is or was serving at the request of Search as a
director, officer, employee, or agent of a wholly owned
subsidiary corporation, partnership, joint venture, trust, or
other enterprise, against expenses (including reasonable
attorneys' fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in
connection with such action, suit, or proceeding if he acted
in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of Search and, with
respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment,
order, settlement, or conviction, or upon a plea of nolo
contendere or its equivalent, shall not of itself create a
presumption that Myers did not act in good faith and in a
manner he reasonably believed to be in or not opposed to the
best interests of Search and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that
his conduct was unlawful.
b. Search shall indemnify Myers, in the event that he was or is a
party or is threatened to be made a party to any threatened,
pending, or completed action or suit by or in the right of
Search to procure a judgment in its favor by reason of the
fact that he is or was a director or officer of Search or he
is or was serving at the request of Search as a director,
officer, partner, or trustee of, or in any similar managerial
or fiduciary position of, or as an employee or agent of, a
wholly owned subsidiary corporation, partnership, joint
venture, trust, association, or other enterprise against
expenses (including reasonable attorneys' fees) actually and
reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed
to the best interests of Search; but no such indemnification
shall be made in respect of any claim, issue, or matter as to
which Myers has been adjudged to be liable for gross
negligence or gross misconduct in the performance of his duty
to Search.
c. To the extent that Myers has been successful on the merits in
defense of any action, suit, or proceeding referred to in
Section 4.a or 4.b in defense of any claim, issue, or matter
therein, he shall be indemnified against expenses (including
reasonable attorneys' fees) actually and reasonably incurred
by him in connection therewith.
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<PAGE> 3
d. Any indemnification under Section 4.a or 4.b (unless ordered
by a court) shall be made by Search only as authorized in the
specific case upon a determination that indemnification of
Myers is proper in the circumstances because he has met the
applicable standard of conduct set forth in such subsection.
Such determination shall be made by the Board of Directors by
a majority vote of a quorum consisting of directors who were
not parties to such action, suit, or proceeding, or, if such a
quorum is not obtainable or even if obtainable a quorum of
disinterested directors so directs, by independent legal
counsel in a written opinion or by the shareholders.
e. Expenses (including reasonable attorneys' fees) incurred in
defending a civil or criminal action, suit, or proceeding
shall be paid by Search in advance of the final disposition of
such action, suit, or proceeding as authorized in Section 4.d
upon receipt of an undertaking by or on behalf of Myers to
repay such amount unless it is ultimately determined that he
is entitled to be indemnified by Search against such expenses
pursuant to this Section 4 or otherwise.
f. The indemnification provided by this Section 4 shall not be
deemed exclusive of any other rights to which Myers may be
entitled under the certificate of incorporation of Search, any
bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise, and any procedure provided for by any
of the foregoing, both as to action in his official capacity
and as to action in another capacity while holding such
office, and shall continue in the event this Agreement is
terminated and shall inure to the benefit of Myers' heirs,
executors, and administrators.
g. Without limitation of the foregoing, Search shall tender a
defense in the current O'Shea Class Action Suit. Myers will
prior to the time of Search undertaking Myers' defense execute
an appropriate engagement letter with Akin, Gump, Strauss,
Hauer & Feld, L.L.P.
5. ESOP SHARES - PUT OPTION
Myers is entitled to receive approximately 111,218 shares of Search
Capital Group, Inc. $.01 par value common stock ("Shares") from the Employee
Stock Ownership Plan terminated in August 1994. Upon distribution to Myers or
to a rollover Individual Retirement Account or other plan qualified under
Section 401 (a) of the Internal Revenue Code of 1986 as designated by Myers,
Search grants Myers the right (the "Put Option") to cause Search to purchase
from Myers all, but not less than all, of the Shares unsold upon the following
terms:
a. PURCHASE PRICE. The purchase price of the Shares shall be Two
Dollars and Twenty-Five Cents ($2.25) per share.
b. TIME FOR EXERCISE. Myers shall notify Search at least thirty
(30) days prior to the expiration of twenty four months
following the execution of this Agreement that Myers intends
to exercise the Put Option. If so exercised, closing shall
take place within five (5) business days following the
expiration of such twelve month period.
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<PAGE> 4
c. CLOSING. At the closing Myers, or the rollover Individual
Retirement Account, as the case may be, shall deliver to
Search stock certificates duly endorsed representing 111,218
shares of the common stock and Search shall deliver to Myers a
cashiers check in the amount of $250,240.50.
d. ANTI-DILUTION PROVISIONS. In the event that Search issues
additional shares of its common stock as a stock dividend or
as part of a stock split, or if Search reduces the number of
its issued and outstanding shares of common stock as a result
of a reverse stock split, the number of the remaining Shares
subject to the right of first refusal and the Put Option, and
the purchase prices herein specified shall all be
appropriately adjusted.
6. RELEASES
a. BY MYERS. Myers RELEASES ALL OFFICERS, DIRECTORS, AND
EMPLOYEES OF SEARCH FROM ANY AND ALL LIABILITIES AND CAUSES OF
ACTION HE MIGHT HAVE AGAINST ANY OF THEM, WHICH LIABILITIES
AROSE OR MAY ARISE FROM AND ARE DIRECTLY OR INDIRECTLY RELATED
TO THE PERFORMANCE OF THEIR DUTIES FOR SEARCH, OTHER THAN THE
OBLIGATIONS CONTAINED IN THIS AGREEMENT.
b. BY SEARCH. Search RELEASES MYERS FROM ANY AND ALL LIABILITIES
AND CAUSES OF ACTION SEARCH MIGHT HAVE AGAINST HIM, WHICH
LIABILITIES AROSE OR MAY ARISE FROM AND ARE DIRECTLY OR
INDIRECTLY RELATED TO THE PERFORMANCE OF HIS DUTIES AS
SHAREHOLDER, OFFICER, DIRECTOR, AND OR AN EMPLOYEE OF SEARCH,
OTHER THAN THE OBLIGATIONS CONTAINED IN THIS AGREEMENT.
7. SETTLEMENT OF SUITS
a. BY MYERS. To the extent Myers is named as an individual
defendant in any claim or cause of action, including the
O'Shea case brought against Myers individually and against
Search, Myers may settle such matters on his own behalf
without the concurrence of Search, but shall not attempt to
bind Search in any manner. Myers shall use reasonable effort
in any such settlement to inform Search of the terms and
conditions of such settlement agreement and to structure any
settlement agreement in a way or manner that does not
adversely affect the interests of Search.
b. BY SEARCH. To the extent Search is named as a defendant in
any claim or cause of action, including the O'Shea case,
brought against Myers and Search, Search may settle such
matters on its own behalf without the concurrence of Myers,
but shall not attempt to bind Myers in any manner. Search
shall use reasonable effort in any
4
<PAGE> 5
such settlement to inform Myers of the terms and conditions of
such settlement agreement and to structure any settlement
agreement in a way or manner that does not adversely affect
the interests of Myers.
c. JOINDER. If the settlement of any matter in which Myers and
Search are named as co-defendants requires the joinder and/or
consent of either of them, such joinder and/or consent shall
not be unreasonably withheld, conditioned, or delayed by
either of them.
8. DISPUTE OF SETTLEMENT TERMS
a. BY MYERS. Myers hereby agrees that as a co-defendant in any
suit in which he and Search are named that he will not bring
any claim or cause of action against Search in relation to the
terms and conditions of any settlement of such matters made by
Search.
b. BY SEARCH. Search hereby agrees that as a co-defendant in any
suit in which it and Myers are named that it will not bring
any claim or cause of action against Myers in relation to the
terms and conditions of any settlement of such matters made by
Myers.
9. MISCELLANEOUS PROVISIONS
a. PROFESSIONAL FEES. Search shall be responsible and pay for
the reasonable attorneys' fees and accountants' fees incurred
by each party hereto in relation to the negotiation and
consummation of this Agreement. Each party hereto shall be
responsible for its own professional fees in relation to the
interpretation, enforcement, or adjudication, if any, of this
Agreement.
b. REPRESENTATIONS AND WARRANTIES OF SEARCH. Search represents
and warrants that the execution, delivery, and performance of
this Agreement have been duly authorized by all necessary
corporate action and that this Agreement is a valid and
binding obligation of Search enforceable according to its
terms.
c. INDEMNITY BY SEARCH. Search agrees to indemnify, save, and
hold Myers harmless from and against costs, expenses, or
disbursements (including reasonable attorneys' fees),
liabilities, obligations, losses, damages, penalties, actions,
judgments, or suits of any kind or nature whatsoever INSOFAR
ONLY such relate to a breach or alleged breach of a
representation or warranty of Search under Section 9.b. On
any action for which indemnity is provided under the foregoing
sentence, Search agrees, if requested, to advance from time to
time attorneys' fees and costs incurred by Myers.
d. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties and
their respective heirs, legal representatives, successors, and
assigns.
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<PAGE> 6
e. FURTHER ASSURANCES. The parties hereto agree to cooperate
with each other and execute any and all documents and to do
any and all things necessary to effectuate this Agreement.
f. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE
GOVERNED UNDER THE LAWS OF THE STATE OF TEXAS AND VENUE FOR
ANY MATTER BROUGHT BY ONE PARTY AGAINST THE OTHER CONCERNING
THIS AGREEMENT SHALL BE A COURT OF COMPETENT JURISDICTION IN
DALLAS COUNTY, TEXAS.
g. INJUNCTIVE RELIEF. Because the parties hereto may not have an
adequate remedy at law, any of the parties hereto may apply
for and receive without objection from any of the other
parties' equitable relief including but not limited to
specific performance, temporary restraining order, or
permanent injunctions. Any of these remedies if elected shall
be in addition to any other remedies that the parties may have
at law or in equity and may be obtained concurrently with the
exercise of any other remedy available to any of the parties
at law or in equity.
h. AMENDMENTS, ETC. This Agreement may be amended, terminated,
or superseded only by an instrument signed by the party
against whom such amendment, termination, or supersession is
sought to be enforced.
i. ENTIRE AGREEMENT. This Agreement evidences the entire
agreement between the parties hereto with respect to the
subject matter hereof and supersedes any prior agreements or
undertakings with respect thereto.
j. NOTICES. All notices, requests, demands, and other
communications provided for or permitted hereunder shall be in
writing and shall be sent by mail, telex, telecopier, or hand
delivery as follows:
Search Capital Group, Inc. With a copy to (not constituting
700 N. Pearl Street notice):
Suite 400, L.B. 401
Dallas, Texas 75201-2809 Search Capital Group, Inc.
Attn: President 700 N. Pearl Street
214 965 6000 Suite 400, L.B. 401
214 965 6098 (fax) Dallas, Texas 75201-2809
Attn: General Counsel
214 965 6000
214 965 6098 (fax)
6
<PAGE> 7
Sam B. Myers, Jr. With a copy to (not constituting
4521 Belfort Place notice):
Dallas, Texas 75205
214 526 6996 Bryan W. Aldridge, Esq.
214 526 5531 (fax) 3220 W. Southlake Blvd., Suite A
Southlake, Texas 76092-8701
214 748 9242
214 748 9238 (fax)
k. SEVERABILITY. If any part of this Agreement is found invalid
or unenforceable, that part will be amended to achieve as
nearly as possible the same economic effect as the original
provision and the remainder of this Agreement will remain in
full force.
l. COUNTERPART. This agreement may be executed in dual
counterparts, each of which shall constitute an original.
IN WITNESS HEREOF, the parties have signed this Agreement as of the
date first written above.
SEARCH CAPITAL GROUP, INC.
By: /s/ George C. Evans
-------------------------------
Its: President and CEO
------------------------------
/s/ Sam B. Myers, Jr.
------------------------------
7
<PAGE> 1
EXHIBIT 10.14
May 16, 1996
Search Capital Group, Inc.
700 North Pearl Street
Suite 400
Dallas, Texas 75201
Attention: Mr. George C. Evans
Chairman, President and Chief Executive Officer
Dear Mr. Evans:
This letter is to confirm our understanding that Search Capital Group, Inc.
("Search" or the "Company") has retained Alex. Brown & Sons Incorporated
("Alex. Brown") to act as Search's financial advisor in the capacity, and
consistent with the terms, described herein:
I. Retainer Services
[ ] Market Reports. Alex. Brown provides periodic presentations and
reports to senior management and Boards of Directors on a variety
financial issues. These presentations are made at the
convenience of the client, but typically occur during regularly
scheduled board or executive committee meetings. With respect to
frequency, some topics lend themselves to monthly updates while
others should be addressed quarterly or semi-annually. I have
listed below a selection of topics:
o Merger & Acquisitions. This topic would include an
analysis of trends and implications in activity volume,
valuation levels, consideration structure, contract terms,
and acquiror profile. We attempt to answer the questions,
'how are deals getting done' and 'why are deals happening'
in the sub-prime auto finance area.
o Capital Markets. This topic covers an analysis of trends
in the equity and fixed income capital markets (both
public and private placements). Valuation levels, new
product introductions, volume of capital raising and
investor sentiment are examined in-depth. Clearly, this
topic is timely for Search and accordingly, an examination
and pro-forma analysis of your capital raising
alternatives would be a core part of our ongoing advice.
o Competitive Positioning. This topic is really more of an
intelligence report for senior management. This service
provides an analysis of your competitors' actions,
implications and resulting opportunities. Alex. Brown's
extensive information gathering network (whether from
equity research, trading or strategic advisory) can be
helpful in anticipating a competitors strategy or
<PAGE> 2
identifying a unique opportunity. This service usually
complements the M&A discussion as well.
o Regulatory. Finally, we also provide commentary regarding
the implications of recently enacted or proposed
regulatory changes.
[ ] Corporate Finance. As part of our ongoing advice, we would
examine and analyze Search's capital structure and advise on the
most optimal means of raising capital, if appropriate. We would
also be prepared to discuss, as necessary, the advisability and
implementation of reverse stock splits and dividend policies
(including DRIPs and Stock Purchase Plans). You mentioned that
the Board may consider a reverse stock split. Such issues as
liquidity, shareholder investment objectives, margin Implications
(i.e. the $5/share barrier), administrative costs, financial
reporting topics all factor into the decision. Given our
experience with growth companies, we have extensive experience in
identifying and weighing the pertinent issues of such an action.
[ ] Valuation. As a matter of prudence and fiduciary responsibility,
a Board of Directors should want to know the theoretical value of
their institution and why. For Search, given its recent
restructuring, the necessity of performing another valuation in
such a short time period is not great. However, as the Company
rebounds and grows, such an exercise will become increasingly
important in the context of stock option plans, mergers,
acquisition currency, capital raising and other strategic issues.
[ ] Defensive Posture. While this is not a near-term concern for
Search, as part of the retainer engagement for other clients, we
also review the institution's' anti-takeover defenses and suggest
certain measures to improve the client's ability to thwart an
unwanted approach. We also assist the client in organizing
itself such that it is more efficient and effective in addressing
an acquisition proposal (e.g. immediate response to the suitor,
informing the Board of Directors, managing key shareholders,
dealing with the news media, etc.).
[ ] Transaction Advice and Support. Often times, a client becomes
involved in a transaction (e.g. acquisition of a small company or
portfolio, etc.) which it is quite capable and willing to execute
on its own. However, as added assurance for senior management or
the Board of Directors, Alex. Brown provides "informal" advice
and support on such matters as target identification, valuation,
approach tactics, due diligence, transaction structure, tax
implications, negotiating strategy, investment community
management, and integration.
We define "informal" advice as those situations which do not
require the issuance of a transaction "fairness opinion". In
such situations, we are available on-site or as "back room"
advisors, whatever the client prefers. This service also may be
quite valuable to finance staffs when executing a particular type
of transaction for the first time, entering a new geographic
region, or dealing with an unfamiliar counter-party.
2
<PAGE> 3
In instances, however, where the transaction is large or complex,
we would agree on a separate fee consistent with customary
industry practice.
[ ] Officer and Director Brokerage Service. Alex. Brown has a
special group solely dedicated to serving corporate officers and
directors on restricted stock purchases/sales, option exercises,
margin accounts and asset hedging/diversification strategies. We
believe such a service further differentiates our ability to
advise and serve our clients.
[ ] Shareholder Relations. As part of this service, we will conduct a
review of Search's shareholder relations program, and as a result
of such review, we will suggest certain measures toward
increasing your knowledge of, and responsiveness to, the interest
and investment objectives of your shareholders. The aim of this
exercise Is to accurately identify and track the turnover in
Search's shareholding base and understand the ongoing investment
objectives of the shareholders (i.e. value, growth, takeover
speculation, market index, IRA, etc.).
[ ] Research and Market-Making. As we discussed, based on Search's
financial recovery and move to NASDAQ's NMS, we will be prepared
to introduce our equity research team to the Company and senior
management and enact market-making, if warranted. As part of our
research sponsorship, we also arrange mini-road shows as well as
one-on-one meetings with key institutional investors. Every year
we also conduct a seminar for specialty growth financial
companies. As I explained, however, I can not guarantee what
opinions our research team may have or express from time to time.
While I have tried to be thorough in the above description of services
provided, it certainly is not in an exhaustive survey, and accordingly, if
there is some other analysis or service you require, we would certainly try to
be accommodating. In the end, the breadth and depth of services extended is
determined solely by you.
II. Compensation
With respect to fees, Alex. Brown would assess a fee of $50,000 per annum.
This fee is payable in equal quarterly or semi-annual installments. We also
are reimbursed for reasonable out-of-pocket expenses (travel, documentation,
etc). We are also prepared to credit this retainer fee against any other
compensation which may arise from a transaction consummated during the course
of our engagement.
III. Indemnification
In consideration of our services as the Company's financial advisor hereunder,
the Company agrees to indemnify and hold harmless Alex. Brown and each of its
directors, officers, agents, employees and controlling persons (within the
meaning of the Securities Act of 1933, as amended) to the extent and as
provided in Addendum A attached hereto and incorporated herein by reference.
The provisions of this paragraph and Addendum A incorporated herein by
reference shall be effective as
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<PAGE> 4
of the date hereof, and shall continue in full force and effect until the
termination of this agreement and, thereafter, shall survive the termination of
Alex. Brown's engagement under this agreement and shall be binding upon any
successors of assigns of the Company.
IV. Term
This agreement shall have an initial term of one year. Thereafter, this
agreement shall renew automatically from year-to-year upon the same terms and
conditions set forth herein until terminated in writing by either Alex. Brown
or Search.
V. Other
Om retainers do not stipulate an "exclusivity" arrangement (i.e. Search is not
obligated to use Alex. Brown for any transaction). I know our competition
seeks exclusivity arrangements, but our experience has been that if we are
otherwise doing a good job, we will be rewarded eventually.
If the foregoing letter correctly sets forth the terms of Alex. Brown's
engagement, please sign and return to us the enclosed duplicate hereof.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ J. ADAM HITT
----------------------------------
J. Adam Hitt
Managing Director
Accepted and Agreed:
SEARCH CAPITAL GROUP, INC.
By: /s/ GEORGE C. EVANS
--------------------------------
George C. Evans
Chairman, President and CEO
4
<PAGE> 5
Addendum A
In connection with our engagement described in the foregoing letter
dated May 16, 1996 (the "Letter") to which this Addendum A is attached, the
Company (as defined in the Letter) agrees to indemnify and hold harmless Alex.
Brown & Sons Incorporated ("Brown") and each of its directors, officers,
agents, employees and controlling persons (within the meaning of the Securities
Act of 1933, as amended) from and against any losses, claims, damages or
liabilities (or actions or proceedings in respect thereto (collectively
"Liabilities") relating to or arising out of our engagement, and will reimburse
Brown and each other person indemnified hereunder for all reasonable legal and
other expenses as incurred in connection with investigating or defending any
such Liabilities whether or not in connection with pending or threatened
litigation in which Brown or any of its directors, officers, agents, employees
and controlling persons is a party; provided, however, that the Company shall,
in no event, be liable in any such case (except cases arising out of the use of
information provided by the Company) for Liabilities that a court of competent
jurisdiction shall have found in a final judgment to have arisen primarily from
any negligence, willful misconduct, breach of duty or business tort of Brown or
the party claiming a right to indemnification.
In case any proceeding shall be instituted involving any person in
respect of whom indemnity may be sought, such person (the "indemnified party")
shall promptly notify the Company and the Company, upon the request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the Company
may designate in such proceeding and shall pay, as they are incurred, the fees
and expenses of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense, except that the Company shall pay as incurred the fees and
expenses of counsel retained by the indemnified party in the event that (i) the
Company and the indemnified party shall have mutually agreed to the retention of
such counsel or, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the Company and the indemnified party and
representation of both parties by the same counsel would be inappropriate, in
the reasonable opinion of the indemnified party, due to actual or potential
differing interests between them.
The Company shall not be liable for any settlement of any action or
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Company agrees
to indemnify the indemnified parties to the extent set forth in this Addendum
A. In addition, the Company will not, without the prior written consent of
Brown, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not Brown or any
indemnified party is an actual or potential party to such claim, action, suit
or proceeding) unless such settlement, compromise or consent includes an
unconditional release of Brown and each other indemnified party hereunder from
all liability arising out of such claim, actions, suit or proceeding.
In the event a claim for indemnification under this Addendum A is
determined to be unenforceable by a final judgment of a court of competent
jurisdiction, then the Company shall contribute to the aggregate losses,
claims, damages or liabilities to which Brown or its officers,
5
<PAGE> 6
directors, agents, employees or controlling persons may be subject in such
amount as is appropriate to reflect the relative benefits received by each of
the company and the party seeking contribution on the one hand, and the
relative faults of the Company and the party seeking contribution on the other
as well as any other relevant equitable considerations.
This indemnification shall apply to the original engagement as set forth
in the Letter and any modification of the original engagement and the
indemnification provided herein shall survive termination of our engagement and
shall be binding upon any successors or assigns of the Company.
Acknowledged and Agreed:
SEARCH CAPITAL GROUP, INC.
By: /s/ GEORGE C. EVANS
--------------------------------
Date: 6/20/96
------------------------------
6
<PAGE> 7
ADDENDUM D
Pursuant to our engagement terms described in a letter dated May 16, 1996, this
addendum is to confirm our understanding that Alex. Brown has been retained by
Search to serve as its financial advisor with respect to the Company's
acquisition of MS Financial, Inc. ("MSFI").
In respect of the above, Search agrees to compensate Alex. Brown $175,000,
payable upon completion of the transaction. if a fairness opinion is required,
an additional fee of $50,000 will be payable upon receipt of the fairness
opinion. We also will be reimbursed for reasonable out-of-pocket expenses
incurred with respect to this engagement. These aforementioned fees will be
credited against any other retainer fees paid pursuant to our letter dated May
16, 1996.
In addition, this memo confirms that Addendum B and Addendum C (both dated
October 8, 1996) are null and void.
/s/ GEORGE C. EVANS /s/ J. ADAM HITT
- ---------------------------- -------------------------------------
George C. Evans J. Adam Hitt
Chairman, President and CEO Managing Director
7
<PAGE> 8
[ALEX. BROWN & SONS INCORPORATED LETTERHEAD]
ADDENDUM E
Pursuant to our engagement terms described in a letter dated May 16, 1996, this
addendum is to confirm our understanding that Alex. Brown has been retained by
Search to conduct a valuation of the securities offered by the Company in its
acquisition of certain assets and liabilities of Dealers Alliance Credit Corp.
in a transaction consummated on or about August 6, 1997.
In respect of the above, Search agrees to compensate Alex. Brown $75,000 payable
upon receipt of the valuation analysis. Reasonable out-of-pocket expenses will
be invoiced separately, including fees and disbursements of counsel, if
required. To the extent officers of Alex. Brown assist in, consult, or provide
testimony (whether in trial, deposition or arbitration) for any action, suit or
proceeding related to, or arising from, Alex. Brown's engagement hereunder,
the Company will pay Alex. Brown its customary per diem charges for the
services of such officers.
/s/ GEORGE C. EVANS /s/ J. ADAM HITT
- -------------------------- -------------------------
George C. Evans J. Adam Hitt
Chairman, President and CEO Managing Director
May 8, 1997
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT CONTRACT
GEORGE C. EVANS
AMENDMENT
This memorandum references the employment contract between Search Capital
Group, Inc. and George C. Evans dated January 20, 1995 and hereby incorporates
the following changes/additions:
Term of Contract:
The original three-year contract that was to run three years beginning January
20, 1995 through January 20, 1998 is hereby extended to run through January 20,
1999 and have a term of three years from January 20, 1996.
Current Salary:
$300,000 per year less appropriate deductions, (i.e., signing bonus) through
1998.
Non-Compete:
Should George C. Evans leave the employment of Search, and compete against
Search within the sub-prime automobile industry (Search Capital Group, Inc.'s
core business), all salaries, benefits and stock/warrants not fully vested
shall cease, provided that no mutually agreed upon agreement between Search
Capital Group, Inc. and George C. Evans overrides these conditions.
Dated this 20th day of March, 1996.
Executed By: Executive Committee:
/s/ GEORGE C. EVANS Abstaining
- ------------------------- ----------
George C. Evans George C. Evans, Chairman
/s/ JAMES F. LEARY
----------------------------------
James F. Leary
/s/ RICHARD F. BONINI
--------------------------
Richard F. Bonini
<PAGE> 1
EXHIBIT 10.18
[SEARCH CAPITAL GROUP INC. LETTERHEAD]
EMPLOYMENT CONTRACT
GEORGE C. EVANS
AMENDMENT
This memorandum references the employment contract between Search Capital
Group, Inc. and George C. Evans dated January 20, 1995 amended on March 20,
1996 and again amended as of this date, February 13th, 1997, by incorporating
the following changes and additions:
Term of Contract:
The original three-year contract that was to run three years beginning January
20, 1995 through January 20, 1998 was renewed on March 20, 1996 to run for
three years through January 20, 1999 and is amended this date, February 13,
1997, to run through January 20, 2000 and/or for a period of three years from
January 20, 1997.
Salary:
Current salary at $300,000 per year plus any adjustments to be made during the
interim by the board.
Non-Compete:
Remains the same as executed on March 20, 1996.
Should George C. Evans leave the employment of Search, and compete against
Search within the sub-prime automobile industry (Search Capital Group, Inc.'s
core business), all salaries, benefits and stock/warrants not fully vested
shall cease, provided that no mutually agreed upon agreement between Search
Capital Group, Inc. and George C. Evans overrides these conditions.
Dated this 13th day of February, 1997.
Executed By: Executive Committee Approval:
/s/ GEORGE C. EVANS Abstaining
- ------------------------- ----------
George C. Evans George C. Evans, Chairman
/s/ LUTHER H. HODGES, JR.
----------------------------------
Luther H. Hodges, Jr.
/s/ RICHARD F. BONINI
----------------------------------
Richard F. Bonini
<PAGE> 1
EXHIBIT 10.20
[INTER-ATLANTIC SECURITIES CORP. LETTERHEAD]
August 22, 1996
Search Capital Group, Inc.
700 North Pearl Street
Suite 400 L.B. 401
Dallas, Texas 75201-2809
Attention: James F. Leary
Vice Chairman - Finance
Gentlemen:
The purpose of this letter is to set forth the terms of the engagement by
Search Capital Group, Inc. (the "Company") of Inter-Atlantic Securities Corp.
("Inter-Atlantic"). This letter replaces the engagement letter dated May 13,
1996 in its entirety. The Company is considering offering subordinated debt
with warrants exercisable into the common stock of the Company or a similar
security (the "Subordinated Debt"). It is currently contemplated that the
Subordinated Debt will be sold directly to sophisticated investors in a private
offering (a "Private Placement").
The Company hereby engages Inter-Atlantic to act as its lead placement agent
for all Private Placements or public offerings of Subordinated Debt undertaken
by the Company during the term of Inter-Atlantic's engagement hereunder.
The term of this engagement shall extend until June 30, 1997 from the date of
execution of this letter, and may be extended by written mutual agreement of
the parties.
In undertaking this assignment, Inter-Atlantic will use its best efforts to
provide the following investment banking and financial advisory services to the
Company:
(a) Perform a due diligence investigation of the business,
operations, financial condition, forecasts, and prospects of the
Company to the extent needed;
(b) Advise the Company on market conditions and the likely reception
accorded a Private Placement of the Subordinated Debt;
(c) Assist the Company in preparing an offering memorandum and
marketing materials;
(d) Develop a marketing plan (including identifying and introducing
prospective investors) for use in the private placement market;
<PAGE> 2
(e) Assist in implementation of the marketing plan for the Private Placement;
(f) Assist in presentations to potential investors;
(g) Make recommendations to the Company during the course of the engagement
regarding any changes or modification of the financing program, if
necessary;
(h) Advise and assist the Company in the preparation and review of all legal
documentation related to the financing;
(i) Assist in the closing of the transaction; and
(j) Provide such other financial advisory and investment banking services as
may be mutually determined.
If during the term of Inter-Atlantic's engagement hereunder the Company
proposes to issue Subordinated Debt in the public market, the Company will
invite Inter-Atlantic to be engaged as its lead underwriter with respect to
such issuance on usual and customary terms and conditions, as shall be agreed
upon by the Company and Inter-Atlantic.
The Company hereby agrees to pay Inter-Atlantic, as compensation for its
services pursuant to any Private Placement, the following fees:
(a) Marketing Fee: The Company shall pay to Inter-Atlantic a Marketing Fee
in the amount of $60,000 after Inter-Atlantic has produced and
distributed an offering memorandum to potential investors. Any payments
made under this paragraph 4 (a) shall be credited against any fee which
becomes payable by the company to Inter-Atlantic.
(b) Private Placement Fee: The Company shall pay to Inter-Atlantic a
Private Placement Fee, which fee shall be payable on the date of the
closing. The Private Placement Fee shall be equal to 3.0% of the gross
par amount of Subordinated Debt sold. One half the Private Placement
Fee will be paid in cash and one half in Subordinated Debt, which will
be valued at par and issued on the same terms as provided to the
investors.
(c) Subsequent Events: If within 12 months of the termination of Inter-
Atlantic's engagement hereunder, the Company consummates a private
placement or public offering of Subordinated Debt involving an investor
(a) with whom negotiations or discussions had occurred and (b) who had
been identified by Inter-Atlantic during the term of Inter-Atlantic's
engagement hereunder, then in each such case Inter-Atlantic shall be
paid a Private Placement Fee, in an amount and at the time provided in
Section 4(b); provided that no fee shall be payable under this
Section 4(c) if Inter-Atlantic has previously been paid a Private
Placement Fee pursuant to Section 4(b) above following the closing of
the Private Placement or public offering of Subordinated Debt.
In addition to any fees that may be payable to Inter-Atlantic hereunder and
regardless of whether any proposed private placement is consummated, the
Company hereby agrees from time to time, upon request, to reimburse Inter-
Atlantic for all reasonable travel, legal and other out - of - pocket expenses
incurred in performing the services hereunder, including fees and disbursements
of Inter-Atlantic's counsel.
<PAGE> 3
Inter-Atlantic agrees to keep confidential all non - public information which
it receives or develops concerning the Company and to disclose that information
only with the consent of the Company or as required by law or legal process.
The Company agrees that except as required by applicable law, any advice to be
provided by Inter-Atlantic under this engagement letter shall not be disclosed
publicly or made available to third parties without the prior approval of
Inter-Atlantic, which approval shall not be unreasonably withheld.
The Company agrees that following the Private Placement Inter-Atlantic has the
right to place advertisements in financial and other newspapers and journals at
its own expense describing its services to the Company hereunder, provided that
Inter-Atlantic will submit a copy of any such advertisements to the Company for
its approval, which approval shall not be unreasonably withheld or delayed.
The Company and Inter-Atlantic acknowledge and agree that Wheat, First
Securities, Inc. ("Wheat First") is acting as co-agent for this transaction and
that that Search shall pay Wheat First a Private Placement Fee of 1.5% of the
gross par amount of Subordinated Debt sold.
It is understood that the confidentiality, compensation, and indemnification
provisions contained in this Agreement shall remain operative and in full force
and effect regardless of any termination of the Agreement.
The Company agrees to indemnify Inter-Atlantic in accordance with the
indemnification letter which is attached hereto as Exhibit A.
This engagement letter and the indemnification letter, attached as Exhibit A,
incorporate the entire understanding of the parties with respect to the subject
matter of this agreement and supersede all previous agreements should they
exist.
1. The Agreement may not be amended or modified except in writing and shall
be governed by and construed in accordance with the laws of the State of
New York.
2. This letter may be terminated on either party's written request with 30
day's notice, subject to the right of Inter-Atlantic to receive any fees
due and payable hereunder and receive reimbursement for its reasonable
out - of - pocket expenses incurred prior to such termination. Such a
fee obligation will not be incurred in the case of Inter-Atlantic's
termination for cause, in which case Inter-Atlantic may be terminated
immediately and shall only be entitled to receive reimbursement for its
reasonable out - of - pocket expenses. No termination, however, shall
affect the indemnification and contribution obligations of the Company
attached as Exhibit A.
Robert Lichten, Andrew Lerner, Peter Lichten and Arnold Welles of Inter-
Atlantic will work on this transaction.
Frederick S. Hammer, a Director of the Company, is affiliated with Inter-
Atlantic and will not participate in this engagement.
Please confirm the foregoing is in accordance with our understandings and
agreements by signing
<PAGE> 4
and returning to Inter-Atlantic the duplicate of this letter enclosed herewith.
Very truly yours,
INTER-ATLANTIC SECURITIES CORP.
By: /s/ ARNOLD WELLES
------------------------------
Name: Arnold Welles
Title: Principal
Accepted and Agreed to:
SEARCH CAPITAL GROUP, INC.
By: /s/JAMES F. LEARY
------------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE> 5
EXHIBIT A
INDEMNIFICATION
Recognizing that transactions of the type contemplated in this engagement
sometimes result in litigation and that Inter-Atlantic's role is advisory, the
Company agrees to indemnify Inter-Atlantic (including its affiliated entities
and its officers, directors, agents, employees and controlling persons) to the
full extent lawful against claims, losses and reasonable expenses as incurred
(including expense of investigation and preparation and reasonable fees and
disbursements of Inter-Atlantic's engagement, and if such indemnification were
for any reason not to be available, to contribute to the settlement, loss or
expenses involved in the proportion that the Company's interest bears to Inter-
Atlantic's interest in the transaction. However, such indemnification and
contribution shall not apply to any claim, loss or expense which arises from
Inter-Atlantic's bad faith or gross negligence in performing its services
hereunder.
The indemnity and contribution provided herein shall remain operative and in
full force and effect regardless of (i) any withdrawal, termination or
consummation of or failure to initiate or consummate any transaction referred
to herewith, (ii) any investigation made by or on behalf of any party hereto or
any person controlling (within the meaning of Section 15 of the Securities Act
of 1933, as amended, or Section 20 (a) of the Securities Exchange Act of 1934,
as amended) any party hereto or any other person entitled to indemnification or
contribution, or (iii) any termination or the completion or expiration of this
agreement or Inter-Atlantic's engagement as the Company's financial advisor and
(iv) whether or not Inter-Atlantic shall, or shall be called upon to, render
any formal or informal advise in the course of such engagement.
Very truly yours,
INTER-ATLANTIC SECURITIES CORP.
By: /s/ ARNOLD WELLES
------------------------------
Name: Arnold Welles
Title: Principal
Accepted and Agreed to:
SEARCH CAPITAL GROUP, INC.
By: /s/ JAMES F. LEARY
------------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE> 1
EXHIBIT 10.21
[INTER-ATLANTIC SECURITIES CORP. LETTERHEAD]
September 6, 1996
Search Capital Group, Inc.
700 North Pearl Street
Suite 400 L.B. 401
Dallas, Texas 75201-2809
Attention: James F. Leary
Vice Chairman - Finance
Gentlemen:
The purpose of this letter is to set forth the terms of the engagement by
Search Capital Group, Inc. (the "Company") of Inter-Atlantic Securities Corp.
("Inter-Atlantic"). We understand the Company seeks to raise approximately
$100 million in additional senior debt in the form of warehousing lines
("Senior Debt") provided by securities firms, which are defined for purposes of
this letter to be NASD registered firms or their affiliates ("Securities
Firms").
1. The Company hereby engages Inter-Atlantic to act as its exclusive agent
for raising Senior Debt from Securities Firms during the term of Inter-
Atlantic's engagement hereunder.
2. The term of this engagement shall extend until March 30, 1997 and may be
extended by written mutual agreement of the parties.
3. In undertaking this assignment, Inter-Atlantic will perform the
following services:
(a) Contact Securities Firms and provide information on the Company.
(b) Determine level of interest of Securities Firms.
(c) Introduce representatives of the Securities Firms to officers of
the Company.
(d) Assist during negotiations with the Securities Firms.
The Company hereby agrees to pay Inter - Atlantic, as compensation for its
services pursuant to raising Senior Debt, the following fee:
<PAGE> 2
Search Capital Group, Inc.
September 6, 1996
(a) Agency Fee of 37.5 basis points on the total amount of Senior
Debt commitments provided by Securities Firms contacted by Inter-
Atlantic. It is understood by all parties that the Agency Fee
will not be payable on Senior Debt provided by Securities Firms
contacted by the Company prior to Inter-Atlantic having contacted
them or by Securities Firms with whom Inter-Atlantic has had no
contact.
(b) Subsequent Events: If within 12 months of the termination of
Inter- Atlantic's engagement hereunder, the Company obtains
commitments from Securities Firms (a) with whom negotiations or
discussions had occurred and (b) who had been identified by Inter
- Atlantic during the term of Inter-Atlantic's engagement
hereunder, then in each such case Inter-Atlantic shall be paid an
Agency Fee, in an amount and at the time provided in Section
4(a); provided that no fee shall be payable under this Section
4(b) if Inter-Atlantic has previously been paid an Agency Fee
pursuant to Section 4(a)above following the closing of the Senior
Debt agreement.
4. In addition to any fees that may be payable to Inter - Atlantic
hereunder and regardless of whether any Senior Debt is arranged, the
Company hereby agrees from time to time, upon request, to reimburse
Inter - Atlantic for all reasonable travel, legal and other out - of -
pocket expenses incurred in performing the services hereunder.
5. Inter - Atlantic agrees to keep confidential all non - public
information which it receives or develops concerning the Company and to
disclose that information only with the consent of the Company or as
required by law or legal process.
6. The Company agrees that except as required by applicable law, any advice
to be provided by Inter-Atlantic under this engagement letter shall not
be disclosed publicly or made available to third parties without the
prior approval of Inter-Atlantic, which approval shall not be
unreasonably withheld.
It is understood that the confidentiality, compensation, and
indemnification provisions contained in this Agreement shall remain
operative and in full force and effect regardless of any termination of
the Agreement.
The Company agrees to indemnify Inter-Atlantic in accordance with the
indemnification letter which is attached hereto as Exhibit A.
<PAGE> 3
Search Capital Group, Inc.
September 6, 1996
The Agreement may not be amended or modified except in writing and shall
be governed by and construed in accordance with the laws of the State of
New York
7. This letter may be terminated on either party's written request with 30
day's notice, subject to the right of Inter-Atlantic to receive any fees
due and payable hereunder and receive reimbursement for its reasonable
out - of - pocket expenses incurred prior to such termination. Such a
fee obligation will not be incurred in the case of Inter-Atlantic's
termination for cause, in which case Inter-Atlantic may be terminated
immediately and shall only be entitled to receive reimbursement for its
reasonable out - of - pocket expenses. No termination, however, shall
affect the indemnification and contribution obligations of the Company
attached as Exhibit A.
Robert Lichten, Andrew Lerner, Peter Lichten and Arnold Welles of Inter-
Atlantic will work on this transaction.
Frederick S. Hammer, a Director of the Company, is affiliated with Inter-
Atlantic and will not participate in this engagement.
Please confirm the foregoing is in accordance with our understandings and
agreements by signing and returning to Inter-Atlantic the duplicate of this
letter enclosed herewith.
Very truly yours,
INTER - ATLANTIC SECURITIES CORP.
By:/s/ ARNOLD WELLES
----------------------------------
Name: Arnold Welles
Title: Principal
Accepted and Agreed to:
SEARCH CAPITAL GROUP, INC.
By:/s/ JAMES F. LEARY
-----------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE> 4
Search Capital Group, Inc.
September 6, 1996
EXHIBIT A
INDEMNIFICATION
Recognizing that transactions of the type contemplated in this engagement
sometimes result in litigation and that Inter-Atlantic's role is advisory, the
Company agrees to indemnify Inter-Atlantic (including its affiliated entities
and its officers, directors, agents, employees and controlling persons) to the
full extent lawful against claims, losses and reasonable expenses as incurred
(including expense of investigation and preparation and reasonable fees and
disbursements of Inter-Atlantic's engagement, and if such indemnification were
for any reason not to be available, to contribute to the settlement, loss or
expenses involved in the proportion that the Company's interest bears to Inter-
Atlantic's interest in the transaction. However, such indemnification and
contribution shall not apply to any claim, loss or expense which arises from
Inter-Atlantic's bad faith or gross negligence in performing its services
hereunder.
The indemnity and contribution provided herein shall remain operative and in
full force and effect regardless of (i) any withdrawal, termination or
consummation of or failure to initiate or consummate any transaction referred
to herewith, (ii) any investigation made by or on behalf of any party hereto or
any person controlling (within the meaning of Section 15 of the Securities Act
of 1933, as amended, or Section 20 (a) of the Securities Exchange Act of 1934,
as amended) any party hereto or any other person entitled to indemnification or
contribution, or (iii) any termination or the completion or expiration of this
agreement or Inter-Atlantic's engagement as the Company's financial advisor and
(iv) whether or not Inter-Atlantic shall, or shall be called upon to, render
any formal or informal advise in the course of such engagement.
Very truly yours,
INTER - ATLANTIC SECURITIES CORP.
By: /s/ ARNOLD WELLES
----------------------------------
Name: Arnold Welles
Title: Principal
Accepted and Agreed to:
SEARCH CAPITAL GROUP, INC.
By: /s/ JAMES F. LEARY
-----------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE> 1
EXHIBIT 23.3
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MS Financial, Inc.:
We consent to the use of our audit report dated February 24, 1997 on
the consolidated financial statements of MS Financial, Inc. and subsidiary as
of December 31, 1996 and 1995, and for each of the years in the three-year
period ended December 31, 1996 included herein and to the reference to our firm
under the headings "Experts" in the prospectus. Our report dated February 24,
1997, contains an explanatory paragraph that states that the Company's material
increases in delinquencies and losses on owned and serviced installment
contracts, substantial net loss and reduced availability of financing raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
/s/ KPMG PEAT MARWICK LLP
Jackson, Mississippi KPMG PEAT MARWICK LLP
June 25, 1997
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Search Financial Services Inc.
(F/K/A Search Capital Group, Inc.)
Dallas, Texas
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement (Form S-8) pertaining to the
Search Capital Group, Inc. 1994 Employee Stock Option Plan of our report dated
May 23, 1997, relating to the consolidated financial statements of Search
Financial Services Inc. (F/K/A Search Capital Group, Inc.) for the year ended
March 31, 1997, appearing in the Company's Form S-4 filed June 25, 1997.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Dallas, Texas
June 25, 1997
<PAGE> 2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Search Financial Services Inc.
(F/K/A Search Capital Group, Inc.)
Dallas, Texas
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement (Form S-3) of our report
dated May 23, 1997, relating to the consolidated financial statements of Search
Financial Services Inc. (F/K/A Search Capital Group, Inc.) for the year ended
March 31, 1997, appearing in the Company's Form S-4 filed June 25, 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Dallas, Texas
June 25, 1997
<PAGE> 3
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Search Financial Services Inc.
(F/K/A Search Capital Group, Inc.)
Dallas, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated May 23, 1997, relating to the
consolidated financial statements of Search Financial Services Inc. (F/K/A
Search Capital Group, Inc.) which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Dallas, Texas
June 25, 1997
<PAGE> 4
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Search Financial Services, Inc.
(F/K/A Search Capital Group, Inc.)
Dallas, Texas
We hereby consent to the incorporation by reference in the Search Financial
Services, Inc. (F/K/A Search Capital Group, Inc.) Prospectus constituting a
part of this Registration Statement (Form S-4 filed June 25, 1997), of our
report dated May 21, 1996, except for Note 7 which is as of May 24, 1996,
relating to the financial statements of Dealers Alliance Credit Corp.
/s/ BDO SEIDMAN, LLP
----------------------------------
BDO Seidman, LLP
Atlanta, Georgia
June 25, 1997
<PAGE> 1
EXHIBIT 10.2
SEARCH-MS FINANCIAL
ESCROW AGREEMENT
This Escrow Agreement, dated as of _______________,1997 (the "Escrow
Agreement"), is entered into by and among Search Capital Group, Inc., a
Delaware corporation ("Search"); and the undersigned holders of shares of the
common stock, $.001 par value, of MS Financial, Inc., MS Diversified
Corporation, a Mississippi corporation ("MSD"), MS Financial Services, Inc., a
Mississippi corporation and a wholly-owned subsidiary of MSD ("MSDSub") and
Golder Thoma Cressy Rauner Fund IV, L.P. (sometimes referred to as "GTCR IV"),
and U.S. Trust Company of Texas, N.A., a national bank ("Escrow Agent"). MSD,
MSDSub and GTCR IV are sometimes collectively referred to as the
"Stockholders".
W I T N E S S E T H:
WHEREAS, MS Financial, Inc. ("MS Financial"), Search and Search's
wholly owned subsidiary, Search Capital Acquisition Corp. ("Newco"), have
entered into an Agreement and Plan of Merger dated February 7, 1997 (as
amended, the "Merger Agreement"), to effect the Merger (as defined in the
Merger Agreement; capitalized terms used herein shall have the same definition
as in the Merger Agreement unless otherwise specifically indicated) of Newco
into MS Financial, which will result in MS Financial being controlled by Search
instead of by the Stockholders, and each outstanding share of MS Financial
Stock will be converted into the right to receive that number of shares of
Search Common Stock, $.01 par value per share ("Search Common Stock"),
specified in the Merger Agreement; and
WHEREAS, Stockholders and Search have entered into a Stockholders
Agreement dated February 7, 1997 (as amended, the "Stockholders Agreement"),
pursuant to which Stockholders and Search agreed to enter into this Escrow
Agreement; and
WHEREAS, Search has agreed to issue the Search Common Stock as an
integral part of the Merger to all of the stockholders of MS Financial,
including but not limited to, the Stockholders; and
WHEREAS, the Stockholders Agreement provides that portions of the
Search Common Stock to be issued as Merger Consideration to the Stockholders
are to be held in escrow pursuant to this Escrow Agreement in order to (i)
guaranty payment of indemnification obligations under the Stockholders
Agreement and (ii) reserve against the possibility that certain anticipated tax
refunds are not received by MS Financial or the Surviving Corporation; and
-1-
<PAGE> 1
EXHIBIT 99.1
FORM OF SEARCH PROXY
SEARCH CAPITAL GROUP, INC.
600 NORTH PEARL STREET, SUITE 2500
DALLAS, TEXAS 75201
SPECIAL MEETING OF STOCKHOLDERS - JULY 28, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints George C. Evans and James F. Leary or
either of them as proxies, each with full powers of substitution, and hereby
authorizes them to represent and to vote, as designated on the reverse side,
all shares of Common Stock, 12% Senior Convertible Preferred Stock and 9%/7%
Convertible Preferred Stock, of Search Capital Group, Inc. ("Search") held of
record by the undersigned on May 30, 1997, at the Special Meeting of
Stockholders of Search to be held on July 28, 1997, or any adjournment thereof.
This Proxy when properly executed and returned in a timely manner will
be voted at the Special Meeting and any adjournment thereof in the manner
described herein. If no contrary indication is made, the proxy will be voted
FOR Proposal 1 and in accordance with the judgment of the persons named as
proxies herein on any other matters that may properly come before the Special
Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE
[Reverse Side]
Please mark
[X] votes as in
this example.
The Board of Directors unanimously recommends that you vote FOR Proposal 1:
1. Proposal to approve and adopt the Agreement and Plan of Merger and the
transactions contemplated thereby, as described in the accompanying
Joint Proxy Statement/Prospectus.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In accordance with their judgment, the proxies are authorized to vote
upon such other matters as may properly come before the Special Meeting
or any adjournment hereof.
[_] MARK HERE FOR ADDRESS CHANGE
AND NOTE AT LEFT
This proxy must be signed exactly as your name appears hereon. When shares are
held by joint tenants, both should sign. Attorneys, executors, administrators,
trustees and guardians should indicate their capacities. If the signer is a
corporation, please print full corporate name and indicate capacity of duly
authorized officer executing on behalf of the corporation. If the signer is a
partnership, please print full partnership name and indicate capacity of duly
authorized person executing on behalf of the partnership.
Signature:__________________________ Date:________
Signature:__________________________ Date:________
<PAGE> 1
EXHIBIT 99.2
FORM OF MSF PROXY
MS FINANCIAL, INC.
715 S. PEAR ORCHARD ROAD, SUITE 300
RIDGELAND, MISSISSIPPI 39157
SPECIAL MEETING OF STOCKHOLDERS - JULY 28, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Vann R. Martin and R. Dale Miller
or either of them as proxies, each with full powers of substitution,
and hereby authorizes them to represent and to vote, as designated on the
reverse side, all shares of Common Stock, $0.001 par value, of MS Financial,
Inc. ("MSF") held of record by the undersigned on June 25, 1997, at the Special
Meeting of Stockholders of MSF to be held on July 28, 1997, or any adjournment
thereof.
This Proxy when properly executed and returned in a timely manner will
be voted at the Special Meeting and any adjournment thereof in the manner
described herein. If no contrary indication is made, the proxy will be voted
FOR Proposal 1 and in accordance with the judgment of the persons named as
proxies herein on any other matters that may properly come before the Special
Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE. CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE
[Reverse Side]
Please mark
[X] votes as in
this example.
The Board of Directors unanimously recommends that you vote FOR Proposal 1:
1. Proposal to approve and adopt the Agreement and Plan of Merger and the
transactions contemplated thereby, as described in the accompanying
Joint Proxy Statement/Prospectus.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In accordance with their judgment, the proxies are authorized to vote
upon such other matters as may properly come before the Special Meeting
or any adjournment hereof.
[_] MARK HERE FOR ADDRESS CHANGE
AND NOTE AT LEFT
This proxy must be signed exactly as your name appears hereon. When shares are
held by joint tenants, both should sign. Attorneys, executors, administrators,
trustees and guardians should indicate their capacities. If the signer is a
corporation, please print full corporate name and indicate capacity of duly
authorized officer executing on behalf of the corporation. If the signer is a
partnership, please print full partnership name and indicate capacity of duly
authorized person executing on behalf of the partnership.
Signature:__________________________ Date:________
Signature:__________________________ Date:________
<PAGE> 1
EXHIBIT 99.3
Search Capital Group, Inc.
700 North Pearl Street, Suite 400
Dallas, Texas 75201
I hereby consent to my being named as a director of Search Capital Group, Inc.
to be elected at the annual meeting of the stockholders of Search and to other
references to my name in the registration statement, on Form S-4, being filed
on behalf of Search Capital Group, Inc. in connection with its proposed
acquisition of MS Financial, Inc.
/s/ JAMES B. STUART JR. 5/7/97
- ----------------------------------- -------------------------
Signature Date
