<PAGE> 1
As filed with the Securities and Exchange Commission on December 4, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SEARCH FINANCIAL SERVICES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 6141 41-1356819
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification No.) Identification
Number)
600 NORTH PEARL STREET, SUITE 2500
DALLAS, TEXAS 75201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(214) 965-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ELLIS A. REGENBOGEN, ESQ.
EXECUTIVE VICE PRESIDENT
AND GENERAL COUNSEL
SEARCH FINANCIAL SERVICES INC.
600 NORTH PEARL STREET, SUITE 2500
DALLAS, TEXAS 75201
(214) 965-6000
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
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WITH A COPY TO:
DARYL B. ROBERTSON, ESQ.
JENKENS & GILCHRIST, A P.C.
1445 ROSS AVENUE, SUITE 3200
DALLAS, TEXAS 75202
(214) 855-4500
Approximate date of commencement of proposed sale of the securities to the
public:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVENESS OF THIS REGISTRATION STATEMENT.
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
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION FEE
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT (1) OFFERING PRICE (1) (1)
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share . . . . . . 10,024,368 $ 1.3158 $ 13,189,930 $ 3,996.95
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</TABLE>
(1) Pursuant to Rule 457(f), the registration fee has been calculated on the
basis of the market value of the 9%/7% Convertible Preferred Stock and the
book value of the 12% Senior Convertible Preferred Stock to be received by
the Registrant in the Reclassification or the Exchange Offer (as defined
herein), assuming that all 2,456,098 outstanding shares of the 9%/7%
Convertible Preferred Stock and all 49,994 outstanding shares of the 12%
Senior Convertible Preferred Stock are reclassified or exchanged into Common
Stock. Pursuant to Rule 457(c), the market value of the 9%/7% Convertible
Preferred Stock was based upon the average of the high and low sale prices
($5-1/8 and $5-1/8, respectively) reported by The Nasdaq National Market as
of November 19, 1997. The book value of the 12% Senior Convertible Preferred
Stock was $12.05 per share as of September 30, 1997, the date of the
Company's last reported balance sheet.
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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.
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<PAGE> 2
SEARCH FINANCIAL SERVICES INC.
FORM S-4
REGISTRATION STATEMENT
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
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FORM S-4 ITEM NUMBER AND CAPTION PROXY STATEMENT/
PROXY STATEMENT/PROSPECTUS CAPTION OR LOCATION
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page . . . . . . . . . Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . . Available Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information . . . . . . . Summary; Risk Factors; Pro Forma Financial
Information
4. Terms of the Transactions . . . . . . . . . Summary; Background, Purposes and Effects; The
Proxy Solicitation; The Exchange Offer; Description
of Capital Stocks; Comparison of Common Stock and
Preferred Stock; Certain Federal Income Tax
Consequences
5. Pro Forma Financial Information . . . . . . Capitalization; Pro Forma Financial Information
6. Material Contracts with Company Being *
Acquired . . . . . . . . . . . . . . . . .
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to *
be Underwriters . . . . . . . . . . . . . .
8. Interests of Named Experts and Counsel . . *
9. Disclosure of Commission Position on
Indemnification for Securities Act Indemnification of Directors and Officers
Liabilities . . . . . . . . . . . . . . . .
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants *
11. Incorporation of Certain Information by *
Reference . . . . . . . . . . . . . . . . .
12. Information with respect to S-2 or S-3 *
Registrants . . . . . . . . . . . . . . . .
13. Incorporation of Certain Information by *
Reference . . . . . . . . . . . . . . . . .
14. Information with Respect to Registrants Summary; Pro Forma Financial Information; Selected
Other Than S-2 or S-3 Registrants . . . . . Consolidated Financial Information; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Description of Search
Capital Stock; Principal Holders of Capital Stock;
Management; Business; Certain Relationships and
Transactions
</TABLE>
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<TABLE>
<S<C> <C> <C>
C. INFORMATION ABOUT COMPANY BEING ACQUIRED
15. Information with Respect to S-3 . . . . . .
*
16. Information with Respect to S-2 or S-3
Companies . . . . . . . . . . . . . . . . . *
17. Information with respect to Companies Other
Than S-2 or S-3 Companies . . . . . . . . . *
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited . . . . The Proxy Solicitation; Management
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer . . . . . . . . . . . The Exchange Offer; Management
</TABLE>
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*Omitted since the answer is negative or the Item is not applicable.
<PAGE> 4
SEARCH FINANCIAL SERVICES INC.
600 North Pearl Street, Suite 2500
Dallas, Texas 75201
(214) 965-6000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ___________________________ ____, 1998
Notice is hereby given that a Special Meeting of Stockholders of
Search Financial Services Inc., a Delaware corporation (the"Company"), will be
held on ________________, 1998, at the offices of the Company located at 600 N.
Pearl Street, Dallas, Texas 75201, at 10:00 a.m., (local time) for the purpose
of considering and voting upon each of the following proposals (the
"Proposals"):
(1) Approval of an amendment (the "9%/7% Preferred Stock
Amendment") to the Company's Restated Certificate of
Incorporation, as amended (the "Charter"), providing for the
reclassification and conversion (the "9%/7% Reclassification")
of each outstanding share of 9%/7% Convertible Preferred
Stock, $0.01 par value per share (the "9%/7% Preferred
Stock"), of the Company into four shares of the Company's
Common Stock, $0.01 par value per share (the "Common Stock");
(2) Approval of an amendment (the "12% Preferred Stock Amendment")
to the Charter providing for the reclassification and
conversion (the "12% Reclassification") of each outstanding
share of 12% Senior Convertible Preferred Stock, $0.01 par
value per share (the "12% Preferred Stock"), of the Company
into four shares of Common Stock;
(3) Approval of the issuance of shares of Common Stock pursuant to
the Company's offer to exchange (the "Exchange Offer"), upon
the terms and subject to the conditions set forth in the
enclosed Proxy Statement/Prospectus, each outstanding share of
9%/7% Preferred Stock and 12% Preferred Stock (collectively,
the "Preferred Stock") for four shares of Common Stock; and
(4) Transaction of such other business as properly may come before
the Special Meeting or any adjournment or postponement
thereof.
Approval of Proposal 3 by the stockholders is required by the rules of
The Nasdaq National Market as a condition to consummation of the Exchange
Offer. Failure to obtain stockholder approval for such issuance would prevent
the consummation of the Exchange Offer.
The close of business on______________________________, 1997 has been
fixed as the record date for the determination of the stockholders entitled to
notice of and to vote at the Special Meeting and any adjournment or
postponement thereof.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING
REGARDLESS OF THE NUMBER OF SHARES YOU HOLD. WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING IN PERSON, PLEASE COMPLETE, SIGN, DATE AND MAIL THE ENCLOSED PROXY
CARD AND RETURN IT IN THE ENCLOSED PRE-PAID ENVELOPE AS SOON AS POSSIBLE.
By order of the Board of Directors,
Ellis A. Regenbogen
Secretary
Dallas, Texas
, 1997
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YOUR VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR PROXY
<PAGE> 5
PROXY STATEMENT/PROSPECTUS
OF
SEARCH FINANCIAL SERVICES INC.
RECLASSIFICATIONS OF EACH SHARE OF PREFERRED STOCK
INTO FOUR SHARES OF COMMON STOCK
OFFER TO EXCHANGE FOUR SHARES OF COMMON STOCK
FOR EACH SHARE OF PREFERRED STOCK
This Proxy Statement/Prospectus is being furnished to the holders of
the Common Stock, par value $0.01 per share (the "Common Stock"), the 9%/7%
Convertible Preferred Stock, par value $0.01 per share (the "9%/7% Preferred
Stock"), and the 12% Senior Convertible Preferred Stock, par value $0.01 per
share (the "12% Preferred Stock"), of Search Financial Services Inc., a
Delaware corporation (the "Company"), in connection with the solicitation of
proxies by and on behalf of the Board of Directors of the Company for use at
the special meeting of stockholders (the "Special Meeting" ) of the Company, or
at any adjournments or postponements thereof, for the purposes set forth
herein. The Special Meeting will be held at 10:00 a.m., local time, on
______________ , 1998 at the Company's offices located at 600 North Pearl
Street, Dallas, Texas 75201. The Company's telephone number is (214) 965-6000.
This Proxy Statement/Prospectus and the enclosed form of proxy are first being
mailed to stockholders of the Company on or about ___________, 1997.
At the Special Meeting, the Company's stockholders will be asked to
consider two amendments (the "Preferred Stock Amendments") to the Company's
Restated Certificate of Incorporation, as amended (the "Charter"). One of the
Preferred Stock Amendments would add provisions to the Charter that would, upon
the filing of that Preferred Stock Amendment with the Secretary of State of the
State of Delaware, automatically reclassify and convert each share of 9%/7%
Preferred Stock into four shares of Common Stock (the "9%/7%
Reclassification"), and the other Preferred Stock Amendment would add
provisions to the Charter that would , upon the filing of that Preferred Stock
Amendment with the Secretary of State of Delaware, automatically reclassify and
convert each share of 12% Preferred Stock into four shares of Common Stock (the
"12% Reclassification" and, together with the 9%/7% Reclassification, the
"Reclassifications").
This Proxy Statement/Prospectus also constitutes an offer to exchange,
upon the terms and subject to the conditions set forth in this Proxy
Statement/Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal" which, together with this Proxy Statement/Prospectus, constitute
the "Exchange Offer"), four shares of Common Stock for each outstanding share
of 9%/7% Preferred Stock and 12% Preferred Stock (the "Preferred Stock"). At
the Special Meeting, the Company's stockholders will also be asked to consider
a proposal to approve the issuance of shares of Common Stock pursuant to the
Exchange Offer (the "Exchange Offer Proposal") as required by the rules of The
Nasdaq National Market. If both of the Preferred Stock Amendments are approved
and become effective, the Exchange Offer will not be consummated because all
outstanding shares of Preferred Stock will be automatically converted to Common
Stock as a result of the Reclassifications.
The Exchange Offer is conditioned upon, among other things, the
Exchange Offer Proposal being approved at the Special Meeting and the
conversion into Common Stock of at least 50% of the outstanding shares of
Preferred Stock pursuant to the Exchange Offer and any Reclassification. See
"The Exchange Offer--Conditions to the Exchange Offer." The Exchange Offer will
expire at 5:00 p.m., Dallas, Texas time, on Friday, __________, 1998 or, if
extended, the latest date and time to which the Exchange Offer has been
extended (the "Expiration Date"). Tendered shares of Preferred Stock may be
withdrawn at any time prior to the Expiration Date.
EACH OF THE PREFERRED STOCK AMENDMENTS WILL BE VOTED ON SEPARATELY,
AND ONE PREFERRED STOCK AMENDMENT MAY BE APPROVED AND EFFECTED WHILE THE OTHER
IS NOT APPROVED. HOLDERS OF PREFERRED STOCK MAY VOTE FOR THE PREFERRED STOCK
AMENDMENTS AND THE EXCHANGE OFFER PROPOSAL (COLLECTIVELY, THE "PROPOSALS")
REGARDLESS OF WHETHER THEY TENDER THEIR SHARES OF PREFERRED STOCK PURSUANT TO
THE EXCHANGE OFFER. WHILE HOLDERS OF THE PREFERRED STOCK MAY TENDER THEIR
SHARES PURSUANT TO THE EXCHANGE OFFER REGARDLESS OF WHETHER THEY VOTE IN FAVOR
OF THE PROPOSALS, THE EXCHANGE OFFER IS CONDITIONED UPON THE EXCHANGE OFFER
PROPOSAL BEING APPROVED AT THE SPECIAL MEETING. THE COMPANY WILL NOT EFFECT
THE 12% RECLASSIFICATION UNLESS THE EXCHANGE OFFER OR THE 9%/7%
RECLASSIFICATION IS ALSO CONSUMMATED.
<PAGE> 6
The principal purposes of the Preferred Stock Amendments and the
Exchange Offer are to (i) decrease or eliminate the dividend burden on the
Company from the Preferred Stock and (ii) thereby enhance the Company's
financial flexibility, which the Company believes should enable it to obtain
additional capital and to take advantage of the consolidation occurring in the
non-prime automobile finance industry. The Company's finance business
requires it to raise significant amounts of capital. See "Background, Purposes
and Effects--Purposes." The Company will not pay any accrued and unpaid
dividends on shares of Preferred Stock exchanged into Common Stock pursuant to
the Reclassifications or the Exchange Offer.
Principal Financial Securities, Inc. ("Principal Financial") has
delivered to the Company's Board of Directors its written opinion concluding
that, as of the date of such opinion and based on the assumptions made,
procedures followed and matters considered as set forth in the opinion, the
Exchange Consideration (as defined herein) is fair to the holders of the
Preferred Stock, from a financial point of view. See "Background, Purposes and
Effects--Fairness Opinion" and Annex A for a description of the types of
analyses performed and the factors considered by Principal Financial and for a
description of the scope of, and limitations on, its fairness opinion.
Prudential Securities, Inc. (the "Financial Advisor") has provided its
financial analysis and recommendation to the Company's Board of Directors with
respect to the exchange ratio for the Reclassifications and the Exchange Offer.
See "Background, Purposes and Effects--Determinations of the Board of
Directors."
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR APPROVAL OF EACH OF THE PROPOSALS, BUT MAKES NO RECOMMENDATION TO
HOLDERS OF SHARES OF PREFERRED STOCK AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING THEIR SHARES OF PREFERRED STOCK IN THE EXCHANGE OFFER. HOLDERS OF
SHARES OF PREFERRED STOCK ARE URGED TO CONSULT THEIR FINANCIAL AND TAX ADVISORS
IN MAKING THEIR DECISIONS AS TO WHAT ACTION TO TAKE AFTER CONSIDERING THEIR OWN
PARTICULAR CIRCUMSTANCES AND THE BENEFITS AND DETRIMENTS TO SUCH HOLDERS.
SEE "RISK FACTORS" COMMENCING ON PAGE 15 HEREIN FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING WHETHER TO APPROVE THE
PROPOSALS AND TO PARTICIPATE IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS, AND
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED UPON OR
ENDORSED THE MERITS OF THIS OFFER. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
The Common Stock and the 9%/7% Preferred Stock are quoted and traded
on The Nasdaq National Market. On November 19, 1997, the last reported sales
prices on The Nasdaq National Market were $1-7/8 for the Common Stock and
$5-1/8 for the 9%/7% Preferred Stock. The 12% Preferred Stock is not traded
on any recognized market. Holders of Preferred Stock are urged to obtain a
current market quotation, if available, for their shares. On October 31, 1997,
there were issued and outstanding 6,682,886 shares of Common Stock, 2,456,098
shares of 9%/7% Preferred Stock and 49,994 shares of 12% Preferred Stock.
Questions or requests for assistance or for additional copies of this
Proxy Statement/Prospectus, the Letter of Transmittal and form of proxy, or
other tender offer or proxy solicitation materials, may be directed to
MacKenzie Partners, Inc. (the "Information Agent"), Prudential Securities, Inc.
or the Investor Relations Department of the Company at their respective
addresses and telephone numbers set forth on the back cover of this Proxy
Statement/Prospectus. Licensed broker/dealers will receive a solicitation fee
of $0.10 for each share of Preferred Stock tendered in the Exchange Offer that
is converted into Common Stock pursuant to the Exchange Offer or the
Reclassifications and for which the particular broker/dealer is designated as
the soliciting broker/dealer by the holder of such share.
The Company's Financial Advisor is: The Information Agent is:
PRUDENTIAL SECURITIES, INC. MACKENZIE PARTNERS, INC.
The date of this Proxy Statement/Prospectus is December 4, 1997.
2
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
Page
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AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CAUTIONARY STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
BACKGROUND, PURPOSES AND EFFECTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
THE PROXY SOLICITATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
THE EXCHANGE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
COMPARISON OF COMMON STOCK AND PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
TRADING PRICE AND DIVIDEND HISTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
LISTING AND TRADING OF COMMON STOCK AND 9%/7% PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
PRO FORMA FINANCIAL INFORMATION (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SELECTED CONSOLIDATED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 74
DESCRIPTION OF SEARCH CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
PRINCIPAL HOLDERS OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
CERTAIN RELATIONSHIPS AND TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
SUBMISSION OF SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
FAIRNESS OPINION OF PRINCIPAL FINANCIAL SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ANNEX A
</TABLE>
3
<PAGE> 8
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company may be inspected and copied at prescribed rates at the
public reference facilities of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at its regional offices at Citicorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661, and at Seven World Trade Center, 13th Floor,
New York, New York 10048. Any interested party may obtain copies of such
material at prescribed rates from the Public Reference Section of the
Commission at its principal offices at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. The Commission also maintains a World Wide
Web site that contains reports, proxies and information statements and other
information regarding registrants that file electronically with the Commission,
including the Company. The address of such Web site is http://www.sec.gov. In
addition, materials filed by the Company 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.
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the securities offered
hereby. Additionally, the Company has filed with the Commission a Schedule
13E-4 (the "Schedule 13E-4") with respect to the Exchange Offer. As permitted
by the regulations of the Commission, this Proxy Statement/Prospectus omits
certain information and exhibits contained in the Registration Statement and
the Schedule 13E-4. Such additional information and exhibits can be inspected
at and obtained from the Commission in the manner set forth above. Statements
contained in this Proxy Statement/Prospectus as to the terms of any contract or
other document are not necessarily complete, and, in each case, reference is
made to the copy of each such contract or other document that has been filed as
an exhibit to the Registration Statement or Schedule 13E-4, each such statement
being qualified in all respects by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OR PROXY SOLICITATION
OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE RESPECTIVE DATES AS OF WHICH INFORMATION IS
GIVEN HEREIN. THE COMPANY IS NOT AWARE OF ANY JURISDICTION IN WHICH THE PROXY
SOLICITATION OR THE EXCHANGE OFFER IS NOT IN COMPLIANCE WITH APPLICABLE LAW.
IF THE COMPANY BECOMES AWARE OF ANY JURISDICTION IN WHICH THE PROXY
SOLICITATION OR EXCHANGE OFFER WOULD NOT BE IN COMPLIANCE WITH APPLICABLE LAW,
THE COMPANY WILL MAKE A GOOD FAITH EFFORT TO COMPLY WITH SUCH LAW. IF, AFTER
SUCH GOOD FAITH EFFORT, THE COMPANY CANNOT COMPLY WITH ANY SUCH LAW, THE PROXY
SOLICITATION AND EXCHANGE OFFER WILL NOT BE MADE WITH RESPECT TO HOLDERS OF
PREFERRED STOCK RESIDING IN SUCH JURISDICTION. IN ANY JURISDICTION WHERE THE
SECURITIES LAWS OR BLUE SKY LAWS REQUIRE THE EXCHANGE OFFER OR PROXY
SOLICITATION TO BE MADE BY A LICENSED BROKER OR DEALER, THE EXCHANGE OFFER OR
PROXY SOLICITATION IS BEING MADE ON BEHALF OF THE COMPANY BY ONE OR MORE
REGISTERED BROKERS OR DEALERS WHICH ARE LICENSED UNDER THE LAWS OF SUCH
JURISDICTION.
CAUTIONARY STATEMENTS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
WHICH MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
"MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," "PROJECT," "GOAL,"
"CONTINUE," OR COMPARABLE TERMINOLOGY. SUCH STATEMENTS INVOLVE RISKS OR
UNCERTAINTIES AND ARE QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONS AND RISK
FACTORS SET FORTH UNDER "RISK FACTORS" AND CONTAINED IN OTHER COMPANY DOCUMENTS
FILED WITH THE COMMISSION.
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<PAGE> 9
SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information contained elsewhere
in this Proxy Statement/Prospectus. Unless otherwise defined herein,
capitalized terms used in this summary have the respective meanings ascribed to
them elsewhere in this Proxy Statement/Prospectus.
THE COMPANY
Search Financial Services Inc. ("Search", and together with its
consolidated subsidiaries the "Company") 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. The Company purchases its receivables individually from franchise
and independent automobile and light truck dealers ("Dealers"), through bulk
purchases of receivables from other finance companies and Dealers who originate
them in the sale of vehicles and through the acquisition of companies engaged
in the same business. During the fiscal year ended March 31, 1997, the Company
commenced other consumer lending operations by opening several consumer lending
branches. As of September 30, 1997, 21 consumer lending branches were
operational.
As part of the turnaround initiated by the Company's current
management team, eight of the Company's former finance subsidiaries (the "Fund
Subsidiaries") emerged from Chapter 11 bankruptcy proceedings in March 1996.
Since that time, the Company has grown substantially through acquisitions,
including the acquisition of MS Financial, Inc. ("MSF") on July 31, 1997.
The Company is incorporated under the laws of the State of Delaware in
1979 and has its principal executive offices at 600 North Pearl, Suite 2500,
Dallas, Texas 75201. The Company's telephone number is 214-965-6000.
THE RECLASSIFICATIONS AND THE EXCHANGE OFFER
THE RECLASSIFICATIONS ................ At the Special Meeting, the Company's
stockholders will be asked to consider
certain amendments (the "Preferred
Stock Amendments") to the Company's
Restated Certificate of Incorporation,
as amended (the "Charter"). The
Preferred Stock Amendments would add
provisions to the Charter that would,
upon the filing of the Preferred Stock
Amendments with the Secretary of State
of the State of Delaware, automatically
reclassify and convert each share of
Preferred Stock into four shares of
Common Stock (the "Reclassifications").
THE EXCHANGE OFFER ................... The Company is offering to exchange,
upon the terms and subject to the
conditions set forth in this Proxy
Statement/Prospectus and the
accompanying Letter of Transmittal (the
"Letter of Transmittal" which, together
with this Proxy Statement/Prospectus,
constitute the "Exchange Offer"), four
shares of Common Stock for each
outstanding share of Preferred Stock.
The Exchange Offer will not be
consummated if both of the
Reclassifications are effected.
EXCHANGE CONSIDERATION ............... The Company will issue four shares of
Common Stock (the "Exchange
Consideration") for each share of
Preferred Stock held by (i) each and
every holder of outstanding shares of
Preferred Stock if the
Reclassifications are effected, or (ii)
each holder of Preferred Stock who
tenders his shares for exchange if the
Exchange Offer is consummated. The
Exchange Consideration was determined
by the Board of Directors after taking
into account various factors, including
the financial analysis and
recommendation of the Company's
financial advisor, Prudential
Securities, Inc., and a fairness
opinion rendered by Principal Financial
Securities, Inc. The Exchange
Consideration represents a premium of
35.2% based on the respective closing
sale prices of the Common Stock and
9%/7% Preferred Stock reported by
5
<PAGE> 10
The Nasdaq National Market on November
18, 1997. See "Background, Purposes and
Effects--Determinations of Board of
Directors" and "--Purposes."
PURPOSES AND EFFECTS OF RECLASSIFICATIONS AND EXCHANGE OFFER
PURPOSES ............................. The principal purposes of the
Reclassifications and the Exchange
Offer are to (i) eliminate or decrease
the dividend burden on the Company from
the Preferred Stock, and (ii) thereby
enhance the Company's financial
flexibility, which the Company believes
should enable it to obtain additional
capital and take advantage of the
consolidation occurring in the non-prime
automobile finance industry. The Company
believes that its future growth is
dependent on its ability to obtain
additional debt and/or equity capital,
some or all of which may take the form
of warehouse lines of credit and
subordinated and/or convertible debt.
Successful completion of the
Reclassifications or the Exchange Offer
will increase the Company's book value
per share of Common Stock and should
increase in future periods any earnings
per share of Common Stock, which the
Company believes will make the Company
and the Common Stock more attractive to
potential lenders and investors.
Assuming the Reclassifications had been
effected on September 30, 1997, the pro
forma book value per share of Common
Stock at that date would have been $1.76
as compared to the actual book value
(deficit) per share of Common Stock
(after deducting the Preferred Stock
liquidation preference) at that date of
$(6.07). Assuming the Reclassifications
had been effected on April 1, 1997, the
pro forma net loss per share of Common
Stock for the six months ended September
30, 1997 would have been $0.97 (or $0.37
excluding an accounting loss adjustment
resulting from the Reclassifications) as
compared to the actual net loss per
share of Common Stock of $1.42 for the
same period. See "Background, Purposes
and Effects--Purposes."
RISK FACTORS AND SPECIAL FACTORS ..... Both the Common Stock offered hereby
and the Preferred Stock are subject to
a number of risks. See "Risk Factors."
EFFECTS OF RECLASSIFICATIONS ON Detriments. Holders of Preferred Stock
HOLDERS OF PREFERRED STOCK AND whose shares are exchanged for shares
OF EXCHANGE OFFER ON EXCHANGING of Common Stock as a result of the
HOLDERS OF PREFERRED STOCK ........... Reclassifications or the Exchange Offer
will relinquish the rights and
privileges of the Preferred Stock,
including the rights to (i) receive
dividends in preference to the Common
Stock, which dividends accrue at a
quarterly per share rate of $1.20 for
the 12% Preferred Stock and, for the
9%/7% Preferred Stock, of $0.63 until
March 31, 1999 and $0.49 thereafter
until conversion, and (ii) receive a
liquidation preference of $28 per share
for the 9%/7% Preferred Stock and $40
per share for the 12% Preferred Stock,
plus accrued and unpaid dividends, upon
the liquidation, dissolution or winding
up of the Company. However, a covenant
in one of the Company's loan agreements
currently prohibits the Company from
paying cash dividends on the Preferred
Stock, and the terms of the 9%/7%
Preferred Stock currently prohibit the
payment of dividends on the 9%/7%
Preferred Stock in the form of shares
of Common Stock. Based upon the
Company's tangible stockholders' equity
as of September 30, 1997 of
$16,975,000, each share of Preferred
Stock would have received a
distribution of only $6.78 if the
Company had dissolved and wound up as
of that date, assuming the Company
realized net book value for its
tangible assets upon liquidation. In
addition, holders of shares of 12%
Preferred Stock have the right, voting
separately as a class, to elect two
6
<PAGE> 11
directors to the Board of Directors if
the Company fails to make six quarterly
dividend payments on the 12% Preferred
Stock. Holders of shares of 9%/7%
Preferred Stock have the right, voting
separately as a class, to elect
two-thirds of the directors to the
Board of Directors if the Company fails
to make four consecutive quarterly
dividend payments, in the form of cash
or shares of Common Stock, on the 9%/7%
Preferred Stock and to approve certain
other matters, including the 9%/7%
Reclassification. Shares of Common
Stock involve a higher degree of risk
for the Holder than the Preferred
Stock. The Common Stock is subordinate
to the Preferred Stock and to claims of
all creditors of the Company in the
event of the bankruptcy, liquidation or
reorganization of the Company. The
Company has not paid cash dividends to
date on the Common Stock, and the
current policy of the Board of
Directors is to retain any available
earnings for use in the operation and
expansion of the Company's business.
The issuance of shares of Common Stock
pursuant to the Reclassifications or
the Exchange Offer may cause a decline
in the market price of the Common
Stock. See "Risk Factors--Risks
Associated with Investment Common
Stock" and "Pro Forma Financial
Information."
Benefits. Holders of shares of the
Preferred Stock receiving Common Stock
as a result of the Reclassifications or
the Exchange Offer will receive four
shares of Common Stock per share of
Preferred Stock, which is more than the
number of shares of Common Stock that
they would be entitled to receive upon
the conversion of the Preferred Stock
in accordance with its terms. Holders
of shares of the Preferred Stock are
currently entitled to convert each
share of 9%/7% Preferred Stock into two
shares of Common Stock and each share
of 12% Preferred Stock into one share
of Common Stock. All shares of the
9%/7% Preferred Stock are mandatorily
convertible into Common Stock in the
year 2003 at a rate of one share of
9%/7% Preferred Stock for up to three
shares of Common Stock, based on a
formula. Holders of shares of 12%
Preferred Stock, for which there is no
established trading market, will
receive marketable shares of Common
Stock listed for trading on The Nasdaq
National Market. The Board of Directors
believes that all stockholders of the
Company should benefit from enhancement
of the Company's financial flexibility
resulting from the elimination or
decrease of the dividend burden of the
Preferred Stock following the
successful completion of the
Reclassifications or the Exchange
Offer. The Company believes that
improved financial flexibility should
enable it to obtain additional capital
and to take advantage of the
consolidation occurring in the
non-prime automobile finance industry.
See "Background, Purposes and
Effects--Effect of Reclassifications on
Holders of Preferred Stock and of
Exchange Offer on Exchanging Holders of
Preferred Stock."
EFFECTS ON HOLDERS RETAINING Benefits. Holders of shares of preferred
PREFERRED STOCK ...................... Stock not converted into Common Stock
pursuant to the Reclassifications or
the Exchange Offer will continue to be
entitled to the rights and preferences
of the Preferred Stock, including the
rights to (i) receive dividends in
preference to the Common Stock, which
dividends accrue at a quarterly per
share rate of $1.20 for the 12%
Preferred Stock and, for the 9%/7%
7
<PAGE> 12
Preferred Stock, of $0.63 until March
31, 1999 and $0.49 thereafter until
converted, (ii) convert their shares of
Preferred Stock into two shares of
Common Stock, or up to three shares
upon mandatory conversion in 2003, with
respect to each share of 9%/7%
Preferred Stock and one share of Common
Stock with respect to each share of 12%
Preferred Stock, and (iii) receive a
liquidation preference of $28 per share
of 9%/7% Preferred Stock or $40 per
share of 12% Preferred Stock, plus
accrued and unpaid dividends, upon any
liquidation, dissolution or winding up
of the Company. However, a covenant in
one of the Company's loan agreements
currently prohibits the Company from
paying cash dividends on the Preferred
Stock, and the terms of the 9%/7%
Preferred Stock currently prohibit the
payment of dividends on the 9%/7%
Preferred Stock in the form of shares
of Common Stock. Based upon the
Company's tangible stockholders' equity
as of September 30, 1997 of
$16,975,000, each share of Preferred
Stock would have received a
distribution of only $6.78 if the
Company had dissolved and wound up as
of that date, assuming the Company
realized net book value for its
tangible assets upon liquidation. In
addition, Holders of shares of 12%
Preferred Stock have the right, voting
separately as a class, to elect two
directors to the Board of Directors if
the Company fails to make six quarterly
dividend payments on the 12% Preferred
Stock. Holders of the 9%/7% Preferred
Stock have the right, voting separately
as a class, to elect two-thirds of the
directors to the Board of Directors if
the Company fails to make four
consecutive quarterly dividend
payments, in the form of cash or shares
of Common Stock, on the 9%/7% Preferred
Stock and to approve certain other
matters, including the 9%/7%
Reclassification. The shares of each
non-exchanging Holder of Preferred
Stock will represent a greater
percentage of the outstanding shares of
the Preferred Stock and, accordingly,
will have greater relative voting power
with respect to any matter submitted
for a separate vote by the holders of
the 9%/7% Preferred Stock or 12%
Preferred Stock. Dividends on shares of
Preferred Stock not exchanged in the
Exchange Offer will continue to accrue
in accordance with the terms of the
Preferred Stock. See "Purposes and
Effects--Effects of Exchange Offer on
Non-Exchanging Holders of Preferred
Stock."
Detriments. If the Reclassifications
are not consummated but the Exchange
Offer is consummated, the Holders of
Preferred Stock whose shares are not
exchanged in the Exchange Offer may
continue not to receive any dividends.
A covenant in one of the Company's loan
agreements currently prohibits the
Company from paying any cash dividends
on the Preferred Stock. The Company
may also enter into additional loan
agreements that contain provisions
limiting or prohibiting the payment of
dividends on the Preferred Stock. In
addition, if the trading price of the
Common Stock remains at less than $4.00
per share, the Company will be
prohibited from paying the dividends on
the 9%/7% Preferred Stock in shares of
Common Stock. The foregoing dividend
restrictions will not be directly
affected by the Exchange Offer.
Dividend arrearages on the Preferred
Stock may negatively impact the
Company's financial flexibility and
ability to obtain additional capital.
If the Exchange Offer is consummated,
the trading market for unexchanged
shares of 9%/7% Preferred Stock will
become more limited, which may
adversely affect the liquidity and
market price of the 9%/7% Preferred
Stock. In addition, the 9%/7% Preferred
Stock may be de-listed by The Nasdaq
National Market and not subsequently
quoted in any other established trading
market. The Preferred Stock is
subordinate to claims of all creditors
of the Company. Therefore, in the
event of bankruptcy, liquidation or
reorganization of the Company, the
assets of the Company may not
8
<PAGE> 13
be sufficient to pay the liquidation
preference on the Preferred Stock after
payment of the claims of creditors. The
terms of the Preferred Stock do not
contain any limitation on the
incurrence of additional indebtedness
by the Company. Holders of large blocks
of shares of 12% Preferred Stock or
9%/7% Preferred Stock who do not
exchange their shares in the Exchange
Offer will have greater relative voting
power with respect to, and may be able
to control the outcome of, any matter
submitted for a separate vote by the
Holders of the 12% Preferred Stock or
the 9%/7% Preferred Stock. See "Risk
Factors--Risks Associated With
Retention of Preferred Stock."
EFFECTS ON HOLDERS OF COMMON STOCK .. A maximum of 10,024,368 shares of
Common Stock may be issued as a result
of the consummation of the
Reclassifications or the Exchange
Offer. The issuance of these shares may
cause a decline in the market price of
the Common Stock. See "Risk
Factors--Risks Associated With
Investment in Common Stock--Potential
Impact on Market Price and Voting
Rights of Common Stock." The holders of
the Common Stock would benefit from a
consummation of the Reclassification or
the Exchange Offer by the elimination
or reduction of the aggregate
liquidation preference of the Preferred
Stock upon any liquidation, dissolution
or winding-up of the Company. The
holders of the Common Stock would also
benefit by eliminating or reducing the
total dividends payable on the
Preferred Stock. As a result, the book
value and any future earnings per share
attributable to the Common Stock should
improve and may result in a positive
impact on the market price of the
Common Stock. In addition, the Company
believes it would be better able to
obtain additional capital and to
participate in the consolidation taking
place in the non-prime automobile
finance industry. See "Background,
Purposes and Effects--Effects on
Holders of Common Stock" and
"--Purposes."
FINANCIAL ADVISOR .................... The Company has engaged Prudential
Securities, Inc. (the "Financial
Advisor") to advise and assist the
Board of Directors in connection with
the Reclassifications and the Exchange
Offer. The Financial Advisor has
delivered to the Board of Directors its
recommendations as to the exchange rate
for the Reclassifications and the
Exchange Offer and its supporting
financial analysis.
FAIRNESS OPINION ..................... Principal Financial Securities, Inc.
("Principal Financial") has delivered
to the Company's Board of Directors its
written opinion concluding that, as of
the date of such opinion and based on
the assumptions made, procedures
followed and matters considered as set
forth in the opinion, the Exchange
Consideration is fair to the holders of
the Preferred Stock, from a financial
point of view. For a description of the
types of analyses performed and the
factors considered by Principal
Financial and for a description of the
scope of, and limitations on, its
fairness opinion, see "Background,
Purposes and Effects--Fairness Opinion"
and Annex A.
COMPARISON OF PREFERRED STOCK AND The terms of the Common Stock differ
COMMON STOCK TERMS ................... from the terms of the Preferred Stock
in certain material respects, including
dividends, rights on liquidation of the
Company and voting rights. See
"Description of Capital Stock" and
"Comparison of Common Stock and
Preferred Stock."
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<PAGE> 14
CERTAIN FEDERAL INCOME TAX Holders of Preferred Stock should
CONSEQUENCES ......................... recognize no gain or loss on the
exchange of their shares of Preferred
Stock solely for shares of Common Stock
pursuant to either the Exchange Offer
or the Reclassifications. See "Certain
Federal Income Tax Consequences."
DISSENTERS' RIGHTS ................... Holders of shares of Preferred Stock
ill not have any dissenters' rights
under applicable state law, or the
Charter, nor will dissenters' rights be
voluntarily provided to Holders of
shares of Preferred Stock, in
connection with the Exchange Offer or
the Reclassifications.
TRADING AND MARKET PRICES ............ The Common Stock and the 9%/7%
Preferred Stock are traded on The
Nasdaq National Market. The Company has
no knowledge of any established trading
market for the 12% Preferred Stock, and
a market for the 12% Preferred Stock is
unlikely to exist in the future. See
"Trading Price and Dividend History."
OUTSTANDING SHARES AND HOLDERS ....... As of October 31, 1997, there were
2,024 record holders of 2,456,098
outstanding shares of 9%/7% Preferred
Stock, 87 record holders of 49,994
outstanding shares of 12% Preferred
Stock, and 3,521 record holders of
6,682,886 outstanding shares of Common
Stock.
THE PROXY SOLICITATION
DATE, TIME AND PLACE OF SPECIAL The Special Meeting of Stockholders of
MEETING .............................. the Company will be held on _________
____, 1998, at 10:00 a.m., local time,
at the offices of the Company located
at 600 North Pearl Street, Dallas,
Texas 75201.
PROPOSALS AT THE SPECIAL MEETING ..... At the Special Meeting, the Company's
stockholders will be asked to consider
and vote upon the following proposals
(the "Proposals"): (1) approval of an
amendment to the Charter (the "9%/7%
Preferred Stock Amendment") providing
for the reclassification and conversion
of each outstanding share of 9%/7%
Preferred Stock into four shares of
Common Stock (the "9%/7%
Reclassification"); (2) approval of an
amendment to the Charter (the "12%
Preferred Stock Amendment") providing
for the reclassification and conversion
of each outstanding share of 12%
Preferred Stock into four shares of
Common Stock (the "12%
Reclassification"); (3) approval of the
issuance of shares of Common Stock
pursuant to the Exchange Offer (the
"Exchange Offer Proposal"); and (4)
such other business as may properly
come before the Special Meeting.
THE PREFERRED STOCK AMENDMENTS ....... The Preferred Stock Amendments would
add provisions to the Charter that
would, upon the filing of the Preferred
Stock Amendments with the Secretary of
State of the State of Delaware,
automatically reclassify and change
each share of Preferred Stock into four
shares of Common Stock. Notwithstanding
the approval of the Preferred Stock
Amendments at the Special Meeting, the
Board of Directors reserves the right
to abandon filing the Preferred Stock
Amendments and consummation of the
Reclassifications. The Company will not
effect the 12% Reclassification unless
the Exchange Offer or the 9%/7%
Reclassification is also consummated.
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<PAGE> 15
RECORD DATE .......................... Only holders of shares of Preferred
Stock and Common Stock at the close of
business on _______________, 1997 (the
"Record Date") are entitled to notice
of and to vote at the Special Meeting.
QUORUM ............................... The holders of a majority of the total
outstanding shares of Common Stock and
Preferred Stock must be present at the
Special Meeting in person or by proxy
to constitute a quorum for voting on
each of the Proposals.
VOTE REQUIRED ........................ The affirmative vote of the holders of
two-thirds of the outstanding shares of
the 9%/7% Preferred Stock, voting
separately as a class, is required to
approve the 9%/7% Preferred Stock
Amendment, and the affirmative vote of
the holders of a majority of the
outstanding shares of the 12% Preferred
Stock, voting separately as a class, is
required to approve the 12% Preferred
Stock Amendment. In addition, both
Preferred Stock Amendments require for
approval the affirmative vote of the
holders of a majority of the total
outstanding shares of Common Stock, 12%
Preferred Stock and 9%/7% Preferred
Stock, voting together as a single
class. The Exchange Offer Proposal
requires for approval the affirmative
vote of the holders of a majority of
the shares of Common Stock, 12%
Preferred Stock and 9%/7% Preferred
Stock, voting together as a single
class, present at the Special Meeting
and entitled to vote. Holders of shares
of Preferred Stock or Common Stock are
entitled to cast one vote per share,
either in person or by proxy.
HOW TO VOTE ON THE PROPOSALS ......... A Holder of Common Stock, 12% Preferred
Stock or 9%/7% Preferred Stock desiring
to vote on the Proposals should
complete and sign the proxy card and
mail or deliver such proxy to the
Exchange Agent at one of the addresses
set forth on the back cover page of
this Proxy Statement/Prospectus.
Holders of Common Stock, 12% Preferred
Stock or 9%/7% Preferred Stock may also
vote their shares in person at the
Special Meeting. Holders of Common
Stock, 12% Preferred Stock or 9%/7%
Preferred Stock whose purchase has been
registered after the Record Date and
who wish to vote at the Special Meeting
must arrange with their seller to
receive a proxy from the holder of
record on the Record Date of such
Common Stock, 12% Preferred Stock or
9%/7% Preferred Stock. See "The Proxy
Solicitation--How to Vote on the
Proposals."
REVOCATION OF PROXIES ................ Proxies may be revoked at any time
until the Proposals have been voted on
at the Special Meeting. See "The Proxy
Solicitation--Revocation of Proxies."
EXCHANGE FOR COMMON STOCK IN EVENT If the Reclassifications are effected,
OF RECLASSIFICATIONS ................. the Company will commence exchange of
certificates representing shares of
Preferred Stock in accordance with the
terms of the Preferred Stock Amendments
immediately upon the filing of the
Preferred Stock Amendments with the
Secretary of State of the State of
Delaware. Until surrendered for
exchange, certificates formerly
representing shares of Preferred Stock
will be deemed to represent the
appropriate number of shares of Common
Stock after the filing of the Preferred
Stock Amendments.
11
<PAGE> 16
THE EXCHANGE OFFER
EXPIRATION DATE ...................... The Exchange Offer expires at 5:00
p.m., Dallas, Texas time, on Friday
________, 1998, or if extended, the
latest date and time to which the
Exchange Offer has been extended (the
"Expiration Date"). See "The Exchange
Offer--Expiration Date; Extensions;
Amendments; Termination."
CONDITIONS OF THE EXCHANGE OFFER ..... The Exchange Offer is subject to a
number of conditions, unless waived or
modified at the sole discretion of the
Company, including the conditions that
the Exchange Offer Proposal is approved
at the Special Meeting, at least 50% of
the outstanding shares of the Preferred
Stock are converted into Common Stock
pursuant to the Exchange Offer and any
Reclassification and there have not
occurred certain material changes in
the business or financial affairs of
the Company. See "The Exchange
Offer--Conditions of the Exchange
Offer."
PROCEDURES FOR TENDERING ............. Holders of shares of Preferred Stock
electing to participate in the Exchange
Offer must properly complete and sign
the Letter of Transmittal (or a
facsimile thereof) in accordance with
the instructions contained therein and
deliver it to the Exchange Agent at the
address set forth on the back cover of
this Proxy Statement/Prospectus prior
to the Expiration Date. In addition,
the Exchange Agent must receive prior
to the Expiration Date the certificates
for the tendered shares of Preferred
Stock or a confirmation that the
tendered shares of Preferred Stock have
been transferred pursuant to the
procedures for book-entry transfer. Any
questions regarding these tender
procedures, or any lost or misplaced
certificates should be directed to the
Solicitation Agent or the Information
Agent at their respective telephone
numbers set forth on the back cover of
this Proxy Statement/Prospectus. See
"The Exchange Offer--Procedures for
Tendering."
LETTERS OF TRANSMITTAL, CERTIFICATES
REPRESENTING PREFERRED STOCK AND ANY
OTHER REQUIRED DOCUMENTS SHOULD BE SENT
ONLY TO THE EXCHANGE AGENT, NOT TO THE
COMPANY, THE INFORMATION AGENT OR THE
SOLICITATION AGENT.
SPECIAL PROCEDURE FOR BENEFICIAL Any beneficial owner whose Preferred
OWNERS ............................... Stock is registered in the name of a
broker, dealer, commercial bank, trust
company or other nominee and who wishes
to tender such owner's Preferred Stock
should contact such nominee promptly
and instruct such nominee to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on
such owner's own behalf, such owner
must, prior to completing and executing
the Letter of Transmittal and
delivering certificates for the owner's
Preferred Stock, either make
appropriate arrangements to register
ownership of the Preferred Stock in
such owner's name or obtain a properly
completed stock power from the nominee.
The transfer of registered ownership
may take considerable time and may not
be able to be completed prior to the
Expiration Date. See "The Exchange
Offer--Procedures for
Tendering--Special Procedure for
Beneficial Owners."
GUARANTEED DELIVERY PROCEDURES ....... If a Holder of shares of Preferred
Stock desires to accept the Exchange
Offer and time will not permit the
Letter of Transmittal or
12
<PAGE> 17
Preferred Stock to reach the Exchange
Agent before the Expiration Date, a
tender may be effected in accordance
with the guaranteed delivery procedures
set forth in "The Exchange
Offer--Procedures for Tendering--
Guaranteed Delivery."
LOST CERTIFICATES .................... Holders who have lost or misplaced the
certificates representing their shares
of Preferred Stock should contact the
Exchange Agent as soon as possible to
start the procedures for obtaining
replacement certificates because these
procedures will take additional time to
complete.
DELIVERY OF COMMON STOCK ............. Subject to the terms and conditions of
the Exchange Offer, the delivery of the
Exchange Consideration to be delivered
pursuant to the Exchange Offer will
occur as promptly as practicable
following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange
Offer."
WITHDRAWAL RIGHTS .................... Tenders of Preferred Stock pursuant to
the Exchange Offer may be withdrawn at
any time prior to the Expiration Date
and, unless accepted for exchange by
the Company, may be withdrawn at any
time after 40 Business Days after the
date of this Proxy
Statement/Prospectus. A "Business Day"
means any day other than a day on which
banking institutions in Dallas, Texas
are authorized or required by law to
close. See "The Exchange
Offer--Withdrawal of Tenders."
EXTENSIONS; AMENDMENTS; TERMINATION .. If the Company determines, in its sole
discretion, to increase or decrease the
consideration offered to Holders of
Preferred Stock, and if the Exchange
Offer is scheduled to expire less than
10 Business Days from and including the
date that notice of such increase or
decrease is first published, sent or
given in the manner specified in "The
Exchange Offer--Expiration Date;
Extensions; Amendments; Termination,"
then the Exchange Offer will be
extended for at least 10 Business Days
from and including the date of such
notice.
The Company expressly reserves the
right, in its sole discretion, subject
to applicable law, to (i) terminate the
Exchange Offer, not accept for exchange
any Preferred Stock, and promptly
return all Preferred Stock, upon the
failure of any of the conditions in
"The Exchange Offer--Conditions of the
Exchange Offer," (ii) waive any
condition to the Exchange Offer and
accept all Preferred Stock previously
tendered pursuant to the Exchange
Offer, (iii) extend the Expiration Date
of the Exchange Offer and retain all
Preferred Stock tendered pursuant to
the Exchange Offer until the Expiration
Date, subject, however, to all
withdrawal rights of Holders (see "The
Exchange Offer--Withdrawal of
Tenders"), (iv) amend the terms of the
Exchange Offer in any respect, (v)
modify the form of the consideration to
be offered pursuant to the Exchange
Offer, or (vi) terminate the Exchange
Offer as to any shares of Preferred
Stock affected by the approval of
either or both of the Preferred Stock
Amendments and not accept for exchange
any such shares of Preferred Stock. Any
amendment applicable to the Exchange
Offer will apply to all Preferred Stock
tendered pursuant to the Exchange
Offer. See "The Exchange
Offer--Expiration Date; Extensions;
Amendments; Termination."
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<PAGE> 18
GENERAL
HOLDERS .............................. The term "Holder" means (i) any person
in whose name any Common Stock or
Preferred Stock is registered on the
books of the Company, (ii) any other
person who has obtained a properly
completed stock power from the
registered holder of shares of Common
Stock or Preferred Stock, or (iii) any
person whose Common Stock or Preferred
Stock is held of record by the
Depository Trust Company or the
Philadelphia Depository Trust Company
(each a "Depository Institution").
INTERESTS OF CERTAIN PERSONS ......... As of October 31, 1997, executive
officers and directors of the Company
beneficially owned an aggregate of
approximately 2.1% of the outstanding
shares of 9%/7% Preferred Stock and
approximately 8.6% of the outstanding
shares of Common Stock. These officers
and directors of the Company have
indicated their present intention to
tender their shares of Preferred Stock
in the Exchange Offer and to vote their
shares of Preferred Stock and Common
Stock in favor of the Proposals. See
"Principal Holders of Capital Stock."
EXCHANGE AGENT ....................... American Securities Transfer and Trust,
Inc., Denver, Colorado. See
"General--The Exchange Agent."
INFORMATION AGENT .................... MacKenzie Partners, Inc., New York, New
York. See "General--Information Agent."
SOLICITING BROKER/DEALERS ............ The Company will pay to licensed
broker/dealers a solicitation fee of
$0.10 for each share of Preferred Stock
tendered in the Exchange Offer that is
converted into Common Stock pursuant to
the Exchange Offer or the
Reclassifications and for which the
particular broker/dealer is designated
as the soliciting broker/dealer by the
holder of such share. See
"General--Solicitation of Proxies and
Tenders."
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<PAGE> 19
RISK FACTORS
Holders of Common Stock and Preferred Stock should carefully consider,
in addition to the other information set forth elsewhere in this Proxy
Statement/Prospectus, the matters described below prior to making decisions
regarding the Exchange Offer and the Preferred Stock Amendments.
RESULTS OF OPERATIONS
The Company does not have a history of profitable operations.
Although the Company had net income before Preferred Stock dividends of
$1,283,000 for the fiscal year ended March 31, 1997, it had net losses before
Preferred Stock dividends of $4,561,000 for the six months ended September 30,
1997 and $2,671,000 for the six months ended March 31, 1996 and net losses
after Preferred Stock dividends of $4,871,000 for the fiscal year ended March
31, 1997 and $6,231,000 for the six months ended September 30, 1997. In
addition, the Company had net losses before Preferred Stock dividends of
$19,894,000 and $25,950,000 for the fiscal years ended September 30, 1995 and
1994, respectively. The Company's lower net loss for the six months ended
March 31, 1996, as compared to prior periods, resulted primarily from an
extraordinary gain of $8,709,000 realized on the exchange of its equity
securities for debt cancellation in connection with the reorganization of the
Fund Subsidiaries (defined herein). The lower net loss for the fiscal year
ended March 31, 1997, as compared to prior periods, was due primarily to a net
reduction of prior credit losses of approximately $7,000,000 and significant
general and administrative expenses incurred during the prior periods related
to the reorganization of the Fund Subsidiaries. The Company's future
profitability will be dependent upon the results of operations from its
receivables purchasing and management business and other businesses. There can
be no assurance that the Company's businesses will be profitable in the future.
AVAILABILITY OF FUNDING
The purchase of receivables and the making of consumer loans requires
the Company to raise significant amounts of funds from various sources,
including banks, finance companies, other lenders and investors. To that end,
the Company is seeking to obtain additional lines of credit and raise
additional equity or debt financing. During recent discussions with investors
and lenders, it has become apparent to the Company that investors and lenders
will not allow the continued, unrestricted payment of cash dividends on the
Preferred Stock while providing capital and funding to the Company for growth.
The Company is seeking to effect the Reclassifications or the Exchange Offer to
facilitate the Company's future activities to obtain additional funding and
capital. If the Reclassifications or the Exchange Offer are consummated,
however, there can be no assurance that lenders and investors will provide
sufficient funds on terms the Company will find acceptable. The Company's
currently planned financing sources include (i) sale of subordinated or
convertible debt securities, (ii) lines of credit, and (iii) securitization of
its receivables. The Company may also seek additional equity investments. The
Company will be required to provide adequate collateral in order to securitize
its receivables. This collateral may be in one or more of several forms,
including third party insurance, cash collateral accounts,
over-collateralization and subordinated interests. The costs of providing
collateral for a securitization may outweigh the benefits that can be obtained
from the securitization. The Company's prior securitizations through the Fund
Subsidiaries were not successful due to lower than expected collection rates on
receivables and lower than expected recoveries on the sale of repossessed
vehicles. The Company caused its Fund Subsidiaries to reorganize their affairs
under Chapter 11 bankruptcy proceedings commencing in August 1995. The
Company's plan of reorganization for the Fund Subsidiaries was confirmed in
March 1996. Under the plan of reorganization, approximately $69 million of
indebtedness of the Fund Subsidiaries was converted into equity securities
issued by the Company. Because of increases in its contract delinquencies and
the provision for possible losses on its contracts in 1996, MSF exceeded
certain delinquency and loss triggers in its securitizations. Consequently,
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. There can be no assurance that funding will be
available to the Company through borrowings, sales of equity or subordinated or
convertible debt securities or securitizations or, if available, that such
funding will be on terms acceptable to the Company. Even if available, there
can be no assurance that the future borrowing or securitization activities of
the Company will be profitable.
TECHNICAL DEFAULTS IN INDEBTEDNESS
In August 1997, the Company announced that, based on current
projections, under the terms of a loan agreement, it would not be allowed to pay
dividends in cash on the Preferred Stock for the quarter ended September 30,
1997. Subsequently, as a result of dividends on the Preferred Stock for that
quarter not being paid, Hall Phoenix/Inwood Ltd. ("HPIL"), the holder of a
$5,000,000 subordinated note issued by Search, has advised Search that an event
of default under that note will occur if the Company's failure to pay dividends
on the Preferred Stock for the quarter ended September 30, 1997 is not cured by
December 4, 1997. This event of default causes defaults under the terms of the
Company's revolving lines of credit. HPIL has notified the Company that it
intends to accelerate payment of the note on December 5, 1997 if the default is
not cured. The Company's other lenders have not sought to
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<PAGE> 20
accelerate payment of the indebtedness owed to them at this time. The Company
continues to service all of its debts, has obtained a waiver under one line of
credit and is attempting to obtain waivers of the remaining defaults arising
from the non-payment of dividends. There can be no assurance that such waivers
will be obtained. If the Company's lenders elect to accelerate their debts,
the Company will likely be unable to pay such debts and at this time is
uncertain what action it will take in such event.
NO ASSURANCE THAT THE RECLASSIFICATIONS OR EXCHANGE OFFER WILL BE CONSUMMATED;
POTENTIAL VARIATIONS IN EXCHANGE OFFER
There can be no assurance that the affirmative votes required for
approval of the Preferred Stock Amendments will be obtained in order to
consummate the Reclassifications. In addition, the consummation of the
Exchange Offer is subject to the satisfaction of certain conditions, including,
among other things, the approval of the Exchange Offer Proposal by the
Company's stockholders and the conversion of at least 1,253,046, or 50%, of the
outstanding shares of Preferred Stock into Common Stock pursuant to the
Exchange Offer and any Reclassification. There can be no assurance such
conditions will be satisfied or that the Exchange Offer will be consummated.
Moreover, it is impossible to predict the exact number of shares of Preferred
Stock that may be tendered and accepted for exchange in the Exchange Offer.
Accordingly, in analyzing the information contained in this Proxy
Statement/Prospectus that gives effect to the completion of the Exchange Offer,
Holders of shares of Preferred Stock should consider that the number of shares
of Preferred Stock exchanged in the Exchange Offer as actually consummated
could differ materially from the number set forth in such information. See
"The Exchange Offer--Conditions to the Exchange Offer."
COMPANY STRUCTURE
Substantially all of the Company's operations are conducted through
its consolidated subsidiaries. Funds are provided to the Company by its
subsidiaries through intercompany payments. The Company is dependent on the
earnings and cash flow from these subsidiaries. Because a substantial part of
the assets of the Company are and will continue to be held by its subsidiaries,
any claims of the Holders of shares of Preferred Stock or Common Stock on the
assets of the Company will be subject to the payment of all liabilities
(whether or not for borrowed money) of such subsidiaries.
RISKS ASSOCIATED WITH INVESTMENT IN COMMON STOCK
Subordination of Common Stock. The Common Stock generally provides
less protection than the Preferred Stock against risks associated with the
Company and its business, and, accordingly, investment in the Common Stock
involves a higher degree of risk than investment in the Preferred Stock. The
Common Stock has no liquidation preference and is subordinate to the Preferred
Stock as well as claims of all creditors of the Company. Therefore, in the
event of the bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to make distributions in respect of the
Common Stock only after claims of all creditors of the Company have been paid
in full and the liquidation preference, plus an amount equal to accrued and
unpaid dividends, has been paid to all holders of shares of Preferred Stock.
Accordingly, in such event, sufficient assets may not exist to pay any claims
of holders of Common Stock. If the Reclassifications are not effected, the
Preferred Stock not tendered and exchanged in the Exchange Offer will continue
to be senior to any claims of the holders of Common Stock, including Common
Stock issued in the Exchange Offer, in the event of the bankruptcy, liquidation
or reorganization of the Company.
Loss of Rights and Privileges of Exchanging Preferred Stockholders.
Holders of shares of Preferred Stock who exchange all or a portion of their
shares of Preferred Stock for shares of Common Stock as a result of the
Reclassifications or Exchange Offer will no longer own such shares of
Preferred Stock and, consequently, will no longer be entitled to any of the
rights and privileges of the Preferred Stock with respect to such exchanged
shares. The rights and privileges of the 12% Preferred Stock include, among
other things, the rights to (i) receive cumulative preferential cash dividends,
when and as declared by the Board of Directors of the Company out of funds
legally available therefor at the rate per share equal to $4.80 per annum, (ii)
receive a liquidation preference of $40.00 per share plus accrued and unpaid
dividends upon the liquidation, dissolution or winding up of the Company, and
(iii) voting separately as a class, elect two directors to the Board of
Directors if the Company fails to make six quarterly dividend payments on the
12% Preferred Stock. The rights and privileges of the 9%/7% Preferred Stock
include, among other things, the rights to (i) receive non-cumulative
preferential dividends, out of funds legally available therefor, at a per annum
rate of $2.52 per share until March 31, 1999, and $1.96 per share thereafter
until converted, (ii) receive a liquidation preference of $28.00 per share plus
accrued and unpaid dividends upon the liquidation, dissolution or winding-up of
the Company, and (iii) voting separately as a class, elect two-thirds of the
directors to the Board of Directors if the Company fails to make four
consecutive quarterly dividend payments, in the form of cash or shares of
Common Stock, on the 9%/7% Preferred Stock and approve certain other matters,
including
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<PAGE> 21
the 9%/7% Reclassification. However, a covenant in one of the Company's loan
agreements currently prohibits the Company from paying cash dividends on the
Preferred Stock, and the terms of the 9%/7% Preferred Stock currently prohibit
the payment of dividends on the 9%/7% Preferred Stock in the form of shares of
Common Stock. Based upon the Company's tangible stockholders' equity as of
September 30, 1997, each share of Preferred Stock would have received a
distribution of only $6.78 if the Company had dissolved and wound up as of that
date, assuming the Company realized net book value for its tangible assets upon
liquidation. See "Comparison of Common Stock and Preferred Stock," "Description
of Capital Stock--12% Preferred Stock" and "--9%/7% Preferred Stock" and "Risk
Factors--Lack of Dividends on Preferred Stock."
Potential Impact on the Market Price and Voting Rights of Common
Stock. The Company will issue a maximum of 10,024,368 shares of Common Stock
in connection with the Reclassifications or the Exchange Offer. The issuance
of such shares may cause a decline in the market price of the Common Stock. If
the Reclassifications are effected, the shares of Common Stock issued to former
holders of the Preferred Stock would represent approximately 60% of the total
outstanding shares of Common Stock immediately following consummation of the
Reclassifications. Assuming 50% of the outstanding shares of Preferred Stock
are exchanged in the Exchange Offer, shares of Common Stock issued in the
Exchange Offer would represent approximately 43% of the total outstanding
shares of Common Stock immediately following consummation of the Exchange
Offer. The Exchange Consideration represents a premium to holders of Preferred
Stock over the existing conversion rates under the terms of the 9%/7% Preferred
Stock and the 12% Preferred Stock. Each share of Common Stock and Preferred
Stock currently is entitled to one vote on any matter voted on by the Company's
stockholders, and each share of 9%/7% Preferred Stock or 12% Preferred Stock is
by its terms currently convertible into two or one shares, respectively, of
Common Stock. The consummation of the Reclassifications or Exchange Offer on
the basis of the greater exchange rate of shares of Common Stock for each share
of Preferred Stock will reduce the relative voting power of the existing
holders of Common Stock to an extent greater than would conversion of the
shares of Preferred Stock in accordance with their terms.
RISKS ASSOCIATED WITH RETENTION OF PREFERRED STOCK
Potential Lack of Trading Market for 9%/7% Preferred Stock. The
Reclassification will result in the conversion of all outstanding shares of
Preferred Stock into shares of Common Stock. If the Reclassifications are not
consummated, the exchange of shares of 9%/7% Preferred Stock pursuant to the
Exchange Offer will reduce the number of Holders and outstanding shares of
9%/7% Preferred Stock. As a result, the liquidity and market value of the
remaining shares of 9%/7% Preferred Stock could be adversely affected. Trading
in The Nasdaq National Market following the completion of the Exchange Offer
will depend upon the number of shares of 9%/7% Preferred Stock outstanding, the
number of remaining Holders of shares of 9%/7% Preferred Stock, the interest of
securities firms in maintaining a market in the 9%/7% Preferred Stock and other
factors. Following completion of the Exchange Offer, The Nasdaq National
Market may delist the 9%/7% Preferred Stock depending upon the number of
Holders of shares of 9%/7% Preferred Stock or the number of shares of 9%/7%
Preferred Stock that remain outstanding. The following quantitative criteria
(among other criteria) must be met for the 9%/7% Preferred Stock to continue to
be designated as a Nasdaq National Market security: (i) 750,000 shares publicly
held; and (ii) 400 holders of 100 shares or more. Following completion of the
Exchange Offer, the 9%/7% Preferred Stock may fail to continue to satisfy these
criteria and perhaps others. Accordingly, there can be no assurance that the
9%/7% Preferred Stock will continue to be listed and traded on The Nasdaq
National Market following completion of the Exchange Offer. Depending upon
factors similar to those regarding listing with The Nasdaq National Market, the
shares of 9%/7% Preferred Stock may no longer constitute "margin securities"
under the margin regulations of the Federal Reserve Board, and, therefore,
could no longer be used as collateral for margin loans made by brokers. See
"Listing and Trading of Common Stock and 9%/7% Preferred Stock."
Dividend Restrictions on Preferred Stock. A covenant in one of the
Company's loan agreements prohibits any payment of dividends by the Company if
as a result the sum of the Company's tangible net worth and subordinated debt,
less any loans to insiders, would be less than $22,500,000. The payment of
cash dividends on the Preferred Stock for the quarter ended September 30, 1997
would have violated this prohibition. As a result, these dividends have not
been paid or accrued on the 9%/7% Preferred Stock. In addition, the Company may
enter into other loan agreements in the future that contain provisions limiting
or prohibiting payment of cash dividends on the Preferred Stock. If the Company
is prevented from paying any dividend on the 9%/7% Preferred Stock (but not the
12% Preferred Stock) entirely in cash, the terms of the 9%/7% Preferred Stock
specify that the Company may pay the dividend in the form of a mixture of cash
and Common Stock to the extent possible under Delaware law and any applicable
loan agreement or, if necessary, entirely in Common Stock, provided the average
market price per share of the Common Stock is $4.00 or greater for the 20
trading day period ending five days prior to the date of payment of the dividend
in Common Stock. If the Common Stock trading price remains at less than $4.00
per share, the Company will be prohibited from paying the dividend on the 9%/7%
Preferred Stock in the form of shares of Common Stock. There can be no
assurance that the Company will be able
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<PAGE> 22
to pay dividends on the Preferred Stock in cash or that it will be able to
satisfy the minimum price condition for issuance of shares of Common Stock as a
dividend on the 9%/7% Preferred Stock. If the Company is able to obtain a
waiver or amendment of the foregoing restrictions in its loan agreement or to
improve its tangible net worth to prevent the imposition of the foregoing
restrictions, the Company may be able to resume dividend payments on the
Preferred Stock in the future so long as the Company does not enter into other
loan agreements that prohibit the payment of dividends on the Preferred Stock.
There can be no assurances, however, that the Company will be able to pay any
future dividends on the Preferred Stock. In addition, dividend arrearages on
the Preferred Stock may negatively impact the Company's financial flexibility
and ability to obtain additional funding and capital. See "Background,
Purposes and Effects--Purposes."
Subordination of Preferred Stock; Failure to Realize Liquidation
Preference. The Preferred Stock is subordinate to claims of all creditors of
the Company. Therefore, in the event of the bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations in respect of the Preferred Stock only after claims of all
creditors of the Company have been paid in full. The Company does not currently
have sufficient net tangible assets, and there can be no assurance that the
Company will at any time have sufficient net tangible assets, to pay the
liquidation preference on the Preferred Stock. Based upon the Company's
tangible stockholders' equity as of September 30, 1997 of $16,975,000, each
share of Preferred Stock would have received a distribution of only $6.78 if the
Company had dissolved and wound up as of that date, assuming the Company
realized net book value for its tangible assets upon liquidation. However, if
the Reclassifications are not consummated, the Preferred Stock not tendered and
exchanged in the Exchange Offer will continue to be senior to any claims of the
holders of Common Stock, including Common Stock issued in the Exchange Offer, in
the event of the bankruptcy, liquidation or reorganization of the Company. The
terms of the Preferred Stock do not contain any limitation on the incurrence of
additional indebtedness by the Company or its subsidiaries. See "Description of
Capital Stock."
REPRESENTATION; FAIRNESS OPINION
No independent representatives have been retained to act on behalf of
the holders of the Preferred Stock or the Common Stock in connection with the
Reclassifications or Exchange Offer or the preparation of this Proxy
Statement/Prospectus. The Company was advised and assisted by the Financial
Advisor in determining the Exchange Consideration and the advisability of the
Reclassifications and the Exchange Offer. Principal Financial has been
retained by the Company to express its opinion regarding the fairness of the
Exchange Consideration, from a financial point of view, to holders of shares of
Preferred Stock. Principal Financial has delivered to the Company's Board of
Directors its written opinion concluding that, as of the date of such opinion
and based on the assumptions made, procedures followed and matters considered
as set forth in the opinion, the Exchange Consideration is fair to the holders
of the Preferred Stock, from a financial point of view. Principal Financial
has made no recommendation as to whether a Holder of Preferred Stock should
vote for the Proposals or tender the Holder's shares in the Exchange Offer.
Holders are urged to consult their own advisors in making the decision whether
to vote for the Proposals or participate in the Exchange Offer. For a
description of the types of analyses performed and the factors considered by
Principal Financial and for a description of the scope of, and limitations on,
its fairness opinion, see "Background, Purposes and Effects--Fairness Opinion"
and "Annex A--Fairness Opinion of Principal Financial Securities."
RISKS IN MOTOR VEHICLE RECEIVABLES PURCHASING AND CONSUMER FINANCE BUSINESSES
The Company faces all of the risks inherent in the motor vehicle
receivables purchasing business and in the consumer finance business. There
can be no assurance that the Company will properly evaluate the receivables
that it purchases or the borrowers to whom it makes consumer loans. There can
be no assurance that the Company will be able to purchase sufficient
receivables and make a sufficient number of consumer loans to profitably employ
its capital and borrowed funds. The Company purchases receivables whose
obligors, and makes loans to consumers who, do not typically 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.
In addition, the vehicles securing the Company's receivables are subject to
deterioration in value due to the passage of time or usage by the obligor, and
the Company's loans to consumers may be unsecured. There can be no assurance
that the Company's efforts to purchase higher credit quality receivables will
be successful or profitable. The Company commenced its consumer finance
business in 1996 and, as of September 30, 1997, operated 21 branches in seven
states and Puerto Rico. While the Company's management has extensive
experience in this business, consumer loans represented only approximately $9
million in gross receivables as of September 30, 1997. A general economic
downturn could adversely affect the ability of obligors and borrowers to make
payments to the Company on its receivables and loans. Substantial unexpected
delinquencies or charge-offs on its receivables or loans could have a material
adverse effect on the Company's
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<PAGE> 23
results of operations. The Company's provisions for credit losses were 23%,
141%, 18% and 54% of the Company's interest revenues for the year ended
September 30, 1995, the transition period ended March 31, 1996, the fiscal year
ended March 31, 1997 and the six months ended September 30, 1997, respectively.
As of September 30, 1997, the Company had an allowance for credit losses of
approximately $10,768,000, which was approximately 9.2% of its net receivables,
as compared to $5,854,000, or 11% of net receivables, as of March 31, 1997.
There can be no assurance that the provision for credit losses is sufficient to
cover all credit losses that the Company may incur.
ACQUISITION STRATEGY
The Company intends to continue to pursue its current growth strategy,
which includes acquiring portfolios of non-prime used motor vehicle receivables
and other consumer loans and other non-prime used motor vehicle finance
companies. There can be no assurance that the Company 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 the Company 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 the Company's reported operating results, unanticipated
losses from the acquired assets or business, devotion of management's
attention, increased burdens on the Company'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
the Company's results of operations.
REPAYMENT OF MSF'S REVOLVING LINE OF CREDIT
As of October 31, 1997, the outstanding balance under MSF's revolving
credit facility (the "MSF Revolving Credit") was approximately $65,000,000.
MSF is required to reduce the outstanding balance of the MSF Revolving Credit
to $50,000,000 by December 31, 1997 and to fully repay the outstanding balance
by July 31, 1998. Search has guaranteed repayment of the MSF Revolving Credit.
The Company intends to make the payments required by the MSF Revolving Credit
through collections on MSF's receivables and through capital obtained by the
Company from the sale of debt or equity securities or other financing sources,
including a securitization transaction. See "--Availability of Funding." If
MSF has insufficient collections on its receivables and if the Company is
unable to obtain funds from these sources, MSF and Search may be unable to make
the required payments under the MSF Revolving Credit. There can be no
assurance that, in that event, the MSF Revolving Credit will be extended or
refinanced or that the bank lenders 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 bank lenders have indicated to MSF and Search that they
currently have no intention of extending or refinancing the MSF Revolving
Credit.
LEVERAGE AND LIQUIDITY
The Company intends to borrow substantial funds to finance its
operations. As the Company's debt leverage increases, its vulnerability to
adverse general economic conditions and to increased competitive pressures will
also increase. Consummation of the Reclassifications or the Exchange Offer
will increase common stockholders' equity of the Company while concurrently
eliminating or reducing its obligations to pay dividends on the Preferred
Stock; however, the Company together with its subsidiaries will continue to
have consolidated indebtedness that is substantial in relation to its
stockholders' equity. The Company's leverage may have the effect generally of
impairing the Company's ability to obtain financing in the future and reducing
the Company's flexibility in responding to changing business and economic
conditions.
INDUSTRY CONSIDERATIONS
In recent periods, several publicly held, non-prime automobile finance
companies have announced major downward adjustments to their financial
statements, violations of loan covenants, related litigation and other events.
In addition, several of these companies have 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
resulting in a tightening of credit to the non-prime markets and could lead to
increased 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. There can be no assurance that similar
claims will not be asserted against the Company in the future or that its
operations will not be subject to enhanced regulatory oversight.
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<PAGE> 24
INCREASES IN INTEREST RATES
While the receivables purchased or originated by the Company in most
cases bear interest at a fixed rate, often near the maximum rates permitted by
law, the Company will finance its purchases of a substantial portion of such
receivables by incurring indebtedness with floating interest rates. The
Company's interest costs will increase during periods of rising interest rates.
Such increases may decrease the Company's net interest margins and thereby
adversely affect the Company's profitability.
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 receivables, which could adversely affect the Company's
profitability and its growth plans.
RELIANCE ON INFORMATION PROCESSING SYSTEMS
The Company's business depends upon its ability to store, retrieve,
process and manage significant amounts of information. 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.
GEOGRAPHIC CONCENTRATION
Currently, the Company is purchasing receivables whose obligors are
located primarily in Texas and certain southeastern states. Although the
Company expects to expand its operations to other geographic areas, the
Company's performance may be adversely affected by regional or local economic
conditions. The Company may from time to time make acquisitions in regions
outside of its current operating areas. There can be no assurance that the
Company's expansion into new geographic areas will generate operating profits.
KEY OFFICER
The Company'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 the Company. The Company does not currently maintain key
person life insurance on the Chief Executive Officer but intends to seek such
coverage.
COMPETITION
The Company has 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
the Company. Some of these competitors may generally be able or willing to
accept more risk in their activities than the Company. Competition may reduce
the number of suitable receivables offered for sale to the Company and increase
the bargaining power of Dealers with which the Company seeks to do business.
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.
20
<PAGE> 25
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 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.
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 the
Company.
The failure to comply with legal requirements applicable to its
business could have a material adverse effect on the Company's results of
operations. Further, the adoption of additional, or the revision of existing,
laws and regulations could have a material adverse effect on the Company's
business.
POTENTIAL ADVERSE EFFECTS OF LITIGATION
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. 1:95CSV649BR, 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 the Company'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, the
Company's accounting controls and computer systems, the operating results and
financial condition of the Company 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 the Company 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 the Fund
Subsidiaries (the "Plan") for the purpose, among other things, of pursuing
causes of action of the former holders of notes issued by the Fund Subsidiaries
who assigned their claims relating to the Bowe Action to the Litigation Trust.
In August 1997, the trustee (the "Litigation Trustee") of the
Litigation Trust filed a complaint (the "Trustee's Action") in the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division, against
the Company, its subsidiary, Search Financial Services Acceptance Corp.
(formerly known as Automobile Credit Acceptance Corp.) ("SFSAC"), certain of the
Company's former officers and directors, certain broker-dealers who sold Notes
of three of the Fund Subsidiaries and the Company's and the Fund Subsidiaries'
former independent accountants. The Litigation Trust was established to pursue
causes of action of the Fund Subsidiaries and of the former Holders of Notes
issued by the Fund Subsidiaries who assigned their claims to the Litigation
Trust. In the Trustee's Action, the Litigation Trust alleges (1) breach of
fiduciary duty owed by Search and the former directors and officers to three of
the Fund Subsidiaries through the use of fraudulent misrepresentations and
omissions in the raising of capital that was used for the benefit of the Company
and its affiliates rather than those Fund Subsidiaries, (2) violations by Search
and the former directors and officers of the Racketeer Influenced and Corrupt
Organizations Act as a result of the fraudulent offering of Notes by three of
the Fund Subsidiaries, (3) negligence by the broker-dealers and accountants in
connection with the offering of Notes by the three Fund Subsidiaries and (4)
payment of voidable preferential transfers to Search and SFSAC, which payments
were specified in the Plan, in the amount of $7,236,111. The plaintiff seeks
recovery of the alleged preferential transfers and unspecified actual, exemplary
and treble damages. Search and SFSAC believe the suit is without merit and are
vigorously defending themselves. An adverse judgment in the suit could,
however, have a material adverse effect on the Company's results of operations
or financial condition.
In November 1997, the Company and all other parties to the Bowe Action
and the Trustee's Action entered into a Stipulation of Settlement to settle all
claims of the Litigation Trust and all claims related to the Bowe Action for an
amount that includes payment by the Company of $362,500 in cash and the
issuance by the Company of Common Stock having a value of $1,787,500. The
settlement is subject to various conditions, including approval by the Federal
District Court for the Southern District of Mississippi and the United States
Bankruptcy Court for the Northern District of Texas, Dallas Division. If all
conditions are satisfied, the settlement is expected to be completed in December
1997.
21
<PAGE> 26
The Company has a reserve of $500,000 related to the Bowe Action.
Although as a result of the Settlement an additional charge of $1,288,000 will
be reflected in the Company's earnings or loss for the third fiscal quarter of
1998, the Settlement will not adversely affect the Company's stockholders'
equity due to the substantial portion of the Settlement being paid in stock.
However, the book value per share will decrease as a result of the Settlement.
In January 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 asserted claims for
unpaid fees due it in connection with a warehouse line of credit MSF entered
into in April 1995. Telluride sought damages in the amount of $437,500, plus
interest, costs and attorneys' fees. That suit was removed to New York state
court in April 1997. In March 1997, MSF filed a declaratory judgment action
against Telluride in Mississippi state court requesting a determination of the
parties' rights and obligations relating to the warehouse line of credit. In
October 1997, Telluride's action in New York state court was dismissed. At
this time, MSF is unable to predict the outcome of this litigation.
VOLATILE TRADING
The Company's Common Stock and 9%/7% Preferred Stock are traded on The
Nasdaq National Market. Trading volumes and prices in these securities are
volatile. No assurance can be given that a more active and widespread trading
market will develop for the Common Stock and 9%/7% Preferred Stock. Further,
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 Common Stock or 9%/7% Preferred Stock
should be traded at low prices, no assurances can be given that there will
continue to be any market for the Common Stock or 9%/7% Preferred Stock.
Factors such as those discussed herein may have a significant effect on the
market prices of the Common Stock or 9%/7% Preferred Stock.
LACK OF DIVIDENDS ON COMMON STOCK
The Company has not paid dividends on the Common Stock and does not
expect to pay dividends on the Common Stock for the foreseeable future.
Furthermore, the Company may not pay dividends on the Common Stock while any
accrued dividends on the Preferred Stock remain unpaid. The Company currently
is prohibited from paying dividends on the Preferred Stock under the terms of a
loan agreement. Dividends on the 9%/7% Preferred Stock were not accrued for the
quarter ended September 30, 1997. The Company's future loan agreements may also
contain provisions that limit or prohibit payment of dividends on the Preferred
Stock. The Company's Preferred Stock dividends constitute a substantial cash
outflow that, if paid, may have a material adverse effect on the Company's
future financial condition and the future market value of the Common Stock. See
"Risk Factors--Dividend Restrictions on Preferred Stock."
SENIOR RIGHTS OF NEW SERIES OF PREFERRED STOCK
The Company's Restated Certificate of Incorporation, as amended (the
"Certificate"), authorizes the issuance of additional series of preferred stock
with such designations, rights and preferences as may be determined from time
to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue shares of preferred stock
that have preferences over the 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 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 the Company.
22
<PAGE> 27
BACKGROUND, PURPOSES AND EFFECTS
BACKGROUND
The Plan became effective in March 1996. The 9%/7% Preferred Stock
was created, and shares of 9%/7% Preferred Stock were first issued, pursuant to
the Plan. For the fiscal year ended March 31, 1997, the Company had net income
before Preferred Stock dividends of $1,283,000 but a net loss after Preferred
Stock dividends of $4,871,000. For the six months ended September 30, 1997,
the Company had a net loss before Preferred Stock dividends of $4,561,000 and a
net loss after Preferred Stock dividends of $6,231,000.
Over the last year, several publicly held, non-prime automobile
finance companies have announced major downward adjustments to their financial
statements, violations of loan covenants, related litigation and other events.
Several companies have filed for bankruptcy protection. These announcements
have had and continue to have a disruptive effect on the market for securities
of non-prime automobile finance companies, have resulted in a tightening of
credit to non-prime finance companies and could lead to increased regulatory
oversight.
In the belief that a major industry consolidation is taking place, the
Company has been pursuing a growth strategy with the objective of being one of
the industry's survivors. In pursuit of this objective, the Company acquired
the assets of Dealers Alliance Credit Corp. ("DACC") in August 1996 and the
assets of U.S. Lending Corporation ("USLC") in November 1996, acquired several
portfolios of receivables in 1996 and acquired MSF on July 31, 1997, its
largest acquisition to date. The Company has grown from approximately
$37,346,000 in total assets at March 31, 1996 to approximately $126,633,000 in
total assets as of September 30, 1997.
The Company believes that its growth is dependent on its ability to
obtain additional funding and capital, and since the reorganization of the Fund
Subsidiaries, the Company has sought to obtain additional financing sources on
terms acceptable to it.
In September 1996, the Company obtained a $25,000,000 revolving line
of credit from Hibernia National Bank ("Hibernia"). This line of credit was
extended in October 1997 and expires in October 2000. The Company and Hibernia
have to date been unsuccessful in their efforts to find additional loan
participants to increase this line of credit up to $100,000,000. The terms of
this line of credit prohibit payment of dividends on the Preferred Stock if the
Company's tangible net worth (as defined) thereafter would be less than
$22,500,000. This covenant prevented payment of cash dividends on the Preferred
Stock for the quarter ended September 30, 1997. As of September 30, 1997, the
Company had a stockholders' equity of approximately $30,209,000 and a tangible
net worth (as defined) for purposes of the Hibernia line of credit of
approximately $21,400,000. The same agreement also prohibits any repurchases of
the Company's stock if as a result the Company's tangible net worth as so
defined would be less than $20,000,000.
In April 1997, the Company commenced an offering to qualified
institutional investors of up to $35 million of subordinated debt with warrants
to purchase Common Stock. In July 1997, the Company modified this offering to
consider convertible debt as an alternative to subordinated debt with warrants.
Several potential investors have indicated to the Company that it needs to
reduce or eliminate the dividend burden of the outstanding shares of Preferred
Stock as a condition of their willingness to pursue further consideration of an
investment in the Company. Based on discussions with these potential
investors, the Company believes that its ability to successfully complete an
offering of convertible or subordinated debt would be significantly improved if
at least 50% of the outstanding shares of Preferred Stock were converted into
Common Stock.
In July 1997, the Company received from a current holder of shares of
9%/7% Preferred Stock an expression of interest in heading up a group that
would purchase up to $12,000,000 in additional shares of 9%/7% Preferred Stock,
subject to certain material modifications to the terms of the 9%/7% Preferred
Stock. After considering the advice of an investment banking firm, the Company
rejected this expression of interest because (i) the sale of more shares of
9%/7% Preferred Stock, as modified, would have further discouraged investments
in the Common Stock, increased the dividend payments on the 9%/7% Preferred
Stock by approximately 50% and resulted in more difficulty in creating earnings
for the holders of shares of Common Stock, (ii) the proposed modifications of
the terms of the 9%/7% Preferred Stock would have further limited the Company's
financial flexibility, and (iii) the sale of more shares of the 9%/7% Preferred
Stock would have exacerbated the reason cited by prospective investors for not
purchasing subordinated or convertible debt of the Company to date.
23
<PAGE> 28
Following the Company's acquisition of MSF, MSF's $70 million line of
credit from a bank group led by Fleet Bank, N.A. has remained in place. The
line of credit expires on July 31, 1998 and must be reduced to $50 million by
December 31, 1997.
The Company has also been seeking to obtain additional warehouse lines
of credit. In May 1997, the Company announced that it had a commitment for a
$100,000,000 warehouse line of credit facility. On August 29, 1997, the
Company announced that negotiations with respect to the facility had terminated
because the parties were unable to agree on terms.
On August 29, 1997, the Company announced that, based on current
projections, under the terms of the Hibernia loan agreement it would not be
allowed to pay dividends in cash on the Preferred Stock for the quarter ended
September 30, 1997. In making the announcement, the Company stated that (i)
its growth is dependent on increasing its capital resources, (ii) it is
continuing discussions to obtain additional lines of credit and raise
additional equity or debt financing, (iii) during these discussions it has
become apparent that investors and lenders will not allow the continued,
unrestricted payment of preferred stock dividends in cash while they are
providing capital and funding for growth and (iv) accordingly, to facilitate
raising the additional financing necessary to fund growth, the Company's
management and its financial advisors were exploring the feasibility and
desirability of offering Holders of the Preferred Stock the opportunity to
exchange their shares of Preferred Stock for shares of the Company's Common
Stock and/or cash. The Company did not accrue any dividends on the 9%/7%
Preferred Stock for the quarter ended September 30, 1997 due to restrictions in
the Hibernia loan agreement and the terms of the 9%/7% Preferred Stock.
In October 1997, the Company announced that, as part of an overall
program to reduce ongoing overhead expenses, the Company's President and Chief
Operating Officer and several other executives were leaving the Company and
that it was closing a regional center maintained at MSF's prior headquarters in
Jackson, Mississippi and MSF's collection center in Mobile, Alabama. These
reductions, together with other MSF staff reductions implemented since the
acquisition of MSF, are expected to result in annual savings of approximately
$3.5 million to $4 million compared to the combined overhead expenses of the
Company and MSF at the time of the acquisition of MSF.
PURPOSES
The principal purposes of the Reclassifications and Exchange Offer are
to (i) eliminate or decrease the dividend burden on the Company from the
Preferred Stock, and (ii) thereby enhance the Company's financial flexibility.
The Company believes that this enhanced flexibility should enable it to obtain
additional capital and to take advantage of the consolidation occurring in the
non-prime automobile finance industry. The Company believes that its future
growth is dependent on its ability to obtain additional debt and/or equity
capital, some or all of which may take the form of warehouse lines of credit
and subordinated and/or convertible debt. As shown below, successful
completion of the Reclassifications or Exchange Offer will increase the
Company's book value attributable to its Common Stock and will decrease net
loss per share of Common Stock, which the Company believes will make the
Company and the Common Stock more attractive to potential lenders and
investors.
<TABLE>
<CAPTION>
PREMIUM ANALYSIS AS OF NOVEMBER 18, 1997
------------------------------------------------------
CLOSING RECLASSIFICATIONS CLOSING RECLASSIFICATIONS RECLASSIFICATIONS
COMMON /EXCHANGE PREFERRED /EXCHANGE /EXCHANGE
STOCK OFFER STOCK OFFER OFFER
PRICE VALUE PRICE PREMIUM PREMIUM
- -------- ----------------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C>
$ 1.69 $ 6.76 $ 5.00 $ 1.76 35.2%
</TABLE>
24
<PAGE> 29
<TABLE>
<CAPTION>
PRO FORMA NET INCOME FOR SIX MONTHS ENDED SEPTEMBER 30, 1997 (1)
----------------------------------------------------------------
PRO FORMA PRO FORMA 100%
ACTUAL 50% EXCHANGE (3) RECLASSIFICATIONS (3)
- ----------------------------------- ----------------------------- --------------------------------
NET INCOME NET INCOME NET INCOME NET INCOME
(LOSS) (LOSS) (LOSS) PER NET (LOSS)
NET PER COMMON TO COMMON INCOME PER COMMON
INCOME (LOSS) (2) SHARE COMMON STOCK SHARE (4) (LOSS) (5) SHARE (5)
- ----------------- ------------ ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$ (6,231,000) $ (1.42) $ (17,197,000) $ (1.45) $ (20,766,000) $ (1.23)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA COMMON EQUITY BOOK VALUE AS OF SEPTEMBER 30, 1997 (1)
---------------------------------------------------------------
PRO FORMA PRO FORMA 100%
ACTUAL 50% EXCHANGE RECLASSIFICATIONS
- ------------------------------------- -------------------------- --------------------------
COMMON COMMON
EQUITY COMMON EQUITY COMMON
COMMON (DEFICIT) EQUITY (DEFICIT) COMMON EQUITY
EQUITY (DEFICIT)(6) PER SHARE (DEFICIT)(6) PER SHARE EQUITY PER SHARE
- -------------------- ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
$ (40,562,000) $ (6.07) $ (5,821,000) $ (0.50) $ 29,468,000 $ 1.76
</TABLE>
- ---------------------
(1) See "Pro Forma Financial Information" for a detailed
presentation of pro forma adjustments and assumptions.
These numbers do not include any pro forma adjustments
for the Company's acquisition of MSF on July 31, 1997.
(2) Represents net income (loss) attributable to Common Stock,
after accrual or payment of Preferred Stock dividends. The
9%/7% Preferred Stock dividends were not accrued for the
quarter ended September 30, 1997.
(3) Assumes the Reclassifications or the Exchange Offer were
consummated on April 1, 1997.
(4) Includes a $(4,278,000) accounting adjustment for the Exchange
Offer. If this adjustment is excluded, the net income (loss)
to Common Stock and the net income (loss) per common share
would have been $(6,071,000) and $(0.65), respectively.
(5) Includes a $(8,556,000) accounting adjustment for the Exchange
Offer. If this adjustment is excluded, the net income (loss)
to Common Stock and the net income (loss) per common share
would have been $(5,362,000) and $(0.37), respectively.
(6) Represents stockholders' equity (deficit) attributable to
Common Stock, after deduction for total liquidation preference
of Preferred Stock.
The Company is seeking to obtain additional lines of credit and raise
additional equity or debt financing. During recent discussions with investors
and lenders, it has become apparent to the Company that investors and lenders
are unwilling to provide capital and funding to the Company for growth given
the current dividend provisions of the Preferred Stock. The Company is seeking
to undertake the Reclassifications and the Exchange Offer to facilitate the
Company's future capital and fund raising activities.
The Company has engaged the Financial Advisor to advise and assist the
Board of Directors in connection with the Reclassifications and Exchange Offer.
DETERMINATIONS OF THE BOARD OF DIRECTORS
Because of the desirability of reducing the Company's expenditures for
dividends on the Preferred Stock and the factors discussed below, the Board of
Directors of the Company determined at a meeting held on November 12, 1997 that
the successful completion of the Reclassifications or Exchange Offer is in the
best interests of the Company and the current holders of Common Stock and is
fair to the exchanging Holders of Preferred Stock from a financial point of
view. The Board of Directors recommends that stockholders vote for approval of
the Preferred Stock Amendments and the Exchange Offer Proposal. However, the
Board of Directors makes no recommendation as to whether a Holder of Preferred
Stock should exchange the Holders' shares in the Exchange Offer if the
Reclassifications are not approved. Although the directors believe that the
transaction is fair to Holders of shares of Preferred Stock, the directors also
believe that the Holders of Preferred Stock should make an independent judgment
as to whether such action is in their own best interests after considering
their own particular circumstances and the benefits and detriments of the
Exchange Offer to such Holders. See "--Effects of Reclassifications on Holders
of Preferred Stock and Effects of Exchange Offer on Exchanging Holders of
Preferred Stock" and "--Effects on Holders Retaining Preferred Stock." The
directors and executive officers of the Company who own shares of Preferred
Stock, however, have indicated their present intention to tender their shares
of Preferred Stock in the Exchange Offer and to vote their shares in favor of
the Proposals. See "Principal Holders of Capital Stock."
25
<PAGE> 30
In reaching its conclusions, the Board of Directors considered, among
other things, the fairness opinion delivered by Principal Financial and the
presentations and analyses delivered by the Financial Advisor. Principal
Financial was engaged by the Company to render its opinion to the Board of
Directors as to the fairness of the Exchange Consideration, from a financial
point of view, to the Holders of shares of Preferred Stock. See "Fairness
Opinion." The Board of Directors did not form a committee of directors to
represent the Holders of shares of Preferred Stock. The Holders of Preferred
Stock were not represented by any other independent party acting solely on
behalf of the unaffiliated Holders of shares of Preferred Stock to negotiate
the Exchange Consideration. The Board of Directors engaged the Financial
Advisor to advise and assist the Board regarding the structure and terms of the
Exchange Offer and the Reclassifications and to advise the Board of Directors
in determining whether the Exchange Offer and the Reclassifications are in the
best interests of the Company and current holders of the Common Stock.
The Board of Directors met on September 18, 1997, at which time the
Financial Advisor reported on its initial analysis of the potential effects
that an exchange offer of solely Common Stock for shares of the Preferred Stock
would have on the Company's book value and projected fiscal 1998 earnings per
share of Common Stock, and on the potential market price of the Common Stock at
various exchange ratios, price-to-earnings ratios and percentages of shares of
Preferred Stock exchanged. The Board of Directors requested that the Financial
Advisor consider the advisability of a cash component in the exchange
consideration to be offered to the Holders of shares of Preferred Stock.
At a meeting on October 8, 1997, the Board of Directors gave further
consideration to an exchange offer. The Financial Advisor made a presentation
regarding its analysis of the potential effects that an exchange of the
Preferred Stock for shares of Common Stock would have on the Company's book
value and projected fiscal 1998 earnings per share of Common Stock, and on the
potential market price of the Common Stock at various exchange ratios,
price-to-earnings ratios and percentages of shares of Preferred Stock
exchanged. The Financial Advisor advised that its preliminary recommendation
was not to include cash as part of the offered exchange consideration.
Although no formal recommendation was made at the meeting, the Financial
Advisor informally advised that its recommended exchange rate, based on
relative trading prices for the 9%/7% Preferred Stock and Common Stock at that
time, would have been four-to-one. The Board was advised that an exchange
offer would require the approval of the Company's stockholders because of the
rules of The Nasdaq Stock Market. The directors, without taking any formal
action, recommended that further action be taken toward an exchange offer to
the holders of the Preferred Stock and toward seeking approval of the Company's
stockholders for reclassifications of each series of the Preferred Stock into
Common Stock, as well as seeking approval for the proposed exchange offer.
On October 25, 1997, the Financial Advisor forwarded its
recommendation and supporting written materials to the members of the Board of
Directors. At a meeting of the Board of Directors held on November 12, 1997,
the Financial Advisor reaffirmed its recommendation with respect to the
Exchange Consideration for a proposed exchange offer or reclassification of the
Preferred Stock. The recommendation proposed an Exchange Consideration of four
shares of Common Stock for each share of Preferred Stock. At the same meeting,
the Financial Advisor gave a presentation supporting the proposed Exchange
Consideration. Principal Financial then delivered its written opinion dated as
of November 10, 1997 (the "Fairness Opinion") that, as of the date of the
Fairness Opinion and based on the assumptions made, procedures followed and
matters considered as set forth in the Fairness Opinion, the Exchange
Consideration is fair to the holders of the Preferred Stock, from a financial
point of view. Principal Financial also made a presentation of supporting
financial analyses and information. See "Fairness Opinion" and Annex A for a
description of the types of analyses performed and the factors considered by
Principal Financial and for a description of the scope of, and limitations on,
its fairness opinion.
After considering the presentations by the Financial Advisor and
Principal Financial, the fairness opinion of Principal Financial and the
factors listed below, the Board of Directors unanimously approved proceeding
with the Exchange Offer and the Reclassifications with the Exchange
Consideration at four shares of Common Stock per share of Preferred Stock. The
Board of Directors unanimously concluded that the Exchange Offer was in the
best interests of the Company and the current Holders of shares of Common
Stock, approved the Exchange Offer and the Proposals, directed that the
Proposals be submitted to the stockholders for consideration and approval at
the Special Meeting and authorized the Company to undertake the Exchange Offer.
In making the foregoing determination to approve the Exchange Offer
and the Proposals, in addition to the presentations of the Financial Advisor
and Principal Financial and the fairness opinion of Principal Financial, the
Board of Directors considered the financial position of the Company, the
various disclosures contained in a draft of this Proxy Statement/Prospectus and
other factors, including the following:
26
<PAGE> 31
(i) The current and historical market prices for the 9%/7% Preferred
Stock and the Common Stock. See "Trading Price and Dividend
History." The Board also considered that the prices since August
29, 1997 were likely to have been impacted by the announcement that
the Company would be unable to pay cash dividends on the Preferred
Stock for the quarter ended September 30, 1997 and may have been
impacted by the contemplation of an exchange offer and investor
attitudes as to the likelihood as to its consummation and impact on
the Company;
(ii) The fact that the Company was unable to pay the quarterly dividends
on the Preferred Stock for the quarter ended September 30, 1997 and
may be unable to pay such dividends for future periods as the result
of the covenant in the Hibernia loan agreement;
(iii) The probability that the Company will be prohibited from, or limited
in, paying dividends on the Preferred Stock by the provisions
contained in one or more of the Company's future loan agreements, if
any;
(iv) The current book value per share of the Preferred Stock and its
relationship to the liquidation preferences of the shares of
Preferred Stock;
(v) The potential effects of the Reclassifications and Exchange Offer on
the Company's book value and historical and projected earnings
(loss) per share of Common Stock and on the market price of the
Common Stock;
(vi) The premium that the Exchange Consideration represents to both the
current conversion rates of the Preferred Stock and the market price
of the 9%/7% Preferred Stock;
(vii) The Company's need to obtain additional funding and capital to
finance its purchase of motor vehicle receivables and origination of
consumer loans;
(viii) The reluctance of investors and lenders to provide additional
funding and capital to the Company while cash dividends on the
Preferred Stock continue to be paid or to accrue; and
(ix) The terms of the 9%/7% Preferred Stock and 12% Preferred Stock,
including without limitation their respective dividends, voting
rights and liquidation preferences and restrictions on repurchases
of one series of Preferred Stock while dividend arrearages on the
other series exist.
In determining whether the Exchange Offer and Reclassifications are in
the best interests of the Company, the Board considered in particular the
Company's need to obtain additional funding and capital to fund its receivables
purchases and loan originations and the unwillingness of investors and lenders
to provide funding and capital to the Company for growth given the current
dividend provisions of the Preferred Stock. The Board concluded that the
Company must substantially reduce the amount of dividends payable on the
Preferred Stock and that the Reclassifications, or alternatively the Exchange
Offer, were the best method to eliminate or substantially reduce such dividend
obligations, thereby freeing funds for the Company's operations and growth
plans, while providing Holders of shares of Preferred Stock an opportunity to
share in any appreciation in the value of the Company through the receipt of
Common Stock. The Board also considered that the book value per share and
earnings per share attributable to the Common Stock were negative, and
if the Reclassifications were effected, or a sufficient number of shares of
Preferred Stock were exchanged in the Exchange Offer, the book value per share
and future earnings per share attributable to the Common Stock might become
positive. The Financial Advisor advised the Board that a change from negative
to positive book value and future earnings per share for the Common Stock
should have a positive impact on the market price for the Common Stock.
In view of the wide variety of factors considered by the Board of
Directors in connection with the Exchange Offer and the Reclassifications, the
Board of Directors did not find it practicable to, and did not, quantify or
otherwise assign relative weight to the factors considered in reaching its
determination set forth above.
THE RECLASSIFICATIONS WOULD EFFECT THE EXCHANGE OF ALL SHARES OF
PREFERRED STOCK. PARTICIPATION IN THE EXCHANGE OFFER IS VOLUNTARY AND HOLDERS
OF PREFERRED STOCK SHOULD CAREFULLY CONSIDER WHETHER TO EXCHANGE. THE BOARD OF
DIRECTORS OF THE COMPANY HAS DETERMINED THAT THE RECLASSIFICATIONS AND THE
EXCHANGE OFFER ARE IN THE BEST INTEREST OF THE COMPANY, HAS UNANIMOUSLY
APPROVED THE RECLASSIFICATIONS AND THE EXCHANGE OFFER AND RECOMMENDS THAT
STOCKHOLDERS VOTE FOR THE PREFERRED STOCK AMENDMENTS AND THE EXCHANGE OFFER
PROPOSALS. HOWEVER, THE BOARD OF DIRECTORS MAKES NO RECOMMENDATION TO HOLDERS
OF PREFERRED STOCK AS TO WHETHER TO TENDER
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OR REFRAIN FROM TENDERING IN THE EXCHANGE OFFER. HOLDERS OF PREFERRED STOCK
ARE URGED TO CONSULT THEIR FINANCIAL AND TAX ADVISORS IN MAKING THEIR DECISION
ON WHAT ACTION TO TAKE AFTER CONSIDERING THEIR OWN PARTICULAR CIRCUMSTANCES AND
THE BENEFITS AND DETRIMENTS TO HOLDERS.
FAIRNESS OPINION
The Company retained Principal Financial to provide to the Board of
Directors a written opinion that the Exchange Consideration to be received by
the holders of the Preferred Stock pursuant to the Reclassifications or the
Exchange Offer is fair, from a financial point of view, to such holders.
On November 12, 1997, Principal Financial presented to the members of
the Board of Directors its Fairness Opinion to the effect that, as of the date
of the Fairness Opinion, which was November 10, 1997, and based on the
assumptions made, procedures followed and matters considered as set forth in
the Fairness Opinion, the Exchange Consideration is fair to the holders of the
Preferred Stock, from a financial point of view. Such opinion is subject to
certain limitations and is based on certain assumptions stated therein, and the
summary of such opinion set forth below is qualified in its entirety by
reference to the full text of such opinion which is attached as Annex A to this
Proxy Statement/Prospectus. Holders of the Preferred Stock are urged to read
the Fairness Opinion in its entirety as such opinion is subject to the
limitations and based on the assumptions set forth therein.
No limitations were imposed by the Company on the scope of Principal
Financial's investigation or the procedures followed by Principal Financial in
rendering the Fairness Opinion. In arriving at the Fairness Opinion, Principal
Financial did not ascribe a specific range of value to the Company, but rather
made its determination as to the fairness, from a financial point of view, of
the Exchange Consideration on the basis of the financial and comparative
analysis described below. Principal Financial's Fairness Opinion is for the
use and benefit of the Board of Directors of the Company and was rendered to
the Board of Directors in connection with its consideration of the
Reclassifications and the Exchange Offer.
The Fairness Opinion does not constitute a recommendation as to any
action the Board of Directors or any stockholder of the Company should take in
connection with the Reclassifications or the Exchange Offer. In rendering the
Fairness Opinion, Principal Financial has not been engaged to act as an agent
or fiduciary of the holders of the Preferred Stock or any other third party.
The Fairness Opinion relates solely to the fairness of the Exchange
Consideration to the holders of the Preferred Stock from a financial point of
view. Principal Financial did not express any opinion as to the structure,
terms or effects of any other aspect of the Reclassifications and the Exchange
Offer. Principal Financial was not requested to and did not make any
recommendation to the Board of Directors of the Company as to the form or
amount of the consideration to be offered to the holders of the Preferred Stock
in the Reclassifications or the Exchange Offer. Principal Financial was not
requested to opine as to, and its Fairness Opinion does not address, the
Company's underlying business decision to proceed with or effect the
Reclassifications or the Exchange Offer.
In connection with the Fairness Opinion, Principal Financial, among
other things, has: (1) reviewed the Registration Statement and Letter of
Transmittal related to the Exchange Offer to be included as an exhibit to the
Registration Statement; (2) reviewed the Charter and all amendments thereto;
(3) reviewed the Loan Agreement and Commercial Guaranty with Hibernia; (4)
reviewed the Loan and Security Agreement between the Company and Lehman
Commercial Paper, Inc.; (5) reviewed the Offering Memorandum for the Company's
proposed subordinated debt; (6) reviewed and analyzed the Company's Form 10-K
for the fiscal year ended March 31, 1997; (7) reviewed the Company's Form 10-Q
for the period ended June 30, 1997; (8) reviewed certain internal financial
statements of the Company prepared by management of the Company, including
financial statements for the month ended August 31, 1997; (9) reviewed the
Company's financial projections through 2004, and the underlying assumptions,
prepared by management of the Company; (10) reviewed and charted historical
trading prices and volumes of the Common Stock and the 9%/7% Preferred Stock,
and analyzed the relationship between the two securities; (11) interviewed
management of the Company and other personnel regarding the financial
performance and the projected financial performance of the Company; (12)
interviewed management of the Company and other personnel regarding the
Company's ability to keep certain revolving credit lines in place; (13)
interviewed management of the Company and other personnel regarding the
Company's current litigation; (14) had discussions with management regarding the
Company's ability to raise capital given the Company's current equity
structure, and in the event the Reclassifications or the Exchange Offer is
completed; (15) analyzed historical and projected liquidation value of the
Preferred Stock; (16) identified and reviewed comparable transactions, to the
extent publicly available; (17) reviewed certain financial and stock market
data of the Company and compared that data with similar data for other
publicly-held companies that have operations similar in some respects to the
operations of the Company; (18) performed various analyses of the Company, the
Reclassifications and the Exchange Offer using various valuation methodologies,
including: (a) comparable transactions analysis; (b) comparable public company
analysis,
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<PAGE> 33
including trading multiples; (c) discounted cash flow analysis; (d) analysis of
historical trading relationships; and (e) liquidation valuation; and (19)
performed such other studies, inquiries, and investigations necessary to render
the Fairness Opinion.
In rendering the Fairness Opinion, Principal Financial assumed and
relied upon, without independent verification, the accuracy, completeness and
fairness of all of the financial and other information used by it without
assuming any responsibility for independent verification of the information and
has further relied upon the assurance of management of the Company that they
are not aware of any facts or circumstances that would make the information
inaccurate or misleading. With respect to the financial projections of the
Company, upon advice of the Company, Principal Financial has assumed that the
projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of the Company as
to the future financial performance of the Company and that the Company will
perform substantially in accordance with the projections. The Fairness Opinion
necessarily was based upon market, economic and other conditions as they
existed on, and could be evaluated as of, the date of the Fairness Opinion. In
addition, Principal Financial did not conduct any physical inspection of the
properties or facilities of the Company. Principal Financial has also assumed
that the Reclassifications and the Exchange Offer will be in all respects
carried out in compliance with all applicable laws and regulations.
The Fairness Opinion is based solely upon the information set forth
therein as reviewed by Principal Financial and circumstances, including
economic, market and financial conditions, existing as of the date of the
Fairness Opinion. Events occurring after the date of the Fairness Opinion
could materially affect the assumptions used both in preparing this opinion and
the documents and projections reviewed by Principal Financial. Principal
Financial has undertaken to update the Fairness Opinion prior to the mailing of
this Proxy Statement/Prospectus to the Company's stockholders.
Additionally, in connection with rendering its opinion, Principal
Financial assumed that holders of at least 50% of the outstanding Preferred
Stock will receive the Exchange Consideration pursuant to the Reclassifications
or the Exchange Offer, that holders of the Preferred Stock will recognize no
gain or loss for tax purposes pursuant to the Reclassifications and the
Exchange Offer under any federal, state, local or foreign income or other tax
laws, that the Company will not incur or suffer any material loss or liability
with respect to its current litigation, that the Company will refinance all
indebtedness due within the next twelve months on terms and conditions
favorable to the Company, and that neither HPIL nor the Company's other lenders
will accelerate any indebtedness owed by the Company to HPIL or such lenders.
Principal Financial did not opine, and was not requested by the Board
of Directors to opine, as to the fairness of any aspect of the
Reclassifications and the Exchange Offer other than the Exchange Consideration
to be received by the Holders in connection therewith. The Fairness Opinion
does not constitute a recommendation to any stockholder of the Company
(including the holders of Preferred Stock) as how such stockholder should vote
on the Proposals, and does not constitute a recommendation that any holder of
Preferred Stock should exchange his Preferred Stock pursuant to the Exchange
Offer.
The following is a summary of certain financial analyses performed by
Principal Financial in connection with the preparation of the Fairness Opinion.
Selected Comparable Transaction Analysis. Principal Financial
analyzed certain publicly available information relating to selected recent
comparable exchange offers. These were exchange offers in which a public
company successfully completed an offer to exchange common stock for
outstanding public preferred stock of the same company. Principal Financial
analyzed such transactions and identified companies which had undertaken such
offers for reasons similar to those of the Company. Principal Financial
computed the premium which the exchange offer represented to the market price
of the preferred stock on the day immediately prior to the announcement of the
exact exchange consideration. Principal Financial noted that on November 7,
1997, which was the last day prior to the date of the Fairness Opinion, the
premium was greater than the range of premiums in comparable transactions. For
the transactions reviewed, the premium has ranged between 1% and 26%, with an
average of 14.8%. The Exchange Consideration in the Reclassifications and the
Exchange Offer represents a premium of 55.2% utilizing the market prices of the
Common Stock and the 9%/7% Preferred Stock as of November 7, 1997.
Conversion Premium Analysis. Principal Financial reviewed and
compared the Exchange Consideration to a range of considerations under various
scenarios. Under the optional conversion right of the 9%/7% Preferred Stock,
the stockholder has the option, at any time, to convert one share of 9%/7%
Preferred Stock into two shares of Common Stock. Under the mandatory
conversion that would occur in March 15, 2003, holders of 9%/7% Preferred Stock
will receive no
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<PAGE> 34
more than three shares of Common Stock. The Exchange Consideration provides a
premium of 35.2% based on the market prices of the Common Stock and 9%/7%
Preferred Stock as of November 7, 1997. The Exchange Consideration is greater
than the consideration under optional and mandatory conversions. The optional
conversion of two shares of Common Stock translates into a discount of 22.40%
to the 9%/7% Preferred Stock market price as of November 7, 1977, and the
mandatory conversion of three shares of Common Stock translates into a 16.40%
premium to the 9%/7% Preferred Stock market price as of such date.
Implied Market Price Exchange Ratios: Principal Financial computed
the implied market price exchange ratio by dividing the historical market price
of the 9%/7% Preferred Stock by the historical market price of the Common Stock
on a daily basis for the period from November 26, 1996 to November 7, 1997. For
these periods, Principal Financial computed the average implied market price
exchange ratio for trading periods of 30 days, 60 days, 90 days, and 120 days
ending November 7, 1997. Principal Financial also computed the average implied
market price ratio for the period between August 28, 1997 and November 7, 1997
(August 28, 1997 being the day immediately prior to the Company announcing its
prohibition of paying dividends on its Preferred Stock and November 7, 1997
being the last trading day prior to the date of the Fairness Opinion). Principal
Financial noted that the Exchange Consideration was greater than the
consideration that would be reflected by the average implied exchange ratios
derived by this method during all periods of study. The averages were as
follows: 30 day average of 3.02X; 60 day of 3.34X; 90 day of 3.07X; 120 day of
2.98X. For the period since the Initial Announcement Date, the implied
exchange ratio was 3.24X, and for the entire trading history, the implied
exchange ratio was 2.88X.
Implied Weighted Average Market Price Exchange Ratios: In this
analysis, Principal Financial weighted the prices used in the average implied
market exchange ratio by volume. Principal Financial computed the average
trading price weighted by the volume of shares traded of the 9%/7% Preferred
Stock and the average historical trading price of the Common Stock. Principal
Financial computed an implied weighted average market price exchange ratio by
dividing the historical weighted average market price of the 9%/7% Preferred
Stock by the historical weighted average market price of the Common Stock for
30 day, 60 day, 90 day and 120 day periods ending November 7, 1997. Principal
Financial also computed the implied weighted average market price exchange
ratio for the period between November 26, 1996 and November 7, 1997, and the
period between August 28, 1997 and November 7, 1997. Principal Financial noted
that the Exchange Consideration was greater than the consideration that would
be reflected by the implied weighted average market price exchange ratio
derived by this method over each period. The implied weighted average market
price exchange ratios were as follows: 30 day of 3.29X; 60 day of 3.76X; 90
day of 3.48X; 120 day of 3.20X. For the period since the Initial Announcement
Date, the implied exchange ratio was 3.58X, and for the entire trading history,
the implied weighted average exchange ratio was 2.98X.
Analysis of Earnings. Principal Financial reviewed the Company's
financial forecasts for the fiscal years 1998 to 2004 prepared and provided by
management of the Company. The figures are projected subsequent to the
Exchange Offer, and are based upon a 50% conversion in the Exchange Offer. The
analysis examines projected earnings per share of Common Stock. The
projections indicate that the earnings per share grow over the period of the
year ending March 31, 1998 through the year ending March 31, 2004.
Principal Financial also stress-tested the Company's projections by
reducing the Company's forecasted net income and loan loss provisions by 20%,
but by maintaining its general and administrative expenses at the forecasted
higher volume levels. The results indicate the Company would return to
profitability in fiscal 2000 and remain profitable thereafter.
Analysis of Earnings under Slow Growth Scenario. Principal Financial
reviewed the Company's financial forecasts monthly from December 31, 1997
through March 31, 2001 under a slow growth scenario. The slow growth scenario
is based on the assumptions that no exchange takes place, new funds are not
made available, and no refinancing of the Company's current debt occurs. Under
this scenario, the Company scales back operations significantly, shrinking its
balance sheet before it experiences new growth, and the value of the Preferred
Stock remains flat.
Historical Analysis of Tangible Book Value and Liquidation Value of
the Preferred Stock. Principal Financial computed the historical tangible
book value of the Preferred Stock. Principal Financial also computed the
liquidation value of the Preferred Stock in two methods. In computing the
liquidation value, Principal Financial assumed a 95% market value in a sale of
the Company's receivable portfolio and a 3% administrative cost for such a
portfolio liquidation sale. Principal Financial also computed the liquidation
value assuming an 80% market value in a sale of the Company's receivable
portfolio and a 3% administrative cost for such portfolio liquidation sale.
The value of the Exchange Consideration of $7.76 (the market price of four
shares of Common Stock as of November 7, 1997) offered in the Reclassifications
and the Exchange Offer is greater than the Preferred Stock tangible book value
and the adjusted liquidation values of the Preferred Stock as of September 30,
1997. On September 30, 1997, the tangible book value of the Preferred Stock
was $6.77 per share, the adjusted liquidation value based on a 95% market value
of the receivable portfolio was $3.04, and the adjusted liquidation value based
on an 80% market value of the receivable portfolio was a negative $3.96.
Tangible Book Value of the Preferred to Liquidation Preference.
Principal Financial computed the historical tangible book value of the
Preferred Stock and compared it to the liquidation preferences of the 9%/7%
Preferred Stock and
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the 12% Preferred Stock of $28.00 and $40.00, respectively, per share.
Principal Financial noted that the tangible book value of the Preferred Stock
has been consistently at a discount to these liquidation preferences. This
discount has been increasing as the tangible book value of the Preferred Stock
has decreased over time.
The foregoing summary does not purport to be a complete description of
Principal Financial's analyses or of the presentation by Principal Financial to
the Board. Principal Financial did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as
to the significance and relevance of each analysis or factor. Accordingly,
Principal Financial believes that its analyses must be considered as a whole
and that selecting portions of its analyses or of the factors considered,
without considering all analyses and factors, could create an incomplete view
of the processes underlying the preparation of the Fairness Opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. In performing its
analyses, Principal Financial made numerous assumptions with respect to general
business and economic conditions and other matters, many of which are beyond
the control of the Company. The analyses performed by Principal Financial are
not necessarily indicative of actual values or actual future results, which may
be significantly more or less favorable than suggested by such analyses.
Additionally, analyses relating to the values of businesses and various classes
of securities do not purport to be appraisals or to reflect the prices at which
businesses may be sold or at which a company's securities may trade at any
given time. Accordingly, such analyses are inherently subject to substantial
uncertainty.
As part of its investment banking activities, Principal Financial is
regularly engaged in the valuation of businesses and their securities in
connection with recapitalizations, exchange offers, mergers and acquisitions,
negotiated underwritings, competitive bids, secondary distributions of listed
and unlisted securities, private placements and valuations for corporate and
other purposes. The Board of Directors selected Principal Financial because of
its expertise, reputation and familiarity with the Company in particular and
the Company's industry in general.
As compensation for its services in connection with the
Reclassifications and the Exchange Offer, the Company has paid Principal
Financial a fee of $150,000. The Company has also agreed to reimburse Principal
Financial for its reasonable expenses (including, without limitation,
professional and legal fees and disbursements) incurred in connection with its
engagement and to indemnify Principal Financial and certain related persons
against certain liabilities in connection with its engagement, including
certain liabilities under the federal securities laws.
Principal Financial is acting as a financial advisor to the Board of
Directors in connection with the Reclassifications and the Exchange Offer. In
the ordinary course of its business, Principal Financial actively trades in the
securities of the Company for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
these securities.
EFFECTS OF RECLASSIFICATIONS ON HOLDERS OF PREFERRED STOCK AND EFFECTS OF
EXCHANGE OFFER ON EXCHANGING HOLDERS OF PREFERRED STOCK
Detriments
Holders of Preferred Stock whose shares are exchanged or reclassified
will no longer own such shares of Preferred Stock and, consequently, will no
longer be entitled to any of the rights and privileges of the Preferred Stock
with respect to such exchanged shares. The rights and privileges of the 12%
Preferred Stock include, among other things, the rights to (i) receive
cumulative preferential cash dividends, when and as declared by the Board of
Directors of the Company out of funds legally available therefor, at the rate
per share equal to $4.80 per annum, (ii) receive a liquidation preference of
$40.00 per share plus accrued and unpaid dividends upon the liquidation,
dissolution or winding up of the Company and (iii), voting separately as a
class, elect two directors to the Board of Directors if the Company fails to
make six quarterly dividend payments on the 12% Preferred Stock. The rights
and privileges of the 9%/7% Preferred Stock include, among other things, the
rights to (i) receive non-cumulative preferential dividends, out of funds
legally available therefor, at a per annum rate of $2.52 per share until March
31, 1999, and $1.96 per share thereafter until conversion, (ii) receive a
liquidation preference of $28.00 per share plus accrued and unpaid dividends
upon the liquidation, dissolution or winding-up of the Company and (iii),
voting separately as a class, elect two-thirds of the directors to the Board of
Directors if the Company fails to make four consecutive quarterly dividend
payments, in the form of cash or shares of Common Stock, on the 9%/7% Preferred
Stock and approve certain other matters, including the 9%/7% Reclassification.
See "Comparison of Common Stock and Preferred Stock," "Description of
Capital Stock--12% Preferred Stock" and "--9%/7% Preferred Stock" and "Pro
Forma Financial Information."
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Although Holders of shares of Preferred Stock have the foregoing
dividend rights, the Company is currently prohibited from paying cash dividends
on the Preferred Stock and may continue to be prohibited from paying dividends
on the Preferred Stock in the future. Holders of shares of Preferred Stock
exchanged will not receive any accrued, unpaid dividends. No separate payment
is being made pursuant to the Exchange Offer or the Reclassifications in
respect of accrued, unpaid dividends on exchanged or reclassified shares of
Preferred Stock.
Although Holders of shares of Preferred Stock are entitled to receive
the foregoing liquidation preferences upon any liquidation, dissolution or
winding up of the Company, the Company does not have sufficient net assets, and
there can be no assurance that the Company will at any time have sufficient net
assets, to pay the full liquidation preference on the Preferred Stock. Based
upon the tangible stockholders' equity of the Company as of September 30, 1997
of $16,975,000 each share of Preferred Stock would have received a
distribution of only $6.78 had the Company dissolved and wound up as of that
date, assuming the Company realized net book value for its tangible assets upon
liquidation.
The Common Stock generally provides less protection than the Preferred
Stock against risks associated with the Company and its business, and,
accordingly, investment in the Common Stock involves a higher degree of risk
than investment in the Preferred Stock. The Common Stock will continue to be
subordinate to any Preferred Stock not reclassified or exchanged and to claims
of all creditors of the Company and has no liquidation preference. Therefore,
in the event of the bankruptcy, liquidation or reorganization of the Company,
the assets of the Company will be available to make distributions in respect of
the Common Stock only after claims of all creditors of the Company have been
paid in full and the liquidation preference, plus an amount equal to accrued
and unpaid dividends, has been paid to all Holders of shares of Preferred
Stock. Accordingly, in such event, sufficient assets may not exist to pay any
amounts to holders of Common Stock. If the Exchange Offer is consummated, but
not the Reclassifications, the Preferred Stock not tendered and exchanged in
the Exchange Offer will continue to be senior to any claims of the holders of
Common Stock, including Common Stock issued in the Exchange Offer, in the event
of the bankruptcy, liquidation or reorganization of the Company.
For a summary of certain federal income tax consequences to exchanging
Holders, see "Certain Federal Income Tax Consequences."
Benefits
Holders of shares of Preferred Stock will receive a greater number of
shares of Common Stock under the Reclassifications or the Exchange Offer than
such holders would be entitled to receive upon the conversion of the Preferred
Stock in accordance with its terms. Holders of shares of Preferred Stock are
currently entitled to convert each share of 9%/7% Preferred Stock into two
shares of Common Stock and each share of 12% Preferred Stock into one share of
Common Stock. In addition, all shares of the 9%/7% Preferred Stock are
mandatorily convertible into Common Stock in the year 2003 at a rate of one
share of 9%/7% Preferred Stock for up to three shares of Common Stock, based on
a formula. Through ownership of Common Stock, exchanging Holders of the
Preferred Stock will continue to be able to participate in the Company's growth
and profitability.
Holders of shares of 12% Preferred Stock, for which there is no
established trading market, will receive marketable shares of Common Stock
which are listed for trading on The Nasdaq National Market. While due to the
passage of time the holders of outstanding shares of 12% Preferred Stock are
free to sell their shares without registration under applicable securities
laws, there are only 49,994 shares of 12% Preferred Stock outstanding. No
trading market has developed or is expected to develop for the 12% Preferred
Stock. The Exchange Offer or the 12% Reclassification provides a method by
which Holders of shares of 12% Preferred Stock may immediately create liquidity
in their investment at a exchange rate that is higher than the applicable
conversion rate for the 12% Preferred Stock.
The Board of Directors believes that all stockholders of the Company
should benefit from the enhancement of the Company's financial flexibility
resulting from the elimination or decrease of the dividend burden of the
Preferred Stock following the successful completion of the Reclassifications or
the Exchange Offer. The Company believes that this enhanced flexibility should
enable it to obtain additional capital and to take advantage of the
consolidation occurring in the non-prime automobile finance industry. See
"--Purposes" above.
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EFFECTS ON HOLDERS RETAINING PREFERRED STOCK
Benefits
Holders of shares of Preferred Stock not converted into Common Stock
pursuant to the Reclassifications or the Exchange Offer will continue to be
entitled to all of the rights and preferences of the Preferred Stock. The
rights and privileges of the 12% Preferred Stock include, among other things,
the rights to (i) receive cumulative preferential cash dividends, when and as
declared by the Board of Directors of the Company out of funds legally
available therefor, at the rate per share equal to $4.80 per annum, (ii)
convert each share of 12% Preferred Stock into one share of Common Stock, (iii)
receive a liquidation preference of $40.00 per share plus accrued and unpaid
dividends upon any liquidation, dissolution or winding up of the Company and
(iv) voting separately as a class, to elect two directors to the Board of
Directors if the Company fails to make six quarterly dividend payments on the
12% Preferred Stock. The rights and privileges of the 9%/7% Preferred Stock
include, among other things, the rights to (i) receive non-cumulative
preferential cash dividends, out of funds legally available therefor, at a per
annum rate of $2.52 per share until March 31, 1999 and $1.96 per share
thereafter until conversion, (ii) convert each share of 9%/7% Preferred Stock
into two shares of Common Stock, or up to three shares of Common upon mandatory
conversion in 2003, (iii) receive a liquidation preference of $28.00 per share
plus accrued and unpaid dividends and (iv) voting separately as a class, to
elect two-third of the directors to the Board of Directors if the Company fails
to make four consecutive quarterly dividend payments, in the form cash or
shares of Common Stock, on the 9%/7% Preferred Stock and to approve certain
other matters, including the 9%/7% Reclassifications. The shares of each
Holder who retains Preferred Stock will represent a greater percentage of the
outstanding shares of the Preferred Stock and, accordingly, will have greater
relative voting power with respect to any matter submitted for a separate vote
by the holders of the 9%/7% Preferred Stock or 12% Preferred Stock. Dividends
on shares of Preferred Stock not exchanged in the Exchange Offer will continue
to accrue in accordance with the terms of the Preferred Stock. See "Comparison
of Common Stock and Preferred Stock" and "Description of Capital Stock--12%
Preferred Stock" and "--9%/7% Preferred Stock."
Although Holders of shares of Preferred Stock are entitled to receive
the foregoing dividends, a covenant in the Hibernia loan agreement currently
prohibits the Company from paying cash dividends on the Preferred Stock. In
addition, the terms of the 9%/7% Preferred Stock currently prohibit the payment
of dividends on the 9%/7% Preferred Stock in the form of shares of Common
Stock. See the discussion below under "--Detriments."
Although Holders of shares of Preferred Stock are entitled to receive
the foregoing liquidation preferences upon any liquidation, dissolution or
winding up of the Company, the Company does not have sufficient net assets, and
there can be no assurance that the Company will at any time have sufficient net
assets, to pay the full liquidation preference on the Preferred Stock. Based
upon the tangible stockholders' equity of the Company as of September 30, 1997
of $18,734,000, each share of Preferred Stock would have received a
distribution of only $7.48 had the Company dissolved and wound up as of that
date, assuming the Company realized net book value for its tangible assets upon
liquidation.
Detriments
If the Exchange Offer is consummated, but not the Reclassifications,
the exchange of shares of 9%/7% Preferred Stock pursuant to the Exchange Offer
will reduce the number of Holders and outstanding shares of 9%/7% Preferred
Stock. As a result, the liquidity and market value of the remaining shares of
9%/7% Preferred Stock could be adversely affected. Trading in The Nasdaq
National Market following the completion of the Exchange Offer will depend upon
the number of shares of 9%/7% Preferred Stock outstanding, the number of
remaining Holders of 9%/7% Preferred Stock, the interest of securities firms in
maintaining a market in the 9%/7% Preferred Stock and other factors.
Following completion of the Exchange Offer, The Nasdaq National Market
may delist the 9%/7% Preferred Stock depending upon the number of Holders of
shares of 9%/7% Preferred Stock or the number of shares of 9%/7% Preferred
Stock that remain outstanding. The following quantitative criteria (among
other criteria) must be met for the 9%/7% Preferred Stock to continue to be
designated as a Nasdaq National Market security: (i) 750,000 shares publicly
held; and (ii) 400 holders of 100 shares or more. Following completion of the
Exchange Offer, the 9%/7% Preferred Stock may fail to continue to satisfy these
criteria and perhaps others. Accordingly, there can be no assurance that the
9%/7% Preferred Stock will continue to be listed and traded on The Nasdaq
National Market following completion of the Exchange Offer. See "Listing and
Trading of Common Stock and 9%/7% Preferred Stock."
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If the Reclassifications are not consummated but the Exchange Offer is
consummated, the Holders of Preferred Stock whose shares are not exchanged in
the Exchange Offer may continue not to receive any dividends. Dividend
arrearages on the Preferred Stock may negatively impact the Company's financial
flexibility and ability to obtain additional capital. See "--Purposes" above.
The Hibernia loan agreement prohibits any payment of dividends by the Company
if as a result the sum of the Company's tangible net worth and subordinated
debt, less any loans to insiders, would be less than $22,500,000. The payment
of cash dividends on the Preferred Stock for the quarter ended September 30,
1997 would have violated this prohibition. In addition, the Company may enter
into other loan agreements that contain provisions limiting or prohibiting
payment of cash dividends on the Preferred Stock. If the Company is prevented
from paying any dividend on the 9%/7% Preferred Stock (but not the 12%
Preferred Stock) entirely in cash, the terms of the 9%/7% Preferred Stock
specify that the Company may pay the dividend in the form of a mixture of cash
and Common Stock to the extent possible under Delaware law and any applicable
loan agreement or, if necessary, entirely in Common Stock, provided the average
market price per share of the Common Stock is $4.00 or greater for the 20
trading day period ending five days prior to the date of payment of the
dividend in Common Stock. If the Common Stock trading price remains at less
than $4.00 per share, the Company will be prohibited from paying the dividend
on the 9%/7% Preferred Stock in the form of Common Stock. There can be no
assurance that the Company will be able to pay dividends on the Preferred Stock
in cash or that it will be able to satisfy the minimum price condition for
issuance of shares of Common Stock as a dividend on the 9%/7% Preferred Stock.
If the Company is able to obtain a waiver or amendment of the foregoing
restrictions in its agreement with Hibernia or to improve its tangible net
worth to prevent the imposition of the foregoing restrictions, the Company may
be able to resume dividend payments on the Preferred Stock in the future so
long as the Company does not enter into other loan agreements that prohibit the
payment of dividends on the Preferred Stock. There can be no assurances,
however, that the Company will be able to pay any future dividends on the
Preferred Stock. See "The Exchange Offer--Purposes of the Exchange Offer."
Holders of large blocks of shares of 12% Preferred Stock or 9%/7%
Preferred Stock who do not exchange their shares in the Exchange Offer will
have greater relative voting power with respect to, and may be able to control
the outcome of, any matter submitted for a separate vote by the Holders of the
12% Preferred Stock or the 9%/7% Preferred Stock. This voting power control
may prevent other holders of shares of Preferred Stock from approving actions
for which a class vote of Preferred Stock is required that may be in the best
interests of the Company or the holders of shares of Preferred Stock.
The Preferred Stock is subordinate to claims of all creditors of the
Company. Therefore, in the event of the bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations in respect of the Preferred Stock only after claims of all
creditors of the Company have been paid in full. Accordingly, in such event,
sufficient assets may not exist to pay the liquidation preference on the
Preferred Stock. However, the Preferred Stock not tendered and exchanged in
the Exchange Offer will continue to be senior to any claims of the holders of
Common Stock, including Common Stock issued in the Exchange Offer, in the event
of the bankruptcy, liquidation or reorganization of the Company. The terms of
the Preferred Stock do not contain any limitation on the incurrence of
additional indebtedness by the Company or its subsidiaries. See "Description
of Capital Stock."
EFFECTS ON HOLDERS OF COMMON STOCK
A maximum of 10,024,368 shares of Common Stock may be issued as a
result of consummation of the Reclassifications or Exchange Offer. The
issuance of these shares may cause a decline in the market price of the Common
Stock and will dilute the voting power of existing holders of Common Stock.
See "Risk Factors--Risks Associated With Investment in Common Stock--Potential
Impact on Market Price and Voting Rights of Common Stock."
The currently outstanding shares of Preferred Stock have an aggregate
liquidation preference of approximately $70,771,000. The Holders of shares of
Preferred Stock are entitled to receive, upon any liquidation, dissolution or
winding up of the Company, up to the amount of the aggregate liquidation
preference plus any accrued and unpaid dividends prior to any distribution of
the remaining assets of the Company to holders of the Common Stock. If the
Reclassifications are consummated, all shares of Preferred Stock will be
reclassified and changed into shares of Common Stock, thereby eliminating the
liquidation preference of the Preferred Stock. Assuming 50% of the outstanding
shares of each series of the Preferred Stock is exchanged pursuant to the
Exchange Offer, the aggregate liquidation preference for the remaining
Preferred Stock would be approximately $35,385,000. Accordingly, the holders
of the Common Stock would benefit from a consummation of the Reclassifications
and could benefit from consummation of the Exchange Offer by the elimination or
reduction of the aggregate liquidation preference of the Preferred Stock to an
amount less than the net realizable value of the Company's assets after
satisfaction of all liabilities of the Company. See "Capitalization" and "Pro
Forma Financial Information."
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<PAGE> 39
Although the Company had net income before dividends on the Preferred
Stock for the fiscal year ended March 31, 1997, the Company had a net loss
before dividends on the Preferred Stock of $4,561,000 for the six months ended
September 30, 1997 and net losses after dividends on the Preferred Stock and
attributable to Common Stock of $4,871,000 for the fiscal year ended March 31,
1997 and $6,231,000 for the six months ended September 30, 1997. Prior to the
quarter ended September 30, 1997, total dividends on the outstanding shares of
Preferred Stock were accruing at a rate of $1,607,500 per quarter, or $6,430,000
per year. Beginning in the second quarter of fiscal 1998, management stopped
accruing the dividends on the 9%/7% Preferred Stock. By reducing the number of
outstanding shares of Preferred Stock, the total amount of dividends payable on
the Preferred Stock is reduced. Assuming 50% and 100% of the shares of
Preferred Stock had been exchanged pursuant to the Exchange Offer or the
Reclassifications as of April 1, 1997, the pro forma net income (loss) per share
attributable to Common Stock would have been $(1.10) or $(0.97), respectively
(or $(0.65) or $(0.37), respectively, excluding an accounting loss adjustment
resulting from the Reclassifications or the Exchange Offer), for the six months
ended September 30, 1997. See "Capitalization" and "Pro Forma Financial
Information."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Holders of Preferred Stock should recognize no gain or loss on the
exchange of their shares of Preferred Stock solely for shares of Common Stock
pursuant to the Exchange Offer or the Reclassifications, except in respect of
cash received in lieu of fractional shares of Common Stock. See "Certain
Federal Income Tax Consequences."
DISSENTERS' RIGHTS
Holders of shares of Preferred Stock will not have any appraisal or
dissenters' rights with respect to the Reclassifications or Exchange Offer
under the Delaware General Corporation Law (the "DGCL") or under the Charter,
and Holders will not be voluntarily afforded dissenters' rights in connection
with the Reclassifications or Exchange Offer.
ACCOUNTING TREATMENT
It is anticipated that the accounting treatment for the
Reclassifications and Exchange Offer will be to recognize in the Company's
stockholders' equity the conversion into Common Stock of the shares of
Preferred Stock that are converted into shares of Common Stock pursuant to the
Reclassifications or the Exchange Offer. In addition, the premium paid to
induce the conversion of the Preferred Stock to Common Stock will be treated
as a reduction in the income available to holders of Common Stock for the
earnings per share calculation. The cost of this inducement is measured as the
excess of the fair value of the Common Stock issued to the holders of Preferred
Stock over the fair value of the Common Stock issuable pursuant to the original
conversion terms of the Preferred Stock. The fees and expenses the Company will
incur in connection with the Reclassifications and the Exchange Offer will be
accounted for as a current period expense.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth the Company's ratio of earnings to
combined fixed charges and Preferred Stock dividends for the last five fiscal
years or transition periods.
<TABLE>
<CAPTION>
Fiscal Year Ended(3)
-------------------------------------------------------------
Six Months
Ended Mar. 31, Mar. 31, Sept. 30, Sept. 30, Sept. 30,
September 30, 1997 1997 1996 (1) 1995 1994 1993 (2)
------------------ -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to (0.34) 0.42 (0.84) (0.76) (1.57) 0.91
Combined Fixed
Charges and Preferred
Stock Dividends
</TABLE>
- -------------
(1) Six month transition period.
(2) Nine month transition period.
(3) In each period, the Company's earnings were inadequate to cover fixed
charges and Preferred Stock dividends. The dollar amounts of the
coverage deficiencies were $6,231,000, $4,871,000, $2,998,000,
$20,134,000, $26,190,000 and $391,000 in the periods ended September
30, 1997, March 31, 1997, March 31, 1996, September 30, 1995,
September 30, 1994 and September 30, 1993.
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<PAGE> 40
THE PROXY SOLICITATION
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting will be held on ____________, 1998 at 10:00 a.m.,
local time, at the offices of the Company located at 600 North Pearl Street,
Dallas, Texas 75201.
THE PROPOSALS
This Proxy Statement/Prospectus is furnished to the holders of Common
Stock and Preferred Stock in connection with the solicitation of proxies by and
on behalf of the Board of Directors of the Company for use at the Special
Meeting, or at any adjournments or postponements thereof, for the purposes set
forth herein (the "Proxy Solicitation"). The accompanying proxy, unless the
stockholder otherwise specifies in the proxy, will be voted FOR each of the
following proposals (the "Proposals"):
1. Approval of an amendment (the "9%/7% Preferred Stock
Amendment") to the Company's Restated Certificate of
Incorporation, as amended (the "Charter"), providing for the
reclassification and conversion of each outstanding share of
9%/7% Preferred Stock into four shares of Common Stock;
2. Approval of an amendment (the "12% Preferred Stock Amendment")
to the Charter providing for the reclassification and
conversion of each outstanding share of 12% Preferred Stock
into four shares of Common Stock; and
3. Approval of the issuance of shares of Common Stock pursuant to
the Company's Exchange Offer, upon the terms and subject to
the conditions set forth in this Proxy Statement/Prospectus
and the Letter of Transmittal (the "Exchange Offer Proposal").
In addition, the accompanying proxy will be voted, in the discretion
of the proxyholders, as to the transaction of such other business as may
properly come before the Special Meeting. The Board of Directors is not
presently aware of any other matters or business to be brought before the
Special Meeting.
Approval of the Exchange Offer Proposal by the stockholders is
required by the rules of The Nasdaq National Market. Failure to obtain
stockholder approval for the Exchange Offer Proposal would prevent the
consummation of the Exchange Offer.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to holders of Preferred Stock and Common Stock on or about
_______________________, 1997.
RECORD DATE AND QUORUM
The Board of Directors of the Company has fixed the close of business
on _______________, 1997 as the Record Date for determining stockholders
entitled to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof.
The presence of a majority of the total outstanding shares of
Preferred Stock and Common Stock, represented in person or by a properly
executed proxy, is necessary to constitute a quorum for the Special Meeting.
OUTSTANDING SHARES AND HOLDERS
On the Record Date, 2,456,098 shares of 9%/7% Preferred Stock, 49,994
shares of 12% Preferred Stock, and 6,682,886 shares of Common Stock were
outstanding and entitled to vote at the Special Meeting, which shares were held
of record by 2,024, 87, and 3,521 holders, respectively.
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<PAGE> 41
VOTING
Holders of record on the Record Date are entitled to cast one vote per
share of Preferred Stock or Common Stock, either in person or by a properly
executed proxy, in connection with the approval of each of the Proposals. All
shares of Preferred Stock and Common Stock represented at the Special Meeting
by properly executed proxies received prior to the vote at the Special Meeting,
unless previously revoked, will be voted in accordance with the instructions
thereon. If no instructions are given, proxies will be voted FOR each of the
Proposals. Any proxy may be revoked at any time until the proposals are voted
on at the Special Meeting. Holders of Preferred Stock or Common Stock may also
vote their shares in person at the Special Meeting.
Shares represented at the meeting but not voted for or against a
Proposal at the meeting, such as abstentions or "broker non-votes," will be
counted in determining a quorum. A "broker non-vote" occurs if a broker or
other nominee holding shares for a beneficial owner does not have discretionary
voting power as to such shares and does not receive specific voting
instructions from the beneficial owner. Shares represented by abstentions will
be deemed present and entitled to vote for purposes of each of the Proposals,
and will have the effect of votes against the Proposals. The Proposals are
considered "non-discretionary items" with respect to which brokers and nominees
may not vote on behalf of beneficial owners without voting instructions.
Accordingly, shares represented by "broker non-votes" will not be deemed
entitled to vote at the meeting and will have no effect on the Exchange Offer
Proposal, but will have the same effect as a vote against the 9%/7% Preferred
Stock Amendment and the 12% Preferred Stock Amendment.
HOW TO VOTE IN THE PROXY SOLICITATION
Holders of Common Stock, 12% Preferred Stock or 9%/7% Preferred Stock
may vote at the Special Meeting by completing and signing the proxy card and
mailing or delivering such proxy card to the Exchange Agent at the address set
forth on the back cover page of this Proxy Statement. If no instructions are
indicated, proxies will be voted in favor of each of the Proposals. Holders of
Common Stock, 12% Preferred Stock or 9%/7% Preferred Stock whose purchase has
been registered after the Record Date and who wish to vote at the Special
Meeting must arrange with their seller to receive a proxy from the holder of
record on the Record Date of such Common Stock, 12% Preferred Stock or 9%/7%
Preferred Stock. Holders may also vote their shares of Common Stock, 12%
Preferred Stock or 9%/7% Preferred Stock by attending the Special Meeting and
voting in person.
BENEFICIAL OWNERS
Any beneficial owner whose shares of Preferred Stock or Common Stock
are registered or held of record on the Record Date in the name of his broker,
dealer, commercial bank, trust company or other nominee and who wishes to vote
for the Proposals should contact such registered holder or holder of record on
the Record Date promptly and instruct such holder to vote for the Proposals on
the beneficial owner's behalf. If such beneficial owner wishes to vote for the
Proposals directly, such beneficial owner must either make appropriate
arrangements to register ownership of shares in such owner's name or obtain a
proxy from the holder of record on the Record Date authorizing the beneficial
owner to vote by proxy on behalf of such record holder. The transfer of record
ownership of shares may take considerable time and, depending on when such
transfer is requested, may not be accomplished prior to the Special Meeting.
REVOCATION OF PROXIES
Proxies may be revoked at any time until the Proposals are voted on at
the Special Meeting. A revocation of a proxy given by a Holder of Preferred
Stock will not have any effect on those shares of Preferred Stock tendered by
the Holder for exchange pursuant to the Exchange Offer. A proxy may be revoked
by (i) giving written notice to the Secretary of the Company at or before the
Special Meeting, or (ii) duly executing and delivering a subsequent proxy. Any
stockholder of record on the Record Date may attend the Special Meeting and
vote in person, whether or not the stockholder has previously given a proxy.
Attendance at the Special Meeting will not in and of itself constitute
revocation of a proxy.
REQUIRED VOTE
Approval of the 9%/7% Preferred Stock Amendment requires the
affirmative vote of a majority of all of the outstanding shares of Common Stock
and Preferred Stock, voting together as a single class, as well as the
affirmative vote of two-thirds of all of the outstanding shares of 9%/7%
Preferred Stock, voting as a separate class. Approval of the 12% Preferred
Stock Amendment requires the affirmative vote of a majority of all of the
outstanding shares of Common Stock
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<PAGE> 42
and Preferred Stock, voting together as a single class, as well as the
affirmative vote of a majority of all of the outstanding shares of 12%
Preferred Stock, voting as a separate class. Approval of the Exchange Offer
Proposal requires the affirmative vote of a majority of the shares of Common
Stock and Preferred Stock, voting together as a single class, represented at
the Special Meeting and entitled to vote.
EXCHANGE OFFER PROPOSAL
The Exchange Offer Proposal consists of the approval of the issuance
of shares of Common Stock pursuant to the Exchange Offer, upon the terms and
subject to the conditions set forth in this Proxy Statement/Prospectus and the
Letter of Transmittal. At the Special Meeting, the Holders of the Common Stock
and Preferred Stock will be asked to consider and vote upon the Exchange Offer
Proposal as a separate proposal. The Exchange Offer Proposal may be approved
and adopted while either or both of the Preferred Stock Amendments are rejected
by the stockholders.
PREFERRED STOCK AMENDMENTS
The Preferred Stock Amendments consist of the 9%/7% Preferred Stock
Amendment (Proposal 1) and the 12% Preferred Stock Amendment (Proposal 2). The
Preferred Stock Amendments will be voted on as separate proposals at the
Special Meeting. One Preferred Stock Amendment may be approved and adopted
while the other Preferred Stock Amendment is rejected by the stockholders.
Generally, the Preferred Stock Amendments would, upon the filing of
the Preferred Stock Amendments with the Secretary of State of the State of
Delaware (the "Effective Date"), automatically reclassify and change each share
of Preferred Stock (inclusive of accrued and unpaid dividends), including
shares of Preferred Stock tendered in the Exchange Offer, into four shares of
Common Stock. At such time, the person entitled to receive the Common Stock as
a result of the Reclassifications will be treated for all purposes as the
registered holder of such Common Stock.
Specifically, the Preferred Stock Amendments will amend the Charter as
follows:
PROPOSAL 1: The 9%/7% Preferred Stock Amendment provides as
follows:
"The Restated Certificate of Incorporation, as amended, of the
Corporation is hereby amended by adding the following new Section 15
to the Certificate of Designation for the 9%/7% Convertible Preferred
Stock:
SECTION 15. Reclassification. Effective upon
the filing of this Certificate of Amendment to the
Corporation's Restated Certificate of Incorporation, as
amended, each outstanding share of Convertible Preferred Stock
(inclusive of accrued and unpaid dividends), shall be
reclassified as and changed into four shares of Common Stock.
Notice of the filing of this Certificate of Amendment shall be
mailed to each holder of the Convertible Preferred Stock, at
the holder's address as it appears on the books of the
Corporation, as promptly as practicable following such filing.
Such notice shall set forth the procedures for exchanging
certificates formerly representing shares of the Convertible
Preferred Stock for the shares of Common Stock. Upon
surrender to the Company of the certificates (duly endorsed in
blank) representing shares of the Convertible Preferred Stock,
certificates representing the appropriate number of shares of
Common Stock shall be issued and delivered to the surrendering
holders. Until surrender to the Company of such certificates,
such certificates will be deemed to represent the appropriate
number of shares of Common Stock that are to be issued and
delivered to the holders of such certificates."
PROPOSAL 2: The 12% Preferred Stock Amendment provides as
follows:
"The Restated Certificate of Incorporation, as amended, of the
Corporation is hereby amended by adding the following new Section 12
to the Certificate of Designations for the 12% Senior Convertible
Preferred Stock:
SECTION 12. Reclassification. Effective upon
the filing of this Certificate of Amendment to the
Corporation's Restated Certificate of Incorporation, as
amended, each
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<PAGE> 43
outstanding share of 12% Preferred Stock (inclusive of
accrued and unpaid dividends) shall be reclassified as and
changed into four shares of Common Stock. Notice of the
filing of this Certificate of Amendment shall be mailed to
each holder of 12% Preferred Stock, at the Holder's address as
it appears on the books of the Corporation, as promptly as
practicable following such filing. Such notice shall set
forth the procedures for exchanging certificates formerly
representing shares of 12% Preferred Stock for the shares of
Common Stock. Upon surrender to the Company of the
certificates (duly endorsed in blank) representing shares of
12% Preferred Stock, certificates representing the appropriate
number of shares of Common Stock shall be issued and delivered
to the surrendering Holders. Until surrender to the Company
of such certificates, such certificates will be deemed to
represent the appropriate number of shares of Common Stock
that are to be issued and delivered to the holders of shares
of such certificates."
NOTWITHSTANDING THE APPROVAL AND ADOPTION OF THE PREFERRED STOCK
AMENDMENTS AT THE SPECIAL MEETING, THE COMPANY RESERVES THE RIGHT TO ABANDON
FILING THE PREFERRED STOCK AMENDMENTS AND THE CONSUMMATION OF THE
RECLASSIFICATION.
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Date, holders of Preferred
Stock will be notified and requested to surrender their present Preferred Stock
certificates for new certificates representing the number of whole shares of
Common Stock to which they are entitled after the Reclassifications. Until so
surrendered, each certificate representing shares of Preferred Stock will be
deemed for all corporate purposes after the Effective Date to evidence
ownership of Common Stock, in the appropriate whole number of shares. American
Securities Transfer and Trust Company, Inc., Denver, Colorado, has been
appointed exchange agent (the "Exchange Agent") to act for stockholders in
effecting the exchange of their certificates.
BOARD RECOMMENDATION
The Board believes that approval of the Exchange Offer Proposal and
the Preferred Stock Amendments is in the best interests of the Company and its
stockholders. See "Background, Purposes and Effects."
A VOTE "FOR" THE APPROVAL AND ADOPTION OF THE EXCHANGE OFFER
PROPOSAL AND THE PREFERRED STOCK AMENDMENTS IS UNANIMOUSLY
RECOMMENDED BY THE BOARD OF DIRECTORS.
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<PAGE> 44
THE EXCHANGE OFFER
GENERAL
The Company is, upon the terms and subject to the conditions set forth
in this Proxy Statement/Prospectus and the accompanying Letter of Transmittal
(the "Letter of Transmittal" which, together with this Proxy
Statement/Prospectus, constitute the "Exchange Offer"), offering to issue four
shares of Common Stock in exchange for each outstanding share of the 9%/7%
Preferred Stock and 12% Preferred Stock. If the Preferred Stock Amendments are
approved and the Reclassifications are effected, the Exchange Offer will not be
consummated because all of the outstanding shares of Preferred Stock will be
automatically converted into Common Stock as a result of the Reclassifications.
This Proxy Statement/Prospectus, together with the Letter of Transmittal, is
being sent to all registered Holders of shares of Preferred Stock as of
_________________, 1997.
Holders of shares of Preferred Stock may participate in the Exchange
Offer by properly completing and signing the Letter of Transmittal and
tendering their shares of Preferred Stock as described in "The Exchange
Offer--Procedures for Tendering" in accordance with the instructions contained
herein and in the Letter of Transmittal prior to the Expiration Date (as
defined herein). Holders of shares of Preferred Stock need not wait until
after the Special Meeting to forward these documents.
Consummation of the Exchange Offer is conditioned on, among other
things, the conversion into Common Stock pursuant to the Exchange Offer and any
Reclassification of at least 1,253,046 shares, or 50%, of the aggregate
outstanding shares of 12% Preferred Stock and 9%/7% Preferred Stock. See
"Conditions to the Exchange Offer." As of October 31, 1997, there were
outstanding 2,456,098 and 49,994 shares of 9%/7% Preferred Stock and 12%
Preferred Stock, respectively. If any shares of Preferred Stock are not
accepted pursuant to the Exchange Offer for any reason, except for approval of
one or both of the Preferred Stock Amendments, such shares will be returned to
tendering Holders (as defined herein) at the Company's expense as promptly as
practicable following the Expiration Date. If one or both of the Preferred
Stock Amendments are approved, the shares affected by said Preferred Stock
Amendment or Amendments will be retained by the Company and canceled, and new
certificates representing the Common Stock to which the holders of the shares
of Preferred Stock are entitled will be delivered to the holders by the
Exchange Agent as promptly as practicable following the effectiveness of the
Preferred Stock Amendment or Amendments.
If both of the Preferred Stock Amendments are not adopted at the
Special Meeting, the Company intends to accept for exchange in the Exchange
Offer those shares of Preferred Stock validly tendered and not withdrawn as of
the Expiration Date; provided that at least 50% of the outstanding shares of
Preferred Stock have been tendered and not withdrawn as of the Expiration Date.
If the 12% Preferred Stock Amendment is not adopted while the 9%/7% Preferred
Stock Amendment is adopted at the Special Meeting, the Company intends to
effect the 9%/7% Reclassification and accept for exchange in the Exchange Offer
those shares of the 12% Preferred Stock that have been validly tendered and not
withdrawn as of the Expiration Date. If the 9%/7% Preferred Stock Amendment is
not adopted while the 12% Preferred Stock Amendment is adopted at the Special
Meeting, the Company intends to effect the 12% Reclassification and accept for
exchange in the Exchange Offer those shares of the 9%/7% Preferred Stock that
have been validly tendered and not withdrawn as of the Expiration Date;
provided that at least 50% of the outstanding shares of Preferred Stock have
been or are converted into Common Stock pursuant to the Exchange Offer and the
12% Reclassification. The 12% Reclassification will not be effected unless the
9%/7% Reclassification or the Exchange Offer is consummated. If the Exchange
Offer Proposal is not adopted at the Special Meeting, the Company will not
consummate the Exchange Offer or accept any shares of Preferred Stock tendered
pursuant thereto. See "The Exchange Offer--Conditions to the Exchange Offer."
The Exchange Offer will expire at 5:00 p.m., Dallas, Texas time, on
Friday, __________, 1998, or if extended, the latest date and time to which the
Exchange Offer has been extended (the "Expiration Date"). Tendered shares of
Preferred Stock may be withdrawn at any time until the Expiration Date.
THE BOARD OF DIRECTORS OF THE COMPANY HAS DETERMINED THAT THE EXCHANGE
OFFER IS IN THE BEST INTEREST OF THE COMPANY AND THE CURRENT HOLDERS OF COMMON
STOCK AND FAIR TO THE EXCHANGING HOLDERS OF PREFERRED STOCK FROM A FINANCIAL
POINT OF VIEW. THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF THE EXCHANGE OFFER PROPOSAL, BUT MAKES NO RECOMMENDATION TO HOLDERS
OF SHARES OF PREFERRED STOCK AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING
THEIR SHARES OF PREFERRED STOCK IN THE EXCHANGE OFFER. HOLDERS OF SHARES OF
PREFERRED STOCK ARE URGED TO CONSULT THEIR FINANCIAL AND TAX ADVISORS IN MAKING
THEIR DECISIONS ON WHAT ACTION TO TAKE AFTER CONSIDERING THEIR OWN PARTICULAR
CIRCUMSTANCES AND THE BENEFITS AND DETRIMENTS TO HOLDERS. IN DETERMINING THE
40
<PAGE> 45
EXCHANGE CONSIDERATION AND THE ADVISABILITY OF CONDUCTING THE EXCHANGE OFFER,
THE BOARD OF DIRECTORS WAS ADVISED AND ASSISTED BY THE FINANCIAL ADVISOR AND
RELIED ON THE FAIRNESS OPINION.
The Company expressly reserves the right, in its sole discretion,
subject to applicable law, to (i) terminate the Exchange Offer, not accept for
exchange any shares of Preferred Stock and promptly return all shares of
Preferred Stock upon the failure of any of the conditions specified above or in
"The Exchange Offer--Conditions to the Exchange Offer," (ii) waive any
condition to the Exchange Offer and accept all shares of Preferred Stock
previously tendered pursuant to the Exchange Offer, (iii) extend the Expiration
Date of the Exchange Offer and retain all shares of Preferred Stock tendered
pursuant to the Exchange Offer until the Expiration Date, subject, however, to
all withdrawal rights of holders (see "The Exchange Offer--Withdrawal of
Tenders"), (iv) amend the terms of the Exchange Offer in any respect, (v)
modify the form of the consideration offered pursuant to the Exchange Offer, or
(vi) terminate the Exchange Offer as to any shares of Preferred Stock that are
automatically converted into Common Stock as a result of either of the
Reclassifications. See "The Exchange Offer--Expiration Date; Extensions;
Amendments; Terminations."
Holders of the Preferred Stock may contact the Company's Investor
Relations Department at (214) 965-6000 if they have questions regarding the
Exchange Offer.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the
conditions set forth herein and in the accompanying Letter of Transmittal, to
exchange four shares of Common Stock for each outstanding share of the
Preferred Stock that is validly tendered and accepted for exchange.
Unless the Exchange Offer has been withdrawn or terminated, the
Company will deliver as promptly as practicable following the Expiration Date
the Common Stock required to be delivered under the Exchange Offer to
exchanging Holders of shares of Preferred Stock. The Company expressly
reserves the right, in its sole discretion, to delay acceptance for exchange of
Preferred Stock tendered under the Exchange Offer and the delivery of the
Exchange Consideration with respect to the Preferred Stock accepted for
exchange (subject to Rules 13e-4 and 14e-1 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which require the Company to consummate
the Exchange Offer or return the Preferred Stock deposited by or on behalf of
the Holders thereof promptly after the termination or withdrawal of the
Exchange Offer), or to amend, withdraw or terminate the Exchange Offer at any
time prior to the Expiration Date for any of the reasons set forth in
"--Conditions to the Exchange Offer" and "--Expiration Dates; Extensions;
Amendments; Termination."
Unless the context requires otherwise, the term "Holder" with respect
to the Exchange Offer means (i) any person in whose name any Preferred Stock is
registered on the books of the Company, (ii) any other person who has obtained
a properly completed stock power from the registered Holder of shares of
Preferred Stock, or (iii) any person whose Preferred Stock is held of record by
The Depository Trust Company and the Philadelphia Depository Trust Company
(each a "Depository Institution").
In all cases, except to the extent waived by the Company, delivery of
the Exchange Consideration pursuant to the Exchange Offer will be made only
after timely receipt by the Exchange Agent of certificates representing
tendered Preferred Stock (or confirmation of book-entry transfer thereof), a
properly completed and duly executed Letter of Transmittal and any other
documents required thereby.
The Company will be deemed to have accepted validly tendered Preferred
Stock (or defectively tendered Preferred Stock with respect to which the
Company has waived such defect) when, as and if the Company has given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering Holders for the purpose of receiving Preferred Stock
from, and remitting cash and Common Stock to, tendering Holders who are
participating in the Exchange Offer.
If any tendered Preferred Stock is not accepted for exchange because
of an invalid tender, the occurrence of certain other events set forth herein
(other than the Reclassifications) or otherwise, unless otherwise requested by
the Holder under "Special Delivery Instructions" in the Letter of Transmittal,
such Preferred Stock will be returned, without expense, to the tendering holder
thereof (or in the case of Preferred Stock tendered by book-entry transfer into
the Exchange Agent's account at one of the Depository Institutions, such
Preferred Stock will be credited to an account maintained at the applicable
Depository Institution designated by the participant therein who so delivered
such Preferred Stock), as promptly as practicable after the Expiration Date or
the withdrawal or termination of the Exchange Offer. If either or both the
Preferred
41
<PAGE> 46
Stock Amendments are approved and effected, any tendered Preferred Stock
affected by the Preferred Stock Amendment or Amendments will be retained and
canceled by the Company, and new certificates representing the shares of Common
Stock to which the holder is entitled as a result of the Preferred Stock
Amendment or Amendments will be issued and delivered by the Company as promptly
as practicable after the effectiveness of the Preferred Stock Amendment or
Amendments. In the case of Preferred Stock tendered by book-entry transfer
into the Exchange Agent's account at one of the Depository Institutions, the
newly issued Common Stock will be credited to an account maintained at the
applicable Depository Institution designated by the participant therein who so
delivered such Preferred Stock.
Tendering stockholders will not be required to pay brokerage
commissions or fees or, subject to the instructions of the Letter of
Transmittal, transfer taxes with respect to the exchange of the Preferred Stock
pursuant to the Exchange Offer. The Company will pay all charges and expenses
of the Exchange Agent, the Financial Advisor and the Information Agent in
connection with the Exchange Offer. See "General."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The Exchange Offer will expire at 5:00 p.m., Dallas, Texas time on
the Expiration Date.
The Company expressly reserves the right, in its sole discretion,
subject to applicable law, to (i) terminate the Exchange Offer, not accept for
exchange any Preferred Stock and promptly return all Preferred Stock upon the
failure of any of the conditions specified below in "--Conditions to the
Exchange Offer," (ii) waive any condition to the Exchange Offer and accept all
Preferred Stock previously tendered pursuant to the Exchange Offer, (iii)
extend the Expiration Date of the Exchange Offer and retain all Preferred Stock
tendered pursuant to Exchange Offer until the Expiration Date, subject,
however, to all withdrawal rights of Holders (see "--Withdrawal of Tenders"),
(iv) amend the terms of the Exchange Offer in any respect, (v) modify the form
of the consideration to be paid pursuant to the Exchange Offer, or (vi)
terminate the Exchange Offer as to any shares of Preferred Stock that are
automatically converted into Common Stock as a result of either of the
Reclassifications. Any amendment applicable to the Exchange Offer will apply
to all Preferred Stock tendered pursuant to the Exchange Offer. During any
extension of the Exchange Offer, all Preferred Stock previously tendered
pursuant to the Exchange Offer and not withdrawn will remain subject to the
Exchange Offer.
If the Company makes a material change in the terms of the Exchange
Offer or in the information concerning the Exchange Offer, the Company will
extend the Exchange Offer. The minimum period for which the Exchange Offer
will be extended following a material change, other than a change in the
Exchange Consideration, will depend upon the facts and circumstances, including
the relative materiality of the change. With respect to an increase or
decrease in the Exchange Consideration, if required, the Exchange Offer will
remain open for a minimum of 10 Business Days following public announcement of
such change. In the case of any extension, amendment, withdrawal or
termination of the offer, a public announcement will be issued no later than
9:00 a.m., New York City time, on the next Business Day after the previously
scheduled Expiration Date of the Exchange Offer. If the Company amends the
minimum 50% conversion condition to decrease the minimum conversion level, the
Company will notify all Holders of such amendment and the Exchange Offer will
remain open for a minimum of 10 Business Days following such public
announcement, during which time Holders may withdraw their prior tenders. If
the Company withdraws or terminates the Exchange Offer, it will give immediate
notice to the Exchange Agent, and all Preferred Stock previously tendered
pursuant to the Exchange Offer will be returned promptly to the tendering
Holders thereof, unless the termination of the Exchange Offer results from the
approval and effectiveness of the Preferred Stock Amendments. See
"--Withdrawal of Tenders."
If the Company determines, in its sole discretion, to increase or
decrease the consideration offered to Holders of shares of Preferred Stock and
if the Exchange Offer is scheduled to expire less than 10 Business Days from
and including the date that notice of such increase or decrease is first
published, sent or given in the manner specified in the preceding paragraph,
then the Exchange Offer will be extended for at least 10 Business Days from and
including the date of such notice.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, or any
extension of the Exchange Offer, the Company (i) will not be required to accept
for exchange, or, subject to any applicable rules and regulations of the
Commission, including Rule 14E-1(c) (relating to the Company's obligation to
deliver the Exchange Consideration or return tendered shares of Preferred Stock
promptly after termination or withdrawal of the Exchange Offer), deliver the
Exchange Consideration; (ii) may postpone the acceptance for exchange of or,
subject to the restriction set forth above, the delivery of the Exchange
Consideration; or (iii) may terminate or amend the Exchange Offer, if at any
time prior to the time of
42
<PAGE> 47
delivery of the Exchange Consideration any of the following events shall occur
and if in the sole judgment of the Company, and regardless of the circumstances
(including any action or omission by the Company or any of its respective
affiliates or subsidiaries) giving rise to any such event, it is inadvisable to
proceed with the Exchange Offer, such acceptance for exchange of shares of
Preferred Stock or the delivery of the Exchange Consideration:
(a) less than 1,253,046 shares, or 50%, of the
outstanding Preferred Stock are converted into Common Stock pursuant
to the Exchange Offer and any Reclassification;
(b) the approval of the Exchange Offer Proposal shall not
have occurred at the Special Meeting or any adjournment or
postponement thereof;
(c) there shall have been any action taken or threatened,
or any statute, rule, regulation, judgment, order, stay, decree or
injunction promulgated, enacted, entered, enforced or deemed
applicable to the Exchange Offer, by or before any court or
governmental regulatory or administrative agency, authority or
tribunal, domestic or foreign, which, in the reasonable judgment of
the Company, (i) challenges the making of the Exchange Offer, or might
directly or indirectly prohibit, prevent, restrict or delay
consummation of the Exchange Offer, or otherwise and adversely affect
in any material manner the Exchange Offer or (ii) could adversely
affect the business, condition (financial or otherwise), income,
operations, properties, assets, liabilities or prospects of the
Company and its subsidiaries, taken as a whole, or materially impair
the contemplated benefits of the Exchange Offer to the Company;
(d) there shall have occurred or be likely to occur any
event affecting the business or financial affairs of the Company that
would or might prohibit, prevent, restrict or delay consummation of
the Exchange Offer or that will, or is reasonably likely to,
materially impair the contemplated benefits of the Exchange Offer or
might be material to Holders of shares of Preferred Stock in deciding
whether to accept the Exchange Offer; or
(e) there shall have occurred (i) any general suspension
of or limitation on trading in securities on any national securities
exchange or in the over-the-counter market (whether or not mandatory),
(ii) any significant adverse change in the price of the Preferred
Stock, (iii) a material impairment in the trading market for debt or
equity securities, (iv) a declaration of a banking moratorium or any
suspension of payments in respect of banks by federal or state
authorities in the United States (whether or not mandatory), (v) a
declaration of a national emergency or a commencement of a war, armed
hostilities or other national or international crisis directly or
indirectly relating to the United States, (vi) any limitation (whether
or not mandatory) by any governmental authority on, or other event
having a reasonable likelihood of affecting, the extension of credit
by banks or other lending institutions in the United States, or (vii)
any significant adverse change in United States securities or
financial markets generally or in the case of any of the foregoing
existing at the time of the commencement of the Exchange Offer, a
material acceleration or worsening thereof.
The foregoing conditions are for the sole benefit of the Company and
may be waived by the Company, in whole or in part, in its sole discretion. Any
determination made by the Company concerning an event, development or
circumstance described or referred to above will be final and binding on all
parties.
PROCEDURES FOR TENDERING
The tender of shares of Preferred Stock by a Holder thereof pursuant
to one of the procedures set forth below will constitute an agreement between
such Holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal (and in the Notice
of Guaranteed Delivery, if applicable).
Each Holder of shares of Preferred Stock wishing to participate in the
Exchange Offer must (i) properly complete and sign the Letter of Transmittal
(or a facsimile thereof) in accordance with the instructions contained herein
and in the Letter of Transmittal, together with any required signature
guarantees, and deliver the same to the Exchange Agent, at one of its addresses
set forth on the back cover page hereof, prior to the Expiration Date and
either (a) certificates for the Preferred Stock must be received by the
Exchange Agent at such address or (b) such Preferred Stock must be transferred
pursuant to the procedures for book-entry transfer described below and a
confirmation of such book-entry transfer must be received by the Exchange
Agent, in each case prior to the Expiration Date, or (ii) comply with the
guaranteed delivery procedures described below.
43
<PAGE> 48
THE METHOD OF DELIVERY OF PREFERRED STOCK AND ALL OTHER DOCUMENTS IS
AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED
THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, INSURANCE BE OBTAINED,
AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO
PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE.
LETTERS OF TRANSMITTAL, CERTIFICATES REPRESENTING PREFERRED STOCK AND
ANY OTHER REQUIRED DOCUMENTS SHOULD BE SENT ONLY TO THE EXCHANGE AGENT, NOT TO
THE COMPANY, THE INFORMATION AGENT OR THE SOLICITATION AGENT.
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of federal income tax, the Exchange Agent will
be required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a Holder pursuant to the Exchange Offer if the Holder does not
provide the Holder's taxpayer identification number (social security number or
employer identification number, as applicable) and certify that such number is
correct. Each tendering Holder should complete and sign the main signature
form and the Substitute Form W-9 included as part of the Letter of Transmittal,
so as to provide the information and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to the Company and the Exchange Agent.
Special Procedure for Beneficial Owners. Any beneficial owner whose
Preferred Stock is registered in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to tender should contact such
registered Holder promptly and instruct such registered Holder to tender on
such beneficial owner's behalf. If such beneficial owner wishes to tender on
such owner's own behalf, such owner must, prior to completing and executing the
Letter of Transmittal and delivering certificates for such owner's tendered
shares of Preferred Stock, either make appropriate arrangements to register
ownership of the Preferred Stock in such owner's name or obtain a properly
completed stock power from the registered Holder. The transfer of registered
ownership may take considerable time and may not be able to be completed prior
to the Expiration Date.
Signature Guarantees. If tendered Preferred Stock is (i) registered
in the name of the signer of the Letter of Transmittal and the Exchange
Consideration is to be delivered(and any untendered Preferred Stock is to be
reissued) in the name of the registered Holder or (ii) tendered for the account
of an Eligible Institution (as defined below), the signature on the Letter of
Transmittal need not be guaranteed. In all other cases, all signatures on
Letters of Transmittal must be guaranteed by a financial institution (including
most banks, savings and loan associations and brokerage houses) that is a
participant in the Security Transfer Agents Medallion Program or the Stock
Exchange Medallion Program (any of the foregoing hereinafter referred to as an
"Eligible Institution"). If the tendered Preferred Stock is registered in the
name of someone other than the signer of the Letter of Transmittal, or if the
Exchange Consideration is to be delivered in the name of any person other than
the signer of the Letter of Transmittal, such tendered Preferred Stock must be
endorsed or accompanied by written instruments of transfer in form satisfactory
to the Company and duly executed by the registered Holder, and the signature on
the endorsement or instrument of transfer must be guaranteed by an Eligible
Institution. If the Exchange Consideration and/or the Preferred Stock that is
not exchanged is to be delivered to an address other than that of the
registered Holder appearing on the register for the Preferred Stock, the
signature in the Letter of Transmittal must be guaranteed by an Eligible
Institution.
Book-Entry Transfer. The Company understands that the Exchange Agent
will make a request promptly after the date of this Proxy Statement/Prospectus
to establish accounts with respect to the Preferred Stock at a Depository
Institution for the purpose of facilitating the Exchange Offer, and subject to
the establishment thereof, any financial institution that is a participant in a
Depository Institution's system may make book-entry delivery of Preferred Stock
by causing such Depository Institution to transfer such Preferred Stock into
the Exchange Agent's account with respect to the Preferred Stock in accordance
with such Depository Institution's Automated Tender Offer Program ("ATOP")
procedures for such book-entry transfers. However, the exchange for the
Preferred Stock so tendered will only be made after timely confirmation (a
"Book-Entry Confirmation") of such Book-Entry Transfer of Preferred Stock into
the Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as such term is defined in the next sentence) and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by a Depository Institution and received by the
Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that such Depository Institution has received an express acknowledgment from a
participant tendering Preferred Stock that is the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
44
<PAGE> 49
Guaranteed Delivery. If a Holder of shares of Preferred Stock desires
to participate in the Exchange Offer and time will not permit the Letter of
Transmittal or Preferred Stock to reach the Exchange Agent before the
Expiration Date or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if the Exchange Agent has received at
one of its addresses on the back cover page hereof prior to the Expiration
Date, a letter, telegram or facsimile transmission from an Eligible Institution
setting forth the name and address of the tendering Holder, the name(s) in
which Preferred Stock is registered and, if the Preferred Stock is held in
certificated form, the certificate number of the Preferred Stock to be
tendered, and stating that the tender is being made thereby and guaranteeing
that within two Nasdaq National Market trading days after the date of execution
of such letter, telegram or facsimile transmission by the Eligible Institution,
the Preferred Stock in proper form for transfer together with a properly
completed and duly executed Letter of Transmittal (and any other required
documents), or a confirmation of book-entry transfer of such Preferred Stock
into the Exchange Agent's account at a Depository Institution, will be
delivered by such Eligible Institution. Unless the Preferred Stock being
tendered by the above-described method is deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
completed Letter of Transmittal and any other required documents) or a
confirmation of book-entry transfer of such Preferred Stock into the Exchange
Agent's account at the applicable Depository Institution in accordance with
such Depository Institution's ATOP procedures is received, the Company may, at
its option, reject the tender. In addition to the copy being transmitted
herewith, copies of a Notice of Guaranteed Delivery which may be used by
Eligible Institutions for the purposes described in this paragraph are
available from the Exchange Agent and the Information Agent.
Miscellaneous. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance for exchange of any tender of
Preferred Stock will be determined by the Company, whose determination will be
final and binding. The Company reserves the absolute right to reject any or
all tenders not in proper form or the acceptance for exchange of which may, in
the opinion of the Company's counsel, be unlawful. The Company also reserves
the absolute right to waive any defect or irregularity in the tender of any
Preferred Stock, and the Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of Transmittal)
will be final and binding. Neither the Company, the Exchange Agent, the
Information Agent, the Solicitation Agent nor any other person will be under
any duty to give notification of any defects or irregularities in tenders or
incur any liability for failure to give any such notification.
Tenders of Preferred Stock involving any irregularities will not be
deemed to have been made until such irregularities have been cured or waived.
Preferred Stock received by the Exchange Agent that is not validly tendered and
as to which the irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering Holder (or in the case of Preferred
Stock tendered by book-entry transfer into the Exchange Agent's account at a
Depository Institution, such Preferred Stock will be credited to an account
maintained at a Depository Institution designated by the participant therein
who so delivered such Preferred Stock), unless otherwise requested by the
Holder in the Letter of Transmittal, as promptly as practicable after the
Expiration Date or the withdrawal or termination of the Exchange Offer.
LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer.
The party tendering Preferred Stock for exchange (the "Transferor")
exchanges, assigns and transfers the Preferred Stock to the Company, and
irrevocably constitutes and appoints the Exchange Agent as the Transferor's
agent and attorney-in-fact to cause the Preferred Stock to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the Preferred
Stock and to acquire Common Stock issuable upon the exchange of such tendered
Preferred Stock and that, when such Transferor's Preferred Stock is accepted
for exchange, the Company will acquire good and unencumbered title to such
tendered Preferred Stock, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claim. The Transferor also
warrants that it will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
exchange, assignment and transfer of tendered Preferred Stock or transfer
ownership of such Preferred Stock on the account books maintained by the
applicable Depository Institution. All authority conferred by the Transferor
will survive the death, bankruptcy or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, legal
representatives, successors, assigns, executors and administrators of such
Transferor.
45
<PAGE> 50
WITHDRAWAL OF TENDERS
Tenders of shares of Preferred Stock pursuant to the Exchange Offer
may be withdrawn at any time prior to the Expiration Date and, unless accepted
for exchange by the Company, may be withdrawn at any time after 40 Business
Days after the date of this Proxy Statement/Prospectus, if such shares have not
yet been accepted for exchange.
To be effective, a written notice of withdrawal delivered by mail,
hand delivery or facsimile transmission must be timely received by the Exchange
Agent at one of its addresses set forth on the back cover page of this Proxy
Statement/Prospectus. The method of notification is at the risk and election
of the Holder of shares of Preferred Stock. Any such notice of withdrawal must
specify (i) the Holder of shares of Preferred Stock named in the Letter of
Transmittal as having tendered Preferred Stock to be withdrawn, (ii) if the
Preferred Stock is held in certificated form, the certificate numbers of the
Preferred Stock to be withdrawn, (iii) that such Holder of shares of Preferred
Stock is withdrawing the Holder's election to have such Preferred Stock
exchanged and (iv) the name of the registered Holder of such Preferred Stock,
and must be signed by the Holder in the same manner as the original signature
on the Letter of Transmittal (including any required signature guarantees) or
be accompanied by evidence satisfactory to the Company that the person
withdrawing the tender has succeeded to the beneficial ownership of the
Preferred Stock being withdrawn. The Exchange Agent will return the properly
withdrawn Preferred Stock promptly following receipt of notice of withdrawal.
If Preferred Stock has been tendered pursuant to the procedure for book-entry
transfer, any notice of withdrawal must specify the name and number of the
account at the applicable Depository Institution to be credited with the
withdrawn Preferred Stock and otherwise comply with such Depository
Institution's procedures. All questions as to the validity of notice of
withdrawal, including time of receipt, will be determined by the Company, and
such determination will be final and binding on all parties. Neither the
Company, the Exchange Agent, the Information Agent nor any other persons will
be under any duty to give notification of any defects or irregularities in any
notice of withdrawal or incur any liability for failure to give any such
notification. Withdrawals of tenders of Preferred Stock may not be rescinded
and any Preferred Stock withdrawn will thereafter be deemed not validly
tendered for purposes of the Exchange Offer. Properly withdrawn Preferred
Stock, however, may be retendered by following the procedures therefor
described elsewhere herein at any time prior to the Expiration Date. See
"--Procedures for Tendering."
GENERAL
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the
exchange or reclassification of the Preferred Stock pursuant to the Exchange
Offer or the Reclassifications. If, however, certificates representing Common
Stock, or Preferred Stock not tendered or accepted for exchange, are to be
delivered to, or are to be issued in the name of, any person other than the
registered Holder of shares of Preferred Stock tendered or if a transfer tax is
imposed for any reason other than the exchange or classification of Preferred
Stock pursuant to the Exchange Offer or the Reclassifications, then the amount
of any such transfer taxes (whether imposed on the registered Holder or any
other persons) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
LISTING AND TRADING PRICES
An application will be made to authorize quotation of the shares of
the Common Stock to be issued in connection with the Exchange Offer and the
Reclassifications on The Nasdaq National Market, where shares of the Common
Stock are currently traded. On August 28, 1997, the last trading day before
the initial public announcement that the Company was considering an exchange
offer for shares of Preferred Stock, the reported closing sales prices on The
Nasdaq National Market for the Common Stock and the 9%/7% Preferred Stock were
$2.8125 and $11.25 per share, respectively. On November 13, 1997, the last
trading day before the initial public announcement of the Exchange
Consideration, the reported closing sales prices for the Common Stock and the
9%/7% Preferred Stock were $1.6875 and $5.00, respectively. See "Trading Price
and Dividend History." There can be no assurance concerning the prices at
which the Common Stock might trade after the Exchange Offer or the
Reclassifications or the prices at which the 9%/7% Preferred Stock might trade
after the Exchange Offer.
46
<PAGE> 51
THE EXCHANGE AGENT
The Exchange Agent for the Exchange Offer and the Reclassifications is
American Securities Transfer & Trust, Inc., Denver, Colorado. All deliveries
and correspondence sent to the Exchange Agent relating to the Exchange Offer or
the Reclassifications should be directed to one of the addresses set forth on
the back cover of this Proxy Statement/Prospectus. The Company will pay the
Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for all of its reasonable out-of-pocket expenses
in connection therewith.
Requests for additional copies of this Proxy Statement/Prospectus, the
Letter of Transmittal or proxy cards should be directed to the Exchange Agent
at the address or telephone number set forth on the back cover hereof, or to
the Information Agent at the address or telephone number set forth on the back
cover of this Proxy Statement/Prospectus.
INFORMATION AGENT
The Company has retained MacKenzie Partners, Inc. (the "Information
Agent") to (i) solicit proxies from Holders of Common Stock and Preferred Stock
for the Special Meeting, and (ii) assist the Company in locating Holders and
responding to requests for information from Holders seeking to tender their
shares of Preferred Stock pursuant to the Exchange Offer. For the services of
MacKenzie Partners, Inc., as Information Agent, the Company has agreed to pay a
fee equal to $7,500 and to reimburse it for reasonable out-of-pocket expenses.
Questions and requests for assistance regarding the Exchange Offer and the
Proposals, requests for additional copies of this Proxy Statement/Prospectus,
the Letter of Transmittal, the proxy card and requests for copies of the Notice
of Guaranteed Delivery may be directed to the Information Agent at the address
and telephone number set forth on the back cover hereof.
FINANCIAL ADVISOR
The Company has engaged the Financial Advisor to advise and assist the
Board of Directors regarding the Exchange Offer and the Reclassifications. For
the services of Prudential Securities, Inc., as Financial Advisor, the Company
has paid a retainer of $100,000 and agreed to pay a fee equal to $150,000 upon
mailing of the Proxy Statement/Prospectus and an additional $150,000 upon
successful completion of the Exchange Offer or the Reclassifications. In
addition, the Company will reimburse the Financial Advisor for certain
reasonable out-of-pocket expenses, including fees and expenses of its counsel.
The Company has also agreed to indemnify the Financial Advisor against certain
liabilities and expenses, including liabilities under Federal securities laws.
SOLICITATION OF PROXIES AND TENDERS
The Company will pay to soliciting brokers/dealers, including the
Financial Advisor, a solicitation fee of $0.10 for each share of Preferred
Stock converted into shares of Common Stock pursuant to the Exchange Offer or
the Reclassifications. To be entitled to such fee with respect to any shares
of Preferred Stock, a broker/dealer must be designated by the Holder of the
particular shares of Preferred Stock in the applicable Letter of Transmittal or
other written instrument as the soliciting broker/dealer for such shares. Only
one broker/dealer may be designated as the soliciting broker/dealer for each
share.
The Company has retained MacKenzie Partners, Inc. to assist in the
solicitation of proxies from Holders of Common Stock and Preferred Stock for
the Special Meeting. See "--Information Agent" above.
Solicitations of proxies and tenders will also be made by telephone or
in person by officers and regular employees of the Company and its affiliates.
No additional compensation will be paid to any such officers and employees for
soliciting tenders or proxies.
FEES AND EXPENSES
The expenses of soliciting tenders and proxies will be borne by the
Company. Other than as described under "Financial Advisor," "--Solicitation by
Proxies and Tenders" and "--Information Agent," the Company will not pay any
fees, including soliciting broker/dealer fees, to any broker, dealer, bank,
trust company or other person for any shares of Preferred Stock exchanged or
reclassified pursuant to the Exchange Offer or the Reclassifications. The
Company will reimburse such persons for customary handling and mailing expenses
incurred in connection with the Exchange Offer and the Proxy
47
<PAGE> 52
Solicitation. No broker, dealer, bank, trust company or fiduciary shall be
deemed to be the agent of the Company, the Exchange Agent or the Information
Agent for purposes of the Exchange Offer or the Proxy Solicitation.
REGULATORY REQUIREMENTS
The Company believes that at the time of commencement of the Proxy
Solicitation and Exchange Offer there will be no federal or state regulatory
requirements to be complied with in connection with the Proxy Solicitation and
Exchange Offer other than filings to be made with the Commission and pursuant
to state securities laws in connection with the Proxy Solicitation and Exchange
Offer. Should any such regulatory approvals or other action be required to
consummate the Reclassifications or the Exchange Offer, the Company presently
contemplates such approval or other action will be sought.
INTERESTS OF CERTAIN PERSONS
As of October 31, 1997, executive officers and directors of the
Company were beneficial owners of an aggregate of approximately 2.1% of the
outstanding shares of 9%/7% Preferred Stock and approximately 8.6% of the
outstanding shares of Common Stock. These executive officers and directors
have indicated their present intention to tender their shares of Preferred
Stock in the Exchange Offer and to vote in favor of each of the Proposals. See
"Principal Holders of Capital Stock."
TRANSACTIONS AND ARRANGEMENTS CONCERNING THE EXCHANGE OFFER
Except as described herein, there are no contracts, arrangements,
understandings or relationships in connection with the Exchange Offer between
the Company or any of its directors or executive officers and any person with
respect to any securities of the Company, including the 9%/7% Preferred Stock,
the 12% Preferred Stock and the Common Stock.
COMPARISON OF COMMON STOCK AND PREFERRED STOCK
The following is a brief summary of certain terms of the Common Stock,
12% Preferred Stock and 9%/7% Preferred Stock. The Holders of shares of
Preferred Stock are being offered shares of Common Stock for their shares of
Preferred Stock pursuant to the Reclassifications and the Exchange Offer. It
is therefore important that they carefully compare the rights and privileges of
the Preferred Stock and the Common Stock, in light of their assessment of the
performance, prospects and risks of the Company, in order to decide whether
they wish to vote for the Proposals and whether and to what extent they wish to
exchange their shares of Preferred Stock in the Exchange Offer. For a more
complete description of the Common Stock, the 12% Preferred Stock and the 9%/7%
Preferred Stock, see "Description of Capital Stock."
<TABLE>
<CAPTION>
COMMON STOCK 9%/7% PREFERRED STOCK 12% PREFERRED STOCK
<S> <C> <C> <C>
Dividends Subject to the Holders of 9%/7% Holders of 12%
preferences that may Preferred Stock are Preferred Stock are
be applicable to any entitled to receive, entitled to receive,
outstanding shares of out of funds legally when and as declared
Preferred Stock or available, non-cumulative by the Board of
other preference dividends at a Directors of the
capital stock, per annum rate of (i) Company out of funds
holders of Common $2.52 per share legally available
Stock are entitled to until March 31, 1999 therefor, cumulative
receive ratably ("End Date"), and cash dividends at a
dividends (ii) $1.96 per share per annum rate of
if, as and when after the End Date $4.80 per share
authorized by the until converted. The payable quarterly on
Board of Directors out dividends are the first day of
of funds legally payable entirely in January, April, July
available therefor. cash to the extent and October of each
Delaware law or the year to Holders of
terms and conditions record as of a date
of any loan agreement fixed by the Board of
for a loan of $5,000,000 Directors of the
or more do not limit or Company which is not
prevent the payment more than 60 days
by the Company of prior to the date the
cash dividends on the dividend is paid.
9%/7% Preferred Unpaid dividends on
Stock. If the the 12% Preferred
Company is prevented Stock cumulate and
from paying a dividend must be paid or set
entirely in aside for payment
before any
distribution, in
cash, stock or
</TABLE>
48
<PAGE> 53
<TABLE>
<S> <C> <C> <C>
cash, the Company other property (other
will pay a dividend than in Common
in the form of a Stock), is made to
mixture of cash and holders of Common
Common Stock to the Stock or any other
extent possible under stock ranking junior
Delaware law and any to the 12% Preferred
applicable loan Stock. Dividends
agreement, or if accrue and cumulate
necessary, entirely from the date of
in Common Stock, issuance. No
provided the average dividends accrue or
closing trading price cumulate for any
for a share of the calendar quarter
Common Stock is $4.00 during which shares
or greater during the of 12% Preferred
20 trading day period Stock are converted
ending five days or a liquidation,
prior to the payment distribution or
of such dividend. winding up of the
Quarterly dividends Company occurs. The
on each share of dividends shall be
9%/7% Preferred Stock payable to holders of
accrue from the first record as of a date
day of each calendar fixed by the Board of
quarter through the Directors which is
last day of such not more than 60 days
calendar quarter and prior to the date the
shall be paid on the dividend is paid or,
15th day of the month if no such date is
following the end of fixed, as of the date
each calendar quarter on which the
to holders of record resolution declaring
as of the last day of the dividend is
the calendar quarter. adopted. If a
The Company may not dividend upon the 12%
make any dividend or Preferred Stock or
distribution (other any other outstanding
than a dividend stock of the Company
payable in Common ranking on a parity
Stock or other junior with the 12%
capital stock) on any Preferred Stock as to
Common Stock or other dividends is in
capital stock that arrears, no stock of
ranks junior to the the Company ranking
9%/7% Preferred Stock on a parity with the
unless all accrued 12% Preferred Stock
and unpaid dividends as to dividends may
on the 9%/7% be (a) redeemed
Preferred Stock have pursuant to a sinking
been paid or declared fund or otherwise,
and set aside for except by a
payment. The Company redemption pursuant
may not purchase or to which all
otherwise acquire for outstanding shares of
any consideration any the 12% Preferred
stock of the Company Stock and all stock
standing on a parity ranking on a parity
with the 9%/7% therewith as to
Preferred Stock as to dividends are
dividends if any redeemed, or (b)
dividends are in purchased or
arrears with respect otherwise acquired
to the 9%/7% for any consideration
Preferred Stock or by the Company or its
any other stock of subsidiary except
the Company ranking pursuant to an
on a parity with the acquisition made
9%/7% Preferred pursuant to an offer
Stock, unless the to purchase all of
acquisition is made the outstanding
pursuant to an offer shares of 12%
to purchase all Preferred Stock and
outstanding shares of all stock of the
9%/7% Preferred Stock Company ranking on a
and the stock of the parity with the 12%
Company ranking on a Preferred Stock as to
parity with the 9%/7% dividends.
Preferred Stock as to
dividends.
Liquidation In the event of a In the event of a In the event of a
Rights liquidation, liquidation, liquidation,
dissolution, or dissolution, or dissolution or
winding up of the winding up of the winding up of the
Company, the holders Company, the Holders Company, the Holders
of Common Stock are of 9%/7% Preferred of 12% Preferred
entitled to Stock are entitled to Stock are entitled to
be be
</TABLE>
49
<PAGE> 54
<TABLE>
<S> <C> <C> <C>
share ratably in all paid $28.00 per paid $40 per share
assets remaining after share plus all plus all accrued and
payment of liabilities accrued and unpaid unpaid dividends
and subject to the dividends thereon thereon before any
liquidation before any distribution or
preferences of any distribution or payment is made to
outstanding shares of payment is made to the holders of Common
Preferred Stock and the holders of Common Stock or any other
other preference Stock or any other capital stock of the
capital stock. capital stock of the Company ranking
Company ranking junior to the 12%
junior to the 9%/7% Preferred Stock. If,
Preferred Stock. If, upon any liquidation,
upon any liquidation dissolution or
of the Company, the winding up of the
amounts payable with Company, the amounts
respect to the 9%/7% payable with respect
Preferred Stock and to the 12% Preferred
any other stock of Stock and any other
the Company ranking capital stock of the
on a parity with the Company ranking on a
9%/7% Preferred Stock parity with the 12%
cannot be paid in Preferred Stock
full, the Holders of cannot be paid in
such stock share full, the Holders of
ratably in any such such stock will share
distribution of ratably in any such
assets in proportion distribution of
to the respective assets in proportion
full preferential to the respective
amounts to which they full preferential
would otherwise be amounts to which they
entitled. After would otherwise be
payment of the full entitled. After
preferential amount payment of the full
to which the Holders preferential amount
of 9%/7% Preferred to which the Holders
Stock would be of 12% Preferred
entitled upon any Stock are entitled
liquidation, upon any liquidation,
dissolution or dissolution or
winding up, they winding up, they will
would have no right have no right or
or claim to any of claim to any of the
the remaining assets remaining assets of
of the Company. the Company.
Optional and Holders of Common Holders of outstanding Holders of 12%
Mandatory Stock have no rights shares of 9%/7% Preferred Stock may
Conversion to convert their Preferred Stock elect at any time to
Common Stock into any may elect at any time convert their
other securities. to convert their preferred shares into
shares into shares of Common Stock. The
Common Stock. The conversion ratio is
conversion ratio is one share of Common
two shares of Common Stock for each share
Stock for each share of 12% Preferred
of 9%/7% Preferred Stock. This
Stock. The conversion ratio is
conversion ratio will subject to adjustment
be proportionately upon any share
adjusted upon any dividend on the
stock dividend on the Common Stock, any
Common Stock, any stock split, stock
stock split, reverse combination or
stock split, stock reclassification of
combination or the Common Stock or
reclassification of any merger,
the Common Stock or consolidation or
any merger, combination of the
consolidation or Company with any
combination of the other corporation or
Company with any corporations. In
other entity. addition, all of the
outstanding shares of
Up to 50% of the 12% Preferred Stock
outstanding shares of may be mandatorily
9%/7% Preferred Stock converted into shares
may be mandatorily of Common Stock at
converted into shares the option of the
of Common Stock at Company following the
the option of the occurrence of a
Company, at a rate of Triggering Event
two shares of Common (defined below).
Stock for one share
of 9%/7% Preferred
Stock, if shares of
the
</TABLE>
50
<PAGE> 55
<TABLE>
<S> <C> <C> <C>
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. The Company is
obligated to pay,
within 30 days after
the effectiveness of
the foregoing
mandatory conversion,
any accrued and
unpaid dividends on
the shares of 9%/7%
Preferred Stock
called for
conversion. Finally,
on March 15, 2003,
all of the
outstanding shares of
9%/7% Preferred Stock
will be mandatorily
converted into shares
of Common Stock. For
the latter mandatory
conversion, each
share of the 9%/7%
Preferred Stock will
be convertible into a
number of shares of
Common Stock equal to
the lesser of three
or the result of
dividing the
liquidation
preference per share
for the 9%/7%
Preferred Stock by
the market price of
the Common Stock as
reported at the close
of business on March
15, 2003. Upon the
final mandatory
conversion, the
Company is required
as soon as
practicable to
declare and pay all
cumulated unpaid
dividends that accrue
through March 15,
2003.
Voting Holders of shares of Each share of 9%/7% Holders of 12%
Rights Common Stock are Preferred Stock is Preferred Stock have
entitled to one vote entitled to exercise one vote for each
per share on all the same voting share held, and may
matters to be voted rights as holders of generally vote along
on by stockholders. shares of Common with the Holders of
There is no Stock and has one Common Stock and not
cumulative voting for vote per share. If as a separate class
the election of the Company defaults upon each and any
directors. in the payment of any matter submitted to a
four consecutive vote of the
quarterly dividends shareholders of the
on outstanding 9%/7% Company. In
Preferred Stock, the addition, the DGCL
Holders of provides that the
outstanding 9%/7% vote of the Holders
Preferred Stock would of a majority of the
be automatically outstanding shares of
entitled to an any series of the
additional vote per Company's preferred
share and given the stock, voting
right to elect separately as a
immediately at an class, is required in
emergency meeting of order to: (a)
shareholders, which increase or decrease
the Company must hold the par value of such
within
</TABLE>
51
<PAGE> 56
<TABLE>
<S> <C> <C> <C>
thirty days after any series of shares, or
such failure, such (b) change the
additional directors powers, preferences,
as equals two-thirds or special rights of
of the Company's such series of shares
Board of Directors so as to affect them
determined after such adversely. If the
election. These Company is in default
special voting rights in the payment of six
expire on March 16, full quarterly
2003. dividends (whether or
not consecutive) on
The affirmative vote any outstanding 12%
or consent of the Preferred Stock,
Holders of at least whether or not earned
66-2/3% of all or declared, the
outstanding shares of number of directors
9%/7% Preferred constituting the
Stock, voting as a Company's Board of
separate class, is Directors will be
required (i) to increased by two and
amend, alter or the Holders of all
repeal any provision outstanding 12%
of the Certificate of Preferred Stock,
Designation voting separately as
establishing the a class, will be
9%/7% Preferred Stock entitled to elect the
to adversely affect additional two
the relative rights, directors until all
preferences, dividends in arrears
qualifications, have been paid, at
limitations or which time the term
restrictions of the of office of the two
9%/7% Preferred Stock additional directors
or (ii) to effect any will end and the
reclassification of number of directors
the 9%/7% Preferred constituting the
Stock. The Board of Directors
affirmative vote or will be reduced by
consent of the two.
Holders of at least
50% of all
outstanding shares of
9%/7% Preferred
Stock, voting as a
separate class, is
required to approve
(x) any merger of the
Company with another
company when the
Company'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 the
Company's assets. In
addition, the DGCL
provides that the
vote of the Holders
of a majority of the
outstanding shares of
any series of
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.
Rankings The Common Stock is The 9%/7% Preferred The 12% Preferred
subordinate to the Stock ranks on a Stock ranks on a
9%/7% Preferred Stock parity with the 12% parity with the 9%/7%
and to the 12% Preferred Stock and Preferred Stock and
Preferred Stock as to senior to the Common senior to the Common
rights to dividends Stock as to rights to Stock as to rights to
and distributions dividends and dividends and
upon liquidation. distributions upon distributions upon
liquidation. liquidation.
</TABLE>
52
<PAGE> 57
<TABLE>
<S> <C> <C> <C>
Optional The Common Stock is The 9%/7% Preferred At any time following
Redemption by not subject to Stock is not subject the occurrence of a
the Company redemption by the to redemption by the Triggering Event
Company or at the Company or at the (defined below), the
election of the election of the 12% Preferred Stock
holders thereof. holders thereof. 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 if there
is 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 Common
Stock if the Common
Stock is traded
over-the-counter,
(ii) the closing
trading prices for
the Common Stock if
traded on NASDAQ, or
(iii) the reported
closing price for the
Common Stock if
traded on any
national or regional
stock exchange.
Notice of redemption
will be sent to each
Holder of 12%
Preferred Stock to be
redeemed at the
address shown on the
share transfer
records of the
Company 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
12% Preferred Stock
are to be redeemed,
the Company must
redeem such shares
either by lot or pro
rata based on the
respective numbers of
shares held by the
Holders of 12%
Preferred Stock.
Subsequent No restrictions. The Company is No provisions.
Issues prohibited from
of Stock issuing preferred
stock that is pari
passu with the 9%/7%
Preferred Stock
unless at the time of
such issuance all
dividends due on the
9%/7% Preferred Stock
have been paid in
full. The Company is
also prohibited from
issuing convertible
preferred stock which
is senior in rights
to the 9%/7%
Preferred Stock
except that
convertible preferred
stock may carry a
then-current market
interest rate, which
may be higher or
lower than that of
the 9%/7% Preferred
Stock.
</TABLE>
53
<PAGE> 58
<TABLE>
<S> <C> <C> <C>
The Company is
prohibited from
issuing common or
preferred 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. The Company
may, nevertheless,
issue options or
warrants to new or
existing directors or
management if such
options or warrants
are approved by the
Compensation
Committee. If the
Company issues any
security not excepted
above for
consideration less
than its fair market
value, as determined
by an independent
third party, the
number of shares of
the 9%/7% Preferred
Stock will be
immediately and
appropriately
adjusted, and the
conversion price of
the 9%/7% Preferred
Stock will be
adjusted downward, to
take into account the
dilution in value of
the security holdings
of former creditors
of the Fund
Subsidiaries caused
by such below fair
market issuance of
the Company's
securities.
Trading The Common Stock is The 9%/7% Preference The 12% Preferred
Market listed on The Nasdaq Stock is listed on Stock is not traded
National Market under The Nasdaq National on any established
the trading symbol Market under the market.
"SFSI." trading symbol
"SFSIP."
</TABLE>
54
<PAGE> 59
TRADING PRICE AND DIVIDEND HISTORY
The Common Stock and 9%/7% Preferred Stock have traded on The Nasdaq
National Market ("Nasdaq") since March 10, 1997. Prior thereto, they traded in
the over-the-counter market. The 12% Preferred Stock is not traded on any
recognized market.
The table below sets forth, for the fiscal quarters indicated, (i) the high
and low sales prices of the Common Stock and 9%/7% Preferred Stock as reported
on Nasdaq since March 10, 1997 and the high and low bid prices of the Common
Stock and 9%/7% Preferred Stock as reported in the over-the-counter market prior
to March 10, 1997, in each case based on published financial sources, and (ii)
cash dividends per share paid on the 9%/7% Preferred Stock and 12% Preferred
Stock. Prices and dividend rates prior to November 22, 1996 are adjusted to
reflect a one-for-eight reverse stock split effected on that date.
Over-the-counter prices reflect inter-dealer transactions or quotations, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
9%/7% PREFERRED CASH DIVIDENDS
COMMON STOCK STOCK PER SHARE
----------------- ----------------- -----------------------------
12% PREFERRED 9%/7%
HIGH LOW HIGH LOW STOCK PREFERRED STOCK
---- --- ---- --- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR 1995:
First Quarter ........... $ 17 $ 9 -- -- $ 1.20 --
Second Quarter .......... 15 6-1/2 -- -- 1.20 --
Third Quarter ........... 16 8 -- -- 1.20 --
Fourth Quarter .......... 15-1/2 8 -- -- 1.20 --
CALENDAR YEAR 1996:
First Quarter ........... 13 8 -- -- 1.20 (1)
Second Quarter .......... 12-1/2 8-1/2 $ 27(1) $ 19(1) 1.20 $ 0.735(1)
Third Quarter ........... 9-1/2 6-1/4 22 16 1.20 0.63
Fourth Quarter .......... 8 4 21 15 1.20 0.63
CALENDAR YEAR 1997:
First Quarter ........... 6-5/8 5 17-1/4 12 1.20 0.63
Second Quarter .......... 5-3/8 3-1/4 13-3/4 8-1/4 1.20 0.63
Third Quarter ........... 5-5/8 1-3/4 13-1/8 6-7/8 1.20 0.63
Fourth Quarter through
November 19, 1997... 2-3/8 1-1/4 8-1/8 3-1/4 -- --(2)
</TABLE>
- -----------------
(1) The 9%/7% Preferred Stock was initially issued pursuant to the Plan and
commenced trading in late May 1996. Dividends on the shares issued pursuant
to the Plan began to accrue on July 1, 1995 and, in connection with the
issuance of those shares, the Company paid the cash dividends accrued from
July 1, 1995 through March 15, 1996, the effective date of the Plan. The
initial quarterly payment of dividends on those initial shares was paid in
July 1996 and represented dividends accrued from March 15, 1996.
(2) The Company did not accrue dividends on its 9%/7% Preferred Stock due to
restrictions in a loan covenant which prevent payment of dividends in cash
if tangible net worth is below $22,500,000.
On August 28, 1997, the last trading day before the initial public
announcement that the Company was considering an exchange offer for shares of
Preferred Stock, the reported closing sales prices on Nasdaq for the Common
Stock and the 9%/7% Preferred Stock were $2.8125 and $11.25 per share,
respectively. On November 13, 1997, the last full trading day prior to the
public announcement of the Exchange Consideration, the closing sales prices of
the Common Stock and 9%/7% Preferred Stock were $1.6875 and $5.00, respectively.
On November 19, 1997, the closing sales prices of the Common Stock and
9%/7% Preferred Stock were $1-7/8 and $5-1/8, respectively.
The Company has never paid dividends on the outstanding Common Stock. The
current policy of the Board of Directors is to retain any available earnings for
use in the operation and expansion of the Company's business. Therefore, the
payment of cash dividends on the Common Stock is unlikely in the foreseeable
future.
Holders of shares of either series of the Preferred Stock will lose any
rights to any cumulated or accrued, unpaid dividends on their Preferred Stock if
the Preferred Stock Amendment affecting their series of Preferred Stock is
effected or if the Holders exchange their shares in the Exchange Offer. The
Company did not accrue any dividends on the 9%/7% Preferred Stock for the
quarter ended September 30, 1997 due to restrictions in the Hibernia loan
agreement and the terms of the 9%/7% Preferred Stock.
55
<PAGE> 60
LISTING AND TRADING OF COMMON STOCK
AND 9%/7% PREFERRED STOCK
The 9%/7% Preferred Stock is currently traded on Nasdaq. Nasdaq may,
however, delist the 9%/7% Preferred Stock depending upon the number of
outstanding shares of 9%/7% Preferred Stock and the number of Holders of 9%/7%
Preferred Stock that remain following completion of the Exchange Offer. The
following quantitative criteria (among other criteria) must be met for the
Preferred Stock to continue to be designated as a Nasdaq National Market
security: (i) 750,000 shares publicly held, and (ii) 400 stockholders who own
100 shares or more. Following the completion of the Exchange Offer, the 9%/7%
Preferred Stock may fail to continue to satisfy these criteria. Accordingly,
there can be no assurance that the 9%/7% Preferred Stock will continue to be
listed and traded on The Nasdaq National Market following completion of the
Exchange Offer.
If the shares of 9%/7% Preferred Stock are no longer listed on Nasdaq, the
shares of 9%/7% Preferred Stock may continue to trade in the over-the-counter
market and price quotations may be reported by other sources. The extent of the
public market for the shares of 9%/7% Preferred Stock and the availability of
such quotations would, however, depend upon the number of Holders of shares of
9%/7% Preferred Stock remaining at such time, the interests in maintaining a
market in such shares on the part of securities firms, the possible termination
of registration of such shares under the Exchange Act, as described below, and
other factors.
Shares of 9%/7% Preferred Stock are currently "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), which has the effect, among other things, of allowing
brokers, banks and certain other lenders to extend credit on the collateral of
such securities. Depending upon factors similar to those described above
regarding listing, it is possible that shares of 9%/7% Preferred Stock would no
longer constitute "margin securities" under the margin regulations of the
Federal Reserve Board and, therefore, could no longer be used as collateral for
margin loans made by brokers.
The 9%/7% Preferred Stock is currently registered under the Exchange Act.
Registration of the 9%/7% Preferred Stock under the Exchange Act may be
terminated upon the application of the Company to the Commission if there are
fewer than 300 Holders of record of the 9%/7% Preferred Stock. If registration
of the shares of the 9%/7% Preferred Stock under the Exchange Act were
terminated, the shares of the 9%/7% Preferred Stock would no longer be "margin
securities" or be eligible for quotation on Nasdaq. Termination of the
registration of the 9%/7% Preferred Stock under the Exchange Act would
substantially reduce the information required to be furnished by the Company to
Holders of 9%/7% Preferred Stock and to the Commission with respect to the 9%/7%
Preferred Stock.
56
<PAGE> 61
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of September 30, 1997, and as adjusted to assume that (a) 50% of each series
of the Preferred Stock is exchanged pursuant to the Exchange Offer, and (b) all
of the Preferred Stock is reclassified as a result of the Reclassifications.
<TABLE>
<CAPTION>
Pro Forma
--------------------------------
Actual 50% 100%
(Unaudited) Exchange(1) Reclassification(2)
--------- ----------- -------------------
(Thousands)
<S> <C> <C> <C>
Lines of credit $ 17,248 $ 17,248 $ 17,248
Notes payable 68,926 68,926 68,926
Subordinated debenture 5,000 5,000 5,000
--------- --------- ---------
Total borrowed debt $ 91,174 $ 91,174 $ 91,174
========= ========= =========
Stockholders' equity:
12% Senior Convertible Preferred Stock, 1 1 --
$0.01 par; authorized 400,000 shares;
issued 49,994 shares (29,997 and 0
shares, pro forma)
9%/7% Convertible Preferred Stock, $0.01 200 100 --
par; authorized 30,000,000 shares;
issued 2,456,098 shares (1,228,049 and
0 shares, pro forma)
Common stock, $0.01 par; authorized 289 339 389
130,000,000 shares; issued 6,682,886
shares (11,842,000 and 16,855,000
shares, pro forma)
Additional paid-in capital 88,252 92,580 96,909
Accumulated deficit (57,321) (62,244) (66,618)
--------- --------- ---------
Total stockholders' equity 31,421 30,776 30,680
--------- --------- ---------
Receivable from officers and directors (1,212) (1,212) (1,212)
--------- --------- ---------
Total stockholders' equity 30,209 29,564 29,468
--------- --------- ---------
Total capitalization $ 121,383 $ 120,738 $ 120,642
========= ========= =========
</TABLE>
- ----------------
(1) Assumes that 50% of the outstanding shares of each of the 9%/7% Preferred
Stock and 12% Preferred Stock are exchanged pursuant to the Exchange Offer.
(2) Assumes that all of the outstanding shares of each of the 9%/7% Preferred
Stock and 12% Preferred Stock are reclassified into Common Stock or a
result of approval by the Company's stockholders of both of the Preferred
Stock Amendments.
57
<PAGE> 62
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following Pro Forma Condensed Balance Sheets and Statements of
Operations for the Company (Collectively, the "Pro Forma Financial
Information") present historical financial statements of the Company as
adjusted to give effect to the consummation of the Reclassifications or the
Exchange Offer, assuming that 50% of each series of the Preferred Stock is
exchanged for shares of Common Stock in the Exchange Offer and 100% of the
Preferred Stock is reclassified and changed into shares of Common Stock in the
Reclassifications. The Exchange Offer and the Reclassifications are reflected
in the unaudited Pro Forma Condensed Consolidated Balance Sheets at March 31
and September 30, 1997 as if it had occurred on each of those dates. The
unaudited Pro Forma Condensed Consolidated Statements of Operations for the
periods ended March 31, 1997 and September 30, 1997 assume that the Exchange
Offer or the Reclassifications had been consummated on April 1, 1996 and
April 1, 1997, respectively.
The unaudited Pro Forma Financial Information and explanatory notes also
present the historical financial statements of the Company as adjusted to give
effect to the acquisition of MSF completed on July 31, 1997 (the "MSF
Acquisition"). The MSF Acquisition is reflected in the unaudited Pro Forma
Condensed Consolidated Statements of Operations for the periods ended March 31,
1997 and September 30, 1997 as if it had occurred on April 1, 1996 and April 1,
1997, respectively, and in the unaudited Pro Forma Condensed Balance Sheet at
March 31, 1997 as if it had occurred on that date. Because the MSF Acquisition
was closed prior to September 30, 1997, it is reflected in the Company's
historical balance sheet at September 30, 1997. These unaudited Pro Forma
Condensed Statements of Operations were prepared based upon (i) the unaudited
consolidated statements of operations of MSF for the 12 months ended December
31, 1996 and the audited consolidated statements of operations of the Company
for the fiscal year ended March 31, 1997 and (ii) the unaudited consolidated
statements of operations of MSF for the four months ended July 31, 1997 and of
the Company for the six months ended September 30, 1997.
A separate unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six-month period ended September 30, 1997, which contains no
pro forma adjustments for the MSF Acquisition, is also presented to show the
effect of only the Reclassification or Exchange Offer.
The unaudited Pro Forma Condensed Consolidated Statements of Operations
for the fiscal year ended March 31, 1997 also reflect the impact on the
historical results of operations of the Company of the acquisition of the
assets of 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 Operations 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 Company's historical balance sheet at March 31, 1997.
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 the Company as they may be in the future or as they might have
been had the various transactions been effected on the assumed dates. The Pro
Forma Financial Information should be read in conjunction with the historical
consolidated financial statements of the Company, and the related notes thereto,
the historical consolidated financial statements of MSF, and the notes related
thereto, and the historical consolidated financial statements of DACC, and the
related notes thereto, presented elsewhere in this Proxy Statement/Prospectus.
58
<PAGE> 63
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
As of March 31, 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ----------------------------
COMPANY MSF ADJUSTMENTS COMBINED
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Gross contracts receivable $ 62,325 $ 97,972 $ 1,500 (a) $ 161,797
Unearned interest (10,636) (25,169) -- (35,805)
Amounts due under securitizations -- 7,580 -- 7,580
--------- --------- --------- ---------
Net contracts receivables 51,689 80,383 1,500 133,572
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 1,500 122,827
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 (801)(a) 2,304
Intangibles, net 6,252 -- 219 (b) 6,471
Other assets, net 910 8,155 -- 9,065
--------- --------- --------- ---------
$ 69,523 $ 91,015 $ 918 $ 161,456
========= ========= ========= =========
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 $ 400 (a) 5,570
Subordinated note payable 5,000 -- -- 5,000
Accrued interest 271 -- -- 271
Redeemable warrants 1,035 -- -- 1,035
--------- --------- --------- ---------
Total liabilities 42,917 73,852 400 117,169
Stock repurchase commitment 2,078 -- -- 2,078
--------- --------- --------- ---------
Convertible preferred stock 201 -- -- 201
Common stock 252 11 (11)(d) 291
39 (c)
Additional paid in capital 78,047 27,660 (27,660)(d) 95,689
17,642 (c)
Unrealized gain on securities
available for sale -- 450 (450)(d) --
Accumulated deficit (52,760) (8,684) 8,684 (d) (52,760)
Treasury stock -- (2,274) 2,274 (d) --
--------- --------- --------- ---------
Total stockholders' equity 25,740 17,163 518 43,421
Notes receivable - stockholders (1,212) -- -- (1,212)
--------- --------- --------- ---------
Net stockholders' equity 24,528 17,163 518 42,209
--------- --------- --------- ---------
Total $ 69,523 $ 91,015 $ 918 $ 161,456
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA 50% EXCHANGE PRO FORMA 100% RECLASSIFICATION
-------------------------- -------------------------------
ADJUSTMENTS AS ADJUSTED ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Gross contracts receivable $ 161,797 $ 161,797
Unearned interest (35,805) (35,805)
Amounts due under securitizations 7,580 7,580
--------- ----------
Net contracts receivables 133,572 133,572
Allowance for losses (12,218) (12,218)
Net loan origination costs 1,473 1,473
--------- ----------
Net contracts receivable - after allowance
for credit losses & other costs 122,827 122,827
Cash and cash equivalents 16,545 16,545
Vehicles held for resale 4,244 4,244
Property and equipment, net 2,304 2,304
Intangibles, net 7,479 7,479
Other assets, net 8,057 8,057
--------- ----------
$ 161,456 $ 161,456
========= ==========
LIABILITIES AND STOCKHOLDERS EQUITY:
Lines of credit $ 23,715 $ 23,715
Note payable 81,038 81,038
Accrued settlements 540 540
Accounts payable and other liabilities $ 675 (e) 5,500 $ 801 (e) 4,881
(745)(f) (1,490)(f)
Subordinated note payable -- 5,000 -- 5,000
Accrued interest -- 271 -- 271
Redeemable warrants -- 1,035 -- 1,035
--------- --------- --------- ---------
Total liabilities (70) 117,099 (689) 116,480
Stock repurchase commitment -- 2,078 -- 2,078
--------- --------- --------- ---------
Convertible preferred stock (100)(g) 101 (201)(g) --
Common stock 50 (h) 341 100 (h) 391
Additional paid in capital (4,093)(i) 100,017 (8,186)(i) 104,346
8,421 (j) 16,843 (j)
Unrealized gain on securities
available for sale -- -- -- --
Accumulated deficit (4,278)(k) (56,968) (8,556)(k) (60,627)
(675)(e) (801)(e)
745 (f) 1,490 (f)
Treasury stock -- -- -- --
--------- --------- --------- ---------
Total stockholders' equity 70 43,491 689 44,110
Notes receivable - stockholders -- (1,212) -- (1,212)
--------- --------- --------- ---------
Net stockholders' equity 70 42,279 689 42,898
--------- --------- --------- ---------
Total $ 0 $ 161,456 $ 0 $ 161,456
========= ========= ========= =========
</TABLE>
59
<PAGE> 64
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
PRO FORMA 50% EXCHANGE PRO FORMA 100% RECLASSIFICATION
---------- ----------------------------- -------------------------------
HISTORICAL ADJUSTMENTS AS ADJUSTED ADJUSTMENTS AS ADJUSTED
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Gross contracts receivable $162,061 $162,061 $162,061
Unearned interest (34,691) (34,691) (34,691)
Installment contracts sold (15,735) (15,735) (15,735)
Amounts due under securitization 3,674 3,674 3,674
Other amounts due 1,605 1,605 1,605
-------- -------- --------
Net contracts receivables 116,914 116,914 116,914
Allowance for losses (10,768) (10,768) (10,768)
Net loan origination costs 1,655 1,655 1,655
-------- -------- --------
Net contracts receivable - after allowance
for credit losses & other costs 107,801 107,801 107,801
Cash and cash equivalents 2,491 2,491 2,491
Vehicles held for resale 1,199 1,199 1,199
Property and equipment, net 2,577 2,577 2,577
Intangibles, net 11,475 11,475 11,475
Other assets, net 1,090 1,090 1,090
-------- -------- --------
$126,633 $126,633 $126,633
======== ======== ========
LIABILITIES AND STOCKHOLDERS EQUITY:
Lines of credit $17,248 $17,248 $17,248
Note payable 68,926 68,926 68,926
Accrued settlements 500 500 500
Accounts payable and other liabilities 2,947 $ 675 (e) 3,592 $ 801 (e) 3,688
(30) (f) (60) (f)
Accrued interest 688 688 688
Subordinated note payable 5,000 -- 5,000 -- 5,000
Redeemable warrants 1,115 -- 1,115 -- 1,115
-------- -------- -------- -------- --------
Total liabilities 96,424 645 97,069 741 97,165
Convertible preferred stock 201 (100) (g) 101 (201) (g) 0
Common stock 289 50 (h) 339 100 (h) 389
Additional paid in capital 88,252 (4,093) (i) 92,580 (8,186) (i) 96,909
8,421 (j) 16,843 (j)
Accumulated deficit (57,321) (4,278) (k) (62,244) (8,556) (k) (66,618)
(675) (e) (801) (e)
30 (f) 60 (f)
-------- -------- -------- -------- --------
Total stockholders' equity 31,421 (645) 30,776 (741) 30,680
Notes receivable - stockholders (1,212) (1,212) (1,212)
-------- -------- -------- -------- --------
Net stockholders' equity 30,209 (645) 29,564 (741) 29,468
-------- -------- -------- -------- --------
Total $126,633 $ 0 $126,633 $ 0 $126,633
======== ======== ======== ======== ========
</TABLE>
60
<PAGE> 65
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
MSF DACC
Search Fiscal 12 Months Operations for Fiscal Year
Year Ended Ended Period Between Ended
March 31, March 31, April 1, 1996 March 31, 1997
1997 1997 and Pro Forma
Historical Historical August 2, 1996 Adjustments Combined
---------- ---------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Interest revenue $10,004 $ 17,769 $ 2,240 $ 30,013
Interest expense (2,306) (7,206) (984) (10,496)
------- -------- ------- --------
Net interest income 7,698 10,563 1,256 19,517
Reduction of (provision for)
credit losses 7,017 (29,995) (6,800) (29,778)
------- -------- ------- --------
Net interest income (loss)
after provision 14,715 (19,432) (5,544) (10,261)
General and administrative
expense (13,432) (11,683) (1,946) $(376)(m) (27,437)
------- -------- ------- ----- --------
Net income (loss) before
dividends and taxes 1,283 (31,115) (7,490) (376) (37,698)
Income tax benefit -- 4,419 -- -- 4,419
Preferred stock dividends (6,154) -- -- -- (6,154)
Gain (loss) on exchange -- -- -- -- --
------- -------- ------- ----- --------
Net income (loss) to
common stockholders $(4,871) $(26,696) $(7,490) $(376) $(39,433)
======= ======== ======= ===== ========
Net income (loss) per share
of common stock $ (1.45) $ (5.56)
======= ========
Weighted average common
and equivalent shares
outstanding 3,366 59 (l) 3,667 (n) 7,092
======= ======= ===== ========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma 50% Exchange Pro Forma 100% Reclassification
---------------------- -------------------------------
Adjustments As Adjusted Adjustments As Adjusted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest revenue $ 30,013 $ 30,013
Interest expense (10,496) (10,496)
-------- --------
Net interest income 19,517 19,517
Reduction of (provision for)
credit losses (29,778) (29,778)
-------- --------
Net interest income (loss)
after provision (10,261) (10,261)
General and administrative
expense $ (675)(e) (28,112) $ (801)(e) (28,238)
------- -------- ------- --------
Net income (loss) before
dividends and taxes (675) (38,373) (801) (38,499)
Income tax benefit -- 4,419 -- 4,419
Preferred stock dividends 2,875 (f) (3,279) 5,749 (f) (405)
Gain (loss) on exchange (4,278)(k) (4,278) (8,556)(k) (8,556)
------- -------- ------- --------
Net income (loss) to
common stockholders $(2,078) $(41,511) $(3,608) $(43,041)
======= ======== ======= ========
Net income (loss) per share
of common stock $ (3.43) $(2.51)
======== ========
Weighted average common
and equivalent shares
outstanding 5,013 12,105 10,025 17,117
======= ======== ======= ========
</TABLE>
61
<PAGE> 66
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
MSF Four Six Months
Search Six Months Ended
Months Ended Ended September 30,
September 30, July 31, 1997
1997 1997 Pro Forma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Interest revenue $ 6,412 $ 6,514 $ 12,926
Interest expense (2,979) (3,230) (6,209)
------- ------- --------
Net interest income 3,433 3,284 6,717
Reduction of (provision for)
credit losses 998 (7,333) (6,335)
------- ------- --------
Net interest income (loss)
after provision 4,431 (4,049) 382
General and administrative expense (8,992) (5,686) $ (125)(m) (14,803)
------- ------- ------ --------
Net income (loss) before dividends
and taxes (4,561) (9,735) (125) (14,421)
Preferred stock dividends (1,670) -- -- (1,670)
Gain (loss) on exchange -- -- -- --
------- ------- ------ --------
Net income (loss) to common
stockholders $(6,231) $(9,735) $ (125) $(16,091)
======= ======= ====== ========
Net income (loss) per share of
common stock $ (1.42)
=======
Weighted average common and
common equivalent shares
outstanding 4,385 2,445 (n)
======= ======
</TABLE>
<TABLE>
<CAPTION>
Pro Forma 50% Exchange Pro Forma 100% Reclassification
------------------------------- -------------------------------
Adjustments As Adjusted Adjustments As Adjusted
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest revenue $ 12,926 $ 12,926
Interest expense (6,209) (6,209)
-------- --------
Net interest income 6,717 6,717
Reduction of (provision for)
credit losses (6,335) (6,335)
-------- --------
Net interest income (loss)
after provision 382 382
General and administrative expense $ (675)(e) (15,478) $ (801)(e) (15,605)
------- -------- ------- --------
Net income (loss) before dividends
and taxes (675) (15,096) (801) (15,223)
Preferred stock dividends 835 (f) (835) 1,670 (f) --
Gain (loss) on exchange (4,278)(k) (4,278) (8,556)(k) (8,556)
------- -------- ------- --------
Net income (loss) to common
stockholders $(4,118) $(20,209) $(7,687) $(23,779)
======= ======== ======= ========
Net income (loss) per share of
common stock $ (1.71) $ (1.41)
======== ========
Weighted average common and
common equivalent shares
outstanding 5,013 11,843 10,025 16,855
======= ======== ======= ========
</TABLE>
62
<PAGE> 67
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Exchange Offer and Reclassifications only)
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Search Six
Months Ended
September 30, Pro Forma 50% Exchange Pro Forma 100% Reclassification
1997 ------------------------------- -------------------------------
Historical Adjustments As Adjusted Adjustments As Adjusted
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest revenue $ 6,412 $ 6,412 $ 6,412
Interest expense (2,979) (2,979) (2,979)
------- -------- --------
Net interest income 3,433 3,433 3,433
Reduction of (provision for)
credit losses 998 998 998
------- -------- --------
Net interest income (loss)
after provision 4,431 4,431 4,431
General and administrative expense (8,992) $ (675)(e) (9,667) $ (801)(e) (9,793)
------- ------- -------- ------- --------
Net income (loss) before dividends
and taxes (4,561) (675) (5,236) (801) (5,362)
Preferred stock dividends (1,670) 835 (f) (835) 1,670 (f) --
Gain (loss) on exchange -- (4,278)(k) (4,278) (8,556)(k) (8,556)
------- ------- -------- ------- --------
Net income (loss) to common
stockholders $(6,231) $(4,118) $(10,349) $(7,687) $(13,918)
======= ======= ======== ======= ========
Net income (loss) per share of
common stock $ (1.42) $ (1.10) $ (0.97)
======= ======== ========
Net income (loss) per share of
common stock excluding
loss on exchange(o) $ (1.42) $ (0.65)(o) $ (0.37)(o)
======= ======== ========
Weighted average common and
common equivalent shares
outstanding 4,385 5,013 9,398 10,025 14,410
======= ======= ======== ======= ========
</TABLE>
63
<PAGE> 68
Notes to Pro Forma Condensed Consolidated
Financial Statements
(a) The fair market value adjustments to MSF's assets and liabilities are as
follows (in thousands):
<TABLE>
<S> <C>
Value associated with MSF bad debt portfolio $ 1,500
Reduction in value of fixed assets (801)
Record transaction cost and expenses (400)
</TABLE>
(b) Adjustments for excess of net value given over net assets acquired as
computed below (in thousands):
<TABLE>
<S> <C>
Fair value adjustments, net $ (299)
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 $ 219
</TABLE>
(c) Adjustments for fair value of Common Stock issued in MSF Acquisition, costs
associated with registering Common Stock and other costs of MSF
Acquisition. The actual value assigned by the Company as of July 31, 1997
to the MSF Acquisition would have yielded a negative goodwill of
$4,542,000 as of March 31, 1997 if such value were used in this proforma.
Accordingly, the proforma presentation as of March 31, 1997 employs a
preliminary value that had been assigned by the Company to the MSF
Acquisition at an earlier date. The estimated preliminary value associated
with the MSF Acquisition was computed as follows:
<TABLE>
<S> <C>
Per Share Amount of $1.63 times 10,431,000 outstanding shares
of common stock of MSF plus the value associated with MSF
options assumed by Search of $678,000 $17,681,000 (1)
Expenses of transaction 750,000
Assumption of debt 73,852,000
-----------
Preliminary estimate of
proforma purchase price $92,283,000
===========
</TABLE>
(1) The preliminary value computed above equated to 3,859,000
shares of Search's Common Stock. The actual number of shares of
Search's Common Stock issued on July 31, 1997 was 3,666,500
valued at $11,768,000, excluding a value of $454,000 for the
assumed options.
(d) Elimination of MSF equity.
(e) Adjustments for solicitation fees of $126,000 or $251,000 at 50% or 100%,
respectively, and financial advisory fees of $550,000.
(f) Elimination of accrued dividends or dividend expense for Preferred Stock.
No elimination was made for dividends paid during the year ended March 31,
1997 with respect to shares of Preferred Stock repurchased in that fiscal
year.
(g) Elimination of reclassified or exchanged Preferred Stock par value.
(h) Represents par value of new shares of Common Stock.
(i) Elimination of additional paid in capital for reclassified or exchanged
Preferred Stock based on market price of Common Stock into which shares of
Common Stock may be converted by original terms of Preferred Stock.
<TABLE>
Common Shares Aggregate
into which Market Preferred Paid-in
Originally Price at Stock par Capital
Convertible Nov. 18, 1997 value Eliminated
------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
9%/7% Preferred 4,912,000 $ 8,302,000 $ 197,000 $ 8,105,000
12% Preferred 50,000 85,000 4,000 81,000
------------ ------------ ---------- -----------
Total @ 100% 4,962,000 $ 8,387,000 $ 201,000 $ 8,186,000
============ ============ ========== ===========
Total @ 50% 2,481,000 $ 4,193,000 $ 100,000 $ 4,093,000
============ ============ ========== ===========
</TABLE>
(j) Represents additional paid in capital for new shares of Common Stock based
on market price of Common Stock of $1.69 per share at November 18, 1997.
(k) Adjustments for excess of market price of new shares of Common Stock over
market price of the shares of Common Stock issuable to holders of
Preferred Stock pursuant to the original conversion terms of the Preferred
Stock as of November 18, 1997.
<TABLE>
<CAPTION>
Aggregate
Common Shares Market
Reclassified into which Excess Price for
or Exchanged Originally Common Excess
Common Shares Convertible Shares Shares
------------- ----------- ------ ----------
<S> <C> <C> <C> <C>
9%/7% Preferred 9,825,000 4,912,000 4,913,000 $8,303,000
12% Preferred 200,000 50,000 150,000 253,000
------------- --------- --------- ----------
Totals 100% 10,025,000 4,962,000 5,063,000 $8,556,000
============= ========= ========= ==========
Totals 50% 5,012,000 2,481,000 2,531,000 $4,278,000
============= ========= ========= ==========
</TABLE>
(l) Represents adjustment to calculations of weighted average common and common
equivalent shares outstanding assuming shares issued in the DACC
Acquisition were outstanding from April 1, 1996.
(m) Represents amortization of net intangible asset acquired in MSF Acquisition
of approximately $31,000 per month.
(n) Represents the number of shares of Common Stock issued in the MSF
Acquisition.
(o) Represents the net income (loss) per share of Common Stock after excluding
the non-cash accounting adjustment for the gain (loss) on exchange
described in note (k) above.
64
<PAGE> 69
BUSINESS
OVERVIEW OF THE COMPANY
The Company 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. The Company
purchases its receivables either through the purchase of individual receivables
from franchise and independent automobile and light truck dealers ("Dealers") or
through bulk purchases of receivables from Dealers and other finance companies
who originate them in the sale of vehicles. During the fiscal year ended March
31, 1997, the Company commenced in other consumer lending operations by opening
several consumer lending branches. As of September 30, 1997, 21 consumer lending
branches were operational.
The automobile finance industry is the second largest consumer finance
market in the United States totaling over $350 billion as of December 1996,
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. It is generally believed that non-prime financing
currently accounts for approximately 20% of the automobile finance market.
Through its wholly owned subsidiary, Automobile Credit Acceptance Corp., the
Company specializes in purchasing receivables secured by used cars and light
trucks and owed by non-prime obligors.
The Company maintains and monitors standards, both initial and ongoing,
that Dealers have to meet before the Company will consider purchasing their
receivables. As of September 30, 1997, the Company had approximately 1,400
Dealers in its network of Dealers (the "Dealer Network") compared to
approximately 50 Dealers in the Dealer Network at March 31, 1996.
On July 31, 1997, the Company acquired MS Financial, Inc. ("MSF") in a
stock-for-stock merger transaction. MSF, headquartered in Jackson, Mississippi,
is a specialized consumer finance company that purchases and services retail
installment contracts on new and used cars and light trucks. As of July 31,
1997, MSF had total assets of approximately $71,250,000, total liabilities of
approximately $64,250,000 and stockholders' equity of approximately $7,000,000.
DESCRIPTION OF HISTORICAL OPERATIONS AND REORGANIZATION OF FUND SUBSIDIARIES
Prior to November 1994, the Company 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.
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.
From late 1994 until March 1996, the Company operated under financial
constraints and had limited ability to raise new operating capital. The
purchasing of receivables for the Fund Subsidiaries was governed by 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.
On August 14, 1995, in order to consummate a debt-to-equity conversion
plan, each of the Fund Subsidiaries filed for reorganization under Chapter 11 of
the U. S. Bankruptcy Code. On March 4, 1996, the Court entered an order (the
"Confirmation Order") confirming a Third Amended Joint Plan of Reorganization
(the "Joint Plan") for all of the Fund Subsidiaries. The Joint Plan became
effective on March 15, 1996 (the "Effective Date").
As a consequence of effectiveness of the 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 in exchange
for Common Stock and 9%/7% Preferred Stock and cash to be distributed to the
former Holders of the Notes, and the Notes were deemed canceled.
65
<PAGE> 70
AUTOMOBILE FINANCE OPERATIONS SINCE REORGANIZATION OF THE FUND SUBSIDIARIES
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
is focusing 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% and are
generally secured by automobiles up to six years in age that have been driven no
more than an average of 25,000 miles per year and fewer than 80,000 total miles.
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. However, the Company is currently expanding
the marketing of its new programs to include states in other regions of the
United States with laws similar to those of the states in which the Company has
focused in the past.
In connection with the new programs, the Company has established
underwriting criteria to evaluate the quality of receivables, the most
significant of which 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 one year of employment for each
obligor
o The obligor must show a positive pay history within the previous two
years
o The obligor must show gross income of at least $1,200 per month
o The maximum payment for the purchased vehicle cannot exceed 20% of the
obligor's gross income
o The debt-to-income gross ratio of the obligor cannot exceed 50%
o The down payment must be 10% of the retail selling price of the
vehicle.
For each receivable purchased pursuant to the new programs, the Company
generally purchases the receivables at a discount, ranging from 5% to 10%,
depending upon the value of the vehicle and the term of the receivable.
The Company purchases receivables from a network of Dealers that originate
motor vehicle receivables through the sale of 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 its 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 agreements with the Dealers, the Company is under no obligation to
purchase any receivables from the Dealer and the Dealer is not obligated to
submit any contracts to the Company.
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, a 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. 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 the Dealer.
Dealers initiate receivable sales transactions directly with the Company's
centralized purchasing personnel by faxing a consumer application to the
Company. The Company's decision whether to purchase a receivable is typically
communicated to the Dealer within approximately one hour, and, if the
application is approved, documentation is completed generally within one week.
The Company pays the Dealer for the receivable after receipt and review of the
original receivable contract and other required documents and after verification
procedures are completed.
The Company's receivables purchasing personnel review each receivable for
compliance with the Company's underwriting criteria, utilizing standard and
supporting documentation provided by the selling Dealer and national
computerized databases that automatically interact with the Company's
proprietary Auto Note Management System Software
66
<PAGE> 71
("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 the ANMS. Once a receivable is purchased, the Company services the
receivable out of one of its branch offices. The Company considers its branch
office network to be a competitive factor as it facilitates collection and
servicing efforts.
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 nonpayment of the receivable
through quasi-loan arrangements, dealer holdbacks, reserve accounts or other
collection collateral or guaranties. Other competitors will only purchase
receivables that have existed and performed in an acceptable manner for a period
of time. Purchase and credit criteria and verification procedures also differ
from competitor to competitor.
In addition to the purchases of individually selected receivables, the
Company seeks to acquire pools of non-prime automobile receivables ("Bulk
Purchases") from Dealers or other finance companies. A Bulk Purchase is analyzed
on both an individual receivable and a pooled basis using criteria similar to
those used to evaluate individual receivable purchases from Dealers. During the
fiscal year ended March 31, 1997, the Company completed Bulk Purchases of
approximately $34,518,000 of gross receivables and acquired $27,490,000 of gross
receivables in other acquisitions. At the time of its acquisition by the
Company, MSF had gross owned and securitized receivables of approximately
$104,000,000.
Following the purchase of each receivable, the Company mails a statement to
the obligor a minimum of seven days before each payment becomes due. These
statements instruct the obligor to remit payments directly to the Company's post
office box or lockbox. 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 principal collection operation is based in Dallas,
Texas.
The Company has a staff of collection personnel that monitor payments on
the Company's receivables and contact obligors via telephone when payments are
delinquent. Collections personnel generally have (i) a minimum of one year
collection experience, (ii) proven ability to obtain corrective action on
delinquent accounts and (iii) knowledge of, and ability to comply with, state
and federal debt collection laws. Generally, if a receivable shows any
indication of default, the receivable is subjected 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 after default, 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 recovery 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 of the obligor to commit to payment by 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. Current Company policy permits
deferment of payments only in very limited instances and only with senior
management approval. Following repossession of a vehicle, the Company sells the
vehicle on a wholesale basis at the highest available bid at an unaffiliated
motor vehicle auction.
The Company's collection and repossession activities are administered with
use of a data processing and communications system developed by the Norwest
Financial Information Services Group (the "Norwest System"). The Company's
ability through the ANMS and the Norwest System to relationally cross-reference
receivable collection statistics to a vehicle, Dealer, customer and geographic
location assists the Company in monitoring receivables and adjusting purchase
procedures and prices.
67
<PAGE> 72
AVERAGE 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 September 30, 1997 and March 31, 1997. These statistics at
March 31, 1997 do not reflect receivables owned by MSF.
AVERAGE RECEIVABLE CHARACTERISTICS
<TABLE>
<CAPTION>
As of As of
September 30, 1997 March 31, 1997
------------------------------------------------------------------------------
Non-Prime Non-Prime
Consumer Auto Total Consumer Auto Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average Original Term - Months 24.2 45.7 42.7 20.0 39.7 38.6
Average Remaining Term - Months 22.4 25.2 24.8 9.1 22.8 22.1
Average APR 24.0% 21.0% 21.42% 34.6% 23.5% 24.1%
Average Monthly Payment Amount $ 111 $ 331 $ 330 $ 92 $ 317 $ 305
Average Original Gross Balance $ 3,005 $ 15,298 $ 13,577 $ 2,284 $ 12,788 $ 12,202
Average Current Gross Balance $ 2,729 $ 8,781 $ 7,933 $ 1,515 $ 6,902 $ 6,616
Average Net Receivable $ 2,139 $ 6,902 $ 6,235 $ 1,160 $ 5,728 $ 5,487
Weighted Average APR 22.4% 20.4% 20.5% 30.0% 22.8% 22.9%
</TABLE>
At September 30, 1997, the Company had an aggregate of 20,428 owned and
securitized receivables in its portfolio with an aggregate total unpaid balance
of $162,061,000, including $34,691,000 in unearned interest and $10,768,000 in
credit loss allowance. Additionally, the Company had a total of 461 vehicles
held for resale having an estimated value of approximately $1,199,000 as of
September 30, 1997.
Seasonality. The Company's operations are 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 owned or securitized receivables that the Company considers
unimpaired or accrual status and impaired or nonaccrual status as of September
30, 1997 and March 31, 1997. The table also shows the same data separately for
the Company's non-prime auto receivables and its consumer loans. The March 31,
1997 figures do not include receivables owned by MSF.
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<PAGE> 73
MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES
(Dollars in thousands)
<TABLE>
<CAPTION>
TOTAL COMPANY: AS OF SEPT. 30, 1997 AS OF MARCH 31, 1997
- ------------- --------------------------------------------- --------------------------------------------
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 17,429 $138,945 86% 8,254 $56,074 90%
31-60 days past due 1,788 14,320 9% 702 3,982 6%
------ -------- --- ----- ------- ---
Subtotal 19,217 $153,265 95% 8,956 $60,056 96%
------ -------- --- ----- ------- ---
Nonaccrual Receivables
61-180 days past due 1,113 8,240 5% 461 2,255 4%
181+ days past due 98 556 0% 4 14 0%
------ -------- --- ----- ------- ---
Subtotal 1,211 8,796 5% 465 2,269 4%
------ -------- --- ----- ------- ---
All Receivables(2) 20,428 $162,061 100% 9,421 $62,325 100%
====== ======== === ===== ======= ===
Vehicles held for
resale @ collateral value 461 $ 1,199 458 $ 1,196
====== ======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
NON-PRIME AUTO: AS OF SEPT. 30, 1997 AS OF MARCH 31, 1997
- -------------- --------------------------------------------- --------------------------------------------
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 14,707 $131,350 85% 7,863 $55,347 90%
31-60 days past due 1,722 14,190 9% 642 3,949 6%
------ -------- --- ----- ------- ---
Subtotal 16,429 $145,540 94% 8,505 $59,296 96%
------ -------- --- ----- ------- ---
Nonaccrual Receivables
61-180 days past due 1,040 8,158 5% 387 2,220 4%
181+ days past due 98 556 1% 4 14 0%
------ -------- --- ----- ------- ---
Subtotal 1,138 8,714 6% 391 2,234 4%
------ -------- --- ----- ------- ---
All Receivables(2) 17,567 $154,254 100% 8,896 $61,530 100%
====== ======== === ===== ======= ===
Vehicles held for
resale @ collateral
value 461 $ 1,199 458 $ 1,196
====== ======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
CONSUMER: AS OF SEPT. 30, 1997 AS OF MARCH 31, 1997
- -------- --------------------------------------------- --------------------------------------------
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 2,722 $ 7,595 97% 391 $ 727 91%
31-60 days past due 66 130 2% 60 33 4%
------ -------- --- ----- ------- ---
Subtotal 2,788 $ 7,725 99% 451 760 95%
------ -------- --- ----- ------- ---
Nonaccrual Receivables
61-180 days past due 73 82 1% 74 35 5%
181+ days past due 0 0 0% 0 0 0%
------ -------- --- ----- ------- ---
Subtotal 73 82 1% 74 35 5%
------ -------- --- ----- ------- ---
All Receivables(2) 2,861 $ 7,807 100% 525 795 100%
====== ======== === ===== ======= ===
</TABLE>
(1) Includes unearned income.
(2) Active receivables shown on the face of the Company's balance sheet exclude
458 and 461 accounts that have been reclassified to vehicles held for
resale at March 31, 1997 and September 30, 1997, respectively.
69
<PAGE> 74
NON-AUTO CONSUMER FINANCE OPERATIONS
The Company initiated its activities in non-auto consumer lending with the
purchase of consumer loans with gross balances of $432,000 in August 1996. The
Company opened its first consumer loan office in November 1996 in Baton Rouge,
Louisiana, and as of September 30, 1997, it had established 21 consumer loan
offices in Florida, Georgia, Louisiana, Oklahoma, Puerto Rico, Tennessee and
Texas. Gross non-auto consumer loans exceeded $1.3 million at March 31, 1997 and
totaled approximately $9 million at September 30, 1997. In November 1997, the
Company received approval from the Office of the Consumer Credit Commissioner
for Texas to establish eight additional branch offices in Texas.
The Company's consumer finance offices provide direct personal loans and
retail sales finance, home equity and second-mortgage lending services to their
customers. Sales finance loans are available to facilitate the purchase of
household appliances and furnishings, to make home improvements, to pay for
education, vacation and other personal expenses and to consolidate previously
incurred indebtedness. Consumer loan customers are developed through the
Company's non-prime automobile lending activities, through the acquisition of
retail sales finance contracts from retailers and through existing relationships
of the Company's branch office personnel. The Company believes that its
non-prime automobile lending and retail sales finance contract purchasing
activities can be an important source of new direct consumer loan customers and
can lead to development of long-term customer relationships. Consumer loans may
be secured or unsecured.
FINANCING
Hibernia Line 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. The Line was renewed, with
the Company's consumer finance subsidiaries added as additional borrowers, in
October 1997. The Line bears interest at the prime rate plus 1%, or 9.5% as of
October 31, 1997. The Line has a maximum commitment of $25,000,000 and is
limited to a percentage of eligible contracts held by SFII and the other
borrowers. The Line is secured by all of the borrowers' assets and expires on
October 11, 2000. Search has guaranteed the Line. Search and the borrowers must
comply with covenants under the Line that require the maintenance of certain
financial ratios and other financial conditions.
MSF Revolving Credit. Following the Company's acquisition of MSF, MSF's $70
million line of credit from a bank group led by Fleet Bank, N.A. has remained in
place. The line of credit must be reduced to $50 million by December 31, 1997.
The facility is secured by a first priority security interest in all of MSF's
assets and is guaranteed by Search.
Future Financings. The Company presently intends to continue purchasing
motor vehicle receivables and expanding its non-auto consumer lending
operations, 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 or convertible debt and equity
financing, securitizations and warehouse lines of credit.
COMPETITION
The Company has numerous competitors engaged in the business of buying
non-prime, used motor vehicle receivables and in making consumer loans. 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.
The Company believes that the primary methods of competition in the
non-prime, used motor vehicle finance industry are establishment of Dealer
relationships, receivables purchasing criteria, marketing, receivables purchase
response time and purchase agreement provisions, including dealer recourse,
reserves or commissions.
The Company commenced its non-auto consumer finance business in November
1996. In that business the Company faces intense competition from numerous
competitors, many of which have been in business for substantial periods of time
and have significantly greater resources than the Company. The Company believes
that the primary methods of competition in the consumer finance business are the
establishment of relationships with independent dealers and potential borrowers
and loan terms. The Company intends to hire experienced individuals with strong
customer relationships to manage its consumer lending branches.
70
<PAGE> 75
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 a consumer finance company, the Company may be subjected 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 recession and other remedies that could have an adverse effect on the
Company.
In the event of default by an obligor on a motor vehicle receivable or
consumer loan that is secured, 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. 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 a
secured party to provide an 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 waived after default, an 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.
EMPLOYEES
As of October 31, 1997, the Company had 232 employees, of which 174 were
engaged in receivables purchasing, collections and origination, 44 in
administration, seven in asset remarketing and seven in senior management.
PROPERTIES
The Company's principal executive offices are located at 600 North Pearl
Street, Dallas, Texas 75201. The Company leases approximately 25,000 square feet
of space at this facility under a lease expiring in 2002. The Company leases an
additional approximately 6,000 square feet of space in Dallas, Texas that is
utilized as the Company's principal collection center under a lease expiring in
2001.
The Company also leases 21 consumer lending offices, some of which also
serve as remote collection facilities. Generally, these facilities are leased
for a period of three to five years and provide for cancellation rights after a
prescribed period of time.
LEGAL PROCEEDINGS
The Company and certain of its former officers and directors are defendants
in a case styled Janice and Warren Bowe, et al. v. 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 the Fund 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, expected repossession rates, the Company's accounting
controls and computer systems, the operating results and financial condition of
the Company and its subsidiaries and the ability of the Fund Subsidiaries to pay
the Notes at the projected rates of return, and were, therefore,
71
<PAGE> 76
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 purchased Notes issued by the three Fund
Subsidiaries. While the Company 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 for the purpose, among other things, of
pursuing causes of action of the former Holders of Notes issued by the Fund
Subsidiaries who assigned their claims with respect to the Bowe Action to the
Litigation Trust.
In August 1997, the trustee (the "Litigation Trustee") of the Litigation
Trust filed a complaint (the "Trustee's Action") in the United States Bankruptcy
Court for the Northern District of Texas, Dallas Division, against the Company,
its subsidiary Search Financial Services Acceptance Corp. (formerly known as
Automobile Credit Acceptance Corp.) ("SFSAC"), certain of the Company's former
officers and directors, certain broker-dealers who sold Notes of three of the
Fund Subsidiaries and the Company's and the Fund Subsidiaries' former
independent accountants. The Litigation Trust was established to pursue causes
of action of the Fund Subsidiaries and of the former Holders of Notes issued by
the Fund Subsidiaries who assigned their claims to the Litigation Trust. In the
Trustee's Action, the Litigation Trust alleges (1) breach of fiduciary duty owed
by Search and the former directors and officers to three of the Fund
Subsidiaries through the use of fraudulent misrepresentations and omissions in
the raising of capital that was used for the benefit of the Company and its
affiliates rather than those Fund Subsidiaries, (2) violations by Search and the
former directors and officers of the Racketeer Influenced and Corrupt
Organizations Act as a result of the fraudulent offering of Notes by three of
the Fund Subsidiaries, (3) negligence by the broker-dealers and accountants in
connection with the offering of Notes by the three Fund Subsidiaries and (4)
payment of voidable preferential transfers to Search and SFSAC, which payments
were specified in the Plan, in the amount of $7,236,111. The plaintiff seeks
recovery of the alleged preferential transfers and unspecific actual, exemplary
and treble damages. Search and SFSAC believe the suit is without merit and are
vigorously defending themselves. An adverse judgment in the suit could, however,
have a material adverse effect on the Company's results of operations or
financial condition.
In November 1997, the Company and all other parties to the Bowe Action and
the Trustee's Action entered into a Stipulation of Settlement to settle all
claims of the Litigation Trust and all claims related to the Bowe Action for an
amount that includes payment by the Company of $362,500 in cash and the issuance
by the Company of Common Stock having a value of $1,787,500. The settlement is
subject to various conditions, including approval by the Federal District Court
for the Southern District of Mississippi and the United States Bankruptcy Court
for the Northern District of Texas, Dallas Division. If all conditions are
satisfied, the settlement is expected to be completed in December 1997.
The Company has a reserve of $500,000 related to the Bowe Action. Although
as a result of the Settlement an additional charge of $1,288,000 will be
reflected in the Company's earnings or loss for the third fiscal quarter of
1998, the Settlement will not adversely affect the Company's stockholders'
equity due to the substantial portion of the Settlement being paid in stock.
However, the book value per share will decrease as a result of the Settlement.
In January 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 asserted claims for
unpaid fees due it in connection with a warehouse line of credit MSF entered
into in April 1995. Telluride sought damages in the amount of $437,500, plus
interest, costs and attorneys' fees. That suit was removed to New York state
court in April 1997. In March 1997, MSF filed a declaratory judgment action
against Telluride in Mississippi state court requesting a determination of the
parties' rights and obligations relating to the warehouse line of credit. In
October 1997, Telluride's action in New York state court was dismissed. At this
time, the Company is unable to predict the outcome of this litigation.
The Company is, from time to time, involved in litigation that is
incidental to its business. There are, however, no other legal proceedings
presently threatened or pending related to the Company which would, in the
opinion of management, have a material impact on the financial condition or
operations of the Company.
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<PAGE> 77
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following summary of selected financial information of the Company
should be read in conjunction with the Consolidated Financial Statements,
including notes thereto, appearing elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
9 Months 9 Months Year Year 6 Months
Ended Ended Ended Ended Ended
9/30/92 9/30/93 9/30/94 9/30/95 3/31/95
--------- --------- --------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Interest Revenue $ 1,493 $ 7,096 $ 14,054 $ 13,472 $ 8,694
Interest Expense (708) (4,713) (9,968) $ (11,205) (6,437)
Reduction of (provision for)
credit losses -- (20,180) (3,128) (5,337)
--------- --------- --------- --------- ---------
Net interest income (loss) after
provision for credit losses 785 2,923 (16,094) (861) (3,080)
General and administrative expenses 663 3,051 9,296 15,881 7,221
Settlement expense -- -- 560 2,837 --
Other income 338 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 460 (128) (25,950) (19,894) (10,301)
Extraordinary gain on discharge debt -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) 460 (128) (25,950) (19,894) (10,301)
Preferred stock dividends 123 263 240 240 120
--------- --------- --------- --------- ---------
Income (loss) attributable to common
stockholders $ 337 $ (391) $ (26,190) $ (20,134) $ (10,421)
========= ========= ========= ========= =========
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK(1):
Income(loss) before extraordinary item $ 0.72 $ (0.48) $ (18.64) $ (17.96) $ (8.96)
Gain on extraordinary item -- -- -- -- --
Net income (loss) $ 0.72 $ (0.48) $ (18.64) $ (17.96) $ (8.96)
========= ========= ========= ========= =========
Weighted average number of common 460 766 1,407 1,121 1,162
shares outstanding
BALANCE SHEET (AT PERIOD END):
Net contracts receivable $ 6,565 $ 29,396 $ 61,823 $ 34,948 $ 76,655
Total assets 14,147 44,223 $ 75,126 49,922 59,985
Notes payable (prepetition subject
to compromise) -- -- -- 69,320 --
Notes payable and lines of credit 11,774 40,562 70,768 1,058 69,160
Total liabilities 12,208 42,013 79,502 75,557 74,783
Stock repurchase commitment -- -- -- 2,078 --
Stockholders' equity (deficit) 1,939 2,210 (4,376) (27,713) (14,798)
</TABLE>
<TABLE>
<CAPTION>
6 Months Year 6 Months 6 Months
Ended Ended Ended Ended
3/31/96 3/31/97 9/30/96 9/30/97
--------- --------- --------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Interest Revenue $ 3,541 $ 10,004 $ 3,898 $ 6,412
Interest Expense (1,306) (2,306) (338) (2,979)
Reduction of (provision for)
credit losses (4,982) 7,017 3,438 998
--------- --------- --------- ---------
Net interest income (loss) after
provision for credit losses (2,747) 14,715 6,998 4,431
General and administrative expenses 8,098 13,392 6,043 8,992
Settlement expense 535 40 -- --
Other income -- -- -- --
--------- --------- --------- ---------
Income (loss) before extraordinary item (11,380) 1,283 955 (4,561)
Extraordinary gain on discharge debt 8,709 -- -- --
--------- --------- --------- ---------
Net income (loss) (2,671) 1,283 955 (4,561)
Preferred stock dividends 327 6,154 2,946 1,670
--------- --------- --------- ---------
Income (loss) attributable to common
stockholders $ (2,998) $ (4,871) $ (1,991) $ (6,231)
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK(1):
Income(loss) before extraordinary item $ (8.96) $ (1.45) $ (0.59) $ (1.42)
Gain on extraordinary item 6.67 -- -- --
Net income (loss) $ (2.29) $ (1.45) $ (0.59) $ (1.42)
========= ========= ========= =========
Weighted average number of common
shares outstanding 1,306 3,366 3,402 4,385
BALANCE SHEET (AT PERIOD END):
Net contracts receivable $ 30,651 $ 51,689 $ 48,896 $ 116,914
Total assets 37,346 69,523 58,368 126,633
Notes payable (prepetition subject
to compromise) -- -- --
Notes payable and lines of credit 2,283 38,311 19,740 91,174
Total liabilities 10,935 42,917 24,052 96,424
Stock repurchase commitment 2,078 2,078 2,078 --
Stockholders' equity (deficit) 24,333 24,528 32,238 30,209
</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.
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<PAGE> 78
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is 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 Dealers in its 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 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 September 30, 1997, had
established a total of 21 non- auto consumer branch offices in Texas, Oklahoma,
Louisiana, Tennessee, Florida, Georgia 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.
Prior to November 1994, the Company primarily financed the purchase of used
motor vehicle receivables through the private and public sale of Notes issued by
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 current 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.
RESULTS OF OPERATIONS
Comparison of Six-Month Period Ended September 30, 1997 and 1996
The Company purchased 866 non-prime motor vehicle contracts during the six
months ended September 30, 1997 compared to 509 non-prime motor vehicle
contracts during the same six months ended September 30, 1996. The cost of
contracts purchased was $9,009,000 ($10,403 per contract) compared to $4,798,000
($9,426 per contract) for the six-month periods in 1997 and 1996, respectively.
The Company purchased 1,098 bulk non-prime motor vehicle contracts at a cost of
$9,717,000 ($8,849 per contract) during the six months ended September 30, 1996.
No bulk purchases were made in the same period in 1997. The Company has also
expanded into other areas of consumer finance. During the six months ended
September 30, 1997, the Company purchased or originated 3,773 non-auto consumer
loan contracts at a cost of $5,328,000 ($1,412 per contract). The Company
purchased 725 non-auto consumer loan contracts during the six months ended
September 30, 1996 at a cost of $278,000 in a bulk purchase transaction.
Interest revenue increased from $3,898,000 for the six months ended
September 30, 1996 to $6,412,000 for the six months ended September 30, 1997.
The increase of $2,514,000, or 64%, is a result of higher average interest
earning net receivables for the six-month period ended September 30, 1997. The
increase in average interest earning receivables is primarily a result of the
MSF acquisition in July 1997. Interest revenue increased 77% in the three-month
period, primarily as a result of the MSF acquisition.
Interest expense increased to $2,979,000 for the six months ended September
30, 1997 compared to $338,000 for the six-month period ended September 30, 1996.
Interest expense increased approximately 400% during the three-month period
ended September 30, 1997 as compared to the three-month period ended September
30, 1996. The increase in interest expense is due to increased borrowings
associated with the Company's outstanding lines of credit, notes payable and
increased warrant accretion.
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<PAGE> 79
The provision for credit losses was favorably impacted during the six months
ended September 30, 1997 by the sale of approximately $140,000,000 of previously
charged-off loans for $1,400,000, i.e., loans on which generally no payments
have been received for at least one year. Reflecting the benefit of this sale,
the reduction of credit losses was $998,000 for the six months ended September
30, 1997, compared to $3,438,000 for the six months ended September 30, 1996. In
the future, management anticipates a lower reduction of credit losses as the
number of remaining charged-off accounts continues to decrease, and any
provisions are not offset by recoveries of prior credit losses. During the
three-month period ended September 30, 1997, the Company recorded a net
$1,507,000 provision for credit losses, primarily due to losses in the DACC
portfolio.
General and administrative expenses increased to $8,992,000 for the six
months ended September 30, 1997, compared to $6,043,000 for the six-month period
in September 30, 1996. During the three-month period ended September 30, 1997,
the Company's general and administrative expenses increased $1,708,000. The
increase in general and administrative expenses is primarily related to
increased expenses associated with the opening of consumer lending branches,
expansion of the Company's servicing capacity, and increases in professional
fees. During the three months ended September 30, 1997, the Company incurred
significant costs associated with the acquisition of MSF and other potential
acquisitions.
Preferred Stock dividends decreased from $2,946,000 for the six months
ended September 30, 1996 to $1,670,000 for the six months ended September 30,
1997. The Company did not declare or accrue dividends on the 9%/7% Preferred
Stock for the quarter ended September 30, 1997 because of a prohibition in one
of its credit agreements.
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
the 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 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. 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
Line and a 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 now required to be repaid in November 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 Joint Plan 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
75
<PAGE> 80
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 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 collectability. 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 Preferred Program and the
receivables acquired in Bulk Purchases from Eagle Finance Corp. 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 Joint Plan 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% Preferred Stock upon confirmation of the Joint Plan, 319,000
shares of 9%/7% Preferred Stock in connection with the acquisition of assets of
DACC and 272,000 shares of 9%/7% Preferred Stock in connection with the
acquisition of assets of USLC.
The Company did 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 Six Month 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, 1996. 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> 81
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 the Company's Consolidated Financial
Statements included elsewhere herein. 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 Joint Plan.
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 the
Company's Consolidated Financial Statements included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
General
During the next 12 months, the Company will require substantial amounts of
cash to support its operations and other activities. Currently, the primary cash
requirements include amounts to purchase and originate new receivables, retire
maturing debt and cover operating expenses. In addition, to the extent it is not
prohibited from doing so, the Company will require cash to pay Preferred Stock
dividends. The Company had approximately $2,490,000 of cash on hand as of
September 30, 1997, which it does not consider adequate to meet its cash needs
during the next 12 months. Because the consumer finance industry requires the
purchase and carrying of receivables, a relatively high ratio of borrowings to
net worth is customary and will be an important element in the Company's
liquidity. 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 cash to
include cash from operations, the securitization of receivables, lines of credit
available from commercial banks and other lenders and convertible or other
subordinated debt.
The Company's cash needs and uses relate to activities of the Company in
three areas. First, operating activities produce cash from the receipt of net
interest income (interest income less interest expense) and use cash to pay
operating expenses. Second, the Company's investing activities use cash for the
purchase or origination of receivables and produce cash from the collection of
principal payments and repossession proceeds. Finally, financing activities
produce or use cash from lines of credit, securitizations and debt or equity
offerings. A discussion of each activity follows.
Operating Activities
For the six months ended September 30, 1997, the Company's loss before
Preferred Stock dividends was $4,561,000. The operating profit for the six
months ended September 30, 1996 did not produce operating cash flows due to
non-cash adjustments included in operating profit which did not produce cash
flows. The Company does not expect to generate operating cash flows in the
foreseeable future. In order to continue to cover its operating expenses in the
next 12 months, the Company will be required to do one or a combination of the
following: leverage any unencumbered receivables, raise additional equity or
debt through public or private sales, securitize receivables, sell receivables,
grow its receivable base large enough to generate operating cash flows or
curtail its operations significantly. Unless a significant acquisition occurs
during the next 12 months, the Company does not expect its receivables base to
become large enough to produce positive operating cash flows.
The Company has consolidated all of MSF's operations into its existing
servicing and origination operations. The significant reduction in MSF's
underwriting and servicing overhead is intended to give the Company additional
net operating income in the range of approximately $1,200,000 per quarter,
assuming the Company is successful in expanding MSF's marketing efforts to
generate receivable growth to offset liquidation in the existing MSF portfolio.
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<PAGE> 82
Investing Activities
For the six months ended September 30, 1997 and 1996, the Company's
investing activities produced $5,688,000 in positive cash flows as compared to
$3,279,000 in negative cash flows, respectively. The primary reason for the
Company's investing activities providing cash flow for the six months ended
September 30, 1997 is that liquidation of the Company's receivables exceeded the
amount of receivables purchased and originated. The Company anticipates
encountering negative cash flows from its investing activities in the next 12
months as its non-prime marketing activities are enhanced with the addition of
MSF's marketing staff and its consumer finance operations are expanded. Material
bulk purchases would also contribute to negative investing cash flows.
The Company's investing activities will be constrained to the extent it
does not have an adequate financing source or sources in place. If the Company
is able to obtain adequate financing and find acceptable receivables to purchase
or originate, the Company should be able to grow its receivable base and help
produce positive operating cash flows.
Financing Activities
For the six months ended September 30, 1997 and 1996, the Company's
financing activities produced $15,287,000 in negative cash flows as compared to
$3,323,000 in positive cash flows, respectively. The decrease in cash flows from
financing activities is caused by the repayments under lines of credit and notes
payable exceeding borrowings, the repurchase of treasury stock of $2,078,000,
the payment of Preferred Stock dividends of $3,213,000 and repayment of
$9,596,000 of the debt assumed in connection with the acquisition of DACC. The
Company's ability to generate positive cash flows from financing activities in
the next 12 months will be dependent on its ability to obtain additional or
expanded lines of credit, to complete a debt or equity offering, to securitize
receivables and to complete the Reclassifications or the Exchange Offer. The
Company has substantial cash flow commitments during the next 12 months that
could cause negative cash flows if anticipated financing activities do not
materialize. The most significant of these commitments requires the Company to
reduce the principal amount outstanding under MSF's line of credit to
$50,000,000 by December 31, 1997. The outstanding balance of MSF's line of
credit was approximately $65,000,000 as of October 31, 1997.
The Company is continuing its effort to raise subordinated debt and/or
convertible debt or, as an alternative, equity financing. Any subordinated debt
or equity raised would require repayment of the $5,000,000 subordinated note
held by Hall Phoenix/Inwood, Ltd. ("HPIL") if the amount raised is greater than
$20,000,000. If less than $20,000,000 is raised, an amount equal to the
percentage that the amount raised bears to $20,000,000 would be the required
repayment. Currently, the Company is seeking to raise from $20,000,000 to
$35,000,000 from this offering.
In August 1997, the Company announced that, based on current projections,
under the terms of a loan agreement, it would not be allowed to pay dividends in
cash on the Preferred Stock for the quarter ended September 30, 1997.
Subsequently, as a result of dividends on the Preferred Stock for that quarter
not being paid, HPIL, the holder of a $5,000,000 subordinated note issued by
Search, has advised Search that an event of default under that note will occur
if the Company's failure to pay dividends on the Preferred Stock for the quarter
ended September 30, 1997 is not cured by December 4, 1997. This event of default
creates defaults under the terms of the Company's revolving lines of credit.
HPIL has notified the Company that it intends to accelerate payment of the note
on December 5, 1997 if the default is not cured. The Company's other lenders
have not sought to accelerate payment of the indebtedness owed to them at this
time. The Company continues to service all of its debts, has obtained a waiver
under one line of credit and is attempting to obtain waivers of the remaining
defaults arising from the nonpayment of dividends. There can be no assurance
that such waivers will be obtained. If the Company's lenders elect to accelerate
their debts, the Company will likely be unable to pay such debts and at this
time is uncertain what action it will take in such event.
The Company is currently in discussions with respect to a number of
acquisition opportunities. The Company desires to expand its business through
the acquisition of similar businesses with which it currently competes or that
are complimentary to its existing business. No commitments or binding agreements
have been entered into with respect to these acquisitions. Accordingly, no
assurance can be given that any of the acquisitions currently being discussed
will be consummated.
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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<PAGE> 83
YEAR 2000 COMPLIANCE
The Company believes its year 2000 compliance program will not materially
impact its operations or financial condition. The Company's program has two
primary areas of focus. First, the Company's front-end, non-prime origination
computer system is date sensitive. The Company plans to review this system using
existing resources by June 30, 1998 and correct any deficiencies well ahead of
the year 2000 deadline. Second, the Company's receivables servicing computer
system is maintained by Norwest Financial Information Systems Group, Inc.
("NFISG"). NFISG has advised the Company that over the last several years it has
taken the necessary steps to prepare for the year 2000, that most of its
processing already supports dates past the year 2000 and that it is continuing
work on its plan to review thoroughly and test each function in advance to
ensure internal calculations and processes accurately support the year 2000 and
beyond. NFISG also advised the Company that its verification of year 2000
compliance will be substantially complete by the end of calendar year 1997 with
additional changes identified during the verification reviews scheduled for
completion before the year 2000 deadline. The Company's charges from NFISG are
based on fixed costs per transaction, which remain fixed until 2001 under the
Company's agreement with NFISG. The Company has not reviewed the year 2000
compliance issue with all of its other suppliers; however, the Company has no
knowledge of any potential problems with respect to those suppliers.
RECENT ACCOUNTING PRONOUNCEMENTS
Information as to recent accounting pronouncements is contained in Notes 9
and 15 of the Notes to Consolidated Financial Statements included elsewhere
herein.
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<PAGE> 84
DESCRIPTION OF SEARCH CAPITAL STOCK
As of the date of this Proxy Statement/Prospectus, the authorized capital
stock of the Company consists of 130,000,000 shares of Common Stock and
60,000,000 shares of preferred stock, par value $0.01 per share ("Authorized
Preferred Stock"). The following description of the Common Stock and the
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 Company's Restated Certificate of Incorporation.
COMMON STOCK
As of October 31, 1997, there were 6,682,886 shares of Common Stock
outstanding. As of the same date, there were outstanding various warrants and
options to purchase a total of 1,901,307 shares of Common Stock. In addition,
the Company is obligated to issue 146,381 shares of 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 840,000 shares of Common
Stock.
Holders of shares of Common Stock are entitled to one vote per 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 Authorized Preferred Stock, holders of 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 the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding Authorized Preferred Stock. Holders of Common
Stock have no preemptive rights and have no rights to convert their Common Stock
into any other securities. The outstanding shares of Common Stock are validly
issued, fully paid and nonassessable.
AUTHORIZED PREFERRED STOCK
The Company's Board of Directors has the authority to cause the Company to
issue up to 60,000,000 shares of 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 the Company. The issuance of the Authorized Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders of the Company. The
issuance of the Authorized Preferred Stock could decrease the amount of earnings
and assets available for distribution to the holders of Common Stock or could
adversely affect the rights and powers, including the voting power, of the
Holders of Common Stock. In certain circumstances, such issuance could have the
effect of decreasing the market price of the Common Stock.
In accordance with this power, the Company'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 "12% Preferred Stock") and
(ii) a series consisting of 30,000,000 shares designated as the "9%/7%
Convertible Preferred Stock" (the " 9%/7% Preferred Stock").
9%/7% PREFERRED STOCK
Dividends. Holders of 9%/7% Preferred Stock are entitled to receive, out of
funds legally available, 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 until converted. The dividends are payable entirely in cash
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 the Company
of cash dividends on the 9%/7% Preferred Stock. If the Company is prevented from
paying a dividend entirely in cash, the Company will pay a dividend in the form
of a mixture of cash and Common Stock to the extent possible under Delaware law
and any applicable loan agreement, or if necessary, entirely in Common Stock,
provided, the Company may pay the dividends in the form of Common Stock so long
as the average closing trading price for a share of the Common Stock is $4.00 or
greater during the 20 trading day period ending five days prior to the payment
of such dividend. Quarterly dividends on each share of 9%/7% Preferred Stock
accrue from the first day of each calendar quarter through the last day of such
calendar quarter and shall be paid on the 15th day of the month following the
end of each calendar quarter to holders of record as of the last day of the
calendar quarter. The Company may not make any dividend or distribution (other
than a dividend payable in Common Stock or other junior capital stock) on any
Common Stock or other capital stock that ranks junior to the 9%/7% Preferred
Stock unless all accrued and unpaid dividends on the 9%/7% Preferred Stock have
been paid or declared and set aside for payment. The Company may not purchase or
otherwise acquire for any consideration any stock of the Company standing on a
parity with the 9%/7% Preferred Stock as to dividends if any dividends are in
arrears with respect to the 9%/7% Preferred Stock or any other stock of the
Company ranking on a parity with the 9%/7% Preferred Stock, unless the
acquisition is made pursuant to an offer to purchase all outstanding shares of
9%/7% Preferred Stock and the stock of the Company ranking on a parity with the
9%/7% Preferred Stock as to dividends.
Conversions. Holders of outstanding shares of 9%/7% Preferred Stock may
elect at any time to convert their shares into shares of Common Stock. The
conversion ratio is two shares of Common Stock for each share of 9%/7% Preferred
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Stock. The conversion ratio will be proportionately adjusted upon any stock
dividend on the Common Stock, any stock split, reverse stock split, stock
combination or reclassification of the Common Stock or any merger, consolidation
or combination of the Company with any other entity.
Up to 50% of the outstanding shares of 9%/7% Preferred Stock may be
mandatorily converted into shares of Common Stock at the option of the Company,
at a rate of two shares of Common Stock for one share of 9%/7% Preferred Stock,
if shares of the 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. The Company is obligated to pay, within 30 days after the effectiveness of
the foregoing mandatory conversion, any accrued and unpaid dividends on the
shares of 9%/7% Preferred Stock called for conversion. Finally, on March 15,
2003, all of the outstanding shares of 9%/7% Preferred Stock will be mandatorily
converted into shares of Common Stock. For the latter mandatory conversion, each
share of the 9%/7% Preferred Stock will be convertible into a number of shares
of Common Stock equal to the lesser of three or the result of dividing the
liquidation preference per share for the 9%/7% Preferred Stock by the market
price of the Common Stock as reported at the close of business on March 15,
2003. Upon the final mandatory conversion, the Company is required as soon as
practicable to declare and pay all cumulated unpaid dividends that accrue
through March 15, 2003.
Liquidation Rights. If the Company is liquidated, the Holders of 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 Common Stock or any other capital stock of the Company ranking junior
to the 9%/7% Preferred Stock. If, upon any liquidation of the Company, the
amounts payable with respect to the 9%/7% Preferred Stock and any other stock of
the Company ranking on a parity with the 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 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 the Company.
Voting Rights. Each share of 9%/7% Preferred Stock is entitled to exercise
the same voting rights as holders of shares of Common Stock and has one vote per
share. If the Company defaults in the payment of any four consecutive quarterly
dividends on outstanding 9%/7% Preferred Stock, the Holders of outstanding 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 the Company must hold within thirty days after any such
failure, such additional directors as equals two-thirds of the Company's Board
of Directors determined after such election. These special voting rights expire
on March 16, 2003.
The affirmative vote or consent of the Holders of at least 66-2/3% of all
outstanding shares of 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 9%/7% Preferred Stock to adversely affect the
relative rights, preferences, qualifications, limitations or restrictions of the
9%/7% Preferred Stock or (ii) to effect any reclassification of the 9%/7%
Preferred Stock. The affirmative vote or consent of the Holders of at least 50%
of all outstanding shares of 9%/7% Preferred Stock, voting as a separate class,
is required to approve (x) any merger of the Company with another company when
the Company'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 the
Company'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 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. The 9%/7% Preferred Stock ranks on a parity with the 12% Preferred
Stock and senior to the Common Stock as to rights to dividends and liquidation
preferences.
Subsequent Issuances of Authorized Preferred Stock. The Company is
prohibited from issuing Authorized Preferred Stock that is pari passu with the
9%/7% Preferred Stock unless at the time of such issuance all dividends due on
the 9%/7% Preferred Stock have been paid in full. The Company is also prohibited
from issuing convertible Authorized Preferred Stock which is senior in rights to
the 9%/7% Preferred Stock except that convertible Authorized Preferred Stock may
carry a then-current market interest rate, which may be higher or lower than
that of the Preferred Stock. The Company 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. The Company
may, nevertheless, issue options or warrants to new or existing directors or
management if such options or warrants are approved by the Compensation
Committee. If the Company issues any security not excepted above for
consideration less than its fair market value as determined by an independent
third party, the number of shares of the 9%/7% Preferred Stock will be
immediately and appropriately adjusted, and the conversion price of the 9%/7%
Preferred Stock will be adjusted downward, to take into account the dilution in
value of the security holdings of former creditors of the Food Subsidiaries
caused by such below fair market issuance of the Company's securities.
Other Rights. The 9%/7% Preferred Stock is not subject to redemption by the
Company or at the election of the Holders thereof. The 9%/7% Preferred Stock
does not have any preemptive or sinking fund rights.
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12% PREFERRED STOCK
Dividends. Holders of 12% Preferred Stock are entitled to receive, when and
as declared by the Board of Directors of the Company out of funds legally
available therefor, cumulative 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
the Company which is not more than 60 days prior to the date the dividend is
paid. Unpaid dividends on the 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 Common Stock), is made to holders of Common Stock or any other
stock ranking junior to the 12% Preferred Stock. Dividends accrue and cumulate
from the date of issuance. No dividends accrue or cumulate for any calendar
quarter during which shares of 12% Preferred Stock are converted or a
liquidation, distribution or winding up of the Company occurs. The dividends
shall be payable to holders of record as of a date fixed by the Board of
Directors which is not more than 60 days prior to the date the dividend is paid
or, if no such date is fixed, as of the date on which the resolution declaring
the dividend is adopted. If a dividend upon the 12% Preferred Stock or any other
outstanding stock of the Company ranking on a parity with the 12% Preferred
Stock as to dividends is in arrears, no stock of the Company ranking on a parity
with the 12% Preferred Stock as to dividends may be (a) redeemed pursuant to a
sinking fund or otherwise, except by a redemption pursuant to which all
outstanding shares of the 12% Preferred Stock and all stock ranking on a parity
therewith as to dividends are redeemed, or (b) purchased or otherwise acquired
for any consideration by the Company or its subsidiary except pursuant to an
acquisition made pursuant to an offer to purchase all of the outstanding shares
of 12% Preferred Stock and all stock of the Company ranking on a parity with the
12% Preferred Stock as to dividends.
Liquidation Rights. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Company, the Holders of 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 Common Stock or any other capital stock of the Company ranking junior
to the 12% Preferred Stock. If, upon any liquidation, dissolution or winding up
of the Company, the amounts payable with respect to the 12% Preferred Stock and
any other capital stock of the Company ranking on a parity with the 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 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 the Company. The merger or
consolidation of the Company 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 the Company, will not be deemed
to be a dissolution, liquidation, or winding up, voluntary or involuntary.
Optional Redemption by the Company. At any time following the occurrence of
a Triggering Event (defined below), the 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 if there is 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 Common Stock if the Common Stock is
traded over-the-counter, (ii) the closing trading prices for the Common Stock if
traded on NASDAQ, or (iii) the reported closing price for the Common Stock if
traded on any national or regional stock exchange. Notice of redemption will be
sent to each Holder of 12% Preferred Stock to be redeemed at the address shown
on the share transfer records of the Company 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 12% Preferred Stock are to be redeemed, the
Company must redeem such shares either by lot or pro rata based on the
respective numbers of shares held by the Holders of 12% Preferred Stock.
Voting Rights. Holders of 12% Preferred Stock have one vote for each share
held, and may generally vote along with the Holders of Common Stock and not as a
separate class upon each and any matter submitted to a vote of the shareholders
of the Company. In addition, the DGCL provides that the vote of the Holders of a
majority of the outstanding shares of any series of the Company'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 the Company is in default in the payment of six full quarterly
dividends (whether or not consecutive) on any outstanding 12% Preferred Stock,
whether or not earned or declared, the number of directors constituting the
Company's Board of Directors will be increased by two and the Holders of all
outstanding 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 Board of Directors will be reduced
by two.
Conversion Rights. Holders of 12% Preferred Stock may elect at any time to
convert their preferred shares into Common Stock. The conversion ratio is one
share of Common Stock for each share of the 12% Preferred Stock. This conversion
ratio is subject to adjustment upon any share dividend on the Common Stock, any
stock split, stock combination or reclassification of the Common Stock or any
merger, consolidation or combination of the Company with any other corporation
or corporations. In addition, all of the outstanding shares of 12% Preferred
Stock may be mandatorily converted into shares of Common Stock at the option of
the Company following the occurrence of a Triggering Event.
Other Rights. The 12% Preferred Stock has no preemptive or sinking fund
rights.
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SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the DGCL. 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 (the Company 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 the Common Stock and the 9%/7% Preferred Stock.
The Company serves as its own transfer agent and registrar for the 12% Preferred
Stock.
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PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table and the notes thereto set forth certain information, as
of October 31, 1997, with respect to the beneficial ownership of shares of the
Common Stock, 12% Preferred Stock and 9%/7% Preferred Stock (1) by any person or
"group," as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), known to the Company to own
beneficially more than five percent of the outstanding shares of Common Stock,
12% Preferred Stock or 9%/7% Preferred Stock, (2) by each director of the
Company and each executive officer of the Company named in the Summary
Compensation Table and (3) by all 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 and 9%/7%
Preferred Stock beneficially owned by such person.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership (1) Percentage of Class Outstanding
----------------------------------------------- ----------------------------------
Name and Address of Beneficial Owner, 9%/7% 12% 9%/7% 12%
Name of Director or Executive Officer Common Preferred Senior Common Preferred Preferred
or Number in Group Stock (2)(3) Stock Preferred Stock Stock Stock
-------------------- ------------- --------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
MS Diversified Corporation
715 South Pear Orchard Road
Ridgeland, MS 39157 1,518,480(4) -- -- 22.7% -- --
Golder, Thoma, Cressey, Rauner, Inc.
6100 Sears Tower
Chicago, IL 60606 1,307,580(5) -- -- 19.6 -- --
Value Partners, Ltd. (6)
2200 Ross Avenue, Suite 4660 W.
Dallas, TX 75201 270,022 444,177 -- 4.0 18.1% --
R-H Capital Partners, L.P. (7)
Atlanta Financial Center
3333 Peachtree Road
Atlanta, GA 30326 -- 153,642 -- -- 6.3 --
George C. Evans 194,364 4,635 -- 2.8 * --
Glen Adams 5,000 9,000 -- * * --
Richard F. Bonini 32,857 6,074 -- * * --
William H. T. Bush 30,000 -- -- * -- --
Frederick S. Hammer 35,000 4,651 -- * * --
Luther H. Hodges, Jr. 32,791 (8) 7,077 -- * * --
James F. Leary 15,366 5,824 -- * * --
A. Brean Murray 70,444 1,562 -- 1.0 * --
Douglas W. Powell 35,137 (9) 357 (9) -- * * --
Barry W. Ridings 30,000 -- -- * -- --
James B. Stuart, Jr. 4,948 -- -- * -- --
Robert D. Idzi 24,318 4,896 -- * * --
Timothy G. Vorbeck 5,365 5,367 -- * * --
All directors and executive officers as a
group (18 persons) 620,218 50,793 -- 8.6 2.1 --
</TABLE>
- -----------------------------------
*Less than 1%
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(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 stockholders, directors and officers of
the Company.
(2) The numbers in the column for shares of Common Stock do not reflect shares
of Common Stock that may be obtained through conversion of the 12%
Preferred Stock or the 9%/7% Preferred Stock. Each share of 12% Preferred
Stock is convertible into one share of Common Stock and each share of 9%/7%
Preferred Stock is currently convertible into two shares of Common Stock.
(3) Includes the following shares of Common Stock deemed beneficially owned by
virtue of the right to acquire them within 60 days upon exercise of stock
options and warrants granted or issued by the Company: George C. Evans,
187,499 shares; Richard F. Bonini, 30,000 shares; William H. T. Bush,
30,000 shares; Frederick S. Hammer, 30,000 shares; Luther H. Hodges, Jr.,
30,000 shares; James F. Leary, 12,500 shares; A. Brean Murray, 70,444
shares; Douglas W. Powell, 30,000 shares; Barry W. Ridings, 30,000 shares;
James B. Stuart, Jr., 1,757 shares; Robert D. Idzi, 19,000 shares; Timothy
G. Vorbeck, 2,083 shares; and all directors and executive officers as a
group, 574,640 shares.
(4) Includes 1,079,105 shares owned by MS Financial Services, Inc., a wholly
owned subsidiary of MS Diversified Corporation.
(5) Represents shares owned by Golder Thoma Cressey Rauner Fund IV, L.L.P.
("GTCR IV"). Golder, Thoma, Cressey, Rauner, Inc. is the general partner of
Golder, Thoma, Cressey, Rauner IV, L.L.P., which in turn serves as the
general partner of GTCR IV.
(6) Value Partners, Ltd. is a Texas limited partnership of which Fisher Ewing
Partners, a Texas general partnership composed of Richard W. Fisher and
Timothy G. Ewing, serves as the general partner. Accordingly, Fisher Ewing
Partners, Mr. Fisher and Mr. Ewing may be deemed to share the power to
direct the voting and disposition of the shares owned by Value Partners,
Ltd.
(7) R-H Capital Partners, L.P. is a Georgia limited partnership of which
R-H/Travelers, L.P. serves as general partner. R-H Capital, Inc. serves as
general partner of R-H/Travelers, L.P. Accordingly, R-H Capital, Inc. and
R-H/Travelers, L.P. may be deemed to share the power to direct the voting
and disposition of the shares owned by R-H Capital Partners, L.P.
(8) Includes 125 shares owned by Mr. Hodges' spouse, as to which Mr. Hodges has
shared voting and investment power.
(9) Includes 289 shares of Common Stock and 678 shares of 9%/7% Preferred Stock
held by a profit sharing plan or the estate of Mr. Powell's parent with
respect to which he is a beneficiary, as to which Mr. Powell may share
voting and investment power.
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MANAGEMENT
EXECUTIVE OFFICERS
The following indicates the name, age, principal occupation and recent
business experience of, and certain other information with respect to, each
executive officer of the Company. All of the executive officers are citizens of
the United States. Additional information regarding the executive officers
required by Schedule 13E-4 is set forth in Annex B.
GEORGE C. EVANS, 62, joined the Company as President, Chief Executive
Officer and director in January 1995. In May 1995, Mr. Evans became Chairman of
the Board of Directors and Chairman of the Executive Committee of the Board of
Directors. He relinquished the President's title in May 1997 and reassumed that
position in October 1997. Mr. Evans has over 30 years' experience in the
consumer lending and financial services industry. During 1992 and 1993, Mr.
Evans was President and Chief Executive Officer 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 Company, Inc., Vice Chairman of Associates Corporation of
North America and Chairman of Associates' International subsidiaries, where his
responsibilities included 6,000 employees and $3.5 billion in receivables, with
1,100 branches and annual earnings in the $100 million range. His term as
director expires at the 2000 annual meeting of directors.
JAMES F. LEARY, 67, became a director of the Company in May 1995 and Vice
Chairman-Finance in September 1995. Mr. Leary was a founder and general partner
of Sunwestern Investment Group, an investment advisory and venture capital
management firm. He previously served as director, Chief Financial Officer and
Senior Executive Vice President for Associates Corporation of North America.
Prior to joining Associates Corporation of North America, he was Senior Vice
President in charge of the National Division of the National Bank of North
America, which was formed by CIT Financial Corporation. Mr. Leary serves on the
boards of several corporations, including Quest Products Corporation, a consumer
products distributor, Associated Materials, Inc., a manufacturer of building
products, Capstone Growth Fund and Capstone Fixed Income Fund. His term as a
director expires at the 2000 annual meeting of directors.
ROBERT D. IDZI, 52, joined the Company as Chief Financial Officer in
October 1994. He was elected Senior Vice President in November 1994, Treasurer
in December 1994, Executive Vice President in February 1996 and Senior Executive
Vice President, Administration in August 1996. Mr. Idzi served as Vice
President, Treasurer, Chief Financial Officer 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.
VANN R. MARTIN, 43, joined the Company as Executive Vice President,
Marketing upon completion of the Company's acquisition of MSF on July 31, 1997.
Mr. Martin was President and Chief Operating Officer of MSF and its immediate
predecessor prior thereto.
ELLIS A. REGENBOGEN, 50, joined the Company as Senior Vice President,
General Counsel and Secretary in August 1996. He was elected Executive Vice
President in January 1997. Mr. Regenbogen has more than 25 years' experience as
a corporate securities, finance and mergers and acquisitions attorney with major
law firms and corporations. Prior to joining the Company, he was Vice
President/Law & Administration, General Counsel and Secretary of Orthofix, Inc.,
a manufacturer of advanced medical devices. Prior thereto, he was a Partner in
Jones, Day, Reavis & Pogue, an international law firm.
L. DANIEL VANDERGRIFT, 65, joined the Company in May 1995 as Vice
President, Collections. Shortly thereafter he became Vice President, Operations,
and he was promoted to Senior Vice President, Collections in February 1996. He
was elected Executive Vice President in July 1997. Prior to joining the Company,
Mr. Vandergrift was Vice President, Marketing and Operations of Century
Acceptance Corporation. Previously, he was employed at Associates Financial
Services Company, Inc. as Senior Vice President of Marketing, Insurance
Operations.
TIMOTHY G. VORBECK, 46, joined the Company as Executive Vice President,
Operations in July 1996. Mr. Vorbeck has 25 years' experience in the consumer
lending and financial services industry. He was Vice President, Operations of
Fidelity Acceptance Corp. from November 1993 until he joined the Company and was
Director of Operations of American General Finance Company prior thereto.
CAROLYN MALONE, 54, was among the Company's original management staff. As
director of human resources, Ms. Malone was promoted to Vice President in
November 1994 and to Senior Vice President in February 1997. 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.
ANDREW D. PLAGENS, 29, joined the Company in May 1994 as Accounting
Manager. He was promoted to Assistant Controller and Analyst in March 1995,
became Controller in July 1995, was elected Vice President in January 1996 and
was elected Senior Vice President in May 1997. Prior to joining the Company, Mr.
Plagens was employed by Hein+Associates and Baird, Kurtz & Dobson, independent
certified public accountants.
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DIRECTORS
The following indicates the name, age, principal occupations and recent
business experience of, and certain other information with respect to, each
director of the Company, other than Messrs. Evans and Leary, for whom similar
information is set forth above under "Executive Officers." All of the directors
are citizens of the United States.
GLEN ADAMS, 58, became a director of the Company in June 1997. Mr. Adams
has been a private investor and director of several companies since August 1996.
From August 1990 to August 1996, he was Chairman of Southmark Corporation, a
real estate and financial services company engaged in liquidation of its assets
pursuant to a Chapter 11 plan of reorganization which became effective in August
1990. Prior thereto, Mr. Adams served as Chairman, President and Chief Executive
Officer of The Great Western Sugar Company, a sugar manufacturer, from 1986 to
1989 during its bankruptcy and Vice President and General Counsel of Hunt
International Resources Corp., a holding company, prior thereto. Mr. Adams is a
director of U. S. Home Corporation, a national home-building company, Zale
Corporation, a jewelry retailer, and Marvel Entertainment Group, Inc., a comic
book publisher. His term expires at the 1998 annual meeting of stockholders.
RICHARD F. BONINI, 58, became a director of the Company in May 1995. Mr.
Bonini is a director, Senior Executive Vice President and Secretary of First
Financial Caribbean Corporation, a mortgage banking company in Puerto Rico. He
also serves as a director of the Doral Federal Savings Bank and the Doral
Mortgage Corporation. Mr. Bonini is a member of the Executive Committee of the
Board of Directors. His term expires at the 1999 annual meeting of stockholders.
WILLIAM H. T. BUSH, 58, has been a director of the Company since 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, Boatman'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., Rite Choice Managed
Care, Inc., Detroit Tool Industries, Inc. and Intrav Inc., a travel company. Mr.
Bush is Chairman of the Audit Committee of the Board of Directors. His term as a
director expires at the 2000 annual meeting of directors.
FREDERICK S. HAMMER, 60, became a director of the Company in August 1996.
He is a senior partner of Inter-Atlantic Securities Corp. ("Inter-Atlantic"), an
investment firm, and a director, Vice Chairman and Chief Executive Officer of
Tri-Arc Financial Services, Inc., an insurance brokerage firm. Previously, Mr.
Hammer was Chairman of Mutual of America Capital Corporation, an investment
management firm. He also serves as a director of IKON Office Solutions, Inc., an
office products supplier, National Media Corporation, a producer of
infomercials, and Provident American Corp., an insurance company. Mr. Hammer is
a member of the Compensation Committee and the Nominating Committee of the Board
of Directors. His term of office expires at the 1999 annual meeting of
stockholders.
LUTHER H. HODGES, JR., 60, became a director of the Company in May 1995.
Mr. Hodges is Managing Member and President of the Caroline Company, LLC, a
private investment management firm. He previously held positions as Chairman and
Chief Executive Officer of Washington Bancorporation and The National Bank of
Washington, and as Chairman of North Carolina National Bank (now known as
NationsBank). He was formerly Undersecretary of the U.S. Department of Commerce
and Deputy Secretary of Commerce. In 1978, he was a candidate for the United
States Senate from North Carolina. Mr. Hodges currently serves as a director of
Quest Products Corporation, Grip Technologies, Inc. and Golden Pacific Brewing
Co. Mr. Hodges is Chairman of the Compensation Committee, and a member of the
Executive Committee and Audit Committee, of the Board of Directors. His term of
office expires at the 1999 annual meeting of stockholders.
A. BREAN MURRAY, 59, has been a director of the Company since December
1993. Mr. Murray is founder and Chairman of Brean Murray & Co., Inc., a
privately-held investment banking and securities firm, and is also Chairman of
its affiliate, BMI Capital Corporation, a registered investment advisor. He is
also a director of First Financial Caribbean Corporation and American Asset
Management Co., a registered investment advisor. Mr. Murray is a member of the
Audit Committee and the Nominating Committee of the Board of Directors. His term
of office expires at the 1998 annual meeting of stockholders.
DOUGLAS W. POWELL, 57, became a director of the Company in November 1996.
He is Chairman and Chief Executive Officer of The Dominion Companies, a
financial services organization. He is also a director of Dominion Funds, Inc.,
a mutual fund manager. Mr. Powell is a member of the Compensation Committee of
the Board of Directors. His term of office expires at the 1998 annual meeting of
stockholders.
BARRY W. RIDINGS, 45, became a director of the Company in August 1996. He
is a Managing Director of BT Alex. Brown, Incorporated ("BT Alex. Brown"), an
investment banking firm. He is a director of Noodle Kidoodle Inc., an operator
of specialty toy stores, New Valley Corp. (formerly known as Western Union),
Norex Industries, which has interests in oil, gas and shipping, Sub-Micron
Systems, a manufacturer of semiconductor fabrication equipment, Telemundo Group,
a Spanish language television network, and Transcor Waste Services Corp., a
waste management company. Mr. Ridings is Chairman of the Nominating Committee of
the Board of Directors. His term of office expires at the 1998 annual meeting of
stockholders.
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JAMES B. STUART, JR., 69, became a director of the Company upon completion
of the Company's acquisition of MSF on July 31, 1997. Mr. Stuart has been
President and Chief Executive Officer of MS Diversified Corporation, a
diversified insurance company ("MSD"), since December 1995 and was Chairman of
the Board of MSF prior to its acquisition by the Company. Prior thereto, he was
Senior Vice President of MSD and President of MS Loan Center, Inc., a consumer
loan subsidiary of MSD.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established an Executive Committee, an Audit Committee, a
Compensation Committee and a Nominating Committee.
Executive Committee. The Executive Committee was established in June 1994
and has all the powers and authority of the Board of Directors in the management
of the business and affairs of the Corporation except to approve or adopt, or
recommend to the stockholders, any action or matter expressly required by the
Delaware General Corporation Law to be submitted to the stockholders for
approval and to adopt or amend any Bylaw of the Company. Mr. Evans is Chairman,
and Messrs. Bonini and Hodges are the other members, of the Executive Committee.
Audit Committee. The Audit Committee was established in September 1993 to
oversee generally, and advise the Board in, matters regarding the Company's
system of internal controls, the work of the Company's internal auditors and the
annual independent audit. The Audit Committee normally meets on an annual basis
to review accounting policies and practices of the Company. Mr. Bush is
Chairman, and Messrs. Hodges and Murray are the other members, of the Audit
Committee.
Compensation Committee. The Compensation Committee was established in
September 1993 to review and approve compensation for all employees whose annual
compensation exceeds a specified level. The Compensation Committee also advises
the Board on the adoption and administration of employee benefit and
compensation plans, including the 1994 Employee Stock Option Plan (the "1994
Plan") and the 1997 Stock Option Plan. Mr. Hodges is Chairman, and Messrs.
Hammer and Powell are the other members, of the Compensation Committee.
Nominating Committee. The Nominating Committee was established in November
1996 to make recommendations to the Board of Directors regarding (1) the size
and composition of the Board of Directors, (2) criteria relating to the
qualifications of candidates for election to the Board, (3) candidates to fill
vacancies in the Board of Directors, (4) a slate of nominees for election as
directors at each annual meeting of stockholders and (5) members of the Board of
Directors to be elected as members and chairmen of the committees of the Board
of Directors. Mr. Ridings is Chairman, and Messrs. Hammer and Murray are the
other members, of the Nominating Committee.
COMPENSATION OF DIRECTORS
The Company pays to each director who is not an employee of the Company
$750 per month and $1,500 for each meeting of the Board of Directors attended
($375 in the case of a telephonic meeting). The Company also reimburses those
directors for expenses incurred by them in connection with attending meetings of
the Board of Directors.
The Company has also compensated non-employee directors through grants of
options and cashless warrants, the purposes of which are similar to those of
grants of options to key employees under the 1994 Plan. During the fiscal year
ended March 31, 1997, awards of cashless warrants to purchase 30,000 shares of
Common Stock were made to the directors who joined the Board during that fiscal
year and awards of cashless warrants to purchase 17,500 shares of Common Stock
were made to the other non-employee directors who served during that fiscal
year. In July 1997, each non-employee director was granted a non-qualified
option under the 1997 Stock Option Plan to purchase 10,000 shares of Common
Stock and additional grants of options for 10,000 shares were also agreed to be
made to each such director as soon as permissible under the 1997 Stock Option
Plan. All awards were made at not less than fair market value at the date of
grant. The warrants and options have a 10-year term. The options become
exercisable over a three-year period.
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EXECUTIVE COMPENSATION
Summary Compensation
The following table shows all annual, long-term and other compensation
awarded or paid to, or earned by, the Company's Chief Executive Officer, and the
other four most highly compensated executive officers of the Company who were
serving as executive officers at March 31, 1997, for services rendered to the
Company in all capacities during the periods indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
----------------------------------------------------- SECURITIES UNDERLYING
OTHER ANNUAL OPTIONS/WARRANTS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR (1) SALARY BONUS COMPENSATION(7) (SHARES) COMPENSATION
--------------------------- -------- -------- -------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
George C. Evans 1997 $300,000 $300,000 -- 170,000 (8) --
Chairman, President and 1996 150,000 185,000 -- -- --
Chief Executive Officer 1995 (2) 162,734 112,500 -- 125,000 --
Anthony J. Dellavechia 1997 156,667 60,000 -- 34,375 $46,338 (9)
Senior Executive Vice 1996 (3) 31,250 25,000 -- 12,500 26,500 (10)
President, Operations Director
James F. Leary 1997 155,000 60,000 -- 37,500 --
Vice Chairman - Finance 1996 50,000 33,000 -- 6,250 --
1995 (4) 13,333 -- -- 6,250 --
Robert D. Idzi 1997 167,244 65,000 -- 31,000 --
Senior Executive Vice 1996 66,666 35,000 -- 6,250 --
President, Chief Financial 1995 117,308 5,000 -- 12,750 27,462 (11)
Office and Treasurer
Timothy G. Vorbeck 1997 112,750 (5) 65,000 (6) -- 21,000 34,342 (12)
Executive Vice President,
Operations
</TABLE>
- ------------------------------
(1) Information is for the fiscal years ended March 31, 1997 and September 30,
1995 and for the six-month transition period ended March 31, 1996.
(2) Mr. Evans joined the Company as President, Chief Executive Officer and
Chief Operating Officer in January 1995. He was elected Chairman of the
Board of Directors in May 1995. He relinquished the position of President
and Chief Operating Officer to Mr. Dellavechia in April 1997 and reassumed
that position in October 1997.
(3) Mr. Dellavechia joined the Company in January 1996. He became President and
Chief Operating Officer of the Company in April 1997. He stepped down as
President and Chief Operating Officer in October 1997.
(4) Mr. Leary became a director of the Company in May 1995 and an employee of
the Company in September 1995. Amount shown as salary includes director
fees.
(5) Mr. Vorbeck joined the Company in July 1996.
(6) Includes $30,000 paid to Mr. Vorbeck in connection with his joining the
Company.
(7) Excludes perquisites and other personal benefits unless the aggregate
amount of such annual compensation exceeded the lesser of $50,000 or 10%
of the total of annual salary and bonus reported for the named executive
officer.
(8) In June 1995, the Board determined to issue to Mr. Evans options or
warrants (to be determined at a later date) to purchase 187,500 shares of
Common Stock at a price of $11.00 per share in 62,500 share increments upon
the occurrence of certain events. Warrants for 62,500 were issued in April
1997 based on the Company reporting earnings of more than $1 million before
taxes and dividends for the fiscal year ended March 31, 1997.
(9) Represents reimbursement for relocation and temporary housing expenses.
(10) Represents consulting fees.
(11) Represents reimbursement for relocation expenses.
(12) Represents reimbursement for relocation expenses and obligations of Mr.
Vorbeck to his previous employer.
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Stock Options and Warrants
The following tables provide information with respect to options and
warrants granted to the persons indicated during the fiscal year ended March 31,
1997 and the value of unexercised options and warrants held by those individuals
at March 31, 1997. None of those individuals exercised any options or warrants
during the fiscal year ended March 31, 1997.
OPTION AND WARRANT GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE
UNDERLYING OPTIONS/WARRANTS APPRECIATION FOR
OPTIONS/WARRANTS GRANTED TO EXERCISE OR OPTION TERM(2)
GRANTED EMPLOYEES DURING BASE PRICE EXPIRATION ---------------------------
(SHARES)(1) THE FISCAL YEAR (PER SHARE) DATE 5% 10%
------------------- ------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
George C. Evans 107,500 32.4% $ 6.125 2/13/07 $414,413 $1,049,738
62,500 18.8 11.00 4/1/07 0 143,125
Anthony J. Dellavechia 34,375 10.4 6.125 2/13/07 132,516 335,672
James F. Leary 37,500 11.3 6.125 2/13/07 144,562 366,188
Robert D. Idzi 31,000 9.3 6.125 2/13/07 119,505 302,715
Timothy G. Vorbeck 6,250 1.9 9.50 7/1/06 37,313 94,625
14,750 4.4 6.125 2/13/07 56,861 144,034
</TABLE>
- ------------------------------
(1) All grants were made on February 13, 1997, except for cashless warrants
issued to Mr. Evans to purchase 62,500 shares of Common Stock as described
in Note 8 to the Summary Compensation Table and the options to purchase
6,250 shares issued to Mr. Vorbeck on July 1, 1996. All options became
exercisable in substantially equal installments on each of the first three
anniversaries of the date of grant of the option so long as employment with
the Company continues. To the extent not already exercisable, the options
become exercisable in the event of certain events constituting a change in
control of the Company. The cashless warrants issued to Mr. Evans are fully
exercisable.
(2) The actual value, if any, that an executive may realize will depend on the
excess of the Common Stock price over the exercise price on the date the
option or warrant is exercised so that there is no assurance the value
realized by an executive will be at or near the potential value indicated.
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<PAGE> 95
AGGREGATED OPTION AND WARRANT EXERCISES
IN FISCAL 1997 AND YEAR-END OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
EXERCISES DURING FISCAL 1997 FISCAL 1997 YEAR-END
--------------------------------- --------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS/WARRANTS IN-THE-MONEY OPTIONS/WARRANTS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE ------------------------------- ----------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- --------------- ------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
George C. Evans 0 - 187,999 107,500 - -
Anthony J. Dellavechia 0 - 15,625 34,375 - -
James F. Leary 0 - 12,500 37,500 - -
Robert D. Idzi 0 - 19,000 31,000 - -
Timothy G. Vorbeck 0 - 0 21,000 - -
</TABLE>
Agreements with Executive Officers
Mr. Evans has an employment agreement with the Company that expires January
20, 2000 and provides for a current annual salary of $350,000 per year. Mr.
Evans is also to receive a bonus ranging from 25% to 100% of annual salary, as
determined by the Board of Directors. See "Compensation Committee Report on
Executive Compensation." The Board has agreed to issue to Mr. Evans options or
warrants (to be determined at a later date) to purchase 125,000 shares of Common
Stock at a price of $11.00 per share upon the occurrence of the following
conditions: (1) 62,500 shares when the market price of the Common Stock reaches
$28.00 per share; and (2) 62,500 shares when the market price of the Common
Stock reaches $40.00 per share. In July 1997, Mr. Evans was granted options
under the 1997 Stock Option Plan to purchase 200,000 shares of Common Stock at
prices equal to or in excess of fair market value at the date of grant. These
options have a 10-year term, become exercisable in equal installments on each of
the first three anniversaries of the date of grant of the option so long as
employment with the Company continues. To the extent not already exercisable,
the options become exercisable in the event of certain events constituting a
change of control of the Company.
Mr. Leary has an employment agreement with the Company that expires April
30, 1998 pursuant to which he is entitled to receive an annual salary of not
less than $160,000.
Other executive officers of the Company have agreements that entitle them
to up to six months' severance in the event of termination of their employment
by the Company other than for gross negligence, fraud or theft.
1997 Stock Option Plan
In June 1997, the Board of Directors adopted, subject to stockholder
approval, the 1997 Stock Option Plan (the "1997 Plan"). The 1997 Plan was
approved by the stockholders in July 1997. The purpose of the 1997 Plan is to
attract and retain directors, officers and other key employees for the Company
and its subsidiaries and to provide to such persons incentives and rewards for
superior performance. A total of 1,250,000 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 1997 Plan. Options covering 490,000 shares had been granted
under the 1997 Plan as of October 31, 1997.
1994 Employee Stock Option Plan
The Company also has a 1994 Employee Stock Option Plan (the "1994 Plan").
The purpose of the 1994 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 625,000 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 1994 Plan. Options covering 425,936 shares were outstanding
under the 1994 Plan as of October 31, 1997.
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<PAGE> 96
Compensation Committee Interlocks and Insider Participation
Mr. Hodges is Chairman, and Messrs. Hammer and Powell are the other
members, of the Compensation Committee. Messrs. Bonini and Bush were members of
the Compensation Committee until August 8, 1996. Mr. Hammer is a senior partner
of Inter-Atlantic, which is one of the placement agents for the Company's
proposed offering of subordinated debt, convertible debt, Common Stock or a
similar security. The Company has paid Inter-Atlantic a marketing fee of
$60,000, and has and will continue to reimburse Inter-Atlantic for expenses it
incurs, in connection with the offering. If the offering is consummated, the
Company will pay Inter-Atlantic a placement fee equal to 3.375% of the principal
amount of securities sold, less the $60,000 marketing fee. One-half of the fee
will be paid in cash and one-half in the form of the same securities sold to
investors.
The Company has also engaged Inter-Atlantic to act as its exclusive agent
for raising senior debt in the form of warehouse lines of credit from securities
firms until December 31, 1997. For such services, the Company has agreed to pay
Inter-Atlantic a fee equal to .375% of the principal amount of commitments for
such senior debt from firms contacted by Inter-Atlantic on the Company's behalf.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The policy of the Company with respect to transactions with officers,
directors and their affiliates is to require that such transactions (i) be on
terms no less favorable to the Company than could be obtained from unrelated
third parties and (ii) where possible, be 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.
Inter-Atlantic, of which Mr. Hammer is a senior partner, is one of the
placement agents for the Company's proposed offering of subordinated debt,
convertible debt, Common Stock or a similar security offering. The Company has
paid Inter-Atlantic a marketing fee of $60,000, and has reimbursed, and will
continue to reimburse it for expenses it incurs in connection with the offering.
If the offering is consummated, the Company will pay Inter-Atlantic a placement
fee equal to 3.375% of the principal amount of securities sold, less the $60,000
marketing fee. One-half of the fee will be paid in cash and one-half will be
paid in the form of the same securities sold to investors.
The Company has also engaged Inter-Atlantic to act as its exclusive agent
for raising senior debt in the form of warehousing lines of credit from lending
institutions until December 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 BT Alex. Brown, of which Mr. Ridings is a
Managing Director, to act as the Company's financial adviser for one year for an
annual retainer which was credited against compensation payable with respect to
the acquisition of MSF.
BT Alex. Brown served as financial advisor to the Company in connection
with the Company's acquisition of MSF. The Company paid BT Alex. Brown a fee
upon consummation of the acquisition, and paid BT Alex. Brown a fee for
rendering its opinion regarding the fairness of the acquisition to the Company
from a financial point of view. BT Alex. Brown also conducted a valuation of the
securities issued by the Company in its acquisition in August 1996 of certain
assets and liabilities of DACC and is conducting a valuation of the securities
issued in the MSF acquisition. The Company has agreed to pay BT Alex. Brown a
fee for these valuation analyses.
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% 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 amounts of these loans in excess of $60,000 outstanding as of
October 31, 1997, which amounts also represent the largest aggregate amounts
outstanding since implementation of the program, were as follows: Mr. Bonini,
$99,998; Mr. Evans, $150,025; Mr. Hammer, $99,999; Mr. Hodges, $149,151; Mr.
Leary, $148,784; Mr. Idzi, $149,724; Mr. Vorbeck, $138,347; and Andrew L.
Tenney, Executive Vice President, Marketing, $109,097.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes certain Federal income tax consequences
to a holder of Preferred Stock that exchanges their shares of Preferred Stock
for shares of Common Stock pursuant to either the Reclassification or the
Exchange Offer (collectively referred to as the "Recapitalization Transaction").
This discussion is based on information provided by the Company, the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
thereunder, Internal Revenue Service ("IRS") rulings and pronouncements, reports
of congressional committees, judicial decisions and current administrative
rulings and practice, all as in effect on the date hereof. Any of these
authorities could be repealed, overruled or modified at any time after the date
hereof. Any such change could be retroactive and, accordingly, could modify the
tax consequences discussed herein. No ruling from the IRS with respect to the
matters discussed herein
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<PAGE> 97
and no tax opinion of counsel have been requested, and there is no assurance
that the IRS will agree with the conclusions set forth in this discussion.
The discussion below is for general information and does not address all of
the Federal income tax consequences that may be relevant to particular
shareholders in light of their personal circumstances or to certain types of
shareholders (such as dealers in securities, insurance companies, foreign
individuals and entities, financial institutions and tax-exempt entities) who
may be subject to special treatment under the federal income tax laws.
Furthermore, this discussion does not address any tax consequences under state,
local or foreign laws. This summary assumes that the shares of Preferred Stock
are held as a "capital asset" within the meaning of section 1221 of the Code.
The Federal income tax consequences discussed below are based upon certain
assumptions (which management believes to be accurate), namely, that: (i) there
are bona fide business purposes for the Recapitalization Transaction (i.e.,
separate and apart from any Federal income tax benefits that may be derived
therefrom); (ii) the Recapitalization Transaction is an isolated transaction and
not part of a plan to increase periodically the proportionate interest of any
shareholder in the assets or earnings of the Company; and (iii) the fair market
value of the shares of Common Stock received by a Holder of 12% Preferred Stock
in exchange for such Holder's 12% Preferred Stock pursuant to either the
Reclassification or the Exchange Offer will not exceed the issue price of the
12% Preferred Stock exchanged therefor in the Recapitalization Transaction. If
one or more of these assumptions prove to be incorrect, then the Federal income
tax consequences discussed below could be altered significantly.
Gain or Loss on Exchange. The exchange of the shares of Preferred Stock for
Common Stock pursuant to either the Reclassifications or the Exchange Offer will
be a recapitalization within the meaning of Section 368(a)(1)(E) of the Code. As
such, holders of shares of Preferred Stock will recognize no gain or loss on the
exchange of their shares of Preferred Stock solely for shares of Common Stock
pursuant to either the Reclassifications or the Exchange Offer ("Participating
Holders"), except in respect of cash received in lieu of fractional shares of
Common Stock.
Tax Basis and Holding Period of Common Stock. The aggregate tax basis of
the shares of the Common Stock received by a Participating Holder will be the
same as the aggregate tax basis of the shares of Preferred Stock surrendered in
exchange therefor (not including any portion of such basis allocated to the
shares of Preferred Stock exchanged for cash, in lieu of fractional shares of
Common Stock). The holding period of the shares of Common Stock received by such
Participating Holder will include the period for which the shares of Preferred
Stock surrendered in exchange therefor was considered to be held, provided that
the Preferred Stock was held as a capital asset at the time of the exchange.
Information Reporting and Backup Withholding. Participating Holders
generally will be required to provide the Exchange Agent with their correct
taxpayer identification numbers (certified under penalties of perjury) on the
Substitute Forms W-9 included as part of the Letter of Transmittal. The taxpayer
identification number of an individual is his or her social security number. A
Participating Holder who does not provide the Exchange Agent with a correct
taxpayer identification number may be subject to a $50 fine imposed by the IRS.
Furthermore, payments made to such a Participating Holder or other payee may be
subject to backup withholding if: (i) the Participating Holder fails to furnish
a correct taxpayer identification number, (ii) the Participating Holder
furnishes an incorrect TIN, (iii) the Company or the Exchange Agent is notified
by the Internal Revenue Service that such Participating Holder failed to report
interest or (iv) under certain circumstances, the Participating Holder fails to
provide a certified statement, signed under penalty of perjury, that the
taxpayer identification number provided is the correct number and that the
Participating Holder is not subject to backup withholding.
If backup withholding applies, the Exchange Agent is required to and will
withhold 31 percent of any payment made to a Participating Holder or other
payee. Backup withholding is not an additional tax but is credited against the
federal income tax liability of the taxpayer subject to the withholding. If
backup withholding results in an overpayment of a taxpayer's federal income
taxes, that taxpayer may obtain a refund from the IRS.
Generally, a Participating Holder or other payee may avoid backup
withholding by completing the Substitute Form W-9 included as part of the Letter
of Transmittal and certifying that the taxpayer identification number included
therein is correct and that the Participating Holder or other payee is not
subject to backup withholding. Certain types of taxpayers (including
corporations and certain foreign individuals) are not subject to these reporting
or withholding requirements.
HOLDERS OF PREFERRED STOCK ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE RECLASSIFICATIONS OR
PARTICIPATION IN THE EXCHANGE OFFER, INCLUDING THE APPLICABILITY OF ANY STATE,
LOCAL OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR
PROPOSED LEGISLATION.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Jenkens &
Gilchrist, a Professional Corporation, Dallas, Texas.
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EXPERTS
The consolidated financial statements of the Company set forth in this
Proxy Statement/Prospectus for the fiscal year ended March 31, 1997, the
transition period of the Company 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 report included herein given on their authority as experts in
accounting and auditing.
The financial statements of DACC for the three months ended March 31, 1996
and for the fiscal year ended December 31, 1995, set forth in this Proxy
Statement/Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, as stated in their report included herein 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 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 the 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
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.
The Company's 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. The Company's Bylaws require
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, he or she had no reasonable cause to believe his
or her conduct was unlawful. 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is therefore unenforceable.
SUBMISSION OF SHAREHOLDER PROPOSALS
Any stockholder who wishes to present a proposal for action at the 1998
annual meeting of stockholders, and who wishes to have it set forth in the Proxy
Statement and identified in the form of proxy prepared by the Company, must
deliver such proposal to the Company at its principal executive offices no later
than February 26, 1998, in compliance with regulations promulgated by the
Securities and Exchange Commission.
In accordance with the Company's Bylaws, for a proposal to be brought
before an annual meeting by a stockholder, the stockholder must deliver to the
Secretary of the Company written notice thereof at least 60, but not more than
90, days prior to the scheduled meeting; provided, that if less than 70 days'
notice or prior public disclosure of the date of the meeting is given, the
required notice must be given prior to the close of business on the 10th day
after notice or disclosure of the meeting date is made. A stockholder's notice
must set forth (1) a brief description of the proposal and the reasons for
bringing such proposal before the meeting, (2) the name and address of the
stockholder making the proposal and of any stockholders known to be supporting
the proposal, (3) the number of shares of each class of the Company's stock
beneficially owned by the proposing stockholder and any stockholders known to be
supporting the proposal, and (4) any financial interest of the proposing
stockholder in the proposal.
94
<PAGE> 99
INDEPENDENT AUDITORS
The independent accounting firm of BDO Seidman, L.L.P. served as
independent auditors for the Company and its subsidiaries for the fiscal year
ended March 31, 1997 and is serving as independent auditors for the Company and
its subsidiaries for the fiscal year ending March 31, 1998. A representative of
BDO Seidman, L.L.P. is expected to be present and available at the Special
Meeting to respond to appropriate questions and will be given an opportunity to
make a statement, if desired.
By Order of the Board of Directors
Ellis A. Regenbogen
Secretary
Dallas, Texas
________ __, 1997
95
<PAGE> 100
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF SEARCH FINANCIAL SERVICES, INC.
Independent Certified Public Accountants' Report F-1
Consolidated balance sheets as of September 30, 1997 (unaudited), March 31, 1997 and March 31, 1996 F-2
Consolidated statements of operations for the six months ended September 30, 1997 and 1996
(unaudited), for the year ended March 31, 1997,and for the six months ended March 31, 1996 and
for the year ended September 30, 1995 F-3
Consolidated statements of changes in stockholders' equity for the six months
ended September 30, 1997 and 1996 (unaudited), for the year ended March 31, 1997, for
the six months ended March 31, 1996 and for the year ended September 30, 1995 F-4
Consolidated statements of cash flows for the six months ended September 30, 1997 and 1996
(unaudited), for the year ended March 31, 1997, for the six months ended
March 31, 1996 and for the year ended September 30, 1995 F-5
Notes to consolidated financial statements F-6
CONSOLIDATED FINANCIAL STATEMENTS OF MS FINANCIAL, INC.
Independent Auditors' Report F-24
Consolidated balance sheets as of December 31, 1995 and 1996 (audited) and March
31, 1997 (unaudited) F-25
Consolidated statements of operations for years ended December 31, 1994, 1995
and 1996 (audited) and three month period ended March 31, 1997 (unaudited) F-26
Consolidated statements of stockholders' equity (deficit) for the
years ended December 31, 1994, 1995 and 1996 (audited) and three month
period ended March 31, 1997 (unaudited) F-27
Consolidated statements of cash flows for the years ended December 31, 1994,
1995 and 1996 (audited) and three month period ended March 31, 1997 and 1996
(unaudited) F-28
Notes to consolidated financial statements F-30
Consolidated balance sheets as of July 31, 1997 (unaudited) and June 30, 1996 (unaudited) F-54
Consolidated statements of operations for the seven month period ended July 31, 1997
(unaudited) and six month period ended June 30, 1996 (unaudited) F-55
FINANCIAL STATEMENTS OF DEALERS ALLIANCE CREDIT CORP.
Report of Independent Certified Public Accountants F-56
Statements of financial condition as of March 31, 1996 and December 31, 1995 F-57
Statements of operations for the fiscal year ended December 31, 1995 and the
three months ended March 31, 1996 F-58
Statements of common stockholders' deficit for the fiscal year ended December
31, 1995 and the three months ended March 31, 1996 F-59
Statements of cash flows for the fiscal year ended December 31, 1995 and the
three months ended March 31, 1996 F-60
Notes to financial statements F-61
</TABLE>
96
<PAGE> 101
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
F-1
<PAGE> 102
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
Sept. 30, March 31, March 31,
1997 1997 1996
--------- --------- ---------
ASSETS Unaudited
--------- --------- ---------
<S> <C> <C> <C>
Gross contracts receivable (Note 6) $ 162,061 $ 62,325 $ 37,086
Unearned interest (34,691) (10,636) (6,435)
--------- --------- ---------
Net contracts receivable 127,370 51,689 30,651
Installment contracts sold (15,735) -- --
Amounts due under securitization 3,674 -- --
Other amounts due 1,605 -- --
Net owned contracts receivable and due from
securitizations 116,914 51,689 30,651
--------- --------- ---------
Allowance for loan losses (10,768) (5,854) (13,353)
Loan origination costs 6,582 5,852 3,984
Amortization of loan origination costs (4,927) (4,379) (3,578)
--------- --------- ---------
Net contract receivables - after allowance
for credit losses & other costs 107,801 47,308 17,704
--------- --------- ---------
Cash and cash equivalents 2,491 12,249 17,817
Vehicles held for resale 1,199 1,196 566
Deferred note offering cost, net of depreciation and
amortization of $1,672 and $1,141 in 1997
and 1996, respectively 104 155 --
Property and equipment, net 2,577 1,608 1,062
Intangibles, net of $450 amortization in 1997 (Note 4) 11,475 6,252 --
Other assets 986 755 197
--------- --------- ---------
Total assets $ 126,633 $ 69,523 $ 37,346
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Lines of credit (Notes 6 & 8) $ 17,248 $ 23,715 $ 2,283
Note payable (Note 7) 68,926 9,596 --
Accrued settlements (Notes 16 & 17) 500 540 688
Accounts payable and other liabilities 2,947 2,760 7,356
Subordinated note payable (Note 7) 5,000 5,000 --
Accrued interest 688 271 15
Redeemable warrants (Notes 2 & 4) 1,115 1,035 593
--------- --------- ---------
96,424 42,917 10,935
--------- --------- ---------
Stock repurchase commitment (Note 10) -- 2,078 2,078
--------- --------- ---------
Stockholders' Equity (Note 9)
- --------------------
Convertible preferred stock 201 201 154
Common stock 289 252 248
Additional paid-in capital 88,252 78,047 79,124
Accumulated deficit (57,321) (52,760) (54,043)
Treasury stock -- -- (1,150)
--------- --------- ---------
Total stockholders' equity 31,421 25,740 24,333
Notes receivable - stockholders (Note 11) (1,212) (1,212) --
--------- --------- ---------
30,209 24,528 24,333
Total liabilities and stockholders' equity $ 126,633 $ 69,523 $ 37,346
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 103
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 Six Months Six Months Year Ended
Ended Ended Year Ended Ended March 31, September 30,
Sept. 30, 1997 Sept. 30, 1996 March 31, 1997 1996 (Note 1) 1995
-------------- -------------- -------------- ------------ -------------
Unaudited Unaudited
<S> <C> <C> <C> <C> <C>
Interest revenue $ 6,412 $ 3,898 $ 10,004 $ 3,541 $ 13,472
Interest expense 2,979 338 2,306 1,306 11,205
-------- -------- -------- -------- --------
Net interest income 3,433 3,560 7,698 2,235 2,267
Reduction of (provision for) credit
losses (Note 6) 998 3,438 7,017 (4,982) (3,128)
-------- -------- -------- -------- --------
Net interest income (loss) after
reduction of (provision for)
credit losses 4,431 6,998 14,715 (2,747) (861)
-------- -------- -------- -------- --------
General and administrative expense 8,992 6,043 13,392 8,098 15,881
Settlement expense -- -- 40 535 2,837
Reorganization expense -- -- -- -- 315
-------- -------- -------- -------- --------
Operating and other expense 8,992 6,043 13,432 8,633 19,033
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item (4,561) 955 1,283 (11,380) (19,894)
Extraordinary gain on discharge of
debt (Notes 2 & 7) -- -- -- 8,709 --
-------- -------- -------- -------- --------
Net income (loss) (4,561) 955 1,283 (2,671) (19,894)
Preferred stock dividends (1,670) (2,946) 6,154 327 240
-------- -------- -------- -------- --------
Net loss attributable to common
stockholders $ (6,231) $ (1,991) $ (4,871) $ (2,998) $(20,134)
======== ======== ======== ======== ========
Loss per common share before
extraordinary item $ (1.42) $ (0.59) $ (1.45) $ (8.96) $ (17.96)
Gain on extraordinary item -- -- -- 6.67 --
-------- -------- -------- -------- --------
Loss per common share (Notes 9 & 10) $ (1.42) $ (0.59) $ (1.45) $ (2.29) $ (17.96)
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding 4,385 3,402 3,366 1,306 1,121
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 104
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Capital Deficit) (Notes 3 and 9)
For the six months ended September 30, 1997 (Unaudited), 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>
--------------------- ----------------------- ---------------------
Preferred Stock - 12% Preferred Stock - 9%/7% Common Stock
--------------------- ----------------------- ---------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------
<S> <C> <C> <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
(Note 16) -- -- -- -- 231,000 18
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) -- -- -- -- -- --
Acquisition - U.S. Lending
Corporation (Note 4) -- -- 271,867 22 231,066 18
Retirement of treasury stock -- -- (254,100) (20) (895,599) (72)
Preferred stock dividends -- -- -- -- -- --
Net income -- -- -- -- -- --
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 50,000 $ 4 2,456,325 $ 197 3,162,997 $ 252
---------------------------------------------------------------------------
Acquisition - MSF -- -- -- -- 3,666,500 37
Preferred dividends -- -- -- -- -- --
Year-to-date income -- -- -- -- -- --
---------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997
(UNAUDITED) 50,000 $4 2,456,325 $ 197 6,829,497 289
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
----------------------------------------------
Preferred Stock - 9%/7% Common Stock Stockholders'
----------------------- --------------------- Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Capital Deficit)
---------------------------------------------------------------------------------------------
<S> <C> <C> <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) 254,100 (20) 517,300 (8,980) -- -- (9,000)
Acquisition - U.S. Lending
Corporation (Note 4) -- -- -- -- 4,463 -- 4,503
Retirement of treasury stock (254,100) 20 (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
------------------------------------------------------------------------------------------
Acquisition - MSF -- -- -- -- $ 11,875 -- $ 11,912
Preferred dividends -- -- -- -- (1,670) -- (1,670)
Year-to-date income -- -- -- -- -- (4,561) (4,561)
------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997
(UNAUDITED) -- -- -- -- 88,252 (57,321) 31,421
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 105
SEARCH FINANCIAL SERVICES INC.
(F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Six Months Six Months Six Months
Ended Ended Year Ended Ended Year Ended
Sept. 30, Sept. 30, March 31, March 31, Sept. 30,
1997 1996 1997 1996 1995
--------- ---------- ---------- ---------- ----------
Unaudited Unaudited
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (4,561) $ 955 $ 1,283 $ (2,671) $(19,894)
Adjustments to reconcile net income
(loss) to cash used in operations:
Provision for (reduction of) credit
losses (998) (1,691) (7,017) 4,982 3,128
Accretion of warrant debt 80 50 122 -- --
Amortization of deferred offering
costs 51 6 60 1,221 2,840
Amortization of loan origination
costs 547 251 868 641 1,047
Amortization of goodwill and
intangibles 358 -- 450 -- --
Depreciation and amortization 387 281 531 262 384
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 585 (36) (246) 470 (86)
Increases (decreases) in
accounts payable and accrued expense 272 (5,377) (5,290) (449) 1,840
-------- -------- -------- -------- --------
Cash used in operations (3,279) (5,561) (9,239) (4,141) (10,741)
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of contract receivables
including origination fees (14,517) (15,463) (39,042) (5,471) (24,830)
Costs associated with acquisition -- -- (230) -- --
Principal payments on contract
receivables including proceeds
from sales of vehicles 21,188 13,173 30,993 17,921 47,652
Purchases of property and equipment (856) (261) (856) (132) (711)
(Increases) decreases in restricted
cash -- -- -- 8,105 (4,519)
-------- -------- -------- -------- --------
Cash provided by (used in) investing 5,815 (2,551) (9,135) 20,423 17,592
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Net borrowings (repayments) under line
of credit (6,467) 1,724 15,295 1,225 (2,429)
Notes payable proceeds 10,653 -- -- -- 1,779
Notes payable repayments (14,160) -- -- -- (5,077)
Capital lease repayments (22) (30) (67) (24) (58)
Notes payable offering costs -- (82) (215) -- (198)
Proceeds from sale of stock, net of
expense -- 4,490 4,346 -- --
Proceeds from exercise of options -- -- -- 12 --
Notes receivable - stockholders -- (1,099) (1,212) -- --
Purchase of treasury stock (2,078) -- (4,000) -- (1,125)
Payment of dividends (3,213) (1,680) (4,724) (120) (240)
-------- -------- -------- -------- --------
Cash provided by (used in) financing
activities (15,287) 3,323 9,423 1,093 (7,348)
-------- -------- -------- -------- --------
CHANGE IN CASH AND CASH EQUIVALENTS:
Change in cash and cash equivalents (12,751) (4,789) (8,951) 17,375 (497)
Net cash acquired (Note 4) 2,993 -- 3,383 -- --
Cash and cash equivalents - beginning 12,249 17,817 17,817 442 939
-------- -------- -------- -------- --------
Cash and cash equivalents - ending $ 2,491 $ 13,028 $ 12,249 $ 17,817 $ 442
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------------------- ---------
SUPPLEMENTAL INFORMATION (Note 20):
Cash paid for interest $ 2,562 $ 60 $ 2,050 $ 71 $ 9,272
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 106
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.
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 except that during the six months ended September 30, 1997, the
Company recorded adjustments include a $2,505,000 reduction in loan loss
reserves due to changed estimates relating to the timing of expected future cash
flows. This charge was the result of the Company selling a portion of its
deficiency balance accounts for approximately $1,450,000. In addition,
management recorded non-recurring adjustments of $298,000 in management fees
from the MS Financial acquisition and $44,000 related to the Autostar Solutions
lawsuit in which the Company reversed an accrual after the jury ruled in the
Company's favor. Results for the six months ended September 30, 1997 are not
necessarily indicative of results to be expected for the full year.
F-6
<PAGE> 107
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 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 (goodwill) is amortized
on a straight-line basis over 90 months. Other intangibles,
F-7
<PAGE> 108
which include customer lists and dealer networks, are being amortized over 10 to
15 years using the straight-line method. The Company monitors its 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.
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 as 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
F-8
<PAGE> 109
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 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.
F-9
<PAGE> 110
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 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 4,795
warrants treated as debt
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.
F-10
<PAGE> 111
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 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
F-11
<PAGE> 112
collateral has been repossessed to be impaired. When the receivable is
considered impaired, interest income ceases to be recognized. Once impaired, the
Company looks to the underlying collateral for repayment of the receivable.
Therefore, at impairment, the Company writes down the receivable to its
estimated net realizable value, which is the fair value of the underlying
collateral if it has been repossessed or the estimated recoverable cash flow if
no repossession has occurred. If the measured amount of the impaired receivable
is less than the Company's net recorded investment in the receivable, the
Company recognizes a charge to provision for credit losses in the amount of the
deficiency and increases the allowance for credit losses by a corresponding
amount. The provision for credit losses is adjusted for any differences between
the final net proceeds from resale of the underlying collateral and the
estimated net realizable value. Generally, the Company charges off a receivable
against the allowance for credit losses at 180 days contractual delinquency, if
no significant payments have been received in the last six months, or, if
earlier, after receipt of the sale proceeds from liquidation of the collateral
securing the receivable. Subsequent proceeds received on a previously
charged-off receivable are recorded as a recovery to the allowance for credit
losses. Any excess of cost paid ("premium") for net receivables acquired is
recorded as an asset and amortized over the life of the related loans acquired
as an adjustment to yield using the interest method.
The 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
Receivables
Allowance After
Total for Allowance
Number of Unpaid Unearned Credit for
As of Sept. 30, 1997 (Unaudited) Receivables Installments Interest Losses Credit Losses
- -------------------------------- ----------- ------------ -------- ------ -------------
<S> <C> <C> <C> <C> <C>
Unimpaired receivables(1) 19,217 $153,265 $ 33,270 $ 7,062 $ 112,933
Impaired receivables(1) 1,211 8,796 1,421 3,706 3,669
-------------------------------------------------------------------
Total 20,428 $162,061 $ 34,691 $ 10,768 $ 116,602
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Net
Receivables
Allowance After
Total for 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(1) 465 $ 2,269 $ 334 $ 993 $ 942
Unimpaired receivables(1) 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(1) 2,323 $ 12,919 $ 1,644 $ 11,275 $ --
Unimpaired receivables(1) 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.
F-12
<PAGE> 113
The change in the allowance for credit losses is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Sept. 30, March 31, March 31, Sept. 30,
1997 1997 1996 1995
-------- -------- -------- --------
Unaudited
<S> <C> <C> <C> <C>
Balance, beginning of period $ 5,854 $ 13,353 $ 18,623 $ 44,633
Allowance recorded upon purchase of
receivables 11,737 9,908 2,194 9,613
Increase in allowance for credit losses 3,434 1,774 4,982 3,128
Realized and estimated recoveries on
previously charged-off accounts 3,957 2,448 2,296 --
Reclassification for inventory value (1,181) (855) 1,238 (1,809)
Receivables charged off against allowance (8,601) (11,983) (15,980) (36,942)
Reduction in allowance for credit losses (4,432) (8,791) -- --
-------- -------- -------- --------
Balance, end of period $ 10,768 $ 5,854 $ 13,353 $ 18,623
======== ======== ======== ========
Net credit losses as a percent of average
net receivables (1) 28.6% 30% 36% 56%
</TABLE>
(1) The September 30, 1997 percentage has been annualized
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>
September 30, 1997 March 31, 1997
------------------ --------------
Unaudited
<S> <C> <C>
Provision for loan losses $ 3,434 $ 1,774
Reduction in allowance (4,432) (8,791)
-------- --------
Net effect on statement of operations 998 7,017
Less proceeds received on previously charged-off accounts 3,957 2,448
-------- --------
Non cash reduction of credit loss provision $ 2,959 $ 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.
The effect of non-accrual receivables on interest income in each of the
following periods was as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Six Months
Ended Year Ended Ended Year Ended
September 30, March 31, March 31, September 30,
1997 1997 1996 1995
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Interest income
As originally contracted $ 272 $606 $1,480 $ 4,522
As recognized (136) (211) (98) (1,033)
----- ---- ------ --------
Reduction of interest income $ 136 $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 September 30, 1997 (unaudited), March 31,
1997 and 1996, and September 30, 1995.
F-13
<PAGE> 114
At September 30, 1997 (unaudited), contractual maturities of receivables
were as follows (in thousands):
<TABLE>
<CAPTION>
2001 and
(Unaudited) 1998 1999 2000 Thereafter Total
--------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Future payments receivable $ 73,357 $ 45,680 $ 27,830 $ 15,194 $162,061
Less unearned interest 15,316 11,451 6,675 1,249 34,691
--------- --------- --------- -------- --------
Net contracts receivable $ 58,041 $ 34,229 $ 21,155 $ 13,945 $127,370
========= ========= ========= ======== ========
</TABLE>
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 June 30, 1997
(unaudited) and 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.
F-14
<PAGE> 115
7. NOTES PAYABLE AND ACCRUED INTEREST
Notes payable at March 31, 1997 consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, 1997
----------------
<S> <C>
Subordinated note payable to HPIL, bearing interest, due monthly, at 14% $ 5,000
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).
Note payable to banks, bearing interest at prime rate plus 1% (9.50% June 30,
1997 and at March 31, 1997, respectively), 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 $12,434,000 and
$14,479,000 at June 30, 1997 and March 31, 1997, respectively (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 June 30, 1997 and March 31, 1997) and is guaranteed by Search.
The Line has a maximum
F-15
<PAGE> 116
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 $23,517,000 and
$23,865,000 at June 30, 1997 and 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 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).
F-16
<PAGE> 117
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 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):
F-17
<PAGE> 118
<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 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
F-18
<PAGE> 119
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.
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 &
inventory reserve $ 1,711 $ 1,260
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.
F-19
<PAGE> 120
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> <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.
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.
F-20
<PAGE> 121
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 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>
F-21
<PAGE> 122
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 tortiously interfered with the plaintiff's contracts and
business and has claimed, as actual damages, $680,000. The Company believes that
these allegations 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.
F-22
<PAGE> 123
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.
20. NON CASH 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.
F-23
<PAGE> 124
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
F-24
<PAGE> 125
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.
F-25
<PAGE> 126
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.
F-26
<PAGE> 127
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.
F-27
<PAGE> 128
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)
F-28
<PAGE> 129
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.
F-29
<PAGE> 130
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)
F-30
<PAGE> 131
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.
F-31 (Continued)
<PAGE> 132
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.
F-32 (Continued)
<PAGE> 133
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)
F-33
<PAGE> 134
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)
F-34
<PAGE> 135
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)
F-35
<PAGE> 136
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.
(Continued)
F-36
<PAGE> 137
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)
F-37
<PAGE> 138
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>
(Continued)
F-38
<PAGE> 139
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)
F-39
<PAGE> 140
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)
F-40
<PAGE> 141
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)
F-41
<PAGE> 142
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)
F-42
<PAGE> 143
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
(Continued)
F-43
<PAGE> 144
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)
F-44
<PAGE> 145
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)
F-45
<PAGE> 146
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)
F-46
<PAGE> 147
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)
F-47
<PAGE> 148
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.
F-48 (Continued)
<PAGE> 149
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.
F-49 (Continued)
<PAGE> 150
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
F-50 (Continued)
<PAGE> 151
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.
F-51 (Continued)
<PAGE> 152
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.
F-52 (Continued)
<PAGE> 153
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.
F-53
<PAGE> 154
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Balance Sheets
As of July 31, 1997 (Unaudited)
and June 30, 1996 (Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
Assets
------
July 31, June 30,
1997 1996
-------- ---------
(unaudited) (unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,937 $ 375
Installment contracts 62,703 82,260
Amounts due under securitizations 6,244 20,436
-------- ---------
68,947 102,696
Allowance for possible losses (9,352) (1,295)
-------- ---------
Installment contracts and amounts due
under securitizations, net 59,595 101,401
-------- ---------
Property and equipment, net 1,301 1,391
Repossessed automobiles 1,281 2,570
Income taxes receivable 5,313 574
Other assets 1,812 5,345
-------- ---------
$ 71,239 $ 111,656
Total assets ======== =========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Notes payable $ 62,822 $ 60,000
Unearned commissions 198 1,566
Accounts payable and accrued expenses 1,240 6,531
-------- ---------
Total liabilities 64,260 68,097
--------- ---------
Stockholders' equity:
Common stock, par value $.001 per share, 50,000,000 shares
authorized, 10,800,000 shares issued and outstanding 11 11
Additional paid-in capital 27,660 27,679
Unrealized gain on securities available for sale 450 --
Retained earnings (accumulated deficit) (18,868) 18,154
Treasury stock 370,074
shares of common, at cost (2,274) (2,285)
-------- ---------
Total stockholders' equity 6,979 43,559
-------- ---------
$ 71,239 $ 111,656
======== =========
</TABLE>
F-54
<PAGE> 155
MS FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Seven-Month Period ended July 31, 1997 (Unaudited)
and Six-Month Period ended June 30, 1996 (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Seven-month Six-month
period ended period ended
July 31, 1997 June 30, 1996
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Interest and fee income on installment contracts
and securitizations $ 10,000 $ 5,122
Other interest income 46 41
Interest expense (4,317) (1,338)
-------- --------
Net interest income before loss provisions 5,729 3,825
Provision for possible losses on installment contracts 11,875 581
-------- --------
Net interest income (loss) after loss provisions (6,146) 3,244
-------- --------
Other income:
Insurance commissions 164 755
Service fee income 954 1,585
Other income 24 454
-------- --------
Total other income 1,142 2,794
-------- --------
Operating expenses:
Salaries and employee benefits 3,815 3,258
Loss on sales of installment contracts 54 31
Legal, professional and accounting fees 2,457 1,385
Office supplies and telephone expense 913 514
Rent and other office occupancy expense 675 380
Direct loan servicing expenses 662 373
Travel and entertainment expense 239 135
Advertising and other promotional expenses 53 30
Other operating expenses 501 282
-------- --------
Total operating expenses 9,369 6,388
-------- --------
Income (loss) before income taxes (14,373) (350)
Income tax expense (benefit) 404 (131)
-------- --------
Net income (loss) $(14,777) $ (219)
======== ========
Net income (loss) per share $ (1.42) $ (.02)
======== ========
Average shares and common equivalent shares outstanding 10,431 10,439
======== ========
</TABLE>
F-55
<PAGE> 156
[BDO SEIDMAN, LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Dealers Alliance Credit Corp.
Atlanta, Georgia
We have audited the accompanying statements of financial condition of Dealers
Alliance Credit Corp. as of March 31, 1996 and December 31, 1995, and the
related statements of operations, common stockholders' deficit, and cash flows
for the three months ended March 31, 1996 and for the year ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dealers Alliance Credit Corp.
as of March 31, 1996 and December 31, 1995, and the results of its operations
and its cash flows for the three months ended March 31, 1996 and for the year
ended December 31, 1995 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations, negative
capital position and notices of default from its principal lenders raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Atlanta, Georgia
May 21, 1996, except for Note 7 /s/ BDO SEIDMAN, LLP
which is as of May 24, 1996
F-56
<PAGE> 157
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF FINANCIAL CONDITION
================================================================================
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Net finance receivables (Note 3) $ 35,125,860 $ 33,686,474
Allowance for credit losses (Note 3) (13,450,000) (14,506,538)
- -----------------------------------------------------------------------------------------------------------------
21,675,860 19,179,936
Cash and cash equivalents 368,767 325,678
Repossessed collateral 437,804 569,556
Furniture and equipment, net 248,940 228,570
Prepaid rent (Note 6) 272,167 327,750
Other assets (Note 6) 647,889 711,832
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 23,651,427 $ 21,343,322
=================================================================================================================
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
LIABILITIES
Revolving credit agreement advances (Note 4) $ 19,250,000 $ 16,850,000
Accounts payable and accrued expenses 1,138,330 1,001,815
Due to related party (Note 11) 19,399 60,111
Senior subordinated notes payable, net (Note 8) 3,486,991 3,460,872
- -----------------------------------------------------------------------------------------------------------------
23,894,720 21,372,798
WARRANTS (Note 8) 563,767 521,945
REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK,
$0.01 par value; 200,000 share authorized, 176,313 and
177,630 shares issued and outstanding, net of $24,645 note
receivable from stockholder (Notes 9 and 11) 8,752,971 8,674,880
COMMON STOCKHOLDERS' DEFICIT (Notes 10 and 11)
Common stock, $0.01 par value; 250,000
shares authorized, 9,402 shares issued and outstanding 94 94
Additional paid-in capital - 82,893
Note receivable from stockholder (25,000) (25,000)
Accumulated deficit (9,535,125) (9,284,288)
- -----------------------------------------------------------------------------------------------------------------
Total common stockholders' deficit (9,560,031) (9,226,301)
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 23,651,427 $ 21,343,322
=================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-57
<PAGE> 158
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS Year
ENDED ended
MARCH 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET FINANCE REVENUES
Interest income on finance contracts $1,908,371 $ 5,638,347
Ancillary and other operating income 140,062 326,193
- ----------------------------------------------------------------------------------------------------------------------
Net finance revenues 2,048,433 5,964,540
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE, NET
Interest expense 699,337 1,342,363
Interest income (9,666) (21,048)
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense, net 689,671 1,321,315
- ----------------------------------------------------------------------------------------------------------------------
Finance income before provision for credit losses 1,358,762 4,643,225
Provision for credit losses - (7,415,113)
- ----------------------------------------------------------------------------------------------------------------------
Net finance income (loss) 1,358,762 (2,771,888)
- ----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Employee compensation and related expenses 961,881 2,909,563
General and administrative 390,749 965,659
Consulting and professional fees 219,950 980,117
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,572,580 4,855,339
- ----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (213,818) $(7,627,227)
======================================================================================================================
</TABLE>
Interim results are not necessarily indicative of the results that may be
expected for the entire year.
See accompanying notes to financial statements.
F-58
<PAGE> 159
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED MARCH 31, 1996
AND YEAR ENDED DECEMBER 31, 1995
================================================================================
<TABLE>
<CAPTION>
Note Total
Common Stock Additional receivable common
------------------ paid-in from Accumulated stockholders'
Shares Amount capital stockholder deficit deficit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
at December 31, 1994 9,402 $94 $ 330,574 $ (25,000) $(1,657,061) $(1,351,393)
Compensatory
common stock options - - 39,450 - - 39,450
Preferred stock dividend - - (219,172) - - (219,172)
Preferred stock accretion - - (48,910) - - (48,910)
Warrant accretion - - (19,049) - - (19,049)
Net loss - - - - (7,627,227) (7,627,227)
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
at December 31, 1995 9,402 94 82,893 (25,000) (9,284,288) (9,226,301)
Preferred stock dividend - - (66,280) - - (66,280)
Preferred stock accretion - - (11,810) - - (11,810)
Warrant accretion - - (4,803) - (37,019) (41,822)
Net loss - - - - (213,818) (213,818)
- --------------------------------------------------------------------------------------------------------------------
BALANCE,
at March 31, 1996 9,402 $94 $ - $ (25,000) $(9,535,125) $(9,560,031)
====================================================================================================================
</TABLE>
Interim results are not necessarily indicative of the results that may be
expected for the entire year.
See accompanying notes to financial statements.
F-59
<PAGE> 160
DEALERS ALLIANCE CREDIT CORP.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS Year
ENDED ended
MARCH 31, 1996 December 31, 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (213,818) $ (7,627,227)
Adjustments:
Provision for credit losses - 7,415,113
Depreciation and amortization 21,568 80,970
Amortization of debt discount and organization fees 62,917 222,212
Compensatory stock options issued to related party - 39,450
Changes in assets and liabilities:
Repossessed collateral 131,752 (511,493)
Other assets 35,321 (1,213,368)
Accounts payable and accrued expenses 136,517 835,542
Due to related party (40,712) 48,254
- ---------------------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities 133,545 (710,547)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of installment contracts receivable (4,966,659) (27,358,521)
Payments received on installment contracts receivable 2,514,695 3,729,126
Purchases of equipment (41,995) (129,685)
Proceeds from sale of assets 3,505 -
- ---------------------------------------------------------------------------------------------------------------
Cash used in investing activities (2,490,454) (23,759,080)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Revolving credit agreement advances 2,400,000 16,850,000
Subordinated debt issuance - 4,000,000
Issuance of preferred stock - 2,972,832
- ---------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 2,400,000 23,822,832
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 43,091 (646,795)
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS at beginning of period 325,678 972,473
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS at end of period $ 368,767 $ 325,678
===============================================================================================================
NON-CASH ACTIVITIES
Accretion of put value of warrants $ 41,822 $ 19,049
Accretion of value of preferred stock 11,810 48,910
Preferred stock dividend 66,280 219,172
</TABLE>
Interim cash flows are not necessarily indicative of the cash flows
that may be expected for the entire year.
See accompanying notes to financial statements.
F-60
<PAGE> 161
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT BUSINESS DESCRIPTION
ACCOUNTING POLICIES
Dealers Alliance Credit Corp. (the
"Company"), is a specialized indirect
consumer finance company engaged in
financing the purchase of used automobiles
by purchasing retail installment sales
contracts ("Installment Contracts")
primarily from independent used automobile
dealers. The Company was incorporated in
the state of Delaware on July 16, 1993.
USE OF ESTIMATES
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
NON-REFUNDABLE ACQUISITION DISCOUNT
Generally, Installment Contracts are
purchased from dealers at non-refundable
acquisition discounts ("Discount") from the
principal amounts financed by the
borrowers. Prior to January 1, 1996 when an
Installment Contract was purchased, the
Company allocated to the allowance for
credit losses the portion of the Discount
deemed necessary to absorb estimated future
credit losses for the Installment Contract
portfolio. Any remaining amount was
deferred as unearned acquisition discount
and was amortized to interest income using
the interest method over the term of the
Installment Contract. The entire Discount
related to Installment Contracts purchased
subsequent to December 31, 1995 has been
allocated to the Allowance for Credit
Losses, and no discount revenue recognized.
REVENUE RECOGNITION
Each installment contract requires the
customer to make monthly payments over a
fixed term. The difference between the
total amount of contractual payments and
the principal amount financed represents
unearned finance charges. Unearned finance
charges are amortized and recorded as
interest income using the interest method
over the term and at the interest rate
stated in the Installment Contract. When an
Installment Contract becomes 61 or more
days past due or the customer becomes the
subject of a bankruptcy proceeding, income
recognition is suspended until the
Installment Contract is restored to a
current status.
F-61
<PAGE> 162
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company derives income from product
warranties sold by a third party that are
financed under the Installment Contracts
(ancillary income). That income is
deferred and recorded as unearned
ancillary income and amortized to revenue
using the sum-of-the-digits method, which
approximates the results of the interest
method, over the terms of the underlying
warranty contracts.
Other operating income, which includes
late charges and deferral fees charged to
customers, is recognized as collected.
ALLOWANCE FOR CREDIT LOSSES
Allowance for credit losses is established
through an allocation at the acquisition
date of the Discount based upon
management's estimate of future credit
losses. Commencing January 1, 1996, the
entire discount has been allocated to the
allowance account. Management
periodically evaluates the adequacy of the
allowance for credit losses by reviewing
credit loss experience, delinquencies, the
value of the collateral and general
economic conditions.
If the allowance for credit losses is
insufficient in comparison to the amount
management believes necessary to absorb
potential losses in the Installment
Contract portfolio, the Company first
transfers amounts from the unearned
acquisition discount, to the extent
available, and then, if necessary, a
provision for credit losses is charged
against earnings.
An Installment Contract is charged to the
allowance for credit losses at the
earliest of the time when the automobile
securing the Installment Contract is
repossessed, the payment under the
Installment Contract is 180 days or more
past due, or the Installment Contract is
otherwise deemed to be uncollectible.
REPOSSESSED AUTOMOBILES
A repossessed automobile is recorded at
its estimated realizable value less
estimated costs of disposition. The
Company commences repossession against the
automobile securing a delinquent account
when it determines that additional
collection efforts are not likely to be
successful. Generally, repossession
occurs when a borrower becomes 60 days
delinquent on an Installment Contract.
Upon repossession, the amount due under an
Installment Contract, net of the related
unearned acquisition discount, if any, is
reduced to the estimated realizable value
of the automobile less estimated costs of
disposition through a charge to the
allowance for credit losses.
F-62
<PAGE> 163
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
DEFERRED CONTRACT ACQUISITION COSTS
The Company defers costs directly
associated with the acquisition of
Installment Contracts such as the fees,
commission and dealers incentives and
amortizes such costs using the interest
method as a reduction of interest income
over the term of the Installment
Contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include liquid
investments with original maturities of
three months or less.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at
cost and are depreciated over their
estimated useful lives, ranging from 4 to
6 years, using the straight-line method.
Accumulated depreciation at March 31, 1996
and December 31, 1995 was $75,699 and
$57,579, respectively.
DEFERRED LOAN COSTS
Commitment, placement and other fees and
expenses incurred in connection with the
Company's Revolving Credit Agreement and
Subordinated Debt are deferred, as other
assets, and amortized under the
sum-of-the-years digits method to interest
expense over the terms of the related
agreements.
INCOME TAXES
The Company records income taxes in
accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". Deferred
taxes are recorded based upon temporary
differences between the financial
statement and tax bases of assets and
liabilities using enacted tax rates in
effect for the year in which the
differences are expected to reverse.
Management provides a valuation allowance
for deferred tax assets when they
determine it is more likely than not that
the benefits from such deferred tax assets
will not be realized.
2. FUTURE PROSPECTS The Company's financial statements for the
three months ended March 31, 1996 and for
the year ended December 31, 1995 have been
prepared on a going concern basis, which
contemplates the realization of assets and
settlement of liabilities and commitments
in the normal course of business. The
Company incurred net losses of $213,818
for the three months ended March 31, 1996
and $7,627,227 for the year ended
F-63
<PAGE> 164
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
December 31, 1995 resulting in an
accumulated deficit of $9,535,125 and
$9,284,288 at March 31, 1996 and December
31, 1995, respectively. During 1996, the
Company's principal lenders notified the
Company that the Company was in default of
certain financial covenants of the loan
agreement and subordinated note
agreements. In these circumstances, the
outstanding borrowings become immediately
due and payable upon notification of the
lenders. These matters raise substantial
doubt about the ability of the Company to
continue as a going concern. Management's
plans in regard to these matters are
discussed below. The financial statements
do not include any adjustments that might
result from the outcome of this
uncertainty.
In early March 1996 Company determined
that its portfolio of installment
contracts was not performing as had been
previously estimated and, consequently, a
significant provision for credit losses
and resulting addition to the allowance
for credit losses was required as of and
for the period ended December 31, 1995.
The Company immediately informed its senior
revolving credit lenders ("Senior
Lenders") and subordinated debt lenders
("Subdebt Lenders") of its determination
and that, as a consequence, the Company
would be in default on a number of
covenants contained in the revolving
credit agreement with the Senior Lenders
("Senior Loan") and subordinated note
agreement with the Subdebt Lenders
("Subordinated Loan"). On March 19, 1996
the Senior Lenders notified Company that
events of default had occurred under the
Senior Loan and that Company would not be
permitted to make any additional
borrowings thereunder. On March 22, 1996
the Subdebt Lenders notified Company than
events of default had occurred under the
Subordinated Loan.
Neither the Senior Lenders nor the Subdebt
Lenders have demanded payment in full or
accelerated the maturity of those debts.
However, the Senior Loan expired by its
terms on May 1, 1996 and in accordance
with an agreement with the Senior Lenders
the Subdebt Lenders cannot currently
accelerate the Subordinated Loan. The
Senior Lenders have informed Company that
they will not renew the Senior Loan;
however, for an unspecified period of time
they will permit Company to use most of
its cash collections from its loan
portfolio to operate its business less
interest payments.
F-64
<PAGE> 165
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
On April 2, 1996 Company retained two
investment banking firms to aid and assist
its efforts to recapitalize the Company
through direct investment, sale or merger.
Although the effort to recapitalize is
continuing and the Senior Lenders are
permitting the Company to operate, no
assurance can be given that Company will
be successful in recapitalizing or that
the Senior Lenders will not accelerate the
Senior Debt and foreclose on the portfolio
collateral prior to the time that any
recapitalization is completed.
3. NET RECEIVABLES Generally, the Company's Installment
Contracts have terms of 24 to 36 months.
The net finance receivables balance
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Contractual payments due $ 46,371,288 $ 44,900,063
Unearned finance charges (11,328,861) (11,278,054)
--------------------------------------------------------------------------
Contractual principal balance 35,042,427 33,622,009
Unearned ancillary income (84,662) (93,358)
Deferred contract acquisition
costs, net 168,095 157,823
--------------------------------------------------------------------------
Net finance receivables $ 35,125,860 $ 33,686,474
==========================================================================
</TABLE>
F-65
<PAGE> 166
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
Activity in the unearned contract
acquisition discount and allowance for
credit losses accounts for the three
months ended March 31, 1996 and the year
ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
UNEARNED CONTRACT ACQUISITION
DISCOUNT
Balance - beginning of period $ - $ 507,783
Discounts allocated to
unearned acquisition -
discount 1,968,292
Amortized to interest income - (546,402)
Transferred to allowance for -
credit losses (1,376,787)
Related to charge-offs, net - (552,886)
--------------------------------------------------------------------------
Balance - end of period $ - $ -
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Balance - beginning of period $14,506,538 $ 598,120
Discounts allocated to
allowance for credit losses 2,185,597 9,383,810
Transferred from unearned
acquisition discount - 1,376,787
Provision for credit losses - 7,415,113
Charge-offs (3,273,975) (4,283,206)
Recoveries 31,840 15,914
--------------------------------------------------------------------------
Balance - end of period $13,450,000 $ 14,506,538
==========================================================================
</TABLE>
The Company's exposure to credit loss in
the event of non-performance by the
customer is represented by the amount of
the Installment Contract less the
acquisition discount. At March 31, 1996
approximately 32%, 24% and 14%, of the
Company's Installment Contracts were
purchased from dealers located in
Tennessee, Georgia and Texas,
respectively.
F-66
<PAGE> 167
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
4. REVOLVING CREDIT At March 31, 1996 the Company had a $35
AGREEMENT million revolving credit agreement
("Revolving Credit Agreement"), which was
in default, with three banks, which
expired on May 1, 1996. The Company's
obligations under the Revolving Credit
Agreement are secured by substantially all
of the Company's assets. Borrowings under
the Revolving Credit Agreement were $19.25
million and $16.85 million at March 31,
1996 and December 31, 1995, respectively.
Interest on the borrowings under the
Revolving Credit Agreement is payable
monthly based upon the referenced prime
rate (which was 8.25% at March 31, 1996)
plus 2% per annum. For the three months
ended March 31, 1996 interest expense
amounted to $470,600 and consisted of
interest on advances (weighted average
interest rate of 10.25%) under the
Revolving Credit Agreement, amortization of
the Revolving Credit Agreement fees and
expenses. For the year ended December 31,
1995 interest expense amounted to $975,340
and consisted of interest on advances
(weighted average interest rate of 11.5%)
under the Revolving Credit Agreement,
amortization of the Revolving Credit
Agreement fees and expenses, and
amortization of the cost of an option to
purchase an interest rate protection
agreement.
The Revolving Credit Agreement requires
the Company to maintain specified
financial ratios and to comply with other
covenants. At March 31, 1996 the Company
was in default under this agreement due to
failure to maintain these agreed upon
covenants, including the minimum interest
coverage ratio, minimum tangible net worth
and the ratio of charge-offs to average
net finance receivables.
5. INCOME TAXES The Company has incurred net operating
losses since its inception in 1993 and,
accordingly, no provision for income taxes
for the three months ended March 31, 1996
or for the year ended December 31, 1995
has been recorded.
Net operating loss carryovers, which
aggregate approximately $4,345,000 at
March 31, 1996, are available to reduce
future federal and state income taxes and
expire through December 31, 2010.
Deferred taxes reflect the net tax effect
of temporary differences between the
financial reporting bases of assets and
liabilities and the amounts applicable for
income tax purposes.
F-67
<PAGE> 168
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company's net deferred tax assets were
as follows:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset:
Pre-operating expenses $ 80,000 $ 87,000
Allowance for credit losses 1,718,000 2,348,000
Net operating loss carryover 1,520,000 812,000
--------------------------------------------------------------------------
3,318,000 3,247,000
Less valuation allowance (3,318,000) (3,247,000)
--------------------------------------------------------------------------
Net deferred tax asset $ - $ -
==========================================================================
</TABLE>
6. LEASES AND OTHER OFFICE FACILITY AND EQUIPMENT LEASES
COMMITMENTS
The Company rents its office under a
non-cancellable lease agreement which
terminates in September 2002 and provides
the Company with options, subject to
certain conditions, to lease additional
space in 1996 and 1997. The new lease
requires the Company to reimburse the
landlord for increases over the base year
amounts for certain expenses, such as real
estate taxes, utilities and maintenance.
Upon executing the lease in August 1995
the Company was required to fund $364,000
of future rental payments and $150,000
representing a security deposit. The
unamortized portion of the future rental
payments and the security deposit are
included in "prepaid rent" and "other
assets" at March 31, 1996 and December 31,
1995. The rental prepayment will reduce
future rental payments through March 1997.
Some of the Company's office equipment is
subject to operating leases. The aggregate
rent expense for the office facility and
equipment leases was $58,900 for the three
months ended March 31, 1996 and $74,200
for the year ended December 31, 1995.
DATA PROCESSING AGREEMENT
The Company entered into a five-year
contract, which expires in June 1999, to
receive data processing services. The
contract requires minimum monthly fees for
services rendered.
F-68
<PAGE> 169
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
At March 31, 1996, future minimum payments
for non-cancellable leases, including the
new office lease, and data processing
services were as follows:
<TABLE>
<CAPTION>
Data
Leases Processing
---------------------------------------------------------------------------
<S> <C> <C>
Year ending March 31, 1997 $ 128,000 $218,000
Year ending March 31, 1998 383,400 180,000
Year ending March 31, 1999 360,200 180,000
Year ending March 31, 2000 292,300 45,000
Year ending March 31, 2001 287,700 -
Thereafter 424,500 -
---------------------------------------------------------------------------
Total $1,876,100 $623,000
===========================================================================
</TABLE>
7. CONTINGENCIES Subsequent to March 31, 1996, the
employment by the Company of its then
president and then chief financial officer
was terminated. Each believes they were
dismissed without cause. The Company has
been notified by counsel representing
these two former employees that legal
action may be initiated against the
Company for, among other things, severance
payments, recommendations and release of
non-compete agreements.
8. SUBORDINATED DEBT During 1995, the Company issued $4 million
AND WARRANTS of subordinated debt, which is
subordinated to the Company's Revolving
Credit Agreement and bears interest at 10%
per annum, payable quarterly. The first
issue of $2.5 million occurred on October
16, 1995 and the remaining $1.5 million was
issued on December 20, 1995. The
Subordinated Debt matures October 16, 2000,
unless repayment is required by redemption
of the Preferred Stock or the completion of
an initial public offering.
In connection with the issuance of the
Subordinated Debt the lenders were issued
warrant ("Warrants") to purchase 18,467
shares of the Company's Common Stock for
an exercise price of $0.01 per share.
These Warrant are exercisable immediately
and expire in 10 years. If the Warrants
are outstanding on November 1, 1998,
unless the repurchase feature is otherwise
accelerated, the Warrant holders have the
right, under certain conditions, to
require the Company to repurchase the
Warrants at a price per share determined
by dividing
F-69
<PAGE> 170
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
the largest of: (i) the Company's then fair
value, (ii) 12 times the Company's net
income for the last 4 quarters or (iii) $14
million divided by the number of
fully-diluted shares of common stock and
common stock equivalents then outstanding.
Upon issuance, the $554,139 fair value of
the Warrants was recorded as original issue
discount. The Company incurred costs
aggregating $369,894 in connection with the
Subordinated Debt. Those costs, which are
included in other assets, and the original
issue discount are amortized as interest
expense over the term of the Subordinated
Debt using the interest method. For the
three months ended March 31, 1996 interest
expense for the subordinated debt was
$101,111 and for the year ended December
31, 1995 interest expense was $64,085. The
Warrant is being accreted over a 36 month
period to an estimated repurchase value of
$995,925 through a charge against net
income available for common stockholders.
Subordinated debt consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31, December 31,
1996 1995
--------------------------------------------------------------------------
<S> <C> <C>
Principal outstanding $4,000,000 $4,000,000
Less:
Original issue discount, net of
accumulated amortization (513,009) (539,128)
--------------------------------------------------------------------------
$3,486,991 $3,460,872
==========================================================================
</TABLE>
9. REDEEMABLE SERIES A The Company has authorized 200,000 shares
CONVERTIBLE PREFERRED of Series A Convertible Preferred Stock
STOCK ("Preferred Stock"), par value $.01 per
share. Holders of the Preferred Stock are
entitled to cumulative annual stock
dividends of 3% on December 30 of each
year. In December 1993, the Company
received commitments to buy 110,000 shares
(gross proceeds of $5.5 million) of its
Preferred Stock, 60% of which was purchased
in December 1993 with the remaining 40%
purchased in September 1994. The December
1993 closing resulted in the issuance of
66,000 shares of Preferred Stock with
proceeds, net of offering costs, of
approximately $3,120,000. The September
1994 closing resulted in the issuance of
44,000 shares of Preferred Stock, with net
proceeds of approximately $2,196,000.
F-70
<PAGE> 171
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
On January 25, 1995 the Company's Board of
Directors approved an offering of 60,000
shares of Preferred Stock at $50 per share
to current holders of the Company's
Preferred and Common Stock. The offering
("Rights Offering") resulted in the
Company receiving commitments to purchase
the entire 60,000 shares of Preferred
Stock offered. The terms of the offering
provided for two closings. The initial
closing in May 1995 resulted in the
issuance of 30,000 shares of Preferred
Stock (net proceeds of $1,480,780). The
second closing was on July 24, 1995 and an
additional 30,000 shares of Preferred
Stock (gross proceeds of $1,500,000) were
issued.
Each share of Preferred Stock may be
converted into 1 share of Common Stock at
any time at the option of the holder.
Conversion into Common Stock is mandatory
in the event of a qualified initial public
offering of the Company's Common Stock, as
defined ("IPO").
If an IPO does not occur before December
1, 1998, each holder of Preferred Stock
may require the Company to redeem its
Preferred Stock at the greater of the
Common Stock's per share fair market value
or its liquidation preference. Redemption
is mandatory on November 30, 1999 at the
greater of the Common Stock's per share
fair market value on September 1, 1999 or
its liquidation preference. The
liquidation preference aggregated
$8,903,600 at March 31, 1996 and
$8,837,300 at December 31, 1995. For
financial accounting purposes, the
Preferred Stock is accreted to the greater
of its liquidation preference ($50 per
share) or the Common Stock's per share
fair market value. Management believes
the fair market value of its Common Stock
was $50 per share at December 31, 1995 and
December 31, 1994. For financial
accounting purposes, the dividends were
valued at $50 per share and were charged
to additional paid-in capital, to the
extent available, and then to accumulated
deficit.
Holders of Preferred Stock are entitled to
one vote per share on all stockholder
matters. The Company's Shareholders
Agreement provides that all stockholders
vote for an eight member Board of
Directors comprised of four nominees of
the majority Common Stockholder (see
Related Party Transactions), one nominee
of a specified Preferred Stock holder
group, two nominees of the stockholders
other than majority Common Stockholder and
one nominee who is the Company's chief
executive officers. The Shareholders
Agreement terminates upon completion of an
IPO.
The Preferred Stock ranks senior to the
Common Stock with respect to
F-71
<PAGE> 172
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
dividends and liquidation rights.
The provisions of the Revolving Credit
Agreement prohibit the payment of
dividends in cash or property, other than
stock dividends on the Preferred Stock.
10. OPTIONS TO PURCHASE On May 1, 1995, the options to purchase
COMMON STOCK Common Stock granted to certain key
officers of the Company during 1994 were
modified. The modification increased the
number of shares under grant from 17,500 to
25,500. Additionally, the rights of those
grantees under the options vest in their
entirety on December 30, 2000, unless
vesting is accelerated by the Company's
achievement of established operating
performance objectives in 1995 and 1996.
The exercise price per share is $50, which
approximated fair market value per share at
the date of the modification.
On November 30, 1993, a member of the
Board of Directors was granted an option,
which vested immediately, to purchase
2,000 shares of Common Stock at an
exercise price per share of $50, which
approximated fair value per share at the
date of grant, through November 30, 2003.
On May 1, 1995, the option granted to
Chicago Holdings, Inc. ("CHI") (see
Related Party Transactions) in November
1993 to purchase 10,000 shares of Common
Stock at an exercise price of $50 per
share was modified. CHI's option to
purchase those shares vest in its entirety
on December 31, 2000, unless vesting is
accelerated by the Company's achievement
of established operating performance
objectives in 1995 and 1996.
On November 30, 1993, CHI was granted an
option, which vested immediately, to
purchase 10,000 shares of Common Stock. On
May 1, 1995 CHI was granted an option,
which vested immediately, to purchase an
additional 2,500 shares of common stock.
The exercise prices per share of the
options are: $100 during 1996, $150 during
1997 and $200 thereafter through November
30, 2003.
F-72
<PAGE> 173
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The Company obtained valuations from an
independent party for the Common Stock
options granted to CHI. The appraiser
determined the fair value of CHI options
granted or modified in 1995 was
approximately $39,450 at the date of
grant. The Company recognized a non-cash
compensatory charge for such options in
1995. The fair value of the options
granted in 1993 was not material.
11. RELATED PARTY COMMON STOCK TRANSACTIONS
TRANSACTIONS
Approximately 89.4% (8,401 shares) of the
Company's outstanding Common Stock is
owned by a wholly-owned subsidiary of CHI,
a founder of the Company. The remaining
outstanding shares of Common Stock are
owned by the Company's President and its
Chairman. The Chairman purchased 1
founding share. CHI's subsidiary
purchased 1 founding share, 5,040 shares
of the Company's Common Stock in the
December 1993 closing for $240,005 and
3,360 shares in the September 1994 closing
for $160,003.
In September 1994, the Company's then
President purchased 1,000 shares of Common
Stock for $50 per share, payable $25,000
in cash and $25,000 by a five-year full
recourse promissory note which bears
interest at 6% per annum. This note is
collateralized by a pledge of the
Company's stock owned by the President,
requires partial repayments in the event
that the President earns an incentive
bonus in 1996, 1997 or 1998, and
accelerates if the President ceases to be
employed by the Company.
PREFERRED STOCK TRANSACTIONS
In 1995 the Company's then President, as a
participant in the Rights Offering,
purchased a total of 493 shares of
Preferred Stock at $50 per share payable
$98 in cash and $24,552 by full recourse
promissory notes due on September 1, 1999
which bear interest at 6% per annum. Those
notes are collateralized by a pledge of
the Company's stock owned by the
President, require partial repayments in
the event that the President earns an
incentive bonus in 1996, 1997 or 1998, and
accelerate if the President ceases to be
employed by the Company.
F-73
<PAGE> 174
DEALERS ALLIANCE CREDIT CORP.
NOTES TO FINANCIAL STATEMENTS
================================================================================
In 1995, a wholly-owned subsidiary of CHI,
as a participant in the Right Offering,
purchased 4,138 shares of preferred stock
for a cash price of $206,900 ($50 per
share).
MANAGEMENT ADVISORY AGREEMENT
The Company has a management advisory
agreement with CHI. CHI agreed to provide
accounting, legal and other services for
the Company through November 1996. CHI's
compensation for those services is $125
per hour, together with reimbursement of
out-of-pocket expenses, for actual time
devoted to assisting the Company. The
terms of the agreement also provide for
CHI to make its senior management
available, at the Company's request, for
advisory and consulting services through
November 1, 1998. CHI is also entitled to
a monthly fee of $10,000 for 36 months
commencing after the Company achieves and
continues to be profitable on a monthly
basis. The agreement provides for the
Company's payment of a market rate fee to
CHI if CHI successfully arranges
additional indebtedness for the Company.
For the three months ended March 31, 1996
and the year ended December 31, 1995, CHI
charged the Company $64,800 and $249,200,
respectively, in hourly management fees
and reimbursement of out-of-pocket
expenses. During 1995 CHI charged the
Company $111,280 and $75,000 as fees for
negotiating increases to the Company's
Revolving Credit Agreement and its
Subordinated Debt.
In August 1995, the Company entered into
an advisory agreement, which expires in
four years, with EQ Corporation, a
shareholder of the Company, pursuant to
which EQ Corporation will provide certain
financial advisory services to the
Company. The terms of the agreement
required the Company to prepay all fees,
which amounted to approximately $149,000,
upon execution of the agreement. Such
amount has been included in other assets
and will be amortized to expense over the
term of the agreement.
F-74
<PAGE> 175
ANNEX A
[Letterhead of Principal Financial Securities]
November 10, 1997
Board of Directors
Search Financial Services Inc.
600 North Pearl Street, Suite 2500
Dallas, Texas 75201
Dear Members of the Board:
Search Financial Services Inc. (the "Company") proposes to reclassify and
convert each share of its outstanding 9%/7% Convertible Preferred Stock and 12%
Senior Convertible Preferred Stock (collectively, the "Preferred Stock") into
four shares of Common Stock, $0.01 par value per share (the "Common Stock"), of
the Company (the "Reclassifications"). As an alternative to the
Reclassifications, the Company proposes to offer (the "Exchange Offer") to the
holders of the Preferred Stock (the "Holders") the opportunity to exchange
their Preferred Stock for shares of the Company's Common Stock on the basis of
four shares of Common Stock for each share of Preferred Stock so exchanged.
The consideration to be offered by the Company to the Holders in connection
with the Reclassifications or the Exchange Offer is referred to herein as the
"Exchange Consideration." The terms and conditions of the Reclassifications
and the Exchange Offer are described in a draft of the Company's Form S-4
registration statement distributed on -----------, 1997 (the "Registration
Statement") relating to the Reclassifications and the Exchange Offer and the
related Proxy Statement/Prospectus (herein so called) contained in the
Registration Statement, which Proxy Statement/Prospectus will be mailed to
stockholders of the Company (including the Holders).
The Board of Directors (the "Board") of the Company has requested that
Principal Financial Securities, Inc. ("PFS") act as an independent investment
banker for the purpose of rendering an opinion (the "Opinion") to the Board as
to the fairness, from a financial point of view, of the Exchange Consideration
to be received by the Holders pursuant to the Reclassifications or the Exchange
Offer.
In the course of our analysis for rendering this Opinion, we have:
1. Reviewed the Registration Statement and Letter of Transmittal related
to the Exchange Offer to be inserted as an exhibit to the Registration
Statement;
<PAGE> 176
Board of Directors
Search Financial Services Inc.
November 10, 1997
Page 2
2. Reviewed the Restated Certificate of Incorporation of the Company and
all amendments thereto;
3. Reviewed the Loan Agreement, First Amendment to Loan Agreement,
Commercial Guaranty, and First Amendment to Commercial Guaranty with Hibernia
National Bank;
4. Reviewed the Loan and Security Agreement between the Company and
Lehman Commercial Paper, Inc.;
5. Reviewed the Offering Memorandum for the Company's proposed
subordinated debt;
6. Reviewed and analyzed the Company's Form 10-K for the fiscal year
ended March 31, 1997;
7. Reviewed the Company's Form 10-Q for the period ended June 30, 1997;
8. Reviewed certain internal financial statements of the Company prepared
by management of the Company, including financial statements for the month
ended August 31, 1997;
9. Reviewed the Company's financial projections through 2004, and the
underlying assumptions, prepared by management of the Company;
10. Reviewed and charted historical trading prices and volumes of the
Company's Common Stock and 9%/7% Convertible Preferred Stock, and analyzed the
relationship between the two securities;
11. Interviewed management of the Company and other personnel regarding
the financial performance and the projected financial performance of the
Company;
12. Interviewed management of the Company and other personnel regarding
the Company's ability to keep certain revolving credit lines in place;
13. Interviewed management of the Company and other personnel regarding
the Company's current litigation;
14. Had discussions with management regarding the Company's ability to
raise capital given the Company's current equity structure, and in the event
the Reclassifications or the Exchange Offer is completed;
<PAGE> 177
Board of Directors
Search Financial Services Inc.
November 10, 1997
Page 3
15. Analyzed historical and projected liquidation value of the Preferred
Stock;
16. Identified and reviewed comparable transactions, to the extent
publicly available;
17. Reviewed certain financial and stock market data of the Company and
compared that data with similar data for other publicly-held companies that
have operations similar in some respects to the operations of the Company;
18. Performed various analyses of the Company, the Reclassifications and
the Exchange Offer using various valuation methodologies, including: (a)
comparable transactions analysis; (b) comparable public company analysis,
including trading multiples; (c) discounted cash flow analysis; (d)
historical trading relationships; and (e) liquidation valuation.
19. Performed such other studies, analyses, inquiries, and investigations
necessary to render our Opinion.
In rendering this Opinion, PFS has assumed and relied upon, without independent
verification, the accuracy, completeness and fairness of all of the financial
and other information that was received by us from the Company or any of its
representatives, or provided to us by public sources. With respect to the
financial projections supplied to us for the Company, we have assumed that all
such information has been reasonably derived on bases reflecting the best
currently available estimates and judgment of the Company's management as to
the future operating and financial performance of the Company. We have also
assumed that the Reclassifications and the Exchange Offer will be in all
respects carried out in compliance with all applicable laws and regulations.
Our Opinion is based solely upon the information set forth herein as reviewed
by us and circumstances, including economic, market and financial conditions,
existing as of the date hereof. Events occurring after the date hereof could
materially affect the assumptions used both in preparing this Opinion and the
documents and projections reviewed by us. We have not undertaken to reaffirm
or revise this Opinion or otherwise comment upon any events occurring after the
date hereof.
Additionally, in connection with rendering our Opinion, we have assumed that
Holders of at least 50% of the outstanding Preferred Stock will receive the
Exchange Consideration pursuant to the Reclassifications or the Exchange Offer,
that Holders will recognize no gain or loss for tax purposes pursuant to the
Reclassifications and the Exchange Offer under any federal, state, local or
foreign income or other tax laws, that the Company will not incur or suffer any
material loss
<PAGE> 178
Board of Directors
Search Financial Services Inc.
November 10, 1997
Page 4
or liability with respect to its current litigation, and that the Company will
refinance all indebtedness due within the next twelve months on terms and
conditions favorable to the Company.
We are not opining, and were not requested by you to opine, as to the fairness
of any aspect of the Reclassifications and the Exchange Offer other than the
Exchange Consideration to be received by the Holders in connection therewith.
Our Opinion does not constitute a recommendation to any stockholder of the
Company (including the Holders) as how such stockholders should vote on the
proposals related to the Reclassifications and the Exchange Offer, and does not
constitute a recommendation that any Holder should exchange his Preferred Stock
pursuant to the Exchange Offer.
We have acted as financial advisor to the Board in connection with the
Reclassifications and the Exchange Offer and will receive a fee for our
services. It is understood that the Opinion and any advice, written or oral,
provided by PFS pursuant to this letter will be solely for (i) the information
and assistance of the Board in connection with its consideration of the
Reclassifications and the Exchange Offer and (ii) introduction into evidence
and other references in connection with any litigation relating to the
Reclassifications and the Exchange Offer, except that the Company may make
reference to our engagement hereunder and appropriately summarize the Opinion
in any proxy statement or prospectus filed by the Company in connection with
the Reclassifications and the Exchange Offer with the Securities and Exchange
Commission and furnished to the stockholders of the Company with respect to the
approval by such stockholders of any aspect of the Reclassifications and the
Exchange Offer. All references to the Opinion in any proxy statement or
prospectus filed by the Company will be in form reasonably satisfactory to us.
Other than as contemplated by this paragraph, the Opinion is not be used,
circulated, quoted, or otherwise referred to for any other purpose, nor is the
Opinion or such advice to be filed with, included in or referred to in whole or
in part in any prospectus, information or proxy statement, filing, other
document or any communication with the Company's stockholders except in each
case with PFS' prior written consent.
As a part of our investment banking business, we regularly issue fairness
opinions and are continually engaged in, among other things, the valuation of
companies and their securities in connection with business reorganizations,
private placements, negotiated underwritings, mergers and acquisitions,
secondary distributions of listed and unlisted securities, and valuations for
estate, corporate and other purposes.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, PFS is of the Opinion that, as of the date of the
Opinion, the Exchange Consideration
<PAGE> 179
Board of Directors
Search Financial Services Inc.
November 10, 1997
Page 5
to be received by the Holders pursuant to the Reclassifications or the Exchange
Offer is fair, from a financial point of view, to such Holders.
Sincerely yours,
/s/ PRINCIPAL FINANCIAL SECURITIES, INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
<PAGE> 180
Facsimile copies of the Letter of Transmittal and proxy card will be
accepted. Letters of Transmittal, proxy cards, certificates representing
shares of Preferred Stock and any other required documents should be sent by
each Holder of shares of Preferred Stock or his broker, dealer, commercial
bank, trust company or other nominee to the Exchange Agent at one of the
addresses set forth below:
THE EXCHANGE AGENT IS:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
By Hand or Overnight Courier: By Mail:
Attention: Operations Center Attention: Operations Center
938 Quail Street, Suite 101 938 Quail Street, Suite 101
Lakewood, Colorado 80215-5513 Lakewood, Colorado 80215-5513
By Facsimile Transmission
(For Eligible Institutions Only):
(303) 234-5340
To Confirm Receipt of Notice of Guaranteed Delivery
by Telephone:
(303) 234-5300
The Information Agent is: The Financial Advisor is:
MacKenzie Partners, Inc. Prudential Securities, Inc.
156 Fifth Avenue One New York Plaza, 16th Floor
New York, New York 10010 New York, New York 10292-2016
(212) 929-5500 (Call Collect) or (212) ___________ (Call Collect) or
(800) 322-2885 (Toll Free) (800) ___________ (Toll Free)
Any questions or requests for assistance or additional copies of this
Proxy Statement/Prospectus, the Letter of Transmittal, the Notice of Guaranteed
Delivery or the proxy card may be directed to the Information Agent or the
Financial Advisor at its telephone number and location set forth above. You
may also contact your broker, dealer, commercial bank or trust company or other
nominee for assistance concerning the Exchange Offer or the Reclassifications.
QUESTIONS REGARDING THE RECLASSIFICATIONS AND THE EXCHANGE OFFER, THE
COMPANY'S PURPOSES AND REASONS FOR THE RECLASSIFICATIONS AND THE EXCHANGE
OFFER, AND THE BENEFITS AND DETRIMENTS TO HOLDERS OF THE PREFERRED STOCK SHOULD
BE DIRECTED TO THE COMPANY'S INVESTOR RELATIONS DEPARTMENT AT (800) 725-6673 OR
TO THE FINANCIAL ADVISOR AT THE ADDRESS AND TELEPHONE NUMBER LISTED ABOVE.
<PAGE> 181
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 shall have power to 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 such person 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 such
person in connection with such action, suit or proceeding if such
person acted in good faith and in a manner such person 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 such person's 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 such
person did not act in good faith and in a manner which such person
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 such person's conduct
was unlawful.
(b) A corporation shall have power to 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 such person 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 such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a
manner the person 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 been 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 present or former director or
officer of a 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, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred
by such person 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 present or former director,
officer, employee or agent is proper in the circumstances because the
person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be
made, with respect to a person who is a director or officer at the
time of such determination (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) by a committee of such directors designated by a
majority vote of such directors, even though less than a quorum, or
(3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (4) by the
stockholders.
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<PAGE> 182
(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 amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the
corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by former directors and officers or other
employees and agents may be so paid upon such terms and conditions, if
any, as the corporation 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 such
person's official capacity and as to action in another capacity while
holding such office.
(g) A corporation shall have 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 such person
and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the corporation would
have the power to indemnify such person 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 such person 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
such person 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
II-2
<PAGE> 183
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, 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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<PAGE> 184
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT NO. DESCRIPTION
3.1 Registrant's Bylaws, as amended to date (incorporated by
reference to Exhibit 3.0 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 ("June 10-Q"))
3.2 Registrant's Restated Certificate of Incorporation, as amended
to date (incorporated by reference to Exhibits 3.2 to 3.8 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997 ("1997 10-K"))
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, as amended to date
(filed as Exhibit 3.2)
4.3 Other than the indebtedness evidenced by agreements listed in
Exhibit 10 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 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 Jenkens & Gilchrist, a Professional Corporation*
8.1 Tax opinion of Jenkens & Gilchrist, a Professional
Corporation*
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
(incorporated by reference to Exhibit 10.2 to Registrant's
Form S-4 Registration Statement (File No. 333-30275) (the
"Form S-4"))
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 (incorporated by reference to Exhibit 10.9 to the Form
S-4)
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 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)
10.12 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)
II-4
<PAGE> 185
10.13 Amendment to Employment Letter Agreement of George C. Evans
dated March 20, 1996 (incorporated by reference to Exhibit
10.17 to the Form S-4)
10.14 Amendment to Employment Letter Agreement of George C. Evans
dated February 13, 1997 (incorporated by reference to Exhibit
10.18 to the Form S-4)
10.15 Employment Letter Agreement between Registrant and James F.
Leary dated May 1, 1996 (incorporated herein by reference from
Exhibit 10.21 to the Registrant's Transition Report on Form
10-K for the transition period ended March 31, 1996 ("1996
10-K"))
10.16 Loan Agreement dated October 6, 1997 between Search Funding
II, Inc., Search Financial Services Holding 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. and Hibernia National Bank (incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997 ("September
1997 10-Q"))
10.17 Commercial Guaranty dated October 6, 1997 between Registrant
and Hibernia National Bank (incorporated by reference to
Exhibit 10.2 to the September 1997 10-Q)
10.18 Promissory Note dated October 6, 1997 in the principal amount
of $25,000,000 payable to Hibernia National Bank (incorporated
by reference to Exhibit 10.3 to the September 1997 10-Q)
10.19 Letter agreement between Registrant and Inter-Atlantic
Securities Corp. dated September 19, 1997
10.20 Letter agreement between Registrant and Inter-Atlantic
Securities Corp. dated September 19, 1997
10.21 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"))
10.22 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)
10.23 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)
10.24 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)
10.25 Loan Agreement dated as of July 31, 1997 among MS Financial,
Inc., as Borrower, the Registrant, as Guarantor, Fleet Bank,
N.A., as Agent and as one of the Banks, LaSalle National Bank,
NBD Bank, The Sumitomo Bank, Limited, CoreStates Bank, N.A.,
Dresdner Bank, AG New York and Grand Cayman Branches and
Trustmark National Bank (incorporated by reference to Exhibit
10.2 to the June 10-Q)
10.28 Agreement and Plan of Merger by and among Registrant, Search
Capital Acquisition Corp. and MS Financial, Inc. dated as of
February 7, 1997 (incorporated by reference to Annex A to the
Form S-4)
10.29 1997 Stock Option Plan of Registrant (incorporated by
reference to Exhibit 4 to Registrant's Form S-8 Registration
Statement (Registration No. 333-34213))
11.1 Statement re computation of per share earnings (incorporated
by reference to Exhibit 11 to the 1997 10-K)
22.1 Subsidiaries of Registrant (incorporated by reference from
Exhibit 22.1 to the 1997 10-K)
23.1 Consent of Jenkens & Gilchrist, a Professional Corporation
(included in Exhibits 5.1 and 8.1)
23.2 Consent of BDO Seidman, LLP
23.3 Consent of KPMG Peat Marwick LLP
II-5
<PAGE> 186
23.4 Consent of Principal Financial Securities, Inc. (included in
the opinion which appears as Annex A to the Joint Proxy
Statement/Prospectus)
24.1 Power of Attorney (included on signature page)
99.1 Form of Proxy Card
99.2 Form of Letter of Transmittal (including Guidelines for
Certification of Taxpayer Identification Number)
99.3 Form of Notice of Guaranteed Delivery
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees
99.5 Form of Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and Other Nominees
99.6 Form of Letter to Stockholders
- --------------------
* To be filed by amendment.
(b) Financial Statement Schedules: None
(c) Report, Opinion or Appraisal: The fairness opinion of
Principal Financial Securities, Inc. included in the Proxy
Statement/Prospectus.
II-6
<PAGE> 187
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
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-7
<PAGE> 188
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 November 20, 1997.
SEARCH FINANCIAL SERVICES INC.
By: /s/ George C. Evans
---------------------------------
George C. Evans, Chairman of the
Board, President 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, President, November 20, 1997
------------------------------------- Chief Executive Officer and
George C. Evans Director
/s/ Glen Adams Director November 20, 1997
-------------------------------------
Glen Adams
/s/ Richard F. Bonini Director November 20, 1997
-------------------------------------
Richard F. Bonini
/s/ William H.T. Bush Director November 20, 1997
-------------------------------------
William H.T. Bush
/s/ Luther H. Hodges, Jr. Director November 20, 1997
-------------------------------------
Luther H. Hodges, Jr.
/s/ Frederick S. Hammer Director November 20, 1997
-------------------------------------
Frederick S. Hammer
/s/ James F. Leary Director November 20, 1997
-------------------------------------
James F. Leary
/s/ A. Brean Murray Director November 20, 1997
-------------------------------------
A. Brean Murray
/s/ Douglas W. Powell Director November 20, 1997
-------------------------------------
Douglas W. Powell
/s/ Barry W. Ridings Director November 20, 1997
-------------------------------------
Barry W. Ridings
/s/ James B. Stuart, Jr. Director November 20, 1997
-------------------------------------
James B. Stuart, Jr.
/s/ Robert D. Idzi Senior Executive Vice President, November 20, 1997
------------------------------------- Chief Financial Officer & Treasurer
Robert D. Idzi
/s/ Andrew D. Plagens Senior Vice President, Controller November 20, 1997
------------------------------------- and Chief Accounting Officer
Andrew D. Plagens
</TABLE>
<PAGE> 189
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.19 Letter agreement between Registrant and Inter-Atlantic Securities Corp. dated September 19, 1997
10.20 Letter agreement between Registrant and Inter-Atlantic Securities Corp. dated September 19, 1997
23.2 Consent of BDO Seidman, L.L.P.
23.3 Consent of KPMG Peat Marwick, LLP
99.1 Form of Proxy Card
99.2 Form of Letter of Transmittal (including Guidelines for Certification of Taxpayer Identification
Number)
99.3 Form of Notice of Guaranteed Delivery
99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
99.5 Form of Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees
99.6 Form of Letter to Stockholders
</TABLE>
<PAGE> 1
EXHIBIT 10.19
[INTER-ATLANTIC SECURITIES CORP. LETTERHEAD]
September 19, 1997
Search Financial Services Inc.
600 North Pearl Street
Suite 2500 L.B. 123
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 Financial Services 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 lending institutions ("Lenders").
1. The Company hereby engages Inter-Atlantic to act as its agent for
raising Senior Debt from Lenders during the term of Inter-Atlantic's
engagement hereunder.
2. The term of this engagement shall extend until December 31, 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 Lenders and provide information on
the Company.
(b) Determine level of interest of Lenders.
(c) Introduce representatives of the Lenders to officers
of the Company.
(d) Assist during negotiations with the Lenders.
4. The Company hereby agrees to pay Inter-Atlantic, as compensation for
its services pursuant to raising Senior Debt, the following fee:
<PAGE> 2
- 2 -
Search Financial Services Inc.
September 19, 1997
(a) Agency Fee of 37.5 basis points on the total amount
of Senior Debt commitments provided by Lenders
contacted by Inter-Atlantic. It is understood by all
parties that the Agency Fee will not be payable on
Senior Debt provided by Lenders contacted by the
Company prior to Inter-Atlantic having contacted
them or by Lenders 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
Lenders (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.
5. 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.
6. 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.
7. 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.
8. 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.
<PAGE> 3
- 3 -
Search Financial Services Inc.
September 19, 1997
9. The Company agrees to indemnify Inter-Atlantic in accordance with the
indemnification letter which is attached hereto as Exhibit A.
10. 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.
11. 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, 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
<PAGE> 4
- 4 -
Search Financial Services Inc.
September 19, 1997
Accepted and Agreed to:
SEARCH FINANCIAL SERVICES INC.
By: /s/ JAMES F. LEARY
-----------------------------
Name: James F. Leary
TItle: Vice Chairman, Finance
<PAGE> 5
- 5 -
Search Financial Services Inc.
September 19, 1997
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 FINANCIAL SERVICES INC.
By: /s/ JAMES F. LEARY
----------------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE> 1
EXHIBIT 10.20
[INTER-ATLANTIC SECURITIES CORP. LETTERHEAD]
September 19, 1997
Search Financial Services Inc.
600 North Pearl Street
Suite 2500 L.B. 123
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 Financial Services Inc. (the "Company") of Inter-Atlantic Securities
Corp. ("Inter-Atlantic"). This letter replaces the engagement letter dated
August 23, 1996 in its entirety. The Company is considering offering
subordinated debt with warrants exercisable into the common stock of the
Company, convertible debt, common stock 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").
1. The Company hereby engages Inter-Atlantic to act as its lead placement
agent for all Private Placements of Subordinated Debt undertaken by
the Company during the term of Inter-Atlantic's engagement hereunder.
2. The term of this engagement shall extend until December 31, 1997 from
the date of execution of this letter, and may be extended by written
mutual agreement of the parties.
3. 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
-2-
Search Financial Services Inc.
September 19, 1997
(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.
The Company hereby agrees to pay Inter-Atlantic, as compensation for
its services pursuant to any Private Placement, the following fees:
(a) 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 3.375% of the gross par amount of
Subordinated Debt sold less the $60,000 Marketing Fee that the
Company has already paid Inter-Atlantic for producing and
distributing an offering memorandum. 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.
(b) 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(a); provided that
no fee shall be payable under this Section 4(b) if
Inter-Atlantic has previously been paid a Private Placement
Fee pursuant to Section 4(a) above
<PAGE> 3
-3-
Search Financial Services Inc.
September 19, 1997
following the closing of the Private Placement or public
offering of Subordinated Debt.
4. 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.
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.
7. 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.
8. The Company and Inter-Atlantic acknowledge and agree that Wheat,
First Securities, Inc. ("Wheat First") is acting as co-agent for this
transaction. The Company shall pay Wheat First a Private Placement
Fee of 1.125% of the gross par amount of Subordinated Debt sold. One
half of Wheat First's 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. Wheat First will not
share in the Marketing Fee.
9. 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> 4
-4-
Search Financial Services Inc.
September 19, 1997
10. 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.
11. 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.
12. 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, 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 FINANCIAL SERVICES INC.
By: /s/ JAMES F. LEARY
-------------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE> 5
-5-
Search Financial Services Inc.
September 19, 1997
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 FINANCIAL SERVICES INC.
By: /s/ JAMES F. LEARY
-------------------------------
Name: James F. Leary
Title: Vice Chairman, Finance
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Search Financial Services, Inc.
(F/K/A Search Capital Group, Inc.)
Dallas, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement 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. which is contained in that Prospectus. Our report contains an
explanatory paragraph regarding a going concern uncertainty.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
-----------------------
BDO SEIDMAN, LLP
Atlanta, Georgia
December 2, 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 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
December 2, 1997
<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
(except for the last paragraph of note 3 which is as of June 25, 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
(except for the last paragraph of note 3 which is as of June 25, 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.
Jackson, Mississippi KPMG PEAT MARWICK LLP
December 2, 1997
/s/ KPMG PEAT MARWICK LLP
---------------------
<PAGE> 1
EXHIBIT 99.1
FORM OF PROXY
SEARCH FINANCIAL SERVICES INC.
600 NORTH PEARL STREET, SUITE 2500
DALLAS, TEXAS 75201
SPECIAL MEETING OF STOCKHOLDERS - ________________ ___, 1998
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 Financial Services Inc. ("Search") held
of record by the undersigned on , 1997, at the Special Meeting
of Stockholders of Search to be held on , 1998, or any
adjournment or postponement thereof.
This Proxy when properly executed and returned in a timely manner will
be voted at the Special Meeting and any adjournment or postponement thereof in
the manner described herein. If no contrary indication is made, the proxy will
be voted FOR Proposals 1, 2 and 3 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 Proposals 1, 2
and 3:
1. Proposal to approve an amendment to the Restated Certificate of
Incorporation that reclassifies the 9%/7% Convertible Preferred Stock
as Common Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Proposal to approve an amendment to the Restated Certificate of
Incorporation that reclassifies the 12% Senior Convertible Preferred
Stock as Common Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Proposal to issue shares of Common Stock pursuant to the Exchange
Offer.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. 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 or postponement thereof.
[ ] 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
LETTER OF TRANSMITTAL
TO TENDER
9%/7% CONVERTIBLE PREFERRED STOCK
AND 12% SENIOR CONVERTIBLE PREFERRED STOCK
OF
SEARCH FINANCIAL SERVICES INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., DALLAS, TEXAS TIME, ON_________,
____________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF 9%/7%
CONVERTIBLE PREFERRED STOCK (THE "9%/7% PREFERRED STOCK") AND 12% SENIOR
CONVERTIBLE PREFERRED STOCK (THE "12% PREFERRED STOCK") MAY BE WITHDRAWN AT ANY
TIME PRIOR TO THE EXPIRATION DATE.
To:
AMERICAN SECURITIES TRANSFER AND TRUST, INC., EXCHANGE AGENT
<TABLE>
<S> <C> <C>
By Facsimile Transmission By Hand Delivery or Overnight
By Mail (for Eligible Institutions Only) Delivery
1825 Lawrence Street, Suite 444 (303) 298-5380
Denver, Colorado 80202 For Confirmation of 1825 Lawrence Street, Suite 444
Attn: Corporate Trust Operations Facsimile Transmission Denver, Colorado 80202
(303) 298-5370 Attn: Corporate Trust Operations
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OR TELEX, OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
DESCRIPTION OF 9%/7% PREFERRED STOCK AND 12% PREFERRED STOCK TENDERED
<TABLE>
<CAPTION>
CERTIFICATE NUMBER(S)
OF TOTAL NUMBER OF
NAMES AND ADDRESSES OF REGISTERED HOLDERS 9%/7% PREFERRED STOCK TENDERED SHARES OF
(PLEASE FILL IN, IF BLANK) OR 9%/7% PREFERRED STOCK
12% PREFERRED STOCK OR
REPRESENTED BY 12% PREFERRED STOCK **
CERTIFICATE(S)*
<S> <C> <C>
------------------------------------------------------------ ----------------------- -----------------------
------------------------------------------------------------ ----------------------- -----------------------
------------------------------------------------------------ ----------------------- -----------------------
------------------------------------------------------------ ----------------------- -----------------------
</TABLE>
* Need not be completed by Holders who tender 9%/7% Preferred Stock or 12%
Preferred Stock by book entry transfer (see below).
** Unless otherwise indicated, it will be assumed that all 9%/7% Preferred
Stock or 12% Preferred Stock evidenced by any certificate(s) delivered to
the Exchange Agent are being tendered. See Instruction 5.
The instructions accompanying this Letter of Transmittal should be
read carefully before this Letter of Transmittal is completed. Except as
otherwise provided herein, all signatures on this Letter of Transmittal must be
guaranteed in accordance with the procedures set forth herein. See Instruction
1. All capitalized terms used herein and not otherwise
<PAGE> 2
defined herein are used herein with the meanings ascribed to them in the Proxy
Statement/Prospectus (and Offer to Exchange contained therein).
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE THE EXCHANGE CONSIDERATION
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR
9%/7% PREFERRED STOCK OR 12% PREFERRED STOCK TO THE EXCHANGE AGENT PRIOR TO THE
EXPIRATION DATE.
This Letter of Transmittal is to be used only if 9%/7% Preferred
Stock or 12% Preferred Stock (together collectively referred to as the
"Preferred Stock") of Search Financial Services Inc. (the "Company") are to be
physically delivered to the Exchange Agent or delivered by book-entry transfer
to the Exchange Agent's account at Depository Trust Company ("DTC") or
Philadelphia Depository Trust Company ("PDTC") (each a "Depository
Institution") pursuant to the book-entry transfer procedures set forth in the
Company's Proxy Statement/Prospectus (and the Offer to Exchange contained
therein) dated __________, 1997 under the heading "The Exchange
Offer--Procedures for Tendering." See Instruction 2. Delivery of documents to
a Depository Institution does not constitute delivery to the Exchange Agent.
Holders whose Preferred Stock is not immediately available or who
cannot deliver their Preferred Stock and all other required documents to the
Exchange Agent, or who cannot complete the procedure for book-entry transfer,
prior to the Expiration Date, may nevertheless tender their Preferred Stock in
accordance with the guaranteed delivery procedures set forth in the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein) under the
heading "The Exchange Offer--Procedures for Tendering." See Instruction 2.
HOLDERS WHO WISH TO TENDER THEIR PREFERRED STOCK MUST, AT A MINIMUM,
COMPLETE COLUMNS (1) THROUGH (3) IN THE BOX HEREIN ENTITLED "DESCRIPTION OF
9%/7% PREFERRED STOCK OR 12% PREFERRED STOCK TENDERED" AND SIGN IN THE
APPROPRIATE BOX BELOW. If only those columns are completed, the holder will be
deemed to have tendered all the Preferred Stock listed in the table. If a
holder wishes to tender less than all of such Preferred Stock such holder
should refer to Instruction 4.
[_] CHECK HERE IF TENDERED SHARES OF PREFERRED STOCK ARE BEING DELIVERED BY
BOOK ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE
AGENT WITH THE BOOK ENTRY FACILITY AND COMPLETE THE FOLLOWING (FOR USE
BY ELIGIBLE INSTITUTIONS ONLY):
Name of Tendering Institution
----------------------------------------
Depository Institution: DTC [ ] PDTC [ ]
----- -----
Account Number
-------------------------------------------------------
Transaction Code Number ----------------------------------------------
[_] CHECK HERE IF TENDERED SHARES OF PREFERRED STOCK ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY ENCLOSED HEREWITH AND
COMPLETE THE FOLLOWING (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):
Name(s) of Registered Holder(s)
--------------------------------------
Date of Execution of Notice of Guaranteed Delivery
-------------------
Window Ticket Number (if available)
----------------------------------
Name of Institution which Guaranteed Delivery
------------------------
<PAGE> 3
If Delivered by Book-Entry Transfer, check box of applicable
Depository Institution
DTC [ ] PDTC [ ]
------ ------
Account Number
-------------------------------------------------------
Transaction Code Number
----------------------------------------------
[_] CHECK HERE IF TENDER OF THE SHARES OF PREFERRED STOCK WAS SOLICITED BY
A LICENSED BROKER/DEALER AND COMPLETE THE FOLLOWING:
Name of Soliciting Broker/Dealer:
-----------------------------------
Address:
------------------------------------------------------------
Telephone Number:
---------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges receipt of
the Proxy Statement/Prospectus (and the Offer to Exchange contained therein)
and this Letter of Transmittal relating to the Company's offer to exchange (the
"Exchange Offer") each outstanding share of 9%/7% Convertible Preferred Stock
and 12% Senior Convertible Preferred Stock (together collectively referred to
as the "Preferred Stock") for four shares of the Company's Common Stock, $.01
par value (the "Exchange Consideration"), and otherwise upon the terms and
subject to the conditions set forth in the Proxy Statement/Prospectus (and the
Offer to Exchange contained therein). The undersigned further acknowledges
that it will be entitled to receive a cash payment (as provided in the Proxy
Statement/Prospectus and the Offer to Exchange contained therein) in lieu of
any fractional shares of Common Stock issuable in the Exchange Offer.
Upon the terms and subject to the conditions of the Exchange Offer,
the undersigned hereby tenders to the Company the principal amount of Preferred
Stock indicated above.
Subject to, and effective upon, the acceptance by the Company of the
Preferred Stock tendered hereby for exchange pursuant to the terms of the
Exchange Offer, the undersigned hereby sells, assigns and transfers to, or upon
the order of, the Company, all right, title and interest in and to, and any and
all claims in respect of or arising or having arisen as a result of the
undersigned's status as a holder of, all Preferred Stock tendered hereby. The
undersigned hereby irrevocably constitutes and appoints the Exchange Agent as
the true and lawful agent and attorney-in- fact of the undersigned with respect
to such Preferred Stock with full power of substitution (such power-of-attorney
being deemed to be an irrevocable power coupled with an interest) to (a)
deliver such Preferred Stock, or transfer ownership of such Preferred Stock on
the account books maintained by the applicable Depository Institution,
together, in either case, with all accompanying evidences of transfer and
authenticity, to or upon the order of the Company, (b) present such Preferred
Stock for transfer on the books of the Company, and (c) receive all benefits
and otherwise exercise all rights of beneficial ownership of such Preferred
Stock, all in accordance with the terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to tender, sell, assign and transfer the Preferred
Stock tendered hereby and that when such Preferred Stock accepted for exchange
by the Company, the Company will acquire good, marketable and unencumbered
title thereto, free and clear of all liens, restrictions, charges and
encumbrances and that none of such Preferred Stock will be subject to any
adverse claim or right. The
<PAGE> 4
undersigned, upon request, will execute and deliver all additional documents
deemed by the Exchange Agent or the Company to be necessary or desirable to
complete the sale, assignment and transfer of the Preferred Stock tendered
hereby.
The undersigned understands that tenders of Preferred Stock pursuant
to any of the procedures described in the Proxy Statement/Prospectus (and the
Offer to Exchange contained therein) under the caption "The Exchange Offer --
Procedures for Tendering" and in the instructions hereto will constitute the
undersigned's acceptance of the terms and conditions of the Exchange Offer.
The Company's acceptance of such Preferred Stock for exchange pursuant to the
terms of the Exchange Offer will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Exchange Offer.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives. PREFERRED STOCK TENDERED PURSUANT TO THE EXCHANGE OFFER MAY
BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE. See the information set
forth under the heading "The Exchange Offer--Withdrawal of Tenders" in the
Proxy Statement/ Prospectus (and the Offer to Exchange contained therein).
This Letter of Transmittal is also being delivered to shareholders of
the Company concurrently with the Proxy Statement/Prospectus of the Company, in
connection with the Special Meeting of Stockholders of the Company, to be held
on ________ __, 1998. The Proxy Statement/Prospectus includes proposals to
amend the Company's Restated Certificate of Incorporation, providing for the
reclassifications and conversions (the "Reclassifications") of each outstanding
share of Preferred Stock into four shares of Common Stock.
The procedures contained herein for tendering shares of Preferred
Stock shall also be applicable if the Reclassifications are effected. The
completion of this Letter of Transmittal and delivery of certificates
evidencing shares of Preferred Stock pursuant to the instructions contained in
this Letter of Transmittal shall also be deemed to be a surrender of such
shares of Preferred Stock for purposes of the Reclassifications.
<PAGE> 5
Unless otherwise indicated herein in the box entitled "Special Payment
Instructions," please issue the Exchange Consideration with respect to
Preferred Stock accepted for exchange, and return any certificates for
Preferred Stock not tendered or not accepted for exchange, in the name(s) of
the registered holder(s) appearing in the box titled "Description of 9%/7%
Preferred Stock and 12% Preferred Stock Tendered" (and, in the case of
Preferred Stock tendered by book-entry transfer, by credit to the account at
the applicable Depository Institution designated above). Similarly, unless
otherwise indicated herein in the box entitled "Special Delivery Instructions,"
please deliver the Exchange Consideration with respect to Preferred Stock for
exchange, together with any certificates for Preferred Stock not tendered or
not accepted for exchange (and accompanying documents, as appropriate) to the
address(es) of the registered holder(s) appearing in the box titled
"Description of 9%/7% Preferred Stock or 12% Preferred Stock Tendered." If
both the "Special Payment Instructions" box and the "Special Delivery
Instructions" box are completed, please issue the Exchange Consideration with
respect to any Preferred Stock accepted for exchange, and return any
certificates for Preferred Stock not tendered or not accepted for exchange, in
the name(s) of, and deliver such Exchange Consideration and any such
certificates to, the person(s) at the address(es) so indicated. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Payment Instructions" box or "Special Delivery Instructions" box
provisions of this Letter of Transmittal to transfer any Preferred Stock from
the name of the registered holder(s) thereof if the Company does not accept any
of such Preferred Stock for exchange pursuant to the terms of the Exchange
Offer.
<TABLE>
<S> <C>
SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1,
5, 6 AND 7) 5, 6 AND 7
To be completed ONLY if certificates for Preferred To be completed ONLY if certificates for Preferred
Stock not accepted and/or the certificate and Stock not accepted and/or the certificate and
check representing the Exchange Consideration, as check representing the Exchange Consideration, as
the case may be, are to be issued in the name of the case may be, are to be sent to someone other
someone other than the undersigned. than the undersigned or to the undersigned at an
address other than that shown in the box entitled
Issue and mail "Description of 9%/7% Preferred Stock and 12%
(check appropriate box(es)) Preferred Stock Tendered" on the face of this
Letter of Transmittal.
[__] 9%/7% Convertible Preferred Stock
Mail or deliver
[__] 12% Senior Convertible Preferred Stock
(check appropriate box(es))
[__] the Exchange Consideration to:
Name [__] 9%/7% Convertible Preferred Stock
----------------------------------------------
(PLEASE PRINT) [__] 12% Senior Convertible Preferred Stock
ADDRESS
------------------------------------------- [__] the Exchange Consideration to:
-------------------------------------------
(INCLUDE ZIP CODE)
Name
- --------------------------------------------------- --------------------------------------------
(TAX IDENTIFICATION OR SOCIAL (PLEASE PRINT)
SECURITY NUMBER) ADDRESS
------------------------------------------
--------------------------------------------------
(INCLUDE ZIP CODE)
Please complete the Substitute Form W-9 below.
</TABLE>
<PAGE> 6
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF
PREFERRED STOCK REGARDLESS OF WHETHER
PREFERRED STOCK IS BEING PHYSICALLY DELIVERED HEREWITH)
<TABLE>
<S> <C>
X Address:
---------------------------------- ---------------------------------------
X --
---------------------------------- ---------------------- -----------------------
Signature(s) of Holder(s) of (Including Zip Code)
Authorized Signatory
Date: , 1998 Area Code and Telephone No.:
------------------------ ------------------
Must be signed by the registered holder(s) Tax Identification or Social
of the Preferred Stock tendered hereby Security No.:
exactly as their name(s) appear(s) on the --------------------------------
certificate(s) for such Preferred Stock or, SIGNATURE GUARANTEE (If required, see
if tendered by a participant in one of the Instructions 1 and 5 below)
Depository Institutions, exactly as such
participant's name appears on a security X
position listing as the owner of the --------------------------------------------
Preferred Stock, or by person(s) authorized (Name of Eligible Institution Guaranteeing
to become registered holder(s) by Signatures)
endorsements and documents transmitted with
this Letter of Transmittal. If signature is X
by a trustee, executor, administrator, --------------------------------------------
guardian, attorney-in-fact, officer of a (Address (including zip code) and Telephone Number
corporation, agent or other person acting in (including area code) of Eligible Institution)
a fiduciary or representative capacity,
please provide the following information and X
see Instruction 5. --------------------------------------------
(Authorized Signature)
Name(s): X
-------------------------------------- --------------------------------------------
(Printed Name)
X X
-------------------------------------------- --------------------------------------------
(Please Print) (Title)
Date: , 1998
Capacity (full title): -----------------------
----------------------
</TABLE>
<PAGE> 7
INSTRUCTIONS FOR HOLDERS
TENDERING PREFERRED STOCK
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of
Transmittal must be guaranteed by a firm which is a member of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., by a commercial bank or trust company having an office or
correspondent in the United States or by any other "Eligible Guarantor
Institution" as such term is defined in Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (each of the foregoing being referred to
herein as an "Eligible Institution") unless (a) this Letter of Transmittal is
signed by the registered holder of the Preferred Stock tendered herewith (or by
a participant in one of the Depository Institutions whose name appears on a
security position listing as the owner of such Preferred Stock) and neither the
"Special Payment Instructions" box nor the "Special Delivery Instructions" box
of this Letter of Transmittal has been completed or (b) such Preferred Stock
are tendered for the account of an Eligible Institution. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND PREFERRED STOCK;
GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be used only
if the Preferred Stock tendered hereby is to be physically delivered to the
Exchange Agent or delivered by book-entry transfer to the Exchange Agent's
account at the applicable Depository Institution pursuant to the procedures set
forth in the Proxy Statement/Prospectus (and the Offer to Exchange contained
therein) under the heading "The Exchange Offer-Procedures for
Tendering-Book-Entry Transfer." All physically tendered Preferred Stock or
confirmations of book-entry transfer into the Exchange Agent's account with the
applicable Depository Institution, together with a properly completed and
validly executed Letter of Transmittal (or facsimile thereof) and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at one of its addresses set forth on the cover page hereof prior
to the Expiration Date. If Preferred Stock is forwarded to the Exchange Agent
in multiple deliveries, a properly completed and validly executed Letter of
Transmittal must accompany each such delivery.
If a holder desires to tender Preferred Stock pursuant to the Exchange
Offer and (a) certificates representing such Preferred Stock are not
immediately available, (b) time will not permit this Letter of Transmittal,
certificates representing such Preferred Stock and all other required documents
to reach the Exchange Agent prior to the Expiration Date, or (c) the procedures
for book-entry transfer cannot be completed prior to the Expiration Date, such
holder may effect a tender of Preferred Stock in accordance with the guaranteed
delivery procedure set forth in the Proxy Statement/Prospectus (and the Offer
to Exchange contained therein) under the heading "The Exchange Offer --
Procedures for Tendering."
Pursuant to the guaranteed delivery procedure:
(a) such tender must be made by or through an Eligible
Institution;
(b) prior to the Expiration Date, the Exchange Agent must have
received from such Eligible Institution, at one of the addresses of the
Exchange Agent set forth on the cover page hereof, a properly completed and
validly executed Notice of Guaranteed Delivery (by telegram, facsimile, mail or
hand delivery) substantially in the form provided by the Company, setting forth
the name and address of the registered holder and the number of shares of
Preferred Stock being tendered and stating that the tender is being made
thereby and guaranteeing that, within three NASDAQ National Market trading
days after the date of the Notice of Guaranteed Delivery, this Letter of
Transmittal validly executed (or a facsimile hereof), together with
certificates evidencing the Preferred Stock (or confirmation of book-entry
transfer of such Preferred Stock into the Exchange Agent's account with the
applicable Depository Institution), and any other documents required by this
Letter of Transmittal and these instructions, will be deposited by such
Eligible Institution with the Exchange Agent; and
(c) the exchange for the Preferred Stock tendered pursuant to the
Exchange Offer will only be made after timely confirmation (a "Book-Entry
Confirmation") of such Book-Entry Transfer of Preferred Stock into the Exchange
Agent's account, and timely receipt by the Exchange Agent of an Agent's Message
(as such term is defined in the next sentence) and any other documents required
by the Letter of Transmittal. The term "Agent's Message" means a message,
<PAGE> 8
transmitted by the applicable Depository Institution and received by the
Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that such Depository Institution has received an express acknowledgment from
a participant tendering 9%/7% Preferred Stock that is the subject of such
Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such participant; and
(d) this Letter of Transmittal or a facsimile hereof, properly
completed and validly executed, with any required signature guarantees,
certificates representing the Preferred Stock in proper form for transfer (or
confirmation of book-entry transfer into the Exchange Agent's account with the
applicable Depository Institution) and all other documents required by this
Letter of Transmittal must be received by the Exchange Agent within three
Nasdaq National Market trading days after the date of such Notice of Guaranteed
Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, PREFERRED STOCK
AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE APPLICABLE
DEPOSITORY INSTITUTION, TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE TENDERING HOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, REGISTERED MAIL
WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES,
THE MAILING SHOULD BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE, TO
PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO SUCH DATE. NO ALTERNATIVE,
CONDITIONAL OR CONTINGENT TENDERS OF PREFERRED STOCK WILL BE ACCEPTED. BY
EXECUTION OF THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF), ALL TENDERING
HOLDERS WAIVE ANY RIGHT TO RECEIVE ANY NOTICE OF THE ACCEPTANCE OF PREFERRED
STOCK FOR PAYMENT.
3. INADEQUATE SPACE. If the space provided herein under
"Description of 9%/7% Preferred Stock or 12% Preferred Stock Tendered" is
inadequate, the certificate numbers of the Preferred Stock and the number of
shares of Preferred Stock tendered should be listed on a separate schedule and
attached hereto.
4. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS WHO TENDER BY
BOOK-ENTRY TRANSFER). The aggregate number of shares of all Preferred Stock
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If tenders of Preferred Stock are made with respect to
less than the entire number of shares of Preferred Stock delivered herewith,
certificate(s) for the shares of Preferred Stock not tendered will be issued
and sent to the registered holder, unless otherwise specified in the "Special
Payment Instructions" or "Special Delivery Instructions" boxes in this Letter
of Transmittal.
5. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
holder(s) of the Preferred Stock tendered hereby, the signature(s) must
correspond with the name(s) as written on the face of the certificates
representing such Preferred Stock without alteration, enlargement or any other
change whatsoever. If this Letter of Transmittal is signed by a participant in
one of the Depository Institutions whose name is shown on a security position
listing as the owner of the Preferred Stock tendered hereby, the signature must
correspond with the name shown on the security position listing as the owner of
the Preferred Stock.
If any Preferred Stock tendered hereby is owned of record by two or
more persons, all such persons must sign this Letter of Transmittal.
If any Preferred Stock tendered hereby is registered in the names of
different holders, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal, and any necessary accompanying documents, as
there are different registrations of such Preferred Stock.
If this Letter of Transmittal is signed by the registered holder of
Preferred Stock tendered hereby, no endorsements of such Preferred Stock or
separate bond powers are required, unless the Exchange Consideration is to be
issued to, or Preferred Stock not tendered or not accepted for exchange is to
be issued in the name of, a person other than the registered holder(s), in
which case the Preferred Stock tendered hereby must be endorsed or accompanied
by appropriate bond powers,
<PAGE> 9
in either case signed exactly as the name(s) of the registered holder(s)
appear(s) on such Preferred Stock (and with respect to a participant in a
Depository Institution whose name appears on a security position listing as the
owner of Preferred Stock, exactly as the name(s) of the participant(s)
appear(s) on such security position listing as the owner of the Preferred
Stock). Signatures on such Preferred Stock and bond powers must be guaranteed
by an Eligible Institution. See Instruction 1.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Preferred Stock tendered hereby, the Preferred
Stock must be endorsed or accompanied by appropriate bond powers, in either
case signed exactly as the name(s) of the registered holder(s) appear(s) on the
certificates representing such Preferred Stock. Signatures on such Preferred
Stock and bond powers must be guaranteed by an Eligible Institution. See
Instruction 1.
If this Letter of Transmittal or any Preferred Stock or bond powers
are signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing, and
proper evidence satisfactory to the Company of such person's authority so to
act must be submitted with this Letter of Transmittal.
6. TRANSFER TAXES. The Company will pay all transfer taxes, if
any, applicable to the exchange of the Preferred Stock pursuant to the Exchange
Offer. If, however, certificates representing Common Stock or Preferred Stock
not tendered or accepted for exchange, are to be delivered to, or are to be
issued in the name of, any person other than the registered Holder of shares of
Preferred Stock tendered or if a transfer tax is imposed for any reason other
than the exchange of Preferred Stock pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered Holder or
any other persons) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the Exchange
Consideration with respect to any Preferred Stock tendered hereby is to be
issued, or Preferred Stock not tendered or not accepted for exchange is to be
issued, in the name of a person other than the person(s) signing this Letter of
Transmittal or to the person(s) signing this Letter of Transmittal but at an
address other than that shown in the box entitled "Description of 9%/7%
Preferred Stock and 12% Preferred Stock Tendered," the appropriate boxes in
this Letter of Transmittal must be completed.
8. SOLICITING BROKER/DEALER. If this tender of Preferred stock
has been solicited by a licensed broker/dealer, please check the appropriate
box on the Letter of Transmittal and complete the necessary information,
including name, address and telephone number, for the broker/dealer. The
Company will pay a solicitation fee to the named broker/dealer of $.10 for each
share of Preferred Stock covered by this Letter of Transmittal if your shares
are converted into Common Stock pursuant to the Exchange Offer or the
Reclassifications.
9. TAXPAYER IDENTIFICATION NUMBER. Each tendering holder is
required to provide the Exchange Agent with the holder's correct taxpayer
identification number ("TIN"), generally, the holders' social security or
federal employer identification number, on Substitute Form W-9, which is
provided under "Important Tax Information" below, and to certify whether such
person is subject to backup withholding of federal income tax.
A holder must cross out item (2) in Part 2 of the Substitute Form W-9
if such holder is subject to backup withholding. Failure to provide the
information on the Substitute Form W-9 may subject the tendering holder to 31%
federal income tax backup withholding on the reportable payments made to the
holder or other payee with respect to Preferred Stock exchanged pursuant to the
Exchange Offer. The box in Part 3 of the form should be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 3 is checked and the
Exchange Agent is not provided with a TIN within 60 days, thereafter the
Exchange Agent will hold 31% of all reportable payments until a TIN is provided
to the Exchange Agent.
10. LOST OR MISSING CERTIFICATES. If a holder desires to tender
Preferred Stock pursuant to the Exchange Offer but the certificates evidencing
such Preferred Stock have been mutilated, lost, stolen or destroyed, such
holder should write to or telephone the Exchange Agent, at the address or
telephone number listed on the front page of this
<PAGE> 10
Letter of Transmittal, about procedures for obtaining replacement certificates
for such Preferred Stock or arranging for indemnification or any other matter
that requires handling by the Exchange Agent.
11. CONFLICTS. In the event of any conflict between the terms of
the Proxy Statement/Prospectus (and the Offer to Exchange contained therein)
and the terms of this Letter of Transmittal, the terms of the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein) will
control.
IMPORTANT TAX INFORMATION
Under the federal income tax law, a holder whose tendered Preferred
Stock is accepted for payment is required by law to provide the Exchange Agent
(as payer) with such holder's correct TIN on Substitute Form W-9 below. If such
holder is an individual, the TIN is his or her social security number. If the
Exchange Agent is not provided with the correct TIN, a $50 penalty may be
imposed by the Internal Revenue Service, and payments of Exchange Consideration
may be subject to backup withholding.
Certain holders (including, among others, corporations) are not
subject to these backup withholdings and reporting requirements. Exempt
holders should indicate their exempt status on Substitute Form W-9. In order
for a foreign individual to qualify as an exempt recipient, such individual
must submit a statement, signed under penalties of perjury, attesting to such
individual's exempt status. Forms of such statements can be obtained from the
Exchange Agent. See the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional instructions.
If backup withholding applies, the Exchange Agent is required to
withhold 31% of any reportable payments made to the holder or other payee.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained from the Internal Revenue
Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on reportable payments made with respect
to Preferred Stock accepted for exchange pursuant to the Exchange Offer, the
holder is required to notify the Exchange Agent of such holder's correct TIN by
completing the form below, certifying that the TIN provided on the Substitute
From W-9 is correct (or that such holder is awaiting a TIN) and that (a) such
holder is exempt from backup withholding, (b) such holder has not been notified
by the Internal Revenue Service that he is subject to backup withholding as a
result of a failure to report all interest or dividends or (c) the Internal
Revenue Service has notified such holder that such holder is no longer subject
to backup withholding.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The holder is required to give the Exchange Agent the TIN (e.g.,
social security number or employer identification number) of the holder of the
Preferred Stock tendered hereby. If the Preferred Stock is held in more than
one name or is not held in the name of the actual owner, consult the enclosed
"Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9" for additional guidance on which number to report.
PAYER'S NAME: AMERICAN SECURITIES TRANSFER AND TRUST, INC.
- --------------------------------------------------------------------------------
SUBSTITUTE
FORM W-9
Please fill in your name, address and type of entity below
----------------------------------------
Name
----------------------------------------
<PAGE> 11
----------------------------------------
Address (number and street)
----------------------------------------
City, State and Zip Code
----------------------------------------
Individual, Corporation, Partnership or Other
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER ("TIN")
- --------------------------------------------------------------------------------
PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND CERTIFY BY SIGNING
AND DATING BELOW
----------------------------------------
Social Security Number
OR
----------------------------------------
Employer Identification Number
- --------------------------------------------------------------------------------
PART 2--CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me) and
(2) I am not subject to backup withholding either because (a) I am exempt
from backup withholding or (b) I have not been notified by the
Internal Revenue Service ("IRS") that I am subject to backup
withholding as a result of failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject
to backup withholding.
- --------------------------------------------------------------------------------
PART 3--
Awaiting TIN [ _]
----------------------------------------
PART 4--
Exempt [__]
- --------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) in Part 2 above if
you have been notified by the IRS that you are subject to backup withholding
because of under reporting interest or dividends on your tax return. However,
if after being notified by the IRS that you were subject to backup withholding
you received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2). If you are exempt
from backup withholding check the box in Part 4 above.
SIGNATURE DATE , 1998
------------------------------------- -------------------
<PAGE> 12
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines for Determining the Proper Identification Number to Give
the Payer. Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen: i.e., 00-0000000. The table below will help determine
the number to give the payer.
<TABLE>
<S> <C>
For this type of account: Give the SOCIAL SECURITY number of:
1. An individual's account The individual
2. Two or more individuals The actual owner of the account,
(joint account) or if combined funds, any one of
the individuals(1)
3. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
4.a. The usual revocable The grantor-trustee(1)
savings trust account
(grantor is also
trustee)
b. So-called trust account The actual owner (1)
that is not a legal or
valid trust under State
law
5. Sole proprietorship The owner(3)
6. A valid trust, estate or The legal entity.(Do not provide
pension trust. the identifying number of the
personal representative or the
trustee unless the legal entity
itself is designated in the
account.
7. Corporate The corporation
8. Religious, charitable The organization
or, educational or
organization.
9. Partnership The partnership
10. Association, club or The organization
other tax- exempt
organization
11. A broker or reregistered The broker or nominee.
nominee.
</TABLE>
<PAGE> 13
<TABLE>
<S> <C> <C>
12. Account with the The public entity.
Department of
Agriculture in the name
of a public entity such
as a State or local
government, school
district or prison that
receives agricultural
payments. in the name
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security
number.
(3) Show the individual name, but may also enter the business or "doing
business as" name. Use either individual's social security number or
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
Note: If no name is circled when there is more than one name, the
number will be considered to be that of the first name listed.
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9
Obtaining a Number
If you don't have a taxpayer identification number or you do not know
your number, obtain Form SS-5, Application for a Social Security Number Card,
or Form SS-4, Application for Employer Identification Number, at the local
office of the Social Security Administration or the Internal Revenue Service
and apply for a number.
Payees Exempt from Backup Withholding
Payees specifically exempted from backup withholding on ALL payments
including the following:
o A Corporation.
o A financial institution.
o An organization exempt from tax under Section 501(a), or an
individual retirement plan, or a custodial account under
Section 403(b)(7).
o The United States or any agency or instrumentality thereof.
o A state, the District of Columbia, a possession of the United
States, or any political subdivision or instrumentality
thereof.
o A foreign government, a political subdivision of a foreign
government, or any agency or instrumentality thereof.
o An international organization or any agency or instrumentality
thereof.
o A dealer in securities or commodities required to register in
the U.S. or a possession of the U.S.
o A real estate investment trust.
o A common trust fund operated by a bank under Section 584(a).
o A trust exempt from tax under Section 664 or described in
Section 4947.
o An entity registered at all times during the tax year under
the Investment Company Act of 1940.
o A foreign central bank of issue.
o A middleman known in the investment community as a nominee or
listed in the most recent publication of the American Society
of Corporate Secretaries, Inc. Nominee List.
o A futures commission merchant registered with the Commodity
Futures Trading Commission.
<PAGE> 14
Payments of dividends and patronage dividends not generally subject to
backup withholding include the following:
o Payments to nonresident aliens subject to withholding under
Section 1441.
o Payments to partnerships not engaged in a trade or business in
the U.S. and which have at least one nonresident partner.
o Payments of patronage dividends where the amount received is
not paid in money.
o Payments made by certain foreign organizations.
Payments of interest not generally subject to backup withholding
include the following:
o Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this
interest is $600 or more and is paid in the course of the
payer's trade or business and you have not provided your
correct taxpayer identification number to the payer.
o Payments of tax-exempt interest (including exempt-interest
dividends under Section 852).
o Payments described in Section 6049(b)(5) to non-resident
aliens.
o Payments on tax-free covenant bonds under Section 1451.
o Payments made by certain foreign organizations.
o Mortgage interest paid by you.
Exempt payees described above should file Substitute Form W-9 to avoid
possible erroneous backup withholding. FILE SUBSTITUTE FORM W-9 WITH THE
PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE
OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST,
DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. If you are a
nonresident alien not subject to backup withholding, submit a completed Form
W-8, Certificate of Foreign Status.
Certain payments other than interest, dividends, and patronage
dividends, that are not subject to information reporting are also not subject
to backup withholdings. For details, see Sections 6041, 6041(A)(a), 6042,
6044, 6045, 6049, 6050A and 6050N, and the regulations thereunder.
Privacy Act Notice.--Section 6109 requires most recipients of
dividend, interest, or other payments to give taxpayer identification numbers
to payers who must report the payments to IRS. The IRS uses the numbers for
identification purposes. Payers must be given the numbers whether or not
recipients are required to file tax returns. Payers must generally withhold
31% of certain taxable payments to a payee who does not furnish a taxpayer
identification number to a payer. Certain penalties may also apply.
Penalties
(1) Penalty for Failure to Furnish Taxpayer Identification Number. -- If
you fail to furnish your taxpayer identification number to a payer, you are
subject to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) Civil Penalty for False Information with Respect to Withholding. -- If
you make a false statement with no reasonable basis which results in no
imposition of backup withholding, you are subject to a penalty of $500.
(3) Criminal Penalty for Falsifying Information. -- Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines, and/or imprisonment.
(4) Misuse of TINs. -- If the requester discloses or uses the TINs in
violation of Federal law, the requester may be subject to civil and criminal
penalties.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE> 15
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE
OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3
OF THE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
CERTIFICATE OF TAXPAYER AWAITING IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal
Revenue Service Center or Social Security Administration Office or (b) I
intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within 60 days, 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number.
SIGNATURE DATE , 1998
------------------------------------- -------------------
<PAGE> 1
Exhibit 99.3
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF 9%/7% CONVERTIBLE PREFERRED STOCK
AND 12% SENIOR CONVERTIBLE PREFERRED STOCK
SEARCH FINANCIAL SERVICES INC.
This Notice of Guaranteed Delivery or a form substantially equivalent
hereto must be used to accept the offer by Search Financial Services Inc. (the
"Company") to exchange (the "Exchange Offer") each share of 9%/7% Convertible
Preferred Stock and 12% Senior Convertible Preferred Stock (together
collectively referred to as the "Preferred Stock") for four shares of the
Company's common stock, $.01 par value (the "Common Stock") if, (a)
certificates representing the Preferred Stock are not immediately available,
(b) the procedures for book-entry transfer cannot be completed prior to the
Expiration Date (as defined), or (c) time will not permit the Preferred Stock
and all other required documents to reach the Exchange Agent prior to the
Expiration Date. This form may be delivered by an Eligible Institution by mail
or hand delivery or transmitted, via facsimile, telegram or telex to the
Exchange Agent as set forth below. All capitalized terms used herein but not
otherwise defined herein shall have the meanings ascribed to them in the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein)
dated._______ __, 1997 of the Company.
To:
AMERICAN SECURITIES TRANSFER AND TRUST, INC., EXCHANGE AGENT
<TABLE>
<S> <C> <C>
By Facsimile Transmission
By Mail (for Eligible Institutions Only) By Hand Delivery or Overnight
1825 Lawrence Street, Suite 444 (303) 298 5380 Delivery
Denver, Colorado 80202 For Confirmation of 1825 Lawrence Street, Suite 444
Attn: Corporate Trust Operations Facsimile Transmission Denver, Colorado 80202
(303) 298 5370 Attn: Corporate Trust Operations
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OR TELEX, OTHER THAN AS
SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature
on the Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., DALLAS TIME,
ON FRIDAY ________ __, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF PREFERRED STOCK MAY BE WITHDRAWN AT ANY TIME
PRIOR TO THE EXPIRATION DATE.
<PAGE> 2
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tender(s) to the Company, upon the terms and
subject to the conditions set forth in the Proxy Statement/Prospectus (and the
Offer to Exchange contained therein) and the related Letter of Transmittal,
receipt of both of which is hereby acknowledged, the number of shares of
Preferred Stock set forth below, pursuant to the guaranteed delivery procedures
set forth in the Proxy Statement/Prospectus (and the Offer to Exchange
contained therein) under the heading "The Exchange Offer--Procedures for
Tendering--Guaranteed Delivery."
All authority herein conferred or agreed to be conferred by this
Notice of Guaranteed Delivery shall survive the death or incapacity of the
undersigned and every obligation of the undersigned under this Notice of
Guaranteed Delivery shall be binding upon the heirs, personal representatives,
executors, administrators, successors, assigns, trustees in bankruptcy and
other legal representatives of the undersigned.
PLEASE SIGN AND COMPLETE
<TABLE>
<S> <C>
Number of Shares of 9%/7% Convertible Signature(s) of Registered Holder(s) of
Preferred Stock or 12% Senior Convertible Authorized Signatory
Preferred Stock Tendered
------------------------------------
----------------------------------------- ------------------------------------
Certificate No(s). of 9%/7% Convertible Name(s) of Registered Holders
Preferred Stock or 12% Senior Convertible
Preferred Stock
(if available) ------------------------------------
------------------------------------
----------------------------------------- ------------------------------------
----------------------------------------- Address(es)
Date ------------------------
------------------------------- Social Security or Taxpayer
Identification No.
------------------------------------
Area Code and Telephone No.
------------------------------------
If Preferred Stock will be delivered by
book-entry transfer, check the appropriate
box below
[__] Depository Trust Company
[__] Philadelphia Depository Trust
Company
Account No.
------------------------
</TABLE>
<PAGE> 3
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Preferred Stock exactly as their name(s) appear(s) on the
certificates representing such Preferred Stock or on a security position
listing as the owner(s) of the Preferred Stock, or by person(s) authorized to
become registered holder(s) by endorsements and documents transmitted with this
Notice of Guaranteed Delivery. If signature is by a trustee, guardian,
attorney-in-fact, officer of a corporation, executor, administrator, agent or
other representative, such person must provide the following information.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
Name(s):
---------------------------------------------------------------------
Capacity:
--------------------------------------------------------------------
Address(es):
-----------------------------------------------------------------
Do not send certificates representing shares of Preferred Stock with
this form. Certificates representing shares of Preferred Stock should be sent
to the Exchange Agent, together with a properly completed and validly executed
Letter of Transmittal.
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or a correspondent in the
United States or another "Eligible Guarantor Institution" as defined in Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby
guarantees that, within three NASDAQ National Market trading days from the
date of this Notice of Guaranteed Delivery, a properly completed and validly
executed Letter of Transmittal (or a facsimile thereof), together with
Preferred Stock tendered hereby in proper form for transfer (or confirmation of
the book-entry transfer of such Preferred Stock into the Exchange Agent's
account at the applicable Depository Institution, pursuant to the procedure for
book-entry transfer set forth in the Proxy Statement/Prospectus (and the Offer
to Exchange contained therein) under the heading "The Exchange
Offer--Procedures for Tendering--Book-Entry Transfer"), and all other required
documents will be deposited by the undersigned with the Exchange Agent at one
of its addresses set forth above.
Name of Firm: Name:
---------------------- --------------------------------
Address: Title:
--------------------------- -------------------------------
Area Code and Telephone No.:
-------------------------------------
- ----------------------------------- Date:
--------------------------------
City State Zip Code
- -----------------------------------
Authorized Signature
NOTE: DO NOT SEND CERTIFICATES REPRESENTING SHARES OF PREFERRED STOCK WITH
THIS FORM. ACTUAL SURRENDER OF PREFERRED STOCK MUST BE MADE PURSUANT
TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND VALIDLY EXECUTED
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE> 4
INSTRUCTIONS
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. The Exchange
Agent must receive at one of its addresses set forth on the cover hereof prior
to the Expiration Date a properly completed and duly executed Notice of
Guaranteed Delivery that (i) contains a signature guaranteed by an Eligible
Institution in the form set forth in such Notice of Guaranteed Delivery, (ii)
sets forth the name and address of the holder of Preferred Stock and the amount
of Preferred Stock tendered, (iii) states that the tender is being made thereby
and (iv) guarantees within three NASDAQ National Market trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, together with the Preferred Stock and any required
signature guarantees and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent. The method of delivery of this Notice of Guaranteed Delivery and all
other required documents to the Exchange Agent is at the election and risk of
the holder, but, except as otherwise provided below, the delivery will be
deemed made only when actually received by the Exchange Agent. If such
delivery is by mail, it is recommended that the holder use properly insured,
registered mail with return receipt requested. For a full description of the
guaranteed delivery procedures, see the Proxy Statement/Prospectus (and the
Offer to Exchange contained therein) under the heading "The Exchange
Offer--Procedures for Tendering--Guaranteed Delivery." In all cases,
sufficient time should be allowed to assure timely delivery to the Exchange
Agent prior to the Expiration Date, as applicable.
2. SIGNATURE ON THIS NOTICE OF GUARANTEED DELIVERY; GUARANTEE OF
SIGNATURES. If this Notice of Guaranteed Delivery is signed by the registered
holder(s) of the Preferred Stock referred to herein, the signature must
correspond with the name(s) as written on the face of such Preferred Stock
without alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by a person other than
the registered holder(s) of any Preferred Stock listed, this Notice of
Guaranteed Delivery must be accompanied by an appropriate instrument or
instruments of transfer or exchange from the registered holder (with signatures
on such instrument or instruments guaranteed by an Eligible Institution) signed
as the name of the registered holder(s) appear(s) on the face of such Preferred
Stock without alteration, enlargement or any change whatsoever.
If this Notice of Guaranteed Delivery is signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
person should so indicate when signing, and proper evidence satisfactory to the
Company of their authority so to act must be submitted.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions
relating to the Exchange Offer or the procedure for exchanging, as well as
requests for assistance or for additional copies of the Proxy
Statement/Prospectus and the Letter of Transmittal, may be directed to the
Company at the address set forth in the Proxy Statement/Prospectus.
<PAGE> 1
Exhibit 99.4
SEARCH FINANCIAL SERVICES INC.
OFFER TO EXCHANGE 9%/7% CONVERTIBLE PREFERRED STOCK AND 12% SENIOR
CONVERTIBLE PREFERRED STOCK FOR SHARES
OF SEARCH FINANCIAL SERVICES INC.
COMMON STOCK
CUSIP NO.812209203
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., DALLAS, TEXAS TIME, ON FRIDAY,
___________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
TENDERS OF 9%/7% CONVERTIBLE PREFERRED STOCK
AND 12% SENIOR CONVERTIBLE PREFERRED STOCK
MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
_______ __, 1997
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We are enclosing herewith the material listed below relating to the
offer to exchange (the "Exchange Offer") by Search Financial Services Inc. (the
"Company") each share of its 9%/7% Convertible Preferred Stock and 12% Senior
Convertible Preferred Stock (together collectively referred to as the
"Preferred Stock") for four shares of the Company's Common Stock, $.01 par
value (the "Exchange Consideration"). Consummation of the Exchange Offer is
subject to, among other things, satisfaction of the conditions set forth in the
Proxy Statement/Prospectus (and the Offer to Exchange contained therein)
referred to below under the heading "The Exchange Offer--Conditions of the
Offer."
We are asking you to contact your clients for whom you hold Preferred
Stock registered in your name or in the name of your nominee. In addition, we
are asking you to contact your clients who, to your knowledge, hold Preferred
Stock registered in their own name.
Enclosed for your information and use are copies of the following
documents:
1. The Company's Proxy Statement/Prospectus (and the Offer to
Exchange contained therein) dated _______ __, 1997;
2. A YELLOW Letter of Transmittal for your use in connection with
the tender of Preferred Stock and for the information of your clients;
3. A BLUE form of letter that may be sent to your clients for
whose accounts you hold Preferred Stock registered in your name or the name of
your nominee, with space provided for obtaining the clients' instructions with
regard to the Exchange Offer;
4. A GREEN form of Notice of Guaranteed Delivery;
5. Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9; and
6. A return envelope addressed to the Exchange Agent.
WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE
NOTE THAT THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., DALLAS, TEXAS TIME, ON
FRIDAY,
<PAGE> 2
_______ ___, 1998 UNLESS EXTENDED (THE "EXPIRATION DATE"). PREFERRED STOCK
TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE
PROCEDURES DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS (AND THE OFFER TO
EXCHANGE CONTAINED THEREIN) AT ANY TIME PRIOR TO THE EXPIRATION DATE.
In all cases, the Exchange Consideration will be issued for Preferred
Stock for exchange pursuant to the Exchange Offer only after timely receipt by
the Exchange Agent of such Preferred Stock (or confirmation of book-entry
transfer of such Preferred Stock into the Exchange Agent's account at one of
the Depository Institutions (as defined in the Proxy Statement/Prospectus and
the Offer to Exchange contained therein), a Letter of Transmittal (or facsimile
thereof), properly completed and validly executed, and any other required
documents.
If holders of Preferred Stock wish to tender, but it is impracticable
for them to forward their Preferred Stock or other required documents prior to
the Expiration Date, a tender may be effected by following the guaranteed
delivery procedures described in the Proxy Statement/Prospectus (and the Offer
to Exchange contained therein) under the heading "The Exchange
Offer--Procedures for Tendering--Guaranteed Delivery."
Procedures for tendering Preferred Stock are set forth in the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein) under the
caption "The Exchange Offer--Procedures for Tendering." Holders of Preferred
Stock who wish to tender their Preferred Stock must use either the Letter of
Transmittal (the "Letter of Transmittal") distributed with the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein ) or a
facsimile thereof. In addition, holders of Preferred Stock who are following
the procedures for guaranteed delivery set forth in the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein) must use the
Notice of Guaranteed Delivery distributed with the Proxy Statement/Prospectus.
The Proxy Statement/Prospectus also includes proposals to amend the
Company's Restated Certificate of Incorporation, providing for the
reclassifications and conversions (the "Reclassifications") of each outstanding
share of Preferred Stock into four shares of Common Stock of the Company. The
procedures contained in the Letter of Transmittal for tendering shares of
Preferred Stock shall also be applicable if the Reclassifications are effected.
The completion of the Letter of Transmittal and delivery of certificates
evidencing shares of Preferred Stock pursuant to the instructions contained in
the Letter of Transmittal shall also be deemed to be a surrender of such shares
of Preferred Stock for purposes of the Reclassifications.
The Company will reimburse you for customary mailing and handling
expenses incurred by you in forwarding any of the enclosed materials to your
clients. The Company will pay or cause to be paid any transfer taxes payable
with respect to the transfer of Preferred Stock to it, except as otherwise
provided in the Letter of Transmittal.
The Company will also pay a solicitation fee to any licensed
broker/dealers in connection with the solicitation of tenders of Preferred
Stock pursuant to the Proxy Statement/Prospectus (and the Offer to Exchange
contained therein).
Any inquiries you may have with respect to the Exchange Offer should
be addressed to, and additional copies of the enclosed materials may be
obtained from, the Company at its address and telephone number set forth on the
back cover page of the Proxy Statement/Prospectus.
Very truly yours,
-------------------------------------
Search Financial Services Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON THE AGENT OF THE COMPANY, THE EXCHANGE AGENT, OR ANY AFFILIATE
OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR TO
MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE
OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
<PAGE> 1
Exhibit 99.5
SEARCH FINANCIAL SERVICES INC.
OFFER TO EXCHANGE 9%/7% CONVERTIBLE
PREFERRED STOCK AND 12% SENIOR CONVERTIBLE PREFERRED STOCK
FOR SHARES OF
SEARCH FINANCIAL SERVICES INC.
COMMON STOCK
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., DALLAS, TEXAS TIME, ON FRIDAY,
______________, 1998, UNLESS EXTENDED (THE
"EXPIRATION DATE").
TENDERS OF 9%/7% CONVERTIBLE PREFERRED STOCK
AND 12% SENIOR CONVERTIBLE PREFERRED STOCK
MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
To Our Clients:
Enclosed for your consideration is the Proxy Statement/Prospectus (and
the Offer to Exchange contained therein) dated ____________, 1997, and a
related form of Letter of Transmittal and instructions thereto (the "Letter of
Transmittal") relating to the offer to exchange (the "Exchange Offer") by
Search Financial Services Inc. (the "Company") each share of its 9%/7%
Convertible Preferred Stock and 12% Senior Convertible Preferred Stock
(together collectively referred to as the "Preferred Stock") into four shares
of the Company's Common Stock, $.01 par value (collectively, the "Exchange
Consideration").
Consummation of the Exchange Offer is subject to, among other things,
satisfaction of the conditions set forth in the Proxy Statement/Prospectus (and
the Offer to Exchange contained therein) under the heading "The Exchange
Offer--Conditions of the Offer."
WE ARE THE REGISTERED HOLDER OF SHARES OF PREFERRED STOCK HELD BY US
FOR YOUR ACCOUNT. A TENDER OF ANY SUCH SHARES OF PREFERRED STOCK CAN BE MADE
ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE
[BLUE] LETTER OF TRANSMITTAL (THE "LETTER OF TRANSMITTAL") IS FURNISHED TO YOU
FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER PREFERRED STOCK
HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to
tender any or all of the Preferred Stock held by us for your account pursuant
to the terms and conditions set forth in the Proxy Statement/Prospectus (and
the Offer to Exchange contained therein) and the Letter of Transmittal. We
urge you to read the Proxy Statement/Prospectus (and the Offer to Exchange
contained therein) and the Letter of Transmittal carefully before instructing
us to tender your Preferred Stock.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Preferred Stock on your behalf in accordance with
the provisions of the Exchange Offer. The Exchange Offer will expire at 5:00
p.m., Dallas, Texas time, on Friday, ____________, 1998, unless extended.
Preferred Stock tendered pursuant to the Exchange Offer may be withdrawn,
subject to the procedures described in the Proxy Statement/Prospectus (and the
Offer to Exchange contained therein), at any time prior to the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for all outstanding Preferred Stock.
<PAGE> 2
2. Consummation of the Exchange Offer is subject to, among other
things, satisfaction of the conditions set forth in the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein) under the
heading "The Exchange Offer--Conditions of the Offer."
3. Any transfer taxes incident to the transfer of Preferred Stock
from the tendering holder to the Company will be paid by the Company, except as
provided in the Proxy Statement/Prospectus (and the Offer to Exchange contained
therein) and the instructions to the Letter of Transmittal.
If you wish to have us tender any or all of the shares of Preferred
Stock pursuant to the Proxy Statement/Prospectus (and the Offer to Exchange
contained therein) held by us for your account, please so instruct us by
completing, executing and returning to us the instruction form that follows.
INSTRUCTIONS REGARDING THE PROXY STATEMENT/PROSPECTUS
(AND THE OFFER TO EXCHANGE CONTAINED THEREIN)
WITH RESPECT TO THE PREFERRED STOCK
OF SEARCH FINANCIAL SERVICES INC.
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer.
This will instruct you whether to tender the principal amount of
Preferred Stock indicated below held by you for the account of the undersigned
pursuant to the terms of and conditions set forth in the Proxy
Statement/Prospectus (and the Offer to Exchange contained therein) and the
Letter of Transmittal.
Box 1 [__] Please tender the 9%/7% Convertible Preferred Stock and/or 12%
Senior Convertible Preferred Stock held by you for my account.
Box 2 [__] Please do not tender any 9%/7% Convertible Preferred Stock or 12%
Senior Convertible Preferred Stock held by you for my account.
Date: ___________________________, 1998
Number of shares of 9%/7% Convertible Preferred Stock to be Tendered:
$_____________*
Number of shares of 12% Senior Convertible Preferred Stock to be Tendered.
$____________*
SIGN HERE
Signature(s)
----------------------------------------------------------------
Please print name(s) here
---------------------------------------------------
Please type or print address
------------------------------------------------
Area Code and Telephone Number
----------------------------------------------
Taxpayer Identification or Social Security Number
---------------------------
My Account Number With You
---------------------------------------------------
* Unless otherwise indicated, signature(s) hereon by beneficial owner(s)
shall constitute an instruction to the nominee to tender Preferred
Stock of such beneficial owner(s).
<PAGE> 1
EXHIBIT 99.6
SEARCH FINANCIAL SERVICES INC.
600 North Pearl Street, Suite 2500
Dallas, Texas 75201
(214) 965-6000
Dear Stockholder:
Over the last two and a half years, we have been REBUILDING Search,
and you have supported our efforts. Now, we are asking for your support in
RESHAPING Search's capital structure. We believe this reshaping is necessary
to continue building Search and achieving earnings to the common stockholder.
This reshaping involves proposals to issue Common Stock for the purpose of
reclassifying or converting as much as possible of the outstanding Preferred
Stock into Common Stock.
The documents accompanying this letter are very important. They are
also very lengthy and complex. I will put in "plain English" what I believe to
be the essence of the proposals. As previously communicated to you, the levels
of Preferred Stock and associated dividends have been a significant impediment
to our efforts to obtain additional funding and capital. Therefore, we need
stockholder approval of the following Proposals: 1) Amendment of the 9%/7%
Preferred Stock terms to reclassify and convert each outstanding share of 9%/7%
Preferred Stock into four shares of Common Stock, and 2) Amendment of the 12%
Preferred Stock terms to reclassify and convert each outstanding share of 12%
Preferred Stock into four shares of Common Stock. In addition, in case
Proposals 1 and 2 are not approved, we are requesting stockholder approval of a
third Proposal: 3) The issuance of shares of Common Stock pursuant to Search's
offer to exchange (the "Exchange Offer") each outstanding share of 9%/7%
Preferred Stock and 12% Preferred Stock into four shares of Common Stock. The
Exchange Offer is conditioned upon at least 50% of the Preferred Stock being
tendered for exchange.
MANAGEMENT AND THE BOARD OF DIRECTORS ARE CONVINCED THAT THE PREFERRED
STOCK AMENDMENTS AND THE EXCHANGE OFFER ARE IMPORTANT PARTS OF SEARCH'S LONG
TERM STRATEGY TO IMPROVE OUR FINANCIAL STRENGTH AND MEET OUR GROWTH OBJECTIVES,
EVEN THOUGH THERE WILL BE AN INCREASED NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING AFTER THE TRANSACTION. By eliminating or reducing the number of
outstanding shares of Preferred Stock, we will be removing a significant
impediment to our ability to obtain additional funding and continue growing the
Company. Although there are no guarantees that we will be successful in
obtaining additional funding, we do believe that our chances will be greatly
enhanced. Also, by eliminating or reducing the amount of Preferred Stock
outstanding, the book value and earnings per share of Common Stock will
increase, which we believe will make Search more attractive to potential
lenders and investors.
This package contains three separate but related documents: (A) the
Proxy Statement/ Prospectus bound together with this letter, (B) a proxy card,
and (C) a separate Letter of Transmittal. The Proxy Statement/Prospectus
provides information for voting on the proposals as well as details of the
terms of the Exchange Offer. The proxy card is how you vote on the Proposals.
The Letter of Transmittal is necessary to tender Preferred Stock pursuant to
the Exchange Offer.
ALL STOCKHOLDERS ARE REQUESTED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY CARD AS SOON AS POSSIBLE SO IT IS RECEIVED BY ___________________, 1998.
If we receive the required affirmative votes on Proposals 1 and 2,
then 100% OF THE PREFERRED STOCK WILL BE CONVERTED AND EXCHANGED FOR COMMON
STOCK and it will not be necessary to conclude the Exchange Offer. In my
opinion this would be the best case scenario. Again, in case Proposals 1 and 2
are not approved, we are requesting that you vote to approve Proposal 3 which
will allow Search to issue Common Stock to those preferred stockholders who
voluntarily tender their shares pursuant to the Exchange Offer, with a minimum
of 50% exchanging in order to be effective.
PREFERRED STOCKHOLDERS WHO ELECT TO EXCHANGE THEIR PREFERRED STOCK ARE
REQUESTED TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED LETTER OF
TRANSMITTAL.
<PAGE> 2
Attached is a series of questions that I anticipate many of you will
have regarding these proposals, with answers. I encourage you to read the
questions and answers, as well as the Proxy Statement/Prospectus, and to return
your proxy card and tender your Preferred Stock as soon as possible. Your vote
is very important regardless of the number of shares you own. You are also
cordially invited to attend Search's Special Meeting of Stockholders to be held
on ________________, 1998, at Search's office located at the above address at
10:00 a.m. local time. I look forward to seeing you at the Special Meeting.
Sincerely,
George C. Evans
Chairman of the Board, President
and Chief Executive Officer
________________, 1997
