-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OvE0ldjEMwRkVH+kOM0n5QDkJkxjPSRn4ZBHZJYQmzw5tmvkr0cPU+VkFndMlIzE RB/0uR+vg+5s7AhaHTv7yA== 0000950129-97-002625.txt : 19970630 0000950129-97-002625.hdr.sgml : 19970630 ACCESSION NUMBER: 0000950129-97-002625 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19970627 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEARCH FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000318672 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 411356819 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30275 FILM NUMBER: 97632060 BUSINESS ADDRESS: STREET 1: 600 N PEARL STREET STREET 2: SUITE 2500 CITY: DALLAS STATE: TX ZIP: 75201-2899 BUSINESS PHONE: 2149656000 MAIL ADDRESS: STREET 1: 600 N PEARL STREET STREET 2: SUITE 2500 CITY: DALLAS STATE: TX ZIP: 75201-2899 FORMER COMPANY: FORMER CONFORMED NAME: SEARCH CAPITAL GROUP INC DATE OF NAME CHANGE: 19930910 FORMER COMPANY: FORMER CONFORMED NAME: SEARCH NATURAL RESOURCES INC DATE OF NAME CHANGE: 19920703 S-4 1 FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997 REGISTRATION NO. 333- ------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 SEARCH FINANCIAL SERVICES INC. (FORMERLY KNOWN AS SEARCH CAPITAL GROUP, INC.) (Exact name of registrant as specified in its charter) DELAWARE 6141 41-1356819 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
ELLIS A. REGENBOGEN, ESQ. EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL 600 NORTH PEARL STREET SEARCH FINANCIAL SERVICES INC. SUITE 2500 600 NORTH PEARL STREET, SUITE 2500 DALLAS, TEXAS 75201 DALLAS, TEXAS 75201 (214) 965-6000 (214) 965-6000 (Address, including zip code and telephone (Name, address, including ZIP code and number, including area code, of telephone number, including area code, registrant's principal executive offices) of agent for service)
---------------- With copies to: DARYL B. ROBERTSON, ESQ. ROBERT D. DRINKWATER, ESQ. BRACEWELL & PATTERSON, L.L.P. BRUNINI, GRANTHAM, GROWER & HEWES, PLLC 500 NORTH AKARD STREET 1400 TRUSTMARK BUILDING SUITE 4000 248 EAST CAPITOL STREET DALLAS, TEXAS 75201 JACKSON, MISSISSIPPI 39205 (214) 740-4000 (601) 948-3101 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AT THE EFFECTIVE TIME OF THE PROPOSED MERGER (THE "MERGER") OF A WHOLLY OWNED SUBSIDIARY OF SEARCH FINANCIAL SERVICES INC. ("SEARCH") WITH AND INTO MS FINANCIAL, INC. ("MSF"), AS DESCRIBED IN THE AGREEMENT AND PLAN OF MERGER, DATED AS OF FEBRUARY 7, 1997 (THE "MERGER AGREEMENT"), ATTACHED AS ANNEX A TO THE JOINT PROXY STATEMENT/PROSPECTUS FORMING A PART OF THIS REGISTRATION STATEMENT, WHICH SHALL OCCUR AS PROMPTLY AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE AND THE SATISFACTION OF ALL CONDITIONS TO THE CLOSING OF THE MERGER. ----------- If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] ----------- CALCULATION OF REGISTRATION FEE
=============================================================================================================================== Proposed Maximum Proposed Maximum Title of Securities Amount To Be Offering Price Aggregate Offering Amount of To Be Registered Registered Per Unit Price Registration Fee - ----------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value per 3,859,474 (2) $3.16723 (3) $12,223,840 (3) $4,190.06 (5) share (1) 337,550 (4) $4.75 (4) $1,603,362 (4) ===============================================================================================================================
(1) This Registration Statement relates to securities of the Registrant issuable to holders of Common Stock and options to purchase Common Stock of MS Financial, Inc., a Delaware corporation ("MSF"), in connection with the proposed merger of a wholly-owned subsidiary of the Registrant with and into MSF. (2) Represents the maximum number of shares of Common Stock expected to be issued in connection with the merger described herein. (3) Estimated solely for the purpose of calculating the registration fee under Rule 457(f)(1) based on the average of the high and low prices reported on The Nasdaq National Market of $1.171875 for the common stock of MSF on June 23, 1997. (4) Represents the maximum number of shares of Common Stock that may be issued upon the exercise of outstanding options held by certain MSF existing and former officers and directors and estimates of offering prices based on the average of the high and low price reported on The Nasdaq National Market of $4.75 for the common stock of Search on June 20, 1997 for purposes of calculating the registration fee under Rule 457(h)(1). (5) Pursuant to Rule 457(b), the registration fee is reduced by the $3,259.35 paid on March 13, 1997, upon the filing under the Securities Exchange Act of 1934 of preliminary copies of the proxy materials for the Registrant and MSF included herein. Therefore, the registration fee payable upon the filing of this Registration Statement is $930.71. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN FORM S-4 PROSPECTUS (INFORMATION ABOUT THE TRANSACTION) 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus................................ Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.................................................... Available Information; Incorporation of Certain Documents by Reference; Table of Contents 3 Risk Factors, Ratio of Earnings to Fixed Charges and Other Information......................................... Summary; Risk Factors; Selected Historical and Pro Forma Consolidated Financial Information; Comparative Per Share Data; Comparative Market Price Data; Pro Forma Combined Condensed Financial Information; The MSF Special Meeting--Record Date Voting Rights; The Merger--Certain Federal Income Tax Consequences; --Regulatory Approvals; --Federal Securities Law Compliance; --Absence of Dissenters' Rights 4. Terms of the Transaction...................................... Summary; The Merger; The Merger Agreement; The Stockholders Agreement; Description of Search Capital Stock; Comparison of the Rights of Search Common Stock and Holders of MSF Common Stock 5 Pro Forma Financial Information............................... Summary; Pro Forma Combined Condensed Financial Information 6. Material Contacts with the Company Being Acquired...................................................... The Merger; The Merger Agreement; The Stockholders Agreement 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters................. Not Applicable 8. Interests of Named Experts and Counsel........................ Legal Matters; Experts 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................ Not Applicable (INFORMATION ABOUT THE REGISTRANT) 10. Information with Respect to S-3 Registrants................... Not Applicable 11. Incorporation of Certain Information by Reference..................................................... Not Applicable 12. Information with Respect to S-2 or S-3 Registrants................................................... Incorporation of Certain Documents by Reference; Summary; Risk Factors; The Merger; The Merger Agreement; The Stockholders Agreement; Description of Search Capital Stock; Search Financial Services Inc.; Consolidated Financial Statements of Search
2 3 13. Incorporation of Certain Information by Reference..................................................... Incorporation of Certain Documents by Reference 14. Information with Respect to Registrants Other than S-2 or S-3 Registrants................................... Not Applicable (INFORMATION ABOUT THE COMPANY BEING ACQUIRED) 15. Information with Respect to S-3 Companies..................... Not Applicable 16. Information with Respect to S-2 or S-3 Companies..................................................... Not Applicable 17. Information with Respect to Companies Other than S-2 or S-3 Companies..................................... Summary; Selected Historical and Pro Forma Financial and Operating Data; Comparative Market Price Data; The Special Meetings; Pro Forma Combined Condensed Financial Information; MS Financial, Inc.; Consolidated Financial Statements of MSF (VOTING AND MANAGEMENT INFORMATION) 18. Information if Proxies, Consents or Authorizations Are to be Solicited............................................ Incorporation of Certain Documents by Reference; Summary; The Special Meetings; The Merger--Interests of Certain Persons in the Merger; --Absence of Dissenters' Rights; MSF--Management; --Director and Executive Compensation; --Security Ownership of Certain Beneficial Owners and Management; Description of Search Capital Stock 19. Information if Proxies, Consents or Authorizations Are not to be Solicited or in an Exchange Offer............... Not Applicable
3 4 MS FINANCIAL, INC. 715 S. PEAR ORCHARD ROAD, SUITE 300 RIDGELAND, MS 39157 (601) 978-6737 June 27, 1997 Dear Stockholder: A Special Meeting of Stockholders of MS Financial, Inc. ("MSF") will be held at the Le Meridien Hotel located at 650 North Pearl Street, Dallas, Texas on Monday, July 28, 1997 at 10:00 a.m., local time. At the Special Meeting, you will be asked to consider and vote upon a proposal (the "Merger Proposal") to adopt the Agreement and Plan of Merger, as amended (the "Merger Agreement"), providing for the merger (the "Merger") of a wholly-owned subsidiary of Search Financial Services Inc. ("Search") with and into MSF. Pursuant to the Merger Agreement, among other things, each share of common stock, par value $.001 per share ("MSF Common Stock"), of MSF outstanding at the effective time of the Merger will be converted into the right to receive a fraction (the "Exchange Ratio") of a share of common stock, par value $0.01 per share, of Search ("Search Common Stock") based on the average closing sales price per share of Search Common Stock for the 10 trading days ending on the fifth business day before the Special Meeting (the "Average Search Trading Price"). The Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount") divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28. As a result of the Merger, MSF will become a wholly-owned subsidiary of Search and the stockholders of MSF will become stockholders of Search. Bear, Stearns & Co. Inc., the investment banking firm retained by the MSF Board of Directors to act as its financial advisor in connection with the Merger, has rendered its opinion to the effect that the Merger is fair to the public stockholders of MSF from a financial point of view. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE TRANSACTIONS RELATED THERETO AND HAS DETERMINED THAT THEY ARE IN THE BEST INTERESTS OF MSF AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL. In the materials accompanying this letter, you will find a Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken by MSF stockholders at the Special Meeting and a proxy card. The Joint Proxy Statement/Prospectus more fully describes the proposed Merger. ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY. Sincerely, James B. Stuart, Jr. Chairman of the Board 5 SEARCH FINANCIAL SERVICES INC. 600 NORTH PEARL STREET, SUITE 2500 DALLAS, TX 75201 (214) 965-6000 June 27, 1997 Dear Stockholder: A Special Meeting of Stockholders of Search Financial Services Inc. ("Search") will be held at the offices of Search located at 600 North Pearl Street, Dallas, Texas on Monday, July 28, 1997 at 10:00 a.m., local time. At the Special Meeting, you will be asked to consider and vote upon a proposal (the "Merger Proposal") to adopt the Agreement and Plan of Merger, as amended (the "Merger Agreement"), providing for the merger (the "Merger") of a wholly-owned subsidiary of Search with and into MS Financial, Inc. ("MSF"). Pursuant to the Merger Agreement, among other things, each share of common stock, par value $.001 per share ("MSF Common Stock"), of MSF outstanding at the effective time of the Merger will be converted into the right to receive a fraction (the "Exchange Ratio") of a share of common stock, par value $.01 per share, of Search ("Search Common Stock") based on the average closing sales price per share of Search Common Stock for the 10 trading days ending on the fifth business day before the special meeting of MSF's stockholders to be held to consider the Merger Proposal (the "Average Search Trading Price"). The Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount") divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28. The Merger Agreement also provides that all outstanding options to purchase shares of MSF Common Stock will be assumed by Search and become options to purchase Search Common Stock. As a result of the Merger, MSF will become a wholly-owned subsidiary of Search, and the stockholders of MSF will become stockholders of Search. Alex. Brown & Sons Incorporated, the investment banking firm retained by the Search Board of Directors to act as its financial advisor in connection with the Merger, has rendered its opinion to the effect that the Exchange Ratio is fair to Search from a financial point of view. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE TRANSACTIONS RELATED THERETO AND HAS DETERMINED THAT THEY ARE IN THE BEST INTERESTS OF SEARCH AND ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL. In the materials accompanying this letter, you will find a Notice of Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be taken by Search stockholders at the Special Meeting and a proxy card. The Joint Proxy Statement/Prospectus more fully describes the proposed Merger. ALL STOCKHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. HOWEVER, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL MEETING. Sincerely, George C. Evans Chairman of the Board and Chief Executive Officer 6 MS FINANCIAL, INC. 715 S. PEAR ORCHARD ROAD, SUITE 300 RIDGELAND, MS 39157 (601) 978-6737 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON MONDAY, JULY 28, 1997 Notice is hereby given that a Special Meeting of Stockholders of MS Financial, Inc. ("MSF") will be held on Monday, July 28, 1997, at 10:00 a.m., local time, at the Le Meridien Hotel located at 650 North Pearl Street, Dallas, Texas for the following purposes: (1) To consider and vote upon a proposal (the "Merger Proposal") to approve and adopt the Agreement and Plan of Merger, dated as of February 7, 1997, as amended ("Merger Agreement"), among MSF, Search Financial Services Inc. ("Search"), and Search Capital Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Search ("Merger Sub"), and the transactions contemplated thereby, pursuant to which Merger Agreement, among other things, (i) Merger Sub will be merged with and into MSF, following which MSF will become a wholly-owned subsidiary of Search (the "Merger"), (ii) as a result of the Merger, each share of common stock, par value $.001 per share, of MSF ("MSF Common Stock") outstanding at the effective time of the Merger (other than shares held in MSF's treasury or owned by Search or any subsidiary of Search or MSF) will be converted into the right to receive a fraction (the "Exchange Ratio") of a share of common stock, par value $.01 per share, of Search ("Search Common Stock") based on the average closing sales price per share of Search Common Stock for the 10 trading days ending on the fifth business day prior to the Special Meeting (the "Average Search Trading Price"), which Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount") divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28, and (iii) all outstanding options to purchase MSF Common Stock will be assumed by Search and become options to purchase Search Common Stock; and (2) To transact such other business that may properly come before the Special Meeting or any postponements or adjournments thereof. Only stockholders of record at the close of business on June 25, 1997 are entitled to notice of and to vote at the Special Meeting, or at any postponements or adjournments thereof. The affirmative vote of the holders of a majority of the outstanding shares of MSF Common Stock is required for the approval of the Merger Proposal. Under the Delaware General Corporation Law, stockholders of MSF will not have the right to assert dissenters rights in connection with the proposed Merger. See "The Merger--Absence of Dissenters' Rights" in the Joint Proxy Statement/Prospectus accompanying this notice. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED. Ridgeland, Mississippi June 27, 1997 BY ORDER OF THE BOARD OF DIRECTORS, James B. Stuart, Jr. Chairman of the Board PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. 7 SEARCH FINANCIAL SERVICES INC. 600 NORTH PEARL STREET, SUITE 2500 DALLAS, TX 75201 (214) 965-6000 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON MONDAY, JULY 28, 1997 Notice is hereby given that a Special Meeting of Stockholders of Search Financial Services Inc. ("Search") will be held on Monday, July 28, 1997, at 10:00 a.m., local time, at the offices of Search located at 600 North Pearl Street, Dallas, Texas, for the following purposes: (1) To consider and vote upon a proposal (the "Merger Proposal") to approve and adopt the Agreement and Plan of Merger, dated as of February 7, 1997 ("Merger Agreement"), among Search, MS Financial, Inc., a Delaware corporation ("MSF"), and Search Capital Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Search ("Merger Sub"), and the transactions contemplated thereby, pursuant to which Merger Agreement, among other things, (i) Merger Sub will be merged with and into MSF, following which MSF will become a wholly-owned subsidiary of Search (the "Merger"), (ii) as a result of the Merger, each share of common stock, par value $.001 per share, of MSF ("MSF Common Stock") outstanding at the effective time of the Merger (other than shares held in MSF's treasury or owned by Search or any subsidiary of Search or MSF) will be converted into the right to receive a fraction (the "Exchange Ratio") of a share of common stock, par value $.01 per share, of Search ("Search Common Stock") based on the average closing sales price per share of Search Common Stock for the 10 trading days ending on the fifth business day prior to the special meeting of MSF's stockholders to be held to consider the Merger Proposal (the "Average Search Trading Price"), which Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount") divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28, and (iii) all outstanding options to purchase MSF Common Stock will be assumed by Search and become options to purchase Search Common Stock; and (2) To transact such other business that may properly come before the Special Meeting or any postponements or adjournments thereof. Only stockholders of record at the close of business on May 30, 1997 are entitled to notice of and to vote at the Special Meeting, or at any postponements or adjournments thereof. The affirmative vote of the holders of a majority of the outstanding shares of Search Common Stock, Search's 12% Senior Convertible Preferred Stock and Search's 9%/7% Convertible Preferred Stock, voting together as one class, that are represented in person or by proxy and entitled to vote at the Special Meeting is required for the approval of the Merger Proposal. Under the Delaware General Corporation Law, stockholders of Search will not have the right to assert dissenters rights in connection with the proposed Merger. See "The Merger--Absence of Dissenters' Rights" in the Joint Proxy Statement/Prospectus accompanying this notice. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF SEARCH COMMON STOCK THAT YOU OWN. WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT WITHOUT DELAY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO ADDITIONAL POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY THEN WITHDRAW YOUR PROXY AND VOTE IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS VOTED. Dallas, Texas June 27, 1997 BY ORDER OF THE BOARD OF DIRECTORS, George C. Evans Chairman of the Board and Chief Executive Officer 8 JOINT PROXY STATEMENT OF SEARCH FINANCIAL SERVICES INC. AND MS FINANCIAL, INC. SEARCH FINANCIAL SERVICES INC. PROSPECTUS This Joint Proxy Statement/Prospectus is being furnished by MS Financial, Inc., a Delaware corporation ("MSF"), and Search Financial Services Inc., a Delaware corporation ("Search"), in connection with the solicitation of proxies for use at the respective special meetings of the stockholders of MSF and Search, or at any adjournments or postponements thereof, for the purposes set forth herein. The special meeting of stockholders of MSF (the "MSF Special Meeting") will be held at 10:00 a.m., local time, on Monday, July 28, 1997, at the Le Meridien Hotel located at 650 North Pearl Street, Dallas, Texas. MSF's telephone number is (601) 978-6737. The special meeting of stockholders of Search (the "Search Special Meeting") will be held at 10:00 a.m., local time, on Monday, July 28, 1997, at the offices of Search located at 600 North Pearl Street, Dallas, Texas 75201. Search's telephone number is (214) 965-6000. Prior to May 19,1997, Search's name was "Search Capital Group, Inc." This Joint Proxy Statement/Prospectus and the respective forms of proxies are first being mailed to stockholders of MSF and Search on or about June 27, 1997. This Joint Proxy Statement/Prospectus also constitutes a prospectus of Search with respect to up to 3,859,474 shares of Search common stock, par value $0.01 per share ("Search Common Stock"), to be issued in connection with the merger (the "Merger") of Search Capital Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Search ("Merger Sub"), with and into MSF pursuant to the Agreement and Plan of Merger, dated as of February 7, 1997, as amended (the "Merger Agreement"), among Search, Merger Sub and MSF. Pursuant to the Merger Agreement, among other things, each share of common stock, par value $.001 per share ("MSF Common Stock"), of MSF outstanding at the effective time of the Merger will be converted into the right to receive a fraction (the "Exchange Ratio") of a share of Search Common Stock, based on the average closing sales price per share of Search Common Stock for the 10 trading days ending on the fifth business day before the MSF Special Meeting (the "Average Search Trading Price"). The Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount") divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28. Search and MSF will publicly announce the Exchange Ratio promptly after it is determined. Stockholders of MSF or Search may call the Secretary of MSF at (601) 978-6694 or the Investor Relations Department of Search at (800) 725-6673 for the Exchange Ratio amount beginning four business days prior to the MSF Special Meeting date. Stockholders may revoke or submit proxies by sending the revocation or proxy via facsimile to (601) 978-6601, if to MSF, or to (214) 965-6104, if to Search. Stockholders are urged to call MSF or Search at the appropriate phone number to be advised of the Exchange Ratio. THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT/ PROSPECTUS. MSF STOCKHOLDERS AND SEARCH STOCKHOLDERS ARE STRONGLY URGED TO READ AND CAREFULLY CONSIDER THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE 20. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS JUNE 27, 1997. 1 9 TABLE OF CONTENTS
Page ---- AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 NO AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 CAUTIONARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 The Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 COMPARATIVE PER SHARE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Cash Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 COMPARATIVE MARKET PRICE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 THE SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Times, Places and Dates of the Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Purpose of the MSF Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Purpose of the Search Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Record Dates; Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Proxies; Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Terms of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Prior Adjustments to Per Share Amount and Exchange Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Background of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 MSF's Reasons for the Merger; Recommendations of the MSF Board . . . . . . . . . . . . . . . . . . . . . . . 34 Opinion of MSF's Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Search's Reasons for the Merger; Recommendations of the Search Board . . . . . . . . . . . . . . . . . . . . 39 Opinion of Search Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Interests of Certain Persons in the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Certain Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Federal Securities Law Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Absence of Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Management and Operations Following the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Restructuring of MSF's Line of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Exchange of Share Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Treatment of MSF Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Business of MSF Pending the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Search Management Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Solicitation of Other Proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2 10 Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Termination; Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 THE STOCKHOLDERS AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Agreement to Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Covenants of the Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Transfer Restrictions; Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Standstill Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Indemnification; Escrow Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 DESCRIPTION OF SEARCH CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Search Authorized Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Search 9%/7% Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Search 12% Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 203 of the Delaware General Corporation Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Transfer Agent and Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 COMPARISON OF THE RIGHTS OF HOLDERS OF SEARCH COMMON STOCK AND MSF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SEARCH FINANCIAL SERVICES INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 64 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 MS FINANCIAL, INC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 76 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Principal and Other Stockholders of MSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Management of MSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
ANNEX A AGREEMENT AND PLAN OF MERGER, AS AMENDED ANNEX B OPINION OF BEAR, STEARNS & CO. INC. ANNEX C OPINION OF ALEX. BROWN & SONS INCORPORATED ANNEX D CONSOLIDATED FINANCIAL STATEMENTS OF MS FINANCIAL, INC. ANNEX E CONSOLIDATED FINANCIAL STATEMENTS OF SEARCH FINANCIAL SERVICES INC. ANNEX F SEARCH'S FORM 10-K TRANSITION REPORT (AS AMENDED) FOR THE PERIOD ENDED MARCH 31, 1996 3 11 AVAILABLE INFORMATION Search and MSF are each subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The reports, proxy statements and other information filed by Search and MSF with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material also can be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 at prescribed rates. The Commission also maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including Search and MSF. The address of such Web site is http://www.sec.gov. In addition, material filed by MSF can be inspected at the offices of the National Association of Securities Dealers, Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. Search has filed with the Commission a Registration Statement on Form S-4 (together with any amendments thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities to be issued pursuant to the Merger Agreement. This Joint Proxy Statement/Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. Statements contained in this Joint Proxy Statement/Prospectus or in any document incorporated by reference in this Joint Proxy Statement/Prospectus as to the contents of any contract or other document referred to herein or therein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or such other document, each such statement being qualified in all respects by such reference. Copies of the Registration Statement and the exhibits and schedules thereto may be obtained, upon payment of the fee prescribed by the Commission, or may be examined without charge at the public reference facilities of the Commission described above. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission by Search pursuant to the Exchange Act are incorporated by reference in this Joint Proxy Statement/Prospectus: 1. Search's Transition Report on Form 10-K (as amended) for the transition period ended March 31, 1996 ("Search's Annual Report"); 2. Search's Current Reports on Form 8-K dated August 6 (as amended), September 27, November 21 and November 25, 1996 and February 7, April 14, May 1 and May 16, 1997; 3. Search's Quarterly Reports on Form 10-Q (as amended) for the quarters ended June 30, September 30 and December 31, 1996; and 4. The description of the Search Common Stock contained in the Registration Statement on Form 8-A filed with the Commission, including any amendments or reports filed for the purpose of updating such information. This Joint Proxy Statement/Prospectus includes a copy of Search's Annual Report as Annex F. Search's Annual Report contains additional information concerning Search and its business which should be reviewed in connection with the Merger Proposal. THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS IS DELIVERED ON WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, IN THE CASE OF DOCUMENTS RELATING TO SEARCH, DIRECTED TO SEARCH FINANCIAL SERVICES INC., 600 NORTH PEARL STREET, SUITE 2500, DALLAS, TEXAS 75201 (TELEPHONE NUMBER (800) 725-6673), ATTENTION: INVESTOR RELATIONS, OR, IN THE CASE OF DOCUMENTS RELATING TO MSF, DIRECTED TO MS FINANCIAL, INC., 715 SOUTH PEAR ORCHARD ROAD, SUITE 300, RIDGELAND, MISSISSIPPI 39157 (TELEPHONE NUMBER (601) 978-6737), ATTENTION: SECRETARY. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY JULY 21, 1997. 4 12 Search has supplied all information contained in this Joint Proxy Statement/Prospectus relating to Search and its subsidiaries, and MSF has supplied all information contained in this Joint Proxy Statement/Prospectus relating to MSF and its subsidiary. Unless the context otherwise requires, "Search" refers to both Search Financial Services Inc. and its consolidated subsidiaries, and "MSF" refers to both MS Financial, Inc. and its consolidated subsidiary. NO AUTHORIZATION NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SEARCH, MSF OR ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SEARCH OR MSF SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. CAUTIONARY STATEMENT This Joint Proxy Statement/Prospectus contains certain forward looking statements, as defined in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations and business of Search following the consummation of the Merger. These forward looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, matters discussed herein under "Risk Factors" as well as the following: (1) expected cost savings from the Merger not being fully realized; (2) delinquency rates and losses with respect to MSF's loan portfolio following the Merger being greater than expected; (3) competitive pressure in the used motor vehicle receivables industry increasing significantly; (4) costs or difficulties related to the integration of the businesses of Search and MSF being greater than expected; (5) unforeseen litigation; (6) adverse changes in governmental and regulatory matters; (7) Search's ability to retain MSF's marketing representatives and dealer relationships; (8) effects from changing MSF's underwriting criteria to Search's underwriting criteria; and (9) general economic conditions, either nationally or in the states in which the combined company will be doing business, being less favorable than expected. 5 13 SUMMARY The following is a summary of certain information contained elsewhere in this Joint Proxy Statement/Prospectus. Reference is made to, and this summary is qualified in its entirety by, the more detailed information contained, or incorporated by reference, in this Joint Proxy Statement/Prospectus and the Annexes hereto. Unless otherwise defined herein, capitalized terms used in this summary have the respective meanings ascribed to them elsewhere in this Joint Proxy Statement/Prospectus. Stockholders are urged to read this Joint Proxy Statement/Prospectus and the Annexes hereto in their entirety. See "Risk Factors" for certain information that should be considered by stockholders. THE COMPANIES Search . . . . . . . . . . . Search is a financial services company specializing in the purchase and management of used motor vehicle receivables, typically those owed by consumer obligors who do not qualify for traditional financing. Search purchases its receivables either through the purchase of individual receivables from franchise and independent automobile and light duty truck dealers ("Dealers") who originate them in the sale of their vehicles or through bulk purchases of receivables from Dealers and other finance companies. The Company also engages in consumer lending activities. The principal executive offices of Search are located at 600 North Pearl Street, Suite 2500, Dallas, Texas 75201 and its telephone number is (214) 965-6000. See "Search Financial Services Inc.," Search's Annual Report attached as Annex F and Search's Consolidated Financial Statements attached as Annex E for more information regarding Search. MSF . . . . . . . . . . . . . MSF is a specialized consumer finance company engaged in the purchase and servicing of installment contracts originated by automobile dealers. MSF acquires installment contracts principally from franchise dealers in connection with their sale of used and new automobile and light duty trucks to approved non-prime consumers. MSF also generates revenue from commissions which it receives from the sale of insurance and other ancillary products sold in conjunction with the installment contracts purchased by MSF through its branch offices. The principal executive offices of MSF are located at 715 South Pear Orchard Road, Suite 300, Ridgeland, Mississippi 39157 and its telephone number is (601) 978-6737. See "MS Financial, Inc." Merger Sub . . . . . . . . . Merger Sub was recently organized by Search for the purpose of effecting the Merger. It has no material assets and has not engaged in any activities except in connection with the proposed Merger. The principal executive offices of Merger Sub are located at 600 North Pearl Street, Suite 2500, Dallas, Texas 75201 and its telephone number is (214) 965-6000. THE SPECIAL MEETINGS Times, Places and Dates of the Special Meetings . . . . . . The MSF Special Meeting will be held at 10:00 a.m., local time, on Monday, July 28, 1997 at the Le Meridien Hotel located at 650 North Pearl Street, Dallas, Texas 75201. The Search Special Meeting will be held at 10:00 a.m., local time, on Monday, July 28, 1997 at the offices of Search located at 600 North Pearl Street, Dallas, Texas 75201. See "The Special Meetings--Times, Places and Dates of Special Meetings." Purposes of the Special Meetings . . . . . . . . . . At the MSF Special Meeting and the Search Special Meeting (collectively, the "Special Meetings"), stockholders will be asked to consider and vote upon proposals to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger. A copy of the Merger Agreement is attached to this Joint Proxy Statement/Prospectus as Annex A. See "The Special Meetings--Purpose of the MSF Special Meeting" and "--Purpose of the Search Special Meeting." 6 14 Record Dates; Voting Rights . Holders of record of MSF Common Stock at the close of business on June 25, 1997 (the "MSF Record Date") will be entitled to notice of, and to vote at, the MSF Special Meeting and at any adjournment or postponement thereof. There were issued and outstanding 10,431,010 shares of MSF Common Stock as of the MSF Record Date, held by approximately 1,200 stockholders of record. Under the Delaware General Corporation Law (the "Delaware Law") and MSF's Second Amended and Restated Certificate of Incorporation, the adoption and approval of the Merger Agreement and the transactions contemplated thereby by the stockholders of MSF requires the affirmative vote of the holders of at least a majority of the outstanding shares of MSF Common Stock. As of the MSF Record Date, 8,080,421 shares of MSF Common Stock (approximately 77% of the shares of MSF Common Stock outstanding as of the MSF Record Date) were entitled to be voted by the directors and officers of MSF and their affiliates. See "The Special Meetings--Record Dates; Voting Rights." MS Diversified Corporation, MS Financial Services, Inc. and Golder Thoma Cressey Rauner Fund IV, L.P. (collectively, the "Principal Stockholders"), the holders of 8,040,000 shares of MSF Common Stock, or approximately 77% of the shares of MSF Common Stock outstanding on the MSF Record Date, have agreed to vote their shares of MSF Common Stock in favor of the Merger at the MSF Special Meeting and have granted a proxy to vote their shares to Merger Sub. When these shares of MSF Common Stock are voted at the MSF Special Meeting in favor of the adoption and approval of the Merger Agreement and the transactions contemplated thereby, the affirmative vote of holders of additional shares of MSF Common Stock will not be required to adopt and approve the Merger Agreement and the transactions contemplated thereby. See "The Stockholders Agreement." Holders of a majority of the shares of MSF Common Stock, represented in person or by proxy, will constitute a quorum at the MSF Special Meeting. Each holder will be entitled to cast one vote for each share of MSF Common Stock held. See "The Special Meetings--Record Dates; Voting Rights." Holders of record of Search Common Stock, Search's 12% Senior Convertible Preferred Stock ("Search 12% Preferred Stock") and Search's 9%/7% Convertible Preferred Stock ("Search 9%/7% Preferred Stock") at the close of business on May 30, 1997 (the "Search Record Date") will be entitled to notice of, and to vote at, the Search Special Meeting and at any adjournment or postponement thereof. There were issued and outstanding 3,016,444 shares of Search Common Stock, 50,000 shares of Search 12% Preferred Stock and 2,456,098 shares of Search 9%/7% Preferred Stock as of the Search Record Date. Under the Delaware law and Search's Amended and Restated Certificate of Incorporation, the adoption and approval of the Merger Agreement and the transactions contemplated thereby by the stockholders of Search requires the affirmative vote of the holders of at least a majority of the outstanding shares of Search Common Stock, Search 12% Preferred Stock and Search 9%/7% Preferred Stock (the "Search Capital Stock"), voting together as one class, that are represented in person or by proxy at the Search Special Meeting. As of the Search Record Date, 94,823 shares of Search Capital Stock (approximately 1.7% of the shares of Search Capital Stock outstanding as of the Search Record Date) were entitled to be voted by the directors and officers of Search and their affiliates. See "The Special Meetings--Record Dates; Voting Rights." Holders of one-half of the outstanding shares of Search Capital Stock, represented in person or by proxy, will constitute a quorum at the Search Special Meeting. Each holder will be entitled to cast one vote for each share of Search Capital Stock held. See "The Special Meetings--Record Dates; Voting Rights." 7 15 THE MERGER Terms of Merger . . . . . . . If the Merger is approved and consummated, each share of MSF Common Stock outstanding at the date and time (the "Effective Time") that the Merger becomes effective (other than shares held in MSF's treasury or owned by Search or any subsidiary of Search or MSF) will be converted into the right to receive a fraction (the "Exchange Ratio") of a share of Search Common Stock, based on the average closing sales price per share of Search Common Stock for the 10 trading days ending on the fifth business day prior to the date of the MSF Special Meeting (the "Average Search Trading Price"). The Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount") divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28. No fractional shares of Search Common Stock will be issued and cash will be paid in lieu of any such fractional shares. See "The Merger Agreement--Conversion of Shares." MSF STOCKHOLDERS SHOULD CONSIDER THAT THE EXCHANGE RATIO WILL BE FIXED ON THE FIFTH BUSINESS DAY PRIOR TO THE DATE OF THE MSF SPECIAL MEETING, BUT THE MARKET VALUE OF THE SHARES OF SEARCH COMMON STOCK THAT HOLDERS OF MSF COMMON STOCK WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE TIME BECAUSE THE MARKET PRICE OF SEARCH COMMON STOCK IS SUBJECT TO FLUCTUATION. IN ADDITION, BECAUSE OF FLUCTUATIONS IN THE MARKET PRICE OF SEARCH COMMON STOCK, THE MARKET VALUE OF SEARCH COMMON STOCK THAT HOLDERS OF MSF COMMON STOCK WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE FOLLOWING THE MERGER. Prior Adjustments to Per Share Amount and Exchange Ratio . . Under the Merger Agreement prior to its amendment on June 25, 1997, the Per Share Amount and the maximum and minimum Exchange Ratios were $2.00 and 0.46 and 0.34, respectively. The Merger Agreement required the Per Share Amount and maximum and minimum Exchange Ratios to be decreased under certain circumstances. In general, the Per Share Amount was to be decreased if the stockholders' equity shown on the unaudited financial statements of MSF for the last month (or, in certain circumstances, the second month) ending before the Effective Time, subject to certain adjustments, decreased. No adjustment would have been made if the adjusted decrease in stockholders' equity was $2.1 million or less. The maximum and minimum Exchange Ratios would have been decreased in proportion to any decrease in the Per Share Amount. See "The Merger--Prior Adjustments to Per Share Amount and Exchange Ratio." Search and MSF originally contemplated that the Effective Time would occur prior to June 30, 1997 and that the foregoing adjustments, if any, would be based on MSF's financial information as of April 30, 1997. Because of unavoidable delays, and to allow additional time for consummation of the Merger, Search and MSF agreed, on June 25, 1997, to an amendment of the Merger Agreement. Under the amendment, the outside date for consummation of the Merger was extended from June 30 to August 15, 1997, the Per Share Amount and minimum and maximum Exchange Ratios were fixed at $1.63 and 0.28 and 0.37, respectively, and the foregoing adjustment provisions of the Merger Agreement were deleted. These amounts are approximately what would have resulted under the adjustment provisions of the original, unamended Merger Agreement using financial information for MSF as of April 30, 1997. Accordingly, no further adjustments to the Per Share Amount or minimum or maximum Exchange Ratios are expected to be made prior to the Effective Time. See "The Merger--Prior Adjustments to Per Share Amount and Exchange Ratio." 8 16 MSF's Reasons for the Merger; Recommendations of the Board of Directors of MSF . . . . . After taking into consideration various factors, the MSF Board has determined that the Merger is in the best interests of MSF and its stockholders and recommends adoption and approval of the Merger Agreement and the transactions contemplated thereby. For a discussion of the factors considered by the MSF Board in reaching its decisions to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the Merger, and to recommend that the MSF stockholders vote FOR the proposal to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger, see "The Merger--MSF's Reasons for the Merger; Recommendations of the MSF Board of Directors." Search's Reasons for the Merger; Recommendations of the Board of Directors of Search . . . After taking into consideration various factors, the Search Board has determined that the Merger is in the best interests of Search and its stockholders and recommends adoption and approval of the Merger Agreement and the transactions contemplated thereby. For a discussion of the factors considered by the Search Board in reaching its decisions to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the Merger, and to recommend that the Search stockholders vote FOR the proposal to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger, see "The Merger--Search's Reasons for the Merger; Recommendations of the Search Board." Opinion of Bear, Stearns & Co. Inc. . . . . . . . . . Bear, Stearns & Co. Inc. ("Bear Stearns") has delivered its written opinion to the MSF Board to the effect that, as of the date of its opinion, the Merger is fair to the public stockholders of MSF from a financial point of view. A copy of such opinion, which sets forth the assumptions made, matters considered, and limits on the review undertaken by Bear Stearns in arriving at its opinion is attached to this Joint Proxy Statement/Prospectus as Annex B and should be read in its entirety. See "The Merger--Opinion of MSF's Financial Advisors." Bear Stearns and Search have had discussions regarding potential securitization transactions by Search in the future with Bear Stearns' assistance. Opinion of Alex. Brown & Sons Incorporated . . . . . . Alex. Brown & Sons Incorporated ("Alex. Brown") has delivered its written opinion to the Search Board to the effect that, as of the date of its opinion, the Exchange Ratio is fair to Search from a financial point of view. A copy of such opinion, which sets forth the assumptions made, matters considered, and limits on the review undertaken by Alex. Brown in arriving at its opinion is attached to this Joint Proxy Statement/Prospectus as Annex C and should be read in its entirety. See "The Merger--Opinion of Search's Financial Advisors." Interests of Certain Persons in the Merger . . . . . . . . In considering the recommendation of the MSF Board to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the Merger, MSF stockholders should be aware that the executive officers of MSF and certain members of the MSF Board have interests in the Merger that are in addition to the interests of MSF stockholders generally, and that the members of the MSF Board having such interests participated in the discussion, deliberation and voting of the MSF Board with respect to the Merger Agreement. See "The Merger--Interests of Certain Persons in the Merger." Ownership of Shares of MSF Common Stock; Election of New Search Director. Three of the directors of MSF also serve as officers of MS Diversified Corporation ("MSD"). MSD and its wholly-owned subsidiary, MS Financial Services, Inc., 9 17 collectively own 41.4% of the outstanding MSF Common Stock. Two other directors of MSF are affiliated with Golder, Thoma, Cressey, Rauner, Inc. ("Golder Thoma"). Golder Thoma's affiliate, Golder Thoma Cressey Rauner Fund IV, L.P., owns 35.7% of the outstanding MSF Common Stock. Together these five directors form a majority of the members of the MSF Board. In addition, Search has agreed that Mr. James B. Stuart, Jr., who is Chairman of MSF and President and Chief Executive Officer of MSD, will become a director of Search following the Merger. Acceleration of Options. The officers and directors of MSF hold options to purchase MSF Common Stock issued under the MSF Amended and Restated Employees' Equity Incentive Plan and the MSF Non-Employee Directors Stock Option Plan (the "MSF Plans"). As a result of the Merger and the terms of their options, at the Effective Time, all of these options will become fully exercisable, to the extent not previously exercisable, to purchase Search Common Stock. See "The Merger Agreement--Treatment of MSF Stock Options." Employment Agreements. Several of MSF's officers have employment contracts with MSF. Under the terms of each of these contracts, the officer is entitled to certain severance payments, after the Effective Time, if the officer's employment is terminated without cause, or if he resigns because there is a material reduction in the officer's salary or benefits, the officer is required to be based more than 25 miles from MSF's present executive offices, or the officer is removed, not reelected to his position with MSF or is assigned duties inconsistent with his duties, responsibilities and status with MSF. The severance payments are generally one-year's base salary. The employment contract for MSF's former Chief Executive Officer, who resigned effective February 28, 1997, provides that he will receive cash severance payments for a one-year period so long as he complies with certain noncompete covenants. MSF, with the consent of Search, has agreed that the former Chief Executive Officer may exercise certain stock options issued under one of the MSF Plans for up to one year after his resignation. Indemnification; Insurance. Under the Merger Agreement, Search has agreed that the Surviving Corporation's Certificate of Incorporation and Bylaws will be no less favorable with respect to indemnification of officers, directors, employees, fiduciaries and agents than MSF's current Second Amended and Restated Certificate of Incorporation and Bylaws. In addition, Search has agreed not to amend or repeal in any manner that would diminish their effect the provisions of the Surviving Corporation's Certificate of Incorporation and Bylaws providing for indemnification of individuals who at any time prior to the Merger were directors, officers, employees, fiduciaries or agents of MSF for a period of three years after the Merger for all matters other than this Joint Proxy Statement/Prospectus, for which the period will be four years following the Merger. Under the Merger Agreement, Search has agreed that the Surviving Corporation will use reasonable efforts, subject to certain cost limitations, to maintain in effect for three years after the Merger MSF's current directors' and officers' liability insurance coverage with respect to matters occurring prior to the Effective Time. Accounting Treatment . . . . The Merger will be accounted for by Search under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations," as amended. See "The Merger--Accounting Treatment." Certain Federal Income Tax Considerations . . . . . . . The Merger is intended to constitute a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), so that no gain or loss would be recognized by MSF stockholders with respect to the receipt of Search Common Stock in exchange for their shares of MSF Common Stock in the Merger (except with respect to any cash received in lieu of fractional shares of Search 10 18 Common Stock). Search and MSF have received an opinion of counsel to the effect that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. Under the Merger Agreement, it is a condition precedent to the obligation of each of Search and MSF to consummate the Merger that the opinion be updated as of the Effective Time. For a further discussion of certain of the federal income tax consequences of the Merger, see "The Merger--Certain Federal Income Tax Considerations." See also "The Merger Agreement--Conditions to the Merger." Absence of Dissenters' Rights . . . . . . . . . . . Neither holders of MSF Common Stock nor holders of Search Capital Stock will be entitled to dissenters' rights under the Delaware Law in connection with the Merger. See "The Merger--Absence of Dissenters' Rights." Management and Operations Following the Merger . . . . Pursuant to the Merger Agreement, upon consummation of the Merger, the officers of Merger Sub immediately prior to the Effective Time will be the initial officers of the Surviving Corporation. One MSF officer will be appointed an Executive Vice President of Search. One MSF director will be elected to the Search Board. Following the Merger, Search intends to consolidate the operations of Search and MSF that provide similar services to realize operating efficiencies and expense savings. No final determination regarding these matters has been made. Search intends to retain MSF's branch locations and operations, including the purchase of receivables for the account of MSF utilizing Search's underwriting guidelines. Following the Merger, Search will continue to review the operations of MSF to determine whether additional operating efficiencies and consolidations of operations can be implemented, including consolidation of branch office operations with facilities of Search that are located in close proximity and the consolidation of all of MSF's headquarters operations, after October 1997, with the similar operations of Search in Dallas, Texas or at other, smaller facilities in the Jackson, Mississippi area. See "The Merger--Management and Operations Following the Merger." Treatment of MSF Stock Options . . . . . . . . . . At the Effective Time, each outstanding option to purchase shares of MSF Common Stock under the MSF Plans will become fully exercisable and will be assumed by Search. Each MSF option assumed by Search under the Merger Agreement will continue to have, and be subject to, the same terms and conditions set forth in the MSF Plans immediately prior to the Effective Time, except that (i) such option will be exercisable for that number of whole shares of Search Common Stock equal to the product of the number of shares of MSF Common Stock that were purchasable under such option multiplied by the Exchange Ratio, rounded up or down to the nearest whole number of shares of Search Common Stock, and (ii) the per share exercise price for the shares of Search Common Stock issuable upon exercise of such assumed option will be equal to the quotient determined by dividing the exercise price per share of MSF Common Stock at which such option was exercisable immediately prior to the Effective Time by the Exchange Ratio, and rounding the resulting exercise price up to the nearest whole cent. See "The Merger Agreement--Treatment of MSF Stock Option." 11 19 THE MERGER AGREEMENT Surrender of Certificates . . If the Merger becomes effective, Search will mail a letter of transmittal with instructions to all holders of record of MSF Common Stock as of the Effective Time for use in surrendering their stock certificates in exchange for certificates representing Search Common Stock and a cash payment in lieu of fractional shares. Certificates should not be surrendered until the letter of transmittal is received. See "The Merger Agreement--Exchange of Share Certificates." Conditions to the Merger . . . . . . . . . . . Consummation of the Merger is subject to the satisfaction or, where legally permissible, waiver of a number of conditions, including, but not limited to (i) the adoption of the Merger Agreement by the requisite vote of the stockholders of MSF and Search, (ii) the absence of any court order or law which makes the Merger illegal or otherwise prohibits the consummation of the Merger, (iii) the continuing accuracy in all material respects of the representations and warranties made in the Merger Agreement on and as of the Effective Time, (iv) the receipt by Search of accountants' "cold comfort" letters with respect to the financial statements of MSF and its subsidiary and certain other matters, (v) the execution of amendments by MSF, Search and MSF's lenders to MSF's line of credit, and (vi) the absence of any pending or threatened litigation against Search, MSF or their respective officers or directors that could have a material adverse effect on Search or MSF. See "The Merger Agreement--Conditions to the Merger." Termination . . . . . . . . . The Merger Agreement may be terminated at any time prior to the Effective Time by mutual consent of Search and MSF, or by either party if (i) the Effective Time has not occurred by August 15, 1997, (ii) there exists any order, decree, ruling or other action prohibiting the transactions contemplated by the Merger Agreement, (iii) the other party has breached any representation, warranty, covenant or agreement in the Merger Agreement such that the related closing conditions would not be satisfied, and such breach has not been promptly cured, or (iv) the stockholders of Search or MSF fail to approve and adopt the Merger Agreement and the Merger. Search may also terminate the Merger Agreement if (i) the MSF Board withdraws, modifies or changes its recommendation of the Merger Agreement or the Merger in a manner adverse to Search or resolves to do so, (ii) the MSF Board recommends to MSF's stockholders any Business Combination Transaction (as defined in "The Merger Agreement--Termination; Amendment") or resolves to do so, (iii) a tender offer or exchange offer for 50% or more of the outstanding shares of MSF Common Stock is commenced and the MSF Board fails to recommend against the stockholders of MSF tendering their shares in such tender offer or exchange offer, or (iv) MSF files a petition for reorganization in bankruptcy or becomes the subject of an involuntary bankruptcy petition that is not rejected within 30 days. In addition, MSF may terminate the Merger Agreement if (i) the Search Board withdraws its recommendation of approval of the issuance of additional shares of Search Common Stock pursuant to the Merger or resolves to do so or (ii) in the exercise of its good faith judgment as to its fiduciary duties under the Delaware Law, the MSF Board in good faith determines, after consultation with its financial advisors and legal counsel and duly considering the written advice of such legal counsel, that termination is required by such fiduciary duties by reason of a proposal that either constitutes a Business Combination Transaction or may reasonably be expected to lead to a Business Combination Transaction. See "The Merger Agreement--Termination; Amendment." Alternative Proposal Fee; Expenses . . . . . . . . . . In connection with termination of the Merger Agreement, upon the occurrence of certain events, (i) MSF would be required to pay Search a fee of $700,000 (which amount is inclusive of all expenses incurred by Search related to the Merger) and 12 20 (ii) Search would be required to pay MSF a fee of $250,000 (which amount is inclusive of all expenses incurred by MSF related to Merger). Upon the occurrence of certain other events, Search or MSF would be required to pay to the other its expenses only. See "The Merger Agreements--Fees and Expenses." THE STOCKHOLDERS AGREEMENT General . . . . . . . . . . . The Stockholders Agreement provides, among other things, that each Principal Stockholder will vote (or cause to be voted), at the MSF Special Meeting or any other meeting of MSF stockholders, the shares of MSF Common Stock held by such stockholder in favor of (i) the Merger, (ii) the execution and delivery by MSF of the Merger Agreement and the approval of the terms thereof and (iii) each of the other actions contemplated by the Merger Agreement, and against (a) any action or agreement that would result in a breach by MSF of the Merger Agreement, (b) unless agreed in advance by Search, any extraordinary corporate transaction, such as a business combination, involving MSF or its subsidiary, or any sale, lease or other transfer of a material amount of assets of MSF, its subsidiary or any securitization trust sponsored by MSF (a "Securitization Trust") or a reorganization, recapitalization, dissolution or liquidation of MSF, its subsidiary or any purchase of MSF Common Stock from a MSF stockholder (an "Alternate Transaction"), and (c) certain changes in the structure, capitalization, business or governance of MSF. In addition, each Principal Stockholder has granted to, and appointed, Merger Sub and an officer of Merger Sub as such Principal Stockholder's irrevocable proxy and attorney-in-fact (with full power of substitution) to vote the shares of MSF Common Stock in accordance with the provisions of the Stockholders Agreement. See "The Stockholders Agreement--Agreement to Vote." In the Stockholders Agreement, the Principal Stockholders have agreed to certain covenants, including that no such stockholder shall (i) solicit or respond to any inquiry, proposal or offer by any person (other than Search or an affiliate of Search) with respect to MSF that constitutes or could reasonably be expected to lead to an Alternate Transaction, or (ii) sell, encumber or otherwise transfer or dispose of such Principal Stockholder's shares of MSF Common Stock or any interest therein, or (iii) pursue any claim of such stockholder against MSF or any of its directors or officers. The Principal Stockholders have also agreed to release any claims that they may have against MSF and its directors and officers at the closing of the Merger. See "The Stockholders Agreement--Covenants of the Stockholders." Indemnification; Escrow Arrangements . . . . . . . . Each Principal Stockholder has agreed to indemnify Search, Merger Sub and the Surviving Corporation from certain liabilities and losses. To secure this indemnification obligation, the Principal Stockholders have agreed to place in escrow shares of Search Common Stock having a value, based upon the Average Search Trading Price, of $2,500,000, for at least 12 months from the Effective Time. These shares will be released in increments of 25% commencing on the first anniversary of the Effective Time and continuing every six months thereafter. Under certain circumstances, Search may request the Principal Stockholders to increase the value of the shares to be placed in escrow by up to $1,000,000. The Principal Stockholders have also agreed to place in escrow additional shares of Search Common Stock having a value, based upon the Average Search Trading Price, of $2,300,000 to secure MSF's representation that it will receive an income tax refund of $6,300,000. The shares will be released from escrow quarterly in proportion to the amount of the refunds received by MSF over $4,000,000. If any portion of the refund is not received by the first anniversary of the closing of the Merger, the remaining Search Common Stock in the tax escrow will revert to Search. See "The Stockholders Agreement-- Indemnification; Escrow Arrangements." 13 21 OTHER MATTERS Comparison of Stockholder Rights . . . . . . . . . . . See "Comparison of the Rights of Holders of Search Common Stock and MSF Common Stock" for a summary of the material differences between the rights of holders of Search Common Stock and MSF Common Stock. RISK FACTORS . . . . . . . . STOCKHOLDERS SHOULD CAREFULLY EVALUATE CERTAIN RISK FACTORS RELATED TO THE COMBINED COMPANIES AFTER THE MERGER. SEE "RISK FACTORS." 14 22 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following selected historical information of Search and MSF has been derived from their respective historical consolidated financial statements, and should be read in conjunction with the historical consolidated financial statements of Search and the related notes thereto, included in Annex E to this Joint Proxy Statement/Prospectus, and the historical consolidated financial statements of MSF and the related notes thereto, included in Annex D to this Joint Proxy Statement/Prospectus. The selected pro forma combined financial information is derived from the pro forma combined condensed financial statements, which are included on pages 55 through 58 in this Joint Proxy Statement/Prospectus, and should be read in conjunction with such pro forma statements and the notes thereto. The pro forma information and the related notes thereto are provided for informational purposes only. The pro forma information presented is not necessarily indicative of the consolidated financial position or results of operations of Search as they may be in the future or as they might have been had the Merger been effected on the assumed dates. 15 23 SELECTED CONSOLIDATED FINANCIAL INFORMATION SEARCH FINANCIAL SERVICES INC. AND SUBSIDIARIES (In Thousands, Except Per Share Data)
9 Months 9 Months Year Year 6 Months 6 Months Year Ended Ended Ended Ended Ended Ended Ended 9/30/92 9/30/93 9/30/94 9/30/95 3/31/95 3/31/96 3/31/97 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS: Interest revenue $1,493 $7,096 $14,054 $13,472 $8,694 $3,541 $10,004 Interest expense (708) (4,173) (9,968) (11,205) (6,437) (1,306) (2,306) Reduction of (provision for) credit losses -- -- (20,180) (3,128) (5,337) (4,982) 7,017 ----------------------------------------------------------------------------- Net interest income (loss) after provision for credit losses 785 2,923 (16,094) (861) (3,080) (2,747) 14,715 General and administrative expense 663 3,051 9,296 15,881 7,221 8,098 13,392 Settlement expense -- -- 560 2,837 -- 535 40 Reorganization expense -- -- -- 315 -- -- -- Other income 338 -- -- -- -- -- -- ----------------------------------------------------------------------------- Income (loss) before extraordinary item 460 (128) (25,950) (19,894) (10,301) (11,380) 1,283 Extraordinary gain on discharge of debt -- -- -- -- -- 8,709 -- ----------------------------------------------------------------------------- Net income (loss) 460 (128) (25,950) (19,894) (10,301) (2,671) 1,283 Preferred stock dividends 123 263 240 240 120 327 6,154 ----------------------------------------------------------------------------- Income (loss) attributable to common stockholders $337 $(391) $(26,190) $(20,134) $(10,421) $(2,998) $(4,871) ============================================================================= EARNINGS (LOSS) PER SHARE OF COMMON STOCK(1): Income (loss) before extraordinary item $0.72 $(0.48) $(18.64) $(17.96) $(8.96) $(8.96) $(1.45) Gain on extraordinary item -- -- -- -- -- 6.67 -- ------------------ ---------------------------------------------------------- Net income (loss) $0.72 $(0.48) $(18.64) $(17.96) $(8.96) $(2.29) $(1.45) ============================================================================= Weighted average number of common shares outstanding 460 766 1,407 1,121 1,162 1,306 3,366 BALANCE SHEET (AT PERIOD END): Net contracts receivable $6,565 $29,396 $61,823 $34,948 $76,655 $30,651 $51,689 Total assets 14,147 44,223 75,126 49,922 59,985 37,346 69,523 Notes payable (prepetition subject to compromise) -- -- -- 69,320 -- -- -- Notes payable and lines of credit 11,774 40,562 70,768 1,058 69,160 2,283 38,311 Total liabilities 12,208 42,013 79,502 75,557 74,783 10,935 42,917 Stock repurchase commitment -- -- -- 2,078 -- 2,078 2,078 Stockholders' equity (deficit) 1,939 2,210 (4,376) (27,713) (14,798) 24,333 24,528
- ------------------------------------- (1) In November 1996, Search effected a 1-for-8 reverse stock split. All references in the financial information to the number of shares outstanding and per share amounts have been retroactively adjusted to reflect the reverse split. 16 24 SELECTED CONSOLIDATED FINANCIAL INFORMATION MS FINANCIAL, INC. AND SUBSIDIARY (In Thousands, Except Per Share Data)
Year Year Year Year Year 3 Months 3 Months Ended Ended Ended Ended Ended Ended Ended 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 3/31/96 3/31/97 -------- -------- -------- -------- -------- ------- ------- INCOME STATEMENT: Interest and fee income on installment contracts and securitizations $6,880 $6,514 $10,008 $12,449 $14,909 $1,645 $4,440 Other interest income 2 13 4 100 70 18 13 Interest expense (2,048) (1,193) (2,441) (3,587) (5,371) (373) (2,208) -------------------------------------------------------------------- Net interest income before loss provisions 4,834 5,334 7,571 8,962 9,608 1,290 2,245 Provisions for possible losses on installment contracts (749) (924) (685) (826) (20,103) (250) (4,342) Provision for impairment of amounts due under securitization -- -- -- -- (3,000) -- -- Provision for possible losses on repossessed automobiles -- -- -- -- (2,800) -- -- -------------------------------------------------------------------- Net interest income (loss) after loss provisions 4,085 4,410 6,886 8,136 (16,295) 1,040 (2,097) Insurance commissions earned 155 667 1,456 1,823 1,329 361 81 Gains on securitizations 633 2,134 2,492 7,072 -- -- -- Service fee income 222 862 1,235 1,951 2,668 864 371 Experience refund on insurance policy -- 900 900 -- -- -- -- Other income 217 349 627 760 753 257 22 Operating expenses (3,152) (4,271) (6,589) (9,340) (15,104) (3,098) (3,419) Income tax (expense) benefit (748) (1,890) (2,622) (3,901) 4,635 (216) -- -------------------------------------------------------------------- Income (loss) from continuing operations 1,412 3,161 4,385 6,501 (22,014) (360) (5,042) Income from operations of discontinued subsidiary, net of income taxes 1,070 -- -- -- -- -- -- -------------------------------------------------------------------- Net income (loss) $2,482 $3,161 $4,385 $6,501 $(22,014) $(360) $(5,042) ==================================================================== EARNINGS (LOSS) PER SHARE: From continuing operations $0.15 $0.34 $0.47 $0.65 $(2.11) $(0.03) $(0.48) From operations of discontinued subsidiary, net of income taxes 0.12 -- -- -- -- -- -- -------------------------------------------------------------------- Net income (loss) $0.27 $0.34 $0.47 $0.65 $(2.11) $(0.03) $(0.48) ==================================================================== Weighted average shares outstanding 9,332 9,332 9,332 9,932 10,433 10,452 10,430 BALANCE SHEET (AT PERIOD END): Total assets $28,422 $32,902 $60,222 $49,718 $101,435 $91,015 Notes payable 15,111 15,046 36,043 -- 75,813 71,442 Total liabilities 17,865 19,184 42,119 4,734 79,681 73,852 Stockholders' equity 10,557 13,718 18,103 44,984 21,754 17,163
17 25 SEARCH AND MSF SELECTED PRO FORMA COMBINED FINANCIAL INFORMATION (In Thousands, Except Per Share Data) (Unaudited)
MSF Fiscal Fiscal Year DACC Fiscal Year Search Fiscal Year Ended Ended Operations for Ended Year Ended December 31, March 31, 1997 Period Between March 31, 1997 March 31, 1997 1996 Pro Forma April 1, 1996 and Pro Forma Historical Historical Combined(1) August 2, 1996(2) Combined(3) ---------- ---------- ----------- ----------------- ----------- CONSOLIDATED STATEMENTS OF OPERATIONS: Net interest income $7,698 $9,608 $17,306 $1,256 $18,562 Net income (loss) before dividends and taxes 1,283 (26,649) (25,493) (7,490) (32,983) Net income (loss) to common stockholders (4,871) (22,014) (27,012) (7,490) (34,502) Net income (loss) per share of common stock(4) (1.45) (3.75) (4.74)
At March 31, 1997 ----------------- At March 31, 1997 Search Historical MSF Historical Pro Forma Combined(5) ----------------- -------------- --------------------- CONSOLIDATED BALANCE SHEET: Net receivables--after allowance for credit losses and other costs $47,308 $74,019 $121,327 Total assets 69,523 91,015 161,806 Total liabilities 42,917 73,852 117,518 Stockholders' equity 24,528 17,163 42,210
- ---------------------------- (1) Pro forma to give effect to the Merger as if it had occurred as of April 1, 1996. (2) Represents the results of operations of Dealers Alliance Credit Corp. ("DACC"), whose assets and business were acquired by Search effective August 2, 1996. (3) Pro forma to give effect to the Merger and the acquisition of DACC as if they had occurred as of April 1, 1996. (4) Per share information assumes an Exchange Ratio of 0.37. See "Comparative Per Share Data." (5) Pro forma to give effect to the Merger as if it had occurred as of March 31, 1997. 18 26 COMPARATIVE PER SHARE DATA The following table sets forth certain historical per share data of Search and MSF and combined per share data on an unaudited pro forma basis giving effect to the Merger using the purchase method of accounting. This data should be read in conjunction with the selected historical and pro forma financial data, the pro forma combined condensed financial statements and the separate historical consolidated financial statements of Search and MSF, and notes thereto, included elsewhere in this Joint Proxy Statement/Prospectus or incorporated herein by reference. The unaudited pro forma combined financial data are not necessarily indicative of the operating results that would have been achieved had the Merger occurred at the beginning of the periods presented and should not be construed as representative of future operations. The pro forma combined amounts per share of Search Common Stock were based on the pro forma combined condensed financial statements included in "Pro Forma Combined Condensed Financial Information" assuming three different Exchange Ratios. Equivalent pro forma combined amounts per share of MSF Common Stock are calculated by multiplying the pro forma income (loss) per Search share and pro forma book value per Search share by three different Exchange Ratios so that the per share amounts are equated to the respective values for one share of MSF Common Stock.
SEARCH (1) MSF --------------------------------------- ------------------------------------ PRO EQUIVALENT HISTORICAL FORMA HISTORICAL PRO FORMA (2) ---------- -------------------------- ---------- ------------------------ 0.37 0.33 0.28 0.37 0.33 0.28 ---- ---- ---- ---- ---- ---- Book value per common share at March 31, 1997 (3) .............................$ 7.69 $ 5.98 $ 6.36 $ 6.90 $ 1.65 $2.21 $ 2.10 $ 1.93 Earnings (loss) per common share for the fiscal year ended March 31, 1997 (4). $(1.45) $(4.74) $(5.02) $(5.44) $(2.11) $(1.75) $(1.66) $(1.52) Market value per share at February 6, 1997 (5)..........................$5.25 $1.375 $ 1.94 $ 1.73 $ 1.47
- --------------------------------- (1) All per share amounts have been adjusted for the one-for-eight stock split effected by Search in November 1996. (2) MSF Equivalent Pro Forma per share data represents the respective Search Pro Forma per share data for a particular Exchange Ratio multiplied by that Exchange Ratio. (3) Historical book value per common share is computed by dividing stockholders' equity for Search or MSF (less, in the case of Search, the dollar amount shown on the balance sheet for convertible preferred stock) by the number of shares of common stock outstanding at the end of each period for Search or MSF, respectively. Pro forma book value per common share is computed by dividing pro forma stockholder's equity (less the dollar amount shown on Search's balance sheet for convertible preferred stock) by the pro forma number of shares of common stock outstanding at the end of the period. The liquidation preference of Search's preferred stock is not taken into account in these calculations. (4) The historical earnings (loss) per common share for MSF are for its fiscal year ended December 31, 1996. (5) Based on closing prices reported by NASDAQ or in the over-the-counter market, as applicable, on February 6, 1997, the day prior to public announcement of the Merger. CASH DIVIDENDS Search and MSF have not declared or paid any cash dividends on their respective common stock during the periods noted above and do not intend to declare or pay any cash dividends on common stock in the foreseeable future. Any future determination as to declaration and payment of cash dividends will be made at the discretion of their respective Boards of Directors and subject to any restrictions in credit agreements and under the terms of any outstanding preferred stock. The Merger Agreement also limits the ability of MSF to declare dividends. Search has paid all required dividends on its preferred stock. 19 27 COMPARATIVE MARKET PRICE DATA Search Common Stock has traded on The Nasdaq Stock Market's National Market ("NASDAQ") since March 10, 1997. Prior thereto, it traded in the over-the-counter market. MSF Common Stock is traded on NASDAQ. Prior to July 21, 1995, MSF Common Stock was not traded on any recognized market. MSF's fiscal year ends on December 31. The table below sets forth, for the fiscal quarters indicated, the high and low sales prices of Search Common Stock (since March 10, 1997) and MSF Common Stock as reported on NASDAQ and high and low bid prices of Search Common Stock as reported in over-the-counter market (prior to March 10, 1997), in each case based on published financial sources. Prices for the Search Common Stock prior to November 22, 1996 are adjusted to reflect a one-for-eight reverse stock split effected on that date. Over-the-counter market prices reflect inter-dealer transactions or quotations, without retail mark-up, mark-down or commission and may not represent actual transactions.
SEARCH MSF -------------------- ------------------- COMMON STOCK COMMON STOCK HIGH LOW HIGH LOW ---- --- ---- --- CALENDAR YEAR 1995: First Quarter . . . . . . . . . . $17 $9 -- -- Second Quarter . . . . . . . . . $15 $6-1/2 -- -- Third Quarter . . . . . . . . . $16 $8 $13-7/8 $11 Fourth Quarter . . . . . . . . . $15-1/2 $8 $12-1/2 $5-3/8 CALENDAR YEAR 1996: First Quarter . . . . . . . . . $13 $8 $7-1/8 $4-3/8 Second Quarter . . . . . . . . . $12-1/2 $8-1/2 $7-5/8 $5-7/8 Third Quarter . . . . . . . . . $9-1/2 $6-1/4 $6-1/4 $2-5/8 Fourth Quarter . . . . . . . . . $8 $4 $3-5/8 $0-5/8 CALENDAR YEAR 1997: First Quarter . . . . . . . . . $6-5/8 $5 $1-5/8 $1-1/4 Second Quarter (through June 23, 1997) . . . . . . . $5-3/8 $3-1/4 $1-9/16 $1-1/8
On February 6, 1997, the last full trading day prior to the execution and delivery of the Merger Agreement and the public announcement thereof, the closing price of Search Common Stock was $5-1/4 per share in the over-the-counter market and the closing price of MSF Common Stock was $1-3/8 per share on NASDAQ. On June 20, 1997, the closing price of Search Common Stock was $4-7/8 per share on NASDAQ. On June 23, 1997 the closing price of MSF Common Stock was $1-7/32 per share on NASDAQ. Since March 10, 1997, the closing sales prices of the Search Common Stock have ranged from $3-1/4 to $6-5/8. From February 1, 1997 until March 10, 1997, when the Search Common Stock began trading on Nasdaq, the closing sales prices of the Search Common Stock ranged from $5 to $6-3/8. Because the market price of Search Common Stock is subject to fluctuation, the market value of the shares of Search Common Stock that holders of MSF Common Stock will receive in the Merger may increase or decrease prior to the Merger. MSF STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR SEARCH COMMON STOCK AND MSF COMMON STOCK. 20 28 RISK FACTORS On a pro forma basis for the twelve-month period ended March 31, 1997, it is estimated that MSF accounted for approximately 53% of the combined revenues of Search and MSF. See "Pro Forma Combined Condensed Financial Information." Following the Merger, MSF is expected to continue to account for a significant portion of the total revenues of Search on a consolidated basis. Stockholders should be aware that, in addition to general market conditions in the industry, the operating results of Search following the Merger will be influenced by a variety of factors, as described below. The following risk factors should be considered carefully by the holders of MSF Common Stock and Search Common Stock in evaluating whether to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the Merger. These factors should be considered in conjunction with the other information included and incorporated by reference in this Joint Proxy Statement/Prospectus. Potential Failure to Achieve Anticipated Benefits from the Merger. Search believes that integration of the operations of Search and MSF will offer opportunities for long-term efficiencies in operations and that such integration should positively affect future operating results of Search. The management and Board of Directors of Search believe that the integration of MSF's business operations with Search's business operations can be effected in a manner that will enhance the value of the two companies. However, such integration will present difficult challenges for Search's management due to the size of MSF's business and operations relative to Search's business operations and the increased time and resources required in management's integration effort. Also, following the Merger, in order to maintain and increase profitability, among other things, Search will need to successfully integrate and streamline overlapping functions of the two companies. Search's ability to successfully integrate MSF's business and operations with Search's business and operations is dependent upon a number of factors, including the adequacy of Search's capital resources and Search's ability to retain and integrate existing MSF management and other key employees, to convert and adapt information and other operational systems, and to retain existing MSF dealers. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations. In light of the foregoing factors and uncertainties, there can be no assurance that Search will be able to successfully integrate MSF's business and operations. Furthermore, there can be no assurance that the process of effecting the integration of MSF's business operations into Search's can be effectively managed to realize the operational efficiencies and profitability anticipated as a result of the Merger. Also, failure to successfully integrate MSF's business and operations could adversely affect Search's results of operations and financial condition. Potential Inability to Repay MSF's Revolving Line of Credit. As of May 31, 1997, the outstanding balance under MSF's revolving credit facility (the "MSF Revolving Credit") with its primary bank lenders (the "MSF Lenders") was $65.1 million. In November 1996, MSF notified the MSF Lenders that it was in violation of certain covenants under the MSF Revolving Credit. MSF paid a default rate of interest of 11.25% on the MSF Revolving Credit from November 22, 1996 through March 16, 1997 and incurred fees of $562,500 in connection with the restructuring of the MSF Revolving Credit that occurred in December 1996. In February 1997, the MSF Lenders, Search and MSF agreed to the terms of a further restructuring of the MSF Revolving Credit. Under these terms, which became effective March 17, 1997, the restructured line of credit (the "Restructured Credit Facility") would continue in effect following the Merger, but MSF would be required to reduce the outstanding balance by $25,000,000 within six months after the Effective Time and satisfy in full the outstanding balance by the first anniversary of the Effective Time. Search has agreed to guarantee the Restructured Credit Facility after the Merger. Search intends to make the payments required by the Restructured Credit Facility through collections on MSF's receivables and through capital obtained by Search from the sale of debt or equity securities or other financing sources, including one or both of securitization transactions or the private placement of $35 million in senior subordinated notes. See "--Necessity of Additional Funding." If MSF has insufficient collections on its receivables and if Search is unable to obtain funds from these sources, MSF and Search may be unable to make the required payments under the Restructured Credit Facility. There can be no assurance that, in that event, the MSF Lenders will extend or refinance the Restructured Credit Facility or will not seek to enforce their remedies against Search and MSF. Such remedies include acceleration of indebtedness, foreclosure on receivables collateral and other debt collection proceedings. Several of the MSF Lenders have indicated to MSF and Search that they currently have no intention of extending or refinancing the Restructured Credit Facility. See "The Merger--Restructuring of MSF's Line of Credit." Necessity of Additional Funding. The purchase of receivables and the making of consumer loans requires Search and MSF to raise significant amounts of funds from various sources, including banks, finance companies and other lenders. 21 29 There can be no assurance that lenders will provide sufficient credit on terms Search or MSF will find acceptable. Search has, however, signed a letter of intent with an affiliate of a large Wall Street investment firm with respect to a $100 million, two-year revolving warehouse line of credit facility. The letter of intent is subject to certain conditions, including negotiation and execution of mutually acceptable definitive facility documents and completion of due diligence. Search's planned financing sources also include (i) a private placement of $35,000,000 of seven-year senior subordinated notes with warrants to purchase Search Common Stock that Search commenced in April 1997 with a view towards its completion during the 30 days following the Effective Time, and (ii) securitization of its and MSF's receivables. Because of an increase in its contract delinquencies in 1996, MSF was unable to complete a securitization transaction in 1996 or access its warehouse credit facility. Search or MSF will be required to provide adequate collateral in order to securitize its installment contracts. This collateral may be in one or more of several forms, including third party insurance, cash collateral accounts, over-collateralization and subordinated investment funds. The costs of providing such collateral for a securitization program may outweigh the benefits that can be obtained from the securitizations. Because of the increase in its contract delinquencies and the provisions for possible losses on its contracts in 1996, MSF exceeded certain delinquency and loss triggers in its existing securitizations. Consequently, at December 31, 1996, the funding of cash collateral accounts related to MSF's securitizations required deferral of any payment to MSF of the excess cash flow generated by its securitized receivables. Search's prior securitizations were not successful due to lower than expected collection rates on its receivables and lower than expected recoveries on the sale of repossessed vehicles, and required a reorganization of eight of its subsidiaries pursuant to Chapter 11 bankruptcy proceedings that were completed in March 1996. Since that time, Search's management has instituted a new receivables program that places more emphasis on obligors with job and residence stability, higher income, and re-established positive credit histories. Search expects that the program will result in lower repossession rates, higher average collections and less administrative expenses for its receivables. Although Search has begun discussions with potential purchasers of its subordinated notes, there can be no assurance that the offering will be successfully completed. There also can be no assurance that funding will be available to Search or MSF through securitizations or, if available, that such funding will be on terms acceptable to them. Even if available, there can be no assurance that the future borrowing or securitization activities of Search or MSF will be profitable. See "Search Financial Services Inc.--Management's Discussion and Analysis of Financial Condition and Results of Operations" and "MS Financial, Inc.--Management's Discussion and Analysis of Financial Condition and Results of Operations." Possible Volatility of Search Common Stock Price. The market price of Search Common Stock may be subject to significant fluctuations in response to operating results, announcements by competitors and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These market fluctuations, as well as general economic conditions, may adversely affect the market price of the Search Common Stock. In addition, fluctuations in the closing sale price of the Search Common Stock prior to the fifth business day before the MSF Special Meeting may affect the Exchange Ratio. See "Comparative Market Price Data" and "The Merger--Terms of the Merger." Lack of Historical Profits. Search does not have a history of profitable operations. Although Search had net income before dividends of $1,283,000 for the fiscal year ended March 31, 1997, it had a net loss of $2,671,000 for the six month transition period ended March 31, 1996 and a net loss of $4,871,000 after preferred stock dividends for the fiscal year ended March 31, 1997. In addition, Search had net losses of $19,894,000 and $25,950,000 for the years ended September 30, 1995 and 1994, respectively. For the year ended December 31, 1996, MSF had a net loss of $22,014,000, and for the three months ended March 31, 1997, MSF had a net loss of $5,042,000. There can be no assurance that the businesses of the combined companies will be profitable in the future. See the Consolidated Financial Statements of Search in Annex E and the Consolidated Financial Statements of MSF in Annex D. Risks in Motor Vehicle Receivables Purchasing and Consumer Finance Businesses. Search and MSF face all of the risks inherent in the motor vehicle receivables purchasing business and in the consumer finance business. There can be no assurance that Search and MSF will properly evaluate the receivables that they purchase or that Search will properly evaluate the borrowers to whom it makes consumer loans. There can be no assurance that Search and MSF will be able to purchase sufficient receivables and that Search will be able to make a sufficient number of consumer loans to profitably employ their capital and borrowed funds. Search and MSF purchase receivables whose obligors, and Search makes loans to consumers who, do not qualify for traditional financing as a result, among other things, of poor credit history, lack of steady employment and/or low income. These individuals generally have higher percentage default rates than individuals with better credit histories. The annual percentage rates on the receivables of MSF and Search range generally from 16% to 36%. In addition, the vehicles securing Search's and MSF's receivables are subject to deterioration in value due to the passage of time or usage by the obligor, and Search's loans to consumers may be unsecured. Search and MSF have limited historical information related to the quality of receivables they are purchasing under Search's new receivables purchasing 22 30 program. There can be no assurance that their efforts to purchase higher credit quality receivables will be successful or profitable. In addition, Search has little history in the consumer loan business. Substantial unexpected delinquencies or charge-offs on its receivables or loans could have a material adverse effect on Search's results of operations. For the year ended September 30, 1994, Search made a provision for credit losses of $20,180,000 as a result of unexpected delinquencies and losses on its receivables. For the same reason, MSF made a total provision for possible losses on its receivables and repossessed automobiles of $22,903,000 for the year ended December 31, 1996, and made an additional provision at March 31, 1997 of $4,342,000. As of March 31, 1997, Search had an allowance for credit losses of $5,854,000. See Notes to Consolidated Financial Statements of Search contained in Annex E. Search's provisions for credit losses were 144%, 23%, 141% and 18% of Search's operating revenues for the year ended September 30, 1994, the year ended September 30, 1995, the transition period ended March 31, 1996 and the fiscal year ended March 31, 1997, respectively. The higher relative provisions for credit losses for the year ended September 30, 1994 and the transition period ended March 31, 1996 were primarily due, respectively, to Search's initial financial difficulties that arose in July 1994 and the bankruptcy reorganization of Search's subsidiaries that was confirmed in March 1996. See the Consolidated Financial Statements of Search in Annex E, Search's Annual Report in Annex F and the Consolidated Financial Statements of MSF in Annex D. There can be no assurance that the total provisions for losses of the combined companies are sufficient to cover any losses that may result from the foregoing risks. A general economic downturn could adversely affect the ability of obligors and borrowers to make payments to Search and MSF on their receivables and loans. Risk that Acquisitions Will Not Occur or be Profitable. Search intends to continue to pursue its current growth strategy, which includes acquiring portfolios of non-prime used motor vehicle receivables and other non-prime used motor vehicle finance companies. There can be no assurance that Search will be able to make profitable acquisitions or successfully integrate any businesses that it acquires into its operations without substantial costs, delays or other problems. In addition, there can be no assurance that any acquired businesses will be profitable at the time of their acquisition or will achieve profitability that justifies the investment therein or that Search will be able to realize expected operating and economic efficiencies following such acquisitions. Acquisitions may involve a number of special risks, including adverse effects on Search's reported operating results, devotion of management's attention, increased burdens on Search's management resources and financial controls, dependence on retention and hiring of key personnel, unanticipated problems or legal liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on Search's results of operations. Exposure from Debt Leverage. Search intends to borrow substantial funds to finance its operations. As Search's debt leverage increases, its vulnerability to adverse general economic conditions and to increased competitive pressures will also increase. See "--Necessity of Additional Funding." Potential Adverse Effects of Unasserted Claims Against MSF. There can be no assurance that third parties will not bring claims with respect to MSF's past operations. The Principal Stockholders have agreed to indemnify Search and MSF against liabilities and losses that may result from claims under the securities laws or claims based upon the same events or occurrences as have been alleged in the litigation discussed in the first paragraph of Note 14 of the Notes to Consolidated Financial Statements of MSF to the extent such claims exceed $400,000. See MSF's Consolidated Financial Statements in Annex D. The Principal Stockholders also have agreed to place in escrow at least $2,500,000 in value of the Search Common Stock received by them in the Merger, based upon the Average Search Trading Price, to secure such indemnification obligation. No claims to which this indemnification obligation would apply have been asserted as of the date of this Joint Proxy Statement/Prospectus and there can be no assurance that, if any such claims are asserted, the value of the shares of Search Common Stock held in escrow will equal or exceed the amount of the claim. The Principal Stockholders are entitled to receive 25% of their escrowed shares 12 months after the Effective Time and an additional 25% every six months thereafter, subject to any pending indemnification claims. In addition, while claims may have to be satisfied by Search or MSF in cash, their rights to indemnification are limited to the shares of Search Common Stock held in escrow. See "The Stockholders Agreement--Indemnifications; Escrow Agreements." Possible Adverse Consequences of MSF Securitization Defaults. As of the date of this Joint Proxy Statement/Prospectus, MSF is in default of its securitization agreements with respect to its MS Auto Grantor Trust 1994-1 and MS Auto Grantor Trust 1995-1 (the "Securitization Trusts"). As a consequence, the trustees of the Securitization Trusts have the right to terminate their servicing agreements with MSF. If the trustees elect to exercise that right, MSF will cease receiving applicable servicing fees with respect to the receivables that it services for the Securitization Trusts. During 1996, MSF earned total servicing fees of $2,668,000 from the Securitization Trusts. There can be no assurance that Search and MSF will be able to cure these defaults or renegotiate MSF's agreements with respect to these securitizations. See 23 31 "MS Financial, Inc.--Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Securitization Programs." Failure to Maintain MSF's Dealer Relationships and Retain MSF's Marketing Personnel. One of Search's primary reasons for the acquisition of MSF is MSF's network of motor vehicle dealers from which it purchases receivables and MSF's marketing department responsible for maintaining dealer contacts. See "The Merger--Search's Reasons for the Merger; Recommendations of the Search Board." MSF has recently begun to apply Search's stricter underwriting criteria in its receivables purchasing activities and plans to continue to apply those criteria after the Merger. See "The Merger Agreement--Business of MSF Pending the Merger." There can be no assurance that, following the Merger, MSF will be able to maintain its dealer network or purchase from its dealer network receivables satisfying Search's underwriting criteria at the volume expected by Search and MSF's marketing personnel. In addition, there can be no assurance that MSF's marketing personnel will remain as employees following the Merger. The failure of MSF's marketing department and dealer network to generate sufficient suitable receivables for purchase by MSF may have an adverse effect on the combined results of operation of Search and MSF. Potential Adverse Effects of Increases in Interest Rates. While the automobile receivables purchased by Search and MSF in most cases bear interest at fixed rates ranging generally between 16% and 36%, often near the maximum rates permitted by law, Search and MSF will finance their purchases of a substantial portion of such receivables by incurring indebtedness with floating interest rates. The current interest rates on borrowings by Search and MSF are approximately prime plus 1%. Search's interest costs will increase during periods of rising interest rates. Such increases may decrease Search's and MSF's net interest margins and thereby adversely affect Search's and MSF's profitability. Failure to Establish and Maintain Profitable Dealer Relationships. Search and MSF plan to expand their receivables purchasing activities by re-establishing relationships and establishing new relationships with Dealers. Dealers often already have favorable secondary financing sources, which may restrict Search's and MSF's ability to develop Dealer relationships and delay their growth. Competitive conditions in Search's and MSF's markets may result in a reduction in the price discounts available from or fees paid by Dealers and a lack of available receivables, which could adversely affect Search's profitability and its growth plans. Reliance on Information Processing Systems. The businesses of Search and MSF depend upon their ability to store, retrieve, process and manage significant amounts of information. Interruption, impairment of data integrity, loss of stored data, breakdown or malfunction of their information processing systems caused by telecommunications failure, conversion difficulties, undetected data input and transfer errors, unauthorized access, viruses, natural disasters, electrical power outage or disruption or other events could have a material adverse effect on the businesses of Search and MSF. Risks from Geographic Concentration. Currently, Search and MSF are purchasing receivables whose obligors are located primarily in Texas and certain southeastern states. Although Search expects to expand their operations to other geographic areas, including initially certain northeastern and midwestern states, the performance of Search and MSF may be adversely affected by regional or local economic conditions. Search may from time to time make acquisitions in regions outside of its current operating areas. There can be no assurance that Search's expansion into new geographic areas will generate operating profits. Importance of Qualified Personnel. Search plans to expand its businesses. The success of this strategy is dependent upon Search's ability to hire and retain qualified managers and other personnel. Search's management believes that Search will be able readily to attract qualified personnel from its competitors, from its acquired businesses and from other companies in related businesses. Risk of Loss of Key Officer. Search's future success depends in some measure upon its Chief Executive Officer who has significant experience in the consumer finance business. An unexpected loss of services of this officer could have a material adverse effect upon Search. Search does not currently maintain key person life insurance on the Chief Executive Officer but intends to seek such coverage. Search has an employment agreement with its Chief Executive Officer that expires in 2000. Competition. Search and MSF have numerous competitors engaged in the business of buying non-prime motor vehicle receivables and in making consumer loans. Many of these competitors have significantly greater financial resources and staff than Search. Some of these competitors may generally be able or willing to accept more risk in their activities than 24 32 Search and MSF. Competition may reduce the number of suitable receivables offered for sale to Search and MSF and increase the bargaining power of Dealers with which Search and MSF seek to do business. These competitive factors could have a material adverse effect upon the operations of Search and MSF. The barriers to entry in the industry are low. Search believes that the primary methods of competition in the industry are through Dealer relationships, receivables purchasing criteria, purchase price discounts, marketing, receivables purchase response time, and purchase agreement provisions, including dealer recourse, reserves or commissions. Rigorous Governmental Regulation. Numerous federal and state consumer protection laws impose requirements upon the origination and collection of consumer receivables. These federal laws and regulations include, among others, the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Indebtedness Collection Practices Act, the Magnuson-Moss Warranty Act and the Federal Reserve Board's Regulation Z. Search believes that it maintains all licenses and permits required for its current operations and is in substantial compliance with all applicable federal, state and local laws. There can be no assurance, however, that Search will be able to maintain all requisite licenses and permits. State laws regulate, among other things, the interest rate chargeable on, and terms and conditions of, motor vehicle retail installment loans. These laws also impose restrictions on consumer transactions and require loan disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. As consumer finance companies, Search and MSF are subject to various consumer claims and litigation seeking damages and statutory penalties based upon, among other theories of liability, usury, wrongful repossession, fraud and discriminatory treatment of credit applicants. The Federal Trade Commission ("FTC") has adopted a holder-in-due-course rule which has the effect of subjecting persons who finance consumer credit transactions (and certain related lenders and their assignees) to all claims and defenses which the purchaser could assert against the seller of the goods and services. Another FTC rule requires that all sellers of used vehicles prepare, complete and display a "Buyer's Guide" which explains the warranty coverage (if any) for such vehicles. Failure of the Dealers to comply with state and federal credit and trade practice laws and regulations could result in consumers having rights of rescission and other remedies that could have an adverse effect on Search and MSF. The failure to comply with legal requirements applicable to its business could have a material adverse effect on Search's results of operations. Further, the adoption of additional, or the revision of existing, laws and regulations could have a material adverse effect on Search's business. Industry Considerations. In recent periods, several major used car finance companies have announced major downward adjustments to their financial statements, violations of loan covenants, related litigation and other events. In addition, one of these companies has filed for bankruptcy protection. These announcements have had and may continue to have a disruptive effect on the market for securities of non-prime automobile finance companies, are expected to result in a tightening of credit to the non-prime markets and could lead to enhanced regulatory oversight. Furthermore, companies in the used car financing market have been subject to an increasing number of lawsuits brought by customers alleging violations of various federal and state consumer credit and similar laws and regulations. MSF has recently settled a lawsuit involving these kinds of claims. See "MS Financial, Inc.--Legal Proceedings." There can be no assurance that similar claims will not be asserted against Search or MSF in the future or that their operations will not be subject to enhanced regulatory oversight. Potential Adverse Effects of Litigation. Search and certain of its former officers and directors are defendants in a case styled Janice and Warren Bowe, et. al. vs. Search Capital Group Inc., et. al., Cause No. 1:95CSV649BR, filed in the Federal District Court for the Southern District of Mississippi (the "Bowe Action"). The plaintiffs, who are former holders of notes issued by three of Search's subsidiaries, allege that the registration statements pursuant to which the notes were sold contained material misrepresentations and omissions of fact with respect to collection rates on contracts, repossession rates, Search's accounting controls and computer systems, the operating results and financial condition of Search and its subsidiaries and the ability of the subsidiaries to pay the notes at the projected rates of return, and were, therefore, materially false and misleading in violation of the securities laws. The plaintiffs seek unspecified damages, rescission, punitive damages and other relief. The plaintiffs also seek establishment of a class of plaintiffs consisting of all persons who have purchased notes issued by the three subsidiaries. While Search believes the suit is without merit and has been vigorously defending itself, it has also sought to reach a negotiated settlement of all claims of all potential class members in the Bowe Action that would also include a settlement of all claims of the litigation trust (the "Litigation Trust") established under the plan of reorganization of eight of Search's subsidiaries for the purpose, among other things, of pursuing 25 33 causes of action of the former holders of notes issued by those subsidiaries who assigned their claims related to the Bowe Action to the Litigation Trust. While a settlement agreement in principle subject to a number of conditions was reached in March 1997 that would have required Search to pay $350,000 in cash and issue shares of Search Common Stock having a value of $1,375,000, Search suspended further negotiations because of the decline in the market price of the Search Common Stock during the first half of May. Search intends to resume negotiations when the market price of the Search Common Stock recovers to its pre-May trading range, but there can be no assurance that the other parties will be willing to resume negotiations or that a settlement on terms acceptable to Search will be concluded. The court had dismissed the plaintiffs' motion for class certification, without prejudice and subject to renewal and final disposition pending the outcome of settlement discussions. Search has a reserve of $500,000 related to the Bowe Action. A settlement or judgment in excess of this reserve could adversely affect Search. Absence of Developed Public Market for Search Common Stock. Although the Search Common Stock has been quoted on NASDAQ since March 10, 1997, trading volume is volatile. No assurance can be given that a more active and widespread trading market will develop for the Search Common Stock. There can be no assurance that Search Common Stock can be sold without considerable delay, if at all. If a more active and widespread market does develop, the prices may be highly volatile. The Commission's rules may apply to impose certain risk disclosure requirements and suitability standards on broker-dealers who effect transactions in low price stocks. These rules may have a negative impact on trading markets for low price stocks. Consequently, if the Search Common Stock should be traded at low prices, no assurances can be given that there will continue to be any market for the Search Common Stock. Factors such as those discussed herein may have a significant effect on the market price of the Search Common Stock. See "Comparative Market Price Data." Lack of Dividends on Common Stock. Search has not paid dividends on the Search Common Stock and does not expect to pay dividends on the Search Common Stock for the foreseeable future. Furthermore, Search may not pay dividends on the Search Common Stock while any accrued dividends on shares of preferred stock remain unpaid. To date, Search has paid all required dividends on its preferred stock, which are currently approximately $1,500,000 each quarter. Search's preferred stock dividends constitute a substantial cash outflow that may have a material adverse effect on Search's future financial condition and the future market value of the Search Common Stock. See "Description of Search Capital Stock." Senior Rights of Preferred Stock. Search's Restated Certificate of Incorporation, as amended (the "Certificate"), authorizes the issuance of preferred stock with such designations, rights and preferences as may be determined from time to time by the Search Board. Accordingly, the Search Board is empowered, without stockholder approval, to issue shares of preferred stock that have preferences over the Search Common Stock with respect to the payment of dividends, liquidation, conversion, voting or other rights which could adversely affect the voting power and ownership interests of holders of Search Common Stock. The issuance of shares of preferred stock or the issuance of rights to purchase such shares could have the effect of discouraging, delaying or preventing a change in control of Search. There are currently issued and outstanding 2,456,098 shares of Search's 9%/7% Convertible Preferred Stock and 50,000 shares of Search's 12% Senior Convertible Preferred Stock. These shares have rights that are superior to the rights of holders of Search Common Stock with respect to dividends, liquidation, conversion and voting which could adversely affect the rights of holders of Search Common Stock. See "Description of Search Capital Stock." 26 34 THE SPECIAL MEETINGS TIMES, PLACES AND DATES OF THE SPECIAL MEETINGS The MSF Special Meeting will be held at 10:00 a.m., local time, on Monday, July 28, 1997, at the Le Meridien Hotel located at 650 North Pearl Street, Dallas, Texas. The Search Special Meeting will be held at 9:00 a.m., local time, on Monday, July 28, 1997, at the offices of Search located at 600 North Pearl Street, Dallas, Texas. PURPOSE OF THE MSF SPECIAL MEETING At the MSF Special Meeting, stockholders of MSF will be asked to consider and vote upon a proposal to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger. A copy of the Merger Agreement is attached to this Joint Proxy Statement/Prospectus as Annex A. PURPOSE OF THE SEARCH SPECIAL MEETING At the Search Special Meeting, stockholders of Search will be asked to consider and vote upon a proposal to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger. RECORD DATES; VOTING RIGHTS Stockholders of MSF of record at the close of business on June 25, 1997 (the "MSF Record Date") will be entitled to notice of and to vote at the MSF Special Meeting and at any adjournment or postponement thereof. There were issued and outstanding 10,431,010 shares of MSF Common Stock as of the MSF Record Date, held by approximately 1,200 stockholders of record. Stockholders of Search of record at the close of business on May 30, 1997 (the "Search Record Date") will be entitled to notice of and to vote at the Search Special Meeting and at any adjournment or postponement thereof. There were issued and outstanding 3,016,444, 50,000 and 2,456,098 shares, respectively, of Search Common Stock, Search 12% Preferred Stock, and Search 9%/7% Preferred Stock, as of the Search Record Date. Under the Delaware General Corporation Law (the "Delaware Law") and MSF's Second Amended and Restated Certificate of Incorporation, the adoption and approval of the Merger Agreement by the stockholders of MSF requires the affirmative vote of the holders of at least a majority of the outstanding shares of MSF Common Stock. As of the MSF Record Date, 8,080,421 shares of MSF Common Stock (approximately 77.5% of the shares outstanding as of the MSF Record Date) were entitled to be voted by the directors and officers of MSF and their affiliates. Under the Delaware Law, the adoption and approval of the Merger Agreement by the stockholders of Search requires the affirmative vote of the holders of at least a majority of the outstanding shares of Search Common Stock, Search 12% Preferred Stock, and Search 9%/7% Preferred Stock, voting together as a class, that are represented in person or by proxy and entitled to vote at the Search Special Meeting. As of the Search Record Date, 94,823 shares of Search Common Stock, Search 12% Preferred Stock, and Search 9%/7% Preferred Stock (approximately 1.7% of the shares outstanding as of the Search Record Date) were entitled to be voted by the directors and officers of Search and their affiliates. MS Diversified Corporation, MS Financial Services, Inc. and Golder Thoma Cressey Rauner Fund IV, L.P. (collectively, the "Principal Stockholders") have entered into a Stockholders Agreement, dated as of February 7, 1997, with Search (the "Stockholders Agreement") pursuant to which the Principal Stockholders have agreed to vote their MSF Common Stock in favor of the Merger. See "The Stockholders Agreement." The Principal Stockholders beneficially owned as of the Record Date an aggregate of 8,040,000 shares of MSF Common Stock, constituting approximately 77% of the shares of MSF Common Stock outstanding on the Record Date. When these shares of MSF Common Stock are voted at the MSF Special Meeting in favor of the adoption and approval of the Merger Agreement and the transactions contemplated thereby, including the Merger, the affirmative vote of holders of additional shares of MSF Common Stock will not be required to adopt and approve the Merger Agreement and the transactions contemplated thereby, including the Merger. Holders of a majority of the shares of MSF Common Stock entitled to vote at the MSF Special Meeting, represented in person or by proxy, will constitute a quorum. Each holder will be entitled to cast one vote for each share of MSF Common Stock held. 27 35 Holders of a majority of the shares of Search Capital Stock, represented in person or by proxy and entitled to vote at the Search Special Meeting, will constitute a quorum. Each holder will be entitled to cast one vote for each share of Search Capital Stock held. PROXIES; REVOCATION OF PROXIES Shares of MSF Common Stock and Search Capital Stock represented by properly executed and unrevoked proxies will be voted at the MSF or Search Special Meeting, as the case may be, in accordance with the directions contained therein. If no direction is made in a properly executed and unrevoked proxy, the shares represented by such proxy will be voted FOR the adoption and approval of the Merger Agreement, and the transactions contemplated thereby. Any MSF or Search stockholder is empowered to revoke a proxy at any time before its exercise. A proxy may be revoked by filing with the Secretary of MSF or Search, as the case may be, a written revocation or a duly executed proxy bearing a later date. Any written notice revoking a proxy for the MSF Special Meeting should be sent to: MS Financial, Inc., 715 S. Pear Orchard Road, Suite 300, Ridgeland, Mississippi 39157, (601) 978-6737, Attention: Secretary, or hand delivered to the Secretary at or before the taking of the vote at the MSF Special Meeting. Any written notice revoking a proxy for the Search Special Meeting should be sent to: Search Financial Services Inc., 600 North Pearl Street, Suite 2500, Dallas, Texas 75201, (214) 965-6000, Attention: Secretary, or hand delivered to the Secretary at or before the taking of the vote at the Search Special Meeting. Any MSF or Search stockholder may attend the MSF or Search Special Meeting, as the case may be, and vote in person, whether or not he has previously given a proxy. MSF and Search will bear their respective costs of soliciting proxies from MSF and Search stockholders. In addition to soliciting proxies by mail, directors, officers and employees of MSF and Search may solicit proxies by telephone, by courier service, by telegram or in person, each without receiving additional compensation therefor. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries (collectively, "Fiduciaries") to forward solicitation materials to the beneficial owners of shares of MSF Common Stock, Search Common Stock, Search 12% Preferred Stock and Search 9%/7% Preferred Stock held of record by such persons, and arrangements may be made with Fiduciaries to obtain authority to sign proxies. MSF and Search will reimburse such Fiduciaries for reasonable out-of-pocket expenses incurred by them in connection therewith. Shares represented at the meetings but not voted for or against a proposal, such as abstentions or "broker non-votes," will be counted in determining a quorum and will have the same effect as votes against the proposal. A "broker non-vote" refers to shares represented at the MSF or Search Special Meeting in person or by proxy by a broker or nominee where such broker or nominee (i) has not received voting instructions on a particular matter from the beneficial owners or persons entitled to vote and (ii) does not have discretionary voting power on such matter. MSF STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS. 28 36 THE MERGER GENERAL The Merger Agreement provides for a business combination between Search and MSF in which a wholly owned subsidiary of Search would be merged with and into MSF and the holders of MSF Common Stock would be issued shares of Search Common Stock. As a result of the Merger, MSF would become a wholly owned subsidiary of Search. The discussion in this Joint Proxy Statement/Prospectus of the Merger and the description of the principal terms of the Merger are subject to and qualified in their entirety by reference to the Merger Agreement, a copy of which is attached to this Joint Proxy Statement/Prospectus as Annex A. EFFECTIVE TIME If the Merger Agreement and the transactions contemplated thereby are approved and adopted by the requisite vote of the stockholders of Search and MSF and the other conditions to the Merger are satisfied or waived (if permissible), the Merger will be consummated and effected at the time a Certificate of Merger is filed with the Secretary of State of Delaware or at such later time as the parties to the Merger Agreement agree and specify in such Certificate of Merger. The Merger Agreement provides that Search and MSF will cause the effective time of the Merger (the "Effective Time") to occur as promptly as practicable, but in no event later than the first business day (unless the parties agree to another date) following the satisfaction or, if permissible, wavier of all the conditions set forth in the Merger Agreement. The Merger Agreement may be terminated prior to the Effective Time by either Search or MSF in certain circumstances, whether before or after approval and adoption of the Merger by the stockholders of Search and MSF. See "The Merger Agreement--Termination; Amendment." TERMS OF THE MERGER If the Merger is approved and consummated, then at the Effective Time Merger Sub will be merged with and into MSF, which will be the Surviving Corporation. In the Merger, each share of MSF Common Stock outstanding at the Effective Time (other than shares of MSF Common Stock held in MSF's treasury or owned by Search or any subsidiary of Search or MSF) will be converted into the right to receive a fraction (the "Exchange Ratio") of a share of Search Common Stock based upon the average of the closing sales price per share of Search Common Stock for the 10 trading days ending on the fifth business day prior to the date of the MSF Special Meeting (the "Average Search Trading Price"). The Exchange Ratio will equal the quotient of $1.63 (the "Per Share Amount") divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28, subject to adjustment downward in certain circumstances. Neither Search nor MSF has the right to terminate the Merger Agreement based on the Average Search Trading Price. No fractional shares of Search Common Stock will be issued, and cash will be paid in lieu of any such fractional shares. The following table illustrates how the total number of shares of Search Common Stock to be received by MSF's stockholders, and the value thereof (based on the Average Search Trading Price), will vary based on different assumed amounts for the Average Search Trading Price.
AVERAGE SEARCH TOTAL SHARES OF TOTAL VALUE OF TRADING PRICE EXCHANGE RATIO SEARCH COMMON STOCK SEARCH COMMON STOCK -------------- -------------- -------------------- ------------------- $6.50 .28 2,920,682 $18,984,000 5.88 .28 2,920,682 17,174,000 5.00 .33 3,442,233 17,211,000 4.35 .37 3,859,473 16,789,000 4.00 .37 3,859,473 15,438,000 3.00 .37 3,859,473 11,578,000
If the Average Search Trading Price is between $5.88 and $4.35, MSF's stockholders will receive approximately the same value of Search Common Stock (i.e. ranging from $17,211,000 to $16,789,000) in the Merger, regardless of the actual Average Search Trading Price. If the Average Search Trading Price is above or below that range, MSF's stockholders will receive a different total value of Search Common Stock in the Merger. 29 37 Search and MSF will publicly announce the Exchange Ratio promptly after it is determined. Stockholders of MSF or Search may call the Secretary of MSF at (601) 978-6694 or the Investor Relations Department of Search at (800) 725-6673 for the Exchange Ratio beginning four business days prior to the MSF Special Meeting date. Stockholders may revoke or submit proxies by sending the revocation or proxy via facsimile to (601) 978-6601, if to MSF, or to (214) 965-6104, if to Search. MSF STOCKHOLDERS SHOULD CONSIDER THAT THE EXCHANGE RATIO WILL BE FIXED ON THE FIFTH BUSINESS DAY PRIOR TO THE DATE OF THE MSF SPECIAL MEETING, BUT THE MARKET VALUE OF THE SEARCH COMMON STOCK THAT HOLDERS OF MSF COMMON STOCK WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE PRIOR TO THE EFFECTIVE TIME BECAUSE THE MARKET PRICE OF SEARCH COMMON STOCK IS SUBJECT TO FLUCTUATION. IN ADDITION, BECAUSE OF FLUCTUATIONS IN THE MARKET PRICE OF SEARCH COMMON STOCK, THE MARKET VALUE OF THE SEARCH COMMON STOCK THAT HOLDERS OF MSF COMMON STOCK WILL RECEIVE IN THE MERGER MAY INCREASE OR DECREASE FOLLOWING THE MERGER. PRIOR ADJUSTMENTS TO PER SHARE AMOUNT AND EXCHANGE RATIO Under the Merger Agreement prior to its amendment on June 25, 1997, the Per Share Amount and the maximum and minimum Exchange Ratios were $2.00 and 0.46 and 0.34, respectively. The Merger Agreement originally provided for a reduction in the total consideration payable by Search in the Merger if MSF's stockholders' equity declined below certain levels, subject to certain adjustments to MSF's stockholders' equity to be made if MSF incurred certain costs, MSF received certain anticipated income tax refunds, the delinquency rate on MSF's receivables increased above a specified level or the amount of MSF's receivables that were or should have been charged off in 1997 exceeded a specified level. These adjustments were negotiated at the request of MSF as an alternative to the condition to Search's obligation to consummate the Merger that MSF not have experienced a material adverse change in its financial condition or results of operations prior to the Effective Time. The adjustments were intended to adjust the aggregate Merger consideration paid by Search for significant decreases in MSF's stockholders' equity and significant changes in MSF's delinquency and loss experience during the period prior to the Effective Time but not for anticipated decreases due to identified costs and fees to be paid by MSF or increases due to anticipated tax refunds. To effect any required reduction, the Per Share Amount and the maximum and minimum Exchange Ratios were to be decreased if, at the Effective Time, the unaudited financial statements of MSF for the last month (or, in certain circumstances, the second month) ending before the Effective Time (the "Most Recent Financial Statements") showed that MSF's stockholders' equity decreased. If there was an adjusted decrease in stockholders' equity of $2,100,000 or less, no adjustment to the Per Share Amount would have been made. If the adjusted decrease was more than $2,100,000 but less than $3,100,000, 50% of such decrease would have been applied to the calculation of an adjusted Per Share Amount, and if the amount of such decrease was $3,100,000 or more, 100% of such decrease would have been applied to the calculation of an adjusted Per Share Amount. There was no limit on the amount by which the consideration to be received by the MSF stockholders could have been reduced as a result of these adjustments. Search and MSF originally contemplated that the Effective Time would occur prior to June 30, 1997 and that the foregoing adjustments, if any, would be based on MSF's financial information as of April 30, 1997. Because of unavoidable delays, and to allow additional time for consummation of the Merger, Search and MSF agreed, on June 25, 1997, to an amendment of the Merger Agreement. Under the amendment, the outside date for consummation of the Merger was extended from June 30 to August 15, 1997, the Per Share Amount and minimum and maximum Exchange Ratios were fixed at $1.63 and 0.28 and 0.37, respectively, and the foregoing adjustment provisions of the Merger Agreement were deleted. These amounts are approximately what would have resulted under the foregoing adjustment provisions of the original, unamended Merger Agreement using financial information for MSF as of April 30, 1997. Accordingly, no further adjustments to the Per Share Amount or minimum or maximum Exchange Ratios are expected to be made prior to the Effective Time. BACKGROUND OF THE MERGER From time to time prior to October 1996, members of Search management and MSF management had various contacts, principally at industry conferences, during which they discussed matters of common interest, including the progress of the companies' respective businesses. On October 9, 1996, Mr. George C. Evans, Chairman, President and Chief Executive Officer, Mr. James F. Leary, Vice Chairman, Finance, and Mr. Robert D. Idzi, Senior Executive Vice President and Chief Financial Officer, of Search, met in Chicago with Mr. Philip Canfield, an associate of Golder, Thoma, Cressey, Rauner, Inc. at a meeting arranged and attended by representatives of Tri-River Capital Group for the Search representatives to introduce themselves to Mr. Canfield 30 38 and to commence discussions regarding a possible acquisition of MSF by Search. The parties discussed generally the status of MSF's business, its financing needs and the possible interest of the Principal Stockholders in an acquisition transaction. On October 13, 1996, Mr. Evans met with Mr. James B. Stuart, Jr., Chairman of the Board of MSF and President and Chief Executive Officer of MS Diversified Corporation ("MSD"), and Mr. Canfield at Mr. Stuart's home in Jackson, Mississippi to further discuss the business of MSF and the possibility of Search acquiring MSF. Messrs. Evans and Stuart also discussed other possible business relationships between Search and MSF, including the purchase by Search of retail installment sales contracts owned by MSF. As a result of this meeting, Search and MSF executed a confidentiality agreement dated October 15, 1996. At a meeting of the Board of Directors of Search on October 17, 1996, Mr. Evans reviewed with the other directors of Search the possible acquisition of motor vehicle retail installment sales contracts having a net receivable balance of approximately $25 million from MSF as a first step towards the possible acquisition of MSF. On October 21, 1996, Search and MSF executed a letter of intent for Search to purchase from MSF non-prime motor vehicle installment sales contracts having a net receivable balance of approximately $25 million, subject to definitive documentation and approval by the Boards of Directors of both companies. The letter of intent stated that it was the intention of Search and MSF promptly following closing of the portfolio acquisition to commence good faith negotiations with respect to the acquisition of MSF by Search. During the weeks of October 20 and 27, 1996, representatives of Search conducted a due diligence review of MSF's loan portfolio for the purpose of identifying motor vehicle installment sales contracts that Search might be interested in purchasing from MSF. On November 4, 1996, Search Funding Corp., a wholly-owned subsidiary of Search, and MSF entered into a Motor Vehicle Installment Sales Contract Assignment and Purchase Agreement pursuant to which Search Funding Corp. acquired from MSF non-prime motor vehicle installment sales contracts with a net receivable balance of approximately $15 million. On November 4, 1996, Search and MSF also executed a letter of intent for Search to purchase from MSF additional motor vehicle retail installment sales contracts totaling approximately $10 million in net receivables, subject to definitive documentation, approval of the Boards of Directors of both companies and receipt by Search of financing for the purchase of these additional receivables. This letter of intent also stated the intention of Search and MSF promptly to commence good faith negotiations with respect to the acquisition of MSF by Search. On November 7, 1996, Messrs. Evans and Idzi and a consultant to Search met with Mr. Philip J. Hubbuch, Jr., Vice Chairman and Chief Executive Officer of MSF, in Jackson, Mississippi to conduct further business due diligence regarding MSF and to begin discussions regarding the structuring of an acquisition of MSF by Search, including consideration of whether cash, Search securities, or both, would be offered to stockholders of MSF and the consideration preferences of the Principal Stockholders. On November 12, 1996, Search and MSF entered into a letter of intent providing Search the opportunity to perform a due diligence review of MSF. The letter of intent provided Search with a 45-day due diligence period by the end of which Search was to prepare and deliver to MSF a proposed definitive agreement for Search to acquire MSF. This letter of intent provided Search with a 45-day right of first refusal with respect to any acquisition of MSF or stock of MSF to which MSF was a party. The letter of intent also set forth the parties' agreement that Search would purchase newly-originated motor vehicle installment sales contracts offered to it by MSF on mutually acceptable terms. On November 13, 1996, Messrs. Stuart and Canfield and Mr. Vann R. Martin, President and Chief Operating Officer of MSF, and Messrs. Evans, Leary and Idzi met separately on behalf of MSF and Search, respectively, with representatives of the MSF Lenders in Chicago to review the November 12 letter of intent, Search's financial condition and recent results of operation, Search's ability to acquire MSF and other financial and procedural aspects of an acquisition of MSF by Search, including the terms upon which MSF's revolving credit facility with the MSF Lenders could be continued following an acquisition. On November 15, 1996, Mr. Evans and Mr. Anthony J. Dellavechia, Senior Executive Vice President, Operations Director of Search, met in Jackson, Mississippi with Mr. Martin and other representatives of MSF to negotiate the terms under which Search would purchase newly-originated motor vehicle installment sales contracts from MSF. 31 39 On November 18, 1996, MSF announced that its year-to-date loss and inability to complete a securitization caused it to violate certain covenants of its revolving credit facility, that it was unable to make any more borrowings under that facility and that it was negotiating for waivers or amendments to the relevant loan documents. MSF also announced that it had retained Bear Stearns to provide financial advice to it on financing and strategic alternatives and that it was evaluating various financing alternatives, as well as a merger with, or possible sale of MSF or its assets to, another company. During the period from November 19, 1996 through December 6, 1996, Mr. Dellavechia, Mr. Andrew L. Tenney, Executive Vice President, Marketing, Mr. Timothy G. Vorbeck, Executive Vice President, Operations, Mr. Karman Wallace, Senior Vice President, Mr. Joe B. Dorman, Senior Vice President, Mr. Lucien Daniel Vandergrift, Vice President, Collections, and other representatives of Search conducted an extensive business due diligence review of MSF's motor vehicle installment sales contract portfolio. During this period, Search also provided MSF with a legal due diligence checklist and Search continued its business and financial due diligence review of MSF. On December 9 and 10, 1996, Messrs. Evans and Dellavechia met with MSF's marketing personnel to discuss a possible acquisition and the effects of utilizing Search's underwriting criteria rather than MSF's criteria following an acquisition. They also visited MSF's collection facility in Mobile, Alabama. On December 12, 1996, after MSF had obtained the consent of the MSF Lenders, Search Funding Corp. and MSF entered into the agreement contemplated by the November 12, 1996 letter of intent between Search and MSF for Search Funding Corp. to purchase newly-originated motor vehicle installment sales contracts from MSF on an ongoing basis. On December 20, 1996, Search sent to the agent bank for the MSF Lenders the terms Search desired for continuation of MSF's revolving credit facility following an acquisition of MSF. Between October and December 1996, representatives of Search, MSF, Alex. Brown and Bear Stearns had discussions regarding the financial aspects and alternative structures of a transaction that might be acceptable to Search, MSF and the Principal Stockholders, including discussions regarding a merger transaction in which MSF stockholders would have a limited right to elect to receive cash in lieu of shares of Search Common Stock, a possible two-step transaction involving purchase of the shares owned by the Principal Stockholders prior to a merger, a purchase of the assets of MSF, and different ranges for the Per Share Amount and the maximum and minimum Exchange Ratios. A transaction involving a limited right to elect cash was not pursued because of limits that Search would have imposed on the aggregate amount of cash available and the per share cash amount. Neither a two-step transaction nor an asset purchase transaction was pursued because the parties believed that such transactions would be more complicated to structure and, ultimately, would take longer to complete. The Per Share Amount and the maximum and minimum Exchange Ratios were the result of negotiation between Search and MSF and their advisers of these and other terms of the Merger Agreement. On December 23, 1996, Mr. Evans proposed to Mr. Stuart that Search acquire MSF for a combination of stock and cash having an aggregate value of approximately $21.3 million, with MSF stockholders electing to receive Search stock receiving $2.04 in Search Common Stock and MSF stockholders electing cash to receive $1.43 in cash for each share of MSF Common Stock, subject to proration in the event more than $5 million in cash would otherwise be payable. The offer was subject to approval by both companies' Boards of Directors, completion of legal due diligence, adjustment for serious deterioration of MSF's portfolio and other customary conditions. Search also presented to MSF a letter of intent setting out these proposed terms. The letter of intent contemplated a definitive agreement being executed by January 6, 1997 and, among other things, would have prevented MSF from soliciting or considering alternative business combination proposals. MSF did not sign the letter of intent to preserve its ability to seek and consider alternative transactions with third parties. On December 27, 1996, Search's counsel distributed to MSF, MSF's counsel and Bear Stearns an initial draft of the Merger Agreement. On December 30, 1996, Mr. Ellis A. Regenbogen, Executive Vice President and General Counsel of Search, and representatives of Search's counsel went to MSF's offices in Jackson, Mississippi to continue their legal due diligence investigation of MSF. Mr. Hubbuch reviewed with them the matters covered in the legal due diligence checklist previously provided to MSF of which he had knowledge and with respect to which documents had not previously been provided to Search, including various matters in litigation and pending employment, workers compensation and other claims. MSF also made additional documents available for review and continued to provide numerous documents, and responded to due diligence inquiries, from that date until the signing of the Merger Agreement. 32 40 On December 30 and 31, 1996, representatives of MSF and Bear Stearns went to Search's offices in Dallas, Texas to continue their due diligence investigation of Search. On January 6, 1997, the Board of Directors of Search met to review the proposed acquisition of MSF and the terms therefor, including that the acquisition might be structured as an all stock transaction if that was acceptable to the Principal Stockholders. On January 7, 1997, MSF's counsel provided to Search's counsel comments on the first draft of the Merger Agreement on behalf of MSF and the Principal Stockholders. Counsel for Search, MSF and MSD held a conference telephone call on January 13, 1997 to review those comments and attempt to identify open business and legal issues. Also on January 7, 1997, Mr. Canfield went to Search's offices in Dallas, Texas to continue MSF's due diligence investigation of Search. On January 9, 1997, Messrs. Evans, Leary and Idzi made a presentation at the offices of Bear Stearns in New York City to representatives of the MSF Lenders and their counsel, Bear Stearns and the Principal Stockholders. On January 14, 1997, MSF's counsel commenced its legal due diligence investigation of Search. Search provided MSF's counsel access to its facilities in Dallas, Texas, to legal due diligence materials and information at its headquarters there and to Search's outside counsel responsible for pending litigation matters. On January 14, 1997, the Board of Directors of MSF met in Dallas to review the status of the ongoing acquisition negotiations with Search. At that meeting, MSF's counsel and financial advisors extensively reviewed and explained the proposed transaction and MSF's alternatives. Mr. Evans met after the Board meeting with Messrs. Stuart and Canfield and Mr. Harold A. Hogue, a director of MSF and Vice President and Chief Financial Officer of MSD, to discuss open issues regarding the acquisition. On January 16, 1997, counsel for the MSF Lenders circulated to representatives of the MSF Lenders, Search, MSF, the Principal Stockholders and their respective counsel and financial advisors, a preliminary draft of a term sheet regarding proposed amendments to the agreement regarding MSF's revolving credit facility, including the terms on which that facility would be available to MSF after the Merger. On January 17, 1997, a revised draft of the Merger Agreement and a first draft of the Stockholders Agreement were distributed by Search's counsel to Search, MSF and the Principal Stockholders and their counsel and financial advisors. On January 17 and 20, 1997, Search and MSF, respectively, provided to representatives of the MSF Lenders and their counsel their proposed changes to the proposed term sheet. Between January 20 and February 7, 1997, numerous telephone conversations took place between Mr. Idzi, Mr. Hogue and representatives of the MSF Lenders during which the terms of the term sheet were negotiated. During this period, counsel for the MSF Lenders also distributed several revised preliminary drafts of the term sheet and conducted a legal due diligence review of Search. Between January 15 and January 31, 1997, Messrs. Evans, Stuart, Canfield, Hogue, Idzi and Regenbogen, counsel for Search, MSF and the Principal Stockholders and representatives of Alex. Brown and Bear Stearns had several telephone conference calls in which some or all of them participated to negotiate the definitive terms of the Merger Agreement and the Stockholders Agreement, including provisions for an adjustment of the consideration payable if MSF's stockholders' equity at closing of the Merger was less than a specified amount or certain other events occurred. A number of revised drafts of such agreements were circulated during this time period. On January 31 and February 1, 1997, Mr. Regenbogen and counsel for Search, MSF, the Principal Stockholders and a representative of Bear Stearns met at Search's offices in Dallas, Texas to continue to negotiate the terms of the Merger Agreement and the Stockholders Agreement and to identify remaining open issues. Mr. Evans participated in part of those meetings to facilitate the resolution of open issues. On February 1 and 2, 1997, Mr. Evans discussed with Messrs. Stuart and Canfield the remaining open issues in the Merger Agreement and the Stockholders Agreement and his proposal for adjustment of the consideration payable in the Merger to account for certain matters identified during the course of Search's due diligence investigation of MSF and to provide for additional adjustments in certain circumstances. 33 41 Messrs. Evans, Stuart, Hogue and Canfield continued to negotiate and resolve these matters by telephone on February 3 and 4 and at Search's offices in Dallas, Texas. On February 5, 1997, Messrs. Stuart, Hogue, Canfield, Idzi and Regenbogen met with counsel for Search, MSF and the Principal Stockholders and a representative of Bear Stearns to complete the negotiation of the Merger Agreement and the Stockholders Agreement. On February 6, 1997, the Board of Directors of Search met by conference telephone to discuss the Merger and drafts of the Merger Agreement and Stockholders Agreement and to vote on whether to approve those agreements and the issuance of shares of Search Common Stock pursuant to the Merger. The Board of Search unanimously approved those matters, with Mr. Barry Ridings, a Managing Director of Alex. Brown, abstaining because of Alex. Brown's role as financial advisor to Search in connection with the Merger. Representatives of Search's counsel and financial advisors participated in the meeting. On February 7, 1997, the Board of Directors of MSF met to discuss the Merger and the revised draft of the Merger Agreement and to vote on whether to approve the Merger and adopt the Merger Agreement. Following extensive, detailed presentations by MSF's counsel and financial advisors regarding the terms of the transaction, information relating to Search and MSF's alternatives, the MSF Board unanimously approved the Merger and adopted the Merger Agreement. Representatives of MSF's counsel and financial advisor participated in the meeting. On February 7, 1997, Search, MSF and the Principal Stockholders exchanged by facsimile their respective signatures to the Merger Agreement and the Stockholders Agreement. Later that day, Search and MSF announced the execution of the Merger Agreement. On February 19, 1997, Search, Merger Sub, MSF and the MSF Lenders signed the term sheet relating to the continuation of MSF's revolving credit facility. On June 25, 1997, Search, MergerSub and MSF amended the Merger Agreement to extend the outside Effective Time from June 30 to August 15, 1997, to eliminate the provisions requiring adjustments of the Per Share Amount and minimum and maximum Exchange Ratios and to fix the Per Share Amount and minimum and maximum Exchange Ratios at reduced amounts from those set forth in the original Merger Agreement. MSF'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE MSF BOARD Since 1992, MSF has financed its operations principally through a revolving credit facility and annual sales of loans in securitization transactions involving insurance provided by a third party surety company. During 1996, MSF's loan delinquencies increased dramatically and exceeded levels specified in the agreements related to MSF's existing securitizations. Because of its concerns about MSF's portfolio, the surety company which had provided insurance for MSF's prior securitizations declined to insure a securitization transaction that MSF had scheduled for September 1996. MSF recorded a $6.7 million provision for loan losses in excess of the normal provision in the third quarter of 1996 to reflect a revaluation of MSF's portfolio. This addition contributed to the $4.2 million loss reported by MSF for the nine month period ended September 30, 1996. The loss resulted in MSF's default under certain covenants in its $90 million revolving credit facility. Throughout September and October 1996, MSF unsuccessfully attempted to complete a securitization transaction and to renegotiate the terms of its revolving credit facility. By mid October, MSF had reached the limit of its revolving credit facility. On October 25, 1996, the Company engaged Bear Stearns to explore MSF's financial and strategic alternatives. Bear Stearns investigated the feasibility of raising additional capital but concluded that it was unlikely that sufficient additional capital could be raised to satisfy MSF's liquidity requirements. Accordingly, the MSF Board concluded that a sale of MSF was in the best interests of MSF's stockholders. With Bear Stearns' assistance, the MSF Board identified and contacted a number of firms that the Board believed were the most likely buyers of MSF. In addition, MSF announced in its Quarterly Report on Form 10-Q filed with the Commission on November 14, 1996 that it was considering a sale. Various meetings were held between MSF representatives and representatives of firms expressing an interest in MSF. Following these meetings, MSF solicited formal indications of interest from the potential buyers. With Bear Stearns' assistance, the MSF Board considered the indications of interest and concluded that the consideration offered by Search was more attractive than the consideration proposed by any other party 34 42 that had been identified, and that Search had a significant likelihood of being able to consummate an acquisition within the time frame imposed by the MSF Lenders. In the course of its deliberations, the MSF Board reviewed a number of factors relevant to the Merger and Merger consideration. In particular, the MSF Board considered (i) the potential value to be achieved through the combination of MSF's and Search's operations, (ii) the alternatives available to MSF, (iii) information concerning Search's business prospects, financial condition and performance, operations and management ability; (iv) the current financial market conditions, and (v) historical and potential market prices for Search's shares. The MSF Board also considered a number of potentially negative factors in its deliberations concerning the Merger, including (i) the loss of control of future operations of MSF after the Merger, (ii) the risk prior to or following consummation of the Merger that the trading price of Search's Common Stock may drop below the level used in establishing the Merger consideration, (iii) the risk that benefits sought to be achieved in the Merger will not be achieved, (iv) Search's lack of established credit sources, and (v) the other risks described above under "Risk Factors." The principal factors considered by the MSF Board in negotiating the Exchange Ratio were (i) the anticipated value of MSF's net assets upon liquidation and the relative trading prices of the Search Common Stock and MSF Common Stock over the recent months prior to execution of the Merger Agreement, (ii) MSF's business prospects, (iii) the historic and anticipated financial results for Search and MSF, (iv) valuations of MSF and Search, (v) the premium that the $2.00 Per Share Amount represented over the trading price of MSF, (vi) an analysis of the combined companies' pro forma financial statements and the potential savings and synergies that might be created by the Merger, and (vii) the terms and conditions of the Merger Agreement. At a meeting of the MSF Board held on February 7, 1997, representatives of Bear Stearns presented a financial analysis of the proposed transaction and advised that, in its opinion, the proposed transaction was fair to the public stockholders of MSF from a financial point of view. Based upon the MSF Board's analysis and the recommendation and advice of Bear Stearns, the MSF Board unanimously approved the Merger and authorized submission of the Merger to a vote of MSF's stockholders. After MSF's management and Search's management reached a tentative compromise on the adjustments to the Per Share Amount and minimum and maximum Exchange Ratios, the MSF Board held a meeting on June 24, 1997 to consider the proposed compromise and amendment to the Merger Agreement. Representatives of Bear Stearns, taking into account the reduced Per Share Amount and minimum and maximum Exchange Ratios, reaffirmed the prior advice of Bear Stearns that the proposed transaction, as amended, was fair to the public stockholders of MSF from a financial point of view. Based upon the MSF Board's analysis and the advice of Bear Stearns, the MSF Board approved the compromise and amendment of the Merger Agreement and reaffirmed its approval of the Merger. After taking into consideration all of the factors set forth above, the MSF Board determined that the Merger was in the best interests of MSF and its stockholders and that MSF should proceed with the Merger at this time. The potential individual interests of the officers and directors of MSF and Search, except for their interests as stockholders, were not considered by the MSF Board in making this determination. OPINION OF MSF'S FINANCIAL ADVISOR MSF retained Bear Stearns by letter agreement dated October 25, 1996 to act as financial advisor to evaluate financing and strategic alternatives. Bear Stearns was selected because of its reputation as a nationally recognized investment banking firm with substantial experience in financial advisory and capital raising, and because Bear Stearns had a previous relationship with MSF, including acting as underwriter for three asset-backed securitization transactions for a wholly-owned, single purpose subsidiary of MSF. As part of the advisory assignment, MSF requested that Bear Stearns provide an opinion as to the fairness of the Merger from a financial point of view to the public stockholders of MSF. No limitations were imposed by MSF upon Bear Stearns with respect to the investigations made or procedures followed by it in rendering its opinion. On February 7, 1997, Bear Stearns advised MSF's Board of Directors that the Merger was fair, from a financial point of view, to the public stockholders of MSF. On June 24, 1997, Bear Stearns advised MSF's Board of Directors that the Merger, as amended, was fair, from a financial point of view to the public shareholders of MSF. Bear Stearns confirmed its opinion in writing as of the date of this Joint Proxy Statement/Prospectus (the "Bear Stearns' Fairness Opinion"). 35 43 THE FULL TEXT OF THE WRITTEN BEAR STEARNS' FAIRNESS OPINION DATED THE DATE HEREOF, WHICH SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEWS UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE, AND SHOULD BE READ IN ITS ENTIRETY. THE SUMMARY OF THE BEAR STEARNS' FAIRNESS OPINION SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPINION. THE BEAR STEARNS' FAIRNESS OPINION DISCUSSED HEREIN IS NOT A CONDITION TO CONSUMMATION OF THE MERGER. Bear Stearns' Fairness Opinion is directed only to the fairness of the Merger, from a financial point of view, to MSF's public stockholders and does not constitute a recommendation to any MSF stockholder as to how such stockholder should vote at the MSF Special Meeting. Bear Stearns and Search have had discussions regarding potential securitization transactions by Search in the future with Bear Stearns' assistance. No agreements or understandings have been reached between Search and Bear Stearns as to any securitization transaction. The consideration to be paid by Search in the Merger was determined as the result of negotiations between the respective representatives and management of MSF and Search. Each holder of MSF Common Stock will receive a fraction of a share of Search Common Stock equal to the Exchange Ratio for each share of MSF Common Stock. The Exchange Ratio will equal the quotient of the Per Share Amount divided by the Average Search Trading Price, but may not be more than 0.37 nor less than 0.28. At June 23, 1997, Search's stock price of $4.88 per share would have produced an Exchange Ratio of approximately 0.33. For purposes of rendering the Bear Stearns' Fairness Opinion, Bear Stearns: (i) reviewed the Joint Proxy Statement/Prospectus in substantially the form to be sent to stockholders, including a copy of the Merger Agreement; (ii) reviewed the Fourth Amended and Restated Loan Agreement dated May 1, 1996 and the First Amendment to such Fourth Amended and Restated Loan Agreement dated December 16, 1996; (iii) reviewed MSF's Annual Report to Stockholders and Annual Report on Form 10-K for the fiscal years ended December 31, 1995 and December 31, 1996, its Prospectus for Common Stock dated July 21, 1995, its Quarterly Reports on Form 10-Q for the periods ended March 31, June 30, and September 30, 1996, and March 31, 1997, and its unaudited preliminary financial results for the periods ended April 30, 1997 and May 31, 1997; (iv) reviewed Search's Annual Report to Shareholders and Transition Report on Form 10-K for the period ended March 31, 1996, its Quarterly Reports on Form 10-Q for the periods ended June 30, September 30 and December 31, 1996, its audited financial results for the year ended March 31, 1997, its Proxy Statement dated August 19, 1996, and Joint Plan of Reorganization confirmed by United States Bankruptcy Court, Northern District of Texas, Dallas Division, in Case No. 395-34981-RCM-11; (v) reviewed certain operating and financial information provided to Bear Stearns by MSF's management relating to MSF's business and prospects; (vi) reviewed certain operating and financial information, including certain projections for the combined companies that assume cost savings, provided to Bear Stearns by Search's management relating to Search's business and prospects; (vii) met with certain members of MSF's senior management to discuss MSF's operations, historical financial statements, future prospects and possible impact to MSF of not consummating the Merger; (viii) met with certain members of Search's senior management to discuss Search's operations, historical financial statements and future prospects; (ix) visited MSF's facilities in Ridgeland, Mississippi; (x) visited Search's facilities in Dallas, Texas; (xi) reviewed the historical prices and trading volumes of the MSF Common Stock and Search Common Stock; (xii) reviewed publicly available financial data and stock market performance data of companies which Bear Stearns deemed generally comparable to MSF and Search; (xiii) reviewed the terms of recent acquisitions of companies which Bear Stearns deemed generally comparable to MSF; (xiv) considered the results of Bear Stearns' conversations with various prospective acquirors of MSF, including the indications of interest received from certain of such prospective acquirors; and (xv) conducted such other studies, analyses, inquires and investigations as Bear Stearns deemed appropriate. In conducting its review and arriving at Bear Stearns' Fairness Opinion, Bear Stearns relied upon and assumed the accuracy and completeness of the financial and other information regarding MSF and Search provided to Bear Stearns by MSF and Search or publicly available, and Bear Stearns did not independently verify such information. With respect to the projected financial results of MSF and Search and the combined companies, Bear Stearns assumed that such results have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Search as to the expected future performance of MSF and Search. Bear Stearns did not assume any responsibility for the information or projections provided to Bear Stearns and further relied upon the assurances of the management of MSF and Search that they were unaware of any facts that would make the information or projections provided to Bear Stearns incomplete or misleading. In arriving at its opinion, Bear Stearns did not perform or obtain any independent appraisal of the assets of MSF or Search. 36 44 The following is a summary of the analyses performed by Bear Stearns in connection with its opinion rendered on June 24, 1997 (which are substantially the same types of analyses performed by Bear Stearns in connection with the Bear Stearns' Fairness Opinion): Financial Statement Review of MSF. Bear Stearns reviewed MSF's Annual Report on Form 10-K for the fiscal years ended December 31, 1995 and December 31, 1996, the IPO prospectus dated July 21, 1995, and its quarterly reports on Form 10-Q for the periods ended March 31, June 30, and September 30, 1996, and March 31, 1997. Bear Stearns noted that net income declined from $6.5 million for the twelve months ended December 31, 1995 to a loss of $22 million for the year ended December 31, 1996. Management also provided Bear Stearns with information that indicated that the net loss for the five months ended May 31, 1997 was $5.6 million. The number of contracts delinquent for over thirty days as a percentage of the total serviced portfolio increased from 12.1% as of December 31, 1995 to 18.7% as of December 31, 1996. Delinquencies decreased to 9.4% of the total serviced portfolio as of May 31, 1997. Repossessions totaled 14.7% for the five months ended May 31, 1997, or approximately 35% on an annualized basis, up from 17.3% for the year ended December 31, 1996. Analysis of MSF Management Forecasts. Bear Stearns reviewed certain internal financial forecasts prepared by the management of MSF. Such forecasts showed continued negative financial results, including net losses and declining book value. Stock Trading Analysis for MSF. Bear Stearns reviewed and analyzed the historical trading prices and volume for the shares of MSF Common Stock on a daily basis from July 21, 1995 to June 23, 1997. Bear Stearns also compared the historical trading prices of MSF Common Stock and certain companies with operations that for purposes of analysis may be considered similar to MSF (the "Peer Company Composite Index"), also on a daily basis from June 21, 1996 to June 23, 1997. The Peer Company Composite Index is composed of the following companies: Aegis Consumer Funding Group, Inc., AmeriCredit Corporation, Consumer Portfolio Services, Inc., Eagle Finance Corp., First Merchants Acceptance Corporation, General Acceptance Corporation, Monaco Finance, Inc., NAL Financial Group, Inc., and TFC Enterprises, Inc. Bear Stearns noted that MSF Common Stock significantly underperformed the Peer Company Composite Index during the comparison period. Stock Trading Analysis for Search. Bear Stearns reviewed and analyzed the historical trading prices and volume for the shares of Search Common Stock on a daily basis from April 1, 1996 to June 23, 1997. Bear Stearns also compared the historical trading prices of Search Common Stock to the Peer Company Composite Index on a daily basis from December 31, 1996 to June 23, 1997. Bear Stearns noted that Search Common Stock outperformed the Peer Company Composite Index during the comparison period. Search Common Stock commenced trading on NASDAQ on March 10, 1997. Prior to that date, it traded on the OTC Bulletin Board. Comparable Company Analysis for MSF. Using publicly available information, Bear Stearns compared the financial performance and stock market valuation of MSF with two peer groups. The first peer group is comprised of auto finance companies with weak historical performances: Aegis Consumer Funding Group, Inc., Eagle Finance Corp., General Acceptance Corporation, Monaco Finance, Inc., NAL Financial Group, Inc., and TFC Enterprises, Inc. (the "Weak Peer Group"). The second peer group is comprised of auto finance companies with stronger historical financial performances: AmeriCredit Corporation and Consumer Portfolio Services, Inc. (the "Strong Peer Group"). Bear Stearns compared the ratio of trading price to last twelve months earnings per share ("EPS"), to 1997 estimated EPS, and to book value for MSF to the values for the two peer groups. For the Weak Peer Group, only NAL Financial Group, Inc. had a meaningful price to last twelve months ratio of 2.2x, and a price to estimated 1997 EPS of 2.4x. For the Strong Peer Group, Bear Stearns calculated a range of price to last twelve months EPS ratios of 11.3x to 17.3x and a median ratio of 14.3x, and a range of price to estimated 1997 EPS ratios of 9.8x to 14.2x and a median ratio of 12.0x. Since MSF reported a loss in the last twelve months and expected a loss in 1997, these multiples are not a meaningful means of comparison. MSF's price to book value was calculated at 0.6x as compared to a range of 0.3x to 2.0x and a median of 0.9x for the Weak Peer Group and a range of 2.5x to 2.9x and a median of 2.7x for the Strong Peer Group. Comparable Company Analysis for Search. Using publicly available information, Bear Stearns compared the financial performance and stock market valuation of Search with the Weak Peer Group and the Strong Peer Group. Bear Stearns compared the ratios of trading price to last twelve months EPS, 1997 estimated EPS (provided by the management of Search), and book value for Search, pro forma for the acquisition of MSF, to the values for the two peer groups. Due to the large amount of preferred equity issued by Search during its restructuring, these ratios were not considered a meaningful method of comparison with the peer groups. 37 45 Comparable Acquisition Analysis. Bear Stearns compared the proposed Merger to past acquisitions of companies which it deemed comparable to MSF. These acquisitions included (acquiror/target): Search/U.S. Lending Corp., Search/Dealers Alliance Credit Corp., Southern National Corporation/Regional Acceptance Corporation, Bay View Capital Corporation/CTL Credit, Inc., Fidelity Acceptance Corp./Century Acceptance Corporation, Inc., KeyCorp/AutoFinance Group, Inc., and First American Corp./Tennessee Credit Corp. (the "Auto Finance Merger Group"). Bear Stearns compared the ratios of premium to receivables, price to earnings and price to book value for the proposed transaction to the median values for the Auto Finance Merger Group. Bear Stearns calculated a range of price to earnings ratios of 5.6x to 42.5 x and a median value of 12.6x for the Auto Finance Merger Group, and a range of premium to receivables ratio of 0.2% to 119.2% and a median value of 13.4%, as compared to 1.2% for the Merger. Because MSF reported a net loss, the price to earnings ratio is not meaningful. Bear Stearns also calculated a price to book ratio of 1.0x for the Merger as compared to a range of 1.0x to 4.4x and a median of 1.3x for the Auto Finance Merger Group. Bear Stearns' opinion on February 7, 1997, Bear Stearns' opinion on June 24, 1997, and the Bear Stearns' Fairness Opinion, were based solely upon the information available to it and economic, market, and other conditions as they existed as of the dates of such opinions. Events occurring thereafter could materially affect the assumptions used in preparing the opinions. In connection with rendering its opinion on February 7, 1997, its opinion on June 24, 1997, and the Bear Stearns' Fairness Opinion, Bear Stearns performed a variety of financial analyses. The evaluation of the fairness, from a financial point of view, is a subjective one based on the experience and judgment of Bear Stearns, and not merely the result of mathematical analysis of financial data. Accordingly, Bear Stearns believes that its analyses must be considered as a whole and that considering portions of such analyses or certain of the factors considered by Bear Stearns without considering all such analyses and factors could create an incomplete view of the process underlying the opinion. In its analyses, Bear Stearns made numerous assumptions with respect to business, market, monetary and economic conditions, industry performance, business and economic conditions, and other matters, many of which are beyond Bear Stearns' and MSF's control. Any estimates contained in Bear Stearns' analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than such estimates. No company used in the above analyses as a comparison is identical to MSF. Accordingly, an analysis of the results of the foregoing is not mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading value of the companies to which MSF is being compared. The analyses performed by Bear Stearns are not necessarily indicative of actual values or actual future results, which my be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as part of Bear Stearns' analysis of the fairness, from a financial point of view, of the Merger to MSF public stockholders. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold or the prices at which any securities may trade at the present time or at any time in the future. Based upon these analyses, Bear Stearns has delivered its opinion that the Merger is fair, from a financial point of view, to the public stockholders of MSF. Fees. The letter agreement dated October 25, 1996 (including the revision dated November 21, 1996), under which MSF retained Bear Stearns to act as financial advisor, included provisions for fees to be payable in connection with any acquisition of MSF. The engagement letter provides that if the Merger is consummated, then MSF shall pay Bear Stearns a cash fee equal to $475,000 plus 3% of the amount by which the total consideration paid exceeds $15 million (against which any opinion fee or retainer fee will be credited). MSF paid Bear Stearns a retainer fee of $125,000 following the execution of the engagement letter and $250,000 at the time Bear Stearns informed the MSF Board that Bear Stearns was prepared to render the Bear Stearns' Fairness Opinion. In addition, MSF has agreed to reimburse Bear Stearns for its reasonable out-of-pocket costs and expenses incurred in connection with the services rendered to MSF pursuant to the letter agreement. MSF also agreed to pay all out-of-pocket expenses (including, without limitation, fees and expenses of Bear Stearns' counsel) in connection with any testimony provided by Bear Stearns relating to Bear Stearns' Fairness Opinion. Pursuant to this letter agreement, MSF has agreed to indemnify Bear Stearns, its affiliates and their respective partners, directors, officers, agents, consultants and employees and controlling persons against certain expenses and liabilities, including liabilities under the federal securities laws. 38 46 SEARCH'S REASONS FOR THE MERGER; RECOMMENDATIONS OF THE SEARCH BOARD The Search Board believes that the following are reasons for the stockholders of Search to vote FOR approval and adoption of the Merger Agreement and the transactions contemplated thereby, including the Merger, and considered each of them to be material in its decision to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the Merger. The Search Board believes that the terms of the Merger are fair to, and the Merger is in the best interests of, Search and its stockholders. Accordingly, the Search Board has approved the Merger Agreement and the Stockholders Agreement. In forming this belief, the Search Board consulted with Search's management, as well as Search's outside legal counsel and its financial advisors, and considered the following factors: 1. the opportunity the Merger presents to expand substantially Search's portfolio of motor vehicle installment sales contracts; 2. the opportunity that acquisition of MSF's marketing personnel and its existing dealer relationships presents to increase substantially the number and dollar volume of motor vehicle installment sales contracts purchased by Search from dealers on an ongoing basis; 3. the increase in Search's stockholders' equity that will result from the Merger and the opportunity to obtain financing for future growth of Search's business through leveraging of that additional equity; 4. the opportunity that a larger portfolio of receivables presents for consummating an offering of notes securitized by those receivables, resulting in a lower overall cost of borrowing; 5. the Merger will result in a combined company that will have total assets and stockholders' equity in excess of Search alone, resulting in an enhanced ability to secure financing on favorable terms, thereby increasing Search's ability to pursue growth through acquisitions and internal loan generation; 6. the capability of Search's existing management, supported by MSF's management, to manage the combined operations of Search and MSF profitably, including the operating efficiencies that can be derived from the elimination of duplicate overhead functions and the overall reduction in Search's general and administrative expenses as a percentage of revenues that would result from realizing the operating efficiencies; 7. Search's need for greater size to provide greater market strength and recognition in an increasingly competitive marketplace and the inability of Search to increase its loan purchasing volume as rapidly as desired on its own; 8. the availability of the Restructured Credit Facility to MSF for a one-year period following the Merger; see "--Restructuring of MSF's Line of Credit;" 9. the presentation of Alex. Brown delivered to the Search Board at its February 6, 1997 meeting regarding various financial and other considerations deemed relevant to the Search Board's evaluation of the Merger and Alex. Brown's opinion to the effect that, as of February 6, 1997, the Exchange Ratio is fair to Search from a financial point of view. See "--Opinion of Alex. Brown & Sons Incorporated;" and 10. the terms and structure of the Merger, including the provisions of the Merger Agreement and the Stockholders Agreement regarding adjustment of the consideration issuable in the Merger in certain circumstances related to MSF's financial performance and the performance of its loan portfolio and the limited indemnification of Search against certain contingent liabilities. See "The Merger Agreement-- Adjustment to Exchange Ratio" and "The Stockholders Agreement--Indemnification; Escrow." 39 47 The Search Board also considered the risks that MSF's contingent liabilities could exceed the amounts for which Search is indemnified in respect of those liabilities, that any such liabilities would have to be satisfied by Search or MSF in cash while their right to indemnification was limited to recovery of shares of Search Common Stock held in escrow pursuant to the Stockholders Agreement and that there is no assurance Search and MSF will be able to meet the repayment obligations of the Restructured Credit Facility within one year after the Effective Time as will be required. See "Risk Factors--MSF's Revolving Line of Credit" and "--MSF's Contingent Liabilities." After taking into consideration all of the factors set forth above, the Search Board determined that the Merger was in the best interests of Search and its stockholders and that Search should proceed with the Merger. After Search's management and MSF's management reached a tentative compromise on the adjustments to the Per Share Amount and minimum and maximum Exchange Ratios, the Search Board held a meeting on June 25, 1997. The Search Board considered and approved the proposed compromise and amendment of the Merger Agreement and reaffirmed its prior determination that the Merger was in the best interests of Search and its stockholders. OPINION OF SEARCH FINANCIAL ADVISOR Search retained Alex. Brown to act as its financial advisor in connection with the Merger and related matters. Alex. Brown was selected to act as Search's financial advisor based upon its qualifications, expertise and reputation, as well as Alex. Brown's prior investment banking relationship and familiarity with Search. Alex. Brown regularly publishes research reports regarding the financial services industry and the businesses and securities of publicly owned companies in that industry. On February 6, 1997, at the meeting at which the Search Board approved the Merger Agreement, Alex. Brown delivered a verbal opinion to the Search Board that, as of such date, the Exchange Ratio, as set forth in the Merger Agreement, was fair to Search from a financial point of view, subject to execution of the Merger Agreement. Alex. Brown's verbal opinion was confirmed in a letter dated February 6, 1997 following execution of the Merger Agreement (the "Opinion"). Pursuant to the Merger Agreement, each share of MSF Common Stock issued and outstanding immediately prior to the Effective Time (other than shares held in MSF's treasury or owned by Search or any subsidiary of Search or MSF) will be converted into the fraction of a share of Search Common Stock equal to the Exchange Ratio, which, pursuant to the Merger Agreement as executed on February 6, 1997, was not to be more than 0.46 nor less than 0.34 and would have been subject to adjustment downward in certain circumstances. No limitations were imposed by the Search Board upon Alex. Brown with respect to the investigations made or procedures followed by it in rendering the Opinion. THE FULL TEXT OF THE OPINION, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX C AND IS INCORPORATED HEREIN BY REFERENCE. SEARCH STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY. THE FOLLOWING SUMMARY OF THE OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION. In rendering the Opinion, Alex. Brown (i) reviewed the Merger Agreement as executed on February 6, 1997, (ii) reviewed certain publicly available business and financial information concerning Search and MSF, and certain internal financial analyses and other information furnished to Alex. Brown by Search, (iii) held discussions with members of senior management of Search regarding the past and current business operations, financial condition, and future prospects of Search and MSF, (iv) reviewed the reported price and trading activity for Search Common Stock and MSF Common Stock and compared certain financial and stock market information for each of Search and MSF with similar information for certain other financial services companies, the securities of which are publicly traded, (v) reviewed the financial terms of certain recent business combinations in the financial services' industry which Alex. Brown deemed comparable in whole or in part, and (vi) performed such other studies and analyses as Alex. Brown considered appropriate. Alex. Brown relied without independent verification upon the accuracy and completeness of all of the financial and other information reviewed by and discussed with it for purposes of its Opinion. With respect to the financial forecasts reviewed by Alex. Brown in rendering its Opinion, Alex. Brown assumed that such financial forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Search as to the future financial performance of Search and MSF. Alex. Brown did not make an independent evaluation or appraisal of the assets or liabilities of Search or MSF nor was it furnished with any such appraisal. On June 26, 1997, Alex. Brown delivered a letter to the Search Board advising the Search Board that Alex. Brown is of the view that the modifications to the Exchange Ratio effected by the June 25th amendment to the Merger Agreement, had they been made prior to February 6, 1997, would not have caused Alex. Brown to change its view expressed in the Opinion that the Exchange Ratio was fair, as of February 6, 1997, from a financial point of view to Search. In reaching that conclusion, Alex. Brown reviewed the June 25th amendment to the Merger Agreement and conducted such other review and analysis as it deemed necessary for the purposes of its June 26th letter. At the direction of Search, Alex. Brown has not performed the review and analysis that it would consider necessary to pass on the fairness, from a financial point of view, to Search of the revised Exchange Ratio as of June 26, 1997 and, as such, Alex. Brown does not address in any manner the fairness, from a financial point of view, to Search of the revised Exchange Ratio in the light of developments since February 6, 1997 relating to either Search or MS Financial specifically or market and economic conditions generally. However, as stated in Alex. Brown's June 26th letter, the delivery of that letter is predicated on the Company's representation that no facts or circumstances have arisen (including any changes in the financial condition, earnings, cash flows and prospects of either the Company or MS Financial since the delivery of the Opinion as compared to the financial condition, earnings, cash flows and prospects of either the Company or MS Financial for periods ending prior to delivery of the Opinion) that materially detract from the financial condition, earnings, cash flows and prospects expected by the Company's senior management to result from the combined entity by virtue of the Merger as previously discussed with Alex. Brown. 40 48 The summary set forth below does not purport to be a complete description of the analyses performed by Alex. Brown in connection with its Opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Accordingly, notwithstanding the separate factors discussed below, Alex. Brown believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create an incomplete view of the evaluation process underlying its Opinion. No one of the analyses performed by Alex. Brown was assigned a greater significance than any other. In performing its analyses, Alex. Brown made numerous assumptions with respect to industry performance, business and economic conditions and other matters, many of which are beyond Search's or MSF's control. The analyses performed by Alex. Brown are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Additionally, analyses relating to the values of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold. All references to the Merger Agreement and the Exchange Ratio in the following summary refer to the Merger Agreement prior to its amendment on June 25, 1997 and the Exchange Ratio as defined prior to such amendment. Analysis of Selected Acquisition Transactions. In preparing the Opinion, Alex. Brown analyzed certain selected merger and acquisition transactions for automobile finance companies based upon the acquisition price relative to book value, last twelve months' ("LTM") earnings and managed portfolio, and the premium to market price. The market price premium is measured against the market price of the common stock one month prior to the acquisition announcement. The analysis included a review and comparison of the mean multiples represented by a sample of recently effected or pending automobile finance company acquisitions nationwide announced since January 1, 1995 (a total of 6 transactions) ("National Transactions"). The relative multiples implied by the Exchange Ratio (based on a $2.00 implied per share value to MSF stockholders as of February 6, 1997) and the National Transactions, respectively, are provided in the following table:
Purchase Price to ----------------------------------------------------------------------------- LTM Earnings Managed Receivables Market Per Share Book Value Portfolio (Gross) Premium --------- ---------- ----------------- ------- CONSIDERATION ($2.00 PER SHARE) NM 111.1% 23% 53% NATIONAL TRANSACTIONS AVERAGE 27.3X 384% 86% 40% HIGH 34.6X 592% 146% 65% LOW 12.7X 132% 13% 28%
The results of this analysis were discounted due to the small sample size, along with the fact that most companies acquired had positive LTM earnings and were performing substantially better than MSF from a financial perspective. Contribution Analysis. Alex. Brown also determined the contribution by MSF of key historical balance sheet items at December 31, 1996 (including gross receivables, receivables net of allowance for loan loss reserves & unearned income, total servicing portfolio, assets and equity) to the resulting pro forma entity, as compared to the implied value contributed by Search in stock that would be received by MSF stockholders in the aggregate as a result of the Merger (based on an implied Exchange Ratio as of February 6, 1997). The relative levels of contribution by MSF in these selected areas and the implied value contributed by Search in stock to be received by MSF stockholders, in the aggregate, are presented in the following table:
BALANCE SHEET ITEMS MSF CONTRIBUTION ------------------- ---------------- Gross Receivables 62.4% Net Receivables 60.2% Servicing Portfolio 70.4% Assets 54.3% Equity 38.9% IMPLIED VALUE CONTRIBUTED IN STOCK BY SEARCH 29.5%
41 49 Impact on Search Stockholders. Based on pro forma financial projections developed by the management of Search, including cost savings, along with the Exchange Ratio that MSF stockholders could receive as part of the Merger Agreement, Alex. Brown was able to determine the expected effect of the transaction to the current stockholders of Search Common Stock. This pro forma analysis indicated that the transaction would likely result in a minor increase in earnings per share for Search's fiscal year ending March 31, 1998, and minor increases in book value and tangible book value per share as of December 31, 1996. Asset Value Analysis. Alex. Brown estimated the asset value of MSF assuming (i) various collectability assumptions on MSF's gross receivables, ranging from 55%-75%, and (ii) that cash, other assets and total liabilities assumed are valued at 100% of their respective book values. The range of collectability assumptions used reflected a variety of scenarios regarding the credit quality of MSF's gross receivables. This analysis indicated that the market value of the Search Common Stock to be issued to the stockholders of MSF in the Merger is within the range of implied asset values of MSF. Analysis of Selected Publicly Traded Companies. In preparing the Opinion, Alex. Brown, using publicly available information, compared selected financial information, including book value, LTM earnings and managed receivables, for Search, MSF and selected groups of automobile finance companies. The first selected group consisted of "C" and "D" credit grade automobile finance company lenders with weak historical performances, including Eagle Finance Corp. (EFCW), General Acceptance Corp. (GACC), Jayhawk Acceptance Corporation (JACC), Mercury Finance Inc. (MFN), Monaco Finance, Inc. (MONFA), NAL Financial Group Inc. (NALF), and TFC Enterprises Inc. (TFCE) (the "Weak Peer Group"). The second selected group consisted of "C" and "D" credit grade automobile finance company lenders with stronger historical performances, including Americredit Corp. (ACF), Consumer Portfolio Services, Inc. (CPSS), First Merchants Acceptance Corporation (FMAC), and National Auto Credit (NAK) (the "Strong Peer Group"). Since Alex. Brown's initial evaluation, First Merchants Acceptance Corporation announced a material downward revision to its historical net income and equity. Alex. Brown analyzed the relative multiples implied by the market price of Search Common Stock, MSF Common Stock and the mean market price of the common stock of the Weak Peer Group and the Strong Peer Group, as of February 5, 1997, to the selected financial information listed above. Alex. Brown calculated the mean price to LTM earnings of 5.1x for the Weak Peer Group and 12.0x for the Strong Peer Group. Since both Search and MSF reported a loss in the last 12 months, these multiples are not a meaningful means of comparison. Alex. Brown calculated a mean price to book value of 152% for Search, 61% for MSF, 102% for the Weak Peer Group, and 207% for the Strong Peer Group. Alex. Brown calculated a mean price to managed receivables of 68.3% for Search, 5.9% for MSF, 27.1% for the Weak Peer Group, and 53.0% for the Strong Peer Group. The results of this analysis were discounted for several reasons, including (i) the divergent multiples reflected due to the distressed nature of many of the companies in the group, (ii) Search Common Stock traded on the OTC Bulletin Board prior to March 10, 1997, and (iii) Search did not have an earnings estimate from the Institutional Brokers Estimate System International, Inc. ("I/B/E/S"). Historical Stock Trading Analysis. In preparing the Opinion, Alex. Brown reviewed the trading prices and volumes for the MSF Common Stock and Search Common Stock and the relationship between price movements of the MSF Common Stock and Search Common Stock and the price movements of the common stock of the Peer Group. This analysis indicated that both Search Common Stock and MSF Common Stock underperformed relative to the Peer Group. Compensation of Financial Advisor. Pursuant to the terms of an engagement letter dated May 16, 1996, as amended, Search has agreed to pay Alex. Brown a fee of $175,000 upon consummation of the Merger. Search has also agreed to pay Alex. Brown a fee of $50,000 for issuance of the Opinion. Whether or not the Merger is consummated, Search also has agreed to pay all of Alex. Brown's reasonable out-of-pocket expenses, including fees and disbursements of counsel, incurred by Alex. Brown in carrying out its duties under its engagement, and to indemnify Alex. Brown and certain related persons against certain liabilities relating to or arising out of its engagement. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the MSF Board to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the Merger, stockholders should be aware that the executive officers of MSF and members of the MSF Board have interests in the Merger that are in addition to the interests of MSF stockholders generally, and that the members of the MSF Board having such interests participated in the discussion, deliberation and voting of the MSF Board with respect to the Merger. 42 50 Ownership of Shares of MSF Common Stock; Election of New Search Director. Messrs. Carl Herrin, James B. Stuart, Jr. and Harold A. Hogue, who are directors of MSF, also serve as Chairman of the Board, President and Chief Executive Officer and Vice President and Chief Financial Officer of MSD, respectively. MSD and its wholly-owned subsidiary, MS Financial Services, Inc., collectively own 41.4% of the outstanding MSF Common Stock. Messrs. Philip A. Canfield and Carl D. Thoma, who are directors of MSF, also serve as an associate and principal, respectively, of Golder, Thoma, Cressey, Rauner, Inc. ("Golder Thoma"). Golder Thoma's affiliate, Golder Thoma Cressey Rauner Fund IV, L.P., owns 35.7% of the outstanding MSF Common Stock. Together these five directors form a majority of the members of the MSF Board. In addition, Search has agreed that Mr. Stuart, who is Chairman of MSF, will become a director of Search following the Merger. Acceleration of Options. The officers and directors of MSF hold options to purchase MSF Common Stock under the MSF Amended and Restated Employees' Equity Incentive Plan and the MSF Non-Employee Directors Stock Option Plan (the "MSF Plans"). As a result of the Merger and the terms of these options, at the Effective Time, all of these options will become fully exercisable, to the extent not previously exercisable, to purchase Search Common Stock. See "The Merger Agreement--Treatment of MSF Stock Options." Options held by directors other than Mr. Stuart will terminate three months following the Effective Time. As of February 7, 1997, the officers and directors of MSF held options to purchase an aggregate of 847,228 shares of MSF Common Stock at a weighted average price of $5.56 per share (at exercise prices ranging from $2.50 to $12.00 per share), of which options to purchase 370,734 shares were exercisable at a weighted average price of $3.85. Employment Agreements. Several of MSF's officers have employment contracts with MSF. Under the terms of each of these contracts, the officer is entitled to certain severance payments after the Effective Time if the officer's employment is terminated without cause, or if the officer resigns because there is a material reduction in the officer's salary or benefits, the officer is required to be based more than 25 miles from MSF's present executive offices, or the officer is removed, not reelected to his position with MSF or is assigned duties inconsistent with his duties, responsibilities and status with MSF. The severance payments are generally one-year's base salary. The employment contract for MSF's former Chief Executive Officer, who resigned effective February 28, 1997, provides that he will receive cash severance payments for a period of one year so long as he complies with certain noncompete covenants. MSF, with the consent of Search, has agreed that the former Chief Executive Officer may exercise certain stock options issued under one of the MSF Plans for up to one year after his resignation. Indemnification; Insurance. Under the Merger Agreement, Search has agreed that the Surviving Corporation's Certificate of Incorporation and Bylaws will be no less favorable with respect to indemnification of officers, directors, employees, fiduciaries and agents than MSF's current Second Amended and Restated Certificate of Incorporation and Bylaws. In addition, Search has agreed not to amend or repeal in any manner that would diminish their effect the provisions of the Surviving Corporation's Certificate of Incorporation and Bylaws providing for indemnification of individuals who at any time prior to the Merger were directors, officers, employees, fiduciaries or agents of MSF for a period of three years after the Merger for all matters other than this Joint Proxy Statement/Prospectus, for which the period will be four years following the Merger. Under the Merger Agreement, Search has agreed that the Surviving Corporation will use reasonable efforts, subject to certain cost limitations, to maintain in effect for three years after the Merger MSF's current directors' and officers' liability insurance coverage with respect to matters occurring prior to the Merger. The MSF Board of Directors was aware of these interests but did not consider them to be significant or of a nature that would affect the objectivity of any director's determination that the Merger was in the best interests of all of the MSF stockholders. ACCOUNTING TREATMENT The Merger will be accounted for by Search under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations," as amended. Under this method of accounting, the aggregate Merger consideration will be allocated to MSF's assets and liabilities based on their estimated fair values at the Effective Time, and the results of operations of MSF will be included in the results of operations of Search only for periods subsequent to the Effective Time. 43 51 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes certain of the principal federal income tax considerations associated with the Merger under the Code to holders who hold shares of MSF Common Stock as capital assets. As it is not feasible to describe all of the tax consequences associated with the Merger, each stockholder should consult his or her tax advisor with respect to the tax consequences of the Merger applicable to his or her specific circumstances. In particular, the following discussion does not address the potential tax consequences applicable to MSF stockholders who are dealers in securities, who acquired their MSF Common Stock through stock option or stock purchase programs or other employee plans or otherwise as compensation, who are subject to special treatment under the Code (such as insurance companies, tax-exempt organizations, financial institutions, nonresident alien individuals or foreign entities), or who hold shares of MSF Common Stock in a hedging transaction or as part of a straddle or conversion transaction, nor any potential tax consequences applicable to the holders of options to purchase MSF Common Stock assumed by Search in the Merger. The following summary is based on the Code, applicable Treasury Regulations, judicial authority and administrative rulings and practice, all as of the date hereof. There can be no assurance that future legislative, judicial or administrative changes or interpretations will not adversely affect the statements and conclusions set forth herein. Any such changes or interpretations could be applied retroactively and could affect the tax consequences of the Merger to MSF, Search and their respective stockholders. Furthermore, the following discussion addresses only certain federal income tax matters and does not consider any state, local or foreign tax consequences of the Merger or other transactions described in this Joint Proxy Statement/Prospectus. Neither Search nor MSF has requested or will request any ruling from the Internal Revenue Service in connection with the Merger. However, the Merger has been structured with the intention that it qualify as a reorganization under Section 368(a) of the Code. Search and MSF have received an opinion from Haynes & Boone L.L.P. ("Haynes & Boone") that the Merger will qualify as a reorganization under Section 368(a) of the Code. Such tax opinion is subject to certain assumptions and qualifications and is based, among other things, on representations and assumptions relating to certain facts and circumstances of, and the intentions of the parties to, the Merger, which assumptions have been made with the consent of MSF and Search. Such opinion is not binding on the Internal Revenue Service and does not preclude it from adopting a contrary position. Haynes & Boone will render an update to the opinion at the Effective Time. If such opinion update is not received, the Merger will not be consummated unless the condition requiring its receipt is waived. Search and MSF currently anticipate that such opinion update will be delivered and that MSF will not waive the condition requiring receipt of such opinion update. Qualification of the Merger as a reorganization depends on compliance with certain technical requirements of federal income tax law, including, among others, the requirement that a continuity of proprietary interest be maintained by the stockholders of the merged corporation. In order for this requirement to be satisfied, the stockholders of MSF must not, pursuant to a plan or intention existing at or prior to the Merger, dispose of so much of either (i) their shares of MSF Common Stock in anticipation of the Merger or (ii) the Search Common Stock received pursuant to the Merger such that the holders of shares of MSF Common Stock, as a group, would no longer have a significant equity interest in the MSF business being conducted by the combined companies after the Merger. It is the position of the Internal Revenue Service that the continuity of interest requirement generally will be considered satisfied if the stockholders of the merged corporation receive in the aggregate (and have no plan to dispose of) stock of the acquiring corporation equal in value to at least 50% of the value of all of the formerly outstanding stock of the acquired corporation as of the effective date of the reorganization, and a decision of the United States Supreme Court indicates that continuity of interest in the range of 40% is sufficient. With the exception of cash paid in lieu of fractional shares, the Merger Agreement provides that all of the consideration paid by Search to MSF stockholders in exchange for their MSF Common Stock pursuant to the Merger will consist of Search Common Stock. Furthermore, pursuant to the Stockholders Agreement, the Principal Stockholders are obligated to give a representation that each such stockholder has no plan to sell, transfer or otherwise dispose of or convey the Search Common Stock received by it pursuant to the Merger. Satisfaction of the continuity of interest requirement, however, depends in part on actions that may be taken by MSF stockholders either before or after the consummation of the Merger over which neither MSF nor Search has any control. Accordingly, there can be no assurance that the continuity of interest requirement will be satisfied with respect to the Merger. If the continuity of interest requirement (or any other requirement for reorganization treatment under the Code) is not satisfied, the Merger will not be treated as a reorganization and material adverse tax consequences will result to MSF and some or all of the holders of MSF Common Stock. Tax Consequences to MSF Stockholders. Assuming the Merger is treated as a reorganization under the Code, the following federal income tax consequences, among others, generally will apply to MSF stockholders: 44 52 (i) No gain or loss will be recognized by a holder of MSF Common Stock with respect to the receipt of Search Common Stock in exchange for such MSF Common Stock pursuant to the Merger (except with respect to any cash received in lieu of fractional shares of Search Common Stock); (ii) The aggregate tax basis of the Search Common Stock received by each MSF stockholder will be the same as the aggregate tax basis of the MSF Common Stock surrendered in the Merger, decreased by the amount of any tax basis allocable to fractional shares of Search Common Stock in lieu of which cash will be paid; (iii) The holding period of the Search Common Stock received by each MSF stockholder will include the period for which the MSF Common Stock surrendered in exchange therefor was considered to be held, provided the MSF Common Stock so surrendered is held as a capital asset at the Effective Time; and (iv) Payment received by holders of MSF Common Stock in lieu of fractional shares of Search Common Stock will be treated as payment in redemption of such fractional shares and, provided that the redeemed interest is held as a capital asset at the Effective Time, will generally result in the recognition of capital gain or loss by such holders measured by the difference between the amount received and the tax basis allocable to such fractional shares. Irrespective of the reorganization status of the Merger, a recipient of shares of Search Common Stock will recognize income if and to the extent any such shares are considered to be received in exchange for services or property (other than MSF Common Stock). All or a portion of such income may be taxable as ordinary income. Gain also will be recognized if and to the extent an MSF stockholder is treated as receiving (directly or indirectly) consideration other than Search Common Stock in exchange for his or her MSF Common Stock. Tax Consequences to Search and MSF. Assuming the Merger is treated as a reorganization under the Code, generally no gain or loss will be recognized by Search, Merger Sub or MSF as a result of the Merger. The Merger will not have any tax consequences for Search stockholders. THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT A COMPLETE DESCRIPTION OF ALL POTENTIAL TAX CONSEQUENCES THAT MAY OCCUR AS A RESULT OF THE MERGER. MSF STOCKHOLDERS SHOULD THEREFORE CONSULT THEIR TAX ADVISORS REGARDING THE FEDERAL TAX CONSEQUENCES OF THE MERGER, THE HOLDING AND DISPOSING OF SEARCH COMMON STOCK RECEIVED IN THE MERGER, THE EXERCISE OF ANY OPTIONS TO PURCHASE MSF COMMON STOCK ASSUMED IN THE MERGER AND THE TAX CONSEQUENCES OF THE MERGER ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR OTHER JURISDICTION. FEDERAL SECURITIES LAW CONSEQUENCES All shares of Search Common Stock received by MSF stockholders in the Merger will be freely transferable, except that shares of Search Common Stock received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of MSF are restricted as described herein. Rule 145 promulgated under the Securities Act regulates the disposition of securities of "affiliates" of MSF in connection with the Merger. As a condition to the Merger, unless waived, MSF must deliver to Search a letter (the "Affiliate Letter") identifying all persons who are "affiliates" of MSF for purposes of Rule 145 under the Securities Act and use its best efforts to cause each person who is identified in the Affiliate Letter as an "affiliate" (an "Affiliate") to deliver to Search, at least 30 days prior to the Effective Time, a written agreement (an "Affiliate Agreement") in which the Affiliate agrees not to sell, transfer or otherwise dispose of Search Common Stock issued to the Affiliate in the Merger except (i) pursuant to a registration statement under the Securities Act, (ii) in a transaction permitted under Rule 145, or (iii) in a transaction exempt from the registration requirements of the Securities Act. After the Effective Time, and so long as necessary to permit the Affiliate to sell the Search Common Stock pursuant to Rule 145, Search will agree to use its best efforts to file all reports required under the Exchange Act and the regulations thereunder in order to permit the Affiliate to sell, transfer or otherwise dispose of the Search Common Stock under Rule 145. Search will issue appropriate stock transfer instructions to the transfer agent for the shares of Search Common Stock that are to be received by such Affiliate and will place restrictive legends on the certificates evidencing Search Common Stock. 45 53 Pursuant to the Stockholders Agreement, the shares of Search Common Stock to be received by the Principal Stockholders will be subject to restrictions on sale, transfer or other disposition and the Principal Stockholders will have certain registration rights. See "The Stockholders Agreement--Transfer Restrictions; Registration Rights." ABSENCE OF DISSENTERS' RIGHTS Holders of MSF Common Stock and Search Common Stock will not have dissenters' rights under the Delaware Law with respect to the Merger. MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER Directors and Officers of Search. The nine individuals currently serving as directors of Search are Messrs. George C. Evans, Richard F. Bonini, William H. T. Bush, Frederick S. Hammer, Luther H. Hodges, Jr., James F. Leary, A. Brean Murray, Douglas W. Powell and Barry W. Ridings. Search has agreed to elect James B. Stuart, Jr., Chairman of the Board of MSF and President and Chief Executive Officer of MSD, to the Search Board for a term expiring at the 1999 annual meeting of the stockholders of Search, effective at the Effective Time. The officers of Search will not change as a result of the Merger, except that Search intends to elect Mr. Vann R. Martin, President and Chief Operating Officer of MSF, as an Executive Vice President of Search. Directors of the Surviving Corporation. In accordance with the Merger Agreement, Mr. Robert D. Idzi, the sole director of Merger Sub, will be the sole director of the Surviving Corporation. MSF has agreed to deliver to Search, at the Closing, the resignations of the directors of MSF. Officers of the Surviving Corporation. Pursuant to the Merger Agreement, upon consummation of the Merger, the officers of Merger Sub immediately prior to the Effective Time will be the initial officers of the Surviving Corporation. Operations. Following the Merger, Search intends to consolidate the operations of Search and MSF that provide similar services to realize operating efficiencies and expense savings. As of the date of this Joint Proxy Statement/Prospectus, no final determination regarding these matters has been made. However, Search currently intends to retain MSF's branch locations and operations, including the purchase of receivables for the account of the Surviving Corporation utilizing Search's underwriting guidelines. It also currently intends to maintain MSF's headquarters in Jackson, Mississippi through the expiration of the sublease for those headquarters on October 31, 1997 and to maintain MSF's collection facility in Mobile, Alabama. Following the Merger, Search will continue to review the operations of MSF to determine whether additional operating efficiencies and consolidations of operations can be implemented, including consolidation of branch office operations with facilities of Search that are located in close proximity and the consolidation of all of MSF's headquarters operations with the similar operations of Search in Dallas, Texas or at other, smaller, facilities in the Jackson, Mississippi area. Search reserves the right to take any such actions and effect any such changes it deems desirable. RESTRUCTURING OF MSF'S LINE OF CREDIT As of May 31, 1997, the outstanding balance under the MSF Revolving Credit was $65.1 million. In November 1996, MSF advised the MSF Lenders that it was in violation of certain covenants under the MSF Revolving Credit. Effective December 16, 1996, MSF and the MSF Lenders reached an agreement to restructure the MSF Revolving Credit. Under the restructured MSF Revolving Credit, MSF was obligated to make certain mandatory prepayments on the MSF Revolving Credit, the due dates of which were extended until February 7, 1997. On February 19, 1997, the MSF Lenders, Search, Merger Sub and MSF entered into a letter agreement specifying the terms of certain agreements that the parties agreed to execute and deliver ("Term Sheet") to further restructure the MSF Revolving Credit. In addition, the MSF Lenders consented to the execution by MSF of the Merger Agreement and the consummation of the transactions contemplated therein. The provisions of the Term Sheet were incorporated into an amended loan agreement, which was further amended as of May 15, 1997. Pursuant to the Term Sheet, as amended, MSF and the MSF Lenders amended the agreements governing the MSF Revolving Credit to provide that MSF's obligations will be payable in full on the earlier of June 30, 1997, the Termination Date specified in the MSF Revolving Credit documents, or the closing date of the Merger. The amount of the aggregate advances that may be outstanding under the MSF Revolving Credit were reduced from $90,000,000 to $75,000,000. Advances will only be made by the MSF Lenders for the purchase of motor vehicle receivables that comply with Search's 46 54 underwriting criteria or payment of expenses that are within an agreed cash budget. MSF will be required to reduce the MSF Revolving Credit by the amount of any proceeds from income tax refunds, and any prepayment from federal income tax refunds will permanently reduce the amount of the MSF Revolving Credit. The MSF Lenders also required the institution of a lock box account for collection of the proceeds from MSF's receivables, with all proceeds to be applied as a mandatory prepayment of the MSF Revolving Credit on a daily basis. MSF is required to maintain the effectiveness of its collection operations in Jackson, Mississippi and Mobile, Alabama. MSF may continue to sell motor vehicle installment sales contracts originated by it prior to the Merger to Search Funding Corp. in accordance with its December 12, 1996 letter agreement with Search and Search Funding Corp. Search may also lend money to MSF for the purpose of purchasing motor vehicle installment sales contracts by MSF, but this indebtedness, and any liens in favor of Search on the motor vehicle installment sales contracts purchased by MSF with these funds, will be subordinated to the indebtedness represented by, and the liens securing, the MSF Revolving Credit. Any material amendments to the Merger Agreement will require the prior written consent of the MSF Lenders. If the Merger is terminated for any reason, Search will be obligated, if requested by the MSF Lenders, to service MSF's receivables for a period of 90 days following the termination and Search will purchase all receivables acquired by MSF after the effective date of the amendments to the MSF Revolving Credit. On the closing date of the Merger, under the Term Sheet, the agreements governing the MSF Revolving Credit will be amended to provide that MSF will have available a revolving loan facility in an aggregate amount equal to the outstanding principal balance of the MSF Revolving Credit on the closing date of the Merger (the "Restructured Credit Facility"). Search will guarantee MSF's obligations to repay the Restructured Credit Facility. Under the Restructured Credit Facility, MSF will be entitled to receive additional advances to the extent of any difference between the borrowing base, as determined from time to time, and the outstanding principal balance of the Restructured Credit Facility. These advances may be used to pay operating expenses in the ordinary course of business and to purchase motor vehicle installment sales contracts. The Restructured Credit Facility will bear interest at the prime rate plus one percent per annum and will terminate on the earlier of the first anniversary of the Effective Time, any prepayment in full of the Restructured Credit Facility and any date on which the MSF Lenders accelerate payment of the Restructured Credit Facility, at which time all outstanding balances will be payable in full. MSF will make principal payments on the Restructured Credit Facility on a weekly basis in an amount equal to all collections with respect to its motor vehicle installment sales contracts and repossessed vehicles. On the six month anniversary of the Effective Time, the commitment of the MSF Lenders under the Restructured Credit Facility will be permanently reduced by $25,000,000 plus a proportionate reduction of certain "overadvance" amounts owed by MSF at the Effective Time. MSF must repay the outstanding balance to the extent it exceeds the reduced commitment amount. Any net proceeds from restructuring of MSF's existing securitization transactions or from income tax refunds received by MSF must be employed to make mandatory prepayments of the Restructured Credit Facility and will permanently reduce the amount of the Restructured Credit Facility. Mandatory prepayments of the Restructured Credit Facility must also be made in the amount of any proceeds from sales or other dispositions of motor vehicle installment sales contracts and other collateral, but these prepayments will not permanently reduce the amount of the Restructured Credit Facility. If the outstanding principal balance of the Restructured Credit Facility exceeds the borrowing base, MSF will be required to make additional prepayments or cause additional eligible receivables to be transferred to MSF for inclusion in the borrowing base, in either case in an amount sufficient to eliminate the excess. The Restructured Credit Facility will be secured by a first priority security interest in all of MSF's assets. If, upon termination of the Restructured Credit Facility, any balance remains outstanding, MSF has agreed to pay the MSF Lenders a refinancing fee equal to five percent of the outstanding balance on such date. In addition, MSF has agreed to pay to the MSF Lenders a $350,000 fee on the earlier of the full repayment of the Restructured Credit Facility, the termination of the Restructured Credit Facility or the first anniversary of the closing date of the Merger. Effectiveness of the Restructured Credit Facility is subject to the following conditions: (i) consummation of the Merger; (ii) receipt of all necessary consents and approvals from all third parties for the consummation of the Merger and the execution of the amendments to the MSF Revolving Credit; and (iii) receipt of all necessary consents and approvals from Search's existing lenders and of any reasonably required intercreditor agreements. 47 55 THE MERGER AGREEMENT The following summarizes the material terms of the Merger Agreement, which is attached hereto as Annex A and incorporated by reference herein. Stockholders of Search and MSF are urged to read the Merger Agreement in its entirety for a more complete description of the terms of the Merger. EXCHANGE OF SHARE CERTIFICATES As promptly as practicable after the Effective Time, Search will send to each stockholder of record of MSF as of the Effective Time a Letter of Transmittal and other transmittal materials for use in exchanging certificates of MSF Common Stock for certificates of Search Common Stock. The transmittal materials will contain information and instructions with respect to the surrender of MSF Common Stock certificates in exchange for new certificates representing Search Common Stock and cash in payment for any fractional shares resulting from the exchange. Certificates should not be surrendered until the Letter of Transmittal is received. Pending delivery to Search of MSF Common Stock certificates, any dividends on the Search Common Stock to be issued as a result of the Merger that are payable prior to the delivery of such certificates will be held by Search. Such dividends will be paid, without interest, to the persons entitled thereto upon delivery of such MSF Common Stock certificates to Search. Fractional shares of Search Common Stock will not be issued in the Merger. Instead, each stockholder of MSF who would otherwise be entitled to a fractional share will receive, at the option of Search, cash equal to (i) the product of such fraction multiplied by the Average Search Trading Price or (ii) the proceeds of any sale of such fractional share which shall be made by the Exchange Agent, as agent of the holder. If Search elects to have the Exchange Agent sell such fractional shares, Search shall pay all brokers' commissions associated with such sales. TREATMENT OF MSF STOCK OPTIONS At the Effective Time, each outstanding option to purchase shares of MSF Common Stock under the MSF Plans will become fully exercisable and will be assumed by Search. Each MSF option assumed by Search under the Merger Agreement will continue to have, and be subject to, the same terms and conditions set forth in the MSF Plan immediately prior to the Effective Time, except that (i) such option will be exercisable for that number of whole shares of Search Common Stock equal to the product of the number of shares of MSF Common Stock that were purchasable under such option multiplied by the Exchange Ratio, rounded up or down to the nearest whole number of shares of Search Common Stock, and (ii) the per share exercise price for the shares of Search Common Stock issuable upon exercise of such assumed option will be equal to the quotient determined by dividing the exercise price per share of MSF Common Stock at which such option was exercisable immediately prior to the Effective Time by the Exchange Ratio, and rounding the resulting exercise price up to the nearest whole cent. BUSINESS OF MSF PENDING THE MERGER Pending the consummation of the Merger, subject to the limitations of a budget approved by the MSF Lenders, and except as expressly required or permitted by the Merger Agreement or as otherwise consented to or approved in advance by Search in writing, MSF has agreed that MSF and its subsidiary will, among other things, (a) conduct their business in the ordinary course and in a manner consistent with past practice as in effect between July 1, 1996 and December 31, 1996 and not introduce any new method of management, operation or accounting, (b) use commercially reasonable efforts to preserve substantially intact their business organization, to keep available the services of their current officers, employees and consultants and to preserve their current relationships with customers, suppliers, lenders and other persons with which they have significant business relations, (c) maintain their respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted, (d) perform in a timely manner all of their obligations under the Merger Agreement, all related documents and all other material agreements relating to or affecting any of their respective assets, (e) keep in full force and effect present insurance policies or other comparable insurance coverage, (f) use all commercially reasonable efforts to maintain and preserve the goodwill associated with their respective businesses, and their respective relationships with customers and others having business relations with them, (g) maintain compliance with all material permits and laws, (h) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments, and (i) inform Search immediately if any event occurs that may have a material adverse effect upon MSF and its subsidiary, taken as a whole. 48 56 In addition, MSF has agreed that MSF and its subsidiary will not take any of the following actions without the prior written consent of Search: (a) amend any of their respective Certificates of Incorporation or Bylaws; (b) (i) declare or pay any dividend, or make any other distribution in respect of any of their respective stock, (ii) split, combine or reclassify any of their respective capital stock, (iii) issue or authorize the issuance of any shares of capital stock, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest, or (iv) purchase, redeem or otherwise acquire or retire for value any shares of their respective stock except that MSF may issue shares of MSF Common Stock pursuant to options outstanding on the date of the Merger Agreement and pursuant to the MSF Plan; (c) incur or agree to incur any indebtedness other than under its existing loan agreement or make any significant capital expenditures, enter into any other contract or commitment involving a significant expenditure, or guarantee any indebtedness of a third party; (d) except in the ordinary course of business consistent with past practice, (i) increase the compensation payable or to become payable to any officer, director, stockholder, employee or agent, (ii) make any bonus or management fee payment to any such person, (iii) make any loans or advances to any person other than travel or entertainment advances in the ordinary course of business to employees and directors, (v) grant, or enter into any agreement providing for, any severance or termination pay or (vi) in any other manner increase the compensation payable, or fringe benefits provided, to any of such persons; (e) directly or indirectly make or cause to be made any payment to an affiliate in excess of the amount or terms of previous payments made in accordance with past practice or enter into any new agreement with any affiliate; (f) create or assume any mortgage, pledge or other lien or encumbrance upon any assets or properties except in the ordinary course of business; (g) sell, assign, lease, pledge or otherwise transfer or dispose of any property or equipment, except in the ordinary course of business consistent with past practice; (h) acquire or negotiate for the acquisition of (by merger, consolidation, purchase of a substantial portion of assets or otherwise), any business or the start-up of any new business, or otherwise acquire or agree to acquire any assets that are material, individually or in the aggregate, to MSF and its subsidiary taken as a whole; (i) merge or consolidate or agree to merge or consolidate with or into any other corporation; (j) waive any material rights or claims; (k) commit a breach (or take any action that with notice or the passage of time, or both, would cause a breach) of, or amend or terminate, any agreement, permit, license or other right; (l) enter into (i) any material contracts or (ii) any other transaction outside the ordinary course of business consistent with past practice or prohibited under the Merger Agreement; or (m) either (i) commence a lawsuit other than for routine collection of finance contracts or (ii) settle or compromise any pending or threatened litigation which would result in a material adverse effect upon MSF and its subsidiary, taken as a whole. If MSF wishes to take any action otherwise prohibited by the Merger Agreement, it must notify Search in writing of its intended prohibited action, provide Search with a justification for the taking of such action and request Search's consent to such prohibited action. Search will have two business days from receipt of such notice and information it may reasonably request regarding such prohibited action to consent to or deny such request. If Search does not respond to MSF's request by the end of such time period, Search will be deemed to have consented to such action. SEARCH MANAGEMENT ASSISTANCE MSF has agreed to (i) cause its President to consult with Search's President and Chief Executive Officer or Senior Executive Vice President, Operations Director (the "Search Senior Executives") regarding MSF's day-to-day operations, (ii) allow the Search Senior Executives and certain other senior executives of Search to observe and participate in the day-to-day operations of MSF, (iii) allow Search to monitor and evaluate MSF's collection activities, policies and procedures, and (iv) implement those collection policies, procedures and practices as are agreed upon by MSF's President and either of the Search Senior Executives. MSF has also agreed not to change its existing policies and procedures or to implement any new policies and procedures without the prior written approval of one of the Search Senior Executives. Search and MSF have agreed that MSF's President and the Search Senior Executives will cause an analysis of MSF's portfolio of owned motor vehicle installment sales contracts to be conducted to determine the amount of any additional reserves or charges to be recognized prior to the Effective Time. For Search's assistance as described above and in more detail in the Merger Agreement, MSF has agreed to pay Search a fee of $100,000 per month. Payment of this fee will not be taken into account in determining whether adjustment of the Per Share Amount and the maximum and minimum Exchange Ratios is required. See "The Merger--Prior Adjustments to Per Share Amount and Exchange Ratio." SOLICITATION OF OTHER PROPOSALS Pending the consummation of the Merger or termination of the Merger Agreement in accordance therewith, neither MSF nor its subsidiaries will, directly or indirectly, solicit, initiate or encourage the submission of any proposal or offer from 49 57 any person relating to any acquisition of all or any material portion of the assets of, or any equity interest in MSF, its subsidiary or any Securitization Trust, or any merger, consolidation, share exchange, business combination or other similar transaction with MSF, its subsidiary or any Securitization Trust, or participate in discussions or negotiations regarding, or provide any information to any person with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to do or seek any of the foregoing. Notwithstanding the foregoing, MSF is not prohibited from (a) participating in discussions or negotiations with, or furnishing information to, any person or entity that submits an unsolicited written acquisition proposal to the MSF Board pursuant to a confidentiality agreement substantially similar to that then in effect between MSF and Search, if the MSF Board, after consultation with its independent legal and financial advisors and taking into consideration the advice of such advisors, determines in good faith that such action is required for the MSF Board to comply with its fiduciary duties to stockholders imposed by Delaware law. MSF shall advise Search orally and in writing of any request for information or acquisition proposal, or any inquiry with respect to or which could result in an acquisition proposal, the material terms and conditions of such request, acquisition proposal or inquiry, and the identity of the person making the same, and shall keep Search apprised of related developments. CONDITIONS TO THE MERGER Consummation of the Merger is subject to the satisfaction or waiver of various conditions, including (i) the approval and adoption of the Merger Agreement and the Merger by the requisite votes of the stockholders of MSF and Search, (ii) the absence of any restrictive court orders or any other legal restraints or prohibitions, and of any governmental proceedings, preventing the consummation of the Merger, and the absence of any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger which makes the consummation of the Merger illegal, (iii) the representations and warranties of Search and MSF being true and correct in all material respects on and as of the Effective Time, (iv) Search and MSF having performed or complied in all material respects with all agreements and covenants required by the Merger Agreement to be performed or complied with by them on or prior to the Effective Time, (v) the receipt of evidence by Search and MSF from the other party that such party has obtained all necessary third party consents, (vi) the receipt by Search of accountants' "cold comfort" letters with respect to the financial statements of MSF and its subsidiary and certain other matters, (vii) the execution by MSF, Search and the MSF Lenders of agreements with respect to the Restructured Credit Facility, (viii) the receipt by Search and MSF of the updated tax opinion of Haynes and Boone, (ix) the continued effectiveness of the Stockholders Agreement, (x) the continued effectiveness of the Registration Statement, and (xi) the absence of any pending or threatened litigation against Search, MSF or their respective officers or directors that could have a material adverse effect on Search or MSF. Although the Merger Agreement permits waiver of each of the foregoing conditions, certain conditions are required to be satisfied by applicable law, rules or regulation, including items (i), (ii) and (x) in the foregoing sentence. Search and MSF will reschedule the Meetings and resolicit votes from their respective stockholders if the companies determine to waive receipt of the updated tax opinion of Haynes and Boone. TERMINATION; AMENDMENT The Merger Agreement may be terminated and the Merger may be abandoned prior to the Effective Time, either before or after its approval by the stockholders of MSF and Search, under the circumstances specified therein, including (i) by mutual written consent duly authorized by the Boards of Directors of Search and MSF; (ii) by either Search or MSF, if the Merger shall not have been consummated by August 15, 1997 and if the terminating party has not caused the failure of the Merger to be consummated on or before such date by its own willful failure to fulfill any of its material obligations under the Merger Agreement; (iii) by Search, if (1) there has been a breach by MSF of any of its representations and warranties under the Merger Agreement or (2) there has been a willful breach on the part of MSF of any of its covenants or agreements contained in the Merger Agreement such that the conditions set forth in Articles 2 and 6 of the Merger Agreement will not be satisfied, and, in both cases, such breach has not been promptly cured after notice to MSF; (iv) by MSF, if (1) there has been a breach by Search or Merger Sub of any of their respective representations and warranties under the Merger Agreement or (2) there has been a willful breach on the part of Search or Merger Sub of any of their respective covenants or agreements contained in the Merger Agreement such that the conditions set forth in Articles 2 and 6 of the Merger Agreement will not be satisfied, and, in both cases, such breach has not been promptly cured after notice to Search and Merger Sub; (v) by either Search or MSF, if there is a final non- appealable order in effect preventing consummation of the Merger or there is any action taken, or any law or order enacted or promulgated, by any governmental authority which would make consummation of the Merger illegal; (vi) by Search, if the MSF Board shall have withdrawn, modified or changed its recommendation of the Merger Agreement or the Merger in a manner adverse to Search or shall have resolved to do so, the MSF Board shall have recommended to the stockholders of MSF any merger, consolidation, share exchange, business combination or other similar transaction (other than the Merger), or any sale, lease or other disposition of 25% or 50 58 more of the assets of MSF and its subsidiary, or the acquisition by any person or group of beneficial ownership of 50% or more of the shares of MSF Common Stock (a "Business Combination Transaction"), or a tender offer or exchange offer for fifty percent (50%) or more of the outstanding MSF Common Stock is commenced and the MSF Board fails to recommend against acceptance of the tender offer or exchange offer; (vii) by Search, if Section 262 of the Delaware Law is applicable to the Merger and more than 10% of the MSF Common Stock issued and outstanding immediately prior to the Effective Time shall constitute dissenting shares; (viii) by MSF, if the Board of Directors of Search shall have withdrawn its recommendation of approval of the issuance of additional shares of Search Common Stock pursuant to the Merger or shall have resolved to do so; (ix) by MSF, if, in the exercise of its good faith judgment as to its fiduciary duties under the Delaware Law, the MSF Board of Directors in good faith determines (after consultation with its financial advisers and Delaware counsel and duly considering the written advice of such legal counsel) that such termination is required by such fiduciary duties by reason of a proposal that either constitutes a Business Combination Transaction or may reasonably be expected to lead to a Business Combination Transaction (a "Business Combination Transaction Proposal"); (x) by either Search or MSF, if the stockholders of MSF or Search shall have failed to approve and adopt the Merger Agreement and the Merger; and (xi) by Search if either MSF or its subsidiary shall have filed a petition for liquidation or re-organization in bankruptcy, or have become the subject of an involuntary bankruptcy petition, which involuntary petition is not rejected by a court having jurisdiction over such proceedings within 30 days of the filing thereof. The Merger Agreement may be amended by an agreement in writing among the parties thereto at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of MSF, no amendment may be made which would reduce the amount or change the type of consideration into which each share of MSF Common Stock will be converted upon consummation of the Merger. FEES AND EXPENSES Except as described below, all fees and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby will be paid by the party incurring such expenses, whether or not the Merger is consummated. Search and MSF will share equally all fees and expenses, other than attorneys' fees, incurred in relation to the printing and filing of this Joint Proxy Statement/Prospectus, and any amendments or supplements thereto. MSF has agreed to pay Search a fee (the "Search Fee") of $700,000 in immediately available funds, which amount is inclusive of all expenses, if (i) the Merger Agreement is terminated by Search as described in clause (vi) or by MSF as described in clause (ix) under "--Termination; Amendment" above, in which case the Search Fee will be paid on the business day immediately following such termination, or (ii) the Merger Agreement is terminated as a result of the failure of the stockholders of MSF to approve the Merger and a proposal for a Business Combination Transaction Proposal shall have been made prior to such termination, and any Business Combination Transaction involving MSF is thereafter consummated within 18 months of such termination, in which case the Search Fee will be paid on the business day immediately following such consummation. Search will be entitled to receive its expenses in immediately available funds in the event that this Agreement is terminated by Search as described in clauses (iii) and (vi) or by MSF as described in clause (ix) under "--Termination; Amendment" above. Search has agreed to pay MSF a fee (the "MSF Fee") of $250,000 in immediately available funds, which amount is inclusive of all expenses, if the Merger Agreement is terminated by MSF as described in clause (viii) under "--Termination; Amendment" above; provided, that Search will not be obligated to pay any or all of the MSF Fee if Search's stockholders do not approve the adoption of the Merger Agreement and the Merger. 51 59 THE STOCKHOLDERS AGREEMENT The following paragraphs summarize, among other things, the material terms of the Stockholders Agreement, which is filed as an exhibit to the Registration Statement. AGREEMENT TO VOTE The Stockholders Agreement provides, among other things, that, at any meeting of stockholders of MSF or in connection with any written consent of stockholders, each Principal Stockholder shall vote (or cause to be voted) during the time the Stockholders Agreement is in effect, the shares of MSF Common Stock held of record or beneficially by such Principal Stockholder, as follows: (1) In favor of the Merger, the adoption, execution and delivery by MSF of the Merger Agreement and the approval of the terms thereof and each of the other actions contemplated by the Merger Agreement and the Stockholders Agreement and any actions required in furtherance thereof; (2) Against any action or agreement that would result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of MSF under the Merger Agreement; (3) Except as otherwise agreed to in writing by Search, against any of the following actions (an "Alternate Transaction"): (i) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving MSF its subsidiary; (ii) a sale, lease or transfer of a material amount of assets of MSF or its subsidiary or a reorganization, recapitalization, dissolution or liquidation of MSF, its subsidiary; or any Securitization Trust, or a reorganization, recapitalization, dissolution or liquidation of MSF or its subsidiary, or any purchase or redemption of MSF Common Stock, from the Principal Stockholder or any other Principal Stockholder; and (4) Against (i) any change in the majority of the MSF Board; or (ii) any material change in the present capitalization of MSF, any amendment to MSF's Restated Certificate of Incorporation; or (iii) any other material change to MSF's corporate structure or business. In addition, each Principal Stockholder has granted to, and appointed, Merger Sub and an officer of Merger Sub as such Principal Stockholder's irrevocable proxy and attorney-in-fact (with full power of substitution) to vote the shares of MSF Common Stock in accordance with the provisions of the Stockholders Agreement. COVENANTS OF THE STOCKHOLDERS During the term of the Stockholders Agreement, each Principal Stockholder has agreed not to (i) solicit, initiate or encourage (including by way of furnishing information) or respond to any inquiries or the making of any proposal by any person (other than Search or any affiliate of Search) with respect to MSF or any Securitization Trust that constitutes or could reasonably be expected to lead to an Alternate Transaction , and, if any Principal Stockholder receives any such inquiry or proposal, then such Principal Stockholder shall promptly inform Search of the terms and conditions, if any, of such inquiry or proposal and the identity of the person making it, and each Principal Stockholder will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties conducted theretofore with respect to any of the foregoing, or (ii) (a) offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to or consent to the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment or other disposition of, any or all of such Principal Stockholder's shares of MSF Common Stock or any interest therein, (b) except as contemplated by the Stockholders Agreement, grant any proxies or powers of attorney, deposit any shares of MSF Common Stock into a voting trust or enter into a voting agreement with respect to any shares of MSF Common Stock, or (c) take any action that would make any representation or warranty of such Principal Stockholder contained in the Stockholders Agreement untrue or incorrect or have the effect of preventing or disabling such Principal Stockholder from performing such Principal Stockholder's obligations under the Stockholders Agreement. Each Principal Stockholder has agreed to cause MSF to comply with its non-solicitation covenant set forth in the Merger Agreement. See "The Merger Agreement--Solicitation of Other Proposals." Each Principal Stockholder will exercise such rights as it has as a stockholder of MSF and will cause its representative on the MSF Board to exercise such rights as they have as Directors of MSF to cause MSF to observe and perform all of its other covenants and obligations under the Merger Agreement in a timely manner. 52 60 Prior to two years after the Effective Time, no Principal Stockholder shall, directly or indirectly, (i) solicit or attempt to induce any employee of Search or MSF to leave the employment of either such employer, or (ii) solicit or otherwise encourage any customer, client, borrower, lender, supplier, vendor, or dealer of MSF, Search or any subsidiary of Search or MSF to cease or discontinue doing business with either MSF or Search or any subsidiary of Search or MSF. TRANSFER RESTRICTIONS; REGISTRATION RIGHTS Each of the Principal Stockholders has agreed that it will not transfer or permit any transfer of all or part of the Search Common Stock received by the Principal Stockholder pursuant to the Merger for a period of 180 days from and after the Effective Time (the "Lock-Up Period"). The Principal Stockholders have also acknowledged that, as affiliates of MSF and/or Search, they may not transfer, or make any offer or agreement to transfer, any shares of Search Common Stock that they acquire in connection with the Merger except (i) in a transaction permitted pursuant to Rule 145 promulgated under the Securities Act or (ii) pursuant to a valid registration statement under the Securities Act. Search has agreed that from and after the end of the Lock-Up Period and for so long as necessary in order to permit each Principal Stockholder to sell the Search Common Stock held by it pursuant to Rule 145, Search will use its reasonable efforts to file on a timely basis all reports required to be filed by it pursuant to the Exchange Act and the rules and regulations thereunder. Search has agreed to provide certain registration rights to the Principal Stockholders. At any time after the end of the Lock-Up Period, any Principal Stockholder that is subject to Rule 145 in respect of the Search Common Stock acquired by such Principal Stockholder pursuant to the Merger, or holds at least 5% of the issued and outstanding shares of Search Common Stock, may request registration of some or all of such Principal Stockholder's shares of Search Common Stock for offer and sale under the Securities Act. The Principal Stockholders collectively will be entitled to request one such registration. In addition, beginning with the end of the Lock-Up Period and continuing until such time as a Principal Stockholder is either no longer subject to Rule 145 or owns less than 5% of the issued and outstanding shares of Search Common Stock, at any time that Search intends to file a registration statement under the Securities Act for purposes of a public offering (excluding registration statements relating to employee benefit plans and corporate reorganizations), Search is required to provide such Principal Stockholder with at least 20 days notice of the filing of such registration statement and to allow such Principal Stockholder an opportunity to include in the registration statement all or part of such stockholders' Search Common Stock. If Search receives a proper demand for registration, Search is required, within 15 days after receipt of such demand, to notify the requesting Principal Stockholder in writing of Search's intent to proceed to do one of the following: (i) proceed with the filing of the registration statement within 30 days from the date of such notice, (ii) if Search reasonably concludes that the filing of a registration statement would require disclosure of material information which Search has a bona fide business purpose for preserving confidential, Search shall so notify the requesting Stockholder and may delay the registration but, in any event, shall file the registration statement within 60 days from the date of such notice; or (iii) in lieu of proceeding with the registration, Search shall have the right to purchase, or cause a third party designated by Search to purchase, all, but not less than all, of the Principal Stockholders' Search Common Stock identified in the demand registration request. The purchase price shall be in cash and in an amount agreed to by the parties and such purchase must be consummated within 30 days from the date of such notice. If, however, the parties are unable to agree on the purchase price within 15 days from the date of notice, Search must proceed to register the securities under clauses (i) or (ii) above. STANDSTILL COVENANTS Until the earlier of (i) two years after the Effective Time or (ii) when the amount of Search Common Stock owned by the Principal Stockholder is less than 5% of all the issued and outstanding Search Common Stock, each Principal Stockholder has agreed, for itself and its affiliates, not to engage in certain proscribed actions, either alone or in concert with others, including the following: (a) acquire, directly or indirectly, any additional securities of Search other than Search Common Stock which such Principal Stockholder acquires pursuant to the Merger or which Search issues to an affiliate as part of an employment or other arrangement with Search or Merger Sub; (b) make or in any way participate in, directly or indirectly, any solicitation of proxies; (c) take any action to form, join or in any way participate in a "group," within the meaning of Section 13(d)(3) of the Exchange Act; (d) vote its shares for the election of any director to the Search Board not approved by management of Search; (e) publicly propose any transaction with respect to Search or any Search affiliate, including but not limited to a tender offer for voting securities of Search; (f) solicit, encourage, entertain or discuss with any person any proposal with respect to Search or any Search affiliate, including but not limited to a business combination or other transaction with, or a change of control of, Search or any Search affiliate; (g) make, solicit, encourage, discuss or participate in a tender offer for or exchange offer for any Search securities; (h) acquire, offer to acquire or agree to acquire, directly or indirectly, all or a substantial portion of the assets of Search and/or any Search affiliate; (i) arrange, or in any way participate in or encourage, directly or indirectly, any financing for the purchase, exchange, acquisition or transfer of any 53 61 assets of Search or any Search affiliate; (j) call, or seek to call, any meeting of Search's stockholders, noteholders, securities holders and/or other creditors; (k) announce any intention to do or enter into any agreement with any other person to do any of the proscribed actions; or (l) communicate with any of Search's creditors regarding Search or any Search affiliate, file or initiate the filing of any bankruptcy petition against Search or any Search affiliate or take any other action which has a material negative effect on Search's financial condition. INDEMNIFICATION; ESCROW ARRANGEMENTS Each Principal Stockholder has agreed to indemnify Search, Merger Sub and the Surviving Corporation from certain liabilities and losses. To secure this indemnification obligation, the Principal Stockholders have agreed to place that number of shares of Search Common Stock to be delivered to them pursuant to the Merger Agreement having a value, based upon the Average Search Trading Price, equal to $2,500,000 into an escrow fund (the "Escrow Fund") to be held pursuant to the terms of an Escrow Agreement, the form of which is filed as an exhibit to the Registration Statement. The portion of the Escrow Fund to be delivered for the account of each Principal Stockholder will be equal to the ratio that the Merger consideration received by that Principal Stockholder bears to the aggregate Merger consideration received by all the Principal Stockholders. Commencing 12 months from the Effective Time and continuing every six months thereafter, the escrow agent will transfer to the Principal Stockholders, pro rata, an amount equal to 25% of the original number of shares of Search Common Stock constituting the Escrow Fund not reserved for any indemnification claims. If Search, acting in a commercially reasonable manner, believes it is necessary to increase the size of the Escrow Fund prior to the Merger based on the likelihood or magnitude of liabilities, losses and other claims for which it is entitled to indemnification by the Principal Stockholders, it may request the Principal Stockholders to increase the Escrow Fund by up to $1,000,000. If the Principal Stockholders agree to the proposed increase, additional Search Common Stock will be contributed to the Escrow Fund at the Effective Time. If they are unable to agree with Search as to the amount of the increase, the parties may submit the disagreement to arbitration in accordance with the terms of the Stockholder Agreement. To secure the representation that MSF will receive an income tax refund of $6,300,000, the Principal Stockholders have agreed to place that number of shares of Search Common Stock to be delivered to them pursuant to the Merger Agreement having a value, based upon the Average Search Trading Price, equal to $2,300,000 into a tax holdback fund to be held by the escrow agent pursuant to the Escrow Agreement (the "Tax Holdback Fund"). The portion of the Tax Holdback Fund to be delivered for the account of each Principal Stockholder will be equal to the ratio that the Merger consideration received by that Principal Stockholder bears to the aggregate Merger consideration received by all of the Principal Stockholders. Shares of Search Common Stock held in the Tax Holdback Fund will be released from escrow quarterly in proportion to the amount of income tax refunds received by MSF or the Surviving Corporation over $4,000,000. Upon receipt by the Surviving Corporation of the full $6,300,000 of income tax refunds, the escrow agent will make the final distribution; provided, however, that if any portion of the income tax refund has not been received by the first anniversary of the closing of the Merger, unless such date has been extended or accelerated by mutual agreement, all the remaining Search Common Stock held in the Tax Holdback Fund on that date will revert to Search. Any income tax refund received after such reversion will be paid to the Principal Stockholders in either cash or Search Common Stock. TERMINATION The Stockholders Agreement and the obligations of each Principal Stockholder thereunder will terminate on the first to occur of (a) termination of the Merger Agreement in accordance with its terms (the "Termination Date") or (b) if the Merger is consummated, the third anniversary of the Effective Time. Notwithstanding the foregoing, (a) the standstill covenants will terminate on the earlier of (i) two years after the Effective Time, or (ii) as to any Principal Stockholder, when the amount of Search Common Stock which that Principal Stockholder owns is less than five percent (5%) of all of the issued and outstanding Search Common Stock, and (b) the provisions relating to the indemnification and escrow arrangements will terminate upon full distribution of the Escrow Fund pursuant to the terms of the Stockholder Agreement and the Escrow Agreement. 54 62 PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (UNAUDITED) The Merger will be accounted for under the "purchase" method of accounting which requires the purchase price to be allocated to the acquired assets and liabilities of MSF on the basis of their estimated fair values as of the date of acquisition. Consequently, upon consummation of the Merger, the combined company will establish a new accounting and reporting basis for the acquired assets and liabilities which will be reflected in the future consolidated financial statements of Search. The following pro forma combined condensed balance sheet and statements of income (collectively, the "Pro Forma Financial Information") present the combined historical financial statements of Search and MSF adjusted to give effect to the Merger on a pro-forma purchase accounting basis. The unaudited Pro Forma Combined Condensed Balance Sheet at March 31, 1997 was prepared based upon the respective consolidated balance sheets of MSF and Search at March 31, 1997, as if the acquisition of MSF had occurred on March 31, 1997. The unaudited Pro Forma Combined Condensed Statements of Income give effect to the acquisition as if it occurred on April 1, 1996 and includes adjustments directly attributable to the acquisition and expected to have a continuing impact on the combined company. The unaudited Pro Forma Combined Condensed Statements of Income were prepared based upon the audited consolidated statements of income of MSF for the fiscal year ended December 31, 1996 and of Search for the fiscal year ended March 31, 1997. Because the Pro Forma Financial Information has been prepared based on estimated fair values, amounts actually recorded may change upon determination of the total purchase price and additional analysis of individual assets and liabilities assumed. The Pro Forma Financial Information and related notes are provided for informational purposes only. The Pro Forma Financial Information presented is not necessarily indicative of the consolidated financial position or results of operations of Search as they may be in the future or as they might have been had the Merger been effected on the assumed dates. The Pro Forma Financial Information should be read in conjunction with the historical consolidated financial statements of Search, and the related notes thereto, presented in Annex E to this Joint Proxy Statement/Prospectus, and the historical consolidated financial statements of MSF, and the notes related thereto, presented in Annex D to this Joint Proxy Statement/Prospectus. See "Consolidated Financial Statements of MSF." The unaudited Pro Forma Condensed Financial Information reflects preliminary purchase accounting adjustments. Estimates relating to the fair value of certain assets, liabilities and other items have been made as more fully described in the Notes to the unaudited Pro Forma Condensed Financial Information. While Search's management has made an initial appraisal and evaluation of MSF's financial condition as of the date of execution of the Merger Agreement, final purchase adjustments, which may include adjustments to additional assets, liabilities and other items, will be made on the basis of the final appraisals and evaluations of MSF's financial condition as of the Effective Time and, therefore, will differ from those reflected in the unaudited Pro Forma Condensed Financial Information. Any variations of the Average Search Trading Price between $5.88 and $4.35, which would result in variations of the Exchange Ratio within the range of 0.28 to 0.37, will not have a significant impact upon the value of Search Common Stock to be issued to the stockholders of MSF in the Merger. The unaudited Pro Forma Condensed Financial Information assumes that the Exchange Ratio is 0.37. See "The Merger--Terms of the Merger." The unaudited Pro Forma Condensed Consolidated Statements of Income and explanatory notes presented also show the impact on the historical results of operation of Search of the acquisition of the assets and business of Dealers Alliance Credit Corp. ("DACC") completed as of August 2, 1996 (the "DACC Acquisition"). The DACC Acquisition is reflected net of pro forma adjustments in the unaudited Pro Forma Condensed Consolidated Statements of Income as if it had occurred on April 1, 1996. Because the DACC Acquisition was closed prior to March 31, 1997, it is reflected in the Search historical balance sheet at March 31, 1997. The combined company expects to achieve certain benefits from the Merger including operating cost savings and revenue enhancements. The pro forma earnings, which do not reflect any direct costs, potential savings or revenue enhancements which are expected to result from the consolidation of operations of Search and MSF, are not indicative of the results of future operations. No assurances can be given with respect to the ultimate level of expense savings and revenue enhancements to be realized. 55 63 SEARCH AND MSF PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)
At March 31, 1997 At March 31, 1997 Historical Pro Forma -------------------------- --------------------------- Search MSF Adjustments Combined ------ --- ----------- -------- ASSETS Gross contracts receivable $ 62,325 $ 97,972 (c) $160,297 Unearned interest (10,636) (25,169)(c) (35,805) Amounts due under securitizations -- 7,580 (c) 7,580 -------- -------- -------- Net contracts receivables 51,689 80,383 132,072 Allowance for losses (5,854) (6,364) (12,218) Net loan origination costs 1,473 -- 1,473 -------- -------- -------- Net contracts receivable - after allowance for credit losses & other costs 47,308 74,019 121,327 Cash and cash equivalents 12,249 4,296 16,545 Vehicles held for resale 1,196 3,048 4,244 Property and equipment, net 1,608 1,497 3,105 Intangibles, net 6,252 -- $ 1,268 (a) 7,520 Other assets, net 910 8,155 -- 9,065 -------- -------- -------- -------- $ 69,523 $ 91,015 $ 1,268 $161,806 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS EQUITY: Lines of credit $ 23,715 $ -- $ 23,715 Note payable 9,596 71,442 81,038 Accrued settlements 540 -- 540 Accounts payable and other liabilities 2,760 2,410 $ 750 (b) 5,919 Subordinated note payable 5,000 -- -- 5,000 Accrued interest 271 -- -- 271 Redeemable warrants 1,035 -- -- 1,035 -------- -------- -------- -------- Total liabilities 42,916 73,852 750 117,518 Stock repurchase commitment 2,078 -- 2,078 -------- -------- -------- -------- Convertible preferred stock 201 -- 201 Common stock 252 11 (11)(b) 292 39 (b) Additional paid in capital 78,047 27,660 (27,660)(b) 95,690 17,642 (b) Unrealized gain on securities available for sale -- 450 (450)(b) -- Accumulated deficit (52,760) (8,684) 8,684 (b) (52,761) Treasury stock -- (2,274) 2,274 (b) -- -------- -------- -------- -------- Total stockholders' equity 25,740 17,163 518 43,422 Notes receivable - stockholders (1,212) -- -- (1,212) -------- -------- -------- -------- Net stockholders' equity 24,528 17,163 518 42,210 -------- -------- -------- -------- Total $ 69,523 $ 91,015 $ 1,268 $161,806 ======== ======== ======== ========
56 64 - ----------------------- (a) The acquisition will be accounted for using the purchase method of accounting, and, accordingly, the purchase price will be allocated to the assets purchased and the liabilities assumed based upon the fair values at the date of acquisition. The following table sets forth a preliminary determination and allocation of the purchase price.
(in thousands) Merger exchange of shares and options (Per Share Amount of $1.63 times 10,431,010 outstanding shares of MSF Common Stock plus the value associated with assumed options of $678,000) $17,681 Assumption of MSF debt 73,852 Transaction costs and expenses 750 ------- Pro forma purchase price $92,283 ======= The preliminary allocation of the pro forma purchase price is as follows: Net receivables after allowance and amounts due under securitizations $74,019 Cash and cash equivalents 4,296 Inventory 3,048 Property, plant and equipment, net 1,497 Other assets 8,155 ------- Identifiable assets $91,015 ======= Cost in excess of fair value of net assets acquired $ 1,268 =======
The allocation of the purchase price noted above is preliminary based on information as of May 28, 1997. Any potential claims which may arise from the Merger will be included in the final purchase price allocation. The excess of cost over the fair value of net assets acquired of $1,268,000 includes both identifiable and unidentifiable intangible assets. As of June 13, 1997, the final valuation of intangible assets had not been made. Search will have the final values assigned upon completion of its evaluations and due diligence process. The identifiable intangible assets will be capitalized and amortized over a period not to exceed the estimated useful lives of the assets. Generally, Search believes that the values assigned will be allocated to the existing dealer network and the customer list of MSF which Search will acquire in the Merger. Search estimates that the average term for amortizing these assets will be 10 years. (b) The following table describes the adjustments to the pro forma balance sheet:
(in thousands) Estimated accrued transaction costs and expenses $750 Elimination of MSF Common Stock (11) Search Common Stock issued (3,859,000 x $0.01) 39 Elimination of MSF paid in capital (27,660) Search paid in capital ($17,003,000 - $39,000 + $678,000) 17,642 Elimination of MSF unrealized gain on sale of securities (450) Elimination of MSF accumulated deficit 8,684 Elimination of MSF treasury stock 2,274 -------- Cost in excess of fair value of net assets acquired $ 1,268 ========
(c) Gross contracts receivables include only installment contracts receivable owned by MSF. All installment contracts receivable held under MSF's Securitization Trusts are shown as net amounts due under securitizations. 57 65 SEARCH AND MSF PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data) (Unaudited)
Fiscal Year DACC Fiscal Year Search Fiscal MSF Fiscal Ended Operations for Ended Year Ended Year Ended March 31, 1997 Period Between March 31, 1997 March 31, 1997 Dec. 31, 1996 Pro Forma April 1, 1996 and Pro Forma Historical Historical Adjustments Combined August 2, 1996 Combined ---------- ---------- ----------- -------- -------------- -------- Interest revenue $ 10,004 $ 14,909 $ 24,913 $ 2,240 $ 27,153 Other interest income -- 70 70 -- 70 Interest expense (2,306) (5,371) (7,677) (984) (8,661) -------- --------- -------- ------- -------- Net interest income 7,698 9,608 17,306 1,256 18,562 Reduction of (provision for) credit losses 7,017 (25,903) (18,886) (6,800) (25,686) -------- --------- -------- ------- -------- Net interest income (loss) after provision 14,715 (16,295) (1,580) (5,544) (7,124) Other income -- 4,750 4,750 -- 4,750 General and administrative expense (13,392) (15,104) $(127)(d) (28,623) (1,946) (30,569) Settlement expense (40) -- -- (40) (40) -------- --------- ----- -------- ------- -------- Net income (loss) before dividends and taxes 1,283 (26,649) (127) (25,493) (7,490) (32,983) Income tax benefit -- 4,635 -- 4,635 -- 4,635 Preferred stock dividends (6,154) -- -- (6,154) -- (6,154) -------- --------- ----- -------- ------- -------- Net income (loss) to common stockholders $ (4,871) $ (22,014) $(127) $(27,012) $(7,490) $(34,502) ======== ========= ===== ======== ======= ======== Net income (loss) per share of common stock $ (1.45) $ (3.75) $ (4.74) ======== ======== ======== Weighted average common and common equivalent shares outstanding 3,366 (a) 3,859 (b) 7,225 59 (c) 7,284 ======== ===== ======== ======= ========
- ------------------------ (a) Restated to reflect the 1-for-8 reverse stock split. (b) Represents the estimated number of shares of Search Common Stock to be issued in the Merger based on an assumed Exchange Ratio of 0.37. (c) Represents adjustment to calculation of weighted average common and common equivalent shares outstanding assuming shares issued in the DACC acquisition were outstanding from April 1, 1996. (d) Represents amortization of net intangible assets ($1,268,000) over a 10-year period. 58 66 DESCRIPTION OF SEARCH CAPITAL STOCK As of the date of this Joint Proxy Statement/Prospectus, the authorized capital stock of Search consists of 130,000,000 shares of Search Common Stock and 60,000,000 shares of preferred stock, par value $0.01 per share ("Search Authorized Preferred Stock") of Search. The following description of the Search Common Stock and Search Authorized Preferred Stock is a summary which does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Search Restated Certificate of Incorporation. For a discussion of significant differences between Search's Restated Certificate of Incorporation and Bylaws, as amended and restated, and MSF's Restated Certificate of Incorporation, as amended, and Amended and Restated Bylaws, see "Comparison of the Rights of Holders of Search Common Stock and MSF Common Stock." COMMON STOCK As of the Search Record Date, there were 3,016,444 shares of Search Common Stock outstanding. As of the same date, there were outstanding various warrants and options to purchase a total of 1,176,899 shares of Common Stock. In addition, the Company is obligated to issue 146,381 shares of Search Common Stock pursuant to the settlement of certain litigation in April 1996. The Company has committed to issue warrants and options to purchase an additional 750,000 shares of Search Common Stock. Holders of shares of Search Common Stock are entitled to one vote per outstanding share on all matters to be voted on by stockholders. There is no cumulative voting for the election of directors. Subject to the preferences that may be applicable to any outstanding Search Authorized Preferred Stock, holders of Search Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution, or winding up of Search, the holders of Search Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding Search Authorized Preferred Stock. Holders of Search Common Stock have no preemptive rights and have no rights to convert their Search Common Stock into any other securities. The outstanding shares of Search Common Stock are, and the Search Common Stock to be outstanding immediately following consummation of the Merger will be, validly issued, fully paid and nonassessable. SEARCH AUTHORIZED PREFERRED STOCK The Search Board has the authority to cause Search to issue up to 60,000,000 shares of Search Authorized Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting any series or the designation of such series, without any further vote or action by the stockholders of Search. The issuance of Search Authorized Preferred Stock may have the effect of delaying, deferring or preventing a change in control of Search without further action by the stockholders of Search. The issuance of Search Authorized Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of Search Common Stock or could adversely affect the rights and powers, including the voting power, of the holders of the Search Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Search Common Stock. In accordance with this power, Search's Board of Directors has designated and established (i) a series consisting of 400,000 shares designated as the "12% Senior Convertible Preferred Stock" (the "Search 12% Preferred Stock") and (ii) a series consisting of 30,000,000 shares designated as the "9%/7% Convertible Preferred Stock" (the "Search 9%/7% Preferred Stock"). SEARCH 9%/7% PREFERRED STOCK Dividends. Holders of Search 9%/7% Preferred Stock are entitled to receive, out of funds legally available therefor, non-cumulative dividends at a per annum rate of (i) $2.52 per share until March 31, 1999 ("End Date"), and (ii) $1.96 per share after the End Date. Search is required to pay in cash the dividends accruing prior to March 15, 1997 and thereafter to the extent Delaware law or the terms and conditions of any loan agreement for a loan of $5,000,000 or more do not limit or prevent the payment by Search of cash dividends on Search 9%/7% Preferred Stock. To the extent that Search's right to pay cash dividends is limited or prevented, Search may pay the dividends in the form of Search Common Stock so long as the average closing trading price for a share of Search Common Stock is $4.00 or greater during the 20 trading day period ending five days prior to the payment of such dividend. The dividends are payable on or about the 15th day of the month following the end of each quarter to holders of record as of the last day of the calendar quarter. Search may not make any 59 67 dividend or distribution (other than a dividend payable in Search Common Stock or other junior capital stock) on, or purchase or redeem, any Search Common Stock or other capital stock that ranks junior to Search 9%/7% Preferred Stock unless all accrued and unpaid dividends on Search 9%/7% Preferred Stock have been paid or declared and set aside for payment. Conversions. Holders of outstanding shares of Search 9%/7% Preferred Stock may elect at any time to convert their shares into shares of Search Common Stock. The conversion ratio is two shares of Search Common Stock for each share of Search 9%/7% Preferred Stock. The conversion ratio will be proportionately adjusted upon any stock dividend on Search Common Stock, any stock split, reverse stock split, stock combination or reclassification of Search Common Stock or any merger, consolidation or combination of Search with any other entity. Up to 50% of the outstanding shares of Search 9%/7% Preferred Stock could be mandatorily converted into shares of Search Common Stock at the option of Search, at a rate of two shares of Search Common Stock for one share of Search 9%/7% Preferred Stock, if shares of Search Common Stock trade (i) at a price of $34.00 per share or higher on any 20 trading days in a period of 30 consecutive trading days between March 16, 1998 and March 15, 1999 or (ii) at a price of $28.00 per share or higher on any 20 trading days in a period of 30 consecutive trading days after March 15, 1999. Finally, on March 15, 2003, all of the outstanding shares of Search 9%/7% Preferred Stock will be mandatorily converted into shares of Search Common Stock. For the latter mandatory conversion, each share of Search 9%/7% Preferred Stock will be convertible into a number of shares of Search Common Stock equal to the lesser of (y) three or (z) the result of dividing the liquidation preference per share for Search 9%/7% Preferred Stock by the market price of Search Common Stock as reported at the close of business on March 15, 2003. For any mandatory conversion, holders of the converted Search 9%/7% Preferred Stock would also be entitled to receive any accrued and unpaid dividends on their converted shares. Liquidation Rights. If Search is liquidated, the holders of Search 9%/7% Preferred Stock are entitled to be paid $28.00 per share plus all accrued and unpaid dividends thereon before any distribution or payment is made to the holders of Search Common Stock or any other capital stock of Search ranking junior to Search 9%/7% Preferred Stock. If, upon any liquidation of Search, the amounts payable with respect to Search 9%/7% Preferred Stock and any other stock of Search ranking on a parity with Search 9%/7% Preferred Stock cannot be paid in full, the holders of such stock share ratably in any such distribution of assets in proportion to the respective full preferential amounts to which they would otherwise be entitled. After payment of the full preferential amount to which the holders of Search 9%/7% Preferred Stock would be entitled upon any liquidation, dissolution or winding up, they would have no right or claim to any of the remaining assets of Search. Voting Rights. Each share of Search 9%/7% Preferred Stock has the same voting attributes and characteristics as do the shares of Search Common Stock, which is one vote per share. If Search defaults in the payment of any four consecutive quarterly dividends on outstanding Search 9%/7% Preferred Stock, the holders of outstanding Search 9%/7% Preferred Stock would be automatically entitled to an additional vote per share and given the right to elect immediately at an emergency meeting of shareholders, which Search must hold within thirty days after any such failure, such additional directors as equals two-thirds of Search's Board of Directors determined after such election. The affirmative vote or consent of the holders of at least 66-2/3% of all outstanding shares of Search 9%/7% Preferred Stock, voting as a separate class, is required (i) to amend, alter or repeal any provision of the Certificate of Designations establishing the Search 9%/7% Preferred Stock to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Search 9%/7% Preferred Stock or (ii) to effect any reclassification of the Search 9%/7% Preferred Stock. The affirmative vote or consent of the holders of at least 50% of all outstanding shares of Search 9%/7% Preferred Stock, voting as a separate class, is required to approve (x) any merger of Search with another company when Search's Board members do not constitute a majority of the board of directors of the surviving company or (y) any sale of more than 50% of Search's assets. In addition, the Delaware Law provides that the vote of the holders of a majority of the outstanding shares of any series of Search Authorized Preferred Stock, voting separately as a class, is required in order to (i) increase or decrease the par value of such series of shares or (ii) change the powers, preferences, or special rights of such series of shares so as to affect them adversely. Ranking. Search 9%/7% Preferred Stock ranks on a parity with the Search 12% Preferred Stock and senior to Search Common Stock as to rights to dividends and liquidation preferences. Subsequent Issuances of Search Authorized Preferred Stock. Search is prohibited from issuing Search Authorized Preferred Stock in the future that is pari passu with Search 9%/7% Preferred Stock unless at the time of such issuance all dividends due on Search 9%/7% Preferred Stock have been paid in full. Search is also prohibited from issuing convertible 60 68 Search Authorized Preferred Stock which is senior in rights to Search 9%/7% Preferred Stock except that such convertible Search Authorized Preferred Stock may carry a then-current market interest rate, which may be higher or lower than that of Search 9%/7% Preferred Stock. Search is also prohibited from issuing preferred or common stock or warrants or any other form of security to any of its affiliates for consideration that does not equal or exceed the fair market value of such security, as determined by an independent third party. Search may, nevertheless, issue options or warrants to new or existing directors or management if such options or warrants are approved by the Compensation Committee. Search may also issue shares of Search Common Stock upon the exercise of outstanding warrants or options but may not amend or modify such warrants or options without the approval of the Compensation Committee. If Search issues any security for consideration less than its fair market value, the number of shares of Search 9%/7% Preferred Stock will be immediately and appropriately adjusted, and the conversion price of Search 9%/7% Preferred Stock will be adjusted downward, to take into account the dilution in value of the security holdings of former creditors of its former bankrupt Subsidiaries caused by such below fair market issuance of Search's securities. Other Rights. Search 9%/7% Preferred Stock is not subject to redemption by Search or at the election of the holders thereof. Search 9%/7% Preferred Stock does not have any preemptive or sinking fund rights. SEARCH 12% PREFERRED STOCK Dividends. Holders of the Search 12% Preferred Stock are entitled to receive, when and as declared by the Board of Directors of Search out of funds legally available therefor, cash dividends at a per annum rate of $4.80 per share payable quarterly on the first day of January, April, July and October of each year to holders of record as of a date fixed by the Board of Directors of Search which is not more than 60 days prior to the date the dividend is paid. Unpaid dividends on the Search 12% Preferred Stock cumulate and must be paid or set aside for payment before any distribution, in cash, stock or other property (other than in Search Common Stock), is made to holders of Search Common Stock or any other stock ranking junior to the Search 12% Preferred Stock. Liquidation Rights. In the event of the voluntary or involuntary liquidation, dissolution or winding up of Search, the holders of the Search 12% Preferred Stock are entitled to be paid $40.00 per share plus all accrued and unpaid dividends thereon before any distribution or payment is made to the holders of Search Common Stock or any other capital stock of Search ranking junior to the Search 12% Preferred Stock. If, upon any liquidation, dissolution or winding up of Search, the amounts payable with respect to the Search 12% Preferred Stock and any other capital stock of Search ranking on a parity with the Search 12% Preferred Stock cannot be paid in full, the holders of such stock will share ratably in any such distribution of assets in proportion to the respective full preferential amounts to which they would otherwise be entitled. After payment of the full preferential amount to which the holders of Search's 12% Preferred Stock are entitled upon any liquidation, dissolution or winding up, they will have no right or claim to any of the remaining assets of Search. The merger or consolidation of Search into or with any other corporation or the merger of any other corporation into it, or the sale, lease or conveyance of all or substantially all of the property or business of Search, will not be deemed to be a dissolution, liquidation, or winding up, voluntary or involuntary. Optional Redemption by Search. At any time following the occurrence of a Triggering Event, the Search 12% Preferred Stock is redeemable, in whole or in part, at the option of the Company at a redemption price equal to $40.00 per share plus all accrued and unpaid dividends thereon. A "Triggering Event" will occur in the event that there shall have been a period of 90 consecutive days for which the average of any of the following prices exceeds $48.00 per share: (i) the average of the high bid and low asked prices for the Search Common Stock if the Search Common Stock is traded over-the-counter, (ii) the closing trading prices for the Search Common Stock if traded on NASDAQ, or (iii) the reported closing price for the Search Common Stock if traded on any national or regional stock exchange. Notice of redemption will be sent to each holder of the Search 12% Preferred Stock to be redeemed at the address shown on the share transfer records of Search not less than 30 nor more than 60 days prior to the redemption date, which shall be specified therein. If less than all the outstanding shares of Search 12% Preferred Stock are to be redeemed, Search must redeem such shares either by lot or pro rata based on the respective numbers of shares held by the holders of the Search 12% Preferred Stock. Voting Rights. Holders of the Search 12% Preferred Stock have one vote for each share held, and may generally vote along with the holders of Search Common Stock and not as a separate class upon each and any matter submitted to a vote of the shareholders of Search. In addition, the Delaware Law provides that the vote of the holders of a majority of the outstanding shares of any series of Search's preferred stock, voting separately as a class, is required in order to: (a) increase or decrease the par value of such series of shares, or (b) change the powers, preferences, or special rights of such series of shares so as to affect them adversely. If Search is in default in the payment of six full quarterly dividends (whether or not 61 69 consecutive) on any outstanding Search 12% Preferred Stock, whether or not earned or declared, the number of directors constituting Search's Board of Directors will be increased by two and the holders of all outstanding Search 12% Preferred Stock, voting separately as a class, will be entitled to elect the additional two directors until all dividends in arrears have been paid, at which time the term of office of the two additional directors will end and the number of directors constituting the Search Board will be reduced by two. Conversion Rights. Holders of the Search 12% Preferred Stock may elect at any time to convert their preferred shares into Search Common Stock. The conversion ratio is one share of Search Common Stock for each share of Search 12% Preferred Stock. This conversion ratio is subject to adjustment upon any share dividend on the Search Common Stock, any stock split, stock combination or reclassification of the Search Common Stock or any merger, consolidation or combination of Search with any other corporation or corporations. In addition, all of the outstanding shares of Search 12% Preferred Stock may be mandatorily converted into shares of Search Common Stock at the option of Search following the occurrence of a Triggering Event. Other Rights. The Search 12% Preferred Stock has no preemptive or sinking fund rights. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW Search is subject to the provisions of Section 203 of the Delaware Law. This statute generally prohibits, under certain circumstances, a Delaware corporation whose stock is publicly traded, from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) the corporation has elected in its certificate of incorporation or bylaws not to be governed by this Delaware law (Search has not made such an election), (ii) prior to the time the stockholder became an interested stockholder, the board of directors approved either the business combination or the transaction which resulted in the person becoming an interested stockholder, (iii) the stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding shares held by directors who were also officers or held in certain employee stock plans) upon consummation of the transaction which resulted in a stockholder becoming an interested stockholder or (iv) the business combination was approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 15% or more of the corporation's outstanding voting stock. The term "business combination" is defined generally to include mergers, consolidations, stock sales, asset based transactions, and other transactions resulting in a financial benefit to the interested stockholder. TRANSFER AGENT AND REGISTRAR American Securities Transfer & Trust, Inc., Denver, Colorado serves as the transfer agent and registrar for Search's Common Stock. COMPARISON OF THE RIGHTS OF HOLDERS OF SEARCH COMMON STOCK AND MSF COMMON STOCK As a consequence of the Merger, the stockholders of MSF will become stockholders of Search. The following is a summary of material differences between the rights of holders of Search Common Stock and the rights of holders of MSF Common Stock. As each of Search and MSF is organized under the laws of Delaware, these differences arise from various provisions of Search's Restated Certificate of Incorporation, as amended ("Search's Certificate of Incorporation"), and Bylaws ("Search's Bylaws") and MSF's Second Amended and Restated Certificate of Incorporation ("MSF's Certificate of Incorporation"), and Amended and Restated Bylaws ("MSF's Bylaws"). The following summary does not purport to be a complete statement of the rights of MSF's stockholders under MSF's Certificate of Incorporation and MSF's Bylaws as compared with the rights of Search's stockholders under Search's Certificate of Incorporation and Search's Bylaws, or a complete description of the specific provisions referred to herein. The summary is qualified in its entirety by reference to the governing corporate instruments, including the aforementioned instruments, of MSF and Search. Stockholder Approval of Certain Business Transactions. MSF's Certificate of Incorporation provides that the affirmative vote both of (i) the holders of shares constituting 66-2/3% of the voting power of MSF and (ii) the holders of the majority of MSF Common Stock at the time outstanding (who shall vote separately as a class) shall be required to approve 62 70 any merger or consolidation of MSF or a subsidiary thereof with or into any beneficial owner of more than 10% of MSF's outstanding voting stock (an "Interested Stockholder"), certain dispositions of assets to Interested Stockholders, certain issuances or transfers by MSF or a subsidiary thereof of securities of such corporations to Interested Stockholders, or certain other extraordinary transactions by MSF (a "Business Transaction"). Any such Business Transaction need not be approved by holders of shares constituting 66-2/3% of the voting power of MSF if: (1) two-thirds of MSF's Board of Directors approved the Business Transaction or (2) certain conditions of the Business Transaction have been met relating to, among other things, the value of the consideration provided for such Business Transaction, the timing of such Business Transaction, the payment of dividends on MSF's capital stock and a proxy or information statement is mailed to the MSF security holders in connection with the Business Transaction. Neither Search's Certificate of Incorporation nor Search's Bylaws contain similar provisions. However, the Search 12% Preferred Stock and Search 9%/7% Preferred Stock have special voting rights with respect to certain extraordinary corporate transactions. See "Description of Search Capital Stock." Action of Stockholders by Written Consent. Pursuant to Search's Bylaws, any action which may be taken at a meeting of Search's stockholders may be taken by written consent of the holders of Search's outstanding capital stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares of such stock entitled to vote thereon were present and voted. MSF's Certificate of Incorporation provides that no action shall be taken by MSF's stockholders except at an annual or special meeting of stockholders and any action required or permitted to be taken at such meeting may be taken by written consent of the holders of outstanding stock having not less than 80% of the votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote were present and voted. Special Meetings of Stockholders. Pursuant to Search's Bylaws, a special meeting of stockholders of Search may be called at any time by the Chairman of the Board, the President, the Board of Directors or at the request in writing of stockholders of Search holding not less than one-half of the votes that all stockholders are entitled to cast at a particular meeting. MSF's Bylaws provide that a special meeting of the stockholders of MSF may be called by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors, the Chairman of the Board, the President, the Vice Chairman and Chief Executive Officer or, by the holders of not less than 25% of the votes at that meeting. Quorum of Stockholders. The bylaws of Search provide that 50% of the outstanding shares entitled to vote constitutes a quorum for the transaction of business at any meeting of Search's stockholders. The bylaws of MSF provide that one-third of the outstanding shares entitled to vote constitute a quorum for the transaction of business at any meeting of MSF's stockholders. Preferred Stock. Search is authorized to issue 60,000,000 shares of preferred stock in one or more series, with the Search Board having the authority to designate the powers, preferences and authorized number of shares of each series. Search has designated and established two series of preferred stock, the first consisting of 400,000 shares of Search 12% Preferred Stock and the second consisting of 30,000,000 shares of Search 9%/7% Preferred Stock. See "Description of Search Capital Stock." To the extent required by 11 U.S.C. Section 1123(a)(6), Search's Certificate of Incorporation prohibits the issuance of any non-voting capital stock. MSF is authorized to issue 5,000,000 shares of preferred stock in one or more series, with the MSF Board having the authority to designate the powers, preferences and authorized number of shares of each such series. The MSF Board has not elected to designate any series of preferred stock. Liability of Management; Indemnification. Both Search's Bylaws and MSF's Bylaws provide for the indemnification of directors and officers of the respective corporations to the fullest extent authorized by Delaware Law. MSF's Bylaws permit MSF to extend this right of indemnification to all employees and agents of MSF. Search's Bylaws provide that this right to indemnification may be extended to any authorized representative of Search if the Search Board so chooses. However, under Search's Bylaws, the Search Board may elect, by a majority of directors present at any meeting of the Search Board, to exclude any person from indemnification. Amendments to Certificates of Incorporation. MSF's Certificate of Incorporation requires the affirmative vote of at least two-thirds of the outstanding capital stock of MSF entitled to vote upon the election of directors to alter, amend or repeal MSF's Certificate of Incorporation. 63 71 Search's Certificate of Incorporation may be amended in accordance with Delaware law, subject to the special voting rights of the Search 12% Preferred Stock and Search 9%/7% Preferred Stock. See "Description of Search Capital Stock." Amendments to Bylaws. Pursuant to MSF's Bylaws and Certificate of Incorporation, MSF's Bylaws may be adopted, altered, amended or repealed by MSF stockholders at any meeting of MSF stockholders, by the affirmative vote of holders of note less than two-thirds of the outstanding shares of stock entitled to vote on the election of directors. Search's Bylaws and Certificate of Incorporation do not have similar provisions, and according to the Delaware Law, Search's Bylaws may be adopted, amended, altered or repealed by the majority vote of the Search Capital Stock represented and entitled to vote at a meeting of Search's stockholders. SEARCH FINANCIAL SERVICES INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Search and its subsidiaries (the "Company") are involved in the purchase, origination and servicing of used motor vehicle and other consumer receivables. The Company's motor vehicle receivables are secured by used automobiles and light trucks which typically have been purchased by consumers with substandard credit histories at retail prices generally ranging from $5,000 to $15,000. The Company generally purchases these receivables from a network of unaffiliated new and used automobile dealers (the "Dealer Network"). The members of the Dealer Network generate the receivables and offer them for sale on a non-exclusive basis to the Company. The Company's acquisition in August 1996 of the assets of Dealers Alliance Credit Corp. ("DACC") enhanced the Dealer Network by providing new dealers as well as establishing a presence for the Company in the southeastern United States non-prime motor vehicle finance market. The Company from time to time makes bulk acquisitions of motor vehicle receivables. During fiscal 1997, the Company began administering its receivables purchasing, servicing and management activities utilizing a receivables management system (the "Norwest System") developed by Norwest Financial Information Systems Group, Inc. The Company uses the Norwest System in conjunction with the Company's proprietary Auto Note Management System software. The Company commenced its used motor vehicle receivables purchasing and servicing business in 1991. The Company opened its first non-automobile consumer finance office on November 1, 1996 in Baton Rouge, Louisiana and, at March 31, 1997, had established a total of eight non-auto consumer branch offices in Texas, Oklahoma, Louisiana, Tennessee and Puerto Rico. Non-auto consumer loans include retail sales finance loans, second mortgage real estate loans, and other consumer loans that may be secured or unsecured. The Company expects to continue its diversification and expansion in the consumer finance area by establishing 10 to 12 more offices during the fiscal year ending March 31, 1998. Prior to November 1994, the Company primarily financed the purchase of used motor vehicle receivables through the private and public sale of interest-bearing notes (the "Notes") issued by wholly-owned subsidiaries organized specifically for this purpose (the "Fund Subsidiaries") and through reinvestment of operating cash flow. Until March 1996, the purchasing of receivables for the Fund Subsidiaries was governed by trust indentures (the "Trust Indentures") which restricted management's ability to alter its receivables purchasing criteria. In March 1996, following confirmation of the Fund Subsidiaries' plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code, the Notes and the indebtedness represented by the Notes, together with the related Trust Indentures, were canceled. At that time, the Company implemented its new receivables purchasing program (the "Preferred Program"). The Preferred Program continues to focus on the purchasing of used motor vehicle receivables whose obligors have non-prime credit histories, but places more emphasis on job, income and residence stability and re-established positive credit of the obligor than the Company's earlier program. The Company finances purchases under the Preferred Program with internally generated funds and other funds borrowed at interest rates lower than what were previously incurred. The Company anticipates lower repossession rates and higher repossession sale proceeds as a result of the stricter credit criteria of the Preferred Program. If the Company is unable to select the proper dealers, purchase contracts with obligors who meet its credit criteria, and realize collection proceeds in adequate amounts, the repossession rate and sale proceeds could be higher and lower, respectively, than anticipated. The terms of receivables under the Preferred Program generally range from 30 months to 60 months. 64 72 Results of Operations Comparison of Twelve-Month Period Ended March 31, 1997 to the Six-Month Period Ended March 31, 1996 Contract Purchasing Activity. The Company purchased 1,284 contracts under its new Preferred Program in non- bulk transactions during the twelve months ended March 31, 1997, compared to 1,169 contracts purchased under its prior program in non-bulk transactions during the six months ended March 31, 1996. The cost of these contract purchases for the twelve-month period ended March 31, 1997 was $13,395,000 ($10,424 per contract) compared to $5,471,000 ($4,680 per contract) for the six-month period ended March 31, 1996. The Company purchased 2,603 contracts in bulk purchase transactions at a cost of $24,966,000 ($9,591 per contract) during the twelve months ended March 31, 1997, compared to 41 contracts purchased in bulk purchase transactions at a cost of $69,000 ($1,683 per contract) during the six months ended March 31, 1996. The increase in the per contract cost of contracts purchased in non-bulk transactions of $5,752 under the Preferred Program is generally due to newer and lower-mileage vehicle, higher credit quality customers and higher wholesale and retail values per vehicle. The increase in the cost of contracts purchased in bulk purchase transactions of $7,908 is due to the Company purchasing contracts that involve higher credit quality obligors or higher value vehicle collateral than the contracts previously purchased by the Company, or both. The Company expects to continue to see an increase in its per contract cost under its Preferred Program when compared to purchases under the prior program. The Company's acquisitions of assets from DACC and U.S. Lending Corp. ("USLC") provided the Company with approximately 4,150 contracts with aggregate balances of $28,100,000, or an average balance of $6,771 per contract. Financial Results. Interest revenue increased to $10,004,000 for the twelve months ended March 31, 1997 from $3,541,000 for the six months ended March 31, 1996. Average interest earning net receivables for the six-month period ended March 31, 1996 were $34,790,000, compared to average interest earning net receivables of $41,065,000 for the twelve months ended March 31, 1997. The Company's acquisitions during the year increased the company's average interest earning net receivables which in turn increased the Company's revenue. Consummation of the acquisition of MSF will provide the Company with a substantially larger receivable portfolio which will generate interest revenue and a portfolio of securitized assets for which the Company expects to receive servicing fees. The acquisitions completed during fiscal 1997 provided over 70% of the growth in the Company's receivables portfolio. Interest expense increased from $1,306,000 for the six months ended March 31, 1996 to $2,306,000 for the twelve months ended March 31, 1997. The six months ended March 31, 1996 included interest expense related to a terminated line of credit and the amortization of offering costs on Fund Subsidiary debt. The twelve months ended March 31, 1997 included interest expense related to the Company's current line of credit and term note. Interest expense is expected to increase as the Company enters into additional financing transactions to expand its receivables portfolio. The outstanding principal balance of the indebtedness assumed by the Company in connection with its acquisition of the assets of DACC (the "DACC Debt"), which is required to be repaid by August 1997, averaged $13,078,000 for the portion of the twelve-month period ended March 31, 1997 following the acquisition. Interest expense includes the accretion in the value of the warrants issued in connection with the fund Subsidiaries plan of reorganization and the acquisition of the assets of DACC and USLC. The outstanding principal balance of the Company's line of credit with Hibernia National Bank averaged $19,395,000 during the twelve-month period ended March 31, 1997. The provision for credit losses decreased from $4,982,000 for the six months ended March 31, 1996 to a reduction of prior provisions for credit losses of $7,017,000 for the twelve months ended March 31, 1997, due primarily to increased recoveries from previously charged-off accounts and reduced provision requirements from the Company's portfolio of lower credit quality loans. During the twelve-month period ended March 31, 1997, the Company recovered $2,448,000 of proceeds from accounts previously charged off compared to recoveries of $2,296,000 for the six months ended March 31, 1996. The Company's remote collections facilities, which were opened during the second calendar quarter of 1995, have been successful in contacting and collecting chronically delinquent and charged-off accounts and locating accounts which had never previously paid. Additionally, the acquisitions of assets of DACC and USLC provided the Company with additional deficiency balances to collect, of which the Company collected approximately $425,000 during the fiscal year ended March 31, 1997. In the future, management anticipates lower recoveries of prior credit losses as these collections decrease and the portion of the Company's portfolio represented by non-auto consumer loans, which traditionally have lower charge off rates, increases. During the twelve months ended March 31, 1997, the Company received a settlement of $245,000 from a car dealer for deficiencies on sales of repossessed cars purchased from that dealer. During the twelve months ended March 31, 1997, the Company reduced its allowance for loan losses by $8,791,000, $2,448,000 of which was due to recovery proceeds and the remaining $6,343,000 of which was a non-cash reduction to reflect lower than anticipated losses from loans purchased under the Company's prior purchasing program. The Company expects to have lesser 65 73 reductions in the future due to lower cash recoveries on previously charged-off accounts and a receivable base which is more predictable as to loss rates and collectibility. During the twelve months ended March 31, 1997, the Company increased its allowance for loan losses by $1,774,000 to reflect an increase in anticipated losses from loans acquired in bulk purchase transactions and from DACC and USLC. The Company's annual chargeoffs, expressed as a percent of average net receivables decreased from 36% for the six-month period ended March 31, 1996 to 30% for the year ended March 31, 1997. The decrease is attributable primarily to the significant change in the Company's receivable portfolio from March 31, 1996 to March 31, 1997. As of March 31, 1996, all of the Company's loans were of a lower credit quality than loans being purchased under the Preferred Program. As of March 31, 1997, these lower credit quality loans had decreased to less than 15% of the total outstanding loans. New originations under the Preferred Program and bulk purchases of receivables offset the liquidation of the old, lower credit quality loans and represent approximately 85% of the total outstanding loans as of March 31, 1997. The Company's bulk acquisitions resulted in provision requirements of over $1,000,000 during the year ended March 31, 1997. The allowance for credit losses as a percent of net outstanding receivables has decreased from 44% as of March 31, 1996 to 11% as of March 31, 1997. The decrease is primarily attributable to the significant change in the Company's loan portfolio from March 31, 1996 to March 31, 1997. All the Company's loans as of March 31, 1996 were purchased under its prior purchasing program for lower credit quality loans. As of March 31, 1997, only approximately 15% of the Company's portfolio was represented by those loans. The remainder of the portfolio was compiled of new originations under the Company's Preferred Program and the receivables acquired in bulk purchases from Eagle and MSF and the receivables acquired in the acquisitions of DACC and USLC. General and administrative expenses increased from $8,098,000 for the six months ended March 31, 1996 to $13,432,000 for the twelve months ended March 31, 1997. Expenses associated with processing repossessions and personnel costs have been reduced on an annualized basis, and confirmation of the Fund Subsidiaries' plan of reorganization has substantially eliminated the professional fees related to the reorganization. The Company closed all three of its retail lots and its related make-ready facility, which were used to process repossessions, by March 31, 1996. The additional offices the Company expects to open for its consumer lending operations will increase the Company's occupancy and personnel costs. The Company plans to open between 10 and 12 offices during fiscal 1998. Most of these offices will be staffed with three to four personnel. It is anticipated that these offices will be located in the southwestern United States. During the six months ended March 31, 1996, the Company recorded a gain of $8,709,000 related to the extinguishment of debt of its Fund Subsidiaries and $535,000 in accruals primarily associated with the Bowe Action. During the year ended March 31, 1997, the Company accrued $40,000 for settlement of certain claims. Preferred stock dividends increased from $327,000 for the six months ended March 31, 1996 to $6,154,000 for the twelve months ended March 31, 1997. The increase of $5,827,000 is related to the issuance of 1,879,000 shares of the Company's 9%/7% convertible preferred stock upon confirmation of the Fund Subsidiaries' plan of reorganization, 319,000 shares of 9%/7% convertible preferred stock in connection with the acquisition of assets of DACC and 272,000 shares of 9%/7% convertible preferred stock in connection with the acquisition of assets of USLC. The Company does not have a provision for income tax expenses for the year ended March 31, 1997 as its income is completely offset by the utilization of its net operating loss carry-forwards of approximately $54,000,000. Comparison of the Period Ended March 31, 1996 to the Six Months Ended March 31, 1995 The Company changed its fiscal year from September 30 to March 31 in order to start a new fiscal year reflecting the Fund Subsidiaries reorganization which was effective March 15, 1995. Therefore, the comparison below compares the six months ended March 31, 1996 to the comparable six months ended March 31, 1995. Contract Purchasing Activity. The Company purchased 1,169 contracts, at a cost of $5,471,000, during the six months ending March 31, 1996 compared to 2,417 contracts, at a cost of $10,670,000, during the six months ending March 31, 1995. The decrease in contracts purchased of 1,248, or 52%, is a result of a decrease in the amount of funds available for reinvestment in contracts due to more Fund Subsidiaries being restricted from purchasing contracts in 1996 than during the six-month period in 1995. Virtually all of the contracts purchased during both periods were purchased under the criteria contained in the Trust Indenture for each Fund Subsidiary. Effective March 15, 1996, the Trust Indentures were canceled and all new originations are now under the Preferred Program. 66 74 Financial Results. For the six months ended March 31, 1996, the Company had interest revenue of $3,541,000 compared to $8,694,000 for the six months ended March 31, 1995. The decrease in interest revenue of $5,153,000, or 59%, is due to a decrease in average net interest earning receivables from $61,100,000, for the six months ended March 31, 1995, to $34,790,000, for the six months ended March 31, 1996. Interest expense decreased $5,131,000, or 80%, from $6,437,000 for the six months ended March 31, 1995 to $1,306,000 for the six months ended March 31, 1996. The decrease in interest expense is due primarily to termination of interest accrual on the debt of the Fund Subsidiaries as of the date of filing for Reorganization, August 15, 1995, or the debt's maturity date, whichever occurred first. See Note 2 of the Notes to Search's Consolidated Financial Statements included in Annex E. The decrease in interest expense was partially offset by the increase in interest expense associated with outstanding lines of credit. The provision for credit losses decreased $355,000, or 7%, from $5,337,000 for the six months ended March 31, 1995, to $4,982,000 for the six months ended March 31, 1996. The decrease in the provision for loan losses is due to adequate provisions for loan losses being provided in prior periods. General and administrative expenses increased $877,000 or 12% from $7,221,000 to $8,098,000. The increase in general and administrative expense is due to higher costs associated with repossessing vehicles and legal and administrative costs associated with effecting the Fund Subsidiaries plan of reorganization. Net loss for the six months ended March 31, 1996 was $2,998,000 compared to $10,421,000 for the six months ended March 31, 1995. The decrease in net loss is due primarily to $8,709,000 of gain on extraordinary items related to extinguishment of the debt of the Fund Subsidiaries. See Note 2 of Notes to Search's Consolidated Financial Statements included in Annex E. Liquidity and Capital Resources General The Company will be required to raise substantial amounts of cash to support its operating, financing and investing activities. Currently, the Company's principal cash requirements are to purchase receivables and originate loans and to pay operating expenses, preferred stock dividends and interest and principal on its indebtedness. The Company will be required to pay in full the outstanding balance of the DACC Debt on August 2, 1997. If the Merger is completed, the Company will be required to reduce certain revolving credit indebtedness owed by MSF, which was $68 million at April 30, 1997, by $25 million within six months and to repay this debt in full within one year after the Merger. Additionally, the Company was required to repurchase stock from a former director of the Company and a trust established by the director for $2,078,000 on May 8, 1997. The Company has a significant amount of cash and cash equivalents as of March 31, 1997, but this will not be sufficient to repay the DACC Debt, cover negative operating cash flows which the Company is experiencing, meet annual dividend requirements, currently over $6,000,000 for the fiscal year ending March 31, 1988, and pay the debts of MSF to the extent required if the Merger is completed. Additionally, the Company anticipates using cash on hand to fund the cash portion of any settlement of the Bowe action that may be finalized. The Company intends to invest a portion of its cash into non-prime automobile and consumer receivables. Additional liquidity will be necessary to support growth of the Company's loan portfolios and operations. Because the used motor vehicle and consumer finance industries require the purchase, origination and carrying of receivables, a relatively high ratio of borrowings to net worth is customary and will be an important element in the Company's operations. The Company will seek to leverage its net worth and any subordinated debt in the future to enhance its liquidity. Additionally, the Company will endeavor to maximize its liquidity by diversifying its sources of funds to include (a) cash from operations, (b) the securitization of receivables, (c) lines of credit from commercial banks and other financing sources, and (d) subordinated debt offerings. The Company has commenced a private offering to accredited investors of up to $35,000,000 of seven-year senior subordinated notes with warrants to purchase shares of Search Common Stock. A portion of the proceeds would be used to repay the outstanding balance of the DACC Debt and the Company's outstanding $5,000,000 of subordinated debt. The Company has also signed a letter of intent with respect to a $100 million, two-year revolving warehouse line of credit facility. The letter of intent is subject to certain conditions, including negotiation and execution of definitive facility documents and completion of due diligence by the lender. This lender has agreed to loan the Company up to $4,000,000 that would be used 67 75 to pay operating expenses, repay a portion of the DACC Debt or fund acquisitions. The loan is subject to completion of definitive loan documentation. Additionally, the Company is discussing with several commercial lenders, including banks and finance companies, arrangements for them to provide additional financing which would be utilized for purchases of receivables and/or operating entities. The Company is also seeking additional participants to expand its $25,000,000 line of credit with Hibernia National Bank. As of March 31, 1997, approximately $23,715,000 was outstanding under this line of credit. Search has entered into the Merger Agreement with MSF pursuant to which MSF will become a wholly-owned subsidiary of Search (the "Merger"). Pursuant to the Merger Agreement, each outstanding share of common stock of MSF will be converted at the effective time of the Merger into the right to receive a fraction (the "Exchange Ratio") of a share of Search Common Stock determined by reference to the average price per share of the Search Common Stock for the 10-day trading period ending on the fifth business day prior to the special meeting of stockholders of MSF at which the Merger Agreement will be considered for adoption (the "Average Trading Price"). The Exchange Ratio will equal $2.00 (the "Per Share Amount") divided by the Average Trading Price, subject to a maximum of .46 and a minimum of .34. The Per Share Amount and the maximum and minimum Exchange Ratios are subject to a downward adjustment in certain circumstances. The Merger is subject to customary conditions, including stockholder approval and the finalization of acceptable arrangements with MSF's lenders. Approval of the Merger by MSF's stockholders requires the affirmative vote of a majority of the outstanding shares of MSF Common Stock. Pursuant to a Stockholders Agreement dated as of February 7, 1997, MSF's principal stockholders, which together own approximately 77% of MSF's outstanding common stock, have agreed to vote their shares in favor of the Merger. If the Merger Agreement is terminated under certain conditions, MSF may be obligated to pay Search a fee of $700,000. Further, the Merger Agreement calls for a monthly fee of $100,000 payable to MSF to Search for operational assistance to MSF prior to consummation of the Merger. Such operational assistance fee is to be applied against the termination fee described above, if applicable. If the Merger Agreement is terminated under other conditions, Search may be obligated to pay MSF a fee of $250,000. For the year ended December 31, 1996, MSF reported interest income of $14,909,000, a net loss of $22,014,000 and a net loss per share of $2.11 At March 31, 1997, MSF had gross contracts receivable of approximately $98 million and an additional approximately $33 million of gross contracts receivable that it serviced. The Company intends to evaluate and pursue acquisition opportunities that the Company anticipates will enable it to grow its receivable base. The Company will consider all forms of financing available to it with respect to any particular acquisition, including additional borrowings and sales or exchanges of equity or debt securities. The Company's ability to acquire additional portfolios and companies is dependent on its obtaining additional financing. Principal Source and Uses of Cash in Operating Activities The principal source of cash from operating activities is provided by net interest income. The principal uses of cash in operations are for general and administrative expenses, non-recurring expenses and payments relating to previously accrued expenses. Comparison of Operating Cash Flows for the Twelve Months Ended March 31, 1997 to the Six Months Ended March 31, 1996 and for the Six Months Ended March 31, 1996 to the Twelve Months Ended September 30, 1995 During the twelve months ended March 31, 1997, the Company utilized $5,947,000 of cash in its operations compared to $4,141,000 of cash being utilized in operations during the six months ended March 31, 1996. The increase of $1,806,000 is primarily due to a decrease in accounts payable and accrued expenses of $5,290,000 and a reduction in the provision for credit losses of $4,569,000 for the twelve months ended March 31, 1997 as compared to a decrease in accounts payable and accrued expenses of $449,000 and an increase in the provision for credit losses of $4,982,000 for the six months ended March 31, 1996. Additionally, the Company had a non-cash gain from the conversion of debt to equity of $8,709,000 in the six-month period ended March 31, 1996. During the six months ended March 31, 1996, the Company utilized cash of $4,141,000 in its operations as compared to cash of $10,741,000 used during the twelve months ended September 30, 1995. The net loss for the six months ended March 31, 1996 decreased to $2,671,000 from a net loss of $19,894,000 for the year ended September 30, 1995. A significant portion of the decrease in loss from 1995 to 1996 resulted from the extraordinary gain on debt extinguishment. 68 76 General and administrative expenses decreased from $15,881,000 to $8,098,000, while settlements and reorganization expenses decreased by $2,617,000 from $3,152,000 to $535,000. The decrease in general and administrative expenditures is due to there being only six months included in the 1996 fiscal period compared to twelve months included in the 1995 fiscal period. The Company anticipates having negative operating cash flows in the foreseeable future as it continues to seek to expand its Dealer Network and consumer finance operations in order to grow its receivable base. The Company will be required to cover any negative operating cash flows from its cash on hand, from the possible financing sources referred to under "General" if available, or from other sources until the Company's receivable base is large enough to cover operating expenses. Principal Sources and Uses of Cash Provided by Investing Activities The principal sources of cash from investing activities are principal payments on receivables and proceeds from the sale of repossessed vehicles and other collateral. The principal uses of cash in investing activities are for purchasing receivables, making consumer loans and purchases of property and equipment. Comparison of Investing Cash Flows for the Twelve Months Ended March 31, 1997 to the Six Months Ended March 31, 1996 and for the Six Months Ended March 31, 1996 to the Twelve Months Ended September 30, 1995 Cash used by investing activities increased by $32,620,000 from cash provided by investing activities of $20,423,000 for the six months ended March 31, 1996 to cash used in investing activities of $12,197,000 for the twelve months ended March 31, 1997. The increase is primarily due to an increase of $35,272,000 in contract purchases and is partially offset by a corresponding increase in collections of $11,481,000. During the twelve months ended September 30, 1995, the Company's investing activities provided cash of $17,592,000 as compared to cash of $20,423,000 provided by investing activities during the six months ended March 31, 1996. This change resulted primarily from reduced contract purchases of $19,359,000 and an increase in unrestricted cash of $12,624,000, partially offset by a decrease in collection proceeds of $29,731,000. Upon confirmation of the Fund Subsidiaries' plan of reorganization, $21,600,000 in cash was released from the Fund Subsidiaries to Search. The Company anticipates encountering negative cash flows from investing activities in the foreseeable future as it continues to seek to expand its non-prime automobile receivable base by expanding into more states and increasing market penetration in existing states and continues its expansion into consumer finance. Principal Sources and Uses of Cash Provided by Financing Activities The principal sources of cash from financing activities are borrowings under line of credit agreements, subordinated and other debt offering proceeds and sales of equity securities. The principal uses of cash in financing activities include repayment of amounts borrowed under lines of credit, repayment of other indebtedness, purchase of treasury stock and payment of dividends on preferred stock. Comparison of Financing Cash Flows for the Twelve Months Ended March 31, 1997 to the Six Months Ended March 31, 1996 and for the Six Months Ended March 31, 1996 to the Twelve Months Ended September 30, 1995 The Company's financing activities provided $9,193,000 of cash during the twelve months ended March 31, 1997 compared to cash of $1,093,000 during the six-month period ended March 31, 1996. The increase of $8,100,000 was primarily due to borrowings under the Company's lines of credit exceeding repayments. The Company paid $4,724,000 in preferred stock dividends during the twelve-month period compared to $120,000 for the six months ended March 31, 1996. The increase is attributable to the preferred shares issued in connection with the Fund Subsidiaries' plan of reorganization. During the twelve months ended September 30, 1995, the Company utilized cash of $7,348,000 in its financing activities as compared to cash of $1,093,000 provided by financing activities during the six months ended March 31, 1996. In 1995, the Company raised only $1,779,000 through Note offerings and repaid $2,429,000 on its line of credit and $5,077,000 of the Notes payable. During the six months ended March 31, 1996, the Company had net borrowings of $1,225,000 under lines of credit, did not raise any funds through Note offerings and did not repay any of the Notes payable. Because of the Fund Subsidiaries' reorganization, no payments were made on the Fund Subsidiaries' Notes and the 69 77 Company's indebtedness to General Electric Capital Corp. was settled in full after confirmation of the Fund. Subsidiaries' plan or reorganization. The Company's acquisition of assets from DACC required the Company to assume the DACC Debt of approximately $17,450,000, $9,596,000 of which remained outstanding at March 31, 1997. The Company is required to repay the outstanding balance by August 1997. Any portion not repaid will require refinancing under existing terms or terms more or less favorable to the Company. The Company anticipates having to refinance a portion of the loan at its maturity date unless it has completed its subordinated debt offering or has an alternative source available. The Company's bulk purchases from Eagle Finance Corp. and MSF were financed with borrowings under its line of credit with Hibernia National Bank and from cash on hand. The Company had $23,715,000 outstanding under this line at March 31, 1997. In November 1996, the Company purchased shares of Search Common Stock and Search 9%/7% convertible preferred stock and warrants to purchase Search Common Stock from HPIL for $9,000,000 as part of a settlement agreement. The Company paid $4,000,000 in cash and executed a $5,000,000 subordinated note bearing interest, payable monthly, at an initial rate of 14%. The interest rate increases by 1% every six months until it reaches 17%. The maturity date is November 21, 2000, but the note must be repaid in full earlier if the Company sells for cash more than $20,000,000, or by a proportionate amount if the Company sells for cash less than $20,000,000, in equity or certain debt securities. The annual dividend requirements on the outstanding shares of 12% Preferred Stock and 9%/7% Preferred Stock, as of March 31, 1997, were $240,000 and $6,200,000, respectively. The annual dividend requirement on the 9%/7% Preferred Stock will remain at that level until March 15, 1999, and then decrease to $4,822,000 until March 2003, assuming no additional shares are issued. Any conversion of Preferred Stock to Common Stock would reduce these dividend requirements. Payment of the dividend on the 9%/7% Preferred Stock in cash may be restricted under some of the Company's debt agreements. If payment of dividends in cash is restricted, the Company may be able to pay the dividend in Search Common Stock under specific circumstances. In July 1996, the Company implemented a loan program for its directors and senior executive officers to finance the purchase of shares of Search Common Stock and 9%/7% Preferred Stock in open market transactions. The loans are evidenced by promissory notes from the borrowers, bear interest at the prime rate, payable quarterly, and mature three years from the date made. The shares of stock purchased with the proceeds of the loans are pledged to the Company as security for the loans. The aggregate amount of these loans outstanding at March 31, 1997 was $1,212,255. During the twelve months ended March 31, 1997, the Company recorded $39,000 of interest revenue from participants under this program. Receivable Concentrations The Company considers Texas and Tennessee to be states with receivable concentrations because receivables with obligors in each of these states exceed 10% of total outstanding receivables. Inflation Historical statistics indicate that collateral value, vehicle sales prices, and receivable interest rates are relatively stable within the Company's market segment. Significant inflation in prices could adversely impact the Company's ability to acquire receivables at favorable prices. General increases in interest rates will result in increases in the Company's interest expense. Seasonality The Company's operations are seasonably impacted by higher delinquency rates during certain periods, including November and December holiday periods. Changes in Asset Quality The Company believes that it is upgrading its credit quality through higher underwriting and collateral standards compared to prior periods. No assurance can be given at this time as to whether these new standards will improve the Company's credit loss experience. 70 78 Recent Accounting Pronouncement Information as to recent accounting pronouncements is contained in Note 9 and 15 of the Notes to Search's Consolidated Financial Statements included in Annex E. FINANCIAL STATEMENTS The audited consolidated financial statements of Search and its subsidiaries for the fiscal year ended March 31, 1997 and six month transition period ended March 31, 1996, together with the report of BDO Seidman, LLP thereon dated May 23, 1997 and notes thereto, are included as Annex E to this Joint Proxy Statement/Prospectus. The audited consolidated financial statements of Search and its subsidiaries for the year ended September 30, 1995, together with the report of BDO Seidman, LLP thereon dated May 10, 1996 and notes thereto, are included in Search's Annual Report included as Annex F to this Joint Proxy Statement/Prospectus. MS FINANCIAL, INC. BUSINESS General MSF is a specialized consumer finance company engaged in the purchase and servicing of retail installment contracts ("Installment Contracts") originated principally by manufacturer-franchised dealerships ("Franchise Dealer") which sell new and used automobiles and light trucks to borrowers with limited credit history, low income or past credit problems ("Non-prime Consumer"). MSF also generates revenues from commissions on the sale of credit life insurance, credit accident and health insurance, and extended service or warranty contracts ("Ancillary Products"). MSF commenced operations in 1984 and achieved significant growth until the third quarter of 1996, reaching a maximum of 23 branch offices in 11 states and 10 regional marketing offices in eight states. At April 30, 1997, MSF's dealer network consisted of approximately 1,032 dealers in 14 states, and MSF's net portfolio of managed Installment Contracts was $100.2 million. During 1996, the amount of MSF's delinquent receivables as a percentage of total receivables increased dramatically to 18.0% at September 30, 1996. This resulted in MSF's inability to maintain acceptable sources of credit necessary for normal business operations. Since October 1, 1996, MSF's sources of liquidity have not been adequate to allow MSF to purchase any significant number of Installment Contracts. See "--Management's Discussion and Analysis of Financial Condition and Results of Operations." At December 31, 1996, delinquent receivables as a percentage of total receivables were 19.3%. Business Strategy Prior to 1996, MSF believed it had implemented a successful business strategy based on its (i) understanding of the automotive finance business, (ii) substantial experience with Franchise Dealers' Non-prime Consumer financing requirements, (iii) ability to evaluate credit risks associated with the Non-prime Consumer market, and (iv) methods of receivables servicing and collection. The principal components of this business strategy included (i) developing and retaining experienced management personnel, (ii) developing and expanding its branch office network around a cluster of urban centers, (iii) utilizing centralized credit functions and advanced management information systems, (iv) developing strong dealer relationships, and (v) providing economical and flexible financing structures. MSF's management believes it can identify some of the reasons for the increase in delinquencies and losses that occurred beginning in late 1995 and continued throughout 1996. Some portion of the increase appears to be attributable to macroeconomic factors which affected the subprime market generally. MSF's management also believes that the decline in the quality of its owned and managed portfolio was, in part, attributable to increased competition in the subprime market which resulted in MSF's management being pressed into the lower end of the range of acceptable credit criteria. Finally, MSF experienced management and turnover problems in its collection/customer service department during 1996 which caused MSF's collection efforts to be less effective than in years past. 71 79 MSF intends to operate within the current confines of available liquidity until the Merger can be consummated with Search. The completion of the Merger is projected to occur in June 1997. After the Effective Time of the Merger, Search, as the controlling party of MSF, would then assume the role of determining MSF's business strategy on an ongoing basis. Installment Contracts Acquisition Program Along with a number of other finance companies purchasing Installment Contracts owed by Non-prime Consumers, MSF experienced a dramatic increase in delinquencies on Installment Contracts in 1996 which ultimately resulted in a devaluation of its owned and managed portfolio and a loss of customary financing sources. Since early October, 1996, MSF's financing sources have not been adequate to continue normal business operations. Historically, MSF has marketed its services through three programs: a branch office network; a central marketing program; and a regional marketing program. Branch Network. The branch office network reached a high of 23 offices during 1996. After closing 12 offices during 1996, MSF currently maintains 11 branch offices divided into two regional divisions (East and West) located in five states. The following table sets forth the locations of MSF's branch offices as of April 30, 1997. Branch Office Locations (by Regional Division)
East West ---- ---- Atlanta, GA Dallas, TX Greensboro, NC Duncanville, TX Memphis, TN Houston, TX (North) Charlotte, NC Houston, TX (South) Winston-Salem, NC Tulsa, OK Oklahoma City, OK
MSF's branch office personnel directly assist the dealership in completing the paper work necessary to complete the sale of the vehicle and the Installment Contract. In connection with that service, MSF's personnel have direct contact with the consumer and market Ancillary Products to the consumer. MSF publishes a schedule of acceptable interest rates and purchases Installment Contracts meeting its criteria at a fixed discount (typically a net discount to the dealer of 7.6% for branch office purchases). Prior to July 1, 1996, after payment of the cost of repossession loss insurance which MSF remitted to the insurance carrier, the amount of the discount retained by MSF was one percent. Since July 1, 1996, MSF has retained the amount previously paid for repossession loss insurance which increased the average net discount to MSF to 7.6% on purchases by branch offices. Central Marketing Program. MSF also purchases Installment Contracts from its Ridgeland, Mississippi office on an indirect basis from dealers. These are typically dealers who have done business with other MSD affiliates. In the central marketing program, the dealers fax a loan application to MSF's headquarters. Any required negotiations to improve credit terms prior to funding an Installment Contract takes place directly between MSF's underwriting personnel and personnel at the dealership. If acceptable terms can be reached, the contract is closed at the dealership by the dealer's personnel. To the extent any Ancillary Products are sold, the dealer retains any commission income. Installment Contracts meeting MSF's published interest rate and credit criteria purchased through the Central Marketing Program are purchased at a fluctuating discount based on the term of the Installment Contract. The discount ranges from 3.75% to 7.5%, subject to a minimum discount of $450. MSF has established arrangements with some dealers that allow the dealer to participate in a portion of the interest paid by the consumer. Otherwise, these transactions are nonrecourse to the dealer. The discount was used by the dealer or MSF on behalf of the dealer to purchase repossession loss insurance prior to July 1, 1996. After MSF discontinued repossession loss insurance (see below) MSF retained the discount, which has averaged approximately 6.75%. Regional Marketing Program. Beginning in November 1995, MSF converted four of its branches into regional marketing programs. These programs were chosen in areas where MSF believed it was not economical to operate a branch office either because of the competitive environment or due to geographic limitations or both. The program consists of a 72 80 sales representative establishing relationships with dealers located in their market areas and soliciting Installment Contracts on an indirect basis. Dealers close the contract, sell any Ancillary Products to the customers and retain the commissions. MSF's personnel do not negotiate the contracts or have any contact with the customer. This program allows the regional marketing representative to cover a larger geographic area since the customer does not come into the branch office to close the contract. Branch office personnel also establish relationships with dealers beyond their normal range of operations and offer the regional marketing program to these dealers. Installment Contracts meeting MSF's published interest rate and credit criteria purchased through the Regional Marketing Program are purchased at a fixed $750 discount, which averages 6.91% of the amount financed. These transactions are nonrecourse to the dealers, and the dealer does not participate in any interest paid on these contracts. After MSF discontinued repossession loss insurance, the $750 discount used to pay the repossession loss insurance premium was retained by MSF. During 1996, MSF closed nine regional offices and, at December 31, 1996, had its only regional office in Raleigh, North Carolina. Dealer Relationships. MSF primarily markets its financing program to Franchise Dealers because it believes that the quality and value of used cars sold by Franchise Dealers are generally higher than those sold by independent dealers. Except for one dealer partially owned by a director of MSF that generated approximately 5.8% of MSF's Installment Contracts outstanding as of December 31, 1996, no dealer accounted for more than 2.7% of MSF's total number of Installment Contracts. For the years ended December 31, 1994, 1995, and 1996, the Company had approximately 632, 781 and 1,059 active dealers, respectively. Each dealer with which MSF establishes a financing relationship enters into a non-exclusive written dealer agreement with MSF (a "Dealer Agreement") governing the purchase of Installment Contracts from such dealer. The Dealer Agreement sets forth the general terms upon which Installment Contracts will be purchased by MSF, but does not obligate the dealer to sell, or MSF to purchase, any particular Installment Contract. MSF monitors the number and tracks the performance of Installment Contracts purchased from each dealer to identify problem dealers at an early stage and take corrective actions against possible adverse trends in loss ratios with respect to such dealers.
Number of Active Dealers by State As of December 31, - --------------------------------- -------------------------------------- 1994 1995 1996(1) ---- ---- ---- Alabama 8 11 12 Georgia 96 93 113 Indiana 2 22 39 Kentucky 14 21 29 Mississippi 82 74 93 North Carolina 59 90 140 Ohio 18 45 70 Oklahoma 51 75 115 Tennessee 86 96 119 Texas 193 228 284 Virginia 9 22 25 Other 14 4 20 ---- ----- ------ Total 632 781 1,059
- ------------------ (1) MSF has been unable to purchase any significant number of Installment Contracts since October 1, 1996. Repossession Loss Insurance. Prior to July 1, 1996, MSF insured against a portion of the losses on its Installment Contracts with a repossession loss policy underwritten by MS Casualty Insurance Company, a subsidiary of MSD ("MS Casualty"). Under that program, at the time of financing, the dealer paid MS Casualty a premium for an insurance policy covering default losses. When an insured vehicle is repossessed, any credit loss of up to $7,000 per vehicle is covered by MS Casualty and, subject to any loss deductibles applied by MSF, paid with respect to the Installment Contract. The total liability of MS Casualty for all repossession losses with respect to each policy year could not, however, exceed the product of $600 times the number of repossession loss policies purchased through MSF during such policy year. In addition, MSF was eligible for an experience refund that allowed MSF to recapture any profits from positive underwriting experience after paying an administrative fee on the repossession policies. MSF earned no experience refund in 1995 or 1996. As of July 1, 73 81 1996, MSF discontinued the repossession loan program and, instead, reduced the purchase price paid dealers for Installment Contracts or retained a portion of the discount previously used to pay the insurance premium. Credit Evaluation and Purchasing Procedures. MSF applies uniform underwriting standards in purchasing Installment Contracts. These standards have been developed and refined over several Installment Contract cycles (i.e., where MSF has experienced the full maturities of several generations of 48-month Installment Contracts) during MSF's 12 year history. The two most important criteria used in evaluating an Installment Contract are the degree of the applicant's creditworthiness and the collateral value of the vehicle. After MSF completes its credit analysis, it advises the dealer of its decision to reject or conditionally approve the Installment Contract. Turnaround time in the automotive finance business is a significant competitive factor, and MSF typically completes its initial credit decision in an average of 1-1/2 hours. Substantially all approved credit applications are approved "conditionally," pursuant to which MSF's acceptance is subject to the consumer and the dealer agreeing on certain provisions. Once the terms of the financing are agreed upon, the financing documents are approved by MSF's home office. The dealer then delivers all documentation required under the Dealer Agreement to MSF, including proof of title indicating MSF's lien, an odometer statement confirming the vehicle's mileage and proof that the automobile is insured, with MSF designated as loss payee. When MSF has received the final credit and other documents from the dealer, MSF remits funds to the dealer. MSF believes that the decline in the qualify of its owned and managed portfolio was, in part, attributable to increased competition in the subprime market which resulted in MSF being pressed into the lower end of the range of acceptable credit criteria. In October 1996, MSF tightened its credit standards. At this point, MSF does not have adequate data to determine whether Installment Contracts purchased since October 1996 will perform significantly better than the Installment Contracts purchased prior to that date. Pursuant to the Merger Agreement, MSF agreed to begin purchasing Installment Contracts which satisfy Search's underwriting criteria or are otherwise approved by Search. Ancillary Products. Prior to MSF's acquisition of an Installment Contract, the dealer and/or MSF's branch office personnel may also offer Ancillary Products to the consumer. MSF acts as an agent for MS Life Insurance Company, a subsidiary of MSD, and MS Casualty in connection with the sale of many of the Ancillary Products and receives a commission on the sale of such products sold through its branch offices. MSF does not receive commissions on the sale of any Ancillary Products in either the central or regional marketing programs. During 1996, the Company's total earned revenues from the sale of Ancillary Products were $1.3 million, or 6.4% of the total revenues, as compared to the 1995 amounts of $1.8 million, or 7.5% of total revenues. Contract Profile. During the years ended 1994, 1995 and 1996, MSF purchased 6,463, 8,768 and 10,352 Installment Contracts, respectively, with principal balances of $65.4 million, $87.0 million, and $110.8 million, respectively. Of the $110.8 million purchased in 1996, $99.9 million were purchased during the first nine months of the year. As of December 31, 1996, the average unpaid principal balance per contract was $7,870 and the average initial principal balance was $10,539. The initial contract term ranged from 12 to 60 months, and the average initial term was 49 months for all loans outstanding at December 31, 1996. The annual percentage rate ("APR") paid by consumers for contracts originated in 1996 ranged from 16.0% to 36.0%. MSF's weighted average APR of Installment Contracts purchased in 1996 was 20.7%. During the first quarter of 1997, MSF purchased 109 Installment Contracts with a principal balance of approximately $1.3 million. The weighted average APR of Installment Contracts purchased during the period was 20.5%. 74 82
At December 31, At March 31, ----------------------------------- ------------ 1994 1995 1996 1997 ---- ---- ---- ---- (Dollars in thousands) New Car Portfolio Installment Contracts 1,129 690 904 11 Principal amount financed $15,244 $ 9,208 $ 13,102 $ 170 Weighted average initial APR 17.7% 18.2% 18.2% 18.5% Used Car Portfolio Installment Contracts 5,334 8,078 9,448 98 Principal amount financed $50,184 $77,765 $ 97,726 $1,109 Weighted average initial APR 21.4% 21.0% 21.0% 20.8% Total Portfolio Installment Contracts 6,463 8,768 10,352 109 Principal amount financed $65,428 $86,973 $110,828 $1,279 Weighted average initial APR 20.4% 20.7% 20.7% 20.5%
Contract Servicing and Administration MSF's centralized Installment Contract servicing and administration activities have been specifically tailored to servicing loans to Non-prime Consumers. The Company's servicing and administration departments, which are located at its corporate headquarters near Jackson, Mississippi, (i) monitor the Installment Contracts and the related collateral, (ii) account for and post all payments received, (iii) respond to customer inquiries, (iv) take all necessary action to maintain the security interest granted in the financed automobile, (v) investigate delinquencies and communicate with the borrowers to obtain timely payments, (vi) pursue deficiencies on Installment Contracts, and (vii) when necessary, contract with third parties to repossess and dispose of the financed automobile. During 1996, MSF experienced unusually high turnover in its customer service department which contributed to the higher delinquencies and losses experienced during the year. Also, as a result of the shortage of experienced sub-prime customer service representatives, in November 1996, the Company opened a customer service center in Mobile, Alabama to support the main office collection efforts. Competition The non-prime credit market is highly fragmented, consisting of many national, regional and local competitors, and is characterized by relative ease of entry. Existing and potential competitors include well-established financial institutions, such as banks, savings and loans, small loan companies, leasing companies and captive finance companies owned by automobile manufacturers and others. MSF believes that increased regulatory oversight and capital requirements imposed by market conditions and governmental agencies have limited the activities of many banks and savings and loans in the Non-prime Consumer credit market. MSF also believes that captive finance companies generally focus on new car financing. As a result, the Non-prime Consumer credit market is primarily serviced by smaller finance organizations that solicit business when and as their capital resources permit. MSF estimates, based on available information, that its managed portfolio represents less than 1% of the Non-prime Consumer automobile finance market in the United States and believes that no competitor controls more than 2% to 3% of this market. Regulation The Company's business is subject to regulation and licensing under various federal, state and local statutes and regulations. Numerous federal and state consumer protection laws and related regulations impose substantive disclosure requirements upon lenders and servicers involved in automobile financing. MSF is also subject to various states' insurance regulations in connection with the sale of insurance policies. MSF believes that it is in substantial compliance with all applicable material laws and regulations. Adverse changes in the laws or regulations to which MSF's business is subject, or in the interpretation thereof, could have a material adverse effect on MSF's business. Because MSF generally charges the highest finance charges permitted by state law, reductions in statutory maximum rates could directly impair operating results. 75 83 Employees At April 30, 1997, MSF had 114 full-time employees, none of whom was covered by a collective bargaining agreement. Of such employees, 85 were located in MSF's headquarters near Jackson, Mississippi or in MSF's service center in Mobile, Alabama and 29 were located in MSF's branch or regional offices. MSF considers its employee relations to be good. PROPERTIES MSF's executive offices are located in Ridgeland, Mississippi, immediately north of Jackson, Mississippi, where it leases 13,176 square feet pursuant to a sublease expiring in December 1997. MSF also leases 3,106 square feet in an adjacent building. As of April 30, 1997, MSF maintained 11 branch offices and one regional office. Generally, these offices range from 200 to 1,300 square feet, and monthly rental rates for such offices range from $445 to $1,953 per month. The average initial term of such leases is 12 to 24 months. MSF does not consider the rental cost of its branch and regional marketing offices to be a material component of its overall cost structure. In October 1996, MSF opened a customer service office in Mobile, Alabama, consisting of 4,670 square feet leased for $1,100 per month for the first six months and $2,200 per month thereafter through September 1997. LEGAL PROCEEDINGS Beginning in June 1995, MSF was named as a defendant in a number of lawsuits filed in the District Court of Harris County, Texas. In certain of these cases, plaintiffs sought class action certification. In January 1997, the Company entered into a settlement agreement covering the pending cases which requires MSF to pay $375,000 prior to July 1, 1997. The terms of the settlement require the Company to release any deficiency claims against the plaintiffs. On January 15, 1997, MSF was named as a defendant in a lawsuit filed by Telluride Funding Corp. ("Telluride") in the U.S. District Court for the Southern District of New York. In its complaint, Telluride asserts claims for unpaid fees due it in connection with MSF's warehouse line of credit entered into in April 1995. Plaintiff seeks damages in the amount of $437,500, plus interest, cost and attorney's fees. At this time, MSF is unable to predict the outcome of this litigation, but it intends to vigorously defend this proceeding. MSF has filed a declaratory judgment action against Telluride in Mississippi State Court requesting a determination of the parties' rights and obligations under the letter agreement relating to the warehouse line of credit. At this time, MSF is unable to predict the outcome of this litigation. MSF is involved, from time to time, in routine litigation incidental to its business. However, MSF believes that it is not a party to any other material pending litigation which, if decided adversely to MSF, would have a significant negative impact on its business, income, assets or operations. MSF is not aware of any other material threatened litigation which might involve MSF. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management's discussion and analysis provides information regarding MSF's consolidated financial condition as of March 31, 1997 and 1996 and December 31, 1995 and 1996, and its results of operations for the three month periods ended March 31, 1997 and 1996 and the years ended December 31, 1994, 1995 and 1996. The management's discussion and analysis should be read in conjunction with the Selected Historical and Pro Forma Consolidated Financial and Operating Data and MSF's Consolidated Financial Statements and the notes thereto, appearing elsewhere in this registration statement. The ratios and the percentages provided below are calculated using the detailed financial information contained in MSF's Consolidated Financial Statements, the notes thereto and the other consolidated financial data included therewith. Overview. MSF is a specialized consumer finance company engaged in the purchase and servicing of Installment Contracts originated by automobile dealers. MSF acquires Installment Contracts principally from Franchise Dealers in connection with the sale of used and new automobiles and light duty trucks to approved Non-prime Consumers. MSF also generates revenue from commissions which it receives from the sale of Ancillary Products sold in conjunction with the Installment Contracts purchased through its branch offices. 76 84 Historical Development and Growth. From its inception, until late 1996, MSF experienced significant growth in its Managed Portfolio, corporate structure and operations. This growth resulted from the development of a branch office network, the regional marketing program and the implementation of a securitization program, and it has been facilitated by the creation of an independent corporate administrative infrastructure. Branch Office Network. In 1990, MSF began expanding its business by opening branch offices in the Midwest, Southeast and Southwest regions of the United States and servicing dealers in these regions. These branch offices develop and improve relationships with dealers and customers, generate Installment Contract applications and produce commission and fee income through the sale of Ancillary Products. This commission and fee income typically offsets each particular branch office's operating expenses within 12 months of its opening. As a result of MSF's branch office expansion, the volume and number of Installment Contracts in MSF's Managed Portfolio have grown significantly in the last several years. The number of branch offices reached a high of 23 in October 1996. Due to a lack of production and profitability, and to reduce MSF's overhead, a total of twelve branches were closed during the fourth quarter of 1996. During 1994, 1995, 1996 and the first quarter of 1997 under this program, MSF purchased Installment Contracts totaling $41.0 million, $65.5 million, $55.7 million and $428 thousand, respectively. Central Marketing Program. In 1984, MSF began purchasing Installment Contracts from MS Diversified Corporation ("MSD") affiliated dealers located principally in Mississippi and Tennessee. During 1996 MSF serviced approximately 45 affiliated dealers in Mississippi, Tennessee and Alabama. During 1994, 1995, 1996 and the first quarter of 1997 under this program, MSF purchased Installment Contracts totaling $24.4 million, $21.1 million, $17.1 million and $104 thousand, respectively. Regional Marketing Program. In 1995, MSF initiated a regional marketing program from four locations. Sales representatives develop relationships with dealers in their market areas to generate Installment Contract applications. Under this program, the contract is closed at the dealership, and the dealer sells any ancillary products and retains the commissions. During 1996, MSF closed nine regional offices, and at April 30, 1997, had only one remaining office located at Raleigh, N.C. During 1995, 1996 and the first quarter of 1997 under this program, MSF purchased Installment Contracts totaling $365 thousand, $38.0 million and $747 thousand, respectively. Use of Securitizations. In 1992, MSF began selling interests in pools of its Installment Contracts to investors through the annual issuance of triple-A rated, asset-backed securities ("Securitization"). These transactions provided a significant source of MSF's funding. Securitizations also allowed MSF to (i) lock in the interest rate spread on the underlying Installment Contracts by obtaining a fixed rate of interest on the Securitization, (ii) record a gain or loss on the sale of the Installment Contracts, (iii) receive residual income attributable to excess cash flows on the Installment Contracts if and when payments on the Installment Contracts are received, and (iv) receive income from servicing the Installment Contracts. This residual income and service fee income is discussed below under "Results of Operations--Interest and Fee Income on Installment Contracts and Securitizations" and "--Service Fee Income," respectively. MSF's last securitization was closed in September 1995. Administrative Development. Prior to 1994, MSD provided most of MSF's executive and administrative services, including its accounting, payroll, data processing, human resource management and computer system maintenance and development services. Between 1993 and 1994, MSD began to charge MSF progressively higher administrative and other fees for these services as MSF expanded its operations. Beginning in January 1994, many of the individuals who had performed these executive and administrative functions for MSF became full-time employees of MSF. Some services, such as payroll processing, mainframe computer usage and software maintenance and development, however, continued to be performed by MSD under a cost sharing contractual arrangement. As of January 1, 1995, MSF assumed responsibility for its own payroll processing and recruited personnel from MSD's management information systems ("MIS") department to form MSF's own MIS department. All remaining fee arrangements between MSF and MSD were discontinued at this time, other than those relating to MSF's use of MSD's mainframe computer. The following table sets forth information with regard to MSF's growth in personnel, branch offices and Installment Contract origination. Also set forth is information regarding portfolio growth, borrowing levels and cost of funds. 77 85
Three Months Ended Year ended December 31, March 31, ----------------------------------- --------- 1994 1995 1996 1997 -------- -------- -------- -------- Number of Branch and Regional Marketing Offices Total at period end 23 24 12 11 Average for the period 17 23 21 11 Company Personnel Executive 5 5 3 2 Headquarters operations, including Mobile office 48 80 94 86 Branch offices 58 54 35 29 --- --- --- ----- Total at period end 111 139 132 117 ============================================ Originated Installment Contracts (000's) Central marketing program $ 24,449 $ 21,130 $ 17,120 $104 Branch offices 40,979 65,478 55,746 428 Regional marketing program 365 37,962 747 ------------------------------------------------- $ 65,428 $ 86,973 $110,828 $1,279 ================================================= Net Managed Portfolio (000's) Total at Period End $ 88,789 $120,318 $130,371 $104,966 Average for the period 73,505 106,309 142,753 117,595 Owned installment and other contracts (000's) Total at period end $ 48,852 $ 22,398 $ 86,972 $ 72,804 Average for the period 39,406 58,903 72,261 82,279 Revolving credit facility balances (000's) Total at period end $ 36,043 -- $ 75,813 $ 71,442 Average for the period 30,213 $ 40,488 52,653 73,705 Average interest rate paid 8.1% 8.9% 10.2% 12.0%
Results of Operations (dollars in thousands, except as noted) Comparison of Three Months Ended March 31, 1996 to Three Months Ended March 31, 1997 Interest and Fee Income on Installment Contracts and Securitizations. Interest and fee income on Installment Contracts and Securitizations represent interest and fee income on owned Installment Contracts, interest income on the retained subordinated interest in securitized Installment Contracts and the residual income attributable to excess cash flows on Securitizations. This income increased by $2,795 or 169.9% from $1,645 for the three months ended March 31, 1996 to $4,440 for the three months ended March 31, 1997. This increase is primarily due to the 166.4% increase in average principal balance of owned loans from $30,887 in the first quarter of 1996 compared to $82,279 in the first quarter of 1997. Also, MSF was unable to complete a Securitization transaction which contributed to the increase in the owned portfolio. These increases were partially offset by a decrease in residual income attributable to excess cash flows on Securitizations which decreased from $38 in the first quarter of 1996 to $0 in the first quarter of 1997. This reduction in recognized residual income is primarily the result of reduced cash flow from the Securitizations which in turn was caused primarily by increased delinquencies during the last half of 1995 and throughout 1996, particularly the last six months of 1996, which slowed the excess cash flows from these securitized portfolios. Residual income attributable to excess cash flows on Securitizations is recognized based on actual and expected cash flows and the estimated rate of return on the recorded investment. Interest Expense. Interest expense increased by $1,835 or 492.0%, from $373 for the three months ended March 31, 1996 to $2,208 in the comparable quarter of 1997. This increase is primarily due to a 544.9% increase in average borrowings from $11,429 for the quarter ended March 31, 1996 to $73,705 for the quarter ended March 31, 1997. The revolving credit facility was not reduced by proceeds from a Securitization transaction during 1996 as it was at the end of 78 86 the year of 1995, which resulted in the average amount outstanding under the credit line increasing by $62,276. Also contributing to the increase was an increase in the interest rate on the revolving credit facility associated with the restructuring the revolving credit facility as a result of MSF's rising delinquency and loss rates at the end of 1996. Provision for Possible Losses. The provision for possible losses increased by $4,092 from $250 for the three months ended March 31, 1996 to $4,342 for the three months ended March 31, 1997. The allowance for possible losses on Installment Contracts increased from 1.1% of the Net Managed Portfolio for the quarter ended March 31, 1996 to 6.1% for the quarter ended March 31, 1997. This significant increase is substantially the result of MSF's rising delinquencies and loss rates on Installment Contracts and the total utilization of the aggregate loss limits and available reserves at MS Casualty. A valuation allowance was not previously considered necessary because of MSF's insurance arrangement with MS Casualty and the relatively lower level of repossessed automobiles in prior periods. The allowance is intended to cover losses on owned Installment Contracts as well as securitized Installment Contracts after taking into account loss reserves and other amounts available at MS Casualty. Insurance Commissions. Insurance commissions represent commission and fee income earned on insurance and other ancillary products sold by the branch offices. This income decreased by $280, or 77.6%, from $361 for the three months ended March 31, 1996 to $81 for the period ending March 31, 1997, primarily as the result of a large decrease in Installment Contract originations from branch offices. In addition, there has been an increase in the number of repossessions during the first quarter of 1997, as compared to the first quarter of 1996. At the time of repossession, any unearned commission is used to reduce the carrying balance of the loss account. As a result, there has been a decrease in unearned commission and commission amortized to income during the quarter. MSF anticipated that as a percent of total revenue, commission income would decrease since it anticipated that its portfolio growth would come primarily from the regional marketing program, where MSF retains no commission on the sale of ancillary products. Service Fee Income. Service fee income represents amounts received by MSF to collect and administer Installment Contracts previously sold into Securitizations. These fees decreased by $493, or 57.1%, from $864 for the quarter ended March 31, 1996 to $371 for the quarter ended March 31, 1997. This decrease was due to a 57.2% decrease in the average balance of securitized Installment Contracts being serviced by MSF comparing the averages for the three month periods ending March 31, 1996 and March 31, 1997. Other Income. Other income is primarily comprised of miscellaneous fee income generated by the branch offices. Other income decreased by $235, or 91.4%, from $257 for the quarter ended March 31, 1996 to $22 for the quarter ended March 31, 1997 due to a decrease in title fee income and other miscellaneous income. Operating Expenses. Operating expenses increased by $321 or 10.4% from $3,098 for the quarter ended March 31, 1996 to $3,419 for the quarter ended March 31,1997 primarily due to increased legal and professional fees associated with the proposed merger between MSF and Search. In addition, during the quarter ended March 31, 1997, MSF also had a loss on sale of Installment Contracts sold to Search of $39. Net Loss. As a result of the factors discussed above, net loss increased by $4,682 from $360 for the quarter ended March 31, 1996 to $5,042 for the quarter ended March 31, 1997. Comparison of 1995 to 1996 Interest and Fee Income on Installment Contracts and Securitizations. Interest and fee income on Installment Contracts and Securitizations increased by $2,460 or 19.8%, from $12,449 in 1995 to $14,909 in 1996. Fee income includes late charges and extension fees which amounted to $927 and $1,623 in 1995 and 1996, respectively. The increase in interest income is primarily due to a 22.7% increase in average owned Installment Contracts outstanding during 1996. The increase in owned Installment Contract balances results primarily from a 27.4% increase in the principal balance of Installment Contracts acquired during 1996. In addition, in 1996, MSF failed to complete a Securitization, which contributed to the increase in owned portfolio. These increases were partially offset by a decrease in residual income attributable to excess cash flows on Securitizations which decreased 83.9% from $422 in 1995 to $68 in 1996. This reduction is primarily the result of reduced cash flow from the Securitizations which was caused primarily by increased delinquencies during the last half of 1995 and throughout 1996. Residual income attributable to excess cash flows on Securitizations is recognized based on actual and expected cash flows and the estimated rate of return on the recorded investment. 79 87 Interest Expense. Interest costs increased by $1,784, or 49.7%, from $3,587 in 1995 to $5,371 in 1996. As a percentage of interest and fee income, interest expenses increased from 24.4% in 1994, to 28.8% in 1995 and 36% in 1996. This increase in the amount of interest expense and the ratio of interest expense to interest and fee income resulted from increases in average borrowings outstanding under the revolving credit facility over those periods. During 1996, the revolving credit facility was not reduced by proceeds from a Securitization during 1996 which resulted in the average amount outstanding under the credit line increasing to $52.7 million in 1996 from $40.5 million in 1995. The remainder of the increase in 1996 relates to an increase in the interest rate on the revolving credit facility for the last two months of 1996, which increased interest expense approximately $363, and the other costs associated with restructuring the debt ($563). The revolving credit facility was restructured in December as a result of MSF's rising delinquency and loss rates. During the third quarter of 1995, MSF completed a Securitization which resulted in $73.2 million in proceeds and received an equity infusion through the completion of an initial public offering of $21.4 million. The net proceeds were used to repay MSF's revolving credit facility which in turn reduced MSF's interest cost for the last quarter of 1995. Provisions for Possible Losses. The provision for possible losses on Installment Contracts increased by $19,277 from $826 in 1995 to $20,103 in 1996. The allowance for possible losses on Installment Contracts increased from 1.3% of the Net Managed Portfolio in 1995 to 7.7% in 1996. This significant increase is substantially the result of MSF's rising delinquencies and loss rates on Installment Contracts and the total utilization of the aggregate loss limits and available reserves at MS Casualty. At the end of MSF's 1995 calendar year, a loss development methodology was utilized that considered what proportion of MSF's losses were developing after specific time frames based on month of loan origination. Based on that static pool loss development, and considering the insurance that MS Casualty provided MSF, allowance levels were established. MSF utilized this approach exclusively through the second quarter of 1996. Beginning in the third quarter of 1996, in consideration of MSF's rising delinquency rates, MSF began supplementing the previously existing methodologies with additional methodologies that better considered the rising delinquency and loss rates. MSF management believed that, with the trend in delinquencies, the previous methodology would not consider the negative trends in the portfolio fast enough. Accordingly, two additional methods were developed. The first supplemental method is based on delinquency information by year of origination. A probability of loss factor is estimated for each delinquency category by year of origination and a percentage of loan dollar loss factor is established for each year. The probability of loss factor represents the ratio of accounts that went into repossession status to the total accounts to reach delinquent status for each delinquency category. The percentage of loan dollar loss factor represents the percentage of actual total loss expected to the remaining balance on those loans. These factors are applied to each delinquency category for each year and then totaled to calculate the required allowance. The second supplemental method considers both historical loss rate and delinquencies. Delinquent balances are accumulated by month of origination and by number of days delinquent. Those delinquent balances are then expressed as a percentage of the remaining balance of loans originated in the applicable month. Then the delinquency percentages are multiplied by the annual probability of loss and percentage of loss factors to calculate a risk weighted delinquency percentage for each category. A total risk weighted delinquency rate is then calculated by totaling the risk weighted delinquency percentage for each category. This rate is then averaged with the next year loss percentage by month of origination. The next year loss percentage represents the estimated losses to be realized in the next year to the remaining balance using the historical loss development approach used by MSF in prior years. The average expected loss rate by month of origination is multiplied by the remaining balance of loans by month of origination and the results are totaled to calculate the required allowance. At December 31, 1996, management provided an allowance for possible losses on repossessed automobiles of $2.8 million. A valuation allowance was not previously considered necessary because of MSF's insurance arrangement with MS Casualty and the relatively lower level of repossessed automobiles in prior periods. The allowance takes into account management's estimate of a 55% recovery rate on sales of repossessed vehicles. Also, at the end of 1996, MSF recorded a provision for impairment of amounts due under securitizations of $3.0 million. This provision was deemed necessary because the deterioration in performance of MSF's sold portfolio has dramatically reduced the amount of residual income attributable to excess cash flows expected to be received under the 1995 Securitization. As reported in MSF's press release dated September 3, 1996 and in MSF's Form 8-K dated September 12, 1996, MSF had a breakdown in its extension granting process that was identified and rectified timely. MSF became aware that as of June 30, 1996, documentation of extensions and internal controls related to extensions fell below MSF's standards. In September 1996, independent auditors hired by MSF's lenders conducted a review of MSF's extension policies. At the direction of MSF's audit committee, MSF's independent auditors periodically audited extension practices beginning in 80 88 September 1996. Search reviewed MSF's extension practices in March 1997. The foregoing reviews followed a substantial revision of MSF's extension policies in November 1996. Assuming the Merger is effected with Search, Search employs an internal auditor who will, among other things, be charged with the responsibility of monitoring MSF's extension practices to ensure compliance with established policies and procedures. MSF believes that these periodic reviews and continued monitoring to be performed by Search's internal auditor will be adequate to ensure material compliance with MSF's established policies and procedures. Because of the breakdown in MSF's extension granting process, certain negative trends in MSF's loan portfolio were not apparent as fast as management would have preferred. MSF's delinquency experience (61 days and greater) increased dramatically in the last two quarters of the calendar year but showed improvement by the end of the first quarter of 1997. Specifically, such delinquencies for the gross managed portfolio were as follows:
Percentage of Percentage of Number of Principal Contracts Amount ---------------- -------------- March 31, 1996 3.9% 3.9% June 30, 1996 3.5% 3.7% September 30, 1996 9.7% 9.9% December 31, 1996 8.8% 9.5% March 31, 1997 4.3% 5.1%
Management of MSF believes that the substantial loan loss provisions made in the third and fourth quarters of 1996 were made timely with the best information available and in consideration of management's loss expectations at the time. Insurance Commissions. Insurance commissions decreased by $494, or 27.1%, from $1,823 in 1995 to $1,329 in 1996, primarily as the result of a 14.9% decrease in Installment Contract originations from branch offices. In addition, there has been an increase in the number of repossessions during 1996. At the time of repossession, any unearned commission is used to reduce the carrying balance of the loss account. As a result, there has been a decrease in unearned commission during the year. Also, in the fall of 1995, MSF reduced emphasis on selling other Ancillary Products in an effort to make the offerings more favorable to automobile dealers without increasing credit risk to MSF. MSF anticipated that as a percent of total revenue, commission income would decrease since it anticipated that its portfolio growth would come primarily from the regional marketing program, where MSF retains no commission on the sale of Ancillary Products. Gains on Securitizations. During 1996, MSF did not complete a Securitization. However, during 1995, MSF completed a $90.0 million Securitization which resulted in a net gain on sale of $7.1 million. For further information, see the discussion at "Liquidity and Capital Resources--Securitization Programs." Service Fee Income. Service fee income on Installment Contracts owned by Securitization Trusts increased by $717, or 36.8%, from $1,951 in 1995 to $2,668 in 1996, due primarily to the 37.3% increase in the average balance of securitized Installment Contracts being serviced by MSF. Other Income. Other income is primarily comprised of miscellaneous fee income generated by the branch offices. Other income decreased by $7, or 1.0%, from $760 in 1995 to $753 in 1996. This decrease is due to a reduction in title fee income and other miscellaneous income. Operating Expenses. Operating expenses increased $5,764, or 61.7%, from $9,340 in 1995 to $15,104 in 1996, partially due to a 24.2% increase in the average number of personnel during the year and other expenses associated with higher contract origination volume. MSF expanded the customer service department by opening a customer service center in Mobile, Alabama, adding to the yearly expenses with startup costs and personnel. In addition, during the year MSF has incurred ongoing legal fees of $1.6 million, a significant portion of which related to defending lawsuits. For further information, see the discussion under "MS Financial, Inc.--Legal Proceedings." Also, at the end of 1996, MSF accrued the expenses associated with the potential settlement of various lawsuits in the state of Texas. The amount of this accrual totaled $375,000. Also, during 1996, the Company expensed the remaining carrying value of the cost of acquiring the Installment 81 89 Contract origination program due to the uncertainties associated with its value as a result of MSF's substantial 1996 net loss. The carrying amount expensed totaled $257,000. Previously, this asset was being amortized on a straight-line basis over ten years. Net Income. As a result of the factors discussed above, net income decreased by $28,515 from $6,501 in 1995 to a loss of $22,014 in 1996. Comparison of 1994 to 1995 Interest and Fee Income on Installment Contracts and Securitizations. Interest and fee income on Installment Contracts and Securitizations increased by $2,441, or 24.4%, from $10,008 in 1994 to $12,449 in 1995. The increase in interest income is primarily due to a 49.5% increase in average owned Installment Contracts outstanding during the year. The increase in owned Installment Contract balances results primarily from an 32.9% increase in the volume of Installment Contracts acquired during 1995. These increases were partially offset by a decrease in residual income attributable to excess case flows on Securitizations which decreased 70.6% from $1,434 in 1994 to $422 in 1995. This reduction in recognized residual income is primarily the result of reduced cash flow from the Securitizations, which in turn was caused primarily by increased delinquencies during the last half of 1995. Residual income attributable to excess cash flows on Securitizations is recognized based on actual and expected cash flows and the estimated rate of return on the recorded investment. Interest Expense. Interest costs increased by $1,146, or 46.9%, from $2,441 in 1994 to $3,587 in 1995. This increase is primarily due to a 34.0% increase in average borrowings under the revolving credit facility to fund the acquisition of Installment Contracts. Also, interest rates were higher during the first half of 1995 compared to the first half of 1994, which is when the bulk of MSF's borrowing were outstanding. During the third quarter of 1995, MSF completed a Securitization, which resulted in $73.2 million in proceeds, and received an equity infusion through the completion of initial public offering of $21.4 million. The net proceeds were used to repay MSF's revolving credit facility which in turn reduced MSF's interest cost. Provision for Possible Losses on Installment Contracts. Provision for possible losses on Installment Contracts increased by $141, or 20.6%, from $685 in 1994 to $826 in 1995. The allowance for possible losses on Installment Contracts decreased from 1.5% of the Net Managed Portfolio in 1994 to 1.3% in 1995. The increase in the allowance was primarily attributable to a $1,184 valuation allowance that was recorded through a reduction in the recorded gain on the 1995 Securitization completed during the third quarter offset by an increase in losses charged to the valuation allowance account. The valuation allowance in intended to cover uninsured losses and is set at a level considered to be adequate to cover the expected future losses on the existing Installment Contract portfolio after taking into account available reserves and aggregate loss limits at MS Casualty to cover outstanding contracts. Increases in the allowance are primarily based on the level of Installment Contracts, historical loss experience and, to a lesser extent, current economic conditions, operating practices and other factors which management deems relevant. Losses on securitized Installment Contracts are limited to amounts recorded as investment in the subordinated trust certificates and amounts due under Securitizations. Insurance Commissions. Insurance commissions increased by $367, or 25.2%, from $1,456 in 1994 to $1,823 in 1995, primarily as the result of a 59.8% increase in Installment Contract originations from branch offices. However, commissions on the sale of Ancillary Products have decreased as a percentage of total revenues from 1994 to 1995 due to MSF's decision in July of 1995 to discontinue offering guaranteed asset protection ("GAP") policies. Also, in the fall of 1995, MSF reduced emphasis on selling other Ancillary Products in an effort to make the offerings more favorable to automobile dealers without increasing credit risk to MSF. MSF anticipates that as a percentage of total revenue, commission income will continue to decrease in the coming years since it anticipates that portfolio growth will come primarily from the regional marketing program, from which MSF retains no commission on the sale of Ancillary Products. Gains on Securitizations. Gains on Securitizations increased by $4,580, or 183.8%, from $2,492 in 1994 to $7,072 in 1995. This increase was attributable to MSF's increase of 157.1% in total Installment Contracts sold under Securitizations from $35,004 in 1994 to $90,000 in 1995, and an overall improvement in efficiencies due primarily to the larger size of the 1995 Securitization. The 1995 gain on the Securitization was reduced by $1,250 of realized losses on hedging transactions and is net of a valuation allowance of approximately $1,184. Service Fee Income. Service fee income increased by $716, or 58.0%, from $1,235 in 1994 to $1,951 in 1995, due primarily to the 49.2% increase in the average balance of securitized Installment Contracts being serviced by MSF. 82 90 Other Income. Other income increased by $133, or 21.2%, from $627 in 1994 to $760 in 1995 due primarily to a 59.8% increase in the dollar volume of Installment Contracts originated through branch offices, which was partially offset by a 38.7% decrease in title fee income in several branch offices and certain nonrecurring items in 1994. Operating Expenses. Operating expenses increased $2,751, or 41.8%, from $6,589 in 1994 to $9,340 primarily due to a 43.7% growth of average employees from 1994 to 1995. In addition, MSF had increased expense related to the additional reporting requirements commencing after the completion of its initial public offering during 1995. Net Income. Net income increased by $2,116, or 48.3%, from $4,385 in 1994 to $6,501 in 1995. The increase was primarily the result of a 35.7% increase in the number of Installment Contracts purchased during the year and the large increase in the gain on Securitization of $4,580 from $2,492 in 1994 to $7,072 in 1995. Quarterly Financial Data and Earnings During 1996, MSF experienced a significant deterioration of portfolio performance as shown by the increase in delinquencies quarter over quarter. As a result of this deterioration, during the third and fourth quarters of 1996 and the first quarter of 1997, MSF increased the provision for losses on Installment Contracts to $7.0 million,$12.5 million, and $4.3 million, respectively. Also, as a result of higher losses during 1996, MSF recorded a provision for possible losses on repossessed automobiles of $2.8 million at year end. A valuation allowance was not previously considered necessary because of MSF's insurance arrangement with MS Casualty. However, at year end, the policy limits had been reached. In addition, at December 31, 1996, MSF recorded a provision for impairment of amounts due under securitizations of $3.0 million. This provision was deemed necessary because of the deterioration of the performance of MSF's sold portfolio. These increases resulted in a large net loss for both the third and fourth quarters. During the third and fourth quarters of 1995, MSF did complete a $90.0 million Securitization which resulted in MSF recognizing a gain on sale of $5.4 million in the third quarter and $1.7 million during the fourth quarter. The following tables set forth selected consolidated financial data and earnings information for MSF on a quarterly basis for 1995, 1996 and the first quarter of 1997. 83 91
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED ENDED 3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 ------------------------------------------------ --------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Number of contracts acquired during period (not in thousands) 3,149 3,366 2,898 939 109 Principal amount of contracts acquired during period $ 32,339 $ 34,979 $ 32,543 $ 10,967 $ 1,279 Net Managed Portfolio - end of period $133,277 $150,024 $163,837 $ 130,371 $104,966 Net Managed Portfolio - average during period $126,008 $142,106 $157,769 $ 149,848 $117,595 Average principal balance of securitized Installment Contracts during period $ 93,520 $ 78,120 $ 64,399 $ 52,807 $ 40,041 Average principal balance of owned Installment Contracts during period $ 30,887 $ 62,071 $ 91,948 $ 104,138 $ 82,279 Net interest income before loss provisions $ 1,290 $ 2,535 $ 2,821 $ 2,962 $ 2,245 Net interest spread $ 1,272 $ 2,511 $ 2,809 $ 2,946 $ 2,232 Provision for possible losses on installment contracts $ 250 $ 331 $ 7,009 $ 12,513 $ 4,342 Provision for impairment of amounts due under securitizations -- -- -- $ 3,000 -- Provisions for possible losses on repossessed automobiles -- -- -- $ 2,800 -- Net income (loss) $ (360) $ 142 $(3,986) $(17,810) $(5,042) Net income (loss) per share $ (0.03) $ 0.01 $ (0.38) $(1.71) $ (.48) Weighted average shares outstanding 10,452 10,856 10,427 10,428 10,430 Delinquency rate - end of period (1) 7.5% 8.3% 18.0% 19.3% 10.1% Loss rate - annualized average for the period(1) 1.1% 1.1% 0.3% 22.0% 19.4% Total assets $78,178 $108,987 $130,037 $101,435 $ 91,015 Notes payable $26,500 $60,000 $ 83,000 $75,813 $ 71,442 Total liabilities $34,779 $65,428 $ 90,459 $79,681 $ 73,852 Stockholder's equity $43,399 $43,559 $ 39,578 $21,754 $ 17,163
84 92
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS ENDED ENDED ENDED ENDED 3/31/95 6/30/95 9/30/95 12/31/95 --------------------------------------------------- ----------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Number of contracts acquired during during period (not in thousands) 2,375 2,726 1,709 1,958 Principal amount of contracts acquired during period $ 23,421 $ 26,394 $ 16,942 $ 20,216 Net Managed Portfolio - end of period $ 98,629 $110,984 $112,407 $120,318 Net Managed Portfolio - average during period $ 93,102 $105,040 $111,966 $115,903 Average principal balance of securitized Installment Contracts during period $ 38,616 $ 33,152 $ 45,405 $ 93,618 Average principal balance of owned Installment Contracts during period $ 53,667 $ 72,023 $ 86,843 $ 23,080 Net interest income before loss provisions $ 2,024 $ 2,751 $ 3,117 $ 1,070 Net interest spread $ 2,018 $ 2,749 $ 3,090 $ 1,005 Provision for possible losses on installment contracts $ 159 $ 357 $ 171 $ 139 Provision for impairment of amounts due under securitizations -- -- -- -- Provision for possible losses on repossessed automobiles -- -- -- -- Net Income $ 595 $ 781 $ 4,306 $ 819 Earnings per share $ 0.06 $ 0.08 $ 0.40 $ 0.07 Weighted average shares outstanding 9,332 9,332 10,882 11,227 Delinquency rate - end of period (1) 5.1% 6.9% 9.1% 12.6% Loss rate - annualized average for the period(1) 0.7% 0.6% 2.0% 1.5% Total assets $ 77,474 $ 97,122 $ 51,939 $ 49,718 Notes payable $ 51,793 $ 70,543 -- -- Total liabilities $ 58,776 $ 77,642 $ 6,653 $ 4,734 Stockholders' equity $ 18,698 $ 19,480 $ 45,286 $ 44,984
- ----------------------------- (1) Percentages are based on the gross amount scheduled to be paid on each Installment Contract, including unearned finance charges and other charges. Installment Contract Loss Experience On all installment contracts with a purchase date on or prior to July 1, 1996, dealers purchased repossession loss insurance from MS Casualty, an insurance company rated A- by A.M. Best & Co. For these contracts, MS Casualty retains the premiums paid by dealers and is obligated to pay MSF up to $7,000 per vehicle upon repossession of the financed vehicle for claims made under the policies; provided, however, that MS Casualty's aggregate liability for all repossession losses during any policy year may not exceed the product of $600 and the number of automobiles contracted during that policy year. At the end of 1996, substantially all amounts available under the insurance arrangement with MS Casualty have been recovered by the Company. Effective July 1, 1996, MSF discontinued repossession loss insurance and began retaining this premium, which averaged $729 per Installment Contract and 6.43% of the amount financed.. Accordingly, MSF will be bearing all of the risks of loss on installment contacts originated subsequent to July 1, 1996. Through the first quarter of 85 93 1997, MSF has experienced increased delinquency, losses and repossessions, as shown in the following credit loss/repossession experience and delinquency tables. As a result of higher losses and delinquencies, MSF substantially increased its allowance for possible losses on Installment Contracts during the third and fourth quarters of 1996 and the first quarter of 1997. MSF regularly reviews the adequacy of its allowance for possible losses on installment contracts. This allowance is set at a level considered to be adequate to cover the expected future losses on the existing installment contract portfolio after taking into account reserves and available loss limits of MS Casualty for outstanding contracts. Increases in the allowance are primarily based on the level of installment contracts, increases in delinquency trends, historical loss experience and, to a lesser extent, current economic conditions, operating practices and other factors which management deems relevant. MSF's charge-off policy is based on a contract-by-contract review of delinquent installment contracts. MSF generally charges off an installment contract at the time the collateral is repossessed and sold at auction, although certain installment contracts may be charged-off sooner if management determines them to be uncollectible. Also, beginning in December 1996, any account which reaches 150 days contractually delinquent is charged off. The following table summarizes MSF's Installment Contract and repossession loss experience:
CREDIT LOSS/REPOSSESSION EXPERIENCE (1) -------------------------------------------------------------- THREE THREE YEAR ENDED DECEMBER 31, MONTHS MONTHS --------------------------------- ENDED ENDED 1994 1995 1996 3/31/96 3/31/97 ------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Average Gross Managed Portfolio $95,826 $139,959 $192,765 $163,583 $165,431 Average month-end number of Installment Contracts 9,907 13,693 17,749 16,200 15,105 Repossessions settled as a percentage of average month-end number of Installment Contracts outstanding (2) 7.7% 11.2% 17.3% 3.74% 8.59% Gross Charge-offs (3) $ 2,288 $ 6,355 $ 21,336 $ 2,920 $ 9,059 Recoveries (4) 417 407 405 112 951 Claim Payments from MS Casualty (5) 1.315 4,200 9,288 2,378 68 ------- -------- -------- -------- -------- Net Charge-offs (6) $ 556 $ 1,748 $ 11,643 $ 430 $ 8,040 ======= ======== ======== ======== ======== Net Charge-offs as a percentage of average gross Managed Portfolio outstanding 0.6% 1.2% 6.0% 1.1% 19.4% ==== ==== ==== ==== ===== Experience refund (7) $ 900 $ -- $ -- $ -- $ -- - --------------------------
(1) All amounts and percentages are based on the gross amount scheduled to be paid on each Installment Contract, including unearned finance charges and other charges. The information in the table includes Installment Contracts previously sold through Securitizations which MSF continues to service. (2) Repossessions settled as a percentage of average month-end number of Installment Contracts outstanding have not been annualized for the quarters presented. (3) Gross charge-offs include principal, late charges, and repossession expenses and are net of insurance (other than repossession loss insurance) claims and rebates and proceeds from the sale of repossessed financed vehicles. (4) Recoveries are collections net of attorney fees and court costs. (5) Refers to claims paid for repossession losses under the MS Casualty repossession loss insurance policies maintained on the vehicles under Installment Contracts, net of recoveries. (6) Net charge-offs equal gross charge-offs minus recoveries and insurance claim payments. (7) Represents amounts refunded to MSF pursuant to its agreement with MS Casualty which allows MSF to recapture any profits from positive underwriting experience after paying an administrative fee on the repossession loss insurance policies. 86 94 Installment Contract Delinquency Experience MSF considers an Installment Contract to be delinquent if the borrower fails to make any payment in full on or before the due date as specified by the terms of the Installment Contract. MSF typically initiates contact with borrowers whose payments are not received by the due date within eight days of the due date. The period-end delinquencies on MSF's Gross Managed Portfolio set forth in the table below are not necessarily representative of average delinquencies during the periods indicated.
Delinquency Experience at December 31, ----------------------------------------------------------------------------- (dollars in thousands) 1994 1995 1996 ------------------------ ------------------------ ------------------------ Number of Number of Number of Contracts Amount Contracts Amount Contracts Amount --------- ------ --------- ------ --------- ------ Owned Installment Contracts Portfolio 4,925 $55,349 1,310 $18,428 8,140 $115,318 Period of delinquency 31-60 days 134 1,336 60 629 753 10,634 61-90 days 45 475 28 304 356 5,055 91-119 days 18 231 27 266 168 2,444 120 days or more 35 393 131 1,660 205 2,983 ------ ------- ------- ------- ----- -------- Total delinquencies 232 2,435 246 $2,859 1,482 $21,116 ====== ======= ======= ======= ===== ======== Total delinquencies as a percent of the portfolio 4.7% 4.4% 18.8% 15.5% 18.2% 18.3% ====== ======= ======= ======= ===== ======== Securitized Installment Portfolio 5,979 $56,506 13,195 $135,000 7,424 $55,592 Period of delinquency 31-60 days 189 1,965 1,001 10,461 785 6,103 61-90 days 77 923 242 2,813 296 2,437 91-119 days 22 250 153 1,839 175 1,620 120 days or more 44 514 118 1,307 172 1,695 ------ ------- ------- ------- ----- -------- Total delinquencies 332 3,652 1,514 $16,420 1,428 $11,855 ====== ======= ======= ======= ===== ======== Total delinquencies as a percent of the portfolio 5.6% 6.5% 11.5% 12.2% 19.2% 21.3% ====== ======= ====== ======= ====== ========
DELINQUENCY EXPERIENCE AT MARCH 31, -------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1997 ----------------------------- --------------------------- Number of Amount Number of Amount Contracts (in thousands) Contracts (in thousands) --------- --------- Owned Installment Contracts Portfolio 4,244 $62,388 7,411 $94,813 Period of delinquency 31-60 days 99 1,380 397 5,188 61-90 days 41 461 123 1,709 91 days or more 69 759 211 3,020 ------ -------- ----- ------- Total delinquencies 209 $ 2,600 731 $ 9,917 ====== ======== ===== ======= Total delinquencies as a percent of the portfolio 4.9% 4.2% 9.9% 10.5% ====== ======== ===== ======= Securitized Installment Contracts Portfolio 11,727 $110,402 5,743 $39,799 Period of delinquency 31-60 days 469 4,825 200 1,542 61-90 days 224 2,402 87 724 91 days or more 285 3,050 143 1,467 ------ -------- ----- ------- Total delinquencies 978 $ 10,277 430 $ 3,733 ====== ======== ===== ======= Total delinquencies as a percent of the portfolio 8.3% 9.3% 7.5% 9.4% ====== ======== ===== =======
87 95 Delinquent contracts and gross charge-offs increased throughout 1996. Though MSF worked diligently to reduce those trends, turnover in the customer service department, management and staff have impeded MSF's ability to rehabilitate delinquent loans and thus have resulted in higher delinquencies, repossessions and chargeoffs. In addition, management of MSF believes there has been a general deterioration in the credit quality for nonprime consumer credit obligations as is evidenced by national trends in delinquencies for those consumers. MSF has taken numerous steps to improve its delinquency ratios and charge-offs. During 1996, MSF adopted a new, more stringent credit scoring system and tightened its credit standards. In July, MSF installed a credit scoring system developed by independent consultants. This scoring system was developed with historical information based on the performance of loans that MSF purchased from January 1, 1993 through June 30, 1994. This system incorporated demographic information of the customer and places heavy emphasis on the previous and current credit history of the application. Each applicant was required to meet a minimum qualifying score and satisfy normal underwriting criteria. Changes made to the credit criteria included reducing advance rates on new vehicles from 115% to 100% of invoice plus tax, title, and license, reducing the payment to income ratio from 25% to 20% of gross income, allowing only 50% of any manufacturer's rebate to apply to the down payment, and tieing the term of Installment Contracts more tightly to minimum NADA trade-in values and certain mileage restrictions. In the first quarter of 1997, MSF changed its underwriting criteria to match those of Search. The changes included requiring a minimum annual income of $12,000, increasing the maximum debt to income ratio from 42% to 50% of gross income, requiring a three-year traceable residence and employment history, requiring each applicant to have a minimum high credit of $1,000 paid or paying satisfactorily within the last twelve months and eliminating all vehicles with more than 80,000 miles or which are older than six years. During the third quarter of 1996, MSF's management reorganized certain functional areas and reassigned responsibilities to place more emphasis on collection efforts. During October 1996, MSF opened a second customer service office in Mobile, Alabama. Management believes this customer service office will allow MSF to hire more experienced personnel. As a result of these steps, along with an increased level of repossessions and chargeoffs, MSF's delinquency has decreased from 19.3% at December 31, 1996 to 10.1% at March 31, 1997. Pursuant to the terms of MSF's Securitization Trusts, once average delinquencies exceed 10% on the 1994 Securitization and 12% on the 1995 Securitization for any two consecutive months, MSF could be replaced as servicer. MSF exceeded these amounts at August 31, 1996 for the 1994 and 1995 Securitization. Delinquencies reached a high of 16.2% for the 1994 Securitization at December 31, 1996 and 21.6% for the 1995 Securitization at October 31, 1996. Liquidity and Capital Resources (dollars in thousands, except as noted) General. MSF requires capital primarily for the purchase of Installment Contracts and for working capital. In the past, MSF has financed these requirements with borrowing under a revolving credit facility and warehouse facility and through MSF's Securitization program. During 1996, MSF suffered substantial losses and, accordingly, substantial reductions in stockholders' equity. These negative financial trends resulted from material increases in delinquencies and losses on owned and serviced Installment Contracts. As a result, MSF is facing a severe liquidity problem because of (i) the lack of availability of funds under MSF's revolving credit facility; (ii) the termination of MSF's warehouse facility; (iii) MSF's inability to complete a Securitization in 1996; and (iv) the delay of payments to MSF under MSF's prior Securitization programs. MSF has been unable to solve its liquidity problems and, on February 7, 1997, executed the Merger Agreement with Search, which, if consummated, will result in MSF becoming a wholly-owned subsidiary of Search, and MSF's former stockholders becoming stockholders of Search. If the Merger with Search is not consummated, MSF will likely be forced to liquidate its portfolio of Installment Contracts through normal collections and/or sales and cease operating as a going concern, unless alternative financing sources are available to MSF. Cash Flows From Operating, Investing and Financing Activities. As shown on the Consolidated Statements of Cash Flows, cash and cash equivalents increased by $566 in 1996, to $1,454 at December 31, 1996. The increase reflected $74,597 net cash provided by financing activities, primarily from increased borrowings under MSF's Revolving Credit Facility, and $4,645 net cash provided by operating activities, offset by $78,676 net cash used in investing activities. The net cash used in investing activities was primarily $109,796 in Installment Contracts purchased, offset by $15,595 in repayment on Installment Contracts and the $14,427 proceeds from sale of Installment Contracts. The net cash provided 88 96 by operating activities of $4,645 includes net income (loss), adjusted for various noncash charges to income, as well as changes in certain balance sheet items. Cash and cash equivalents increased to $4,296 at March 31, 1997 principally due to a decrease in the volume of Installment Contracts purchased. Revolving Credit Facility. The revolving credit facility, which provides funds to purchase Installment Contracts and for working capital, previously consists of a three-year revolving facility of up to $45.0 million and a 364-day revolving facility of up to $45.0 million. If not extended or renewed, the 364-day facility could have been converted into a two-year term facility. The maximum amount available under the revolving credit facility was limited to a borrowing base principally consisting of 90% of the net adjusted amount of eligible Installment Contracts. The revolving credit facility is secured by substantially all of MSF's assets other than the accounts owned by MS Auto Receivables Company. As of May 31, 1997, MSF had an outstanding balance of $65.1 million on the MSF Revolving Credit facility bearing a rate of interest of 9.5%. In November 1996, MSF advised its lenders that it was in default under certain covenants under the agreements governing the revolving credit facility. Effective December 16, 1996, MSF and its lenders reached an agreement to amend these agreements. The amended agreements redefined eligible loans and reduced the advance rate from 90% to 85% of eligible loans. The amendments obligated MSF to make certain mandatory prepayments by January 31, 1997, increased the interest rate and imposed a $562,500 restructuring fee. The lenders agreed to extend the prepayment date to February 7, 1997. On February 19, 1997, the lenders, Search and MSF entered into a letter agreement specifying the terms of certain agreements that the parties agreed to execute and deliver (the "Term Sheet"). In addition, the lenders consented to the execution by MSF of the Merger Agreement and the consummation of the transactions contemplated therein. The provisions of the Term Sheet were incorporated into an amended loan agreement which was further amended as of May 15, 1997. Under the Term Sheet, as amended, Search, MSF and the lenders agreed to amend the agreements governing the revolving credit facility pending consummation of the Merger to provide that MSF's obligations will be payable in full on the earlier of June 30, 1997, the facility Termination Date or the closing date of the Merger. The amount of the advances under the revolving credit facility were reduced from $90,000,000 to $75,000,000. Advances will only be made for Installment Contracts that comply with Search's underwriting criteria, are within an agreed cash budget and are purchased from dealers in the ordinary course of business. MSF will be required to reduce the revolving credit facility by the amount of any proceeds from income tax refunds, and any prepayments from federal income tax refunds will permanently reduce the amount of the MSF Revolving Credit facility. The lenders also required the establishment of a lock box account for collection of the proceeds from MSF's receivables, with all proceeds to be applied as a mandatory prepayment of the facility on a daily basis. MSF is required to maintain the effectiveness of its collection operations in Ridgeland, Mississippi and Mobile, Alabama. MSF may continue to sell Installment Contracts originated by it prior to the Merger to Search in accordance with its December 12, 1996, letter agreement with Search Funding Corp. Search may also lend money to MSF for the purpose of purchasing Installment Contracts by MSF, but this indebtedness, and any liens in favor of Search on the Installment Contracts purchased by MSF with these funds, will be subordinated to the indebtedness represented by, and the liens securing, the revolving credit facility. The Term Sheet also specifies that any material amendments to the Merger Agreement will require the prior written consent of the lenders. If the Merger is terminated for any reason, Search will be obligated, if requested by the lenders, to service MSF's receivables for a period of 90 days following the termination, and Search will purchase all receivable acquired by MSF since the effective date of the amendments to the revolving credit facility. The Term Sheet also specifies that Search and Merger Sub must agree to enter into certain additional amendments to the revolving credit facility to be effective at the Effective Time of the Merger. On the closing date of the Merger, under the Term Sheet, the agreements governing the revolving credit facility will be amended to provide that MSF will have available a revolving credit facility in an aggregate amount equal to the outstanding principal balance of all of the receivables on such date. Search will agree to guarantee MSF's obligations to repay the facility. Under the amended facility, MSF will be entitled to receive additional advances to the extent of any difference between the borrowing base, as determined from time to time, and the outstanding principal balance of the amended facility. These advances may be used to pay operating expenses in the ordinary course of business and the purchase cost of new Installment Contracts. The loan will bear interest at prime plus one percent per annum and will terminate on the earlier of the first anniversary of the Effective Time, any prepayment in full of the loan and any date on which the lenders accelerate payment of the facility at which time all outstanding balances will be payable in full. MSF will make principal payments on the amended facility on a weekly basis in an amount equal to all collections with respect to its motor vehicle receivables and repossessed vehicles. All proceeds will be deposited in a lock box or blocked account collaterally assigned to the lenders. On the six-month anniversary of the Effective Time, the commitment under the facility will be permanently 89 97 reduced by $25,000,000 plus a proportionate reduction of certain "over advance" amounts owed by MSF at the Effective Time. MSF must repay the outstanding balance to the extent it exceeds the reduced commitment amount. Any proceeds from restructuring of MSF's existing securitizations or from income tax refunds must be employed as mandatory prepayments of the loan and will permanently reduce the commitment amount. Mandatory prepayments must also be made in the amount of any proceeds from sales or other dispositions of Installment Contracts and other collateral. MSF will be required to deliver weekly borrowing base certificates. If the outstanding principal balance of the loan exceeds the borrowing base, MSF will be required to make additional prepayments or cause additional eligible receivables to be transferred to MSF for inclusion in the borrowing base, in either case, in an amount sufficient to eliminate the excess. The facility will be secured by a first priority security interest in all of MSF'S assets. If, upon termination of the facility, any balance remains outstanding, MSF has agreed to pay the lenders a refinancing fee equal to five percent of the outstanding balance on such debt. In addition, MSF has agreed to pay to the lenders a $350,000 fee on the earlier of the full repayment of the amended facility, the termination of the facility is subject to the following conditions: (i) consummation of the Merger; (ii) receipt of all necessary consents and approvals from all third parties for the consummation of the Merger and the execution of the amendments to the revolving credit facility, and (iii) receipt of all necessary consents and approvals from Search's exiting lenders and of any reasonably required intercreditor agreements. Warehouse Facility. MSF, through a special purpose subsidiary, established a $50.0 million structured "warehouse" revolving credit securitization facility. The warehouse facility was structured like a Securitization. However, unlike a typical Securitization, (i) the Installment Contracts sold are not intended to be held to maturity but are instead to be "warehoused" for up to 12 months pending their later sale in a Securitization, (ii) the pass-through interest rate is floating, and (iii) MSF's sale of the Installment Contracts is accounted for as a financing rather than a sale. Loans made pursuant to the warehouse facility are insured by Financial Security Assurance, Inc. ("FSA"). In September 1996, FSA advised MSF that it would not insure any loans made pursuant to the warehouse facility on terms which were acceptable to MSF, effectively terminating the availability of this facility. See "MS Financial Inc.--Legal Proceedings" for a description of certain claims made against MSF for fees payable under the warehouse facility. Securitization Programs. In 1992, MSF began selling interests in pools of its Installment Contracts to investors through the issuance of triple-A rated, asset-backed securities. The net proceeds from these periodic Securitizations were generally used to pay down outstanding loans under the revolving credit facility and the warehouse facility, thereby making such facilities available for the purchase of additional Installment Contracts. During 1994 and 1995, MSF securitized $35.0 million and $90.0 million, respectively, of MSF's Installment Contracts, for an aggregate of $125.0 million. The average APR on Installment Contracts securitized in 1994 and 1995 was approximately 20.6%. In each of its Securitizations, MSF sold its Installment Contracts to a special purpose subsidiary corporation ("SPC"), which then sold the Installment Contracts to a newly formed grantor trust in exchange for certificates of beneficial interests in the trust. In the 1994 Securitization, the certificates consisted of $1.75 million in subordinated certificates retained by MSF and $33.25 million in senior certificates sold to investors. MSF did not retain any portion of the certificates issued in connection with the Securitization closed in 1995. The holders of such certificates are entitled to a proportionate amount of monthly principal reductions in the underlying Installment Contracts and interest at a fixed pass-through rate each month. As a credit enhancement for each Securitization, FSA issued an insurance policy which guarantees principal and interest payments due to the holders of that portion of the certificates sold to investors. MSF services the Installment Contracts sold to the trust and receives a monthly fee at a base rate of 3.75% per annum, plus certain late fees, prepayment charges and similar fees received on securitized Installment Contracts. The service fee of 3.75% is considered reasonable based on the expense of servicing subprime Installment Contracts. The Securitization transactions allow MSF to repurchase loans when the balances have been reduced to a level not greater than 10% of the original pool balance. Gains from the sale of Installment Contracts in Securitizations have provided a significant portion of MSF's revenues. SFAS No. 77 requires that the gain be calculated as the difference between the sales price and the net receivables, less any necessary accrual for recourse provisions. The specific methodology for the gain calculation for these transactions is provided by EITF Issue No. 88-11 and is described as follows: (i) sales price for any senior certificates is calculated as the proceeds received; and (ii) the recorded investment in the loans is the net carrying value under the simple interest 90 98 methodology and is allocated between the senior and subordinate certificates based on the relative fair values of those portions at the date of sale. If excess servicing is retained, a portion of the recorded investment is allocated to excess servicing based on its relative fair value. To allocate the recorded investment in the loans, the fair value of the senior certificates is determined to be the sales price. The fair value of the subordinate certificates is determined based on the original terms of the portion retained, estimating prepayments and discounting such cash flows using a discount rate which reflects the term, risk and other considerations. The fair value of the excess servicing is calculated (i) using cash flow projections of payments to be received assuming prepayments, (ii) less payments to the senior certificate holders, (iii) less payments for servicing fee, standby servicing fee and surety premiums to the certificate insurer, (iv) plus an estimate of interest to be earned on the collection account and subordination spread account and (v) less payment to the subordinate certificate holders. Prepayment levels used in the original projections for MSF's Securitizations were 1.5 ABS (absolute prepayment speed). This estimate was derived by MSF's financial advisors based on historical performance of similar loans. MSF's tracking models were updated monthly for actual performance within each Securitization. The formulae in the models would recalculate the projections continuing to apply the 1.5 ABS assumption to future months. Although MSF did not recalculate a revised prepayment speed, per se, at December 31, 1996, adjustments were made to the 1995-1 Securitization model to incorporate the faster prepayment speeds observed in the life cycles of the three prior Securitization models. The interest rate paid to investors in MSF's Securitizations was fixed upon the close of each Securitization and ranged from 4.66% on 1993-1, to 6.75% on 1994-1, to 6.2% on 1995-1. The collection account and subordination spread account are trustee accounts for the accumulation of funds until remittance in accordance with terms of the agreement. Cash flows after payment of the senior certificates and after payment of fees and expenses are used to fund a subordination spread account held by the trustee. This account is provided for the benefit of the certificate insurer and would be used by the trustee to fund any shortfalls to the senior certificate holders. Once this account is funded, all remaining cash goes to MSF as collections on subordinate certificates and as interest differential. At the end of the Securitization, the funds in the subordination spread account go to MSF. The fair value of cash flows is calculated using the expected net cash flows to MSF, discounted at a rate of approximately 12%. Once the recorded investment in the loans has been allocated, gain is recorded as the difference between the sales price for the senior certificates and the allocated basis in the senior certificates. The subordinate certificates are recorded at their allocated basis, and the excess servicing is recorded at its allocated basis. Prior to January 1, 1997, the subordinated certificates and the excess servicing were carried by MSF in its financial statements at their historical cost. Since MSF's adoption of SFAS No. 125 effective January 1, 1997, these assets are carried at their fair value. MSF also nets expenses incurred in the Securitization against the gain calculation. In MSF's financial statements, the subordinated certificates are classified as "Retained portion of contracts sold in securitizations", the excess servicing (interest differential) and cash used to fund the collateral accounts are classified as "amounts due under securitizations." The simple interest balance of installment contracts sold is removed from installment contracts owned and shown as installment contracts sold in Note 4 to MSF's Consolidated Financial Statements. From the income statement side, the gain on sale is shown as such on the income statement, and earnings from the retained subordinated certificates and amounts due under securitizations are classified as interest and fee income on installment contracts and securitizations. MSF does not recognize earnings on amounts due under securitizations until cash is received by MSF. As disclosed in Note 5 to MSF's Consolidated Financial Statements, MSF is contingently liable on the securitized receivables for losses attributable to default. In accordance with SFAS No. 77, MSF accrues those estimated losses at the time the loans are sold. In MSF's financial records, those losses affect MSF's ability to fully collect the amounts shown in Note 4 as retained portion of installment contracts sold and amounts due under securitizations. However, as disclosed in Note 5, such risk of accounting loss does not exceed amounts recorded as assets in the consolidated balance sheet. Nonetheless, when MSF believes that amounts to be received are less than the recorded amount of the asset based on discounted cash flows, an impairment loss is taken and the asset written down. In 1996, MSF exceeded certain delinquency and loss triggers in the outstanding Securitizations. As a consequence, excess cash flow otherwise payable to MSF from the Securitizations was retained within the Securitizations as additional collateral for the certificate holders. Pursuant to the terms of the Securitization documents, in October 1996 FSA increased 91 99 the premiums on the policies issued to insure the certificates. Because of the violation of the delinquency and loss triggers, FSA has the right to remove MSF as servicer. In September 1996, FSA advised MSF that it would not insure the MSF Securitization planned for September, and MSF was unable to complete a Securitization in 1996. Loan Sales. During November 1996, MSF sold approximately $15 million in loans to Search for approximately $14.4 million. $13.5 million of the proceeds were used to reduce the balance outstanding under the revolving credit facility. During the first quarter of 1997, MSF sold Installment Contracts of $728 thousand to Search for $689 thousand. MSF has no continuing interest in these loans or loan repurchase obligations. Interest Rate Exposure and Hedging Strategy. Increase in interest rates generally result in increases in MSF's expenses and, to the extent not offset by increases in the volume of Installment Contracts purchased, can lead to decreases in profitability. MSF's borrowings under the revolving credit facility and the warehouse facility are at variable rates. Installment Contracts bear interest at fixed rates which are generally at or near the maximum rates permitted by law. Higher interest rates increase MSF's borrowing costs, and such increased borrowing costs generally cannot be offset by increases in the rates with respect to Installment Contracts purchased. Historically, other than pursuant to Securitizations, MSF had not entered into hedging transactions to limit its exposure to short-term interest rate fluctuations. In 1995, however, MSF entered into $80.0 million notional amount of U.S. Treasury interest rate futures contracts that closely paralleled the average life and the net amount of the senior certificates issued to investors in connection with the 1995 Securitization. The accumulated loss on the contracts of $1.25 million was paid at the settlement of the contracts and included in the measurement of the gain on the Securitization transaction. Inflation Increase in inflation generally results in higher interest rates. Higher interest rates generally result in increases in MSF's expenses and, to the extent not offset by increases in the volume of or interest rates of Installment Contracts purchased, can lead to decreases in its profitability, as described above. Seasonality and Quarterly Fluctuations Although MSF's operations do not fluctuate seasonally or quarterly, its revenues and net income have, historically, been higher in the quarters in which it completes a Securitization. However, no assurances can be made that MSF's revenue and net income will be higher in future periods in which MSF completes a Securitization. SELECTED FINANCIAL DATA Certain selected financial data for MSF appears under the captions "Summary--Selected Historical and Pro Forma Consolidated Financial and Operating Data" and "Summary--Comparative Per Share Data" in this Joint Proxy Statement/Prospectus. FINANCIAL STATEMENTS The audited consolidated financial statements of MSF and its subsidiary for the years ended December 31, 1994, 1995 and 1996, together with the report of KPMG Peat Marwick L.L.P. thereon dated February 24, 1997 and notes thereto, are included as Annex D to this Joint Proxy Statement/Prospectus. The unaudited consolidated financial statements of MSF and its subsidiary for the periods ended March 31, 1997 and 1996 are included in Annex D to this Joint Proxy Statement/Prospectus. PRINCIPAL AND OTHER STOCKHOLDERS OF MSF The following table sets forth certain information regarding beneficial ownership of MSF Common Stock, as of March 10, 1997, by (i) each director of MSF, (ii) MSF's executive officer, (iii) each person known to MSF to be the beneficial owner of more than 5% of the outstanding MSF Common Stock, and (iv) all directors and executive officers of MSF as a group. Unless otherwise indicated, the persons named below have, to the knowledge of MSF, sole voting and investment power with respect to the shares beneficially owned by them. 92 100
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS - ------------------------ ---------------- ---------------- MS Diversified Corporation 4,320,000 (1) 41.4% 715 South Pear Orchard Road Suite 400 Ridgeland, Mississippi 39157 Golder, Thoma, Cressey, Rauner, Inc. 3,720,000 (2) 35.7% 6100 Sears Tower Chicago, Illinois 60606 James B. Stuart, Jr. 4,680 (3) * Philip A. Canfield 3,000 (3) * Carl Herrin 1,000 (3)* Harold A. Hogue 33,838 (4) * Robert P. Plummer 1,500 (5) * Reed Bramlett 1,000 (3) * Bruce L. Miller 1,000 (6) * Carl D. Thoma 1,000 (3) * Vann R. Martin 116,926 (7) 1.1% All directors and executive officers as a group (9 persons) 163,944 1.5%
- ----------------------------------- * Indicates less than 1%. (1) Includes 3,070,000 shares held by MS Financial Services, Inc., a wholly-owned subsidiary of MSD. (2) Represents shares held by Golder Thoma Cressey Rauner Fund IV, L.L.P. ("GTCR IV"). Golder, Thoma, Cressey, Rauner, Inc. serves as the general partner of Golder, Thoma, Cressey, Rauner IV, L.L.P., which in turn serves as the general partner of GTCR IV. (3) Includes or represents options to purchase 1,000 shares at $12 per share. (4) Includes options to purchase 1,000 shares at $7.3125 per share and options to purchase 19,558 shares at $2.50 per share. (5) Includes options to purchase 1,000 shares at $5.25 per share. (6) Represents options to purchase 1,000 shares at $5.25 per share. (7) Includes options to purchase 15,645 shares at $12 per share and 95,820 shares at $2.50 per share. MANAGEMENT OF MSF Business Experience. MSF's sole remaining executive officer, Vann R. Martin, President and Chief Operating Officer, will continue as an executive officer of MSF following the Merger and is expected to be appointed Executive Vice President of Search. Mr. Martin, age 41, has been with MSF and its predecessors since inception and has served as President and Chief Operating Officer of MSF and its immediate predecessor since 1989. One director of MSF, James B. Stuart, Jr., MSF's Chairman of the Board, will be appointed as a director of Search following the Merger. Mr. Stuart, age 69, has served as President and Chief Executive Officer of MSD since December 1995. From 1983 to December 1995, he served as Senior Vice President of MSD and President of MS Loan Center, Inc., a consumer loan subsidiary of MSD. Compensation. The following table sets forth the compensation paid by MSF for services rendered for the fiscal years ended December 31, 1996, December 31, 1995 and December 31, 1994, to Mr. Martin. 93 101 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ALL OTHER ------------------------------ UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) (1) ($)(2) --------------------------- ---- ---------- --------- ---------------------------------- Vann R. Martin 1996 131,827 -- -- 7,000 President and Chief Operating Officer 1995 120,000 48,000(3) 97,780 7,870 1994 100,000 40,000 146,664 7,750
- ---------------------------------- (1) Under the Employee's Equity Incentive Plan, Mr. Martin was granted options for the purchase of (a) up to 146,664 shares of MSF Common Stock at an exercise price of $2.50 per share in 1994, (b) up to 19,556 shares of MSF Common Stock, respectively, at an exercise price of $2.50 per share in January 1995, and (c) up to 78,224 shares of MSF Common Stock at an exercise price of $12.00 per share in July 1995. (2) Reflects amounts contributed by MSF under MSF's Profit Sharing 401(k) Plan and Trust paid by MSF and/or its subsidiaries, plus director's fees paid by a subsidiary of MSF. (3) Bonus for 1995 services was paid in 1996. No bonus was earned for 1996. Exercisability of Options at Fiscal Year End. The following table sets forth information concerning the number of unexercised stock options held by Mr. Martin at December 31, 1996. No options were exercised by Mr. Martin in 1996 or were "in-the-money" at December 31, 1996. AGGREGATE FISCAL YEAR END OPTIONS
NUMBER OF SECURITIES UNDERLYING UNEXERCISED OPTIONS AT FY-END(#) -------------------- NAME EXERCISABLE/UNEXERCISABLE ---- ------------------------- Vann R. Martin 78,222/166,222
Employment Agreement. MSF's amended and restated employment agreement with Mr. Martin provides that he will be entitled to receive an annual base salary of $120,000, subject to periodic increases by the Board of Directors, and will be eligible for an annual bonus of up to 40% of his annual base salary. In addition, he is also eligible to participate in all present and future fringe benefit plans of MSF including option, profit-sharing, insurance and similar plans. The employment agreement with Mr. Martin states that he will be provided with one year of severance pay in the event he is terminated or resigns with good reason following a change of control of the Company. Further, the employment agreement provides that he will be prohibited from competing with the business of MSF during the period he is receiving severance pay. The employment agreement shall continue until his earlier death, retirement at age 65, removal or permanent disability. LEGAL MATTERS The validity of the issuance of the shares of Search Common Stock to be issued in connection with the Merger will be passed upon for Search by Bracewell & Patterson, L.L.P., Dallas, Texas. Haynes & Boone, L.L.P., special counsel to MSF, will render an opinion with respect to certain federal income tax consequences of the Merger. See "The Merger--Certain Federal Income Tax Considerations." 94 102 EXPERTS The consolidated financial statements set forth in Annex E and Annex F to this Joint Proxy Statement/Prospectus for the fiscal year ended March 31, 1997, the transition period ended March 31, 1996 and the fiscal year ended September 30, 1995 have been audited by BDO Seidman, LLP, independent auditors, as stated in their reports, which are incorporated herein by reference and have been so incorporated in reliance on the reports of such firm, given on their authority as experts in accounting and auditing. The financial statements of DACC, as of and for the three months ended March 31, 1996 and as of and for the fiscal year ended December 31, 1995, incorporated in this Prospectus by reference from the Company's Form 8-K Current Report, as amended, dated August 6, 1996 have been audited by BDO Seidman, LLP, independent certified public accountants, as stated in their reports, which are incorporated herein by reference, and have been so incorporated in reliance upon such reports given upon the authority of that firm as experts in accounting and auditing. The consolidated financial statements of MSF and subsidiaries as of December 31, 1996 and December 31, 1995, and for each of the years in the three-year period ended December 31, 1996, have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1996 consolidated financial statements of MSF contains an explanatory paragraph that states that MSF's material increases in delinquencies and losses on owned and serviced installment contracts, substantial net loss and reduced availability of financing raise substantial doubt about the entity's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. STOCKHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING Stockholders who intend to present proposals at Search's 1997 Annual Meeting of Stockholders, which Search currently expects to hold in July 1997, are required to deliver their proposals to Search at its principal executive offices a reasonable time before the solicitation of proxies for that meeting is made, for inclusion in the proxy statement and form of proxy relating to that meeting. All proposals must comply with the applicable requirements of the federal securities laws and Search's Bylaws. OTHER MATTERS MSF's Board does not intend to bring any matters before the MSF Special Meeting other than those specifically set forth in the Notice of Special Meeting and it does not know of any matters to be brought before the MSF Special Meeting by others. If any other matters properly come before the MSF Special Meeting, it is the intention of the persons named in the accompanying proxies to vote such proxies in accordance with the judgment of the MSF Board. Search's Board does not intend to bring any matters before the Search Special Meeting other than those specifically set forth in the Notice of Special Meeting and it does not know of any matters to be brought before the Search Special Meeting by others. If any other matters properly come before the Search Special Meeting, it is the intention of the persons named in the accompanying proxies to vote such proxies in accordance with the judgment of the Search Board. 95 103 ANNEX A AGREEMENT AND PLAN OF MERGER BY AND AMONG SEARCH CAPITAL GROUP, INC., SEARCH CAPITAL ACQUISITION CORP., AND MS FINANCIAL, INC., DATED AS OF FEBRUARY 7, 1997 104 TABLE OF CONTENTS 1. PLAN OF REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . 1 1.1. The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . 1 (a) The Merger . . . . . . . . . . . . . . . . . . . . . . 1 (b) Effects of the Merger . . . . . . . . . . . . . . . . . 1 (c) Certificate of Incorporation . . . . . . . . . . . . . 1 (d) Bylaws . . . . . . . . . . . . . . . . . . . . . . . . 1 (e) Directors and Officers . . . . . . . . . . . . . . . . 2 1.2. Conversion of Securities . . . . . . . . . . . . . . . . . . . 2 (a) Capital Stock of Newco . . . . . . . . . . . . . . . . 2 (b) Cancellation of Certain Shares of Capital Stock of MS Financial . . . . . . . . . . . . . . . . . . . . . . . 2 (c) Conversion of Capital Stock of MS Financial . . . . . . 2 (d) Maximum and Minimum Exchange Ratio . . . . . . . . . . 2 (e) Adjustment of Exchange Ratio . . . . . . . . . . . . . 2 (f) Fractional Shares . . . . . . . . . . . . . . . . . . . 2 (g) Adjustments for Financial Changes . . . . . . . . . . . 3 (h) Adjustment of Exchange Ratio . . . . . . . . . . . . . 4 1.3. Exchange of Certificates . . . . . . . . . . . . . . . . . . . 4 (a) Exchange Agent . . . . . . . . . . . . . . . . . . . . 4 (b) Exchange Procedures . . . . . . . . . . . . . . . . . . 4 (c) Distributions with Respect to Unexchanged Shares of MS Financial Stock . . . . . . . . . . . . . . . . . . . . 4 (d) Termination of Exchange Fund . . . . . . . . . . . . . 5 (e) No Liability . . . . . . . . . . . . . . . . . . . . . 5 (f) Withholding Rights . . . . . . . . . . . . . . . . . . 5 (g) No Further Ownership Rights in Capital Stock of MS Financial . . . . . . . . . . . . . . . . . . . . . . . 5 (h) Lost, Stolen or Destroyed Certificates . . . . . . . . 5 1.4. Stock Transfer Books . . . . . . . . . . . . . . . . . . . . . 5 1.5. Stock Options and Other Rights to MS Financial Stock . . . . . 5 1.6. Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . 6 2. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1. Certificate of Merger Filing; Closing Time . . . . . . . . . . 6 2.2. Documents to be Delivered at Closing by MS Financial . . . . . 6 2.3. By Search/Newco . . . . . . . . . . . . . . . . . . . . . . . 7 3. REPRESENTATIONS AND WARRANTIES OF MS FINANCIAL . . . . . . . . . . . 8 3.1. Due Organization . . . . . . . . . . . . . . . . . . . . . . . 8 3.2. Authorization; Validity . . . . . . . . . . . . . . . . . . . 8 3.3. No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.4. Permits and Intangibles . . . . . . . . . . . . . . . . . . . 9 3.5. Capital Stock of the Company . . . . . . . . . . . . . . . . . 9 3.6. Transactions in Capital Stock . . . . . . . . . . . . . . . . 9 3.7. Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.8. Predecessor Status; etc. . . . . . . . . . . . . . . . . . . . 10 3.9. Spin-off by the Company . . . . . . . . . . . . . . . . . . . 10 3.10. Financial Statements . . . . . . . . . . . . . . . . . . . . . 10 3.11. SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.12. Liabilities and Obligations . . . . . . . . . . . . . . . . . 11 3.13. Accounts and Notes Receivable . . . . . . . . . . . . . . . . 11 3.14. Finance Contracts . . . . . . . . . . . . . . . . . . . . . . 12 3.15. Offices, FTC; Warranties . . . . . . . . . . . . . . . . . . . 13 3.16. Environmental Matters . . . . . . . . . . . . . . . . . . . . 13 (a) Hazardous Material . . . . . . . . . . . . . . . . . . 13 (b) Hazardous Materials Activities . . . . . . . . . . . . 13
i 105 (c) Permits . . . . . . . . . . . . . . . . . . . . . . . . 14 (d) Environmental Liabilities . . . . . . . . . . . . . . . 14 3.17. Real and Personal Property . . . . . . . . . . . . . . . . . . 14 3.18. Significant Car Dealers, Material Contracts and Commitments . 14 3.19. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.20. Compensation; Employment Agreements . . . . . . . . . . . . . 15 3.21. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 15 3.22. Employee Matters . . . . . . . . . . . . . . . . . . . . . . . 16 3.23. Conformity with Law; Litigation . . . . . . . . . . . . . . . 16 3.24. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.25. Government Contracts . . . . . . . . . . . . . . . . . . . . . 17 3.26. Absence of Changes . . . . . . . . . . . . . . . . . . . . . . 17 3.27. Bank Accounts Powers of Attorney . . . . . . . . . . . . . . . 19 3.28. Relations with Governments . . . . . . . . . . . . . . . . . . 19 3.29. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.30. Opinion of Financial Advisor . . . . . . . . . . . . . . . . . 19 3.31. Vote Required . . . . . . . . . . . . . . . . . . . . . . . . 19 3.32. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.33. Absence of Claims Against Company . . . . . . . . . . . . . . 19 3.34. Complete Copies of Materials . . . . . . . . . . . . . . . . . 19 3.35. Compliance with Laws of Delaware . . . . . . . . . . . . . . . 20 3.36. Hart-Scott-Rodino Filing . . . . . . . . . . . . . . . . . . . 20 3.37. Review of Search . . . . . . . . . . . . . . . . . . . . . . . 20 4. REPRESENTATIONS OF SEARCH AND NEWCO . . . . . . . . . . . . . . . . . 20 4.1. Due Organization . . . . . . . . . . . . . . . . . . . . . . . 20 4.2. Authorization; Validity of Obligations . . . . . . . . . . . . 20 4.3. No Conflicts; Required Filings and Consents . . . . . . . . . 21 4.4. Permits and Intangibles . . . . . . . . . . . . . . . . . . . 21 4.5. Capitalization of Search and Ownership of Search Stock . . . . 21 4.6. SEC Filings; Financial Statements . . . . . . . . . . . . . . 22 4.7. Absence of Certain Changes or Events . . . . . . . . . . . . . 23 4.8. Conformity with Law; Litigation . . . . . . . . . . . . . . . 23 4.9. Ownership of Newco; No Prior Activities . . . . . . . . . . . 23 4.10. Vote Required . . . . . . . . . . . . . . . . . . . . . . . . 23 4.11. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.12. Transactions in Capital Stock . . . . . . . . . . . . . . . . 24 4.13. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.14. Complete Copies of Materials . . . . . . . . . . . . . . . . . 24 4.15. Hart-Scott-Rodino Filing . . . . . . . . . . . . . . . . . . . 24 4.16. Review of Company . . . . . . . . . . . . . . . . . . . . . . 24 4.17. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5.1. Access to Information; Confidentiality . . . . . . . . . . . . 25 5.2. Conduct of Business by MS Financial . . . . . . . . . . . . . 26 5.3. Prohibited Activities . . . . . . . . . . . . . . . . . . . . 26 5.4. No Solicitation of Transactions . . . . . . . . . . . . . . . 27 5.5. Notification of Certain Matters . . . . . . . . . . . . . . . 28 5.6. Cooperation in Obtaining Required Consents and Approvals . . . 28 5.7. Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.8. Registration Statement; Proxy Statement . . . . . . . . . . . 28 5.9. Stockholders Meetings . . . . . . . . . . . . . . . . . . . . 29 5.10. Appropriate Action; Consents; Filings . . . . . . . . . . . . 30 5.11. Obligations of Newco . . . . . . . . . . . . . . . . . . . . . 30 5.12. Public Announcements . . . . . . . . . . . . . . . . . . . . . 31
ii 106 5.13. Delivery of SEC Documents . . . . . . . . . . . . . . . . . . 31 5.14. Further Action . . . . . . . . . . . . . . . . . . . . . . . . 31 5.15. Indemnification . . . . . . . . . . . . . . . . . . . . . . . 31 5.16. Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5.17. Tax Reorganization . . . . . . . . . . . . . . . . . . . . . . 33 5.18. Search Stock . . . . . . . . . . . . . . . . . . . . . . . . . 33 5.19. Directorship . . . . . . . . . . . . . . . . . . . . . . . . . 33 6. CONDITIONS TO THE MERGER. . . . . . . . . . . . . . . . . . . . . . . 33 6.1. Conditions to the Obligations of Each Party . . . . . . . . . 33 6.2. Conditions to the Obligations to Search and Newco . . . . . . 34 (a) Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . 34 (b) No Litigation . . . . . . . . . . . . . . . . . . . . . 34 (c) Consents and Approvals . . . . . . . . . . . . . . . . 34 (d) Cold Comfort Letter . . . . . . . . . . . . . . . . . . 34 (e) Bank Financing . . . . . . . . . . . . . . . . . . . . 34 (f) Insurance . . . . . . . . . . . . . . . . . . . . . . . 34 6.3. Conditions to the Obligations of MS Financial . . . . . . . . 35 (a) Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . 35 (b) No Litigation . . . . . . . . . . . . . . . . . . . . . 35 (c) Consents and Approvals . . . . . . . . . . . . . . . . 35 7. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.1. Termination . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.2. Effect of Termination . . . . . . . . . . . . . . . . . . . . 36 7.3. Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . 36 7.4. Successors and Assigns . . . . . . . . . . . . . . . . . . . . 36 7.5. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 36 7.6. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 37 7.7. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 37 7.8. Specific Performance; Remedies . . . . . . . . . . . . . . . . 37 7.9. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.10. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 38 7.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . 38 7.12. Absence of Third Party Beneficiary Rights . . . . . . . . . . 38 7.13. Mutual Drafting . . . . . . . . . . . . . . . . . . . . . . . 39 7.14. Further Representations . . . . . . . . . . . . . . . . . . . 39 7.15. Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . . 39 7.16. Survival of Certain Clauses . . . . . . . . . . . . . . . . . 39 8. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
iii 107 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made as of February 7, 1997, by and among (i) Search Capital Group, Inc., a Delaware corporation ("Search"), (ii) Search Capital Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Search ("Newco"), and (iii) MS Financial, Inc., a Delaware corporation ("MS Financial"). BACKGROUND A. MS Financial is a Mississippi-based consumer finance company engaged in the financing and servicing of non-prime automobile installment loans; and B. The respective Boards of Directors of Search, Newco and MS Financial deem it advisable and in the best interests of Search, Newco and MS Financial and their respective stockholders that Newco merge with and into MS Financial (the "Merger") pursuant to this Agreement and the applicable provisions of the Delaware Statutes. C. This Agreement is intended as a plan of reorganization within the provisions of Section 368(a) of the Code. D. Some of the capitalized terms set forth below are defined in Article 8 below. NOW, THEREFORE, in consideration of the foregoing premises, which are incorporated herein by reference, and of the representations, warranties, covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by all parties, the parties hereto, intending to be legally bound, agree as follows: 1. PLAN OF REORGANIZATION. 1.1. The Merger. (a) The Merger. At the Effective Time, Newco shall be merged with and into MS Financial pursuant to this Agreement and the Delaware Statutes, the separate corporate existence of Newco shall cease and MS Financial shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). (b) Effects of the Merger. The Merger shall have the effects provided therefor by the Delaware Statutes. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time (i) all the rights, privileges, powers and franchises, of a public as well as of a private nature, and all property, real and personal, and all debts due on whatever account, including without limitation subscriptions to shares, and all other choses in action, and all and every other interest of or belonging to or due to MS Financial or Newco, shall be vested in the Surviving Corporation without further act or deed, and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of MS Financial and Newco immediately prior to the Effective Time, and (ii) all debts, liabilities, duties and obligations of MS Financial and Newco shall be the debts, liabilities, duties and obligations of the Surviving Corporation. (c) Certificate of Incorporation. At the Effective Time, the Amended and Restated Certificate of Incorporation of MS Financial shall be the Certificate of Incorporation of the Surviving Corporation, until thereafter amended in accordance with the terms of the Certificate of Incorporation of the Surviving Corporation and the Delaware Statutes. (d) Bylaws. From and after the Effective Time, the Bylaws of Newco as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation until thereafter amended in accordance with the terms of the Bylaws and Certificate of Incorporation of the Surviving Corporation and the Delaware Statutes. 1 108 (e) Directors and Officers. The directors of Newco immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each such director to hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation until a successor to such director is elected and has qualified or until such director's death, resignation, removal or disqualification. The officers of Newco immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, each such officer to hold office in accordance with the Bylaws of the Surviving Corporation until a successor to such officer is duly elected or appointed and qualified, or until such officer's death, resignation, removal or disqualification. 1.2. Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Search, Newco, MS Financial or any stockholder of Newco or MS Financial, the shares of capital stock of each of Newco and MS Financial shall be converted as follows: (a) Capital Stock of Newco. Each share of Newco Stock issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and non- assessable share of common stock of the Surviving Corporation. (b) Cancellation of Certain Shares of Capital Stock of MS Financial. All shares of capital stock of MS Financial that are owned directly or indirectly by Search, Newco, MS Financial or the Subsidiary of MS Financial immediately prior to the Effective Time (as treasury shares or otherwise) shall be canceled and no stock of Search or other consideration shall be delivered in exchange therefor. (c) Conversion of Capital Stock of MS Financial. Subject to Sections 1.2 (d), (e), (f), (g) and (h), each share of MS Financial Stock issued and outstanding immediately prior to the Effective Time (other than shares to be canceled pursuant to Section 1.2(b) and Dissenting Shares, if any), shall automatically be canceled and extinguished and converted, without any action on the part of the holder thereof, into the right to receive that number of shares of Search Common Stock as equals the Exchange Ratio. At the Effective Time, all such shares of MS Financial Stock shall no longer be outstanding and shall automatically be canceled and retired and shall cease to exist, and each holder of a Certificate shall cease to have any rights with respect thereto, except the right to receive the shares of Search Common Stock to which such holder is entitled under this Section 1.2(c). (d) Maximum and Minimum Exchange Ratio. Notwithstanding the provisions of Section 1.2(c) above and except for any adjustment made pursuant to Sections 1.2(e), (g) and (h) in no event will the Exchange Ratio exceed 0.46 or be less than 0.34. (e) Adjustment of Exchange Ratio. Subject to the provisions of Section 5.18 hereof, if, between the date of this Agreement and the Effective Time, the outstanding shares of Search Common Stock, or, subject to compliance with Section 5.3 below, MS Financial Stock, shall have been changed into a different number of shares, or a different class, by reason of any reclassification, recapitalization, split up, stock dividend, stock combination or exchange of shares, then the Exchange Ratio shall be correspondingly adjusted. (f) Fractional Shares. No certificates or scrip evidencing fractional shares of Search Common Stock shall be issued, but in lieu thereof each holder of shares of MS Financial Stock who would otherwise be entitled to receive a fraction of a share of Search Common Stock shall, at the option of Search, either receive from Search an amount of cash equal to the Valuation Period Market Value multiplied by Exchange Ratio multiplied by the fraction of a share of Search Common Stock to which such holder would otherwise be entitled, as soon as practicable after the Effective Time, or the Exchange Agent shall sell in the open market all such fractional share interests, as agent of the holder, and remit such proceeds to the holder. If Search elects to have the Exchange Agent sell such fractional shares, Search shall pay all brokers' commissions associated with such sales. 2 109 (g) Adjustments for Financial Changes. (i) Notwithstanding the provisions of Sections 1.2(c) and (d), the Per Share Amount and the maximum and minimum Exchange Ratio figures in Section 1.2(d) shall be adjusted as set forth in Section 1.2(g)(ii) if, at the Effective Time, the unaudited financial statements of MS Financial for the last month ending before the Effective Time (provided, however, that if the Effective Time is on or before the 15th day of a month, then the unaudited financial statements for the second month before the Effective Time shall govern) (the "Most Recent Financial Statements")) prepared in accordance with GAAP and MS Financial's past practice but adjusting stockholders' equity in accordance with (A), (B) and (C) below (as so adjusted, the "Adjusted Stockholders' Equity"), show that stockholders' equity is less than the stockholders' equity shown on the Current Balance Sheet. (A) The actual stockholders' equity reflected on the balance sheet included in the Most Recent Financial Statements (the "Adjustment Balance Sheet") shall be adjusted to reflect (1) that no decrease in stockholders' equity shall be made for the aggregate $2,995,500 in costs shown on Schedule 1.2(g), (2) no increase in the amount of stockholders' equity shall be made for the first $2,300,000 of income tax refunds in excess of $4,000,000, and (3) no decrease in stockholders' equity shall be made for the payments required by Section 5.16(f) below. The actual stockholders' equity on the Adjustment Balance Sheet shall be further adjusted in the event that KPMG requires any changes to stockholders' equity as a result of requiring changes in the "Allowance for Losses" account shown on the Current Balance Sheet, but adjusted for unearned discount (as so adjusted, "Allowance for Losses") against the "Notes Receivable --C.A.R.S." account shown on the Current Balance Sheet, but adjusted for unearned discount (as so adjusted, "Net Managed Receivables"). In the event of a KPMG required change, no increase in such Allowance for Losses shall be subtracted from stockholders' equity and no decrease in such Allowance for Losses shall be added to stockholders' equity. (As reflected in the Current Balance Sheet, the Allowance for Losses was $12,567,932 against Net Managed Receivables of $132,742,638, for a ratio of 9.5%.) (B) If the Delinquency Rate Percentage for the month to which the Most Recent Financial Statements relate exceeds by 25% or more the Delinquency Rate Percentage for December 1996 (which was 19.3%), stockholders' equity shall be adjusted by an amount equivalent to 50% of the income statement net after tax effect of charging off all Finance Contracts reflected in the "Notes Receivable -- C.A.R.S." account that are 91 days or more contractually past due, first, by charging the Allowance for Losses shown on the Adjustment Balance Sheet for the dollar amount of such charge-offs and, second, by debiting the Provision for Losses account on the statement of income included in the Most Recent Financial Statement (the "Adjustment Income Statement") by an amount sufficient to restore the ratio of the Allowance for Losses (less the amount of additional changes required by KPMG as of December 31, 1996 as discussed in paragraph (A) above) to Net Managed Receivables to 9.5%. (C) If, for the period between January 1, 1997 and the end of the month to which the Most Recent Financial Statements relate, the total amount of Net Managed Receivables charged off, and that should have been charged off, by MS Financial (other than charge-offs made pursuant to paragraph (B) above) according to GAAP and MS Financial's general accounting practices in place between July 1, 1996 and December 31, 1996, exceeds $7 million, stockholders' equity shall be adjusted by an amount equivalent to 50% of the income statement net after tax effect of debiting the Provision for Losses account on the Adjustment Income Statement by an amount sufficient to restore the ratio of the Allowance for Losses (less the amount of additional changes required by KPMG as of December 31, 1996 as discussed in paragraph (A) above) to Net Managed Receivables to 9.5%. 3 110 (ii) The formula for calculating the Per Share Amount adjustment is as provided in this Section 1.2(g)(ii). If the Adjusted Decrease in Stockholders' Equity (as defined below) is $2,100,000 or less, no adjustment to the Per Share Amount shall be made. If the Adjusted Decrease in Stockholders' Equity is more than $2,100,000 but less than $3,100,000, then 50% of such decrease shall be applied to the following calculation of the Adjusted Per Share Amount. If the Adjusted Decrease in Stockholders' Equity is $3,100,000 or more, then 100% of such decrease shall be applied to the following calculation of the Adjusted Per Share Amount. For purposes of this Section 1.2(g), "Adjusted Decrease in Stockholders' Equity" shall be equal to stockholders equity as shown on the Current Balance Sheet less the Adjusted Stockholders' Equity multiplied by the applicable percentage (50% or 100%) required by the foregoing; provided, that the Adjusted Decrease in Stockholders' Equity shall be zero if the Adjusted Stockholders' Equity is greater than the stockholders' equity on the Current Balance Sheet. The dollar amount of the Adjusted Decrease in Stockholders' Equity shall then be divided by the total number of shares of MS Financial Stock to be exchanged in the Merger, the resulting decimal number shall be subtracted from the otherwise applicable Per Share Amount, and the resulting figure shall become the adjusted Per Share Amount (the "Adjusted Per Share Amount") to be used in the Merger. The formula for calculating the adjusted maximum and minimum Exchange Ratio figures is as follows: the figures in Section 1.2(d) shall be multiplied by a fraction, the numerator of which is the Adjusted Per Share Amount and the denominator of which is the Per Share Amount prior to any adjustment. (h) Adjustment of Exchange Ratio. In the event that the adjustments provided for in Section 1.2(g) are made, the Adjusted Per Share Amount (rounded to the nearest hundredth of a share) shall replace the Per Share Amount in the calculation of the Exchange Ratio to be made pursuant to the definition of Exchange Ratio. 1.3. Exchange of Certificates. (a) Exchange Agent. At or before the Effective Time, Search shall deposit, or shall cause to be deposited, with the Exchange Agent for the benefit of the holders of shares of MS Financial Stock, for exchange in accordance with this Article 1, through the Exchange Agent, the Exchange Fund. The Exchange Agent shall, pursuant to instructions from Search, deliver the Search Common Stock and any cash contemplated to be distributed pursuant to this Article 1 out of the Exchange Fund. The Exchange Fund shall not be used for any other purpose. (b) Exchange Procedures. As soon as reasonably practicable after the Effective Time, Search will instruct the Exchange Agent to mail to each holder of record of a Certificate, (i) a letter of transmittal which shall specify that delivery shall be effected, and that risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other customary provisions as Search may reasonably specify and (ii) instructions for use in effecting the surrender of such holders' Certificates in exchange for certificates evidencing shares of Search Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration and the Certificate so surrendered shall forthwith be cancelled. Subject to Section 1.3(h), under no circumstances will any holder of a Certificate be entitled to receive any part of the Merger Consideration until such holder shall have surrendered such Certificate. In the event of a transfer of ownership of shares of MS Financial Stock which is not registered in the transfer records of MS Financial, the Merger Consideration may be paid in accordance with this Article 1 to the transferee if the Certificate evidencing such shares of MS Financial Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 1.3(b) (but subject to Section 1.3(h)), each Certificate shall be deemed at any time after the Effective Time to evidence only the right to receive upon such surrender the Merger Consideration. No interest shall be paid on the Merger Consideration. (c) Distributions with Respect to Unexchanged Shares of MS Financial Stock. No dividends or other distributions declared or made after the Effective Time with respect to Search Common Stock with 4 111 a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Search Common Stock constituting the Merger Consideration with respect to such unsurrendered Certificate, until the holder of such Certificate shall surrender such Certificate to the Exchange Agent (or Search, after termination of the Exchange Fund in accordance with Section 1.3(d)). Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the holder of such Certificate, in addition to the Merger Consideration, without interest, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to the whole shares of Search Common Stock constituting the Merger Consideration, with respect to such Certificate. (d) Termination of Exchange Fund. Any portion of the Exchange Fund which remains undistributed to the holders of MS Financial Stock for one year after the Effective Time shall be delivered to Search, upon demand and, subject to Section 1.3(e), any holders of MS Financial Stock who have not theretofore complied with this Article 1 shall thereafter look only to Search for the Merger Consideration to which they are entitled. (e) No Liability. Neither Search nor the Surviving Corporation shall be liable to any holder of shares of MS Financial Stock for any shares of Search Common Stock or cash (or dividends or distributions with respect thereto), delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (f) Withholding Rights. Search shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of MS Financial Stock such amounts as Search is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Search, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of MS Financial Stock in respect of which such deduction and withholding was made by Search. (g) No Further Ownership Rights in Capital Stock of MS Financial. All Merger Consideration issued or paid upon the conversion of shares of MS Financial Stock in accordance with the terms hereof shall be deemed to have been issued or paid in full satisfaction of all rights pertaining to such shares of MS Financial Stock. (h) Lost, Stolen or Destroyed Certificates. In the event any Certificate(s) shall have been lost, stolen or destroyed, the Exchange Agent shall cause payment of the Merger Consideration to be made in exchange for such lost, stolen or destroyed Certificate(s) upon the making of an affidavit of that fact by the holder thereof; provided, however, that Search may, in its reasonable discretion and as a condition precedent thereto, require the owner of such lost, stolen or destroyed Certificate(s) to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Search with respect to the Certificate(s) alleged to have been lost, stolen or destroyed. 1.4. Stock Transfer Books. At the Effective Time, the stock transfer books of MS Financial shall be closed and there shall be no further registration of transfers of shares of MS Financial Stock thereafter on the records of MS Financial. If, after the Effective Time, Certificates are presented to MS Financial for any reason, they shall be canceled and exchanged as provided in Section 1.3. 1.5. Stock Options and Other Rights to MS Financial Stock. (a) All Company Options outstanding at the Effective Time shall remain outstanding following the Effective Time. At the Effective Time, the Company Options shall, by virtue of the Merger and without any further action on the part of MS Financial or the holder thereof, be assumed by Search in such manner that Search (i) is a corporation "assuming a stock option in a transaction to which Section 424(a) applied" within the meaning of Section 424 of the Code or (ii) to the extent that Section 424 of the Code does not apply to any such Company Options, would be such a corporation were Section 424 of the Code applicable to such Company Options. From and after the Effective Time, all references to MS Financial in the MS 5 112 Financial Stock Option Plans and the applicable stock option agreements issued thereunder shall be deemed to refer to Search, which shall have assumed the MS Financial Stock Option Plans as of the Effective Time by virtue of this Agreement and without any further action. Each Company Option assumed by Search shall be exercisable upon the same terms and conditions as under the applicable MS Financial Stock Option Plan and the applicable option agreement issued thereunder, except that (A) each such Company Option shall be exercisable for, and represent the right to acquire, that whole number of shares of Search Common Stock (rounded up or down to the nearest whole share) equal to the number of shares of MS Financial Stock subject to such Company Option multiplied by the Exchange Ratio, and (B) the option price per share of Search Common Stock shall be an amount equal to the option price per share of MS Financial Stock subject to such Company Option in effect immediately prior to the Effective Time divided by the Exchange Ratio (the option price per share, as so determined, being rounded upward to the nearest full cent). No payment shall be made for fractional interests. (b) The MS Financial Employee Stock Purchase Plan shall be canceled in accordance with its terms immediately prior to the Effective Time. 1.6. Dissenting Shares. (a) Notwithstanding any provision of this Agreement to the contrary, and only in the event that a stockholder of MS Financial is entitled to exercise rights under Section 262 of the Delaware Statutes with respect to the Merger, then any Dissenting Shares held by such holder shall not be converted into or represent the right to receive the Merger Consideration. If stockholders of MS Financial are not entitled to exercise rights under Section 262 of the Delaware Statutes with respect to the Merger, this Section 1.6 shall be inapplicable. A holder of Dissenting Shares shall be entitled to receive payment of the fair value of such holder's Dissenting Shares in accordance with the provisions of Section 262 of the Delaware Statutes, except that all shares of MS Financial Stock held by stockholders who shall have failed to perfect or who effectively shall have withdrawn or lost their rights to appraisal of such shares of MS Financial Stock under Section 262 of the Delaware Statutes shall not be considered Dissenting Shares and shall be governed by the provisions of this Agreement applicable to the conversion of MS Financial Stock other than Dissenting Shares. (b) MS Financial shall give Search (i) prompt notice upon receipt by MS Financial, at any time prior to the Effective Time, of any demand for appraisal of shares of MS Financial Stock in accordance with Section 262 of the Delaware Statutes and withdrawals of any such notice and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for appraisal under Section 262 of the Delaware Statutes. MS Financial shall not, except with the prior written consent of Search, or as required by the Delaware Statutes, make any payment with respect to any demands for the appraisal of shares of MS Financial Stock or offer to settle or settle any such demands. 2. CLOSING. 2.1. Certificate of Merger Filing; Closing Time. As promptly as practicable, and in no event later than the first business day following the satisfaction or, if permissible, waiver of the conditions set forth in Article 6 (or such other date as may be agreed upon in writing by the parties hereto), the parties hereto will cause the Merger to be consummated by filing a certificate of merger (the "Certificate of Merger"), together with any required officers' certificates and/or other required filings, with the Secretary in such form as is required by, and executed in accordance with, the relevant provisions of the Delaware Statutes. The Merger shall become effective at the Effective Time. Immediately prior to the filing of the Certificate of Merger, the Closing will be held at the offices of Search in Dallas, Texas, or such other place as the parties may agree. 2.2. Documents to be Delivered at Closing by MS Financial. At the Closing the following documents, in a form satisfactory to Search, acting reasonably, and fully executed by the appropriate party or parties thereto, shall be delivered to Search by MS Financial: (a) A Closing Certificate signed by the President of MS Financial stating (i) that the representations and warranties in Article 3 of this Agreement are true and correct in all material respects as of the Closing, with corrections to any representations and warranties that have changed since the date of 6 113 this Agreement, (ii) that all of the terms, covenants, agreements and conditions of this Agreement and such Related Documents required to be complied with, performed or satisfied by MS Financial prior to the Closing have been complied with, performed or satisfied by MS Financial in all material respects. (b) Copies of the resolutions adopted by the Board of Directors of MS Financial and the stockholders of MS Financial authorizing the execution and delivery of this Agreement and the consummation of the Transactions, duly certified as of the Closing by the Secretary of MS Financial; (c) Corporate good standing certificates dated within ten (10) days of Closing of MS Financial and its Subsidiary, with respect to each state in which either MS Financial or its Subsidiary does business or is qualified to do business, and incumbency certificates for MS Financial and its Subsidiary dated as of the Closing Date; (d) All consents or approvals required to (i) avoid default under any material contracts to which MS Financial or any of its Subsidiaries is a party, or (ii) avoid any penalties imposed by any Governmental Authority and (iii) to consummate the Transactions; (e) Evidence of the cancellation of the MS Financial Employee Stock Purchase Plan; (f) The Most Recent Financial Statements, together with all other information necessary to make the calculations provided for in Section 1.2(g) and (h); (g) All other documents required to be delivered by MS Financial which are listed on the Closing Checklist; (h) The resignations of all of the existing officers and directors of MS Financial's Subsidiary and the resignations of the directors of MS Financial; and (i) The certification by MS Financial's Secretary on this Agreement pursuant to Section 251 of the Delaware Statutes stating that a majority of the outstanding stock of MS Financial entitled to vote on this Agreement has been voted for the adoption of this Agreement. 2.3. By Search/Newco. At the Closing, the following documents, in a form satisfactory to MS Financial, acting reasonably, and fully executed by the appropriate party or parties thereto, shall be delivered to MS Financial by Search and Newco: (a) Closing Certificates for Search and Newco signed by their Presidents stating (i) that the representations and warranties in Article 4 of this Agreement are true and correct in all material respects as of the Closing, with corrections to any representations and warranties that have changed since the date of this Agreement, and (ii) that all of the terms, covenants, agreements and conditions of this Agreement and the Related Documents required to be complied with, performed or satisfied by Search and Newco, respectively, prior to the Closing, have been complied with, performed or satisfied by Search and Newco in all material respects, provided that if any change is made based upon the occurrence of a Search Material Adverse Effect, MS Financial shall have the rights set out in Section 7.1 of this Agreement. (b) Copies of the resolutions adopted by the Boards of Directors of Search and Newco authorizing the execution and delivery of this Agreement and the consummation of the Transactions, duly certified as of the Closing by the Secretary of Search and Newco, respectively; (c) Corporate good standing certificates from the State of Delaware for Search and Newco, each such certificate dated within ten (10) days of Closing, and an incumbency certificate for each of Search and Newco dated as of the Closing Date; (d) All consents or approvals required to (i) avoid default under any material contracts to which Search or Newco is a party or (ii) avoid any penalties imposed by any Governmental Authority and (iii) consummate the Transactions; 7 114 (e) All other documents required to be delivered by Search or Newco which are listed on the Closing Checklist; (f) Written evidence reasonably satisfactory to MS Financial that the Exchange Agent has been given instructions regarding the issuance of shares of Search Common Stock pursuant to this Agreement and has been provided with cash sufficient to make payment for fractional shares as required by this Agreement or is authorized to accumulate fractional shares and sell same in accordance with Section 1.2(f); and (g) The certification by Newco's Secretary on this Agreement pursuant to Section 251 of the Delaware statutes stating that a majority of the outstanding stock of Newco entitled to vote on this Agreement has been voted for the adoption of this Agreement. 3. REPRESENTATIONS AND WARRANTIES OF MS FINANCIAL. To induce Search and Newco to enter into this Agreement and consummate the Transactions, MS Financial represents and warrants to Search and Newco as set forth below. 3.1. Due Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Company has the requisite corporate power to carry on its business as it is now being conducted. The Company is duly qualified as a foreign corporation and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a Company Material Adverse Effect. Schedule 3.1, contains a list of all jurisdictions in which the Company is authorized or qualified to do business as a foreign corporation. The Company has delivered to Search true, complete and correct copies of the Restated Certificate of Incorporation and Bylaws of the Company. The Restated Certificate of Incorporation and Bylaws are in full force and effect and have not been amended, modified, revoked, terminated or cancelled or in any other manner varied from the documents delivered to Search. The Company's Restated Certificate of Incorporation and Bylaws are collectively referred to as the "MS Charter Documents." The Company has made available to Search true, complete and correct sets of the minute books of the Company, and the copies thereof delivered to Search are complete and accurate copies of all materials included therein for the periods covered thereby. The Company is not in violation of any provision of the MS Charter Documents. 3.2. Authorization; Validity. The Company has all requisite corporate power and authority to execute and deliver this Agreement and all of the agreements and documents referred to on the Closing Checklist (the "Related Documents") to which the Company is a party and, with respect to the Merger, upon the adoption of this Agreement by MS Financial's stockholders in accordance with this Agreement, the Related Documents and the Delaware Statutes, to perform its obligations pursuant to the terms of this Agreement and all of the Related Documents to which the Company is a party and to consummate the Transactions. The execution and delivery by the Company of this Agreement and the Related Documents to which the Company is a party and the performance by the Company of its obligations under this Agreement and such Related Documents have been duly and validly authorized by the Board of Directors of the Company and by all other necessary corporate action other than adoption of this Agreement by the holders of a majority of the then outstanding shares of MS Financial Stock and the filing and recordation of the Certificate of Merger as required by the Delaware Statutes. This Agreement has been, and the Related Documents to which the Company is a party will be, duly and validly executed and delivered by the Company and are, or upon their execution will be, legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of Law governing specific performance, injunctive relief or other equitable remedies. 3.3. No Conflicts; Compliance. (a) The execution, delivery and performance of this Agreement and the Related Documents by the Company, and the consummation of the Transactions, will not: 8 115 (i) conflict with, or result in a breach or violation of, any of the MS Charter Documents; (ii) except as disclosed in Schedule 3.3(a)(ii), conflict with, or result in a default (or would constitute a default but for any requirement of notice or lapse of time or both), or require the consent of any third party, under any document, agreement or other instrument or obligation, including, without limitation, those relating to the Warehouse Loans and the Securitization Trusts, to which the Company is a party or by which the Company or any assets of the Company are bound or affected, other than conflicts or defaults which would not, individually or in the aggregate, have a Company Material Adverse Effect, or result in the creation or imposition of any lien, charge or encumbrance on any of the Company's properties, other than liens, charges, or encumbrances which would not, individually or in the aggregate, have a Company Material Adverse Effect; (iii) except as disclosed in Schedule 3.3(a)(iii),result in any impairment of, or give to any other Person any right of termination, amendment, acceleration or cancellation with respect to, any permit, license, franchise, contractual right or other authorization of the Company material to MS Financial and its Subsidiary taken as a whole; or (iv) violate any Law to which the Company is subject or by which any assets of the Company are bound or affected, the violation of which would have a Company Material Adverse Effect. (b) Except as disclosed in Schedule 3.3(b), the execution and delivery of this Agreement by the Company do not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permission of, or filing with or notification to, any Governmental Authority except (i) for applicable requirements, if any, of the Exchange Act, the Securities Act, and Blue Sky Laws, and filing and recordation of the Certificate of Merger as required by the Delaware Statutes, (ii) such notice as is necessary to comply with HSR, and (iii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay consummation of the Merger, or otherwise prevent MS Financial from performing its obligations under this Agreement. 3.4. Permits and Intangibles. The Company owns or holds all Material Permits, and Schedule 3.4 contains a list of all Material Permits. The Material Permits are valid, and the Company has not received any notice that any Governmental Authority intends to modify, suspend, cancel, terminate or not renew any Material Permit. Except as disclosed on Schedule 3.4, the Company is not in conflict with, or in default or violation of, (i) any Law applicable to the Company or by which any property or asset of the Company is bound or affected, (ii) any of the Material Permits or (iii) any note, bond, mortgage, indenture, contract, agreement, lease, or other instrument or obligation to which the Company is a party or by which the Company or any property or asset of the Company is bound or affected except as would not have a Company Material Adverse Effect. The Transactions will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the Company by, any Material Permit. 3.5. Capital Stock of the Company. The authorized capital stock of MS Financial consists of 50,000,000 shares of MS Financial Stock, 10,429,926 shares of which are issued and outstanding, 374,000 shares of which are held as treasury shares, and 5,000,000 shares of preferred stock, par value $.001 per share, none of which is issued or outstanding. The authorized capital stock of the Subsidiary and its par value are indicated on Schedule 3.5 hereto. All of the issued and outstanding shares of the capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and not subject to preemptive rights. All of the issued and outstanding shares of the capital stock of the Company and any other securities sold by the Company and the Securitization Trusts were offered, issued, sold and delivered by the Company in compliance with all applicable state and federal Laws concerning the issuance, offer and sale of securities. Further, none of such shares was issued in violation of any preemptive rights. 3.6. Transactions in Capital Stock. Except as set forth on Schedule 3.6, no option, warrant, call, subscription right, conversion right or other contract or commitment of any kind exists of any character, written or oral, which may obligate the Company to issue or sell any shares of capital stock or other equity interests. Except 9 116 as set forth on Schedule 3.6, the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. 3.7. Subsidiary. Except as listed in Schedule 3.7, the Company does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, nor is the Company, directly or indirectly, a participant in any joint venture, partnership or other noncorporate entity. The only Subsidiary of MS Financial is MS Auto Receivables Company. MS Financial owns all of the capital stock of MS Auto Receivables Company. 3.8. Predecessor Status; etc. Schedule 3.8 sets forth a listing of all names of all predecessor companies of the Company during the five-year period immediately preceding the date hereof, including without limitation the names of any entities from whom the Company has acquired material assets. Except as specified in Schedule 3.8, the Company has not at any time during the five-year period immediately preceding the date hereof been a Subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 3.9. Spin-off by the Company. Except as disclosed in Schedule 3.9, there has not been, nor does there exist any agreement in respect of, any sale or spin-off of material assets of either the Company, or any Affiliate of the Company, within the past two years and there are no plans for any such sale or spin-off. 3.10. Financial Statements. Schedule 3.10 includes (a) true, complete and correct copies of the Company's audited Consolidated Balance Sheet as of December 31, 1995 (the end of its most recent completed fiscal year for which audited financial statements are available), and audited Consolidated Statements of Income, Cash Flows and Stockholders' Equity for the three years ended December 31, 1995 (collectively, the "Reviewed Financials") and (b) true, complete and correct copies of the Company's unaudited Consolidated Balance Sheet (the "Current Balance Sheet") as of December 31, 1996 (the "Balance Sheet Date"), and unaudited Consolidated Statement of Income for the twelve month period ended December 31, 1996 (the "Current Income Statement"; the Current Balance Sheet and the Current Income Statement are sometimes referred to collectively as the "Unaudited Financials;" and together with the Reviewed Financials, the "Company Financial Statements"). The Company Financial Statements have been prepared in accordance with GAAP throughout the periods indicated (except as may be indicated in the notes thereto), subject, in the case of the Unaudited Financials, to year-end audit adjustments and to the omission of footnote information. The balance sheets included in the Company Financial Statements and each of the statements of income, cash flows and stockholders' equity included in the Company Financial Statements present fairly in all material respects the consolidated financial position, results of operations, cash flows and changes in stockholders' equity of MS Financial and its consolidated Subsidiary as at the respective dates thereof and for the respective periods indicated therein (subject, in the case of the Unaudited Financials, to year-end audit adjustments). Since December 31, 1996, there have been no material changes in the Company's accounting policies. 3.11. SEC Filings. (a) MS Financial has timely filed all Company SEC Reports and has delivered true and complete copies thereof to Search. The Company SEC Reports, and all similar SEC filings and reports for the Securitization Trusts, (i) were prepared in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (ii) did not, at the time they were filed (or at the effective date thereof in the case of registration statements), contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. MS Financial's Subsidiary is not currently required to file any form, report or other document with the SEC under Section 12 of the Exchange Act. (b) The information supplied by the Company for inclusion in the Registration Statement and the Proxy Statement shall not, at (i) the time the Registration Statement is declared effective, (ii) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of MS Financial and Search, (iii) the time of each of the MS Financial Stockholders Meeting and the Search Stockholders Meeting, and (iv) the Effective Time, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit 10 117 to state any material fact required to be stated therein, or necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the MS Financial Stockholders Meeting and the Search Stockholders Meeting which shall have become false or misleading. If at any time prior to the Effective Time any event or circumstance relating to the Company, or their respective officers or directors, is discovered by the Company which should be set forth in an amendment or a supplement to the Registration Statement or Proxy Statement, Company shall promptly inform Search and cooperate with Search in the preparation, filing and mailing of an appropriate amendment or supplement. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Search or any of its representatives in the Proxy Statement. All documents that the Company is responsible for filing with the SEC in connection with the Transactions will comply as to form and substance in all material respects with the applicable requirements of the Securities Act and the rules and regulations promulgated thereunder and the Exchange Act and the rules and regulations promulgated thereunder. (c) MS Financial has heretofore furnished to Search complete and correct copies of all amendments and modifications (if any) that have not been filed by MS Financial with the SEC to all agreements, documents and instruments previously filed by MS Financial as exhibits to the Company SEC Reports and currently in effect. (d) Except for the transactions described in Schedule 3.11(d), all transactions involving the Company that are required to be disclosed in the Company SEC Reports in accordance with Item 404 of Regulation S-K promulgated under the Securities Act have been so disclosed, and since January 1, 1996 the Company has not entered into any transactions that would be required to be disclosed in future public filings under the Exchange Act pursuant to such Item which have not already been disclosed in the Company SEC Reports filed prior to the date hereof. 3.12. Liabilities and Obligations. (a) Except as disclosed in Schedule 3.12, the Company is not liable for or subject to any liabilities except for: (i) those liabilities reflected on the Current Balance Sheet and not previously paid or discharged; (ii) those liabilities disclosed in any Company SEC Report filed by the Company after December 31, 1996; (iii) those liabilities arising in the ordinary course of business consistent with past practice such as was in place between July 1, 1996 and December 31, 1996; and (iv) those liabilities that would not, individually or in the aggregate, have a Company Material Adverse Effect. For purposes of this Section 3.12, the term "liabilities" shall include without limitation any direct or indirect liability or obligation, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost, expense, obligation or responsibility, either accrued, absolute, contingent, mature, unmature or otherwise and whether known or unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated, secured or unsecured. (b) The Company has no liability for sale or other excise taxes that would be accelerated due to the Merger. 3.13. Accounts and Notes Receivable. Schedule 3.13 contains an accurate list, as of a date not more than two business days prior to the date hereof, of the accounts and notes receivable of the Company (including without limitation receivables from and advances to employees and the Stockholders, but excluding those applicable to Finance Contracts) which includes all aging of all accounts and notes receivable, but excluding those applicable to Finance 11 118 Contracts, showing amounts due in 30-day aging categories. The Company knows of no defenses to the accounts receivable or notes receivable. 3.14. Finance Contracts. Each Finance Contract acquired by the Company, whether or not pursuant to a Car Dealer Agreement, including all Related Security under such Finance Contract (a) has been fully performed by Company and, to the best of the Company's knowledge, the Car Dealer party thereto, (b) is an installment sale agreement or other deferred payment obligation providing for the retention of a first lien or security interest in the underlying personal property to secure payment of the obligation evidenced thereby and such lien has been, or, in the case of Finance Contracts purchased in the last 60 days, is in the process (which process is being timely and properly pursued consistent with industry standards and legal requirements) of being duly perfected in accordance with applicable Law, (c) is owned by the Company and the Company owns all rights to receive all amounts payable thereunder, except for the rights of Lenders and trustees of the Securitization Trusts disclosed on Schedule 3.14(c); (d) is in one of the forms attached as Schedule 3.14(d), or, to the Company's best knowledge, is otherwise in full compliance with all applicable Laws, except where such non-compliance is immaterial and would not invalidate the Finance Contract or the Company's rights (after the Merger) to enforce full performance of same by the related obligor; (e) except as required by applicable law, does not impose any obligation upon Company or any other Person, which, if not performed, would give rise to any right of offset, counterclaim or other defense on the part of the related obligor to any amount payable by it under the Finance Contract, (f) except as disclosed in Schedule 3.14(f), is free of any dispute, adverse claim, counterclaim, offset or defense (including, without limitation, the material breach of (i) any warranty by the Car Dealer of the goods covered by such Finance Contract or (ii) any service contract, extended service warranty or like agreement by such Car Dealer) of the obligor or such other Person or entity as may have guaranteed or secured the obligations of the obligor (except for (y) the insolvency of such obligor or such other Person or entity as may have guaranteed or secured the obligations of the obligor and (z) the right of an obligor to receive a rebate of the unearned finance charge in the event of payment in full prior to maturity) except for (1) the interest of the obligor in the goods sold pursuant to such Finance Contract, (2) the security interests created in favor of such Car Dealer and the Company, and (3) mechanics' or similar statutory liens subordinate to such security interests resulting from actions of the obligor, (g) to the best of the Company's knowledge does not, and the Company has received no claims that it does, contravene any Laws applicable thereto and no party thereto has at any time violated any such Laws with respect thereto, (h) grants to the respective Car Dealer and assigns to Company a valid, enforceable and perfected first priority security interest in and to such Finance Contract and such Related Security which is free and clear of any adverse claims subject to the exceptions stated in clause (f) above, (i) has no effective financing statement or lien notation on any certificate of title or other instrument similar in effect covering all or any part of such Finance Contract or Related Security, which would give the Person filing, named on or entitled to the benefit of such statement or instrument priority senior to or pari passu with Company, on file in any recording office or is otherwise effective except such as may be filed in favor of the Car Dealer or Company and collaterally assigned to the Senior Bank Lender, (j) requires Company to be named as loss payee or beneficiary (as may be applicable) under any insurance policy with respect to such Finance Contract, and entitles Company to the benefits of such insurance policy, 12 119 (k) refers to motor vehicles, including any equipment sold and financed in connection with the Finance Contract, which to the extent required under applicable Law, are duly registered and licensed and are or, in the case of Finance Contracts purchased in the last 60 days will timely and properly be the subject of a certificate of title issued in the name of the obligor which indicates a security interest therein held by the Company, in the appropriate form and in compliance with all appropriate procedures as may be necessary under applicable Law to cause a perfected and first priority security interest to exist in favor of the Company to secure the obligations of such obligor under such Finance Contract; (l) if purchased from a Car Dealer from which Company has purchased five (5) or more Finance Contracts, was validly assigned to Company by a Car Dealer in connection with a Car Dealer Agreement in substantially the form of one of the forms set forth in Schedule 3.14(l) and Car Dealer Assignment in substantially one of the forms of assignment contained in Schedule 3.14(l) or appearing at the bottom of the second page of each of the forms of the Finance Contract contained in Schedule 3.14(d), free and clear of all liens and adverse claims and (i) to the best of the Company's knowledge, constitutes a legal, valid and binding obligation of such Car Dealer enforceable against such Car Dealer in accordance with its terms, and (ii) pursuant to which Company is in physical possession of such Finance Contract and all writings comprising such Related Security; and (m) contains representations and warranties from the Car Dealer to Company with respect to such Finance Contract under the Car Dealer Assignment related thereto all of which are to the best of the Company's knowledge true and correct. 3.15. Offices, FTC; Warranties. (a) Each of the Company's offices is and has been operated as a licensed location in any jurisdiction requiring such license in conformity with all such licensing and other Laws applicable to the purchase of Finance Contracts, and the sale of insurance coverage related thereto, including, without limitation, Motor Vehicle Retail Installment Sales Acts, Sales Finance Agency Acts, or any other Law regulating the business of acquiring Finance Contracts and the sale of insurance coverage related thereto, except where any failure would not have a Company Material Adverse Effect. The Company is familiar with the Federal Trade Commission's used car rule and, to the best of the Company's knowledge, based on "as is" sheets provided by Car Dealers, its Car Dealers are in compliance with such rule. (b) Each Finance Contract has been originated by a Car Dealer pursuant to a Car Dealer Agreement that, to the best of the Company's knowledge, is enforceable in accordance with its terms against such Car Dealer. To the extent that the Finance Contracts finance so-called "extended warranty plans," or "service contracts" to the best of the Company's knowledge, such plans are in substantial compliance with all applicable consumer credit Laws, including any and all special insurance Laws relating thereto. 3.16. Environmental Matters. (a) Hazardous Material. The Company does not have any liability for claims arising out of events involving underground storage tanks, or any substance that has been designated by any Governmental Authority or by applicable Law to be radioactive, toxic, hazardous or otherwise a danger to health or the environment, including, without limitation, PCBs, asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to the United States Resource Conservation and Recovery Act of 1976, as amended, and the regulations promulgated pursuant to said Laws, but excluding office and janitorial supplies properly and safely maintained (a "Hazardous Material") present in, on or under any property, including the land and the improvements, ground water and surface water thereof, that the Company has at any time owned, operated, occupied or leased. (b) Hazardous Materials Activities. The Company does not have any liability for claims arising out of events involving the transportation, storage, use, manufacture, disposal of, release of, or exposure of its employees or others to Hazardous Materials in violation of any Law in effect on or before the Closing Date, nor from the disposal of, transportation, sale, or manufacture of any product containing 13 120 a Hazardous Material (collectively, "Company Hazardous Materials Activities") in violation of any Laws promulgated by any Governmental Authority in effect prior to or as of the date hereof to prohibit, regulate or control Hazardous Materials or any Hazardous Material Activity. (c) Permits. The Company currently does not hold, and is not required to hold, any environmental approvals, permits, licenses, clearances and consents (the "Environmental Permits") necessary for the conduct of the Company's Hazardous Material Activities and other business of the Company as such activities and business are currently being conducted. (d) Environmental Liabilities. No action, proceeding, revocation proceeding, amendment procedure, writ, injunction or claim is pending, or threatened concerning any Environmental Permit, Hazardous Material or any Company Hazardous Materials Activity. The Company is not aware of any fact or circumstance which could involve the Company in any environmental litigation or impose upon the Company any material environmental liability. 3.17. Real and Personal Property. Schedule 3.17 sets forth an accurate list of all owned and leased real property, all personal property included in "Furniture and Fixtures" and "Leasehold Improvements" on the Current Balance Sheet and all other personal property owned or leased by the Company with a value in excess of $5,000 (a) as of the Balance Sheet Date and (b) acquired since the Balance Sheet Date, including in each case a true, complete and correct copy of the lease for each item of equipment with an annual rental payment of $5,000 or more and all real properties on which are situated buildings, warehouses, workshops, garages and other structures used in the operation of the business of the Company and also including an indication as to which assets are currently owned, or were formerly owned, by any Stockholder or business or personal Affiliates of the Company or any Stockholder. To the best knowledge of the Company, all leases set forth on Schedule 3.17 are in full force and effect and constitute valid and binding agreements of the Company and, to the best knowledge of the Company, of the other parties thereto in accordance with their respective terms. All fixed assets used by the Company that are material to the operation of its business are either owned by the Company or leased under an agreement listed on Schedule 3.17. Schedule 3.17 includes true, complete and correct copies of all title reports and title insurance policies received or owned by the Company that are still in effect. Schedule 3.17 also includes a summary description of all plans or projects involving the opening of new operations, expansion of any existing operations or the acquisition of any real property or existing business, to which management of the Company has made any material expenditure in the two-year period prior to the date of this Agreement, which if pursued by the Company or the Surviving Corporation would require additional material expenditures of capital. 3.18. Significant Car Dealers, Material Contracts and Commitments. (a) Schedule 3.18 includes a complete and accurate list of all Car Dealers that originated $50,000 or more in Finance Contracts during 1996. Schedule 3.18 also contains an accurate list of all material contracts, commitments, leases, instruments, agreements, licenses or permits to which Company is a party or by which it or its properties are bound (including without limitation contracts with directors, employees, any of the Stockholders, Car Dealers, joint venture or partnership agreements, real estate leases, equipment leases, software licenses, contracts with any labor organizations, loan agreements, servicing agreements, securitization agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements) (i) as of the Balance Sheet Date and (ii) entered into since the Balance Sheet Date (collectively, the "Material Contracts"). The Company has made available to Search true, complete and correct copies of the Material Contracts and all amendments thereto. Except to the extent set forth on Schedule 3.18, (w) none of Company's Car Dealers has canceled or substantially reduced or is currently attempting or threatening to cancel or substantially reduce its sale of Finance Contracts to the Company, (x) the Company has complied with all of its commitments and obligations and is not in default under any of the Material Contracts and no notice of default has been received with respect to any of the Material Contracts and (y) there are no Material Contracts that were not negotiated at arm's length with third parties not Affiliated with Company or any officer, director or Stockholder of Company and (z) the Company has no knowledge that any of the Material Contracts will not be complied with by the parties thereto. 14 121 (b) Each Material Contract is valid and binding on the Company, is in full force and effect, is, to the best of the Company's knowledge, enforceable against the parties thereto (other than the Company) in accordance with its terms and is not subject to any default (or event that, with notice or the passage of time, or both would constitute a default) thereunder by any party obligated to Company pursuant thereto. The Company has used its best efforts to fully comply in all material respects with the provisions of each Material Contract. Company has used its best efforts to obtain, or will obtain prior to the Closing, all necessary consents, waivers and approvals of parties to any Material Contracts as are required in connection with any of the Transactions, or as are required of any Governmental Authority or other third party in order that any such Material Contract remain in effect without modification after the Merger and without giving rise to any default or right of termination, cancellation or acceleration or loss of any right or benefit thereunder. All Company Third Party Consents are listed on Schedule 3.18. 3.19. Insurance. Schedule 3.19 sets forth an accurate list of all insurance policies carried by the Company and all insurance loss runs or workmen's compensation claims received for the past two policy years. The Company has delivered to Search, prior to the date of this Agreement, true, complete and correct copies of all current insurance policies, all of which are in full force and effect. All premiums payable under all such policies have been paid and, to the best of the Company's knowledge, the Company is otherwise in full compliance with the terms of such policies (or other policies providing substantially similar insurance coverage). Such policies of insurance are of the type and in amounts customarily carried by similarly situated Persons conducting businesses similar to that of the Company. The Company does not know of any threatened termination of or material premium increase with respect to, any of such policies. The Company maintains insurance adequate to indemnify all of its officers and directors for any liability arising from events that occurred prior to Closing and such insurance shall remain effective notwithstanding the Merger. 3.20. Compensation; Employment Agreements. Schedule 3.20 hereto sets forth an accurate list of all officers, directors and key employees of the Company, as of the date hereof, all employment agreements with such officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such Persons as of (a) the Balance Sheet Date and (b) the date hereof. The Company has provided to Search true, complete and correct copies of all employment, management, severance and other compensation or benefit contracts, commitments and arrangements with Persons listed on Schedule 3.20. 3.21. Employee Benefit Plans. (a) All employee benefit plans, programs and policies (whether formal or informal, and whether maintained for the benefit of a single individual or more than one individual) maintained or contributed to by the Company for the benefit of any current or former employee of the Company or in which such employees are entitled to participate are listed in Schedule 3.21 (the "Benefit Plans"). Copies of all such written Benefit Plans, written descriptions of all such oral Benefit Plans, and all other documentation relating to such Benefit Plans have been delivered or made available to Search. The Company does not sponsor and has not participated in any "defined benefit plan" as defined in Section 3(25) of ERISA. (b) Each Benefit Plan and the operation and administration thereof complies, and has at all times complied, in all material respects with the requirements of all applicable Laws including without limitation the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the Code. (a) Each Benefit Plan which is an employee pension benefit plan as defined in Section 3(2) of ERISA and is intended to qualify under section 401(a) of the Code so qualifies and has received a favorable determination letter from the Internal Revenue Service that it is so qualified and nothing has occurred since the date of such letter to affect the qualified status of such Plan, and each trust which forms a part of any such plan is tax-exempt under section 501(a) of the Code, (b) no liability has been incurred or is expected to be incurred under Title IV of ERISA to any party with respect to any Benefit Plan, or any other plan presently or heretofore maintained or contributed to by the Company, any predecessor to the Company or any entity that is or at any time was a member of a controlled group, as defined in Section 412(n) (6) (B) of the Code, which includes or included the Company ("Controlled Group Member"), and no fact exists or event has occurred that would reasonably be expected to give rise to any such liability, (c) neither the Company nor any Controlled Group Member has incurred any liability for any tax imposed under section 15 122 4971 through 4980B of the Code or civil liability under section 502(i) or (1) of ERISA, (d) no Benefit Plan is a multi-employer plan within the meaning of section 3(37) of ERISA, (e) no Benefit Plan provides health or death benefit coverage beyond the termination of an employee's employment, except as required by Part 6 of Title I of ERISA or section 4980B of the Code, (f) no material "reportable event" (within the meaning of section 4043 of ERISA) has occurred with respect to any Benefit Plan or any plan maintained by a Controlled Group Member since the effective date of said section 4043, (g) no suit, actions or other litigation (excluding claims for benefits incurred in the ordinary course of plan activities) have been brought against or with respect to any Benefit Plan, and (h) all contributions to Benefit Plans that were required to be made under such Benefit Plans have been made as of the Balance Sheet Date, and all benefits accrued under any unfunded Benefit Plan will have been paid, accrued or otherwise adequately reserved in accordance with GAAP as of such date and the Company will have performed by the Closing Date all material obligations required to be performed as of such date under Benefit Plans. (c) The Company and the Subsidiary have not incurred any liability under, and have complied in all respects with, the Worker Adjustment Retraining Notification Act and no fact or event exists that could give rise to liability under such act, except for such occurrences, noncompliances and liabilities as would not, individually or in the aggregate, have a Company Material Adverse Effect. 3.22. Employee Matters. The Company is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union. No employee of the Company is represented by any labor union or covered by any collective bargaining agreement and no campaign to establish such representation is in progress. There is no pending or threatened labor dispute involving the Company and any group of its employees nor has the Company experienced any labor interruptions over the past three years that resulted in a Company Material Adverse Effect and the Company considers its relationship with its employees to be good. 3.23. Conformity with Law; Litigation. (a) The Company has not violated any Law or any Order of any Governmental Authority having jurisdiction over it other than violations which would not have a Company Material Adverse Effect. (b) Except as described in Schedule 3.23, there are no claims, counterclaims, actions, suits, investigations or other proceedings, pending or threatened, against or affecting the Company, or seeking to delay or prevent consummation of the Merger, at law or in equity, or before or by any arbitrator or any Governmental Authority having jurisdiction over it and no notice of any claim, counterclaim, action, suit or proceeding, whether pending or threatened, has been received. (c) There are no judgments, orders, injunctions, decrees, stipulations or awards (whether rendered by a Governmental Authority or by arbitration) against the Company or against any of its properties or businesses. 3.24. Taxes. (a) Other than as set forth on Schedule 3.24(a), the Company has timely filed or will timely file all requisite federal, state and other Tax returns, reports and forms ("Returns") for all periods ended on or before the Closing Date, other than Returns with respect to which the failure to file would not result in penalties, fines, or other payments totaling more than $5,000 in the aggregate. (b) Other than as set forth on Schedule 3.24(b), there are no examinations in progress or claims against the Company for Taxes for any period or periods and no notice of any claim for Taxes, whether pending or threatened, has been received. (c) The amounts shown as accruals for Taxes on the Current Balance Sheet are sufficient for the payment of all Taxes, whenever determined, for all fiscal periods ended on or before that date. (d) The Company has a taxable year ended on December 31. (e) The Company currently utilizes the accrual method of accounting for income tax purposes and such method of accounting has not changed in the past five years. 16 123 (f) The Company has paid or has fully accrued for all Taxes and will have withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other taxes required to be withheld, whenever determined, with respect to periods ending on or before the Closing Date. (g) Copies of (i) any Tax examinations, (ii) extensions of statutory limitations for the collection or assessment of Taxes and (iii) the Returns of the Company for the last three (3) fiscal years are included as part of Schedule 3.24(g). (h) There are (and as of immediately following the Closing there will be) no liens, pledges, charges, claims, security interests or other encumbrances of any sort ("Liens") on the assets of the Company relating to or attributable to Taxes (excluding current year property or ad valorem taxes). (i) None of the Company's assets are treated as "tax exempt use property" within the meaning of Section 168(h) of the Code. (j) As of the Effective Time, there will not be any contract, agreement, plan or arrangement, including but not limited to the provisions of this Agreement, covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to Section 280G, 404 or 162 of the Code. (k) The Company has not filed any consent agreement under Section 341(f)(2) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company. (l) The Company is not a party to a tax sharing, tax indemnity or allocation agreement nor does the Company owe any amount under any such agreement. (m) The Company is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code. (n) The Company's tax basis in its assets for purposes of determining its future amortization, depreciation and other federal income tax deductions is accurately reflected on the Company's tax books and records. (o) The Company has not taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. 3.25. Government Contracts. The Company is not a party to any governmental contracts subject to price redetermination or renegotiation. 3.26. Absence of Changes. Since December 31, 1996, except as disclosed in Schedule 3.26 or agreed to by Search in writing, there has not been: (a) any event giving rise to a Company Material Adverse Effect, (b) any damage, destruction or loss (whether or not covered by insurance) adversely affecting the properties or business of the Company that would have a Company Material Adverse Effect, (c) any change in the authorized capital of the Company or in its outstanding securities or any grant of any options, warrants, calls, conversion rights or commitments, (d) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the Company, 17 124 (e) any increase in the compensation, bonus, sales commissions or fee arrangements payable or to become payable by the Company to any of its officers, directors, Stockholders, employees, consultants or agents other than in the ordinary course of business and in accordance with and consistent with past practices, (f) any work interruptions, labor grievances or claims filed, or any similar event or condition of any character, which would result in a Company Material Adverse Effect, (g) any sale or transfer, or any agreement to sell or transfer, any asset, property or right of the Company having an original cost of $5,000 or more to any Person, including without limitation the Stockholders and their Affiliates, (h) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the Company, including without limitation any indebtedness or obligation of any Stockholders or any Affiliate thereof, provided that the Company may negotiate and adjust bills in the course of good faith disputes with customers in a manner consistent with past practice, (i) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the Company or requiring consent of any party to the transfer and assignment of any such assets, property or rights, (j) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of business of the Company, (k) any waiver of any material rights or claims of the Company, (l) any breach, amendment or termination of any Material Contract, (m) any transaction by the Company outside the ordinary course of business, (n) any capital expenditure or commitment by the Company, individually or in the aggregate, exceeding $5,000 other than those listed on Schedule 3.26(n), (o) change in the accounting methods or practices (including any change in depreciation or amortization policies or rates) by the Company or the revaluation by the Company of any of its assets, (p) any creation or assumption by the Company of any mortgage, pledge, security interest or lien or other encumbrance on any asset, other than those listed on Schedule 3.26(p), (q) any entry into, amendment of, relinquishment, termination or nonrenewal by the Company of any contract, lease transaction, commitment or other right or obligation requiring aggregate payments by the Company in excess of $50,000, other than those listed on Schedule 3.26(q), (r) loan by the Company to any Person or entity, incurring by the Company of any indebtedness (excluding indebtedness under the Fourth Amended and Restated Loan Agreement dated as of May 1, 1996 among MS Financial, Fleet Bank, N.A., as Agent, and the Banks party thereto, as amended by the First Amendment to the Fourth Amended and Restated Loan Agreement dated as of December 16, 1996 by and among MS Financial, Fleet Bank, N.A., as Agent, and the Banks party thereto and proposed to be further amended pursuant to the Bank Loan Term Sheet (the "MS Loan Agreement") guaranteeing by the Company of any indebtedness or debt securities of others or issuance or sale of any debt securities of the Company, (s) the commencement or notice or threat of commencement of any lawsuit or proceeding against or investigation of the Company or any of its affairs not otherwise disclosed on Schedule 3.23, or 18 125 (t) agreement by the Company or any officer or employee thereof to do any of the things described in the preceding clauses (a) through (s) (other than agreements with Search regarding the Transactions), or (u) any change of servicer or notice of an impending change of servicer for any of the Securitization Trusts. 3.27. Bank Accounts Powers of Attorney. Schedule 3.27 sets forth an accurate list, as of the date of this Agreement, of: (a) the name of each financial institution in which the Company has any account or safe deposit box; (b) the names in which the accounts or boxes are held; (c) the type of account; and (d) the name of each Person authorized to draw thereon or have access thereto. Schedule 3.27 also sets forth the name of each Person, corporation, firm or other entity holding a general or special power of attorney from the Company and a description of the terms of such power. 3.28. Relations with Governments. The Company has not made, offered or agreed to offer anything of value to any governmental official, political party or candidate for government office and it has not taken any action that would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any Law of similar effect. 3.29. Disclosure. No representation or warranty by the Company contained in this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary to make any statement herein not misleading. 3.30. Opinion of Financial Advisor. MS Financial has received the opinion of Bear, Stearns & Co. ("Bear Stearns") on the date of this Agreement to the effect that the Merger is fair from a financial point of view to MS Financial's stockholders as of the date thereof. As soon as practicable after the date of this Agreement, MS Financial will deliver a written copy of such opinion to Search dated as of the date of the Proxy Statement and such written opinion will be attached to the Proxy Statement. A copy of the Bear Stearns engagement letter dated October 25, 1996, as amended by the letter agreement dated November 21, 1996 (the "Engagement Letter"), has previously been delivered to Search. 3.31. Vote Required. The affirmative vote of the holders of a majority of the then outstanding shares of MS Financial Stock is the only vote of the holders of any class or series of capital stock of MS Financial necessary to adopt this Agreement and consummate the Transactions. 3.32. Brokers. No broker, finder or investment banker (other than Bear Stearns) is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of MS Financial. The Engagement Letter is the only agreement pursuant to which Bear Stearns will be entitled to any payment relating to the Transactions. 3.33. Absence of Claims Against Company. To the best knowledge of the Company, the Stockholders have no claims against the Company. 3.34. Complete Copies of Materials. The Company has delivered to Search true, correct and complete copies (or summaries) of each agreement, contract, commitment or other document that is referred to in the Schedules or that has been requested by Search or its counsel in writing. 19 126 3.35. Compliance with Laws of Delaware. Without limiting any of the other representations or warranties contained herein, MS Financial shall comply with all provisions of the Delaware Statutes applicable to the Transaction, including but not limited to Section 262 thereof. 3.36. Hart-Scott-Rodino Filing. The Company will file any and all documentation, notices and responses, and will cooperate with Search with respect to any and all filings, notices and responses, to Governmental Authorities necessary to comply with HSR and to obtain the pre-clearance for the Merger to be effectuated. 3.37. Review of Search. Without in any way affecting the importance, scope or effectiveness of, or impacting its reliance on, any other provision of this Agreement, and without acknowledging the accuracy or completeness of any materials provided to it, the Company acknowledges that it has had a full opportunity to request from Search and Newco all information concerning Search and Newco that the Company deems relevant to its decision to enter into this Agreement and to consummate the Transactions, and has reviewed the information provided by Search and Newco. 4. REPRESENTATIONS OF SEARCH AND NEWCO. To induce MS Financial to enter into this Agreement and consummate the Transactions, each of Search and Newco represents and warrants to MS Financial as follows: 4.1. Due Organization. Search and Newco are corporations duly organized, validly existing and in good standing under the laws of the State of Delaware. Search and Newco have the requisite corporate power to carry on their respective businesses as they are now being conducted. Search and Newco are duly qualified as foreign corporations and are in good standing in each jurisdiction where the character of either of their properties owned or held under lease or the nature of their respective activities makes such qualification necessary, except where the failure to be so qualified or in good standing would not, individually or in the aggregate, have a Search Material Adverse Effect. Search and Newco have delivered to MS Financial true, complete and correct copies of their Certificates of Incorporation and Bylaws. The Certificates of Incorporation and Bylaws are in full force and effect and, as of the date of this Agreement, have not been amended, modified, revoked, terminated or cancelled or in any other manner varied from the documents delivered to MS Financial. The Certificate of Incorporation and Bylaws are collectively referred to as the "Search Charter Documents." Search and Newco have made available to MS Financial true, complete and correct sets of their minute books. Neither Search nor Newco is in violation of any provision of the Search Charter Documents. 4.2. Authorization; Validity of Obligations. Search and Newco have all requisite corporate power and authority to execute and deliver this Agreement and the Related Documents and, with respect to the Merger and the issuance of the shares of Search Common Stock in connection with the Merger, if required by the rules of the NASD, upon the approval thereof by Search's stockholders in accordance with those rules, the Search Charter Documents, this Agreement and the Delaware Statutes, to perform their respective obligations pursuant to the terms of this Agreement and the Related Documents to which they are a party and to consummate the Transactions. The execution and delivery of this Agreement and such Related Documents by Search and Newco and the performance by each of Search and Newco of their respective obligations under this Agreement and such Related Documents have been duly and validly authorized by the respective Boards of Directors of Search and Newco, and by all other necessary corporate action other than approval of the issuance of Search Common Stock pursuant to the Merger by holders of a majority of the total votes cast with respect thereto by the stockholders of Search at the Search Stockholders Meeting pursuant to the Delaware Statutes, the Search Charter Documents and the rules of the NASD, and the filing and recordation of the Certificate of Merger. This Agreement has been, and the Related Documents to which either Search or Newco is a party will be, duly and validly executed and delivered by Search and/or Newco, as the case may be, and will be, legal, valid and binding obligations of Search and/or Newco enforceable against Search and/or Newco in accordance with their terms, except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of Law governing specific performance, injunctive relief or other equitable remedies. 20 127 4.3. No Conflicts; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement and the Related Documents, the consummation of the Transactions and the fulfillment of the terms hereof and thereof will not: (i) conflict with, or result in a breach or violation of, the Search Charter Documents; (ii) conflict with, or result in a default (or would constitute a default but for any requirement of notice or lapse of time or both) under any document, agreement or other instrument to which either Search or Newco is a party, or result in the creation or imposition of any lien, charge or encumbrance on any of Search's or Newco's properties pursuant to (y) any Law to which either Search or Newco or any of their respective property is subject, or (z) any judgment, order or decree to which Search or Newco is bound or any of their respective property is subject, other than such as would not individually or in the aggregate have a Search Material Adverse Effect; (iii) result in termination of, or give to any other Person any right of termination, amendment, acceleration or cancellation with respect to any permit, license, franchise, contractual right or other authorization of Search or Newco material to Search and its Subsidiaries, taken as a whole; or (iv) violate any Law to which Search or Newco is subject or by which any assets of Search or Newco are bound or affected the violation of which would have a Search Material Adverse Effect. (b) The execution and delivery of this Agreement by Search and Newco do not, and the performance of this Agreement by Search and Newco will not, require any consent, approval, authorization or permission of, or filing with or notification to, any Governmental Authority except (i) for applicable requirements, if any, of the Exchange Act, the Securities Act, and Blue Sky Laws, and filing and recordation of the Certificate of Merger with the Secretary as required by the Delaware Statutes (ii) such notice as is necessary to comply with HSR and (iii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay consummation of the Merger, or otherwise prevent Search or Newco from performing its obligations under this Agreement. 4.4. Permits and Intangibles. Search and Newco own or hold all Search Material Permits. The Search Material Permits are valid, and neither Search nor Newco has received any notice that any Governmental Authority intends to modify, suspend, cancel, terminate or not renew any Search Material Permit. Except as disclosed on Schedule 4.4, neither Search nor Newco is in conflict with, or in default or violation of, (i) any Law applicable to Search or Newco or by which any property or asset of Search or Newco is bound or affected, (ii) any of the Search Material Permits or (iii) any note, bond, mortgage, indenture, contract, agreement, lease, or other instrument or obligation to which Search or Newco is a party or by which Search or Newco or any property or asset of Search or Newco is bound or affected except as would not have a Search Material Adverse Effect. The Transactions will not result in a default under, or a breach or violation of, or adversely affect the rights and benefits afforded to Search or Newco by, any Search Material Permit. 4.5. Capitalization of Search and Ownership of Search Stock. (a) The authorized capital stock of Search consists of 130,000,000 shares of Search Common Stock and 60,000,000 shares of Preferred Stock. 3,181,861 shares of Search Common Stock, 50,000 shares of 12% Senior Convertible Preferred Stock and 2,456,098 shares of 9%/7% Convertible Preferred Stock were outstanding on January 31, 1997. At that date, warrants and options to purchase 751,649 shares of Search Common Stock were outstanding and Search was obligated to issue an additional 146,381 shares of Search Common Stock and Search had committed to issue warrants and options to purchase an additional 817,500 shares of Search Common Stock. A total of 7,968,294 shares of Search Common Stock were reserved for issuance upon conversion of the outstanding shares of 12% Senior Convertible Preferred Stock and 9%/7% Convertible Preferred Stock. The authorized capital stock of Newco consists of 1,000 shares of Common Stock, all of which are outstanding and outstanding owned beneficially and of record by Search. 21 128 All of the issued and outstanding shares of the capital stock of Search and Newco have been duly authorized and validly issued, are fully paid and nonassessable and not subject to preemptive rights. All of the issued and outstanding shares of the capital stock of Search and Newco were offered, issued, sold and delivered by Search or Newco, as the case may be, in compliance with all applicable state and federal laws concerning the issuance, offer and sale of securities. Further, none of such shares was issued in violation of any preemptive rights. (b) The shares of Search Common Stock to be issued pursuant to the Merger will be duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, the Search Charter Documents or any agreement to which Search is a party or by which Search is bound and will, when issued, be registered under the Securities Act, the Exchange Act and applicable Blue Sky Laws, unless exempt therefrom. 4.6. SEC Filings; Financial Statements. (a) Search has filed all Search SEC Reports. The Search SEC Reports (i) were prepared in all material respects in accordance with the requirements of the Securities Act and the Exchange Act, as the case may be, and the rules and regulations thereunder and (ii) did not, at the time they were filed (or at the effective date thereof in the case of registration statements), contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. No Subsidiary of Search is currently required to file any form, report or other document with the SEC under Section 12 of the Exchange Act. (b) The information supplied by Search for inclusion in the Registration Statement and the Proxy Statement shall not, at (i) the time the Registration Statement is declared effective, (ii) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of Search and MS Financial, (iii) the time of the MS Financial Stockholders Meeting or the Search Stockholders Meeting, and (iv) the Effective Time, contain any statement which, at such time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading or necessary to correct any statements in any earlier communication with respect to the solicitation of proxies for the MS Financial Stockholders Meeting and the Search Stockholders Meeting which shall have become false or misleading. If at any time prior to the Effective Time any event or circumstance relating to Search or any Search Subsidiary, or their respective officers or directors, should be discovered by Search which should be set forth in an amendment or a supplement to the Registration Statement or Proxy Statement, Search shall promptly inform MS Financial. Notwithstanding the foregoing, Search and Newco make no representation or warranty with respect to any information supplied by MS Financial, the Stockholders, or any of their representatives which is contained in the Proxy Statement. All documents that Search is responsible for filing with the SEC in connection with the Transactions will comply as to form and substance in all material aspects with the applicable requirements of the Securities Act and the rules and regulations promulgated thereunder and the Exchange Act and the rules and regulations promulgated thereunder. (c) Search has heretofore furnished to MS Financial complete and correct copies of all amendments and modifications (if any) that have not been filed by Search with the SEC to all agreements, documents and instruments previously filed by Search as exhibits to the Search SEC Reports and currently in effect as of the date of this Agreement. (d) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Search SEC Report for the transition period ended March 31, 1996 and the unaudited consolidated financial statements of Search and its consolidated Subsidiaries for the six months ended September 30, 1996 were prepared in accordance with GAAP (except as may be indicated in the notes thereto and except that financial statements included with interim reports do not contain all GAAP notes to such financial statements) and each fairly presented in all material respects the consolidated financial positions, results of operations and changes in stockholders' equity and cash flows of Search and the 22 129 consolidated Subsidiaries as at the respective dates thereof and for the respective periods indicated therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments which were not and are not expected, individually or in the aggregate, to have a Search Material Adverse Effect). Since September 30, 1996, there have been no material changes in Search's accounting policies. (e) Except for the transactions described in Schedule 4.6(e), all transactions involving Search or any of its subsidiaries that are required to be disclosed in the Search SEC Reports in accordance with Item 404 of Regulation S-K promulgated under the Securities Act have been so disclosed, and between September 30, 1996 and the date of this Agreement, neither Search nor any of its subsidiaries has entered into any transactions that would be required to be disclosed in future public filings under the Exchange Act pursuant to such Item which have not already been disclosed in the Search SEC Reports filed prior to the date hereof. 4.7. Absence of Certain Changes or Events. Since September 30, 1996 and prior to the date of this Agreement, except (a) as contemplated by, or disclosed pursuant to, this Agreement or any Schedule to this Agreement, (b) disclosed by Search to MS Financial in writing on the date hereof, or (c) disclosed in any Search SEC Report, Search and its subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and, since September 30, 1996, there has not been (i) any event or events (whether or not covered by insurance), individually or in the aggregate, having a Search Material Adverse Effect other than changes or effects affecting the non-prime automobile finance industry generally, (ii) any material change by Search in its accounting methods, principles or practices, or (iii) any entry by Search or any Search Subsidiary into any commitment or Transaction material to Search or the Search Subsidiaries, except in the ordinary course of business and consistent with past practice. 4.8. Conformity with Law; Litigation. (a) Search and Newco have not violated any Law or any Order of any Governmental Authority having jurisdiction over either of them other than violations which would not have a Search Material Adverse Effect. (b) Except as disclosed in any Search SEC Report, there are no claims, counterclaims, actions, suits, investigations or other proceedings, pending or, to the best of Search's and Newco's knowledge, threatened, against or affecting Search or Newco, or seeking to delay or prevent consummation of the Merger, at law or in equity, or before or by any arbitrator or any Governmental Authority having jurisdiction over either of them and no notice of any such claim, counterclaim, action, suit or proceeding, whether pending or threatened, has been received by either of them. Except as disclosed in any Search SEC Report, there are no judgments, orders, injunctions, decrees, stipulations or awards (whether rendered by a Governmental Authority or by arbitration) against Search or Newco or against any of either of their properties or businesses having a Search Material Adverse Effect. 4.9. Ownership of Newco; No Prior Activities. (a) Newco was formed solely for the purpose of engaging in the Transactions. (b) As of the date hereof and the Effective Time, except for obligations or liabilities incurred in connection with its incorporation or organization and the Transactions and except for this Agreement and any other agreements or arrangements, contemplated by this Agreement, Newco has not and will not have incurred, directly or indirectly, through any subsidiary or Affiliate, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any Person. 4.10. Vote Required. The affirmative vote of the holders of a majority of the outstanding shares of Search Common Stock and Preferred Stock voted is the only vote, if any, of the holders of any class or series of capital stock of Search necessary to approve the issuance of shares of Search Common Stock to the stockholders of MS Financial pursuant to the Merger. 23 130 4.11. Brokers. No broker, finder or investment banker (other than Alex. Brown & Sons Incorporated and Tri-River Capital Group) is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of Search or Newco. 4.12. Transactions in Capital Stock. Except as set forth in Section 4.5(a), the Search SEC Reports and, as contemplated by this Agreement, as of the date of this Agreement, no option, warrant, call, subscription right, conversion right or other contract or commitment of any kind exists of any character, written or oral, which may obligate Search to issue or sell any shares of capital stock or other equity interests. Except as set forth in the Search SEC Reports filed prior to the date of this Agreement or in Schedule 4.12, neither Search nor Newco has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. 4.13. Disclosure. No representation or warranty by Search or Newco contained in this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary to make any statement herein or therein not misleading. 4.14. Complete Copies of Materials. Except as set forth in Schedule 4.14, Search and Newco have made available to MS Financial true and complete copies (or summaries) of each agreement, contract, commitment or other document which pertains to Search or Newco, or to which Search or Newco is a party, and which is referred to in the Closing Checklist or in the Schedules, or that has been requested in writing by MS Financial or its counsel. 4.15. Hart-Scott-Rodino Filing. Search and Newco will file any and all documentation, notices and responses, and will cooperate with MS Financial with respect to any and all filings, notices and responses to Governmental Authorities necessary to comply with HSR or required by Law and to obtain the pre-clearance for the Merger to be effectuated. 4.16. Review of Company. Without in any way affecting the importance, scope or effectiveness of, or impacting its reliance on, any other provision of this Agreement, and without acknowledging the accuracy or completeness of any materials provided to it, Search acknowledges that it has had a full opportunity to request from the Company, all information concerning the Company that Search deems relevant to its decision to enter into this Agreement and to consummate the Transactions and that it has reviewed such information as has been provided to it. 4.17. Taxes. (a) Search and Newco have timely filed or will timely file all requisite Returns for all periods ended on or before the Effective Time. (b) There are no examinations in progress or claims against Search or Newco for Taxes for any period or periods and no notice of any claim for Taxes, whether pending or threatened, has been received. (c) The amounts shown as accruals for Taxes on Search's current balance sheet are sufficient for the payment of all Taxes, whenever determined, for all fiscal periods ended on or before that date. (d) Search has a taxable year ending on March 31 in each year. (e) Search and Newco currently use the accrual method of accounting for income tax purposes and such method of accounting has not changed in the past five years. (f) Search and Newco have paid or have fully accrued for all Taxes and will have withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other taxes required to be withheld, whenever determined, with respect to periods ending on or before the Closing Date. (g) Copies of (i) any Tax examinations and (ii) extensions of statutory limitations for the collection or assessment of Taxes are included as part of Schedule 4.17. 24 131 (h) There are (and as of immediately following the Closing there will be) no liens, pledges, charges, claims, security interests or other encumbrances of any sort ("Liens") on the assets of Search or Newco relating to or attributable to Taxes (excluding current year property or ad valorem taxes). (i) None of Search's or Newco's assets are treated as "tax exempt use property" within the meaning of Section 168(h) of the Code. (j) Search and Newco have not filed any consent agreement under Section 341(f)(2) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by Search or Newco. (k) Neither Search nor Newco is or has been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code. (l) Search's tax basis in its assets for purposes of determining its future amortization, depreciation and other federal income tax deductions is accurately reflected on Search's tax books and records. (m) Neither Search nor Newco has taken or agreed to take any action that would prevent the Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. 5. COVENANTS. 5.1. Access to Information; Confidentiality. (a) Between the date of this Agreement and the Effective Time, Search and MS Financial will, and each will direct its Subsidiaries to, afford to the other and its officers and authorized representatives access to (i) all of their sites, properties, books and records, including, without limitation, in the case of MS Financial, the records of the Securitization Trusts, and (ii) such additional financial and operating data and other information as to their respective businesses and properties as each may from time to time reasonably request, including but not limited to verification of the other party's compliance with all of the terms and conditions of this Agreement and access to employees, customers and vendors for due diligence inquiry. Each of Search and MS Financial will cooperate and will direct its Subsidiaries to cooperate with the other and its representatives in the preparation of any documents or other material which may be required in connection with this Agreement. The representations, warranties, covenants and obligations as set forth in this Agreement shall not be affected or modified in any manner whatsoever by any due diligence inquiry. In addition, any due diligence inquiry shall not be a defense to any breach of any of the representations, warranties, covenants or obligations contained herein. (b) Each of the Company, on the one hand, and Search and Newco on the other hand, agrees that it will not disclose any confidential or proprietary information which it obtains or acquires regarding the other or its Subsidiary to any Person, firm, corporation, association or other entity for any purpose or reason whatsoever, except to authorized employees or other authorized representatives of the respective parties and to counsel, lenders, secured creditors, underwriters, investment bankers and other advisers; provided, that such advisors agree to the confidentiality provisions of this Section 5.1(b), subject to Section 5.1(c) below. (c) The confidentiality obligations of a party hereto shall be terminated regarding any confidential or proprietary information obtained or acquired if (i) such information becomes known to the public generally through no fault of the receiving party, (ii) disclosure is required by Law or the order of any Governmental Authority under color of Law, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party; provided, that prior to disclosing any information pursuant to clause (i), (ii) or (iii) above, such party shall, if possible, give prior written notice thereof to the other party and provide the other party with the opportunity to contest such disclosure. 25 132 5.2. Conduct of Business by MS Financial. Subject to the limitations of that certain budget approved pursuant to the Bank Loan Term Sheet, between the date hereof and the Effective Time, unless otherwise contemplated by this Agreement, including, without limitation, the provisions of Section 5.16, or agreed to by Search in writing, MS Financial will, and will cause its Subsidiary, to: (a) carry on their respective businesses only in the ordinary course of business consistent with past practice as was in effect between July 1, 1996 and December 31, 1996 and not introduce any new method of management, operation or accounting; (b) use all commercially reasonable efforts to preserve substantially intact its business organization, to keep available the services of its current officers, management and marketing employees and to preserve its current relationships with dealers, suppliers, lenders, and other Persons with which any of them has a significant business relationship; (c) maintain their respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (d) perform in a timely manner all of their obligations under this Agreement and the Related Documents to which they are a party and all other material agreements relating to or affecting any of their respective assets, the failure of which to perform would, when aggregated with all other agreements not performed, have a Company Material Adverse Effect. (e) keep in full force and effect present insurance policies or other comparable insurance coverage; (f) use all commercially reasonable efforts to maintain and preserve the goodwill associated with their respective businesses, and their respective relationships with customers and others having business relations with them; (g) maintain compliance with all Material Permits and Laws; (h) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments; and (i) inform Search immediately if any event occurs that may have a Company Material Adverse Effect. 5.3. Prohibited Activities. Without the prior written consent of Search, between the date hereof and the Effective Time, MS Financial will not, and will cause its Subsidiary not to: (a) amend any of the MS Charter Documents; (b) (i) declare or pay any dividend, or make any other distribution (whether in cash, stock or property) in respect of any of their respective stock whether now or hereafter outstanding, (ii) split, combine or reclassify any of their respective capital stock, (iii) issue or authorize the issuance of any shares of capital stock, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including, without limitation, any phantom interest), or (iv) purchase, redeem or otherwise acquire or retire for value any shares of their respective stock (including without limitation the right to acquire any shares and any phantom interest), except that MS Financial may issue shares of MS Financial Stock pursuant to Company Options outstanding on the date of this Agreement and pursuant to the MS Financial Employee Stock Purchase Plan; (MS Financial acknowledges that any such a prohibited occurrence which relates to the distribution of MS Financial stock could affect Search's compliance with the relevant securities laws in the distribution of the Search Common Stock); (c) incur or agree to incur any indebtedness other than under the MS Loan Agreement or make any capital expenditures in excess of $5,000 in the aggregate other than those listed in Schedule 5.3(c), 26 133 enter into any other contract or commitment involving an expenditure in excess of $5,000 (other than to purchase Finance Contracts), or guarantee any indebtedness of a third party; (d) except in the ordinary course of business consistent with past practice, (i) increase the compensation payable or to become payable to any officer, director, stockholder, employee or agent, (ii) make any bonus or management fee payment to any such Person, (iii) make any loans or advances to any Person other than travel or entertainment advances in the ordinary course of business to employees and directors, (iv) adopt or amend any employee benefit plan, (v) grant, or enter into any agreement providing for, any severance or termination pay or (vi) in any other manner increase the compensation payable, or fringe benefits provided, to any of the aforesaid Persons; (e) directly or indirectly make or cause to be made any payment to an Affiliate other than in accordance with existing agreements and then only in accordance with past practices or enter into any new agreement with any Affiliate; (f) create or assume any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired except pursuant to the MS Financial Debt in the ordinary course of business; (g) sell, assign, lease, pledge or otherwise transfer or dispose of any property or equipment, except in the ordinary course of business consistent with past practice; (h) acquire or negotiate for the acquisition of (by merger, consolidation, purchase of a substantial portion of assets or otherwise) any business or the start-up of any new business, or otherwise acquire or agree to acquire any assets that are material, individually or in the aggregate, to MS Financial and its Subsidiary taken as a whole; (i) merge or consolidate or agree to merge or consolidate with or into any other corporation; (j) waive any material rights or claims ; (k) commit a breach (or take any action that with notice or the passage of time, or both, would cause a breach) of, or amend or terminate, any agreement, permit, license or other right; (l) enter into (i) any material contracts or (ii) any other transaction outside the ordinary course of business consistent with past practice or prohibited hereunder; (m) either (i) commence a lawsuit other than for routine collection of Finance Contracts or (ii) settle or compromise any pending or threatened litigation which would result in a Company Material Adverse Effect; (n) take, or agree (in writing or otherwise) to take, any of the actions described in Sections 5.3(a) through (m) above, or any action which would make any of the representations and warranties of MS Financial contained in this Agreement untrue and result in a Company Material Adverse Effect. (o) If MS Financial wishes to take any action otherwise prohibited by paragraphs (a) through (n) of this Section 5.3, it must notify Search in writing as provided for in Section 7.9 of its intended prohibited action, provide Search with a justification for the taking of such action and request Search's consent to such prohibited action. Search shall have two business days from receipt of such notice and information it may reasonably request regarding such prohibited action to consent to or deny such request. If Search does not respond to MS Financial's request by the end of said time period, Search shall be deemed to have consented to such action. 5.4. No Solicitation of Transactions. Neither MS Financial, nor its Subsidiary shall, directly or indirectly, through any officer, director, employee, agent or otherwise, solicit, initiate or encourage the submission of any proposal or offer from any Person relating to any acquisition or purchase of all or any material portion of the 27 134 assets of, or any equity interest in, MS Financial, Subsidiary of MS Financial or any Securitization Trust, or any merger, consolidation, share exchange, business combination or other similar transaction with MS Financial, the Subsidiary of MS Financial or any Securitization Trust, or participate in any negotiations or discussions regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing; provided, however, that nothing contained in this Section 5.4 shall prohibit the Board of Directors of MS Financial from authorizing MS Financial or the Board's other designees to review, or to furnish information to, or entering into discussions or negotiations with, any Person in connection with an unsolicited proposal in writing by such Person to acquire MS Financial pursuant to a merger, consolidation, share exchange, business combination or other similar transaction or to acquire all or substantially all of the assets of MS Financial or any of its Subsidiaries received by the Board of Directors of MS Financial after the date of this Agreement, if, and only to the extent that, (a) the Board of Directors of MS Financial, after consultation with its independent legal and financial advisors and taking into consideration the advice of such advisors, determines in good faith that such action is required for the Board of Directors of MS Financial to comply with its fiduciary duties to stockholders imposed by Delaware Law and (b) prior to furnishing such information to, or entering into discussions or negotiations with, such Person, MS Financial (i) gives Search as promptly as practicable prior oral and written notice of MS Financial's intention to furnish such information or begin such discussions and (ii) receives from such Person an executed confidentiality agreement on terms no less favorable to MS Financial than those contained in the Confidentiality Agreement between Search and MS Financial dated October 15, 1996. MS Financial shall notify Search promptly if any proposal or offer, or any inquiry or contact with any Person with respect thereto, is made and shall, in any such notice to Search, indicate in reasonable detail the terms and conditions of such proposal, offer, inquiry or contact. MS Financial agrees not to release any third party from, or waive any provision of, any confidentiality or standstill agreement to which MS Financial is a party. MS Financial immediately shall cease and cause to be terminated all existing discussions or negotiations with any Persons conducted heretofore with respect to any of the foregoing. 5.5. Notification of Certain Matters. Each party hereto shall give prompt notice to the other parties hereto of (a) the occurrence or non- occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of it contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (b) any material failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such party hereunder. The delivery of any notice pursuant to this Section 5.5 shall not, without the express written consent of the other parties be deemed to (x) modify the representations or warranties hereunder of the party delivering such notice, (y) modify the conditions set forth in Article 6, or (z) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 5.6. Cooperation in Obtaining Required Consents and Approvals. For all consents and approvals which MS Financial is required to obtain pursuant to this Agreement, Search shall cooperate and provide to MS Financial such documentation or other information as MS Financial shall reasonably request. For all consents and approvals which Search is required to obtain pursuant to this Agreement, MS Financial shall cooperate and provide to Search such documentation or other information as Search shall reasonably request. 5.7. Tax Returns. MS Financial shall timely file, and shall cause its Subsidiary to timely file, subject to any permissible extensions, all federal and state income tax returns due before the Effective Time for taxable periods ending on or prior to the Closing and have paid or will pay all Taxes attributable to such periods, subject to any permissible extensions. Such returns will be prepared and filed in accordance with applicable Law and in a manner consistent with past practices and shall be subject to review by Search. 5.8. Registration Statement; Proxy Statement. (a) As promptly as practicable after the execution of this Agreement, Search shall prepare a Registration Statement including therein a combined Proxy Statement and Prospectus, in connection with the registration under the Securities Act of the shares of Search Common Stock to be issued to the stockholders of MS Financial pursuant to the Merger. Search shall send the Registration Statement to MS Financial for MS Financial's review and comment prior to the filing of the Registration Statement and Proxy Statement with the SEC. As promptly as practicable, MS Financial shall review and approve the contents of the Registration Statement and Proxy Statement, as they may be revised, its approval not to be unreasonably withheld or delayed. As promptly as practicable, Search shall file the Registration Statement in the form 28 135 approved by MS Financial with the SEC. Search and MS Financial each shall use all reasonable efforts to cause the Registration Statement to become effective as promptly as practicable, and, prior to the effective date of the Registration Statement, Search shall take all or any action required under any applicable federal or Blue Sky laws in connection with the issuance of shares of Search Common Stock pursuant to the Merger. Each of MS Financial and Search shall pay its own expenses incurred in connection with the Registration Statement, Proxy Statement, MS Financial Stockholders Meeting and Search Stockholders Meeting, including, without limitation, the fees and disbursements of their respective counsel, accountants and other representatives, except that MS Financial and Search each shall pay one-half of any printing, filing and other fees and expenses incurred in connection with the Registration Statement. MS Financial shall furnish all information concerning MS Financial and the Stockholders as Search may reasonably request in connection with such actions and the preparation of the Registration Statement and Proxy Statement. As promptly as practicable after the Registration Statement shall have become effective, Search, if required, and MS Financial shall mail the Proxy Statement to their respective stockholders. The Proxy Statement shall include the recommendations of the Boards of Directors of Search, if required, and MS Financial in favor of the Merger, unless otherwise prohibited by the applicable fiduciary duties of such directors, as determined by such directors in good faith after consultation with and duly considering the written advice of independent legal counsel, subject to Section 5.4. (b) No amendment or supplement to the Proxy Statement or the Registration Statement will be made by Search or MS Financial without the approval of the other, which shall not be unreasonably withheld. Search and MS Financial each will advise the other, promptly after it receives notice thereof, of the time when the Registration Statement has become effective or any supplement or amendment has been filed, the issuance of any stop order, the suspension of the qualification of the Search Common Stock issuable in connection with the Merger for offering or sale in any jurisdiction, or any request by the SEC for amendment of the Proxy Statement or the Registration Statement or comments thereon and responses thereto or requests by the SEC for additional information. (c) Search shall promptly prepare and submit to the NASD an application for quotation of the shares of Search Common Stock issuable in the Merger on NASDAQ, and shall use its reasonable best efforts to obtain, prior to the Effective Time, approval for the quotation of such Search Common Stock on NASDAQ, subject to official notice of issuance. MS Financial shall cooperate with Search with respect to such application. (d) MS Financial, Search and Newco each hereby (i) consents to the use of its name and, on behalf of its Subsidiaries and Affiliates, the names of such Subsidiaries and Affiliates and to the inclusion of financial statements and business information relating to such party and its Subsidiary and Affiliates (in each case, to the extent required by applicable securities laws) in the Registration Statement and the Proxy Statement, (ii) agrees to use all reasonable efforts to obtain the written consent of any Person or entity retained by it which may be required to be named (as an expert or otherwise) in the Registration Statement or the Proxy Statement, and (iii) agrees to reasonably cooperate, and agrees to use all reasonable efforts to cause its Subsidiary and Affiliates to reasonably cooperate, with any legal counsel, investment banker, accountant or other agent or representative retained by any of the parties specified in clause (i) above in connection with the preparation of any and all information required, as determined after consultation with each party's counsel, to be disclosed by applicable securities laws in the Registration Statement or the Proxy Statement. 5.9. Stockholders Meetings. MS Financial shall call and hold a meeting of its stockholders (the "MS Financial Stockholders Meeting") as promptly as practicable for the purpose of voting upon the adoption of this Agreement. If required by the rules of the NASD, Search shall call and hold a meeting of its stockholders (the "Search Stockholders Meeting") as promptly as practicable for the purpose of voting upon the approval of the issuance of additional shares of Search Common Stock pursuant to the Merger. MS Financial and Search shall use all reasonable efforts to hold the respective MS Financial Stockholders Meeting and Search Stockholders Meeting on the same day and as soon as practicable after the date on which the Registration Statement becomes effective. MS Financial and Search shall use all reasonable efforts to solicit from their respective stockholders proxies in favor of the adoption of this Agreement in the case of MS Financial, and in favor of the issuance of additional shares of Search Common Stock pursuant to the Merger in the case of Search, and shall take all other action reasonably necessary or 29 136 advisable to secure the vote or consent of stockholders required by the Delaware Statutes to obtain such approvals (including unanimously recommending such approval), unless otherwise necessary and mandatory under the applicable fiduciary duties of the directors of MS Financial or Search, as determined by such directors in good faith under applicable Law after consultation with and duly considering the written advice of independent legal counsel, subject to Section 5.4. 5.10. Appropriate Action; Consents; Filings. (a) MS Financial and Search shall use their best reasonable efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law or required to be taken by any Governmental Authority or otherwise to consummate and make effective the Transactions as promptly as practicable, (ii) obtain from any Governmental Authority any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Search or MS Financial or any of their Subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the Transactions, including, without limitation, the Merger, and (iii) as promptly as practicable, make all necessary filings, and thereafter make any other required submissions and responses to inquiries as promptly as possible, with respect to this Agreement and the Merger required under or by (A) the Securities Act and the Exchange Act, and any other applicable federal securities or Blue Sky Laws, (B) the rules and regulations of the NASD, (C) the Delaware Statutes, (D) HSR and the Federal Trade Commission and the Antitrust Division of the Department of Justice, and (E) any other applicable Law or Governmental Authority; provided, that Search and MS Financial shall cooperate with each other in connection with the making of all such filings and responses, including providing copies of all such documents to the non-filing party and its advisors prior to filing or responding to inquiries and, if requested, accepting all reasonable additions, deletions or changes suggested in connection therewith. MS Financial and Search shall use reasonable best efforts to furnish to each other all information required for any application or other filing to be made pursuant to any applicable Law (including all information required to be included in the Proxy Statement and the Registration Statement) in connection with the Transactions. (b) Each of Search and MS Financial shall give (or shall cause their respective Subsidiaries to give) any notices to third parties, and use, and cause their respective subsidiaries to use, their reasonable best efforts to obtain any third party consents, (i) necessary to consummate the Transactions, (ii) disclosed or required to be disclosed in the Schedules hereto, or (iii) required to prevent a Company Material Adverse Effect or a Search Material Adverse Effect from occurring prior to or after the Effective Time. (c) In the event that Search or MS Financial shall fail to obtain any third party consent described in subsection (b) above, it shall use all reasonable efforts, and shall take any such actions reasonably requested by the other party, to minimize any adverse effect upon MS Financial and Search, their respective Subsidiaries, their respective stockholders, and their respective businesses resulting, or which could reasonably be expected to result after the Effective Time, from the failure to obtain such consent. (d) From the date of this Agreement until the Effective Time, each party shall promptly notify the other parties of any pending, or to the best knowledge of the first party, threatened, action, proceeding or investigation by or before any Governmental Authority or any other Person (i) challenging or seeking material damages in connection with the Merger or the conversion of MS Financial Stock into Search Common Stock pursuant to the Merger or (ii) seeking to restrain or prohibit the consummation of the Merger or otherwise limit the right of Search or, the knowledge of such first party, Newco or any other Search Subsidiary to own or operate all or any portion of the businesses or assets of MS Financial or its Subsidiary, which in either case is reasonably likely to have a Company Material Adverse Effect prior to the Effective Time, or a Search Material Adverse Effect (including the Surviving Corporation) after the Effective Time. 5.11. Obligations of Newco. Search shall take all action necessary to cause Newco to perform its agreements, covenants, and obligations under this Agreement and to consummate the Merger on the terms and subject to conditions set forth in this Agreement. This obligation of Search shall terminate at the Effective Time. 30 137 5.12. Public Announcements. Search and MS Financial shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or the Transactions and shall not issue any such press release or make any such public statement prior to such consultation. The parties have agreed on the text of a joint press release by which Search and MS Financial will announce the execution of this Agreement. 5.13. Delivery of SEC Documents. Each of MS Financial and Search shall promptly deliver to the other true and correct copies of any report, statement or schedule filed by it with the SEC subsequent to the date of this Agreement. 5.14. Further Action. At any time before or after the Effective Time, and from time to time, each party to this Agreement agrees, subject to the terms and conditions of this Agreement, to take such actions and to execute and deliver such documents as may be necessary to effectuate the purposes of this Agreement at the earliest practicable time. 5.15. Indemnification. (a) The Certificate of Incorporation of the Surviving Corporation and its Subsidiary shall contain provisions that acknowledge and agree that the provisions relating to limitation on liability that are set forth in the MS Charter Documents as of the date of this Agreement shall remain effective for a period of four years from the Effective Time with respect to individuals who at any time prior to the Effective Time were directors, officers, employees, fiduciaries or agents of MS Financial or any of its Subsidiaries in respect of actions or omissions occurring at or prior to the Effective Time, including, without limitation, the Transactions, and the Surviving Corporation shall not amend (in any manner that would materially diminish the effect of such provisions) or repeal such provisions for a period of four years from the Effective Time. (b) The Surviving Corporation shall use reasonable efforts to maintain in effect for three years from the Effective Time the current directors' and officers' liability insurance coverage listed, and identified as such, in Schedule 5.15(b) (provided, that the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are not materially less advantageous to such officers and directors) with respect to individuals who at any time prior to the Effective Time were directors, officers, employees, fiduciaries or agents of MS Financial in respect of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the matters contemplated by this Agreement); provided, however, that in no event shall the Surviving Corporation be required to expend pursuant to this Section 5.15(b) more than $332,500 in the aggregate, including any amounts paid prior to the Effective Time by MS Financial, for such coverage. (c) If the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person other than in the ordinary course of business or as part of a securitization transaction, then, and in each such case, proper provision shall be made so that the successors and assigns of the Surviving Corporation, or at Search's option, Search, shall assume the obligations of the Surviving Corporation set forth in this Section 5.15. (d) The Certificate of Incorporation and Bylaws of the Surviving Corporation shall contain provisions with respect to indemnification and advancement of expenses no less favorable than those that are set forth in the MS Charter Documents as of the date of this Agreement, which provisions shall not be amended, repealed or modified in any manner that would diminish their effect, for a period of three years from the Effective Time for all matters other than the Proxy Statement described in Section 5.8 above, and for a period of four years from the Effective Time with respect to said Proxy Statement, with respect to individuals who at any time prior to the Effective Time were directors, officers, employees, fiduciaries or agents of MS Financial in respect of actions or omissions occurring at or prior to the Effective Time (including, without limitation, the matters contemplated by this Agreement). (e) The obligations of the Surviving Corporation under this Section 5.15 shall not be terminated or modified in such a manner as to adversely affect any director, officer, employee, fiduciary or 31 138 agent to whom this Section 5.15 applies without the consent of each affected director, officer, employee, fiduciary and agent (it being expressly agreed that the directors, officers, employees, fiduciaries and agents to whom this Section 5.15 applies shall be third-party beneficiaries of this Section 5.15). (f) Notwithstanding the foregoing, any obligation of the Surviving Corporation relating to indemnification shall be subject to such liability first being satisfied out of the directors' and officers' liability insurance coverage referred to in Section 5.15(b) and second any Merger Consideration held in escrow pursuant to the Stockholders Agreement dated of even date herewith between the Stockholders and Search (the "Stockholders Agreement"), if applicable, and third, and then only to the extent that the insurance does not fully cover such liability, shall the Surviving Corporation be responsible for such indemnification obligations. 5.16. Operations. Between the date hereof and the Effective Time, subject to the fiduciary duties of MS Financial's Board of Directors, MS Financial will use its best efforts to conduct its business utilizing its current personnel and current operating policies and procedures subject to the following provisions: (a) Beginning at the first to occur of either the expiration or termination of the HSR waiting period, or, if an HSR filing is not required, the execution of this Agreement, MS Financial shall cause its President to consult with Search's President and Chief Executive Officer or Senior Executive Vice President - Operations Director on a daily basis regarding the Company's day-to-day operations, including, without limitation, implementation of such marketing, servicing, collection and administrative policies, procedures and programs as such officers of Search shall approve, and take any and all suggestions into account with respect the operations of MS Financial and its Subsidiary. Except with regard to matters provided for in subsections (b), and (d) below, MS Financial shall not be required to implement any suggestion made by Search's personnel, but agrees to take such suggestions into account with respect to the Company's operations. In addition, MS Financial agrees to permit Search's President and Chief Executive Officer, its Senior Executive Vice President - Operations Director, its Executive Vice President - Operations and its Executive Vice President - Marketing access to MS Financial and its Subsidiary and to the operations of MS Financial and its Subsidiary in order to observe and participate in the day-to-day operations of MS Financial and its Subsidiary. (b) No Finance Contracts will be purchased by MS Financial or its Subsidiary unless such Finance Contracts meet Search's underwriting criteria, a copy of which is included in Schedule 5.16, or are otherwise approved by either the President and Chief Executive Officer or the Senior Executive Vice President - Operations Director of Search. Search shall cause its Subsidiary, Search Funding Corp., to abide by the letter agreement contained in Schedule 5.16, pursuant to which it agrees to purchase Finance Contracts that meet Search's underwriting criteria from MS Financial. (c) MS Financial will allow Search to monitor and evaluate MS Financial's collection activities, policies and procedures. Beginning at the first to occur of either the expiration or termination of the HSR waiting period, or, if an HSR filing is not required, the execution of this Agreement, MS Financial agrees to implement those collection policies, procedures and practices as shall be agreed upon by MS Financial's President and either the President and Chief Executive Officer or Senior Executive Vice President - Operations Director of Search and to take any and all suggestions into account with respect to the operations of MS Financial and its Subsidiary. Such individuals will cause an analysis of Finance Contracts owned by MS Financial to be conducted to determine the amount of any additional reserves or charge- offs to be recognized prior to the Effective Time. (d) MS Financial agrees not to change any existing policies or procedures and not to implement any new policies or procedures without the prior written approval of Search's President and Chief Executive Officer or Senior Executive Vice President - Operations Director. (e) Day-to-day operations and operating policies and procedures will be the responsibility of MS Financial's President. No salary or other compensation increases other than pursuant to Section 5.3(d) or employee terminations will be made by MS Financial without the approval of MS Financial's President, 32 139 who will first consult with the President and Chief Executive Officer or the Senior Executive Vice President - Operations Director of Search. (f) For Search's assistance as set forth in this Section 5.16, MS Financial shall pay Search $100,000 per month, payable on or before the first business day of each month. This fee shall be included in Search's Expenses unless previously paid. Any payments made pursuant to this Section 5.16(f) shall be credited against the Search Fee and shall not be taken into account when making the calculations required by Section 1.2(g). The fee shall be pro rated for the month in which this Agreement is executed and shall be payable with respect to that month within three business days of the date of this Agreement; and a similar pro ration for the month in which this Agreement is terminated shall be made and any excess portion shall be credited to the Search Fee and/or Search's Expenses, or refunded to the Company by Search if no Search Fee or Expenses are payable pursuant to the terms of Article 7 below. 5.17. Tax Reorganization. After the date of this Agreement, Search will not, prior to the Effective Time, and will not permit the Surviving Corporation after the Effective Time, to take any action inconsistent with the guidelines provided to Search by MS Financial prior to the Effective Time, and accepted by Search, acting reasonably, regarding spin-offs and other corporate transactions that might affect the qualification of the Transaction as a reorganization qualifying under the provisions of Section 368(a) of the Code. 5.18. Search Stock. Search shall not, between the date of this Agreement and the Effective Time, change the outstanding shares of Search Common Stock into a different number of shares, or a different class, by reason of any reclassification, recapitalization, split-up, stock dividend, stock combination or exchange of shares without the prior written consent of MS Financial, which consent shall not be unreasonably withheld. 5.19. Directorship. The Board of Directors of Search shall elect James Stuart Jr. to the Board of Directors of Search for a term expiring at the 1999 annual meeting of the stockholders of Search, effective at the Effective Time. 6. CONDITIONS TO THE MERGER. 6.1. Conditions to the Obligations of Each Party. The obligations of MS Financial, Search and Newco to consummate the Merger are subject to the satisfaction of the following conditions: (a) this Agreement and the Transactions shall have been approved and adopted by (i) the affirmative vote of the stockholders of MS Financial in accordance with the Delaware Statutes and MS Financial's Restated Certificate of Incorporation, and (ii) if required by the rules of the NASD, the stockholders of Search in accordance with the Delaware Statutes, Search's Restated Certificate of Incorporation and the rules of the NASD; (b) the Registration Statement shall have been declared effective, no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceeding for that purpose shall have been initiated or threatened by the SEC; (c) no Governmental Authority shall have issued, enacted, promulgated, enforced or entered any order, stay, decree, judgment or injunction (each an "Order") or Law which is in effect and has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger and the other Transactions; (d) the waiting period applicable to the Merger under the HSR Act shall have expired or been terminated; (e) Search and MS Financial each shall have received an opinion of Haynes & Boone, LLP, reasonably satisfactory in form and substance to Search and MS Financial, to the effect that the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, which shall be dated on or about the date that is two business days prior to the date the 33 140 Proxy Statement is first mailed to stockholders of MS Financial and which shall be updated as of the Effective Time; (f) the Stockholders Agreement shall be in full force and effect at the Effective Time; (g) MS Financial shall have delivered to Search, prior to the expiration or termination of the HSR pre-clearance waiting period, a letter identifying all persons who are anticipated to be, at the time of the MS Financial Stockholders Meeting, Affiliates of MS Financial for purposes of Rule 145 under the Securities Act. MS Financial shall have used its best efforts to cause each Person who is identified as an Affiliate in such letter to deliver, on or before the date which is 30 days prior to the Effective Time, a written agreement in connection with restrictions on Affiliates under Rule 145 in substantially the form of Schedule 6.1(g); and (h) on or before February 19, 1997 (i) Search and MS Financial shall have entered into the Bank Loan Term Sheet on terms acceptable to Search and MS Financial and (ii) MS Financial shall receive from the Senior Bank Lenders such Lenders' consent to the provisions of this Agreement and the consummation of the Transactions by MS Financial. A copy of the Bank Loan Term Sheet shall be attached hereto as Exhibit 6.1(h) after the Bank Loan Term Sheet is fully executed. 6.2. Conditions to the Obligations to Search and Newco. The obligations of Search and Newco to consummate the Merger are subject to the satisfaction of, or waiver by Search and Newco, at or before the Closing, of the following further conditions: (a) Representations and Warranties; Performance of Obligations. All of the representations and warranties of MS Financial contained in this Agreement shall be true, correct and complete in all material respects on and as of the Effective Time with the same effect as though such representations and warranties had been made on and as of such time, and all of the terms, covenants, agreements and conditions of this Agreement shall have been complied with, performed or satisfied by MS Financial, in all material respects, (b) No Litigation. No Order issued by any Governmental Authority limiting or restricting the Company's conduct or operation of its businesses following the Merger shall be in effect, nor shall any proceeding brought by a Governmental Authority seeking any such Order be pending. There shall be no action, suit, claim or proceeding of any nature pending, except as set forth on Schedule 3.23, or threatened against Search, Newco or MS Financial or its Subsidiary, their respective properties or any of their officers or directors that could have a Company Material Adverse Effect. (c) Consents and Approvals. All necessary Company Third Party Consents relating to the consummation of the Transactions shall have been obtained. (d) Cold Comfort Letter. Search shall have received from MS Financial "cold comfort" letters of KPMG Peat Marwick L.L.P. of the kind contemplated by the Statement of Auditing Standards with respect to Letters for Underwriters promulgated by the American Institute of Certified Public Accountants (the "AICPA Statement") dated the date on which the Registration Statement shall become effective and the Effective Time, respectively, and addressed to Search, in connection with the procedures undertaken by it with respect to the financial statements of MS Financial and its Subsidiaries contained in the Registration Statement and the other matters contemplated by the AICPA Statement and customarily included in comfort letters relating to transactions similar to the Merger. (e) Bank Financing. MS Financial, Search and MS Financial's lenders shall have entered into the Acquisition Date Amendment Documents, as that term is defined in the Bank Loan Term Sheet included in Schedule 6.2(f), and there shall have been no Event of Default, as such term is defined in the Acquisition Date Amendment Documents. 34 141 (f) Insurance. The current directors' and officers' liability insurance policy maintained by MS Financial shall have been continued on a "tail" basis on terms reasonably acceptable to Search for a period of three years after the Effective Time with respect to matters occurring prior to the Effective Time. 6.3. Conditions to the Obligations of MS Financial. The obligations of MS Financial to effect the Merger are subject to the satisfaction of, or waiver by MS Financial of, the following conditions at or before the Closing: (a) Representations and Warranties; Performance of Obligations. All of the representations and warranties of Search and Newco contained in this Agreement shall be true, correct and complete, so as not to give rise to any Search Material Adverse Effect, on and as of the Effective Time with the same effect as though such representations and warranties had been made on and as of such time, and all of the terms, covenants, agreements and conditions of this Agreement shall have been complied with, performed or satisfied by Search and Newco in all material respects. (b) No Litigation. There shall be no action, suit, claim or proceeding of any nature pending or threatened against Search, Newco or MS Financial or its Subsidiary, their respective properties or any of their officers or directors that could have a Company Material Adverse Effect or a Search Material Adverse Effect, or which would prohibit the Transactions. (c) Consents and Approvals. All necessary Search Third Party Consents relating to the consummation of the Transactions shall have been obtained and made. 7. GENERAL. 7.1. Termination. This Agreement may be terminated, and the Transactions may be abandoned, at any time prior to the Effective Time, notwithstanding any requisite approval and adoption of this Agreement and the Transactions, as follows: (a) by mutual written consent of the Boards of Directors of Search and MS Financial; (b) by either Search or MS Financial if the Effective Time shall not have occurred on or before June 30, 1997; provided, that the right to terminate this Agreement under this Section 7.1(b) shall not be available to any party whose material misrepresentation, breach of warranty or failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by (i) Search if there is or has been a breach, failure to fulfill or default on the part of the Company of any of its representations and warranties contained herein or in the due and timely performance and satisfaction of any of the covenants, agreements or conditions contained herein, such that the conditions set forth in Articles 2 and 6 would not be satisfied, and such default or failure shall not have been cured or shall not reasonably be expected to be cured before the Closing, and (ii) MS Financial if there has been a Search Material Adverse Effect or is or has been a breach, failure to fulfill or default on the part of Search or Newco of any of its representations and warranties contained herein or in the due and timely performance and satisfaction of any of the covenants, agreements or conditions contained herein, such that the conditions set forth in Articles 2 and 6 would not be satisfied, and such default or failure shall not have been cured or shall not reasonably be expected to be cured before the Closing; (d) by either Search or MS Financial if there shall be a final nonappealable order in effect preventing consummation of the Merger, or there shall be any action taken, or any Law or Order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Authority which would make consummation of the Merger illegal (provided, that the right to terminate this Agreement pursuant to this subsection (d) shall not be available to any party which has not complied with its obligations under Sections 5.10, 3.35, 3.36 and 4.14; 35 142 (e) by Search, if (i) the Board of Directors of MS Financial shall have withdrawn, modified or changed its recommendation of this Agreement or the Merger in a manner adverse to Search or shall have resolved to do so, (ii) the Board of Directors of MS Financial shall have recommended to the stockholders of MS Financial any Business Combination Transaction or resolved to do so, or (iii) a tender offer or exchange offer for 50% or more of the outstanding shares of capital stock of MS Financial is commenced, and the Board of Directors of MS Financial shall have failed to recommend against the stockholders of MS Financial tendering their shares in such tender offer or exchange offer; (f) by Search, if Section 262 of the Delaware Statutes is applicable to the Merger and Dissenting Shares represent more than ten percent (10%) of the MS Financial Stock issued and outstanding immediately prior to the Effective Time; (g) by MS Financial, if the Board of Directors of Search shall have withdrawn its recommendation of approval of the issuance of additional shares of Search Common Stock pursuant to the Merger or shall have resolved to do so; (h) by MS Financial, if, in the exercise of its good faith judgment (subject to Section 5.4) as to its fiduciary duties under the Delaware Statutes, the Board of Directors of MS Financial in good faith under applicable Law determines (after consultation with its financial advisers and legal counsel and duly considering the written advice of such legal counsel) that such termination is required by such fiduciary duties by reason of a proposal that either constitutes a Business Combination Transaction or may reasonably be expected to lead to a Business Combination Transaction (a "Business Combination Transaction Proposal"); provided that any termination of this Agreement by MS Financial pursuant to this Section 7.1(h) shall be conditioned on MS Financial paying the full Search Fee required by Section 7.7 hereof; (i) by either Search or MS Financial, if the stockholders of MS Financial or Search shall have failed to approve and adopt this Agreement, the Merger and the Transactions at meetings duly convened therefor; (j) by Search if either MS Financial or its Subsidiary shall have filed a petition for liquidation or re-organization in bankruptcy, or have become the subject of an involuntary bankruptcy petition, which involuntary petition is not rejected by a court having jurisdiction over such proceedings within 30 days of the filing thereof; and (k) by Search if KPMG has not completed its annual audit of the Company and issued its opinion with respect to such audit by March 10, 1997 or such later date to which Search and MS financial may agree. 7.2. Effect of Termination. In the event of the termination of this Agreement pursuant to Section 7.1, this Agreement shall become void and, except as herein provided, there shall be no liability or obligation on the part of any party hereto or its officers, directors or stockholders. Notwithstanding the foregoing sentence, (a) the provisions of this Section 7.2 and Sections 5.1(b) and Article 7 shall remain in full force and effect and survive any termination of this Agreement, and (b) MS Financial as one party, and Search and Newco as one party, shall remain liable to the other for any breach of this Agreement by such party prior to this Agreement's termination. 7.3. Cooperation. MS Financial, and Search and Newco shall each deliver or cause to be delivered to the other at the Closing, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of effectuating this Agreement. 7.4. Successors and Assigns. This Agreement and the rights of the parties hereunder may not be assigned (including by operation of law) without the written consent of all parties. 7.5. Entire Agreement. This Agreement (which includes the Schedules hereto) and the confidentiality agreement dated October 15, 1996 between Search and MS Financial set forth the entire understanding of the parties hereto with respect to the Transactions. It shall not be amended or modified except by a written instrument duly 36 143 executed by each of the parties hereto. Any and all other previous agreements and understandings between or among the parties regarding the subject matter hereof, whether written or oral, are superseded by this Agreement. 7.6. Counterparts. This Agreement may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. This Agreement shall become binding when one or more counterparts taken together shall have been executed and delivered (which deliveries may be by telefax) by the parties. 7.7. Fees and Expenses. (a) MS Financial shall pay Search a fee (the "Search Fee") of Seven Hundred Thousand ($700,000) in immediately available funds, which amount is inclusive of all Expenses, if: (i) this Agreement is terminated pursuant to Section 7.1(e) or (h), in which case the Search Fee will be paid on the business day immediately following such termination; or (ii) this Agreement is terminated pursuant to Section 7.1(i) as a result of the failure of the stockholders of MS Financial to approve the Merger and a Business Combination Transaction Proposal shall have been made prior to such termination, and any Business Combination Transaction involving MS Financial is thereafter consummated within 18 months of such termination, in which case the Search Fee will be paid on the business day immediately following such consummation. (b) Search shall be entitled to receive its Expenses in immediately available funds in the event that this Agreement is terminated either by Search pursuant to Section 7.1(c) or (e) or by MS Financial pursuant to Section 7.1(h). (c) Search shall pay MS Financial a fee (the "MS Financial Fee") of Two Hundred Fifty Thousand Dollars ($250,000) in immediately available funds, which amount is inclusive of all Expenses, if this Agreement is terminated pursuant to Section 7.1(g); provided that nothing in this Section 7.7(c) shall obligate Search to pay any or all of the MS Financial Fee if Search's stockholders do not approve the adoption of this Agreement and the Transactions after Search's Board of Directors has approved the same. (d) No termination of this Agreement pursuant to Section 7.1(c) shall prejudice the ability of a non-breaching party to seek damages from any other party for any breach of this Agreement, including, without limitation, attorneys' fees and the right to pursue any remedy at law or in equity. If Search is required to file suit to seek the Search Fee and it ultimately succeeds on the merits, it shall be entitled to receive (in addition to the Search Fee or any other Expenses) all expenses, including, without limitation, attorneys' fees and expenses, which it has incurred in enforcing its rights under Section 7.2. If MS Financial is required to file suit to seek the MS Financial Fee and it ultimately succeeds on the merits, MS Financial shall be entitled to receive (in addition to the MS Financial Fee) all expenses, including, without limitation, attorneys' fees and expenses, which it has incurred in enforcing its rights under Section 7.2. (e) Except as set forth in this Section 7.7 and Section 5.8(a), all costs and expenses incurred in connection with this Agreement and the Transactions shall be paid by the party incurring such expenses, whether or not any transaction contemplated thereby is consummated. Notwithstanding the foregoing, MS Financial shall pay to or incur Expenses from only those Persons listed on Schedule 7.7(e), provided that such Persons may not include legal counsel to the Stockholders. 7.8. Specific Performance; Remedies. Each party hereto acknowledges that the other parties will be irreparably harmed and that there will be no adequate remedy at law for any violation by any of them of any of the covenants or agreements contained in this Agreement, including without limitation, the confidentiality obligations set forth in Section 5.1(b) and (b). It is accordingly agreed that, in addition to any other remedies which may be available upon the breach of any such covenants or agreements, each party hereto shall have the right to obtain injunctive relief 37 144 to restrain a breach or threatened breach of, or otherwise to obtain specific performance of, the other parties' covenants and agreements contained in this Agreement. 7.9. Notices. Any notice, request, claim, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given if delivered personally or sent by facsimile transmission (with confirmation of receipt), by registered or certified mail, postage prepaid, or by recognized courier service, as follows: If to Search or Newco to: Search Capital Group, Inc. 700 N. Pearl Street Suite 400, L.B. 401 Dallas, Texas 75201-2809 Attention: George C. Evans, Chairman, President & CEO and Ellis Regenbogen, Executive Vice President and General Counsel Facsimile No.: 214-965-6098 With a copy to: Riezman & Blitz, P.C. 120 S. Central, 10th Floor St. Louis, Missouri 63105 Attention: Richard M. Riezman Facsimile No.: 314-727-6458 If to MS Financial: MS Financial, Inc. 715 S. Pear Orchard Road Suite 300 Ridgeland, MS 39157 Attn: Phillip J. Hubbuch, Jr. Facsimile No.: 601-856-1611 With a copy to: Brunini, Grantham, Grover & Hewes, PLLC 1400 Trustmark Building 248 East Capitol Jackson, MS 39201 Attn: Robert D. Drinkwater, Esq. Facsimile No.: 601-960-6902 or to such other address as the Person to whom notice is to be given may have specified in a notice duly given to the sender as provided herein. Such notice, request, claim, demand, waiver, consent, approval or other communication shall be deemed to have been given as of the date so delivered, transmitted by facsimile, mailed or dispatched and, if given by any other means, shall be deemed given only when actually received by the addressees. 7.10. Governing Law. This Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed wholly in that State. 7.11. Severability. If any provision of this Agreement or the application thereof to any Person or circumstances is held invalid or unenforceable in any jurisdiction, the remainder hereof, and the application of such provision to such Person or circumstances in any jurisdiction, shall not be affected thereby, and to this end the provisions of this Agreement shall be severable. 7.12. Absence of Third Party Beneficiary Rights. No provision of this Agreement is intended, nor will be interpreted, to provide or to create any third party beneficiary rights or any other rights of any kind in any client, customer, Affiliate, shareholder, employee, partner of any party hereto or any other Person or entity. 38 145 7.13. Mutual Drafting. This Agreement is the mutual product of the parties hereto, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of each of the parties, and shall not be construed for or against any party hereto. 7.14. Further Representations. Each party to this Agreement acknowledges and represents that it has been represented by its own legal counsel in connection with the Transactions contemplated by this Agreement, with the opportunity to seek advice as to its legal rights from such counsel. Each party further represents that it is being independently advised as to the tax consequences of the Transactions contemplated by this Agreement and is not relying on any representation or statements made by the other party as to such tax consequences. 7.15. Amendment; Waiver. This Agreement may be amended by the parties hereto at any time prior to the Effective Time by execution of an instrument in writing signed on behalf of each of the parties hereto; provided, that after the approval and adoption of this Agreement and the Transactions by the stockholders of MS Financial, no amendment may be made that would reduce the amount or change the type of consideration into which each share of MS Financial Stock shall be converted upon consummation of the Merger. At any time prior to the Effective Time, any party may (a) extend the time for the performance of any obligation of any other party, (b) waive any inaccuracy in the representations and warranties of any other party and (c) waive compliance with any agreement or conditions contained herein. Any extension or waiver by any party of any provision hereto shall be valid only if set forth in an instrument in writing signed on behalf of such party. 7.16. Survival of Certain Clauses. None of the representations, warranties, covenants and indemnities made by MS Financial, Search or Newco in or pursuant to this Agreement or in any document delivered pursuant to this Agreement and the Related Documents shall survive the Effective Time or any termination of this Agreement pursuant to Section 7.1 except as follows: the agreements set forth in Section 5.1(b), 5.15, and Sections 7.2 through 7.16 shall survive the Effective Time and shall remain in effect indefinitely. 8. DEFINITIONS. When a capitalized term is used in this Agreement and such term is not defined elsewhere in this Agreement, such term shall have the meaning ascribed to it pursuant to the following provisions of this Article 8: 8.1. "Acquisition Date Amendment Documents" is defined in Section 6.2(f). 8.2. "Adjusted Decrease in Stockholders' Equity" is defined in Section 1.2(g)(i). 8.3. "Adjusted Per Share Amount" is defined in Section 1.2(g)(ii). 8.4. "Adjusted Stockholders' Equity" is defined in Section 1.2(g). 8.5. "Adjustment Balance Sheet" is defined in Section 1.2(g)(i). 8.6. "Adjustment Income Statement" is defined in Section 1.2(g)(i). 8.7. "Affiliate" means each "Affiliate" or "associate" of the applicable Person (as such terms are defined in Rule 12b-2 under the Exchange Act as of the Effective Time), whether or not such Person is such an Affiliate or Associate as of the Effective Time, and each officer and director of such Person. 8.8. "Agreement" is defined in the preamble. 8.9. "AICPA Statement" is defined in Section 6.2(e). 8.10. "Allowance for Losses" is defined in Section 1.2(g). 8.11. "Balance Sheet Date" is defined in Section 3.10. 8.12. "Bank Loan Term Sheet" means the bank loan term sheet included as Exhibit 6.1(h) hereto. 39 146 8.13. "Benefit Plans" is defined in Section 3.21(a). 8.14. "Blue Sky Laws" means state securities or "blue sky" laws. 8.15. "Business Combination Transaction" means any of the following involving MS Financial or its Subsidiary: (1) any merger, consolidation, share exchange, business combination or other similar transaction (other than the transactions contemplated hereby); (2) any sale, lease, exchanges, transfer or other disposition (other than a pledge or mortgage) of 25% or more of the assets of MS Financial and the Subsidiary, as applicable, taken as a whole, in a single transaction or series of transactions; or (3) the acquisition by a Person or entity or any "group" (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of beneficial ownership of 50% or more of the shares of MS Financial Stock, as applicable, whether by tender offer, exchange offer or otherwise. 8.16. "Business Combination Transaction Proposal" is defined in Section 7.1(h). 8.17. "Car Dealer" means any retail vendor of motor vehicles with which MS Financial or its Subsidiary has an agreement pursuant to which MS Financial or its Subsidiary purchases Finance Contracts from such vendor. 8.18. "Car Dealer Agreement" means any agreement between the Company and a Car Dealer, substantially in the form of Schedule 3.14(l). 8.19. "Car Dealer Assignment" means any assignment substantially in the form of Schedule 3.14(l). 8.20. "Certificate of Merger" is defined in Section 2.1. 8.21. "Company Hazardous Materials Activities" is defined in Section 3.16(b). 8.22. "Certificate" means a stock certificate or certificates which immediately prior to the Effective Time evidenced outstanding shares of MS Financial Stock (other than Dissenting Shares, if any, and shares to be canceled pursuant to Section 1.2(b)). 8.23. "Closing" means a closing held at the offices of Search in Dallas, Texas, or such other place and time as the parties may agree. 8.24. "Closing Checklist" means the list of documents to be delivered or provided in connection with the Transactions, in the form of Schedule 8.24 hereto. 8.25. "Closing Certificate" means the certificates described in sections 2.2(a) and 2.3(a) hereof. 8.26. "Closing Date" shall mean the date upon which the Closing is to occur. 8.27. "Code" means the Internal Revenue Code of 1986, as amended. 8.28. "Company" means MS Financial and its Subsidiary. 8.29. "Company Material Adverse Effect" means any change, effect, or circumstance that is, individually or when taken together with all other changes, effects and circumstances that have occurred prior to the date of determination of the occurrence of the Company Material Adverse Effect, is or is reasonably likely to be material and adverse to the condition (financial or otherwise), operations, properties, results of operations, or business or prospects of MS Financial and its Subsidiary, taken as a whole, or would materially impair the ability of MS Financial and its Subsidiary, taken as a whole, to perform its obligations under this Agreement or impede the consummation of the Transactions. 8.30. "Company Options" means options to acquire MS Financial Stock under the MS Financial Stock Option Plans. 40 147 8.31. "Company Third Party Consents" means all consents of Persons not party to this Agreement required to be obtained by MS Financial to prevent any breach of this Agreement by MS Financial or to consummate the Transactions. 8.32. "Company SEC Reports" means all forms, reports and documents required to be filed by MS Financial with the SEC since January 1, 1995. 8.33. "Controlled Group Member" is defined in Section 3.21(b). 8.34. "Current Balance Sheet" is defined in Section 3.10. 8.35. "Current Income Statement" is defined in Section 3.10. 8.36. "Delaware Statutes" means the Delaware General Corporation Law, as amended. 8.37. "Delinquency Rate Percentage" means, with respect to a calendar month Period, the fraction, expressed as a percentage, equal to the sum of the aggregate outstanding principal balance of Finance Contracts owned and/or serviced by the Company that are past due as of the end of such month for more than 30 days divided by the aggregate outstanding principal balance of Finance Contracts owned and/or serviced by the Company as of the end of such calendar month. 8.38. "Determination Date" means the date that is five business days prior to the date of the MS Financial Stockholders Meeting or, if that date is not a NASDAQ trading day, the NASDAQ trading day immediately preceding that date. 8.39. "Dissenting Shares" means any issued and outstanding shares of MS Financial Stock which are held by stockholders of MS Financial who have not voted in favor of the Merger and who are entitled to file, and have filed, with MS Financial, in full compliance with Section 262 of the Delaware Statutes, prior to the taking of the vote of the stockholders of MS Financial on the Merger, a written notice of intent to demand appraisal of such shares of MS Financial Stock. 8.40. "Effective Time" means the date and time of the filing of the Certificate of Merger with the Secretary, or such later time as may be specified in the Certificate of Merger filed with the Secretary. 8.41. "Engagement Letter" is defined in Section 3.30. 8.42. "Environmental Permits" is defined in Section 3.16(c). 8.43. "ERISA" is defined in Section 3.21(b). 8.44. "Exchange Act" means the Securities and Exchange Act of 1934, as amended. 8.45. "Exchange Agent" means American Securities Transfer, Inc. 8.46. "Exchange Fund" means certificates evidencing the shares of Search Common Stock, issuable pursuant to Section 1.2 and an estimated amount of cash required to be delivered pursuant to Article 1 in exchange for fractional shares of Search Common Stock. 8.47. "Exchange Ratio" shall mean the number of shares of Search Common Stock having a value equal to the Per Share Amount, determined as of the Determination Date except as otherwise provided in Sections 1.2(d), (e), (g) and (h) The number of shares having a value equal to the Per Share Amount determined as of the Determination Date shall be determined by dividing the Per Share Amount by the Valuation Period Market Value. 8.48. "Expenses" means all out-of-pocket expenses and fees actually incurred or accrued by Search, Newco or MS Financial, as applicable, or on their respective behalf in connection with the Transactions prior to the termination of this Agreement (including, without limitation, all fees and expenses of counsel, financial advisors, 41 148 banks or other entities providing financing to Search (including financing, commitment and other fees payable thereto), accountants, environmental and other experts and consultants, and all registration fees and expenses and all printing and advertising expenses) and in connection with the negotiation, preparation, execution, performance and termination of this Agreement, the structuring of the Transactions, any agreements relating thereto, and any filings to be made in connection therewith. 8.49. "Finance Contract" means a motor vehicle installment sales contract assigned to MS Financial or owned by a Securitization Trust that is secured by title to, security interests in, or liens on a motor vehicle under applicable provisions of the motor vehicle or other similar Law of the jurisdiction in which the motor vehicle is titled and registered by the purchaser at the time the contract is originated. 8.50. "GAAP" means United States generally accepted accounting principles applied on a consistent basis. 8.51. "Governmental Authority" shall mean any United States (federal, state or local) or foreign (to the extent having any jurisdiction over the parties or the Transactions) government, or governmental, regulatory or administrative authority, agency, department, board, bureau, instrumentality commission or court of competent jurisdiction. 8.52. "Hazardous Material" is defined in Section 3.16(a). 8.53. "HSR" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (Antitrust Improvements Act) Pub.L. 94-435, Sept. 30, 1976, 90 Stat. 1383, as amended. 8.54. "KPMG" means KPMG Peat Marwick L.L.P. 8.55. "Law" means statutes, rules, regulations, ordinances, orders, judgments or decrees of any Governmental Authority. 8.56. "Liens" is defined in Section 3.24(h). 8.57. "Material Contracts" is defined in Section 3.18(a). 8.58. "Material Permits" means licenses, franchises, consents, approvals, orders, permits and other governmental authorizations, including without limitation titles (including without limitation motor vehicle titles and current registrations), fuel permits, certificates, trademarks, trade names, patents, patent applications and copyrights, necessary to conduct the businesses of MS Financial or its Subsidiary and the failure of MS Financial or its Subsidiary to hold or possess would have a Company Material Adverse Effect. 8.59. "Merger" is defined in the preamble. 8.60. "Merger Consideration" means certificates evidencing the number of whole shares of Search Common Stock and cash (in lieu of fractional shares) to which a holder of MS Financial Stock is entitled as the result of the Merger. 8.61. "Most Recent Financial Statements" is defined in Section 1.2(g)(i). 8.62. "MS Financial" is defined in the preamble. 8.63. "MS Charter Documents" is defined in Section 3.1. 8.64. "MS Financial Employees' Equity Incentive Plan" means the MS Financial Amended and Restated Employees' Equity Incentive Plan substantially in the form of Schedule 8.63 hereto. 8.65. "MS Financial Fee" is defined in Section 7.7(c). 8.66. "MS Financial Stock" means the common stock of MS Financial, par value $.001 per share. 42 149 8.67. "MS Financial Stock Option Plans" means the MS Financial Employees' Equity Incentive Plan and the Non-Employee Directors Stock Option Plan. 8.68. "MS Financial Stockholders Meeting" is defined in Section 5.9. 8.69. "MS Loan Agreement" is defined in Section 3.26(r). 8.70. "Net Managed Receivables" is defined in Section 1.2(g). 8.71. "Non-Employee Directors Stock Option Plan" means the stock option plan substantially in the form of Schedule 8.70 hereto. 8.72. "NASD" means the National Association of Securities Dealers, Inc. or any successor entity. 8.73. "NASDAQ" means the NASD Automated Quotations -National Market System. 8.74. "Newco" is defined in the preamble. 8.75. "Newco Stock" means the common stock of Newco, par value $.01 per share. 8.76. "Order" is defined in Section 6.1(c). 8.77. "Per Share Amount" means $2.00, or such amount adjusted pursuant to Section 1.2(e) or Section 1.2(g) if such an adjustment is to be made. 8.78. "Person" means any individual, firm, corporation, partnership or other entity, including without limitation, any "person" or "group" within the meaning of Section 13(d) under the Exchange Act. 8.79. "Proxy Statement" means the proxy statement, which may be a joint proxy statement, to be sent to the stockholders of Search, if required, and MS Financial. 8.80. "Registration Statement" means a registration statement on Form S-4 (together with all amendments thereto) filed by Search in respect of the issuance of Search Common Stock pursuant to this Agreement. 8.81. "Related Documents" is defined in Section 3.2. 8.82. "Related Security" means all security documents, including, without limitation, Uniform Commercial Code Financing statements, evidencing a security interest in a Finance Contract. 8.83. "Returns" is defined in Section 3.24(a). 8.84. "Reviewed Financials" is defined in Section 3.10. 8.85. "Search" is defined in the preamble. 8.86. "Search Charter Documents" is defined in Section 4.1. 8.87. "Search Common Stock" means the common stock of Search, $.01 par value per share. 8.88. "Search Fee" is defined in Section 7.7(a). 8.89. "Search Material Adverse Effect" means any change, effect or circumstance that, individually, or when taken together with all other changes, effects and circumstances that have occurred prior to the date of determination of the occurrence of the Search Material Adverse Effect (i) is or is reasonably likely to be material and adverse to the condition (financial or otherwise), operations, properties, results of operations, business or prospects 43 150 of Search, or (ii) would or is reasonably likely to impair Search's ability to perform its obligations under this Agreement or impede the consummation of the Transactions. 8.90. "Search Material Permits" means licenses, franchises, consents, approvals, orders, permits and other governmental authorizations, including without limitation titles (including without limitation motor vehicle titles and current registrations), fuel permits, certificates, trademarks, trade names, patents, patent applications and copyrights, necessary to conduct the businesses of Search or its Subsidiaries and the failure of Search or its Subsidiaries to hold or possess would have a Search Material Adverse Effect. 8.91. "Search SEC Reports" means all forms, reports and documents required to be filed by Search with the SEC since December 31, 1993. 8.92. "Search Stockholders Meeting" is defined in Section 5.9. 8.93. "Search Third Party Consents" means all consents of Persons not party to this Agreement required to be obtained by Search or Newco to prevent any breach of this Agreement by Search. 8.94. "SEC" means the Securities and Exchange Commission. 8.95. "Secretary" means the Secretary of State of the State of Delaware. 8.96. "Securities Act" means the Securities Act of 1933, as amended. 8.97. "Securitization Trusts" means MS Auto Grantor Trust 1995-1, MS Auto Grantor Trust 1994-1, and MS Auto Grantor Trust 1993-1. 8.98. "Senior Bank Lender" means the lenders referred to in the Bank Loan Term Sheet. 8.99. "Stockholders" means MS Diversified Corporation, MS Financial Services, Inc., and Golder Thoma Chessy Rauner IV, L.P. 8.100. "Stockholders Agreement" is defined in Section 5.15(f). 8.101. "Subsidiary" means, with respect to any Person, an Affiliate controlled by such person directly, or indirectly through one or more intermediaries. 8.102. "Surviving Corporation" is defined in Section 1.1(a). 8.103. "Tax" means any tax or similar governmental charge, import or levy (including without limitation income taxes, franchise taxes, transfer taxes or fees, sales taxes, use taxes, gross receipts taxes, value added taxes, employment taxes, excise taxes, ad valorem taxes, property taxes, withholding taxes, payroll taxes, minimum taxes or windfall profit taxes) together with any related penalties, fines, additions to tax or interest imposed by any Governmental Authority. 8.104. "Transactions" means the Merger and all other actions or events described or required by this Agreement. 8.105. "Unaudited Financials" is defined in Section 3.10. 8.106. "Valuation Period Market Value" means the average of the closing prices of a share of Search Common Stock, as quoted on NASDAQ for the 10 NASDAQ trading days immediately preceding and including the Determination Date or, if the Search Common Stock is not quoted on NASDAQ, the average of the high bid and low ask prices of a share of Search Common Stock as quoted in the over-the- counter market for such 10 trading day period. 44 151 8.107. "Warehouse Loans" means loans pursuant to the transaction entered into pursuant to that certain Repurchase Agreement dated as of April 1, 1995 between the Company and Telluride Funding Corp. and certain other related documents, as such may be amended, modified, supplemented, extended, renewed or replaced, in connection with which Financial Security Assurance Inc. issued a financial guaranty insurance policy. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. SEARCH CAPITAL GROUP, INC. By: /s/ George C. Evans ---------------------------- Name: George C. Evans Title: Chairman, President and Chief Executive Officer SEARCH CAPITAL ACQUISITION CORP. By: /s/ Robert D. Idzi ---------------------------- Name: Robert D. Idzi Title: Senior Executive Vice President MS FINANCIAL, INC. By: /s/ Vann R. Martin ---------------------------- Name: Vann R. Martin Title: President and Chief Operating Officer 45 152 June 25, 1997 MS Financial, Inc. 700 S. Pear Orchard Road Ridgeland, MS 39157 Gentlemen: This letter confirms our agreement that the Agreement and Plan of Merger by and among us dated as of February 7, 1997 (the "Merger Agreement") is amended as follows: 1. Sections 1.2 (g) and (h) of the Merger Agreement and all references to Sections 1.2 (g) and (h) in the Merger Agreement are deleted; 2. Section 1.2 (d) of the Merger Agreement is amended to read in its entirety as follow: "(d) Maximum and Minimum Exchange Ratio. Notwithstanding the provisions of Section 1.2 (c) above and except for any adjustment made pursuant to Section 1.2 (e), in no event will the Exchange Ratio exceed .37 or be less than 0.28." 3. Sections 2.2 (f), 8.2, 8.3, 8.4, 8.5, 8.6, 8.10, 8.37, 8.61 and 8.70 of the Merger Agreement are deleted; 4. Section 7.1 (b) of the Merger Agreement is amended by changing the date referenced therein from "June 30, 1997" to "August 15, 1997"; and 5. Section 8.77 of the Merger Agreement is amended to read in its entirety as follows: "8.77. "Per Share Amount" means $1.63, or such amount adjusted pursuant to Section 1.2 (e) if such an adjustment is to be made." Please acknowledge your agreement to the foregoing by signing this letter in the space provided below. Sincerely, SEARCH FINANCIAL SERVICES INC. By: /s/ GEORGE C. EVANS -------------------------------- George C. Evans Chairman of the Board and Chief Executive Officer 153 Letter: MS Financial, Inc. June 25, 1997 Page 2 SEARCH CAPITAL ACQUISITION CORP. By: /s/ ROBERT D. IDZI ------------------------------- Robert D. Idzi Senior Executive Vice President Agreed: MS FINANCIAL, INC. By: /s/ JAMES B. STUART, JR. ------------------------------- James B. Stuart, Jr., Chairman The undersigned acknowledge (1) their agreement to the foregoing amendments to the Merger Agreement (the "Amendment"), (2) that the Stockholders Agreement dated as of February 7, 1997 by and among Search Financial Services, Inc. and the undersigned (the "Stockholders Agreement") remains in full force and effect and (3) that all references in the Stockholders Agreement to the Merger Agreement shall be to the Merger Agreement as amended by the Amendment. MS FINANCIAL SERVICES, INC. By: /s/ JAMES B. STUART, JR. ------------------------------- James B. Stuart, Jr. MS DIVERSIFIED CORPORATION By: /s/ JAMES B. STUART, JR. ------------------------------- James B. Stuart, Jr., President GOLDER, THOMA, CRESSY, RAUNER FUND IV, L.P. By: GTCR IV, L.P., its General Partner By: Golder, Thoma, Cressy, Rauner, Inc., its General Partner By: /s/ DONALD J. EDWARDS ------------------------------- Donald J. Edwards Its: Principal 154 ANNEX B 1997 -------- MS Financial, Inc. 715 S. Pear Orchard Road Ridgeland, Mississippi 39157 Dear Sirs: We understand that MS Financial, Inc. ("MSF") and Search Financial Services Inc. ("Search") have entered into an Agreement and Plan of Merger (the "Merger Agreement") dated February 7, 1997 and amended on June 25, 1997, pursuant to which MSF will become a wholly-owned subsidiary of Search (the "Transaction"). Upon consummation of the Transaction, each share of MSF common stock will be converted into $1.63 of Search common stock, based upon the average trading price of Search common stock for the ten business days ending five business days before the meeting of the MS Financial stockholders to agree to the Transaction. The conversion ratio is subject to a collar such that the conversion ratio shall not exceed 0.37 or be less than 0.28. You have provided us with the joint proxy/prospectus statement (the "Proxy Statement"), which includes the Merger Agreement among MSF and Search, in substantially final form to be sent to the stockholders of MSF and Search. We understand the Transaction will require approval of the stockholders of MSF and Search. You have asked us to render our opinion as to whether the Transaction is fair, from a financial point of view, to the public stockholders of MSF. In the course of performing our review and analyses for rendering this opinion, we have: 1. reviewed the Joint Proxy Statement/Prospectus; 2. reviewed the Fourth Amended and Restated Loan Agreement dated May 1, 1996, and the First Amendment to Fourth Amended and Restated Loan Agreement dated December 16, 1996; 3 . reviewed MSF's Annual Report to Shareholders and Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and December 31, 1996, its Prospectus for Common Stock dated July 21, 1995, its Quarterly Reports on Form 1O-Q for the periods ended March 31, June 30, September 30, 1996 and March 31, 1997, and its unaudited preliminary financial results for the periods ended April 30, 1997 and May 31, 1997; 4. reviewed Search's Annual Report to Shareholders and Transition Report on Form 10-K for the fiscal year ended March 31, 1996, its Quarterly Reports on Form 10-Q for the periods ended June 30, September 3O and December 31, 1996, its audited financial results for March 31, 1997, its Proxy Statement dated August 19, 1996, and Joint Plan of Reorganization confirmed by in the United States Bankruptcy Court, Northern District of Texas, Dallas Division, in Case No. 395-34981-RCM-11; 155 MS Financial, Inc. 1997 - -------------, Page 2 5. reviewed certain operating and financial information, provided to us by management, relating to MSF's business and prospects; 6. reviewed certain operating and financial information, including certain projections for the combined companies that assume costs savings, provided to us by Search's management, relating to Search's business and prospects; 7. met with certain members of MSF's senior management to discuss MSF's operations, historical financial statements, future prospects and possible impact to MSF of not consummating the Transaction; 8 met with certain members of Search's senior management to discuss Search's operations, historical financial statements and future prospects 9 . visited MSF's facilities in Ridgeland, Mississippi; 10. visited Search's facilities in Dallas, Texas; 11. reviewed the historical prices and trading volumes of the common shares of MSF and Search; 12. reviewed publicly available financial data and stock market performance data of companies which we deemed generally comparable to MSF and Search; 13. reviewed the terms of recent acquisitions of companies which we deemed generally comparable to MSF; 14. considered the results of our conversations with various prospective acquirors of MSF, including the indications of interest received from certain of such prospective acquirors; and 15. conducted such other studies, analyses, inquiries and investigations as we deemed appropriate. In the course of our review, we have relied upon and assumed, without independent verification, the accuracy and completeness of the financial and other information provided to us by MSF and Search. With respect to MSF's and Search's projected financial results, that assume certain synergies for the combined companies, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the managements of MSF and Search as to the expected future performance of MSF and Search, respectively. We have not assumed any responsibility for the independent verification of such information or projections provided to us and we have further relied upon the assurances of the managements of MSF and Search that they are unaware of any facts that would make the information or projections provided to us incomplete or misleading. In arriving at our opinion, we have not performed any independent appraisal of the assets or liabilities of MSF and Search. Our opinion is necessarily based on economic, market and other conditions, and the information made available to us, as of the date hereof. Based on the foregoing, it is our opinion that the Transaction is fair, from a financial point of view, to the public stockholders of MSF. We have acted as financial advisor to MSF in connection with the Transaction and will receive a fee for such services, payment of a significant portion of which is contingent upon the consummation of the Transaction. 156 MS Financial, Inc. 1997 - -------------, Page 3 It is understood that this letter (i) is intended for the use of the Board of Directors of MSF and may not be disseminated, quoted or referred to at any time without our prior written consent and (ii) does not constitute a recommendation to any stockholder as to how such stockholder should vote on the proposed Transaction. Notwithstanding the previous sentence, Bear Steams expressly consents to the inclusion of this letter in its entirety as an exhibit to the proxy materials or the resulting Form S-4 distributed in connection with the Transaction. Very truly yours, BEAR, STEARNS & CO. INC. By: ------------------------------ Managing Director DBR/klh 157 ANNEX C ALEX. BROWN AMERICA'S OLDEST INVESTMENT BANKING FIRM ESTABLISHED 1800 February 6, 1997 Board of Directors Search Capital Group, Inc. 700 N. Pearl Street, Suite 400 Dallas, TX 75201 Dear Members of the Board of Directors: MS Financial, Inc. ("MS Financial"), Search Capital Group, Inc. ("Search" or "the Company") and Search Capital Acquisition Corp., a Delaware Corporation and a wholly-owned subsidiary of Search (the "Merger Sub"), have entered into an agreement and plan of merger dated as of February 7, 1997 (the "Agreement"). Pursuant to the Agreement, the Merger Sub shall be merged with and into MS Financial (the "Merger"), and each share of MS Financial's common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into an amount of shares (the "Exchange Ratio") of common stock of Search with a value equal to $2.00 per share held; however, at no time will the Exchange Ratio exceed 0.46x or be less than 0.34x. We have assumed, with your consent, that the Merger will qualify as a tax free transaction for federal income tax purposes. You have requested our opinion as to whether the Exchange Ratio is fair, from a financial point of view, to Search. Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its investment banking business, is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for estate, corporate and other purposes. We have acted as financial advisor to the Board of Directors of Search in connection with the transaction described above and will receive a fee for our services, a portion of which is contingent upon the consummation of the Merger. We have provided financial advice to Search historically, including bankruptcy restructuring as well as merger and acquisition advisory services. Alex. Brown currently holds Search common stock received as compensation for prior services, and at present, an Alex. Brown employee is a member of the Board of Directors of Search. Alex. Brown also served as the lead-managing underwriter in MS Financial's July 24, 1995 initial public offering of its Common Stock. Alex. Brown maintained a market in the Common Stock of MS Financial until mid-1996, and regularly publishes research reports regarding the auto finance and consumer industries and the businesses and securities of publicly traded companies in such industries. In the ordinary course of business, Alex. Brown may actively trade the securities of both MS Financial and Search for our own account and the account of our customers and, accordingly, may at any time hold a long or short position in such securities. In connection with this opinion, we have reviewed certain publicly available financial information and other information concerning MS Financial and Search and certain internal analyses and other information furnished to us by Search. We have also held discussions with the members of the senior management of Search regarding the businesses and prospects of Search and MS Financial and the joint prospects of a combined company. In addition, we have (i) reviewed the reported prices and trading activity for the common stock of both MS Financial and Search, (ii) compared certain financial and stock market information for MS Financial and Search with similar information for certain other auto finance companies whose securities are publicly traded, (iii) reviewed the financial terms of certain recent business combinations which we deemed comparable in whole or in part, (iv) reviewed the terms of the Agreement and certain related documents, and (v) performed such other studies and analyses and considered such other factors as we deemed appropriate. 158 We have not independently verified the information described above and for purposes of this opinion have assumed the accuracy, completeness and fairness thereof. With respect to the information relating to the prospects of MS Financial and Search, we have assumed that such information reflects the best currently available judgments and estimates of the management of Search as to the likely future financial performances of Search and MS Financial and of the combined entity. Alex. Brown was not involved in any discussions with the management of MS Financial regarding this transaction or the prospects of a combined company. In addition, we have not made nor been provided with an independent evaluation or appraisal of the assets or liabilities of MS Financial and Search, nor have we been furnished with any such evaluations or appraisals. We are not expressing our opinion as to the value of Search's common stock when issued pursuant to the Merger or the prices at which Search's common stock will trade subsequent to such issuance. Our opinion is based on market, economic and other conditions as they exist and can be evaluated as of the date of this letter. Our advisory services and the opinion expressed herein were prepared for the use of the Board of Directors of Search and do not constitute a recommendation to any stockholder as to how such stockholder should vote. We hereby consent to the inclusion of this opinion in its entirety as an exhibit to any proxy or registration statement distributed in connection with the Merger. Based upon and subject to the foregoing, it is our opinion that, as of the date of this letter, the Exchange Ratio is fair, from a financial point of view, to Search. Very truly yours, ALEX. BROWN & SONS INCORPORATED By: /s/ J. ADAM HITT ---------------------------------- Name: J. Adam Hitt Managing Director -2- 159 ANNEX D MS FINANCIAL, INC. Index to Consolidated Financial Statements
Page ---- Independent Auditors' Report D-2 Consolidated Balance Sheets as of December 31, 1995 and 1996 (audited) and D-3 March 31, 1997 (unaudited) Consolidated Statements of Operations, years ended December 31, 1994, 1995 and 1996 (audited) and three-month periods ended March 31, 1996 and 1997 (unaudited) D-4 Consolidated Statements of Stockholders' Equity, years ended December 31, 1994, 1995 and 1996 (audited) and three-month period ended March 31, 1997 (unaudited) D-5 Consolidated Statements of Cash Flows, years ended December 31, 1994, 1995 and 1996 (audited) and three-month periods ended March 31, 1996 and 1997 (unaudited) D-6 - D-7 Notes to Consolidated Financial Statements D-8 - D-31
D-1 160 Independent Auditors' Report The Board of Directors and Stockholders MS Financial, Inc.: We have audited the accompanying consolidated balance sheets of MS Financial, Inc. and subsidiary as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MS Financial, Inc. and subsidiary at December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company experienced in 1996 material increases in delinquencies and losses on owned and serviced installment contracts, a substantial net loss, and reduced availability of financing. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in note 2. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. /s/ KPMG Peat Marwick LLP Jackson, Mississippi KPMG Peat Marwick LLP February 24, 1997, except for the last paragraph of note 3 which is as of June 25, 1997 D-2 161 MS FINANCIAL, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 1995 and 1996 (Audited) and March 31, 1997 (Unaudited) (in thousands, except share data)
Assets ------ December 31, ------------------ March 31, 1995 1996 1997 ---- ---- ----------- (unaudited) 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 ========= ========= =========
See accompanying notes to consolidated financial statements. D-3 162 MS FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Operations Years ended December 31, 1994, 1995 and 1996 (Audited) and Three-Month Periods ended March 31, 1996 and 1997 (Unaudited) (in thousands, except per share data)
Three-month periods ended Years ended December 31, March 31, ----------------------------- ---------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (unaudited) 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 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. D-4 163 MS FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Stockholders' Equity Years ended December 31, 1994, 1995 and 1996 (Audited) and Three-Month Period ended March 31, 1997 (Unaudited) (in thousands, except share data)
Unrealized gain (loss) Retained Additional on securities earnings Common paid-in available (accumulated Treasury stock capital for sale deficit) stock Total ------- ------- ------------- ------- ------- ------- 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 ======= ======= ===== ======= ======= =======
See accompanying notes to consolidated financial statements. D-5 164 MS FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years ended December 31, 1994, 1995 and 1996 (Audited) and Three-Month Periods ended March 31, 1996 and 1997 (Unaudited) (in thousands)
Three-month periods ended Years ended December 31, March 31, --------------------------- ------------ 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (unaudited) 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 -------- -------- -------- -------- --------
(Continued) D-6 165 MS FINANCIAL, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (in thousands)
Three-month periods ended Years ended December 31, March 31, ---------------------------- ---------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (unaudited) 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 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. D-7 166 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements December 31, 1994, 1995 and 1996 (Audited) and March 31, 1996 and 1997 (Unaudited) (1) Summary of Significant Accounting Policies (a) Principles of Consolidation and Business The consolidated financial statements include the accounts of MS Financial, Inc. (the Company) and its wholly-owned subsidiary, MS Auto Receivables Company (MARCO). All significant intercompany accounts have been eliminated in consolidation. The Company's principal business activity is to purchase, resell to investors and service retail automobile sales contracts. Several of the dealers from whom the Company purchases such retail sales contracts are affiliates of stockholders of MS Diversified Corporation (MS Diversified). Retail sales contracts are purchased from dealers located principally in the Southeast, Southwest and Midwest regions of the United States. (b) Unaudited Interim Financial Statements The unaudited interim financial statements have been prepared in conformity with generally accepted accounting principles and include all adjustments which are, in the opinion of management, necessary to a fair presentation of the results for the interim period presented. All such adjustments are, in the opinion of management, of a normal recurring nature and those necessary for the adoption of new accounting pronouncements. Results for the three-months ended March 31, 1997 are not necessarily indicative of results to be expected for the full year. (c) Income Recognition Interest income from installment contracts is recognized using the interest method adjusted for estimated prepayments of the installment contracts. Prepayments are estimated based on historical performance of the Company's loan portfolio. Accrual of interest income does not cease for delinquent installment contracts because any amounts are immaterial to the financial statements due to the short delinquency period allowed before repossession of the underlying collateral or charge-off of the installment contract balance. At December 31, 1996, the Company had charged-off all installment contracts, including delinquent interest, that were at least 150 days delinquent. (Continued) D-8 167 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Interest income from securitizations is recognized using the interest method based on actual and expected cash flows and the estimated rate of return on the recorded investment. For each securitization, the Company periodically evaluates amounts due under securitizations for impairment based on expected discounted cash flows, as revised for actual cash flows through the evaluation date. As a result of such analyses, the Company recognized a $3.0 million impairment in 1996 on amounts due under its 1995 securitization. Insurance commissions are recognized as income using methods which approximate the method indicated: Credit life insurance - interest method Accident and health insurance - relation to anticipated claims Warranty extension insurance - straight-line Installment contract extension fees are recognized when collected. During 1995, the Company began deferring collection of extension fees from certain borrowers and adding those fees to the installment contract balance. Such deferred extension fees are recorded as deferred income and are recognized when collected after the full repayment of the installment contract. Deferrable costs on the origination of installment contracts are not material and are expensed when incurred. Servicing fee income is recognized when earned. (d) Securitization Transactions Sales of installment contracts under securitization transactions are recognized under the provisions of Statement of Financial Accounting Standards (SFAS) No. 77, "Reporting by Transferors for Transfers of Receivables with Recourse." Gains on securitization transactions are calculated based on the difference between the sales price and the allocated basis of the installment contracts sold. The investment in installment contracts is allocated between the portion sold and the portion retained based on the relative fair values of the portion sold and the portion retained on the date of sale. In estimating fair values, the Company considers prepayment and default risks and discounts estimated cash flows at interest rates that are commensurate with the risks involved and consistent with rates a non-affiliated purchaser may require. All anticipated costs, including estimated recourse obligations, associated with the securitizations are offset against the gain recognized. D-9 (Continued) 168 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (e) Allowance for Possible Losses on Installment Contracts The allowance for possible losses is intended to cover losses on owned installment contracts, as well as securitized installment contracts. Losses on securitized installment contracts are limited to amounts recorded as investment in the subordinated trust certificates and amounts due under securitizations. Provisions for possible losses on installment contracts are charged to income in amounts sufficient to absorb any repossession expenses, delinquent interest and unpaid installment contracts balances in excess of the insurance provided by MS Casualty Insurance Company (MS Casualty - see note 8). Credit loss experience, contractual delinquency of installment contracts, the value of underlying collateral, repossession loss insurance and other factors are considered by management in assessing the adequacy of the allowance for possible losses on installment contracts. (f) Property and Equipment and Repossessed Automobiles Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for furniture and fixtures using the straight-line method over the estimated useful lives of the related assets which range from five to six years. Leasehold improvements are depreciated using the straight-line method over the lives of the leases which range from seven to eight years. Repossessed automobiles are carried at the lower of cost (unpaid installment contract balance) or fair value, less the costs of disposition. In determining fair value, management considers the estimated selling price of the automobile, repossession loss insurance proceeds from MS Casualty and rebates on credit life insurance, other insurance and extended warranties. At December 31, 1996, management provided an allowance for possible losses on repossessed automobiles of $2.8 million. A valuation allowance was not previously considered necessary because of expected reimbursements under the Company's insurance arrangement with MS Casualty (see note 8) and the relatively lower levels of repossessed automobiles in prior periods. (g) Installment Contract Origination Program Acquisition Cost The cost of acquiring the installment contract origination program was being amortized on a straight-line basis over ten years. During 1996, the remaining carrying value of this intangible asset ($257 thousand) was expensed because of the uncertainties associated with its value as a result of the Company's substantial 1996 net loss. D-10 (Continued) 169 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (h) Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Prior to December 1993, the results of the Company's operations (including its predecessor) were included in MS Diversified's consolidated income tax returns and income taxes were allocated to and provided for by the Company (including its predecessor) as if it filed separate income tax returns. MS Diversified has agreed to hold the Company harmless from any deficiency if any tax return filed by the Company, or any tax return filed by MS Diversified on behalf of the Company, for any period prior to December 1993 was not true and correct in all material respects in accordance with all applicable tax laws then in effect. (i) Cash Equivalents The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. (j) Net Income (Loss) Per Share Net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding plus common stock equivalent shares issuable upon exercise of stock options. Stock options issued prior to the Company's initial public offering of stock are treated as outstanding for all periods presented. (k) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (Continued) D-11 170 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for possible losses on installment contracts, the carrying value of amounts due under securitizations and the valuation of repossessed automobiles. The Company believes that the allowance for possible losses on installment contracts is adequate. While the Company uses available information to recognize losses on installment contracts, future adjustments to the allowance may be necessary based on changes in economic conditions. The Company also believes that discounted cash flows will be adequate to recover the Company's carrying value of amounts due under securitizations and the carrying value of repossessed automobiles. It is reasonably possible that the expectations associated with these estimates could change in the near term (i.e., within one year) and that the effect of any such changes could be material to the consolidated financial statements. (l) Reclassifications Certain prior period amounts have been reclassified to conform with the 1996 presentation. (m) Recent Accounting Pronouncements In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). SFAS No. 125 requires that an entity recognize the financial and servicing assets it controls and the liabilities it has incurred and derecognize financial assets when control has been surrendered and derecognize liabilities when extinguished. Standards are provided by this statement for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is generally effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. The Company plans to adopt SFAS No. 125 in its 1997 consolidated financial statements. Management of the Company believes that SFAS No. 125 will have a material impact on its future financial statements, particularly in those periods when the Company completes a securitization transaction (see note 5). SFAS No. 125 will modify the Company's gain on securitization calculation, principally by allowing the Company (Continued) D-12 171 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements to establish a servicing asset or liability for installment contracts sold based on relative fair values. Subsequently, the Company will be required to amortize its servicing asset or liability in proportion to and over the period of net servicing income or net servicing loss. The servicing asset or liability will then be assessed for impairment or increased obligation based on its fair value. Finally, the Company's retained interest in securitizations will be measured like investments in debt securities available-for-sale or trading and adjustments to fair value will be reflected as a component of stockholders' equity for available-for-sale debt securities or as a component of net income or loss for debt securities held for trading. The Company is not aware of any other significant matters that might result from the adoption of SFAS No. 125. The impact of adopting SFAS No. 125 at January 1, 1997 was to reduce stockholders' equity by $347 thousand to reflect the unrealized loss on the Company's retained interest in securitizations (including the interest differential) as a component of stockholders' equity. (2) Liquidity As reflected in the accompanying 1996 consolidated financial statements, the Company has suffered substantial losses and, accordingly, substantial reductions in stockholders' equity. These negative financial trends have resulted from material increases in delinquencies and losses on owned and serviced installment contracts. As a result, the Company is facing a severe liquidity problem because of (i) the lack of availability of funds under the Company's revolving credit facility (see note 7); (ii) the lack of availability of funds under the Warehouse Facility (see note 7); (iii) the Company's inability to complete a securitization in 1996; and (iv) the delay of payments to the Company under the Company's prior securitization programs (see note 5). To address the Company's liquidity problem, the Company engaged an investment banker to advise the Company on alternatives, formed a board committee to assist in addressing financial issues, renegotiated the terms of its revolving credit facility, sold $14.5 million of its installment contracts, reduced the number of its employees, scaled back the extent of its operations and is pursuing the merger of the Company (see note 3). There can be no assurance that the Company's efforts to alleviate its liquidity problems and restore its operations will be successful. If the Company is unsuccessful in its efforts, it may be unable to meet its obligations, which raises substantial doubt about the Company's ability to continue as a going concern. If the Company is unable (Continued) D-13 172 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements to continue as a going concern and is forced to liquidate assets to meet its obligations, the Company may not be able to recover the recorded amounts of such assets. The Company's consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. (3) Merger Agreement On February 7, 1997, the Company entered into an agreement and plan of merger (the Agreement) with Search Capital Group, Inc. (Search). The Agreement, if consummated, will result in the Company becoming a subsidiary of Search through the mutual exchange of common stock. Under the Agreement, each stockholder of the Company would receive between .34 and .46 shares of Search common stock for each share of the Company's common stock, subject to adjustment in certain events. The exchange ratio will be determined based on the market price of Search's common stock during a prescribed valuation period preceding the Company's stockholder vote on the merger and an assumed $2.00 per share value of the Company's common stock, subject to adjustment in certain events. Among other conditions, the Agreement is subject to the filing of certain documents with, and approval of such documents by, the Securities and Exchange Commission and the affirmative vote of a majority of the Company's stockholders and Search's stockholders. If the Agreement is terminated under certain conditions, the Company may be obligated to pay a fee to Search of up to $700 thousand. Further, the Agreement calls for a monthly fee of $100 thousand payable to Search for operational assistance to be provided by Search to the Company between February 7, 1997, and consummation of the merger. Such operational assistance fee is to be applied against the termination fee described above, if applicable. Effective June 25, 1997, the Boards of Directors of Search and the Company agreed to amend the merger agreement so that each stockholder of the Company would receive between .28 and .37 shares of Search common stock, subject to adjustment in certain events. Further, the exchange ratio will be determined based on the market price of Search's common stock during a prescribed valuation period preceding the Company's stockholder vote on the merger and an assumed $1.63 per share value of the Company's common stock, subject to adjustment in certain events. D-14 (Continued) 173 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (4) Installment Contracts and Amounts Due Under Securitizations ----------------------------------------------------------- A summary of installment contracts and amounts due under securitizations at December 31, 1995 and 1996 and March 31, 1997 (unaudited) follows (in thousands):
December 31, -------------------- March 31, 1995 1996 1997 ---- ---- --------- (unaudited) 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 ========= ========= =========
At December 31, 1996, contractual maturities of installment contracts owned were (in thousands):
Portion Other Automobile retained of consumer installment installment installment contracts contracts contracts owned sold owned Total ------- ------- ------- ------- 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 ======== ======= ======= =======
(Continued) D-15 174 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements It is the Company's experience that a substantial portion of the installment contracts portfolio is either repaid or extended before contractual maturity dates. Further, the Company periodically sells installment contracts to investors and experiences repossessions and losses on its installment contracts. Therefore, the above tabulation is not to be regarded as a forecast of future cash collections. At December 31, 1995 and 1996, the Company had $5.1 million and $8.7 million of gross amounts due under installment contracts which had one or more payments delinquent more than 90 days. A summary of amounts due under securitizations at December 31, 1995 and 1996 and March 31, 1997 (unaudited) follows (in thousands):
December 31, ------------------- March 31, 1995 1996 1997 ---- ---- ---- (unaudited) 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 ======== ======== ========
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):
Three-month periods ended Years ended December 31, March 31, ----------------------------- ---------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (unaudited) 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
D-16 (Continued) 175 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Three-month periods ended Years ended December 31, March 31, ----------------------------- ---------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (unaudited) 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 ======= ======= ======= ======= =======
Transactions in the allowance for possible losses on installment contracts follow (in thousands):
Three-month periods ended March 31, Years ended December 31, ---------------- --------------------------------- 1996 1997 1994 1995 1996 ------- ------- ---- ---- ---- (unaudited) 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 ======= ======= ======= ======= =======
(Continued) D-17 176 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (5) Installment Contract Sales and Securitizations The Company periodically sells to investors automobile installment contracts purchased from automobile dealers and assigned to the Company. During 1994 and 1995, $35 million and $90 million, respectively, of installment contracts were sold in transactions whereby the installment contracts were transferred to trusts in which beneficial ownership interests were purchased by investors in the form of trust certificates. The Company purchased the subordinated portion of the trust certificates in the 1994 transaction. The Company remains contingently liable on the installment contracts sold, principally for losses attributable to default and prepayment risks. Under SFAS No. 77, the installment contracts purchased by outside investors are accounted for as sales and the corresponding net gains are recognized in the Company's consolidated financial statements. The Company's risk of accounting loss does not exceed amounts recorded as assets in the consolidated balance sheets as a result of the Company's securitization transactions. If delinquencies on installment contracts sold in securitizations exceed certain predefined levels, the funding of cash collateral accounts that are held in trust for the benefit of the senior certificate holders is increased. The increase in the cash collateral accounts is funded with cash flows from the securitized installment contracts that otherwise would be forwarded to the Company. Further, the Company can be replaced as servicer by the issuer of the Company's financial guaranty insurance policy (see below). During 1996 these restrictive covenants were exceeded on the Company's 1993, 1994, and 1995 securitizations and the funding of the respective cash collateral accounts was increased as described above. At December 31, 1996, the cash collateral accounts for the 1994 and 1995 securitizations remained underfunded by approximately $10.5 million. This underfunding, which decreases as the principal balance of the installment contracts securitized decreases, will continue to defer cash available to the Company from the securitizations until certain reduced levels of delinquencies are achieved for specified time periods or required cash has been provided to fully fund the cash collateral accounts. Additionally, the Company has not been notified, nor does management expect for the Company to be notified, of any request for the Company's replacement as servicer on the installment contracts sold. In March and May of 1995, the Company entered into $80 million of U. S. Treasury interest rate futures that hedged the securitization which was consummated in September, 1995. Accordingly, the accumulated loss on the contracts of $1.25 million was paid at settlement of the contracts and included in the measurement of the gain on the securitization transaction. (Continued) D-18 177 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The Company obtains a financial guaranty insurance policy for the benefit of the senior certificate holders from an unrelated party. Distributions under the subordinated certificates are pledged to the issuer of the financial guaranty insurance policy and the stock of MARCO is pledged on a junior-lien basis to further secure the financial guaranty insurance policy. At December 31, 1995 and 1996, the Company was servicing for third parties installment contracts totaling approximately $99.4 million and $44.1 million, respectively. Of these amounts, $98.8 million and $44.0 million, respectively, represented the aggregate uncollected principal balance of installment contracts sold in securitizations. The Company remains contingently liable for loans serviced for third parties. The Company services these installment contracts and receives a service fee based on a percent of the outstanding principal balance. At December 31, 1995 and 1996, the Company held approximately $1.3 million and $585 thousand of subordinated trust certificates arising from prior securitizations. These certificates are classified as installment contracts and amounts due under securitizations in the accompanying balance sheets and are carried at amortized cost as the Company has the positive intent and ability to hold these securities to maturity. These securities are not due at a single maturity date because principal repayments are dependent on the cash flows of the underlying installment contracts. The following table reflects the carrying value and estimated fair value of these securities (in thousands):
Carrying Unrealized Unrealized Estimated value gains losses fair value ----------- ------------- -------------- ---------- December 31, 1995 $ 1,328 - (75) 1,253 =========== ===== === ====== December 31, 1996 $ 585 - (19) 566 =========== ===== === ======
Fair values have been estimated using anticipated cash flows discounted at rates a buyer of comparable certificates may require. (Continued) D-19 178 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (6) Property and Equipment A summary of property and equipment at December 31, 1995 and 1996 and March 31, 1997 (unaudited) follows (in thousands):
December 31, -------------------- March 31, 1995 1996 1997 ------- ------- ------- (unaudited) 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 ======= ======= =======
(7) Notes Payable Notes payable consist of borrowings under a revolving credit facility with several commercial banks. This agreement, as amended December 16, 1996, provides for borrowings of up to $90 million; however, the agreement requires a mandatory reduction of the total facility to $65 million effective January 31, 1997. The borrowing base for the commitment is generally equal to 85% of the net amount of eligible installment contracts, as defined. At December 31, 1996, the Company was over-advanced approximately $16.5 million based on the borrowing base formula. Advances under the revolving credit facility are secured by all assets of the Company. The final maturity of the facility, as amended December 16, 1996, is April 30, 1997. As described below, the revolving credit facility is expected to be amended further. In consideration of the pending merger described in note 3 and noncompliance with certain provisions of the revolving credit facility occurring subsequent to December 31, 1996, the Company and the banks involved entered into a letter agreement and consent dated February 19, 1997 that is intended to effectively amend the revolving credit facility described above. Under this agreement, the maturity of the revolving credit facility is extended to the earlier of May 15, 1997, the merger closing date or repayment of amounts due under the facility. Further, the aggregate commitment is reduced from $90 million to $75 million. The Company can request advances under the facility as long as the aggregate advances do not exceed $75 million and the over-advance (as described above) does not exceed $20 million. Additionally, the interest rate on the facility is reduced to the prime rate plus 100 basis points (9.25% on February 19, 1997). (Continued) D-20 179 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The agreement also provides for certain amendments to the facility to be entered into on the merger closing. These amendments are expected to provide for the refinancing of outstanding advances, a $25 million mandatory reduction of the commitment plus a proportionate reduction of the over-advance six months after the effective date of the merger, interest at the prime rate plus 100 basis points (1%), an additional fee to the banks of $350 thousand, and an extended maturity to the earlier of the first anniversary of the merger closing date, repayment of the then outstanding advances or any date that the repayment of the advances is accelerated under the agreement. Under the agreement in effect at December 31, 1996, interest was payable at the prime rate plus 300 basis points (11.25% at December 31, 1996). This rate of interest constitutes the default rate as defined in the agreement and is the contractual rate of interest from November 22, 1996 and continuing until the aggregate advances do not exceed $50 million and the over-advance does not exceed $5 million. Previously, the rate of interest was substantially lower and varied under a series of formulas based on the prime rate or LIBOR. The higher rate of interest was imposed under the revolving credit facility based on certain events of default that occurred in the fourth quarter of 1996, principally because of the Company's increasing delinquencies and losses on its owned and serviced installment contracts. The weighted average interest rate under the revolving credit facility was 8.1%, 8.9% and 10.2%, respectively, during 1994, 1995 and 1996. The Company was required to pay a restructuring fee of 625 basis points (.625%) on the full amount of the commitment in three equal installments on the last business day of November, 1996, December, 1996 and January, 1997. The agreement contains certain restrictive covenants relative to delinquencies, capital expenditures, indebtedness, dividends and certain other items. Under these covenants the Company is presently unable to pay dividends on its common stock and does not expect to be able to pay dividends in the near future. At December 31, 1996, management believes the Company was in compliance with these restrictive covenants. Also, prior to the fourth quarter of 1996, the Company had available a $50 million "warehouse" revolving credit securitization facility (the Warehouse Facility). The Warehouse Facility allowed the Company to transfer pools of installment contracts for a term securitization. Accordingly, the Company was required to repurchase installment contracts that had been in the Warehouse Facility for more than twelve months. Transfers of installment contracts under the Warehouse Facility were accounted for as financing transactions. Advances under the Warehouse Facility were secured by the transferred installment contracts and interest was computed based on D-21 (Continued) 180 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements the 30-day LIBOR rate. The initial commitment was through April 1996, but was automatically extended monthly with a final termination date of May 5, 2000, unless a party to the agreement objected to the extension or the agreement was otherwise effectively canceled. In the fourth quarter of 1996, the Company was informed by a party to the Warehouse Facility that this financing source was no longer available to the Company as a result of certain events of default occurring on the Company's prior securitization transactions. (8) Related Party Transactions The Company had agreements with MS Diversified for human resources and data processing services. The Company reimbursed MS Diversified generally on a fee basis determined annually, and such fees were intended to approximate the cost of obtaining comparable services from unaffiliated parties. Subsequent to December 31, 1994, the Company initiated its own human resources and data processing departments and discontinued these agreements with MS Diversified. The Company does continue to share certain computer hardware with MS Diversified. Company management believes that expenses reflected in the consolidated statements of operations under these agreements with MS Diversified are not materially different from the costs that would have been incurred by the Company if such services had been provided by an unrelated party. The Company reimbursed MS Diversified approximately $381 thousand in 1994, $170 thousand in 1995 and $268 thousand in 1996, for these services. Direct expenses incurred by MS Diversified on behalf of the Company are allocated to the Company based on the actual costs incurred. MS Diversified billed the Company $1.9 million and $140 thousand for costs incurred during 1994 and 1995, respectively. There were no expenses incurred by MS Diversified on behalf of the Company in 1996. The Company had a payable balance to MS Diversified of $1 thousand at December 31, 1994. The Company leases office space from MS Diversified pursuant to a sublease entered into in December 1993 and expiring in December 1997. In 1994, 1995 and 1996, the Company paid MS Diversified an aggregate of $159 thousand, $170 thousand and $174 thousand, respectively, for this sublease. The Company has the option to renew the sublease for up to three additional terms of five years each, at prescribed increasing rates. (Continued) D-22 181 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements For installment contracts originated prior to July 1, 1996, MS Casualty insured the Company against loss on retail automobile sales contracts, subject to a limitation of $7 thousand per vehicle. Additionally, the total liability of MS Casualty for all contracts insured during a policy coverage year could not exceed the product of $600 and the number of automobile contracts written during that year. During 1996, the Company recovered from MS Casualty substantially all amounts due under the insurance arrangement. Additionally, effective July 1, 1996, the Company discontinued the practice of insuring its installment contracts with MS Casualty and began purchasing such installment contracts at a discount. Claim payments received by the Company from MS Casualty under this insurance arrangement aggregated $1.3 million, $4.2 million and $9.3 million in 1994, 1995 and 1996, respectively. While the insurance arrangement described above did not require the Company to apply a deductible on each claim, the Company periodically elected to apply a deductible to selected claims and absorb certain losses on the installment contracts. Company management believes that this process altered the timing of charge-offs on installment contracts, but did not alter the ultimate amount of losses to be incurred by the Company. Had the Company filed all claims for the full amount of the loss, amounts available from MS Casualty under the insurance arrangement would have been reduced and the Company's allowance for possible losses on installment contracts would have been greater at December 31, 1995; however, management believes that the Company's 1995 and 1996 provision for possible losses on installment contracts would have been unchanged. Premiums for such insurance coverage were based on a percentage of the amount financed and were either paid by the automobile dealers at the time the installment contracts were purchased by the Company or withheld from the loan proceeds to the dealers and paid by the Company. Premium payments to MS Casualty by either the Company or the dealers for such insurance coverage aggregated $4.3 million, $5.7 million and $4.4 million in 1994, 1995 and 1996, respectively. At December 31, 1995, the Company had a payable balance of $394 thousand to MS Casualty for payment of such premiums. At December 31, 1995, the Company had a receivable balance from MS Casualty of $1.0 million for losses insured under this arrangement. The Company shared in the profitability of this insurance arrangement with MS Casualty based on a contractual determination of profitability consistent with standard insurance industry practices. The Company recorded experience refund income on the MS Casualty insurance contract of $900 thousand in 1994. No experience refund was earned in 1995 or 1996. (Continued) D-23 182 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements MS Life Insurance Company, also a subsidiary of MS Diversified, insures the borrowers against loss under credit life insurance and accident and health insurance. MS Dealer Service Corporation and United Service Protection Corporation, also related companies, insure the borrowers against loss under warranty extension insurance. The Company is named as loss payee on the various insurance policies. Premiums for such insurance are financed in the retail sales contract. During 1994, 1995 and 1996, premiums totaling $7.0 million, $6.7 million and $7.5 million, respectively, for such insurance were financed in the retail sales contracts. During 1994, 1995 and 1996, the Company received $263 thousand, $327 thousand and $506 thousand of proceeds under the credit life and accident and health insurance policies. At December 31, 1995, the Company had payable balances to these companies of $138 thousand. At December 31, 1996, the Company had a receivable balance from these companies of $82 thousand. Through May 1995 MS Byrider Sales, Inc., a related company, reimbursed the Company for its share of certain officers' salaries. In May 1995, in contemplation of the Company's initial public offering of stock in July 1995, the officers resigned their positions at MS Byrider Sales, Inc. The Company purchased 350 shares of 7% cumulative preferred stock of MS Auto Credit, Inc., a 26% voting interest, for $500 thousand on December 28, 1994. MS Auto Credit, Inc. is a subsidiary of MS Byrider Sales, Inc. The preferred shares had a liquidation preference of $500 thousand, but otherwise had the same rights and benefits as the common shares of MS Auto Credit, Inc. Accordingly, this investment was accounted for using the equity method of accounting and is included in other assets in the December 31, 1995 balance sheet. During 1996, the Company sold its preferred stock investment in MS Auto Credit, Inc. to MS Diversified for $500 thousand cash plus the value of accrued dividends. The Company also had a $500 thousand line of credit with MS Auto Credit, Inc. At December 31, 1995, no advances were outstanding under this credit agreement. This line of credit matured in 1996. In 1994, 1995 and 1996, the Company purchased an aggregate of $6.7 million, $6.9 million and $3.4 million, respectively, in installment contracts from two dealers partially owned by a director of the Company. In 1994, 1995 and 1996, the Company purchased an aggregate of $24.4 million, $21.1 million and $17.1 million of installment contracts from affiliates of stockholders of MS Diversified. (Continued) D-24 183 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (9) Income Taxes The current and deferred components of income tax expense (benefit) follow (in thousands):
Current Deferred Total ------- -------- ----- 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) ======= ======= =======
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):
1994 1995 1996 ---- ---- ---- 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) ======= ======= =======
(Continued) D-25 184 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 1995 and 1996 are presented below (in thousands):
1995 1996 ---- ---- 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 -- ======= =======
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of taxable loss in 1996 and uncertainties for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences and has fully offset the net deferred tax asset with a valuation allowance. Future changes in the valuation allowance will be recorded as a component of net income or loss on the statement of operations. D-26 (Continued) 185 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements During 1996, the Internal Revenue Service commenced and completed a review of the Company's 1994 Federal tax return. The results of this examination resulted in an additional assessment of $94 thousand, including interest, which was accrued by the Company in 1996. (10) Commitments The Company leases office space under operating lease agreements with MS Diversified and unrelated parties which expire, subject to renewal options, from 1996 to 1998. The following is a summary of future minimum lease payments under the leases (in thousands): 1997 $ 250 1998 36 1999 4 ------ $ 290 ======
Rent expense for office space under lease agreements totaled $296 thousand for 1994, $377 thousand in 1995 and $402 thousand for 1996. (11) Employee Benefit Plans During 1994, the Company adopted a 401(k) plan for substantially all of its employees. Under the Company's 401(k) plan, employees may elect to contribute from 2% to 16% of monthly base pay, with the Company providing matching contributions of one-half of employee contributions up to 6% of monthly base pay. Total expense under the plan amounted to $40 thousand in 1994, $75 thousand in 1995 and $111 thousand in 1996. The Board of Directors of the Company has adopted an employees' equity incentive plan (the Employees' Plan) under which the Company has reserved 1,177,776 shares of common stock for issuance. Stock options, restricted stock and performance awards or any combination thereof may be granted to officers, employees and consultants of the Company. The Compensation Committee of the Board of Directors in its sole discretion determines the recipients and the amounts of all awards. Options granted vest over a five year period. Each option granted expires ten years from the date of grant. The option exercise price must be equal to the fair value of the Company's common stock on the date of grant. D-27 (Continued) 186 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements In May 1995, the Board of Directors of the Company adopted a Non-employee Directors' Stock Option Plan (the Directors' Plan). Under the Directors' Plan, non-employee directors may be granted options to purchase common stock. An aggregate of 50,000 shares of common stock are reserved for issuance under the Directors' Plan. The Directors' Plan provides for the automatic grant of an option to purchase 5,000 shares of common stock to each director at the commencement of his or her initial term of service on the Board, exercisable at the rate of 1,000 shares on each of the first five anniversaries of the initial date of grant. Each option granted expires ten years from the date of grant. The option exercise price must be equal to the fair value of the Company's common stock on the date of grant. The following table summarizes the Company's option activity:
Employees' Plan Directors' Plan ----------------------- ------------------------- Average price Average price per share Shares per share Shares ------------- ------ -------------- ------ 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 ====== ========= ====== =========
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 provides accounting and reporting standards for stock-based employee compensation plans and also applies to transactions in which the Company acquires goods and services from nonemployees in exchange for the Company's equity instruments. SFAS No. 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all employee stock compensation plans. Entities electing to remain with the accounting treatment outlined in APB Opinion No. 25, "Accounting for Stock Issued to Employees" are required to make pro forma disclosures of net income and net income per share, as if the fair value based method D-28 (Continued) 187 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements had been adopted. The Company accounts for its stock based compensation plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation costs for the plans been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the following pro forma amounts for options issued during the respective year shown below (in thousands, except per share data):
1995 1996 ---- ---- 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) ======= =======
The fair value of each option grant is estimated on the date of grant using an option pricing model with the following weighted average assumptions used for grants in 1995 and 1996: risk-free investment rate of 6.74% in 1995 and 6.28% in 1996, no expected dividends, expected life of ten years, and expected volatility of 60% in both years. In May 1995, the stockholders of the Company adopted a Stock Purchase Plan (the Stock Purchase Plan) which covers 200,000 shares of common stock. Beginning in 1996, eligible employees can purchase common stock at a discount by participating in quarterly Stock Purchase Plan offerings in which payroll deductions may be used to purchase shares of common stock. Common stock issuable under the Stock Purchase Plan must be shares reacquired by the Company. (12) Business and Credit Concentrations During the normal conduct of its operations, the Company engages in the extension of credit to automobile consumers through dealers. The risks associated with these credits include economic, competitive and other risks. A substantial portion of the risk is limited due to the number of customers and their dispersion throughout eleven principally southeastern states; however, operations are concentrated in one industry. In 1995, approximately 33%, 23% and 19% of the amount of installment contracts originated were originated in Texas, Mississippi and North Carolina, respectively. In 1996, approximately 36%, 16% and 20% of the amount of installment contracts originated were originated in Texas, Mississippi and North Carolina, respectively. No other state represented more than 10% of the total originations in 1995 and 1996. Management believes that the securitization of the installment contracts does not change the nature of credit risk concentration. D-29 (Continued) 188 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (13) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments," requires that the Company disclose estimated fair values for its financial instruments. Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions significantly affect the estimates and, as such, the derived fair value may not be indicative of the value negotiated in an actual sale and may not be comparable to that reported by other companies. In addition, the fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Fair value estimates, methods and assumptions for significant financial instruments are set forth below (in thousands):
Carrying Estimated value fair value --------- ---------- 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 ======= =======
Installment Contracts The fair values are estimated for loans in bankruptcy status and the retained portion of installment contracts sold in securitizations by discounting projected gross cash flows using an interest rate that is commensurate with the risks involved and consistent with rates a non-affiliated purchaser may require. The fair values for performing loans and delinquent loans are estimated as a discounted value of the amount due. The discount factors for delinquent loans are based on the number of payments delinquent. D-30 (Continued) 189 MS FINANCIAL, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Amounts Due Under Securitizations The fair values are estimated for amounts due under securitization by discounting projected gross cash flows using an interest rate that is commensurate with the risks involved and consistent with rates a non-affiliated purchaser may require. (14) Contingencies The Company is a defendant in litigation in which the plaintiffs contend that the Company's practice of selling and financing of ancillary products is unlawful. The plaintiffs also contend that the Company required the plaintiffs to purchase one or more ancillary products as a condition of purchasing the plaintiffs' installment contracts. The plaintiffs seek unspecified actual, statutory and exemplary damages, cancellation of finance charges under their installment contract, recovery of finance charges previously paid, prejudgment and post judgment interest and attorneys' fees. Although the Company denies any liability or fault with respect to these allegations, the Company agreed to a tentative net cash settlement of $375 thousand in January 1997, if such settlement is paid by July 1, 1997 ($425 thousand if paid afterwards). During 1996, the Company accrued $375 thousand as a liability based on the tentative settlement agreement. Management anticipates that the settlement will be finalized under these terms prior to July 1, 1997. On January 15, 1997, an action was commenced against the Company to recover certain fees pursuant to the Warehouse Facility discussed in note 7. The plaintiff seeks to recover $438 thousand, plus interest costs, attorneys fees and other costs incurred by the plaintiff as a result of the Company's alleged breach of contract. In the opinion of management, this litigation will not have a material effect on the Company's results of operations or financial condition. In addition, in the normal course of business, the Company is subject to various other pending and threatened litigation. In the opinion of management, the ultimate outcome of the matters will not have a material impact on the Company's financial statements. D-31 190 ANNEX E SEARCH FINANCIAL SERVICES INC. (F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Certified Public Accountants' Report E-2 Consolidated Balance Sheets as of March 31, 1997 and March 31, 1996 E-3 Consolidated Statements of Operations for the year ended March 31, 1997, the six months E-4 ended March 31, 1996, and the year ended September 30, 1995 Consolidated Statement of Changes in Stockholders' Equity (Capital Deficit) for the year E-5 ended March 31, 1997, the six months ended March 31, 1996 and the year ended September 30, 1995 Consolidated Statements of Cash Flows for the year ended March 31, 1997, the six months E-6 ended March 31, 1996, and the year ended September 30, 1995 Notes to Consolidated Financial Statements E-7
E-1 191 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors and Stockholders Search Financial Services Inc. (f/k/a Search Capital Group, Inc.) Dallas, Texas We have audited the accompanying consolidated balance sheets of Search Financial Services Inc. (f/k/a Search Capital Group, Inc.) and its subsidiaries (the "Company") as of March 31, 1997 and 1996, and the related consolidated statements of operations, changes in stockholders' equity (capital deficit), and cash flows for the year ended March 31, 1997, the six months ended March 31, 1996, and the year ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Search Financial Services Inc. (f/k/a Search Capital Group, Inc.) and its subsidiaries at March 31, 1997 and 1996, and the results of their operations and cash flows for the year ended March 31, 1997, the six months ended March 31, 1996, and the year ended September 30, 1995 in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP ---------------------------- BDO Seidman, LLP Dallas, Texas May 23, 1997 E-2 192 SEARCH FINANCIAL SERVICES INC. (F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands)
March 31, 1997 March 31, 1996 -------------- -------------- ASSETS - ------ Gross contracts receivable (Note 6) $62,325 $37,086 Unearned interest (10,636) (6,435) ------- ------- Net contracts receivable 51,689 30,651 Allowance for credit losses (5,854) (13,353) Loan origination costs 5,852 3,984 Amortization of loan origination costs (4,379) (3,578) ------- ------- Net contract receivables - after allowance for credit losses & other costs 47,308 17,704 ------- ------- Cash and cash equivalents 12,249 17,817 Vehicles held for resale 1,196 566 Deferred note offering cost, net of depreciation and amortization of $1,672 and $1,141 in 1997 and 1996, respectively 155 - Property and equipment, net 1,608 1,062 Intangibles, net of $450 amortization in 1997 (Note 4) 6,252 - Other assets 755 197 ------- ------- Total assets $69,523 $37,346 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Lines of credit (Notes 6 & 8) $23,715 $ - Note payable (Note 7) 9,596 2,283 Accrued settlements (Notes 16 & 17) 540 688 Accounts payable and other liabilities 2,760 7,356 Subordinated note payable (Note 7) 5,000 - Accrued interest 271 15 Redeemable warrants (Notes 2 & 4) 1,035 593 ------- ------- 42,917 10,935 ------- ------- Stock repurchase commitment (Note 10) 2,078 2,078 ------- ------- Stockholders' Equity (Note 9) - -------------------- Convertible Preferred stock 201 154 Common stock 252 248 Additional paid-in capital 78,047 79,124 Accumulated deficit (52,760) (54,043) Treasury stock - (1,150) ------- ------- Total stockholders' equity 25,740 24,333 Notes receivable - stockholders (Note 11) (1,212) - ------- ------- 24,528 24,333 Total liabilities and stockholders' equity $69,523 $37,346 ======= =======
See accompanying notes to consolidated financial statements. E-3 193 SEARCH FINANCIAL SERVICES INC. (F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES Consolidated Statements of Operations (In Thousands except per share data)
Six Months Ended Year Ended March 31, 1996 Year Ended March 31, 1997 (Note 1) September 30, 1995 -------------- ---------------- ------------------ Interest revenue $10,004 $ 3,541 $13,472 Interest expense 2,306 1,306 11,205 ------- ------- -------- Net interest income 7,698 2,235 2,267 Reduction of (provision for) credit losses (Note 6) 7,017 (4,982) (3,128) ------- ------- -------- Net interest income (loss) after reduction of (provision for) credit losses 14,715 (2,747) (861) ------- ------- -------- General and administrative expense 13,392 8,098 15,881 Settlement expense 40 535 2,837 Reorganization expense - - 315 ------- ------- -------- Operating and other expense 13,432 8,633 19,033 ------- ------- -------- Income (loss) before extraordinary item 1,283 (11,380) (19,894) Extraordinary gain on discharge of debt (Notes 2 & 7) - 8,709 - ------- ------- -------- Net income (loss) 1,283 (2,671) (19,894) Preferred stock dividends 6,154 327 240 ------- ------- -------- Net loss attributable to common stockholders $(4,871) $(2,998) $(20,134) ======= ======= ======== $ (1.45) $ (8.96) $ (17.96) Loss per common share before extraordinary item Gain on extraordinary item - 6.67 - ------- ------- -------- Loss per common share (Notes 9 & 10) $ (1.45) $ (2.29) $ (17.96) ======= ======= ======== Weighted average number of common shares outstanding 3,366 1,306 1,121 ======= ======= ========
See accompanying notes to consolidated financial statements. E-4 194 SEARCH FINANCIAL SERVICES INC. (F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES Statement of Changes in Stockholders' Equity (Capital Deficit) (Notes 3 and 9) For the year ended March 31, 1997, six months ended March 31, 1996 and year ended September 30, 1995 (In Thousands except per share amounts)
Treasury Stock ---------------------- --------------------- ------------------- --------------------- Preferred Stock-12% Preferred Stock-9%/7% Common Stock Preferred Stock-9%/7% ---------------------- --------------------- ------------------- --------------------- Shares Amount Shares Amount Shares Amount Shares Amount ------------------------------------------------------------------------------------------------- BALANCE, OCTOBER 1, 1994 50,000 $ 4 - $ - 1,462,191 $ 117 - $ - ------------------------------------------------------------------------------------------------- Stock purchase at May 5, 1995 - $ - - $ - - $ - - $ - Stock repurchase commitment - - - - (115,418) (9) - - Preferred stock dividends - - - - - - - - Net loss - - - - - - - - ------------------------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1995 50,000 $ 4 - $ - 1,346,773 $ 108 - $ - ------------------------------------------------------------------------------------------------- Exercise of options - $ - - $ - 4,480 $ 1 - $ - Class action suit settlement - - - - 231,000 18 - - (Note 16) Reorganization (Note 2) - - 1,878,956 150 1,514,375 121 - - Preferred stock dividends - - - - - - - - Net loss - - - - - - - ------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1996 50,000 $ 4 1,878,956 $ 150 3,096,628 $248 - $ - ------------------------------------------------------------------------------------------------- Debt conversion - Hall Financial Group, Inc. (Note 5) - $ - - $ - 312,500 $ 25 - - Additional investment - Hall Financial Group, Inc. (Note 5) - - 254,100 20 204,800 16 - - Investment - Alex. Brown & Sons, Incorporated - - - - 26,462 2 - - Acquisition - Dealers Alliance Credit Corp. (Note 4) - - 319,257 26 159,629 13 - - Conversion of 9%/7% preferred to common - - (13,755) (1) 27,511 2 - - Stock repurchase - Hall Financial Group, Inc. (Note 5) - - - - - - 254,100 (20) Acquisition - U.S. Lending Corporation (Note 4) - - 271,867 22 231,066 18 - - Retirement of treasury stock - - (254,100) (20) (895,599) (72) (254,100) 20 Preferred stock dividends - - - - - - - - Net income - - - - - - - - ------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1997 50,000 $ 4 2,456,325 $197 3,162,997 $252 - $ - ================================================================================================= Treasury Stock ------------------------ Common Stock Stockholders' ------------------------ Paid-In Accumulated Equity Shares Amount Capital Deficit (Capital Deficit) --------------------------------------------------------------------------------- BALANCE, OCTOBER 1, 1994 315,799 $ (25) $ 27,006 $(31,478) $ (4,376) --------------------------------------------------------------------------------- Stock purchase at May 5, 1995 62,500 $ (1,125) $ $ - $ (1,125) Stock repurchase commitment - - (2,069) - (2,078) Preferred stock dividends - - (240) - (240) Net loss - - - (19,894) (19,894) --------------------------------------------------------------------------------- BALANCE, SEPTEMBER 30, 1995 378,299 $ (1,150) $24,697 $(51,372) $(27,713) --------------------------------------------------------------------------------- Exercise of options - $ - $ 10 $ - $ 11 Class action suit settlement (Note 16) - - 2,595 - 2,613 Reorganization (Note 2) - - 52,149 - 52,420 Preferred stock dividends - - (327) - (327) Net loss - - - (2,671) (2,671) --------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1996 378,299 $ (1,150) $ 79,124 $(54,043) $ 24,333 --------------------------------------------------------------------------------- Debt conversion - Hall Financial Group, Inc. (Note 5) - $ - $ 1,692 $ - $ 1,717 Additional investment - Hall Financial Group, Inc. (Note 5) - - 4,310 - 4,346 Investment - Alex. Brown & Sons, Incorporated - - 150 - 152 Acquisition - Dealers Alliance Credit Corp. (Note 4) - - 4,521 - 4,560 Conversion of 9%/7% preferred to common - - (1) - Stock repurchase - Hall Financial Group, Inc. (Note 5) 517,300 (8,980) - - (9,000) Acquisition - U.S. Lending Corporation (Note 4) - - 4,463 - 4,503 Retirement of treasury stock (895,599) 10,130 (10,058) - - Preferred stock dividends - - (6,154) - (6,154) Net income - - - 1,283 1,283 --------------------------------------------------------------------------------- BALANCE AT MARCH 31, 1997 - $ - $ 78,047 $(52,760) $ 25,740 =================================================================================
See accompanying notes to consolidated financial statements E-5 195 SEARCH FINANCIAL SERVICES INC. (F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands)
Year Ended Six Months Ended Year Ended March 31, 1997 March 31, 1996 September 30, 1995 -------------- ----------------- ------------------ OPERATING ACTIVITIES: Net income (loss) $ 1,283 $ (2,671) $(19,894) Adjustments to reconcile net income (loss) to cash used in operations: Provision for (reduction of) credit losses (7,017) 4,982 3,128 Accretion of warrant debt 122 - - - Amortization of deferred offering costs 60 1,221 2,840 Amortization of loan origination costs 868 641 1,047 Amortization of goodwill and intangibles 450 - - Depreciation and amortization 531 262 384 Extraordinary gain on discharge of debt - (8,709) - Loss on disposition of fixed assets - 112 - Changes in assets and liabilities: Decreases (increases) in other assets, net (246) 470 (86) Increases (decreases) in accounts payable and accrued expense (5,290) (449) 1,840 ---------- --------- -------- Cash used in operations (9,239) (4,141) (10,741) ---------- --------- -------- INVESTING ACTIVITIES: Purchase of contract receivables including origination fees (39,042) (5,471) (24,830) Principal payments on contract receivables including proceeds from sales of vehicles 30,993 17,921 47,652 Purchases of property and equipment (856) (132) (711) (Increases) decreases in restricted cash - 8,105 (4,519) ---------- --------- -------- Cash provided by (used in) investing (9,135) 20,423 17,592 ---------- --------- -------- FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit 15,295 1,225 (2,429) Notes payable proceeds - - 1,779 Notes payable repayments - - (5,077) Capital lease repayments (67) (24) (58) Notes payable offering costs (215) - (198) Proceeds from sale of stock, net of expense 4,346 - - Proceeds from exercise of options - 12 - Notes receivable - stockholders (1,212) - - Purchase of treasury stock (4,000) - (1,125) Payment of dividends (4,724) (120) (240) ---------- --------- -------- Cash provided by (used in) financing activities 9,423 1,093 (7,348) ---------- --------- -------- CHANGE IN CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents (8,951) 17,375 (497) Net cash acquired (Note 4) 3,383 - - Cash and cash equivalents - beginning 17,817 442 939 ---------- --------- -------- Cash and cash equivalents - ending $ 12,249 $ 17,817 $ 442 ========== ========= ======== SUPPLEMENTAL INFORMATION (Note 20): Cash paid for interest $ 2,050 $ 71 $ 9,272 ========== ========= ========
See accompanying notes to consolidated financial statements. E-6 196 SEARCH FINANCIAL SERVICES INC. (F/K/A SEARCH CAPITAL GROUP, INC.) AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES General. The accompanying consolidated financial statements include the accounts of Search Financial Services Inc. (f/k/a Search Capital Group, Inc.) ("Search") and its subsidiaries (the "Company") as follows: Automobile Credit Holdings, Inc. Automobile Credit Acceptance Corp. ("ACAC") Consumer Dealer Autocredit Corporation Newsearch, Inc. Search Capital Acquisition Corp. Search Financial Services Company Search Financial Services of Florida, Inc. Search Financial Services of Georgia, Inc. Search Financial Services of Louisiana, Inc. Search Financial Services of Oklahoma, Inc. Search Financial Services of Puerto Rico, Inc. Search Financial Services of Tennessee, Inc. Search Financial Services of Texas, Inc. Search Mortgage Services of Tennessee, Inc. Search Funding Corp. ("SFC") Search Funding II, Inc. Search Funding III, Inc. Search Funding IV, Inc. Search Funding V, Inc. During fiscal 1997, the special purpose subsidiaries of Search which raised money through the issuance of interest bearing notes for the purchase of contract receivables (the "Fund Subsidiaries") were dissolved. The balance sheet as of March 31, 1996 and the statements of operations and cash flows for the periods ended March 31, 1996 and September 30, 1995 include the Fund Subsidiaries in the consolidation (see note 2). In 1996, the Company changed its fiscal year end to March 31. Effective May 16, 1997, the name of Search was changed from Search Capital Group, Inc. to Search Financial Services Inc. In November 1996, the Company effected a 1-for-8 reverse stock split. All references in the financial statements and notes to the number of shares outstanding, the number of shares subject to warrants and options and per share amounts have been retroactively restated to reflect the reverse split. Basis of Consolidation. The consolidated financial statements include the accounts of the Company, after elimination of all significant intercompany accounts and transactions, and have been prepared in accordance with generally accepted accounting principles. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Contracts Receivable, Allowance for Credit Losses, and Interest Income. The Company records receivables purchased at cost. Contractual finance charges are recorded as unearned interest and amortized to interest income using the interest method. An initial allowance for credit losses is recorded at the acquisition of a receivable equal to the difference between the amount financed and the acquisition cost, which is what the Company estimates to be fair value. The Company considers all of its contracts receivable to be consumer installment loans to E-7 197 individuals. In accordance with Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"), these receivables are reviewed individually for impairment generally using the receivable's contractual delinquency or repossession status. All receivables which exceed 60 days contractual delinquency or with respect to which the underlying collateral has been repossessed are considered impaired. Once impaired, a receivable is placed on nonaccrual status and written down to its net realizable value, and no interest income is recognized until the receivable returns to nonimpaired status. Therefore, at impairment, the Company writes down the receivable to its estimated net realizable value, which is the fair value of the underlying collateral if it has been repossessed or the estimated recoverable cash flow if no repossession has occurred. If the measured amount of the impaired receivable is less than the Company's net recorded investment in the receivable, the Company recognizes a charge to provision for credit losses in the amount of the deficiency and increases the allowance for credit losses by a corresponding amount. The provision for credit losses is adjusted for any differences between the final net proceeds from resale of the underlying collateral and the estimated net realizable value. All payments received on impaired receivables are considered a return of principal. Generally, the Company charges off a receivable against the allowance for credit losses at 180 days contractual delinquency if no significant payments have been received in the last six months, or earlier after receipt of the sale proceeds from liquidation of the collateral securing the receivable. Subsequent proceeds received on a previously charged-off receivable are recorded as a recovery to the allowance for credit losses. Any excess of cost paid ("premium") for net receivables acquired is recorded as an asset and amortized over the life of the related loans acquired as an adjustment to yield using the interest method. All amounts are stated as gross receivables, which include unearned interest, unless otherwise indicated. Loan Origination Costs. The Company performs substantially all of the functions associated with origination of its receivables and capitalizes the related costs. The portion capitalized is amortized by the interest method against income as an adjustment of yield. Vehicles Held for Resale. Vehicles held for resale represents the estimated collateral value of motor vehicles in the Company's possession and are carried at the lower of cost or estimated net realizable value (estimated auction value less estimated costs to sell at the time of repossession). The Company classifies a loan as vehicle held for resale upon physically repossessing the vehicle and until the vehicle is sold at auction. The deficiency balance, if any, is then charged off. Deferred Notes Payable Offering Costs. Costs directly related to notes payable offerings were capitalized and amortized to expense by the interest method over the contractual terms of the notes. Deferred offering costs were the commissions, printing, legal, accounting and other expenditures incurred in issuing the notes to the investors. Property and Equipment. Property and equipment includes assets which are depreciated over three-year and five-year lives and leasehold improvements which are amortized over the remaining term of the lease. Cost in Excess of Fair Value of Net Assets Acquired and Other Intangibles. Cost in excess of the fair value of net assets acquired is amortized on a straight-line basis over 90 months. Other intangibles, which include customer lists and dealer networks, are being amortized over 10 to 15 years using the straight-line method. The Company continually monitors its cost in excess of net assets acquired (goodwill) and its other intangibles to determine whether any impairment of these assets has occurred. In making such determination with respect to goodwill, the Company evaluates the performance, on an undiscounted basis, of the underlying businesses which gave rise to such amounts. With respect to other intangibles, the Company bases its determination on the performance, on an undiscounted basis, of the related intangibles. Net Loss Per Share Attributable to Common Stockholders. The net loss per share attributable to common stockholders has been computed based on the weighted average number of shares of Search common stock outstanding during each period and after deducting preferred stock dividends declared. Common stock equivalents are included in the calculations except when their effect would be antidilutive. Income Taxes. The Company files a consolidated federal income tax return. The Company uses the asset and liability method to provide for income taxes under which deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. E-8 198 Statement of Cash Flows. For purposes of reporting cash flows, the Company considers short term cash investments with original maturities of three months or less to be cash equivalents. Recent Accounting Pronouncements. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). SFAS No. 125 requires that an entity recognize the financial and servicing assets it controls and the liabilities it has incurred and derecognize financial assets when control has been surrendered and derecognize liabilities when extinguished. SFAS No. 125 provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It is generally effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. Management of Company believes that SFAS No. 125 has no current impact on the Company there exist no significant transactions as contemplated by SFAS 125; however, SFAS 125 may have a material impact on its future financial statements, if in those periods the Company completes a securitization transaction. 2. CHAPTER 11 BANKRUPTCY FILING OF THE FUND SUBSIDIARIES AND CONFIRMATION OF THE JOINT PLAN OF REORGANIZATION As of March 31, 1996, the Fund Subsidiaries consisted of six public and two private corporations as follows: Automobile Credit Fund 1991-III, Inc. - Private Automobile Credit Finance, Inc. - Public Automobile Credit Partners, Inc. - Private Automobile Credit Finance 1992-II, Inc. - Public Automobile Credit Finance III, Inc. - Public Automobile Credit Finance IV, Inc. - Public Automobile Credit Finance V, Inc. - Public Automobile Credit Finance VI, Inc. - Public In August 1995, the Fund Subsidiaries filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code. Search and its unrestricted subsidiaries did not seek protection under the Code, but Search was a co-proponent of a joint plan of reorganization for the Fund Subsidiaries. On March 4, 1996, the Court entered an order ("Confirmation Order") confirming the Third Amended Plan of Reorganization (the "Joint Plan") for all of the Fund Subsidiaries, effective on March 15, 1996 (the "Effective Date"). Total secured claims of all noteholders under the Joint Plan were $53,240,000, and total unsecured claims were $16,080,000, for total claims of $69,320,000, which comprised the total of notes payable and accrued interest due the noteholders (see Note 7). The Joint Plan allowed noteholders to choose one of two options. Under one of the options (the "Equity Option"), noteholders received with respect to the secured portion of their claims shares of Search common stock, shares of a new series of 9%/7% convertible preferred stock and a cash payment equal in amount as if dividends had been calculated on the 9%/7% convertible preferred stock from July 1, 1995 to the Effective Date. Under the other option (the "Collateral Option"), noteholders would receive with respect to the secured portion of their claims distributions of the proceeds of the continued collection or sale of the motor vehicle receivables securing their notes. In accordance with the Joint Plan, the number of shares issued was calculated as of the Effective Date so that noteholders received shares of common stock and 9%/7% convertible preferred stock having a value equal, on a fully diluted basis, to 75% of the value of all shares of 9%/7% convertible preferred stock, common stock, 12% senior convertible preferred stock, warrants, stock options and rights then outstanding, or agreed to be issued by Search (with certain exceptions, including any shares issued to Hall Phoenix/Inwood Ltd., ("HPIL") under the Funding Agreement referred to in Note 5). At a special stockholders' meeting on March 1, 1996, stockholders of Search approved amendments to Search's Certificate of Incorporation increasing Search's authorized capital stock to 130,000,000 shares of common stock and 60,000,000 shares of preferred stock. Before the Effective Date, Value Partners, Ltd. purchased all of the secured claims of noteholders who had elected the Collateral Option (approximately $12,800,000 of original note principal amount) and changed the election for such secured claims to the Equity Option. The selling noteholders retained their unsecured claims. As a E-9 199 consequence of this transaction, 100% of the secured claims of noteholders received treatment under the Equity Option. With respect to the unsecured portion of noteholders' claims, the noteholders and any other holders of unsecured claims are entitled to receive from Search a pro rata share of warrants (the "Warrants") to purchase an aggregate of 625,000 shares of common stock. These Warrants will be issued after the unsecured claims of non- noteholders are determined by the bankruptcy court. (see Note 9). The Company is required to redeem all unexercised Warrants at $2.00 for each share of stock subject to the Warrants in March 2001. The Warrants are considered debt and have been recorded at their estimated fair value. The accretion from fair value to the redemption amount is recorded as interest expense over the term of the Warrants using the interest method. The Joint Plan required that a trust ("Litigation Trust") be established for the benefit of the noteholders, with a total funding of $350,000. The Litigation Trust is authorized to pursue claims and causes of action of the Fund Subsidiaries and of certain participating noteholders. Proceeds will be distributed pro rata to noteholders. On the Effective Date, the net assets of the Fund Subsidiaries were transferred to Search. The Fund Subsidiaries' notes and the indebtedness represented by those notes were deemed canceled when the Confirmation Order became final. The trust indentures for the notes, and all related restrictions, were also deemed canceled. As a result of the implementation of the Joint Plan and the cancellation of the notes, a net extraordinary gain from the extinguishment of debt was reported in the amount of $8,709,000 (see Note 7). The Fund Subsidiaries accounted for all transactions, where applicable, related to the reorganization proceedings in accordance with Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") issued by the American Institute of Certified Public Accountants. 3. REVERSE STOCK SPLIT In August 1996, the Board of Directors of Search authorized a one-for-eight reverse stock split that became effective on November 22, 1996 following stockholder approval. All references in the financial statements and notes to the number of shares outstanding, the number of shares subject to warrants and options and per share amounts have been retroactively restated to reflect the reverse split decreased number of common and preferred shares outstanding. 4. ACQUISITIONS In November 1996, Search Funding III, Inc., a wholly-owned subsidiary of Search, completed its acquisition of certain assets of U.S. Lending Corporation ("USLC"). USLC conducted purchasing and servicing of used motor vehicle receivables in Deerfield Beach, Florida. USLC had been operating under Chapter 11 of the U.S. Bankruptcy Code. The acquisition was accounted for as an asset purchase. Accordingly, results of operations related to the acquired assets have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the net assets acquired based upon their estimated fair value. Search purchased USLC's net assets, valued at $4,819,000, for 231,066 shares of common stock, 271,867 shares of 9%/7% convertible preferred stock, and Warrants to purchase 154,960 shares of common stock. The assets acquired were approximately $3,500,000 in cash, gross receivables of approximately $1,800,000 and an undetermined amount of delinquent accounts and foreclosure deficiency balance accounts. In August 1996, Search Funding IV, Inc. ("SFIV"), a wholly-owned subsidiary of Search, acquired all of the assets and assumed certain liabilities of Dealers Alliance Credit Corp. ("DACC"). DACC conducted purchasing and servicing of used motor vehicle receivables in Atlanta, Georgia. DACC had purchased loans from over 1,000 new and used car dealers, primarily in Georgia, Texas, Tennessee and Florida. The Company has been using the DACC facilities as a regional marketing branch for southeastern states, a collection center and as a full-service consumer loan facility. The acquisition was accounted for under the purchase method of accounting. Accordingly, results of operations related to the acquired assets have been included in the consolidated financial statements since E-10 200 the date of acquisition. The purchase price was allocated to the net assets acquired based upon their estimated fair value. For DACC's net assets, valued at approximately $21,000,000, Search delivered 159,629 shares of common stock, 319,257 shares of 9%/7% convertible preferred stock, and Warrants to purchase 159,629 shares of common stock with a total value of $4,795,000. In addition, the Company assumed approximately $17,450,000 in bank debt under a restructured line of credit. The calculation of the purchase price and allocation to the acquired assets of DACC is as follows (in thousands): Net contracts receivable $14,380 Cash and cash equivalents 753 Vehicles held for sale 284 Property and equipment 222 Customer lists 2,175 Dealer network 2,200 Other assets 835 ------- Total estimated fair value of assets acquired 20,849 ------- Liabilities assumed 18,239 Fair value of Search equity instruments issued, including redeemable warrants treated as debt 4,795 Direct acquisition costs 143 ------- Total cost $23,177 ------- Cost in excess of fair value of net assets acquired and other identifiable intangibles $ 2,328 =======
The Company periodically evaluates the recoverability and remaining life of the excess value and determines whether it should be completely or partially written-off or the amortization period accelerated. The Company will recognize an impairment of excess value to the extent that the undiscounted estimated future operating cash flows of the acquired assets are determined to be less than the carrying amount of the excess value. If an impairment of excess value were to occur, the Company would reflect the impairment through a reduction in the carrying value of such excess value. The Warrants issued in both the USLC and DACC transactions have redemption features which require the Company to redeem all unexercised warrants at $2.00 for each share of stock subject to the Warrants in March 2001. The Warrants are considered debt and have been recorded at their estimated fair value. The accretion from fair value to redemption amount is recorded as interest expense over the term of the warrants using the interest method. In September 1996, the Company acquired approximately $12,000,000 in gross receivables from Eagle Finance Corp. for a total cash price of approximately $9,600,000. In November 1996, the Company acquired approximately $21,000,000 in gross receivables from MS Financial, Inc. for a total cash price of approximately $14,400,000. The receivables were purchased at a premium over the net assets acquired. The premiums are amortized over the life of the related portfolio as an adjustment to yield using the interest method. 5. TRANSACTIONS WITH HALL AND AFFILIATES In November 1995, Search entered into a Funding Agreement (the "Funding Agreement") with Hall Financial Group, Inc. ("HFG"). Pursuant to the Funding Agreement, HFG made loans totaling $2,283,000 (the "HFG Notes") to Search. The HFG Notes could, at the election of HFG or its assignee, be converted into a maximum of 312,500 shares of Search common stock. Effective April 2, 1996, HPIL, as assignee of the HFG Notes, converted the HFG Notes into 312,500 shares of Search common stock. Because the conversion price E-11 201 specified in the HFG Notes for these shares was less than the full amount due under the HFG Notes, Search paid to HPIL the remaining portion of the debt evidenced by the HFG Notes ($567,000) in cash. The Funding Agreement also provided to HFG the option to purchase common stock, 9%/7% convertible preferred stock, and Warrants. Effective April 2, 1996, HPIL, as assignee of HFG, fully exercised this purchase option by paying $4,346,000 to Search for 204,800 shares of common stock, 254,100 shares of 9%/7% convertible preferred stock, and warrants to purchase 484,522 shares of common stock, including Warrants to purchase 84,522 shares. Pursuant to the Funding Agreement, HFG designated two nominees who were elected to Search's Board of Directors. In October 1996, the two directors filed suit against Search seeking access as directors to certain of the Company's books and records and Search initiated legal action against the two directors and HPIL. In November 1996, the Company, the two directors and HPIL entered into a settlement agreement. As a result of the agreement, Search paid HPIL $4,000,000 in cash and executed a $5,000,000 subordinated note (see Note 7) to repurchase from HPIL and the directors all of their 517,300 shares of common stock, 254,100 shares of 9%/7% convertible preferred stock and warrants to purchase 484,522 shares of common stock, including Warrants to purchase 84,522 shares, and to settle all claims against Search. The parties also agreed to dismiss all litigation and mutually release each other, and the two directors resigned from the Board of Directors. The value of the settlement approximated the market value of the securities acquired by the Company at the date of the agreement. The maturity date of the subordinated note is November 21, 2000; however, the note must be repaid in full earlier if the Company sells more than, or in a proportionate amount if the Company sells less than, $20,000,000 of equity or certain debt securities for cash (see Note 19). 6. CONTRACTS RECEIVABLE, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME The Company records receivable purchases at cost. Contractual finance charges are recorded as unearned interest and amortized to interest income using the interest method. As discussed below, amortization of interest income ceases upon impairment. An initial allowance for credit losses is recorded at the acquisition of a receivable equal to the difference between the amount financed and the acquisition cost, which is what the Company estimates to be fair value. An additional allowance may be recorded at acquisition if it is determined that the discount recorded as an allowance is not adequate to cover expected losses. In accordance with SFAS No. 114, receivables are analyzed on a loan-by-loan basis. The Company evaluates the impairment of receivables generally based on the receivables' contractual delinquency. The Company considers receivables that are contractually delinquent 60 days or more or with respect to which the underlying collateral has been repossessed to be impaired. When the receivable is considered impaired, interest income ceases to be recognized. Once impaired, the Company looks to the underlying collateral for repayment of the receivable. Therefore, at impairment, the Company writes down the receivable to its estimated net realizable value, which is the fair value of the underlying collateral if it has been repossessed or the estimated recoverable cash flow if no repossession has occurred. If the measured amount of the receivable is less than the Company's net recorded investment in the impaired receivable, the Company recognizes a charge to provision for credit losses in the amount of the deficiency and increases the allowance for credit losses by a corresponding amount. The provision for credit losses is adjusted for any differences between the final net proceeds from resale of the underlying collateral and the estimated net realizable value. Generally, the Company charges off a receivable against the allowance for credit losses at 180 days contractual delinquency, if no significant payments have been received in the last six months, or, if earlier, after receipt of the sale proceeds from liquidation of the collateral securing the receivable. Subsequent proceeds received on a previously charged-off receivable are recorded as a recovery to the allowance for credit losses. Any excess of cost paid ("premium") for net receivables acquired is recorded as an asset and amortized over the life of the related loans acquired as an adjustment to yield using the interest method. E-12 202 The Company's receivables, allowance for credit losses and net receivables after allowance for credit losses, excluding net loan origination costs, are summarized below on a consolidated basis (in thousands):
Net Allowance Receivables Total for After Allowance Number of Unpaid Unearned Credit for As of March 31, 1997 Receivables Installments Interest Losses Credit Losses - --------------------- ----------- ------------ -------- ------ ------------- Impaired receivables 465 $ 2,269 $ 334 $ 993 $ 942 Unimpaired receivables 8,956 60,056 10,302 4,861 44,893 --------------------------------------------------------------------- Total 9,421 $62,325 $10,636 $ 5,854 $45,835 ===================================================================== As of March 31, 1996 - --------------------- Impaired receivables(1) 421 $ 2,091 $ 380 $ 1,711 $ - Unimpaired receivables(1) 7,575 34,995 6,055 11,642 17,298 --------------------------------------------------------------------- Total 7,996 $37,086 $ 6,435 $ 13,353 $17,298 ===================================================================== As of September 30, 1995 - ------------------------ Impaired receivables 2,323 $12,919 $ 1,644 $ 11,275 $ - Unimpaired receivables 9,805 53,758 11,462 7,348 34,948 --------------------------------------------------------------------- Total 12,128 $66,677 $13,106 $ 18,623 $34,948 =====================================================================
(1) Status as defined in the previous paragraphs of this Note. Certain unimpaired receivables may be considered problem loans. The change in the allowance for credit losses is summarized as follows (in thousands):
March 31, March 31, September 30, 1997 1996 1995 --------- --------- ------------- Balance, beginning of period $ 13,353 $18,623 $44,633 Allowance recorded upon purchase of receivables 9,908 2,194 9,613 Increase in allowance for credit losses 1,774 4,982 3,128 Proceeds received on previously charged-off - accounts 2,448 2,296 Reclassification for inventory value (855) 1,238 (1,809) Receivables charged off against allowance (11,983) (15,980) (36,942) Reduction in allowance for credit losses (8,791) - - -------- ------- ------- Balance, end of period $ 5,854 $13,353 $18,623 ======== ======= ======= Net credit losses as a percent of average net receivables 30% 36% 56%
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).
March 31, 1997 -------------- Provision for loan losses $ 1,774 Reduction in allowance (8,791) -------- Net effect on statement of operations 7,017 Less proceeds received on previously charged-off accounts 2,448 -------- Non cash reduction of credit loss provision $ 4,569 ========
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. E-13 203 The effect of non-accrual receivables on interest income in each of the following periods was as follows (in thousands):
Six Months Year Ended Ended Year Ended March 31 March 31, September 30, 1997 1996 1995 -------- ---------- ------------- Interest income As originally contracted $606 $1,480 $ 4,522 As recognized (211) (98) (1,033) ---- ------ -------- Reduction of interest income $395 $1,382 $ 3,489 ==== ====== ========
There were no commitments to lend additional funds to customers whose loans were classified as non-accrual as of March 31, 1997 and 1996, and September 30, 1995. At March 31, 1997, contractual maturities of receivables were as follows (in thousands):
2001 and 1998 1999 2000 Thereafter Total -------- --------- -------- ---------- ------- 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 ======= ======= ======= ====== =======
In the opinion of management, a portion of the receivables at March 31, 1997 will be repaid or extended either before or past the contractual maturity date. In addition, some of those receivables will be charged off before maturity. The above tabulation, therefore, is not to be regarded as a forecast of future cash collections. The Company's receivables are generally installment receivables having a fixed annual percentage rate ("APR"). These receivables are predominantly secured by motor vehicles, although during the fiscal year ended March 31, 1997, the Company commenced making and acquiring non-auto consumer loans that may be secured or unsecured. The obligors of the Company's receivables are domestically-based at the time the receivables are originated or purchased by the Company from a dealer, and the Company has no material amount of foreign receivables. Receivables will become nonaccrual status due to their contractual delinquency exceeding 60 days or due to repossession of underlying collateral. The Company also considers certain delinquent receivables that are in the contractual status of less than 60 days past due to be potential problem receivables. Uncertainty as to overall economic conditions, regional considerations, and current trends in portfolio growth cause the Company to review these receivables for potential problems. The Company considers Texas and Tennessee to be states with receivable concentrations, because receivables with obligors in each of these states exceed 10% of total outstanding receivables. Most of the Company's receivables are due from individuals located in large metropolitan areas of Texas and other southern and western states. To some extent, realization of the receivables will be dependent on local economic conditions. The Company holds vehicle titles as collateral for all motor vehicle receivables until such receivables are paid in full. E-14 204 7. NOTES PAYABLE AND ACCRUED INTEREST Notes payable at March 31, 1997 consist of the following (in thousands): Subordinated note payable to HPIL, bearing interest, due monthly, at 14% through May 1996, 15% thereafter through November 1997, 16% thereafter through May 1998 and 17% thereafter; principal due on the earlier of (i) November 21, 2000 or (ii) the sale by the Company for cash of any equity securities or subordinated debt, in which event all principal is payable if at least $20,000,000 is sold or a proportionate portion is payable if less than $20,000,000 is sold (see Note 5). $ 5,000 Note payable to banks, bearing interest at prime rate plus 1% (9.50% at March 31, 1997), due monthly, requiring monthly principal payments equal to the positive difference between all cash proceeds received by SFIV during the month and the sum of all operating expenses incurred by SFIV during the month, with remaining principal due August 2, 1997, collateralized by all assets of SFIV totaling $14,479,000 at March 31, 1997 (see Note 4 ). 9,596 ------- Total notes payable $14,596 =======
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): 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 =========
Certain of the Fund Subsidiaries stopped accruing interest on the remaining unpaid principal of these notes as of their maturity. As these Fund Subsidiaries defaulted, it was management's position that the accrual of interest was not warranted since the Fund Subsidiaries did not have sufficient assets to fully retire the principal portion of their notes. The August 1995 bankruptcy filing of the individual Fund Subsidiaries was an event of default for each of the Fund Subsidiaries under the terms of its indenture agreement. In accordance with SOP 90-7, contractual interest obligations, which are relieved from payment as a result of the Chapter 11 proceedings, are not accrued. Therefore, no interest expense was recorded for the six months ended March 31, 1996. For the year ended September 30, 1995, contractual interest on the above obligations amounted to $12,453,000 which was $1,500,000 in excess of reported interest expense (see Note 2). 8. LINES OF CREDIT In September 1996, Search Funding II, Inc. ("SFII"), a wholly-owned subsidiary of Search, entered into a revolving credit agreement (the "Line") with Hibernia National Bank ("HNB"). The Line bears interest at the prime rate plus 1% (9.50% at March 31, 1997) and is guaranteed by Search. The Line has a maximum commitment of $25,000,000 and is limited to a percentage of eligible contracts held by SFII. The Line is secured by all SFII assets totaling $23,865,000 at March 31, 1997 and expires on September 11, 1999. Search and SFII must comply with covenants that require the maintenance of a minimum adjusted net worth of $20,000,000 and a leverage ratio of not more than 5 to 1. In June 1994, SFC entered into an agreement for a line of credit with General Electric Capital Corporation ("GECC"). The line of credit initially had a maximum borrowing commitment of $20,000,000 and was limited to a percentage of eligible contracts held by SFC. The line of credit was secured by all SFC assets and was guaranteed by E-15 205 Search. The Joint Plan called for Search to fully satisfy its obligation to GECC. As a result, in March 1996, Search paid GECC $173,000, which included all principal and interest owing as of that date. This payment fully satisfied Search's obligation to GECC. 9. STOCKHOLDERS' EQUITY 12% Senior Convertible Preferred Stock. As of March 31, 1997, Search had issued 50,000 shares of its 12% senior convertible preferred stock. The 12% senior convertible preferred shares have a $.01 par value and a liquidation preference of $40.00 per share, plus accrued and unpaid dividends. The 12% senior convertible preferred shares are convertible at the option of the holder into one share of Search common stock for each share of 12% senior convertible preferred stock and entitle the holder to one vote per share. The shares carry a cumulative annual dividend of $4.80 per share, payable quarterly. Search may cause conversion of the shares to common stock or may redeem the shares at $40.00 per share, plus accrued and unpaid dividends, upon the occurrence of certain events specified in the Certificate of Designation for the 12% senior convertible preferred shares. 9%/7% Convertible Preferred Stock. As of March 31, 1997, Search had issued, or committed to issue, in connection with the Joint Plan 1,879,000 shares of the 9%/7% convertible preferred stock. During April 1996, Search issued an additional 254,100 shares of 9%/7% convertible preferred stock in connection with the HFG transaction. It repurchased these shares in November 1996 (see Note 5). The Company issued 319,257 shares of the 9%/7% convertible preferred stock in connection with its acquisition of the assets of DACC and certain indebtedness of DACC and 271,867 shares of the 9%/7% convertible preferred stock in connection with the acquisition of assets of USLC (see Note 4). The 9%/7% convertible preferred shares have a $.01 par value and a liquidation preference of $28.00 per share, plus accrued and unpaid dividends. The shares carry a non-cumulative annual dividend of $2.52 per share until March 31, 1999 and $1.96 per share thereafter. The 9%/7% convertible preferred shares are currently convertible at the option of the holder into two shares of common stock for each share of 9%/7% convertible preferred stock and entitle the holder to one vote per share. Search may cause conversion of the shares to common stock upon the occurrence of certain events specified in the Certificate of Designation for the 9%/7% convertible preferred stock. Any shares not converted prior to March 15, 2003 will automatically be converted into no more than three shares of common stock based on a formula specified in the Certificate of Designation. Common Stock. As of March 31, 1997, 3,162,997 shares of the common stock were outstanding. In addition, at that date there were outstanding various warrants and options to purchase a total of 1,114,399 shares of common stock, Search was obligated to issue 146,381 shares of common stock pursuant to the settlement of certain litigation in April 1996 (see Note 16) and Search had committed to issue warrants and options to purchase an additional 812,500 shares of common stock, including Warrants to purchase 625,000 shares. Warrants. Search is authorized to issue Warrants to purchase up to 10,000,000 shares of common stock pursuant to a warrant agreement dated as of March 22, 1996, as amended. Warrants to purchase 625,000 shares are to be issued to noteholders and other unsecured claim holders under the Joint Plan (see Note 2), and Warrants to purchase 314,589 shares of common stock issued in connection with the acquisition of the assets of DACC and USLC are outstanding (see Note 4). Warrants to purchase 84,522 shares of common stock, and other warrants to purchase 375,000 shares of common stock, were repurchased from HPIL in November 1996 (see Note 5). The exercise price per share of the Warrants is $18.00 and increases by $2.00 on March 15 of each successive year through 2000. The Warrants will expire on March 14, 2001, at which time Search must redeem all unexercised Warrants at a redemption price of $2.00 per share. Because the Warrants must be redeemed if not exercised, they have been classified outside of permanent equity as debt at fair value. An accretion to the redemption amount of $1,879,000 will be made over the term of five years using the interest method. Employee Stock Options and Other Common Stock Warrants. On August 1, 1994, the Board of Directors adopted, subject to stockholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The Plan was approved by Search's stockholders at their annual meeting held in May 1995. Employees of the Company and directors of E-16 206 subsidiaries are eligible to participate in the Plan. As of March 31, 1997, approximately 160 persons were eligible to participate. The Plan expires on July 31, 2004, although any option outstanding on such date will remain outstanding until it either has expired or has been fully exercised. The Plan is administered by the Compensation Committee of the Board. Options granted under the Plan generally are not transferable other than by will or by the laws of descent and distribution. The options usually vest over a three-year period. A total of 625,000 shares of common stock has been reserved for sale upon exercise of options granted under the Plan. As of March 31, 1997, options to acquire approximately 400,000 shares of common stock were outstanding under the Plan and 118,000 were vested as of March 31, 1997. In addition, Search had committed to issue to an executive officer of the Company options or cashless warrants, at the officer's option, for 187,500 shares of common stock upon certain financial performance or stock price targets being attained. The Company has issued to non-employee directors, key employees and certain consultants cashless warrants, the purposes of which are similar to those of grants of options under the Plan. These cashless warrants are immediately vested, are exercisable for 10 years, are transferable and are generally granted at not less than market value at the date of grant. As of March 31, 1997, cashless warrants to purchase 372,500 shares of common stock and other warrants (excluding the Warrants) to purchase 31,250 shares of common stock were outstanding. During the fiscal year ended March 31, 1997, Search issued options to employees to purchase 269,625 shares of common stock under the Plan and issued cashless warrants to purchase 198,125 shares of common stock to non-employee directors of, and consultants to, Search at average exercise price of $7.20. During the six months ended March 31, 1996, Search issued options to employees to purchase 230,000 shares of common stock under the Plan and cashless warrants to purchase 436,000 shares of common stock to non-employee directors, key employees and consultants at an average exercise price of $10.08. Certain options issued during the year ended September 30, 1995 were repriced to reflect the current market prices at that time. During the fiscal year ended September 30, 1995, options to acquire 113,813 shares of common stock were issued to officers and employees of the Company at average exercise price of $12.84. During the six months ended March 31, 1996, 4,480 warrants were exercised at an average price of $2.68 per share. Recent Accounting Pronouncement. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), in October 1995 to establish accounting and reporting standards for stock-based employee compensation plans such as stock option and restricted stock plans. SFAS 123 defines a fair value-based method of accounting for compensation expense for stock-based plans and encourages all entities to adopt that method of accounting. Entities electing to remain with the accounting treatment outlined in APB Opinion No. 25, "Accounting for Stock Issued to Employees," are required to make pro forma disclosures of net income and net income per share as if the fair value based method had been adopted. The Company accounts for its stock-based compensation under APB Opinion No. 25 under which no compensation cost has been recognized. Had compensation costs for stock-based compensation been determined consistent with SFAS No. 123, the Company's net loss and loss per common share would have been adjusted to the following pro forma amounts for options and warrants issued during the periods shown below (in thousands, except per share data):
Six Months Ended Fiscal Year Ended March 31, 1996 March 31,1997 ----------------- ------------------- 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
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 E-17 207 6.22 in 1996 and 6.37 in 1997, no expected dividends, expected life of ten years, and expected volatility of 53% in both years. 10. STOCK CANCELLATION AND STOCK REPURCHASE AGREEMENT In May 1995, Search purchased from one of its directors 62,500 shares of Search's common stock for $18 per share, market value on that date. Simultaneously with the purchase, the director resigned from the Board. Search was also given an irrevocable proxy expiring in May 1997 to vote 101,515 shares of common stock held by a trust formed by the former director. These shares held by the trust and an additional 13,902 shares held by an individual retirement account of the former director were subject to a "put" to the Company in May 1997 for $18 per share, the market value at the date of the agreement. These shares are shown on the balance sheet outside of permanent equity at the redemption price. If these redeemable shares were excluded from net loss per share, the fiscal 1997, 1996 and 1995 loss per share would be $(1.49), $(2.48) and $(19.76), respectively. In May 1997, the Company repurchased all of the shares held by the trust and the director's retirement account for a total cash price of $2,078,000. 11. RELATED PARTY TRANSACTIONS In April 1997, the Company commenced a private offering to accredited investors of up to $35 million of subordinated notes with warrants to purchase shares of common stock. Inter-Atlantic Securities Corp. ("Inter-Atlantic") is one of the placement agents for the offering. A director of Search is a senior partner of Inter-Atlantic. The Company has paid Inter-Atlantic a marketing fee of $60,000, and has and will continue to reimburse it for expenses it incurs, in connection with the offering. Pursuant to its agreement with Inter-Atlantic, if the offering is consummated, the Company will pay Inter-Atlantic a placement fee equal to 3% of the principal amount of subordinated notes sold. One-half of the fee will be paid in cash and one-half will be paid in subordinated notes with warrants. The Company also engaged Inter-Atlantic to act as its exclusive agent for raising senior debt in the form of warehousing lines of credit from securities firms during the fiscal year ended March 31, 1997. For such services, the Company has agreed to pay Inter-Atlantic a fee equal to .375% of the principal amount of such senior debt from firms contacted by Inter-Atlantic on the Company's behalf. In May 1996, the Company retained Alex. Brown & Sons, Incorporated ("Alex. Brown") to act as the Company's financial adviser for an initial term of one year. The agreement renews from year-to-year thereafter and provides for an annual retainer which is credited against compensation with respect to particular transactions. A director of Search is a Managing Director of Alex. Brown. The Company paid $288,000 to Alex. Brown in 1996. Alex. Brown has served as financial advisor to the Company in connection with the Company's proposed acquisition of MS Financial, Inc. The Company has agreed to pay Alex. Brown a fee of $175,000 upon consummation of such acquisition, and to pay Alex. Brown a fee of $50,000 for rendering its opinion regarding the fairness of the acquisition to the Company from a financial point of view. Alex. Brown also conducted a valuation of the securities issued by the Company in its acquisition of certain assets and liabilities of DACC. The Company agreed to pay Alex. Brown a $75,000 fee for this valuation analysis. In July 1996, the Company implemented a loan program for its directors and senior executive officers to finance the purchase of shares of common stock and 9%/7% convertible preferred stock in open market transactions. The loans are evidenced by promissory notes from the borrowers, bear interest at the prime rate, payable quarterly, and mature three years from the date made. The shares of stock purchased with the proceeds of the loans are pledged to the Company as security for the loans. The aggregate amount of these loans outstanding at March 31, 1997 was $1,212,255. Consulting fees of approximately $24,000 were paid to a former director for work relating to potential receivables portfolio purchases in fiscal 1997. E-18 208 Brean Murray & Co., Inc. ("BMCI") received a $200,000 success fee from Search on March 25, 1996, subsequent to confirmation of the Joint Plan. The Chairman of BMCI is a director of Search. Additional related party transactions are described in Notes 9 and 10. 12. INCOME TAXES The Company does not have a provision for income tax expense for the year ended March 31, 1997 as its income is completely offset by the utilization of its net operating loss carry-forwards. The Company files a consolidated income tax return. The components of the Company's net deferred tax asset as of March 31, 1997 are as follows (in thousands):
March 31, March 31, 1997 1996 --------- --------- Deferred tax asset: - ------------------- Allowance for credit losses & $ 1,711 $ 1,260 inventory reserve Net operating loss carry-forwards 18,394 13,000 Other tax credit carry-forwards 90 90 Accrued settlement costs - 170 Valuation allowance (20,195) (14,520) --------- ---------- Total deferred tax asset $ - $ - ========= ==========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of taxable losses in the current and prior years and uncertainties for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will not realize the benefits of these deductible differences and has fully offset the net deferred tax asset with a valuation allowance. Future changes in the valuation allowance will be recorded as a component of net income or loss on the statement of operations. At March 31, 1997, the Company had a net operating loss carryforward for Federal income tax purposes of approximately $54,100,000 which will expire, if unused, in the following years (in thousands):
Years of Expiration Amount ------------------- ------ 2009 $27,200 2010 16,320 2011 4,060 2012 6,520 ------- Total $54,100 =======
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. E-19 209 13. COMMITMENTS The Company commenced operation of six new leased consumer loan facilities during fiscal 1997 in Dallas, Texas, Baton Rouge, Louisiana, Atlanta, Georgia, Carolina, Puerto Rico, Bayamon, Puerto Rico, and Oklahoma City, Oklahoma. The leases on these facilities expire through 2002. In May 1997, the Company signed a 58-month lease for its new office headquarters located in Dallas, Texas. In April 1996, the Company signed a 60-month lease for approximately 6,000 square feet of space in Dallas, Texas to serve as the Company's collection center. Total operating lease commitments of the Company are as follows (in thousands):
Year Ending March 31, ------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 Thereafter -------- -------- ------- -------- -------- -------------- Office leases $826 $839 $833 $803 $781 $563 Office equipment leases 139 77 9 - - - ---- ---- ---- ---- ---- ---- Total operating leases $965 $916 $842 $803 $781 $563 ==== ==== ==== ==== ==== ====
In addition to the operating leases, the Company has one capitalized lease with payments of $81,000 per year through 1998 and $67,000 in 1999. 14. CHANGE IN FISCAL YEAR In 1996, the Company changed its fiscal year end to March 31. The following table reflects the unaudited comparable period of fiscal 1995 (in thousands except share data):
Six months ended March 31, 1995 ----------------- 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 ========
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 E-20 210 subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions significantly affect the estimates and, as such, the derived fair value may not be indicative of the value negotiated in an actual sale and may not be comparable to that reported by other companies. In addition, the fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Fair value estimates for significant financial instruments are set forth below (in thousands):
Carrying Estimated value fair value -------- ---------- March 31, 1997 Net contracts receivable $51,689 $49,621 ======= ======= March 31, 1996 Net contracts receivable $30,651 $26,360 ======= =======
16. SETTLEMENT OF O'SHEA CLASS ACTION LAWSUIT On July 7, 1994, a class action civil lawsuit was filed against Search, certain of its officers and directors, one of its former accounting firms and the lead underwriter and one of its principals involved in the issuance of Search's common stock. This action was filed in the United States District Court for the Northern District of Texas, Dallas Division, and was styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al. In July 1994, similar actions styled John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al, and Gary Odom v. Search Capital Group, Inc., et al, were also filed. The above cases were consolidated in September 1994 (the "O'Shea Class Action Suit"). The O'Shea Class Action Suit was filed on behalf of all purchasers of Search's common stock during the period beginning December 10, 1993 and ending through July 5, 1994, which was the date that Search made a public announcement regarding lower earnings. The O'Shea Class Action Suit contended that Search made misstatements in its registration statements concerning the Company's computerized system, accounting methodologies used by the Company, collectibility of its receivables and repossession rates of autos that secured its receivables. The plaintiffs also complained of allegedly false public filings, press releases and reports issued during 1994. The plaintiffs sought damages, rescission, punitive damages, pre-judgment interest, fees, costs, equitable relief and or injunctive relief and such other relief as the court deemed just and proper. In April 1996, the court entered a Final Judgment and Order of Dismissal approving a settlement (the "Settlement") entered into between Search and counsel for the plaintiffs. The Settlement provided for a cash payment by Search of $287,000 and the issuance by Search of its common stock with a value of $2,613,000. As a result of the Settlement, Search issued 84,619 shares of its common stock and is committed to issue an additional 146,381 shares of its common stock. 17. LEGAL PROCEEDINGS The Company and ACAC are defendants in a pending civil action filed in the 153rd Judicial District Court, Tarrant County, Texas, styled Autostar Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corp., Cause No. 153-144940. The plaintiff in this action alleges the existence of a partnership between the plaintiff and another defendant and seeks damages, actual and exemplary, and an injunction for alleged conversion and misappropriation of certain property, including computer programs, allegedly owned by the plaintiff. In the petition, the plaintiff alleges that ACAC wrongfully assisted its co-defendant and tortiuously interfered with the plaintiff's contracts and business and has claimed, as actual damages, $680,000. The Company believes that these allegations E-21 211 are without merit and intends to vigorously defend itself at trial, which is now scheduled in July 1997. No opinion can be given as to the final outcome of this lawsuit. The Company and certain of its former officers and directors are defendants in a case styled Janice and Warren Bowe, et. al. vs. Search Capital Group, Inc., et. al., Cause No. 1:95CV 649GR, filed in the Federal District Court for the Southern District of Mississippi. The plaintiffs, who are former holders of notes issued by three of the Fund Subsidiaries, allege violations of the securities laws by the defendants and seeks unspecified damages, rescission, punitive damages and other relief. The plaintiffs also seek establishment of a class of plaintiffs consisting of all persons who purchased notes issued by the three Fund Subsidiaries. Although no assurances can be given, the Company believes it has meritorious defenses to this action and will defend itself vigorously. The Company has been party to certain settlement negotiations with discussions of amounts payable by the Company ranging from reimbursements of expenses to $1,700,000 in cash and stock. However, as of May 23, 1997, negotiations have been suspended with no scheduled resumption. While the ultimate outcome of this litigation cannot be determined, management has established a reserve of $500,000 for expenses and losses from this litigation. There are presently no other legal proceedings, threatened or pending, relating to the Company which would, in the opinion of management, have a material impact on earnings or the financial condition of the Company. 18. MERGER AGREEMENT Search has entered into an Agreement and Plan of Merger dated as of February 7, 1997 (the "Merger Agreement") with MS Financial, Inc. ("MS") pursuant to which a wholly-owned subsidiary of Search will merge into MS (the "Merger"), resulting in MS becoming a wholly-owned subsidiary of Search. Pursuant to the Merger, each outstanding share of common stock of MS will be converted at the effective time of the Merger into the right to receive a fraction (the "Exchange Ratio") of a share of Search common stock determined by reference to the average price per share of the Search common stock for the 10-day trading period ending on the fifth business day prior to the special meeting of stockholders of MS at which the Merger Agreement will be considered for adoption (the "Average Trading Price"). The Exchange Ratio will equal $2.00 (the "Per Share Amount") divided by the Average Trading Price, subject to a maximum of .46 and a minimum of .34. The Per Share Amount and the maximum and minimum Exchange Ratios are subject to downward adjustment in certain circumstances. The Merger is subject to customary conditions, including stockholder approval and the finalization of acceptable arrangements with MS' lenders. Approval of the Merger by MS' stockholders requires the affirmative vote of a majority of the outstanding shares of common stock of MS. Pursuant to a Stockholders Agreement dated as of February 7, 1997, MS' principal stockholders, which together own approximately 77% of MS' outstanding common stock, have agreed to vote their shares in favor of the Merger. If the Merger Agreement is terminated under certain conditions, MS may be obligated to pay the Company a fee of $700,000. Further, the Merger Agreement calls for a monthly fee of $100,000 payable by MS to the Company for operational assistance to MS between February 7, 1997 and the consummation of the Merger. Such operational assistance fee is to be applied against the termination fee described above, if applicable. If the Merger Agreement is terminated under other conditions, Search may be obligated to pay MS a fee of $250,000. For the year ended December 31, 1996, MS reported interest income of $14,909,000, a net loss of $22,014,000 and a net loss per share of $2.11. 19. SUBSEQUENT EVENTS In April 1997, the Company commenced a private offering to accredited investors of up to $35 million of seven-year senior subordinated notes with warrants to purchase shares of Search's common stock. Additionally, the Company has signed a letter of intent to obtain a $100,000,000 warehouse line of credit with an investment banking firm. In addition to the $100,000,000 warehouse line of credit, the Company is also negotiating a $4,000,000 short-term line of credit with the same investment banking firm. E-22 212 20. NONCASH ACTIVITIES During the 12 months ended March 31, 1997, the Company issued a $5,000,000 note payable in connection with the purchase of stock from HFG. Additionally, the Company had an increase in the valuation adjustment for inventory of $855,000, a decrease of $1,238,000 and an increase of $1,809,000 for the year ended March 31, 1997, six months ended March 31, 1996 and the year ended September 30, 1995, respectively. On April 2, 1996, HFG converted $2,283,000 in loans into 312,500 shares of common stock. During the year ended March 31, 1997, the Company acquired substantially all of the assets of DACC and USLC in stock transactions, for which the Company received cash, receivables, fixed assets and assumed certain liabilities (Note 4). Additionally, Alex. Brown converted fees owed for investment banking services into common stock during the year ended March 31, 1997. E-23 213 ANNEX F UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-K/A AMENDMENT NO. 2 (Mark One) [ ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended [X] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from October 1, 1995 to March 31, 1996. Commission File No. 0-9539 S E A R C H C A P I T A L G R O U P, I N C. (Exact name of registrant as specified in its charter) DELAWARE 41-1356819 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 700 NORTH PEARL, SUITE 400 PLAZA OF THE AMERICAS NORTH TOWER, LOCK BOX 401 DALLAS, TEXAS 75201-7490 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (214) 965-6000 ------------------ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE 9%/7% CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE WARRANTS EXPIRING MARCH 14, 2001 (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of June 17, 1996, there were 27,208,225 outstanding shares (with an aggregate market value of $35,914,857) of Registrant's $.01 par value common stock, and the aggregate market value of shares held by non-affiliates of the Registrant was $26,541,957 based on the average of the high and low sale price and 20,107,543 shares held by non-affiliates. 214 PART I ITEM 1. BUSINESS OVERVIEW OF THE COMPANY. Search Capital Group, Inc. (herein called "Search" and together with its consolidated subsidiaries called the "Company") is an industry specific financial services Company specializing in the purchase and management of used motor vehicle receivables purchased from franchise and independent automobile and light truck dealers ("Dealers"). The Dealers originate these receivables by financing the sale of vehicles to purchasers who do not qualify for credit from traditional lending sources. These receivables generally carry imputed interest rates in the range of 18% to 26% The automobile finance industry is the second largest consumer finance market in the United States totaling $353 billion as of December, 1995, according to the Federal Reserve Board. Automobile financing is usually provided by finance companies affiliated with manufacturers and banks, credit unions and independent finance companies. The financings are generally segmented according to the type of car sold (new or used) and the credit characteristics of the borrower (generally, prime or non-prime). Non-prime borrowers are individuals who, due to either incomplete or imperfect credit histories, are unable to obtain traditional financing through a bank or one of the finance companies affiliated with manufacturers. The Company specializes in financing used cars and trucks to these non-prime borrowers through its wholly-owned operating subsidiary, Automobile Credit Acceptance Corp. DESCRIPTION OF HISTORICAL OPERATIONS AND REORGANIZATION OF FUND SUBSIDIARIES. Prior to November 1994, the Company primarily financed the purchase of used motor vehicle receivables through the private and public sale of interest-bearing notes (the "Notes") issued by wholly owned subsidiaries organized specifically for this purpose (the "Fund Subsidiaries") and through reinvestment of operating cash flow. Each offering of Notes was issued by a newly organized subsidiary without recourse to Search or its other subsidiaries. The Notes offered by each of the Fund Subsidiaries were not rated by a national credit agency. After November 1994, due primarily to higher than expected losses in the collection of its receivables held by these Fund Subsidiaries, the Company, directed by then existing management, abandoned its Note offering activities and sharply reduced all receivables purchasing activities while attempting to evaluate and, where necessary, modify or remedy purchasing and collection procedures. At the same time, the Company's directors began searching for new management which could further identify problems, stabilize operations, and develop a financial plan and strategy for turnaround and future growth. On January 20, 1995, George C. Evans joined the Company as President, Chief Executive officer, and a director of the Company. Mr. Evans was appointed Chairman of the Board of Directors on May 5, 1995. Mr. Evans has over 30 years of experience in the consumer lending and financial services industry, including having served as President and Chief Operating Officer of Associates Financial Services, Vice Chairman of Associates Corporation of North America and Chairman and Chief Executive Officer of Associates International and its subsidiaries. During 1995, four other managers who previously held senior positions in finance, operations, and marketing at Associates Corporation of North America or its subsidiaries joined Search. For a detailed description of current management, see Item 10, Directors and Executive Officers of the Company. From late 1994, shortly before Mr. Evans joined the Company, until March 1996, the Company operated under financial constraints and limited ability to raise new operating capital. The purchasing of receivables for the Fund Subsidiaries was governed by trust indentures (the "Trust Indentures") which restricted management's ability to alter its receivables purchasing criteria in accordance with stricter standards developed by new management. In addition, the Company's inability to access credit sources due to the historical losses on the Company's receivables portfolio and limitations on investment of funds repaid on existing portfolios dramatically reduced the Company's ability to finance the purchase of new receivables. At the same time, to improve the quality of the Company's portfolio of receivables purchasing procedures were tightened and management significantly reduced the number of Dealers from whom the Company would purchase receivables. At Search's annual meeting of shareholders, held May 10, 1995, Search announced a preliminary outline of a plan to convert the approximately $69 million debt owed by the Fund Subsidiaries into equity of Search. On August 14, 1995, in order to consummate the debt-to-equity conversion plan, it was necessary for each of the Fund Subsidiaries to file for 1 215 reorganization under Chapter 11 of the U. S. Bankruptcy Code. On August 25, 1995, an organizational meeting was held by the U. S. Bankruptcy Trustee to select a committee (the "Committee") to represent the Noteholders ("Creditors") during the bankruptcy proceedings. On December 19, 1995, Search, the Fund Subsidiaries and the Committee agreed to a consensual plan of reorganization. On March 4, 1996, the Court entered an order (the "Confirmation Order") confirming the Third Amended Joint Plan of Reorganization (the "Joint Plan") for all of the Fund Subsidiaries, after sufficient affirmative votes for confirmation of the Joint Plan were obtained from the holders ("Noteholders") of the outstanding Notes issued by the Fund Subsidiaries. The Notes and the Noteholders constituted essentially all of the indebtedness and creditors, respectively, of the Fund Subsidiaries. The effective date of the Joint Plan was March 15, 1996 (the "Effective Date"). As a consequence of effectiveness of Joint Plan, on the Effective Date, the assets of the Fund Subsidiaries (less funding of a litigation trust and professional fees) were transferred to Search by operation of law on the Effective Date in exchange for Search Common Stock and 9%/7% Convertible Preferred Stock and cash to be distributed to the former Noteholders of the Fund Subsidiaries. Under the Joint Plan, the Notes and the indebtedness represented by the Notes, together with their related Trust Indentures, were deemed canceled upon the Effective Date. OPERATIONS SINCE REORGANIZATION OF THE FUND SUBSIDIARIES. Except for the historical information contained herein, this Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled Risk Factors. Since confirmation of the Joint Plan, the Company has implemented new programs intended to expand its receivables purchasing operations into higher credit quality receivables. Although these new programs target the Company's historical market of purchasers with non-standard credit histories, the Company intends to focus more on purchasers with job and residence stability, higher income, and re-established positive credit. Receivables purchased under the new programs typically carry interest rates ranging from approximately 18% to 26%. The receivables purchased under the new programs are generally secured by automobiles up to 6 years in age, having been driven (i) no more than an average of 25,000 miles per year and (ii) having fewer than 80,000 total miles. For each receivable purchased pursuant to the new programs, the Company generally receives an acquisition fee and purchases the receivables at a discount, ranging from 8% to 12%, depending upon the value and the term of the receivable which range from 24 to 60 months. The Company purchases receivables from a network of automobile and light truck Dealers ("Dealer Network") that originates motor vehicle receivables through the sale of used automobiles and light trucks. During the reorganization process, because the Company had abandoned its Note offering activities and sharply reduced all receivables purchasing activities, it also experienced a significant reduction in the size of the Dealer Network. The Company is currently marketing its new programs to Dealers through the efforts of employees and marketing representatives. The marketing representatives include both individuals and organizations specializing in the marketing of financing programs to Dealers. The Dealers are unaffiliated with the Company. Each Dealer enters into an agreement with the Company and agrees to use Company-approved contract forms. Under the dealer agreements, the Company is under no obligation to purchase any receivables from the Dealer. It is the Company's goal to market the new programs primarily to franchise Dealers and qualified independent Dealers. The Company has set standards for Dealers to qualify as members of the Dealer Network. In most cases, to qualify for membership in the Dealer Network, each Dealer must have been in business at least two years, be in good standing with regulatory and auto-association authorities and meet certain credit standards. The Company generally verifies that a Dealer meets these standards through credit bureau reporting services. Franchise Dealers normally qualify for membership in the Dealer Network. Membership in the Dealer Network can be terminated at the Company's discretion. The Company personnel review the receivables submitted by and purchased from each Dealer. Decisions to terminate a Dealer from the Dealer Network are made on a case-by-case basis depending on the past performance of the Dealer and performance of the receivables purchased from such Dealer. 2 216 Dealers communicate and initiate receivable sales transactions directly with the Company's centralized purchasing personnel by faxing a consumer application to the Company. the Company's decision to purchase a receivable is typically communicated to the Dealer in approximately one hour, and if the application is approved, documentation is completed generally in one week. the Company pays the Dealer for the sale of the receivable after receipt and review of the original receivable contract and other required documents and after verification procedures are completed. Historically, the Company's principal market focus has been in the southern and southwestern states where "self-help" repossession laws promote efficient collection efforts with respect to defaulted receivables, and where milder climates generate higher collateral values for used vehicles. See Item 1. Business. "Regulation." However, the Company is currently expanding the market focus of its new programs in states with laws similar to those states in which the Company currently operates. Historically, the Company's receivables purchasing criteria were governed by the terms of the Trust Indentures governing the Notes. The Trust Indentures were canceled as of the Effective Date of the Joint Plan, and no longer govern the criteria the Company uses to evaluate the quality of a receivable. As of May 31, 1996, 93.2% of the receivables owned by the Company were purchased using the criteria set forth in the Trust Indentures. The Trust Indentures established specific criteria with respect to the price, purchase discount, term, downpayment, installments and interest rate for the receivables the Company purchases and also with respect to price, cost to the Dealer, average wholesale value, age, mileage and make of the motor vehicles securing such receivables. The Company believes that the most significant of these criteria were as follows: o The average purchase price of receivables could not exceed 53% of the total remaining unpaid installments of the receivables; o The average purchase price for a receivable could not significantly exceed the approximate average wholesale value and/or the Dealer's actual cost for the underlying financed vehicle; o The receivable generally had to have an original term of 36 months or less; o The age of each financed vehicle could not generally exceed eight years for automobiles or nine years for trucks; o The obligor on the receivable was required to make a down payment in cash plus a net trade-in allowance of at least 25% of the Dealer's cost in the financed vehicle; The new programs also target used vehicle motor vehicle receivables whose obligors have non-prime credit histories, but place more emphasis on job, income and residence stability and re-established positive credit of the obligor. Receivables purchased under the new programs typically carry imputed interest rates ranging from approximately 18% to 26%. The receivables purchased under the new programs are generally secured by automobiles up to 6 years in age, having been driven (i) no more than an average of 25,000 miles per year and (ii) having fewer than 80,000 total miles. In connection with the new programs, the Company has established criteria to evaluate the quality of receivables. the Company believes that the most significant of these criteria are as follows: o The obligor must show one year verifiable residence and three years traceable residence; o the Company must be able to verify 1 year of employment for each obligor; o Obligor must show a positive pay history within the previous two years; o Obligor must show gross income of at least $1200 per month; o The maximum payment for the purchased vehicle cannot exceed 20% of the obligor's gross income; o The debt to income ratio of the obligor cannot exceed 50% of gross income; o Downpayment must be 10% of the retail selling price of the vehicle. The Company's receivables purchasing personnel review each receivable for compliance with the foregoing criteria, utilizing standard and supporting documentation provided via facsimile by the selling Dealer and national computerized databases that automatically interact with the Company's proprietary Auto Note Management System Software ("ANMS"). The Company verifies, by reference to published wholesale vehicle value guides, the average wholesale prices of the underlying vehicles. In most instances, the Company performs this pre-purchase receivable evaluation within one hour, thereby assisting the Dealer in the timely sale of the underlying vehicle. This one hour turnaround time is considered by the Company to be an important competitive factor, and the Company monitors its turnaround time through its ANMS. 3 217 The Company's underwriting strategy differs from many of its competitors. Many of the Company's competitors make only bulk purchases of receivables and/or retain recourse against the selling Dealer for non-payment of the receivable through quasi-loan arrangements, dealer holdbacks or reserve accounts or other collection collateral or guaranties. The purchase and credit criteria and verification procedures also differ from competitor to competitor. Certain other competitors will only purchase "seasoned" receivables, i.e. receivables that have existed and performed in an acceptable manner for a period of time. In addition to the purchases of individually selected receivables, the Company is currently seeking the acquisition of pools of non-prime credit automobile receivables ("Bulk Purchases") from Dealers or other finance companies. The Company expects to use the acquisition of Bulk Purchases as a means of increasing the number of receivables in its portfolio of receivables. The receivables forming a potential Bulk Purchase are analyzed on both an individual and a pooled basis using criteria similar to the criteria used to evaluate loans purchased from Dealers. In addition, the historical performance of receivables forming a potential Bulk Purchase are analyzed. Individual receivables that do not meet the Company's credit criteria will be excluded from the Bulk Purchase, or if a large number of the receivables forming the potential Bulk Purchase do not meet the Company's credit criteria, the entire Bulk Purchase may be rejected. Following the purchase of each receivable, the Company mails a statement to each obligor a minimum of 5 days before each payment becomes due. These statements instruct each obligor to remit payments directly to the Company's post office box. Payments may also be made in person at the Company's offices or via Western Union Quick Collect(TM) service or through Ace Cash Express(TM). The Company's collections operations are currently based in Dallas, Texas and, the Company operates branch collections offices in the following cities: Garland, Texas; Arlington, Texas; Houston, Texas; and Memphis, Tennessee. The Company has a staff of collection personnel that monitor payments of the receivables and that contact obligors via telephone when payments are delinquent. Collections personnel generally have (i) a minimum of one year collection experience, (ii) the ability to obtain corrective action on delinquent accounts and (iii) knowledge and ability to comply with state and federal debt collection laws. Generally, if the receivable shows any indication of default, the receivable is subject to enhanced collection efforts, including intensified telephone and written contacts aimed at identifying the likelihood and expected amount of payment on the receivable. At any time thereafter, the Company may (i) contract with an independent third party repossession firm to locate and peacefully repossess the motor vehicle securing the receivable or (ii) seek and obtain an order of a court of competent jurisdiction for turnover of the motor vehicle. The decision to repossess a motor vehicle is made on a case-by-case basis by a collections unit manager. Factors considered by these unit managers include recent payments and willingness on the part of the obligor to commit to payment upon a date certain. Any delays in repossession expose the Company to the risk of reduced resale value for the vehicle due to additional mileage and the possibility of damage or lack of necessary maintenance or repairs to the vehicle. Company policy does not currently allow an account's payments to be deferred except in very rare instances and only with senior management approval. The Company's collection and repossession activities are administered with use of the ANMS. The Company's ability through the ANMS to relationally cross-reference receivable collection statistics to a vehicle, Dealers, customers and geographic locations assists the Company in monitoring receivables and adjusting purchase procedures and prices. Following repossession of a vehicle, the Company generally sells the vehicle on a wholesale basis at the highest available bid at an unaffiliated motor vehicle auction. During the period from October 1994 until December 1995, the Company sold many of its repossessed vehicles directly to consumers at three used car lots operated by the Company. The sale of the vehicles in this manner, rather than on a wholesale basis, created a new undiscounted receivable with associated risks of default and payment delays. The Company closed all three lots by December 31, 1995. The Company's current ANMS and related systems are connected with outside databases, such as national credit bureaus and wholesale vehicle valuation guides. These systems contribute to the Company's ability to satisfy the Dealer Network's needs by enhancing the Company's ability to meet its targeted one-hour receivable processing commitment. During August 1996, the Company will begin combining the receivable processing capabilities of its ANMS with a data processing and communications system developed by Norwest Financial Information Services Group (the "Norwest System"). The Company believes that the Norwest System will allow the Company to more efficiently expand its operations into new regions of the United States, as well as provide the Company with flexibility to expand its operations into other areas of consumer lending. 4 218 RECEIVABLES CHARACTERISTICS General. Set forth below is a summary of pertinent statistics regarding the average active receivable in the Company's portfolio of motor vehicle receivables, as of March 31, 1996 and September 30, 1995. AVERAGE RECEIVABLE CHARACTERISTICS
AS OF AS OF March 31, 1996 SEPTEMBER 30, 1995 -------------- ------------------ Purchase price to customer of underlying vehicle $8,020 $8,026 Dealer's profit on receivable sale $963 $959 Age of vehicle 5.2 Years 5.9 Years Wholesale value of vehicle $4,613 $4,640 Down payment (including net trade-in credit) $1,593 $1,588 Receivable term 31 Months 31.6 Months Annual Percentage Rate 23.9% 24.2% Semi-monthly payment $150 $150 Original receivable balance (principal and unearned interest) $9,569 $9,549 Purchase price for receivable $4,870 $4,969 Receivable cost as % of receivable balance 51% 52% Receivable discount as % of receivable balance 49% 48%
At March 31, 1996, the Company had an aggregate of 7,996 motor vehicle receivables in its portfolio with an aggregate total unpaid balance of $37,086,000, including $6,435,000 in unearned interest and $13,353,000 in credit loss allowance. Additionally, the Company had a total of 333 vehicles held for resale having an estimated value of approximately $566,000. Seasonality. The Company's operations are seasonably impacted by higher delinquency rates during certain holiday periods. Delinquency. Generally, the Company considers a receivable to be impaired if the contractual delinquency is greater than 60 days or the collateral has been repossessed. Once impaired, the Company places the receivable on nonaccrual status, which stops the recognition of interest income. The following table breaks out the receivables that the Company considers unimpaired or accrual status and impaired or nonaccrual status (i.e., contractual delinquency is greater than 60 days or repossessed collateral) as of March 31, 1996 and September 30, 1995. 5 219
MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES (Dollars in thousands) AS OF March 31, 1996 AS OF SEPTEMBER 30,1995 ----------------------------------------- ------------------------------------------- Total (1) % of Total Total (1) % of Total Number of Unpaid Unpaid Number of Unpaid Unpaid Contractual Delinquency Receivables Installments Installments Receivables Installments Installments ----------------------- ----------- ------------ ------------ ----------- ------------ ------------ Accrual Receivables 0 to 30 days past due 6,871 $31,816 86% 8,233 $45,464 68% 31-60 days past due 704 3,179 9% 1,572 8,294 12% ----- ------- ------ ------ ------- ----- Subtotal 7,575 34,995 95% 9,805 53,758 80% ----- ------- ------ ------ ------- ----- Nonaccrual Receivables 61-180 days past due 420 2,091 5% 1,696 9,182 14% 181+ days past due 1 - - 627 3,737 6% ----- ------- ----- ------ ------- ----- Subtotal 421 2,091 5% 2,323 $12,919 20% ----- ------- ----- ------ ------- ----- All Receivables (2) 7,996 $37,086 100.0% 12,128 $66,677 100.0% ===== ======= ===== ====== ======= ===== Vehicles held for resale @ collateral value 333 $ 566 N/A 599 $ 601 N/A ===== ======= ====== =======
(1) Includes unearned income. (2) Active receivables exclude 333 and 599 accounts that have been reclassified to vehicles held for resale at March 31, 1996 and September 30, 1995, respectively. The percentage of contractually delinquent accounts has decreased from September 30, 1995 to March 31, 1996. At the end of September 30, 1995, 20% of the Company's active contracts were at least 61 days contractually delinquent compared to 5% at March 31, 1996. The decrease in accounts at least 61 days contractually delinquent is due to increased collection efforts and tightened credit criteria and the Company's charge-off policy implemented in June 1995. FINANCING Sale of Asset-Backed Notes by Fund Subsidiaries. Until November 1994, the Company financed its receivables purchasing activities through public and private sale of unrated, automobile receivables-backed Notes issued by its Fund Subsidiaries. Generally, the sale of automobile receivables-backed securities requires a rating by a rating agency. The Company did not seek such a rating for its Notes. From 1992 until 1994, the Company sold a total principal amount of approximately $72,000,000 of Notes through its Fund Subsidiaries. After November 1994, due primarily to higher than expected losses in the collection of its receivables held by these Fund Subsidiaries, the Company abandoned its Note offering activities. See Item 1. Business. "Description of Historical Operations and Reorganization of Fund Subsidiaries" above. Financing with Hall Financial Group, Inc. and Affiliates. In November 1995, Hall Financial Group, Inc. ("HFG") provided interim financing of approximately $2.3 million pending confirmation of the Fund Subsidiaries' Joint Plan. After the Joint Plan's confirmation, in April 1996, HFG assigned its rights to its subsidiary, Hall Phoenix/Inwood, Ltd. ("HPIL"), which exercised a right to convert a portion of the debt into 2,500,000 shares of Search's Common Stock. Search repaid the remaining $567,000 of debt. In addition, HPIL purchased from Search 1,638,378 shares of Common Stock, 2,032,812 shares of 9%/7% Convertible Preferred Stock and five-year warrants to purchase, at $2.00 per share (increasing $0.25 per year), 676,178 shares of Common Stock in consideration for a total cash payment of $4,346,000 to Search. GECC Line of Credit. Upon confirmation of the Joint Plan, in March 1996, the Company retired the remaining debt of $173,000 owing on its line of credit from General Electric Credit Corporation. Effect of Joint Plan. As a result of the confirmation and effectiveness of the Joint Plan, approximately $69,300,000 of debt owed by the Fund Subsidiaries to Noteholders was canceled. The assets of the Fund Subsidiaries (net of a $350,000 deposit to a litigation trust and $2,000,000 escrowed for payment for professional fees), consisting primarily of approximately $29,000,000 of net receivables and $16,345,000 of cash, were deemed transferred to Search. Following the effectiveness of the Joint Plan, consummation of the transactions with HPIL in April 1996 and repayment of the GECC line of credit, the Company had no borrowed debt, approximately $31,000,000 in net receivables and approximately $21,600,000 in cash. See "Item 8. Financial Statements and Supplementary Data" and "Liquidity and Capital Resources." 6 220 Future Financings. The Company presently intends to continue purchasing receivables and expand its operations into other consumer lending areas, both of which will require future financing. The Company is currently pursuing several alternatives to meet its needs for liquidity. These financing alternatives include subordinated debt financing, securitizations and bank lines of credit. COMPETITION The Company has numerous competitors engaged in the business of buying new and used motor vehicle receivables at a discount. The Company in the past had few competitors that purchased receivables from high credit risk individuals who purchased medium-priced, used motor vehicles in the Company's then primary geographic markets consisting generally of the metropolitan areas of Arizona, Georgia, Florida, South Carolina, Oklahoma, Tennessee and Texas. The Company's new programs target receivables whose obligors have somewhat lower credit risk than obligors of receivables previously purchased by the Company. Though the Company expects to market the new programs in a more diverse geographic region, the Company expects to encounter more competition in the purchase of such lower risk receivables. The Company competes to some extent with providers of alternative financing services, such as floor plan lines of credit from financial institutions, lease financing and dealer self-financing, and certain purchasers of receivables for higher-priced, used motor vehicles. National or regional rental car companies, finance companies, used car companies, auction houses, dealer groups or other firms with equal or greater financial resources than the Company could elect to compete with the Company in its market. These competitive factors could have a material adverse effect upon the operations of the Company. REGULATION Numerous federal and state consumer protection laws impose requirements upon the origination and collection of consumer receivables. State laws impose finance charge ceilings and other restrictions on consumer transactions and may require certain contract disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. In addition, certain of these laws make an assignee (purchaser) of such contract liable to the obligor thereon for any violations committed by the assignor (seller). the Company's ANMS verifies the accuracy of disclosure for each receivable that it purchases; however, the Company, as an assignee of such receivables, may be unable to enforce some of its receivables or may be subject to liability to the obligors under some of its receivables if such receivables do not comply with various laws and regulations or the seller violated such law or regulation. In the event of default by an obligor on a receivable, the Company has the remedies of a secured party under the Uniform Commercial Code ("UCC"). The UCC remedies of a secured party include the right to repossession by self-help means, unless such means would constitute a breach of the peace. Unless the obligor voluntarily surrenders a vehicle, self-help repossession, by an independent third-party repossession entity engaged by the Company, is the method usually employed by the Company when an obligor defaults. Self-help repossession is accomplished by retaking possession of the motor vehicle. If a breach of the peace is likely to occur, or if applicable state law so requires, the Company must obtain a court order from the appropriate state court and repossess the vehicle in accordance with that order. In most jurisdictions, including those states in which the Company presently does or intends to do business, the UCC and other state laws require the secured party to provide the obligor with reasonable notice of the date, time, and place of any public sale or the date after which any private sale of the collateral may be held. Unless the obligor waives his rights after default, the obligor has the right to redeem the collateral prior to actual sale by paying the secured party the unpaid installments (less any required discount for prepayment) of the receivable plus reasonable expenses for repossessing, holding, and preparing the collateral for disposition and arranging for its sale, plus in some jurisdictions, reasonable attorneys' fees, or, in some states, by payment of delinquent installments. 7 221 EMPLOYEES As of April 30, 1996 the Company had 98 employees, of which 64 were engaged in receivables purchasing and collections, 6 dealing with the repossession and resale of repossessed vehicles, 22 in administration and 6 in senior management. RISK FACTORS The Company faces certain risks associated with the operation of it business that in some cases have affected, and in the future could affect, the Company's actual results from operations. These risk factors include, but are not limited to, the following: Availability of Funding. The purchase of contracts requires the Company and/or its subsidiaries to raise significant amounts of funds from various sources, including banks, finance companies, and other lenders. There can be no assurance that lenders will provide sufficient credit on terms the Company will find acceptable. One of the Company's planned financing sources is expected to be securitizations. There can be no assurance that the Company's future securitization activities will increase its profitability. Further, there can be no assurance that funding will be available to the Company through the issuance of automobile receivables-backed securities or, if available, that it will be on terms acceptable to the Company. Defaults on Automobile Receivables/Shift to New Credit Market. The Company has no historical information related to the quality of receivables it is currently purchasing under its new receivables purchasing programs. A significant increase in delinquencies, repossessions, charge-offs or related receivables could have a material adverse effect on the Company's financial performance. Leverage. The ratio of debt to the sum of net worth of the Company may from time to time be from 5 to 1 to as much as 7 to 1. This degree of leverage will increase the Company's vulnerability to adverse general economic conditions and to increased competitive pressures. Qualified Personnel. The Company plans to commence a consumer finance business and to expand its automobile receivables purchasing business. The success of this strategy is dependent upon the Company's ability to hire and retain qualified managers and other personnel. Dealers. the Company plans to expand its receivables purchasing activities by re-establishing relationships and establishing new relationships with dealers. Dealers often already have favorable secondary financing sources, which may restrict the Company's ability to develop dealer relationships and delay the Company's growth. Competitive conditions in the Company's markets may result in a reduction in the price discounts available from or fees paid by dealers and a lack of available contracts, which could adversely effect the Company's profitability and its growth plans. Key Officers. The Company's future success depends in some measure upon its Chief Executive Officer who has significant experience in the consumer financing business. An unexpected loss of services of this officer could have a material adverse effect upon the Company. The Company does not currently maintain key person life insurance on the Chief Executive Officer but intends to obtain such coverage. Reliance on Information Processing Systems. The Company's Business depends upon its ability to store, retrieve, process and manage significant amounts of information. The Company's management information systems, including servers, networks, databases, backup and other systems essential for receivable management, are located and maintained in the Company's Dallas, Texas headquarters. Interruption, impairment of data integrity, loss of stored data, breakdown or malfunction of the Company's information processing systems caused by telecommunications failure, conversion difficulties, undetected data input and transfer errors, unauthorized access, viruses, natural disasters, electrical power outage or disruption, or other events could have a material adverse effect on the Company's business financial condition and results of operations. Increases in Interest Rates. While the automobile receivables purchased by the Company in most cases bear interest at a fixed rate near the maximum rates permitted by law, the Company will finance its purchases of a substantial 8 222 portion of such contracts by incurring indebtedness with floating interest rates. As a result, the Company's interest costs could increase during periods of rising interest rates, which may decrease net interest margins and thereby adversely affect the Company's profitability. Competition. The Company has numerous competitors engaged in the business of buying new and used motor vehicle receivables at a discount. The new programs target receivables whose obligors have somewhat lower credit risk than obligors of receivables previously purchased by the Company. Though the Company expects to market the new programs in a more diverse geographic region, the Company expects to encounter more competition in the purchase of such lower risk receivables. These competitive factors could have a material adverse effect upon the operations of the Company. Regulation. Numerous federal and state consumer protection laws impose requirements upon the origination and collection of consumer receivables. These federal laws and regulations include, among others, the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Indebtedness Collection Practices Act, the Magnuson-Moss Warranty Act and the Federal Reserve Board's Regulation Z. The Company believes that it maintains all licenses and permits required for its current operations and is in substantial compliance with all applicable federal, state and local laws. There can be no assurance, however, that the Company will be able to maintain all requisite licenses and permits. The failure to satisfy those and other legal requirements could have a material adverse effect in the operation of the Company. Further, the adoption of additional, or the revision of existing, laws and regulations could have a material adverse effect on the Company's business. The Federal Trade Commission ("FTC") has adopted the holder-in-due-course rule which has the effect of subjecting persons who finance consumer credit transactions (and certain related lenders and their assignees) to all claims and defenses which the purchaser could assert against the seller of the goods and services. Failure of the Dealers to comply with state and federal credit and trade practice laws and regulations could result in consumers having rights of rescission and other remedies that could have an adverse effect on the Company. The FTC's Rule of Sale of Used Vehicles requires that all sellers of used vehicles prepare, complete and display a "Buyer's Guide" which explains the warranty coverage (if any) for such vehicles. State laws regulate, among other things, the interest rate and terms and conditions of motor vehicle retail installment loans. These laws also impose restrictions on consumer transactions and require loan disclosures in addition to those required under federal law. These requirements impose specific statutory liabilities upon creditors who fail to comply with their provisions. As a consumer finance Company, the Company is subject to various consumer claims and litigation seeking damages and statutory penalties based upon, among other theories of liability, usury, wrongful repossession, fraud and discriminatory treatment of credit applicants. ITEM 3. LEGAL PROCEEDINGS On July 7, 1994, a class action civil lawsuit was filed against Search, certain of its officers and directors, one of its former accounting firms and the lead underwriter and one of its principals involved in the issuance of Search's common stock. This action was filed in the United States District Court for the Northern District of Texas, Dallas Division, and was styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al, Civil Action No. 3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action No. 3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc., et al., Civil Action No. 3:94-CV-1494-J, respectively, were also filed. The above cases were consolidated in September 1994 under Civil Action No. 3:94-CV-1428-J (the "O'Shea Class Action Suit"). The O'Shea Class Action Suit was filed on behalf of all purchasers of Search's common stock during the period beginning December 10, 1993 and ending through July 5, 1994, which was the date that Search made a public announcement regarding lower earnings. The O'Shea Class Action Suit contended that Search made misstatements in its registration statements concerning the Company's computerized system, accounting methodologies used by the Company, collectibility of its receivables and repossession rates of autos that secured its receivables. The plaintiffs also complained of allegedly false public filings, press releases and reports issued during 1994. The plaintiffs sought damages, rescission, punitive damages, pre-judgment interest, fees, costs, equitable relief and or injunctive relief and such other relief as the court deemed just and proper. 9 223 On April 26, 1996, the court entered a Final Judgment and Order of Dismissal approving a settlement (the "Settlement") entered into between Search and counsel for the plaintiffs. This Settlement was initially filed with the court on August 4, 1995, and an amended version of the Settlement was filed on November 13, 1995. The Settlement provided for a cash payment by Search of $287,000 and the issuance by Search of its common stock with a value of $2,613,000. As a result of the settlement Search issued 1,848,000 shares of its common stock. In December 1993, Automobile Credit Acceptance Corp., a wholly-owned subsidiary of Search ("ACAC"), was joined as a defendant in a pending civil action filed in the 153rd Judicial District Court, Tarrant County, Texas, styled Autostar Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corp., Cause No. 153-144940. The plaintiff in this action alleges the existence of a partnership between the plaintiff and another defendant and seeks damages, actual and exemplary, and an injunction for alleged conversion and misappropriation of certain property, including computer programs, allegedly owned by the plaintiff. In the petition, the plaintiff alleges that ACAC wrongfully assisted its co-defendant and tortiously interfered with the plaintiff's contracts and business and has claimed, as damages, $750,000. ACAC believes that these allegations are without merit. Discovery in the case is still ongoing and no opinion can be given as to the final outcome of the lawsuit. On August 14, 1995, the Fund Subsidiaries filed a petition in the U.S. Bankruptcy Court in the Northern District of Texas, Dallas Division, seeking protection under Chapter 11 of the U.S. Bankruptcy Code. These cases were consolidated for joint administration under Case No. 395-34981-RCM-11. On March 4, 1996, the Court entered the Confirmation Order confirming the Joint Plan for all of the Fund Subsidiaries. The Joint Plan was effective March 15, 1996. See "Item 1, Business, Description of Historical Operations and Reorganization of Fund Subsidiaries," and Note 2 to the Notes to Consolidated Financial Statements in Item 7 for a description of the Joint Plan. On January 9, 1996, Search received notice from plaintiffs that a suit had been filed on December 21, 1995 against Search, certain of its former officers and directors, and certain underwriters of three of the Fund Subsidiaries. The case is styled Janice and Warren Bowe, et. al. vs. Search Capital Group, Inc., et. al., Cause No. 1:95CV 649GR, and was filed in the Federal District Court for the Southern District of Mississippi. The case was reassigned under Cause No 1:95CSV649BR upon recusal of the judge originally assigned to this case because of his relationship with certain defendants. The plaintiffs allege violations of the securities laws by the defendants and seeks unspecified damages, rescission, punitive damages and other relief. The plaintiffs also seek establishment of a class of plaintiffs consisting of all persons who have purchased Notes issued by three of the Fund Subsidiaries. Although no assurances can be given, the Company believes it has meritorious defenses to this action and will defend itself vigorously. While the ultimate outcome of this litigation cannot be determined, management estimates that the total expenses and losses from the litigation will be at least $500,000, and, accordingly, management has established a reserve of $500,000 for this litigation. There are presently no other legal proceedings, threatened or pending, relating to the Company which would, in the opinion of management, have a material impact on earnings or the financial condition of the Company. 10 224 PART II ITEM 6. SELECTED FINANCIAL DATA Set forth below is a table of selected consolidated financial data for the fiscal year ended December 31, 1992; the nine month period ending September 30, 1993; the fiscal years ended September 30, 1994 and September 30, 1995 and the six month period ended March 31, 1996:
6 MONTHS 6 MONTHS YEAR YEAR 9 MONTHS 9 MONTHS YEAR ENDED ENDED ENDED ENDED ENDED ENDED ENDED (In thousands, except per share data) 3/31/96 3/31/95 9/30/95 9/30/94 9/30/93 9/30/92 12/31/92 -------- -------- -------- -------- -------- ------- -------- Statement of Operations Data: Interest revenue $ 3,541 $ 8,694 $ 13,472 $ 14,054 $ 7,096 $ 1,493 $ 2,739 Interest expense (1) (1,306) (6,437) (11,205) (9,968) (4,173) (708) (1,909) Provision for credit losses (2) (4,982) (5,337) (3,128) (20,180) - - - -------- -------- ---------- -------- ------- ------- ------- Net interest income (loss) after provision for credit losses (2,747) (3,080) (861) (16,094) 2,923 785 830 Operating and Other expenses 8,098 7,221 15,881 9,296 3,051 663 1,470 Settlement expense 535 - 2,837 560 - - - Reorganization expense - - 315 - - - - Other income - - - - - 338 - -------- -------- ---------- -------- ------- ------- ------- Income (loss) from continuing operations (11,380) (10,301) (19,894) (25,950) (128) 460 (640) Extraordinary gain on debt discharge 8,709 - - - - - - -------- -------- ---------- -------- ------- ------- ------- Net income (loss) (2,671) (10,301) (19,894) (25,950) (128) 460 (640) Preferred stock dividends 327 120 240 240 263 123 206 -------- -------- ---------- -------- ------- ------- ------- Income(loss) available to common stockholders $ (2,998) $(10,421) $ (20,134) $(26,190) $ (391) $ $337 $ (846) ======== ======== ========= ======== ====== ======= ====== Net income (loss) per share of common stock from continuing operations $ (1.12) $ (1.12) $ (2.25) $(2.33) $ (0.06) $ .09 $ (0.22) Gain per share on extraordinary item .83 - - - - - - Net income (loss) per share of common stock $ (.29) (1.12) $ (2.25) $(2.33) $ (0.06) .09 $(0.22) Weighted average number of common shares outstanding (4) 10,447 9,296 8,967 11,258 6,131 3,679 3,851 Operating Data: Number of active Dealers at period end (3) 22 125 125 206 126 51 68 Number of receivables at period end 7,996 15,425 15,425 18,995 6,991 2,222 2,962 Number of receivables purchased during period 1,169 2,771 5,328 18,377 6,331 2,589 3,452 (In thousands) 3/31/96 3/31/95 9/30/95 9/30/94 9/30/93 9/30/92 12/31/92 ------- ------- ------- ------- ------- ------- -------- Balance Sheet Data: Net contracts receivable $17,298 $ 76,655 $ 34,948 $ 61,823 $29,396 $ 6,565 $11,009 Total assets 37,346 59,985 49,922 75,126 44,223 14,147 19,912 Notes payable (prepetition subject to compromise) - - 69,320 - - - - Notes payable - 69,160 - 70,768 40,562 11,774 18,000 Total liabilities 10,935 74,783 75,557 79,502 42,013 12,099 18,838 Stock repurchase commitment 2,078 - 2,078 - - - - Stockholders' equity (deficit) 24,333 (14,798) (25,635) (4,376) 2,210 1,939 1,074
- ---------------------- (1) Includes amortization of offering expenses incurred in connection with Note offerings of $1,221,000, $1,391,000, $2,840,000, $2,158,000, $762,000, $230,000 and $306,000, respectively. (2) The provision for credit losses is first recorded in 1994 because of the adoption of SFAS 114. See the discussion in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Interest Income and Provision for Credit Losses." (3) Active Dealers are those Dealers who sold receivables to the Company during the last 30 days of the current period, and the last 60 days of the fiscal year ended September 31, 1995. (4) The weighted average common shares outstanding are significantly less than the outstanding common shares shown on F-5 due to the effective date of the Joint Plan beginning on March 15, 1996. 11 225 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Except where otherwise indicated, the following discussion relates to the operations of the Company on a consolidated basis. Interest Income and Provision for Credit Losses Through the third quarter of fiscal 1994, the Company aggregated pools of loans and recorded interest revenue and allowance for credit losses for the pools based on AICPA Practice Bulletin 6, Amortization of Discounts on Certain Acquired Loans ("PB6"). Under PB6 no credit loss was recognized on a portfolio of retail installment sales contracts unless the aggregate of the undiscounted expected future cash flows for that portfolio of loans was less than the carrying amount of the respective portfolio. Each of the Fund Subsidiaries aggregated its loan portfolio into a separate and distinct pool for collective evaluation under PB6. Each portfolio of loans held by each of the Fund Subsidiaries was considered a separate and distinct pool for treatment under PB6. Under PB6, the Company recorded an allowance for credit losses upon acquisition of the retail installment sales contracts in an amount equal to the difference between the total future contractual payments and the estimated undiscounted future cash collections. The difference between the undiscounted future cash collections and the acquisition amount of the installment contracts was amortized to interest revenue over the period in which payments on the receivables were expected to be collected. Under PB6, if the estimate of the total probable collections was increased or decreased but still greater than the sum of the acquisition amount less collections plus the discount amortized to date, the remaining amount of the discount to be amortized to interest income was adjusted and amortized over the remaining life of the loans. Accordingly, changes in estimates of future cash collections were recognized through prospective yield adjustments. In the fourth quarter of fiscal 1994, Search elected early adoption of Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"), which address the accounting by creditors for impairment of a loan and related income recognition and disclosures. In accordance with SFAS 114, contracts receivable are analyzed on a loan-by-loan basis. Search evaluates the impairment of loans based on contractual delinquency, as well as other factors specific to the receivable. When a concern exists as to the collectibility of an account, interest income ceases to be recognized. The receivables, once impaired, are collateral dependent; that is, once a receivable is in default, Search looks to the underlying collateral for repayment of the receivable. Therefore, at impairment, Search records an allowance for credit losses to record the receivable at the fair value of the collateral. If the measure of the impaired receivable is less than the net recorded investment in the receivable, Search recognizes an impairment by creating an additional allowance for credit losses in excess of the initial allowance provided, with a corresponding charge to provision for credit losses. The provision for credit losses is adjusted for any differences between the final net proceeds of an impaired receivable and its net carrying value. Search continues to record receivable purchases at cost. Contractual finance charges are initially recorded as unearned interest and amortized to interest income using the interest method. As noted above, amortization of interest income ceases upon impairment. An initial allowance for credit losses is recorded at the acquisition of a note receivable equal to the unearned discount, the difference between the amount financed and the acquisition cost. The recognition of this initial allowance is recorded as an adjustment to the provision for credit losses. The following table, containing estimates that the Company believes are reasonably accurate, compares on an unaudited basis how much the provision for credit losses would have been charged, net of the effect of increased income, if the Company had accounted for the impairment of loans under PB6 on a loan-by-loan basis versus the pooled methodology used by the Company. The amount shown for PB6 on a pooled methodology used by the Company for 1994 is the amount that the Company would have charged against the provision for credit losses and the reduction in interest income had the Company reported its results under that method for fiscal year 1994. 12 226
(Dollars in thousands) FOR THE YEARS ENDING ---------------------------------------------------------------------------------- (Unaudited) DECEMBER 31, 1992 SEPTEMBER 30, 1993 SEPTEMBER 30, 1994 CUMULATIVE --------------------- ---------------------- ---------------------- -------------- PB6 on a net loan-by-loan basis $135 $45 $5,668 $5,848 PB6 on a pooled basis - - 5,259 5,259 ---- --- ------ ------ Increase (Decrease) in Credit Losses $135 $45 $ 409 $ 589 ==== === ====== ======
Calculating the provision for credit losses under PB6 on a loan-by-loan basis and PB6 on a pooled basis would have resulted in a difference in earnings for those years due to the way that individual amounts are separated from pooled amounts. The Company reported its results by applying PB6 using a pooled methodology for fiscal years 1992 and 1993. Differing interpretations of PB6 are that it permits the evaluation of impaired loans using either a pooled or a loan-by-loan methodology. When PB6 is applied on a pooled basis, the excess loan impairment reserve, arising when the net investment is greater than the amount probable of collection on individual loans, is netted against the excess unearned interest and discount of the other loans in the same pool of loans. If there are not adequate available unearned interest and discount balances in the pool of loans, the excess over those collective balances would be charged directly to the provision for credit losses. When PB6 is applied on a loan-by-loan basis, the excess loan impairment reserve, arising when the net investment is greater than the amounts probable of collection on individual loans, is charged directly to the provision for credit losses and is not netted against unearned interest and discount for other loans in the pool, thus resulting in a larger direct charge to the provision for credit losses than would arise on a pooled basis. In addition, when PB6 is applied on a loan-by-loan basis, the expected future cash collections on non-impaired loans is greater than the average expected future cash collections of the pool of loans. This excess of future cash collections results in an increased unearned discount for non-impaired loans, which is amortized to interest income on a prospective basis. Prior to adoption of SFAS 114, the Company, as more fully explained below, only recorded credit losses when the aggregate of undiscounted expected future cash flows of a pool of loans did not exceed the carrying amount of the respective pool. In 1994, credit losses of $5,259,000, which represented the excess of the carrying amount of the respective pools over the undiscounted expected future cash flows of the respective pools, would have been recorded notwithstanding the adoption of SFAS 114. In accordance with the adoption of SFAS 114, the portion of the increase in allowance for credit losses (applicable to the $14,921,000 recorded to reduce individually impaired loans to the fair value of their underlying collateral), some of which, if any, is attributable to prior years, was included in current operations of the year of adoption (fiscal 1994), and no cumulative effect is shown on the statement of operations. The Company is evaluating impairment of its contract receivables on a loan-by-loan basis since the adoption of SFAS 114. The following table, containing unaudited PB6 estimates that the Company believes are reasonably accurate, compares the provision for credit losses and reduction in interest income under PB6 and under SFAS 114 for fiscal year 1994:
(Dollars in thousands) YEAR ENDED SEPTEMBER 30, 1994 ----------------------------------- Provision for Credit Losses $20,180 PB6: Interest Revenue Reduction 4,413 Provision for Credit Losses 846 5,259 ------ ------- Increases in Losses due to Adoption of SFAS 114 $14,921 =======
Under SFAS 114, the impairment on a loan in excess of any existing reserve is charged to the provision for credit losses in the current period. Therefore, when measuring the provision for credit losses, the primary difference is the prospective treatment of impairment under PB6 as compared to the current treatment under SFAS 114. SFAS 114 recognizes 13 227 all of the impairment into the current period instead of adjusting the amortization of the remaining unearned interest and discount over the remaining life of the loan. Under PB6, when the total probable collections for a loan is greater than the net investment, any adjustment to the estimated undiscounted collections is recorded as a reduction to unearned interest and discount, with the remaining unearned interest and discount being amortized over the remaining life of the loan, reducing the future yield of the loan. Therefore, under PB6, credit losses are only recorded when the future expected yield of the loan portfolio has been reduced to zero and the net investment is greater than the undiscounted probable collection. Management elected early adoption of SFAS 114 in fiscal 1994 because the measurement of credit losses provided by this statement is considered preferable. During 1994, the Company expanded its business rapidly purchasing 18,377 contracts compared to 6,331 in 1993. The deterioration in contract performance in 1994 due to the increase in first payment default rates and lower repossession proceeds caused the need for a higher loss provision. Under PB6, some of the impairment would have reduced future interest income over the life of the remaining loans. Under SFAS 114, the loss was recognized during the last quarter of 1994 upon conversion to SFAS 114. RESULTS OF OPERATIONS Contract Purchasing Activity. Contract purchases increased rapidly during the nine months ended September 1993 and the fiscal year ended September 1994. Due to the inadequate collections on contract receivables, the Company tightened purchasing procedures in January 1995. Total contract collections over the life of a group of loans is primarily dependent on repossession rates, number of payments received prior to repossession and repossession proceeds. While eventual repossession rates can only be forecasted during the life of a group of contracts, the percentage of contracts that have not made their first payment ("first payment defaults") is a good indication of the quality of receivable purchased within a specific period. First payment defaults are more serious than other repossessions because the differences between repossession proceeds and the cost of the receivable are not reduced by customer payments prior to repossession. Chart 1 - Number of Contracts Booked by Quarter CHART 14 228 Chart 2 - First Payment Defaults by Quarter Contracts were Booked. CHART First Payment Default. The changes in first payment defaults suggest that when contract purchasing volume increased in 1994, the quality of the contracts being purchased deteriorated. After analysis of these contracts, the Company realized that the high number of first payment defaults were due, in part, to (i) dealers overstating to the Company the amount of the downpayment made by obligors and (ii) dealers overstating the value of the automobile securing the receivables. Obligors, because they had little downpayment invested in the automobile or because they felt they had paid too high a price for the automobile, were willing to allow the automobile to be repossessed rather than begin making payments. After year end September 1994, the Company was able to reduce first payment defaults by being more selective in the contracts purchased and initiating personal interviews in order to verify amount of downpayments. Comparison of the Period Ended March 31, 1996 to the Six Months Ended March 31, 1995 The Company changed its fiscal year from September 30 to March 31 in order to start a new fiscal year reflecting the reorganization effective March 15, 1995. Therefore, the comparison below compares the six months ended March 31, 1996 to the comparable six months ended March 31, 1995. The Company purchased 1,169 contracts, at a cost of $5,471,000, during the six months ending March 31, 1996 compared to 2,417 contracts, at a cost of $10,670,000, during the six months ending March 31, 1995. The decrease in contracts purchased of 1,248, or 52%, is a result of a decrease in the amount of funds available for reinvestment in contracts due to more fund subsidiaries being restricted from purchasing contracts in 1996 than during the six month period in 1995. Virtually all of the contracts purchased during both periods were purchased under the criteria contained in the trust indenture for each fund subsidiary. Effective March 15, 1996, the trust indentures were canceled and all new originations are now under the Company's new purchasing criteria. See Item 1. Business. "Operations Since Reorganization of the Fund Subsidiaries" for a discussion of the Company's new underwriting standards. For the six months ended March 31, 1996, the Company had interest revenue of $3,541,000 compared to $8,694,000 for the six months ended March 31, 1995. The decrease in interest revenue of $5,153,000, or 59%, is due to a decrease in average net interest earning receivables from $61,100,000, for the six months ended March 31, 1995, to $34,790,000, for the six months ended March 31, 1996. 15 229 Interest expense decreased $5,131,000, or 80%, from $6,437,000 for the six months ended March 31, 1995 to $1,306,000 for the six months ended March 31, 1996. The decrease in interest expense is due primarily to termination of interest accrual on the debt of the fund subsidiaries as of the date of filing for bankruptcy, August 15, 1995, or the fund's maturity date, whichever occurred first. See note 5 to the consolidated financial statements. The decrease in interest expense was partially offset the increase in interest expense associated with outstanding lines of credit. The provision for credit losses decreased $355,000, or 7%, from $5,337,000 for the six months ended March 31, 1995, to $4,982,000 for the six months ended March 31, 1996. The decrease in the provision for loan losses is due to adequate provisions for loan losses being provided in prior periods. General and administrative expenses increased $877,000 or 12% from $7,221,000 to $8,098,000. The increase in general and administrative expense is due to higher cost associated with repossessing vehicles and legal and administrative costs. Net loss for the six months ended March 31, 1996 was $2,998,000 compared to $10,421,000 for the six months ended March 31, 1995. The decrease in net loss is due primarily to $8,709,000 of gain on extraordinary Items related to extinguishment of debt on fund subsidiaries. See Note 5 to the notes to Consolidated Financial Statements. Comparison of Twelve Month Periods Ended September 30, 1995 and the Twelve Month Period Ending September 30, 1994 The Company purchased 5,328 contracts, at a cost of $24,830,000, during the twelve months ending September 30, 1995 compared to 18,377, contracts at a cost of $88,124,000 purchased during the twelve months ended September 30, 1994. The decrease in contract purchases of 13,049, or 71%, was due to tightened purchasing procedures, reductions in new funds raised, and a smaller Dealer Network. Interest revenue decreased 4% from $14,054,000 to $13,472,000 for the year ended September 30, 1995, due to decreased contracts receivables. Interest expense increased 12% from $9,968,000 to $11,205,000 due to increased offering cost amortization and the fact that the ACF VI debt of $10,675,000 was outstanding for all of 1995 as compared to a portion of 1994. The increase in interest expense was somewhat mitigated by ceasing the interest expense accrual for the note debts of the fund subsidiaries as a result of the bankruptcy petitions or maturity dates (whichever event occurred first). See Note 5 in Notes to Consolidated Financial Statements. The provision for credit losses decreased 85% from $20,180,000 to $3,128,000 due to generally adequate allowance established in prior years and the adequacy of the initial allowance on current year purchases to cover losses during the twelve months ended September 30, 1995. In addition, purchase activity was down substantially in 1995 compared to 1994. As most additional allowances are recorded in the first six months of a contract's life, this decrease in purchasing activity also had an impact on the decreased provision for credit losses. General and administrative expenses increased from $9,296,000 to $15,881,000. The increase in general and administrative expense is primarily due to increased repossession, remarketing, and collection costs. During the years ended September 30, 1995, the Company incurred $1,270,000 of additional cost in the repossession and remarketing of vehicles as compared to such costs in 1994. The largest increases were in repossession and repair fees which increased from $1,432,000 to $2,332,000. During the year ended September 30, 1995, the Company repossessed a total of 7,273 vehicles compared to 6,449 during the year ended September 30, 1994. The net loss before dividends decreased $6,056,000 from $25,950,000 in fiscal 1994 to $19,894,000 in fiscal 1995. The decrease in net loss was primarily due to a decrease in the provision for credit losses of $17,052,000 partially offset by increases in interest expense of $1,237,000 and general and administrative expenses of $6,561,000 and increases in settlement and reorganization charges of $2,592,000. 16 230 LIQUIDITY AND CAPITAL RESOURCES Joint Plan of Reorganization Until November 1994, the Company financed its receivables purchasing activities through public and private sale of unrated, automobile receivables-backed notes issued by its Fund Subsidiaries. From 1992 until 1994, the Company sold a total principal amount of approximately $72,000,000 of notes through its Fund Subsidiaries. After November 1994, due primarily to higher than expected losses in the collection of its receivables held by these Fund Subsidiaries, the Company abandoned its note offering activities. In August 1995, search caused each of the eight Fund Subsidiaries to file for reorganization under chapter 11 of the U.S. Bankruptcy Code. The Joint Plan of Reorganization for the Fund Subsidiaries ("Joint Plan") was confirmed and became effective on March 15, 1996. As a result of the confirmation and effectiveness of the Joint plan, approximately $69,300,000 of debt owed by the Fund Subsidiaries to Noteholders was canceled in exchange for Search Common Stock, 9%/7% convertible preferred stock, warrants and cash distributed to former Noteholders of the Fund Subsidiaries. The assets of the Fund Subsidiaries (net of a $350,000 deposit to a litigation trust and $2,000,000 escrowed for payment for professional fees), consisting primarily of approximately $29,000,000 of net receivables and $16,345,000 of cash, were deemed transferred to Search. Following the effectiveness of the Joint Plan and certain financing transactions (see "Item 1. Business -- Financing"), the Company had no borrowed debt, approximately $31,000,000 in net receivables and approximately $21,600,000 in cash. See "Item 8. Financial Statements and Supplementary Data" and "Liquidity and Capital Resources." The Company has redeemable shares that require payment of approximately $2,078,000 in May 1997. The warrants issued as part of the Plan of Reorganization and to HPIL, if not exercised by the expiration date of March 2001, may be "put" back to the Company at $.25. The total potential liability at March 2001 under these warrants is $1,419,000. General The Company's business will have an ongoing requirement to raise substantial amounts of cash to support its activities. The principal cash requirements include amounts to purchase receivables, cover operating expenses, and to pay preferred stock dividends. The Company has a significant amount of cash on hand as of March 31, 1996 which it considers adequate to meet its reasonably anticipated needs. The Company intends to invest a portion of this cash into finance receivables. In the future, additional liquidity will be necessary to support growth of the Company's loan portfolio and operations. The Company intends to leverage its net equity and subordinated debt in the future. Search has obtained a commitment for a line of credit to purchase receivables which would then be assigned to special purpose entities for future securitization. Search has also received a commitment for a line of credit to purchase receivables which would remain on Search's balance sheet. These commitments are subject to completion of definitive documentation. Search is also pursuing additional banking lines of credit. These financings would be utilized for the purchase of contract receivables. Search believes the financings as contemplated would be adequate to fund anticipated future operations of Search. The Company's annual dividend requirements on the outstanding shares of its 12% Preferred Stock and 9%/7% Preferred Convertible Stock, as of May 31, 1996, were $240,000 and $5,375,000, respectively. The annual dividend requirement on the Company's 9%/7% Convertible Preferred Stock will remain at the 9% level, or $5,375,000, for the first three years and then decrease to the 7% level, or $4,181,000, for the remaining four-year term. Any conversion to Common Stock would reduce these dividend requirements. Operating Activities During the six months ended March 31, 1996, the Company utilized cash of $4,141,000 in its operations as compared to cash of $10,741,000 used in during the twelve months ended September 30, 1995. The net loss for the six months ended March 31, 1996 decreased from a net loss of $19,894,000 for the year ended September 30, 1995 to a net loss of $2,671,000 for the six months ended March 31, 1996. A significant portion of the decrease in loss from 1995 to 1996 resulted from an extraordinary gain on debt extinguishment of $8,709,000. General and administrative expenses decreased from $15,881,000 to $8,098,000, while settlements and reorganization expenses decreased by $2,617,000 from $3,152,000 to $535,000. The decrease in general and administrative expenditures is due to there being only six monthly periods included in 1996 compared to twelve monthly periods included in 1995. 17 231 Investing Activities During the twelve months ended September 30, 1995, the Company's investing activities provided cash of $17,592,000 as compared to cash of $20,423,000 provided by investing activities during the six months ended March 31, 1996. This change resulted primarily from reduced contract purchases of $19,359,000 and an increase in unrestricted cash of $12,624,000, partially offset by decreased collection proceeds of $29,731,000. Additionally, upon completion of the Joint Plan, $21,600,000 in cash was released from the Fund Subsidiaries to Search. Financing Activities During the twelve months ended September 30, 1995, the Company Utilized cash of $7,348,000 in its financing activities as compared to cash of $1,093,000 provided by financing activities during the six months ended march 31, 1996. In 1995, the Company raised only $1,779,000 through note offerings and repaid $2,429,000 on its line of credit and repaid $5,077,000 of the Notes payable. During the six months ended March 31, 1996, the Company had net borrowings of $1,225,000 under lines of credit, did not raise any funds through Note offerings and did not repay any of the Notes payable. Because of the bankruptcy, no payments were made on the Fund Subsidiaries' Notes Payable and GECC was settled in full. Nonaccrual Receivables The following table sets forth the receivables which are accounted for on a nonaccrual basis. The Company has no receivables which are both accruing and contractually past due 90 days or more.
MOTOR VEHICLE RECEIVABLES - AGING AND DELINQUENCIES (Dollars in thousands) AS OF March 31, 1996 AS OF SEPTEMBER 30,1995 ----------------------------------------- ------------------------------------------- Total (1) % of Total Total (1) % of Total Number of Unpaid Unpaid Number of Unpaid Unpaid Contractual Delinquency Receivables Installments Installments Receivables Installments Installments ----------------------- ----------- ------------ ------------ ----------- ------------ ------------ Accrual Receivables 0 to 30 days past due 6,871 $31,816 86% 8,233 $45,464 68% 31-60 days past due 704 3,179 9% 1,572 8,294 12% ----- ------- ------ ------ ------- ----- Subtotal 7,575 34,995 95% 9,805 53,758 80% ----- ------- ------ ------ ------- ----- Nonaccrual Receivables 61-180 days past due 420 2,091 5% 1,696 9,182 14% 181+ days past due 1 - - 627 3,737 6% ----- ------- ----- ------ ------- ----- Subtotal 421 2,091 5% 2,323 $12,919 20% ----- ------- ----- ------ ------- ----- All Receivables (2) 7,996 $37,086 100.0% 12,128 $66,677 100.0% ===== ======= ===== ====== ======= ===== Vehicles held for resale @ collateral value 333 $ 566 - 599 $ 601 - ===== ======= ====== =======
(1) Includes unearned income. (2) Active receivables exclude 333 and 599 accounts that have been reclassified to vehicles held for resale at March 31, 1996 and September 30, 1995, respectively. Potential Problem Receivables Receivables are considered nonaccrual receivables due to their contractual delinquency exceeding 60 days or due to repossession of underlying collateral. The Company also considers certain delinquent receivables that are in the contractual status of less than 60 days past due to be potential problem receivables based on collections. Uncertainty as to overall economic conditions, regional considerations, and current trends in portfolio growth cause the Company to review these accounts for potential problems. 18 232 Receivables Concentrations The Company considers Texas and Tennessee to be states with receivable concentrations because receivables with obligors in each of these states exceed 10% of total outstandings. Inflation Historical statistics indicate that collateral value, vehicle sales price, and receivable interest rates are relatively stable within the Company's market segment. Significant inflation in prices could adversely impact the Company's ability to acquire receivables at favorable prices. General increases in interest rates will result in increases in the Company's interest expense. Seasonality The Company's operations are seasonably impacted by higher delinquency rates during certain periods, including November and December holiday periods. Changes in Asset Quality The Company believes that it is upgrading its credit quality through higher underwriting and collateral standards compared to prior periods. No assurance can be given at this time as to whether these new standards will improve the Company's credit loss experience rate. Recent Accounting Pronouncement Information as to recent accounting pronouncements is contained in Note 8 of the Notes to Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See index at page F-1. 19 233 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Certified Public Accountants' Report F-2 Consolidating Balance Sheets as of March 31, 1996 and September 30, 1995 F-3 Consolidating Statements of Operations for the six months ended March 31, 1996, the years ended September 30, 1995 and 1994. F-4 Consolidated Statement of Changes in Stockholders' Equity (Capital Deficit) for the period from October 1, 1993 through March 31, 1996. F-5 Consolidated Statements of Cash Flows for the six months ended March 31, 1996, the years ended September 30, 1995 and 1994. F-6 Notes to Consolidated Financial Statements F-7
All financial statement schedules are omitted because they are not applicable, not required, or the information required to be set forth therein is included in the financial statements or the notes thereto. F-1 234 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT To The Board of Directors and Stockholders Search Capital Group, Inc. Dallas, Texas We have audited the accompanying consolidated balance sheets of Search Capital Group, Inc. and its subsidiaries ("the Company") as of March 31, 1996, and September 30, 1995, and the related consolidated statements of operations, changes in stockholders' equity (capital deficit), and cash flows for the six months ended March 31, 1996, and the years ended September 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Search Capital Group, Inc. and Subsidiaries as of March 31, 1996, and September 30, 1995, and the results of its operations and its cash flows for the six months ended March 31, 1996, and the years ended September 30, 1995 and 1994 in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements in 1994, the Company elected early adoption of Statements of Financial Accounting Standards Nos. 114 and 118, thus changing its method of accounting for loan impairments. /s/ BDO Seidman, LLP --------------------------------- BDO Seidman, LLP Certified Public Accountants Dallas, Texas May 10, 1996 F-2 235 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets
March 31, 1996 September 30, 1995 ----------------------------------- ------------------ ASSETS Historical Pro forma (Note 3) ------------ ------------------- Gross contracts receivable (Note 4) $ 37,086,000 $ 37,086,000 $ 66,677,000 Unearned interest (6,435,000) (6,435,000) (13,106,000) ------------ ------------ ------------ Net contracts receivable 30,651,000 30,651,000 53,571,000 Allowance for credit losses (13,353,000) (13,353,000) (18,623,000) Loan origination costs 3,984,000 3,984,000 3,754,000 Amortization of loan origination costs (3,578,000) (3,578,000) (2,937,000) ------------ ------------ ------------ Net contract receivables - after allowance for credit losses & other costs 17,704,000 17,704,000 35,765,000 ------------ ------------ ------------ Cash and cash equivalents 17,817,000 21,582,000 442,000 Restricted cash (Note 2) -- -- 8,105,000 Vehicles held for resale 566,000 566,000 601,000 Deferred note offering cost, net (Note 1) -- -- 3,062,000 Property and equipment, net 1,062,000 1,062,000 1,306,000 Other assets, net 197,000 197,000 641,000 ------------ ------------ ------------ Total assets $ 37,346,000 $ 41,111,000 $ 49,922,000 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) Lines of credit (Notes 3 & 6) $ 2,283,000 $ -- $ 1,058,000 Accrued settlements (Notes 14 & 15) 688,000 688,000 2,912,000 Accrued restructuring (Note 2) -- -- 214,000 Accounts payable and other liabilities 7,356,000 7,356,000 2,051,000 Accrued interest 15,000 -- 2,000 Redeemable warrants (Note 8) 593,000 673,000 -- ------------ ------------ ------------ Liabilities 10,935,000 8,717,000 6,237,000 ------------ ------------ ------------ Prepetition notes payable and accrued interest - subject to compromise (Notes 2,5) -- -- 69,320,000 ------------ ------------ ------------ Stock repurchase commitment (Note 9) 2,078,000 2,078,000 2,078,000 ------------ ------------ ------------ Stockholders' Equity (Capital Deficit) Preferred stock (Note 8) 154,000 174,000 4,000 Common stock (Note 8) 248,000 289,000 108,000 Additional paid-in capital 79,124,000 85,046,000 24,697,000 Accumulated deficit (54,043,000) (54,043,000) (51,372,000) Treasury stock (1,150,000) (1,150,000) (1,150,000) ------------ ------------ ------------ Total stockholders' equity (capital deficit) 24,333,000 30,316,000 (27,713,000) ------------ ------------ ------------ Total liabilities and stockholders' equity (capital deficit) $ 37,346,000 $ 41,111,000 $ 49,922,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-3 236 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Operations
Six Months Ended March 31, 1996 Year Ended September Year Ended (Note 1) 30, 1995 September 30, 1994 ------------------------------ ------------------------- ------------------------- Interest revenue $ 3,541,000 $ 13,472,000 $ 14,054,000 Interest expense 1,306,000 11,205,000 9,968,000 ------------ ------------ ------------ Net interest income (loss) 2,235,000 2,267,000 4,086,000 Provision for credit losses 4,982,000 3,128,000 20,180,000 ------------ ------------ ------------ Net interest income (loss) after provision for credit losses (2,747,000) (861,000) (16,094,000) ------------ ------------ ------------ General and administrative expense 8,098,000 15,881,000 9,296,000 Settlement expense 535,000 2,837,000 560,000 Reorganization expense (Notes 2 & 10) -- 315,000 -- ------------ ------------ ------------ Operating and other expense 8,633,000 19,033,000 9,856,000 ------------ ------------ ------------ Loss before extraordinary item (11,380,000) (19,894,000) (25,950,000) Extraordinary gain on discharge of debt (Notes 2 & 5) 8,709,000 -- -- ------------ ------------ ------------ Net loss (2,671,000) (19,894,000) (25,950,000) Preferred stock dividends (327,000) (240,000) (240,000) ------------ ------------ ------------ Net loss attributable to common stockholders $ (2,998,000) $(20,134,000) $(26,190,000) ============ ============ ============ Loss per common share before extraordinary item $ (1.12) $ (2.25) $ (2.33) Gain on extraordinary item 0.83 -- -- ------------ ------------ ------------ Loss per common share $ (0.29) $ (2.25) $ (2.33) ============ ============ ============ Weighted average number of common shares outstanding 10,447,000 8,967,000 11,258,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 237 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Statement of Changes in Stockholders' Equity (Capital Deficit) (Note 8) For the period from October 1, 1993 through March 31, 1996
Preferred Stock -12% Preferred Stock - 9%/7% Common stock --------------------------- --------------------------- --------------------------- Shares Amount Shares Amount Shares Amount ------------ ------------ ------------ ------------ ------------ ------------ Balance, October 1, 1993 400,000 $ 4,000 -- -- 12,165,670 $ 122,000 ------------ ------------ ------------ ------------ ------------ ------------ Issuance of common shares for cash -- -- -- -- 2,785,000 28,000 ESOP termination, net of expenses -- -- -- -- (306,152) (3,000) Stock cancellation -- -- -- -- (2,946,988) (30,000) 12% preferred stock dividends -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance, September 30, 1994 400,000 4,000 -- -- 11,697,530 117,000 ------------ ------------ ------------ ------------ ------------ ------------ Stock purchase at May 5, 1995 -- -- -- -- -- -- Stock repurchase commitment -- -- -- -- (923,344) (9,000) 12% preferred stock dividends -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance, September 30, 1995 400,000 4,000 -- -- 10,774,186 108,000 ------------ ------------ ------------ ------------ ------------ ------------ Exercise of options -- -- -- -- 35,840 1,000 Class action suit settlement (Note 14) -- -- -- -- 1,848,000 18,000 Reorganization (Note 2) -- -- 15,031,648 150,000 12,115,001 121,000 12% preferred stock dividends -- -- -- -- -- -- 9% preferred stock dividends -- -- -- -- -- -- Net loss -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Historical balance at March 31, 1996 400,000 4,000 15,031,648 150,000 24,773,027 248,000 ------------ ------------ ------------ ------------ ------------ ------------ PRO FORMA INFORMATION (NOTE 3) Debt conversion -- -- -- -- 2,500,000 25,000 Additional investment -- -- 2,032,800 20,000 1,638,400 16,000 ------------ ------------ ------------ ------------ ------------ ------------ Pro forma balance at March 31, 1996 400,000 $ 4,000 17,064,448 $ 170,000 28,911,427 $ 289,000 ============ ============ ============ ============ ============ ============ Treasury Stock Stockholders' --------------------------- Additional ESOP Notes Accumulated Equity Shares Amount Paid-In Capital Receivable Deficit (Capital Deficit) ------------ ------------ --------------- ------------ ------------ ----------------- Balance, October 1, 1993 2,526,389 $ (25,000) $ 8,711,000 $ (1,073,000) $ (5,528,000) $ 2,211,000 ------------ ------------ ------------ ------------ ------------ ------------ Issuance of common shares for cash -- -- 19,379,000 -- -- 19,407,000 ESOP termination, net of expenses -- -- (874,000) 1,073,000 -- 196,000 Stock cancellation -- -- 30,000 -- -- -- 12% preferred stock dividends -- -- (240,000) -- -- (240,000) Net loss -- -- -- -- (25,950,000) (25,950,000) ------------ ------------ ------------ ------------ ------------ ------------ Balance, September 30, 1994 2,526,389 (25,000) 27,006,000 -- (31,478,000) (4,376,000) ------------ ------------ ------------ ------------ ------------ ------------ Stock purchase at May 5, 1995 500,000 (1,125,000) -- -- -- (1,125,000) Stock repurchase commitment -- -- (2,069,000) -- -- (2,078,000) 12% preferred stock dividends -- -- (240,000) -- -- (240,000) Net loss -- -- -- -- (19,894,000) (19,894,000) ------------ ------------ ------------ ------------ ------------ ------------ Balance, September 30, 1995 3,026,389 (1,150,000) 24,697,000 -- (51,372,000) (27,713,000) ------------ ------------ ------------ ------------ ------------ ------------ Exercise of options -- -- 10,000 -- -- 11,000 Class action suit settlement (Note 14) -- -- 2,595,000 -- -- 2,613,000 Reorganization (Note 2) -- -- 52,149,000 -- -- 52,420,000 12% preferred stock dividends -- -- (120,000) -- -- (120,000) 9% preferred stock dividends -- -- (207,000) -- -- (207,000) Net loss -- -- -- -- (2,671,000) (2,671,000) ------------ ------------ ------------ ------------ ------------ ------------ Historical balance at March 31, 1996 3,026,389 (1,150,000) 79,124,000 -- (54,043,000) 24,333,000 ------------ ------------ ------------ ------------ ------------ ------------ PRO FORMA INFORMATION (NOTE 3) Debt conversion -- -- 1,692,000 -- -- 1,717,000 Additional investment -- -- 4,230,000 -- -- 4,266,000 ------------ ------------ ------------ ------------ ------------ ------------ Pro forma balance at March 31, 1996 3,026,389 $ (1,150,000) $ 85,046,000 -- $(54,043,000) $ 30,316,000 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements F-5 238 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Six Months Ended Year Ended Year Ended March 31, 1996 September 30, 1995 September 30, 1994 --------------------- --------------------- -------------------- < OPERATING ACTIVITIES: Net loss $ (2,671,000) $(19,894,000) $(25,950,000) Adjustments to reconcile net loss to cash provided by (used in) operations: Provision for credit losses 4,982,000 3,128,000 20,180,000 Amortization of deferred offering costs 1,221,000 2,840,000 2,158,000 Amortization of loan origination costs 641,000 1,047,000 1,728,000 Depreciation and amortization 262,000 384,000 217,000 Extraordinary gain on discharge of debt (8,709,000) -- -- Loss on disposition of fixed assets 112,000 -- -- Changes in assets and liabilities: Decreases (increases) in other assets, net 470,000 (86,000) 60,000 Increases (decreases) in accounts payable and accrued expense (449,000) 1,840,000 3,488,000 ------------ ------------ ------------ Cash provided by (used in) operations (4,141,000) (10,741,000) 1,881,000 ------------ ------------ ------------ INVESTING ACTIVITIES: Purchase of contract receivables including origination fees (5,471,000) (24,830,000) (88,124,000) Principal payments on contract receivables including proceeds from sales of vehicles 17,921,000 47,652,000 33,912,000 Purchases of property and equipment (132,000) (711,000) (957,000) (Increases) decreases in restricted cash 8,105,000 (4,519,000) 3,416,000 Decrease in notes receivable, related party -- -- 167,000 ------------ ------------ ------------ Cash provided by (used in) investing 20,423,000 17,592,000 (51,586,000) ------------ ------------ ------------ FINANCING ACTIVITIES: Net borrowings (repayments) under line of credit 1,225,000 (2,429,000) 3,487,000 Notes payable proceeds -- 1,779,000 31,206,000 Notes payable repayments -- (5,077,000) (1,000,000) Capital lease (repayments) financing (24,000) (58,000) 308,000 Notes payable offering costs -- (198,000) (3,455,000) Proceeds from sale of stock, net of expense -- -- 19,407,000 Proceeds from exercise of options 12,000 -- -- Purchase of treasury stock -- (1,125,000) -- Change in ESOP Note Receivable -- -- 196,000 Payment of dividends (120,000) (240,000) (240,000) ------------ ------------ ------------ Cash provided by (used in) financing activities 1,093,000 (7,348,000) 49,909,000 ------------ ------------ ------------ CHANGE IN CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents 17,375,000 (497,000) 204,000 Cash and cash equivalents - beginning 442,000 939,000 735,000 ------------ ------------ ------------ Cash and cash equivalents - ending $ 17,817,000 $ 442,000 $ 939,000 ============ ============ ============ SUPPLEMENTAL INFORMATION: Cash paid for interest $ 71,000 $ 9,272,000 $ 7,426,000 ============ ============ ============
See accompanying notes to consolidated financial statements. F-6 239 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND PRACTICES General. The accompanying consolidated financial statements include the accounts of Search Capital Group, Inc. ("Search") including its subsidiaries ("the Company") as follows:
Ownership Subsidiary Percentage ---------- ---------- Automobile Credit Holdings, Inc. ("ACHI") 100% Automobile Credit Acceptance Corp. ("ACAC") (100% owned by ACHI) 100% Consumer Dealer Autocredit Corporation ("CDAC") (100% owned by ACHI) 100% * Eight Fund Subsidiaries and two previous Fund Subsidiaries 100% Newsearch, Inc. 100% * Search Funding Corp. ("SFC") 100% Automobile Wholesaling, Inc. 100% * Search Automobile Leasing Corporation 100% * * Currently inactive.
The Fund Subsidiaries are special purpose subsidiaries of Search which raised money through the issuance of interest bearing notes for the purchase of contract receivables. The Fund Subsidiaries (see Note 2 for discussion of bankruptcy proceedings) have accounted for all transactions, where applicable, related to the reorganization proceedings in accordance with Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," ("SOP 90-7") issued by the American Institute of Certified Public Accountants ("AICPA") in November 1990. ACAC raised capital to be used by the Fund Subsidiaries to purchase, at a significant discount, retail installment sale contracts generated by the sale of used automobiles and light trucks. ACAC also serviced the contracts on behalf of the Fund Subsidiaries and will continue to service the contracts for the Company. In 1996, the Company changed its fiscal year end to March 31. The prior year consolidated statements have been formatted to conform with the 1996 presentation. Basis of Consolidation. The consolidated financial statements include the accounts of the Company, after elimination of all significant intercompany accounts and transactions, and have been prepared in accordance with generally accepted accounting principles. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Contracts Receivable, Allowance for Credit Losses, and Interest Income. The Company records receivables purchased at cost. Contractual finance charges are recorded as unearned interest and amortized to interest income using the interest method. An initial allowance for credit losses is recorded at the acquisition of a receivable equal to the difference between the amount financed and the acquisition cost, which is what the Company estimates to be fair value. The Company considers all of its contracts receivable to be consumer installment loans to individuals. In accordance with Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"), these receivables are reviewed individually for impairment generally using the receivable's contractual delinquency or repossession status. All receivables which exceed 60 days contractual delinquency or with respect to which the underlying collateral has been repossessed are considered impaired. Once impaired, a receivable is placed on nonaccrual status and written down to its net realizable value, and no interest income is recognized until the receivable returns to nonimpaired status. Therefore, at impairment, the Company writes down the receivable to its estimated net realizable value, which is the fair value of the underlying collateral if it has been repossessed or the estimated recoverable cash flow if no repossession has occurred. If the new recorded amount of the impaired receivable is less than the Company's net recorded investment in the receivable, the Company recognizes a charge to provision for credit losses in the amount of the deficiency and increases the allowance for credit losses by a corresponding amount. The provision for credit losses is adjusted for any differences between the final net proceeds from resale of the underlying collateral and the estimated net realizable value. All payments received on impaired receivables are considered a return of principal. Generally, the Company charges off a receivable against the allowance for credit losses at 180 days contractual delinquency if no significant payments have been received in the last six months, or earlier after receipt of the sale proceeds from liquidation of the collateral securing the receivable. F-7 240 Subsequent proceeds received on a previously charged-off receivable are recorded as a recovery to the allowance for credit losses. Any excess of cost paid ("premium") for net receivables acquired is recorded as an asset and amortized over the life of the related loans acquired as an adjustment to yield using the interest method. Loan Origination Costs. The Company performs substantially all of the functions associated with origination of the contracts and capitalizes the related costs. The portion capitalized is amortized by the interest method against income as an adjustment of yield. Deferred Notes Payable Offering Costs. Costs directly related to notes payable offerings were capitalized and amortized to expense by the interest method over the contractual terms of the notes. Deferred offering costs were the commissions, printing, legal, accounting and other expenditures incurred in issuing the notes to the investors. Vehicles Held for Resale. Vehicles held for resale represents the estimated collateral value of motor vehicles in the Company's possession and are carried at the lower of cost or estimated net realizable value (estimated auction value less estimated costs to sell at the time of repossession). The Company classifies a loan as vehicle held for resale upon physically repossessing the vehicle and until the vehicle is sold at auction. The deficiency balance, if any, is then charged off. Property and Equipment. Property and equipment includes assets which are depreciated over 3 year and 5 year lives and leasehold improvements which are amortized over the remaining term of the lease. Net Loss Per Share Attributable to Common Stockholders. The net loss per share attributable to common stockholders has been computed based on the weighted average number of shares of Search common stock outstanding during each period and after deducting preferred stock dividends declared. Common stock equivalents are included in the calculations except when their effect would be antidilutive. Income Taxes. The Company files a consolidated federal income tax return. The Company uses the asset and liability method to provide for income taxes under which deferred tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Statement of Cash Flows. For purposes of reporting cash flows, the Company considers short term cash investments with original maturities of three months or less to be cash equivalents. Cash held in a Fund Subsidiary was restricted to payment of allowable expenses and investment in contract receivables until the note balance of the Fund Subsidiary was satisfied. 2. CHAPTER 11 BANKRUPTCY FILING OF THE FUND SUBSIDIARIES AND CONFIRMATION OF THE JOINT PLAN OF REORGANIZATION As of March 31, 1996, the Fund Subsidiaries consisted of six public and two private corporations as follows: Automobile Credit Fund 1991-III, Inc. ("ACF 91-III") - Private Automobile Credit Finance, Inc. ("ACF") - Public Automobile Credit Partners, Inc. ("ACP") - Private Automobile Credit Finance 1992-II, Inc. ("ACF 92-II") - Public Automobile Credit Finance III, Inc. ("ACF III") - Public Automobile Credit Finance IV, Inc. ("ACF IV") - Public Automobile Credit Finance V, Inc. ("ACF V") - Public Automobile Credit Finance VI, Inc. ("ACF VI") - Public At September 30, 1995, Fund Subsidiaries' cash balances of $8,105,000 were restricted for reinvestment use or held in sinking funds to be applied to the repayment of the Fund Subsidiaries Notes. F-8 241 On August 14, 1995, only the Fund Subsidiaries filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code. Search and its unrestricted subsidiaries did not seek protection under the Code but Search was a co-proponent of a joint plan of reorganization for the Fund Subsidiaries. On March 4, 1996, the Court entered an order ("Confirmation Order") confirming the Third Amended Plan of Reorganization ("Joint Plan") for all of the Fund Subsidiaries, effective on March 15, 1996 ("Effective Date"). Total secured claims of all noteholders under the Joint Plan were $53,240,000, and total unsecured claims were $16,080,000, for total claims of $69,320,000, which comprised the total of notes payable and accrued interest due the Noteholders (Note 5). The Joint Plan allowed noteholders to choose one of two options. Under one of the options ("Equity Option"), noteholders would receive with respect to the secured portion of their claims shares of Search common stock, shares of a new series of 9%/7% convertible preferred stock and a cash payment equal in amount as if dividends had been calculated on the preferred stock from July 1, 1995 to the Effective Date. Under the other option ("Collateral Option"), noteholders would receive with respect to the secured portion of their claims distributions of the proceeds of the continued collection or the sale of the motor vehicle receivables securing their Notes. According to the Joint Plan, the number of shares of common stock to be issued would be calculated as of the Effective Date so that noteholders would receive preferred stock and common stock equal, on a fully diluted basis, to 75% of the value of all shares of new 9%/7% preferred stock, common stock, existing 12% preferred stock, warrants, stock options and rights then outstanding, or agreed to be issued by Search (with certain exceptions, including any shares issued to Hall Phoenix Inwood Limited, (HPIL) under the Funding Agreement, see Note 3). At a special shareholders meeting on March 1, 1996, shareholders of Search approved two amendments to Search's Certificate of Incorporation, increasing Search's authorized capital stock to 130,000,000 shares of common stock and 60,000,000 shares of new preferred stock. The Certificate of Incorporation also was amended to prohibit Search from issuing any non-voting capital stock. Before the Effective Date, Value Partners, Ltd. ("VPL") purchased all of the secured claims of noteholders who had elected the Collateral Option (approximately $12,800,000 of original Note principal amount) and changed the election for such secured claims to the Equity Option. The selling noteholders retained their unsecured claims. As a consequence of this transaction, 100% of the secured claims of noteholders received treatment under the Equity Option. With respect to the unsecured portion of noteholders' claims, the noteholders and any other holders of unsecured claims, will receive from Search a pro rata share of warrants to purchase an aggregate of 5,000,000 shares of common stock (the "Warrants"). The Warrants will be issued after the unsecured claims of non-noteholders have been finally determined by the Court. (See Note 8). The Joint Plan required that a trust ("Litigation Trust") be established for the benefit of the holders of unsecured claims, including the Noteholders, with a total funding of $350,000. The Litigation Trust is authorized to pursue claims and causes of action of the Fund Subsidiaries and of certain participating Noteholders. Proceeds will be distributed pro rata to unsecured claim holders. The Litigation Trust cannot pursue any causes of action during the first year following the Effective Date where tolling agreements have been executed. The Litigation Trust will automatically terminate if Search's Common Stock trades at an average price of $2.50 per share for 30 consecutive trading days during the first year following effectiveness of the Joint Plan. On the Effective Date, the net assets of the Fund Subsidiaries were transferred to Search, and the Fund Subsidiaries are to be liquidated and dissolved as soon as possible thereafter. The Notes and the indebtedness represented by the Notes were deemed canceled when the Confirmation Order became final. The trust indentures for the Notes, and all related restrictions, were also deemed canceled. As a result of the implementation of the Joint Plan and the cancellation of the Notes, a net extraordinary gain from the extinguishment of debt was reported in the amount of $8,709,000 (See Note 5). The Joint Plan provided that the Board of Directors of Search select two additional directors from qualified director nominees submitted by the official Creditors Committee for the Debtors. These new directors have been selected by the Board, but pursuant to their request, will not be appointed as directors until Search obtains directors and officers liability insurance coverage, which Search is pursuing. The duration of the term of one of the new F-9 242 directors will be three years, and the duration of the term of the other new director will be two years. These two new members will also be appointed to membership on the Compensation Committee of the Board for the one year period immediately following the Effective Date. 3. PRO FORMA INFORMATION AND TRANSACTIONS WITH HALL AND AFFILIATES The consolidated pro forma balance sheet as of March 31,1996, contains the accounts of the Company, after elimination of all significant intercompany accounts and transactions after giving effect to the following significant events. Subsequent to March 31, 1996, Search consummated certain of the Hall Financial Group (HFG) transactions as described below. The transactions are included in the pro forma balance sheet of the Company as if the transactions were effective March 31, 1996. On November 30, 1995, Search entered into a Funding Agreement ("Funding Agreement") with HFG. Pursuant to the Funding Agreement, HFG made loans totaling $2,283,000 ("HFG Notes") to Search. The HFG Notes could, at the election of HFG or its assigns, be converted into a maximum 2,500,000 shares of Search common stock. Effective April 2, 1996, HPIL, as assignee from HFG of the HFG Notes, fully exercised the rights of the holder of the HFG Notes to convert the Notes into 2,500,000 shares of Search common stock. Because the conversion price specified in the HFG Notes for these shares was less than the full amount due HFG, Search paid to HPIL the remaining portion of the debt evidenced by the HFG Notes ($567,000) in cash. The Funding Agreement also provided to HFG the option to purchase common stock, 9%/7% preferred stock, and warrants Effective April 2, 1996, HPIL, as assignee of HFG, fully exercised this purchase option by paying $4,346,000 cash to Search for which Search issued 1,638,400 shares of common stock and 2,032,800 shares of 9%/7% preferred stock, and warrants to purchase 676,000 shares of common stock to HPIL. Pursuant to the Funding Agreement, HFG was entitled to elect one director to Search's Board if HFG converted the HFG Notes into common stock and to elect another director if HFG purchased at least $1,000,000 Present Value of securities from Search. These new directors, pursuant to their request, will be appointed as directors when Search obtains directors and officers liability insurance, which Search is pursuing. As a result of satisfaction of these conditions, HFG has designated two HFG officers as its representatives for appointment to Search's Board. 4. CONTRACTS RECEIVABLE, ALLOWANCE FOR CREDIT LOSSES AND INTEREST INCOME Through the third quarter of fiscal 1994, the Company recorded interest revenue and allowance for credit losses based on AICPA Practice Bulletin 6, "Amortization of Discounts on Certain Acquired Loans," ("PB6"). Under PB6, the Company recorded an allowance for credit losses upon acquisition of the installment loans ("receivables") in an amount equal to the difference between the contractual payments due and the estimated undiscounted future cash collections. The difference between the undiscounted future cash collections and the acquisition amount of the receivables was amortized to interest revenue over the period in which payments on the receivables were expected to be collected. Under PB6, if the estimate of the total probable collections was increased or decreased but still greater than the sum of the acquisition amount less collections plus the discount amortized to date, the remaining amount of the discount to be amortized to interest income was adjusted and amortized over the remaining life of the receivables. Accordingly, changes in estimates of future cash collections were recognized through prospective yield adjustments. In the fourth quarter of fiscal 1994, the Company elected early adoption of Statements of Financial Accounting Standards Nos. 114 and 118 ("SFAS 114"), which address the accounting by creditors for impairment of a loan and related income recognition and disclosures. In accordance with SFAS No. 114, receivables are analyzed on a loan-by-loan basis. The Company evaluates the impairment of receivables generally based on the receivables' contractual delinquency. The Company considers receivables that are contractually delinquent 60 days or more or with respect to which the underlying collateral has been repossessed to be impaired. When the receivable is considered impaired, interest income ceases to be recognized. Once impaired, the Company looks to the underlying collateral for repayment of the receivable. Therefore, at impairment, the Company writes down the receivable to its estimated net realizable value, which is the fair value of the underlying collateral if it has been repossessed or the estimated recoverable cash flow if no repossession has occurred. If the new recorded amount of the receivable is less than the Company's net recorded investment in the receivable, the Company recognizes a charge to provision for credit losses in the amount of the deficiency and increases the allowance for credit losses by a corresponding amount. The provision for credit losses is adjusted for any differences between the final net proceeds from resale of the underlying collateral and the estimated net realizable value. Generally, the Company charges off a receivable against the allowance for credit losses at 180 days contractual delinquency, if no significant payments have been received in the last six months, or, if earlier, after receipt of the sale proceeds from liquidation of the collateral securing the receivable. Subsequent proceeds received on a previously charged-off receivable are recorded as a recovery to the allowance for credit losses. Any excess of cost paid ("premium") for net receivables acquired is recorded as an asset and amortized over the life of the related loans acquired as an adjustment to yield using the interest method. F-10 243 The Company records receivable purchases at cost. Contractual finance charges are recorded as unearned interest and amortized to interest income using the interest method. As noted above, amortization of interest income ceases upon impairment. An initial allowance for credit losses is recorded at the acquisition of a receivable equal to the unearned discount, which is the difference between the amount financed and the acquisition cost. The recorded investment and related allowance for credit losses, excluding net loan origination costs, are summarized below on a consolidated basis:
Net Allowance Receivables Total for After (Dollars in thousands) Number of Unpaid Unearned Credit Allowance for As of March 31, 1996 Receivables Installments Interest Losses Credit Losses - --------------------- ----------- ------------ -------- ------ ------------- Impaired receivables 421 $ 2,091 $ 380 $ 1,711 -- Unimpaired receivables 7,575 34,995 6,055 11,642 17,298 ------ ------- ------- ------- ------- Total 7,996 $37,086 $ 6,435 $13,353 $17,298 ====== ======= ======= ======= ======= As of September 30, 1995 - ------------------------ Impaired receivables 2,323 $12,919 $ 1,644 $11,275 -- Unimpaired receivables 9,805 53,758 11,462 7,348 34,948 ------ ------- ------- ------- ------- Total 12,128 $66,677 $13,106 $18,623 $34,948 ====== ======= ======= ======= =======
The change in the allowance for credit losses is summarized as follows on a consolidated basis:
March 31, September 30, September 30 (Dollars in thousands) 1996 1995 1994 ---------- ------------- ------------ Balance, beginning of period $ 18,623 $ 44,633 $ 4,656 Allowance recorded upon purchase of receivables 2,194 9,613 37,727 Increase in allowance for credit losses 4,982 3,169 20,180 Receivables charged off against allowance (14,742) (38,792) (17,930) Recovery of prior credit losses 2,296 -- -- -------- -------- -------- Balance, end of period $ 13,353 $ 18,623 $ 44,630 ======== ======== ======== Net credit losses as a percent of average net receivables 36% 56% 26%
F-11 244 The effect of non-accrual receivables on interest income for each of the three periods presented was: Interest income As originally contracted $ 1,480 $ 4,522 $ 5,520 As recognized (98) (1,033) (1,922) ------- ------- ------- Reduction of interest income $ 1,382 $ 3,489 $ 3,598 ======= ======= =======
There were no commitments to lend additional funds to customers whose loans were classified as non-accrual as of March 31, 1996, September 30, 1995 or September 30, 1994. At March 31, 1996, contractual maturities of receivables were as follows:
(Dollars in thousands) 1997 1998 1999 Total ------- ------- ------ ------- Future payments receivable $23,445 $11,507 $2,134 $37,086 Less unearned interest 4,886 1,450 99 6,435 ------- ------- ------ ------- Net contracts receivable $18,559 $10,057 $2,035 $30,651 ======= ======= ====== =======
In the opinion of management, a portion of the receivables will be repaid or extended either before or past the contractual maturity date. In addition, some receivables will default before maturity. The above tabulation, therefore, is not to be regarded as a forecast of future cash collections. The Company's receivables are all secured by motor vehicles, have fixed annual percentage rates ("APR"), and are generally installment receivables owed by individuals. As of March 31, 1996, the Company had no other loan types. The obligors are domestically-based at the time a receivable is purchased by the Company from a dealer. The Company has no material amounts of foreign receivables. Receivables will become nonaccrual status due to their contractual delinquency exceeding 60 days or due to repossession of underlying collateral. The Company also considers certain delinquent receivables that are in the contractual status of less than 60 days past due to be potential problem receivables based on collections. Uncertainty as to overall economic conditions, regional considerations, and current trends in portfolio growth cause the Company to review these receivables for potential problems. The Company considers Texas and Tennessee to be states with receivable concentrations because receivables with obligors in each of these states exceed 10% of total outstanding receivables. Through the use of its Auto Notes Management System, management is able to evaluate the loan impairment of the receivables on a loan-by-loan basis. Prior to adoption of SFAS 114, the Company, as more fully explained below, only recognized credit losses when the aggregate of undiscounted expected future cash flows of a pool of receivables did not exceed the carrying amount of the respective pool. In 1994, credit losses of $5,259,000, which represented the excess of the carrying amount of the respective pools over the undiscounted expected future cash flows of the respective pools, would have been recorded notwithstanding the adoption of SFAS 114. In accordance with the adoption of SFAS 114, the portion of the increase in allowance for credit losses (applicable to the $14,921,000 recorded to reduce impaired receivables to the fair value of their underlying collateral), some of which, if any, is attributable to prior years, was included in current operations of the year of adoption (fiscal 1994) and no cumulative effect is shown on the statement of operations. The following table, containing unaudited PB6 estimates that the Company believes to be reasonably accurate, compares the provision for credit losses and reduction in interest income under PB6 and under SFAS 114 for fiscal year 1994: F-12 245
Year Ended (Dollars in thousands) September 30, 1994 ------------------ Provision for credit losses $20,180 PB6: Interest revenue reduction $ 4,413 Provision for credit losses 846 5,259 ------- ------- Increases in losses due to adoption of SFAS 114 $14,921 =======
Under SFAS 114, the impairment of a receivable in excess of any existing reserve is charged to the provision for credit losses in the current period. Therefore, when measuring the provision for credit losses, the primary difference is the prospective treatment of impairment under PB6 as compared to the current treatment under SFAS 114. SFAS 114 recognizes all of the impairment in the current period instead of adjusting the amortization of the remaining unearned interest and discount over the remaining life of the receivable. Under PB6, when the total probable collections for a receivable is greater than the net investment, any adjustment to the estimated undiscounted collections is a reduction to unearned interest and discount, with the remaining unearned interest and discount being amortized over the remaining life of the receivable, reducing the future yield of the loan. Therefore, under PB6 credit losses are only recorded when the future expected yield of the receivable portfolio has been reduced to zero and the net investment is greater than the undiscounted probable collection. Management elected early adoption of SFAS 114 in fiscal 1994 because the measurement of credit losses provided by this statement is considered preferable. Most of the Company's receivables are due from individuals located in large metropolitan areas of Texas and other southern and western states. To some extent, realization of the receivables will be dependent on local economic conditions. The Company holds vehicle titles as collateral for all receivables until such receivables are paid in full. 5. NOTES PAYABLE AND ACCRUED INTEREST Notes payable of the Fund Subsidiaries at September 30, 1995 and prior to the final confirmation of the Joint Plan of Reorganization, March 15, 1996 (see Note 2), consisted of the following: F-13 246 Notes payable by ACF 91-III, bearing interest at 21%, required monthly interest payments at 15% through March 31, 1995, at which time principal and the remaining deferred interest accrued at 6% was due - in default at maturity date. $ 590,000 Notes payable by ACP, bearing interest at 21%, required monthly interest payments of 15% through April 30, 1995 at which time principal and the remaining deferred interest accrued at 6% was due in default at maturity date. 610,000 Notes payable by ACF, bearing interest at 18%, required monthly interest payments at 15% through December 31, 1994, at which time principal and the remaining deferred interest accrued at 3% was due - in default at maturity date. 1,506,000 Notes payable by ACF 92-II, bearing interest at 15% due monthly, required payment of principal in full on December 31, 1995. 10,000,000 Notes payable by ACF III, bearing interest at 15% due monthly, required payment of principal in full on April 30, 1996. 15,000,000 Notes payable by ACF IV, bearing interest at 3% until October 15, 1993 and 14% thereafter due monthly, required payment of principal quarterly from September 30, 1995 to December 31, 1996. 10,000,000 Notes payable by ACF V, bearing interest at 12% due monthly, required payment of principal quarterly from October 1, 1996 to December 31, 1997. 19,872,000 Notes payable by ACF VI, bearing interest at 12% due monthly, required payment of principal quarterly from July 1, 1997 to June 30, 1998. 10,675,000 ----------- Total notes payable 68,253,000 Accrued Interest - prepetition 1,067,000 ----------- Total notes payable and accrued interest $69,320,000 ===========
As a result of the confirmation of the Joint Plan, the above debt and accrued interest was ultimately extinguished in exchange for common stock, 9%/7% preferred stock, warrants and other provisions of the Joint Plan. The extinguishment of debt resulted in a net extraordinary gain of $8,677,000. The following table shows the components of the gain: Calculation of net extraordinary gain on debt extinguishment Total Notes and accrued interest $ 69,320,000 Value of exchange (56,367,000) Administrative claims (2,400,000) Unamortized debt offering costs (1,844,000) ------------ Net gain of debt extinguishment $ 8,709,000 ============
As of their maturity ACF, ACF 91-III and ACP stopped accruing interest on the remaining unpaid principal. As these Fund Subsidiaries defaulted, it was management's position that the accrual of interest was not warranted since each Fund Subsidiary did not have sufficient assets to fully retire the principal portion of the Notes. The August 14, 1995 bankruptcy filing of the individual Fund Subsidiaries was an event of default for each of the Fund Subsidiaries under the terms of their respective indenture agreements. In accordance with SOP 90-7, contractual interest obligations, which are relieved from payment as a result of the Chapter 11 proceedings, are not accrued; therefore, no interest expense was recorded for the six months ended March 31, 1996. For the year ended September 30, 1995, contractual interest on the above obligations amounted to $12,453,000 which was $1,500,000 in excess of reported interest expense. See Note 2. F-14 247 6. LINE OF CREDIT On June 17, 1994, SFC entered into an agreement for a line of credit with General Electric Capital Corporation ("GECC"). The line of credit initially had a maximum borrowing commitment of $20,000,000 and was limited to a percentage of eligible contracts held by SFC. The line of credit was secured by all SFC assets and was guaranteed by Search. In January 1995, SFC signed an agreement with GECC to revise the existing restrictive covenants and to eliminate any future advances under the line of credit. On March 22, 1995, GECC advised Search that it and SFC were in default of various provisions of the original loan agreement and the January 1995 agreement. As a result of these defaults, GECC declared the outstanding balance, as of that date, due and payable. Search, SFC and GECC established a pay-out plan which required a minimum payment of $500,000 per quarter. As of September 30, 1995, the line had a balance of $1,058,000. The Joint Plan called for Search to fully satisfy its obligation to GECC. As a result, on March 18, 1996, Search paid GECC $173,000 which included all principal and interest owing as of that date. This payment fully satisfied Search's obligation to GECC. 7. EMPLOYEE STOCK OWNERSHIP PLAN Effective August 1, 1994, the Board of Directors terminated the employee stock ownership plan ("ESOP"). As part of the termination, Search reacquired from the ESOP 306,152 shares of Search common stock at $3.50 per share in exchange for the balance of the note receivable plus accrued interest, totaling $1,183,000. The reacquired shares were canceled on September 29, 1994, and the remaining 178,848 shares were allocated to participating employees. 8. STOCKHOLDERS' EQUITY 12% Senior Convertible Preferred Stock. As of March 31, 1996, Search had issued 400,000 shares of its 12% preferred stock. The 12% preferred shares have a $.01 par value and have voting rights and a liquidation preference of $5.00 per share plus accrued and unpaid dividends. The 12% preferred shares are convertible into one share of Search's $.01 common stock for each share of 12% preferred at the option of the shareholder. The shares carry a cumulative annual dividend of $0.60 per share, payable quarterly. Search may convert the shares to common stock or may redeem the shares at $5.00 per share upon the occurrence of certain events defined in the terms of the 12% preferred Certificate of Designation. 9%/7% Convertible Preferred Stock. On March 1, 1996, the Board of Directors established a new series of preferred stock, 9%/7% preferred stock, for the purpose of effecting the Joint Plan. As of March 31, 1996, Search had issued in connection with the Joint Plan, or committed to issue, 15,031,648 shares of its 9%/7% preferred. During April 1996, Search issued an additional 2,032,800 shares of 9%/7% preferred stock in connection with the HFG transaction, reflected in the pro forma consolidated balance sheet as of March 31, 1996. See Note 3. The 9%/7% preferred shares, which are essentially pari passu to the existing 12% preferred stock, have a $.01 par value and have voting rights and a liquidation preference of $3.50 per share plus all accrued and unpaid dividends. The shares carry a non-cumulative dividend rate of $.315 per share until the end of the twelfth full calendar quarter following payment of the first dividend (9% End Date) and $.245 per share after the 9% End Date. The 9%/7% preferred shares are convertible at any time into common stock in the ratio of two shares of common stock for each share of 9%/7% preferred. Conversion may occur upon the occurrence of certain events as defined in the Certificate of Designation (see Note 2). Common stock. On March 1, 1996, the stockholders approved an amendment to Search's Certificate of Incorporation to increase the number of authorized shares of $.01 par value common stock to 130,000,000 for the purpose of effecting the Joint Plan. As of March 31, 1996, Search had issued or committed to issue a total of F-15 248 25,875,219 shares of its common stock. Of this amount, 12,115,001 shares were issued in connection with the Joint Plan (see Note 2), 2,500,000 in connection with the HFG conversion, 1,638,400 shares in connection with the HFG purchase (see Note 3) and 1,848,000 shares for the settlement of the class action lawsuit (see Note 14). Warrants. During the six months ended March 31, 1996, 35,840 warrants were exercised at an average price of $0.335 per share. In February 1994, 25,000 warrants were exercised at a price of $0.375 per share. On March 1, 1996, the Board of Directors authorized Search to issue a new class of warrants to purchase up to 5,676,178 shares of Common Stock, for the purpose of effecting the Joint Plan. These warrants are governed by a warrant agreement dated as of March 22, 1996. Warrants to purchase 5,000,000 shares are to be issued to noteholders and other unsecured claim holders under the Joint Plan, and warrants to purchase 676,178 shares of Common Stock have been issued to HPIL, as assignee of HFG, pursuant to the Funding Agreement (see Note 3). The exercise price per share of these warrants is initially $2.00 and increases by $.25 on March 15 of each successive year. These warrants will expire on March 14, 2001, at which time Search must redeem all remaining unexercised warrants at a redemption price of $0.25 per warrant. These warrants are considered "put" warrants and, accordingly, have been classified outside of permanent equity as debt at fair value. An accretion to the redemption amount of $1,419,000 will be made over the term of five years and recorded as interest expense using the interest method. Common Stock Warrants and Employee Stock Options. On August 1, 1994, the Board of Directors adopted, subject to stockholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The Plan was approved by Search's stockholders at their annual meeting held in May 1995. Employees of the Company or directors of subsidiaries are eligible to participate in the Plan. As of March 31, 1996, approximately 100 persons were eligible to participate. The Plan expires on July 31, 2004, although any option outstanding on such date will remain outstanding until it either has expired or has been fully exercised. The Plan is administered by the Compensation Committee of the Board. Options granted under the Plan are not otherwise transferable other than by will or by the laws of descent and distribution. Options are forfeited immediately after an optionee's employment is terminated for cause or 30 days after the optionee's mental or physical disability. The options usually vest over a three year period. A total of 1,750,000 shares of common stock has been reserved for sale upon exercise of options granted under the Plan. As of March 31, 1996, there were 2,581,500 outstanding options and/or warrants of which 1,500,000 can be exercised as either options or warrants at the employee's election. Certain options issued during the year ended September 30, 1995, were repriced to reflect the current market prices at that time. During the six months ended March 31, 1996, Search issued 253,000 options to employees and 436,000 warrants under the plan. All were issued at the market price existing at that time. In October 1994, 100,000 options were issued to an officer of Search and in January 1995, 500,000 and 25,000 were issued respectively to two officers of Search. In January 1995, an additional 285,500 options were issued to employees. In August and September 1994, an additional 29,000 options were issued to employees. All were issued at the market price existing at that time. In August 1994, 2 officers and 5 employees agreed, subject to shareholder approval of the Plan, to the cancellation of their warrants in exchange for options under the Plan at the then current market price of $4.25. The canceled warrants consisted of 220,000 at $3.00 per share issued in April 1993, 70,000 at $8.75 per share issued in December 1993, and 35,000 at $14.75 per share issued in June 1994. Recent Accounting Pronouncement. The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123") was issued in October 1995 to establish accounting and reporting standards for stock-based employee compensation plans such as stock option and restricted stock plans. FAS 123 defines a fair value based method of accounting for measuring compensation expense for stock-based plans and encourages all entities to adopt that method of accounting. However, FAS 123 also permits entities to continue to measure compensation expense for stock-based plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing F-16 249 to remain with the intrinsic value based method must make pro forma disclosures of net income and earnings per share as if the fair value based method defined by FAS 123 was applied. Under the fair value based method, compensation expense would be measured as the value of an award under a stock-based plan on the date the award is granted and would be recognized over the vesting period of the award. Under the intrinsic value based method, compensation expense is measured as the excess, if any, of the market price of the stock underlying the award on the date the award is granted, over the exercise price. Under Search's Plan, awards have no intrinsic value on the date of the grant as the exercise price equals the market price on that date. Currently, the Company does not expect to adopt the FAS 123 fair value based method of accounting for its plan, but intends to provide the required pro forma disclosures in the March 31, 1997 financial statements. 9. STOCK CANCELLATION AND STOCK PURCHASE AGREEMENT On May 5, 1995, Search purchased from a director of Search 500,000 shares of Search's $.01 par value common stock for $2.25 per share. The purchase was recorded at cost and is reflected as treasury stock. Simultaneously with the purchase, the director resigned from the Board. Search was also given an irrevocable proxy expiring May 5, 1997 to vote the remaining approximately 800,000 shares of stock held by a trust formed by the former director. These remaining shares held by the trust may be "put" back to the Company at the expiration date for $2.25 per share, which was the market value at the date of the agreement. These shares are shown outside of permanent equity on the face of the balance sheet at the redemption price. If these redeemable shares were excluded from net loss per share, the fiscal 1996 and 1995 loss per share would be $(.31) and $(2.47), respectively. On July 20, 1994, certain stockholders voluntarily canceled 2,946,988 shares of common stock and warrants to purchase 390,654 shares of common stock. Had these shares and warrants been canceled at the beginning of the fiscal year ended September 30, 1994, the common shares outstanding and net loss per share would have been $(2.95) on a weighted average number of common shares and equivalents outstanding of 8,893,000 shares. 10. RELATED PARTY TRANSACTIONS During the six months ended March 31, 1996 and the year ended September 30, 1994, the Company paid or accrued approximately $25,000 and $156,000, respectively for fees related to the Note offerings described in Notes 4 and 5 and the class action settlement noted in Note 14 to an individual who owned a minority interest in ACAC and two of the Fund Subsidiaries until June 1992, and was a director of Search for a period of time in 1992 and 1993. During the year ended September 30, 1994, Search engaged Brean Murray, Foster Securities Inc. ("BMFS") to serve as underwriter for Search's public offering of common stock, and co-managing broker-dealer, together with another independent broker-dealer, for the public offering of asset-backed debt securities offered in 1994, by Search's subsidiaries, Automobile Credit Finance V, Inc. and Automobile Credit Finance VI, Inc. Search paid BMFS $1,987,000 in connection with the common stock offering and $766,000 in connection with the public offerings of asset-backed debt securities. Also in connection with its services as underwriter of the common stock offering, BMFS was issued warrants to purchase 240,000 shares of common stock exercisable for a period of 5 years at a price of $9.60 per share. BMFS, simultaneously with its receipt of the warrants, assigned warrants to purchase 113,558 shares to Mr. A. Brean Murray. Mr. Murray is a director of Search and Chairman of BMFS. On March 25, 1996, subsequent to confirmation of the Joint Plan discussed in Note 2, BMFS received a $200,000 success fee from Search. Additional related party transactions are described in Notes 7, 8 and 9. F-17 250 11. INCOME TAXES The Company files a consolidated income tax return. The components of the Company's net deferred tax asset as of March 31, 1996 and September 30, 1995 are as follows:
March 31, September 30, September 30, 1996 1995 1994 ------------ ------------- -------------- Deferred tax asset: Allowance for credit losses & inventory reserve $ 1,260,000 $ 800,000 $ 1,500,000 Net operating loss carry-forwards 13,000,000 15,400,000 8,900,000 Other tax credit carry-forwards 90,000 90,000 90,000 Accrued settlement costs 170,000 Valuation allowance (14,520,000) (16,290,000) (10,490,000) ------------ ------------ ------------ Total deferred tax asset -- -- -- ------------ ------------ ------------
At March 31, 1996, the Company's consolidated tax return group has a net operating loss carryforward for Federal income tax purposes of approximately $44,100,000 which will expire, if unused, in the following years:
Years of Expiration Amount ------------------- ----------- 1998 to 2008 $ 4,400,000 2009 27,200,000 2010 12,500,000 ------------ Total $44,100,000 ============
Following the acquisition of the minority interest in ACHI on June 30, 1993 (see Note 3), the Company's tax consolidated group had a change in ownership as defined under Section 382 of the Internal Revenue Code, which will limit the utilization of the net operating loss to approximately $1,000,000 per year on those NOL losses incurred prior to 1994. The debt to equity conversion as outlined in the Joint Plan of Reorganization resulted in approximately $8,709,000 of debt discharge income. Additionally, this debt to equity conversion resulted in an ownership change as defined under Section 382 of the Internal Revenue Code. This will result in a limitation on the utilization of the net operating losses incurred prior to the debt-to-equity conversion. 12. COMMITMENTS On October 28, 1992, ACAC entered into a sixty month lease for office facilities with a basic monthly rental obligation of $13,450. This lease was modified in 1994 to expand the office facilities from approximately 16,000 square feet to approximately 23,000 square feet at a revised monthly rental obligation of $22,057. Rental expense for the six months ended March 31, 1996 and the years ended September 30, 1995, and 1994, was approximately $132,000, $265,000 and $212,000, respectively. The Company opened four remote collection facilities during fiscal 1995. These leases expire through 1999. Lease expense for the six months ended March 31, 1996 and fiscal 1995 was $34,000 and $20,000, respectively. On April 1, 1996, the Company signed a lease for an additional 6,000 square feet of office space located in Dallas, Texas. The Company plans to move a portion of its existing operations into the facility on July 1, 1996, the lease commitment date. The lease has a term of sixty six months and an approximate monthly rental of $5,300. The lease commitments for this lease are included below in the operating lease commitment schedule. F-18 251 Operating lease commitments by the Company are as follows:
Year Ending March 31, ---------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- ------- ------- Office leases $377,000 $300,000 $ 96,000 $82,000 $73,000 Office equipment leases 62,000 31,000 7,000 -- -- -------- -------- -------- ------- ------- Total operating leases $439,000 $331,000 $103,000 $82,000 $73,000 ======== ======== ======== ======= =======
In addition to the operating leases, the Company has one capitalized lease with payments of $81,000 per year through 1998 and $67,000 in 1999. 13. CHANGE IN FISCAL YEAR In 1996, the Company changed its fiscal year end to March 31. The following table reflects the unaudited comparable period of fiscal 1995 (in thousands except per share data):
Six months ended March 31, 1995 ---------------- Interest revenue $ 8,694 Interest expense 6,437 ------- Net interest income 2,257 Provision for credit losses 5,337 ------- Net interest loss after provision for credit losses 3,080 Operating expenses 7,221 ------- Net loss 10,301 Preferred stock dividends 120 ------- Net loss attributable to common shareholders $10,421 ======= Net loss per common share 1.12 ======= Weighted average number of common shares 9,296 =======
The adjustments to the March 31, 1995 interim financial statement consist of only normal recurring adjustments. 14. SETTLEMENT OF O'SHEA CLASS ACTION LAWSUIT On July 7, 1994, a class action civil lawsuit was filed against Search, certain of its officers and directors, one of its former accounting firms and the lead underwriter and one of its principals involved in the issuance of Search's common stock. This action was filed in the United States District Court for the Northern District of Texas, Dallas Division, and was styled Ellen O'Shea, et al v. Search Capital Group, Inc., et al. Civil Action No. 3:94-CV-1428-J. On July 11, 1994, and on July 13, 1994, similar actions in John R. Boyd, Jr., et al. v. Search Capital Group, Inc., et al., Civil Action No. 3:94-CV-1452-J; and Gary Odom v. Search Capital Group, Inc., et al,. Civil Action No. 3:94-CV-1494-J, respectively, were also filed. The above cases were consolidated in September 1994 under Civil Action No. 3:94-CV-1428-J (the "O'Shea Class Action Suit"). The O'Shea Class Action Suit was filed on behalf of all purchasers of Search's common stock during the period beginning December 10, 1993 and ending through July 5, 1994, which was the date that Search made a public announcement regarding lower earnings. The O'Shea Class Action Suit contended that Search made misstatements in its registration statements concerning the Company's computerized system, accounting methodologies used by the Company, collectibility of its receivables and repossession rates of autos that secured its receivables. The plaintiffs also complained of allegedly false public filings, press releases and reports issued during F-19 252 1994. The plaintiffs sought damages, rescission, punitive damages, pre-judgment interest, fees, costs, equitable relief and or injunctive relief and such other relief as the court deemed just and proper. On April 26, 1996, the court entered a Final Judgment and Order of Dismissal approving a settlement (the "Settlement") entered into between Search and counsel for the plaintiffs. This Settlement was initially filed with the court on August 4, 1995, and an amended version of the Settlement was filed on November 13, 1995. The Settlement provided for a cash payment by Search of $287,000 and the issuance by Search of its common stock with a value of $2,613,000. As a result of the settlement Search issued 1,848,000 shares of its common stock. The terms of the final settlement have been recorded in the fiscal 1996 financial statements. 15. LEGAL PROCEEDINGS In December 1993, ACAC was joined as a defendant in a pending civil action filed in the 153rd Judicial District Court, Tarrant County, Texas, styled Autostar Solutions, Inc. v. Tim Clothier and Automobile Credit Acceptance Corp., Cause No. 153-144940. The plaintiff in this action alleges the existence of a partnership between the plaintiff and another defendant and seeks damages, actual and exemplary, and an injunction for alleged conversion and misappropriation of certain property, including computer programs, allegedly owned by the plaintiff. In the petition, the plaintiff alleges that ACAC wrongfully assisted its co-defendant and tortiously interfered with the plaintiff's contracts and business and has claimed, as damages, $750,000. ACAC believes that these allegations are without merit and has filed a general denial and has a pending motion for partial summary judgment. Discovery in the case is still ongoing and no opinion can be given as to the final outcome of the lawsuit. On August 14, 1995, the Fund Subsidiaries filed a petition in the U.S. Bankruptcy Court in the Northern District of Texas, Dallas Division, seeking protection under Chapter 11 of the U.S. Bankruptcy Code (see Note 2). These cases were consolidated for joint administration under Case No. 395-34981-RCM-11. On March 4, 1996, the Court entered the Confirmation Order confirming the Joint Plan for all of the Fund Subsidiaries. The Joint Plan was effective March 15, 1996. On January 9, 1996, Search received notice from plaintiffs that a suit had been filed on December 21, 1995 against Search, certain of its former officers and directors, and certain underwriters of three of the Fund Subsidiaries. The case is styled Janice and Warren Bowe, et. al. vs. Search Capital Group, Inc., et. al., Cause No. 1:95CV 649GR, and was filed in the Federal District Court for the Southern District of Mississippi. The case was reassigned under Cause No 1:95CSV649BR upon recusal of the judge originally assigned to this case because of his relationship with certain defendants. The plaintiffs allege violations of the securities laws by the defendants and seeks unspecified damages, rescission, punitive damages and other relief. The plaintiffs also seek establishment of a class of plaintiffs consisting of all persons who have purchased Notes issued by three of the Fund Subsidiaries. Although no assurances can be given, the Company believes it has meritorious defenses to this action and will defend itself vigorously. While the ultimate outcome of this litigation cannot be determined, management estimates that the total expenses and losses from the litigation will be at least $500,000, and, accordingly, management has established a reserve of $500,000 for this litigation. There are presently no other legal proceedings, threatened or pending, relating to the Company which would, in the opinion of management, have a material impact on earnings or the financial condition of the Company. F-20 253 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Pursuant to Instruction 1 of Regulation S-K, Item 304, no disclosure is required under this item because of prior reports filed with the Securities and Exchange Commission on forms 8-K. 20 254 \ PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the name and age of the directors, the year of the annual meeting of shareholders at which each director's term will expire and the year of his initial election or appointment as a director.
SHAREHOLDERS ANNUAL POSITION DIRECTOR MEETING AT WHICH NAME HELD AGE SINCE TERM WILL EXPIRE - --------------------- ----------------------------- --- -------- ----------------- Richard F. Bonini Director (1) 57 1995 1999 Luther H. Hodges, Jr. Director (2) 59 1995 1999 George C. Evans President, Chairman and 61 1995 1998 Chief Executive Officer (3) A. Brean Murray Director (4) 59 1993 1998 William H. T. Bush Director (5) 57 1995 1997 James F. Leary Director and Vice 66 1995 1997 Chairman - Finance (6)
(1) Serves as a member of the Executive and Compensation Committees of the Board of Directors. (2) Serves as Chairman of the Compensation Committee and a member of the Audit Committee of the Board of Directors. (3) Serves as Chairman of the Executive Committee of the Board of Directors. (4) Serves as a member of the Audit Committee of the Board of Directors. (5) Serves as Chairman of the Audit Committee and a member of the Compensation Committee of the Board of Directors. (6) Serves as a member of the Executive Committee of the Board of Directors. Each of the Directors of the Company is a united states citizen. During the last five years, none of the Directors (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), or (ii) was a party to a civil proceeding of a judicial or an administrative body of competent jurisdiction that resulted in a final judgment, decree, or final order enjoining further violations of, or prohibiting activity subject to, federal or state securities laws or finding any violations of such laws. Business Histories of Directors GEORGE C. EVANS, joined the Company as President, Chief Executive Officer, and Director on January 20, 1995. On May 5, 1995, Mr. Evans became Chairman of the Board of Directors and Chairman of the Executive Committee of the Board of Directors. Mr. Evans has over 30 years of experience in the consumer lending and financial services industry. During 1992 and 1993, Mr. Evans was President and CEO of Century Acceptance Corporation, a 32-state operation engaged in consumer and automobile financing. Previously, he served as President and Chief Operating Officer of Associates Financial Services, Vice Chairman of Associates Corporation of North America and as Chairman and CEO of Associates International Subsidiaries, where his responsibilities included 6,000 employees, $3.5 Billion in receivables, with 1,100 branches and annual earnings in the $100 million range. Prior to Associates, Mr. Evans was employed by AVCO Financial Services where he rose from Branch Manager to Senior Vice President. A. BREAN MURRAY, was elected a Director of the Company in December 1993. Mr. Murray is Chairman of Brean Murray, Foster Securities, Inc., A privately-held securities firm, and is also Chairman of its affiliate BMI Capital Corporation, a registered investment advisor. He founded Brean Murray, Foster Securities Inc. In 1973. Mr. Murray has been in the Securities Industry since 1963 as a portfolio manager, director of institutional sales, director of venture capital and corporate finance and chief executive officer. He is a Director of First Caribbean Corporation, a mortgage banking company in Puerto Rico. He is a co-founder and Chairman of JABRA Corporation, a private company that sells hands-free auditory equipment. 21 255 LUTHER H. HODGES, JR., was appointed a director of the Company in May 1995. Mr. Hodges is currently president of the Caroline Co., an investment partnership in Conway, South Carolina. Mr. Hodges has previously held positions as Chairman and CEO of Washington Bancorporation and The National Bank of Washington, chairman of North Carolina National Bank (now known as NationsBank) and was formerly Under Secretary of the U.S. Department of Commerce and Deputy Secretary of Commerce. Mr. Hodges currently serves on the boards of numerous other organizations and corporations, including Phaseout of America. In 1978, he was a candidate for the United States Senate from North Carolina. JAMES F. LEARY, was appointed a director of the Company in May 1995 and was named Vice Chairman-Finance of the Company in September 1995. Mr. Leary has also been an employee of the Company since September 1995. Mr. Leary was a founder and partner in the Sunwestern Investment Group, an investment advisory and venture capital management firm. He previously served as director, CFO and Senior Executive Vice President for Associates Corporation of North America. From 1964 through 1973 he held various positions at CIT Financial Corporation, including Assistant Treasurer. Currently, he serves on the boards of several corporations, including Phaseout of America, Associated Materials, Inc., Maxserv, Inc., and certain mutual funds managed by Capstone Asset Management. RICHARD F. BONINI, was appointed a director of the Company in May 1995. Mr. Bonini is currently a director, Senior Executive Vice President and Secretary for First Financial Caribbean Corporation, a mortgage banking company in Puerto Rico. He also serves as director for the Doral Federal Savings Bank and the Doral Mortgage Corporation. WILLIAM H.T. BUSH, was appointed a director of the Company in September 1995. He served as President of Boatman's National Bank of St. Louis and as a member of its board of directors and the board of directors of its parent holding Company, Boatmen's Bancshares, Inc. Until June 1986. In 1986, Mr. Bush founded the Financial Advisory Firm of Bush-O'Donnell & Company, specializing in investment management and financial advisory services. He also serves on the boards of directors of Mississippi Valley Bankshares, Inc., INTRAV, Inc., Rite Choice Managed Care, Inc., and Detroit Tool Industries, Inc. and other civic organizations and served as a surrogate for his brother, former President George Bush, during the 1988 and 1992 political campaigns. Mr. Bush is also the uncle of George W. Bush, the current Governor of Texas. BUSINESS HISTORIES OF EXECUTIVE OFFICERS. ANTHONY J. DELLAVECHIA, age 60, became associated with the Company in August 1995 as an independent consultant and in January 1996, was named Senior Executive Vice President, Operations Director. Mr. Dellavechia has over 30 years experience in the consumer lending and financial services industry. Mr. Dellavechia served in several executive capacities including Senior Executive Vice President, Operations Director with Associates Financial Services Company, Inc., a division of the Associates Corporation of North America, from 1979 until his retirement in 1985. He was named President of U.S. Consumer Operations in 1983. Prior to Associates, he worked for AVCO Financial Services from 1957 until 1976 where he began his career as a financial representative and progressed through the ranks to the position of Area Vice President, in charge of that Company's largest area. ROBERT D. IDZI, age 51, joined the Company as Chief Financial Officer in October 1994. In November 1994, he was elected Senior Vice President, in December 1994, he was elected Treasurer and in February 1996, he was elected Executive Vice President. Mr. Idzi served as Vice President, Treasurer, CFO and Director of Unilease Computer Corporation, which engaged in the leasing of mainframe computers and peripheral equipment, from 1986 until 1987. From 1987 until 1992, Mr. Idzi was Senior Vice President and Chief Financial Officer of Equator Holdings, Ltd., a U.S. Based merchant bank subsidiary of the Hongkong Shanghai Banking Group. A Certified Public Accountant, Mr. Idzi began his career at the public accounting firm of Price Waterhouse. He received a B.S. Degree in Accounting from Georgetown University and is a member of the American Institute of Certified Public Accountants and the Financial Executives Institute. JOE B. DORMAN, age 51, joined the Company as General Counsel in February 1995. In March 1995, he was elected Senior Vice President. Previously, Mr. Dorman served as Counsel to Electronic Data Systems ("EDS") of Dallas, Texas from 1990 to 1995. Prior to joining EDS, Mr. Dorman was associated with the Dallas law firm of Graham, Bright & Smith and the Dallas firm of McKenzie & Baer. Mr. Dorman has also served as principal and General Counsel for Lease 22 256 Investment Corporation and Intercap Corporation. Mr. Dorman is licensed to practice law in the State of Texas. He is a Certified Public Accountant and a Member of the Bar in the State of Texas. ANDREW L. TENNEY joined Search as Operations Director in January 1995. In March 1995 he was elected Executive Vice President. Mr. Tenney has over 30 years experience in the consumer lending and financial services industry. Prior to joining Search, he was Executive Vice President of Century Acceptance Corporation. Mr. Tenney served as Executive Vice President at ABQ Financial. Previously, he was employed at Associates Financial Services as Senior Vice President, Marketing, and Executive Vice President in Consumer Operations. Before joining Associates, Mr. Tenney was employed by Avco Financial Services for 16 years rising to the level of Vice President. CAROLYN MALONE, age 53, was among the Company's original management staff. As director of human resources, Ms. Malone was promoted to Vice President in November 1994, and, in January 1995, she was elected Assistant Secretary. Prior to her affiliation with the Company, she spent 15 years with an oil and gas exploration entrepreneur and seven years with McCommons Oil Company. For the past 30 years, her business career has involved human resources, office management and administration. Ms. Malone attended Del Mar Junior College and graduated from Corpus Christi School of Business in 1965. Ms. Malone received her certification as human resource professional from the University of Texas at Dallas in 1994. ANDREW D. PLAGENS, age 28, joined the Company in May 1994 as Accounting Manager. In March 1995, he was promoted to Assistant Controller and Analyst, effective July 1, 1995, he became Controller of the Company and in January 1996 was promoted to Vice President. Prior to joining the Company, he was employed by Hein + Associates and Baird, Kurtz & Dobson. Mr. Plagens is a licensed CPA and a Member of the American Institute of CPA's and the Texas Society of CPA's. There are no family relationships between any of the directors or Executive Officers of the Company. Except as already described, none of the Company's directors hold directorships in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or pursuant to the requirements of Section 15(d) of the Exchange Act or any company registered as an Investment Company under the Investment Company Act of 1940. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Based solely on a review of the copies furnished to the Company and written representations from the executive officers and directors, the Company believes that all Section 16(a) filing requirements for the period ended March 31, 1996 applicable to its executive officers, directors and greater than ten percent (10%) beneficial owners were satisfied, with the exception of the following: On January 16, 1996, Anthony J. Dellavechia, an executive officer of the Company, was granted the option to purchase 50,000 shares of the Company's Common Stock and warrants to purchase 50,000 shares of the Company's Common Stock. Mr. Dellavechia reported these transactions along with his initial statement of ownership with the filing of his Form 5 on April 15, 1996. On March 27, 1996, Joe B. Dorman, an executive officer of the Company, was granted the option to purchase 25,000 shares of the Company's Common Stock and warrants to purchase 25,000 shares of the Company's Common Stock. Mr. Dorman reported this transaction with the filing of his Form 5 on April 15, 1996. On March 27, 1996, Robert D. Idzi, an executive officer of the Company, was granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr. Idzi reported this transaction with the filing of his Form 5 on April 15, 1996. On March 27, 1996, Carolyn Malone, a Vice President of the Company in charge of human resources, was granted the option to purchase 25,000 shares of the Company's Common Stock and warrants to purchase 5,000 shares of the Company's Common Stock. Ms. Malone reported this transaction with the filing of her Form 5 on April 15, 1996. On January 16, 1996, Karman L. Wallace, an executive officer of the Company, was granted the option to purchase 25,000 shares of the Company's Common Stock and warrants to purchase 25,000 shares of the Company's Common Stock. 23 257 Mr. Wallace reported these transactions along with his initial statement of ownership with the filing of his Form 5 on April 15, 1996. On March 27, 1996, Richard F. Bonini, a director of the Company, was granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr. Bonini reported this transaction with the filing of his Form 5 on April 15, 1996. On March 27, 1996, William H.T. Bush, a director of the Company, was granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr. Bush reported this transaction with the filing of his Form 5 on April 15, 1996. On March 27, 1996, Luther Hodges, Jr., A director of the Company, was granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr. Hodges reported this transaction with the filing of his Form 5 filed on April 15, 1996. On March 27, 1996, James F. Leary, a director of the Company, was granted warrants to purchase 50,000 shares of the Company's Common Stock and, on March 22, 1996, purchased 1,600 shares of the Company's Common Stock. Mr. Leary reported these transactions with the filing of his Form 5 on April 15, 1996. On March 27, 1996, William H.T. Bush, a director of the Company, was granted warrants to purchase 50,000 shares of the Company's Common Stock. Mr. Bush reported this transaction with the filing of his Form 5 on April 15, 1996. The Company believes that no other Forms 3, 4 or 5 for directors, executive officers or greater than 10% beneficial owners were required to be filed with the SEC for the six-month transition period ended March 31, 1996. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information for the fiscal years ended September 30, 1994 and September 30, 1995 and the six-month transition period ended March 31, 1996, regarding the compensation of each individual who served as the Company's Chief Executive Officer during the six-month period ended March 31, 1996, and each of the Company's four most highly compensated executive officers (other than the Chief Executive Officer) who served as an executive officer of the Company at the end of the six-month period ended March 31, 1996. 24 258 SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION SECURITIES ALL OTHER UNDERLYING ---------------- OTHER ANNUAL OPTIONS/SAR'S COMPENSATION (S) NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) (#) ---------------- --------------------------- ---- ---------- --------- ---------------- ------------- George C. Evans, 1996(1) 150,000 185,000 - - - Pres., CEO, COO 1995 162,734 112,500 - 1,000,000(3) - (from 1/20/95) (2)(5) 1,000,000(4) Robert D. Idzi 1996(1) 66,666 35,000 - 50,000(7) - EVP, CFO and Treasurer(2) 1995 117,308 5,000 - 204,000(3) 27,462(8) Anthony J. Dellavechia 1996(1) 31,250 25,000 - 50,000(7) 26,500(9) Sr. EVP, Operations Director(2) - 50,000(6) Joe B. Dorman(2) 1996(1) 55,833 25,000 - 25,000(7) - SVP, General 25,000(6) Counsel and Secretary 1995 67,128 - - 50,000(3) - 50,000(4) Andrew L. Tenney 1996(1) 62,499 25,000 - 25,000(7) - EVP and Operations Director(2) 25,000(6) 1995 79,775 - - 50,000(3) - 50,000(4)
- ------------------------------------------ (1) The compensation shown for 1996 represents compensation for the six-month transition period ended March 31, 1996. (2) Mr. Evans was elected President, Chief Executive Officer and Chief Operating Officer effective January 20, 1995. In May 1995, Mr. Evans was also elected Chairman of the Board of Directors. Mr. Idzi was elected Chief Financial Officer in October 1994, Treasurer in January 1995, and Executive Vice President in February 1996. Mr. Dellavechia joined the Company as Senior Executive Vice President and Operations Director in January 1996. Mr. Dorman joined the Company as General Counsel in February 1995, was elected Senior Vice President in March 1995 and was elected Secretary in May 1995. Mr. Vandergrift joined the Company in May 1995 and was elected Senior Vice President in February 1996. Mr. Tenney was elected Operations Director in January 1995, and in May 1995, was elected Executive Vice President. On April 1, 1996, Mr. Tenney resigned as an executive officer of the Company and worked as a consultant from April 1, 1996 to June 30, 1996. On July 1, 1996, Mr. Tenney assumed the position of Executive Vice President of Marketing. (3) Includes newly granted options as well as replacement options granted in exchange for the cancellation of previously granted options, as follows: for Mr. Evans, 500,000 options granted on January 20, 1995, all subsequently replaced on June 29, 1995 by the 500,000 options which he currently holds; for Mr. Tenney, 25,000 options granted on January 23, 1995, all subsequently replaced on June 29, 1995 by the 25,000 options which he currently holds; for Mr. Idzi, 102,000 options granted on January 15, 1995, all subsequently replaced on June 29, 1995 by the 102,000 options which he currently holds; for Mr. Dorman, 25,000 options granted on February 20, 1995 all subsequently replaced on June 29, 1995 by the 25,000 options which he currently holds. (4) Includes newly granted warrants as well as replacement warrants granted in exchange for the cancellation of previously granted warrants, as follows: for Mr. Evans, 500,000 warrants granted on May 10, 1995, all subsequently replaced on June 29, 1995 by the 500,000 warrants which he currently holds; for Mr. Tenney, 25,000 warrants granted on May 10, 1995, all subsequently replaced on June 29, 1995 by 25,000 warrants which he currently holds; for Mr. Dorman, 25,000 warrants granted on May 10, 1995, all subsequently replaced on June 29, 1995 by 25,000 warrants which he currently holds. (5) In June 1995, the Board determined to issue to Mr. Evans options or warrants (to be determined at a later date) to purchase 1,500,000 shares of common stock at a price of $1.375 Per share. These warrants or options will be issued to Mr. Evans in 500,000 share portions upon the occurrence of the following conditions: (a) 500,000 shares when the company earns $1 million before taxes and dividends by the fiscal year ending March 31, 1997; (b) 500,000 shares when the market price of the Company's Common Stock reaches $3.50 per share; and (c) 500,000 shares when the market price of the Company's Common Stock reaches $5.00 per share. (6) Represents options granted on March 27, 1996. (7) Represents warrants granted on March 27, 1996. (8) Relocation reimbursements. (9) Represents consulting fees paid to Mr. Dellavechia during the transition period. The foregoing executive officers receive health and disability insurance benefits which do not exceed 10% of their respective salaries. These benefits are also provided to all other employees of the Company. 25 259 The Company has no long-term incentive plans, pension plans, or stock appreciation rights plans. The Company adopted, as of August 1, 1994, its 1994 Employee Stock Option Plan, which was approved at its annual meeting of stockholders in May 1995. Certain 1994 Employee Stock Options and warrants to purchase Common Stock, as summarized in the following table, were granted to executive officers in the six-month period ended March 31, 1996. OPTION AND WARRANT GRANTS TO EXECUTIVE OFFICERS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF STOCK PRICE SECURITIES % OF TOTAL WARRANTS APPRECIATION FOR UNDERLYING AND OPTIONS GRANTED EXERCISE OR OPTION OR WARRANT WARRANTS AND TO EMPLOYEES DURING BASE PRICE EXPIRATION TERM NAME OPTIONS GRANTED # THE FISCAL YEAR ($ PER SHARE) DATE (8) 5% 10% ---- ----------------- --------------- ------------- -------- ---- ------- George C. Evans - - - - Robert D. Idzi 50,000(1) 10.2 1.26 3/27/06 $39,620 $100,406 Anthony J. Dellavechia 50,000(1) 10.2 1.25 1/16/06 39,306 99,609 50,000(3) 10.2 1.25 1/16/06 39,306 99,609 Joe B. Dorman 25,000(1) 5.1 1.26 3/27/06 19,810 50,202 25,000(2) 5.1 1.26 3/27/06 19,810 50,202 Andrew L. Tenney 25,000(1) 5.1 1.26 3/27/06 19,810 50,202 25,000(2) 5.1 1.26 3/27/06 19,810 50,202
(1) Represents warrants to purchase Common Stock. (2) Represents 1994 Employer Stock Options which vest in 1/3 yearly increments following the date of their grant. (3) Represents stock options granted before the Fund Subsidiaries' reorganization which, as a result of the change in control following the reorganization, are now fully vested. The following unexpired stock options to purchase Common Stock were held by the executives officers of the Company listed below at March 31, 1996.
FISCAL YEAR END OPTION AND WARRANT VALUES NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN THE MONEY OPTIONS AND WARRANTS AND WARRANTS AT MARCH 31, 1996 AT MARCH 31, 1996 -------------------------------------------- ------------------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------- ------------- -------------- ------------ -------------- George C. Evans 1,000,000 - $290,000 - Robert D. Idzi 152,000 - 35,580 - Anthony J. Dellavechia 100,000 - 13,000 - Joe B. Dorman 75,000 25,000 9,000 $3,000 Andrew L. Tenney 75,000 25,000 9,000 3,000
(1) Calculated using the fair market value of the Common Stock underlying the options and warrants as of the end of the transition period ($1.38) And the exercise price of the options or warrants. COMPENSATION OF DIRECTORS The Company pays to each director a fee of $750 per month and $1,500 per meeting attended, plus reimbursement of expenses in connection with attending each meeting. In addition, the Company has granted each director warrants to 26 260 purchase Common Stock. See "Principal Holders of Capital Stock." Messrs. Evans and Leary, who are employees of the Company, do not receive separate compensation for their services as directors, although Mr. Leary, who is an employee of search was paid salary and bonus totaling $57,999 during the transition period. OTHER AGREEMENTS WITH EXECUTIVE OFFICERS Effective January 20, 1995, George C. Evans joined the Company as President, Chief Executive Officer, Chief Operating Officer and a member of the Board of Directors by executing a three-year employment agreement at an annual compensation of $250,000 minimum per year. Mr. Evans is also to receive a bonus ranging from 25% to 100%, as determined by the Board, of annual salary. In June 1995, the Board determined to issue to Mr. Evans options or warrants (to be determined at a later date) to purchase 1,500,000 shares of Common Stock at a price of $1.375 per share. These warrants or options will be issued to Mr. Evans in 500,000 share portions upon the occurrence of the following conditions: (a) 500,000 shares when the Company earns $1 million before taxes and dividends before fiscal year ending march 31, 1997; (b) 500,000 shares when the market price of the Company's Common Stock reaches $3.50 per share; and (c) 500,000 shares when the market price of the Company's Common Stock reaches $5.00 per share. On May 1, 1996, Mr. James F. Leary entered into a two-year employment agreement with the Company. During the term of this agreement, Mr. Leary will be paid a salary of $160,000 per year. As of March 31, 1996, no other employee of the Company or its subsidiaries was covered by an employment agreement. EMPLOYEE STOCK OPTION PLAN On August 1, 1994, the Board of Directors adopted, subject to stockholder approval, the 1994 Employee Stock Option Plan (the "Plan"). The Plan was approved by the stockholders on May 10, 1995. The purpose of the Plan is to advance the interest of the Company by providing additional incentives to attract and retain qualified and competent employees, upon whose efforts and judgment the success of the company (including its subsidiaries) is largely dependent, through the encouragement of stock ownership in the Company by such persons. A total of 1,750,000 shares of Common Stock (subject to adjustment to compensate for the issuance of stock dividends or any recapitalization resulting in a stock split-up, combination or exchange of shares of Common Stock) have been reserved for sale upon exercise of options granted under the Plan. Options covering 1,122,000 shares had been granted under the Plan as of March 31, 1996. CASHLESS WARRANTS GRANTS. The Company also compensates its directors, key employees and some consultants through grants of cashless warrants. The purposes of these warrant grants are similar to those of the Employee Stock Option Plan. The exercise price of these warrants may be paid by the holder either (i) in cash or (ii) by surrender of warrants equal to the cash value of the exercise price. As of March 31, 1996, the Company had outstanding a total of 1,585,000 cashless warrants. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. In September 1993, the Board of Directors established a compensation committee (the "Compensation Committee"). The Compensation Committee currently consists of the following directors: A. Brean Murray, Richard F. Bonini and James F. Leary. Mr. Leary also serves as an employee of the Company in his capacity as Vice-Chairman of Finance. In addition, during the six-month period ended March 31, 1996, the Company paid Murray, Foster Securities Inc. ("BMFS") $200,000 for services rendered by it related to the success of the joint plan of reorganization. Mr. Murray is the chairman of BMFS. See, "Certain Relationships and Related Transactions." 27 261 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION The Compensation Committee (the "Committee") is now comprised of three non-employee directors: Luther H. Hodges, Jr., Chairman, Richard F. Bonini and William H. T. Bush. The Committee regularly reviews the executive compensation policies and practices of the Company and establishes or approves the compensation for executive officers. The Committee also administers The Company's 1994 Stock Option Plan. The Company's primary objective is to maximize stockholder value. To aid in accomplishing this goal, the Committee is guided by two principles in determining executive compensation policies: first, to attract, develop, reward and retain highly talented individuals; and second, to motivate executive officers to perform to the best of their abilities and to achieve both short-term and long-term Company objectives that will contribute to the overall goal of enhancing stockholder value. The Company's executive compensation program consists of two main elements: o Annual compensation, which is comprised of base salary and bonus, and o Long-term incentives that provide a financial opportunity to executive officers through grants of stock options and warrants. The compensation that may be realized by executives through these incentives is tied directly to the value of the Company's Common Stock in the future. The Committee believes that the Company's executive compensation program reflects the fundamental principles described above and provides strong incentives to executives to maximize Company performance. The base salary for Mr. George Evans, Chief Executive Officer, was determined by direct negotiations with Mr. Evans at the time of his employment in January 1995. The Employment Agreement for Mr. Evans specified his salary and the range for his bonus. Of the current Board of Directors, only A. Brean Murray was a member at that time. One of the Committee's members, A. Brean Murray, was a member of the Board at that time. The other members of the Board who participated in the negotiations are no longer members of the Board. During August 1995, the Committee, then composed of Messrs. A. Brean Murray, Luther H. Hodges, Jr. and James F. Leary, met informally to discuss Mr. Evans' performance and compensation. In September 1995, the deliberations of the Committee were presented to the Board of Directors, who approved changes to Mr. Evans' compensation. Prior to this approval, Mr. Leary, who had been elected Vice Chairman, resigned from the Compensation Committee. The Committee and the Board of Directors considered the following matters: his (i) knowledge of the consumer finance industry; (ii) reputation and acquaintances with other persons in the finance industry; (iii) performance in improving Company operations and employee confidence; (iv) performance in hiring competent and experienced executives which could assist in the "turnaround" of the Company; (v) performance in formulating and implementing plans to convert the Company's debt to equity; (vi) performance in dealing with shareholders and Noteholders who, at the time of his initial employment, were hostile toward the Company's former management; (vii) performance in settling the O'Shea shareholder class action litigation; and (viii) performance in assembling a Board of Directors with experience ad knowledge in the finance industry. Based on the foregoing evaluation, the Board of Directors, acting on the recommendation of the Committee, approved an increase in Mr. Evans' salary from $250,000 to $300,000 and a bonus of $250,000. Mr. Evans received the bonus in two payments, the first portion of which, consisting of $65,000, was paid at the end of the fiscal year ended September 1995. The remaining $185,000 was to be paid subsequent to and conditioned upon Confirmation of the Joint Plan. The Board also promised to grant to Mr. Evans the right to receive warrants or options, at his election, to purchase 1,500,000 shares of Common Stock, based on the future performance of the Company and its Common Stock per share price. The Committee approves the salary of the other executive officers of the Company, including the executive officers named in the Summary Compensation Table. The Committee at the end of each fiscal year reviews incentive bonus awards proposed by Mr. Evans for all of the executive officers other than Mr. Evans. The Committee and Mr. Evans jointly reviewed the individual performances of each executive officer other than Mr. Evans, and the Committee gave significant consideration 28 262 of Mr. Evans' views on the performance of each such executive officer. The Committee also awards all warrants and 1994 Employee Stock Options to executive officers. Again, such awards are generally proposed by Mr. Evans, and the Committee and Mr. Evans jointly review the individual performances of each executive officer other than Mr. Evans in making the awards. The size of the bonus, option and warrant awards to executive officers were based on subjective factors, including primarily the perceived importance of the individual's contribution to the success of the Company and upon the amount of and value of options and warrants currently held by the individual. The Committee also takes into consideration in granting options and warrants to executive officers the relationship of the number of options and warrants held by each of the executive officers to a subjective rating of the degree of responsibility of the position held by each officer compared to that of the other executive officers. While not having a target ownership level of Common Stock by executive officers, the Committee has endeavored to motivate executives by granting options at levels that present executives with an opportunity for significant gains that are commensurate to gains in stockholder value. During the transition period ended March 31, 1996, bonus, option and warrant awards granted to executive employees were tied to the success of the Fund Subsidiaries' reorganization. Executive officers were granted a number of options and warrants prior to and during the transition period due to the Company's need to conserve cash in order to complete the reorganization of its Fund Subsidiaries, while continuing to attract qualified executive employees notwithstanding the troubled circumstances of the Company. Stock options and warrants are designed to align the interests of the recipients with those of the stockholders of the Company. Stock options and warrants are typically granted by the Company with an exercise price equal to the market price of the Company's Common Stock on the date of grant. The options generally vest over three years, and the warrants immediately vest. In the six-month transition period ended March 1996, the 1994 Employee Stock Options that were granted prior to the effectiveness of the Joint Plan became fully vested as a result of the substantial number of shares of stock that were issued by the Company pursuant to the Joint Plan and the resulting deemed change in control of the Company. In summary, the Committee's executive compensation decisions are generally intended to link a significant portion of the compensation of the Company's executive officers to individual performance and to corporate performance and stock price appreciation. The Committee intends to continue the policy of linking executive compensation to corporate performance and improvement in stockholder value, recognizing that economic factors beyond management's control may result in imbalances for a particular period but that consistent improvement in corporate performance over the long-term will enure to the mutual benefit of the Company's executives and its stockholders. 29 263 PERFORMANCE GRAPH The following graph presents cumulative shareholder return on the Company's Common Stock for the five-year period ended March 31, 1996. The Company is compared to the S&P 500 Index and the S&P Financial Index. The graph assumes that $100 was invested in the Company's Common Stock and in each index at the beginning of the measurement period. The data source for all graphs is Bloomberg data service and National Quotation Bureau. COMPARISON OF CUMULATIVE TOTAL RETURN 1993-1996* GRAPH * Assumes the reinvestment of any dividends. (1) Due to the sporadic and limited trading of the Company's Common Stock before March 31, 1993, only three years are shown. 30 264 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL HOLDERS OF CAPITAL STOCK The following table sets forth certain information, as of June 17, 1996, relating to the beneficial ownership of the Common Stock, 12% Preferred Stock (the "12% Preferred Stock") and 9%/7% Preferred Stock (i) by any person or "group," as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, known to the Company to own beneficially 5% or more of the outstanding Common Stock or shares of Preferred Stock, and (ii) by each current director and executive officer of the Company and by all current directors and executive officers of the Company as a group. Except as otherwise indicated, each of the persons named below is believed by the Company to possess sole voting and investment power with respect to the shares of Common Stock, 12% Preferred Stock or 9%/7% Preferred Stock beneficially owned by such person.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1) PERCENTAGE OF CLASS OUTSTANDING NAME OF DIRECTOR OR EXECUTIVE OFFICER OR NUMBER OF NAME AND COMMON NUMBER OF NUMBER OF 12% ADDRESS OF BENEFICIAL STOCK 9%/7% PREFERRED 12% PREFERRED COMMON 9%/7% PREFERRED PREFERRED ---------------------- ------ - OWNER SHARES STOCK SHARES STOCK SHARES STOCK STOCK STOCK ----- ------ ------------ ------------ ----- ----- ----- Hall Phoenix/Inwood, Ltd. 7,814,556(2) 2,032,812 28.7% 11.9% 750 N. St. Paul, Suite 200 Dallas, Texas 75201-3247 Value Partners, Ltd. 2,150,174 2,667,819 7.9% 15.6% 2200 Ross Ave. Suite 4660 W Dallas, TX 75201 Greg Muns, M.D. - 20,000 - 5% 1319 Shores Circle Rockwall, Texas 75087 Sam Coker Retirement - 20,000 - 5% Trust Rt. 2, Box 50 Millsap, Texas 76066 A. Brean Murray 483,558(3) 1.7% Luther H. Hodges, Jr. 111,000(4) * James F. Leary 102,500(4) * William H.T. Bush 100,000(5) * Richard F. Bonini 122,862(4) 12,236 * * George C. Evans 1,000,000(6) 3.5 George C. Evans, as 812,127(7) 2.9 holder of the SBM Trust, irrevocable proxy Joe B. Dorman 75,000(8) * Robert D. Idzi 152,000(9) * Anthony J. Dellavechia 100,000(10) * Andrew L. Tenney 100,000(11) * All directors and executive officiers as a group (9 person) 3,277,007 12,236 11.0% *
------------------------- * Less than 1% (1) The information as to beneficial ownership of Common Stock, 12% Preferred Stock and 9%/7% Preferred Stock has been furnished by the Company's transfer agent and the respective shareholders, directors and officers of the Company. Each named person or group is deemed to be the beneficial owner of securities which may be acquired by such person or group within 60 days through the exercise of options, warrants and rights, if any, and such securities are 31 265 deemed to be outstanding for the purpose of computing the percentage of stock beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage of stock beneficially owned by any other person or group. (2) Includes (i) warrants to purchase 3,000,000 shares of Common Stock at $2.00 per share on or before November 30, 2000, and (ii) warrants to purchase 676,178 shares of Common Stock at $2.00 per share (increasing $0.25 each year) on or before March 31, 2001. (3) Includes (i) warrants to purchase 10,000 shares, at $8.75 per share, on or before December 20, 1998, (ii) warrants to purchase 113,558 shares at $9.60 per share on or before December 10, 1998, (iii) warrants to purchase 250,000 shares at $1.09 per share on or before June 29, 2005, and (iv) warrants to purchase 50,000 shares at $1.16 per share on or before March 27, 2006. (4) Includes warrants to purchase 50,000 shares at $1.09 per share on or before June 29, 2005 and warrants to purchase 50,000 shares at $1.16 per share on or before March 27, 2006. (5) Represents warrants to purchase 50,000 shares at $1.375 per share on or before August 4, 2005 and warrants to purchase 50,000 shares at $1.16 per share on or before March 27, 2006. (6) Represents (i) warrants to purchase 500,000 shares at $1.09 per share on or before June 29, 2005 and (ii) options issued under the 1994 Employee Stock Option Plan to purchase 500,000 shares of Common Stock at $1.09 per share on or before January 20, 2005, which vested in Mr. Evans following the Fund Subsidiaries' reorganization. (7) Represents 812,127 shares owned of record by the SBM Trust for which Mr. Evans holds an irrevocable proxy to vote. Mr. Evans has no other relationship with the SBM Trust. (8) Represents (i) warrants to purchase 25,000 shares at $1.09 per share on or before June 29, 2005, (ii) options issued under the 1994 Employee Stock Option Plan to purchase 25,000 shares of Common Stock at $1.09 per share on or before February 20, 2005, which vested in Mr. Dorman following the Fund Subsidiaries' reorganization and (iii) warrants to purchase 25,000 shares at $1.26 per share on or before March 27, 2006. (9) Represents options issued under the 1994 Employee Stock Option Plan to purchase 102,000 shares at $1.09 per share on or before January 15, 2005, which vested in Mr. Idzi following the Fund Subsidiaries' reorganization, and warrants to purchase 50,000 shares at $1.26 per share on or before March 27, 2006. (10) Represents warrants to purchase 50,000 shares at $1.25 per share on or before January 16, 2006 and options issued under the 1994 Employee Stock Option Plan to purchase 50,000 shares at $1.25 per share on or before January 16, 2006, which vested in Mr. Dellavechia following the Fund Subsidiaries' reorganization. (11) Represents warrants to purchase 25,000 shares at $1.25 per share on or before January 16, 2006 and options issued under the 1994 Employee Stock Option Plan to purchase 25,000 shares at $1.26 per share on or before March 27, 2007, which vested in Mr. Tenney following the Fund Subsidiaries' reorganization. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The policy of the Company with respect to transactions with officers, directors and affiliates is to require that such transactions be (i) on terms no less favorable to the Company than could be obtained from unrelated third parties and (ii) approved by a majority of the disinterested directors of the Company. The following transactions were approved by the Board of Directors of the Company in accordance with such policy. Mr. A. Brean Murray is a director of the Company and Chairman of Brean Murray, Foster Securities Inc. ("BMFS"). In March 1996, the Company paid a $200,000 cash fee to BMFS for its services related to the success of the Joint Plan. These services included research and advice to the Company regarding the feasibility, terms and marketability of securities issued under the Joint Plan, the advantages and disadvantages of a reverse stock split, the feasibility of the Company's plans to re-focus its receivables purchasing activities, and the potential trading markets and values of the Company's stock following the completion of the Joint Plan. These fees are subject to approval by the Court pursuant to 11 U.S.C. Section 1129(a)(4). Pursuant to the Joint Plan, Mr. Frederick S. Hammer will become a member of the Board of Directors. Mr. Hammer is a principal in Inter-Atlantic Securities Corp., which will receive a fee for its services to be rendered in connection with obtaining potential subordinated debt financing for The Company. Inter-Atlantic will receive the following compensation: o A marketing fee in the amount of $50,000 after Inter-Atlantic has produced an offering memorandum to be given to potential investors. o If subordinated debt financing is obtained, a private placement fee equal to 4.5% of the gross par amount of subordinated debt. One-half of the private placement fee will be paid in cash and one-half in subordinated debt, which will be valued at par and issued on the same terms as provided to the investors. 32 266 Pursuant to the Funding Agreement ("Funding Agreement") entered into on November 30, 1995 between the Company and Hall Financial Group, Inc. ("HFG"), HFG made loans totaling $2,283,000 ("HFG Notes") to Search. The Funding Agreement gave HFG the right to convert the HFG Notes into 2,500,000 shares of the Company's common stock. Further, in connection with the Funding Agreement, the Company granted to HFG warrants to purchase 3,000,000 shares of the Company's Common Stock. The grants of these warrants and conversion rights gave HFG beneficial ownership of approximately 38.7% of Company's common stock, making HFG an affiliate of the Company. Effective April 2, 1996, HPIL, as assignee from HFG of the HFG Notes, fully exercised the rights of the holder of the HFG Notes to convert the Notes into 2,500,000 shares of Search common stock. The Funding Agreement also provided to HFG the option to purchase common stock, 9%/7% Preferred Stock, and warrants. Effective April 2, 1996, HPIL, as assignee of HFG, fully exercised this purchase option by paying $4,346,000 cash to the Company for which the Company issued 1,638,400 shares of common stock and 2,032,800 shares of 9%/7% Preferred Stock, and warrants to purchase 676,000 shares of common stock to HPIL. Pursuant to the Funding Agreement, HFG was entitled to elect one director to the Company's Board if HFG converted the HFG notes into common stock and to elect another if HFG purchased at least $1,000,000 present value of securities from the Company. These new directors, Messrs. Craig Hall and Larry E. Levey, pursuant to their request, will appointed as directors when the Company obtains directors and officers liability insurance, which the Company is pursuing. As a result of satisfaction of these conditions, HFG has designated two HFG officers as its representatives for appointment to the Company's Board. 33 267 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND SCHEDULES The financial statements listed in the Index to Financial Statements are filed as part of this annual report. No financial statement schedules are required to be filed as part of this annual report because all information otherwise included in schedules has been incorporated into the Notes to Consolidated Financial Statements. (b) REPORTS ON FORM 8-K During the quarter ended March 31, 1996 the following reports on Form 8-K were filed by the Company: On April 3, 1996, the Company filed a report on Form 8-K announcing a change in its fiscal year end from September 30 to March 31. On April 18, 1996, the Company filed a report on Form 8-K announcing the Effective Date of the Joint Plan. On May 14, 1996, the Company filed a report on Form 8-K announcing the approval of the shareholders class action suit settlement by U.S. District Court, Northern District of Texas, Dallas Division. 34 268 (c) EXHIBITS Exhibit Number Description - --------------- ------------------------------------------------------------- 2.1 Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.1 to the April 17, 1996 Form 8-K Current Report). 2.2 Modification to Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.2 to the April 17, 1996 Form 8-K Current Report). 2.3 Order Confirming Third Amended and Supplemented Joint Plan, Pursuant to 11 U.S.C. ss. 1129 (incorporated by reference to Exhibit 2.3 to the April 17, 1996 Form 8-K Current Report). 2.4 Chapter 11 Post-Confirmation Order (incorporated by reference to Exhibit 2.4 to the April 17, 1996 Form 8-K Current Report). 2.5 Order Regarding Entry Date of Order Confirming Third Amended and Supplemented Joint Plan Pursuant to 11 U.S.C. ss. 1129 (incorporated by reference to Exhibit 2.5 to the April 17, 1996 Form 8-K Current Report). 2.6 Order Granting Second Motion for Technical, Non-Material Modification to the Third Amended and Supplemented Joint Plan of Reorganization (incorporated by reference to Exhibit 2.6 to the April 17, 1996 Form 8-K Current Report). 3.1 Certificate of Incorporation, as amended to date. 3.2 Bylaws, as amended. 4.1 Warrant to purchase 3,000,000 shares of common stock of Search Capital Group, Inc. dated as of November 30, 1995 (incorporated herein by reference from Exhibit 4.1 to the Form 8-K Current Report dated November 30, 1995). 4.2 Certificate of Designation 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the April 17, 1996 Form 8-K). 4.3 Warrant Agreement dated as of March 27, 1996 between Search Capital Group, Inc. and American Securities Transfer, Inc., as Warrant Agent (incorporated by reference to Exhibit 4.2 to the April 17, 1996 Form 8-K). 10.1 Form of Director's Warrant to purchase shares of Common Stock of Search Capital Group, Inc. (incorporated by reference from Exhibit 10.16 of Search Capital Group, Inc.'s Annual Report on Form 10-K for the nine-month transition period ended September 30, 1993) 10.2 Form of Warrant for Officers and Employees to purchase shares of Common Stock of Search Capital Group, Inc. (incorporated by reference from Exhibit 10.17 of Search Capital Group, Inc.'s Annual Report on Form 10-K for the nine-month transition period ended September 30, 1993) 10.3 1994 Employee Stock Option Plan of Search Capital Group, Inc. (incorporated by reference from Exhibit 10.18 of Search Capital Group, Inc. Annual Report on Form 10-K for the fiscal year ended September 31, 1994). 10.4 Stock Purchase Agreement between Search Capital Group, Inc. and Louis Dorfman, Trustee of the SBM Trust (incorporated by reference from Exhibit 10.9 to Search Capital Group, Inc.'s originally filed Annual Report on Form 10-K for the year ended September 30, 1995). 35 269 Exhibit Number Description - -------------- ------------------------------------------------------------ 10.5 Funding Agreement dated November 30, 1995 (the "Funding Agreement") among Search Capital Group, Inc., Search Funding Corp., Automobile Credit Acceptance Corp., Automobile Credit Holdings, Inc., Newsearch, Inc. and Hall Financial Group, Inc. (incorporated herein by reference from Exhibit 99.1 to the Form 8-K Current Report of Search Capital Group, Inc. dated November 30, 1995 (the 11/95 8-K")). 10.6 Convertible Promissory Note dated November 30, 1995 from Search Capital Group, Inc. and Search Funding Corp. payable to the order of Hall Financial Group, Inc. in the principal amount of $1,284,487.28 (incorporated herein by reference from Exhibit 99.2 to the 11/95 8-K). 10.7 Promissory Note dated November 30, 1995 from Search Capital Group, Inc. and Search Funding Corp. payable to the order of Hall Financial Group, Inc. in the principal amount of $715,512.72. (incorporated herein by reference from Exhibit 99.3 to the 11/95 8-K). 10.8 Convertible Note dated November 30, 1995 from Search Capital Group, Inc. and Search Funding Corp. payable to the order of Hall Financial Group, Inc. in the principal amount of $1,000,000.00. (incorporated herein by reference from Exhibit 99.4 to the 11/95 8-K). 10.9 Newsearch Pledge Agreement dated as of November 30, 1995 between Newsearch, Inc. and Hall Financial Group, Inc. (incorporated herein by reference from Exhibit 99.5 to the 11/95 8-K). 10.10 Search Pledge Agreement dated as of November 30, 1995 between Search Capital Group, Inc. and Hall Financial Group, Inc. (incorporated herein by reference from Exhibit 99.6 to the 11/95 8-K). 10.11 ACHI Pledge Agreement dated as of November 30, 1995 between Automobile Credit Holdings, Inc. and Hall Financial Group, Inc. (incorporated herein by reference from Exhibit 99.7 to the 11/95 8-K). 10.12 Search Security Agreement dated as of November 30, 1995 between Search Capital Group, Inc. and Hall Financial Group, Inc. (incorporated herein by reference from Exhibit 99.7 to the 11/95 8-K). 10.13 SFC Security Agreement dated as of November 30, 1995 between Search Funding Corp. and Hall Financial Group, Inc. (incorporated herein by reference from Exhibit 99.9 to the 11/95 8-K). 10.14 ACAC Security Agreement dated as of November 30, 1995 between Automobile Credit Acceptance Corp. and Hall Financial Group, Inc. (incorporated herein by reference from Exhibit 99.10 to the 11/95 8-K). 10.15 First Amendment to the Funding Agreement dated December 31, 1995 10.16 Second Amendment to the Funding Agreement dated March 25, 1996 10.17 Third Amendment to the Funding Agreement dated April 1, 1996. 10.18 Letter Agreement between Search and Alex. Brown & Sons, Inc. dated May 24, 1995 (incorporated by reference from Exhibit 10.20 to Search Capital Group, Inc.'s Annual Report on Form 10-K for the year ended September 30, 1995). 10.19 Employment Letter Agreement between George C. Evans and Search date January 20, 1995 (incorporated by reference from Exhibit 10.21 to Search Capital Group, Inc.'s Annual Report on Form 10-K for the year ended September 30, 1995). 36 270 Exhibit Number Description - -------------- -------------------------------------------------------------- 10.20 Amendment to Employment Agreement of George C. Evans dated May 10, 1995 (incorporated by reference from Exhibit 10.22 to Search Capital Group, Inc.'s Annual Report on Form 10-K for the year ended September 30, 1995). 10.21 Employment Agreement between Search and James F. Leary dated May 1, 1996. 11.1 Computation of per share earnings (loss) 22.1 List of Subsidiaries (incorporated by reference from Search Capital Group, Inc.'s Annual Report on Form 10-K for the fiscal year ended September 31, 1994). 23.1 Consent of BDO Seidman, LLP 27.1 Financial data schedule 28.1 Letter agreement between the Company and Inter-Atlantic Securities dated May 13, 1996. (d) FINANCIAL STATEMENTS EXCLUDED BY RULE 14a-3(b). None of the Registrant's financial statements are excluded from the annual report to shareholders by Rule 14a-3(b). 37 271 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEARCH CAPITAL GROUP, INC. By: /s/ George C. Evans ---------------------------------------- George C. Evans, President and Chief Executive Officer Date: May 29, 1997 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ George C. Evans - ----------------------------- May 29, 1997 George C. Evans Chairman of the Board, Chief Executive Officer, Chief Operating Officer and Director /s/ Robert D. Idzi - ------------------------------ May 29, 1997 Robert D. Idzi Executive Vice President, Chief Financial Officer and Treasurer /s/ Andrew D. Plagens - ------------------------------ May 29, 1997 Andrew D. Plagens Senior Vice President, Controller and Chief Accounting Officer /s/ A. Brean Murray - ------------------------------ May 8, 1997 A. Brean Murray Director /s/ Richard F. Bonini - ------------------------------ May 29, 1997 Richard F. Bonini Director /s/ Luther H. Hodges - ------------------------------ May 29, 1997 Luther H. Hodges Director /s/ James F. Leary - ------------------------------ May 29, 1997 James F. Leary Vice Chairman of Finance and Director /s/ William H. T. Bush - ------------------------------- May 29, 1997 William H. T. Bush Director
38 272
SIGNATURE TITLE DATE - --------- ----- ---- - ------------------------------- ---------------------------- Frederick S. Hammer Director /s/ DOUG POWELL - ------------------------------- May 8, 1997 Doug Powell Director /s/ BARRY W. RIDINGS - ------------------------------- May 29, 1997 Barry W. Ridings Director
39 273 EXHIBIT INDEX
Exhibit Number Description -------- ------------------------------------------------------------- 11.1 Computation of per share earnings (loss) 23.1 Consent of BDO Seidman, LLP 27.1 Financial data for the transition period ended March 31, 1996
274 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Delaware General Corporation Law. Section 102(b)(7) of the Delaware General Corporation Law provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 (relating to liability for unauthorized acquisitions or redemptions of, or dividends on, capital stock) of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Section 145 of the Delaware General Corporation Law provides as follows: "(a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such II-1 275 amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) A corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees)." Restated Certificate of Incorporation. Paragraph ELEVENTH of the Restated Certificate of Incorporation states that the Company shall, to the fullest extent permitted by Delaware General Corporation Law, indemnify any and all persons who it would have the power to indemnify under such law from and against any and all of the expenses, liabilities or other matters referred to in or covered by such law and, to the extent permitted under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his director or officer capacity and as to action in another capacity while holding such office. Such indemnification obligation will continue as to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of his heirs, executors and administrators. Paragraph TWELFTH of the Restated Certificate of Incorporation states that, to the fullest extent permitted by the Delaware General Corporation Law, a director of the Company will not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Bylaws. Article IX of the Company's Bylaws requires the Company to indemnify any person who was or is a party, or threatened to be made a party to any suit or proceeding, by reason of the fact that he or she is or was an authorized representative of the Company for specified liabilities and expenses if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, II-2 276 he or she had no reasonable cause to believe his or her conduct was unlawful. The Board of Directors, by vote of a majority of those present at any meeting, may elect to exclude such person from such indemnification. The indemnified liabilities and expenses include, but are not limited to, legal fees and disbursements and amounts of judgments, fines or penalties against an amount paid in settlement by the indemnified party. The Company may advance any reasonable expense incurred by the indemnified party prior to the final disposition of any claim, action, suit or proceeding if it receives an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification. These indemnification rights are in addition to any other indemnification rights to which the person may be entitled under any agreement, vote of stockholders, the Restated Certificate of Incorporation, or as a matter of law or otherwise. The directors and officers of the Company are insured (subject to certain exceptions and deductions) against liabilities that they may incur in their capacity as such, including liabilities under the Securities Act, under a liability policy carried by the Company. II-3 277 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits EXHIBIT NO. DESCRIPTION 2.1 Agreement and Plan of Merger dated as of February 7, 1997 among the Registrant, Search Capital Acquisition Corp. and MS Financial, Inc. ("MSF") (included as part of Annex A to the Joint Proxy Statement/Prospectus) 2.2 Letter agreement dated as of June 4, 1997 among the Registrant, Search Capital Acquisition Corp. and MSF (included as part of Annex A to the Joint Proxy Statement/Prospectus) 4.1 Specimen certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-68524)) 4.2 Restated Certificate of Incorporation of Search Financial Services Inc. (incorporated by reference to Exhibit 3.1 to Registrant's Transition Report on Form 10-K for the transition period ended March 31, 1996 ("1996 10-K")) 4.3 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (the "9/30/96 Form 10-Q")) 4.4 Certificate of Correction to the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the 9/30/96 Form 10-Q) 4.5 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.4 to the 9/30/96 Form 10-Q) 4.6 Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.7 to Registrant's Form S-3 Registration Statement (Registration No. 333-20551)) 4.7 Loan Agreement dated September 11, 1996 between Search Funding II, Inc. and Hibernia National Bank 4.8 Commercial Security Agreement dated September 11, 1996 between Search Funding II, Inc. and Hibernia National Bank 4.9 Commercial Guaranty dated September 11, 1996 between Registrant and Hibernia National Bank. 4.10 Promissory Note dated September 11, 1996 in the principal amount of $25,000,000 payable to Hibernia National Bank. 4.11 Other than the indebtedness evidenced by the agreements listed in Exhibits 4.7 and 4.10 above and Exhibit 10.33 below, none of the outstanding long-term debt of the Registrant and its consolidated subsidiaries exceeds ten percent (10%) of the total assets of the Registrant and its consolidated subsidiaries, and, except for Exhibit 10.25, copies of the constituent instruments defining the rights of the holders of such debt are not included as exhibits to this Registration Statement. The Registrant agrees to furnish copies of such instruments to the Commission upon request. 5.1 Opinion of Bracewell & Patterson, L.L.P., counsel to the Registrant 8.1 Tax Opinion of Haynes & Boone, L.L.P. 10.1 Stockholders Agreement, dated as of February 7, 1997, between the Registrant and certain stockholders of MSF (incorporated by reference to Exhibit 2.2 to Registrant's Current Report on Form 8-K dated February 7, 1997) II-4 278 10.2 Form of Escrow Agreement, dated as of February 7, 1997, between the Registrant, MSF, certain stockholders of MSF and U.S. Trust Company of Texas, N.A. as escrow agent 10.3 Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.1 to Registrant's April 17, 1996 Form 8-K Current Report (the "April 1996 8-K") 10.4 Modification to Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.2 to the April 1996 8-K) 10.5 Order Confirming Third Amended and Supplemented Joint Plan, Pursuant to 11 U.S.C. Section 1129 (incorporated by reference to Exhibit 2.3 to the April 1996 8-K) 10.6 Chapter 11 Post-Confirmation Order (incorporated by reference to Exhibit 2.4 to the April 1996 8-K) 10.7 Order Regarding Entry Date of Order Confirming Third Amended and Supplemented Joint Plan Pursuant to 11 U.S.C. Section 1129 (incorporated by reference to Exhibit 2.5 to the April 1996 8-K 10.8 Order Granting Second Motion for Technical, Non-Material Modification to the Third Amended and Supplemented Joint Plan of Reorganization (incorporated by reference to Exhibit 2.6 to the April 1996 8-K) 10.9 Form of Warrants to purchase shares of Common Stock of Registrant issued to directors containing a cashless exercise feature 10.10 1994 Employee Stock Option Plan of Registrant, as amended and adjusted (incorporated by reference from Exhibit 4.1 of Registrant's Form S-8 Registration Statement (Registration No. 333-22315)) 10.11 Agreement between Registrant and Louis Dorfman, Trustee of The SBM Trust dated as of May 5, 1995 (incorporated by reference from Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year ended September 30, 1995 (the "1995 10-K")) 10.12 Agreement between Registrant and Sam B. Meyers, Jr. dated as of May 5, 1995 10.13 Letter Agreement between Registrant and Alex. Brown & Sons, Inc. dated May 24, 1995 (incorporated herein by reference from Exhibit 10.20 to the 1995 10-K) 10.14 Letter Agreement and Addenda A, D and E thereto between Registrant and Alex. Brown & Sons Incorporated dated May 16, 1996 10.15 Employment Letter Agreement between George C. Evans and Registrant dated January 20, 1995 (incorporated herein by reference from Exhibit 10.21 to the 1995 10-K) 10.16 Amendment to Employment Letter Agreement of George C. Evans dated May 10, 1995 (incorporated herein by reference from Exhibit 10.22 to the 1995 10-K) 10.17 Amendment to Employment Letter Agreement of George C. Evans dated March 20, 1996 10.18 Amendment to Employment Letter Agreement of George C. Evans dated February 13, 1997 10.19 Employment Letter Agreement between Registrant and James F. Leary dated May 1, 1996 (incorporated herein by reference from Exhibit 10.21 to the 1996 10-K) 10.20 Letter agreement between Registrant and Inter-Atlantic Securities Corp. dated August 23, 1996 10.21 Letter agreement between Registrant and Inter-Atlantic Securities Corp. dated September 6, 1996 II-5 279 10.22 Compromise and Settlement Agreement by and among Craig Hall, Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood, Ltd. and Registrant effective as of November 21, 1996 (incorporated by reference from Exhibit 10.1 to Registrant's Current Report on Form 8-K dated November 21, 1996 (the "November 1996 8-K") 10.23 Mutual Release Agreement effective as of November 21, 1996 by and among Registrant, George C. Evans, Craig Hall, Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood, Ltd. (incorporated by reference from Exhibit 10.2 to the November 1996 8-K) 10.24 Standstill Agreement effective as of November 21, 1996 by and among Registrant, Craig Hall, Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood, Ltd. (incorporated by reference from Exhibit 10.3 to the November 1996 8-K) 10.25 Subordinated Note dated November 21, 1996 in the principal amount of $5,000,000 (incorporated by reference from Exhibit 10.4 to the November 1996 8-K) 10.26 Asset Purchase Agreement (the "Asset Purchase Agreement") among U.S. Lending Corporation, as Debtor-In- Possession, Registrant and Search Funding III, Inc. dated July 17, 1996 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 10.27 Second Amendment dated November 5, 1996 to the Asset Purchase Agreement (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 10.28 Asset Acquisition Agreement among Registrant, Search Funding IV, Inc. and Dealers Alliance Credit Corp. dated as of August 2, 1996 (incorporated by reference from Exhibit 2.1 to Registrant's Current Report on Form 8-K dated August 6, 1996 (the "August 1996 8-K") 10.29 Sub-Debt Acquisition Agreement among Registrant, Search Funding IV, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation dated as of August 2, 1996 (incorporated by reference from Exhibit 2.2 to the August 1996 8-K) 10.30 Escrow Agreement among Registrant, Dealers Alliance Credit Corp., Search Funding IV, Inc., R-H Capital Partners, L.P., Kellett Investment Corporation and U.S. Trust Company of Texas, N.A., dated as of August 6, 1996 (incorporated by reference from Exhibit 2.3 to the August 1996 8-K) 10.31 Search-DACC Shareholders Agreement dated as of August 2, 1996 between Registrant and Dealers Alliance Credit Corp. (incorporated by reference from Exhibit 2.4 to the August 1996 8-K) 10.32 Sub-Debt Shareholders Agreement dated as of August 2, 1996 among Registrant, R-H Capital Partners, L.P. and Kellett Investment Corporation (incorporated by reference from Exhibit 2.5 to the August 1996 8-K) 10.33 Debt Assumption Agreement dated as of August 2, 1996 among Registrant, Search Funding IV, Inc., LaSalle National Bank, as Agent, Bank One Chicago, N.A. and Fleet Capital Corporation (incorporated by reference from Exhibit 2.6 to the August 1996 8-K) 10.33 Motor Vehicle Installment Sales Contract Assignment and Purchase Agreement dated September 27, 1996 between Eagle Finance Corp. and Search Funding Corp. (incorporated by reference from Exhibit 2 to Registrant's Current Report on Form 8-K dated September 27, 1996) 10.34 Motor Vehicle Installment Sales Contract Assignment and Purchase Agreement dated as of November 1, 1996 between MS Financial, Inc. and Search Funding Corp. (incorporated by reference from Exhibit 2.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) II-6 280 10.35 Letter agreement between the Registrant and MS Financial, Inc. dated November 4, 1996 (incorporated by reference from Exhibit 2.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 11.1 Statement re computation of per share earnings (incorporated by reference to Exhibit 11.1 to Registrant's Transition Report on Form 10-K dated March 31, 1996) 13.1 Registrant's Transition Report on Form 10-K (as amended) for the transition period ended March 31, 1996 (included as Annex F to the Joint Proxy Statement/Prospectus) 23.1 Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 5.1) 23.2 Consent of Haynes & Boone, L.L.P. (included in Exhibit 8.1) 23.3 Consent of KPMG Peat Marwick LLP 23.4 Consent of BDO Seidman, LLP 23.5 Consent of Bear, Stearns & Co. Inc. (included in the opinion which appears as Annex B to the Joint Proxy Statement/Prospectus) 23.6 Consent of Alex. Brown & Sons Incorporated (included in the opinion which appears as Annex C to the Joint Proxy Statement/Prospectus) 23.7 Consent of Deloitte & Touche LLP 24.1 Power of Attorney (included on signature page) 99.1 Form of Proxy Card for Search Common Stock, Search 12% Preferred Stock and Search 9%/7% Preferred Stock 99.2 Form of Proxy Card for MSF Common Stock 99.3 Consent of James B. Stuart, Jr. (b) Financial Statement Schedules: None (c) Report, Opinion or Appraisal: The fairness opinions of Bear, Stearns & Co. Inc. and Alex. Brown & Sons Incorporated are included in the Joint Proxy Statement/Prospectus. II-7 281 ITEM 22. UNDERTAKINGS The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, as amended (the "Securities Act"), each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. The Registrant undertakes that every prospectus (i) that is filed pursuant to the immediately preceding paragraph, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form S-4, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. II-8 282 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on June 25, 1997. SEARCH FINANCIAL SERVICES INC. By: /s/ George C. Evans ------------------- George C. Evans, Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, George C. Evans, Robert D. Idzi and Ellis A. Regenbogen, or any of them, with full power to act alone, his true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact or any of them may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ George C. Evans Chairman of the Board, Chief June 25, 1997 - -------------------------- Executive Officer and Director George C. Evans /s/ Richard F. Bonini Director June 25, 1997 - -------------------------- Richard F. Bonini /s/ William H. T. Bush Director June 25, 1997 - -------------------------- William H. T. Bush /s/ Luther H. Hodges, Jr. Director June 25, 1997 - -------------------------- Luther H. Hodges, Jr. /s/ Frederick S. Hammer Director June 25, 1997 - -------------------------- Frederick S. Hammer /s/ James F. Leary Director June 25, 1997 - -------------------------- James F. Leary /s/ A. Brean Murray Director June 25, 1997 - -------------------------- A. Brean Murray /s/ Douglas W. Powell Director June 25, 1997 - -------------------------- Douglas W. Powell /s/ Barry W. Ridings Director June 25, 1997 - -------------------------- Barry W. Ridings /s/ Robert D. Idzi Senior Executive Vice President, June 25, 1997 - -------------------------- Chief Financial Officer & Robert D. Idzi Treasurer /s/ Andrew D. Plagens Senior Vice President, Controller June 25, 1997 - -------------------------- and Chief Accounting Officer Andrew D. Plagens
II-9 283 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Agreement and Plan of Merger dated as of February 7, 1997 among the Registrant, Search Capital Acquisition Corp. and MS Financial, Inc. ("MSF") (included as part of Annex A to the Joint Proxy Statement/Prospectus) 2.2 Letter agreement dated as of June 4, 1997 among the Registrant, Search Capital Acquisition Corp. And MSF (included as part of Annex A to the Joint Proxy Statement/Prospectus) 4.1 Specimen certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-68524)) 4.2 Restated Certificate of Incorporation of Search Financial Services Inc. (incorporated by reference to Exhibit 3.1 to Registrant's Transition Report on Form 10-K for the transition period ended March 31, 1996 ("1996 10-K")) 4.3 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (the "9/30/96 Form 10-Q")) 4.4 Certificate of Correction to the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the 9/30/96 Form 10-Q) 4.5 Certificate of Amendment of Certificate of Designation of 9%/7% Convertible Preferred Stock (incorporated by reference to Exhibit 3.4 to the 9/30/96 Form 10-Q) 4.6 Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.7 to Registrant's Form S-3 Registration Statement (Registration No. 333-20551)) 4.7 Loan Agreement dated September 11, 1996 between Search Funding II, Inc. and Hibernia National Bank 4.8 Commercial Security Agreement dated September 11, 1996 between Search Funding II, Inc. and Hibernia National Bank 4.9 Commercial Guaranty dated September 11, 1996 between Registrant and Hibernia National Bank. 4.10 Promissory Note dated September 11, 1996 in the principal amount of $25,000,000 payable to Hibernia National Bank. 4.11 Other than the indebtedness evidenced by the agreements listed in Exhibits 4.7 and 4.10 above and Exhibit 10.33 below, none of the outstanding long-term debt of the Registrant and its consolidated subsidiaries exceeds ten percent (10%) of the total assets of the Registrant and its consolidated subsidiaries, and, except for Exhibit 10.25, copies of the constituent instruments defining the rights of the holders of such debt are not included as exhibits to this Registration Statement. The Registrant agrees to furnish copies of such instruments to the Commission upon request. 5.1 Opinion of Bracewell & Patterson, L.L.P., counsel to the Registrant 8.1 Tax Opinion of Haynes & Boone, L.L.P.
284 10.1 Stockholders Agreement, dated as of February 7, 1997, between the Registrant and certain stockholders of MSF (incorporated by reference to Exhibit 2.2 to Registrant's Current Report on Form 8-K dated February 7, 1997) 10.2 Form of Escrow Agreement, dated as of February 7, 1997, between the Registrant, MSF, certain stockholders of MSF and U.S. Trust Company of Texas, N.A. as escrow agent 10.3 Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.1 to Registrant's April 17, 1996 Form 8-K Current Report (the "April 1996 8-K") 10.4 Modification to Third Amended Joint Plan of Reorganization (incorporated by reference to Exhibit 2.2 to the April 1996 8-K) 10.5 Order Confirming Third Amended and Supplemented Joint Plan, Pursuant to 11 U.S.C. Section 1129 (incorporated by reference to Exhibit 2.3 to the April 1996 8-K) 10.6 Chapter 11 Post-Confirmation Order (incorporated by reference to Exhibit 2.4 to the April 1996 8-K) 10.7 Order Regarding Entry Date of Order Confirming Third Amended and Supplemented Joint Plan Pursuant to 11 U.S.C. Section 1129 (incorporated by reference to Exhibit 2.5 to the April 1996 8-K 10.8 Order Granting Second Motion for Technical, Non-Material Modification to the Third Amended and Supplemented Joint Plan of Reorganization (incorporated by reference to Exhibit 2.6 to the April 1996 8-K) 10.9 Form of Warrants to purchase shares of Common Stock of Registrant issued to directors containing a cashless exercise feature 10.10 1994 Employee Stock Option Plan of Registrant, as amended and adjusted (incorporated by reference from Exhibit 4.1 of Registrant's Form S-8 Registration Statement (Registration No. 333-22315)) 10.11 Agreement between Registrant and Louis Dorfman, Trustee of The SBM Trust dated as of May 5, 1995 (incorporated by reference from Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year ended September 30, 1995 (the "1995 10-K")) 10.12 Agreement between Registrant and Sam B. Meyers, Jr. dated as of May 5, 1995 10.13 Letter Agreement between Registrant and Alex. Brown & Sons, Inc. dated May 24, 1995 (incorporated herein by reference from Exhibit 10.20 to the 1995 10-K) 10.14 Letter Agreement and Addenda A, D and E thereto between Registrant and Alex. Brown & Sons Incorporated dated May 16, 1996 10.15 Employment Letter Agreement between George C. Evans and Registrant dated January 20, 1995 (incorporated herein by reference from Exhibit 10.21 to the 1995 10-K) 10.16 Amendment to Employment Letter Agreement of George C. Evans dated May 10, 1995 (incorporated herein by reference from Exhibit 10.22 to the 1995 10-K) 10.17 Amendment to Employment Letter Agreement of George C. Evans dated March 20, 1996 10.18 Amendment to Employment Letter Agreement of George C. Evans dated February 13, 1997 10.19 Employment Letter Agreement between Registrant and James F. Leary dated May 1, 1996
285 10.20 Letter agreement between Registrant and Inter-Atlantic Securities Corp. dated August 23, 1996 10.21 Letter agreement between Registrant and Inter-Atlantic Securities Corp. dated September 6, 1996 10.22 Compromise and Settlement Agreement by and among Craig Hall, Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood, Ltd. and Registrant effective as of November 21, 1996 (incorporated by reference from Exhibit 10.1 to Registrant's Current Report on Form 8-K dated November 21, 1996 (the "November 1996 8-K") 10.23 Mutual Release Agreement effective as of November 21, 1996 by and among Registrant, George C. Evans, Craig Hall, Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood, Ltd. (incorporated by reference from Exhibit 10.2 to the November 1996 8-K) 10.24 Standstill Agreement effective as of November 21, 1996 by and among Registrant, Craig Hall, Larry Levey, Hall Financial Group, Inc., Phoenix/Inwood Corp. and Hall Phoenix/Inwood, Ltd. (incorporated by reference from Exhibit 10.3 to the November 1996 8-K) 10.25 Subordinated Note dated November 21, 1996 in the principal amount of $5,000,000 (incorporated by reference from Exhibit 10.4 to the November 1996 8-K) 10.26 Asset Purchase Agreement (the "Asset Purchase Agreement") among U.S. Lending Corporation, as Debtor-In-Possession, Registrant and Search Funding III, Inc. dated July 17, 1996 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996) 10.27 Second Amendment dated November 5, 1996 to the Asset Purchase Agreement (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 10.28 Asset Acquisition Agreement among Registrant, Search Funding IV, Inc. and Dealers Alliance Credit Corp. dated as of August 2, 1996 (incorporated by reference from Exhibit 2.1 to Registrant's Current Report on Form 8-K dated August 6, 1996 (the "August 1996 8-K") 10.29 Sub-Debt Acquisition Agreement among Registrant, Search Funding IV, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation dated as of August 2, 1996 (incorporated by reference from Exhibit 2.2 to the August 1996 8-K) 10.30 Escrow Agreement among Registrant, Dealers Alliance Credit Corp., Search Funding IV, Inc., R-H Capital Partners, L.P., Kellett Investment Corporation and U.S. Trust Company of Texas, N.A., dated as of August 6, 1996 (incorporated by reference from Exhibit 2.3 to the August 1996 8-K) 10.31 Search-DACC Shareholders Agreement dated as of August 2, 1996 between Registrant and Dealers Alliance Credit Corp. (incorporated by reference from Exhibit 2.4 to the August 1996 8-K) 10.32 Sub-Debt Shareholders Agreement dated as of August 2, 1996 among Registrant, R-H Capital Partners, L.P. and Kellett Investment Corporation (incorporated by reference from Exhibit 2.5 to the August 1996 8-K) 10.33 Debt Assumption Agreement dated as of August 2, 1996 among Registrant, Search Funding IV, Inc., LaSalle National Bank, as Agent, Bank One Chicago, N.A. and Fleet Capital Corporation (incorporated by reference from Exhibit 2.6 to the August 1996 8-K)
286 10.33 Motor Vehicle Installment Sales Contract Assignment and Purchase Agreement dated September 27, 1996 between Eagle Finance Corp. and Search Funding Corp. (incorporated by reference from Exhibit 2 to Registrant's Current Report on Form 8-K dated September 27, 1996) 10.34 Motor Vehicle Installment Sales Contract Assignment and Purchase Agreement dated as of November 1, 1996 between MS Financial, Inc. and Search Funding Corp. (incorporated by reference from Exhibit 2.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 10.35 Letter agreement between the Registrant and MS Financial, Inc. dated November 4, 1996 (incorporated by reference from Exhibit 2.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996) 11.1 Statement re computation of per share earnings (incorporated by reference to Exhibit 11.1 to Registrant's Transition Report on Form 10-K dated March 31, 1996) 13.1 Registrant's Transition Report on Form 10-K (as amended) for the transition period ended March 31, 1996 (included as Annex F to the Joint Proxy Statement/Prospectus) 23.1 Consent of Bracewell & Patterson, L.L.P. (included in Exhibit 5.1) 23.2 Consent of Haynes & Boone, L.L.P. (included in Exhibit 8.1) 23.3 Consent of KPMG Peat Marwick LLP 23.4 Consent of BDO Seidman, LLP 23.5 Consent of Bear, Stearns & Co. Inc. (included in the opinion which appears as Annex B to the Joint Proxy Statement/ Prospectus) 23.7 Consent of Deloitte & Touche LLP 23.6 Consent of Alex. Brown & Sons Incorporated (included in the opinion which appears as Annex C to the Joint Proxy Statement/ Prospectus) 24.1 Power of Attorney (included on signature page) 99.1 Form of Proxy Card for Search Common Stock, Search 12% Preferred Stock and Search 9%/7% Preferred Stock 99.2 Form of Proxy Card for MSF Common Stock 99.3 Consent of James B. Stuart, Jr.
EX-4.7 2 LOAN AGREEMENT DATED SEPTEMBER 11, 1996 1 EXHIBIT 4.7 LOAN AGREEMENT
- ----------------------------------------------------------------------------------------------------------------------------- PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $25,000,000.00 09-11-1996 09-11-1999 536 - -----------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- BORROWER: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK (TIN: 75-2554995) (TIN: 72-0210640) 700 NORTH PEARL STREET 313 CARONDELET STREET SUITE 400, L.B. 401 POST OFFICE BOX 61540 DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161 ================================================================================ THIS LOAN AGREEMENT between SEARCH FUNDING II, INC. ("BORROWER") and HIBERNIA NATIONAL BANK ("LENDER") is made and executed on the following terms and conditions. Borrower has applied to Lender for a loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Louisiana Commercial Laws - Secured Transactions (La.-R.S. 10:9-101, et seq.). All references to dollar amounts shall mean amounts in lawful money of the United States of America. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached or to be attached to this Loan Agreement from time to time. BORROWER. The word "Borrower" means individually, collectively and interchangeably SEARCH FUNDING II, INC., and all other persons and entities signing Borrower's Note. BORROWING BASE. THE WORDS "BORROWING BASE" MEAN THE LESSER OF (A) $25,000,000.00; or (b) 65% of the aggregate amount of the outstanding principal and interest owed to Borrower under Borrower's Eligible Paper. BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in New Orleans, Louisiana, excluding Saturdays and Sundays. CHATTEL PAPER. The words "Chattel Paper" mean a writing or writings which evidence BOTH a monetary obligation AND a security interest in, or a lease of, specific goods as security for payment of the monetary obligation. Chattel Paper does not include written evidences of unsecured monetary obligations. COLLATERAL. The word "Collateral" means and includes individually, collectively, interchangeably and without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise, including all accessions, additions, replacements, and substitutions and all related accounts, inventory, contract rights, and general intangibles. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." DEBTOR. The word "Debtor" means individually, collectively and interchangeably each person or entity obligated upon any Chattel Paper and any grantor of a security interest as security for any Chattel Paper. ELIGIBLE PAPER. The words "Eligible Paper" mean, at any time, Borrower's Chattel Paper which Lender, in the reasonable exercise of its credit judgment, finds acceptable. Unless otherwise agreed to by Lender in writing, Eligible Paper does not include: (a) Chattel Paper that does not evidence a security interest in a motor vehicle. (b) Chattel Paper that is not encumbered by a first priority perfected Security Interest, granted in favor of Lender, where first priority perfection is confirmed by evidence or opinions reasonably acceptable to Lender. (c) Chattel Paper that is not free and clear of all security interests, liens, encumbrances, and claims of third parties, except for Permitted Liens. (d) Chattel Paper in which any person or entity (including any subsidiary or affiliate of Borrower) other than Borrower owns any interest. (e) Chattel Paper that evidences a security interest that has not been perfected within a reasonable time after origination of the Chattel Paper. (f) Chattel Paper that is not delivered to Lender within a reasonable period (as determined by Lender in its sole discretion) after origination or acquisition by Borrower. (g) Chattel Paper with three (3) or more cumulative contractual payments past due. (h) Chattel Paper with respect to which the Debtor has been granted more than two (2) extensions during the most recent consecutive twelve (12) month period. (i) Chattel Paper of any Debtor who, after incurring the indebtedness evidenced by the Chattel Paper, has filed or has had filed against it a petition in bankruptcy, insolvency proceeding, or other proceeding under any other debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay the debts of the Debtor as such debts become due; or who is in a debt repayment, consolidation or restructure plan under the auspices, direction or control of any entity or agency involved in providing credit rehabilitation or counseling service (including, without limitation, Consumer Credit Counselors). (j) Chattel Paper that has been referred to an attorney for collection. (k) Chattel Paper that evidences a security interest in any goods that are in the possession of Borrower or any agent of Borrower. 2 09-11-1996 LOAN AGREEMENT PAGE 2 LOAN NO. (CONTINUED) ================================================================================ (l) Chattel Paper that represents a renewal or a restructure of a monetary obligation, in whole or in part, in which the prior delinquency of the Debtor was a consideration in the renewal or restructure. (m) Chattel Paper not payable in substantially equal monthly installments until maturity or with a final installment equal to two or more times the regular monthly installments. (n) Chattel Paper with respect to which the Debtor is a shareholder, director, officer, employee or agent of Borrower. (o) Chattel Paper with respect to which the Debtor is a subsidiary of, or affiliated with or related to Borrower or any shareholder, director or officer of Borrower. (p) Chattel Paper with respect to which the obligations of the Debtor may be conditional. (q) Chattel Paper with respect to which the Debtor is not a resident of the United States, except to the extent such Chattel Paper is supported by security interests, insurance, bonds, or other assurances reasonably satisfactory to Lender. (r) Chattel Paper with respect to which Borrower is or may become liable to the Debtor for goods sold or services rendered by the Debtor to Borrower. (s) Chattel Paper which is subject to any discount (other than discounts for unearned interest), credit, dispute, counterclaim or setoff in favor of the Debtor. (t) Chattel Paper with respect to which Lender, using its reasonable credit judgment, deems ineligible. (u) Chattel Paper with respect to which the Debtor is the United States government or any department or agency of the United States. (v) Chattel Paper not supported by appropriate documentation as determined by Lender in its sole, but reasonable, discretion. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean individually, collectively, and interchangeably any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." EXPIRATION DATE. The words "Expiration Date" mean the earlier of (a) in the event an Event of Default occurs, the date Lender demands repayment, in full, of the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid, (b) the date of termination of Lender's commitment to lend under this Agreement, or (c) the latest stated maturity date of the Note and any renewals and extensions of the Note (PROVIDED, HOWEVER, THAT LENDER HAS MADE NO COMMITMENT TO, AND IS NOT OBLIGATED TO, RENEW THE NOTE OR EXTEND THE MATURITY DATE OF THE NOTE). GRADE D PAPER. The words "Grade D Paper" mean and include all Chattel Paper for which Borrower sends more than one statement per calendar month to the Debtor and all Chattel Paper which otherwise conforms to "D paper" grading standards for the non-prime automobile loan industry. GRANTOR. The word "Grantor" means and includes individually, collectively, interchangeably and without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation Borrower and each Guarantor granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes individually, collectively, interchangeably and without limitation, SEARCH CAPITAL GROUP, INC., and each and all other guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes individually, collectively, interchangeably and without limitation, any and all present and future loans, extensions of credit, liabilities and/or obligations of every nature and kind whatsoever that Borrower may now and in the future owe to or incur in favor of Lender and its successors or assigns, including without limitation, Borrower's Indebtedness in favor of Lender under the Note, whether such loans, extensions of credit, liabilities and/or obligations are direct or indirect, or by way of assignment, and whether related or unrelated, or whether committed or purely discretionary, and whether absolute or contingent, voluntary or involuntary, determined or undetermined, liquidated or unliquidated, due or to become due, together with interest, costs, expenses, attorneys' fees and other fees and charges, whether or not any such Indebtedness may be barred under any statute of limitations or may be otherwise unenforceable or voidable for any reason. LENDER. The word "Lender" means HIBERNIA NATIONAL BANK (TIN: 72-0210640), its successors and assigns, and any subsequent holder or holders of Borrower's Loan and Note, or any interest therein. LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the section titled "LINE OF CREDIT." LOAN. The words "Loan" and "Loans" mean and include any and all loans and financial accommodations from Lender to Borrower hereunder whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time, and further including any and all subsequent amendments, additions, substitutions, renewals and refinancings of Borrower's Loan. NOTE. The word "Note" means Borrower's promissory note or notes evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. The Note initially evidencing Borrower's Loan obligations in favor of Lender shall be drawn for the maximum amount of the Borrowing Base, shall provide for interest at the rate established for the Line of Credit, shall provide for payment, in full, of all principal interest and other charges by no later than the Expiration Date, and shall contain such other provisions (including, without limitation, provisions relating to calculation of interest, acceleration, default interest, cross-defaults, rights upon default, payment application, and attorneys' fees) as customarily incorporated by Lender in its commercial loan notes. ALTHOUGH THE WORD "NOTE" INCLUDES REFINANCINGS, LENDER IS UNDER NO OBLIGATION TO RENEW THE NOTE OR EXTEND THE MATURITY DATE OF THE NOTE OR ANY SUBSTITUTE, REPLACEMENT OR REFINANCING NOTE OR NOTES THEREFOR. PERMITTED LIENS. The words "Permitted Liens" mean (a) Security Interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens securing obligations which were incurred prior to Borrower's acquisition of the property subject to such liens; (d) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent or are being contested in good faith; and (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by Lender in writing. 3 09-11-1996 LOAN AGREEMENT PAGE 3 LOAN NO. (CONTINUED) ================================================================================ RELATED DOCUMENTS. The words "Related Documents" mean and include individually, collectively, interchangeably and without limitation all promissory notes, credit agreements, loan agreements, guaranties, security agreements, mortgages, collateral mortgages, deeds of trust, and all other instruments, agreements, and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include individually, collectively, interchangeably and without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SECURITY INTEREST. The words "Security Interest" mean and include individually, collectively, interchangeably and without limitation any and all present and future mortgages, pledges, crop pledges, assignments and other security agreements directly or indirectly securing the repayment of Borrower's Loan and Note, whether created by law, contract, or otherwise. APPLICATION FOR AND PURPOSE OF THE LOAN. Borrower has applied to Lender for a Loan in the aggregate principal amount of U.S. $25,000,000.00 for working capital. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows: CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and any subsequent Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all other Related Documents have been duly authorized, executed, and delivered by Borrower to Lender, including, without limitation (i) the Note, (ii) Security Agreements granting to Lender Security Interests in the Collateral, (iii) Financing Statements perfecting Lender's Security Interests; (iv) evidence of Insurance as required below; and (v) any other documents required under this Agreement or by Lender or its counsel. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may reasonably request. (c) The Security Interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority, subject to Permitted Liens, and shall be in full force and effect and Lender shall have received evidence, acceptable to Lender, of the priority of Lender's Security Interests in the Collateral as contemplated by this Agreement. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and shall be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted a review of Borrower's payment records, ledger sheets, and computer tapes or disks kept to record payment information, and Borrower's other books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the other Related Documents as are then due and payable. (g) The representations and warranties set forth in this Agreement, in the other Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct in all material respects. (h) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under the Line of Credit, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by persons authorized, in writing, by Borrower. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, not earlier than noon, New Orleans time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. OVERLINES AND OVERADVANCES. In the event the unpaid principal amount of the outstanding Advances under the Line of Credit ever exceeds $25,000,000.00 (the maximum amount of the Borrowing Base), Borrower agrees to pay the excess amount (an "OVERLINE") within two (2) Business Days after notice from Lender to Borrower. In the event the unpaid principal amount of the outstanding Advances under the Line of Credit ever exceeds the Borrowing Base, Borrower agrees to pay the excess amount (an "OVERADVANCE") within two (2) Business Days after notice from Lender to Borrower. Overlines and overadvances shall bear interest at the rate stated in the Note. If not sooner paid, interest on overlines and overadvances shall be paid on the last day of each month, until the Expiration Date. Upon request of Lender, Borrower shall execute a promissory note, payable to the order of Lender, to represent the amount of any overline and any overadvance; however, Borrower acknowledges and agrees that the records of Lender and this Agreement shall constitute conclusive evidence, absent manifest error, of any overline or overadvance and the obligation of Borrower to repay any overline or overadvance, with interest. All overlines and overadvances for which Lender has not demanded payment earlier, and all unpaid and accrued interest on overlines and overadvances not due and payable earlier, shall be due and payable on the Expiration Date. BORROWER ACKNOWLEDGES AND AGREES THAT LENDER IS NOT OBLIGATED TO BORROWER TO FUND ANY ADVANCE THAT WOULD CREATE AN OVERLINE OR AN OVERADVANCE. ADVANCES FOR INTEREST AND FEES. Borrower hereby authorizes Lender to make Advances under the Line of Credit in amounts necessary to pay any and all fees and charges provided for under this Agreement and in order to pay any accrued interest due under the Note. Any such Advance may, at the option of Lender, be funded directly to Lender or deposited into a deposit account of Borrower maintained with Lender (including a Dominion Account) which account may then be debited by Lender for the amount of such Advances. If no Event of Default has occurred, Lender hereby agrees to make all Advances necessary to pay any and all fees and charges provided for under this Agreement and in order to pay any accrued interest due under the Note even if the Advance creates an Overline or an Overadvance, and Borrower agrees to pay the amount of any such Overline or Overadvance within two (2) Business Days after notice from Lender to Borrower. INTEREST. The outstanding and unpaid principal balance under the Note shall bear interest at the rate stated in the Note. Borrower shall make payments of unpaid interest accrued on the outstanding and unpaid principal balance under the Note as provided for in the Note. All unpaid and accrued interest not due and payable earlier, shall be due and payable on the Expiration Date. UNUSED FACILITY FEE. In addition to interest, Borrower agrees to pay to Lender an unused facility fee on the daily average unused portion of the Line of Credit [the "unused portion" being the amount by which the maximum dollar amount of the Note ($25,000,000.00) exceeds 4 09-11-1996 LOAN AGREEMENT PAGE 4 LOAN NO. (CONTINUED) ================================================================================ the outstanding principal balance due under the Note] from the date of this Agreement through the Expiration Date, at the rate of 0.070% per annum, payable for each three (3) calendar month period (each calendar quarter), in arrears, fifteen (15) days after last day of each calendar quarter. The first unused facility fee payment is due on OCTOBER 15, 1996, covering the period beginning on the date of this Agreement through SEPTEMBER 30, 1996. MANDATORY PRINCIPAL REPAYMENTS. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. FACILITY CHARGES. Borrower recognizes that Lender has incurred and will continue to incur certain costs and expenses in connection with establishing, maintaining, servicing, and administering the credit facility. To ensure that Lender is able to recover such costs and expenses, Borrower agrees that, notwithstanding any other provision of this Agreement, the Note, or the other Related Documents, Lender shall be entitled to collect the following facility charges, which Borrower hereby promises and agrees to pay: COMMITMENT FEE. A commitment fee of $62,500.00 [0.250% of the maximum dollar amount of the Line of Credit - $25,000,000.00], payable, in full, with or at the initial Advance of the Loan (Lender acknowledges that Borrower has paid $10,000.00 of this Commitment Fee, leaving a balance due of $52,500.00). MONITORING FEE. A monitoring fee of $1,500.00 per month for each month or portion of a month during the term of this Agreement. The monitoring fee for a month is due and payable on the first day of the following month. ANNUAL RENEWAL FEE. A annual renewal fee of $62,500.00 [0.250% of the maximum dollar amount of the Line of Credit - $25,000,000.00], payable, in full, on each annual anniversary of this Agreement prior to the Expiration Date. DUE DILIGENCE EXPENSES. All reasonable expenses incurred by Lender, including Lender's reasonable attorneys' fees, incurred by Lender for Lender's due diligence, payable by Borrower upon demand by Lender. EARLY TERMINATION. Lender agrees that Borrower shall have the right to terminate this Agreement prior to the Expiration Date upon Borrower (a) giving Lender ninety (90) days' written notice of termination and designating a termination effective date, (b) paying Lender, on the designated termination effective date, the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid, AND (c) paying Lender, on the designated termination effective date, a commitment cancellation charge equal to (i) $500,000.00 [2.000% of the maximum dollar amount of the Line of Credit - $25,000,000.00] if the early termination date occurs during the first year after the date of the Note, (ii) $250,000.00 [1.000% of the maximum dollar amount of the Line of Credit - $25,000,000.00] if the early termination occurs during the second year after the date of the Note, and (iii) $0.00 (i.e. without any commitment cancellation charge) if the early termination date occurs during the third year after the date of the Note. In the event, after the date of this Agreement, a renewal or substitute Note is executed to represent the Line of Credit indebtedness, these commitment cancellation charges shall apply during the term of the renewal or substitute Note (i.e., the "date of the Note" for purposes determining commitment cancellation charges shall be the date of the renewal or substitute Note), unless the renewal or substitute Note specifically provides otherwise. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the Line of Credit. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower, absent manifest error, unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower shall grant to Lender Security Interests in Borrower's present and future Chattel Paper, accounts, inventory, instruments, documents and general intangibles (the "COLLATERAL"). Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral and agrees to deliver possession to Lender of all property included in the Collateral for which possession by Lender is necessary to perfect and continue Lender's Security Interests. Lender acknowledges and agrees that delivery of certificates of title to motor vehicles in which a security interest has been granted as security for the payment of Borrower's Chattel Paper are not necessary by law to perfect and continue Lender's Security Interests in the Collateral. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's Security Interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's chief executive office or should Borrower merge or consolidate with any other entity. DELIVERY AND POSSESSION OF ELIGIBLE PAPER. Borrower shall deliver to Lender all original instruments representing Eligible Paper. Upon request of Lender, Borrower shall deliver to Lender all other Eligible Paper documentation, including, without limitation, all original disclosure statements, security agreements, financing statements (unless financing statements are filed in which event Lender will be provided with a copy showing filing information), and all other supporting documentation. Also, upon request of Lender, Borrower shall deliver the original certificates of title to all motor vehicles in which a security interest has been granted as security for the payment of Borrower's Chattel Paper. With respect to Borrower, Lender shall be deemed to have exercised reasonable care in the custody and preservation of all Chattel Paper documents (including instruments and certificates of title) in the possession of Lender if Lender takes such action for that purpose as Borrower shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Borrower shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in any Chattel Paper against Debtors or other parties, nor to protect, preserve or maintain any security interest evidenced by any Chattel Paper. COLLATERAL SCHEDULES. Concurrently with the delivery of each Chattel Paper package under this Agreement, Borrower shall execute and deliver to Lender a statement for each package identifying the current principal balance and next payment due, and such other information as Lender may request, all in form and substance satisfactory to Lender. Thereafter and at such frequency as Lender shall require, Borrower shall execute and deliver to Lender such supplemental statements and such other matters and information relating to Borrower's Chattel Paper as Lender may request. 5 09-11-1996 LOAN AGREEMENT PAGE 5 LOAN NO. (CONTINUED) ================================================================================ COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral and all payment and balance information, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Chattel Paper, Borrower agrees to keep and maintain such balance and payment history records as Lender may reasonably require, including, without limitation, delinquency information. REPRESENTATIONS AND WARRANTIES CONCERNING CHATTEL PAPER. With respect to the Chattel Paper, Borrower represents and warrants to Lender: (a) all present Chattel Paper of Borrower represents, and all future Chattel Paper of Borrower will represent, loans acquired by Borrower in the ordinary course of Borrower's business and in compliance and conformity with all applicable federal, state and local laws, ordinances, rules, and regulations, (b) each Chattel Paper represented by Borrower to be an Eligible Paper for purposes of this Agreement conforms to the requirements of the definition of an Eligible Paper; (c) all Chattel Paper information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (d) Lender, its assigns, or agents shall have the right at any time to inspect, examine, and review Borrower's records and to verify and confirm with Debtors the accuracy of such Chattel Paper information, and Borrower agrees to reimburse Lender for all of Lender's reasonable out-of-pocket expenses incurred in connection with any such inspection, examination, or review (excluding personnel costs of Lender or personnel costs of any independent contractor retained by Lender to conduct or assist in any such inspection, examination, or review). RIGHT TO COLLECT CHATTEL PAPER. Borrower may collect amounts due under any Chattel Paper, subject to the obligation of Borrower to deposit all collections in a Dominion Account. At any time after any Event of Default occurs, Lender may exercise its rights to collect the Chattel Paper and to notify Debtors to make payments directly to Lender for application to the Indebtedness. RELEASE OF COLLATERAL. Borrower may apply to Lender for a release of Collateral from the Security Interests in connection with a sale of Collateral by Borrower outside of the ordinary course of Borrower's business or in bulk. Borrower's release application will identify the Collateral to be sold, the gross sales price, an itemization of sales price attributed to the Collateral sold if the sale includes property of persons or entities other than Borrower, the net sale proceeds to be deposited into the Dominion Account, and such other information as Lender may reasonably request. Lender agrees to approve a release request if (a) no Overline shall be created or increased under the Line of Credit after the sale and the net sales proceeds attributable to the Collateral sold are deposited into the Dominion Account, (b) no Event of Default has occurred and the sale will not result in the occurrence of an Event of Default, and (c) the effect of the sale on the financial condition of Borrower and Guarantors will not result in a breach of any of the Financial Covenants contained in this Agreement. Any approval by Lender of a requested release will be evidenced by a separate writing and shall be effective upon the deposit of the net sale proceeds attributable to the Collateral sold, in good funds, into the Dominion Account. Lender agrees to execute all appropriate release documents for an approved release request and agrees to deliver the executed release documents to Borrower, or its designee, upon deposit of the net sale proceeds attributable to the Collateral sold into the Dominion Account or, if requested by Borrower or the Collateral purchaser, to allow the executed release documents to be held by an escrow agent pending deposit of the net sales proceeds attributable to the Collateral sold into the Dominion Account. DOMINION ACCOUNT. Borrower shall establish and maintain one or more deposit accounts with Lender or with a bank designated by Lender ("DOMINION ACCOUNT") into which Borrower shall deposit, daily, all amounts paid on any Chattel Paper and from sales of any of the Collateral. All deposits shall be made no later than the first Business Day after receipt by Borrower. Borrower shall have no right to draw upon any Dominion Account. On the second Business Day after a deposit into a Dominion Account, the amount of the deposit shall be drawn from the Dominion Account by Lender and applied to repayment of the Loan. LOCK BOX. Borrower agrees to instruct, in writing, all Debtors and others responsible for making payments on Chattel Paper and other amounts due to Borrower to make all payments to an address selected by Lender. Lender also has the independent right, but not a duty, to notify Debtors and others responsible for making payments on Chattel Paper or other amounts due to Borrower to make all payments to the address selected by Lender. All payments received by Lender and all payments received by Borrower will be deposited, daily, into a Dominion Account. All deposits of payments received by Lender shall be made to a Dominion Account no later than the first Business Day after receipt by Lender. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender as of the date of this Agreement and as of the date of each disbursement of Loan proceeds: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas, and is, or prior to the initial Advance will be, duly qualified to do business in, and in good standing under the laws of Arizona, Colorado, Florida, Georgia, Indiana, Kansas, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Utah and Virginia. Borrower is not qualified to do and is not doing business in any other jurisdiction. AUTHORIZATION. Borrower's execution, delivery and performance of this Agreement have been duly authorized, and do not conflict with, and will not result in a violation of, or constitute or give rise to an event of default under Borrower's Articles of Incorporation or Bylaws, or any agreement or other instrument which may be binding upon Borrower, or under any law or governmental regulation or court decree or order applicable to Borrower and/or its properties. Borrower has the power and authority to enter into Borrower's Loan and Note and to grant collateral security therefor. Borrower has the further power and authority to own and to hold all of its assets and properties, and to carry on its business as presently conducted. STOCK OWNERSHIP. Borrower is a wholly owned subsidiary of SEARCH CAPITAL GROUP, INC., a Delaware corporation that is a Guarantor of the Indebtedness and the owner of all the authorized and issued capital stock of Borrower. FIDUCIARY OBLIGATION OF BORROWER. Borrower shall act in a fiduciary capacity as to Lender with regard to receipt and collection by Borrower, in trust for and on behalf of Lender, of any and all amounts paid on the Collateral. ALL AMOUNTS PAID ON THE COLLATERAL SHALL BE DEPOSITED INTO A DOMINION ACCOUNT. Any diversion or use by Borrower of any portion of any amount paid on the Collateral shall constitute an Event of Default. FINANCIAL INFORMATION. Borrower's annual audited financial statements furnished to Lender are and were prepared in accordance with generally accepted accounting principles, Borrower's other financial statements furnished to Lender are and were prepared in accordance with generally accepted accounting principles (with the exception of year-end adjustments and footnoting), and all fairly present, in all material respects, Borrower's financial condition and solvency as of the date thereof. To the best of Borrower's knowledge, Borrower has no contingent obligations or liabilities that were not disclosed or reserved against in Borrower's financial statements or in the notes thereto. Since the dates of such financial statements, there has been no material adverse change in Borrower's financial condition or business. PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all security interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name (other than the former names of Borrower disclosed in this Agreement) for at least the last five (5) years. Lender recognizes, however, that Borrower may elect not to apply for registration of a certificate of title to a repossessed motor vehicle in Borrower's name if, under applicable law, Borrower is allowed to resell the repossessed vehicle without such registration. 6 09-11-1996 LOAN AGREEMENT PAGE 6 LOAN NO. (CONTINUED) ================================================================================ HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub.L.No.99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable federal, state or local laws, regulations, rules or ordinances adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower agrees, represents and warrants that: (a) During the period of Borrower's ownership of Borrower's properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, or about any of the properties; (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters; (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, or about any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, rules and ordinances, including without limitation those laws, regulations, rules and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of this Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste. Borrower hereby (i) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (ii) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION. There are no suits or proceedings pending, or to the knowledge of Borrower, threatened against or affecting Borrower, any Guarantor, or the assets of Borrower or any Guarantor, before any court or by any governmental agency, other than those previously disclosed in documents filed by Borrower or any Guarantor with the Securities and Exchange Commission and delivered to Lender by Borrower or any Guarantor, which, if adversely determined, may have a material adverse effect on the financial condition or business of Borrower or any Guarantor. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any security agreements, or permitted the filing or attachment of any security interests on or adversely affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral, except for Permitted Liens. BINDING EFFECT. This Agreement, the Note and all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (a) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (b) Borrower has not withdrawn from any such plan or initiated steps to do so, and (c) no steps have been taken to terminate any such plan. LOCATION OF BORROWER'S REGISTERED OFFICE. The registered office of Borrower is 700 NORTH PEARL STREET, SUITE 400, L.B. 401, DALLAS, TEXAS 75201-7490, or as Borrower may otherwise notify Lender as required by this Agreement. LOCATION OF BORROWER'S CHIEF EXECUTIVE OFFICE. The chief executive office of Borrower [as pertinent under La.-R.S. 10:9-103(3)(d) and similar applicable laws] is 700 NORTH PEARL STREET, SUITE 400, L.B. 401, DALLAS, TEXAS 75201- 7490, or as Borrower may otherwise notify Lender as required by this Agreement. LOCATION OF BORROWER'S RECORDS. Borrower maintains an office and keeps its records concerning any of the Collateral at 700 NORTH PEARL STREET, SUITE 400, L.B. 401, DALLAS, TEXAS 75201-7490, or as Borrower may otherwise notify Lender as required by this Agreement. TAX IDENTIFICATION NUMBER. The Tax Identification Number of Borrower is 75-2554995, and this is the only Tax Identification Number used by Borrower for the last ten (10) years. TRADE NAMES. Borrower does not operate any of its businesses under any trade name, nor has Borrower operated any of its businesses under any trade name for a period of ten (10) years preceding the date of this Agreement, other than its former names, SEARCH AUTOMOBILE LEASING CORPORATION, HASSLEFREE FINANCE CORP., and AUTOMOBILE CREDIT FINANCE CORPORATION, SERIES 1994-I. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees that Lender is relying upon the above representations and warranties in making the above referenced Loan and extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Loan and Note shall be paid in full, or until the Expiration Date, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: BUSINESS IN OTHER JURISDICTIONS. Promptly inform Lender in writing of Borrower's election to do business in any jurisdiction other than the states of Arizona, Colorado, Florida, Georgia, Indiana, Kansas, Mississippi, Missouri, North Carolina, Ohio, Oklahoma, South Carolina, 7 09-11-1996 LOAN AGREEMENT PAGE 7 LOAN NO. (CONTINUED) ================================================================================ Tennessee, Texas, Utah and Virginia. Upon request of Lender, Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral for any other jurisdiction. CHANGES IN FINANCIAL CONDITION AND LITIGATION. Promptly inform Lender in writing of (a) all material adverse changes in the financial condition of Borrower or any Guarantor, and (b) the threat of, the institution of, or any adverse determination by final judgment in, any litigation, arbitration proceeding or governmental proceeding which could reasonably be expected to involve a claim against Borrower or any Guarantor for more than $100,000.00. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and review Borrower's books and records at all reasonable times. FINANCIAL REPORTS. Prepare all annual financial statements and reports required to be provided under this Agreement in accordance with generally accepted accounting principles, applied on a consistent basis and prepare all other financial statements and reports required to be provided under this Agreement in accordance with generally accepted accounting principles (with the exception of year-end adjustments and footnoting), applied on a consistent basis, and each statement and report shall be certified as being true and correct, in all material respects, to the best knowledge and belief, by the chief financial officer of the entity for which the report was prepared or other officer or person acceptable to Lender. ANNUAL FINANCIAL STATEMENTS - BORROWER. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's fiscal year-end financial statements (including balance sheet and income statement and a statement of cash flows) audited by a certified public accountant satisfactory to Lender and accompanied by the unqualified opinion of the certified public accountant. The certified public accounting firm of BDO Siedman shall be qualified as a certified public accountant satisfactory to Lender. ANNUAL FINANCIAL STATEMENTS - SEARCH CAPITAL GROUP. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, fiscal year-end financial statements (including consolidated balance sheet, income statement and statement of cash flows) for Borrower's parent corporation, SEARCH CAPITAL GROUP, INC., prepared in the form of consolidated statements for the parent corporation and all of its subsidiaries, including Borrower, audited by a certified public accountant satisfactory to Lender and accompanied by the unqualified opinion of the certified public accountant. The certified public accounting firm of BDO Siedman shall be qualified as a certified public accountant satisfactory to Lender. MONTHLY FINANCIAL STATEMENTS - BORROWER. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than ten (10) Business Days after the end of each calendar month, Borrower's month- end financial statements (including balance sheet and income statement) for the prior month, prepared and certified as correct, in all material respects, subject to year-end adjustments, to the best knowledge and belief, by Borrower's chief financial officer or other officer or person acceptable to Lender. MONTHLY FINANCIAL STATEMENTS - SEARCH CAPITAL GROUP. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than ten (10) Business Days after the end of each calendar month, month-end financial statements (including balance sheet and income statement) for Borrower's parent corporation, SEARCH CAPITAL GROUP, INC., prepared in the form of consolidated statements for the parent corporation and all of its subsidiaries, including Borrower, for the prior month, prepared and certified as correct, in all material respects, subject to year-end adjustments, to the best knowledge and belief, by the chief financial officer of SEARCH CAPITAL GROUP, INC., or other officer or person acceptable to Lender. MONTHLY ACCOUNTS RECEIVABLE AGING REPORTS. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than ten (10) Business Days after the end of each calendar month, a schedule of Borrower's accounts receivable (including Chattel Paper) by account debtor (including Debtors), with aging. Each monthly accounts receivable report shall be prepared by Borrower and certified as correct, in all material respects, to the best knowledge and belief, by the chief financial officer of Borrower or other officer or person acceptable to Lender, and shall be in form and content acceptable to Lender. The gross amount of accounts receivable of Borrower shown on monthly accounts receivable reports must be equal to the amount of accounts receivable shown on Borrower's monthly financial statements prepared for the same month-end. BORROWING BASE CERTIFICATES. Without demand or request by Lender, by noon of each day Borrower makes a request for an Advance under the Line of Credit, by noon on the Wednesday following a week during which no Advance under the Line of Credit was requested, and at such other times as Lender may request, furnish Lender with a Borrowing Base Certificate, in reasonable detail and in form and content acceptable to Lender, prepared by Borrower and certified as correct, to the best knowledge and belief, by Borrower's chief financial officer or other officer or person acceptable to Lender, identifying the calculation of the Borrowing Base utilizing balance and eligibility information current as of the date the Borrowing Base Certificate is furnished to Lender. WEEKLY RECEIPTS SCHEDULES. Without demand or request by Lender, within four (4) Business Days after the end of each week and at such other times as Lender may request, furnish Lender with weekly receipts schedules identifying, in detail, each Chattel Paper payment included in each Dominion Account deposit made by Borrower during the prior week. Weekly receipt schedules shall be prepared by Borrower and certified as correct, to the best knowledge and belief, by the chief financial officer of Borrower or other officer or person acceptable to Lender, and shall be in form and content acceptable to Lender. TAX RETURNS. Upon request of Lender, furnish Lender with copies of the most current federal tax returns filed by Borrower and each Guarantor, with all schedules and supporting documentation. PUBLIC DOCUMENTS. Without demand or request by Lender, within thirty (30) days of the filing of each, furnish Lender with copies of the 10-K, 10-Q, and each other document filed by Borrower or any Guarantor with the Securities and Exchange Commission. ADDITIONAL INFORMATION. Furnish such additional information, statements and reports with respect to the financial condition and business operations of Borrower and Guarantors as Lender may reasonably request from time to time. VEHICLE TITLES. Secure original certificates of title to all motor vehicles in which a security interest has been granted as security for the payment of Borrower's Chattel Paper and, upon request of Lender, allow inspection of all such original certificates of title or deliver possession of such original certificates of title to Lender, as requested by Lender. Lender acknowledges that an affiliate of Borrower, rather than Borrower, may be reflected as the secured party or lienholder on a certificate of title although the Chattel Paper evidencing the security interest referred to on such certificate has been assigned to Borrower. NOTICE TO DEBTORS. Notify, in writing, all present and future Debtors and others responsible for payment on any Chattel Paper, to send all payments on Chattel Paper to the Lock Box address selected by Lender. 8 09-11-1996 LOAN AGREEMENT PAGE 8 LOAN NO. (CONTINUED) ================================================================================ INSURANCE. Maintain public liability insurance in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be canceled or diminished without at least thirty (30) days' prior written notice to Lender. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; and (d) the expiration date of the policy. GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, on Lender's forms, and in the amounts and by the guarantors named below: GUARANTOR AMOUNTS --------- ------- SEARCH CAPITAL GROUP, INC. UNLIMITED OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's working capital needs incurred in the ordinary course of Borrower's business. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or properties, income, or profits of Borrower, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of the properties, income, or profits of Borrower. Provided, however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting principles. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against properties, income, or profits of Borrower. PERFORMANCE. Perform and comply with all terms, conditions and provisions set forth in this Agreement and in all other instruments and agreements between Borrower and Lender in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement. OPERATIONS. Substantially maintain its present executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance in all material respects with all applicable federal, state and local laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including, without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. CHATTEL PAPER FORMS. Acquire Chattel Paper only on forms of notes, security agreements, disclosure statements and other documents that are all in compliance and conformity with all applicable laws, ordinances, rules, and regulations. BANKING RELATIONSHIP AND ACCOUNTS. Establish and maintain Lender as the principal and primary banking establishment of Borrower and all significant operating accounts of Borrower shall be maintained with Lender. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all collateral for the Loan or Loans and Borrower's other properties and to examine or review Borrower's books, accounts, ledger sheets, and records and to make copies and memoranda of Borrower's books, accounts, ledger sheets, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. CHANGE OF LOCATION. Immediately notify Lender in writing of any additions to or changes in the location of Borrower's businesses or Borrower's chief executive office. TITLE TO ASSETS AND PROPERTY. Maintain good and indefeasible title to all of Borrower's assets and properties. NOTICE OF DEFAULT AND ERISA MATTERS. Forthwith upon learning of the occurrence of any of the following, Borrower shall provide Lender with written notice thereof, describing the same and the steps being taken by Borrower with respect thereto: (a) the occurrence of any Event of Default, (b) the occurrence or existence of matter or event which, with notice from Lender and expiration of any applicable cure period, would be an Event of Default, or (c) the occurrence of a Reportable Event or a Prohibited Transaction (as defined in ERISA) under, or the institution of steps by Borrower to withdraw from, or the institution of any steps to terminate, any employee benefit plan as to which Borrower may have any liability. OTHER INFORMATION. From time to time, Borrower will provide Lender with such other information as Lender may reasonably request. EMPLOYEE BENEFIT PLANS. So long as this Agreement remains in effect, Borrower will maintain each employee benefit plan as to which it may have any liability, in compliance with all applicable requirements of law and regulations. OTHER AGREEMENTS. Borrower will not enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder or under any instrument or document delivered or to be delivered by it hereunder or in connection herewith. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct, in all material respects, as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. 9 09-11-1996 LOAN AGREEMENT PAGE 9 LOAN NO. (CONTINUED) ================================================================================ NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that as long as this Agreement remains in effect Borrower shall not, without the prior written consent of Lender: GRADE D PAPER ACQUISITIONS. Acquire Grade D Paper other than as a part of bulk acquisitions of seasoned Chattel Paper pools from entities that have been actively engaged in the automobile loan industry for at least one (1) year prior to the acquisition. The value of Grade D Paper included in any such bulk acquisition may not exceed 15% of the value of the Chattel Paper acquired. COMMINGLING OF ELIGIBLE PAPER. Include as Eligible Paper any Chattel Paper that is not owned solely by Borrower. ISSUANCE OF SHARES. Issue, sell or otherwise dispose of, any shares of its capital stock or other securities, or rights, warrants or options to purchase or acquire any shares or securities of Borrower other than shares of its capital stock issued as stock dividends; provided, however, that (a) Borrower shall be allowed to issue its shares and securities to, and acquire its shares and securities from, its parent corporation, SEARCH CAPITAL GROUP, INC., and (b) Borrower may also issue its shares and securities to, and acquire its shares and securities from, others if, after the transaction, SEARCH CAPITAL GROUP, INC., owns and controls more than 50% of the voting rights for the election of directors. REDEMPTION OF SHARES. Redeem, retire or repurchase any shares of its capital stock or other securities, except as permitted under "Issuance of Shares," above. INDEBTEDNESS AND LIENS. (a) Create, incur or assume indebtedness for borrowed money, including capital leases, other than (i) trade debt incurred in the normal course of business, or (ii) indebtedness to Lender contemplated by this Agreement, (b) except as allowed as a Permitted Lien grant a security interest in, or otherwise encumber, any of the Collateral, (c) sell, transfer, or otherwise alienate any of Borrower's inventory outside of the normal course of business, or (d) sell, transfer, or otherwise alienate any of Borrower's Chattel Paper. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) operate under any trade name other than trade names, if any, identified in this Agreement, (c) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, dissolve or transfer or sell Collateral out of the ordinary course of business, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure, except in each case as permitted under "Issuance of Shares," above. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets other than in the ordinary course of business, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. FINANCIAL COVENANTS. Borrower covenants and agrees with Lender that as long as this Agreement remains in effect Borrower and Guarantors shall comply with the following financial covenants: DEFINITIONS. For purposes of testing compliance with these Financial Covenants the following terms shall have the following meanings. Except as otherwise provided by these defined terms, all computations made to determine compliance with these Financial Covenants shall be made on a consolidated basis for SEARCH CAPITAL GROUP, INC., and all of its subsidiaries, in accordance with generally accepted accounting principles, applied on a consistent basis, and certified as true and correct, in all material respects, to the best knowledge and belief, by the chief financial officer of SEARCH CAPITAL GROUP, INC., or other officer or person acceptable to Lender. ADJUSTED NET WORTH. The term "Adjusted Net Worth" shall mean the Stated Net Worth of SEARCH CAPITAL GROUP, INC, and its subsidiaries, on a consolidated basis, plus Subordinated Debt, less Intangibles, and less amounts (a) due from any shareholder, director, officer, employee or agent of SEARCH CAPITAL GROUP, INC., or of any subsidiary or affiliate of SEARCH CAPITAL GROUP, INC., or (b) due from any person or entity (other than a subsidiary) which is affiliated with, or related to,SEARCH CAPITAL GROUP, INC., or any of its subsidiaries, or any of the shareholders, officers, or directors of SEARCH CAPITAL GROUP, INC., or any of its subsidiaries. DEBT. The term "Debt" shall mean all liabilities of SEARCH CAPITAL GROUP, INC., and its subsidiaries, on a consolidated basis, INCLUDING SUBORDINATED DEBT. INTANGIBLES. The term "Intangibles" shall mean all of the intangible assets of SEARCH CAPITAL GROUP, INC., and its subsidiaries, on a consolidated basis, including goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible expenses, but excluding leaseholds and leasehold improvements. SUBORDINATED DEBT. The term "Subordinated Debt" shall mean indebtedness and liabilities of SEARCH CAPITAL GROUP, INC., and its subsidiaries which have been subordinated by written agreement to the Indebtedness, and to the indebtedness of any Guarantor to Lender, in form and substance acceptable to Lender. STATED NET WORTH. The term "Stated Net Worth" shall mean the total assets of SEARCH CAPITAL GROUP, INC., and its subsidiaries, on a consolidated basis, less total Debt. MINIMUM ADJUSTED NET WORTH. SEARCH CAPITAL GROUP, INC., shall maintain an Adjusted Net Worth of no less than $20,000,000.00. MAXIMUM LEVERAGE POSITION. SEARCH CAPITAL GROUP, INC., shall maintain a leverage position of no more than 5.00 to 1.00, where leverage position is the result of the following formula: Debt - Subordinated Debt ------------------------------------ Stated Net Worth + Subordinated Debt TESTING FREQUENCY. Compliance with Minimum Adjusted Net Worth and Maximum Leverage Position requirements shall be tested quarterly (based on the fiscal year of SEARCH CAPITAL GROUP, INC.) based on the then most recent financial statements of SEARCH CAPITAL GROUP, INC., and its subsidiaries, on a consolidated basis. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the other Related Documents or any other agreement that Borrower or any Guarantor has with Lender, (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt, (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the total value of the Collateral securing any Loan, (d) Borrower or any Grantor seeks, claims or otherwise attempts to limit, modify or revoke any Security Interest granted to Lender, or (e) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. 10 09-11-1996 LOAN AGREEMENT PAGE 10 LOAN NO. (CONTINUED) ================================================================================ INSECURITY. Borrower agrees that, even though no Event of Default shall have occurred, Lender shall have the right to demand, by written notice to Borrower, full repayment, subject to the provisions of this paragraph, of the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid, if (a) Lender in good faith deems itself insecure, or (b) the results of any annual review by Lender of Borrower's books, records or operations or the Collateral are not satisfactory to Lender. If such a repayment demand is made by Lender, even though no Event of Default shall have occurred, Borrower and Lender agree that, unless and until an Event of Default occurs, Borrower shall continue to have the right to request and receive Advances under the Line of Credit, subject to the other terms and conditions of this Agreement; provided, however, that, sixty (60) days after notice of Lender's repayment demand under this provision, the percentage of the aggregate amount of the outstanding principal and interest owed to Borrower under Borrower's Eligible Paper used to determine the Borrowing Base under the Line of Credit shall be reduced by five (5) percentage points and shall be further reduced by an additional five (5) percentage points every thirty (30) days thereafter. Additionally, after notice of Lender's repayment demand under this provision, Borrower shall not be obligated to pay any of the commitment cancellation charges, unused facility fees, or annual renewal fees otherwise due and payable under this Agreement or any of the Related Documents. DEPOSIT ACCOUNTS. As collateral security for repayment of Borrower's Note and all renewals and extensions, as well as to secure any and all other loans, notes, indebtedness and obligations that Borrower may now and in the future owe to Lender or incur in Lender's favor, whether direct or indirect, absolute or contingent, due or to become due, of any nature and kind whatsoever, Borrower hereby grants Lender a continuing Security Interest in any and all funds that Borrower may now and in the future have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Borrower is an account holder (with the exception of IRA, pension, and other tax-deferred deposits). Borrower further agrees that Lender may, after an Event of Default has occurred, apply any funds that Borrower may have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Borrower is an account holder (with the exception of IRA, pension, and other tax-deferred deposits) against the unpaid balance of Borrower's Note and any and all other present and future indebtedness and obligations that Borrower may then owe to Lender, in principal, interest, fees, costs, expenses, and attorneys' fees; provided, however, that the Event of Default prerequisite for application authority shall not apply to any Dominion Account. SPECIFIC DEPOSIT ACCOUNT DEBIT AUTHORIZATION. Without any demand or notice whatsoever, Borrower hereby authorizes Lender to debit any Dominion Account in order to pay any facility fee or facility charge due under this Agreement, in order to pay any overline or overadvance, and in order to pay any accrued interest due under the Note. Without any demand or notice whatsoever, Borrower hereby authorizes Lender, after an Event of Default occurs, to debit any one or more of Borrower's other deposit accounts with Lender (with the exception of IRA, pension, and other tax-deferred deposits) in order to pay any facility fee or facility charge due under this Agreement, in order to pay any overline or overadvance, and in order to pay any accrued interest due under the Note. Borrower hereby waives the right to notice of any account debit effected in accordance with this authorization, including, without limitation, the notice provided for under La.-R.S. 6:316, as amended. EVENTS OF DEFAULT. The following actions or inactions or both shall constitute Events of Default under this Agreement: PAYMENT OF DIVIDENDS BY SEARCH CAPITAL GROUP, INC. Should SEARCH CAPITAL GROUP, INC., pay any dividends on its stock (other than dividends payable in its stock) unless (a) its Adjusted Net Worth (as defined in the FINANCIAL COVENANTS section above) exceeds $22,500,000.00, and (b) the dividend payment will not reduce its Adjusted Net Worth to amount equal to or less than $22,500,000.00. DEFAULT UNDER THE NOTE. Should Borrower default in the payment of any amounts due and payable under the Note. DEFAULT UNDER DOMINION ACCOUNT OBLIGATIONS. Should Borrower fail to deposit, into a Dominion Account, any collection made of any amounts due under any Chattel Paper, or any amount received from the sale of any of Borrower's inventory, within one (1) Business Day of receipt. DEFAULT IN PAYMENT OF OVERLINES OR OVERADVANCES. Should Borrower default in the payment of any Overline or Overadvance within two (2) Business Days after notice from Lender to Borrower. DEFAULT UNDER THIS AGREEMENT. Should Borrower violate, or fail to comply fully with, any of the other terms and conditions of, this Agreement, and such violation or failure shall not have been remedied within fifteen (15) days after notice of such violation or failure by Lender to Borrower. DEFAULT UNDER RELATED DOCUMENTS. Should any Guarantor violate, or fail to comply fully with, any of the other terms and conditions of, such Guarantor's guaranty of the Loan, and such violation or failure shall not have been remedied within fifteen (15) days after notice of such violation or failure by Lender to Borrower. Should, after expiration of any applicable cure periods, any event of default occur or exist under any other Related Document. OTHER DEFAULTS IN FAVOR OF LENDER. Should Borrower or any Guarantor default under any other loan, extension of credit, security agreement, or obligation in favor of Lender, and such default shall not have been remedied within fifteen (15) days after notice of such default by Lender to Borrower. DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Guarantor default (after expiration of any applicable cure periods) under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement in favor of any other creditor or person involving in excess of $1,000,000.00, and such default shall not have been remedied within fifteen (15) days after notice of such default by Lender to Borrower. INSOLVENCY. Should the suspension of business, failure or insolvency, however evidenced, of Borrower or any Guarantor of Borrower's Loan and the Note occur or exist. VOLUNTARY READJUSTMENT OF INDEBTEDNESS. Should proceedings for readjustment of indebtedness, reorganization, bankruptcy, composition or extension under any insolvency law be brought by Borrower or any Guarantor. INVOLUNTARY READJUSTMENT OF INDEBTEDNESS. Should proceedings for readjustment of indebtedness, reorganization, bankruptcy, composition or extension under any insolvency law be brought against Borrower or any Guarantor, and such proceedings are not dismissed within sixty (60) days after commencement. ASSIGNMENT FOR BENEFIT OF CREDITORS. Should Borrower or any Guarantor file proceedings for a respite or make a general assignment for the benefit of creditors. RECEIVERSHIP. Should proceedings for the appointment of a receiver of all or any part of Borrower's property, or the property of any Guarantor, be commenced and such proceedings are not dismissed within sixty (60) days after commencement, or should a receiver be appointed for all or any part of Borrower's property, or the property of any Guarantor. 11 09-11-1996 LOAN AGREEMENT PAGE 11 LOAN NO. (CONTINUED) ================================================================================ DISSOLUTION PROCEEDINGS. Should proceedings for the dissolution or appointment of a liquidator of Borrower or any Guarantor be commenced by any person or entity other than Borrower and such proceedings are not dismissed within sixty (60) days after commencement, or should Borrower or any Guarantor be dissolved or have a liquidator appointed. FALSE STATEMENTS. Should any representation or warranty of Borrower or any Guarantor made in connection with the Loan prove to be incorrect or misleading in any material respect. DEFECTIVE COLLATERALIZATION - CHATTEL PAPER. Should any Related Document granting Lender a Security Interest in any of the Chattel Paper cease to be in full force and effect (including the failure of any such Related Document to create a valid and perfected security interest or lien in the Chattel Paper) at any time for any reason. DEFECTIVE COLLATERALIZATION - OTHER COLLATERAL. Should any Related Document granting Lender a Security Interest in any of the Collateral other than Chattel Paper cease to be in full force and effect (including the failure of any such Related Document to create a valid and perfected security interest or lien on such other Collateral) at any time for any reason, and such condition or failure shall not have been remedied within fifteen (15) days after notice thereof by Lender to Borrower. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, all commitments and obligations of Lender under this Agreement or the other Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all Loans immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. If any Event of Default shall occur, Lender shall have the right at its sole option, to accelerate payment of Borrower's Note in full, in principal, interest, costs, expenses, attorneys' fees, and other fees and charges, as well as to accelerate the maturity of any and all other loans and/or obligations that Borrower may then owe to Lender, whether direct or indirect, or by way of assignment or purchase of a participation interest, and whether absolute or contingent, liquidated or unliquidated, voluntary or involuntary, determined or undetermined, due or to become due, and whether now existing or hereafter arising, and whether Borrower is obligated alone or with others on a "solidary" or "joint and several" basis, as a principal obligor or as a surety, of every nature and kind whatsoever, whether any such indebtedness may be barred under any statute of limitations or otherwise may be unenforceable or voidable for any reason whatsoever. If any Event of Default shall occur, Lender shall have the additional right, again at its sole option, to file an appropriate collection action against Borrower and/or against any Guarantor, and/or to proceed or exercise any rights against any Collateral then securing repayment of Borrower's Loan and Note. Borrower further agrees that Lender's remedies shall be cumulative in nature and nothing under this Agreement or otherwise, shall be construed as to limit or restrict the options and remedies available to Lender following any event of default under this Agreement or otherwise. If any Event of Default shall occur, Lender shall have the additional right, again at its sole option, to notify Debtors to make payments directly to Lender and Lender may remove from the business premises of Borrower, all documents, files, ledgers, computer tapes and disks, and all other records relating to the Collateral to facilitate in making direct collections. Borrower shall be responsible for and pay all reasonable costs and expenses incurred by Lender in making direct collections, including Lender's internal costs and attorneys' fees. As soon as practical after receipt of payments directly from Debtors, Lender shall deposit the collections into a Dominion Account. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. ADDITIONAL DOCUMENTS. Borrower shall provide Lender with the following additional documents: CORPORATE RESOLUTION - BORROWER. Borrower has provided or will provide Lender with a certified copy of resolutions properly adopted by Borrower's Board of Directors, and certified by Borrower's corporate secretary or assistant secretary, under which Borrower's Board of Directors authorized one or more designated officers or employees to execute this Agreement on behalf of Borrower and to execute the above referenced Note and any and all Security Agreements directly or indirectly securing repayment of the same, and to consummate the borrowings and other transactions as contemplated hereunder, and to consent to the remedies following Borrower's default as provided herein and under the above referenced Security Agreements. CORPORATE RESOLUTIONS - GUARANTORS. Borrower has provided or will provide Lender with certified copies of resolutions properly adopted by the Board of Directors of each Guarantor (or by a duly organized and authorized committee of the Board of Directors, if appropriate), and certified by the corporate secretary or assistant secretary of each Guarantor, under which the Board of Directors of each Guarantor (or a duly organized and authorized committee of the Board of Directors, if appropriate) authorized one or more designated officers or employees to execute the Related Documents on behalf of each Guarantor, and to consummate the transactions as contemplated hereunder, and to consent to the remedies provided for under the Related Documents. CERTIFICATION. Where required by Lender, Borrower has provided or will provide Lender with a certificate executed by Borrower's principal or executive officer, certifying that the representations and warranties set forth in this Agreement are true and correct, and further certifying that no Event of Default presently exists under this Agreement, or under Borrower's Note, or under any Security Agreement directly or indirectly securing repayment of the same, as of the date hereof. OPINION OF COUNSEL. Where required by Lender, Borrower has provided or will provide Lender with an opinion of Borrower's counsel certifying to and that: (a) this Agreement and Borrower's Note and Security Agreements constitute valid and binding obligations on the part of Borrower that are enforceable in accordance with their respective terms; (b) Borrower and each Guarantor are validly existing and in good standing; (c) Borrower has authority to enter into this Agreement and to consummate the transactions contemplated hereunder; (d) each Guarantor has authority to enter into the Related Documents and to consummate the transactions contemplated hereunder; and (e) such other matters as may have been requested by Lender or by Lender's counsel. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Louisiana and all Advances and payments to be made hereunder shall be delivered in Louisiana. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Louisiana. 12 09-11-1996 LOAN AGREEMENT PAGE 12 LOAN NO. (CONTINUED) ================================================================================ CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower consents to the disclosure of such information by Lender to any one or more purchasers, or potential purchasers, and hereby waives any rights to privacy it may have with respect to such disclosure by Lender, but Borrower specifically reserves its rights to privacy with respect to any further disclosure or dissemination of such information by Lender's purchasers or potential purchasers. Lender agrees to notify Borrower of any sale or transfer of (a) the Loan in its entirety, and (b) any assignment of the "lead lender" position if participation interests in the Loan are sold or transferred. Borrower additionally waives any and all other notices of sale of participation interests, as well as all notices of any repurchase of participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under this Agreement and under the participation agreement or agreements governing the sale of such participation interests. CONTROLLING TERMS. The Related Documents shall contain such terms and provisions as the parties thereto shall agree (including provisions for repayment, interest and security) and the terms and conditions of each of the Related Documents shall be cumulative and in addition to the terms and provisions of this Agreement, which shall apply to all other Related Documents. This Agreement and all of the other Related Documents shall be construed in such a manner as to give full force and effect to all provisions of this Agreement and the other Related Documents; however, in the event of any irreconcilable conflict between the terms and provisions contained in this Agreement and in any of the other Related Documents, the terms and provisions of this Agreement shall control. COSTS AND EXPENSES. Borrower agrees to pay, upon demand, all of Lender's out-of-pocket expenses, including reasonable attorneys' fees, incurred in connection with the preparation, execution, enforcement and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. If an Event of Default occurs, Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. ENTIRE AGREEMENT. This Agreement, the Note, and the other Related Documents, embody the final, entire agreement of the parties hereto and supersede any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES TO THIS AGREEMENT. MAXIMUM INTEREST RATE. No provision of this Agreement, the Note, or any other Related Document shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable law ("THE MAXIMUM RATE"). If interest in excess of the Maximum Rate is provided for in this Agreement, in any other Related Document, or otherwise in connection with the Loan, or is adjudicated to be so provided, the provisions of this section shall govern and prevail and neither Borrower, nor any Guarantor or Grantor, shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of Advances made under this Agreement. In the event Lender ever receives, collects or applies, as interest due and payable under the Note, any sum in excess of the Maximum Rate, the amount of the excess shall be applied as a payment and reduction of the principal of the indebtedness represented by the Note; and if the principal of the indebtedness represented by the Note has been fully paid, any remaining excess shall forthwith be paid to Borrower. In determining whether or not interest paid or payable exceeds the Maximum Rate, Borrower and Lender shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate and spread, in equal or unequal parts, the total amount of interest throughout the entire contemplated term of the indebtedness represented by the Note so that interest for the entire term does not exceed the Maximum Rate. NOTICES. To give Borrower any notice required under this Agreement, Lender may hand deliver or mail such notice to Borrower at the address specified for Borrower in this Agreement, or at any other address that Borrower may have given to Lender by written notice as provided in this paragraph. To give Lender any notice under this Agreement, Borrower may hand deliver or mail such notice to Lender at the address specified in this Agreement, or at any other address that Lender may have given to Borrower by written notice as provided in this paragraph. All notices required or permitted under this Agreement must be in writing and will be considered as given on the day it is delivered by hand or deposited in the U. S. Mail in the form and to the address specified in this Agreement. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SOLE DISCRETION OF LENDER. Whenever Lender's consent or approval is required under this Agreement, the decision as to whether or not to consent or approve shall be in the sole, but reasonable, discretion of Lender, and Lender's decision shall be final and conclusive, absent manifest error. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. 13 09-11-1996 LOAN AGREEMENT PAGE 13 LOAN NO. (CONTINUED) ================================================================================ BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF SEPTEMBER 11, 1996. BORROWER: SEARCH FUNDING II, INC. By: /s/ Robert D. Idzi --------------------------------------------------- Robert D. Idzi, Senior Executive Vice President LENDER: HIBERNIA NATIONAL BANK By: /s/ Norm Winters ---------------------------------------------------- Authorized Officer EX-4.8 3 COMMERCIAL SECURITY AGREEMENT 1 EXHIBIT 4.8 COMMERCIAL SECURITY AGREEMENT - ----------------------------------------------------------------------------------------------------------------------------- PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $25,000,000.00 09-11-1996 09-11-1999 855 - -----------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- BORROWER/GRANTOR: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK (TIN: 75-2554995) (TIN: 72-0210640) 700 NORTH PEARL STREET 313 CARONDELET STREET SUITE 400, L.B. 401 POST OFFICE BOX 61540 DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161 ================================================================================ THIS COMMERCIAL SECURITY AGREEMENT is entered into between SEARCH FUNDING II, INC. (referred to below as "GRANTOR"); and HIBERNIA NATIONAL BANK (referred to below as "LENDER"). For valuable consideration, Grantor hereby pledges to Lender and grants to Lender a continuing security interest in the Collateral to secure Grantor's present and future Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law or otherwise. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Louisiana Commercial Laws - Secured Transactions (La.-R.S. 10: 9-101, et seq.). All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached or to be attached to this Commercial Security Agreement from time to time. COLLATERAL. The word "Collateral" means individually, collectively and interchangeably any and all of Grantor's present and future rights, title and interest in and to the following described property, wherever located, together with any and all present and future additions thereto, substitutions therefor, and replacements thereof: ALL CHATTEL PAPER, INSTRUMENTS, DOCUMENTS, ACCOUNTS, INVENTORY, AND GENERAL INTANGIBLES The Collateral includes any and all of Grantor's present and future chattel paper, equipment leases, retail installment contracts, notes and chattel mortgages, notes and security agreements, instruments, documents, and all other similar obligations and indebtedness that may now and in the future be owed to or held by Grantor from whatever source arising, and all monies and proceeds payable thereunder, and all of Grantor's rights and remedies to collect and enforce payment and performance thereof, as well as to enforce any guaranties of the foregoing and security therefor, and all of Grantor's present and future rights, title and interest in and with respect to the goods or other property that may give rise to or that may secure any of the foregoing, including without limitation Grantor's insurance rights with regard thereto, and any and all present and future general intangibles of Grantor in any way related or pertaining to any of the foregoing, including without limitation Grantor's account ledgers, books, records, files, computer disks and software, and all rights that Grantor may have with regard thereto. The Collateral includes any and all of Grantor's present and future accounts, instruments, documents, notes, and all other similar obligations and indebtedness that may now and in the future be owed to or held by Grantor from whatever source arising, and all monies and proceeds payable thereunder, and all of Grantor's rights and remedies to collect and enforce payment and performance thereof, as well as to enforce any guaranties of the foregoing and security therefor, and all of Grantor's present and future rights, title and interest in and with respect to the goods, services, and other property that may give rise to or that may secure any of the foregoing, including without limitation Grantor's insurance rights with regard thereto, and all present and future general intangibles of Grantor in any way related or pertaining to any of the foregoing, including without limitation Grantor's account ledgers, books, records, files, computer disks and software, and all rights that Grantor may have with regard thereto. The Collateral includes any and all of Grantor's present and future inventory (including consigned inventory), merchandise and other items of personal property held for sale or lease, no matter where located, of every type and description, including without limitation any and all of Grantor's present and future raw materials, components, work-in-process, finished items, packing and shipping materials, containers, items held for sale, items held for lease, items for which Grantor is lessor, goods to be furnished under contract for services, materials used or consumed in Grantor's business, whether held by Grantor or by others, and all documents of title, warehouse receipts, bills of lading, and other documents of every type covering all or any part of the foregoing, and any and all additions thereto and substitutions or replacements therefor, and all accessories, attachments, and accessions thereto, whether added now or later, and all products and proceeds derived or to be derived therefrom, including without limitation all insurance proceeds and refunds of insurance premiums, if any, and all sums that may be due from third parties who may cause damage to any of the foregoing, or from any insurer, whether due to judgment, settlement, or other process, and any and all present and future accounts, chattel paper, instruments, documents, and notes that may be derived from the sale, lease or other disposition of any of the foregoing, and any rights of Grantor to collect or enforce payment thereof, as well as to enforce any guarantees of the forgoing and security therefor, and all of Grantor's present and future general intangibles in any way related or pertaining to the ownership, operation, use, or collection of any of the foregoing, including without limitation Grantor's books, records, files, computer disks and software, and all rights that Grantor may have with regard thereto. Inventory includes inventory temporarily out of Grantor's possession or custody and all returns on accounts, chattel paper and instruments. The Collateral includes all general intangibles, choses in action and causes of action and all other intangible personal property and rights of Grantor of every nature and kind, now owned or hereafter acquired, including without limitation corporate or other business records, inventions, designs, blueprints, plans, specifications, patents, patent applications, trade marks, trade names, trade secrets, goodwill, copyrights, registrations, licenses, franchises, insurance proceeds, including without limitation insurance covering the lives of key employees on which Grantor is beneficiary, and any letter of credit, guaranty, claim, security interest, or other security held or granted to Grantor to secure payment of any indebtedness. The word "Collateral" also includes any and all present or future parts, accessories, attachments, additions, accessions, substitutions and replacements to and for the collateral. The word "Collateral" further includes any and all of Grantor's present and future rights to any proceeds derived or to be derived from the sale, lease, damage, destruction, insurance loss, expropriation and other disposition of the collateral, including without limitation, any and all of Grantor's rights to enforce collection and payment of such proceeds. ENCUMBRANCES. The word "Encumbrances" means individually, collectively and interchangeably any and all presently existing and/or future mortgages, liens, privileges and other contractual and/or statutory security interests and rights of every nature and kind that, now and/or in the future, may affect the Collateral or any part or parts thereof. EVENT OF DEFAULT. The words "Event of Default" mean individually, collectively, and interchangeably any of the Events of Default set forth below in the section titled "Events of Default." 2 09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 2 LOAN NO. (CONTINUED) ================================================================================ GRANTOR. The word "Grantor" means individually, collectively and interchangeably SEARCH FUNDING II, INC. Any Grantor who signs this Agreement, but does not sign the Note, is signing this Agreement solely to grant a security interest as affecting Grantor's interest in the Collateral and will not be personally liable to Lender under the Note except as otherwise provided by contract or by law (e.g., personal liability under a guaranty or as a surety). GUARANTOR. The word "Guarantor" means and includes individually, collectively, interchangeably and without limitation, each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note, in principal, interest, costs, expenses and attorneys' fees and all other fees and charges, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" also includes any and all other loans, extensions of credit, obligations, debts and liabilities, plus interest thereon, of Grantor that may now and in the future be owed to or incurred in favor of Lender, as well as all claims by Lender against Grantor, whether existing now or later; whether they are voluntary or involuntary, whether related or unrelated, whether committed or purely discretionary, due or to become due, direct or indirect or by way of assignment, determined or undetermined, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others, of every nature and kind whatsoever, in principal, interest, costs, expenses and attorneys' fees and all other fees and charges; whether Grantor may be obligated as guarantor, surety, accommodation party or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by any statute of limitations; and whether such indebtedness may be or hereafter may become void or otherwise unenforceable. LENDER. The word "Lender" means HIBERNIA NATIONAL BANK (TIN: 72-0210640), its successors and assigns, and any subsequent holder or holders of the Note, or any interest therein. NOTE. The word "Note" means the promissory note DATED SEPTEMBER 11, 1996, in the principal amount of $25,000,000.00 from Grantor to Lender, together with all substitute or replacement notes therefor, as well as all renewals, extensions, modifications, refinancings, consolidations and substitutions of and for such promissory note. PERMITTED LIENS. The words "Permitted Liens" mean (a) liens and security interests securing Indebtedness owed by Grantor to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens securing obligations which were incurred prior to Grantor's acquisition of the property subject to such liens and security interests; (d) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent or are being contested in good faith; and (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by Lender in writing. RELATED DOCUMENTS. The words "Related Documents" mean and include individually, collectively, interchangeably and without limitation, the Loan Agreement between Grantor and Lender dated SEPTEMBER 11, 1996, as amended or modified from time to time ("THE LOAN AGREEMENT"), and all promissory notes, credit agreements, other loan agreements, environmental agreements, guaranties, security agreements, mortgages, collateral mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. CONTINUING SECURITY INTEREST TO SECURE PRESENT AND FUTURE INDEBTEDNESS. Grantor affirms that Grantor has granted a continuing security interest in the Collateral in favor of Lender to secure any and all present and future Indebtedness of Grantor in favor of Lender, as may be outstanding from time to time set forth above, in principal, interest, costs, expenses, attorneys' fees and other fees and charges, with the continuing preferences and priorities provided under applicable law. Grantor agrees that all such additional loans and Indebtedness will be secured under this Agreement without the necessity that Grantor agree or consent to such a result at the time such additional loans are made and Indebtedness incurred, without the further necessity that the note or notes evidencing such additional loans or Indebtedness refer to the fact that such notes are secured by this Agreement. Grantor further agrees Grantor may not subsequently have a change of mind and insist that any such additional loans or Indebtedness not be secured by this Agreement unless Lender specifically agrees to such a request in writing. DURATION. This Agreement shall remain in full force and effect until such time as this Agreement and the security interests created hereby are terminated and canceled by Lender under a written cancellation instrument in favor of Grantor. Lender agrees to deliver a written cancellation instrument to Grantor, at the request of Grantor, after repayment of the Indebtedness and all obligations of Lender to Grantor, and of Grantor to Lender, have been fully performed or otherwise terminated. DEPOSIT ACCOUNTS. As collateral security for repayment of the Indebtedness and all renewals and extensions, as well as to secure any and all other loans, notes, indebtedness and obligations that Grantor may now and in the future owe to Lender or incur in Lender's favor, whether direct or indirect, absolute or contingent, due or to become due, of any nature and kind whatsoever, Grantor is granting Lender a continuing security interest in any and all funds that Grantor may now and in the future have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Grantor is an account holder (with the exception of IRA, pension, and other tax-deferred deposits). Grantor further agrees that Lender may, after an Event of Default has occurred, apply any funds that Grantor may have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Grantor is an account holder (with the exception of IRA, pension, and other tax-deferred deposits) against the unpaid balance of any of the Indebtedness; provided, however, that the Event of Default prerequisite for application authority shall not apply to any dominion account required to be maintained by Grantor under any of the Related Documents. REPRESENTATIONS, WARRANTIES AND COVENANTS OF GRANTOR. Grantor represents, warrants and covenants to Lender as follows: ORGANIZATION. Grantor is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas. Grantor has its registered office at 700 NORTH PEARL STREET, SUITE 400, L.B. 401, DALLAS, TEXAS 75201-7490. Grantor's chief executive office is located at 700 NORTH PEARL STREET, SUITE 400, L.B. 401, DALLAS, TEXAS 75201-7490. Grantor will notify Lender of any change in the location of Grantor's registered office or chief executive office. AUTHORIZATION. Grantor's execution, delivery and performance of this Agreement have been duly authorized, and do not conflict with, and will not result in a violation of, or constitute or give rise to any default under Grantor's Articles of Incorporation or Bylaws, or any agreement or other instrument which may be binding upon Grantor, or under any law or governmental regulation or court decree or order applicable to Grantor and/or its properties. PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other reasonable actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon reasonable request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic, facsimile, or other reproduction of any financing statement. Grantor will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the 3 09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 3 LOAN NO. (CONTINUED) ================================================================================ assumed business names of Grantor. Grantor also promptly will notify Lender of any change in Grantor's Employer Identification Number. Grantor represents and warrants to Lender that Grantor has provided Lender with Grantor's correct Employer Identification Number and that Grantor has no other Employer Identification Numbers. Grantor promptly shall notify Lender should Grantor apply for or obtain a new Employer Identification Number. NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. The Collateral that comprises Eligible Paper under the Loan Agreement is enforceable in accordance with its terms, is genuine, and complies with applicable state and federal laws and regulations concerning form, content and manner of preparation and execution, and, to the best of Grantor's knowledge, all persons appearing to be obligated on the Eligible Paper have authority and capacity to contract and are in fact obligated as they appear to be on the Eligible Paper, free of any offset, compensation, deduction or counterclaim. To the extent the Collateral consists of accounts, chattel paper, instruments, or general intangibles that are not Eligible Paper under the Loan Agreement, such ineligible Collateral is enforceable in accordance with its terms, is genuine, and complies in all material respects with applicable state and federal laws and regulations concerning form, content and manner of preparation and execution, and, to the best of Grantor's knowledge, all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral, free of any offset, compensation, deduction or counterclaim. At the time any account, chattel paper, instrument or general intangible becomes subject to a security interest in favor of Lender, the account, chattel paper, instrument or general intangible shall be a good and valid account, chattel paper, instrument or general intangible representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor; there shall be no setoffs or counterclaims against any such account, chattel paper, instrument or general intangible; and no agreement under which any deductions or discounts may be claimed shall have been made with the account debtor except those disclosed to Lender in writing. So long as this Agreement remains in effect, Grantor shall not, without Lender's prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such accounts, chattel paper, instruments or general intangibles, except in the ordinary course of Grantor's business. LOCATION OF COLLATERAL RECORDS. Grantor shall keep all records concerning the Collateral at Grantor's chief executive office, or at such other locations as are acceptable to Lender. TRANSACTIONS INVOLVING COLLATERAL. Grantor shall not sell or otherwise transfer or dispose of any the Collateral, except for (a) inventory sold in the ordinary course of Grantor's business, (b) accounts, chattel paper and instruments collected in the ordinary course of Grantor's business, and (c) sales of Collateral under terms and conditions permitted under the Loan Agreement. As long as no Event of Default has occurred, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business, unless Lender has agreed to release the Collateral sold under the terms of the Loan Agreement. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any Encumbrance or charge, other than Permitted Liens, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender for deposit into the Dominion Account. RELEASE OF COLLATERAL. Grantor may apply to Lender for a release of Collateral from this Agreement in connection with a sale of Collateral by Grantor outside of the ordinary course of Grantor's business or in bulk in accordance with the terms and conditions of the Loan Agreement. Lender agrees to allow the requested release in accordance with the terms and conditions of the Loan Agreement. TITLE, AUTHORITY, BINDING EFFECT. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all Encumbrances except for Permitted Liens. Except for Permitted Liens, no financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor further represents and warrants that it has requisite authority to enter into this Agreement in favor of Lender and to grant to Lender the security interest in the Collateral as provided herein. Grantor additionally represents and warrants that this Agreement is binding upon Grantor as well as Grantor's heirs, successors, representatives, transferees and assigns, and is legally enforceable in accordance with its terms. The foregoing representations and warranties and all other representations and warranties of Grantor under this Agreement shall be continuing and shall survive the termination of this Agreement. COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and insofar as the Collateral consists of accounts, chattel paper, instruments and general intangibles, Grantor shall deliver to Lender schedules of such Collateral, including such information as Lender may require, including without limitation names and addresses of account debtors and agings of accounts, chattel paper, instruments and general intangibles. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. REPAIRS AND MAINTENANCE. Grantor shall keep and maintain and shall cause others to keep and maintain Grantor's inventory in good order, repair and merchantable condition, subject to the discretion of Grantor using reasonable business judgment considering the value of the inventory and costs of repairs and maintenance. Grantor shall further make and/or cause all necessary repairs to be made to the Collateral, including the repair and restoration of any portion of Grantor's inventory that may be damaged, lost or destroyed, subject to the discretion of Grantor using reasonable business judgment considering the value of the inventory and costs of repairs and restoration. TAXES. Grantor shall promptly pay or cause to be paid when due, all taxes, local and special assessments, and governmental and other charges of every type and description, that may from time to time be imposed, assessed and levied against the Collateral or against Grantor. Grantor further agrees, upon Lender's request, to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not materially jeopardized. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with, and shall cause others to comply with, all laws, ordinances and regulations of all governmental authorities applicable to the production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as, in Lender's reasonable opinion, Lender's interest in any of the Collateral that is included in Eligible Paper under the Loan Agreement, is not jeopardized. Grantor shall not use the Collateral, and shall not permit others to use the Collateral, for any purpose other than those previously agreed to by Lender in writing; but in no event shall any of the Collateral be used in any manner that would damage, depreciate or diminish its value or that may result in cancellation or termination of insurance coverage. Grantor additionally agrees not to do or suffer to be done anything that may increase the risk of fire or other hazards to the Collateral. 4 09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 4 LOAN NO. (CONTINUED) ================================================================================ HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. ENCUMBRANCES. Grantor shall not, without the prior written consent of Lender, grant any Encumbrance that may affect the Collateral, or any part or parts thereof, nor shall Grantor permit or consent to any Encumbrance, other than a Permitted Lien, attaching to or being filed against any of the Collateral in favor of anyone other than Lender. Grantor shall further promptly pay when due all statements and charges of mechanics, materialmen, laborers and others incurred in connection with the alteration, improvement, repair and maintenance of Grantor's inventory, or otherwise furnish appropriate security or bond, so that no future Encumbrance, other than a Permitted Lien, may ever attach to or be filed against any Collateral. Grantor additionally agrees to obtain, upon request by Lender, and in form and substance as may then be satisfactory to Lender, appropriate waivers and/or subordinations of any lessor's liens or privileges, vendor's liens or privileges, purchase money security interests, and any other Encumbrances, other than Permitted Liens, that may affect the Collateral at any time. NOTICE OF ENCUMBRANCES. Grantor shall immediately notify Lender in writing upon the filing of each attachment, lien or other Encumbrance, other than Permitted Liens, involving $100,000.00 or more. Grantor additionally agrees to notify Lender immediately in writing upon the occurrence of any default, or event that with the passage of time, failure to cure, or giving of notice, might result in a default under any of Grantor's obligations that may be secured by any presently existing or future Encumbrance or that might result in an Encumbrance affecting the Collateral, other than a Permitted Lien, or should any of the Collateral be seized or attached or levied upon, or threatened by seizure or attachment or levy, by any person other than Lender. BOOKS AND RECORDS. Grantor will keep proper books and records with regard to Grantor's business activities and the Collateral in which a security interest is granted hereunder, in accordance with generally accepted accounting principles, applied on a consistent basis throughout, which books and records shall at all reasonable times be open to inspection and copying by Lender or its designated agents. Lender shall also have the right to inspect Grantor's books and records, and to discuss Grantor's affairs and finances with Grantor's officers and representatives, at such reasonable times as Lender may designate. GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS, CHATTEL PAPER AND INSTRUMENTS. Until an Event of Default has occurred and except as otherwise provided below with respect to accounts, chattel paper and instruments, Grantor may have possession and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts, chattel paper and instruments. At any time and even though no Event of Default exists, Lender may exercise its rights to collect the accounts, chattel paper and instruments and to notify account debtors to make payments directly to Lender for deposit into the dominion account provided for in the Loan Agreement. Lender or Lender's agents may also periodically contact individual obligors and debtors to verify the amounts then owing under such obligations, to determine whether such obligors and debtors have any offsets or counterclaims against the accounts, chattel paper and instruments and/or Grantor, and to inquire about such other matters as Lender may deem necessary or desirable. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Collateral. ADDITIONAL COVENANTS. Grantor additionally agrees: NO SETTLEMENT OR COMPROMISE. Grantor will not, without the prior written consent of Lender, compromise, settle, adjust or extend payment under any of the Collateral, except in the ordinary course of Grantor's business. BOOKS AND RECORDS. Grantor will keep proper books and records with regard to Grantor's business activities and the Collateral, which books and records shall at all times be open to inspection and copying by Lender or its designated agent. Lender shall also have the right to inspect Grantor's books and records, and to discuss Grantor's affairs and finances with Grantor at such reasonable times as Lender may designate. LOCK BOX. Grantor agrees that Lender may at any time require Grantor to institute procedures whereby the proceeds and/or payments of any accounts, chattel paper and instruments subject to this Agreement shall be paid by the debtors thereof under a lock box arrangement to Lender, or to Lender's agent, or to one or more financial institutions designated by Lender. Grantor further agrees that, if no Event of Default exists under this Agreement, any and all of such funds received under such a lock box arrangement shall, at Lender's sole election and discretion, either be (a) paid and/or turned over to Grantor; (b) deposited into one or more accounts for the benefit of Grantor (which deposit accounts shall be subject to collateral assignment and pledge in favor of Lender as provided under this Agreement); (c) deposited into one or more accounts for the joint benefit of Grantor and Lender (which deposit accounts shall likewise be subject to assignment and pledge in favor of Lender as provided under this Agreement); (d) paid and/or turned over to Lender to be applied to the Indebtedness in such order and priority as Lender may determine within its sole discretion; or (e) any combination of the foregoing as Lender shall determine from time to time. Grantor further agrees that, should one or more Events of Default exist under this Agreement, any and all funds received under such a lock box arrangement shall be paid and/or turned over to Lender to be applied to principal, accrued interest, costs, expenses, attorneys' fees and other fees and charges under the Indebtedness, again in such order and priority as Lender may determine within its sole discretion. NOTICE TO OBLIGORS. Upon request by Lender, Grantor will immediately notify individual obligors with regard to the Collateral, advising such obligors and/or debtors of the fact that Lender has been granted a security interest in their obligations. In the event that Grantor should fail to provide such notices for any reason upon request by Lender, Grantor agrees that Lender may forward appropriate notices to such obligors and debtors, either in Lender's name or in the name of Grantor. ADDITIONAL DOCUMENTS. Grantor shall at any time, from time to time, one or more times, upon written request by Lender, execute and deliver such further documents and do any and all such further acts and things as Lender may reasonably request, within its sole discretion, to effect the purposes of this Agreement. 5 09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 5 LOAN NO. (CONTINUED) ================================================================================ VERIFICATIONS. Grantor additionally agrees that Lender or Lender's agents may periodically contact individual debtors whose Notes, Instruments and Chattel Paper have been assigned and pledged hereunder in order to verify the amounts then owing under such obligations, to determine whether such debtors have any offsets or counterclaims against Grantor, and such other matters about which Lender may inquire. NOTIFICATION OF LENDER. Grantor will promptly deliver to Lender all written notices, and will promptly give Lender written notice of any other notices received by Grantor with respect to any matter that adversely affects the Collateral, as a whole, in a material respect, and Lender will promptly give like notice to Grantor of any such notices received by Lender or its nominee. EXPENDITURES BY LENDER. Grantor recognizes and agrees that Lender may incur certain expenses in connection with Lender's exercise of rights under this Agreement. If not discharged or paid when due and not being contested by Grantor in good faith, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, Encumbrances and other claims, at any time levied or placed on the Collateral. After an Event of Default has occurred, Lender also may (but shall not be obligated to) pay all reasonable costs for insuring, maintaining and preserving the Collateral, including without limitation, the purchase of insurance protecting only Lender's interest in the Collateral. Lender may further take such other action or actions and incur such additional expenditures as Lender may reasonably deem to be necessary and proper to cure or rectify any actions or inactions on Grantor's part as may be required under this Agreement. Nothing under this Agreement or otherwise shall obligate Lender to take any such actions or to incur any such additional expenditures on Grantor's behalf, or as making Lender in any way responsible or liable for any loss, damage, or injury to the Collateral, to Grantor, or to any other person or persons, resulting from Lender's election not to take such actions or to incur such additional expenses. In addition, Lender's election to take any such actions or to incur such additional expenditures shall not constitute a waiver or forbearance by Lender of any Event of Default under this Agreement. All such expenditures for such purposes, to the extent reasonably incurred for reasonable amounts, will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment. All such expenditures for such purposes, to the extent reasonably incurred for reasonable amounts, shall become a part of the Indebtedness and, at Lender's option, will be payable on demand. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. The following actions or inactions or both shall constitute Events of Default under this Agreement: DEFAULT UNDER THIS AGREEMENT. Should Grantor violate, or fail to comply fully with any of the terms and conditions of, or default under this Agreement, and such violation or failure shall not have been remedied within fifteen (15) days after notice of such violation or failure by Lender to Grantor. DEFAULT UNDER RELATED DOCUMENT. Should any event of default occur under any Related Document, after expiration of any applicable cure period. RIGHTS AND REMEDIES ON DEFAULT. After an Event of Default occurs under this Agreement, Lender shall have all the rights of a secured party under applicable law, including, without limitation, those rights available to secured creditors under the Louisiana Commercial Laws - Secured Transactions (La.-R.S. 10:9-101, et seq.). In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender, at its sole option, may accelerate the maturity and declare and demand immediate payment in full of any and all Indebtedness secured hereby in principal, interest, costs, expenses, attorneys' fees and other fees and charges. SEIZURE AND SALE OF COLLATERAL IN LOUISIANA. In the event that Lender elects to commence appropriate Louisiana foreclosure proceedings under this Agreement after an Event of Default has occurred, Lender may cause the Collateral, or any part or parts thereof, to be immediately seized wherever found, and sold, whether in term of court or in vacation, under ordinary or executory process, in accordance with applicable Louisiana law, to the highest bidder for cash, with or without appraisement, and without the necessity of making additional demand upon or notifying Grantor or placing Grantor in default, all of which are expressly waived. CONFESSION OF JUDGMENT. For purposes of foreclosure under Louisiana executory process procedures, Grantor confesses judgment and acknowledges to be indebted unto and in favor of Lender, up to the full amount of the Indebtedness, in principal, interest, costs, expenses, attorneys' fees and other fees and charges. Grantor further confesses judgment and acknowledges to be indebted unto and in favor of Lender in the amount of all additional advances that Lender may make on Grantor's behalf pursuant to this Agreement, together with interest thereon, up to a maximum of two (2) times the face amount of the aforesaid Note. To the extent permitted under applicable Louisiana law, Grantor additionally waives (a) the benefit of appraisal as provided in Articles 2332, 2336, 2723 and 2724 of the Louisiana Code of Civil Procedure, and all other laws with regard to appraisal upon judicial sale; (b) the demand and three (3) days' delay as provided under Articles 2639 and 2721 of the Louisiana Code of Civil Procedure; (c) the notice of seizure as provided under Articles 2293 and 2721 of the Louisiana Code of Civil Procedure; (d) the three (3) days' delay provided under Articles 2331 and 2722 of the Louisiana Code of Civil Procedure; and (e) all other benefits provided under Articles 2331, 2722 and 2723 of the Louisiana Code of Civil Procedure and all other Articles not specifically mentioned above. KEEPER. Should any or all of the Collateral be seized as an incident to an action for the recognition or enforcement of this Agreement, by executory process, sequestration, attachment, writ of fieri facias or otherwise, Grantor hereby agrees that the court issuing any such order shall, if requested by Lender, appoint Lender, or any agent designated by Lender, or any person or entity named by Lender at the time such seizure is requested, or any time thereafter, as Keeper of the Collateral as provided under La.-R.S. 9:5136, et seq. Such a Keeper shall be entitled to reasonable compensation. Grantor agrees to pay the reasonable fees of such Keeper, which are hereby fixed at $150.00 per hour, which compensation to the Keeper shall also be secured by this Agreement in the form of an additional advance as provided herein. DECLARATION OF FACT. Should it become necessary for Lender to foreclose under this Agreement, all declarations of fact, which are made under an authentic act before a Notary Public in the presence of two witnesses, by a person declaring such facts to lie within his or her knowledge, shall constitute authentic evidence for purposes of executory process and also for purposes of La.-R.S. 9:3509.1, La.-R.S. 9:3504(D)(6) and La.-R.S. 10:9-508, as applicable. DELIVER COLLATERAL. This provision applies, to the extent applicable, if and when the Collateral for any reason is located outside the State of Louisiana following the occurrence of any Event of Default, or should there be a subsequent change in Louisiana law permitting such remedies. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. PUBLIC OR PRIVATE SALE OF COLLATERAL. To the extent that any of the Collateral is then in Lender's possession, Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on 6 09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 6 LOAN NO. (CONTINUED) ================================================================================ a recognized market, Lender shall give or mail to Grantor, or any of them, notice at least ten (10) days in advance of the time and place of any public sale, or of the date after which any private sale may be made. Grantor agrees that any requirement of reasonable notice is satisfied if Lender mails notice by ordinary mail addressed to Grantor, or any of them, at the last address Grantor has given Lender in writing. If a public sale is held, there shall be sufficient compliance with all requirements of notice to the public by a single publication in any newspaper of general circulation in the parish or county where the Collateral is located, setting forth the time and place of sale and a brief description of the property to be sold. Lender may be a purchaser at any public sale. Grantor agrees that any such sale shall be conclusively deemed to be conducted in a commercially reasonable manner if it is made consistent with the standard of similar sales of collateral by commercial banks in New Orleans, Louisiana. APPOINT RECEIVER. This provision applies if and when the Collateral for any reason is located outside the State of Louisiana following the occurrence of any Event of Default, or should Louisiana law change or be interpreted to permit such a remedy. Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. COLLECT AND APPLY REVENUES. Lender shall have the right, at its sole option and election, at any time, whether or not one or more Events of Default then exist under this Agreement, to directly collect and receive all proceeds and/or payments arising under or in any way accruing from the Collateral, as such amounts become due and payable. In order to permit the foregoing, Grantor unconditionally agrees to deliver to Lender, immediately following demand, any and all of Grantor's records, ledger sheets, and other documentation, in the form requested by Lender, with regard to the Collateral and any and all proceeds and/or payments applicable thereto. Lender shall have the further right, whether or not an Event of Default then exists under this Agreement, where appropriate and within Lender's sole discretion, to collect any and all proceeds and payments that may then and/or in the future be due and owing under this Agreement. Until an Event of Default has occurred and Lender has exercised the right to accelerate the maturity of any or all of the Indebtedness, all amounts so collected and received will be deposited into the dominion account provided for in the Loan Agreement. All proceeds and/or payments arising under or in any way accruing from the Collateral directly collected and received by Lender under this Agreement in excess of the amounts owed under all of the Indebtedness secured by this Agreement will be paid by Lender to Grantor by deposit into an account maintained by Grantor with Lender or as otherwise requested, in writing, by Grantor. ADDITIONAL EXPENSES. In the event that it should become necessary for Lender to conduct a search for any of the Collateral in connection with any foreclosure action, or should it be necessary to remove the Collateral, or any part or parts thereof, from the premises in which or on which the Collateral is then located, and/or to store and/or refurbish such Collateral, Grantor agrees to reimburse Lender for the reasonable cost of conducting such a search and/or removing and/or storing and/or refurbishing such Collateral, which additional expense shall also be secured by the lien of this Agreement. SPECIFIC PERFORMANCE. Lender may, in addition to the foregoing remedies, or in lieu thereof, in Lender's sole discretion, commence an appropriate action against Grantor seeking specific performance of any covenant contained herein, or in aid of the execution or enforcement of any power herein granted. OBTAIN DEFICIENCY. Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement and any Related Document. OTHER RIGHTS AND REMEDIES. Have and exercise any or all of the rights and remedies of a secured creditor under the provisions of the Louisiana Commercial Laws - Secured Transactions (La.-R.S. 10:9-101, et seq.), at law, in equity, or otherwise. CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. Nothing under this Agreement or otherwise shall be construed so as to limit or restrict the rights and remedies available to Lender following an Event of Default, or in any way to limit or restrict the rights and ability of Lender to proceed directly against Grantor and/or against any Guarantor and/or to proceed against any other collateral directly or indirectly securing the Indebtedness. ASSIGNMENT OF INDEBTEDNESS; TRANSFER OF COLLATERAL. Grantor hereby recognizes and agrees that Lender may assign all or any portion of the Indebtedness to one or more third party creditors subject to the terms and conditions of the Loan Agreement. Grantor additionally agrees that any and all of Grantor's other and future loans, extensions of credit, liabilities and obligations in favor of such a third party assignee will be secured by the Collateral. Grantor further agrees that Lender may transfer all or any portion of the Collateral to such a third party assignee, in which case Lender will be fully released from any and all of Lender's obligations and responsibilities to Grantor with regard to the transferred Collateral. Subject to the notice provisions of the Loan Agreement, any third party creditor to whom the Collateral is transferred will acquire all of Lender's rights and powers with respect to the transferred Collateral, with Lender retaining all powers and rights with regard to any of the Collateral which is not transferred to another party. PROTECTION OF LENDER'S SECURITY RIGHTS. Grantor agrees to appear in and to defend all actions or proceedings purporting to affect Lender's security rights and interests granted under this Agreement. In the event that Lender elects to defend any such action or proceeding, Grantor agrees to reimburse Lender for Lender's reasonable costs associated therewith, including without limitation, Lender's attorneys' fees, which additional costs and expenses shall be secured by this Agreement. INDEMNIFICATION OF LENDER. Grantor agrees to indemnify, to defend and to save and hold Lender harmless from any and all claims, suits, obligations, damages, losses, costs, expenses (including without limitation, Lender's reasonable attorneys' fees), demands, liabilities, penalties, fines and forfeitures of any nature whatsoever which may be asserted against or incurred by Lender, arising out of or in any manner occasioned by this Agreement or the rights and remedies granted to Lender hereunder; provided, however, that this indemnity and hold harmless provision shall not apply to any such claims asserted against Lender by any participant, transferee, shareholder, officer, director of Lender or a subsidiary or affiliate of Lender (who is not also a shareholder, officer, director of Grantor or SEARCH CAPITAL GROUP, INC., or a subsidiary or affiliate of Grantor or SEARCH CAPITAL GROUP, INC. The foregoing indemnity provision shall survive the cancellation of this Agreement as to all matters arising or accruing prior to such cancellation, and the foregoing indemnity provision shall further survive in the event that Lender elects to exercise any of the remedies as provided under this Agreement following any Event of Default hereunder. EXECUTION OF ADDITIONAL DOCUMENTS. Grantor agrees to execute all additional documents, instruments and agreements that Lender may deem to be reasonably necessary and proper, within its sole discretion, in form and substance satisfactory to Lender, to keep this Agreement in effect, to better reflect the true intent of this Agreement, and to consummate fully all of the transactions contemplated hereby and by any other agreement, instrument or document heretofore, now or at any time or times hereafter executed by Grantor and delivered to Lender. 7 09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 7 LOAN NO. (CONTINUED) ================================================================================ INSPECTION; AUDITS. Lender and its agents may periodically enter upon Grantor's premises at reasonable hours and inspect the Collateral. Lender and its agents may also periodically conduct audits of the Collateral and may further inspect and audit Grantor's books and records that in any way pertain to the Collateral and any part or parts thereof. APPLICATION OF PAYMENTS. Grantor agrees that all payments and other sums and amounts received by Lender under the Indebtedness or under this Agreement, shall be applied: first, to reimburse Lender for its costs of collecting the same (including but not limited to, reimbursement of Lender's reasonable attorneys' fees); second, to the repayment of interest on all additional advances that Lender may have made on Grantor's behalf pursuant to this Agreement; third, to the payment of principal of all such additional advances; and finally, to the payment of principal and interest on the Indebtedness then outstanding, which may be applied in such order and priority as Lender may determine within its sole discretion. TAXATION. In the event that there should be any change in law with regard to taxation of security agreements or the debts they secure, Grantor agrees to pay any taxes, assessments or charges that may be imposed upon Lender as a result of this Agreement, subject to the right of Grantor to contest imposition of such taxes, assessments or charges. Payment by Grantor to Lender of such taxes, assessments and charges shall not be due and payable as long as the imposition of same is being contested in good faith by Grantor. EFFECT OF WAIVERS. Grantor has waived, and/or does by these presents waive, presentment for payment, protest, notice of protest, notice of nonpayment, notice of acceleration and notice of intent to accelerate under all of the Indebtedness secured by this Agreement. Grantor has further waived, and/or does by these presents waive, all pleas of division and discussion, and all similar rights with regard to the Indebtedness, and agrees that Grantor shall remain liable, together with any and all Guarantors of the Indebtedness, on a "solidary" or "joint and several" basis. Grantor further agrees that discharge or release of any party who is, may, or will be liable to Lender under any of the Indebtedness, or the release of the Collateral or any other collateral directly or indirectly securing repayment of the same, shall not have the effect of releasing or otherwise diminishing or reducing the actual or potential liability of Grantor and/or any other party or parties guaranteeing payment of the Indebtedness, who shall remain liable to Lender, and/or remain liable to Lender, and/or of releasing any Collateral or other collateral that is not expressly released by Lender. Grantor additionally agrees that Lender's acceptance of payments other than in accordance with the terms of any agreement, or agreements governing repayment of the Indebtedness, or Lender's subsequent agreement to extend or modify such repayment terms, shall likewise not have the effect of releasing Grantor, and/or any other party or parties guaranteeing payment of the Indebtedness, from their respective obligations to Lender, and/or of releasing any of the Collateral or other collateral directly or indirectly securing repayment of the Indebtedness. In addition, no course of dealing between Grantor and Lender, nor any failure or delay on the part of Lender to exercise any of the rights and remedies granted to Lender under this Agreement, or under any other agreement or agreements by and between Grantor and Lender, shall have the effect of waiving any of Lender's rights and remedies. Any partial exercise of any rights and remedies granted to Lender shall furthermore not constitute a waiver of any of Lender's other rights and remedies, it being Grantor's intent and agreement that Lender's rights and remedies shall be cumulative in nature. Grantor further agrees that, upon the occurrence of any Event of Default under this Agreement, any waiver or forbearance on the part of Lender to pursue the rights and remedies available to Lender, shall be binding upon Lender only to the extent that Lender specifically agrees to any such waiver or forbearance in writing. A waiver or forbearance as to one Event of Default shall not constitute a waiver or forbearance as to any other Event of Default. None of the warranties, conditions, provisions and terms contained in this Agreement or any other agreement, document, or instrument now or hereafter executed by Grantor and delivered to Lender, shall be deemed to have been waived by any act or knowledge of Lender, Lender's agents, officers or employees; but only by an instrument in writing specifying such waiver, signed by a duly authorized officer of Lender and delivered to Grantor. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF LOUISIANA. LENDER AND GRANTOR HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR GRANTOR AGAINST THE OTHER. EXCEPT TO THE EXTENT THAT THE APPLICATION OF THE LAW OF ANOTHER STATE IS MANDATORY, THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF LOUISIANA. ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. ENTIRE AGREEMENT. This Agreement, the Note, and the other Related Documents, embody the final, entire agreement of the parties hereto and supersede any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES TO THIS AGREEMENT. NOTICES. To give Grantor any notice required under this Agreement, Lender may hand deliver or mail such notice to Grantor at the address specified for Grantor in this Agreement, or at any other address that Grantor may have given to Lender by written notice as provided in this paragraph. To give Lender any notice under this Agreement, Grantor may hand deliver or mail such notice to Lender at the address specified in this Agreement, or at any other address that Lender may have given to Grantor by written notice as provided in this paragraph. All notices required or permitted under this Agreement must be in writing and will be considered as given on the day it is delivered by hand or deposited in the U. S. Mail in the form and to the address specified in this Agreement. POWER OF ATTORNEY. At all times and even though no Event of Default exists, Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; and (c) to notify postal authorities to change the address for delivery of mail addressed to Grantor to such address as Lender may designate. After an Event of Default has occurred, Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (i) to sue for all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (ii) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (iii) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. These powers are given as security for the Indebtedness, and the authorities hereby conferred are, and shall be irrevocable, and shall remain in full force and effect until renounced by Lender. 8 09-11-1996 COMMERCIAL SECURITY AGREEMENT PAGE 8 LOAN NO. (CONTINUED) ================================================================================ SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SOLE DISCRETION OF LENDER. Whenever Lender's consent or approval is required under this Agreement, the decision as to whether or not to consent or approve shall be in the sole and exclusive discretion of Lender, reasonably exercised, and Lender's decision shall be final and conclusive, absent manifest error. SUCCESSORS AND ASSIGNS BOUND; SOLIDARY LIABILITY. Grantor's obligations and agreements under this Agreement shall be binding upon Grantor's successors, heirs, legatees, devisees, administrators, executors and assigns. In the event that there is more than one Grantor under this Agreement, all of the agreements and obligations made and/or incurred by Grantors under this Agreement shall be on a "solidary" or "joint and several" basis. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER 11, 1996. GRANTOR: SEARCH FUNDING II, INC. By: /s/ Robert D. Idzi ----------------------------------------------------- Robert D. Idzi, Senior Executive Vice President LENDER: HIBERNIA NATIONAL BANK By: /s/ Norm Winters ----------------------------------------------------- Authorized Officer EX-4.9 4 COMMERICAL GUARANTY 1 EXHIBIT 4.9 COMMERCIAL GUARANTY - ----------------------------------------------------------------------------------------------------------------------------- PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $25,000,000.00 09-11-1996 09-11-1999 855 - -----------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- BORROWER: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK (TIN: 75-2554995) (TIN: 72-0210640) 700 NORTH PEARL STREET 313 CARONDELET STREET SUITE 400, L.B. 401 POST OFFICE BOX 61540 DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161 GUARANTOR: SEARCH CAPITAL GROUP, INC. 700 NORTH PEARL STREET SUITE 400, L.B. 401 DALLAS, TEXAS 75201-7490 =============================================================================== AMOUNT OF GUARANTY. THE AMOUNT OF THIS COMMERCIAL GUARANTY IS UNLIMITED. DEFINITIONS. The following terms shall have the following meanings when used in this Agreement: AGREEMENT. The word "Agreement" means this Guaranty Agreement as this Agreement may be amended or modified from time to time. BORROWER. The word "Borrower" means individually, collectively and interchangeably SEARCH FUNDING II, INC.. BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in New Orleans, Louisiana, excluding Saturdays and Sundays. EVENT OF DEFAULT. The words "Event of Default" mean and include each event that qualifies as an event of default or default event under any of the Indebtedness in favor of Lender or under any of the Related Documents (after expiration of any applicable cure period). GUARANTOR. The word "Guarantor" means individually, collectively and interchangeably SEARCH CAPITAL GROUP, INC., and all other persons guaranteeing payment and satisfaction of the Indebtedness as hereinafter defined. INDEBTEDNESS. The word "Indebtedness" means the indebtedness of Borrower evidenced by the Note, in principal, interest, costs, expenses and attorneys' fees and all other fees and charges arising thereunder, together with all other indebtedness and costs and expenses for which Borrower is responsible under any of the Related Documents. LENDER. The word "Lender" means HIBERNIA NATIONAL BANK [TIN: 72-0210640], its successors and assigns, and any subsequent holder or holders of the Indebtedness. NOTE. The word "Note" means the promissory note DATED SEPTEMBER 11, 1996, in the principal amount of $25,000,000.00 from Borrower to Lender, together with all substitute or replacement notes therefor, as well as all renewals, extensions, modifications, refinancings, consolidations and substitutions of and for such promissory note. RELATED DOCUMENTS. The words "Related Documents" mean and include individually, collectively, interchangeably and without limitation, the Loan Agreement between Grantor and Lender dated SEPTEMBER 11, 1996, as amended or modified from time to time ("THE LOAN AGREEMENT"), and all promissory notes, credit agreements, other loan agreements, environmental agreements, guaranties, security agreements, mortgages, collateral mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan Agreement. GUARANTEE OF THE INDEBTEDNESS. GUARANTOR HEREBY ABSOLUTELY AND UNCONDITIONALLY AGREES TO, AND BY THESE PRESENTS DOES HEREBY, GUARANTEE THE PROMPT AND PUNCTUAL PAYMENT, PERFORMANCE AND SATISFACTION OF ANY AND ALL OF THE INDEBTEDNESS IN FAVOR OF LENDER. CONTINUING GUARANTY. THIS IS A CONTINUING GUARANTY AGREEMENT UNDER WHICH GUARANTOR AGREES TO GUARANTEE PAYMENT OF THE INDEBTEDNESS IN FAVOR OF LENDER ON A CONTINUING BASIS. Guarantor's obligations and liability under this Agreement shall be open and continuous in effect. Guarantor intends to and does hereby guarantee at all times the prompt and punctual payment, performance and satisfaction of all of the Indebtedness in favor of Lender. Accordingly, any payments made on the Indebtedness will not discharge or diminish the obligations and liability of Guarantor under this Agreement for any remaining and succeeding Indebtedness of Borrower in favor of Lender. JOINT, SEVERAL AND SOLIDARY LIABILITY. Guarantor's obligations and liability under this Agreement shall be on a "solidary" or "joint and several" basis along with Borrower to the same degree and extent as if Guarantor had been and/or will be a co-borrower, co-principal obligor and/or co-maker of the Indebtedness. In the event that there is more than one Guarantor under this Agreement, or in the event that there are other guarantors, endorsers or sureties of all or any portion of the Indebtedness, Guarantor's obligations and liability hereunder shall further be on a "solidary" or "joint and several" basis along with such other guarantors, endorsers and/or sureties. DURATION OF GUARANTY. This Agreement and Guarantor's obligations and liability hereunder shall remain in full force and effect until such time as this Agreement may be canceled or otherwise terminated by Lender under a written cancellation instrument in favor of Guarantor (subject to the automatic reinstatement provisions hereinbelow). It is anticipated that fluctuations may occur in the aggregate amount of the Indebtedness guaranteed under this Agreement and it is specifically acknowledged and agreed to by Guarantor that reductions in the amount of the Indebtedness, even to zero ($0.00) dollars, prior to Lender's written cancellation of this Agreement, shall not constitute or give rise to a termination of this Agreement. At the request of Guarantor, Lender agrees to deliver a written cancellation instrument to Guarantor (which shall be subject to the automatic reinstatement provisions hereinbelow) after the Indebtedness has been fully repaid and all obligations of Lender to Borrower, and of Borrower to Lender under the Related Documents, have been fully performed or otherwise terminated. CANCELLATION OF AGREEMENT; EFFECT. Unless otherwise indicated under such a written cancellation instrument, Lender's agreement to terminate or otherwise cancel this Agreement shall affect only, and shall be expressly limited to, Guarantor's continuing obligations and liability to guarantee the Indebtedness incurred, originated and/or extended (without prior commitment) after the date of such a written cancellation instrument; with Guarantor remaining fully obligated and liable under this Agreement for any and all of the Indebtedness incurred, originated, extended, or committed to prior to the date of such a written cancellation instrument. Nothing under this Agreement or under any other agreement or understanding by and between Guarantor and Lender, shall in any way obligate, or be construed to obligate, Lender to agree to the subsequent termination or cancellation of Guarantor's obligations and liability hereunder; it being fully understood and agreed to by Guarantor that Lender has and intends to continue to rely on Guarantor's assets, income and financial resources in extending credit and other Indebtedness to and in favor of Borrower, and that to release Guarantor from Guarantor's continuing obligations and liabilities under this Agreement would so prejudice Lender that Lender may, within its sole and uncontrolled discretion and judgment, refuse to release Guarantor from any of its continuing 2 09-11-1996 COMMERCIAL GUARANTY PAGE 2 LOAN NO. (CONTINUED) =============================================================================== obligations and liability under this Agreement for any reason whatsoever as long as any of the Indebtedness remains unpaid and outstanding, or otherwise. DEFAULT. Should any Event of Default occur, Guarantor unconditionally and absolutely agrees to pay Lender the then unpaid amount of the Indebtedness, in principal, interest, costs, expenses, attorneys' fees and other fees and charges. Such payment or payments shall be made at Lender's offices indicated above, immediately following demand by Lender. GUARANTOR'S WAIVERS. Guarantor hereby waives: (a) Notice of Lender's acceptance of this Agreement. (b) Presentment for payment of the Indebtedness, notice of dishonor and of nonpayment, notice of intention to accelerate, notice of acceleration, protest and notice of protest, collection or institution of any suit or other action by Lender in collection thereof, including any notice of default in payment thereof, or other notice to, or demand for payment thereof, on any party. (c) Any right to require Lender to notify Guarantor of any nonpayment relating to any collateral directly or indirectly securing the Indebtedness, or notice of any action or nonaction on the part of Borrower, Lender, or any other guarantor, surety or endorser of the Indebtedness, or notice of the creation of any new or additional Indebtedness subject to this Agreement (d) Any rights to demand or require collateral security from the Borrower or any other person as provided under applicable Louisiana law or otherwise. (e) Any right to require Lender to notify Guarantor of the terms, time and place of any public or private sale of any collateral directly or indirectly securing the Indebtedness. (f) Any "one action" or "anti-deficiency" law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor, before or after Lender's commencement or completion of any foreclosure action, or any action in lieu of foreclosure. (g) Any election of remedies by Lender that may destroy or impair Guarantor's subrogation rights or Guarantor's right to proceed for reimbursement against Borrower or any other guarantor, surety or endorser of the Indebtedness, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness. (h) Any disability or other defense of Borrower, or any other guarantor, surety or endorser, or any other person, or by reason of the cessation from any cause whatsoever, other than payment in full of the Indebtedness. (i) Any statute of limitations or prescriptive period, if at the time an action or suit brought by Lender against Guarantor is commenced, there is any outstanding Indebtedness of Borrower to Lender which is barred by any applicable statute of limitations or prescriptive period. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor's full knowledge of its significance and consequences, and that, under the circumstances, such waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law. GUARANTOR'S SUBORDINATION OF RIGHTS. In the event that Guarantor should for any reason (a) advance or lend monies to Borrower, whether or not such funds are used by Borrower to make payment(s) under the Indebtedness, and/or (b) make any payment(s) to Lender or others for and on behalf of Borrower under the Indebtedness, and/or (c) make any payment to Lender in total or partial satisfaction of Guarantor's obligations and liabilities under this Agreement, and/or (d) if any of Guarantor's property is used to pay or satisfy any of the Indebtedness, Guarantor hereby agrees that any and all rights that Guarantor may have or acquire to collect from or to be reimbursed by Borrower (or from or by any other guarantor, endorser or surety of the Indebtedness), whether Guarantor's rights of collection or reimbursement arise by way of subrogation to the rights of Lender or otherwise, shall in all respects, whether or not Borrower is presently or subsequently becomes insolvent, be subordinate, inferior and junior to the rights of Lender to collect and enforce payment, performance and satisfaction of Borrower's then remaining Indebtedness, until such time as the Indebtedness is fully paid and satisfied. In the event of Borrower's insolvency or consequent liquidation of Borrower's assets, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to Borrower's then remaining Indebtedness. Guarantor hereby assigns to Lender all claims which it may have or acquire against Borrower or any assignee or trustee of Borrower in bankruptcy; provided that, such assignment shall be effective only for the purpose of assuring to Lender full payment of the Indebtedness guaranteed under this Agreement. GUARANTOR'S RECEIPT OF PAYMENTS. If Guarantor should for any reason whatsoever receive, after any Event of Default occurs, any payment(s) from Borrower (or any other guarantor, surety or endorser of the Indebtedness) that Borrower (or such a third party) may owe to Guarantor for any reason, Guarantor agrees to accept such payment(s) in trust for and on behalf of Lender, advising Borrower (or the third party payee) of such fact. Guarantor further unconditionally agrees to immediately deliver such funds to Lender, with such funds being held by Guarantor over any interim period, in trust for Lender. In the event that Guarantor should for any reason whatsoever receive any such funds from Borrower (or any third party), and Guarantor should deposit such funds in one or more of Guarantor's deposit accounts, no matter where located, Lender shall have the right to attach any and all of Guarantor's deposit accounts in which such funds were deposited, whether or not such funds were commingled with other monies of Guarantor, and whether or not such funds then remain on deposit in such an account or accounts. To this end and to secure Guarantor's obligations under this Agreement, Guarantor collaterally assigns and pledges to Lender, and grants to Lender a continuing security interest in, any and all of Guarantor's present and future rights, title and interest in and to all monies that Guarantor may now and/or in the future maintain on deposit with banks, savings and loan associations and other entities (other than tax deferred accounts), in which Guarantor may at any time deposit any such funds that may be received from Borrower (or any other guarantor, endorser or surety of the Indebtedness) in favor of Lender. DEPOSIT ACCOUNTS. As collateral security for repayment of Guarantor's obligations hereunder and under any additional guaranties previously granted or to be granted by Guarantor in the future, and additionally as collateral security for any present and future indebtedness of Guarantor in favor of Lender, Guarantor is granting Lender a continuing security interest in any and all funds that Guarantor may now and in the future have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Guarantor is an account holder (with the exception of IRA, pension, and other tax-deferred deposits). Guarantor further agrees that, after any Event of Default occurs, Lender may at any time apply any funds that Guarantor may have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Guarantor is an account holder (with the exception of IRA, pension, and other tax-deferred deposits) against the unpaid balance of any and all other present and future obligations and indebtedness of Guarantor to Lender, in principal, interest, fees, costs, expenses, and attorneys' fees. ADDITIONAL COVENANTS. Guarantor agrees that Lender may, at its sole option, at any time, and from time to time, without the consent of or notice to Guarantor, or any of them, or to any other party, and without incurring any responsibility to Guarantor or to any other party, and without impairing or releasing any of Guarantor's obligations or liabilities under this Agreement: (a) Make additional secured and/or unsecured loans to Borrower. (b) Discharge, release or agree not to sue any party (including, but not limited to, Borrower or any other guarantor, surety, or endorser of the Indebtedness), who is or may be liable to Lender for any of the Indebtedness. (c) Release, surrender, or abandon, in any manner and in any order, any collateral directly or indirectly securing repayment of any of the Indebtedness. (d) Sell, lease, transfer, or otherwise deal with, in any manner and in any order, any collateral directly or indirectly securing repayment of any of the Indebtedness, after an Event of Default occurs. (e) Alter, renew, extend, accelerate, or otherwise change the manner, place, terms and/or times of payment or other terms of the Indebtedness, or any part thereof, including any increase or decrease in the rate or rates of interest on any of the Indebtedness. 3 09-11-1996 COMMERCIAL GUARANTY PAGE 3 LOAN NO. (CONTINUED) =============================================================================== (f) Settle or compromise any of the Indebtedness. (g) Subordinate and/or agree to subordinate the payment of all or any part of the Indebtedness, or Lender's security rights in any collateral directly or indirectly securing any such Indebtedness, to the payment and/or security rights of any other present and/or future creditors of Borrower. (h) Apply any payments and/or proceeds to any of the Indebtedness in such priority or with such preferences as Lender may determine in its sole discretion, regardless of which of the Indebtedness then remains unpaid. (i) Take or accept any other collateral security or guaranty for any or all of the Indebtedness. (j) Enter into, deliver, modify, amend, or waive compliance with, any instrument or arrangement evidencing, securing or otherwise affecting, all or any part of the Indebtedness. NO IMPAIRMENT OF GUARANTOR'S OBLIGATIONS. No course of dealing between Lender and Borrower (or any other guarantor, surety or endorser of the Indebtedness), nor any failure or delay on the part of Lender to exercise any of Lender's rights and remedies under this Agreement or any other agreement or agreements by and between Lender and Borrower (or any other guarantor, surety or endorser), shall have the effect of impairing or releasing Guarantor's obligations and liabilities to Lender, or of waiving any of Lender's rights and remedies under this Agreement or otherwise. Any partial exercise of any rights and remedies granted to Lender shall furthermore not constitute a waiver of any of Lender's other rights and remedies; it being Guarantor's intent and agreement that Lender's rights and remedies shall be cumulative in nature. Guarantor further agrees that any waiver or forbearance on the part of Lender to pursue Lender's available rights and remedies shall be binding upon Lender only to the extent that Lender specifically agrees to such waiver or forbearance in writing. A waiver or forbearance on the part of Lender as to one Event of Default shall not constitute a waiver or forbearance as to any other Event of Default. NO RELEASE OF GUARANTOR. Guarantor's obligations and liabilities under this Agreement shall not be released, impaired, reduced, or otherwise affected by, and shall continue in full force and effect notwithstanding the occurrence of any event, including without limitation any one or more of the following events: (a) The death, insolvency, bankruptcy, arrangement, adjustment, composition, liquidation, disability, dissolution, or lack of authority (whether corporate, partnership or trust) of Borrower (or any person acting on Borrower's behalf), or of any other guarantor, surety or endorser of the Indebtedness. (b) Any payment by Borrower, or any other party, to Lender that is held to constitute a preferential transfer or a fraudulent conveyance under any applicable law, or any such amounts or payment which, for any reason, Lender is required to refund or repay to Borrower or to any other person. (c) Any dissolution of Borrower, or any sale, lease or transfer of all or any part of Borrower's assets. (d) Any failure of Lender to notify Guarantor of the making of additional loans or other extensions of credit in reliance on this Agreement. AUTOMATIC REINSTATEMENT. This Agreement and Guarantor's obligations and liabilities hereunder shall continue to be effective, and/or shall automatically and retroactively be reinstated, if a release or discharge has occurred, or if at any time, any payment or part thereof to Lender with respect to any of the Indebtedness, is rescinded or must otherwise be restored by Lender pursuant to any insolvency, bankruptcy, reorganization, receivership, or any other debt relief granted to Borrower or to any other party to the Indebtedness or any such security therefor. In the event that Lender must rescind or restore any payment received in total or partial satisfaction of the Indebtedness, any prior release or discharge from the terms of this Agreement given to Guarantor shall be without effect, and this Agreement and Guarantor's obligations and liabilities hereunder shall automatically and retroactively be renewed and/or reinstated and shall remain in full force and effect to the same degree and extent as if such a release or discharge had never been granted. It is the intention of Lender and Guarantor that Guarantor's obligations and liabilities hereunder shall not be discharged except by Guarantor's full and complete performance and satisfaction of such obligations and liabilities; and then only to the extent of such performance. LEGAL EXISTENCE. Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Guarantor is duly qualified and in good standing as a foreign corporation in each jurisdiction where in the nature of the business transacted and the property owned by Guarantor makes such qualification necessary, except where the failure to be so qualified will not have a material adverse affect on Guarantor. Guarantor's guaranty of the Indebtedness and this Agreement does not violate Guarantor's Certificate of Incorporation or Bylaws. Guarantor has taken all corporate action necessary to authorize the execution, delivery and performance of this Agreement. REPRESENTATIONS AND WARRANTIES BY GUARANTOR. Guarantor represents and warrants that: (a) Guarantor is the parent corporation and owner of all of the authorized, issued and outstanding stock of Borrower. (b) Guarantor has the lawful power to own its properties and to engage in its business as presently conducted. (c) Guarantor's guaranty of the Indebtedness and Guarantor's execution, delivery and performance of this Agreement are not in violation of any laws and will not result in a default under any contract, agreement, or instrument to which Guarantor is a party, or by which Guarantor or its property may be bound. (d) Guarantor has agreed and consented to execute this Agreement and to guarantee the Indebtedness in favor of Lender, at Borrower's request and not at the request of Lender. (e) Guarantor will receive and/or has received a direct or indirect material benefit from the transactions contemplated herein and/or arising out of the Indebtedness. (f) This Agreement, when executed and delivered to Lender, will constitute a valid, legal and binding obligation of Guarantor, enforceable in accordance with its terms. (g) Guarantor has established adequate means of obtaining information from Borrower on a continuing basis regarding Borrower's financial condition. (h) Lender has made no representations to Guarantor as to the creditworthiness of Borrower. (i) There are no suits or proceedings pending, or to the knowledge of Guarantor, threatened against or affecting Borrower, Guarantor, or the assets of Borrower or Guarantor, before any court or by any governmental agency, other than those previously disclosed to Lender in documents filed by Borrower or Guarantor with the Securities and Exchange Commission and delivered to Lender by Borrower or Guarantor, which, if adversely determined, may have a material adverse effect on the financial condition or business of Borrower or Guarantor. AFFIRMATIVE COVENANTS. Guarantor covenants and agrees with Lender that, so long as this Agreement remains in effect, Guarantor will: CHANGES IN FINANCIAL CONDITION AND LITIGATION. PROMPTLY INFORM LENDER OF (A) all material adverse changes in the financial condition of Borrower or Guarantor, and (b) the threat of, the institution of, or any adverse determination by final judgment in, any litigation, arbitration proceeding or governmental proceeding which could reasonably be expected to involve a claim against Borrower or Guarantor for more than $100,000.00. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Guarantor's books and records at all reasonable times. FINANCIAL REPORTS. Prepare all annual financial statements and reports required to be provided under this Agreement in accordance with generally accepted accounting principles, applied on a consistent basis and prepare all other financial statements and reports required to be provided under this Agreement in accordance with generally accepted accounting principles (with the exception of year-end adjustments and footnoting), applied on a consistent basis, and each statement and report shall be certified as being true and correct, in all material respects, to the best knowledge and belief, by the chief financial officer of Guarantor or other officer or person acceptable to Lender. 4 09-11-1996 COMMERCIAL GUARANTY PAGE 4 LOAN NO. (CONTINUED) =============================================================================== ANNUAL FINANCIAL STATEMENTS. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, fiscal year-end financial statements (including consolidated balance sheet, income statement and statement of cash flows) for Guarantor, prepared in the form of consolidated statements for Guarantor and all of its subsidiaries, including Borrower, audited by a certified public accountant satisfactory to Lender and accompanied by the unqualified opinion of the certified public accountant. The certified public accounting firm of BDO Siedman shall be qualified as a certified public accountant satisfactory to Lender unless and until Lender notifies Guarantor to the contrary. MONTHLY FINANCIAL STATEMENTS. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than ten (10) Business Days after the end of each calendar month, month-end financial statements (including balance sheet and income statement) for Guarantor, prepared in the form of consolidated statements for Guarantor and all of its subsidiaries, including Borrower, for the prior month, prepared and certified as correct, in all material respects, to the best knowledge and belief, by the chief financial officer of Guarantor or other officer or person acceptable to Lender. TAX RETURNS. Upon request of Lender, furnish Lender with copies of the most current federal tax returns filed by Guarantor, with all schedules and supporting documentation. PUBLIC DOCUMENTS. Without demand or request by Lender, within thirty (30) days of the filing of each, furnish Lender with copies of the 10-K, 10-Q, and each other document filed by Guarantor with the Securities and Exchange Commission. ADDITIONAL INFORMATION. Furnish such additional information, statements and reports with respect to the financial condition and business operations of Guarantor as Lender may reasonably request from time to time. GUARANTOR INFORMATION. Guarantor agrees to keep adequately informed of any facts, events or circumstances which might in any way affect Guarantor's risks under this Agreement. Guarantor further agrees that Lender shall have no obligation to disclose to Guarantor any information or material relating to Borrower or the Indebtedness. NEGATIVE COVENANTS. Guarantor covenants and agrees with Lender that as long as this Agreement remains in effect Guarantor shall not, without the prior written consent of Lender: DIVIDENDS. Pay any dividends on Guarantor's stock (other than dividends payable in its stock) unless (a) Guarantor's Adjusted Net Worth (as defined in the FINANCIAL COVENANTS section below) exceeds $22,500,000.00, and (b) the dividend payment will not reduce Guarantor's Adjusted Net Worth to amount equal to or less than $22,500,000.00. REDEMPTION OF SHARES. Redeem, retire or repurchase any shares of its capital stock or other securities if such redemption, retirement or repurchase would cause Guarantor to be out of compliance with any of the Financial Covenants provided for in this Agreement. CONTINUITY OF OPERATIONS. (a) Engage in any business activities other than those related to financial services, (b) cease operations, liquidate, or dissolve, (c) merge with any other entity if the members of the board of directors of Guarantor immediately prior to the merger do not immediately after the merger constitute a majority of (i) the members of the board of directors of Guarantor if it survives the merger, or (ii) the board of directors of the surviving company if Guarantor does not survive the merger, or (d) sell all or substantially all of Guarantor's assets. FINANCIAL COVENANTS. Guarantor covenants and agrees with Lender that as long as this Agreement remains in effect Guarantor shall comply with the following financial covenants: DEFINITIONS. For purposes of testing compliance with these Financial Covenants the following terms shall have the following meanings. Except as otherwise provided by these defined terms, all computations made to determine compliance with these Financial Covenants shall be made on a consolidated basis for Guarantor and all of its subsidiaries, in accordance with generally accepted accounting principles, applied on a consistent basis, and certified as true and correct, in all material respects, to the best knowledge and belief, by the chief financial officer of Guarantor or other officer or person acceptable to Lender. ADJUSTED NET WORTH. The term "Adjusted Net Worth" shall mean the Stated Net Worth of Guarantor and its subsidiaries, on a consolidated basis, plus Subordinated Debt, less Intangibles, and less amounts (a) due from any shareholder, director, officer, employee or agent of Guarantor or of any subsidiary or affiliate of Guarantor, or (b) due from any person or entity (other than a subsidiary) which is affiliated with, or related to, Guarantor or any of its subsidiaries, or any of the shareholders, officers, or directors of Guarantor or any of its subsidiaries. DEBT. The term "Debt" shall mean all liabilities of Guarantor and its subsidiaries, on a consolidated basis, INCLUDING SUBORDINATED DEBT. INTANGIBLES. The term "Intangibles" shall mean all of the intangible assets of Guarantor and its subsidiaries, on a consolidated basis, including goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible expenses, but excluding leaseholds and leasehold improvements. SUBORDINATED DEBT. The term "Subordinated Debt" shall mean indebtedness and liabilities of Guarantor and its subsidiaries which have been subordinated by written agreement to the Indebtedness, and to the indebtedness of any Guarantor to Lender, in form and substance acceptable to Lender. STATED NET WORTH. The term "Stated Net Worth" shall mean the total assets of Guarantor and its subsidiaries, on a consolidated basis, less total Debt. MINIMUM ADJUSTED NET WORTH. Guarantor shall maintain an Adjusted Net Worth of no less than $20,000,000.00. MAXIMUM LEVERAGE POSITION. Guarantor shall maintain a leverage position of no more than 5.00 to 1.00, where leverage position is the result of the following formula: Debt - Subordinated Debt ------------------------------------ Stated Net Worth + Subordinated Debt TESTING FREQUENCY. Compliance with Minimum Adjusted Net Worth and Maximum Leverage Position requirements shall be tested quarterly (based on the fiscal year of Guarantor) based on the then most recent financial statements of Guarantor and its subsidiaries, on a consolidated basis. TRANSFER OF INDEBTEDNESS. This Agreement is for the benefit of Lender and for such other person or persons as may from time to time become or be the holders of all or any part of the Indebtedness. This Agreement shall be transferrable and negotiable with the same force and 5 09-11-1996 COMMERCIAL GUARANTY PAGE 5 LOAN NO. (CONTINUED) =============================================================================== effect and to the same extent as the Indebtedness may be transferrable; it being understood and agreed to by Guarantor that, upon any transfer or assignment of all or any part of the Indebtedness, the holder of such Indebtedness shall have all of the rights and remedies granted to Lender under this Agreement. Guarantor further agrees that, upon any transfer of all or any portion of the Indebtedness, Lender may transfer and deliver any and all collateral securing repayment of such Indebtedness (including, but not limited to, any collateral provided by Guarantor) to the transferee of such Indebtedness, and such collateral shall secure any and all of the Indebtedness in favor of such a transferee. Guarantor additionally agrees that, after any such transfer or assignment has taken place, Lender shall be fully discharged from any and all liability and responsibility to Borrower and Guarantor with respect to such collateral, and the transferee thereafter shall be vested with all the powers and rights with respect to such collateral, except for gross negligence or willful misconduct. CONSENT TO PARTICIPATION. Guarantor recognizes and agrees that Lender may, from time to time, one or more times, transfer all or any part of the Indebtedness through sales of participation interests in such Indebtedness to one or more third party lenders. Lender agrees to notify Guarantor of any sale or transfer of (a) the Indebtedness in its entirety, and (b) any assignment of the "lead lender" position if participation interests in the Indebtedness are sold or transferred. Guarantor specifically agrees and consents to all such transfers and assignments, and waives any and all other notices of sale of participation interests, as well as all notices of any repurchase of participation interests. Guarantor additionally agrees that the purchaser of a participation interest in the Indebtedness will be considered as the absolute owner of a percentage interest of such Indebtedness and that such a purchaser will have all of the rights granted under any participation agreement governing the sale of such a participation interest. Guarantor waives any rights of offset that Guarantor may have against Lender and/or any purchaser of such a participation interest, and Guarantor unconditionally agrees that either Lender or such a purchaser may enforce Guarantor's obligations and liabilities under this Agreement, irrespective of the failure or insolvency of Lender or any such purchaser. NOTICES. To give Guarantor any notice required under this Agreement, Lender may hand deliver or mail such notice to Guarantor at the address specified for Guarantor in this Agreement, or at any other address that Guarantor may have given to Lender by written notice as provided in this paragraph. To give Lender any notice under this Agreement, Guarantor may hand deliver or mail such notice to Lender at the address specified in this Agreement, or at any other address that Lender may have given to Guarantor by written notice as provided in this paragraph. All notices required or permitted under this Agreement must be in writing and will be considered as given on the day it is delivered by hand or deposited in the U. S. Mail in the form and to the address specified in this Agreement. ADDITIONAL GUARANTIES. Guarantor recognizes and agrees that Guarantor may have previously granted, and may in the future grant, one or more additional guaranties of the Indebtedness in favor of Lender. Should this occur, the execution of this Agreement and any additional guaranties on the part of Guarantor will not be construed as a cancellation of this Agreement or any of Guarantor's additional guaranties; it being Guarantor's full intent and agreement that all such guaranties of the Indebtedness in favor of Lender shall remain in full force and effect and shall be cumulative in nature and effect. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Guaranty: AMENDMENT. No amendment, modification, consent or waiver of any provision of this Agreement, and no consent to any departure by Guarantor therefrom, shall be effective unless the same shall be in writing signed by a duly authorized officer of Lender, and then shall be effective only as to the specific instance and for the specific purpose for which given. CAPTION HEADINGS. Caption headings of the sections of this Agreement are for convenience purposes only and are not to be used to interpret or to define their provisions. In this Agreement, whenever the context so requires, the singular includes the plural and the plural also includes the singular. ENTIRE AGREEMENT. This Agreement embodies the final, entire agreement of the parties hereto and supersede any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES TO THIS AGREEMENT. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the substantive laws of the State of Louisiana. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable. This Agreement shall be construed and enforceable as if the illegal, invalid or unenforceable provision had never comprised a part of it, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Agreement, a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and legal, valid and enforceable. SUCCESSORS AND ASSIGNS BOUND. Guarantor's obligations and liabilities under this Agreement shall be binding upon Guarantor's successors, heirs, legatees, devisees, administrators, executors and assigns. WAIVE JURY. Guarantor and Lender hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either against the other. GUARANTOR AND LENDER ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT AND AGREES TO ITS TERMS. IN ADDITION, GUARANTOR UNDERSTANDS THAT THIS AGREEMENT IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS AGREEMENT TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED. NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS AGREEMENT EFFECTIVE. THIS AGREEMENT IS DATED SEPTEMBER 11, 1996. GUARANTOR: SEARCH CAPITAL GROUP, INC. By: /s/ ROBERT D. IDZI ------------------------------------------------ Robert D. Idzi, Senior Executive Vice President LENDER: HIBERNIA NATIONAL BANK By: /s/ NORM WINTERS ------------------------------------------------ Authorized Officer EX-4.10 5 PROMISSORY NOTE DATED SEPTEMBER 11, 1996 1 EXHIBIT 4.10 PROMISSORY NOTE
- ----------------------------------------------------------------------------------------------------------------------------- PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $25,000,000.00 09-11-1996 09-11-1999 536 - -----------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- BORROWER: SEARCH FUNDING II, INC. LENDER: HIBERNIA NATIONAL BANK (TIN: 75-2554995) (TIN: 72-0210640) 700 NORTH PEARL STREET 313 CARONDELET STREET SUITE 400, L.B. 401 POST OFFICE BOX 61540 DALLAS, TEXAS 75201-7490 NEW ORLEANS, LOUISIANA 70161 ================================================================================ PRINCIPAL AMOUNT: $25,000,000.00 INITIAL RATE: 9.250% DATE OF NOTE: SEPTEMBER 11, 1996
PROMISE TO PAY. SEARCH FUNDING II, INC. ("BORROWER") promises to pay to the order of HIBERNIA NATIONAL BANK ("LENDER"), in lawful money of the United States of America the sum of TWENTY-FIVE MILLION AND NO/100 DOLLARS (U.S. $25,000,000.00) or such other or lesser amounts as may be reflected from time to time on the books and records of Lender as evidencing the aggregate unpaid principal balance of loan advances made to Borrower on a revolving line of credit basis as provided below, together with simple interest assessed on a variable rate basis at the rate per annum equal to 1.000 percentage point over the Index provided below (exclusive of any Additional Interest that may be due under this Note), as the Index under this Note may be adjusted from time to time, one or more times, with interest being assessed on the unpaid principal balance of this Note as outstanding from time to time, commencing on SEPTEMBER 11, 1996, and continuing until this Note is paid in full. LINE OF CREDIT. This Note evidences a revolving line of credit "master note". Advances under this Note may be requested orally by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower, at Lender's address shown above, written notice of revocation of their authority: GEORGE C. EVANS, JAMES F. LEARY, ANTHONY J. DELLAVECHIA, ROBERT D. IDZI, ELLIS A. REGENBOGEN, and CAROLYN J. MALONE. REQUESTS FOR ADVANCES WILL BE MADE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN THE LOAN AGREEMENT BETWEEN BORROWER AND LENDER DATED SEPTEMBER 11, 1996, AS IT MAY BE AMENDED OR MODIFIED FROM TIME TO TIME ("THE LOAN AGREEMENT"). Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's deposit accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (i) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note, (ii) Borrower or any guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt, (iii) there occurs a material adverse change in Borrower's financial condition or in the financial condition of any guarantor, or in the total value of the collateral securing repayment of this Note, or (iv) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guaranty of this Note or any other loan with Lender. PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON SEPTEMBER 11, 1999. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING OCTOBER 1, 1996, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE FIRST DAY OF EACH MONTH AFTER THAT UNTIL THIS NOTE IS PAID IN FULL. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is THE CHASE MANHATTAN BANK PRIME COMMERCIAL LENDING RATE (the "INDEX"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INDEX CURRENTLY IS 8.250% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 9.250% PER ANNUM. OTHER FEES AND CHARGES. In addition to the principal, interest and other fees and charges provided for in this Note, Borrower agrees to also pay all other amounts, fees and charges provided for in the Loan Agreement, including, without limitation, all overlines, overadvances, interest on overlines and overadvances, unused facility fees, facility charges and expenses, and commitment cancellation charges provided for in the Loan Agreement. PREPAYMENT. Borrower may prepay this Note in full at any time by paying the then unpaid principal balance of this Note, plus accrued simple interest and any unpaid charges through date of prepayment. Prepayment of the amounts due under this Note shall not constitute termination of any agreement between Borrower and Lender, including, without limitation, the Loan Agreement. Specifically, Borrower acknowledges and agrees that Lender may be entitled to a commitment cancellation charge provided for in the Loan Agreement. If Borrower prepays this Note in full, or if Lender accelerates payment, Borrower understands that, unless otherwise required by law, any prepaid fees or charges will not be subject to rebate and will be earned by Lender at the time this Note is signed. DEFAULT. The following actions and/or inactions shall constitute default events under this Note: DEFAULT UNDER THIS NOTE. Should Borrower default in the payment of any amounts due and payable under this Note. DEFAULT UNDER LOAN AGREEMENT. Should any Event of Default occur under the Loan Agreement (as the term "Event of Default" is defined in the Loan Agreement). LENDER'S RIGHTS UPON DEFAULT. Should any one or more default events occur or exist under this Note as provided above, Lender shall have the right, at its sole option, to declare formally this Note to be in default and to accelerate the maturity and insist upon immediate payment in full of the unpaid principal balance then outstanding under this Note, plus accrued interest, together with reasonable attorneys' fees, costs, expenses and other fees and charges as provided herein. Lender shall have the further right, again at its sole option, to declare formal default and to accelerate the maturity and to insist upon immediate payment in full of each and every other loan, extension of credit, debt, liability and/or obligation of every nature and kind that Borrower may then owe to Lender, whether direct or indirect or by way of assignment, and whether absolute or contingent, liquidated or unliquidated, voluntary or involuntary, determined or undetermined, secured or unsecured, whether Borrower is obligated alone or with others on a "solidary" or "joint and several" basis, as a principal obligor or otherwise, all without further notice or demand, unless Lender shall otherwise elect. 2 09-11-1996 PROMISSORY NOTE Page 2 Loan No. (Continued) ================================================================================ ATTORNEYS' FEES. If Lender refers this Note to an attorney for collection, or files suit against Borrower to collect this Note, or if Borrower files for bankruptcy or other relief from creditors, Borrower agrees to pay Lender's reasonable attorneys' fees. DEPOSIT ACCOUNTS. As collateral security for repayment of this Note and all renewals and extensions, as well as to secure any and all other loans, notes, indebtedness and obligations that Borrower may now and in the future owe to Lender or incur in Lender's favor, whether direct or indirect, absolute or contingent, due or to become due, of any nature and kind whatsoever (with the exception of any indebtedness under a consumer credit card account), Borrower is granting Lender a continuing security interest in any and all funds that Borrower may now and in the future have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Borrower is an account holder (with the exception of IRA, pension, and other tax-deferred deposits). Borrower further agrees that Lender may, at any time after a default event occurs, apply any funds that Borrower may have on deposit with Lender or in certificates of deposit or other deposit accounts as to which Borrower is an account holder (with the exception of IRA, pension, and other tax-deferred deposits) against the unpaid balance of this Note and any and all other present and future indebtedness and obligations that Borrower may then owe to Lender, in principal, interest, fees, costs, expenses, and attorneys' fees. GOVERNING LAW. Borrower agrees that this Note and the loan evidenced hereby shall be governed under the laws of the State of Louisiana. Specifically, this business or commercial Note is subject to La.-R.S. 9:3509, et seq. INTEREST AFTER DEFAULT. If Lender declares this Note to be in default, Lender has the right prospectively to adjust and fix the simple interest rate under this Note, until this Note is paid in full, to 3.000 percentage points in excess of the interest rate under this Note at the time of default. MAXIMUM INTEREST RATE. Anything to the contrary contained herein notwithstanding, no provision of this Note shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable law ("THE MAXIMUM RATE"). If interest in excess of the Maximum Rate is provided for in this Note or otherwise in connection with the loan transaction represented by this Note, or is adjudicated to be so provided, the provisions of this paragraph shall govern and prevail and neither Borrower, nor any guarantor, shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of Advances made under this Agreement. In the event Lender ever receives, collects or applies, as interest due and payable under this Note, any sum in excess of the Maximum Rate, the amount of the excess shall be applied as a payment and reduction of the principal of the indebtedness represented by this Note; and if the principal of the indebtedness represented by this Note has been fully paid, any remaining excess shall forthwith be paid to Borrower. In determining whether or not interest paid or payable exceeds the Maximum Rate, Borrower and Lender shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee or premium rather than as interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate and spread, in equal or unequal parts, the total amount of interest throughout the entire contemplated term of the indebtedness represented by this Note so that interest for the entire term does not exceed the Maximum Rate. WAIVERS. Borrower and each guarantor of this Note hereby waive demand, presentment for payment, protest, notice of protest, notice of nonpayment, notice of acceleration and notice of intent to accelerate, and all pleas of division and discussion, and severally agree that their obligations and liabilities to Lender hereunder shall be on a "solidary" or "joint and several" basis. Borrower and each guarantor further severally agree that discharge or release of any party who is or may be liable to Lender for the indebtedness represented hereby, or the release of any collateral directly or indirectly securing repayment hereof, shall not have the effect of releasing any other party or parties, who shall remain liable to Lender, or of releasing any other collateral that is not expressly released by Lender. Borrower and each guarantor additionally agree that Lender's acceptance of payment other than in accordance with the terms of this Note, or Lender's subsequent agreement to extend or modify such repayment terms, or Lender's failure or delay in exercising any rights or remedies granted to Lender, shall likewise not have the effect of releasing Borrower or any other party or parties from their respective obligations to Lender, or of releasing any collateral that directly or indirectly secures repayment hereof. In addition, any failure or delay on the part of Lender to exercise any of the rights and remedies granted to Lender shall not have the effect of waiving any of Lender's rights and remedies. Any partial exercise of any rights and/or remedies granted to Lender shall furthermore not be construed as a waiver of any other rights and remedies; it being Borrower's intent and agreement that Lender's rights and remedies shall be cumulative in nature. Borrower and each guarantor further agree that, should any default event occur or exist under this Note, any waiver or forbearance on the part of Lender to pursue the rights and remedies available to Lender, shall be binding upon Lender only to the extent that Lender specifically agrees to any such waiver or forbearance in writing. A waiver or forbearance on the part of Lender as to one default event shall not be construed as a waiver or forbearance as to any other default. SUCCESSORS AND ASSIGNS LIABLE. Borrower's and each guarantor's obligations and agreements under this Note shall be binding upon Borrower's and each guarantor's respective successors, heirs, legatees, devisees, administrators, executors and assigns. The rights and remedies granted to Lender under this Note shall inure to the benefit of Lender's successors and assigns, as well as to any subsequent holder or holders of this Note. CAPTION HEADINGS. Caption headings of the sections of this Note are for convenience purposes only and are not to be used to interpret or to define their provisions. In this Note, whenever the context so requires, the singular includes the plural and the plural also includes the singular. SEVERABILITY. If any provision of this Note is held to be invalid, illegal or unenforceable by any court, that provision shall be deleted from this Note and the balance of this Note shall be interpreted as if the deleted provision never existed. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. BORROWER: SEARCH FUNDING II, INC. By: /s/ Robert D. Idzi ---------------------------------------------------- Robert D. Idzi, Senior Executive Vice President EX-5.1 6 OPINION OF BRACEWELL & PATTERSON, L.L.P. 1 EXHIBIT 5.1 [BRACEWELL & PATTERSON, L.L.P. LETTERHEAD] May 8, 1997 Search Capital Group, Inc. 700 North Pearl, Suite 400 North Tower, Lock Box 401 Dallas, Texas 75201 Gentlemen: We refer to the Form S-4 Registration Statement of Search Capital Group, Inc., a Texas corporation (the "Company"), filed with the Securities and Exchange Commission, and the Joint Proxy Statement/Prospectus contained therein (the "Registration Statement"), for the purpose of registering under the Securities Act of 1933, as amended, up to 4,797,800 shares of the Company's Common Stock, $0.01 par value per share (the "Common Shares"). The Common Shares are to be issued in connection with the merger (the "Merger") of Search Capital Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of the Company ("Merger Sub"), with and into MS Financial, Inc., a Delaware corporation ("MSF"), pursuant to the Agreement and Plan of Merger, dated as of February 7, 1997 (the "Merger Agreement"), among the Company, MSF, and Merger Sub. We have examined copies, certified or otherwise identified to our satisfaction, of the Company's Restated Certificate of Incorporation and Bylaws, including any and all amendments thereto, and minutes of applicable meetings of the stockholders and the board of directors of the Company, or written consents in lieu of such meetings, together with such other corporate records and certificates of public officials and of officers of the Company as we have deemed relevant for the purposes of this opinion. Based upon the foregoing, and having regard to the legal considerations that we deem relevant, it is our opinion that: 1. All necessary corporate actions have been taken to authorize the issuance of the Common Shares in connection with the Merger. 2. Assuming that all relevant corporate actions heretofore taken by the Company remain in full force and effect, if and when the Common Shares are issued, sold, and delivered by the Company in accordance with the terms and conditions of the Merger Agreement and as 2 Search Capital Group, Inc. May 8, 1997 Page 2 contemplated by the Registration Statement, the Common Shares will be legally issued, fully paid, and nonassessable. We hereby consent to the reference to us under the caption "Legal Matters" in the Joint Proxy Statement/Prospectus, which constitutes a part of the Registration Statement referred to above. We also consent to the inclusion in the Registration Statement of this opinion as Exhibit 5.1 thereto. Very truly yours, /s/ BRACEWELL & PATTERSON, L.L.P. Bracewell & Patterson, L.L.P. EX-8.1 7 FORM OF SECTION 368(A) TAX OPINION 1 EXHIBIT 8.1 [LETTERHEAD OF HAYNES AND BOONE, LLP] May 21, 1997 Search Capital Group, Inc. 700 North Pearl Street, Suite 400 Dallas, Texas 75201 MS Financial, Inc. 715 South Pear Orchard Road, Suite 300 Ridgeland, Mississippi 39157 Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 6.1(e) of the Agreement and Plan of Merger, dated as of February 7, 1997 (the "MERGER AGREEMENT"), whereby a wholly owned subsidiary ("MERGER SUB") of Search Capital Group, Inc. ("SEARCH") will be merged with and into MS Financial, Inc. ("MSF") and MSF will become a wholly owned subsidiary of Search (the "MERGER"). Capitalized terms used in this opinion are defined as set forth in the Merger Agreement. We have acted as special counsel to MSF in connection with the transactions contemplated by the Merger Agreement and the Registration Statement. In rendering this opinion, we have reviewed the Merger Agreement, the Stockholders Agreement, the Form S-4 Registration Statement, the MS Financial, Inc. Proxy Statement/Search Capital Group, Inc. Prospectus, and such other documents and certificates as we have considered necessary for the purposes of the opinions hereafter set forth. For purposes of rendering this opinion, we have made the following assumptions: 1. The fair market value of the Search Common Stock and other consideration received by each MSF stockholder will be approximately equal to the fair market value of the MSF Common Stock surrendered in the exchange pursuant to the Merger. 2. There is no plan or intention by the MSF Stockholders who own 5 percent or more of the MSF Common Stock, or to the best knowledge of the management of MSF, by the remaining MSF Stockholders, to sell, exchange, or otherwise dispose of that number of shares of Search Common Stock received in the Merger that 2 Search Capital Group, Inc. MS Financial, Inc. May 21, 1997 Page 2 would reduce the MSF Stockholders' ownership of Search Common Stock to a number of shares having a value, as of the date of the Merger, of less than 50 percent of the value of all of the formerly outstanding MSF Common Stock as of the same date. For purposes of this assumption, shares of MSF Common Stock exchanged for cash or other property or exchanged for cash in lieu of fractional shares of Search Common Stock will be treated as outstanding MSF Common Stock on the date of the Merger. Moreover, shares of MSF Common Stock and shares of Search Common Stock held by MSF Stockholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this assumption. 3. Following the Merger, MSF will hold at least (a) 90 percent of the fair market value of its net assets, (b) 70 percent of the fair market value of its gross assets, (c) 90 percent of the fair market value of Merger Sub's net assets, and (d) 70 percent of the fair market value of Merger Sub's gross assets, each as held immediately prior to the Merger. For purposes of this assumption, amounts paid by MSF or Merger Sub to stockholders who receive cash or other property, amounts used by MSF or Merger Sub to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by MSF will be included as assets of MSF or Merger Sub, respectively, immediately prior to the Merger. 4. Prior to the Merger, Search will own stock in Merger Sub possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of Merger Sub, in accordance with Code Section 368(c)(1) ("CONTROL"). 5. MSF has no plan or intention to issue additional shares of its Common Stock that would result in Search losing Control of MSF. 6. Search has no plan or intention to reacquire any of its Common Stock issued in the Merger. 7. Search has no plan or intention to (a) liquidate MSF, (b) merge MSF with or into another corporation (c) sell or otherwise dispose of the MSF Common Stock except for transfers of 3 Search Capital Group, Inc. MS Financial, Inc. May 21, 1997 Page 3 MSF Common Stock to a corporation controlled by Search, or (d) cause MSF to sell or otherwise dispose of any of its assets or any of the assets acquired from Merger Sub, except for dispositions made in the ordinary course of business or transfers of assets to a corporation controlled by MSF. 8. Merger Sub will have no liabilities assumed by MSF, and will not transfer to MSF any assets subject to liabilities, in the Merger. 9. Following the Merger, MSF will continue its historic business as a specialized consumer finance company engaged in the purchase, securitization and servicing of installment contracts or use a significant portion of its historic business assets in a business. 10. Search, Merger Sub, MSF, and the stockholders of MSF each will pay their own expenses, if any, incurred in connection with the Merger. 11. There is no intercorporate indebtedness existing between Search and MSF or between Merger Sub and MSF that was issued, acquired, or will be settled at a discount. 12. In the Merger, shares of MSF Common Stock representing Control of MSF, as defined in Code Section 368(c)(1), will be exchanged solely for voting common stock of Search. For purposes of this assumption, no shares of MSF Common Stock have been exchanged for cash or other property originating with Search. 13. At the time of the Merger, MSF will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire Common Stock in MSF that, if exercised or converted, would affect Search's acquisition or retention of Control of MSF. 14. Search does not own, and has not owned during the past five years, any shares of MSF Common Stock. 4 Search Capital Group, Inc. MS Financial, Inc. May 21, 1997 Page 4 15. None of the parties to the Merger are investment companies as defined in Code Section 368(a)(2)(F)(iii) and (iv). 16. On the date of Merger, the fair market value of the assets of MSF will exceed the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 17. MSF is not under the jurisdiction of a court in a title 11 or similar case within the meaning of Code Section 368(a)(3)(A). In rendering this opinion, we have examined and relied upon the representations and warranties contained in the Merger Agreement, certain representations made to us both orally and in writing by officers and directors of MSF and certain representations, warranties and covenants contained in the Stockholders Agreement. Insofar as this opinion relates to other factual matters, we have relied upon representations made to us by such officers, directors and stockholders. Although nothing has come to our attention leading us to question, or giving us reasonable grounds to question, such information, we have not made any independent review or investigation of such representations or warranties and we do not have any basis for believing that the covenants will not be carried out in accordance with their terms. The opinions hereinafter expressed are qualified to the extent that the validity or enforceability of any provisions in the Merger Agreement, the Stockholders Agreement or any ancillary agreement, or of any rights granted to any person or entity pursuant to any of those instruments, may be subject to or affected by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the accuracy and completeness of all corporate records made available to us by MSF and its officers and directors. We have also assumed that the Merger will be consummated in accordance with the terms of the Merger Agreement, the Stockholders Agreement and the Form S-4 Registration Statement. This opinion is based on existing law as contained in the Code, the Treasury Regulations, administrative rulings and court decisions as of the date hereof. No assurances can be given that future legislative, administrative or judicial changes or interpretations will not 5 Search Capital Group, Inc. MS Financial, Inc. May 21, 1997 Page 5 be applied retroactively or that such changes would not adversely affect the tax consequences of the Merger. Moreover, this opinion only addresses certain federal income tax consequences set forth herein, and it does not consider any state, local or foreign tax consequences of the Merger. The issues on which we render opinions below are discussed in the "Certain Federal Income Tax Considerations" section of the Form S-4 Registration Statement for Search. Based on and subject to the foregoing, it is our opinion that the Merger should be treated as a "reorganization" under Code Sections 368(a)(1)(A) and 368(a)(2)(E) and that the following tax consequences should apply to the MSF Stockholders, Search, Merger Sub and MSF: 1. The MSF Stockholders will not recognize any gain or loss with respect to the receipt of the Search Common Stock in exchange for the MSF Common Stock pursuant to the Merger, except with respect to any cash received in lieu of fractional shares of Search Common Stock. 2. The aggregate tax basis of the Search Common Stock received by each MSF Stockholder will be the same as the aggregate tax basis of the MSF Common Stock surrendered in the Merger, decreased by the amount of any tax basis allocable to fractional shares of Search Common Stock in lieu of which cash will be paid. 3. The holding period of the Search Common Stock received by each MSF Stockholder will include the period for which the MSF Common Stock surrendered in exchange therefor was considered to be held, provided the MSF Common Stock so surrendered is held as a capital asset at the Effective Time. 4. The payment received by the stockholders of the MSF Common Stock in lieu of fractional shares of Search Common Stock will be treated as a payment in redemption of such fractional shares and, provided that the redeemed interest is held as a capital asset at the Effective Time, will result in recognition of capital gain or loss by such holders measured by the difference between the amount received and the tax basis allocable to such fractional shares. 6 Search Capital Group, Inc. MS Financial, Inc. May 21, 1997 Page 6 5. Neither Search, Merger Sub nor MSF will recognize any gain or loss as a result of the Merger. Our opinions are based upon our best interpretations of existing sources of law but such opinions have no binding effect on the IRS or any court. There can be no assurance that the IRS will not challenge the conclusions or propriety of any of counsel's opinions and no assurance can be given that counsel's interpretations will be followed if they become the subject of judicial or administrative proceedings. Future legislation or regulatory announcements could have a material and adverse impact on the tax results addressed in this opinion and could result in changes in the conclusions reached herein. Except as expressly set forth herein, no opinions are rendered as to any other matters relevant to the Merger, whether pertaining to federal income taxes or otherwise. This opinion is delivered and is effective as of two business days prior to the date the Proxy Statement is first mailed to the MSF Stockholders. Accordingly, this opinion is based on matters existing on such date. We hereby consent to the reference to our Firm and the use of our name in the Registration Statement under the captions "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS," and "LEGAL MATTERS," and to the filing of a copy of this opinion with the Securities and Exchange Commission as Exhibit 8.1 to the Registration Statement. Very truly yours, /s/ HAYNES AND BOONE, L.L.P. Haynes and Boone, L.L.P. EX-10.2 8 SEARCH-MS FINANCIAL ESCROW AGREEMENT 1 EXHIBIT 10.2 SEARCH-MS FINANCIAL ESCROW AGREEMENT This Escrow Agreement, dated as of _______________,1997 (the "Escrow Agreement"), is entered into by and among Search Capital Group, Inc., a Delaware corporation ("Search"); and the undersigned holders of shares of the common stock, $.001 par value, of MS Financial, Inc., MS Diversified Corporation, a Mississippi corporation ("MSD"), MS Financial Services, Inc., a Mississippi corporation and a wholly-owned subsidiary of MSD ("MSDSub") and Golder Thoma Cressy Rauner Fund IV, L.P. (sometimes referred to as "GTCR IV"), and U.S. Trust Company of Texas, N.A., a national bank ("Escrow Agent"). MSD, MSDSub and GTCR IV are sometimes collectively referred to as the "Stockholders". W I T N E S S E T H: WHEREAS, MS Financial, Inc. ("MS Financial"), Search and Search's wholly owned subsidiary, Search Capital Acquisition Corp. ("Newco"), have entered into an Agreement and Plan of Merger dated February 7, 1997 (as amended, the "Merger Agreement"), to effect the Merger (as defined in the Merger Agreement; capitalized terms used herein shall have the same definition as in the Merger Agreement unless otherwise specifically indicated) of Newco into MS Financial, which will result in MS Financial being controlled by Search instead of by the Stockholders, and each outstanding share of MS Financial Stock will be converted into the right to receive that number of shares of Search Common Stock, $.01 par value per share ("Search Common Stock"), specified in the Merger Agreement; and WHEREAS, Stockholders and Search have entered into a Stockholders Agreement dated February 7, 1997 (as amended, the "Stockholders Agreement"), pursuant to which Stockholders and Search agreed to enter into this Escrow Agreement; and WHEREAS, Search has agreed to issue the Search Common Stock as an integral part of the Merger to all of the stockholders of MS Financial, including but not limited to, the Stockholders; and WHEREAS, the Stockholders Agreement provides that portions of the Search Common Stock to be issued as Merger Consideration to the Stockholders are to be held in escrow pursuant to this Escrow Agreement in order to (i) guaranty payment of indemnification obligations under the Stockholders Agreement and (ii) reserve against the possibility that certain anticipated tax refunds are not received by MS Financial or the Surviving Corporation; and -1- 2 WHEREAS, Stockholders and Search desire that Escrow Agent hold the Search Common Stock in escrow, and Escrow Agent has agreed to do so, on the terms and conditions set forth in this Escrow Agreement. NOW, THEREFORE, in consideration of the foregoing recitals, which are incorporated into this Escrow Agreement as if fully set forth, and for other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Establishment of Escrow. (a)Indemnification Escrow Fund. Search hereby delivers to Escrow Agent the number of shares (the "Escrow Shares") of Merger Consideration equal to Two Million, Five Hundred Thousand Dollars ($2,500,000) worth of Search Common Stock at the Valuation Period Market Value (the "Escrow Fund") to Escrow Agent to hold in escrow on the terms and conditions set forth herein. (b)Tax Holdback Escrow. Search hereby delivers to Escrow Agent the number of shares (the "Tax Holdback Shares") of Merger Consideration equal to Two Million, Three Hundred Thousand Dollars ($2,300,000) worth of Search Common Stock at the Valuation Period Market Value (the "Tax Holdback Fund") to hold in escrow on the terms and conditions set forth herein. 2. Receipt. Escrow Agent hereby acknowledges receipt of the Escrow Fund and the Tax Holdback Fund and agrees to hold them in escrow in accordance with the terms of this Escrow Agreement. 3. Charges Against Escrow Fund. The Escrow Fund has been created pursuant to Section 12.1 of the Stockholders Agreement for the purpose of securing and providing a source for satisfying any amount to be paid in Escrow Shares by the Stockholders to Search pursuant to Section 10 of the Stockholders Agreement. In the event that, and from time to time as, Search determines that it is entitled to any of the Escrow Shares as indemnification pursuant to the aforesaid Section 10 of the Stockholders Agreement, Search shall provide a notice to the Escrow Agent, in substantially the form attached hereto as Exhibit 1, of such claim (a "Claim") against the Escrow Fund, stating the method of computation of such Claim, the number of Escrow Shares to satisfy the amount of such claim, a brief description of the facts upon which such Claim is based and a reference to the provisions of the Stockholders Agreement in respect of which such Claim shall have occurred. The Escrow Agent shall mail a copy of such -2- 3 Claim notice via registered or certified mail, return receipt requested, to the Stockholders. Unless it receives a timely Objection Notice from the Stockholders pursuant to Section 4 below, the Escrow Agent shall disburse to Search out of the Escrow Fund the number of Escrow Shares specified in the notice of the Claim. 4. Dispute of Claim Against Escrow Fund. (a)The Stockholders (or either of them) shall have the right to dispute any Claim against the Escrow Fund within the thirty (30) business day period following delivery of a copy of a Claim notice by delivering to the Escrow Agent and Search written notice in substantially the form attached hereto as Exhibit 2 (an "Objection Notice") that the Stockholders dispute the matter(s) set forth in such Claim notice either with respect to the validity, the amount, or the number of Escrow Shares of the Claim (or each). Such notice shall include the basis, with reasonable specificity, of the objection. (b)Upon timely receipt of an Objection Notice, the Escrow Agent shall reserve against the Escrow Fund 1.5 times the number of Escrow Shares stated in the Claim and place such Escrow Shares so reserved in a separate account (in effect putting a hold on any disbursement of such Escrow Shares) (such shares so reserved and placed in a separate account being called a "Dispute Fund"). The Escrow Agent shall take no action with respect to the Dispute Fund, except upon receipt of joint written instructions from Search and the Stockholders in substantially the form attached hereto as Exhibit 3 or by a final judgment or decree of any court of competent jurisdiction in accordance with Section 16.7 of the Stockholders Agreement. Upon such instructions or judgment, decree or award, the Escrow Agent shall promptly follow the instruction therein. 5. Release of Escrow Fund. The Escrow Agent shall release to the respective Stockholders the number of Escrow Shares as follows: 25% of the Escrow Fund on the first anniversary after the Effective Time; 25% eighteen months after the Effective Time; 25% twenty-four months after the Effective Time; and the remainder thirty-six months after the Effective Time; provided, that any Escrow Shares in the Dispute Fund, and 1.5 times the number of Escrow Shares specified in an unresolved Claim made less than thirty (30) days prior to the release date set forth above, will be withheld from the number of Escrow Shares to be released on any such date. 6. Tax Holdback Fund. (a)Charges Against the Tax Holdback Fund. The Tax Holdback Fund has been created pursuant to Section 12.4 of the -3- 4 Stockholders Agreement for the purpose of reserving against the possibility that MS Financial or the Surviving Corporation do not receive certain anticipated tax refunds from federal and state taxing authorities. On December 31, 1998 (unless such date is accelerated or extended by mutual agreement of the parties based on the status of such refunds), any shares of Search Common Stock remaining in the Tax Holdback Fund (i.e., after releases of any of such shares pursuant to paragraph (b) below) shall be released to Search pursuant to joint instructions signed by Search and the Stockholders. (b) Release of Tax Holdback Fund. As tax refunds in excess of $4,000,000 are received by MS Financial or the Surviving Corporation, shares of Search Common Stock held in the Tax Holdback Fund shall be released to the Stockholders from escrow on no less than a quarterly basis in proportion to such income tax refunds received, pursuant to joint instructions signed by Search and the Stockholders. 7. Certificate Legend. The certificates representing the Escrow Fund and the Tax Holdback Fund shall bear the legend required by the Stockholders Agreement until said legend is removed pursuant to the terms and conditions of the Stockholders Agreement. Thereafter, all certificates representing the Search Common Stock still constituting a part of the Escrow Fund or the Tax Holdback Fund shall bear a legend substantially as follows: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISTRIBUTED OR DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE CONDITIONS SPECIFIED IN THAT CERTAIN ESCROW AGREEMENT DATED _______________ ___, 1997, TO WHICH AGREEMENT SEARCH CAPITAL GROUP, INC ("SEARCH"), MS DIVERSIFIED CORPORATION, MS FINANCIAL SERVICES, INC. AND GOLDER, THOMA, CRESSY, RAUNER FUND IV, L.P. ARE PARTIES. A COPY OF SUCH AGREEMENT WILL BE MAILED TO THE HOLDER HEREOF WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR DIRECTED TO SEARCH AT ITS HEADQUARTERS IN DALLAS, TEXAS." 8. Fees. The Escrow Agent is charging for its services hereunder the fees set forth on Schedule A, attached hereto and incorporated herein. Search shall be solely responsible for the payment of such fees. 9. Duties. The duties of the Escrow Agent hereunder are only such as are herein specifically provided, being purely administrative in nature, and the Escrow Agent shall incur no liability whatsoever except for fraudulent conduct. Other than -4- 5 the obligations of the Escrow Agent set forth in this Escrow Agreement, the Escrow Agent shall have no other obligations, rights, or duties with reference to this Escrow Agreement. The Escrow Agent shall not be bound by any modification of this Escrow Agreement unless in writing and signed by all of the parties hereto. 10. Uncertainty or Conflict: In the event that the Escrow Agent shall be uncertain as to its duties or obligations hereunder or shall receive instructions from any party hereto with respect to any part or all of the Escrow Fund or the Tax Holdback Fund, which are in conflict with any of the provisions of this Escrow Agreement, the Escrow Agent shall be entitled to refrain from taking any action other than to keep safely the Escrow Fund and the Tax Holdback Fund and any other property so received by it until it shall be directed by a court as provided in the following Section. 11. Litigation: If (i) the Escrow Agent becomes involved in or is threatened with litigation for any reason resulting from its capacity as Escrow Agent, and/or (ii) the Escrow Agent is uncertain as to its duties or obligations hereunder, the Escrow Agent is hereby authorized to deposit with the U.S. district court in St. Louis, Missouri the Escrow Fund and/or the Tax Holdback Fund and notify Stockholders and Search of the same. Thereupon, the Escrow Agent shall stand fully relieved and discharged of any further duties hereunder in respect of such action and the matters giving rise thereto except as may be instructed by said court. In the event Escrow Agent is a party to any litigation, Stockholders and Search severally agree to reimburse Escrow Agent on demand for any reasonable out-of-pocket expenses incurred by Escrow Agent in connection with such litigation. 12. Escrow Agent Replacement. If Escrow Agent resigns as Escrow Agent, the parties shall have thirty (30) days to select a new Escrow Agent. If the parties fail to select a new Escrow Agent within said thirty (30) day period, Escrow Agent shall appoint a successor Escrow Agent. Any successor Escrow Agent shall agree to be bound by all of the terms and conditions of this Escrow Agreement. 13. Voting Rights. The respective Stockholders will, subject to the restrictions set forth in the Stockholders Agreement, retain the right to vote the Escrow Shares and the Tax Holdback Shares. 14. Termination. Upon disbursement of the entire Escrow Fund and the Tax Holdback Fund, this Escrow Agreement shall terminate. -5- 6 15. Notices. Any notice, request, claim, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given if delivered personally or sent by telefax (with confirmation of receipt), by registered or certified mail, postage prepaid, or by recognized courier service, as follows: If to Search or Newco to: Search Capital Group, Inc. 700 N. Pearl Street Suite 400, L.B. 401 Dallas, Texas 75201-2809 Attention: George C. Evans, Pres. & CEO and Ellis Regenbogen, Executive Vice President and General Counsel Facsimile No.: 214-965-6098 Telephone No.: 214-965-6000 With a copy to: Riezman & Blitz, P.C. 120 South Central Avenue St. Louis, Missouri 63105 Attention: Richard M. Riezman, Esq. Facsimile No.: 314-727-6458 Telephone No.: 314-727-0101 If to MSD, or MSDSub: Mississippi Diversified Corporation 715 South Pear Orchard Road, Suite 400 Ridgeland, Mississippi 39157 Attention: Tom Ostenson Facsimile No.: 601-978-6756 With a copy to: Phelps Dunbar, L.L.P. Suite 500, Mtel Centre South Lamar Street Post Office Box 23066 Jackson, Mississippi 39225-3066 Attention: Charles D. Porter Facsimile No.: 601-360-9777 If to GTCR IV: Golder Thoma Cressy Rauner Fund IV, L.P. c/o Golder, Thoma, Cressy, Rauner, Inc. 6100 Sears Tower Chicago, Illinois 60606-6402 Attention: Phil Canfield Facsimile No.: 312-382-2201 If to Escrow Agent to: U.S. Trust Company of Texas, N.A. Ross Avenue, Suite 2700 Dallas, TX 75201 -6- 7 Attention: William Barber Facsimile No.: 214-754-1303 or to such other address as the Person to whom notice is to be given may have specified in a notice duly given to the sender as provided herein. Such notice, request, claim, demand, waiver, consent, approval or other communication shall be deemed to have been given as of the date so delivered, telefaxed, mailed or dispatched and, if given by any other means, shall be deemed given only when actually received by the addressees. 16. Miscellaneous. (a) This Escrow Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. (b) This Escrow Agreement may be executed in one or more counterparts, and each such counterpart shall, for all purposes, be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. (c) If any provision(s) of this Escrow Agreement are held to be invalid, illegal or unenforceable by a court of competent jurisdiction, the validity, legality and enforceability of the remaining provisions of this Escrow Agreement shall not in any way be affected or impaired thereby. (d) The obligations and duties of Escrow Agent herein are personal to Escrow Agent and Escrow Agent may not assign any and/or all of its obligations or duties hereunder except as set forth herein. (e) Indemnity. Escrow Agent is hereby severally indemnified by Search and Stockholders against any liability resulting from the exercise of its duties under this Escrow Agreement which are not performed fraudulently or with gross negligence. * * * * * -7- 8 IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement as of the day and year first above written. SEARCH CAPITAL GROUP, INC. ("SEARCH") By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- MS DIVERSIFIED CORPORATION ("MSD") By: ---------------------------------------------- Name: ------------------------------------------- Title: ------------------------------------------- MS FINANCIAL SERVICES, INC. ("MSDSub") By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- GOLDER THOMA CRESSY RAUNER FUND IV, L.P. ("GTCR IV") By: GTCR IV, L.P., its General Partner By: Golder, Thoma, Cressey, Rauner, Inc., its General Partner By: --------------------------------- Its Authorized Officer U.S. TRUST COMPANY OF TEXAS, N.A. ("Escrow Agent") By: ---------------------------------------------- Name: -------------------------------------------- Title: ------------------------------------------- -8- 9 SCHEDULE A ESCROW AGENT FEES -9- 10 Exhibit 1 [date] NOTICE OF CLAIM FOR INDEMNITY U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201 RE: Escrow Agreement, dated _____________, 1997 (the "Escrow Agreement"), among Search Capital Group, Inc., a Delaware corporation ("Search"), Golder Thoma Cressey Rauner Fund IV, L.P., MS Diversified Corporation, MS Financial Services, inc. (collectively, the "Stockholders") and U.S. Trust Company of Texas, N.A. Subject to Section 5 of the Escrow Agreement, you are hereby authorized and instructed to disburse ___________ Escrow Shares (as defined in the Escrow Agreement) from the Escrow Fund (as defined in the Escrow Agreement), representing a total amount of $_______________, to Search by reason of the following claim: This claim is based on the following facts: [brief description of the method of computation of the Claim, the facts upon which the Claim is based and a reference to the provisions of the Stockholders Agreement in respect of which such Claim shall have occurred] SEARCH CAPITAL GROUP, INC. By: Name: Title: -10- 11 Exhibit 2 [date] OBJECTION NOTICE U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201 RE: Escrow Agreement, dated _____________, 1997 (the "Escrow Agreement"), among Search Capital Group, Inc., a Delaware corporation ("Search"), Golder Thoma Cressey Rauner Fund IV, L.P., MS Diversified Corporation, MS Financial Services, Inc. (collectively, the "Stockholders") and U.S. Trust Company of Texas, N.A. You hereby are notified that the Stockholders dispute the Claim for Indemnity set out in the Notice for Claim for Indemnity of Search dated _________________ ("Claim"). The basis for disputing such Claim is: [insert a paragraph stating with reasonable specificity the basis of the objection] GOLDER THOMA CRESSY RAUNER FUND, IV., L.P. By: GTCR IV, L.P., its General Partner By: Golder, Thoma, Cressey, Rauner, Inc., its General Partner By: Its Authorized Officer MS DIVERSIFIED CORPORATION By: Name: Title: MS FINANCIAL SERVICES, INC. By: Name: Title: -11- 12 Exhibit 3 [date] JOINT INSTRUCTIONS FOR DISPUTE RESOLUTION U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201 RE: Escrow Agreement, dated _____________, 1997 (the "Escrow Agreement"), among Search Capital Group, Inc., a Delaware corporation ("Search"), Golder Thoma Cressey Rauner Fund IV, L.P., MS Diversified Corporation, MS Financial Services, Inc. (collectively, the "Stockholders") and U.S. Trust Company of Texas, N.A. You hereby are authorized and instructed to take the following action with respect to the Dispute Fund (as defined in the Escrow Agreement) that was created by reason of Search's Notice of Claim for Indemnity dated _____________ _ and the Stockholders' Objection Notice dated __________________: [Instructions for treatment of the Dispute Fund] SEARCH CAPITAL GROUP, INC. By: Name: Title: GOLDER THOMA CRESSY RAUNER FUND, IV., L.P. By: GTCR IV, L.P., its General Partner By: Golder, Thoma, Cressey, Rauner, Inc., its General Partner By: Its Authorized Officer MS DIVERSIFIED CORPORATION By: Name: Title: MS FINANCIAL SERVICES, INC. By: Name: Title: -12- EX-10.9 9 FORM OF WARRANT 1 EXHIBIT 10.9 NUMBER 9710______ WARRANT THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND NEITHER THE WARRANTS NOR ANY INTEREST THEREIN MAY BE SOLD, TRANSFERRED, PLEDGED, CONVEYED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION, OR AN EXEMPTION THEREFROM, UNDER SAID ACT AND THE RULES AND REGULATIONS THEREUNDER. SEARCH CAPITAL GROUP, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE STOCK PURCHASE WARRANT This is to certify that, for value received, ____________, or registered assigns, ("Holder") is entitled to purchase, on or before ____________, 2007, at 5:00 p.m., in the Central Time Zone, __________ shares of $.01 par value Common Stock ("Stock") of Search Capital Group, Inc. (the "Company"), at $______ per share, upon presentation of this Warrant and payment of the purchase price at the office of Search Capital Group, Inc.; SUBJECT, HOWEVER, TO THE STATEMENT OF RIGHTS OF WARRANTHOLDERS PRINTED ON THE REVERSE HEREOF, and to which the Holder assents by acceptance of this Warrant. This Warrant is transferable on the same manner and with the same effect as in the case of a negotiable instrument payable to a specific person, subject to compliance with applicable securities laws. By accepting this Warrant, the Holder hereof agrees that, if and when this Warrant is properly assigned in blank, the Company may treat any bearer as absolute owner for all purposes, notwithstanding any notice to the contrary. This Warrant shall be void unless the subscription right herein granted is exercised on or before 5:00 p.m., ___________, 2007. Attest: Search Capital Group, Inc. By: - ------------------------- --------------------------- Secretary George C. Evans Chairman, President and CEO CORPORATE SEAL 2 STATEMENT OF RIGHTS OF WARRANT HOLDERS 1. Reservation of stock. Company covenants that, while this Warrant is exercisable, it will reserve from its authorized and unissued Stock a sufficient number of shares to provide for the delivery of Stock pursuant to the exercise of this and all other similar warrants. 2. Stockholder's rights. Until the valid exercise of this warrant, the Holder hereof shall not be entitled to any rights of a stockholder; but immediately upon the exercise of this Warrant and upon payment as provided herein, the Holder hereof shall be deemed a record holder of the Stock. 3. Divisibility of Warrant. This Warrant may be divided into Warrants of one share or multiples thereof, upon surrender at the office of the Company. 4. Fractional Warrants. Upon the exercise of this Warrant, no fractions of shares shall be issues; but fractional Warrants will be delivered, entitling the Holder, upon surrender with other fractional Warrants aggregating one or more full shares, to purchase such full shares. 5. Payment of Taxes. Search shall pay all expenses and any and all United States federal, state and local taxes and other charges (and all foreign taxes and other charges imposed by any jurisdiction otherwise than by reason of a connection between the Holder and such jurisdiction) that may be payable in connection with the preparation, issuance and delivery of Warrants and Stock or other Certificates issuable upon exercise hereof, except that Search shall not be required to pay any tax based upon income and delivery of Warrants or Certificates for shares of Stock in a name other than that of the Holder of this Warrant. 6. Transfer. This Warrant is transferable in the same manner and with the same effect as in the case of a negotiable instrument payable to a specific person, SUBJECT TO COMPLIANCE WITH APPLICABLE SECURITIES LAWS. Upon surrender of this Warrant to Company at the Company's office or agency with the assignment form annexed hereto as Exhibit 1 ("Assignment Form") duly executed, funds sufficient to pay any transfer tax, and a legal opinion reasonably satisfactory to Company that such transfer will not violate any applicable securities laws, Company shall, without charge, promptly execute and deliver a new Warrant in the name of the assignee named in such Assignment Form and this Warrant shall promptly be canceled; provided, however, that upon any such assignment there shall be filed with the Company the address of the registered owner of Warrants represented by each new Warrant delivered. If and when this Warrant is assigned in blank, the Company shall treat the bearer as the absolute owner of the Warrants represented hereby for all purposes and the Company shall not be affected by any notice to the contrary. A Warrant, if properly assigned, may be exercised by an assignee without having a new Warrant issued. 7. Exercise of the Purchase Rights. The purchase rights set forth in this Warrant are exercisable by the Holder hereof, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth on the face hereof, by tendering to the Company at its office a notice of exercise in the form annexed hereto as Exhibit 2 ("Notice of Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than twenty-one (21) days thereafter, the Company shall issue to the Holder a certificate for the number of shares Stock purchased and shall execute the Notice of Exercise indicating the number of shares which remain subject to future purchase, if any. The Exercise Price may be paid at the Holder's election either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined below. If the Holder elects the Net Issuance method, the Company will issue Stock in accordance with the following formula: X = Y(A-B) ------ A Where: X = the number of shares of Stock to be issued to the Holder. Y = the number of shares of Stock requested to be exercised under this Warrant. A = the fair market value of one (1) share of stock. B = the Exercise Price of one (1) share of stock. As used herein, current fair market value of Stock shall mean with respect to each share of Stock: (i) if traded on a securities exchange, the fair market value shall be deemed to be the average of the closing prices over a twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined; or (ii) if actively traded over-the-counter, the fair market value shall be deemed to be the average of the closing bid and asked prices quoted on the NASDAQ system (or similar system) over the twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined; (iii) if at any time the Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Stock shall be the highest price per share which was paid by a willing and informed buyer under no compulsion to purchase to a willing and informed seller under no compulsion to sell as such purchase was recorded by the "market maker" of the Stock. 8. Adjustment of Shares. (a) If at any time while this Warrant is outstanding, there shall be any increase or decrease in the number of issued and outstanding shares of stock through the declaration of a stock dividend or through any recapitalization resulting in a stock split-up, combination or exchange of shares, then, and in such event, appropriate adjustment shall be made in the number of shares and the exercise price per share thereof then subject to this Warrant, so that the same proportion of the Company's issued and outstanding shares shall remain subject to purchase at the same aggregate exercise price. (b) The Board may change the terms of this Warrant with respect to the exercise price or the number of shares subject to this Warrant, or both, when, in the Board's sole discretion, such adjustments become appropriate by reason of any corporate reorganization transaction. (c) Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with a direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to the number of or exercise price of shares then subject to this Warrant. 9. Maintenance of Office or Agency. The Company shall at all times maintain an office or agency in the United States, where this Warrant may be presented or surrendered for subdivision, combination, registration of transfer or exchange and where notices and demands may be served upon the Company in respect of the Warrants. The registrar and transfer agent for this Warrant shall perform its duties as such hereunder promptly and in good faith. Such office or agency shall initially be located at 700 N. Pearl Street, Suite 400, L.B. 401, Dallas Texas 75201. The Company shall give the Holder prior written notice of any change in the address of such office or agency. 10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY, AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, WITHOUT GIVING EFFECT TO THE LAWS THEREOF RELATING TO CHOICE OF LAW. 11. Captions. The captions of the sections and paragraphs of this Warrant have been inserted for convenience only and shall have not substantive effect. 12. Notices. Any notice, request, demand, consent, or other communication pursuant to this Warrant shall be given when received and shall be given in writing, and delivered in person against receipt therefor, or sent by certified mail, postage as follows: (a) If to the Company, at: Search Capital Group, Inc., Plaza of the Americas, 700 N. Pearl Street, Suite 400, L.B. 401, Dallas, TX 75201, Attn.: Warrant Transfer Agent, or at such other address as it shall hereafter furnish in writing to the Holder, or (b) If to the Holder, the address of the Holder as it appears on the Warrant ledger of the Company. IN WITNESS WHEREOF, Search Capital Group, Inc. has caused this Warrant to be signed in its name by its President and its corporate seal to be imprinted hereon and attested by its Secretary or Assistant Secretary. Dated: As of the day of , 199 . ------------ --------------------- ---- ATTEST: SEARCH CAPITAL GROUP, INC. By: - -------------------------------- --------------------------- Secretary Name: George C. Evans Title: Chairman, President and CEO CORPORATE SEAL 3 EXHIBIT 1 PURCHASE FORM (TO BE EXECUTED UPON FULL OR PARTIAL EXERCISE OF WARRANT) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Number 9710__ to purchase ________ shares of $.01 par value Common Stock ("Shares") and herewith tenders payment for such Shares to the order of Search Capital Group, Inc. (a) in the amount of $__________ ____ for __________ shares (b) or the requisite number of Shares as required by Section 7 of the Statement of Rights of Warrant Holder contained on the reverse side of the Warrant Number 9710___ for _________ Shares. The undersigned requests that a Certificate for such Shares be registered in the name of Holder, whose address is ______________________________________________. If said number of Shares is less than all of the Shares purchasable under this Warrant, the undersigned requests that a new Warrant representing the remaining balance of the shares be issued to and registered in the name of the undersigned. Dated: . ------------------------- Signature: ---------------------------- (Signature must conform in all respects to name of Holder as specified on the face of this Warrant Number 9710___) 4 EXHIBIT 2 ASSIGNMENT FORM (TO BE EXECUTED UPON FULL OR PARTIAL SALE OR ASSIGNMENT OF WARRANT NUMBER 9710____) FOR VALUE RECEIVED, _____________________ hereby sells, assigns and transfers unto: Name ---------------------------------------------------------------------------- (Please type or print in block letters) Address ------------------------------------------------------------------------- the right to purchase ___________ Shares Search Capital Group, Inc. Stock represented by Warrant Number 9710____ to which this Assignment Form is attached as to which such right is exercisable and does hereby irrevocably constitute and appoint ___________________________________, attorney, to transfer the same on the books of Search Capital Group, Inc., with the full power of substitution in the premises. Dated: . ------------------------- Signature: ---------------------------- (Signature must conform in all respects to name of Holder as specified on the face of this Warrant Number 9710___) EX-10.12 10 AGREEMENT DATED MAY 5, 1995 WITH SAM B. MYERS, JR. 1 EXHIBIT 10.12 ORIGINAL -------- AGREEMENT This agreement ("Agreement") dated as of May 5, 1995 is entered into by and between Search Capital Group, Inc. ("Search"), and Sam B. Myers, Jr. ("Myers"). RECITALS WHEREAS, Myers is presently Chairman of the Board of Search and has served Search as a director and officer, at various times since 1985; and WHEREAS, Search has requested that Myers resign as a member of the Board of Directors and as an officer of Search Capital Group, Inc., and any of its subsidiaries; and WHEREAS, Myers agrees to do so; and WHEREAS, Search and Myers have reached certain understandings to facilitate a smooth transition which they wish to memorialize; NOW, THEREFORE, for the mutual promises recited herein and Ten Dollars ($10.00) and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the parties hereto, and with the intent to be legally bound hereby, the parties hereto agree as follows: 1. RESIGNATION. Upon execution hereof, Myers shall tender his resignation as a member of the Board of Directors and as an officer of Search Capital Group, Inc., and any of its subsidiaries. 2. CONSULTING AGREEMENT. a. SERVICES. For a period of three months beginning May 15, 1995, Myers agrees to provide consulting services on such matters as may be referred to him from time to time by the Chief Executive Officer of Search and as are within Myers' areas of expertise. Myers shall devote such time, energy, and attention as is necessary to perform and discharge his duties and responsibilities hereunder in an efficient, trustworthy and businesslike manner. Such duties shall be rendered in Dallas, Texas. Myers will not be required to devote such time as would unreasonably interfere with Myers' conduct of his investments and other business interests. b. COMPENSATION. As compensation, Myers shall be paid a monthly salary of $12,500, and receive title to the four year old company car he presently possesses, which the parties agree has a value of $11,725. 2 3. MYERS' COOPERATION IN SUITS. Myers shall continue to cooperate with and assist Search, to the extent that Myers' time reasonably permits, in the defense of the O'Shea Class Action Suit or any other suit brought against Search that relates to the period of time when Myers was an officer, director, shareholder and or employee of Search. 4. INDEMNIFICATION. a. Search shall indemnify Myers in the event he was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of Search), by reason of the fact that he is or was a director, officer, employee, or agent of Search or he is or was serving at the request of Search as a director, officer, employee, or agent of a wholly owned subsidiary corporation, partnership, joint venture, trust, or other enterprise, against expenses (including reasonable attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Search and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that Myers did not act in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Search and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. b. Search shall indemnify Myers, in the event that he was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of Search to procure a judgment in its favor by reason of the fact that he is or was a director or officer of Search or he is or was serving at the request of Search as a director, officer, partner, or trustee of, or in any similar managerial or fiduciary position of, or as an employee or agent of, a wholly owned subsidiary corporation, partnership, joint venture, trust, association, or other enterprise against expenses (including reasonable attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Search; but no such indemnification shall be made in respect of any claim, issue, or matter as to which Myers has been adjudged to be liable for gross negligence or gross misconduct in the performance of his duty to Search. c. To the extent that Myers has been successful on the merits in defense of any action, suit, or proceeding referred to in Section 4.a or 4.b in defense of any claim, issue, or matter therein, he shall be indemnified against expenses (including reasonable attorneys' fees) actually and reasonably incurred by him in connection therewith. 2 3 d. Any indemnification under Section 4.a or 4.b (unless ordered by a court) shall be made by Search only as authorized in the specific case upon a determination that indemnification of Myers is proper in the circumstances because he has met the applicable standard of conduct set forth in such subsection. Such determination shall be made by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding, or, if such a quorum is not obtainable or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or by the shareholders. e. Expenses (including reasonable attorneys' fees) incurred in defending a civil or criminal action, suit, or proceeding shall be paid by Search in advance of the final disposition of such action, suit, or proceeding as authorized in Section 4.d upon receipt of an undertaking by or on behalf of Myers to repay such amount unless it is ultimately determined that he is entitled to be indemnified by Search against such expenses pursuant to this Section 4 or otherwise. f. The indemnification provided by this Section 4 shall not be deemed exclusive of any other rights to which Myers may be entitled under the certificate of incorporation of Search, any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, and any procedure provided for by any of the foregoing, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue in the event this Agreement is terminated and shall inure to the benefit of Myers' heirs, executors, and administrators. g. Without limitation of the foregoing, Search shall tender a defense in the current O'Shea Class Action Suit. Myers will prior to the time of Search undertaking Myers' defense execute an appropriate engagement letter with Akin, Gump, Strauss, Hauer & Feld, L.L.P. 5. ESOP SHARES - PUT OPTION Myers is entitled to receive approximately 111,218 shares of Search Capital Group, Inc. $.01 par value common stock ("Shares") from the Employee Stock Ownership Plan terminated in August 1994. Upon distribution to Myers or to a rollover Individual Retirement Account or other plan qualified under Section 401 (a) of the Internal Revenue Code of 1986 as designated by Myers, Search grants Myers the right (the "Put Option") to cause Search to purchase from Myers all, but not less than all, of the Shares unsold upon the following terms: a. PURCHASE PRICE. The purchase price of the Shares shall be Two Dollars and Twenty-Five Cents ($2.25) per share. b. TIME FOR EXERCISE. Myers shall notify Search at least thirty (30) days prior to the expiration of twenty four months following the execution of this Agreement that Myers intends to exercise the Put Option. If so exercised, closing shall take place within five (5) business days following the expiration of such twelve month period. 3 4 c. CLOSING. At the closing Myers, or the rollover Individual Retirement Account, as the case may be, shall deliver to Search stock certificates duly endorsed representing 111,218 shares of the common stock and Search shall deliver to Myers a cashiers check in the amount of $250,240.50. d. ANTI-DILUTION PROVISIONS. In the event that Search issues additional shares of its common stock as a stock dividend or as part of a stock split, or if Search reduces the number of its issued and outstanding shares of common stock as a result of a reverse stock split, the number of the remaining Shares subject to the right of first refusal and the Put Option, and the purchase prices herein specified shall all be appropriately adjusted. 6. RELEASES a. BY MYERS. Myers RELEASES ALL OFFICERS, DIRECTORS, AND EMPLOYEES OF SEARCH FROM ANY AND ALL LIABILITIES AND CAUSES OF ACTION HE MIGHT HAVE AGAINST ANY OF THEM, WHICH LIABILITIES AROSE OR MAY ARISE FROM AND ARE DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF THEIR DUTIES FOR SEARCH, OTHER THAN THE OBLIGATIONS CONTAINED IN THIS AGREEMENT. b. BY SEARCH. Search RELEASES MYERS FROM ANY AND ALL LIABILITIES AND CAUSES OF ACTION SEARCH MIGHT HAVE AGAINST HIM, WHICH LIABILITIES AROSE OR MAY ARISE FROM AND ARE DIRECTLY OR INDIRECTLY RELATED TO THE PERFORMANCE OF HIS DUTIES AS SHAREHOLDER, OFFICER, DIRECTOR, AND OR AN EMPLOYEE OF SEARCH, OTHER THAN THE OBLIGATIONS CONTAINED IN THIS AGREEMENT. 7. SETTLEMENT OF SUITS a. BY MYERS. To the extent Myers is named as an individual defendant in any claim or cause of action, including the O'Shea case brought against Myers individually and against Search, Myers may settle such matters on his own behalf without the concurrence of Search, but shall not attempt to bind Search in any manner. Myers shall use reasonable effort in any such settlement to inform Search of the terms and conditions of such settlement agreement and to structure any settlement agreement in a way or manner that does not adversely affect the interests of Search. b. BY SEARCH. To the extent Search is named as a defendant in any claim or cause of action, including the O'Shea case, brought against Myers and Search, Search may settle such matters on its own behalf without the concurrence of Myers, but shall not attempt to bind Myers in any manner. Search shall use reasonable effort in any 4 5 such settlement to inform Myers of the terms and conditions of such settlement agreement and to structure any settlement agreement in a way or manner that does not adversely affect the interests of Myers. c. JOINDER. If the settlement of any matter in which Myers and Search are named as co-defendants requires the joinder and/or consent of either of them, such joinder and/or consent shall not be unreasonably withheld, conditioned, or delayed by either of them. 8. DISPUTE OF SETTLEMENT TERMS a. BY MYERS. Myers hereby agrees that as a co-defendant in any suit in which he and Search are named that he will not bring any claim or cause of action against Search in relation to the terms and conditions of any settlement of such matters made by Search. b. BY SEARCH. Search hereby agrees that as a co-defendant in any suit in which it and Myers are named that it will not bring any claim or cause of action against Myers in relation to the terms and conditions of any settlement of such matters made by Myers. 9. MISCELLANEOUS PROVISIONS a. PROFESSIONAL FEES. Search shall be responsible and pay for the reasonable attorneys' fees and accountants' fees incurred by each party hereto in relation to the negotiation and consummation of this Agreement. Each party hereto shall be responsible for its own professional fees in relation to the interpretation, enforcement, or adjudication, if any, of this Agreement. b. REPRESENTATIONS AND WARRANTIES OF SEARCH. Search represents and warrants that the execution, delivery, and performance of this Agreement have been duly authorized by all necessary corporate action and that this Agreement is a valid and binding obligation of Search enforceable according to its terms. c. INDEMNITY BY SEARCH. Search agrees to indemnify, save, and hold Myers harmless from and against costs, expenses, or disbursements (including reasonable attorneys' fees), liabilities, obligations, losses, damages, penalties, actions, judgments, or suits of any kind or nature whatsoever INSOFAR ONLY such relate to a breach or alleged breach of a representation or warranty of Search under Section 9.b. On any action for which indemnity is provided under the foregoing sentence, Search agrees, if requested, to advance from time to time attorneys' fees and costs incurred by Myers. d. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties and their respective heirs, legal representatives, successors, and assigns. 5 6 e. FURTHER ASSURANCES. The parties hereto agree to cooperate with each other and execute any and all documents and to do any and all things necessary to effectuate this Agreement. f. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED UNDER THE LAWS OF THE STATE OF TEXAS AND VENUE FOR ANY MATTER BROUGHT BY ONE PARTY AGAINST THE OTHER CONCERNING THIS AGREEMENT SHALL BE A COURT OF COMPETENT JURISDICTION IN DALLAS COUNTY, TEXAS. g. INJUNCTIVE RELIEF. Because the parties hereto may not have an adequate remedy at law, any of the parties hereto may apply for and receive without objection from any of the other parties' equitable relief including but not limited to specific performance, temporary restraining order, or permanent injunctions. Any of these remedies if elected shall be in addition to any other remedies that the parties may have at law or in equity and may be obtained concurrently with the exercise of any other remedy available to any of the parties at law or in equity. h. AMENDMENTS, ETC. This Agreement may be amended, terminated, or superseded only by an instrument signed by the party against whom such amendment, termination, or supersession is sought to be enforced. i. ENTIRE AGREEMENT. This Agreement evidences the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any prior agreements or undertakings with respect thereto. j. NOTICES. All notices, requests, demands, and other communications provided for or permitted hereunder shall be in writing and shall be sent by mail, telex, telecopier, or hand delivery as follows: Search Capital Group, Inc. With a copy to (not constituting 700 N. Pearl Street notice): Suite 400, L.B. 401 Dallas, Texas 75201-2809 Search Capital Group, Inc. Attn: President 700 N. Pearl Street 214 965 6000 Suite 400, L.B. 401 214 965 6098 (fax) Dallas, Texas 75201-2809 Attn: General Counsel 214 965 6000 214 965 6098 (fax) 6 7 Sam B. Myers, Jr. With a copy to (not constituting 4521 Belfort Place notice): Dallas, Texas 75205 214 526 6996 Bryan W. Aldridge, Esq. 214 526 5531 (fax) 3220 W. Southlake Blvd., Suite A Southlake, Texas 76092-8701 214 748 9242 214 748 9238 (fax) k. SEVERABILITY. If any part of this Agreement is found invalid or unenforceable, that part will be amended to achieve as nearly as possible the same economic effect as the original provision and the remainder of this Agreement will remain in full force. l. COUNTERPART. This agreement may be executed in dual counterparts, each of which shall constitute an original. IN WITNESS HEREOF, the parties have signed this Agreement as of the date first written above. SEARCH CAPITAL GROUP, INC. By: /s/ George C. Evans ------------------------------- Its: President and CEO ------------------------------ /s/ Sam B. Myers, Jr. ------------------------------ 7 EX-10.14 11 RETAINER SERVICES DATED APRIL 25, 1997 1 EXHIBIT 10.14 May 16, 1996 Search Capital Group, Inc. 700 North Pearl Street Suite 400 Dallas, Texas 75201 Attention: Mr. George C. Evans Chairman, President and Chief Executive Officer Dear Mr. Evans: This letter is to confirm our understanding that Search Capital Group, Inc. ("Search" or the "Company") has retained Alex. Brown & Sons Incorporated ("Alex. Brown") to act as Search's financial advisor in the capacity, and consistent with the terms, described herein: I. Retainer Services [ ] Market Reports. Alex. Brown provides periodic presentations and reports to senior management and Boards of Directors on a variety financial issues. These presentations are made at the convenience of the client, but typically occur during regularly scheduled board or executive committee meetings. With respect to frequency, some topics lend themselves to monthly updates while others should be addressed quarterly or semi-annually. I have listed below a selection of topics: o Merger & Acquisitions. This topic would include an analysis of trends and implications in activity volume, valuation levels, consideration structure, contract terms, and acquiror profile. We attempt to answer the questions, 'how are deals getting done' and 'why are deals happening' in the sub-prime auto finance area. o Capital Markets. This topic covers an analysis of trends in the equity and fixed income capital markets (both public and private placements). Valuation levels, new product introductions, volume of capital raising and investor sentiment are examined in-depth. Clearly, this topic is timely for Search and accordingly, an examination and pro-forma analysis of your capital raising alternatives would be a core part of our ongoing advice. o Competitive Positioning. This topic is really more of an intelligence report for senior management. This service provides an analysis of your competitors' actions, implications and resulting opportunities. Alex. Brown's extensive information gathering network (whether from equity research, trading or strategic advisory) can be helpful in anticipating a competitors strategy or 2 identifying a unique opportunity. This service usually complements the M&A discussion as well. o Regulatory. Finally, we also provide commentary regarding the implications of recently enacted or proposed regulatory changes. [ ] Corporate Finance. As part of our ongoing advice, we would examine and analyze Search's capital structure and advise on the most optimal means of raising capital, if appropriate. We would also be prepared to discuss, as necessary, the advisability and implementation of reverse stock splits and dividend policies (including DRIPs and Stock Purchase Plans). You mentioned that the Board may consider a reverse stock split. Such issues as liquidity, shareholder investment objectives, margin Implications (i.e. the $5/share barrier), administrative costs, financial reporting topics all factor into the decision. Given our experience with growth companies, we have extensive experience in identifying and weighing the pertinent issues of such an action. [ ] Valuation. As a matter of prudence and fiduciary responsibility, a Board of Directors should want to know the theoretical value of their institution and why. For Search, given its recent restructuring, the necessity of performing another valuation in such a short time period is not great. However, as the Company rebounds and grows, such an exercise will become increasingly important in the context of stock option plans, mergers, acquisition currency, capital raising and other strategic issues. [ ] Defensive Posture. While this is not a near-term concern for Search, as part of the retainer engagement for other clients, we also review the institution's' anti-takeover defenses and suggest certain measures to improve the client's ability to thwart an unwanted approach. We also assist the client in organizing itself such that it is more efficient and effective in addressing an acquisition proposal (e.g. immediate response to the suitor, informing the Board of Directors, managing key shareholders, dealing with the news media, etc.). [ ] Transaction Advice and Support. Often times, a client becomes involved in a transaction (e.g. acquisition of a small company or portfolio, etc.) which it is quite capable and willing to execute on its own. However, as added assurance for senior management or the Board of Directors, Alex. Brown provides "informal" advice and support on such matters as target identification, valuation, approach tactics, due diligence, transaction structure, tax implications, negotiating strategy, investment community management, and integration. We define "informal" advice as those situations which do not require the issuance of a transaction "fairness opinion". In such situations, we are available on-site or as "back room" advisors, whatever the client prefers. This service also may be quite valuable to finance staffs when executing a particular type of transaction for the first time, entering a new geographic region, or dealing with an unfamiliar counter-party. 2 3 In instances, however, where the transaction is large or complex, we would agree on a separate fee consistent with customary industry practice. [ ] Officer and Director Brokerage Service. Alex. Brown has a special group solely dedicated to serving corporate officers and directors on restricted stock purchases/sales, option exercises, margin accounts and asset hedging/diversification strategies. We believe such a service further differentiates our ability to advise and serve our clients. [ ] Shareholder Relations. As part of this service, we will conduct a review of Search's shareholder relations program, and as a result of such review, we will suggest certain measures toward increasing your knowledge of, and responsiveness to, the interest and investment objectives of your shareholders. The aim of this exercise Is to accurately identify and track the turnover in Search's shareholding base and understand the ongoing investment objectives of the shareholders (i.e. value, growth, takeover speculation, market index, IRA, etc.). [ ] Research and Market-Making. As we discussed, based on Search's financial recovery and move to NASDAQ's NMS, we will be prepared to introduce our equity research team to the Company and senior management and enact market-making, if warranted. As part of our research sponsorship, we also arrange mini-road shows as well as one-on-one meetings with key institutional investors. Every year we also conduct a seminar for specialty growth financial companies. As I explained, however, I can not guarantee what opinions our research team may have or express from time to time. While I have tried to be thorough in the above description of services provided, it certainly is not in an exhaustive survey, and accordingly, if there is some other analysis or service you require, we would certainly try to be accommodating. In the end, the breadth and depth of services extended is determined solely by you. II. Compensation With respect to fees, Alex. Brown would assess a fee of $50,000 per annum. This fee is payable in equal quarterly or semi-annual installments. We also are reimbursed for reasonable out-of-pocket expenses (travel, documentation, etc). We are also prepared to credit this retainer fee against any other compensation which may arise from a transaction consummated during the course of our engagement. III. Indemnification In consideration of our services as the Company's financial advisor hereunder, the Company agrees to indemnify and hold harmless Alex. Brown and each of its directors, officers, agents, employees and controlling persons (within the meaning of the Securities Act of 1933, as amended) to the extent and as provided in Addendum A attached hereto and incorporated herein by reference. The provisions of this paragraph and Addendum A incorporated herein by reference shall be effective as 3 4 of the date hereof, and shall continue in full force and effect until the termination of this agreement and, thereafter, shall survive the termination of Alex. Brown's engagement under this agreement and shall be binding upon any successors of assigns of the Company. IV. Term This agreement shall have an initial term of one year. Thereafter, this agreement shall renew automatically from year-to-year upon the same terms and conditions set forth herein until terminated in writing by either Alex. Brown or Search. V. Other Om retainers do not stipulate an "exclusivity" arrangement (i.e. Search is not obligated to use Alex. Brown for any transaction). I know our competition seeks exclusivity arrangements, but our experience has been that if we are otherwise doing a good job, we will be rewarded eventually. If the foregoing letter correctly sets forth the terms of Alex. Brown's engagement, please sign and return to us the enclosed duplicate hereof. Very truly yours, ALEX. BROWN & SONS INCORPORATED By: /s/ J. ADAM HITT ---------------------------------- J. Adam Hitt Managing Director Accepted and Agreed: SEARCH CAPITAL GROUP, INC. By: /s/ GEORGE C. EVANS -------------------------------- George C. Evans Chairman, President and CEO 4 5 Addendum A In connection with our engagement described in the foregoing letter dated May 16, 1996 (the "Letter") to which this Addendum A is attached, the Company (as defined in the Letter) agrees to indemnify and hold harmless Alex. Brown & Sons Incorporated ("Brown") and each of its directors, officers, agents, employees and controlling persons (within the meaning of the Securities Act of 1933, as amended) from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereto (collectively "Liabilities") relating to or arising out of our engagement, and will reimburse Brown and each other person indemnified hereunder for all reasonable legal and other expenses as incurred in connection with investigating or defending any such Liabilities whether or not in connection with pending or threatened litigation in which Brown or any of its directors, officers, agents, employees and controlling persons is a party; provided, however, that the Company shall, in no event, be liable in any such case (except cases arising out of the use of information provided by the Company) for Liabilities that a court of competent jurisdiction shall have found in a final judgment to have arisen primarily from any negligence, willful misconduct, breach of duty or business tort of Brown or the party claiming a right to indemnification. In case any proceeding shall be instituted involving any person in respect of whom indemnity may be sought, such person (the "indemnified party") shall promptly notify the Company and the Company, upon the request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the Company may designate in such proceeding and shall pay, as they are incurred, the fees and expenses of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense, except that the Company shall pay as incurred the fees and expenses of counsel retained by the indemnified party in the event that (i) the Company and the indemnified party shall have mutually agreed to the retention of such counsel or, (ii) the named parties to any such proceeding (including any impleaded parties) include both the Company and the indemnified party and representation of both parties by the same counsel would be inappropriate, in the reasonable opinion of the indemnified party, due to actual or potential differing interests between them. The Company shall not be liable for any settlement of any action or proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the indemnified parties to the extent set forth in this Addendum A. In addition, the Company will not, without the prior written consent of Brown, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not Brown or any indemnified party is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of Brown and each other indemnified party hereunder from all liability arising out of such claim, actions, suit or proceeding. In the event a claim for indemnification under this Addendum A is determined to be unenforceable by a final judgment of a court of competent jurisdiction, then the Company shall contribute to the aggregate losses, claims, damages or liabilities to which Brown or its officers, 5 6 directors, agents, employees or controlling persons may be subject in such amount as is appropriate to reflect the relative benefits received by each of the company and the party seeking contribution on the one hand, and the relative faults of the Company and the party seeking contribution on the other as well as any other relevant equitable considerations. This indemnification shall apply to the original engagement as set forth in the Letter and any modification of the original engagement and the indemnification provided herein shall survive termination of our engagement and shall be binding upon any successors or assigns of the Company. Acknowledged and Agreed: SEARCH CAPITAL GROUP, INC. By: /s/ GEORGE C. EVANS -------------------------------- Date: 6/20/96 ------------------------------ 6 7 ADDENDUM D Pursuant to our engagement terms described in a letter dated May 16, 1996, this addendum is to confirm our understanding that Alex. Brown has been retained by Search to serve as its financial advisor with respect to the Company's acquisition of MS Financial, Inc. ("MSFI"). In respect of the above, Search agrees to compensate Alex. Brown $175,000, payable upon completion of the transaction. if a fairness opinion is required, an additional fee of $50,000 will be payable upon receipt of the fairness opinion. We also will be reimbursed for reasonable out-of-pocket expenses incurred with respect to this engagement. These aforementioned fees will be credited against any other retainer fees paid pursuant to our letter dated May 16, 1996. In addition, this memo confirms that Addendum B and Addendum C (both dated October 8, 1996) are null and void. /s/ GEORGE C. EVANS /s/ J. ADAM HITT - ---------------------------- ------------------------------------- George C. Evans J. Adam Hitt Chairman, President and CEO Managing Director 7 8 [ALEX. BROWN & SONS INCORPORATED LETTERHEAD] ADDENDUM E Pursuant to our engagement terms described in a letter dated May 16, 1996, this addendum is to confirm our understanding that Alex. Brown has been retained by Search to conduct a valuation of the securities offered by the Company in its acquisition of certain assets and liabilities of Dealers Alliance Credit Corp. in a transaction consummated on or about August 6, 1997. In respect of the above, Search agrees to compensate Alex. Brown $75,000 payable upon receipt of the valuation analysis. Reasonable out-of-pocket expenses will be invoiced separately, including fees and disbursements of counsel, if required. To the extent officers of Alex. Brown assist in, consult, or provide testimony (whether in trial, deposition or arbitration) for any action, suit or proceeding related to, or arising from, Alex. Brown's engagement hereunder, the Company will pay Alex. Brown its customary per diem charges for the services of such officers. /s/ GEORGE C. EVANS /s/ J. ADAM HITT - -------------------------- ------------------------- George C. Evans J. Adam Hitt Chairman, President and CEO Managing Director May 8, 1997 EX-10.17 12 EMPLOYMENT CONTRACT - GEORGE C. EVANS - 1-20-95 1 EXHIBIT 10.17 EMPLOYMENT CONTRACT GEORGE C. EVANS AMENDMENT This memorandum references the employment contract between Search Capital Group, Inc. and George C. Evans dated January 20, 1995 and hereby incorporates the following changes/additions: Term of Contract: The original three-year contract that was to run three years beginning January 20, 1995 through January 20, 1998 is hereby extended to run through January 20, 1999 and have a term of three years from January 20, 1996. Current Salary: $300,000 per year less appropriate deductions, (i.e., signing bonus) through 1998. Non-Compete: Should George C. Evans leave the employment of Search, and compete against Search within the sub-prime automobile industry (Search Capital Group, Inc.'s core business), all salaries, benefits and stock/warrants not fully vested shall cease, provided that no mutually agreed upon agreement between Search Capital Group, Inc. and George C. Evans overrides these conditions. Dated this 20th day of March, 1996. Executed By: Executive Committee: /s/ GEORGE C. EVANS Abstaining - ------------------------- ---------- George C. Evans George C. Evans, Chairman /s/ JAMES F. LEARY ---------------------------------- James F. Leary /s/ RICHARD F. BONINI -------------------------- Richard F. Bonini EX-10.18 13 EMPLOYMENT CONTRACT - GEORGE C. EVANS 1 EXHIBIT 10.18 [SEARCH CAPITAL GROUP INC. LETTERHEAD] EMPLOYMENT CONTRACT GEORGE C. EVANS AMENDMENT This memorandum references the employment contract between Search Capital Group, Inc. and George C. Evans dated January 20, 1995 amended on March 20, 1996 and again amended as of this date, February 13th, 1997, by incorporating the following changes and additions: Term of Contract: The original three-year contract that was to run three years beginning January 20, 1995 through January 20, 1998 was renewed on March 20, 1996 to run for three years through January 20, 1999 and is amended this date, February 13, 1997, to run through January 20, 2000 and/or for a period of three years from January 20, 1997. Salary: Current salary at $300,000 per year plus any adjustments to be made during the interim by the board. Non-Compete: Remains the same as executed on March 20, 1996. Should George C. Evans leave the employment of Search, and compete against Search within the sub-prime automobile industry (Search Capital Group, Inc.'s core business), all salaries, benefits and stock/warrants not fully vested shall cease, provided that no mutually agreed upon agreement between Search Capital Group, Inc. and George C. Evans overrides these conditions. Dated this 13th day of February, 1997. Executed By: Executive Committee Approval: /s/ GEORGE C. EVANS Abstaining - ------------------------- ---------- George C. Evans George C. Evans, Chairman /s/ LUTHER H. HODGES, JR. ---------------------------------- Luther H. Hodges, Jr. /s/ RICHARD F. BONINI ---------------------------------- Richard F. Bonini EX-10.20 14 TERMS OF THE ENGAGEMENT DATED AUGUST 22, 1996 1 EXHIBIT 10.20 [INTER-ATLANTIC SECURITIES CORP. LETTERHEAD] August 22, 1996 Search Capital Group, Inc. 700 North Pearl Street Suite 400 L.B. 401 Dallas, Texas 75201-2809 Attention: James F. Leary Vice Chairman - Finance Gentlemen: The purpose of this letter is to set forth the terms of the engagement by Search Capital Group, Inc. (the "Company") of Inter-Atlantic Securities Corp. ("Inter-Atlantic"). This letter replaces the engagement letter dated May 13, 1996 in its entirety. The Company is considering offering subordinated debt with warrants exercisable into the common stock of the Company or a similar security (the "Subordinated Debt"). It is currently contemplated that the Subordinated Debt will be sold directly to sophisticated investors in a private offering (a "Private Placement"). The Company hereby engages Inter-Atlantic to act as its lead placement agent for all Private Placements or public offerings of Subordinated Debt undertaken by the Company during the term of Inter-Atlantic's engagement hereunder. The term of this engagement shall extend until June 30, 1997 from the date of execution of this letter, and may be extended by written mutual agreement of the parties. In undertaking this assignment, Inter-Atlantic will use its best efforts to provide the following investment banking and financial advisory services to the Company: (a) Perform a due diligence investigation of the business, operations, financial condition, forecasts, and prospects of the Company to the extent needed; (b) Advise the Company on market conditions and the likely reception accorded a Private Placement of the Subordinated Debt; (c) Assist the Company in preparing an offering memorandum and marketing materials; (d) Develop a marketing plan (including identifying and introducing prospective investors) for use in the private placement market; 2 (e) Assist in implementation of the marketing plan for the Private Placement; (f) Assist in presentations to potential investors; (g) Make recommendations to the Company during the course of the engagement regarding any changes or modification of the financing program, if necessary; (h) Advise and assist the Company in the preparation and review of all legal documentation related to the financing; (i) Assist in the closing of the transaction; and (j) Provide such other financial advisory and investment banking services as may be mutually determined. If during the term of Inter-Atlantic's engagement hereunder the Company proposes to issue Subordinated Debt in the public market, the Company will invite Inter-Atlantic to be engaged as its lead underwriter with respect to such issuance on usual and customary terms and conditions, as shall be agreed upon by the Company and Inter-Atlantic. The Company hereby agrees to pay Inter-Atlantic, as compensation for its services pursuant to any Private Placement, the following fees: (a) Marketing Fee: The Company shall pay to Inter-Atlantic a Marketing Fee in the amount of $60,000 after Inter-Atlantic has produced and distributed an offering memorandum to potential investors. Any payments made under this paragraph 4 (a) shall be credited against any fee which becomes payable by the company to Inter-Atlantic. (b) Private Placement Fee: The Company shall pay to Inter-Atlantic a Private Placement Fee, which fee shall be payable on the date of the closing. The Private Placement Fee shall be equal to 3.0% of the gross par amount of Subordinated Debt sold. One half the Private Placement Fee will be paid in cash and one half in Subordinated Debt, which will be valued at par and issued on the same terms as provided to the investors. (c) Subsequent Events: If within 12 months of the termination of Inter- Atlantic's engagement hereunder, the Company consummates a private placement or public offering of Subordinated Debt involving an investor (a) with whom negotiations or discussions had occurred and (b) who had been identified by Inter-Atlantic during the term of Inter-Atlantic's engagement hereunder, then in each such case Inter-Atlantic shall be paid a Private Placement Fee, in an amount and at the time provided in Section 4(b); provided that no fee shall be payable under this Section 4(c) if Inter-Atlantic has previously been paid a Private Placement Fee pursuant to Section 4(b) above following the closing of the Private Placement or public offering of Subordinated Debt. In addition to any fees that may be payable to Inter-Atlantic hereunder and regardless of whether any proposed private placement is consummated, the Company hereby agrees from time to time, upon request, to reimburse Inter- Atlantic for all reasonable travel, legal and other out - of - pocket expenses incurred in performing the services hereunder, including fees and disbursements of Inter-Atlantic's counsel. 3 Inter-Atlantic agrees to keep confidential all non - public information which it receives or develops concerning the Company and to disclose that information only with the consent of the Company or as required by law or legal process. The Company agrees that except as required by applicable law, any advice to be provided by Inter-Atlantic under this engagement letter shall not be disclosed publicly or made available to third parties without the prior approval of Inter-Atlantic, which approval shall not be unreasonably withheld. The Company agrees that following the Private Placement Inter-Atlantic has the right to place advertisements in financial and other newspapers and journals at its own expense describing its services to the Company hereunder, provided that Inter-Atlantic will submit a copy of any such advertisements to the Company for its approval, which approval shall not be unreasonably withheld or delayed. The Company and Inter-Atlantic acknowledge and agree that Wheat, First Securities, Inc. ("Wheat First") is acting as co-agent for this transaction and that that Search shall pay Wheat First a Private Placement Fee of 1.5% of the gross par amount of Subordinated Debt sold. It is understood that the confidentiality, compensation, and indemnification provisions contained in this Agreement shall remain operative and in full force and effect regardless of any termination of the Agreement. The Company agrees to indemnify Inter-Atlantic in accordance with the indemnification letter which is attached hereto as Exhibit A. This engagement letter and the indemnification letter, attached as Exhibit A, incorporate the entire understanding of the parties with respect to the subject matter of this agreement and supersede all previous agreements should they exist. 1. The Agreement may not be amended or modified except in writing and shall be governed by and construed in accordance with the laws of the State of New York. 2. This letter may be terminated on either party's written request with 30 day's notice, subject to the right of Inter-Atlantic to receive any fees due and payable hereunder and receive reimbursement for its reasonable out - of - pocket expenses incurred prior to such termination. Such a fee obligation will not be incurred in the case of Inter-Atlantic's termination for cause, in which case Inter-Atlantic may be terminated immediately and shall only be entitled to receive reimbursement for its reasonable out - of - pocket expenses. No termination, however, shall affect the indemnification and contribution obligations of the Company attached as Exhibit A. Robert Lichten, Andrew Lerner, Peter Lichten and Arnold Welles of Inter- Atlantic will work on this transaction. Frederick S. Hammer, a Director of the Company, is affiliated with Inter- Atlantic and will not participate in this engagement. Please confirm the foregoing is in accordance with our understandings and agreements by signing 4 and returning to Inter-Atlantic the duplicate of this letter enclosed herewith. Very truly yours, INTER-ATLANTIC SECURITIES CORP. By: /s/ ARNOLD WELLES ------------------------------ Name: Arnold Welles Title: Principal Accepted and Agreed to: SEARCH CAPITAL GROUP, INC. By: /s/JAMES F. LEARY ------------------------------ Name: James F. Leary Title: Vice Chairman, Finance 5 EXHIBIT A INDEMNIFICATION Recognizing that transactions of the type contemplated in this engagement sometimes result in litigation and that Inter-Atlantic's role is advisory, the Company agrees to indemnify Inter-Atlantic (including its affiliated entities and its officers, directors, agents, employees and controlling persons) to the full extent lawful against claims, losses and reasonable expenses as incurred (including expense of investigation and preparation and reasonable fees and disbursements of Inter-Atlantic's engagement, and if such indemnification were for any reason not to be available, to contribute to the settlement, loss or expenses involved in the proportion that the Company's interest bears to Inter- Atlantic's interest in the transaction. However, such indemnification and contribution shall not apply to any claim, loss or expense which arises from Inter-Atlantic's bad faith or gross negligence in performing its services hereunder. The indemnity and contribution provided herein shall remain operative and in full force and effect regardless of (i) any withdrawal, termination or consummation of or failure to initiate or consummate any transaction referred to herewith, (ii) any investigation made by or on behalf of any party hereto or any person controlling (within the meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20 (a) of the Securities Exchange Act of 1934, as amended) any party hereto or any other person entitled to indemnification or contribution, or (iii) any termination or the completion or expiration of this agreement or Inter-Atlantic's engagement as the Company's financial advisor and (iv) whether or not Inter-Atlantic shall, or shall be called upon to, render any formal or informal advise in the course of such engagement. Very truly yours, INTER-ATLANTIC SECURITIES CORP. By: /s/ ARNOLD WELLES ------------------------------ Name: Arnold Welles Title: Principal Accepted and Agreed to: SEARCH CAPITAL GROUP, INC. By: /s/ JAMES F. LEARY ------------------------------ Name: James F. Leary Title: Vice Chairman, Finance EX-10.21 15 TERMS OF THE ENGAGEMENT DATED SEPTEMBER 6, 1996 1 EXHIBIT 10.21 [INTER-ATLANTIC SECURITIES CORP. LETTERHEAD] September 6, 1996 Search Capital Group, Inc. 700 North Pearl Street Suite 400 L.B. 401 Dallas, Texas 75201-2809 Attention: James F. Leary Vice Chairman - Finance Gentlemen: The purpose of this letter is to set forth the terms of the engagement by Search Capital Group, Inc. (the "Company") of Inter-Atlantic Securities Corp. ("Inter-Atlantic"). We understand the Company seeks to raise approximately $100 million in additional senior debt in the form of warehousing lines ("Senior Debt") provided by securities firms, which are defined for purposes of this letter to be NASD registered firms or their affiliates ("Securities Firms"). 1. The Company hereby engages Inter-Atlantic to act as its exclusive agent for raising Senior Debt from Securities Firms during the term of Inter- Atlantic's engagement hereunder. 2. The term of this engagement shall extend until March 30, 1997 and may be extended by written mutual agreement of the parties. 3. In undertaking this assignment, Inter-Atlantic will perform the following services: (a) Contact Securities Firms and provide information on the Company. (b) Determine level of interest of Securities Firms. (c) Introduce representatives of the Securities Firms to officers of the Company. (d) Assist during negotiations with the Securities Firms. The Company hereby agrees to pay Inter - Atlantic, as compensation for its services pursuant to raising Senior Debt, the following fee: 2 Search Capital Group, Inc. September 6, 1996 (a) Agency Fee of 37.5 basis points on the total amount of Senior Debt commitments provided by Securities Firms contacted by Inter- Atlantic. It is understood by all parties that the Agency Fee will not be payable on Senior Debt provided by Securities Firms contacted by the Company prior to Inter-Atlantic having contacted them or by Securities Firms with whom Inter-Atlantic has had no contact. (b) Subsequent Events: If within 12 months of the termination of Inter- Atlantic's engagement hereunder, the Company obtains commitments from Securities Firms (a) with whom negotiations or discussions had occurred and (b) who had been identified by Inter - Atlantic during the term of Inter-Atlantic's engagement hereunder, then in each such case Inter-Atlantic shall be paid an Agency Fee, in an amount and at the time provided in Section 4(a); provided that no fee shall be payable under this Section 4(b) if Inter-Atlantic has previously been paid an Agency Fee pursuant to Section 4(a)above following the closing of the Senior Debt agreement. 4. In addition to any fees that may be payable to Inter - Atlantic hereunder and regardless of whether any Senior Debt is arranged, the Company hereby agrees from time to time, upon request, to reimburse Inter - Atlantic for all reasonable travel, legal and other out - of - pocket expenses incurred in performing the services hereunder. 5. Inter - Atlantic agrees to keep confidential all non - public information which it receives or develops concerning the Company and to disclose that information only with the consent of the Company or as required by law or legal process. 6. The Company agrees that except as required by applicable law, any advice to be provided by Inter-Atlantic under this engagement letter shall not be disclosed publicly or made available to third parties without the prior approval of Inter-Atlantic, which approval shall not be unreasonably withheld. It is understood that the confidentiality, compensation, and indemnification provisions contained in this Agreement shall remain operative and in full force and effect regardless of any termination of the Agreement. The Company agrees to indemnify Inter-Atlantic in accordance with the indemnification letter which is attached hereto as Exhibit A. 3 Search Capital Group, Inc. September 6, 1996 The Agreement may not be amended or modified except in writing and shall be governed by and construed in accordance with the laws of the State of New York 7. This letter may be terminated on either party's written request with 30 day's notice, subject to the right of Inter-Atlantic to receive any fees due and payable hereunder and receive reimbursement for its reasonable out - of - pocket expenses incurred prior to such termination. Such a fee obligation will not be incurred in the case of Inter-Atlantic's termination for cause, in which case Inter-Atlantic may be terminated immediately and shall only be entitled to receive reimbursement for its reasonable out - of - pocket expenses. No termination, however, shall affect the indemnification and contribution obligations of the Company attached as Exhibit A. Robert Lichten, Andrew Lerner, Peter Lichten and Arnold Welles of Inter- Atlantic will work on this transaction. Frederick S. Hammer, a Director of the Company, is affiliated with Inter- Atlantic and will not participate in this engagement. Please confirm the foregoing is in accordance with our understandings and agreements by signing and returning to Inter-Atlantic the duplicate of this letter enclosed herewith. Very truly yours, INTER - ATLANTIC SECURITIES CORP. By:/s/ ARNOLD WELLES ---------------------------------- Name: Arnold Welles Title: Principal Accepted and Agreed to: SEARCH CAPITAL GROUP, INC. By:/s/ JAMES F. LEARY ----------------------------- Name: James F. Leary Title: Vice Chairman, Finance 4 Search Capital Group, Inc. September 6, 1996 EXHIBIT A INDEMNIFICATION Recognizing that transactions of the type contemplated in this engagement sometimes result in litigation and that Inter-Atlantic's role is advisory, the Company agrees to indemnify Inter-Atlantic (including its affiliated entities and its officers, directors, agents, employees and controlling persons) to the full extent lawful against claims, losses and reasonable expenses as incurred (including expense of investigation and preparation and reasonable fees and disbursements of Inter-Atlantic's engagement, and if such indemnification were for any reason not to be available, to contribute to the settlement, loss or expenses involved in the proportion that the Company's interest bears to Inter- Atlantic's interest in the transaction. However, such indemnification and contribution shall not apply to any claim, loss or expense which arises from Inter-Atlantic's bad faith or gross negligence in performing its services hereunder. The indemnity and contribution provided herein shall remain operative and in full force and effect regardless of (i) any withdrawal, termination or consummation of or failure to initiate or consummate any transaction referred to herewith, (ii) any investigation made by or on behalf of any party hereto or any person controlling (within the meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20 (a) of the Securities Exchange Act of 1934, as amended) any party hereto or any other person entitled to indemnification or contribution, or (iii) any termination or the completion or expiration of this agreement or Inter-Atlantic's engagement as the Company's financial advisor and (iv) whether or not Inter-Atlantic shall, or shall be called upon to, render any formal or informal advise in the course of such engagement. Very truly yours, INTER - ATLANTIC SECURITIES CORP. By: /s/ ARNOLD WELLES ---------------------------------- Name: Arnold Welles Title: Principal Accepted and Agreed to: SEARCH CAPITAL GROUP, INC. By: /s/ JAMES F. LEARY ----------------------------- Name: James F. Leary Title: Vice Chairman, Finance EX-23.3 16 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.3 CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders MS Financial, Inc.: We consent to the use of our audit report dated February 24, 1997 on the consolidated financial statements of MS Financial, Inc. and subsidiary as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996 included herein and to the reference to our firm under the headings "Experts" in the prospectus. Our report dated February 24, 1997, contains an explanatory paragraph that states that the Company's material increases in delinquencies and losses on owned and serviced installment contracts, substantial net loss and reduced availability of financing raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG PEAT MARWICK LLP Jackson, Mississippi KPMG PEAT MARWICK LLP June 25, 1997 EX-23.4 17 CONSENT OF BDO DEIDMAN, LLP 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Search Financial Services Inc. (F/K/A Search Capital Group, Inc.) Dallas, Texas We hereby consent to the incorporation by reference in the Prospectus constituting a part of this Registration Statement (Form S-8) pertaining to the Search Capital Group, Inc. 1994 Employee Stock Option Plan of our report dated May 23, 1997, relating to the consolidated financial statements of Search Financial Services Inc. (F/K/A Search Capital Group, Inc.) for the year ended March 31, 1997, appearing in the Company's Form S-4 filed June 25, 1997. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Dallas, Texas June 25, 1997 2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Search Financial Services Inc. (F/K/A Search Capital Group, Inc.) Dallas, Texas We hereby consent to the incorporation by reference in the Prospectus constituting a part of this Registration Statement (Form S-3) of our report dated May 23, 1997, relating to the consolidated financial statements of Search Financial Services Inc. (F/K/A Search Capital Group, Inc.) for the year ended March 31, 1997, appearing in the Company's Form S-4 filed June 25, 1997. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Dallas, Texas June 25, 1997 3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Search Financial Services Inc. (F/K/A Search Capital Group, Inc.) Dallas, Texas We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 23, 1997, relating to the consolidated financial statements of Search Financial Services Inc. (F/K/A Search Capital Group, Inc.) which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO Seidman, LLP BDO Seidman, LLP Dallas, Texas June 25, 1997 4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Search Financial Services, Inc. (F/K/A Search Capital Group, Inc.) Dallas, Texas We hereby consent to the incorporation by reference in the Search Financial Services, Inc. (F/K/A Search Capital Group, Inc.) Prospectus constituting a part of this Registration Statement (Form S-4 filed June 25, 1997), of our report dated May 21, 1996, except for Note 7 which is as of May 24, 1996, relating to the financial statements of Dealers Alliance Credit Corp. /s/ BDO SEIDMAN, LLP ---------------------------------- BDO Seidman, LLP Atlanta, Georgia June 25, 1997 EX-23.7 18 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 10.2 SEARCH-MS FINANCIAL ESCROW AGREEMENT This Escrow Agreement, dated as of _______________,1997 (the "Escrow Agreement"), is entered into by and among Search Capital Group, Inc., a Delaware corporation ("Search"); and the undersigned holders of shares of the common stock, $.001 par value, of MS Financial, Inc., MS Diversified Corporation, a Mississippi corporation ("MSD"), MS Financial Services, Inc., a Mississippi corporation and a wholly-owned subsidiary of MSD ("MSDSub") and Golder Thoma Cressy Rauner Fund IV, L.P. (sometimes referred to as "GTCR IV"), and U.S. Trust Company of Texas, N.A., a national bank ("Escrow Agent"). MSD, MSDSub and GTCR IV are sometimes collectively referred to as the "Stockholders". W I T N E S S E T H: WHEREAS, MS Financial, Inc. ("MS Financial"), Search and Search's wholly owned subsidiary, Search Capital Acquisition Corp. ("Newco"), have entered into an Agreement and Plan of Merger dated February 7, 1997 (as amended, the "Merger Agreement"), to effect the Merger (as defined in the Merger Agreement; capitalized terms used herein shall have the same definition as in the Merger Agreement unless otherwise specifically indicated) of Newco into MS Financial, which will result in MS Financial being controlled by Search instead of by the Stockholders, and each outstanding share of MS Financial Stock will be converted into the right to receive that number of shares of Search Common Stock, $.01 par value per share ("Search Common Stock"), specified in the Merger Agreement; and WHEREAS, Stockholders and Search have entered into a Stockholders Agreement dated February 7, 1997 (as amended, the "Stockholders Agreement"), pursuant to which Stockholders and Search agreed to enter into this Escrow Agreement; and WHEREAS, Search has agreed to issue the Search Common Stock as an integral part of the Merger to all of the stockholders of MS Financial, including but not limited to, the Stockholders; and WHEREAS, the Stockholders Agreement provides that portions of the Search Common Stock to be issued as Merger Consideration to the Stockholders are to be held in escrow pursuant to this Escrow Agreement in order to (i) guaranty payment of indemnification obligations under the Stockholders Agreement and (ii) reserve against the possibility that certain anticipated tax refunds are not received by MS Financial or the Surviving Corporation; and -1- EX-99.1 19 FORM OF SEARCH PROXY 1 EXHIBIT 99.1 FORM OF SEARCH PROXY SEARCH CAPITAL GROUP, INC. 600 NORTH PEARL STREET, SUITE 2500 DALLAS, TEXAS 75201 SPECIAL MEETING OF STOCKHOLDERS - JULY 28, 1997 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints George C. Evans and James F. Leary or either of them as proxies, each with full powers of substitution, and hereby authorizes them to represent and to vote, as designated on the reverse side, all shares of Common Stock, 12% Senior Convertible Preferred Stock and 9%/7% Convertible Preferred Stock, of Search Capital Group, Inc. ("Search") held of record by the undersigned on May 30, 1997, at the Special Meeting of Stockholders of Search to be held on July 28, 1997, or any adjournment thereof. This Proxy when properly executed and returned in a timely manner will be voted at the Special Meeting and any adjournment thereof in the manner described herein. If no contrary indication is made, the proxy will be voted FOR Proposal 1 and in accordance with the judgment of the persons named as proxies herein on any other matters that may properly come before the Special Meeting. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE [Reverse Side] Please mark [X] votes as in this example. The Board of Directors unanimously recommends that you vote FOR Proposal 1: 1. Proposal to approve and adopt the Agreement and Plan of Merger and the transactions contemplated thereby, as described in the accompanying Joint Proxy Statement/Prospectus. FOR AGAINST ABSTAIN [_] [_] [_] 2. In accordance with their judgment, the proxies are authorized to vote upon such other matters as may properly come before the Special Meeting or any adjournment hereof. [_] MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT This proxy must be signed exactly as your name appears hereon. When shares are held by joint tenants, both should sign. Attorneys, executors, administrators, trustees and guardians should indicate their capacities. If the signer is a corporation, please print full corporate name and indicate capacity of duly authorized officer executing on behalf of the corporation. If the signer is a partnership, please print full partnership name and indicate capacity of duly authorized person executing on behalf of the partnership. Signature:__________________________ Date:________ Signature:__________________________ Date:________ EX-99.2 20 FORM OF MFS PROXY 1 EXHIBIT 99.2 FORM OF MSF PROXY MS FINANCIAL, INC. 715 S. PEAR ORCHARD ROAD, SUITE 300 RIDGELAND, MISSISSIPPI 39157 SPECIAL MEETING OF STOCKHOLDERS - JULY 28, 1997 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Vann R. Martin and R. Dale Miller or either of them as proxies, each with full powers of substitution, and hereby authorizes them to represent and to vote, as designated on the reverse side, all shares of Common Stock, $0.001 par value, of MS Financial, Inc. ("MSF") held of record by the undersigned on June 25, 1997, at the Special Meeting of Stockholders of MSF to be held on July 28, 1997, or any adjournment thereof. This Proxy when properly executed and returned in a timely manner will be voted at the Special Meeting and any adjournment thereof in the manner described herein. If no contrary indication is made, the proxy will be voted FOR Proposal 1 and in accordance with the judgment of the persons named as proxies herein on any other matters that may properly come before the Special Meeting. PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE [Reverse Side] Please mark [X] votes as in this example. The Board of Directors unanimously recommends that you vote FOR Proposal 1: 1. Proposal to approve and adopt the Agreement and Plan of Merger and the transactions contemplated thereby, as described in the accompanying Joint Proxy Statement/Prospectus. FOR AGAINST ABSTAIN [_] [_] [_] 2. In accordance with their judgment, the proxies are authorized to vote upon such other matters as may properly come before the Special Meeting or any adjournment hereof. [_] MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT This proxy must be signed exactly as your name appears hereon. When shares are held by joint tenants, both should sign. Attorneys, executors, administrators, trustees and guardians should indicate their capacities. If the signer is a corporation, please print full corporate name and indicate capacity of duly authorized officer executing on behalf of the corporation. If the signer is a partnership, please print full partnership name and indicate capacity of duly authorized person executing on behalf of the partnership. Signature:__________________________ Date:________ Signature:__________________________ Date:________ EX-99.3 21 CONSENT OF JAMES B. STUART, JR. 1 EXHIBIT 99.3 Search Capital Group, Inc. 700 North Pearl Street, Suite 400 Dallas, Texas 75201 I hereby consent to my being named as a director of Search Capital Group, Inc. to be elected at the annual meeting of the stockholders of Search and to other references to my name in the registration statement, on Form S-4, being filed on behalf of Search Capital Group, Inc. in connection with its proposed acquisition of MS Financial, Inc. /s/ JAMES B. STUART JR. 5/7/97 - ----------------------------------- ------------------------- Signature Date -----END PRIVACY-ENHANCED MESSAGE-----