-----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, CvqHqWBWXmKSBCY+MwB9WCbqzaGI2pqpLQMcKNJcnMRMRbnOBWJLnv13+tgAsbuh YXF7uBC0sWxkkI5EYHH/TA== 0000950134-97-008620.txt : 19971117 0000950134-97-008620.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950134-97-008620 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-09539 FILM NUMBER: 97721993 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 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1997 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: September 30, 1997 0-9539 - --------------------- ----------------------- SEARCH FINANCIAL SERVICES INC. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 41-1356819 - ----------------------------- --------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 600 North Pearl, Suite 2500 Dallas, Texas 75201 ------------------- (Address of principal executive offices, including zip code) 214-965-6000 ------------ (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 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 ----- ----- 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 ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding Class at November 14, 1997 - ----------------------------------- ---------------------------------- Common Stock, $.01 par value 6,682,886 1 2 SEARCH FINANCIAL SERVICES INC. FORM 10-Q INDEX
PART I FINANCIAL INFORMATION PAGE ---- Item 1. Consolidated Financial Statements.................................................3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................15 PART II OTHER INFORMATION................................................................20 Item 1. Legal Proceedings................................................................20 Item 3. Defaults Upon Senior Securities..................................................21 Item 4. Submission of Matters to a Vote of Security Holders .............................21 Item 6. Exhibits and Reports on Form 8-K.................................................23 SIGNATURES .................................................................................24
The financial information for the interim periods presented herein is unaudited. In the opinion of management, all adjustments necessary (which are of a normal recurring nature) have been included for a fair presentation of the results of operations. The results of operations for an interim period are not necessarily indicative of the results that may be expected for a full year or any other interim period. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Form 10-Q for quarter ended September 30, 1997 contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which may be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "goal," "continue," or comparable terminology, that involve risks or uncertainties and that are qualified in their entirety by the cautions and risk factors contained herein and in the Company's 10-K Annual Report for the fiscal year ended March 31, 1997 and in other Company documents filed with the Securities and Exchange Commission. 2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS SEARCH FINANCIAL SERVICES INC. AND SUBSIDIARIES Consolidated Balance Sheets
UNAUDITED AUDITED ASSETS SEPTEMBER 30, 1997 MARCH 31, 1997 - ------ ------------------ -------------- Gross contracts receivable (Note 2) $ 162,061,000 $ 62,325,000 Unearned interest (34,691,000) (10,636,000) ------------- ------------- Net contracts receivable 127,370,000 51,689,000 Installment contracts sold (15,735,000) -- Amounts due under securitization (Note 4) 3,674,000 -- Other amounts due 1,605,000 -- ------------- ------------- Net owned contracts receivable and due from securitizations 116,914,000 51,689,000 Allowance for loan losses (10,768,000) (5,854,000) Loan origination costs 6,582,000 5,852,000 Amortization of loan origination costs (4,927,000) (4,379,000) ------------- ------------- Net contract receivables - after allowance for credit losses & other costs 107,801,000 47,308,000 ------------- ------------- Cash and cash equivalents 2,491,000 12,249,000 Vehicles held for resale 1,199,000 1,196,000 Deferred note offering costs, net 104,000 155,000 Property and equipment, net 2,577,000 1,608,000 Intangibles, net 11,475,000 6,252,000 Other assets 986,000 755,000 ------------- ------------- Total assets $ 126,633,000 $ 69,523,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Lines of credit $ 17,248,000 $ 23,715,000 Notes Payable 68,926,000 9,596,000 Accrued settlements 500,000 540,000 Accounts payable and other liabilities 2,947,000 2,760,000 Subordinated note payable 5,000,000 5,000,000 Accrued interest 688,000 271,000 Redeemable warrants 1,115,000 1,035,000 ------------- ------------- Total Liabilities 96,424,000 42,917,000 ------------- ------------- Stock repurchase commitment -- 2,078,000 ------------- ------------- Stockholders' Equity Convertible preferred stock 201,000 201,000 Common stock 289,000 252,000 Additional paid-in capital 88,252,000 78,047,000 Accumulated deficit (57,321,000) (52,760,000) ------------- ------------- Total stockholders' equity 31,421,000 25,740,000 ------------- ------------- Receivable from officers and directors (1,212,000) (1,212,000) ------------- ------------- Total stockholders' equity 30,209,000 24,528,000 ============= ============= Total liabilities and stockholders' equity $ 126,933,000 $ 69,523,000 ============= =============
See accompanying notes to consolidated financial statements. 3 4 SEARCH FINANCIAL SERVICES INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)
Six Months Ended Six Months Ended September 30, 1997 September 30, 1996 ------------------ ------------------ Interest revenue $ 6,412,000 $ 3,898,000 Interest expense 2,979,000 338,000 ----------- ----------- Net interest income 3,433,000 3,560,000 Reduction of credit losses 998,000 3,438,000 ----------- ----------- Net interest income after reduction of credit losses 4,431,000 6,998,000 ----------- ----------- General and administrative expense 8,992,000 6,043,000 ----------- ----------- Net income (loss) before dividends (4,561,000) 955,000 Preferred stock dividends (1,670,000) (2,946,000) ----------- ----------- Net loss attributable to common stockholders $(6,231,000) $(1,991,000) =========== =========== Net loss per share attributable to common stockholders $ (1.42) $ (0.59) =========== =========== Weighted average number of common shares outstanding 4,385,000 3,402,000 =========== =========== Three Months Ended Three Months Ended September 30, 1997 September 30, 1996 ------------------ ------------------ Interest revenue $ 3,965,000 $ 2,239,000 Interest expense 1,944,000 316,000 ----------- ----------- Net interest income 2,021,000 1,923,000 Reduction of credit losses (provisions for) (1,507,000) 2,056,000 ----------- ----------- Net interest income after reduction of credit losses 514,000 3,979,000 ----------- ----------- General and administrative expense 5,223,000 3,515,000 ----------- ----------- Net income (loss) before dividends (4,709,000) 464,000 Preferred stock dividends (60,000) (1,542,000) ----------- ----------- Net loss attributable to common stockholders $(4,769,000) $(1,078,000) =========== =========== Net loss per share attributable to common stockholders $ (0.85) $ (0.32) =========== =========== Weighted average number of common shares outstanding 5,594,000 3,329,000 =========== ===========
4 5 SEARCH FINANCIAL SERVICES INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30, 1996 ------------------ ------------------ OPERATING ACTIVITIES: Net income (loss) $ (4,561,000) $ 955,000 Adjustments to reconcile net income (loss) to cash used in operations: (Reduction) of credit losses (Note 2) (998,000) (1,691,000) Accretion of warrant debt 80,000 50,000 Amortization of deferred offering costs 51,000 6,000 Amortization of loan origination costs 547,000 251,000 Amortization of goodwill 358,000 -- Depreciation 387,000 281,000 Changes in assets and liabilities: Decreases (increases) in other assets 585,000 (36,000) Increases (decreases) in interest payable (180,000) -- Increases (decreases) in accounts payable 675,000 (5,377,000) Increases (decreases) in accrued expenses (223,000) -- ------------ ------------ Cash used in operations (3,279,000) (5,561,000) ------------ ------------ INVESTING ACTIVITIES: Purchase of contracts receivable (14,337,000) (14,488,000) Increase in loan origination fee (180,000) (975,000) Principal payments on contracts receivables 17,522,000 13,173,000 Proceeds from sales of vehicles 3,412,000 -- Purchase of property and equipment (856,000) (261,000) ------------ ------------ Cash provided by investing activities 5,561,000 (2,551,000) ------------ ------------ FINANCING ACTIVITIES: Borrowings under line of credit 9,433,000 3,952,000 Repayments under line of credit (15,900,000) (2,228,000) Notes payable proceeds 10,653,000 -- Notes payable repayments (14,160,000) -- Capital lease principal payments (22,000) (30,000) Deferred offering costs -- (82,000) Stock repurchase (2,078,000) -- Net proceeds from debt conversion and sale of stock -- 4,490,000 Loans for stock purchases -- (1,099,000) Payment of dividends on preferred stock (3,213,000) (1,680,000) ------------ ------------ Cash provided by (used in) financing activities (15,287,000) 3,323,000 ------------ ------------ CHANGE IN CASH AND CASH EQUIVALENTS: Change in cash and cash equivalents (12,751,000) (4,789,000) Cash and cash equivalents - beginning 12,249,000 17,817,000 Net cash acquired 2,993,000 -- ------------ ------------ Cash and cash equivalents - ending $ 2,491,000 $ 13,028,000 ============ ============ - ----------------------------------------------------------------------------------------------- Supplemental Information: Cash Paid for Interest $ 2,562,000 $ 60,000 ============ ============
5 6 SEARCH FINANCIAL SERVICES INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The consolidated financial statements of Search Financial Services Inc. ("Search") and together with its subsidiaries (together the "Company") are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures present fairly the financial position of the Company at the dates, and its financial position for the periods presented. The financial statements should be read in conjunction with the audited consolidated financial statements and related notes and schedules included in the Company's Form 10-K Annual Report for the fiscal year ended March 31, 1997. During the six months ended September 30, 1997, the Company recorded adjustments which it considers not of a normal recurring nature. These adjustments include a $998,000 reduction in loan loss reserves due to changed estimates relating to the timing of expected future cash flows due to the Company selling a portion of its deficiency balance accounts for approximately $1,450,000 and $44,000 related to the Autostar Solutions lawsuit in which the Company reversed an accrual after the jury ruled in the Company's favor. The consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior periods balances to conform to current period presentation. 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. 2. CONTRACT RECEIVABLES, 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. 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 allowance is not adequate to cover expected losses. 6 7 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. Generally, the Company considers receivables that are contractually delinquent greater than 60 days or with respect to which the underlying collateral has been repossessed to be impaired at which time interest income ceases to be recognized. Once impaired, the Company looks to the underlying collateral for repayment of the receivable. At impairment, the Company writes down the receivable to its estimated net realizable value, which is the fair value of the underlying collateral if it has been repossessed or the estimated recoverable cash flow if no repossession has occurred. If the measured amount of the impaired receivable is less than the Company's net recorded investment in the receivable, the Company recognizes a charge to provision for credit losses in the amount of the deficiency and increases the allowance for credit losses by a corresponding amount. The provision for credit losses is adjusted for any differences between the final net proceeds from resale of the underlying collateral and the estimated net realizable value. Generally, the Company charges off a receivable against the allowance for credit losses at 180 days contractual delinquency, if no significant payments have been received in the last six months, or, if earlier, after receipt of the sale proceeds from liquidation of the collateral securing the receivable. Subsequent proceeds received on a previously charged-off receivable are recorded as a recovery to the allowance for credit losses. Any excess of cost paid ("premium") for net receivables acquired is recorded as an asset and amortized over the life of the related loans acquired as an adjustment to yield using the interest method. AVERAGE RECEIVABLE CHARACTERISTICS At September 30, 1997, the Company had 20,428 owned and securitized receivables in its portfolio with an aggregate total unpaid balance of $162,061,000, including $34,691,000 in unearned interest and $10,768,000 in loan loss allowance, compared to an aggregate of 9,421 receivables in its portfolio with an aggregate total unpaid balance of $62,325,000, including $10,636,000 in unearned interest and $5,854,000 in loan loss allowance, as of March 31, 1997. Additionally, the Company had a total of 461 vehicles held for resale having an estimated value of approximately $1,199,000 as of September 30, 1997, compared to 458 vehicles held for resale as of March 31, 1997 with a value of approximately $1,196,000. Set forth below is a summary of pertinent statistics regarding the average active receivable in the Company's non-prime (owned and securitized) and consumer portfolios of receivables as of September 30, 1997 and March 31, 1997. 7 8
AS OF AS OF SEPTEMBER 30, 1997 MARCH 31, 1997 ------------------------------- ------------------------------ NON-PRIME NON-PRIME CONSUMER AUTO TOTAL CONSUMER AUTO TOTAL -------- --------- ------- -------- --------- ------- Average Original Term - Months 24.2 45.7 42.7 20.0 39.7 38.6 Average Remaining Term - Months 22.4 25.2 24.8 9.1 22.8 22.1 Average APR 24.0 21.0 21.42 34.6 23.5 24.1 Average Payment Amount $111 $331 $330 $92 $317 $305 Average Original Gross Balance $3,005 $15,298 $13,577 $2,284 $12,788 $12,202 Average Current Gross Balance $2,729 $ 8,781 $ 7,933 $1,515 $ 6,902 $ 6,616 Average Net Receivable $2,139 $ 6,902 $ 6,235 $1,160 $ 5,728 $ 5,487 Weighted Average APR 22.4 20.4 20.5 30.0 22.8 22.9
DISTRIBUTION OF RECEIVABLES BY STATE The following tables set forth information regarding the distribution of the Company's owned and securitized contract receivables by state. (Dollar amounts shown in thousands.)
AS OF SEPTEMBER 30, 1997 ---------------------------------------------- NUMBER OF TOTAL UNPAID STATE RECEIVABLES INSTALLMENTS % OF TOTAL - ------------------- ----------- ------------ ---------- Texas 7,445 $ 60,803 37% Mississippi 2,853 23,620 15% North Carolina 2,348 22,089 14% Tennessee 1,961 12,973 8% Georgia 1,345 11,117 7% Oklahoma 933 7,154 4% Louisiana 800 5,051 3% Other 2,743 19,254 12% ------ -------- --- 20,428 $162,061 100% ====== ======== ===
AS OF MARCH 31,1997 ---------------------------------------------- NUMBER OF TOTAL UNPAID STATE RECEIVABLES INSTALLMENTS % OF TOTAL - ------------------- ----------- ------------ ---------- Texas 3,831 $ 25,405 41% Tennessee 1,447 8,370 13% Mississippi 647 6,652 11% Georgia 834 5,750 9% North Carolina 419 4,461 7% Florida 627 2,511 4% Louisiana 590 1,753 3% Other 1,026 7,423 12% ----- -------- --- 9,421 $ 62,325 100% ===== ======== ===
8 9 CONTRACTUAL MATURITIES The following tables set forth certain information related to the contractual maturities of the Company's owned and securitized contract receivables as of September 30, 1997 and March 31, 1997. (In thousands.)
AS OF SEPTEMBER 30, 1997 ---------------------------------------------------- 12 MONTHS ENDING SEPTEMBER 30, 2001 and 1998 1999 2000 Thereafter Total ---------------------------------------------------- Future payments receivable $73,357 $45,680 $27,830 $15,194 $162,061 Less unearned interest 15,316 11,451 6,675 1,249 34,691 Net contractual maturities $58,041 $34,229 $21,155 $13,945 $127,370 ====================================================
AS OF MARCH 31, 1997 ---------------------------------------------------- 12 MONTHS ENDING MARCH 31, 1997 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 contractual maturities $23,117 $15,306 $10,083 $ 3,183 $ 51,689 ====================================================
In the opinion of management, a portion of the receivables shown above 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 or interest income. RECEIVABLES DELINQUENCY AND ALLOWANCE FOR CREDIT LOSSES 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 tables break out the owned and securitized receivables that the Company considers unimpaired or accrual status and impaired or nonaccrual status as of September 30, 1997 and March 31, 1997. TOTAL COMPANY:
(Dollars in thousands) AS OF SEPTEMBER 30, 1997 AS OF MARCH 31, 1997 ------------------------------------------ ----------------------------------------- Total (1) % of Total Total(1) % of Total Contractual Number of Unpaid Unpaid Number of Unpaid Unpaid Delinquency Receivables Installments Installments Receivables Installments Installments - ----------------------- ----------- ------------ ------------ ----------- ------------ ------------ Accrual Receivables 0 to 30 days past due 17,429 $138,945 86% 8,254 $56,074 90% 31-60 days past due 1,788 14,320 9% 702 3,982 6% ----------------------------------------- ----------------------------------------- Subtotal 19,217 $153,265 95% 8,956 $60,056 96% ----------------------------------------- ----------------------------------------- Nonaccrual Receivables 61-180 days past due 1,113 8,240 5% 461 2,255 4% 181+ days past due 98 556 0% 4 14 0% ----------------------------------------- ----------------------------------------- Subtotal 1,211 8,796 5% 465 2,269 4% ----------------------------------------- ----------------------------------------- All Receivables (2) 20,428 $162,061 100% 9,421 $62,325 100% ========================================= ========================================= Vehicles held for resale @ collateral value 461 $ 1,199 458 $ 1,196 ======================== ========================
9 10 NON-PRIME AUTO:
(Dollars in thousands) AS OF SEPTEMBER 30, 1997 AS OF MARCH 31, 1997 ------------------------------------------ ----------------------------------------- Total (1) % of Total Total(1) % of Total Contractual Number of Unpaid Unpaid Number of Unpaid Unpaid Delinquency Receivables Installments Installments Receivables Installments Installments - ----------------------- ----------- ------------ ------------ ----------- ------------ ------------ Accrual Receivables 0 to 30 days past due 14,707 $131,350 85% 7,863 $55,347 90% 31-60 days past due 1,722 14,190 9% 642 3,949 6% ---------------------------------------- ------------------------------------------ Subtotal 16,429 $145,540 94% 8,505 $59,296 96% ---------------------------------------- ------------------------------------------ Nonaccrual Receivables 61-180 days past due 1,040 8,158 5% 387 2,220 4% 181+ days past due 98 556 1% 4 14 0% ---------------------------------------- ------------------------------------------ Subtotal 1,138 8,714 6% 391 2,234 4% ---------------------------------------- ------------------------------------------ All Receivables(2) 17,567 $154,254 100% 8,896 $61,530 100% ======================================== ========================================== Vehicles held for resale @ collateral value 461 $ 1,199 458 $ 1,196 ======================== ==========================
CONSUMER:
(Dollars in thousands) AS OF SEPTEMBER 30, 1997 AS OF MARCH 31, 1997 ------------------------------------------ ----------------------------------------- Total (1) % of Total Total(1) % of Total Contractual Number of Unpaid Unpaid Number of Unpaid Unpaid Delinquency Receivables Installments Installments Receivables Installments Installments - ----------------------- ----------- ------------ ------------ ----------- ------------ ------------ Accrual Receivables 0 to 30 days past due 2,722 $ 7,595 97% 391 $ 727 91% 31-60 days past due 66 130 2% 60 33 4% ---------------------------------------- ------------------------------------------ Subtotal 2,788 $ 7,725 99% 451 $ 760 95% ---------------------------------------- ------------------------------------------ Nonaccrual Receivables 61-180 days past due 73 82 1% 74 35 5% 181+ days past due 0 0 0% 0 0 0% ---------------------------------------- ------------------------------------------ Subtotal 73 82 1% 74 35 5% ---------------------------------------- ------------------------------------------ All Receivables 2,861 $ 7,807 100% 525 $ 795 100% ======================================== ==========================================
(1) Includes unearned income. (2) Active receivables shown on the face of the Company's balance sheet exclude 461 and 458 accounts that have been reclassified to vehicles held for resale at September 30, 1997 and March 31, 1997, respectively. The following tables set forth certain information related to the delinquency of the Company's contract receivables as of September 30, 1997 and March 31, 1997.
AS OF SEPTEMBER 30, 1997 --------------------------------------------------------------------------- TOTAL ALLOWANCE NET RECEIVABLES NUMBER OF UNPAID UNEARNED FOR CREDIT AFTER ALLOWANCE CONTRACTUAL DELINQUENCY RECEIVABLES(1) INSTALLMENTS INTEREST LOSSESS FOR CREDIT LOSSES - ----------------------- -------------- ------------ -------- ---------- ----------------- Unimpaired receivables 19,217 $153,265 $ 33,270 $ 4,162 $115,883 Impaired receivables 1,211 8,796 1,421 6,606 769 ------ -------- -------- ------- -------- Total 20,428 $162,061 $ 34,691 $10,768 $116,602 ====== ======== ======== ======= ======== Reserve for credit losses as a percent of net receivables 8.5% ========
10 11
AS OF MARCH 31, 1997 ------------------------------------------------------------------------ TOTAL ALLOWANCE NET RECEIVABLES CONTRACTUAL NUMBER OF UNPAID UNEARNED FOR CREDIT AFTER ALLOWANCE DELINQUENCY RECEIVABLES(1) INSTALLMENTS INTEREST LOSSES FOR CREDIT LOSSES - ----------------------- -------------- ------------ -------- ---------- ----------------- Unimpaired receivables 8,956 $60,056 $10,302 $4,861 $44,893 Impaired receivables 465 2,269 334 993 942 ----- ------- ------- ------ ------- Total 9,421 $62,325 $10,636 $5,854 $45,835 ===== ======= ======= ====== ======= Reserve for credit losses as a percent of net receivables 11.3% =======
(1) Excludes 461 and 458 accounts that have been reclassified to vehicles held for resale as of September 30, 1997 and March 31, 1997, respectively. The following table shows the changes in the Company's allowance for loan losses for the six months ended September 30, 1997.
SIX MONTHS ENDING SEPTEMBER 30, 1997 ------------------ Balance at beginning of period $ 5,854,000 Allowance recorded on acquisition of receivables 11,737,000 Increase in allowance for loan losses 3,434,000 Proceeds received on previously charged-off accounts 3,957,000 Reduction in allowance for credit losses (4,432,000) Receivables charged off against allowance (9,782,000) ----------- Balance at end of period $10,768,000 ----------- Net credit losses as a percent of average net receivables 14% ===========
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 six months ended September 30, 1997, as follows.
SIX MONTHS ENDED SEPTEMBER 30, 1997 ------------------ Provision for loan losses $ 3,436,000 Reduction in allowance (4,432,000) ----------- Net effect on statement of operations $ (998,000) ===========
The Company's receivables are generally installment receivables having a fixed annual percentage rate ("APR"). These receivables are predominantly secured by motor vehicles as of September 30, 1997. 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. The Company has no material amount of foreign receivables. Receivables become nonaccrual status due to their contractual delinquency greater than 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 11 12 considerations, and current trends in portfolio growth cause the Company to review these receivables for impairment. The Company considers Texas, Mississippi and North Carolina to be states with receivable concentrations, because receivables with obligors in each of these states exceed 10% of the total outstanding receivables. Most of the Company's receivables are due from individuals located in large metropolitan areas of Texas, Mississippi and North Carolina and other southern and western states. To some extent, realization of the receivables will be dependent on local economic conditions. Generally, the Company holds titles as collateral for all receivables until such receivables are paid in full. 3. ACQUISITION Effective July 31, 1997, Search completed its acquisition of MS Financial, Inc. ("MSF"). Search issued 3,666,500 shares of its common stock in the acquisition. MSF conducted purchasing and servicing of non-prime motor vehicle receivables in Jackson, Mississippi. The acquisition was accounted for under the purchase method of accounting. Accordingly, MSF's results of operations have been included in the consolidated financial statements since the date of acquisition. The purchase price was allocated to the assets acquired based upon their estimated fair value as of July 31, 1997. MSF's net assets were valued at $12,910,000. The allocation of the purchase price to the acquired assets and liabilities of MSF is as follows (in thousands): Cash $ 1,937 Receivables, net (1) 60,172 Inventory 703 Bad debt accounts 1,500 Other assets, primarily income tax 7,125 Property & equipment, net 500 Dealer network 5,643 ------- Fair value of assets acquired $77,580 ------- Payables and accrueds 1,837 Term note 62,823 ------- Fair value of liabilities assumed 64,660 ------- Net assets acquired $12,920 ======= Total value paid by Search $12,920 =======
(1) Includes the receivable for securitizations. The cost in excess of fair value of net tangible assets acquired of $5,643,000 is being amortized over a term of approximately 15 years on a straight-line basis. The 12 13 Company periodically evaluates the recoverability and remaining life of the goodwill 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. 4. INSTALLMENT CONTRACTS SOLD AND SECURITIZATIONS During calendar 1994 and 1995, $35 million and $90 million, respectively, of installment contracts were sold by MSF 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. MSF retained a subordinated portion of the trust certificates in the 1994 transaction. MSF 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 were recognized in MSF's consolidated financial statements. The Company's risk of accounting loss does not exceed amounts recorded as amounts due from securitizations in the consolidated balance sheets as a result of MSF's securitization transactions. Since delinquencies on installment contracts sold in securitizations serviced by MSF exceeded certain predefined levels prior to MSF's acquisition and have continued to exceed those levels, the funding of cash collateral accounts that are held in trust for the benefit of the senior certificate holders has been increased. The increase in the cash collateral accounts is required to be funded with cash flows from the securitized installment contracts that otherwise would be forwarded to the Company. Further, MSF can be replaced as servicer by the issuer of the financial guaranty insurance policy (see below). As of September 30, 1997, the cash collateral account for the 1995 securitization remained underfunded by approximately $3,000,000. On July 31, 1997, the date of acquisition of MSF, the amount of underfunding was approximately $4,000,000. 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 securitization 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, MSF has not been notified, nor does management expect for MSF to be notified, of any request for replacement as servicer on the installment contracts sold. MSF obtained a financial guaranty insurance policy for the benefit of the senior certificate holders from an unrelated party. Distributions under the subordinated certificates held by MSF are pledged to the issuer of the financial guaranty insurance policy. At September 30, 1997, the Company was servicing for third parties net installment contracts totaling approximately $17,000,000. Of this amount, $16,000,000 represented the aggregate uncollected principal balance of installment contracts sold in MSF securitizations. The Company services these installment contracts and receives a service fee based on a percent of the outstanding principal balance. 13 14 5. 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 $18.00 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 in an individual retirement account of the former director were subject to a "put" to the Company in May 1997 for $18.00 per share, the market value at the date of the agreement. On May 8, 1997, all 115,417 shares were put to the Company, at which time the Company paid $2,078,000 in cash to acquire those shares. The shares were subsequently retired. 6. 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 plan of reorganization, 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. Warrants to purchase 84,522 shares of common stock and other Warrants to purchase 375,000 shares of common stock were repurchased from Hall Phoenix Inwood, Ltd. in November 1996. The exercise price per share of the Warrants is currently $18.00. The exercise price per share 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 from March 15, 1996 using the interest method. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Search Financial Services Inc. ("Search", and together with its consolidated subsidiaries the "Company") is a financial services company specializing in the purchase and management of non-prime motor vehicle receivables, typically those owed by consumer obligors who do not qualify for traditional financing. The Company purchases its contracts individually from franchise and independent automobile and light truck dealers ("Dealers"), through bulk purchases of receivables from other finance companies, and Dealers who originate them in the sale of vehicles and through the acquisition of companies engaged in the same business. During the fiscal year ended March 31, 1996, the Company commenced operations in other consumer lending areas by opening several consumer lending branches. As of September 30, 1997, 21 consumer lending branches were operational. Prior to November 4, 1994, the Company primarily financed the purchase of non-prime 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 bankruptcy proceedings, the Notes and the indebtedness represented by the Notes, together with their related Trust Indentures, were canceled. At that time, the Company implemented its new purchasing program (the "Preferred Program"). The Preferred Program continues to focus on the purchasing of non-prime motor vehicle receivables whose obligors have non-prim 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 programs. The Company anticipates lower repossession rates and higher repossession sale proceeds as a result of the Preferred Program. The terms of loans under the Preferred Program generally range from 30 months to 60 months. RESULTS OF OPERATIONS Comparison of Six-Month and Three-Month Periods Ended September 30, 1997 and 1996 The Company purchased 866 non-prime motor vehicle contracts during the six months ended September 30, 1997 compared to 509 non-prime motor vehicle contracts during the six months ended September 30, 1996. The cost of contract purchases was $9,009,000 ($10,403 per contract) compared to $4,798,000 ($9,426 per contract) for the six-month periods in 1997 and 1996, respectively. The Company purchased 1,098 bulk non-prime contracts at a cost of $9,717,000 ($8,849 per contract) during the six months ended September 30, 1996. No bulk purchases were made in the same period in 1997. The Company has also expanded into other areas of consumer finance. During the six months ended September 30, 1997, the Company 15 16 purchased or originated 3,773 non-auto consumer loan contracts at a cost of $5,328,000 ($1,412 per contract). The Company purchased 725 non-auto consumer loan contracts during the six months ended September 30, 1996 at a cost of $278,000 in a bulk purchase transaction. Interest revenue increased from $3,898,000 for the six months ended September 30, 1996 to $6,412,000 for the six months ended September 30, 1997. The increase of $2,514,000, or 64%, is a result of higher average interest earning net receivables for the six-month period ended September 30, 1997. The increase in average interest earning receivables is primarily a result of the MSF acquisition in July 1997. Interest revenue increased 77% in the three month period primarily as a result of the MSF transaction. Interest expense increased to $2,979,000 for the six months ended September 30, 1997 compared to $338,000 for the six-month period ended September 30, 1996. Interest expense increased during the three month period approximately 400%. The increase in interest expense is due to increased borrowings associated with the Company's outstanding lines of credit, notes payable and increased warrant accretion. The provision for credit losses was favorably impacted during the six months ended September 30, 1997 by the sale of $1,400,000 of previously charged-off loans, i.e., loans on which generally no payments had been received for at least one year. Reflecting the benefit of this sale, the reduction of credit losses was $998,000 for the six months ended September 30, 1997, compared to $3,438,000 for the six months ended September 30, 1996. In the future, management anticipates a lower reduction of credit losses as the number of remaining charged-off accounts continues to decrease, and any provisions are not offset by recoveries of prior credit losses. During the three month period, the company recorded a new $1,507,000 provision for credit losses primarily due to losses in the DACC portfolio. General and administrative expenses increased to $9,025,000 for the six months ended September 30, 1997 compared to $5,922,000 for the six-month period ended September 30, 1996. During the three month period,the Company's general and administrative expense increased $1,708,000. The increase in general and administrative expenses is primarily related to increased expenses associated with the opening of consumer lending branches, expansion of the Company's servicing capacity, and increases in professional fees. During the six months ended September 30, 1997, the Company incurred significant costs associated with the acquisition of MSF and other potential acquisitions. Preferred stock dividends decreased from $2,946,000 for the six months ended September 30, 1996 to $1,670,000 for the six months ended September 30, 1997. The Company did not accrue preferred stock dividends for the quarter ended September 30, 1997 because of a prohibition in one of its credit agreements. LIQUIDITY AND CAPITAL RESOURCES General During the next 12 months the Company will require substantial amounts of cash to support its operations and other activities. Currently, the primary cash requirements include amounts to purchase and originate new receivables, retire maturing debt and cover operating expenses. In addition, to the extent it is not prohibited from doing so, the Company will require cash to pay preferred stock dividends. The Company had approximately $2,490,000 of cash on 16 17 hand as of September 30, 1997, which it does not consider adequate to meet its cash needs during the next 12 months. Because the consumer finance industry requires the purchase and carrying of receivables, a relatively high ratio of borrowings to net worth is customary and will be an important element in the Company's liquidity. The Company will seek to leverage its net worth and any subordinated debt in the future to enhance its liquidity. Additionally, the Company will endeavor to maximize its liquidity by diversifying its sources of cash to include cash from operations, the securitization of receivables, lines of credit available from commercial banks and other lenders, and convertible or other subordinated debt. The Company's cash needs and uses relate to activities of the Company in three areas. First, operating activities produce cash from the receipt of net interest income (interest income less interest expense) and use cash to pay operating expenses. Second, the Company's investing activities use cash for the purchase or origination of receivables and produce cash from the collection of principal payments and repossession proceeds. Finally, financing activities produce or use cash from lines of credit, securitizations and debt or equity offerings. Following is a discussion of each activity. Operating Activities For the six months ended September 30, 1997, the Company's loss before preferred stock dividends was $4,561,000. The operating profit for the six months ended September 30, 1996 did not produce operating cash flows due to non-cash adjustments included in operating profit which do not produce cash flows. The Company does not expect to generate operating cash flows in the foreseeable future. In order to continue to cover its operating expenses in the next 12 months, the Company will be required to do one or a combination of the following: leverage any unencumbered receivables, raise additional equity or debt through public or private sales, securitize receivables, sell receivables, grow its receivable base large enough to generate operating cash flows or curtail its operations significantly. Unless a significant acquisition occurs during the next 12 months, the Company does not expect its receivable base to become large enough to produce positive operating cash flows. The Company has consolidated all of MSF's operations into its existing servicing and origination operations. The significant reduction in MSF's underwriting and servicing overhead is intended to generate net operating income in the range of approximately $1,200,000 per quarter, assuming the Company is successful in expanding MSF's marketing efforts to generate receivable growth to offset liquidation in the existing MSF portfolio. Investing Activities For the six months ended September 30, 1997, the Company's investing activities produced $5,688,000 positive cash flows compared to $3,657,000 negative cash flows, for the six months ended September 30, 1996. The primary reason for the Company's investing activities providing cash flow for the six months ended September 30, 1997 is that liquidation of the Company's receivables exceeded the amount of receivables purchased and originated. The Company anticipates encountering negative cash flows from its investing activities in the next 12 months as its non-prime marketing activities are enhanced by the acquisition of MSF and its 17 18 consumer finance operations are expanded. Material bulk purchases would also contribute to negative investing cash flows. The Company's investing activities will be constrained to the extent it does not have an adequate financing source or sources in place. If the Company is able to obtain adequate financing and find acceptable receivables to purchase or originate, the Company should be able to grow its receivable base and help produce positive operating cash flows. Financing Activities For the six months ended September 30, 1997 and 1996, the Company's financing activities produced $15,287,000 negative cash flows compared to positive cash flows of $3,323,000 for the six months ended September 30, 1996. The decrease in cash flows from financing activities is caused by repayments under lines of credit and notes payable exceeding borrowings, the repurchase of treasury stock of $2,078,000, the payment of preferred stock dividends of $3,213,000 and repayment of $9,596,000 of the debt assumed in connection with the acquisition of Dealers Alliance Credit Corp. The Company's ability to generate positive cash flows from investing activities in the next 12 months will be dependent on its ability to obtain additional or expanded lines of credit, to complete a debt or equity offering, to securitize receivables and to complete an exchange offer of common stock for preferred stock. The Company has substantial cash flow commitments during the next 12 months that could cause negative cash flows if anticipated financing activities do not materialize. The most significant of these commitments requires the Company to reduce the principal amount outstanding under MSF's line of credit to $50,000,000 by December 31, 1997. The balance due under the MSF line of credit was $65,000,000 as of November 14, 1997. The Company is continuing its efforts to raise convertible or other subordinated debt. Any subordinated debt or equity raised would require repayment of the $5,000,000 subordinated note held by Hall Phoenix/Inwood, Ltd. ("HPIL") if the amount raised is greater than $20,000,000. If less than $20,000,000 is raised, an amount equal to the percentage that the amount raised bears to $20,000,000 would be the required repayment. Currently, the Company is seeking to raise $20,000,000-$35,000,000 from this offering. Additionally, the Company is preparing an exchange offer to convert its outstanding preferred stock into Common Stock. HPIL, the holder of a $5,000,000 subordinated note issued by Search, has advised Search that an event of default under that note will occur if the Company's failure to pay dividends on its preferred stock for the quarter ended September 30, 1997 is not cured by December 3, 1997. This event of default causes defaults under the terms of the Company's revolving lines of credit. Neither HPIL nor any of the Company's lenders has sought to accelerate payment of the indebtedness owed to it at this time. The Company continues to service all of its debts and is attempting to obtain waivers of the defaults arising from the non-payment of dividends. There can be no assurance that such waivers will be obtained. So long as there is a default under the Company's senior debt. HPIL is not entitled to receive any payments under its subordinated note until the senior debt is paid in full. If the Company's lenders elect to accelerate their debts, the Company will likely be unable to pay such debts and at this time is uncertain what action it will take in this event. The company is currently in discussions with respect to a number of acquisition opportunities. The Company desires to expand its business through the acquisition of similar businesses with which it currently competes or that are complimentary to its existing business. No 18 19 commitments or binding agreements have been entered into with respect to these acquisitions. Accordingly, no assurance can be given that any of the acquisitions currently being discussed will be consummated Inflation 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 non-prime operations are seasonably impacted by higher delinquency rates during certain periods, including November and December holiday periods. Year 2000 Compliance The Company believes its year 2000 compliance program will not materially impact its operations or financial condition. The Company's program has two primary areas of focus. First, the Company's front-end non-prime origination system is date sensitive. The Company plans to review this system using existing resources by the end of the fourth quarter of fiscal 1998 and to correct any deficiencies well ahead of the year 2000 deadline. Second, the Company's receivables servicing system is maintained by Norwest Financial Information Systems Group, Inc. (NFISG). NFISG has advised the Company that over the last several years it has taken the necessary steps to prepare for the year 2000, most of its processing already supports dates past the year 2000 and that it is continuing work on its plan to thoroughly review and test each function in advance to ensure internal calculations and processes accurately support the year 2000 and beyond.. NFISG has also advised the Company that its verification of year 2000 compliance will be substantially complete by the end of calendar 1997 with additional changes identified during verification reviews scheduled and completed well ahead of the year 2000 deadline. The Company's charges from NFISG are based on fixed cost per transaction, which remain fixed until 2001. 19 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company and certain of its former and current officers and directors are defendants in a case styled Janice and Warrant Bowe, et al. vs. Search Capital Group, Inc., et al., Cause No. 1:95CSV649BR, filed in the Federal District Court for the Southern District of Mississippi (the "Bowe Action"). The plaintiffs, who are former holders of notes issued by three of the Company's subsidiaries, allege that the registration statements pursuant to which the notes were sold contained material misrepresentations and omissions of fact with respect to collection rates on contracts, repossession rates, the Company's accounting controls and computer systems, the operating results and financial condition of the Company and its subsidiaries and the ability of the subsidiaries to pay the notes at the projected rates of return, and were, therefore, materially false and misleading in violation of the securities laws. The plaintiffs seek unspecified damages, rescission, punitive damages and other relief. The plaintiffs also seek establishment of a class of plaintiffs consisting of all persons who have purchased notes issued by the three subsidiaries. While the Company believes the suit is without merit and has been vigorously defending itself, it has also sought to reach a negotiated settlement of all claims of all potential class members in the Bowe Action that would also include a settlement of all claims of the litigation trust (the "Litigation Trust") established under the plan of reorganization of the Fund Subsidiaries (the "Plan") for the purpose, among other things, of pursuing causes of action of the former holders of notes issued by the Fund Subsidiaries who assigned their claims relating to the Bowe Action to the Litigation Trust. On or about August 12, 1997, the trustee (the "Litigation Trustee") of the Litigation Trust filed a complaint (the "Trustee's Action") in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, against the Company, its subsidiary, Search Financial Services Acceptance Corp. (formerly known as Automobile Credit Acceptance Corp.) ("SFSAC"), certain of the Company's former officers and directors, certain broker-dealers who sold Notes of three of the Fund Subsidiaries and the Company's and the Fund Subsidiaries' former independent accountants. The Litigation Trust was established to pursue causes of action of the Fund Subsidiaries and of the former Holders of Notes issued by the Fund Subsidiaries who assigned their claims to the Litigation Trust. In the Trustee's Action, the Litigation Trust alleges (1) breach of fiduciary duty owed by Search and the former directors and officers to three of the Fund Subsidiaries through the use of fraudulent misrepresentations and omissions in the raising of capital that was used for the benefit of the Company and its affiliates rather than those Fund Subsidiaries, (2) violations by Search and the former directors and officers of the Racketeer Influenced and Corrupt Organizations Act as a result of the fraudulent offering of Notes by three of the Fund Subsidiaries, (3) negligence by the broker-dealers and accountants in connection with the offering of Notes by the three Fund Subsidiaries and (4) payment of voidable preferential transfers to Search and SFSAC, which payments were specified in the Plan, in the amount of $7,236,111. The plaintiff seeks recovery of the alleged preferential transfers and unspecified actual, exemplary and treble damages. Search and SFSAC believe the suit is without merit and are vigorously defending themselves. 20 21 While a settlement agreement in principle with respect to the Bowe Action and the claims by the Litigation Trustee was reached in March 1997 that would have required the Company to pay $350,000 in cash and issue shares of its Common Stock having a value of $1,375,000, the Company suspended further negotiations in May. Settlement discussions have resumed, but there can be no assurance that a settlement on terms acceptable to the Company will be concluded. The court had dismissed the plaintiffs' motion for class certification in the Bowe Action without prejudice and subject to renewal and final disposition, pending the outcome of settlement discussions. Because a settlement has not yet been consummated, counsel for the plaintiffs in the Bowe Action has indicated it will request that the Mississippi Federal District Court take up and resolve the question of class certification. The Company has a reserve of $500,000 related to the Bowe Action and the Trustee's Action. A settlement or judgment in excess of this reserve could adversely affect the Company. In January 1997, MSF was named as a defendant in a lawsuit filed by Telluride Funding Corp. ("Telluride") in the U.S. District Court for the Southern District of New York. In its complaint, Telluride asserted claims for unpaid fees due it in connection with a warehouse line of credit MSF entered into in April 1995. Telluride sought damages in the amount of $437,500, plus interest, costs and attorney's fees. That suit was removed to New York state court in April 1997. In March 1997, MSF filed a declaratory judgment action against Telluride in Mississippi state court requesting a determination of the parties' rights and obligations relating to the warehouse line of credit. In October 1997, Telluride's action in New York state court was dismissed. At this time, MSF is unable to predict the outcome of this litigation. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company did not pay dividends on its preferred stock for the quarter ended September 30, 1997. The amount of preferred stock dividends that would have been payable for that quarter was $1,610,000. See Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Financing Activities". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 28, 1997, the Company held its annual meeting of stockholders to vote on the following items: Item 1. To elect directors to serve until the 2000 annual meeting of stockholders; Item 2. To approve the Company's 1997 Stock Option Plan; Item 3. To ratify the appointment of BDO Seidman, LLP as the Company's independent auditors for the fiscal year ending March 31, 1998. 21 22 The following table shows the voting with respect to these items.
Broker For Against Abstentions Non-Votes --- ------- ----------- --------- Item 1: 0 William H.T. Bush 3,835,312 19,222 0 0 Anthony J. Dellavechia 3,833,593 20,941 0 0 George C. Evans 3,831,997 22,537 0 0 James F. Leary 3,834,398 20,136 0 0 Item 2 1,856,880 871,738 59,269 1,066,647 Item 3 3,820,369 13,440 20,725 0
On July 31, 1997, the Company held a special meeting of stockholders to vote on the acquisition of MSF. The following table shows the voting with respect to that acquisition.
For Against Abstentions Broker Non-Votes --- ------- ----------- ---------------- Item 1 3,882,253 22,385 21,067 28,485
22 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed in response to Item 601 of Regulation S-K. Exhibit Number Description - ---------- ------------------------------------------------------------ 10.1 Loan Agreement dated October 6, 1997 between Search Funding II, Inc., Search Financial Services Holding Company, Search Financial Services of Florida, Inc., Search Financial Services of Georgia, Inc., Search Financial Services of Louisiana, Inc., Search Financial Services of Oklahoma, Inc., Search Financial Services of Puerto Rico, Inc., Search Financial Services of Tennessee, Inc., Search Financial Services of Texas, Inc. and Hibernia National Bank 10.2 Commercial Guaranty dated October 6, 1997 between Registrant and Hibernia National Bank 10.3 Promissory Note dated October 6, 1997 in the principal amount of $25,000,000 payable to Hibernia National Bank 11.0 Statement re computation of per share earnings 27.0 Financial data schedule (b) Report on Form 8-K The Company filed a Current Report on Form 8-K, dated August 12, 1997, reporting the commencement of a lawsuit against the Company and that it expected it would not be allowed to pay dividends in cash on preferred stock. 23 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SEARCH FINANCIAL SERVICES INC.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ GEORGE C. EVANS Chairman of the Board, President, 11/14/97 - ------------------------ Chief Executive Officer, and Director George C. Evans /s/ ROBERT D. IDZI 11/14/97 - ------------------------ Senior Executive Vice President, Robert D. Idzi Chief Financial Officer and Treasurer /s/ ANDREW D. PLAGENS Senior Vice President, Controller and 11/14/97 - ------------------------ Chief Accounting Officer Andrew D. Plagens
24 25 EXHIBIT INDEX
Exhibit Number Description - ---------- ------------------------------------------------------------ 10.1 Loan Agreement dated October 6, 1997 between Search Funding II, Inc., Search Financial Services Holding Company, Search Financial Services of Florida, Inc., Search Financial Services of Georgia, Inc., Search Financial Services of Louisiana, Inc., Search Financial Services of Oklahoma, Inc., Search Financial Services of Puerto Rico, Inc., Search Financial Services of Tennessee, Inc., Search Financial Services of Texas, Inc. and Hibernia National Bank 10.2 Commercial Guaranty dated October 6, 1997 between Registrant and Hibernia National Bank 10.3 Promissory Note dated October 6, 1997 in the principal amount of $25,000,000 payable to Hibernia National Bank 11.0 Statement re computation of per share earnings 27.0 Financial data schedule
EX-10.1 2 LOAN AGREEMENT DATED OCTOBER 6, 1997 1 EXHIBIT 10.1 LOAN AGREEMENT
- --------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $25,000,000.00 10-06-1997 - --------------------------------------------------------------------------------------------------------------------------------- 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.
BORROWERS: SEARCH FUNDING II, INC. SEARCH FINANCIAL SERVICES HOLDING COMPANY SEARCH FINANCIAL SERVICES OF FLORIDA, INC. SEARCH FINANCIAL SERVICES OF GEORGIA, INC. SEARCH FINANCIAL SERVICES OF LOUISIANA, INC. SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC. SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC. SEARCH FINANCIAL SERVICES OF TENNESSEE, INC. SEARCH FINANCIAL SERVICES OF TEXAS, INC.
LENDER: HIBERNIA NATIONAL BANK (TIN: 72-0210640) 313 CARONDELET STREET POST OFFICE BOX 61540 NEW ORLEANS, LOUISIANA 70161 ================================================================================ THIS LOAN AGREEMENT between SEARCH FUNDING II, INC., SEARCH FINANCIAL SERVICES HOLDING COMPANY, SEARCH FINANCIAL SERVICES OF FLORIDA, INC., SEARCH FINANCIAL SERVICES OF GEORGIA, INC., SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., and SEARCH FINANCIAL SERVICES OF TEXAS, INC. (collectively "BORROWERS" and individually "BORROWER") and HIBERNIA NATIONAL BANK ("LENDER") is made and executed on the following terms and conditions. Borrowers have 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 words "Borrower" and "Borrowers" mean individually, collectively and interchangeably SEARCH FUNDING II, INC., SEARCH FINANCIAL SERVICES HOLDING COMPANY, SEARCH FINANCIAL SERVICES OF FLORIDA, INC., SEARCH FINANCIAL SERVICES OF GEORGIA, INC., SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., SEARCH FINANCIAL SERVICES OF TEXAS, INC., and all other entities signing the Note. BORROWING BASE. The words "Borrowing Base" mean the lesser of (a) $25,000,000.00; or (b) the sum of (i) the lesser of (1) $17,000,000.00 ("THE ELIGIBLE NON-PRIME AUTO PAPER SUBLIMIT"), or (2) 65% of the aggregate amount of the outstanding principal and interest owed under Eligible Non-Prime Auto Paper, and (ii) the lesser of (1) $8,000,000.00 ("THE ELIGIBLE CONSUMER PAPER SUBLIMIT"), or (2) 65% of the aggregate amount of the outstanding principal and interest owed under Eligible Consumer Paper. Borrowers shall have the right to decrease the Eligible Non-Prime Auto Paper Sublimit, no more than once during each calendar month, and increase the Eligible Consumer Paper Sublimit by the amount of the Eligible Non-Prime Auto Paper Sublimit decrease. Borrowers shall not have the right to decrease the Eligible Consumer Paper Sublimit and increase the Eligible Non-Prime Auto Paper Sublimit. Each Eligible Non-Prime Auto Paper Sublimit decrease/Eligible Consumer Paper Sublimit increase must be $5,000,000.00, or more, in increments of $500,000.00. At least five (5) Business Days before the effective date of each Eligible Non-Prime Auto Paper Sublimit decrease/Eligible Consumer Paper Sublimit increase, Borrowers shall provide Lender with written notice containing (a) the amount of the sublimit decrease/increase, and (b) the effective date of the sublimit increase/decrease. 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. CONSUMER PAPER. The words "Consumer Paper" mean a negotiable instrument or other writing which evidences a monetary obligation of a natural person incurred for personal, family, or household purposes. Consumer Paper does not include (a) obligations of legal entities, or (b) obligations incurred for commercial or agricultural purposes. 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, 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 Non-Prime Auto Paper or Consumer Paper and any grantor of a security interest as security for any Non-Prime Auto Paper or Consumer Paper. ELIGIBLE CONSUMER PAPER. The words "Eligible Consumer Paper" mean, at any time, the Consumer Paper of SEARCH FINANCIAL SERVICES HOLDING COMPANY, SEARCH FINANCIAL SERVICES OF FLORIDA, INC., SEARCH FINANCIAL SERVICES OF GEORGIA, INC., SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., and SEARCH FINANCIAL SERVICES OF TEXAS, INC., which Lender, in the reasonable exercise of its credit judgment, finds acceptable. Unless otherwise agreed to by Lender in writing, Eligible Consumer Paper does not include: (a) Consumer Paper that is not encumbered by a first lien priority perfected Security Interest, granted in favor of Lender, where first lien priority perfection is confirmed by evidence or opinions reasonably acceptable to Lender. (b) Consumer Paper that is not free and clear of all security interests, liens, encumbrances, and claims of third parties, except for Permitted Liens. (c) Consumer Paper in which any person or entity (including any subsidiary or affiliate of any Borrower) other than Borrowers owns any interest. 2 10-06-1997 LOAN AGREEMENT PAGE 2 LOAN NO. (CONTINUED) ================================================================================ (d) Consumer Paper that is not in the possession of Lender or a custodian approved in writing by Lender. (e) Consumer Paper with three (3) or more cumulative contractual payments past due, where a contractual payment is considered past due only if the Debtor has paid less than NINETY PERCENT (90%) of the amount of the contractual payment due (i.e., if a Debtor pays 90% or more of a contractual payment it is not considered past due). (f) Consumer Paper with respect to which the Debtor has been granted more than two (2) extensions during the most recent consecutive twelve (12) month period. (g) Consumer Paper of any Debtor who, after incurring the indebtedness evidenced by the Consumer 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). (h) Consumer Paper that has been referred to an attorney for collection. (i) Consumer Paper that evidences a security interest in any goods that are in the possession of any Borrower or any agent of any Borrower. (j) Consumer 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. (k) Consumer 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. (l) Consumer Paper with respect to which the Debtor is a shareholder, director, officer, employee or agent of any Borrower. (m) Consumer Paper with respect to which the Debtor is a subsidiary of, or affiliated with or related to, any Borrower or any shareholder, director or officer of any Borrower. (n) Consumer Paper with respect to which the obligations of the Debtor may be conditional. (o) Consumer Paper with respect to which the Debtor is not a resident of the United States or Puerto Rico, except to the extent such Consumer Paper is supported by security interests, insurance, bonds, or other assurances reasonably satisfactory to Lender. (p) Consumer Paper with respect to which any Borrower is or may become liable to the Debtor for goods sold or services rendered by the Debtor to any Borrower. (q) Consumer Paper which is subject to any discount (other than discounts for unearned interest), credit, dispute, counterclaim or setoff in favor of the Debtor. (r) Consumer Paper with respect to which Lender, using its reasonable credit judgment, deems ineligible. (s) Consumer Paper not supported by appropriate documentation as determined by Lender in its sole, but reasonable, discretion. ELIGIBLE NON-PRIME AUTO PAPER. The words "Eligible Non-Prime Auto Paper" mean, at any time, the Non-Prime Auto Paper of SEARCH FUNDING II, INC., which Lender, in the reasonable exercise of its credit judgment, finds acceptable. Unless otherwise agreed to by Lender in writing, Eligible Non-Prime Auto Paper does not include: (a) Non-Prime Auto 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. (b) Non-Prime Auto Paper that is not free and clear of all security interests, liens, encumbrances, and claims of third parties, except for Permitted Liens. (c) Non-Prime Auto Paper in which any person or entity (including any subsidiary or affiliate of any Borrower) other than SEARCH FUNDING II, INC., owns any interest. (d) Non-Prime Auto Paper that evidences a security interest in a motor vehicle that has not been perfected within a reasonable time after origination of the Non-Prime Auto Paper. (e) Non-Prime Auto Paper that is not delivered to Lender or a custodian approved by Lender within a reasonable period (as determined by Lender in its sole discretion) after origination or acquisition. (f) Non-Prime Auto Paper with three (3) or more cumulative contractual payments past due, where a contractual payment is considered past due only if the Debtor has paid less than NINETY PERCENT (90%) of the amount of the contractual payment due (i.e., if a Debtor pays 90% or more of a contractual payment it is not considered past due). (g) Non-Prime Auto Paper with respect to which the Debtor has been granted more than two (2) extensions during the most recent consecutive twelve (12) month period. (h) Non-Prime Auto Paper of any Debtor who, after incurring the indebtedness evidenced by the Non-Prime Auto 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). (i) Non-Prime Auto Paper that has been referred to an attorney for collection. 3 10-06-1997 LOAN AGREEMENT PAGE 3 LOAN NO. (CONTINUED) ================================================================================ (j) Non-Prime Auto Paper that evidences a security interest in any goods that are in the possession of any Borrower or any agent of any Borrower. (k) Non-Prime Auto 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. (l) Non-Prime Auto 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. (m) Non-Prime Auto Paper with respect to which the Debtor is a shareholder, director, officer, employee or agent of any Borrower. (n) Non-Prime Auto Paper with respect to which the Debtor is a subsidiary of, or affiliated with or related to, any Borrower or any shareholder, director or officer of any Borrower. (o) Non-Prime Auto Paper with respect to which the obligations of the Debtor may be conditional. (p) Non-Prime Auto Paper with respect to which the Debtor is not a resident of the United States, except to the extent such Non-Prime Auto Paper is supported by security interests, insurance, bonds, or other assurances reasonably satisfactory to Lender. (q) Non-Prime Auto Paper with respect to which any Borrower is or may become liable to the Debtor for goods sold or services rendered by the Debtor to any Borrower. (r) Non-Prime Auto Paper which is subject to any discount (other than discounts for unearned interest), credit, dispute, counterclaim or setoff in favor of the Debtor. (s) Non-Prime Auto Paper with respect to which Lender, using its reasonable credit judgment, deems ineligible. (t) Non-Prime Auto 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 Non-Prime Auto Paper for which the Debtor is sent more than one statement per calendar month and all other Non-Prime Auto 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 each Borrower and each Guarantor granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes individually, collectively, interchangeably and without limitation, SEARCH FINANCIAL SERVICES 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 any Borrower may now and in the future owe to or incur in favor of Lender and its successors or assigns, including without limitation, the indebtedness of Borrowers 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 the 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 Borrowers (or any 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 any Loan. NOTE. The word "Note" means the promissory note or notes of Borrowers evidencing the principal and interest repayment obligations of Borrowers under the Line of Credit, as well as any substitute, replacement or refinancing note or notes therefor. The Note initially evidencing the Line of Credit repayment obligations in favor of Lender shall be drawn for the maximum dollar 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. NON-PRIME AUTO PAPER. The words "Non-Prime Auto Paper" mean a writing or writings which evidence BOTH a monetary obligation of a natural person incurred for personal, family, or household purposes AND a security interest in, or a lease of, a motor vehicle as security for payment of the monetary obligation. Non-Prime Auto Paper does not include (a) written evidences of unsecured monetary obligations, (b) 4 10-06-1997 LOAN AGREEMENT PAGE 4 LOAN NO. (CONTINUED) ================================================================================ written evidences of monetary obligations secured by goods other than motor vehicles, (c) obligations of legal entities, or (d) obligations incurred for commercial or agricultural purposes. PERMITTED LIENS. The words "Permitted Liens" mean (a) Security Interests securing Indebtedness owed by Borrowers 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 the acquisition by any Borrower 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. 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 the Note, whether created by law, contract, or otherwise. APPLICATION FOR AND PURPOSE OF THE LOAN. Borrowers have applied to Lender for a Loan in the aggregate principal amount of $25,000,000.00 for working capital. LINE OF CREDIT. Lender agrees to make Advances to Borrowers 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, Borrowers 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 Borrowers 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 Borrowers 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) Custodian Agreements designating the Lender approved custodians to take and maintain possession for Lender of the Non-Prime Auto Paper and Consumer Paper of each Borrower whose Non-Prime Auto Paper and Consumer Paper is not all held at Lender's offices, (v) evidence of Insurance as required below; and (vi) 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) Lender shall have received such written opinions or agreements as are reasonably acceptable to Lender and its counsel that the form of note, security agreement, disclosure statement and other documents used in connection with Non-Prime Auto Paper and Consumer Paper originated by Borrowers complies and conforms with all applicable laws, ordinances, rules, and regulations, which opinions or agreements shall run in favor of Lender in the event Lender acquires ownership of any of the Non-Prime Auto Paper and Consumer Paper originated by Borrowers on the forms covered by the opinions or agreements. (d) 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. (e) 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. (f) Lender, at its option and for its sole benefit, shall have conducted a review of the payment records, ledger sheets, and computer tapes or disks kept to record payment information of Borrowers, and other books, records, and operations of Borrowers, and Lender shall be satisfied as to their condition. (g) Borrowers 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. (h) 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. (i) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrowers 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 accounts of any Borrower, may be requested orally or in writing by persons authorized, in writing, by any 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 each Borrower (a) when credited to any deposit account of any 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. INITIAL ADVANCE. The proceeds of the initial Advance under the Line Credit shall be used to pay the full amounts due under all other lines of credit extended by Lender to any Borrower and each Borrower agrees that once the initial Advance is made under the Line of Credit provided for in this Agreement, all other outstanding lines of credit from Lender to Borrowers are terminated and Lender is not obligated to fund any advance requested under any such other line of credit. OVERLINES AND OVERADVANCES. In the event the unpaid principal amount of the outstanding Advances under the Line of Credit ever exceeds the maximum dollar amount of the Note ($25,000,000.00 ), Borrowers agree to pay the excess amount (an "OVERLINE") within two (2) Business Days after notice from Lender to Borrowers. In the event the unpaid principal amount of the outstanding Advances under the Line 5 10-06-1997 LOAN AGREEMENT PAGE 5 LOAN NO. (CONTINUED) ================================================================================ of Credit ever exceeds the Borrowing Base, Borrowers agree to pay the excess amount (an "OVERADVANCE") within two (2) Business Days after notice from Lender to Borrowers. 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, Borrowers shall execute a promissory note, payable to the order of Lender, to represent the amount of any overline and any overadvance; however, Borrowers acknowledge and agree that the records of Lender and this Agreement shall constitute conclusive evidence, absent manifest error, of any overline or overadvance and the obligation of Borrowers 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. BORROWERS ACKNOWLEDGE AND AGREE THAT LENDER IS NOT OBLIGATED TO BORROWERS TO FUND ANY ADVANCE THAT WOULD CREATE AN OVERLINE OR AN OVERADVANCE. ADVANCES FOR INTEREST AND FEES. Borrowers hereby authorize 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 any 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 Borrowers agree to pay the amount of any such Overline or Overadvance within two (2) Business Days after notice from Lender to Borrowers. INTEREST. The outstanding and unpaid principal balance under the Note and any overline and any overadvance shall bear interest at the rate stated in the Note. Borrowers 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. MANDATORY PRINCIPAL REPAYMENTS. On the Expiration Date, Borrowers 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. Borrowers recognize that Lender has incurred and will continue to incur certain costs and expenses in connection with establishing, maintaining, servicing, and administering the Line of Credit. To ensure that Lender is able to recover such costs and expenses, Borrowers agree 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 Borrowers hereby promise and agree to pay: COMMITMENT FEE. A commitment fee of $25,000.00, payable at the time of the making of the initial Advance. MONITORING FEE. A monitoring fee of $3,000.00 per month [$1,500.00 for Non-Prime Auto Paper and $1,500.00 for Consumer Paper] 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. An annual renewal fee of $62,500.00 [0.250% of the maximum dollar amount of the Note - $25,000,000.00], payable, in full, on each annual anniversary of this Agreement prior to the Expiration Date. COLLATERAL STORAGE AND SERVICE FEE. A collateral storage and service fee of $500.00 per month for each month or portion of a month during the term of this Agreement, due and payable on the first day of the following month. UNUSED FACILITY FEE. An unused facility fee, in addition to interest, 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 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 the last day of each calendar quarter. DUE DILIGENCE EXPENSES. All reasonable expenses incurred by Lender, including Lender's reasonable attorneys' fees, for Lender's due diligence, payable by Borrowers upon demand by Lender. EARLY TERMINATION. Lender agrees that Borrowers shall have the right to terminate this Agreement prior to the Expiration Date upon Borrowers (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) 4.000% of the maximum dollar amount of the Note [$25,000,000.00] if the early termination date occurs during the first year after the date of the Note, (ii) 3.000% of the maximum dollar amount of the Note if the early termination occurs during the second year after the date of the Note, and (iii) 1.000% of the maximum dollar amount of the Note if the early termination 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 Borrowers with periodic statements of the loan account of Borrowers, which statements shall be considered to be correct and conclusively binding on Borrowers, absent manifest error, unless Borrowers notify Lender to the contrary within thirty (30) days after the receipt by Borrowers of any such statement which Borrowers deem to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrowers to Lender, Borrowers shall grant to Lender Security Interests in the present and future chattel paper, instruments, accounts, inventory, documents and general intangibles of Borrowers (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, Borrowers agree and represent and warrant to Lender: PERFECTION OF SECURITY INTERESTS. Borrowers agree 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 agree to deliver possession to Lender, or to a custodian approved in writing by 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 Non-Prime Auto Paper are not necessary by law to perfect and continue Lender's Security Interests in the Collateral. Contemporaneous with the execution of this Agreement, each Borrower will execute one or more UCC financing 6 10-06-1997 LOAN AGREEMENT PAGE 6 LOAN NO. (CONTINUED) ================================================================================ 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. Each 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 any Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrowers will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's Security Interest in the Collateral. Borrowers promptly will notify Lender of any change in the name of any Borrower including any change to the assumed business names of any Borrower. Borrowers also promptly will notify Lender of any change in the Employer Identification Number of any Borrower. Borrowers further agree to notify Lender in writing prior to any change in address or location of the chief executive office of any Borrower or should any Borrower merge or consolidate with any other entity. CROSS COLLATERALIZATION. Each Borrower acknowledges that all collateral of each Borrower is collateral for all Loans made under this Agreement. DELIVERY AND POSSESSION OF ELIGIBLE PAPER. Each Borrower shall deliver to Lender, or to a custodian approved in writing by Lender, all original instruments representing all Eligible Non-Prime Auto Paper and all Consumer Paper. Upon request of Lender, each Borrower shall deliver to Lender, or to a custodian approved in writing by Lender, all other Eligible Non-Prime Auto Paper and Consumer 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, Borrowers 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 Non-Prime Auto Paper. With respect to Borrowers, Lender and any custodian shall be deemed to have exercised reasonable care in the custody and preservation of all Non-Prime Auto Paper and Consumer Paper documents (including instruments and certificates of title) in the possession of Lender or any custodian if Lender or the custodian takes such action for that purpose as any Borrower shall request or as Lender, in Lender's sole discretion, or the custodian shall deem appropriate under the circumstances, but failure to honor any request by any 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 Non-Prime Auto Paper or any Consumer Paper against Debtors or other parties, nor to protect, preserve or maintain any security interest evidenced by any Non-Prime Auto Paper or securing any Consumer Paper. In the event any Eligible Non-Prime Auto Paper or any Consumer Paper is held by a custodian, each Borrower shall (a) execute a Custodian Agreement, in form and substance satisfactory to Lender, by which the custodian is appointed to hold Non-Prime Auto Paper and Consumer Paper for the benefit of Lender, and (b) affix and maintain a conspicuous legend to all Non-Prime Auto Paper and Consumer Paper delivered to the custodian clearly identifying the Non-Prime Auto Paper and Consumer Paper as subject to a security interest in favor of Lender. INSPECTION AND EXAMINATION BY GOVERNMENTAL AGENCIES. Lender agrees to allow, and agrees to direct any custodian acting for Lender to allow, inspection and examination of all Non-Prime Auto Paper and Consumer Paper and Non-Prime Auto Paper and Consumer Paper records by all governmental agencies with regulatory powers over Borrowers, as and where required by such agencies (including, if necessary, returning Non-Prime Auto Paper and Consumer Paper and Non-Prime Auto Paper and Consumer Paper records to the jurisdiction of origination). All costs incurred by Lender or any custodian in connection with any such governmental agency inspection or examination will be paid by Borrowers. COLLATERAL SCHEDULES. Concurrently with the delivery of each Non-Prime Auto Paper package and each Consumer Paper package under this Agreement, Borrowers 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, Borrowers shall execute and deliver to Lender such supplemental statements and such other matters and information relating to the Non-Prime Auto Paper and Consumer Paper as Lender may request. COLLATERAL RECORDS. Borrowers do 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 Non-Prime Auto Paper and the Consumer Paper, Borrowers agree to keep and maintain such balance and payment history records as Lender may reasonably require, including, without limitation, delinquency information. REPRESENTATIONS AND WARRANTIES CONCERNING NON-PRIME AUTO PAPER. With respect to the Non-Prime Auto Paper, Borrowers represent and warrant to Lender: (a) all present Non-Prime Auto Paper represents, and all future Non-Prime Auto Paper will represent, loans acquired by SEARCH FUNDING II, INC., in the ordinary course of its business, and in compliance and conformity with all applicable federal, state and local laws, ordinances, rules, and regulations, (b) all Non-Prime Auto Paper represented by Borrowers to be Eligible Non-Prime Auto Paper for purposes of this Agreement conforms to the requirements of the definition of Eligible Non-Prime Auto Paper; (c) all Non-Prime Auto 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 the records of Borrowers and to verify and confirm with Debtors the accuracy of such Non-Prime Auto Paper information, and Borrowers agree 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). REPRESENTATIONS AND WARRANTIES CONCERNING CONSUMER PAPER. With respect to the Consumer Paper, Borrowers represent and warrant to Lender: (a) all present Consumer Paper represents, and all future Consumer Paper will represent, loans originated or acquired by Borrowers in the ordinary course of the business of Borrowers and in compliance and conformity with all applicable federal, state and local laws, ordinances, rules, and regulations, (b) all Consumer Paper represented by Borrowers to be Eligible Consumer Paper for purposes of this Agreement conforms to the requirements of the definition of Eligible Consumer Paper; (c) all Consumer 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 the records of Borrowers and to verify and confirm with Debtors the accuracy of such Consumer Paper information, and Borrowers agree 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. Borrowers may collect amounts due under any Non-Prime Auto Paper and any Consumer Paper, subject to the obligation of Borrowers 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 Non-Prime Auto Paper and the Consumer Paper and to notify Debtors to make payments directly to Lender for application to the Indebtedness. RELEASE OF COLLATERAL. Borrowers may apply to Lender for a release of Collateral from the Security Interests in connection with a sale of Collateral outside of the ordinary course of business or in bulk. The 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 Borrowers, 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 7 10-06-1997 LOAN AGREEMENT PAGE 7 LOAN NO. (CONTINUED) ================================================================================ not result in the occurrence of an Event of Default, and (c) the effect of the sale on the financial condition of Borrowers 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 Borrowers, or the designee of Borrowers, upon deposit of the net sale proceeds attributable to the Collateral sold into the Dominion Account or, if requested by Borrowers 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. Borrowers shall establish and maintain one or more deposit accounts with Lender or with a bank designated by Lender ("DOMINION ACCOUNT") into which Borrowers shall deposit, daily, all amounts paid on any Non-Prime Auto Paper and any Consumer Paper and from sales of any of the Collateral. All deposits shall be made, in kind, no later than the first Business Day after receipt by any Borrower. Borrowers 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. Borrowers agree to instruct, in writing, all Debtors and others responsible for making payments on Non-Prime Auto Paper or on Consumer Paper and other amounts due to any 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 Non-Prime Auto Paper, on Consumer Paper, or on other amounts due to any Borrower to make all payments to the address selected by Lender. All payments received by Lender and all payments received by any 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. Each 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. SEARCH FUNDING II, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas, and is 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. SEARCH FUNDING II, INC., is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES HOLDING COMPANY, is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas. SEARCH FINANCIAL SERVICES HOLDING COMPANY, is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES OF FLORIDA, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas, and is duly qualified to do business in, and in good standing under the laws of Florida and Texas. SEARCH FINANCIAL SERVICES OF FLORIDA, INC., is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES OF GEORGIA, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas, and is duly qualified to do business in, and in good standing under the laws of Georgia and Texas. SEARCH FINANCIAL SERVICES OF GEORGIA, INC., is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Louisiana. SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas, and is duly qualified to do business in, and in good standing under the laws of Oklahoma and Texas. SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of Puerto Rico, and is duly qualified to do business in, and in good standing under the laws of Puerto Rico. SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas, and is duly qualified to do business in, and in good standing under the laws of Tennessee and Texas. SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., is not qualified to do and is not doing business in any other jurisdiction. SEARCH FINANCIAL SERVICES OF TEXAS, INC., is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Texas. SEARCH FINANCIAL SERVICES OF TEXAS, INC., is not qualified to do and is not doing business in any other jurisdiction. AUTHORIZATION. The execution, delivery and performance of this Agreement by each Borrower has been duly authorized, and does not conflict with, and will not result in a violation of, or constitute or give rise to an event of default under the Articles of Incorporation or Bylaws of any Borrower, or any agreement or other instrument which may be binding upon any Borrower, or under any law or governmental regulation or court decree or order applicable to any Borrower and/or its properties. Each Borrower has the power and authority to enter into the Loan, to execute the Note and to grant collateral security therefor. Each 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. SEARCH FUNDING II, INC., and SEARCH FINANCIAL SERVICES HOLDING COMPANY is each a wholly owned subsidiary of SEARCH FINANCIAL SERVICES INC., a Delaware corporation that is a Guarantor of the Indebtedness. All other Borrowers are wholly owned subsidiaries of SEARCH FINANCIAL SERVICES HOLDING COMPANY. FIDUCIARY OBLIGATION OF BORROWERS. Each Borrower shall act in a fiduciary capacity as to Lender with regard to receipt and collection by each 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 any Borrower of any portion of any amount paid on the Collateral shall constitute an Event of Default. FINANCIAL INFORMATION. The annual audited financial statements furnished to Lender by Borrowers are and were prepared in accordance with generally accepted accounting principles. The other financial statements furnished to Lender by Borrowers 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, the financial condition and solvency of the entity or consolidated group to which they relate as of the date thereof. To the best of the knowledge of Borrowers, no Borrower has any contingent obligations or liabilities that were not disclosed or reserved against in the financial statements of Borrowers or in the notes thereto. Since the dates of such financial statements, there has been no material adverse change in the financial condition or business of any Borrower. DEBT OF BORROWERS. With the exception of indebtedness owed to others to be paid with the first Advance under the Line of Credit, no Borrower has any obligation for borrowed money, including capital leases, other than (a) trade debt incurred in the normal course of business, (b) indebtedness of any Borrower to others that is subordinated by written agreement to the Indebtedness, and (c) indebtedness to Lender under this Agreement. PROPERTIES. Except with respect to Permitted Liens, Borrowers own and have good title to all of the properties of Borrowers free and clear of all security interests, and no Borrower has executed any security documents or financing statements relating to such properties. All of the properties of Borrowers are titled in the legal name of Borrowers, and no Borrower has used, or filed a financing statement under, any other name (other than the former names of each Borrower disclosed in this Agreement) for at least the last five (5) years. Lender 8 10-06-1997 LOAN AGREEMENT PAGE 8 LOAN NO. (CONTINUED) ================================================================================ recognizes, however, that Borrowers may elect not to apply for registration of a certificate of title to any repossessed motor vehicle if, under applicable law, Borrowers are allowed to resell the repossessed vehicle without such registration. 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. ?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, Borrowers agree, represent and warrant that: (a) during the period of ownership by any Borrower of the properties of any Borrower, 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) no Borrower has any 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; and (c) neither any 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. Borrowers authorize 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 the expense of Borrowers and for the purposes of Lender only and shall not be construed to create any responsibility or liability on the part of Lender to any Borrower or to any other person. The representations and warranties contained herein are based on the due diligence of Borrowers in investigating the properties for hazardous waste. Each Borrower hereby (i) releases and waives any future claims against Lender for indemnity or contribution in the event any 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 the ownership by any Borrower or interest of any Borrower in the properties, whether or not the same was or should have been known to any 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 Borrowers, threatened against or affecting any Borrower, any Guarantor, or the assets of any Borrower or any Guarantor, before any court or by any governmental agency, other than those previously disclosed in documents filed by any Borrower or any Guarantor with the Securities and Exchange Commission and delivered to Lender by any Borrower or any Guarantor, which, if adversely determined, may have a material adverse effect on the financial condition or business of any Borrower or any Guarantor. TAXES. To the best of the knowledge of Borrowers, all tax returns and reports of each 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 Borrowers 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, no Borrower has 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 any of the Indebtedness, 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 with respect to Permitted Liens. BINDING EFFECT. This Agreement, the Note and all Security Agreements directly or indirectly securing repayment of the Indebtedness are binding upon each Borrower as well as upon the successors, representatives and assigns of each Borrower, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrowers intend to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which any 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) no Borrower has 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 REGISTERED OFFICES. The registered office of each Borrower is as follows (or as Borrowers may otherwise notify Lender as required by this Agreement): SEARCH FUNDING II, INC., 600 North Pearl Street, Suite 2500, L.B.123, Dallas, Texas 75201-2899 SEARCH FINANCIAL SERVICES HOLDING COMPANY, 600 North Pearl Street, Suite 2500, L.B. 123, Dallas, Texas 75201-2899 SEARCH FINANCIAL SERVICES OF FLORIDA, INC., 600 North Pearl Street, Suite 2500, L.B. 123, Dallas, Texas 75201-2899 SEARCH FINANCIAL SERVICES OF GEORGIA, INC., 600 North Pearl Street, Suite 2500, L.B. 123, Dallas, Texas 75201-2899 SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., 320 Somerulos Street, Baton Rouge, Louisiana 70802 SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., 600 North Pearl Street, Suite 2500, L.B. 123, Dallas, Texas 75201-2899 SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., 105 Ponce de Leon Avenue (Hato Rey), San Juan, Puerto Rico 00918 SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., 600 North Pearl Street, Suite 2500, L.B. 123, Dallas, Texas 75201-2899 SEARCH FINANCIAL SERVICES OF TEXAS, INC., 600 North Pearl Street, Suite 2500, L.B. 123, Dallas, Texas 75201-2899
LOCATION OF CHIEF EXECUTIVE OFFICES. The chief executive office of each Borrower [as pertinent under La.-R.S. 10:9- 103(3)(d) and similar applicable laws] is at 600 NORTH PEARL STREET, SUITE 2500, L.B. 123, DALLAS, TEXAS 75201- 2899, or as Borrower may otherwise notify Lender as required by this Agreement. LOCATION OF RECORDS. Each Borrower keeps its records concerning any of the Collateral at 600 NORTH PEARL STREET, SUITE 2500, L.B. 123, DALLAS, TEXAS 75201-2899, or as Borrower may otherwise notify Lender as required by this Agreement. Each Borrower, other than SEARCH FUNDING II, INC., hereby notifies Lender that it keeps records concerning Collateral at its branch offices in the jurisdiction in which it does business. TAX IDENTIFICATION NUMBER. The Tax Identification Numbers of Borrowers are as follows (which are the only Tax Identification Numbers used by Borrowers during the last ten (10) years): 9 10-06-1997 LOAN AGREEMENT PAGE 9 LOAN NO. (CONTINUED) ================================================================================ SEARCH FUNDING II, INC. - 75-2554995 SEARCH FINANCIAL SERVICES HOLDING COMPANY - 75-2669329 SEARCH FINANCIAL SERVICES OF FLORIDA, INC. - 75-2678806 SEARCH FINANCIAL SERVICES OF GEORGIA, INC. - 75-2669332 SEARCH FINANCIAL SERVICES OF LOUISIANA, INC. - 72-1332091 SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC. - 75-2669336 SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC. - 66-0535659 SEARCH FINANCIAL SERVICES OF TENNESSEE, INC. - 75-2669335 SEARCH FINANCIAL SERVICES OF TEXAS, INC. - 75-2669330 TRADE NAMES. No Borrower operates any of its businesses under any trade name, nor has any 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 as follows: SEARCH FUNDING II, INC. former names: SEARCH AUTOMOBILE LEASING CORPORATION, HASSLEFREE FINANCE CORP., and AUTOMOBILE CREDIT FINANCE CORPORATION, SERIES 1994-I SEARCH FINANCIAL SERVICES HOLDING COMPANY former name: SEARCH FINANCIAL SERVICES COMPANY INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrowers 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 Borrowers 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 REPRESENTATIONS AND WARRANTIES. Borrowers understand and agree that Lender is relying upon the above representations and warranties in making the above referenced Loan and extending Advances to Borrowers. Borrowers further agree that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as the Note shall be paid in full, or until the Expiration Date, whichever is the last to occur. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, each Borrower will: BUSINESS IN OTHER JURISDICTIONS. Promptly inform Lender in writing of the election of any Borrower to do business in any jurisdiction other than the jurisdiction of its incorporation, any jurisdiction in which it is qualified to do business as set forth under the REPRESENTATIONS AND WARRANTIES - Organization section of this Agreement, or such other jurisdiction in which Lender has a first priority perfected Security Interest in the Collateral of that Borrower. Upon request of Lender, each Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue the Security Interests of Lender 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 any 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 any 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 its 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 person acceptable to Lender. ANNUAL FINANCIAL STATEMENTS - SEARCH FINANCIAL SERVICES. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) calendar days after the end of each fiscal year, fiscal year-end financial statements for SEARCH FINANCIAL SERVICES INC., the parent corporation of Borrowers. The fiscal year-end statements shall be furnished in the form of consolidated statements for SEARCH FINANCIAL SERVICES INC. and all of its subsidiaries, including Borrowers, and shall include consolidated balance sheet, consolidated income statement and consolidated statement of cash flows, with detailed schedules for each consolidated company attached, and shall be 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 - BORROWERS. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than twenty (20) calendar days after the end of each calendar month, month-end financial statements for each Borrower (including balance sheet and income statement) for the prior month, prepared and certified as correct, in all material respects, subject to year-end and quarter-end adjustments, to the best knowledge and belief, by the chief financial officer of each Borrower or other person acceptable to Lender. MONTHLY FINANCIAL STATEMENTS - SEARCH FINANCIAL SERVICES. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than twenty (20) calendar days after the end of each calendar month, month-end financial statements (including balance sheet and income statement) for the parent corporation of Borrowers, SEARCH FINANCIAL SERVICES INC., prepared in the form of consolidated statements for the parent corporation and all of its subsidiaries, including Borrowers, for the prior month, prepared and certified as correct, in all material respects, subject to year-end and quarter-end adjustments, to the best knowledge and belief, by the chief financial officer of SEARCH FINANCIAL SERVICES INC., or other person acceptable to Lender. MONTHLY RECEIVABLES AGING SCHEDULES. Without demand or request by Lender, furnish Lender with, as soon as available, but in no event later than fifteen (15) calendar days after the end of each calendar month, a schedule of the receivables of each Borrower (including chattel paper, instruments and accounts) by account debtor, with aging. Each monthly receivables schedule shall be prepared by each Borrower and certified as correct, in all material respects, to the best knowledge and belief, by the chief financial officer of each Borrower or other person acceptable to Lender, and shall be in form and content acceptable to Lender. The combined gross amount of receivables of Borrowers shown on monthly receivables reports must be equal to the combined amount of receivables shown on the monthly financial statements of Borrowers prepared for the same month-end. THESE SCHEDULES SHALL BE PROVIDED IN WRITTEN AND ELECTRONIC MEDIA FORM AND FORMAT ACCEPTABLE TO LENDER. 10 10-06-1997 LOAN AGREEMENT PAGE 10 LOAN NO. (CONTINUED) ================================================================================ BORROWING BASE CERTIFICATES. Without demand or request by Lender, by noon of each day Borrowers make 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 Borrowers and certified as correct, to the best knowledge and belief, by the chief financial officer of Borrowers or other 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 payment included in each Dominion Account deposit made by each Borrower during the prior week. Weekly receipt schedules shall be prepared by Borrowers and certified as correct, to the best knowledge and belief, by the chief financial officer of Borrowers or other 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 each Borrower and each Guarantor, with all schedules and supporting documentation. PUBLIC DOCUMENTS. Without demand or request by Lender, within thirty (30) calendar days of the filing of each, furnish Lender with copies of the 10-K, 10-Q, and each other document filed by each Borrower and each 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 Borrowers 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 Non-Prime Auto 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 Borrowers, rather than a Borrower, may be reflected as the secured party or lienholder on a certificate of title although the Non-Prime Auto Paper evidencing the security interest referred to on such certificate has been assigned to any Borrower. NOTICE TO DEBTORS. Notify, in writing, all present and future Debtors and others responsible for payment on any Non-Prime Auto Paper or any Consumer Paper, to send all payments on Non-Prime Auto Paper or Consumer Paper to the Lock Box address selected by Lender. INSURANCE. Maintain public liability insurance in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrowers, 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 FINANCIAL SERVICES INC. UNLIMITED OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between each 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 working capital needs of Borrowers incurred in the ordinary course of business of Borrowers. 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 any Borrower or properties, income, or profits of any 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 any Borrower. Provided, however, Borrowers 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) Borrowers shall have established on the books of Borrowers adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting principles. Borrowers, 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 Borrowers. PERFORMANCE. Perform and comply with all terms, conditions and provisions set forth in this Agreement and in all other instruments and agreements between each Borrower and Lender in a timely manner, and promptly notify Lender if any 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 the employee benefit plans of such Borrower. NON-PRIME AUTO PAPER FORMS. Acquire Non-Prime Auto 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. CONSUMER PAPER FORMS. Originate and acquire Consumer 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 each Borrower and all significant operating accounts of each Borrower shall be maintained with Lender. 11 10-06-1997 LOAN AGREEMENT PAGE 11 LOAN NO. (CONTINUED) ================================================================================ INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral and the other properties of such Borrower and to examine or review the books, accounts, ledger sheets, and records of such Borrower and to make copies and memoranda of the books, accounts, ledger sheets, and records of such Borrower. If any 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, such 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 the expense of Borrowers. CHANGE OF LOCATION. Immediately notify Lender in writing of any additions to or changes in any business location of such Borrower or the chief executive office of such Borrower. TITLE TO ASSETS AND PROPERTY. Maintain good and indefeasible title to all of the assets and properties of such Borrower. NOTICE OF DEFAULT AND ERISA MATTERS. Forthwith upon learning of the occurrence of any of the following, Borrowers shall provide Lender with written notice thereof, describing the same and the steps being taken by Borrowers 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 any Borrower to withdraw from, or the institution of any steps to terminate, any employee benefit plan as to which Borrowers may have any liability. OTHER INFORMATION. From time to time, Borrowers will provide Lender with such other information as Lender may reasonably request. EMPLOYEE BENEFIT PLANS. So long as this Agreement remains in effect, each 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. No Borrower will 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 the chief financial officer of each Borrower, or other 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. NEGATIVE COVENANTS. Each Borrower covenants and agrees with Lender that, as long as this Agreement remains in effect, no Borrower shall, 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 Non-Prime Auto 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 Non-Prime Auto Paper acquired. BULK PURCHASES. Make any bulk purchase of Non-Prime Auto Paper or Consumer Paper. Borrowers acknowledge and agree that Lender shall have the right to examine and inspect all matters, details and components of bulk purchases proposed by Borrowers and shall have the right to declare as ineligible any and all Non-Prime Auto Paper or Consumer Paper that Lender deems ineligible using its reasonable credit judgment. COMMINGLING OF ELIGIBLE PAPER. Include as Eligible Non-Prime Auto Paper or Eligible Consumer Paper, Non-Prime Auto Paper or Consumer Paper that is not owned solely by Borrowers. 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 any Borrower other than shares of its capital stock issued as stock dividends; provided, however, that (a) each Borrower shall be allowed to issue its shares and securities to, and acquire its shares and securities from, its parent corporation, and (b) each Borrower may also issue its shares and securities to, and acquire its shares and securities from, others if, after the transaction, SEARCH FINANCIAL SERVICES INC., owns and controls, directly or indirectly, 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 obligations 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 the inventory of any Borrower outside of the normal course of business, or (d) sell, transfer, or otherwise alienate any chattel paper, instruments or accounts of any Borrower other than as allowed under this Agreement. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which that 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 the outstanding shares or alter or amend the capital structure of any Borrower, 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 - SEARCH FINANCIAL SERVICES HOLDING. Each Borrower covenants and agrees with Lender that as long as this Agreement remains in effect each Borrower and 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 12 10-06-1997 LOAN AGREEMENT PAGE 12 LOAN NO. (CONTINUED) ================================================================================ be made on a consolidated basis for SEARCH FINANCIAL SERVICES HOLDING COMPANY, 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 FINANCIAL SERVICES HOLDING COMPANY, or other person acceptable to Lender. ADJUSTED NET WORTH. The term "Adjusted Net Worth" shall mean the Stated Net Worth of SEARCH FINANCIAL SERVICES HOLDING COMPANY, 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 FINANCIAL SERVICES HOLDING COMPANY, or of any subsidiary or affiliate of SEARCH FINANCIAL SERVICES HOLDING COMPANY, or (b) due from any person or entity (other than a subsidiary) which is affiliated with, or related to, SEARCH FINANCIAL SERVICES HOLDING COMPANY, or any of its subsidiaries, or any of the shareholders, officers, or directors of SEARCH FINANCIAL SERVICES HOLDING COMPANY, or any of its subsidiaries. DEBT. The term "Debt" shall mean all liabilities of SEARCH FINANCIAL SERVICES HOLDING COMPANY, and its subsidiaries, on a consolidated basis, INCLUDING SUBORDINATED DEBT. INTANGIBLES. The term "Intangibles" shall mean all of the intangible assets of SEARCH FINANCIAL SERVICES HOLDING COMPANY, 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 FINANCIAL SERVICES HOLDING COMPANY, 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 FINANCIAL SERVICES HOLDING COMPANY, and its subsidiaries, on a consolidated basis, less total Debt. MINIMUM ADJUSTED NET WORTH. SEARCH FINANCIAL SERVICES HOLDING COMPANY, shall maintain an Adjusted Net Worth of no less than $1,500,000.00. MAXIMUM LEVERAGE POSITION. SEARCH FINANCIAL SERVICES HOLDING COMPANY, shall maintain a leverage position of no more than 4.00 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 FINANCIAL SERVICES HOLDING COMPANY) based on the then most recent financial statements of SEARCH FINANCIAL SERVICES HOLDING COMPANY, and its subsidiaries, on a consolidated basis. FINANCIAL COVENANTS - GUARANTOR. Each Borrower covenants and agrees with Lender that as long as this Agreement remains in effect each Borrower and 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 SEARCH FINANCIAL SERVICES 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 FINANCIAL SERVICES INC., or other person acceptable to Lender. ADJUSTED NET WORTH. The term "Adjusted Net Worth" shall mean the Stated Net Worth of SEARCH FINANCIAL SERVICES 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 FINANCIAL SERVICES INC, or of any subsidiary or affiliate of SEARCH FINANCIAL SERVICES INC., or (b) due from any person or entity (other than a subsidiary) which is affiliated with, or related to,SEARCH FINANCIAL SERVICES INC., or any of its subsidiaries, or any of the shareholders, officers, or directors of SEARCH FINANCIAL SERVICES INC., or any of its subsidiaries. DEBT. The term "Debt" shall mean all liabilities of SEARCH FINANCIAL SERVICES INC., and its subsidiaries, on a consolidated basis, INCLUDING SUBORDINATED DEBT. INTANGIBLES. The term "Intangibles" shall mean all of the intangible assets of SEARCH FINANCIAL SERVICES 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 FINANCIAL SERVICES 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 FINANCIAL SERVICES INC., and its subsidiaries, on a consolidated basis, less total Debt. MINIMUM ADJUSTED NET WORTH. SEARCH FINANCIAL SERVICES INC., shall maintain an Adjusted Net Worth of no less than $15,000,000.00 until October 1, 1997. Beginning October 1, 1997, SEARCH FINANCIAL SERVICES INC., shall maintain an Adjusted Net Worth of no less than $20,000,000.00. MAXIMUM LEVERAGE POSITION. SEARCH FINANCIAL SERVICES 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 FINANCIAL SERVICES INC.) based on the then most recent financial statements of SEARCH FINANCIAL SERVICES INC., and its subsidiaries, on a consolidated basis. 13 10-06-97 LOAN AGREEMENT PAGE 13 LOAN NO. (CONTINUED) ================================================================================ CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to any 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) any 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 any Borrower or any Guarantor has with Lender, (b) any 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 the financial condition of any Borrower or any Guarantor, or in the total value of the Collateral securing any Loan, (d) any 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. INSECURITY. Each Borrower agrees that, even though no Event of Default shall have occurred, Lender shall have the right to demand, by written notice to Borrowers, 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 books, records or operations of Borrowers 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, Borrowers and Lender agree that, unless and until an Event of Default occurs, Borrowers 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 Borrowers under the Eligible Non- Prime Auto Paper and Eligible Consumer 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, Borrowers 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 the Indebtedness, each Borrower hereby grants Lender a continuing Security Interest in any and all funds that each Borrower may now and in the future have on deposit with Lender or in certificates of deposit or other deposit accounts as to which any Borrower is an account holder (with the exception of IRA, pension, and other tax-deferred deposits). Each Borrower further agrees that Lender may, after an Event of Default has occurred, apply any funds that any Borrower may have on deposit with Lender or in certificates of deposit or other deposit accounts as to which any Borrower is an account holder (with the exception of IRA, pension, and other tax-deferred deposits) against the unpaid balance of the Indebtedness; 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, each 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, each Borrower hereby authorizes Lender, after an Event of Default occurs, to debit any one or more of the other deposit accounts of any Borrower 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. Each 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 FINANCIAL SERVICES - BEFORE SEPTEMBER 30, 1997. Should SEARCH FINANCIAL SERVICES INC., before September 30, 1997, pay or declare any dividends on its stock (other than dividends payable in its stock) unless (a) its Adjusted Net Worth (as defined in the FINANCIAL COVENANTS - GUARANTOR section above) exceeds $15,000,000.00, and (b) payment of the dividend will not reduce its Adjusted Net Worth to an amount equal to or less than $15,000,000.00. PAYMENT OF DIVIDENDS BY SEARCH FINANCIAL SERVICES - ON AND AFTER SEPTEMBER 30, 1997. Should SEARCH FINANCIAL SERVICES INC., on or after September 30, 1997, pay or declare any dividends on its stock (other than dividends payable in its stock) unless (a) its Adjusted Net Worth (as defined in the FINANCIAL COVENANTS - GUARANTOR section above) exceeds $22,500,000.00, and (b) payment of the dividend will not reduce its Adjusted Net Worth to an amount equal to or less than $22,500,000.00. DEFAULT UNDER THE NOTE. Should Borrowers default in the payment of any amounts due and payable under the Note. DEFAULT UNDER DOMINION ACCOUNT OBLIGATIONS. Should any Borrower fail to deposit, into a Dominion Account, any collection made of any amounts due under any Non-Prime Auto Paper or any Consumer Paper, or any amount received from the sale of any inventory of any Borrower, within one (1) Business Day of receipt. DEFAULT IN PAYMENT OF OVERLINES OR OVERADVANCES. Should any Borrower default in the payment of any Overline or Overadvance within two (2) Business Days after notice from Lender to Borrowers. DEFAULT UNDER THIS AGREEMENT. Should any 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 Borrowers. 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 Borrowers. 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 any 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 Borrowers. DEFAULT IN FAVOR OF THIRD PARTIES. Should any 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 Borrowers. INSOLVENCY. Should the suspension of business, failure or insolvency, however evidenced, of any Borrower or any Guarantor 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 any Borrower or any Guarantor. 14 10-06-1997 LOAN AGREEMENT PAGE 14 LOAN NO. (CONTINUED) ================================================================================ INVOLUNTARY READJUSTMENT OF INDEBTEDNESS. Should proceedings for readjustment of indebtedness, reorganization, bankruptcy, composition or extension under any insolvency law be brought against any Borrower or any Guarantor, and such proceedings are not dismissed within sixty (60) days after commencement. ASSIGNMENT FOR BENEFIT OF CREDITORS. Should any 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 the property of any Borrower or 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 the property of any Borrower or any Guarantor. DISSOLUTION PROCEEDINGS. Should proceedings for the dissolution or appointment of a liquidator of any Borrower or any Guarantor be commenced by any person or entity other than any Borrower and such proceedings are not dismissed within sixty (60) days after commencement, or should any Borrower or any Guarantor be dissolved or have a liquidator appointed. FALSE STATEMENTS. Should any representation or warranty of any Borrower or any Guarantor made in connection with the Loan prove to be incorrect or misleading in any material respect. DEFECTIVE COLLATERALIZATION - NON-PRIME AUTO PAPER. Should any Related Document granting Lender a Security Interest in any of the Non-Prime Auto 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 Non-Prime Auto Paper) at any time for any reason. DEFECTIVE COLLATERALIZATION - CONSUMER PAPER. Should any Related Document granting Lender a Security Interest in any of the Consumer 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 Consumer 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 Non-Prime Auto Paper or Consumer 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 Borrowers. 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 any 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 the 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 any 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 any 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 any Borrower and/or against any Guarantor, and/or to proceed, or exercise any rights, against any Collateral then securing repayment of the Note. Borrowers further agree that the remedies of Lender 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 any Borrower, all documents, files, ledgers, computer tapes and disks, and all other records relating to the Collateral to facilitate in making direct collections. Borrowers 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 any Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. ADDITIONAL DOCUMENTS. Borrowers shall provide Lender with the following additional documents: CORPORATE RESOLUTION - BORROWERS. Borrowers have provided or will provide Lender with a certified copy of resolutions properly adopted by the Board of Directors of each Borrower, and certified by the corporate secretary or assistant secretary of each Borrower, under which the Board of Directors of each Borrower authorized one or more designated officers or employees to execute this Agreement on behalf of each 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 an Event of Default as provided herein. CORPORATE RESOLUTIONS - GUARANTORS. Borrowers have 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, each Borrower has provided or will provide Lender with a certificate executed by the principal or executive officer of each Borrower, 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 the Note, or under any Security Agreement directly or indirectly securing repayment of the same, as of the date hereof. 15 10-06-97 LOAN AGREEMENT PAGE 15 LOAN NO. (CONTINUED) ================================================================================ OPINION OF COUNSEL. Where required by Lender, Borrowers have provided or will provide Lender with an opinion of counsel for Borrowers certifying to and that: (a) this Agreement and the Note and Security Agreements constitute valid and binding obligations on the part of each Borrower that are enforceable in accordance with their respective terms; (b) each Borrower and each Guarantor is validly existing and in good standing; (c) each 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 counsel for Lender. 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 Borrowers hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or any Borrower against the other. This Agreement shall be governed by and construed in accordance with the laws of the State of Louisiana. 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. Each Borrower agrees and consents to sale or transfer by Lender, 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 any Borrower or about any other matter relating to the Loan, and each 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 each Borrower specifically reserves its rights to privacy with respect to any further disclosure or dissemination of such information by purchasers or potential purchasers. Lender agrees to notify Borrowers 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. Each Borrower additionally waives any and all other notices of sale of participation interests, as well as all notices of any repurchase of participation interests. Each 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. Borrowers agree to pay, upon demand, all of the out-of-pocket expenses of Lender, 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 Borrowers will pay that amount. This includes, subject to any limits under applicable law, attorneys' fees and 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. Borrowers 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 (including, without limitation, the Loan Agreement dated SEPTEMBER 11, 1996, between SEARCH FUNDING II, INC., and Lender, as amended, which is hereby terminated without any obligation of any party thereto to any other party thereto) 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 no Borrower, 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 Borrowers. In determining whether or not interest paid or payable exceeds the Maximum Rate, Borrowers 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 Borrowers any notice required under this Agreement, Lender may hand deliver or mail such notice to any Borrower at the chief executive office address specified for any Borrower in this Agreement, or at any other address that Borrowers may have given to Lender by written notice as provided in this paragraph. Notice to a single Borrower shall be considered as notice to all Borrowers. To give Lender any notice under this Agreement, Borrowers 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 Borrowers (or any 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. 16 10-06-1997 LOAN AGREEMENT PAGE 16 LOAN NO. (CONTINUED) ================================================================================ SOLE DISCRETION OF LENDER. Whenever consent or approval of Lender 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 the decision of Lender shall be final and conclusive, absent manifest error. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of any Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. No Borrower shall 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 each Borrower in this Agreement or in any certificate or other instrument delivered by any 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 any Borrower, any Guarantor or any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of any Borrower, any Guarantor or 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. EACH BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF OCTOBER 6, 1997. BORROWERS: SEARCH FUNDING II, INC. By /s/ ROBERT D. IDZI ----------------------------------------------------- Robert D. Idzi, Senior Executive Vice President SEARCH FINANCIAL SERVICES HOLDING COMPANY SEARCH FINANCIAL SERVICES OF FLORIDA, INC. SEARCH FINANCIAL SERVICES OF GEORGIA, INC. SEARCH FINANCIAL SERVICES OF LOUISIANA, INC. SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC. SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC. SEARCH FINANCIAL SERVICES OF TENNESSEE, INC. SEARCH FINANCIAL SERVICES OF TEXAS, INC. By: /s/ ROBERT D. IDZI ---------------------------------------------------- Robert D. Idzi, Senior Executive Vice President of each entity LENDER: HIBERNIA NATIONAL BANK By: /s/ BARRY G. MCMAHON ---------------------------------------------------- Authorized Officer EX-10.2 3 COMMERCIAL GUARANTY DATED OCTOBER 6, 1997 1 EXHIBIT 10.2 COMMERCIAL GUARANTY
- ----------------------------------------------------------------------------------------------------------------------------------- PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $25,000,000.00 10-06-1997 - ----------------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for the use of Lender only and do not limit the applicability of this document to any particular loan or item. - ----------------------------------------------------------------------------------------------------------------------------------- BORROWERS: SEARCH FUNDING II, INC. SEARCH FINANCIAL SERVICES HOLDING COMPANY SEARCH FINANCIAL SERVICES OF FLORIDA, INC. SEARCH FINANCIAL SERVICES OF GEORGIA, INC. SEARCH FINANCIAL SERVICES OF LOUISIANA, INC. SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC. SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC. SEARCH FINANCIAL SERVICES OF TENNESSEE, INC. SEARCH FINANCIAL SERVICES OF TEXAS, INC. GUARANTOR: SEARCH FINANCIAL SERVICES INC. LENDER: HIBERNIA NATIONAL BANK 600 NORTH PEARL STREET (TIN: 72-0210640) SUITE 2500 - L.B. 123 313 CARONDELET STREET DALLAS, TEXAS 75201-2899 POST OFFICE BOX 61540 NEW ORLEANS, LOUISIANA 70161 ===================================================================================================================================
AMOUNT OF GUARANTY. THE AMOUNT OF THE GUARANTY PROVIDED FOR UNDER THIS AGREEMENT 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 words "Borrower" and "Borrowers" mean individually, collectively and interchangeably SEARCH FUNDING II, INC., SEARCH FINANCIAL SERVICES HOLDING COMPANY, SEARCH FINANCIAL SERVICES OF FLORIDA, INC., SEARCH FINANCIAL SERVICES OF GEORGIA, INC., SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., and SEARCH FINANCIAL SERVICES OF TEXAS, INC., and such other entities as may become Borrowers under the Loan Agreement between Borrowers and Lender dated OCTOBER 6, 1997, any amendments and supplements to the Loan Agreement. 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 FINANCIAL SERVICES INC., and all other persons guaranteeing payment and satisfaction of the Indebtedness as hereinafter defined. INDEBTEDNESS. The word "Indebtedness" means the indebtedness of Borrowers 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 any 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 OCTOBER 6, 1997, in the principal amount of $25,000,000.00 made by Borrowers, payable to the order of 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 Borrowers and Lender dated OCTOBER 6, 1997, 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 Borrowers (or any of them) 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 each 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 Borrowers, and of Borrowers 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 2 10-06-1997 COMMERCIAL GUARANTY LOAN NO. (CONTINUED) PAGE 2 ================================================================================ 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 any 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 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 any 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 any 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 any 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 any 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 any 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 any Borrower, whether or not such funds are used by any Borrower to make payment(s) under the Indebtedness, and/or (b) make any payment(s) to Lender or others for and on behalf of any 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 any 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 any 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 the then remaining Indebtedness, until such time as the Indebtedness is fully paid and satisfied. In the event of the insolvency or consequent liquidation of the assets of any Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of any 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 the then remaining Indebtedness. Guarantor hereby assigns to Lender all claims which it may have or acquire against any Borrower or any assignee or trustee of any 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 any Borrower (or any other guarantor, surety or endorser of the Indebtedness) that any 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 Borrowers (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 any 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 any 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 hereby grants 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: 3 10-06-1997 COMMERCIAL GUARANTY LOAN NO. (CONTINUED) PAGE 3 ================================================================================ (a) Make additional secured and/or unsecured loans to any Borrower. (b) Discharge, release or agree not to sue any party (including, but not limited to, any 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. (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 any 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 any 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 any 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 any Borrower (or any person acting on behalf of any Borrower), or of any other guarantor, surety or endorser of the Indebtedness. (b) Any payment by any 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 any Borrower or to any other person. (c) Any dissolution of any Borrower, or any sale, lease or transfer of all or any part of the assets of any Borrower. (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 any 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 SEARCH FUNDING II, INC., and SEARCH FINANCIAL SERVICES HOLDING COMPANY, and SEARCH FINANCIAL SERVICES HOLDING COMPANY is the parent corporation and owner of all of the authorized, issued and outstanding stock of each other 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 the request of Borrowers 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 each Borrower on a continuing basis regarding the financial condition of each Borrower. (h) Lender has made no representations to Guarantor as to the creditworthiness of any Borrower. (i) There are no suits or proceedings pending, or to the knowledge of Guarantor, threatened against or affecting any Borrower, Guarantor, or the assets of any Borrower or Guarantor, before any court or by any governmental agency, other than those previously disclosed to Lender in documents filed by any Borrower or Guarantor with the Securities and Exchange Commission and delivered to Lender by any Borrower or Guarantor, which, if adversely determined, may have a material adverse effect on the financial condition or business of any Borrower or Guarantor. 4 10-06-1997 COMMERCIAL GUARANTY LOAN NO. (CONTINUED) PAGE 4 ================================================================================ 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 in writing of (a) all material adverse changes in the financial condition of any 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 any 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. 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 Borrowers, 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 Borrowers, 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 any 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 - BEFORE SEPTEMBER 30, 1997. Before September 30, 1997, pay or declare 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 below) exceeds $15,000,000.00, and (b) payment of the dividend will not reduce its Adjusted Net Worth to an amount equal to or less than $15,000,000.00. DIVIDENDS - ON AND AFTER SEPTEMBER 30, 1997. On or after September 30, 1997, pay or declare 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 below) exceeds $22,500,000.00, and (b) payment of the dividend will not reduce its Adjusted Net Worth to an 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. 5 10-06-1997 COMMERCIAL GUARANTY LOAN NO. (CONTINUED) PAGE 5 ================================================================================ 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 $15,000,000.00 until October 1, 1997. Beginning October 1, 1997, 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 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 each 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 Agreement: 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. 6 10-06-1997 COMMERCIAL GUARANTY LOAN NO. (CONTINUED) PAGE 6 ================================================================================ 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 AGREE 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 OCTOBER 6, 1997. GUARANTOR: SEARCH FINANCIAL SERVICES INC. By: /s/ ROBERT D. IDZI ---------------------------------------------------- Robert D. Idzi, Senior Executive Vice President and Chief Financial Officer LENDER: HIBERNIA NATIONAL BANK By: /s/ Barry G. McMahan ----------------------------------------------------- Authorized Officer EX-10.3 4 PROMISSORY NOTE DATED OCTOBER 6, 1997 1 EXHIBIT 10.3 PROMISSORY NOTE
- ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $25,000,000.00 10-06-1997 09-30-2000 - ------------------------------------------------------------------------------------------------------------------------------------ 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. - ------------------------------------------------------------------------------------------------------------------------------------
BORROWERS: SEARCH FUNDING II, INC. SEARCH FINANCIAL SERVICES HOLDING COMPANY SEARCH FINANCIAL SERVICES OF FLORIDA, INC. SEARCH FINANCIAL SERVICES OF GEORGIA, INC. SEARCH FINANCIAL SERVICES OF LOUISIANA, INC. SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC. SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC. SEARCH FINANCIAL SERVICES OF TENNESSEE, INC. SEARCH FINANCIAL SERVICES OF TEXAS, INC.
LENDER: HIBERNIA NATIONAL BANK (TIN: 72-0210640) 313 CARONDELET STREET POST OFFICE BOX 61540 NEW ORLEANS, LOUISIANA 70161 ================================================================================ PRINCIPAL AMOUNT: $25,000,000.00 INITIAL RATE: 9.500% DATE OF NOTE: OCTOBER 6, 1997
PROMISE TO PAY. SEARCH FUNDING II, INC., SEARCH FINANCIAL SERVICES HOLDING COMPANY, SEARCH FINANCIAL SERVICES OF FLORIDA, INC., SEARCH FINANCIAL SERVICES OF GEORGIA, INC., SEARCH FINANCIAL SERVICES OF LOUISIANA, INC., SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC., SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC., SEARCH FINANCIAL SERVICES OF TENNESSEE, INC., and SEARCH FINANCIAL SERVICES OF TEXAS, INC. (collectively, "BORROWERS" and individually, "BORROWER") promise 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 ($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 Borrowers 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, 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 OCTOBER 6, 1997, 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 Borrowers 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 Borrowers 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 BORROWERS AND LENDER DATED OCTOBER 6, 1997, AS IT MAY BE AMENDED OR MODIFIED FROM TIME TO TIME ("THE LOAN AGREEMENT"). Borrowers agree to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any deposit account maintained by any Borrower 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) any Borrower or any guarantor is in default under the terms of this Note or any agreement that any Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note, (ii) any 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 the financial condition of any Borrower or 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. BORROWERS WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON SEPTEMBER 30, 2000. IN ADDITION, BORROWERS WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING NOVEMBER 1, 1997, 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. Borrowers 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 Borrowers. Lender will tell Borrowers the current Index rate upon Borrowers' request. Borrowers understand 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 8.500% 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 9.500% PER ANNUM. OTHER FEES AND CHARGES. In addition to the principal, interest and other fees and charges provided for in this Note, Borrowers agree 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. Borrowers 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 late charges through date of prepayment. Prepayment of the amounts due under this Note shall not constitute termination of any agreement between Borrowers and Lender, including, without limitation, the Loan Agreement. Specifically, Borrowers acknowledge and agree that Lender may be entitled to a commitment cancellation charge provided for in the Loan Agreement. If Borrowers prepay this Note in full, or if Lender accelerates payment, Borrowers understand 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 Borrowers 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 2 10-06-1997 PROMISSORY NOTE PAGE 2 LOAN NO. (CONTINUED) ================================================================================ obligation of every nature and kind that any 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 any 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. ATTORNEYS' FEES. If Lender refers this Note to an attorney for collection, or files suit against Borrowers to collect this Note, or if any Borrower files for bankruptcy or other relief from creditors, Borrowers agree 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 any 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, each Borrower hereby grants Lender a continuing security interest in any and all funds that each Borrower may now and in the future have on deposit with Lender or in certificates of deposit or other deposit accounts as to which each Borrower is an account holder (with the exception of IRA, pension, and other tax-deferred deposits). Borrowers further agree that Lender may, at any time after a default event occurs, apply any funds that any Borrower may have on deposit with Lender or in certificates of deposit or other deposit accounts as to which any 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 any Borrower may then owe to Lender, in principal, interest, fees, costs, expenses, and attorneys' fees. GOVERNING LAW. Borrowers agree 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 no Borrower or 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 Borrowers. In determining whether or not interest paid or payable exceeds the Maximum Rate, Borrowers 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. Each Borrower and each guarantor of this Note hereby waives 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 agrees that its obligations and liabilities to Lender hereunder shall be on a "solidary" or "joint and several" basis. Each Borrower and each guarantor further severally agrees 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. Each Borrower and each guarantor additionally agrees 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 any 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 each Borrower's intent and agreement that Lender's rights and remedies shall be cumulative in nature. Each Borrower and each guarantor further agrees 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. Each Borrower's and each guarantor's obligations and agreements under this Note shall be binding upon each 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, EACH BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. LENDER AND BORROWERS HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR ANY BORROWER AGAINST THE OTHER. BORROWERS: SEARCH FUNDING II, INC. SEARCH FINANCIAL SERVICES HOLDING COMPANY SEARCH FINANCIAL SERVICES OF FLORIDA, INC. SEARCH FINANCIAL SERVICES OF GEORGIA, INC. SEARCH FINANCIAL SERVICES OF LOUISIANA, INC. SEARCH FINANCIAL SERVICES OF OKLAHOMA, INC. By:/s/ROBERT D. IDZI SEARCH FINANCIAL SERVICES OF PUERTO RICO, INC. --------------------------------------------------- SEARCH FINANCIAL SERVICES OF TENNESSEE, INC. Robert D. Idzi, Senior Executive Vice President SEARCH FINANCIAL SERVICES OF TEXAS, INC. By: /s/ROBERT D. IDZI ------------------------------------------------- Robert D. Idzi, Senior Executive Vice President of each entity
EX-11 5 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.0 SEARCH FINANCIAL SERVICES, INC. AND SUBSIDIARIES Statement re: Computation of Per Share Earnings Loss
Six Months Ended Six Months Ended September 30, 1997 September 30, 1996 ------------------ ------------------ Weighted Average Shares: Common stock outstanding at end of period 6,829 3,958 Adjustment for weighting of shares (2,444) (557) Common stock equivalents assumed outstanding -- -- ------- ------- Weighted average shares outstanding $ 4,385 $ 3,401 ======= ======= Net Income(Loss) $(6,231) $(1,991) ======= ======= Computation of net income(loss) per share: Net income(loss) divided by weighted average shares outstanding $ (1.42) $ (0.59) ======= =======
EX-27 6 FINANCIAL DATA SCHEDULE
5 3-MOS MAR-31-1997 JUL-01-1997 SEP-30-1997 2,491,000 0 127,370,000 10,768,000 1,199,000 120,292,000 6,221,596 (3,994,596) 126,944,000 96,329,000 0 0 201,000 290,000 0 126,944,000 3,965,000 3,965,000 0 0 0 (1,507,000) 1,944,000 (4,769,000) 0 (4,769,000) 0 0 0 (4,769,000) (0.85) (0.85)
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