-----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, MwCSe/EpRjvKPIXuKRF5sVGN4C+hK+kR9tbA32Ca+1AG+9FEmbiCB+Bfy8B/JuSZ QtzqiwmDFkblByCjl7JjBQ== 0000950134-96-004453.txt : 19960928 0000950134-96-004453.hdr.sgml : 19960928 ACCESSION NUMBER: 0000950134-96-004453 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960806 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960820 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEARCH CAPITAL GROUP 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-09539 FILM NUMBER: 96618285 BUSINESS ADDRESS: STREET 1: 700 N PEARL ST STE 400 STREET 2: PLZ OF THE AMERICAS NORTH TOWER CITY: DALLAS STATE: TX ZIP: 75201-7490 BUSINESS PHONE: 2149656000 MAIL ADDRESS: STREET 1: 700 N PEARL STE 400,NORH TOWER STREET 2: PLAZA OF THE AMERICAS CITY: DALLAS STATE: TX ZIP: 75201-7490 FORMER COMPANY: FORMER CONFORMED NAME: SEARCH NATURAL RESOURCES INC DATE OF NAME CHANGE: 19920703 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) AUGUST 6, 1996 -------------------------------- SEARCH CAPITAL GROUP, INC. - -------------------------------------------------------------------------------- (exact name of registrant as specified in its charter) DELAWARE 0-9539 41-1356819 - ---------------------------- ------------------- ---------------------- (State or other jurisdiction (Commission File (I.R.S. Employer of incorporation) Number) Identification No.) 700 N. PEARL STREET SUITE 400, L.B. 401 DALLAS, TEXAS 75201-7490 - ---------------------------------------- ----------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (214) 965-6000 ------------------------------ NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On August 6, 1996, the Company completed its acquisition of substantially all of the assets of Dealers Alliance Credit Corp. ("DACC"). DACC's assets consisted primarily of used motor vehicle retail installment sales contracts, repossessed motor vehicles, cash, and certain furniture and equipment. As of June 30, 1996, DACC had contracts with total unpaid future installments of approximately $35 million and net finance receivables of approximately $14.3 million after reduction for unearned finance charges of approximately $8.1 million and after an allowance for credit losses of approximately $12.5 million. The Company assumed all balance sheet liabilities of DACC, other than approximately $4.1 million of subordinated debt and warrants and certain other claims. These liabilities consisted primarily of indebtedness owing to senior lenders, accounts payable, accrued expenses, an office lease expiring 2002, service and equipment maintenance agreements and an employment agreement for a DACC employee. As of June 30, 1996, DACC owed approximately $18 million to its senior lenders and had accounts payable and accrued expenses of approximately $0.7 million. The assumed senior debt bears interest at the prime rate plus 1%, matures on August 2, 1997 and is secured by the contracts purchased from DACC. The Company must make monthly prepayments of the debt in amounts equal to any excess of (i) the monthly collections on the purchased contracts over (ii) up to $475,000 of permitted monthly operating expenses. In addition to assuming the foregoing liabilities, the Company issued to DACC (i) 766,218 shares of a new series of preferred stock designated "Series B 9%/7% Convertible Preferred Stock" (the "Series B Preferred Stock"), (ii) 1,277,030 shares of Common Stock, and (iii) five-year warrants to purchase 1,277,030 shares of Common Stock at $2.00 per share (increasing by $0.25 each year). One-half of the securities issued to DACC were escrowed until May 2, 1997, and the remaining securities were escrowed until August 3, 1997, to secure certain indemnification obligations of DACC in favor of the Company under the purchase agreement. The Company also purchased the subordinated debt owing by DACC and certain related warrants to purchase DACC stock. All of the debt and warrants were canceled by the Company as part of the consideration for the transfer of DACC's assets. The Company issued a total of 1,787,842 shares of Series B Preferred Stock to the two holders of such debt and warrants. One-fourth of these shares were escrowed until May 2, 1997, and an additional 25% of these shares were escrowed until August 3, 1997, to secure certain indemnification obligations of the holders in favor of the Company. As a result of the acquisition of DACC and the issuance of the Company's securities in connection therewith, the total stockholders' equity of the Company increased approximately $8.357 million. See "Pro Forma Condensed Consolidated Balance Sheets." The Company and the recipients of the Company's securities, including DACC, also entered into shareholders' agreements that require the Company to file within six months after the closing, and to use best efforts to cause to become effective within 90 days thereafter, a registration statement with the Securities and Exchange Commission for the offer and resale of the securities issued by the Company in this acquisition. The Company will bear all of the costs of such registration (other than underwriting discounts, commissions and expenses incurred by the security holders) and up to $40,000 of the fees of counsel for the security holders. The terms of the Series B Preferred Stock are similar to the terms of the Company's existing 9%/7% Convertible Preferred Stock (the "New Preferred Stock"). According to its terms, the shares of Series B Preferred Stock will be automatically converted, on a one-for-one basis, into newly issued shares of New Preferred Stock when certain clarifying amendments to the terms of the New Preferred Stock are approved by the Company's stockholders and filed with the Delaware Secretary of State. The Company has filed with the Securities and Exchange Commission proxy materials with respect to a special stockholders' meeting called for the purpose of considering such amendments. -1- 3 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (A) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. INDEX TO FINANCIAL STATEMENTS FOR DEALERS ALLIANCE CREDIT CORP.
Page ---- Financial Statements for the three-month period ended March 31, 1996 and year ended December 31, 1995 Independent auditors' report F-1 Statements of financial condition F-2 Statements of operations F-3 Statements of common stockholders' deficit F-4 Statements of cash flows F-5 Notes to financial statements F-6 Financial Statements for the year ended December 31, 1994 and for the period from inception, July 16, 1993, to December 31, 1993 Independent auditors' report F-20 Statements of financial condition F-21 Statements of operations F-22 Statements of common shareholders' deficit F-23 Statements of cash flows F-24 Notes to financial statements F-25 Financial Statements for the three-month period ended June 30, 1996 Statement of financial condition F-32 Statement of operations F-33 Statement of cash flows F-34
-2- 4 [BDO SEIDMAN, LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT Board of Directors Dealers Alliance Credit Corp. Atlanta, Georgia We have audited the accompanying statements of financial condition of Dealers Alliance Credit Corp. as of March 31, 1996 and December 31, 1995, and the related statements of operations, common stockholders' deficit, and cash flows for the three months ended March 31, 1996 and for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dealers Alliance Credit Corp. as of March 31, 1996 and December 31, 1995, and the results of its operations and its cash flows for the three months ended March 31, 1996 and for the year ended December 31, 1995 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's recurring losses from operations, negative capital position and notices of default from its principal lenders raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. May 21, 1996, except for Note 7 /s/ BDO SEIDMAN, LLP which is as of May 24, 1996 F-1 5 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF FINANCIAL CONDITION ================================================================================
MARCH 31, December 31, 1996 1995 - ----------------------------------------------------------------------------------------------------------------- ASSETS Net finance receivables (Note 3) $ 35,125,860 $ 33,686,474 Allowance for credit losses (Note 3) (13,450,000) (14,506,538) - ----------------------------------------------------------------------------------------------------------------- 21,675,860 19,179,936 Cash and cash equivalents 368,767 325,678 Repossessed collateral 437,804 569,556 Furniture and equipment, net 248,940 228,570 Prepaid rent (Note 6) 272,167 327,750 Other assets (Note 6) 647,889 711,832 - ----------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 23,651,427 $ 21,343,322 ================================================================================================================= LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT LIABILITIES Revolving credit agreement advances (Note 4) $ 19,250,000 $ 16,850,000 Accounts payable and accrued expenses 1,138,330 1,001,815 Due to related party (Note 11) 19,399 60,111 Senior subordinated notes payable, net (Note 8) 3,486,991 3,460,872 - ----------------------------------------------------------------------------------------------------------------- 23,894,720 21,372,798 WARRANTS (Note 8) 563,767 521,945 REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK, $0.01 par value; 200,000 share authorized, 176,313 and 177,630 shares issued and outstanding, net of $24,645 note receivable from stockholder (Notes 9 and 11) 8,752,971 8,674,880 COMMON STOCKHOLDERS' DEFICIT (Notes 10 and 11) Common stock, $0.01 par value; 250,000 shares authorized, 9,402 shares issued and outstanding 94 94 Additional paid-in capital - 82,893 Note receivable from stockholder (25,000) (25,000) Accumulated deficit (9,535,125) (9,284,288) - ----------------------------------------------------------------------------------------------------------------- Total common stockholders' deficit (9,560,031) (9,226,301) - ----------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT $ 23,651,427 $ 21,343,322 =================================================================================================================
See accompanying notes to financial statements. F-2 6 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF OPERATIONS ================================================================================
THREE MONTHS Year ENDED ended MARCH 31, 1996 December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------- NET FINANCE REVENUES Interest income on finance contracts $1,908,371 $ 5,638,347 Ancillary and other operating income 140,062 326,193 - ---------------------------------------------------------------------------------------------------------------------- Net finance revenues 2,048,433 5,964,540 - ---------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE, NET Interest expense 699,337 1,342,363 Interest income (9,666) (21,048) - ---------------------------------------------------------------------------------------------------------------------- Total interest expense, net 689,671 1,321,315 - ---------------------------------------------------------------------------------------------------------------------- Finance income before provision for credit losses 1,358,762 4,643,225 Provision for credit losses - (7,415,113) - ---------------------------------------------------------------------------------------------------------------------- Net finance income (loss) 1,358,762 (2,771,888) - ---------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Employee compensation and related expenses 961,881 2,909,563 General and administrative 390,749 965,659 Consulting and professional fees 219,950 980,117 - ---------------------------------------------------------------------------------------------------------------------- Total operating expenses 1,572,580 4,855,339 - ---------------------------------------------------------------------------------------------------------------------- NET LOSS $ (213,818) $(7,627,227) ======================================================================================================================
Interim results are not necessarily indicative of the results that may be expected for the entire year. See accompanying notes to financial statements. F-3 7 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF COMMON STOCKHOLDERS' DEFICIT THREE MONTHS ENDED MARCH 31, 1996 AND YEAR ENDED DECEMBER 31, 1995 ================================================================================
Note Total Common Stock Additional receivable common ------------------ paid-in from Accumulated stockholders' Shares Amount capital stockholder deficit deficit - -------------------------------------------------------------------------------------------------------------------- BALANCE, at December 31, 1994 9,402 $94 $ 330,574 $ (25,000) $(1,657,061) $(1,351,393) Compensatory common stock options - - 39,450 - - 39,450 Preferred stock dividend - - (219,172) - - (219,172) Preferred stock accretion - - (48,910) - - (48,910) Warrant accretion - - (19,049) - - (19,049) Net loss - - - - (7,627,227) (7,627,227) - -------------------------------------------------------------------------------------------------------------------- BALANCE, at December 31, 1995 9,402 94 82,893 (25,000) (9,284,288) (9,226,301) Preferred stock dividend - - (66,280) - - (66,280) Preferred stock accretion - - (11,810) - - (11,810) Warrant accretion - - (4,803) - (37,019) (41,822) Net loss - - - - (213,818) (213,818) - -------------------------------------------------------------------------------------------------------------------- BALANCE, at March 31, 1996 9,402 $94 $ - $ (25,000) $(9,535,125) $(9,560,031) ====================================================================================================================
Interim results are not necessarily indicative of the results that may be expected for the entire year. See accompanying notes to financial statements. F-4 8 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF CASH FLOWS ================================================================================
THREE MONTHS Year ENDED ended MARCH 31, 1996 December 31, 1995 - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (213,818) $ (7,627,227) Adjustments: Provision for credit losses - 7,415,113 Depreciation and amortization 21,568 80,970 Amortization of debt discount and organization fees 62,917 222,212 Compensatory stock options issued to related party - 39,450 Changes in assets and liabilities: Repossessed collateral 131,752 (511,493) Other assets 35,321 (1,213,368) Accounts payable and acrued expenses 136,517 835,542 Due to related party (40,712) 48,254 - --------------------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities 133,545 (710,547) - --------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of installment contracts receivable (4,966,659) (27,358,521) Payments received on installment contracts receivable 2,514,695 3,729,126 Purchases of equipment (41,995) (129,685) Proceeds from sale of assets 3,505 - - --------------------------------------------------------------------------------------------------------------- Cash used in investing activities (2,490,454) (23,759,080) - --------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Revolving credit agreement advances 2,400,000 16,850,000 Subordinated debt issuance - 4,000,000 Issuance of preferred stock - 2,972,832 - --------------------------------------------------------------------------------------------------------------- Cash provided by financing activities 2,400,000 23,822,832 - --------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 43,091 (646,795) - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS at beginning of period 325,678 972,473 - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS at end of period $ 368,767 $ 325,678 =============================================================================================================== NON-CASH ACTIVITIES Accretion of put value of warrants $ 41,822 $ 19,049 Accretion of value of preferred stock 11,810 48,910 Preferred stock dividend 66,280 219,172
Interim cash flows are not necessarily indicative of the cash flows that may be expected for the entire year. See accompanying notes to financial statements. F-5 9 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ 1. SUMMARY OF SIGNIFICANT BUSINESS DESCRIPTION ACCOUNTING POLICIES Dealers Alliance Credit Corp. (the "Company"), is a specialized indirect consumer finance company engaged in financing the purchase of used automobiles by purchasing retail installment sales contracts ("Installment Contracts") primarily from independent used automobile dealers. The Company was incorporated in the state of Delaware on July 16, 1993. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NON-REFUNDABLE ACQUISITION DISCOUNT Generally, Installment Contracts are purchased from dealers at non-refundable acquisition discounts ("Discount") from the principal amounts financed by the borrowers. Prior to January 1, 1996 when an Installment Contract was purchased, the Company allocated to the allowance for credit losses the portion of the Discount deemed necessary to absorb estimated future credit losses for the Installment Contract portfolio. Any remaining amount was deferred as unearned acquisition discount and was amortized to interest income using the interest method over the term of the Installment Contract. The entire Discount related to Installment Contracts purchased subsequent to December 31, 1995 has been allocated to the Allowance for Credit Losses, and no discount revenue recognized. REVENUE RECOGNITION Each installment contract requires the customer to make monthly payments over a fixed term. The difference between the total amount of contractual payments and the principal amount financed represents unearned finance charges. Unearned finance charges are amortized and recorded as interest income using the interest method over the term and at the interest rate stated in the Installment Contract. When an Installment Contract becomes 61 or more days past due or the customer becomes the subject of a bankruptcy proceeding, income recognition is suspended until the Installment Contract is restored to a current status. F-6 10 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ The Company derives income from product warranties sold by a third party that are financed under the Installment Contracts (ancillary income). That income is deferred and recorded as unearned ancillary income and amortized to revenue using the sum-of-the-digits method, which approximates the results of the interest method, over the terms of the underlying warranty contracts. Other operating income, which includes late charges and deferral fees charged to customers, is recognized as collected. ALLOWANCE FOR CREDIT LOSSES Allowance for credit losses is established through an allocation at the acquisition date of the Discount based upon management's estimate of future credit losses. Commencing January 1, 1996, the entire discount has been allocated to the allowance account. Management periodically evaluates the adequacy of the allowance for credit losses by reviewing credit loss experience, delinquencies, the value of the collateral and general economic conditions. If the allowance for credit losses is insufficient in comparison to the amount management believes necessary to absorb potential losses in the Installment Contract portfolio, the Company first transfers amounts from the unearned acquisition discount, to the extent available, and then, if necessary, a provision for credit losses is charged against earnings. An Installment Contract is charged to the allowance for credit losses at the earliest of the time when the automobile securing the Installment Contract is repossessed, the payment under the Installment Contract is 180 days or more past due, or the Installment Contract is otherwise deemed to be uncollectible. REPOSSESSED AUTOMOBILES A repossessed automobile is recorded at its estimated realizable value less estimated costs of disposition. The Company commences repossession against the automobile securing a delinquent account when it determines that additional collection efforts are not likely to be successful. Generally, repossession occurs when a borrower becomes 60 days delinquent on an Installment Contract. Upon repossession, the amount due under an Installment Contract, net of the related unearned acquisition discount, if any, is reduced to the estimated realizable value of the automobile less estimated costs of disposition through a charge to the allowance for credit losses. F-7 11 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ DEFERRED CONTRACT ACQUISITION COSTS The Company defers costs directly associated with the acquisition of Installment Contracts such as the fees, commission and dealers incentives and amortizes such costs using the interest method as a reduction of interest income over the term of the Installment Contracts. CASH AND CASH EQUIVALENTS Cash and cash equivalents include liquid investments with original maturities of three months or less. FURNITURE AND EQUIPMENT Furniture and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 4 to 6 years, using the straight-line method. Accumulated depreciation at March 31, 1996 and December 31, 1995 was $75,699 and $57,579, respectively. DEFERRED LOAN COSTS Commitment, placement and other fees and expenses incurred in connection with the Company's Revolving Credit Agreement and Subordinated Debt are deferred, as other assets, and amortized under the sum-of-the-years digits method to interest expense over the terms of the related agreements. INCOME TAXES The Company records income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Deferred taxes are recorded based upon temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Management provides a valuation allowance for deferred tax assets when they determine it is more likely than not that the benefits from such deferred tax assets will not be realized. 2. FUTURE PROSPECTS The Company's financial statements for the three months ended March 31, 1996 and for the year ended December 31, 1995 have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred net losses of $213,818 for the three months ended March 31, 1996 and $7,627,227 for the year ended F-8 12 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ December 31, 1995 resulting in an accumulated deficit of $9,535,125 and $9,284,288 at March 31, 1996 and December 31, 1995, respectively. During 1996, the Company's principal lenders notified the Company that the Company was in default of certain financial convenants of the loan agreement and subordinated note agreements. In these circumstances, the outstanding borrowings become immediately due and payable upon notification of the lenders. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are discussed below. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. In early March 1996 Company determined that its portfolio of installment contracts was not performing as had been previously estimated and, consequently, a significant provision for credit losses and resulting addition to the allowance for credit losses was required as of and for the period ended December 31, 1995. The Company immediately informed its senior revolving credit lenders ("Senior Lenders") and subordinated debt lenders ("Subdebt Lenders") of its determination and that, as a consequence, the Company would be in default on a number of covenants contained in the revolving credit agreement with the Senior Lenders ("Senior Loan") and subordinated note agreement with the Subdebt Lenders ("Subordinated Loan"). On March 19, 1996 the Senior Lenders notified Company that events of default had occurred under the Senior Loan and that Company would not be permitted to make any additional borrowings thereunder. On March 22, 1996 the Subdebt Lenders notified Company than events of default had occurred under the Subordinated Loan. Neither the Senior Lenders nor the Subdebt Lenders have demanded payment in full or accelerated the maturity of those debts. However, the Senior Loan expired by its terms on May 1, 1996 and in accordance with an agreement with the Senior Lenders the Subdebt Lenders cannot currently accelerate the Subordinated Loan. The Senior Lenders have informed Company that they will not renew the Senior Loan; however, for an unspecified period of time they will permit Company to use most of its cash collections from its loan portfolio to operate its business less interest payments. F-9 13 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ On April 2, 1996 Company retained two investment banking firms to aid and assist its efforts to recapitalize the Company through direct investment, sale or merger. Although the effort to recapitalize is continuing and the Senior Lenders are permitting the Company to operate, no assurance can be given that Company will be successful in recapitalizing or that the Senior Lenders will not accelerate the Senior Debt and foreclose on the portfolio collateral prior to the time that any recapitalization is completed. 3. NET RECEIVABLES Generally, the Company's Installment Contracts have terms of 24 to 36 months. The net finance receivables balance consisted of the following:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- Contractual payments due $ 46,371,288 $ 44,900,063 Unearned finance charges (11,328,861) (11,278,054) -------------------------------------------------------------------------- Contractual principal balance 35,042,427 33,622,009 Unearned ancillary income (84,662) (93,358) Deferred contract acquisition costs, net 168,095 157,823 -------------------------------------------------------------------------- Net finance receivables $ 35,125,860 $ 33,686,474 ==========================================================================
F-10 14 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ Activity in the unearned contract acquisition discount and allowance for credit losses accounts for the three months ended March 31, 1996 and the year ended December 31, 1995 was as follows:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- UNEARNED CONTRACT ACQUISITION DISCOUNT Balance - beginning of period $ - $ 507,783 Discounts allocated to unearned acquisition - discount 1,968,292 Amortized to interest income - (546,402) Transferred to allowance for - credit losses (1,376,787) Related to charge-offs, net - (552,886) -------------------------------------------------------------------------- Balance - end of period $ - $ - ==========================================================================
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES Balance - beginning of period $14,506,538 $ 598,120 Discounts allocated to allowance for credit losses 2,185,597 9,383,810 Transferred from unearned acquisition discount - 1,376,787 Provision for credit losses - 7,415,113 Charge-offs (3,273,975) (4,283,206) Recoveries 31,840 15,914 -------------------------------------------------------------------------- Balance - end of period $13,450,000 $ 14,506,538 ==========================================================================
The Company's exposure to credit loss in the event of non-performance by the customer is represented by the amount of the Installment Contract less the acquisition discount. At March 31, 1996 approximately 32%, 24% and 14%, of the Company's Installment Contracts were purchased from dealers located in Tennessee, Georgia and Texas, respectively. F-11 15 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ 4. REVOLVING CREDIT At March 31, 1996 the Company had a $35 AGREEMENT million revolving credit agreement ("Revolving Credit Agreement"), which was in default, with three banks, which expired on May 1, 1996. The Company's obligations under the Revolving Credit Agreement are secured by substantially all of the Company's assets. Borrowings under the Revolving Credit Agreement were $19.25 million and $16.85 million at March 31, 1996 and December 31, 1995, respectively. Interest on the borrowings under the Revolving Credit Agreement is payable monthly based upon the referenced prime rate (which was 8.25% at March 31, 1996) plus 2% per annum. For the three months ended March 31, 1996 interest expense amounted to $470,600 and consisted of interest on advances (weighted average interest rate of 10.25%) under the Revolving Credit Agreement, amortization of the Revolving Credit Agreement fees and expenses. For the year ended December 31, 1995 interest expense amounted to $975,340 and consisted of interest on advances (weighted average interest rate of 11.5%) under the Revolving Credit Agreement, amortization of the Revolving Credit Agreement fees and expenses, and amortization of the cost of an option to purchase an interest rate protection agreement. The Revolving Credit Agreement requires the Company to maintain specified financial ratios and to comply with other covenants. At March 31, 1996 the Company was in default under this agreement due to failure to maintain these agreed upon covenants, including the minimum interest coverage ratio, minimum tangible net worth and the ratio of charge-offs to average net finance receivables. 5. INCOME TAXES The Company has incurred net operating losses since its inception in 1993 and, accordingly, no provision for income taxes for the three months ended March 31, 1996 or for the year ended December 31, 1995 has been recorded. Net operating loss carryovers, which aggregate approximately $4,345,000 at March 31, 1996, are available to reduce future federal and state income taxes and expire through December 31, 2010. Deferred taxes reflect the net tax effect of temporary differences between the financial reporting bases of assets and liabilities and the amounts applicable for income tax purposes. F-12 16 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ The Company's net deferred tax assets were as follows:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- Deferred tax asset: Pre-operating expenses $ 80,000 $ 87,000 Allowance for credit losses 1,718,000 2,348,000 Net operating loss carryover 1,520,000 812,000 -------------------------------------------------------------------------- 3,318,000 3,247,000 Less valuation allowance (3,318,000) (3,247,000) -------------------------------------------------------------------------- Net deferred tax asset $ - $ - ==========================================================================
6. LEASES AND OTHER OFFICE FACILITY AND EQUIPMENT LEASES COMMITMENTS The Company rents its office under a non-cancellable lease agreement which terminates in September 2002 and provides the Company with options, subject to certain conditions, to lease additional space in 1996 and 1997. The new lease requires the Company to reimburse the landlord for increases over the base year amounts for certain expenses, such as real estate taxes, utilities and maintenance. Upon executing the lease in August 1995 the Company was required to fund $364,000 of future rental payments and $150,000 representing a security deposit. The unamortized portion of the future rental payments and the security deposit are included in "prepaid rent" and "other assets" at March 31, 1996 and December 31, 1995. The rental prepayment will reduce future rental payments through March 1997. Some of the Company's office equipment is subject to operating leases. The aggregate rent expense for the office facility and equipment leases was $58,900 for the three months ended March 31, 1996 and $74,200 for the year ended December 31, 1995. DATA PROCESSING AGREEMENT The Company entered into a five-year contract, which expires in June 1999, to receive data processing services. The contract requires minimum monthly fees for services rendered. F-13 17 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ At March 31, 1996, future minimum payments for non-cancellable leases, including the new office lease, and data processing services were as follows:
Data Leases Processing --------------------------------------------------------------------------- Year ending March 31, 1997 $ 128,000 $218,000 Year ending March 31, 1998 383,400 180,000 Year ending March 31, 1999 360,200 180,000 Year ending March 31, 2000 292,300 45,000 Year ending March 31, 2001 287,700 - Thereafter 424,500 - --------------------------------------------------------------------------- Total $1,876,100 $623,000 ===========================================================================
7. CONTINGENCIES Subsequent to March 31, 1996, the employment by the Company of its then president and then chief financial officer was terminated. Each believes they were dismissed without cause. The Company has been notified by counsel representing these two former employees that legal action may be initiated against the Company for, among other things, severance payments, recommendations and release of non-compete agreements. 8. SUBORDINATED DEBT During 1995, the Company issued $4 million AND WARRANTS of subordinated debt, which is subordinated to the Company's Revolving Credit Agreement and bears interest at 10% per annum, payable quarterly. The first issue of $2.5 million occurred on October 16, 1995 and the remaining $1.5 million was issued on December 20, 1995. The Subordinated Debt matures October 16, 2000, unless repayment is required by redemption of the Preferred Stock or the completion of an initial public offering. In connection with the issuance of the Subordinated Debt the lenders were issued warrant ("Warrants") to purchase 18,467 shares of the Company's Common Stock for an exercise price of $0.01 per share. These Warrant are exercisable immediately and expire in 10 years. If the Warrants are outstanding on November 1, 1998, unless the repurchase feature is otherwise accelerated, the Warrant holders have the right, under certain conditions, to require the Company to repurchase the Warrants at a price per share determined by dividing F-14 18 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ the largest of: (i) the Company's then fair value, (ii) 12 times the Company's net income for the last 4 quarters or (iii) $14 million divided by the number of fully-diluted shares of common stock and common stock equivalents then outstanding. Upon issuance, the $554,139 fair value of the Warrants was recorded as original issue discount. The Company incurred costs aggregating $369,894 in connection with the Subordinated Debt. Those costs, which are included in other assets, and the original issue discount are amortized as interest expense over the term of the Subordinated Debt using the interest method. For the three months ended March 31, 1996 interest expense for the subordinated debt was $101,111 and for the year ended December 31, 1995 interest expense was $64,085. The Warrant is being accreted over a 36 month period to an estimated repurchase value of $995,925 through a charge against net income available for common stockholders. Subordinated debt consisted of the following:
MARCH 31, December 31, 1996 1995 -------------------------------------------------------------------------- Principal outstanding $4,000,000 $4,000,000 Less: Original issue discount, net of accumulated amortization (513,009) (539,128) -------------------------------------------------------------------------- $3,486,991 $3,460,872 ==========================================================================
9. REDEEMABLE SERIES A The Company has authorized 200,000 shares CONVERTIBLE PREFERRED of Series A Convertible Preferred Stock STOCK ("Preferred Stock"), par value $.01 per share. Holders of the Preferred Stock are entitled to cumulative annual stock dividends of 3% on December 30 of each year. In December 1993, the Company received commitments to buy 110,000 shares (gross proceeds of $5.5 million) of its Preferred Stock, 60% of which was purchased in December 1993 with the remaining 40% purchased in September 1994. The December 1993 closing resulted in the issuance of 66,000 shares of Preferred Stock with proceeds, net of offering costs, of approximately $3,120,000. The September 1994 closing resulted in the issuance of 44,000 shares of Preferred Stock, with net proceeds of approximately $2,196,000. F-15 19 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ On January 25, 1995 the Company's Board of Directors approved an offering of 60,000 shares of Preferred Stock at $50 per share to current holders of the Company's Preferred and Common Stock. The offering ("Rights Offering") resulted in the Company receiving commitments to purchase the entire 60,000 shares of Preferred Stock offered. The terms of the offering provided for two closings. The initial closing in May 1995 resulted in the issuance of 30,000 shares of Preferred Stock (net proceeds of $1,480,780). The second closing was on July 24, 1995 and an additional 30,000 shares of Preferred Stock (gross proceeds of $1,500,000) were issued. Each share of Preferred Stock may be converted into 1 share of Common Stock at any time at the option of the holder. Conversion into Common Stock is mandatory in the event of a qualified initial public offering of the Company's Common Stock, as defined ("IPO"). If an IPO does not occur before December 1, 1998, each holder of Preferred Stock may require the Company to redeem its Preferred Stock at the greater of the Common Stock's per share fair market value or its liquidation preference. Redemption is mandatory on November 30, 1999 at the greater of the Common Stock's per share fair market value on September 1, 1999 or its liquidation preference. The liquidation preference aggregated $8,903,600 at March 31, 1996 and $8,837,300 at December 31, 1995. For financial accounting purposes, the Preferred Stock is accreted to the greater of its liquidation preference ($50 per share) or the Common Stock's per share fair market value. Management believes the fair market value of its Common Stock was $50 per share at December 31, 1995 and December 31, 1994. For financial accounting purposes, the dividends were valued at $50 per share and were charged to additional paid-in capital, to the extent available, and then to accumulated deficit. Holders of Preferred Stock are entitled to one vote per share on all stockholder matters. The Company's Shareholders Agreement provides that all stockholders vote for an eight member Board of Directors comprised of four nominees of the majority Common Stockholder (see Related Party Transactions), one nominee of a specified Preferred Stock holder group, two nominees of the stockholders other than majority Common Stockholder and one nominee who is the Company's chief executive officers. The Shareholders Agreement terminates upon completion of an IPO. The Preferred Stock ranks senior to the Common Stock with respect to F-16 20 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ dividends and liquidation rights. The provisions of the Revolving Credit Agreement prohibit the payment of dividends in cash or property, other than stock dividends on the Preferred Stock. 10. OPTIONS TO PURCHASE On May 1, 1995, the options to purchase COMMON STOCK Common Stock granted to certain key officers of the Company during 1994 were modified. The modification increased the number of shares under grant from 17,500 to 25,500. Additionally, the rights of those grantees under the options vest in their entirety on December 30, 2000, unless vesting is accelerated by the Company's achievement of established operating performance objectives in 1995 and 1996. The exercise price per share is $50, which approximated fair market value per share at the date of the modification. On November 30, 1993, a member of the Board of Directors was granted an option, which vested immediately, to purchase 2,000 shares of Common Stock at an exercise price per share of $50, which approximated fair value per share at the date of grant, through November 30, 2003. On May 1, 1995, the option granted to Chicago Holdings, Inc. ("CHI") (see Related Party Transactions) in November 1993 to purchase 10,000 shares of Common Stock at an exercise price of $50 per share was modified. CHI's option to purchase those shares vest in its entirety on December 31, 2000, unless vesting is accelerated by the Company's achievement of established operating performance objectives in 1995 and 1996. On November 30, 1993, CHI was granted an option, which vested immediately, to purchase 10,000 shares of Common Stock. On May 1, 1995 CHI was granted an option, which vested immediately, to purchase an additional 2,500 shares of common stock. The exercise prices per share of the options are: $100 during 1996, $150 during 1997 and $200 thereafter through November 30, 2003. F-17 21 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ The Company obtained valuations from an independent party for the Common Stock options granted to CHI. The appraiser determined the fair value of CHI options granted or modified in 1995 was approximately $39,450 at the date of grant. The Company recognized a non-cash compensatory charge for such options in 1995. The fair value of the options granted in 1993 was not material. 11. RELATED PARTY COMMON STOCK TRANSACTIONS TRANSACTIONS Approximately 89.4% (8,401 shares) of the Company's outstanding Common Stock is owned by a wholly-owned subsidiary of CHI, a founder of the Company. The remaining outstanding shares of Common Stock are owned by the Company's President and its Chairman. The Chairman purchased 1 founding share. CHI's subsidiary purchased 1 founding share, 5,040 shares of the Company's Common Stock in the December 1993 closing for $240,005 and 3,360 shares in the September 1994 closing for $160,003. In September 1994, the Company's then President purchased 1,000 shares of Common Stock for $50 per share, payable $25,000 in cash and $25,000 by a five-year full recourse promissory note which bears interest at 6% per annum. This note is collateralized by a pledge of the Company's stock owned by the President, requires partial repayments in the event that the President earns an incentive bonus in 1996, 1997 or 1998, and accelerates if the President ceases to be employed by the Company. PREFERRED STOCK TRANSACTIONS In 1995 the Company's then President, as a participant in the Rights Offering, purchased a total of 493 shares of Preferred Stock at $50 per share payable $98 in cash and $24,552 by full recourse promissory notes due on September 1, 1999 which bear interest at 6% per annum. Those notes are collateralized by a pledge of the Company's stock owned by the President, require partial repayments in the event that the President earns an incentive bonus in 1996, 1997 or 1998, and accelerate if the President ceases to be employed by the Company. F-18 22 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS ================================================================================ In 1995, a wholly-owned subsidiary of CHI, as a participant in the Right Offering, purchased 4,138 shares of preferred stock for a cash price of $206,900 ($50 per share). MANAGEMENT ADVISORY AGREEMENT The Company has a management advisory agreement with CHI. CHI agreed to provide accounting, legal and other services for the Company through November 1996. CHI's compensation for those services is $125 per hour, together with reimbursement of out-of-pocket expenses, for actual time devoted to assisting the Company. The terms of the agreement also provide for CHI to make its senior management available, at the Company's request, for advisory and consulting services through November 1, 1998. CHI is also entitled to a monthly fee of $10,000 for 36 months commencing after the Company achieves and continues to be profitable on a monthly basis. The agreement provides for the Company's payment of a market rate fee to CHI if CHI successfully arranges additional indebtedness for the Company. For the three months ended March 31, 1996 and the year ended December 31, 1995, CHI charged the Company $64,800 and $249,200, respectively, in hourly management fees and reimbursement of out-of-pocket expenses. During 1995 CHI charged the Company $111,280 and $75,000 as fees for negotiating increases to the Company's Revolving Credit Agreement and its Subordinated Debt. In August 1995, the Company entered into an advisory agreement, which expires in four years, with EQ Corporation, a shareholder of the Company, pursuant to which EQ Corporation will provide certain financial advisory services to the Company. The terms of the agreement required the Company to prepay all fees, which amounted to approximately $149,000, upon execution of the agreement. Such amount has been included in other assets and will be amortized to expense over the term of the agreement. F-19 23 [DELOITTE & TOUCHE LLP LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Dealers Alliance Credit Corp.: We have audited the accompanying statements of financial condition of Dealers Alliance Credit Corp. as of December 31, 1994 and 1993, and the related statements of operations, shareholders' deficit, and cash flows for the year ended December 31, 1994 and the period from July 16, 1993 (date of incorporation) to December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Dealers Alliance Credit Corp. as of December 31, 1994 and 1993, and the results of its operations and its cash flows for the year ended December 31, 1994 and the period from July 16, 1993 (date of incorporation) to December 31, 1993 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP February 17, 1995 F-20 24 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1994 AND 1993 - --------------------------------------------------------------------------------
ASSETS 1994 1993 Net finance receivables $ 3,629,717 $ - Allowance for credit losses (598,120) - ----------- ----------- Net receivables 3,031,597 - Cash and cash equivalents 972,473 3,026,389 Repossessed collateral 58,063 - Furniture and equipment, net 131,411 - Other assets 67,158 131,507 ----------- ----------- $ 4,260,702 $ 3,157,896 =========== =========== LIABILITIES AND COMMON SHAREHOLDERS' DEFICIT Accounts payable and accrued expenses $ 166,271 $ 127,265 Due to related party 11,857 148,165 ----------- ----------- Total liabilities 178,128 275,430 Series A Convertible Preferred Stock, $0.01 par value; 200,000 shares authorized, 112,363 and 66,000 shares issued and outstanding at December 31, 1994 and 1993, respectively 5,433,967 3,120,000 Common Shareholders' Deficit: Common stock, $0.01 par value; 250,000 shares authorized, 9,402 and 6,302 shares issued and outstanding at December 31, 1994 and 1993, respectively 94 63 Additional paid-in capital 330,574 299,962 Note receivable from shareholder (25,000) (59,987) Accumulated deficit (1,657,061) (477,572) ----------- ----------- Total common shareholders' deficit (1,351,393) (237,534) ----------- ----------- $ 4,260,702 $ 3,157,896 =========== ===========
See notes to financial statements. F-21 25 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - -------------------------------------------------------------------------------
1994 1993 REVENUES: Interest income: Finance contracts $ 428,450 $ - Other 81,411 5,794 Ancillary and other operating income 11,501 - ----------- --------- Total revenues 521,362 5,794 INTEREST EXPENSE 119,787 - ----------- --------- NET INTEREST INCOME 401,575 5,794 ----------- --------- OPERATING EXPENSES: Employee compensation and related expenses 864,183 42,218 Other 716,881 441,148 ----------- --------- Total expenses 1,581,064 483,366 ----------- --------- NET LOSS $(1,179,489) $(477,572) =========== =========
See notes to financial statements. F-22 26 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF COMMON SHAREHOLDERS' DEFICIT YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - -----------------------------------------------------------------------
NOTE COMMON STOCK ADDITIONAL RECEIVABLE TOTAL COMMON ------------------- PAID-IN FROM ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL SHAREHOLDER DEFICIT STOCK DEFICIT BALANCE, JULY 16, 1993 - $ - $ - $ - $ - $ - $ - Issuance of common stock 6,302 63 299,962 (59,987) - - 240,038 Net loss - - - - (477,572) - (477,572) ----- ----- --------- -------- -------- ------ -------- BALANCE, DECEMBER 31, 1993 6,302 63 299,962 (59,987) (477,572) - (237,534) Repayment of note receivable from shareholder - - - 29,987 - - 29,987 Repurchase of common stock for treasury stock (1,260) - - 30,000 - (61,210) (31,210) Issuance of shares from treasury stock 1,000 - 1,421 (25,000) - 48,579 25,000 Treasury stock retired - (3) (12,628) - - 12,631 - Issuance of common stock 3,360 34 159,969 - - - 160,003 Preferred stock dividend - - (118,150) - - - (118,150) Net loss - - - - (1,179,489) - (1,179,489) ----- ----- -------- -------- ----------- -------- ----------- BALANCE, DECEMBER 31, 1994 9,402 $ 94 $330,574 $(25,000) $(1,657,061) $ - $(1,351,393) ===== ===== ======== ======== =========== ======== ===========
See notes to financial statements. F-23 27 DEALERS ALLIANCE CREDIT CORP. STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - --------------------------------------------------------------------------------
1994 1993 OPERATING ACTIVITIES: Interest income received - finance contracts $ 291,197 $ - Interest income - short-term investments 87,205 - Ancillary and other operating receipts 5,533 Payments for borrowing fees (36,889) (100,000) Payments for operating expenses (1,683,453) (233,649) ----------- ---------- Net cash used in operating activities (1,336,407) (333,649) INVESTING ACTIVITIES: Purchases of finance contracts (3,316,689) - Principal payments received on finance contracts 374,836 - Purchases of furniture and equipment (156,463) - ----------- ---------- Net cash used in investing activities (3,098,316) - FINANCING ACTIVITIES: Purchase of treasury stock (30,000) - Proceeds from issuance of common stock 185,003 240,038 Proceeds from issuance of preferred stock, net 2,195,817 3,120,000 Repayment of note receivable from shareholder 29,987 - ----------- ---------- Net cash provided by financing activities 2,380,807 3,360,038 ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,053,916) 3,026,389 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,026,389 - ----------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 972,473 $3,026,389 =========== ========== RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: Net loss $(1,179,489) $ (477,572) Depreciation and amortization: Furniture and equipment 25,051 - Contract acquisition discount income (158,331) - Ancillary income (5,969) - Contract acquisition costs 21,078 - Decrease (increase) in other assets 58,555 (131,507) Increase in accounts payable and accrued expenses 39,006 127,265 Increase (decrease) in due to related party (136,308) 148,165 ----------- ---------- NET CASH USED IN OPERATING ACTIVITIES $(1,336,407) $ (333,649) =========== ==========
See notes to financial statements. F-24 28 DEALERS ALLIANCE CREDIT CORP. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1994 AND PERIOD FROM JULY 16, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 1993 - ------------------------------------------------------------------------------- 1. BUSINESS DESCRIPTION Dealers Alliance Credit Corp. (the "Company") was incorporated in the state of Delaware on July 16, 1993, and operates from leased office space in Atlanta, Georgia. The Company is a finance company specializing in purchasing and servicing sub-prime automobile installment sales contracts ("finance contracts"), originated by automobile dealers and secured by the purchased automobiles. The Company began operations on December 1, 1993. As of December 31, 1994, the Company had purchased finance contracts from dealers located in seven southeastern states. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nonrefundable Contract Acquisition Discount - Generally, finance contracts are purchased from dealers at nonrefundable contract acquisition discounts from the principal amounts financed by the borrowers, "Dealer Discount." The amount of this Dealer Discount, which includes both credit and yield enhancement, is negotiated by the Company with the dealer. When a finance contract is purchased, the Company allocates to the allowance for credit losses the portion of the Dealer Discount deemed necessary to absorb estimated future credit losses for the finance contract portfolio. Any remaining amount is deferred as unearned contract acquisition discount and is amortized to interest income using the interest method over the term of the finance contract. When a specific finance contract is determined to be uncollectible, any unearned contract acquisition discount related to that contract is offset against the unpaid contract balance prior to charging the allowance for credit losses. Revenue Recognition - Each finance contract requires the borrower to make monthly payments over a fixed term. The difference between the total amount of contractual payments and the principal amount financed represents unearned finance charges. Unearned finance charges are amortized and recorded as interest income using the interest method over the term and at the interest rate stated in the finance contract. When a finance contract becomes 61 or more days past due, income recognition is suspended until the contractual aging is restored to a current status. The Company receives commissions from the sale of warranty contracts. Those commissions are deferred and recorded as unearned ancillary income and amortized to revenue using the sum-of-the-digits method, which approximates the results of the interest method, over the terms of the underlying warranty contracts. Other operating income, which includes late charges and extension fees charged to customers, is recognized as collected. Allowance for Credit Losses - Allowance for credit losses is established through an allocation of the Dealer Discount based upon management's estimate of future credit losses. Management believes that the allowance for credit losses and the related unearned contract acquisition discounts are adequate to F-25 29 absorb potential losses in the portfolio. Management evaluates the adequacy of the allowance for credit losses by reviewing credit loss experience, delinquencies, the value of the underlying collateral and general economic conditions. If necessary, a provision for credit losses will be charged against earnings to maintain the allowance for credit losses at an amount management believes necessary to absorb potential losses in the finance contract portfolio. Through December 31, 1994, the allocations of Dealer Discounts to the allowance for credit losses together with unearned contract acquisition discounts have been adequate to absorb all estimated credit losses. Accordingly, no provision for credit losses has been required. A finance contract is charged to the allowance for credit losses at the earliest of the month in which the related collateral is repossessed, the finance contract is six months or more past due, or the finance contract is otherwise deemed to be uncollectible. Repossessed Collateral - Repossessed collateral is recorded at its estimated net realizable value. The Company commences repossession against collateral when it determines that other collection efforts are not likely to be successful. Usually repossession occurs before a borrower has defaulted on two consecutive monthly payments. Upon repossession, the net amount due under a finance contract is reduced to the estimated net realizable value of the collateral through a charge to the related unearned contract acquisition discount with any remaining amount charged to the allowance for credit losses. Deferred Contract Acquisition Costs - The Company defers costs directly associated with the acquisition of finance contracts and amortizes such costs using the interest method as a reduction of interest income over the term of finance contracts. Cash and Cash Equivalents - Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. Furniture and Equipment - Furniture and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 4 to 6 years, using the straight-line method. Accumulated depreciation at December 31, 1994 was $25,051. Revolving Credit Facility Fees - Commitment and facility fees and expenses are paid to the Company's lender in accordance with the provisions of the Company's revolving credit facility. Those deferred costs are included in other assets and amortized to interest expense over the term of the facility. Income Taxes - The Company records income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Deferred taxes are recorded based upon temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company incurred net operating losses in 1994 and 1993 and, accordingly, no provision for income taxes was made for the year ended December 31, 1994 and the period from July 16, 1993 (date of incorporation) to December 31, 1993. Postretirement and Postemployment Benefits - The Company does not offer postretirement or postemployment benefits to its employees. Accordingly, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," have no effect upon the Company's financial position or results of operations. F-26 30 3. FINANCE RECEIVABLES Generally, the Company's finance contracts have terms of 12 to 36 months. The net finance receivables balance consisted of the following at December 31, 1994: Contractual payments due $ 5,492,830 Unearned finance charges (1,433,492) ----------- Total finance receivables 4,059,338 Unearned contract acquisition discount (507,783) Unearned ancillary income (11,741) Deferred contract acquisition costs, net 89,903 ----------- Net finance receivables $ 3,629,717 ===========
At December 31, 1994 contractual payments due under finance contracts are scheduled to be received as follows:
YEAR ENDING DECEMBER 31, 1995 $2,342,707 1996 2,096,651 1997 1,049,816 1998 3,656 ---------- Total $5,492,830 ==========
The Company's experience has shown that some payments will be received prior to contractual due dates. When a finance contract is determined to be uncollectible, the unpaid account balance due is reduced by the net realizable value of the repossessed collateral and any remaining unearned contract acquisition discount. The net amount remaining, if any, is charged to the allowance for credit losses. Activity in the unearned contract acquisition discount and allowance for credit losses accounts for the year ended December 31, 1994, was as follows:
UNEARNED ALLOWANCE CONTRACT FOR ACQUISITION CREDIT DISCOUNT LOSSES Balance - beginning of year $ - $ - Discounts negotiated 703,422 747,441 Amortized to interest income (158,331) - Charge-offs, net (37,308) (149,321) --------- --------- Balance - end of year $ 507,783 $ 598,120 ========= =========
F-27 31 4. REVOLVING CREDIT FACILITY The Company has an $8 million revolving credit facility with a bank ("Facility"), which expires on December 31, 1995. Borrowings are secured by substantially all of the Company's assets. During 1994, the Company's operations did not require advances under the Facility. Interest on the borrowings under the Facility is payable monthly based upon the referenced prime rate, which was 8.5% at December 31, 1994, plus 2% per annum. Interest expense, which consisted solely of commitment and facility fees and expenses, for the year ended December 31, 1994 was $119,787. The Facility requires the Company to maintain specified financial ratios and to comply with other covenants. In January 1995, the Company acquired an option, exercisable on or before December 31, 1995, to purchase a contract which would provide interest rate protection during 1996 and 1997 on various notional amounts up to $15 million. The option is held for purposes other than trading. If the Company exercised its option and if the contract's referenced interest rate exceeds 12% during 1996 and 1997, then the Company would receive a payment computed using the rate differential multiplied by the applicable notional amount for that period. The contract exposes the Company to credit risk through counterparty nonperformance which risk is mitigated by the counterparty's financial condition. The Company would not require collateral or other security to support financial instruments with off-balance sheet credit risk. 5. INCOME TAXES Net operating loss carryovers, which aggregate approximately $1,255,000, are available to reduce future federal and state income taxes and expire in 2008 and 2009. Deferred tax asset reflects the net tax effect of temporary differences between the financial reporting bases of assets and liabilities and the amounts applicable for income tax purposes. The Company's net deferred tax asset at December 31, 1994 and 1993 was:
1994 1993 Deferred tax asset: Preoperating expenses $ 116,000 $ 145,000 Allowance for credit losses 34,000 Net operating loss carryover 477,000 36,000 -------- --------- 627,000 181,000 Less valuation allowance (627,000) (181,000) --------- --------- Net deferred tax asset $ - $ - ========= =========
6. LEASES AND OTHER COMMITMENTS Office Lease - The Company rents its office under a noncancellable lease agreement with an initial term of four years. The lease requires the Company to reimburse the landlord for increases over the base year amounts for certain expenses, such as real estate taxes, utilities, and maintenance. Some of the Company's office equipment is subject to operating leases. The aggregate rental expense for the office and equipment leases was $41,429 for the year ended December 31, 1994 and $5,984 for the period from July 16, 1993 (date of incorporation) to December 31, 1993. Data Processing Agreement - The Company entered into a five-year contract, which expires in May 1999, to receive data processing services. The contract requires minimum monthly servicing fees. F-28 32 At December 31, 1994, future minimum payments for noncancellable leases and data processing services were as follows:
DATA YEAR ENDING DECEMBER 31: LEASES PROCESSING 1995 $ 41,756 $117,500 1996 41,239 218,000 1997 38,655 184,000 1998 - 180,000 1999 - 75,000 -------- -------- Total $121,650 $774,500 ======== ========
Employment Agreements - The Company has employment agreements with certain key officers which provide for aggregate base annual compensation of $426,500 plus bonuses based on certain operating performance goals in 1995. The agreements expire on various dates through December 31, 1995 and may be extended by mutual agreement. Additionally, the agreements require termination payments in the event of the employee's involuntary termination. At December 31, 1994, the aggregate amount of the contingent termination obligation was $196,375. 7. SERIES A CONVERTIBLE PREFERRED STOCK The Company has authorized 200,000 shares of Series A Convertible Preferred Stock ("Preferred Stock"), par value $.01 per share. In December 1993, the Company received commitments to buy 110,000 shares (gross proceeds of $5.5 million) of its Preferred Stock, 60% of which was purchased in December 1993 with the remaining 40% purchased in September 1994. The December closing resulted in the issuance of 66,000 shares of Preferred Stock with proceeds, net of offering costs, of approximately $3,120,000. The September closing resulted in the issuance of 44,000 shares of Preferred Stock, with net proceeds of approximately $2,196,000. Holders of the Preferred Stock are entitled to an annual stock dividend of 3% on December 30 of each year. Additionally, for financial reporting purposes, the Preferred Stock is accreted to the greater of the Common Stock's per share fair market value or its liquidation preference ($50 per share). Management believes the fair market value of its Common Stock was $50 per share at December 31, 1994. A stock dividend of 2,363 shares was declared for holders of record as of December 31, 1994. For financial accounting purposes, that dividend was valued at $50 per share, or $118,500 and was charged to additional paid-in capital. Each share of Preferred Stock may be converted into one share of Common Stock at any time at the option of the holder. Conversion into Common Stock is mandatory in the event of a qualified initial public offering ("IPO") of the Company's Common Stock. If an IPO does not occur before December 1, 1998, each holder of Preferred Stock may require the Company to redeem its Preferred Stock at the greater of the Common Stock's per share fair market value or its liquidation preference. Redemption is mandatory on November 30, 1999 at the greater of the Common Stock's per share fair market value on September 1, 1999 or its liquidation preference. The liquidation preference aggregated $5,618,150 at December 31, 1994. F-29 33 Holders of Preferred Stock are entitled to one vote per share on all shareholder matters. The Company's Shareholders' Agreement provides that all shareholders vote for a seven-member Board of Directors comprised of four nominees of the majority Common Stockholder (see Related Party Transactions), one nominee of a specified Preferred Stockholder group, and two nominees of the stockholders other than the majority Common Stockholder. The Preferred Stock ranks senior to the Common Stock with respect to dividends and liquidation rights. 8. COMMON STOCK On December 1, 1993, the Company received commitments to buy 10,500 shares (gross proceeds of $500,000) of its Common Stock (see Related Party Transactions) of which 60% were purchased in December 1993, with the remaining 40% purchased at a second closing which occurred in September 1994. The December closing resulted in the issuance of 6,300 shares of Common Stock, with the Company receiving cash of $240,038 and a note receivable in the amount of $59,987. In September 1994, the Company received cash of $160,003 for purchase of the remaining committed shares of Common Stock. The provisions of the Facility prohibit the payment of dividends in cash or property, other than stock dividends on the Preferred Stock. 9. COMMON STOCK OPTIONS At December 31, 1994, the Company had outstanding options to acquire shares of the Company's Common Stock, as follows:
DATE NUMBER OF OF EXERCISE EXERCISE OPTION HOLDER GRANT SHARES PRICE CONDITION Chicago Holdings, Inc. 1993 10,000 $50 (a) Chicago Holdings, Inc. 1993 10,000 Various (b) Management 1994 17,500 $50 (c) Member of the Board of Directors 1993 2,000 $50 Expires December, 2003
(a) Chicago Holdings, Inc. ("CHI") (see Related Party Transactions), has options to acquire 10,000 shares of the Company's Common Stock at $50 per share. Those options are exercisable after the second, third, and fourth years of the Company's operations if certain financial goals are achieved. Those options expire in December 2003. (b) CHI also has vested options, which expire in December 2003, to acquire an additional 10,000 shares of the Company's Common Stock. The exercise prices per share of those options are: $75 during 1994, $100 during 1995 and 1996, $150 during 1997, and $200 thereafter through December 2003. (c) Management's options to acquire 17,500 shares of the Company's Common Stock at $50 per share are exercisable after the second and third years of the Company's operations if financial goals are achieved. F-30 34 10. RELATED PARTY TRANSACTIONS Common Stock Transactions - Approximately 89.4% (8,401 shares) of the Company's outstanding Common Stock is owned by a wholly owned subsidiary of CHI, a founder of the Company. The remaining outstanding shares of Common Stock are owned by the Company's President and its Chairman. CHI's subsidiary purchased one founding share, 5,040 shares of the Company's Common Stock in the December 1993 closing for $240,005, and 3,360 shares in the September 1994 closing for $160,003. Approximately $60,000 of the $300,000 proceeds from the issuance of the Company's Common Stock in December 1993 was paid with a 6% note due from the Company's former President. The note was due in two installments ($29,987 on January 17, 1994 and $30,000 on December 1, 1998). In connection with the resignation of the Company's former President during June 1994, the following were consummated: (i) consulting services of the former President were retained through the end of 1994 for a fee of $75,000, (ii) his stock options were terminated, (iii) his commitment to acquire additional shares of Common Stock was terminated, and (iv) his 1,260 shares of the Common Stock were purchased by the Company, as treasury stock, in exchange for the original purchase price of $61,210 ($30,000 of cash and the cancellation the above promissory note). In September 1994, the Company's new President purchased 1,000 shares of treasury Common Stock for $50 per share, payable $25,000 in cash and $25,000 by a five-year promissory note which bears interest at 6% per annum. Management Advisory Agreement - The Company has a management advisory agreement with CHI. CHI agreed to provide accounting, legal, and other services for an initial term expiring on November 30, 1996. CHI's compensation for services performed under the agreement is (i) $125 per hour, together with reimbursement of out-of-pocket expenses, for actual time devoted to the Company's business, (ii) a transaction structuring fee of $120,000 (which was paid during 1994), and (iii) a monthly fee of $10,000 for 36 months commencing after the Company achieves and continues to be profitable on a monthly basis. The agreement provides for the Company's payment of a market rate fee to CHI if CHI successfully arranges additional indebtedness for the Company. During 1994 and 1993, CHI charged the Company $125,875 and $23,875, respectively, in hourly management fees and $26,806 and $390,815, respectively, for reimbursement of out-of-pocket expenses. 11. IMPACT OF NEW ACCOUNTING STANDARDS The Company expects to adopt SFAS No. 107, "Disclosure About Fair Value Of Financial Instruments," in 1995. Since SFAS No. 107 requires disclosures only as to the fair value of financial instruments, the adoption of SFAS No. 107 will have no effect on the Company's financial position or results of operations. 12. SUBSEQUENT EVENT On January 25, 1995, the Company's Board of Directors approved an offering of 60,000 shares of Preferred Stock at $50 per share (gross proceeds of $3,000,000) to current holders of the Company's Preferred and Common Stock. The terms of the offering provide for two closings with proceeds of $1.5 million to be derived from the initial closing. F-31 35 DEALERS ALLIANCE CREDIT CORP. STATEMENT OF FINANCIAL CONDITION JUNE 30, 1996 (UNAUDITED) ASSETS: June 30, 1996 - ------ ------------- Gross finance receivables $ 34,947,444 Unearned finance charges (8,092,739) ------------ Net finance receivables 26,854,705 Unearned ancillary income (50,578) ------------ Net finance receivables after ancillary 26,804,127 Allowance for credit losses (7,502,390) Deferred acquisition costs, net 142,816 ------------ 19,444,553 Cash and cash equivalents 687,806 Repossessed collateral 603,512 Furniture and equipment, net 233,332 Prepaid rent, net 200,243 Subordinated debt issuance costs, net 280,589 Other assets, net 323,007 ------------ $ 21,773,042 ============ LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT: - -------------------------------------------- Revolving credit agreement advances $ 18,000,000 Accounts payable and accrued expenses 671,331 Due to related party 8,017 Senior subordinated notes payable, net 3,513,598 ------------ Total liabilities $ 22,192,946 ------------ Warrants 563,767 Redeemable Series A Convertible Preferred Stock, $0.01 par value; 200,000 shares authorized, 176,746 issued and outstanding 8,787,972 Common stockholders' deficit: Common stock, $0.01 par value; 250,000 shares authorized, 9,402 shares issued and outstanding 94 Additional paid-in capital 0 Note receivable from stockholder (25,000) Accumulated deficit (9,746,737) ------------ Total common stockholders' deficit (9,771,643) ------------ $ 21,773,042 ============
F-32 36 DEALERS ALLIANCE CREDIT CORP. STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Six Months Ended June 30, 1996 ----------------- Revenues: Interest income on finance contracts $ 3,628,051 Ancillary income 99,537 Late charges and other income 139,647 ----------- Total finance revenues 3,867,235 Amortization of deferred contract acquisition costs (138,813) ----------- Net finance revenues 3,728,422 Interest expense, net (1,428,357) ----------- Net finance income 2,300,065 ----------- Operating expenses: 2,690,496 ----------- Net loss $ (390,431) ===========
F-33 37 DEALERS ALLIANCE CREDIT CORP. STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Six Months Ended June 30, 1996 ----------------- Operating activities Net loss $ (390,431) Adjustments: Provision for credit losses -- Depreciation and amortization 41,956 Amortization of debt discount and organization fees 204,099 Compensatory stock options issued to related party -- Changes in assets and liabilities: Repossessed collateral (33,633) Other assets 235,742 Accounts payable and accrued expenses (330,484) Due to related party (52,094) ------------ Cash provided by (used in) operating activities (325,491) ------------ Investing activities Purchases of installment contracts receivable (6,145,407) Payments received on installment contracts receivable 5,721,516 Purchases of equipment (41,995) Proceeds from sales of assets 3,505 ------------ Cash used in investing activities (462,381) ------------ Financing activities Revolving credit agreement advances 1,150,000 ------------ Cash provided by financing activities 1,150,000 ------------ Net increase (decrease) in cash and cash equivalents 362,128 Cash and cash equivalents at beginning of period 325,678 ------------ Cash and cash equivalents at end of period $ 687,806 ============
F-34 38 (B) PRO FORMA FINANCIAL INFORMATION. The following condensed consolidated financial statements of the Company and its subsidiaries set forth unaudited condensed consolidated balance sheets as of June 30, 1996 and unaudited condensed consolidated statements of operations for the six-month transition period ended March 31, 1996 and the three month period ended June 30, 1996, on an actual historical basis and on a pro forma adjusted basis to give effect to the purchase of DACC's assets, the assumption of certain of DACC's liabilities, the issuance by the Company of Common Stock, Series B Preferred Stock and warrants, and the assumption and restructuring of DACC's revolving credit agreement in connection therewith. -3- 39 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS)
Historical Adjustments (a) Pro Forma ---------- ---------------- --------- ASSETS - ------ Gross contracts receivable $ 30,344 $ 34,947 $ 65,291 Unearned interest (5,621) (8,143) (b) (13,764) --------- ---------- --------- Net contracts receivable 24,723 26,804 51,527 Allowance for credit losses (10,506) (12,502) (23,008) Net loan origination costs 274 -- 274 --------- ---------- --------- Net contracts receivable - after 14,491 14,302 28,793 --------- ---------- --------- allowance for credit losses and other costs Cash and cash equivalents 20,871 531 (e) 21,402 Vehicles held for resale 356 604 960 Property and equipment, net 988 233 1,221 Other assets, net 210 200 410 Goodwill -- 11,158 (d) 11,158 --------- ---------- --------- Total assets $ 36,916 $ 27,038 $ 63,944 ========= ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Lines of credit -- 18,000 18,000 Accrued settlements 500 -- 500 Dividends payable 1,610 -- 1,610 Accounts payable and other liabilities 2,477 671 3,148 --------- ---------- --------- Total liabilities 4,587 18,671 23,258 --------- ---------- --------- Stockholders' Equity - -------------------- Preferred stock 175 26 (c) 201 Common stock 302 13 (c) 315 Additional paid-in capital 86,532 8,318 (c) 94,850 Accumulated deficit (53,530) -- (53,530) Treasury stock (1,150) -- (1,150) --------- ---------- --------- Total stockholders' equity 32,329 8,357 40,686 --------- ---------- --------- Total liabilities and stockholders' equity $ 36,916 $ 27,028 $ 63,944 ========= ========== =========
See accompanying notes to pro forma condensed consolidated financial statements. -4- 40 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended March 31, 1996 Adjustments (f) Pro Forma ----------------- ---------------- ----------- Interest revenue $ 3,541 $ 3,554 $ 7,095 Interest expense (1,306) (813) (g) (2,119) ------------ ------------ --------- Net interest income (loss) 2,235 2,741 4,976 Provision for credit losses (4,982) -- (h) (4,982) ------------ ------------ --------- Net interest income (loss) after provision for credit losses (2,747) 2,741 (6) ------------ ------------ --------- General and administrative expense (8,098) (1,700) (i) (9,798) Goodwill amortization -- (372) (j) (372) Settlement expense (535) -- (535) ------------ ------------ --------- Income (loss) before extraordinary item (11,380) 669 (10,711) Extraordinary gain on discharge of debt 8,709 -- 8,709 ------------ ------------ --------- Net income (loss) (2,671) 669 (2,002) Preferred stock dividends (327) (402) (k) (729) ------------ ------------ --------- Net income (loss) attributable to common stockholders $ (2,998) $ 267 $ (2,731) ============ ============ ========= Common stock dividends $ 0 $ 0 $ 0 ============ ============ ========= Income (loss) per common share before extraordinary item $ (1.12) $ 0.21 $ (0.97) Gain on extraordinary item 0.83 -- 0.74 ------------ ------------ --------- Income (loss) per common share $ (0.29) $ 0.21 $ (0.23) ============= ============ ========= Weighted average number of common shares outstanding 10,447 1,277 (l) 11,724 ============ ============ =========
See accompanying notes to pro forma condensed consolidated financial statements. -5- 41 SEARCH CAPITAL GROUP, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30, 1996 Adjustments (e) Pro Forma ------------------ ---------------- ----------- Interest revenue $ 1,659 $ 1,777 $ 3,436 Interest expense -- (407)(g) (407) ------------ ----------- ----------- Net interest income (loss) 1,659 1,370 3,029 Recovery of (provision for) credit losses 1,382 -- (h) 1,382 ------------ ----------- ----------- Net interest income (loss) after provision for 3,041 1,370 4,411 ------------ ----------- ----------- credit losses General and administrative expense (2,528) (850)(i) (3,378) Goodwill amortization -- (186)(j) (186) ------------ ----------- ----------- Net income (loss) before dividends 513 334 847 ------------ ----------- ----------- Preferred stock dividends (1,404) (201)(k) (1,605) ------------ ----------- ----------- Net income (loss) attributable to common $ (891) $ 133 $ (758) ============ =========== =========== stockholders Common stock dividends $ 0 $ 0 $ 0 ============ =========== =========== Income (loss) per common share $ (.03) $ 0.10 $ .03 ============ =========== =========== Weighted average number of common shares outstanding 26,628 1,277(l) 27,905 ============ =========== ===========
See accompanying notes to pro forma condensed consolidated financial statements. -6- 42 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (a) Represents the assets purchased and liabilities assumed from DACC, as though the transaction had occurred on June 30, 1996. Except as otherwise noted, each line item adjustment is taken directly from a corresponding line item in the Statement of Financial Condition for DACC as of June 30, 1996. Excluded from the adjustments are the following line items from DACC's balance sheet which represent either liabilities not assumed or assets that have no value to the Company: Subordinate debt issue costs $ 280,589 Other assets 323,008 Due to related party 8,017 Senior subordinated notes payable, net 3,513,598 Warrants 563,767 Redeemable Series A preferred stock 8,787,972
(b) Represents unearned finance charges of $(8,092,739) plus unearned ancillary income of $(50,578). (c) Represents the issuance of 2,554,060 shares of $0.01 par value Series B Preferred Stock valued at $2.54 per share, 1,277,030 shares of $0.01 par value Common Stock valued at $1.06 per share and 1,277,030 warrants to purchase Common Stock valued at $0.41 per warrant. (d) Goodwill is derived from the total value of issued stock less the net assets (assets less liabilities) acquired from DACC:
As of June 30, 1996 ------------------- Total assets $ 15,870,000 Goodwill 11,158,000 ------------ $ 27,028,000 ============ Total liabilities $ 18,671,000 Stockholders' equity 8,357,000 ------------ $ 27,028,000 ============
(e) Represents DACC's cash and cash equivalents at June 30, 1996 of $687,806 net of $157,000 of cash retained by DACC to pay certain obligations and transaction expenses. (f) Represents the revenues and expenses attributable to the assets purchased and liabilities assumed from DACC as though the transaction had occurred on October 1, 1995. Except as otherwise noted, each line item is the sum of (x) the corresponding line item in the audited Statement of Operations of DACC for the three months ended March 31, 1996 plus (y) an estimate of the line item for the fourth quarter of 1995 derived from the corresponding line item in DACC's audited Statement of Operations for the year ended December 31, 1995. (g) Represents interest on DACC's revolving credit agreement and excludes interest on senior subordinated notes payable which the Company did not assume. (h) Assumes sufficient provisions for credit losses at the time of the Company's acquisition. (i) Represents estimated general and administrative expenses after taking into account a reduction of operations at DACC's facilities. Without reduction, these expenses would have been $2,788,000 for the six months ended -7- 43 March 31, 1996. Reduction in personnel, occupancy, consulting, professional and data processing expenses have been and will be made. Additionally, non-recurring costs have been eliminated. (j) Represents amortization of goodwill over 180-month period. (k) Represents six or three months, as the case may be, of dividends at a rate of $0.315 per annum per share on 2,554,060 new shares of Series B Preferred Stock issued in the acquisition from DACC. (l) Represents number of new shares of Common Stock issued in the acquisition from DACC. -8- 44 (C) EXHIBITS. Exhibit No. Description - ----------- ----------- 2.1 Asset Acquisition Agreement among Search Capital Group, Inc., Search Funding IV, Inc. and Dealers Alliance Credit Corp. dated as of August 2, 1996 2.2 Sub-Debt Acquisition Agreement among Search Capital Group, Inc., Search Funding IV, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation dated as of August 2, 1996 2.3 Escrow Agreement among Search Capital Group, Inc., Dealers Alliance Credit Corp., Search Funding IV, Inc., R-H Capital Partners, L.P., Kellett Investment Corporation and U.S. Trust Company of Texas, N.A., dated as of August 6, 1996 2.4 Search-DACC Shareholders Agreement dated as of August 2, 1996 between Search Capital Group, Inc. and Dealers Alliance Credit Corp. 2.5 Sub-Debt Shareholders Agreement dated as of August 2, 1996 among Search Capital Group, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation 2.6 Debt Assumption Agreement dated as of August 2, 1996 among Search Capital Group, Inc., Search Funding IV, Inc., LaSalle National Bank, as Agent, Bank One Chicago, N.A. and Fleet Capital Corporation 4.1 Certificate of Designation of Series B 9%/7% Convertible Preferred Stock -9- 45 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SEARCH CAPITAL GROUP, INC. By: /s/ Robert Idzi -------------------------------------------- Robert Idzi, Senior Executive Vice President Dated: August 19, 1996 -10- 46 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 2.1 Asset Acquisition Agreement among Search Capital Group, Inc., Search Funding IV, Inc. and Dealers Alliance Credit Corp. dated as of August 2, 1996 2.2 Sub-Debt Acquisition Agreement among Search Capital Group, Inc., Search Funding IV, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation dated as of August 2, 1996 2.3 Escrow Agreement among Search Capital Group, Inc., Dealers Alliance Credit Corp., Search Funding IV, Inc., R-H Capital Partners, L.P., Kellett Investment Corporation and U.S. Trust Company of Texas, N.A., dated as of August 6, 1996 2.4 Search-DACC Shareholders Agreement dated as of August 2, 1996 between Search Capital Group, Inc. and Dealers Alliance Credit Corp. 2.5 Sub-Debt Shareholders Agreement dated as of August 2, 1996 among Search Capital Group, Inc., R-H Capital Partners, L.P. and Kellett Investment Corporation 2.6 Debt Assumption Agreement dated as of August 2, 1996 among Search Capital Group, Inc., Search Funding IV, Inc., LaSalle National Bank, as Agent, Bank One Chicago, N.A. and Fleet Capital Corporation 4.1 Certificate of Designation of Series B 9%/7% Convertible Preferred Stock
EX-2.1 2 ASSET ACQUISITION AGREEMENT 1 EXHIBIT 2.1 ASSET ACQUISITION AGREEMENT BY AND AMONG SEARCH CAPITAL GROUP, INC. SEARCH FUNDING IV, INC. AND DEALERS ALLIANCE CREDIT CORP. DATED AS OF AUGUST 2, 1996 2 ASSET ACQUISITION AGREEMENT THIS ASSET ACQUISITION AGREEMENT (the "Agreement") is made as of August 2, 1996, by and among (i) Search Capital Group, Inc., a Delaware corporation ("Search"); (ii) Dealers Alliance Credit Corp., a Delaware corporation ("DACC"); and (iii) Search Funding IV, Inc., a Texas corporation and a wholly-owned subsidiary of Search ("Newco"). BACKGROUND A. DACC is an Atlanta based specialized indirect consumer finance company engaged in financing the purchase of used automobiles by purchasing installment sales contracts from independent used automobile dealers; and B. DACC and Search have reached an agreement dated June 19, 1996 (the "June 19th Agreement") regarding the sale by DACC of its assets to Search, and the assumption by Search of certain specified obligations of DACC. NOW, THEREFORE, in consideration of the foregoing premises, which are incorporated herein by reference, and of the representations, warranties, covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by all parties, the parties hereto, intending to be legally bound, agree as follows: 1. Sale of Assets 1.1 (a) Assets Purchased. Subject to the terms and conditions set forth in this Agreement, at the Closing (as defined in Article 2) DACC shall sell, convey, assign, transfer and deliver to Newco, and Newco shall purchase from DACC (this transaction is hereafter referred to as the "Sale"), all of DACC's assets, except those set forth below in Section 1.1(b) (collectively the "Assets"), free and clear of all claims, liens and encumbrances of any kind (collectively "Liens"), other than those Liens specifically assumed pursuant to Section 1.3 below, which Assets include, but are not limited to, the following: -1- 3 (i) All "Receivables" (as hereinafter defined). The term "Receivables" means all receivables of DACC, whether current or delinquent, and all previously charged-off accounts, skipped accounts and/or bad debt accounts; and all rights related to said receivables, including all contract rights against motor vehicle dealers and all other entities which transferred installment contract obligations to DACC; all chattel paper; all rights in the vehicle(s) that secures each said receivable; and all rights in all other security for said receivables, including but not limited to all guaranties, indemnities, insurance proceeds, and premium refunds; (ii) All accounts, contract rights and/or intangibles, including, but not limited to, all cash (excluding the amounts set forth below in Section 1.1(b)) and all bank accounts, all contracts or agreements with motor vehicle dealers, all insurance contracts and all rights thereunder, and assignable right, title and interest in all finance company licenses, software licenses, personal property leases, franchises, and all discoveries and other intellectual property used or usable in DACC's business as listed on SCHEDULE 1.1(ii) attached hereto; (iii) All real estate leases to which DACC is a party, and all other real estate interests owned by DACC, all as listed on SCHEDULE 1.1(iii); (iv) All of DACC's tangible personal property, including but not limited to, all furniture, fixtures and equipment. If an inventory of such property exists it shall be attached hereto as SCHEDULE 1.1(iv), otherwise Newco may with DACC's assistance prepare such an inventory to be attached to the Bill of Sale delivered to Newco at Closing; (v) DACC's rights in all repossessed collateral; -2- 4 (vi) All loan forms and advertising materials, together with the artwork, formats and copy used in the preparation thereof; and all records and files pertaining to DACC's customers and suppliers, including, without limitation, sales records, correspondence with customers, customer files and account histories, records of purchases from suppliers and correspondence with suppliers; (vii) The name "Dealers Alliance Credit Corp.", and DACC's rights in all telephone numbers and other trade names associated with DACC's business (excluding telephone numbers used in common with Affiliates of DACC); (viii) All of DACC's books and records pertaining to the Assets and the Assumed Liabilities (as defined in Section 1.3 below), whether said books and records are in paper or electronic media form; and (ix) Any and all other real property and rights therein, and any and all other tangible and intangible personal property of any kind, now owned or leased or acquired by DACC between the date of this Agreement and Closing. (b) Excluded Assets. Notwithstanding Section 1.1(a), the following assets of DACC are specifically excluded from the Assets: (i) An amount of cash (in a separate account not to be transferred to Search) required to pay the expenses set forth in SCHEDULE 1.1(b)(i); provided that if any liability or expense of DACC, either identified pursuant to Schedule 1.1(b)(i), or which does not constitute an Assumed Liability, is paid by DACC prior to Closing, the amount of money so paid by DACC shall be deducted from the amount of cash which DACC would otherwise be entitled to retain pursuant to this Section 1.1(b)(i) after Closing. Cash may be shifted among line items on SCHEDULE 1.1(b)(i), provided that the total cash retained by DACC may not -3- 5 exceed $200,000, and provided further that the amounts to be paid for legal fees may not be increased above the amounts stated on SCHEDULE 1.1(b)(i); (ii) DACC's general ledger, corporate minute books, stock transfer ledger, income tax records and any other similar corporate records and documents; and (iii) All of DACC's rights under this Agreement and the Related Documents (as defined in Schedule 3). 1.2 Purchase Price. The aggregate purchase price (the "Purchase Price") to be paid to DACC for the purchase of the Assets shall be the issuance by Search of the Search securities listed below (the "Search Securities"), cancellation of the Subordinated Claims (as defined in Section 1.9) and assumption by Newco of the Assumed Liabilities (as defined in Section 1.3 hereof): (a) 766,218 shares of Search 9%/7% Convertible Preferred Series B, which shall be governed by the Certificate of Designation set forth on SCHEDULE 1.2(a) attached hereto, (the "Convertible Stock"). (b) 1,277,030 shares of Search's common stock, par value $.01 per share ("Common Stock"), which shall be identical to the Search common stock issued to noteholders under the Chapter 11 Bankruptcy Code plan of reorganization for which Search was a co-proponent (the "Plan"); and (c) 1,277,030 Search warrants which shall be identical to Search warrants issued to noteholders under the Plan and shall be in the form attached hereto as SCHEDULE 1.2(c) (the "Warrants"). (d) At Closing (as defined in Section 2.1), provided that Search is able to acquire from the holders (the "Subordinated Debt Holders") of the Subordinated Debt (as defined in Schedule 3.3), the Subordinated Claims, for consideration equal to 1,787,842 shares of Convertible Stock (893,921 shares of which is to be delivered to the -4- 6 Escrow Agent as described in Section 10.1 below), Search will deliver to DACC for cancellation the Subordinated Claims. (e) DACC hereby acknowledges that the number of shares of Search Securities to be issued to DACC has been based upon a value of Two Dollars Fifty-Four Cents ($2.54) per share for the Convertible Stock, One Dollar Six Cents ($1.06) per share for the Common Stock, and Forty-One Cents ($.41) for the Warrants. 1.3 Assumed Liabilities. (a) Subject to the terms and conditions of Section 1.4 below, DACC shall transfer and assign at Closing, and Newco shall assume at the Closing, and pay, perform and discharge when due, the following liabilities and obligations of DACC: (i) The liabilities and obligations of DACC disclosed on DACC's interim balance sheet (the "Current Balance Sheet") dated as of May 31, 1996 (the "Balance Sheet Date"), a copy of which interim balance sheet is attached hereto as SCHEDULE 1.3(a)(i); (ii) The liabilities and obligations of DACC which shall have been incurred by DACC after May 31, 1996 in the ordinary course of business; and (iii) The liabilities and obligations of DACC which shall have been incurred by DACC other than in the ordinary course of business that have been approved by Search (acting in a commercially reasonable manner); and (iv) The liabilities and obligations listed on Schedule 1.3. (The liabilities identified in Section 1.3(a)(i),(ii), (iii) and (iv) are collectively referred to as the "Assumed Liabilities"). As soon after Closing as -5- 7 possible, DACC shall deliver to Search a separate statement certified by the chief financial officer of DACC showing all of the liabilities and obligations of DACC which shall have been incurred by DACC in the ordinary course of business since May 31, 1996 and prior to Closing and which remain unsatisfied as of Closing for Search's review (the "Post-Closing List"). In addition, DACC shall not pay any portion of the Senior Bank Debt after May 31, 1996 other than as set forth on Schedule 1.3(v). (b) In addition to the Assumed Liabilities described in Section 1.3(a) above, Search shall also assume, on terms reasonably acceptable to Search (and which provide for the release of DACC from further liability), DACC's Senior Bank Debt (as defined in Section 3.3(b) of Schedule 3). 1.4 No Other Liabilities Assumed. Except for the Assumed Liabilities, neither Newco nor Search shall assume or be liable for in any manner, any and all other liabilities or obligations of DACC, whether known or unknown, contingent or fixed, secured or unsecured. This includes, but is not limited to, the items set forth on SCHEDULE 1.4 attached hereto. 1.5 Payment. At the Closing, Search shall deliver (i) to the Escrow Agent (defined in Section 10.1 below) the Search Securities required to be issued to DACC and the Indemnity Shares (defined below in Section 1.9(d)); and (ii) to the Subordinated Debt Holders the Non-Indemnity Shares (defined below in Section 1.9(d)), all of which Search Securities shall be validly issued, fully-paid and nonassessable and free and clear of all Liens. 1.6 Allocation. At the Closing, Newco and DACC shall execute a joint certificate allocating the Purchase Price among the Assets. Newco and DACC acknowledge that such allocation shall have been arrived at by arms length negotiation, and Newco and DACC hereby agree, subject to the requirements of Section 1060 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, to report consistently, in any tax return completed or filed by them, such sale and assumption pursuant to this Agreement in accordance with said allocation. -6- 8 1.7 Shareholders Agreement. At Closing, DACC and Search shall execute a Shareholders Agreement (the "DACC Shareholders Agreement") in the form attached hereto as SCHEDULE 1.7. 1.8 Additional Provisions. (a) All dividends and other distributions made after the Closing on the Search Securities held by the Escrow Agent on behalf of DACC shall be made to the Escrow Agent on behalf of DACC and held in Escrow until the First Expiration Date or Final Expiration Date (each as defined in Section 8.2), as the case may be. (b) Search shall pay a minimum of three consecutive quarterly cash dividends on the Convertible Stock provided, that if the Convertible Stock shall have been converted into Search's 9%/7% Convertible Preferred shares issued to noteholders under the Plan (the "9/7 Noteholder Convertible Preferred"), such dividends shall be paid on the shares of the 9/7 Noteholder Convertible Preferred held by the previous holders of the Convertible Preferred. Each such dividend shall be paid on the 15th day after the close of the quarter (or, if such day is not a business day, on the first business day thereafter). The first such quarter's dividends shall begin to accrue on the date the Convertible Stock is issued by Search, which DACC acknowledges will entitle DACC to receive only a partial quarter's dividend payment. In addition, at the same time as Search pays its first of the aforesaid quarterly dividend payments, Search shall also pay to DACC an amount of cash equal to the difference between a full quarter's dividend payment with respect to the Convertible Stock and the partial dividend amount paid pursuant to the immediately preceding sentence. (c) As promptly as possible after Closing, Search shall request, and shall use best efforts to obtain, Search shareholder approval for the conversion of the Convertible Stock into the same class of convertible preferred shares as the 9/7 Noteholder Convertible Preferred. If Search fails to effect the aforesaid conversion by April 1, 1997, -7- 9 Search shall pay to DACC the sum of Two Hundred Thousand Dollars ($200,000.00). 1.9 Subordinated Debt. (a) Search will use reasonable efforts to enter into an asset acquisition agreement (the "Sub-Debt Acquisition Agreement") with the Subordinated Debt Holders whereby each of the Subordinated Debt Holders will transfer to Search, or any other designee reasonably acceptable to Search: (i) all Subordinated Debt and all warrants to acquire DACC stock; and (ii) all DACC Claims (as defined in the Sub-Debt Acquisition Agreement) against DACC, together with all other rights each of the Subordinated Debt Holders possess regarding DACC, if any, (clauses (i) and (ii) are collectively referred to as the "Subordinated Claims"), in exchange for 1,787,842 shares of Convertible Stock. Search's transfer of the Subordinated Claims to DACC at Closing for cancellation is part of the Purchase Price and is a condition to the obligation of DACC to consummate the transactions contemplated hereby. (b) Search, with DACC's assistance shall, prior to Closing and as promptly as possible, use all reasonable efforts to negotiate with the Subordinated Debt Holders the form of the Sub-Debt Acquisition Agreement (and all agreements contemplated therein) (collectively, the "Sub-Debt Agreements") to implement the agreement described in Section 1.9(a); a copy of the Sub-Debt Agreements shall be attached hereto at Closing as SCHEDULE 1.9. (c) All of the Sub-Debt Agreements shall be subject to Search's and DACC's prior reasonable approval, which shall not be unreasonably withheld. In addition, at or prior to Closing, Search shall have the right to verify that all of the terms and conditions of the Sub-Debt Agreements have been fully performed and satisfied by both DACC and the Subordinated Debt Holders, except for the items described in Section 2.2 below. (d) At Closing Search will (i) deliver to each of the Subordinated Debt Holders, in the respective amounts set -8- 10 forth in Section 1.5 of the Sub-Debt Acquisition Agreement, two (2) certificates representing 893,921 shares of Convertible Stock (the "Non-Indemnity Shares"), and (ii) deliver to the Escrow Agent for the benefit of the Subordinated Debt Holders one (1) certificate representing 893,921 shares (the "Indemnity Shares") of the Convertible Stock (for a total of 1,787,842 shares of the Convertible Stock), all of which shall be validly issued, fully paid and nonassessable and free and clear of any Liens, except for the Escrow Agreement, in exchange for the fully signed and completed Sub-Debt Agreements. (The Indemnity Shares and Non-Indemnity Shares are sometimes collectively referred to as "Search Sub-Debt Securities"). The Search Sub-Debt Securities shall be subject to the terms of the Sub-Debt Shareholders Agreement; in addition, the Indemnity Shares shall be subject to the Escrow Agreement. 2. Closing. 2.1 Date and Location. The consummation of the Sale and the other transactions contemplated by this Agreement (the "Closing") shall take place as promptly as possible after the execution of this Agreement, but in no event later than August 2, 1996, or at such other earlier time and date as Search, DACC and Newco may mutually agree, provided that all conditions to Closing shall have been satisfied or waived. The parties intend to close by exchanging signed counterparts of all necessary documents. 2.2 Documents to be Delivered at Closing. At the Closing the following documents, in a form reasonably satisfactory to Search and DACC, shall be delivered and executed by the parties as follows: (a) By DACC. (i) To Newco a Bill of Sale conveying to Newco title to the Assets being purchased from DACC, free and clear of all Liens other than the Assumed Liabilities and the Senior Bank Debt, and incorporating by reference the representations and warranties -9- 11 contained in Sections 3.11, 3.12 and 3.13 of Schedule 3. (ii) To Newco a special power of attorney in recordable form authorizing Newco or Newco's agent to sign any and all titles, documents or instruments in connection with the Assets on behalf of DACC. (iii) To Newco an Assignment and Assumption Agreement (the "Assignment Agreement") pursuant to which DACC shall assign to Newco, and Newco shall assume from DACC, and agree to pay, perform and discharge when due, the Assumed Liabilities. The Assignment and Assumption Agreement shall include a list, to the extent known and identifiable by DACC as of Closing, of the Assumed Liabilities and the amount of each Assumed Liability. (iv) Transfer to Newco title to the Receivables by endorsement or assignment as reasonably specified by Search or Newco; in addition, DACC shall deliver to Newco as part of its books and records a summary of all Receivables (which need not be in print or paper form), which shall include the name and address of the obligor, the loan number, the balance outstanding, the date the most recent payment was made, and a description of the collateral for the loan. (v) To Newco and Search a Closing Certificate confirming that the representations and warranties in Schedule 3 of this Agreement are true and correct as of the Closing, with corrections to any representations that have changed since the date of this Agreement, provided that if any change is made based upon the occurrence of a DACC Material Adverse Effect (as defined in Section 6.5 below), Search shall have the right to terminate this Agreement pursuant to Section 11.2 below; provided, further, that if Search and Newco shall consummate the transactions contemplated hereby, Search and Newco shall automatically be deemed to have waived, to the -10- 12 extent set forth in such Closing Certificate, any breach or violation of the representations and warranties of DACC contained in this Agreement. (vi) To Newco such other documents, including instruments of sale, transfer and assignment, as is reasonably believed necessary by Search to enable Newco immediately after Closing to use, operate, collect, sell, assign and enjoy the benefits of the Assets. (vii) To Newco and Search copies of the resolutions adopted by the Board of Directors of DACC and the shareholders of DACC, authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, duly certified as of the Closing by the Secretary of DACC. (viii) To Newco and Search a corporate good standing certificate and incumbency certificate, each dated within 10 business days of Closing. (ix) To Search the original signed Amendment to the Articles of Incorporation changing DACC's legal name to a name reasonably acceptable to Search. (x) To Search a legal opinion concerning this transaction from DACC's counsel in form reasonably acceptable to Search. (xi) To the extent any consents or approvals shall be reasonably requested by Search in connection with any of the transactions herein contemplated, or to the effective transfer or assignment of any of the Assets being purchased by Search from DACC, DACC shall deliver to Search copies of all such consents or approvals so requested by Search. (xii) To Newco proof reasonably satisfactory to Search that all Liens affecting the Assets shall be released of record immediately after Closing, except -11- 13 for Liens expressly assumed by Newco pursuant to this Agreement. (xiii) To Newco a detailed list (in a form reasonably satisfactory to Search) of all repossessed collateral with corresponding loan number, location of the collateral and a status report on each of said loans. (xiv) Possession of all Assets shall be delivered to Newco at Closing. (xv) To Search triplicates of the DACC Shareholders Agreement, the Escrow Agreement, and all related documents which have been executed by DACC. (xvi) To Search a DACC executed securities "big boy" letter in the form reasonably satisfactory to Search. (xvii) To Search a Certificate certifying that no DACC Material Adverse Effect has been experienced regarding the Assets between May 31, 1996 and Closing. (xviii) To the parties so specified, all other documents reasonably requested in order to consummate the transactions contemplated hereby. (b) Senior Bank Debt (i) Newco and the holders of the Senior Bank Debt shall have entered into a Debt Assumption Agreement (and all other agreements contemplated thereby) for assumption of the Senior Bank Debt on terms reasonably acceptable to Search and DACC. (c) By Subordinated Debt Holders (i) Each of the Subordinated Debt Holders shall have executed the Sub-Debt Agreements and Search shall have verified compliance by the Subordinated Debt -12- 14 Holders with all of the material terms and conditions of the Sub-Debt Agreements. (ii) To Search, each of the Subordinated Debt Holders shall have executed a securities "big boy" letter in the form reasonably satisfactory to Search. (d) By Search/Newco (i) To the Escrow Agent the Search Securities specified in Section 1.5 and the Indemnity Shares described in Section 1.9(d) and to the Subordinated Debt Holders the Non-Indemnity Shares specified in Section 1.9(d). (ii) To DACC certified charters and corporate good standing certificates and incumbency certificates for each corporation, each such certificate dated within 10 business days of Closing. (iii) To DACC Closing Certificates for Search and Newco confirming that the representations in Schedule 4 of this Agreement are true and correct as of the Closing, with corrections to any representations that have changed since the date of this Agreement, provided, that if DACC shall consummate the transactions contemplated hereby, DACC shall automatically be deemed to have waived, to the extent set forth in such Closing Certificate, any breach or violation of the representations and warranties of Search and Newco contained in this Agreement. (iv) To DACC a copy of the resolutions adopted by the Board of Directors of Search authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, duly certified as of the Closing by the Secretary of Search. (v) To DACC a Certificate certifying that to the best of Search's information, knowledge and belief no Search Material Adverse Effect (as defined in Section -13- 15 7.2 below) has been experienced by Search since the date Search's 1996 SEC Form 10-K was filed with the SEC ("10-K Filing Date"). (vi) To DACC from Newco the Assignment Agreement pursuant to which DACC shall assign to Newco, and Newco shall assume from DACC, and agree to pay, perform and discharge when due, the Assumed Liabilities. (vii) To DACC a legal opinion concerning this transaction from Search's counsel in form reasonably acceptable to DACC. (viii) To DACC triplicates of the DACC Shareholders Agreement, the Escrow Agreement, and all related documents which have been executed by Search and/or Newco. (ix) To DACC a Quit Claim Bill of Sale and Assignment of the Subordinated Claims, including any documents evidencing the Subordinated Claims to the extent received from the Subordinated Debt Holders. (x) To the parties so specified, all other documents reasonably requested in order to consummate the transactions contemplated hereby. 3. REPRESENTATIONS AND WARRANTIES OF DACC To induce Search and Newco to enter into this Agreement and consummate the transactions contemplated hereby, DACC represents and warrants to Search and Newco as set forth in SCHEDULE 3 attached hereto, which representations and warranties are incorporated in this Section 3 by reference and are deemed to be part of this Agreement. 4. REPRESENTATIONS OF SEARCH AND NEWCO To induce DACC to enter into this Agreement and consummate the transactions contemplated hereby, each of Search and Newco represents and warrants to DACC as set forth in SCHEDULE 4 -14- 16 attached hereto, which representations and warranties are incorporated in this Section 4 by reference and are deemed to be part of this Agreement. 5. COVENANTS 5.1 Access to Information; Confidentiality. (a) Between the date of this Agreement and the Closing, DACC will afford to the officers and authorized representatives of Search and Newco access to (i) all of the sites, properties, books and records of DACC and (ii) such additional financial and operating data and other information as to the business and properties of DACC as Search and Newco may from time to time reasonably request, including without limitation access to DACC's employees, customers and vendors for due diligence inquiry. DACC will cooperate with Search and Newco and their representatives in the preparation of any documents or other material which may be required in connection with this Agreement. DACC's representations, warranties, covenants and obligations as set forth in this Agreement (y) shall survive Search's due diligence inquiry and (z) shall not be affected or modified in any manner whatsoever by any due diligence inquiry conducted by Search. In addition, Search's due diligence inquiry shall not be a defense by DACC to any breach of any of DACC's representations, warranties, covenants or obligations. (b) DACC agrees that it will not disclose any confidential or proprietary information which it obtains or acquires regarding Search or Newco to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except to authorized employees or other authorized representatives of DACC and to counsel and other advisers, provided that such advisors (other than counsel) agree to the confidentiality provisions of this Section 5.1(b), subject to Section 5.1(d) below. (c) Each of Search and Newco agree that prior to Closing they will not disclose any confidential or proprietary information which either may obtain or acquire regarding -15- 17 DACC to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except to authorized representatives of Search and Newco and to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 5.1(c), subject to Section 5.1(d) below. DACC acknowledges that after the Closing all such confidential and proprietary information shall belong to Newco. (d) The confidentiality obligations of a party hereto shall be terminated regarding any confidential or proprietary information obtained or acquired if (i) such information becomes known to the public generally through no fault of the receiving party, (ii) disclosure is required by law or the order of any governmental authority under color of law, or (iii) the disclosing party receives the written opinion of its counsel that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, provided, that prior to disclosing any information pursuant to clause (i), (ii) or (iii) above, such party shall, if possible, give prior written notice thereof to the other party and provide the other party with the opportunity to contest such disclosure, and disclose only such portion of such confidential information which is legally required to be disclosed and exercise its best efforts to obtain assurances that confidential treatment will be accorded such information. (e) In order to facilitate the resolutions of any Claims (as defined in Section 8.1 below) made by or against or incurred by DACC after the Closing, upon reasonable notice to Search and Newco, each of Search and Newco shall (i) permit DACC, its counsel, accountants and other representatives to have reasonable access during regular business hours to the offices, properties, books and records of Search and Newco relating to the Assets, (ii) furnish DACC, its counsel, accountants and other representatives such additional financial and other information regarding the Assets as DACC may from time to time reasonably request, (iii) make available to DACC, its -16- 18 counsel, accountants and other representatives the employees of Search and Newco whose assistance, testimony or presence is necessary to assist DACC in evaluating any Claims and defending any Claims; provided, however, that such investigation and access shall not unreasonably interfere with any of the businesses or operations of Search or Newco. Costs and expenses incurred by Search and Newco in connection with this Section 5.1(e) which are connected to or related to Claims covered by Section 8.1(a) below shall be deemed an includable part of the Claims when so incurred by Search. Costs and expenses incurred by Search and Newco in connection with this Section 5.1(e) not connected or related to Claims under Section 8.1(a) shall be paid for by Search and/or Newco. 5.2 Conduct of Business Pending Closing. Between May 31, 1996 and the Closing, DACC will: (a) carry on its business in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (b) maintain its properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (c) perform in all material respects its obligations under agreements relating to or affecting the Assets; (d) keep in full force and effect present insurance policies or other comparable insurance coverage; (e) use commercially reasonable efforts to maintain and preserve the goodwill associated with its name and its relationships with customers and others having business relations with it; (f) maintain compliance in all material respects with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities to the extent its -17- 19 failure to do so would have a DACC Material Adverse Effect; (g) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments; and (h) inform Search immediately if any event occurs that may have a DACC Material Adverse Effect. 5.3 Prohibited Activities. Between May 31, 1996 and the Closing, DACC has not, and will not, without the prior written consent of Search, which shall not be unreasonably withheld: (a) declare or pay any dividend, or make any other distribution (whether in cash, stock or property) in respect of its stock whether now or hereafter outstanding, or split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or purchase, redeem or otherwise acquire or retire for value any shares of its stock (DACC acknowledges that any such a prohibited occurrence which relates to the distribution of DACC stock could affect Search's compliance with the relevant securities laws in the distribution of the Search Securities); (b) except for expenses set forth on Schedule 1.1(b)(i), the Material Contracts listed in Schedule 3.13 and the Finance Contracts acquired in the ordinary course of business, enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, or guarantee any Indebtedness (as defined in Schedule 3) in an amount not in excess of $10,000, including contracts to provide services to customers; (c) except as may be required by law as disclosed on Schedule 5.3(c), increase the compensation payable or to become payable to any officer, director, stockholder, employee or agent; make any bonus or management fee payment to any such person; make any loans or advances; adopt or amend any employee benefit plan; grant any severance or termination pay, or in any other manner -18- 20 increase the compensation payable to and/or fringe benefits provided to any of the aforesaid parties; provided, however, that raises in the ordinary course of business to non-key employees shall be permitted; (d) except for the payments listed on Schedule 1.1(b)(i) and for payments on the Senior Debt (as set forth in Schedule 1.3), make any payment other than in the "ordinary course of business," which shall not include paying any past due amounts except to the extent such past due amounts constitute part of the Assumed Liabilities. (e) directly or indirectly make or cause to be made any payment to an "Affiliate," other than Chicago Holdings, Inc., and then only to the extent any such payments are in the ordinary course of business. For purposes of this Agreement, the term "Affiliate" shall mean any entity which is directly or indirectly owned (partially or totally) or controlled by any officer, director, employee or shareholder of DACC; (f) directly or indirectly make, or cause to be made, any payments to or for the benefit of the Subordinated Debt Holders; (g) create or assume any mortgage, pledge or other Lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, other than any Liens relating to the Senior Bank Debt; (h) sell, assign, lease, pledge or otherwise transfer or dispose of any property or equipment except in the ordinary course of business consistent with past practice; (i) acquire or negotiate for the acquisition of (by merger, consolidation, purchase of a substantial portion of assets or otherwise) any business or the start-up of any new business, or otherwise acquire or agree to acquire any assets that are material, individually or in the aggregate, to DACC; -19- 21 (j) merge or consolidate or agree to merge or consolidate with or into any other corporation; (k) waive any material rights or claims of DACC, provided that DACC may negotiate and adjust claims in the course of good faith disputes with account debtors, employees and governmental agencies in a manner consistent with past practice; (l) commit a material breach of or amend or terminate any material agreement, permit, license or other right, except for amending or terminating Finance Contracts in the ordinary course of business; (m) enter into any other transaction (i) that is not negotiated at arm's length or (ii) outside the ordinary course of business consistent with past practice or (iii) prohibited hereunder; (n) commence a lawsuit other than for routine collection of loans; (o) take, or agree (in writing or otherwise) to take, any of the actions described in Sections 5.3(a) through (n) above, or any action which would make any of the representations and warranties of DACC contained in this Agreement untrue or result in any of the conditions set forth in Sections 6 and 7 not being satisfied. 5.4 No Solicitation of Offers. Prior to the first to occur of the Closing or the termination of this Agreement pursuant to Section 11.1, neither DACC nor any agent, officer, director or any representative of DACC will, during the period commencing on the date of this Agreement and ending with the Closing, directly or indirectly: (a) solicit, encourage or initiate the submission of proposals or offers from any person for, (b) participate in any discussions pertaining to, or (c) furnish any information to any person other than Search and Newco relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, DACC or a merger, consolidation or business combination of DACC, except, in each case, to the extent required by fiduciary -20- 22 obligations under applicable law. In addition to the foregoing, if DACC receives any unsolicited offer or proposal relating to any of the above, DACC shall immediately notify Search thereof, including the identity of the party making such offer or proposal and the specific terms of such offer or proposal. 5.5 Notification of Certain Matters. Each party hereto shall give prompt notice to the other parties hereto of (a) the occurrence or non-occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of it contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (b) any material failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such party hereunder; provided, that in the event that the other party consummates the transactions contemplated hereby despite being provided with such written notice, then the other party shall automatically be deemed to have waived compliance with such representation, warranty, covenant, condition or agreement to the extent set forth in such written notice. 5.6 Cooperation in Obtaining Required Consents and Approvals. For all consents and approvals which DACC is required to obtain pursuant to this Agreement, Search shall cooperate and provide to DACC such documentation or other information as DACC shall reasonably request. For all consents and approvals which Search is required to obtain pursuant to this Agreement, DACC shall cooperate and provide to Search such documentation or other information as Search shall reasonably request. Each party shall use all reasonable efforts to obtain all consents and approvals as shall be necessary for the performance of its obligations under this Agreement. 5.7 Tax Returns. DACC shall timely file all federal and state tax returns required to be filed by DACC for taxable periods ending on or prior to the Closing and shall have paid or will pay when due all taxes which DACC is required to pay attributable to such periods, except for such payments which are the subject of a bona fide dispute, which shall be paid upon resolution of such dispute. Such returns will be prepared -21- 23 and filed in accordance with applicable law and in a manner consistent with past practices. After the Closing, Search, on the one hand, and DACC, on the other hand, will make available to the other, as reasonably requested, all information, records or documents relating to the liability for Taxes of DACC for all periods prior to and after the Closing and will preserve such information, records or documents until the expiration of any applicable statute of limitations or extensions thereof. 5.8 Employees. Newco shall immediately hire all employees of DACC upon the Closing, but, except as set forth below, neither Search nor Newco is obligated to pay said employees any compensation or other amounts owed to them by DACC for periods prior to the date they are hired by Newco except to the extent included by the Assumed Liabilities (e.g. accrued vacation). On or before Closing DACC shall terminate all of its employees and pay all amounts owed to them through Closing, except to the extent any such amounts are either part of the Assumed Liabilities and/or constitute accrued but unpaid vacation pay. Notwithstanding the foregoing, Newco hereby agrees to assume DACC's obligations under DACC's employment agreement with Edmond McGinty effective as of Closing, provided that Newco retains McGinty as an employee for at least 61 days after Closing. If Newco terminates McGinty at any time during the period ending on the 60th day after Closing, DACC shall be responsible for all obligations regarding the termination of McGinty's employment. Newco and Search shall provide to all employees of DACC hired by Newco the employee benefit plans currently offered as of Closing by Search to Search's employees. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SEARCH AND NEWCO The obligation of Search and Newco to effect the Closing is subject to the satisfaction or waiver, at or before the Closing, of the following conditions: 6.1 Representations and Warranties; Performance of Obligations. All of the representations and warranties of DACC contained in this Agreement shall be true, correct and complete in all material respects on and as of the Closing with the same effect as though such representations and warranties had been -22- 24 made on and as of such date and all of the terms, covenants, agreements and conditions of this Agreement to be complied with, performed or satisfied by DACC on or before the Closing shall have been duly complied with, performed or satisfied in all material respects. 6.2 No Litigation. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Newco's proposed acquisition of the Assets, or limiting or restricting Newco's conduct or operation of its business following the Sale shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending. There shall be no action, suit claim or proceeding of any nature pending against Search, Newco or DACC, their respective properties or any of their officers or directors, that would,if adversely determined, be reasonably likely to have a DACC Material Adverse Effect on the Assets. 6.3 Consents and Approvals. All necessary consents of and filings with any governmental authority or agency or third party relating to the consummation by DACC of the transactions contemplated hereby shall have been obtained and made. 6.4 DACC Shareholders. DACC's shareholders shall have approved the Sale. 6.5 No Material Adverse Effect. No "DACC Material Adverse Effect" shall have occurred between May 31, 1996 and Closing. For purposes of this Agreement, the term "DACC Material Adverse Effect" means any change or event which materially harms, damages, decreases the value of or interferes with the servicing, collection, maintenance and/or use of the Assets. Search acknowledges that the decrease in the value of DACC's Receivables due to the collection of DACC's Receivables between May 31, 1996 and Closing in the ordinary course of business shall not constitute a DACC Material Adverse Effect, and that continued and increased operating losses during that period shall not constitute a DACC Material Adverse Effect if the operating loss for each month is not more than 10% greater -23- 25 than the operating loss for the month of May or June, whichever is greater. In addition, Search acknowledges that DACC is currently insolvent and that neither such current insolvency nor any continued insolvency of DACC shall constitute a DACC Material Adverse Effect. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF DACC The obligation of DACC to effect the Sale are subject to the satisfaction or waiver, at or before the Closing, of the following conditions: 7.1 Representations and Warranties; Performance of Obligations. All of the representations and warranties of Search and Newco contained in this Agreement shall be true, correct and complete in all material respects on and as of the Closing as though such representations and warranties had been made as of such date and all of the terms, covenants, agreements and conditions of this Agreement to be complied with, performed or satisfied by Search and Newco on or before the Closing shall have been duly complied with, performed or satisfied in all material respects. 7.2 No Material Adverse Effect. No "Search Material Adverse Effect" shall have occurred between the 10-K Filing Date and Closing. For purposes of this Agreement, the term "Search Material Adverse Effect" has the meaning specified in Section 4.1 of Schedule 4. DACC acknowledges, covenants and agrees that if a Search Material Adverse Effect has occurred, DACC's sole remedy shall be to terminate this Agreement upon notice to Search pursuant to the terms of Section 11.1 below. 7.3 No Litigation. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Newco's proposed acquisition of the Assets, or limiting or restricting Newco's conduct or operation of its business following the Sale shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending. There shall be no action, suit -24- 26 claim or proceeding of any nature pending against Search, Newco or DACC, their respective properties or any of their officers or directors, that would,if adversely determined, be reasonably likely to have a Search Material Adverse Effect. 7.4 Consents and Approvals. All necessary consents of and filings with any governmental authority or agency or third party relating to the consummation by Search and Newco of the transactions contemplated hereby shall have been obtained and made. 7.5 DACC Shareholders. DACC's shareholders shall have approved the Sale. 8. INDEMNIFICATION BY DACC 8.1 Indemnification by DACC. (a) Subject to the terms of Sections 8.1(b) and 8.5 below, DACC covenants and agrees to indemnify, defend, protect and hold harmless Search and Newco and their respective officers, directors, employees, successors and assigns (individually, a "Search Indemnified Party" and collectively "Search Indemnified Parties") from, against and in respect of: (i) all liabilities, losses, claims, damages, punitive damages, courses of actions, lawsuits, administrative proceedings (including informal proceedings), investigations, audits, demands, assessments, adjustments, judgments, settlement payments, deficiencies, penalties, fines, interest (including interest from the date of such damages) and costs and expenses (including without limitation, reasonable attorneys' fees and disbursements of every kind, nature and description) (collectively, "Claims") suffered, sustained, incurred or paid by the Search Indemnified Parties in connection with, resulting from or arising out of, directly or indirectly: -25- 27 (1) any material breach of any representation or warranty of DACC set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of DACC in connection herewith; (2) any material nonfulfillment of any covenant or agreement on the part of DACC in this Agreement, or (3) all liabilities and obligations of DACC except for the Assumed Liabilities. (ii) any and all Claims incident to any of the foregoing or to the enforcement of this Section 8.1. (b) DACC shall not have any obligation under Section 8.1(a) to any Search Indemnified Party with respect to any Claim except to the extent the total amount of all Claims governed by Section 8.1(a) shall, in the aggregate, exceed $500,000.00 (the "Deductible"). All Claims in excess of the Deductible shall become eligible for indemnification under the terms and conditions of this Section 8.1 (c) Notwithstanding anything to the contrary in Section 8.1(a), any Claim which alleges fraud or violation of "laws" and/or "regulations" (each as defined in Section 3.15 of Schedule 3) by DACC or usury with respect to a Finance Contract (as defined in Schedule 3) that is raised or brought by the obligor or a guarantor of said Finance Contract by way of a counterclaim in a proceeding instituted by or on behalf of Search with respect said Finance Contract shall not be eligible for indemnification hereunder if the aforesaid allegations of fraud or violation of law and/or regulation by DACC or usury are not successfully proven by said obligor or guarantor in such proceeding, in which event Search shall bear the entire cost of such proceedings. If, however, the aforesaid allegations are successfully proven in such proceeding, said Claim shall be eligible for indemnification and be deemed to be a Claim governed by Section 8.1(a) of this Agreement. In addition, any such -26- 28 Claim governed by this Section 8.1(c) shall be treated as a "Pending Claim" (as defined below in Section 10.2) for purposes of Sections 8.5 and 10.2 below. 8.2 Expiration. (a) Subject to the resolution of all Pending Claims, the indemnification obligations of DACC under this Section 8 shall terminate as follows: (i) With respect to all Claims based upon fraud, usury and/or violation of "laws" and "regulations" (each as defined in Section 3._ of Schedule 3) by or on the part of DACC with respect to Finance Contracts, one day after the first (1st) anniversary of the Closing (the "Final Expiration Date"). (ii) With respect to all other Claims governed by this Section 8, nine (9) months after Closing (the "First Expiration Date"). (The Final Expiration Date and the First Expiration Date are collectively sometimes referred to as the "Expiration Dates"). 8.3 No Substitution of Shareholders. If DACC liquidates prior to the Final Expiration Date, all of the Search Securities held by the Escrow Agent shall remain in Escrow except as set forth below in Section 10. No shareholder of DACC shall be personally liable for DACC's obligations under this Section 8, except in the event they have received Search Securities in connection with or as a result of a breach or violation of the Escrow Agreement, and recovery for such liability shall be limited to such Search Securities. Once Search Securities are properly distributed by the Escrow Agent from Escrow, none of the DACC Shareholders shall have any responsibility or obligation to Search, except as may be set forth in the DACC Shareholders Agreement. 8.4 Indemnification Procedures. All Claims for indemnification under this Section 8 (including any Claims -27- 29 subject to the Deductible) shall be asserted and resolved as follows: (a) In the event a Search Indemnified Party has a Claim against DACC (DACC, including all successors, shall be known collectively as the "Indemnifying Party") hereunder which does not involve a Claim being asserted against or sought to be collected by a third party, the Search Indemnified Party shall with reasonable promptness send a Claim Notice (the "Claim Notice") with respect to such Claim to Richard J. Uhl (the "Representative") and, in the event the Deductible shall have been satisfied, to the Escrow Agent. Such Claim Notice shall: (i) state that the Search Indemnified Party has paid or incurred a DACC 100% Claim or a Shared Claim and is entitled to indemnification under Section 8 of this Agreement (an "Indemnification Item"); (ii) state the aggregate dollar amount of such Indemnification Item; (iii) specify in reasonable detail the nature and amount of each individual Indemnification Item; (iv) specify in detail those DACC Escrow Shares, in the order of class and Value as specified in Section 8.4 of this Agreement, that Escrow Agent shall deliver to the Search Indemnified Party or as otherwise directed by the Search Indemnified Party in satisfaction of the Indemnification Item(s) set forth in the Claim Notice in accordance with Sections 8.4(e) and 10.3 of this Agreement; and (v) state the amount remaining in the Deductible after applying the Indemnification Item(s) in such Claim Notice towards the Deductible. Any Claim Notice may include multiple Indemnification Items. If the Representative does not notify the Search Indemnified Party within 30 days of receipt of the Claim Notice (the -28- 30 "Notice Period") that the Indemnifying Party disputes such Claim, the amount of such Claim shall be conclusively deemed a liability of the Indemnifying Party hereunder. In case the Representative shall, within the Notice Period, object in writing to any Claim made in accordance with this Section 8.4(a), the Search Indemnified Party shall have fifteen (15) days to respond in a written statement to the objection of the Representative. If after such fifteen (15) day period there remains a dispute as to any Claims, the parties shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such Claims. If the parties should so agree, a memorandum setting forth such agreement shall be prepared and executed by both parties. If no such agreement can be reached after good faith negotiations the parties may pursue applicable remedies as provided by Section 11.18. (b) In the event that any Claim for which the Indemnifying Party would be liable to a Search Indemnified Party hereunder is asserted against a Search Indemnified Party by a third party, the Search Indemnified Party shall with reasonable promptness notify the Representative of such Claim, specifying the nature of such claim and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such Claim). The actions and decisions of the Representative shall be binding upon the Indemnifying Party. The Representative shall have 30 days from the receipt of the Claim Notice (the "Notice Period") to notify the Search Indemnified Party (i) whether or not the Indemnifying Party disputes the Indemnifying Party's liability to the Search Indemnified Party hereunder with respect to such Claim and (ii) if the Indemnifying Party does not dispute such liability, whether or not the Indemnifying Party desires, at the sole cost and expense of the Indemnifying Party, to defend against such Claim, provided that the Indemnifying Party is hereby authorized (but not obligated) prior to and during the Notice Period to file any motion, answer or other pleading and to take any other action which the Indemnifying Party shall deem necessary or appropriate to protect the Indemnifying Party's interests. If the Representative notifies the -29- 31 Search Indemnified Party within the Notice Period that the Indemnifying Party does not dispute the Indemnifying Party's obligation to indemnify hereunder and desires to defend the Search Indemnified Party against such Claim, except as hereinafter provided, the Indemnifying Party shall have the right to defend by appropriate proceedings, which proceedings shall be promptly settled or prosecuted by the Indemnifying Party to a final conclusion; provided that, unless the Search Indemnified Party otherwise agrees in writing, the Indemnifying Party may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the Search Indemnified Party. If the Search Indemnified Party desires to participate in, but not control, any such defense or settlement the Search Indemnified Party may do so at the Search Indemnified Party's sole cost and expense. If the Indemnifying Party elects not to defend the Search Indemnified Party against such Claim, whether by failure of the Representative to give the Search Indemnified Party timely notice as provided above or otherwise, then the Search Indemnified Party, without waiving any rights against the Indemnifying Party, may settle or defend against any such Claim in the Search Indemnified Party's commercially reasonable discretion (provided, that the Search Indemnified Party may not settle any matter (in whole or part) unless such settlement includes a complete and unconditional release of the Indemnifying Party) and the Search Indemnified Party shall be entitled to recover from the Indemnifying Party the amount of any settlement or judgment and, on an ongoing basis, all indemnifiable costs and expenses of the Search Indemnified Party with respect thereto, including interest from the date such costs and expenses were incurred. (c) If at any time, in the reasonable opinion of the Search Indemnified Party, notice of which shall be given in writing to the Representative, any such Claim seeks material prospective relief which could have a materially adverse effect on the assets, liabilities, financial condition, results of operations or business prospects of any Search Indemnified Party, the Search Indemnified Party -30- 32 shall have the right to control or assume (as the case may be) the defense of any such Claim and the amount of any judgment or, subject to the prior approval of the Indemnifying Party, settlement and the reasonable costs and expenses of defense shall be included as part of the indemnification obligations of the Indemnifying Party hereunder. If the Search Indemnified Party should elect to exercise such right, the Representative shall have the right to participate in, but not control, the defense of such claim or demand at the sole cost and expense of the Indemnifying Party. (d) The Search Indemnified Party's failure to give reasonably prompt notice to the Representative of any actual or threatened claim or demand which may give rise to a right of indemnification hereunder shall not relieve the Indemnifying Party of any liability which the Indemnifying Party may have to the Search Indemnified Party unless the failure to give such notice materially and adversely prejudiced the Indemnifying Party. (e) All shares of Search Securities issued to and/or on behalf of DACC pursuant to this Agreement and delivered to the Escrow Agent (the "DACC Escrow Shares") shall be available to satisfy the indemnification obligations of the Indemnifying Party pursuant to this Section 8 through the First Expiration Date or Final Expiration Date, as the case may be, subject to the retention of that portion of the DACC Escrow Shares required pursuant to Section 10.2 below for Pending Claims. Upon determination of the dollar amount owed to a Search Indemnified Party in satisfaction of the Indemnifying Party's obligations with respect to "DACC 100% Claims" (defined below in Section 10.3) and the Indemnifying Party's obligations with respect to the Indemnifying Party's portion of the "Shared Claims" (defined below in Section 10.3), the Escrow Agent shall, pursuant to the terms of the Escrow Agreement, deliver to the Search Indemnified Party that number of DACC Escrow Shares having a Value (as defined below) equal to the dollar amount so determined as set forth herein in this Section 8.4(e) from the respective classes of DACC Escrow Shares identified below. For purposes of this -31- 33 Agreement, the term "Value" per share of DACC Escrow Shares shall mean (i) the allocated price of each class of the DACC Escrow Shares, namely Two Dollars Fifty-Three and Eight Tenths Cents ($2.538) per share for the Convertible Stock, One Dollar Five and Seven Tenths Cents ($1.057) per share for the Common Stock, and Forty- One Cents ($.41) for the Warrants. In the event of any stock split, reverse stock split, stock combination or reclassification of any of the DACC Escrow Shares or any merger, consolidation or combination of Search with any other entity or entities, the Value of the DACC Escrow Shares shall be proportionally adjusted so that the Value of the DACC Escrow Shares after such event shall be the same as the Value such DACC Escrow Shares possessed immediately prior to such event. Such adjustment shall be made successively upon the occurrence of the events listed in the immediately preceding sentence. Subject to Section 10.3, the order by class in which the Escrow Agent shall deliver DACC Escrow Shares to the Search Indemnified Parties pursuant to this Section 8 is as follows: (1) the Warrants, until no more Warrants are held by the Escrow Agent; then (2) the Common Stock, until no more shares of Common Stock is held by the Escrow Agent; then (3) the Convertible Stock, until no more shares of Convertible Stock is held by the Escrow Agent; then (4) cash. The foregoing order of distribution shall be followed with respect to all DACC Escrow Shares held by the Escrow Agent in Escrow. 8.5 Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and indemnities made by DACC in or pursuant to this Agreement or in any document delivered pursuant hereto will survive the Closing and will remain in effect until, and will expire upon, the First Expiration Date or Final Expiration Date as set forth above in Section 8.2, provided, however, that the indemnification obligations with respect to any Pending Claim (and the related representations, warranties and covenants) existing as of either of the aforesaid Dates will survive until the final resolution of such Pending Claim. 9. INDEMNIFICATION BY SEARCH -32- 34 9.1 Indemnification by Search. Search covenants and agrees to indemnify, defend, protect and hold harmless DACC and its officers, directors and employees, and also DACC's stockholders, but only as set forth in Section 9.2 below (individually, a "DACC Indemnified Party" and collectively "DACC Indemnified Parties") from, against and in respect of: (a) all Claims suffered, sustained, incurred or paid by the DACC Indemnified Parties in connection with, resulting from or arising out of, directly or indirectly: (i) any material breach of any representation or warranty of Search or Newco set forth in this Agreement or any certificate, document or instrument delivered by or on behalf of Search or Newco in connection herewith; (ii) any material nonfulfillment of any covenant or agreement on the part of Search or Newco in this Agreement, or (iii) the Assumed Liabilities and/or the Senior Bank Debt. (b) any and all Claims incident to any of the foregoing or to the enforcement of this Section 9.1. 9.2 Exclusive Agent. Search's indemnification obligations to DACC's stockholders are conditioned on the DACC stockholders appointing Richard J. Uhl ("Agent") as their exclusive agent for handling all matters related to indemnity claims of DACC stockholders. Without limiting the preceding sentence, Agent is the only one who can assert, prosecute or settle indemnity claims of DACC stockholders, and Agent is the only one who can give or receive notices on behalf of the DACC stockholders with respect to their indemnity claims. Search shall have no indemnity obligations to any DACC stockholder who directly asserts a claim against Search or who does not otherwise comply with the requirements of this Section 9.2. 9.3 Expiration. Search's indemnification obligations under this Section 9 shall terminate as follows: -33- 35 (a) With respect to Claims based upon the Assumed Liabilities and/or the Senior Bank Debt, upon Search satisfying in full the Assumed Liabilities and the Senior Bank Debt. (b) With respect to all other Claims, one day after the first (1st) anniversary of the Closing. 9.4 Indemnification Procedures. All Claims for indemnification under this Section 9 shall be asserted and resolved as follows: (a) In the event a DACC Indemnified Party has a Claim against Search hereunder which does not involve a Claim being asserted against or sought to be collected by a third party, the DACC Indemnified Party shall with reasonable promptness send a Claim notice (the "Claim Notice") with respect to such Claim to Search. If Search does not notify the DACC Indemnified Party within 30 days of receipt of the Claim Notice (the "Notice Period") that Search disputes such Claim, the amount of such Claim shall be conclusively deemed a liability of Search hereunder. In case Search shall, within the Notice Period, object in writing to any Claim made in accordance with this Section 9.3(a), the DACC Indemnified Party shall have fifteen (15) days to respond in a written statement to the objection of Search. If after such fifteen (15) day period there remains a dispute as to any Claims, the parties shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such Claims. If the parties should so agree, a memorandum setting forth such agreement shall be prepared and executed by both parties. If no such agreement can be reached after good faith negotiations the parties may pursue applicable remedies as provided by Section 11.18. (b) If any Claim for which Search would be liable to a DACC Indemnified Party hereunder is asserted against a DACC Indemnified Party by a third party, the DACC Indemnified Party shall with reasonable promptness notify Search of such Claim, specifying the nature of such claim and the amount or the estimated amount thereof to the -34- 36 extent then feasible (which estimate shall not be conclusive of the final amount of such Claim). Search shall have 30 days from the receipt of the Claim Notice (the "Notice Period") to notify the DACC Indemnified Party (i) whether or not Search disputes Search's liability to the DACC Indemnified Party hereunder with respect to such Claim and (ii) if Search does not dispute such liability, whether or not Search desires, at Search's sole cost and expense, to defend against such Claim, provided that Search is hereby authorized (but not obligated) prior to and during the Notice Period to file any motion, answer or other pleading and to take any other action which Search shall deem necessary or appropriate to protect Search's interests. If Search notifies the DACC Indemnified Party within the Notice Period that Search does not dispute Search's obligation to indemnify hereunder and agrees to defend the DACC Indemnified Party against such Claim, except as hereinafter provided, Search shall have the right to defend by appropriate proceedings, which proceedings shall be promptly settled or prosecuted by Search to a final conclusion; provided that, unless the DACC Indemnified Party otherwise agrees in writing, Search may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the DACC Indemnified Party. If the DACC Indemnified Party desires to participate in, but not control, any such defense or settlement the DACC Indemnified Party may do so at the DACC Indemnified Party's sole cost and expense. If Search elects not to defend the DACC Indemnified Party against such Claim, whether by failure of Search to give the DACC Indemnified Party timely notice as provided above or otherwise, then the DACC Indemnified Party, without waiving any rights against Search, may settle or defend against any such Claim in the DACC Indemnified Party's commercially reasonable discretion (provided, that the DACC Indemnified Party may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the Search Indemnifying Party) and the DACC Indemnified Party shall be entitled to recover from Search the amount of any settlement or judgment and, on an ongoing basis, all indemnifiable costs -35- 37 and expenses of the DACC Indemnified Party with respect thereto, including interest from the date such costs and expenses were incurred. (c) Nothing herein shall be deemed to prevent a DACC Indemnified Party from making a claim, and a DACC Indemnified Party may make a claim hereunder, for potential or contingent claims or demands provided the Claim Notice sets forth the specific basis for any such potential or contingent claim or demand to the extent then feasible and the DACC Indemnified Party has reasonable grounds to believe that such a claim or demand may be made. (d) The DACC Indemnified Party's failure to give reasonably prompt notice to Search of any actual, threatened or possible claim or demand which may give rise to a right of indemnification hereunder shall not relieve Search of any liability which Search may have to the DACC Indemnified Party unless the failure to give such notice materially and adversely prejudiced Search. 9.5 Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and indemnities made by Search and Newco in or pursuant to this Agreement or in any document delivered pursuant hereto will survive the Closing and will remain in effect, and will expire as provided in Section 9.3, provided, however, that the indemnification obligations with respect to any Pending Claim (and the related representations, warranties and covenants) will survive until the final resolution of such Pending Claim. 10. ESCROW 10.1 Escrow. At Closing the Search Securities as specified in Section 1.5 (also referred to as the DACC Escrow Shares for purposes of Section 8 above, this Section 10 and the Escrow Agreement), and the Indemnity Shares specified in Section 1.9(d) shall be delivered to U.S. Trust Company of Texas, N.A. ("Escrow Agent") to be held by the Escrow Agent pursuant to that certain Escrow Agreement entered into by and among Search, Newco, DACC, each of the Subordinated Debt -36- 38 Holders, and Escrow Agent in substantially the form as attached hereto as Schedule 10.1 on the Closing (the "Escrow Agreement"). The Escrow Agent shall hold the DACC Escrow Shares and the Indemnity Shares pursuant to the Escrow Agreement. The Escrow Agent shall distribute the DACC Escrow Shares pursuant to the terms of this Section 10 and the Escrow Agreement; the Escrow Agent shall distribute the Indemnity Shares pursuant to the terms of Section 10 of the Sub-Debt Acquisition Agreement and the Escrow Agreement. The parties agree to instruct the Escrow Agent to transfer the DACC Escrow Shares and all cash attributable thereto as follows in the following order: (a) Prior to the First Expiration Date, to Search for cancellation of that amount of DACC Escrow Shares and/or cash, in the order of class as specified in Section 8.4 above, to the extent necessary to satisfy all finally resolved DACC 100% Claims and DACC's portion of the Shared Claims. (b) At the First Expiration Date, but subject to Section 10.2 below, to DACC and/or the shareholders of DACC 638,515 Warrants less the number of Warrants delivered to Search for cancellation, 638,515 shares of Common Stock less the number of shares of Common Stock delivered to Search for cancellation, and 383,109 shares of Convertible Stock less the number of shares of Convertible Stock delivered to Search for cancellation, and all dividends which shall have been received by the Escrow Agent attributable to the DACC Escrow Shares released to DACC and not distributed to Search pursuant to Section 10.1(a). (c) After the First Expiration Date and prior to the Final Expiration Date, and to the extent still held by the Escrow Agent in Escrow, to Search for cancellation of that amount of DACC Escrow Shares and/or cash, in the order of class as specified in Section 8.4 above, to the extent necessary to satisfy all finally resolved DACC 100% Claims and DACC's portion of the Shared Claims. (d) At the Final Expiration Date, but subject to Section 10.2 below, to DACC and/or the shareholders of DACC the -37- 39 balance of the DACC Escrow Shares and all dividends which shall have been received by the Escrow Agent attributable to the DACC Escrow Shares released to DACC and not distributed to Search pursuant to Sections 10.1(a) or 10.1(c). 10.2 Pending Claims. Notwithstanding anything to the contrary in Section 10.1, if the aggregate amount of all DACC 100% Claims and the Shared Claims (including the amount of all Pending Claims as determined below) shall have exceeded the Deductible and Pending Claims exist as of an Expiration Date, the Escrow Agent shall retain in Escrow that portion, in excess of the Deductible, of the DACC Escrow Shares and/or cash, in the order specified in Section 8.4, with a Value equal to: (i) 100% of the amount of the DACC 100% Claims and DACC's portion of the Shared Claims, as determined by Search acting in good faith in a commercially reasonable manner, if Search determines the amount of any of such Claims is reasonably certain, or (ii) 125% of the amount of the DACC 100% Claims and DACC's portion of the Shared Claims, as determined by Search acting in good faith in a commercially reasonable manner, if Search determines the amount of any such Claims is not reasonably certain. Upon the final resolution of any Pending Claim, the Escrow Agent shall likewise distribute in the priorities specified in Section 10.1 the DACC Escrow Shares and/or cash reserved by the Escrow Agent with respect to such types of Pending Claim. The term "Pending Claim" shall mean any Claim governed by Section 8 which has not been resolved finally as of an Expiration Date. 10.3 Pro Rata Payment of Claims. Search and DACC acknowledge that there are three types of indemnity Claims governed by either this Agreement and/or the Sub-Debt Acquisition Agreement: (i) those for which only DACC has liability (the "DACC 100% Claims"), (ii) those for which only the Subordinated Debt Holders have liability (the "SDH 100% Claims"), and (iii) those for which both DACC and the Subordinated Debt Holders have liability (the "Shared Claims"). With respect to DACC 100% Claims only DACC Escrow Shares and/or cash attributable thereto shall be used to pay such Claims. With respect to SDH 100% Claims only Indemnity Shares and/or cash attributable thereto shall be used to pay such Claims. With respect to Shared Claims, 62% of such Claims shall be paid -38- 40 from DACC Escrow Shares and/or cash attributable thereto, and 38% of such Claims shall be paid from Indemnity Shares and/or cash attributable thereto, provided, that if either the DACC Escrow Shares or the cash attributable thereto, on the one hand, or the Indemnity Shares and the cash attributable thereto, on the other, are insufficient to pay such party's share of the Shared Claim, then the other party shall pay any deficiency so that Search receives payment for 100% of the Shared Claim. 11. GENERAL 11.1 Termination. This Agreement may be terminated at any time prior to the Closing: (a) by mutual consent of Search and DACC; or (b) by DACC, on the one hand, or by Search, on the other hand, if the Closing shall not have occurred on or before August 2, 1996; provided that the right to terminate this Agreement under this Section 11.1(b) shall not be available to either party (Search and Newco deemed to be a single party for this purpose) whose material misrepresentation, breach of warranty or failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; or (c) by DACC, on the one hand, or by Search, on the other hand, if there is or has been a material breach, failure to fulfill or default on the part of the other party of any of the representations and warranties contained herein or in the due and timely material performance and satisfaction of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made or shall not reasonably be expected to occur before the Closing; or (d) by DACC, on the one hand, or by Search, on the other hand, if there shall be a final nonappealable order of a federal or state Court in effect preventing consummation of the Sale or any other transaction contemplated hereby; -39- 41 or there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Sale or any other transaction contemplated hereby by any governmental entity which would make the consummation of the Sale or any other transaction contemplated hereby illegal. 11.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 11.1, this Agreement shall forthwith become void, and except as hereinafter provided, there shall be no liability or obligation on the part of any party hereto or its officers, directors or stockholders. Notwithstanding the foregoing sentence, (a) the provisions of this Section 11.2, Section 5.l(b) and (c) (confidentiality) and the other provisions of Section 11 (including without limitation brokers and expenses), shall remain in full force and effect and survive any termination of this Agreement; (b) DACC and the Search/Newco Group shall remain liable to the other for any breach of this Agreement prior to its termination; and (c) in the event of termination of this Agreement pursuant to Section 11.1(c) above, then notwithstanding the provisions of Section 11.8 below, the breaching party shall be liable to the other party to the extent of the expenses incurred by such other party in connection with this Agreement and the transactions contemplated hereby, as well as any damages in accordance with Section 11.18. 11.3 Cooperation. DACC, Search and Newco shall each deliver or cause to be delivered to the other on the Closing, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. DACC will also cooperate and use its reasonable efforts to have the present officers, directors and employees of DACC, and have all "contract employees" provided to DACC by Chicago Holdings, Inc. or any other Affiliate, cooperate with Search on and after the Closing in furnishing information, evidence, testimony and other assistance in connection with any obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods -40- 42 prior to the Closing, in each case at the cost and expense of Search. 11.4 Successors and Assigns. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, and their permitted successors and assigns. 11.5 Entire Agreement. This Agreement (which includes the Schedules attached hereto) sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby. It shall not be amended or modified except by a written instrument duly executed by each of the parties hereto. Any and all previous agreements and understandings between or among the parties regarding the subject matter hereof, whether written or oral, are superseded by this Agreement, including, without limitation, the June 19 Agreement. 11.6 Counterparts. This Agreement may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. This Agreement shall become binding when one or more counterparts taken together shall have been executed and delivered (which deliveries may be by telefax) by the parties. 11.7 Brokers and Agents. Search and Newco (as a group) and DACC each represents and warrants to the other that it has not employed any broker or agent in connection with the transactions contemplated by this Agreement and agrees to indemnify the other against all loss, damages or expense relating to or arising out of claims for fees or commissions of any broker or agent employed or alleged to have been employed by such indemnifying party, except that DACC has an obligation to pay a brokerage commission to The Chicago Corporation and EVEREN Securities, Inc. in connection with the consummation of the Sale, which obligation shall be solely that of DACC. -41- 43 11.8 Expenses. Search has and will pay the fees, expenses and disbursements of Search and Newco and their agents, representatives, financial advisors, accountants and counsel incurred in connection with the subject matter of this Agreement. DACC has and will pay the fees, expenses and disbursements of DACC and its agents, representatives, financial advisors, accountants and counsel incurred in connection with the subject matter of this Agreement. 11.9 Specific Performance; Remedies. Each party hereto acknowledges that the other parties will be irreparably harmed and that there will be no adequate remedy at law for any violation by any of them of any of the covenants or agreements contained in this Agreement, including without limitation, the confidentiality obligations set forth in Section 5.1(b) and (c). It is accordingly agreed that, in addition to any other remedies which may be available upon the breach of any such covenants or agreements, each party hereto shall have the right to obtain injunctive relief to restrain a breach or threatened breach of, or otherwise to obtain specific performance of, the other parties' covenants and agreements contained in this Agreement. 11.10 Notices. Any notice, request, claim, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given if delivered personally or sent by telefax (with confirmation of receipt), by registered or certified mail, postage prepaid, or by recognized courier service, as follows: If to Search or Newco to: Search Capital Group, Inc. 700 N. Pearl Street Suite 400, L.B. 401 Dallas, Texas 75201-2809 Attention: George C. Evans, President & CEO Facsimile No.: 214-965-6098 -42- 44 With a copy to: Riezman & Blitz, P.C. 120 S. Central, 10th Floor St. Louis, Missouri 63105 Attention: Richard M. Riezman, Esq. Facsimile No.: 314-727-6458 If to DACC Dealers Alliance Credit Corp. c/o Chicago Holdings, Inc. 1000 RIDC Plaza P.O. Box 11432 Pittsburgh, PA 15238 Attention: Richard J. Uhl, President & CEO Facsimile No.: 412-963-9841 -43- 45 With a copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attention: Russell S. Berman, Esq. Facsimile No.: 212-479-6275 or to such other address as the person to whom notice is to be given may have specified in a notice duly given to the sender as provided herein. Such notice, request, claim, demand, waiver, consent, approval or other communication shall be deemed to have been given as of the date so delivered, telefaxed, mailed or dispatched and, if given by any other means, shall be deemed given only when actually received by the addressees. 11.11 Governing Law . This Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of Delaware. 11.12 Severability. If any provision of this Agreement or the application thereof to any person or circumstances is held invalid or unenforceable in any jurisdiction, the remainder hereof, and the application of such provision to such person or circumstances in any jurisdiction, shall not be affected thereby, and to this end the provisions of this Agreement shall be severable. 11.13 Absence of Third Party Beneficiary Rights. No provision of this Agreement is intended, nor will be interpreted, to provide or to create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, employee, partner of any party hereto or any other person or entity. 11.14 Mutual Drafting. This Agreement is the mutual product of the parties hereto, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of each of the parties, and shall not be construed for or against any party hereto. -44- 46 11.15 Further Representations. Each party to this Agreement acknowledges and represents that it has been represented by its own legal counsel in connection with the transactions contemplated by this Agreement, with the opportunity to seek advice as to its legal rights from such counsel. Each party further represents that it is being independently advised as to the tax consequences of the transactions contemplated by this Agreement and is not relying on any representation or statements made by the other party as to such tax consequences. 11.16 Amendment; Waiver. This Agreement may be amended by the parties hereto at any time prior to the Closing by execution of an instrument in writing signed on behalf of each of the parties hereto. Any extension or waiver by any party of any provision hereto shall be valid only if set forth in an instrument in writing signed on behalf of such party. 11.17 Public Disclosure. (a) Between the date of this Agreement and Closing: (i) DACC shall not make any disclosure (whether or not in response to an inquiry) of the subject matter of this Agreement unless previously approved by Search in writing; (ii) Search shall provide to DACC a copy of all materials to be filed by Search with the Securities and Exchange Commission ("SEC") regarding this Agreement and the Sale for DACC's review and comment; and (iii) DACC and Search shall mutually prepare and approve a joint press release to be issued contemporaneously with Closing regarding this Agreement and the Sale. (b) After Closing, Search shall provide to DACC a copy of all materials to be filed with the SEC regarding this Agreement and the Sale for DACC's review and comment. (c) Search shall consider all comments and/or reasonable suggested changes made by DACC pursuant to Sections 11.17(a) and (b), provided, however, that the determination of Search's securities counsel on any DACC suggested changes regarding any materials to be filed by -45- 47 Search with the SEC shall be final and binding on the parties hereto. 11.18 Arbitration. (a) Any controversy, claim or dispute arising out of or relating to this Agreement or the breach, termination, enforceability or validity hereof, including without limitation the determination of the scope or applicability of the agreement to arbitrate set forth in this Section 11.18, shall be determined exclusively by binding arbitration in a city mutually agreed to by DACC and Search before three arbitrators. The arbitration shall be governed by the American Arbitration Association (the "AAA") under its Commercial Arbitration Rules, provided that Persons eligible to be selected as arbitrators shall be limited to attorneys-at-law each of whom has actively practiced law (in private or corporate practice or as a member of the judiciary) for at least 15 years concentrating in either general commercial litigation or general corporate and commercial matters. (b) Judgment upon the award rendered may be entered in any court having jurisdiction. (c) Each of DACC and the Subordinated Debt Holders, on the one hand, and Search and Newco, on the other, shall, subject to the award of the arbitrators, pay an equal share of the arbitrators' fees. The arbitrators shall have the power to award recovery of all costs (including attorneys' fees, administrative fees, arbitrators' fees and court costs) to the prevailing party. 11.19 WAIVER. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, -46- 48 EXCEPT TO THE EXTENT OF ANY SUCH DAMAGES OCCASIONED BY AN INTENTIONAL BREACH BY ANY PARTY OF ITS OBLIGATIONS UNDER THIS AGREEMENT. EACH OF THE PARTIES HEREBY ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL IN THE NEGOTIATION, EXECUTION AND DELIVERY OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, SUCH WAIVER OF THE RIGHT TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES TO THE EXTENT WAIVED BY THE PARTIES HERETO. [THE REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK] -47- 49 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the day and year first above written. SEARCH CAPITAL GROUP, INC. By:/s/ ROBERT D. IDZI ------------------------------------- Robert D. Idzi, E.V.P. & CFO DEALERS ALLIANCE CREDIT CORP. By:/s/ RICHARD J. UHL ------------------------------------- Chief Executive Officer SEARCH FUNDING IV, INC. By:/s/ ROBERT D. IDZI ------------------------------------- Robert D. Idzi, S.V.P. & CFO -48- 50 SCHEDULES Schedule 1.1 (ii) - DACC Intangible Property List Schedule 1.1 (iii) - DACC Owned and Leased Real Estate Schedule 1.1 (iv) - DACC Furniture, Fixtures and Equipment Schedule 1.2 (a) - Form of Search Convertible Preferred Stock Schedule 1.2 (c) - Form of Search Warrant Schedule 1.3 - DACC May 31, 1996 Balance Sheet, Additional Assumed Specific DACC Liabilities And Senior Bank Debt Amount Schedule 1.4 - List of DACC Excluded Liabilities Not Assumed Schedule 1.7 - Form of Shareholder Agreement Schedule 1.9 - Form of Sub-Debt Agreements Schedule 3 - Representations and Warranties of DACC Schedule 4 - Representations and Warranties of Search and Newco Schedule 10.1 - Form of Escrow Agreement
-49- 51 SCHEDULE 3 and 4 TABLE OF CONTENTS 3. REPRESENTATIONS AND WARRANTIES OF DACC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- -------------------------------------- 3.1 DUE ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- ---------------- 3.2 AUTHORIZATION; VALIDITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- ----------------------- 3.3 NO CONFLICTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -1- ------------ 3.4 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -2- ------------ 3.5 PREDECESSOR STATUS; ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3- ------------------------ 3.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3- -------------------- 3.7 LIABILITIES AND OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -3- --------------------------- 3.8 ACCOUNTS AND NOTES RECEIVABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4- ----------------------------- 3.9 PERMITS AND INTANGIBLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4- ----------------------- 3.10 VALIDITY OF FINANCE CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -4- ----------------------------- 3.11 FINANCE CONTRACTS ASSIGNABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5- ---------------------------- 3.12 LEASES ASSIGNABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -5- ----------------- 3.13 SIGNIFICANT CAR DEALER, MATERIAL CONTRACTS AND COMMITMENTS . . . . . . . . . . . . . . . . . . . . . -5- ---------------------------------------------------------- 3.14 EMPLOYEE BENEFIT PLANS AND LABOR UNIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -6- --------------------------------------- 3.15 CONFORMITY WITH LAW; LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7- ------------------------------- 3.16 RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7- -------- 3.17 ABSENCE OF CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -7- ------------------ 3.18 BANK ACCOUNTS; POWERS OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8- --------------------------------- 3.19 DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8- ---------- 3.20 SEARCH SECURITIES REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -8- --------------------------------- 3.21 COMPLETE COPIES OF MATERIALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9- ---------------------------- 3.22 OFFICES, FTC; WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9- ------------------------ 3.23 ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -9- --------------------- 4. REPRESENTATIONS OF SEARCH AND NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10- ----------------------------------- 4.1 DUE ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10- ---------------- 4.2 AUTHORIZATION; VALIDITY OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10- -------------------------------------- 4.3 NO CONFLICTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -10- ------------ 4.4 SEARCH CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11- --------------------- 4.5 SEARCH SECURITIES DISCLOSURE DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -11- -------------------------------------- 4.6 ABSENCE OF MATERIAL CHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12- --------------------------- 4.7 SEARCH SEC FILINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -12- ------------------ 4.8 RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13- -------- 4.9 SEARCH FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -13- --------------------------- 4.10 OWNERSHIP OF NEWCO; NO PRIOR ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14- --------------------------------------- 4.11 CONFORMITY WITH LAW; LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -14- -------------------------------
52 Note: For purposes of Schedules 3 and 4, the term "Agreement" refers to the Asset Acquisition Agreement, dated as of August __, 1996, by and among Search Capital Group, Inc. ("Search"), Search Funding IV, Inc. ("Newco") and Dealers Alliance Credit Corp. ("DACC"), including all Schedules thereto. SCHEDULE 3 3. REPRESENTATIONS AND WARRANTIES OF DACC: 3.1 DUE ORGANIZATION. DACC is a corporation duly organized, validly existing and is in good standing under the laws of the jurisdiction of its incorporation and is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to own its properties and to carry on its business in the places and in the manner as now conducted except where the failure to be so authorized or qualified would not have a DACC Material Adverse Effect (as defined in Section 6.5 of the Agreement) on the Assets or materially adversely affect the ability of DACC to consummate the Sale. SCHEDULE 3.1 hereto contains a list of all jurisdictions in which DACC is authorized or qualified to do business and DACC is in good standing in each of said jurisdictions. 3.2 AUTHORIZATION; VALIDITY. DACC has all requisite corporate power and authority to enter into and perform its obligations pursuant to the terms of the Agreement and all of the agreements and documents referred to therein (the "Related Documents"). The execution and delivery of the Agreement and the Related Documents to which DACC is a party by DACC and the performance by DACC of its obligations thereunder have been duly and validly authorized by the Board of Directors of DACC and by all necessary corporate action, except that the Sale must still be approved by DACC's stockholders. This Agreement is, and upon execution by DACC the Related Documents will be, legal, valid and binding obligations of DACC enforceable against DACC in accordance with their terms, subject to approval of the Sale by DACC's stockholders, except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 3.3 NO CONFLICTS. The execution, delivery and performance of the Agreement, the consummation of the transactions -1- 53 contemplated thereby, and the fulfillment of the terms thereof will not: (a) conflict with, or result in a breach or violation of, DACC's certificate of incorporation or bylaws; (b) conflict with, or result in a default (or would constitute a default but for any requirement of notice or lapse of time or both) under any document, agreement or other instrument to which DACC is a party, or result in the creation or imposition of any lien, charge or encumbrance on any of DACC's properties pursuant to (i) any law or regulation to which either DACC or any of its property is subject or (ii) any judgment, order or decree to which DACC is bound or any of its property is subject, provided that the holders ("Senior Debt Holders") of the Senior Bank Debt (defined below) and the holders of the Subordinated Debt (defined below) consent to this transaction, except, in each case, as would not, individually or in the aggregate, have a DACC Material Adverse Effect. "Senior Bank Debt" means all debt owed by DACC from time to time under the Amended and Restated Loan and Security Agreement dated October 30, 1995, as amended (as amended, the "Senior Loan Agreement"), between DACC and LaSalle National Bank, as agent for the financial institutions that are parties to said loan agreement from time to time. "Subordinated Debt" means all debt owed by DACC from time to time under the Senior Subordinated Note and Warrant Purchase Agreement dated October 16, 1995, as amended, originally between DACC and R-H Capital Partners, L.P.; and (c) except as would not materially adversely effect Search's ability to service, collect, maintain and/or use the Assets and/or would not constitute a DACC Material Adverse Effect: (i) result in termination or impairment of any material permit, license, franchise, contractual right or other authorization of DACC, but, in each case, only if and to the extent such licenses, permits, franchises, contractual rights and other authorizations are assignable by DACC; or (ii) violate any law, order, judgment, rule, regulation, decree or ordinance to which DACC is subject or by which the Assets are bound. -2- 54 3.4 SUBSIDIARIES. DACC has no subsidiaries and does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity, nor is DACC, directly or indirectly, a participant in any joint venture, partnership or other noncorporate entity. 3.5 PREDECESSOR STATUS; ETC. SCHEDULE 3.5 sets forth a listing of all names of all predecessor companies of DACC during the five-year period immediately preceding the date hereof, including without limitation the names of any entities from whom DACC has acquired material assets. DACC has not at any time during the five year period immediately preceding the date hereof been a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 3.6 FINANCIAL STATEMENTS. (a) DACC acknowledges that Search is relying upon DACC's "Audited Financials" (as defined below) for purposes of satisfying the applicable Securities and Exchange Commission requirements governing Search's proxy materials (a preliminary draft of which was filed by Search with the SEC on July 19, 1996), and upon the consent of DACC's auditors (which such auditors have provided) to use such Audited Financials as part of the aforesaid proxy materials. (b) For the purpose of acknowledging Search's reliance on DACC's Audited Financials as set forth in the foregoing Section 3.6(a), and for no other purposes, DACC affirms that SCHEDULE 3.6 includes true, complete and correct copies of DACC's audited Statement of Financial Condition as of December 31, 1995 (the end of its most recent completed fiscal year) and as of March 31, 1996, and audited Related Statements of Operations, Common Stockholders Deficit and Cash Flows for the year ended December 31, 1995 and for the three (3) months ended March 31, 1996 (collectively, the "Audited Financials"). 3.7 LIABILITIES AND OBLIGATIONS. DACC is not liable for or subject to any "liabilities" which will either materially adversely affect Search's ability to service, collect, maintain and/or use the Assets, constitute a DACC Material Adverse Effect, or cause Search to become obligated for any such liabilities, except for the following: -3- 55 (a) those liabilities reflected on the Current Balance Sheet and not previously paid or discharged; (b) those liabilities arising in the ordinary course of DACC's business consistent with past practice after the Balance Sheet Date; (c) those liabilities incurred since the Balance Sheet Date other than in the ordinary course of business which were approved by Search; and (d) those liabilities identified on Schedules 1.3 and 1.4. For purposes of this Section 3.7, the term "liabilities" shall include without limitation any direct or indirect liability, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost, expense, obligation or responsibility, either accrued, absolute, contingent, mature, unmature or otherwise and whether known or unknown, fixed or unfixed, liquidated or unliquidated, secured or unsecured. 3.8 ACCOUNTS AND NOTES RECEIVABLE. DACC will deliver to Search at Closing DACC's books and records (as described in Section 1.1(a)(viii) of the Agreement), which contain the accounts and notes receivable of DACC as of June 30, 1996 (including without limitation receivables from and advances to employees, DAAC's stockholders and others), and which include all aging of all accounts and notes receivable as of June 30, 1996 showing amounts due in 30-day aging categories. 3.9 PERMITS AND INTANGIBLES. Except as would not have a DACC Material Adverse Effect, DACC owns or holds all licenses, franchises, permits and other governmental authorizations in each jurisdiction identified above in Section 3.1 necessary for DACC to operate the Assets (the "Material Permits"). DACC has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in the Material Permits is not in violation of any of the foregoing except where such noncompliance or violation would not have a DACC Material Adverse Effect. 3.10 VALIDITY OF FINANCE CONTRACTS. Except for the exceptions noted on SCHEDULE 3.10, with respect to each "Finance Contract" (as defined below in Section 3.10): (i) such Finance Contract does not contravene any applicable usury laws, rules or regulations; (ii) DACC has not at any time violated any other laws, rules or regulations with respect thereto, except as -4- 56 would not have a DACC Material Adverse Effect or as would not materially adversely affect Search's ability to service, collect, maintain and/or use the Assets; (iii) DACC has not pledged, transferred or encumbered the Finance Contract or Related Security, except to the Senior Debt Holders; (iv) to DACC's knowledge, the Finance Contract was validly assigned to DACC by the assignor thereof and, except as noted below in this Section 3.10, DACC is in physical possession of such Finance Contract; (v) to DACC's knowledge, there are no deferred sales taxes due and owing on or with respect to the Finance Contract; and (vi) such Finance Contract was not procured by fraud on the part of DACC. DACC further represents that (y) DACC has physical possession of substantially all, but not necessarily all, of the Finance Contracts; and (z) except for DACC's obligations under its agreement(s) with "WYNN'S" and/or any affiliate of WYNN'S, DACC has not incurred any liability or obligation under any extended service or warranty agreement regarding any Car Dealer or obligor. The term "Finance Contracts" shall mean all consumer finance contracts being sold by DACC to Search and the term "Finance Contract" shall mean any one of such Finance Contracts. The term "Related Security" means all collateral and security agreements for the Finance Contracts and all tangible or intangible collateral therefor, including but not limited to all physical collateral therefor (i.e. all motor vehicles) and the proceeds thereof, and all guaranties, indemnities, warranties, insurance proceeds and premium refunds and other property of whatever character at any time held as security for such Finance Contract. 3.11 FINANCE CONTRACTS ASSIGNABLE. To the best of DACC's knowledge, all of DACC's Finance Contracts and all collateral for said Finance Contracts, including but not limited to recourse rights against Car Dealers, guaranties, insurance rights and lien rights are fully assignable to Newco without the consent of any other person, and all such Finance Contracts and the collateral therefor are enforceable by Newco to the same extent they would have been enforceable by DACC. 3.12 LEASES ASSIGNABLE. Except as set forth in SCHEDULE 3.12, DACC represents and warrants all leases of real property and personal property being assigned are assignable without the lessor's consent. DACC agrees to use reasonable efforts to obtain the consent to the assignment to Newco of the leases listed on SCHEDULE 3.12, and will provide Newco with a copy of each lessor's written consent obtained with respect to the assignment of said leases. Search agrees to fully cooperate with DACC in obtaining such consents. Newco is not liable under and is not assuming any leases listed on SCHEDULE 3.12, -5- 57 except for those leases that the lessor has consented in writing to the assignment thereof to Newco. 3.13 SIGNIFICANT CAR DEALER, MATERIAL CONTRACTS AND COMMITMENTS. SCHEDULE 3.13, which is attached hereto, sets forth a substantially complete list of all vehicle dealers ("Car Dealers") from whom DACC purchased Finance Contracts between January 1, 1996 and June 30, 1996 and the aggregate monthly amount purchased by DACC from such Car Dealers. SCHEDULE 3.13 also contains an accurate list of all material contracts, commitments, leases, instruments, agreements, licenses or permits to which DACC is a party or by which it or its properties are bound (including without limitation contracts with significant car dealers, joint venture or partnership agreements, real estate leases, equipment leases, software licenses, contracts with any labor organizations, loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements) (i) as of the Balance Sheet Date and (ii) entered into since the Balance Sheet Date (collectively, the "Material Contracts"). DACC will deliver to Search at Closing as part of DACC's books and records, true, complete and correct copies of the Material Contracts. Except to the extent set forth on SCHEDULE 3.13 and except as would not have a DACC Material Adverse Effect or materially adversely effect Search's ability to service, collect, maintain and/or use the Assets, (y) DACC has complied with all of its commitments and obligations and is not in default under any of the Material Contracts and no notice of default has been received with respect to any thereof and (z) there are no Material Contracts that were not negotiated at arm's length with third parties not affiliated with DACC or any officer, director or stockholder of DACC. Each Material Contract is valid and binding on DACC and is in full force and effect and to the knowledge of DACC is not subject to any material default thereunder by any party obligated to DACC pursuant thereto. DACC has obtained, or will use its reasonable efforts to obtain prior to the Closing, all necessary consents, waivers and approvals of parties to any Material Contracts as are required in connection with any of the transactions contemplated hereby, or as are required of any governmental agency or other third party advisable in order that any such Material Contract remain in effect without material modification after the Sale and without giving rise to any right to termination, cancellation or acceleration or loss of any right or benefit. Search agrees to fully cooperate with DACC in obtaining such consents. All DACC third party consents are listed on SCHEDULE 3.13. -6- 58 3.14 EMPLOYEE BENEFIT PLANS AND LABOR UNIONS. (a) BENEFIT PLANS. Schedule 3.14 sets forth a list of all DACC's employee benefit plans. DACC shall maintain the availability of COBRA coverage through its health insurance plan to the extent required by law (provided that Search is willing to administer the same with respect to all DACC employees hired by Search post-closing). (b) LABOR UNION. DACC is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union. No employee of DACC is represented by any labor union or covered by any collective bargaining agreement and, to the knowledge of DACC, no campaign to establish such representation is in progress. There is no pending or, to the best knowledge of DACC, threatened labor dispute involving DACC and any group of its employees nor has DACC experienced any labor interruptions over the past three years and DACC considers its relationship with its employees to be good. 3.15 CONFORMITY WITH LAW; LITIGATION. DACC has complied in all material respects with, is not in violation in any material respect of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to the Assets which would constitute a DACC Material Adverse Effect, or which would materially adversely effect Search's ability to service, collect, maintain and/or use the Assets. Except as set forth in Schedule 3.15 there are no claims, actions, suits or proceedings, pending or, to the knowledge of DACC, threatened, against or affecting DACC at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it which, if adversely determined, would have a DACC Material Adverse Effect. There are no judgments, orders, injunctions, decrees, stipulations or awards (whether rendered by a Court or administrative agency or by arbitration) against DACC or against any of the Assets which would have a DACC Material Adverse Effect. The terms "law" and "regulation" as used in this Agreement include all state and federal laws and regulations applicable to DACC's business, and such laws and regulations include but are not limited to the federal Fair Debt Collections Practices Act, the federal Truth in Lending act, the Federal Trade Commission rule dealing with preservation of consumers' claims -7- 59 and defenses, the Fair Credit Reporting Act, the uniform commercial code, applicable state usury laws, laws regulating financing of motor vehicles, and laws regulating consumer finance companies. 3.16 RESERVED 3.17 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as contemplated herein or as set forth on SCHEDULE 3.17 there has not been: (a) any change that by itself or together with other changes, has had a DACC Material Adverse Effect; (b) any cancellation, or agreement to cancel, any Indebtedness (as defined below) or other obligation owing to DACC, provided that DACC may negotiate and adjust claims in the course of good faith disputes with account debtors and car dealers in a manner consistent with past practice; (c) any entry into, amendment of, relinquishment, termination or nonrenewal by DACC of any contract, lease transaction, commitment or other right or obligation requiring aggregate payments by DACC in excess of $50,000, except as set forth on Schedules 3.13 and/or 1.1(b)(i) and except for Finance Contracts acquired in the ordinary course of business; nor has DACC entered into any agreement, contract or commitment with any Car Dealer requiring the purchase of Finance Contracts in bulk. (d) any loan by DACC to any person or entity except for Finance Contracts acquired in the ordinary course of business, incurring by DACC of any Indebtedness, guaranteeing by DACC of any Indebtedness, issuance or sale of any debt securities of DACC or guaranteeing of any debt securities of others; (e) any commencement or notice or, to the knowledge of DACC, threat of commencement of any material lawsuit or proceeding against or investigation of DACC or any of the assets; or (f) any negotiation or agreement by DACC or any officer or employee thereof to do any of the things described in the preceding clauses (a) through (e) (other than negotiations with Search and its representatives regarding the transactions contemplated by this Agreement). -8- 60 For purposes of this Section 3.17, "Indebtedness" means (i) all indebtedness of DACC, whether or not contingent, for borrowed money, (ii) all obligations of DACC evidenced by notes, bonds, debentures or other similar instruments, (iii) all obligations of DACC as lessee under leases that have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (iv) all obligations, contingent or otherwise, of DACC under acceptance, letter of credit or similar facilities, (v) all Indebtedness of others referred to in clauses (i) through (iv) above guaranteed directly or indirectly in any manner by DACC, or in effect guaranteed directly or indirectly by DACC through any agreement or arrangement, and (vi) all Indebtedness referred to in clauses (a) through (d) above secured by any lien on property owned by DACC, even though DACC has not assumed or become liable for the payment of such Indebtedness. 3.18 BANK ACCOUNTS; POWERS OF ATTORNEY. SCHEDULE 3.18 sets forth an accurate list, as of the date of this Agreement, of: (i) the name and address of each financial institution in which DACC has any account or safe deposit box; (ii)the names in which the accounts or boxes are held; (iii) the type of account; and (iv) the name of each person authorized to draw thereon or have access thereto. 3.19 DISCLOSURE. Reserved. 3.20 SEARCH SECURITIES REPRESENTATIONS. DACC (a) has such knowledge, sophistication and experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Search Securities; (b) fully understands the nature, scope and duration of the limitations on transfer contained in the Shareholder Agreement: (c) understands that the Search Securities are not registered and that their resale is restricted by law; and (d) can bear the economic risk of any investment in the Search Securities. DACC has had an adequate opportunity to ask questions and receive answers (and has asked such questions and received answers to its satisfaction) from the officers of Search concerning the business, operations and financial condition of Search and/or the Search Securities Disclosure Documents (as defined below in Section 4.5). DACC has no contract, undertaking, agreement or arrangement, written or oral, with any other person to sell, transfer or grant participations in any shares of Search Securities to be acquired by DACC in the Sale and is not acquiring the Search Securities with a view to their distribution. In addition, DACC understands the nature of the restrictions imposed by Rules 145 and 144 of the rules and -9- 61 regulations of the Securities and Exchange Commission under the Securities Act of 1933, as amended, as well as the restrictions on resale of the Search Securities imposed by the Shareholder Agreement to which DACC is a party. 3.21 COMPLETE COPIES OF MATERIALS. DACC has delivered, and/or will deliver at Closing, to Search and Newco true and complete copies of each agreement, contract, commitment or other document (or summaries of same) that is referred to in DACC Schedules or that has been requested by Search and Newco or its counsel. 3.22 OFFICES, FTC; WARRANTIES. Except as would not have a DACC Material Adverse Effect, DACC has at all times that it has been in business operated each of its offices as a licensed location in any jurisdiction requiring such license in conformity with all such licensing and other laws applicable to the purchase of Finance Contracts, including Motor Vehicle Retail Installment Sales Acts, Sales Finance Agency Acts, or any other law regulating the business of acquiring Finance Contracts from DACC. 3.23 ENVIRONMENTAL MATTERS. To DACC's knowledge and except as would not have a DACC Material Adverse Effect: (a) DACC is in full compliance with all federal, state and local environmental laws, rules, regulations and ordinances regarding its business operations and (b) DACC has not engaged in any activities that could create claims against DACC under federal or state environmental laws. SCHEDULE 4 4. REPRESENTATIONS OF SEARCH AND NEWCO 4.1 DUE ORGANIZATION. Search is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and Newco is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and each of Search and Newco is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective businesses in the places and in the manner as now conducted except for where the failure to be so authorized or qualified would not have a material adverse effect on the business, operations, affairs, prospects, properties, assets, profits, or condition (financial or otherwise) of Search and its subsidiaries, taken as a whole (a "Search Material Adverse Effect"). -10- 62 4.2 AUTHORIZATION; VALIDITY OF OBLIGATIONS. Each of Search and Newco has the full legal right, power and corporate authority to enter into and perform its obligations pursuant to the terms of the Agreement and the Related Documents. The execution and delivery of this Agreement and the Related Documents by Search and Newco and the performance by each of Search and Newco of its obligations thereunder have been duly and validly authorized by the respective Boards of Directors of Search and Newco and by all necessary corporate action. The Agreement is, and upon execution by Search and Newco the Related Documents will be, legal, valid and binding obligations of each of Search and Newco enforceable in accordance with their terms except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 4.3 NO CONFLICTS. The execution, delivery and performance of the Agreement, the consummation of the transactions contemplated thereby and the fulfillment of the terms thereof will not: (a) conflict with, or result in a breach or violation of the Certificate of Incorporation and the Bylaws, each as amended, of Search and Newco. (b) conflict with, or result in a default (or would constitute a default but for any requirement of notice or lapse of time or both) under any document, agreement or other instrument to which either Search or Newco is a party, or result in the creation or imposition of any lien, charge or encumbrance on any of Search's or Newco's properties pursuant to (i) any law or regulation to which either Search or Newco or any of their respective property is subject, or (ii) any judgment, order or decree to which Search or Newco is bound or any of their respective property is subject, except, in each case, as would not individually or in the aggregate, have a Search Material Adverse Effect. (c) result in termination or any impairment of any material permit, license, franchise, contractual right or other authorization of Search or Newco ("Search Third Party Consents"); or -11- 63 (d) violate any law, order, judgement, rule or regulation to which Search or Newco is subject or by which Search or Newco is bound. 4.4 SEARCH CAPITALIZATION. The authorized capital stock of Search consists of 130,000,000 shares of Common Stock and 60,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"), of which 400,000 shares have been designated as the 12% Senior Convertible Preferred Stock (the "12% Stock"), 55,000,000 shares have been designated as the 9/7 Noteholder Convertible Preferred and 4,000,000 shares have been designated as the Convertible Stock. As of the date of this Agreement, 26,189,094 shares of Common Stock were issued and outstanding (excluding treasury shares), 3,026,389 shares of Common Stock were held in treasury, 11,462,678 shares of Common Stock were reserved for issuance upon exercise of options and warrants issued by Search. In addition, as of the date of this Agreement 400,000 shares of 12% Stock, 16,983,143 shares of 9/7 Noteholder Convertible Preferred and no shares of Convertible Stock were issued and outstanding. All of the outstanding shares of capital stock of Search have been duly authorized and validly issued and are fully paid and nonassessable and were not issued in violation of any preemptive or other rights. When issued to DACC and the Subordinated Debt Holders pursuant to the terms of this Agreement, the Convertible Stock and the Common Stock to be issued by Search pursuant to this Agreement will be duly authorized and validly issued and fully paid and nonassessable and not issued in violation of any preemptive or other rights. When issued to DACC and the Subordinated Debt Holders pursuant to the terms of this Agreement, the Search Securities shall be free and clear of all Liens and shall be issued and delivered in compliance with all applicable federal, state and local laws, rules and regulations. When issued to DACC, the Warrants will be duly authorized and validly issued and will be legal, valid and binding obligations of Search, enforceable against Search in accordance with their terms. 4.5 SEARCH SECURITIES DISCLOSURE DOCUMENTS. As promptly as possible after the date of the Agreement, Search will provide to DACC the following: (a) a copy of Search's SEC Form 10-K dated July 2, 1996, including all supplements or amendments thereto, a copy of all SEC 10-Q's and 8-K's filed by Search since March 31, 1996, a copy of all proxy statements relating to Search's meetings of stockholders (whether annual or special) held -12- 64 since January 1, 1996 and a copy of all other forms, reports and other registration statements filed by Search with the Commission since January 1, 1996 (the forms, reports and other documents referred to in this clauses (a) being referred to, collectively, as the "SEC Reports"). (b) a copy of Search's bankruptcy Plan of Reorganization, including the Plan's disclosure documents and all amendments and supplements thereto, and all other documents and information related thereto; and (c) such other documents and information as are deemed relevant and material in connection with the issuance of the Search Securities to DACC (collectively the "Search Disclosure Documents"). In addition, Search shall make available to DACC those officers or representatives of Search as are necessary to respond to any questions DACC may reasonably have regarding Search and the Search Securities. 4.6 ABSENCE OF MATERIAL CHANGES. Since March 31, 1996, except as contemplated by this Agreement, as disclosed in any SEC Report filed since March 31, 1996 and prior to the date of this Agreement or as set forth in Schedule 4.6, Search and its subsidiaries have conducted their businesses in accordance with the description in Search's Form 10-K and, since March 31, 1996, there has not been: (a) any change that by itself or together with other changes has had a Search Material Adverse Effect; (b) any damage, destruction or loss (whether or not covered by insurance) having a Search Material Adverse Effect; (c) any material change by Search in its accounting methods, principles or practices; or (d) any entry by Search or any of its subsidiaries into any commitment or transaction which has a Search Material Adverse Effect. 4.7 SEARCH SEC FILINGS. Search has filed with the Commission all required filings on a timely basis since the date of its Plan of Reorganization and such filings as well as the SEC -13- 65 Reports are, (i) to the best of Search's knowledge, true, accurate and complete, and were prepared in accordance with the requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations thereunder, and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Search shall file with the Commission a Form 8-K regarding the subject matter of this transaction within the time limits specified by the Commission after Closing has occurred. 4.8 RESERVED. 4.9 SEARCH FINANCIAL STATEMENTS. (a) SCHEDULE 4.9 includes (i) true, complete and correct copies of Search's audited consolidated financial statements as of March 31, 1996 (the "Audited Financials") and (ii) true, complete and correct copies of Search's unaudited interim consolidated financial statements as of for the period ending June 30, 1996 (the "Interim Financials;" and together with the Audited Financials, the "Search Financial Statements"). The Search Financial Statements have been prepared in accordance with GAAP, subject, in the case of the Interim Financials to normal year-end audit adjustments, which individually or in the aggregate will not be material, and to the omission of footnote information. The Search Financial Statements present fairly (i) the consolidated financial condition of Search as of the date indicated thereon, and (ii) the results of its consolidated operations for the periods indicated thereon. Since the date of the Interim Financials there have been no material changes in Search's accounting policies. In addition, Search will deliver to DACC the most recent available interim unaudited or audited financial statements (or portions thereof) as soon as the same have been prepared for all time periods after the date of the Interim Financials up to and including the month of July, 1996. (b) Except as disclosed in the SEC Reports filed prior to the date of this Agreement, as set forth in the Search Financial Statements or as set forth in Schedule 4.9, since March 31, 1996, neither Search nor any of its -14- 66 subsidiaries has incurred any liability or obligation of any nature which would be required to be reflected on a balance sheet, or in the notes thereto, prepared in accordance with generally accepted accounting principles, except for liabilities and obligations incurred in the ordinary course of business in accordance with the description contained in Search's Form 10-K or liabilities which would not, individually or in the aggregate, have a Search Material Adverse Effect. 4.10 OWNERSHIP OF NEWCO; NO PRIOR ACTIVITIES. (a) Newco was formed solely for the purpose of engaging in the Sale and the other transactions contemplated by the Agreement. (b) As of the date of the Agreement and as of the Closing, all of the outstanding capital stock of Newco is and will be owned directly by Search. As of the Closing, there will be no options, warrants or other rights (including registration rights), agreements, arrangements or commitments to which Newco is a party of any character relating to the issued or unissued capital stock of, or other equity interests in, Newco, or obligating Newco to grant, issue or sell any shares of the capital stock of, or other equity interests in, Newco, by sale, lease, license or otherwise. There are no obligations, contingent or otherwise, of Newco to repurchase, redeem or otherwise acquire any shares of the capital stock of Newco. (c) As of the date hereof and the Closing, except for the obligations or liabilities incurred in connection with its incorporation or organization and the Sale and other transactions contemplated hereby, Newco has not and will not have incurred, directly or indirectly, through any subsidiary or affiliate, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. 4.11 CONFORMITY WITH LAW; LITIGATION. Search has complied in all material respects with, is not in violation in any material respect of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to Search, any of its subsidiaries or any of their assets or properties which would constitute a -15- 67 Search Material Adverse Effect, or which would materially adversely affect Search's ability to perform its obligations under the Agreement. Except as set forth in Schedule 4.11 there are no claims, actions, suits or proceedings, pending or, to the knowledge of Search, threatened, against or affecting Search at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it which, if adversely determined, would have a Search Material Adverse Effect. There are no judgments, orders, injunctions, decrees, stipulations or awards (whether rendered by a Court or administrative agency or by arbitration) against Search, any of its subsidiaries or any of their assets or properties which would have a Search Material Adverse Effect. -16- EX-2.2 3 SUB-DEBT ACQUISITION AGREEMENT 1 EXHIBIT 2.2 SUB-DEBT ACQUISITION AGREEMENT BY AND AMONG SEARCH CAPITAL GROUP, INC. SEARCH FUNDING IV, INC. R-H CAPITAL PARTNERS, L.P. AND KELLETT INVESTMENT CORPORATION dated as of August 2, 1996 2 SUB-DEBT ACQUISITION AGREEMENT THIS SUB-DEBT ACQUISITION AGREEMENT (the "Sub-Debt Acquisition Agreement") is made as of August 2, 1996, by and among (i) Search Capital Group, Inc., a Delaware corporation ("Search"); (ii) R-H Capital Partners, L.P. ("R-H"), a Georgia limited partnership; (iii) Kellett Investment Corporation ("Kellett"), a Georgia corporation (hereinafter R-H and Kellett may be individually or collectively referred to as the "Subordinated Debt Holders" or "SDH"); and (iv) Search Funding IV, Inc., a Texas corporation and a wholly-owned subsidiary of Search ("Newco"). BACKGROUND A. DACC is an Atlanta based specialized indirect consumer finance company engaged in financing the purchase of used automobiles by purchasing installment sales contracts from independent use automobile dealers; and B. DACC and Search have reached an Asset Acquisition Agreement dated as of August 2, 1996 (the "DACC Acquisition Agreement") regarding the sale (the "DACC Sale") by DACC of its assets (the "DACC Assets") to Newco and the assumption by Newco of certain specified obligations of DACC; and C. Each SDH and Search have entered into this Sub-Debt Acquisition Agreement regarding the sale by each SDH of certain assets to Newco. D. Unless otherwise expressly stated in this Sub-Debt Acquisition Agreement, all capitalized terms shall have the same definition as given in the DACC Acquisition Agreement and all references to schedules shall mean and refer to the schedules defined or referenced in the DACC Acquisition Agreement. NOW, THEREFORE, in consideration of the foregoing premises, which are incorporated herein by reference, and of -1- 3 the representations, warranties, covenants and agreements herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged by all parties, the parties hereto, intending to be legally bound, agree as follows: 1. Sale of Assets 1.1 Assets Purchased. Subject to the terms and conditions set forth in this Sub-Debt Acquisition Agreement, at the Closing each SDH shall sell, convey, assign, transfer and deliver to Newco, and Newco shall purchase from each SDH (both transactions are individually and collectively referred to as the "Sub-Debt Sale"), all of the assets of each SDH listed below in Section 1.1(a)-(c) below (collectively the "Sub-Debt Assets"), free and clear of all claims, liens and encumbrances of any kind (collectively "Liens"): (a) the Subordinated Debt (as defined in Section 3.3 of SUB-DEBT SCHEDULE 3). (b) The Warrants (the word "Warrants" is defined in the Senior Subordinated Note and Warrant Purchase Agreement dated as of 10/16/95 among DACC and R-H Capital Partners, L.P., as amended on December 21, 1995 ("Previous Agreement"), and is incorporated herein by reference), together with all other rights each SDH possesses regarding DACC. (c) Subject to the provisions of Section 1.10 below, all "DACC Claims" (as defined below) held jointly or severally by the SDH. "DACC Claims" means all liabilities, losses, claims (whether based upon violation of securities laws or otherwise), damages, punitive damages, causes of actions, lawsuits, administrative proceedings (including informal proceedings), investigations, audits, demands, assessments, adjustments, judgments, settlement payments, deficiencies, penalties, fines, interest -2- 4 (including interest from the date of such damages) and costs and expenses (including without limitation, reasonable attorneys' fees and disbursements of every kind, nature and description) held jointly or severally by the SDH against DACC, or any officer, employee, agent, representative, shareholder or director of DACC, whether known or unknown, contingent or fixed, secured or unsecured. 1.2 Purchase Price. The aggregate purchase price (the "Purchase Price") to be paid to the SDH for the purchase of the Sub-Debt Assets shall be the issuance by Search of the Search securities listed below (the "Search Sub- Debt Securities"): (a) 1,787,842 shares of Search 9%/7% Convertible Preferred Series B. The Indemnity Shares (893,921 of such shares) shall be placed into escrow on behalf of the Subordinated Debt Holders pursuant to the escrow agreement among Dealers, Search, the Escrow Agent and the Subordinated Debt Holders ("Escrow Agreement"), which is attached as SCHEDULE 10.1 to the DACC Acquisition Agreement, and the remaining 893,921 shares shall be distributed as follows: (i) a certificate representing 614,571 shares of the Non-Indemnity Shares shall be delivered to R-H (which shall be subject to the Sub-Debt Shareholders Agreement) and (ii) a certificate representing 279,350 shares of the Non-Indemnity Shares shall be distributed to Kellett (which shall be subject to the Sub-Debt Shareholders Agreement). (b) Each SDH hereby acknowledges that the number of shares of Search Sub-Debt Securities to be issued to such SDH has been based upon a value of Two Dollars Fifty-Four Cents ($2.54) per share for the Convertible Stock. 1.3 Reserved -3- 5 1.4 No Other Liabilities Assumed. Except as expressly provided in this Sub-Debt Acquisition Agreement, neither Newco nor Search shall assume or be liable for in any manner, any and all other liabilities, commitments, claims or obligations of either SDH, whether known or unknown, contingent or fixed, secured or unsecured. 1.5 Payment. At the Closing, (a) Search shall deliver to the Escrow Agent (defined in Section 10.1 below) pursuant to this Sub-Debt Acquisition Agreement two certificates representing the Indemnity Shares (893,921 shares of the Convertible Stock required to be issued on behalf of the Subordinated Debt Holders and held by the Escrow Agent) so that such shares may be used to satisfy the indemnification obligations of SDH pursuant to the terms of this Sub-Debt Acquisition Agreement, if necessary; and (b) Search shall deliver to R-H a certificate representing 614,571 shares of the Non-Indemnity Shares (which shall be subject to the Sub-Debt Shareholders Agreement); and (c) Search shall deliver to Kellett a certificate representing 279,350 shares of the Non-Indemnity Shares (which shall be subject to the Sub-Debt Shareholders Agreement). All of the Search Sub-Debt Securities shall be validly issued, fully-paid and nonassessable and free and clear of all Liens, except as provided for in this Sub-Debt Acquisition Agreement and the Escrow Agreement. 1.6 Allocation. At the Closing, Newco and each SDH shall execute a joint certificate allocating the Purchase Price among the Sub-Debt Assets. Newco and each SDH acknowledge that such allocation shall have been arrived at by arms length negotiation, and Newco and each SDH hereby agree, subject to the requirements of Section 1060 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder, to report consistently, in any tax return completed or filed by them, such sale pursuant to this Sub-Debt Acquisition Agreement in accordance with said allocation. 1.7 Sub-Debt Shareholders Agreement. At Closing, each SDH and Search shall execute the Sub-Debt Shareholders -4- 6 Agreement (the "Sub-Debt Shareholders Agreement") in the form attached hereto as SUB-DEBT SCHEDULE 1.7. 1.8 Additional Provisions. (a) All dividends and other distributions made after the Closing on the Search Sub-Debt Securities held by the Escrow Agent shall be made to the Escrow Agent on behalf of the beneficial owners of such Search Sub-Debt Securities and held in Escrow until the First Expiration Date or Final Expiration Date, as the case may be. All dividends and other distributions made after the Closing on the Non-Indemnity Shares shall be made directly to the beneficial owners of such Securities. (b) Search shall pay a minimum of three consecutive quarterly cash dividends on the Convertible Stock contemporaneously with Search's dividend payments with respect to the Convertible Stock issued on behalf of DACC pursuant to the DACC Acquisition Agreement. The first such quarter's dividends shall begin to accrue on the date the Convertible Stock is issued by Search, which each SDH acknowledges will entitle such SDH to receive only a partial quarter's dividend payment. In addition, at the same time as Search pays its first of the aforesaid quarterly dividend payments, Search shall also pay to each SDH an amount of cash equal to the difference between a full quarter's dividend payment with respect to such Convertible Stock and the partial dividend amount paid pursuant to the immediately preceding sentence. (c) As promptly as possible after Closing, Search shall request, and shall use best efforts to obtain, Search shareholder approval for the conversion of the Convertible Stock into the same class of convertible preferred shares as issued to noteholders under the Chapter 11 Bankruptcy Code plan of reorganization -5- 7 ("Plan") for which Search was a co-proponent (the "9/7 Noteholder Convertible Preferred"). 1.9 Subject to Sub-Debt Shareholders Agreement. The Indemnity Shares and the Non-Indemnity Shares shall be subject to the Sub-Debt Shareholders Agreement and the terms of this Sub-Debt Acquisition Agreement. 1.10 Excess Amount. In the event the SDH shall pay more than its portion of the Shared Claims pursuant to the provisions of Section 10.3 through Indemnity Shares and/or cash attributable thereto (the amount paid in excess of SDH's portion of the Shared Claims is hereinafter referred to as the "Excess Amount"), the parties agree that the DACC Claims shall exclude the rights of the SDH to receive DACC Escrow Shares and/or cash pursuant to Section 7 of the Escrow Agreement. The parties agree that no shareholder, employee, director, officer, representative or agent of DACC shall have personal liability whatsoever with respect to the Excess Amount. 2. Closing. 2.1 Date and Location. The Closing shall take place contemporaneously with the Closing specified in the DACC Acquisition Agreement, provided that all conditions to Closing shall have been satisfied or waived. The parties intend to close by exchanging signed counterparts of all necessary documents. 2.2 Documents to be Delivered at Closing. At the Closing the following documents, in a form reasonably satisfactory to Search and each SDH, shall be delivered and executed by the parties as follows: (a) By Each SDH. (i) To Newco Assignments conveying to Newco all rights of the SDH in the Warrants. -6- 8 (ii) To Newco Irrevocable Note Powers conveying to Newco all rights of the SDH in the Subordinated Debt. (iii) To Newco a Bill of Sale and Assignment conveying to Newco title to the Sub-Debt Assets referenced in Section 1.1(c) above being purchased from such SDH, free and clear of all Liens, and incorporating by reference the representations and warranties contained in SUB-DEBT SCHEDULE 3. (iv) To Newco and Search a Sub-Debt Closing Certificate confirming that the representations and warranties in SUB-DEBT SCHEDULE 3 of this Sub-Debt Acquisition Agreement are true and correct as of the Closing, with corrections to any representations that have changed since the date of this Sub-Debt Acquisition Agreement, provided that if any change is made based upon the occurrence of a Sub-Debt Material Adverse Effect (as defined in Section 6.5 below), Search shall have the right to terminate this Sub-Debt Acquisition Agreement pursuant to Section 11.2 below; provided, further, that if Search and Newco shall consummate the transactions contemplated hereby, Search and Newco shall automatically be deemed to have waived, to the extent set forth in the Sub-Debt Closing Certificate, any breach or violation of the representations and warranties of the SDH contained in this Sub-Debt Acquisition Agreement. (v) To Newco such other documents, including instruments of sale, transfer and assignment, as is reasonably believed necessary by Search to enable Newco immediately after Closing to use, operate, collect, sell, and assign the Sub-Debt Assets. (vi) To the extent any consents or approvals shall be reasonably requested by Search in connection with any of the transactions herein contemplated, or to the effective transfer or assignment of any of the Sub- -7- 9 Debt Assets being purchased by Search from each SDH, each SDH shall deliver to Search copies of all such consents or approvals so requested by Search. (vii) Possession of all Sub-Debt Assets shall be delivered to Newco within one business day of Closing. (viii) To Search triplicates of the Sub-Debt Shareholders Agreement, the Escrow Agreement, and all related documents which have been executed by each SDH. (ix) To Search a Sub-Debt Certificate certifying that no Sub-Debt Material Adverse Effect has been experienced regarding the Sub-Debt Assets between the date of this Sub-Debt Acquisition Agreement and Closing. (x) To the parties so specified, all other documents reasonably requested in order to consummate the transactions contemplated hereby. (xi) Each SDH shall have executed this Sub-Debt Acquisition Agreement and Search shall have verified compliance by each SDH with all of the material terms and conditions of this Sub-Debt Acquisition Agreement. (xii) To Search, each SDH shall have executed a securities "big boy" letter in the form reasonably satisfactory to Search. (b) By Search/Newco (i) To the Escrow Agent the Indemnity Shares to be held by the Escrow Agent for the benefit of the SDH. -8- 10 (ii) To the SDH, the Non-Indemnity Shares (in the amounts specified in Section 1.5). (iii) To each SDH Sub-Debt Closing Certificates for Search and Newco confirming that the representations in SUB-DEBT SCHEDULE 4 of this Sub-Debt Acquisition Agreement are true and correct as of the Closing, with corrections to any representations that have changed since the date of this Sub- Debt Acquisition Agreement, provided, that if a SDH shall consummate the transactions contemplated hereby, such SDH shall automatically be deemed to have waived, to the extent set forth in such Sub-Debt Closing Certificate, any breach or violation of the representations and warranties of Search and Newco contained in this Sub-Debt Acquisition Agreement. (iv) To each SDH a Sub-Debt Certificate certifying that to the best of Search's information, knowledge and belief no Search Sub-Debt Material Adverse Effect (as defined in Section 7.2 below) has been experienced by Search since the 10-K Filing Date. (v) To each SDH triplicates of the Sub-Debt Shareholders Agreement, the Escrow Agreement, and all related documents which have been executed by Search. (vi) To the parties so specified, all other documents reasonably requested in order to consummate the transactions contemplated hereby. 3. REPRESENTATIONS AND WARRANTIES OF EACH SDH To induce Search and Newco to enter into this Sub-Debt Acquisition Agreement and consummate the transactions contemplated hereby, each SDH represents and warrants to Search and Newco as set forth in SUB-DEBT SCHEDULE 3 attached hereto (with respect to that particular SDH and not the other SDH), which representations and warranties are incorporated in this -9- 11 Section 3 by reference and are deemed to be part of this Sub-Debt Acquisition Agreement. 4. REPRESENTATIONS OF SEARCH AND NEWCO To induce each SDH to enter into this Sub-Debt Acquisition Agreement and consummate the transactions contemplated hereby, each of Search and Newco represents and warrants to each SDH as set forth in SUB-DEBT SCHEDULE 4 attached hereto, which representations and warranties are incorporated in this Section 4 by reference and are deemed to be part of this Sub-Debt Acquisition Agreement. 5. COVENANTS 5.1 Access to Information; Confidentiality. (a) Between the date of this Sub-Debt Acquisition Agreement and the Closing, each SDH will afford to the officers and authorized representatives of Search and Newco access to all of the information, documents, books and records of such SDH relevant to the Sub-Debt Assets, and such other information relevant to the Sub-Debt Assets as Search may reasonably request. Each SDH will cooperate with Search and Newco and their representatives in the preparation of any documents or other material which may be required in connection with this Sub-Debt Acquisition Agreement. Each SDH's representations, warranties, covenants and obligations as set forth in this Sub-Debt Acquisition Agreement (y) shall survive Search's inquiry and (z) shall not be affected or modified in any manner whatsoever by any inquiry conducted by Search. In addition, Search's inquiry shall not be a defense by either SDH to any breach of any of such SDH's representations, warranties, covenants or obligations. (b) Each SDH agrees that it will not disclose any confidential or proprietary information which it obtains or acquires regarding Search or Newco to any person, firm, -10- 12 corporation, association or other entity for any purpose or reason whatsoever, except to authorized employees or other authorized representatives of such SDH and to counsel and other advisers, provided that such advisors (other than counsel) agree to the confidentiality provisions of this Section 5.1(b), subject to Section 5.1(d) below. (c) Each of Search and Newco agree that prior to Closing they will not disclose any confidential or proprietary information which either may obtain or acquire regarding each SDH to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except to authorized representatives of Search, Newco and DACC and to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 5.1(c), subject to Section 5.1(d) below. (d) The confidentiality obligations of a party hereto shall be terminated regarding any confidential or proprietary information obtained or acquired if (i) such information becomes known to the public generally through no fault of the receiving party, (ii) disclosure is required by law or the order of any governmental authority under color of law, or (iii) the disclosing party receives the written opinion of its counsel that such disclosure is required in connection with the defense of a lawsuit against the disclosing party, provided, that prior to disclosing any information pursuant to clause (i), (ii) or (iii) above, such party shall, if possible, give prior written notice thereof to the other party and provide the other party with the opportunity to contest such disclosure, and disclose only such portion of such confidential information which is legally required to be disclosed and exercise its best efforts to obtain assurances that confidential treatment will be accorded such information. -11- 13 5.2 Conduct of Business Pending Closing. Between May 31, 1996 and the Closing, each SDH will: (a) perform in all material respects its obligations under agreements relating to or affecting the Sub-Debt Assets; (b) maintain compliance in all material respects with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities to the extent its failure to do so would have a Sub-Debt Material Adverse Effect; and (c) inform Search immediately if any event occurs that may have a Sub-Debt Material Adverse Effect. 5.3 Prohibited Activities. Prior to Closing, each SDH has not, and will not, without the prior written consent of Search, which shall not be unreasonably withheld: (a) sell, assign, lease, pledge or otherwise transfer or dispose of any of the Sub-Debt Assets; (b) take, agree (in writing or otherwise) to take, or omit or take any action which would have a Sub-Debt Material Adverse Effect, or any action which would make any of the representations and warranties of either SDH contained in this Sub-Debt Acquisition Agreement untrue or result in any of the conditions set forth in Sections 6 and 7 not being satisfied. 5.4 No Solicitation of Offers. Since July 15, 1996 and prior to the first to occur of the Closing or the termination of this Sub-Debt Acquisition Agreement pursuant to Section 11.1, neither SDH nor any agent, officer, director or any representative of either SDH will, during the period commencing on the date of this Sub-Debt Acquisition Agreement and ending with the Closing, directly or indirectly: (a) solicit, -12- 14 encourage or initiate the submission of proposals or offers from any person for, (b) participate in any discussions pertaining to, or (c) furnish any information to any person other than Search and Newco relating to, any acquisition or purchase of all or a material amount of the Sub-Debt Assets of, or any equity interest in, either SDH or a merger, consolidation or business combination of either SDH, except in each case, to the extent required by fiduciary obligations under applicable law. In addition to the foregoing, if a SDH receives any unsolicited offer or proposal relating to any of the above, such SDH shall immediately notify Search thereof, including the identity of the party making such offer or proposal and the specific terms of such offer or proposal. 5.5 Notification of Certain Matters. Each party hereto shall give prompt notice to the other parties hereto of (a) the occurrence or non-occurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of it contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (b) any material failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such party hereunder; provided, that in the event that the other party (for purposes of this paragraph, the SDH shall be deemed to be one party and Search and Newco shall be deemed to be the other party) consummates the transactions contemplated hereby despite being provided with such written notice, then the other party shall automatically be deemed to have waived compliance with such representation, warranty, covenant, condition or agreement to the extent set forth in such written notice. 5.6 Cooperation in Obtaining Required Consents and Approvals. For all consents and approvals which a SDH is required to obtain pursuant to this Sub-Debt Acquisition Agreement, Search shall cooperate and provide to such SDH such documentation or other information as such SDH shall reasonably request. For all consents and approvals which Search is required to obtain pursuant to this Sub-Debt Acquisition -13- 15 Agreement, each SDH shall cooperate and provide to Search such documentation or other information as Search shall reasonably request. Each party shall use all reasonable efforts to obtain all consents and approvals as shall be necessary for the performance of its obligations under this Sub-Debt Acquisition Agreement. 5.7 Ownership of Sub-Debt Assets. (a) R-H possesses and owns all right, title and interest in and to the Subordinated Notes and the R-H Warrants, copies of which are attached hereto as SUB-DEBT SCHEDULE 5.7(A). (b) Kellett possesses and owns all right, title and interest in and to the Subordinated Note and the Kellett Warrants, copies of which are attached hereto as SUB-DEBT SCHEDULE 5.7(B). (c) R-H and Kellett jointly and severally own all right, title, and interest in and to all of the Sub-Debt Assets except as set forth above in Section 5.7(a) and (b) above. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF SEARCH AND NEWCO The obligation of Search and Newco to effect the Closing is subject to the satisfaction or waiver, at or before the Closing, of the following conditions: 6.1 Representations and Warranties; Performance of Obligations. All of the representations and warranties of each SDH contained in this Sub-Debt Acquisition Agreement shall be true, correct and complete in all material respects on and as of the Closing with the same effect as though such representations and warranties had been made on and as of such date and all of the terms, covenants, agreements and conditions of this Sub-Debt Acquisition Agreement to be complied with, performed or satisfied by each SDH on or before the Closing -14- 16 shall have been duly complied with, performed or satisfied in all material respects. 6.2 No Litigation. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Newco's proposed acquisition of the Sub-Debt Assets, or limiting or restricting Newco's conduct or operation of its business following the Sub-Debt Sale shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending. There shall be no action, suit claim or proceeding of any nature pending against Search, Newco or SDH or either of their respective properties or any of their officers or directors, that would, if adversely determined, be reasonably likely to have a Sub-Debt Material Adverse Effect on the Sub-Debt Assets. 6.3 Consents and Approvals. All necessary consents of and filings with any governmental authority or agency or third party relating to the consummation by either SDH of the transactions contemplated hereby shall have been obtained and made. 6.4 SDH. All necessary approval for the Sub-Debt Sale by each SDH has been obtained. 6.5 No Material Adverse Effect. No "Sub-Debt Material Adverse Effect" shall have occurred prior to the time of Closing. For purposes of this Sub-Debt Acquisition Agreement, the term "Sub-Debt Material Adverse Effect" means any change or event which materially interferes with or causes either SDH to be unable to execute this Sub-Debt Acquisition Agreement and consummate the Sub-Debt Sale and all other transactions contemplated hereby. -15- 17 6.6 Contemporaneous Closing. Closing under this Sub-Debt Acquisition Agreement takes place contemporaneously with the Closing under the DACC Acquisition Agreement. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH SDH The obligation of each SDH to effect the Sub-Debt Sale are subject to the satisfaction or waiver, at or before the Closing, of the following conditions: 7.1 Representations and Warranties; Performance of Obligations. All of the representations and warranties of Search and Newco contained in this Sub-Debt Acquisition Agreement shall be true, correct and complete in all material respects on and as of the Closing as though such representations and warranties had been made as of such date and all of the terms, covenants, agreements and conditions of this Sub-Debt Acquisition Agreement to be complied with, performed or satisfied by Search and Newco on or before the Closing shall have been duly complied with, performed or satisfied in all material respects. 7.2 No Material Adverse Effect. No "Search Sub-Debt Material Adverse Effect" shall have occurred between the 10-K Filing Date and Closing. For purposes of this Sub-Debt Acquisition Agreement, the term "Search Sub-Debt Material Adverse Effect" has the meaning specified in Section 4.1 of SUB-DEBT SCHEDULE 4. Each SDH acknowledges, covenants and agrees that if a Search Sub-Debt Material Adverse Effect has occurred, such SDH's sole remedy shall be to terminate this Sub-Debt Acquisition Agreement upon notice to Search pursuant to the terms of Section 11.1 below. 7.3 No Litigation. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or provision challenging Newco's proposed acquisition of the Sub-Debt Assets, or limiting or restricting Newco's conduct or operation of its business following the Sub- -16- 18 19 Debt Sale shall be in effect, nor shall any proceeding brought by an administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending. There shall be no action, suit claim or proceeding of any nature pending against Search, Newco or either SDH, their respective properties or any of their officers or directors, that would, if adversely determined, be reasonably likely to have a Search Sub-Debt Material Adverse Effect. 7.4 Consents and Approvals. All necessary consents of and filings with any governmental authority or agency or third party relating to the consummation by Search and Newco of the transactions contemplated hereby shall have been obtained and made. 7.5 Contemporaneous Closing. Closing under this Sub-Debt Acquisition Agreement takes place contemporaneously with the Closing under the DACC Acquisition Agreement. 8. INDEMNIFICATION BY EACH SDH 8.1 Indemnification by Each SDH. Subject to the terms of Section 8.5 below, each SDH jointly and severally covenants and agrees to indemnify, defend, protect and hold harmless Search and Newco and their respective officers, directors, employees, successors and assigns (individually, a "Sub-Debt Search Indemnified Party" and collectively "Sub- Debt Search Indemnified Parties") from, against and in respect of: (i) all Claims suffered, sustained, incurred or paid by the Sub-Debt Search Indemnified Parties in connection with, resulting from or arising out of, directly or indirectly: (1) Claims governed by Section 8.1(a) of the DACC Acquisition Agreement that are based upon fraud, usury and/or violation of laws and regulations by or on the part of DACC with -17- 20 respect to Finance Contracts to the extent such Claims exceed the Deductible as set forth in the DACC Acquisition Agreement, except if such Claims are not subject to indemnification pursuant to Section 8.1(c) of the DACC Acquisition Agreement (In addition, any Claim subject to indemnification pursuant to Section 8.1(c) of the DACC Acquisition Agreement shall be treated as a Pending Claim for purposes of Sections 8.5 and 10.2 below); (2) any material breach of any representation or warranty of a SDH set forth in this Sub- Debt Acquisition Agreement or any certificate, document or instrument delivered by or on behalf of such SDH in connection herewith; or (3) any material nonfulfillment of any covenant or agreement on the part of a SDH prior to the Expiration Dates. (ii) any and all Claims incident to any of the foregoing or to the enforcement of this Section 8.1. 8.2 Expiration. (a) Subject to the resolution of all Pending Claims, the indemnification obligations of the SDH under this Section 8 shall terminate as follows: (i) With respect to all Claims based upon fraud, usury and/or compliance with all "laws" and "regulations" (each as defined in Section 3.15 of Schedule 3 of the DACC Acquisition Agreement) by DACC or on the part of DACC with respect to Finance Contracts, the Final Expiration Date. (ii) With respect to all other Claims governed by this Section 8, the First Expiration Date. -18- 21 8.3 No Substitution of Entities. If either SDH liquidates prior to the Final Expiration Date, all of the Indemnity Shares held by the Escrow Agent shall remain in Escrow except as set forth below in Section 10. No shareholder/partner of the SDH shall be personally liable for SDH's obligations under this Section 8, except in the event they have received Indemnity Shares in connection with or as a result of a breach or violation of the Escrow Agreement, and recovery for such liability shall be limited to such Indemnity Shares. Once the Indemnity Shares are properly distributed by the Escrow Agent from Escrow, neither SDH shall have any responsibility or obligation to Search, except as may be set forth in the Sub-Debt Shareholders Agreement. 8.4 Indemnification Procedures. All Claims for indemnification under this Section 8 shall be asserted and resolved as follows. (a) In the event a Sub-Debt Search Indemnified Party has a Claim against the SDH (the SDH, including all successors, shall be known collectively as the "Sub-Debt Indemnifying Parties") hereunder which does not involve a Claim being asserted against or sought to be collected by a third party, the Sub-Debt Search Indemnified Party shall with reasonable promptness send a Claim Notice with respect to such Claim to R-H c/o Ken Millar (the "Representative") and Escrow Agent. Such Claim Notice shall: (i) state that the Sub-Debt Search Indemnified Party has paid or incurred a SDH 100% Claim or a Shared Claim and is entitled to indemnification under Section 8 of this Sub-Debt Acquisition Agreement (an "Indemnification Item"); (ii) state the aggregate dollar amount of such Indemnification Item; -19- 22 (iii) specify in reasonable detail the nature and amount of each individual Indemnification Item; and (iv) specify in detail those Indemnity Shares in Value that Escrow Agent shall deliver to the Sub-Debt Search Indemnified Party or as otherwise directed by the Sub-Debt Search Indemnified Party in satisfaction of the Indemnification Item(s) set forth in the Claim Notice in accordance with Sections 8.4(e) and 10.3 of this Sub-Debt Acquisition Agreement. Any Claim Notice may include multiple Indemnification Items. If the Representative does not notify the Sub-Debt Search Indemnified Party within 30 days of receipt of the Claim Notice (the "Notice Period") that the Sub-Debt Indemnifying Parties disputes such Claim, the amount of such Claim shall be conclusively deemed a liability of the Sub-Debt Indemnifying Parties hereunder. In case the Representative shall, within the Notice Period, object in writing to any Claim made in accordance with this Section 8.4(a), the Sub-Debt Search Indemnified Party shall have fifteen (15) days to respond in a written statement to the objection of the Representative. If after such fifteen (15) day period there remains a dispute as to any Claims, the parties shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such Claims. If the parties should so agree, a memorandum setting forth such agreement shall be prepared and executed by both parties. If no such agreement can be reached after good faith negotiations the parties may pursue applicable remedies as provided by Section 11.18. (b) In the event that any Claim for which the Sub-Debt Indemnifying Parties would be liable to a Sub-Debt Search Indemnified Party hereunder is asserted against a Sub-Debt Search Indemnified Party by a third party, the Sub-Debt Search Indemnified Party shall with reasonable promptness notify the Representative of such Claim, specifying the nature of such claim and the amount or -20- 23 the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such Claim). The actions and decisions of the Representative shall be binding upon the Sub-Debt Indemnifying Parties. The Representative shall have 30 days from the receipt of the Claim Notice (the "Notice Period") to notify the Sub-Debt Search Indemnified Party (i) whether or not the Sub- Debt Indemnifying Parties disputes the Sub-Debt Indemnifying Parties' liability to the Sub-Debt Search Indemnified Party hereunder with respect to such Claim and (ii) if the Sub-Debt Indemnifying Parties does not dispute such liability, whether or not the Sub-Debt Indemnifying Parties desires, at the sole cost and expense of the Sub-Debt Indemnifying Parties, to defend against such Claim, provided that the Sub-Debt Indemnifying Parties is hereby authorized (but not obligated) prior to and during the Notice Period to file any motion, answer or other pleading and to take any other action which the Sub-Debt Indemnifying Parties shall deem necessary or appropriate to protect the Sub-Debt Indemnifying Parties' interests. If the Representative notifies the Sub-Debt Search Indemnified Party within the Notice Period that the Sub-Debt Indemnifying Parties does not dispute the Sub-Debt Indemnifying Parties' obligation to indemnify hereunder and desires to defend the Sub-Debt Search Indemnified Party against such Claim, except as hereinafter provided, the Sub-Debt Indemnifying Parties shall have the right to defend by appropriate proceedings, which proceedings shall be promptly settled or prosecuted by the Sub-Debt Indemnifying Parties to a final conclusion; provided that, unless the Sub-Debt Search Indemnified Party otherwise agrees in writing, the Sub-Debt Indemnifying Parties may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the Sub-Debt Search Indemnified Party. If the Sub-Debt Search Indemnified Party desires to participate in, but not control, any such defense or settlement the Sub-Debt -21- 24 Search Indemnified Party may do so at the Sub-Debt Search Indemnified Party's sole cost and expense. If the Sub-Debt Indemnifying Parties elects not to defend the Sub-Debt Search Indemnified Party against such Claim, whether by failure of the Representative to give the Sub-Debt Search Indemnified Party timely notice as provided above or otherwise, then the Sub-Debt Search Indemnified Party, without waiving any rights against the Sub-Debt Indemnifying Parties, may settle or defend against any such Claim in the Sub-Debt Search Indemnified Party's commercially reasonable discretion (provided, that the Sub-Debt Search Indemnified Party may not settle any matter (in whole or part) unless such settlement includes a complete and unconditional release of the Sub-Debt Indemnifying Parties) and the Sub-Debt Search Indemnified Party shall be entitled to recover from the Sub-Debt Indemnifying Parties the amount of any settlement or judgment and, on an ongoing basis, all indemnifiable costs and expenses of the Sub-Debt Search Indemnified Party with respect thereto, including interest from the date such costs and expenses were incurred. (c) If at any time, in the reasonable opinion of the Sub-Debt Search Indemnified Party, notice of which shall be given in writing to the Representative, any such Claim seeks material prospective relief which could have a materially adverse effect on the assets, liabilities, financial condition, results of operations or business prospects of any Sub-Debt Search Indemnified Party, the Sub-Debt Search Indemnified Party shall have the right to control or assume (as the case may be) the defense of any such Claim and the amount of any judgment or, subject to the prior approval of the Sub-Debt Indemnifying Parties, settlement and the reasonable costs and expenses of defense shall be included as part of the indemnification obligations of the Sub-Debt Indemnifying Parties hereunder. If the Sub-Debt Search Indemnified Party should elect to exercise such right, -22- 25 the Representative shall have the right to participate in, but not control, the defense of such claim or demand at the sole cost and expense of the Sub-Debt Indemnifying Parties. (d) The Sub-Debt Search Indemnified Party's failure to give reasonably prompt notice to the Representative of any actual or threatened claim or demand which may give rise to a right of indemnification hereunder shall not relieve the Sub-Debt Indemnifying Parties of any liability which the Sub-Debt Indemnifying Parties may have to the Sub-Debt Search Indemnified Party unless the failure to give such notice materially and adversely prejudiced the Sub-Debt Indemnifying Parties. (e) All of the Indemnity Shares delivered to the Escrow Agent shall be available to satisfy the indemnification obligations of the Sub-Debt Indemnifying Parties pursuant to this Section 8 through the First Expiration Date or Final Expiration Date, as the case may be, subject to the retention of that portion of the Indemnity Shares required pursuant to Section 10.1 below for Pending Claims. Upon determination of the dollar amount owed to a Sub-Debt Search Indemnified Party in satisfaction of the Sub-Debt Indemnifying Parties' obligations with respect to SDH 100% Claims (as defined below in Section 10.3) and the Sub-Debt Indemnifying Parties' obligations with respect to the Sub-Debt Indemnifying Parties' portion of the Shared Claims, the Escrow Agent shall, pursuant to the terms of the Escrow Agreement, promptly deliver to the Sub-Debt Search Indemnified Party that number of Indemnity Shares having a Value (as defined below) equal to the dollar amount so determined as the obligation of such Sub-Debt Indemnifying Parties, from the class of Indemnity Shares identified below. For purposes of this Sub-Debt Acquisition Agreement, the term "Value" per share of Indemnity Shares shall mean the allocated price of the Search Sub-Debt Securities, namely Two Dollars Fifty- -23- 26 Three and Eight Tenths Cents ($2.538) per share for the Convertible Stock. In the event of any stock split, reverse stock split, stock combination or reclassification of any of the Indemnity Shares or any merger, consolidation or combination of Search with any other entity or entities, the Value of the Indemnity Shares shall be proportionally adjusted so that the Value of the Indemnity Shares after such event shall be the same as the Value such Indemnity Shares possessed immediately prior to such event. Such adjustment shall be made successively upon the occurrence of the events listed in the immediately preceding sentence. (f) Notwithstanding anything in Section 8.4 of this Sub-Debt Acquisition Agreement to the contrary, all Claims under Section 8.1(i)(1) of this Sub-Debt Acquisition Agreement and any and all Claims under Section 8.1(ii) of this Sub-Debt Acquisition Agreement which are incident to 8.1(i)(1) of this Sub-Debt Acquisition Agreement or to the enforcement of 8.1(i)(1) of this Sub-Debt Acquisition Agreement shall be governed by the indemnification provisions of Section 8.4 of the DACC Acquisition Agreement, and once a determination has been made under Section 8.4 of the DACC Acquisition Agreement, such determination shall be final, binding and conclusive upon such SDH. Search agrees that it will provide notice to each SDH of all Claims that Search, acting in a commercially reasonable manner, considers to be Shared Claims (as defined below in Section 10.3). 8.5 Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and indemnities made by a SDH in or pursuant to this Sub-Debt Acquisition Agreement or in any document delivered pursuant hereto will survive the Closing and will remain in effect until, and will expire upon, the First Expiration Date or Final Expiration Date as set forth above in section 8.2, provided, however, that the indemnification obligations with respect to -24- 27 any Pending Claim (and the related representations, warranties and covenants) existing as of either of the aforesaid Dates will survive until the final resolution of such Pending Claim. 8.6 Limitations of SDH Indemnification Obligations. Notwithstanding anything in this Sub-Debt Acquisition Agreement to the contrary, each SDH's liability for indemnification under this Agreement is limited to the extent of such SDH's Indemnity Shares, and neither SDH shall be required to utilize any of such SDH's other assets, including, but not limited to, such SDH's Non-Indemnity Shares, to discharge an indemnification obligation under this Sub-Debt Acquisition Agreement. 9. INDEMNIFICATION BY SEARCH 9.1 Indemnification by Search. Search covenants and agrees to indemnify, defend, protect and hold harmless each SDH and each SDH's officers, directors and employees, and also the beneficial owners (which may be referred to as the "SDH Owners") of each SDH (but only as set forth in Section 9.2 below) (individually, a "SDH Indemnified Party" and collectively "SDH Indemnified Parties") from, against and in respect of: (a) all Claims suffered, sustained, incurred or paid by the SDH Indemnified Parties in connection with, resulting from or arising out of, directly or indirectly: (i) any material breach of any representation or warranty of Search or Newco set forth in this Sub-Debt Acquisition Agreement or any certificate, document or instrument delivered by or on behalf of Search or Newco in connection herewith; or (ii) any material nonfulfillment of any covenant or agreement on the part of Search or Newco in this Sub-Debt Acquisition Agreement, or -25- 28 (b) any and all Claims incident to any of the foregoing or to the enforcement of this Section 9.1. 9.2 Exclusive Agent. Search's indemnification obligations to the SDH Owners are conditioned on such beneficial owners appointing R-H c/o Ken Millar ("Agent") as their exclusive agent for handling all matters related to indemnity claims of the SDH Owners. Without limiting the preceding sentence, Agent is the only one who can assert, prosecute or settle indemnity claims of SDH Owners, and Agent is the only one who can give or receive notices on behalf of the SDH Owners with respect to their indemnity claims. Search shall have no indemnity obligations to any SDH Owners who directly asserts a claim against Search or who does not otherwise comply with the requirements of this Section 9.2. 9.3 Expiration. Search's indemnification obligations under this Section 9 shall terminate with respect to all Claims, one day after the first (1st) anniversary of the Closing. 9.4 Indemnification Procedures. All Claims for indemnification under this Section 9 shall be asserted and resolved as follows: (a) In the event a SDH Indemnified Party has a Claim against Search hereunder which does not involve a Claim being asserted against or sought to be collected by a third party, the SDH Indemnified Party shall with reasonable promptness send a Claim notice (the "Claim Notice") with respect to such Claim to Search. If Search does not notify the SDH Indemnified Party within 30 days of receipt of the Claim Notice (the "Notice Period") that Search disputes such Claim, the amount of such Claim shall be conclusively deemed a liability of Search hereunder. In case Search shall, within the Notice Period, object in writing to any Claim made in accordance with this Section 9.3(a), the SDH Indemnified Party shall have fifteen (15) days to respond in a -26- 29 written statement to the objection of Search. If after such fifteen (15) day period there remains a dispute as to any Claims, the parties shall attempt in good faith for sixty (60) days to agree upon the rights of the respective parties with respect to each of such Claims. If the parties should so agree, a memorandum setting forth such agreement shall be prepared and executed by both parties. If no such agreement can be reached after good faith negotiations the parties may pursue applicable remedies as provided by Section 11.18. (b) If any Claim for which Search would be liable to a SDH Indemnified Party hereunder is asserted against a SDH Indemnified Party by a third party, the SDH Indemnified Party shall with reasonable promptness notify Search of such Claim, specifying the nature of such claim and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such Claim). Search shall have 30 days from the receipt of the Claim Notice (the "Notice Period") to notify the SDH Indemnified Party (i) whether or not Search disputes Search's liability to the SDH Indemnified Party hereunder with respect to such Claim and (ii) if Search does not dispute such liability, whether or not Search desires, at Search's sole cost and expense, to defend against such Claim, provided that Search is hereby authorized (but not obligated) prior to and during the Notice Period to file any motion, answer or other pleading and to take any other action which Search shall deem necessary or appropriate to protect Search's interests. If Search notifies the SDH Indemnified Party within the Notice Period that Search does not dispute Search's obligation to indemnify hereunder and agrees to defend the SDH Indemnified Party against such Claim, except as hereinafter provided, Search shall have the right to defend by appropriate proceedings, which proceedings shall be promptly settled or prosecuted by Search to a final conclusion; provided that, unless the -27- 30 SDH Indemnified Party otherwise agrees in writing, Search may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the SDH Indemnified Party. If the SDH Indemnified Party desires to participate in, but not control, any such defense or settlement the SDH Indemnified Party may do so at the SDH Indemnified Party's sole cost and expense. If Search elects not to defend the SDH Indemnified Party against such Claim, whether by failure of Search to give the SDH Indemnified Party timely notice as provided above or otherwise, then the SDH Indemnified Party, without waiving any rights against Search, may settle or defend against any such Claim in the SDH Indemnified Party's commercially reasonable discretion (provided, that the SDH Indemnified Party may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the Sub-Debt Search Indemnifying Parties) and the SDH Indemnified Party shall be entitled to recover from Search the amount of any settlement or judgment and, on an ongoing basis, all indemnifiable costs and expenses of the SDH Indemnified Party with respect thereto, including interest from the date such costs and expenses were incurred. (c) Nothing herein shall be deemed to prevent a SDH Indemnified Party from making a claim, and a SDH Indemnified Party may make a claim hereunder, for potential or contingent claims or demands provided the Claim Notice sets forth the specific basis for any such potential or contingent claim or demand to the extent then feasible and the SDH Indemnified Party has reasonable grounds to believe that such a claim or demand may be made. (d) The SDH Indemnified Party's failure to give reasonably prompt notice to Search of any actual, threatened or possible claim or demand which may give rise to a right of indemnification hereunder shall not -28- 31 relieve Search of any liability which Search may have to the SDH Indemnified Party unless the failure to give such notice materially and adversely prejudiced Search. 9.5 Survival of Representations, Warranties and Covenants. All representations, warranties, covenants and indemnities made by Search and Newco in or pursuant to this Sub-Debt Acquisition Agreement or in any document delivered pursuant hereto will survive the Closing and will remain in effect, and will expire as provided in Section 9.3, provided, however, that the indemnification obligations with respect to any Pending Claim (and the related representations, warranties and covenants) will survive until the final resolution of such Pending Claim. 10. ESCROW 10.1 Escrow. At Closing the Indemnity Shares (as specified in Section 1.5) shall be delivered to U.S. Trust of Texas, N.A. ("Escrow Agent") to be held by the Escrow Agent pursuant to that certain Escrow Agreement entered into by and among DACC, Search, Newco, each SDH and Escrow Agent in substantially the form as attached as SCHEDULE 10.1 to the DACC Acquisition Agreement on the Closing (the "Escrow Agreement"). The Escrow Agent shall hold the Indemnity Shares pursuant to the Escrow Agreement. The Escrow Agent shall distribute the Indemnity Shares pursuant to the terms of this Section 10 and the Escrow Agreement. The parties agree to instruct the Escrow Agent to transfer the Indemnity Shares and all cash attributable thereto as follows in the following order: (a) Prior to the First Expiration Date, to Search for cancellation of that amount of Indemnity Shares and/or cash, in the order of class as specified in Section 8.4 above, to the extent necessary to satisfy all finally resolved SDH 100% Claims and the SDH's portion of the Shared Claims. -29- 32 (b) At the First Expiration Date, but subject to Section 10.2 below, to the Subordinated Debt Holders, 446,960 shares of the Indemnity Shares less the number of Indemnity Shares delivered to Search for cancellation, but including all dividends which shall have been received by the Escrow Agent attributable to the Indemnity Shares released to the Subordinated Debt Holders and not distributed to Search pursuant to Section 10.1(a). (c) After the First Expiration Date and prior to the Final Expiration Date, and to the extent still held by the Escrow Agent in Escrow, to Search for cancellation of that amount of Indemnity Shares and/or cash, in the order of class as specified in Section 8.4 above, to the extent necessary to satisfy all finally resolved SDH 100% Claims and the SDH's portion of the Shared Claims. (d) At the Final Expiration Date, but subject to Section 10.2 below, to the Subordinated Debt Holders the balance of the Indemnity Shares, but including all dividends which shall have been received by the Escrow Agent attributable to the Indemnity Shares released to SDH and not distributed to Search pursuant to Section 10.1(a). (e) Notwithstanding anything in this Section 10.1 to the contrary, (i) all of the Indemnity Shares to be distributed to the SDH shall be distributed based on the following percentages (68.75% to R-H and 31.25% to Kellett), and (ii) all of the Indemnity Shares to be cancelled shall be cancelled based on the following percentages (68.75% to R-H and 31.25% to Kellett). 10.2 Pending Claims. Notwithstanding anything to the contrary in Section 10.1, if SDH 100% Claims or Pending Claims with respect to SDH 100% Claims exist as of the Expiration Date, the Escrow Agent shall retain in Escrow that portion of the Indemnity Shares and/or cash with a Value equal to: (i) -30- 33 100% of the amount of the SDH 100% Claims, as determined by Search acting in good faith in a commercially reasonable manner, if Search determines the amount of any of such Claims is reasonably certain, or (ii) 125% of the amount of the SDH 100% Claims, as determined by Search acting in good faith in a commercially reasonable manner, if Search determines the amount of any such Claims is not reasonably certain. Upon the final resolution of any such Pending Claim, the Escrow Agent shall likewise distribute in the priorities specified in Section 10.1 the Indemnity Shares and/or cash reserved by the Escrow Agent with respect to such types of Pending Claim. The term "Pending Claim" shall mean any Claim governed by Section 8 which has not been resolved finally as of an Expiration Date. Notwithstanding anything to the contrary in Section 10.1, in addition to the amounts to be retained, if any, by the Escrow Agent pursuant to the immediately preceding paragraph, if the aggregate amount of all DACC 100% Claims and the Shared Claims (including the amount of all Pending Claims with respect to DACC 100% Claims and the Shared Claims as determined pursuant to Section 10 of the DACC Agreement), shall have exceeded the Deductible, and Pending Claims with respect to DACC 100% Claims and/or the Shared Claims exist as of an Expiration Date, the Escrow Agent shall retain in Escrow that portion, in excess of the Deductible, of the Indemnity Shares and/or cash with a Value equal to: (i) 100% of the amount of the SDH's portion of the Shared Claims, as determined by Search acting in good faith in a commercially reasonable manner, if Search determines the amount of any of such Claims is reasonably certain, or (ii) 125% of the amount of SDH's portion of the Shared Claims, as determined by Search acting in good faith in a commercially reasonable manner, if Search determines the amount of any such Claims is not reasonably certain. Upon the final resolution of any such Pending Claim, the Escrow Agent shall likewise distribute in the priorities specified in Section 10.1 the Indemnity Shares and/or cash reserved by the Escrow Agent with respect to such types of Pending Claim. -31- 34 10.3 Pro Rata Payment of Claims. The parties acknowledge that there are three types of indemnity Claims covered by this Agreement and/or the DACC Acquisition Agreement: (i) those for which only DACC has liability (the "DACC 100% Claims"), (ii) those for which only the SDH has liability (the "SDH 100% Claims"), and (iii) those for which both DACC and the SDH have liability (the "Shared Claims"). With respect to DACC 100% Claims only, only DACC Escrow Shares and/or cash attributable thereto shall be used to pay such Claims. With respect to SDH 100% Claims only, only Indemnity Shares and/or cash attributable thereto shall be used to pay such Claims. With respect to Shared Claims, 62.741% of such Claims shall be paid from DACC Escrow Shares and/or cash attributable thereto, and 37.259% of such Claims shall be paid from Indemnity Shares and/or cash attributable thereto, provided that if either the DACC Escrow Shares or the cash attributable thereto, on the one hand, or the Indemnity Shares and the cash attributable thereto, on the other, are insufficient to pay such party's share of the Shared Claim, then the other party (subject to Section 8.6 above) shall pay any deficiency so that Search receives payment for 100% of the Shared Claim. 11. GENERAL 11.1 Termination. This Sub-Debt Acquisition Agreement may be terminated at any time prior to the Closing: (a) by mutual consent of Search, Newco and each SDH; or (b) by each SDH, on the one hand, or by Search and Newco, on the other hand, if the Closing shall not have occurred on or before August 15, 1996; provided that the right to terminate this Sub-Debt Acquisition Agreement under this Section 11.1(b) shall not be available to either party (Search and Newco deemed to be a single party for this purpose) whose material -32- 35 misrepresentation, breach of warranty or failure to fulfill any obligation under this Sub-Debt Acquisition Agreement has been the cause of, or resulted in, the failure of the Closing to occur on or before such date; or (c) by each SDH, on the one hand, or by Search and Newco, on the other hand, if there is or has been a material breach, failure to fulfill or default on the part of the other party of any of the representations and warranties contained herein or in the due and timely material performance and satisfaction of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made or shall not reasonably be expected to occur before the Closing; or (d) by each SDH, on the one hand, or by Search and Newco, on the other hand, if there shall be a final nonappealable order of a federal or state Court in effect preventing consummation of the Sub-Debt Sale or any other transaction contemplated hereby; or there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Sub-Debt Sale or any other transaction contemplated hereby by any governmental entity which would make the consummation of the Sub-Debt Sale or any other transaction contemplated hereby illegal. 11.2 Effect of Termination. In the event of the termination of this Sub-Debt Acquisition Agreement pursuant to Section 11.1, this Sub-Debt Acquisition Agreement shall forthwith become void, and except as hereinafter provided, there shall be no liability or obligation on the part of any party hereto or its officers, directors or stockholders. Notwithstanding the foregoing sentence, (a) the provisions of this Section 11.2, Section 5.l(b) and (c) (confidentiality) and the other provisions of Section 11 (including without -33- 36 limitation brokers and expenses), shall remain in full force and effect and survive any termination of this Sub-Debt Acquisition Agreement; (b) Each SDH, on the one hand, and Search and Newco, on the other hand, shall remain liable to the other for any breach of this Sub-Debt Acquisition Agreement prior to its termination; and (c) in the event of termination of this Sub-Debt Acquisition Agreement pursuant to Section 11.1(c) above, then notwithstanding the provisions of Section 11.8 below, the breaching party shall be liable to the other party to the extent of the expenses incurred by such other party in connection with this Sub-Debt Acquisition Agreement and the transactions contemplated hereby, as well as any damages in accordance with Section 11.18. 11.3 Cooperation. Both SDH, Search and Newco shall each deliver or cause to be delivered to the other on the Closing, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Sub-Debt Acquisition Agreement. Each SDH will also cooperate and use its reasonable efforts to have its present officers, directors, partners and/or employees cooperate with Search on and after the Closing in furnishing information, evidence, testimony and other assistance in connection with any obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Closing, in each case at the cost and expense of Search. 11.4 Successors and Assigns. This Sub-Debt Acquisition Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, and their permitted successors and assigns. 11.5 Entire Agreement. This Sub-Debt Acquisition Agreement (which includes the Sub-Debt Schedules attached hereto) sets forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby. -34- 37 It shall not be amended or modified except by a written instrument duly executed by each of the parties hereto. Any and all previous agreements and understandings between or among the parties regarding the subject matter hereof, whether written or oral, are superseded by this Sub-Debt Acquisition Agreement. 11.6 Counterparts. This Sub-Debt Acquisition Agreement may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. This Sub-Debt Acquisition Agreement shall become binding when one or more counterparts taken together shall have been executed and delivered (which deliveries may be by telefax) by the parties. 11.7 Brokers and Agents. Search and Newco (as a group) and the SDH each represents and warrants to the other that it has not employed any broker or agent in connection with the transactions contemplated by this Sub-Debt Acquisition Agreement and agrees to indemnify the other against all loss, damages or expense relating to or arising out of claims for fees or commissions of any broker or agent employed or alleged to have been employed by such indemnifying party. 11.8 Expenses. Search has and will pay the fees, expenses and disbursements of Search and Newco and their agents, representatives, financial advisors, accountants and counsel incurred in connection with the subject matter of this Sub-Debt Acquisition Agreement. Each SDH has and will pay the fees, expenses and disbursements of such SDH and its agents, representatives, financial advisors, accountants and counsel incurred in connection with the subject matter of this Sub-Debt Acquisition Agreement. 11.9 Specific Performance; Remedies. Each party hereto acknowledges that the other parties will be irreparably harmed and that there will be no adequate remedy at law for any -35- 38 violation by any of them of any of the covenants or agreements contained in this Sub-Debt Acquisition Agreement, including without limitation, the confidentiality obligations set forth in Section 5.1(b) and (c). It is accordingly agreed that, in addition to any other remedies which may be available upon the breach of any such covenants or agreements, each party hereto shall have the right to obtain injunctive relief to restrain a breach or threatened breach of, or otherwise to obtain specific performance of, the other parties' covenants and agreements contained in this Sub- Debt Acquisition Agreement. 11.10 Notices. Any notice, request, claim, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given if delivered personally or sent by telefax (with confirmation of receipt), by registered or certified mail, postage prepaid, or by recognized courier service, as follows: If to Search or Newco to: Search Capital Group, Inc. 700 N. Pearl Street Suite 400, L.B. 401 Dallas, Texas 75201-2809 Attention: George C. Evans, President & CEO Facsimile No.: 214-965-6098 -36- 39 With a copy to: Riezman & Blitz, P.C. 120 S. Central, 10th Floor St. Louis, Missouri 63105 Attention: Richard M. Riezman, Esq. Facsimile No.: 314-727-6458 If to SDH: (1) R-H Capital Partners, L.P. Atlanta Financial Center 3333 Peachtree Road Atlanta, GA 30326 Attention: Mr. Ken Millar Facsimile No.: (404) 266-5966 With a copy to: King & Spalding 191 Peachtree Street Atlanta, GA 30303 Attention: John J. Kelley III, Esq. Facsimile No.: (404) 572-5100 (2) Kellett Investment Corporation 200 Galleria Parkway, Suite 1800 Atlanta, GA 30339 Attention: John E. Cunningham Facsimile No.: (770) 956-7412 -37- 40 With a copy to: Troutman Sanders LLP 600 Peachtree Street, N.E., Suite 5200 Atlanta, GA 30308-2216 Attention: Hazen H. Dempster Facsimile No.: (404) 885-3900 or to such other address as the person to whom notice is to be given may have specified in a notice duly given to the sender as provided herein. Such notice, request, claim, demand, waiver, consent, approval or other communication shall be deemed to have been given as of the date so delivered, telefaxed, mailed or dispatched and, if given by any other means, shall be deemed given only when actually received by the addressees. 11.11 Governing Law . This Sub-Debt Acquisition Agreement shall be governed by and construed, interpreted and enforced in accordance with the laws of the State of Delaware. 11.12 Severability. If any provision of this Sub-Debt Acquisition Agreement or the application thereof to any person or circumstances is held invalid or unenforceable in any jurisdiction, the remainder hereof, and the application of such provision to such person or circumstances in any jurisdiction, -38- 41 shall not be affected thereby, and to this end the provisions of this Sub-Debt Acquisition Agreement shall be severable. 11.13 Absence of Third Party Beneficiary Rights. No provision of this Sub-Debt Acquisition Agreement is intended, nor will be interpreted, to provide or to create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, employee, partner of any party hereto or any other person or entity. 11.14 Mutual Drafting. This Sub-Debt Acquisition Agreement is the mutual product of the parties hereto, and each provision hereof has been subject to the mutual consultation, negotiation and agreement of each of the parties, and shall not be construed for or against any party hereto. 11.15 Further Representations. Each party to this Sub-Debt Acquisition Agreement acknowledges and represents that it has been represented by its own legal counsel in connection with the transactions contemplated by this Sub-Debt Acquisition Agreement, with the opportunity to seek advice as to its legal rights from such counsel. Each party further represents that it is being independently advised as to the tax consequences of the transactions contemplated by this Sub-Debt Acquisition Agreement and is not relying on any representation or statements made by the other party as to such tax consequences. 11.16 Amendment; Waiver. This Sub-Debt Acquisition Agreement may be amended by the parties hereto at any time prior to the Closing by execution of an instrument in writing signed on behalf of each of the parties hereto. Any extension or waiver by any party of any provision hereto shall be valid only if set forth in an instrument in writing signed on behalf of such party. 11.17 Public Disclosure. (a) After Closing, Search shall provide to each SDH a copy of all materials to be filed with the SEC regarding -39- 42 this Sub-Debt Acquisition Agreement, the DACC Acquisition Agreement, the Sale and the Sub-Debt Sale for such SDH's review and comment. (b) Search shall consider all comments and/or reasonable suggested changes made by a SDH pursuant to Section 11.17(a), provided, however, that the determination of Search's securities counsel on any such SDH suggested changes regarding any materials to be filed by Search with the SEC shall be final and binding on the parties hereto. 11.18 Arbitration. (a) Any controversy, claim or dispute arising out of or relating to this Sub-Debt Acquisition Agreement or the breach, termination, enforceability or validity hereof, including without limitation the determination of the scope or applicability of the agreement to arbitrate set forth in this Section 11.18, shall be determined exclusively by binding arbitration in a city mutually convenient to both SDH and Search before three arbitrators. The arbitration shall be governed by the AAA under its Commercial Arbitration Rules, provided that Persons eligible to be selected as arbitrators shall be limited to attorneys-at-law each of whom has actively practiced law (in private or corporate practice or as a member of the judiciary) for at least 15 years concentrating in either general commercial litigation or general corporate and commercial matters. (b) Judgment upon the award rendered may be entered in any court having jurisdiction. (c) Both SDH, on the one hand, and Search and Newco, on the other, shall, subject to the award -40- 43 of the arbitrators, pay an equal share of the arbitrators' fees. The arbitrators shall have the power to award recovery of all costs (including attorneys' fees, administrative fees, arbitrators' fees and court costs) to the prevailing party. 11.19 WAIVER. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF THIS SUB-DEBT ACQUISITION AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS SUB-DEBT ACQUISITION AGREEMENT ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, EXCEPT TO THE EXTENT OF ANY SUCH DAMAGES OCCASIONED BY AN INTENTIONAL BREACH BY ANY PARTY OF ITS OBLIGATIONS UNDER THIS SUB-DEBT ACQUISITION AGREEMENT. EACH OF THE PARTIES HEREBY ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL IN THE NEGOTIATION, EXECUTION AND DELIVERY OF THIS SUB-DEBT ACQUISITION AGREEMENT, INCLUDING, WITHOUT LIMITATION, SUCH WAIVER OF THE RIGHT TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF THIS SUB-DEBT ACQUISITION AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS SUB-DEBT ACQUISITION AGREEMENT ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES TO THE EXTENT WAIVED BY THE PARTIES HERETO. 11.20 INCORRECT CERTIFICATES. If Search delivers Stock Certificates to the Escrow Agent which are incorrectly titled, upon receipt of notice that such Stock Certificates were incorrectly titled, Search shall promptly prepare new correctly titled replacement Stock Certificates and deliver such Stock Certificates to the Escrow Agent, and the incorrectly titled Stock Certificates shall be deemed null and void, without any further action by any of the parties to this Sub-Debt Acquisition Agreement. THE REST OF THE PAGE IS INTENTIONALLY LEFT BLANK -41- 44 IN WITNESS WHEREOF, the parties hereto have signed this Sub-Debt Acquisition Agreement as of the day and year first above written. SEARCH CAPITAL GROUP, INC. By: /s/ ROBERT D. IDZI ------------------------------------- Robert D. Idzi, E.V.P. & CFO R-H CAPITAL PARTNERS, L.P. By: R-H/Travelers, L.P., its general partner By: R-H Capital, Inc., its general partner By: /s/ KENNETH T. MILLAR ------------------------------------- Kenneth T. Millar Managing Director KELLETT INVESTMENT CORPORATION By:/s/ STILES A. KELLETT JR. ------------------------------------- SEARCH FUNDING IV, INC. By: /s/ ROBERT D. IDZI ------------------------------------- Robert D. Idzi, S.V.P. & CFO -42- 45 SUB-DEBT SCHEDULES Sub-Debt Schedule 1.7 - Form of Sub-Debt Shareholder Agreement Sub-Debt Schedule 3 - Representations and Warranties of Each SDH Sub-Debt Schedule 4 - Representations and Warranties of Search and Newco Sub-Debt Schedule 5.7(a) - Subordinated Notes and the R-H Warrants Sub-Debt Schedule 5.7(b) - Subordinated Note and the Kellett Warrants
-43- 46 SCHEDULE 3 and 4 TABLE OF CONTENTS 3. REPRESENTATIONS AND WARRANTIES OF SUBORDINATED DEBT HOLDERS . . -1- ----------------------------------------------------------- 3.1 DUE ORGANIZATION . . . . . . . . . . . . . . . . . . . . -1- ---------------- 3.2 AUTHORIZATION; VALIDITY . . . . . . . . . . . . . . . . -1- ----------------------- 3.3 NO CONFLICTS . . . . . . . . . . . . . . . . . . . . . . -1- ------------ 3.4 LIABILITIES AND OBLIGATIONS . . . . . . . . . . . . . . -2- --------------------------- 3.5 PERMITS AND INTANGIBLES . . . . . . . . . . . . . . . . -2- ----------------------- 3.6 CONFORMITY WITH LAW; LITIGATION . . . . . . . . . . . . -3- ------------------------------- 3.7 ABSENCE OF CHANGES . . . . . . . . . . . . . . . . . . . -3- ------------------ 3.8 SEARCH SUB-DEBT SECURITIES REPRESENTATIONS . . . . . . . -3- ------------------------------------------ 3.9 COMPLETE COPIES OF MATERIALS . . . . . . . . . . . . . . -4- ---------------------------- 4. REPRESENTATIONS OF SEARCH AND NEWCO . . . . . . . . . . . . . . -5- ----------------------------------- 4.1 DUE ORGANIZATION . . . . . . . . . . . . . . . . . . . . -5- ---------------- 4.2 AUTHORIZATION; VALIDITY OF OBLIGATIONS . . . . . . . . . -5- -------------------------------------- 4.3 NO CONFLICTS . . . . . . . . . . . . . . . . . . . . . . -5- ------------ 4.4 SEARCH CAPITALIZATION . . . . . . . . . . . . . . . . . -6- --------------------- 4.5 SEARCH SUB-DEBT SECURITIES DISCLOSURE DOCUMENTS . . . . -6- ----------------------------------------------- 4.6 ABSENCE OF MATERIAL CHANGES . . . . . . . . . . . . . . -7- --------------------------- 4.7 SEARCH SEC FILINGS . . . . . . . . . . . . . . . . . . . -7- ------------------ 4.8 SEARCH FINANCIAL STATEMENTS . . . . . . . . . . . . . . -8- --------------------------- 4.9 OWNERSHIP OF NEWCO; NO PRIOR ACTIVITIES . . . . . . . . -8- --------------------------------------- 4.10 CONFORMITY WITH LAW; LITIGATION . . . . . . . . . . . . -9- -------------------------------
47 Note: For purposes of Sub-Debt Schedules 3 and 4, the term "Sub-Debt Acquisition Agreement" refers to the Asset Acquisition Sub-Debt Acquisition Agreement, dated as of August 2, 1996, by and among Search Capital Group, Inc. ("Search"), Search Funding IV, Inc. ("Newco"), R-H Capital Partners, L.P. ("R-H"); and Kellett Investment Corporation ("Kellett") (hereinafter R-H and Kellett may be individually or collectively referred to as the "Subordinated Debt Holders" or "SDH"), including all Sub-Debt Schedules thereto. SUB-DEBT SCHEDULE 3 3. REPRESENTATIONS AND WARRANTIES OF SUBORDINATED DEBT HOLDERS: 3.1 DUE ORGANIZATION. R-H is duly organized and validly existing as a limited partnership and is in good standing under the laws of the State of Georgia. Kellett is duly organized and validly existing as a corporation and is in good standing under the laws of the State of Georgia. 3.2 AUTHORIZATION; VALIDITY. Each SDH has all requisite power and authority to enter into and perform its obligations pursuant to the terms of the Sub-Debt Acquisition Agreement and all of the agreements and documents referred to therein (the "Related Documents"). The execution and delivery of the Sub-Debt Acquisition Agreement and the Related Documents to which each SDH is a party by each SDH and the performance by each SDH of its obligations thereunder have been duly and validly authorized by the respective governing bodies of each SDH and by all necessary action. This Sub-Debt Acquisition Agreement is, and upon execution by each SDH, the Related Documents will be, legal, valid and binding obligations of each SDH enforceable against each SDH in accordance with their terms, except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. -1- 48 3.3 NO CONFLICTS. The execution, delivery and performance of the Sub-Debt Acquisition Agreement, the consummation of the transactions contemplated thereby, and the fulfillment of the terms thereof will not: (a) conflict with, or result in a breach or violation of, the organizational documents for R-H, or conflict with, or result in a breach or violation of, the Certificate of Incorporation and the By-Laws for Kellett; (b) conflict with, or result in a default (or would constitute a default but for any requirement of notice or lapse of time or both) under any document, agreement or other instrument to which either SDH is a party, or result in the creation or imposition of any lien, charge or encumbrance on any of the properties of either SDH pursuant to (i) any law or regulation to which either SDH is subject or on any of either SDH's properties or (ii) any judgment, order or decree to which either SDH is bound or any of the property owned by either SDH is subject. "Subordinated Debt" means all debt owed by Dealers Alliance Credit Corp., a Delaware corporation ("DACC") from time to time under the Senior Subordinated Note and Warrant Purchase Agreement dated October 16, 1995, as amended, originally between DACC and R-H Capital Partners, L.P.; and (c) except as would not materially adversely affect Search's or Newco's ability to acquire, possess, sell, assign, transfer and/or convey the Sub-Debt Assets and/or would not constitute a Sub-Debt Material Adverse Effect: (i) result in termination or impairment of any material permit, license, franchise, contractual right or other authorization of either SDH, but, in each case, only if and to the extent such licenses, permits, franchises, contractual rights and other authorizations are assignable by such SDH; or -2- 49 (ii) violate any law, order, judgment, rule, regulation, decree or ordinance to which either SDH is subject or by which the Sub-Debt Assets are bound. 3.4 LIABILITIES AND OBLIGATIONS. Each SDH is not liable for or subject to any "liabilities" which will either materially adversely affect Search's or Newco's ability to acquire, possess, sell, transfer, assign and/or convey the Sub-Debt Assets and/or would not constitute a Sub-Debt Material Adverse Effect or cause Search or Newco to become obligated for any such liabilities. For purposes of this Section 3.4, the term "liabilities" shall include without limitation any direct or indirect liability, indebtedness, guaranty, endorsement, claim, loss, damage, deficiency, cost, expense, obligation or responsibility, either accrued, absolute, contingent, mature, unmature or otherwise and whether known or unknown, fixed or unfixed, liquidated or unliquidated, secured or unsecured. 3.5 PERMITS AND INTANGIBLES. Except as would not have a Sub-Debt Material Adverse Effect, each SDH owns or holds all licenses, franchises, permits and other governmental authorizations in each jurisdiction necessary for such SDH to own, possess, sell, assign, convey and transfer the Sub-Debt Assets (the "Material Permits"). 3.6 CONFORMITY WITH LAW; LITIGATION. Each SDH has complied in all material respects with, is not in violation in any material respect of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to the Sub-Debt Assets which would constitute a Sub-Debt Material Adverse Effect, or which would materially adversely affect Search's or Newco's ability to service, collect, maintain and/or use the Sub-Debt Assets. There are no claims, actions, suits or proceedings, pending or, to the knowledge of each SDH, threatened, against or affecting either SDH at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction -3- 50 over it which, if adversely determined, would have a Sub-Debt Material Adverse Effect. There are no judgments, orders, injunctions, decrees, stipulations or awards (whether rendered by a Court or administrative agency or by arbitration) against either SDH or against any of the Sub-Debt Assets which would have a Sub-Debt Material Adverse Effect. The terms "law" and "regulation" as used in this Sub-Debt Acquisition Agreement include all state and federal laws and regulations applicable to either SDH's business. 3.7 ABSENCE OF CHANGES. Prior to Closing, there has not been any change that by itself or together with other changes, has had a Sub-Debt Material Adverse Effect. 3.8 SEARCH SUB-DEBT SECURITIES REPRESENTATIONS. Each SDH (a) has such knowledge, sophistication and experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Search Sub-Debt Securities; (b) fully understands the nature, scope and duration of the limitations on transfer contained in the Sub-Debt Shareholders Agreement: (c) understands that the Search Sub-Debt Securities are not registered and that their resale is restricted by law; and (d) can bear the economic risk of any investment in the Search Sub-Debt Securities. Each SDH has had an adequate opportunity to ask questions and receive answers (and has asked such questions and received answers to its satisfaction) from the officers of Search concerning the business, operations and financial condition of Search and/or the Search Sub-Debt Securities Disclosure Documents (as defined below in Section 4.5). Except as has been previously stated or established in the organizational documents for each SDH, each SDH has no contract, undertaking, agreement or arrangement, written or oral, with any other person to sell, transfer or grant participation in any shares of Search Sub-Debt Securities to be acquired by such SDH in the Sub-Debt Sale and is not acquiring the Search Sub-Debt Securities with a view to their distribution, except as may be permitted under the Sub-Debt Shareholders Agreement once the registration statement for such Search Sub-Debt Securities has become effective as set forth -4- 51 therein. In addition, each SDH understands the nature of the restrictions imposed by Rules 145 and 144 of the rules and regulations of the Securities and Exchange Commission under the Securities Act of 1933, as amended, as well as the restrictions on resale of the Search Sub-Debt Securities imposed by the Sub-Debt Shareholders Agreement to which such SDH is a party. 3.9 COMPLETE COPIES OF MATERIALS. Each SDH has delivered, and/or will deliver at Closing, to Search and Newco true and complete copies of each agreement, contract, commitment or other document (or summaries of same) that is referred to in SDH Sub-Debt Schedules or that has been requested by Search and Newco or its counsel. [THE REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK] -5- 52 SUB-DEBT SCHEDULE 4 4. REPRESENTATIONS OF SEARCH AND NEWCO 4.1 DUE ORGANIZATION. Search is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and Newco is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, and each of Search and Newco is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective businesses in the places and in the manner as now conducted except for where the failure to be so authorized or qualified would not have a material adverse effect on the ability of Search to consummate the transaction contemplated by this Sub-Debt Acquisition Agreement and the DACC Acquisition Agreement (a "Search Sub-Debt Material Adverse Effect"). 4.2 AUTHORIZATION; VALIDITY OF OBLIGATIONS. Each of Search and Newco has the full legal right, power and corporate authority to enter into and perform its obligations pursuant to the terms of the Sub-Debt Acquisition Agreement and the Related Documents. The execution and delivery of this Sub-Debt Acquisition Agreement and the Related Documents by Search and Newco and the performance by each of Search and Newco of its obligations thereunder have been duly and validly authorized by the respective Boards of Directors of Search and Newco and by all necessary corporate action. The Sub-Debt Acquisition Agreement is, and upon execution by Search and Newco, the Related Documents will be a legal, valid and binding obligations of each of Search and Newco enforceable in accordance with their terms except as such enforceability may be limited by principles of public policy and subject to the laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies. 4.3 NO CONFLICTS. The execution, delivery and performance of the Sub-Debt Acquisition Agreement, the consummation of the -6- 53 transactions contemplated thereby and the fulfillment of the terms thereof will not: (a) conflict with, or result in a breach or violation of the Certificate of Incorporation and the Bylaws, each as amended, of Search and Newco. (b) conflict with, or result in a default (or would constitute a default but for any requirement of notice or lapse of time or both) under any document, agreement or other instrument to which either Search or Newco is a party, or result in the creation or imposition of any lien, charge or encumbrance on any of Search's or Newco's properties pursuant to (i) any law or regulation to which either Search or Newco or any of their respective property is subject, or (ii) any judgment, order or decree to which Search or Newco is bound or any of their respective property is subject, except, in each case, as would not individually or in the aggregate, have a Search Sub-Debt Material Adverse Effect; (c) result in termination or any impairment of any material permit, license, franchise, contractual right or other authorization of Search or Newco; or (d) violate any law, order, judgement, rule or regulation to which Search or Newco is subject or by which Search or Newco is bound. 4.4 SEARCH CAPITALIZATION. The authorized capital stock of Search consists of 130,000,000 shares of Common Stock and 60,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"), of which 400,000 shares have been designated as the 12% Senior Convertible Preferred Stock (the "12% Stock"), 55,000,000 shares have been designated as the 9/7 Noteholder Convertible Preferred and 4,000,000 shares have been designated as the Convertible Stock. As of the date of this Sub-Debt Acquisition Agreement, 26,189,094 shares of Common Stock were issued and outstanding (excluding treasury shares), 3,026,389 shares of Common Stock were held in treasury, 11,462,678 shares of Common Stock were reserved for issuance -7- 54 upon exercise of options and warrants issued by Search. In addition, as of the date of this Sub-Debt Acquisition Agreement 400,000 shares of 12% Stock, 16,983,143 shares of 9/7 Noteholder Convertible Preferred and no shares of Convertible Stock were issued and outstanding. All of the outstanding shares of capital stock of Search have been duly authorized and validly issued and are fully paid and nonassessable and were not issued in violation of any preemptive or other rights. When issued to a SDH pursuant to the terms of this Sub-Debt Acquisition Agreement, the Search Sub-Debt Securities to be issued by Search pursuant to this Sub-Debt Acquisition Agreement will be duly authorized and validly issued and fully paid and nonassessable, not issued in violation of any preemptive or other rights, free and clear of all Liens (except for as provided in the Escrow Agreement and this Sub-Debt Acquisition Agreement), and shall be issued and delivered in compliance with all applicable federal, state and local laws, rules and regulations. 4.5 SEARCH SUB-DEBT SECURITIES DISCLOSURE DOCUMENTS. As promptly as possible after the date of the Sub-Debt Acquisition Agreement, Search will provide to each SDH the following: (a) a copy of Search's SEC Form 10-K dated July 2, 1996, including all supplements or amendments thereto, a copy of all SEC 10-Q's and 8-K's filed by Search since March 31, 1996, a copy of all proxy statements relating to Search's meetings of stockholders (whether annual or special) held since January 1, 1996 and a copy of all other forms, reports and other registration statements filed by Search with the Commission since January 1, 1996 (the forms, reports and other documents referred to in this clauses (a) being referred to, collectively, as the "SEC Reports") (b) a copy of Search's bankruptcy Plan of Reorganization, including the Plan's disclosure documents and all amendments and supplements thereto, and all other documents and information related thereto; and (c) such other documents and information as are deemed relevant and material in connection with the issuance of -8- 55 the Search Sub-Debt Securities to a SDH (collectively the "Search Sub-Debt Disclosure Documents"). In addition, Search shall make available to each SDH those officers or representatives of Search as are necessary to respond to any questions a SDH may reasonably have regarding Search and the Search Sub-Debt Securities. 4.6 ABSENCE OF MATERIAL CHANGES. Since March 31, 1996, except as contemplated by this Sub-Debt Acquisition Agreement, as disclosed in any SEC Report filed since March 31, 1996 and prior to the date of this Sub-Debt Acquisition Agreement or as set forth in Sub-Debt Schedule 4.6, Search and its subsidiaries have conducted their businesses in accordance with the description in Search's Form 10-K and, since March 31, 1996, there has not been: (a) any change that by itself or together with other changes has had a Search Sub-Debt Material Adverse Effect; (b) any damage, destruction or loss (whether or not covered by insurance) having a Search Sub-Debt Material Adverse Effect; (c) any material change by Search in its accounting methods, principles or practices; or (d) any entry by Search or any of its subsidiaries into any commitment or transaction which has a Search Sub-Debt Material Adverse Effect. 4.7 SEARCH SEC FILINGS. Search has filed with the Commission all required filings on a timely basis since the date of its Plan of Reorganization and such filings as well as the SEC Reports are, (i) to the best of Search's information, true, accurate and complete, and were prepared in accordance with the requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations thereunder and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be -9- 56 stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Search shall file with the Commission a Form 8-K regarding the subject matter of the DACC transaction and this Sub-Debt Acquisition Agreement within the time limits specified by the Commission after Closing has occurred. 4.8 SEARCH FINANCIAL STATEMENTS. (a) The representations and warranties set forth in Section 4.9(a) of Schedule 4 to the DACC Acquisition Agreement are hereby incorporated herein. In addition, Search will deliver to each SDH the most recent available interim unaudited or audited financial statements (or portions thereof) as soon as the same have been prepared for all time periods after the date of the Interim Financials. (b) Except as disclosed in the SEC Reports filed prior to the date of this Sub-Debt Acquisition Agreement, as set forth in the Search Financial Statements or as set forth in Sub-Debt Schedule 4.8, since March 31, 1996, neither Search nor any of its subsidiaries has incurred any liability or obligation of any nature which would be required to be reflected on a balance sheet, or in the notes thereto, prepared in accordance with generally accepted accounting principles, except for liabilities and obligations incurred in the ordinary course of business in accordance with the description contained in Search's Form 10-K or liabilities which would not, individually or in the aggregate, have a Search Sub-Debt Material Adverse Effect. 4.9 OWNERSHIP OF NEWCO; NO PRIOR ACTIVITIES. (a) Newco was formed solely for the purposes of engaging in the DACC Sale and the Sub-Debt Sale and the other transactions contemplated by the DACC Acquisition Agreement and this Sub-Debt Acquisition Agreement. -10- 57 (b) As of the date of the Sub-Debt Acquisition Agreement and as of the Closing, all of the outstanding capital stock of Newco is and will be owned directly by Search. As of the Closing, there will be no options, warrants or other rights (including registration rights), agreements, arrangements or commitments to which Newco is a party of any character relating to the issued or unissued capital stock of, or other equity interests in, Newco, or obligating Newco to grant, issue or sell any shares of the capital stock of, or other equity interests in, Newco, by sale, lease, license or otherwise. There are no obligations, contingent or otherwise, of Newco to repurchase, redeem or otherwise acquire any shares of the capital stock of Newco. (c) As of the date hereof and the Closing, except for the obligations or liabilities incurred in connection with its incorporation or organization and the DACC Sale and the Sub-Debt Sale and other transactions contemplated hereby, Newco has not and will not have incurred, directly or indirectly, through any subsidiary or affiliate, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. 4.10 CONFORMITY WITH LAW; LITIGATION. Search has complied in all material respects with, is not in violation in any material respect of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to Search, any of its subsidiaries or any of their assets or properties which would constitute a Search Sub-Debt Material Adverse Effect, or which would materially adversely affect Search's ability to perform its obligations under the Sub-Debt Acquisition Agreement. Except as set forth in Sub-Debt Schedule 4.10, there are no claims, actions, suits or proceedings, pending or, to the knowledge of Search, threatened, against or affecting Search at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over it which, if adversely determined, would have a Search Sub-Debt Material Adverse -11- 58 Effect. There are no judgments, orders, injunctions, decrees, stipulations or awards (whether rendered by a Court or administrative agency or by arbitration) against Search, any of its subsidiaries or any of their assets or properties which would have a Search Sub-Debt Material Adverse Effect. -12- EX-2.3 4 ESCROW AGREEMENT 1 EXHIBIT 2.3 ESCROW AGREEMENT This Escrow Agreement is entered into as of August 6, 1996, by and among: (i) Search Capital Group, Inc., a Delaware corporation ("Search"); (ii) Dealers Alliance Credit Corp., a Delaware corporation ("DACC"); (iii) Search Funding IV, Inc. a Texas corporation and a wholly-owned subsidiary of Search ("Newco"); (iv) R-H Capital Partners, L.P. ("R-H"); (v) Kellett Investment Corporation ("Kellett") (hereinafter R-H and Kellett may be individually or collectively referred to as the "Subordinated Debt Holders" or "SDH") and (vi) U.S. Trust Company of Texas, N.A. ("Escrow Agent"). Search and Newco are sometimes collectively referred to as "Buyer". W I T N E S S E T H: WHEREAS, DACC entered into an Asset Acquisition Agreement with Buyer dated as of August 2, 1996 (the "Asset Acquisition Agreement"), pursuant to which Buyer agreed to purchase DACC's "Assets" (as defined in the Asset Acquisition Agreement; capitalized terms used herein shall have the same definition as in the Asset Acquisition Agreement unless otherwise specifically indicated); WHEREAS, Search has agreed to issue the Search Securities in partial payment for the Assets; and WHEREAS, the Asset Acquisition Agreement provides that part of the Search Securities are to be held in escrow pursuant to this Escrow Agreement in order to guaranty payment of DACC's indemnification obligations under the Asset Acquisition Agreement (such part of the Search Securities to be held in escrow under the Asset Acquisition Agreement shall be referred to herein as the "DACC Escrow Shares"); WHEREAS, DACC and Buyer desire that Escrow Agent hold the DACC Escrow Shares in escrow, and Escrow Agent has agreed to do so, on the terms and conditions set forth in the Asset Acquisition Agreement and this Escrow Agreement. WHEREAS, Buyer has entered into an Asset Acquisition Agreement with SDH dated as of August 2, 1996 (the "Sub-Debt Search-DACC Escrow Agreement -1- 2 Acquisition Agreement"), pursuant to which Buyer agreed to purchase certain "Sub-Debt Assets" (as defined in the Sub-Debt Acquisition Agreement); and WHEREAS, Search has agreed to issue the Search Sub-Debt Securities (as defined in the Sub-Debt Acquisition Agreement) in payment for the Sub-Debt Assets; and WHEREAS, the Sub-Debt Acquisition Agreement provides that the Indemnity Shares (as defined in the Sub-Debt Acquisition Agreement), are to be held in escrow pursuant to this Escrow Agreement in order to guaranty payment of SDH's indemnification obligations under the Sub-Debt Acquisition Agreement; and WHEREAS, Buyer and SDH desire that Escrow Agent hold the Indemnity Shares in escrow, and Escrow Agent has agreed to do so, on the terms and conditions set forth in the Sub-Debt Acquisition Agreement and this Escrow Agreement. NOW, THEREFORE, in consideration of the foregoing recitals, which are incorporated into the Agreement as if fully set forth, and for other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Establishment of DACC Escrow. DACC and Buyer hereby deliver the DACC Escrow Shares to Escrow Agent to hold in escrow on the terms and conditions set forth herein. All dividends or other distributions made by Search with respect to any of the DACC Escrow Shares while the DACC Escrow Shares are held in escrow by Escrow Agent shall be paid to Escrow Agent and held in escrow under the terms of this Escrow Agreement (the DACC Escrow Shares together with the dividends or other distributions paid thereon are collectively referred to as the "DACC Escrow Deposit"). The DACC Escrow Shares consist of: (i) 766,218 shares of Convertible Stock; (ii) 1,277,030 shares of Common Stock; and (iii) 1,277,030 Warrants. Search-DACC Escrow Agreement -2- 3 The DACC Escrow Shares and cash attributable thereto shall be held in escrow pursuant this Agreement and shall be available to satisfy the indemnification obligations of DACC under the Asset Acquisition Agreement with respect to the "DACC 100% Claims" and DACC's portion of the "Shared Claims". 2. Establishment of Sub-Debt Escrow. SDH and Buyer hereby deliver the Indemnity Shares to Escrow Agent to hold in escrow on the terms and conditions set forth herein. All dividends or other distributions made by Search with respect to any of the Indemnity Shares while the Indemnity Shares are held in escrow shall be paid to Escrow Agent and held in escrow by Escrow Agent under the terms of this Agreement (the Indemnity Shares together with the dividends or other distributions paid thereon are collectively referred to as the "Sub-Debt Escrow Deposit"). The Indemnity Shares consists of 893,921 shares of Convertible Stock issued for the benefit of SDH pursuant to the Sub-Debt Acquisition Agreement. The Indemnity Shares and cash attributable thereto shall be held in escrow pursuant this Agreement and shall be available to satisfy the indemnification obligations of SDH under the Sub-Debt Acquisition Agreement with respect to the "SDH 100% Claims" and SDH's portion of the "Shared Claims". 3. Receipt. By Escrow Agent's executing Schedule 3.1 attached hereto and incorporated herein, Escrow Agent hereby acknowledges receipt of (i) the DACC Escrow Shares funding the DACC Escrow Deposit; and (ii) the Indemnity Shares funding the Sub-Debt Escrow Deposit, and agrees to hold the DACC Escrow Deposit and the Sub-Debt Escrow Deposit in escrow in accordance with the terms of this Agreement. For purposes of this Agreement, "Master Escrow Deposit" shall mean collectively the DACC Escrow Deposit and the Sub-Debt Escrow Deposit. 4. Definitions. As stated above, the parties hereto acknowledge that the Master Escrow Deposit has been established to secure DACC's indemnification obligations under the Asset Acquisition Agreement and SDH's indemnification obligations under the Sub-Debt Acquisition Agreement. For purposes of this Agreement, there are three types of indemnity Claims governed by this Escrow Agreement: (i) those for which only DACC has liability (the "DACC 100% Claims"), (ii) those for which only Search-DACC Escrow Agreement -3- 4 the Subordinated Debt Holders have liability (the "SDH 100% Claims"), and (iii) those for which both DACC and SDH have liability (the "Shared Claims"). With respect to DACC 100% Claims only DACC Escrow Shares and/or cash attributable thereto shall be used to pay such Claims. With respect to SDH 100% Claims only Indemnity Shares and/or cash attributable thereto shall be used to pay such Claims. With respect to Shared Claims, 62.741% of such Claims shall be paid from DACC Escrow Shares and/or cash attributable thereto, and 37.259% of such Claims shall be paid from Indemnity Shares and/or cash attributable thereto, provided, that if either the DACC Escrow Shares and the cash attributable thereto, on the one hand, or the Indemnity Shares and the cash attributable thereto, on the other, are insufficient to pay such party's share of the Shared Claim, then the other party shall pay any deficiency so that Search receives payment for 100% of the Shared Claim, provided further, however, that the other party shall be responsible for paying such deficiency only to the extent that DACC Escrow Shares and/or cash attributable thereto or Indemnity Shares and/or cash attributable thereto, as the case may be, continue to be held in escrow by Escrow Agent. 5. Disbursement Instructions for the DACC Escrow Deposit. Escrow Agent shall hold the DACC Escrow Deposit and disburse the DACC Escrow Deposit as follows: (a) Prior to the Final Expiration Date, a Search Indemnified Party may make claims for payment from the DACC Escrow Deposit for a DACC 100% Claim and/or DACC's portion of a Shared Claim by delivering to the Escrow Agent a Claim Notice (as defined in Section 8.4(a) of the Asset Acquisition Agreement) which shall: (i) state that the Search Indemnified Party has paid or incurred a DACC 100% Claim or a Shared Claim and is entitled to indemnification under Section 8 of the Asset Acquisition Agreement (an "Indemnification Item"); (ii) state the aggregate dollar amount of such Indemnification Item; Search-DACC Escrow Agreement -4- 5 (iii) specify in reasonable detail the nature and amount of each individual Indemnification Item; and (iv) specify in detail those DACC Escrow Shares, in the order of class and Value as specified in Section 8.4(e) of the Asset Acquisition Agreement, that Escrow Agent shall deliver to the Search Indemnified Party or as otherwise directed by the Search Indemnified Party in satisfaction of the Indemnification Item(s) set forth in the Claim Notice in accordance with Sections 8.4(e) and 10.3 of the Asset Acquisition Agreement. The Search Indemnified Party shall deliver a copy of such Claim Notice to DACC pursuant to the Asset Acquisition Agreement and provide to the Escrow Agent evidence of receipt of a copy of such Claim Notice by DACC. Any Claim Notice may include multiple Indemnification Items. The first Claim Notice shall, in addition to the items mentioned above, state that the Deductible has been satisfied and include in reasonable detail all items of indemnification which shall have been attributable to the satisfaction of the Deductible. (b) If DACC does not notify the Search Indemnified Party and Escrow Agent within thirty (30) days of receipt by DACC of the Claim Notice (the "Notice Period") that DACC disputes any Indemnification Item included in a Claim Notice, DACC shall be deemed to have acknowledged the correctness of the amount claimed for such Indemnification Item in such Claim Notice as well as the direction as to what class and Value of DACC Escrow Shares shall be delivered to Search to satisfy such Indemnification Item, and the Escrow Agent shall thereafter deliver to the Search Indemnified Party from the DACC Escrow Deposit the number of shares of the DACC Escrow Shares and/or cash (to the extent such DACC Escrow Shares and/or cash have not been distributed to DACC pursuant to Section 5(d) below) by class and equal in Value to the amount specified in the Claim Notice with respect to such Indemnification Item. (c) If DACC shall, within the Notice Period, object in writing to any Indemnification Item, DACC and the Search Indemnified Party shall proceed to resolve any dispute with respect to such Indemnification Item pursuant the provisions Search-DACC Escrow Agreement -5- 6 set forth in Section 8.4 of the Asset Acquisition Agreement and the amount so objected to shall be held by the Escrow Agent and shall not be released from the DACC Escrow Deposit except in accordance with either (i) written instructions executed by DACC and Search or (ii) the final nonappealable order of a court of competent jurisdiction directing the Escrow Agent with respect to the matters relating to the claims by the Search Indemnified Party for indemnification from DACC, promptly after which time the Escrow Agent shall deliver to the Search Indemnified Party out of the DACC Escrow Deposit the number of shares of the DACC Escrow Shares and/or cash by class and equal in Value to the portion of such amount set forth in such written instructions or in such order, as the case may be. (d) Thirty (30) days prior to the First Expiration Date, DACC shall deliver to Search and to the Escrow Agent a written notice (the "DACC Distribution Notice") setting forth an estimate of the amount (the "DACC Distribution Amount") of shares of the DACC Escrow Shares and/or cash by class and Value DACC shall be entitled to have distributed to DACC out of the DACC Escrow Deposit pursuant to Sections 10.1(b) and 10.2 of the Asset Acquisition Agreement. If Search objects to the DACC Distribution Amount specified in the DACC Distribution Notice, Search shall, within twenty (20) days after receipt by Search and the Escrow Agent of the DACC Distribution Notice, deliver to the Escrow Agent and to DACC a certificate specifying in reasonable detail the nature and basis for such objection. If the Escrow Agent shall not have received such a certificate from Search objecting to the DACC Distribution Amount specified in the DACC Distribution Notice within twenty (20) days after receipt by Search and Escrow Agent of the DACC Distribution Notice, Search shall be deemed to have acknowledged the correctness of the DACC Distribution Amount specified in the DACC Distribution Notice, and the Escrow Agent shall thereafter deliver to DACC out of the DACC Escrow Deposit the amount of shares of the DACC Escrow Shares and/or cash by class and equal in Value to the DACC Distribution Amount specified in the DACC Distribution Notice. If the Escrow Agent shall receive, within twenty (20) days after receipt by Search and the Escrow Agent of the DACC Distribution Notice, a certificate of Search objecting to the DACC Distribution Amount specified in the DACC Distribution Notice, then no payment shall be made from the Search-DACC Escrow Agreement -6- 7 DACC Escrow Deposit except in accordance with either (i) written instructions executed by Search and DACC, or (ii) the final nonappealable order of a court of competent jurisdiction directing the Escrow Agent to make such a payment. (e) After the Final Expiration Date, a Search Indemnified Party may make claims for payment from the DACC Escrow Deposit only in respect of Claims that were included in determining the Reserved Amount (as defined below). (f) Thirty (30) days prior to the Final Expiration Date, Search shall deliver to DACC and the Escrow Agent a written notice (the "Reserve Notice") setting forth the amount of shares of DACC Escrow Shares and/or cash by class and Value (the "Reserved Amount") of the DACC Escrow Deposit required to be reserved and retained to secure payment of Pending Claims pursuant to Section 10.2 of the Asset Acquisition Agreement. If DACC shall object to the Reserved Amount specified in the Reserve Notice, DACC shall, within twenty (20) days after receipt by DACC and the Escrow Agent of the Reserve Notice, deliver to the Escrow Agent and to Search a certificate specifying in reasonable detail the nature and basis for such objection. If the Escrow Agent shall not have received a DACC certificate objecting to the Reserved Amount specified in the Reserve Notice within twenty (20) days after receipt by DACC and Escrow Agent of the Reserve Notice, DACC shall be deemed to have acknowledged the correctness of the Reserved Amount specified in the Reserve Notice, and the Escrow Agent shall promptly thereafter deliver to DACC out of the DACC Escrow Deposit an amount equal to the shares of the DACC Escrow Shares and/or cash then remaining in the DACC Escrow Deposit less the Reserved Amount specified by class and Value in the Reserve Notice. If the Escrow Agent shall receive, within twenty (20) days after receipt by DACC and Escrow Agent of the Reserve Notice, a DACC certificate objecting to the Reserved Amount specified in the Reserve Notice, then Escrow Agent shall deliver to DACC out of the DACC Escrow Deposit the amount of shares of the DACC Escrow Shares and/or cash equal to the shares of the DACC Escrow Deposit then remaining in the DACC Escrow Deposit less the Reserved Amount specified in the Reserve Notice. Subject to Section 5(g) below, no additional payment shall be made from the DACC Escrow Deposit until Escrow Search-DACC Escrow Agreement -7- 8 Agent is provided with either (i) written instructions executed by Search and DACC, or (ii) the final nonappealable order of a court of competent jurisdiction directing the Escrow Agent to make such a payment. (g) Thereafter, Escrow Agent shall retain in the DACC Escrow Deposit the Reserve Amount pending final resolution of the Pending Claims as defined in Section 10.2 of the Asset Acquisition Agreement. Upon final resolution of a Pending Claim, Search shall submit a Claim Notice to Escrow Agent and comply with the procedures set forth above in Sections 5(a),(b), and (c). Upon final resolution of all Pending Claims and distributions from the DACC Escrow Deposit as payment for such Claims, any remaining DACC Escrow Shares and/or cash held in the DACC Escrow Deposit shall be delivered to DACC. 6. Disbursement Instructions for the Sub-Debt Escrow Deposit. Escrow Agent shall hold the Sub-Debt Escrow Deposit and disburse the Sub-Debt Escrow Deposit as follows: (a) Prior to the Final Expiration Date, a Sub-Debt Search Indemnified Party, as defined in the Sub-Debt Acquisition Agreement, may make claims for payment from the Sub-Debt Escrow Deposit for a SDH 100% Claim and/or SDH's portion of a Shared Claim by delivering to the Escrow Agent a Claim Notice (for purposes of this Section 6, "Claim Notice" shall be as defined in Section 8.4(a) of the Sub-Debt Acquisition Agreement") which shall: (i) state that the Sub-Debt Search Indemnified Party has paid or incurred a SDH 100% Claim or a Shared Claim and is entitled to indemnification under Section 8 of the Sub-Debt Acquisition Agreement (an "Indemnification Item"); (ii) state the aggregate dollar amount of such Indemnification Item; (iii) specify in reasonable detail the nature and amount of each individual Indemnification Item; and Search-DACC Escrow Agreement -8- 9 (iv) specify in detail those Indemnity Shares in Value as specified in Section 8.4(e) of the Sub-Debt Acquisition Agreement that Escrow Agent shall deliver to the Sub-Debt Search Indemnified Party or as otherwise directed by the Sub-Debt Search Indemnified Party in satisfaction of the Indemnification Item(s) set forth in the Claim Notice in accordance with Sections 8.4(e) and 10.3 of the Sub-Debt Acquisition Agreement. The Sub-Debt Search Indemnified Party shall deliver a copy of such Claim Notice to SDH and provide to the Escrow Agent evidence of receipt of a copy of such Claim Notice by SDH. Any Claim Notice may include multiple Indemnification Items. (b) If SDH does not notify the Sub-Debt Search Indemnified Party and Escrow Agent within thirty (30) days of receipt by SDH of the Claim Notice (the "Notice Period") that SDH disputes any Indemnification Item included in a Claim Notice, SDH shall be deemed to have acknowledged the correctness of the amount claimed for such Indemnification Item in such Claim Notice as well as the direction as to what Value of Indemnity Shares shall be delivered to Search to satisfy such Indemnification Item, and the Escrow Agent shall thereafter deliver to the Sub-Debt Search Indemnified Party from the Sub-Debt Escrow Deposit the number of shares of the Indemnity Shares and/or cash (to the extent such Indemnity Shares and/or cash have not been distributed to the SDH pursuant to Section 6(d) below) equal in Value to the amount specified in the Claim Notice with respect to such Indemnification Item. (c) If SDH shall, within the Notice Period, object in writing to any Indemnification Item, SDH and the Sub-Debt Search Indemnified Party shall proceed to resolve any dispute with respect to such Indemnification Item pursuant the provisions set forth in Section 8.4 of the Sub-Debt Acquisition Agreement and the amount so objected to shall be held by the Escrow Agent and shall not be released from the Sub-Debt Escrow Deposit except in accordance with either (i) written instructions executed by SDH and Search or (ii) the final nonappealable order of a court of competent jurisdiction directing the Escrow Agent with respect to the matters relating Search-DACC Escrow Agreement -9- 10 to the claims by the Sub-Debt Search Indemnified Party for indemnification from SDH, promptly after which time the Escrow Agent shall deliver to the Sub-Debt Search Indemnified Party out of the Sub-Debt Escrow Deposit the number of shares of the Indemnity Shares and/or cash equal in Value to the portion of such amount set forth in such written instructions or in such order, as the case may be. (d) Thirty (30) days prior to the First Expiration Date, SDH shall deliver to Search and to the Escrow Agent a written notice (the "SDH Distribution Notice") setting forth an estimate of the amount (the "SDH Distribution Amount") of shares of the Indemnity Shares and/or cash equal in Value that SDH shall be entitled to have distributed to SDH out of the Sub-Debt Escrow Deposit pursuant to Sections 10.1(b) and 10.2 of the Sub-Debt Acquisition Agreement. If Search objects to the SDH Distribution Amount specified in the SDH Distribution Notice, Search shall, within twenty (20) days after receipt by Search and the Escrow Agent of the SDH Distribution Notice, deliver to the Escrow Agent and to SDH a certificate specifying in reasonable detail the nature and basis for such objection. If the Escrow Agent shall not have received such a certificate from Search objecting to the SDH Distribution Amount specified in the SDH Distribution Notice within twenty (20) days after receipt by Search and Escrow Agent of the SDH Distribution Notice, Search shall be deemed to have acknowledged the correctness of the SDH Distribution Amount specified in the SDH Distribution Notice, and the Escrow Agent shall promptly thereafter deliver to SDH out of the Sub-Debt Escrow Deposit the amount of shares of the Indemnity Shares and/or cash equal in Value to the SDH Distribution Amount specified in the SDH Distribution Notice. If the Escrow Agent shall receive, within twenty (20) days after receipt by Search and Escrow Agent of the SDH Distribution Notice, a certificate of Search objecting to the SDH Distribution Amount specified in the SDH Distribution Notice, then no payment shall be made from the Sub-Debt Escrow Deposit except in accordance with either (i) written instructions executed by Search and SDH, or (ii) the final nonappealable order of a court of competent jurisdiction directing the Escrow Agent to make such a payment. Search-DACC Escrow Agreement -10- 11 (e) After the Final Expiration Date, a Sub-Debt Search Indemnified Party may make claims for payment from the Sub-Debt Escrow Deposit only in respect of Claims that were included in determining the Sub-Debt Reserved Amount (as defined below). (f) Thirty days prior to the Final Expiration Date, Search shall deliver to SDH and the Escrow Agent a written notice (the "Sub-Debt Reserve Notice") setting forth the amount of shares of Indemnity Shares and/or cash by Value (the "Sub-Debt Reserved Amount") of the Sub-Debt Escrow Deposit required to be reserved and retained to secure payment of SDH's indemnification obligations for the Pending Claims pursuant to Section 10.2 of the Sub-Debt Acquisition Agreement. If SDH shall object to the Sub-Debt Reserved Amount specified in the Sub-Debt Reserve Notice, SDH shall, within twenty (20) days after receipt by SDH and the Escrow Agent of the Sub-Debt Reserve Notice, deliver to the Escrow Agent and to Search a certificate specifying in reasonable detail the nature and basis for such objection. If the Escrow Agent shall not have received a certificate objecting to the Sub-Debt Reserved Amount specified in the Sub-Debt Reserve Notice within twenty (20) days after receipt by SDH and the Escrow Agent of the Sub-Debt Reserve Notice, SDH shall be deemed to have acknowledged the correctness of the Sub-Debt Reserved Amount specified in the Sub-Debt Reserve Notice, and the Escrow Agent shall promptly thereafter deliver to SDH out of the SDH Escrow Deposit an amount equal to the shares of the Indemnity Shares and/or cash then remaining in the Sub-Debt Escrow Deposit less the Sub-Debt Reserved Amount specified in the Sub-Debt Reserve Notice. If the Escrow Agent shall receive, within twenty (20) days after receipt by SDH and Escrow Agent of the Sub-Debt Reserve Notice, a SDH Certificate objecting to the Sub-Debt Reserved Amount specified in the Sub-Debt Reserve Notice, then Escrow Agent shall deliver to SDH out of the Sub-Debt Escrow Deposit the amount of shares of the Indemnity Shares and/or cash equal to the shares of the Sub-Debt Escrow Deposit then remaining in the Sub-Debt Escrow Deposit less that Sub-Debt Reserved Amount specified in the Sub-Debt Reserve Notice. Subject to Section 6(g), no additional payment shall be made from the Sub-Debt Escrow Deposit until Escrow Agent is provided with either (i) written instructions executed by SDH and Search Search-DACC Escrow Agreement -11- 12 or (ii) the final nonappealable order of a court of competent jurisdiction directing the Escrow Agent to make such a payment. (g) Thereafter, Escrow Agent shall retain in the Sub-Debt Escrow Deposit the Sub-Debt Reserved Amount pending final resolution of the Pending Claims as defined in Section 10.2 of the Sub-Debt Acquisition Agreement. Upon final resolution of a Pending Claim, Search shall submit a Claim Notice to Escrow Agent and comply with the procedures set forth above in Sections 6(a),(b), and (c). Upon final resolution of all Pending Claims and distributions from the Sub-Debt Escrow Depoist as payment for such Claims, any remaining Indemnity Shares and/or cash held in the Sub-Debt Escrow Deposit shall be delivered to SDH. 7. Reservation of DACC Claims. In the event SDH shall pay more than its portion of the Shared Claims pursuant to the provisions of Section 4 of this Agreement through Indemnity Shares and/or cash attributable thereto (the amount paid in excess of SDH's portion of the Shared Claims is hereinafter referred to as the "Excess Amount"), DACC and SDH agree that SDH shall be entitled to receive, out of any shares of DACC Escrow Shares and/or cash remaining in the DACC Escrow Deposit after satisfaction in full of all indemnity obligations of DACC to Search pursuant to the Asset Acquisition Agreement and Section 5 of this Escrow Agreement, an amount of DACC Escrow Shares and/or cash equal in Value to the Excess Amount. The parties agree that no shareholder, employee, director, officer, representative or agent of DACC shall have personal liability whatsoever with respect to the Excess Amount. This provision shall not affect Escrow Agent's duties or obligations hereunder except that the Escrow Agent shall distribute the DACC Escrow Shares and/or cash out of the DACC Escrow Deposit to SDH pursuant to either (i) written instructions executed by DACC and SDH or (ii) the final nonappealable order of a court of competent jursidiction directing Escrow Agent with respect to such matters. 8. Investment. Any portion of the DACC Escrow Deposit or the Sub-Debt Escrow Deposit consisting of cash shall be: (i) invested as directed by joint instructions of DACC and Buyer for the DACC Escrow Deposit or Buyer and SDH for the Sub-Debt Search-DACC Escrow Agreement -12- 13 Escrow Deposit, as the case may be, or (ii) in the absence of such joint instructions, shall be deposited in a commingled short term investment fund managed by an investment manager and available to Escrow Agent (e.g. Excelsior govt money fund). For tax purposes (1) all earnings on the DACC Escrow Shares shall be reported as earned by DACC; DACC's federal employer identification number is 25-1713866 and all tax notification forms or reports shall use the address set forth in Section 16 below as DACC's address for such forms or reports; and (2) 68.75% of the earnings on the Indemnity Shares shall be reported as earned by R-H and R-H's federal employer identification number is 58-2179728 and 31.25% of the earnings on the Indemnity Shares shall be reported as earned by Kellett and Kellett's federal employer identification number is 58-2158433. All tax notification forms or reports shall use the address set forth in Section 16 below as R-H's and Kellett's addresses for such forms or reports. 9. Certificate Legend. All certificates representing the DACC Escrow Shares shall bear the legend required by the Shareholders Agreement until said legend is removed pursuant to the terms and conditions of the Shareholders Agreement. All certificates representing the Indemnity Shares shall bear the legend required by the Sub-Debt Shareholders Agreement (as defined in the Sub-Debt Acquisition Agreement) until said legend is removed pursuant to the terms and conditions of the Sub-Debt Shareholders Agreement. Thereafter, all certificates representing the DACC Escrow Shares and the Indemnity Shares still constituting a part of the Master Escrow Deposit shall bear a legend substantially as follows: "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISTRIBUTED OR DISPOSED OF EXCEPT IN ACCORDANCE WITH THE CONDITIONS SPECIFIED IN THAT CERTAIN ESCROW AGREEMENT DATED AUGUST 2, 1996 AMONG SEARCH CAPITAL GROUP, INC, SEARCH FUNDING IV, INC., DEALERS ALLIANCE CREDIT CORP., R-H CAPITAL PARTNERS, L.P., KELLETT INVESTMENT CORPORATION AND U.S. TRUST COMPANY OF TEXAS, N.A. A COPY OF SUCH AGREEMENT WILL BE MAILED TO THE HOLDER HEREOF WITHOUT CHARGE WITHIN FIVE DAYS AFTER Search-DACC Escrow Agreement -13- 14 RECEIPT OF WRITTEN REQUEST THEREFOR DIRECTED TO SEARCH AT ITS HEADQUARTERS IN DALLAS, TEXAS." Notwithstanding the foregoing, Escrow Agent shall not be responsible for placing legends on certificates delivered to Escrow Agent hereunder, or changing legends on certificates delivered to Escrow Agent hereunder. 10. Fees. Escrow Agent is charging for its services hereunder the fees set forth on Schedule A, attached hereto and incorporated herein. The Escrow Agent's fees for the first year shall be paid by Search upon Search's receipt of invoice therefor and thereafter, Escrow Agent's fees shall be paid as follows: 62.741% of the fees shall be paid by deducting cash from the DACC Escrow Deposit and 37.259% of the fees shall be paid by deducting cash from the Sub-Debt Escrow Deposit. 11. Duties. The duties of the Escrow Agent hereunder are only such as are herein specifically provided, being purely administrative in nature, and the Escrow Agent shall incur no liability whatsoever except for fraudulent or grossly negligent conduct. Other than the obligations of the Escrow Agent set forth in this Agreement, the Escrow Agent shall have no other obligations, rights, or duties with reference to this Agreement. The Escrow Agent shall not be bound by any modification of this Agreement unless in writing and signed by all of the parties hereto. 12. Uncertainty or Conflict: In the event that the Escrow Agent shall be uncertain as to its duties or obligations hereunder or shall receive instructions from any party hereto with respect to any part or all of the Master Escrow Deposit, which are in conflict with any of the provisions of this Agreement, the Escrow Agent shall be entitled to refrain from taking any action other than to keep safely the Master Escrow Deposit and any other property so received by it until it shall be directed by a court as provided in the following Section. 13. Litigation: If (a) the Escrow Agent becomes involved in or is threatened with litigation for any reason resulting from its capacity as Escrow Agent, and/or (b) the Escrow Agent is uncertain as to its duties or obligations hereunder, the Escrow Search-DACC Escrow Agreement -14- 15 Agent is hereby authorized to deposit with the U.S. district court in Dallas, Texas the Master Escrow Deposit and notify the parties hereto of the same. Thereupon, the Escrow Agent shall stand fully relieved and discharged of any further duties hereunder in respect of such action and the matters giving rise thereto except as may be instructed by said court. In the event Escrow Agent is a party to any litigation, DACC, Buyer and SDH severally agree to reimburse Escrow Agent on demand for any reasonable out-of-pocket expenses incurred by Escrow Agent in connection with such litigation, and Escrow Agent shall also have the right to deduct said expenses from the Master Escrow Deposit. 14. Escrow Agent Replacement. If Escrow Agent resigns as Escrow Agent, the parties shall have thirty (30) days to select a new Escrow Agent. If the parties fail to select a new Escrow Agent within said thirty (30) day period, Escrow Agent shall appoint a successor Escrow Agent, which shall be a federally chartered national bank or trust company with assets in excess of $1 billion. Any successor Escrow Agent shall agree to be bound by all of the terms and conditions of this Agreement. 15. Termination. Upon disbursement of the entire Master Escrow Deposit, this Agreement shall terminate. 16. Notices. Any notice, request, claim, demand, waiver, consent, approval or other communication which is required or permitted hereunder shall be in writing and shall be deemed given if delivered personally or sent by telefax (with confirmation of receipt), by registered or certified mail, postage prepaid, or by recognized courier service, as follows: If to Search or Newco to: Search Capital Group, Inc. 700 N. Pearl Street Suite 400, L.B. 401 Dallas, Texas 75201-2809 Attention: George C. Evans, Pres. & CEO Facsimile No.: 214-965-6098 Search-DACC Escrow Agreement -15- 16 With a copy to: Riezman & Blitz, P.C. 120 S. Central, 10th Floor St. Louis, Missouri 63105 Attention: Richard M. Riezman, Esq. Facsimile No.: 314-727-6458 If to DACC: Dealers Alliance Credit Corp. c/o Chicago Holdings, Inc. 10000 RIDC Plaza Suite 200 Pittsburgh, PA 15238 Attention: Richard J. Uhl, Pres.& CEO Facsimile No.: 412-963-9841 With a copy to: Kronish, Lieb, Weiner & Hellman, LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attention: Russell S. Berman, Esq. Facsimile No.: 212-479-6275 If to SDH: (1) R-H Capital Partners, L.P. Atlanta Financial Center 3333 Peachtree Road Atlanta, GA 30326 Attention: Mr. Ken Millar Facsimile No.: (404) 266-5966 With a copy to: Search-DACC Escrow Agreement -16- 17 King & Spalding 191 Peachtree Street Atlanta, GA 30303 Attention: John J. Kelley III, Esq. Facsimile No.: (404) 572-5100 (2) Kellett Investment Corporation 200 Galleria Parkway, Suite 1800 Atlanta, GA 30339 Attention: John E. Cunningham Facsimile No.: (770) 956-7412 With a copy to: Troutman Sanders LLP 600 Peachtree Street, N.E., Suite 5200 Atlanta, GA 30308-2216 Attention: Hazen H. Dempster Facsimile No.: (404) 885-3900 If to Escrow Agent to: Bill Barber U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201 Facsimile No.: 214-754-1303 Search-DACC Escrow Agreement -17- 18 or to such other address as the person to whom notice is to be given may have specified in a written notice duly given to the sender as provided herein. Such notice, request, claim, demand, waiver, consent, approval or other communication shall be deemed to have been received: (i) as of the date delivered personally; (ii) as of the date of the telefax confirmation; (iii) as of the date the registered or certified mail acknowledgement of receipt is signed or the date of refusal to accept delivery; (iv) the date the acknowledgement of receipt is signed if delivered by courier; and, (v) if given by any other means, shall be deemed received only when actually received by the addressees. 17. Miscellaneous. a. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. b. This Agreement may be executed in one or more counterparts, and each such counterpart shall, for all purposes, be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. c. If any provision(s) of this Agreement are held to be invalid, illegal or unenforceable by a court of competent jurisdiction, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. d. The obligations and duties of Escrow Agent herein are personal to Escrow Agent and Escrow Agent may not assign any and/or all of its obligations or duties hereunder except as set forth herein. e. Escrow Agent is hereby severally indemnified by Buyer, DACC and SDH against any liability resulting from the exercise of its duties under this Agreement which are not performed with fraud or gross negligence. Search-DACC Escrow Agreement -18- 19 THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK. Search-DACC Escrow Agreement -19- 20 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. SEARCH CAPITAL GROUP, INC. ("Search") By: /s/ ROBERT D. IDZI - E.V.P. & CFO ------------------------------------- Robert D. Idzi SEARCH FUNDING IV, INC. ("Newco") By: /s/ ROBERT D. IDZI - E.V.P. & CFO ------------------------------------- Robert D. Idzi DEALERS ALLIANCE CREDIT CORP. ("DACC") By: /s/ RICHARD J. UHL ------------------------------------- R-H CAPITAL PARTNERS, L.P. ("R-H") By: R-H/Travelers, L.P., its general partner By: R-H Capital, Inc., its general partner By: /s/ KENNETH T. MILLAR ------------------------------------- Kenneth T. Millar Managing Director KELLETT INVESTMENT CORPORATION ("Kellett") By:/s/ STILES A. KELLETT, JR. ------------------------------------- Search-DACC Escrow Agreement 20 21 U.S. TRUST COMPANY OF TEXAS, N.A. ("Escrow Agent") By: /s/ BILL BARBER --------------------------------------------- Bill Barber Vice President Search-DACC Escrow Agreement -21- 22 SCHEDULE A ESCROW AGENT FEES First year annual Escrow Agent Fee: $3,000.00 For each additional year: $1,500.00 per year (due in advance) ** plus out of pocket extraordinary expenses Search-DACC Escrow Agreement -22- 23 SCHEDULE 3.1 ESCROW AGENT RECEIPT Escrow Agent acknowledges receipt of certificates for the following securities:
Title Type of Security Number of Shares ----- ---------------- ---------------- US Trust of Texas, N.A. as escrow Series B 9%/7% Convertible 766,218 agent f/b/o Dealers Alliance Credit Preferred Stock Corp. US Trust of Texas, N.A. as escrow Search Common Stock 1,277,030 agent f/b/o Dealers Alliance Credit Corp. US Trust of Texas, N.A. as escrow Warrants expiring March 14, 1,277,030 agent f/b/o Dealers Alliance Credit 2001 Corp. US Trust of Texas, N.A. as escrow Series B 9%/7% Convertible 893,921 agent f/b/o R-H Capital Partners, Preferred Stock L.P. and Kellett Investment Corporation
U.S. TRUST COMPANY OF TEXAS, N.A. By /s/ BILL BARBER --------------------------------- Bill Barber, Vice President Date 8/06/96 ------------------------------- Search-DACC Escrow Agreement -23- EX-2.4 5 SEARCH-DACC SHAREHOLDER AGREEMENT 1 EXHIBIT 2.4 SEARCH-DACC SHAREHOLDERS AGREEMENT THIS SEARCH-DACC SHAREHOLDERS AGREEMENT ("Agreement") is made and entered into as of August 2, 1996, by and between (i) Search Capital Group, Inc., a Delaware corporation ("Search") and (ii) Dealers Alliance Credit Corp., a Delaware corporation ("DACC"), on behalf of itself and all "DACC Shareholders" (as defined below). R E C I T A L S A. Search, Newco and DACC have entered into that certain Asset Acquisition Agreement dated August 2, 1996 (the "Asset Acquisition Agreement"). The delivery of this Agreement is a condition to the consummation of the transactions contemplated by the Asset Acquisition Agreement. Capitalized terms that are not defined herein have the meanings assigned to them in the Asset Acquisition Agreement. B. Pursuant to the Asset Acquisition Agreement, Search will issue to DACC and the Subordinated Debt Holders the Search Securities specified in the Asset Acquisition Agreement. NOW, THEREFORE, in consideration of the foregoing recitals, the representations, warranties and covenants herein contained and other good and valuable consideration, the receipt, adequacy and sufficiency of all of which are hereby acknowledged, Search and DACC hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: "Commission" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities act. "DACC Shareholders" means all of the stockholders of DACC as of Closing, and their respective successors and assigns. "Registration Expenses" means the expenses so described in Section 4 hereof. Search-DACC Shareholders -1- 2 "Registrable Securities" means (i) the Search Securities issued to DACC and the Subordinated Debt Holders pursuant to the Asset Acquisition Agreement, (ii) any of the securities of search issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Search Securities; provided, however, that shares of the Search Securities or other securities shall only be treated as Registrable Securities if and so long as they have not been sold to or through a broker-dealer or underwriter in a public distribution or public securities transaction. "Restricted Securities" means securities subject to the terms and conditions of Rule 145 and Rule 144 promulgated by the Commission pursuant to the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 2. RESTRICTED SEARCH SECURITIES. 2.1 Stop Transfer Instructions/Securities Legend. DACC acknowledges and agrees that all of the Search Securities issued by Search at the closing will be Restricted Securities. DACC further acknowledges and agrees that stop transfer instructions have been given to Search's transfer agent and the Escrow Agent with respect to certificates evidencing the Search Securities and that there will be placed on the certificates evidencing the Search Securities a legend stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULES 145 AND 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISTRIBUTED OR DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE CONDITIONS SPECIFIED IN THAT CERTAIN ESCROW AGREEMENT DATED AUGUST 2, 1996 AMONG SEARCH CAPITAL GROUP, INC., SEARCH FUNDING IV, INC., DEALERS ALLIANCE CREDIT CORP., R-H CAPITAL PARTNERS, L.P., KELLETT Search-DACC Shareholders -2- 3 INVESTMENT CORPORATION AND U.S. TRUST COMPANY OF TEXAS, N.A. A COPY OF SUCH AGREEMENT WILL BE MAILED TO THE HOLDER HEREOF WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT OF WRITTEN REQUEST THEREFOR DIRECTED TO SEARCH AT ITS HEADQUARTERS IN DALLAS, TEXAS." 2.2 Removal of Securities Legend. Search agrees to remove promptly the stop transfer instructions and securities legend described in Section 2.1 by delivery of substitute certificates without such legend upon (i) the declaration by the Commission and all relevant state securities regulators of the effectiveness of the registration statement under the Securities Act ("Registration Effectiveness"), (ii) the expiration of the restrictive period set forth in Rule 145(d), or (iii) the delivery by DACC to Search of a copy of a letter from the staff of the Commission, or an opinion of counsel in form and substance reasonably satisfactory to Search, to the effect that such securities legend is not required for purposes of the Securities Act. 2.3 Escrow Legend. DACC acknowledges and agrees that even after removal of the legend described in Section 2.1 on the certificates representing the Search Securities, the legend required by the Escrow Agreement shall remain on the certificates representing all of the Search Securities which are held by the Escrow Agent. Search agrees to remove promptly the escrow legend by delivery of substitute certificates without such legend upon the proper release of the aforesaid Search Securities from escrow. 3. REQUIRED REGISTRATION. Search shall (i) within six (6) months after Closing, file a registration statement with the Commission to effect the registration for the purposes of the reoffering and resale of the Search Securities under the Securities Act with respect to all, but not less than all, of the Registrable Securities held on behalf of DACC and the DACC Shareholders; and (ii) use its best efforts to cause the Commission to declare said registration statement effective under the Securities Act as promptly as possible but no later than ninety (90) days after filing the aforesaid registration statement with the Commission. Search shall be obligated to register Registrable Securities pursuant to this Section 3 on Search-DACC Shareholders -3- 4 one (1) occasion only. Notwithstanding anything to the contrary contained herein, the obligation of Search with respect to a registration under this Section 3 shall be deemed satisfied only at such time as the registration statement covering all shares of Registrable Securities shall have become effective. 4. EXPENSES. All expenses incurred by Search in complying with this Agreement, including, without limitation, all registration, qualifications and filing fees, blue sky fees and expenses printing expenses, fees and disbursements of counsel and independent public accountants for Search, fees of the National Association of Securities Dealers, Inc., transfer taxes, escrow fees, fees of transfer agents and registrars, and costs of insurance, but excluding any Selling Expenses, are herein called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Registrable Securities, plus all costs incurred by DACC or the DACC Shareholders in connection with or applicable to the sale of the Registrable Securities, are herein called "Selling Expenses." Search and DACC agree that the Registration Expenses shall include the reasonable fees and expenses of one (1) counsel for DACC and all DACC Shareholders in connection with the registration filed pursuant to this Agreement, provided that Search shall not be responsible for counsel fees and expenses in excess of Thirty Thousand Dollars ($30,000.00). Search will pay all Registration Expenses in connection with the registration statement filed pursuant to this Agreement. All Selling Expenses in connection with any registration statement filed pursuant to this Agreement shall be borne by DACC and/or the DACC Shareholders. 5. INDEMNIFICATION. In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to this Agreement, Search will indemnify and hold harmless DACC and the DACC Shareholders against any losses, claims, damages, or liabilities, joint or several, to which DACC or the DACC Shareholders may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of Search-DACC Shareholders -4- 5 any material fact contained in any registration under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by Search of any rule or regulation promulgated under the Securities Act applicable to Search and relating to action or inaction by Search in connection with any such registration, and will reimburse DACC and the DACC Shareholders for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Search will not be liable in any such case if and to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and conformity with information furnished to Search by or on behalf of DACC in writing specifically for use in such registration statement or prospectus. Promptly after receipt by DACC of notice of the commencement of any action for which indemnification may be obtained hereunder, DACC shall, if a claim in respect thereof is to be made against Search hereunder, notify Search in writing thereof; but the omission to so notify Search shall not relieve Search from any liability which Search may have to DACC and the DACC Shareholders other than under this Section 5 and, in any event, only to the extent Search has been materially prejudiced by the failure to provide Search with such notice. In case any such action shall be brought against DACC , Search shall be entitled to participate in and, to the extent Search shall agree that it is liable to DACC or the DACC Shareholders for indemnification hereunder, to assume and undertake the defense thereof with counsel of search's own choosing, and, after notice from Search to DACC of Search's election so to assume and undertake the defense thereof and of its agreement that it is liable for indemnification hereunder, Search shall not be liable to DACC under this Section 5 for any legal expenses subsequently incurred by DACC in connection with the Search-DACC Shareholders -5- 6 defense thereof other than reasonable costs of investigation and of liaison with counsel so elected; provided, however, that if the defendants in any such action include both DACC and Search and DACC or the DACC Shareholders shall have reasonably concluded that there may be reasonable defenses available to DACC or the DACC Shareholders which are different from or additional to those available to Search or if the interests of DACC or the DACC Shareholders reasonably may be deemed to conflict with the interests of Search, DACC or the DACC Shareholders shall have the right to select separate counsel, satisfactory to Search in its commercially reasonable discretion, and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by Search as incurred. 6. CHANGE IN COMMISSION FORMS OR PROCEDURES. In the event that the Commission shall adopt new forms or procedures which authorize or permit other means of secondary distribution which may require action by Search other than registration under the Securities Act, the parties agree that the foregoing provisions shall apply, as nearly as may be possible, to such new forms or procedures so long as the economic or other burden of compliance therewith to Search or DACC is not materially greater than the burden contemplated by the foregoing provisions. 7. TRANSFER OF REGISTRATION RIGHTS. 7.1 Transfers Permitted. DACC may assign its rights under this Agreement, but only to the trustee of a liquidating trust, and then only upon the prior written approval of Search, whose approval shall not be unreasonably withheld. DACC acknowledges that only DACC or the aforesaid liquidating trust trustee shall have the right to enforce DACC's rights under this Agreement prior to Registration Effectiveness. 7.2 Compliance with Laws and Agreements. Each such transfer shall comply with all applicable securities laws and any agreements between Search and the transferor. Search-DACC Shareholders -6- 7 7.3 Transfer Instruments. The transferee shall execute and deliver to Search an agreement in form and substance satisfactory to Search by which the transferee agrees to be bound by all terms and provisions of this Agreement as an assignee of the transferred rights. 8. REGISTRATION PROCEDURES. 8.1 In accordance with Section 3 above, when Search is required by the provisions of this Agreement to effect the registration of the Registrable Securities under the Securities Act, Search will: (a) prepare and file with the Commission a registration statement (which shall be on Form S-1 or other form of general applicability satisfactory to Search) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided in Section 8.1(b)). Search may include other securities in such registration statement in addition to the Registrable Securities at Search's option; provided that Search shall withdraw from such registration statement any securities that prevent Search from registering the Registrable Securities. (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith, including, without limitation, all filings and reports required to be filed under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, as may be necessary to keep such registration statement effective (i) if Search, using its commercially reasonable efforts, is able to maintain said registration pursuant to a Commission Form S-3 (including by way of amending such registration statement into a Form S-3 registration), until the earlier of (1) such time as all of the Registrable Securities shall have been sold and (2) such time as DACC and the DACC Shareholders shall no longer be subject to the restrictions on resale of the Registrable Securities of Rule 144 under the Securities Act; and (ii) if Search is Search-DACC Shareholders -7- 8 not able to utilize said Form S-3, then for a period of fifteen (15) months after the date said registration statement is declared effective by the Commission (provided, that in the event this clause (ii) shall become operative, Search shall continue to file with the Commission all filings and reports required to be filed under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, until the earlier of (A) such time as all of the Registrable Securities shall have been sold and (B) such time as DACC and the DACC Shareholders shall no longer be subject to the restrictions on resale of the Registrable Securities of Rule 144 under the Securities Act), and as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement for such period (for purposes of this paragraph (b), Form S-3 shall include any successor form promulgated by the Commission); (c) furnish to DACC and each DACC Shareholder such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons may reasonably request in order to facilitate the sale or other disposition of the Registrable Securities covered by such registration statement; (d) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under state "blue sky" laws in Texas and New York to the extent legally required; (e) use its commercially reasonable efforts to list or have approved for trading the Registrable Securities covered by such registration statement on each securities exchange upon which Search's other securities are listed and/or each over the counter market in which Search's other securities have been approved for trading, and if such securities are not so listed on the New York Stock Exchange or on the American Stock Exchange, than on the NASDAQ's National Market System at the time the registration statement becomes effective; Search-DACC Shareholders -8- 9 (f) immediately notify DACC at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, included an untrue statement of material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (g) make available for inspection by DACC, and any attorney, accountant, or other agent retained by DACC, all financial and other records, pertinent corporate documents, and properties of Search, and cause Search's officers, directors, and employees to supply all information reasonably requested by DACC or any such attorney, accountant, or agent in connection with such registration statement; and (h) in connection with each registration hereunder, DACC and each DACC Shareholder will furnish to Search in writing such information with respect to itself and the proposed distribution by it as shall be reasonably requested by Search in order to assure compliance with federal and applicable state securities laws. 9. DACC VOTES. DACC agrees that DACC shall vote the Search Securities in favor of adoption by Search's shareholders of the matters proposed for adoption at a special shareholders meeting as further described in Search's preliminary proxy materials as filed with the Commission on July 19, 1996 and provided to DACC. Search has provided a copy of all proxy materials to DACC for DACC's review prior to Closing. DACC and Search both further acknowledge that the above referenced preliminary proxy materials have been or will be amended. Search agrees to provide DACC with a copy of all amendments to the above referenced preliminary proxy materials prior to the date of said special shareholders meeting. DACC agrees to review all such preliminary proxy materials, and to vote the Search Securities in favor of all matters proposed for adoption as set forth in the amended proxy materials which it approves, acting in a commercially reasonable manner. Search-DACC Shareholders -9- 10 10. MISCELLANEOUS. 10.1 Further Assurances. The parties shall execute and deliver such other and further instruments and perform such other and further acts as may reasonably be required to fully consummate the transactions contemplated hereby. 10.2 Counterparts. This Agreement may be executed in one or more counterparts (which may be facsimile copies thereof), each of which shall be deemed an original, but all of which together shall constitute one and the same document. 10.3 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and legal representatives. 10.4 Notices. All notices or other communications hereunder shall be in writing and shall be sent by courier, or shall be sent by personal delivery, messenger or by electronic transmission (with answerback) to the addresses set forth for notices in the Asset Acquisition Agreement. 10.5 Governing Law. This Agreement shall be construed and governed by the laws of the State of Delaware without giving effect to the principles of conflicts of laws thereof. 10.6 Entire Agreement. This Agreement (together with the Asset Acquisition Agreement and the other agreements entered into pursuant thereto) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no party hereto shall be bound by any communications between them on the subject matter hereof unless such communications are in writing and bear a date contemporaneous with or subsequent to the date hereof. 10.7 Waivers and Amendments; Noncontractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument duly executed and acknowledged with the same formality as this Agreement, and signed by all the parties. Search-DACC Shareholders -10- 11 10.8 Construction. Whenever used herein, the neuter gender includes the feminine and masculine, the masculine includes the feminine and neuter, the singular number includes the plural, and the plural number includes the singular. The captions of the sections of this Agreement are for convenience of reference only, and the words contained therein shall in no way be held to explain, modify, amplify, or aid in the interpretation, construction or meaning of the provisions of this Agreement. The normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the construction or the interpretation of this Agreement or any amendments hereto. 10.9 Severability. The illegality, unenforceability or invalidity or any one or more covenants, phrases, clauses, sentences or sections of this Agreement, as determined by a court of competent jurisdiction, shall not affect the remaining portions of this Agreement, or any part thereof; and if any provision, section or subsection of this Agreement is adjudged by any court to e void or unenforceable in whole or in part, such provision, section or subsection, or portion thereof, shall be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent or, if it cannot be so amended without materially altering the intention of the parties as expressed herein, it shall be stricken and the remainder of this Agreement shall continue in full force and effect. Each provision, section and subsection of this Agreement is separable from every other provision, section and subsection and constitutes a separate distinct covenant. 10.10 Authority. Each party signing this Agreement, either directly or on behalf of another person or entity, represents and warrants that such party has all requisite authority to execute this Agreement and that such party will be bound hereby. Search-DACC Shareholders -11- 12 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first above written. SEARCH CAPITAL GROUP, INC ("Search") By: /s/ ROBERT D. IDZI -------------------------------- Title: E.V.P. & CFO ----------------------------- DEALERS ALLIANCE CREDIT CORP., on behalf of itself and all DACC Shareholders By: /s/ RICHARD J. UHL -------------------------------- Title: CHIEF EXECUTIVE OFFICER ----------------------------- Search-DACC Shareholders EX-2.5 6 SUB - DEBT SHAREHOLDERS AGREEMENT 1 EXHIBIT 2.5 SUB-DEBT SHAREHOLDERS AGREEMENT THIS SUB-DEBT SHAREHOLDERS AGREEMENT ("Agreement") is made and entered into as of August 2, 1996, by and between (i) Search Capital Group, Inc., a Delaware corporation ("Search") (ii) R-H Capital Partners, L.P. ("R-H"); (iii) Kellett Investment Corporation ("Kellet") (hereinafter R-H and Kellet may be individually or collectively referred to as the "Subordinated Debt Holders" or "SDH"). R E C I T A L S A. Search, Newco and the Subordinated Debt Holders have entered into that certain Asset Acquisition Agreement dated August 2, 1996 (the "Sub-Debt Acquisition Agreement"). The delivery of this Agreement is a condition to the consummation of the transactions contemplated by the Sub-Debt Acquisition Agreement. Capitalized terms that are not defined herein have the meanings assigned to them in the Sub-Debt Acquisition Agreement. B. Pursuant to the Sub-Debt Acquisition Agreement, Search will issue to the Sub-Debt Holders the Search Sub-Debt Securities specified in the Sub-Debt Acquisition Agreement. NOW, THEREFORE, in consideration of the foregoing recitals, the representations, warranties and covenants herein contained and other good and valuable consideration, the receipt, adequacy and sufficiency of all of which are hereby acknowledged, Search and SDH hereby agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the following definitions: "Commission" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities act. "Registration Expenses" means the expenses so described in Section 4 hereof. -1- 2 "Registrable Securities" means (i) the Search Sub-Debt Securities issued to R-H and Kellett pursuant to the Sub-Debt Acquisition Agreement, (ii) any of the securities of Search issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Search Sub-Debt Securities; provided, however, that shares of the Search Sub- Debt Securities or other securities shall only be treated as Registrable Securities if and so long as they have not been sold to or through a broker-dealer or underwriter in a public distribution or public securities transaction. "Restricted Securities" means securities subject to the terms and conditions of Rule 145 and Rule 144 promulgated by the Commission pursuant to the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 2. RESTRICTED SEARCH SUB-DEBT SECURITIES. 2.1 Stop Transfer Instructions/Securities Legend. SDH acknowledges and agrees that all of the Search Sub-Debt Securities issued by Search at the Closing will be Restricted Securities. SDH further acknowledges and agrees that stop transfer instructions have been given to Search's transfer agent and the Escrow Agent with respect to certificates evidencing the Search Sub-Debt Securities and that there will be placed on the certificates evidencing the Search Sub-Debt Securities a legend stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULES 145 AND 144 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED, SOLD, PLEDGED, EXCHANGED, TRANSFERRED OR OTHERWISE DISTRIBUTED OR DISPOSED OF EXCEPT IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE CONDITIONS SPECIFIED IN THAT CERTAIN ESCROW AGREEMENT DATED AUGUST 2, 1996 AMONG SEARCH CAPITAL GROUP, -2- 3 INC., SEARCH FUNDING IV, INC., DEALERS ALLIANCE CREDIT CORP., R-H CAPITAL PARTNERS, L.P., KELLETT INVESTMENT CORPORATION AND U.S. TRUST COMPANY OF TEXAS, N.A. A COPY OF SUCH AGREEMENT WILL BE MAILED TO THE HOLDER HEREOF WITHOUT CHARGE WITHIN FIVE DAYS AFTER RECEIPT OF WRITTEN REQUEST THEREFOR DIRECTED TO SEARCH AT ITS HEADQUARTERS IN DALLAS, TEXAS." 2.2 Removal of Securities Legend. Search agrees to remove promptly the stop transfer instructions and securities legend described in Section 2.1 by delivery of substitute certificates without such legend upon (i) the declaration by the Commission and all relevant state securities regulators of the effectiveness of the registration statement under the Securities Act ("Registration Effectiveness"), (ii) the expiration of the restrictive period set forth in Rule 145(d), or (iii) the delivery by SDH to Search of a copy of a letter from the staff of the Commission, or an opinion of counsel in form and substance reasonably satisfactory to Search, to the effect that such securities legend is not required for purposes of the Securities Act. 2.3 Escrow Legend. SDH acknowledges and agrees that even after removal of the legend described in Section 2.1 on the certificates representing the Search Sub-Debt Securities, the legend required by the Escrow Agreement shall remain on the certificates representing all of the Search Sub-Debt Securities which are held by the Escrow Agent. Search agrees to remove promptly the escrow legend by delivery of substitute certificates without such legend upon the proper release of the aforesaid Search Sub-Debt Securities from escrow. 3. REQUIRED REGISTRATION. Search shall (i) within six (6) months after Closing, file a registration statement with the Commission to effect the registration for the purposes of the reoffering and resale of the Search Sub-Debt Securities under the Securities Act with respect to all, but not less than all, of the Registrable Securities held on behalf of SDH and the SDH Shareholders; and (ii) use its best efforts to cause the Commission to declare said registration statement effective under the Securities Act as promptly as possible but no later than ninety (90) days after filing the aforesaid registration -3- 4 statement with the Commission. Search shall be obligated to register Registrable Securities pursuant to this Section 3 on one (1) occasion only. Notwithstanding anything to the contrary contained herein, the obligation of Search with respect to a registration under this Section 3 shall be deemed satisfied only at such time as the registration statement covering all shares of Registrable Securities shall have become effective. 4. EXPENSES. All expenses incurred by Search in complying with this Agreement, including, without limitation, all registration, qualifications and filing fees, blue sky fees and expenses printing expenses, fees and disbursements of counsel and independent public accountants for Search, fees of the National Association of Securities Dealers, Inc., transfer taxes, escrow fees, fees of transfer agents and registrars, and costs of insurance, but excluding any Selling Expenses, are herein called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Registrable Securities, plus all costs incurred by either R-H or Kellett in connection with or applicable to the sale of the Registrable Securities, are herein called "Selling Expenses." Search and SDH agree that the Registration Expenses shall include the reasonable fees and expenses of one (1) counsel for both R-H and Kellett, in connection with the registration filed pursuant to this Agreement, provided that Search shall not be responsible for counsel fees and expenses in excess of $10,000. Search will pay all Registration Expenses in connection with the registration statement filed pursuant to this Agreement. All Selling Expenses in connection with any registration statement filed pursuant to this Agreement shall be borne by R-H and/or Kellett as they so agree. 5. INDEMNIFICATION. In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to this Agreement, Search will indemnify and hold harmless the Subordinated Debt Holders against any losses, claims, damages, or liabilities, joint or several, to which the Subordinated Debt Holders may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are -4- 5 based upon any untrue statement or alleged untrue statement of any material fact contained in any registration under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by Search of any rule or regulation promulgated under the Securities Act applicable to Search and relating to action or inaction by Search in connection with any such registration, and will reimburse SDH for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that Search will not be liable in any such case if and to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and conformity with information furnished to Search by or on behalf of SDH in writing specifically for use in such registration statement or prospectus. Promptly after receipt by SDH of notice of the commencement of any action for which indemnification may be obtained hereunder, SDH shall, if a claim in respect thereof is to be made against Search hereunder, notify Search in writing thereof; but the omission to so notify Search shall not relieve Search from any liability which Search may have to SDH other than under this Section 5 and, in any event, only to the extent Search has been materially prejudiced by the failure to provide Search with such notice. In case any such action shall be brought against SDH, Search shall be entitled to participate in and, to the extent Search shall agree that it is liable to SDH for indemnification hereunder, to assume and undertake the defense thereof with counsel of Search's own choosing, and, after notice from Search to SDH of Search's election so to assume and undertake the defense thereof and of its agreement that it is liable for indemnification hereunder, Search shall not be liable to SDH under this Section 5 for any legal expenses subsequently incurred by SDH in connection with the defense thereof other than reasonable costs of investigation -5- 6 and of liaison with counsel so elected; provided, however, that if the defendants in any such action include both SDH and Search and SDH shall have reasonably concluded that there may be reasonable defenses available to SDH which are different from or additional to those available to Search or if the interests of SDH reasonably may be deemed to conflict with the interests of Search, SDH shall have the right to select separate counsel, satisfactory to Search in its commercially reasonable discretion, and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by Search as incurred. 6. CHANGE IN COMMISSION FORMS OR PROCEDURES. In the event that the Commission shall adopt new forms or procedures which authorize or permit other means of secondary distribution which may require action by Search other than registration under the Securities Act, the parties agree that the foregoing provisions shall apply, as nearly as may be possible, to such new forms or procedures so long as the economic or other burden of compliance therewith to Search or SDH is not materially greater than the burden contemplated by the foregoing provisions. 7. No TRANSFER OF REGISTRATION RIGHTS PERMITTED. Neither R-H nor Kellett may assign their respective rights under this Agreement without the prior written approval of Search, whose approval shall not be unreasonably withheld. 8. REGISTRATION PROCEDURES. 8.1 In accordance with Section 3 above, when Search is required by the provisions of this Agreement to effect the registration of the Registrable Securities under the Securities Act, Search will: (a) prepare and file with the Commission a registration statement (which shall be on Form S-1 or other form of general applicability satisfactory to Search) with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby -6- 7 (determined as hereinafter provided in Section 8.1(b)). Search may include other securities in such registration statement in addition to the Registrable Securities at Search's option; provided that Search shall withdraw from such registration statement any securities that prevent Search from registering the Registrable Securities. (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith, including, without limitation, all filings and reports required to be filed under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, as may be necessary to keep such registration statement effective (i) if Search, using its commercially reasonable efforts, is able to maintain said registration pursuant to a Commission Form S-3 (including by way of amending such registration statement into a Form S-3 registration), until the earlier of (1) such time as all of the Registrable Securities shall have been sold and (2) such time as SDH shall no longer be subject to the restrictions on resale of the Registrable Securities of Rule 144 under the Securities Act; and (ii) if Search is not able to utilize said Form S-3, then for a period of fifteen (15) months after the date said registration statement is declared effective by the Commission (provided, that in the event this clause (ii) shall become operative, Search shall continue to file with the Commission all filings and reports required to be filed under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, until the earlier of (A) such time as all of the Registrable Securities shall have been sold and (B) such time as SDH shall no longer be subject to the restrictions on resale of the Registrable Securities of Rule 144 under the Securities Act), and as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement for such period (for purposes of this paragraph (b), Form S-3 shall include any successor form promulgated by the Commission); -7- 8 (c) furnish to SDH such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as SDH may reasonably request in order to facilitate the sale or other disposition of the Registrable Securities covered by such registration statement; (d) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under state "blue sky" laws in Georgia, Texas and New York to the extent legally required; (e) use its commercially reasonable efforts to list or have approved for trading the Registrable Securities covered by such registration statement on each securities exchange upon which Search's other securities are listed and/or each over the counter market in which Search's other securities have been approved for trading, and if such securities are not so listed on the New York Stock Exchange or on the American Stock Exchange, than on the NASDAQ's National Market System at the time the registration statement becomes effective; (f) immediately notify SDH at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus contained in such registration statement, as then in effect, included an untrue statement of material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (g) make available for inspection by SDH, and any attorney, accountant, or other agent retained by SDH, all financial and other records, pertinent corporate documents, and properties of Search, and cause Search's officers, directors, and employees to supply all information reasonably requested by SDH or any such attorney, accountant, or agent in connection with such registration statement; and -8- 9 (h) in connection with each registration hereunder, SDH will furnish to Search in writing such information with respect to itself and the proposed distribution by it as shall be reasonably requested by Search in order to assure compliance with federal and applicable state securities laws. 9. SDH VOTES. SDH agrees that SDH shall vote the Search Sub-Debt Securities in favor of adoption by Search's shareholders of the matters proposed for adoption at a special shareholders meeting as further described in Search's preliminary proxy materials as filed with the Commission on July 19, 1996 and provided to SDH. Search has provided a copy of all proxy materials to SDH for SDH's review prior to Closing. SDH and Search both further acknowledge that the above referenced preliminary proxy materials have been or will be amended. Search agrees to provide SDH with a copy of all amendments to the above referenced preliminary proxy materials prior to the date of said special shareholders meeting. SDH agrees to review all such preliminary proxy materials, and to vote the Search Securities in favor of all matters proposed for adoption as set forth in the amended proxy materials which it approves, acting in a commercially reasonable manner. 10. MISCELLANEOUS. 10.1 Further Assurances. The parties shall execute and deliver such other and further instruments and perform such other and further acts as may reasonably be required to fully consummate the transactions contemplated hereby. 10.2 Counterparts. This Agreement may be executed in one or more counterparts (which may be facsimile copies thereof), each of which shall be deemed an original, but all of which together shall constitute one and the same document. 10.3 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and legal representatives. 10.4 Notices. All notices or other communications hereunder shall be in writing and shall be sent by courier, or shall be -9- 10 sent by personal delivery, messenger or by electronic transmission (with answerback) to the addresses set forth for notices in the Sub-Debt Acquisition Agreement. 10.5 Governing Law. This Agreement shall be construed and governed by the laws of the State of Delaware without giving effect to the principles of conflicts of laws thereof. 10.6 Entire Agreement. This Agreement (together with the Sub-Debt Acquisition Agreement and the other agreements entered into pursuant thereto) constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and no party hereto shall be bound by any communications between them on the subject matter hereof unless such communications are in writing and bear a date contemporaneous with or subsequent to the date hereof. 10.7 Waivers and Amendments; Noncontractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, cancelled, renewed or extended, and the terms hereof may be waived, only by a written instrument duly executed and acknowledged with the same formality as this Agreement, and signed by all the parties. 10.8 Construction. Whenever used herein, the neuter gender includes the feminine and masculine, the masculine includes the feminine and neuter, the singular number includes the plural, and the plural number includes the singular. The captions of the sections of this Agreement are for convenience of reference only, and the words contained therein shall in no way be held to explain, modify, amplify, or aid in the interpretation, construction or meaning of the provisions of this Agreement. The normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the construction or the interpretation of this Agreement or any amendments hereto. 10.9 Severability. The illegality, unenforceability or invalidity or any one or more covenants, phrases, clauses, sentences or sections of this Agreement, as determined by a court of competent jurisdiction, shall not affect the remaining portions of this Agreement, or any part thereof; and if any -10- 11 provision, section or subsection of this Agreement is adjudged by any court to be void or unenforceable in whole or in part, such provision, section or subsection, or portion thereof, shall be deemed amended to conform to applicable laws so as to be valid and enforceable to the fullest possible extent or, if it cannot be so amended without materially altering the intention of the parties as expressed herein, it shall be stricken and the remainder of this Agreement shall continue in full force and effect. Each provision, section and subsection of this Agreement is separable from every other provision, section and subsection and constitutes a separate distinct covenant. 10.10 Authority. Each party signing this Agreement, either directly or on behalf of another person or entity, represents and warrants that such party has all requisite authority to execute this Agreement and that such party will be bound hereby. [THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK -11- 12 IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first above written. SEARCH CAPITAL GROUP, INC ("Search") By: /s/ ROBERT D. IDZI -------------------------------- Title: E.V.P. & CFO ----------------------------- R-H CAPITAL PARTNERS, L.P. By: R-H/Travelers, L.P., its general partner By: R-H Capital, Inc., its general partner By: /s/ KENNETH T. MILLAR ------------------------------- Kenneth T. Millar Managing Director KELLETT INVESTMENT CORPORATION By: /s/ STILES A. KELLETT, JR. --------------------------------- Title: CHAIRMAN ------------------------------ EX-2.6 7 DEBT ASSUMPTION AGREEMENT 1 EXHIBIT 2.6 ================================================================================ DEBT ASSUMPTION AGREEMENT Dated as of August 2, 1996 among SEARCH CAPITAL GROUP, INC. and SEARCH FUNDING IV, INC. and LASALLE NATIONAL BANK, as Agent and BANK ONE CHICAGO, N.A. and FLEET CAPITAL CORPORATION ================================================================================ 2 TABLE OF CONTENTS
Page ---- Section 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . -1- Section 2. Assumption . . . . . . . . . . . . . . . . . . . . . . . . -10- Section 3. Payments and Prepayments. . . . . . . . . . . . . . . . . -10- Section 4. Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . -11- Section 7. Interest. . . . . . . . . . . . . . . . . . . . . . . . . -12- Section 8. Deposit Accounts, Use of Funds . . . . . . . . . . . . . . -12- Section 10. Mandatory Prepayment; Mandatory Reduction. . . . . . . . . -13- Section 11. Conditions to Closing. . . . . . . . . . . . . . . . . . . -13- (a) Consents . . . . . . . . . . . . . . . . . . . . -13- (b) Fees, Costs and Expenses . . . . . . . . . . . . -13- (c) Required Documents . . . . . . . . . . . . . . . -13- (i) Agreement . . . . . . . . . . . . . . -13- (ii) Legal Opinion . . . . . . . . . . . . -14- (iii) UCC Financing Statements . . . . . . -14- (iv) Officer's Certificate . . . . . . . . -14- (v) Insurance Policies and Endorsements . -14- (vi) Articles and Bylaws . . . . . . . . . -14- (vii) Good Standing Certificates . . . . . -14- (viii) Board Resolutions . . . . . . . . . . -14- (ix) Incumbency Certificates . . . . . . . -14- (x) Borrowing Base Certificate . . . . . -14- (xi) Release . . . . . . . . . . . . . . . -15- (xii) Closing of Purchase. . . . . . . . . -15- Section 12. Security for Obligations . . . . . . . . . . . . . . . . . -15- Section 13. Agent's and Lenders' Closing and Administrative Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . -16- Section 14. Representations and Warranties . . . . . . . . . . . . . . -17- (a) Organization of Borrowers . . . . . . . . . . . . -17- (b) Due Authorization . . . . . . . . . . . . . . . . -17- (c) Validity of This Agreement . . . . . . . . . . . -17- (d) Absence of Default . . . . . . . . . . . . . . . -17- (e) Litigation . . . . . . . . . . . . . . . . . . . -18- (f) Regulation U . . . . . . . . . . . . . . . . . . -18-
3 (g) Employee Benefit Plans . . . . . . . . . . . . . -18- (h) Good Title and Absence of Liens . . . . . . . . . -18- (i) Licenses, Compliance with Laws . . . . . . . . . -18- (j) Impairment of Contract Collateral . . . . . . . . -18- (k) Validity of Contracts . . . . . . . . . . . . . . -18- (l) Obligors' Duties to Make Payments . . . . . . . . -19- (m) Accuracy of Information . . . . . . . . . . . . . -19- (n) Chief Executive Office . . . . . . . . . . . . . -19- (o) Solvency . . . . . . . . . . . . . . . . . . . . -20- (p) Offices, FTC; Warranties . . . . . . . . . . . . -20- (q) No Material Adverse Change . . . . . . . . . . . -20- Section 15. Affirmative Covenants . . . . . . . . . . . . . . . . . . -20- (a) Financial Information . . . . . . . . . . . . . . -20- (b) Taxes . . . . . . . . . . . . . . . . . . . . . . -22- (c) Insurance . . . . . . . . . . . . . . . . . . . . -22- (d) Notice of Default, Litigation and ERISA . . . . . -23- (e) Performance of Obligations. . . . . . . . . . . . -23- (f) Books and Records, Audits . . . . . . . . . . . . -23- (g) Plans . . . . . . . . . . . . . . . . . . . . . . -23- (h) Performance of Contract Duties, Defense of Collateral . . . . . . . . . . . . . . . . . . . -23- (i) Possessory Perfection in Contract Collateral . . -24- (j) Compliance with Laws . . . . . . . . . . . . . . -24- (k) Collateral Agent . . . . . . . . . . . . . . . . -24- Section 16. Negative Covenants . . . . . . . . . . . . . . . . . . . . -24- (a) Business Activities . . . . . . . . . . . . . . . -24- (b) Liabilities . . . . . . . . . . . . . . . . . . . -24- (c) Security Interests . . . . . . . . . . . . . . . -24- (d) Investment . . . . . . . . . . . . . . . . . . . -25- (e) Sale, Transfer or Encumbrance of Assets . . . . . -25- (f) Restricted Payments . . . . . . . . . . . . . . . -25- (h) Transactions with Affiliates . . . . . . . . . . -25- (i) Loan and Advances . . . . . . . . . . . . . . . . -25- (j) Consolidation, Merger, Sale or Pledge of Assets . -26- (k) Inconsistent Financing Statements . . . . . . . . -26- (l) Modification of Contract Terms . . . . . . . . . -26- (m) Capital Expenditures . . . . . . . . . . . . . . -26- (n) Leverage Ratio . . . . . . . . . . . . . . . . . -26- (o) Subordinated Indebtedness Ratio . . . . . . . . . -26- (p) Tangible Net Worth . . . . . . . . . . . . . . . -26- (q) Unrestricted Cash. . . . . . . . . . . . . . . -26- (r) Modification of Certain Agreements. . . . . . . -26-
-ii- 4 Section 17. Events of Default . . . . . . . . . . . . . . . . . . . . -27- Section 18. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . -28- Section 21. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . -32- Section 22. Participations. . . . . . . . . . . . . . . . . . . . . . -32- Section 23. Waiver and Amendment. . . . . . . . . . . . . . . . . . . -32- Section 24. Accounting and Financial Determinations . . . . . . . . . -33- Section 25. Right of Offset . . . . . . . . . . . . . . . . . . . . . -33- Section 26. Computation and Payment of Liabilities . . . . . . . . . . -34- Section 27. Notices . . . . . . . . . . . . . . . . . . . . . . . . . -34- Section 28. Costs and Expenses . . . . . . . . . . . . . . . . . . . . -34- Section 29. Severability, Choice of Law. . . . . . . . . . . . . . . . -34- Section 30. Successors and Assigns . . . . . . . . . . . . . . . . . . -35- Section 31. Taxes and Expenses Regarding the Collateral . . . . . . . -35- Section 32. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . -35- Section 33. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . -35- Section 34. Section Headings . . . . . . . . . . . . . . . . . . . . . -37- Section 35. Construction . . . . . . . . . . . . . . . . . . . . . . . -37- Section 36. Restatement of Prior Agreements . . . . . . . . . . . . . -37- Section 36. Release of Liens . . . . . . . . . . . . . . . . . . . . . -37-
-iii- 5 DEBT ASSUMPTION AGREEMENT This Debt Assumption Agreement dated as of August 2, 1996, is by and among Search Funding IV, Inc., a Texas corporation (hereinafter referred to as the "Company"), Search Capital Group, Inc., a Delaware corporation (hereinafter referred to as "SCGI"; the Company and SCCI are hereinafter individually referred to as a "Borrower" and collectively as the "Borrowers"), LaSalle National Bank, Bank One, Chicago, N.A. and Fleet Capital Corporation (individually, a "Lender" and collectively "Lenders") and LaSalle National Bank, as agent for Lenders (in such capacity hereinafter referred to as "Agent"). W I T N E S S E T H: WHEREAS, Dealers Alliance Credit Corp. ("DACC"), Lenders and Agent are parties to an Amended and Restated Loan and Security Agreement dated as of October 30, 1995, as amended and supplemented from time to time, and various instruments, documents and agreements related thereto (collectively, the "Prior Agreements"), pursuant to which Lenders made loans and advances to DACC; WHEREAS, SCGI and the Company are parties to an Asset Acquisition Agreement dated August 2, 1996 (the "Purchase Agreement") with Dealers Alliance Credit Corp. ("DACC"), pursuant to which the Company is acquiring substantially all of the assets and business of DACC subject to the first and senior lien of Agent, and assuming all of the obligations of DACC to Lenders under the Prior Agreements (collectively, the "Assumption"). WHEREAS, DACC, SCGI and the Company have requested that Lenders consent to the Assumption and amend and restate the Prior Agreements in their entirety. WHEREAS, Lenders are willing to consent to the Assumption requested by the Borrowers pursuant to this Agreement and to amend and restate the Prior Agreements in their entirety, effective on the date hereof, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the parties' mutual agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. The following words and phrases, not otherwise defined herein, when used as capitalized terms in this Agreement shall have the following respective meanings (all words and phrases which have been defined elsewhere herein having the meanings there ascribed to them): "Affiliates" of any Person means any other Person which controls or is controlled by, or which is under common control with, that Person. -1- 6 "Agreement" means this Debt Assumption Agreement, any exhibits or schedules hereto, any concurrent or subsequent rider to this Debt Assumption Agreement and any extensions, supplements, modifications or amendments to this Debt Assumption Agreement. "Applicable Lending Office" shall mean for Agent and each Lender the lending office of the Agent or Lender designated on the signature pages hereof or such other office of such Lender as such Lender may from time to time specify to the Agent and Borrowers in writing. "Assets" shall have the meaning provided in the Purchase Agreement. "Assumed Debt" shall mean all obligations and liabilities of DACC to Agent and Lenders under the Prior Agreements, however evidenced. "Authorized Representative" means those officers or employees of Borrower authorized by the Borrower to act with respect to this Agreement, the Instruments, and for all other necessary or appropriate purposes required to carry out the purpose of this Agreement. "Borrowing Base" means at any time the lesser of (a) the Outstanding Balance, or (b) the sum of 75% of the aggregate amount of all remaining unpaid Eligible Receivables related to Eligible Contracts, plus a dollar amount equal to the difference between the Outstanding Balance as of July 31, 1996 and 75% of the aggregate amount of all remaining unpaid Eligible Receivables related to Eligible Contracts as of July 31, 1996. Notwithstanding the foregoing, in the event the Company modifies the current Operation Policies in a manner which would have a material adverse effect on the Collateral or Borrowers' ability to pay or perform the Obligations, the Lenders may, in their sole, but reasonable discretion, in accordance with Section 23 of this Agreement, upon written notice to Borrowers, reduce the maximum percentage rate of advance set forth in (b) above against any Eligible Receivables arising out of Eligible Contracts. "Borrowing Base Certificate" shall mean a Borrowing Base Certificate, duly executed by an Authorized Representative of Borrowers, substantially in the form of Exhibit A hereto. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks are authorized or required to close in the state in which the office of any Lender is located. "Capital Expenditures" means, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities and including capitalized lease obligations but exclusive of operating leases) during such period that are required by generally accepted accounting principles to be included in or reflected by the property, plant or equipment or similar fixed asset accounts in the balance sheet of a Person. -2- 7 "Cash Equivalent Investments" shall mean investments having a stated maturity no greater than one year from the date of such investment in (i) obligations of the United States government or any agency thereof or obligations guaranteed by the United States government, (ii) certificates of deposit of LaSalle National Bank or such commercial banks having combined capital and surplus of at least $200,000,000, or (iii) commercial paper or similar short term instruments with a rating of at least "A-1" by Standard & Poors Corporation and "Prime-1" by Moody's Investors Service, Inc. "Change in Control" means: (a) all or substantially all of the Company's or SCGI's assets are sold, leased, transferred or otherwise disposed of as an entirety or substantially as an entirety (in one transaction or a series of transactions) to any Person or Persons; (b) the stockholders or directors of the Company or SCGI consummate or approve a definitive agreement or plan for (i) any merger, consolidation, exchange of shares, recapitalization, restructuring or other business combination with or into another corporation pursuant to which the board of directors of Company or SCGI do not constitute a majority (x) of the members of the Board of Directors of the Corporation if it survives the merger or (y) of the board of directors of the surviving company if it does not survive the merger, or (ii) the liquidation or dissolution of the Company or SCGI; or (c) SCGI ceases to (x) beneficially own shares, representing 80% of the common stock of the Company. "Collateral" shall have the meaning provided in Section 12. "Collateral Agent" shall have the meaning provided in Section 12. "Collecting Banks" shall have the meaning provided in Section 8. "Commitment" shall mean, as to each Lender, the amount set forth opposite its name on the signature pages hereto under the heading "Commitment" as its share of the outstanding principal amount of the Assumed Debt due to Lenders as of the date of this Agreement. "Commitment Percentage" shall mean, with respect to any Lender a fraction (expressed as a percentage), the numerator of which shall be the aggregate amount of such Lender's Commitment and the denominator of which shall be the aggregate Commitments. "Contract" means any and all installment sale agreements, chattel paper or other deferred payment obligations and all documents, instruments and agreements related thereto (hereinafter referred to as a "Contract", and in the case of any such agreement consisting of more than one document, instrument or other writing, every such document, instrument or other writing comprising any such agreement shall be deemed, collectively, to be the re- -3- 8 spective "Contract"), now existing or owned or hereafter arising or acquired by Borrower, together with all Related Security and all payments and other proceeds arising therefrom. "Credit Termination Date" shall mean August 2, 1997. "Dealer" means a dealer that has sold a motor vehicle to an Obligor pursuant to a Contract. "Dealer Agreement" means an agreement between DACC or a Borrower and a Dealer that governs the sale or assignment of Contracts from such Dealer to DACC or a Borrower, including any provisions for assignment (whether without recourse, with recourse, with a repurchase obligation by the Dealer or with a guaranty by such Dealer) contained in such Contracts and Related Security with respect thereto. "Dealer Assignment" means a written assignment of a Contract by a Dealer to DACC or a Borrower. "Default" means any event of a nature described in Section 17 which, with the lapse of time (or with notice given to Borrower by Agent or Lenders and the lapse of time) specified in the description of such event, would constitute an Event of Default. "Default Rate" shall have the meaning provided in Section 7. "Depository Account" shall have the meaning provided in Section 8. "Dollar(s)" and the sign "$" shall mean lawful money of the United States of America. "Eligible Contract" at any time means each Contract originated by a Dealer and acquired by the Company from DACC or SCGI, including all Related Security under such Contract, which complies with the representations and warranties contained in this Agreement and with respect to which each of the following requirements is then met: (a) not more than 3.75 of the originally scheduled monthly payments under the Contract have been deferred or not paid when due; (c) the Contract is an installment sale agreement or other deferred payment obligation providing for the retention of a first lien or security interest in the underlying personal property to secure payment of the obligation evidenced thereby and such lien has been duly perfected in accordance with applicable law; (d) the Company is the lawful owner of the Contract and all amounts payable thereunder, and the Company has a first and valid lien and security interest, free and clear of all Security Interests, in the related personal property; -4- 9 (e) the Contract is in substantial compliance with all applicable statutes, rules and regulations, except where such non-compliance is immaterial and would not invalidate the Contract or Agent's or Lenders' rights to enforce full performance of same by the related Obligor, and is assignable to Agent and Lenders; (f) neither the Contract nor any agreement in connection therewith, imposes any obligation upon the Company or any other Person, which, if not performed, would give rise to any right of offset, counterclaim or other defense on the part of the related Obligor to any amount payable by it under the Contract; (g) as of the time of inception of the Contract, and as of the time of determination of eligibility, all of the following shall be true: (1) the related Obligor has full power and capacity to enter into the Contract and perform his obligations thereunder, and (2) the Contract has been duly executed and delivered by the related Obligor and is a legal, valid, binding and enforceable obligation of that Obligor; and (3) the Contract has not been amended or rewritten (except for deferrals of payments thereunder); (h) no sum due or to become due under the Contract from the related Obligor is subject to any then-existing offset, counterclaim or other defense on the part of that Obligor; (i) the related item of personal property sold under the Contract is, by the terms of the Contract, made available to the related Obligor for use solely within the continental United States of America; (j) except as set forth in (a) above as to missed payments, the related Obligor or any co-obligor thereof shall not have failed to perform fully any obligation to be performed by it, under the Contract or under any other agreement in connection therewith; (k) the motor vehicle sold under the Contract has not been repossessed from the Obligor; (l) the related Obligor is not the subject of a proceeding under any provision of any federal or state bankruptcy or insolvency law or proceeding, unless the related Obligor has reaffirmed such Contract in accordance with applicable law; and (m) the Contract involves the sale of an automobile or light truck; -5- 10 "Eligible Receivable" means with respect to any Eligible Contract at any time, Gross Receivables (less unearned finance charges, attributable to such Eligible Contract) unconditionally required by the terms of the respective Eligible Contract to be paid by the related Obligor without any claim of any right of setoff, defense, or right of counterclaim against the Borrower, Agent or Lenders. "ERISA" shall have the meaning provided in Section 14(g) of this Agreement. "Event of Default" shall have the meaning provided in Section 17. "Expenses" means, for any calendar month, the sum of all actual operating expenses incurred by the Company of the type set forth on Exhibit "C" to this Agreement, but in no event more than $475,000 for any calendar month. "Fiscal Year" means the twelve month accounting period of Borrowers commencing April 1 and ending March 31 of each calendar year. "Gross Receivables" means with respect to any Contract at any time, all of the contractual payments unconditionally required by the terms of the respective Contract to be paid by the related Obligor without any claims of any right of setoff, defense, or right of counterclaim against DACC, the Borrowers, Agent or Lenders. "Instrument" means any document or writing under which any obligation is evidenced, assumed or undertaken, or any right to any Security Interest is granted or perfected in favor of Agent or Lenders; "Instrument executed pursuant hereto" and similar terms means all notes and each other instrument executed and delivered to Agent or Lenders by Borrowers pursuant hereto. "Intangible Assets" means, without limitation, all organization costs, goodwill, franchises, licenses, covenants not to compete, patents, trademarks, servicemarks, and any other assets classified as intangibles in accordance with generally accepted accounting principles. "Investment" means, when used with respect to any Borrower, any loan or advance made by it to any other Person (including, without limitation, any contingent obligation) in respect of any capital stock, Liabilities, obligation or liability of any other Person and any other investment made by a Borrower (however acquired) in stock or other ownership interests in any other Person, including, without limitation, any investment made in exchange for the issuance of shares of stock of a Borrower. The outstanding amount of any Investment shall be considered to be the original amount thereof less returns of principal or capital thereof (and without adjustment by reason of the financial condition of such Person), or, in the case of Liabilities of a Borrower in respect of any Liabilities, obligation or liability of any other Person, the amount (subject to any limitation contained in the Instrument creating such Liabilities of a Borrower) of such other Liabilities, obligation or liability. "Lender" shall have the meaning provided in the Preamble. -6- 11 "Leverage Ratio" shall mean the ratio of SCGI's consolidated Liabilities (exclusive of Subordinated Indebtedness) to SCGI's consolidated Tangible Net Worth, plus Subordinated Debt. "Liabilities" of any Person means at any time all amounts which, in accordance with generally accepted accounting principles, would be included in determining liabilities as shown on the liability side of a balance sheet of that Person as of the date in question. "Loss Reserves" means all dealer and loan loss reserves maintained by the Company. "Mandatory Reduction" means the positive difference between all cash proceeds of the Collateral received by the Company during any calendar month including, but not limited to, cash received from DACC under the Purchase Agreement, payments of principal and interest under Contracts, insurance proceeds, sales of repossessed Collateral, garnishments of Obligor's assets and collections on previously charged-off obligations due from Obligors, and the sum of all Expenses during such month. "Majority Lenders" shall mean, at any time while there is more than one Lender, two (2) or more Lenders. "Monthly Compliance Certificate" means a compliance certificate duly executed by the Authorized Representative of Borrower, substantially in the form of Exhibit B attached hereto. "Purchase Agreement" shall have the meaning provided in the Preambles to this Agreement. "Obligations" shall mean the Assumed Debt and all interest payable with respect thereto, together with all other amounts which Borrowers may from time to time be obligated to pay to Agent or Lenders, howsoever evidenced, pursuant to this Agreement or any other agreement, understanding, or relationship by and between Agent or Lenders, by themselves or in connection with any other party, with the Borrowers, or arising out of any other cause whatsoever, whether liquidated, contingent, stated, unstated, direct or indirect, primary or secondary, voluntary or involuntary, determinable or indeterminable, due or not due, or otherwise, whether heretofore, now, or hereafter created, owing, incurred, made, due or payable, between the Agent or Lenders and the Borrowers. "Obligor" shall mean the Person obligated for the payment of principal or other money under any Contract; and "Related Obligor" shall, when used with respect to any Contract, mean the Person so obligated thereunder. "Operating Policies" shall mean Borrowers' written policies and procedures regarding charge offs, repossessions and collections attached hereto as Exhibit D. -7- 12 "Organizational Documents" means, as to any Person the articles of incorporation, or any other organizational agreement or document which forms the basis for the legal existence of the Person and provides for the rules or its operation and the rights and obligations of its members, partners, shareholders, or directors. "Outstanding Balance" means the outstanding balance of the Assumed Debt, less the sum of all Mandatory Reductions paid by Borrowers to Agent. "Permitted Liens" shall have the meaning provided in Section 16. "Person" shall mean any natural person, partnership, corporation, firm, association, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Prime Rate" means the variable rate of interest, per annum, from time to time announced by LaSalle National Bank as its prime (or equivalent) rate and changing as and when changes therein are announced. Such rate is one of LaSalle National Bank's index rates and merely serves as a basis upon which effective rates of interest are calculated for loans making reference thereto and may not be the lowest or best rate at which LaSalle National Bank calculates interest or extends credit. "Prior Agreements" shall have the meaning provided in the Preamble to this Agreement. "Redeemable Stock" shall mean any capital stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or any other agreement) or upon the happening of any event matures or is or will become mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, or is exchangeable for or convertible into a security of a Person other than the issuer of such capital stock or into a Liability. "Related Security" shall mean, with respect to a Contract: (a) all of the Borrower's interest with respect to such Contract under the (i) Dealer Agreement pursuant to which such Contract was acquired, and/or (ii) the Dealer Assignment from the Dealer from whom the Contract was acquired; (b) all motor vehicles underlying such Contract; and (c) all collateral and security agreements and property purported to be subject thereto held as security for such Contract, including all guaranties, indemnities, warranties, insurance proceeds and premium refunds and underwritings and property of whatever character at any time held as security for such Contract. "Reportable Event" shall have the meaning provided in Section 14(g) of this Agreement. -8- 13 "Restricted Payment" shall mean (i) dividends (in cash, property or obligations, but excluding (x) dividends payable solely in shares of capital stock other than Redeemable Stock) on, or other payments or distributions on account of or with respect to, or the setting apart of money for a sinking or other analogous fund for, or the purchase, redemption, retirement or other acquisition of, any shares (including without limitation the purchase, redemption, retirement or other acquisition of any right or option to acquire any such shares) of any class of capital stock of the Company or any warrants or options, (ii) any prepayment by the Company or SCGI of principal, optional redemption, purchase, retirement prior to stated maturity, defeasance, or similar optional prepayment with respect to any Liabilities which are subordinate to or otherwise junior in right of payment to the Obligations if an Event of Default exists and is continuing or would be created thereby, or (iii) any loans, advances or any other payments by the Company to, or transactions by the Company with, any Affiliate of the Company. "R-H" shall mean R-H Capital Partners, L.P. "Security Instrument" means any security agreement, amendment or supplement thereto, financing statement, continuation statement, chattel mortgage, chattel mortgage note, assignment or collateral assignment, pledge agreement or other agreement providing for, evidencing or perfecting any Security Interest. "Security Interest" means any lien, encumbrance or security interest of any kind whatsoever, whether arising under a Security Instrument or as a matter of law, judicial process, or otherwise. "Stockholders' Equity" means, without duplication, the consolidated stockholders' equity of SCGI, as included in and calculated in a manner consistent with, "stockholder's equity" as set forth in the audited consolidated balance sheet of SCGI and its subsidiaries dated as of March 31, 1996. "Subordinated Indebtedness" means any obligations of SCGI to any Person subordinated to the repayment of the Obligations by written agreement, which agreement may provide for periodic principal and interest payments prior to an Event of Default and shall provide, among other customary subordination terms, for (i) the final maturity of such obligations to exceed the Credit Termination Date by not less than one (1) year, (ii) a prohibition on prepayments if an Event of Default exists or would be created thereby, and (iii) a restriction on acceptance of payments or actions to enforce SCGI's obligations subsequent to an Event of Default which is not waived, until the earlier of (i) the payment in full of the Obligations or (ii) 179 days after the occurrence of such Event of Default. "Tangible Net Worth" shall mean the sum of Stockholder's Equity, plus Subordinated Indebtedness, minus Intangible Assets. Unless otherwise defined herein, terms or phrases defined in the Uniform Commercial Code as in effect on the date hereof in the State of Illinois are used herein as therein defined. -9- 14 Unless otherwise specified, all accounting terms used herein or in any other Instrument or loan document related hereto shall be interpreted, all accounting determinations and computations hereunder or thereunder shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, generally accepted accounting principles applied on a consistent basis. Section 2. Assumption. Subject to the terms and conditions of this Agreement including, without limitation, Section 11 of this Agreement, Borrowers, jointly and severally assume as of the date hereof and agree to pay the Assumed Debt and Lenders consent to the Assumption. Borrowers acknowledge and agree that the Assets acquired by the Company are subject to a first and senior lien in favor of Agent to secure the Obligations hereunder. Section 3. Payments and Prepayments. (a) Borrowers shall make each payment in respect of the principal of and interest on the Obligations and any other payments due under this Agreement not later than 12:00 p.m. Chicago time on the day when due, in Dollars, to the Agent for the account of each Lender at the Agent's Applicable Lending Office in Chicago, Illinois in immediately available funds. If any payment is received subsequent to 12:00 p.m. Chicago time on the day when due, that payment shall be deemed to be received on the next Business Day, and the additional time shall be included in computing interest in connection with such payment. (b) Upon the occurrence of an Event of Default, any Lender for whose account any such payment is to be made may (but shall not be obligated to) debit the amount of any such payment which is not made when due and payable or declared due and payable, to any ordinary deposit account of either Borrower with such Lender and shall give notice thereof to such Borrower, provided the failure to give such notice shall not affect the validity of such debit. Agent may, on behalf of Lenders, debit any deposit account of either Borrower with Agent, for payments due Lenders hereunder. (c) Each payment received by the Agent under this Agreement for the account of a Lender shall be paid promptly to such Lender on the same Business Day of receipt by Agent if received by 12:00 p.m. Chicago time, or otherwise on the next successive Business Day, in the type of funds received, for account of Lender at such Lender's Applicable Lending Office for the Obligation in respect of which such payment is made, net of any amounts which are due and owing to Agent by such Lender at the time of such distribution by Agent. (d) Any prepayment of the Obligations by Borrowers shall be without premium or penalty at any time. Section 4. Pro Rata Treatment. -10- 15 Except to the extent otherwise provided herein, (i) each payment of principal of the Obligations by Borrowers shall be made for the account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Obligations according to their respective Commitment Percentage held by the Lenders; and (ii) each payment of interest on the Obligations by Borrowers shall be made for the account of the Lenders pro rata in accordance with the amounts of interest due and payable to the respective Lenders. Section 5. Sharing of Payments, Etc. (a) Upon the occurrence of an Event of Default, Borrowers agree that, in addition to (and without limitation of) any right of set-off, bankers' lien or counterclaim a Lender might otherwise have, each Lender shall be entitled, at its option, to offset balances held by it for the account of either Borrower at any of its offices, against any principal of or interest on any of the Obligations or any other amount payable to such Lender hereunder, in which case it shall promptly notify Borrowers and the Agent thereof, provided that such Lender's failure to notify Borrowers and the Agent shall not affect the validity thereof. (b) If any Lender (i) shall obtain payment of any principal of or interest on any Obligations due to it from Borrowers under this Agreement through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise, and, as a result of such payment, such Lender shall have received a greater percentage of the Obligations then due hereunder by Borrowers to such Lender than the percentage of the Obligations received by any other Lenders, or (ii) such Lender's percentage of the outstanding Obligations is less than the Lender's pro rata share of such Obligations, it shall promptly purchase from such other Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Obligations due such other Lenders in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that (x) each Lender shall hold Obligations according to its pro rata share of its Commitment of such Obligations, and (y) all the Lenders shall share the benefit of such excess payment (net of any expenses which may be incurred by such Lender in obtaining or preserving such excess payment) pro rata in accordance with the unpaid Obligations due to each of the Lenders. To such end all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. (c) Borrowers agree that any Lender so purchasing a participation (or direct interest) in the Obligations due to other Lenders may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Obligations in the amount of such participation. (d) Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of Borrowers. If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a payment or set-off to which this Section 7 applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner -11- 16 consistent with the rights of the Lenders entitled under this Section 7 to share in the benefits of any recovery on such secured claim. Section 6. Repayment of Obligations. Subject to the provisions of this Agreement, Borrowers agree to repay the Obligations in whole upon the Credit Termination Date, in part to the extent that the unpaid amount of the Obligations outstanding exceeds the Borrowing Base, in part, to the extent of Mandatory Reductions required hereunder, and shall be repaid in whole, upon demand of the Agent or the Majority Lenders, in accordance with Section 17 upon the occurrence of an Event of Default. Section 7. Interest. Borrowers' Obligations shall bear interest on the unpaid principal balance thereof outstanding from time to time, with interest on the Assumed Debt beginning upon the date of this Agreement continuing until Agent receives collected funds with respect to any payments, at a per-annum rate of interest equal to one percent (1.00%) in excess of the Prime Rate, which shall be calculated on the basis of the actual number of days elapsed over a year of 360 days, and shall be payable monthly, in arrears, commencing on the 1st day of the first month following the date of this Agreement and on the same date of each month thereafter. Upon the occurrence of an Event of Default, and during the continuation thereof, the Obligations shall bear interest, calculated on the basis of the actual number of days elapsed over a year of 360 days, at a per-annum rate of interest equal to four percent (4.00%) in excess of the Prime Rate ("Default Rate"). Section 8. Deposit Accounts, Use of Funds (a) The Company shall maintain with Agent, all of its primary operating, deposit and disbursement accounts. The Company may, as required by its business needs, maintain deposit and disbursement accounts in other financial institutions in locations not conveniently serviced by Agent; provided however the Company shall cause all deposits in such accounts to be concentrated in its accounts with Agent as hereinafter provided. The Company shall maintain sufficient demand deposit balances in its deposit accounts with Agent to cover the costs of all services provided by Agent to the Company in connection with the Company's accounts with Agent as advised to the Company from time to time by Agent. In the event the Company fails to maintain demand deposit balances sufficient to generate earnings credits to cover the cost of all services provided by Agent to the Company in connection with the accounts, Agent shall be permitted to debit the Company's deposit accounts for customary costs associated with such services. All such fees and costs shall accrue solely to the benefit of Agent and no Lender shall have an interest therein. Borrowers shall on a daily basis transfer all cash proceeds of the Collateral to its depository account at Agent. Absent the occurrence of an Event of Default, Borrowers shall be -12- 17 permitted to use such collections to pay the Expenses (including, interest on the Obligations) up to the monthly limit of $475,000. Section 9. Books and Records. The books and records of Agent shall be prima facie evidence of the amount of Borrowers' Obligations from time to time outstanding and the dates and amounts of disbursements and payments with respect to the Obligations. Section 10. Mandatory Prepayment; Mandatory Reduction. If at any time, the aggregate outstanding principal amount of all Obligations exceeds the Borrowing Base, Borrowers shall either (i) make a principal prepayment, in whole, or in part at least equal to the amount of the excess of the Obligations outstanding over the Borrowing Base, or (ii) SCGI will transfer additional Eligible Contracts to the Company under which there are sufficient Eligible Receivables to eliminate such deficiency. Commencing September 15, 1996, and on the same date each month thereafter, Borrowers shall make a principal prepayment to Agent for the benefit of Lenders in an amount equal to the Mandatory Reduction for the immediately preceding month. Section 11. Conditions to Closing. 11.1 The closing of this Agreement and Lenders' consent to the Assumption shall be subject, in addition to all other terms and conditions of this Agreement, to the satisfaction of the following conditions precedent at the times specified: (a) Consents. All consents, approvals and authorizations required in connection with the execution, delivery or performance of this Agreement, shall have been obtained by the Borrowers, and Borrowers shall not have incurred or become subject to any liability as a result thereof. (b) Fees, Costs and Expenses. Agent and Lenders shall have received all fees, costs and expenses due and payable pursuant to Section 13 of this Agreement. (c) Required Documents. There shall have been delivered to Lenders the following documents in form and substance satisfactory to Lenders, and there shall have been consummated or satisfied all of the transactions or conditions contemplated by each such document: (i) Agreement. Multiple copies of this Agreement as requested all duly executed by the Borrowers. (ii) Legal Opinion. The legal opinion of Borrowers' counsel addressed to Agent and Lenders, in form and substance satisfactory to Agent, Lenders and their counsel. -13- 18 (iii) UCC Financing Statements. Evidence of the proper filing of UCC-1 financing statements perfecting first liens (except as otherwise provided herein) and security interests in favor of Lenders in the Collateral. (iv) Officer's Certificate. A certificate executed by the Chief Executive Officer of each Borrower, stating that (A) no Default or Event of Default has occurred and is continuing, (B) no litigation, investigation or proceeding, or injunction, writ or restraining order of the type described in Section 14(e) hereof is pending or threatened, and (C) each of the conditions precedent to the consummation of the Assumption contemplated hereby has been met or satisfied. (v) Insurance Policies and Endorsements. Copies of policies of insurance required hereby together with lender's loss payable endorsements on Agent's required form, duly executed. (vi) Articles and Bylaws. A copy of (A) each Borrower's Certificate of Incorporation, certified by the Secretary of State of the State of its incorporation as of a date not more than 20 days prior to the date hereof, and (B) copies of the bylaws, and any amendments thereto, of each Borrower certified by the corporate secretary of each Borrower. (vii) Good Standing Certificates. Good Standing Certificates for each Borrower in the State of its incorporation and in each other state in which each Borrower has an office, keeps Collateral, or otherwise where the failure of such Borrower to be qualified to transact business as a foreign corporation would have a material adverse impact on such Borrower. (viii) Board Resolutions. Certified copies of resolutions of the board of directors of each Borrower authorizing the execution and delivery of and the consummation of the transactions contemplated by this Agreement, and all other Instruments. (ix) Incumbency Certificates. Incumbency certificates with respect to the officers of each Borrower executing this Agreement and the Instruments. (x) Borrowing Base Certificate. A Borrowing Base Certificate reflecting information regarding the Collateral as of July 31, 1996 accompanied by such copies or such documents, schedules, computations and certificates as reasonably requested by Lenders. (xi) Release. A mutual release in the form of Exhibit E hereto executed by DACC. (xii) Closing of Purchase. Evidence of the closing of the transactions contemplated by the Purchase Agreement, and the related transactions between DACC and R-H contemplated thereby. -14- 19 Section 12. Security for Obligations. To secure payment when due (at maturity, by acceleration, or otherwise) of Borrowers' Obligations, the Company hereby grants to Agent, as agent for the Lenders, a continuing first priority lien and security interest in and to all assets of the Company now existing or owned or hereafter arising or acquired, including (a) all of the Company's right, title and interest in and to any and all Contracts, all Related Security and all monies or rights to monies due and payable thereunder or with respect thereto; (b) all personal property or the Company's interest therein which from time to time is subject to any Contract or is otherwise now owned or hereafter acquired by the Company (or a security interest therein held by the Company), together with all attachments, accessories, replacements, substitutions, accessions, products and proceeds thereto, therefor, or thereof; (c) all of the Company's now owned or existing or hereafter arising or acquired accounts, accounts receivable, contract rights, general intangibles (including without limitation, license rights, insurance proceeds, royalties, choses in action, patents, trademarks and trade names), chattel paper, deposit accounts, records, customer lists, instruments, documents, notes, computer software, firmware, disks and tapes representing any of the foregoing, inventory, machinery, equipment or fixtures and all proceeds and products of any of the foregoing; (d) all property and assets acquired from DACC pursuant to the Purchase Agreement; and (e) all policies of insurance with respect to any of the foregoing and all rights to receive payments or proceeds under any such policies of insurance or otherwise with respect to any damage, destruction or loss of any of the foregoing (all of which property above described in this Section is herein referred to collectively as "Collateral"). Borrowers will pay all filing, recording, search and other expenses incurred by Agent with respect to perfection of Agent's security interest under this Agreement and the confirmation of the priority of Agent's security interest in the Collateral. Borrowers will execute and deliver such financing statements and further documents and instruments, and do such further acts and things as Agent may reasonably request in order to fully effect the purposes of this Agreement and Agent's rights and Security Interest in the Collateral. Notwithstanding anything to the contrary contained herein, absent the occurrence of an Event of Default by Borrowers, Borrowers shall not be required to deliver to Agent physical possession of the Contracts or record assignments of underlying liens, title documents or mortgages securing the obligations of a related Obligor under a Contract; provided, however, Borrowers shall affix a legend to all Contracts as follows: "Search Funding IV, Inc. has collaterally assigned its rights in this Retail Installment Contract to LaSalle National Bank ("LaSalle") as Agent for itself and certain other senior lenders. The interest of LaSalle shall terminate upon Buyer's full payment of all amounts due hereunder." Agent shall appoint an Authorized Representative acceptable to Agent for each business location of Borrower to act as Agent's agent for purposes of perfecting Agent's lien on the Collateral in Borrower's possession ("Collateral Agent") and Borrower agrees to fully cooperate with such Collateral Agent. Upon payment in full under any Contract, Agent agrees to release its lien on such Contract. The Company hereby expressly agrees that, anything herein to the contrary notwithstanding, it shall observe and perform all of the conditions and obligations to be -15- 20 observed and performed by the Company as assignee of DACC under each Contract, agreement, instrument or obligation constituting Collateral hereunder, all in accordance with and pursuant to the terms and provisions thereof. The exercise by Agent of any of the rights assigned hereunder shall not release the Company from any of its duties or obligations under any such Contract, agreement, instrument or obligation. Agent shall not have any duty, responsibility, obligation or liability under any such Contract, agreement, instrument or obligation by reason of or arising out of the assignment thereof to Agent or the granting to Agent of a Security Interest therein or the receipt by Agent of any payment relating to any such Contract, agreement, instrument or obligation pursuant hereto, nor shall Agent be required or obligated by virtue of the grant of the Security Interest to the Agent in any manner to perform or fulfill any of the obligations of the Borrower thereunder or pursuant thereto, or to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by it or the sufficiency of any performance of any party under any such Contract, agreement, instrument or obligation, or to present or file any claim, or to take any action to collect or enforce any performance or the payment of any amounts which may have been assigned to it, in which it may have been granted a Security Interest or to which it may be entitled at any time or times. Section 13. Agent's and Lenders' Closing and Administrative Costs and Expenses. (a) The Company shall pay Agent for all reasonable expenses and fees paid or incurred by Agent in connection with the documentation, negotiation, closing and administration of this Agreement and Borrowers' Obligations, and for all reasonable expenses and fees paid or incurred by Agent and Lenders in connection with the enforcement of this Agreement and Borrowers' Obligations. Such fees and expenses shall include, without limitation, search fees and expenses, certification costs, expedited mail charges, filing and recording fees and the reasonable fees and expenses of Agent's and Lenders' attorneys and paralegals, whether such fees and expenses are incurred prior to or after the date hereof. (b) The Company shall further reimburse the Agent on written demand, for all reasonable costs, fees and expenses incurred by Agent and Lenders, or their agents or employees with respect to any collateral or other audits performed in the administration of this Agreement; provided, however, absent the occurrence of an Event of Default, such audits shall not occur more often than once each calendar quarter. Section 14. Representations and Warranties. To induce Lenders to enter into this Agreement and to consent to the Assumption hereunder, Borrowers represent and warrant to Lenders as follows which representations and warranties shall be true from the time of Borrowers' execution of this Agreement until all Obligations have been repaid in full: (a) Organization of Borrowers. SCGI is a corporation validly organized and existing and in good standing under the laws of the State of Delaware and the Company is a corporation validly organized and existing and in good standing under the laws of the -16- 21 State of Texas. Each Borrower is qualified to do business and in good standing as a foreign corporation in each jurisdiction where the nature of its business or property require it to be qualified, except where the absence of such qualification would not materially adversely affect the financial condition, operations or business of such Borrower or materially impair the ability of such Borrower to perform any of its obligations under this Agreement or any Instrument executed pursuant hereto and will maintain such qualifications and good standing. Each Borrower has full corporate power and authority to own its property and conduct its business substantially as presently conducted by it. Each Borrower has full corporate power and authority to enter into and to perform its obligations under this Agreement and each Instrument executed pursuant hereto and to obtain loans and advances hereunder. (b) Due Authorization. The execution and delivery by Borrowers of this Agreement and each Instrument executed pursuant hereto and the performance by Borrowers of their obligations hereunder and thereunder have been duly authorized by all necessary corporate action, do not require Borrowers to obtain any approval or consent of any governmental agency or authority, do not and will not conflict with, result in any violation of, or constitute any default under, any provision of the Organizational Documents of either Borrower or any agreement or other Instrument binding upon or applicable to either Borrower (other than any agreement or other Instrument with respect to which a waiver has been obtained), or any present law or governmental regulation or court decree or order applicable to it and will not result in or require the creation or imposition of any Security Interest in any of their properties pursuant to the provisions of any present agreement or other Instrument binding upon or applicable to either Borrower other than under this Agreement. (c) Validity of This Agreement. This Agreement is, and each Instrument executed pursuant hereto will, on the due execution and delivery thereof, be the legal, valid and binding obligation of each Borrower enforceable in accordance with its terms, except as may be limited by bankruptcy and moratorium laws and all other similar laws affecting the rights of creditors generally and the application of general principles of equity and to the extent that specific performance and other equitable remedies may be granted or denied in a court's discretion. (d) Absence of Default. Neither Borrower is in default in the payment of any Liabilities in excess of the sum of $500,000 in the aggregate, or under any law or governmental regulation or court decrees or order. (e) Litigation. Except as set forth on Schedule 14(e) of this Agreement, no litigation, arbitration or governmental investigation or proceeding is pending or, to the knowledge of either Borrower, threatened against Borrower or any of its properties which, if adversely determined, would materially adversely affect the financial condition, operations or business of such Borrower or impair the ability of such Borrower to perform any of its obligations under this Agreement or any Instrument executed pursuant hereto. -17- 22 (f) Regulation U. Neither Borrower is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock, and none of the assets of either Borrower consist of margin stock. Terms to which meanings are ascribed in Regulation U of the Board of Governors of the Federal Reserve System or any regulations substituted therefor, as from time to time in effect, are used in this subsection with such meanings. (g) Employee Benefit Plans. Each employee benefit plan ("Plan") now or hereafter maintained by either Borrower will comply in all material respects with all applicable requirements of law and regulations; no "Reportable Event", such term being used herein with the meaning ascribed to it in the Employee Retirement Income Security Act of 1974, as amended (herein called "ERISA"), will have occurred with respect to any Plan; and neither Borrower will have withdrawn from any Plan or initiated steps to do so, and no steps will have been taken to terminate any Plan. (h) Good Title and Absence of Liens. The Company is, and covenants to remain, the owner of its assets, free and clear of all liens, encumbrances and security interests, except for Permitted Liens. (i) Licenses, Compliance with Laws. Each Borrower has been issued all required material federal, state and local licenses, certificates or permits relating to it and its facilities, businesses, assets, property, leaseholds and equipment and is in substantial compliance with all applicable federal, state and local laws, rules and regulations the failure to comply with which would be reasonably likely to have a material adverse effect on the financial condition, operations, assets, business, properties or prospects of such Borrower. (j) Impairment of Contract Collateral. Neither Borrower has knowledge of any default as to any Eligible Contract by any party, except for missed or deferred payments which would not render such Eligible Contract ineligible hereunder, nor of anything which would impair the value of any Eligible Contract. (k) Validity of Contracts. To the knowledge of either Borrower, each Eligible Contract (i) is free of any dispute, counterclaim, offset or defense (including, without limitation, the material breach of (w) any warranty by the Dealer of the goods covered by such Contract or (x) any service contract, extended service warranty or like agreement by such Dealer) of the Obligor or such other person or entity as may have guaranteed or secured the obligations of the Obligor (except for (y) the insolvency of such Obligor or such other person or entity as may have guaranteed or secured the obligations of the Obligor and (z) the right of an Obligor to receive a rebate of unearned finance charge in the event of payment in full prior to maturity); (ii) does not contravene any laws, rules or regulations applicable thereto and no party thereto has at any time violated any such laws, rules or regulations with respect thereto; (iii) is free and clear of all adverse claims, except for (x) the interest of the Obligor in the goods sold pursuant to such Contract, (y) the security interests created in favor of such Dealer and the Company, and (z) mechanics' or similar statutory liens subordinate to such security interests resulting from actions of the Obligor; (iv) grants to the respective Dealer and assigns to the Company a valid, -18- 23 enforceable and perfected first priority security interest in and to such Contract and such Related Security which is free and clear of any adverse claims subject to the exceptions stated in clause (iii) above; (v) no effective financing statement, lien notation on any certificate of title or other instrument similar in effect covering all or any part of such Contract or Related Security, which would give the Person filing, named on or entitled to the benefit of such statement or instrument priority senior to or pari passu with the Company, is on file in any recording office or is otherwise effective except such as may be filed in favor of the Dealer or the Company and collaterally assigned to Lender in accordance with this Agreement; (vi) requires either DACC or the Company to be named as loss payee or beneficiary (as may be applicable) under any insurance policy with respect to such Contract, and entitles the Company to the benefits of such insurance policy; (vii) the motor vehicle, including any equipment sold and financed in connection with the Contract is, to the extent required under applicable law, duly registered and licensed and is the subject of a certificate of title issued in the name of the Obligor which indicates a security interest therein held by the Company or DACC, in the appropriate form and in compliance with all appropriate procedures as may be necessary under applicable law to cause a perfected and first priority security interest to exist in favor of DACC or the Company to secure the obligations of such Obligor under such Contract; and (xiii) each of the representations and warranties from the Dealer to the Company with respect to such Contract under the Dealer Assignment related thereto are true and correct. (l) Obligors' Duties to Make Payments. Each Eligible Contract shall impose upon the related Obligor thereunder a duty to make all periodic payments set forth therein, which duty shall be absolute and unconditional, and to the best knowledge of Borrowers shall not be, nor be claimed to be, subject to any setoffs, claims, defenses or rights of counterclaim against Agent or Lenders. (m) Accuracy of Information. All written information heretofore or contemporaneously furnished by or on behalf of Borrowers to Agent or Lenders for purposes of or in connection with this Agreement and such other written information hereafter furnished by or on behalf of Borrowers to Agent or Lenders will be, true and accurate in every material respect on the date as of which such information is dated or certified and when taken in its entirety is not incomplete by omitting to state any material fact necessary to make such information not misleading. (n) Chief Executive Office. The chief executive office and principal place of business of the Company is located at 700 N. Pearl Street, Suite 400, L.B. 401, Dallas, Texas, and the Chief Executive Office and principal place of business of SCGI is located at 700 N. Pearl Street, Suite 400, L.B. 401, Dallas, Texas 75201. Except as set forth on Exhibit E hereto, Borrowers have no other places of business. The Borrowers will not change their chief executive office and principal place of business or open any additional places of business without fifteen (15) days prior written notice to Agent and will take all steps required to perfect and maintain perfected a first and senior lien and security interest in favor of Agent on the Collateral. -19- 24 (o) Solvency. After giving effect to the transactions contemplated by the Purchase Agreement, the value of each Borrower's assets including equity is greater than the amount required to pay its total Liabilities, and each Borrower is able to pay its debts as they mature. Each Borrower has sufficient capital to carry on its business and transactions as now conducted. (p) Offices, FTC; Warranties. Each Borrower agrees that it will operate each of its offices as a licensed location in any jurisdiction requiring such license in conformity with all such licensing and other laws applicable to the purchase of Contracts, including Motor Vehicle Retail Installment Sales Acts, Sales Finance Agency Acts, or any other law regulating the business of acquiring Contracts from Dealers. To the extent either Borrower does not have a license for each location, it will immediately procure a license or advise Lenders of the reason that it is exempt from such licensing requirement or that no such licensing requirement exists in the jurisdiction of such location. (q) No Material Adverse Change. Since March 31, 1996, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of SCGI. Section 15. Affirmative Covenants. Borrowers covenant and agree with Agent and Lenders that, until all of the Obligations shall have been paid and performed in full: (a) Financial Information. Borrowers will furnish, or will cause to be furnished, to Agent and Lenders copies of the following financial statements, reports and information, all of which shall be prepared on a basis consistent with generally accepted accounting principles consistently applied throughout the periods involved and shall present fairly the financial condition of Borrowers as at the dates thereof and the results of their operations for the periods then ended: (i) promptly when available and in any event within thirty (30) days after the close of each calendar month of each Fiscal Year, a Monthly Compliance Certificate from SCGI substantially in the form of Exhibit B; (ii) promptly when available and in any event within thirty (30) days after the close of each calendar month, an unconsolidated and a consolidated balance sheet of SCGI as of the close of such month, unconsolidated and consolidated statements of income and cash flows for such month and for the period commencing at the end of the previous Fiscal Year and ending with the close of such month, and comparisons of such balance sheet and statements of income against the like period of the immediate prior Fiscal Year, all in such form as will be acceptable to Lenders, certified by the Authorized Representative as having been prepared as specified in (a) above, subject to the absence of footnotes and quarter-end and year-end adjustments; -20- 25 (iii) promptly when available and in any event within 120 days after the close of each Fiscal Year, audited financial statements consisting of at least consolidated and consolidating balance sheets of SCGI and its subsidiaries at the close of that Fiscal Year and consolidated and consolidating statements of income and cash flow for that Fiscal Year, together with an unqualified opinion and report of BDO Seidman, LLC or such other independent public accountants of recognized standing selected by Borrowers and acceptable to Lenders (which acceptance shall not be unreasonably withheld); and a written statement of those accountants that they have examined such provisions of this Agreement as are appropriate to the normal scope of their audit and have not become aware, in the normal scope of their audit, of any default in the performance by Borrowers of any obligation to be performed by them pursuant to Sections 15 and 16 hereof except such, if any, as may be disclosed in such statement; (iv) promptly upon receipt and after review by the Borrowers' audit committees, copies of management letters submitted to Borrowers by independent public accountants in connection with any audit or review by such accountants of the books and records of Borrowers (including, without limitation, in the normal scope of any audit or review for purposes of certifying any annual or interim financial statements of Borrowers); (v) monthly a summary report of Contract portfolio activity based upon end of month balances, together with a charge-off and recovery summary report as of the last day of each month, within thirty (30) days of the end of each calendar month; (vi) monthly, a summary of all Expenses incurred during such month which shall be delivered to Agent and Lenders within fifteen (15) days of the end of each calendar month; (vii) monthly, a summary aging of all Contracts as of the end of such calendar month, together with a Borrowing Base Certificate and required supporting reconciliations and schedules (made as of the last day of each respective month), both of which shall be delivered to Agent and Lenders not later than the 15th day of the next succeeding month; (viii) promptly after the sending or filing thereof, copies of all reports which SCGI is required to send to any of its securityholders, and all reports and registration statements which SCGI files with the U.S. Securities and Exchange Commission or any national securities exchange; (ix) promptly after the effectiveness thereof, any amendment, supplement or other modification of (i) the Operating Policies of the Borrowers from the form thereof previously distributed to Agent and Lenders, or (ii) the Borrowers' accounting policies regarding its Contracts; (x) on a daily basis, a report of cash collections on the Collateral received by the Company from any source and all bank account balances in all accounts maintained by the Company; and -21- 26 (xi) such other information with respect to the financial condition and operations of either Borrower as Agent or Lenders may from time to time reasonably request. (b) Taxes. All assessments and taxes, whether real, personal or otherwise, due or payable by, or imposed, levied or assessed against, Borrowers or any of their property, have been paid, and shall hereafter be paid in full, before delinquency, and to the best of Borrowers' knowledge, all assessments and taxes due or payable by, or imposed, levied or assessed against any real property leased by Borrowers have been paid, and shall hereafter be paid in full, before delinquency. Borrowers shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of them by law. Nothing herein contained shall preclude either Borrower from contesting, in good faith and by appropriate proceedings, the imposition of any assessments or taxes and to withhold payment of such contested amounts pending the resolution of such proceedings provided that such Borrower maintains adequate reserves therefore and the failure to pay such taxes or assessments will not result in the imposition of a lien not permitted hereunder. (c) Insurance. The Company will maintain or cause to be maintained with responsible insurance companies insurance with respect to the Collateral (other than Collateral which secures the obligations of related Obligors under the Contracts), its properties and business, against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses, and will furnish to Agent and Lenders prior to the closing of this Agreement and upon request by Agent or Lenders, at reasonable intervals thereafter, a certificate of an Authorized Representative, as well as independent evidence of such coverage, setting forth the nature and extent of all insurance policies maintained by the Company or Obligors in accordance with this subsection; which insurance policies (other than policies maintained by Obligors as required by the Contracts) shall, by endorsement, name Agent as lender's loss payee to the extent of Agent's interest therein; provided, that the policies will not be invalidated as against Agent or Lenders because of any violation of a condition or warranty of the policy or application therefor by the Company; and provided that the policies may be materially altered or cancelled by the insurer only after 30 days' prior written notice to Agent. After the occurrence of an Event of Default, Borrowers hereby appoint Agent as attorney-in-fact for Borrowers to prove and adjust any losses and to endorse any loss drafts in connection with such policies. Borrowers hereby assign to Agent all sums which may become payable under such insurance, including returned premiums and dividends as additional security hereunder; and Borrowers shall give immediate written notice to Agent and to the insurers of any significant loss or damage to the Collateral and shall promptly file proofs of loss with such insurers. (d) Notice of Default, Litigation and ERISA. Borrowers will immediately give written notice to Agent of: (i) the occurrence of any Default or Event of Default; -22- 27 (ii) any litigation, arbitration or governmental investigation or proceeding not previously disclosed in writing by Borrowers to Agent which has been instituted or, to the knowledge of Borrowers, is threatened against either Borrower or any of its properties which, if adversely determined, would materially adversely affect the financial condition, operation or business of a Borrower or impair the ability of a Borrower to perform any of its obligations under this Agreement or any Instrument executed pursuant hereto; (iii) the occurrence of any Reportable Event under, or the institution of steps by either Borrower to withdraw from, or the institution of any steps to terminate, any Plan; and (iv) the occurrence of any default or event of default under the Purchase Agreement. (e) Performance of Obligations. Borrowers will perform promptly and faithfully all of their obligations under this Agreement and each other Instrument executed pursuant hereto. (f) Books and Records, Audits. Borrowers will in all material respects keep books and records reflecting all of their business affairs and transactions in accordance with generally accepted accounting principles and permit Agent and Lenders (or any of their employees or agents) at reasonable times and intervals, to visit all of its offices, conduct examinations and audits of the Company's books and records and the Collateral, discuss Borrowers' financial matters with Borrowers' officers and independent accountants (and hereby authorizes such independent accountants to discuss Borrowers' financial matters with Agent and Lenders and their representatives) and examine any of its other corporate records. Such books and records shall be maintained at Borrowers' principal places of business set forth herein. (g) Plans. Each Borrower will maintain each of its employee benefit Plans, if any, in compliance in all material respects with all requirements of the Plan and any applicable laws and regulations. (h) Performance of Contract Duties, Defense of Collateral. Borrowers covenant and agree that they will perform in all material respects their duties and obligations under each Contract. Borrowers covenant to defend the Collateral from any liens, claims, encumbrances and security interests other than Permitted Liens. (i) Possessory Perfection in Contract Collateral. Upon request by Agent or Majority Lenders after the occurrence of an Event of Default, the Company will deliver to Agent with respect to each item of Collateral which constitutes a Contract, the single, signed counterpart which constitutes the original thereof of each document of which each such Contract is comprised, together with all related instruments, including, without limitation, vehicle titles, duly assigned to Agent. Borrower covenants that Borrower will -23- 28 prominently stamp or mark each original Contract with the legend set forth in Section 12 above. (j) Compliance with Laws. Borrowers shall comply in all material respects with all statutes, rules and regulations applicable to Borrowers and their respective business, including without limitation, all applicable statutes, rules and regulations relating to Borrowers' businesses as consumer finance companies. (k) Collateral Agent. The Company shall make available an Authorized Representative at all times to serve as Collateral Agent in accordance with Section 12 of this Agreement. Section 16. Negative Covenants. Borrowers covenant and agree with Lenders that until all of the Obligations shall have been paid and performed in full: (a) Business Activities. Borrowers will not engage in any business which would represent any substantial change from Borrowers' existing businesses as described in the most recent Form 10-K filed by SCGI with the United States Securities and Exchange Commission. (b) Liabilities. The Company will not create, incur, assume or suffer to exist or otherwise become or be liable in respect of any Liabilities without the prior written consent of Lenders other than: (i) Liabilities in respect of the Obligations; (ii) Liabilities in respect of taxes, assessments, governmental charges or levies and claims of any kind to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of Section 15; (iii) Liabilities to trade creditors, employees or other Persons in the ordinary course of the Company's business; or (iv) as otherwise expressly permitted by this Agreement. (c) Security Interests. The Company will not create, incur, assume, or suffer to exist any Security Interest upon any of its property or assets, whether now owned or hereafter acquired, except: (i) the Security Interest granted by this Agreement; (ii) inchoate liens for taxes, assessments or other governmental charges or levies not at the time delinquent; and -24- 29 (iii) judgment liens junior and subordinate to the Security Interest of this Agreement, which have been in existence less than 30 days after the entry thereof or with respect to which execution has been stayed. (c)(i)-(iii) above are hereinafter referred to as "Permitted Liens". (d) Investment. The Company will not, without the prior written consent of Lenders make, incur, assume or suffer to exist any Investment in any other Person, except Cash Equivalent Investments. (e) Sale, Transfer or Encumbrance of Assets. The Company will not without the prior written consent of Lenders, sell, lease, pledge, encumber, grant a security interest in (other than (i) to Lenders, or (ii) Permitted Liens), or otherwise dispose of, move, relocate, or transfer, whether by sale or otherwise, any of the Company's assets, except for the movement of assets in the ordinary course of business to locations disclosed in advance to Agent and where the Company has executed and tendered to Agent appropriate UCC-1 financing statements for filing or taken other steps required to enable Agent to perfect its lien. (f) Restricted Payments. The Company will not make any Restricted Payment other than payments to SCGI for direct assistance in the areas of accounting, tax, financial planning, MIS, legal and treasury services, based upon actual time incurred, at a reasonable per hourly rate, plus out-of-pocket expenses provided; however, that such payments shall cease upon the occurrence and during the continuance of an Event of Default hereunder. (g) Execution and Modifications of Certain Documents. The Company will not amend its articles (or certificate, as the case may be) of incorporation or bylaws, except for amendments which are not material to the Company and do not adversely affect the interests of the Lenders, and the Borrowers will not enter into any new agreement which causes or constitutes a Default or Event of Default under this Agreement. (h) Transactions with Affiliates. The Company shall not enter into any transaction with, any Affiliate, except in the ordinary course of business and upon fair and reasonable terms which are no less favorable to the Company than would obtain in a comparable arm's length transaction with a Person not an Affiliate. (i) Loan and Advances. The Company will not make any loans to any Person; guarantee any debt or other obligation of any other Person. (j) Consolidation, Merger, Sale or Pledge of Assets. The Company will not, without the prior written consent of Lenders, (i) consolidate with, combine with, acquire or merge into or with any other Person, (ii) purchase or otherwise acquire any other Person or all or substantially all of the assets of any Person (or any division thereof), or (iii) issue or cause to be registered for issuance any class of capital stock of the Company; provided, however, Lenders shall not unreasonably withhold their consent to issuances of -25- 30 capital stock hereafter approved by the Company's board of directors under terms which provide no features for redemption or "put" of the stock, and neither Borrower will, without the prior written consent of Lenders, (i) sell, transfer or dispose of all or any substantial part of its assets to any Person, or (ii) suffer or permit a Change in Control. (k) Inconsistent Financing Statements. The Company will not file, nor allow to remain on file, and unreleased, any financing statement or other document which perfects or purports to perfect any Security Interest in favor of any other Person which is inconsistent with subsection (c) of this Section. (l) Modification of Contract Terms. Neither Borrower will modify the terms of any Contract which is at that time reflected in the Borrowing Base so as to render a Contract not otherwise eligible into an Eligible Contract, without the prior written consent of Lenders. (m) Capital Expenditures. The Company shall not make any Capital Expenditures in excess of the aggregate sum of $50,000 without prior written consent of the Lenders. (n) Leverage Ratio. SCGI shall not permit its Leverage Ratio to exceed 5.0 to 1.0 at any time. (o) Subordinated Indebtedness Ratio. SCGI shall not permit the ratio of its Subordinated Indebtedness to its consolidated Tangible Net Worth to exceed 1.50 to 1.0 at any time. (p) Tangible Net Worth. SCGI shall not permit its unconsolidated Tangible Net Worth to be less than $22,500,000 or its consolidated Tangible Net Worth to be less than $22,500,000. (q) Unrestricted Cash. SCGI shall maintain at all times cash balances unrestricted as to use of not less than $5,000,000. (r) Modification of Certain Agreements. The Company shall not consent to or enter into any amendment, supplement or other material modification of (a) any agreement governing or relating to any other material Liabilities, if such amendment, supplement or other modification would be materially adverse to Lenders, in their sole, but reasonable judgment; or (b) any material term or provision (i) contained in the Operating Policies from the form previously distributed to the Lenders, or (ii) of the Company's accounting policies regarding the Contracts, if such amendment, supplement or other modification would be materially adverse to Lenders, in their sole, but reasonable judgment or materially adversely effect the Borrowing Base. -26- 31 Section 17. Events of Default. The occurrence of any of the following shall constitute an Event of Default hereunder: (a) Either Borrower defaults in the payment when due or declared due of any of the Obligations and such default is not cured within three (3) Business Days of notice of such breach by Agent to Borrowers; (b) Either Borrower defaults in the due performance and observance of any covenant or agreement contained in Section 17 or 18 of this Agreement and such default is not cured within ten (10) days of notice of such breach by Agent to Borrowers; (c) Either Borrower defaults in the due performance and observance of any warranty, representation, covenant or agreement contained herein, other than as specified in (a) or (b) above, or in any Instrument, document or agreement executed pursuant hereto, and fails to cure same within thirty (30) days of notice by Agent to Borrowers; provided, however, the breach of a warranty or representation contained in Section 14(j) or (k) of this Agreement, shall not constitute an Event of Default hereunder, absent the occurrence of some other Event of Default hereunder, whether as a result thereof or otherwise. (d) any default shall occur under the terms applicable to (i) any Liabilities of either Borrower representing any borrowing or financing in excess of the aggregate sum of $5,000,000 (other than the Obligations), and all applicable cure periods shall have expired, or (ii) any Liabilities of either Borrower under any other material agreement (which is not being contested by such Borrower in good faith by appropriate proceedings) with respect to any purchase or lease by such Borrower of goods or services, and the holder or holders, or an agent for such holder or holders thereof, shall then have accelerated any payment or the performance of any obligations due under, such Liabilities; (e) SCGI shall become insolvent or either Borrower shall generally fail to pay, or admit in writing its inability to pay debts as they become due; or either Borrower shall apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, or other custodian for itself or any of its property, or make a general assignment for the benefit of creditors; or, in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian shall be appointed for either Borrower or for a substantial part of its property and not be discharged within 30 days; or any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding shall be commenced against or in respect of either Borrower as a debtor and, if not commenced by a Borrower, be consented to or acquiesced in by a Borrower or remain for 30 days undismissed; or either Borrower shall take any action to authorize, or in furtherance of, any of the foregoing; (f) Any representation or warranty made by either Borrower herein, in any Instrument, or in any certificate or financial or other statement heretofore, or hereafter -27- 32 furnished by or on behalf of either Borrower, shall prove to be in any material respect false or misleading; (g) Either Borrower shall suspend the transaction of business or is enjoined, restrained or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; Section 18. Remedies. Upon the occurrence of an Event of Default described in Section 17(e) hereunder, the Obligations shall automatically be and become immediately due and payable, without notice or demand. Upon the occurrence of any Event of Default hereunder, Agent may and shall, at the direction of the Majority Lenders, exercise any or all of the following remedies, in addition to those granted to Agent and Lenders under applicable law or the Uniform Commercial Code of Illinois and all other applicable jurisdictions where Collateral is located, which rights and remedies will be cumulative and not exclusive: (a) In the case of an Event of Default other than an Event of Default described in Section 17(e) of this Agreement, immediately without notice to the Borrowers, declare all or any part of the outstanding amount of the Obligations to be due and payable, whereupon the full unpaid amount of the Obligations shall be and become immediately due and payable. (b) Terminate this Agreement as to any future liabilities or obligations of Lenders, but without affecting Agent's or Lenders' rights or Borrower's Obligations. (c) Exercise all rights and remedies under each Contract, lease, security agreement and other contract included among the Collateral as are afforded to the secured party thereunder or which are otherwise afforded to the Company thereunder; Agent may, subject to the rights of Obligors, recover possession of any tangible personal property under any Contract, and require that same be assembled and delivered to a specific location; and Agent shall be entitled to a decree of specific performance to enforce the rights set forth in this subsection (c). (d) Notify each Obligor party to a Contract that the Contract has been assigned to Agent, that all payments are to be forwarded to Agent without set off or diminution of any kind, and that all correspondence is thereafter to be sent directly to the Agent. Furthermore Agent is authorized and directed by Borrowers to collect and receive any and all revenues and other cash and non-cash proceeds which constitute part of, or are derived from, the Collateral. (e) Sell all or any part of the Collateral, free from any and all claims of either Borrower, in one lot and as an entirety, or in separate lots, at public or private sale, for cash or credit, in its discretion. Upon any such public sale, Agent may bid for the property offered for sale or any part thereof and the proceeds of such sale, net of costs, shall be applied to any Obligations secured hereby as provided hereinafter. Any such sale -28- 33 shall be held or conducted in a commercially reasonable manner and at such place and at such time as Agent may specify, or as may be required by law. Without limiting the generality of the foregoing, Borrowers expressly agree in any such event that Agent, without demand of performance or other demand or notice of any kind (except the notice specified herein of time and place of public or private sale) to or upon Borrowers or any other person (all and each of which demands and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Collateral or any part thereof. If any notification of intended disposition of any of the Collateral is required by law, such notification shall be deemed reasonable and properly given in accordance with Section 18(e) hereof five (5) Business Days before such disposition. At the request of Agent, Borrowers shall promptly execute and deliver to Agent such instruments of title and other documents as Agent shall deem necessary or advisable to enable Agent to obtain possession of any portion or all of the Collateral, or to transfer the title to any portion or all of the Collateral, to any purchaser (including, without limitation, Agent or Lenders) in connection with any sale. Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization and sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any or all of the Collateral or in any way relating to the rights of Agent hereunder, including reasonable attorney's fees and legal expenses, to the payment in whole or in part of the Obligations hereunder, in such order as Agent may elect, and only after so applying such net proceeds, after payment in full of the Obligations hereunder, shall apply the surplus, if any, to Borrowers or whomsoever may be lawfully entitled to receive the same. Borrowers hereby waive presentment, demand and protest (to the extent permitted by applicable law) of any kind in connection with this Agreement or any Collateral. Section 19. Agent. (a) Appointment. Each Lender hereby designates and appoints LaSalle as Agent of such Lender under this Agreement, and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and to exercise such powers as are set forth herein, together with such other powers as are incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 19. The provisions of this Section 19 are solely for the benefit of Agent and Lenders, and Borrowers shall not have the right to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, Agent shall act solely as agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for Borrowers. (b) Nature of Duties. Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement. The duties of Agent shall be mechanical and administrative in nature. Agent shall not have by reason of this Agreement a fiduciary -29- 34 relationship in respect of any Lender. Nothing in this Agreement, expressed or implied, is intended to or shall be construed to impose upon Agent any obligation in respect of this Agreement except as expressly set forth herein. Each Lender shall make its own independent investigation of the financial condition and affairs of the Borrowers in connection with the Assumption hereunder and shall make its own appraisal of the creditworthiness of Borrowers, and Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the date of this Agreement or at any time or times thereafter, except for documents delivered to Agent pursuant to this Agreement by or on behalf of the Borrowers. If Agent seeks the consent or approval of the Majority Lenders to the taking or refraining from taking any action hereunder, Agent shall send notice thereof to each Lender. Agent shall promptly notify each Lender at any time that the Majority Lenders have instructed Agent to act or refrain from acting pursuant hereto. (c) Rights, Exculpation, Etc. Neither Agent, any Affiliate of Agent, nor any of their respective officers, directors, employees, agents, attorneys or consultants, shall be liable to any Lender for any action taken or omitted by them hereunder, or in connection herewith, except that Agent shall be obligated for its gross negligence or willful misconduct in the performance of its express obligations hereunder; provided, however Agent shall be liable for any error in the apportionment or distribution of payments made by it pursuant to this Agreement. If any such apportionment or distribution is subsequently determined to have been made in error the recipient of such payment shall return to Agent any payment in excess of the amount to which they are determined to have been entitled. Agent shall not be responsible to any Lender for any recitals, statements, representations or warranties herein or for the enforceability, collectibility, or sufficiency of this Agreement, or any of the transactions contemplated hereby and thereby; or for the financial condition of Borrowers. Agent shall not be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or the financial condition of Borrowers, or the existence or possible existence of any Event of Default or Default, provided, however, that the foregoing shall not release Agent from its express obligations under this Agreement. Agent may at any time request instructions or indemnification from Lenders with respect to any actions or approvals which by the terms of this Agreement Agent is permitted or required to take or to grant, and if such instructions or indemnification are promptly requested, Agent shall be absolutely entitled to refrain from taking any action or to withhold any approval and shall not be under any liability whatsoever to any Person for refraining from any action or withholding any approval under this Agreement until it shall have received such instructions or indemnification (to Agent's satisfaction) from the Lenders. Without limiting the foregoing, no Lender shall have any right of action whatsoever against Agent as a result of Agent acting or refraining from acting under this Agreement in accordance with the instructions of the Majority Lenders. (d) Reliance. Agent shall be entitled to rely upon any written notices, statements, certificates, orders or other documents or any telephone message believed by it in good faith to be genuine and correct and to have been signed, sent or made by the proper -30- 35 Person, and with respect to all matters pertaining to this Agreement and its duties hereunder or thereunder, upon advice of legal counsel (including counsel for Borrowers), independent public accountants and other experts selected by it. (e) Indemnification. To the extent that Agent is not reimbursed and indemnified by Borrowers, Lenders will reimburse and indemnify Agent, upon demand, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it in any way relating to or arising out of this Agreement or any action taken or omitted by Agent under this Agreement, in proportion to each Lender's ratable share of the Commitments; provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from Agent's gross negligence or willful misconduct. The obligations of Lenders under this Section 19(e) shall survive the payment in full of all Obligations and the termination of this Agreement. (f) The Agent Individually. With respect to its pro rata share of the Commitments hereunder, Agent shall have and may exercise the same rights and powers hereunder and is subject to the same obligations and liabilities as and to the extent set forth herein for any other Lender. The terms "Lender" or "Lenders" or any similar terms shall include Agent in its individual capacity and Agent may accept deposits from and generally engage in any kind of banking, trust or other business with Borrower as if it were not acting as Agent pursuant hereto. (g) Successor Agent: Resignation of Agent. (i) Agent may resign from the performance of all of its functions and duties hereunder at any time by giving at least thirty (30) Business Days' prior written notice to Lenders and Borrowers. Such resignation shall take effect upon the acceptance by a successor Agent of appointment pursuant to clauses (ii) and (iii) below or as otherwise provided below. (ii) Upon any such notice of resignation by Agent, the Majority Lenders shall appoint a successor Agent. (iii) If a successor Agent shall not have been so appointed within said thirty (30) Business Day period, the retiring Agent, shall then appoint a successor Agent who shall serve as Agent until such time, if any, as the Majority Lenders, appoint a successor Agent as provided above. (iv) Upon the appointment of a successor Agent, the term "Agent" shall, for all purposes of this Agreement, thereafter mean such successor. (h) Collateral Matters. Agent is hereby authorized on behalf of all Lenders, without the necessity of any notice to or further consent from any Lender, from time to time prior to a Default, to take any action with respect to any Collateral which may be necessary -31- 36 to perfect and maintain perfected the security interest in and liens upon the Collateral granted pursuant to this Agreement. Agent shall provide the Lenders with prompt notice of any Default or Event of Default of which Agent has actual knowledge. Section 20. Relations Among Lenders. (a) Except as contemplated under this Agreement, no Lender shall make any loan, advance or other financial accommodation to either Borrower without the prior written consent of the Majority Lenders. (b) Each Lender agrees that it will not take any action, nor institute any actions or proceedings, against either Borrower or any other obligor hereunder or with respect to any Collateral, without the prior written consent of the Majority Lenders. Section 21. Miscellaneous. Concerning the Collateral and the Collateral Documents. Each Lender agrees that any action taken by Agent or the Majority Lenders in accordance with the provisions of this Agreement, and the exercise by Agent or the Lenders of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Lenders. Section 22. Participations. Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement; provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligation and (iii) Borrowers, Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and with regard to any and all payments to be made under this Agreement. No Lender may, without the consent of all Lenders, make an assignment of its rights or obligations under this Agreement. Section 23. Waiver and Amendment. (a) Agent's or Lenders' failure, at any time or times hereafter, to require strict performance by Borrowers of any provision of this Agreement shall not waive, affect or diminish any right of Agent or Lenders thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Agent or Lenders of a Default or Event of Default by Borrowers under this Agreement shall not suspend, waive or affect any other Default or Event of Default by Borrower under this Agreement whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. -32- 37 (b) Subject to subsection 23(c) below and except as otherwise specifically provided in this Agreement, no amendment or modification of any provision of this Agreement shall be effective without the written agreement of the Majority Lenders and Borrower, and no termination or waiver of any provision of this Agreement, or consent to any departure by Borrowers therefrom, shall in any event be effective without the written concurrence of the Majority Lenders, which the Majority Lenders shall have the right to grant or withhold at their sole, but reasonable, discretion. (c) Notwithstanding the provisions of Section 23(b), any amendment relating (i) to any change in the Commitments of any Lender, of the total of the Commitments, (ii) to any change in the final maturity of the Obligations, (iii) to the reduction of interest rates applicable to the Obligations or fees payable under this Agreement, (iv) to the definition of "Borrowing Base" or "Majority Lenders", (v) to the provisions contained in this Section (c), (vi) to the release of Collateral, (vii) to the amount or computation of Mandatory Reductions, (viii) to the Borrowing Base, or (ix) to any Event of Default involving the payment of money or the performance of any material obligation by Borrower under this Agreement, shall be effective only if evidenced by an agreement in writing signed by or on behalf of all Lenders. No amendment, modification termination or waiver of any provision of Section 19 or any other provision referring to Agent shall be effective without the written concurrence of Agent. Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of such Lender. Section 24. Accounting and Financial Determinations. Where the character or amount of any asset or liability or item of income or expense is required to be determined under this Agreement, each such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with generally accepted accounting principles applied on a basis consistent with the audited financial statements of SCGI referred to in Section 15 hereof. Section 25. Right of Offset. Subject to the terms of this Agreement, in addition to, and without limitation of, any rights of Agent and Lenders under applicable law or otherwise. Agent and Lenders may, when any Event of Default shall have occurred and be continuing and without notice or demand of any kind, appropriate and apply toward payment of any Obligations (whether or not then due), any amounts, properties, balances, credits, deposit accounts or other monies of either Borrower in the possession or control of Agent or Lenders for any purpose. -33- 38 Section 26. Computation and Payment of Liabilities. Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, that payment shall be made on the next succeeding Business Day, and that extension of time shall be included in computing interest, if any, in connection with such payment. Section 27. Notices. Except as otherwise expressly provided, all notices and other communications to any party pursuant to this Agreement or any Instrument executed pursuant hereto shall be in writing addressed, delivered or transmitted to it at its address or number set forth below its signature hereto or to such other address or number as it shall designate in a notice to the other party. Any notice if mailed properly addressed shall be deemed given on the third Business Day after mailing postage prepaid by certified or registered mail, or on the second Business Day when sent by overnight delivery service which provides at least upon request a receipt for delivery; provided, however, if such delivery is made on a day other than a Business Day, such notice shall be effective on the next Business Day. Section 28. Costs and Expenses. Borrowers agree to reimburse Agent and Lenders upon demand for all reasonable costs, fees and expenses (including reasonable attorneys' fees and legal expenses) incurred by Agent and Lenders hereunder or in connection herewith in enforcing the Obligations of Borrowers hereunder or any other Instrument executed pursuant hereto. The obligations of Borrowers under this Section shall survive any termination of this Agreement. Section 29. Severability, Choice of Law. Any provision of this Agreement or any instrument executed pursuant hereto which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of any such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or any such Instrument or affecting the validity or enforceability of that provision in any other jurisdiction. This Agreement and all terms and provisions hereof shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois without regard to the choice of law rules thereof except as to perfection of any Security Interest which shall be controlled by the laws of the relevant jurisdiction. Borrowers, to further induce the Agent and Lenders to enter into this Agreement agrees that, subject to the Agent or Lenders' election, all actions, suits or proceedings regarding the interpretation or enforcement of this Agreement or any Instrument shall be litigated only in courts having situs in Cook County, Illinois, and consents to jurisdiction of any such court having subject matter jurisdiction over the matter -34- 39 of such litigation, action, or proceeding and hereby irrevocably appoints CT Corporation, whose address is 208 S. LaSalle Street, Chicago, IL 60603, or such other person whom Lenders may designate in writing to Borrowers as agent for the personal service of process. Borrowers agree that service of such process shall constitute personal service upon Borrowers, upon forwarding of notice to Borrowers of such service in accordance with the provisions of Section 27 hereof. Section 30. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, except that Borrowers may not assign or transfer their rights hereunder without the prior written consent of Lenders. Lenders reserve the right, subject to the terms of Section 22 of this Agreement, to assign or grant participations in all or any part of, or any interest in, their rights and benefits hereunder or under any other Instrument executed pursuant hereto and may, in connection therewith, disclose all documents and information which it may have relating to Borrowers or its business, this Agreement, and any other such Instrument. Section 31. Taxes and Expenses Regarding the Collateral. If Borrowers fail to pay promptly when due to any other person or entity, monies which Borrowers are required to pay by reason of any provision in this Agreement, Agent or Lenders may, upon notice to Borrowers, but need not, pay the same and charge such Borrowers' account therefor if necessary to preserve or protect the Collateral, or if there is no immediate harm to the Collateral, Lenders, may, after the occurrence of any Event of Default, but need not, pay the same and charge Borrower's account therefor. Borrowers shall promptly reimburse Agent and Lenders for all such payments. All such sums shall become additional Obligations owing to Agent and Lenders, shall bear interest at the interest rate then applicable under this Agreement, and shall be secured by the Collateral. Any payments made by Agent or Lenders shall not constitute an agreement by Agent or Lenders to make similar payments in the future, or a waiver by Agent or Lenders of any default under this Agreement. Agent or Lenders need not inquire as to, or contest the validity of, any such expense, tax, security interest, encumbrance or lien. The receipt of the usual official governmental or court notice for the payment of the foregoing shall be conclusive evidence that the same was validly due and owing, and the receipt of any other notice with respect to all other such monies due hereunder shall be prima facie evidence that the same was validly due and owing. Section 32. Waiver of Jury Trial. BORROWERS, AGENT AND LENDERS EACH WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY TRANSACTION HEREUNDER. Section 33. Indemnity. -35- 40 (a) Borrowers shall indemnify and hold harmless Agent, Lenders and their directors, officers, agents, counsel and employees ("Indemnified Persons") from and against all losses, claims, damages, costs, expenses and liabilities ("Losses") incurred by any of them arising out of or relating to a breach by Borrowers' of their representations, warranties, covenants or agreements contained in this Agreement, any Contract, or any other transaction contemplated hereby or thereby other than arising out of any intercreditor relationship between Lenders and any Participant and except for any such losses caused by the gross negligence or willful misconduct of such Indemnified Persons, and shall reimburse Agent and Lenders and each other Indemnified Person for any expenses (including the fees and disbursements of legal counsel) incurred in connection with the investigation of, preparation for or defense of any actual or threatened claim, action or proceeding arising therefrom (including any such costs of responding to discovery requests or subpoenas), regardless of whether Agent or Lenders or other Indemnified Person is a party thereto. (b) Indemnification Procedures. All claims for indemnification under this Section 33 shall be asserted and resolved as follows: (i) In the event that any Claim for which the Borrowers would be liable to an Indemnified Person hereunder is asserted against an Indemnified Person by a third party, the Indemnified Person shall with reasonable promptness send a Claim Notice (the "Claim Notice") with respect to such Claim to the President of SCGI (the "Representative") specifying the nature of such claim and the amount or the estimated amount thereof to the extent then feasible (which estimate shall not be conclusive of the final amount of such Claim). The actions and decisions of the Representative shall be binding upon the Borrowers. The Representative shall have 15 days from the receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Person (a) whether or not the Borrowers dispute the Borrowers' liability to the Indemnified Person hereunder with respect to such Claim, and (b) if the Borrowers do not dispute such liability, whether or not the Borrowers desire, at the sole cost and expense of the Borrowers, to defend against such Claim, provided that the Borrowers are hereby authorized (but not obligated) prior to and during the Notice Period to file any motion, answer or other pleading and to take any other action which the Borrowers shall deem necessary or appropriate to protect the Borrowers' interests. If the Representative notifies the Indemnified Person within the Notice Period that the Borrowers do not dispute the Borrowers' obligation to indemnify hereunder and desire to defend the Indemnified Person against such Claim, except as hereinafter provided, the Borrowers shall have the right to defend by appropriate proceedings, which proceedings shall be promptly settled or prosecuted by the Borrowers to a final conclusion; provided that, unless the Indemnified Person otherwise agrees in writing, the Borrowers may not settle any matter (in whole or in part) unless such settlement includes a complete and unconditional release of the Indemnified Person. If the Indemnified Person desires to participate in, but not control, any such defense or settlement the Indemnified Person may do so at the Indemnified Person's sole cost and expense. If the Borrowers elect not to defend the Indemnified Person against such Claim, whether by failure of the Representative to give the Indemnified Person timely notice as provided above or otherwise, then the Indemnified Person, without waiving any rights against the -36- 41 Borrowers, may settle or defend against any such Claim in the Indemnified Person's commercially reasonable discretion and the Indemnified Person shall be entitled to recover form the Borrowers to the extent the Claim is covered by Borrowers' indemnification obligations under this section, the amount of any settlement or judgment and, all indemnifiable costs and expenses of the Indemnified Person with respect thereto, including interest from the date such costs and expenses were incurred. Section 34. Section Headings. Section headings and numbers have been set forth herein for convenience only and shall be without substantive meaning or content of any kind whatsoever. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. Section 35. Construction. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Agent, Lenders or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of the parties hereto. Section 36. Restatement of Prior Agreements. This Agreement constitutes an amendment and restatement of and a replacement and substitute for the Prior Agreements. The Obligations under the Prior Agreements are continuing indebtedness and nothing in this Agreement shall be deemed to constitute payment, settlement, or novation of the corresponding Obligations of DACC, or any guarantor, surety, or other party primarily or secondarily liable for such Obligations. Upon execution of this Agreement by the parties, this Agreement shall amend and supersede and is substituted for the Prior Agreements in their entirety and upon satisfaction of all of the conditions precedent set forth in Section 11 of this Agreement, DACC shall be released of its obligations under the Prior Agreements under a Mutual Release in the form of Exhibit E hereto. Section 36. Release of Liens. Upon payment in full of the Obligations, Agent shall release all liens on the Collateral. -37- 42 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. SEARCH FUNDING IV, INC. By: /s/ ROBERT D. IDZI ------------------------------- Title: E.V.P. & CFO ------------------------------- Address: 700 N. Pearl St., Suite L.B. 401 Dallas, Texas 75201-2809 Attn: ROBERT D. IDZI ------------------------ Fax: 214-965-6098 ------------------------ SEARCH CAPITAL GROUP, INC. By: /s/ ROBERT D. IDZI ------------------------------- Title: E.V.P. & CFO ------------------------------- Address: 700 N. Pearl St., Suite L.B. 401 Dallas, Texas 75201-2809 Attn: Robert D. Idzi ------------------------ Fax: 214-965-6098 ------------------------ COMMITMENT: $7,478,571.42 LASALLE NATIONAL BANK By: [ILLEGIBLE] ------------------------------- Title: Sr. V.P. ------------------------------- Address: 120 South LaSalle Street Chicago, Illinois 60601 Attn: James Thompson Fax: 312/750-6382 COMMITMENT: $4,985,714.29 FLEET CAPITAL CORPORATION By: [ILLEGIBLE] ------------------------------- Title: V.P. ------------------------------- Address: 20800 Swenson Drive, #350 Waukesha, WI 53186 Attn: Dennis Rebman Fax: 414/798-4882 COMMITMENT: $4,985,714.29 BANK ONE, CHICAGO, N.A. By: [ILLEGIBLE] ------------------------------- Title: V.P. ------------------------------- Address: 111 N. Canal Street Chicago, Illinois 60606 Attn: Farhaan Hassan Fax: 312/627-5833 -38- 43 EXHIBIT A DEALERS ALLIANCE CREDIT CORP. BORROWING BASE CERTIFICATE Dated as of _____________________ The undersigned Authorized Representative of Search Funding IV, Inc. ("Borrower"), in connection with that certain Debt Assumption Agreement, dated as of August __, 1996 (as amended from time to time, the "Agreement"), among the Borrower, LaSalle National Bank as Agent and the financial institutions from time to time parties thereto, does hereby certify, represent and warrant that: 1. The undersigned is an officer of Borrower holding the office set forth beneath the signature below; 2. The undersigned has made such examination or investigation of the books, records, business and affairs of Borrower as necessary to express an informed opinion as to the matters set forth herein; 3. No Default or event of Default has occurred and is continuing; 4. The information contained in the attachment to this Certificate is accurate and complete; and 5. The representations and warranties contained in the Agreement are true and correct in all material respects as of the date hereof as if made on the date hereof. By: ------------------------------- Title: ------------------------------- 44 Computation of Borrowing Base 1. Total Gross Receivables from prior month (line 5) $___________ 2. Gross Receivables written during current month $___________ 3. Aggregate Gross Receivables (item 1 and item 2) $___________ 4. Less collections and charge offs A. collections during current month $___________ B. gross charge offs during current month $___________ C. other reductions $___________ 5. Total Gross Receivables (item 3 less item 4) $___________ 6. Less Ineligible Receivables A. accounts past due more than 60 days $__________ B. repossession accounts $__________ C. bankruptcy accounts (unless reaffirmed) $__________ D. rewritten accounts $__________ E. Deferred payment accounts $__________ Total Ineligible Receivables $___________ 7. Eligible Receivables (item 5 less item 6) $___________ 8. Less Unearned Charges A. Unearned Finance Charges (UFC) $__________ B. Unamortized Discount (UD) $__________ C. Unearned Ancillary Income (UAI) $__________ D. less UFC, UD and UAI for ineligible accounts $__________ Net Unearned Charges $___________ 9. Less Loss Reserves A. allowance for credit losses, less $___________
45 B. amortized portion of allowance for credit losses, and $___________ C. Reserves for ineligible accounts $___________ Net Loss Reserves $__________* 10. Net Eligible Receivables (item 7 less items 8 and 9) $__________ 11. Applicable Advance Rate $__________ 12. Borrowing Base (item 10 times item 11) $__________ 13. Lesser of Borrowing Base or $35,000,000 $__________ 14. Outstanding balance of Revolving Credit Loans $__________ 15. Availability (item 13 minus item 14) $__________
If positive, the amount is available Revolving Credit. If negative, the amount is the minimum Mandatory Prepayment due. * or $____________, if greater, which sum is equal to 14% of Net Finance Receivables. 46 EXHIBIT B MONTHLY COMPLIANCE CERTIFICATE LaSalle National Bank 120 South LaSalle Street Chicago, Illinois 60603 Re: Debt Assumption Agreement, dated as of August __, 1996 (together with all Amendments from time to time, if any, hereinafter referred to as the "Agreement") among _______________________ ("Borrowers") and LaSalle National Bank as Agent ("Agent") and the financial institutions from time to time parties thereto. Gentlemen: In accordance with Section 15(a)(i) of the Agreement, SCGI hereby certifies to the Lender that: A. On __________, 19__ (the "Monthly Computation Date"), the Leverage Ratio did not exceed 5.0 to 1.0, all as computed on Attachment 1 hereto. B. On the Monthly Computation Date, the unconsolidated Tangible Net Worth of SCGI was $______________, as computed on Attachment 2 hereto and the consolidated Tangible Net Worth of SCGI was $______________, as computed on Attachment 3 hereto. C. On the Monthly Computation Date the ratio of SCGI's Subordinated Indebtedness to its Consolidated Tangible Net Worth did not exceed 1.50 to 1.0, all as computed on Attachment 3 hereto. D. All of the information set forth in this Certificate (and in the Attachments hereto) is true and correct; and E. Except as stated on Attachment __ hereto (if applicable), no Event of Default had occurred and was continuing at the Monthly Computation Date or as of the date of this certificate. IN WITNESS WHEREOF, Borrower has caused this Certificate to be executed and delivered by it Authorized Representative this _____ day of ____________, 19__. SEARCH CAPITAL GROUP, INC. By: ------------------------------- Title: ------------------------------- EX-4.1 8 CERTIFICATE OF DESIGNATION 1 EXHIBIT 4.1 SEARCH CAPITAL GROUP, INC. CERTIFICATE OF DESIGNATION SERIES B 9%/7% CONVERTIBLE PREFERRED STOCK Pursuant to the authority conferred upon the Board of Directors by the Certificate of Incorporation of Search Capital Group, Inc., a Delaware corporation (the "Corporation"), and the provisions of Section 151 of the Delaware General Corporation Law, the following resolution creating a series of 4,000,000 shares of preferred stock designated as Series B 9%/7% Convertible Preferred Stock was duly adopted as of July 29, 1996 by all necessary action on the part of the Corporation: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Certificate of Incorporation, a series of preferred stock of the Corporation be, and it hereby is, created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of shares of such series, and the qualifications, limitations, or restrictions thereof are as follows: SECTION 1. Designation of Series. The series shall be designated as "Series B 9%/7% Convertible Preferred Stock" (hereinafter called "Series B Preferred Stock"). SECTION 2. Number of Shares. The number of shares of Series B Preferred Stock is 4,000,000 with the par value of $0.01 per share and a liquidation preference of $3.50 per share plus any declared but unpaid dividends, after payment of all debts of the Corporation, which number of shares the Board of Directors may increase or decrease but may not decrease below the number of shares of the series then outstanding. SECTION 3. Dividends. The holders of the Series B Preferred Stock shall be entitled to receive, out of any funds legally available, non-cumulative dividends at the annual rate of $0.315 per share (i.e., 9% of $3.50 liquidation preference) per annum until March 31, 1999 (the "End Date") and thereafter at the rate of $0.245 per share (i.e., 7% of $3.50 liquidation preference) per annum from the day following the End Date. In the event of any stock split, reverse stock split, stock combination or reclassification of the Series B Preferred Stock or any merger, consolidation or combination of the Corporation with any other entity or entities, the dividend rates shall be subject to adjustment by the Board of Directors upon, and in appropriate proportion to, any adjustment to the liquidation preference of the Series B Preferred Stock pursuant to Section 6 hereof. The Corporation may not pay dividends on the Series B Preferred Stock except in cash until all accrued dividends have been paid by the Corporation in cash on the Series B Preferred Stock through the calendar quarter ending March 31, 1997. After the accrued dividends have been paid in cash by the Corporation for such period, dividends will continue to be paid entirely in cash unless the Corporation is prohibited from paying the dividends entirely in cash by Delaware law (the state of its incorporation) or by the terms of any loan 2 agreement of $5,000,000 or more. If the Corporation is prevented from paying a dividend entirely in cash, it will pay a dividend in the form of a mixture of cash and common stock of the Corporation ("Common Stock") to the extent possible under Delaware law and any applicable loan agreement, or if necessary, entirely in Common Stock, provided the average market price per share of the Common Stock is $.50 or greater for the 20 trading day period ending five days prior to the date of payment of the Common Stock dividend. Such $.50 minimum market price shall be subject to adjustment by the Board of Directors upon and in appropriate proportion to, any adjustment to the conversion rate of the Series B Preferred Stock pursuant to subsection 10(c) hereof. The value of any shares of Common Stock paid out as a dividend on the Series B Preferred Stock shall be based on the average market price of the Common Stock for the 20 trading day period ending five days prior to the date of payment of the Common Stock dividend. For purposes of this Section, the market price of the Corporation's Common Stock shall be determined by using the closing sales price as reported by NASDAQ, if the Common Stock is quoted by NASDAQ, or any national stock exchange on which the Common Stock is listed for trading (or if such stock is only traded over-the-counter, the average of the closing bid and asked prices). If there is no established market for the Common Stock, the market price shall be the fair market value of the Common Stock as determined by the good-faith judgment of the Board of Directors. If a dividend upon any shares of the Series B Preferred Stock, or any other outstanding stock of the Corporation ranking on a parity with the Series B Preferred Stock, or any other outstanding stock of the Corporation ranking on a parity with the Series B Preferred Stock as to dividends, is in arrears, no stock of the Corporation standing on a parity with the Series B Preferred Stock as to dividends may be purchased or otherwise acquired for any consideration by the Corporation except pursuant to an acquisition made pursuant to the terms of one or more offers to purchase all of the outstanding shares of the Series B Preferred Stock and all stock of the Corporation ranking on a parity with the Series B Preferred Stock as to dividends (which offers shall describe such proposed acquisition of all such parity stock). Unless otherwise declared by the Board of Directors or required by this Certificate of Designation, no dividends shall accrue or cumulate for any calendar quarter (or portion thereof) during which a liquidation, dissolution or winding up of the Corporation occurs. SECTION 4. Dividend Payment Dates; Accrual Periods. Quarterly dividends on each share of Series B Preferred Stock shall (a) accrue from the date of issuance of such share through the last day of the calendar quarter in which the share was issued and thereafter from the first day of each calendar quarter through the last day of such calendar quarter, and (b) be paid on the 15th day of the month following the end of each calendar quarter to the holder of record of such share at the close of business on the last day of the calendar quarter. SECTION 5. Redemption. The Series B Preferred Stock shall not be subject to redemption by the Corporation or at the election of the holders thereof. SECTION 6. Liquidation Rights. If the Corporation is liquidated, the Series B Preferred Stock will have a preference as to liquidation proceeds (proceeds from the disposition of assets less payment of all debts) in the amount of $3.50 per share plus all -2- 3 accrued and unpaid dividends, if any, after payment of all debts of the Corporation. If upon any liquidation of the Corporation, the assets available for distribution to the holders of the Series B Preferred Stock and any other stock of the Corporation which shall then be outstanding and which shall be on a parity with the Series B Preferred Stock upon liquidation (hereinafter in this paragraph called the "Total Amount Available") shall be insufficient to pay the holders of all outstanding shares of the Series B Preferred Stock and all other such parity stock the full amounts (including all dividends accrued and unpaid) to which they shall be entitled by reason of such liquidation of the Corporation, then there shall be paid to the holders of the Series B Preferred Stock in connection with such liquidation of the Corporation, an amount equal to the product derived by multiplying the Total Amount Available times a fraction, the numerator of which shall equal the number of outstanding shares of the Series B Preferred Stock multiplied by $3.50 plus any accrued and unpaid dividends thereon and a denominator of which shall be the total amount which would have been distributed by reason of such liquidation of the Corporation with respect to the Series B Preferred Stock and all other stock ranking on a parity with the Series B Preferred Stock upon liquidation then outstanding had the Corporation possessed sufficient assets to pay the full amount which the holders of all such stock would be entitled to receive in connection with such liquidation of the Corporation. The merger or consolidation of the Corporation into or with any other corporation, or the merger of any other corporation into the Corporation, or the sale, lease or conveyance of all or substantially all the property or business of the Corporation, shall not be deemed to be a dissolution or winding up, voluntary or involuntary, for the purposes of this Section 6. In the event of any stock split, reverse stock split, stock combination or reclassification of the Series B Preferred Stock or any merger, consolidation or combination of the Corporation with any other entity or entities, the liquidation preference per share shall be proportionally adjusted so that the holders of the Series B Preferred Stock after such event shall be entitled to receive upon liquidation of the Corporation the same total preference as to liquidation proceeds as such holders would have been entitled to receive with respect to their Series B Preferred Stock had the Corporation been liquidated immediately prior to such event. Such adjustment shall be made successively upon the occurrence of the events listed in this paragraph. Any adjustments shall be determined by the Board of Directors. SECTION 7. Ranking. The Series B Preferred Stock shall rank, in right of payment of dividends and as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, senior and superior to the Corporation's currently authorized Common Stock (collectively, the "Junior Capital Stock"). The Series B Preferred Stock may be, at the Corporation's sole discretion, either superior or pari passu (i.e., the two classes of preferred stock will share proportionately as to their respective interest in any liquidation proceeds or dividends) in dividend rights and liquidation preferences to all other subsequently issued preferred stock. However, no other preferred stock, whether or not convertible, may be issued in the future that will be pari passu with the Series B Preferred Stock unless at the time of such issuance all dividends due the -3- 4 holders of the Series B Preferred Stock have been paid in full. In no event shall convertible preferred stock be issued which is senior in rights to that of the Series B Preferred Stock, other than that such pari passu convertible preferred stock may carry the then current market interest rate, which may be higher or lower than that of the Series B Preferred Stock. The Series B Preferred Stock will be pari passu with the existing 9%/7% Convertible Preferred Stock and the 12% Senior Convertible Preferred Stock, and pari passu or senior in rights to future issues of straight, convertible and all other forms of preferred stock with the exception of the rate of interest for such future issues of preferred stock, which shall be no greater than the prevailing market rate for similar such issues. Whenever reference is made to shares "ranking on a parity with the Series B Preferred Stock," such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends or as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation rank on an equality with the rights of the holders of the Series B Preferred Stock. Whenever reference is made to shares "ranking junior to the Series B Preferred Stock," such reference shall mean and include all shares of the Corporation in respect of which the rights of the holders thereof as to the payment of dividends and as to distributions in the event of a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation are junior and subordinate to the rights of the holders of the Series B Preferred Stock. The rights of the Series B Preferred Stock will be subordinate to the rights of all existing and future holders of the Corporation's debt. SECTION 8. Dividends on Junior Stock. In no event so long as any Series B Preferred Stock shall be outstanding shall any dividends, except a dividend payable in Common Stock or other shares ranking junior to the Series B Preferred Stock, be paid or declared or any distribution be made on any Junior Capital Stock, nor shall any Junior Capital Stock be purchased, retired or otherwise acquired by the Corporation (except out of the proceeds of the sale of Junior Capital Stock) unless all accrued and unpaid dividends on the Series B Preferred Stock shall have been declared and paid or a sum sufficient for payment thereof set apart. SECTION 9. Voting Rights. Each share of the Series B Preferred Stock shall be entitled to exercise the same voting rights as holders of the Corporation's Common Stock and shall have one vote per share. If the Corporation fails to pay a Series B Preferred Stock dividend in cash or Common Stock for any four consecutive quarters, the Series B Preferred Stock shall automatically be vested with an additional one vote per share, and the holders of the Series B Preferred Stock will be given the right to elect immediately at an emergency meeting of the shareholders which the Corporation shall hold within 30 days after any such failure, one additional member to the Corporation's Board of Directors. At any meeting at which the holders of the Series B Preferred Stock shall be entitled to elect a director, the holders of 50% of the then outstanding shares of the Series B Preferred -4- 5 Stock, present in person or by proxy, shall be sufficient to constitute a quorum, and the vote of the holders of a majority of such shares so present at any such meeting at which there shall be such a quorum shall be sufficient to elect the member of the Board of Directors which the holders of the Series B Preferred Stock is entitled to elect as hereinabove provided. On March 15, 2003, the number of persons constituting the Board of Directors shall be reduced by the one director then in office elected pursuant to this Section 9, the term of office of such director so elected shall end, and the holders of the Series B Preferred Stock shall be divested of their special class voting rights in respect of subsequent elections of directors. Prior to March 15, 2003, the Corporation will not, without the affirmative vote or consent of the holders of at least 66 2/3% of all outstanding shares of Series B Preferred Stock, voting as a single class, (i) amend, alter or repeal any provision of this Certificate of Designation to adversely affect the relative rights, preferences, qualifications, limitations or restrictions of the Series B Preferred Stock or (ii) effect any reclassification of the Series B Preferred Stock (other than by virtue of the mandatory conversion set forth herein or a stock split or reverse stock split of the Series B Preferred Stock which has no material adverse effect on the voting rights of the Series B Preferred Stock when compared to the voting rights of the other classes of capital stock after the consummation of such stock split or reverse stock split). Prior to March 15, 2003, the Corporation will not, without the affirmative vote or consent of holders of at least 50% of the outstanding shares of Series B Preferred Stock, voting as a single class (i) merge with another company when the members of the Board of Directors of the Corporation immediately prior to the merger do not constitute a majority (x) of the members of the Board of Directors of the Corporation if it survives the merger or (y) of the board of directors of the surviving company if the Corporation does not survive the merger, and (ii) sell more than 50% of the Corporation's assets. Other than those set forth in this Section 9, the holders of the Preferred Shares shall have no further voting rights. SECTION 10. Conversion Rights. (a) Optional Conversion. Shares of the Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time or from time to time at the office of the Corporation or of any transfer agent of the Series B Preferred Stock, into fully paid and nonassessable shares of Common Stock at the rate of two shares of Common Stock for each share of Series B Preferred Stock. (b) Mechanics of Conversion. Before any holder of the Series B Preferred Stock shall be entitled to convert the same into Common Stock pursuant to this Section 10, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of the transfer agent for the Series B Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation, at its principal corporate office, of the -5- 6 election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of the Series B Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid together with a check for any declared and unpaid dividends on such Series B Preferred Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Series B Preferred Stock to be converted, and the person or persons entitled to receive this Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of Common Stock on such date. Any holder of the Series B Preferred Stock who elects to convert his shares to Common Stock waives any and all rights to any accrued, but undeclared, dividends with respect to the Series B Preferred Stock, but shall retain the right to any dividends declared and accrued during the time such holder was a holder of record of the Series B Preferred Stock. (c) Adjustments to Conversion Ratio. In the event of any stock dividend (except a Common Stock dividend that may be paid pursuant to Section 3 of this Certificate of Designation) on the Common Stock, any stock split, reverse stock split, stock combination or reclassification of the Common Stock or any merger, consolidation or combination of the Corporation with any other entity or entities, the conversion rate shall be proportionately adjusted so that the holders of the Series B Preferred Stock after such event shall be entitled to receive upon conversion the number and kind of shares which such holders would have owned or been entitled to receive had such Series B Preferred Stock been converted immediately prior to such event. Such adjustment shall be made successively upon the occurrence of the events listed in this paragraph. Any adjustments shall be determined by the Board of Directors. (d) No Fractional Shares. No fractional shares shall be issuable upon conversion; and the number of shares of Common Stock to be issued shall be rounded down to the nearest whole share, and the Corporation shall, at its option, issue script representing such fractional share or pay cash in lieu of such fractional share based upon the market price (if traded over-the-counter, the average of the bid and asked prices) of the Common Stock as reported at the close of business on the day such conversion is effected or, if there is no established market for the Common Stock, the fair value of the Common Stock as determined by the good-faith judgment of the Board of Directors. (e) Reservation of Common Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock, such number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, -6- 7 be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as will be sufficient for such purpose. (f) Status of Converted Stock. In case any shares of Series B Preferred Stock shall be converted into Common Stock, the shares so converted shall, after any filings required by law, assume the statues of authorized but unissued shares of Series B Preferred Stock. (g) Mandatory Conversion into Common Stock. The Corporation may, at its option, call for the mandatory conversion, in whole or in part, of up to 50% of the issued and outstanding shares of Series B Preferred Stock under the following conditions: (i) the Corporation's Common Stock trades at a market price of $4.25 per share or higher on each of any 20 trading days in a period of 30 consecutive trading days, beginning on March 16, 1998 and ending on March 15, 1999, or (ii) the Corporation's Common Stock trades at a market price of $3.50 per share or higher on each of any 20 trading days in a period of 30 consecutive trading days, beginning on March 16, 1999 and ending on the day immediately preceding the Final Conversion Date (as defined herein). The trigger prices per share of $4.25 and $3.50 shall be subject to adjustment by the Board of Directors upon, and in appropriate proportion to, any adjustment to the conversion rate of the Series B Preferred Stock pursuant to subsection 10(c) hereof. In the event the Corporation elects to call for the conversion of a portion of the Series B Preferred Stock issued and outstanding pursuant to clause (i) or (ii) above, then the Corporation shall select the shares to be converted to the effect that to the extent practicable each holder of shares of the Series B Preferred Stock shall have a pro rata portion of his or her shares converted. The Corporation shall cause a notice of the mandatory conversion pursuant to the immediately preceding paragraph to be mailed, postage prepaid, to the holders of the Series B Preferred Stock at their respective addresses appearing on the share transfer records of the Corporation. The Board of Directors may elect to specify an effective date for such conversion ("Effective Conversion Date"), which date may be no later than 60 days after the Board meeting or consent at which the Corporation's election to convert was duly adopted. If no Effective Conversion Date is specified by the Board of Directors, the Effective Conversion Date shall be the date of the initial mailing of the required notice. Such notice shall set forth the number of shares of the Series B Preferred Stock that are mandatorily converted as of the Effective Conversion Date with respect to each holder thereof, and the address of the place where such shares of the Series B Preferred Stock shall be exchanged, upon presentation and surrender of the certificates representing such shares, and the certificates representing the shares of Common Stock shall be delivered. The dividends on the shares of Series B Preferred Stock called for conversion shall cease to accrue on the Effective Conversion Date. Any notice which is mailed in the manner provided herein shall be conclusively presumed to have been duly given, whether or not the holder of the shares of the Series B Preferred Stock receives such notice, and failure to duly give such notice by mail, or any defect in such notice, to any holder of shares of the Series B Preferred Stock shall not affect the validity of the conversion thereof into Common Stock. Consequently, as of the close of business on the Effective Conversion Date, all shares of the Series B Preferred Stock called for conversion, regardless of whether notice of conversion is actually received by the -7- 8 holder, shall automatically be deemed to be the shares of Common Stock into which such shares could have been voluntarily converted by the holders thereof. As of the close of business on the Effective Conversion Date, the Series B Preferred Stock called for conversion shall be deemed to cease to be outstanding or to accrue dividends, the persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the registered holders of such Common Stock and all rights of any holders of the Series B Preferred Stock called for conversion shall thereupon be extinguished except the right to receive the Common Stock in exchange therefor and any accrued and unpaid dividends thereon. Holders of the Series B Preferred Stock called for conversion must surrender the certificates representing such stock in order to receive the Common Stock into which such Series B Preferred Stock has been converted. The Corporation shall be obligated to pay, within 30 days after the Effective Conversion Date, any accrued and unpaid dividends on the shares of Series B Preferred Stock called for conversion, to the holders who, on the Effective Conversion Date, held such shares of Series B Preferred Stock. Any previously unconverted Series B Preferred Stock shall be automatically and mandatorily converted on March 15, 2003 (the "Final Conversion Date"). For the purpose of the conversion on the Final Conversion Date, each share of Series B Preferred Stock shall be convertible into a number of shares of Common Stock which shall equal the lesser of (i) three (which number shall be subject to adjustment by the Board of Directors upon, and in the same proportion as, any adjustment in the conversion rate of the Series B Preferred Stock pursuant to subsection 10(c) hereof), or (ii) the result of dividing the liquidation preference per share for the Series B Preferred Stock by the market price per share of the Common Stock as reported at the close of business on the Final Conversion Date (or if such date is not a trading day, on the first trading day immediately preceding the Final Conversion Date). The Corporation shall cause a notice of such mandatory conversion on the Final Conversion Date to be mailed, postage prepaid, to the holders of record of the Series B Preferred Stock at their respective addresses appearing on the share transfer records of the Corporation. Such notice shall set forth a statement that all outstanding shares of the Series B Preferred Stock shall be automatically and mandatorily converted as of the Final Conversion Date and the address of the place where such shares of Series B Preferred Stock shall be exchanged, upon presentation and surrender of the certificates representing such shares, and the certificates representing the shares of Common Stock shall be delivered. The dividends on such shares shall cease to accrue on the Final Conversion Date. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the shares of the Series B Preferred Stock receives such notice, and failure to duly give such notice by mail, or any defect in such notice, to any holder of shares of the Series B Preferred Stock shall not affect the validity of the conversion thereof into Common Stock. Consequently, all issued shares of the Series B Preferred Stock, as of close of business on the Final Conversion Date, regardless of whether notice of conversion is actually received by the holder, shall automatically be deemed to be the shares of Common Stock into which such shares are converted. As of the close of business on the -8- 9 Final Conversion Date, the Series B Preferred Stock shall be deemed to cease to be outstanding or to accrue dividends, the persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the registered holders of such Common Stock and all rights of any holders of the Series B Preferred Stock shall thereupon be extinguished except the right to receive the Common Stock in exchange therefor and any accrued and unpaid dividends thereon. Holders of the Series B Preferred Stock must surrender the certificates representing such stock in order to receive the Common Stock into which such Series B Preferred Stock has been converted. The Corporation shall be required to declare and pay all cumulated unpaid dividends that accrue through the Final Conversion Date as soon as practicable following the Final Conversion Date. After the conversion of all issued shares of the Series B Preferred Stock, all shares of the Series B Preferred Stock shall be canceled, the Series B Preferred Stock shall not be reissued and shall be deemed canceled and shall revert to authorized but unissued Preferred Stock of the Corporation, undesignated as to series, and the number of shares of Preferred Stock which the Corporation shall have authority to issue shall not be decreased by such conversion. For purposes of this subsection (g), the market price of the Corporation's Common Stock shall be determined by using the closing sales price as reported by NASDAQ, if the Common Stock is quoted by NASDAQ, or any national stock exchange on which the Common Stock is listed for trading (or if such stock is only traded over-the-counter, the average of the closing bid and asked prices). If there is no established market for the Common Stock, the market price shall be the fair market value of the Common Stock as determined by the good-faith judgment of the Board of Directors. (h) Automatic Conversion into 9%/7% Convertible Preferred Stock. The Series B Preferred Stock shall be automatically and mandatorily converted, when and if the Corporation files with the Delaware Secretary of State a Certificate of Amendment containing certain clarifying amendments to the terms of the Certificate of Designation of 9%/7% Convertible Preferred Stock, as set forth in the Corporation's preliminary proxy statement filed with the Securities and Exchange Commission on July 19, 1996, into fully paid and nonassessable shares of 9%/7% Convertible Preferred Stock at a rate of one share of 9%/7% Convertible Preferred Stock for each share of Series B Preferred Stock. The effective date of such conversion shall be the first business day following the filing of such Certificate of Amendment with the Delaware Secretary of State ("Automatic Conversion Date"). In the event of any stock split, reverse stock split, stock combination or reclassification of the 9%/7% Convertible Preferred Stock or any merger, consolidation or combination of the Corporation with any other entity or entities, the conversion rate set forth in this subsection (h) shall be proportionately adjusted so that the holders of the Series B Preferred Stock after such event shall be entitled to receive upon conversion the number and kind of shares which such holders would have owned or been entitled to receive had such Series B Preferred Stock been converted immediately prior to such event. Such adjustment shall be made successively upon the occurrence of the events listed in this paragraph. Any adjustments shall be determined by the Board of Directors. -9- 10 The Corporation shall cause a notice of such mandatory conversion on the Automatic Conversion Date to be mailed, postage prepaid, to the holders of record of the Series B Preferred Stock at their respective addresses appearing on the share transfer records of the Corporation. Such notice shall set forth a statement that all outstanding shares of the Series B Preferred Stock shall be automatically and mandatorily converted as of the Automatic Conversion Date and the address of the place where such shares of Series B Preferred Stock shall be exchanged, upon presentation and surrender of the certificates representing such shares, and the certificates representing the shares of 9%/7% Convertible Preferred Stock shall be delivered. The dividends on such shares shall cease to accrue on the Automatic Conversion Date. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the shares of the Series B Preferred Stock receives such notice, and failure to duly give such notice by mail, or any defect in such notice, to any holder of shares of the Series B Preferred Stock shall not affect the validity of the conversion thereof into 9%/7% Convertible Preferred Stock. Consequently, all issued shares of the Series B Preferred Stock, as of close of business on the Automatic Conversion Date, regardless of whether notice of conversion is actually received by the holder, shall automatically be deemed to be the shares of 9%/7% Convertible Preferred Stock into which such shares are converted. As of the close of business on the Automatic Conversion Date, the Series B Preferred Stock shall be deemed to cease to be outstanding or to accrue dividends, the persons entitled to receive the 9%/7% Convertible Preferred Stock issuable upon conversion shall be treated for all purposes as the registered holders of such 9%/7% Convertible Preferred Stock and all rights of any holders of the Series B Preferred Stock shall thereupon be extinguished except the right to receive the 9%/7% Convertible Preferred Stock in exchange therefor and any accrued and unpaid dividends thereon. Holders of the Series B Preferred Stock must surrender the certificates representing such stock in order to receive the 9%/7% Convertible Preferred Stock into which such Series B Preferred Stock has been converted. The Corporation shall be required to declare and pay all cumulated unpaid dividends that accrue through the Automatic Conversion Date as soon as practicable following the Automatic Conversion Date. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of 9%/7% Convertible Preferred Stock, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock, such number of shares of 9%/7% Convertible Preferred Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Preferred Stock, and if at any time the number of authorized but unissued shares of 9%/7% Convertible Preferred Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of 9%/7% Convertible Preferred Stock to such number of shares as will be sufficient for such purpose. After the conversion of all issued shares of the Series B Preferred Stock, all shares of the Series B Preferred Stock shall be canceled, the Series B Preferred Stock shall not be reissued and shall be deemed canceled and shall revert to authorized but unissued Preferred Stock of the Corporation, undesignated as to series, and the number of shares of Preferred -10- 11 Stock which the Corporation shall have authority to issue shall not be decreased by such conversion. SECTION 11. Other Rights. The Corporation will not be obligated to redeem the Series B Preferred Stock, and thus will not be required to establish a redemption or sinking fund. SECTION 12. Effects of Conversion on Capital and Surplus. Upon conversion of the Series B Preferred Stock the stated capital of the Common Stock issued upon such conversion shall be the aggregate par value thereof, and the stated capital and capital surplus (capital in excess of par of stated value) of the Corporation shall be correspondingly increased or reduced to reflect the difference between stated capital of the Series B Preferred Stock so converted and the par or stated value of the Common Stock issued upon conversion. SECTION 13. Anti-Dilution. The Corporation shall be prohibited from issuing preferred or Common Stock or warrants or any other form of security to an affiliate for consideration that does not equal or exceed the fair market value of such security (as determined by an independent third party); provided that, the Corporation may issue options or warrants to new or existing directors or management, so long as such warrants or options are approved by the Compensation Committee of the Board of Directors. The Corporation may also issue Common Stock upon the exercise of warrants or options presently outstanding; provided that, such warrants or options are not amended or modified without the approval of the Compensation Committee. In the event that the Corporation issues to an affiliate any security not excepted above for consideration that is less than the fair market value (as determined above) of such security, the number of shares Series B Preferred Stock shall be immediately and appropriately adjusted (and the conversion price of the Series B Preferred Stock adjusted downward on a full ratchet basis) to take into account the dilution in value of the securities holdings of the holders caused by such below-market issuance of the Corporation's securities. SECTION 14. Other Limits. In addition, the Corporation will not (a) declare any cash or other form of dividend on or with respect to any issue of Common Stock unless all dividends on the Series B Preferred Stock have been paid, nor (b) issue Common Stock that is convertible into convertible or other Preferred Stock. -11- 12 Dated as of July 29, 1996. SEARCH CAPITAL GROUP, INC. By: /s/ George C. Evans ------------------------------------------ Name: George C. Evans ---------------------------------------- Title: Chairman of the Board, President --------------------------------------- and Chief Executive Officer ATTESTED TO: /s/ Robert D. Idzi - ------------------------------------------- Robert D. Idzi -12- -----END PRIVACY-ENHANCED MESSAGE-----