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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): January 28, 1998
Ugly Duckling Corporation
(Exact name of registrant as specified in its charter)
Delaware 20841 86-0721358
(State or other (Commission (IRS Employer
jurisdiction of incorporation) File Number) Identification Number)
2525 East Camelback Road, Suite 1150, Phoenix, AZ 85016
(Address of principal executive offices)
Registrant's telephone number, including area code: (602) 852-6600
NONE
(Former name or former address, if changed since last report)
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Item 5. Other Events
Consistent with its strategy to obtain servicing rights to large sub-prime
contract portfolios, Ugly Duckling Corporation (the "Company") has entered into
an agreement to service contract receivables of Reliance Acceptance Group, Inc.
("Reliance"), which filed for reorganization under Title 11 of the United
States Code (the "Bankruptcy Case") on February 9, 1998 (the "Petition Date")
in the United States Bankruptcy Court for the District of Delaware
("Bankruptcy Court"). Reliance is a national specialty finance company,
primarily engaged in the business of purchasing and servicing contracts
(the "Receivables") for the purchase of new or used automobiles, trucks, vans
and sport utility vehicles by consumers who have limited access to traditional
sources of credit.
In connection with the Bankruptcy Case, the Company and Reliance have
entered into a servicing agreement ("Servicing Agreement") whereby the Company
will service certain Receivables owned by Reliance in exchange for (i) a monthly
servicing fee of the greater of four percent (4%) per annum of the aggregate
outstanding principal balance of all non-defaulted Receivables computed monthly
on the basis of the declining balance of the Receivables Portfolio (consisting
of Reliance's portfolio of (A) prime receivables and (B) sub-prime receivables),
or fifteen dollars ($15.00) per Receivable per month plus reimbursement of
certain costs and expenses; (ii) $1.3 million in proceeds realized from the sale
of a pool of charged-off receivables existing as of the Petition Date
("Charged-Off Proceeds"); (iii) a total of (A) four percent (4%) of the
outstanding principal balance of each Receivable (exclusive of defaulted and
certain other Receivables) sold in any bulk sale to a person other than the
Company or an affiliate of the Company, and (B) $4.7 million in net collections,
recovery and sale proceeds from the Receivables Portfolio and certain other cash
receipts of Reliance reduced by any amount previously paid under clause (A)
above, following payment of Reliance's primary bank debt and, if applicable,
repayment to Reliance of any proceeds of litigation, the Reliance Warrants (as
defined below) and equity proceeds used by Reliance to pay its primary bank debt
("Post-Bank Debt Proceeds"); and (iv) following the Company's receipt of the
Post-Bank Debt Proceeds, twenty-five percent (25%) of the net collections,
recovery and sale proceeds from the Receivables Portfolio and certain other cash
receipts of Reliance (the "Incentive Fee"). Reliance, in consideration for
entering into the Servicing Agreement will receive privately issued warrants
("Reliance Warrants") to purchase shares of common stock, $.001 par value per
share ("Common Stock") of the Company as follows: Fifty thousand (50,000)
Reliance Warrants will be granted to Reliance upon the Company's receipt of the
Charged-Off Proceeds; up to one hundred thousand (100,000) Reliance Warrants
will be granted to Reliance based upon the Company's receipt of up to $4.7
million of Post-Bank Debt Proceeds; and Reliance will be granted an additional
seventy-five thousand (75,000) Reliance Warrants for every $1 million actually
received by the Company through the Incentive Fee. The Reliance Warrants are to
be non-exercisable for thirty (30) months and will have a strike price of twelve
dollars and 50/100 ($12.50) for the first one hundred and fifty thousand
(150,000) Reliance Warrants and a strike price for all other Reliance Warrants
of the greater of twelve dollars and 50/100 ($12.50) or one hundred twenty
percent (120%) of the market price of the Common Stock on the date of issuance
of the Reliance Warrants. The Reliance Warrants will be subject to vesting and a
right of redemption of the Company on terms still to be negotiated.
In addition to the Servicing Agreement and granting of Reliance Warrants,
the Company and Reliance have entered into a transition services agreement (the
"Transition Agreement"), up and until the Servicing Agreement is approved by the
Bankruptcy Court, pursuant to which the Company will provide transition services
to Reliance, at Reliance's request, relating to the current and future servicing
of Receivables,for an hourly fee of $175.00 and reimbursement of costs and
expenses. The Servicing Agreement and Transition Agreement are subject to the
approval of the Bankruptcy Court and, once approved by the Bankruptcy Court,
Reliance will be liable for a $2.0 million breakup
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fee in the event the Servicing Agreement, the Transition Agreement or related
agreements are terminated or materially breached by Reliance, or a person other
than the Company is selected as the Servicer for the Receivables. If the Company
elects in the future not to service the Receivables pursuant to the Servicing
Agreement, the Company will be required to pay a $2 million breakup fee to
Reliance.
There can be no assurance that the Reliance transaction will be
concluded on the terms and conditions outlined above or at all, or if concluded
will prove profitable.
On January 28, 1998, the Company borrowed $7 million from Greenwich
Capital Financial Products, Inc. ("Greenwich Financial") pursuant to a Loan
Agreement, dated as of January 28, 1998 (the "Greenwich Loan"). The Greenwich
Loan was used to repay amounts owing to General Electric Capital Corporation
("GE Capital") under the Company's revolving credit facility with GE Capital.
The Greenwich Loan is secured by (1) a pledge by Duck Ventures, Inc., a direct
wholly-owned subsidiary of the Company ("DVI"), of all of the issued and
outstanding common stock of Champion Receivables Corp. II ("CRC II"), a
bankruptcy remote subsidiary wholly-owned by DVI, and (2) all of the Company's
right, title and interest in and to certain assets pledged to the Company by
First Merchants Acceptance Corporation. The Greenwich Loan is payable by the
Company on April 28, 1998 and bears interest at the rate of 9-1/2 percent per
annum.
The Company believes that it will need additional financing in the near
future. There can be no assurance that the Company will have the liquidity to
repay the Greenwich Loan when due or to continue to finance its other
outstanding obligations. In this regard, the Company is evaluating various
financing options including as set forth below.
The Company has entered into a commitment letter with Greenwich
Financial for Greenwich Financial to provide the Company, subject to certain
conditions and the execution of definitive documents, a $30 million standby
repurchase credit facility and a $150 million surety-enhanced revolving credit
facility. The commitment letter also provides, subject to certain conditions,
for Greenwich Financial to be the exclusive securitization agent of the Company
for $1 billion of AAA-rated surety wrapped securities as part of the Company's
ongoing securitization program.
This Form 8-K includes statements that may constitute forward-looking
statements, usually containing the words "believe," "estimate," "project,"
"expect," or similar expressions. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. By
making these forward-looking statements, the Company undertakes no obligation to
update these statements for revisions or changes after the date of this release.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
For a transaction similar to the Reliance transaction there are numerous risks
and uncertainties, such as diverting the attention of Company management from
other business concerns, the potential loss of key employees, approvals from
third parties, regulators and the Bankruptcy Court, and increased costs. The
Company's future financings and liquidity involve numerous risks and
uncertainties, such as finding acceptable counterparties that will lend to the
Company under satisfactory terms and conditions, and future actual cash
outflows and inflows of the Company. Investors should also consider factors
that would cause or contribute to such differences, which include, but are not
limited to, factors detailed in this Form 8-K," in the section entitled "Risk
Factors" in the Company's Registration Statement (No. 333-42973) on Form S-1
filed with the Securities and Exchange Commission on December 22, 1997, as
amended on February 6, 1998 and on February 9, 1998, and in the sections
entitled "Factors That May Affect Future Results and Financial Condition" and
"Factors That May Affect Future Stock Performance" and elsewhere in the
Company's most recent reports on Form 10-K/A and Form 10-Q, and in the Company's
other Securities and Exchange Commission filings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UGLY DUCKLING CORPORATION
(Registrant)
Dated February 9, 1998 By: /s/ Steven P. Johnson
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Steven P. Johnson, Senior Vice President
and General Counsel
