<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
--------------------
FORM T-3
FOR APPLICATIONS FOR QUALIFICATION OF INDENTURES UNDER THE
TRUST INDENTURE ACT OF 1939
--------------------
UGLY DUCKLING CORPORATION
(NAME OF APPLICANT)
2525 E. CAMELBACK, SUITE 500, PHOENIX, ARIZONA 85016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
--------------------
SECURITIES TO BE ISSUED UNDER THE INDENTURE TO BE QUALIFIED
<TABLE>
<CAPTION>
TITLE OF CLASS AMOUNT
-------------- ------
<S> <C>
12% Subordinated Debentures due 2003 $16,486,582
</TABLE>
Approximate date of proposed public offering:
November 24, 1998
Name and address of agent for service:
Steven P. Johnson, Esq.
General Counsel
Ugly Duckling Corporation
2525 East Camelback Road, Suite 500
Phoenix, Arizona 85016
copy to:
Steve Pidgeon
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
The Company hereby amends this application for qualification on such date or
dates as may be necessary to delay its effectiveness until (i) the 20th day
after the filing of a further amendment which specifically states that it shall
supersede this application, or (ii) such date as the Securities and Exchange
Commission, acting pursuant to Section 307(c) of the Act, may determine upon
written request of the Company.
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The Indenture being qualified hereby was also the subject of a Form T-3
filing (No. 22-22393) made on September 17, 1998 and declared effective by the
Securities and Exchange Commission on October 20, 1998, which Form T-3 filing
described an exchange offer of the Company commenced on September 21, 1998 and
which expired October 19, 1998. Because the Company is now commencing a new
exchange offer with respect to Indenture securities, this filing is being made
for protective purposes.
GENERAL
1. General Information.
(a) Form of organization: A corporation
(b) State or other sovereign power under the laws of which organized: Delaware
2. Securities Act exemption applicable.
On September 21, 1998, Ugly Duckling Corporation, a Delaware corporation
(the "Company") initiated an exchange offer (the "Original Exchange Offer") to
exchange up to 5,000,000 shares of its common stock, par value $.001 per share
("Common Stock"), for up to $32,500,000 aggregate principal amount of its 12%
Subordinated Debentures due 2003 (the "Debentures") on the basis of $6.50
principal amount of Debentures per share, and on October 23, 1998, a total of
2,463,603 shares of Common Stock were exchanged for $16,013,418 aggregate
principal amount of Debentures (the "Existing Debentures"). The Existing
Debentures were issued under the Indenture dated as of October 15, 1998 (the
"Base Indenture") between the Company and Harris Trust and Savings Bank, as
trustee (the "Trustee"), as amended by the First Supplemental Indenture thereto
dated as of October 15, 1998 (the "First Supplement" and together with the Base
Indenture, the "Indenture").
The Company now proposes to issue additional Debentures in an additional
exchange offer (the "New Exchange Offer") pursuant to the Offering Circular
dated November 20, 1998 (the "Offering Circular"), and the related Letter of
Transmittal and Notice of Guaranteed Delivery of even date therewith. In the New
Exchange Offer, the Company is offering to exchange up to $16,486,582 aggregate
principal amount of Debentures ("New Debentures") for up to 2,536,397 shares of
Common Stock on the basis of $6.50 principal amount of Debentures per share. The
New Debentures would also be issued under the Indenture and would be included
within the $32,500,000 authorized in the First Supplement.
The Company is relying on the exemption from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), provided by
Section 3(a)(9) thereunder in connection with the New Exchange Offer and relied
on the same exemption in connection with the Original Exchange Offer.
The Company has retained Corporate Investor Communications, Inc. as the
"Information Agent" and Harris Trust Company of California as the "Exchange
Agent" in connection with the New Exchange Offer. The Information Agent and the
Exchange Agent will provide to holders of Common Stock only information
otherwise contained in the Offering Circular and general information regarding
the mechanics of the exchange process. The Exchange Agent will provide the
actual acceptance and exchange services with respect to the exchange of the
Common Stock and the New Debentures. Neither the Information Agent nor the
Exchange Agent will solicit exchanges in connection with the New Exchange Offer
or make recommendations as to the acceptance or rejection of the New Exchange
Offer. Both the Information Agent and the Exchange Agent will be paid reasonable
fees directly by the Company for their services.
There are no cash payments made or to be made by any holder of the Common
Stock.
AFFILIATIONS
3. Affiliates.
The following is a list of all direct and indirect subsidiaries and
affiliates of the Company. Indirect subsidiaries are indented and listed under
their direct parent. Unless otherwise indicated the basis of control is
ownership of equity securities and all subsidiaries are wholly-owned
subsidiaries.
Ugly Duckling Corporation (Delaware)
A. Ugly Duckling Car Sales and Finance Corporation (formerly Duck Ventures,
Inc.) (Arizona)
1. Ugly Duckling Credit Corporation (formerly Champion Acceptance
Corporation) (Arizona)
a. Champion Financial Services, Inc. (Arizona)
2
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2. Ugly Duckling Car Sales, Inc. (Arizona)
a. Ugly Duckling Car Sales Florida, Inc. (Florida)
b. Ugly Duckling Car Sales New Mexico, Inc. (New Mexico)
c. Ugly Duckling Car Sales Texas, L.L.P. (Arizona)
d. Ugly Duckling Car Sales Georgia, Inc. (Georgia)
e. Ugly Duckling Car Sales California, Inc. (California)
3. Ugly Duckling Portfolio Corporation (formerly Champion Portfolio
Corporation) (Arizona)
4. Ugly Duckling Receivables Corp. (Delaware)
5. Ugly Duckling Receivables Corp. II (Delaware)
6. Drake Insurance Services, Inc. (Arizona)
a. Drake Insurance Agency, Inc. (Arizona)
b. Drake Property & Casualty Life Insurance Co.
(Turks & Caicos Islands)
c. Drake Life Insurance Co. (Turks & Caicos Islands)
7. Ugly Duckling Dealer Finance, Inc. (Arizona)
a. Ugly Duckling Dealer Finance Alabama, Inc. (Arizona)
8. UDRAC, Inc. (Arizona)
9. UDRAC Rentals, Inc. (Arizona)
10. Cygnet Financial Corporation (Delaware)
a. Cygnet Financial Services, Inc. (Arizona)
b. Cygnet Dealer Finance, Inc. (Arizona)
1. Cygnet Finance Alabama, Inc. (Arizona)
c. Cygnet Financial Portfolio, Inc. (Arizona)
d. Cygnet Support Services, Inc. (Arizona)
e. Fidelity Funding Auto Receivables Corp.
f. Fidelity Funding Auto Receivables Corp. II
g. Fidelity Funding Auto Receivables Corp. III
i. Fidelity Funding Receivables, L.L.C.
Ernest C. Garcia II owns approximately 29% of the outstanding Common
Stock of the Company, but hereby disclaims control of the Company. Mr. Garcia
also owns 100% of the outstanding voting securities of Verde Investments, Inc.
3
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MANAGEMENT AND CONTROL
4. Directors and executive officers.
The names and mailing addresses of the directors and executive officers of the
Company are set forth below. The title of each of the executive officers set
forth below refers to such executive officer's position with the Company.
<TABLE>
<CAPTION>
NAME ADDRESS OFFICE
- ---- ------- ------
<S> <C> <C>
Ernest C. Garcia II 2525 E. Camelback Rd., Suite 1150 Chief Executive Officer
Phoenix, Arizona 85016 and Director
Gregory B. Sullivan 2525 E. Camelback Rd., Suite 500 President, Chief Operating Officer
Phoenix, Arizona 85016 and Director
Steven P. Johnson 2525 E. Camelback Rd., Suite 1150 Senior Vice President,
Phoenix, Arizona 85016 General Counsel and Secretary
Steven T. Darak 2525 E. Camelback Rd., Suite 500 Chief Financial Officer
Phoenix, Arizona 85016 Senior Vice President, Treasurer
and Principal Accounting Officer
Donald L. Addink 2525 E. Camelback Rd., Suite 1150 Senior Vice President - Senior Analyst
Phoenix, Arizona 85016
Robert J. Abrahams 2525 E. Camelback Rd., Suite 500 Independent Director
Phoenix, Arizona 85016
Christopher D. Jennings 2525 E. Camelback Rd., Suite 500 Independent Director
Phoenix, Arizona 85016
John N. MacDonough 2525 E. Camelback Rd., Suite 500 Independent Director
Phoenix, Arizona 85016
</TABLE>
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<TABLE>
<S> <C> <C>
Frank P. Willey 2525 E. Camelback Rd., Suite 500 Independent Director
Phoenix, Arizona 85016
</TABLE>
5. Principal owners of voting securities.
Based upon the most recent information available to the Company, the following
individuals own ten percent (10%) or more of the voting securities of the
Company.
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As of November 19, 1998
<TABLE>
<CAPTION>
NAME AND COMPLETE TITLE OF AMOUNT % OF VOTING
MAILING ADDRESS CLASS OWNED OWNED SECURITIES OWNED
- ----------------- ----------- ------ ----------------
<S> <C> <C> <C>
Ernest C. Garcia II Common Stock 4,699,500 29%
2525 E. Camelback Rd.
Suite 1150
Phoenix, Arizona 85016
</TABLE>
UNDERWRITERS
6. Underwriters. The following are the names and complete mailing address of
(a) each person who within three years prior to the date of filing the
application, acted as an underwriter of any securities of the obligor which
were outstanding on the date of filing the application and (b) each proposed
principal underwriter of the securities proposed to be offered. The title of
each class of securities underwritten by each person specified in (a) also
follows:
(a) The following were the underwriters in the Company's issuances in 1996 and
1997 of shares of its common stock:
Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, California 92715
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 19th Street North
Arlington, VA 22209
In addition, Greenwich Capital Markets has acted as underwriter in connection
with the issuance of certificates in a number of securitizations of finance
receivables generated by Company dealerships or purchased from third parties,
certain limited obligations as to which have been guaranteed by the Company.
(b) There are no underwriters of the securities proposed to be offered in the
New Exchange Offer.
CAPITAL SECURITIES
7. Capitalization.
(a) The following information is provided as to each authorized class of
securities of the Company.
(i) Equity Securities (as of November 19, 1998)
<TABLE>
<CAPTION>
TITLE OF CLASS AMOUNT AUTHORIZED AMOUNT OUTSTANDING
- -------------- ----------------- ------------------
<S> <C> <C>
Common Stock 100,000,000 16,069,502(1)
$.001 par value
Preferred Stock 10,000,000 0
$.001 par value
</TABLE>
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(1) The Company also has outstanding warrants to purchase Common Stock as
follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
NO. OF WARRANTS EXERCISABLE THROUGH PER SHARE
- --------------- ------------------- ---------
<S> <C> <C>
121,023 June 21, 2006 $ 6.75
174,000 June 21, 2001 $ 9.45
389,800 February 20, 2000 $20.00
325,000 April 1, 2001 $20.00
50,000 February 9, 2001 $12.50
500,000 February, 2001 $10.00
</TABLE>
In addition, the Company is obligated to issue 115,000 warrants exercisable for
a period of three years from the issue date at a price of 120% of the then
market price of the Company's Common Stock per share to a lender to Cygnet in
the event a split-off of certain discontinued operations of the Company does not
occur by December 31, 1998, and additional warrants in an indeterminate amount
as described in the Company's Form 10-Q Report for the Quarter ended September
30, 1998 under "Management's Discussion and Analysis of Results of Operations
and Financial Condition of the Continuing Company Businesses -- Liquidity and
Capital Resources -- Reliance Transaction." As of November 19, 1998, the Company
also had outstanding approximately 1,798,000 options to purchase Common Stock
issued under employee benefit plans of the Company.
(ii) Debt Securities (as of November 19, 1998)
The Company has registered $200,000,000 in aggregate principal amount of its
debt securities under the Securities Act pursuant to a
Registration Statement on Form S-3 (No. 333-31531) filed with the Commission on
July 18, 1997. To date, no debt securities have been issued thereunder.
The Company also has outstanding a $10 million subordinated debenture payable to
Verde Investments, Inc., $20 million of subordinated notes payable,
approximately $3.4 million of notes payable secured by real estate,
approximately $15 million of notes payable secured by the stock of the Company's
bankruptcy remote subsidiaries, and indebtedness outstanding from time to time
under the Company's revolving facility with General Electric Capital
Corporation. In addition, pursuant to the Original Exchange Offer, the Company
has outstanding $16,013,418 Existing Debentures.
See also description of certain guarantees of the Company in Item 6(a).
(b) The following is a brief outline of the voting rights of each class of
voting securities referred to in paragraph (a) above.
See description of the Company's Common Stock and Preferred Stock under
"Description of Capital Stock" in the Offering Circular attached as Exhibit
T3E.1.
INDENTURE SECURITIES
8. Analysis of indenture provisions.
The following is an analysis of the Indenture provisions required under Section
305(a)(2) of the Trust Indenture Act of 1939, as amended.
Capitalized terms used herein and not otherwise defined are defined in the
Indenture or in the Offering Circular. Up to $100,000,000 of securities
("Securities") may be issued under the Indenture in one or more series of which
the Debentures will be one series.
7
<PAGE> 8
A. EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the Indenture
with respect to Securities of any series: (a) failure to pay principal of or any
premium on any Securities of that series when due; (b) failure to pay any
interest on any Securities of that series when due, continued for 30 days; (c)
failure to deposit any sinking fund payment, when due, in respect of any
Securities of that series; (d) failure to perform any other covenant of the
Company in the Indenture (other than a covenant included in the Indenture
solely for the benefit of a series other than that series), continued for 90
days after written notice has been given by the Trustee, or the Holders of at
least 25% in principal amount of the Outstanding Securities of that series, as
provided in the Indenture; (e) certain events in bankruptcy, insolvency, or
reorganization, and (f) any other Event of Default specified for such series in
the supplemental indenture or Board Resolution creating or governing such
series. There are no additional Events of Default provided for the Debentures.
If a default with respect to Securities of any series occurs, the Trustee shall
give the Holders of such Securities notice of such default as and to the extent
provided in the Trust Indenture Act; provided that in the case of any default
specified in subclause (d) of the immediately preceding paragraph, no such
notice shall be given until at least 30 days after the occurrence thereof.
B. AUTHENTICATION AND DELIVERY
The Securities shall be executed on behalf of the Company by its Chairman of the
Board, its Vice Chairman of the Board, its President or one of its Vice
Presidents, and attested by its Secretary or one of its Assistant Secretaries.
The signature of any of these officers on the Securities may be manual or
facsimile. The Indenture does not contain any provisions limiting the use of
proceeds from sale of the Securities. The Company will not receive any proceeds
(other than shares of Common Stock) upon issuance of the Debentures.
C. RELEASE OF PROPERTY SUBJECT TO LIEN
The Company's obligations under the Securities will not be secured by any
liens or security interests on any assets of the Company. Therefore, the
Indenture does not contain any provisions with respect to the release or the
release and substitution of any property subject to such a lien.
D. SATISFACTION AND DISCHARGE
Under the terms of the Indenture, the Company will be discharged from all its
obligations with respect to the Securities of a series (except for certain
obligations to exchange or register the transfer of such Securities, to replace
stolen, lost, or mutilated Securities, to maintain paying agencies, and to hold
moneys for payment in trust) upon satisfaction of certain conditions, including
the deposit in trust for the benefit of the Holders of such Securities of money
or U.S. Government Obligations, or both, which, through the payment of principal
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on such Securities on the respective Stated Maturities or on any
Redemption Date established for such Securities in accordance with their terms.
Such defeasance or discharge may occur only if, among other things, the Company
has delivered to the Trustee an Opinion of Counsel to the effect that the
Company has received from, or there has been published by, the United States
Internal Revenue Service a ruling, or there has been a change in tax law, in
either case to the effect that Holders of such Securities will not recognize
gain or loss for federal income tax purposes as a result of such deposit,
defeasance, and discharge and will be subject to federal income tax on the same
amount, in the same manner, and at the same times as would have been the case if
such deposit, defeasance, and discharge were not to occur.
8
<PAGE> 9
The Indenture will also be deemed to be satisfied and discharged, except as
to certain limited provisions, as to Securities of a series that have become due
and payable or will become due and payable at their Stated Maturity within one
year from the date of determination or are to be called for redemption within
one year under arrangements satisfactory to the Trustee, but only if the
Company deposits money in an amount sufficient to pay the entire principal,
premium, and interest to the date of deposit (as to Securities that have become
due and payable) or to the Stated Maturity or Redemption Date, as the case may
be, and certain other conditions are satisfied.
E. EVIDENCE OF COMPLIANCE WITH CONDITIONS AND COVENANTS
The Company will deliver to the Trustee, within 120 days after the end of
each fiscal year of the Company ending after the date hereof, an Officers'
Certificate, stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder) and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
9. Other Obligors. The following is the name and complete mailing address
of any person, other than the applicant, who is an obligor upon the Indenture
securities.
No person other than the Company is an obligor with respect to the Debentures.
Contents of the application for qualification. This application for
qualification comprises --
(a) Pages numbered 1 to 11, consecutively.
(b) The statement of eligibility and qualification of each trustee under the
indenture to be qualified.
(c) The following exhibits in addition to those filed as a part of the
statement of eligibility and qualification of each trustee.
(i) Exhibit T3A -- The Company's Certificate of Incorporation
(incorporated by reference to the Company's Quarterly report on Form 10-Q,
filed August 10, 1998).
(ii) Exhibit T3B -- The Company's Bylaws (incorporated by reference to the
Company's Quarterly Report on Form 10-Q, filed August 14, 1997)
(iii) Exhibit T3C.1 -- A copy of the form of Indenture to be qualified
(iv) Exhibit T3C.2 -- A copy of the form of First Supplemental Indenture
to the Indenture to be qualified.
(v) Exhibit T3D -- Not applicable
(vi) Exhibit T3E.1 -- Form of Offering Circular, dated as of November 20,
1998
(vii) Exhibit T3E.2 -- Form of Letter of Transmittal, dated as of November
20, 1998 and accompanying documents
9
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(viii) Exhibit T3E.3 -- The Company's Form 10-Q Report for the
Quarter ended September 30, 1998
(ix) Exhibit T3F -- Cross Reference Sheet (see page ii of Exhibit
T3C.1)
(x) Exhibit 99.7 -- Form T-1 Statement of Eligibility of Harris
Trust and Savings Bank under the Trust Indenture Act of 1939.
10
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SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
applicant, Ugly Duckling Corporation, a corporation organized and existing
under the laws of the State of Delaware, has duly caused this application to be
signed on its behalf by the undersigned, thereunto duly authorized, all in the
city of Phoenix, and State of Arizona, on the 20th day of November, 1998.
UGLY DUCKLING CORPORATION
By: /s/ Ernest C. Garcia, II
_______________________________________
(Ernest C. Garcia, II, Chairman of the
Board and Chief Executive Officer)
Attest: /s/ Judith A. Boyle By: /s/ Greg Sullivan
_______________________________ _______________________________________
(Judith A. Boyle) (Greg Sullivan, Chief Operating
Officer and President)
11
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EXHIBIT INDEX
(i) Exhibit T3A -- The Company's Certificate of Incorporation
(incorporated by reference to the Company's Quarterly report on Form 10-Q,
filed August 10, 1998).
(ii) Exhibit T3B -- The Company's Bylaws (incorporated by reference to the
Company's Quarterly Report on Form 10-Q, filed August 14, 1997)
(iii) Exhibit T3C.1 -- A copy of the form of Indenture to be qualified
(iv) Exhibit T3C.2 -- A copy of the form of First Supplemental Indenture
to the Indenture to be qualified.
(v) Exhibit T3D -- Not applicable
(vi) Exhibit T3E.1 -- Form of Offering Circular, dated as of November 20,
1998
(vii) Exhibit T3E.2 -- Form of Letter of Transmittal, dated as of November
20, 1998 and accompanying documents
(viii) Exhibit T3E.3 -- The Company's Form 10-Q Report for the Quarter
ended September 30, 1998
(ix) Exhibit T3F -- Cross Reference Sheet (see page ii of Exhibit T3C.1)
(x) Exhibit 99.7 -- Form T-1 Statement of Eligibility of Harris Trust and
Savings Bank under the Trust Indenture Act of 1939.
<PAGE> 1
UGLY DUCKLING CORPORATION
TO
HARRIS TRUST AND SAVINGS BANK
Trustee
--------------
INDENTURE
Dated as of October 15, 1998
(For Subordinated Securities or, if Article Fourteen is made non-applicable
(as permitted by Section 301), for Senior Securities)
<PAGE> 2
Certain Sections of this Indenture relating to Sections 310 through 318,
inclusive, of the Trust Indenture Act of 1939:
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
--------------------------- -----------------
<S> <C>
Section 310 (a)(1).................................................................... 609
(a)(2).................................................................... 609
(a)(3).................................................................... Not Applicable
(a)(4).................................................................... Not Applicable
(a)(5).................................................................... 609
(b)....................................................................... 608
609
Section 311 (a)....................................................................... 613
(b)....................................................................... 613
Section 312 (a)....................................................................... 701
702
(b)....................................................................... 702
(c)....................................................................... 702
Section 313 (a)....................................................................... 703
(b)....................................................................... 703
(c)....................................................................... 703
(d)....................................................................... 703
Section 314 (a)....................................................................... 704
(a)(4).................................................................... 101
1004
(b)....................................................................... Not Applicable
(c)(1).................................................................... 102
(c)(2).................................................................... 102
(c)(3).................................................................... 1304
(d)....................................................................... Not Applicable
(e)....................................................................... 102
Section 315 (a)....................................................................... 601
(b)....................................................................... 602
(c)....................................................................... 601
(d)....................................................................... 601
607
(e)....................................................................... 514
Section 316 (a)....................................................................... 101
(a)(1)(A)................................................................. 502
512
(a)(1)(B)................................................................. 513
(a)(2).................................................................... Not Applicable
(b)....................................................................... 508
(c)....................................................................... 104
Section 317 (a)(1).................................................................... 503
505
(a)(2).................................................................... 504
(b)....................................................................... 1003
Section 318 (a)....................................................................... 107
</TABLE>
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Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE ONE
Definitions and Other Provisions
of General Application...................................................................................1
Section 101. Definitions............................................................................1
Section 102. Compliance Certificates and Opinions...................................................8
Section 103. Form of Documents Delivered to Trustee.................................................9
Section 104. Acts of Holders; Record Dates..........................................................9
Section 105. Notices, Etc., to Trustee and Company.................................................11
Section 106. Notice to Holders; Waiver.............................................................12
Section 107. Conflict with Trust Indenture Act.....................................................12
Section 108. Effect of Headings and Table of Contents..............................................12
Section 109. Successors and Assigns................................................................13
Section 110. Separability Clause...................................................................13
Section 111. Benefits of Indenture.................................................................13
Section 112. Governing Law.........................................................................13
Section 113. Legal Holidays........................................................................13
ARTICLE TWO
Security Forms..........................................................................................13
Section 201. Forms Generally.......................................................................13
Section 202. Form of Face of Security..............................................................14
Section 203. Form of Reverse of Security...........................................................16
Section 204. Form of Legend for Global Securities..................................................19
Section 205. Form of Trustee's Certificate of Authentication.......................................20
ARTICLE THREE
The Securities..........................................................................................20
Section 301. Amount of Securities; Issuable in Series..............................................20
Section 302. Denominations.........................................................................23
Section 303. Execution, Authentication, Delivery and Dating........................................23
Section 304. Temporary Securities..................................................................25
Section 305. Registration, Registration of Transfer and Exchange...................................25
Section 306. Mutilated, Destroyed, Lost and Stolen Securities......................................27
Section 307. Payment of Interest; Interest Rights Preserved........................................28
Section 308. Persons Deemed Owners.................................................................29
Section 309. Cancellation..........................................................................29
Section 310. Computation of Interest...............................................................29
Section 311. CUSIP Numbers.........................................................................30
</TABLE>
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<TABLE>
<S> <C>
ARTICLE FOUR
Satisfaction and Discharge..............................................................................30
Section 401. Satisfaction and Discharge of Indenture...............................................30
Section 402. Application of Trust Money............................................................31
ARTICLE FIVE
Remedies................................................................................................31
Section 501. Events of Default.....................................................................31
Section 502. Acceleration of Maturity; Rescission and Annulment....................................33
Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee.......................34
Section 504. Trustee May File Proofs of Claim......................................................34
Section 505. Trustee May Enforce Claims Without Possession of Securities...........................35
Section 506. Application of Money Collected........................................................35
Section 507. Limitation on Suits...................................................................35
Section 508. Unconditional Right of Holders to Receive Principal, Premium and
Interest..............................................................................36
Section 509. Restoration of Rights and Remedies....................................................36
Section 510. Rights and Remedies Cumulative........................................................36
Section 511. Delay or Omission Not Waiver..........................................................37
Section 512. Control by Holders....................................................................37
Section 513. Waiver of Past Defaults...............................................................37
Section 514. Undertaking for Costs.................................................................38
Section 515. Waiver of Usury, Stay or Extension Laws...............................................38
ARTICLE SIX
The Trustee.............................................................................................38
Section 601. Certain Duties and Responsibilities...................................................38
Section 602. Notice of Defaults....................................................................38
Section 603. Certain Rights of the Trustee.........................................................39
Section 604. Not Responsible for Recitals or Issuance of Securities................................40
Section 605. May Hold Securities...................................................................40
Section 606. Money Held in Trust...................................................................40
Section 607. Compensation and Reimbursement........................................................40
Section 608. Conflicting Interests.................................................................41
Section 609. Corporate Trustee Required; Eligibility...............................................41
Section 610. Resignation and Removal; Appointment of Successor.....................................41
Section 611. Acceptance of Appointment by Successor................................................43
Section 612. Merger, Conversion, Consolidation or Succession to Business...........................44
Section 613. Preferential Collection of Claims Against Company.....................................44
Section 614. Appointment of Authenticating Agent...................................................44
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company.......................................................46
Section 701. Company to Furnish Trustee Names and Addresses of Holders.............................46
</TABLE>
iv
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<TABLE>
<S> <C>
Section 702. Preservation of Information; Communications to Holders................................46
Section 703. Reports by Trustee....................................................................47
Section 704. Reports by Company....................................................................47
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease....................................................47
Section 801. Company May Consolidate, Etc., Only on Certain Terms..................................47
Section 802. Successor Substituted.................................................................48
ARTICLE NINE
Supplemental Indentures.................................................................................49
Section 901. Supplemental Indentures Without Consent of Holders....................................49
Section 902. Supplemental Indentures With Consent of Holders.......................................50
Section 903. Execution of Supplemental Indentures..................................................51
Section 904. Effect of Supplemental Indentures.....................................................51
Section 905. Conformity with Trust Indenture Act...................................................51
Section 906. Reference in Securities to Supplemental Indentures....................................51
ARTICLE TEN
Covenants...............................................................................................52
Section 1001. Payment of Principal, Premium and Interest............................................52
Section 1002. Maintenance of Office or Agency.......................................................52
Section 1003. Money for Securities Payments to Be Held in Trust.....................................52
Section 1004. Statement by Officers as to Default...................................................53
Section 1005. Existence.............................................................................54
Section 1006. Maintenance of Properties.............................................................54
Section 1007. Payment of Taxes and Other Claims.....................................................54
Section 1008. Waiver of Certain Covenants...........................................................54
Section 1009. Calculation of Original Issue Discount................................................55
ARTICLE ELEVEN
Redemption of Securities................................................................................55
Section 1101. Applicability of Article..............................................................55
Section 1102. Election to Redeem; Notice to Trustee.................................................55
Section 1103. Selection by Trustee of Securities to Be Redeemed.....................................55
Section 1104. Notice of Redemption..................................................................56
Section 1105. Deposit of Redemption Price...........................................................57
Section 1106. Securities Payable on Redemption Date.................................................57
Section 1107. Securities Redeemed in Part...........................................................58
ARTICLE TWELVE
Sinking Funds...........................................................................................58
Section 1201. Applicability of Article..............................................................58
</TABLE>
v
<PAGE> 6
<TABLE>
<S> <C>
Section 1202. Satisfaction of Sinking Fund Payments with Securities.................................59
Section 1203. Redemption of Securities for Sinking Fund.............................................59
ARTICLE THIRTEEN
Defeasance and Covenant Defeasance......................................................................59
Section 1301. Company's Option to Effect Defeasance or Covenant Defeasance..........................59
Section 1302. Defeasance and Discharge..............................................................60
Section 1303. Covenant Defeasance...................................................................60
Section 1304. Conditions to Defeasance or Covenant Defeasance.......................................61
Section 1305. Deposited Money and U.S. Government Obligations to Be Held in
Trust; Miscellaneous Provisions.......................................................63
Section 1306. Reinstatement.........................................................................63
ARTICLE FOURTEEN
Subordination of Securities.............................................................................64
Section 1401. Securities Subordinate to Senior Indebtedness.........................................64
Section 1402. Suspension of Payment When Senior Indebtedness in Default.............................64
Section 1403. Payment Over of Proceeds Upon Dissolution, Etc........................................66
Section 1404. Monies Held in Trust..................................................................67
Section 1405. Subrogation to Rights of Holders of Senior Indebtedness...............................67
Section 1406. Unconditional Obligation..............................................................68
Section 1407. Trustee to Effectuate Subordination...................................................68
Section 1408. Notice to Trustee.....................................................................68
Section 1409. Rights of Trustee as Holder of Senior Indebtedness; Preservation of
Trustee's Rights......................................................................69
Section 1410. Trustee Not Fiduciary for Holders of Senior Indebtedness..............................70
Section 1411. No Waiver of Subordination Provisions.................................................70
Section 1412. Defeasance of this Article Fourteen...................................................71
</TABLE>
- ----------
Note: This table of contents shall not, for any purpose, be deemed to be a part
of the Indenture.
vi
<PAGE> 7
INDENTURE, dated as of October 15, 1998, between Ugly Duckling
Corporation, a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal office at
2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016, and Harris Trust
and Savings Bank, an Illinois banking corporation, as Trustee (herein called the
"Trustee").
Recitals of the Company
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured
debentures, notes or other evidences of indebtedness (herein called the
"Securities"), to be issued in one or more series as in this Indenture provided.
All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done.
Now, Therefore, This Indenture Witnesseth:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities or of series thereof, as
follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
Section 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles, and, except as otherwise herein expressly
provided, the term "generally accepted accounting principles" with
respect to any computation required or permitted hereunder shall mean
such accounting principles as are generally accepted in the United
States of America;
<PAGE> 8
(4) unless the context otherwise requires, any reference to an
"Article" or a "Section" refers to an Article or a Section, as the case
may be, of this Indenture; and
(5) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.
"Act", when used with respect to any Holder, has the meaning specified
in Section 104.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 614 to act on behalf of the Trustee to authenticate
Securities of one or more series.
"Board of Directors" means either the board of directors of the Company
or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day", when used with respect to any Place of Payment, means
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in Phoenix, Arizona or that Place of Payment are authorized
or obligated by law or executive order to close.
"Capitalized Lease Obligation" means, as to any Person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, or, if at any time after the execution of this instrument
such Commission is not existing and performing the duties now assigned to it
under the Trust Indenture Act, then the body performing such duties at such
time.
2
<PAGE> 9
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, its Vice
Chairman of the Board, its President or a Vice President, and by its Treasurer,
an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered
to the Trustee.
"Conditional Notice" has the meaning specified in Section 1104.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee at which at any particular time its corporate trust business shall
be administered, which office at the date hereof is located at Chicago,
Illinois.
"Corporation" means a corporation, association, company, joint-stock
company or business trust.
"Covenant Defeasance" has the meaning specified in Section 1303.
"Credit Agreement" means the Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement dated as of August 15, 1997
among the Company, General Electric Capital Corporation, and certain other
parties, as such agreement may be amended, restated, modified, renewed,
refunded, replaced or refinanced from time to time, including any notes,
guarantees, security or pledge agreements, letters of credit and other documents
or instruments executed pursuant thereto and any exhibits or schedules to any of
the foregoing.
"Defaulted Interest" has the meaning specified in Section 307.
"Defeasance" has the meaning specified in Section 1302.
"Depositary" means, with respect to Securities of any series issuable
in whole or in part in the form of one or more Global Securities, a clearing
agency registered under the Exchange Act that is designated to act as Depositary
for such Securities as contemplated by Section 301.
"Designated Senior Indebtedness" means (i) all Indebtedness outstanding
under the Credit Agreement and (ii) any other Senior Indebtedness designated by
the Company as "Designated Senior Indebtedness" from time to time.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934 and any
statute successor thereto, in each case as amended from time to time.
3
<PAGE> 10
"Expiration Date" has the meaning specified in Section 104.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time.
"Global Security" means a Security that evidences all or part of the
Securities of any series and bears the legend set forth in Section 204 (or such
legend as may be specified as contemplated by Section 301 for such Securities).
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Indebtedness" means with respect to any Person, without duplication,
(i) all Obligations of such Person for borrowed money, (ii) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all Capitalized Lease Obligations of such Person, (iv) all obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other similar accrued
liabilities arising in the ordinary course of business and payable in accordance
with customary terms), (v) all obligations for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction, (vi)
guarantees and other contingent obligations in respect of Indebtedness referred
to in clauses (i) through (v) above and clause (viii) below, (vii) all
obligations of any other Person of the type referred to in clauses (i) through
(vi) which are secured by any lien on any property or asset of such Person, the
amount of such obligation being deemed to be the lesser of the fair market value
of such property or asset or the amount of the obligation so secured, and (viii)
all obligations under currency agreements and interest swap agreements of such
Person.
"Indenture" means this instrument as originally executed and as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively. The term "Indenture" shall also include the terms of particular
series of Securities established as contemplated by Section 301.
"Interest", when used with respect to an Original Issue Discount
Security which by its terms bears interest only after Maturity, means interest
payable after Maturity.
"Interest Payment Date", when used with respect to any Security, means
the Stated Maturity of an instalment of interest on such Security.
"Investment Company Act" means the Investment Company Act of 1940 and
any statute successor thereto, in each case as amended from time to time.
4
<PAGE> 11
"Maturity", when used with respect to any Security, means the date on
which the principal of such Security or an instalment of principal becomes due
and payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, call for redemption or otherwise.
"Notice of Default" means a written notice of the kind specified in
Section 501(4).
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed by the Chairman of
the Board, a Vice Chairman of the Board, the Chief Executive Officer, the
President or a Vice President, and by the Chief Financial Officer, the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of
the Company, and delivered to the Trustee. One of the officers signing an
Officers' Certificate given pursuant to Section 1004 shall be the principal
executive, financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, or other counsel who shall be acceptable to the
Trustee.
"Original Issue Discount Security" means any Security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the Maturity thereof pursuant to Section 502.
"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(1) Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;
(2) Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any
Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own
Paying Agent) for the Holders of such Securities; provided that, if
such Securities are to be redeemed, notice of such redemption has been
duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made;
(3) Securities as to which Defeasance has been effected
pursuant to Section 1302; and
(4) Securities which have been paid pursuant to Section 306 or
in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented
5
<PAGE> 12
to the Trustee proof satisfactory to it that such Securities are held
by a bona fide purchaser in whose hands such Securities are valid
obligations of the Company; provided, however, that in determining
whether the Holders of the requisite principal amount of the
Outstanding Securities have given, made or taken any request, demand,
authorization, direction, notice, consent, waiver or other action
hereunder as of any date, (A) the principal amount of an Original Issue
Discount Security which shall be deemed to be Outstanding shall be the
amount of the principal thereof which would be due and payable as of
such date upon acceleration of the Maturity thereof to such date
pursuant to Section 502, (B) if, as of such date, the principal amount
payable at the Stated Maturity of a Security is not determinable, the
principal amount of such Security which shall be deemed to be
Outstanding shall be the amount as specified or determined as
contemplated by Section 301, (C) the principal amount of a Security
denominated in one or more foreign currencies or currency units which
shall be deemed to be Outstanding shall be the U.S. dollar equivalent,
determined as of such date in the manner provided as contemplated by
Section 301, of the principal amount of such Security (or, in the case
of a Security described in Clause (A) or (B) above, of the amount
determined as provided in such Clause), and (D) Securities owned by the
Company or any other obligor upon the Securities or any Affiliate of
the Company or of such other obligor shall be disregarded and deemed
not to be Outstanding, except that, in determining whether the Trustee
shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent, waiver or other action, only
Securities which the Trustee actually knows to be so owned shall be so
disregarded. Securities so owned which have been pledged in good faith
may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to act with respect
to such Securities and that the pledgee is not the Company or any other
obligor upon the Securities or any Affiliate of the Company or of such
other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of or any premium or interest on any Securities on behalf of the
Company.
"Person" means any individual, corporation, partnership, joint venture,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Place of Payment", when used with respect to the Securities of any
series, means the place or places where the principal of and any premium and
interest on the Securities of that series are payable as specified as
contemplated by Section 301.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
6
<PAGE> 13
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Regular Record Date" for the interest payable on any Interest Payment
Date on the Securities of any series means the date specified for that purpose
as contemplated by Section 301.
"Responsible Officer", when used with respect to the Trustee, means the
chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, any senior trust
officer, any trust officer or assistant trust officer, the controller or any
assistant controller or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.
"Securities" has the meaning stated in the first recital of this
Indenture and more particularly means any Securities authenticated and delivered
under this Indenture.
"Securities Act" means the Securities Act of 1933 and any statute
successor thereto, in each case as amended from time to time.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Senior Indebtedness" means all obligations on any Indebtedness of the
Company, whether outstanding on the date of original issuance of the Securities
of any series or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Securities of any
series. Notwithstanding the foregoing, except as otherwise provided with respect
to a series of Securities, "Senior Indebtedness" shall not include (i) any
Indebtedness of the Company to a Subsidiary of the Company, (ii) Indebtedness
to, or guaranteed on behalf of, any shareholder, director, officer or employee
of the Company (including, without limitation, amounts owed for compensation),
(iii) any liability for federal, state, local or other taxes owed or owing by
the Company, and (iv) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 307.
7
<PAGE> 14
"Stated Maturity", when used with respect to any Security or any
instalment of principal thereof or interest thereon, means the date specified in
such Security as the fixed date on which the principal of such Security or such
instalment of principal or interest is due and payable.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of capital stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more other Subsidiaries of such Person or (iii) one
or more other Subsidiaries of such Person. Unless otherwise specified,
"Subsidiary" means a Subsidiary of the Company.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force
at the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean or include each Person who is then a Trustee hereunder, and
if at any time there is more than one such Person, "Trustee" as used with
respect to the Securities of any series shall mean the Trustee with respect to
Securities of that series.
"U.S. Government Obligation" has the meaning specified in Section 1304.
"Vice President", when used with respect to the Company or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "vice president".
Section 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of an
Officers' Certificate, if to be given by an officer of the Company, or an
Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirements set forth in
this Indenture.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include,
(1) a statement that each individual signing such certificate
or opinion has read such covenant or condition and the definitions
herein relating thereto;
8
<PAGE> 15
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
Section 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or opinion of counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 104. Acts of Holders; Record Dates.
Any request, demand, authorization, direction, notice, consent, waiver
or other action provided or permitted by this Indenture to be given, made or
taken by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act"
9
<PAGE> 16
of the Holders signing such instrument or instruments. Proof of execution of any
such instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Indenture and (subject to Section 601) conclusive in
favor of the Trustee and the Company, if made in the manner provided in this
Section.
The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
a signer acting in a capacity other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which the Trustee deems sufficient.
The ownership of Securities shall be proved by the Security Register.
Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future Holder of the
same Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
The Company may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities of any series entitled to
give, make or take any request, demand, authorization, direction, notice,
consent, waiver or other action provided or permitted by this Indenture to be
given, made or taken by Holders of Securities of such series, provided that the
Company may not set a record date for, and the provisions of this paragraph
shall not apply with respect to, the giving or making of any notice,
declaration, request or direction referred to in the next paragraph. If any
record date is set pursuant to this paragraph, the Holders of Outstanding
Securities of the relevant series on such record date, and no other Holders,
shall be entitled to take the relevant action, whether or not such Holders
remain Holders after such record date; provided that no such action shall be
effective hereunder unless taken on or prior to the applicable Expiration Date
by Holders of the requisite principal amount of Outstanding Securities of such
series on such record date. Nothing in this paragraph shall be construed to
prevent the Company from setting a new record date for any action for which a
record date has previously been set pursuant to this paragraph (whereupon the
record date previously set shall automatically and with no action by any Person
be cancelled and of no effect), and nothing in this paragraph shall be construed
to render ineffective any action taken by Holders of the requisite principal
amount of Outstanding Securities of the relevant series on the date such action
is taken. Promptly after any record date is set pursuant to this paragraph, the
Company, at its own expense, shall cause notice of such record date, the
proposed action by Holders and the applicable Expiration Date to be given to the
Trustee in writing and to each Holder of Securities of the relevant series in
the manner set forth in Section 106.
10
<PAGE> 17
The Trustee may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities of any series entitled to join
in the giving or making of (i) any Notice of Default, (ii) any declaration of
acceleration referred to in Section 502, (iii) any request to institute
proceedings referred to in Section 507(2) or (iv) any direction referred to in
Section 512, in each case with respect to Securities of such series. If any
record date is set pursuant to this paragraph, the Holders of Outstanding
Securities of such series on such record date, and no other Holders, shall be
entitled to join in such notice, declaration, request or direction, whether or
not such Holders remain Holders after such record date; provided that no such
action shall be effective hereunder unless taken on or prior to the applicable
Expiration Date by Holders of the requisite principal amount of Outstanding
Securities of such series on such record date. Nothing in this paragraph shall
be construed to prevent the Trustee from setting a new record date for any
action for which a record date has previously been set pursuant to this
paragraph (whereupon the record date previously set shall automatically and with
no action by any Person be canceled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Securities of the relevant
series on the date such action is taken. Promptly after any record date is set
pursuant to this paragraph, the Trustee, at the Company's expense, shall cause
notice of such record date, the proposed action by Holders and the applicable
Expiration Date to be given to the Company in writing and to each Holder of
Securities of the relevant series in the manner set forth in Section 106.
With respect to any record date set pursuant to this Section, the party
hereto which sets such record date may designate any day as the "Expiration
Date" and from time to time may change the Expiration Date to any earlier or
later day; provided that no such change shall be effective unless notice of the
proposed new Expiration Date is given to the other party hereto in writing, and
to each Holder of Securities of the relevant series in the manner set forth in
Section 106, on or prior to the existing Expiration Date. If an Expiration Date
is not designated with respect to any record date set pursuant to this Section,
the party hereto which set such record date shall be deemed to have initially
designated the 180th day after such record date as the Expiration Date with
respect thereto, subject to its right to change the Expiration Date as provided
in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be
later than the 180th day after the applicable record date.
Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any particular Security may do so with regard to
all or any part of the principal amount of such Security or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.
Section 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
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(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office,
Attention: Corporate Trust Trustee Administration, or
(2) the Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Company addressed to it at the address of its principal
office specified in the first paragraph of this instrument or at any
other address previously furnished in writing to the Trustee by the
Company.
Section 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. In any case where notice to Holders is
given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Where this Indenture provides for notice
in any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Section 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a provision
of the Trust Indenture Act which is required under such Act to be a part of and
govern this Indenture, the latter provision shall control. If any provision of
this Indenture modifies or excludes any provision of the Trust Indenture Act
which may be so modified or excluded, the latter provision shall be deemed to
apply to this Indenture as so modified or to be excluded, as the case may be.
Section 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
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Section 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
Section 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto and their successors
hereunder and the Holders, any benefit or any legal or equitable right, remedy
or claim under this Indenture.
Section 112. Governing Law.
This Indenture and the Securities shall be governed by and construed in
accordance with the law of the State of Arizona, without regard to conflicts of
laws principles thereof.
Section 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day at any Place of Payment,
then (notwithstanding any other provision of this Indenture or of the Securities
(other than a provision of any Security which specifically states that such
provision shall apply in lieu of this Section)) payment of interest or principal
(and premium, if any) need not be made at such Place of Payment on such date,
but may be made on the next succeeding Business Day at such Place of Payment
with the same force and effect as if made on the Interest Payment Date or
Redemption Date, or at the Stated Maturity.
ARTICLE TWO
Security Forms
Section 201. Forms Generally.
The Securities of each series shall be in substantially the form set
forth in this Article, or in such other form as shall be established by or
pursuant to a Board Resolution or in one or more indentures supplemental hereto,
in each case with such appropriate insertions, omissions, substitutions and
other variations as are required or permitted by this Indenture, and may have
such letters, numbers or other marks of identification and such legends or
endorsements placed thereon
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<PAGE> 20
as may be required to comply with the rules of any securities exchange or
Depositary therefor or as may, consistently herewith, be determined by the
officers executing such Securities, as evidenced by their execution thereof. If
the form of Securities of any series is established by action taken pursuant to
a Board Resolution, a copy of an appropriate record of such action shall be
certified by the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee at or prior to the delivery of the Company Order
contemplated by Section 303 for the authentication and delivery of such
Securities.
The definitive Securities shall be printed, lithographed or engraved on
steel engraved borders or may be produced in any other manner, all as determined
by the officers executing such Securities, as evidenced by their execution of
such Securities.
Section 202. Form of Face of Security.
[Insert any legend required by the Internal Revenue Code and the
regulations thereunder.]
UGLY DUCKLING CORPORATION
No. _____________ $_________
CUSIP NO. _______
Ugly Duckling Corporation, a corporation duly organized and existing
under the laws of Delaware (herein called the "Company," which term includes any
successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _________________________ or registered
assigns, the principal sum of ___________________________ Dollars on
___________________________ [if the Security is to bear interest prior to
Maturity, insert --, and to pay interest thereon from _________________ or from
the most recent Interest Payment Date to which interest has been paid or duly
provided for, semi-annually on ____________________________ and
____________________________ in each year, commencing _____________________, at
the rate of ________% per annum, until the principal hereof is paid or made
available for payment [if applicable, insert --, provided that any principal and
premium, and any such instalment of interest, which is overdue shall bear
interest at the rate of _________% per annum (to the extent that the payment of
such interest shall be legally enforceable), from the dates such amounts are due
until they are paid or made available for payment, and such interest shall be
payable on demand]. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in such Indenture,
be paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest, which shall be the _______________ or _________________
(whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly provided
for will forthwith cease to be payable to the Holder on such Regular Record Date
and may either be paid to the Person in whose name this Security (or one or more
Predecessor Securities) is
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registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Securities of this series not less than 10 days prior to
such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities of this series may be listed, and upon such notice as may be required
by such exchange, all as more fully provided in said Indenture].
[If the Security is not to bear interest prior to Maturity, insert --
The principal of this Security shall not bear interest except in the case of a
default in payment of principal upon acceleration, upon redemption or at Stated
Maturity and in such case the overdue principal and any overdue premium shall
bear interest at the rate of ____________% per annum (to the extent that the
payment of such interest shall be legally enforceable), from the dates such
amounts are due until they are paid or made available for payment. Interest on
any overdue principal or premium shall be payable on demand. Any such interest
on overdue principal or premium which is not paid on demand shall bear interest
at the rate of ______________% per annum (to the extent that the payment of such
interest on interest shall be legally enforceable), from the date of such demand
until the amount so demanded is paid or made available for payment. Interest on
any overdue interest shall be payable on demand.]
Payment of the principal of (and premium, if any) and [if applicable,
insert -- any such] interest on this Security will be made at the office or
agency of the Company maintained for that purpose in ____________________, in
such coin or currency of the United States of America as at the time of payment
is legal tender for payment of public and private debts [if applicable,
insert--; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register].
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
In Witness Whereof, the Company has caused this instrument to be duly
executed.
UGLY DUCKLING CORPORATION
By_______________________________________
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<PAGE> 22
Attest:
______________________
Section 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under an Indenture, dated as of October 15, 1998 (herein called the
"Indenture", which term shall have the meaning assigned to it in such
instrument), between the Company and Harris Trust and Savings Bank, as Trustee
(herein called the "Trustee", which term includes any successor trustee under
the Indenture), and reference is hereby made to the Indenture for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Company, the Trustee and the Holders of the Securities and of the terms
upon which the Securities are, and are to be, authenticated and delivered. This
Security is one of the series designated on the face hereof [if applicable,
insert --, limited in aggregate principal amount to
$_____________________________ ].
[If applicable, insert -- The Securities of this series are subject to
redemption upon not less than 30 days' notice by mail, [if applicable, insert --
(1) on _______________ in any year commencing with the year
_____________________ and ending with the year ______________________ through
operation of the sinking fund for this series at a Redemption Price equal to
100% of the principal amount, and (2)] at any time [if applicable, insert -- on
or after ____________________________ , 19____], as a whole or in part, at the
election of the Company, at the following Redemption Prices (expressed as
percentages of the principal amount): If redeemed [if applicable, insert -- on
or before __________________________________ , and if redeemed] during the 12-
month period beginning ___________________________ of the years indicated,
Redemption Redemption
Year Price Year Price
- ---- ----- ---- -----
and thereafter at a Redemption Price equal to ____________% of the principal
amount, together in the case of any such redemption [if applicable, insert --
(whether through operation of the sinking fund or otherwise)] with accrued
interest to the Redemption Date, but interest installments whose Stated Maturity
is on or prior to such Redemption Date will be payable to the Holders of such
Securities, or one or more Predecessor Securities, of record at the close of
business on the relevant Record Dates referred to on the face hereof for such
interest installments, all as provided in the Indenture.]
[If applicable, insert -- The Securities of this series are subject to
redemption upon not less than 30 days' notice by mail, (1) on
______________________ in any year commencing with the year ______________ and
ending with the year ________________________ through operation of the sinking
fund for this series at the Redemption Prices for redemption through operation
of the sinking fund (expressed as percentages
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<PAGE> 23
of the principal amount) set forth in the table below, and (2) at any time [if
applicable, insert -- on or after ___________________ ], as a whole or in part,
at the election of the Company, at the Redemption Prices for redemption
otherwise than through operation of the sinking fund (expressed as percentages
of the principal amount) set forth in the table below: If redeemed during the
12-month period beginning ______________________________ of the years indicated,
Redemption Price
For Redemption Redemption Otherwise
Through Operation Than Through
of the Operation
Year Sinking Fund Of the Sinking Fund
- ---- ------------ -------------------
and thereafter at a Redemption Price equal to ______________% of the principal
amount, together in the case of any such redemption (whether through operation
of the sinking fund or otherwise) with accrued interest to the Redemption Date,
but interest installments whose Stated Maturity is on or prior to such
Redemption Date will be payable to the Holders of such Securities, or one or
more Predecessor Securities, of record at the close of business on the relevant
Record Dates referred to on the face hereof for such interest installments, all
as provided in the Indenture.]
[If applicable, insert -- The sinking fund for this series provides for
the redemption on ___________________________ in each year beginning with the
year __________________ and ending with the year _________________ of [if
applicable, insert -- not less than $___________________ ("mandatory sinking
fund") and not more than] $_____________ aggregate principal amount of
Securities of this series. Securities of this series acquired or redeemed by the
Company otherwise than through [if applicable, insert -- mandatory] sinking fund
payments may be credited against subsequent [if applicable, insert -- mandatory]
sinking fund payments otherwise required to be made [if applicable, insert -- in
the inverse order in which they become due].]
[If the Security is subject to redemption of any kind, insert -- In the
event of redemption of this Security in part only, a new Security or Securities
of this series and of like tenor for the unredeemed portion hereof will be
issued in the name of the Holder hereof upon the cancellation hereof.]
[If applicable, insert paragraph regarding subordination of the
Security.]
[If applicable, insert -- The Indenture contains provisions for
defeasance at any time of [the entire indebtedness of this Security] [or]
[certain restrictive covenants and Events of Default with respect to this
Security] [, in each case] upon compliance with certain conditions set forth in
the Indenture.]
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[If the Security is not an Original Issue Discount Security, insert --
If an Event of Default with respect to Securities of this series shall occur and
be continuing, the principal of the Securities of this series may be declared
due and payable in the manner and with the effect provided in the Indenture.]
[If the Security is an Original Issue Discount Security, insert -- If
an Event of Default with respect to Securities of this series shall occur and be
continuing, an amount of principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture. Such amount shall be equal to [insert -- formula for determining the
amount]. Upon payment (i) of the amount of principal so declared due and payable
and (ii) of interest on any overdue principal, premium and interest (in each
case to the extent that the payment of such interest shall be legally
enforceable), all of the Company's obligations in respect of the payment of the
principal of and premium and interest, if any, on the Securities of this series
shall terminate.]
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee without
the consent of any Holders in certain limited cases, and with the consent of the
Holders of a majority in principal amount of the Securities at the time
Outstanding of each series to be affected subject to certain exceptions. The
Indenture also contains provisions permitting the Holders of specified
percentages in principal amount of the Securities of each series at the time
Outstanding, on behalf of the Holders of all Securities of such series, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver shall be conclusive and binding upon the Holder of this Security and upon
all future Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the
Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and shall have failed to institute any such proceeding, for 60
days after receipt of such notice, request and offer of indemnity. The foregoing
shall not apply to any suit instituted by the Holder of this Security for the
enforcement of any payment of principal hereof or any premium or interest hereon
on or after the respective due dates expressed herein.
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<PAGE> 25
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and any premium and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of and any
premium and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
this series and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
The Securities of this series are issuable only in registered form
without coupons in denominations of $__________________ and any integral
multiple thereof. As provided in the Indenture and subject to certain
limitations therein set forth, Securities of this series are exchangeable for a
like aggregate principal amount of Securities of this series and of like tenor
of a different authorized denomination, as requested by the Holder surrendering
the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
Section 204. Form of Legend for Global Securities.
Unless otherwise specified as contemplated by Section 301 for the
Securities evidenced thereby, every Global Security authenticated and delivered
hereunder shall bear a legend in substantially the following form:
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A
NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A
SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE
REGISTERED, IN THE NAME OF ANY PERSON OTHER
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<PAGE> 26
THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE INDENTURE.
Section 205. Form of Trustee's Certificate of Authentication.
The Trustee's certificates of authentication shall be in substantially
the following form:
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
_________________________________,
As Trustee
By ______________________________
Authorized Officer
ARTICLE THREE
The Securities
Section 301. Amount of Securities; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is limited to $100,000,000, except for
Securities authenticated and delivered upon transfer of or in exchange for, or
in lieu of other Securities pursuant to Section 304, 305, 306, 906, and 1107,
and except for Securities which, pursuant to Section 303, are deemed never to
have been authenticated and delivered hereunder.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution and, subject to Section 303,
set forth, or determined in the manner provided, in an Officers' Certificate, or
established in one or more indentures supplemental hereto, prior to the issuance
of Securities of any series,
(1) the title of the Securities of the series (which shall
distinguish the Securities of the series from Securities of any other
series);
(2) any limit upon the aggregate principal amount of the
Securities of the series which may be authenticated and delivered under
this Indenture (except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other
Securities of the series pursuant to Section 304, 305, 306, 906 or 1107
and except for any Securities which, pursuant to Section 303, are
deemed never to have been authenticated and delivered hereunder);
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(3) the Person to whom any interest on a Security of the
series shall be payable, if other than the Person in whose name that
Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest;
(4) the date or dates on which the principal of any Securities
of the series is payable;
(5) the rate or rates at which any Securities of the series
shall bear interest, if any, the basis of computation of such interest
(if other than as provided in Section 310), the date or dates from
which any such interest shall accrue, the Interest Payment Dates on
which any such interest shall be payable the manner of determination of
such Interest Payment Dates and the Regular Record Date for any such
interest payable on any Interest Payment Date;
(6) the right, if any, to extend the interest payment periods
and the duration of such extension;
(7) the place or places where the principal of and any premium
and interest on any Securities of the series shall be payable;
(8) the period or periods within which, the price or prices at
which and the terms and conditions upon which any Securities of the
series may be redeemed, in whole or in part, at the option of the
Company and, if other than by a Board Resolution, the manner in which
any election by the Company to redeem the Securities shall be
evidenced;
(9) the obligation, if any, of the Company to redeem or
purchase any Securities of the series pursuant to any sinking fund or
analogous provisions or at the option of the Holder thereof and the
period or periods within which, the price or prices at which and the
terms and conditions upon which any Securities of the series shall be
redeemed or purchased, in whole or in part, pursuant to such
obligation;
(10) if other than denominations of $1,000 and any integral
multiple thereof, the denominations in which any Securities of the
series shall be issuable;
(11) if the amount of principal of or any premium or interest
on any Securities of the series may be determined with reference to an
index or pursuant to a formula, the manner in which such amounts shall
be determined;
(12) if other than the currency of the United States of
America, the currency, currencies or currency units in which the
principal of or any premium or interest on any Securities of the series
shall be payable and the manner of determining the equivalent thereof
in the currency of the United States of America for any purpose,
including for purposes of the definition of "Outstanding" in Section
101;
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(13) if the principal of or any premium or interest on any
Securities of the series is to be payable, at the election of the
Company or the Holder thereof, in one or more currencies or currency
units other than that or those in which such Securities are stated to
be payable, the currency, currencies or currency units in which the
principal of or any premium or interest on such Securities as to which
such election is made shall be payable, the periods within which and
the terms and conditions upon which such election is to be made and the
amount so payable (or the manner in which such amount shall be
determined);
(14) if other than the entire principal amount thereof, the
portion of the principal amount of any Securities of the series which
shall be payable upon declaration of acceleration of the Maturity
thereof pursuant to Section 502;
(15) if the principal amount payable at the Stated Maturity of
any Securities of the series will not be determinable as of any one or
more dates prior to the Stated Maturity, the amount which shall be
deemed to be the principal amount of such Securities as of any such
date for any purpose thereunder or hereunder, including the principal
amount thereof which shall be due and payable upon any Maturity other
than the Stated Maturity or which shall be deemed to be Outstanding as
of any date prior to the Stated Maturity (or, in any such case, the
manner in which such amount deemed to be the principal amount shall be
determined);
(16) if applicable, that the Securities of the series, in
whole or any specified part, shall be defeasible pursuant to Section
1302 or Section 1303 or both such Sections and, if other than by a
Board Resolution, the manner in which any election by the Company to
defease such Securities shall be evidenced;
(17) if applicable, that any Securities of the series shall be
issuable in whole or in part in the form of one or more Global
Securities and, in such case, the respective Depositaries for such
Global Securities, the form of any legend or legends which shall be
borne by any such Global Securities in addition to or in lieu of that
set forth in Section 204 and any circumstances in addition to or in
lieu of those set forth in Clause (2) of the last paragraph of Section
305 in which any such Global Security may be exchanged in whole or in
part for Securities registered, and any transfer of such Global
Security in whole or in part may be registered, in the name or names of
Persons other than the Depositary for such Global Security or a nominee
thereof;
(18) any addition to or change in the Events of Default which
applies to any Securities of the series and any change in the right of
the Trustee or the requisite Holders of such Securities to declare the
principal amount thereof due and payable pursuant to Section 502;
(19) any addition to or change in the covenants set forth in
Article Ten which applies to Securities of the series; and
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<PAGE> 29
(20) the non-application of, or any addition to or change in,
Article Fourteen with respect to Securities of the series;
(21) any other terms of the series (which terms shall not be
inconsistent with the provisions of this Indenture, except as permitted
by Section 901(5)).
All Securities of any one series shall be substantially identical
except as to denomination and except as may otherwise be provided in or pursuant
to the Board Resolution referred to above and (subject to Section 303) set
forth, or determined in the manner provided, in the Officers' Certificate
referred to above or in any such indenture supplemental hereto.
If any of the terms of the series are established by action taken
pursuant to a Board Resolution, a copy of an appropriate record of such action
shall be certified by the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee at or prior to the delivery of the Officers'
Certificate setting forth the terms of the series.
Section 302. Denominations.
The Securities of each series shall be issuable only in registered form
without coupons and only in such denominations as shall be specified as
contemplated by Section 301. In the absence of any such specified denomination
with respect to the Securities of any series, the Securities of such series
shall be issuable in denominations of $1,000 and any integral multiple thereof.
Section 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Vice Chairman of the Board, its President or one of
its Vice Presidents, and attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Securities may be
manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities of any series executed by the
Company to the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities, and the Trustee in accordance
with the Company Order shall authenticate and deliver such Securities. If the
form or terms of the Securities of the series have been established by or
pursuant to one or more Board Resolutions as permitted by Sections 201 and 301,
in authenticating such Securities, and accepting the additional responsibilities
under this Indenture in relation to such
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Securities, the Trustee shall be entitled to receive, and (subject to Section
601) shall be fully protected in relying upon, an Opinion of Counsel stating,
(1) if the form of such Securities has been established by or
pursuant to Board Resolution as permitted by Section 201, that such
form has been established in conformity with the provisions of this
Indenture;
(2) if the terms of such Securities have been established by
or pursuant to Board Resolution as permitted by Section 301, that such
terms have been established in conformity with the provisions of this
Indenture; and
(3) that such Securities, when authenticated and delivered by
the Trustee and issued by the Company in the manner and subject to any
conditions specified in such Opinion of Counsel, will constitute valid
and legally binding obligations of the Company enforceable in
accordance with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
If such form or terms have been so established, the Trustee shall not be
required to authenticate such Securities if the issue of such Securities
pursuant to this Indenture will affect the Trustee's own rights, duties or
immunities under the Securities and this Indenture or otherwise in a manner
which is not reasonably acceptable to the Trustee.
Notwithstanding the provisions of Section 301 and of the preceding
paragraph, if all Securities of a series are not to be originally issued at one
time, it shall not be necessary to deliver the Officers' Certificate otherwise
required pursuant to Section 301 or the Company Order and Opinion of Counsel
otherwise required pursuant to such preceding paragraph at or prior to the
authentication of each Security of such series if such documents are delivered
at or prior to the authentication upon original issuance of the first Security
of such series to be issued.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder. Notwithstanding the
foregoing, if any Security shall have been authenticated and delivered hereunder
but never issued and sold by the Company, and the Company shall deliver such
Security to the Trustee for cancellation as provided in Section 309, for all
purposes of this Indenture such Security shall be deemed never to have been
authenticated and delivered hereunder and shall never be entitled to the
benefits of this Indenture.
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Section 304. Temporary Securities.
Pending the preparation of definitive Securities of any series, the
Company may execute, and upon Company Order the Trustee shall authenticate and
deliver, temporary Securities which are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued and with such appropriate insertions, omissions, substitutions and
other variations as the officers executing such Securities may determine, as
evidenced by their execution of such Securities.
If temporary Securities of any series are issued, the Company will
cause definitive Securities of that series to be prepared without unreasonable
delay. After the preparation of definitive Securities of such series, the
temporary Securities of such series shall be exchangeable for definitive
Securities of such series upon surrender of the temporary Securities of such
series at the office or agency of the Company in a Place of Payment for that
series, without charge to the Holder. Upon surrender for cancellation of any one
or more temporary Securities of any series, the Company shall execute and the
Trustee shall authenticate and deliver in exchange therefor one or more
definitive Securities of the same series, of any authorized denominations and of
like tenor and aggregate principal amount. Until so exchanged, the temporary
Securities of any series shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities of such series and tenor.
Section 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office or in any other
office or agency of the Company in a Place of Payment being herein sometimes
referred to as the "Security Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of Securities and of transfers of Securities. The Trustee is hereby appointed
"Security Registrar" for the purpose of registering Securities and transfers of
Securities as herein provided.
Upon surrender for registration of transfer of any Security of a series
at the office or agency of the Company in a Place of Payment for that series,
the Company shall execute, and the Trustee shall authenticate and deliver, in
the name of the designated transferee or transferees, one or more new Securities
of the same series, of any authorized denominations and of like tenor and
aggregate principal amount.
At the option of the Holder, Securities of any series may be exchanged
for other Securities of the same series, of any authorized denominations and of
like tenor and aggregate principal amount, upon surrender of the Securities to
be exchanged at such office or agency. Whenever any Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Securities which the Holder making the exchange is
entitled to receive.
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All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or
for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 304, 906 or 1107 not involving any transfer.
If the Securities of any series (or of any series and specified tenor)
are to be redeemed, the Company shall not be required (A) to issue, register the
transfer of or exchange any Securities of that series (or of that series and
specified tenor, as the case may be) during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of any
such Securities selected for redemption and ending at the close of business on
the day of such mailing, or (B) to register the transfer of or exchange any
Security so selected for redemption in whole or in part, except the unredeemed
portion of any Security being redeemed in part.
The provisions of Clauses (1), (2), (3) and (4) below shall apply only
to Global Securities:
(1) Each Global Security authenticated under this Indenture
shall be registered in the name of the Depositary designated for such
Global Security or a nominee thereof and delivered to such Depositary
or a nominee thereof or custodian therefor, and each such Global
Security shall constitute a single Security for all purposes of this
Indenture.
(2) Notwithstanding any other provision in this Indenture, no
Global Security may be exchanged in whole or in part for Securities
registered and no transfer of a Global Security in whole or in part may
be registered, in the name of any Person other than the Depositary for
such Global Security or a nominee thereof unless (A) such Depositary
(i) has notified the Company that it is unwilling or unable to continue
as Depositary for such Global Security or (ii) has ceased to be a
clearing agency registered under the Exchange Act, (B) there shall have
occurred and be continuing an Event of Default with respect to such
Global Security, (C) the Company executes and delivers to the Trustee a
Company Order that such Global Security shall be so transferable or
exchangeable, or (D) there shall exist such circumstances, if any, in
addition to or in lieu of the foregoing as have been specified for this
purpose as contemplated by Section 301.
(3) Subject to Clause (2) above, any exchange of a Global
Security for other Securities may be made in whole or in part, and all
Securities issued in exchange for a Global
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Security or any portion thereof shall be registered in such names as
the Depositary for such Global Security shall direct.
(4) Every Security authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global
Security or any portion thereof, whether pursuant to this Section,
Section 304, 306, 906 or 1107 or otherwise, shall be authenticated and
delivered in the form of, and shall be, a Global Security, unless such
Security is registered in the name of a Person other than the
Depositary for such Global Security or a nominee thereof.
Section 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of the same series and of like tenor and principal
amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them to save each of them and
any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of the same series and of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series issued pursuant to this Section in
lieu of any destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the destroyed,
lost or stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities of that series duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
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Section 307. Payment of Interest; Interest Rights Preserved.
Except as otherwise provided as contemplated by Section 301 with
respect to any series of Securities, interest on any Security which is payable,
and is punctually paid or duly provided for, on any Interest Payment Date shall
be paid to the Person in whose name that Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest, at the office or agency of the Company maintained for that
purpose in a Place of Payment for such series of Securities, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; provided, however, that at the
option of the Company payment of interest may be made by check mailed to the
address of the Person entitled thereto as such address shall appear in the
Security Register.
Any interest on any Security of any series which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities of such series
(or their respective Predecessor Securities) are registered at the
close of business on a Special Record Date for the payment of such
Defaulted Interest, which shall be fixed in the following manner. The
Company shall notify the Trustee in writing of the amount of Defaulted
Interest proposed to be paid on each Security of such series and the
date of the proposed payment, and at the same time the Company shall
deposit with the Trustee an amount of money equal to the aggregate
amount proposed to be paid in respect of such Defaulted Interest or
shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to
be held in trust for the benefit of the Persons entitled to such
Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than 15 days and not less than 10 days
prior to the date of the proposed payment and not less than 10 days
after the receipt by the Trustee of the notice of the proposed payment.
The Trustee shall promptly notify the Company of such Special Record
Date and, in the name and at the expense of the Company, shall cause
notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor to be given to each Holder of Securities
of such series in the manner set forth in Section 106, not less than 10
days prior to such Special Record Date. Notice of the proposed payment
of such Defaulted Interest and the Special Record Date therefor having
been so mailed, such Defaulted Interest shall be paid to the Persons in
whose names the Securities of such series (or their respective
Predecessor Securities) are registered at the close of business on such
Special Record Date and shall no longer be payable pursuant to the
following Clause (2).
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(2) The Company may make payment of any Defaulted Interest on
the Securities of any series in any other lawful manner not
inconsistent with the requirements of any securities exchange on which
such Securities may be listed, and upon such notice as may be required
by such exchange, if, after notice given by the Company to the Trustee
of the proposed payment pursuant to this Clause, such manner of payment
shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
Section 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal of and any premium
and (subject to Section 307) any interest on such Security and for all other
purposes whatsoever, whether or not such Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
Section 309. Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer or exchange or for credit against any sinking fund payment shall, if
surrendered to any Person other than the Trustee, be delivered to the Trustee
and shall be promptly cancelled by it. The Company may at any time deliver to
the Trustee for cancellation any Securities previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee (or to any other Person for delivery
to the Trustee) for cancellation any Securities previously authenticated
hereunder which the Company has not issued and sold, and all Securities so
delivered shall be promptly cancelled by the Trustee. No Securities shall be
authenticated in lieu of or in exchange for any Securities cancelled as provided
in this Section, except as expressly permitted by this Indenture. All cancelled
Securities held by the Trustee shall be disposed of as directed by a Company
Order.
Section 310. Computation of Interest.
Except as otherwise specified as contemplated by Section 301 for
Securities of any series, interest on the Securities of each series shall be
computed on the basis of a 360-day year of twelve 30-day months.
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Section 311. CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers.
ARTICLE FOUR
Satisfaction and Discharge
Section 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of further effect
(except as to any surviving rights of registration of transfer or exchange of
Securities herein expressly provided for), and the Trustee, at the expense of
the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 306 and
(ii) Securities for whose payment money has theretofore been deposited
in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust, as provided in
Section 1003) have been delivered to the Trustee for cancellation; or
(B) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
money in an amount sufficient to pay and discharge the entire indebtedness on
such Securities not theretofore delivered to the Trustee for cancellation, for
principal and any premium and interest to the date of such deposit (in the case
of Securities
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which have become due and payable) or to the Stated Maturity or Redemption Date,
as the case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607, the obligations of
the Company to any Authenticating Agent under Section 614 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
Section 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal and any premium and
interest for whose payment such money has been deposited with the Trustee.
ARTICLE FIVE
Remedies
Section 501. Events of Default.
"Event of Default", wherever used herein with respect to Securities of
any series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(1) default in the payment of any interest upon any Security
of that series when it becomes due and payable, and continuance of such
default for a period of 30 days; or
(2) default in the payment of the principal of or any premium
on any Security of that series at its Maturity; or
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(3) default in the deposit of any sinking fund payment, when
and as due by the terms of a Security of that series; or
(4) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with or which has expressly been
included in this Indenture solely for the benefit of a series of
Securities other than that series), and continuance of such default or
breach for a period of 90 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities of that series a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(5) the entry by a court having jurisdiction in the premises
of (A) a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or (B) a
decree or order adjudging the Company a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company
under any applicable Federal or State law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order for relief or any such other
decree or order unstayed and in effect for a period of 90 consecutive
days; or
(6) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by
it to the entry of a decree or order for relief in respect of the
Company in an involuntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency case
or proceeding against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under any applicable
Federal or State law, or the consent by it to the filing of such
petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or of any substantial part of its property, or
the making by it of an assignment for the benefit of creditors, or the
admission by it in writing of its inability to pay its debts generally
as they become due, or the taking of corporate action by the Company in
furtherance of any such action; or
(7) any other Event of Default provided with respect to
Securities of that series.
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Section 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default specified in
Section 501(5) or 501(6)) with respect to Securities of any series at the time
Outstanding occurs and is continuing, then in every such case the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Securities
of that series may declare the principal amount of all the Securities of that
series (or, if any Securities of that series are Original Issue Discount
Securities, such portion of the principal amount of such Securities as may be
specified by the terms thereof) to be due and payable immediately, by a notice
in writing to the Company (and to the Trustee if given by Holders), and upon any
such declaration such principal amount (or specified amount) shall become
immediately due and payable. If an Event of Default specified in Section 501(5)
or 501(6) with respect to Securities of any series at the time Outstanding
occurs, the principal amount of all the Securities of that series (or, if any
Securities of that series are Original Issue Discount Securities, such portion
of the principal amount of such Securities as may be specified by the terms
thereof) shall automatically, and without any declaration or other action on the
part of the Trustee or any Holder, become immediately due and payable.
At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter in this
Article provided, the Holders of a majority in principal amount of the
Outstanding Securities of that series, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest on all Securities of that series,
(B) the principal of (and premium, if any, on) any Securities
of that series which have become due otherwise than by such declaration
of acceleration and any interest thereon at the rate or rates
prescribed therefor in such Securities,
(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate or rates prescribed therefor
in such Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel; and
(2) all Events of Default with respect to Securities of that
series other than the non-payment of the principal of Securities of
that series which has become due solely by such declaration of
acceleration, have been cured or waived as provided in Section 513.
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No such rescission shall affect any subsequent default or impair any
right consequent thereon.
Section 503. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or
premium, if any, on) any Security at the Maturity thereof, the Company
will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on
such Securities for principal and any premium and interest and, to the
extent that payment of such interest shall be legally enforceable,
interest on any overdue principal and premium and on any overdue
interest, at the rate or rates prescribed therefor in such Securities,
and, in addition thereto, such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel.
If an Event of Default with respect to Securities of any series occurs
and is continuing, the Trustee may in its discretion proceed to protect and
enforce its rights and the rights of the Holders of Securities of such series by
such appropriate judicial proceedings as the Trustee shall deem most effectual
to protect and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
Section 504. Trustee May File Proofs of Claim.
In case of any judicial proceeding relative to the Company (or any
other obligor upon the Securities), its property or its creditors, the Trustee
shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture Act
in order to have claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it for
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 607.
No provision of this Indenture shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement,
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adjustment or composition affecting the Securities or the rights of any Holder
thereof or to authorize the Trustee to vote in respect of the claim of any
Holder in any such proceeding; provided, however, that the Trustee may, on
behalf of the Holders, vote for the election of a trustee in bankruptcy or
similar official and be a member of a creditors' or other similar committee.
Section 505. Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
Section 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal or any premium
or interest, upon presentation of the Securities and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:
First: To the payment of all amounts due the Trustee under Section 607;
Second: To the payment of the amounts then due and unpaid for principal
of and any premium and interest on the Securities in respect of which or for the
benefit of which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on such
Securities for principal and any premium and interest, respectively, and
Third: To the payment of the balance, if any, to the Company or any
other Person or Persons legally entitled thereto.
Section 507. Limitation on Suits.
No Holder of any Security of any series shall have any right to
institute any proceeding, judicial or otherwise, with respect to this Indenture,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Securities
of that series;
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(2) the Holders of not less than 25% in principal amount of
the Outstanding Securities of that series shall have made written
request to the Trustee to institute proceedings in respect of such
Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities of that
series; it being understood and intended that no one or more of such
Holders shall have any right in any manner whatever by virtue of, or by
availing of, any provision of this Indenture to affect, disturb or
prejudice the rights of any other of such Holders, or to obtain or to
seek to obtain priority or preference over any other of such Holders or
to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all of such Holders.
Section 508. Unconditional Right of Holders to Receive Principal, Premium and
Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of and any premium and (subject to Section 307)
interest on such Security on the respective Stated Maturities expressed in such
Security (or, in the case of redemption, [except as provided in any Conditional
Notice given with respect thereto,] on the Redemption Date) and to institute
suit for the enforcement of any such payment, and such rights shall not be
impaired without the consent of such Holder.
Section 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
Section 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities in the last paragraph of
Section 306, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
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in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
Section 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Securities
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
Section 512. Control by Holders.
The Holders of a majority in principal amount of the Outstanding
Securities of any series shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred on the Trustee, with respect to the
Securities of such series, provided that
(1) such direction shall not be in conflict with any rule of
law or with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) subject to the provisions of Section 601, the Trustee
shall have the right to decline to follow any such direction if the
Trustee in good faith shall, by a Responsible Officer or Officers of
the Trustee, determine that the proceeding so directed would involve
the Trustee in personal liability.
Section 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of such series waive any past default hereunder with respect to such
series and its consequences, except a default
(1) in the payment of the principal of or any premium or
interest on any Security of such series, or
(2) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Security of such series affected.
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Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
Section 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken, suffered or
omitted by it as Trustee, a court may require any party litigant in such suit to
file an undertaking to pay the costs of such suit, and may assess costs against
any such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; provided that neither this Section nor the Trust Indenture Act
shall be deemed to authorize any court to require such an undertaking or to make
such an assessment in any suit instituted by the Company or the Trustee.
Section 515. Waiver of Usury, Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
The Trustee
Section 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as provided by
the Trust Indenture Act. Notwithstanding the foregoing, no provision of this
Indenture shall require the Trustee to expend or risk its own funds or otherwise
incur any financial liability in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity against
such risk or liability is not reasonably assured to it. Whether or not therein
expressly so provided, every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section.
Section 602. Notice of Defaults.
If a default occurs hereunder with respect to Securities of any series,
the Trustee shall give the Holders of Securities of such series notice of such
default as and to the extent provided by the
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Trust Indenture Act; provided, however, that in the case of any default of the
character specified in Section 501(4) with respect to Securities of such series,
no such notice to Holders shall be given until at least 30 days after the
occurrence thereof. For the purpose of this Section, the term "default" means
any event which is, or after notice or lapse of time or both would become, an
Event of Default with respect to Securities of such series.
Section 603. Certain Rights of the Trustee.
Subject to the provisions of Section 601:
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have been signed
or presented by the proper party or parties;
(2) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order,
and any resolution of the Board of Directors shall be sufficiently
evidenced by a Board Resolution;
(3) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate;
(4) the Trustee may consult with counsel of its selection and
the advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(5) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(6) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or
attorney; and
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(7) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder.
Section 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the
Trustee's certificates of authentication, shall be taken as the statements of
the Company, and neither the Trustee nor any Authenticating Agent assumes any
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Indenture or of the Securities. Neither the
Trustee nor any Authenticating Agent shall be accountable for the use or
application by the Company of Securities or the proceeds thereof.
Section 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and, subject to Sections
608 and 613, may otherwise deal with the Company with the same rights it would
have if it were not Trustee, Authenticating Agent, Paying Agent, Security
Registrar or such other agent.
Section 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed in writing with the Company.
Section 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time such compensation
as shall be agreed to in writing between the Company and the Trustee
for all services rendered by it hereunder (which compensation shall not
be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation, expenses and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and (3) to indemnify the
Trustee for, and to hold it harmless against, any loss, liability or
expense
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incurred without negligence or bad faith on its part, arising out of or
in connection with the acceptance or administration of the trust or
trusts hereunder, including the costs and expenses of defending itself
against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder.
The Trustee shall have a lien prior to the Securities upon all property
and funds held by it hereunder for any amount owing it or any predecessor
Trustee pursuant to this Section 607, except with respect to funds held in trust
for the benefit of the Holders of particular Securities.
Without limiting any rights available to the Trustee under applicable
law, when the Trustee incurs expenses or renders services in connection with an
Event of Default specified in Section 501(5) or Section 501(6), the expenses
(including the reasonable charges and expenses of its counsel) and compensation
for the services are intended to constitute expenses of administration under any
applicable Federal or State bankruptcy, insolvency or other similar law.
The provisions of this Section shall survive the termination of this
Indenture.
Section 608. Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture. To the extent
permitted by such Act, the Trustee shall not be deemed to have a conflicting
interest by virtue of being a trustee under this Indenture with respect to
Securities of more than one series.
Section 609. Corporate Trustee Required; Eligibility.
There shall at all times be one (and only one) Trustee hereunder with
respect to the Securities of each series, which may be Trustee hereunder for
Securities of one or more other series. Each Trustee shall be a Person that is
eligible pursuant to the Trust Indenture Act to act as such and has a combined
capital and surplus of at least $50,000,000. If any such Person publishes
reports of condition at least annually, pursuant to law or to the requirements
of its supervising or examining authority, then for the purposes of this Section
and to the extent permitted by the Trust Indenture Act, the combined capital and
surplus of such Person shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
the Trustee with respect to the Securities of any series shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
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Section 610. Resignation and Removal; Appointment of Successor.
No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 611.
The Trustee may resign at any time with respect to the Securities of
one or more series by giving written notice thereof to the Company. If the
instrument of acceptance by a successor Trustee required by Section 611 shall
not have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee with respect to the
Securities of such series.
The Trustee may be removed at any time with respect to the Securities
of any series by Act of the Holders of a majority in principal amount of the
Outstanding Securities of such series, delivered to the Trustee and to the
Company.
If at any time:
(1) the Trustee shall fail to comply with Section 608 after
written request therefor by the Company or by any Holder who has been a
bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609
and shall fail to resign after written request therefor by the Company
or by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then, in any such case,
(A) the Company by a Board Resolution may remove the Trustee with
respect to all Securities, or (B) subject to Section 514, any Holder
who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the removal of the Trustee with
respect to all Securities and the appointment of a successor Trustee or
Trustees.
If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, with respect
to the Securities of one or more series, the Company, by a Board Resolution,
shall promptly appoint a successor Trustee or Trustees with respect to the
Securities of that or those series (it being understood that any such successor
Trustee may be appointed with respect to the Securities of one or more or all of
such series and that at any time there shall be only one Trustee with respect to
the Securities of any particular series) and shall comply with the applicable
requirements of Section 611. If, within one year after such resignation, removal
or incapability, or the occurrence of such vacancy, a successor Trustee with
respect to the
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Securities of any series shall be appointed by Act of the Holders of a majority
in principal amount of the Outstanding Securities of such series delivered to
the Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment in accordance with the
applicable requirements of Section 611, become the successor Trustee with
respect to the Securities of such series and to that extent supersede the
successor Trustee appointed by the Company. If no successor Trustee with respect
to the Securities of any series shall have been so appointed by the Company or
the Holders and accepted appointment in the manner required by Section 611, any
Holder who has been a bona fide Holder of a Security of such series for at least
six months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee
with respect to the Securities of such series.
The Company shall give notice of each resignation and each removal of
the Trustee with respect to the Securities of any series and each appointment of
a successor Trustee with respect to the Securities of any series to all Holders
of Securities of such series in the manner provided in Section 106. Each notice
shall include the name of the successor Trustee with respect to the Securities
of such series and the address of its Corporate Trust Office.
Section 611. Acceptance of Appointment by Successor.
In case of the appointment hereunder of a successor Trustee with
respect to all Securities, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on the request
of the Company or the successor Trustee, such retiring Trustee shall, upon
payment of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee and
shall duly assign, transfer and deliver to such successor Trustee all property
and money held by such retiring Trustee hereunder.
In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company, the
retiring Trustee and each successor Trustee with respect to the Securities of
one or more series shall execute and deliver an indenture supplemental hereto
wherein each successor Trustee shall accept such appointment and which (1) shall
contain such provisions as shall be necessary or desirable to transfer and
confirm to, and to vest in, each successor Trustee all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of that
or those series to which the appointment of such successor Trustee relates, (2)
if the retiring Trustee is not retiring with respect to all Securities, shall
contain such provisions as shall be deemed necessary or desirable to confirm
that all the rights, powers, trusts and duties of the retiring Trustee with
respect to the Securities of that or those series as to which the retiring
Trustee is not retiring shall continue to be vested in the retiring Trustee, and
(3) shall add to or change any of the provisions of this Indenture as shall be
necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee, it being understood that nothing herein or
in such
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supplemental indenture shall constitute such Trustees co-trustees of the same
trust and that each such Trustee shall be trustee of a trust or trusts hereunder
separate and apart from any trust or trusts hereunder administered by any other
such Trustee; and upon the execution and delivery of such supplemental indenture
the resignation or removal of the retiring Trustee shall become effective to the
extent provided therein and each such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee with respect to the Securities of that or
those series to which the appointment of such successor Trustee relates; but, on
request of the Company or any successor Trustee, such retiring Trustee shall
duly assign, transfer and deliver to such successor Trustee all property and
money held by such retiring Trustee hereunder with respect to the Securities of
that or those series to which the appointment of such successor Trustee relates.
Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in the
first or second preceding paragraph, as the case may be.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
Section 612. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Securities so authenticated with the same effect
as if such successor Trustee had itself authenticated such Securities.
Section 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
Section 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents (by giving
notice of the appointment in the manner provided in Section 106 to the Company
and to all Holders of Securities of the series with respect to which the
Authenticating Agent(s) will serve) with respect to one or
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more series of Securities, which Authenticating Agent(s) shall be authorized to
act on behalf of the Trustee to authenticate Securities of such series issued
upon original issue and upon exchange, registration of transfer or partial
redemption thereof or pursuant to Section 306, and Securities so authenticated
shall be entitled to the benefits of this Indenture and shall be valid and
obligatory for all purposes as if authenticated by the Trustee hereunder.
Wherever reference is made in this Indenture to the authentication and delivery
of Securities by the Trustee or the Trustee's certificate of authentication,
such reference shall be deemed to include authentication and delivery on behalf
of the Trustee by an Authenticating Agent and a certificate of authentication
executed on behalf of the Trustee by an Authenticating Agent. Each
Authenticating Agent shall be acceptable to the Company and shall at all times
be a corporation organized and doing business under the laws of the United
States of America, any State thereof or the District of Columbia, authorized
under such laws to act as Authenticating Agent, having a combined capital and
surplus of not less than $50,000,000 and subject to supervision or examination
by Federal or State authority. If such Authenticating Agent publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Authenticating Agent shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to be
eligible in accordance with the provisions of this Section, such Authenticating
Agent shall resign immediately in the manner and with the effect specified in
this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall give notice of such
appointment in the manner provided in Section 106 to all Holders of Securities
of the series with respect to which such Authenticating Agent will serve. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section.
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If an appointment with respect to one or more series is made pursuant
to this Section, the Securities of such series may have endorsed thereon, in
addition to the Trustee's certificate of authentication, an alternative
certificate of authentication in the following form:
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
,
-----------------------------------
As Trustee
By
--------------------------------
As Authenticating Agent
By
--------------------------------
Authorized Officer
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
Section 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(1) fifteen days after each Regular Record Date, a list, in
such form as the Trustee may reasonably require, of the names and
addresses of the Holders of Securities of each series as of such
Regular Record Date, and
(2) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list in similar form and content as of a date not more than 15 days
prior to the time such list is furnished; excluding from any such list
names and addresses received by the Trustee in its capacity as Security
Registrar.
Section 702. Preservation of Information; Communications to Holders.
The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 701 and the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
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The rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the corresponding
rights and privileges of the Trustee, shall be as provided by the Trust
Indenture Act.
Every Holder of Securities, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act.
Section 703. Reports by Trustee.
The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act at the times and in the manner provided pursuant thereto. If
required by Section 313(a) of the Trust Indenture Act, the Trustee shall, within
sixty days after each May 15 following the date of this Indenture deliver to
Holders a brief report, dated as of such May 15, which complies with the
provisions of such Section 313(a).
A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which any
Securities are listed, with the Commission and with the Company. The Company
will promptly notify the Trustee when any Securities are listed on any stock
exchange.
Section 704. Reports by Company.
The Company shall file with the Trustee and the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided pursuant to such Act; provided that any such
information, documents or reports required to be filed with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the
Trustee within 15 days after the same is so required to be filed with the
Commission.
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
Section 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other Person
or convey, transfer or lease its properties and assets substantially as an
entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless:
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(1) in case the Company shall consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, the Person formed by such
consolidation or into which the Company is merged or the Person which
acquires by conveyance or transfer, or which leases, the properties and
assets of the Company substantially as an entirety shall be a
corporation, partnership, unincorporated organization, trust, or other
entity shall be organized and validly existing under the laws of the
United States of America, any State thereof or the District of Columbia
and shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the
Trustee, the due and punctual payment of the principal of and any
premium and interest on all the Securities and the performance or
observance of every covenant of this Indenture on the part of the
Company to be performed or observed;
(2) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Company or
any Subsidiary as a result of such transaction as having been incurred
by the Company or such Subsidiary at the time of such transaction, no
Event of Default, and no event which, after notice or lapse of time or
both, would become an Event of Default, shall have happened and be
continuing;
(3) if, as a result of any such consolidation or merger or
such conveyance, transfer or lease, properties or assets of the Company
would become subject to a mortgage, pledge, lien, security interest or
other encumbrance which would not be permitted by this Indenture, the
Company or such successor Person, as the case may be, shall take such
steps as shall be necessary effectively to secure the Securities
equally and ratably with (or prior to) all indebtedness secured
thereby; and
(4) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article and that all
conditions precedent herein provided for relating to such transaction
have been complied with.
Section 802. Successor Substituted.
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease of the properties
and assets of the Company substantially as an entirety in accordance with
Section 801, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein, and thereafter, except in the case
of a lease, the predecessor Person shall be relieved of all obligations and
covenants under this Indenture and the Securities.
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ARTICLE NINE
Supplemental Indentures
Section 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the
Company and the assumption by any such successor of the covenants of
the Company herein and in the Securities; or
(2) to add to the covenants of the Company for the benefit of
the Holders of all or any series of Securities (and if such covenants
are to be for the benefit of less than all series of Securities,
stating that such covenants are expressly being included solely for the
benefit of such series) or to surrender any right or power herein
conferred upon the Company; or
(3) to add any additional Events of Default for the benefit of
the Holders of all or any series of Securities (and if such additional
Events of Default are to be for the benefit of less than all series of
Securities, stating that such additional Events of Default are
expressly being included solely for the benefit of such series); or
(4) to add to or change any of the provisions of this
Indenture to such extent as shall be necessary to permit or facilitate
the issuance of Securities in bearer form, registrable or not
registrable as to principal, and with or without interest coupons, or
to permit or facilitate the issuance of Securities in uncertificated
form; or
(5) to add to, change or eliminate any of the provisions of
this Indenture in respect of one or more series of Securities, provided
that any such addition, change or elimination (A) shall neither (i)
apply to any Security of any series created prior to the execution of
such supplemental indenture and entitled to the benefit of such
provision nor (ii) modify the rights of the Holder of any such Security
with respect to such provision or (B) shall become effective only when
there is no such Security Outstanding; or
(6) to secure the Securities; or
(7) to establish the form or terms of Securities of any series
as permitted by Sections 201 and 301; or
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(8) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one
or more series and to add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee,
pursuant to the requirements of Section 611; or
(9) to cure any ambiguity, to correct or supplement any
provision herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions with respect to
matters or questions arising under this Indenture, provided that such
action pursuant to this Clause (9) shall not adversely affect the
interests of the Holders of Securities of any series in any material
respect.
Section 902. Supplemental Indentures With Consent of Holders.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities of each series affected by such
supplemental indenture, by Act of said Holders delivered to the Company and the
Trustee, the Company, when authorized by a Board Resolution, and the Trustee may
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders of Securities of such series under this Indenture; provided, however,
that no such supplemental indenture shall, without the consent of the Holder of
each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any
instalment of principal of or interest on, any Security, or reduce the
principal amount thereof or the rate of interest thereon or any premium
payable upon the redemption thereof, or reduce the amount of the
principal of an Original Issue Discount Security or any other Security
which would be due and payable upon a declaration of acceleration of
the Maturity thereof pursuant to Section 502, or change any Place of
Payment where, or the coin or currency in which, any Security or any
premium or interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, [except as
provided in any Conditional Notice given with respect thereto,] on or
after the Redemption Date), or reduce the percentage in principal
amount of the Outstanding Securities of any series, the consent of
whose Holders is required for any such supplemental indenture, or the
consent of whose Holders is required for any waiver (of compliance with
certain provisions of this Indenture or certain defaults hereunder and
their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513
or Section 1008, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Security
affected thereby; provided, however, that this clause shall not be
deemed to require the consent of any Holder with respect to changes in
the references to "the
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Trustee" and concomitant changes in this Section and Section 1008, or
the deletion of this proviso, in accordance with the requirements of
Sections 611 and 901(8).
A supplemental indenture which changes or eliminates any covenant or
other provision of this Indenture which has expressly been included solely for
the benefit of one or more particular series of Securities, or which modifies
the rights of the Holders of Securities of such series with respect to such
covenant or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
Section 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
Section 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
Section 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
Section 906. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to this Article may, and shall
if required by the Trustee, bear a notation in form approved by the Trustee as
to any matter provided for in such supplemental-indenture. If the Company shall
so determine, new Securities of any series so modified as to conform, in the
opinion of the Trustee and the Company, to any such supplemental indenture may
be prepared and executed
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by the Company and authenticated and delivered by the Trustee in exchange for
Outstanding Securities of such series.
ARTICLE TEN
Covenants
Section 1001. Payment of Principal, Premium and Interest.
The Company covenants and agrees for the benefit of each series of
Securities that it will duly and punctually pay the principal of and any premium
and interest on the Securities of that series in accordance with the terms of
the Securities and this Indenture.
Section 1002. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of
Securities an office or agency where Securities of that series may be presented
or surrendered for payment, where Securities of that series may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Company in respect of the Securities of that series and this Indenture
may be served. The Company will give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies where the Securities of one or more series may be presented
or surrendered for any or all such purposes and may from time to time rescind
such designations; provided, however, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in each Place of Payment for Securities of any series for such
purposes. The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
Section 1003. Money for Securities Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent with
respect to any series of Securities, it will, on or before each due date of the
principal of or any premium or interest on any of the Securities of that series,
segregate and hold in trust for the benefit of the Persons entitled thereto a
sum sufficient to pay the principal and any premium and interest so becoming due
until such sums shall be paid to such Persons or otherwise disposed of as herein
provided and will promptly notify the Trustee of its action or failure so to
act.
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Whenever the Company shall have one or more Paying Agents for any
series of Securities, it will, prior to each due date of the principal of or any
premium or interest on any Securities of that series, deposit with a Paying
Agent a sum sufficient to pay such amount, such sum to be held as provided by
the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the
Company will promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent for any series of Securities
other than the Trustee to execute and deliver to the Trustee an instrument in
which such Paying Agent shall agree with the Trustee, subject to the provisions
of this Section, that such Paying Agent will (1) comply with the provisions of
the Trust Indenture Act applicable to it as a Paying Agent and (2) during the
continuance of any default by the Company (or any other obligor upon the
Securities of that series) in the making of any payment in respect of the
Securities of that series, upon the written request of the Trustee, forthwith
pay to the Trustee all sums held in trust by such Paying Agent for payment in
respect of the Securities of that series.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of or any premium or
interest on any Security of any series and remaining unclaimed for two years
after such principal, premium or interest has become due and payable shall be
paid to the Company on Company Request, or (if then held by the Company) shall
be discharged from such trust; and the Holder of such Security shall thereafter,
as an unsecured general creditor, look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Company cause to
be published once, in a newspaper published in the English language, customarily
published on each business day and of general circulation in the Borough of
Manhattan, The City of New York, New York, notice that such money remains
unclaimed and that, after a date specified therein, which shall not be less than
30 days from the date of such publication, any unclaimed balance of such money
then remaining will be repaid to the Company.
Section 1004. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company ending after the date hereof, an Officers'
Certificate, stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
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grace or requirement of notice provided hereunder) and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
Section 1005. Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and statutory) and franchises; provided, however, that the
Company shall not be required to preserve any such right or franchise if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders.
Section 1006. Maintenance of Properties.
The Company will cause all properties used or useful in the conduct of
its business to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that nothing in this Section shall prevent the
Company from discontinuing the operation or maintenance of any of such
properties if such discontinuance is, in the judgment of the Company, desirable
in the conduct of its business and not disadvantageous in any material respect
to the Holders.
Section 1007. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon the Company or upon the income,
profits or property of the Company, and (2) all lawful claims for labor,
materials and supplies which, if unpaid, might by law become a lien upon the
property of the Company; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim (i) whose amount, applicability or validity is being
contested in good faith by appropriate proceedings or (ii) if the failure to pay
such tax, assessment, charge or claim is not likely to have a material adverse
effect on the financial condition of the Company and its consolidated
Subsidiaries, taken as a whole.
Section 1008. Waiver of Certain Covenants.
Except as otherwise specified as contemplated by Section 301 for
Securities of such series, the Company may, with respect to the Securities of
any series, omit in any particular instance to comply with any term, provision
or condition set forth in any covenant provided pursuant to Section 301(19),
901(2) or 901(7) for the benefit of the Holders of such series or in any of
Sections 1006 through 1007 if before the time for such compliance the Holders of
at least a majority in principal
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amount of the Outstanding Securities of such series shall, by Act of such
Holders, either waive such compliance in such instance or generally waive
compliance with such term, provision or condition, but no such waiver shall
extend to or affect such term, provision or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of the Company and the duties of the Trustee in respect of any such term,
provision or condition shall remain in full force and effect.
Section 1009. Calculation of Original Issue Discount.
The Company shall file with the Trustee promptly at the end of each
calendar year a written notice specifying the amount of original issue discount
(including daily rates and accrual periods) accrued on Outstanding Securities as
of the end of such year.
ARTICLE ELEVEN
Redemption of Securities
Section 1101. Applicability of Article.
Securities of any series which are redeemable before their Stated
Maturity shall be redeemable in accordance with their terms and (except as
otherwise specified as contemplated by Section 301 for such Securities) in
accordance with this Article.
Section 1102. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced
by a Board Resolution or in another manner specified as contemplated by Section
301 for such Securities. In case of any redemption at the election of the
Company the Company shall, at least 45 days prior to the Redemption Date fixed
by the Company (unless a shorter notice shall be satisfactory to the Trustee),
notify the Trustee of such Redemption Date, of the principal amount of
Securities of such series to be redeemed and, if applicable, of the tenor of the
Securities to be redeemed. In the case of any redemption of Securities (a) prior
to the expiration of any restriction on such redemption provided in the terms of
such Securities or elsewhere in this Indenture, or (b) pursuant to an election
of the Company which is subject to a condition specified in the terms of such
Securities or elsewhere in this Indenture, the Company shall furnish the Trustee
with an Officers' Certificate evidencing compliance with such restriction.
Section 1103. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities of any series are to be redeemed
(unless all the Securities of such series and of a specified tenor are to be
redeemed or unless such redemption affects only a single Security), the
particular Securities to be redeemed shall be selected not more than 60 days
prior to the Redemption Date by the Trustee, from the Outstanding Securities of
such series not
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previously called for redemption, by such method as the Trustee shall deem fair
and appropriate and which may provide for the selection for redemption of a
portion of the principal amount of any Security of such series, provided that
the unredeemed portion of the principal amount of any Security shall be in an
authorized denomination (which shall not be less than the minimum authorized
denomination) for such Security. If less than all the Securities of such series
and of a specified tenor are to be redeemed (unless such redemption affects only
a single Security), the particular Securities to be redeemed shall be selected
not more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities of such series and specified tenor not previously called
for redemption in accordance with the preceding sentence.
The Trustee shall promptly notify the Company in writing of the
Securities selected for redemption as aforesaid and, in case of any Securities
selected for partial redemption as aforesaid, the principal amount thereof to be
redeemed.
The provisions of the two preceding paragraphs shall not apply with
respect to any redemption affecting only a single Security, whether such
Security is to be redeemed in whole or in part. In the case of any such
redemption in part, the unredeemed portion of the principal amount of the
Security shall be in an authorized denomination (which shall not be less than
the minimum authorized denomination) for such Security.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
Section 1104. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Securities to be redeemed, at his address appearing in
the Security Register.
All notices of redemption shall identify the Securities to be redeemed
(including CUSIP number) and shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities of any series
and of a specified tenor consisting of more than a single Security are
to be redeemed, the identification (and, in the case of partial
redemption of any such Securities, the principal amounts) of the
particular Securities to be redeemed and, if less than all the
Outstanding Securities of any series and
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of a specified tenor consisting of a single Security are to be
redeemed, the principal amount of the particular Security to be
redeemed,
(4) that on the Redemption Date [, except as otherwise
provided in any Conditional Notice (as defined below),] the Redemption
Price will become due and payable upon each such Security to be
redeemed and, if applicable, that interest thereon will cease to accrue
on and after said date,
(5) the place or places where each such Security is to be
surrendered for payment of the Redemption Price, and
(6) that the redemption is for a sinking fund, if such is the
case.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company and shall be irrevocable.
Each notice of redemption (except with respect to any mandatory sinking
fund payment, as defined in Section 1201) may include a statement that such
redemption shall be conditional upon the receipt by the Trustee on or prior to
the Redemption Date of amounts sufficient to pay principal of, and premium, if
any, and interest on, the Securities to be redeemed, and that if such amounts
shall not have been so received, said notice shall be of no force and effect,
the Securities to be redeemed will not become due and payable, and the Company
shall not be required to redeem such Securities (a "Conditional Notice"). In the
event that a Conditional Notice is given and sufficient amounts as referred to
in the Conditional Notice are not so received, the redemption shall not be made
and the Trustee shall, within a reasonable time thereafter, give notice, to the
persons and in the manner in which the notice of redemption was given, that such
amounts were not received and the redemption was not effected.
Section 1105. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on, all the Securities
which are to be redeemed on that date.
Section 1106. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, [and, in the event
that a Conditional Notice was given, money for the payment of the Redemption
Price having been deposited as provided in Section 1105,] the Securities so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
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Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest and the holders thereof
will have no rights in respect to the Securities so to be redeemed except to
receive payment of the Redemption Price thereof, without interest accrued on any
funds held after the Redemption Date to pay such Redemption Price. Upon
surrender of any such Security for redemption in accordance with said notice,
such Security shall be paid by the Company at the Redemption Price, together
with accrued interest to the Redemption Date; provided, however, that, unless
otherwise specified as contemplated by Section 301, installments of interest
whose Stated Maturity is on or prior to the Redemption Date will be payable to
the Holders of such Securities, or one or more Predecessor Securities,
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 307.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and any premium shall, until
paid, bear interest from the Redemption Date at the rate prescribed therefor in
the Security.
Section 1107. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered
at a Place of Payment therefor (with, if the Company or the Trustee so requires,
due endorsement by, or a written instrument of transfer in form satisfactory to
the Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Security without service
charge, a new Security or Securities of the same series and of like tenor, of
any authorized denomination as requested by such Holder, in aggregate principal
amount equal to and in exchange for the unredeemed portion of the principal of
the Security so surrendered.
ARTICLE TWELVE
Sinking Funds
Section 1201. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund
for the retirement of Securities of any series except as otherwise specified as
contemplated by Section 301 for such Securities.
The minimum amount of any sinking fund payment provided for by the
terms of any Securities is herein referred to as a "mandatory sinking fund
payment", and any payment in excess of such minimum amount provided for by the
terms of such Securities is herein referred to as an "optional sinking fund
payment". If provided for by the terms of any Securities, the cash amount of any
sinking fund payment may be subject to reduction as provided in Section 1202.
Each sinking fund payment shall be applied to the redemption of Securities as
provided for by the terms of such Securities.
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Section 1202. Satisfaction of Sinking Fund Payments with Securities.
The Company (1) may deliver Outstanding Securities of a series (other
than any previously called for redemption) and (2) may apply as a credit
Securities of a series which have been redeemed either at the election of the
Company pursuant to the terms of such Securities or through the application of
permitted optional sinking fund payments pursuant to the terms of such
Securities, in each case in satisfaction of all or any part of any sinking fund
payment with respect to any Securities of such series required to be made
pursuant to the terms of such Securities as and to the extent provided for by
the terms of such Securities; provided that the Securities to be so credited
have not been previously so credited. The Securities to be so credited shall be
received and credited for such purpose by the Trustee at the Redemption Price,
as specified in the Securities so to be redeemed, for redemption through
operation of the sinking fund and the amount of such sinking fund payment shall
be reduced accordingly.
Section 1203. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any
Securities, the Company will deliver to the Trustee an Officers' Certificate
specifying the amount of the next ensuing sinking fund payment for such
Securities pursuant to the terms of such Securities, the portion thereof, if
any, which is to be satisfied by payment of cash and the portion thereof, if
any, which is to be satisfied by delivering and crediting Securities pursuant to
Section 1202 and stating the basis for such credit and that such Securities have
not been previously so credited and will also deliver to the Trustee any
Securities to be so delivered. Not less than 30 days prior to each such sinking
fund payment date, the Trustee shall select the Securities to be redeemed upon
such sinking fund payment date in the manner specified in Section 1103 and cause
notice of the redemption thereof to be given in the name of and at the expense
of the Company in the manner provided in Section 1104. Such notice having been
duly given, the redemption of such Securities shall be made upon the terms and
in the manner stated in Sections 1106 and 1107.
ARTICLE THIRTEEN
Defeasance and Covenant Defeasance
Section 1301. Company's Option to Effect Defeasance or Covenant Defeasance.
The Company may elect, at its option at any time, to have Section 1302
or Section 1303 applied to any Securities or any series of Securities, as the
case may be, designated pursuant to Section 301 as being defeasible pursuant to
such Section 1302 or 1303, in accordance with any applicable requirements
provided pursuant to Section 301 and upon compliance with the conditions set
forth below in this Article. Any such election shall be evidenced by a Board
Resolution or in another manner specified as contemplated by Section 301 for
such Securities.
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Section 1302. Defeasance and Discharge.
Upon the Company's exercise of its option (if any) to have this Section
applied to any Securities or any series of Securities, as the case may be, the
Company shall be deemed to have been discharged from its obligations, and the
provisions of Article Fourteen shall cease to be effective, with respect to such
Securities as provided in this Section on and after the date the conditions set
forth in Section 1304 are satisfied (hereinafter called "Defeasance"). For this
purpose, such Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by such Securities and to have
satisfied all its other obligations under such Securities and this Indenture
insofar as such Securities are concerned (and the Trustee, at the expense of the
Company, shall execute proper instruments acknowledging the same), subject to
the following which shall survive until otherwise terminated or discharged
hereunder: (1) the rights of Holders of such Securities to receive, solely from
the trust fund described in Section 1304 and as more fully set forth in such
Section, payments in respect of the principal of and any premium and interest on
such Securities when payments are due, (2) the Company's obligations with
respect to such Securities under Sections 304, 305, 306, 1002 and 1003 and with
respect to the Trustee under Section 607, (3) the rights, powers, trusts, duties
and immunities of the Trustee hereunder and (4) this Article. Subject to
compliance with this Article, the Company may exercise its option (if any) to
have this Section applied to any Securities notwithstanding the prior exercise
of its option (if any) to have Section 1303 applied to such Securities.
Section 1303. Covenant Defeasance.
Upon the Company's exercise of its option (if any) to have this Section
applied to any Securities or any series of Securities, as the case may be, (1)
the Company shall be released from its obligations under Section 801(3),
Sections 1006 through 1007, inclusive, and any covenants provided pursuant to
Section 301(19), 901(2), 901(6) or 901(7) for the benefit of the Holders of such
Securities and (2) the occurrence of any event specified in Sections 501(4)
(with respect to any of Section 801(3), Sections 1006 through 1007, inclusive,
and any such covenants provided pursuant to Section 301(19), 901(2), 901(6) or
901(7)), and 501(7) shall be deemed not to be or result in an Event of Default
and the provisions of Article Fourteen shall cease to be effective, in each case
with respect to such Securities as provided in this Section on and after the
date the conditions set forth in Section 1304 are satisfied (hereinafter called
"Covenant Defeasance"). For this purpose, such Covenant Defeasance means that,
with respect to such Securities, the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such specified Section (to the extent so specified in the case of Section
501(4)) or Article Fourteen, whether directly or indirectly by reason of any
reference elsewhere herein to any such Section or Article or by reason of any
reference in any such Section or Article to any other provision herein or in any
other document, but the remainder of this Indenture and such Securities shall be
unaffected thereby.
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Section 1304. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to the application of Section
1302 or Section 1303 to any Securities or any series of Securities, as the case
may be:
(1) The Company shall irrevocably have deposited or caused to
be deposited with the Trustee as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for,
and dedicated solely to, the benefit of the Holders of such Securities,
(A) money in an amount, or (B) U.S. Government Obligations which
through the scheduled payment of principal and interest in respect
thereof in accordance with their terms will provide, not later than one
day before the due date of any payment, money in an amount, or (C) a
combination thereof, in each case sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed
in a written certification thereof delivered to the Trustee, to pay and
discharge, and which shall be applied by the Trustee to pay and
discharge, the principal of and any premium and interest on such
Securities on the respective Stated Maturities or on any Redemption
Date established pursuant to clause (9) below, in accordance with the
terms of this Indenture and such Securities. As used herein, "U.S.
Government Obligation" means (x) any security which is (i) a direct
obligation of the United States of America for the payment of which the
full faith and credit of the United States of America is pledged or
(ii) an obligation of a Person controlled or supervised by and acting
as an agency or instrumentality of the United States of America the
payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either
case (i) or (ii), is not callable or redeemable at the option of the
issuer thereof, and (y) any depositary receipt issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with
respect to any U.S. Government Obligation which is specified in Clause
(x) above and held by such bank for the account of the holder of such
depositary receipt, or with respect to any specific payment of
principal of or interest on any U.S. Government Obligation which is so
specified and held, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount
payable to the holder of such depositary receipt from any amount
received by the custodian in respect of the U.S. Government Obligation
or the specific payment of principal or interest evidenced by such
depositary receipt.
(2) In the event of an election to have Section 1302 apply to
any Securities or any series of Securities, as the case may be, the
Company shall have delivered to the Trustee an Opinion of Counsel
stating that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the
date of this instrument, there has been a change in the applicable
Federal income tax law, in either case (A) or (B) to the effect that,
and based thereon such opinion shall confirm that, the Holders of such
Securities will not recognize gain or loss for Federal income tax
purposes as a result of the deposit, Defeasance and discharge to be
effected with respect to such Securities and will be subject to Federal
income tax on the same amount, in the same manner and at the same times
as would be the case if such deposit, Defeasance and discharge were not
to occur.
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(3) In the event of an election to have Section 1303 apply to
any Securities or any series of Securities, as the case may be, the
Company shall have delivered to the Trustee an Opinion of Counsel to
the effect that the Holders of such Securities will not recognize gain
or loss for Federal income tax purposes as a result of the deposit and
Covenant Defeasance to be effected with respect to such Securities and
will be subject to Federal income tax on the same amount, in the same
manner and at the same times as would be the case if such deposit and
Covenant Defeasance were not to occur.
(4) The Company shall have delivered to the Trustee an
Officers' Certificate to the effect that neither such Securities nor
any other Securities of the same series, if then listed on any
securities exchange, will be delisted as a result of such deposit.
(5) No event which is, or after notice or lapse of time or
both would become, an Event of Default with respect to such Securities
or any other Securities shall have occurred and be continuing at the
time of such deposit or, with regard to any such event specified in
Sections 501(5) and (6), at any time on or prior to the 90th day after
the date of such deposit (it being understood that this condition shall
not be deemed satisfied until after such 90th day).
(6) Such Defeasance or Covenant Defeasance shall not cause
the Trustee to have a conflicting interest within the meaning of the
Trust Indenture Act (assuming all Securities are in default within the
meaning of such Act).
(7) Such Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company is a party or by which it
is bound.
(8) Such Defeasance or Covenant Defeasance shall not result
in the trust arising from such deposit constituting an investment
company within the meaning of the Investment Company Act unless such
trust shall be registered under such Act or exempt from registration
thereunder.
(9) If the Securities are to be redeemed prior to Stated
Maturity (other than from mandatory sinking fund payments or analogous
payments), notice of such redemption shall have been duly given
pursuant to this Indenture or provision therefor satisfactory to the
Trustee shall have been made.
(10) At the time of such deposit, (A) no default in the
payment of any principal of or premium or interest on any Senior Debt
shall have occurred and be continuing, (B) no event of default with
respect to any Senior Debt shall have resulted in such Senior Debt
becoming, and continuing to be, due and payable prior to the date on
which it would otherwise have become due and payable (unless payment of
such Senior Debt has been made or duly provided for), and (C) no other
event of default with respect to any Senior Debt shall
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have occurred and be continuing permitting (after notice or lapse of
time or both) the holders of such Senior Debt (or a trustee on behalf
of such holders) to declare such Senior Debt due and payable prior to
the date on which it would otherwise have become due and payable.
(11) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent with respect to such Defeasance or Covenant
Defeasance have been complied with.
Section 1305. Deposited Money and U.S. Government Obligations to Be Held in
Trust; Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee pursuant to Section 1304 in respect of any Securities shall be
held in trust and applied by the Trustee, in accordance with the provisions of
such Securities and this Indenture, to the payment, either directly or through
any such Paying Agent (including the Company acting as its own Paying Agent) as
the Trustee may determine, to the Holders of such Securities, of all sums due
and to become due thereon in respect of principal and any premium and interest,
but money so held in trust need not be segregated from other funds except to the
extent required by law.
Money and U.S. Government Obligations so held in trust shall not be
subject to the provisions of Article Fourteen.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 1304 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of Outstanding Securities.
Anything in this Article to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon Company Request any
money or U.S. Government Obligations held by it as provided in Section 1304 with
respect to any Securities which, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect the Defeasance or Covenant Defeasance, as
the case may be, with respect to such Securities.
Section 1306. Reinstatement.
If the Trustee or the Paying Agent is unable to apply any money in
accordance with this Article with respect to any Securities by reason of any
order or judgment of any court or governmental authority enjoining, restraining
or otherwise prohibiting such application, then the obligations under this
Indenture and such Securities from which the Company has been discharged or
released pursuant to Section 1302 or 1303 shall be revived and reinstated as
though no deposit
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had occurred pursuant to this Article with respect to such Securities, until
such time as the Trustee or Paying Agent is permitted to apply all money held in
trust pursuant to Section 1305 with respect to such Securities in accordance
with this Article; provided, however, that at any such time or during the
continuance of any such event, the Company may request the return of all money
or securities deposited hereunder with respect to such Securities and the
Trustee will return to the Company all such money and securities.
ARTICLE FOURTEEN
Subordination of Securities
Section 1401. Securities Subordinate to Senior Indebtedness.
Unless otherwise provided in a supplemental indenture or pursuant to
Section 301, the Company covenants and agrees, and each Holder of Securities
issued hereunder by his acceptance thereof likewise covenants and agrees, that
all Securities shall be issued subject to the provisions of this Article
Fourteen; and each Holder of a Security, whether upon original issue or upon
transfer or assignment thereof, accepts and agrees to be bound by such
provisions.
The payment of all Obligations on all Securities issued hereunder
shall, to the extent and in the manner hereinafter set forth, be subordinate and
junior in right of payment to the prior payment in full of all Obligations on
Senior Indebtedness, whether outstanding at the date of this Indenture or
thereafter incurred.
No provision of this Article Fourteen shall prevent the occurrence of
any default or Event of Default hereunder.
Section 1402. Suspension of Payment When Senior Indebtedness in Default.
(a) If any default occurs and is continuing in the payment
when due, whether at maturity, upon any redemption, by acceleration or
otherwise, of any principal, premium or interest on any Senior
Indebtedness, no payment of any kind or character shall be made by or
on behalf of the Company or any other Person on its behalf with respect
to any Obligations on the Securities or to acquire any of the
Securities for cash or property or otherwise.
(b) In addition, if any other event of default occurs and is
continuing with respect to any Senior Indebtedness, other than
Designated Senior Indebtedness, as such event of default is defined in
the instrument creating or evidencing such Senior Indebtedness,
permitting the holders of such Senior Indebtedness then outstanding to
immediately accelerate the maturity thereof and if a representative for
such issue of Senior Indebtedness gives written notice of the event of
default to the Trustee (a "Default Notice"), then unless and until all
events of default with respect to such Senior Indebtedness have been
cured, or
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waived in writing or have ceased to exist or the Trustee receives
notice from such representative for the respective issue of Senior
Indebtedness terminating the Blockage Period (as defined below), during
the 179 days after the delivery of such Default Notice (the "Blockage
Period"), neither the Company nor any other Person on its behalf shall
(x) make any payment of any kind or character with respect to any
Obligations on the Securities or (y) acquire any of the Securities for
cash or property or otherwise. Notwithstanding anything herein to the
contrary, in no event will a Blockage Period extend beyond 179 days
from the date the payment on the Securities was due and only one such
Blockage Period may be commenced within any 365 consecutive days,
irrespective of the number of defaults with respect to Senior
Indebtedness during such period. In no event may the total number of
days during which any Blockage Period is or Blockage Periods are in
effect exceed 179 days in the aggregate during any consecutive 365 day
period. No event of default which existed or was continuing on the date
of the commencement of any Blockage Period with respect to the Senior
Indebtedness shall be, or be made, the basis for commencement of a
second Blockage Period by a representative of such Senior Indebtedness
unless such event of default shall have been cured or waived for a
period of not less than 90 consecutive days (it being acknowledged that
any subsequent action, or any breach of any financial covenants for a
period commencing after the date of commencement of such Blockage
Period that, in either case, would give rise to an event of default
pursuant to any provisions under which an event of default previously
existed or was continuing shall constitute a new event of default for
this purpose.)
(c) In addition, if any event of default (as defined in the
instrument creating or evidencing any Designated Senior Indebtedness)
occurs and is continuing with respect to any Designated Senior
Indebtedness or an executive officer of the Company has actual
knowledge of a default under any Designated Senior Indebtedness, which
with notice or lapse of time or both would result in an event of
default under such Designated Senior Indebtedness, then the Company
shall give notice thereof to the Trustee and, regardless of the giving
of such notice, no payment of any kind or character shall be made by or
on behalf of the Company or any other Person on its behalf with respect
to any Obligations on the Securities or to acquire any of the
Securities for cash or property or otherwise for a period of 179 days
from the date of each such event of default on the date that an
executive officer obtains actual knowledge that there is such a default
(a "Designated Senior Indebtedness Blockage Period"), unless and until
all such events of defaults or defaults with respect to such Designated
Senior Indebtedness have been cured or waived in writing pursuant to
the Designated Senior Indebtedness or have ceased to exist or the
Trustee receives notice from a representative for the applicable issue
of Designated Senior Indebtedness terminating the Designated Senior
Indebtedness Blockage Period. Immediately upon receipt of a notice of
default from a representative of any Designated Senior Indebtedness by
the Company, the Company shall give notice thereof to the Trustee, but
the failure of the Company to give such notice shall not affect the
rights of the Designated Senior Indebtedness hereunder.
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(d) The Company further agrees, for the benefit of the holders
of Designated Senior Indebtedness, that in the event any Security is
declared due and payable under Section 502 hereof before its expressed
maturity, (i) the Company will give prompt notice in writing of such
happening to the holders of Designated Senior Indebtedness and (ii) no
payment of any kind or character shall be made by or on behalf of the
Company or any other Person on its behalf with respect to any
Obligations on the Securities or to acquire any of the Securities for
cash or property or otherwise without the consent of the Designated
Senior Indebtedness.
Section 1403. Payment Over of Proceeds Upon Dissolution, Etc.
(a) Upon any payment by the Company, or distribution of assets
of the Company of any kind or character, whether in cash, property or
securities, to creditors upon any liquidation, dissolution, winding-up,
assignment for the benefit of creditors or marshaling of assets of the
Company or in bankruptcy, reorganization, insolvency, receivership or
other similar proceeding relating to the Company or its property,
whether voluntary or involuntary, all Obligations due or to become due
upon all Senior Indebtedness shall first be paid in full, or payment
thereof duly provided for to the satisfaction of holders of Senior
Indebtedness, before any payment or distribution of any kind or
character is made on account of any Obligations on the Securities, or
for the acquisition of any of the Securities for cash, or property, or
otherwise. Upon any such dissolution, winding-up, liquidation,
reorganization, receivership or similar proceeding, any payment by the
Company, or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to which the
Holders of the Securities or the Trustee for the benefit of such
Holders would be entitled, except for the provisions of this Article
Fourteen, shall be paid by the Company or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, or by the Holders of the Securities or by the
Trustee under this Indenture if received by them or it, directly to the
holders of Senior Indebtedness (pro rata to such holders on the basis
of the respective amounts of Senior Indebtedness held by such holders)
or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments
evidencing any Senior Indebtedness may have been issued, as their
respective interests may appear to the extent necessary to pay all
Senior Indebtedness in full, in money or money's worth, after giving
effect to any concurrent payment or distribution or provision therefor
to or for the holders of Senior Indebtedness, before any payment or
distribution is made to the Holders of Securities or to the Trustee for
the benefit of such Holders.
(b) To the extent any payment of Senior Indebtedness (whether
by or on behalf of the Company, as proceeds of security or enforcement
of any right of setoff or otherwise) is declared to be fraudulent or
preferential, set aside or required to be paid to any receiver, trustee
in bankruptcy, liquidating trustee, agent or other similar Person under
any bankruptcy, insolvency, receivership, fraudulent conveyance or
similar law, then, if such payment is recovered by, or paid over to,
such receiver, trustee in bankruptcy, liquidating trustee, agent or
other similar Person, the Senior Indebtedness or part thereof
originally
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intended to be satisfied shall be deemed to be reinstated and
outstanding as if such payment had not occurred.
For purposes of this Article Fourteen, the words, "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
is subordinated at least to the extent provided in this Article Fourteen with
respect to the Securities to the payment of all Senior Indebtedness which may at
the time be outstanding; provided that (i) the Senior Indebtedness is assumed by
the new corporation, if any, resulting from any such reorganization or
readjustment, and (ii) the rights of the holders of the Senior Indebtedness are
not, without the consent pursuant to such Senior Indebtedness, altered by such
reorganization or readjustment. The consolidation of the Company with, or the
merger of the Company into, another corporation or the liquidation or
dissolution of the Company following the conveyance, transfer or lease of its
property as an entirety, or substantially as an entirety, to another corporation
upon the terms and conditions provided for in Article Eight hereof shall not be
deemed a dissolution, winding-up, or liquidation for the proposes of this
Section 1403 if such other corporation shall, as a part of such consolidation,
merger, conveyance or transfer, comply with the conditions stated in Article
Eight hereof.
Section 1404. Monies Held in Trust.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, prohibited by the foregoing, shall be received by the
Holders of the Securities or by the Trustee on behalf of such Holders in
violation of this Article Fourteen, such payment or distribution shall be held
in trust for the benefit of and shall be paid over or delivered to the holders
of Senior Indebtedness (pro rata to such holders on the basis of the respective
amounts of Senior Indebtedness held by such holders) or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing any Senior Indebtedness may have been issued,
as their respective interests may appear, for application to the payment of all
Senior Indebtedness remaining unpaid in full in money or monies worth in
accordance with its terms, after giving effect to any concurrent payment or
distribution or provision therefor to or for the holders of such Senior
Indebtedness.
Section 1405. Subrogation to Rights of Holders of Senior Indebtedness.
Subject to the payment in full of all Senior Indebtedness, the Holders
of the Securities shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the
Obligations on the Securities shall be paid in full; and, for the purposes of
such subrogation, no payment or distributions to the holders of the Senior
Indebtedness of any cash, property or securities to which the Holders of the
Securities or the Trustee would be entitled except for the provisions of this
Article Fourteen, and no payment over pursuant to the provisions of this Article
Fourteen, to or for the benefit of the holders of Senior Indebtedness by Holders
of the Securities or the Trustee,
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shall, as between the Company, its creditors other than holders of Senior
Indebtedness, and the Holders of the Securities, be deemed to be a payment by
the Company to or on account of the Senior Indebtedness. It is understood that
the provisions of this Article Fourteen are and are intended solely for the
purposes of defining the relative rights of the Holders of the Securities, on
the one hand, and the holders of the Senior Indebtedness on the other hand.
Section 1406. Unconditional Obligation.
Nothing contained in this Article Fourteen or elsewhere in this
Indenture or in the Securities is intended to or shall impair, as between the
Company and the Holders of the Securities, the obligation of the Company, which
is absolute and unconditional, to pay to the Holders of the Securities the
principal of (and premium, if any) and interest on the Securities as and when
the same shall become due and payable in accordance with their terms, or is
intended to or shall affect the relative rights of the Holders of the Securities
and creditors of the Company other than the holders of the Senior Indebtedness,
nor shall anything herein or therein prevent the Trustee or the Holder of any
Security from taking any action to accelerate the maturity of Securities
pursuant to Section 502 or from exercising all remedies otherwise permitted by
applicable law upon default under this Indenture, subject to the rights, if any,
under this Article Fourteen of the holders of Senior Indebtedness in respect of
cash, property or securities of the Company received upon the exercise of any
such remedy.
Section 1407. Trustee to Effectuate Subordination.
Each Holder of a Security by his acceptance thereof authorizes and
directs the Trustee in his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article Fourteen
and appoints the Trustee his attorney-in-fact for any and all such purposes.
Section 1408. Notice to Trustee.
The Company shall give prompt written notice to a Responsible Officer
of the Trustee of any fact known to the Company which would prohibit the making
of any payment of monies to or by the Trustee in respect of the Securities
pursuant to the provisions of this Article Fourteen; provided, however, that
except as provided in Section 1402(c) hereof, nothing herein shall require the
Company to give any notice of a default on any of the Senior Indebtedness other
than a payment default, and the Company shall not be deemed a representative of
the Senior Indebtedness for purposes of instituting a Blockage Period.
Notwithstanding the provisions of this Article Fourteen or any other provision
of this Indenture, the Trustee shall not be charged with knowledge of the
existence of any facts which would prohibit the making of any payment of monies
to or by the Trustee in respect of the Securities pursuant to the provisions of
this Article Fourteen, unless and until a Responsible Officer of the Trustee
shall have received written notice thereof at the Corporate Trust Office of the
Trustee from the Company or a holder or holders of Senior Indebtedness or their
representative or representatives or from any trustee or trustees therefor; and
before the receipt of
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any such written notice, the Trustee, subject to the provisions of Article Six,
shall be entitled in all respects to assume that no such facts exist; provided,
however, that if the Trustee shall not have received the notice provided for in
this Section 1408 prior to the date upon which by the terms hereof any money may
become payable for any purpose (including, without limitation, the payment of
the principal of (or premium, if any) or interest on any Security), then,
anything herein contained to the contrary notwithstanding, the Trustee shall
have full power and authority to receive such money and to apply the same to the
purposes for which they were received.
The Trustee shall be entitled to rely on information regarding amounts
then due and owing on the Senior Indebtedness, if any, received from the holders
of Senior Indebtedness (or their representatives) or, if such information is not
received from such holders or their representatives, from the Company and only
amounts included in the information provided to the Trustee shall be paid to the
holders of Senior Indebtedness.
The Trustee, subject to the provisions of Article Six, shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a representative
or trustee on behalf of such holder) to establish that such notice has been
given by a holder of Senior Indebtedness or a representative or trustee on
behalf of any such holder or holders. In the event that the Trustee determines
in good faith that further evidence is required with respect to the right of any
Person as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Article Fourteen, the Trustee may request such
Person to furnish evidence to the reasonable satisfaction of the Trustee as to
the amount of Senior Indebtedness held by such Person, the extent to which such
Person is entitled to participate in such payment or distribution and any other
facts pertinent to the rights of such Person under this Article Fourteen, and if
such evidence is not furnished the Trustee may defer any payment to such Person
pending judicial determination as to the right of such Person to receive such
payment.
Upon any payment or distribution of assets of the Company referred to
in this Article Fourteen, the Trustee, subject to the provision of Article Six,
and the Holders of the Securities shall be entitled to rely upon any order or
decree made by any court of competent jurisdiction in which such dissolution,
winding-up, liquidation or reorganization proceedings are pending, or a
certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent
or other person making such payment or distribution, delivered to the Trustee or
to the Holders of the Securities, for the purposes of ascertaining the persons
entitled to participate in such distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article Fourteen.
Section 1409. Rights of Trustee as Holder of Senior Indebtedness; Preservation
of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article Fourteen in respect of any Senior Indebtedness
at any time held by it, to the same extent as any other
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holder of Senior Indebtedness, and nothing in this Indenture shall deprive the
Trustee of any of its rights as such holder.
Nothing in this Article Fourteen shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 607.
Section 1410. Trustee Not Fiduciary for Holders of Senior Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and, subject to the provisions of Article Six,
the Trustee shall not be liable to any holder of Senior Indebtedness if it shall
in good faith mistakenly pay over or deliver to Holders of Securities, the
Company or any other person money or assets to which any holder of Senior
Indebtedness shall be entitled by virtue of this Article Fourteen or otherwise.
Section 1411. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms, provisions and covenants of this
Indenture, regardless of any knowledge thereof which any such holder may have or
otherwise be charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article or
the obligations hereunder of the Holders of the Securities to the holders of
Senior Indebtedness, do any one or more of the following: (i) change the manner,
place or terms of payment or extend the time of payment of, or renew or alter,
Senior Indebtedness, or otherwise amend or supplement in any manner Senior
Indebtedness or any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise
deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (iii) release any person liable in any manner for the collection
of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights
against the Company and any other Person.
Each Holder by purchasing or accepting a Security waives any and all
notice of the creation, modification, renewal, extension or accrual of any
Senior Indebtedness and notice of or proof of reliance by any holder or owner of
Senior Indebtedness upon this Article Fourteen and Senior Indebtedness shall
conclusively be deemed to have been created, contracted or incurred in reliance
upon this Article Fourteen, and all dealings between the Company and the holders
and owners of Senior Indebtedness shall be deemed to have been consummated in
reliance upon this Article Fourteen.
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Section 1412. Defeasance of this Article Fourteen.
The subordination of the Securities provided by this Article Fourteen
shall apply only to Securities that are Outstanding under this Indenture and is
expressly made subject to the provisions for Defeasance or Covenant Defeasance
in Article Thirteen hereof and the provisions for satisfaction and discharge of
this Indenture in Article Four hereof and, anything herein to the contrary
notwithstanding, upon the effectiveness of any such Defeasance or Covenant
Defeasance or any such satisfaction and discharge, the Securities then
Outstanding shall thereupon cease to be subordinated pursuant to this Article
Fourteen.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
In Witness Whereof, the parties hereto have caused this Indenture to be
duly executed all as of the day and year first above written.
UGLY DUCKLING CORPORATION
By: /s/ Steven P. Johnson
----------------------------------------
Steven P. Johnson
----------------------------------------
Sr. Vice President and Secretary
----------------------------------------
Attest:
/s/ Judith A. Boyle
- ---------------------------
HARRIS TRUST AND SAVINGS BANK, as Trustee
By: /s/ Robert D. Foltz
----------------------------------------
Robert D. Foltz
----------------------------------------
Vice President
----------------------------------------
Attest:
/s/ Megan M. Francis
- ---------------------------
Megan M. Francis
Assistant Secretary
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State of Arizona )
) ss.:
County of Maricopa )
On the 22 day of October, 1998 before me personally came Steven P.
Johnson, to me known, who, being by me duly sworn, did depose and say that he is
Senior Vice President of Ugly Duckling Corporation, one of the corporations
described in and which executed the foregoing instrument.
/s/ Peggy Sue Hurst
-------------------------------------
State of Illinois )
) ss.:
County of Cook )
On the 23 day of October, 1998, before me personally came R. Foltz, to
me known, who, being by me duly sworn, did depose and say that he is Vice
President of Harris Trust and Savings Bank, one of the corporations described in
and which executed the foregoing instrument; that he knows the seal of said
corporation; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
/s/ Maricela Marquez
-------------------------------------
72
<PAGE> 1
EXHIBIT T3C.2
UGLY DUCKLING CORPORATION
TO
HARRIS TRUST AND SAVINGS BANK
Trustee
First Supplemental Indenture
Dated as of October 15, 1998
To
Indenture
Dated as of October 15, 1998
12% Subordinated Debentures due 2003
FIRST SUPPLEMENTAL INDENTURE, dated as of October 15, 1998,
between Ugly Duckling Corporation, a corporation duly organized and existing
under the laws of the State of Arizona (herein called the "Company"), having its
principal office at 2525 East Camelback Road, Suite 1150, Phoenix, Arizona
85016, and Harris Trust and Savings Bank, an Illinois banking corporation, as
Trustee (herein called the "Trustee") under the Indenture dated as of October
15, 1998 between the Company and the Trustee (the "Indenture").
<PAGE> 2
Recitals of the Company
The Company has executed and delivered the Indenture to the
Trustee to provide for the issuance from time to time of its unsecured
debentures, notes or other evidences of indebtedness (the "Securities"), said
Securities to be issued in one or more series as in the Indenture provided.
Pursuant to the terms of the Indenture, the Company desires to
provide for the establishment of a new series of its Securities to be known as
its 12% Subordinated Debentures due 2003 (herein called the "Debentures"), the
form and substance of such Debentures and the terms, provisions and conditions
thereof to be set forth as provided in the Indenture and this First Supplemental
Indenture.
All things necessary to make this First Supplemental Indenture
a valid agreement of the Company, and to make the Debentures, when executed by
the Company and authenticated and delivered by the Trustee, the valid
obligations of the Company, have been done.
Now, Therefore, This First Supplemental Indenture Witnesseth:
For and in consideration of the premises and the purchase of
the Debentures by the Holders thereof, and for the purpose of setting forth, as
provided in the Indenture, the form and substance of the Debentures and the
terms, provisions and conditions thereof, it is mutually agreed, for the equal
and proportionate benefit of all Holders of the Debentures, as follows:
ARTICLE ONE
General Terms and Conditions of
the Debentures
Section 101. There shall be and is hereby authorized a series
of Securities designated the "12% Subordinated Debentures due 2003", limited in
aggregate principal amount to $32,500,000, which amount shall be as set forth in
any written order of the Company for the authentication and delivery of
Debentures. The Debentures shall mature and the principal shall be due and
payable together with all accrued and unpaid interest thereon on the fifth
anniversary of the date of initial issuance thereof and shall be issued in the
form of registered Debentures without coupons in denominations of $1.00 and any
integral multiple thereof.
Section 102. Except as provided in Section 103 herein, the
Debentures shall be issued in certificated form. Principal and interest on the
Debentures issued in certificated form will be payable, the transfer of such
Debentures will be registrable and such Debentures will be exchangeable for the
Debentures bearing identical terms and provisions at the Corporate Trust Office
of the Trustee from time to time, which is initially in Chicago, Illinois;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the registered holder at such address as shall appear
in the Security Register.
2
<PAGE> 3
Section 103. Each Note will bear interest at the rate of 12%
per annum from the original date of issuance until the principal thereof becomes
due and payable, and on any overdue principal, payable semiannually on April 15
and October 15 of each calendar year (each, an "Interest Payment Date"),
commencing on April 15, 1999, to the person in whose name such Note or any
predecessor Note is registered, at the close of business on each April 1 and
October 1 next preceding such Interest Payment Date. Any such interest
installment not punctually paid or duly provided for shall forthwith cease to be
payable to the registered holders on such Regular Record Date, and may be paid
to the person in whose name the Note (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date to be fixed by the
Trustee for the payment of such defaulted interest, notice whereof shall be
given to the registered holders of the Debentures not less than 10 days prior to
such Special Record Date, or may be paid at any time in any other lawful manner
not inconsistent with the requirements of any securities exchange on which the
Debentures may be listed, and upon such notice as may be required by such
exchange, all as more fully provided in the Indenture.
The amount of interest payable for any period will be computed
on the basis of a 360-day year of twelve 30-day months. Interest will accrue
from the date of original issuance to, but not including, the relevant payment
date. In the event that any date on which interest is payable on the Debentures
is not a Business Day, then payment of interest payable on such date will be
made on the next succeeding day which is a Business Day (and without any
interest or other payment in respect of any such delay), in each case with the
same force and effect as if made on such date.
Section 104. The Debentures shall be defeasible pursuant to
Section 1302 and Section 1303 of the Indenture.
ARTICLE TWO
Redemption of the Debentures
Section 201. The Debentures will be redeemable at any time and
from time to time prior to maturity at the option of the Company, as a whole or
in part, upon not less than 30 nor more than 60 days' notice, at the principal
amount to be redeemed, together with accrued interest to the date fixed for
redemption.
ARTICLE THREE
Additional Covenants
Section 301. Definitions. For purposes of this Article Three,
except as otherwise expressly provided or unless the context otherwise requires:
"CONSOLIDATED LEVERAGE RATIO" as of any date of determination
means the ratio of (i) the total liabilities of the Company and its
consolidated Subsidiaries, as determined in accordance with GAAP,
excluding Junior Subordinated Obligations, to (ii) the Consolidated Net
Worth of the Company.
3
<PAGE> 4
"CONSOLIDATED NET WORTH" as of any date of determination means
the consolidated stockholders' equity of the Company and its
consolidated Subsidiaries, as determined in accordance with GAAP, plus
all Junior Subordinated Obligations of the Company and its consolidated
Subsidiaries.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect from time to time.
"JUNIOR SUBORDINATED OBLIGATION" means any indebtedness of the
Company or its Subsidiaries that by its terms is expressly subordinated
in right of payment to the Debentures.
Section 302. Minimum Equity. The Company shall, at all times
while any of the Debentures remain Outstanding, maintain Consolidated Net Worth
of at least $100,000,000.
Section 303. Consolidated Leverage Ratio. The Company will not
allow its Consolidated Leverage Ratio to exceed 6.0 to 1.0.
ARTICLE FOUR
Form of Debentures
Section 401. The Debentures and the Trustee's certificate of
authentication to be endorsed thereon are to be substantially in the following
form:
[INSERT OID LEGEND]
UGLY DUCKLING CORPORATION
No. _____________ $______________
CUSIP NO. __________________ Date of Original Issuance: October __, 1998
Ugly Duckling Corporation, a corporation duly organized and existing
under the laws of Delaware (herein called the "Company," which term includes any
successor Person under the Indenture hereinafter referred to), for value
received, hereby promises to pay to ______________ or registered assigns, the
principal sum of ___________ Dollars on the date that is five (5) years from the
date of original issuance set forth above, and to pay interest thereon from the
original date of issuance or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, semi-annually on April 15 and
October 15 in each year, commencing April 15, 1999, at the rate of 12% per
annum, until the principal hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any Interest
Payment Date will, as provided in such Indenture, be paid to the Person in whose
4
<PAGE> 5
name this Security (or one or more Predecessor Securities) is registered at the
close of business on the Regular Record Date for such interest, which shall be
the April 1 or October 1 (whether or not a Business Day), as the case may be,
next preceding such Interest Payment Date. Any such interest not so punctually
paid or duly provided for will forthwith cease to be payable to the Holder on
such Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Securities
of this series not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities of this series
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
Payment of the principal of (and premium, if any) and any such interest
on this Security will be made at the office or agency of the Company maintained
for that purpose in Chicago, Illinois, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts; provided, however, that at the option of the Company
payment of interest may be made by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
In Witness Whereof, the Company has caused this instrument to be duly
executed.
UGLY DUCKLING CORPORATION
By_______________________________________
Attest:
- ----------------------
5
<PAGE> 6
Form of Reverse of Security.
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under an Indenture, dated as of October 15, 1998 (herein called the
"Indenture", which term shall have the meaning assigned to it in such
instrument), between the Company and Harris Bank and Trust Company, as Trustee
(herein called the "Trustee", which term includes any successor trustee under
the Indenture), and reference is hereby made to the Indenture for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Company, the Trustee and the Holders of the Securities and of the terms
upon which the Securities are, and are to be, authenticated and delivered. This
Security is one of the series designated on the face hereof, limited in
aggregate principal amount to $32,500,000.
The Securities of this series are subject to redemption upon not less
than 30 days' notice by mail, at any time, as a whole or in part, at the
election of the Company, at a Redemption Price equal to 100% of the principal
amount, together with accrued interest to the Redemption Date, but interest
installments whose Stated Maturity is on or prior to such Redemption Date will
be payable to the Holders of such Securities, or one or more Predecessor
Securities, of record at the close of business on the relevant Record Dates
referred to on the face hereof for such interest installments, all as provided
in the Indenture. The Indenture provides that a notice of redemption may be
given that is conditional upon the receipt by the Trustee on or prior to the
Redemption Date of amounts sufficient to pay principal of, and premium, if any,
and interest on, the Securities to be redeemed, and that if such amounts shall
not have been so received, said notice shall be of no force and effect, the
Securities to be redeemed will not become due and payable on the Redemption
Date, and the Company will not be required to redeem such Securities on such
date.
In the event of redemption of this Security in part only, a new
Security or Securities of this series and of like tenor for the unredeemed
portion hereof will be issued in the name of the Holder hereof upon the
cancellation hereof.
The Securities of this series are subordinate in right of payment, in
the manner and to the extent set forth in the Indenture, to the prior payment in
full of all Senior Indebtedness of the Company. To the extent and in the manner
provided in the Indenture, Senior Indebtedness must be paid before any payment
may be made to any Holder of this Security. Any Holder by accepting this
Security agrees to the subordination and authorizes the Trustee to give it
effect.
The Indenture contains provisions for defeasance at any time of the
entire indebtedness of this Security or certain restrictive covenants and Events
of Default with respect to this Security, in each case upon compliance with
certain conditions set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall
occur and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
6
<PAGE> 7
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee without
the consent of any Holders in certain limited cases, and with the consent of the
Holders of a majority in principal amount of the Securities at the time
Outstanding of each series to be affected subject to certain exceptions. The
Indenture also contains provisions permitting the Holders of specified
percentages in principal amount of the Securities of each series at the time
Outstanding, on behalf of the Holders of all Securities of such series, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver shall be conclusive and binding upon the Holder of this Security and upon
all future Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange herefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the
Holder of this Security shall not have the right to institute any proceeding
with respect to the Indenture or for the appointment of a receiver or trustee or
for any other remedy thereunder, unless such Holder shall have previously given
the Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and shall have failed to institute any such proceeding, for 60
days after receipt of such notice, request and offer of indemnity. The foregoing
shall not apply to any suit instituted by the Holder of this Security for the
enforcement of any payment of principal hereof or any premium or interest hereon
on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and any premium and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of and any
premium and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
this series and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees.
7
<PAGE> 8
The Securities of this series are issuable only in registered form
without coupons in denominations of $1.00 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
ARTICLE FIVE
Original Issue of Debentures
Section 501. Debentures in the aggregate principal amount of
$32,500,000, may, upon execution of this First Supplemental Indenture, or from
time to time thereafter, be executed by the Company and delivered to the Trustee
for authentication, and the Trustee shall thereupon authenticate and deliver
said Debentures to or upon the written order of the Company, signed by its
Chairman, its President, or any Vice President and its Treasurer, an Assistant
Treasurer, its Secretary or an Assistant Secretary, without any further action
by the Company.
ARTICLE SIX
Application of Article Fourteen
Section 6.01. The Debentures will be subject to the
subordination provisions of Article Fourteen of the Indenture. Notwithstanding
the definition of Senior Indebtedness in the Indenture, for purposes of the
Debentures, Senior Indebtedness will include the Company's 10% Subordinated
Debenture dated June 21, 1996 payable to Verde Investments, Inc.
8
<PAGE> 9
ARTICLE SEVEN
Paying Agent and Registrar
Section 701. The Trustee will be the Paying Agent, transfer
agent, and Registrar for the Debentures.
ARTICLE EIGHT
Interest and Original Issue Discount Reporting, Backup Withholding
Section 801. On or before January 31 following each calendar
year with respect to which there are Outstanding Debentures or such other due
date prescribed therefor, as advised to the Trustee by the Company, the Trustee
will prepare and mail to each Holder of Outstanding Debentures at any time
during the preceding calendar year Forms 1099-INT and 1099-OID or such other
forms prescribed therefor by the Internal Revenue Service, as advised to the
Trustee by the Company, containing such information as instructed by the
Company, including the information contained in Section 1009 of the Indenture,
together with any letter prepared by the Company explaining tax issues relating
thereto to the extent not otherwise prohibited by law. Further, on or before
February 28 following each calendar year with respect to which there are
Outstanding Debentures or such other due date prescribed therefor, as advised to
the Trustee by the Company, the Trustee will prepare and file with the Internal
Revenue Service or any other relevant taxing authority, as advised to the
Trustee by the Company, by magnetic tape or other required transmission source,
as advised to the Trustee by the Company, containing the aforementioned
information furnished by the Company.
Section 802. During each calendar year with respect to which
there are Outstanding Debentures, the Trustee will satisfy all applicable
backup withholding rules in connection with payments made or deemed made with
respect to the Debentures including, without limitation, payments of interest,
accruals of original issue discount, and payments associated with redemptions
and other dispositions of Debentures.
ARTICLE NINE
Sundry Provisions
Section 901. Except as otherwise expressly provided in this
First Supplemental Indenture or in the form of Debentures or otherwise clearly
required by the context hereof or thereof, all terms used herein or in said form
of Debentures that are defined in the Indenture shall have the several meanings
respectively assigned to them thereby.
Section 902. The Indenture, as supplemented by this First
Supplemental Indenture, is in all respects ratified and confirmed, and this
First Supplemental Indenture shall be deemed part of the Indenture in the manner
and to the extent herein and therein provided.
This instrument may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
In Witness Whereof, the parties hereto have caused this First
Supplemental Indenture to be duly executed all as of the day and year first
above written.
UGLY DUCKLING CORPORATION
By /s/ Steven P. Johnson
---------------------------
Steven P. Johnson
Senior Vice President and
Secretary
Attest:
/s/ Judith A. Boyle
- ----------------------------
9
<PAGE> 10
HARRIS TRUST AND SAVINGS BANK,
As Trustee
By: /s/ Robert D. Foltz
-------------------------
Robert D. Foltz
Vice President
(seal)
Attest: /s/ Megan M. Francis
--------------------
Megan M. Francis
Assistant Secretary
10
<PAGE> 11
State of Arizona )
) ss.:
County of Maricopa )
On the 22 day of October, 1998, before me personally came
Steven P. Johnson, to me known, who being by me duly sworn, did depose and say
that she/he is the Senior Vice President of Ugly Duckling Corporation, one of
the corporations described in and which executed the foregoing instrument; and
that she/he signed her/his name thereto by the authority of the Board of
Directors of said Corporation.
--------------------------------------
Official Seal
Peggy Sue Hurst
State of Illinois )
) ss.:
County of Cook )
On the 23 day of October, 1998, before me personally came R.
Foltz, to me known, who being by me duly sworn, did depose and say that she/he
is the Vice President of Harris Trust and Savings Bank, one of the corporations
described in and which executed the foregoing instrument; that she/he knows the
seal of said corporation; that the seal affixed to said instrument is such
corporate seal; that it was so affixed by authority of the Board of Directors of
said corporation; and that she/he signed her/his name thereto by like authority.
/s/ Maricela Marquez
--------------------------------------
Official Seal
(seal)
11
<PAGE> 1
UGLY DUCKLING CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 500
PHOENIX, ARIZONA 85016
To the Holders of Our Common Stock:
Enclosed are materials relating to our offer to exchange up to $16,486,582
aggregate principal amount of our 12% Subordinated Debentures due 2003 (the
"Debentures") for up to 2,536,397 shares of our common stock, par value $.001
per share ("Common Stock"), as described in the enclosed Offering Circular dated
November 20, 1998 (the "Exchange Offer").
This exchange would be made on the following basis:
- --------------------------------------------------------------------------------
$6.50 PRINCIPAL AMOUNT OF DEBENTURES
FOR EACH SHARE OF COMMON STOCK
- --------------------------------------------------------------------------------
Interest on the Debentures will accrue from October 23, 1998, and will be
payable in cash semiannually on each April 15 and October 15, commencing April
15, 1999, until the Debentures are paid in full. The Debentures will be issued
under an Indenture Supplement dated October 15, 1998 pursuant to which the
Company previously issued $16,013,418 principal amount of Debentures in an
exchange offer that expired on October 19, 1998. The terms of the Debentures
being offered hereby are identical to the terms of the Debentures previously
issued by the Company.
The principal purpose of the Exchange Offer is to reduce the number of
shares of Common Stock outstanding, thereby offering the potential for increased
earnings per share in the future. To effect this reduction, the Company is
offering to purchase outstanding shares of its Common Stock at a purchase price
of $6.50 per share, representing a premium of approximately 30% above its market
price as reported on the Nasdaq National Market on November 18, 1998, which the
Company does not believe adequately reflects the underlying value of its Common
Stock, all as more fully described in the enclosed materials. The Exchange Offer
is contingent upon certain conditions as described herein. Executive officers
and directors of the Company have advised the Company that they do not intend to
tender any shares of Common Stock in the Exchange Offer.
PLEASE READ THE ENCLOSED MATERIALS CAREFULLY.
For further assistance or additional copies of any of the enclosed
materials, please call Corporate Investor Communications, Inc. at 1-888-673-4478
(toll free).
Very truly yours,
/s/ Ernest C. Garica II
ERNEST C. GARCIA, II
Chairman of the Board and
Chief Executive Officer
Ugly Duckling Corporation
November 20, 1998
Phoenix, Arizona
<PAGE> 2
UGLY DUCKLING CORPORATION
OFFER TO EXCHANGE
UP TO $16,486,582 AGGREGATE PRINCIPAL AMOUNT OF ITS
12% SUBORDINATED DEBENTURES DUE 2003
FOR UP TO 2,536,397 SHARES OF ITS
COMMON STOCK
Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling" or the
"Company"), hereby offers to exchange, upon the terms and subject to the
conditions set forth herein and in the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), up to $16,486,582 aggregate principal
amount of its 12% Subordinated Debentures due 2003 (the "Debentures") for up to
2,536,397 shares ("Shares") of its common stock, $.001 par value per share
("Common Stock") on the basis of $6.50 principal amount of Debentures for each
Share of Common Stock.
On November 18, 1998, the closing price of the Common Stock as reported on
Nasdaq's National Market System ("Nasdaq") was $5.00. For a further description
of the Common Stock, see "Description of Capital Stock." The Company does not
intend to apply for listing or quotation of the Debentures on any exchange or
automated quotation system. Accordingly, there can be no assurance that any
public market will develop for the Debentures. See "Risk Factors -- Possible
Lack of Trading Market for the Debentures."
On October 23, 1998, the Company issued $16,013,418 principal amount of the
Debentures in exchange for 2,463,603 shares of its Common Stock, which were
tendered in an exchange offer that expired on October 19, 1998 (the "Original
Exchange Offer"). The terms of the Debentures being offered pursuant to this
Exchange Offer are identical to the Debentures issued in connection with the
Original Exchange Offer and will be issued pursuant to the terms of an Indenture
Supplement dated October 15, 1998, under which the existing Debentures were
issued. Other than the dates of commencement and expiration, and the lack of a
minimum offering condition, the terms of the Exchange Offer are substantially
identical to the terms of the Original Exchange Offer.
The Debentures will be unsecured obligations of the Company subordinated
and subject in right of payment to all existing and future senior indebtedness
of the Company. As of September 30, 1998, the Company's outstanding senior
indebtedness aggregated approximately $78.3 million. The Debentures will bear
interest at 12% per annum from October 23, 1998, payable semiannually on each
April 15 and October 15, commencing April 15, 1999, until the Debentures are
paid in full. The Company will be required to repay the principal amount of the
Debentures on October 23, 2003. The Debentures will be redeemable, at the
Company's option, in whole at any time or in part from time to time, at the
principal amount to be redeemed plus accrued and unpaid interest thereon to the
redemption date. The Debentures will be issued pursuant to an Indenture between
the Company and Harris Trust and Savings Bank, as Trustee. The Company will be
subject to certain limited financial covenants as more fully described in the
Indenture. See "Description of the Debentures."
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON TUESDAY,
DECEMBER 22, 1998, UNLESS EXTENDED.
The Company will accept up to 2,536,397 Shares if tendered (representing
approximately 16% of the Shares outstanding as of November 18, 1998). If more
than 2,536,397 shares of Common Stock are tendered, the Company will accept no
more than 2,536,397 of the tendered Shares, to be allocated among tendering
stockholders on a pro rata basis. The Exchange Offer is subject to a number of
additional conditions as described herein and may be amended or withdrawn in
certain circumstances. See "The Exchange Offer -- Conditions to and Amendment of
the Exchange Offer."
THESE SECURITIES ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION
WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION").
THE COMMISSION DOES NOT PASS UPON THE MERITS OF ANY SECURITIES NOR DOES IT PASS
UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING
LITERATURE.
THE DATE OF THIS OFFERING CIRCULAR IS NOVEMBER 20, 1998
<PAGE> 3
For a discussion of certain risks and other factors to be considered in
connection with the Exchange Offer, see "Risk Factors."
The Company, its Board of Directors and its executive officers make no
recommendations as to whether any stockholders should tender any or all of such
stockholders' Shares pursuant to the Exchange Offer. Each stockholder must make
his, her or its own decision whether to tender Shares of Common Stock and, if
so, how many Shares to tender. Executive officers and directors of the Company
have advised the Company that they do not intend to tender their Shares in the
Exchange Offer.
The Company has made no arrangements for and has no understanding with any
dealer, salesman or other person regarding the solicitation of tenders
hereunder, and no person has been authorized to give any information or to make
any representation not contained in this Offering Circular in connection with
the Exchange Offer, and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company or any other
person. Neither the delivery of this Offering Circular nor any exchange or sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein.
This Offering Circular does not constitute an offer to exchange or sell, or
a solicitation of an offer to exchange or buy, any securities other than the
securities covered by this Offering Circular by the Company or any other person,
or any such offer or solicitation of such securities by the Company or any such
other person in any state or other jurisdiction to any person to whom it is
unlawful to make any such offer or solicitation. In any state or other
jurisdiction where it is required that the securities offered by this Offering
Circular be qualified for offering or that the offering be approved pursuant to
tender offer statutes in such state or jurisdiction, no offer is hereby being
made to, and tenders will not be accepted from residents of any such state or
jurisdiction unless and until such requirements have been satisfied.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. 3
SUMMARY OF EXCHANGE OFFER................................... 4
RISK FACTORS................................................ 10
THE EXCHANGE OFFER.......................................... 17
General................................................... 17
Expiration Time, Extensions, Termination and Amendments... 17
How to Tender............................................. 18
Withdrawal Rights......................................... 19
Acceptance of Shares for Exchange; Delivery of Debentures
to be Exchanged........................................ 20
Denominations; Fractional Interests....................... 20
Proration if Shares Tendered Exceed Maximum............... 20
Conditions to and Amendment of the Exchange Offer......... 21
Exchange Agent............................................ 21
Information Agent......................................... 22
No Financial Advisor...................................... 22
Payment of Expenses....................................... 22
BACKGROUND, PURPOSE AND EFFECT OF THE EXCHANGE OFFER........ 23
CAPITALIZATION.............................................. 25
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA................ 26
CERTAIN PRO FORMA FINANCIAL INFORMATION..................... 28
PRICE RANGE OF COMMON STOCK................................. 30
DIVIDENDS................................................... 30
BUSINESS.................................................... 31
DESCRIPTION OF THE DEBENTURES............................... 34
DESCRIPTION OF CAPITAL STOCK................................ 42
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES....... 43
</TABLE>
2
<PAGE> 5
AVAILABLE INFORMATION
Corporate Investor Communications, Inc. (toll free telephone no.
1-888-673-4478) will act as Information Agent in connection with the Exchange
Offer. See "The Exchange Offer -- Information Agent."
Ugly Duckling is subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, NW, Washington, D.C. 20549, and at the following regional
offices of the Commission; Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained by mail from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
NW, Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a site on the World Wide Web that contains reports, proxy and
information statements and other information filed electronically by Ugly
Duckling with the Commission which can be accessed over the Internet at
http:\\www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated by
reference into this Offering Circular: (i) Ugly Duckling's Annual Report on Form
10-K for the fiscal year ended December 31, 1997, as amended; (ii) Ugly
Duckling's Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30, and September 30, 1998 (a copy of which accompanies this Offering Circular),
respectively; (iii) Ugly Duckling's Reports on Form 8-K filed with the
Commission on January 2, February 9, February 10, February 20, June 16, June 25,
September 2, October 13, October 21, and November 18, 1998, respectively; (iv)
Ugly Duckling's Notice and Proxy Statement dated August 4, 1998; and (v) Cygnet
Financial Corporation's Prospectus dated August 26, 1998. If any statement
contained in any of the foregoing documents incorporated by reference herein is
modified or superseded by a statement in this Offering Circular, the statement
in any such foregoing document will be deemed for the purposes of this Offering
Circular to have been modified or superseded by such statement in this Offering
Circular, and the statement in any such foregoing document is incorporated by
reference herein only as modified or to the extent it is not superseded. All
documents subsequently filed by the Company during the period of the Exchange
Offer pursuant to Sections 13, 14 or 15(d) of the Exchange Act shall be deemed
to be incorporated by reference in this Offering Circular and to be a part
hereof from the date of filing such documents.
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<PAGE> 6
SUMMARY OF EXCHANGE OFFER
The following is a summary of certain features of the Exchange Offer and
other matters, and all statements contained herein are qualified in their
entirety by reference to the more detailed information and financial statements
hereinafter set forth.
THE COMPANY
GENERAL
The Company operates a chain of buy here-pay here used car dealerships and
underwrites, finances and services retail installment contracts generated from
the sale of used cars by its Company dealerships and by third party dealers
located in selected markets throughout the country. The Company targets its
products and services to the sub-prime segment of the automobile financing
industry, which focuses on selling and financing the sale of used cars to
persons who have limited credit histories, low incomes, or past credit problems
("Sub-Prime Borrowers").
Dealership Operations and Related Securitization Program. As of the date
of this Offering Circular, the Company was operating 55 used car dealerships
("Company Dealerships") located in nine metropolitan areas and seven states. The
Company distinguishes its Company Dealership operations from those of typical
buy here -- pay here dealers through its network of multiple locations, upgraded
facilities, large inventories of used cars, regional centralized purchasing,
value-added marketing programs, and dedication to customer service. For the nine
months ended September 30, 1998, the Company generated revenues from its
continuing dealership operations of $216.1 million and net earnings of $8.6
million, compared to $79.5 million in revenues and $4.3 million in net earnings,
respectively, for the same period of 1997.
During the first quarter of 1996, the Company initiated a Securitization
Program under which special purpose "bankruptcy remote" subsidiaries sell
securities backed by finance contracts to investors. In February 1998, the
Company executed a commitment letter with Greenwich Capital Markets, Inc.
("Greenwich Capital") under which, among other things, Greenwich Capital retains
the right to be the exclusive securitization agent for the Company for up to $1
billion of AAA-rated, surety wrapped securities as part of the Company's ongoing
Securitization Program. The agreement contains certain provisions that would not
oblige Greenwich Capital or require the Company to fulfill the remaining
commitment under the agreement.
Third Party Operations. Beginning in 1994 with the acquisition of Champion
Financial Services, Inc. ("Champion"), an independent automobile finance
company, the Company has been involved in the acquisition and servicing of
retail installment contracts generated by third party car dealers, typically
involving Sub-Prime Borrowers. From the acquisition of Champion through the
first quarter of 1998, the Company pursued an aggressive growth plan, setting up
a national third party branch office network pursuant to which it acquired
retail installment contracts from numerous independent third party car dealers.
In 1997, the Company began to engage in the purchase of loan portfolios in
bulk and the servicing of loan portfolios on behalf of third parties, including
companies that were experiencing financial difficulties. The Company maintains
loan servicing facilities in Nashville, Tennessee, Denver, Colorado, San
Antonio, Texas, and Dallas, Texas to support its bulk servicing operations. In
recent periods, the Company has entered into several large servicing or bulk
purchasing transactions involving independent third party finance receivable
portfolios and, in some cases, has sold or securitized these portfolios, with
servicing retained. The two most significant of such transactions were
transactions with First Merchants Acceptance Corporation and Reliance Acceptance
Group.
The Company has also initiated a program pursuant to which the Company
provides qualified independent used car dealers with warehouse purchase
facilities and operating credit lines primarily secured by the dealer's retail
installment contract portfolio (the "Cygnet Dealer Program").
4
<PAGE> 7
RECENT DEVELOPMENTS
Discontinued Operations. In the third quarter of 1997, the Company
announced a strategic evaluation of its third party dealer operations, including
the possible sale or spin-off of these operations. In February 1998, the Company
announced its intention to close its branch office network and exit this line of
business. The closure was substantially complete as of March 31, 1998, although
the Company is continuing to negotiate lease settlements and terminations and to
service the associated loan portfolio. The Company recorded a pre-tax charge to
discontinued operations totaling approximately $9.1 million (approximately $5.6
million, net of income taxes) during the first quarter of 1998. In addition, a
$6.0 million charge ($3.6 million net of income taxes) was taken during the
third quarter of 1998 due primarily to higher than anticipated loan losses and
servicing expenses in connection with the branch office loan portfolio.
In April 1998, the Company announced that its Board of Directors had
directed management to proceed with separating its dealership operations from
the Cygnet Dealer Program and the Company's bulk purchase and third party loan
servicing operations. Since that date, these businesses have been classified as
discontinued operations in the Company's Consolidated Financial Statements.
The Company subsequently formed a new wholly owned subsidiary, Cygnet
Financial Corporation ("Cygnet") to effectuate the separation of the Company's
dealership and non-dealership operations. At the Company's annual meeting held
on August 31, 1998, stockholders of the Company approved a split-up proposal
under which the assets and liabilities of the non-dealership businesses would be
transferred to Cygnet and Cygnet would become a separate public company through
a rights offering to stockholders of the Company. Due to a lack of stockholder
participation in the offering, however, the rights offering was terminated and
the Company recorded a $1.2 million after tax charge relating to the costs
incurred for this terminated rights offering during the third quarter of 1998.
The Company is continuing to explore alternatives for formally separating
its dealership and non-dealership operations, although there can be no assurance
that the Company will ultimately be successful in this regard. Although the
Company was not successful in formally separating its non-dealership operations
as contemplated, it has completed the internal process of establishing separate
management teams and infrastructures for the dealership and non-dealership
operations. The Company believes this structure enhances each segment's ability
to focus on its own operations and facilitates the Company's goal of formally
separating them. Individuals contemplating whether to participate in the
Exchange Offer should consider the possibility that Ugly Duckling could later
decide to retain rather than separate its non-dealership operations, in which
case Ugly Duckling's Consolidated Financial Statements would require restatement
to reflect the integration of certain financial results currently attributed to
discontinued operations.
Securitization Accounting Change. On November 17, 1998 the Company
announced a change in the way it will structure transactions under its
Securitization Program. Previously, the Company structured its securitization
transactions as sales for accounting purposes. Beginning in the fourth quarter
of 1998, however, the Company will structure securitizations for accounting
purposes to retain the Finance Receivables and the related debt on the Company's
balance sheet and recognize the income over the life of the contracts. The
Company will no longer recognize a Gain on Sale of Finance Receivables as
previously recognized by the Company. This change will not affect the Company's
prior securitizations.
The fundamentals of the Company's continuing business, particularly its
revenues, should be unaffected by this change. The Company expects to continue
to finance its receivables through securitization. There will, however, be a
significant adverse impact on earnings per share for the next few periods as the
Company builds its on-balance sheet portfolio. The Company expects to incur a
significant loss in the fourth quarter of 1998 and this change will continue to
have a material adverse effect on reported earnings until the Company's interest
earnings, net of interest and other related expenses, from the additional
contracts added to the Company's balance sheet approximates the revenues the
Company has historically recognized on its securitization transactions. The
Company believes that this change will enhance the long-term value of the
Company through greater earnings stability and predictability, as well as
instill higher confidence in those earnings from the investment community,
although there can be no assurance in this regard.
5
<PAGE> 8
Initial Exchange Offer. On September 17, 1998, the Company initiated an
exchange offer (the "Original Exchange Offer") to exchange up to 5,000,000
shares of its Common Stock for 12%, five-year subordinated debentures of the
Company due October 23, 2003 with terms identical to those being offered
hereunder. The exchange ratio was $6.50 principal amount of Debentures for each
share of Common Stock validly tendered.
The Original Exchange Offer expired on October 19, 1998 with a total of
2,463,603 shares of Common Stock being tendered in exchange for $16,013,418
aggregate principal amount of the Debentures (the "Existing Debentures").
BACKGROUND, PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Ugly Duckling completed its initial public offering in June 1996 with the
sale of 2,300,000 Shares of its Common Stock at a price of $6.75 per share.
Following the initial public offering, the price of the Company's Common Stock
increased significantly, to a high of $25.75 per share in the first quarter of
1997, reflecting a stock market with generally increasing stock prices, a
healthy used car sales and finance industry, and growth in the Company's
revenues and earnings. In recent periods, however, the used car sales and
financing industry has encountered difficulties, with several used car companies
announcing major downward adjustments to their financial statements, violations
of loan covenants, related litigation, and other events. In addition, certain of
these companies have filed for bankruptcy protection. These difficulties have
corresponded with a general decline in the stock prices of companies involved in
this industry. At the same time, stock prices of small-cap companies have
recently experienced a broad-based decline. Consistent with this market decline,
particularly with respect to companies in the used car sales and finance
industry, the price of the Company's Common Stock has decreased to $5.00 as of
November 18, 1998, a price that is near the low end of its 52-week trading
range.
The Company does not believe that recent prices reflect the underlying
value of its Common Stock. In this regard, in establishing a tender price that
is significantly higher than the market price of the Shares as of November 18,
1998, the Company considered the following factors, among others.
- The closing price of $5.00 per Share as of November 18, 1998, two
business days prior to the announcement of the Exchange Offer, represents
an 81% decline from its all-time high in the first quarter of 1997 and a
61% decline from its high in 1998. See "Price Range of Common Stock."
- The recent Share price reflects a discount of approximately 49% to the
Company's book value per share as of September 30, 1998. See "Summary
Selected Consolidated Financial Data."
- The Company's recent and historical financial results, including the
Company's increase in revenues ($216.1 million compared to $79.5 million)
and basic earnings per share from continuing operations ($0.46 compared
to $0.25) for the nine month period ended September 30, 1998 as compared
to the nine month period ended September 30, 1997. See "Summary Selected
Consolidated Financial Data."
The principal purpose of the Exchange Offer is to reduce the number of
Shares of Common Stock outstanding by offering to purchase Shares in the
Exchange Offer, thereby offering the potential for increased earnings per share
in the future. The Company believes that if it is able to increase earnings per
share, this development could have a positive influence on the price of its
Common Stock. The increased indebtedness resulting from the Exchange Offer,
however, will significantly increase the Company's debt service requirements and
could negatively affect earnings per share. See "Risk Factors -- Increased
Leverage and Debt Service Obligations" and "-- No Assurance of Increased
Earnings Per Share."
Holders of Shares of Common Stock electing to participate in the Exchange
Offer will realize the following benefits.
- In exchange for Shares, tendering stockholders will receive a debt
security with a principal amount approximately 30% greater than the
market price of the Shares as of November 18, 1998.
6
<PAGE> 9
- The Debentures will bear interest at 12% per annum from October 23, 1998,
payable each April 15 and October 15 until the Debentures are paid in
full.
- The Debentures, although subordinated in right of payment to all other
existing and future senior indebtedness of the Company, represent a claim
on the Company's assets senior to any claim of the holders of the
Company's Common Stock.
Notwithstanding the benefits to tendering stockholders summarized above,
holders of Shares contemplating the Exchange Offer should take into account the
following considerations.
- Tendering stockholders receiving Debentures will relinquish the right to
share in any capital appreciation of the Company's Common Stock.
- Unlike the Shares, the Debentures will not be listed on any exchange or
automated quotation system and there can be no assurance that a trading
market will develop.
- Unlike holders of Common Stock, holders of the Debentures will have no
rights to vote on matters submitted to the Company's stockholders.
- The Company has the right to prepay the Debentures at any time without
penalty or premium by paying the unpaid principal amount and accrued
interest on the Debentures.
- Tendering stockholders will be subject to certain tax consequences that
may differ from those that would be realized if the Shares were sold for
cash.
Finally, holders of Shares contemplating the Exchange Offer should consider
that the Company has not retained any financial advisor or investment banking
firm to assist the Company in determining the price and terms of the Debentures
or whether the consideration offered in the Exchange Offer is adequate to
tendering stockholders. The Company also has not requested any report, opinion,
or appraisal relating to the fairness of the consideration being offered
pursuant to the Exchange Offer. For a discussion of risk factors that should be
taken into account in considering the Exchange Offer, see "Risk Factors."
7
<PAGE> 10
THE EXCHANGE OFFER
EXPIRATION TIME............... 5:00 p.m., New York City time, on Tuesday,
December 22, 1998, unless extended (the
"Expiration Time").
EXCHANGE RATIO................ $6.50 principal amount of Debentures for each
share of Common Stock validly tendered.
ACCEPTANCE OF SHARES;
CONDITIONS OF THE EXCHANGE
OFFER....................... The Company will accept up to 2,536,397 Shares
(representing approximately 16% of the
outstanding Shares of the Company's Common
Stock as of November 18, 1998) in the Exchange
Offer. If more than 2,536,397 Shares are
tendered, the Company will accept no more than
2,536,397 Shares of Common Stock, to be
allocated among the tendering stockholders on a
pro rata basis. The Exchange Offer is subject
to a number of conditions as described herein.
See "The Exchange Offer -- Conditions to and
Amendment of the Exchange Offer."
DESCRIPTION OF DEBENTURES..... The Debentures will be unsecured obligations of
the Company subordinated and subject in right
of payment to all existing and future senior
indebtedness of the Company. As of September
30, 1998, the Company's outstanding senior
indebtedness aggregated approximately $78.3
million, including the Company's revolving
credit facility with General Electric Capital
Corporation and $5.0 million of subordinated
notes included in the Company's discontinued
operations. The Debentures will bear interest
at 12% per annum from October 23, 1998, payable
semiannually on each April 15 and October 15,
commencing April 15, 1999, until the Debentures
are paid in full. The Company will be required
to repay the principal amount of the Debentures
on October 23, 2003. The Debentures will be
redeemable, at the Company's option, in whole
at any time or in part from time to time, at
the principal amount to be redeemed plus
accrued and unpaid interest thereon to the
redemption date. The Debentures will be issued
pursuant to an Indenture between the Company
and Harris Trust and Savings Bank, as Trustee.
The Company will be subject to certain limited
financial covenants and other restrictions as
more fully described in the Indenture. See
"Description of the Debentures."
HOW TO TENDER................. A holder of Shares wishing to accept the
Exchange Offer must either (a) complete the
accompanying Letter of Transmittal and forward
it with the certificates representing the
Shares to be tendered and any other required
documents to Harris Trust and Savings Bank (the
"Exchange Agent") or (b) request a broker or
bank to effect the transaction. Holders of
Shares registered in the name of a broker,
dealer, bank, trust company, or other nominee
must contact such institution to tender their
Shares. Certificates representing the Shares
may be physically delivered after effecting a
valid tender pursuant to certain guaranteed
delivery procedures. Physical delivery is not
required if confirmation of book-entry
transfers of such Shares to the Exchange
Agent's account at The Depository Trust Company
("DTC") is delivered in a timely fashion. See
"The Exchange Offer -- How to Tender."
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<PAGE> 11
DELIVERY OF SECURITIES........ The Company will deliver Debentures in exchange
for Shares pursuant to the Exchange Offer as
soon as practicable after the Expiration Time.
See "The Exchange Offer -- Acceptance of Shares
for Exchange; Delivery of Debentures to be
Exchanged."
WITHDRAWAL RIGHTS............. Tenders of Shares pursuant to the Exchange
Offer may be withdrawn prior to 5:00 p.m., New
York City time, on December 22, 1998, and, if
the Company has not previously accepted such
Shares for exchange, after January 22, 1999.
Except for such rights of withdrawal, all
tenders are irrevocable.
CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES....... See "Certain United States Federal Income Tax
Consequences" for a discussion of certain
federal income tax consequences associated with
the Exchange Offer and the ownership of the
Debentures, and "Risk Factors -- Certain United
States Federal Income Tax Risks."
LISTING AND TRADING OF
SECURITIES.................... The Company's Common Stock (symbol: UGLY) is
listed on Nasdaq's National Market System. On
November 18, 1998, two business days before the
announcement of the Exchange Offer, the closing
per share price for the Common Stock as
reported by Nasdaq was $5.00. No market
currently exists with respect to the
Debentures, and the Company does not intend to
list the Debentures for trading on any exchange
or automated quotation system. Accordingly,
there can be no assurance that any trading
market will develop for the Debentures or, if
developed, as to any price at which they might
be traded. See "Risk Factors -- Possible Lack
of Trading Market for the Debentures."
EXCHANGE AGENT AND TRUSTEE.... Harris Trust and Savings Bank will serve as the
Exchange Agent for the Exchange Offer and as
Trustee under the Indenture. See "The Exchange
Offer -- Exchange Agent" and "Description of
the Debentures -- The Indenture."
INFORMATION AGENT............. Corporate Investor Communications, Inc. will
serve as the Information Agent in connection
with the Exchange Offer (the "Information
Agent") telephone no. 1-888-673-4478
(toll-free). See "The Exchange
Offer -- Information Agent."
COMMON STOCK OUTSTANDING...... Approximately 16,070,000 Shares were
outstanding as of November 18, 1998.
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<PAGE> 12
RISK FACTORS
Investment in the Debentures is subject to certain risks and other factors,
including but not limited to those set forth below. In considering the Exchange
Offer, an investor should carefully consider the following risk factors, as well
as the risk factors appearing in the Company's filings with the Commission and
incorporated herein by reference, including the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1998, a copy of which accompanies
this Offering Circular, and all other information appearing in this Offering
Circular, as well as his or her particular financial circumstances, investment
objectives and tax situation.
EXCHANGE OFFER SUBJECT TO CERTAIN CONTINGENCIES
The Exchange Offer is subject to certain contingencies that are not within
the control of the Company. First, the Company will accept no more than
2,536,397 Shares in the Exchange Offer. If more than 2,536,397 Shares are
validly tendered, the Company will allocate Debentures among the tendering
stockholders on a pro-rata basis based on the number of Shares tendered. In
addition, the Exchange Offer requires qualification of the Indenture under the
Trust Indenture Act and may require certain approvals or consents from
government regulatory agencies, self regulatory organizations, and other third
parties. Certain consents may be obtained only if the Company is willing to
provide certain concessions to third parties. There can be no assurance that all
required conditions, consents, or regulatory approvals will be obtained or
achieved in a timely manner. Moreover, the Exchange Offer may be modified or
withdrawn in certain circumstances subject to the discretion of the Company's
Board of Directors. See "The Exchange Offer -- Conditions to and Amendment of
the Exchange Offer."
LOSS OF RIGHTS ASSOCIATED WITH COMMON STOCK
To the extent that stockholders exchange their Shares for Debentures, they
will be relinquishing certain rights available to holders of Common Stock in
exchange for acquiring rights as holders of debt. Stockholders whose Shares are
validly tendered and accepted for exchange will lose the right to share in any
capital appreciation of the Company's Common Stock, will not be entitled to vote
upon any matters submitted to the Company's stockholders, and will no longer be
entitled to dividends paid, if any, on the Company's Common Stock. In addition,
because there is an established trading market for the Shares and no established
trading market for the Debentures, the liquidity of a tendering stockholder's
investment in the Company will likely be reduced.
MARKET ISSUES
If successful, the Exchange Offer will reduce the Company's stockholder's
equity and increase its indebtedness, thereby increasing the Company's debt to
equity ratio and its debt service obligations. There can be no assurance that
the market will not regard these results unfavorably and that the price of the
Company's Common Stock will not be adversely affected. To the extent that the
market does not regard the Exchange Offer as favorable, the market price of the
Debentures also could be adversely affected. In addition, although the Company
believes that the Exchange Offer complies with all applicable listing and
maintenance requirements imposed by the Nasdaq National Market, there can be no
assurance that issues regarding the Common Stock's listing status will not
arise.
POSSIBLE LACK OF TRADING MARKET FOR DEBENTURES
No market currently exists for the Debentures, and the Company does not
intend to list the Debentures on any exchange or automated quotation system.
Accordingly, no assurance can be given generally as to the liquidity of the
Debentures after their issuance or the prices at which they may trade, or that a
trading market will develop.
The terms of the Debentures to be issued in this Exchange Offer are
identical to the terms of the Debentures issued in the Original Exchange Offer.
As a result, the Exchange Offer will increase the number, principal amount, and
holders of the Debentures, which the Company believes may positively impact the
liquidity of the trading market for the Debentures. There can be no assurance,
however, that issuance of the new Debentures will positively impact the trading
market for the Debentures, particularly if the Debentures issued in the Exchange
Offer are not considered to be part of the same "issue" (for tax purposes) as
the Debentures issued in the Original Exchange Offer. See "Certain United States
Federal Income Tax
10
<PAGE> 13
Consequences -- Certain Federal Income Tax Consequences to Prospective Holders
of Debentures" and "-- Original Issue Discount -- Trading of Debentures."
INCREASED PERCENTAGE OF SHARES HELD BY MANAGEMENT
As of November 18, 1998, the Company's officers and directors beneficially
owned approximately 35% of the outstanding Shares of the Company's Common Stock,
with Mr. Ernest Garcia II, the Company's Chairman of the Board and Chief
Executive Officer, beneficially owning approximately 29%. The Company's
executive officers and directors have advised the Company that they do not
intend to participate in the Exchange Offer. Assuming the maximum number of
Shares is exchanged in the Exchange Offer, the Company's officers and directors
will beneficially own approximately 41% of the Company's outstanding Shares of
Common Stock (with Mr. Garcia owning approximately 35%).
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture will contain certain covenants that, among other things, will
require the Company not to allow its Consolidated Leverage Ratio (as defined
herein) to exceed 6 to 1 and to maintain at all times a Consolidated Net Worth
(as defined herein) of at least $100,000,000. If the Company fails to meet these
covenants, such failure will constitute an Event of Default (as defined herein)
under the Indenture. See "Description of the Debentures." In addition, the
Company expects that the change in its securitization structure will result in
significant additional indebtedness, which will have an adverse impact on the
Company's leverage ratio. There can be no assurance that the Company will be
able to satisfy these financial covenants and any other covenants contained in
the Indenture. If the Company is unable to cure an Event of Default on a timely
basis, the principal amount of the Debentures may become immediately due and
payable. There can also be no assurance that these financial covenants will not
materially and adversely affect the Company's ability to finance its future
operations or capital needs or to engage in other business activities, including
implementation of its business and growth strategies.
ARBITRARY DETERMINATION OF TERMS OF DEBENTURES
The Company has determined the terms of the Debentures without retaining
any independent financial advisor or investment banking firm. Accordingly, there
can be no assurance that the terms of the Debentures are fair from a financial
point of view to tendering stockholders. In this regard, there can be no
assurance that if the Company were to issue subordinated debt in the capital
markets, the interest rate on such debt would not be higher than 12% per annum,
or that the financial and other covenants would not be more restrictive. For
example, companies that issue unsecured, non-investment grade subordinated debt
similar to the Debentures typically are subject to more restrictions than those
imposed by the Indenture with respect to the Debentures, including restrictions
on incurring additional indebtedness above a specified amount or in violation of
a specified formula, paying dividends or making certain other distributions,
payments and investments, creating liens, and engaging in transactions with
affiliates or in unrelated businesses, among others. In addition, the terms of
such securities typically include a change of control provision, which typically
provides a right to debt holders to force a company to redeem their debt in the
event of a change of control of that company's voting securities. As a result,
stockholders who tender their Shares in exchange for Debentures may not receive
the same level of protection that typically would be afforded to holders of
unsecured, non-investment grade subordinated debt issued by other similarly
situated companies. Because the Debentures contain terms that may be less
attractive than other similar types of securities issued in the market, there
can be no assurance that the Company will not record the Debentures at a
discount from their principal amount. In addition, the relative lack of standard
restrictive covenants may adversely affect the liquidity of the Debentures.
NO ASSURANCE OF INCREASED EARNINGS PER SHARE
Although the primary purpose of the Exchange Offer is to reduce the number
of the Company's outstanding shares of Common Stock, thereby offering the
potential for increased earnings per share in the future, the reduction in
equity and corresponding increase in indebtedness could have a negative effect
on earnings per share. In this regard, the table set forth in the Section
entitled "Certain Pro Forma Financial Information," which shows the pro forma
effects of the Exchange Offer on the Company's financial results assuming the
maximum number of Shares tendered, indicates that earnings per share from
continuing operations for the nine months ended September 30, 1998 would have
decreased slightly on a pro forma basis. For the year ended December 31, 1997,
the table shows that earnings per share from continuing operations
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<PAGE> 14
would have decreased significantly assuming the maximum number of Shares was
exchanged. Further, following the Exchange Offer, the Company expects that the
Debentures will be recorded at the fair market value of the Shares tendered in
exchange as of the date the Shares are exchanged, with the difference being
amortized over the term of the Debentures as additional interest expense, which
would have a negative effect on earnings per share.
MARGINABILITY
Generally speaking, the Debentures should be margin stock for purposes of
Regulation T which governs the extension of credit by brokers and dealers, but
will likely not be margin stock under Regulation U which governs the extension
of credit by other lenders because it is not listed on the Nasdaq National
Market System. Under Regulation T, the required margin for the Debentures will
likely be the margin required by the creditor in good faith or the percentage
set by the regulatory authority where the trade occurs, whichever is greater.
Under Regulation U, the maximum loan value of non-margin stock and other
collateral is their good faith loan value.
In addition, under Regulation U, to enable a customer to participate in an
exchange offer that is made to holders of an issue of margin stock, a lender may
allow substitution of the securities received in the exchange, and a non-margin,
non-exempted security acquired in exchange for a margin stock will be treated as
if it were a margin stock for a period of 60 days following the exchange.
Stockholders contemplating an exchange of Common Stock for Debentures
should consult with their brokers concerning the marginability of the Debentures
and the required margin therefor.
INCREASED LEVERAGE AND DEBT SERVICE OBLIGATIONS
Following the Exchange Offer, the Company will be more highly leveraged and
will have incurred substantial additional debt service in addition to operating
expenses and planned capital expenditures. At September 30, 1998, as adjusted to
give effect to the $16,013,418 of Debentures issued in October 1998 in the
Original Exchange Offer and the issuance of the maximum $16,486,582 principal
amount of the Debentures, the total indebtedness of the Company would have been
approximately $103.5 million including $5.0 million of subordinated notes
included in the Company's discontinued operations. Assuming the issuance of the
maximum $16,486,582 principal amount of the Debentures pursuant to the Exchange
Offer, the Company would incur additional debt service of approximately
$1,978,390 annually, which is in addition to the $1,921,610 of annual interest
payments the Company is obligated to pay on the Existing Debentures.
Additionally, the Company anticipates incurring a significant amount of
additional debt from future securitization transactions.
The Company's increased level of indebtedness may have several important
effects on its future operations, including, without limitation, (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest and principal on its indebtedness, reducing the funds
available for operations and for capital expenditures, including acquisitions,
(ii) covenants contained in the Indenture will require the Company to meet
certain financial tests, and other restrictions may limit its ability to borrow
additional funds or to dispose of assets, and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities, (iii) the Company's leveraged position will
substantially increase its vulnerability to adverse changes in general economic,
industry and competitive conditions, (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate and other purposes may be limited, and (v) the Company's
leveraged position and the various covenants contained in the Indenture may
place the Company at a relative competitive disadvantage as compared to certain
of its competitors. The Company's ability to meet its debt service obligations
and to reduce its total indebtedness will be dependent upon the Company's future
performance, which will be subject to general economic, industry and competitive
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control, or its ability to raise
additional equity. There can be no assurance that the Company's business will
continue to generate cash flow at or above current levels. If the Company is
unable to generate sufficient cash flow from operations in the future to service
its debt, it may be required, among other things, to seek additional financing
in the debt or equity markets, to refinance or restructure all or a portion of
its indebtedness, including the Debentures, to sell selected assets, or to
reduce or delay planned capital expenditures and growth or business strategies.
There can
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<PAGE> 15
be no assurance that any such measures would be sufficient to enable the Company
to service its debt, or that any of these measures could be effected on
satisfactory terms, if at all.
If the Company fails to pay any required payment of interest or principal
with respect to the Debentures on a timely basis, such failure will constitute a
default under the terms of the Indenture. An event of default under the
Indenture also may trigger an event of default under certain other existing
obligations of the Company, including its revolving credit facility (the
"Revolving Facility") with General Electric Capital Corporation ("GE Capital").
As a result, the incurrence of additional debt resulting from the Exchange Offer
will increase the risk of possible default by the Company with respect to its
current and future obligations.
SUBORDINATION
The Debentures will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined in the Indenture), which will include borrowings under the Company's
Revolving Facility with GE Capital, the Verde Note (as defined herein), and debt
the Company will incur from future securitization transactions. The Debentures
will rank senior only to other indebtedness of the Company that expressly
provides that it is subordinated in right of payment to the Debentures, if any.
In the event of bankruptcy, liquidation, insolvency, reorganization or similar
proceeding relating to the Company, the assets of the Company will be available
to pay obligations on the Debentures only after all Senior Indebtedness has been
paid in full, and there may not be sufficient assets remaining to pay amounts
due on any or all of the Debentures outstanding. The Company may not pay
principal of or interest on the Debentures, make any deposit pursuant to
defeasance provisions or repurchase or redeem or otherwise retire any Debentures
(i) if any payment obligation on Senior Indebtedness is not paid when due or
(ii) if any other event of default on Senior Indebtedness occurs that permits
the holders of such Senior Indebtedness to accelerate the maturity of such
Senior Indebtedness, in accordance with its terms, and the Trustee for the
Debentures receives a notice of such default unless, in either case, the default
has been cured or waived, any such acceleration has been rescinded or such
Senior Indebtedness has been paid in full or, in the case of any default other
than a payment default, 179 days have passed since the default notice is given.
In addition, if there exists an event of default, as such term is defined in any
instrument creating or evidencing any Designated Senior Indebtedness (described
below), on any Designated Senior Indebtedness or if an executive officer of the
Company has actual knowledge of a default on any Designated Senior Indebtedness,
which with notice or lapse of time or both would become an event of default,
then no payment can be made on the Debentures for a period of 179 days from the
date of such event of default or the date that an executive officer of the
Company obtains actual knowledge that there is such a default unless such
default is cured or waived or a representative of such Designated Senior
Indebtedness terminates the payment blockage period. Moreover, even if there is
an event of default with respect to the Debentures and the Debentures are
declared due and payable as a result thereof, no payment can be made on the
Debentures while any Designated Senior Indebtedness is outstanding without the
consent of the Designated Senior Indebtedness. In the event that there is an
event of default under the Designated Senior Indebtedness or an executive
officer of the Company has actual knowledge of a default under Designated Senior
Indebtedness and a payment is made on the Debentures in violation of the above
provisions, holders of Debentures receiving such payment may be required to
return the monies paid for the benefit of the Senior Indebtedness. In addition,
in an insolvency, bankruptcy or liquidation scenario, there is always the risk
that senior creditors would seek to recover any monies paid on the Debentures.
Designated Senior Indebtedness includes the Revolving Facility with GE Capital,
as amended from time to time and any refundings or replacements thereof, as well
as any other Senior Indebtedness designated by the Company from time to time as
Designated Senior Indebtedness. There are no restrictions in the Indenture on
the ability of the Company to designate Senior Indebtedness as Designated Senior
Indebtedness. As of September 30, 1998, without including any indebtedness under
the Debentures, the Company had approximately $78.3 million of indebtedness
outstanding, all of which would be Senior Indebtedness and $44.9 million of
which would be Designated Senior Indebtedness under the Revolving Facility with
GE Capital. However, although there was only $44.9 million outstanding under the
Revolving Facility with GE Capital as of September 30, 1998, the Company may,
under certain circumstances and if certain conditions are satisfied, borrow up
to $125 million under that facility. Additionally, the Company anticipates
incurring a significant amount of additional debt from future securitization
transactions. Moreover, there is always the possibility that the maximum
commitment on the facility could be increased. Additional Senior Indebtedness
may be incurred by the Company and its subsidiaries from time to time, subject
to certain
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<PAGE> 16
restrictions imposed by the Indenture, the Revolving Facility with GE Capital
and other agreements of the Company. See "Description of the
Debentures -- Subordination" and "-- Certain Covenants."
HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES
The Debentures will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company. The Debentures will also be structurally subordinated to all
indebtedness and other liabilities of the Company's subsidiaries. Substantially
all of the Company's operating income is generated by its subsidiaries and the
Company from time to time will not hold assets other than the stock of its
subsidiaries. As a result, the Company will rely on dividends and other payments
received from its subsidiaries to provide substantially all of the funds
necessary to meet its debt service obligations, including the payment of
principal of and interest on the Debentures. Certain agreements of the Company
may now or in the future limit the ability of its subsidiaries in certain
situations to pay dividends to the Company or to repay intercompany debt. The
Debentures are not guaranteed by any of the subsidiaries of the Company, and
therefore, should the Company fail to satisfy any payment obligation under the
Debentures, the holders would not have a direct claim therefor against the
subsidiaries. Any indebtedness incurred directly by the subsidiaries of the
Company, including guarantees, will be senior in right of payment to the common
stock of such subsidiaries. This means that in the event of any liquidation or
bankruptcy of a subsidiary, all debt of such subsidiary would be entitled to be
paid before any amounts would be available to the Company by virtue of ownership
of the common stock. Except as described above under "Risk
Factors -- Restrictions Imposed by Terms of Indebtedness" and under "Description
of the Debentures -- Certain Covenants," the Indenture will not limit the
ability of the Company and its subsidiaries to incur additional indebtedness,
including Senior Indebtedness. Moreover, certain Senior Indebtedness of the
Company is now and may in the future be guaranteed by, and secured by the assets
of, the Company's subsidiaries. In the event of a default under any such Senior
Indebtedness, the lenders thereunder would be entitled to a claim on the assets
securing such indebtedness. Accordingly, because of any or all of the above, the
Company may not have sufficient monies available from its subsidiaries or from
other means, or assets remaining after payment of prior claims from time to
time, to pay amounts due on the Debentures. In addition, Ugly Duckling
Receivables Corporation ("UDRC") and Ugly Duckling Receivables Corporation II
("UDRC II"), formally known as Champion Receivables Corporation ("CRC") and
Champion Receivables Corporation II ("CRC II"), respectively, are the Company's
wholly-owned special purpose "bankruptcy remote" entities. Their assets,
including assets in discontinued operations, are comprised of Residuals in
Finance Receivables Sold and Investments Held In Trust, in the amounts of
approximately $44.7 million and $23.4 million, respectively, at September 30,
1998, which amounts would not be available to satisfy claims of creditors of the
Company on a consolidated basis.
RISK OF PREPAYMENT
The Debentures are subject to redemption at the option of the Company in
whole at any time or in part from time to time without penalty or premium upon
notice to the holders of the Debentures. As a result, the holders of the
Debentures will be subject to a risk of prepayment at a time when interest rates
may be generally declining. In such case, holders of Debentures that are
redeemed who tendered their Shares to acquire an interest-bearing security will
no longer have the right to receive interest and may be forced to reinvest the
redemption proceeds in securities with a lower rate of interest.
FRAUDULENT TRANSFER STATUTES
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the issuance of the Debentures. Under federal or state fraudulent
transfer laws, if a court were to find that, at the time the Debentures were
issued, the Company (i) issued the Debentures with the intent of hindering,
delaying or defrauding current or future creditors or (ii) (A) received less
than fair consideration or reasonably equivalent value for incurring the
indebtedness represented by the Debentures and (B) (1) was insolvent or was
rendered insolvent or contemplated insolvency by reason of the issuance of the
Debentures, (2) was engaged, or about to engage, in a business or transaction
for which its assets or capital were unreasonably small or (3) intended to
incur, or believed (or should have believed) it would incur, debts beyond its
ability to pay as such debts mature (as all of the foregoing terms are defined
in or interpreted under such fraudulent transfer statutes), such court could
void all or a portion of the Company's obligations to the holders of the
Debentures, or void or
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<PAGE> 17
subordinate the Company's obligations to the holders of the Debentures, and take
other action detrimental to the holders of the Debentures, including in certain
circumstances, invalidating the Debentures. In that event, there would be no
assurance that any repayment on the Debentures would ever be recovered by the
holders of the Debentures.
The definition of insolvency for purposes of the foregoing consideration
varies among jurisdictions depending upon the federal or state law that is being
applied in any such proceeding. Generally, however, the Company would be
considered insolvent at the time it incurs the indebtedness constituting the
Debentures, if (i) the fair market value (or fair saleable value) of its assets
is less than the amount required to pay its total existing debts and liabilities
(including the probable liability on contingent liabilities) as they become
absolute or matured or (ii) it is incurring debts beyond its ability to pay as
such debts mature. Based upon financial and other information, the Company
believes that it is solvent and will continue to be solvent after issuing the
Debentures, will have sufficient capital for carrying on its business after such
issuance and will be able to pay its debts as they mature. There can be no
assurance, however, that a court passing on such standards would agree with the
Company. There can also be no assurance as to what standard a court would apply
in order to determine whether the Company was "insolvent" as of the date the
Debentures were issued, or that, regardless of the method of valuation, a court
would not determine that the Company was insolvent on that date or otherwise
agree with the Company with respect to the above standards.
CERTAIN UNITED STATES FEDERAL INCOME TAX RISKS
Tax Consequences of Exchange Offer
The exchange of Shares for Debentures by a tendering stockholder pursuant
to the Exchange Offer will be a taxable event treated for United States federal
income tax purposes as either (1) a sale or exchange of the stockholder's Shares
or (2) a deemed distribution of property by the Company with respect to such
Shares.
Sale or exchange treatment will result if a tendering stockholder satisfies
any of three tests under Section 302 of the Code which measure reductions in a
stockholder's overall equity interest. If treated as a sale or exchange, a
stockholder should recognize capital gain or loss in an amount equal to the
difference between (a) the sum of the cash received (if any) plus the "issue
price" of the Debentures and (b) the stockholder's adjusted tax basis of the
Shares exchanged pursuant to the Exchange Offer. In general, the "issue price"
of the Debentures should be the value of the Shares as of the time of the
Original Exchange Offer ($5.0667). However, if the value of the Shares as of the
time of this Exchange Offer is greater than the value of the Shares as of the
time of the Original Exchange Offer, there is a risk that the Internal Revenue
Service may assert that the "issue price" of the Debentures is the value of the
Shares as of the time of this Exchange Offer.
If none of the Section 302 tests is satisfied, then to the extent of the
Company's current or accumulated "earnings and profits" (as determined for
federal income tax purposes), a tendering stockholder will be treated as having
received a dividend taxable as ordinary income in an amount equal to the sum of
the cash received (if any) plus the fair market value (as of the time of the
exchange) of the Debentures received without reduction for the adjusted tax
basis of the Shares exchanged pursuant to the Exchange Offer. The stockholder's
adjusted tax basis in the Shares exchanged will be added to the stockholder's
remaining Shares; however, if the stockholder retains no Shares following the
exchange, the benefit of such basis will be permanently lost. To the extent, if
any, that the sum of the cash plus the fair market value of the Debentures
exceeds the Company's current and accumulated earnings and profits (as
determined for federal income tax purposes), the excess will be treated first as
a tax-free return of such stockholder's tax basis in the Shares and thereafter
as capital gain. Corporate stockholders receiving a dividend must assess the
applicability of the dividends-received deduction to the extent applicable and
the impact of Section 1059 governing "extraordinary distributions."
In determining whether any one of the Section 302 tests is satisfied, a
tendering stockholder must take into account not only the Shares actually owned
by such stockholder but also Shares which are constructively owned by the
stockholder by reason of attribution rules contained in Section 318 of the Code.
The Company cannot predict whether or to what extent the Exchange Offer will be
oversubscribed. If the Exchange Offer is oversubscribed, proration of the
tenders pursuant to the Exchange Offer will cause the Company to accept fewer
Shares than are tendered. Therefore, a stockholder can be given no assurance
that a sufficient number of such stockholder's Shares will be exchanged pursuant
to the Exchange Offer to ensure that such exchange will
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<PAGE> 18
satisfy one or more of the Section 302 tests and be treated as a sale, rather
than as a dividend, for United States federal income tax purposes.
If a stockholder sells Shares to persons other than the Company at or about
the same time such holder also exchanges Shares pursuant to the Exchange Offer
and the various sales effected by the stockholder are part of a plan to reduce
or terminate the stockholder's proportionate equity interest in the Company,
then sales to persons other than the Company may, for United States federal
income tax purposes, be integrated with the stockholder's exchange of Shares
pursuant to the Exchange Offer and, if integrated, should be taken into account
in determining whether a tendering stockholder satisfies any of the Section 302
tests.
See "Certain United States Federal Income Tax Consequences" -- "Certain
Federal Income Tax Consequences to Tendering Stockholders" -- "Characterization
of the Exchange."
Interest on Debentures -- General
In general, interest will be taxable as ordinary income to a holder of a
Debenture at the time such amounts are accrued or received in accordance with
the holder's method of accounting. See "Certain United States Federal Income Tax
Consequences" -- "Certain Federal Income Tax Consequences to Tendering
Stockholders" -- "Interest on the Debentures -- General". Depending upon a
stockholder's particular circumstances, the tax consequences of holding
Debentures may be less advantageous than the consequences of holding Shares
because, for example, interest payments on the Debentures will not be eligible
for any dividends-received deduction that might otherwise be available to
corporate stockholders. Purchasers of Debentures will be credited with interest
from October 23, 1998.
Original Issue Discount on Debentures
The Debentures will be issued with significant "original issue discount"
("OID") for United States federal income tax purposes. Consequently, holders of
the Debentures will be required to recognize significant amounts of income in
advance of receipt of the cash payments to which the income is attributable for
United States federal income tax consequences, regardless of the holders'
methods of accounting. See "Certain United States Federal Income Tax
Consequences" -- "Certain Federal Income Tax Consequences to Prospective Holders
of Debentures" -- "Original Issue Discount on Debentures" and "Taxation of
Original Issue Discount on Debentures." This OID will accrue to purchasers of
Debentures from October 23, 1998.
STOCKHOLDERS CONTEMPLATING AN EXCHANGE OF SHARES FOR DEBENTURES PURSUANT TO
THE EXCHANGE OFFER ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE
SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF EXCHANGES
MADE BY THEM PURSUANT TO THE EXCHANGE OFFER AS WELL AS THE SPECIFIC FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES ASSOCIATED WITH THE OWNERSHIP
OF DEBENTURES RECEIVABLE IN THE EXCHANGE.
FORWARD LOOKING STATEMENTS
This Offering Circular contains certain forward looking statements.
Additional written or oral forward looking statements may be made by the Company
from time to time in filings with the Commission or otherwise. Such statements
may include, but not be limited to, estimates of the value of the Company's
Common Stock, projections of revenues, income, earnings per share, loss, capital
expenditures, plans for future operations, financing needs or plans, the
Company's ability to service its debt obligations, and plans relating to
products or services of the Company as well as assumptions relating to the
foregoing. The words "believe," "expect," "anticipate," "estimate," "project,"
and similar expressions identify forward looking statements. Forward looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the forward
looking statements. Statements in this Offering Circular, including those
contained in the section entitled "Risk Factors," and in the section entitled
"Background, Purpose and Effect of the Exchange Offer," describe factors, among
others, that could contribute to or cause such differences. The Company
undertakes no obligation to update any forward looking statements.
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THE EXCHANGE OFFER
GENERAL
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange up to
$16,486,582 aggregate principal amount of its Debentures for up to 2,536,397
Shares of its outstanding Common Stock on the basis of $6.50 principal amount of
Debentures for each Share of Common Stock outstanding. Pursuant to the Original
Exchange Offer, the Company issued $16,013,418 principal amount of its
Debentures in exchange for 2,463,603 shares of its Common Stock in October 1998.
The terms of the Debentures being offered pursuant to the Exchange Offer are
identical to the Debentures issued in connection with the Original Exchange
Offer and will be issued pursuant to the terms of the Indenture Supplement dated
October 15, 1998, under which $16,013,418 principal amount of Debentures were
originally issued on October 23, 1998.
If more than 2,536,397 Shares are tendered, the Company will accept no more
than 2,536,397 Shares of Common Stock, with Debentures to be allocated among the
tendering stockholders on a pro rata basis. The Exchange Offer is subject to a
number of additional conditions. See "The Exchange Offer -- Conditions to and
Amendment of the Exchange Offer."
Stockholders who do not tender will retain their Shares of Common Stock and
stockholders who tender will receive Debentures with the following rights
compared to those associated with the ownership of Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK DEBENTURES
- -------------------------------------------- --------------------------------------------
<S> <C>
Equity; pro rata claim to assets of the Debt; right to receive specified principal
Company after payment of all debt amount with senior claim to assets of the
obligations, plus right to share in capital Company compared to holders of equity, but
appreciation. subordinated to all other senior debt
obligations of the Company, plus the right
to receive interest, but no right to capital
appreciation.
No interest payable on Common Stock, Interest at 12% year annum, payable
although dividends are possible. semiannually in cash on each April 15 and
October 15, commencing April 15, 1999.
Voting rights on all matters submitted to No voting rights.
stockholders.
Shares are listed on Nasdaq and are subject Debentures will not be listed on any
to established trading market. exchange or automated quotation system; no
assurance of any trading market.
</TABLE>
The foregoing table is set forth for comparative purposes only and does not
take into account all factors relating to a comparison of the Shares to the
Debentures, nor does it take into account any factors relating to the tax
consequences of accepting the Exchange Offer. For a more complete description of
the Debentures and the Common Stock, see "Description of the Debentures" and
"Description of Capital Stock." See also "Certain United States Federal Income
Tax Consequences."
Tendering stockholders will not be obligated to pay brokerage commissions
or fees or, subject to Instruction 9 of the Letter of Transmittal, transfer
taxes with respect to the exchange of Shares for Debentures pursuant to the
Exchange Offer. The Company will pay all charges and expenses of the Exchange
Agent, the Information Agent, and the Trustee in connection with the Exchange
Offer. See "The Exchange Offer -- Payment of Expenses."
EXPIRATION TIME, EXTENSIONS, TERMINATION AND AMENDMENTS
The Exchange Offer will terminate at 5:00 p.m., New York City time, on
Tuesday, December 22, 1998, unless extended by the Company in its sole
discretion. During any extension of the Exchange Offer, all Shares
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<PAGE> 20
previously tendered and not yet exchanged will remain subject to the Exchange
Offer (subject to withdrawal rights specified herein) and may be accepted for
exchange by the Company. The later of 5:00 p.m., New York City time, on Tuesday,
December 22, 1998, or the latest time and date to which the Exchange Offer may
be extended, is referred to herein as the "Expiration Time."
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time for which the Exchange Offer is to remain open by
giving oral or written notice to Harris Trust and Savings Bank (the "Exchange
Agent") of such extension prior to 9:00 a.m., New York City time, on the
business day after the previously scheduled Expiration Time. The Company also
expressly reserves the right (i) to terminate the Exchange Offer and not accept
for exchange any Shares not theretofore accepted for exchange upon the
occurrence of any of the events set forth herein under "The Exchange
Offer -- Conditions to and Amendment of the Exchange Offer" or (ii) to amend the
Exchange Offer. Any such extension, termination or amendment will be followed as
promptly as practicable by public announcement thereof, such announcement in the
case of an extension to be issued no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Time. Without
limiting the manner in which the Company may choose to make such public
announcement, the Company shall not, unless otherwise required by law, have an
obligation to publish, advertise or otherwise communicate any such public
announcement other than by making a release to the Dow Jones News Service.
HOW TO TENDER
Except as set forth below, for a stockholder to duly tender Shares pursuant
to the Exchange Offer, certificates representing the Shares (or a confirmation
of a book-entry transfer of the Shares into the Exchange Agent's account at The
Depository Trust Company ("DTC") as described below), together with a properly
completed and duly executed Letter of Transmittal or facsimile thereof, with any
required signature guarantees and any other required documents, must be
transmitted to and received by the Exchange Agent on or prior to the Expiration
Time at one of the addresses specified below under "The Exchange Offer --
Exchange Agent." LETTERS OF TRANSMITTAL AND CERTIFICATES REPRESENTING THE SHARES
SHOULD NOT BE SENT TO UGLY DUCKLING OR TO THE INFORMATION AGENT. Signatures on
Letters of Transmittal need not be guaranteed by a firm which is a member of a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc. ("NASD") or by a commercial bank or trust company
having an office in the United States ("Eligible Institution"), provided the
Shares tendered pursuant thereto are tendered (i) by a registered holder of the
Shares who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In all other cases, signatures
must be guaranteed by an Eligible Institution. If Shares are registered in the
name of a person other than the signer of the Letter of Transmittal, the
certificates representing the Shares must be endorsed by, or be accompanied by,
a written instrument or instruments of transfer or exchange in form satisfactory
to the Company, duly executed by the registered holder, with the signature
thereon guaranteed as aforesaid.
The Exchange Agent has established an account with respect to the Shares at
DTC and any financial institution which is a participant in the DTC system may
make book-entry delivery of the Shares by causing DTC to transfer such Shares
into the Exchange Agent's account in accordance with DTC's procedure for such
transfer. However, although delivery of Shares may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the Letter of
Transmittal (or facsimile thereof), with any required signature guarantees and
any other required documents, must in any case be transmitted to and received by
the Exchange Agent prior to the Expiration Time at one of the addresses
specified below under "The Exchange Offer -- Exchange Agent", or the guaranteed
delivery procedure described below must be complied with. Delivery of documents
to DTC in accordance with DTC's procedures does not constitute delivery to the
Exchange Agent.
Tendering stockholders are required under federal income tax law to provide
a correct Taxpayer Identification Number on a Substitute Form W-9, which is
included, together with guidelines relating to the form, with the Letter of
Transmittal. Failure to complete and return this Substitute Form W-9 to the
Exchange Agent may subject a stockholder to a $50 penalty imposed by the
Internal Revenue Service and will
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<PAGE> 21
result in backup withholding of 31% on interest and other payments with respect
to the Debentures and cash in lieu of fractional interests in the Debentures.
The method of delivery of certificates representing the Shares and all
other required documents is at the election and risk of the tendering
stockholder but delivery by registered mail with return receipt requested,
properly insured, is recommended.
If a stockholder desires to tender Shares and certificates representing the
Shares are not immediately available or time will not permit such holder's
Letter of Transmittal, certificates representing the Shares or other required
documents to reach the Exchange Agent before the Expiration Time, such holder's
tender may be effected if:
(a) such tender is made through an Eligible Institution;
(b) prior to the Expiration Time, the Exchange Agent has received a
telegram, facsimile transmission or letter from such Eligible Institution
setting forth the name and address of the holder of such Shares and the
number of the Shares tendered and stating that the tender is being made
thereby and guaranteeing that, within three Nasdaq trading days after the
date of such telegram, facsimile transmission or letter, the Letter of
Transmittal, together with certificates representing the Shares (or
confirmation of book-entry transfer of such Shares into the Exchange
Agent's account with DTC as described above) and any other documents
required by the Letter of Transmittal, will be deposited by such Eligible
Institution with the Exchange Agent; and
(c) such Letter of Transmittal and certificates representing the
Shares, in proper form for transfer (or confirmation of book-entry transfer
of such Shares into the Exchange Agent's account at DTC as described
above), and other required documents are received by the Exchange Agent
within three Nasdaq trading days after the date of such telegram, facsimile
transmission or letter.
The acceptance by a stockholder of the Exchange Offer pursuant to one of
the procedures set forth above will constitute an agreement between the
stockholder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the accompanying Letter of Transmittal.
The Company will accept Shares by giving notice thereof to the Exchange
Agent.
All questions as to the form of all documents and the validity (including
time of receipt) and acceptance of all tenders will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
The Company reserves the absolute right to reject any and all tenders not in
proper form or the acceptance of which would, in the opinion of the Company's
counsel, be unlawful. The Company also reserves the absolute right to waive any
of the conditions of the Exchange Offer or any defect or irregularity in the
tender of any of the Shares. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) will be final. No tender of Shares will be deemed to have
been properly made until all defects and irregularities have been cured or
waived. Neither the Company, the Information Agent, the Exchange Agent nor any
other person shall be under any duty to give notification of any defects or
irregularities in tenders, nor shall any of them incur any liability for failure
to give such notification.
WITHDRAWAL RIGHTS
All tenders duly and validly made are irrevocable, except that Shares
tendered pursuant to the Exchange Offer may be withdrawn prior to the Expiration
Time, and, unless theretofore accepted for exchange as provided in the Exchange
Offer, may also be withdrawn after 5:00 p.m., New York City time, on January 22,
1999.
To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must be received by the Exchange Agent on a timely basis at one of
the addresses specified under "The Exchange Offer -- Exchange Agent." Any notice
of withdrawal must specify the name of the person having tendered the Shares to
be withdrawn, the names in which the Shares are registered if different from
that of the tendering stockholder and the number of Shares to be withdrawn. If
certificates representing the Shares have been
19
<PAGE> 22
physically delivered to the Exchange Agent, then prior to the release of such
certificates, the tendering stockholder must also submit the certificate number
of the certificates representing the Shares to be withdrawn and the signature on
such holder's notice of withdrawal must be guaranteed by an Eligible
Institution. If certificates representing the Shares have been delivered
pursuant to the book-entry procedures set forth above under "The Exchange
Offer -- How to Tender," any notice of withdrawal must specify the name and
number of the participant's account at DTC to be credited with the withdrawn
Shares. All questions as to validity, form and eligibility (including time of
receipt) of notices of withdrawal will be determined by the Company, in its sole
discretion, which determination shall be final and binding. Any Shares
effectively withdrawn will be deemed not to have been duly tendered for purposes
of the Exchange Offer.
None of the Company, the Information Agent or any other person will be
under any duty to give notification of any defects or irregularities in any
notice of withdrawal or incur any liability for failure to give such
notification. However, the Exchange Agent will attempt to correct any defective
tenders by contacting the tendering stockholder. Withdrawals of tenders of
Shares may not be rescinded, and any Shares properly withdrawn will thereafter
be deemed not validly tendered for purposes of the Exchange Offer. However,
withdrawn Shares may be returned by following one of the procedures described
under "The Exchange Offer -- How to Tender" at any time prior to the Expiration
Time.
ACCEPTANCE OF SHARES FOR EXCHANGE;
DELIVERY OF DEBENTURES TO BE EXCHANGED
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Shares validly tendered and not withdrawn will be
made promptly after the Expiration Time. For purposes of the Exchange Offer, the
Company will be deemed to have accepted for exchange validly tendered Shares
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering
stockholders for the purposes of receiving Debentures from the Company and
transmitting such securities to such stockholders. If the Company should extend
the Exchange Offer or be delayed in consummation of the Exchange Offer for any
reason, then, without prejudice to the Company's rights under the Exchange
Offer, the Exchange Agent acting on behalf of the Company may retain tendered
Shares, and such Shares may not be withdrawn, subject to the withdrawal rights
of tendering stockholders set forth above under "The Exchange
Offer -- Withdrawal Rights." Tendered Shares not accepted for exchange by the
Company because of an invalid tender, the termination of the Exchange Offer as a
result of the existence of a condition set forth below under "The Exchange
Offer -- Conditions to and Amendment of the Exchange Offer" or for any other
reason, will be returned without expense to the tendering stockholders (or, in
the case of Shares delivered by book-entry transfer within DTC, will be credited
to the account maintained within DTC by the participant in the DTC system who
delivered such Shares) as promptly as practicable following the expiration or
termination of the Exchange Offer.
Delivery of Debentures in exchange for Shares tendered pursuant to the
Exchange Offer will be made by the Company to the Exchange Agent, as agent for
the tendering stockholders, only after receipt by the Exchange Agent of
certificates representing the tendered Shares (or confirmation of the book-entry
transfer of such Shares into the Exchange Agent's account at DTC), a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), and
any other required documents.
DENOMINATIONS; FRACTIONAL INTERESTS
The Debentures will be issued only in denominations of $1.00 and integral
multiples thereof. Fractional interests with respect to the Debentures will not
be distributed to tendering stockholders. Instead, the Company will pay cash in
lieu of such interests.
PRORATION IF SHARES TENDERED EXCEED MAXIMUM
If stockholders tendering Shares validly tender more than 2,536,397 shares,
the Company will accept for exchange no more than 2,536,397 Shares. In such
event, Debentures will be allocated to tendering stockholders on a pro rata
basis based on the number of Shares tendered by each tendering stockholder. The
20
<PAGE> 23
Company will accept from each tendering stockholder that number of Shares equal
to 2,536,397 multiplied by a fraction, the numerator of which is the total
number of Shares validly tendered by such tendering stockholder and the
denominator of which is the total number of Shares validly tendered by all
tendering stockholders. The number of Shares will be rounded up or down as
nearly as practicable to result in the tender of whole Shares rather than
fractional Shares. Any Shares not accepted by the Company as a result of the
allocation described above will be returned promptly to the tendering
stockholder.
CONDITIONS TO AND AMENDMENT OF THE EXCHANGE OFFER
The Company may accept up to 2,536,397 Shares validly tendered
(representing approximately 16% of the outstanding Shares of the Company's
Common Stock as of November 18, 1998). If more than 2,536,397 Shares are
tendered, the Company will accept no more than 2,536,397 Shares of Common Stock,
to be allocated among the tendering stockholders on a pro rata basis as
described under "-- Proration if Shares Tendered Exceed Maximum." The Exchange
Offer is subject to other conditions described below.
An application will be filed with the Commission for qualification of the
Indenture under which the Debentures will be issued under the Trust Indenture
Act of 1939 (the "Trust Indenture Act"). The Exchange Offer is conditioned upon
the Indenture being qualified under the Trust Indenture Act. In addition to the
foregoing conditions, the Company may decline to accept any Shares in exchange
for Debentures and may withdraw the Exchange Offer as to Shares not then
accepted if, before the time of acceptance, there shall have occurred any of the
following events which, in the Company's sole judgment, makes it inadvisable to
proceed with such acceptance:
(a) any government agency or other person shall have instituted or
threatened any action or proceeding before any court or administrative
agency (i) challenging the acquisition of Shares pursuant to the Exchange
Offer or otherwise in any manner relating to the Exchange Offer or (ii)
otherwise materially adversely affecting the Company, or there shall have
occurred any existing action or proceeding with respect to the Company; or
(b) any statute, rule or regulation shall have been proposed or
enacted, or any action shall have been taken by any governmental authority,
which would or might prohibit, restrict or delay consummation of the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(c) any state of war, national emergency, banking moratorium or
suspension of payments by banks in the State of New York shall have
occurred, or any currency or exchange control laws or regulations or
general suspension of trading or limitation on prices on Nasdaq shall have
been imposed or there shall have occurred a material adverse change in the
securities markets generally; or
(d) any required consents or approvals from third parties or
government regulatory agencies shall not have been obtained; or
(e) the Exchange Offer would result in the Company's Shares being
delisted from the Nasdaq National Market; or
(f) any change, or development involving a prospective change, in or
affecting the business or financial affairs of the Company shall have
occurred.
The Company reserves the right to waive any of the foregoing conditions.
The Company also reserves the right to amend the Exchange Offer by public
announcement of any amendment. The Exchange Offer, however, may not be amended
or withdrawn unless the amendment or the circumstances described above regarding
withdrawal occur prior to the Expiration Time.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
Exchange Offer. All correspondence in connection with the Exchange Offer and the
Letter of Transmittal should be addressed to the Exchange Agent, as follows:
21
<PAGE> 24
HARRIS TRUST AND SAVINGS BANK
<TABLE>
<S> <C> <C>
Mailing Address: Facsimile Copy Number (For Hand/Overnight Delivery:
c/o Harris Trust Eligible Institutions Only): Harris Trust and Savings Bank
Company of New York 212-701-7636 c/o Harris Trust Company of
P.O. Box 1010 Confirm Receipt of Facsimile New York
Wall Street Station By Telephone 88 Pine Street, 19th Floor
New York, N.Y. 10268-1010 212-701-7624 New York, NY 10005
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE VALID
DELIVERY.
INFORMATION AGENT
Corporate Investor Communications, Inc. will act as Information Agent in
connection with the Exchange Offer. For further assistance or additional copies
of documents call the Information Agent toll-free at 1-888-673-4478 or write to
the Information Agent at:
<TABLE>
<S> <C> <C>
Mailing Address: Facsimile Copy Number: Hand Delivery:
Corporate Investor 201-804-8693 Corporate Investor
Communications, Inc. Communications, Inc.
111 Commerce Road 111 Commerce Road
Carlstadt, NJ 07072-2586 Carlstadt, NJ 07072-2586
</TABLE>
LETTERS OF TRANSMITTAL AND CERTIFICATES REPRESENTING THE SHARES SHOULD NOT
BE SENT TO THE INFORMATION AGENT. See "The Exchange Offer -- How to Tender."
NO FINANCIAL ADVISOR
No financial advisor has been retained to render, and no financial advisor
has rendered, an opinion as to the fairness of the Exchange Offer to holders of
the Company's Common Stock or to solicit exchanges of Common Stock for
Debentures.
PAYMENT OF EXPENSES
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended, afforded by Section 3(a)(9) thereof. Therefore, the Company will not
pay any commission or other remuneration to any broker, dealer, salesman or
other person for soliciting tenders of the Shares. However, regular employees of
the Company (who will not be additionally compensated therefor) may solicit
tenders and will answer inquiries concerning the Exchange Offer.
The Company will pay the Exchange Agent and the Information Agent
reasonable and customary fees for their services and will reimburse such parties
for their reasonable out-of-pocket expenses in connection therewith. The Company
will also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Offering Circular and related documents to the beneficial owners of the
Shares held of record by such persons and in handling or forwarding tenders and
consents for their customers.
22
<PAGE> 25
BACKGROUND, PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Ugly Duckling completed its initial public offering in June 1996 with the
sale of 2,300,000 Shares of its Common Stock at a price of $6.75 per share.
Following the initial public offering, the price of the Company's Common Stock
increased significantly, to a high of $25.75 per share in the first quarter of
1997, reflecting a stock market with generally increasing stock prices, a
healthy used car sales and finance industry, and growth in the Company's
revenues and earnings. In recent periods, however, the used car sales and
financing industry has encountered difficulties, with several used car companies
announcing major downward adjustments to their financial statements, violations
of loan covenants, related litigation, and other events. In addition, certain of
these companies have filed for bankruptcy protection. These difficulties have
corresponded with a general decline in the stock prices of companies involved in
this industry. At the same time, stock prices of small-cap companies have
recently experienced a broad-based decline. Consistent with this market decline,
particularly with respect to companies in the used car sales and finance
industry, the price of the Company's Common Stock decreased to $5.00 as of
November 18,, 1998, a price that is near the low end of its 52-week trading
range.
The Company does not believe that recent prices reflect the underlying
value of its Common Stock. In this regard, in establishing a tender price that
is significantly higher than the market price of the Shares as of November 18,
1998, the Company considered the following factors, among others.
- The closing price of $5.00 per Share as of November 18, 1998, two
business days prior to the announcement of the Exchange Offer, represents
an 81% decline from its all-time high in the first quarter of 1997 and a
61% decline from its high in 1998. See "Price Range of Common Stock."
- The recent Share price reflects a discount of approximately 49% to the
Company's book value per share as of September 30, 1998. See "Summary
Selected Consolidated Financial Data."
- The Company's recent and historical financial results, including the
Company's increase in revenues ($216.1 million compared to $79.5 million)
and basic earnings per share from continuing operations ($0.46 compared
to $0.25) for the nine month period ended September 30, 1998 as compared
to the nine month period ended September 30, 1997. See "Summary Selected
Consolidated Financial Data."
The principal purpose of the Exchange Offer is to reduce the number of
Shares of Common Stock outstanding by offering to purchase Shares in the
Exchange Offer, thereby offering the potential for increased earnings per share
in the future. The Company believes that if it is able to increase earnings per
share, this development could have a positive influence on the price of its
Common Stock. The increased indebtedness resulting from the Exchange Offer,
however, will significantly increase the Company's debt service requirements and
could negatively affect earnings per share. See "Risk Factors -- Increased
Leverage and Debt Service Obligations" and "-- No Assurance of Increased
Earnings Per Share."
Holders of Shares of Common Stock electing to participate in the Exchange
Offer will realize the following benefits.
- In exchange for Shares, tendering stockholders will receive a debt
security with a principal amount approximately 30% greater than the
market price of the Shares as of November 18, 1998.
- The Debentures will bear interest at 12% per annum, payable each April 15
and October 15 until the Debentures are paid in full.
- The Debentures, although subordinated in right of payment to all other
existing and future senior indebtedness of the Company, represent a claim
on the Company's assets senior to any claim of the holders of the
Company's Common Stock.
Notwithstanding the benefits to tendering stockholders summarized above,
holders of Shares contemplating the Exchange Offer should take into account the
following considerations.
- Tendering stockholders receiving Debentures will relinquish the right to
share in any capital appreciation of the Company's Common Stock.
23
<PAGE> 26
- Unlike the Shares, the Debentures will not be listed on any exchange or
automated quotation system and there can be no assurance that a trading
market will develop.
- Unlike holders of Common Stock, holders of the Debentures will have no
rights to vote on matters submitted to the Company's stockholders.
- The Company has the right to prepay the Debentures at any time without
penalty or premium by paying the unpaid principal amount and accrued
interest on the Debentures.
- Tendering stockholders will be subject to certain tax consequences that
may differ from those that would be realized if the Shares were sold for
cash.
Finally, holders of Shares contemplating the Exchange Offer should consider
that the Company has not retained any financial advisor or investment banking
firm to assist the Company in determining the price and terms of the Indentures
or whether the consideration offered in the Exchange Offer is adequate to
tendering stockholders. The Company also has not requested any report, opinion,
or appraisal relating to the fairness of the consideration being offered
pursuant to the Exchange Offer. For a discussion of risk factors which should be
taken into account in considering the Exchange Offer, see "Risk Factors."
If the Exchange Offer is completed, the Shares accepted for exchange will
be held by the Company as treasury stock.
24
<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1998 and pro forma to give effect to the exchange of Debentures
assuming the maximum number of Shares were tendered as if such exchange had
occurred on September 30, 1998. The pro forma Original Exchange Offer Shares
exchanged reflect the 2,463,603 Shares exchanged in October 1998 at a weighted
average price of $5.05 per Share. The pro forma information for the maximum
number of Shares exchanged assumes that the total number of Shares exchanged are
the 5,000,000 Shares tendered pursuant to both the Original Exchange Offer and
this Exchange Offer valued at $5.00 per Share, which approximates the price of
the Company's Common Stock as of November 18, 1998.
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
AS ADJUSTED
-----------------------------
ORIGINAL MAXIMUM
EXCHANGE OFFER NO. OF
SHARES SHARES
ACTUAL EXCHANGED EXCHANGED
-------- -------------- -----------
(IN THOUSANDS AND UNAUDITED)
<S> <C> <C> <C>
Debt:
Revolving Facility..................................... $ 44,852 $ 44,852 $ 44,852
Notes Payable.......................................... 3,480 3,480 3,480
Subordinated Notes Payable(1).......................... 25,000 25,000 25,000
12% Subordinated Debentures due 2003(3)................ -- 12,441 25,123
-------- -------- --------
Total Debt(1).................................. 73,332 85,773 98,455
-------- -------- --------
Stockholders' Equity:
Common Stock; $.001 par value, 100,000,000 shares
authorized, 18,560,000 issued and outstanding (Actual),
13,567,000 and 17,567,000 issued and outstanding,
respectively (As Adjusted)(1)(2)....................... 173,285 160,354 147,672
Retained Earnings...................................... 8,133 8,133 8,133
-------- -------- --------
Total Stockholders' Equity..................... 181,418 168,487 155,805
-------- -------- --------
Total Capitalization(1)........................ $254,750 $254,260 $254,260
======== ======== ========
</TABLE>
- ---------------
(1) Excludes $5 million of subordinated notes payable included within the
Company's discontinued operations.
(2) Excludes (i) approximately 1,556,000 shares of Common Stock issuable upon
exercise of warrants issued and outstanding, (ii) up to 175,000 shares of
Common Stock issuable upon reaching certain milestones related to the
transaction with Reliance Acceptance Group, (iii) approximately 1,298,000
shares of Common Stock issuable upon exercise of stock options issued and
outstanding under the Company's Long-Term Incentive Plan as of November 18,
1998, and (iv) 500,000 shares of Common Stock issuable upon exercise of
stock options issued and outstanding under the 1998 Executive Incentive Plan
as of November 18, 1998.
(3) The amounts represent the principal amount of the Debentures less the
discount.
25
<PAGE> 28
UGLY DUCKLING CORPORATION
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1997, are derived from the
consolidated financial statements of the Company, which consolidated financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The selected data presented below for the nine-month periods
ended September 30, 1998 and 1997, and as of September 30, 1998 and 1997, are
derived from the unaudited condensed consolidated financial statements of the
Company. The information presented below under the caption "Dealership Operating
Data" is unaudited. In the opinion of management, such unaudited data reflect
all adjustments, consisting only of normally recurring adjustments, necessary to
fairly present the Company's financial position and results of operations for
the periods presented. The results of operations of any interim period are not
necessarily indicative of results to be expected for a full fiscal year. For
additional information, see the Consolidated Financial Statements and notes
thereto of the Company included in the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- -------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales of Used Cars...................................... $216,111 $ 79,543 $123,814 $ 53,768 $47,824 $27,768 $13,969
Less:
Cost of Used Cars Sold................................ 123,976 45,902 72,358 31,879 29,733 13,604 6,606
Provision for Credit Losses........................... 45,053 14,193 22,354 9,657 8,359 8,024 3,292
-------- -------- -------- -------- ------- ------- -------
47,082 19,448 29,102 12,232 9,732 6,140 4,071
-------- -------- -------- -------- ------- ------- -------
Interest Income......................................... 12,031 8,511 12,559 8,597 8,227 4,683 1,629
Gain on Sale of Finance Receivables..................... 12,093 6,155 6,721 3,925 -- -- --
Servicing Income........................................ 11,834 5,114 8,738 1,887 -- -- --
Other Income............................................ 404 1,964 3,587 650 308 556 879
-------- -------- -------- -------- ------- ------- -------
36,362 21,744 31,605 15,059 8,535 5,239 2,508
-------- -------- -------- -------- ------- ------- -------
Income before Operating Expenses........................ 83,444 41,192 60,707 27,291 18,267 11,379 6,579
Operating Expenses:
Selling and Marketing................................. 15,462 6,663 10,538 3,585 3,856 2,402 1,293
General and Administrative............................ 48,412 24,469 39,412 12,221 11,677 7,722 3,108
Depreciation and Amortization......................... 3,534 2,128 3,150 1,382 1,225 713 557
-------- -------- -------- -------- ------- ------- -------
67,408 33,260 53,100 17,188 16,758 10,837 4,958
-------- -------- -------- -------- ------- ------- -------
Income before Interest Expense.......................... 16,036 7,932 7,607 10,103 1,509 542 1,621
Interest Expense........................................ 1,687 630 706 2,429 5,328 2,870 893
-------- -------- -------- -------- ------- ------- -------
Earnings (Loss) before Income Taxes..................... 14,349 7,302 6,901 7,674 (3,819) (2,328) 728
Income Taxes (Benefit).................................. 5,777 2,966 2,820 694 -- (334) 30
-------- -------- -------- -------- ------- ------- -------
Earnings (Loss) from Continuing Operations.............. 8,572 4,336 4,081 6,980 (3,819) (1,994) 698
Discontinued Operations:
Earnings (Loss) from Discontinued Operations, net of
income taxes.......................................... (9,591) 1,409 5,364 (1,114) (153) 27 --
-------- -------- -------- -------- ------- ------- -------
Net Earnings (Loss)..................................... $ (1,019) $ 5,745 $ 9,445 $ 5,866 $(3,972) $(1,967) $ 698
======== ======== ======== ======== ======= ======= =======
</TABLE>
<TABLE>
Earnings (Loss) per Common Share from Continuing Operations:
<S> <C> <C> <C> <C> <C> <C>
Basic............................................... $ .46 $ 0.25 $ 0.23 $ 0.77 $ (0.69) $ (0.36)
======== ======== ======== ======== ======= =======
Diluted............................................. $ .46 $ 0.24 $ 0.22 $ 0.73 $ (0.69) $ (0.36)
======== ======== ======== ======== ======= =======
Net Earnings (Loss) per Common Share:
Basic............................................... $ (0.05) $ 0.33 $ 0.53 $ 0.63 $ (0.72) $ (0.35)
======== ======== ======== ======== ======= =======
Diluted............................................. $ (0.05) $ 0.32 $ 0.52 $ 0.60 $ (0.72) $ (0.35)
======== ======== ======== ======== ======= =======
<CAPTION>
Earnings (Loss) per Common Share from Continuing Operations:
<S> <C>
Basic............................................... $ 0.14
=======
Diluted............................................. $ 0.14
=======
Net Earnings (Loss) per Common Share:
Basic............................................... $ 0.14
=======
Diluted............................................. $ 0.14
=======
</TABLE>
26
<PAGE> 29
<TABLE>
Shares Used in Computation --
<S> <C> <C> <C> <C> <C> <C> <C>
Basic Shares............................................ 18,600 17,620 17,832 7,887 5,522 5,584 5,011
======== ======== ======== ======== ======= ======= =======
Diluted Shares.......................................... 18,800 18,200 18,234 8,298 5,522 5,584 5,011
======== ======== ======== ======== ======= ======= =======
Earnings to Fixed Charges(a)............................ 4.48 5.91 3.91 2.62 (b) (b) 1.69
======== ======== ======== ======== ======= ======= =======
BALANCE SHEET DATA:
Cash and Cash Equivalents............................... $ 955 $ 4,401 $ 3,537 $ 18,455 $ 1,419 $ 168 $ 79
Finance Receivables, Net................................ 60,684 29,920 60,778 14,186 27,732 14,534 7,089
Total Assets.......................................... 278,788 217,994 275,633 117,629 60,712 29,681 11,936
Subordinated Notes Payable.............................. 25,000 12,000 12,000 14,000 14,553 18,291 8,941
Total Debt............................................ 73,332 20,352 77,171 26,904 49,754 28,233 9,380
Preferred Stock......................................... -- -- -- -- 10,000 -- --
Common Stock............................................ 173,285 171,943 172,622 82,612 127 77 1
Total Stockholders' Equity (Deficit).................. 181,418 177,395 181,774 82,319 4,884 (1,194) 697
Principal Balances Serviced:
Dealership Sales........................................ $ 30,089 $ 16,546 $ 55,965 $ 7,068 $34,226 $19,881 $ 9,588
Securitized with Servicing Retained..................... 306,650 228,995 238,025 51,662 -- -- --
Discontinued Operations................................. 33,884 25,182 29,965 49,772 13,805 1,620 --
Servicing on Behalf of Others........................... 61,100 162,000 127,322 -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Total Serviced Portfolios............................. $431,723 $432,723 $451,277 $108,502 $48,031 $21,501 $ 9,588
======== ======== ======== ======== ======= ======= =======
DEALERSHIP OPERATING DATA (UNAUDITED):
Average Sales Price per Car............................. $ 7,946 $ 7,364 $ 7,443 $ 7,107 $ 6,478 $ 5,269 $ 4,159
Number of Used Cars Sold................................ 27,198 10,801 16,636 7,565 7,383 5,270 3,359
Company Dealerships..................................... 51 35 41 8 8 8 5
Number of Contracts Originated.......................... 26,915 10,208 16,001 6,929 6,129 4,731 3,093
Principal Balances Originated (000 Omitted)............. $207,643 $ 76,126 $116,830 $ 48,996 $36,568 $23,589 $12,984
Retained Portfolio:
Number of Contracts Outstanding......................... 4,025 2,665 7,993 1,045 8,049 5,515 2,929
Allowance as % of Outstanding Principal................. 18.5% 20.0% 18.5% 23.0% 21.9% 30.4% 30.0%
Average Principal Balance Outstanding................... $ 7,476 $ 6,231 $ 7,002 $ 6,764 $ 4,252 $ 3,605 $ 3,273
Average Yield on Contracts.............................. 25.8% 26.0% 26.7% 29.2% 28.0% 28.2% 26.4%
Delinquencies -- Retained Portfolio:
Principal Balances 31 to 60 Days........................ 0.8% 1.5% 2.2% 2.3% 4.2% 5.1% 10.5%
Principal Balances over 60 Days......................... 2.5% 2.8% 0.6% 0.6% 1.1% 1.3% 15.0%
</TABLE>
- ---------------
(a) For the purposes of these computations, "earnings" are defined as the sum of
pre-tax income from continuing operations plus fixed charges of the Company
and its subsidiaries, adjusted to exclude the amount of any interest
capitalized during the period, but adding the amount of previously
capitalized interest amortized during the period; "fixed charges" consist of
interest on debt, amortization of debt discount, premium, and expense, and
that portion of rents which is representative of the interest factor.
(b) Earnings did not cover fixed charges by $3.9 million and $2.5 million in the
years ended December 31, 1995 and 1994, respectively.
27
<PAGE> 30
CERTAIN PRO FORMA FINANCIAL INFORMATION
The table set forth below shows the pro forma effects the Exchange Offer
would have had on the adjusted financial condition and results of operations of
the Company for the year ended December 31, 1997 and for the nine months ended
September 30, 1998, assuming the maximum number of Shares had been exchanged on
the first day of the respective periods. The pro forma Original Exchange Offer
Shares exchanged reflect the 2,463,603 Shares exchanged in October 1998 at a
weighted average price of $5.05 per Share. The pro forma information for the
maximum number of Shares exchanged assumes that the total number of Shares
exchanged are the 5,000,000 Shares tendered pursuant to both the Original
Exchange Offer and this Exchange Offer valued at $5.00 per Share, which
approximates the price of the Company's Common Stock as of November 18, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED DECEMBER 31, 1997
------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
-------------------------------- --------------------------------
ORIGINAL MAXIMUM ORIGINAL MAXIMUM
EXCHANGE OFFER NO. OF SHARES EXCHANGE OFFER NO. OF SHARES
ACTUAL SHARES EXCHANGED EXCHANGED ACTUAL SHARES EXCHANGED EXCHANGED
-------- ---------------- ------------- -------- ---------------- -------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales of Used Cars.................... $216,111 $216,111 $216,111 $123,814 $123,814 $123,814
Less:
Cost of Used Cars Sold............... 123,976 123,976 123,976 72,358 72,358 72,358
Provision for Credit Losses.......... 45,053 45,053 45,053 22,354 22,354 22,354
-------- -------- -------- -------- -------- --------
47,082 47,082 47,082 29,102 29,102 29,102
-------- -------- -------- -------- -------- --------
Interest Income....................... 12,031 12,031 12,031 12,559 12,559 12,559
Gain on Sale of Finance
Receivables.......................... 12,093 12,093 12,093 6,721 6,721 6,721
Servicing Income...................... 11,834 11,834 11,834 8,738 8,738 8,738
Other Income.......................... 404 404 404 3,587 3,587 3,587
-------- -------- -------- -------- -------- --------
36,362 36,362 36,362 31,605 31,605 31,605
-------- -------- -------- -------- -------- --------
Income before Operating Expenses...... 83,444 83,444 83,444 60,707 60,707 60,707
Operating Expenses:
Selling and Marketing................ 15,462 15,462 15,462 10,538 10,538 10,538
General and Administrative........... 48,412 48,412 48,412 39,412 39,412 39,412
Depreciation and Amortization........ 3,534 3,534 3,534 3,150 3,150 3,150
-------- -------- -------- -------- -------- --------
67,408 67,408 67,408 53,100 53,100 53,100
-------- -------- -------- -------- -------- --------
Income before Interest Expense........ 16,036 16,036 16,036 7,607 7,607 7,607
Interest Expense...................... 1,687 3,664(1) 5,719(1) 706 3,342(1) 6,081(1)
-------- -------- -------- -------- -------- --------
Earnings before Income Taxes.......... 14,349 12,372 10,317 6,901 4,265 1,526
Income Taxes.......................... 5,777 4,986(2) 4,164(2) 2,820 1,743(2) 624(2)
-------- -------- -------- -------- -------- --------
Earnings from Continuing
Operations........................... $ 8,572 $ 7,386 $ 6,153 $ 4,081 $ 2,522 $ 902
======== ======== ======== ======== ======== ========
Earnings per Common Share from
Continuing Operations:
Basic................................ $ 0.46 $ 0.46 $ 0.45 $ 0.23 $ 0.16 $ 0.07
======== ======== ======== ======== ======== ========
Diluted.............................. $ 0.46 $ 0.45 $ 0.45 $ 0.22 $ 0.16 $ 0.07
======== ======== ======== ======== ======== ========
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 YEAR ENDED DECEMBER 31, 1997
------------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA
-------------------------------- --------------------------------
ORIGINAL MAXIMUM ORIGINAL MAXIMUM
EXCHANGE OFFER NO. OF SHARES EXCHANGE OFFER NO. OF SHARES
ACTUAL SHARES EXCHANGED EXCHANGED ACTUAL SHARES EXCHANGED EXCHANGED
-------- ---------------- ------------- -------- ---------------- -------------
(IN THOUSANDS, EXCEPT SHARES USED IN COMPUTATION AND BOOK VALUE PER SHARE)
<S> <C> <C> <C> <C> <C> <C>
Shares Used in Computation:
Basic................................ 18,600 16,136 13,600 17,832 15,368 12,832
======== ======== ======== ======== ======== ========
Diluted.............................. 18,800 16,336 13,800 18,234 15,770 13,234
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and Cash Equivalents............. $ 955 $ 955 $ 955 $ 3,537 $ 3,537 $ 3,537
Finance Receivables, Net.............. 60,684 60,684 60,684 60,778 60,778 60,778
Total Assets......................... 278,788 278,788 278,788 275,633 275,633 275,633
Subordinated Notes Payable............ 25,000 37,441(3) 50,123(3) 12,000 24,441(3) 37,123(3)
Total Debt........................... 73,332 85,773 98,455 77,171 89,612 102,294
Preferred Stock....................... -- -- -- -- -- --
Common Stock.......................... 173,285 160,354(3) 147,672(3) 172,622 159,691(3) 147,009(3)
Total Stockholders' Equity........... 181,418 168,487 155,805 181,774 168,843 156,161
Common Shares Outstanding............. 18,533 16,069 13,533 18,521 16,057 13,521
Book Value per share.................. 9.79 10.49 11.51 9.81 10.52 11.55
</TABLE>
- ---------------
(1) To reflect the effect of the additional debt service and discount amortized
over the life of the Debentures.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998 YEAR ENDED DECEMBER 31, 1997
-------------------------------- --------------------------------
ORIGINAL MAXIMUM ORIGINAL MAXIMUM
EXCHANGE OFFER NO. OF SHARES EXCHANGE OFFER NO. OF SHARES
SHARES EXCHANGED EXCHANGED SHARES EXCHANGED EXCHANGED
---------------- ------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Par Value of Debentures Issued......................... $ 16,013 $32,500 $16,013 $32,500
======== ======= ======= =======
Interest Incurred During the Period at 12%............. $ 1,441 $ 2,925 $ 1,922 $ 3,900
Amortization of the Discount of $3,572,000 and
$7,377,000 for the Original Exchange Offer and
Maximum Shares Exchanged, Respectively............... 536 1,107 714 1,475
-------- ------- ------- -------
Interest Expense Adjustment............................ $ 1,977 $ 4,032 $ 2,636 $ 5,375
======== ======= ======= =======
</TABLE>
(2) To record the income tax effects of the interest expense adjustment.
(3) To reflect the increase in Subordinated Notes Payable and the decrease in
Common Stock pursuant to the Exchange Offer.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1998 YEAR ENDED DECEMBER 31, 1997
-------------------------------- --------------------------------
ORIGINAL MAXIMUM ORIGINAL MAXIMUM
EXCHANGE OFFER NO. OF SHARES EXCHANGE OFFER NO. OF SHARES
SHARES EXCHANGED EXCHANGED SHARES EXCHANGED EXCHANGED
---------------- ------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Par Value of Subordinated Debentures................... $16,013 $32,500 $16,013 $32,500
Less: Discount......................................... 3,572 7,377 3,572 7,377
------- ------- ------- -------
Carrying Value of Debentures Payable................... 12,441 25,123 12,441 25,123
Estimated Stock Acquisition Costs...................... 490 490 490 490
------- ------- ------- -------
Common Stock Acquired.................................. $12,931 $25,613 $12,931 $25,613
======= ======= ======= =======
</TABLE>
29
<PAGE> 32
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq Stock Market under the
symbol "UGLY." The Company's initial public offering was effected on June 17,
1996 at a price of $6.75 per share. The high and low closing sales prices of the
Common Stock as reported by Nasdaq since that date are reported below.
<TABLE>
<CAPTION>
MARKET PRICE
----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1996:
Second Quarter (from June 18, 1996)......................... $10.00 $ 8.50
Third Quarter............................................... $15.50 $ 8.13
Fourth Quarter.............................................. $21.63 $13.00
FISCAL YEAR 1997:
First Quarter............................................... $25.75 $16.25
Second Quarter.............................................. $18.06 $13.13
Third Quarter............................................... $17.00 $12.50
Fourth Quarter.............................................. $16.75 $ 7.69
FISCAL YEAR 1998:
First Quarter............................................... $10.88 $ 6.31
Second Quarter.............................................. $12.70 $ 8.00
Third Quarter............................................... $ 9.13 $ 4.63
</TABLE>
On November 18, 1998, there were approximately 78 holders of record of the
Company's Common Stock.
Ugly Ducking's capital stock consists of 100,000,000 shares of Common
Stock, of which approximately 16,070,000 shares were outstanding as of November
18, 1998 and 10,000,000 shares of Preferred Stock, none of which were issued and
outstanding as of November 18, 1998.
DIVIDENDS
Cash dividends have never been paid on Ugly Duckling's Common Stock. The
Company presently intends to retain earnings and does not anticipate that cash
dividends will be paid on its Common Stock in the foreseeable future. Under the
terms of the Revolving Facility with GE Capital, the Company may not declare or
pay dividends in excess of 15% of each year's net earnings available for
distribution.
30
<PAGE> 33
BUSINESS
GENERAL
The Company operates a chain of buy here-pay here used car dealerships and
underwrites, finances and services retail installment contracts generated from
the sale of used cars by its Company dealerships and by third party dealers
located in selected markets throughout the country. The Company targets its
products and services to the sub-prime segment of the automobile financing
industry, which focuses on selling and financing the sale of used cars to
persons who have limited credit histories, low incomes, or past credit problems
("Sub-Prime Borrowers").
Dealership Operations and Related Securitization Program. As of the date
of this Offering Circular, the Company was operating 55 used car dealerships
("Company Dealerships") located in nine metropolitan areas and seven states. The
Company distinguishes its Company Dealership operations from those of typical
buy here -- pay here dealers through its network of multiple locations, upgraded
facilities, large inventories of used cars, regional centralized purchasing,
value-added marketing programs, and dedication to customer service. Company
Dealerships are typically located in high visibility, high traffic commercial
areas, and generally are newer and cleaner in appearance than other buy
here -- pay here dealers, helping promote the Company's image as a friendly and
reputable business. For the nine months ended September 30, 1998, the Company
generated revenues from its continuing dealership operations of $216.1 million
and net earnings of $8.6 million, compared to $79.5 million in revenues and $4.3
million in net earnings, respectively, for the same period of 1997.
During the first quarter of 1996, the Company initiated a Securitization
Program under which special "bankruptcy remote" subsidiaries sell securities
backed by finance contracts to investors. In February 1998, the Company executed
a commitment letter with Greenwich Capital Markets, Inc. ("Greenwich Capital")
under which, among other things, Greenwich Capital retains the right to be the
exclusive securitization agent for the Company for up to $1 billion of AAA
surety wrapped securities as part of the Company's ongoing Securitization
Program. The agreement contains certain provisions that would not oblige
Greenwich Capital or require the Company to fulfill the remaining commitment
under the agreement.
Third Party Operations. Beginning in 1994 with the acquisition of Champion
Financial Services, Inc. ("Champion"), an independent automobile finance
company, the Company has been involved in the acquisition and servicing of
retail installment contracts generated by third party car dealers, typically
involving Sub-Prime Borrowers. From the acquisition of Champion through the
first quarter of 1998, the Company pursued an aggressive growth plan, setting up
a national third party branch office network pursuant to which it acquired
retail installment contracts from numerous independent third party car dealers.
In 1997, the Company began to engage in the purchase of loan portfolios in
bulk and the servicing of loan portfolios on behalf of third parties, including
companies that were experiencing financial difficulties. The Company maintains
loan servicing facilities in Nashville, Tennessee, Denver, Colorado, San
Antonio, Texas, and Dallas, Texas to support its bulk servicing operations,
which are included in discontinued operations. In recent periods, the Company
has entered into several large servicing or bulk purchasing transactions
involving independent third party finance receivable portfolios and, in some
cases, has sold or securitized these portfolios, with servicing retained. The
two most significant of such transactions involved transactions with First
Merchants Acceptance Corporation and with Reliance Acceptance Group. The total
contract portfolio serviced by the Company's third party loan servicing
operations totaled $725.1 million as of September 30, 1998.
The Company has also initiated a program pursuant to which the Company
provides qualified independent used car dealers with warehouse purchase
facilities and operating credit lines primarily secured by the dealer's retail
installment contract portfolio (the "Cygnet Dealer Program"). The Cygnet Dealer
Program's contract portfolio totaled $39.4 million as of September 30, 1998.
31
<PAGE> 34
RECENT DEVELOPMENTS
Discontinued Operations. In the third quarter of 1997, the Company
announced a strategic evaluation of its third party dealer operations, including
the possible sale or spin-off of these operations. In February 1998, the Company
announced its intention to close its branch office network and exit this line of
business. The closure was substantially complete as of March 31, 1998, although
the Company is continuing to negotiate lease settlements and terminations, and
to service the associated loan portfolio. The Company recorded a pre-tax charge
to discontinued operations totaling approximately $9.1 million (approximately
$5.6 million, net of income taxes) during the first quarter of 1998. In
addition, a $6.0 million charge ($3.6 million net of income taxes) was taken
during the third quarter of 1998 due primarily to higher than anticipated loan
losses and servicing expenses in connection with the branch office loan
portfolio.
In April 1998, the Company announced that its Board of Directors had
directed management to proceed with separating its dealership operations from
the Cygnet Dealer Program and the Company's bulk purchase and third party loan
servicing operations. Since that date, these businesses have been classified as
discontinued operations in the Company's Consolidated Financial Statements.
The Company subsequently formed a new wholly owned subsidiary, Cygnet
Financial Corporation ("Cygnet") to effectuate the separation of the Company's
dealership and non-dealership operations. At the Company's annual meeting held
on August 31, 1998, stockholders of the Company approved a split-up proposal
under which the assets and liabilities of the non-dealership businesses would be
transferred to Cygnet and Cygnet would become a separate public company through
a rights offering to stockholders of the Company. Due to a lack of stockholder
participation in the offering, however, the rights offering was terminated. In
the third quarter of 1998, the Company recorded an after tax charge of
approximately $1.2 million relating to the costs incurred for the terminated
right offering.
The Company is continuing to explore alternatives for formally separating
its dealership and non-dealership operations, although there can be no assurance
that the Company will ultimately be successful in this regard. Although the
Company was not successful in formally separating its non-dealership operations
as contemplated, it has completed the internal process of establishing separate
management teams and infrastructures for the dealership and non-dealership
operations. The Company believes this structure enhances each segment's ability
to focus on its own operations and facilitates the Company's goal of formally
separating them.
Individuals contemplating whether to participate in the Exchange Offer
should consider the possibility that Ugly Duckling could later decide to retain
rather than separate its non-dealership operations, in which case Ugly
Duckling's consolidated financial statements would require restatement to
reflect the integration of certain financial results currently attributed to
discontinued operations.
Securitization Accounting Change. On November 17, 1998 the Company
announced a change in the way it structures transactions under its
Securitization Program. Previously, the Company structured its securitization
transactions as sales for accounting purposes. Beginning in the fourth quarter
of 1998, however, the Company will structure securitizations for accounting
purposes to retain the Finance Receivables and the related debt on the Company's
balance sheet and recognize the income over the life of the contracts. The
Company will no longer recognize a Gain on Sale of Finance Receivables as
previously recognized by the Company. This change will not affect the Company's
prior securitizations.
The fundamentals of the Company's continuing business should be unaffected
by this change. The Company expects to continue to finance its receivables
through securitization. There will, however, be a significant adverse impact on
earnings per share for the next few periods as the Company builds its on-balance
sheet portfolio. The Company expects to incur a significant loss in the fourth
quarter of 1998 and this change will continue to have a material adverse effect
on reported earnings until the Company's interest earnings, net of interest and
other related expenses, from the additional contracts added to the Company's
balance sheet approximates the revenues the Company has historically recognized
on its securitization transactions. However, the Company believes that this
change will enhance the long-term value of the Company through
32
<PAGE> 35
greater earnings stability and predictability, as well as instill higher
confidence in those earnings from the investment community.
Initial Exchange Offer. On September 17, 1998, the Company initiated an
exchange offer (the "Original Exchange Offer") to exchange up to 5,000,000
shares of its Common Stock for 12%, five-year subordinated debentures of the
Company due October 23, 2003 with terms identical to those being offered
hereunder. The exchange ratio was $6.50 principal amount of Debentures for each
share of Common Stock validly tendered.
The Original Exchange Offer expired on October 19, 1998 with a total of
2,463,603 shares of Common Stock being tendered for $16,013,418 aggregate
principal amount of the Debentures in connection with the offer (the "Existing
Debentures").
33
<PAGE> 36
DESCRIPTION OF THE DEBENTURES
The Debentures will be issued under an Indenture, as supplemented and
amended by the First Supplemental Indenture thereto (collectively, the
"Indenture"), by and between the Company and Harris Trust and Savings Bank, as
Trustee (the "Trustee"). The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, the Trust Indenture Act, and to all of the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part of the Indenture by reference to the Trust Indenture
Act as in effect on the date of the Indenture. A copy of the Indenture will be
filed with the Commission as an exhibit to the Form T-3 filed in connection with
the qualification of the Indenture under the Trust Indenture Act.
The Indenture allows the issuance of debt securities of the Company ("Debt
Securities"), in one or more series, in an aggregate principal amount up to
$100,000,000. The First Supplemental Indenture establishes the Debentures as a
series of Debt Securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Debentures are limited in aggregate principal amount to $32,500,000,
$16,486,582 principal amount of which may be issued in this Exchange Offer, and
will mature on October 23, 2003. Interest on the Debentures will accrue from
October 23, 1998 at the rate of 12% per annum and will be payable semiannually
in cash on each April 15 and October 15 (each, an "Interest Payment Date"),
commencing on April 15, 1999, to the registered holders of the Debentures
("Holders") at the close of business on the April 1 and October 1 immediately
preceding the applicable Interest Payment Date. Interest is payable on the
Debentures from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance.
The Debentures will be unsecured obligations of the Company and will not be
entitled to the benefit of any mandatory sinking fund.
PAYMENT AND PAYING AGENTS
Payment of interest on a Debenture on any Interest Payment Date will be
made to the Person in whose name such Debenture (or one or more Predecessor
Debentures) is registered at the close of business on the Regular Record Date
for such interest. (Section 307).
Principal of and interest on the Debentures will be payable at the office
of such Paying Agent or Paying Agents as the Company may designate for such
purpose from time to time, except that at the option of the Company payment of
any interest may be made by check mailed to the address of the Person entitled
thereto as such address appears in the Security Register. (Section 307). The
corporate trust office of the Trustee in Chicago, Illinois will be designated as
the Company's Paying Agent for payments with respect to the Debentures. The
Company may at any time designate additional Paying Agents or rescind the
designation of any Paying Agent or approve a change in the office through which
any Paying Agent acts, except that the Company will be required to maintain a
Paying Agent in each Place of Payment for the Debentures. (Section 1002).
All moneys paid by the Company to a Paying Agent for the payment of the
principal of or any premium or interest on any Debentures which remain unclaimed
at the end of two years after such principal, premium, or interest has become
due and payable will be repaid to the Company, subject to certain publication
requirements, and the Holder of such Debentures thereafter may look only to the
Company for payment thereof. (Section 1003).
FORM, EXCHANGE, AND TRANSFER
The Debentures will be issuable only in fully registered form without
coupons and in denominations of $1.00 and any integral multiple thereof.
(Section 302).
34
<PAGE> 37
At the option of the Holder, subject to the terms of the Indenture,
Debentures will be exchangeable for other Debentures, of any authorized
denomination and of like tenor and aggregate principal amount. (Section 305).
Subject to the terms of the Indenture, Debentures may be presented for exchange
as provided above or for registration of transfer (duly endorsed or with the
form of transfer endorsed thereon duly executed) at the office of any transfer
agent designated by the Company for such purpose. No service charge will be made
for any registration of transfer or exchange of Debentures, but, with certain
limited exceptions, the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. The
Company has appointed the Trustee as Security Registrar and transfer agent for
the Debentures. (Section 305). The Company may at any time designate additional
transfer agents or rescind the designation of any transfer agent or approve a
change in the office through which any transfer agent acts, except that the
Company will be required to maintain a transfer agent in each Place of Payment
for the Debentures. (Section 1002).
If the Debentures are to be redeemed, the Company will not be required to
(i) issue, register the transfer of, or exchange any Debentures during a period
beginning at the opening of business 15 days before the day of mailing of a
notice of redemption of any such Debentures that may be selected for redemption
and ending at the close of business on the day of such mailing or (ii) register
the transfer of or exchange any Debenture so selected for redemption, in whole
or in part, except the unredeemed portion of any such Debenture being redeemed
in part. (Section 305).
REDEMPTION
The Debentures will be redeemable, at the Company's option, in whole at any
time or in part from time to time, upon not less than 30 nor more than 60 days'
notice, at the principal amount to be redeemed, plus, in each case, accrued and
unpaid interest thereon, if any, to the date of redemption.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Debentures are to be redeemed at any
time, selection of such Debentures for redemption will be made by the Trustee,
on a pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate. Notice of redemption shall be mailed by first-class mail at least
30 but not more than 60 days before the redemption date to each Holder of
Debentures to be redeemed at its registered address. If any Debenture is to be
redeemed in part only, the notice of redemption that relates to such Debenture
shall state the portion of the principal amount thereof to be redeemed. A new
Debenture in a principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Debenture. On and after the redemption date, interest will cease to accrue on
Debentures or portions thereof called for redemption as long as the Company has
deposited with the Paying Agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture. Each notice of redemption may
include a statement that such redemption shall be conditional upon the receipt
by the Trustee on or prior to the Redemption Date of amounts sufficient to pay
principal of, and interest on, the Debentures to be redeemed, and that if such
amounts shall not have been so received, said notice shall be of no force and
effect, the Debentures to be redeemed will not become due and payable on the
Redemption Date, and the Company shall not be required to redeem such Debentures
on such date. If such a Conditional Notice is given, failure by the Company to
deposit money necessary to effect the redemption on or prior to the Redemption
Date will not result in a default under the Indenture.
SUBORDINATION
The payment of all obligations on the Debentures is subordinated in right
of payment to the prior payment in full of all obligations on Senior
Indebtedness. Upon any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to creditors upon
any liquidation, dissolution, winding up, assignment for the benefit of
creditors or marshaling of assets of the Company or in a bankruptcy,
reorganization, insolvency, receivership or other similar proceeding relating to
the Company or its property, whether voluntary or involuntary, all Obligations
(as hereafter defined) due or to become due upon all Senior Indebtedness shall
first be paid in full, or such payment duly provided for to the satisfaction of
the
35
<PAGE> 38
holders of Senior Indebtedness, before any payment or distribution of any kind
or character is made on account of any Obligations on the Debentures, or for the
acquisition of any of the Debentures for cash or property or otherwise. If any
default occurs and is continuing in the payment when due, whether at maturity,
upon any redemption, by acceleration or otherwise, of any principal of, premium
or interest on any Senior Indebtedness, no payment of any kind or character
shall be made by or on behalf of the Company or any other Person on its behalf
with respect to any Obligations on the Debentures or to acquire any of the
Debentures for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Senior Indebtedness, other than the Designated Senior
Indebtedness (as hereafter defined), as such event of default is defined in the
instrument creating or evidencing such Senior Indebtedness, permitting the
holders of such Senior Indebtedness then outstanding to immediately accelerate
the maturity thereof and if a representative for such issue of Senior
Indebtedness gives written notice of the event of default to the Trustee (a
"Default Notice"), then, unless and until all events of default with respect to
such Senior Indebtedness have been cured or waived in writing or have ceased to
exist or the Trustee receives notice from such representative for the respective
issue of Senior Indebtedness terminating the Blockage Period (as defined below),
during the 179 days after the delivery of such Default Notice (the "Blockage
Period"), neither the Company nor any other Person on its behalf shall (x) make
any payment of any kind or character with respect to any Obligations on the
Debentures or (y) acquire any of the Debentures for cash or property or
otherwise. Notwithstanding the above, in no event will a Blockage Period extend
beyond 179 days from the date the payment on the Debentures was due and only one
such Blockage Period may be commenced within any 365 consecutive days
irrespective of the number of defaults with respect to Senior Indebtedness
during such period. In no event may the total number of days during which any
Blockage Period is or Blockage Periods are in effect exceed 179 days in the
aggregate during any consecutive 365 day period. No event of default which
existed or was continuing on the date of the commencement of any Blockage Period
with respect to the Senior Indebtedness shall be, or be made, the basis for
commencement of a second Blockage Period by a representative of such Senior
Indebtedness unless such event of default shall have been cured or waived for a
period of not less than 90 consecutive days. However, any subsequent action, or
any breach of any financial covenants for a period commencing after the date of
commencement of such Blockage Period that, in either case, would give rise to an
event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose.
In addition, if any event of default (as defined in the instrument creating
or evidencing any Designated Senior Indebtedness) occurs and is continuing with
respect to any Designated Senior Indebtedness or an executive officer of the
Company has actual knowledge of a default under any Designated Senior
Indebtedness, which with notice or lapse of time or both would result in an
event of default under such Designated Senior Indebtedness, then the Company
shall give notice thereof to the Trustee and, regardless of the giving of such
notice, no payment of any kind or character shall be made by or on behalf of the
Company or any other Person on its behalf with respect to any Obligations on the
Debentures or to acquire any of the Debentures for cash or property or otherwise
for a period of 179 days from the date of each such event of default or the date
that an executive officer obtains actual knowledge that there is such a default
(a "Designated Senior Indebtedness Blockage Period"), unless and until all such
events of defaults or defaults with respect to such Designated Senior
Indebtedness have been cured or waived in writing pursuant to the Designated
Senior Indebtedness or have ceased to exist or the Trustee receives notice from
a representative for the applicable issue of Designated Senior Indebtedness
terminating the Designated Senior Indebtedness Blockage Period. In the event any
Debenture is declared due and payable before its expressed maturity under
Section 502 of the Indenture, (i) the Company will give prompt notice in writing
of such happening to the holders of Designated Senior Indebtedness and (ii) no
payment of any kind or character shall be made by or on behalf of the Company or
any other Person on its behalf with respect to any obligations on the Debentures
or to assume any of the Debentures for cash or property or otherwise without the
consent of the Designated Senior Indebtedness.
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By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Indebtedness,
including the Holders of the Debentures, may recover less, ratably, than holders
of Senior Indebtedness. See also "Risk Factors -- Subordination."
For purposes of the subordination provisions of the Debentures, the
following definitions apply:
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Credit Agreement" means the Amended and Restated Motor Vehicle Installment
Contract Loan and Security Agreement dated as of August 15, 1997 among the
Company, General Electric Capital Corporation, and certain other parties, as
such agreement may be amended, restated, modified, renewed, refunded, replaced
or refinanced from time to time, including any notes, guarantees, security or
pledge agreements, letters of credit and other documents or instruments executed
pursuant thereto and any exhibits or schedules to any of the foregoing.
"Designated Senior Indebtedness" means (i) all Indebtedness outstanding
under the Credit Agreement and (ii) any other Senior Indebtedness designated by
the Company as "Designated Senior Indebtedness" from time to time.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other similar accrued
liabilities arising in the ordinary course of business and payable in accordance
with customary terms), (v) all obligations for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction, (vi)
guarantees and other contingent obligations in respect of Indebtedness referred
to in clauses (i) through (v) above and clause (viii) below, (vii) all
obligations of any other Person of the type referred to in clauses (i) through
(vi) which are secured by any lien on any property or asset of such Person, the
amount of such obligation being deemed to be the lesser of the fair market value
of such property or asset or the amount of the obligation so secured, and (viii)
all obligations under currency agreements and interest swap agreements of such
Person.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Senior Indebtedness" means all Obligations on any Indebtedness of the
Company, whether outstanding on the date of original issuance of the Debentures
or thereafter created, incurred or assumed, unless, in the case of any
particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Debentures.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (i) any
Indebtedness of the Company to a Subsidiary of the Company, (ii) Indebtedness
to, or guaranteed on behalf of, any shareholder, director, officer or employee
of the Company (including, without limitation, amounts owed for compensation),
(iii) any liability for federal, state, local or other taxes owed or owing by
the Company, and (iv) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company.
Except to the extent described below under "Certain Covenants," the
Indenture does not limit the aggregate amount of Senior Indebtedness that the
Company or its subsidiaries may issue. As of September 30, 1998, outstanding
Senior Indebtedness of the Company and its consolidated subsidiaries aggregated
approximately $78.3 million.
The Company also has outstanding a $10 million subordinated note payable to
Verde Investments, Inc., an affiliate of the Company (the "Verde Note"), which
will be senior in right of payment to the Debentures.
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The subordination provisions apply only to Debentures that are Outstanding.
Debentures will not be deemed to be Outstanding if, among other circumstances,
money in the necessary amount has been deposited with the Trustee or any Paying
Agent (other than the Company) in trust, or set aside and segregated in trust by
the Company (if it acts as its own Paying Agent) for the redemption of such
Debentures and notice of redemption has been given as required in the Indenture
or provision therefor satisfactory to the Trustee has been made. In addition,
upon the effectiveness of any Defeasance or Covenant Defeasance as described
below under the heading "Defeasance and Covenant Defeasance," the Debentures
then Outstanding shall cease to be subordinated under the Indenture.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants provided
for the Debentures:
Consolidated Leverage Ratios. The Company will not allow its Consolidated
Leverage Ratio to exceed 6.0 to 1.0. "Consolidated Leverage Ratio" means, as of
any date of determination, the ratio of (i) the total liabilities of the Company
and its consolidated Subsidiaries (determined in accordance with generally
accepted accounting principles ("GAAP")), excluding all Junior Subordinated
Obligations, to (ii) the Consolidated Net Worth of the Company. "Junior
Subordinated Obligation" means any indebtedness of the Company that by its terms
is expressly subordinated in right of payment to the Debentures. "Consolidated
Net Worth" means, as of any date of determination, the consolidated
stockholders' equity of the Company and its consolidated Subsidiaries
(determined in accordance with GAAP), plus all Junior Subordinated Obligations
of the Company. The change in the securitization structure will result in a
significant additional amount of debt, which will negatively impact the
Company's leverage ratio.
Minimum Equity. The Company will at all times maintain Consolidated Net
Worth (defined above) of at least $100,000,000.
EVENTS OF DEFAULT
Each of the following will constitute an Event of Default under the
Indenture with respect to Debt Securities of any series: (a) failure to pay
principal of or any premium on any Debt Securities of that series when due; (b)
failure to pay any interest on any Debt Securities of that series when due,
continued for 30 days; (c) failure to deposit any sinking fund payment, when
due, in respect of any Debt Securities of that series; (d) failure to perform
any other covenant of the Company in the Indenture (other than a covenant
included in the Indenture solely for the benefit of a series other than that
series), that continues for 90 days after written notice has been given by the
Trustee, or the Holders of at least 25% in principal amount of the Outstanding
Debt Securities of that series, as provided in the Indenture; (e) certain events
in bankruptcy, insolvency, or reorganization, and (f) any other Event of Default
specified for such series in the supplemental indenture or Board Resolution
creating or governing such series. (Section 501). There are no additional Events
of Default provided for the Debentures.
If an Event of Default (other than an Event of Default described in clause
(e) above) with respect to the Debt Securities of any series at the time
Outstanding shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Debt Securities of
that series by notice as provided in the Indenture may declare the principal
amount of the Debt Securities of that series (or, in the case of any Debt
Security that is an Original Issue Discount Security or the principal amount of
which is not then determinable, such portion of the principal amount of such
Debt Security, or such other amount in lieu of such principal amount, as may be
specified in the terms of such Debt Security) to be due and payable immediately.
If an Event of Default described in clause (e) above with respect to the Debt
Securities of any series at the time Outstanding shall occur, the principal
amount of all the Debt Securities of that series (or, in the case of any such
Original Issue Discount Security or other Debt Security, such specified amount)
will automatically, and without any action by the Trustee or any Holder, become
immediately due and payable. After any such acceleration, but before a judgment
or decree based on acceleration, the Holders of a majority in aggregate
principal amount of the Outstanding Debt Securities of that series may rescind
and annul such acceleration if all Events of Default, other than the non-payment
of accelerated principal (or other specified
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amount), have been cured or waived as provided in the Indenture and payment of
all overdue interest and certain other payments are made by the Company.
(Section 502). For information as to waiver of defaults, see "Modification and
Waiver."
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
will be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders, unless such Holders
shall have offered to the Trustee reasonable indemnity. (Section 603). Subject
to such provisions for the indemnification of the Trustee and to certain other
conditions, the Holders of a majority in principal amount of the Outstanding
Debt Securities of any series will have the right to direct the time, method,
and place of conducting any proceeding for any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee, with respect to the
Debt Securities of that series. (Section 512).
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the Indenture, or for the appointment of a
receiver or a trustee, or for any other remedy thereunder, unless (i) such
Holder has previously given to the Trustee written notice of a continuing Event
of Default with respect to the Debt Securities of that series, (ii) the Holders
of at least 25% in aggregate principal amount of the Outstanding Debt Securities
of that series have made written request, and such Holder or Holders have
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and (iii) the Trustee has failed to institute such proceeding, and has
not received from the Holders of a majority in aggregate principal amount of the
Outstanding Debt Securities of that series a direction inconsistent with such
request, within 60 days after such notice, request, and offer. (Section 507).
However, such limitations do not apply to a suit instituted by a Holder of a
Debt Security for the enforcement of payment of the principal of or any premium
or interest on such Debt Security on or after the applicable due date specified
in such Debt Security. (Section 508).
The Company will be required to furnish to the Trustee annually a statement
by certain of its officers as to whether or not the Company, to their knowledge,
is in default in the performance or observance of any of the terms, provisions,
and conditions of the Indenture and, if so, specifying all such known defaults.
(Section 1004).
If a default occurs under the Indenture with respect to Debt Securities of
any series, the Trustee shall give the Holders of Securities of such series
notice of such default as required by the Trust Indenture Act, provided that in
the case of a default described in clause (d) in the first paragraph under
"Events of Default" herein, no such notice to Holders shall be given until at
least 30 days after the occurrence of such default.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee at any time and from time to time without the consent of the
Holders of any of the Debt Securities in certain limited cases. (Section 901).
In addition, modifications and amendments of the Indenture may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the Outstanding Debt Securities of
each series affected by such modification or amendment; provided, however, that
no such modification or amendment may, without the consent of the Holder of each
Outstanding Debt Security affected thereby, (a) change the Stated Maturity of
the principal of, or any installment of principal of or interest on, any Debt
Security, (b) reduce the principal amount of, or any premium or interest on, any
Debt Security, (c) reduce the amount of principal of an Original Issue Discount
Security or any other Debt Security payable upon acceleration of the Maturity
thereof, (d) change the place or currency of payment of principal of, or any
premium or interest on, any Debt Security, (e) impair the right to institute
suit for the enforcement of any payment on or with respect to any Debt Security,
(f) reduce the percentage in principal amount of Outstanding Debt Securities of
any series, the consent of whose Holders is required for modification or
amendment of the Indenture, reduce the percentage in principal amount of
Outstanding Debt Securities of any series necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults, or
modify such provisions with respect to modification and waiver. (Section 902).
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The Holders of not less than a majority in aggregate principal amount of
the Outstanding Debt Securities of any series may waive compliance by the
Company with certain restrictive provisions of the Indenture. (Section 1008).
The Holders of a majority in principal amount of the Outstanding Debt Securities
of any series may waive any past default under the Indenture with respect to
such series, except a default in the payment of principal, premium, or interest
and certain covenants and provisions of the Indenture which cannot be amended
without the consent of the Holder of each Outstanding Debt Security of such
series affected. (Section 513).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of the Outstanding Debt Securities have given or
taken any request, demand, authorization, direction, notice, consent, waiver, or
other action under the Indenture as of any date, (i) the principal amount of an
Original Issue Discount Security that will be deemed to be Outstanding will be
the amount of the principal thereof that would be due and payable as of such
date upon acceleration of the Maturity thereof to such date, (ii) if, as of such
date, the principal amount payable at the Stated Maturity of a Debt Security is
not determinable (for example, because it is based on an index), the principal
amount of such Debt Security deemed to be Outstanding as of such date will be an
amount determined in the manner prescribed for such Debt Security, and (iii) the
principal amount of a Debt Security denominated in one or more foreign
currencies or currency units that will be deemed to be Outstanding will be the
U.S. dollar equivalent, determined as of such date in the manner prescribed for
such Debt Security, of the principal amount of such Debt Security (or, in the
case of a Debt Security described in clause (i) or (ii) above, of the amount
described in such clause). Certain Debt Securities, including those for whose
payment or redemption money has been deposited or set aside in trust for the
Holders and those that have been fully defeased pursuant to Section 1302 of the
Indenture, will not be deemed to be Outstanding. (Section 101).
Except in certain limited circumstances, the Company will be entitled to
set any day as a record date for the purpose of determining the Holders of
Outstanding Debt Securities of any series entitled to give or take any request,
demand, authorization, direction, notice, consent, waiver, or other action under
the Indenture, in the manner and subject to the limitations provided in the
Indenture. In certain limited circumstances, the Trustee will be entitled to set
a record date for action by Holders. If a record date is set for any action to
be taken by Holders of a particular series, such action may be taken only by
persons who are Holders of Outstanding Debt Securities of that series on the
record date. To be effective, such action must be taken by Holders of the
requisite principal amount of such Debt Securities within a specified period
following the record date. For any particular record date, this period will be
180 days or such other shorter period as may be specified by the Company (or the
Trustee, if it sets the record date), and may be shortened or lengthened (but
not beyond 180 days) from time to time. (Section 104).
DEFEASANCE AND COVENANT DEFEASANCE
The provisions of Section 1302, relating to defeasance and discharge of
indebtedness, and Section 1303, relating to defeasance of certain restrictive
covenants in the Indenture, will apply to the Debentures.
Defeasance and Discharge. Pursuant to Section 1302, the Company will be
discharged from all its obligations with respect to the Debentures (except for
certain obligations to exchange or register the transfer of Debentures, to
replace stolen, lost, or mutilated Debentures, to maintain paying agencies, and
to hold moneys for payment in trust) upon satisfaction of certain conditions,
including the deposit in trust for the benefit of the Holders of Debentures of
money or U.S. Government Obligations, or both, which, through the payment of
principal and interest in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of and any premium
and interest on the Debentures on the respective Stated Maturities or on any
Redemption Date established for the Debentures in accordance with the terms of
the Indenture and such Debentures. Such defeasance or discharge may occur only
if, among other things, the Company has delivered to the Trustee an Opinion of
Counsel to the effect that the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or there has been a change
in tax law, in either case to the effect that Holders of the Debentures will not
recognize gain or loss for federal income tax purposes as a result of such
deposit, defeasance, and discharge and will be subject to federal
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income tax on the same amount, in the same manner, and at the same times as
would have been the case if such deposit, defeasance, and discharge were not to
occur. (Sections 1302 and 1304).
Defeasance of Certain Covenants. Pursuant to Section 1303, if certain
conditions are satisfied, the Company may omit to comply with certain
restrictive covenants in the Indenture, and the occurrence of certain Events of
Default, which are described above in clause (d) (with respect to such
restrictive covenants) under "Events of Default," will be deemed not to be or
result in an Event of Default and the provisions of Article Fourteen relating to
subordination will cease to be effective, in each case with respect to the
Debentures. The Company, in order to exercise such option, will be required to
deposit, in trust for the benefit of the Holders of the Debentures, money or
U.S. Government Obligations, or both, which, through the payment of principal
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on the Debentures on the respective Stated Maturities or on any
Redemption Dates established for the Debentures in accordance with the terms of
the Indenture and the Debentures. The Company will also be required, among other
things, to deliver to the Trustee an Opinion of Counsel to the effect that
Holders of the Debentures will not recognize gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to federal income tax on the same amount, in the same manner,
and at the same times as would have been the case if such deposit and defeasance
were not to occur. In the event the Company exercised this option with respect
to the Debentures and the Debentures were declared due and payable because of
the occurrence of any Event of Default, the amount of money and U.S. Government
Obligations so deposited in trust would be sufficient to pay amounts due on the
Debentures at the time of their respective Stated Maturities, but may not be
sufficient to pay amounts due on the Debentures upon any acceleration resulting
from such Event of Default. In such case, the Company would remain liable for
such payments. (Sections 1303 and 1304).
SATISFACTION AND DISCHARGE
The Indenture will also be deemed to be satisfied and discharged, except as
to certain limited provisions, as to Debentures that have become due and payable
or will become due and payable at their Stated Maturity within one year from the
date of determination or are to be called for redemption within one year under
arrangements satisfactory to the Trustee, but only if the Company deposits money
in an amount sufficient to pay the entire principal, premium, and interest to
the date of deposit (as to Debentures that have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be, and certain other
conditions are satisfied. (Section 401). See also "Defeasance and Covenant
Defeasance."
NOTICES
Notices to Holders of Debentures will be given by mail to the addresses of
such Holders as they may appear in the Security Register. (Sections 101 and
106).
TITLE
The Company, the Trustee, and any agent of the Company or the Trustee may
treat the Person in whose name a Debenture is registered as the absolute owner
thereof (whether or not such an Debenture may be overdue) for the purpose of
making payment and for all other purposes. (Section 308).
GOVERNING LAW
The Indenture and the Debt Securities will be governed by, and construed in
accordance with, the law of the State of Arizona (Section 112).
REGARDING THE TRUSTEE
The Trustee under the Indenture is Harris Trust and Savings Bank. The
Company maintains normal banking arrangements with the Trustee, which include
the use of an affiliated company, Harris Trust Company of California, as the
transfer agent for the Common Stock.
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DESCRIPTION OF CAPITAL STOCK
The Company is a Delaware corporation and its affairs are governed by its
Certificate of incorporation and Bylaws and the Delaware General Corporation
Law. The following description of the Company's capital stock, which is complete
in all material respects, is qualified in its entirety by reference to the
provisions of the Company's Certificate of Incorporation and Bylaws, as amended.
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of Preferred
Stock, par value $.001 per share. As of November 18, 1998, approximately
16,070,000 shares of Common Stock were issued and outstanding. As of November
18, 1998, there were no issued and outstanding shares of Preferred Stock. As of
November 18, 1998, the Company's officers and directors beneficially owned
approximately 35% of the outstanding Shares of the Company's Common Stock, with
Mr. Ernest Garcia II, the Company's Chairman of the Board and Chief Executive
Officer, beneficially owning approximately 29%. The Company's executive officers
and directors have advised the Company that they do not intend to participate in
the Exchange Offer. Assuming the maximum number of Shares is exchanged in the
Exchange Offer, the Company's officers and directors will beneficially own
approximately 41% of the Company's outstanding shares of Common Stock (with Mr.
Garcia owning approximately 35%).
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution, or winding up of the Company, the holders of Common Stock are
entitled to share ratably in any corporate assets remaining after payment of all
debts, subject to any preferential rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
The Board of Directors of the Company has the authority, without further
action by the Company's stockholders, to issue from time to time up to
10,000,000 shares of Preferred Stock in one or more series and to fix the number
of shares, designations, voting powers, preferences, optional and other special
rights, and the restrictions or qualifications thereof. The rights, preferences,
privileges, and restrictions or qualifications of different series of Preferred
Stock may differ with respect to dividend rates, amounts payable on liquidation,
voting rights, conversion rights, redemption provisions, sinking fund
provisions, and other matters. The issuance of Preferred Stock could: (i)
decrease the amount of earnings and assets available for distribution to holders
of Common Stock; (ii) adversely affect the rights and powers, including voting
rights, of holders of Common Stock; and (iii) have the effect of delaying,
deferring, or preventing a change in control of the Company.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion summarizes certain United States federal income
tax consequences associated with the Exchange Offer and the ownership of
Debentures. The discussion is intended only as a summary and does not purport to
be a complete analysis of all potential tax considerations that may be relevant
in connection with the Exchange Offer. The discussion is based upon the Internal
Revenue Code of 1986, as amended to the date hereof (the "Code"), existing and
proposed United States Treasury regulations promulgated thereunder, current
administrative pronouncements and judicial decisions, changes to any of which
could materially affect the continued validity of the discussion herein and
could be made on a retroactive basis. No rulings will be sought from the
Internal Revenue Service with respect to the treatment of the Exchange Offer and
no assurance may be given that contrary positions may not be taken by the
Internal Revenue Service or by a court of law.
SCOPE
The discussion relating to stockholders who participate in the Exchange
Offer addresses only stockholders who are "United States persons" and who hold
Shares as capital assets within the meaning of Section 1221 of the Code, and
does not address all of the tax consequences that may be relevant to particular
stockholders in light of their personal circumstances, or to certain types of
stockholders (such as certain financial institutions, dealers in securities or
commodities, insurance companies, tax-exempt organizations, persons who acquired
Shares as compensation and persons who hold Shares as a position in a "straddle"
or as a part of a "hedging" or "conversion" transaction for United States
federal income tax purposes). In the context of the discussion pertaining to the
Debentures, the discussion describes certain tax consequences applicable only to
original holders of the Debentures. The discussion does not include any
description of the tax laws of any state, local, or non-U.S. government that may
be applicable to a particular stockholder. As used herein, a "United States
person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States, any State or any political subdivision thereof, (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source, or (iv) a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust.
THE SUMMARY DISCUSSION SET FORTH HEREIN IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE TAX CONSEQUENCES OF AN EXCHANGE OF SHARES FOR DEBENTURES PURSUANT TO
THE EXCHANGE OFFER MAY VARY DEPENDING UPON, AMONG OTHER THINGS, THE PARTICULAR
SITUATION AND CIRCUMSTANCES OF THE TENDERING STOCKHOLDER. ALL STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC FEDERAL,
STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF EXCHANGES MADE BY THEM
PURSUANT TO THE EXCHANGE OFFER, INCLUDING THE EFFECT OF THE STOCK OWNERSHIP
ATTRIBUTION RULES DESCRIBED HEREIN.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO TENDERING STOCKHOLDERS
Characterization of the Exchange
An exchange of Shares for Debentures by a stockholder pursuant to the
Exchange Offer will be a taxable transaction for United States federal income
tax purposes. The United States federal income tax consequences of such exchange
to a Stockholder may vary depending upon the Stockholder's particular facts and
circumstances. Depending on such facts and circumstances, the exchange will be
treated as either a sale or a distribution for United States federal income tax
purposes.
Under Section 302 of the Code, an exchange of Shares for Debentures
pursuant to the Exchange Offer will be treated as a "sale or exchange" of such
Shares for United States federal income tax purposes (rather
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than as a deemed distribution by the Company with respect to Shares continued to
be held (or deemed to be held) by the tendering stockholder) if the receipt of
Debentures upon such exchange (i) is "substantially disproportionate" with
respect to the stockholder, (ii) results in a "complete termination" of the
stockholder's interest in the Company, or (iii) is "not essentially equivalent
to a dividend" with respect to the stockholder. These tests (the "Section 302
tests") are explained more fully below. See "Section 302 Tests" below.
If any of the Section 302 tests is satisfied and the exchange of the
tendered Shares is, therefore, treated as a "sale or exchange" of such Shares
for United States federal income tax purposes, the tendering stockholder should
recognize capital gain or loss equal to the difference between (a) the sum of
the cash received (if any) plus the "issue price" of the Debentures and (b) the
stockholder's adjusted tax basis in the Shares exchanged pursuant to the
Exchange Offer. As set forth below under the caption "Issue Price of Debentures
Defined," the Company believes that the "issue price" of the Debentures should
be the issue price of the Debentures issued in the Original Exchange Offer
($5.0667). Such capital gain or loss will generally be long-term capital gain or
loss if the tendering stockholder held the tendered Shares for more than 12
months. Under current law, any such gain or loss recognized by individuals,
trusts or estates will be subject to a maximum 20 percent tax rate if the Shares
have been held for more than 12 months. Particularly if the fair market value of
the Shares as of the date of the exchange contemplated by this Exchange Offer
exceeds $5.0667, there is a risk that the Internal Revenue Service may assert
that a stockholder should recognize capital gain equal to the difference between
(a) the sum of the cash received (if any) plus the fair market value of the
Shares at the time of the exchange and (b) the stockholder's adjusted basis in
the Shares. See "Issue Price of Debentures Defined."
If none of the Section 302 tests is satisfied, then, to the extent of the
Company's current and accumulated earnings and profits (as determined for
federal income tax purposes), the tendering stockholder will generally be
treated as having received a dividend taxable as ordinary income in an amount
equal to the sum of the cash plus the fair market value of the Debentures
received by the stockholder pursuant to the Exchange Offer (without reduction
for the adjusted tax basis of the Shares tendered pursuant to the Exchange
Offer), no loss will be recognized, and (subject to reduction as described below
for corporate stockholders eligible for the dividends-received deduction) the
tendering stockholder's adjusted tax basis in the Shares exchanged pursuant to
the Exchange Offer will be added to such stockholder's adjusted tax basis in the
stockholder's remaining Shares, if any. If a tendering stockholder does not
retain any Shares, such stockholder may lose tax basis entirely. If the exchange
of Shares by a stockholder is not treated as a sale or exchange for federal
income tax purposes, the amount (if any) by which the sum of the cash plus the
fair market value of the Debentures exceeds the current or accumulated earnings
and profits of the Company (as determined for federal income tax purposes) will
be treated, first, as a nontaxable return of capital to the extent of the
stockholder's basis in the Shares, and thereafter, as taxable capital gain.
Constructive Ownership of Stock
In determining whether any of the Section 302 tests is satisfied, a
stockholder must take into account not only the Shares which are actually owned
by the stockholder, but also Shares which are constructively owned by the
stockholder by reason of the attribution rules contained in Section 318 of the
Code. Under Section 318 of the Code, a stockholder may be treated as owning (i)
Shares that are actually owned, and in some cases constructively owned, by
certain related individuals or entities in which the stockholder owns an
interest, or, in the case of stockholders that are entities, by certain
individuals or entities that own an interest in the stockholder and (ii) Shares
which the stockholder has the right to acquire by exercise of an option or a
conversion right contained in another instrument held by the stockholder.
Section 302 Tests
One of the following tests must be satisfied in order for the exchange of
Shares pursuant to the Exchange Offer to be treated as a sale or exchange for
federal income tax purposes.
44
<PAGE> 47
a. Substantially Disproportionate Test. The exchange of Shares for
Debentures by a stockholder will be "substantially disproportionate" if
the percentage of the outstanding Shares actually and constructively
owned by the stockholder immediately following the exchange of Shares
pursuant to the Exchange Offer (treating as not being outstanding all
Shares exchanged pursuant to the Exchange Offer) is less than 80% of the
percentage of the outstanding Shares actually and constructively owned
by such stockholder immediately before the exchange of Shares pursuant
to the Exchange Offer (treating as outstanding all Shares exchanged
pursuant to the Exchange Offer). Stockholders should consult their own
tax advisors with respect to the application of the "substantially
disproportionate" test to their particular situation and circumstances.
b. Complete Termination Test. The exchange of Shares for Debentures will
be a "complete termination" of a stockholder's interest in the Company
if either (i) all of the Shares actually and constructively owned by the
stockholder are exchanged pursuant to the Exchange Offer or (ii) all of
the Shares actually owned by the stockholder are exchanged pursuant to
the Exchange Offer and, with respect to the Shares constructively owned
by the stockholder which are not exchanged pursuant to the Exchange
Offer, the stockholder is eligible to waive (and effectively waives)
constructive ownership of all such Shares under procedures described in
Section 302(c) of the Code. Stockholders considering making such a
waiver should do so in consultation with their own tax advisors.
c. Not Essentially Equivalent to a Dividend Test. Even if the exchange of
Shares for Debentures fails to result in satisfaction of the
"substantially disproportionate" test and the "complete termination"
test, a stockholder may nevertheless satisfy the "not essentially
equivalent to a dividend" test if the stockholder's exchange of Shares
pursuant to the Exchange Offer results in a "meaningful reduction" in
the stockholder's proportionate interest in the Company. Whether the
receipt of Debentures by a stockholder who exchanges Shares pursuant to
the Exchange Offer will be "not essentially equivalent to a dividend"
will depend upon the stockholder's particular facts and circumstances.
The Internal Revenue Service has indicated in published revenue rulings
that even a small reduction in the proportionate interest of a small
minority stockholder in a publicly held corporation who exercises no
control over corporate affairs may constitute such a "meaningful
reduction." The Internal Revenue Service held, for example, in Rev. Rul.
76-385, 1976-2 C.B. 92, that a reduction in the percentage ownership
interest of a stockholder in a publicly held corporation from .0001118%
to .0001081% (a reduction of only 3.3% in the stockholder's prior
percentage ownership interest) would constitute a "meaningful
reduction." Stockholders expecting to rely on the "not essentially
equivalent to a dividend" test should consult their own tax advisors as
to its application to their particular situation and circumstances.
The Company cannot predict whether or to what extent the Exchange Offer
will be oversubscribed. If the Exchange Offer is oversubscribed, proration of
the tenders pursuant to the Exchange Offer will cause the Company to accept
fewer Shares than are tendered. Therefore, a stockholder can be given no
assurance that a sufficient number of such stockholder's Shares will be
exchanged pursuant to the Exchange Offer to ensure that such exchange will
satisfy one or more of the Section 302 tests and be treated as a sale, rather
than as a dividend, for United States federal income tax purposes pursuant to
the rules discussed above.
Contemporaneous dispositions or acquisitions of Shares by a stockholder or
related individuals or entities may be deemed to be part of a single integrated
transaction which will be taken into account in determining whether any of the
Section 302 tests has been satisfied in connection with Shares exchanged
pursuant to the Exchange Offer. Thus, for example, if a stockholder sells Shares
to persons other than the Company at or about the time such stockholder also
exchanges Shares pursuant to the Exchange Offer, and the various sales effected
by the stockholder are part of an overall plan to reduce or terminate such
stockholder's proportionate interest in the Company, then the sales to persons
other than the Company may, for United States federal income tax purposes, be
integrated with the stockholder's exchange of Shares pursuant to the Exchange
Offer and, if integrated, should be taken into account in determining whether
the holder satisfies any of the three tests described above.
45
<PAGE> 48
STOCKHOLDERS CONTEMPLATING AN EXCHANGE OF DEBENTURES FOR SHARES ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE SECTION 302 TESTS, INCLUDING THE
EFFECT OF THE ATTRIBUTION RULES AND THE POSSIBILITY THAT A SUBSTANTIALLY
CONTEMPORANEOUS SALE OF SHARES TO PERSONS OTHER THAN THE COMPANY MAY ASSIST IN
SATISFYING ONE OR MORE OF THE SECTION 302 TESTS, AS WELL AS THE SPECIFIC
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF EXCHANGES MADE BY
THEM PURSUANT TO THE EXCHANGE OFFER.
Corporate Stockholder Dividend Treatment
If an exchange of Shares pursuant to the Exchange Offer by a corporate
stockholder is treated as a dividend, the corporate stockholder (other than an S
corporation) may be entitled to claim the dividends-received deduction
(generally 70%, but 80% under certain circumstances) with respect to the gross
dividend under Section 243 of the Code, subject to applicable limitations. With
respect to specific limitations on claiming the dividends-received deduction,
corporate stockholders should consider the effect of Section 246(c) of the Code,
which disallows the dividends-received deduction with respect to any dividend on
any share of stock that is held for 45 days or less during the 90-day period
beginning on the date which is 45 days before the date on which such share
becomes ex-dividend with respect to such dividend. For this purpose, the length
of time a taxpayer is deemed to have held stock may be reduced by periods during
which the taxpayer's risk of loss with respect to the stock is diminished by
reason of the existence of certain options or other hedging transactions.
Additionally, corporate stockholders that have incurred indebtedness directly
attributable to an investment in Shares should consider the effect of Section
246A of the Code which reduces the dividends-received deduction by a percentage
generally computed based on the amount of such indebtedness and the
stockholder's total adjusted tax basis in the Shares.
In addition, any amount received by a corporate stockholder pursuant to the
Exchange Offer that is treated as a dividend may constitute an "extraordinary
dividend" under Section 1059 of the Code. Accordingly, a corporate stockholder
may be required under Section 1059(a) of the Code to reduce its adjusted tax
basis (but not below zero) in its Shares by the non-taxed portion of the
extraordinary dividend (i.e. the portion of the dividend for which a deduction
is allowed), and, if such portion exceeds the stockholder's adjusted tax basis
in its Shares, to treat the excess as gain from the sale of such Shares in the
year in which the dividend is received. These basis reductions and gain
recognition rules would be applied by taking account only the stockholder's
adjusted tax basis in the Shares that were exchanged, without regard to other
Shares that the stockholder may continue to own. CORPORATE STOCKHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE APPLICATION OF SECTION 1059 OF THE CODE
TO THE EXCHANGE OFFER AND ANY DIVIDENDS WHICH MAY BE TREATED AS PAID WITH
RESPECT TO SHARES EXCHANGED PURSUANT TO THE EXCHANGE OFFER.
"Issue Price" of Debentures Defined
Because of the identity in the terms of the Debentures issued in the
Original Exchange Offer and the Debentures issued in this Exchange Offer and
because of the close proximity in time of the Original Exchange Offer and this
Exchange Offer, the Company believes that all of the Debentures issued in the
Original Exchange Offer and this Exchange Offer are part of the same "issue"
within the meaning of the regulations issued under Sections 1271-1275 of the
Code. As a consequence, so long as the Shares continue to be traded on an
established securities market throughout the 60 day period ending 30 days after
the Expiration Time, as is likely, the "issue price" of the Debentures issued in
this Exchange Offer should be the same as the "issue price" of the Debentures
issued in the Original Exchange Offer. Hence, the "issue price" of the
Debentures should be the fair market value of the Shares exchanged therefor as
of the time of the Original Exchange Offer ($5.0667). There is a risk that the
Internal Revenue Service may assert that the Debentures issued in this Exchange
Offer are not part of the same "issue" as those issued in connection with the
Original Exchange Offer. If the Internal Revenue Service were to prevail with
respect to such assertion, the "issue price" of the Debentures issued in this
Exchange Offer would be determined as follows. If the Shares were traded on an
46
<PAGE> 49
established securities market throughout the 60 day period ending 30 days after
the Expiration Time, the "issue price" of the Debentures would be the fair
market value of the Shares exchanged therefor as of the date of the exchange
contemplated by this Exchange Offer. If the Shares were not traded on an
established securities market within the applicable period, the "issue price" of
the Debentures would be their "stated redemption price at maturity" (generally,
the face value of the Debentures) unless either (i) the Debentures did not bear
"adequate stated interest" within the meaning of Section 1274 of the Code, which
is unlikely, or (ii) also unlikely, the Debentures were issued in a so-called
"potentially abusive situation" as defined in the Treasury Regulations under
Section 1274 of the Code, in which case the "issue price" of the Debentures
would be the present value of all payments to be made on the Debenture,
discounted at the applicable federal rate.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO PROSPECTIVE HOLDERS OF DEBENTURES
Interest on the Debentures -- General
With respect to stockholders who exchange Shares for Debentures in the
Exchange Offer, interest on the Debentures will, except as provided below (See
"Original Issue Discount on Debentures" and "Taxation of Original Issue
Discount"), be taxable as ordinary interest income at the time such amounts are
accrued or received in accordance with the holder's method of accounting for
United States federal income tax purposes. Holders of Debentures will be
credited with interest from October 23, 1998.
Original Issue Discount on Debentures
If the "stated redemption price at maturity" of the Debentures exceeds the
"issue price" of the Debentures by more than a de minimis amount (0.25% of the
"stated redemption price at maturity" multiplied by the number of years to
maturity), the Debentures will be treated as having original issue discount
("OID") to the extent of such excess.
The "stated redemption price at maturity" of the Debentures will equal the
total of all payments under the Debentures, other than payments of "qualified
stated interest." "Qualified stated interest" generally is stated interest that
is unconditionally payable in cash or other property (other than an additional
debt instrument of the issuer) at least annually at a single fixed rate.
The "issue price" of the Debentures is defined generally above under the
caption "Issue Price of Debentures Defined" and should equal the fair market
value of the Shares as of the time of the Original Exchange Offer ($5.0667). On
the other hand, it is possible that in the context of the receipt of Debentures
by a stockholder in a transaction treated as other than a sale or exchange for
federal income tax purposes (See "Certain Federal Income Tax Consequences to
Tendering Stockholders" -- "Characterization of the Exchange"), the "issue
price" of the Debentures for purposes of computing OID could equal the face
value of the Debentures. Such a result would produce a divergence in the "issue
price" of the Debentures for purposes of computing OID based on the status of
the exchange of Shares for Debentures as either a sale or exchange or a
distribution for federal income tax purposes. Because such a result appears
anomalous and would generate substantial administrative difficulties, the
Company intends to treat the "issue price" of the Debentures in all cases as the
fair market value of the Shares as of the time of the Original Exchange Offer so
long as the Shares continue to be traded on an established securities market.
See "Issue Price of Debentures Defined."
The "stated redemption price at maturity" of the Debentures should be $6.50
for each Share tendered by a stockholder. This amount exceeds the $5.0667
intended "issue price" of the Debentures. Accordingly, the Debentures will have
significant OID. If the "issue price" of the Debentures is held to be greater
than $5.0667, the amount of OID with respect to the Debentures would be smaller.
Taxation of Original Issue Discount on Debentures
Each holder of a Debenture with OID will be required to include in gross
income an amount equal to the sum of the "daily portions" of the OID for all
days during the taxable year in which such holder holds or is deemed to hold the
Debenture regardless of the holder's method of accounting and even though the
cash to
47
<PAGE> 50
which such income is attributable may not be received until the sale,
redemption, or maturity of the Debenture. The daily portions of OID required to
be included in a holder's gross income in a taxable year will be determined
under a constant yield method by allocating to each day during the taxable year
in which the holder holds or is deemed to hold the Debenture a pro rata portion
of the OID thereon which is attributable to the accrual period in which such day
is included. The amount of the OID attributable to each accrual period will be
the "adjusted issue price" of the Debenture at the beginning of such accrual
period multiplied by the "yield to maturity" of the Debenture (properly adjusted
for the length of the accrual period). The adjusted issue price of a Debenture
at the beginning of an accrual period will be the original issue price of the
Debenture plus the aggregate amount of OID that accrued in all prior accrual
periods, less any cash payments on the Debenture. The "yield to maturity" is the
discount rate that, when used in computing the present value of all principal
and interest payments to be made under the Debentures, produces an amount equal
to the "issue price" of the Debentures. The Company believes that purchasers of
all of the Debentures will be deemed to have held the Debentures since October
23, 1998 and will accrue OID from such date.
The Company will cause to be furnished annually to the Internal Revenue
Service and to record holders of the Debentures information relating to the OID,
if any, accruing during the calendar year. Such information will be based on the
amount of OID that would have accrued to a holder who acquired the Debentures in
the Exchange Offer.
If a stockholder receives Debentures in a transaction treated as other than
a sale or exchange for federal income tax purposes (See "Certain Federal Income
Tax Consequences to Tendering Stockholders" -- "Characterization of the
Exchange") and the fair market value of the Debentures exceeds the "issue price"
of the Debentures (generally, the trading value of the Shares (See "Issue Price
of Debentures Defined")), the stockholder could, in connection with the receipt
and holding of the Debentures, recognize ordinary income (excluding "qualified
stated interest") in an aggregate amount in excess of the face amount of the
Debentures received. In such case, the OID recognition would result in an
increase to the initial tax basis of the Debentures (See "Redemption or Sale of
Debentures" below) and could provide the stockholder with a taxable loss at the
time of the sale or redemption of the Debentures; however, such loss could be a
capital loss the deductibility of which may be limited under the Code. It is not
known whether the fair market value of the Debentures exceeds the "issue price"
of the Debentures. Alternatively, if the "issue price" of a Debenture received
in a transaction treated as other than a sale or exchange for federal income tax
purpose is the face value of such Debenture (See "Original Issue Discount on
Obligations"), any such taxable loss may not occur.
BECAUSE THE RULES GOVERNING OID MAY REQUIRE HOLDERS OF DEBENTURES TO PAY
FEDERAL INCOME TAXES ON INCOME IN ADVANCE OF RECEIPT OF THE CASH ATTRIBUTABLE TO
SUCH INCOME, STOCKHOLDERS CONTEMPLATING AN EXCHANGE OF SHARES FOR DEBENTURES
PURSUANT TO THE EXCHANGE OFFER ARE URGED TO CONSULT THEIR OWN TAX ADVISORS. OID
WILL ACCRUE ON THE DEBENTURES FROM OCTOBER 23, 1998.
Original Issue Discount -- Trading of Debentures
Because of the identity in the terms of the Debentures issued in the
Original Exchange Offer and the Debentures issued in this Exchange Offer and
because of the close proximity in time of the Original Exchange Offer and this
Exchange Offer, the Company believes that all of the Debentures issued in the
Original Exchange Offer and this Exchange Offer are part of the same "issue"
within the meaning of the regulations issued under Sections 1271-1275 of the
Code. (See "Characterization of the Exchange" and "Issue Price of Debentures
Defined" above.) If all of the Debentures are treated as part of the same
"issue," the amount of OID with respect to the Debentures issued in this
Exchange Offer will be the same as the amount of OID with respect to the
Debentures issued in the Original Exchange Offer. The Company believes that as a
result of the identity in the amount of OID with respect to all Debentures and
as a consequence of other factors, all of the Debentures should trade
interchangeably, which could positively impact the development of a trading
market for the Debentures.
48
<PAGE> 51
There is, however, a risk that the Internal Revenue Service may assert that
the Debentures issued in this Exchange Offer are not part of the same "issue" as
those issued in connection with the Original Exchange Offer. If the Internal
Revenue Service were to prevail with respect to such assertion and if the value
of the Shares as of the time of this Exchange Offer differed from the value of
the Shares as of the time of the Original Exchange Offer, the amount of OID with
respect to the Debentures issued in this Exchange Offer would differ from the
amount of OID with respect to the Debentures issued in the Original Exchange
Offer. Because variations in the amount of OID with respect to specific
Debentures would be difficult or impossible to account for and maintain
administratively, the ability to trade the Debentures issued in this Exchange
Offer interchangeably with the Debentures issued in the Original Exchange Offer
could be adversely affected. Further, if there were variations in the amount of
OID and if the value of the Debentures at any time were less than the "issue
price" of either group of Debentures, prospective purchasers might prefer one
group of Debentures over another group because of perceived benefits in
acquiring Debentures with a smaller amount of OID than other Debentures, thereby
also potentially adversely impacting the ability of the Debentures to trade
interchangeably.
Bond Premium
If the "issue price" of a Debenture were determined to exceed its stated
principal amount, which is unlikely, the Debenture would be treated as having
been issued with amortizable bond premium, in which case a holder thereof would
be entitled to amortize such bond premium over the life of the Debenture if an
election under Section 171 of the Code is made or is already in effect. An
election under Section 171 of the Code is available only if the Debenture is
held as a capital asset. This election is revocable only with the consent of the
Internal Revenue Service and applies to all obligations owned or subsequently
acquired by the holder on or after the first day of the taxable year to which
the election applies. To the extent the excess is deducted as amortizable bond
premium, the holder's adjusted tax basis in the Debentures will be reduced. The
amortizable bond premium is treated as an offset to interest income on the
Debentures rather than as a separate deduction item.
Redemption or Sale of Debentures
Generally, any redemption or sale of the Debentures by a holder will result
in taxable gain or loss equal to the difference between the sum of the amount of
cash and the fair market value of the other property received (except to the
extent attributable to accrued but previously untaxed interest) and the holder's
adjusted basis in the Debentures. The initial tax basis of a holder's Debentures
will generally equal the excess of the "issue price" of the Debentures; however,
in the case of a stockholder who receives the Debentures in a transaction
treated as other than a sale or exchange, the initial tax basis of a holder's
Debentures will be the fair market value of the Debentures as of the time of the
exchange. A holder's initial tax basis in the Debentures will be increased by
any OID with respect to the Debenture included in the holder's income prior to
sale or redemption of the Debenture and will be reduced by the amount of any
amortizable bond premium applied against the holder's income prior to sale or
redemption of the Debenture and by any cash payments other than payments of
qualified stated interest.
Except to the extent attributable to accrued but previously untaxed
interest, such gain or loss will generally be long-term capital gain or loss if
the holder's holding period for the Debentures exceeds twelve months and if the
Debenture is held as a capital asset by the holder. However, if for any reason
the "issue price" of a holder's Debenture exceeds the holder's adjusted tax
basis in the Debentures at the time of the issuance of the Debenture, which
appears unlikely in the present circumstances given the Company's intent with
respect to the computation of OID (See "Original Issue Discount on Debentures"
above), an additional portion of such gain will be ordinary in character. Thus,
for example, if the "issue price" of a Debenture issued in a transaction treated
as other than a sale or exchange for federal income tax purposes (i.e., a
dividend transaction) were the face value of the Debenture (See "Original Issue
Discount on Debentures" above) and the stockholder recognized dividend income in
an amount smaller than the face value of the Debentures, an additional portion
of the gain on disposition of the Debenture could be ordinary in character.
HOLDERS OF DEBENTURES CONTEMPLATING A SALE OF THE DEBENTURES ARE URGED TO
CONSULT
49
<PAGE> 52
THEIR OWN TAX ADVISORS REGARDING THE TAX EFFECTS OF SUCH SALE PRIOR TO
CONSUMMATING THE SALE.
Backup Withholding
Backup withholding at a rate of 31% may apply to interest (including OID)
payments and the proceeds from a redemption of the Debentures unless the holder
(i) is a corporation or comes within certain other exempt categories and
demonstrates such fact or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with all applicable requirements of the backup withholding
rules. The backup withholding tax is not an additional tax and may be credited
against a holder's United States federal income tax liability provided that
correct information is provided to the Internal Revenue Service. Stockholders
may furnish their correct taxpayer identification number and otherwise comply
with the backup withholding rules by completing and returning the Substitute
Form W-9, included as a part of the Letter of Transmittal.
TAX CONSEQUENCES TO COMPANY
The Company will recognize no gain or loss in connection with the
acquisition of Shares in exchange for Debentures.
50
<PAGE> 1
LETTER OF TRANSMITTAL
TO TENDER
SHARES OF COMMON STOCK
OF
UGLY DUCKLING CORPORATION
PURSUANT TO THE OFFERING CIRCULAR DATED NOVEMBER 20, 1998
THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 22, 1998, UNLESS EXTENDED.
<TABLE>
<S> <C> <C>
THE EXCHANGE AGENT:
Harris Trust and Savings Bank
BY MAIL: BY FACSIMILE: BY HAND/OVERNIGHT DELIVERY:
Harris Trust and Savings Bank Harris Trust and Savings Bank Harris Trust and Savings Bank
c/o Harris Trust Company c/o Harris Trust Company c/o Harris Trust Company
of New York of New York of New York
P.O. Box 1010 212-701-7636 88 Pine Street
Wall Street Station Confirm Receipt of Facsimile By 19th Floor
New York, New York 10268-1010 Telephone to 212-701-7624 New York, New York 10005
--------------- --------------- ---------------
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN
AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
This Letter of Transmittal is to be completed by holders of Common Stock of
Ugly Duckling Corporation either if Certificates representing Shares of Common
Stock ("Common Stock Certificates") are to be forwarded herewith or if delivery
of Common Stock is to be made by book-entry transfer to the account maintained
by the Exchange Agent at The Depository Trust Company ("DTC") pursuant to the
procedures set forth in the Offering Circular under "The Exchange Offer -- How
to Tender." Stockholders whose Common Stock Certificates are not immediately
available or who cannot transmit their Common Stock Certificates (or confirm a
book-entry transfer of such Common Stock into the Exchange Agent's account at
DTC) and transmit any other documents required hereby to the Exchange Agent so
that they are received prior to the Expiration Time (as defined in the Exchange
Offer) must tender their Common Stock according to the guaranteed delivery
procedures set forth in the Offering Circular under "The Exchange Offer -- How
to Tender." See Instruction 2 to this Letter of Transmittal.
[ ] CHECK HERE IF COMMON STOCK IS BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO
THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT AT DTC AND COMPLETE THE
FOLLOWING (ONLY PARTICIPANTS IN DTC MAY DELIVER COMMON STOCK BY BOOK-ENTRY
TRANSFER):
Name of Tendering Institution
-------------------------------------------------------------------------
DTC Account Number
-------------------------------------------------------------------------
Transaction Code Number
-------------------------------------------------------------------------
[ ] CHECK HERE IF THE COMMON STOCK IS BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT.
<PAGE> 2
<TABLE>
<CAPTION>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK TENDERED
- ---------------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF HOLDER(S) COMMON STOCK TENDERED
(PLEASE FILL IN, IF BLANK) (ATTACH ADDITIONAL LIST, IF NECESSARY)
- ---------------------------------------------------------------------------------------------------------------------------
CERTIFICATE TOTAL SHARES REPRESENTED NUMBER OF SHARES
NUMBER(S)* BY CERTIFICATE(S) TENDERED**
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
TOTAL NUMBER OF SHARES TENDERED
- ---------------------------------------------------------------------------------------------------------------------------
* Need not be completed by Stockholders who deliver Common Stock by book-entry transfer.
** Unless otherwise indicated, the total number of shares represented by Certificate will be deemed to have been tendered.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXCHANGE RATIO FOR DEBENTURES
$6.50 PRINCIPAL AMOUNT OF 12% SUBORDINATED DEBENTURES DUE 2003 (BEARING INTEREST
AT 12% PER ANNUM FROM OCTOBER 23, 1998, PAYABLE SEMIANNUALLY ON EACH APRIL 15
AND OCTOBER 15, COMMENCING APRIL 15, 1999, UNTIL THE DEBENTURES ARE PAID IN
FULL) FOR EACH SHARE OF COMMON STOCK
- ------------------------------------------------------------
SPECIAL REGISTRATION
INSTRUCTIONS
(SEE INSTRUCTIONS 8, 9 AND 11)
To be completed ONLY if Common Stock not exchanged and/or Debentures or
any checks (in respect of payments of fractional interests of Debentures) are
to be issued in the name of and sent to someone other than the undersigned:
Issue
and
Send
to:
Name ----------------------------------------------------------
(Please Print)
Address -------------------------------------------------
-----------------------------------------------------------
Zip Code
-----------------------------------------------------------
Tax Identification or Social Security No.
- ------------------------------------------------------------
- ------------------------------------------------------------
SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS 8, 9 AND 11)
To be completed ONLY if Common Stock not exchanged and/or Debentures or
any checks (in respect of payments of fractional interests of Debentures)
issued in the name of the undersigned are to be sent to someone other than the
undersigned or to the undersigned at an address other than that shown above.
Mail
to:
Name ----------------------------------------------------------
(Please Print)
Address -------------------------------------------------
-----------------------------------------------------------
Zip Code
- ------------------------------------------------------------
2
<PAGE> 3
STOCKHOLDERS SIGN HERE
(SEE INSTRUCTION 1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) OF OWNER(S)
DATED:
- --------------------------------------------------------------------------------
MUST BE SIGNED BY HOLDER(S) AS NAME(S) APPEAR(S) ON COMMON STOCK
CERTIFICATE(S) OR BY PERSON(S) AUTHORIZED TO BECOME HOLDER(S) BY ENDORSEMENTS
AND OTHER DOCUMENTS TRANSMITTED. IF SIGNATURE IS BY TRUSTEE, EXECUTOR,
ADMINISTRATOR, GUARDIAN, OFFICER OR OTHER PERSON ACTING IN A FIDUCIARY OR
REPRESENTATIVE CAPACITY, PLEASE SET FORTH FULL TITLE. SEE INSTRUCTION 8.
NAME(S)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT
CAPACITY
- --------------------------------------------------------------------------------
ADDRESS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCLUDE ZIP CODE
AREA CODE AND TEL. NO.
- --------------------------------------------------------------------------------
TAX IDENTIFICATION OR SOCIAL SECURITY NO.
- ---------------------------------------------------------------------------
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 8)
AUTHORIZED SIGNATURE
- --------------------------------------------------------------------------------
NAME OF FIRM
- --------------------------------------------------------------------------------
PLEASE PRINT
DATED:
- --------------------------------------------------------------------------------
IMPORTANT TAX INFORMATION
Under the federal income tax law, a Stockholder whose tendered Common Stock
is accepted for exchange is required to provide the Exchange Agent with such
Stockholder's correct TIN on Substitute Form W-9. If such Stockholder is an
individual, the TIN is his social security number. If the Exchange Agent is not
provided with the correct TIN, the Stockholder may be subject to a $50 penalty
imposed by federal law. In addition, interest payments with respect to the
Debentures and any cash paid in lieu of the issuance of fractional interests in
Debentures may be subject to backup withholding of 31% of any payments made to
the Stockholder. Backup withholding is not an additional tax. Rather, the
federal income tax liability of persons subject to backup withholding will be
reduced by the amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be obtained.
Certain holders of securities (including, among others, all corporations
and certain foreign individuals) are not subject to backup withholding. In order
for a foreign person to qualify as an exempt recipient, that Stockholder must
attest under penalties of perjury to that person's exempt status. Other exempt
recipients can establish their exemptions from backup withholding in the manner
described in the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.
3
<PAGE> 4
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a Stockholder
with respect to Debentures acquired pursuant to the Exchange Offer, the
Stockholder is required to notify the Exchange Agent of his correct TIN (or that
such Stockholder is awaiting a TIN) by completing and signing the Substitute
Form W-9.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Stockholder is required to give the Exchange Agent the TIN of the
record owner of the Common Stock. If the Common Stock is in more than one name
or is not in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report. If "Special Registration
Instructions" above have been completed, the TINs of the person(s) in whose name
the Debentures are to be registered and the payee of the check for fractional
interests, as specified therein, are required to be given to the Exchange Agent.
4
<PAGE> 5
- --------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER
(PLEASE READ GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
SUBSTITUTE FORM W-9
("GUIDELINES") BEFORE COMPLETING THIS FORM)
AFTER COMPLETING THE FORM, RETURN TO TRANSFER AGENT
- --------------------------------------------------------------------------------
Name (If joint names, list first and circle name of the person or entity whose
number you enter in Part I below.)
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
City, State, and ZIP Code
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------
PART I TAXPAYER IDENTIFICATION NUMBER PART II
- ------------------------------------------------------------------------------ ------------
Enter your taxpayer identification number in the --------------------------- FOR PAYEES EXEMPT FROM
appropriate box. For individuals, this is your SOCIAL SECURITY NUMBER BACKUP WITHHOLDING (SEE
social security number. However, if you are a GUIDELINES)
resident alien OR a sole proprietor, see
Guidelines. For other entities, it is your employer ---------------------------
identification number. If you do not have a number,
see Guidelines.
OR
---------------------------
NOTE: If the account is in more than one name, see EMPLOYER IDENTIFICATION
Guidelines for instructions on whose number to NUMBER
enter.
---------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PART III CERTIFICATION
- -------------------------------------------------------------------------------------
</TABLE>
Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me) and
(2) I am not subject to backup withholding because (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service (the "IRS") that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has notified
me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS - You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup withholding
because you have failed to report all interest or dividends on your tax
return.
------------------------------------------------------------------------------
Sign here
------------------------------------------------------------------------------
5
<PAGE> 6
Ladies and Gentlemen:
The Common Stockholder(s) whose signature(s) appear(s) hereon (the
"Stockholder") hereby tenders to Ugly Duckling Corporation, Inc., a Delaware
corporation (the "Company"), Common Stock pursuant to the Company's offer as
contained in the Offering Circular dated November 20, 1998 (the "Exchange
Offer"), receipt of which is hereby acknowledged, and in this Letter of
Transmittal (which together constitute the "Offer"), in exchange for 12%
Subordinated Debentures due 2003 (the "Debentures") on the basis of $6.50
principal amount of Debentures for each Share of Common Stock (and a payment in
respect of fractional Debenture interests as set forth in the Offering Circular
under "The Exchange Offer -- Denominations; Fractional Interests"). Capitalized
terms not defined herein have the meanings set forth in the Offering Circular.
Upon the terms and subject to the conditions of the Exchange Offer, the
Stockholder deposits with you the above-described Common Stock. The Stockholder
hereby sells, assigns and transfers to, or upon the order of, the Company all
right, title and interest in and to such Shares of Common Stock as are being
tendered hereby (and any and all shares of capital stock or other securities
issued or issuable in respect of such Common Stock) after the acceptance for
exchange of such Shares of Common Stock. The Stockholder hereby irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the Stockholder (with full knowledge that such Exchange
Agent also acts as the agent of the Company) with respect to such Shares of
Common Stock and any such securities with full power of substitution (such power
of attorney being deemed to be an irrevocable power coupled with an interest) to
(a) deliver such Shares of Common Stock or transfer ownership of such Shares of
Common Stock on the account books maintained by DTC, together in either case
with all accompanying evidences of transfer and authenticity to or upon the
order of the Company upon receipt by the Exchange Agent as the Stockholder's
agent of the Debentures in the exchange ratio specified above for exchange and
(b) receive all benefits (including without limitation, all interest, shares and
other securities resulting from any distribution, combination or exchange
involving such Shares of Common Stock) and otherwise exercise all rights of
beneficial ownership of such Shares of Common Stock and any such securities, all
in accordance with the terms of the Exchange Offer.
The Stockholder hereby represents and warrants that the Stockholder has
full power and authority to tender, sell, assign and transfer the Shares of
Common Stock tendered hereby (and such shares of capital stock or other
securities issued in respect thereof) and that the Company will acquire good and
unencumbered title thereto, free and clear of all liens, restrictions, charges
and encumbrances and not subject to any adverse claim when the same are
purchased by the Company. The Stockholder will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company to
be necessary or desirable to complete the sale, assignment and transfer of the
Shares of Common Stock and any such securities tendered hereby.
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the Stockholder and every obligation of the Stockholder
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the Stockholder. Except as stated in the Offering Circular, this
tender is irrevocable.
The Stockholder understands that acceptance of the Exchange Offer will
constitute an agreement between the Stockholder and the Company upon the terms
and subject to the conditions of the Exchange Offer only when either (a) a duly
executed and properly completed copy of this Letter of Transmittal, or facsimile
thereof, accompanied by Common Stock Certificates (or confirmation of a
book-entry transfer of such Common Stock into the Exchange Agent's account at
DTC) is received by the Exchange Agent, or (b) (i) such tender is made by or
through an Eligible Institution (as defined in Instruction 2 of this Letter of
Transmittal), (ii) prior to the Expiration Time the Exchange Agent has received
a telegram, facsimile transmission or letter from such Eligible Institution
setting forth the name and address of the holder of such Common Stock and the
number of Shares of Common Stock tendered and stating that the tender is being
made thereby and that, within three National Association of Securities Dealers
Automated Quotation System ("Nasdaq") trading days after the date of such
telegram, facsimile transmission or letter, the Letter of Transmittal, together
with the Common Stock Certificates (or confirmation of a book-entry transfer of
such Common Stock into the Exchange Agent's account at DTC) and any other
documents required by the Letter of Transmittal, will be deposited by such
Eligible Institution with the Exchange Agent, and (iii) such Letter of
Transmittal and Common Stock Certificates, in proper form for transfer (or
confirmation of a book-entry transfer of such Common Stock into the Exchange
Agent's account at DTC) and other required documents are received by the
Exchange Agent within three Nasdaq trading days after the date of
6
<PAGE> 7
such telegram, facsimile transmission or letter, all as provided in the Offering
Circular under "The Exchange Offer -- How to Tender."
Unless otherwise indicated in the box entitled "Special Registration
Instructions," please deliver Debentures (and, if applicable, Common Stock not
exchanged in an over-subscription) registered in the name of the Stockholder and
make any check on account of fractional interests payable to the Stockholder.
Similarly, unless otherwise indicated in the box entitled "Special Delivery
Instructions," please send Debentures (and, if applicable, Common Stock not
exchanged in an over-subscription), as well as any check on account of
fractional interests, to the Stockholder at the address shown below the
signature of the Stockholder. The Stockholder recognizes that the Company has no
obligation pursuant to the Special Registration Instructions and Special
Delivery Instructions to transfer any Common Stock from the name of the
registered holder thereof if the Company accepts none of the Common Stock for
exchange.
7
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL AND COMMON STOCK. Common Stock
Certificates (or confirmation of a book-entry transfer of such Common Stock into
the Exchange Agent's account at DTC), together with a properly completed and
duly executed Letter of Transmittal or facsimile thereof, and any other
documents required by this Letter of Transmittal should be transmitted to the
Exchange Agent at the appropriate address set forth herein and must be received
by the Exchange Agent prior to the Expiration Time (as defined in the Offering
Circular).
2. GUARANTEE OF DELIVERY. The acceptance by the Company of tenders of
Common Stock pursuant to the Exchange Offer will constitute an agreement between
the Stockholder and the Company, upon the terms and subject to the conditions of
the Exchange Offer, only when a properly completed and duly executed Letter of
Transmittal and any other required documents are received by the Exchange Agent
or a telegram, facsimile transmission or letter from an Eligible Institution as
provided below is received by the Exchange Agent. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted for exchange validly
tendered Common Stock when, as and if the Company has given oral or written
notice thereof to the Exchange Agent.
Stockholders whose Common Stock Certificates are not immediately available
or who cannot deliver their Common Stock Certificates (or confirm a book-entry
transfer of such Common Stock into the Exchange Agent's account at DTC) and
deliver all other documents required hereby may tender their Common Stock by
tendering through a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., or
by a commercial bank or trust company having an office in the United States (an
"Eligible Institution") pursuant to the guaranteed delivery procedures set forth
in the Offering Circular under "The Exchange Offer -- How to Tender." Pursuant
to such procedures: (i) such tender must be made by or through an Eligible
Institution; (ii) prior to the Expiration Time, the Exchange Agent must have
received a telegram, facsimile transmission or letter from such Eligible
Institution setting forth the name and address of the holder of such Common
Stock and the number of Shares of Common Stock tendered and stating that the
tender is being made thereby and guaranteeing that, within three Nasdaq trading
days after the date of such telegram, facsimile transmission or letter, the
Letter of Transmittal, together with the Common Stock Certificates (or
confirmation of book-entry transfer of such Common Stock into the Exchange
Agent's account at DTC), and any other documents required by the Letter of
Transmittal will be deposited by such Eligible Institution with the Exchange
Agent; and (iii) such Letter of Transmittal and Common Stock Certificates in
proper form for transfer (or confirmation of a book-entry transfer of such
Common Stock into the Exchange Agent's account at DTC) and other required
documents must be received by the Exchange Agent within three Nasdaq trading
days after the date of such notice of guaranteed delivery, all as provided in
the Offering Circular under "The Exchange Offer -- How to Tender."
Issuance of Debentures in exchange for Common Stock tendered and accepted
for exchange pursuant to the Exchange Offer will be made only against timely
deposit of Common Stock Certificates (or confirmation of a book entry transfer
of such Common Stock into the Exchange Agent's account at DTC), a properly
completed and duly executed Letter of Transmittal, and any other required
documents.
3. METHOD OF DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. The
method of delivery of this Letter of Transmittal, the Common Stock Certificates
(or confirmation of a book-entry transfer of such Common Stock into the Exchange
Agent's account at DTC), and any other required documents is at the option and
risk of the Stockholder but, except as otherwise provided in Instruction 2
above, the delivery will be deemed made only when actually received by the
Exchange Agent. If such delivery is by mail, it is suggested that registered
mail with return receipt requested, properly insured, be used.
4. NO CONDITIONAL TENDERS. The Company is not obligated to accept any
alternative, conditional, irregular or contingent tenders.
5. INADEQUATE SPACE. If the space provided in the box entitled
"Description of Common Stock Tendered" of this Letter of Transmittal is
inadequate, the Common Stock Certificate numbers and number of shares should be
listed on a separate signed schedule to be affixed hereto.
8
<PAGE> 9
6. PARTIAL TENDERS. Issuance of Debentures in exchange for Shares of
Common Stock will be made only against deposit of tendered Shares of Common
Stock. If less than the entire number of Shares of Common Stock evidenced by a
submitted Common Stock Certificate is tendered, the tendering Stockholder should
fill in the number of Shares of Common Stock tendered in the appropriate boxes
above entitled "Number of Shares Tendered." The Exchange Agent will then issue
and send to the tendering holder (unless otherwise requested by the holder under
"Special Issuance and Payment Instructions" and "Special Delivery Instructions"
in this Letter of Transmittal), a newly issued Common Stock Certificate for
Shares of Common Stock submitted but not tendered, together with any tendered
Shares of Common Stock that were not accepted for exchange because of proration
or otherwise. The entire number of all Shares of Common Stock deposited with the
Exchange Agent will be deemed to have been tendered unless otherwise indicated.
Tendered Shares of Common Stock not accepted for exchange by the Company,
including as a result of proration, if any, will be returned without expense to
the tendering holder of such Shares of Common Stock (or, in the case of the
Shares of Common Stock tendered by book-entry transfer into the Exchange Agent's
account at DTC, such Shares of Common Stock will be credited to an account
maintained at DTC) as promptly as practicable following the Expiration Time,
subject to delays, if any, resulting from proration.
7. DENOMINATIONS: FRACTIONAL INTERESTS. The Debentures will be issued
only in denominations of $1.00 and any integral multiple thereof. The Company
will pay cash in lieu of such interests all as provided in the Offering Circular
under "The Exchange Offer -- Denominations; Fractional Interests," and subject
to the conditions and exceptions set forth therein.
8. SIGNATURES ON LETTER OF TRANSMITTAL AND ENDORSEMENTS; GUARANTEE OF
SIGNATURES. If the Letter of Transmittal is signed by the holder of the Common
Stock tendered hereby, the signature must correspond with the name as written on
the face of the Common Stock Certificates without alteration, enlargement or any
change whatsoever.
If the Shares of Common Stock tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
When this Letter of Transmittal is signed by the holder or holders of the
Common Stock Certificates transmitted hereby, no endorsement of Common Stock
Certificates is required. If, however, the Debentures are to be issued, or the
Common Stock reissued, or checks for fractional interests are to be payable to a
person other than the holder, then endorsements of Common Stock Certificates
transmitted hereby are required.
If this Letter of Transmittal is signed by a person other than the holder
or holders of the Common Stock Certificates tendered hereby, the Common Stock
Certificates must be endorsed and signed exactly as the name or names of the
holder or holders appear on the Common Stock Certificates.
If this Letter of Transmittal or any Common Stock Certificates are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and proper evidence satisfactory to the
Company of their authority so to act must be submitted.
Signatures on Common Stock Certificates required by this Instruction 8 must
be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Common Stock Certificates are tendered (i) by
a holder of such Shares who has not completed the box entitled "Special
Registration Instructions" or "Special Delivery Instructions" on this Letter of
Transmittal or (ii) for the account of an Eligible Institution.
9. TRANSFER TAXES. The Company will pay any transfer taxes applicable to
the transfer of Common Stock to it or its order pursuant to the Exchange Offer.
If, however, delivery of Debentures is to be made to, or is to be registered or
issued in the name of any person other than the holder of the Common Stock
tendered hereby, or if the Common Stock tendered hereby is registered in the
name of any person other than the person signing this Letter of Transmittal, or
if for any other reason other than the transfer of Common Stock to the Company
or its order pursuant to the Exchange Offer a transfer tax is imposed, the
amount of any such transfer taxes (whether imposed on the holder or any other
person) will be payable by the tendering Stockholder. If satisfactory evidence
of payment of such taxes or exemption therefrom is not submitted herewith, the
amount of such transfer taxes due will be billed directly to such tendering
Stockholder.
9
<PAGE> 10
Except as provided in this Instruction 9, it will not be necessary for
transfer tax stamps to be affixed to the Common Stock Certificates listed in
this Letter of Transmittal.
10. SUBSTITUTE FORM W-9. The tendering Stockholder is required to provide
the Exchange Agent with a correct Taxpayer Identification Number ("TIN") on
Substitute Form W-9, unless an exemption applies. Failure to provide the
information on the form may subject the tendering Stockholder to backup
withholding tax of 31% on interest payments with respect to the Debentures and
any cash paid in lieu of the issuance of fractional interests in the Debentures.
If the tendering Stockholder has not been issued a TIN and has applied for a
number (or intends to apply for a number in the near future), the tendering
Stockholder should write "Applied for" on the face of the Substitute Form W-9.
If the Exchange Agent is not provided with a TIN within 60 days, the Exchange
Agent will withhold 31% of all such payments in respect of interest thereafter
until a TIN is provided to the Exchange Agent. See "Important Tax Information"
on the enclosed "Guidelines for Certification of Taxpayer Identification Number
on Substitute Form W-9" for additional information concerning Substitute Form
W-9 and 31% backup withholding, including information on exemptions from backup
withholding.
11. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS. If Debentures and/or
Shares of Common Stock and/or a check for payment for fractional interests in
respect of Debentures are to be issued in the name of or delivered to a person
other than the signer of the Letter of Transmittal or to an address other than
that shown above, the appropriate boxes on the Letter of Transmittal should be
completed.
12. WAIVER OF CONDITIONS. The Company reserves the absolute right to
waive any of the specified conditions in the Exchange Offer in the case of any
Shares of Common Stock tendered.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance
or additional copies of the Offering Circular and the Letter of Transmittal may
be directed to the Information Agent at the address and telephone number set
forth below or to your broker, dealer, commercial bank or trust company.
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together with
Common Stock Certificates or confirmation of a book-entry transfer of such
Common Stock into the account of the Exchange Agent at The Depository Trust
Company) and all other required documents must be received by the Exchange Agent
or a Notice of Guaranteed Delivery must be received by the Exchange Agent, prior
to the Expiration Time, all as defined in the Offering Circular.
THE INFORMATION AGENT IS:
CORPORATE INVESTOR
COMMUNICATIONS, INC.
111 COMMERCE ROAD
CARLSTADT, NEW JERSEY 07072-2586
------------------------
TOLL FREE: 1-888-673-4478
10
<PAGE> 11
NOTICE OF GUARANTEED DELIVERY
UGLY DUCKLING CORPORATION
OFFER TO EXCHANGE
UP TO $16,486,582 AGGREGATE PRINCIPAL AMOUNT OF ITS
12% SUBORDINATED DEBENTURES DUE 2003
FOR
UP TO 2,536,397 SHARES OF ITS COMMON STOCK
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON DECEMBER 22, 1998, UNLESS EXTENDED.
As set forth in the Offering Circular dated November 20, 1998 (the
"Offering Circular") under "The Exchange Offer -- How to Tender," this form or
one substantially equivalent hereto must be used to accept the Exchange Offer
(as defined below) of Ugly Duckling Corporation, a Delaware corporation (the
"Company"), if certificates representing Shares of Common Stock ("Common Stock
Certificates") are not immediately available (or the procedures for book-entry
transfer cannot be completed on a timely basis) or the shareholders cannot
deliver their Common Stock Certificates, Letter of Transmittal and other
required documents to the Exchange Agent (as defined in the Offering Circular)
on or prior to 5:00 p.m., New York City time, on December 22, 1998 unless
extended as described in the Offering Circular (the "Expiration Time"). Such
form may be delivered by hand or transmitted by facsimile transmission or mail
to the Exchange Agent prior to the Expiration Time.
TO: HARRIS TRUST AND SAVINGS BANK
(THE "EXCHANGE AGENT")
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
BY HAND BY FACSIMILE TRANSMISSION: BY MAIL:
OR OVERNIGHT COURIER: Harris Trust and Savings Bank
Harris Trust and Savings Bank c/o Harris Trust Company Harris Trust and Savings Bank
c/o Harris Trust Company of New York c/o Harris Trust Company
of New York 212-701-7636 of New York
88 Pine Street Confirm Receipt of Facsimile P.O. Box 1010
19th Floor By Wall Street Station
New York, New York 10005 Telephone to 212-701-7624 New York, New York 10268-1010
- -------------------------------------------------------------------------------------------------------
For information call
Corporate Investor Communications, Inc.
1-888-673-4478
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
Delivery of this instrument to an address or transmission of instruction
via a facsimile number other than as set forth above will not constitute a valid
delivery.
This form is not to be used to guarantee signatures. The Eligible
Institution (as defined in the Letter of Transmittal) that completes this form
must communicate the guarantee to the Exchange Agent and must deliver the Letter
of Transmittal and Common Stock Certificates to the Exchange Agent within the
time period shown herein. Failure to do so could result in a financial loss to
such Eligible Institution.
The undersigned hereby tenders to the Company, upon the terms and
conditions set forth in the Offering Circular and related Letter of Transmittal
(which together constitute the "Exchange Offer"), receipt of which is hereby
acknowledged, ________________ Shares of Common Stock pursuant to the guaranteed
delivery procedure described in the Exchange Offer "The Exchange Offer -- How to
Tender."
(PLEASE TYPE OR PRINT ALL INFORMATION BELOW)
<TABLE>
<S> <C>
SIGNATURE(S): --------------------------------------- COMMON STOCK CERTIFICATE NO(S) (IF AVAILABLE):
----------------------------------------------------- -----------------------------------------------------
----------------------------------------------------- -----------------------------------------------------
NAME(S) OF RECORD HOLDER(S) -------------------- TOTAL NUMBER OF SHARES REPRESENTED BY
----------------------------------------------------- CERTIFICATE(S):
ADDRESS(ES): ---------------------------------------- -----------------------------------------------------
----------------------------------------------------- NAME OF TENDERING INSTITUTION: -------------------
----------------------------------------------------- ACCOUNT NUMBER: ----------------------------------
-----------------------------------------------------
ZIP CODE
AREA CODE AND TEL. NO(S): ------------------------
-----------------------------------------------------
DATED: ----------------------------------------------
</TABLE>
2
<PAGE> 13
GUARANTEE
(DO NOT USE FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office in the United States, hereby
guarantees (a) that the above named person(s) "own(s)" the Shares tendered
hereby within the meaning of Rule 13e-4 under the Securities Exchange Act of
1934, as amended, and (b) that delivery to the Company of certificates
representing the Shares of Common Stock tendered hereby, together with a
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof properly completed and duly executed and any other required
documents will be received by the Exchange Agent no later than three (3) Nasdaq
trading days after the date of execution of this Notice of Guaranteed Delivery.
<TABLE>
<S> <C>
- ----------------------------------------------------- -----------------------------------------------------
NAME OF FIRM AUTHORIZED SIGNATURE
- ----------------------------------------------------- -----------------------------------------------------
ADDRESS TITLE
- ----------------------------------------------------- -----------------------------------------------------
ZIP CODE NAME: PLEASE TYPE OR PRINT
AREA CODE & TEL. NO. ----------------------------- DATED ----------------------------------------------
</TABLE>
NOTE: DO NOT SEND COMMON STOCK CERTIFICATES WITH THIS FORM.
CERTIFICATES MUST BE SENT WITH THE LETTER OF TRANSMITTAL.
3
<PAGE> 14
UGLY DUCKLING CORPORATION
OFFER TO EXCHANGE
UP TO $16,486,582 AGGREGATE PRINCIPAL AMOUNT OF ITS
12% SUBORDINATED DEBENTURES DUE 2003
FOR
UP TO 2,536,397 SHARES OF ITS COMMON STOCK
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 22, 1998, UNLESS EXTENDED.
November 20, 1998
To Our Clients:
Enclosed for your consideration are an Offering Circular dated November 20,
1998 (the "Offering Circular") and a Letter of Transmittal relating to an
exchange offer as described therein (which together constitute the "Exchange
Offer") of Ugly Duckling Corporation, a Delaware corporation (the "Company"), to
purchase up to $16,486,582 aggregate principal amount of its 12% Subordinated
Debentures due 2003 (the "Debentures") for up to 2,536,397 shares ("Shares") of
its Common Stock, $.001 par value per share ("Common Stock") on the basis of
$6.50 principal amount of Debentures for each Share of Common Stock. The Offer
will terminate at 5:00 p.m., New York City time, on December 22, 1998, unless
extended by the Company (the "Expiration Time").
This material is being forwarded to you as the beneficial owner of Common
Stock held by us in your account but not registered in your name. A TENDER WITH
RESPECT TO SUCH COMMON STOCK MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND
PURSUANT TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender
any or all of your Shares of Common Stock of Ugly Duckling Corporation held by
us for your account pursuant to the terms and conditions of the Exchange Offer.
Your instructions to us should be forwarded as promptly as possible in order to
permit us to tender your Common Stock on your behalf in accordance with the
provisions of the Exchange Offer.
Tenders of Common Stock pursuant to the Exchange Offer may be withdrawn by
holders at any time prior to the Expiration Time.
We urge you to read the enclosed Exchange Offer and related Letter of
Transmittal carefully before instructing us to tender your Common Stock.
If you wish to have us tender any or all of your Common Stock, please so
instruct us by completing, executing, detaching and returning to us the attached
instruction form. THE ACCOMPANYING FORM OF LETTER OF TRANSMITTAL IS FURNISHED TO
YOU FOR YOUR INFORMATION ONLY AND MAY NOT BE USED BY YOU TO TENDER YOUR COMMON
STOCK.
<PAGE> 15
INSTRUCTIONS
The undersigned acknowledges receipt of your letter enclosing the Offering
Circular and the Letter of Transmittal relating to the Exchange Offer by Ugly
Duckling Corporation to exchange its 12% Subordinated Debentures for Shares of
its Common Stock.
This will instruct you to tender the number of Shares of Common Stock
indicated below (or, if no number is indicated below, the entire number of
Shares) that are held by you for the account of the undersigned, upon the terms
and subject to the conditions set forth in the Offering Circular and related
Letter of Transmittal.
Aggregate number of Shares of Common Stock to be tendered: -----------------.(1)
SIGN HERE
Signature(s)
- --------------------------------------------------------------------------------
Name(s)
- --------------------------------------------------------------------------------
Address(es)
- --------------------------------------------------------------------------------
Zip Code
Area Code and Telephone No(s).
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security No(s).
- -------------------------------------------------------------------
Dated:
- --------------------------------------------------------------------------------
(1) I/we understand that if I/we sign without indicating a lesser amount in the
space above, the entire number of Shares of Common Stock held by you for
my/our account will be tendered.
2
<PAGE> 16
UGLY DUCKLING CORPORATION
OFFER TO EXCHANGE
UP TO $16,486,582 AGGREGATE PRINCIPAL AMOUNT OF ITS
12% SUBORDINATED DEBENTURES DUE 2003
FOR
UP TO 2,536,397 SHARES OF ITS COMMON STOCK
THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 22, 1998, UNLESS EXTENDED.
November 20, 1998
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Ugly Duckling Corporation, a Delaware corporation (the "Company"), is
offering, upon the terms and conditions set forth in the enclosed Offering
Circular dated November 20, 1998 (the "Offering Circular") and the enclosed
Letter of Transmittal relating to an exchange offer as described therein (which
together constitute the "Exchange Offer"), to purchase up to $16,486,582
aggregate principal amount of its 12% Subordinated Debentures due 2003 (the
"Debentures") for up to 2,536,397 shares ("Shares") of its Common Stock, $.001
par value per share ("Common Stock") on the basis of $6.50 principal amount of
Debentures for each Share of Common Stock. The Offer will terminate at 5:00
p.m., New York City time, on December 22, 1998, unless extended by the Company
(the "Expiration Time").
We are asking you to contact your clients for whom you hold Common Stock
registered in your name or in the name of your nominee.
The Company will not pay any fees or commissions to any broker or dealer or
other person for soliciting tenders of Common Stock pursuant to the Offer.
However, you will be reimbursed for customary mailing and handling expenses
incurred by you in forwarding any of the enclosed materials to your clients.
The Company will pay or cause to be paid all transfer taxes, if any,
applicable to the sale of Common Stock to it or its order, except as otherwise
provided in Instruction 9 of the Letter of Transmittal.
For your information and for forwarding to your clients for whom you hold
Common Stock registered in your name or in the name of your nominee or who hold
Common Stock registered in their own names, we are enclosing the following
documents:
1. The Offering Circular;
2. A Letter of Transmittal (to be used to accept the Exchange Offer);
3. A form of letter that may be sent to your clients for whose
accounts you hold Common Stock registered in your name or in the name of your
nominee, with space provided for obtaining such clients instructions with
regard to the Exchange Offer;
4. A Notice of Guaranteed Delivery;
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9; and
6. A return envelope addressed to the Exchange Agent.
WE URGE YOU TO CONTACT YOUR CLIENTS AS SOON AS POSSIBLE. The Exchange Offer
will expire at 5:00 p.m., New York City time, on December 22, 1998, unless
extended.
<PAGE> 17
A stockholder wishing to tender Common Stock pursuant to the Exchange Offer
should (i) complete and execute the Letter of Transmittal (or facsimile
thereof), and have the signature thereon guaranteed if required by the
instructions thereof, and deliver such Letter of Transmittal, together with
certificates representing the Shares of Common Stock to be tendered and any
other required documents, to the Exchange Agent at or prior to the Expiration
Time, or (ii) request his broker, dealer, commercial bank, trust company or
other nominee to effect the transaction for him. See the Offering Circular under
"The Exchange Offer -- How to Tender."
Stockholders who wish to tender their Common Stock pursuant to the Exchange
Offer and (i) whose Common Stock Certificates are not immediately available, or
(ii) who cannot deliver their Common Stock Certificates and Letter of
Transmittal to the Exchange Agent on or prior to the Expiration Time, must
tender their Common Stock according to the guaranteed delivery procedures set
forth in the Exchange Offer under "The Exchange Offer -- How to Tender."
ANY INQUIRIES YOU MAY HAVE WITH RESPECT TO THE EXCHANGE OFFER OR REQUESTS
FOR ADDITIONAL COPIES OF THE ABOVE DOCUMENTS SHOULD BE ADDRESSED TO CORPORATE
INVESTOR COMMUNICATIONS, INC., 111 COMMERCE ROAD, CARLSTADT, NEW JERSEY
07072-2586, TOLL FREE AT 1-(888)-673-4478.
Very truly yours,
UGLY DUCKLING CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY PERSON AS AN AGENT OF THE COMPANY OR AUTHORIZE YOU OR ANY OTHER PERSON TO
USE ANY DOCUMENT OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH
RESPECT TO THE EXCHANGE OFFER NOT MADE IN THE OFFERING CIRCULAR OR THE LETTER OF
TRANSMITTAL.
2
<PAGE> 18
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<TABLE>
<C> <S> <C>
- ------------------------------------------------------------
GIVE NAME AND THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- ------------------------------------------------------------
1. Individual The individual
2. Two or more individuals (joint The actual owner of
account) the account or, if
combined funds, the
first individual on
the account(1)
3. Custodian account of a minor The minor(2)
(Uniform Transfers to Minors Act)
4 a. The usual revocable savings The grantor-
trust account (grantor is also trustee(1)
trustee)
b. So-called trust account that is The actual owner(1)
not a legal or valid trust
under State law
5. Sole proprietorship The owner(3)
- ------------------------------------------------------------
- ------------------------------------------------------------
GIVE NAME AND THE
FOR THIS TYPE OF ACCOUNT: EMPLOYER
IDENTIFICATION
NUMBER OF--
- ------------------------------------------------------------
6. Sole proprietorship The owner(3)
7. A valid trust, estate, or pension Legal entity(4)
trust
8. Corporate The corporation
9. Partnership The partnership
10. Association, club or other tax- The organization
exempt organization
11. A broker or registered nominee The broker or
nominee
12. Account with the Department of The public entity
Agriculture in the name of a
public entity (such as a state or
local government, school district,
or prison) that receives
agricultural program payments
- ------------------------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish. If
only one person on a joint account has a Social Security Number, that
person's number must be furnished.
(2) Circle the minor's name and furnish the minor's Social Security Number.
(3) You must show your individual name, but may also enter your business or
"doing business as" name. You may use your Social Security Number or your
Employer Identification Number (if you have one).
(4) List first and circle the name of the legal trust, estate, or pension trust.
(Do not furnish the identifying number of the personal representative or
trustee unless the legal entity itself is not designated in the account
title.)
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 19
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
HOW TO OBTAIN A TAXPAYER IDENTIFICATION NUMBER
If you do not have a taxpayer identification number, apply for one immediately.
To apply for a Social Security Number, obtain Form SS-5 from your local Social
Security office. Obtain Form SS-4 to apply for an employer identification
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding include the following:
- A corporation.
- A financial institution.
- An organization exempt from tax under section 501(a), an IRA, or a custodial
account under section 403(b)(7), if the account satisfies the requirements
of section 401(f)(2).
- The United States or any of its agencies or instrumentalities.
- A state, the District of Columbia, a possession of the United States, or any
of their political subdivisions or instrumentalities.
- A foreign government or any of its political subdivisions, agencies, or
instrumentalities.
- An international organization or any of its agencies or instrumentalities.
- A dealer in securities or commodities required to register in the U.S., the
District of Columbia, or a possession of the U.S.
- A real estate investment trust.
- A common trust fund operated by a bank under section 584(a).
- An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
- A middleman known in the investment community as a nominee or who is listed
in the most recent publication of the American Society of Corporate
Secretaries, Inc., the Nominee List.
- A trust exempt from tax under section 664 or described in section 4947.
- An entity registered at all times during the tax year under the Investment
Company Act of 1940.
- A foreign central bank of issue.
------------------------------------------------------------
Exempt payees described above should still complete the substitute Form W-9
enclosed herewith to avoid possible erroneous backup withholding. EXEMPT PAYEES
SHOULD FURNISH THEIR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON PART II
OF THE FORM, SIGN AND DATE THE FORM, AND RETURN IT TO THE EXCHANGE AGENT.
NONRESIDENT ALIEN AND FOREIGN CORPORATIONS.--If you are a nonresident alien or a
foreign entity not subject to withholding, furnish the Exchange Agent a complete
IRS Form W-8, "Certificate of Foreign Status."
PRIVACY ACT NOTICE.--Section 6109 of the Internal Revenue Code requires most
recipients of dividends, interest, or other payments to give taxpayer
identification numbers to payers who must report the payments to the IRS. The
IRS uses the numbers for identification purposes and to help verify the accuracy
of your tax return. Payers must be given the numbers whether or not recipients
are required to file tax returns. Payers must generally withhold 31% of taxable
interest, dividend, and certain other payments to a payee who does not furnish a
taxpayer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER--If you fail
to furnish your taxpayer identification number to a payer, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING--If you make
a false statement with no reasonable basis that results in no imposition of
backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.
FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE.
<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 000-20841
UGLY DUCKLING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0721358
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2525 E. CAMELBACK ROAD,
SUITE 500
PHOENIX, ARIZONA 85016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 852-6600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
At November 10, 1998 there were 16,069,502 shares of Common Stock, $0.001
par value, outstanding.
This document serves both as a resource for analysts, shareholders, and
other interested persons, and as the quarterly report on Form 10-Q of Ugly
Duckling Corporation ("Company") to the Securities and Exchange Commission,
which has taken no action to approve or disapprove the report or pass upon its
accuracy or adequacy. Additionally, this document is to be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
================================================================================
<PAGE> 2
UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. -- FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -- September 30, 1998 and December 31, 1997.................. 3
Condensed Consolidated Statements of Operations -- Three Months and Nine Months Ended
September 30, 1998 and September 30, 1997........................................................ 4
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1998
and September 30, 1997........................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE CONTINUING COMPANY BUSINESSES............................................. 11
PART II. -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.......................................................................... 29
Item 2. CHANGES IN SECURITIES...................................................................... 30
Item 3. DEFAULTS UPON SENIOR SECURITIES............................................................ 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 30
Item 5. OTHER INFORMATION.......................................................................... 31
Item 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... 31
SIGNATURE.......................................................................................... 33
Exhibit 10.1.....................................................................................
Exhibit 10.2.....................................................................................
Exhibit 10.3.....................................................................................
Exhibit 10.4.....................................................................................
Exhibit 10.5.....................................................................................
Exhibit 10.6.....................................................................................
Exhibit 10.7.....................................................................................
Exhibit 10.8.....................................................................................
Exhibit 10.9.....................................................................................
Exhibit 10.10....................................................................................
Exhibit 10.11....................................................................................
Exhibit 27.......................................................................................
Exhibit 99.......................................................................................
</TABLE>
2
<PAGE> 3
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................................ $ 955 $ 3,537
Finance Receivables, Net................................. 60,684 60,778
Investments Held in Trust................................ 20,076 11,637
Inventory................................................ 36,184 32,372
Property and Equipment, Net.............................. 25,681 39,182
Intangible Assets, Net................................... 14,571 16,366
Other Assets............................................. 13,929 9,350
Net Assets of Discontinued Operations.................... 106,708 102,411
-------- --------
$278,788 $275,633
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable....................................... $ 2,199 $ 2,867
Accrued Expenses and Other Liabilities................. 21,839 13,821
Notes Payable.......................................... 48,332 65,171
Subordinated Notes Payable............................. 25,000 12,000
-------- --------
Total Liabilities................................... 97,370 93,859
-------- --------
Stockholders' Equity:
Preferred Stock........................................ -- --
Common Stock........................................... 19 19
Additional Paid-in Capital............................. 173,266 172,603
Retained Earnings...................................... 8,133 9,152
-------- --------
Total Stockholders' Equity.......................... 181,418 181,774
-------- --------
$278,788 $275,633
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales of Used Cars ................................ $ 73,620 $ 33,530 $ 216,111 $ 79,543
Less:
Cost of Used Cars Sold .......................... 42,763 20,012 123,976 45,902
Provision for Credit Losses ..................... 15,746 6,084 45,053 14,193
--------- --------- --------- ---------
15,111 7,434 47,082 19,448
--------- --------- --------- ---------
Interest Income ................................... 4,592 3,820 12,031 8,511
Gain on Sale of Finance Receivables ............... 3,820 2,012 12,093 6,155
Servicing Income .................................. 3,973 2,465 11,834 5,114
Other Income ...................................... 112 1,017 404 1,964
--------- --------- --------- ---------
12,497 9,314 36,362 21,744
--------- --------- --------- ---------
Income before Operating Expenses .................. 27,608 16,748 83,444 41,192
Operating Expenses:
Selling and Marketing ........................... 5,242 2,891 15,462 6,663
General and Administrative ...................... 16,889 10,395 48,412 24,469
Depreciation and Amortization ................... 1,207 862 3,534 2,128
--------- --------- --------- ---------
23,338 14,148 67,408 33,260
--------- --------- --------- ---------
Operating Income .................................. 4,270 2,600 16,036 7,932
Interest Expense .................................. 531 190 1,687 630
--------- --------- --------- ---------
Earnings before Income Taxes ...................... 3,739 2,410 14,349 7,302
Income Taxes ...................................... 1,503 979 5,777 2,966
--------- --------- --------- ---------
Earnings from Continuing Operations ............... 2,236 1,431 8,572 4,336
Discontinued Operations:
Earnings (Loss) from Operations of Discontinued
Operations, net of income taxes
(Benefit) of $(432), $(2,117), $(680) and
$1,052, respectively ............................ (677) (3,259) (1,104) 1,409
Loss on Disposal of Discontinued Operations, net
of income tax benefit of $2,340, and $5,364 ..... (3,660) -- (8,487) --
--------- --------- --------- ---------
Net Earnings (Loss) ............................... $ (2,101) $ (1,828) $ (1,019) $ 5,745
========= ========= ========= =========
Earnings per Common Share from
Continuing Operations:
Basic ........................................... $ 0.12 $ .08 $ 0.46 $ 0.25
========= ========= ========= =========
Diluted ......................................... $ 0.12 $ .08 $ 0.46 $ 0.24
========= ========= ========= =========
Net Earnings (Loss) per Common Share:
Basic ........................................... $ (0.11) $ (0.10) $ (0.05) $ 0.33
========= ========= ========= =========
Diluted ......................................... $ (0.11) $ (0.10) $ (0.05) $ 0.32
========= ========= ========= =========
Shares Used in Computation
Basic ........................................... 18,560 18,460 18,600 17,620
========= ========= ========= =========
Diluted ......................................... 18,800 19,000 18,800 18,200
========= ========= ========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss) ........................................... $ (1,019) $ 5,745
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided by (Used) in Operating Activities:
Earnings (Loss) from Discontinued Operations .................. (9,591) 1,409
Provision for Credit Losses ................................... 45,053 14,193
Gain on Sale of Finance Receivables ........................... (12,093) (6,155)
Decrease (Increase) in Deferred Income Taxes .................. (675) 1,200
Depreciation and Amortization ................................. 3,534 2,128
Origination of Finance Receivables ............................ (207,643) (124,890)
Proceeds from Sale of Finance Receivables ..................... 159,498 120,145
Collections of Finance Receivables ............................ 16,713 23,020
Increase in Inventory ......................................... (3,812) (7,687)
Increase in Other Assets ...................................... (2,595) (3,448)
Increase in Accounts Payable, Accrued Expenses, and Other
Liabilities ................................................ 7,483 9,089
Increase in Income Taxes Receivable/Payable ................... (1,522) (3,445)
--------- ---------
Net Cash Provided by (Used in) Operating Activities ........ (6,669) 31,304
--------- ---------
Cash Flows Provided by (Used in) Investing Activities:
Increase in Investments Held in Trust ......................... (8,438) (7,258)
Net (Increase) Decrease in Notes Receivable ................... 78 (1,629)
Purchase of Property and Equipment ............................ (17,090) (14,073)
Proceeds from disposal of Property and Equipment .............. 27,413 --
Payment for Acquisition of Assets ............................. -- (35,566)
--------- ---------
Net Cash Provided by (Used in) Investing Activities ........ 1,963 (58,526)
--------- ---------
Cash Flows from Financing Activities:
Issuance of Notes Payable ..................................... 30,000 --
Repayment of Notes Payable .................................... (46,839) (34,508)
Issuance (Repayment) of Subordinated Notes Payable, Net ....... 13,000 (2,000)
Proceeds from Issuance of Common Stock ........................ 303 88,662
Acquisition of Treasury Stock ................................. (535) --
Other, Net .................................................... -- 57
--------- ---------
Net Cash Provided by (Used in) Financing Activities ........ (4,071) 52,211
--------- ---------
Cash Provided by (Used in) Discontinued Operations .............. 6,195 (39,043)
--------- ---------
Net Decrease in Cash and Cash Equivalents ....................... (2,582) (14,054)
Cash and Cash Equivalents at Beginning of Period ................ 3,537 18,455
--------- ---------
Cash and Cash Equivalents at End of Period ...................... $ 955 $ 4,401
========= =========
Supplemental Statement of Cash Flows Information:
Interest Paid ................................................. $ 7,697 $ 2,816
========= =========
Income Taxes Paid ............................................. $ 1,558 $ 15
========= =========
Assumption of Debt in Connection with Acquisition of Assets ... $ -- $ 29,900
========= =========
Purchase of Property and Equipment with Capital Leases ........ $ -- $ 211
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Ugly Duckling Corporation ("Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary to present the Company's financial position and results of operations
for the periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full fiscal year. The
Condensed Consolidated Balance Sheet as of December 31, 1997 was derived from
audited consolidated financial statements as of that date but does not include
all the information and footnotes required by generally accepted accounting
principles. It is suggested that these condensed consolidated financial
statements be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K, for
the year ended December 31, 1997.
NOTE 2. DISCONTINUED OPERATIONS
In February 1998, the Company announced its intention to close its branch
office network (the "Branch Offices") through which the Company purchased retail
installment contracts, and exit this line of business in the first quarter of
1998. The closure was substantially complete as of March 31, 1998. The Company
is continuing to negotiate lease settlements and terminations with respect to
its Branch Office network closure and to service the associated loan portfolio.
Further, in April 1998, the Company announced that its Board of Directors had
directed management to proceed with separating current dealership operations
from the bulk purchasing and third party loan servicing operations and the
collateralized dealer finance program, which provides qualified independent used
car dealers ("Third Party Dealers") with warehouse purchase facilities and
operating credit lines primarily secured by the dealers' retail installment
contract portfolio ("Cygnet Dealer Program"). The Company's continuing
operations are focusing exclusively on the retail sale of used cars through its
chain of dealerships, as well as the collection and servicing of the resulting
loans. The continuing operations include the Company's dealerships, loan
servicing operations of the related loans, the Securitization Program (defined
below in this Form 10-Q under Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Continuing Company Businesses -
Results of Operations - Gain on Sale of Finance Receivables) and the previously
effected dealership securitization transactions, the Company's existing
insurance operations related to the dealership operations, and its rent-a-car
franchise business (which is generally inactive) (the "Continuing Operations").
In June 1998 the Company formed a new wholly owned subsidiary, Cygnet Financial
Corporation ("Cygnet"), to effectuate a split-up (the "Split-up") and operate
the non-dealership activities, which include the Cygnet Dealer Program and the
bulk purchasing and third party loan servicing operations. As a result of these
two announcements, the Company has retroactively restated the accompanying
condensed consolidated balance sheets and condensed consolidated statements of
operations to reflect the Company's discontinued operations in accordance with
Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events Transactions." A
proposal to effect the Split-up through a rights offering (the "Rights
Offering") was approved by the stockholders at the annual stockholder's meeting
held in August 1998. The Company subsequently issued rights to its stockholders
that granted each holder the opportunity to purchase one (1) share of Cygnet
common stock, at a subscription rate of $7.00 per share, for every four (4)
shares of Company Common Stock held (the "Rights"). Due to a lack of shareholder
participation, however, the Rights Offering was canceled in September 1998.
Management of the Company is continuing to explore alternatives with regard to
separating the operations of Cygnet.
Included within the Company's discontinued operations (the "Discontinued
Operations") is the Cygnet Dealer Program, the bulk purchase and/or servicing of
contracts originated by other sub-prime lenders, and the Branch Offices that the
Company closed in February 1998. The assets and liabilities related to the
Branch Offices, which include Finance Receivables and Residuals in Finance
Receivables Sold, will remain with the Company without regard to the separation
of Cygnet's operations from the Company.
6
<PAGE> 7
The components of Net Assets of Discontinued Operations as of September 30, 1998
and December 31, 1997 follow (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Branch Office Finance Receivables, net .............. $ 33,884 $ 26,780
Branch Office Residuals in Finance
Receivables Sold .................................. 9,581 16,099
Investments Held in Trust ........................... 4,640 7,277
Notes Receivable and Other Assets -- FMAC ........... 19,105 25,686
Cygnet Dealer Finance Portfolio ..................... 37,629 19,438
Furniture and Equipment -- Cygnet ................... 3,205 2,070
Capitalized Start-up Costs .......................... -- 2,453
Other Assets, net of Accounts Payable and
Accrued Liabilities ............................... (1,336) 2,608
--------- ---------
$ 106,708 $ 102,411
========= =========
</TABLE>
Following is a summary of the operating results of the Discontinued
Operations for the periods ended September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
BRANCH BRANCH
CYGNET OFFICES TOTAL CYGNET OFFICES TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 11,948 $ -- $ 11,948 $ 3,338 $ (584) $ 2,754
Expenses ........................ 13,057 6,000 19,057 2,705 5,425 8,130
-------- -------- -------- -------- -------- --------
Earnings (Loss) before
Income Taxes .................. (1,109) (6,000) (7,109) 633 (6,009) (5,376)
Income (Taxes) Benefit .......... 432 2,340 2,772 (251) 2,368 2,117
-------- -------- -------- -------- -------- --------
Earnings (Loss) from Discontinued
Operations .................... $ (677) $ (3,660) $ (4,337) $ 382 $ (3,641) $ (3,259)
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
BRANCH BRANCH
CYGNET OFFICES TOTAL CYGNET OFFICES TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 24,499 $ 3,137 $ 27,636 $ 3,475 $ 16,814 $ 20,289
Expenses ........................ 25,004 18,267 43,271 4,030 13,798 17,828
-------- -------- -------- -------- -------- --------
Earnings (Loss) before
Income Taxes .................. (505) (15,130) (15,635) (555) 3,016 2,461
Income (Taxes) Benefit .......... 189 5,855 6,044 232 (1,284) (1,052)
-------- -------- -------- -------- -------- --------
Earnings (Loss) from Discontinued
Operations .................... $ (316) $ (9,275) $ (9,591) $ (323) $ 1,732 $ 1,409
======== ======== ======== ======== ======== ========
</TABLE>
The Loss from Discontinued Operations, net of income taxes, totaled $4.3 million
for the three months ended September 30, 1998. The loss incurred during the
three months ended September 30, 1998 included a $3.7 million charge, net of
income taxes, attributable to higher-than-estimated loan losses and portfolio
collection expenses associated with the Branch Office's that were closed in the
first quarter of 1998. The loss from the Company's Cygnet Dealer Program and
bulk purchasing and loan servicing operations totaled $677,000 for the three
months ended September, 30, 1998, which included a charge totaling approximately
$1.2 million, net of income taxes, incurred for Cygnet's terminated Rights
Offering.
7
<PAGE> 8
NOTE 3. SUMMARY OF FINANCE RECEIVABLES PRINCIPAL BALANCES, NET
Following is a summary of Finance Receivables Principal Balances, Net, as of
September 30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Installment Sales Contract Principal
Balances ....................................... $30,089 $55,965
Add: Accrued Interest ............................ 372 461
Loan Origination Costs ......................... 636 1,431
------- -------
Principal Balances, net .......................... 31,097 57,857
Residuals in Finance Receivables Sold ............ 35,159 13,277
------- -------
66,256 71,134
Less Allowance for Credit Losses ................. (5,572) (10,356)
------- -------
Finance Receivables, net ......................... $60,684 $60,778
======= =======
The Finance Receivables are classified as
follows:
Finance Receivables Held for Sale ................ $28,000 $52,000
Finance Receivables Held for Investment .......... 3,097 5,857
------- -------
$31,097 $57,857
======= =======
</TABLE>
As of September 30, 1998 and December 31, 1997, the Residuals in Finance
Receivables Sold were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Retained interest in subordinated securities (B
Certificates) ........................................ $ 63,353 $ 25,483
Net interest spreads, less present value discount ...... 31,793 10,622
Reduction for estimated discounted credit losses ....... (59,987) (22,828)
--------- ---------
Residuals in Finance Receivables sold .................. $ 35,159 $ 13,277
========= =========
Securitized principal balances outstanding ............. $ 246,734 $ 127,356
========= =========
Estimated discounted credit losses as a % of securitized
principal balances outstanding ....................... 24.3% 17.9%
========= =========
</TABLE>
The following table reflects a summary of activity for the Residuals in
Finance Receivables Sold for the periods ended September 30, 1998 and 1997,
respectively (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance, Beginning of Period ... $28,417 $12,551 $ 13,277 $ 8,512
Additions ...................... 11,182 11,541 35,435 17,734
Amortization ................... (4,440) (2,370) (13,553) (4,524)
Write Down ..................... -- (5,700) -- (5,700)
------- ------- -------- -------
Balance, End of Period ......... $35,159 $16,022 $ 35,159 $16,022
======= ======= ======== =======
</TABLE>
NOTE 4. NOTES PAYABLE
Following is a summary of Notes Payable as of September 30, 1998 and
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
Revolving Facility with GE Capital ............. $44,852 $56,950
Mortgage loan with finance company ............. 3,386 7,450
Others ......................................... 94 771
------- -------
$48,332 $65,171
======= =======
</TABLE>
NOTE 5. COMMON STOCK EQUIVALENTS
8
<PAGE> 9
Net Earnings (Loss) per common share amounts are based on the weighted
average number of common shares and Common Stock equivalents outstanding for the
periods ended September 30, 1998 and 1997 as follows (in thousands, except for
per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings from Continuing Operations ..... $ 2,236 $ 1,431 $ 8,572 $ 4,336
======= ======= ======= =======
Net Earnings (Loss) ..................... $(2,101) $(1,828) $(1,019) $ 5,745
======= ======= ======= =======
Basic EPS-Weighted Average Shares
Outstanding ........................... 18,560 18,460 18,600 17,620
======= ======= ======= =======
Basic Earnings Per Share from:
Continuing Operations ................. $ 0.12 $ 0.08 $ 0.46 $ 0.25
======= ======= ======= =======
Net Earnings (Loss) ................... $ (0.11) $ (0.10) $ (0.05) $ 0.33
======= ======= ======= =======
Basic EPS-Weighted Average Shares
Outstanding ........................... 18,560 18,460 18,600 17,620
Effect of Diluted Securities:
Warrants .............................. 29 414 25 66
Stock Options ......................... 211 126 175 514
------- ------- ------- -------
Dilutive EPS-Weighted Average Shares
Outstanding ........................... 18,800 19,000 18,800 18,200
======= ======= ======= =======
Diluted Earnings (Loss) Per Share from:
Continuing Operations ................. $ 0.12 $ 0.08 $ 0.46 $ 0.24
======= ======= ======= =======
Net Earnings (Loss) ................... $ (0.11) $ (0.10) $ (0.05) $ 0.32
======= ======= ======= =======
Warrants Not Included in Diluted EPS
Since Antidilutive .................... 1,439 -- 1,439 --
======= ======= ======= =======
Stock Options Not Included in Diluted EPS
Since Antidilutive .................... 1,562 503 716 405
======= ======= ======= =======
</TABLE>
NOTE 6. BUSINESS SEGMENTS
The Company has three distinct business segments. These consist of retail
car sales operations ("Company Dealerships"), operations attributable to the
administration and collection of Finance Receivables generated at the Company
Dealerships ("Company Dealership Receivables"), and corporate and other
operations. These segments exclude the activities of the Discontinued
Operations.
A summary of operating activity by business segment for the periods ended
September 30, 1998 and 1997, respectively, follows:
<TABLE>
<CAPTION>
COMPANY
COMPANY DEALERSHIP CORPORATE
DEALERSHIPS RECEIVABLES AND OTHER TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months ended September 30, 1998:
Sales of Used Cars ................... $ 73,620 $ -- $ -- $ 73,620
Less: Cost of Cars Sold .............. 42,763 -- -- 42,763
Provision for Credit Losses ........ 15,709 37 -- 15,746
--------- --------- --------- ---------
15,148 (37) -- 15,111
Interest Income ...................... -- 4,537 55 4,592
Gain on Sale of Finance Receivables .. -- 3,820 -- 3,820
Servicing Income ..................... -- 3,973 -- 3,973
Other Income (Expense) ............... 70 (1) 43 112
--------- --------- --------- ---------
Income before Operating Expenses ..... 15,218 12,292 98 27,608
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 5,242 -- -- 5,242
General and Administrative ......... 8,175 4,380 4,334 16,889
Depreciation and Amortization ...... 628 323 256 1,207
--------- --------- --------- ---------
14,045 4,703 4,590 23,338
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ............................ $ 1,173 $ 7,589 $ (4,492) $ 4,270
========= ========= ========= =========
Three months ended September 30, 1997:
Sales of Used Cars ................... $ 33,530 $ -- $ -- $ 33,530
Less: Cost of Cars Sold .............. 20,012 -- -- 20,012
Provision for Credit Losses ........ 6,084 -- -- 6,084
--------- --------- --------- ---------
7,434 -- -- 7,434
Interest Income ...................... -- 3,820 -- 3,820
Gain on Sale of Finance Receivables .. -- 2,012 -- 2,012
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
COMPANY
COMPANY DEALERSHIP CORPORATE
DEALERSHIPS RECEIVABLES AND OTHER TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Servicing Income ..................... -- 2,465 -- 2,465
Other Income ......................... 552 -- 465 1,017
--------- --------- --------- ---------
Income before Operating Expenses ..... 7,986 8,297 465 16,748
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 2,891 -- -- 2,891
General and Administrative ......... 4,542 3,369 2,484 10,395
Depreciation and Amortization ...... 426 318 118 862
--------- --------- --------- ---------
7,859 3,687 2,602 14,148
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ........................... $ 127 $ 4,610 $ (2,137) $ 2,600
========= ========= ========= =========
Nine Months ended September 30, 1998:
Sales of Used Cars ................... $ 216,111 $ -- $ -- $ 216,111
Less: Cost of Cars Sold .............. 123,976 -- -- 123,976
Provision for Credit Losses ........ 45,006 47 -- 45,053
--------- --------- --------- ---------
47,129 (47) -- 47,082
Interest Income ...................... -- 11,860 171 12,031
Gain on Sale of Finance Receivables .. -- 12,093 -- 12,093
Servicing Income ..................... -- 11,834 -- 11,834
Other Income (Expense) ............... 270 (9) 143 404
--------- --------- --------- ---------
Income before Operating Expenses ..... 47,399 35,731 314 83,444
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 15,462 -- -- 15,462
General and Administrative ......... 24,847 12,914 10,651 48,412
Depreciation and Amortization ...... 1,856 972 706 3,534
--------- --------- --------- ---------
42,165 13,886 11,357 67,408
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ............................ $ 5,234 $ 21,845 $ (11,043) $ 16,036
========= ========= ========= =========
Nine Months ended September 30, 1997:
Sales of Used Cars ................... $ 79,543 $ -- $ -- $ 79,543
Less: Cost of Cars Sold .............. 45,902 -- -- 45,902
Provision for Credit Losses ........ 14,193 -- -- 14,193
--------- --------- --------- ---------
19,448 -- -- 19,448
Interest Income ...................... -- 8,511 -- 8,511
Gain on Sale of Finance Receivables .. -- 6,155 -- 6,155
Servicing Income ..................... -- 5,114 -- 5,114
Other Income ......................... 1,155 83 726 1,964
--------- --------- --------- ---------
Income before Operating Expenses ..... 20,603 19,863 726 41,192
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 6,656 -- 7 6,663
General and Administrative ......... 10,824 7,840 5,805 24,469
Depreciation and Amortization ...... 984 785 359 2,128
--------- --------- --------- ---------
18,464 8,625 6,171 33,260
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ............................ $ 2,139 $ 11,238 $ (5,445) $ 7,932
========= ========= ========= =========
</TABLE>
NOTE 7. USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ materially from those
estimates.
NOTE 8. BANKRUPTCY REMOTE ENTITIES
Ugly Duckling Receivables Corporation ("UDRC") and Ugly Duckling Receivables
Corporation II ("UDRC II"), formerly known as Champion Receivables Corporation
("CRC") and Champion Receivables Corporation II ("CRC II"), respectively,
(collectively referred to as "Securitization Subsidiaries"), are the Company's
wholly-owned special purpose "bankruptcy remote" entities. Their assets,
including assets in Discontinued Operations, are comprised of Residuals in
Finance Receivables Sold and Investments Held In Trust, in the amounts of
approximately $44.7 million and $23.4 million, respectively, at September 30,
1998, which amounts would not be available to satisfy claims of creditors of the
Company on a consolidated basis.
NOTE 9. RECLASSIFICATIONS
Certain reclassifications have been made to previously reported information
to conform to the current presentation.
10
<PAGE> 11
NOTE 10. SUBSEQUENT EVENT
Subsequent to September 30, 1998, the Company completed a debt for Common
Stock exchange in which the Company acquired approximately 2,463,600 shares of
Common Stock in exchange for debentures with a face value of $6.50 per share of
stock exchanged. The debentures' aggregate principal amount is approximately
$16,013,400 and bear interest at 12% per annum, payable semi-annually with the
entire principal balance due at the end of the five-year term (October 23,
2003). The debentures are subordinate to all other Company indebtedness and
contain certain call provisions at the option of the Company. See "Management's
Discussion of Results of Operations and Financial Condition of the Continuing
Company Businesses - Liquidity and Capital Resources - Exchange Offer".
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE CONTINUING COMPANY BUSINESSES
This Quarterly Report on Form 10-Q contains forward looking statements.
Additional written or oral forward looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. Such forward looking statements are within the meaning of that term
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements may include, but
not be limited to, projections of revenues, income, or loss, capital
expenditures, plans for future operations, including plans for a possible
separation of the Company's non-dealership operations, financing needs or plans,
and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. The words "believe," "expect," "intend,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward looking statements. The Company undertakes no obligation
to publicly update or revise any forward looking statements, whether as a result
of new information, future events, or otherwise. Statements in this Quarterly
Report, including the Notes to the Condensed Consolidated Financial Statements
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition of the Continuing Company Businesses," describe factors, among others,
that could contribute to or cause such differences. Additional risk factors that
could cause actual results to differ materially from those expressed in such
forward looking statements are set forth in Exhibit 99 which is attached hereto
and incorporated by reference into this Quarterly Report on Form 10-Q.
INTRODUCTION
General. Ugly Duckling Corporation ("Company") operates a chain of "buy
here-pay here" used car dealerships in the United States and underwrites,
finances, and services retail installment contracts generated from the sale of
used cars by its dealerships ("Company Dealerships") and by third party used car
dealers ("Third Party Dealers") located in selected markets throughout the
country. As part of its financing activities, the Company has initiated a
collateralized dealer financing program ("Cygnet Dealer Program") pursuant to
which it provides qualified independent used car dealers with warehouse
facilities and operating lines of credit secured by the dealers' retail
installment contract portfolios and inventory. The Company targets its products
and services to the sub-prime segment of the automobile financing industry,
which focuses on selling and financing the sale of used cars to persons who have
limited credit histories, low incomes, or past credit problems.
The Company commenced its used car sales and finance operations with the
acquisition of two Company Dealerships in 1992. During 1993, the Company
acquired three additional Company Dealerships. In 1994, the Company constructed
and opened four new Company Dealerships that were built specifically to meet the
Company's new standards of appearance, reconditioning capabilities, size, and
location. During 1994, the Company closed one Company Dealership because the
facility failed to satisfy these new standards and, at the end of 1995, closed
its Gilbert, Arizona dealership. In January 1997, the Company acquired selected
assets of a group of companies engaged in the business of selling and financing
used motor vehicles, including four dealerships located in the Tampa Bay/St.
Petersburg market ("Seminole"). In March 1997, the Company opened its first used
car dealership in the Las Vegas market. In April 1997, the Company acquired
selected assets of a company in the business of selling and financing used motor
11
<PAGE> 12
vehicles, including seven dealerships located in the San Antonio market ("EZ
Plan"). In addition, the Company opened two additional dealerships in the
Albuquerque market and one additional dealership in the Phoenix market during
the second quarter of 1997. In August 1997, the Company closed a dealership in
Prescott, Arizona. In September 1997, the Company acquired selected assets of a
company in the business of selling used motor vehicles, including six
dealerships in the Los Angeles market, two in the Miami market, two in the
Atlanta market and two in the Dallas market ("Kars"). Although the Company did
not acquire the loan portfolio of Kars, it did acquire Kars' loan servicing
assets and began servicing Kars retained portfolio and portfolios previously
securitized by Kars. During the first quarter of 1998, the Company opened one
dealership in the Phoenix, Tampa and Dallas markets, respectively. The Company
opened one dealership in the Phoenix, Tampa, Dallas, San Antonio, and Atlanta
markets, respectively, and closed both of its dealerships in the Miami, Florida
market during the second quarter of 1998. During the third quarter of 1998, the
Company opened one Company dealership in the Atlanta market and operated 51 and
35 dealerships at September 30, 1998 and 1997, respectively.
In 1994, the Company acquired Champion Financial Services, Inc., an
independent automobile finance company. In April 1995, the Company initiated an
aggressive plan to expand the number of contracts purchased from its Third Party
Dealer Branch Office network (the "Branch Offices"). The Company operated 83
Branch Offices at December 31, 1997 In February 1998, the Company announced its
intention to close its Branch Office network, and exit this line of business in
the first quarter of 1998. The Company recorded a pre-tax charge to Discontinued
Operations totaling approximately $9.1 million (approximately $5.6 million, net
of income taxes) during the first quarter of 1998. In addition, a $6 million
charge ($3.6 million net of income taxes) was taken during the third quarter of
1998 due to primarily higher than anticipated loan losses and servicing
expenses. The restructuring was substantially complete by the end of the first
quarter of 1998 and included the termination of approximately 450 employees,
substantially all of whom were employed at the Company's Branch Offices that
were in place on the date of the announcement. The Company is continuing to: (1)
negotiate lease settlements, sublease arrangements, and terminations with
respect to its Branch Office network closure; and (2) service the Branch Office
loan portfolio.
SPLIT-UP OF THE COMPANY
In the third quarter of 1997, the Company announced a strategic evaluation
of its third party dealer operations, including the possible sale or spin-off of
these operations. In February 1998, the Company announced its intention to close
its Branch Offices, and to focus instead on its Cygnet Dealer Program, which
offers warehouse purchase facilities and lines of credit to selected independent
used car dealers, and the bulk purchase and/or servicing of large contract
portfolios. The Company further announced that it was continuing to evaluate
alternatives for these remaining third party dealer operations. On April 28,
1998, the Company announced that its Board of Directors had directed management
to proceed with separating current operations into two companies and
subsequently formed a new wholly owned subsidiary, Cygnet Financial Corporation
("Cygnet"), which would operate the Cygnet Dealer Program and the bulk purchase
and third party loan servicing operations. A proposal to Split-up the two
companies through a rights offering (the "Rights Offering") was approved by the
stockholders at the annual stockholder's meeting held in August 1998. The
Company subsequently issued rights to its stockholders of record on August 17,
1998 that allowed the holder to purchase one (1) share of Cygnet common stock,
at a subscription rate of $7.00 per share, for every four (4) shares of Company
Common Stock held by him (the "Rights"). Due to a lack of stockholder
participation, however, Cygnet would not have met the NASDAQ stock exchange
listing requirements and the Rights Offering was, therefore, canceled.
Management of the Company is continuing to explore alternatives with regard to
separating the operations of Cygnet from the Company. Unless otherwise noted,
the following discussion relates to Continuing Operations only.
FINANCIAL POSITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of September 30, 1998 and December
31, 1997, and its results of operations for the three month periods ended
September 30, 1998 and 1997, respectively, and the nine month periods ended
September 30, 1998 and 1997, respectively.
FINANCIAL POSITION
Growth in Finance Receivables. Contract receivables serviced increased by
51.0% to $276.8 million on September 30, 1998 (including $246.7 million in
contracts serviced under the Company's Securitization Program) from $183.3
million at December 31, 1997 (including $127.4 million in contracts serviced
under the Company's Securitization Program).
12
<PAGE> 13
The following tables reflect the growth in period end balances measured in
terms of the principal amount and the number of contracts arising from
Continuing Operations.
13
<PAGE> 14
TOTAL CONTRACTS OUTSTANDING:
(PRINCIPAL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- --------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Principal Amount ...................... $276,823 41,456 $183,321 35,762
Less: Portfolios Securitized and Sold.. 246,734 37,431 127,356 27,769
-------- -------- -------- --------
Company Total ......................... $ 30,089 4,025 $ 55,965 7,993
======== ======== ======== ========
</TABLE>
In addition to the loan portfolio summarized above, the Company also
services loan portfolios totaling approximately $154.9 million ($61.1 million
for Kars and $93.8 million from Branch Office originations) as of September 30,
1998 and $267.9 million ($127.3 million for Kars and $140.6 million from Branch
Office originations) as of December 31, 1997.
TOTAL CONTRACTS ORIGINATED/PURCHASED:
(PRINCIPAL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Principal Amount ........... $ 71,027 $ 32,147 $207,643 $131,526
Number of Contracts ........ 9,058 4,389 26,915 22,246
Average Principal .......... $ 7,841 $ 7,324 $ 7,715 $ 5,912
</TABLE>
Finance Receivable Principal Balances originated/purchased during the three
months ended September 30, 1998 increased by 120.9% to $71.0 million from $32.1
million in the three month period ended September 30, 1997. For the nine month
period ended September 30, 1998, Finance Receivable Principal Balances
originated/purchased increased by 57.9% to $207.6 million from $131.5 million in
the nine month period ended September 30, 1997. During the nine month period
ended September 30, 1997, Finance Receivable Principal Balances
originated/purchased included the purchase of approximately $55.4 million
(13,250 contracts) in Finance Receivables in conjunction with the Seminole and
EZ Plan acquisitions.
RESULTS OF OPERATIONS
For Three Months Ended September 30, 1998 Compared To Three Months Ended
September 30, 1997
The prices at which the Company sells its cars and the interest rates that
it charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default. The
Provision for Credit Losses reflects these factors and is treated by the Company
as a cost of both the future interest income derived on the contract receivables
originated at Company Dealerships as well as a cost of the sale of the cars
themselves. Accordingly, unlike traditional car dealerships, the Company does
not present gross profits in its Statements of Operations calculated as Sales of
Used Cars less Cost of Used Cars Sold.
Sales of Used Cars. Sales of Used Cars increased by 119.6% to $73.6 million
for the three month period ended September 30, 1998 from $33.5 million for the
three month period ended September 30, 1997. This growth reflects a significant
increase in the number of used car dealerships in operation from 35 dealerships
in operation at September 30, 1997 compared to 51 dealerships in operation at
September 30, 1998. Units sold increased by 101.8% to 9,128 units in the three
month period ended September 30, 1998 from 4,523 units in the three month period
ended September 30, 1997. Same store sales increased by 5.6% in the three month
period ended September 30, 1998 compared to the three month period ended
September 30, 1997. Management expects same store sales to remain relatively
stable in future periods.
The average sales price per car increased 8.8% to $8,065 for the three month
period ended September 30, 1998 from $7,413 for the three month period ended
September 30, 1997. The increase in the average sales price per unit was
primarily the result of the Company charging a higher sales price to compensate
for higher vehicle inventory costs, and management's efforts to increase the
gross margin realized on a per unit basis.
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<PAGE> 15
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 113.7% to $42.8 million for the three month period ended September
30, 1998 from $20.0 million for the three month period ended September 30, 1997.
On a per unit basis, the Cost of Used Cars Sold increased by 5.9% to $4,685 for
the three month period ended September 30, 1998 from $4,424 for the three month
period ended September 30, 1997. The gross margin on used car sales (Sales of
Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
increased by 128.3% to $30.9 million for the three month period ended September
30, 1998 from $13.5 million for the three month period ended September 30, 1997.
As a percentage of sales, the gross margin was 41.9% and 40.3% for the three
month periods ended September 30, 1998 and 1997, respectively. On a per unit
basis, the gross margin per car sold was $3,380 and $2,988 for the three month
periods ended September 30, 1998 and 1997, respectively. The increase in the
average cost per unit is primarily the result of an increase in the Company's
purchase price for vehicles compared to the prior comparable period.
Provision for Credit Losses. A high percentage of Company Dealership
customers ultimately do not make all of their contractually scheduled payments,
requiring the Company to charge off the remaining principal balance due. As a
result, the Company recognizes a Provision for Credit Losses in order to
establish an Allowance for Credit Losses sufficient to absorb anticipated future
losses. The Provision for Credit Losses increased by 158.8% to $15.7 million in
the three month period ended September 30, 1998 from $6.1 million for the three
month period ended September 30, 1997. The Provision for Credit Losses per unit
originated at Company Dealerships increased by 25.4% to $1,738 per unit in the
three month period ended September 30, 1998 from $1,386 per unit in the three
month period ended September 30, 1997. As a percentage of contract balances
originated, the Provision for Credit Losses averaged 22.2% and 18.9%, for the
three month periods ended September 30, 1998 and 1997, respectively. The
increase in the provision for credit losses results primarily from the Company
charging a higher provision for credit losses on cars sold and financed in
states that impose interest rate limitations to compensate for the lower
interest rate earned on those loans.
The Company charges its Provision for Credit Losses to current operations
and does not recognize any portion of the unearned interest income as a
component of its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full annual percentage rate ("APR")
on its contracts less amortization of loan origination costs.
Interest Income. Interest Income consists primarily of interest on Finance
Receivables from Company Dealership sales and income from Residuals in Finance
Receivables Sold. Interest Income increased by 20.2% to $4.6 million for the
three month period ended September 30, 1998 from $3.8 million for the three
month period ended September 30, 1997. Interest Income was reduced by the sale
of Finance Receivables with remaining principal balances of $246.7 million and
$155.4 million as of September 30, 1998 and 1997, respectively, pursuant to the
Securitization Program, and may continue to be affected in future periods by
additional securitizations. A primary element of the Company's sales strategy is
to provide financing to customers with poor credit histories who are unable to
obtain automobile financing through traditional sources. The Company financed
96.5% of sales revenue and 99.2% of the used cars sold at Company Dealerships
for the three month period ended September 30, 1998, compared to 95.9% of sales
revenue and 97.0% of the used cars sold for the three month period ended
September 30, 1997. The average amount financed increased to $7,841 for the
three month period ended September 30, 1998 from $7,324 for the three month
period ended September 30, 1997. The increase in the average amount financed is
due primarily to an increase in the average sales price from the comparable
period in the prior year. Primarily as a result of its expansion into markets
with interest rate limits, the Company's yield on its Company Dealership
Receivable portfolio has trended downward. The effective yield on Finance
Receivables from Company Dealerships was 25.8% and 26.0%, for the three month
periods ended September 30, 1998 and 1997, respectively. The Company's policy is
to charge 29.9% per annum on its Company Dealership contracts. However, in those
states that impose usury limits, the Company charges the maximum interest rate
permitted.
Gain on Sale of Finance Receivables. Ugly Duckling Receivables Corporation
("UDRC") and Ugly Duckling Receivables Corporation II ("UDRC II"), formerly
known as Champion Receivables Corporation ("CRC") and Champion Receivables
Corporation II ("CRC II"), respectively (collectively referred to as
"Securitization Subsidiaries"), are the Company's wholly owned special purpose
"bankruptcy remote" entities. During the first quarter of 1996, the Company
initiated a securitization program under which UDRC sold securities backed by
contracts to SunAmerica Life Insurance Company ("SunAmerica"). Beginning with
the third fiscal quarter of 1997, the Company expanded the securitization
program to include UDRC II and sales of UDRC II securities through private
placement of securities to investors other than SunAmerica (the "Securitization
Program"). Under the Securitization Program, the Securitization Subsidiaries
assign and transfer the contracts to separate trusts ("Trusts") pursuant to
Pooling and Servicing Agreements (the "Pooling Agreements"). Pursuant to the
Pooling Agreements, Class A Certificates and subordinated Class B Certificates
are issued to the Securitization Subsidiaries. The Securitization Subsidiaries
then sell the Class A Certificates to the investors and retain the Class B
Certificates. The transferred contracts are serviced by Champion Acceptance
Corporation ("CAC"), another subsidiary of
15
<PAGE> 16
the Company. For the Company's securitizations that took place prior to July 1,
1997, the Company's Class A Certificates received ratings from Standard & Poors
ranging from "BBB" to "A". To obtain these ratings from Standard & Poors, UDRC
was required to provide a credit enhancement by establishing and maintaining a
cash spread account for the benefit of the certificate holders. For the
securitization transactions that were consummated after July 1, 1997, the
Company's Class A Certificates received a "AAA" rating from Standard & Poors,
and a "Aaa" rating from Moody's Investors Service. To obtain these ratings, UDRC
II (1) obtained an insurance policy from MBIA Insurance Corporation which
unconditionally and irrevocably guaranteed full and complete payment of the
Class A guaranteed distribution (as defined), and (2) provided a credit
enhancement by establishing and maintaining a cash spread account for the
benefit of the certificate holders. The Securitization Subsidiaries make an
initial cash deposit into the spread account, ranging from 3% to 4% of the
initial underlying Finance Receivables principal balance and pledge this cash to
the Trusts. The Securitization Subsidiaries are also required to then make
additional deposits to the spread account from the residual cash flow (through
the trustees) as necessary to attain and maintain the spread account at a
specified percentage, ranging from 6.0% to 8.0%, of the underlying Finance
Receivables principal balance. Distributions are not made to the Securitization
Subsidiaries on the Class B Certificates unless the spread account has the
required balance, the required periodic payments to the Class A Certificate
holders are current, and the trustee, servicer and other administrative costs
are current.
The Company recognizes a Gain on Sale of Loans equal to the difference
between the sales proceeds for the Finance Receivables sold and the Company's
recorded investment in the Finance Receivables sold. The Company's investment in
Finance Receivables consists of the principal balance of the Finance
Receivables, as well as the allowance for credit losses related thereto.
Therefore, once the Company securitizes a pool of loans, the Company reduces the
allowance for credit losses for the amount of allowance for credit losses
related to the loans securitized. The Company allocates the recorded investment
in the Finance Receivables between the portion of the Finance Receivables sold
and the portion retained based on the relative fair values on the date of sale.
To the extent that actual cash flows on a securitization are below original
estimates, and differ materially from the original securitization assumptions
and, in the opinion of management, those differences appear to be other than
temporary in nature, the Company would be required to revalue the Residuals in
Finance Receivables Sold and record a charge to earnings based upon the
reduction.
UDRC made an initial spread account deposit totaling $2.8 million during the
three months ended September 30, 1998 in conjunction with a single
securitization. Based upon securitizations in effect as of September 30, 1998,
the Company's continuing operations were required to maintain an aggregate
balance in its spread accounts of $20.0 million, a portion of which may be
funded over time. As of September 30, 1998, the Company maintained an aggregate
spread account balance of $18.8 million, which satisfied the funding requirement
for all of the securitization transactions consummated prior to the three month
period ended September 30, 1998. Accordingly, an additional $1.2 million related
to the securitization consummated during the three month period ended September
30, 1998 will need to be funded from future cash flows. The additional funding
requirements will decline as the trustee deposits additional cash flows into the
spread account and as the principal balance of the underlying Finance
Receivables declines. In addition to the spread account balance of $18.8 million
at September 30, 1998, the Company had deposited a total of $1.3 million in
trust accounts in conjunction with certain other agreements.
The Company also maintains spread accounts for the securitization
transactions that were consummated by the Company's Discontinued Operations. The
Company had satisfied its funding obligation of $4.6 million as of September 30,
1998, with respect to these securitization transactions.
During the three months ended September 30, 1998, the Company securitized an
aggregate of $69.9 million in contracts, issuing $51.0 million in Class A
securities, and $18.9 million in Class B securities (Residuals in Finance
Receivables Sold). During the three months ended September 30, 1997, the Company
securitized an aggregate of $103.8 million in contracts issuing $85.1 million in
Class A securities and $18.7 million in Class B securities. The Company recorded
the carrying value of the Residuals in Finance Receivables sold at $11.2 million
and $12.4 million, respectively, for the securitization transactions consummated
during the three months ended September 30, 1998 and 1997, respectively. The
Company recorded Gain on Sale of Loans of $3.8 million (5.5% of principal sold)
and $7.7 million (7.4% of principal sold), net of expenses related to
securitization transactions during the three months ended September 30, 1998 and
1997, respectively. The decrease in the gain on sale percentage was due to the
utilization of a higher cumulative net loss assumption for the securitization
transaction consummated during the three months ended September 30, 1998
(28.6%). The Company recorded a $5.7 million charge (approximately $3.4 million
net of income taxes) in the three month period ended September 30, 1997, which
resulted in a net Gain on Sale of Finance Receivables of $2.0 million for the
quarter ended
16
<PAGE> 17
September 30, 1997. The charge reduced the carrying value of the Residuals in
Finance Receivables Sold and had the effect of increasing the cumulative net
loss assumptions to approximately 27.5% for securitizations closed prior to
September 30, 1997.
During the three month period ended September 30, 1998, the Trust issued
certificates at a yield of 5.6% resulting in net spread, before net credit
losses and after servicing, insurer, and trustee fees, of 18.1%. During the
three month period ended September 30, 1997, the Trust issued certificates at a
yield of 6.3% resulting in net spread, before net credit losses and after
servicing, insurer, and trustee fees, of 15.0%.
The Company's net earnings may fluctuate from quarter to quarter in the
future as a result of the timing and size of its securitizations. The Company's
securitization transactions have historically been structured to record a gain
on sale of the Finance Receivables for accounting purposes. Management is
currently evaluating the structure of its securitization transactions and is
considering structuring future transactions to recognize the interest income
over the life of the contracts for accounting purposes. Historically, gains on
sales of Finance Receivables have been material to the Company's reported
revenues and net earnings. Altering the structure of such transactions whereby
no gain is recognized at the time of a securitization transaction, would have a
material effect on the Company's reported revenues and net earnings until such
time as the Company were to accumulate Finance Receivables on its balance sheet
sufficient to generate interest income (net of interest and other expenses)
equivalent to the revenues the Company has historically recognized on its
securitization transactions.
The Securitization Subsidiaries are the Company's wholly-owned special
purpose "bankruptcy remote" entities. Their assets, including assets included in
Discontinued Operations, include Residuals in Finance Receivables Sold and
Investments Held In Trust, in the amounts of approximately $44.7 million and
$23.4 million, respectively, at September 30, 1998, which amounts would not be
available to satisfy claims of creditors of the Company on a consolidated basis.
Servicing Income. Servicing Income for the three months ended September 30,
1998 increased 61.2% to $4.0 million from $2.5 million in the three month period
ended September 30, 1997. The Company serviced contracts totaling $433.0 million
at September 30, 1998 for monthly fees ranging from .25% to .33% of beginning of
period principal balances (3% to 4% annualized).
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 64.8% to $27.6 million for
the three month period ended September 30, 1998 from $16.7 million for the three
month period ended September 30, 1997. Growth of Sales of Used Cars, Interest
Income, Servicing Income, and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the three month periods ended September
30, 1998 and 1997, Selling and Marketing Expenses were comprised almost entirely
of advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 81.3% to $5.2 million for the three
month period ended September 30, 1998 from $2.9 million for the three month
period ended September 30, 1997. As a percentage of Sales of Used Cars, these
expenses averaged 7.1% for the three month period ended September 30, 1998 and
8.6% for the three month period ended September 30, 1997. On a per unit sold
basis, Selling and Marketing Expenses of Company Dealerships decreased to $574
per unit for the three month period ended September 30, 1998 from $639 per unit
for the three month period ended September 30, 1997. The Company incurred
significantly higher marketing costs in markets it entered in the third quarter
of 1997 in order to establish brand name recognition. The Company did not enter
any new markets in the third quarter of 1998 and, accordingly, incurred a lower
marketing cost per unit for the three months ended September 30, 1998.
General and Administrative Expenses. General and Administrative Expenses
increased by 62.5% to $16.9 million for the three month period ended September
30, 1998 from $10.4 million for the three month period ended September 30, 1997.
These expenses represented 19.6% and 24.3% of total revenues for three month
periods ended September 30, 1998 and 1997, respectively. The increase in General
and Administrative Expenses was a result of the overall growth of the Company.
The number of used car dealerships increased over the comparable prior year
period, loan servicing operations expanded to accommodate the resulting growth
in the portfolio serviced, and corporate expenses increased to support the
growth in both Company Dealership and loan servicing operations. The decrease in
General and Administrative Expenses as a percent of total revenues, however, was
due primarily to the disproportionate increase in revenues over the incremental
costs required to manage the Company as it expands.
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<PAGE> 18
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 40.0% to $1.2 million for the three month period ended
September 30, 1998 from $862,000 for the three month period ended September 30,
1997. The increase was due primarily to the increase in amortization of goodwill
associated with the Company's 1997 acquisitions, and increased depreciation
expense from the addition of Company Dealerships.
Interest Expense. Interest expense increased by 179.5% to $531,000 in the
three month period ended September 30, 1998 from $190,000 in the three month
period ended September 30, 1997. The increase in interest expense over the prior
comparable period was due primarily to increased borrowings to support the
Company's expansion and increasing inventory. Approximately $951,000 and $1.4
million of interest expense was allocated to Discontinued Operations for the
three month periods ended September 30, 1998 and 1997, respectively.
Income Taxes. Income taxes totaled $1.5 million and $979,000 which resulted
in an effective rate of 40.2% and 40.6% in the three month periods ended
September 30, 1998 and 1997, respectively.
Loss from Discontinued Operations. Discontinued Operations consist primarily
of the Company's Cygnet Dealer Program, the Branch Office network, and the
Company's bulk purchasing and loan servicing operations.
The Loss from Discontinued Operations, net of income taxes, totaled $4.3
million for the three months ended September 30, 1998 compared to $3.3 million
for the three months ended September 30, 1997. The loss incurred during the
three months ended September 30, 1998 included a $3.7 million charge, net of
income taxes, attributable to higher-than-estimated loan losses and portfolio
collection expenses associated with the Branch Offices that were closed in the
first quarter of 1998. The loss from the Company's Cygnet Dealer Program and
bulk purchasing and loan servicing operations totaled $677,000 for the three
months ended September, 30, 1998, which included a charge totaling approximately
$1.2 million, net of income taxes, incurred for Cygnet's terminated Rights
Offering. The $3.3 million loss from Discontinued Operations for the three
months ended September 30, 1997 includes a charge of approximately $2.6 million,
net of income taxes, resulting from the write down of the Residuals in Finance
Receivables Sold from Branch Office securitization transactions.
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<PAGE> 19
RESULTS OF OPERATIONS
For Nine Months Ended September 30, 1998 Compared To Nine Months Ended September
30, 1997
Sales of Used Cars. Sales of Used Cars increased by 171.7% to $216.1
million for the nine month period ended September 30, 1998 from $79.5 million
for the nine month period ended September 30, 1997. This growth reflected a
significant increase in the number of used cars sold as a result of the
increased number of dealerships in operation during the respective periods (51
and 35 dealerships in operation at September 30, 1998 and 1997, respectively).
Units sold increased by 151.8% to 27,198 units in the nine month period ended
September 30, 1998 from 10,801 units in the nine month period ended September
30, 1997. Same store sales increased by 2.4% in the nine month period ended
September 30, 1998 compared to the nine month period ended September 30, 1997.
Management expects same store sales to remain relatively stable in future
periods.
The average sales price per car increased 7.9% to $7,946 for the nine month
period ended September 30, 1998 from $7,364 for the nine month period ended
September 30, 1997. The increase in the average sales price per was primarily
the result of the Company charging a higher sales price to compensate for higher
vehicle inventory prices, and management's efforts to increase the gross margin
realized on a per unit basis.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 170.1% to $124.0 million for the nine month period ended September
30, 1998 from $45.9 million for the nine month period ended September 30, 1997.
On a per unit basis, the Cost of Used Cars Sold increased by 7.3% to $4,558 for
the nine month period ended September 30, 1998 from $4,250 for the nine month
period ended September 30, 1997. The gross margin on used car sales (Sales of
Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
increased by 173.9% to $92.1 million for the nine month period ended September
30, 1998 from $33.6 million for the nine month period ended September 30, 1997.
As a percentage of sales, the gross margin was 42.6% and 42.3% for the nine
month periods ended September 30, 1998 and 1997, respectively. On a per unit
basis, the gross margin per car sold was $3,388 and $3,115 for the nine month
periods ended September 30, 1998 and 1997, respectively.
Provision for Credit Losses. The Provision for Credit Losses increased by
217.4% to $45.1 million in the nine month period ended September 30, 1998
compared to $14.2 million for the nine month period ended September 30, 1997.
The Provision for Credit Losses per unit originated at Company Dealerships
increased by 6.1% to $1,674 per unit in the nine month period ended September
30, 1998 compared to $1,578 per unit in the nine month period ended September
30, 1997. As a percentage of contract balances originated, the Provision for
Credit Losses averaged 21.7% and 18.6%, for the nine month periods ended
September 30, 1998 and 1997, respectively. The increase in the provision for
credit losses results primarily from the Company charging a higher provision for
credit losses on cars sold and financed in states that impose interest rate
limitations to compensate for the lower interest rate earned on those loans.
Interest Income. Interest Income increased by 41.4% to $12.0 million for the
nine month period ended September 30, 1998 from $8.5 million for the nine month
period ended September 30, 1997. Interest Income was reduced by the sale of
Finance Receivables with remaining principal balances of $246.7 million and
$155.4 million as of September 30, 1998 and 1997, respectively, pursuant to the
Securitization Program, and may continue to be affected in future periods by
additional securitizations. The Company financed 96.1% of sales revenue and
99.0% of the used cars sold at Company Dealerships for the nine month period
ended September 30, 1998, compared to 95.7% of sales revenue and 94.5% of the
used cars sold for the nine month period ended September 30, 1997. The average
amount financed increased to $7,715 for the nine month period ended September
30, 1998 from $7,457 for the nine month period ended September 30, 1997. The
increase in the average amount financed was primarily due to an increase in the
average sales price from the comparable period in the prior year. Primarily as a
result of its expansion into markets with interest rate limits, the Company's
yield on its Company Dealership Receivable portfolio has trended downward. The
effective yield on Finance Receivables from Company Dealerships was 25.2% and
27.7%, for the nine month periods ended September 30, 1998 and 1997,
respectively. The Company's policy is to charge 29.9% per annum on its Company
Dealership contracts. However, in those states that impose usury limits, the
Company charges the maximum interest rate permitted.
Gain on Sale of Finance Receivables. During the nine months ended September
30, 1998, the Company securitized an aggregate of $222.8 million in contracts,
issuing $161.1 million in Class A securities, and $61.7 million in Class B
securities (Residuals in Finance Receivables Sold). During the nine months ended
September 30, 1997, the Company securitized an aggregate of $151.7 million in
contracts issuing $121.4 million in Class A securities and $30.3 million in
Class B securities. The Company recorded the carrying value of the Residuals in
Finance Receivables sold at $36.5 million and $20.1 million in the nine months
ended September
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<PAGE> 20
30, 1998 and 1997, respectively. The Company recorded Gain on Sale of Loans of
$12.1 million (5.4% of principal sold) and $11.9 million (8.6% of principal
sold), before considering the $5.7 million write down of the Residuals in
Finance Receivables Sold taken in the nine months ended September 30, 1997, net
of expenses related to securitization transactions during the nine months ended
September 30, 1998 and 1997, respectively. The decrease in the gain on sale
percentage was due to the utilization of a higher cumulative net loss assumption
for the 1998 securitizations.
During the nine month period ended September 30, 1998, the Trusts issued
certificates at an average yield of 5.93% resulting in net spread, before net
credit losses and after servicing, insurer, and trustee fees, of 17.5%. During
the nine month period ended September 30, 1997, the Trusts issued certificates
at an average yield of 6.67% resulting in net spread, before net credit losses
and after servicing, insurer, and trustee fees, of 15.3%.
Servicing Income. Servicing Income for the nine months ended September 30,
1998 increased 131.4% to $11.8 million from $5.1 million in the nine month
period ended September 30, 1998. The Company serviced contracts totaling $433.0
and $432.7 million at September 30, 1998 and September 30, 1997, respectively,
for monthly fees ranging from .25% to .33% of beginning of period principal
balances (3% to 4% annualized).
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 102.6% to $83.4 million for
the nine month period ended September 30, 1998 from $41.2 million for the nine
month period ended September 30, 1997. Growth of Sales of Used Cars, Interest
Income, Servicing Income, and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the nine month periods ended September
30, 1998 and 1997, Selling and Marketing Expenses were comprised almost entirely
of advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 132.1% to $15.5 million for the nine
month period ended September 30, 1998 from $6.7 million for the nine month
period ended September 30, 1997. As a percentage of Sales of Used Cars, these
expenses averaged 7.2% for the nine month period ended September 30, 1998 and
8.4% for the nine month period ended September 30, 1997. On a per unit sold
basis, Selling and Marketing Expenses of Company Dealerships decreased to $568
per unit for the nine month period ended September 30, 1998 from $617 per unit
for the nine month period ended September 30, 1997. The Company incurred
significantly higher marketing costs in markets it entered in the first three
quarters of 1997 in order to establish brand name recognition. The Company did
not enter any new markets in the first three quarters of 1998 and, accordingly,
incurred a lower marketing cost per unit for the nine months ended September 30,
1998.
General and Administrative Expenses. General and Administrative Expenses
increased by 97.9% to $48.4 million for the nine month period ended September
30, 1998 from $24.5 million for the nine month period ended September 30, 1997.
These expenses represented 19.2% and 24.2% of total revenues for the nine month
periods ended September 30, 1998, and 1997, respectively. The increase in
General and Administrative Expenses was a result of the overall growth of the
Company. The number of used car dealerships increased over the comparable prior
year period, loan servicing operations expanded to accommodate the resulting
growth in the portfolio serviced, and corporate expenses increased to support
the growth in both Company Dealership and loan servicing operations. The
decrease in General and Administrative Expenses, however, as a percent of total
revenues was due primarily to the disproportionate increase in revenues over the
incremental costs required to manage the Company as it expands.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 66.1% to $3.5 million for the nine month period ended
September 30, 1998 from $2.1 million for the nine month period ended September
30, 1997. The increase was due primarily to the increase in amortization of
goodwill associated with the Company's 1997 acquisitions, and increased
depreciation expense from the addition of used car dealerships.
Interest Expense. Interest expense increased by 167.8% to $1.7 million in
the nine month period ended September 30, 1998 from $630,000 in the nine month
period ended September 30, 1997. The increase in interest expense over the prior
comparable period was due primarily to increased borrowings to support the
Company's increasing finance receivable portfolio, property and equipment and
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<PAGE> 21
inventory. Approximately $2.7 million and $2.3 million of interest expense was
allocated to Discontinued Operations for the nine month periods ended September
30, 1998 and 1997, respectively.
Income Taxes. Income taxes totaled $5.8 million and $3.0 million, which
resulted in an effective rate of 40.3% and 40.6% in the nine month periods ended
September 30, 1998 and 1997, respectively.
Earnings (Loss) from Discontinued Operations. The loss from Discontinued
Operations, net of income taxes, totaled $9.6 million for the nine months ended
September 30, 1998 compared to earnings of $1.4 million for the nine months
ended September 30, 1997. The loss from Discontinued Operations for the nine
months ended September 30, 1998 was comprised of a $1.1 million loss from
operations of Discontinued Operations, net of income taxes, and a loss of $8.5
million from the Branch Offices. Earnings from Discontinued Operations were
significantly impacted by the $8.5 million securitization gain (before income
taxes) recognized on the sale of Branch Office network loans offset by the $2.6
million charge, net of income taxes, related to the Residuals in Finance
Receivables Sold included in Discontinued Operations in the nine month period
ended September 30, 1997. Discontinued Operations consist primarily of the
Company's Cygnet Dealer Program, the Branch Office network, and the Company's
bulk purchasing and loan servicing operations.
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses ("Allowance") to
cover anticipated credit losses on the contracts currently in its portfolio. The
Allowance has been established through the Provision for Credit Losses.
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the three and nine month periods
ended September 30, 1998 and 1997, in thousands.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period .......... $ 5,950 $ 9,929 $ 10,356 $ 1,625
Provision for Credit Losses ........... 15,746 6,084 45,053 14,193
Allowance on Acquired Loans ........... -- -- -- 15,309
Reduction Attributable to Loans Sold .. (14,068) (10,325) (44,785) (21,407)
Net Charge Offs ....................... (2,056) (2,379) (5,052) (6,411)
-------- -------- -------- --------
Balance, End of Period ................ $ 5,572 $ 3,309 $ 5,572 $ 3,309
======== ======== ======== ========
Allowance as Percent of Period End
Balances ............................ 18.5% 20.0% 18.5% 20.0%
======== ======== ======== ========
Charge off Activity:
Principal Balances .................. $ (2,665) $ (3,139) $ (7,001) $ (8,355)
Recoveries, Net ..................... 670 760 1,949 1,944
-------- -------- -------- --------
Net Charge Offs ....................... $ (2,056) $ (2,379) $ (5,052) $ (6,411)
======== ======== ======== ========
</TABLE>
The Allowance on contracts was 18.5% of outstanding principal balances as of
September 30, 1998 and December 31, 1997 and 20.0% at September 30, 1997.
The Company's policy is to charge off contracts when they are deemed
uncollectible, but in any event at such time as a contract is delinquent for 90
days.
Recoveries as a percentage of principal balances charged off averaged 25.1%
for the three month period ended September 30, 1998 compared to 24.2% for the
three month period ended September 30, 1997. Recoveries as a percentage of
principal balances charged off for the nine month periods ended September 30,
1998 and 1997 averaged 27.8% and 23.3%, respectively.
Static Pool Analysis. To monitor contract performance the Company
implemented "static pool" analysis for contracts originated since January 1,
1993. Static pool analysis is a monitoring methodology by which each month's
originations and subsequent charge offs are assigned a unique pool and the pool
performance is monitored separately. Improving or deteriorating performance is
measured based on cumulative gross and net charge offs as a percentage of
original principal balances, based on the number of
21
<PAGE> 22
complete payments made by the customer before charge off. The table below sets
forth the cumulative net charge offs as a percentage of original contract
cumulative balances, based on the quarter of origination and segmented by the
number of payments made prior to charge off. For periods denoted by "x", the
pools have not seasoned sufficiently to allow for computation of cumulative
losses. For periods denoted by " -- ", the pools have not yet attained the
indicated cumulative age. While the Company monitors its static pools on a
monthly basis, for presentation purposes the information in the tables is
presented on a quarterly basis.
Currently reported cumulative losses may also vary from those previously
reported due to ongoing collection efforts on charged off accounts and the
difference between final proceeds on the liquidation of repossessed collateral
versus original accounting estimates. Management believes that such variation
will not be material.
The following table sets forth as of October 31, 1998, the cumulative net
charge offs as a percentage of original contract cumulative (pool) balances,
based on the quarter of origination and segmented by the number of monthly
payments completed by customers before charge off. Additionally, set forth is
the percent of principal reduction for each pool since inception and cumulative
total net losses incurred (TLI).
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
-------------------------------------------------------------------
ORIG. 0 3 6 12 18 24 TLI REDUCED
------- --- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993:
1st Quarter..... $ 2,326 6.9% 18.7% 26.5% 31.8% 33.9% 35.1% 35.4% 100.0%
2nd Quarter..... $ 2,942 7.2% 18.9% 25.1% 29.4% 31.7% 32.1% 32.4% 100.0%
3rd Quarter..... $ 3,455 8.6% 19.5% 23.7% 28.5% 30.7% 31.6% 31.9% 100.0%
4th Quarter..... $ 4,261 6.3% 16.1% 21.6% 27.0% 28.9% 29.5% 29.6% 100.0%
1994:
1st Quarter..... $ 6,305 3.4% 10.0% 13.4% 17.9% 20.3% 20.9% 21.0% 100.0%
2nd Quarter..... $ 5,664 2.8% 10.4% 14.1% 19.6% 21.5% 22.0% 22.1% 100.0%
3rd Quarter..... $ 6,130 2.8% 8.1% 12.0% 16.3% 18.2% 19.1% 19.2% 100.0%
4th Quarter..... $ 5,490 2.4% 7.6% 11.2% 16.4% 19.3% 20.2% 20.3% 100.0%
1995:
1st Quarter..... $ 8,191 1.1% 7.3% 12.2% 17.3% 19.8% 20.7% 20.8% 99.8%
2nd Quarter..... $ 9,846 1.7% 7.0% 11.8% 16.3% 19.1% 20.7% 21.0% 99.1%
3rd Quarter..... $10,106 1.9% 6.8% 10.8% 17.6% 21.4% 23.0% 23.4% 96.5%
4th Quarter..... $ 8,426 1.2% 5.6% 10.7% 17.5% 22.1% 23.7% 23.9% 94.5%
1996:
1st Quarter..... $13,635 1.3% 7.5% 13.2% 20.7% 24.7% 26.0% 26.2% 89.6%
2nd Quarter..... $13,462 2.2% 9.2% 13.9% 22.8% 26.7% 28.1% 27.9% 88.4%
3rd Quarter..... $11,082 1.6% 7.1% 13.1% 21.8% 26.0% 27.6% 27.6% 83.1%
4th Quarter..... $10,817 0.7% 8.6% 16.2% 25.2% 29.6% 29.8% 29.8% 78.9%
1997:
1st Quarter..... $16,279 2.1% 10.4% 17.4% 24.0% 28.3% 28.3% 28.4% 71.7%
2nd Quarter..... $25,875 1.5% 9.9% 15.9% 22.9% 24.4% x 24.4% 59.9%
3rd Quarter..... $32,147 1.2% 8.3% 13.2% 20.5% x -- 20.6% 49.3%
4th Quarter..... $42,529 1.5% 7.1% 13.1% x -- -- 16.0% 39.6%
1998:
1st Quarter..... $69,708 1.0% 7.4% x -- -- -- 10.3% 28.9%
2nd Quarter..... $66,908 1.2% x -- -- -- -- 4.4% 11.9%
3rd Quarter..... $71,027 x -- -- -- -- -- 0.2% 11.4%
</TABLE>
The following table sets forth the principal balances 31 to 60 days
delinquent, and 61 to 90 days delinquent as a percentage of total outstanding
Company Dealership contract principal balances.
<TABLE>
<CAPTION>
RETAINED SECURITIZED MANAGED
-------- ----------- -------
<S> <C> <C> <C>
September 30, 1998:
31 to 60 days ...................... 0.8% 5.0% 4.5%
61 to 90 days ...................... 2.5% 2.4% 2.4%
December 31,1997:
31 to 60 days ...................... 2.2% 4.5% 3.6%
61 to 90 days ...................... 0.6% 2.2% 1.5%
</TABLE>
In accordance with the Company's charge off policy, there are no accounts
more than 90 days delinquent as of September 30, 1998 and December 31, 1997.
22
<PAGE> 23
RESIDUALS IN FINANCE RECEIVABLES SOLD
Residuals in Finance Receivables Sold represent the Company's retained
portion of the securitization assets. The Company utilizes a number of estimates
in arriving at the initial valuation of the Residuals in Finance Receivables
Sold, which represent the expected present value of net cash flows into the
Trust in excess of those required to pay principal and interest on the Class A
certificates. The present value of expected cash flows are a function of a
number of items including, but not limited to, charge off rates, repossession
recovery rates, portfolio delinquency, prepayment rates, and Trust expenses.
Subsequent to the initial recording of the Residuals in Finance Receivables
Sold, the carrying value is adjusted for the actual cash flows into the
respective Trusts in order to maintain a carrying value which approximates the
present value of the expected net cash flows into the Trust in excess of those
required to pay all obligations of the respective Trust other than the
obligations to the Class B certificates. To the extent that actual cash flows on
a securitization are below original estimates, differ materially from the
original securitization assumptions, and in the opinion of management, those
differences appear to be other than temporary in nature, the Company would be
required to revalue the residual portion of the securitization which it retains,
and record a charge to earnings based upon the reduction. During the third
fiscal quarter of 1997, the Company recorded a $5.7 million charge
(approximately $3.4 million, net of income taxes) to Continuing Operations to
write down the Residuals in Finance Receivables Sold. The Company determined a
write down in the Residuals in Finance Receivables Sold was necessary due to an
increase in net losses in the securitized loan portfolio. The charge which
resulted in a reduction in the carrying value of the Company's Residuals in
Finance Receivables Sold had the effect of increasing the cumulative net loss at
loan origination assumption to approximately 27.5%, for the securitization
transactions that took place prior to September 30, 1997 which approximates the
assumption used for the securitization transactions consummated during the third
quarter of 1997. For the securitizations that were completed during the nine
month period ended September 30, 1998, net losses were estimated using total
expected cumulative net losses at loan origination of approximately 29.0%,
adjusted for actual cumulative net losses prior to securitization.
The allowance for credit losses imbedded in the Residuals in Finance
Receivables Sold as a percentage of the remaining principal balances of
securitized contracts was approximately 24.3% as of September 30, 1998, compared
to 17.9% as of December 31, 1997. There can be no assurance that the charge
taken by the Company in the third quarter of 1997 was sufficient and that the
Company will not record additional charges in the future in order to write down
the Residuals in Finance Receivables Sold.
The assumptions utilized in prior securitizations may not necessarily be the
same as those utilized in future securitizations. The Company classifies the
residuals as "held-to-maturity" securities in accordance with SFAS No. 115.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in its contract portfolio,
expansion of Company Dealerships, the purchase of inventories, the purchase of
property and equipment, and for working capital and general corporate purposes.
In addition, the Company intends to continue to acquire loans under the Cygnet
Dealer Program and pursue other opportunities within the Discontinued
Operations. The Company funds its capital requirements through equity offerings,
operating cash flow, the sale of Finance Receivables, and supplemental
borrowings.
The Company's Net Cash Used in Operating Activities was $6.7 million for the
nine month period ended September 30, 1998 compared to $31.3 million Net Cash
Provided by Operating Activities in the nine month period ended September 30,
1997. The change was primarily due to the loss from Discontinued Operations and
a decrease in the advance rate received in securitization transactions, which
resulted in a lower proceeds from the sale of Finance Receivables relative to
the amount of cash used to originate Finance Receivables.
The Net Cash Provided by Investing Activities was $2.0 million in the nine
months ended September 30, 1998 compared to Net Cash Used in Investing
Activities of $58.5 million in the nine months ended September 30, 1997. The
change was a result of the Company receiving cash proceeds of $27.4 million from
the sale of property and equipment during the nine months ended September 30,
1998. (See the explanation of this transaction below under the caption "Sale --
Leaseback of Real Property.") The Company did not consummate any such
transaction during the nine months ended September 30, 1997. The Company paid
cash totaling $35.6 million for acquired assets during the nine months ended
September 30, 1997 and $0 in the comparable period in 1998. In addition, the
Increase in Net Cash Provided by Investing Activities was impacted by an
increase in Investments Held in Trust and an increase in the purchase of
Property and Equipment.
23
<PAGE> 24
The Company's Net Cash Used In Financing Activities was $4.1 million in the
nine month period ended September 30, 1998 compared to $52.2 million Net Cash
Provided by Financing Activities in the nine month period ended September 30,
1997. This change was primarily the result of the $88.7 million in proceeds from
the Company's sale of Common Stock in the nine month period ended September 30,
1997, and a decrease in the net repayment of notes payable.
The Company's Net Cash Provided by Discontinued Operations was $6.2 million
in the nine month period ended September 30, 1998 compared to $39.0 million Net
Cash Used in Discontinued Operations in the nine month period ended September
30, 1997. The change was due primarily to a decrease in Finance Receivables
originated and retained by the Discontinued Operations.
Revolving Facility. In September 1998, the Company amended its revolving
credit facility (the "Revolving Facility") with General Electric Capital
Corporation ("GE Capital") increasing the maximum commitment to $125.0 million.
The Revolving Facility provides working capital utilized primarily for operating
activities as well as investing in new dealership facilities. Under the
Revolving Facility, the Company may borrow up to 65.0% of the principal balance
of eligible contracts originated from the sale of used cars, up to 86.0% of the
principal balance of eligible contracts previously originated by the Branch
Offices, and the lesser of $20 million or 65% of the National Automobile Dealers
Association average wholesale Black Book value for eligible vehicle inventory.
However, an amount up to $8.0 million of the borrowing capacity under the
Revolving Facility is not available at any time when the guarantee of the
Company to the Contract Purchaser (defined below under "Transactions Regarding
First Merchants Acceptance Corporation") is in effect. The Revolving Facility
expires in June 2000 and contains a provision that would require the Company to
pay GE Capital a termination fee of $200,000 in the event the Revolving Facility
was terminated by the Company prior to the expiration date. The facility is
secured by substantially all of the Company's assets. As of September 30, 1998,
the Company's borrowing capacity under the Revolving Facility was $59.3 million,
the aggregate principal amount outstanding under the Revolving Facility was
approximately $44.9 million, and the amount available to be borrowed under the
facility was $14.4 million. The Revolving Facility bears interest at the 30-day
LIBOR plus 3.15%, payable daily (total rate of 8.80% as of September 30, 1998).
The Revolving Facility contains covenants that, among other things, limit
the Company's ability to, without GE Capital's consent: (i) incur additional
indebtedness; (ii) make unsecured loans or other advances of money to officers,
directors, employees, stockholders or affiliates in excess of $25,000 in total;
(iii) engage in securitization transactions (other than the Securitization
Program, for which GE Capital has consented); (iv) merge with, consolidate with,
acquire or otherwise combine with any other person or entity, transfer any
division or segment of its operations to another person or entity, or form new
subsidiaries; (v) make any change in its capital structure; (vi) declare or pay
dividends except in accordance with all applicable laws and not in excess of
fifteen percent (15%) of each year's net earnings available for distribution;
(vii) make certain investments and capital expenditures; (viii) engage in
certain transactions with affiliates, and (ix) require all of the Company's
computer systems to be Year 2000 compliant no later than March 31, 1999 (see
discussion below under "Year 2000"). These covenants also require the Company to
maintain specified financial ratios, including a debt ratio of 2.2 to 1 and a
net worth of at least $100,000,000 (increasing to $110,000,000 in January 1999)
and to comply with all laws relating to the Company's business. The Revolving
Facility also provides that a transfer of ownership of the Company that results
in less than 15.0% of the Company's voting stock being owned by Mr. Ernest C.
Garcia II will result in an event of default under the Revolving Facility.
Under the terms of the Revolving Facility, the Company is required to
maintain an interest coverage ratio and a cash flow based interest coverage
ratio that the Company failed to satisfy during the nine month period ended
September 30, 1998. This was primarily as a result of the charges taken during
1998 with respect to the closure of the Branch Office network, for which the
Company incurred a loss from Discontinued Operations of $8.5 million (net of
income tax benefit of $5.7 million). GE Capital has waived the covenant
violations as of September 30, 1998.
The Company's Revolving Facility currently contains provision for borrowings
based upon eligible finance receivable contracts and does not provide for
borrowings based upon contracts or notes receivable acquired or issued pursuant
to the Cygnet Dealer Program. The Company believes these assets may be sources
of additional liquidity and, therefore, is currently exploring alternatives
regarding obtaining financing secured by the assets generated by the Cygnet
Dealer Program and the Company's Residuals in Finance Receivables Sold. There
can be no assurance that these assets will, in fact, be a source of liquidity
for the Company.
Subordinated Indebtedness and Preferred Stock. Prior to its public offering
in September 1996, the Company historically borrowed substantial amounts from
Verde Investments Inc. ("Verde"), an affiliate of the Company. The Subordinated
Notes Payable balances outstanding to Verde totaled $10.0 million and $12.0
million as of September 30, 1998 and December 31, 1997,
24
<PAGE> 25
respectively. Prior to September 21, 1996, these borrowings accrued interest at
an annual rate of 18.0%. Effective September 21, 1996 the annual interest rate
on these borrowings was reduced to 10.0%. The Company is required to make
monthly payments of interest and annual payments of principal in the amount of
$2.0 million. Except for the debt incurred related to the exchange offer (see
below), this debt is junior to all of the Company's other indebtedness and the
Company may suspend interest and principal payments in the event it is in
default on obligations to any other creditors. In July 1997, the Company's Board
of Directors approved the prepayment of the $10.0 million in subordinated debt
after the earlier of (1) the Company's completion of a debt offering; or (2) at
such time as (a) the FMAC transactions (described below under "Transactions with
First Merchants Acceptance Corporation") have been completed or the cash
requirements for completion of said transaction are known, and (b) the Company
either has cash in excess of its current needs or has funds available under its
financing sources in excess of its current needs. No such prepayment has been
made as of the date of filing of this Form 10-Q. Any such prepayment would
require the consent of certain lenders to the Company.
In February 1998, the Company executed senior subordinated notes payable
agreements with unrelated parties for a total of $15.0 million in subordinated
debt. The unsecured three year notes call for interest at 12% per annum payable
quarterly and are senior to the Verde subordinated note payable. In connection
with the issuance of the senior subordinated notes payable, the Company issued
warrants, which were valued at approximately $900,000, to the lenders to
purchase up to 500,000 shares of the Company's Common Stock at an exercise price
of $10.00 per share exercisable at any time until the later of (1) February
2001, or (2) such time as the notes have been paid in full.
In July 1998, the Company secured a subordinated loan of $5 million from
third party lenders for a three-year term and will be required to issue warrants
to purchase 115,000 shares of Company Common Stock at an exercise price of 120%
of the average trading price for the Company Common Stock for the 20 consecutive
trading days prior to the issuance of such warrants subject to a call feature if
the closing price of the Company Common Stock equals or exceeds 160% of the
warrant exercise price for a period of 20 consecutive trading days. The Company
is obligated to issue the warrants by December 31, 1998 if the loan is not paid
in full by that date. The Company does not anticipate prepayment of the note by
December 31, 1998.
Exchange Offer. Effective October 23, 1998, the Company acquired
approximately 2,463,600 shares of Company Common Stock in exchange for
subordinated debentures with a par value of approximately $16.0 million
("Exchange Offer"). The debentures are unsecured and subordinate to all existing
and future indebtedness of the Company and bear interest a 12% per annum payable
semi-annually each April and October, approximately $2.9 million per year, until
they are paid in full. The debentures were issued at a premium of approximately
$3.7 million in excess of the market value of the shares tendered. The premium
will be amortized over the life of the debentures and results in an effective
interest rate of approximately 19.1%. The Company will be required to pay the
principal amount of debentures on the fifth anniversary of their issuance date.
The debentures can be partially or fully redeemed at the Company's option at any
time. As a result of the Exchange Offer, the number of common shares outstanding
decreased to approximately 16,070,000 compared to approximately 18,533,000
shares outstanding immediately prior to the effective date.
Additional Financing. On January 28, 1998, the Company executed a $7.0
million note payable that accrued interest at 9.5% per annum. The Company paid
this note in full on April 1, 1998.
On November 12, 1998, the Company borrowed $15 million for a term of 364
days from Greenwich Capital with an interest rate equal to LIBOR plus 400 basis
points, and secured by the stock of the Company's Securitization Subsidiaries.
The Company will use the proceeds of the loan for operating activities.
On February 19, 1998, the Company and certain of its affiliates executed a
second short-term $30.0 million standby repurchase credit facility. Pursuant to
the terms of this facility, the lender agreed to purchase, subject to repurchase
rights of the Company and its subsidiaries, certain eligible sub-prime
automobile Finance Receivables originated and or purchased by the Company's
affiliates for a purchase price (and corresponding repurchase obligation) of no
more than $30.0 million. During the nine month period ended September 30, 1998,
the lender purchased approximately $30.0 million in contracts pursuant to the
facility, which accrued interest at a rate of 9.5% per annum. The Company
exercised its repurchase obligation on March 24, 1998.
Securitizations. The Company's Securitization Program is a primary source of
funding for the Company. Under this program, the Company sold approximately
$170.4 million in certificates secured by contracts to SunAmerica through
securitizations effected prior to September 30, 1997. Since September 30, 1997,
the Company has consummated additional securitizations under the Securitization
Program with private investors through Greenwich Capital Markets, Inc.
("Greenwich Capital"). In February 1998, the Company executed a commitment
letter with Greenwich Capital under which, among other things, Greenwich Capital
retains the right to be the exclusive securitization agent for the Company for
up to $1 billion of AAA-surety wrapped securities as part of the Company's
ongoing Securitization Program. The agreement contains certain provisions that
would not oblige Greenwich Capital or require the Company to fulfill the
remaining commitment under the agreement.
25
<PAGE> 26
At the closing of each securitization, the Securitization Subsidiaries
receive payment for the certificates sold (net of Investments Held in Trust).
The Company also generates cash flow under this program from ongoing servicing
fees and excess cash flow distributions resulting primarily from the difference
between the payments received from customers on the contracts and the payments
paid on the Class A Certificates. In addition, securitization allows the Company
to fix its cost of funds for a given contract portfolio, and broadens the
Company's capital source alternatives. Failure to periodically engage in
securitization transactions will adversely affect the Company.
In connection with its securitization transactions, the Securitization
Subsidiaries are required to make an initial cash deposit into an account held
by the trustee ("Spread Account") and to pledge this cash to the Trust to which
the Finance Receivables were sold. The Trust in turn invests the cash in high
quality, liquid investment securities. In addition, the cash flows due to the B
Certificates first are deposited into the Spread Account as necessary to attain
and maintain the Spread Account at a specified percentage of the underlying
Finance Receivables principal balance. In the event that the cash flows
generated by the Finance Receivables sold to the Trust are insufficient to pay
obligations of the Trust, including principal or interest due to certificate
holders or expenses of the Trust, the trustee will draw funds from the Spread
Account as necessary to pay the obligations of the Trust. The Spread Account
must be maintained at a specified percentage of the principal balances of the
Finance Receivables held by the Trust, which can be increased in the event
delinquencies or losses exceed specified levels. If the Spread Account exceeds
the specified percentage, the trustee will release the excess cash to the
Securitization Subsidiaries from the pledged Spread Account.
Debt Shelf Registration. On July 18, 1997, the Company filed a Form S-3
registration statement for the purpose of registering up to $200 million of its
debt securities in one or more series at prices and on terms to be determined at
the time of sale. The registration statement has been declared effective by the
Securities and Exchange Commission and is available for future debt offerings.
There can be no assurance given that the Company will be able to successfully
register and sell debt securities in the future.
Transactions Regarding First Merchants Acceptance Corporation. The Company's
Discontinued Operations was actively involved in the bankruptcy proceedings of
First Merchants Acceptance Corporation ("FMAC"). FMAC was in the business of
purchasing and securitizing loans made primarily to sub-prime borrowers by
various Third Party Dealers. In various transactions relating to the FMAC
bankruptcy proceedings, the Company, among other things, (l) purchased the
secured claims of certain creditors of FMAC, sold the contracts securing such
claims at a profit to a third party purchaser ("Contract Purchaser"), guaranteed
the purchaser a specified return on the contracts and obtained a related
guarantee from FMAC secured by, among other things, the stock of certain
entities holding residual interests and certain equity certificates in various
securitized loan pools of FMAC, and entered into servicing arrangements with
respect to such contracts; (2) made debtor-in-possession loans to FMAC, secured
as described above, and received interest income therefrom; (3) entered into
various servicing agreements with respect to receivables in the securitized
pools of FMAC; (4) obtained rights to receive certain payments with respect to
distributions on residual interests in such securitized pools and obtained
certain interests in charged off receivables in such pools; (5) obtained rights
to certain fees; (6) obtained the FMAC servicing platform; and (7) issued
certain warrants to purchase Company Common Stock consisting of (a) warrants
issued to FMAC's bank group to purchase up to 389,800 shares of the Company's
Common Stock at an exercise price of $20.00 per share at any time through
February 20, 2000, and subject to a call feature by the Company if the closing
market price of the Company's Common Stock equals or exceeds $27.00 per share
for a period of five consecutive trading days, and (h) warrants issued to FMAC
to purchase 325,000 shares of the Company's Common Stock at any time through
April 1, 200l at a price of $20.00 per share, subject to a call feature by the
Company if the closing market price of the Company's Common Stock equals or
exceeds $28.50 per share for a period of 10 consecutive trading days. The
Company also contributed to FMAC all of its shares of FMAC Common Stock in
exchange for the assets constituting FMAC's servicing platform.
Reliance Transaction. In February 1998, the Company's Discontinued
Operations entered into servicing and transition servicing arrangements with
Reliance Acceptance Group, Inc. ("Reliance"), which company also filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code that same
month.
Pursuant to the servicing agreement entered into between the Company and
Reliance (the "Servicing Agreement"), as amended, following the Effective Date,
the Company will service certain receivables of 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
Reliance 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) $3.25 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, fifteen percent (15%) 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 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 $3.25 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 will have a strike price of twelve
dollars and 50/100 ($12.50) for the first one hundred 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 exercisable as follows: (i)
the first 50,000 Reliance Warrants will be exercisable for three years from the
Reliance Petition Date and (ii) all remaining Reliance Warrants will be
exercisable for three years from the date of issuance.
As of the close of business on the effective date of Reliance's plan of
reorganization (July 31, 1998), the Company purchased Reliance's furniture,
fixtures, and equipment, including computer software and hardware and related
licenses for $250,000, payable in twelve equal monthly installments over a
period of one year beginning August 15, 1998, and has a period of sixty days to
require Reliance to assume and assign to the Company any of the leases or other
contracts not previously rejected by Reliance.
Industry Considerations. In recent periods, several major used car finance
companies have announced major downward adjustments to their financial
statements, violations of loan covenants, related litigation, and other events.
In addition, certain of these companies have filed for bankruptcy protection.
These announcements have had a disruptive effect on the market for securities of
sub-prime automobile finance companies, have resulted in a tightening of credit
to the sub-prime markets, and could lead to enhanced regulatory oversight. A
reduction in access to the capital markets or to credit sources could have a
material adverse affect on the Company. The Company's securitization
transactions have historically been structured to record a gain on sale of the
finance receivables for accounting purposes. Management is currently evaluating
the structure of its securitization transactions and is considering altering the
structure of future transactions to recognize the interest income on the loans
over the life of the contracts for accounting purposes. Historically, gains on
sales of Finance Receivables have been material to the Company's reported
revenues and net earnings. Altering the structure of such transactions whereby
no gain is recognized at the time of a securitization transaction, would have a
material effect on the Company's reported revenues and net earnings until such
time as the Company were to accumulate Finance Receivables on its
26
<PAGE> 27
balance sheet sufficient to generate interest income (net of interest and
other expenses) equivalent to the revenues the Company has historically
recognized on its securitization transactions.
Capital Expenditures and Commitments. The Company is pursuing an aggressive
growth strategy. In the first nine months of 1998, the Company has opened ten
new dealerships. Further, the Company currently has eight dealerships under
development. The Company believes that it will expend approximately $1.5 to $1.7
million to construct (excluding inventory) each Company Dealership.
On July 11, 1997, the Company entered into an agreement, as amended, to
provide "debtor in possession" financing to FMAC (the "DIP Facility") in an
amount up to $21.5 million to be adjusted downward from time to time. As of
September 30, 1998, the maximum commitment was reduced to $12.4 million and the
outstanding balance on the DIP totaled $10.9 million. The Company expects the
maximum commitment to be further reduced to $11.5 million as FMAC receives
income tax refunds from various taxing jurisdictions.
The Company intends to finance the construction of new dealerships and the
DIP financing through operating cash flows and supplemental borrowings,
including amounts available under the Revolving Facility and the Securitization
Program, if any.
Sale-Leaseback of Real Property. In March 1998, the Company executed a
commitment letter with an investment company for the sale-leaseback of up to
$37.0 million in real property. Pursuant to the terms of the agreement, the
Company would sell certain real property to the investment company for its
original cost and leaseback the properties for an initial term of twenty years.
The Company retains certain extension options, and pays monthly rents of
approximately one-twelfth of 10.75% of the purchase price plus all occupancy
costs and taxes. The agreement calls for annual increases in the monthly rents
of not less than 2%. As of September 30, 1998, the Company has sold
approximately $27.4 million of property under this arrangement and utilized
substantially all of the proceeds from the sale to pay down debt of the Company.
Common Stock Repurchase Program. In October 1997 the Company's Board of
Directors authorized a stock repurchase program by which the Company may acquire
up to one million shares of its Common Stock from time to time on the open
market. Under the program, purchases may be made depending on market conditions,
share price and other factors. The stock repurchase program will terminate on
December 31, 1998, unless extended by the Company's Board of Directors, and may
be discontinued at any time. The Company has repurchased 72,000 shares of Common
Stock pursuant to the Repurchase Program (28,000 shares during the quarter ended
June 30, 1998 and 44,000 shares during the quarter ended September 30, 1998). In
addition, approximately 2,463,600 shares were acquired from the Exchange Offer
subsequent to September 30, 1998. As of the date of the filing of this Form
10-Q, the Company repurchased a total of approximately 2,535,600 shares of
Company Common Stock under both its Repurchase Program and the Exchange Offer at
an average cost of $5.12 per share.
Stock Option Grants. Effective January 15, 1998, the Compensation Committee
of the Company's Board of Directors awarded 775,000 stock options to key
officers of the Company at an exercise price of $8.25 per share, the market
value of the Common Stock on the date of grant ("Awards"). Of these Awards,
500,000 options were granted to Gregory B. Sullivan, President and Chief
Operating Officer of the Company. Two Hundred Fifty Thousand of the options
granted to Mr. Sullivan were granted under the existing Ugly Duckling Long Term
Incentive Plan, pursuant to the plan's general terms, including vesting in equal
increments over a five-year period beginning on the first anniversary date of
the grant. The other 250,000 options to Mr. Sullivan and the remaining 225,000
options granted to the other key officers were granted under the new Ugly
Duckling 1998 Executive Incentive Plan ("Executive Grants"). These options
contain time and price vesting requirements. The Executive Grants will vest in
equal increments over five years subject to continued employment by the Company
and will also be subject to additional vesting hurdles based on the market value
of the Company's Common Stock as traded on NASDAQ. The price hurdle for the
first year of the grants is a 20% increase in such market value over the
exercise price of the options, with the price hurdles increased for the next
four years in additional 20% increments over the exercise price of the options.
In order for the price hurdles to be met, the Common Stock must trade at the
targeted value for a period of 10 consecutive trading days. The price hurdles
can be met at any time before or after the time vesting requirements are
satisfied, and will be completely met at such time as the Common Stock trades at
100% in excess of the exercise price of the options for 10 consecutive trading
days. In any event, the Executive Grants will become fully vested on January 15,
2005, unless sooner exercised or forfeited. As of the current date, the first
two price hurdles have been met. The Company believes that the Awards are
material in the aggregate. As such, they will have the effect of diluting the
ownership interest of existing stockholders of the Company.
27
<PAGE> 28
Year 2000. The year 2000 presents potential concerns for business computing
due to calculation problems from the use of a 2-digit year format as the year
changes from 1999 to 2000. The problem affects certain computer software,
hardware, and other systems containing processors and embedded chips.
Consequently, information technology ("IT") systems and non-IT systems
(collectively, "Business Systems") may not be able to accurately process certain
transactions before, during, or after January 1, 2000. As a result, businesses
and governmental agencies are at risk for potential disruption to their business
from Business System malfunctions or failures. This is commonly referred to as
the Year 2000 ("Year 2000") issue. The Company could be impacted by failures of
its own Business Systems as well as those of its suppliers and business
partners, and is in the process of implementing its Year 2000 compliance program
that consists of Business Systems identification, testing and remediation,
assessment of critical suppliers, and contingency planning.
The first component of the compliance program is to identify the Business
Systems of the Company for purposes of evaluation for Year 2000 compliance. This
phase is complete as the critical computer programs, hardware, and other
equipment have been identified for evaluation to determine which systems are
compliant, will be replaced or remediated.
The second part of the program is the evaluation and replacement or
remediation of the Company's Business Systems that are not Year 2000 compliant.
The Company is in the process of converting to one automobile sales and loan
servicing system currently in use by the Company, which has reduced the scope of
the compliance program, and expects the conversion to be completed by the end of
1998. An outside consulting firm has been engaged and has begun evaluating
remediation of the critical computer programs that the Company has elected to
modify to become Year 2000 compliant. The Company believes the replacement or
remediation of the critical Business Systems will be substantially complete by
March 31, 1999.
Critical suppliers, vendors, and business partners ("Key Business
Partners") have been identified and steps are being taken to ascertain their
Year 2000 readiness. These steps include interviews, questionnaires, and other
types of inquiries. Because of the vast number of Business Systems used by Key
Business Partners and the varying levels of Year 2000 readiness, it is difficult
to assess the likelihood and impact of a malfunction due to this issue. The
Company is not currently aware of any business relationships with Key Business
Partners that it believes will likely result in a significant disruption of its
businesses. However, a Year 2000 failure could occur and have a material adverse
effect on the Company. Management currently believes its greatest risk is with
its utility suppliers, banking and financial institution partners, and suppliers
of telecommunications services, all of which are operating within the United
States. Potential consequences of the Company or its Key Business Partners
Business Systems' not being Year 2000 compliant include failure to operate due
to a lack of power, disruption or errors in loan collection efforts, and delays
in receiving inventory and supplies. In the event any of the aforementioned
events were to occur, the results could have a material adverse impact on the
Company and its operations.
Concurrent with the remediation and evaluation of the Business Systems of
the Company and its Key Business Partners, contingency plans are being developed
to mitigate the risks that could occur in the event of a Year 2000 related
business disruption. Contingency plans may include increasing inventory levels,
securing additional financing or other actions deemed prudent. Estimated costs
associated with developing and implementing contingency measures are not
currently estimable.
It is currently estimated that remediation and testing of the Company's
Business Systems will cost between $2.1 million and $2.7 million (including
Discontinued Operations), and will be expensed in the period incurred, in
accordance with the Company's capitalization policy, and funded through cash
flows from operations. Expenses to date have approximated $265,000. The Company
believes that the majority of its Business Systems that require modification or
replacement to become Year 2000 compliant will be remediated. Therefore,
substantially all of the costs incurred will be expensed.
The scheduled completion dates and costs associated with the various
components of the Year 2000 compliance program described above are estimates and
are subject to change.
Cygnet's loan servicing operations currently utilize Affiliated Computer
Services, Inc.'s ("ACS") loan processing and collections platform. Cygnet Dealer
Program is in the process of converting its loan processing and collections
systems to the ACS system (Cygnet Dealer Program and Cygnet's loan servicing
operations are included in Discontinued Operations). ACS is a third party
service bureau that processes transactions using Shaw Systems Associates, Inc.
("Shaw") software and other products ("Shaw Products"). Shaw has certified to
ACS that a significant portion of the Shaw Products that ACS uses to process
Cygnet's transactions are Year 2000 compliant. Based upon a Shaw certification
and a representation from ACS to Cygnet, Cygnet believes that Shaw has also
undertaken to provide additional Year 2000 compliant Shaw Products to ACS as
such systems become
28
<PAGE> 29
compliant. The ACS Agreement requires that the ACS systems processing Cygnet's
transactions be fully Year 2000 compliant by January 1, 1999. However, Cygnet's
sole remedy if ACS does not comply with this requirement is to terminate the ACS
Agreement and convert to another system, which would be costly and disruptive to
operations and could have a material adverse effect on Cygnet's business and
operations.
Seasonality. Historically, the Company has experienced higher revenues in
the first two quarters of the year than in the latter half of the year. The
Company believes that these results are due to seasonal buying patterns
resulting in part from the fact that many of its customers receive income tax
refunds during the first half of the year, which are a primary source of down
payments on used car purchases.
Properties. As of September 30, 1998, the Company leased substantially all
of its facilities, of which 37 were Branch Office locations that the Company
closed in 1998. The Company is continuing to negotiate lease settlements and
terminations with respect to its Branch Office network closure. The Company's
corporate headquarters is located in approximately 40,000 square feet of leased
space in Phoenix, Arizona.
Inflation. Increases in inflation generally result in higher interest rates.
Higher interest rates on the Company's borrowings would decrease the
profitability of the Company's existing portfolio. The Company will seek to
limit this risk through its Securitization Program and, to the extent market
conditions permit, for contracts originated at Company Dealerships, either by
increasing the interest rate charged or the profit margin on the cars sold. To
date, inflation has not had a significant impact on the Company's operations.
Accounting Matters. In September 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) which became effective for the Company
January 1, 1998. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS No. 130 did not have a material
impact on the Company.
In September 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) which became effective for
the Company January 1, 1998. SFAS No. 131 establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to stockholders.
The adoption of SFAS No. 131 did not have a material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132) which becomes
effective for the Company January 1, 1999. SFAS No. 132 establishes standards
for the information that public enterprises report in annual financial
statements. The Company believes the adoption of SFAS No. 132 will not have a
material impact on the Company.
The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the financial
statements. In addition, the amendments expand existing disclosure requirements
to include quantitative and qualitative information about market risk inherent
in market risk sensitive instruments. The required quantitative and qualitative
information is to be disclosed outside the financial statements and related
notes thereto. As the Company believes that the derivative financial instrument
disclosure contained within the notes to the consolidated financial statements
of its 1997 Form 10-K substantially conform with the accounting policy
requirements of these amendments, no further interim period disclosure has been
provided.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except for vehicles sold in Arizona under a limited warranty program, the
Company sells its cars on an "as is" basis, and requires all customers to sign
an agreement on the date of sale pursuant to which the Company disclaims any
obligation for vehicle-related
29
<PAGE> 30
problems that subsequently occur. Although the Company believes that such
disclaimers are enforceable under applicable state, federal and other laws and
regulations, there can be no assurance that they will be upheld in every
instance. Despite obtaining these disclaimers, the Company, in the ordinary
course of business, receives complaints from customers relating to such
vehicle-related problems as well as alleged violations of federal and state
consumer lending or other similar laws and regulations. While most of these
complaints are made directly to the Company or to various consumer protection
organizations and are subsequently resolved, the Company is named occasionally
as a defendant in civil suits filed by customers in state, local, or small
claims courts. There can be no assurance that the Company will not be a target
of similar claims in the future. Additionally, in the ordinary course of
business, the Company is a defendant in various other types of legal
proceedings. There can be no assurance that the Company will not be a target of
similar claims and legal proceedings in the future. The Company believes that
the ultimate disposition of pending matters on a cumulative basis will not have
a material adverse effect on the Company. However, there can be no assurance in
this regard.
ITEM 2. CHANGES IN SECURITIES.
(a) None.
(b) None, except as set forth below under Item 2(c).
(c) During the first quarter of 1998, (i) warrants to acquire 500,000 shares
of Common Stock of the Company at an exercise price of $10.00 per share were
issued in a private placement under Section 4(2) of the Securities Act of 1933
("Securities Act") to certain lenders in connection with a $15 million loan and
(ii) warrants to acquire 50,000 shares of Common Stock of the Company at an
exercise price of $12.50 per share were issued in a private placement in
connection with the Reliance Bankruptcy proceedings described in the Form 10-Q
under the heading "Management's Discussion and Analysis of Results of Operations
and Financial Condition of the Continuing Company Business -- Liquidity and
Capital Resources -- Reliance Transaction". During the third quarter of 1998,
documents were executed that provide certain lenders rights to warrants to
acquire 115,000 shares of Common Stock of the Company at an exercise price of
120% of the average trading price of the Company's Common Stock over a specified
time period, subject to the Company's right to not issue the warrants to the
lenders if the related loan is paid in full by the Company on or before December
31, 1998. These warrants were also offered in a private placement under Section
4(2) of the Securities Act. For certain stock option grants during the first
quarter of 1998 see "Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Continuing Company Business -
Liquidity and Capital Resources - Stock Option Grants".
As discussed earlier in this Form 10-Q, on September 17, 1998 the Company
initiated an Exchange Offer to exchange up to 5,000,000 shares of its Common
Stock for 12%, five-year subordinated debentures of the Company due October 23,
2003 ("Debentures"). The exchange ratio was $6.50 principal amount of Debentures
for each share of Common Stock validly tendered. On October 19, 1998 the
Exchange Offer expired by its original terms. A total of 2,463,603 shares of
Common Stock were exchange for Debentures ($16,013,418 aggregate principal
amount) in connection with the offer. The Debentures were not registered under
the Securities Act, since the exchange of such securities for Common Stock was
made pursuant to Section 3(a)(9) of the Securities Act. The Debentures are
unsecured obligations of the Company subordinated and subject in right of
payment to all existing and future senior indebtedness of the Company, but not
subordinated to holders of equity (e.g., the Company's common stockholders).
Holders of the Debentures have the right to receive specified principal amounts,
along with interest at 12% per annum. The Indenture relating to the Debentures
subjects the Company to certain financial covenants and other restrictions that
could affect the rights of common stockholders of the Company.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Continuing Company Businesses -- Liquidity and
Capital Resources -- Revolving Facility".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Set forth below is information concerning each of the four matters submitted
to a vote at the Company's Annual Meeting of Stockholders on August 31, 1998:
(1) Directors: Each of the following persons was elected as a director of
the Company to hold office until the 1999 Annual Meeting of Stockholders, until
his successor is duly elected and qualified, or until retirement, resignation or
removal: Robert J.
30
<PAGE> 31
Abrahams, Ernest C. Garcia II, Christopher D. Jennings, John N. MacDonough,
Gregory B. Sullivan, Frank P. Willey. Each of these persons received a minimum
of 17,695,153 votes "for" reelection and a maximum of 28,521 votes "withheld."
(2) Amendment of Long-Term Incentive Plan: The stockholders approved the
management proposal for certain technical amendments to the Company's Long-Term
Incentive Plan (no increase in shares available for issuance was being
requested).
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
17,264,084 445,443 11,147 --
</TABLE>
(3) 1998 Executive Incentive Plan: The stockholders approved the management
proposal for the Company's new 1998 Executive Incentive Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
15,054,924 2,655,728 13,022 --
</TABLE>
(4) Split-up: The stockholders approved the proposal to Split-up the Company
pursuant to which Ugly Duckling Corporation would transfer substantially all of
its non-dealership operations to a newly-formed company, Cygnet Financial
Corporation ("Cygnet") and Cygnet would be capitalized through a Rights
Offering:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
12,979,826 126,070 61,352 4,556,426
</TABLE>
The Rights Offering and Split-Up were not consummated. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition of the
Continuing Company Business - Split-up of the Company".
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional
Investments, L.P. ("Kayne Anderson"), and certain other lenders (the
"Lenders"), dated July 20, 1998
10.2 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders,
dated as of July 20, 1998
10.3 Servicing Agreement by and among Reliance Acceptance Corporation,
Registrant, and certain lenders
10.4 Agreement of Understanding by and among Reliance Acceptance Corporation,
Registrant and others
10.5 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and
among Cygnet Financial Services, Inc. and Mountain Parks Financial
Services, Inc.
10.6 1998 Executive Incentive Plan *
10.7 Amended and Restated Long Term Incentive Plan (as of January 15, 1998) *
10.8 Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement between Registrant and General Electric
Capital Corporation dated September 9, 1998
11 Statement re Computation of Per Share Earnings (see Note 5 to Notes to
Condensed Consolidated Financial Statements)
27.1 Financial Data Schedule - 9 months ended 9/30/98
27.2 Financial Data Schedule - 9 months ended 9/30/97
27.3 Financial Data Schedule - 6 months ended 6/30/98
27.4 Financial Data Schedule - 6 months ended 6/30/97
99 Cautionary Statements Regarding Forward Looking Statements and Risk
Factors
- ----------
* Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
During the third quarter 1998, the Company filed three reports on Form 8-K. The
first report on Form 8-K, dated August 31, 1998 and filed September 2, 1998,
pursuant to Item 5 reported approval by the stockholders during the Company's
1998 annual meeting of the Company proceeding with the planned Split-up and the
related Rights Offering. The second report on Form 8-K, dated and filed
September 17, 1998, pursuant to Items 5 and 7 (1) reported the initiation of an
offer by the Company to exchange shares of its
31
<PAGE> 32
Common Stock for subordinated debentures ("Exchange Offer"), and (2) filed as
exhibits to the Form 8-K the offering circular describing the Exchange Offer and
Ugly Duckling Corporation's press release dated September 17, 1998 titled "Ugly
Duckling Corporation Announces Exchange Offer." The third report on Form 8-K,
dated September 25, 1998 and filed September 29, 1998, pursuant to Items 5 and 7
(1) reported the termination of the Rights Offering and the Split-up, and (2)
filed as exhibits to the Form 8-K documents not previously filed by the Company
consisting of a Supplement dated September 28, 1998 to the Offering Circular for
the Exchange Offer regarding the termination of the Rights Offering and Ugly
Duckling Corporation's press release dated September 28, 1998 titled "Ugly
Duckling Corporation and Cygnet Financial Corporation Terminate Rights
Offering." After the third quarter 1998, the Company filed two reports on Form
8-K. The first report on Form 8-K, dated October 8, 1998 and filed on October
13, 1998, pursuant to Items 5 and 7 (1) reported an expected charge to
Discontinued Operations totaling approximately $4.8 million (net of income
taxes) in the third quarter ended September 30, 1998, and (2) filed as exhibits
to the Form 8-K a Supplement No. 2 dated October 9, 1998 to the Offering
Circular for the Exchange Offer regarding the third quarter charge and Ugly
Duckling Corporation's press release dated October 8, 1998 titled "Ugly Duckling
Corporation Announces Third Quarter Charges to Discontinued Operations." The
second report on Form 8-K, dated October 20, 1998 and filed on October 21, 1998,
pursuant to Items 5 and 7 (1) reported the events described in two press
releases, and (2) filed as exhibits to the Form 8-K said press releases dated
October 21, 1998 and October 20, 1998 titled "Ugly Duckling Corporation
Announces Third Quarter 1998 Results" and "Ugly Duckling Corporation Announces
Successful Completion of Exchange Offer," respectively.
32
<PAGE> 33
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 thereunto duly authorized.
Ugly Duckling Corporation
/s/ STEVEN T. DARAK
--------------------------------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 13, 1998
33
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
Statement of Eligibility
Under the Trust Indenture Act of 1939
of a Corporation Designated to Act as Trustee
Check if an Application to Determine Eligibility
of a Trustee Pursuant to Section 305(b)(2)__________
HARRIS TRUST AND SAVINGS BANK
(Name of Trustee)
Illinois 36-1194448
(State of Incorporation) (I.R.S. Employer Identification No.)
111 West Monroe Street, Chicago, Illinois 60603
(Address of principal executive offices)
Megan Francis, Harris Trust and Savings Bank,
311 West Monroe Street, Chicago, Illinois, 60606
312-461-6030 phone 312-461-3525 facsimile
(Name, address and telephone number for agent for service)
UGLY DUCKLING CORPORATION
(Note Issuer)
Delaware 86-0721358
(State of Incorporation) (I.R.S. Employer Identification No.)
2525 E. Camelback Road, Suite 500
Phoenix Arizona 85016
(Address of principal executive offices)
12% Subordinated Debentures due 2003
(Title of indenture securities)
<PAGE> 2
1. GENERAL INFORMATION. Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
Commissioner of Banks and Trust Companies, State of Illinois,
Springfield, Illinois; Chicago Clearing House Association, 164 West
Jackson Boulevard, Chicago, Illinois; Federal Deposit Insurance
Corporation, Washington, D.C.; The Board of Governors of the Federal
Reserve System, Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Harris Trust and Savings Bank is authorized to exercise corporate trust
powers.
2. AFFILIATIONS WITH OBLIGOR. If the Obligor is an affiliate of the Trustee,
describe each such affiliation.
The Obligor is not an affiliate of the Trustee.
3. thru 15.
NO RESPONSE NECESSARY
16. LIST OF EXHIBITS.
1. A copy of the articles of association of the Trustee as now in effect
which includes the authority of the trustee to commence business and to
exercise corporate trust powers.
A copy of the Certificate of Merger dated April 1, 1972 between Harris
Trust and Savings Bank, HTS Bank and Harris Bankcorp, Inc. which
constitutes the articles of association of the Trustee as now in effect
and includes the authority of the Trustee to commence business and to
exercise corporate trust powers was filed in connection with the
Registration Statement of Louisville Gas and Electric Company, File No.
2-44295, and is incorporated herein by reference.
2. A copy of the existing by-laws of the Trustee.
A copy of the existing by-laws of the Trustee was filed in connection
with the Registration Statement of Commercial Federal Corporation, File
No. 333-20711, and is incorporated herein by reference.
3. The consents of the Trustee required by Section 321(b) of the Act.
(included as Exhibit A on page 2 of this statement)
4. A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority.
(included as Exhibit B on page 3 of this statement)
1
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
HARRIS TRUST AND SAVINGS BANK, a corporation organized and existing under the
laws of the State of Illinois, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of Chicago, and State of Illinois, on the 19th day of November, 1998.
HARRIS TRUST AND SAVINGS BANK
By: /s/ Megan Francis
------------------------
/s/ Megan Francis
Assistant Vice President
EXHIBIT A
The consents of the trustee required by Section 321(b) of the Act.
Harris Trust and Savings Bank, as the Trustee herein named, hereby consents
that reports of examinations of said trustee by Federal and State authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefor.
HARRIS TRUST AND SAVINGS BANK
By: /s/ Megan Francis
------------------------
/s/ Megan Francis
Assistant Vice President
2
<PAGE> 4
EXHIBIT B
Attached is a true and correct copy of the statement of condition of Harris
Trust and Savings Bank as of September 30, 1998, as published in accordance with
a call made by the State Banking Authority and by the Federal Reserve Bank of
the Seventh Reserve District.
[HARRIS BANK LOGO]
Harris Trust and Savings Bank
111 West Monroe Street
Chicago, Illinois 60603
of Chicago, Illinois, And Foreign and Domestic Subsidiaries, at the close of
business on September 30, 1998, a state banking institution organized and
operating under the banking laws of this State and a member of the Federal
Reserve System. Published in accordance with a call made by the Commissioner of
Banks and Trust Companies of the State of Illinois and by the Federal Reserve
Bank of this District.
Bank's Transit Number 71000288
<TABLE>
<CAPTION>
THOUSANDS
ASSETS OF DOLLARS
<S> <C> <C>
Cash and balances due from depository institutions:
Non-interest bearing balances and currency and coin.................. $1,097,714
Interest bearing balances............................................ 213,712
Securities:............................................................
a. Held-to-maturity securities......................................... 0
b. Available-for-sale securities....................................... 5,036,734
Federal funds sold and securities purchased under agreements to resell 48,950
Loans and lease financing receivables:
Loans and leases, net of unearned income............................. $9,111,098
LESS: Allowance for loan and lease losses............................ 104,900
----------
Loans and leases, net of unearned income, allowance, and reserve
(item 4.a minus 4.b)................................................. 9,006,198
Assets held in trading accounts........................................ 202,008
Premises and fixed assets (including capitalized leases)............... 245,290
Other real estate owned................................................ 365
Investments in unconsolidated subsidiaries and associated companies.... 41
Customer's liability to this bank on acceptances outstanding........... 34,997
Intangible assets...................................................... 260,477
Other assets........................................................... 1,148,163
-----------
TOTAL ASSETS $17,294,649
===========
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<TABLE>
<S> <C> <C>
LIABILITIES
Deposits:
In domestic offices..................................................... $ $9,467,895
Non-interest bearing............................................... 2,787,471
Interest bearing................................................... 6,680,424
In foreign offices, Edge and Agreement subsidiaries, and IBF's.......... 1,268,759
Non-interest bearing............................................... 23,329
Interest bearing................................................... 1,245,430
Federal funds purchased and securities sold under agreements to repurchase
in domestic offices of the bank and of its Edge and Agreement subsidiaries,
and in IBF's:
Federal funds purchased & securities sold under agreements to repurchase..... 3,118,548
Trading Liabilities.......................................................... 110,858
Other borrowed money:
a. With remaining maturity of one year or less............................. 1,202,050
b. With remaining maturity of more than one year........................... 0
Bank's liability on acceptances executed and outstanding..................... 34,997
Subordinated notes and debentures............................................ 225,000
Other liabilities............................................................ 530,224
--------------------------
TOTAL LIABILITIES $15,958,331
==========================
EQUITY CAPITAL
Common stock................................................................. $100,000
Surplus...................................................................... 604,834
a. Undivided profits and capital reserves.................................. 580,271
b. Net unrealized holding gains (losses) on available-for-sale securities.. 51,213
--------------------------
TOTAL EQUITY CAPITAL $1,336,318
==========================
Total liabilities, limited-life preferred stock, and equity capital.......... $17,294,649
==========================
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I, Pamela Piarowski, Vice President of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
is true to the best of my knowledge and belief.
PAMELA PIAROWSKI
10/29/98
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and, to the best of our
knowledge and belief, has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and the
Commissioner of Banks and Trust Companies of the State of Illinois and is true
and correct.
EDWARD W. LYMAN,
ALAN G. MCNALLY,
RICHARD E. TERRY
Directors.
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