<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
JUNE 30, 1998
COMMISSION FILE NUMBER 000-20841
UGLY DUCKLING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 86-0721358
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
</TABLE>
2525 E. CAMELBACK ROAD,
SUITE 1150
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 August 4, 1998, there were 18,604,441 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.
- --------------------------------------------------------------------------------
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<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 -- June 30, 1998 and
December 31, 1997......................................... 3
Condensed Consolidated Statements of Operations -- Three
Months and Six Months Ended June 30, 1998 and June 30,
1997...................................................... 4
Condensed Consolidated Statements of Cash Flows -- Six
Months Ended June 30, 1998 and June 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...................... 13
PART II. -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.................................. 36
Item 2. CHANGES IN SECURITIES.............................. 36
Item 3. DEFAULTS UPON SENIOR SECURITIES.................... 36
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................... 36
Item 5. OTHER INFORMATION.................................. 36
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................... 38
SIGNATURE................................................... 39
Exhibit 3.1 ..............................................
Exhibit 4 ................................................
Exhibit 10.1 .............................................
Exhibit 10.2 .............................................
Exhibit 10.3 .............................................
Exhibit 10.4 .............................................
Exhibit 10.5 .............................................
Exhibit 10.6 .............................................
Exhibit 10.7 .............................................
Exhibit 11................................................
Exhibit 27................................................
Exhibit 99................................................
</TABLE>
2
<PAGE> 3
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................................... $ 1,652 $ 3,537
Finance Receivables, Net.................................... 55,728 60,778
Investments Held in Trust................................... 17,894 11,637
Inventory................................................... 34,690 32,372
Property and Equipment, Net................................. 27,785 39,182
Intangible Assets, Net...................................... 14,715 16,366
Other Assets................................................ 11,614 9,350
Net Assets of Discontinued Operations....................... 114,767 102,411
-------- --------
$278,845 $275,633
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable.......................................... $ 2,964 $ 2,867
Accrued Expenses and Other Liabilities.................... 19,200 13,821
Notes Payable............................................. 47,891 65,171
Subordinated Notes Payable................................ 25,000 12,000
-------- --------
Total Liabilities...................................... 95,055 93,859
-------- --------
Stockholders' Equity:
Preferred Stock........................................... -- --
Common Stock.............................................. 19 19
Additional Paid-in Capital................................ 173,775 172,603
Retained Earnings......................................... 10,228 9,152
Treasury Stock............................................ (232) --
-------- --------
Total Stockholders' Equity............................. 183,790 181,774
-------- --------
$278,845 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales of Used Cars...................................... $69,519 $27,802 $142,491 $46,013
Less:
Cost of Used Cars Sold................................ 40,850 15,951 81,213 25,890
Provision for Credit Losses........................... 14,274 4,848 29,308 8,109
------- ------- -------- -------
14,395 7,003 31,970 12,014
------- ------- -------- -------
Interest Income......................................... 3,560 3,179 7,439 4,691
Gain on Sale of Finance Receivables..................... 3,659 3,012 8,273 4,143
Servicing Income........................................ 4,025 1,635 7,861 2,649
Other Income............................................ 146 519 293 947
------- ------- -------- -------
11,390 8,345 23,866 12,430
------- ------- -------- -------
Income before Operating Expenses........................ 25,785 15,348 55,836 24,444
Operating Expenses:
Selling and Marketing................................. 4,894 2,240 10,220 3,772
General and Administrative............................ 14,846 8,470 31,515 14,074
Depreciation and Amortization......................... 1,175 737 2,327 1,266
------- ------- -------- -------
20,915 11,447 44,062 19,112
------- ------- -------- -------
Operating Income........................................ 4,870 3,901 11,774 5,332
Interest Expense........................................ 517 263 1,164 440
------- ------- -------- -------
Earnings before Income Taxes............................ 4,353 3,638 10,610 4,892
Income Taxes............................................ 1,763 1,488 4,274 1,987
------- ------- -------- -------
Earnings from Continuing Operations..................... 2,590 2,150 6,336 2,905
Discontinued Operations:
Earnings (Loss) from Operations of Discontinued
Operations, net of income taxes of $244, $1,516,
$(248) and $3,169, respectively....................... 358 2,161 (487) 4,668
Loss on Disposal of Discontinued Operations, net of
income tax benefit of $3,024.......................... -- -- (4,767) --
------- ------- -------- -------
Net Earnings............................................ $ 2,948 $ 4,311 $ 1,082 $ 7,573
======= ======= ======== =======
Earnings per Common Share from Continuing Operations:
Basic................................................. $ 0.14 $ 0.12 $ 0.34 $ 0.17
======= ======= ======== =======
Diluted............................................... $ 0.14 $ 0.11 $ 0.33 $ 0.16
======= ======= ======== =======
Net Earnings per Common Share:
Basic................................................. $ 0.16 $ 0.23 $ 0.06 $ 0.44
======= ======= ======== =======
Diluted............................................... $ 0.16 $ 0.23 $ 0.06 $ 0.43
======= ======= ======== =======
Shares Used in Computation -- Continuing Operations:
Basic................................................. 18,590 18,450 18,570 17,200
======= ======= ======== =======
Diluted............................................... 18,980 19,000 18,930 17,800
======= ======= ======== =======
Shares Used in Computation -- Net Earnings:
Basic................................................. 18,590 18,450 18,570 17,200
======= ======= ======== =======
Diluted............................................... 18,980 19,000 18,930 17,800
======= ======= ======== =======
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings.............................................. $ 1,082 $ 7,573
Adjustments to Reconcile Net Earnings to Net Cash
Provided by Operating Activities:
Earnings (Loss) from Discontinued Operations.............. (5,254) 4,668
Provision for Credit Losses............................... 29,308 8,109
Gain on Sale of Finance Receivables....................... (8,273) (4,143)
Purchase of Finance Receivables........................... (136,705) (44,172)
Proceeds from Sale of Finance Receivables................. 109,711 35,923
Collections of Finance Receivables........................ 12,444 4,790
Increase in Deferred Income Taxes......................... (675) (195)
Depreciation and Amortization............................. 2,327 1,266
Increase in Inventory..................................... (2,317) (6,312)
Increase in Other Assets.................................. (2,506) (3,616)
Increase in Accounts Payable, Accrued Expenses, and Other
Liabilities............................................ 5,790 7,904
Increase in Income Taxes Receivable/Payable............... 703 315
--------- --------
Net Cash Provided by Operating Activities.............. 5,635 12,110
--------- --------
Cash Flows Used In Investing Activities:
Increase in Investments Held in Trust..................... (6,256) (2,046)
Net Decrease in Notes Receivable.......................... 75 75
Purchase of Property and Equipment........................ (12,535) (11,093)
Proceeds from disposal of Property and Equipment.......... 21,821 --
Payment for Acquisition of Assets......................... -- (18,071)
--------- --------
Net Cash Provided by (Used in) Investing Activities.... 3,105 (31,135)
--------- --------
Cash Flows from Financing Activities:
Issuance of Notes Payable................................. 30,000 --
Repayment of Notes Payable................................ (47,462) (34,635)
Issuance (Repayment) of Subordinated Notes Payable........ 13,000 (2,000)
Proceeds from Issuance of Common Stock.................... 202 88,662
Other, Net................................................ (163) 43
--------- --------
Net Cash Provided by (Used in) Financing Activities.... (4,423) 52,070
--------- --------
Cash Used in Discontinued Operations........................ (6,202) (10,351)
--------- --------
Net Increase (Decrease) in Cash and Cash Equivalents........ (1,885) 22,694
Cash and Cash Equivalents at Beginning of Period............ 3,537 18,455
--------- --------
Cash and Cash Equivalents at End of Period.................. $ 1,652 $ 41,149
========= ========
Supplemental Statement of Cash Flows Information:
Interest Paid............................................. $ 2,706 $ 893
========= ========
Income Taxes Paid......................................... $ 1,106 $ 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. Further, in April 1998, the Company announced
that its Board of Directors had directed management to proceed with separating
current operations into two publicly held companies. 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 Company has retained its securitization program (the "Securitization
Program") and the residual interests in all securitization transactions
previously effected by the Company, its existing insurance operations relating
to its dealership activities, 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, to
effectuate the anticipated split-up (the "Split-up") and operate the
non-dealership activities. 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, including the Split-up Businesses and the
Company's third party dealer branch office network 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 and Transactions."
Included within the Company's discontinued operations is a collateralized
dealer financing program ("Cygnet Dealer Program"), pursuant to which the
Company 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. Discontinued operations
also include the bulk purchase and/or servicing of contracts originated by other
subprime lenders. The Company intends to transfer certain assets and liabilities
related to the Cygnet Dealer Program and the operations that bulk purchase
and/or service contracts by other subprime lenders. Further, discontinued
operations include the Branch Offices which the Company closed in February 1998
and which will not be transferred pursuant to the anticipated Split-up.
6
<PAGE> 7
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of Net Assets of Discontinued Operations as of June 30, 1998
and December 31, 1997 follow (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Branch Office Finance Receivables, net...................... $ 42,180 $ 26,780
Residuals in Finance Receivables Sold....................... 11,446 16,099
Investments Held in Trust................................... 5,500 7,277
Notes Receivable -- FMAC.................................... 18,135 25,686
Cygnet Dealer Finance Portfolio............................. 32,974 19,438
Furniture and Equipment -- Cygnet........................... 1,943 2,070
Capitalized Start-up Costs.................................. -- 2,453
Other Assets, net of Accounts Payable and Accrued
Liabilities............................................... 2,589 2,608
-------- --------
$114,767 $102,411
======== ========
</TABLE>
Following is a summary of the operating results of the Discontinued
Operations for the periods ended June 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues................................... $10,415 $ 8,681 $ 16,935 $17,535
Expenses................................... (9,813) (5,004) (25,461) (9,698)
------- ------- -------- -------
Earnings (Loss) before Income Taxes........ 602 3,677 (8,526) 7,837
Income Taxes (Benefit)..................... 244 1,516 (3,272) 3,169
------- ------- -------- -------
Earnings (Loss) from Discontinued
Operations............................... $ 358 $ 2,161 $ (5,254) $ 4,668
======= ======= ======== =======
</TABLE>
NOTE 3. SUMMARY OF FINANCE RECEIVABLES PRINCIPAL BALANCES, NET
Following is a summary of Finance Receivables Principal Balances, Net, as
of June 30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Installment Sales Contract Principal Balances............... $32,156 $ 55,965
Add: Accrued Interest....................................... 393 461
Loan Origination Costs.................................... 711 1,431
------- --------
Principal Balances, net..................................... 33,260 57,857
Residuals in Finance Receivables Sold....................... 28,418 13,277
------- --------
61,678 71,134
Less Allowance for Credit Losses............................ (5,950) (10,356)
------- --------
Finance Receivables, net.................................... $55,728 $ 60,778
======= ========
The finance receivables are classified as follows:
Finance Receivables Held for Sale........................... $30,000 $ 52,000
Finance Receivables Held for Investment..................... 3,260 5,857
------- --------
$33,260 $ 57,857
======= ========
</TABLE>
7
<PAGE> 8
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 1998 and December 31, 1997, the Residuals in Finance
Receivables Sold were comprised of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Retained interest in subordinated securities (B
Certificates)............................................. $ 54,370 $ 25,483
Net interest spreads, less present value discount........... 26,364 10,622
Reduction for estimated credit losses....................... (52,316) (22,828)
-------- --------
Residuals in finance receivables sold....................... $ 28,418 $ 13,277
======== ========
Securitized principal balances outstanding.................. $217,197 $127,356
======== ========
Estimated credit losses as a % of securitized principal
balances outstanding...................................... 24.1% 17.9%
======== ========
</TABLE>
The following table reflects a summary of activity for the Residuals in
Finance Receivables Sold for the periods ended June 30, 1998 and 1997,
respectively (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, Beginning of Period................ $24,741 $10,082 $13,277 $ 8,512
Additions................................... 10,396 3,854 24,254 6,193
Amortization................................ (6,719) (1,385) (9,113) (2,154)
------- ------- ------- -------
Balance, End of Period...................... $28,418 $12,551 $28,418 $12,551
======= ======= ======= =======
</TABLE>
NOTE 4. NOTES PAYABLE
Following is a summary of Notes Payable as of June 30, 1998 and December
31, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Revolving Facility with GE Capital.......................... $41,795 $56,950
Mortgage loan with finance company.......................... 6,000 7,450
Others...................................................... 96 771
------- -------
$47,891 $65,171
======= =======
</TABLE>
8
<PAGE> 9
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. COMMON STOCK EQUIVALENTS
Net Earnings per common share amounts are based on the weighted average
number of common shares and common stock equivalents outstanding for the periods
ended June 30, 1998 and 1997 as follows (in thousands, except for per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Earnings from Continuing Operations............... $ 2,590 $ 2,150 $ 6,336 $ 2,905
======= ======= ======= =======
Net Earnings...................................... $ 2,948 $ 4,311 $ 1,082 $ 7,573
======= ======= ======= =======
Basic EPS-Weighted Average Shares Outstanding..... 18,590 18,450 18,570 17,200
======= ======= ======= =======
Basic Earnings Per Share from:
Continuing Operations........................... $ 0.14 $ 0.12 $ 0.34 $ 0.17
======= ======= ======= =======
Net Earnings.................................... $ 0.16 $ 0.23 $ 0.06 $ 0.44
======= ======= ======= =======
Basic EPS-Weighted Average Shares Outstanding..... 18,590 18,450 18,570 17,200
Effect of Diluted Securities:
Warrants........................................ 44 136 35 157
Stock Options................................... 346 414 325 443
------- ------- ------- -------
Dilutive EPS-Weighted Average Shares
Outstanding..................................... 18,980 19,000 18,930 17,800
======= ======= ======= =======
Diluted Earnings Per Share from:
Continuing Operations........................... $ 0.14 $ 0.11 $ 0.33 $ 0.16
======= ======= ======= =======
Net Earnings.................................... $ 0.16 $ 0.23 $ 0.06 $ 0.43
======= ======= ======= =======
Warrants Not Included in Diluted EPS
Since Antidilutive.............................. 1,214 -- 715 --
======= ======= ======= =======
Stock Options Not Included in Diluted EPS
Since Antidilutive.............................. 571 461 96 785
======= ======= ======= =======
</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.
9
<PAGE> 10
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of Operating Activity by business segment for the periods ended
June 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 June 30, 1998:
Sales of Used Cars............................. $ 69,519 $ -- $ -- $ 69,519
Less: Cost of Cars Sold........................ 40,850 -- -- 40,850
Provision for Credit Losses.................. 14,264 10 -- 14,274
-------- ------- ------- --------
14,405 (10) -- 14,395
Interest Income................................ -- 3,506 54 3,560
Gain on Sale of Loans.......................... -- 3,659 -- 3,659
Servicing Income............................... -- 4,025 -- 4,025
Other Income (Expense)......................... 99 (9) 56 146
-------- ------- ------- --------
Income before Operating Expenses............... 14,504 11,171 110 25,785
-------- ------- ------- --------
Operating Expenses:
Selling and Marketing........................ 4,894 -- -- 4,894
General and Administrative................... 7,117 4,272 3,457 14,846
Depreciation and Amortization................ 615 311 249 1,175
-------- ------- ------- --------
12,626 4,583 3,706 20,915
-------- ------- ------- --------
Earnings (Loss) before Interest Expense........ $ 1,878 $ 6,588 $(3,596) $ 4,870
======== ======= ======= ========
Three months ended June 30, 1997:
Sales of Used Cars............................. $ 27,802 $ -- $ -- $ 27,802
Less: Cost of Cars Sold........................ 15,951 -- -- 15,951
Provision for Credit Losses.................. 4,848 -- -- 4,848
-------- ------- ------- --------
7,003 -- -- 7,003
Interest Income................................ -- 3,179 -- 3,179
Gain on Sale of Loans.......................... -- 3,012 -- 3,012
Servicing Income............................... -- 1,635 -- 1,635
Other Income................................... 398 83 38 519
-------- ------- ------- --------
Income before Operating Expenses............... 7,401 7,909 38 15,348
-------- ------- ------- --------
Operating Expenses:
Selling and Marketing........................ 2,240 -- -- 2,240
General and Administrative................... 3,812 2,983 1,675 8,470
Depreciation and Amortization................ 358 261 118 737
-------- ------- ------- --------
6,410 3,244 1,793 11,447
-------- ------- ------- --------
Earnings (Loss) before Interest Expense........ $ 991 $ 4,665 $(1,755) $ 3,901
======== ======= ======= ========
</TABLE>
10
<PAGE> 11
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
COMPANY
COMPANY DEALERSHIP CORPORATE
DEALERSHIPS RECEIVABLES AND OTHER TOTAL
----------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Six months ended June 30, 1998:
Sales of Used Cars............................. $142,491 $ -- $ -- $142,491
Less: Cost of Cars Sold........................ 81,213 -- -- 81,213
Provision for Credit Losses.................. 29,298 10 -- 29,308
-------- ------- ------- --------
31,980 (10) -- 31,970
Interest Income................................ -- 7,321 118 7,439
Gain on Sale of Loans.......................... -- 8,273 -- 8,273
Servicing Income............................... -- 7,861 -- 7,861
Other Income (Expense)......................... 200 (9) 102 293
-------- ------- ------- --------
Income before Operating Expenses............... 32,180 23,436 220 55,836
-------- ------- ------- --------
Operating Expenses:
Selling and Marketing........................ 10,184 -- 36 10,220
General and Administrative................... 16,653 8,527 6,335 31,515
Depreciation and Amortization................ 1,228 649 450 2,327
-------- ------- ------- --------
28,065 9,176 6,821 44,062
-------- ------- ------- --------
Earnings (Loss) before Interest Expense........ $ 4,115 $14,260 $(6,601) $ 11,774
======== ======= ======= ========
Six months ended June 30, 1997:
Sales of Used Cars............................. $ 46,013 $ -- $ -- $ 46,013
Less: Cost of Cars Sold........................ 25,890 -- -- 25,890
Provision for Credit Losses.................. 8,109 -- -- 8,109
-------- ------- ------- --------
12,014 -- -- 12,014
Interest Income................................ -- 4,691 -- 4,691
Gain on Sale of Loans.......................... -- 4,143 -- 4,143
Servicing Income............................... -- 2,649 -- 2,649
Other Income................................... 602 83 262 947
-------- ------- ------- --------
Income before Operating Expenses............... 12,616 11,566 262 24,444
-------- ------- ------- --------
Operating Expenses:
Selling and Marketing........................ 3,765 -- 7 3,772
General and Administrative................... 6,281 4,471 3,322 14,074
Depreciation and Amortization................ 558 467 241 1,266
-------- ------- ------- --------
10,604 4,938 3,570 19,112
-------- ------- ------- --------
Earnings (Loss) before Interest Expense........ $ 2,012 $ 6,628 $(3,308) $ 5,332
======== ======= ======= ========
</TABLE>
NOTE 7. ACQUISITIONS
On January 15, 1997, the Company acquired substantially all of the assets
of Seminole Finance Corporation and related companies ("Seminole"), including
four dealerships in Tampa/St. Petersburg and a contract portfolio of
approximately $31.1 million (6,953 contracts) in exchange for approximately $2.5
million in cash and the assumption of $29.9 million in debt. On April 1, 1997,
the Company purchased substantially all of the assets of EZ Plan, Inc. (EZ
Plan), a Company engaged in the business of selling and financing used motor
vehicles, including seven dealerships in San Antonio and a contract portfolio of
approximately $24.3
11
<PAGE> 12
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million (6,297 contracts) in exchange for $26.3 million in cash. The following
summary, prepared on a pro forma basis, combines the consolidated results of
operations (unaudited) for the six months ended June 30, 1997 as if the
acquisitions had been consummated as of January 1, 1997. These pro forma results
are not necessarily indicative of the future results of operations of the
Company or the results that would have been obtained had the acquisitions taken
place on January 1, 1997 (in thousands, except per share data).
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
----------------
<S> <C>
Sales of Used Cars.......................................... $61,173
Interest Income............................................. 10,498
Other Income................................................ 4,593
-------
Total Revenues.............................................. 76,264
Earnings (Loss) from Continuing Operations.................. (1,026)
Net Earnings................................................ 395
Earnings (Loss) per share from Continuing Operations:
Basic..................................................... (0.06)
Diluted................................................... (0.06)
Net Earnings per share:
Basic..................................................... 0.02
Diluted................................................... 0.02
</TABLE>
NOTE 8. 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 from those estimates. These
include the provision for loss on discontinued operations that was recorded in
the accompanying condensed consolidated financial statements for the six month
period ended June 30, 1998, which provision is based upon management's best
estimate of the amounts expected to be realized from the closure of the Branch
Office network as well as from the Split-up of certain operations. The amounts
the Company will ultimately realize could differ materially from the amounts
assumed in arriving at the loss anticipated on disposal of the discontinued
operations.
NOTE 9. BANKRUPTCY REMOTE ENTITIES
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, (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 $39.9 million and $22.1 million, respectively, at June 30, 1998,
which amounts would not be available to satisfy claims of creditors of the
Company on a consolidated basis.
NOTE 10. RECLASSIFICATIONS
Certain reclassifications have been made to previously reported information
to conform to the current presentation.
12
<PAGE> 13
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 the anticipated
Split-up (as defined below) of the Company's operations and related Rights
Offering (as defined below), 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 and the Company's definitive proxy
statement on Schedule 14A filed with the Securities and Exchange Commission on
August 4, 1998, which is incorporated by reference into this Quarterly Report on
Form 10-Q. Further, risk and uncertainties, in connection with the Split-up
transaction and related Rights Offering are also set forth in more detail in the
"Risk Factors" section of the Cygnet prospectus dated August 4, 1998 and
elsewhere therein.
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
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
13
<PAGE> 14
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 store in the Phoenix,
Tampa and Dallas markets, respectively. The Company opened one store 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. The Company operated 50 and 22 dealerships at June 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. The restructuring was
substantially complete by the end of the first quarter of 1998 and included the
termination of approximately 400 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 negotiate lease settlements and
terminations with respect to its Branch Office network closure.
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 third party dealer contract buying office network, and to focus instead on
its Cygnet dealer finance 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 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 publicly held companies and subsequently formed a new wholly owned
subsidiary, Cygnet Financial Corporation ("Cygnet"), to effectuate the Split-up.
A proposal to split-up the two Companies (the "Split-up Proposal") will be
presented to stockholders of the Company for approval at the upcoming annual
meeting of stockholders.
There can be no assurance that all of the conditions to the Split-up or the
Rights Offering will be satisfied or that the Split-up will be effected or that
the Rights (as defined below) will be issued. See the "Risk Factors" section of
the Company's definitive proxy statement dated August 4, 1998. In addition, the
Rights Offering is subject to a number of risks and uncertainties, and for a
more complete discussion of these matters, see the "Risk Factors" section of the
Cygnet prospectus dated August 4, 1998. The registration statement relating to
the Rights Offering has been filed with and declared effective by the Securities
and Exchange Commission. This discussion of the Split-up and the related Rights
Offering shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any state in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. The securities sold
in the Rights Offering will be offered only by means of a Cygnet prospectus.
Copies of the notice and proxy statement of the Company relating to the Split-up
and copies of the prospectus of Cygnet relating to the Rights Offering may be
obtained by contacting: Steven P. Johnson, General Counsel of the Company, 2525
E. Camelback Road, Phoenix, AZ 85016. A copy of the prospectus is also being
distributed to stockholders of the Company with the upcoming notice and proxy
statement, pursuant to which the Company's stockholders will vote on the
Split-up. For more complete information about the Split-up and the related
Rights Offering, and their impact on the Company and Cygnet obtain a proxy
statement and prospectus as indicated above. Read these documents carefully
before you invest or send money. See "Part II. -- Item 5. Other Information."
14
<PAGE> 15
The Company's Board of Directors believes that the separation of the
Company into two publicly traded companies would be beneficial to each of the
Company's current businesses, because, among other things:
- It would separate businesses with distinct financial, investment, and
operating characteristics so that each could adopt strategies and pursue
objectives more appropriate to its specific operations than is possible
under the Company's present combined structure.
- It would allow each separate business group to attract and compensate
qualified employees with stock-based compensation and incentive plans
directly related to the performance of its business.
- It would allow investors, lenders, and employees to better evaluate the
performance and investment characteristics of each business group,
enhancing the likelihood that each will achieve appropriate market
recognition of its performance.
If the Split-up Proposal is approved and certain other conditions are
satisfied, the Company and its subsidiaries will transfer to Cygnet and
subsidiaries of Cygnet certain assets and liabilities (the "Transferred Assets")
on the effective date of the Split-up (the "Effective Date"). The Transferred
Assets will include (i) the Company's bulk purchase and servicing operations
with respect to finance receivables originated by independent used car
dealerships ("Third Party Dealers"); (ii) the assets and related liabilities of
Cygnet Dealer Finance, Inc., which operates the Cygnet Dealer Program; (iii)
substantially all of the Company's rights and certain obligations pursuant to
certain transactions with First Merchants Acceptance Corporation ("FMAC"),
including the servicing platform and rights and certain other rights and
residual interests, and the assumption by Cygnet of certain funding obligations
and guarantees of the Company in connection with the FMAC transaction but
excluding certain rights and liabilities retained by the Company as described
under "Risk Factors -- Risks to the Company Relating to the FMAC Transaction"
and in "Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Continuing Company Businesses -- Transactions
Regarding First Merchants Acceptance Corporation"; and (iv) substantially all of
the Company's rights and certain obligations pursuant to certain transactions
with Reliance Acceptance Group, Inc. ("Reliance"), described generally under
"Risk Factors -- Risks to the Company Relating to the Reliance Transaction" and
in "Management's Discussion and Analysis of Results of Operations and Financial
Condition of the Continuing Company Businesses -- Reliance Transaction,"
including the servicing platform and certain servicing and transition servicing
arrangements. The Transferred Assets had a net book value of approximately $54.7
million and a net appraised value of approximately $54.9 million as of June 30,
1998. However, it is expected that the book value of the Transferred Assets will
increase prior to the transfer contemplated herein as additional contracts are
acquired under warehouse purchase facilities, additional advances are made under
operating credit lines through the Cygnet Dealer Program, or additional
transactions are consummated.
The Company would retain its used car dealership operations, its
securitization program, the servicing rights and its interests in the bankruptcy
remote subsidiaries that own residual interests in all securitization
transactions previously effected by the Company, and its rent-a-car franchise
business (which is generally inactive). The Company would continue to service,
through its loan servicing and collection facilities located in Phoenix,
Arizona, San Antonio, Texas, Dallas, Texas, and Tampa, Florida, the automobile
receivables in its various securitized pools, receivables purchased through its
Branch Office network that was closed in the first quarter of 1998 (whether
securitized or retained), as well as the receivables serviced pursuant to the
transactions effected in September 1997 with Kars. The Company would also retain
certain rights and direct obligations relating to the FMAC and Reliance
transactions. See "Risk Factors -- Risks to the Company Relating to the FMAC
Transaction" and "-- Risks to the Company Relating to the Reliance Transaction."
References herein to the "Continuing Company Businesses" shall mean those
businesses of the Company that the Company would continue to own and operate if
the Split-up is successfully effected and concluded.
As consideration for the Transferred Assets, on the Effective Date, Cygnet
would issue to the Company 40,000 shares of Cumulative Convertible Preferred
Stock, Series A, $.001 par value per share (the "Cygnet Preferred Stock"), with
an aggregate liquidation preference of $40 million and make a cash or equivalent
payment (the "Cash Payment") equal to the difference between the greater of the
appraised value or the book value of the Transferred Assets (in each case net of
assumed liabilities) (except with respect to intangible
15
<PAGE> 16
assets with a current book value of approximately $955,000 as to which no value
has been assigned by the parties) and the $40 million of Cygnet Preferred Stock.
In addition to issuing the Cygnet Preferred Stock, Cygnet would be further
capitalized through a rights offering to stockholders of the Company ("Rights
Offering"). Each stockholder of the Company on August 17, 1998, the record date
for the Rights Offering, would receive one (1) transferable Right for every four
(4) shares of Company common stock held by him (the "Rights"). Each Right would
allow the holder to purchase one (1) share of Cygnet common stock at a
subscription price of $7.00 per share (the "Subscription Price"). The Rights
would be exercisable for a limited period of 20 days unless extended (the
"Offering Period"). Holders of Rights who exercise all of their Rights may
subscribe for an additional number of shares of Cygnet common stock at the
Subscription Price out of the pool of shares underlying unexercised Rights on
the expiration date of the Rights Offering up to the number of shares purchased
upon exercise of such holder's Rights. See "Part II. -- Item 5. Other
Information."
The Company has incurred subordinated indebtedness to Verde Investments,
Inc. ("Verde"), an affiliate of the Company wholly-owned by Mr. Ernest C. Garcia
II, the Company's principal shareholder and Chief Executive Officer. As of July
1, 1998, the balance of such indebtedness was $10 million. The Company intends
to utilize a portion of the Cash Payment to repay the Verde indebtedness in
full. Alternatively, Verde may deposit the Verde Note or any part thereof with
Cygnet in payment of all or any portion of the Subscription Price for exercise
of Rights acquired from Mr. Garcia or otherwise, the related Over-Subscription
Privilege (defined below), and the Standby Purchase Obligation (defined below).
In such case, Cygnet would transfer the Verde Note to the Company for
cancellation in lieu of the payment of a portion of the Cash Payment. The
Company believes that the terms of the Verde Note are equivalent to those that
could have been obtained through arm's length negotiations.
The Cash Payment, which is expected to range from $10 million to $20
million, will be used (i) first, to repay the $10 million Verde indebtedness,
which carries an interest rate of 10% per annum, and (ii) the balance (estimated
to be zero to $10 million) will be utilized by the Company to pay down the
Company's revolving credit facility with General Electric Capital Corporation,
which bears interest at 30-day LIBOR plus 3.15% (8.80% at June 30, 1998).
The Company is in the process of evaluating a number of transactions and
may identify and pursue other transactions ("Interim Transactions") that, if
consummated prior to the Split-up, would be assigned to, or concluded by,
Cygnet. In addition, Cygnet has recently closed two Interim Transactions. The
Company does not believe any of the Interim Transactions recently concluded or
currently under consideration are material to its financial condition or results
of operations, individually or in the aggregate, or that any of such
transactions, would constitute the acquisition of a business for which separate
financial statements would be required to be publicly disclosed by The Company.
None of the transactions described below requires stockholder approval of the
Company, nor are any of such transactions with an affiliate of the Company. The
consummation of any of these transactions currently under consideration is
subject to a number of contingencies, which may include the negotiation and
preparation of definitive agreements, completion of due diligence, and the
receipt of required consents from third parties. As a result, there can be no
assurance that any of these potential transactions will be completed by the
Company.
To effect any Interim Transactions, Cygnet may borrow money from a third
party lender ("Third Party Loans"), or from the Company ("Interim Company
Loans"). Third Party Loans made to Cygnet prior to the Effective Date may be
guaranteed by the Company, and Cygnet and the Company will seek to have any such
guarantee released as of the Effective Date, with Cygnet likely providing a
replacement guarantee. Interim Company Loans may become due and payable on the
Effective Date. Moreover, on the business day immediately preceding the
Effective Date, Cygnet will distribute to the Company all earnings accrued to
such date. In addition, Cygnet will pay to the Company on the Effective Date the
excess, if any, of the aggregate appraised value of the assets and rights and
related liabilities acquired by Cygnet in any Interim Transactions (the "Interim
Assets"), as of the Effective Date, over the aggregate book value of the Interim
Assets (the "Interim Consideration"). The Company and Cygnet may agree to other
terms with respect to how Interim Transactions will be structured or treated if
the Company believes that such structure or treatment results in
16
<PAGE> 17
adequate consideration to the Company at the time of the Split-up with respect
to the Interim Assets. The purpose for the payment by Cygnet to the Company of
the Interim Consideration is to place both parties as close as possible to the
economic situation each would confront if the Interim Transactions were effected
by the Company rather than Cygnet.
Interim Transactions recently concluded include the following:
Servicing Agreement. On July 31, 1998, Cygnet closed a transaction
pursuant to which the Company will service a $50 million portfolio of automobile
finance receivables owned by a third party. Preliminary terms of the servicing
agreement provide that: (i) Cygnet would receive a servicing fee equal to the
greater of 3.75% of the outstanding principal balance or $17.50 for each
contract in the portfolio that is not a defaulted contract and 63.75% of all net
collections and proceeds on defaulted contracts, provided that if the net losses
of the portfolio do not exceed 7%, Cygnet would receive an additional servicing
fee of .25% on defaulted contracts, (ii) Cygnet would receive all late fees and
certain other fees and reimbursable expenses associated with the servicing; and
(iii) the servicing agreement could be terminated without cause upon payment to
Cygnet of 3 months of servicing fees. Cygnet would also purchase all assets
utilized by the current owner in servicing the portfolio including furniture,
fixtures and equipment, for a purchase price of $500,000, and would assume the
existing lease of the service facility and all amounts due thereunder from and
after the closing date.
Until the Effective Date of the Split-up, the Company would provide
subservicing of the portfolio on the same terms as the proposed servicing
agreement, after which the agreement would be assumed by Cygnet.
Assumption of Servicing Agreements. Cygnet recently closed a transaction
pursuant to which the Company will assume the obligations of an existing special
servicer of six pools of automobile finance receivables, including four
securitized pools. Cygnet would receive a monthly servicing fee equal to the
greater of 4% of the outstanding principal balance of each contract or $14.00
per contract. Cygnet would also be paid certain incentive fees, will be
reimbursed for certain fees, and will be indemnified by the parent company of
the existing special servicer for certain obligations being assumed. During an
interim period, which should not exceed 60 days, while certain modifications are
being made to the special servicing agreements to be assumed by the Company and
certain consents are being obtained, the company will act as special subservicer
of the pools on the same terms as outlined above, but will not be responsible
for such indemnified obligations. If such modifications are not effected or such
consents not obtained, the company can be removed as special subservicer
following this interim period. The Company has agreed upon the resignation or
removal of the servicer of the pools to assume the obligations of servicer for
no additional compensation.
Cygnet has also agreed to purchase the charged off receivables from five of
the pools for a purchase price of $600,000.
Until the Effective Date of the Split-up, the Company will provide
subservicing of these portfolios on the same terms as the servicing and related
agreements, after which Cygnet would assume the agreements.
Transactions under consideration include the following:
Insurance Agency. The Company is currently evaluating the acquisition of
or a management arrangement with an operating insurance agency, which offers
insurance-related products and services designed to reduce the risk of loss to
holders of portfolios of automobile finance receivables and residential mortgage
loans, including banks, savings and loan associations, finance companies, credit
unions, securitization participants and automobile dealers, among others. Cygnet
anticipates paying approximately $4 million for this business.
Charge-Offs. The Company is negotiating the purchase of a pool of
charged-off automobile finance receivables of approximately $33.3 million (as of
February 28, 1998) for a purchase price based upon a formula. If purchased by
the Company, the pool would be transferred to Cygnet at the effective date of
the Split-up.
Purchase of Bank Debt. Cygnet has agreed to purchase the interests of a
bank in a bank group credit facility. The purchased interest is 18% of the
approximately $48 million current outstanding principal balance of the facility
(or approximately $8.6 million). The purchase price for the interest equals
90.5% of the principal amount of the interest as of the closing date of the
purchase (expected to approximate $7.8 million).
17
<PAGE> 18
The purchase price will be paid $3 million in cash, with the balance evidenced
by a promissory note providing for interest at a fixed rate based on LIBOR plus
150 basis points. This promissory note will be guaranteed by the Company until
the occurrence of both (i) the Split-up and (ii) Cygnet having a total
shareholders' equity of at least $50 million (which is expected to occur at the
time of the Split-up). The credit facility is secured by a pool of receivables
and a residual interest in a securitized pool of receivables.
Loan, Servicing Agreement and Investment. Cygnet is negotiating a
transaction in which Cygnet would make a loan to a third party entity
("Borrower") of $2 million (the "Loan") with interest payable at 12% per annum
and maturing on October 31, 1998; provided that if, prior to October 31, 1998,
Borrower either receives an equity investment from a third party of (i) not less
than $10 million or (ii) not less than $5 million and receives a loan of not
less than $5 million that is subordinate to the Loan and other existing credit
facilities of Borrower, then the maturity date of the Loan will be extended to
the second anniversary of the closing date of the Loan. The Loan is expected to
be secured by all of Borrower's assets, subject to a senior security interest
supporting Borrower's $35 million senior secured credit facility. In
consideration for the Loan, Cygnet would receive warrants to purchase up to 5%
of Borrower's outstanding common stock as of the closing date exerciseable for
three years at an exercise price of $.0l per share. Cygnet would also be granted
certain additional investment rights in Borrower and would obtain the right to
service a portfolio of receivables for a fee equal to the greater of 4% per
annum of the outstanding principal balance of the receivables or $17.50 for each
contract in the portfolio, plus all collected late fees and modification fees
and reimbursement of costs and expenses. Borrower would have the right to
terminate Cygnet as servicer for cause or without cause after the later of (i)
six months after commencement of servicing and (iii) payment in full of the Loan
upon payment of a termination fee equal to three months servicing fees.
Until the Effective Date of the Split-up, the Company will provide
subservicing of the portfolio on the same terms as the servicing agreement
described above after which Cygnet would assume the agreements.
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of June 30, 1998 and December 31,
1997, and its results of operations for the three month periods ended June 30,
1998 and 1997, respectively, and the six month periods ended June 30, 1998 and
1997, respectively.
Growth in Finance Receivables. Contract receivables serviced increased by
36.0% to $249.4 million on June 30, 1998 (including $217.2 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).
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.
TOTAL CONTRACTS OUTSTANDING:
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS)
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------- ----------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Principal Amount......................... $249,353 42,899 $183,321 35,762
Less: Portfolios Securitized and Sold.... 217,197 38,413 127,356 27,769
-------- ------ -------- ------
Company Total............................ $ 32,156 4,486 $ 55,965 7,993
======== ====== ======== ======
</TABLE>
In addition to the loan portfolio summarized above, the Company also
services loan portfolios totaling approximately $197.3 million ($79.2 million
for Kars and $118.1 million from Branch Office originations) as of June 30, 1998
and $267.9 million ($127.3 million for Kars and $140.6 million from Branch
Office originations) as of December 31, 1997.
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<PAGE> 19
TOTAL CONTRACTS ORIGINATED/PURCHASED:
(IN THOUSANDS, EXCEPT NUMBER OF CONTRACTS AND AVERAGE PRINCIPAL)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Principal Amount........................... $66,908 $52,034 $136,616 $99,379
Number of Contracts........................ 8,518 10,006 17,857 19,069
Average Principal.......................... $ 7,855 $ 5,200 $ 7,651 $ 5,212
</TABLE>
Finance Receivable Principal Balances originated/purchased during the three
months ended June 30, 1998 increased by 28.6% to $66.9 million from $52.0
million in the three month period ended June 30, 1997. During the three month
period ended June 30, 1997, Finance Receivable Principal Balances
originated/purchased were affected by the purchase of approximately $24.3
million (6,297 contracts) in finance receivables in conjunction with the EZ Plan
acquisition. For the six month period ended June 30, 1998, Finance Receivable
Principal Balances originated/purchased increased by 37.5% to $136.6 million
from $99.4 million in the six month period ended June 30, 1997. During the six
month period ended June 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.
19
<PAGE> 20
RESULTS OF OPERATIONS
For Three Months Ended June 30, 1998 Compared To Three Months Ended June 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 150.1% to $69.5
million for the three month period ended June 30, 1998 from $27.8 million for
the three month period ended June 30, 1997. This growth reflects a significant
increase in the number of used car dealerships in operation from 22 dealerships
in operation during the three month period ended June 30, 1997 compared to 50
dealerships in operation during the three month period ended June 30, 1998.
Units sold increased by 126.8% to 8,631 units in the three month period ended
June 30, 1998 from 3,806 units in the three month period ended June 30, 1997.
Same store sales increased by 20.6% in the three month period ended June 30,
1998 compared to the three month period ended June 30, 1997. The increase in
same store sales was a result of certain stores operating for the entire three
months of the quarter ended June 30, 1998 while operating less than the entire
three months in the comparable quarter in 1997. Management expects same store
sales to remain relatively stable in future periods.
The average sales price per car increased 10.3% to $8,055 for the three
month period ended June 30, 1998 from $7,305 for the three month period ended
June 30, 1997.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 156.1% to $40.9 million for the three month period ended June 30,
1998 from $16.0 million for the three month period ended June 30, 1997. On a per
unit basis, the Cost of Used Cars Sold increased by 12.9% to $4,733 for the
three month period ended June 30, 1998 from $4,191 for the three month period
ended June 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
141.9% to $28.7 million for the three month period ended June 30, 1998 from
$11.9 million for the three month period ended June 30, 1997. As a percentage of
sales, the gross margin was 41.2% and 42.6% for the three month periods ended
June 30, 1998 and 1997, respectively. On a per unit basis, the gross margin per
car sold was $3,322 and $3,114 for the three month periods ended June 30, 1998
and 1997, respectively. The increase in the average cost per unit and for the
decline in gross margin percent is primarily the result of an increase in
vehicle reconditioning costs from 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 194.4% to $14.3 million in
the three month period ended June 30, 1998 from $4.8 million for the three month
period ended June 30, 1997. On a percentage basis, the Provision for Credit
Losses per unit originated at Company Dealerships increased by 25.6% to $1,641
per unit in the three month period ended June 30, 1998 from $1,307 per unit in
the three month period ended June 30, 1997. As a percentage of contract balances
originated, the Provision for Credit Losses averaged 21.3% and 18.7%, for the
three month periods ended June 30, 1998 and 1997, respectively.
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 12.0% to
20
<PAGE> 21
$3.6 million for the three month period ended June 30, 1998 from $3.2 million
for the three month period ended June 30, 1997. Interest Income was reduced by
the sale of finance receivables with remaining principal balances of $217.2
million and $70.5 million as of June 30, 1998 and 1997, respectively, pursuant
to the Securitization Program, and will 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 96.2% of sales revenue and 98.7% of the used cars sold at Company
Dealerships for the three month period ended June 30, 1998, compared to 93.1% of
sales revenue and 95.4% of the used cars sold for the three month period ended
June 30, 1997. The average amount financed increased to $7,855 for the three
month period ended June 30, 1998 from $7,246 for the three month period ended
June 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 25.3% and 26.0%, for the three month periods ended June 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. 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. The transferred contracts are serviced by
Champion Acceptance Corporation ("CAC"), another subsidiary of 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
21
<PAGE> 22
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 $2.6 million during
the three months ended June 30, 1998 in conjunction with a single
securitization. Based upon securitizations in effect as of June 30, 1998, the
Company's continuing operations were required to maintain an aggregate balance
in its spread accounts of $17.5 million, a portion of which may be funded over
time. As of June 30, 1998, the Company maintained an aggregate spread account
balance of $16.6 million, which satisfied the funding requirement for all of the
securitization transactions consummated prior to the three month period ended
June 30, 1998. Accordingly, an additional $900,000 related to the securitization
consummated during the three month period ended June 30, 1998 will need to be
funded from future cash flows. The additional funding requirements will decline
as the trustees deposit 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 $16.6 million, 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 $5.5 million as of June 30,
1998, with respect to these securitization transactions.
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,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115).
During the three months ended June 30, 1998, the Company securitized an
aggregate of $66.0 million in contracts, issuing $47.5 million in Class A
securities, and $18.5 million in Class B securities (Residuals in Finance
Receivables Sold). During the three months ended June 30, 1997, the Company
securitized an aggregate of $32.8 million in contracts issuing $24.7 million in
Class A securities and $8.1 million in Class B securities. The Company recorded
the carrying value of the Residuals in Finance Receivables sold at $10.8 million
and $6.3 million, respectively, for the securitization transactions consummated
during the three months ended June 30, 1998. The Company recorded Gain on Sale
of Loans of $3.7 million (5.6% of principal sold) and $3.0 million (9.1% of
principal sold), net of expenses related to securitization transactions during
the three months ended June 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 June 30, 1998.
During the three month period ended June 30, 1998, the Trust issued
certificates at a yield of 6.10% resulting in net spread, before net credit
losses and after servicing, insurer, and trustee fees, of 17.5%.
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 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 $39.9 million and
$22.1 million, respectively, at June 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 June 30,
1998 increased 146.2% to $4.0 million from $1.6 million in the three month
period ended June 30, 1998. The Company serviced contracts totaling $446.7 at
June 30, 1998 million for monthly fees ranging from .25% to .33% of beginning of
period principal balances (3% to 4% annualized). The significant increase was
due to the increase in the principal balance of contracts serviced.
22
<PAGE> 23
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 68.0% to $25.8 million for
the three month period ended June 30, 1998 from $15.3 million for the three
month period ended June 30, 1997. Growth of Sales of Used Cars, Interest Income
on the loan portfolios, 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 June 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 118.5 % to $4.9 million for the
three month period ended June 30, 1998 from $2.2 million for the three month
period ended June 30, 1997. As a percentage of Sales of Used Cars, these
expenses averaged 7.0% for the three month period ended June 30, 1998 and 8.1%
for the three month period ended June 30, 1997. On a per unit sold basis,
Selling and Marketing Expenses of Company Dealerships decreased slightly to $567
per unit for the three month period ended June 30, 1998 from $589 per unit for
the three month period ended June 30, 1997. The Company incurred significantly
higher marketing costs in markets it entered in the first half of 1997 in order
to establish brand name recognition. The Company did not enter any new markets
in the first half of 1998 and, accordingly, incurred a lower marketing cost per
unit for the three months ended June 30, 1998.
General and Administrative Expenses. General and Administrative Expenses
increased by 75.3% to $14.8 million for the three month period ended June 30,
1998 from $8.5 million for the three month period ended June 30, 1997. These
expenses represented 18.3% and 23.4% of total revenues for three month periods
ended June 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. General and
Administrative Expenses also continue to reflect the inefficiencies inherent in
utilizing multiple origination and loan servicing systems. The Company is in the
process of consolidating operations to one of its current systems. 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.
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 59.4% to $1.2 million for the three month period ended
June 30, 1998 from $737,000 for the three month period ended June 30, 1997. The
increase was due primarily to the increase in amortization of goodwill
associated with the Company's recent acquisitions, and increased depreciation
expense from the addition of Company Dealerships.
Interest Expense. Interest expense increased by 96.6% to $517,000 in the
three month period ended June 30, 1998 from $263,000 in the three month period
ended June 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 inventory.
Income Taxes. Income taxes totaled $1.8 million and $1.5 million which
resulted in an effective rate of 40.5% and 40.9% in the three month periods
ended June 30, 1998 and 1997, respectively.
Earnings from Discontinued Operations. Discontinued operations consist
primarily of the Company's Cygnet Dealer Program, the Branch Office network, the
Company's bulk purchasing and loan servicing operations, and transactions
related to FMAC.
Earnings from discontinued operations, net of income taxes, decreased to
$358,000 for the three months ended June 30, 1998 compared to $2.2 million for
the three months ended June 30, 1997. Earnings from discontinued operations were
impacted by the $5.0 million securitization gain (before income taxes)
recognized on the sale of Branch Office network loans in the three months ended
June 30, 1997.
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<PAGE> 24
RESULTS OF OPERATIONS
For Six Months Ended June 30, 1998 Compared To Six Months Ended June 30, 1997
Sales of Used Cars. Sales of Used Cars increased by 209.7% to $142.5
million for the six month period ended June 30, 1998 from $46.0 million for the
six month period ended June 30, 1997. This growth reflected a significant
increase in the number of used cars sold. Units sold increased by 187.8% to
18,070 units in the six month period ended June 30, 1998 from 6,278 units in the
six month period ended June 30, 1997. Same store sales increased by 18.2% in the
six month period ended June 30, 1998 compared to the six month period ended June
30, 1997. The increase in same store sales was a result of certain stores
operating for the entire six months of the period ended June 30, 1998 while
operating less than the entire six months in the comparable period in 1997.
Management expects same store sales to remain relatively stable in future
periods.
The average sales price per car increased to $7,886 for the six month
period ended June 30, 1998 from $7,329 for the six month period ended June 30,
1997.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 213.7% to $81.2 million for the six month period ended June 30,
1998 from $25.9 million for the six month period ended June 30, 1997. On a per
unit basis, the Cost of Used Cars Sold increased by 9.0% to $4,494 for the six
month period ended June 30, 1998 from $4,124 for the six month period ended June
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 204.5% to
$61.3 million for the six month period ended June 30, 1998 from $20.1 million
for the six month period ended June 30, 1997. As a percentage of sales, the
gross margin was 43.0% and 43.7% for the six month periods ended June 30, 1998
and 1997, respectively. On a per unit basis, the gross margin per car sold was
$3,391 and $3,205 for the six month periods ended June 30, 1998 and 1997,
respectively. The increase in the average cost per unit and the decline in gross
margin percent and gross margin per car sold were primarily the result of an
increase in vehicle reconditioning costs from the prior comparable period.
Provision for Credit Losses. The Provision for Credit Losses increased by
261.4% to $29.3 million in the six month period ended June 30, 1998 compared to
$8.1 million for the six month period ended June 30, 1997. On a percentage
basis, the Provision for Credit Losses per unit originated at Company
Dealerships increased by 16.4% to $1,641 per unit in the six month period ended
June 30, 1998 compared to $1,394 per unit in the six month period ended June 30,
1997. As a percentage of contract balances originated, the Provision for Credit
Losses averaged 21.4% and 18.4%, respectively, for the six month periods ended
June 30, 1998 and 1997.
Interest Income. Interest Income consists primarily of interest on finance
receivables from Company Dealership sales and income from Residuals and Finance
Receivables Sold. Interest Income increased by 58.6% to $7.4 million for the
three month period ended June 30, 1998 from $4.7 million for the three month
period ended June 30, 1997. Interest Income was reduced by the sale of finance
receivables with remaining principal balances of $217.2 million and $70.5
million as of June 30, 1998 and 1997, respectively, pursuant to the
Securitization Program, and will continue to be affected in future periods by
additional securitizations. The Company financed 95.9% of sales revenue and
98.8% of the used cars sold at Company Dealerships for the six month period
ended June 30, 1998, compared to 91.6% of sales revenue and 92.7% of the used
cars sold for the six month period ended June 30, 1997. The average amount
financed increased to $7,656 for the six month period ended June 30, 1998 from
$7,244 for the six month period ended June 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 25.7% and 27.9%, for
the six month periods ended June 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 six months ended June 30,
1998, the Company securitized an aggregate of $152.6 million in contracts,
issuing $110.1 million in Class A securities, and $42.5
24
<PAGE> 25
million in Class B securities (Residuals in Finance Receivables Sold). During
the six months ended June 30, 1997, the Company securitized an aggregate of
$48.0 million in contracts issuing $36.3 million in Class A securities and $11.7
million in Class B securities. The Company recorded the carrying value of the
Residuals in Finance Receivables sold at $25.5 million and $8.5 million,
respectively. The Company recorded Gain on Sale of Loans of $8.3 million (5.4%
of principal sold) and $4.1 million (9.0% of principal sold), net of expenses
related to securitization transactions during the six months ended June 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
securitization.
During the six month period ended June 30, 1998, the Trust issued
certificates at an average yield of 6.11% resulting in net spread, before net
credit losses and after servicing, insurer, and trustee fees, of 17.2%.
Servicing Income. Servicing Income for the six months ended June 30, 1998
increased 196.8% to $7.9 million from $2.6 million in the six month period ended
June 30, 1998. The Company serviced contracts totaling $446.7 at June 30, 1998
million for monthly fees ranging from .25% to .33% of beginning of period
principal balances (3% to 4% annualized). The significant increase was due to
the increase in the principal balance of contracts serviced.
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 128.4% to $55.8 million for
the six month period ended June 30, 1998 from $24.4 million for the six month
period ended June 30, 1997. Growth of Sales of Used Cars, Interest Income and
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 six month periods ended June 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 170.9% to $10.2 million for the six
month period ended June 30, 1998 from $3.8 million for the six month period
ended June 30, 1997. As a percentage of Sales of Used Cars, these expenses
averaged 7.2% for the six month period ended June 30, 1998 and 8.2% for the six
month period ended June 30, 1997. On a per unit sold basis, Selling and
Marketing Expenses of Company Dealerships decreased to $566 per unit for the six
month period ended June 30, 1998 from $601 per unit for the six month period
ended June 30, 1997. The Company incurred significantly higher marketing costs
in markets it entered in the first half of 1997 in order to establish brand name
recognition. The Company did not enter any new markets in the first half of 1998
and, accordingly, incurred a lower marketing cost per unit for the six months
ended June 30, 1998.
General and Administrative Expenses. General and Administrative Expenses
increased by 123.9% to $31.5 million for the six month period ended June 30,
1998 from $14.1 million for the six month period ended June 30, 1997. These
expenses represented 18.9% and 24.1% of total revenues for the six month periods
ended June 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. General and
Administrative Expenses also continue to reflect the inefficiencies inherent in
utilizing multiple origination and loan servicing systems. The Company is in the
process of consolidating operations to one of its current systems. 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 83.8% to $2.3 million for the six month period ended
June 30, 1998 from $1.3 million for the six month period ended June 30, 1997.
The increase was due primarily to the
25
<PAGE> 26
increase in amortization of goodwill associated with the Company's recent
acquisitions, and increased depreciation expense from the addition of used car
dealerships.
Interest Expense. Interest expense increased by 164.5% to $1.2 million in
the six month period ended June 30, 1998 from $440,000 in the six month period
ended June 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 inventory.
Income Taxes. Income taxes totaled $4.3 million and $2.0 million, which
resulted in an effective rate of 40.3% and 40.6% in the six month periods ended
June 30, 1998 and 1997, respectively.
Earnings (Loss) from Discontinued Operations. Discontinued operations
consist primarily of the Company's Cygnet Dealer Program, the Branch Office
network, the Company's bulk purchasing and loan servicing operations, and
transactions related to FMAC.
The loss from discontinued operations, net of income taxes, totaled $5.3
million for the six months ended June 30, 1998 compared to earnings of $4.7
million for the six months ended June 30, 1997. The loss from discontinued
operations for the six months ended June 30, 1998 was comprised of a $487,000
loss from operations, net of income taxes, of discontinued operations and a loss
of $4.8 million from the closure of 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 in the six months ended June 30, 1997.
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 six month periods
ended June 30, 1998 and 1997, in thousands.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period................. $ 6,153 $ 9,223 $ 10,356 $ 1,625
Provision for Credit Losses.................. 14,274 4,848 29,308 8,109
Allowance on Acquired Loans.................. -- 6,708 -- 15,309
Reduction Attributable to Loans Sold......... (13,082) (8,414) (30,722) (11,082)
Net Charge Offs.............................. (1,395) (2,436) (2,992) (4,032)
-------- ------- -------- --------
Balance, End of Period....................... $ 5,950 $ 9,929 $ 5,950 $ 9,929
======== ======= ======== ========
Allowance as Percent of Period End
Balances................................... 18.5% 23.3% 18.5% 23.3%
======== ======= ======== ========
Charge off Activity:
Principal Balances......................... $ (2,069) $(2,954) $ (4,332) $ (5,216)
Recoveries, Net............................ 674 518 1,340 1,184
-------- ------- -------- --------
Net Charge Offs.............................. $ (1,395) $(2,436) $ (2,992) $ (4,032)
======== ======= ======== ========
Net Charge Offs as % of Average Principal
Outstanding................................ 2.97% 4.2% 5.0% 10.4%
======== ======= ======== ========
</TABLE>
The Allowance on contracts was 18.5% of outstanding principal balances as
of June 30, 1998 and December 31, 1997 and 23.3% at June 30, 1997. The Allowance
at June 30, 1997 was significantly effected by the Seminole portfolio
acquisition in which the Company obtained $9.0 million of discount acquired on a
total
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<PAGE> 27
loan portfolio of $31.1 million, resulting in a significant increase in the
Allowance as a percentage of outstanding principal balances.
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 32.6%
for the three month period ended June 30, 1998 compared to 29.0% for the three
month period ended June 30, 1997. Recoveries as a percentage of principal
balances charged off for the six month periods ended June 30, 1998 and 1997
averaged 31.0% and 22.7%, 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 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 July 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 customer before charge off. Additionally, set forth is the
percent of principal reduction for each pool since inception and cumulative
total net losses incurred (TLI). Such data contains a revision of previously
reported data as a result of a recently detected computational error.
27
<PAGE> 28
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% x 27.9% 83.6%
3rd Quarter................. $11,082 1.6% 7.1% 13.1% 21.8% 26.0% -- 26.5% 77.4%
4th Quarter................. $10,817 1.6% 8.9% 16.4% 24.8% x -- 27.9% 71.7%
1997:
1st Quarter................. $16,279 2.2% 10.6% 17.6% 24.3% -- -- 25.4% 64.0%
2nd Quarter................. $25,875 1.5% 10.0% 16.1% x -- -- 21.7% 50.9%
3rd Quarter................. $32,147 1.3% 8.5% 13.4% -- -- -- 17.0% 37.6%
4th Quarter................. $42,529 1.5% 7.1% x -- -- -- 11.7% 26.8%
1998:
1st Quarter................. $69,708 1.0% x -- -- -- -- 5.7% 14.4%
2nd Quarter................. $66,908 x -- -- -- -- -- 0.5% 2.5%
</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>
June 30, 1998:
31 to 60 days............................................. 1.1% 3.6% 3.2%
61 to 90 days............................................. 2.2% 1.5% 1.6%
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 June 30, 1998 and December 31, 1997.
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
28
<PAGE> 29
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 June 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 six
month period ended June 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 remaining allowance for credit losses inherent in the securitization
assumptions as a percentage of the remaining principal balances of securitized
contracts was approximately 24.1% as of June 30, 1998, compared to 17.9% as of
December 31, 1997. There can be no assurance that the charge taken by the
Company 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 until the Split-up is complete 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 Provided by Operating Activities decreased by 53.5%
or $6.5 million to $5.6 million for the six month period ended June 30, 1998
from $12.1 million in the six month period ended June 30, 1997. The decrease was
primarily due to the loss from discontinued operations.
The Net Cash Provided by Investing Activities increased by 110.0% or $34.2
million to $3.1 million in the six months ended June 30, 1998 from $31.1 million
Used In Investing Activities in the six months ended June 30, 1997. The increase
was a result of the Company receiving cash proceeds of $21.8 million from the
sale of property and equipment during the six months ended June 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 six months ended June 30, 1997. The Company paid cash totaling $18.1 million
for acquired assets during the six months ended June 30, 1997 and $0 in the
comparable period in 1998. In addition, the Increase in Net Cash Provided by
Investing Activities was effected by an increase in Investments Held in Trust
and a decrease in the purchase of Property and Equipment.
29
<PAGE> 30
The Company's Net Cash Used In Financing Activities decreased 108.5% or
$56.5 million to $4.4 million in the six month period ended June 30, 1998
compared to $52.1 million Net Cash Provided by Financing Activities in the six
month period ended June 30, 1997. This decrease was primarily the result of the
$88.7 million in proceeds from the Company's sale of common stock in the six
month period ended June 30, 1997, and a decrease in the net repayment of notes
payable.
The Company's Net Cash Used in Discontinued Operations decreased by 40.1%
or $4.1 million to $6.2 million in the six month period ended June 30, 1998 from
$10.4 million in the six month period ended June 30, 1997 due primarily to a
decrease in finance receivables originated and retained by the discontinued
operations.
Revolving Facility. The Company maintains a revolving credit facility (the
"Revolving Facility") with General Electric Capital Corporation ("GE Capital")
that has a maximum commitment of up to $100.0 million. 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 and up to 86.0% of the
principal balance of eligible contracts originated by the Branch Offices.
However, an amount up to $10 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 December 1998. The facility is secured by substantially all of the
Company's assets. As of June 30, 1998, the Company's borrowing capacity under
the Revolving Facility was $58.2 million, the aggregate principal amount
outstanding under the Revolving Facility was approximately $41.8 million, and
the amount available to be borrowed under the facility was $10.6 million. The
Revolving Facility bears interest at the 30-day LIBOR plus 3.15%, payable daily
(total rate of 8.80% as of June 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; and (viii) engage in
certain transactions with affiliates. These covenants also require the Company
to maintain specified financial ratios, including a debt ratio of 2.1 to 1 and a
net worth of at least $75,000,000, 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 which the Company failed to satisfy during
the six month period ended June 30, 1998. This was primarily as a result of the
charges taken in the first quarter of 1998 with respect to the closure of the
Branch Office network, for which the Company incurred a loss from discontinued
operations of $5.6 million (net of income tax benefit of $3.5 million.) GE
Capital has waived the covenant violation as of June 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. Further, the Revolving Facility does not
contain provision for borrowing against the Company's inventory. The Company
considers these assets to 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 inventory.
Subordinated Indebtedness and Preferred Stock. Prior to its public
offering in June 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 June 30, 1998 and December 31, 1997, respectively. Prior
to June 21, 1996, these borrowings
30
<PAGE> 31
accrued interest at an annual rate of 18.0%. Effective June 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. 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. It is
the Company's intent to pay off the $10.0 subordinated Note Payable to Verde at
the time the Split-up is effectuated.
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.
As of July 20, 1998, Cygnet secured a subordinated loan of $5 million from
a third party lender for a three-year term. On the effective date of the
Split-up transaction, Cygnet will be required to issue to the lender warrants to
purchase up to 115,000 shares of Cygnet common stock at an exercise price of
$8.40 per share, subject to a call feature by Cygnet if the closing price of the
Cygnet common stock equals or exceeds $13.44 per share for a period of 20
consecutive trading days. The loan is guaranteed by the Company. Also on the
effective date of the Split-up transaction, the Company's guarantee will be
released. If the Split-up has not occurred by December 31, 1998, and the loan is
not repaid, the Company 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.
Additional Financing. On January 28, 1998, the Company executed a $7.0
million note payable which accrued interest at 9.5% per annum. The Company paid
this note payable in full on April 1, 1998.
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 six month period ended June 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 June 30, 1997. Since June 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
will become the exclusive securitization agent for the Company for up to $1.0
billion of AAA-rated surety wrapped securities as part of the Company's ongoing
Securitization Program.
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
31
<PAGE> 32
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.
Transactions Regarding First Merchants Acceptance Corporation. The Company
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, 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.
It is the Company's intent to transfer substantially all of the rights and
liabilities related to the FMAC transaction (except cash received by the Company
prior to the Effective Date) to Cygnet in conjunction with the Split-up.
However, the Company will remain liable as to certain liabilities in the FMAC
transaction. For additional information concerning the FMAC transaction, and the
liabilities that will be retained by the Company with respect thereto following
the Split-up, see "Risk Factors -- Risks Relating to the FMAC Transaction." The
transactions described above were consummated primarily by the Company's
discontinued operations.
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<PAGE> 33
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 an
adverse affect on the Company.
Capital Expenditures and Commitments. The Company is pursuing an
aggressive growth strategy. In the first six months of 1998, the Company has
opened eight new dealerships. Further, the Company currently has 10 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 in an amount up to $21.5
million to be adjusted downward from time to time. As of June 30, 1998, the
maximum commitment was reduced to $12.4 million and the outstanding balance on
the DIP totaled $9.8 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 FMAC commitment will be transferred to Cygnet
in conjunction with the Split-up as described generally under "Risk
Factors -- Risks to the Company Relating to the FMAC Transaction."
The Company intends to finance these expenditures 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%. On or about May 14, 1998, the Company completed the first
closing of the sales-leaseback transaction. In conjunction with this closing,
the Company sold property for approximately $21.8 million. Substantially all of
the proceeds from the sale were utilized to pay down the Revolving Facility.
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. As of the date of filing of this Form 10-Q, the
Company had repurchased 28,000 shares of common stock.
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, subject to approval of the stockholders
at the upcoming 1998 Annual Meeting ("Existing Grants"). These options contain
time and price vesting requirements. The Existing 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
33
<PAGE> 34
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 Existing Grants will become fully
vested on January 15, 2005, unless sooner exercised or forfeited. 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.
Reliance Transaction. In February 1998, the Company 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. It is the Company's intent to
transfer all contract rights and liabilities related to, and assets (except cash
received by the Company prior to the Effective Date) obtained in, the Reliance
transaction to the Company's discontinued operations in conjunction with the
Split-up. However, the Company will remain liable as to certain obligations in
the Reliance transaction. See "Risk Factors -- Risks Relating to the Reliance
Transaction." The following is a general description of the Reliance
transaction.
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) ail 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.
Year 2000. The Company has commenced certain limited reviews and
assessments of its computer systems in order to evaluate its exposure to year
2000 issues. The Company has incurred costs and expenses of approximately
$25,000 to date in evaluating its year 2000 issues. The Company expects to make
modifications
34
<PAGE> 35
or changes to its computer information systems to enable proper processing of
transactions relating to the year 2000 and beyond. The Company estimates total
costs and expenses to be between $500,000 to $1,000,000 to modify its existing
systems and make it year 2000 compliant. The Company considers year 2000 costs
and expenses to be material to its operation and financial position. The Company
will evaluate appropriate courses of action, including replacement of certain
systems whose associated costs would be recorded as assets and subsequently
amortized, or modification of its existing systems which costs would be expended
as incurred. Resolution of all year 2000 issues is critical to the Company's
business. There can be no assurance that the Company will be able to completely
resolve all year 2000 issues in a timely fashion or that the ultimate cost to
identify and implement solutions to all year 2000 problems will not be material
to the Company.
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 June 30, 1998, the Company leased substantially all of
its facilities, of which 39 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 30,000 square feet of leased
space in Phoenix, Arizona. Following the Split-up, the Company expects to move
to new office space under a lease of similar terms and conditions, at or near
the current location.
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 June 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 June 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.
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 are 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.
35
<PAGE> 36
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 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. Although the amount of the ultimate
exposure of the above, if any, cannot be determined at this time, the Company,
based on the advice of counsel, does not expect the final outcome to have a
material adverse effect on the Company. 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 these 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.
(c) During the three months ended March 31, 1998, warrants to purchase
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 to certain lenders in connection with the execution of loan
documents with such lenders. For certain stock option grants during the first
quarter of 1998, see a description of stock option grants to key officers of the
Company. Further, the Company has executed certain agreements with Reliance
regarding the issuance of warrants. See a description of these transaction
herein under "Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Continuing Company Businesses -- Liquidity and
Capital Resources". For the three month period beginning April 1, 1998 and
ending June 30, 1998, there were no equity securities of the Company sold by it
during such period that were not registered under the Securities Act of 1933.
(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.
None.
ITEM 5. OTHER INFORMATION.
On August 4, 1998, the Company announced that the registration statement
filed with the Securities and Exchange Commission ("SEC") by Cygnet, relating to
the previously disclosed plan to separate UDC into two publicly traded companies
(i.e., the Split-up), was declared effective by the SEC on August 4, 1998. As
discussed above in this Form 10-Q, as part of the Split-up, Cygnet would acquire
and operate substantially all of the non-dealer finance operations currently
conducted by the Company, including its bulk purchasing and
36
<PAGE> 37
certain servicing operations and its third-party dealer financing operations.
The Company would retain and continue to operate its "buy here-pay here"
dealerships and to service the finance receivables generated by those
dealerships. If the Split-up transaction were completed, the Company and Cygnet
would be owned, operated and managed as separate public companies. The Cygnet
registration statement (File No. 333-57323) provides for a rights offering (the
"Rights Offering"), which includes, among other things, (a) the distribution of
transferable rights to holders of Company common stock to subscribe for shares
of common stock of Cygnet (i.e., the Rights), and (b) the sale of shares of
Cygnet common stock upon exercise of these Rights. Pursuant to the Rights
Offering, each holder of Company common stock as of August 17, 1998 would
receive one Right for every four shares of Company common stock. Each Right
would represent the right to subscribe for one share of Cygnet common stock at
an exercise price of $7.00. The Rights Offering is expected to commence on or
about September 1, 1998, assuming that the Company's stockholders approve the
Split-up transaction at the Annual Meeting of Stockholders of the Company
scheduled for Monday, August 31, 1998 at 4:00 p.m. in Phoenix. The Split-up
transaction, including the transfer of assets from the Company to Cygnet and the
issuance of the Rights and Cygnet common stock, is subject to a number of
contingencies and incentives. These contingencies and incentives include,
without limitation, the approval of the Split-up by the stockholders of the
Company, the finalization of appraisals of the assets to be transferred, certain
income tax consequences of the Rights Offering and the sale of the transferred
assets from the Company to Cygnet, and various other consents and approvals.
There can be no assurance that all of the conditions to the Split-up or the
Rights Offering will be satisfied or that the Split-up will be effected or the
Rights will be issued. See "Part I -- Item 2. Management's Discussion and
Analysis of Results of Operations and Financial Condition of the Continuing
Company Businesses. -- Split-up of the Company."
The above summary of the Split-up and Rights Offering includes statements
that may constitute forward-looking statements, usually containing the words
"believe," "estimate," "project," "expects" or similar expressions. These
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements inherently
involve risks and uncertainties that could cause actual results to differ
materially from the forward-looking statements. By making these forward-looking
statements, the Company undertakes no obligation to update these statements for
revisions or changes after the date of this Form 10-Q. Factors that would cause
or contribute to such differences include, but are not limited to, factors
detailed in the sections and subsections entitled "Risk Factors," "Factors That
May Affect Future Results and Financial Condition" and "Factors That May Affect
Future Stock Performance" in the Company's most recent reports on Form 10-K and
Form 10-Q (including this Form 10-Q), factors detailed in the section "Risk
Factors" in the Company's definitive proxy statement dated August 4, 1998, and
elsewhere in the Company's Securities and Exchange Commission filings. In
addition, the Rights Offering is subject to a number of additional risks and
uncertainties, and for a more complete discussion of these matters, see the
"Risk Factors" section of the Cygnet prospectus dated August 4, 1998.
The registration statement relating to the Cygnet securities (Rights and
common stock) has been filed with and declared effective by the Securities and
Exchange Commission. This discussion of the Split-up and the related Rights
Offering shall not constitute an offer to sell or the solicitation of an offer
to buy nor shall there be any sale of these securities in any state in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state. The securities sold
in the Rights Offering will be offered only by means of a Cygnet prospectus.
Copies of the definitive notice and proxy statement of the Company relating to
the Split-up and copies of the prospectus of Cygnet relating to the Rights
Offering may be obtained by contacting Steven P. Johnson, General Counsel of the
Company, 2525 E. Camelback Road, Phoenix, AZ 85016. A copy of the prospectus is
also being distributed to stockholders of the Company with the notice and proxy
statement, pursuant to which the Company's stockholders will vote on the
Split-up. For more complete information about the Split-up and the related
Rights Offering, and their impact on the Company and Cygnet obtain a definitive
proxy statement and prospectus as indicated above. Read these documents
carefully before you invest or send money.
37
<PAGE> 38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<S> <C> <C>
Exhibit 3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant (as of May 15, 1997)
Exhibit 4 -- Certificate of Designation of the Preferred Stock (par value
$.001 per share) (filed as part of Exhibit 3.1)
Exhibit 10.1 -- Letter Agreement for Modification of Terms of Employment
between Registrant and Steven A. Tesdahl, dated May 21,
1998*
Exhibit 10.2 -- Amended and Restated Employment Agreement between Registrant
and Walter Vonsh, dated May 26, 1998*
Exhibit 10.3 -- Letter Agreement for Terms of Employment between Cygnet
Financial Corporation and Gregory R.
Ciccolini, dated May 14, 1998*
Exhibit 10.4 -- Letter Agreement for Terms of Employment between Cygnet
Financial Corporation and Eric J . Splaver, dated June 12,
1998*
Exhibit 10.5 -- Service Agreement among Reliance Acceptance Corporation,
Registrant, BankAmerica Business Credit, Inc. and certain
other parties dated as of February 9, 1998
Exhibit 10.6 -- Agreement of Understanding among Reliance Acceptance Group
Inc., Reliance Acceptance Corporation and Registrant, dated
as of February 9, 1998
Exhibit 10.7 -- Purchase and Sale-Leaseback Agreement and Joint Escrow
Instructions between Champion Acceptance Corporation, Ugly
Duckling Car Sales, Inc., Ugly Duckling Car Sales New
Mexico, Inc., Ugly Duckling Car Sales Florida, Inc. and Ugly
Duckling Car Sales Texas, L.L.P., date as of May 13, 1998
Exhibit 11 -- Statement re Computation of Per Share Earnings (see Note 5
to Notes to Condensed Consolidated Financial Statements)
Exhibit 27 -- Financial Data Schedule
Exhibit 99 -- Cautionary Statement Regarding Forward Looking Statements
and Risk Factors
</TABLE>
- ---------------
* Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
During the second quarter 1998, the Company filed two reports on Form 8-K.
The first report on Form 8-K, dated June 11, 1998 and filed June 16, 1998,
pursuant to Items 5 and 7 (1) reported additional information on the Company's
strategic evaluation of its businesses and operations, including additional
information on the Split-up of the Company whereby Cygnet would operate all
non-dealership operations, and (2) filed as an exhibit to the Form 8-K
retroactively restating, in accordance with applicable accounting literature,
certain historical consolidated financial statements reflecting the Company's
discontinued operations, including, without limitation, the Split-up businesses
of the Company. The second report on Form 8-K, dated June 19, 1998 and filed
June 25, 1998, pursuant to Item 5 and 7(1) reported the filing of an initial
registration statement for Cygnet in connection with the Split-up of the Company
and the related Rights Offering, and (2) filed as an exhibit to the Form 8-K,
Ugly Duckling Corporation's press release dated June 22, 1998 titled "Ugly
Duckling Corporation Split-up: Cygnet Financial Corporation Files Initial
Registration Statement to Register Securities for Split-up." After the second
quarter 1998, the Company has, thus far, not filed any reports on Form 8-K.
38
<PAGE> 39
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: August 10, 1998
39
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the
Registrant
4 Certificate of Designation of the Preferred Stock (par value
$.001 per share) (filed as part of Exhibit 3.1)
10.1 Letter Agreement for Modification of Terms of Employment
between Registrant and Steven A. Tesdahl, dated May 21,
1998*
10.2 Amended and Restated Employment Agreement between Registrant
and Walter Vonsh, dated May 26, 1998*
10.3 Letter Agreement for Terms of Employment between Cygnet
Financial Corporation and Gregory R. Ciccolini, dated May
14, 1998*
10.4 Letter Agreement for Terms of Employment between Cygnet
Financial Corporation and Eric J. Splaver, dated June 12,
1998*
10.5 Service Agreement among Reliance Acceptance Corporation,
Registrant, BankAmerica Business Credit, Inc. and certain
other parties dated as of February 9, 1998
10.6 Agreement of Understanding among Reliance Acceptance Group
Inc., Reliance Acceptance Corporation and Registrant, dated
as of February 9, 1998
10.7 Purchase and Sale-Leaseback Agreement and Joint Escrow
Instructions between Champion Acceptance Corporation, Ugly
Duckling Car Sales, Inc., Ugly Duckling Car Sales New
Mexico, Inc., Ugly Duckling Car Sales Florida, Inc. and Ugly
Duckling Car Sales Texas, L.L.P., date as of May 13, 1998
11.0 Statement re Computation of Per Share Earnings (see Note 5
to Notes to Condensed Consolidated Financial Statement)
27 Financial Data Schedule
99 Cautionary Statement Regarding Forward Looking Statements
and Risk Factors
</TABLE>
- ---------------
* Management contract or compensatory plan, contract or arrangement.
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
UGLY DUCKLING CORPORATION
AMENDED AND RESTATED AS OF
May 15, 1997
ARTICLE ONE
The name of the corporation is UGLY DUCKLING CORPORATION.
ARTICLE TWO
The address of the corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is Corporation Trust
Company.
ARTICLE THREE
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE FOUR
The Corporation shall have perpetual existence.
ARTICLE FIVE
A. The corporation shall be authorized to issue two classes of
shares of stock to be designated, respectively, "Common Stock" and "Preferred
Stock"; the total number of shares of Common Stock that the corporation shall
have authority to issue shall be 100,000,000, and each of such shares shall have
a par value of $.001; and the total number of shares of Preferred Stock that the
corporation shall have the authority to issue shall be 10,000,000, and each of
such shares shall have a par value of $.001.
B. Shares of Preferred Stock may be issued from time to time in
one or more series as may from time to time be determined by the Board of
Directors of the corporation, each of said series to be distinctly designated.
The voting powers, preferences and relative, participating, optional, and other
special rights, and the qualifications, limitations, or restrictions thereof, if
any, of each such series may differ from those of any and all other series of
Preferred Stock at any time outstanding, and the
1
<PAGE> 2
Board of Directors is hereby expressly granted authority to fix or alter, by
resolution or resolutions, the designation, number, voting powers, preferences,
and relative, participating, optional, and other special rights, and the
qualifications, limitations, and restrictions thereof, of each such series.
C. The corporation hereby designates 1,000,000 shares of
Preferred Stock as Series A Preferred Stock, which shares shall have the
following rights, powers, privileges, preferences, designations and limitations:
1. Designation and Rank.
The Series A Preferred Stock shall rank prior to the Common
Stock and to all other classes and series of equity securities of the
corporation now or hereafter authorized, issued or outstanding (such other
classes and series of equity securities collectively may be referred to herein
as the "Junior Stock"), other than any classes or series of equity securities of
the corporation ranking on a parity with (the "Parity Stock") or senior to (the
"Senior Stock") the Series A Preferred Stock as to dividend rights and rights
upon liquidation, winding up or dissolution of the corporation. The Series A
Preferred Stock shall be junior to all outstanding debt of the corporation. The
Series A Preferred Stock shall be subject to creation of Senior Stock, Parity
Stock and Junior Stock to the extent not expressly prohibited herein, and the
provisions hereof.
2. Dividends.
A. The holders of record of shares of the Series A Preferred
Stock shall be entitled to receive, when, as and if declared by the Board of
Directors of the corporation, out of any funds of the corporation legally
available therefor, cumulative cash dividends ("Dividends") at the per annum
rates set forth below, which shall accrue from December 31, 1995, and be payable
quarterly in arrears on the last day of March, June, September and December, in
each year, commencing March 31, 1996, or, if such day is a non-business day, on
the next business day, without interest (each of such dates, a "Dividend Payment
Date").
January 1, 1996 - December 31, 1996 12%
January 1, 1997 - December 31, 1997 13%
January 1, 1998 - December 31, 1998 14%
January 1, 1999 - December 31, 1999 15%
January 1, 2000 - December 31, 2000 16%
January 1, 2001 - December 31, 2001 17%
January 1, 2002 and thereafter 18%
Each declared Dividend shall be payable to holders of record as they
appear on the stock books of the corporation at the close of business on the
applicable record date, which shall be not more than 30 nor less than 10
calendar days preceding the Dividend Payment Date therefor, as determined by the
Board or a duly authorized committee
2
<PAGE> 3
thereof (each of such dates, a "Record Date"). Dividends on each share of Series
A Preferred Stock shall accrue and be cumulative from the date of issuance
thereof, whether or not there shall be profits, surplus or other funds of the
corporation legally available for the payment of such Dividends at the time such
Dividends shall accrue or become due and whether or not such Dividends are
declared. Accrued and unpaid Dividends for any prior Dividend periods may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to holders of record on such date, not exceeding 45 days preceding the
payment date thereof, as may be fixed by the Board.
B. Unless full Dividends on the Series A Preferred Stock at the
rates set forth in paragraph C.2a above shall have been paid or declared and a
sum sufficient for the payment thereof set apart: (i) no dividend whatsoever
shall be paid or declared, and no distribution shall be made, on any Common
Stock or any other Junior Stock and (ii) no Common Stock shall be purchased,
redeemed or acquired by the corporation and no monies shall be paid into or set
aside or made available for a sinking fund for the purchase, redemption or
acquisition thereof; provided, however, that this restriction shall not apply to
the repurchase of shares of Common Stock or any other Junior Stock from
directors, officers or employees of the corporation pursuant to agreements under
which the corporation has the option to repurchase such shares upon the
occurrence of certain events, including the termination of employment.
3. Liquidation Preference.
A. In the event of any liquidation, dissolution or winding up of
the corporation, either voluntarily or involuntarily, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the corporation to the
holders of Common Stock of the corporation or any other Junior Stock, an amount
equal to the Issuance Price for each share of Series A Preferred Stock plus all
Dividends due and not paid on such shares (the "Liquidation Payment"). If upon
such liquidation, dissolution or winding up of the corporation the assets of the
corporation are insufficient to pay the Liquidation Payment in full on each
share of Series A Preferred Stock, then such assets as are available for
distribution to the holders of the Series A Preferred Stock shall be distributed
ratably among such holders. Unless specifically designated as Junior Stock or
Senior Stock with respect to the distribution of assets, all other series or
classes of Preferred Stock shall rank on a parity with the Series A Preferred
Stock with respect to the distribution of assets. All of the preferential
amounts to be paid to the holders of the Series A Preferred Stock and any Parity
Stock under this paragraph shall be paid or set apart for payment before the
payment or setting apart for payment of any amount for or the distribution of
any assets of the corporation to the holders of the Common Stock in connection
with such liquidation, dissolution or winding up.
B. A consolidation or merger of the corporation with or into any
other corporation where less than 50% of the outstanding voting securities of
the surviving corporation are held by the shareholders of the corporation
existing
3
<PAGE> 4
immediately prior to the consolidation or merger or a sale of all or
substantially all of the assets of the corporation, shall be deemed to be a
liquidation, dissolution or winding up of the corporation within the meaning of
this paragraph C.3.
4. Voting Rights.
A. Except as provided in C.4.b. below, or as otherwise from time
to time required by applicable law, the shares of Series A Preferred Stock shall
not entitle the holder thereof to any voting rights in the corporation.
B. The approval of 66 2/3% of the outstanding shares of the
Series A Preferred Stock, voting separately as a class, shall be required to
authorize any action of the corporation which (i) changes the rights,
preferences or privileges of the shares of the Series A Preferred Stock, or (ii)
creates any new class of stock having preference over or being on a parity with
the shares of the Series A Preferred Stock as to distributions upon the
liquidation, winding up or dissolution of the corporation. If Dividends for an
entire calendar year have not been declared and paid within 30 days after the
end of the calendar year, then until said Dividends are paid, holders of Series
A Preferred Stock shall be entitled to vote in the election of members of the
Board of Directors of the corporation. In such event, each share of Series A
Preferred Stock shall entitle the holder thereof to ten votes in the election of
members of the Board of Directors and said votes may be cumulated in accordance
with applicable law. At any time that holders of Series A Preferred Stock are
entitled to vote in the election of members of the Board of Directors, the
holders of 25% of the outstanding shares of the interest of Series A Preferred
Stock may call a special meeting of the Board of Directors in accordance with
the Bylaws of the corporation.
5. Right of Redemption. The corporation shall have the right to
redeem the Series A Preferred Stock, in whole or in part, from time to time at
any time, except as otherwise prohibited by law, at the Issuance Price per
share, plus an amount equal to all accrued and unpaid Dividends (whether or not
any such Dividend has been declared, but without interest thereon) to the date
such payment is made available in full to holder of shares of Series A Preferred
Stock (the "Redemption Price"). If fewer than all of the shares of Series A
Preferred Stock are to be redeemed at any time, selection of shares for
redemption shall be made by the Board of Directors of the corporation on a pro
rata basis or in such other equitable manner as the Board shall determine. The
corporation shall cause a notice of the record date set by the Board of
Directors for the payment of the Redemption Price (the "Redemption Date") to be
mailed to the holders of the Series A Preferred Stock to be redeemed at least 30
days prior to the Redemption Date. Following the Redemption Date, unless this
corporation defaults in payment the Redemption Price on the Redemption Date, the
holders of the shares of Series A Preferred Stock called for redemption shall
cease to have any rights as stockholders of the corporation with respect to such
shares called for redemption except the right to receive the Redemption Price
upon surrender of the certificate or certificates representing the shares of
Series A Preferred Stock called for redemption, endorsed for
4
<PAGE> 5
transfer to the corporation, and such shares shall not be deemed to be
outstanding for any purpose whatsoever.
6. Transfer. The corporation shall keep a register in which the
corporation shall register the transfer of any shares of Series A Preferred
Stock. Upon presentment for registration of transfer of a certificate
representing shares of Series A Preferred Stock (accompanied by such stock
assignments or stock powers as the corporation may require), the corporation
shall cancel such certificate and shall execute and issue to the transferor
and/or transferee new certificates aggregating a number of shares of Series A
Preferred Stock as is equal to the number represented by the canceled
certificate.
ARTICLE SIX
The power to adopt, amend, and repeal any or all of the Bylaws of the
corporation is reserved to the Board of Directors of the corporation.
ARTICLE SEVEN
Election of members to the Board of Directors need not be by written
ballot unless the Bylaws of the corporation shall so provide.
Meetings of the stockholders of the corporation may be held within or
without the State of Delaware, as the Bylaws may provide. The books of the
corporation may be kept (subject to any provision contained in the Delaware
General corporation Law) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the corporation.
ARTICLE EIGHT
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended. Any repeal or modification of this
provision shall not adversely affect any right or protection of a director of
the corporation existing at the time of such repeal or modification. The
limitation of liability provided herein shall continue after a director has
ceased to occupy such position as to acts or omissions occurring during such
director's term of terms of office.
5
<PAGE> 6
ARTICLE NINE
A. The corporation shall to the fullest extent authorized by the
Delaware General Corporation Law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the corporation to provide broader indemnification rights than such law
permitted the corporation to provide prior to such amendment), indemnify and
hold harmless any person who was or is a party, or is threatened to be made a
party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "Indemnitee") against
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
excise taxes or penalties paid in connection with the Employee Retirement Income
Security Act of 1974, as amended, and amounts paid in settlement) reasonably
incurred or suffered by such Indemnitee in connection therewith; provided,
however, that except as provided in this section with respect to proceedings to
enforce rights to indemnification, the corporation shall indemnify any such
Indemnitee in connection with a proceeding (or part thereof) initiated by such
Indemnitee only if such proceeding or part thereof was authorized by the board
of directors of this corporation.
B. The right to indemnification conferred in this section shall include
the right to be paid by the corporation the expenses (including attorneys' fees)
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that, if the Delaware General Corporation Law requires, an
advancement of expenses incurred by an Indemnitee in his capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such Indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the corporation of an undertaking, by
or on behalf of such Indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is not
further right to appeal that such Indemnitee is not entitled to be indemnified
for such expenses under this section or otherwise. The rights to indemnification
and to the advancement of expenses conferred in this section shall be contract
rights and such rights shall continue as to an Indemnitee who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
Indemnitee's heirs, executors and administrators.
C. If a claim under the two preceding paragraphs of this section is not
paid in full by the corporation within sixty (60) days after a written claim has
been received by the corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
(20) days, the Indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim.
6
<PAGE> 7
If successful in whole or in part in any such suit, or in a suit brought by the
corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the Indemnitee shall be entitled to be paid also the expense of
prosecuting or defending such suit. In (i) any suit brought by the Indemnitee to
enforce a right to indemnification hereunder (but not in a suit brought by the
Indemnitee to enforce a right to an advancement of expenses) and (ii) in any
suit brought by the corporation to recover an advancement of expenses pursuant
to the terms of an undertaking, the corporation shall be entitled to recover
such expenses upon a final adjudication that the Indemnitee has not met any
applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
Indemnitee is proper in the circumstances because the Indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its board of
directors, independent legal counsel, or its stockholders) that the Indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the Indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the Indemnitee, be a defense to such suit. In any suit
brought by the Indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or brought by the corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the Indemnitee is not entitled to be indemnified, or to such
advancement of expenses under this section or otherwise shall be on the
corporation.
D. The rights to indemnification and advancement of expenses conferred
in this section shall not be exclusive of any other rights which any person may
have or hereafter acquire under any statute, the corporation's certificate of
incorporation, as it may be amended or restated from time-to-time, any
agreement, vote of stockholders or disinterested directors, or otherwise. No
amendment or repeal of this Article Eight shall apply to or have any effect on
any right to indemnification provided hereunder with respect to any acts or
omissions occurring prior to such amendment or repeal.
E. The corporation shall have the power to purchase and maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the corporation or another corporation, partnership, joint venture,
trust or other enterprise (including an employee benefit plan) against any
expense, liability or loss, whether or not the corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law. The corporation may also create a trust fund,
grant a security interest and/or use other means (including, but not limited to
letters of credit, surety bonds and/or similar arrangements), as well as enter
into contracts providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to any or
all of the foregoing, to ensure the payment of such amounts as may become
necessary to effect indemnification as provided therein, or elsewhere.
7
<PAGE> 8
F. For purposes of this section, references to the "corporation" shall
include any subsidiary of this corporation from and after the acquisition
thereof by this corporation, so that any person who is a director, officer,
employee or agent of such subsidiary after the acquisition thereof by this
corporation shall stand in the same position under the provisions of this
section as such person would have had such person served in such position for
this corporation.
G. The corporation may, to the extent authorized from time to time by
the board of directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the corporation to the fullest extent of
the provisions of this section with respect to the indemnification and
advancement of expenses of directors and officers of the corporation.
ARTICLE TEN
The name and mailing address of the incorporator is Steven P. Johnson,
2525 East Camelback Road, Phoenix, Arizona 85016.
ARTICLE ELEVEN
The number of directors constituting the initial Board of Directors of
the corporation is one (1). The size of the Board of Directors may be increased
or decreased in the manner provided in the Bylaws of the corporation. All
corporate powers of the corporation shall be exercised by or under the direction
of the Board of Directors except as otherwise provided herein or by law. The
name and address of the persons who are to serve as directors until the first
annual meeting of stockholders or until their successors are elected and
qualified are:
8
<PAGE> 9
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Ernest C. Garcia, II 2525 East Camelback Road, Suite 510
Phoenix, Arizona 85016
</TABLE>
ARTICLE TWELVE
Subject to any conditions imposed by law, the corporation
expressly denies the application of the Arizona Corporate Takeover Laws, Arizona
Revised Statutes Sections 10-2701 et seq., or any successor thereto.
ARTICLE THIRTEEN
The Corporation hereby elects not to be governed by Section 203
(Business Combinations with Interested Stockholders) of the Delaware General
Corporation Law.
ARTICLE FOURTEEN
The corporation reserves the right to amend, alter, change, or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by the Delaware General corporation Law.
DATED this 24 day of April, 1996, As amended on April 1997 and May 1997.
9
<PAGE> 10
CERTIFICATE OF DESIGNATIONS
OF THE
SERIES B PREFERRED STOCK
(Par Value $.001 Per Share)
OF
UGLY DUCKLING CORPORATION
--------------------------------
Pursuant to Section 151(g) of the
Delaware General Corporation Law
--------------------------------
The undersigned duly authorized officer of UGLY DUCKLING CORPORATION, a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "Company"), pursuant to Section 151(g) thereof, DOES
HEREBY CERTIFY:
That the Certificate of Incorporation of the Company authorizes the
creation of up to 20,000,000 shares of the Company's common stock, par value
$.001 per share ("Common Stock") and 10,000,000 shares of the Company's
preferred stock, par value $.001 per share (such preferred stock, together with
all other preferred stock of the Company the creation of which has been or is in
the future authorized by the Certificate of Incorporation, the "Preferred
Stock"); and
That pursuant to the authority conferred upon the Board of Directors
(the "Board") by the Certificate of Incorporation of the Company, on June 12,
1996, the Board adopted the following resolution creating a series of 1,000,000
shares of Preferred Stock designated as set forth below:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation of the
Company (the "Certificate of Incorporation"), and the General Corporation Law of
the State of Delaware, the issuance of a Series B Preferred Stock, which shall
consist of 1,000,000 shares of the 10,000,000 shares of Preferred stock which
the Company now has authority to issue, be, and the same hereby is, authorized,
and the Board hereby fixes the powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations, or restrictions thereof, of the shares of such series (in addition
to the powers, designations, preferences and relative, participating, optional,
or other special rights, and the qualifications, limitations, or restrictions
thereof, set forth in the Certificate of Incorporation which may be applicable
to the Preferred Stock) authorized by this resolution as follows:
A
<PAGE> 11
1. Designation and Rank.
The Series B Preferred Stock shall rank prior to the Common
Stock and to all other classes and series of equity securities of the
corporation now or hereafter authorized, issued, or outstanding (such other
classes and series of equity securities collectively may be referred to herein
as the "Junior Stock"), other than any classes or series of equity securities of
the corporation ranking on a parity with (the "Parity Stock") or senior to (the
"Senior Stock") the Series B Preferred Stock as to dividend rights and rights
upon liquidation, winding up, or dissolution of the corporation. The Series B
Preferred Stock shall be junior to all outstanding debt of the corporation. The
Series B Preferred Stock shall be subject to creation of Senior Stock, Parity
Stock and Junior Stock to the extent not expressly prohibited herein, and the
provisions hereof.
2. Dividends.
A. The holders of record of shares of the Series B
Preferred Stock shall be entitled to receive, when, as, and if declared by the
Board of Directors of the corporation, out of any funds of the corporation
legally available therefor, cumulative cash dividends ("Dividends") at the per
annum rates set forth below, which shall accrue from June 21, 1996, and be
payable quarterly in arrears on the last day of March, June, September and
December, in each year, commencing June 30, 1996, or, if such day is a
non-business day, on the next business day, without interest (each of such
dates, a "Dividend Payment Date").
June 21, 1996 - December 31, 1997 10%
January 1, 1998 and thereafter 12%
Each declared Dividend shall be payable to holders of record as they
appear on the stock books of the corporation at the close of business on the
applicable record date, which shall be not more than 30 nor less than 10
calendar days preceding the Dividend Payment Date therefor, as determined by the
Board or a duly authorized committee thereof (each of such dates, a "Record
Date"). Dividends on each share of Series B Preferred Stock shall accrue and be
cumulative from the date of issuance thereof, whether or not there shall be
profits, surplus, or other funds of the corporation legally available for the
payment of such Dividends at the time such Dividends shall accrue or become due
and whether or not such Dividends are declared. Accrued and unpaid Dividends for
any prior Dividend periods may be declared and paid at any time, without
reference to any regular Dividend Payment Date, to holders of record on such
date, not exceeding 45 days preceding the payment date thereof, as may be fixed
by the Board.
B. Unless full Dividends on the Series B Preferred
Stock at the rates set forth in paragraph 2.A. above shall have been paid or
declared and a sum sufficient for the payment thereof set apart: (i) no dividend
whatsoever shall be paid or declared, and no distribution shall be made, on any
Common Stock or any other Junior
B
<PAGE> 12
Stock and (ii) no Common Stock shall be purchased, redeemed, or acquired by the
corporation and no monies shall be paid into or set aside or made available for
a sinking fund for the purchase, redemption, or acquisition thereof; provided,
however, that this restriction shall not apply to the repurchase of shares of
Common Stock or any other Junior Stock from directors, officers, or employees of
the corporation pursuant to agreements under which the corporation has the
option to repurchase such shares upon the occurrence of certain events,
including the termination of employment.
3. Liquidation Preference.
A. In the event of any liquidation, dissolution, or
winding up of the corporation, either voluntarily or involuntarily, the holders
of Series B Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
corporation to the holders of Common Stock of the corporation or any other
Junior Stock, an amount equal to the Issuance Price for each share of Series B
Preferred Stock plus all Dividends due and not paid on such shares (the
"Liquidation Payment"). If upon such liquidation, dissolution, or winding up of
the corporation the assets of the corporation are insufficient to pay the
Liquidation Payment in full on each share of Series B Preferred Stock, then such
assets as are available for distribution to the holders of the Series B
Preferred Stock shall be distributed ratably among such holders. Unless
specifically designated as Junior Stock or Senior Stock with respect to the
distribution of assets, all other series or classes of Preferred Stock shall
rank on a parity with the Series B Preferred Stock with respect to the
distribution of assets. All of the preferential amounts to be paid to the
holders of the Series B Preferred Stock and any Parity Stock under this
paragraph shall be paid or set apart for payment before the payment or setting
apart for payment of any amount for or the distribution of any assets of the
corporation to the holders of the Common Stock in connection with such
liquidation, dissolution, or winding up.
B. A consolidation or merger of the corporation with
or into any other corporation where less than 50% of the outstanding voting
securities of the surviving corporation are held by the shareholders of the
corporation existing immediately prior to the consolidation or merger or a sale
of all or substantially all of the assets of the corporation, shall be deemed to
be a liquidation, dissolution, or winding up of the corporation within the
meaning of this paragraph 3.B.
4. Voting Rights.
A. Except as provided in 4.B. below, or as otherwise
from time to time required by applicable law, the shares of Series B Preferred
Stock shall not entitle the holder thereof to any voting rights in the
corporation.
B. The approval of 66 2/3% of the outstanding shares
of the Series B Preferred Stock, voting separately as a class, shall be required
to authorize any action of the corporation which (i) changes the rights,
preferences, or privileges of the
C
<PAGE> 13
shares of the Series B Preferred Stock, or (ii) creates any new class of stock
having preference over or being on a parity with the shares of the Series B
Preferred Stock as to distributions upon the liquidation, winding up, or
dissolution of the corporation. If Dividends for an entire calendar year have
not been declared and paid within 30 days after the end of the calendar year,
then until said Dividends are paid, holders of Series B Preferred Stock shall be
entitled to vote in the election of members of the Board of Directors of the
corporation. In such event, each share of Series B Preferred Stock shall entitle
the holder thereof to ten votes in the election of members of the Board of
Directors and said votes may be cumulated in accordance with applicable law. At
any time that holders of Series B Preferred Stock are entitled to vote in the
election of members of the Board of Directors, the holders of 25% of the
outstanding shares of the interest of Series B Preferred Stock may call a
special meeting of the Board of Directors in accordance with the Bylaws of the
corporation.
5. Right of Redemption. The corporation shall have the right
to redeem the Series B Preferred Stock, in whole or in part, from time to time
at any time, except as otherwise prohibited by law, at the Issuance Price per
share, plus an amount equal to all accrued and unpaid Dividends (whether or not
any such Dividend has been declared, but without interest thereon) to the date
such payment is made available in full to holders of shares of Series B
Preferred Stock (the "Redemption Price"). If fewer than all of the shares of
Series B Preferred Stock are to be redeemed at any time, selection of shares for
redemption shall be made by the Board of Directors of the corporation on a pro
rata basis or in such other equitable manner as the Board shall determine. The
corporation shall cause a notice of the record date set by the Board of
Directors for the payment of the Redemption Price (the "Redemption Date") to be
mailed to the holders of the Series B Preferred Stock to be redeemed at least 30
days prior to the Redemption Date. Following the Redemption Date, unless this
corporation defaults in payment of the Redemption Price on the Redemption Date,
the holders of the shares of Series B Preferred Stock called for redemption
shall cease to have any rights as stockholders of the corporation with respect
to such shares called for redemption except the right to receive the Redemption
Price upon surrender of the certificate or certificates representing the shares
of Series B Preferred Stock called for redemption, endorsed for transfer to the
corporation, and such shares shall not be deemed to be outstanding for any
purpose whatsoever.
6. Transfer. The corporation shall keep a register in which
the corporation shall register the transfer of any shares of Series B Preferred
Stock. Upon presentment for registration of transfer of a certificate
representing shares of Series B Preferred Stock (accompanied by such stock
assignments or stock powers as the corporation may require), the corporation
shall cancel such certificate and shall execute and issue to the transferor
and/or transferee new certificates aggregating a number of shares of Series B
Preferred Stock as is equal to the number represented by the canceled
certificate.
D
<PAGE> 14
IN WITNESS WHEREOF, Ugly Duckling Corporation has caused this
Certificate to be signed by Gregory B. Sullivan, its President and Chief
Operating Officer, and attested by Steven P. Johnson, its Senior Vice President,
General Counsel, and Secretary this 18th day of June, 1996.
UGLY DUCKLING CORPORATION, a
Delaware corporation
By: /s/ Gregory B. Sullivan
Name: Gregory B. Sullivan
Title: President and Chief Operating
Officer
Attest: /s/ Steven P. Johnson
Name: Steven P. Johnson
Title: Senior Vice President, General Counsel,
and Secretary
E
<PAGE> 1
EXHIBIT 10.1
[UGLY DUCKLING CORPORATION LETTERHEAD]
May 21, 1998
VIA HAND DELIVERY
Steven A. Tesdahl
9501 North 46th Place
Phoenix, Arizona 85028
Re: Modification of Terms of Employment ("Modification")
Dear Steve:
The purpose of this letter agreement is to modify and amend the terms of your
employment with Ugly Duckling Corporation as evidenced by the letter agreement
from me, dated August 6, 1997, re Terms of Employment ("Employment Agreement").
The "Change of Control" provisions of your Employment Agreement presently
states, in part, that:
"For purposes of this letter, change of control shall be defined by the
[Ugly Duckling Long Term Incentive Plan] but shall include the removal
and/or resignation of Ernest C. Garcia II as the Chairman of the Board of
Directors and Chief Executive Officer of Ugly Duckling."
It is my understanding that you have agreed to modify and amend the preceding
provision to allow Greg Sullivan to serve as Chief Executive Officer of Ugly
Duckling, without triggering any possible Change of Control event under your
Employment Agreement. Thus, the last sentence of the Change of Control
provisions of your Employment Agreement is replaced with the following sentence:
"For purposes of this letter, change of control shall be defined by the
Plan but shall include the (1) removal and/or resignation of Ernest C.
Garcia II as the Chairman of the Board of Directors of Ugly Duckling, or
(2) removal and/or resignation of (i) Mr. Garcia as the Chief Executive
Officer of Ugly Duckling, without Gregory B. Sullivan serving as Mr.
Garcia's replacement as Chief Executive Officer or (ii) Mr. Sullivan as
the Chief Executive Officer of Ugly Duckling, without Mr. Garcia serving
as Mr. Sullivan's replacement as Chief Executive Officer."
This Modification, together with the Employment Agreement, embodies the entire
agreement and understanding between Ugly Duckling and you and supersedes all
prior or contemporaneous agreements and understanding between us, verbal or
written, relating to the subject matter hereof and thereof.
If this Modification is consistent with your understanding and it is acceptable
to you, then please acknowledge your acceptance by signing this letter and
returning it to me. If you have any questions or comments regarding the above,
please contact Greg Sullivan or me.
Very truly yours,
/s/ Steven P. Johnson
Steven P. Johnson
General Counsel
<PAGE> 2
May 21, 1998
Steven A. Tesdahl
Page 2
Accepted and agreed to as of the date first written above:
/s/ Steven A. Tesdahl
- ---------------------------------
Steven A. Tesdahl
<PAGE> 1
EXHIBIT 10.2
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
AGREEMENT DATE: May 26, 1998
UDC: UGLY DUCKLING CORPORATION
A DELAWARE CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
VONSH: WALTER T. VONSH
11577 EAST LA JUNTA
SCOTTSDALE, ARIZONA 85255
RECITALS
The parties acknowledge that the following recitals are true, correct
and a material part of this Amended and Restated Employment Agreement (this
"Agreement"):
1. UDC is an Arizona corporation engaged in the used motor vehicle
sales and financing business (the "Business").
2. Pursuant to an Employment Agreement dated March 22, 1995 (the
"Original Employment Agreement") Vonsh has been employed by UDC and its
subsidiaries on a full time basis since April, 1995 and Vonsh served as the
President of Champion Financial Services, Inc. ("CFS") and as an officer of UDC.
3. In February, 1998, UDC decided to discontinue operation of CFS (the
"CFS Closure") and as a result of the CFS Closure the services of Vonsh are no
longer required on a full-time basis but may be required on a part-time, as
needed basis from time to time.
4. UDC seeks to employ Vonsh on a part-time, as needed basis and Vonsh
is willing to perform certain services for UDC on a part-time, as needed basis.
5. UDC and Vonsh seek to amend and restate the Original Employment
Agreement so that this Agreement supersedes and replaces the Original Employment
Agreement.
NOW, THEREFORE, in consideration of the covenants, representations and
warranties of the parties stated herein, the performances of the parties
required hereby and the benefits to
<PAGE> 2
be obtained by the parties herefrom, UDC and Vonsh mutually agree and expressly
intend to amend and restate the Original Employment Agreement as follows:
SECTION 1. EMPLOYMENT.
As of the Agreement Date, UDC shall employ Vonsh on a part-time, as
needed basis to render the services required by this Agreement (the "Services").
Vonsh shall render the Services on a part-time, as needed basis as an employee
of UDC. However, Vonsh shall no longer hold any offices of UDC, CFS or any
affiliates thereof and Vonsh has resigned all offices previously held by Vonsh.
SECTION 2. SERVICES.
The Services rendered by Vonsh shall be rendered to the best of Vonsh's
ability, in compliance with all applicable laws and pursuant to the instructions
of the Chief Executive Officer of UDC (the "CEO") or the board of directors of
UDC (the "Board"). The Services to be rendered by Vonsh include, but may not be
limited to, the following:
2.1 CFS CLOSURE. Vonsh shall continue to assist UDC with the CFS
Closure as requested by the CEO or the Board.
2.2 SPECIAL PROJECTS. If requested by the CEO or Board, Vonsh shall
perform and provide assistance to the Business by performing special executive
projects similar to executive duties previously performed while a full-time
employee.
2.3 AFFILIATE BUSINESSES. If requested by the CEO or Board, Vonsh shall
perform and provide other assistance to the businesses of subsidiaries and
affiliates of UDC (the "Affiliate Businesses").
SECTION 3. COMPENSATION.
During the term of this Agreement and not thereafter, UDC shall
compensate Vonsh for the Services rendered by Vonsh pursuant to this Agreement
by paying and providing to Vonsh the following:
3.1 SALARY. Vonsh shall receive a salary of One Hundred Fifty Thousand
Dollars ($150,000.00) each year (the "Salary"). The Salary shall be payable in
arrears in regularly scheduled installments commencing on the first regular
payday after the Agreement Date. The Salary shall be payable only as it is
earned and upon termination or expiration of this Agreement no Salary shall be
payable thereafter. However, in the event of a change of control of UDC, as
defined in the Option Plan referred to in Section 3.4 hereof, but excluding the
proposed spin-off of the non-dealership operations of UDC, at the request of
Vonsh the Salary for the balance of the term of this Agreement shall
automatically be accelerated and paid in full on the effective date of the
change of control.
2
<PAGE> 3
3.2 BONUS. In addition to the Salary, UDC shall pay to Vonsh a bonus of
$81,000.00 (the "Bonus") on the Agreement Date.
3.3 VEHICLE. UDC provides a vehicle to Vonsh pursuant to the Original
Employment Agreement. On or before July 7, 1998, Vonsh shall surrender the
vehicle to UDC and UDC shall not be required to provide a vehicle to Vonsh
thereafter.
3.4 OPTIONS. Vonsh holds options to acquire 126,000 shares of common
stock of UDC (the "Options") pursuant and subject to, all terms and conditions
of UDC's Long Term Incentive Stock Option Plan (the "Option Plan"). Provided
Vonsh performs fully all of his obligations during the entire term of this
Agreement, then upon expiration of this Agreement, that is, on June 30, 2001,
all Options not then vested shall automatically be fully vested.
3.5 BENEFITS. Vonsh shall continue to receive all employment related
benefits Vonsh is now receiving (i.e., medical insurance) under the terms and
conditions stated in the policies therefor.
3.6 EXPENSES. UDC shall reimburse Vonsh for reasonable and necessary
expenses incurred by Vonsh in performing the Services. All such expenses shall
be reimbursed in accordance with UDC's expense reimbursement policies.
3.7 WITHHOLDINGS. All installments of the Salary, Bonus and all other
funds paid to Vonsh pursuant to this Section 3, shall have withheld therefrom
all federal and state income taxes and all other amounts that UDC is required by
law to withhold.
SECTION 4. TERM AND TERMINATION.
4.1 TERM. This Agreement shall commence as of the Agreement Date and
shall expire on June 30, 2001 (the "Expiration Date"), unless terminated prior
thereto. Neither party has any obligation to extend this Agreement upon the
Expiration Date.
4.2 TERMINATION BY VONSH. Vonsh may terminate this Agreement at any
time, by delivery of written notice of termination to UDC thirty (30) or more
days prior to the effective date of the termination. If Vonsh terminates this
Agreement all of Vonsh's rights under this Agreement shall expire and terminate
as of the effective date of termination.
4.3 TERMINATION BY UDC FOR CAUSE. If any of the following events or
actions occur, UDC may immediately terminate this Agreement for cause by
delivery of written notice of termination to Vonsh.
4.3.1 Vonsh commits any fraud, embezzlement or other act of
dishonesty, commits any criminal act or willful misconduct, makes
material misrepresentation regarding UDC, CFS, the Business or the
Affiliate Businesses or refuses to follow a lawful order of the CEO or
Board.
3
<PAGE> 4
4.3.2 Vonsh knowingly violates any laws, rules or regulations
applicable to the Business or Affiliate Businesses.
4.3.3 Vonsh engages in any conduct or action that materially
and personally harms or threatens to materially and personally harm any
employee or customer of UDC, CFS, the Business or the Affiliate
Businesses or any person with whom any of the foregoing engage in
business.
4.3.4 Vonsh breaches any of the covenants made in Section 5
hereof.
If this Agreement is terminated by UDC pursuant to this Section 4.3, UDC shall
have no obligation to Vonsh except for the payment of Salary earned prior to the
effective date of the termination and Vonsh shall not be entitled to any
additional Salary, Bonus or other amounts or benefits other than those earned
and received by Vonsh prior to the effective date of the termination.
4.4 TERMINATION BY DEATH. This Agreement shall automatically expire and
terminate upon the death of Vonsh. In the event of the death of Vonsh during the
term of this Agreement, UDC shall pay to Vonsh's estate, within 30 days after
Vonsh's death, an amount equal to one-half of the Salary for the balance of the
term of this Agreement.
SECTION 5. CONFIDENTIALITY, BUSINESS PROPERTY AND NON-COMPETITION.
5.1 CONFIDENTIALITY. Vonsh acknowledges that certain information
regarding UDC, CFS, the Business and the Affiliate Businesses may be business
secrets and that the confidentiality thereof is a valuable right of UDC. At all
times during and after the term of this Agreement Vonsh shall maintain the
confidentiality of all such information and shall not disclose such information
without the prior written consent of the Board, unless required by law.
5.2 BUSINESS PROPERTY. Vonsh acknowledges that all tangible and
intangible property of UDC, CFS, the Business and the Affiliate Businesses,
including, but not limited to, records, files, data, contracts and information
regarding employees and customers belong exclusively to UDC and Vonsh shall not
own nor acquire any interest therein. Upon expiration or termination of this
Agreement all such property in the possession of Vonsh shall be immediately
surrendered and returned to UDC.
5.3 ENFORCEMENT. Vonsh acknowledges that UDC will incur substantial,
irreparable, immediate and continuing harm if any of the covenants of Vonsh
stated in this Section 5 are violated and that monetary awards will not be
adequate remedies for the violations. Therefore, Vonsh acknowledges and agrees
that equitable remedies may be sought and obtained by UDC including, but not
limited to, temporary and permanent restraining orders and injunctions.
4
<PAGE> 5
SECTION 6. GENERAL PROVISIONS.
6.1 NOTICES. All notices and communications hereunder shall be in
writing and shall be given by personal delivery or mailed first class,
registered or certified mail, postage prepaid, and shall be deemed received upon
the earlier of actual delivery or three (3) business days after deposit in the
United States Mail. Notices to the parties shall be delivered or mailed to the
addresses set forth in this Agreement.
6.2 TIME. Time is of the essence of this Agreement. However, if any
action is required to be taken on a Saturday, Sunday or legal holiday, the
action shall be deemed timely taken if it is taken on the next regular business
day.
6.3 LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Arizona. Any action brought in
connection with this Agreement shall be brought and prosecuted in a federal or
state court of competent jurisdiction in Arizona.
6.4 LIABILITY OF AFFILIATES. The parties acknowledge that this
Agreement is made exclusively between UDC and Vonsh and that neither the
shareholders, directors, officers, employees or agents of UDC, CFS or their
affiliates, shall have any liability under this Agreement of any kind at any
time.
6.5 NEGOTIATIONS AND INTEGRATION. The terms and provisions of this
Agreement represent the results of extensive negotiations between the parties.
The terms and provisions of this Agreement shall be interpreted and construed in
accordance with their usual and customary meanings. All understandings and
agreements between the parties are merged in this Agreement which alone fully
and completely expresses their agreement. This Agreement is entered into after
full investigation, neither party relying upon any statements or representations
made by the other not embodied in this Agreement. This Agreement supersedes the
Original Employment Agreement. There are no employment related agreements
between UDC or the Affiliate Businesses and Vonsh other than this Agreement and
no obligations of the parties to each other except as expressly stated in this
Agreement.
6.6 ASSIGNMENT AND MODIFICATION. This Agreement may not be assigned,
delegated or subcontracted at any time. This Agreement may not be changed
orally, but only by an agreement in writing, signed by the parties.
6.7 SEVERANCE. If any provision of this Agreement or the application of
such provision to any person or circumstance shall be held invalid, the
remainder of this Agreement, or the application of such provision to persons or
circumstances other than those to which it was held invalid, shall not be
effected thereby.
6.8 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
parties hereto, their successors and assigns. However, nothing herein shall be
deemed to permit assignment except in strict accordance with the provisions of
this Agreement.
5
<PAGE> 6
6.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same Agreement.
IN WITNESS WHEREOF, the parties hereby acknowledge their receipt,
review, understanding and acceptance of every provision of this Agreement,
effective as of the Agreement Date.
UDC: Ugly Duckling Corporation
a Delaware corporation
By: /s/ Steven P. Johnson
------------------------------
Name: Steven P. Johnson
------------------------------
Its: Sr. V.P. & Secretary
------------------------------
Vonsh: /s/ Walter T. Vonsh
------------------------------
Walter T. Vonsh
6
<PAGE> 1
EXHIBIT 10.3
May 14, 1998
Mr. Gregory R. Ciccolini
6249 East Gelding Drive
Scottsdale, Arizona 85254
Re: Terms of Employment
Dear Greg:
I am pleased that you have accepted the offer of employment made by
Cygnet Financial Corporation ("Cygnet"). The purpose of this letter is to
confirm the terms and conditions under which you will be employed.
POSITION: You will serve as Chief Information Officer of Cygnet. As Chief
Information Officer you will be responsible for the operation and
use of all technology and information systems employed by Cygnet.
You will also manage all personnel involved in these systems. You
will report to the Chief Executive Officer of Cygnet. You will be
employed on a full-time basis and will devote all of your working
time and efforts exclusively to Cygnet. Your position is an
executive position and, therefore, you are exempt from the
minimum wage and overtime provisions of the Fair Labor Standards
Act.
LOCATION: Your office will be located at 2525 East Camelback Road, Phoenix,
Arizona 85016. The location of your office may be changed from
time to time. Also, you may be required to provide services from
time to time at other Cygnet locations. You may also be required
to travel in the performance of services.
SALARY: You will receive a salary at the rate of $120,000.00 per year.
Your salary will be reviewed annually in December and may be
adjusted at the discretion of the Board of Directors of Cygnet.
BENEFITS: Enclosed is a summary of the employee benefits of Ugly Duckling
Corporation. Cygnet is expected to have similar benefits. You
will be entitled to the current benefits of Ugly Duckling
Corporation as an employee of Cygnet.
<PAGE> 2
Mr. Gregory R. Ciccolini
May 12, 1998
Page 2
STOCK OPTIONS: You will receive a nonqualified option to purchase 20,000 shares
of common stock of Cygnet (the "Stock Options") upon completion
of the "spin-off" of Cygnet from Ugly Duckling Corporation (the
"Spin-Off"). The exercise price of the Stock Options will be the
price that Ugly Duckling Corporation shareholders must pay to
acquire common stock of Cygnet in the Spin-Off (the "Spin-Off
Price"). The Stock Options will vest over five years from the
date of grant and be subject to other usual and customary terms
and conditions. The Stock Options are granted to provide you an
incentive to work in a manner that adds as much value as possible
to Cygnet. However, Cygnet makes no representations or warranties
as to, and, shall have no liability for, the value of the Stock
Options or the price of common stock of Cygnet at any time. You
acknowledge that the issuance and/or exercise of the Stock
Options may constitute compensation to you and you shall be
responsible for paying all income taxes assessed on said
compensation.
STOCK GRANT: As a signing bonus, you will receive the right to be issued that
number of shares of common stock of Cygnet at the Spin-Off Price
equal to $50,000 (the "Restricted Stock"). The Restricted Stock
will vest and be issued to you on June 1, 2002, provided you are
then employed by Cygnet. The Restricted Stock is granted to
induce you to bear all risk of terminating your current
employment and accepting employment with Cygnet under the terms
of this letter. However, Cygnet makes no representations or
warranties as to, and, shall have no liability for, the value or
price of the Restricted Stock at any time. You acknowledge that
the issuance of the Restricted Stock will constitute compensation
to you and you shall be responsible for paying all income taxes
assessed on said compensation. You authorize Cygnet to withhold
from the Restricted Stock at the time of issuance that number of
shares with a value equal to the withholdings required by
applicable law. If any withholdings are required prior to the
issuance of the Restricted Stock you authorize Cygnet to make the
withholdings from your Salary. The Restricted Stock will not be
registered under the Securities Act of 1933 and will be subject
to transfer restrictions under Rule 144 of the Securities Act of
1933.
TERM: Your employment will commence on June 1, 1998. There is no
minimum term for your employment. You are employed at will and
your employment may be terminated at any time for any lawful
reason, all at the discretion and will of Cygnet. However, if
your employment is terminated by Cygnet without cause prior to
June 1, 1999, then your Salary, but not any other benefits, will
be continued for six months. If your employment is terminated (a)
by Cygnet without cause after June 1, 1999; (b) by Cygnet at any
time for cause; or (c) by you at any time, then your Salary will
not be continued after the termination. The continuation of your
Salary, if required, will be a severance benefit (the "Severance
Benefit") and the Severance Benefit will be your exclusive
benefit and remedy for the termination of your employment by
Cygnet.
<PAGE> 3
Mr. Gregory R. Ciccolini
May 12, 1998
Page 3
without cause. For purposes of this letter and the
termination of your employment by Cygnet without
cause, "without cause" shall mean termination for
any reason other than your (a) illegal conduct;
(b) gross negligence or intentional misconduct;
(c) willful failure to perform your duties after
receipt of written demand for performance of your
duties; or (d) conduct that harms or threatens to
harm any employee of Cygnet or any employee of any
organization that does business with Cygnet.
CHANGE OF CONTROL: If a change in control of Cygnet occurs during the
term of your employment and your employment by
Cygnet is either (a) terminated by you within 12
months after the change of control; (b) terminated
by Cygnet without cause within 90 days prior to
the change of control; or (c) terminated by Cygnet
without cause within 12 months after the change of
control, then in any such event all Stock Options
and Restricted Stock granted to you pursuant to
this letter that are not yet vested at the time of
the change of control shall automatically be fully
vested, subject to approval of the Board of
Directors of Cygnet. If the vesting of your Stock
Options and Restricted Stock is accelerated due to
the termination of your employment in connection
with a change of control then no Severance Benefit
shall be payable to you. For purposes of this
letter, change of control shall be defined by the
Long Term Incentive Stock Option Plan of Ugly
Duckling Corporation but shall include the removal
and/or resignation of Ernest C. Garcia II as the
Chairman of the Board of Directors of Cygnet.
OTHER TERMS: There are no material terms and conditions of your
employment other than as stated in this letter.
This letter constitutes a legally binding and
enforceable contract under Arizona law. You
acknowledge that you have received the advice of
independent legal counsel prior to signing this
letter.
<PAGE> 4
Mr. Gregory R. Ciccolini
May 12, 1998
Page 4
If these terms and conditions of employment are acceptable to you, then
please acknowledge your acceptance by signing this letter and returning it to
me. If you have any questions or comments regarding these terms and conditions
of your employment, please contact me or Ernie Garcia.
I look forward to working with you.
Cordially,
/s/ STEVEN P. JOHNSON
Steven P. Johnson
General Counsel
SPJ:ag
Accepted this 18 day of May, 1998.
/s/ GREGORY R. CICCOLINI
- ---------------------------------
Gregory R. Ciccolini
Social Security No. ________________
<PAGE> 1
EXHIBIT 10.4
June 12, 1998
Mr. Eric J. Splaver
3102 East Brookwood Court
Phoenix, Arizona 85048
Re: Terms of Employment
Dear Eric:
I am pleased that you have accepted the offer of employment made by
Cygnet Financial Corporation ("Cygnet"). Initially, Cygnet will be a wholly
owned subsidiary of Ugly Duckling Corporation but it is intended that Cygnet be
separated from Ugly Duckling Corporation in connection with the spin-off of all
non-dealership operations of Ugly Duckling Corporation (the "Spin-Off"). The
purpose of this letter is to confirm the terms and conditions under which you
will be employed by Cygnet.
POSITION: You will serve as Chief Financial Officer of Cygnet. As Chief
Financial Officer you will be responsible for all accounting and
financial reporting activities of Cygnet and its subsidiaries.
You will also manage all personnel involved in these activities.
You will report to the Chief Executive Officer of Cygnet. You
will be employed on a full-time basis and will devote all of your
working time and efforts exclusively to Cygnet. Your position is
an executive position and, therefore, you are exempt from the
minimum wage and overtime provisions of the Fair Labor Standards
Act.
LOCATION: Your office will be located at 2525 East Camelback Road, Phoenix,
Arizona 85016. The location of your office may be changed from
time to time. Also, you may be required to provide services from
time to time at other Cygnet locations. You may also be required
to travel in the performance of services.
SALARY: You will receive a salary at the rate of $120,000.00 per year.
Your salary will be reviewed annually in December and may be
adjusted at the discretion of the Board of Directors of Cygnet.
BENEFITS: Enclosed is a summary of the employee benefits of Ugly Duckling
Corporation. Cygnet is expected to have similar benefits. You
will be
<PAGE> 2
Mr. Eric J. Splaver
June 12, 1998
Page 2
entitled to the current benefits of Ugly Duckling Corporation as
an employee of Cygnet.
STOCK OPTIONS: Upon completion of the Spin-Off you will receive options to
purchase 30,000 shares of common stock of Cygnet (the "Cygnet
Stock Options"). The Cygnet Stock Options will be qualified to
the maximum extent possible. The exercise price of the Cygnet
Stock Options will be the price that Ugly Duckling Corporation
shareholders must pay to acquire common stock of Cygnet in the
Spin-Off (the "Spin-Off Price"). The Cygnet Stock Options will
vest over five years from the date of grant and be subject to
other usual and customary terms and conditions. The Cygnet Stock
Options are granted to provide you an incentive to work in a
manner that adds as much value as possible to Cygnet. However,
Cygnet makes no representations or warranties as to, and, shall
have no liability for, the value of the Cygnet Stock Options or
the price of common stock of Cygnet at any time. You acknowledge
that the issuance and/or exercise of the Cygnet Stock Options may
constitute compensation to you and you shall be responsible for
paying all income taxes assessed on said compensation. In
addition to the Cygnet Stock Options, upon the effective date of
the Spin-Off all stock options of Ugly Duckling Corporation now
held by you shall be fully vested and exercisable.
STOCK GRANT: Upon completion of the Spin-Off you will receive that number of
shares of common stock of Cygnet at the Spin-Off Price equal to
$100,000 (the "Restricted Stock"). The Restricted Stock will vest
over four years from the effective date of the Spin-Off. The
Restricted Stock is granted to induce you to bear all risk of
terminating your current employment with Ugly Duckling and
accepting employment with Cygnet under the terms of this letter.
However, Cygnet makes no representations or warranties as to,
and, shall have no liability for, the value or price of the
Restricted Stock at any time. You acknowledge that the issuance
of the Restricted Stock will constitute compensation to you and
you shall be responsible for paying all income taxes assessed on
said compensation. You authorize Cygnet to withhold from the
Restricted Stock at the time of issuance that number of shares
with a value equal to the withholdings required by applicable
law. If any withholdings are required prior to the issuance of
the Restricted Stock you authorize Cygnet to make the
withholdings from your Salary. The Restricted Stock will not be
registered under the Securities Act of 1933 and will be subject
to transfer restrictions under Rule 144 of the Securities Act of
1933.
TERM: Your employment will commence on or about the effective date of
the Spin-Off. There is no minimum term for your employment. You
are employed at will and your employment may be terminated at any
time for any lawful reason, all at the discretion and will of
Cygnet. However, if your employment is terminated by Cygnet
without cause prior to the third anniversary of the effective
date of the Spin-Off, then your Salary
<PAGE> 3
Mr. Eric J. Splaver
June 12, 1998
Page 3
and benefits will be continued for one year. If
your employment is terminated (a) by Cygnet
without cause after the third anniversary of the
effective date of the Spin-Off; (b) by Cygnet at
any time for cause; or (c) by you at any time,
then your Salary and benefits will not be
continued after the termination. The continuation
of your Salary and benefits, if required, will be
a severance benefit (the "Severance Benefit") and
the Severance Benefit will be your exclusive
benefit and remedy for the termination of your
employment by Cygnet without cause. For purposes
of this letter and the termination of your
employment by Cygnet without cause, "without
cause" shall mean termination for any reason other
than your (a) illegal conduct; (b) gross
negligence or intentional misconduct; (c) willful
failure to perform your duties after receipt of
written demand for performance of your duties; or
(d) conduct that harms or threatens to harm any
employee of Cygnet or any employee of any
organization that does business with Cygnet.
CHANGE OF CONTROL: If a change in control of Cygnet occurs at any
time during the term of your employment and your
employment by Cygnet is either (a) terminated by
you within 12 months after the change of control;
(b) terminated by Cygnet without cause within 90
days prior to the change of control; or (c)
terminated by Cygnet without cause within 12
months after the change of control, then in any
such event all Cygnet Stock Options and Restricted
Stock granted to you pursuant to this letter and
thereafter that are not yet vested shall
automatically be fully vested. For purposes of
this letter, change of control shall be defined by
the Long Term Incentive Stock Option Plan of Ugly
Duckling Corporation but shall include the removal
and/or resignation of Ernest C. Garcia II as the
Chairman of the Board of Directors of Cygnet.
OTHER TERMS: There are no material terms and conditions
of your employment other than as stated in this
letter and any personnel policies of Cygnet that
may be adopted and revised by Cygnet from time to
time (the "Personnel Policies"). This letter, but
not the Personnel Policies, constitutes a legally
binding and enforceable contract under Arizona
law. You acknowledge that you have received, or
had the opportunity to receive, the advice of
independent legal counsel prior to signing this
letter.
<PAGE> 4
Mr. Eric J. Splaver
June 12, 1998
Page 4
If these terms and conditions of employment are acceptable to you, then
please acknowledge your acceptance by signing this letter and returning it to
me. If you have any questions or comments regarding these terms and conditions
of your employment, please contact me.
I look forward to working with you.
Cordially,
/s/ ERNEST C. GARCIA, II
Ernest C. Garcia, II
ECG:ag
Accepted this 16 day of June, 1998.
/s/ ERIC J. SPLAVER
- ---------------------------------
Eric J. Splaver
<PAGE> 1
Exhibit 10.5
SERVICING AGREEMENT
This SERVICING AGREEMENT ("Servicing Agreement") is made as of February
9, 1998 by and between RELIANCE ACCEPTANCE CORPORATION, a Delaware corporation
("RAC"), on behalf of itself and all of its subsidiaries with the exception of
Reliance Auto Receivables Corporation (collectively, the "Subsidiaries" and
together with RAC, the "Client"), UGLY DUCKLING CORPORATION, a Delaware
corporation ("UDC"), acting by or through one or more of its subsidiaries or
Affiliates as designated in writing by UDC prior to the Effective Date of this
Servicing Agreement (the "Servicer"), and BANKAMERICA BUSINESS CREDIT, INC., a
Delaware corporation ("Agent"), as agent on behalf of itself and the other
lenders (including Agent, the "Lenders") who are parties to that certain Amended
and Restated Loan and Security Agreement dated October 7, 1997 among the Agent,
the Lenders, RAC, and certain subsidiaries of RAC (as amended from time to time,
the "Loan and Security Agreement").
RECITALS
A. Client and Agent have entered into the Loan and Security
Agreement, pursuant to which the Lenders made certain loans and other financial
accommodations to the Client. To secure the obligations of the Client
thereunder, the Client granted to the Agent and Lenders a security interest in,
among other things, substantially all of its "Receivables" (as defined herein).
B. On February 9, 1998, RAC and the Subsidiaries, as debtors in
possession in the Bankruptcy Case as defined below, filed Chapter 11 petitions
under the provisions of Title 11, United States Code, as amended (the
"Bankruptcy Code"), in the United States District Court for the State of
Delaware (the "Court") and such petitions are currently pending as a
jointly-administered case (the "Bankruptcy Case"). As part of the Bankruptcy
Case, the Lenders have provided debtor-in-possession financing to Client
pursuant to which they have obtained liens and security interests on, among
other things, all of Client's "Receivables" (as defined herein).
C. RAC desires to enter into an agreement with the Servicer
pursuant to which the Servicer shall manage, administer, service, make
collection calls and liquidate vehicles with respect to certain motor vehicle
retail installment sale contracts of Client secured by new or used automobiles,
sport utility vehicles and/or light-duty trucks and the accessions thereto,
("Sale Contracts", which Sale Contracts are either identified on Schedule 1
hereto as of the Effective Date or added to Schedule 1 after the Effective Date
pursuant to the provisions of Section 2.01 (such Sale Contracts, together with
the "Documents" (as defined herein) and the "Insurance Policies" (as defined
herein), are referred to herein as the "Receivables").
D. Pursuant to the Consulting Agreement, as defined herein, the
Servicer is to provide consulting services to Client regarding Client's
servicing of the Receivables prior to the time Servicer begins servicing the
Receivables pursuant to this Servicing Agreement.
E. The Servicer has agreed to commence servicing the Receivables
pursuant to this Servicing Agreement upon the "Effective Date" (as defined
herein).
NOW THEREFORE, in consideration of the covenants and conditions
contained in this Servicing Agreement, the parties, intending to be legally
bound, hereby agree as follows:
1
<PAGE> 2
ARTICLE 1
DEFINED TERMS
Section 1.01. Defined Terms. Capitalized and defined terms contained in
this Servicing Agreement without definitions have the following meanings, and
the definitions of such terms are equally applicable to both the singular and
plural forms of such terms and to the masculine, feminine and neuter genders of
such terms.
"Advisors" shall mean the accountants, auditors and attorneys of a
Person.
"Affiliate" of any Person means any Person who directly or indirectly
controls, is controlled by, or is under direct or indirect common control with
such Person. For purposes of this definition of "Affiliate," the term "control"
(including the terms "controlling," "controlled by" and "under common control
with") means the possession, directly or indirectly, of the power to direct or
cause a direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
"Backup Servicer" shall mean any backup servicer appointed pursuant to
Section 2.01(c).
"Bank Portfolio" shall mean a portfolio of Client's Receivables
constituting (with a book value of $28.4 million as of January 31, 1998) finance
contracts originated and serviced from the Client's Northbrook, Illinois Branch
commonly referred to as the Auto Sub, Inc., a subsidiary of Cole Taylor Bank,
which was merged into Reliance Acceptance Corporation in the spinoff transaction
which became effective on February 12, 1998.
"Business Day" shall mean any day other than (i) a Saturday or Sunday,
or (ii) another day on which banking institutions in the State of Arizona are
authorized or obligated by law to be closed.
"Certificate of Title" shall mean with respect to any Financed Vehicle,
the certificate of title (or other evidence of ownership) issued by the
department of motor vehicles, or other appropriate governmental body, of the
state in which the Financed Vehicle is registered or is to be registered,
showing the Obligor as owner with either notation of the first lien of any party
who is a Client, or such other status indicated thereon which is necessary to
perfect the security interest of Client or, if applicable, Agent, in the
Financed Vehicle as a first priority interest, and showing no other actual or
possible ownership or lien interests.
"Client" means, collectively, RAC and the Subsidiaries, and upon being
reorganized pursuant to the Bankruptcy Case, shall mean all such entities as
reorganized.
"Collateral" means a Financed Vehicle and any other property in which a
lien has been created in favor of any party which is a Client or the Agent.
"Collection Account" shall mean such bank account designated to Servicer
in writing as the Collection Account by the Interested Party.
"Collection Period" means a calendar month.
"Collection Policy" means the Ugly Duckling Holdings, Inc. (n/k/a Ugly
Duckling Corporation) Collections Department Policy and Procedures Manual
revised as of October 27, 1995 and attached hereto as Exhibit A, as such may be
subsequently modified by the Servicer with the consent of the Interested Party.
2
<PAGE> 3
"Collections" shall have the meaning set forth in Section 3.01(a).
"Controlled Servicer" shall mean any Servicer for which UDC has the
ability, by ownership of securities or otherwise, to direct the policies or
operations.
"Credit Application" shall mean the credit application completed by the
Obligor in order to request financing for the Obligor's purchase of the Financed
Vehicle.
"Deboarding Charge" shall mean the lesser of (1) $200,000, and (2) all
(i) capital expenditures of Servicer related to this Servicing Agreement, plus
(ii) lease and contract termination fees and costs related to the termination of
the Servicer pursuant to Section 6.03(a) of this Servicing Agreement.
"Defaulted Receivable" means any Receivable with respect to which (i)
except for Receivables for which the Servicer has repossessed, in compliance
with the Collection Policy, the related Financed Vehicle as provided in (ii)
below, at least 10% of a Scheduled Payment is 120 days or more delinquent on a
contractual basis (not paid by the due date); (ii) notwithstanding (i) above,
the Servicer has, in compliance with the Collection Policy, (A) repossessed the
related Financed Vehicle prior to the expiration of the 120 days in (i) above
and thereafter, (B) any applicable redemption period has expired, and thereafter
(C) the Servicer has liquidated the Financed Vehicle; (iii) there has commenced
an Insolvency Proceeding by or against an Obligor, and any Scheduled Payment is
delinquent (not paid by the due date) more than 90 days; (iv) the Financed
Vehicle is missing, has been damaged beyond ordinary means of repair, or has
been leased or disposed of by sale or other transfer of title; or (v) a Skip
Loss Investigation was initiated and not satisfactorily resolved within the
earlier of (A) 90 days, or (B) the date when at least 10% of a Scheduled Payment
on the Receivable is 120 days or more delinquent on a contractual basis (not
paid by the due date).
"Depository Accounts" are such bank accounts subject to the Master
Agency Agreement in the name of the Servicer set forth in Exhibit B attached
hereto and such other or different bank accounts subject to the Master Agency
Agreement in the name of the Servicer designated by the Servicer as Depository
Accounts pursuant to the Master Agency Agreement.
"Documentation" shall have the meaning set forth in Section 7.16.
"Documents" shall mean with respect to each Receivable, (i) the original
Certificate of Title or proof of lien perfection; (ii) the executed Original
Purchased Contract with original signatures; (iii) if available or unless
electronically stored, a copy of the dealer invoice and invoices for any
additional equipment included in such contract, (iv) a copy of the original
signed Credit Application; (v) verification that any party who is a Client was
the loss payee, additional insured, or lienholder with respect to the Insurance
Policies (including policy number); (vi) if available, a copy of the "Report of
Sale," "Guaranty of Title" or other comparable document executed by the seller
dealer which has been forwarded to the appropriate department of motor vehicles;
(vii) if available or unless electronically stored, copies of: (a) credit bureau
reports, (b) the completed credit investigation form, (c) the completed
verification of employment and income forms, (d) Obligor references, and (e) the
credit scoring sheet; (viii) the applicable funds disbursement invoice or
listing; (ix) a certificate for each type of Insurance Policy purchased by
Obligor; (x) if available, Client's loan process or "deal structure" sheet; (xi)
if available, a "fact sheet" from the dealer, (xii) a copy of the "Credit Life
Insurance Policy", if any, and the "Credit Disability Insurance Policy", if any,
on the Obligor relating to the Financed Vehicle; (xiii) a copy of the "Vehicle
Invoice", if applicable; (xiv) if available, other documents, or copies, as
applicable, that may be reasonably required in the ordinary course of business
with respect to the enforceability of the Obligor's obligations, and (xv) all
other records, files, and documents, whether consisting of paper or computerized
or in some other
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form, which relate specifically to the applicable Receivable, Obligor, or the
Financed Vehicle or associated rights under the Receivable, including, without
limitation, instruments, documents, correspondence and memoranda generated by or
coming into the possession of the Servicer (including, but not limited to,
insurance premium receipts, ledger sheets, payment records, insurance claim
files, correspondence and current and historical computer data files) that are
required to document or service any Receivable.
"Effective Date" means the effective date of a plan of reorganization or
liquidation for Client in the Bankruptcy Case that ratifies this Servicing
Agreement, provided such plan has been accepted by the class containing the
Agent and the Lenders and has not been modified pursuant to Section 1127 of the
Bankruptcy Code or otherwise without the necessary votes or consents of the
Agent and the Lenders.
"Expiration Date" shall have the meaning set forth in Section 6.01.
"Financed Vehicle" means a new or used automobile, sport utility
vehicles or light-duty trucks and all accessions thereto comprising the
Collateral, securing an Obligor's indebtedness under a Receivable that is being
serviced by the Servicer hereunder.
"Indebtedness" means, as applied to any Person at any time, (a) all
indebtedness, monetary obligations or other monetary liabilities of such Person
(i) for borrowed money or evidenced by debt securities, debentures, acceptances,
notes or other similar instruments, and any accrued interest, fees and charges
relating thereto, (ii) with respect to letters of credit issued for such
Person's account, (iii) to pay the deferred purchase price of property or
services, except accounts payable and accrued expenses arising in the ordinary
course of business, (iv) in respect of capital leases or (v) in respect of
guaranties in connection with any of the foregoing; (b) all indebtedness,
monetary obligations or other monetary liabilities of such Person secured by a
lien on any property of such Person whether or not such indebtedness, monetary
obligations or monetary liabilities are assumed by such Person; (c) all
preferred stock subject to mandatory redemptions; (d) all indebtedness, monetary
obligations or other monetary liabilities of such Person under, in connection
with or relating to a securitization facility; and (e) all contingent
contractual monetary obligations with respect to any of the foregoing.
"lnsolvency Proceeding" means (i) the commencement by a person as debtor
of any case or proceeding under any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar law, or the filing of a motion or other
pleading seeking the appointment of a receiver, trustee, custodian or similar
official for such person or any substantial part of such person's property, or
(ii) the commencement of any such case or proceeding against such person which
(x) is consented to by such person, (y) results in the entry of such order or
appointment, the issuance of such a protective decree or the entry of an order
having similar effect or (z) is not dismissed within 30 days, or (iii) the
making by a person of a general assignment for the benefit of creditors or (iv)
the admission in writing by a person of such person's inability to pay such
person's debts as they become due.
"Insurance Policies" means any credit life, disability or warranty
policy, or any collision or comprehensive insurance policy that insures a
Financed Vehicle and shall include any Required Borrower Insurance.
"Interested Party" means the Agent until such time as (i) all
obligations to the Agent and the Lenders of (A) any entities which are a Client,
and (B) Reliance Acceptance Group, Inc. shall have been irrevocably paid in full
in cash and, (ii) the Servicer has received written notice from the Agent
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that (i) has occurred at which time the Servicer may unconditionally rely and
act on such notice and thereafter the Interested Party shall be the Client.
"Lien" shall mean a security interest, lien, charge, pledge or
encumbrance of any kind.
"Liquidation Proceeds" means, with respect to any Defaulted Receivable,
all funds, collections and proceeds collected from whatever source in respect
thereof or on the related Financed Vehicle (including, but not limited to, all
proceeds of sale or other disposition, collections, insurance proceeds, dealer
recourse and third party originator recourse).
"Management Employees" shall mean employees, other than Senior Management
Employees of the Servicer or its Affiliates with the titles (or comparable
titles) set forth on Exhibit I.
"Master Agency Agreement" shall mean that Master Depository Accounts and
Post-Office Boxes and Agency Agreement, a copy of which is appended hereto as
Exhibit H, which agreement as it pertains to any of the Depository Accounts may
not be amended or supplemented except pursuant to the terms thereof.
"Obligor" means, with respect to a Receivable, the purchaser of the
Financed Vehicle, each co-purchaser, co-signer and guarantor, or any other
person responsible or potentially responsible for payments under the Receivable.
"Original Purchased Contract" shall mean with respect to each
Receivable, the original contract, together with the original of any and all
modifications, amendments or assignments with respect thereto.
"Other Materials" shall have the meaning set forth in Section 7.16.
"Outstanding Principal Balance" means the unpaid principal balance of a
Receivable as of a certain date, which amount shall (1) include accrued but
unpaid premiums for any Insurance Policies with respect to the Receivable, (2)
include earned but uncollected finance charges related to the Receivable, but
(3) not include any unearned finance charges related to the Receivable.
"Performance Event" means the occurrence and continuation of one of the
events set forth on Exhibit C hereto.
"Person" means any individual, corporation, estate, partnership, joint
venture, limited liability company, association, joint stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof, or other entity.
"Receivable" has the meaning set forth in Recital C.
"Reimbursable Expenses" are the costs and expenses of the Servicer set
forth in Section 2.10(b).
"Required Borrower Insurance" shall mean any casualty insurance an
Obligor is required to obtain pursuant to the terms of a Receivable.
"Sale Contracts" shall have the meaning set forth in Recital C.
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"Schedule of Payments" means the schedule of periodic payments disclosed
on a Receivable, as modified or extended pursuant to and consistent with the
Collection Policy or this Servicing Agreement.
"Scheduled Payment" means, with respect to any date, the payment amount
indicated as due on that date on the Schedule of Payments.
"Senior Management Employees" of a Person shall mean the titled officers
(or comparable titles) employed by the Servicer or its Affiliates set forth on
Exhibit J.
"Service Provider" shall mean any Person who provides Servicer with any
of the services to be provided pursuant to this Servicing Agreement.
"Servicer" means, as of the Effective Date, one or more of UDC's
Affiliates as designated in writing to Client and Agent by UDC prior to the
Effective Date, or, thereafter, any entity which becomes the servicer pursuant
to this Servicing Agreement in compliance with the terms of Section 6.05.
"Skip Loss Investigation" means an investigation of the whereabouts of a
Financed Vehicle or Obligor which has been initiated by Servicer.
"Spin-Off" shall mean, with respect to a Person, an entity with
shareholders that include at least all of the same shareholders or interest
holders as that Person.
"Substituted Financed Vehicle" shall have the meaning set forth in
Section 2.19.
"Transition Agreement" is the Transition Services Agreement dated as of
February 9, 1998, by and between the Servicer and Client pursuant to which the
Servicer shall provide Client with transition services with respect to Client's
servicing of the Receivables.
"UDC" means Ugly Duckling Corporation, a Delaware corporation.
ARTICLE II
ADMINISTRATION AND SERVICING OF RECEIVABLES
Section 2.01. Appointment and Backup Servicer.
(a) Client hereby appoints, effective on the Effective Date, the
Servicer to manage, administer, service and make collections on the Receivables
as specified herein and to otherwise perform the duties of the Servicer. On the
Effective Date, Client, Agent and Servicer shall modify Schedule 1 (as appended
to this Servicing Agreement on or about the date of this Servicing Agreement) to
delete the Sale Contracts that are either Defaulted Receivables or no longer
owned by Client as of the Effective Date. In addition, on the Effective Date and
at any time thereafter, Schedule 1 shall be amended, upon receipt by Servicer of
written notice from Client and Agent indicating as such, to include any Sale
Contracts of Client existing on or prior to the Effective Date (other than a
contract relating to a Defaulted Receivable) which were not previously on
Schedule 1, provided, however, that Servicer shall have no obligation to service
any Receivable until such time as it is deemed listed on Schedule 1. Servicer
accepts such appointment effective as of the Effective Date on the terms and
conditions of this Servicing Agreement. In performing its duties hereunder, the
Servicer shall have full power and authority to do or cause to be done any and
all things in connection with such servicing and administration which it may
deem necessary or
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desirable, within the terms of this Servicing Agreement or the Collection
Policy. In the performance of its duties hereunder, the Servicer shall be an
independent contractor acting on its own behalf in its own name and for its own
account. It shall have no authority, express or implied, to act in any manner or
by any means for or on behalf of Client or Agent in any capacity other than as
an independent contractor. Neither this Servicing Agreement nor any of the
activities contemplated hereby shall be deemed to create any partnership, joint
venture, agency or employer/employee relationship between the Servicer, Client
or Agent. Notwithstanding the foregoing provisions of this Section 2.01,
pursuant to express provisions of this Servicing Agreement, the Servicer may be
authorized or directed to take certain actions on behalf of or for the direct
benefit of Client and Agent, provided that, in the taking of such actions, the
Servicer shall continue to be acting as an independent contractor. Except as set
forth in Section 2.10(b) of this Servicing Agreement, Servicer shall perform all
of its obligations under this Servicing Agreement at its own expense.
(b) The appointment of Servicer pursuant to Section 2.01 shall be for a
term commencing on the Effective Date and ending, unless earlier terminated
pursuant to the provisions of Section 5.03, 5.04, or 6.03, on the Expiration
Date (as defined in Section 6.01).
(c) The Interested Party reserves the right to appoint a backup servicer
for the Receivables (the "Backup Servicer"). Upon notice to Servicer and UDC of
such appointment, Servicer shall deliver to the Backup Servicer copies of all
notices, reports and computer diskettes required to be delivered by Servicer to
Client or Agent under this Servicing Agreement. The additional cost of providing
such notices, reports and computer diskettes to Backup Servicer shall be borne
by the Servicer, but any charges, costs or expenses of Backup Servicer shall be
borne by Client.
Section 2.02. Collection of Receivable Payments; Sale of or
Subcontracting for Defaulted Receivables.
(a) The Servicer shall be responsible for collection of payments called
for under the terms and provisions of the Receivables, as and when the same
shall become due, and shall follow the Collection Policy. Consistent with this
Section 2.02 and the Collection Policy, the Servicer may grant at its discretion
extensions, rebates or adjustments on a Receivable, or modify the original due
date of a Receivable if such extensions are limited to two (2) one (1) month
extensions in any consecutive twelve (12) month period. Servicer will exercise
care in offering extensions and modifications so as not to defer losses likely
to occur. During the life of a Receivable, extensions and modifications shall
not (i) be granted more than six (6) times, or (ii) except as provided below,
reduce the Obligor's Outstanding Principal Balance. Servicer shall not permit
any due date changes in a Receivable other than in the same month. The Servicer
may in its discretion waive any late payment charge or any other fees that may
be collected in the ordinary course of servicing a Receivable. In no event shall
the Outstanding Principal Balance of a Receivable be reduced, except in
connection with a settlement in full of a Defaulted Receivable as provided in
the following sentence. The Servicer shall have the ability to settle any
account in full that does not result in a charge-off of greater than the lesser
of (i) $500, or (ii) 20% of the then Outstanding Principal Balance of the
applicable Receivable. Any amount over such limit will require that the Servicer
notify Client and Agent of such request in writing, and that the Interested
Party respond to such request pursuant to the procedures set forth in Section
7.10.
(b) Servicer shall provide sufficient staffing and telephone lines to:
(1) quote payoffs to requesting Obligors verbally and in writing, (2) record
changes in garaging and billing addresses for Obligors, (3) record name changes,
(4) answer billing questions and (5) respond to any other reasonable written or
telephonic inquiries by Obligors, Agent or Client relating to the Receivables.
If the full amount of a Scheduled Payment due under a Receivable is not received
within three (3)
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Business Days after its due date, the Servicer will make reasonable and
customary efforts to contact the Obligor by telephone to inquire as to the
status of such payment.
(c) Notwithstanding any provision in this Servicing Agreement, the
Servicer shall not be responsible for servicing any Defaulted Receivable and
shall only be required to take such actions with respect thereto as set forth in
Sections 2.02(d) below.
(d) At the expense of Client, the Servicer shall sell or contract for
the collection of any or all Defaulted Receivables with the consent of the
Client and Agent. Each sale or contract for collection shall be (i) for all
Receivables that become Defaulted Receivables during not less than a six (6)
month period, and (ii) (if a sale,) by a bid procedure acceptable to the
Servicer and the Interested Party, and the Servicer and the Agent shall be
permitted to be bidders in such sale. All sales shall be for cash. If the
Defaulted Receivables are contracted for collection, each bidder, together with
its Affiliates, must have not less than 7,500 auto Receivables, other than the
Client's Defaulted Receivables, which it and its Affiliates are servicing.
Neither the Servicer, nor its employees or their relatives, shall be allowed to
purchase Defaulted Receivables except through an open auction procedure.
Section 2.03. Realization Upon Receivables. In the event a Receivable
becomes or is reasonably anticipated to become a Defaulted Receivable, the
Servicer (either directly or through the use of independent contractors or
agents) shall use its reasonable best efforts, consistent with the Collection
Policy, to repossess or otherwise convert the ownership of the Financed Vehicle
securing such Receivable. None of the Servicer, nor its employees or their
relatives, shall be allowed to purchase Financed Vehicles being foreclosed upon,
except through an open auction procedure. In any case in which the Financed
Vehicle shall have suffered damage, the Servicer shall not expend funds for
repair or repossession of such Financed Vehicle unless the Servicer shall
determine that such repair or repossession should increase the value of the
Liquidation Proceeds by an amount greater than the amount of such expenses.
Section 2.04. Maintenance of Security Interests in Financed Vehicles and
Receivables.
(a) Provided that Servicer or any Service Provider is aware of facts
which indicate a need to take such actions as described below, Servicer shall,
consistent with the standard set forth in Section 2.15, take such actions as are
necessary to maintain the continuing perfection and priority of Client's and
Agent's right, title and interest in the Receivables and the Collateral,
including, but not limited to, obtaining the execution and the registering,
re-registering, recording, re-recording, filing, and refiling of all security
agreements, Certificates of Title, cautionary financing statements, continuation
statements or other instruments as are necessary to maintain the security
interests granted by the Obligors under the respective Receivables. Client and
Agent authorize Servicer to re-perfect or cause the re-perfection of such
security interests on their behalf.
(b) Subject to Section 2.10(b) and 2.10(e), all expenses paid by
Servicer pursuant to this Section 2.04(b) shall be borne by Client. In addition,
in the event the Interested Party directs Servicer in writing to reissue in
Client's or Agent's name the Certificate of Title related to a Receivable,
Client shall reimburse Servicer for the reasonable time spent by Servicer's
Management Employees at a rate of $200 per hour and other employees at a rate
agreed to by the Servicer and the Interested Party in effecting such reissuance.
Section 2.05. Additional Covenants of Servicer.
(a) Except as otherwise provided in the Collection Policy, the Servicer
shall (i) not release any Financed Vehicle securing any Receivable from the
security interest granted by such
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Receivable in whole or in part except in the event of payment in full by the
Obligor thereunder (or settlement pursuant to Section 2.02) or upon transfer of
the Financed Vehicle to a successor purchaser of the vehicle following
repossession by the Servicer, (ii) not materially impair the rights of Client or
Agent in the Receivables or the Collateral, (iii) not increase the number of
scheduled payments due under a Receivable except as permitted herein, (iv)
except as provided in Section 2.02(d), not sell, pledge, assign, or transfer to
any other Person, or grant, create, incur, assume, or suffer to exist any Lien
on any Receivable, the Collateral, or any interest therein, (v) upon obtaining
or a Service Provider obtaining actual knowledge thereof, immediately notify
Client and Agent of the existence of any Lien on any such Receivable with an
Outstanding Principal Balance in excess of $2,000.00, (vi) defend the right,
title, and interest of Client and Agent in, to and under such Receivables and
Collateral, against all claims of third parties claiming through or under the
Servicer, (vii) deposit into the Depository Accounts and to the Collection
Account all payments received by Servicer with respect to the Receivables in
accordance with this Servicing Agreement, (viii) promptly notify Client and
Agent of the occurrence of any Event of Default and any breach by Servicer or
UDC of any of their covenants or representations and warranties contained
herein, and (ix) upon the discovery of the relocation out of state of a Financed
Vehicle, promptly notify Client and Agent of the occurrence of any event which,
to the knowledge of the Servicer or a Service Provider, would require that
Client or Agent make or cause to be made any filings, reports, notices, or
applications or seek any consents or authorizations from any and all government
agencies, tribunals, or authorities to create, maintain, and protect a
first-priority security interest of Client or Agent in, to and on the Financed
Vehicles and a first-priority security interest of Agent in, to, and on the
Receivables (unless such actions are being taken by the Servicer pursuant to
Section 2.04(a) above). Subject to Section 2.10(b) and 2.10(e), all expenses
paid by Servicer pursuant to this Section 2.05(a) shall be borne by Client.
(b) The Servicer will promptly advise Client and Agent of any inquiry
received from an Obligor which contemplates the consent of Client or Agent.
Inquiries contemplating the consent of Client or Agent shall include, but not be
limited to, inquiries about settlement of any unasserted claim or defense, or
compromise of any amount an Obligor owes, in an amount in excess of the amounts
set forth in Section 2.02(a), or any other matters the Servicer should
reasonably understand are not within the Servicer's authority under this
Servicing Agreement or the Collection Policy.
(c) Within two (2) Business Days of receipt, Servicer shall provide
Client and Agent with copies of all correspondence, written notices, and legal
and administrative documents which specifically allege that Servicer committed a
wrongful act with regard to a Receivable, Obligor, or any Collateral and which
specifically allege claims, damages or loss in excess of $20,000 per occurrence
or $100,000 in the aggregate (collectively, the "Notice Items"). Within two (2)
Business Days of receipt, Servicer shall inform Client and Agent in writing of
the following:
(1) the receipt of any written claim or the initiation of any
legal process, litigation or administrative or judicial investigation regarding
the Notice Items involving an uninsured amount in excess of $20,000 in any one
instance or $100,000 in the aggregate;
(2) the receipt of a written notice from any agency or
governmental body having authority over the conduct of its business that (i) it
is being placed under regulatory supervision, (ii) any license, permit, charter,
membership or registration needed to perform this Servicing Agreement or
material to the conduct of its business is to be suspended or revoked, or (iii)
it is to cease and desist any practice, procedure or policy employed by it in
the conduct of its business, and such cessation will materially adversely affect
the conduct of its business or materially adversely affect its financial affairs
or adversely affect its ability to perform this Servicing Agreement; or
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(3) the receipt of any written claim or the receipt of a written
notice of the initiation of any legal process, litigation or administrative of
juridical investigation against it which may materially and adversely affect the
operations, financial condition or business of Servicer or Servicer's ability to
perform this Servicing Agreement or which in any way involves Client's or
Agent's security interest in the Receivables or related Collateral or other
rights therein or under this Servicing Agreement.
(d) The Servicer will reasonably cooperate with Client and Agent in
audits, review and special reports as may be required by the Court; provided
that the Servicer is reimbursed by Client for all reasonable costs and expenses
associated therewith and such does not unreasonably interfere with the
Servicer's business activities. For purposes of this Section 2.05(d) the term
special reports shall not include any reports noted on Exhibit D hereto and the
term audits does not include the audits referenced in Section 2.17.
Section 2.06. Reports Provided by Servicer. The Servicer will provide to
Client, Agent, and, if requested in writing by the Interested Party, Backup
Servicer such reports relating to the Receivables as noted in Exhibit D in the
form specified therein. Servicer shall also provide such parties such additional
reports as may be requested in writing by the Interested Party within the time
set forth in such request (such time not to be less than five (5) Business
Days), but any increase in number of reports or reporting frequency requested
from that provided on Exhibit D will require an additional fee to be agreed to
by the Servicer, Client, and Agent based on the specific requests of the
Interested Party. Requests for such additional reports will be billed to Client
on a time and materials basis. All reports provided to Client or Agent shall be
certified by an officer of Servicer as being true and correct in all material
respects. All reports provided by Servicer to Client and Agent shall have at
least a line item setting forth the cumulative total for the relevant category
in the report during the term of the Servicing Agreement.
Section 2.07. Servicing Fee.
(a) The Servicer shall be paid by Client a base monthly Servicing Fee
equal to the greater, for a given calendar month, of (A) 4% divided by twelve
(12) on the Outstanding Principal Balance of the Receivables, other than
Defaulted Receivables, as of the first day of such calendar month; or (B) $15.00
per Receivable, other than Defaulted Receivables, serviced pursuant to this
Servicing Agreement, as of the first day of such calendar month. Additionally,
the Servicer shall be paid (i) the reimbursable expenses pursuant to Section
2.10(b) below, (ii) all third party charges paid for not-sufficient fund checks
and returned checks, and (iii) if earned, the amounts set forth on Schedule 2
attached hereto. Servicer shall be permitted to collect and retain late fees,
modification fees and extension fees actually paid by Obligors. The Servicer
shall commence earning fees and have the right to reimbursement for costs and
expenses as of the Effective Date. The base monthly fee shall be prorated for
any calendar month for which the appointment of the Servicer was not effective
for all days in that calendar month (based upon the number of days for which
such appointment was effective).
(b) Each Collection Period, the base monthly Servicing Fee pursuant to
this Section 2.07 with respect to the immediately preceding Collection Period,
and reimbursable expenses pursuant to Section 2.10(b) incurred during the
immediately preceding Collection Period, shall be paid by Client not later than
the fifth (5th) Business Day after the Servicer delivers (i) the applicable
Servicer Certificate to Client and Agent pursuant to Section 2.08 below, (ii)
the reconciliation of accounts required pursuant to C.2. of Exhibit D, and (iii)
the summary report of all reimbursements, expenses and costs pursuant to Section
2.10(b) in the form of Exhibit K (the "Servicer Payment Date"). Amounts earned
by Servicer described on Schedule 2 shall be paid as provided in Schedule 2.
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Section 2.08. Servicer Certificates. The Servicer shall deliver to
Client and Agent, on or prior to the fifteenth (15th) day of each month, a
Servicer Certificate substantially in the form provided in Exhibit E hereto (the
"Servicer Certificate").
Section 2.09. [Reserved]
Section 2.10. Costs and Expenses.
(a) Except as set forth in Section 2.10(b) below, all costs and expenses
paid by the Servicer in carrying out its duties hereunder shall be paid or
caused to be paid by the Servicer out of the compensation to be paid to or
retained by the Servicer pursuant to this Servicing Agreement.
(b) Subject to Section 2.10(e), during the term of this Servicing
Agreement, the Servicer shall be reimbursed by Client for the following actual
third-party costs and expenses not constituting normal overhead which Servicer
has incurred in connection with the performance of its duties hereunder:
(i) Compensation paid to outside legal counsel to protect the
interests of Client or Agent, or if Client or Agent is not the owner of the
Receivables, the owner's interest in assets administered under this Servicing
Agreement;
(ii) Compensation paid to professional accountants retained at
Client's or Agent's direction to review the assets administered under this
Servicing Agreement;
(iii) Compensation paid to independent repossessors and direct
out-of-pocket expenses arising from or related to realization of Receivables of
Client administered under the Servicing Agreement, including, but not limited
to, repossession fees and charges, auction fees, towing charges, storage fees,
repair expenses and detailing expenses;
(iv) Sales, franchise, income, excise, personal property or other
taxes arising from or related to any Receivables administered under the
Servicing Agreement (provided, however, nothing in this Servicing Agreement
shall obligate Client or Agent to pay any income or other taxes of Servicer or
UDC);
(v) Parking or other fines, insurance, title or other such fees
arising from or related to any Receivables administered under the Servicing
Agreement;
(vi) Costs for retitling the Financed Vehicles after a request
therefor from the Interested Party;
(vii) Costs associated with cooperating with or providing any
audits, reviews or special reports related to Agent or Client in the Case (but
not the reports set forth on Exhibit D or the audits set forth in Section 2.17),
including Client as a reorganized entity; and
(viii) Expenses and costs associated with the sale or contracting
for collection of Defaulted Receivables pursuant to Section 2.02(d).
Other requested services will be quoted on a time and materials basis utilizing
the Servicer's current pricing schedule. With respect to such other requested
services, the Servicer shall only be reimbursed to the extent it receives prior
written approval from the Interested Party pursuant to the procedures set forth
in Section 7.10. In the event Servicer seeks but does not obtain in a specific
instance written approval to incur expenses of those stated herein, Servicer
shall not be obligated
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to proceed with the recommended activity as to which such approval is sought.
Services requested of Servicer by the Interested Party which require the
services of Management Employees shall be billed at the rate of $200 per hour
for the services of such Management Employees identified by the Servicer and
approved by the Interested Party.
(c) Servicer's rights to reimbursement of expenses shall not be
contingent upon success in a Skip Loss Investigation, repossession, litigation
or similar activity.
(d) In furtherance of its performance hereunder, the Servicer may, with
the prior written consent of the Interested Party pursuant to the procedures set
forth in Section 7.10, contract for goods or services with Affiliates of
Servicer. To the extent such goods or services give rise to an expense
reimbursable pursuant to Section 2.10(b) above, the costs or expenses for such
goods or services must be upon costs, terms and conditions that are market
rates, terms and conditions found in arms' length transactions in the relevant
geographic area.
(e) Notwithstanding anything to the contrary in this Servicing
Agreement, Servicer shall not be entitled to reimbursement of any fees, costs,
or expenses which (i) are not ultimately paid by Servicer, (ii) are incurred by
Servicer in connection with services rendered beyond the scope of this Servicing
Agreement or contrary to the Collection Policy, or (iii) arise from the gross
negligence or wilful misconduct of Servicer or any Service Provider.
Reimbursement of any fees, costs, or expenses to Servicer shall not foreclose
Client or Agent from disputing Client's obligation to reimburse such fees,
costs, or expenses, nor act as an admission of the propriety of such fees,
costs, or expenses. All backup documentation for costs and expenses shall be
available at the offices of Servicer for inspection and audit by Client and
Agent at the cost of the Client. In the event any fee, cost, or expense
obligation for which Servicer seeks reimbursement is disputed by Client or
Agent, Servicer, Client and Agent shall each use their best efforts to resolve
such dispute. If Client, Agent and Servicer cannot agree on a disputed
obligation, such obligation shall not be the subject of reimbursement to
Servicer until such dispute has been reviewed pursuant to the Payment
Reimbursement Dispute Resolution Policy, a copy of which is attached to this
Servicing Agreement as Exhibit F. Any expense which is paid to Servicer and
which is subsequently disputed by Client or Agent and which has not been placed
in escrow by the Servicer pursuant to the provisions of the Payment
Reimbursement Dispute Resolution Policy set forth on Exhibit F hereto may be
deducted from any subsequent reimbursable expenses or any fees to be paid to
Servicer, without prejudice to the right of Servicer to place the disputed
amount in escrow from collections in conformity with the provisions of the
Payment Reimbursement Dispute Resolution Policy set forth on Exhibit F hereto.
Upon resolution of any disputed amounts, any amounts owing to the Servicer,
Client, or Agent, along with interest earned thereon in escrow, shall be paid to
the party entitled to such funds.
Section 2.11. Responsibility for Insurance Policies: Processing of
Claims Under Insurance Policies.
(a) The Servicer, on behalf of Client and Agent, will administer and
enforce all rights and responsibilities of the holder of the Receivables
provided for in any applicable Insurance Policy, provided, however, that the
Servicer shall not be required to pay any premiums on the Insurance Policies
except from collections of Receivables.
(b) If directed by the Interested Party, and at Client's expense, the
Servicer shall obtain Required Borrower Insurance with respect to any
Receivable.
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Section 2.12. Records Maintenance.
(a) The Servicer shall maintain copies or originals of the Documents in
its files with respect to each Receivable and the Financed Vehicle related
thereto, provided that they were given to the Servicer by the Client. The
Servicer shall keep satisfactory books and records pertaining to each Receivable
and shall make periodic reports in accordance with this Servicing Agreement.
Such records may not be destroyed or otherwise disposed of except as provided
herein and as allowed by applicable laws, regulations or decrees. All documents,
whether developed or originated by the Servicer or not, reasonably required to
document or to properly administer any Receivable shall remain at all times the
property of Client (unless transferred by Client). The Servicer shall not
acquire any property rights with respect to any Receivables or any Documents
(including, without limitation, any possessory Lien with respect to any
Receivable or any Documents), and shall not have the right to possession of them
except pursuant to the terms of this Servicing Agreement. The Servicer shall
bear the entire cost of restoration in the event any Documents shall become
damaged, lost or destroyed while in the Servicer's possession or under the
Servicer's control.
(b) The Servicer hereby agrees that the computer files and other
physical records of the Receivables maintained by the Servicer will bear an
indication reflecting that the Receivables are owned by Client and are subject
to a Lien in favor of Agent.
Section 2.13. Possession and Ownership of Documents. Unless otherwise
specified herein, the Servicer shall maintain physical possession of good and
legible copies of the Documents and shall hold all Documents in trust for the
benefit of Client and Agent, and all Documents, as between Servicer and Client,
shall remain the property of Client. The Servicer shall respond to all third
party inquiries concerning ownership of the Receivables by indicating that the
Receivables are the property of Client, and, if applicable, subject to a Lien in
favor of the Agent. The Servicer hereby agrees that the computer files and other
physical records of the Receivables maintained by the Servicer will bear an
indication reflecting that the Receivables are owned by Client and are subject
to a Lien in favor of the Agent.
Section 2.14. Warranties, Representations and Indemnity With Respect to
Documents. As to each Document generated by Client, the Client warrants and
represents that such Document is free of illegal or prohibited powers or
provisions, and that the enforcement thereof by the Servicer will not subject
the Servicer to liability under any federal, state or local law, provided such
enforcement by the Servicer is conducted in accordance with the provisions of
this Servicing Agreement and the Collection Policy. Subject to Section 2.10(e),
Client will indemnify Servicer, pursuant to the provisions of Section 5.05(a),
from all liability and costs, including reasonable attorneys' fees, paid as a
result of the presence of any such illegal or prohibited provision, but,
notwithstanding anything to the contrary in this Servicing Agreement, the
presence of any such illegal or prohibited provision shall not, pursuant to
Section 5.02 or 5.04 or otherwise, permit Servicer to terminate its appointment
pursuant to this Servicing Agreement.
Section 2.15. Standard of Care. In performing its duties and obligations
hereunder and in making its judgments, determinations and decisions pursuant to
this Servicing Agreement, the Servicer will comply with all applicable state and
federal laws, rules, and regulations and will exercise that degree of skill and
care consistent with the degree of skill and care that the Servicer exercises
with respect to similar motor vehicle retail installment sales contracts or
loans owned and/or serviced by the Servicer and that is consistent with prudent
industry standards, and will apply, in performing such duties and obligations,
those standards, policies and procedures consistent with the standards, policies
and procedures the Servicer applies with respect to similar motor vehicle retail
installment contracts or loans owned or serviced by it; provided, however, that
notwithstanding the foregoing, the Servicer shall not, except pursuant to a
judicial order from a court of competent
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jurisdiction, or as otherwise required by applicable law or regulation, release
or waive the right to collect the unpaid balance on any Receivable. In
performing its duties and obligations hereunder, the Servicer shall maintain all
state and federal licenses and franchises necessary for it to perform its
responsibilities hereunder, and shall not impair the rights of Client or Agent
(and, if applicable, any escrow agent) in the Receivables and any other property
in which Client or Agent has an interest. Notwithstanding any provision to the
contrary herein, and even to the extent that compliance requires the exercise of
a higher standard of care than set forth above, the Servicer shall (i) comply
with the Collection Policy, and (ii) the standard of care set forth in Section
5.05 of this Servicing Agreement. Notwithstanding any provision to the contrary
in this Servicing Agreement, the Servicer shall not be responsible or liable to
Client, Agent or any other person for any act done in compliance with this
Servicing Agreement, absent willful misconduct or gross negligence.
Notwithstanding any provision in any Receivable, if the Servicer determines that
any provision in any Receivable is either illegal or unenforceable, then
Servicer may elect, without liability to Client or Agent, not to enforce or
follow such provision.
Section 2.16. Records. The Servicer shall maintain or cause to be
maintained such books of account and other records as will enable Client and
Agent to determine the status of each Receivable.
Section 2.17. Inspection.
(a) At all times during the term hereof, the Servicer shall afford
Client and Agent, their authorized agents, and any escrow agent, if applicable,
upon not less than 24 hours notice, reasonable access during normal business
hours to the all records relating to the Receivables. The examination referred
to in this Section 2.17 will be conducted in a manner which does not
unreasonably interfere with the Servicer's normal operations or customer or
employee relations. Without otherwise limiting the scope of the examination,
Client, Agent, or any applicable escrow agent may, using generally accepted
audit procedures, verify (1) the status of each Receivable and review the
Documents and other records relating thereto for conformity to reports prepared
pursuant to Section 2.06 or otherwise, and (2) Servicer's compliance with this
Servicing Agreement. Nothing in this section shall affect the obligation of the
Servicer to observe any applicable law prohibiting disclosure of information
regarding Obligors, and the failure of the Servicer to provide access to
information as a result of such obligation shall not constitute a breach of this
Section 2.17. The Servicer's obligations under this Section 2.17 shall be to
provide access to records related to the Receivables, ensure that such records
are in reasonable order, and to respond to questions related to such records.
The Servicer shall not be compensated for providing such services and for
otherwise facilitating any such reasonable inspections. Any other expense
incident to the exercise by Client or Agent of any right under this Section 2.17
(including without limitation copying costs and third party fees and costs)
shall be borne by Client, provided, however, that, upon request, Servicer agrees
to provide such services to Client and Agent at Servicer's actual cost.
(b) At no additional charge, not more frequently than monthly, Servicer
will, at the Interested Party's request, provide Client, Agent, and Backup
Servicer, as applicable, with a data extract disk, in a format mutually
agreeable to Client, Agent, and Servicer, containing records relating to the
Receivables.
Section 2.18. Enforcement.
(a) The Servicer will, consistent with the standard of care required by
this Servicing Agreement and the Collection Policy, act with respect to the
Receivables and the Collateral in such manner as will, in the reasonable
judgment of the Servicer, maximize the benefits to be received by Client and
Agent with respect thereto. Servicer may disregard instructions or demands from
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other parties which, in Servicer's reasonable judgment, have not been authorized
by the Interested Party, or conflict with Client's or Agent's interest, written
instructions or approvals.
(b) The Servicer may and shall, at the direction of the Interested
Party, sue to enforce or collect upon the Receivables and the Insurance Policies
(including unpaid claims), in its own name, if possible, or as agent for Client.
If the Servicer commences a legal proceeding to enforce a Receivable or an
Insurance Policy, the act of commencement shall be deemed to be an automatic
assignment of the Receivable and the related rights under the Insurance Policies
by Client to the Servicer for purposes of collection only. If, however, in any
enforcement suit or legal proceeding it is held that the Servicer may not
enforce a Receivable or an Insurance Policy on the grounds that it is not a real
party in interest or a holder entitled to enforce the Receivable or the
Insurance Policy, Client shall, at Servicer's request, assign the Receivable or
the Insurance Policy to Servicer for the limited extent necessary to enforce the
Receivable or the Insurance Policy, or take such steps as the Interested Party
deems necessary to enforce the Receivable or the Insurance Policy, including
bringing suit in Client's name. Pursuant to the terms of Section 2.10(b) and
2.10(e), the Servicer shall be entitled to reimbursement for expenses paid in
connection with enforcement or collection activities with respect to the
Receivables pursuant to this Section 2.18(b).
(c) The Servicer shall exercise any rights of recourse against third
persons that exist with respect to any Receivable in accordance with the
Collection Policy, the Servicer's usual practice and the standard of care
required by Section 2.15 hereof. In exercising such recourse rights, the
Servicer is hereby authorized on Client's and Agent's behalf to reassign the
Receivable and to deliver the Certificate of Title to the Financed Vehicle to
the person against whom recourse exists at the price set forth in the document
creating the recourse. The provisions of Section 2.18(b) above, including
Servicer's right to reimbursement of expenses, shall similarly apply to this
Section.
(d) The Servicer may grant to the Obligor on any Receivable any rebate,
refund or adjustment that the Servicer in the exercise of its reasonable
judgment and consistent with the Collection Policy believes is required because
of prepayment in full of the Receivable, and may deduct the amount of any such
rebate, refund or adjustment from the amount otherwise payable by the Servicer.
The Servicer may not permit any rescission or cancellation of any Receivable nor
may it take any action with respect to any Receivable or Collateral which would
materially impair the rights of Client or Agent therein or in the proceeds
thereof.
(e) The Servicer may not increase or reduce the amount of any Scheduled
Payments, change any Receivable annual percentage rate, or extend or rewrite any
Receivable; provided, however, that the Servicer may extend any Receivable
pursuant to Section 2.02(a).
Section 2.19. Substitution of Collateral. In the event a Financed
Vehicle sustains significant physical damage such that the insurance company
carrying the physical damage insurance covering such Financed Vehicle determines
that the Financed Vehicle is not repairable, the Servicer may permit the Obligor
to pledge a vehicle of equal or greater market value than that of the Financed
Vehicle immediately prior to sustaining the physical damage. The second vehicle
shall be substituted as the collateral ("Substituted Financed Vehicle") for the
Receivable and the terms of the Receivable shall not be amended or modified
except to reflect the substituted collateral. The Servicer shall, within 180
days of the acceptance of the Substituted Financed Vehicle, cause the
certificate of title for the Substituted Financed Vehicle to be delivered to
Client or the Servicer for the benefit of Client or the escrow agent, as
applicable. The Servicer shall make appropriate notation in its records of the
substitution of the collateral.
Section 2.20. Sale of Receivables. (a) The Servicer agrees to cooperate
with the Client and Agent, and to provide information reasonably required by the
Client or Agent, in connection with a
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proposed sale by Client or Agent of all or a portion of the Receivables. If
requested by the Client or Agent and given at least ten (10) Business Days
advance written notice, the Servicer shall: (i) arrange for representatives of
the Servicer to meet with prospective purchasers, (ii) arrange for
representatives of the Servicer to provide information reasonably requested by
any such prospective purchaser with respect to Receivables and the servicing
thereof, (iii) arrange for representatives of the Servicer to meet with rating
agencies, credit enhancement providers and such other similar parties as the
Client or Agent shall designate and to provide information with respect to
Receivables and the servicing thereof, (iv) provide information reasonably
requested for the preparation of any offering materials required in connection
with a sale by Client or Agent of the Receivables, including, without
limitation, information relating to the servicing of the Receivables by the
Servicer, (v) assist the Client and the Agent in reviews of the Servicer's
reporting, collection, servicing and recovery management systems in respect of
the Receivables; and (vi) provide any other information or services reasonably
requested by Client or Agent to assist in the potential or actual sale of all or
a portion of the Receivables. The above services will be charged to Client at a
rate of $200 per hour for Servicer's Management Employees, and $300 per hour for
Servicer's Senior Management Employees. The Servicer shall identify all
Management Employees and Senior Management Employees to be used for such
services, prior to their commencement of services. Subject to Section 2.10(e),
Client will reimburse Servicer for the reasonable expenses paid for printing,
copying and postage, audit or accountant expense, legal fees, or other
out-of-pocket costs paid to respond to Client's or Agent's requests regarding
any such prospective sale by Client and Agent. Except for actions or inactions
of Servicer which constitute gross negligence or willful misconduct, Servicer
shall have no liability to Client, Agent or the potential purchaser under this
Section 2.20 for the failure of Servicer to provide such purchaser with accurate
information or the failure for any reason for the sale not to close,
(b) Servicer recognizes that the Client intends to sell the Bank
Portfolio. Servicer agrees that (1) until such sale, and for the fees and
expenses set forth in Section 2.07 and 2.10, it shall provide all services as to
the Bank Portfolio required under this Servicing Agreement as to any other
Receivable, (2) it shall cooperate with Client and Agent in the sale of the Bank
Portfolio pursuant to the provisions of Section 2.20(a), and (3) upon sale of
the Bank Portfolio, it shall not be entitled to any additional fees or expenses
with respect to the Bank Portfolio, except such fees, costs and expenses accrued
as of the date of sale.
(c) Notwithstanding any other provision in this Servicing Agreement, if
the Client or Agent sells any or all of the Receivables other than the Bank
Portfolio, or Defaulted Receivables, to any person or entity other than the
Servicer or an Affiliate of Servicer, the Servicer shall be paid a fee equal to
4% of the Outstanding Principal Balance of such sold Receivables calculated on
the date of such sale (the "Exit Sale Proceeds"), provided that, the Base Amount
shall be reduced by the lesser of (i) the amount of Exit Sale Proceeds received
by the Servicer from such sale and (ii) the remaining Base Amount on the date
that such Exit Sale Proceeds are calculated. The Servicer may retain possession
of all Documents for such sold Receivables until receipt of such amount.
Section 2.21. Directions of Interested Party. The Servicer may follow
any and all instructions, directions or decisions by the Interested Party as are
to be given or made by the Interested Party without any liability of the
Servicer to Agent or Client which is not the Interested Party for following such
instructions, directions, or decisions.
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ARTICLE III
COLLECTIONS AND INSURANCE COVERAGE
Section 3.01 Collections.
(a) Subject to Section 3.01(b) below, Servicer shall deposit into one of
the Depository Accounts on or prior to each Business Day, and shall remit to the
Collection Account, and to no other account, on the third (3rd) Business Day
after receipt thereof, all available funds for payments made by or on behalf of
the Obligor and received by or on behalf of the Servicer, including all actual
payments, insurance proceeds, recoveries, collections, all proceeds relating to
the repossession or disposition of the Financed Vehicles, and all payments or
other amounts, if any, made by or on behalf of an Obligor and received by the
Servicer with respect to any Receivable (the "Collections"). Servicer shall give
to Agent all notices required to be given to Client pursuant to the Master
Agency Agreement simultaneously upon giving such notices to Client. In addition,
notwithstanding anything to the contrary in the Master Agency Agreement,
Servicer agrees that all funds transferred or retransferred pursuant to the
Master Agency Agreement shall be transferred directly to the Collection Account
after transfer to the Consolidating Depository Accounts.
(b) Notwithstanding Section 3.01(a) above, if, in any calendar month,
Client does not timely pay to Servicer all amounts required to be paid to
Servicer pursuant to Sections 2.07 and 2.10, the Servicer may, commencing on the
second (2nd) Business Day after written notice to Client and Agent of such
nonpayment, from the Collections to be remitted to the Collection Account, place
into an escrow, in conformity with the provisions of the Payment Reimbursement
Dispute Resolution Policy set forth on Exhibit F hereto, an amount equal to such
unpaid amounts.
Section 3.02 Insurance Coverage. Servicer shall maintain, at its own
expense, a crime insurance policy, with broad coverage with responsible
companies on all officers, employees or other Persons acting on behalf of
Servicer in any capacity with regard to the Receivables to handle funds, money,
documents and papers relating to the Receivables. Any such insurance shall
protect and insure Servicer against losses for dishonest acts of such Persons
and shall be maintained in a form that would meet the requirements of prudent
institutional auto loan servicers and in an amount of not less than $10,000 per
occurrence with no deductible. Client and Agent shall be named as loss payee and
as an additional named insured on such policy.
ARTICLE IV
REPRESENTATIONS, WARRANTIES, AND COVENANTS
Section 4.01. Representations and Warranties of the Servicer. The
Servicer and UDC hereby make the following representations and warranties to
Client and Agent only as to itself, provided that with respect to any Controlled
Servicer, UDC shall make such representations and warranties as to itself and
such Servicer. These representations and warranties are made as of the execution
of this Servicing Agreement by Servicer or UDC as being true and correct at that
time and at all times thereafter while either Servicer or UDC has obligations
pursuant to this Servicing Agreement.
(a) Due Organization and Good Standing. The Servicer and UDC are
corporations duly organized, validly existing, and in good standing under the
laws of the State of their incorporation, with power and authority to own their
properties and to conduct their businesses as such properties are owned and such
businesses are presently conducted. Servicer and UDC are qualified to do
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business as foreign corporations and are in good standing in each jurisdiction
where the character of their properties or the nature of their activities makes
such qualification necessary.
(b) Power and Authority. The Servicer and UDC have the power and
authority to execute and deliver this Servicing Agreement and to carry out its
terms; and the execution, delivery, and performance of this Servicing Agreement
have been duly authorized by the Servicer and UDC by all necessary corporate
action.
(c) Binding Obligations. This Servicing Agreement shall constitute a
legal, valid, and binding obligation of the Servicer and UDC enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or other similar laws affecting the
enforcement of creditors' rights in general and by general principles of equity,
regardless of whether such enforceability shall be considered in a proceeding in
equity or at law.
(d) No Violation. The consummation of the transactions contemplated by
this Servicing Agreement and the fulfillment of the terms thereof shall not
conflict with, result in any breach of any of the terms, and the provisions of,
nor constitute (with or without notice or lapse of time) a default under, the
articles of organization or by-laws of the Servicer or UDC, or to the best of
the Servicer's or UDC's knowledge, after reasonable investigation, any
indenture, agreement, or other instrument to which the Servicer or UDC is a
party or by which either of them shall be bound; nor result in the creation or
imposition of any lien upon any of their properties pursuant to the terms of any
such indenture, agreement, or other instrument (other than this Servicing
Agreement); nor violate any law or, to the best of the Servicer's or UDC's
knowledge, any order, rule, or regulation applicable to the Servicer or UDC of
any court or of any federal or state regulatory body, administrative agency, or
other governmental instrumentality having jurisdiction over the Servicer, UDC,
or any of their properties.
(e) No Proceedings. There are no proceedings or investigations pending
or, to the Servicer's or UDC's best knowledge, threatened before any court,
regulatory body, administrative agency, or other governmental instrumentality
having jurisdiction over the Servicer or UDC or any of their properties (a)
asserting the invalidity of this Servicing Agreement, (b) seeking to prevent the
consummation of any of the transactions contemplated by this Servicing
Agreement, or (c) seeking any determination or ruling that might materially and
adversely affect the performance by the Servicer or UDC of either of their
obligations under, or the validity or enforceability of, this Servicing
Agreement.
(f) Permits and Licenses. Servicer and UDC have all necessary permits,
licenses, consents, approvals, waivers, registrations, and notifications
necessary for the execution and performance by Servicer and UDC pursuant to this
Servicing Agreement (including, without limitation, all permits, licenses,
consents, approvals, waivers, registrations, and notifications relating to any
hardware, software, or other intellectual property utilized or to be utilized by
Servicer or UDC pursuant to this Servicing Agreement) and there has not been any
revocation, withdrawal, termination, modification, cancellation, suspension, or
similar limitation of such permits, licenses, consents, approvals, waivers,
registrations, and notifications.
Section 4.02. Representations and Warranties of RAC. RAC hereby makes
the following representations, warranties and covenants to Servicer, UDC, and
Agent. These representations, warranties, and covenants are made as of the
execution of this Servicing Agreement by RAC as being true and correct at that
time and at all times thereafter while Client has any obligations pursuant to
this Servicing Agreement.
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(a) Due Organization and Good Standing. RAC is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, with power and authority to own its properties and to conduct its
business as such properties are owned and such business is presently conducted.
RAC is qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where the character of its properties or the nature of its
activities makes such qualification necessary.
(b) Power and Authority. RAC has the power and authority to execute and
deliver this Servicing Agreement and to carry out its terms; and the execution,
delivery, and performance of this Servicing Agreement have been duly authorized
by the Client by all necessary corporate action.
(c) Binding Obligations. This Servicing Agreement shall constitute a
legal, valid, and binding obligation of RAC enforceable in accordance with its
terms.
(d) No Violation. The consummation of the transactions contemplated by
this Servicing Agreement and the fulfillment of the terms thereof shall not
conflict with, result in any breach of any of the terms, and the provisions of,
nor constitute (with or without notice or lapse of time) a default under, the
articles of organization or by-laws of RAC, or to the best of the RAC's
knowledge, after reasonable investigation, any indenture, agreement, or other
instrument to which RAC is a party or by which it shall be bound; nor result in
the creation or imposition of any lien upon any of its properties pursuant to
the terms of any such indenture, agreement, or other instrument (other than this
Servicing Agreement); nor violate any law or, to the best of the RAC's
knowledge, any order, rule, or regulation applicable to RAC of any court or of
any federal or state regulatory body, administrative agency, or other
governmental instrumentality having jurisdiction over RAC or its properties.
(e) No Proceedings. Other than the Bankruptcy Case, there are no
proceedings or investigations pending or, to RAC's best knowledge, threatened
before any court, regulatory body, administrative agency, or other governmental
instrumentality having jurisdiction over RAC or its properties (a) asserting the
invalidity of this Servicing Agreement, (b) seeking to prevent the consummation
of any of the transactions contemplated by this Servicing Agreement, or (c)
seeking any determination or ruling that might materially and adversely affect
the performance by RAC of its obligations under, or the validity or
enforceability of, this Servicing Agreement.
(f) Permits and Licenses. RAC has all necessary permits, licenses,
consents, approvals, waivers, registrations, and notifications necessary for the
execution and performance by RAC pursuant to this Servicing Agreement
(including, without limitation, all permits, licenses, consents, approvals,
waivers, registrations, and notifications relating to any hardware, software, or
other intellectual property utilized or to be utilized by RAC pursuant to this
Servicing Agreement) and there has not been any revocation, withdrawal,
termination, modification, cancellation, suspension, or similar limitation of
such permits, licenses, consents, approvals, waivers, registrations, and
notifications.
Section 4.03. Representations and Warranties of the Agent. Agent hereby
makes the following representations, warranties and covenants to Servicer, UDC,
and Client. These representations, warranties, and covenants are made as of the
execution of this Servicing Agreement by Agent as being true and correct at that
time and at all times thereafter while Agent has rights pursuant to this
Servicing Agreement.
(a) Due Organization and Good Standing. Agent is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, with power and authority to own its properties and to conduct its
business as such properties are owned and such business
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is presently conducted. Agent is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
its properties or the nature of its activities makes such qualification
necessary.
(b) Power and Authority. Agent has the power and authority to execute
and deliver this Servicing Agreement and to carry out its terms; and the
execution, delivery, and performance of this Servicing Agreement have been duly
authorized by the Agent by all necessary corporate action.
(c) Binding Obligations. This Servicing Agreement shall constitute a
legal, valid, and binding obligation of Agent enforceable in accordance with its
terms.
(d) No Violation. The consummation of the transactions contemplated by
this Servicing Agreement and the fulfillment of the terms thereof shall not
conflict with, result in any breach of any of the terms, and the provisions of,
nor constitute (with or without notice or lapse of time) a default under, the
articles of organization or by-laws of Agent or to the best of the Agent's
knowledge, after reasonable investigation, any indenture, agreement, or other
instrument to which Agent is a party or by which it shall be bound; nor result
in the creation or imposition of any lien upon any of its properties pursuant to
the terms of any such indenture, agreement, or other instrument (other than this
Servicing Agreement); nor violate any law or, to the best of the Agent's
knowledge, any order, rule, or regulation applicable to Agent of any court or of
any federal or state regulatory body, administrative agency, or other
governmental instrumentality having jurisdiction over Agent or its properties.
(e) No Proceedings. There are no proceedings or investigations pending
or, to Agent's best knowledge, threatened before any court, regulatory body,
administrative agency, or other governmental instrumentality having jurisdiction
over Agent or its properties (a) asserting the invalidity of this Servicing
Agreement, (b) seeking to prevent the consummation of any of the transactions
contemplated by this Servicing Agreement, or (c) seeking any determination or
ruling that might materially and adversely affect the performance by Agent of
its obligations under, or the validity or enforceability of, this Servicing
Agreement.
Section 4.04. Survival of Representations and Warranties. The
representations and warranties set forth in this Article IV are continuous and
shall survive the termination of this Servicing Agreement, with respect to any
Servicer, shall survive the termination of the appointment of such Servicer, and
with respect to any Controlled Servicer, shall survive the termination of the
appointment of such Controlled Servicer. Upon discovery by either Client,
Servicer, UDC, or Agent of a breach of any of the foregoing representations and
warranties, the party discovering such breach shall give prompt written notice
to the other parties.
Section 4.05. Covenants of the Servicer and UDC. Servicer and UDC hereby
covenant to Client and Agent for so long as Servicer shall continue to act as
Servicer hereunder:
(a) All payments received by Servicer with respect to the Receivables
will be received in trust by Servicer for the benefit of Client and Agent and
will be deposited into Depository Accounts which are not subject to any Lien in
favor of any other Person.
(b) Contemporaneously with the execution and delivery of this Servicing
Agreement and on the Effective Date, Servicer shall deliver to Client and Agent
a list of the servicing locations of Servicer and the officers involved in, or
responsible for, the administration and servicing of the Receivables, which list
shall be promptly updated in writing by the Servicer to Client and Agent as
changes are made. From and after the Effective Date, Servicer shall not change a
location where it administers or services the Receivables unless it first gives
Client and Agent sixty (60) days written
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notice and takes what action Client and Agent reasonably request in order to
protect Client and Agent's interest in the Receivables and Documents at the new
location.
(c) The Servicer acknowledges that: (i) the Agent has advised it that
the Agent has a first priority security interest in the Receivables and the
proceeds therefrom, and (ii) Servicer has no interest, except as provided in
Section 3.01(b) for the payment and reimbursement of amounts pursuant to this
Servicing Agreement, in the Receivables and the proceeds therefrom deposited in
the Depository Accounts. Except as otherwise provided in this Servicing
Agreement, the Servicer agrees to hold the Receivables and the proceeds
therefrom in its possession as agent for the Agent for the purpose of perfecting
the security interest granted by the Client to the Agent therein.
(d) The Servicer and UDC agree to give written notice to Client and
Agent within two (2) Business Days of the occurrence of any Event of Default by
Servicer or UDC of which it has knowledge.
(e) From the date of this Agreement, if the Servicer is not part of the
consolidated group of UDC and its subsidiaries, the Servicer shall provide
Client and Agent with quarterly financial statements for Servicer within sixty
(60) days of the end of each of Servicer's fiscal quarters, and with annual
audited financial statements within one hundred twenty (120) days of the fiscal
year-end. The annual financial statements shall be audited by a public
accounting firm acceptable to Client and Agent. So long as Servicer is a
Controlled Servicer, UDC shall provide Client and Agent with UDC's and
Servicer's quarterly and audited annual financial statements within ten (10)
Business Days after such statements are first made available by UDC to third
parties.
ARTICLE V
DEFAULT, REMEDIES AND LIABILITY
Section 5.01. Events of Default by Servicer or UDC. Any of the following
acts or occurrences shall constitute an Event of Default by Servicer or UDC
under this Servicing Agreement:
(a) The intentional failure of Servicer to make any payment, transfer,
or deposit of monies required to be made under the terms of this Servicing
Agreement on the date such payment, transfer, or deposit of monies is required
to be made;
(b) The failure of Servicer (other than an intentional failure) to make
any payment, transfer, or deposit of monies required to be made under the terms
of this Servicing Agreement on the date such payment, transfer, or deposit is
required to be made, which failure continues unremedied for a period of two (2)
Business Days after the date when originally due, provided, however, that such
grace period shall no longer apply upon the failure of Servicer to make, in any
given rolling ninety (90) day period, more than three (3) failures in excess of
$50,000 of payments, transfers, or deposits of monies each required to be made
under the terms of this Servicing Agreement on the date such payments,
transfers, or deposits were required to be made;
(c) The failure of Servicer or UDC to observe or perform in any material
respect any other covenant or agreement required to be performed under this
Servicing Agreement which failure continues unremedied for a period of five (5)
Business Days after written notice of such failure shall have been given to the
breaching party, provided that, if such failure cannot be cured by diligent
efforts of the breaching party within such five (5) Business Day period, then
such time period shall be extended by the Interested Party for the shorter of
(i) the period reasonably required to cure such failure using the diligent
efforts of the breaching party, and (ii) thirty (30) days;
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(d) The entry with respect to Servicer or UDC of a decree or order for
relief by a court or agency or supervisory authority having jurisdiction under
any present or future federal or state bankruptcy, insolvency or similar law;
(e) UDC or the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations;
(f) An involuntary case shall be commenced against UDC or Servicer and
the petition shall not be dismissed, stayed, bonded or discharged within sixty
(60) days after commencement of the case; or a court having jurisdiction in the
premises shall enter a decree or order for relief in respect of UDC or the
Servicer in an involuntary case, under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect; or any other similar relief shall
be granted under any applicable federal, state, local or foreign law; or the
board of directors of UDC or the Servicer adopts any resolution or otherwise
authorizes any action to approve any of the foregoing. A decree or order of a
court having jurisdiction in the premises for the appointment of a receiver,
liquidator, sequestrator, trustee, custodian or other officer having similar
powers over UDC or the Servicer or over all or a substantial part of the assets
of UDC or the Servicer shall be entered; or an interim receiver, trustee or
other custodian of UDC or the Servicer or of all or a substantial part of the
assets of UDC or the Servicer shall be appointed or a warrant of attachment,
execution or similar process against any substantial part of the assets of UDC
or the Servicer shall be issued and any such event shall not be stayed,
dismissed, bonded or discharged within sixty (60) days after entry, appointment
or issuance; or the board of directors of UDC or the Servicer adopts any
resolution or otherwise authorizes any action to approve any of the foregoing;
(g) UDC or the Servicer shall fail to make any payment when due with
respect to any Indebtedness of UDC or the Servicer (other than an obligation
payable hereunder), or any breach, default or event of default shall occur, or
any other condition shall exist under any instrument, agreement or indenture
pertaining to any such Indebtedness, if the holder or holders of such
Indebtedness accelerate the maturity of any such Indebtedness or require a
redemption or other repurchase of such Indebtedness and such failure relates to
the acceleration or redemption of an amount in excess of $10,000,000, in the
case of UDC and $2,000,000 in the case of Servicer, and such acceleration shall
continue for a period of five (5) Business Days;
(h) There shall have occurred any event which materially adversely
affects the ability of the Servicer or UDC to perform its obligations hereunder,
or there is a material adverse change in the financial condition or operations
of the Servicer or UDC;
(i) Except with the written consent of the Interested Party, which shall
not be unreasonably withheld, there shall occur a "Change of Control of
Servicer" or a "Change of Control of UDC." For purposes of the preceding
sentence and subject to Section 6.05(a), a "Change of Control of Servicer" shall
mean the occurrence of any event following which at least fifty percent (50%) of
the outstanding voting securities of Servicer shall not at such time be
beneficially owned by UDC or a direct or indirect subsidiary of UDC. A "Change
of Control of UDC" shall mean any one or more of the following events:
(1) A change of control of UDC of a nature that would be
required to be reported in response to Item 6(e) of
Schedule 14A of the Securities Exchange Act of 1934, as
amended ("1934 Act");
(2) A change of control of UDC through a transaction or series
of transactions, such that any person (as that term is
used in Section 13(d) and 14(d)(2) of
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the 1934 Act), excluding affiliates of UDC as of the date
hereof, is or becomes the beneficial owner (as that term
is used in Section 13(d) of the 1934 Act), directly or
indirectly, of securities of UDC representing eighty
percent (80%) or more of the combined voting power of
UDC's then outstanding securities;
(3) Any consolidation or merger of UDC in which UDC is not the
continuing or surviving company or pursuant to which stock
would be converted into cash, securities or other
property, other than a merger of UDC in which the holders
of the shares of stock immediately before the merger have
at least fifty percent (50%) of the ownership of common
stock of the surviving company immediately after the
merger;
(4) The shareholders of UDC approve any plan or proposal for
the liquidation or dissolution of UDC; or
(5) Substantially all of the assets of UDC (equal to at least
75% of the total assets of UDC as shown on its most recent
balance sheet prepared prior to the sale or transfer) are
sold or otherwise transferred to parties that are not
within a "controlled group of corporations" (as defined in
Section 1563 of the Internal Revenue Code of 1986, as
amended) in which UDC is a member.
Notwithstanding anything to the contrary above, this provision shall not apply
to any "Change of Control of UDC" if the person obtaining such control has a net
worth equal to or greater than the net worth of UDC as of the date of such
Change of Control.
(j) At any time, for any reason, any Depository Account is subject to a
Lien;
(k) The Master Agency Agreement is amended without the consent of the
Interested Party; and
(l) Any representation, warranty or statement made by Servicer or UDC in
this Servicing Agreement or in any certificate, report or other writing
delivered pursuant hereto shall prove to be incorrect in any material respect as
of the time when the same shall have been made
Section 5.02. Events of Default by Client. Any of the following acts or
occurrences shall constitute an Event of Default by Client under this Servicing
Agreement:
(a) Failure of Client (or any party on Client's behalf) to make any
payment required to be made under the terms of this Servicing Agreement which
failure continues unremedied for a period of fifteen (15) days after written
notice of such failure shall have been given by Servicer to the Client and
Agent;
(b) The failure of Client (or any party on Client's behalf) to observe
or perform in any material respect any other covenant or agreement required to
be performed under this Servicing Agreement which failure continues unremedied
for a period of five (5) Business Days after written notice of such failure
shall have been given to Client and Agent; provided that, if such failure cannot
be cured by diligent efforts of or for Client within such five (5) Business Day
period, then such time period shall be extended by the shorter of (i) the period
required to cure such failure using the diligent efforts of Client, and (ii)
thirty (30) days;
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(c) The entry with respect to Client of a decree or order for relief by
a court or agency or supervisory authority having jurisdiction under any present
or future federal or state bankruptcy, insolvency or similar law;
(d) Client shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations;
(e) An involuntary case shall be commenced against Client and the
petition shall not be dismissed, stayed, bonded or discharged within sixty (60)
days after commencement of the case; or a court having jurisdiction in the
premises shall enter a decree or order for relief in respect of Client in an
involuntary case, under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect; or any other similar relief shall be granted
under any applicable federal, state, local or foreign law; or the board of
directors of Client adopts any resolution or otherwise authorizes any action to
approve any of the foregoing. A decree or order of a court having jurisdiction
in the premises for the appointment of a receiver, liquidator, sequestrator,
trustee, custodian or other officer having similar powers over Client or over
all or a substantial part of the assets of Client shall be entered; or an
interim receiver, trustee or other custodian of Client or of all or a
substantial part of the assets of Client shall be appointed or a warrant of
attachment, execution or similar process against any substantial part of the
assets of Client shall be issued and any such event shall not be stayed,
dismissed, bonded or discharged within sixty (60) days after entry, appointment
or issuance; or the board of directors of Client adopts any resolution or
otherwise authorizes any action to approve any of the foregoing;
(f) Client shall fail to make any payment when due with respect to any
Indebtedness of Client (other than an obligation payable hereunder), or any
breach, default or event of default shall occur, or any other condition shall
exist under any instrument, agreement or indenture pertaining to any such
Indebtedness, if the holder or holders of such Indebtedness accelerate the
maturity of any such Indebtedness or require a redemption or other repurchase of
such Indebtedness and such failure relates to the acceleration or redemption of
an amount in excess of $10,000,000, and such acceleration shall continue for a
period of five (5) Business Days.
(g) Any representation, warranty or statement made by Client in this
Servicing Agreement or in any report or other writing delivered pursuant hereto
shall prove to be incorrect in any material respect as of the time when the same
shall have been made.
Notwithstanding (c), (d), (e), and (f) above, the Bankruptcy Case, or any
actions or lack of actions as a result of the Bankruptcy Case or Bankruptcy
Code, shall not by itself be an Event of Default as to Client.
Section 5.03. Remedies of Client and Agent.
(a) If an Event of Default as described in Section 5.01 shall have
occurred and be then continuing, the Interested Party may exercise any right or
remedy available to Client or Agent under this Servicing Agreement or under
applicable law and, in addition, may terminate the appointment of Servicer under
this Servicing Agreement by giving sixty (60) days prior written notice of such
termination to Servicer and UDC. Such termination of the appointment of Servicer
shall be without prejudice to any claims of Client or Agent resulting from an
Event of Default by Servicer or UDC. If an Event of Default occurs as described
in Section 5.01(d) through (f) above as to the Servicer, the appointment of
Servicer under this Servicing Agreement may be terminated effective immediately
by the Interested Party upon written notice to the Servicer and UDC.
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(b) Notwithstanding any termination of Servicer pursuant to this Section
5.03, Servicer agrees, at Servicer's expense, to cooperate with Client and Agent
during such sixty (60) day period with respect to the transition of all or part
the duties and obligations of Servicer hereunder to another party as set forth
in Section 6.04 to this Servicing Agreement.
Section 5.04. Remedies of Servicer.
(a) If an Event of Default as described in Section 5.02 shall have
occurred and be then continuing, Servicer may exercise any right or remedy
available to it under this Servicing Agreement or under applicable law,
including termination of Servicer's appointment under this Servicing Agreement
(but not termination of this Servicing Agreement itself) by giving sixty (60)
days prior written notice of such termination to Client and Agent. Such
termination of the appointment of Servicer shall be without prejudice to any
claims of Servicer or UDC resulting from an Event of Default by Client,
provided, however, that Servicer and UDC agree and acknowledge that so long as
Agent does not own any of the Receivables, Agent shall have no liability to
Servicer or UDC pursuant to this Servicing Agreement other than resulting (i)
from a breach of representation or warranty of Agent hereunder or (ii)
instructions given by the Agent as the Interested Party. If an Event of Default
occurs as described in Section 5.02(c) through (e) above as to RAC, Servicer's
appointment under this Servicing Agreement may be terminated effective
immediately by Servicer and UDC upon written notice to the Agent and Client.
(b) Notwithstanding any termination of Servicer pursuant to this Section
5.04, Servicer agrees to cooperate with Client and Agent during such sixty (60)
day period with respect to the transition of all or part the duties and
obligations of Servicer hereunder to another party as set forth in Section 6.04
to this Servicing Agreement; provided that such transition shall be at Client's
expense, and the Servicer shall be entitled to compensation for the services of
Management Employees at a rate of $200 per hour for services related to the
transition.
Section 5.05. Liability and Indemnity.
(a) The Servicer and UDC shall be strictly accountable to Client and
Agent for all payments actually received by it (or any party with which it has
contracted) on Receivables and shall be liable for any actual damages resulting
from its breach of such obligation. However, in no event shall any party to this
Servicing Agreement be liable for any consequential, incidental or special
damages.
(b) Servicer and UDC hereby indemnify Client and Agent from any and all
losses, damages, costs, good faith settlements, expenses, taxes, reasonably
attorneys' and paralegals' fees, and all other liabilities of any kind or nature
whatsoever, resulting, directly or indirectly, in whole or in part, from any
claim, demand or suit by any third party against Client or Agent arising from an
action or omission by the Servicer under this Servicing Agreement or from the
action or inaction of any Servicer Provider.
(c) The following procedures shall apply with respect to any indemnity
obligation pursuant to this Servicing Agreement:
(1) Any party seeking indemnification pursuant to this Servicing
Agreement (the "Indemnified Party") shall give to the party obligated to provide
indemnification to such Indemnified Party (the "Indemnitor") a notice (a "Claim
Notice") describing in reasonable detail the facts giving rise to any claim for
indemnification and shall include in such Claim Notice (if then known) the
amount or the method of computation of the amount of such claim, and a reference
to the provision of this Servicing Agreement or any other agreement, document or
instrument executed hereunder
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or in connection herewith upon which such claim is based; provided, that a Claim
Notice in respect of any action at law or suit in equity by or against a third
Person as to which indemnification will be sought shall be given promptly after
the action or suit is commenced; provided further that failure to give such
notice shall not relieve the Indemnitor of its obligations hereunder except to
the extent it shall have been prejudiced by such failure.
(2) In calculating any amount claimed pursuant to a Claim Notice,
there shall be deducted (i) any insurance recovery in respect thereof (and no
right of subrogation shall accrue hereunder to any insurer), and (ii) the amount
of any tax benefit to the Indemnified Party (or any of its Affiliates) with
respect to such amount (after giving effect to the tax effect of receipt of the
indemnification payments).
(3) After the giving of any Claim Notice pursuant hereto, the
amount of indemnification to which an Indemnified Party shall be entitled shall
be determined: (i) by the written agreement between the Indemnified Party and
the Indemnitor; (ii) by a final judgment or decree of any court of competent
jurisdiction; or (iii) by any other means to which the Indemnified Party and the
Indemnitor shall agree. The judgment or decree of a court shall be deemed final
when the time for appeal, if any, shall have expired and no appeal shall have
been taken or when all appeals taken shall have been finally determined. The
Indemnified Party shall have the burden of proof in establishing the amount
sought through indemnification.
(4) The Indemnified Party shall have the right to conduct and
control, through counsel of its choosing, the defense, compromise or settlement
of any third Person claim, action or suit against such Indemnified Party as to
which indemnification will be sought by any Indemnified Party from any
Indemnitor hereunder, and in any such case the Indemnitor shall cooperate in
connection therewith and shall furnish, at its own expense, such records,
information and testimony and attend such conferences, discovery proceedings,
hearings, trials and appeals as may be reasonably requested by the Indemnified
Party in connection therewith; provided, that the Indemnitor may participate,
through counsel chosen by it and at its own expense, in the defense of any such
claim, action or suit as to which the Indemnified Party has so elected to
conduct and control the defense thereof; and provided, further, that the
Indemnified Party shall not, without the written consent of the Indemnitor
(which written consent shall not be unreasonably withheld), pay, compromise or
settle any such claim, action or suit, except that no such consent shall be
required if, following a written request from the Indemnified Party, the
Indemnitor shall fail, within 14 days after the making of such request, to
acknowledge and agree in writing that, if such claim, action or suit shall be
adversely determined, such Indemnitor has an obligation to provide
indemnification hereunder to such Indemnified Party. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay, settle or
compromise any such claim, action or suit without such consent, provided that in
such event the Indemnified Party shall waive any right to indemnity therefor
hereunder unless such consent is unreasonably withheld.
(d) UDC, until such time as it has transferred all of its rights and
obligations pursuant to this Servicing Agreement to a Spin-Off or another entity
which is not an Affiliate in compliance with Section 6.05, shall be liable to
Client and Agent for any and all liability of Servicer to Client or Agent.
Thereafter, (i) UDC shall not be liable for the liability of Servicer except for
claims against Servicer arising before the effective date of the Spin-Off or
assignment to such other non-Affiliate entity, and (ii) the events of default
listed in Section 5.01 shall not apply to UDC, except for defaults occurring
prior to the effective date of the Spin-Off or such assignment to such other
non-Affiliate entity.
Section 5.06. Force Majeure. Notwithstanding anything herein to the
contrary, no party to this Servicing Agreement shall be considered in default
hereunder or have any liability to any party
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for any failure to perform if such failure arises out of the following causes
beyond the control of such party: acts of God or a public enemy, fire, flood or
war.
ARTICLE VI
TERMINATION
Section 6.01. Term of Agreement. The term of this Servicing Agreement
shall begin on the Effective Date as set forth above and shall continue until
the sixtieth (60th) day after the last Scheduled Payment of the last unpaid
Receivable that is then being serviced by the Servicer (such 60th day, the
"Expiration Date").
Section 6.02. Effect of Termination of Agreement. Upon termination of
this Servicing Agreement, the Servicer shall, at the direction and expense of
the Interested Party, promptly return all Documents and any related files and
correspondence in its possession as are related to the management of the
Receivables and the services provided hereunder.
Section 6.03. Termination of Appointment of Servicer Without Cause.
(a) The Interested Party may terminate the Servicer upon sixty (60) days
written notice to Servicer upon the occurrence of a Performance Event. Upon such
termination, Servicer shall be entitled to receive (i) the accrued and unpaid
servicer fee pursuant to Section 2.07(a)(i), the accrued and unpaid costs and
expenses pursuant to Section 2.10(b), plus (iii) the Deboarding Charge from
Client, but shall not have any other claim resulting from such termination.
(b) Notwithstanding the lack of an Event of Default by Client pursuant
to this Servicing Agreement, Servicer may, so long as there exists no Event of
Default by Servicer or UDC, terminate its appointment as Servicer pursuant to
this Servicing Agreement at any time (1) at least upon at least ninety (90) days
prior written notice to the Client and Agent, and (2) payment of $2 million to
Client as a transition fee (but not as a penalty), which funds will be subject
to the Agent's lien pursuant to the Loan and Security Agreement or any other
documents granting a lien in favor of Agent and Lenders.
(c) Notwithstanding the lack of an Event of Default or a Performance
Event by the Servicer or UDC pursuant to this Servicing Agreement, the
Interested Party may terminate the appointment of Servicer pursuant to this
Servicing Agreement at any time (1) at least upon at least ninety (90) days
prior written notice to the Servicer, and (2) payment by Client of (i) the
accrued and unpaid servicer fee pursuant to Section 2.07(a)(i), the accrued and
unpaid costs and expenses pursuant to Section 2.10(b), plus (iii) $2,000,000 to
the Servicer.
Section 6.04. Transfer of Servicing. Upon termination of the appointment
of Servicer, the Servicer shall cooperate, at the expense of Client (unless such
termination results from an Event of Default by Servicer or UDC or as a result
of Section 6.03(b), in which case at the expense of Servicer), in the transfer
of the Receivables (including any Documents) to such party or parties designated
by the Interested Party in writing. Any matters pending at the effective
termination date will continue to be processed in an orderly and timely fashion;
it being intended, however, that responsibility for the Receivables shall
transfer as quickly as practicable and in any event no later than ninety (90)
days after the giving of notice of termination. After the effective date of the
termination of the appointment of Servicer until such transfer of servicing,
and, if requested, for one hundred twenty (120) days thereafter, the Servicer
shall provide consulting services pursuant to the terms of the Transition
Agreement.
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Section 6.05. Merger or Consolidation of, or Assumption of the
Obligations of, Servicer. (a) Servicer may assign all (but not less than all) of
its rights and obligations pursuant to this Servicing Agreement to any Affiliate
of UDC so long as (1) such Affiliate upon assignment has executed an agreement
of assumption to perform every obligation of the Servicer hereunder, and (2)
immediately after giving effect to such transaction, no Event of Default (as
defined in Section 5.01), and no event which, after notice or lapse of time, or
both, would become an Event of Default as to Servicer or UDC, shall have
happened and be continuing. Such assignment shall not affect UDC's liability to
Client or Agent for any liability of Servicer. In addition, Servicer may assign
all (but not less than all) of its rights and obligations pursuant to this
Servicing Agreement to any Spin-Off of UDC at the time of assignment so long as
such Spin-Off (1) upon assignment has executed an agreement of assumption to
perform every obligation of the Servicer hereunder, and (2) has a tangible net
worth of not less than $20,000,000 at the time it becomes the Servicer, and
agrees in writing not to have less than one (1) full-time collector for every
350 Receivables being serviced under this Servicing Agreement at all future
times when it has obligations pursuant to this Servicing Agreement, and
provided, that immediately after giving effect to such transaction, no Event of
Default (as defined in Section 5.01), and no event which, after notice or lapse
of time, or both, would become an Event of Default as to Servicer or UDC shall
have happened and be continuing. Upon such assignment, UDC shall no longer be
liable to Client or Agent for any liability of Servicer arising after the
effective date of such assignment, but UDC shall remain liable to Client and
Agent for any liability of UDC or Servicer arising on or prior to such date.
(b) Any Person (i) into which the Servicer may be merged or
consolidated, (ii) which may result from any merger or consolidation to which
the Servicer shall be a party, or (iii) which may succeed to the properties and
assets of the Servicer substantially as a whole, which Person, if not an
Affiliate of UDC, has, at the time of such merger or consolidation, (x) a
tangible net worth of not less than $20,000,000, and (y) not less than one (1)
full-time collector for every 350 Receivables being serviced under this
Servicing Agreement, shall be the successor to the Servicer or under this
Servicing Agreement upon execution of an agreement of assumption to perform
every obligation of the Servicer hereunder (which agreement shall require such
Person If not an Affiliate of UDC, to maintain such net worth and ratio of
collectors at all time when it has any obligation pursuant to this Servicing
Agreement) so long as immediately after giving effect to such transaction, no
Event of Default (as defined in Section 5.01), and no event which, after notice
or lapse of time, or both, would become an Event of Default as to Servicer or
UDC shall have happened and be continuing.
(c) Notwithstanding anything to the contrary in this Servicing
Agreement, UDC and Servicer shall be liable to Client and Agent for all actions
and inactions of any Service Provider, and the delegation to a Servicer Provider
of any obligations of UDC or Servicer under this Servicing Agreement shall not
relieve UDC or Servicer of such obligations.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.01. Amendment. This Servicing Agreement may only be amended by
mutual written consent of the parties hereto.
Section 7.02. Waivers. The provisions of this Servicing Agreement may
only be waived by written consent of the party making the waiver. The failure of
either party at any time to require performance by the other of any provision of
this Servicing Agreement shall in no way affect that party's right to enforce
such provision, nor shall the waiver by either party of any breach of any
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provision of this Servicing Agreement be taken or held to be a waiver of any
further breach of the same provision or any other provision.
Section 7.03. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered personally
or mailed by first-class registered or certified mail, postage prepaid, or by
telephonic facsimile transmission and overnight delivery service, postage
prepaid, in any case addressed as follows:
To the Servicer:
Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attn: Steven P. Johnson, Esq.
Fax: (602) 852-6696
With a copy to:
Snell & Wilmer L.L.P.
One Arizona Center
400 East Van Buren
Phoenix, Arizona 85004-0001
Attn: Timothy W. Moser, Esq.
Fax: (602) 382-6070
To Client:
Reliance Acceptance Group, Inc.
400 North Loop
1604 East Suite 210
San Antonio, Texas 87232
Attn: James T. Moran
Fax: (210) 402-0761
With a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: James Stempel, Esq.
Fax: (312) 861-2200
To Agent:
BankAmerica Business Credit, Inc.
40 E. 52nd St.
New York, NY 10022
Attn: Richard Gennario
Fax: (212) 836-5169
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With a copy to:
Sidley & Austin
One First National Plaza
Chicago, IL 60603
Attn: Larry J. Nyhan, Esq.
Fax: (312) 853-7036
Such notice, request, consent or other communication shall be deemed given when
so delivered, or if mailed two days after deposit with the U.S. Postal Service.
Section 7.04. Severability of Provisions. If one or more of the
provisions of this Servicing Agreement shall be held invalid for any reason,
such provisions shall be deemed severable from the remaining provisions of this
Servicing Agreement and shall in no way affect the validity or enforceability of
such remaining provisions. To the extent permitted by law, the parties hereto
hereby waive any law which renders any provision of this Servicing Agreement
prohibited or unenforceable.
Section 7.05. Rights Cumulative. All rights and remedies under this
Servicing Agreement are cumulative, and none is intended to be exclusive of
another. No delay or omission in insisting upon the strict observance or
performance of any provision of this Servicing Agreement, or in exercising any
right or remedy, shall be construed as a waiver or relinquishment of such
provision, nor shall it impair such right or remedy. Every right and remedy may
be exercised from time to time and as often as deemed expedient.
Section 7.06. Servicer and UDC Offset. The obligations of Servicer and
UDC pursuant to this Servicing Agreement shall be subject to any defense,
counterclaim or right of offset which Servicer or UDC may have against any other
party to this Servicing Agreement, any Receivable or otherwise except to the
extent provided in the Payment Reimbursement Dispute Resolution Policy, a copy
of which is attached to this Servicing Agreement as Exhibit F.
Section 7.07. Client and Agent Offset. The obligations of Client
pursuant to this Servicing Agreement shall be subject to any defense,
counterclaim or right of offset which Client may have against UDC or Servicer
pursuant to this Servicing Agreement, any Receivable or otherwise except to the
extent provided in the Payment Reimbursement Dispute Resolution Policy, a copy
of which is attached to this Servicing Agreement as Exhibit F.
Section 7.08. Powers of Attorney. Servicer is made Client's
attorney-in-fact for the limited purpose of signing documents necessary to
maintain perfection of the liens and security interests in the Financed
Vehicles, release a lien upon full payment of a Receivable, to transfer title to
the buyer of a Financed Vehicle at a sale foreclosing such security interest
following repossession, file insurance claims and endorse checks for deposit to
the Client's lock box account. With respect to other matters, Client shall, from
time to time, provide to the employees of the Servicer limited, revocable powers
of attorney or other such written authorizations as may be appropriate to enable
the Servicer to perform its obligations under this Servicing Agreement; provided
however, that Client shall not be required to provide such powers with respect
to any matter for which Client does not have authority to perform itself.
Section 7.09. Captions. The article, paragraph and other headings
contained in this Servicing Agreement are for reference purposes only, and shall
not limit or otherwise affect the meaning hereof.
30
<PAGE> 31
Section 7.10. Decisions and Direction. Notwithstanding anything to the
contrary in this Servicing Agreement, when the Servicer shall be required to
submit a matter in writing for approval or consent of the Interested Party, the
following procedures shall apply:
(a) So long as the Agent is the Interested Party, the Servicer shall
submit such request simultaneously to both the Client and Agent with all
relevant information necessary to permit Client and Agent to make an informed
decision on such request. If, by 3:00 p.m. (Phoenix time) on the fourth (4th)
Business Day after the submission of such request and information to Client and
Agent (the "Initial Response Date"), Client shall not have informed Servicer in
writing of its response to such request, Client shall be deemed to have accepted
such request. If Client does respond to such request, it shall submit such
response in writing to Servicer by 3:00 p.m. (Phoenix time) on the Initial
Response Date. After receiving a written response to its request from Client,
Servicer shall cause Agent to receive such written response promptly, but no
later than 5:00 p.m. (Phoenix time) on the Initial Response Date. If Servicer
has not received a written response to its request by 3:00 p.m. (Phoenix time)
on the Initial Response Date, it shall inform Agent in writing by 5:00 p.m.
(Phoenix time) on the Initial Response Date of such lack of response. So long as
Agent, by 5:00 p.m. (Phoenix time) on the Initial Response Date, shall have
received from Servicer Client's written response or notice in writing that
Client has not responded, Agent shall respond in writing to Servicer, by 5:00
p.m. (Phoenix time) on the third Business Day after it receives from Servicer
either Client's written response or notice in writing that Client has not
responded (the "Second Response Date"), as to whether it agrees with Client's
response. If Agent does not agree with Client's response, Agent's response shall
control and the Servicer may act accordingly. So long as Agent shall have
received the proper written notice from Servicer by 5:00 p.m. (Phoenix time) on
the Initial Response Date, if Agent does not respond by 5:00 p.m. (Phoenix time)
on the Second Response Date, Agent shall be deemed to have accepted (1) Client's
response, if one has been give by Client, or (2) Servicer's request, if Client
did not respond to such request by 3:00 p.m. (Phoenix time) on the Initial
Response Date and the Servicer may act accordingly.
(b) So long as Client is the Interested Party, the Servicer shall submit
such request to Client with all relevant information necessary to permit Client
to make an informed decision on such request. If, by 5:00 p.m. (Phoenix time) on
the Initial Response Date, Client shall not have informed Servicer in writing of
its response to such request, Client shall be deemed to have accepted such
request. If Client does respond to such request, it shall submit such response
in writing to Servicer by 5:00 p.m. (Phoenix time) on the Initial Response Date.
All decisions to be made by Servicer pursuant to this Agreement shall be made by
the Servicer in its sole discretion using the Standard of Care set forth in
Section 2.15 of this Servicing Agreement.
Section 7.11. Assignment and Binding Effect. Except as provided in this
Servicing Agreement, no party to this Servicing Agreement other than the Agent
may assign any of its rights or obligations pursuant to this Servicing Agreement
without the consent of the other parties hereto, provided, however, that
Servicer and UDC acknowledge that Client's rights under this Servicing Agreement
may be assigned to Agent with the prior notice to them but without their prior
consent, and Servicer and UDC agree, upon such assignment, to recognize Agent as
having all rights of Client under this Servicing Agreement.
Section 7.12. Legal Holidays. In the case where the date on which any
action required to be taken, document required to be delivered or payment
required to be made is not a Business Day, such action, delivery or payment need
not be made on that date, but may be made on the next succeeding Business Day.
31
<PAGE> 32
Section 7.13. Counterparts. This Servicing Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.
Section 7.14. Governing Law. This Servicing Agreement shall be deemed
entered into with and shall be governed by and interpreted in accordance with
the laws (except for the conflict of law principles) of the State of Arizona,
except to the extent that it is mandatory that the laws of some other
jurisdiction apply.
Section 7.15. Parties. This Servicing Agreement shall inure solely to
the benefit of and shall be binding upon the parties hereto, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any equitable right, remedy or claim under or
in respect of or by virtue of this Servicing Agreement or any provision
contained herein.
Section 7.16. Confidentiality of Servicer's Proprietary Information.
Client and Agent acknowledge that the designs, specifications, manuals,
documentation and other materials produced by Servicer and related to the
services performed and the products provided hereunder (collectively
"Documentation"), and all other systems, programs, designs, specifications,
manuals, documentation and other materials which are developed by the Servicer
in connection with this Servicing Agreement (collectively "Other Materials") are
the confidential property and information of the Servicer and shall remain as
such property and information of the Servicer, both before and after the term of
this Servicing Agreement. Client and Agent shall not copy, sell, assign,
transfer, distribute or disclose all or any part of the Documentation or Other
Materials to any other person, partnership, corporation or other entity, except
its Advisors or as otherwise permitted herein. Client and Agent shall confine
the knowledge and use of the Documentation and Other Materials only to their
employees and Advisors who require such knowledge and use in the ordinary course
and scope of their employment, and Client and Agent and such employees shall use
such Documentation and Other Materials solely in connection with Client's and
Agent's own purposes under this Servicing Agreement. Further, employees and
Advisors of Client or Agent shall be advised of the confidential nature of the
Documentation and Other Materials and be directed by Client and Agent to keep
such information confidential. Notwithstanding the foregoing, the Client and
Agent may disclose such Documents and Other Materials to Persons in addition to
Advisors provided that Client and Agent give the Servicer ten (10) days prior
written notice of such disclosure and, if required by the Servicer in its sole
discretion, such person(s) signs a Confidentiality Letter in the form attached
hereto as Exhibit G.
Section 7.17. No Solicitation of Employees. During the term of this
Servicing Agreement, Client and Agent shall not directly or indirectly solicit
employees to leave the employ of the Servicer.
Section 7.18. Attorneys' Fees. In the event of any action at law or suit
in equity or a claim in bankruptcy or other proceeding to enforce this Servicing
Agreement, the prevailing party shall be entitled to receive, in addition to any
other sums which it is awarded, all costs and expenses of such action or suit,
including reasonable attorneys fees paid.
Section 7.19 Entire Agreement. This Servicing Agreement, the Transition
Agreement, the documents incorporated by reference herein and therein, express
the entire agreement of the parties hereto, and supersede all prior promises,
representations, understandings, arrangements and agreements between the parties
with respect to the subject matter contained herein. The parties hereto further
acknowledge and agree that neither of them has made any representations to
induce the execution and delivery of this Servicing Agreement except those
expressly set forth herein.
32
<PAGE> 33
IN WITNESS WHEREOF, the parties have caused this Servicing
Agreement to be duly executed by their respective authorized representatives on
the 6th day of February 1998.
UGLY DUCKLING CORPORATION, a Delaware
corporation
By: RUSSELL GRISANTI
Its: Executive Vice President
"Servicer"
RELIANCE ACCEPTANCE CORPORATION, a
Delaware corporation
By:______________________________________________
Its:_____________________________________________
"Client"
BANKAMERICA BUSINESS CREDIT, INC., a
Delaware corporation
By:______________________________________________
Its:_____________________________________________
"Agent"
33
<PAGE> 34
Schedule 1 Receivables
Schedule 2 Bonus Fees
Exhibit A Collection Policy
Exhibit B Depository Accounts
Exhibit C Performance Events
Exhibit D Receivable Reports
Exhibit E Servicer Certificates
Exhibit F Payment Reimbursement Dispute Resolution Policy
Exhibit G Confidentiality Letter
Exhibit H Master Agency Agreement
Exhibit I Management Employees
Exhibit J Senior Management Employees
Exhibit K Form of Expense Report
34
<PAGE> 35
SCHEDULE 1
RECEIVABLES
<TABLE>
<CAPTION>
Name Account No. Principal Balance
---- ----------- -----------------
<S> <C> <C>
</TABLE>
[OMITTED]
<PAGE> 36
SCHEDULE 2
BONUS FEES
As additional consideration for agreeing to service the
Receivables, the Servicer shall receive:
1. The first One Million Three Hundred Thousand Dollars
($1,300,000.00) in proceeds realized by Client from the sale of the pool of
Defaulted Receivables existing as of the date Client files its petitions for
relief under Chapter 11 of the Bankruptcy Code (including any sale to UDC or an
Affiliate that bids at least $1.3 million) so long as UDC or an Affiliate has
bid at least $1.3M in cash upon sale for such Receivables; and
2. After all claims of the Lenders (the "Bank Debt") have been
paid (i) in cash in full, or (ii) in other than cash in full, with the consent
of Lenders in full and final satisfaction;
(A) without the use of any Litigation Proceeds, Warrant
Proceeds or Equity Proceeds (collectively, the
"Excluded Proceeds"), (I) the first amount equal to
Base Amount (as defined below) of Cash Flow (as
defined below); and (II) after payment of such
amount in (I), thereafter, 25% of the Cash Flow (as
defined below), or
(B) with the use of Excluded Proceeds, then
additionally after net collections on the
Receivables in an amount equal to such Excluded
Proceeds applied to the Bank Debt (which such
Excluded Proceeds shall remain the property of the
Client) (I) the first amount equal to Base Amount
(as defined below) of Cash Flow (as defined below);
and (II) after payment of such amount in (I),
thereafter, 25% of the Cash Flow (as defined
below).
The amounts payable pursuant to Items 1 or 2 shall be payable immediately upon
Client's receipt of the relevant proceeds or Cash Flow.
The term "Base Amount" shall mean $4,700,000, minus any and all
Exit Sale Proceeds previously paid to the Servicer pursuant to Section 2.20(c).
The term "Cash Flow" shall mean any and all cash proceeds of
Client's (including Client, as reorganized) assets, including, without
limitation, collections with respect to the Receivables, the Bank Portfolio,
disposition and recovery proceeds from Defaulted Receivables and other
Receivables, proceeds from the sale of other miscellaneous assets previously or
currently owned by Client, including, without limitation, any securitization
transactions and tax refunds. "Cash Flow" shall not include any proceeds from
claims and causes of action of Client.
The terms "Litigation Proceeds," "Warrant Proceeds" and "Equity
Proceeds" shall have the meaning set forth in the Plan of Reorganization of the
Client as originally filed, without amendment, on February 9, 1998.
<PAGE> 37
EXHIBIT A
COLLECTION POLICY
[Full copy of Collection Manual to be attached]
<PAGE> 38
EXHIBIT B
DEPOSITORY ACCOUNTS
Bank One, Arizona, N.A.
201 North Central Avenue, 26th Floor
Phoenix, Arizona 85004
Attn: Mr. Russ Gunderson
Phone: (602) 221-1033
Acct: 0987-4687 (Collection)
Acct: 0987-4628 (ARD)
Bank One, Texas, N.A.
PO Box 655415
Dallas, Texas 75265-5415
Attn: Ms. Kim Spencer
Phone: (214) 290-2533
Acct: 1826339630
Barnett Bank, Inc.
1 Progress Plaza, Suite 290
St. Petersburg, Florida 33701
Attn: Mr. Jeff McRae
Phone: (813) 892-1559
Acct: 1266693164 (Collection)
Acct: 1266692930 (ARD)
Las Vegas Business Bank
PO Box 82503
Las Vegas, Nevada 89180
Attn: Ms. Mary Gould
Phone: (702) 794-0070
Acct: 1008625
NationsBank
PO Box 25500
Albuquerque, New Mexico 87125
Attn: Ms. Claire Dobbins
Phone: (505) 282-4361
Acct: 2864323730
<PAGE> 39
EXHIBIT C
PERFORMANCE EVENTS
The occurrence of either of the following shall constitute a
Performance Event:
1. The percentage (computed on the Outstanding Principal Balance)
of Receivables other than Defaulted Receivables that are Delinquent Receivables
but not Defaulted Receivables (computed on the Outstanding Principal Balance) as
of the end of any two consecutive Collection Periods shall exceed the aggregate
of the Effective Date Delinquency Rate plus 300 basis points.
2. The Annualized Defaulted Receivable Loss shall exceed:
For any of the first 4 full Collection Periods
after the Effective Date 33%
For any of the 5th through the 8th, inclusive, full
Collection Periods after the Effective Date 30%
Thereafter for any Collection Period 27%
For purposes of the Performance Events, the following words and
phrases shall have the following meaning:
A. "Annualized Defaulted Receivable Loss" shall mean (i) the
Outstanding Principal Balance of all Receivables that first became a Defaulted
Receivable during a Collection Period divided by the Outstanding Principal
Balance of all Receivables (other than Receivables that previously became
Defaulted Receivables) as of the first day of the same Collection Period, (ii)
multiplied by 12.
B. "Delinquent Receivables" shall mean any Receivables that are
not Defaulted Receivables for which at least 10% of the Scheduled Payment is 30
days or more delinquent on a contractual basis.
C. "Effective Date Delinquency Rate" shall mean the percentage
(computed on the Outstanding Principal Balance) of Receivables that are not
Defaulted Receivables which were Delinquent Receivables but not Defaulted
Receivables as of the last day of the Collection Period immediately preceding
the Effective Date.
<PAGE> 40
EXHIBIT D
SERVICER REPORTS
A. Daily Reports (to be provided by 3:00 P.M. (New York time) the next
Business Day)
1. Daily cash collection report by branch and by source (e.g. A/R
cash, repossession cash, refund cash, fee cash, N.S.F. checks,
etc.).
2. Total amount wired to Agent each day.
B. Weekly Reports (to be provide within three (3) Business Days of the end
of the week)
1. Balance in the cash collection account as of the end of the week
C. Monthly Reports (to be provide within fifteen (15) Days of the end of
the calendar month)
1. Aging of accounts receivable to 120 days
2. Defaulted Receivable Report showing (i) the deficient balance of
each account charged-off and the status of such account (e.g. in
litigation, skipped account, etc.), and (ii) the aggregate
balance of all charged-off accounts by category (e.g. in
litigation, skipped account, etc.), with a separate listing for
charge-offs occurring during the month.
3. Reconciliation of accounts receivable showing (i) all additions
and subtractions by category to the balance of each Receivable
during the month (e.g. additions or subtractions by way of
collections, fees, late charges, write downs, charge-offs,
returned checks, etc.), and (ii) by such categories, the
aggregate additions and subtractions for all Receivables, with
separate listings for additions and subtractions during the
month.
4. Deferment and Extensions Report listing (i) any deferment or
extension granted, and its duration, for each Receivable, and
(ii) the aggregate number of deferments or extensions granted for
all Receivables with a separate listing for deferments and
extensions granted during the month.
5. Due Date Change Report listing (i) the current due date for each
Receivable and any change to the due date, and (ii) any change to
the balance for each future day made during the current month,
with a separate listing for changes made to individual
Receivables during the current month and all due date changes
made during the life of the Receivable, including the current
month.
6. Bankruptcy Report listing each account in bankruptcy and the
aggregate balance of all accounts in bankruptcy, including a
separate listing showing each account which has entered or exited
bankruptcy during the current month and the aggregate balance of
all such accounts.
7. Repossession Report, in detail acceptable to the Client and
Agent, detailing separately (i) each account in repossession and
the aggregate balance of all
<PAGE> 41
accounts in repossession, (ii) all vehicles sold at auction
during the current month, the loan balance for each such account
and the aggregate balance for all such accounts, the value of
each vehicle and the aggregate value of all vehicles at the time
of repossession, and the individual and aggregate gross and net
amounts received from auction, and (iii) all fees by category for
repossessing vehicles both by account and in the aggregate (for
the current month and during the term of the Servicing
Agreement).
<PAGE> 42
EXHIBIT E
SERVICER CERTIFICATE
The undersigned, ____________________________, the _____________ of
_____________________________ ("Company") does hereby certify on behalf of
Company pursuant to that certain Servicing Agreement dated February _____, 1998,
between UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC"), RELIANCE
ACCEPTANCE CORPORATION, a Delaware corporation ("Client') and BANKAMERICA
BUSINESS CREDIT, INC., a Delaware corporation ("Agent") (the "Servicing
Agreement") that (i) all reports and data, regardless of the form or medium in
which delivered to Client or Agent, prior to or contemporaneously with this
Certificate, are accurate and complete, (ii) the representations and warranties
of the undersigned and UDC contained in the Servicing Agreement and made as of
the execution thereof are true and correct on and as of the date of this
Certificate, (iii) Servicer is entitled pursuant to the Servicing Agreement to
reimbursement of all expenses for which Servicer seeks reimbursement hereunder
and Servicer has incurred such expenses prior to the date hereof; and (iv) the
undersigned and UDC are not in default of the Servicing Agreement as of the date
of this Certificate.
Date: __________________, ____ ___________________________________________
a ___________ corporation
By:______________________________________
Its:_____________________________________
<PAGE> 43
EXHIBIT F
PAYMENT REIMBURSEMENT DISPUTE RESOLUTION POLICY
(a) In the event of a dispute between the parties hereto regarding the
subject matter hereof, the parties hereto agree to explore resolution of the
dispute through negotiation or alternative dispute resolution techniques
including, but not limited to, the appointment of unrelated third parties who
may act as an independent arbitration panel.
(b) Should the Servicer and Interested Party agree to arbitration, the
number of arbitrators shall be three (3) and shall be appointed as follows:
within ten (10) days of written agreement to arbitrate, Servicer and Interested
Party shall each designate one (1) arbitrator who has knowledge and experience
in commercial matters, and the (2) arbitrators so designated shall jointly
appoint a third arbitrator within ten (10) days of their respective
appointments. The arbitrators so selected shall schedule a hearing on the
disputed issues within forty-five (45) days after the last appointment. The
decision of a majority of the arbitrators shall become binding on the parties,
and the arbitrator shall deliver their written decision to the parties as
expeditiously as possible. The arbitration shall be conducted either in Phoenix,
Arizona or in Chicago, Illinois, and shall be governed by the law of the state
where the arbitration is held. The cost of the arbitration, including reasonable
attorneys' fees, shall be charged against the non-prevailing party. A default
judgment may be entered against any party who fails to appear at the arbitration
hearing. The decision of the arbitrators shall be final and unappealable and
shall be filed as a judgment of record in the appropriate jurisdiction and shall
be grounds for dismissal of any court action commenced by any party with respect
to a dispute arising out of the issues submitted for arbitration.
(c) In the event that Servicer in good faith believes that it is owed
any amounts pursuant to Section 2.07 or 2.10(b) after the applicable due date
for payment, it shall notify the other parties to this Servicing Agreement, and
the parties shall in good faith attempt to resolve such claim. To the extent
that the claim cannot be resolved by the parties within five (5) Business Days,
then the parties hereby agree to determine, within ten (10) Business Days
thereafter, whether the claim will be resolved by arbitration as provided above.
The amount in dispute may be deposited by Servicer from Collections into a joint
order, interest bearing account at a mutually acceptable depository institution
no earlier than three (3) Business Days after the expiration of the initial five
(5) Business Day period. The prevailing party in any dispute over such amounts
shall be entitled to all funds placed in such escrow, plus all accrued interest
thereon.
<PAGE> 44
EXHIBIT G
CONFIDENTIALITY LETTER
[DATE]
[NAME AND ADDRESS OF COMPANY/
PERSON BOUND BY LETTER]
RE: CONFIDENTIALITY LETTER -- ACCEPTANCE OF CONFIDENTIALITY
PROVISIONS TO PROTECT CONFIDENTIAL PROPERTY AND INFORMATION
Ladies and Gentlemen:
__________________ ("Company") hereby acknowledges the
confidentiality provisions ("Confidentiality Provisions") to protect
Confidential Information (as defined below) to which this letter relates, made
by Reliance Acceptance Corporation ("RAC") and BankAmerica Business Credit,
Inc., as agent for a lending group ("BABCI"), for the benefit of Ugly Duckling
Corporation ("UDC") and one or more of its subsidiaries or affiliates
("Servicer"), found in the Servicing Agreement by and between the preceding
parties, dated as of _______________, 1998, ("Servicing Agreement"). Company
hereby agrees to be bound by the terms and conditions of the Confidentiality
Provisions found at Section 7.16 of the Servicing Agreement with respect to all
Confidential Information provided by RAC, BABCI, UDC and/or Servicer to Company.
Company also acknowledges that the Confidential Information includes property
and information of the Servicer both before and after the term of the Servicing
Agreement. Company shall not copy, sell, assign, transfer, distribute or
disclose all or any part of the Confidential Information to any other person,
partnership, corporation or other entity, without the prior written consent of
Servicer. Company shall confine the knowledge and use of the Confidential
Information only to its employees who require such knowledge and use in the
ordinary course and scope of their employment, and Company and its employees
shall use such Confidential Information solely in connection with assisting
RAC's and/or BABCI's purposes under the Servicing Agreement. Further, employees
of Company shall be advised of the confidential nature of the Confidential
Information and be directed by Company to keep such information confidential.
Upon any expiration or termination of the Servicing Agreement or earlier if
appropriate, Company shall promptly return to the Servicer all property or
information that is covered by this confidentiality letter and which is not
required by Company to service its "Receivables" or to realize upon its
"Collateral" (each as defined in the Servicing Agreement).
"Confidential Information" shall mean the designs,
specifications, manuals, documentation and other materials produced by Servicer
and related to the services performed and the products provided hereunder, and
all other systems, programs, designs, specifications ,manuals, documentation and
other materials which are developed by the Servicer in connection with the
Servicing Agreement.
Date: __________________, 1998 [NAME OF COMPANY OR PERSON]
By:____________________________________
Name:__________________________________
Its:___________________________________
<PAGE> 45
EXHIBIT H
MASTER AGENCY AGREEMENT
[To be provided by Ugly Duckling]
<PAGE> 46
EXHIBIT I
MANAGEMENT EMPLOYEES
[OMITTED]
<PAGE> 47
EXHIBIT J
SENIOR MANAGEMENT EMPLOYEES
[OMITTED]
<PAGE> 48
EXHIBIT K
FORM OF EXPENSE REPORT
[OMITTED]
<PAGE> 1
EXHIBIT 10.6
EXECUTION COPY
AGREEMENT OF UNDERSTANDING
This AGREEMENT OF UNDERSTANDING (this "Agreement") is made and entered into
as of February 9, 1998 by and among Reliance Acceptance Group, Inc., a Delaware
corporation ("RAG"), Reliance Acceptance Corporation, a Delaware corporation
("RAC"), the wholly-owned subsidiaries of RAC listed on the signature page
hereto (the "Subsidiaries"), and Ugly Duckling Corporation, a Delaware
corporation ("UDC"), by and through one of its subsidiaries or affiliates. RAG,
RAC, the Subsidiaries and UDC are collectively referred to herein as the
"Parties" and individually as a "Party".
RECITALS
WHEREAS, RAG and UDC entered into a letter of intent dated December 19,
1997 (as amended pursuant to a letter agreement dated January 15, 1998, the
"Letter of Intent") (Capitalized terms used herein but not otherwise defined
herein shall have the meanings given such terms in the Letter of Intent);
WHEREAS, pursuant to the Letter of Intent, RAG and UDC agreed to negotiate
and execute definitive agreements, including, without limitation, the
Transition Services Agreement dated as of February 9, 1998 (the "Transition
Agreement") between UDC, by and through one of its subsidiaries or affiliates,
and RAG, the Warrant Agreement and the Servicing Agreement (the "Transaction
Agreements");
WHEREAS, the Transaction Agreements contemplate the filing of chapter 11
petitions by RAG, RAC and the Subsidiaries (collectively, the "Reliance
Entities") and the preparation, filing, confirmation and consummation of a
joint plan of reorganization in the chapter 11 cases of such entities;
WHEREAS, the Reliance Entities are currently negotiating the terms and
conditions of a plan of reorganization with their respective senior secured
lenders and other creditors and parties in interest;
WHEREAS, the Reliance Entities believe that it is in the best interest of
the Reliance Entities and their creditors for such Entities to seek relief under
chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") and,
concurrently therewith, file a proposed plan of reorganization incorporating the
terms of the Transaction Agreements as substantially embodied in the draft joint
plan attached hereto as Exhibit A (the "Draft Plan") and a related disclosure
statement (the "Disclosure Statement"); and
WHEREAS, the parties hereto desire to set forth their agreement regarding
the preparation, execution and delivery of the Transaction Agreements, the
Consensual Plan (as defined below) and the Disclosure Statement and the
consummation of the transactions contemplated thereby;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the terms and
conditions herein contained, the adequacy and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:
1. Preparation of the Plan and other Materials. Promptly upon execution of
this Agreement, the Reliance Entities shall instruct its counsel to (a)
negotiate with its lenders and file a plan of reorganization incorporating the
terms and provisions of the Draft Plan (the "Consensual Plan"); and (b) prepare
(i) petitions (the "Petitions") for relief under chapter 11 of the Bankruptcy
Code; (ii) all schedules, motions, pleadings and other papers necessary in
connection with the filing of the Petitions (including, without limitation, the
Section 363 Sale Motion); and (iii) a Disclosure Statement describing the
Reliance Entities and the Consensual Plan and seeking the consent of each class
of impaired claims and interests identified in the Draft Plan. The Reliance
Entities' counsel shall consult with counsel to UDC with respect to such
documents and provide UDC and its counsel reasonable opportunity to review and
comment on drafts thereof.
2. Timetable for Plan of Reorganization and Solicitation and Filing. The
Reliance Entities shall use their respective good faith efforts to (a) file the
Petitions on or before February 10, 1998; (b) file the Disclosure Statement on
or before March 9, 1998; and (c) obtain Bankruptcy Court approval of the
adequacy of the Disclosure Statement by April 20, 1998. Not later than five
business days after such Bankruptcy Court approval (or such other date as the
Bankruptcy Court orders), the Reliance Entities shall distribute the Disclosure
Statement to all known members of each class of impaired claims or interests
identified in the Consensual Plan and shall solicit the consent of each such
class of claims and interests in compliance with the Bankruptcy Code and Federal
Rules of Bankruptcy Procedure. The solicitation period shall remain open for 35
calendar days (or such longer period as the Bankruptcy Court orders). The
Reliance Entities shall use their respective good faith efforts to notice a
hearing on confirmation of the Consensual Plan, to convene not more than 45 days
after the date the Disclosure Statement is approved and to conclude not more
than 60 days after such approval.
3. Timetable for Consummation of Transactions. The Parties shall use their
respective good faith efforts to consummate the transactions contemplated by the
Transaction Agreements (the "Closing") on the later of (a) the eleventh day
after the entry by the Bankruptcy Court of the Confirmation Order, unless after
the entry of the Confirmation Order, UDC elects in its sole discretion to
proceed with the closing prior to such eleventh day; (b) the first business day
subsequent to the entry by the Bankruptcy Court of the Confirmation Order on
which there is no stay of the Confirmation Order or the closing in effect; or
(c) such other time as the parties mutually agree, but in no event later than
August 1, 1998. The Parties agree that time is of the essence with respect to
the transactions contemplated hereby. At the Closing, the Transition Agreement
shall terminate in accordance with its terms; UDC (or the applicable affiliate
thereof) and RAG shall execute and deliver the Servicing Agreement in the form
attached hereto as Exhibit C, and UDC and RAG shall execute and deliver a
Warrant Agreement with terms and conditions consistent with those described in
the Letter of Intent (the "Warrant Agreement").
4. Support of the Consensual Plan. Each Party will use its reasonable best
efforts to obtain approval of the motions for approval of the Transition
Agreement and the Break-
2
<PAGE> 3
Up Fee (as defined in paragraph 5 below) and confirmation of the Consensual Plan
in accordance with the Bankruptcy Code and the timetables set forth in Sections
2 and 3, respectively. Each Party will use its reasonably best efforts to
achieve confirmation including recommending to the holders of impaired claims
and interests that the Consensual Plan be confirmed. No Party shall (a) object
to confirmation of the Consensual Plan or otherwise commence any proceeding to
oppose or alter the Consensual Plan or any other reorganization documents
containing terms and conditions consistent with those contained in the Draft
Plan (the "Plan Documents"), (b) vote for, consent to, support or participate in
the formulation of any other plan of reorganization or liquidation proposed or
filed or to be proposed or filed in any chapter 11 or chapter 7 case commenced
in respect of any Reliance Entity, (c) directly or indirectly seek, solicit,
support or encourage any other plan, proposal or offer of dissolution, winding
up, liquidation, reorganization, merger or restructuring of the Reliance
Entities that could reasonably be expected to prevent, delay or impede the
successful reorganization of the Reliance Entities as contemplated by the Draft
Plan, (d) object to the Disclosure Statement or the compliance of the
solicitation of consents to the Consensual Plan with Bankruptcy Code Section
1126 or (e) take any other action that is inconsistent with, or that would delay
confirmation of the Consensual Plan; provided, however, that no Party shall be
barred from taking any action with respect to any matter which action is not
inconsistent with the Transaction Agreements and/or the Consensual Plan.
5. Break-Up Fee. On the date the Petitions are filed (the "Petition
Date"), RAG shall file a motion (after consulting with and obtaining the input
from counsel to UDC) seeking a hearing date on approval of the Transition
Agreement in the form attached hereto as Exhibit B, and the Break-Up Fee (as
defined below) on or before the tenth day following the Petition Date. Such
motion shall request the UDC's claim for the Break-Up Fee be afforded status as
a superpriority administrative claim secured by a lien on the Reliance Entities'
assets. The Bankruptcy Court order approving the Transition Agreement and the
Break-Up Fee shall be reasonably satisfactory in form and substance to each
Party hereto (the "Break-Up Fee Order"). The Reliance Entities shall pay to UDC
a $2,000,000 fee (the "Break-Up Fee") in the event that after the Bankruptcy
Court has entered the Break-Up Fee Order, (a) RAG and UDC execute and deliver
the Warrant Agreement and (b)(i) UDC terminates the Transition Agreement, the
Servicing Agreement or this Agreement by written notice after the Reliance
Entities materially breach the Transition Agreement or this Agreement at any
time or the Servicing Agreement prior to the effective date of the Consensual
Plan, as applicable (provided that at such time UDC is not then in breach of any
of such Agreements); or (ii) the Transactions are not consummated solely as a
result of the Reliance Entities' entering into an alternative transaction with a
counterparty other than UDC; it being understood that the conditions described
in clauses (a) and (b) shall not be satisfied if the Transactions are not
consummated due to the failure of a condition to Closing set forth in paragraph
6 below to have been satisfied. UDC shall pay to the Reliance Entities a
$2,000,000 fee (the "Reliance Break-Up Fee") in the event that after the
Bankruptcy Court has entered the Break-Up Fee Order, the Reliance Entities
terminate the Transition Agreement, the Servicing Agreement or this Agreement by
written notice after UDC materially breaches the Transition Agreement or this
Agreement at any time or the Servicing Agreement prior to the effective date of
the Consensual Plan, as applicable (provided that at such time the Reliance
Entities are not then in breach of any of such Agreements).
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<PAGE> 4
6. Conditions to Closing of the Transactions. The Parties
obligations to consummate the transactions contemplated by the Transaction
Agreements are subject to the satisfaction of the following conditions:
(a) The Break-Up Fee Order shall have been entered by the Bankruptcy
Court on or before the twentieth day after the Petition Date;
(b) The Bankruptcy Court shall have entered an order approving the
Disclosure Statement on or before May 29, 1998 in form and substance
satisfactory to the Reliance Entities;
(c) The Reliance Entities shall have obtained the acceptance of the
Consensual Plan from the requisite classes of claims and equity interests;
(d) The Bankruptcy Court shall have entered the Confirmation Order
approving, among other things, the Consensual Plan (as the same may have been
modified or amended, so long as such modification and/or amendment does not
adversely affect UDC's rights as set forth in the Transaction Documents and the
Consensual Plan) on or before July 10, 1998 in form and substance satisfactory
to the Reliance Entities;
(e) UDC and the Reliance Entities shall have executed and delivered
the Servicing Agreement;
(f) UDC and RAG shall have executed and delivered the Warrant
Agreement; and
(g) The Reliance Entities and their senior secured lenders shall have
executed and delivered the post-confirmation loan agreement referred to in the
Consensual Plan.
7. Representations and Warranties. Each Party represents and
warrants to the other Parties that (a) it has full power and authority, and has
taken all action necessary to execute, deliver and perform this Agreement and
all documents required to be executed and delivered by it in connection
herewith, to fulfill its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby, subject to the
entry of any and all required Bankruptcy Court orders; (b) the making and
performance by it of this Agreement and all documents required to be executed
and delivered by it in connection herewith, and fulfillment of its obligations
hereunder and thereunder, do not violate any law or regulation of the
jurisdiction under which it exists, any other law or regulation applicable to
it or constitute a breach or default of any material agreement to which it is a
party or by which it is bound, or contravene any provision of any document
under which it was organized; and (c) this Agreement and all documents required
to be executed hereunder have been duly executed and delivered by it and
constitute its legal, valid and binding obligation, enforceable (subject to any
bankruptcy, insolvency, reorganization, restructuring, moratorium or similar
laws affecting creditors' rights generally) against it in accordance with the
respective terms hereof and thereof.
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<PAGE> 5
8. Miscellaneous.
(a) This Agreement, together with the Exhibits hereto, constitute the
complete agreement of the Parties with respect to the subject matters referred
to herein and supersede all prior or contemporaneous negotiations, promises,
covenants, agreements or representations of every nature whatsoever with respect
thereto, all of which have become merged finally integrated into this Agreement.
This Agreement cannot be amended, modified or supplemented except by an
instrument in writing executed by the Parties.
(b) Except as otherwise provided in the Transaction Agreements, each Party
agrees, at its cost and expense, to execute and deliver, or to cause to be
executed and delivered, all such instruments and to take all such action as any
other Party may reasonably request in order to effectuate the intent and
purposes of, and to carry out the terms of this Agreement.
(c) It is acknowledged and agreed by the Parties that (except as otherwise
set forth herein) money damages would not be a sufficient remedy for any breach
of this Agreement by any Party and each non-breaching Party shall be entitled to
specific performance and injunctive or other equitable relief as a remedy of
such breach, and each Party agrees to waive any requirement for the securing or
posting of a bond in connection with such remedy.
(d) Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
(e) This Agreement shall become effective upon the execution and delivery
of counterparts hereof by each of the parties listed on the signature pages
hereof. This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors and permitted. Neither this Agreement
nor any rights or obligations of any Party hereto can be assigned or otherwise
transferred without the prior written consent of the other Parties hereto.
(f) This Agreement may be executed in counterparts, each of which when so
executed shall be an original, but all such counterparts shall together
constitute but one and the same instrument. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF.
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<PAGE> 6
IN WITNESS WHEREOF, the due execution hereof by the respective duly
authorized general partner or officer of the undersigned as of the date first
written above.
RELIANCE ACCEPTANCE GROUP, INC.
By: /s/ James T. Moran
-------------------------------
Name:
Title:
RELIANCE ACCEPTANCE CORPORATION
By: /s/ James T. Moran
-------------------------------
Name:
Title:
RELIANCE ACCEPTANCE CORP. OF ARIZONA,
RELIANCE ACCEPTANCE CORP. OF COLORADO,
RELIANCE ACCEPTANCE CORP. OF FLORIDA,
RELIANCE ACCEPTANCE CORP. OF GEORGIA,
RELIANCE ACCEPTANCE CORP. OF ILLINOIS,
RELIANCE ACCEPTANCE CORP. OF INDIANA,
RELIANCE ACCEPTANCE CORP. OF IOWA,
RELIANCE ACCEPTANCE CORP. OF KENTUCKY,
RELIANCE ACCEPTANCE CORP. OF MINNESOTA,
RELIANCE ACCEPTANCE CORP. OF MISSOURI,
RELIANCE ACCEPTANCE CORP. OF NEVADA,
RELIANCE ACCEPTANCE CORP. OF NEW MEXICO,
RELIANCE ACCEPTANCE CORP. OF NORTH
CAROLINA, RELIANCE ACCEPTANCE CORP. OF
OHIO, RELIANCE ACCEPTANCE CORP. OF
OREGON, RELIANCE ACCEPTANCE CORP. OF
SOUTH CAROLINA, RELIANCE ACCEPTANCE
CORP. OF TENNESSEE, RELIANCE ACCEPTANCE
CORP. OF TEXAS, RELIANCE ACCEPTANCE
CORP. OF UTAH, RELIANCE ACCEPTANCE CORP.
OF WASHINGTON
By: /s/ James T. Moran
-------------------------------
Name:
Title:
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<PAGE> 7
IN WITNESS WHEREOF, the due execution hereof by the respective duly
authorized general partner or officer of the undersigned as of the date first
written above.
UGLY DUCKLING CORPORATION
By: /s/ Ernest C. Garcia II
--------------------------------------
Name: Ernest C. Garcia II
Title: CEO
7
<PAGE> 1
EXHIBIT 10.7
PURCHASE AND SALE-LEASEBACK AGREEMENT
AND JOINT ESCROW INSTRUCTIONS
UGLY DUCKLING PORTFOLIO
By and Between
CHAMPION ACCEPTANCE CORPORATION, AN ARIZONA CORPORATION, UGLY DUCKLING CAR
SALES, INC., AN ARIZONA CORPORATION, UGLY DUCKLING CAR SALES NEW MEXICO, INC., A
NEW MEXICO CORPORATION, UGLY DUCKLING CAR SALES FLORIDA, INC., A FLORIDA
CORPORATION, AND UGLY DUCKLING CAR SALES TEXAS, L.L.P., AN ARIZONA LIMITED
LIABILITY PARTNERSHIP
as Sellers
and
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
as Buyer
<PAGE> 2
TABLE OF CONTENTS
Section Page(s)
1. AGREEMENT TO SELL.............................................. 1
2. CERTAIN DEFINITIONS............................................ 1
3. PURCHASE PRICE................................................. 2
4. PAYMENT OF PURCHASE PRICE...................................... 2
5. OPENING AND CLOSE OF ESCROW.................................... 2
6. CONTINGENCIES.................................................. 3
7. SELLER'S OBLIGATIONS........................................... 5
8. SELLER REPRESENTATIONS AND WARRANTIES.......................... 5
9. BUYER'S REPRESENTATIONS AND WARRANTIES......................... 9
10. CONDITIONS TO CLOSE OF ESCROW.................................. 10
11. DELIVERIES TO ESCROW HOLDER.................................... 11
12. COSTS AND EXPENSES............................................. 12
13. PRORATIONS AND ADJUSTMENTS..................................... 12
14. DISBURSEMENTS AND OTHER ACTIONS BY ESCROW HOLDER............... 13
15. INDEMNIFICATION................................................ 13
16. RIGHT OF ENTRY................................................. 13
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<PAGE> 3
17. DAMAGE OR CONDEMNATION PRIOR TO CLOSING........................ 14
18. BROKERS........................................................ 14
19. LIMITATION OF LIABILITY........................................ 14
20. NOTICES........................................................ 14
21. REQUIRED ACTIONS OF BUYER AND SELLERS.......................... 15
22. PARTIAL INVALIDITY............................................. 15
23. WAIVERS........................................................ 15
24. SUCCESSORS AND ASSIGNS......................................... 16
25. REMEDIES....................................................... 16
26. SURVIVAL....................................................... 16
27. CONSENTS AND APPROVALS......................................... 16
28. INDEMNIFICATION................................................ 16
29. PROFESSIONAL FEES.............................................. 17
30. ENTIRE AGREEMENT; AMENDMENT.................................... 17
31. CONSTRUCTION OF AGREEMENT; KNOWLEDGE OF SELLERS................ 18
32. GOVERNING LAW.................................................. 18
33. WAIVER OF JURY TRIAL........................................... 18
ii
<PAGE> 4
TABLE OF DEFINED TERMS
Term Page(s)
AGREEMENT 1
APPLICABLE LAWS 5
APPLICABLE PROPERTIES 10
BILL OF SALE 8
BUYER 1
CLAIM 11
CLOSE OF ESCROW 2
CLOSING DATE 2
CONTINGENCIES 2
DEALERSHIP 1
DEALERSHIPS 1
DEED 8
ENVIRONMENTAL REPORT 3
ESCROW 1
ESCROW HOLDER 1
EXISTING CONTRACTS 5
EXTRACTION RIGHTS 2
HAZARD INSURANCE POLICY 6
ICCMC 1
IMPROVEMENTS 1
INTANGIBLE PROPERTY 1
LAND 1
LEASE 8
LEASE GUARANTY 8
LIEN 5
OPENING OF ESCROW 2
OTHER PROPERTIES 10
OUTSIDE CLOSING DATE 2
OWNER'S TITLE COMMITMENT 7
OWNER'S TITLE POLICY 7
PERSONAL PROPERTY 1
PROPERTIES 1
PROPERTY 1
PTR 3
PTRS 3
REAL PROPERTY 2
SELLER 1
SELLER INFORMATION 2
SELLERS 1
TITLE COMPANY 3
iii
<PAGE> 5
Escrow No. ___________
PURCHASE AND SALE-LEASEBACK AGREEMENT
AND JOINT ESCROW INSTRUCTIONS
UGLY DUCKLING PORTFOLIO
This Purchase and Sale-Leaseback Agreement and Joint Escrow
Instructions (this "AGREEMENT"), is entered into as of May 13, 1998, by and
between CHAMPION ACCEPTANCE CORPORATION, an Arizona corporation, UGLY DUCKLING
CAR SALES, INC., an Arizona corporation, UGLY DUCKLING CAR SALES NEW MEXICO,
INC., a New Mexico corporation, UGLY DUCKLING CAR SALES FLORIDA, INC., a Florida
corporation, and UGLY DUCKLING CAR SALES TEXAS, L.L.P., an Arizona limited
liability partnership (collectively, "SELLERS"; individually, a "SELLER"), and
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP., a Maryland corporation
("ICCMC"), or its assignees (ICCMC or its assignees are referred to herein,
collectively, as "BUYER"), and constitutes an agreement to purchase and sell
real property, and escrow instructions directed to Fidelity National Title
Insurance Company ("ESCROW Holder"), to establish an escrow (the "ESCROW") to
accommodate the transactions contemplated by this Agreement.
RECITALS
A. The Sellers are the owners of the "Properties" (as hereinafter
defined), which consist principally of the real estate assets associated with
the twenty (20) car dealerships (individually, a "Dealership"; collectively, the
"DEALERSHIPS"), identified on Exhibit "A" hereto. The particular Seller that
owns each Dealership is indicated on Exhibit "A".
B. Sellers desire to sell and then leaseback from Buyer, and Buyer
desires to purchase and then leaseback to Sellers, the Properties on the terms
and subject to the conditions hereinafter set forth.
TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the premises and the
respective undertakings of the parties hereinafter set forth, it is hereby
agreed as follows:
1. AGREEMENT TO SELL. On the terms and conditions hereinafter set
forth, Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, the
Properties.
2. CERTAIN DEFINITIONS.
2.1 "PROPERTIES" means the "Land", the "Improvements", the
"Personal Property", the "Intangible Property" and the "Extraction Rights"
relating to the Dealerships, collectively. "PROPERTY" means the "Land", the
"Improvements", the "Personal Property", the "Intangible Property" and the
"Extraction Rights" relating to a specific Dealership.
2.2 "LAND" with respect to a particular Dealership means the
real property described on Exhibit "B" hereto with respect to such Dealership,
together with all and singular the respective tenements, hereditaments,
easements, rights-of-way and appurtenances belonging or in anywise
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appertaining to the same, and all other rights ancillary, appurtenant or related
thereto, and all trees, shrubs and other landscaping located thereon.
2.3 "IMPROVEMENTS" with respect to a particular Dealership
means all improvements, structures and fixtures, excluding trade fixtures used
exclusively in the operation of the business of the Dealership, now or on the
"Closing Date" (as hereinafter defined) for such Dealership located on the Land
with respect to such Dealership.
2.4 "PERSONAL PROPERTY" with respect to a particular
Dealership means all tangible personal property now or on the Closing Date for
such Dealership located on or about the Land with respect to such Dealership or
attached or appurtenant thereto or used in connection with the operation
thereof, but excluding any personal property used exclusively in the operation
of the business of the Dealership (and not used for the operation or maintenance
of the Improvements), such as portable tools and equipment, above ground
portable lifts, air compressors, office furniture, Ugly Duckling signage, all of
which is excluded from Personal Property and shall be retained by Sellers.
2.5 "INTANGIBLE PROPERTY" with respect to a particular
Dealership means all intangible property now or on the Closing Date for such
Dealership owned or held in connection with the Land, the Improvements, the
Personal Property or the Extraction Rights with respect to such Dealership,
including all permits, certificates of occupancy and warranties (including those
relating to construction or fabrication), plans, drawings, renderings, surveys,
title insurance policies, claims under insurance policies or otherwise, rights
to receive proceeds of a condemnation or taking of all or any portion of the
Land or Improvements with respect to such Dealership, topographical maps, and
landscape plans in any way related to the Land, the Improvements, the Personal
Property and potential future improvements contemplated to be located on the
Land, or Extraction Rights, with respect to such Dealership, or any part
thereof, but excluding any intangible property used exclusively in the operation
of the business of such Dealership.
2.6 "EXTRACTION RIGHTS" with respect to a particular
Dealership means all water and water rights, and all minerals, hydrocarbons,
natural gas, metals, ores and other substances now or hereafter existing beneath
the surface of the Land with respect to such Dealership and all rights related
to the extraction thereof.
2.7 "REAL PROPERTY" with respect to a particular Dealership,
means the Land, Extraction Rights and Improvements with respect to such
Dealership.
3. PURCHASE PRICE. The purchase price for each Property is as
provided on Exhibit "A" hereto (the "PURCHASE PRICE").
4. PAYMENT OF PURCHASE PRICE. Buyer shall deposit the Purchase
Price for each Property, as adjusted for the allocations of transaction costs
and prorations to be made pursuant to Sections 12 and 13 of this Agreement (as
determined by Escrow Holder), into Escrow in cash or other immediately available
funds on the Closing Date for such Property. Escrow Holder shall deliver the
funds so deposited, as adjusted for the allocations of transaction costs and
prorations to be made pursuant to Sections 12 and 13, to the Seller of each
particular Property at the Close of Escrow for such Property.
5. OPENING AND CLOSE OF ESCROW.
5.1 OPENING OF ESCROW. For the purposes of this Agreement, the
"OPENING OF ESCROW" shall be the date on which Escrow Holder has received a
fully executed original or executed
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<PAGE> 7
counterpart copies of this Agreement signed by Buyer and Sellers. Escrow Holder
is instructed to notify Buyer and Sellers, in writing (which may be by facsimile
transmission), of the date of Opening of Escrow. Buyer and Sellers shall
execute, deliver and be bound by any reasonable and customary supplemental
instructions that may be reasonably requested by Escrow Holder or that may be
necessary or convenient to consummate the transaction contemplated by this
Agreement. However, the supplemental instructions shall not supersede this
Agreement as between Buyer and Sellers, and in all cases this Agreement shall
control as between them. All supplemental instructions shall be in writing
(including by facsimile transmission).
5.2 CLOSE OF ESCROW.
5.2.1 CLOSING UPON RECORDATION. "CLOSE OF ESCROW" for
any particular Property shall mean the date and time that the "Deed" (as
hereinafter defined) for such Property is recorded in the official records of
the county wherein such Property is located.
5.2.2 NEW YORK STYLE CLOSING. At Buyer's written
election, the sale of any particular Property may be closed by means of a
so-called New York Style closing, with the concurrent delivery of the documents
of title, transfer of interest, delivery of the "Owner's Title Policy" or
"Owner's Title Commitment" (as such quoted terms are hereinafter defined) for
such Property, and the payment of the Purchase Price for such Property, as
adjusted for the allocations of transaction costs and prorations provided
herein. In the event of a New York Style Closing for any particular Property,
(a) the "CLOSE OF ESCROW" for such Property shall be the date of such concurrent
deliveries, and (b) the applicable Seller (or all the Sellers if required by
Escrow Holder) shall provide any undertaking, affidavit or indemnity (including
a gap indemnity) to assist or enable the Title Company to accommodate the New
York Style Closing. In no event shall Buyer be required to furnish any
undertaking, affidavit or indemnity for a New York Style Closing.
5.2.3 OUTSIDE CLOSING DATE. Close of Escrow for each
Property shall take place on a date (the "CLOSING DATE" for such Property) no
later than the date listed on Exhibit "A" (the "OUTSIDE CLOSING DATE"), subject
to the terms and conditions hereinafter set forth. Buyer may elect in writing
for the Close of Escrow to occur on any earlier date for any particular Property
on two (2) business days' notice to the applicable Seller, subject to the terms
and conditions hereinafter set forth.
6. CONTINGENCIES.
6.1 LISTING OF CONTINGENCIES. Buyer's obligations to
consummate the purchase of each Property contemplated by this Agreement is
expressly subject to and contingent upon satisfaction or written waiver by Buyer
of each of the following contingencies (the "CONTINGENCIES") at or before the
Close of Escrow for each Property:
6.1.1 Sellers' delivery to Buyer and Buyer's approval
of all contracts, documents, studies, reports, surveys, data and all
other information in Sellers' files or readily obtainable by Sellers
that relates to the Properties or any portion thereof (collectively,
the "SELLER INFORMATION").
6.1.2 Sellers' delivery to Buyer, and Buyer's
approval of, an environmental assessment report (the "ENVIRONMENTAL
REPORT") with respect to such Property prepared by an environmental
consultant acceptable to Buyer at Sellers' expense, each such
Environmental Report to include such scope of work and to be in such
detail as Buyer may require. Without limitation on Seller's other
obligations hereunder, Sellers shall, at Seller's sole cost, cause the
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<PAGE> 8
Environmental Report for each Property to be assigned to Buyer on or
before the Closing Date for such Property and cause each Environmental
Report to be updated to a date not earlier than sixty (60) days before
the applicable Closing Date.
6.1.3 Buyer's approval of the zoning, entitlements,
building restrictions, building plans, assessments, availability of
utilities, feasibility of development and/or use of such Property for
Buyer's intended purposes, and other similar information and analyses
relating to such Property, if Buyer should choose to obtain and review
any of such information or make any of such analyses.
6.1.4 Buyer's approval of the exceptions to clear
title to such Property as are shown on a preliminary title report or a
commitment for title insurance, as the case may be (collectively the
"PTRS"; individually a "PTR") issued by Escrow Holder (the "TITLE
COMPANY") with respect to such Property. Seller shall (i) cause the
Title Company to deliver the PTR, together with legible copies of the
documents underlying each of the exceptions to title referenced
therein, and (ii) deliver a current ALTA Class A survey of the Land and
Improvements for such Property prepared by a licensed land surveyor and
legibly showing all matters described in the PTR, to Buyer not less
than ten (10) days prior to the Closing Date, with a certification
acceptable to Buyer. Any exception to title to be shown on the Owner's
Title Policy for such Property in addition to those shown in the PTR
shall, unless caused by Buyer, be subject to Buyer's approval, which
may be granted or denied by Buyer, at any time prior to the date of
Close of Escrow for such Property.
6.1.5 Buyer's approval of the structural components,
plumbing systems, sewer and/or septic systems, heating, ventilation and
air conditioning systems, electrical systems, built-in appliances,
roof(s), geology and soils compaction, foundation, and mechanical
systems, of, serving or at, as applicable, the Land and Improvements
for such Property.
6.1.6 Sellers' delivery to Buyer and Buyer's approval
of all appraisals or other documents relating to the value of such
Property reasonably accessible to any Seller.
6.1.7 Sellers' delivery to Buyer and Buyer's approval
of all tax returns, if any, relating to such Property for the last five
(5) years.
6.1.8 Sellers' delivery to Buyer and Buyer's approval
of all permits, certificates of occupancy and other government
approvals relating to such Property.
6.1.9 Buyer's approval of all other aspects of the
physical, legal, general economic and environmental condition of such
Property.
6.1.10 The satisfaction of each of the foregoing
contingencies with respect to each other Property.
Buyer's approval shall in no way limit Sellers' obligations under the
representations, warranties, indemnities and other provisions of this Agreement.
At any time prior to the Close of Escrow for a particular Property, Buyer may
elect not to purchase such Property by giving written notice of its election to
Seller; provided, however, that if Buyer so elects, in its sole and absolute
discretion, not to acquire any of the Properties, Buyer shall pay to Seller a
fee in the amount of $100 as consideration of its rights granted hereunder.
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6.2 EFFECT OF ELECTION NOT TO ACQUIRE. If Buyer elects not to
purchase any particular Property, this Agreement shall terminate as to such
Property, and the parties shall thereafter have no further rights, duties or
obligations under this Agreement with regard to such Property except to the
extent this Agreement expressly provides otherwise. Except as otherwise herein
provided, this Agreement shall remain in full force and effect with respect to
any Property with respect to which this Agreement is not so terminated. In
addition, if Buyer elects not to purchase any particular Property and such
decision was not based on any default by Seller hereunder, Seller may elect,
within five (5) business days after receipt of written notification from Buyer
that Buyer has elected not to purchase any particular Property, to terminate
this Agreement with regard to all other Properties as to which Close of Escrow
has not occurred.
6.3 DELIVERIES. Seller agrees to deliver to Buyer all of the
documents, contracts, reports, surveys, data and other items listed in Section
6.1 above.
7. SELLER'S OBLIGATIONS. So long as this Agreement remains in
effect with respect to a Property:
7.1 ENCUMBRANCES; OFFERS. None of the Sellers shall, without
the prior written consent of Buyer (such consent in Buyer's sole discretion),
convey any interest in such Property or subject such Property to any liens,
encumbrances, covenants, conditions, easements, rights of way or similar matters
after the date of this Agreement. Seller shall remove any and all monetary liens
or judgments against each Property prior to the Close of Escrow for such
Property.
7.2 CONTRACTS. Without the prior written consent of Buyer,
none of the Sellers shall modify, extend, renew, replace, or otherwise change
any of the terms, covenants or conditions of any agreement affecting or relating
to such Property or the use, operation, maintenance, management, or occupancy of
such Property, nor enter into any other obligations or agreements affecting such
Property, excluding agreements relating solely to the operation of the
Dealership and not necessary or desirable for the ownership of the Property
without regard to its use as a Dealership.
7.3 PTR. If Sellers have not done so previously, promptly
after the date of Opening of Escrow, Sellers shall cause the Title Company to
deliver to Buyer the PTR for such Property and legible copies of all of the
documents recorded against such Property and governing each of the exceptions
set forth therein, together with a survey for such Property meeting the
requirements of Section 6.1.5, above. Sellers shall not permit any exception to
title to the Land or Improvements other than those shown in the PTRs to exist or
be recorded.
7.4 EVALUATIONS. If Sellers have not done so previously,
promptly after the date of Opening of Escrow, Sellers shall deliver to Buyer
true, complete and correct copies of all surveys, studies, reports, plans,
analyses, investigations, appraisals and other evaluations regarding such
Property or any aspect or portion thereof performed by or for any of the Sellers
or their affiliates, or in any Seller's possession, or obtainable by any of
them. In addition, if after the date hereof and prior to the Close of Escrow for
such Property any Seller or its affiliates should obtain or be able to obtain
any item that, if now possessed by any Seller, Sellers would be required to
deliver to Buyer pursuant to the preceding sentence, promptly after such Seller
or its affiliates obtain the same, such Seller shall deliver a true, complete
and correct copy thereof to Buyer.
8. SELLER REPRESENTATIONS AND WARRANTIES. Each of the Sellers
hereby represents, warrants, covenants and acknowledges to Buyer that:
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8.1 Each Seller has been duly organized and is validly
existing in good standing under the laws of the State of its incorporation (as
provided in this first paragraph of this Agreement), and has all licenses
necessary to carry on its business as now being conducted and is licensed,
qualified and in good standing in the states where any of its assets are located
if and to the extent the laws of such states require licensing or qualification
in order to conduct business of the type conducted by such Seller.
8.2 Each Seller has the legal power, right and actual
authority to enter into this Agreement and the documents and instruments to be
executed by such Seller pursuant to this Agreement, and has the power, right,
capacity and authority to consummate the transactions contemplated by this
Agreement. The individuals executing this Agreement, and the instruments to be
executed by each Seller pursuant to this Agreement, on behalf of such Seller
have the legal power, right, capacity and actual authority to bind such Seller
to the terms and conditions of this Agreement and those documents and
instruments. The execution and delivery by each Seller of this Agreement, and
the other agreements and instruments to be executed by it as contemplated hereby
and thereby, and the performance and compliance by each Seller with the terms
hereof and thereof, are within the power and actual authority (corporate, trust,
partnership or otherwise) of such Seller and have been duly authorized by all
necessary action on the part of such Seller, this Agreement has been duly and
validly executed and delivered by each Seller and, assuming due authorization,
execution and delivery by the Buyer, constitutes, and the other agreements and
instruments to be executed by each Seller as contemplated hereby constitutes and
will constitute, the legal, valid and binding obligations of each Seller,
enforceable against them in accordance with their respective terms, subject to
insolvency, reorganization, moratorium and other similar laws affecting
creditors' rights generally and to general principles of equity (regardless of
whether such enforcement is considered in a proceeding in equity or at law.
8.3 The consummation of the transactions contemplated by this
Agreement is in the ordinary course of each of the Sellers' business. Neither
the execution, delivery and performance by any of the Sellers of, nor the
compliance with their obligations under, this Agreement, and the other
agreements and instruments to be executed by it as contemplated hereby and
thereby, will conflict with or result in breach of, or constitute a default (or
an event which, with notice or the lapse of time, or both, would constitute a
default) or result in the acceleration of any obligation under, the
organizational documents of any of the Sellers, or any of the provisions of any
law, governmental rule, regulation, judgment, decree or order binding on any of
the Sellers or its assets, or any of the provisions of any indenture, mortgage,
contract or other instrument to which any of the Sellers is a party or by which
any are bound, or result in the creation or imposition of any lien, charge or
encumbrance upon any of its property pursuant to the terms of any such
indenture, mortgage, contract or other instrument. Neither the sale of any
Property, nor the consummation of the transactions contemplated by this
Agreement, are or will result in violation of any applicable federal, state or
local statute, law, rule, code, ordinance or regulation.
8.4 No license, consent, approval, authorization or order of,
or registration or filing with, or notice to any court or governmental agency,
is required for the execution, delivery or performance by any Seller of this
Agreement, and the other agreements and instruments to be executed by it as
contemplated hereby; and no such licenses, consent, approval, authorization,
order, registration or filing is required for the performance by any Seller of
its obligations hereunder or thereunder.
8.5 No litigation, arbitration, governmental investigation or
other proceeding, adverse claim or action of any kind or nature is pending or,
threatened that (i) could bring into question the validity of this Agreement,
the documents and instruments to be entered into by any Seller as contemplated
by this Agreement or any action taken or to be taken in connection with the
obligations of any Seller contemplated hereby, (ii) presents a material risk
that any Seller could be prevented from
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entering into this Agreement, or the other documents and instruments to be
entered into by it as contemplated hereby or (iii) may materially and adversely
affect any Seller's ability to perform its obligations under this Agreement, or
such other documents and instruments. Each Seller shall notify Buyer promptly
upon becoming aware of any such pending litigation, arbitration, governmental
investigation or other proceeding, adverse claim or action.
8.6 Each Seller is solvent and neither the sale of any
Property or any portion thereof nor the performance of its obligations hereunder
would cause any Seller to become insolvent. No sale of a Property is being
undertaken with the intent to hinder, delay or defraud any of the Sellers'
creditors.
8.7 No portion of any Property or the business conducted
thereon is in violation of any applicable building code, zoning or land use law,
or any other law, order, ordinance, statute, rule, code or regulation applicable
thereto (collectively, "APPLICABLE LAWS"). All inspections, licenses and
certificates required to be made or issued with respect to all occupied portions
of all of the Real Property and, with respect to the use and occupancy of the
same, including certificates of occupancy and fire underwriting certificates,
have been made or obtained from the appropriate authorities and are in full
force and effect, and each Property is lawfully occupied under applicable law.
Each Property is, and as of the Close of Escrow for such Property will be, in
all material respects, in compliance with, and is used and occupied in
accordance with, all Applicable Laws and all restrictive covenants of record
applicable to each Property.
8.8 No proceeding is pending or, to any Seller's knowledge,
threatened or under consideration for the total or partial condemnation of any
of the Properties, and no portion of any of the Properties has suffered any
damage from waste, fire, water, earthquake or earth movement, windstorm, flood,
tornado, or otherwise, in a manner that could affect adversely the value of a
Property or the use for which any of the premises therein were intended.
8.9 No litigation is pending or, to Sellers' knowledge,
threatened or under consideration that could affect any Property or any portion
thereof or interest therein, or that could affect any Seller's ability to
perform its obligations under this Agreement.
8.10 There is no lease or other contract with respect to the
occupancy of a Property or any portion thereof or interest therein, nor will
there be any such lease or other contract at the Close of Escrow for such
Property, that would bind Buyer or such Property or any portion thereof from and
after the Close of Escrow for any Property except for the "Lease" (as defined
herein and matters described in the PTRs). Sellers have delivered to Buyer true,
complete and correct copies of each of the contracts (the "EXISTING CONTRACTS")
included in the Intangible Property, and each of the other items constituting
the Intangible Property. Each of the Existing Contracts, including all
amendments thereto, is listed on Exhibit "F". Each of the Existing Contracts is
in full force and effect and free from default. Sellers have obtained any
approvals required to assign their interests in the Intangible Property to
Buyer. Each Existing Contract affecting a Property shall be terminated at Close
of Escrow for such Property, at Seller's sole cost and expense, or shall
continue as a direct agreement between the applicable Seller and the other
party(ies) under such Existing Contract (with no obligation or liability on
Buyer or the Property whatsoever).
8.11 Sellers have good and marketable fee simple title to the
Properties and each portion thereof and interest therein, free and clear of any
and all liens, claims, encumbrances, participation interests, equities, pledges,
charges or security interests of any nature (collectively, a "LIEN"), other than
any such Lien to be released on or before the Close of Escrow and prior to or
simultaneously with the consummation of the purchase and sale of the affected
Property as contemplated
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herein. Without limiting the generality of the foregoing, there are no
mechanics' or similar liens or claims which have been filed for work, labor or
material (and no rights are outstanding that under law could give rise to such
lien) which are or may become liens on any Property or any portion thereof or
interest therein. Sellers' interest in the Properties and right to sell and
convey the same to Buyer is not subject to any interest or participation of, or
right of first offer or refusal or other right or option in favor of, or other
agreement with, any other party, and immediately upon the sale and conveyance of
any Property as herein contemplated, the Buyer or its designee shall have good
indefeasible fee simple title to, and will be the sole legal owner of, each
Property free and clear of any Lien.
8.12 All taxes, governmental assessments, insurance premiums,
water, sewer and municipal charges, rents under all ground leases and similar
charges which have become due and owing with respect to each Property and each
portion thereof and interest therein have been paid. With respect to the
Properties located in the State of Texas, none are assessed as "agricultural" or
"open space" land for tax purposes.
8.13 All of the Improvements constructed or under construction
on the Land for each Property lie wholly within the boundaries and building
restriction lines of the Land, and no improvements on adjoining properties
encroach upon the Land except as shown in the surveys delivered to Buyer
pursuant to Section 6.1.5.
8.14 All Improvements are insured by an insurer licensed to do
business in the state where the applicable Property is located against loss by
fire, hazards of extended coverage and such other hazards as are customary in
the areas where each Real Property is located, in an amount sufficient to
prevent the owner thereof from being deemed a co-insurer and to provide coverage
on a full replacement cost basis (in some cases, exclusive of foundations and
footings), and if any portion of the Real Property is in an area identified on a
Flood Hazard Boundary Map or Flood Hazard Rate Map issued by the Federal
Emergency Management Agency or the Secretary of Housing and Urban Development,
as having special flood hazards, a flood insurance policy is in effect with
respect to such Real Property issued by a generally acceptable flood insurance
carrier in an amount which is at least equal to the lesser of (i) the maximum
insurable value of such Real Property, and (ii) the amount necessary to fully
compensate for any damage or loss to the improvements which are a part of such
Real Property on a replacement cost basis, in each case in an amount not less
than such amount as is necessary to avoid the application of any co-insurance
clause contained in the related hazard insurance policy. In addition, each
business carried on upon any Real Property or any portion thereof (or the owner
of such business) carries workers' compensation insurance. Sellers have no
knowledge that any action, omission, misrepresentation, negligence, fraud or
other similar occurrence has taken place that could present a material risk of a
failure or impairment of full and timely coverage under any such insurance
policy. All such insurance policies (collectively, the "HAZARD INSURANCE
POLICY") are the valid and binding obligation of the insurer named therein and
contain a standard endorsement naming the Sellers, their successors and assigns,
as a co-insured thereunder, and each such insurance policy may not be terminated
or expire without thirty (30) days' prior written notice to the Sellers or their
successors-in-interest (except where applicable law requires a shorter period).
No notice of termination, cancellation or non-renewal with respect to any of
such policies has been given, and all premiums thereon have been paid.
8.15 Each Real Property is owned in fee by Sellers.
8.16 Each Property is in good repair and free and clear of any
damage or condition that would materially affect the use, enjoyment, value or
marketability of such Property; each Property is comprised of one or more
separate and lawfully created parcels that abuts or has access to a dedicated,
physically open road; each Property is served by public utilities and services
generally available in the
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surrounding community and by well or public water and sewer systems (or septic
facilities); each Property has all parking required under applicable law for the
operation of the facilities currently existing or businesses currently conducted
thereon; no part of any of the Improvements for any Property lies outside the
boundaries of, or building setback and other restriction lines applicable to,
such Property except as disclosed by the surveys delivered to Buyer pursuant to
Section 6.1.5; and no improvements on adjoining properties encroach onto any
Property except for encroachments that do not adversely affect the use,
enjoyment, value or marketability of such Property.
8.17 No portion of any Property or any interest therein is
subject to a bankruptcy plan.
8.18 No statement, report or other document within the Seller
Information prepared by any Sellers, or to each Sellers' knowledge in any report
prepared by any other party, contains any untrue statement of material fact or
omits to state a material fact necessary to make the statements and information
contained therein not misleading.
8.19 Each Property and each portion thereof is in compliance
with all environmental laws, statutes, ordinances, regulations, orders, rules,
decrees and similar requirements of federal, state, municipal and any other
governmental and quasi-governmental authorities, agencies and instrumentalities
relating thereto, and no hazardous material or substance was or is incorporated
in, stored on, transported to or from, disposed of or located above, on or below
or discharged from any portion of any Property by Sellers (except if the same
(1) was in the ordinary course of business, (2) was in full compliance with all
Applicable Laws pertaining thereto, (3) did not involve any release, spill,
disposition or discharge, and (4) did not and does not create any health or
safety hazard). There are no underground storage tanks at any Property except as
disclosed in the Environmental Reports. The Sellers have not received
notification from any federal, state or other governmental or quasi-governmental
authority, agency or instrumentality of any actual, potential, known, or threat
of release of hazardous materials or substances on, above, below or from any
Property or any potential or known liability that has resulted in or may result
in a lien on any Property except as disclosed in the Environmental Reports. For
purposes of this representation, the terms hazardous material and hazardous
substance (a) shall have all the meanings given to them under any applicable
federal, state, municipal, or other jurisdiction's, laws, statutes, rules,
regulations and ordinances, and (b) without limiting the generality of the
foregoing, shall include any substance which is toxic, explosive, corrosive,
flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise
hazardous, or any substance which contains gasoline, diesel fuel or other
petroleum hydrocarbons, polychlorinated biphenyls (PCBs), or radon gas, urea
formaldehyde, asbestos, lead or mercury.
8.20 Each Property is a separate tax parcel, separate and
apart from any other property owned by the Seller or any other person or entity.
8.21 Each Deed will be in recordable form and legal, valid and
binding against Sellers in accordance with its terms, and at the Close of Escrow
will be recorded or filed in the appropriate records or files of the applicable
jurisdiction and in a manner sufficient to put third parties on constructive
notice of the conveyance of the Property to Buyer or its designee.
9. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and
warrants to Sellers that, as of the date of this Agreement:
9.1 Buyer is a corporation, duly formed and presently existing
in good standing under the laws of the State of Maryland. Buyer has the legal
power, right and authority to enter into this
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Agreement and the instruments to be executed by Buyer pursuant to this
Agreement, and to consummate the transactions contemplated by this Agreement.
9.2 The individuals executing this Agreement and the
instruments to be executed by Buyer pursuant to this Agreement on behalf of
Buyer have the legal power, right and actual authority to bind Buyer to the
terms and conditions of this Agreement and those instruments.
9.3 Neither the execution and delivery of this Agreement and
the documents referred to in this Agreement, nor the incurring of the
obligations set forth in this Agreement, nor the consummation of the
transactions contemplated in this Agreement, nor compliance with the terms of
this Agreement and the documents referred to in this Agreement, conflict with or
result in a material breach of any terms, conditions or provisions of, or
constitute a default under, any bond, note or other evidence of indebtedness or
any contract, indenture, mortgage, deed of trust, loan, partnership agreement,
lease or other agreement or instrument to which Buyer is a party, nor any law,
governmental rule, regulation, judgment, decree or order binding on Buyer.
9.4 Buyer is entering into this Agreement and desires to
purchase the Property for its own account, and not as an undisclosed agent for
any third party, and Buyer acknowledges that Buyer's obligations under this
Agreement are not contingent on Buyer's ability to secure financing for its
acquisition of the Property or a tenant for the Property or any portion thereof.
10. CONDITIONS TO CLOSE OF ESCROW.
10.1 Buyer's obligation to purchase each Property is subject
to and conditioned upon the satisfaction or Buyer's written waiver of each of
the following conditions on or before the Closing Date for such Property:
10.1.1 The Title Company shall have delivered to
Buyer its irrevocable and unconditional commitment (the "OWNER'S TITLE
COMMITMENT" for such property) to issue an ALTA (1970 Form B) extended
coverage owner's policy of title insurance (the "OWNER'S TITLE POLICY"
for such Property) effective as of the date and time the Deed for such
Property is recorded with coverage in the amount of the Purchase Price
for such Property, naming Buyer as the insured, showing fee simple
title to the Property to be vested in Buyer, free and clear of all
liens and encumbrances other than non-delinquent real property taxes
and assessments and those matters shown on the PTR for such Property
approved by Buyer pursuant to Section 6.1.5, plus any additional
exceptions that Buyer may have approved in writing or which Buyer may
have caused, together with endorsements in form reasonably satisfactory
to Buyer with respect to access, contiguity, tax parcel,
non-imputation, fairway, survey, comprehensive, zoning and such other
matters as Buyer may reasonably request. With respect to the Properties
located in the State of Texas, however, the Owner's Title Policy must
insure that, after the completion of the Close of Escrow, Purchaser is
the owner of indefeasible fee simple title to each Texas Property,
subject only to those matters shown on the PTR for such Property
approved by Buyer pursuant to Section 6.1.5, plus (i) any additional
exceptions that Buyer may have approved in writing or which Buyer may
have caused and (ii) the standard printed exceptions included in a
Texas Standard Form Owner Policy of Title Insurance; provided, however,
the printed form survey exception must be, at Buyer's expense, limited
to "shortages in area;" the printed form exception for restrictive
covenants must be deleted or must list only those restrictive covenants
that have been approved by Buyer; there must be no exception for rights
of parties in possession; and the standard exception for taxes must
read: "Standby fees, taxes and assessments by any taxing
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authority for the 1998 and subsequent years, and subsequent taxes and
assessments by any taxing authority for prior years due to change in
land usage or ownership."
10.1.2 Sellers' timely delivery to Escrow Holder of
each of the items required to be delivered by Sellers pursuant to this
Agreement.
10.1.3 Satisfaction of each of the Contingencies set
forth in Section 6.1 above as to such Property.
10.1.4 Sellers' representations and warranties under
Section 8 above having been true, complete and correct in all material
respects, and not having been misleading in any material respect, on
the date of this Agreement or on the Closing Date for such Property.
10.1.5 Sellers not being in default in the
performance of any of its obligations under this Agreement.
10.1.6 The subject Property being in the same
condition as at the date of this Agreement, reasonable wear and tear
excepted.
10.2 Sellers' obligation to sell each Property is subject
to and conditioned upon the satisfaction or Sellers' written waiver of each of
the following conditions on or before the Closing Date for such Property:
10.2.1 Buyer's representations and warranties under
Section 9 above having been true, complete and correct in all material
respects, and not misleading in any material respect, on the date of
this Agreement or at the time of Close of Escrow.
10.2.2 Buyer's timely delivery into Escrow of all
sums required from Buyer to close Escrow, as set forth in Section 4
above, subject to Sections 12 and 13 below, and all documents and
instruments required to close Escrow as contemplated by this Agreement.
11. DELIVERIES TO ESCROW HOLDER.
11.1 On the business day prior to the Closing Date for each
Property, the Seller owning such Property shall deliver or cause to be delivered
to Escrow Holder the following documents:
11.1.1 A deed (the "DEED") duly executed by Seller
and properly acknowledged, in the form of Exhibit "G" (or such other
form as required by Buyer, in Buyer's good-faith discretion, to satisfy
any requirements of the law in which any particular Property is
located), conveying the Land, Improvements and Extraction Rights
included in such Property.
11.1.2 A certification duly executed by such Seller
under penalty of perjury, in the form of Exhibit "H", stating that
Seller is not a foreign corporation, a foreign partnership, a foreign
trust, or a foreign estate, as those terms are defined in the Internal
Revenue Code and the income tax regulations promulgated under the
Internal Revenue Code, together with any state equivalent non-foreign
status/withholding certificate.
11.1.3 Such evidence as Buyer and the title company
issuing the owner's policy of title insurance may require as to
authority of such Seller to convey the Property to Buyer.
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11.1.4 A bill of sale (the "BILL OF SALE"), in the
form of Exhibit "I", duly executed by the Seller for such Property,
conveying the Personal Property and Intangible Property included in
each Property.
11.1.5 A lease of such Property (the "LEASE" for such
Property), in the form of Exhibit "J", duly executed by such Seller.
11.1.6 A guaranty of the Lease for such Property (the
"LEASE GUARANTY" for such Property), in the form of Exhibit "K", duly
executed by Ugly Duckling Corporation.
11.1.7 To the extent not previously delivered to
Buyer, originals (or, if originals are not available, certified copies)
of all contracts, warranties, licenses, permits and other documents
included in the Intangible Property for such Property.
11.1.8 A certificate in form reasonably satisfactory
to Buyer and duly executed by Sellers under which Sellers jointly and
severally represent and warrant that all of the representations and
warranties of Sellers under this Agreement are true and correct on the
Closing Date for such Property as if made on and as of such Closing
Date.
11.1.9 An owner's affidavit and such other customary
documents as may be required by the Title Company.
11.1.10 For any Property located in Arizona, an
Affidavit of Real Property Value executed by Seller (and to be executed
by Buyer).
11.1.11 Such other documents as Buyer reasonably may
request in connection with the transactions contemplated hereby.
11.2 Buyer shall deliver or cause to be delivered to
Escrow Holder, on the Closing Date for each Property, the Purchase Price for
such Property.
12. COSTS AND EXPENSES. Sellers shall pay all closing costs for
the sale of each Property including (1) all state, county and local transfer and
recording taxes and all recording charges, (2) all escrow fees and relating
charges imposed by Escrow Holder, (3) all charges in connection with the title
insurance and surveys contemplated by this Agreement, including the premiums for
the policies of title insurance to be issued to Buyer, and (4) all of Buyer's
due diligence costs and expenses, including appraisals, environmental reports
and reasonable attorneys' fees and disbursements of Buyer in connection with its
due diligence, the preparation, negotiation of this Agreement and the documents
contemplated hereby and the closing of the transactions contemplated hereby. The
foregoing expenses shall be paid regardless of whether any particular Property
is acquired under this Agreement and such obligations shall survive the
termination of the Agreement with respect to any particular Property or with
respect to all Properties. Buyer may credit any of the foregoing costs and
expenses incurred and not reimbursed prior to Closing against the Purchase Price
for any Property.
13. PRORATIONS AND ADJUSTMENTS. At the Close of Escrow for each
Property, the Lease for such Property will be entered into and will provide for
the payment of all expenses with respect to such Property by the tenant under
such Lease (and such tenant shall be the Seller for such Property). Accordingly,
there will be no prorations hereunder and Buyer shall have no responsibility
whatsoever for any of the costs and expenses associated with any Property.
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14. DISBURSEMENTS AND OTHER ACTIONS BY ESCROW HOLDER. Upon the
Close of Escrow for any particular Property, Escrow Holder shall promptly
undertake all of the following in the manner indicated:
14.1 Cause the Deed and any other documents that the parties
to this Agreement may mutually direct, to be recorded in the official records of
the county in which such Property is located, with documentary transfer stamps
(or, in jurisdictions outside California, with information regarding the
purchase price paid by Buyer) not affixed to the Deed or recorded and an
appropriate affidavit in lieu thereof to be recorded, if the same is reasonably
possible.
14.2 Disburse all funds deposited with Escrow Holder by Buyer,
and not previously disbursed, as follows:
14.2.1 Pay to the parties entitled thereto amounts
chargeable to the account of any Seller under the terms of this
Agreement, including any prepayment fees to any lender or broker's
commission payable by any Seller pursuant to Section 18, and charge
those amounts to the applicable Seller's account.
14.2.2 Pay the remaining balance of the Purchase
Price as directed by Sellers, after giving appropriate credit for any
amount that may have been paid directly by Buyer to Sellers against the
Purchase Price and of which Escrow Holder has been notified jointly by
Buyer and Sellers.
14.2.3 When the foregoing disbursements have been
made, refund any remaining balance in the Escrow to Buyer.
14.3 Direct the Title Company to issue the Owner's Title
Policy and deliver an original of that policy to Buyer.
14.4 Deliver to both Buyer and Seller copies of all documents
delivered to either party to, or recorded pursuant to, this Agreement.
14.5 Deliver to both Buyer and Seller a closing statement
showing the distribution, application, receipt and earnings of all funds
processed through Escrow.
15. INDEMNIFICATION. If the Close of Escrow occurs for any
Property, then Sellers shall protect, defend, indemnify and hold harmless Buyer
and such Property from and against: (a) any "Claim" (as hereinafter defined) in
any way related to any such Property and arising or accruing prior to the
Closing Date; and (b) any Claim that results from any breach or default by
Sellers under this Agreement.
16. RIGHT OF ENTRY. Buyer and Buyer's agents and representatives
shall have the right to enter upon each Property and each portion thereof at all
reasonable times prior to the Close of Escrow or earlier termination of this
Agreement, on reasonable prior notice to Sellers, in order to conduct such
inspections, surveys, tests or studies as Buyer may deem necessary or
appropriate in connection with satisfying the Contingencies set forth in Section
6.1 of this Agreement, or otherwise. Sellers shall cooperate fully with Buyer in
connection with all of such inspections, surveys, tests and studies. Any
physical damage directly and negligently caused to the Property by Buyer or
Buyer's agents and representatives during any such inspection, survey, test, or
study shall be promptly repaired by Buyer at Buyer's cost. In addition, Buyer
may contact any and all other occupants of the Real Property, both at the Real
Property and elsewhere, for any purpose.
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17. DAMAGE OR CONDEMNATION PRIOR TO CLOSING. Sellers shall
promptly notify Buyer of any damage to any Property that has occurred, and of
any condemnation proceedings that are commenced or proposed against any Property
or any portion thereof after the execution of this Agreement and prior to the
Close of Escrow. If such events should occur, Buyer may elect to keep this
Agreement to continue in effect as to such Property, without delay or abatement
of the Purchase Price for such Property, in which event, Sellers shall assign
and transfer to Buyer at the Close of Escrow all of Sellers' rights with respect
to the insurance proceeds relating to any damage and any and all condemnation
proceeds (including severance damages) that Sellers may have received or be
entitled to receive; and if any damage is not covered by insurance or the
insurance proceeds are inadequate to cover the reasonable cost of repair of the
damage, but this Agreement continues in effect, then the uninsured portion
thereof shall be credited toward the Purchase Price of the particular Property
at the Close of Escrow. Notwithstanding the foregoing, Buyer may, at its option,
at any time after such event, elect to terminate this Agreement as to the
affected Property.
18. BROKERS. Each Seller represents and warrants to Buyer, and
Buyer represents and warrants to each Seller, that no broker or finder has been
engaged by it, respectively, in connection with any of the transactions
contemplated by this Agreement or to its knowledge is in any way connected with
any of such transactions. In the event of a Claim for broker's or finder's fee
or commissions in connection herewith, then Sellers shall indemnify, protect,
defend and hold Buyer harmless from and against the same if it shall be based
upon any statement or agreement alleged to have been made by any Seller
(including any Claims in connection with the Brokers), and Buyer shall
indemnify, protect, defend and hold each Seller harmless from and against the
same if it shall be based upon any statement or agreement alleged to have been
made by Buyer.
19. LIMITATION OF LIABILITY. No present or future partner, member,
director, officer, shareholder, employee, advisor, affiliate or agent of or in
Buyer or any affiliate of Buyer shall have any personal liability, directly or
indirectly, under or in connection with this Agreement or any agreement made or
entered into under or in connection with the provisions of this Agreement, or
any amendment or amendments to any of the foregoing made at any time or times,
heretofore or hereafter, and Seller and its successors and assigns and, without
limitation, all other persons and entities, shall look solely to Buyer's assets
for the payment of any Claim or for any performance, and Seller hereby waives
any and all such personal liability. For purposes of this Section 19, no
negative capital account or any contribution or payment obligation of any
partner or member in Buyer shall constitute an asset of Buyer. In addition,
neither Buyer nor any successor or assign of Buyer intends to assume any
personal liability, directly or indirectly, under or in connection with any
agreement or instrument to which any Property is now or hereafter subject, and
no such assumption shall be implied except to the extent expressly set forth in
the Bill of Sale. In the event this Agreement is assigned by Buyer to an
assignee with respect to one or more Properties (the "APPLICABLE PROPERTIES"),
but not all the Properties (the Properties other than the Applicable Properties
being herein called the "OTHER PROPERTIES"), then such assignee shall have no
obligation or liability under this Agreement or any document executed in
connection herewith except to the extent expressly assumed and then only to the
extent such obligation or liability relates to the Applicable Properties and not
the Other Properties. The limitations of liability contained in this Section are
in addition to, and not in limitation of, any limitation on liability applicable
to Buyer provided elsewhere in this Agreement or by law or by any other
contract, agreement or instrument.
20. NOTICES. Any notice which a party is required or may desire to
give under this Agreement, shall be in writing and may be sent by personal
delivery or by mail (either [i] by United States registered or certified mail,
return receipt requested, postage prepaid, or [ii] by Federal Express or similar
generally recognized overnight carrier regularly providing proof of delivery),
addressed as
14
<PAGE> 19
hereinafter provided. Any notice so given by mail shall be deemed to have been
given as of the date of delivery (whether accepted or refused) established by
U.S. Post Office return receipt or the overnight carrier's proof of delivery, as
the case may be. Any such notice not so given shall be deemed given upon actual
receipt of the same by the party to whom the same is to be given. Notices may be
given by facsimile transmission and shall be deemed given upon the actual
receipt of the same by the individual to which they are addressed, and shall be
promptly followed by a hard copy notice by mail as provided above. Each notice
hereunder shall be addressed as follows:
If to Buyer: Imperial Credit Commercial Mortgage
Investment Corp.
11601 Wilshire Boulevard, Suite 2080
Los Angeles, California 90025
Attention: Mr. Daniel J. Occelli
With a copy to: Imperial Credit Commercial Mortgage
Investment Corp.
11601 Wilshire Boulevard, Suite 2080
Los Angeles, California 90025
Attention: Norbert M. Seifert, Esq.
If to Seller: Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attention: Chief Executive Officer
With a copy to: Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attention: General Counsel
Any address for service of notice on any party may be changed by that party
serving a notice upon the other and Escrow Holder of the new address at least
five (5) days in advance, except that any change of address to a post office box
shall not be effective unless a street address is also specified for use in
effectuating personal service.
21. REQUIRED ACTIONS OF BUYER AND SELLERS. Following the
satisfaction or Buyer's waiver of all Contingencies with respect to a Property,
Buyer and Sellers shall execute all instruments and documents and take all other
actions that may be reasonably required in order to consummate the purchase and
sale of such Property contemplated in this Agreement, and shall use their best
efforts to accomplish the Close of Escrow for such Property in accordance with
the provisions of this Agreement.
22. PARTIAL INVALIDITY. If any term or provision of this
Agreement, or its application to any person or circumstance, shall be invalid or
unenforceable to any extent, the remainder of this Agreement, and the
application of the term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected,
and each term and provision of this Agreement shall be valid and be enforced to
the fullest extent permitted by law.
23. WAIVERS. No waiver of any breach of any covenant or provision
shall be deemed a waiver of any preceding or succeeding breach of that or any
other covenant or provision. No waiver of a condition shall constitute a waiver
or a default unless specifically agreed to in writing. No waiver with
15
<PAGE> 20
respect to the Close of Escrow of any Property will constitute a waiver for any
other Property. No extension of time for performance of any obligation or act
shall be deemed an extension of the time for performance of any other obligation
or act.
24. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall inure to the benefit of the respective successors and assigns of Buyer
and Sellers. Buyer may assign its right to acquire any of the Properties to one
or more affiliates of Buyer.
25. REMEDIES. No remedy conferred upon a party in this Agreement
is intended to be exclusive of any other remedy herein or by law provided or
permitted, but each shall be cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing at law, in equity or by
statute (except as otherwise expressly herein provided). Each Seller shall be
primarily (jointly and severally) liable for the obligations and liabilities of
Sellers and any Seller under this Agreement and each of the documents executed
by Sellers or any Seller in connection with this Agreement. Each Seller hereby
waives any suretyship or guarantor rights and defenses that might otherwise
apply (in the absence of this waiver), and without limitation on the foregoing,
each of the waivers set forth in paragraph 8 of the form of guaranty attached
hereto as Exhibit "K" are hereby incorporated, mutatis mutandis, and shall apply
to each Seller as though set forth in full in this Section (with such changes as
would be appropriate to apply the same to this Agreement as opposed to the
"Lease" therein described).
26. SURVIVAL. Unless otherwise expressly provided for in this
Agreement, the representations, warranties, indemnification obligations and
covenants of the parties set forth in this Agreement shall survive the
consummation of the transaction contemplated by this Agreement and the delivery
and recordation of each of the Deeds. All warranties and representations shall
be effective regardless of any investigation made or which could have been made.
27. CONSENTS AND APPROVALS. No consent or approval provided to be
given by a party hereunder shall be effective unless in writing and, except as
otherwise expressly provided herein, each such approval and consent may be given
or withheld in the absolute discretion of such party.
28. INDEMNIFICATION. The indemnification obligations under this
Agreement shall be subject to the following provisions:
16
<PAGE> 21
28.1 The party seeking indemnification ("Indemnitee") shall notify
the other party ("Indemnitor") of any Claim against Indemnitee within fifteen
(15) days after it has notice of such Claim, but failure to notify Indemnitor
shall in no case prejudice the rights of Indemnitee under this Agreement unless
Indemnitor shall be prejudiced by such failure and then only to the extent of
such prejudice. Should Indemnitor fail to discharge or undertake to defend
Indemnitee against such liability (with counsel approved by Indemnitee), within
ten (10) days after Indemnitee gives Indemnitor written notice of the same, then
Indemnitee may settle such Claim, and Indemnitor's liability to Indemnitee shall
be conclusively established by such settlement, the amount of such liability to
include both the settlement consideration and the reasonable costs and expenses,
including attorneys' fees, incurred by Indemnitee in effecting such settlement.
Indemnitee shall have the right to employ its own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of Indemnitee
unless: (a) the employment of such counsel shall have been authorized in writing
by Indemnitor in connection with the defense of such action, (b) Indemnitor
shall not have employed counsel to direct the defense of such action, or (c)
Indemnitee shall have reasonably concluded that there may be defenses available
to it which are different from or additional to those available to Indemnitor
(in which case Indemnitor shall not have the right to direct the defense of such
action or of Indemnitee), in any of which events such fees and expenses shall be
borne by Indemnitor.
28.2 The indemnification obligations under this Agreement
shall also extend to any present or future advisor, trustee, director, officer,
partner, member, employee, beneficiary, shareholder, participant or agent of or
in Indemnitee or any entity now or hereafter having a direct or indirect
ownership interest in Indemnitee.
28.3 "CLAIM" means any obligation, liability, claim (including any
claim for damage to property or injury to or death of any persons), lien or
encumbrance, loss, damage, cost or expense (including any judgment, award,
settlement, reasonable attorneys' fees and other costs and expenses incurred in
connection with the defense of any actual or threatened action, proceeding or
claim [including appellate proceedings], and any collection costs or enforcement
costs).
29. PROFESSIONAL FEES. If any party becomes involved in litigation
(including bankruptcy and appellate proceedings) arising out of or relating to
this Agreement, the court in the litigation (including bankruptcy or appellate
proceedings) or arbitrator in any arbitration shall award legal expenses
(including, but not limited to attorneys' fees, court costs and other legal
expenses) to the prevailing party. The award for legal expenses shall not be
computed in accordance with any court schedule, but shall be as necessary to
fully reimburse all attorneys' fees and other legal expenses actually incurred
in good faith, regardless of the size of the judgment, it being the intention of
the parties to fully compensate for all the attorneys' fees and other legal
expenses paid in good faith. For the purpose of this Agreement, the terms
"attorneys' fees" or "attorneys' fees and costs" shall mean the reasonable fees
and expenses of counsel to the parties hereto, which may include printing,
duplicating and other expenses, air freight charges, and fees billed for law
clerks, paralegals, librarians and others not admitted to the bar but performing
services under the supervision of an attorney. The terms "attorneys' fees" or
"attorneys' fees and costs" shall also include all reasonable fees and expenses
incurred with respect to appeals, arbitrations and bankruptcy proceedings, and
whether or not any action or proceeding is brought with respect to the matter
for which said fees and expenses were incurred.
30. ENTIRE AGREEMENT; AMENDMENT. This Agreement (including all
exhibits attached) is the final expression of, and contains the entire agreement
between, the parties with respect to the subject matter addressed in this
Agreement and supersedes all prior understandings with respect to that subject
matter. This Agreement may not be modified, changed, supplemented or terminated,
nor may any obligation under this Agreement be waived, except by written
instrument signed by the party to be
17
<PAGE> 22
charged or by its agent duly authorized in writing. The parties do not intend to
confer any benefit under this Agreement on any person, entity, firm or
corporation other than Buyer and Sellers.
31. CONSTRUCTION OF AGREEMENT; KNOWLEDGE OF SELLERS. Headings at
the beginning of each section and subsection are solely for the convenience of
the parties and are not a part of this Agreement. Whenever required by the
context of this Agreement, the singular shall include the plural and the
masculine shall include the feminine and vice versa. This Agreement has been
fully negotiated by Buyer and Sellers; accordingly, this Agreement shall not be
construed as if it had been prepared by one of the parties, but rather as if
both parties together had prepared it. Accordingly, any generally applicable
rule of construction to the effect that ambiguities in a document are to be
construed in the manner less (or least) favorable to the drafting party shall
not apply to this Agreement and the terms and conditions set forth herein.
Unless otherwise indicated, all references to sections and subsections are to
sections and subsections in this Agreement. All exhibits referred to in this
Agreement are attached and incorporated by this reference. In the event the date
on which Buyer or Sellers is required to take any action under the terms of this
Agreement is not a business day, the actions shall be taken on the next
succeeding business day. As used in this Agreement, (i) references to the
"knowledge" of any Seller shall be deemed to refer to the actual knowledge of
such Seller or to such knowledge that such Seller would have had if it had
conducted a reasonably diligent and complete investigation, and (ii) the term
"including" and "include" shall mean "including without limitation" and "include
without limitation", respectively.
32. GOVERNING LAW. This Agreement shall be governed by,
interpreted under, and construed and enforced in accordance with the laws of the
State of California applicable to transactions to be performed wholly within the
State of California. Each party agrees to submit to the jurisdiction of the
courts of Los Angeles County, California, as necessary to effectuate the terms
of this Agreement, and that proper venue in any matter so litigated shall be in
the Central District of the Los Angeles County Superior Court or of the
Municipal Court of the Los Angeles Judicial District, as appropriate.
33. WAIVER OF JURY TRIAL. To the maximum extent permitted by law,
each of the Sellers and Buyer hereby knowingly, voluntarily and intentionally
waive the right to a trial by jury in respect of any litigation based hereon,
arising out of, under or in connection with this Agreement or any course of
conduct, course of dealing, statement (whether verbal or written) or action of
either party or any exercise by any party of their respective rights under this
Agreement or in any way relating to the Properties (including, without
limitation, any action to rescind or cancel this Agreement, and any claim or
defense asserting that this Agreement was fraudulently induced or is otherwise
void or voidable). This waiver is a material inducement for Seller to enter this
Agreement.
34. NEW MEXICO INDEMNIFICATION PROVISION. To the extent, if at
all, that NMSA Section 56-7-1 is applicable to this Agreement, any
indemnification will not extend to liability, claims, damages, losses or
expenses, including attorneys' fees, arising out of (A) the preparation or
approval of maps, drawings, opinions, reports, surveys, change orders, designs,
or specifications by indemnitee, or the agents or employees of indemnitee, and
(B) the giving of or the failure to give direction or instructions by
indemnitee, or the agents or employees of indemnitee, where such giving or
failure to give directions or instructions is the primary cause of bodily injury
to persons or damages.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
"SELLERS":
18
<PAGE> 23
CHAMPION ACCEPTANCE CORPORATION,
AN ARIZONA CORPORATION
By: /s/ Steven P. Johnson
-------------------------------
Name: Steven P. Johnson
------------------------------
Title: Secretary
-----------------------------
UGLY DUCKLING CAR SALES, INC.,
AN ARIZONA CORPORATION
By: /s/ Steven P. Johnson
-------------------------------
Name: Steven P. Johnson
------------------------------
Title: Secretary
-----------------------------
UGLY DUCKLING CAR SALES NEW MEXICO,
INC.,
A NEW MEXICO CORPORATION
By: /s/ Steven P. Johnson
-------------------------------
Name: Steven P. Johnson
------------------------------
Title: Secretary
-----------------------------
UGLY DUCKLING CAR SALES FLORIDA, INC.,
A FLORIDA CORPORATION
By: /s/ Steven P. Johnson
-------------------------------
Name: Steven P. Johnson
------------------------------
Title: Secretary
-----------------------------
19
<PAGE> 24
UGLY DUCKLING CAR SALES TEXAS, L.L.P.,
AN ARIZONA LIMITED LIABILITY PARTNERSHIP
By: Ugly Duckling Car Sales, Inc.,
an Arizona corporation
Its: General Partner
By: /s/ Steven P. Johnson
-------------------------------
Name: Steven P. Johnson
------------------------------
Title: Secretary
-----------------------------
"BUYER":
IMPERIAL CREDIT COMMERCIAL MORTGAGE
INVESTMENT CORP.,
A MARYLAND CORPORATION
By: /s/ James M. Flagg
-------------------------------
Name: James M. Flagg
------------------------------
Title: Sr. Vice President
-----------------------------
The undersigned accepts its appointment as Escrow Holder in accordance with the
foregoing terms and conditions and confirms that it has opened an escrow upon
those terms and conditions:
"ESCROW HOLDER":
FIDELITY NATIONAL TITLE COMPANY
By:
-------------------------------
Name:
------------------------------
Title:
-----------------------------
Date: May , 1998
20
<PAGE> 25
EXHIBIT LIST
<TABLE>
<S> <C>
A - Description of Dealerships, Purchase Price and Outside Closing Date
B - Description of Land
C - Omitted
D - Omitted
E - Omitted
F - List of Existing Contracts
G - Form of Deed
H - Form of Non-Foreign Status Certificate
I - Form of Bill of Sale
J - Form of Lease
K - Form of Lease Guaranty
Schedule 8.1 List of Sellers and Jurisdiction of Incorporation
</TABLE>
21
<PAGE> 26
EXHIBIT "A"
DESCRIPTION OF DEALERSHIPS, PURCHASE PRICE
AND OUTSIDE CLOSING DATE
22
<PAGE> 27
EXHIBIT "A"
<TABLE>
<CAPTION>
NO. PROPERTY SELLER/TENANT BOOK VALUE FIDELITY NATIONAL CLOSING
SALE PRICE TITLE ESCROW NO. DATE
<S> <C> <C> <C> <C> <C>
1 1515 E. Bell Rd., Ugly Duckling Car Sales, $ 1,896,975 82091876 May
Phoenix, AZ Inc.
2 330 N. 24th St., Ugly Duckling Car Sales, $ 1,557,158 82091877 May
Phoenix, AZ Inc.
3 333 S. Alma School, Ugly Duckling Car Sales, $ 2,559,979 82091878 May
Mesa, AZ Inc.
4 5017 W. Glendale -
Intentionally Deleted
5 5104 W. Glendale, Ugly Duckling Car Sales, $ 1,426,555 82091880 May
Glendale, AZ Inc.
6 9650 N. 19th Ave., Ugly Duckling Car Sales, $ 894,035 82091881 May
Phoenix, AZ Inc.
7 1030 N. Colorado, Champion Acceptance $ 3,476,573 82091883 May
Gilbert, AZ Corporation
8 1002 S. 52nd Street -
Intentionally Deleted
9 400 N. Arizona Ave., Ugly Duckling Car Sales, $ 804,889 82091884 May
Chandler, AZ Inc.
10 4121 S. Central Ave., Ugly Duckling Car Sales, $ 642,854 82091885 May
Phoenix, AZ Inc.
11 4515 E. Miami, Phoenix, Ugly Duckling Car Sales, $ 2,544,127 82091886 May
AZ Inc.
12 2301 N. Oracle, Tucson, Ugly Duckling Car Sales, $ 1,395,615 82091887 May
AZ Inc.
13 1901 W. Copper, Tucson, Ugly Duckling Car Sales, $ 626,496 82091888 May
AZ Inc.
14 3434 E. Broadway, Champion Acceptance $ 1,273,400 82091889 May
Tucson, AZ Corporation
15 4700 4th Street, NW, Ugly Duckling Car Sales $ 1,473,751 82091890 May
Albuquerque, NM New Mexico, Inc.
17 1219 S.E. Military Dr., Ugly Duckling Car Sales $ 1,273,535 82091892 May
San Antonio, TX Texas, L.L.P.
SUBTOTAL - MAY $21,845,942
16 700 Wyoming Blvd., Ugly Duckling Car Sales $ 2,787,207 8209191 July 31
Albuquerque, NM New Mexico, Inc.
18 1507 Bandera Road, San Ugly Duckling Car Sales $ 1,180,215 82091893 July 31
Antonio, TX Texas, L.L.P.
19 350 S. W.W. White, San Ugly Duckling Car Sales $ 1,261,987 82091894 July 31
Antonio, TX Texas, L.L.P.
20 11704 N. Florida Ave., Ugly Duckling Car Sales $ 1,640,261 82091895 July 31
Tampa, FL Florida, Inc.
</TABLE>
<PAGE> 28
<TABLE>
<S> <C> <C> <C> <C> <C>
21 8805 E. Adamo Dr., Ugly Duckling Car Sales $ 1,091,000 82091896 July 31
Brandon, FL Florida, Inc.
22 7501 North Dale Mabry Ugly Duckling Car Sales $ 1,600,000 July 31
Hwy., Tampa, FL Florida, Inc.
SUBTOTAL - JULY $ 9,560,670
GRAND TOTAL $31,406,612
</TABLE>
<PAGE> 29
EXHIBIT "B"
DESCRIPTION OF LAND
[OMITTED]
<PAGE> 30
EXHIBIT "C"
OMITTED
<PAGE> 31
EXHIBIT "D"
OMITTED
<PAGE> 32
EXHIBIT "E"
OMITTED
<PAGE> 33
EXHIBIT "F"
LIST OF EXISTING CONTRACTS -- OMITTED
<PAGE> 34
EXHIBIT "G"
FORM OF DEED
<PAGE> 35
GENERAL WARRANTY DEED
For the consideration of Ten Dollars, and other valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the undersigned,
, a , the
- ---------------- ------------------------------ ----------------------
Grantor herein, does hereby convey to , a
----------------------------------
, the Grantee, the following real
- ------------ -------------------------
property situated in Maricopa County, Arizona, together with all rights and
privileges appurtenant thereto, to wit:
SEE EXHIBIT "A" ATTACHED HERETO AND INCORPORATED HEREIN BY
THIS REFERENCE.
SUBJECT TO current taxes and assessments, reservations in
patents, and all easements, rights of way, encumbrances,
liens, covenants, conditions, restrictions, obligations and
liabilities as may appear of record.
AND the Grantor hereby binds itself and its successors to warrant and
defend the title, subject to the matters above set forth.
GRANTOR:
----------------------------------
By:
-------------------------------------
Name:
-------------------------------------
Title:
----------------------------------
<PAGE> 36
EXHIBIT "H"
FIRPTA STATEMENT
<PAGE> 37
CERTIFICATE OF NON-FOREIGN STATUS
Section 1445 of the Internal Revenue Code provides that a transferee of
a U.S. real property interest must withhold tax if the transferor is a foreign
person. To inform , a ("BUYER"),
------------------ ------------------------
and that withholding of tax is not required
---------------------------------
upon the disposition of a U.S. real property interest by ,
---------------------
a ("SELLER"), the undersigned hereby swears, affirms and
----------------------
certifies the following on behalf of Seller:
1. Seller is not a foreign corporation, foreign partnership, foreign
trust, or foreign estate (as those terms are defined in the Internal Revenue
Code and Income Tax Regulations).
2. Seller's U.S. employer identification number is .
-------------------
3. Seller's office address is:
---------------------------------
---------------------------------
Attention:
-----------------------
Telecopier:
-----------------------
4. Seller understands that this certification may be disclosed to the
Internal Revenue Service by Buyer and that any false statement contained herein
could be punished by fine, imprisonment, or both.
Under penalties of perjury, the undersigned declares that he has
examined this certification and to the best of his knowledge and belief it is
true, correct and complete, and he/she further declares that he has the
authority to sign this document on behalf of Seller.
Executed as of the day of , 1998.
------- ----------------
-----------------------------,
a
----------------------------
By:
----------------------------
Name:
-------------------------
Title:
-------------------------
<PAGE> 38
EXHIBIT "I"
BILL OF SALE
<PAGE> 39
BILL OF SALE AND ASSIGNMENT
FOR VALUABLE CONSIDERATION, receipt and adequacy of which is hereby
acknowledged, the undersigned, , a
--------------------- --------------------
("ASSIGNOR"), hereby sells, transfers, assigns and conveys to
, a ("ASSIGNEE"), the following:
- ------------------ --------------------------
(1) the "Personal Property" and (2) the "Intangible Property." The terms
"Personal Property" and "Intangible Property" shall have the respective
definitions set forth in that certain agreement ("PURCHASE AGREEMENT") captioned
"PURCHASE AND SALE - LEASE BACK AGREEMENT AND JOINT ESCROW INSTRUCTIONS", dated
as of April , 1998, by and between Assignor and Assignee.
The covenants, agreements, representations, warranties, indemnities and
limitations provided in the Purchase Agreement with respect to the property
conveyed hereunder, are hereby incorporated herein by this reference as if
herein set out in full and shall inure to the benefit of and shall be binding
upon Assignee and Assignor and their respective successors and assigns.
IN WITNESS WHEREOF, Assignor has executed this Bill of Sale and
Assignment as of , 1998.
-------------------
ASSIGNOR:
------------------------,
a
-----------------------
By:
----------------------
Name:
----------------------
Title:
----------------------
<PAGE> 40
EXHIBIT "J"
LEASE
<PAGE> 41
LEASE
THIS LEASE (this "Lease") is entered into as of the ____ day of
_______________, 1998 (the "Commencement Date"), by and between [ICCMIC entity],
a_______________ (the "Landlord"), whose address for purposes of notice
hereunder is Attention: Mr. James M. Flagg, c/o Imperial Credit Mortgage
Investment Corporation, 11601 Wilshire Boulevard, Suite 2080, Los Angeles,
California 90025, and UGLY DUCKLING CAR SALES, INC., an Arizona corporation (the
"Tenant"), whose address for purposes of notice hereunder is Attention: General
Counsel, 2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016.
R E C I T A L S
This Lease is made with reference to the following facts and
objectives:
Landlord is the owner of the following: (i) certain tract(s) or
parcel(s) of land located in the _________, and more particularly described on
the attached and incorporated Exhibit "A" (the land described above, together
with all rights, interests, easements, rights of way and appurtenances related
thereto, shall hereinafter be referred to as the "Land"); and (ii) a building or
buildings located or to be located on the Land and all other structures and
improvements existing or to be constructed on the Land, together with all
fixtures and equipment therein owned by Landlord (collectively, the
"Improvements"). The Land and Improvements are hereinafter collectively referred
to as the "Premises." No easement for light, air or view is included with or
appurtenant to the Premises.
Pursuant to all of the terms, conditions, covenants and provisions of
this Lease, Tenant desires to lease the Premises from Landlord, and Landlord
desires to lease the Premises to Tenant, for the rents and during the terms
hereinafter set forth.
Landlord acquired the Premises on the Commencement Date and for the
period of at least _________ years prior to the Commencement Date, Tenant owned,
occupied and operated the Premises.
Tenant has examined the title of the Premises, the physical condition
of the Premises, environmental studies and reports of the Premises, and the
economic feasibility of conducting its business in and from the Premises. Tenant
has determined that the same are satisfactory to Tenant, and Tenant accepts the
Premises on an "AS IS - WHERE IS" basis. TENANT ACKNOWLEDGES THAT LANDLORD
(WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND
WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES, INCLUDING ANY
WARRANTY OR REPRESENTATION AS TO ITS FITNESS FOR USE OR PURPOSE, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE, AS TO THE QUALITY OF THE MATERIAL
OR WORKMANSHIP THEREIN, LATENT OR PATENT, AS TO LANDLORD'S TITLE THERETO, OR AS
TO VALUE, COMPLIANCE WITH SPECIFICATIONS, LOCATION, USE, CONDITION,
MERCHANTABILITY, QUALITY, DESCRIPTION, DURABILITY OR OPERATION, IT BEING AGREED
THAT ALL RISKS INCIDENT THERETO ARE TO BE BORNE BY TENANT. Tenant acknowledges
that the Premises are of its selection and to its specifications, that the
Premises have been inspected by Tenant and are satisfactory to it, and that in
deciding to lease the Premises, Tenant is relying solely on its own
investigation of the Premises and not upon any representation or warranty from
Landlord or its agents. In
<PAGE> 42
the event of any defect or deficiency in the Premises of any nature, whether
patent or latent, Landlord shall not have any responsibility or liability with
respect thereto or for any incidental or consequential damages (including strict
liability in tort).
It is the parties' objective to provide for an absolute "bond
equivalent" net net net lease to Landlord; the Basic Rent (as hereinafter
defined) payable by Tenant hereunder shall be an absolute "bond equivalent" net
net net return to Landlord and Tenant shall pay all costs and expenses relating
to the Premises and Tenant's operations thereon. Landlord would not have entered
into this Lease if it did not meet the aforesaid criteria.
NOW, THEREFORE, IN CONSIDERATION of the aforesaid Recitals, and in
consideration of the Premises leased by Landlord to Tenant hereby, and in
consideration of the rents and covenants to be paid and performed by Tenant
hereunder, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties covenant and agree as
follows:
I. LEASE.
1.1. Demise of Premises. Landlord hereby demises the Premises
to Tenant, and Tenant hereby lets and accepts the Premises from Landlord, for
the term herein described.
1.2. Title and Condition. The Premises are demised and let "as
is" subject to all matters of record and all other title exceptions, including
but not limited to (a) the rights of any parties in possession and the existing
state of the title as of the commencement of the term of this Lease, (b) any
state of facts which an accurate survey or physical inspection thereof might
show, (c) all zoning regulations, restrictions, rules and ordinances, building
restrictions and other laws and regulations now in effect or hereafter adopted
by any governmental authority having jurisdiction over the condition of any
buildings, structures and other improvements located thereon, all as of the
commencement of the term of this Lease, without representation or warranty by
Landlord. Tenant represents that it has examined the title to and the condition
of the Premises and has found the same to be satisfactory to it.
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1.3. Use of Leased Premises.
(a) Tenant is currently operating the Premises for
the purpose of used car sales and activities incidental and related thereto (the
"Intended Use"). Tenant agrees to remain open for business and to operate the
Intended Use in all or substantially all of the Premises during the Term. Tenant
may occupy and use the Premises for no use other than the Intended Use without
Landlord's consent, which shall not be unreasonably withheld, conditioned or
delayed. In no event, however, shall the Premises be used for a use which would
(i) have a material adverse effect on the value of the Premises, (ii) increase
(when compared to use as the Intended Use) the likelihood that Tenant, Landlord
or Lender would incur liability under any provisions of any Environmental Laws,
or (iii) result in or give rise to any material environmental deterioration or
degradation of the Premises. Tenant shall not create or suffer to exist any
public or private nuisance, hazardous or illegal condition or waste on or with
respect to the Premises. Tenant shall not use, occupy or permit any of the
Premises to be used or occupied, nor do or permit anything to be done in or on
any of the Premises, in a manner which would (A) make void or voidable any
insurance which Tenant is required hereunder to maintain then in force with
respect to any of the Premises, or (B) affect the ability of Tenant to obtain
any insurance which Tenant is required to furnish hereunder, (C) impair
Landlord's title to the Premises, or in such manner as might reasonably make
possible a claim or claims of adverse usage or adverse possession by the public,
as such, or third Persons, or of implied dedication of the Premises or any
portion thereof, or (D) conflict with the terms or conditions of any instrument
or agreement binding upon Landlord, Tenant or the Premises. Nothing contained in
this Lease and no action by Landlord shall be construed to mean that Landlord
has granted to Tenant any authority to do any act or make any agreement that may
create any such third party or public right, title, interest, lien, charge or
other encumbrance upon the estate of the Landlord in the Premises.
(b) Tenant represents and warrants to Landlord that
all necessary certificates of occupancy, permits, licenses and consents from any
and all appropriate governmental authorities have been obtained by Tenant and
are in full force and effect, and Tenant agrees to maintain them in full force
and effect during the Term.
1.4. Quiet Enjoyment. For so long as no Event of Default (as
hereinafter defined) exists hereunder, Landlord warrants peaceful and quiet
enjoyment of the Premises by Tenant against acts of Landlord or anyone claiming
through Landlord, provided that Landlord and its agents may enter upon and
examine the Premises at reasonable times. Exercise by Landlord of its rights to
come upon the Premises as set forth in this Lease shall not constitute a
violation of this Section.
II. TERM.
2.1. Term. Subject to the terms and conditions hereof, Tenant
shall have and hold the Premises for a primary term (herein called the "Primary
Term") commencing on the Commencement Date and ending at midnight on
_______________, 2018, unless this Lease shall be sooner terminated or extended.
Tenant shall have the right and option to extend this Lease for four (4)
consecutive extended terms, of five (5) years each (herein, collectively called
the "Extended Terms" and individually, an "Extended Term" and together with the
Primary Term, sometimes hereinafter called the "Term" "term of this Lease" or
"term hereof"). If no Event of Default shall exist at the time of exercise of
such option, each Extended Term shall commence on the day immediately succeeding
the expiration date of the Primary Term or the preceding Extended Term and shall
end at midnight on the day immediately preceding the fifth anniversary of the
first day of such Extended Term. Provided no Event of Default shall exist at the
time of exercise of such option, Tenant may exercise each said option to extend
this Lease for an Extended Term by giving written notice to that effect at least
one (1) year prior to the
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expiration of the then existing term. If Tenant fails to exercise an option to
extend the Term one (1) year or more prior to the expiration of the then current
Term, Tenant's option to extend the Term shall not be terminated and this Lease
shall not expire unless Landlord delivers to Tenant written notice of Tenant's
failure to exercise its option to extend the Term of this Lease and Tenant then
fails to exercise the option within fifteen (15) days after receipt of the
written notice from Landlord. If Tenant does not exercise any such option in a
timely manner, then Landlord shall have the right during the remainder of the
Term of this Lease to advertise the availability of the Premises for reletting
and/or sale and to erect upon the Premises signs appropriate for the purpose of
indicating such availability. Landlord shall also have such right in the final
year of the fourth Extended Term. The term "Lease Year" shall mean a calendar
year, except that the first partial "Lease Year" (the "First Lease Year") shall
commence on the "Commencement Date and expire on December 31, 1998.
III. BASIC RENT; ADDITIONAL RENT.
3.1. Basic Rent. Tenant covenants to pay to Landlord as and
for the rental of the Premises the amounts set forth below (which amounts, as
increased by the amounts provided for in Section 3.2 hereof, is together called
the "Basic Rent"):
(a) For and with respect to the First Lease Year the
amount of $ ___________, payable in equal monthly installments of $____________
(but if the Commencement Date does not occur on the first day of a calendar
month, the installment for the period from the Commencement Date to the end of
the calendar month in which the Commencement Date occurs shall be paid on the
Commencement Date and shall be prorated based on a thirty (30) day month).
(b) For and with respect to the second Lease Year
(i.e., calendar year 1999), the amount of $ ___________, payable in equal
monthly installments of $____________ .
(c) Basic Rent shall be adjusted commencing with the
first (1st) day of the third Lease Year and as of the first (1st) day of each
Lease Year thereafter (each such date being referred to herein as an "BR
Adjustment Date" and each such Lease Year commencing with the third Lease Year
being referred to herein as a "BR Period"). Basic Rent for the first BR Period
will be adjusted on the first BR Adjustment Date by an amount calculated by
multiplying the Basic Rent then in effect by the percentage increase, if any, in
the "CPI", as defined below in this paragraph, from the month immediately
preceding the BR Adjustment Date over the CPI for the month immediately
preceding the second Lease Year. Basic Rent for each subsequent BR Period will
be adjusted on each subsequent BR Adjustment Date by an amount calculated by
multiplying the Basic Rent then in effect, by the percentage increase, if any,
in the CPI from the last month of the BR Period then ending over the CPI for the
last month of the most recent prior BR Adjustment Date. If the aforesaid
calculations can not be made by the BR Adjustment Date, there shall be an
adjustment retroactive to the BR Adjustment Date as soon as possible after such
calculations can be made. Notwithstanding the foregoing to the contrary, in no
event shall the percentage increase for any such Lease Year exceed five percent
(5%) or be less than two percent (2%). The "CPI" shall mean (and charges subject
to adjustment pursuant to the CPI under this Lease shall mean adjustment
pursuant to changes in) the "Consumer Price Index For All Urban Consumers
(1982-84=100) U.S. City Average, published by the Bureau of Labor Statistics of
the U.S. Department of Labor. If no CPI is published for the month for which CPI
is to be utilized pursuant to this Lease, the most recent prior month shall be
utilized. In the event the CPI is not published by the Bureau of Labor
Statistics or another governmental agency at any time during the Term, the most
comparable statistics on the purchasing power of the consumer dollar as
published by a responsible financial authority and as selected by Landlord shall
be used for making such computation.
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(d) If an option to extend the Term is exercised, for
and with respect to the applicable Extended Term, at the rate equal to one
hundred percent (100%) of fair market rental value, but in no event less than
the Basic Rent payable in the last year of the prior portion of the Term
("Extended Term Basic Rent"). Fair market rental value will be determined as of
the first day of the applicable Extended Term but at the time and on the basis
set forth in Section 11.3 hereof.
Tenant unconditionally and irrevocably agrees to make the
Basic Rent payments directly to Landlord or Landlord's designee and to pay the
same on the first day of each month, commencing on the Commencement Date. After
any Event of Default, Landlord shall have the right to require that such
payments be made in immediately available funds.
3.2. Additional Rent. Tenant shall pay and discharge before
the imposition of any fine, lien, interest or penalty may be added thereto for
late payment thereof, as Additional Rent, all other amounts and obligations
which Tenant assumes or agrees to pay or discharge pursuant to this Lease,
together with every fine, penalty, interest and cost which may be added by the
party to whom such payment is due for nonpayment or late payment thereof. In the
event of any failure by Tenant to pay or discharge any of the foregoing,
Landlord shall have all rights, powers and remedies provided herein, by law or
otherwise, in the event of nonpayment of Basic Rent.
3.3. Late Charge. If any installment of Basic Rent is not paid
within five (5) days after notice that the same is due and not paid, Tenant
shall pay to Landlord or Lender, as the case may be, on demand, as Additional
Rent, a late charge equal to three percent (3%) (the "Late Charge") on such
overdue installment of Basic Rent. Such payment shall be in addition to, and not
in lieu of, the interest payable pursuant to Section 11.18.
3.4. True Lease. Landlord and Tenant agree that this Lease is
a true lease and does not represent a financing arrangement. Each party shall
reflect the transactions represented by this Lease in all applicable books,
records and reports (including, without limitation, income tax filings) in a
manner consistent with "true lease" treatment rather than "financing" treatment.
3.5. Net Lease; Non-Terminability.
(a) This is an absolutely net lease to Landlord. It
is the intent of the parties hereto that the Basic Rent payable under this Lease
shall be an absolutely net return to Landlord and that Tenant shall pay all
costs and expenses relating to the Premises and operations carried on therein,
including but not limited to costs and expenses relating to any period prior to
the Premises which is not expressly declared to be that of Landlord shall be
deemed to be an obligation of Tenant to be timely performed by Tenant at
Tenant's expense. Basic Rent, Additional Rent and all other sums payable
hereunder by Tenant, shall be paid without notice, demand, set-off,
counterclaim, abatement, suspension, deduction or defense.
(b) This Lease shall not terminate nor shall Tenant
have any right to terminate this Lease, nor shall Tenant be entitled to any
abatement or reduction of rent hereunder, nor shall the obligations of Tenant
under this Lease be affected by reason of: (i) any damage to or destruction of
all or any part of the Premises from whatever cause; (ii) the taking in whole or
in part of the Premises or any portion thereof by condemnation, requisition or
otherwise except as provided in Article VII; (iii) the prohibition, limitation
or restriction of Tenant's use of all or any part of the Premises, or any
interference with such use; (iv) any eviction by paramount title or otherwise;
(v) Tenant's acquisition or ownership of all or any of the Premises otherwise
than as expressly provided herein; (vi) any default on the part of Landlord
under this Lease, or under any other agreement to which Landlord and Tenant may
be parties; (vii) any abandonment of the Premises by Tenant or (viii) any other
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cause whether similar or dissimilar to the foregoing, any present or future law
to the contrary notwithstanding. It is the intention of the parties hereto that
the obligations of Tenant hereunder shall be separate and independent covenants
and agreements, that the Basic Rent, the Additional Rent and all other sums
payable by Tenant hereunder shall continue to be payable in all events and that
the obligations of Tenant hereunder shall continue unaffected, unless the
requirement to pay or perform the same shall have been terminated pursuant to
Article VII of this Lease.
(c) Tenant agrees that it will remain obligated under
this Lease in accordance with its terms, and it will not take any action to
terminate, rescind or avoid this Lease because of: (i) any readjustment,
liquidation, dissolution, or winding-up or other proceeding affecting Landlord
or its successors-in-interest or (ii) any action with respect to this Lease
which may be taken by any trustee or receiver of Landlord or its
successors-in-interest or by any court in any such proceeding.
(d) To the extent permitted by applicable law, Tenant
waives all rights which may now or hereafter be conferred by law (i) to quit,
terminate or surrender this Lease or the Premises or any part thereof, or (ii)
to any abatement, suspension, deferment or reduction of the Basic Rent,
Additional Rent or any other sums payable under this Lease.
IV. PAYMENT OF IMPOSITIONS, TAXES AND ASSESSMENTS; COMPLIANCE WITH LAW;
ENVIRONMENTAL MATTERS.
4.1. Payment of Impositions. Tenant shall pay or discharge all
Impositions (as hereinafter defined) when due, including but not limited to
Impositions relating to any period prior to the Commencement Date.
Notwithstanding the foregoing provision of this Section 4.1, Tenant shall not be
required to pay any franchise, corporate, estate, inheritance, succession,
transfer (other than transfer taxes, recording fees, or similar charges payable
in connection with a conveyance hereunder to Tenant), income or excess profits
taxes of Landlord hereunder. Tenant agrees to furnish to Landlord and Lender,
evidence of the payment of the taxes described in Section 11.12(a)(i) within
thirty (30) days after payment thereof. Tenant agrees to furnish evidence of
payment of other Impositions with fifteen (15) days of Landlord's request
therefor. In the event that any Imposition levied or assessed against the
Premises becomes due and payable during the term hereof and may be legally paid
in installments, Tenant shall have the option to pay such Imposition in
installments. In such event, Tenant shall be liable only for those installments
which relate (on an accrual basis) to the term hereof or any period prior to the
term hereof. On or prior to the Termination Date, all accrued Impositions
relating to the term hereof shall be paid by Tenant to Landlord (whether or not
the tax bill therefor is then due and payable, but subject to readjustment in
the event of any error in calculation).
4.2. Compliance with Laws. Tenant shall, at its expense,
comply with and shall cause the Premises to comply with all governmental
statutes, laws, rules, orders, regulations and ordinances, including without
limitation, the Americans with Disabilities Act of 1990, as the same may be
amended from time to time, all fire regulations, occupational health and safety
laws, applicable point of sale laws, building codes, Environmental Laws, zoning
and land use laws and regulations, and any other law the failure to comply with
which at any time would affect Landlord or the Premises or any part thereof, or
the use thereof, including those which require the making of any structural,
unforeseen or extraordinary changes, whether or not any of the same involve a
change of policy on the part of the body enacting the same. Tenant shall, at its
expense, comply with all changes required in order to obtain the Required
Insurance (as hereinafter defined), and with the provisions of all contracts,
agreements,
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instruments and restrictions existing at the commencement of this Lease or
thereafter suffered or permitted by Tenant affecting the Premises or any part
thereof or the ownership, occupancy or use thereof.
4.3. Permitted Contests. Provided that Tenant shall have
complied with, and shall continue to comply with, its obligations under Section
4.2 (including but not limiting to any governmental requirement of payment under
protest as a condition to a contest), Tenant may contest, in good faith and at
its expense and in accordance with all laws and governmental requirements, the
existence, the amount or the validity of the requirements imposed pursuant to
Section 4.2, or the extent of its liability therefor, by appropriate
proceedings. At least thirty (30) days prior to any such contest, and as a
condition thereto, Tenant shall notify Landlord as to the proposed contest in
reasonable detail, and Landlord shall have the right to require Tenant to post
security in amount and form reasonably required by Landlord. No such contest or
proceedings shall in any way eliminate or otherwise interfere with Tenant's
obligation to make timely payments of Basic Rent and Additional Rent under this
Lease. Tenant further agrees that each such contest shall be promptly prosecuted
to a final conclusion. Tenant shall pay, defend, indemnify, protect and save
Landlord harmless against, any and all losses, judgments, decrees and costs
(including all attorneys' fees, appearance costs and expenses) incurred by
Landlord in connection with any such contest (but this shall not be construed so
as to require Tenant to pay Impositions which relate to a period after the Term
even if such Impositions are increased in connection with a contest) and shall,
promptly after the final settlement, compromise or determination of such
contest, fully pay and discharge the amounts which shall be levied, assessed,
charged or imposed or be determined to be payable therein or in connection
therewith, together with all penalties, fines, interests, costs and expenses
thereof or in connection therewith, and perform all acts, the performance of
which shall be ordered or decreed as a result thereof. No such contest shall
subject Landlord to the risk of any criminal liability or shall subject the
Premises to the risk of foreclosure.
4.4. Hazardous Materials. Tenant shall:
(a) not cause, or permit any Hazardous Material (as
defined below) to exist on or discharge from the Premises (except for items (1)
sold or used in the ordinary course of Tenant's business, (2) in full compliance
with all Environmental Laws pertaining thereto, (3) not involving any release,
spill, disposition or discharge, and (4) not creating any health or safety
hazard), and shall promptly: (i) pay any claim against Tenant, Landlord, Lender
or the Premises; (ii) remove any charge or lien upon any of the Premises; and
(iii) defend, indemnify, protect and hold Landlord and Lender harmless from any
and all claims, expenses, liability, loss or damage (including reasonable
attorneys' fees) resulting from any Hazardous Material that at any time exists
on or is discharged from the Premises except to the extent it is the direct
result of the actual gross negligence or willful misconduct of Landlord;
(b) not cause or permit any Hazardous Material to
exist on or discharge from any property owned or used by Tenant which would
result in any charge or lien upon the Premises and shall promptly: (i) pay any
claim against Tenant, Landlord, Lender or the Premises; (ii) remove any charge
or lien upon the Premises; and (iii) defend, indemnify, protect and hold
Landlord and Lender harmless from any and all claims, expenses, liability, loss
or damage (including reasonable attorneys' fees) resulting from the existence or
discharge of any such Hazardous Material except to the extent it is the direct
result of the actual gross negligence or willful misconduct of Landlord;
(c) notify Landlord and Lender within ten (10) days
after Tenant first has knowledge of any of the following:
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(i) that Hazardous Material exists on
or has been discharged from or onto the Premises (whether originating thereon or
migrating to the Premises from other property);
(ii) that Tenant is subject to
investigation by any governmental authority evaluating whether any remedial
action is needed to respond to the release or threatened release of any
Hazardous Material into the environment from the Premises;
(iii) notice or claim to the effect that
Tenant is or may be liable to any person as a result of the release or
threatened release of any Hazardous Material into the environment from the
Premises;
(iv) notice that the Premises are subject
to an environmental lien;
(v) notice of violation to Tenant or
awareness by Tenant of a condition which might reasonably result in a notice of
violation of any applicable Environmental Law.
(d) comply, and cause the Premises to comply, with
all statutes, laws, ordinances, rules and regulations of all local, state or
federal authorities having authority over the Premises or any portion thereof or
their use, including without limitation, relative to any Hazardous Material,
petroleum products, asbestos containing materials or PCB's.
(e) "Hazardous Material" means any hazardous or toxic
material, substance or waste which is defined by those or similar terms or is
regulated as such under any Environmental Laws ), and without limiting the
generality of the foregoing, shall include any substance which is toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous, or any substance which contains gasoline,
diesel fuel or other petroleum hydrocarbons, polychlorinated biphenyls (PCBs),
or radon gas, urea formaldehyde, asbestos, lead or mercury.
(f) "Environmental Laws" means any statute, law,
ordinance, rule or regulation of any local, county, state or federal authority
having jurisdiction over the Property or any portion thereof or its use as the
same may be amended from time to time, including but not limited to: (i) the
Federal Water Pollution Control Act (33 U.S.C. Section 1317) as amended; (ii)
the Federal Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et
seq.) as amended; (iii) the Comprehensive Environmental Response Compensation
and Liability Act (42 U.S.C. Section 9601 et seq.) as amended; (iv) the Toxic
Substance Control Act (15 U.S.C. Section 2601) as amended; and (v) the Clean Air
Act (42 U.S.C. Section 7401) as amended.
(g) The Tenant's obligations and liabilities under
this Section 4.4 shall survive the expiration or termination of this Lease and
shall include, without limitation, matters arising prior to the Commencement
Date.
V. MAINTENANCE AND REPAIR; ALTERATIONS.
5.1. Maintenance and Repair. Tenant acknowledges that it has
received the Premises in good condition, repair and appearance. Tenant agrees
that, at its expense, it will keep and maintain the Premises, including any
altered, rebuilt, additional or substituted buildings, structures and other
improvements thereto, in good condition and repair. It will make promptly, all
structural and nonstructural, foreseen and unforeseen, ordinary and
extraordinary changes and repairs or replacements of every kind which may be
required to be made to keep and maintain the Premises in such good
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condition, repair and appearance and it will keep the Premises orderly and free
and clear of rubbish. Tenant covenants not to install any underground storage
tanks on the Premises. Tenant agrees that its obligation to maintain and repair
the Premises as set forth in this Section 5.1 benefit both Landlord and Tenant,
are the sole responsibility of Tenant, and may not be delegated. Tenant further
covenants to perform or observe all terms, covenants or conditions of any
reciprocal easement or maintenance agreement to which it may at any time be a
party or to which the Premises are currently subject. Tenant shall, at its
expense, use its best efforts to enforce compliance with any reciprocal easement
or maintenance agreement benefiting the Premises by any other person subject to
such agreement. Landlord shall not be required to maintain, repair or rebuild,
or to make any Alterations of any nature to the Premises, or any part thereof,
whether ordinary or extraordinary, structural or nonstructural, foreseen or not
foreseen, or to maintain the Premises or any part thereof in any way. Tenant
hereby expressly waives the right to make repairs at the expense of Landlord
which may be provided for in any law in effect at the time of the commencement
of the term of this Lease or which may thereafter be enacted. In the event that
the Premises shall violate any law and as a result of such violation an
enforcement action is threatened or commenced against Tenant or with respect to
the Premises, then Tenant shall either (i) obtain valid and effective waivers or
settlements of all claims, liabilities and damages resulting from each such
violation, whether the same shall affect Landlord, Tenant or both, or (ii) take
such action as shall be necessary to remove such violation, including, if
necessary, making any necessary repairs or replacements, structural or
otherwise.
5.2. Engineering Report. Beginning the Sixth Lease Year, and
every five (5) years thereafter, Tenant shall provide Landlord, upon Landlord's
written request, with an engineering study of the Premises ("Engineering
Report") addressed to Landlord, in form, content and scope reasonably acceptable
to Landlord, prepared by a qualified engineering firm. The Engineering Report
shall include, without limitation, a study or analysis of (a) all structural
components of the Premises, (b) all mechanical, electrical, plumbing, HVAC,
sprinkler, fire suppression, elevators, and other building systems and equipment
designated by Landlord, and (c) the roof of all buildings. Tenant shall also
provide to Landlord Hazardous Materials audits addressed to Landlord, in form,
content and scope reasonably acceptable to Landlord, prepared by a qualified
Hazardous Materials consulting firm. The first such Hazardous Materials audit
shall be provided to Landlord no later than sixty (60) days after the
Commencement Date, and Hazardous Materials audits shall thereafter be provided
to Landlord every five (5) years after the Commencement Date (or more frequently
if Landlord so requests in writing).
5.3. Encroachments. If any Improvements situated on the
Premises at any time during the Term of this Lease shall encroach upon any
property, street or right-of-way adjoining or adjacent to the Premises, or shall
violate the agreements or conditions contained in any restrictive covenant
affecting the Premises or any part thereof, or shall impair the rights of others
under or hinder or obstruct any easement or right-of-way to which the Premises
are subject, then, promptly after the written request of Landlord or any person
affected by any such encroachment, violation, impairment, hindrance or
obstruction, Tenant shall, at its expense, either (i) obtain effective waivers,
or settlements of all claims, liabilities and damages resulting from each such
encroachment, violation, impairment, hindrance or obstruction whether the same
shall affect Landlord, Tenant or both, or (ii) make such changes in the
improvements on the Premises and take such other action as shall be necessary to
remove such encroachments, hindrances or obstructions and to end such violations
or impairments, including, if necessary, the alteration or removal of any
improvement on the Premises. Any such alteration or removal shall be made in
conformity with the requirements of Section 5.4 hereof to the same extent as if
such alteration or removal were an Alteration under the provisions of Section
5.4.
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5.4. Alterations.
(a) Tenant may, at its expense, make additions to and
alterations of the Improvements to the Premises and make substitutions
and replacements thereto (sometimes hereinafter collectively referred
to as "Alterations"), provided that: (i) Landlord approves, which
approval shall not be unreasonably withheld, conditioned or delayed,
any Alterations to the Premises before such alterations are commenced,
after having received from Tenant a complete set of plans and
specifications for the proposed work,(ii) in Landlord's reasonable
judgment, the market value of the Premises and the Intended Use shall
not thereby be reduced or impaired and the appearance of the Property
will not be adversely affected; (iii) the Alterations are
architecturally consistent with existing Improvements; (iv) the
Alterations shall be performed in a good and workmanlike manner; (v)
such work shall not violate any term of any restriction to which the
Premises are subject or the requirements of any insurance policy
required to be maintained by Tenant hereunder, and shall be
expeditiously completed in compliance with all laws, ordinances, rules,
regulations and requirements applicable thereto, including without
limitation, the Americans with Disabilities Act of 1990 and all
regulations issued thereunder, as the same may be amended from time to
time; and (vi) no Improvements shall be demolished unless Tenant shall
have first furnished Landlord with such surety bonds or other security
acceptable to Landlord as shall be necessary to assure rebuilding of
such Improvements. Tenant shall promptly pay all costs and expenses of
each such Alteration, discharge all liens arising therefrom and procure
and pay for all permits and licenses required in connection therewith.
All such Alterations shall be and remain part of the realty and the
property of Landlord and shall be subject to this Lease. Tenant may
place upon the Premises any inventory, trade fixtures, machinery or
equipment belonging to Tenant or third parties and may remove the same
at any time during the Term. Tenant shall repair any damage to the
Premises or any portion thereof (including all Improvements thereon)
caused by such removal.
5.5. No Liens. Tenant will not, directly or indirectly, create
or permit to be created or to remain, and shall within thirty (30) days of
filing of any, mechanics, contractors or other liens, discharge or bond, at its
expense, any liens with respect to, the Premises or any part thereof or Tenant's
interest therein or the Basic Rent, Additional Rent or other sums payable by
Tenant under this Lease, other than the lien for real estate taxes which are not
yet due and payable. Nothing contained in this Lease shall be construed as
constituting the consent or request, expressed or implied, by Landlord to the
performance of any labor or services or of the furnishing of any materials for
any Alterations, repair or demolition of or to the Premises or any part thereof
by any contractor, subcontractor, laborer, materialman or vendor. Notice is
hereby given that Landlord will not be liable for any labor, services or
materials furnished or to be furnished to Tenant, or to anyone holding the
Premises or any part thereof, and that no mechanic's or other liens for any such
labor services or materials shall attach to or affect the interest of Landlord
in and to the Premises.
[THE FOLLOWING SECTION IS APPLICABLE ONLY TO THE MIAMI STREET
SITE IN PHOENIX, ARIZONA:
5.6 SEWER SYSTEM AGREEMENT. TENANT SHALL COMPLY WITH ALL OF
THE OBLIGATIONS IMPOSED PURSUANT TO THAT CERTAIN SEWER SYSTEM AGREEMENT DATED
NOVEMBER 17, 1997, RECORDED NOVEMBER 18, 1997 AS INSTRUMENT NO. 97-0808576 OF
THE OFFICIAL RECORDS OF THE COUNTY IN WHICH THE PREMISES IS LOCATED, AS SUCH
SEWER SYSTEM AGREEMENT MAY BE AMENDED, AND ALL DOCUMENTS RELATED THERETO
(COLLECTIVELY, THE "SEWER AGREEMENT") UPON LICENSEE (AS DEFINED IN THE SEWER
AGREEMENT), THE PREMISES OR THE OWNER OF THE PREMISES. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING: (a) TENANT SHALL PAY ALL COSTS, EXPENSES, FEES AND
CHARGES THEREUNDER AND SHALL OBTAIN AND MAINTAIN IN FULL FORCE AND EFFECT ALL
PERMITS REQUIRED THEREUNDER; (b) TENANT SHALL PERFORM ANY
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CONSTRUCTION WORK REQUIRED OR PERMITTED THEREUNDER IN ACCORDANCE WITH THE
TERMS AND CONDITIONS OF THIS LEASE; AND (c) TENANT SHALL NOT AMEND OR TERMINATE
THE SEWER AGREEMENT OR ASSIGN ANY OF ITS RIGHTS OR OBLIGATIONS THEREUNDER
WITHOUT LANDLORD'S PRIOR WRITTEN CONSENT.]
VI. INSURANCE; INDEMNIFICATION.
6.1. Insurance. Tenant shall maintain, or cause to be
maintained, at its sole expense, the following insurance on the Premises (herein
called the "Required Insurance"):
(a) Insurance against loss or damage to the
Improvements (the "Improvements Insurance") under a fire and broad form of all
risk extended coverage insurance policy (which shall include flood insurance if
the Premises is located within a flood hazard area, and earthquake insurance)
together with an agreed value endorsement. Such insurance shall be in amounts
sufficient to prevent Landlord or Tenant from becoming a co-insurer under the
applicable policies, and not less than the full replacement cost of the
Improvements (excluding footings and foundations and other parts of the
Improvements which are not insurable) as reasonably determined from time to time
by Landlord but not more frequently than once in any 12-month period. Such
insurance policies may contain reasonable exclusions and deductible amounts as
are common to properties similar to the Premises.
(b) Commercial general liability insurance for the
benefit of Landlord, Tenant and Lender against claims for damages to person or
property occurring on, in or about the Premises and the adjoining streets,
sidewalks, gutters, curbs, passageways and other areas adjacent thereto, if any,
with a combined single limit of at least Five Million Dollars ($5,000,000.00)
for personal injury and property damage or such greater amounts as may
reasonably be required by Landlord, consistent with coverage on properties
similarly constructed, occupied and maintained, such insurance to include full
coverage of the indemnity set forth in Section 6.10. Policies for such insurance
shall be for the mutual benefit of Landlord, Tenant and Lender, as their
respective interests may appear.
(c) Workers' compensation insurance to the extent
necessary to protect Landlord, Tenant and the Premises against workers'
compensation claims, covering all persons employed in connection with any work
done on or about the Premises with respect to which claims for death or bodily
injury could be asserted against Landlord, Tenant or the Premises. Such policy
of workers' compensation insurance shall comply with all of the requirements of
applicable state law.
(d) At any time when any portion of the Premises are
being constructed, altered or replaced, builder's risk insurance (in completed
value non-reporting form) in an amount no less than the actual replacement value
of the Improvements, exclusive of foundations and excavations.
(e) At least twelve (12) months of business
interruption insurance; boiler and sprinkler leakage insurance; and such other
insurance on the Premises, in such amounts and against such other hazards which
may be reasonably required by Landlord or Lender, consistent with coverage on
properties similarly constructed, occupied and maintained.
6.2. Permitted Insurers. The Required Insurance shall be
written by companies of recognized financial standing authorized to do insurance
business in the state in which the Premises are located and have Bests ratings
of A X or better. The Required Insurance shall name as the insured parties
thereunder Landlord and Tenant, as their interests may appear, and Lender as an
additional insured under a standard "mortgagee" endorsement or its equivalent
satisfactory to Landlord. Landlord shall not be required to prosecute any claim
against, or to contest any settlement proposed by, an insurer.
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Tenant may, at its expense, prosecute any such claim or contest any such
settlement in the name of Landlord, Tenant or both with the consent of Landlord,
and Landlord will join therein at Tenant's written request upon the receipt by
Landlord of an indemnity from Tenant against all costs, liabilities and expenses
in connection therewith.
6.3. Insurance Claims. Insurance claims by reason of damage to
or destruction of any portion of the Premises shall be primarily adjusted by
Tenant, but both Landlord and Lender shall have the right to join with Tenant in
adjusting any such loss and approve any adjustment proposed by Tenant.
6.4. Insured Parties. Any loss under any such policy shall be
made payable to Landlord (or, if Landlord so elects, to Lender), subject to the
requirements of Section 6.9. Every policy of Required Insurance shall contain an
agreement that the insurer will not cancel such policy except after thirty (30)
days' written notice to Landlord and Lender and that any loss otherwise payable
thereunder shall be payable notwithstanding any act or negligence of Landlord,
Tenant or Lender which might, absent such agreement, result in a forfeiture of
all or a part of such insurance payment and notwithstanding (i) any foreclosure
or other action taken by a creditor pursuant to any provision of any Mortgage or
other Loan Document upon the happening of a default or Event of Default
thereunder or (ii) any change in ownership of the Premises.
6.5. Delivery of Policies. Tenant shall deliver to Landlord
promptly after the delivery of this Lease, the original or duplicate policies or
Accord-27 form certificates of insurers, satisfactory to Lender, evidencing all
of the Required Insurance. Tenant shall, prior to the expiration of any such
policy, deliver to Landlord another original or duplicate of such policy or
certificates evidencing the renewal of any such policy. If Tenant fails to
maintain or renew any Required Insurance, or to pay the premium therefor, or to
deliver such certificate, then Landlord, at its option, but without obligation
to do so, procure such insurance. Any sums so expended by Landlord shall be
Additional Rent hereunder and shall be repaid by Tenant within five (5) days
after notice to Tenant of such expenditure and the amount thereof. together with
interest thereon at the Interest Rate.
6.6. No Double Coverage. Tenant shall not obtain or carry
separate insurance covering the same risks as any Required Insurance unless
Tenant, Landlord and Lender are included therein as named insured, with loss
payable as provided in this Lease and the policy contains a first mortgagee
endorsement in favor of the Lender. Tenant shall immediately notify Landlord
whenever any such separate insurance is obtained and shall deliver to Landlord
the policies or certificates evidencing the same. Any insurance which Landlord
may elect to carry shall be excess and not primary coverage.
6.7. Blanket Insurance. Anything contained in this Article VI
to the contrary notwithstanding, all Required Insurance may be carried under a
"blanket" or "umbrella" policy or policies covering other property or
liabilities of Tenant, provided that such policies otherwise comply with the
provisions of this Lease and specify the coverage and amounts thereof with
respect to the Premises.
6.8. Damages for Tenant's Failure to Properly Insure. Landlord
or Lender shall not be limited in the proof of any damages which Landlord or
Lender may claim against Tenant arising out of or by reason of Tenant's failure
to provide and keep in force insurance, as provided above, to the amount of the
insurance premium or premiums not paid or incurred by Tenant and which would
have been payable under such insurance; but Landlord and Lender shall also be
entitled to recover as damages for such breach, the uninsured amount of any
loss, to the extent of any deficiency in the Required Insurance and damages,
costs and expenses of suit suffered or incurred by reason of or damage to, or
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destruction of, the Premises, occurring during any period when Tenant shall have
failed to provide the Required Insurance. Tenant shall indemnify, defend,
protect and hold harmless Landlord and Lender for any liability incurred by
Landlord or Lender arising out of any deductibles for Required Insurance.
6.9. Casualty. If all or any part of the Premises shall be
damaged or destroyed by casualty which is insured or required to be insured
under this Lease, or by any other casualty if the cost to repair such other
casualty does not exceed twenty percent (20%) of the total replacement cost of
the Improvements, Tenant shall promptly notify the Landlord thereof, and shall,
with reasonable promptness and diligence, rebuild, replace and repair any damage
or destruction to the Premises, at its expense, in conformity with the
requirements of Section 5.4(a) hereof, in such manner as to restore the same to
the same or better condition as existed prior to such casualty, using materials
of the same or better grade than that of the materials being replaced, and there
shall be no abatement of Basic Rent or Additional Rent. Proceeds of casualty
insurance of $100,000.00 or less shall be paid to Tenant. Proceeds in excess of
$100,000.00 shall be held by Landlord or a proceeds trustee (which may be
Lender, an escrow or title company, or a bank or trust company designated by
Landlord) and paid to Tenant, but only against certificates of Tenant,
appropriate lien waivers and such other information reasonably required by
Landlord or the proceeds trustee delivered to Landlord from time to time, but
not more frequently than once per calendar month, as such work or repair
progresses. Each such certificate shall describe the work or repair for which
Tenant is requesting payment and the cost incurred by Tenant in connection
therewith and stating that Tenant has not theretofore received payment for such
work and has sufficient funds remaining to complete the work free of liens or
claims. Any proceeds remaining after Tenant has repaired the Premises shall be
delivered to Tenant. No payment shall be made to Tenant if there exists any
Event of Default under this Lease. If Tenant is not required to restore after a
casualty, this Lease shall nevertheless remain in full force and effect, with no
abatement of Basic Rent or Additional Rent, except that Landlord shall have the
right to terminate this Lease by notice to Tenant if Tenant does not agree to
restore within sixty (60) days after the casualty, or if Tenant agrees to
restore but does not diligently proceed to do so.
6.10. INDEMNIFICATION.
(A) TENANT AGREES TO PAY, AND TO PROTECT, DEFEND,
INDEMNIFY AND SAVE HARMLESS LANDLORD, LENDER, THEIR AFFILIATED ENTITIES, AND
EACH OF THE FOREGOING PARTIES' RESPECTIVE PARTNERS, DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS (COLLECTIVELY, THE "INDEMNITEES" OR INDIVIDUALLY, AN
"INDEMNITEE") FROM AND AGAINST ANY AND ALL LIABILITIES, LOSSES, DAMAGES, COSTS,
EXPENSES (INCLUDING ALL REASONABLE ATTORNEYS' FEES AND EXPENSES), CAUSES OF
ACTION, SUITS, CLAIMS, DEMANDS OR JUDGMENTS OF ANY NATURE WHATSOEVER (I) ARISING
FROM ANY INJURY TO, OR THE DEATH OF, ANY PERSON OR DAMAGE TO PROPERTY (INCLUDING
PROPERTY OF EMPLOYEES AND INVITEES OF TENANT) ON THE PREMISES OR UPON ADJOINING
SIDEWALKS, STREETS OR WAYS, UNLESS EXCLUSIVELY OCCASIONED BY THE ACTUAL GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF INDEMNITEES, (II) ARISING FROM THE USE,
NON-USE, CONDITION, MAINTENANCE, REPAIR OR OCCUPATION OF THE PREMISES OR ANY
PART THEREOF OR ADJOINING SIDEWALKS, STREETS OR WAYS, UNLESS EXCLUSIVELY
OCCASIONED BY THE ACTUAL GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF INDEMNITEES,
(III) ARISING FROM VIOLATION BY TENANT OF ANY AGREEMENT OR CONDITION OF THIS
LEASE OR ANY SUBLEASE (INCLUDING WITHOUT LIMITATION THE FAILURE TO PAY
IMPOSITIONS), OR ANY CONTRACT OR AGREEMENT TO WHICH TENANT IS A PARTY, OR ANY
RESTRICTION, LAW, ORDINANCE OR REGULATION (INCLUDING WITHOUT LIMITATION, THE
AMERICANS
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WITH DISABILITIES ACT OF 1990 AND ALL REGULATIONS ISSUED THEREUNDER) AFFECTING
THE PREMISES OR ANY PART THEREOF OR THE OWNERSHIP, OCCUPANCY OR USE THEREOF,
UNLESS EXCLUSIVELY OCCASIONED BY THE ACTUAL GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF INDEMNITEES; OR (IV) ARISING OUT OF ANY PERMITTED CONTEST REFERRED
TO IN SECTION 4.3 (COLLECTIVELY, "INDEMNIFIED MATTERS"), EVEN IF SUCH
INDEMNIFIED MATTERS ARISE FROM OR ARE ATTRIBUTABLE TO THE SOLE OR CONCURRENT
NEGLIGENCE OF ANY INDEMNITEE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
THE INDEMNIFIED MATTERS SHALL INCLUDE MATTERS ARISING PRIOR TO THE COMMENCEMENT
DATE. IF LANDLORD, LENDER OR ANY OTHER INDEMNITEE SHALL BE MADE A PARTY TO ANY
SUCH LITIGATION COMMENCED AGAINST TENANT, AND IF TENANT, AT ITS EXPENSE, SHALL
FAIL TO PROVIDE THE INDEMNITEES WITH COUNSEL (UPON LANDLORD'S REQUEST)
REASONABLY APPROVED BY LANDLORD, TENANT SHALL PAY ALL COSTS AND ATTORNEYS' FEES
AND EXPENSES INCURRED OR PAID BY THE INDEMNITEES IN CONNECTION WITH SUCH
LITIGATION. TENANT'S OBLIGATIONS AND LIABILITIES UNDER THIS SECTION 6.10 SHALL
SURVIVE THE EXPIRATION OF THIS LEASE. TENANT WAIVES ALL CLAIMS AGAINST THE
INDEMNITEES ARISING FROM ANY LIABILITY DESCRIBED IN THIS SECTION 6.10 (A),
UNLESS EXCLUSIVELY OCCASIONED BY THE ACTUAL GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE INDEMNITEES. THE WAIVER AND INDEMNITY PROVISIONS IN THIS
PARAGRAPH ARE INTENDED TO EXCULPATE AND INDEMNIFY THE INDEMNITEES (I) FROM AND
AGAINST THE DIRECT CONSEQUENCES OF THEIR OWN NEGLIGENCE OR FAULT WHEN THE
INDEMNITEES ARE SOLELY NEGLIGENT OR CONTRIBUTORILY, PARTIALLY, JOINTLY,
COMPARATIVELY OR CONCURRENTLY NEGLIGENT WITH TENANT OR ANY OTHER PERSON (BUT IS
NOT EXCLUSIVELY AND GROSSLY NEGLIGENT, AND HAS NOT COMMITTED WILLFUL MISCONDUCT)
AND (II) FROM AND AGAINST ANY LIABILITY OF THE INDEMNITEES BASED ON ANY
APPLICABLE DOCTRINE OF STRICT LIABILITY UNLESS RESULTING FROM THE EXCLUSIVE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNITEES.
(B) SHOULD ANY CLAIM BE MADE AGAINST ANY INDEMNITEE
BY A PERSON NOT A PARTY TO THIS LEASE WITH RESPECT TO ANY INDEMNIFIED MATTER,
LANDLORD SHALL PROMPTLY GIVE TENANT WRITTEN NOTICE OF ANY SUCH CLAIM, AND TENANT
SHALL THEREAFTER DEFEND OR SETTLE ANY SUCH CLAIM, AT ITS SOLE EXPENSE, ON ITS
OWN BEHALF AND WITH COUNSEL OF ITS SELECTION; PROVIDED, HOWEVER, THAT TENANT'S
COUNSEL SHALL BE COMPETENT COUNSEL EXPERIENCED IN THE TYPE OF LITIGATION OR
CLAIM AT ISSUE AND SHALL BE ACCEPTABLE TO LANDLORD, ACTING REASONABLY. UPON
TENANT'S ASSUMPTION OF THE DEFENSE OF ANY CLAIM PURSUANT TO TENANT'S INDEMNITY,
LANDLORD SHALL HAVE THE RIGHT TO PARTICIPATE IN THE DEFENSE OR SETTLEMENT OF THE
CLAIM, WITH COUNSEL RETAINED AND PAID BY IT UNLESS: (A) THE EMPLOYMENT OF SUCH
COUNSEL SHALL HAVE BEEN AUTHORIZED IN WRITING BY TENANT IN CONNECTION WITH THE
DEFENSE OF SUCH ACTION, (B) TENANT SHALL NOT HAVE EMPLOYED COUNSEL TO DIRECT THE
DEFENSE OF SUCH ACTION, OR (C) LANDLORD SHALL HAVE REASONABLY CONCLUDED THAT
THERE MAY BE DEFENSES AVAILABLE TO IT WHICH ARE DIFFERENT FROM OR ADDITIONAL TO
THOSE AVAILABLE TO TENANT (IN WHICH CASE TENANT SHALL NOT HAVE THE RIGHT TO
DIRECT THE DEFENSE OF SUCH ACTION), IN ANY OF WHICH EVENTS SUCH FEES AND
EXPENSES SHALL BE BORNE BY TENANT. TENANT SHALL CAUSE THE ATTORNEYS RETAINED BY
IT TO CONSULT
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AND COOPERATE FULLY WITH COUNSEL FOR LANDLORD. IN SUCH DEFENSE OR SETTLEMENT OF
ANY CLAIMS, LANDLORD SHALL PROVIDE TENANT WITH ORIGINALS OR COPIES OF ALL
RELEVANT DOCUMENTS AND SHALL COOPERATE WITH AND ASSIST TENANT, AT NO EXPENSE TO
LANDLORD. NOTWITHSTANDING ANY PROVISION OF THIS SECTION 6.10 TO THE CONTRARY,
TENANT SHALL NOT ENTER INTO ANY SETTLEMENT OR AGREEMENT IN CONNECTION WITH ANY
INDEMNIFIED MATTERS BINDING UPON OR ADVERSELY AFFECTING LANDLORD OR LENDER OR
ANY OTHER INDEMNITEE, OR ADMIT ANY LIABILITY OR FACT IN CONTROVERSY BINDING UPON
OR ADVERSELY AFFECTING LANDLORD OR LENDER OR ANY OTHER INDEMNITEE, WITHOUT THE
PRIOR WRITTEN CONSENT OF SUCH INDEMNITEE, IN ITS SOLE DISCRETION.
(C) LANDLORD AGREES TO PAY, AND TO PROTECT, DEFEND,
INDEMNIFY AND SAVE HARMLESS TENANT AND ITS AGENTS FROM AND AGAINST ANY AND ALL
LIABILITIES, LOSSES, DAMAGES, COSTS, EXPENSES (INCLUDING ALL REASONABLE
ATTORNEYS' FEES AND EXPENSES OF TENANT), CAUSES OF ACTION, SUITS, CLAIMS,
DEMANDS OR JUDGMENTS OF ANY NATURE WHATSOEVER ARISING EXCLUSIVELY FROM THE
ACTUAL GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNITEES IN CONNECTION
WITH THE PREMISES.
[FOR NEW MEXICO PREMISES ADD:
(D) TO THE EXTENT, IF AT ALL, THAT NMSA SECTION
56-7-1 IS APPLICABLE TO THIS LEASE, ANY INDEMNIFICATION WILL NOT EXTEND TO
LIABILITY, CLAIMS, DAMAGES, LOSSES OR EXPENSES, INCLUDING ATTORNEYS' FEES,
ARISING OUT OF (A) THE PREPARATION OR APPROVAL OF MAPS, DRAWINGS, OPINIONS,
REPORTS, SURVEYS, CHANGE ORDERS, DESIGNS, OR SPECIFICATIONS BY THE INDEMNITEES;
AND (B) THE GIVING OF OR THE FAILURE TO GIVE DIRECTION OR INSTRUCTIONS BY THE
INDEMNITEES, WHERE SUCH GIVING OR FAILURE TO GIVE DIRECTIONS OR INSTRUCTIONS IS
THE PRIMARY CAUSE OF BODILY INJURY TO PERSONS OR DAMAGE.]
VII. CONDEMNATION.
7.1. Assignment of Award. Subject to the rights of Tenant set
forth in this Article VII, Tenant hereby irrevocably assigns to Landlord any
award or payment to which Tenant may be or become entitled with respect to
Complete, Partial or Temporary Taking of the Premises or any part thereof, by
condemnation or other eminent domain proceedings pursuant to any law, general or
special, by any governmental authority, whether the same shall be paid or
payable in respect of Tenant's leasehold interest hereunder or otherwise.
Notwithstanding the foregoing, Tenant may recover the value of its personal
property at the Premises, if taken, so long as the amount of the Net Award
received by Landlord is at least equal to the higher of (a) the net book value
of the Premises as reflected on Landlord's financial statements, or (b) the fair
market value of the Premises, on the date of the Complete, Partial or Temporary
Taking. Landlord and Lender shall be entitled to participate in any such
proceeding.
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7.2. Definitions for Article VII.
(a) "Complete Taking" shall mean the occurrence of
any actual or threatened condemnation or other eminent domain proceeding
pursuant to any general or special law, or any agreement with an authority
having the power of eminent domain, which results in the taking or conveyance of
(i) the entire Premises or (ii) such a significant portion of the Premises that,
in the good faith judgment of either Tenant or Landlord, it is uneconomic to
rebuild or restore the remaining portion of the Premises for the continued
operation of the business.
(b) "Partial Taking" shall mean the occurrence of any
taking of a portion of the Premises by condemnation or other eminent domain
proceedings, or any agreement with an authority having the power of eminent
domain, which does not result in the taking or conveyance of such a significant
portion of the Premises that, in the good faith judgment of either Tenant or
Landlord, it is uneconomic to rebuild or restore the remaining portion of the
Premises for the continued operation of the business.
(c) "Temporary Taking" shall mean the occurrence of a
temporary taking of the use or occupancy of the Premises or any part thereof by
any governmental authority.
(d) "Net Award" shall mean all amounts payable as a
result of any condemnation or other eminent domain proceeding and all amounts
payable pursuant to any agreement with any condemning authority (which agreement
shall be deemed to be a taking) which has been made in settlement of or under
threat of any condemnation or other eminent domain proceeding affecting the
Premises, less all expenses incurred as a result thereof not otherwise paid by
Tenant and the collection of such amounts.
7.3. Complete Taking.
Upon the occurrence of a Complete Taking, this Lease
shall terminate. The Termination Date shall occur ten (10) days after Landlord
shall have received the Net Award, and this Lease shall continue in full force
and effect without abatement of Basic Rent or Additional Rent or other sums
payable by Tenant until the Termination Date; provided, however, that on or
prior to the Termination Date (and, at Landlord's option, as a condition to the
termination of this Lease) Tenant shall pay (and Tenant hereby agrees to pay) a
termination payment in the amount, if any, by which the Net Award is exceeded by
the Leasehold Amount. The "Leasehold Amount" shall be the present value of the
Basic Rent payable during the balance of the Term (exclusive of any unexercised
Extended Term) after the Termination Date, using the discount rate specified in
Section 10.2(f) of this Lease.
7.4. Partial Taking. Upon the occurrence of any Partial
Taking, this Lease shall continue in full effect without abatement or reduction
of Basic Rent, Additional Rent or other sums payable by Tenant. In the event
Landlord receives a Net Award in connection with any such Partial Taking
Landlord shall, provided there is no Event of Default hereunder, make the Net
Award available to Tenant, and Tenant shall, regardless of the adequacy of the
award, make repairs in accordance with the requirements of Section 5.4(a) hereof
so that, thereafter, the Premises shall be, as nearly as possible, in a
condition as good as the condition thereof immediately prior to such Taking,
but, if such Net Award shall be in excess of One Hundred Thousand Dollars
($100,000), the proceeds shall be held by Landlord or a proceeds trustee (which
may be Lender or Lender's designee, or a bank or trust company designated by
Landlord), and paid only upon delivery to Landlord of (i) certificates of Tenant
identifying the repair work for which Tenant is requesting payment and the cost
incurred by Tenant in connection therewith
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and stating that Tenant has not theretofore received payment for such work; (ii)
appropriate lien waivers; and (iii) such other information as may be reasonably
required by the proceeds trustee. Any Net Award remaining after such repairs
have been made shall (subject to the next sentence) be delivered to Tenant,
except that if an Event of Default exists, the excess shall be paid to Landlord.
If a Partial Taking occurs during the last five (5) years of the Primary Term or
during any Extended Term and the excess Net Award therefor would, by reason of
the preceding sentence be delivered to Tenant, such excess net Award shall
instead be paid as follows: (a) if such Partial Taking occurs during the last
49th through 60th months of the Primary Term or any Extended Term, 20% of the
excess Net Award shall be delivered to Landlord and the balance shall be
delivered to Tenant; (b) if such Partial Taking occurs during the last 37th
through 48th months of the Primary Term or any Extended Term, 40% of the excess
Net Award shall be delivered to Landlord and the balance shall be delivered to
Tenant; (c) if such Partial Taking occurs during the last 25th through 36th
months of the Primary Term or any Extended Term, 60% of the excess Net Award
shall be delivered to Landlord and the balance shall be delivered to Tenant; (d)
if such Partial Taking occurs during the last 13th through 24th months of the
Primary Term or any Extended Term, 80% of the excess Net Award shall be
delivered to Landlord and the balance shall be delivered to Tenant; and (e) if
such Partial Taking occurs during the last 12 months of the Primary Term or any
Extended Term, 100% of the excess Net Award shall be delivered to Landlord.
7.5. Temporary Taking. Upon the occurrence of any Temporary
Taking, Tenant shall, promptly after any such Temporary Taking ceases, at its
expense, repair any damage caused thereby in conformity with the requirements of
Section 5.4(a) hereof so that, thereafter, the Premises shall be, as nearly as
possible, in a condition as good as the condition thereof immediately prior to
such Temporary Taking. In the event of such Temporary Taking, Tenant shall be
entitled to receive the entire Net Award payable by reason of such Temporary
Taking, less any costs incurred by the Landlord in connection therewith. If the
cost of any repairs required to be made by Tenant pursuant to this Section 7.5
shall exceed the amount of the Net Award, the deficiency shall be paid by
Tenant. No payments shall be made to Tenant pursuant to this Section 7.5, if any
Event of Default shall exist under this Lease. No Basic Rent or Additional Rent
shall abate through the duration of such Temporary Taking.
VIII. ASSIGNMENT AND SUBLETTING.
8.1. Power to Assign and Sublet. Tenant shall not sublet all
or any portion of the Premises nor assign any or all of its rights and interests
under this Lease without Landlord's prior written consent, which shall not be
unreasonably withheld, conditioned or delayed (except that Landlord may withhold
consent to a sublease of less than all of the Premises in its sole and absolute
discretion). Any sublease or assignment shall expressly be made subject to all
of the provisions, including the use provisions in Section 1.3, of this Lease.
Tenant shall, within ten (10) days after the execution and delivery of any such
assignment or the sublease of all of the Premises, deliver a conformed copy
thereof to Landlord. An assignment of this Lease shall also be deemed to occur
in the event Ugly Duckling Corporation, the guarantor under the Guaranty, ceases
to own, directly or indirectly, 100% of the common stock of Tenant.
8.2. Assumption by Assignee; Tenant Remains Liable. If Tenant
assigns its rights and interests under this Lease, the assignee under such
assignment shall expressly assume all the obligations of Tenant hereunder in an
instrument delivered to Landlord at the time of such assignment. No assignment
or sublease made as permitted by this Article VIII shall affect or reduce any of
the obligations of Tenant hereunder or the obligations of any guarantor of
Tenant, and all such obligations shall continue in full force and effect as
obligations of a principal and not as obligations of a guarantor or surety, to
the same extent as though no assignment or subletting had been made, provided
that performance by any such assignee or sublessee of any of the obligations of
Tenant under this Lease shall
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be deemed to be performance by Tenant. No sublease or assignment made as
permitted by this Article VIII shall impose any obligations on Landlord or
otherwise affect any of the rights of Landlord under this Lease. Tenant hereby
absolutely assigns to Landlord all subleases and all rents, issues and profits
derived and to be derived therefrom, to secure performance of Tenant's
obligations under this Lease. Landlord hereby grants to Tenant a license to
collect all rents payable under any sublease (up to one month in advance), but
upon any Event of Default, Landlord may in its sole discretion revoke such
license and collect the rents directly from any sublessee and retain the same.
8.3. Other Transfers Void. Neither this Lease nor any interest
of Tenant therein, nor the Term hereby demised shall be mortgaged by Tenant, nor
shall Tenant mortgage or pledge the interest of Tenant in and to any sublease of
the Premises or the rentals payable thereunder. Any mortgage, pledge, sublease
or assignment made in violation of this Article VIII shall be void.
IX. FINANCIAL INFORMATION.
9.1. Financial Statements. Tenant will furnish to Landlord and
Lender (i) Tenant's annual audited financial statements within ninety (90) days
after the end of Tenant's fiscal year, and (ii) Tenant's unaudited quarterly
financial statements within forty-five (45) days after the end of each quarter.
X. DEFAULT.
10.1. Events of Default. Any of the following occurrences or
acts shall constitute an event of default (herein called an "Event of Default")
under this Lease:
(a) If Tenant, at any time during the continuance of
this Lease (and regardless of the pendency of any bankruptcy, reorganization,
receivership, insolvency or other proceedings at law, in equity, or before any
administrative tribunal, which have or might have the effect of preventing
Tenant from complying with the terms of this Lease), shall (i) fail to make any
payment of Basic Rent, Additional Rent or other sum herein required to be paid
by Tenant hereunder for five (5) days after written notice of such failure; (ii)
fail to continuously operate the Premises for the Intended Use in accordance
with the terms and conditions of Section 1.3 of this Lease for thirty (30) days
after written notice of such failure; or (iii) fail to observe or perform any
other provision hereof for thirty (30) days after written notice of such failure
to observe or perform; or
(b) If any representation or warranty of Tenant
hereunder or set forth in any notice, certificate, demand, request or other
instrument delivered pursuant to, or in connection with this Lease or in
connection with the acquisition of the Premises by Landlord, shall either prove
to be false or misleading in any material respect as of the time when the same
shall have been made and Landlord actually suffers damages as a proximate cause
thereof which are not paid by Tenant; or
(c) If Tenant shall file a petition commencing a
voluntary case under the Federal Bankruptcy Code or any federal or state law (as
now or hereafter in effect) relating bankruptcy, insolvency, reorganization,
winding-up or adjustment of debts (hereinafter collectively called "Bankruptcy
Law") or if Tenant shall: (i) apply for or consent to the appointment of, or the
taking of possession by, any receiver, custodian, trustee, United States Trustee
or liquidator (or other similar official) of the Premises or any part thereof or
of any substantial portion of Tenant's property; or (ii) generally not pay its
debts as they become due, or admit in writing its inability to pay its debts
generally as they become due; or (iii) make a general assignment for the benefit
of its creditors; or (iv) file a petition commencing a voluntary case under or
seeking to take advantage of any Bankruptcy
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Law; or (v) fail to controvert in timely and appropriate manner, or in writing
acquiesce to, any petition commencing an involuntary case against Tenant or
otherwise filed against Tenant pursuant to any Bankruptcy Law; or (vi) take any
action in furtherance of any of the foregoing; or
(d) If an order for relief against Tenant shall be
entered in any involuntary case under the Federal Bankruptcy Code or any similar
order against Tenant shall be entered pursuant to any other Bankruptcy Law, or
if a petition commencing an involuntary case against Tenant or proposing the
reorganization of Tenant under any Bankruptcy Law shall be filed and not be
discharged or denied within ninety (90)) days after such filing, or if a
proceeding or case shall be commenced in any court of competent jurisdiction
seeking: (i) the liquidation, reorganization, dissolution, winding-up or
adjustment of debts of Tenant; or (ii) the appointment of a receiver, custodian,
trustee, United States Trustee or liquidator (or any similar official) of the
Premises or any part thereof or of Tenant or of any substantial portion of
Tenant's property; (iii) the attachment of the Premises or any portion thereof,
or (iv) any similar relief as to Tenant pursuant to any Bankruptcy Law, and any
such proceeding or case shall continue undismissed for ninety (90) days after
such relief is granted; or
(e) If the Premises shall be left both unattended and
without maintenance as provided herein, for a period of thirty (30) consecutive
days or more; or
(f) If there occurs an "Event of Default" (as defined
therein) under any of the leases listed on Exhibit "C".
10.2. Landlord's Remedies.
(a) In the event of an Event of Default, Landlord
shall have the right at its election to give Tenant ten (10) days' written
notice of Landlord's intention to terminate the term of this Lease on a date
specified in such notice. Thereupon, the term of this Lease and the estate
hereby granted shall terminate on such date as completely and with the same
effect as if such date were the date fixed herein for the expiration of the term
of this Lease, and all rights of Tenant hereunder shall terminate, but Tenant
shall remain liable as provided herein.
(b) In the event of an Event of Default, Landlord
shall have the immediate right, whether or not the term of this Lease shall have
been terminated pursuant to Section 10.2(a), to (i) re-enter and repossess the
Premises or any part thereof by force, summary proceedings, ejection or
otherwise, and (ii) remove all persons and property therefrom, Tenant hereby
expressly waiving any and all notices to quit, cure or vacate provided by
current or any future law. Landlord shall be under no liability by reason of any
such re-entry, repossession or removal. No such re-entry or taking of possession
of the Premises by Landlord shall be construed as an election on Landlord's part
to terminate the term of this Lease unless a written notice of such intention to
be given to Tenant pursuant to Section 10.2(a).
(c) At any time or from time to time after the
repossession of the Premises or any part thereof pursuant to Section 10.2(b),
whether or not the term of this Lease shall have been terminated pursuant to
Section 10.2(a), Landlord will use reasonable efforts to relet the Premises or
any part thereof for the account of Tenant, in the name of Tenant or Landlord or
otherwise, without notice to Tenant, for such term or terms (which may be
greater or less than the period which would otherwise have constituted the
balance of the term of this Lease) and on such reasonable conditions (which may
include concessions or free rent) and for such uses as Landlord may reasonably
determine, and Landlord may collect and receive any rents payable by reason of
such reletting. Landlord shall not be responsible or liable for any failure to
relet the Premises or any part thereof or for any failure to collect any rent
due
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upon any such reletting.
(d) No termination of the term of this Lease pursuant
to Section 10.2(a), by operation of law or otherwise, and no repossession of the
Premises or any part thereof pursuant to Section 10.2(b) or otherwise, and no
reletting of the Premises or any part thereof pursuant to Section 10.2(c), shall
relieve Tenant of its liabilities and obligations hereunder, all of which shall
survive such expiration, termination, repossession or reletting.
(e) In the event of any such termination or
repossession, Tenant will pay to Landlord the Basic Rent, Additional Rent and
other sums required to be paid by Tenant to and including the date of such
termination or repossession (together with interest at the Interest Rate on past
due amounts); and, thereafter, Tenant shall, until the end of what would have
been the term of this Lease in the absence of such termination or repossession,
and whether or not the Premises or any part thereof shall have been relet, be
liable to Landlord for, and shall pay to Landlord, as liquidated and agreed
current damages: (i) the Basic Rent, Additional Rent and other sums which would
be payable under this Lease by Tenant in the absence of such termination or
repossession, less (ii) the net proceeds, if any, of any reletting effected for
the account of Tenant pursuant to Section 10.2(c), after deducting from such
proceeds all of Landlord's reasonable out-of-pocket expenses incurred in
connection with such reletting (including, without limitation, all repossession
costs, brokerage commissions, legal expenses, attorneys' fees, employees'
expenses, and expenses of preparation for such reletting). Tenant will pay such
current damages on the days on which the Basic Rent would have been payable
under this Lease in the absence of such termination or repossession, and
Landlord shall be entitled to recover the same from Tenant on each such day.
(f) At any time after such termination or
repossession by reason of the occurrence of any Event of Default, whether or not
Landlord shall have collected any current damages pursuant to Section 10.2(e),
Landlord shall be entitled to recover from Tenant, and Tenant will pay to
Landlord on demand, as and for liquidated and agreed final damages for Tenant's
default and in lieu of all current damages beyond the date of such demand (it
being agreed that it would be impracticable or extremely difficult to fix the
actual damages), an amount equal to the present value of all rent payable under
the Lease beyond the date of such demand over the then present value of the then
fair market rental for the Premises, at the date of such demand for what would
be the unexpired term of the Lease, which present value shall in each case be
determined by the application of a discount rate equal to the discount rate of
the Federal Reserve Bank of San Francisco at the time of the demand plus one
percent (1%). If any law shall be construed to limit the amount of such
liquidated final damages to less than the amount above agreed upon, Landlord
shall be entitled to the maximum amount allowable under such statute or rule of
law.
(g) Notwithstanding anything to the contrary stated
herein, if an Event of Default shall have happened and be continuing, whether or
not Tenant shall have abandoned the Premises, Landlord may elect to continue
this Lease in effect for so long as the Landlord does not terminate Tenant's
right to possession of the Premises and Landlord may enforce all of its rights
and remedies hereunder including, without limitation, the right to recover all
Basic Rent, Additional Rent and other sums payable hereunder as the same become
due.
10.3. Additional Rights of Landlord. No right or remedy herein
conferred upon or reserved to Landlord is intended to be exclusive of any other
right or remedy, and each and every right and remedy shall be cumulative and in
addition to any other right or remedy given hereunder or now or hereafter
existing at law or in equity or by statute. The failure of Landlord to insist at
any time upon the strict performance of any covenant or agreement or to exercise
any option, right, power or remedy
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contained in this Lease shall not be construed as waiver or a relinquishment
thereof for the future. A receipt by Landlord of any Basic Rent, any Additional
Rent or any other sum payable hereunder with knowledge of the breach of any
covenant or agreement contained in this Lease shall not be deemed a waiver of
such breach, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless expressed in writing and signed by Landlord. In
addition to other remedies provided in this Lease, Landlord shall be entitled,
to the extent permitted by applicable law, to injunctive relief in case of the
violation, or attempted or threatened violation, of any of the covenants,
agreements, conditions or provisions of this Lease, or to a decree compelling
performance of any of the covenants, agreements, conditions or provisions of
this Lease, including but not limited to the provisions of this Lease setting
forth Tenant's operating covenant, or to any other remedy allowed to Landlord at
law or in equity.
10.4. Waivers by Tenant. To the extent permitted by applicable
law, Tenant hereby waives and surrenders for itself and all those claiming under
it, including creditors of all kinds, (i) any right or privilege which it or any
of them may have under any present or future construction, statute or rule of
law to redeem the Premises or to have a continuance of this Lease for the term
hereby demised after termination of Tenant's right of occupancy by order or
judgment of any court or by any legal process or writ, or under the terms of
this Lease or after the termination of the term of this Lease as herein
provided, and (ii) the benefits of any present or future constitution, statute
or rule of law which exempts property from liability for debt or for distress
for rent.
10.5. Attorneys' Fees. In the event of an Event of Default, if
an action shall be brought by Landlord for the enforcement of any right set
forth herein, Tenant shall be liable for all of the reasonable out-of-pocket
expenses incurred by Landlord in connection therewith, including without
limitation, attorneys' fees. However, should Tenant prevail in an action for
violation of quiet enjoyment under this Lease, then and only in such event shall
Landlord be liable for reasonable out-of-pocket expenses incurred by Tenant in
connection therewith, including attorneys' fees.
XI. MISCELLANEOUS.
11.1. Notices, Demands and Other Instruments. All notices,
demands, requests, consents, approvals and other instruments required or
permitted to be given pursuant to the terms of this Lease shall be in writing
and shall be deemed to have been properly given if (a) with respect to Tenant,
sent by registered or certified mail with a return receipt requested, postage
prepaid, or sent by facsimile, nationally recognized overnight express carrier
or delivered by hand, in each case addressed to Tenant at its notice address
first above set forth, and (b) with respect to Landlord, sent by registered or
certified mail with a return receipt request, postage prepaid, or sent by
facsimile, nationally recognized overnight express courier or delivered by hand
in each case, addressed to the Landlord at its address first above set forth
along with a copy to the Lender (if Tenant shall have been given Lender's
address). Landlord and Tenant shall each have the right from time to time to
specify as its address for purposes of this Lease any other address in the
United States of America upon giving fifteen (15) days written notice thereof,
similarly given, to the other party, except that any change of address to a post
office box shall not be effective unless a street address is also specified for
use in effectuating personal service. Notices shall be deemed communicated upon
the earlier of receipt, or seventy-two (72) hours from the time of mailing if
mailed as provided in this Section 11.1.
11.2. Estoppel Certificates and Consents.
(a) Tenant will, from time to time, upon not less
than twenty (20) days prior written request by Landlord or by Lender, execute,
acknowledge and deliver a certificate certifying:
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(i) that this Lease is unmodified and in full effect (or setting forth any
modifications along with the statement that this Lease as modified is in full
effect ); (ii) that the Basic Rent and Additional Rent payable and the dates to
which the Basic Rent, Additional Rent and other sums payable hereunder have been
paid; (iii) that to the best knowledge of Tenant, Landlord is not in any default
of the Lease; (iv) the commencement and expiration dates of the Lease; (v) the
amount of any security or other deposits; (vi) that either Tenant is in
possession of the Premises or who is in possession; (vii) any concessions or
other rights that Tenant (including first refusal, option or other occupancy
claims) or Landlord may have; and (viii) such other matters as may reasonably be
required by the requesting party. Any such certificate may be relied upon by any
Lender, prospective purchaser, or prospective Lender of the Premises. Tenant
further agrees to reasonably cooperate with Lender and its affiliates in the
preparation of disclosure documents which may be issued in connection with a
secondary market transaction involving a sale or securitization of its loan.
(b) From time to time during the term of this Lease,
Landlord expects to secure financing of its interest in the Premises by
assigning Landlord's interest in this Lease and the sums payable hereunder. In
the event of any such assignment to the Lender, Tenant will, upon not less than
twenty (20) days prior written request by Landlord, execute, acknowledge and
deliver to Landlord a consent clearly indicating (i) that Tenant is to make
Basic Rent payments or portions thereof directly to Lender if required by
Lender, and (ii) consent to such assignment addressed to such Lender in a form
satisfactory to Lender; and Tenant will produce, at Tenant's expense, such
certificates and other documents as may be reasonably requested by the Lender.
Tenant acknowledges that, by execution hereof, it has agreed to make payments of
Basic Rent or portions thereof directly to Lender, without further notice or
direction if required by Lender, and Landlord consents to said payments by
Tenant to Lender.
11.3. Determination of Fair Market Rental Value. For a period
of at least thirty (30) days after Tenant's notice to Landlord of Tenant's
exercise of the option for the applicable Extended Term, Landlord and Tenant
shall attempt, diligently and in good faith, to agree upon fair market rental
value for purposes of setting Extended Term Basic Rent. If Landlord and Tenant
are unable to agree upon such amount, fair market rental value shall be
determined by an appraisal, which shall be performed by an appraiser selected by
Landlord within the later of (i) sixty (60) days after the first day of the
twelfth month before the end of the immediately preceding Term, or (ii) sixty
(60) days after notice to Landlord of Tenant's exercise of the option for the
applicable Extended Term and paid one half by Tenant and one half by Landlord.
Any appraiser selected by Landlord shall have qualifications that include a
minimum of five (5) years of experience in the appraisal of commercial real
estate in the state in which the Premises are located. Such appraiser shall be
disinterested, and shall be a member of a nationally recognized appraisal
association. Further, any such appraiser shall comply with any licensing law
then in effect for appraisers authorized to perform general appraisals within
such state. If there are then any existing Federal laws governing appraisers,
said appraiser shall be in compliance with the then applicable Federal laws for
appraisers performing appraisals of commercial real estate. In the event that
Tenant disputes the appraised fair market rental value determined by an
appraiser (hereinafter the "First Appraiser"), who performed an appraisal
pursuant to this Section 11.3, it shall so notify Landlord within fifteen (15)
days after receipt of such written determination by the First Appraiser, and the
disagreement shall be resolved as follows:
(a) Within five (5) days after the service of such
notice by Tenant to Landlord, Tenant shall designate a second appraiser (the
"Second Appraiser"), who shall appraise the fair market rental value of the
Premises. This Second Appraiser shall render its opinion of the fair market
rental value no later than thirty (30) days after the service of notice by
Tenant stated above. In the event
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that the higher of the two appraised fair market rental values rendered herein
is not more than ten percent (10%) greater than the lower of the two appraised
fair market rental values, then the mean between the two appraised values shall
be utilized to fix the appraised fair market rental value.
(b) In the event that the higher of the two appraised
fair rental values is more than ten percent (10%) higher than the lower of the
two appraised fair market rental values, then the First Appraiser and the Second
Appraiser will meet within fifteen (15) days after receipt of the Second
Appraisal by Tenant, to attempt to agree upon the appraised fair market rental
value. If the First Appraiser and Second Appraiser do not agree upon the
appraised fair rental value after such meeting, then they shall appoint a third
appraiser (the "Third Appraiser").
(c) If the First and Second Appraiser shall be unable
to agree upon the appointment of the Third Appraiser within fifteen (15) days
after receipt and acceptance of the Second Appraisal by Tenant, then the Third
Appraiser shall be selected by the Tenant and Landlord themselves. If Tenant and
Landlord cannot agree on the third appraiser, within a further period of five
(5) days, then either, on behalf of both, may, in accordance with applicable
court rules, apply to the superior court of the state in which the Premises are
located which has jurisdiction over the area in which the Premises is located,
for the selection of the Third Appraiser. The fees and costs of the Second
Appraiser will be borne by Tenant, and the fees and costs of the Third
Appraiser, will be divided equally between Tenant and Landlord. The cost of
application to the court shall be divided equally between Tenant and Landlord.
In the event of the failure, refusal or inability of any appraiser to act, a new
appraiser shall be appointed in its stead, which appointment shall be made in
the same manner as provided herein; e.g., if the Second Appraiser must be
replaced, then Tenant will have the right to designate its replacement. In the
event that a Third Appraiser is selected in the manner aforesaid, it shall
perform an appraisal of the fair market rental value of the Premises in
accordance with the terms of this Section 11.3 within thirty (30) days after its
appointment. In the event that the appraised fair market rental value rendered
by the Third Appraiser is higher than the lower appraised fair market rental
value, but lower than the higher appraised fair market rental value, as rendered
by the First Appraiser and the Second Appraiser, then the appraised fair market
rental value rendered by the Third Appraiser shall become the appraised value.
In the event that the appraised value rendered by the Third Appraiser is lower
than the lower appraised value or higher than the higher appraised fair rental
value, as rendered by the First Appraiser and Second Appraiser, than an
Appraisal Panel shall be convened.
The "Appraisal Panel," consisting of the First, Second and Third Appraiser,
shall convene within fifteen (15) days after submission of a written appraisal
to Landlord and Tenant by the Third Appraiser (which Third Appraisal does not
resolve the appraised fair market value question in accordance with this Section
11.3). The purpose of the formation of the Appraisal Panel will be to attempt to
reach a decision by two members of the Appraisal Panel on the appraised fair
rental value. A decision joined in by any two of the appraisers of the Appraisal
Panel shall be the decision of the Appraisal Panel, and shall be binding upon
the parties hereto following written notice thereof, which notice shall state
the appraised fair rental value of the Premises. If no two members of the
Appraisal Panel can concur in a decision of the appraised fair rental value
within fifteen (15) days after the submission of the appraisal by the Third
Appraiser to the parties, then the parties shall go to a neutral mediator for
mediation. If the parties are unable to agree upon a fair rental value through
mediation, the matter will be submitted to binding arbitration under the rules
of the American Arbitration Association.
(d) Each appraiser shall be instructed to take into
account the credit worthiness of Tenant and Guarantor (including the extent to
which Basic Rent and Additional Rent under this Lease shall have been paid on
the date due) and to assume that the provisions of this Lease (excluding the
Basic Rent provision but including the cross default provision, the absolute
triple net
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nature of this Lease and the limitation of liability of Landlord) would govern
for a five (5) year term, that the Premises may be used for any lawful
commercial use (regardless of their actual use), that, as set forth in the
Recitals to this Lease, the Premises being leased (and the fair market rent
applicable thereto) includes the Land and the Improvements. Tenant shall have
the right to change the use of the Premises to another lawful commercial use
during any Extended Term, subject to the prior written approval of Landlord,
which shall not be unreasonably withheld or delayed.
11.4. No Merger. There shall be no merger of this Lease or the
leasehold estate hereby created with the fee estate in the Premises or any part
thereof by reason of the same person acquiring or holding, directly or
indirectly, this Lease or the leasehold estate hereby created or any interest in
this Lease or in such leasehold estate as well as the fee estate in the Premises
or any portion thereof.
11.5. Surrender. Upon the termination of this Lease, Tenant
shall peaceably surrender the Premises to Landlord in the same condition in
which they were received from Landlord at the commencement of this Lease, except
as altered as permitted or required by this Lease (and except for normal wear
and tear provided that Tenant shall have fully complied with its obligations
under Section 5.1 of this Lease). Tenant shall pay, on or before the Termination
Date, all costs and expenses relating to the Premises or its maintenance or
operation which accrued during the Lease Term. Tenant shall remove from the
Premises prior to or within a reasonable time after such termination (not to
exceed thirty (30) days) all its personal property that is capable of removal
without causing damage to the Premises, and, at Tenant's expense, shall at such
times of removal, repair any damage caused by such removal. Property not so
removed shall become the property of Landlord. Landlord may thereafter cause
such property to be removed and disposition of and the cost of repairing any
damage caused by such removal shall be borne by Tenant. Any holding over by
Tenant of the Premises after the expiration or earlier termination of the term
of this Lease or any extensions thereof, with the consent of Landlord, shall
operate and be construed as a tenancy from month to month only, at one hundred
twenty-five (125%) of the Basic Rent reserved herein and upon the same terms and
conditions as contained in this Lease. Notwithstanding the foregoing, any
holding over without Landlord's consent shall entitle Landlord, in addition to
collecting Basic Rent at a rate of one hundred twenty-five percent (125%)
thereof, to exercise all rights and remedies provided by law or in equity.
11.6. Separability. Each and every covenant and agreement
contained in this Lease is separate and independent, and the breach of any
thereof by Landlord other than the covenant of quiet enjoyment in Section 1.4,
shall not discharge or relieve Tenant from any obligation hereunder. If any term
or provision of this Lease or the application thereof to any person or
circumstances or at any time to any extent be invalid and unenforceable, the
remainder of this Lease, or the application of such term or provision to persons
or circumstances or at any time other than those to which it is invalid or
unenforceable, shall not be affected thereby, and each term and provision of
this Lease shall be valid and shall be enforced to the extent permitted by law.
11.7. Merger, Consolidation or Sale of Assets. It shall be a
condition precedent to the merger of Tenant into another corporation, to the
consolidation of Tenant with one or more other corporations and to the sale or
other disposition of all or substantially all the assets of Tenant to one or
more other entities that the surviving entity or transferee of assets, as the
case may be, shall deliver to Landlord and to Lender an acknowledged instrument
in recordable form assuming all obligations, covenants and responsibilities of
Tenant hereunder and under any instrument executed by Tenant consenting to the
assignment of Landlord's interest in this Lease to the Lender as security for
indebtedness. Tenant covenants that it will not merge or consolidate or sell or
otherwise dispose of all or substantially all of its assets unless such an
instrument shall have been so delivered and unless the entity with which it
intends
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to merge, consolidate, sell or otherwise transfer its assets to has a credit
rating at least equal to Tenant's then current credit rating.
11.8. Savings Clause. No provision contained in this Lease
which purports to obligate Tenant to pay any amount of interest or any fees,
costs or expenses which are in excess of the maximum permitted by applicable
law, shall be effective to the extent that it calls for payment of any interest
or other sums in excess of such maximum.
11.9. Binding Effect; Limitation of Liability. All of the
covenants, conditions and obligations contained in this Lease shall be binding
upon and inure to the benefit of the respective successors and assigns of
Landlord and Tenant to the same extent as if each successor and assign were in
each case named, except that a successor and assign of Landlord shall only be
bound as to covenants, conditions and obligations arising after the transfer.
Notwithstanding anything to the contrary set forth in this Lease, if Landlord
shall fail to perform any covenant, term or condition of this Lease upon
Landlord's part to be performed, and if as a consequence of such default Tenant
shall recover a judgment against Landlord, such judgment shall be satisfied only
out of the proceeds of sale received upon execution of such judgment and levy
thereon against the right, title and interest of Landlord in the Premises, and
Landlord shall not be personally liable therefor; provided, however, that in the
event of a transfer of the Premises, and in the event such liability relates to
a period prior to such transfer, such limitation of liability shall not apply to
owner of the Premises during such period (the "Prior Owner") unless the
transferee of the Premises has assumed liability with respect to such period;
provided, further, however, that the liability of the Prior Owner shall in any
event be limited to the amount of proceeds actually received by the Prior Owner
in connection with its transfer of the Premises, net of all costs incurred in
connection with such transfer, and such liability of the Prior Owner shall in no
event continue for a period longer than one (1) year after the transfer by the
Prior Owner of the Premises.
11.10. Table of Contents and Headings. The table of contents
and headings used in this Lease are for convenience of reference only and shall
not to any extent have the effect of modifying, amending or changing the
provisions of this Lease.
11.11. Governing Law. This Lease shall be governed by and
interpreted under the laws of the state in which the Premises is located, but
not including such state's conflict of laws rules.
11.12. Certain Definitions.
(a) The term "Imposition" means:
(i) All real estate taxes imposed by
governmental authorities of any kind;
(ii) All other taxes and any payments in
lieu thereof, assessments (including assessments for benefits from public works
or improvements, whether or not begun or completed prior to the commencement of
the term of this Lease and whether or not to be completed within said term),
levies, fees, water and sewer rents and charges, and all other governmental
charges of every kind, general and special, ordinary and extraordinary, whether
or not the same shall have been within the express contemplation of the parties
hereto, together with any interest and penalties thereon, which are, with
respect to the Lease Term or any period prior to the Lease Term, imposed or
levied upon or assessed against: (A) the Premises or any part thereof; (B) any
Basic Rent, any Additional Rent reserved or payable hereunder; and/or (C) this
Lease or the leasehold estate created hereby or which arise in respect of the
operation, possession, occupancy or use of the Premises.
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(iii) Any gross receipts or similar taxes
imposed or levied upon, assessed against or measured by the Basic Rent,
Additional Rent or any other sums payable by Tenant hereunder or levied upon or
assessed against the Premises with respect to the Lease Term or any period prior
to the Lease Term;
(iv) All sales and use taxes which may be
levied or assessed against or payable by Landlord and Tenant on account of the
acquisition, leasing or use of the Premises or any portion thereof including but
not limited to any taxes levied on the rental payable hereunder with respect to
the Lease Term or any period prior to the Lease Term; and
(v) All charges for water, gas, light,
heat, telephone, electricity, power and other utilities and communications
services rendered or used on or about the Premises during the Lease Term or any
period prior to the Lease Term.
(b) The term "Landlord" means the owner, for the time
being, of the rights of the lessor under this Lease, and its successors and
assigns, and upon any assignment or transfer of such rights, except an
assignment or transfer made as security for an obligation, the assignor or
transferor shall be relieved of all future duties and obligations under this
Lease, provided the assignee or transferee assumes in writing in recordable form
all such future duties and obligations of Landlord and such written assumption
is delivered to or otherwise benefits Tenant.
(c) The term "Lease" means this Lease as amended and
modified from time to time together with any memorandum or short form of lease
entered into for the purpose of recording.
(d) The term "Lender" means the holder of a mortgage
or deed of trust ("Mortgage") or other security agreement encumbering Landlord's
interest in the Premises and its successors and assigns. The documents,
including but not limited to the Mortgage, evidencing and securing any loan
encumbering Landlord's interest in the Premises are herein called "Loan
Documents".
(e) The term "Termination Date" means the date on
which this Lease terminates in accordance with its terms, and shall be any
business day and not a Saturday, Sunday or legal holiday.
11.13. Exhibits. The exhibits to this Lease are hereby
incorporated by reference herein and made a part hereof. The Guaranty (the
"Guaranty") attached hereto as Exhibit B is being executed and delivered on the
Commencement Date, and such execution and delivery, at the election of Landlord,
shall be a condition to the effectiveness of this Lease.
11.14. Integration. This Lease, the exhibits hereto and the
memorandum, if any, hereof, constitute the entire agreement between the parties
hereto with regard to the subject matter hereof, and supersede any prior
understandings, agreements or negotiations. This Lease may not be amended or
modified except by a writing executed by Tenant and Landlord, with the consent
of any Lender.
11.15. Lease Memorandum. Each of Landlord and Tenant shall
execute, acknowledge and deliver to the other a written memorandum of this Lease
("Memorandum") to be recorded in the appropriate land records of the
jurisdiction in which the Premises is located, in order to give public notice
and protect the validity of this Lease. In the event of any discrepancy between
the provisions of the recorded Memorandum and the provisions of this Lease, the
provisions of this Lease shall prevail.
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11.16. Subordination to Landlord Financing.
(a) (i) Subject to the provisions of Section
11.16(a)(ii) below, Tenant agrees that this Lease shall at all times be subject
and subordinate to the lien of any Mortgage, and Tenant agrees, upon demand,
without cost, to execute instruments as may be reasonably required to further
effectuate or confirm such subordination.
(ii) Tenant's agreement to subordinate set
forth in Section 11.16(a)(ii) above is conditioned upon the Lender agreeing
that: Tenant's tenancy and Tenant's rights under this Lease shall not be
disturbed, terminated or otherwise adversely affected, nor shall this Lease be
affected, by any default under any Mortgage, and in the event of a foreclosure
or other enforcement of any Mortgage, or sale in lieu thereof, the purchaser at
such foreclosure sale shall be bound to Tenant for the Term of this Lease, the
rights of Tenant under this Lease shall expressly survive, and this Lease shall
in all respects continue in full force and effect so long as there is no Event
of Default; provided, however, that such purchaser shall not:
(A) be liable for any prior act or
omission of Landlord;
(B) be subject to any defense,
counterclaim, set-off or offset which Tenant may then have against
Landlord;
(C) be bound by any payment of rent
that Tenant may have made to Landlord more than thirty (30) days before
the date such rent was first due and payable under this Lease with
respect to any period after the date of attornment other than, and only
to the extent that, this Lease expressly required such a prepayment;
(D) be bound by any obligation to
make any payment to Tenant which was required to be made prior to the
time such successor landlord succeeded to Landlord's interest; or
(E) be bound by any obligation to
perform any work or to make improvements to the Premises.
(b) Notwithstanding the provisions of Section
11.16(a), the holder of any Mortgage to which this Lease is subject and
subordinate shall have the right, at its sole option, at any time, to
subordinate and subject the Mortgage, in whole or in part, to this Lease by
recording a unilateral declaration to such effect.
(c) At any time prior to the expiration of the Term,
Tenant agrees, at the election and upon demand of any owner of the Leased
Premises, or of a Lender who has granted non-disturbance to Tenant pursuant to
Section 11.16(a) above, to attorn, from time to time, to any such owner or
lender, upon the terms and conditions of this Lease, for the remainder of the
Term. The provisions of this Section 11.16(c) shall inure to the benefit of any
such owner or Lender, shall apply notwithstanding that, as a matter of law, this
Lease may terminate upon the foreclosure of the Mortgage, shall be
self-operative upon any such demand, and no further instrument shall be required
to give effect to said provisions.
(d) Each of Tenant, Landlord and Lender, however,
upon written demand of the other, hereby agrees to execute, from time to time,
instruments in confirmation of the foregoing
27
<PAGE> 68
provisions of Sections 11.16(a) and 11.16(c), in the form customarily used by
such Lender to the extent consistent with the requirements of such Sections,
acknowledging such subordination, non-disturbance and attornment as are provided
in such Sections and setting forth the terms and conditions of its tenancy.
11.17 Waiver of Statutory Liens. Landlord hereby forever
waives and releases any and all liens, security interests and rights of Landlord
created, granted or imposed by statute, law or regulation ("Statutory Liens")
on, in or to any tangible personal property of Tenant located at any time at the
Premises (the "Tenant Personalty"). Landlord acknowledges and agrees that Tenant
may convey the Tenant Personalty, including granting security interests in the
Tenant Personalty, from time to time free and clear of all Statutory Liens.
Landlord shall, upon written demand of Tenant from time to time, execute and
deliver to Tenant such documents as may reasonably be required to evidence and
confirm Landlord's waiver of the Statutory Liens.
11.18 Interest Rate. Any amount due from either party to the
other under this Lease which is not paid within five (5) days after such amount
was due (including, without limitation, amounts due as reimbursement for costs
incurred in performing obligations of such party hereunder upon its failure to
so perform) shall bear interest at the prime (or reference) rate plus four
percent (4%) of Bank of America NA ("Interest Rate") from the date due until
paid, unless otherwise specifically provided herein, but the payment of such
interest shall not excuse or cure any default by Tenant under this Lease.
[THE FOLLOWING SECTION IS TO BE INCLUDED ONLY IN THE LEASE
FOR THE 19TH STREET SITE IN PHOENIX, ARIZONA:
11.19. SIGNS. THE PREMISES SHALL INCLUDE THE BILLBOARD LOCATED
ON THE LAND. TENANT SHALL COMPLY WITH ALL OF ITS OBLIGATIONS PURSUANT TO THAT
CERTAIN SIGN LEASE AGREEMENT #02-1028 DATED DECEMBER 15, 1996, AS ASSIGNED BY
ASSIGNMENT DATED APRIL 14, 1997, AS SUCH SIGN LEASE AGREEMENT MAY BE AMENDED,
AND ALL DOCUMENTS RELATED THERETO (COLLECTIVELY, THE "SIGN LEASE") AND, PROVIDED
THAT THERE IS NO EVENT OF DEFAULT UNDER THIS LEASE, SHALL HAVE THE RIGHT TO
RECEIVE ALL REVENUES THEREFROM. PROVIDED THAT THERE IS NO EVENT OF DEFAULT UNDER
THIS LEASE, IF THE SIGN LEASE TERMINATES, TENANT SHALL ALSO HAVE THE RIGHT TO
SUBLEASE OR LICENSE SUCH BILLBOARD TO THIRD PARTIES FOR ADVERTISING PURPOSES AND
THE RIGHT TO RECEIVE ALL REVENUES THEREFROM. ANY SUCH SUBLEASE OR LICENSE SHALL
BE SUBJECT AND SUBORDINATE TO THIS LEASE. WITHOUT LIMITING THE GENERALITY OF THE
FOREGOING, THE PROVISIONS OF SECTION 5.1 OF THIS LEASE (MAINTENANCE AND REPAIR)
AND THE PROVISIONS OF SECTION 4.2 OF THIS LEASE (COMPLIANCE WITH LAWS) SHALL BE
APPLICABLE TO SUCH BILLBOARD AND ANY SIGNS INSTALLED THEREON.]
28
<PAGE> 69
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the day and year first above set forth.
"LANDLORD"
__________________________________________
a ___________________________________
By: _________________________________
Title: _________________________________
"TENANT"
UGLY DUCKLING CAR SALES, INC.,
an Arizona corporation
By: _________________________________
Title: _________________________________
By: _________________________________
Title: _________________________________
29
<PAGE> 70
EXHIBIT "K"
LEASE GUARANTY
<PAGE> 71
GUARANTY
THIS GUARANTY, dated as of ________, 1998, (together with all
amendments and supplements hereto, referred to as this "Guaranty"), is from UGLY
DUCKLING CORPORATION, a corporation organized and existing under the laws of
Delaware (herein, together with its successors and assigns, including, without
limitation, any entity succeeding thereto by merger, consolidation or
acquisition of its assets substantially as an entirety, referred to as
"Guarantor"), to _______, a _________ (herein, together with its successors and
assigns, referred to as "Lessor").
WHEREAS, Ugly Duckling Car Sales, Inc., an Arizona corporation herein,
together with any entity succeeding thereto by merger, consolidation or
acquisition of its assets substantially as an entirety, referred to as
"Lessee"), a subsidiary [describe relationship] of Guarantor, leased from Lessor
and Lessor has leased to Lessee a certain parcel of real property together with
the building and improvements located thereon, and as described in Exhibit A
attached hereto (the "Premises") pursuant to a Lease dated as of even date
herewith, between Lessor and Lessee (the "Lease") (capitalized terms not defined
herein shall have the meanings given in the Lease); and
WHEREAS, the execution and delivery of this Guaranty by Guarantor is an
inducement to Lessor to enter into the Lease and Lessor has advised Guarantor
that it is not willing to enter into the Lease unless this Guaranty is executed
and delivered (the Lease and the other documents executed and delivered at or
prior to the closing by Lessee, other documents related to the Lease made by
Lessee to or with Lessor and all modifications and amendments to the foregoing,
made by Lessee to or with Lessor being, collectively, the "Lease Documents");
NOW, THEREFORE, in consideration of the premises, and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Guarantor agrees with Lessor as follows:
1. Guarantor unconditionally and irrevocably guarantees (i) the payment
and performance by Lessee of all its obligations, covenants, agreements, terms
and conditions under the Lease Documents and (ii) the prompt payment of all sums
which may become payable by Lessee pursuant to any of the Lease Documents in
full when due in accordance with the provisions thereof. This Guaranty is
irrevocable, unconditional and absolute. If for any reason any sums shall not be
paid by Lessee promptly when due (after any notice required by the Lease
Documents and prior to the expiration of any applicable period of grace provided
for in the Lease Documents), or any such agreement, covenant, term or condition
is not performed or observed by Lessee in accordance with the Lease Documents,
Guarantor promptly, after notice thereof, will pay the same to the person
entitled thereto pursuant to the provisions of any such Lease Document and will
promptly perform and observe the same or cause the same promptly to be performed
or observed, in any case regardless of (a) any defenses or rights of setoff or
counterclaims which Lessee or Guarantor may have or assert, (b) whether Lessor
shall have taken any steps to enforce any rights against Lessee or any other
remedy thereunder as a result of the default of Lessee thereunder and (c) any
other condition, contingency, thing or matter whatsoever. Guarantor also agrees
to pay to Lessor such further reasonable and actual amounts as shall be
sufficient to cover the cost and expense actually incurred in collecting such
sums, or any part thereof, or of otherwise enforcing this
1
<PAGE> 72
Guaranty, including without limitation, in any case, reasonable attorneys' fees
and disbursements.
2. The obligations, covenants, agreements and duties of Guarantor under
this Guaranty shall in no way be affected or impaired by reason of the happening
from time to time of any of the following, although without notice to or the
further consent of Guarantor:
(a) the extension, in whole or in part, of the time for
payment by Lessee or Guarantor of any sums owing or payable under any
of the Lease Documents (provided, however, that if any such extension
is expressly granted by Lessor, then Guarantor shall be entitled to the
benefit of such extension);
(b) any release of liability of Lessee;
(c) any assignment or reassignment of the Lease or subletting
of the Premises or any part thereof (but not with respect to any period
beyond the Lease Term and any Extended Term if such additional period
was agreed to by Lessor and an assignee [and not Lessee] unless
Guarantor consented to such additional period);
(d) the modification or amendment of any of the obligations of
Lessee under the Lease Documents, whether the same be in the form of a
new agreement or the modification or amendment of an existing Document
(any of the foregoing being a "Modification"), or of Guarantor under
this Guaranty;
(e) the doing or the omission of any of the acts (including,
without limitation, the giving of any consent referred to therein)
referred to in the Lease Documents or this Guaranty;
(f) any failure, omission or delay on the part of Lessor to
enforce, assert or exercise any right, power or remedy conferred on or
available to Lessor in or by any of the Lease Documents or this
Guaranty, or any action on the part of Lessor granting indulgence or
extension in any form whatsoever (except to the extent, if any, that
such indulgence shall have been expressly granted by Lessor);
(g) the voluntary or involuntary liquidation, dissolution,
sale of all or substantially all of the assets, marshalling of assets
and liabilities, receivership, conservatorship, custodianship,
insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition or readjustment of, or other
similar proceeding affecting Lessee or Guarantor or any of their
assets;
(h) the inability of Lessor or Lessee, respectively, to
enforce any provision of the Lease Documents or this Guaranty, for any
reason;
(i) any change in the relationship between Lessee and
Guarantor or any termination of such relationship;
(j) the inability of Lessee to perform, or, to the extent
permitted by applicable law, the release of Lessee or Guarantor from
the performance of any obligation, agreement, covenant, term or
condition of Lessee under any of the Lease Documents by reason of any
law, regulation or decree, now or hereafter in effect; or
2
<PAGE> 73
(k) any action or inaction by Lessor which results in any
impairment or destruction of any subrogation rights of Guarantor or any
rights of Guarantor to proceed against Lessee for reimbursement.
3. In the event of the rejection or disaffirmance of the Lease by
Lessee or Lessee's receiver pursuant to any law affecting creditor's rights,
Guarantor will, and does hereby (without the necessity of any further agreement
or act) assume all obligations and liabilities of Lessee under or arising out of
the Lease, to the same extent as if Guarantor had been originally named the
lessee under the Lease, and there had been no such rejection or disaffirmance;
Guarantor will confirm such assumption in writing at the request of Lessor, upon
or after such rejection or disaffirmance. Guarantor, upon such assumption, shall
have all rights of Lessee under the Lease and shall be entitled to a new lease
on all of the terms and conditions of the Lease with respect to the unexpired
portion of the Lease (to the extent permitted by law). Guarantor will execute
and deliver such documents as Lessor may from time to time reasonably require to
evidence such assumption, to confirm this Guaranty and to certify that Guarantor
is not in default hereunder.
4. Notice of acceptance of this Guaranty and notice of any obligations
or liabilities contracted or incurred by Lessee under any of the Lease Documents
are hereby waived by Guarantor.
5. This Guaranty shall be construed in accordance with the laws of the
state in which the Premises are located.
6. This Guaranty may not be modified or amended except by written
agreement duly executed by Guarantor with the consent in writing of Lessor and
any Lender.
7. [Guarantor is a company required to file certain reports with the
Securities and Exchange Commission ("SEC"). Guarantor will deliver to Lessor
within 30 days of filing with the SEC (other than on a confidential basis) or
otherwise making public, copies of all financial statements, 8-K, 10-K and 10-Q
reports, and notices and proxy statements sent by Guarantor to its
stockholders.]
8. Guarantor waives any right it may have (a) to require Lessor to
proceed against Lessee or against any other party [(PURSUANT TO A.R.S. SEC.
12.1641 ET. SEQ. OR OTHERWISE)] or (b) to require Lessor to pursue any remedy
within the power of the Lessor and Guarantor agrees that all of Guarantor's
obligations under this Guaranty are independent of the obligations of Lessee
under the Lease Documents or under any other instrument or agreement, and that a
separate action may be brought against Guarantor whether or not an action is
commenced against Lessee under any thereof. [GUARANTOR ALSO WAIVES RULE 17(f) OF
THE ARIZONA RULES OF CIVIL PROCEDURE.]
9. All notices, demands, requests, consents, approvals and other
instruments required or permitted to be given pursuant to the terms of this
Guaranty shall be in writing and shall be deemed to have been properly given if
(a) with respect to Guarantor, sent by registered or certified mail with a
return receipt requested, postage prepaid, or sent by facsimile, nationally
recognized overnight express carrier or delivered by hand, in each case
addressed to Guarantor at its notice address set forth below, and (b) with
respect to Lessor, sent by registered or certified mail with a return receipt
request, postage prepaid, or sent by facsimile, nationally recognized overnight
express courier or delivered by hand in each case, addressed to the Lessor at
its address set forth below along with a copy to the Lender (if Guarantor shall
have been given Lender's address). Lessor and Guarantor shall each have the
right from
3
<PAGE> 74
time to time to specify as its address for purposes of this Guaranty any other
address in the United States of America upon giving fifteen (15) days written
notice thereof, similarly given, to the other party, except that any change of
address to a post office box shall not be effective unless a street address is
also specified for use in effectuating personal service. Notices shall be deemed
communicated upon the earlier of receipt, or seventy-two (72) hours from the
time of mailing if mailed as provided in this Section 9.
Notices shall be addressed as follows:
If to Lessor: __________________________
c/o Imperial Credit Mortgage Investment Corporation
11601 Wilshire Boulevard, Suite 2080
Los Angeles, California 90025
Attention: Mr. James M. Flagg
If to Guarantor: Ugly Duckling Corporation
Attention: General Counsel
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
10. Guarantor hereby consents to, and no further consent by Guarantor
shall be required for, (i) any assignment of rights of Lessor hereunder, in
whole or in part, either as collateral security for obligations of Lessor
secured by a lien on the Premises or in connection with the sale of the Premises
or any interest therein or (ii) any assignment of the rights of Lessor under the
Lease. Lessor will give notice to Guarantor of any such assignment, but a
failure to do so will not result in any liability on Lessor, affect in any
manner the enforceability of this Guaranty, the rights and remedies of Lessor
hereunder or the obligations of Guarantor hereunder.
11. In case any one or more of the provisions hereof or of the Lease
Documents shall be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision hereof and this Guaranty shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
12. Guarantor shall not, directly or indirectly, without the express
prior written consent of Lessor, which may be withheld by Lessor in its sole and
absolute discretion, (i) merge into or consolidate with any other corporation,
partnership or any other entity ("Person") or permit any other Person to merge
into or consolidate with Guarantor; (ii) sell, lease, transfer, abandon or
otherwise dispose of all or substantially all of Guarantor's properties or
assets; or (iii) sell or offer for sale any shares of capital stock or any
securities convertible into, or any rights to acquire, shares of capital stock,
unless in each case, of each of (i), (ii) or (iii) above, Guarantor' s ability
to perform all of its obligations under this Guaranty (in Lessor's opinion) will
not be impaired after giving effect to such transaction. Within 10 days
following the merger of Guarantor into another corporation, or the consolidation
of Guarantor with one or more other corporations or the sale or other
disposition of all or substantially all the assets of Guarantor to one or more
other entities, the surviving entity or transferee of assets, as the case may
be, shall deliver to Lessor an acknowledged instrument in recordable form
assuming all obligations, covenants and responsibilities of Guarantor hereunder
and under this Guaranty.
4
<PAGE> 75
13. Lessor will accept performance by Guarantor of any of the
obligations guaranteed under the Lease Documents as if such performance had been
made by Lessee; provided, however, that the foregoing shall not be deemed to be
an agreement by Lessor to allow access to the Premises in order to cure any
default, it being acknowledged that any such right of access shall be obtained
by Guarantor pursuant to a separate agreement with Lessee (and Lessor agrees to
recognize any such rights of access which are so granted, provided that Lessor
shall have received appropriate written notice thereof).
14. This Guaranty shall be binding upon, and inure to the benefit of
and be enforceable by, the Guarantor, the Lessor, the Lessee, any Lender, and
their respective successors and assigns.
15. Guarantor further agrees that, to the extent that the Lessee or
Guarantor makes a payment or payments to the Lessor, which payment or payments
or any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to the Lessee or the
Guarantor or their respective estate trustee, receiver or any other party under
any bankruptcy law, state or federal law, common law or equitable laws, then to
the extent of such payment or repayment, this Guaranty and the advances or part
thereof which have been paid, reduced or satisfied shall be reinstated and
continued in full force and effect as of the date such initial payment
reduction, or satisfaction occurred.
16. Guarantor's rights (direct or indirect) of subrogation,
contribution, reimbursement, indemnification or other right of payment or
recovery from any person or entity (including, without limitation, the Lessee)
for any payments made by the Guarantor hereunder, are hereby subordinated to the
rights of Lessor, and Guarantor hereby subordinates, absolutely and
unconditionally, any such right of subrogation, contribution, reimbursement,
indemnification and other rights of recovery which it may hereafter acquire. In
no event shall Guarantor exercise any such right of subrogation, contribution,
reimbursement, indemnification or other right of recovery, now existing or
hereafter acquired, unless and until Lessee shall have complied with all of its
obligations under the Lease Documents and the Term of the Lease shall have
expired.
Ugly Duckling Corporation,
a Delaware corporation
By: ____________________________
Title: ____________________________
By: ____________________________
Title: ____________________________
5
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,652
<SECURITIES> 17,884
<RECEIVABLES> 61,678
<ALLOWANCES> 5,950
<INVENTORY> 34,690
<CURRENT-ASSETS> 0<F1>
<PP&E> 33,395
<DEPRECIATION> 5,610
<TOTAL-ASSETS> 278,845
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 173,562
<OTHER-SE> 10,228
<TOTAL-LIABILITY-AND-EQUITY> 278,845
<SALES> 142,491
<TOTAL-REVENUES> 166,357
<CGS> 81,213
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 44,062
<LOSS-PROVISION> 29,308
<INTEREST-EXPENSE> 1,164
<INCOME-PRETAX> 10,610
<INCOME-TAX> 4,274
<INCOME-CONTINUING> 6,336
<DISCONTINUED> (5,254)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,082
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
<PAGE> 1
EXHIBIT-99
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS
The Company wishes to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and is filing this
cautionary statement in connection with such safe harbor legislation. The
Company's Form 10-K, this Form 10-Q, any other Form 10-Q, any Form 8-K, other
SEC filings (including, without limitation, the Company's definitive proxy
statement dated August 4, 1998 and Cygnet's prospectus dated August 4, 1998), or
any other written or oral statements made by or on behalf of the Company may
include forward looking statements which reflect the Company's current views
with respect to future events and financial performance. The words "believe,"
"expect," "anticipate," "intend," "forecast," "project," and similar expressions
identify forward looking statements.
The Company wishes to caution investors that any forward looking
statements made by or on behalf of the Company are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to, the Risk Factors listed below (many of which have been discussed in prior
SEC filings by the Company). Though the Company has attempted to list
comprehensively these important factors, the Company wishes to caution investors
that other factors may in the future prove to be important in affecting the
Company's results of operations. New factors emerge from time to time and it is
not possible for management to predict all of such factors, nor can it assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from forward looking statements.
Investors are further cautioned not to place undue reliance on such
forward looking statements as they speak only of the Company's views as of the
date the statement was made. 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.
Capitalized terms not otherwise defined in this Exhibit 99 shall have the
meaning assigned to them in the Form 10-Q.
RISK FACTORS
Investing in the securities of the Company involves certain risks. In
addition to the other information included elsewhere in this Form 10-Q,
investors should give careful consideration to the following risk factors which
may impact the Company's performance and the price of its stock.
NO ASSURANCE OF PROFITABILITY
The Company began operations in 1992 and incurred significant operating
losses in 1994 and 1995. The Company recorded net earnings of $5.9 million in
1996 and net earnings in 1997 of $9.5 million. However, the Company incurred net
losses in the three month period ended March 31, 1998 of $1.9 million due
primarily to a charge of $9.1 million (approximately $5.6 million, net of income
taxes) for discontinued operations and in the three month period ended September
30, 1997 of $1.8 million due in large part to a charge of $10.0 million
(approximately $6.0 million, net of income taxes) against Residuals in Finance
Receivables Sold. There can be no assurance that the Company will be profitable
in future periods.
The Company's ability to sustain profitability will depend primarily upon
its ability to: (i) expand its revenue generating operations while not
proportionately increasing its administrative overhead; (ii) originate and
purchase contracts with an acceptable level of credit risk; (iii) effectively
collect payments due on the contracts in its portfolio; (iv) locate sufficient
financing, with acceptable terms, to fund the expansion of used car sales and
the origination and purchase of additional contracts; (v) adapt to the
increasingly competitive market in which it operates; and (vi) properly execute
the Split-up transaction and related business strategy. Outside factors, such as
the economic, regulatory, and judicial environments in which it operates, will
also have an effect on the Company's business. The Company's inability to
achieve or maintain any or all of these objectives could have a material adverse
effect on the Company.
DEPENDENCE ON SECURITIZATIONS
In recent periods, the Company's earnings (loss) from operations have been
significantly impacted by the sales of contract receivables and the earnings
(loss) recorded by the Company on the Residuals in Finance Receivables Sold. The
Company's ability to successfully complete securitizations in the future may be
affected by several factors, including the condition of securities markets
generally, conditions in the asset-backed securities markets specifically,
1
<PAGE> 2
and the credit quality of the Company's portfolio. The amount of any gain on
sale in connection with securitizations is based upon certain estimates and
assumptions, which may not subsequently be realized. To the extent that actual
cash flows on a securitization 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 is required to revalue
the Residuals in Finance Receivables Sold, and record a charge to earnings based
upon the reduction. In addition, the Company records ongoing income based upon
the cash flows on Residuals in Finance Receivables Sold. The income recorded on
the Residuals in Finance Receivables Sold will vary from quarter to quarter
based upon cash flows received in a given period. To the extent that cash flows
are deficient, charge offs of finance receivables exceed estimates, or
assumptions that were applied to the underlying portfolio are not realized, and
in the opinion of management those differences appear to be other than temporary
in nature, the Company is required to revalue the Residuals in Finance
Receivables Sold, and record a charge to earnings.
During the year ended December 31, 1997, the Company recorded a charge for
continuing operations of $5.7 million ($3.4 million after taxes) against the
Residuals in Finance Receivables Sold. The charge resulted from an upward
revision in the Company's net charge off assumptions related to the underlying
contract portfolios supporting the Company's Residuals in Finance Receivables
Sold. Although the Company believes the charge was adequate to adjust the
assumptions to a level which will more closely approximate future net losses in
the underlying contract portfolio, there can be no assurance in that regard.
UDRC and UDRC II (the Securitization Subsidiaries), are the Company's
wholly-owned special purpose "bankruptcy remote" entities. Their assets include
Residuals in Finance Receivables Sold and Investments Held in Trust, in the
amounts of $39.9 million and $22.1 million, respectively, at June 30, 1998,
which amounts would not be available to satisfy claims of creditors of the
Company.
DEPENDENCE ON EXTERNAL FINANCING; CASH POSITION
The Company has borrowed, and will continue to borrow, substantial amounts
to fund its operations. In this regard, the Company's operations, are highly
capital intensive. Currently, the Company receives financing pursuant to the
Revolving Facility with GE Capital, which has a maximum commitment of $100.0
million. Under the Revolving Facility, the Company may borrow up to 65.0% of the
principal balance of eligible Company Dealership contracts and up to 86.0% of
the principal balance of eligible Third Party Dealer contracts. However, an
amount up to $10.0 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 is in effect. The Revolving Facility is secured by
substantially all of the Company's assets. In addition, the Revolving Facility
and/or other credit facilities of the Company contain various restrictive
covenants that limit, among other things, the Company's ability to engage in
mergers and acquisitions, incur additional indebtedness, and pay dividends or
make other distributions, and also requires the Company to meet certain
financial tests. Although the Company believes it is currently in compliance
with the terms and conditions of the Revolving Facility and such other
facilities, other than the interest coverage ratio for which the Company
obtained a waiver, there can be no assurance that the Company will be able to
continue to satisfy such terms and conditions or that the Revolving Facility
will be extended beyond its current expiration date. In addition, the Company
has established a Securitization Program pursuant to which the Company is
subject to numerous terms and conditions. Failure of the Company to engage in
securitization transactions could have a material adverse effect on the Company.
The Company's cash and cash equivalents decreased from $3.5 million at
December 31, 1997 to $1.7 million at June 30, 1998. This decrease is due in
large part to the growth of the Cygnet Dealer Program loan portfolio. The
Company is currently evaluating its alternatives for the future financing of the
Cygnet Dealer Program, including its financing, in part, through the Split-up.
On January 28, 1998, the Company borrowed $7 million from Greenwich Capital (the
"Greenwich Loan"), the proceeds of which were utilized to reduce the Revolving
Facility. The Greenwich Loan was repaid on April 1, 1998. The Company is
currently evaluating other longer term financing options, including certain
additional financing transactions that may be entered into with Greenwich
Capital. There can be no assurance that any further securitizations will be
completed or that the Company will be able to secure additional financing when
and as needed in the future, or on terms acceptable to the Company.
POOR CREDITWORTHINESS OF BORROWERS; HIGH RISK OF CREDIT LOSSES
Substantially all of the contracts that the Company services are with
Sub-Prime Borrowers. Due to their poor credit histories and/or low incomes,
Sub-Prime Borrowers are generally unable to obtain credit from traditional
financial institutions, such as banks, savings and loans, credit unions, or
captive finance companies owned by
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automobile manufacturers. The Company has established an Allowance for Credit
Losses, which approximated 18.5% of contract principal balances as of June 30,
1998 and December 31, 1997, respectively, to cover anticipated credit losses on
the contracts currently in its portfolio. The Company believes its current
Allowance for Credit Losses is adequate to absorb anticipated credit losses.
However, there is no assurance that the Company has adequately provided for, or
will adequately provide for, such credit risks or that credit losses in excess
of its Allowance for Credit Losses will not occur in the future. A significant
variation in the timing of or increase in credit losses on the Company's
portfolio would have a material adverse effect on the Company.
Discontinued operations of the Company include the Cygnet Dealer Program,
pursuant to which the Company provides qualified Third Party Dealers with
warehouse purchase facilities and operating lines of credit primarily secured by
such dealers' retail installment contract portfolios and/or inventory. While the
Company requires Third Party Dealers to meet certain minimum net worth and
operating history criteria to be considered for inclusion in the Cygnet Dealer
Program, the Company will, nevertheless, be extending credit to dealers who may
not otherwise be able to obtain debt financing from traditional lending
institutions such as banks, credit unions, and major finance companies.
Consequently, similar to its other financing activities, the Company will be
subject to a high risk of credit losses that could have a material adverse
effect on the Company and on the Company's ability to meet its own financing
obligations.
POTENTIAL CHANGE IN BUSINESS STRATEGY -- DISCONTINUED OPERATIONS
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
closure was substantially complete by March 31, 1998. Further, in April 1998,
the Company announced that its Board of Directors had directed management to
proceed with separating current operations into two publicly held companies. The
Company's continuing operations will focus 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 Company would also retain its existing
securitization program and the residual interests in all securitization
transactions previously effected by the Company, its existing insurance
operations relating to its dealership activities, and its rent-a-car franchise
business (which is generally inactive). Cygnet has been formed to operate all
non-dealership operations. There can be no assurance that the Company will
effect a Split-up of any business operations; what form that such a transaction
would take if implemented, including whether stockholders will receive or be
able to acquire equity interests in any operation transferred in connection with
a Split-up; or that any Split-up would prove successful or economically
beneficial to the Company or its stockholders. Further, failure to implement a
Split-up could adversely affect the Company's operations and financial
condition, as well as the market for its common stock and warrants. In addition,
under the Company's most recent securitizations, absent consent of the
interested parties, a Split-up of its servicing operations would constitute a
"termination event," under which the insurer in respect of the securitization
could terminate the Company's servicing rights. Further, upon a termination
event, distributions in connection with the Company's residual interest in such
securitization effectively would be suspended until the interest of third party
holders is paid in full.
During the three month period ended March 31, 1998, the Company recorded a
charge of $9.1 million (approximately $5.6 million, net of income taxes) for
discontinued operations. There can be no assurance that the charge will prove
adequate or that upward or downward adjustments to the charge will not be
required in future periods.
POSSIBLE FAILURE TO CONSUMMATE THE SPLIT-UP
It is anticipated that the Split-up of the Company will be accomplished
through a Rights Offering to Company stockholders. There are numerous conditions
to both the making of the Rights Offering and the successful conclusion of the
Split-up following the Offering Period. Among other things, these transactions
require numerous consents from all parties to various existing agreements of the
Company and its subsidiaries. It is possible that
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certain consents can be obtained only if the Company remains contingently liable
on the underlying transactions. In addition, various regulatory approvals and
licenses must be obtained for the consummation of the transactions and the
operation of the transferred businesses by Cygnet and its subsidiaries. Although
the Company and/or Cygnet intends to timely initiate application for all
required licenses, obtaining such approvals and licenses is subject to the
procedures of the applicable governmental licensing entity. There can be no
assurance that all required approvals, licenses or conditions will be obtained
or achieved in a timely manner. Moreover, either the Rights Offering or the
Split-up may be abandoned or postponed at any time for any reason in the
sole discretion of the Company's or Cygnet's Board of Directors. Other
conditions and uncertainties include the approval of the Split-up by the
stockholders of the Company, the finalization of appraisals of the assets to be
transferred and certain income tax consequences of the Rights Offering and the
sale of the transferred assets from the Company to Cygnet.
Uncertainties concerning the progress and ultimate outcome of the Split-up
could cause fluctuation and instability in the market price of the Company's
common stock. If the Rights Offering is made but the Split-up does not occur,
the Rights will not be exercised for Cygnet common stock and all subscription
funds will be returned without interest.
Relative to the above discussion, there can be no assurance that all of
the conditions to the Rights Offering or the Split-up will be satisfied or that
the Split-up will be effected or the Rights will be issued. See the Company's
proxy statement dated August 4, 1998 and Cygnet's prospectus dated August 4,
1998 for more complete information about the risks and uncertainties associated
with Split-up and the related Rights Offering and their impact on the Company
and Cygnet.
RISKS RELATING TO THE CYGNET PREFERRED STOCK
The Cygnet Preferred Stock provides for certain cumulative dividends.
However, dividends on the Cygnet Preferred Stock are payable only out of funds
legally available therefor when and as declared by the Cygnet Board of
Directors. If dividends are not paid for a specified period, the Company will
have the right to elect two members of the Cygnet Board of Directors (in
addition to the then existing number of directors) at the next following meeting
of stockholders of Cygnet and thereafter until all accrued dividends are paid in
full. However, such directors will constitute a minority of Cygnet's Board of
Directors.
Currently, the Company owns the Transferred Assets that would be
transferred to Cygnet if the Split-up is successfully concluded and,
accordingly, has control over the risks and liabilities inherent in such assets.
Following the Split-up, although a substantial portion of the Company's assets
and net worth will be embodied in the Cygnet Preferred Stock, the Company will
no longer have control over the Transferred Assets and associated risks, but
must rely on Cygnet and its management for expected returns on the Cygnet
Preferred Stock. Although the Cygnet Preferred Stock will be senior in right of
payment to all Cygnet common stock, Cygnet's Certificate of Incorporation
authorizes its Board of Directors to issue up to 500,000 shares of its preferred
stock. Additional issuances of preferred stock by Cygnet may be pari passu in
right of payment with the Cygnet Preferred Stock. The Cygnet Preferred Stock
will also be junior in right of payment to all indebtedness of Cygnet. There are
no restrictions in the Cygnet Preferred Stock on the ability of Cygnet to incur
indebtedness.
SPLIT-UP TRANSACTION -- POTENTIAL FEDERAL INCOME TAX CONSEQUENCES OF THE
RIGHTS OFFERING AND SALE OF THE TRANSFERRED ASSETS
Tax Consequences to Holders of Company common stock. Holders of Company
common stock will generally recognize dividend income (taxable as ordinary
income) in an amount equal to the fair market value, if any, of the Rights as
of the date of their distribution. There can be no assurance as to the
exact amount of dividend income, if any, a holder of Company common stock will
recognize upon the receipt of Rights. If the Rights are trading for value on
the date of their distribution, the Company may, in its discretion, report to
holders of Company common stock the receipt of dividend income in an amount
equal to the average of the high and low trading prices of the Rights on such
date.
To avoid the possibility of the recognition of ordinary income and the
creation of a potentially deferred or nondeductible capital loss, it will, in
many instances, be in the interests of holders of Company common stock
receiving Rights to either exercise or sell the Rights, rather than to allow
the Rights to lapse.
Tax Consequences to Company Consolidated Group of Distribution of Rights.
Distribution of Rights. The Company will recognize gain on the
distribution of the Rights in an amount equal to the greater of (1) the fair
market value, if any, of the Rights as of the date of their distribution or (2)
the sum of (a) the aggregate amount, if any, by which (i) the fair market value
of each Transferred Asset as of the Effective Date exceeds (ii) the amount paid
by Cygnet for such Transferred Asset plus (b) the aggregate amount, if any, by
which the fair market value of each Interim Asset as of the Effective Date
exceeds (iii) the adjusted tax basis of such Interim Asset. Based primarily on
the advice of an appraiser and other experts, management of the Company believes
that as a consequence, the fair market value of each of the Interim Assets
should not exceed their adjusted tax basis as of the Effective Date.
If any tax liabilities are triggered by the Company's recognition of gain
on the distribution of the Rights, such tax liabilities will be borne solely by
the Company.
Sales of Transferred Assets. If the consideration paid by Cygnet to the
Company for any of the Transferred Assets (including the allocable portion of
any Company liabilities assumed by Cygnet) exceeds the adjusted tax basis of
such asset, gain will be recognized by the Company consolidated group to the
extent of such excess. Based primarily on the advice on appraiser and other
experts, management of the Company believes that the gain recognized in
connection with the sale of the Transferred Assets should be immaterial.
The appraisals, advice of other experts, and the beliefs of management of
the Company are not binding on the Internal Revenue Service. Further, the fair
market value of one or more the Transferred Assets may increase during the
period between June 30, 1998 and the effective date of the Split-up and result
in the payment by Cygnet of greater consideration. Accordingly, it cannot be
stated with complete assurance that the Company's gain on the sale of the
Transferred Assets would be immaterial.
If any tax liabilities are triggered by the Company's recognition of gain
on the sale of the Transferred Assets, such tax liabilities will be borne
solely by the Company.
Receipt of Interim Consideration. The receipt of Interim Consideration by
the Company from Cygnet will generate taxable income to the Company to the
extent of the amount received. Tax liabilities triggered by such receipt will
be borne solely by the Company.
Redemptions of Preferred Stock. Although redemptions of Cygnet Preferred
Stock owned by the Company are intended to be treated for federal income tax
purposes as sales of the redeemed shares generally resulting in no gain or loss
to the Company, ownership of Cygnet common stock by any person or entity owning
50% or more of the value of the outstanding Company stock, either directly or
indirectly through application of various attribution rules, may cause the
proceeds of such redemptions to be treated as taxable dividends resulting in
income to the Company to the extent of the redemption proceeds. If any tax
liabilities are triggered in connection with redemptions of Cygnet Preferred
Stock held by the Company, such tax liabilities will be borne solely by the
Company.
LOSS OF DIVERSIFICATION AND EARNINGS ON THE TRANSFERRED ASSETS
The effectuation of the Split-up will reduce the diversification of current
Company operations, could increase the seasonal fluctuation in sales and
earnings of the Continuing Company Businesses, and could increase the
susceptibility of the Continuing Company Businesses to economic fluctuations
inherent in business cycles. The Company's used car sales business is inherently
more subject to seasonal fluctuations than are the Split-up Businesses being
transferred to Cygnet. This is principally due to seasonal buying patterns
resulting in part from the fact that many of the Company's customers receive
income tax refunds during the first half of the year, which are a primary source
of down payments on used car purchases. Moreover, because the Company generally
sells more cars during the first half of the year, it will have more contracts
to securitize during that period, and securitizations have historically been a
primary source of earnings for the Company. A large percentage of the 1997
reported earnings of the Company consolidated group is comprised of gain from
the sale of the Owned Contracts (defined below under "Risks to the Company
Relating to the FMAC Transaction") in the FMAC transaction as well as interest
income on loans made by the Company under the DIP Facility (defined below under
"Risks to the Company Relating to the FMAC Transaction") and on the Senior Bank
Debt (defined below under "Risks to the Company Relating to the FMAC
Transaction") in the FMAC transaction, the remaining future earnings, if any,
under which would be transferred to Cygnet.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
The success of any participant in the sub-prime industry, including the
Company, depends in part on its ability to continue to adapt its technology, on
a timely and cost-effective basis, to meet changing customer and industry
standards and requirements. During the prior year, the Company converted to a
new loan servicing and collection data processing system at its Gilbert, Arizona
facility which services the Company's Arizona, Nevada, and New Mexico Company
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Dealership loan portfolios as well as substantially all of the Third Party
Dealer Branch Office loan portfolio. In connection with these conversions, the
Company confronted various implementation and integration issues, which
management believes resulted in increases in both contract delinquencies and
charge offs. Although many of these issues have been resolved, failure to
promptly and fully resolve all issues could have a material adverse effect on
the Company.
The Company services its loan portfolios on loan servicing and collection
data processing systems on various platforms. The Company is in the process of
converting substantially all of its Continuing Operations loan servicing and
collection data processing to a single loan servicing and collection data
processing system. Failure to successfully complete the conversion to a single
loan servicing and data processing system could have a material adverse effect
on the Company.
The Company has commenced a study of its computer systems in order to
assess its exposure to year 2000 issues. The Company expects to make the
necessary modifications or changes to its computer information systems to enable
proper processing of transactions relating to the year 2000 and beyond. The
Company estimates that it will cost from $500,000 to $1.0 million to modify its
existing systems, should it choose to do so. The Company will evaluate
appropriate courses of action, including replacement of certain systems whose
associated costs would be recorded as assets and subsequently amortized or
modification of its existing systems which costs would be expensed as incurred.
However, failure of the Company to fully address and resolve its year 2000
issues, including modification of its existing systems, replacement of such
systems, or other matters could have a material adverse effect on the Company.
The Company is dependent on its loan servicing and collection facilities
as well as long-distance and local telecommunications access in order to
transmit and process information among its various facilities. The Company
maintains a standard program whereby it prepares and stores off site back ups of
its main system applications and data files on a routine basis. Due primarily to
the Company's recent acquisitions and significant growth, the Company believes
that its current disaster response plan will need to be revised. Although
management intends to update the disaster response plan during 1998, there can
be no assurance a failure will not occur in the interim or that the plan as
revised will prevent or enable timely resolution of any systems failure.
Further, a natural disaster, calamity, or other significant event that causes
long-term damage to any of these facilities or that interrupts its
telecommunications networks could have a material adverse effect on the Company.
RISKS TO THE COMPANY RELATING TO THE FMAC TRANSACTION
If the Split-up is effectuated, the Transferred Assets will include
substantially all assets (except cash received by the Company prior to the
Effective Date) and liabilities relating to the FMAC transaction. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Transfer of Assets Pursuant to the Split-up." The liabilities being
transferred to Cygnet include certain funding obligations of the Company to
provide "debtor-in-possession" financing to FMAC (the "DIP Facility"). As of
June 30, 1998, the maximum commitment under the DIP Facility was $12.4 million,
of which $9.8 million was outstanding. The DIP Facility is a revolving facility
and, except for payments made from the proceeds of tax refunds received by FMAC,
will be permanently paid down only from distributions on certain residual
interests (the "B Pieces") in the various securitized loan pools of FMAC (the
"Securitized Pools"' after payment of certain other amounts.
In addition, the liabilities being transferred to Cygnet include a
guarantee of a specified return on certain contracts (the "Owned Contracts")
sold to a third party purchaser (the "Contract Purchaser") in connection with
the FMAC transaction, subject to a maximum guarantee amount of $10 million (the
"Owned Contract Guarantee"). Although, as between the Company and Cygnet, Cygnet
will be responsible for the DIP Facility and Owned Contract Guarantee, the
Company will not be released from such obligations and will continue to be
directly liable on these obligations. Therefore, if Cygnet does not fulfill such
obligations, the Company must do so.
During the pendency of the FMAC bankruptcy proceedings, the Company
purchased approximately 78% of FMAC's senior bank debt (the "Senior Bank Debt")
held by seven members (the "Selling Banks") of FMAC's original nine-member bank
group for approximately $69 million, which represented a discount of 10% (the
"Discount") of the outstanding principal amount of such debt. Under agreements
with the Selling Banks, the Company has agreed to pay the Selling Banks
additional consideration up to the amount of the Discount (the "Additional
Consideration") if and to the extent the FMAC plan of reorganization provides
for and FMAC or any other party subsequently makes a cash payment or issues
notes at market rates to certain unsecured creditors and equity holders of FMAC
on account of their allowed claims worth an amount in excess of 10% of their
allowed
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claims (collectively, the "Excess Cash"). Following the Effective Date, the
Company would retain the obligation to pay any Additional Consideration to the
Selling Banks.
One source of cash payments that may in the future be made to unsecured
creditors of FMAC is from recoveries on the Owned Contracts and the B Pieces
after payment of certain prior amounts. Under FMAC's plan of reorganization,
such excess recoveries will be shared on the basis of 82 1/2% for the benefit of
FMAC and 17 1/2% for the benefit of the Company (or Cygnet following the
Effective Date) (the "Excess Collection Split"), subject to certain
contingencies that may reduce or eliminate the Company's (or Cygnet's)
percentage share therein. However, the Company has the option, to be exercised
one time, to distribute shares of Common Stock of the Company (the "Stock Option
Shares") to FMAC or, at the request of FMAC and pursuant to its instructions,
directly to the unsecured creditors of FMAC, in exchange for FMAC's right to
receive all or a portion of distributions under the Excess Collections Split in
cash (including both recoveries under the Excess Collections Split from the
Owned Contracts and the B Pieces) (the "Stock Option"). To the extent exercised,
payments to FMAC's unsecured creditors and equity holders would be reduced,
which would reduce the risk of payment of the Additional Consideration to the
Selling Banks. The number of Stock Option Shares that the Company will issue
would be based on the Company's estimate of the cash distributions expected to
be received on FMAC's share of the Excess Collection Split. For purposes of the
election, the Stock Option Shares would be valued at 98% of the average of the
closing prices for the previous 10 trading days of Company Common Stock on
Nasdaq or such other market on which such stock may be traded (the "Stock Option
Value"), which must average at least $8.00 per share.
After issuance and delivery of the Stock Option Shares, the Company will
be entitled to receive FMAC's share of cash distributions under the Excess
Collections Split (including both recoveries under the Excess Collections Split
from the Owned Contracts and the B Pieces) from and after the Exercise Date
until the Company has received such distributions equal to the Stock Option
Value. These distributions would be in addition to the Company's right to
receive its share under the Excess Collections Split that is to be transferred
to Cygnet. Once the Company has received cash distributions equal to the Stock
Option Value, FMAC will retain the remaining portion of its share of cash
distributions under the Excess Collections Split, if any, in excess of the Stock
Option Value.
After the Effective Date, Cygnet will service the FMAC contract portfolios
relating to the Owned Contracts and the B Pieces. To facilitate the Company's
decision as to whether to exercise the Stock Option, under the Capitalization
Agreement, Cygnet will advise the Company at least 7 days prior to the date that
cash distributions under the Excess Collections Split are likely to begin and of
its estimate as to the likely amount and timing of such cash distributions.
Cygnet will allow the Company reasonable access to its books and records to
allow the Company to verify such estimate, and to cooperate with the Company in
determining the amount and timing of the Company's issuance of the Stock Option
Shares. In addition, Cygnet will pay over to the Company all of FMAC's share of
cash distributions under the Excess Collections Split up to the Stock Option
Value following any issuance by the Company of the Stock Option Shares.
Despite these arrangements with Cygnet, the FMAC transaction will pose
continuing risks to the Company. In this regard, the ability of the Company to
issue the Stock Option Shares is subject to certain contingencies, including the
market price of the Company's Common Stock, which is not within the control of
the Company, and the ability of the Company to maintain or effect the
registration of such shares under the Securities Act. Moreover, even if the
Company is able to issue Stock Option Shares, the number of Stock Option Shares
issued may not be in a sufficient amount to prevent the Additional Consideration
being payable to the Selling Banks. On the other hand, if the Company
overestimates the number of Stock Option Shares to be issued, it will cause
dilution to the Company's Common Stock without concurrent consideration being
received by the Company. Moreover, even if the Stock Option Shares are issued
and the cash payments to FMAC's unsecured creditors and equity holders are
reduced, there can be no assurance that the Selling Banks will not assert a
fight to the Additional Consideration.
In addition, the Company has agreed in a contingent sharing agreement to
pay 10% of the Excess Collections Split received by the Company to Financial
Security Assurance ("FSA"), the insurer of certain obligations to holders of the
senior certificates representing interests in the Securitized Pools in exchange
for FSA's consent to amendments to documents governing servicing of the
Securitized Pools (the "FSA Obligation"). Although, as between the Company and
Cygnet, Cygnet will be obligated to fulfill the FSA Obligation, if Cygnet does
not do so, the Company will be liable to FSA to pay the required moneys.
In connection with the transfer of servicing rights to Cygnet in relation
to the FMAC transaction, the Company may be required or choose to enter into a
subservicing arrangement with Cygnet as to certain pools, in which case the
Company would remain contingently liable.
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RISKS TO THE COMPANY RELATING TO THE RELIANCE TRANSACTION
The Company has been involved in the bankruptcy proceedings of Reliance
and has entered into a servicing agreement with Reliance (the "Servicing
Agreement"), pursuant to which the Company will service certain receivables of
Reliance. Reliance's plan of reorganization was confirmed on June 29, 1998 in
open court and became effective on July 31, 1998. The bankruptcy court executed
the formal order confirming the plan on July 2, 1998. The Servicing Agreement
requires the Company to issue warrants to purchase Company Common Stock
("Reliance Warrants") to Reliance in certain amounts at various times. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition of the Continuing Company Businesses --Reliance Transaction" for a
description of the amount and times at which Reliance Warrants would be issued.
The Servicing Agreement is expected to be transferred to Cygnet on the Effective
Date. However, the Company will retain the obligation to issue the Reliance
Warrants.
Pursuant to the Capitalization Agreement, following the Effective Date,
the Company will use its best efforts to issue the Reliance Warrants at the
request of Cygnet from time to time when required, and Cygnet will pay to the
Company an amount of consideration upon each such issuance equal to the fair
value of the Reliance Warrants (as determined by the Company for financial
accounting purposes) on the date of issuance of the Reliance Warrants. The
issuance of the Reliance Warrants may result in dilution of the Company's Common
Stock and in market confusion based upon an ongoing tie between the Company and
Cygnet. Moreover, the consent of Reliance may be required in order to transfer
servicing and other rights relating to the Reliance transaction froth the
Company to Cygnet and there can be no assurance that such consent will be
obtained.
POTENTIAL ISSUANCE OF DILUTIVE SECURITIES
The Company has granted warrants to purchase a total of approximately 1.5
million shares of Common Stock of the Company to various parties with exercise
prices ranging from $6.75 to $20.00 per share. Such issuances or warrant
exercises could prove to be dilutive for the Company's then existing
stockholders.
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS
In 1997, the Company completed three significant acquisitions (Seminole,
EZ Plan, and Kars) and intends to consider additional acquisitions, alliances,
and transactions involving other companies that could complement the Company's
existing business. There can be no assurance that suitable acquisition parties,
joint venture candidates, or transaction counterparties can be identified, or
that, if identified, any such transactions will be consummated on terms
favorable to the Company, or at all. Furthermore, there can be no assurance that
the Company will be able to integrate successfully such acquired businesses,
including those recently acquired, into its existing operations, which could
increase the Company's operating expenses in the short-term and adversely affect
the Company. Moreover, these types of transactions by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt, and amortization of expenses related to goodwill and intangible
assets, all of which could adversely affect the Company's profitability. As of
June 30, 1998, the Company had goodwill totaling approximately $14.7 million,
the components of which will be amortized over a period of 15 to 20 years. These
transactions involve numerous risks, such as the diversion of the attention of
the Company's management from other business concerns, the entrance of the
Company into markets in which it has had no or only limited experience, and the
potential loss of key employees of the acquired company, all of which could have
a material adverse effect on the Company.
HIGHLY COMPETITIVE INDUSTRY
Although the used car sales industry has historically been highly
fragmented, it has attracted significant attention from a number of large
companies, including AutoNation, U.S.A. and Driver's Mart, which have entered
the used car sales business or developed large used car sales operations. Many
franchised new car dealerships have also increased their focus on the used car
market. The Company believes that these companies are attracted by the
relatively high gross margins that can be achieved in this market and the
industry's lack of consolidation. Many of these companies and franchised dealers
have significantly greater financial, marketing, and other resources than the
Company. Among other things, increased competition could result in increased
wholesale costs for used cars, decreased retail sales prices, and lower margins.
Like the sale of used cars, the business of purchasing and servicing
contracts originated from the sale of used cars
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to Sub-Prime Borrowers is highly fragmented and very competitive. Various
companies have increased the competition for the purchase of contracts, in many
cases purchasing contracts at prices that the Company believes are not
commensurate with the associated risk. There are numerous financial services
companies serving, or capable of serving, this market, including traditional
financial institutions such as banks, savings and loans, credit unions, and
captive finance companies owned by automobile manufacturers, and other
non-traditional consumer finance companies, many of which have significantly
greater financial and other resources than the Company. Increased competition
may cause downward pressure on the interest rates the Company charges on
contracts originated by its Company Dealerships or cause the Company to reduce
or eliminate the nonrefundable acquisition discount on the contracts it
purchases in bulk, which could have a material adverse effect on the Company.
Similarly, increased competition may be another reason for a potential Company
spin-off to third parties or shareholders of Third Party Dealer operations,
including its third party purchasing and servicing operations, Cygnet Dealer
Program, and all or portions of their related portfolios.
GENERAL ECONOMIC CONDITIONS
The Company's business is directly related to sales of used cars, which
are affected by employment rates, prevailing interest rates, and other general
economic conditions. While the Company believes that current economic conditions
favor continued growth in the markets it serves and those in which it seeks to
expand, a future economic slowdown or recession could lead to decreased sales of
used cars and increased delinquencies, repossessions, and credit losses that
could hinder the Company's business. Because of the Company's focus on the
sub-prime segment of the automobile financing industry, its actual rate of
delinquencies, repossessions, and credit losses could be higher under adverse
conditions than those experienced in the used car sales and finance industry in
general.
INDUSTRY CONSIDERATIONS AND LEGAL CONTINGENCIES
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 events 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. Furthermore, companies in the used vehicle financing
market have been named as defendants in an increasing number of class action
lawsuits brought by customers alleging violations of various federal and state
consumer credit and similar laws and regulations. There can be no assurance that
these trends and events will not have significant negative impact on the
Company.
NEED TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH THIRD PARTY DEALERS
Pursuant to the Cygnet Dealer Program, the Company enters into financing
agreements with qualified Third Party Dealers. The Company's Third Party Dealer
financing activities depend in large part upon its ability to establish and
maintain relationships with such dealers. While the Company believes that it has
been successful in developing and maintaining relationships with Third Party
Dealers in the markets that it currently serves, there can be no assurance that
the Company will be successful in maintaining or increasing its existing Third
Party Dealer base, or that a sufficient number of qualified dealers will become
involved in the Cygnet Dealer Program.
GEOGRAPHIC CONCENTRATION
Company Dealership operations are currently located in Arizona, Georgia,
California, Texas, Florida, Nevada, and New Mexico. Because of this
concentration, the Company's business may be adversely affected in the event of
a downturn in the general economic conditions existing in the Company's primary
markets.
SENSITIVITY TO INTEREST RATES
A substantial portion of the Company's financing income results from the
difference between the rate of interest it pays on the funds it borrows and the
rate of interest it earns on the contracts in its portfolio. While the contracts
the Company owns bear interest at a fixed rate, the indebtedness that the
Company incurs under its Revolving Facility bears interest at a floating rate.
In the event the Company's interest expense increases, it would seek to
compensate for such increases by raising the interest rates on its Company
Dealership contracts, increasing the acquisition discount at which it purchases
portfolios in bulk, or raising the retail sales prices of its used cars. To the
extent the Company were unable to do so, the Company's net interest margins
would decrease, thereby adversely affecting the Company's profitability.
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IMPACT OF USURY LAWS
Historically, a significant portion of the Company's used car sales
activities were conducted in, and a significant portion of the contracts the
Company services were originated in, Arizona, which does not impose limits on
the interest rate that a lender may charge. However, the Company has expanded,
and will continue to expand, its operations into states that impose usury
limits, such as Florida and Texas. The Company attempts to mitigate these rate
restrictions by raising the retail prices of its used cars or purchasing
contracts originated in these states at a higher discount. The Company's
inability to mitigate rate restrictions in states imposing usury limits would
adversely affect the Company's planned expansion and its results of operations.
There can be no assurance that the usury limitations to which the Company is or
may become subject or that additional laws, rules, and regulations that may be
adopted in the future will not adversely affect the Company's business.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success will depend upon the continued services of
the Company's senior management as well as the Company's ability to attract
additional members to its management team with experience in the used car sales
and financing industry. The unexpected loss of the services of any of the
Company's key management personnel, or its inability to attract new management
when necessary, could have a material adverse effect upon the Company. The
Company has entered into employment agreements (which include non-competition
provisions) with certain of its officers. The Company does not currently
maintain any key person life insurance on any of its executive officers.
The Company's future success may be adversely affected by the loss of the
services of certain of the Company's senior management to Cygnet if the Split-up
is effected. Following the Split-up, Ernest C. Garcia, II would no longer serve
as Chief Executive Officer of the Company although he would retain his position
as Chairman of the Board of Directors of the Company. In addition, Steven P.
Johnson, the Company's current Senior Vice President and General Counsel, Donald
L. Addink, the Company's current Vice President -- Senior Analyst, and Eric J.
Splaver, the Company's current Controller, will no longer act in such capacities
with the Company. The loss of the services of such individuals may cause
disruption on a temporary basis as new individuals take over executive
management responsibilities for the Company in such positions.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Ernest C. Garcia, II, the Company's Chairman, Chief Executive Officer,
and principal stockholder, holds approximately 25.2% of the outstanding Common
Stock, including 136,500 shares held by The Garcia Family Foundation, Inc., an
Arizona non-profit corporation, and 20,000 shares held by Verde Investments,
Inc., a real estate investment corporation, controlled by Mr. Garcia. As a
result, Mr. Garcia has a significant influence upon the activities of the
Company, as well as on all matters requiring approval of the stockholders,
including electing or removing members of the Company's Board of Directors,
causing the Company to engage in transactions with affiliated entities, causing
or restricting the sale or merger of the Company, and changing the Company's
dividend policy. Mr. Garcia has indicated that he intends to resign his position
as Chief Executive Officer concurrent with the completion of the Split-up
transaction.
POTENTIAL ANTI-TAKEOVER EFFECT OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the Company to issue
"blank check" Preferred Stock, the designation, number, voting powers,
preferences, and rights of which may be fixed or altered from time to time by
the Board of Directors. Accordingly, the Board of Directors has the authority,
without stockholder approval, to issue Preferred Stock with dividend,
conversion, redemption, liquidation, sinking fund, voting, and other rights that
could adversely affect the voting power or other rights of the holders of the
Common Stock. The Preferred Stock could be utilized, under certain
circumstances, to discourage, delay, or prevent a merger, tender offer, or
change in control of the Company that a stockholder might consider to be in its
best interests. Although the Company has no present intention of issuing any
shares of its authorized Preferred Stock, there can be no assurance that the
Company will not do so in the future.
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal,
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state, and local statutes, ordinances, and regulations. Among other things,
these laws require that the Company obtain and maintain certain licenses and
qualifications, limit or prescribe terms of the contracts that the Company
originates and/or purchases, require specified disclosures to customers, limit
the Company's right to repossess and sell collateral, and prohibit the Company
from discriminating against certain customers. The Company is also subject to
federal and state franchising and insurance laws.
The Company believes that it is currently in substantial compliance with
all applicable material federal, state, and local laws and regulations. There
can be no assurance, however, that the Company will be able to remain in
compliance with such laws, and such failure could result in fines or
interruption or cessation of certain of the business activities of the Company
and could have a material adverse effect on the operations of the Company. In
addition, the adoption of additional statutes and regulations, changes in the
interpretation of existing statutes and regulations, or the Company's entrance
into jurisdictions with more stringent regulatory requirements could have a
material adverse effect on the Company.
LISTING AND TRADING OF COMPANY COMMON STOCK
The market price of the Common Stock has been and may continue to be
volatile in response to such factors as, among others, variations in the
anticipated or actual results of operations of the Company or other companies in
the used car sales and finance industry, changes in conditions affecting the
economy generally, analyst reports, or general trends in the industry.
It is expected that, after the Effective Date of the Split-up, the
Company Common Stock will continue to be listed and traded on Nasdaq. However,
the Company's financial results will no longer be consolidated with the results
of the businesses of Cygnet, which may affect the trading price of the Company's
Common Stock.
The prices at which the shares of the Company's Common Stock will trade
after the Split-up will be determined by the marketplace and may be influenced
by many factors, including, among others, the proportional value of the
Company's asset base, stream of cash flows, profits, or other measure of value
in relation to the prices of the Company Common Stock prior to the Split-up, the
depth and liquidity of the market for such shares, investor perceptions of the
Company and the industries in which its businesses participate, and general
economic and market conditions. The trading price of the Company Common Stock
after the Split-up may be less than, equal to, or greater than the trading
prices of the Company Common Stock prior to the Split-up.
MARKET PERCEPTION ISSUES
Although one purpose of the separation of the Continuing Company
Businesses from those being transferred to Cygnet is to allow investors,
lenders, and others to more easily evaluate the performance and investment
characteristics of each business group and to enhance the likelihood that each
will achieve appropriate market recognition of its performance, there will, at
least for a significant period of time, continue to be ties between the two
companies that may prove confusing to the market. For example, although the
Transferred Assets will include substantially all of the assets and liabilities
of the Company in connection with the FMAC transaction, the Company will retain
certain contingent liabilities with respect to that transaction and may in the
future issue the Stock Option Shares (defined below under "Risks to the Company
Relating to the FMAC Transaction") in connection with assets transferred to
Cygnet. In addition, a substantial portion of the Company's assets and net worth
will be embodied in the Cygnet Preferred Stock.
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