<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 000-20841
UGLY DUCKLING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 86-0721358
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2525 E. CAMELBACK ROAD,
SUITE 500
PHOENIX, ARIZONA 85016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 852-6600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
At November 10, 1998 there were 16,069,502 shares of Common Stock, $0.001
par value, outstanding.
This document serves both as a resource for analysts, shareholders, and
other interested persons, and as the quarterly report on Form 10-Q of Ugly
Duckling Corporation ("Company") to the Securities and Exchange Commission,
which has taken no action to approve or disapprove the report or pass upon its
accuracy or adequacy. Additionally, this document is to be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
================================================================================
<PAGE> 2
UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. -- FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -- September 30, 1998 and December 31, 1997.................. 3
Condensed Consolidated Statements of Operations -- Three Months and Nine Months Ended
September 30, 1998 and September 30, 1997........................................................ 4
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1998
and September 30, 1997........................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE CONTINUING COMPANY BUSINESSES............................................. 11
PART II. -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.......................................................................... 29
Item 2. CHANGES IN SECURITIES...................................................................... 30
Item 3. DEFAULTS UPON SENIOR SECURITIES............................................................ 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 30
Item 5. OTHER INFORMATION.......................................................................... 31
Item 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... 31
SIGNATURE.......................................................................................... 33
Exhibit 10.1.....................................................................................
Exhibit 10.2.....................................................................................
Exhibit 10.3.....................................................................................
Exhibit 10.4.....................................................................................
Exhibit 10.5.....................................................................................
Exhibit 10.6.....................................................................................
Exhibit 10.7.....................................................................................
Exhibit 10.8.....................................................................................
Exhibit 10.9.....................................................................................
Exhibit 10.10....................................................................................
Exhibit 10.11....................................................................................
Exhibit 27.......................................................................................
Exhibit 99.......................................................................................
</TABLE>
2
<PAGE> 3
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................................ $ 955 $ 3,537
Finance Receivables, Net................................. 60,684 60,778
Investments Held in Trust................................ 20,076 11,637
Inventory................................................ 36,184 32,372
Property and Equipment, Net.............................. 25,681 39,182
Intangible Assets, Net................................... 14,571 16,366
Other Assets............................................. 13,929 9,350
Net Assets of Discontinued Operations.................... 106,708 102,411
-------- --------
$278,788 $275,633
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts Payable....................................... $ 2,199 $ 2,867
Accrued Expenses and Other Liabilities................. 21,839 13,821
Notes Payable.......................................... 48,332 65,171
Subordinated Notes Payable............................. 25,000 12,000
-------- --------
Total Liabilities................................... 97,370 93,859
-------- --------
Stockholders' Equity:
Preferred Stock........................................ -- --
Common Stock........................................... 19 19
Additional Paid-in Capital............................. 173,266 172,603
Retained Earnings...................................... 8,133 9,152
-------- --------
Total Stockholders' Equity.......................... 181,418 181,774
-------- --------
$278,788 $275,633
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales of Used Cars ................................ $ 73,620 $ 33,530 $ 216,111 $ 79,543
Less:
Cost of Used Cars Sold .......................... 42,763 20,012 123,976 45,902
Provision for Credit Losses ..................... 15,746 6,084 45,053 14,193
--------- --------- --------- ---------
15,111 7,434 47,082 19,448
--------- --------- --------- ---------
Interest Income ................................... 4,592 3,820 12,031 8,511
Gain on Sale of Finance Receivables ............... 3,820 2,012 12,093 6,155
Servicing Income .................................. 3,973 2,465 11,834 5,114
Other Income ...................................... 112 1,017 404 1,964
--------- --------- --------- ---------
12,497 9,314 36,362 21,744
--------- --------- --------- ---------
Income before Operating Expenses .................. 27,608 16,748 83,444 41,192
Operating Expenses:
Selling and Marketing ........................... 5,242 2,891 15,462 6,663
General and Administrative ...................... 16,889 10,395 48,412 24,469
Depreciation and Amortization ................... 1,207 862 3,534 2,128
--------- --------- --------- ---------
23,338 14,148 67,408 33,260
--------- --------- --------- ---------
Operating Income .................................. 4,270 2,600 16,036 7,932
Interest Expense .................................. 531 190 1,687 630
--------- --------- --------- ---------
Earnings before Income Taxes ...................... 3,739 2,410 14,349 7,302
Income Taxes ...................................... 1,503 979 5,777 2,966
--------- --------- --------- ---------
Earnings from Continuing Operations ............... 2,236 1,431 8,572 4,336
Discontinued Operations:
Earnings (Loss) from Operations of Discontinued
Operations, net of income taxes
(Benefit) of $(432), $(2,117), $(680) and
$1,052, respectively ............................ (677) (3,259) (1,104) 1,409
Loss on Disposal of Discontinued Operations, net
of income tax benefit of $2,340, and $5,364 ..... (3,660) -- (8,487) --
--------- --------- --------- ---------
Net Earnings (Loss) ............................... $ (2,101) $ (1,828) $ (1,019) $ 5,745
========= ========= ========= =========
Earnings per Common Share from
Continuing Operations:
Basic ........................................... $ 0.12 $ .08 $ 0.46 $ 0.25
========= ========= ========= =========
Diluted ......................................... $ 0.12 $ .08 $ 0.46 $ 0.24
========= ========= ========= =========
Net Earnings (Loss) per Common Share:
Basic ........................................... $ (0.11) $ (0.10) $ (0.05) $ 0.33
========= ========= ========= =========
Diluted ......................................... $ (0.11) $ (0.10) $ (0.05) $ 0.32
========= ========= ========= =========
Shares Used in Computation
Basic ........................................... 18,560 18,460 18,600 17,620
========= ========= ========= =========
Diluted ......................................... 18,800 19,000 18,800 18,200
========= ========= ========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss) ........................................... $ (1,019) $ 5,745
Adjustments to Reconcile Net Earnings (Loss) to Net Cash
Provided by (Used) in Operating Activities:
Earnings (Loss) from Discontinued Operations .................. (9,591) 1,409
Provision for Credit Losses ................................... 45,053 14,193
Gain on Sale of Finance Receivables ........................... (12,093) (6,155)
Decrease (Increase) in Deferred Income Taxes .................. (675) 1,200
Depreciation and Amortization ................................. 3,534 2,128
Origination of Finance Receivables ............................ (207,643) (124,890)
Proceeds from Sale of Finance Receivables ..................... 159,498 120,145
Collections of Finance Receivables ............................ 16,713 23,020
Increase in Inventory ......................................... (3,812) (7,687)
Increase in Other Assets ...................................... (2,595) (3,448)
Increase in Accounts Payable, Accrued Expenses, and Other
Liabilities ................................................ 7,483 9,089
Increase in Income Taxes Receivable/Payable ................... (1,522) (3,445)
--------- ---------
Net Cash Provided by (Used in) Operating Activities ........ (6,669) 31,304
--------- ---------
Cash Flows Provided by (Used in) Investing Activities:
Increase in Investments Held in Trust ......................... (8,438) (7,258)
Net (Increase) Decrease in Notes Receivable ................... 78 (1,629)
Purchase of Property and Equipment ............................ (17,090) (14,073)
Proceeds from disposal of Property and Equipment .............. 27,413 --
Payment for Acquisition of Assets ............................. -- (35,566)
--------- ---------
Net Cash Provided by (Used in) Investing Activities ........ 1,963 (58,526)
--------- ---------
Cash Flows from Financing Activities:
Issuance of Notes Payable ..................................... 30,000 --
Repayment of Notes Payable .................................... (46,839) (34,508)
Issuance (Repayment) of Subordinated Notes Payable, Net ....... 13,000 (2,000)
Proceeds from Issuance of Common Stock ........................ 303 88,662
Acquisition of Treasury Stock ................................. (535) --
Other, Net .................................................... -- 57
--------- ---------
Net Cash Provided by (Used in) Financing Activities ........ (4,071) 52,211
--------- ---------
Cash Provided by (Used in) Discontinued Operations .............. 6,195 (39,043)
--------- ---------
Net Decrease in Cash and Cash Equivalents ....................... (2,582) (14,054)
Cash and Cash Equivalents at Beginning of Period ................ 3,537 18,455
--------- ---------
Cash and Cash Equivalents at End of Period ...................... $ 955 $ 4,401
========= =========
Supplemental Statement of Cash Flows Information:
Interest Paid ................................................. $ 7,697 $ 2,816
========= =========
Income Taxes Paid ............................................. $ 1,558 $ 15
========= =========
Assumption of Debt in Connection with Acquisition of Assets ... $ -- $ 29,900
========= =========
Purchase of Property and Equipment with Capital Leases ........ $ -- $ 211
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Ugly Duckling Corporation ("Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
pursuant to rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for a complete financial statement
presentation. In the opinion of management, such unaudited interim information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary to present the Company's financial position and results of operations
for the periods presented. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full fiscal year. The
Condensed Consolidated Balance Sheet as of December 31, 1997 was derived from
audited consolidated financial statements as of that date but does not include
all the information and footnotes required by generally accepted accounting
principles. It is suggested that these condensed consolidated financial
statements be read in conjunction with the Company's audited consolidated
financial statements included in the Company's Annual Report on Form 10-K, for
the year ended December 31, 1997.
NOTE 2. DISCONTINUED OPERATIONS
In February 1998, the Company announced its intention to close its branch
office network (the "Branch Offices") through which the Company purchased retail
installment contracts, and exit this line of business in the first quarter of
1998. The closure was substantially complete as of March 31, 1998. The Company
is continuing to negotiate lease settlements and terminations with respect to
its Branch Office network closure and to service the associated loan portfolio.
Further, in April 1998, the Company announced that its Board of Directors had
directed management to proceed with separating current dealership operations
from the bulk purchasing and third party loan servicing operations and the
collateralized dealer finance program, which provides qualified independent used
car dealers ("Third Party Dealers") with warehouse purchase facilities and
operating credit lines primarily secured by the dealers' retail installment
contract portfolio ("Cygnet Dealer Program"). The Company's continuing
operations are focusing exclusively on the retail sale of used cars through its
chain of dealerships, as well as the collection and servicing of the resulting
loans. The continuing operations include the Company's dealerships, loan
servicing operations of the related loans, the Securitization Program (defined
below in this Form 10-Q under Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Continuing Company Businesses -
Results of Operations - Gain on Sale of Finance Receivables) and the previously
effected dealership securitization transactions, the Company's existing
insurance operations related to the dealership operations, and its rent-a-car
franchise business (which is generally inactive) (the "Continuing Operations").
In June 1998 the Company formed a new wholly owned subsidiary, Cygnet Financial
Corporation ("Cygnet"), to effectuate a split-up (the "Split-up") and operate
the non-dealership activities, which include the Cygnet Dealer Program and the
bulk purchasing and third party loan servicing operations. As a result of these
two announcements, the Company has retroactively restated the accompanying
condensed consolidated balance sheets and condensed consolidated statements of
operations to reflect the Company's discontinued operations in accordance with
Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events Transactions." A
proposal to effect the Split-up through a rights offering (the "Rights
Offering") was approved by the stockholders at the annual stockholder's meeting
held in August 1998. The Company subsequently issued rights to its stockholders
that granted each holder the opportunity to purchase one (1) share of Cygnet
common stock, at a subscription rate of $7.00 per share, for every four (4)
shares of Company Common Stock held (the "Rights"). Due to a lack of shareholder
participation, however, the Rights Offering was canceled in September 1998.
Management of the Company is continuing to explore alternatives with regard to
separating the operations of Cygnet.
Included within the Company's discontinued operations (the "Discontinued
Operations") is the Cygnet Dealer Program, the bulk purchase and/or servicing of
contracts originated by other sub-prime lenders, and the Branch Offices that the
Company closed in February 1998. The assets and liabilities related to the
Branch Offices, which include Finance Receivables and Residuals in Finance
Receivables Sold, will remain with the Company without regard to the separation
of Cygnet's operations from the Company.
6
<PAGE> 7
The components of Net Assets of Discontinued Operations as of September 30, 1998
and December 31, 1997 follow (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Branch Office Finance Receivables, net .............. $ 33,884 $ 26,780
Branch Office Residuals in Finance
Receivables Sold .................................. 9,581 16,099
Investments Held in Trust ........................... 4,640 7,277
Notes Receivable and Other Assets -- FMAC ........... 19,105 25,686
Cygnet Dealer Finance Portfolio ..................... 37,629 19,438
Furniture and Equipment -- Cygnet ................... 3,205 2,070
Capitalized Start-up Costs .......................... -- 2,453
Other Assets, net of Accounts Payable and
Accrued Liabilities ............................... (1,336) 2,608
--------- ---------
$ 106,708 $ 102,411
========= =========
</TABLE>
Following is a summary of the operating results of the Discontinued
Operations for the periods ended September 30, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
BRANCH BRANCH
CYGNET OFFICES TOTAL CYGNET OFFICES TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 11,948 $ -- $ 11,948 $ 3,338 $ (584) $ 2,754
Expenses ........................ 13,057 6,000 19,057 2,705 5,425 8,130
-------- -------- -------- -------- -------- --------
Earnings (Loss) before
Income Taxes .................. (1,109) (6,000) (7,109) 633 (6,009) (5,376)
Income (Taxes) Benefit .......... 432 2,340 2,772 (251) 2,368 2,117
-------- -------- -------- -------- -------- --------
Earnings (Loss) from Discontinued
Operations .................... $ (677) $ (3,660) $ (4,337) $ 382 $ (3,641) $ (3,259)
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
BRANCH BRANCH
CYGNET OFFICES TOTAL CYGNET OFFICES TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues ........................ $ 24,499 $ 3,137 $ 27,636 $ 3,475 $ 16,814 $ 20,289
Expenses ........................ 25,004 18,267 43,271 4,030 13,798 17,828
-------- -------- -------- -------- -------- --------
Earnings (Loss) before
Income Taxes .................. (505) (15,130) (15,635) (555) 3,016 2,461
Income (Taxes) Benefit .......... 189 5,855 6,044 232 (1,284) (1,052)
-------- -------- -------- -------- -------- --------
Earnings (Loss) from Discontinued
Operations .................... $ (316) $ (9,275) $ (9,591) $ (323) $ 1,732 $ 1,409
======== ======== ======== ======== ======== ========
</TABLE>
The Loss from Discontinued Operations, net of income taxes, totaled $4.3 million
for the three months ended September 30, 1998. The loss incurred during the
three months ended September 30, 1998 included a $3.7 million charge, net of
income taxes, attributable to higher-than-estimated loan losses and portfolio
collection expenses associated with the Branch Office's that were closed in the
first quarter of 1998. The loss from the Company's Cygnet Dealer Program and
bulk purchasing and loan servicing operations totaled $677,000 for the three
months ended September, 30, 1998, which included a charge totaling approximately
$1.2 million, net of income taxes, incurred for Cygnet's terminated Rights
Offering.
7
<PAGE> 8
NOTE 3. SUMMARY OF FINANCE RECEIVABLES PRINCIPAL BALANCES, NET
Following is a summary of Finance Receivables Principal Balances, Net, as of
September 30, 1998 and December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
<S> <C> <C>
Installment Sales Contract Principal
Balances ....................................... $30,089 $55,965
Add: Accrued Interest ............................ 372 461
Loan Origination Costs ......................... 636 1,431
------- -------
Principal Balances, net .......................... 31,097 57,857
Residuals in Finance Receivables Sold ............ 35,159 13,277
------- -------
66,256 71,134
Less Allowance for Credit Losses ................. (5,572) (10,356)
------- -------
Finance Receivables, net ......................... $60,684 $60,778
======= =======
The Finance Receivables are classified as
follows:
Finance Receivables Held for Sale ................ $28,000 $52,000
Finance Receivables Held for Investment .......... 3,097 5,857
------- -------
$31,097 $57,857
======= =======
</TABLE>
As of September 30, 1998 and December 31, 1997, the Residuals in Finance
Receivables Sold were comprised of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Retained interest in subordinated securities (B
Certificates) ........................................ $ 63,353 $ 25,483
Net interest spreads, less present value discount ...... 31,793 10,622
Reduction for estimated discounted credit losses ....... (59,987) (22,828)
--------- ---------
Residuals in Finance Receivables sold .................. $ 35,159 $ 13,277
========= =========
Securitized principal balances outstanding ............. $ 246,734 $ 127,356
========= =========
Estimated discounted credit losses as a % of securitized
principal balances outstanding ....................... 24.3% 17.9%
========= =========
</TABLE>
The following table reflects a summary of activity for the Residuals in
Finance Receivables Sold for the periods ended September 30, 1998 and 1997,
respectively (in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance, Beginning of Period ... $28,417 $12,551 $ 13,277 $ 8,512
Additions ...................... 11,182 11,541 35,435 17,734
Amortization ................... (4,440) (2,370) (13,553) (4,524)
Write Down ..................... -- (5,700) -- (5,700)
------- ------- -------- -------
Balance, End of Period ......... $35,159 $16,022 $ 35,159 $16,022
======= ======= ======== =======
</TABLE>
NOTE 4. NOTES PAYABLE
Following is a summary of Notes Payable as of September 30, 1998 and
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------- -------
<S> <C> <C>
Revolving Facility with GE Capital ............. $44,852 $56,950
Mortgage loan with finance company ............. 3,386 7,450
Others ......................................... 94 771
------- -------
$48,332 $65,171
======= =======
</TABLE>
NOTE 5. COMMON STOCK EQUIVALENTS
8
<PAGE> 9
Net Earnings (Loss) per common share amounts are based on the weighted
average number of common shares and Common Stock equivalents outstanding for the
periods ended September 30, 1998 and 1997 as follows (in thousands, except for
per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings from Continuing Operations ..... $ 2,236 $ 1,431 $ 8,572 $ 4,336
======= ======= ======= =======
Net Earnings (Loss) ..................... $(2,101) $(1,828) $(1,019) $ 5,745
======= ======= ======= =======
Basic EPS-Weighted Average Shares
Outstanding ........................... 18,560 18,460 18,600 17,620
======= ======= ======= =======
Basic Earnings Per Share from:
Continuing Operations ................. $ 0.12 $ 0.08 $ 0.46 $ 0.25
======= ======= ======= =======
Net Earnings (Loss) ................... $ (0.11) $ (0.10) $ (0.05) $ 0.33
======= ======= ======= =======
Basic EPS-Weighted Average Shares
Outstanding ........................... 18,560 18,460 18,600 17,620
Effect of Diluted Securities:
Warrants .............................. 29 414 25 66
Stock Options ......................... 211 126 175 514
------- ------- ------- -------
Dilutive EPS-Weighted Average Shares
Outstanding ........................... 18,800 19,000 18,800 18,200
======= ======= ======= =======
Diluted Earnings (Loss) Per Share from:
Continuing Operations ................. $ 0.12 $ 0.08 $ 0.46 $ 0.24
======= ======= ======= =======
Net Earnings (Loss) ................... $ (0.11) $ (0.10) $ (0.05) $ 0.32
======= ======= ======= =======
Warrants Not Included in Diluted EPS
Since Antidilutive .................... 1,439 -- 1,439 --
======= ======= ======= =======
Stock Options Not Included in Diluted EPS
Since Antidilutive .................... 1,562 503 716 405
======= ======= ======= =======
</TABLE>
NOTE 6. BUSINESS SEGMENTS
The Company has three distinct business segments. These consist of retail
car sales operations ("Company Dealerships"), operations attributable to the
administration and collection of Finance Receivables generated at the Company
Dealerships ("Company Dealership Receivables"), and corporate and other
operations. These segments exclude the activities of the Discontinued
Operations.
A summary of operating activity by business segment for the periods ended
September 30, 1998 and 1997, respectively, follows:
<TABLE>
<CAPTION>
COMPANY
COMPANY DEALERSHIP CORPORATE
DEALERSHIPS RECEIVABLES AND OTHER TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months ended September 30, 1998:
Sales of Used Cars ................... $ 73,620 $ -- $ -- $ 73,620
Less: Cost of Cars Sold .............. 42,763 -- -- 42,763
Provision for Credit Losses ........ 15,709 37 -- 15,746
--------- --------- --------- ---------
15,148 (37) -- 15,111
Interest Income ...................... -- 4,537 55 4,592
Gain on Sale of Finance Receivables .. -- 3,820 -- 3,820
Servicing Income ..................... -- 3,973 -- 3,973
Other Income (Expense) ............... 70 (1) 43 112
--------- --------- --------- ---------
Income before Operating Expenses ..... 15,218 12,292 98 27,608
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 5,242 -- -- 5,242
General and Administrative ......... 8,175 4,380 4,334 16,889
Depreciation and Amortization ...... 628 323 256 1,207
--------- --------- --------- ---------
14,045 4,703 4,590 23,338
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ............................ $ 1,173 $ 7,589 $ (4,492) $ 4,270
========= ========= ========= =========
Three months ended September 30, 1997:
Sales of Used Cars ................... $ 33,530 $ -- $ -- $ 33,530
Less: Cost of Cars Sold .............. 20,012 -- -- 20,012
Provision for Credit Losses ........ 6,084 -- -- 6,084
--------- --------- --------- ---------
7,434 -- -- 7,434
Interest Income ...................... -- 3,820 -- 3,820
Gain on Sale of Finance Receivables .. -- 2,012 -- 2,012
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
COMPANY
COMPANY DEALERSHIP CORPORATE
DEALERSHIPS RECEIVABLES AND OTHER TOTAL
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Servicing Income ..................... -- 2,465 -- 2,465
Other Income ......................... 552 -- 465 1,017
--------- --------- --------- ---------
Income before Operating Expenses ..... 7,986 8,297 465 16,748
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 2,891 -- -- 2,891
General and Administrative ......... 4,542 3,369 2,484 10,395
Depreciation and Amortization ...... 426 318 118 862
--------- --------- --------- ---------
7,859 3,687 2,602 14,148
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ........................... $ 127 $ 4,610 $ (2,137) $ 2,600
========= ========= ========= =========
Nine Months ended September 30, 1998:
Sales of Used Cars ................... $ 216,111 $ -- $ -- $ 216,111
Less: Cost of Cars Sold .............. 123,976 -- -- 123,976
Provision for Credit Losses ........ 45,006 47 -- 45,053
--------- --------- --------- ---------
47,129 (47) -- 47,082
Interest Income ...................... -- 11,860 171 12,031
Gain on Sale of Finance Receivables .. -- 12,093 -- 12,093
Servicing Income ..................... -- 11,834 -- 11,834
Other Income (Expense) ............... 270 (9) 143 404
--------- --------- --------- ---------
Income before Operating Expenses ..... 47,399 35,731 314 83,444
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 15,462 -- -- 15,462
General and Administrative ......... 24,847 12,914 10,651 48,412
Depreciation and Amortization ...... 1,856 972 706 3,534
--------- --------- --------- ---------
42,165 13,886 11,357 67,408
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ............................ $ 5,234 $ 21,845 $ (11,043) $ 16,036
========= ========= ========= =========
Nine Months ended September 30, 1997:
Sales of Used Cars ................... $ 79,543 $ -- $ -- $ 79,543
Less: Cost of Cars Sold .............. 45,902 -- -- 45,902
Provision for Credit Losses ........ 14,193 -- -- 14,193
--------- --------- --------- ---------
19,448 -- -- 19,448
Interest Income ...................... -- 8,511 -- 8,511
Gain on Sale of Finance Receivables .. -- 6,155 -- 6,155
Servicing Income ..................... -- 5,114 -- 5,114
Other Income ......................... 1,155 83 726 1,964
--------- --------- --------- ---------
Income before Operating Expenses ..... 20,603 19,863 726 41,192
--------- --------- --------- ---------
Operating Expenses:
Selling and Marketing .............. 6,656 -- 7 6,663
General and Administrative ......... 10,824 7,840 5,805 24,469
Depreciation and Amortization ...... 984 785 359 2,128
--------- --------- --------- ---------
18,464 8,625 6,171 33,260
--------- --------- --------- ---------
Earnings (Loss) before Interest
Expense ............................ $ 2,139 $ 11,238 $ (5,445) $ 7,932
========= ========= ========= =========
</TABLE>
NOTE 7. USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ materially from those
estimates.
NOTE 8. BANKRUPTCY REMOTE ENTITIES
Ugly Duckling Receivables Corporation ("UDRC") and Ugly Duckling Receivables
Corporation II ("UDRC II"), formerly known as Champion Receivables Corporation
("CRC") and Champion Receivables Corporation II ("CRC II"), respectively,
(collectively referred to as "Securitization Subsidiaries"), are the Company's
wholly-owned special purpose "bankruptcy remote" entities. Their assets,
including assets in Discontinued Operations, are comprised of Residuals in
Finance Receivables Sold and Investments Held In Trust, in the amounts of
approximately $44.7 million and $23.4 million, respectively, at September 30,
1998, which amounts would not be available to satisfy claims of creditors of the
Company on a consolidated basis.
NOTE 9. RECLASSIFICATIONS
Certain reclassifications have been made to previously reported information
to conform to the current presentation.
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NOTE 10. SUBSEQUENT EVENT
Subsequent to September 30, 1998, the Company completed a debt for Common
Stock exchange in which the Company acquired approximately 2,463,600 shares of
Common Stock in exchange for debentures with a face value of $6.50 per share of
stock exchanged. The debentures' aggregate principal amount is approximately
$16,013,400 and bear interest at 12% per annum, payable semi-annually with the
entire principal balance due at the end of the five-year term (October 23,
2003). The debentures are subordinate to all other Company indebtedness and
contain certain call provisions at the option of the Company. See "Management's
Discussion of Results of Operations and Financial Condition of the Continuing
Company Businesses - Liquidity and Capital Resources - Exchange Offer".
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF THE CONTINUING COMPANY BUSINESSES
This Quarterly Report on Form 10-Q contains forward looking statements.
Additional written or oral forward looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. Such forward looking statements are within the meaning of that term
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements may include, but
not be limited to, projections of revenues, income, or loss, capital
expenditures, plans for future operations, including plans for a possible
separation of the Company's non-dealership operations, financing needs or plans,
and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. The words "believe," "expect," "intend,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements, which speak only as of the date the statement was made.
Forward looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward looking statements. The Company undertakes no obligation
to publicly update or revise any forward looking statements, whether as a result
of new information, future events, or otherwise. Statements in this Quarterly
Report, including the Notes to the Condensed Consolidated Financial Statements
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition of the Continuing Company Businesses," describe factors, among others,
that could contribute to or cause such differences. Additional risk factors that
could cause actual results to differ materially from those expressed in such
forward looking statements are set forth in Exhibit 99 which is attached hereto
and incorporated by reference into this Quarterly Report on Form 10-Q.
INTRODUCTION
General. Ugly Duckling Corporation ("Company") operates a chain of "buy
here-pay here" used car dealerships in the United States and underwrites,
finances, and services retail installment contracts generated from the sale of
used cars by its dealerships ("Company Dealerships") and by third party used car
dealers ("Third Party Dealers") located in selected markets throughout the
country. As part of its financing activities, the Company has initiated a
collateralized dealer financing program ("Cygnet Dealer Program") pursuant to
which it provides qualified independent used car dealers with warehouse
facilities and operating lines of credit secured by the dealers' retail
installment contract portfolios and inventory. The Company targets its products
and services to the sub-prime segment of the automobile financing industry,
which focuses on selling and financing the sale of used cars to persons who have
limited credit histories, low incomes, or past credit problems.
The Company commenced its used car sales and finance operations with the
acquisition of two Company Dealerships in 1992. During 1993, the Company
acquired three additional Company Dealerships. In 1994, the Company constructed
and opened four new Company Dealerships that were built specifically to meet the
Company's new standards of appearance, reconditioning capabilities, size, and
location. During 1994, the Company closed one Company Dealership because the
facility failed to satisfy these new standards and, at the end of 1995, closed
its Gilbert, Arizona dealership. In January 1997, the Company acquired selected
assets of a group of companies engaged in the business of selling and financing
used motor vehicles, including four dealerships located in the Tampa Bay/St.
Petersburg market ("Seminole"). In March 1997, the Company opened its first used
car dealership in the Las Vegas market. In April 1997, the Company acquired
selected assets of a company in the business of selling and financing used motor
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vehicles, including seven dealerships located in the San Antonio market ("EZ
Plan"). In addition, the Company opened two additional dealerships in the
Albuquerque market and one additional dealership in the Phoenix market during
the second quarter of 1997. In August 1997, the Company closed a dealership in
Prescott, Arizona. In September 1997, the Company acquired selected assets of a
company in the business of selling used motor vehicles, including six
dealerships in the Los Angeles market, two in the Miami market, two in the
Atlanta market and two in the Dallas market ("Kars"). Although the Company did
not acquire the loan portfolio of Kars, it did acquire Kars' loan servicing
assets and began servicing Kars retained portfolio and portfolios previously
securitized by Kars. During the first quarter of 1998, the Company opened one
dealership in the Phoenix, Tampa and Dallas markets, respectively. The Company
opened one dealership in the Phoenix, Tampa, Dallas, San Antonio, and Atlanta
markets, respectively, and closed both of its dealerships in the Miami, Florida
market during the second quarter of 1998. During the third quarter of 1998, the
Company opened one Company dealership in the Atlanta market and operated 51 and
35 dealerships at September 30, 1998 and 1997, respectively.
In 1994, the Company acquired Champion Financial Services, Inc., an
independent automobile finance company. In April 1995, the Company initiated an
aggressive plan to expand the number of contracts purchased from its Third Party
Dealer Branch Office network (the "Branch Offices"). The Company operated 83
Branch Offices at December 31, 1997 In February 1998, the Company announced its
intention to close its Branch Office network, and exit this line of business in
the first quarter of 1998. The Company recorded a pre-tax charge to Discontinued
Operations totaling approximately $9.1 million (approximately $5.6 million, net
of income taxes) during the first quarter of 1998. In addition, a $6 million
charge ($3.6 million net of income taxes) was taken during the third quarter of
1998 due to primarily higher than anticipated loan losses and servicing
expenses. The restructuring was substantially complete by the end of the first
quarter of 1998 and included the termination of approximately 450 employees,
substantially all of whom were employed at the Company's Branch Offices that
were in place on the date of the announcement. The Company is continuing to: (1)
negotiate lease settlements, sublease arrangements, and terminations with
respect to its Branch Office network closure; and (2) service the Branch Office
loan portfolio.
SPLIT-UP OF THE COMPANY
In the third quarter of 1997, the Company announced a strategic evaluation
of its third party dealer operations, including the possible sale or spin-off of
these operations. In February 1998, the Company announced its intention to close
its Branch Offices, and to focus instead on its Cygnet Dealer Program, which
offers warehouse purchase facilities and lines of credit to selected independent
used car dealers, and the bulk purchase and/or servicing of large contract
portfolios. The Company further announced that it was continuing to evaluate
alternatives for these remaining third party dealer operations. On April 28,
1998, the Company announced that its Board of Directors had directed management
to proceed with separating current operations into two companies and
subsequently formed a new wholly owned subsidiary, Cygnet Financial Corporation
("Cygnet"), which would operate the Cygnet Dealer Program and the bulk purchase
and third party loan servicing operations. A proposal to Split-up the two
companies through a rights offering (the "Rights Offering") was approved by the
stockholders at the annual stockholder's meeting held in August 1998. The
Company subsequently issued rights to its stockholders of record on August 17,
1998 that allowed the holder to purchase one (1) share of Cygnet common stock,
at a subscription rate of $7.00 per share, for every four (4) shares of Company
Common Stock held by him (the "Rights"). Due to a lack of stockholder
participation, however, Cygnet would not have met the NASDAQ stock exchange
listing requirements and the Rights Offering was, therefore, canceled.
Management of the Company is continuing to explore alternatives with regard to
separating the operations of Cygnet from the Company. Unless otherwise noted,
the following discussion relates to Continuing Operations only.
FINANCIAL POSITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
Company's consolidated financial position as of September 30, 1998 and December
31, 1997, and its results of operations for the three month periods ended
September 30, 1998 and 1997, respectively, and the nine month periods ended
September 30, 1998 and 1997, respectively.
FINANCIAL POSITION
Growth in Finance Receivables. Contract receivables serviced increased by
51.0% to $276.8 million on September 30, 1998 (including $246.7 million in
contracts serviced under the Company's Securitization Program) from $183.3
million at December 31, 1997 (including $127.4 million in contracts serviced
under the Company's Securitization Program).
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The following tables reflect the growth in period end balances measured in
terms of the principal amount and the number of contracts arising from
Continuing Operations.
13
<PAGE> 14
TOTAL CONTRACTS OUTSTANDING:
(PRINCIPAL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- --------------------
PRINCIPAL NO. OF PRINCIPAL NO. OF
AMOUNT CONTRACTS AMOUNT CONTRACTS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Principal Amount ...................... $276,823 41,456 $183,321 35,762
Less: Portfolios Securitized and Sold.. 246,734 37,431 127,356 27,769
-------- -------- -------- --------
Company Total ......................... $ 30,089 4,025 $ 55,965 7,993
======== ======== ======== ========
</TABLE>
In addition to the loan portfolio summarized above, the Company also
services loan portfolios totaling approximately $154.9 million ($61.1 million
for Kars and $93.8 million from Branch Office originations) as of September 30,
1998 and $267.9 million ($127.3 million for Kars and $140.6 million from Branch
Office originations) as of December 31, 1997.
TOTAL CONTRACTS ORIGINATED/PURCHASED:
(PRINCIPAL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Principal Amount ........... $ 71,027 $ 32,147 $207,643 $131,526
Number of Contracts ........ 9,058 4,389 26,915 22,246
Average Principal .......... $ 7,841 $ 7,324 $ 7,715 $ 5,912
</TABLE>
Finance Receivable Principal Balances originated/purchased during the three
months ended September 30, 1998 increased by 120.9% to $71.0 million from $32.1
million in the three month period ended September 30, 1997. For the nine month
period ended September 30, 1998, Finance Receivable Principal Balances
originated/purchased increased by 57.9% to $207.6 million from $131.5 million in
the nine month period ended September 30, 1997. During the nine month period
ended September 30, 1997, Finance Receivable Principal Balances
originated/purchased included the purchase of approximately $55.4 million
(13,250 contracts) in Finance Receivables in conjunction with the Seminole and
EZ Plan acquisitions.
RESULTS OF OPERATIONS
For Three Months Ended September 30, 1998 Compared To Three Months Ended
September 30, 1997
The prices at which the Company sells its cars and the interest rates that
it charges to finance these sales take into consideration that the Company's
primary customers are high-risk borrowers, many of whom ultimately default. The
Provision for Credit Losses reflects these factors and is treated by the Company
as a cost of both the future interest income derived on the contract receivables
originated at Company Dealerships as well as a cost of the sale of the cars
themselves. Accordingly, unlike traditional car dealerships, the Company does
not present gross profits in its Statements of Operations calculated as Sales of
Used Cars less Cost of Used Cars Sold.
Sales of Used Cars. Sales of Used Cars increased by 119.6% to $73.6 million
for the three month period ended September 30, 1998 from $33.5 million for the
three month period ended September 30, 1997. This growth reflects a significant
increase in the number of used car dealerships in operation from 35 dealerships
in operation at September 30, 1997 compared to 51 dealerships in operation at
September 30, 1998. Units sold increased by 101.8% to 9,128 units in the three
month period ended September 30, 1998 from 4,523 units in the three month period
ended September 30, 1997. Same store sales increased by 5.6% in the three month
period ended September 30, 1998 compared to the three month period ended
September 30, 1997. Management expects same store sales to remain relatively
stable in future periods.
The average sales price per car increased 8.8% to $8,065 for the three month
period ended September 30, 1998 from $7,413 for the three month period ended
September 30, 1997. The increase in the average sales price per unit was
primarily the result of the Company charging a higher sales price to compensate
for higher vehicle inventory costs, and management's efforts to increase the
gross margin realized on a per unit basis.
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<PAGE> 15
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 113.7% to $42.8 million for the three month period ended September
30, 1998 from $20.0 million for the three month period ended September 30, 1997.
On a per unit basis, the Cost of Used Cars Sold increased by 5.9% to $4,685 for
the three month period ended September 30, 1998 from $4,424 for the three month
period ended September 30, 1997. The gross margin on used car sales (Sales of
Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
increased by 128.3% to $30.9 million for the three month period ended September
30, 1998 from $13.5 million for the three month period ended September 30, 1997.
As a percentage of sales, the gross margin was 41.9% and 40.3% for the three
month periods ended September 30, 1998 and 1997, respectively. On a per unit
basis, the gross margin per car sold was $3,380 and $2,988 for the three month
periods ended September 30, 1998 and 1997, respectively. The increase in the
average cost per unit is primarily the result of an increase in the Company's
purchase price for vehicles compared to the prior comparable period.
Provision for Credit Losses. A high percentage of Company Dealership
customers ultimately do not make all of their contractually scheduled payments,
requiring the Company to charge off the remaining principal balance due. As a
result, the Company recognizes a Provision for Credit Losses in order to
establish an Allowance for Credit Losses sufficient to absorb anticipated future
losses. The Provision for Credit Losses increased by 158.8% to $15.7 million in
the three month period ended September 30, 1998 from $6.1 million for the three
month period ended September 30, 1997. The Provision for Credit Losses per unit
originated at Company Dealerships increased by 25.4% to $1,738 per unit in the
three month period ended September 30, 1998 from $1,386 per unit in the three
month period ended September 30, 1997. As a percentage of contract balances
originated, the Provision for Credit Losses averaged 22.2% and 18.9%, for the
three month periods ended September 30, 1998 and 1997, respectively. The
increase in the provision for credit losses results primarily from the Company
charging a higher provision for credit losses on cars sold and financed in
states that impose interest rate limitations to compensate for the lower
interest rate earned on those loans.
The Company charges its Provision for Credit Losses to current operations
and does not recognize any portion of the unearned interest income as a
component of its Allowance for Credit Losses. Accordingly, the Company's
unearned finance income is comprised of the full annual percentage rate ("APR")
on its contracts less amortization of loan origination costs.
Interest Income. Interest Income consists primarily of interest on Finance
Receivables from Company Dealership sales and income from Residuals in Finance
Receivables Sold. Interest Income increased by 20.2% to $4.6 million for the
three month period ended September 30, 1998 from $3.8 million for the three
month period ended September 30, 1997. Interest Income was reduced by the sale
of Finance Receivables with remaining principal balances of $246.7 million and
$155.4 million as of September 30, 1998 and 1997, respectively, pursuant to the
Securitization Program, and may continue to be affected in future periods by
additional securitizations. A primary element of the Company's sales strategy is
to provide financing to customers with poor credit histories who are unable to
obtain automobile financing through traditional sources. The Company financed
96.5% of sales revenue and 99.2% of the used cars sold at Company Dealerships
for the three month period ended September 30, 1998, compared to 95.9% of sales
revenue and 97.0% of the used cars sold for the three month period ended
September 30, 1997. The average amount financed increased to $7,841 for the
three month period ended September 30, 1998 from $7,324 for the three month
period ended September 30, 1997. The increase in the average amount financed is
due primarily to an increase in the average sales price from the comparable
period in the prior year. Primarily as a result of its expansion into markets
with interest rate limits, the Company's yield on its Company Dealership
Receivable portfolio has trended downward. The effective yield on Finance
Receivables from Company Dealerships was 25.8% and 26.0%, for the three month
periods ended September 30, 1998 and 1997, respectively. The Company's policy is
to charge 29.9% per annum on its Company Dealership contracts. However, in those
states that impose usury limits, the Company charges the maximum interest rate
permitted.
Gain on Sale of Finance Receivables. Ugly Duckling Receivables Corporation
("UDRC") and Ugly Duckling Receivables Corporation II ("UDRC II"), formerly
known as Champion Receivables Corporation ("CRC") and Champion Receivables
Corporation II ("CRC II"), respectively (collectively referred to as
"Securitization Subsidiaries"), are the Company's wholly owned special purpose
"bankruptcy remote" entities. During the first quarter of 1996, the Company
initiated a securitization program under which UDRC sold securities backed by
contracts to SunAmerica Life Insurance Company ("SunAmerica"). Beginning with
the third fiscal quarter of 1997, the Company expanded the securitization
program to include UDRC II and sales of UDRC II securities through private
placement of securities to investors other than SunAmerica (the "Securitization
Program"). Under the Securitization Program, the Securitization Subsidiaries
assign and transfer the contracts to separate trusts ("Trusts") pursuant to
Pooling and Servicing Agreements (the "Pooling Agreements"). Pursuant to the
Pooling Agreements, Class A Certificates and subordinated Class B Certificates
are issued to the Securitization Subsidiaries. The Securitization Subsidiaries
then sell the Class A Certificates to the investors and retain the Class B
Certificates. The transferred contracts are serviced by Champion Acceptance
Corporation ("CAC"), another subsidiary of
15
<PAGE> 16
the Company. For the Company's securitizations that took place prior to July 1,
1997, the Company's Class A Certificates received ratings from Standard & Poors
ranging from "BBB" to "A". To obtain these ratings from Standard & Poors, UDRC
was required to provide a credit enhancement by establishing and maintaining a
cash spread account for the benefit of the certificate holders. For the
securitization transactions that were consummated after July 1, 1997, the
Company's Class A Certificates received a "AAA" rating from Standard & Poors,
and a "Aaa" rating from Moody's Investors Service. To obtain these ratings, UDRC
II (1) obtained an insurance policy from MBIA Insurance Corporation which
unconditionally and irrevocably guaranteed full and complete payment of the
Class A guaranteed distribution (as defined), and (2) provided a credit
enhancement by establishing and maintaining a cash spread account for the
benefit of the certificate holders. The Securitization Subsidiaries make an
initial cash deposit into the spread account, ranging from 3% to 4% of the
initial underlying Finance Receivables principal balance and pledge this cash to
the Trusts. The Securitization Subsidiaries are also required to then make
additional deposits to the spread account from the residual cash flow (through
the trustees) as necessary to attain and maintain the spread account at a
specified percentage, ranging from 6.0% to 8.0%, of the underlying Finance
Receivables principal balance. Distributions are not made to the Securitization
Subsidiaries on the Class B Certificates unless the spread account has the
required balance, the required periodic payments to the Class A Certificate
holders are current, and the trustee, servicer and other administrative costs
are current.
The Company recognizes a Gain on Sale of Loans equal to the difference
between the sales proceeds for the Finance Receivables sold and the Company's
recorded investment in the Finance Receivables sold. The Company's investment in
Finance Receivables consists of the principal balance of the Finance
Receivables, as well as the allowance for credit losses related thereto.
Therefore, once the Company securitizes a pool of loans, the Company reduces the
allowance for credit losses for the amount of allowance for credit losses
related to the loans securitized. The Company allocates the recorded investment
in the Finance Receivables between the portion of the Finance Receivables sold
and the portion retained based on the relative fair values on the date of sale.
To the extent that actual cash flows on a securitization are below original
estimates, and differ materially from the original securitization assumptions
and, in the opinion of management, those differences appear to be other than
temporary in nature, the Company would be required to revalue the Residuals in
Finance Receivables Sold and record a charge to earnings based upon the
reduction.
UDRC made an initial spread account deposit totaling $2.8 million during the
three months ended September 30, 1998 in conjunction with a single
securitization. Based upon securitizations in effect as of September 30, 1998,
the Company's continuing operations were required to maintain an aggregate
balance in its spread accounts of $20.0 million, a portion of which may be
funded over time. As of September 30, 1998, the Company maintained an aggregate
spread account balance of $18.8 million, which satisfied the funding requirement
for all of the securitization transactions consummated prior to the three month
period ended September 30, 1998. Accordingly, an additional $1.2 million related
to the securitization consummated during the three month period ended September
30, 1998 will need to be funded from future cash flows. The additional funding
requirements will decline as the trustee deposits additional cash flows into the
spread account and as the principal balance of the underlying Finance
Receivables declines. In addition to the spread account balance of $18.8 million
at September 30, 1998, the Company had deposited a total of $1.3 million in
trust accounts in conjunction with certain other agreements.
The Company also maintains spread accounts for the securitization
transactions that were consummated by the Company's Discontinued Operations. The
Company had satisfied its funding obligation of $4.6 million as of September 30,
1998, with respect to these securitization transactions.
During the three months ended September 30, 1998, the Company securitized an
aggregate of $69.9 million in contracts, issuing $51.0 million in Class A
securities, and $18.9 million in Class B securities (Residuals in Finance
Receivables Sold). During the three months ended September 30, 1997, the Company
securitized an aggregate of $103.8 million in contracts issuing $85.1 million in
Class A securities and $18.7 million in Class B securities. The Company recorded
the carrying value of the Residuals in Finance Receivables sold at $11.2 million
and $12.4 million, respectively, for the securitization transactions consummated
during the three months ended September 30, 1998 and 1997, respectively. The
Company recorded Gain on Sale of Loans of $3.8 million (5.5% of principal sold)
and $7.7 million (7.4% of principal sold), net of expenses related to
securitization transactions during the three months ended September 30, 1998 and
1997, respectively. The decrease in the gain on sale percentage was due to the
utilization of a higher cumulative net loss assumption for the securitization
transaction consummated during the three months ended September 30, 1998
(28.6%). The Company recorded a $5.7 million charge (approximately $3.4 million
net of income taxes) in the three month period ended September 30, 1997, which
resulted in a net Gain on Sale of Finance Receivables of $2.0 million for the
quarter ended
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September 30, 1997. The charge reduced the carrying value of the Residuals in
Finance Receivables Sold and had the effect of increasing the cumulative net
loss assumptions to approximately 27.5% for securitizations closed prior to
September 30, 1997.
During the three month period ended September 30, 1998, the Trust issued
certificates at a yield of 5.6% resulting in net spread, before net credit
losses and after servicing, insurer, and trustee fees, of 18.1%. During the
three month period ended September 30, 1997, the Trust issued certificates at a
yield of 6.3% resulting in net spread, before net credit losses and after
servicing, insurer, and trustee fees, of 15.0%.
The Company's net earnings may fluctuate from quarter to quarter in the
future as a result of the timing and size of its securitizations. The Company's
securitization transactions have historically been structured to record a gain
on sale of the Finance Receivables for accounting purposes. Management is
currently evaluating the structure of its securitization transactions and is
considering structuring future transactions to recognize the interest income
over the life of the contracts for accounting purposes. Historically, gains on
sales of Finance Receivables have been material to the Company's reported
revenues and net earnings. Altering the structure of such transactions whereby
no gain is recognized at the time of a securitization transaction, would have a
material effect on the Company's reported revenues and net earnings until such
time as the Company were to accumulate Finance Receivables on its balance sheet
sufficient to generate interest income (net of interest and other expenses)
equivalent to the revenues the Company has historically recognized on its
securitization transactions.
The Securitization Subsidiaries are the Company's wholly-owned special
purpose "bankruptcy remote" entities. Their assets, including assets included in
Discontinued Operations, include Residuals in Finance Receivables Sold and
Investments Held In Trust, in the amounts of approximately $44.7 million and
$23.4 million, respectively, at September 30, 1998, which amounts would not be
available to satisfy claims of creditors of the Company on a consolidated basis.
Servicing Income. Servicing Income for the three months ended September 30,
1998 increased 61.2% to $4.0 million from $2.5 million in the three month period
ended September 30, 1997. The Company serviced contracts totaling $433.0 million
at September 30, 1998 for monthly fees ranging from .25% to .33% of beginning of
period principal balances (3% to 4% annualized).
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 64.8% to $27.6 million for
the three month period ended September 30, 1998 from $16.7 million for the three
month period ended September 30, 1997. Growth of Sales of Used Cars, Interest
Income, Servicing Income, and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the three month periods ended September
30, 1998 and 1997, Selling and Marketing Expenses were comprised almost entirely
of advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 81.3% to $5.2 million for the three
month period ended September 30, 1998 from $2.9 million for the three month
period ended September 30, 1997. As a percentage of Sales of Used Cars, these
expenses averaged 7.1% for the three month period ended September 30, 1998 and
8.6% for the three month period ended September 30, 1997. On a per unit sold
basis, Selling and Marketing Expenses of Company Dealerships decreased to $574
per unit for the three month period ended September 30, 1998 from $639 per unit
for the three month period ended September 30, 1997. The Company incurred
significantly higher marketing costs in markets it entered in the third quarter
of 1997 in order to establish brand name recognition. The Company did not enter
any new markets in the third quarter of 1998 and, accordingly, incurred a lower
marketing cost per unit for the three months ended September 30, 1998.
General and Administrative Expenses. General and Administrative Expenses
increased by 62.5% to $16.9 million for the three month period ended September
30, 1998 from $10.4 million for the three month period ended September 30, 1997.
These expenses represented 19.6% and 24.3% of total revenues for three month
periods ended September 30, 1998 and 1997, respectively. The increase in General
and Administrative Expenses was a result of the overall growth of the Company.
The number of used car dealerships increased over the comparable prior year
period, loan servicing operations expanded to accommodate the resulting growth
in the portfolio serviced, and corporate expenses increased to support the
growth in both Company Dealership and loan servicing operations. The decrease in
General and Administrative Expenses as a percent of total revenues, however, was
due primarily to the disproportionate increase in revenues over the incremental
costs required to manage the Company as it expands.
17
<PAGE> 18
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 40.0% to $1.2 million for the three month period ended
September 30, 1998 from $862,000 for the three month period ended September 30,
1997. The increase was due primarily to the increase in amortization of goodwill
associated with the Company's 1997 acquisitions, and increased depreciation
expense from the addition of Company Dealerships.
Interest Expense. Interest expense increased by 179.5% to $531,000 in the
three month period ended September 30, 1998 from $190,000 in the three month
period ended September 30, 1997. The increase in interest expense over the prior
comparable period was due primarily to increased borrowings to support the
Company's expansion and increasing inventory. Approximately $951,000 and $1.4
million of interest expense was allocated to Discontinued Operations for the
three month periods ended September 30, 1998 and 1997, respectively.
Income Taxes. Income taxes totaled $1.5 million and $979,000 which resulted
in an effective rate of 40.2% and 40.6% in the three month periods ended
September 30, 1998 and 1997, respectively.
Loss from Discontinued Operations. Discontinued Operations consist primarily
of the Company's Cygnet Dealer Program, the Branch Office network, and the
Company's bulk purchasing and loan servicing operations.
The Loss from Discontinued Operations, net of income taxes, totaled $4.3
million for the three months ended September 30, 1998 compared to $3.3 million
for the three months ended September 30, 1997. The loss incurred during the
three months ended September 30, 1998 included a $3.7 million charge, net of
income taxes, attributable to higher-than-estimated loan losses and portfolio
collection expenses associated with the Branch Offices that were closed in the
first quarter of 1998. The loss from the Company's Cygnet Dealer Program and
bulk purchasing and loan servicing operations totaled $677,000 for the three
months ended September, 30, 1998, which included a charge totaling approximately
$1.2 million, net of income taxes, incurred for Cygnet's terminated Rights
Offering. The $3.3 million loss from Discontinued Operations for the three
months ended September 30, 1997 includes a charge of approximately $2.6 million,
net of income taxes, resulting from the write down of the Residuals in Finance
Receivables Sold from Branch Office securitization transactions.
18
<PAGE> 19
RESULTS OF OPERATIONS
For Nine Months Ended September 30, 1998 Compared To Nine Months Ended September
30, 1997
Sales of Used Cars. Sales of Used Cars increased by 171.7% to $216.1
million for the nine month period ended September 30, 1998 from $79.5 million
for the nine month period ended September 30, 1997. This growth reflected a
significant increase in the number of used cars sold as a result of the
increased number of dealerships in operation during the respective periods (51
and 35 dealerships in operation at September 30, 1998 and 1997, respectively).
Units sold increased by 151.8% to 27,198 units in the nine month period ended
September 30, 1998 from 10,801 units in the nine month period ended September
30, 1997. Same store sales increased by 2.4% in the nine month period ended
September 30, 1998 compared to the nine month period ended September 30, 1997.
Management expects same store sales to remain relatively stable in future
periods.
The average sales price per car increased 7.9% to $7,946 for the nine month
period ended September 30, 1998 from $7,364 for the nine month period ended
September 30, 1997. The increase in the average sales price per was primarily
the result of the Company charging a higher sales price to compensate for higher
vehicle inventory prices, and management's efforts to increase the gross margin
realized on a per unit basis.
Cost of Used Cars Sold and Gross Margin. The Cost of Used Cars Sold
increased by 170.1% to $124.0 million for the nine month period ended September
30, 1998 from $45.9 million for the nine month period ended September 30, 1997.
On a per unit basis, the Cost of Used Cars Sold increased by 7.3% to $4,558 for
the nine month period ended September 30, 1998 from $4,250 for the nine month
period ended September 30, 1997. The gross margin on used car sales (Sales of
Used Cars less Cost of Used Cars Sold excluding Provision for Credit Losses)
increased by 173.9% to $92.1 million for the nine month period ended September
30, 1998 from $33.6 million for the nine month period ended September 30, 1997.
As a percentage of sales, the gross margin was 42.6% and 42.3% for the nine
month periods ended September 30, 1998 and 1997, respectively. On a per unit
basis, the gross margin per car sold was $3,388 and $3,115 for the nine month
periods ended September 30, 1998 and 1997, respectively.
Provision for Credit Losses. The Provision for Credit Losses increased by
217.4% to $45.1 million in the nine month period ended September 30, 1998
compared to $14.2 million for the nine month period ended September 30, 1997.
The Provision for Credit Losses per unit originated at Company Dealerships
increased by 6.1% to $1,674 per unit in the nine month period ended September
30, 1998 compared to $1,578 per unit in the nine month period ended September
30, 1997. As a percentage of contract balances originated, the Provision for
Credit Losses averaged 21.7% and 18.6%, for the nine month periods ended
September 30, 1998 and 1997, respectively. The increase in the provision for
credit losses results primarily from the Company charging a higher provision for
credit losses on cars sold and financed in states that impose interest rate
limitations to compensate for the lower interest rate earned on those loans.
Interest Income. Interest Income increased by 41.4% to $12.0 million for the
nine month period ended September 30, 1998 from $8.5 million for the nine month
period ended September 30, 1997. Interest Income was reduced by the sale of
Finance Receivables with remaining principal balances of $246.7 million and
$155.4 million as of September 30, 1998 and 1997, respectively, pursuant to the
Securitization Program, and may continue to be affected in future periods by
additional securitizations. The Company financed 96.1% of sales revenue and
99.0% of the used cars sold at Company Dealerships for the nine month period
ended September 30, 1998, compared to 95.7% of sales revenue and 94.5% of the
used cars sold for the nine month period ended September 30, 1997. The average
amount financed increased to $7,715 for the nine month period ended September
30, 1998 from $7,457 for the nine month period ended September 30, 1997. The
increase in the average amount financed was primarily due to an increase in the
average sales price from the comparable period in the prior year. Primarily as a
result of its expansion into markets with interest rate limits, the Company's
yield on its Company Dealership Receivable portfolio has trended downward. The
effective yield on Finance Receivables from Company Dealerships was 25.2% and
27.7%, for the nine month periods ended September 30, 1998 and 1997,
respectively. The Company's policy is to charge 29.9% per annum on its Company
Dealership contracts. However, in those states that impose usury limits, the
Company charges the maximum interest rate permitted.
Gain on Sale of Finance Receivables. During the nine months ended September
30, 1998, the Company securitized an aggregate of $222.8 million in contracts,
issuing $161.1 million in Class A securities, and $61.7 million in Class B
securities (Residuals in Finance Receivables Sold). During the nine months ended
September 30, 1997, the Company securitized an aggregate of $151.7 million in
contracts issuing $121.4 million in Class A securities and $30.3 million in
Class B securities. The Company recorded the carrying value of the Residuals in
Finance Receivables sold at $36.5 million and $20.1 million in the nine months
ended September
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<PAGE> 20
30, 1998 and 1997, respectively. The Company recorded Gain on Sale of Loans of
$12.1 million (5.4% of principal sold) and $11.9 million (8.6% of principal
sold), before considering the $5.7 million write down of the Residuals in
Finance Receivables Sold taken in the nine months ended September 30, 1997, net
of expenses related to securitization transactions during the nine months ended
September 30, 1998 and 1997, respectively. The decrease in the gain on sale
percentage was due to the utilization of a higher cumulative net loss assumption
for the 1998 securitizations.
During the nine month period ended September 30, 1998, the Trusts issued
certificates at an average yield of 5.93% resulting in net spread, before net
credit losses and after servicing, insurer, and trustee fees, of 17.5%. During
the nine month period ended September 30, 1997, the Trusts issued certificates
at an average yield of 6.67% resulting in net spread, before net credit losses
and after servicing, insurer, and trustee fees, of 15.3%.
Servicing Income. Servicing Income for the nine months ended September 30,
1998 increased 131.4% to $11.8 million from $5.1 million in the nine month
period ended September 30, 1998. The Company serviced contracts totaling $433.0
and $432.7 million at September 30, 1998 and September 30, 1997, respectively,
for monthly fees ranging from .25% to .33% of beginning of period principal
balances (3% to 4% annualized).
Income before Operating Expenses. As a result of the Company's continued
expansion, Income before Operating Expenses grew by 102.6% to $83.4 million for
the nine month period ended September 30, 1998 from $41.2 million for the nine
month period ended September 30, 1997. Growth of Sales of Used Cars, Interest
Income, Servicing Income, and Gain on Sale of Loans were the primary
contributors to the increase.
Operating Expenses. Operating Expenses consist of Selling and Marketing
Expenses, General and Administrative Expenses, and Depreciation and
Amortization.
Selling and Marketing Expenses. For the nine month periods ended September
30, 1998 and 1997, Selling and Marketing Expenses were comprised almost entirely
of advertising costs and commissions relating to Company Dealership operations.
Selling and Marketing Expenses increased by 132.1% to $15.5 million for the nine
month period ended September 30, 1998 from $6.7 million for the nine month
period ended September 30, 1997. As a percentage of Sales of Used Cars, these
expenses averaged 7.2% for the nine month period ended September 30, 1998 and
8.4% for the nine month period ended September 30, 1997. On a per unit sold
basis, Selling and Marketing Expenses of Company Dealerships decreased to $568
per unit for the nine month period ended September 30, 1998 from $617 per unit
for the nine month period ended September 30, 1997. The Company incurred
significantly higher marketing costs in markets it entered in the first three
quarters of 1997 in order to establish brand name recognition. The Company did
not enter any new markets in the first three quarters of 1998 and, accordingly,
incurred a lower marketing cost per unit for the nine months ended September 30,
1998.
General and Administrative Expenses. General and Administrative Expenses
increased by 97.9% to $48.4 million for the nine month period ended September
30, 1998 from $24.5 million for the nine month period ended September 30, 1997.
These expenses represented 19.2% and 24.2% of total revenues for the nine month
periods ended September 30, 1998, and 1997, respectively. The increase in
General and Administrative Expenses was a result of the overall growth of the
Company. The number of used car dealerships increased over the comparable prior
year period, loan servicing operations expanded to accommodate the resulting
growth in the portfolio serviced, and corporate expenses increased to support
the growth in both Company Dealership and loan servicing operations. The
decrease in General and Administrative Expenses, however, as a percent of total
revenues was due primarily to the disproportionate increase in revenues over the
incremental costs required to manage the Company as it expands.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on the Company's property and equipment and
amortization of the Company's goodwill and trademarks. Depreciation and
amortization increased by 66.1% to $3.5 million for the nine month period ended
September 30, 1998 from $2.1 million for the nine month period ended September
30, 1997. The increase was due primarily to the increase in amortization of
goodwill associated with the Company's 1997 acquisitions, and increased
depreciation expense from the addition of used car dealerships.
Interest Expense. Interest expense increased by 167.8% to $1.7 million in
the nine month period ended September 30, 1998 from $630,000 in the nine month
period ended September 30, 1997. The increase in interest expense over the prior
comparable period was due primarily to increased borrowings to support the
Company's increasing finance receivable portfolio, property and equipment and
20
<PAGE> 21
inventory. Approximately $2.7 million and $2.3 million of interest expense was
allocated to Discontinued Operations for the nine month periods ended September
30, 1998 and 1997, respectively.
Income Taxes. Income taxes totaled $5.8 million and $3.0 million, which
resulted in an effective rate of 40.3% and 40.6% in the nine month periods ended
September 30, 1998 and 1997, respectively.
Earnings (Loss) from Discontinued Operations. The loss from Discontinued
Operations, net of income taxes, totaled $9.6 million for the nine months ended
September 30, 1998 compared to earnings of $1.4 million for the nine months
ended September 30, 1997. The loss from Discontinued Operations for the nine
months ended September 30, 1998 was comprised of a $1.1 million loss from
operations of Discontinued Operations, net of income taxes, and a loss of $8.5
million from the Branch Offices. Earnings from Discontinued Operations were
significantly impacted by the $8.5 million securitization gain (before income
taxes) recognized on the sale of Branch Office network loans offset by the $2.6
million charge, net of income taxes, related to the Residuals in Finance
Receivables Sold included in Discontinued Operations in the nine month period
ended September 30, 1997. Discontinued Operations consist primarily of the
Company's Cygnet Dealer Program, the Branch Office network, and the Company's
bulk purchasing and loan servicing operations.
ALLOWANCE FOR CREDIT LOSSES
The Company has established an Allowance for Credit Losses ("Allowance") to
cover anticipated credit losses on the contracts currently in its portfolio. The
Allowance has been established through the Provision for Credit Losses.
The following table reflects activity in the Allowance, as well as
information regarding charge off activity, for the three and nine month periods
ended September 30, 1998 and 1997, in thousands.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of Period .......... $ 5,950 $ 9,929 $ 10,356 $ 1,625
Provision for Credit Losses ........... 15,746 6,084 45,053 14,193
Allowance on Acquired Loans ........... -- -- -- 15,309
Reduction Attributable to Loans Sold .. (14,068) (10,325) (44,785) (21,407)
Net Charge Offs ....................... (2,056) (2,379) (5,052) (6,411)
-------- -------- -------- --------
Balance, End of Period ................ $ 5,572 $ 3,309 $ 5,572 $ 3,309
======== ======== ======== ========
Allowance as Percent of Period End
Balances ............................ 18.5% 20.0% 18.5% 20.0%
======== ======== ======== ========
Charge off Activity:
Principal Balances .................. $ (2,665) $ (3,139) $ (7,001) $ (8,355)
Recoveries, Net ..................... 670 760 1,949 1,944
-------- -------- -------- --------
Net Charge Offs ....................... $ (2,056) $ (2,379) $ (5,052) $ (6,411)
======== ======== ======== ========
</TABLE>
The Allowance on contracts was 18.5% of outstanding principal balances as of
September 30, 1998 and December 31, 1997 and 20.0% at September 30, 1997.
The Company's policy is to charge off contracts when they are deemed
uncollectible, but in any event at such time as a contract is delinquent for 90
days.
Recoveries as a percentage of principal balances charged off averaged 25.1%
for the three month period ended September 30, 1998 compared to 24.2% for the
three month period ended September 30, 1997. Recoveries as a percentage of
principal balances charged off for the nine month periods ended September 30,
1998 and 1997 averaged 27.8% and 23.3%, respectively.
Static Pool Analysis. To monitor contract performance the Company
implemented "static pool" analysis for contracts originated since January 1,
1993. Static pool analysis is a monitoring methodology by which each month's
originations and subsequent charge offs are assigned a unique pool and the pool
performance is monitored separately. Improving or deteriorating performance is
measured based on cumulative gross and net charge offs as a percentage of
original principal balances, based on the number of
21
<PAGE> 22
complete payments made by the customer before charge off. The table below sets
forth the cumulative net charge offs as a percentage of original contract
cumulative balances, based on the quarter of origination and segmented by the
number of payments made prior to charge off. For periods denoted by "x", the
pools have not seasoned sufficiently to allow for computation of cumulative
losses. For periods denoted by " -- ", the pools have not yet attained the
indicated cumulative age. While the Company monitors its static pools on a
monthly basis, for presentation purposes the information in the tables is
presented on a quarterly basis.
Currently reported cumulative losses may also vary from those previously
reported due to ongoing collection efforts on charged off accounts and the
difference between final proceeds on the liquidation of repossessed collateral
versus original accounting estimates. Management believes that such variation
will not be material.
The following table sets forth as of October 31, 1998, the cumulative net
charge offs as a percentage of original contract cumulative (pool) balances,
based on the quarter of origination and segmented by the number of monthly
payments completed by customers before charge off. Additionally, set forth is
the percent of principal reduction for each pool since inception and cumulative
total net losses incurred (TLI).
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
MONTHLY PAYMENTS COMPLETED BY CUSTOMER BEFORE CHARGE OFF
-------------------------------------------------------------------
ORIG. 0 3 6 12 18 24 TLI REDUCED
------- --- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993:
1st Quarter..... $ 2,326 6.9% 18.7% 26.5% 31.8% 33.9% 35.1% 35.4% 100.0%
2nd Quarter..... $ 2,942 7.2% 18.9% 25.1% 29.4% 31.7% 32.1% 32.4% 100.0%
3rd Quarter..... $ 3,455 8.6% 19.5% 23.7% 28.5% 30.7% 31.6% 31.9% 100.0%
4th Quarter..... $ 4,261 6.3% 16.1% 21.6% 27.0% 28.9% 29.5% 29.6% 100.0%
1994:
1st Quarter..... $ 6,305 3.4% 10.0% 13.4% 17.9% 20.3% 20.9% 21.0% 100.0%
2nd Quarter..... $ 5,664 2.8% 10.4% 14.1% 19.6% 21.5% 22.0% 22.1% 100.0%
3rd Quarter..... $ 6,130 2.8% 8.1% 12.0% 16.3% 18.2% 19.1% 19.2% 100.0%
4th Quarter..... $ 5,490 2.4% 7.6% 11.2% 16.4% 19.3% 20.2% 20.3% 100.0%
1995:
1st Quarter..... $ 8,191 1.1% 7.3% 12.2% 17.3% 19.8% 20.7% 20.8% 99.8%
2nd Quarter..... $ 9,846 1.7% 7.0% 11.8% 16.3% 19.1% 20.7% 21.0% 99.1%
3rd Quarter..... $10,106 1.9% 6.8% 10.8% 17.6% 21.4% 23.0% 23.4% 96.5%
4th Quarter..... $ 8,426 1.2% 5.6% 10.7% 17.5% 22.1% 23.7% 23.9% 94.5%
1996:
1st Quarter..... $13,635 1.3% 7.5% 13.2% 20.7% 24.7% 26.0% 26.2% 89.6%
2nd Quarter..... $13,462 2.2% 9.2% 13.9% 22.8% 26.7% 28.1% 27.9% 88.4%
3rd Quarter..... $11,082 1.6% 7.1% 13.1% 21.8% 26.0% 27.6% 27.6% 83.1%
4th Quarter..... $10,817 0.7% 8.6% 16.2% 25.2% 29.6% 29.8% 29.8% 78.9%
1997:
1st Quarter..... $16,279 2.1% 10.4% 17.4% 24.0% 28.3% 28.3% 28.4% 71.7%
2nd Quarter..... $25,875 1.5% 9.9% 15.9% 22.9% 24.4% x 24.4% 59.9%
3rd Quarter..... $32,147 1.2% 8.3% 13.2% 20.5% x -- 20.6% 49.3%
4th Quarter..... $42,529 1.5% 7.1% 13.1% x -- -- 16.0% 39.6%
1998:
1st Quarter..... $69,708 1.0% 7.4% x -- -- -- 10.3% 28.9%
2nd Quarter..... $66,908 1.2% x -- -- -- -- 4.4% 11.9%
3rd Quarter..... $71,027 x -- -- -- -- -- 0.2% 11.4%
</TABLE>
The following table sets forth the principal balances 31 to 60 days
delinquent, and 61 to 90 days delinquent as a percentage of total outstanding
Company Dealership contract principal balances.
<TABLE>
<CAPTION>
RETAINED SECURITIZED MANAGED
-------- ----------- -------
<S> <C> <C> <C>
September 30, 1998:
31 to 60 days ...................... 0.8% 5.0% 4.5%
61 to 90 days ...................... 2.5% 2.4% 2.4%
December 31,1997:
31 to 60 days ...................... 2.2% 4.5% 3.6%
61 to 90 days ...................... 0.6% 2.2% 1.5%
</TABLE>
In accordance with the Company's charge off policy, there are no accounts
more than 90 days delinquent as of September 30, 1998 and December 31, 1997.
22
<PAGE> 23
RESIDUALS IN FINANCE RECEIVABLES SOLD
Residuals in Finance Receivables Sold represent the Company's retained
portion of the securitization assets. The Company utilizes a number of estimates
in arriving at the initial valuation of the Residuals in Finance Receivables
Sold, which represent the expected present value of net cash flows into the
Trust in excess of those required to pay principal and interest on the Class A
certificates. The present value of expected cash flows are a function of a
number of items including, but not limited to, charge off rates, repossession
recovery rates, portfolio delinquency, prepayment rates, and Trust expenses.
Subsequent to the initial recording of the Residuals in Finance Receivables
Sold, the carrying value is adjusted for the actual cash flows into the
respective Trusts in order to maintain a carrying value which approximates the
present value of the expected net cash flows into the Trust in excess of those
required to pay all obligations of the respective Trust other than the
obligations to the Class B certificates. To the extent that actual cash flows on
a securitization are below original estimates, differ materially from the
original securitization assumptions, and in the opinion of management, those
differences appear to be other than temporary in nature, the Company would be
required to revalue the residual portion of the securitization which it retains,
and record a charge to earnings based upon the reduction. During the third
fiscal quarter of 1997, the Company recorded a $5.7 million charge
(approximately $3.4 million, net of income taxes) to Continuing Operations to
write down the Residuals in Finance Receivables Sold. The Company determined a
write down in the Residuals in Finance Receivables Sold was necessary due to an
increase in net losses in the securitized loan portfolio. The charge which
resulted in a reduction in the carrying value of the Company's Residuals in
Finance Receivables Sold had the effect of increasing the cumulative net loss at
loan origination assumption to approximately 27.5%, for the securitization
transactions that took place prior to September 30, 1997 which approximates the
assumption used for the securitization transactions consummated during the third
quarter of 1997. For the securitizations that were completed during the nine
month period ended September 30, 1998, net losses were estimated using total
expected cumulative net losses at loan origination of approximately 29.0%,
adjusted for actual cumulative net losses prior to securitization.
The allowance for credit losses imbedded in the Residuals in Finance
Receivables Sold as a percentage of the remaining principal balances of
securitized contracts was approximately 24.3% as of September 30, 1998, compared
to 17.9% as of December 31, 1997. There can be no assurance that the charge
taken by the Company in the third quarter of 1997 was sufficient and that the
Company will not record additional charges in the future in order to write down
the Residuals in Finance Receivables Sold.
The assumptions utilized in prior securitizations may not necessarily be the
same as those utilized in future securitizations. The Company classifies the
residuals as "held-to-maturity" securities in accordance with SFAS No. 115.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support increases in its contract portfolio,
expansion of Company Dealerships, the purchase of inventories, the purchase of
property and equipment, and for working capital and general corporate purposes.
In addition, the Company intends to continue to acquire loans under the Cygnet
Dealer Program and pursue other opportunities within the Discontinued
Operations. The Company funds its capital requirements through equity offerings,
operating cash flow, the sale of Finance Receivables, and supplemental
borrowings.
The Company's Net Cash Used in Operating Activities was $6.7 million for the
nine month period ended September 30, 1998 compared to $31.3 million Net Cash
Provided by Operating Activities in the nine month period ended September 30,
1997. The change was primarily due to the loss from Discontinued Operations and
a decrease in the advance rate received in securitization transactions, which
resulted in a lower proceeds from the sale of Finance Receivables relative to
the amount of cash used to originate Finance Receivables.
The Net Cash Provided by Investing Activities was $2.0 million in the nine
months ended September 30, 1998 compared to Net Cash Used in Investing
Activities of $58.5 million in the nine months ended September 30, 1997. The
change was a result of the Company receiving cash proceeds of $27.4 million from
the sale of property and equipment during the nine months ended September 30,
1998. (See the explanation of this transaction below under the caption "Sale --
Leaseback of Real Property.") The Company did not consummate any such
transaction during the nine months ended September 30, 1997. The Company paid
cash totaling $35.6 million for acquired assets during the nine months ended
September 30, 1997 and $0 in the comparable period in 1998. In addition, the
Increase in Net Cash Provided by Investing Activities was impacted by an
increase in Investments Held in Trust and an increase in the purchase of
Property and Equipment.
23
<PAGE> 24
The Company's Net Cash Used In Financing Activities was $4.1 million in the
nine month period ended September 30, 1998 compared to $52.2 million Net Cash
Provided by Financing Activities in the nine month period ended September 30,
1997. This change was primarily the result of the $88.7 million in proceeds from
the Company's sale of Common Stock in the nine month period ended September 30,
1997, and a decrease in the net repayment of notes payable.
The Company's Net Cash Provided by Discontinued Operations was $6.2 million
in the nine month period ended September 30, 1998 compared to $39.0 million Net
Cash Used in Discontinued Operations in the nine month period ended September
30, 1997. The change was due primarily to a decrease in Finance Receivables
originated and retained by the Discontinued Operations.
Revolving Facility. In September 1998, the Company amended its revolving
credit facility (the "Revolving Facility") with General Electric Capital
Corporation ("GE Capital") increasing the maximum commitment to $125.0 million.
The Revolving Facility provides working capital utilized primarily for operating
activities as well as investing in new dealership facilities. Under the
Revolving Facility, the Company may borrow up to 65.0% of the principal balance
of eligible contracts originated from the sale of used cars, up to 86.0% of the
principal balance of eligible contracts previously originated by the Branch
Offices, and the lesser of $20 million or 65% of the National Automobile Dealers
Association average wholesale Black Book value for eligible vehicle inventory.
However, an amount up to $8.0 million of the borrowing capacity under the
Revolving Facility is not available at any time when the guarantee of the
Company to the Contract Purchaser (defined below under "Transactions Regarding
First Merchants Acceptance Corporation") is in effect. The Revolving Facility
expires in June 2000 and contains a provision that would require the Company to
pay GE Capital a termination fee of $200,000 in the event the Revolving Facility
was terminated by the Company prior to the expiration date. The facility is
secured by substantially all of the Company's assets. As of September 30, 1998,
the Company's borrowing capacity under the Revolving Facility was $59.3 million,
the aggregate principal amount outstanding under the Revolving Facility was
approximately $44.9 million, and the amount available to be borrowed under the
facility was $14.4 million. The Revolving Facility bears interest at the 30-day
LIBOR plus 3.15%, payable daily (total rate of 8.80% as of September 30, 1998).
The Revolving Facility contains covenants that, among other things, limit
the Company's ability to, without GE Capital's consent: (i) incur additional
indebtedness; (ii) make unsecured loans or other advances of money to officers,
directors, employees, stockholders or affiliates in excess of $25,000 in total;
(iii) engage in securitization transactions (other than the Securitization
Program, for which GE Capital has consented); (iv) merge with, consolidate with,
acquire or otherwise combine with any other person or entity, transfer any
division or segment of its operations to another person or entity, or form new
subsidiaries; (v) make any change in its capital structure; (vi) declare or pay
dividends except in accordance with all applicable laws and not in excess of
fifteen percent (15%) of each year's net earnings available for distribution;
(vii) make certain investments and capital expenditures; (viii) engage in
certain transactions with affiliates, and (ix) require all of the Company's
computer systems to be Year 2000 compliant no later than March 31, 1999 (see
discussion below under "Year 2000"). These covenants also require the Company to
maintain specified financial ratios, including a debt ratio of 2.2 to 1 and a
net worth of at least $100,000,000 (increasing to $110,000,000 in January 1999)
and to comply with all laws relating to the Company's business. The Revolving
Facility also provides that a transfer of ownership of the Company that results
in less than 15.0% of the Company's voting stock being owned by Mr. Ernest C.
Garcia II will result in an event of default under the Revolving Facility.
Under the terms of the Revolving Facility, the Company is required to
maintain an interest coverage ratio and a cash flow based interest coverage
ratio that the Company failed to satisfy during the nine month period ended
September 30, 1998. This was primarily as a result of the charges taken during
1998 with respect to the closure of the Branch Office network, for which the
Company incurred a loss from Discontinued Operations of $8.5 million (net of
income tax benefit of $5.7 million). GE Capital has waived the covenant
violations as of September 30, 1998.
The Company's Revolving Facility currently contains provision for borrowings
based upon eligible finance receivable contracts and does not provide for
borrowings based upon contracts or notes receivable acquired or issued pursuant
to the Cygnet Dealer Program. The Company believes these assets may be sources
of additional liquidity and, therefore, is currently exploring alternatives
regarding obtaining financing secured by the assets generated by the Cygnet
Dealer Program and the Company's Residuals in Finance Receivables Sold. There
can be no assurance that these assets will, in fact, be a source of liquidity
for the Company.
Subordinated Indebtedness and Preferred Stock. Prior to its public offering
in September 1996, the Company historically borrowed substantial amounts from
Verde Investments Inc. ("Verde"), an affiliate of the Company. The Subordinated
Notes Payable balances outstanding to Verde totaled $10.0 million and $12.0
million as of September 30, 1998 and December 31, 1997,
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respectively. Prior to September 21, 1996, these borrowings accrued interest at
an annual rate of 18.0%. Effective September 21, 1996 the annual interest rate
on these borrowings was reduced to 10.0%. The Company is required to make
monthly payments of interest and annual payments of principal in the amount of
$2.0 million. Except for the debt incurred related to the exchange offer (see
below), this debt is junior to all of the Company's other indebtedness and the
Company may suspend interest and principal payments in the event it is in
default on obligations to any other creditors. In July 1997, the Company's Board
of Directors approved the prepayment of the $10.0 million in subordinated debt
after the earlier of (1) the Company's completion of a debt offering; or (2) at
such time as (a) the FMAC transactions (described below under "Transactions with
First Merchants Acceptance Corporation") have been completed or the cash
requirements for completion of said transaction are known, and (b) the Company
either has cash in excess of its current needs or has funds available under its
financing sources in excess of its current needs. No such prepayment has been
made as of the date of filing of this Form 10-Q. Any such prepayment would
require the consent of certain lenders to the Company.
In February 1998, the Company executed senior subordinated notes payable
agreements with unrelated parties for a total of $15.0 million in subordinated
debt. The unsecured three year notes call for interest at 12% per annum payable
quarterly and are senior to the Verde subordinated note payable. In connection
with the issuance of the senior subordinated notes payable, the Company issued
warrants, which were valued at approximately $900,000, to the lenders to
purchase up to 500,000 shares of the Company's Common Stock at an exercise price
of $10.00 per share exercisable at any time until the later of (1) February
2001, or (2) such time as the notes have been paid in full.
In July 1998, the Company secured a subordinated loan of $5 million from
third party lenders for a three-year term and will be required to issue warrants
to purchase 115,000 shares of Company Common Stock at an exercise price of 120%
of the average trading price for the Company Common Stock for the 20 consecutive
trading days prior to the issuance of such warrants subject to a call feature if
the closing price of the Company Common Stock equals or exceeds 160% of the
warrant exercise price for a period of 20 consecutive trading days. The Company
is obligated to issue the warrants by December 31, 1998 if the loan is not paid
in full by that date. The Company does not anticipate prepayment of the note by
December 31, 1998.
Exchange Offer. Effective October 23, 1998, the Company acquired
approximately 2,463,600 shares of Company Common Stock in exchange for
subordinated debentures with a par value of approximately $16.0 million
("Exchange Offer"). The debentures are unsecured and subordinate to all existing
and future indebtedness of the Company and bear interest a 12% per annum payable
semi-annually each April and October, approximately $2.9 million per year, until
they are paid in full. The debentures were issued at a premium of approximately
$3.7 million in excess of the market value of the shares tendered. The premium
will be amortized over the life of the debentures and results in an effective
interest rate of approximately 19.1%. The Company will be required to pay the
principal amount of debentures on the fifth anniversary of their issuance date.
The debentures can be partially or fully redeemed at the Company's option at any
time. As a result of the Exchange Offer, the number of common shares outstanding
decreased to approximately 16,070,000 compared to approximately 18,533,000
shares outstanding immediately prior to the effective date.
Additional Financing. On January 28, 1998, the Company executed a $7.0
million note payable that accrued interest at 9.5% per annum. The Company paid
this note in full on April 1, 1998.
On November 12, 1998, the Company borrowed $15 million for a term of 364
days from Greenwich Capital with an interest rate equal to LIBOR plus 400 basis
points, and secured by the stock of the Company's Securitization Subsidiaries.
The Company will use the proceeds of the loan for operating activities.
On February 19, 1998, the Company and certain of its affiliates executed a
second short-term $30.0 million standby repurchase credit facility. Pursuant to
the terms of this facility, the lender agreed to purchase, subject to repurchase
rights of the Company and its subsidiaries, certain eligible sub-prime
automobile Finance Receivables originated and or purchased by the Company's
affiliates for a purchase price (and corresponding repurchase obligation) of no
more than $30.0 million. During the nine month period ended September 30, 1998,
the lender purchased approximately $30.0 million in contracts pursuant to the
facility, which accrued interest at a rate of 9.5% per annum. The Company
exercised its repurchase obligation on March 24, 1998.
Securitizations. The Company's Securitization Program is a primary source of
funding for the Company. Under this program, the Company sold approximately
$170.4 million in certificates secured by contracts to SunAmerica through
securitizations effected prior to September 30, 1997. Since September 30, 1997,
the Company has consummated additional securitizations under the Securitization
Program with private investors through Greenwich Capital Markets, Inc.
("Greenwich Capital"). In February 1998, the Company executed a commitment
letter with Greenwich Capital under which, among other things, Greenwich Capital
retains the right to be the exclusive securitization agent for the Company for
up to $1 billion of AAA-surety wrapped securities as part of the Company's
ongoing Securitization Program. The agreement contains certain provisions that
would not oblige Greenwich Capital or require the Company to fulfill the
remaining commitment under the agreement.
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At the closing of each securitization, the Securitization Subsidiaries
receive payment for the certificates sold (net of Investments Held in Trust).
The Company also generates cash flow under this program from ongoing servicing
fees and excess cash flow distributions resulting primarily from the difference
between the payments received from customers on the contracts and the payments
paid on the Class A Certificates. In addition, securitization allows the Company
to fix its cost of funds for a given contract portfolio, and broadens the
Company's capital source alternatives. Failure to periodically engage in
securitization transactions will adversely affect the Company.
In connection with its securitization transactions, the Securitization
Subsidiaries are required to make an initial cash deposit into an account held
by the trustee ("Spread Account") and to pledge this cash to the Trust to which
the Finance Receivables were sold. The Trust in turn invests the cash in high
quality, liquid investment securities. In addition, the cash flows due to the B
Certificates first are deposited into the Spread Account as necessary to attain
and maintain the Spread Account at a specified percentage of the underlying
Finance Receivables principal balance. In the event that the cash flows
generated by the Finance Receivables sold to the Trust are insufficient to pay
obligations of the Trust, including principal or interest due to certificate
holders or expenses of the Trust, the trustee will draw funds from the Spread
Account as necessary to pay the obligations of the Trust. The Spread Account
must be maintained at a specified percentage of the principal balances of the
Finance Receivables held by the Trust, which can be increased in the event
delinquencies or losses exceed specified levels. If the Spread Account exceeds
the specified percentage, the trustee will release the excess cash to the
Securitization Subsidiaries from the pledged Spread Account.
Debt Shelf Registration. On July 18, 1997, the Company filed a Form S-3
registration statement for the purpose of registering up to $200 million of its
debt securities in one or more series at prices and on terms to be determined at
the time of sale. The registration statement has been declared effective by the
Securities and Exchange Commission and is available for future debt offerings.
There can be no assurance given that the Company will be able to successfully
register and sell debt securities in the future.
Transactions Regarding First Merchants Acceptance Corporation. The Company's
Discontinued Operations was actively involved in the bankruptcy proceedings of
First Merchants Acceptance Corporation ("FMAC"). FMAC was in the business of
purchasing and securitizing loans made primarily to sub-prime borrowers by
various Third Party Dealers. In various transactions relating to the FMAC
bankruptcy proceedings, the Company, among other things, (l) purchased the
secured claims of certain creditors of FMAC, sold the contracts securing such
claims at a profit to a third party purchaser ("Contract Purchaser"), guaranteed
the purchaser a specified return on the contracts and obtained a related
guarantee from FMAC secured by, among other things, the stock of certain
entities holding residual interests and certain equity certificates in various
securitized loan pools of FMAC, and entered into servicing arrangements with
respect to such contracts; (2) made debtor-in-possession loans to FMAC, secured
as described above, and received interest income therefrom; (3) entered into
various servicing agreements with respect to receivables in the securitized
pools of FMAC; (4) obtained rights to receive certain payments with respect to
distributions on residual interests in such securitized pools and obtained
certain interests in charged off receivables in such pools; (5) obtained rights
to certain fees; (6) obtained the FMAC servicing platform; and (7) issued
certain warrants to purchase Company Common Stock consisting of (a) warrants
issued to FMAC's bank group to purchase up to 389,800 shares of the Company's
Common Stock at an exercise price of $20.00 per share at any time through
February 20, 2000, and subject to a call feature by the Company if the closing
market price of the Company's Common Stock equals or exceeds $27.00 per share
for a period of five consecutive trading days, and (h) warrants issued to FMAC
to purchase 325,000 shares of the Company's Common Stock at any time through
April 1, 200l at a price of $20.00 per share, subject to a call feature by the
Company if the closing market price of the Company's Common Stock equals or
exceeds $28.50 per share for a period of 10 consecutive trading days. The
Company also contributed to FMAC all of its shares of FMAC Common Stock in
exchange for the assets constituting FMAC's servicing platform.
Reliance Transaction. In February 1998, the Company's Discontinued
Operations entered into servicing and transition servicing arrangements with
Reliance Acceptance Group, Inc. ("Reliance"), which company also filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code that same
month.
Pursuant to the servicing agreement entered into between the Company and
Reliance (the "Servicing Agreement"), as amended, following the Effective Date,
the Company will service certain receivables of Reliance in exchange for (i) a
monthly servicing fee of the greater of four percent (4%) per annum of the
aggregate outstanding principal balance of all non-defaulted receivables
computed monthly on the basis of the declining balance of the receivables
portfolio (consisting of Reliance's portfolio of (A) prime receivables and (B)
sub-prime receivables), or fifteen dollars ($15.00) per receivable per month
plus reimbursement of certain costs and expenses; (ii) $1.3 million in proceeds
realized from the sale of a pool of charged off receivables existing as of the
Reliance petition date ("Charged-Off Proceeds"); (iii) a total of (A) four
percent (4%) of the outstanding principal balance of each receivable (exclusive
of defaulted and certain other receivables) sold in any bulk sale to a person
other than the Company or an affiliate of the Company, and (B) $3.25 million in
net collections, recovery, and sale proceeds from the receivables portfolio and
certain other cash receipts of Reliance reduced by any amount previously paid
under clause (A) above, following payment of Reliance's primary bank debt and,
if applicable, repayment to Reliance of any proceeds of litigation, the
Reliance Warrants (as defined below), and equity proceeds used by Reliance to
pay its primary bank debt ("Post-Bank Debt Proceeds"); and (iv) following the
Company's receipt of the Post-Bank Debt Proceeds, fifteen percent (15%) of the
net collections, recovery, and sale proceeds from the receivables portfolio and
certain other cash receipts of Reliance (the "Incentive Fee"). Reliance, in
consideration for entering into the Servicing Agreement will receive privately
issued warrants ("Reliance Warrants") to purchase shares of Common Stock of the
Company as follows: fifty thousand (50,000) Reliance Warrants will be granted
to Reliance upon the Company's receipt of the Charged-Off Proceeds; up to one
hundred thousand (100,000) Reliance Warrants will be granted to Reliance based
upon the Company's receipt of up to $3.25 million of Post-Bank Debt Proceeds;
and Reliance will be granted an additional seventy-five thousand (75,000)
Reliance Warrants for every $1 million actually received by the Company through
the Incentive Fee. The Reliance Warrants will have a strike price of twelve
dollars and 50/100 ($12.50) for the first one hundred fifty thousand (150,000)
Reliance Warrants and a strike price for all other Reliance Warrants of the
greater of twelve dollars and 50/100 ($12.50) or one hundred twenty percent
(120%) of the market price of the Common Stock on the date of issuance of the
Reliance Warrants. The Reliance Warrants will be exercisable as follows: (i)
the first 50,000 Reliance Warrants will be exercisable for three years from the
Reliance Petition Date and (ii) all remaining Reliance Warrants will be
exercisable for three years from the date of issuance.
As of the close of business on the effective date of Reliance's plan of
reorganization (July 31, 1998), the Company purchased Reliance's furniture,
fixtures, and equipment, including computer software and hardware and related
licenses for $250,000, payable in twelve equal monthly installments over a
period of one year beginning August 15, 1998, and has a period of sixty days to
require Reliance to assume and assign to the Company any of the leases or other
contracts not previously rejected by Reliance.
Industry Considerations. In recent periods, several major used car finance
companies have announced major downward adjustments to their financial
statements, violations of loan covenants, related litigation, and other events.
In addition, certain of these companies have filed for bankruptcy protection.
These announcements have had a disruptive effect on the market for securities of
sub-prime automobile finance companies, have resulted in a tightening of credit
to the sub-prime markets, and could lead to enhanced regulatory oversight. A
reduction in access to the capital markets or to credit sources could have a
material adverse affect on the Company. The Company's securitization
transactions have historically been structured to record a gain on sale of the
finance receivables for accounting purposes. Management is currently evaluating
the structure of its securitization transactions and is considering altering the
structure of future transactions to recognize the interest income on the loans
over the life of the contracts for accounting purposes. Historically, gains on
sales of Finance Receivables have been material to the Company's reported
revenues and net earnings. Altering the structure of such transactions whereby
no gain is recognized at the time of a securitization transaction, would have a
material effect on the Company's reported revenues and net earnings until such
time as the Company were to accumulate Finance Receivables on its
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balance sheet sufficient to generate interest income (net of interest and
other expenses) equivalent to the revenues the Company has historically
recognized on its securitization transactions.
Capital Expenditures and Commitments. The Company is pursuing an aggressive
growth strategy. In the first nine months of 1998, the Company has opened ten
new dealerships. Further, the Company currently has eight dealerships under
development. The Company believes that it will expend approximately $1.5 to $1.7
million to construct (excluding inventory) each Company Dealership.
On July 11, 1997, the Company entered into an agreement, as amended, to
provide "debtor in possession" financing to FMAC (the "DIP Facility") in an
amount up to $21.5 million to be adjusted downward from time to time. As of
September 30, 1998, the maximum commitment was reduced to $12.4 million and the
outstanding balance on the DIP totaled $10.9 million. The Company expects the
maximum commitment to be further reduced to $11.5 million as FMAC receives
income tax refunds from various taxing jurisdictions.
The Company intends to finance the construction of new dealerships and the
DIP financing through operating cash flows and supplemental borrowings,
including amounts available under the Revolving Facility and the Securitization
Program, if any.
Sale-Leaseback of Real Property. In March 1998, the Company executed a
commitment letter with an investment company for the sale-leaseback of up to
$37.0 million in real property. Pursuant to the terms of the agreement, the
Company would sell certain real property to the investment company for its
original cost and leaseback the properties for an initial term of twenty years.
The Company retains certain extension options, and pays monthly rents of
approximately one-twelfth of 10.75% of the purchase price plus all occupancy
costs and taxes. The agreement calls for annual increases in the monthly rents
of not less than 2%. As of September 30, 1998, the Company has sold
approximately $27.4 million of property under this arrangement and utilized
substantially all of the proceeds from the sale to pay down debt of the Company.
Common Stock Repurchase Program. In October 1997 the Company's Board of
Directors authorized a stock repurchase program by which the Company may acquire
up to one million shares of its Common Stock from time to time on the open
market. Under the program, purchases may be made depending on market conditions,
share price and other factors. The stock repurchase program will terminate on
December 31, 1998, unless extended by the Company's Board of Directors, and may
be discontinued at any time. The Company has repurchased 72,000 shares of Common
Stock pursuant to the Repurchase Program (28,000 shares during the quarter ended
June 30, 1998 and 44,000 shares during the quarter ended September 30, 1998). In
addition, approximately 2,463,600 shares were acquired from the Exchange Offer
subsequent to September 30, 1998. As of the date of the filing of this Form
10-Q, the Company repurchased a total of approximately 2,535,600 shares of
Company Common Stock under both its Repurchase Program and the Exchange Offer at
an average cost of $5.12 per share.
Stock Option Grants. Effective January 15, 1998, the Compensation Committee
of the Company's Board of Directors awarded 775,000 stock options to key
officers of the Company at an exercise price of $8.25 per share, the market
value of the Common Stock on the date of grant ("Awards"). Of these Awards,
500,000 options were granted to Gregory B. Sullivan, President and Chief
Operating Officer of the Company. Two Hundred Fifty Thousand of the options
granted to Mr. Sullivan were granted under the existing Ugly Duckling Long Term
Incentive Plan, pursuant to the plan's general terms, including vesting in equal
increments over a five-year period beginning on the first anniversary date of
the grant. The other 250,000 options to Mr. Sullivan and the remaining 225,000
options granted to the other key officers were granted under the new Ugly
Duckling 1998 Executive Incentive Plan ("Executive Grants"). These options
contain time and price vesting requirements. The Executive Grants will vest in
equal increments over five years subject to continued employment by the Company
and will also be subject to additional vesting hurdles based on the market value
of the Company's Common Stock as traded on NASDAQ. The price hurdle for the
first year of the grants is a 20% increase in such market value over the
exercise price of the options, with the price hurdles increased for the next
four years in additional 20% increments over the exercise price of the options.
In order for the price hurdles to be met, the Common Stock must trade at the
targeted value for a period of 10 consecutive trading days. The price hurdles
can be met at any time before or after the time vesting requirements are
satisfied, and will be completely met at such time as the Common Stock trades at
100% in excess of the exercise price of the options for 10 consecutive trading
days. In any event, the Executive Grants will become fully vested on January 15,
2005, unless sooner exercised or forfeited. As of the current date, the first
two price hurdles have been met. The Company believes that the Awards are
material in the aggregate. As such, they will have the effect of diluting the
ownership interest of existing stockholders of the Company.
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Year 2000. The year 2000 presents potential concerns for business computing
due to calculation problems from the use of a 2-digit year format as the year
changes from 1999 to 2000. The problem affects certain computer software,
hardware, and other systems containing processors and embedded chips.
Consequently, information technology ("IT") systems and non-IT systems
(collectively, "Business Systems") may not be able to accurately process certain
transactions before, during, or after January 1, 2000. As a result, businesses
and governmental agencies are at risk for potential disruption to their business
from Business System malfunctions or failures. This is commonly referred to as
the Year 2000 ("Year 2000") issue. The Company could be impacted by failures of
its own Business Systems as well as those of its suppliers and business
partners, and is in the process of implementing its Year 2000 compliance program
that consists of Business Systems identification, testing and remediation,
assessment of critical suppliers, and contingency planning.
The first component of the compliance program is to identify the Business
Systems of the Company for purposes of evaluation for Year 2000 compliance. This
phase is complete as the critical computer programs, hardware, and other
equipment have been identified for evaluation to determine which systems are
compliant, will be replaced or remediated.
The second part of the program is the evaluation and replacement or
remediation of the Company's Business Systems that are not Year 2000 compliant.
The Company is in the process of converting to one automobile sales and loan
servicing system currently in use by the Company, which has reduced the scope of
the compliance program, and expects the conversion to be completed by the end of
1998. An outside consulting firm has been engaged and has begun evaluating
remediation of the critical computer programs that the Company has elected to
modify to become Year 2000 compliant. The Company believes the replacement or
remediation of the critical Business Systems will be substantially complete by
March 31, 1999.
Critical suppliers, vendors, and business partners ("Key Business
Partners") have been identified and steps are being taken to ascertain their
Year 2000 readiness. These steps include interviews, questionnaires, and other
types of inquiries. Because of the vast number of Business Systems used by Key
Business Partners and the varying levels of Year 2000 readiness, it is difficult
to assess the likelihood and impact of a malfunction due to this issue. The
Company is not currently aware of any business relationships with Key Business
Partners that it believes will likely result in a significant disruption of its
businesses. However, a Year 2000 failure could occur and have a material adverse
effect on the Company. Management currently believes its greatest risk is with
its utility suppliers, banking and financial institution partners, and suppliers
of telecommunications services, all of which are operating within the United
States. Potential consequences of the Company or its Key Business Partners
Business Systems' not being Year 2000 compliant include failure to operate due
to a lack of power, disruption or errors in loan collection efforts, and delays
in receiving inventory and supplies. In the event any of the aforementioned
events were to occur, the results could have a material adverse impact on the
Company and its operations.
Concurrent with the remediation and evaluation of the Business Systems of
the Company and its Key Business Partners, contingency plans are being developed
to mitigate the risks that could occur in the event of a Year 2000 related
business disruption. Contingency plans may include increasing inventory levels,
securing additional financing or other actions deemed prudent. Estimated costs
associated with developing and implementing contingency measures are not
currently estimable.
It is currently estimated that remediation and testing of the Company's
Business Systems will cost between $2.1 million and $2.7 million (including
Discontinued Operations), and will be expensed in the period incurred, in
accordance with the Company's capitalization policy, and funded through cash
flows from operations. Expenses to date have approximated $265,000. The Company
believes that the majority of its Business Systems that require modification or
replacement to become Year 2000 compliant will be remediated. Therefore,
substantially all of the costs incurred will be expensed.
The scheduled completion dates and costs associated with the various
components of the Year 2000 compliance program described above are estimates and
are subject to change.
Cygnet's loan servicing operations currently utilize Affiliated Computer
Services, Inc.'s ("ACS") loan processing and collections platform. Cygnet Dealer
Program is in the process of converting its loan processing and collections
systems to the ACS system (Cygnet Dealer Program and Cygnet's loan servicing
operations are included in Discontinued Operations). ACS is a third party
service bureau that processes transactions using Shaw Systems Associates, Inc.
("Shaw") software and other products ("Shaw Products"). Shaw has certified to
ACS that a significant portion of the Shaw Products that ACS uses to process
Cygnet's transactions are Year 2000 compliant. Based upon a Shaw certification
and a representation from ACS to Cygnet, Cygnet believes that Shaw has also
undertaken to provide additional Year 2000 compliant Shaw Products to ACS as
such systems become
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compliant. The ACS Agreement requires that the ACS systems processing Cygnet's
transactions be fully Year 2000 compliant by January 1, 1999. However, Cygnet's
sole remedy if ACS does not comply with this requirement is to terminate the ACS
Agreement and convert to another system, which would be costly and disruptive to
operations and could have a material adverse effect on Cygnet's business and
operations.
Seasonality. Historically, the Company has experienced higher revenues in
the first two quarters of the year than in the latter half of the year. The
Company believes that these results are due to seasonal buying patterns
resulting in part from the fact that many of its customers receive income tax
refunds during the first half of the year, which are a primary source of down
payments on used car purchases.
Properties. As of September 30, 1998, the Company leased substantially all
of its facilities, of which 37 were Branch Office locations that the Company
closed in 1998. The Company is continuing to negotiate lease settlements and
terminations with respect to its Branch Office network closure. The Company's
corporate headquarters is located in approximately 40,000 square feet of leased
space in Phoenix, Arizona.
Inflation. Increases in inflation generally result in higher interest rates.
Higher interest rates on the Company's borrowings would decrease the
profitability of the Company's existing portfolio. The Company will seek to
limit this risk through its Securitization Program and, to the extent market
conditions permit, for contracts originated at Company Dealerships, either by
increasing the interest rate charged or the profit margin on the cars sold. To
date, inflation has not had a significant impact on the Company's operations.
Accounting Matters. In September 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) which became effective for the Company
January 1, 1998. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS No. 130 did not have a material
impact on the Company.
In September 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131) which became effective for
the Company January 1, 1998. SFAS No. 131 establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to stockholders.
The adoption of SFAS No. 131 did not have a material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits" (SFAS No. 132) which becomes
effective for the Company January 1, 1999. SFAS No. 132 establishes standards
for the information that public enterprises report in annual financial
statements. The Company believes the adoption of SFAS No. 132 will not have a
material impact on the Company.
The Securities and Exchange Commission has approved rule amendments to
clarify and expand existing disclosure requirements for derivative financial
instruments. The amendments require enhanced disclosure of accounting policies
for derivative financial instruments in the footnotes to the financial
statements. In addition, the amendments expand existing disclosure requirements
to include quantitative and qualitative information about market risk inherent
in market risk sensitive instruments. The required quantitative and qualitative
information is to be disclosed outside the financial statements and related
notes thereto. As the Company believes that the derivative financial instrument
disclosure contained within the notes to the consolidated financial statements
of its 1997 Form 10-K substantially conform with the accounting policy
requirements of these amendments, no further interim period disclosure has been
provided.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except for vehicles sold in Arizona under a limited warranty program, the
Company sells its cars on an "as is" basis, and requires all customers to sign
an agreement on the date of sale pursuant to which the Company disclaims any
obligation for vehicle-related
29
<PAGE> 30
problems that subsequently occur. Although the Company believes that such
disclaimers are enforceable under applicable state, federal and other laws and
regulations, there can be no assurance that they will be upheld in every
instance. Despite obtaining these disclaimers, the Company, in the ordinary
course of business, receives complaints from customers relating to such
vehicle-related problems as well as alleged violations of federal and state
consumer lending or other similar laws and regulations. While most of these
complaints are made directly to the Company or to various consumer protection
organizations and are subsequently resolved, the Company is named occasionally
as a defendant in civil suits filed by customers in state, local, or small
claims courts. There can be no assurance that the Company will not be a target
of similar claims in the future. Additionally, in the ordinary course of
business, the Company is a defendant in various other types of legal
proceedings. There can be no assurance that the Company will not be a target of
similar claims and legal proceedings in the future. The Company believes that
the ultimate disposition of pending matters on a cumulative basis will not have
a material adverse effect on the Company. However, there can be no assurance in
this regard.
ITEM 2. CHANGES IN SECURITIES.
(a) None.
(b) None, except as set forth below under Item 2(c).
(c) During the first quarter of 1998, (i) warrants to acquire 500,000 shares
of Common Stock of the Company at an exercise price of $10.00 per share were
issued in a private placement under Section 4(2) of the Securities Act of 1933
("Securities Act") to certain lenders in connection with a $15 million loan and
(ii) warrants to acquire 50,000 shares of Common Stock of the Company at an
exercise price of $12.50 per share were issued in a private placement in
connection with the Reliance Bankruptcy proceedings described in the Form 10-Q
under the heading "Management's Discussion and Analysis of Results of Operations
and Financial Condition of the Continuing Company Business -- Liquidity and
Capital Resources -- Reliance Transaction". During the third quarter of 1998,
documents were executed that provide certain lenders rights to warrants to
acquire 115,000 shares of Common Stock of the Company at an exercise price of
120% of the average trading price of the Company's Common Stock over a specified
time period, subject to the Company's right to not issue the warrants to the
lenders if the related loan is paid in full by the Company on or before December
31, 1998. These warrants were also offered in a private placement under Section
4(2) of the Securities Act. For certain stock option grants during the first
quarter of 1998 see "Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Continuing Company Business -
Liquidity and Capital Resources - Stock Option Grants".
As discussed earlier in this Form 10-Q, on September 17, 1998 the Company
initiated an Exchange Offer to exchange up to 5,000,000 shares of its Common
Stock for 12%, five-year subordinated debentures of the Company due October 23,
2003 ("Debentures"). The exchange ratio was $6.50 principal amount of Debentures
for each share of Common Stock validly tendered. On October 19, 1998 the
Exchange Offer expired by its original terms. A total of 2,463,603 shares of
Common Stock were exchange for Debentures ($16,013,418 aggregate principal
amount) in connection with the offer. The Debentures were not registered under
the Securities Act, since the exchange of such securities for Common Stock was
made pursuant to Section 3(a)(9) of the Securities Act. The Debentures are
unsecured obligations of the Company subordinated and subject in right of
payment to all existing and future senior indebtedness of the Company, but not
subordinated to holders of equity (e.g., the Company's common stockholders).
Holders of the Debentures have the right to receive specified principal amounts,
along with interest at 12% per annum. The Indenture relating to the Debentures
subjects the Company to certain financial covenants and other restrictions that
could affect the rights of common stockholders of the Company.
(d) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition of the Continuing Company Businesses -- Liquidity and
Capital Resources -- Revolving Facility".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Set forth below is information concerning each of the four matters submitted
to a vote at the Company's Annual Meeting of Stockholders on August 31, 1998:
(1) Directors: Each of the following persons was elected as a director of
the Company to hold office until the 1999 Annual Meeting of Stockholders, until
his successor is duly elected and qualified, or until retirement, resignation or
removal: Robert J.
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<PAGE> 31
Abrahams, Ernest C. Garcia II, Christopher D. Jennings, John N. MacDonough,
Gregory B. Sullivan, Frank P. Willey. Each of these persons received a minimum
of 17,695,153 votes "for" reelection and a maximum of 28,521 votes "withheld."
(2) Amendment of Long-Term Incentive Plan: The stockholders approved the
management proposal for certain technical amendments to the Company's Long-Term
Incentive Plan (no increase in shares available for issuance was being
requested).
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
17,264,084 445,443 11,147 --
</TABLE>
(3) 1998 Executive Incentive Plan: The stockholders approved the management
proposal for the Company's new 1998 Executive Incentive Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
15,054,924 2,655,728 13,022 --
</TABLE>
(4) Split-up: The stockholders approved the proposal to Split-up the Company
pursuant to which Ugly Duckling Corporation would transfer substantially all of
its non-dealership operations to a newly-formed company, Cygnet Financial
Corporation ("Cygnet") and Cygnet would be capitalized through a Rights
Offering:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
12,979,826 126,070 61,352 4,556,426
</TABLE>
The Rights Offering and Split-Up were not consummated. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition of the
Continuing Company Business - Split-up of the Company".
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional
Investments, L.P. ("Kayne Anderson"), and certain other lenders (the
"Lenders"), dated July 20, 1998
10.2 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders,
dated as of July 20, 1998
10.3 Servicing Agreement by and among Reliance Acceptance Corporation,
Registrant, and certain lenders
10.4 Agreement of Understanding by and among Reliance Acceptance Corporation,
Registrant and others
10.5 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and
among Cygnet Financial Services, Inc. and Mountain Parks Financial
Services, Inc.
10.6 1998 Executive Incentive Plan *
10.7 Amended and Restated Long Term Incentive Plan (as of January 15, 1998) *
10.8 Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement between Registrant and General Electric
Capital Corporation dated September 9, 1998
11 Statement re Computation of Per Share Earnings (see Note 5 to Notes to
Condensed Consolidated Financial Statements)
27.1 Financial Data Schedule - 9 months ended 9/30/98
27.2 Financial Data Schedule - 9 months ended 9/30/97
27.3 Financial Data Schedule - 6 months ended 6/30/98
27.4 Financial Data Schedule - 6 months ended 6/30/97
99 Cautionary Statements Regarding Forward Looking Statements and Risk
Factors
- ----------
* Management contract or compensatory plan, contract or arrangement.
(b) Reports on Form 8-K.
During the third quarter 1998, the Company filed three reports on Form 8-K. The
first report on Form 8-K, dated August 31, 1998 and filed September 2, 1998,
pursuant to Item 5 reported approval by the stockholders during the Company's
1998 annual meeting of the Company proceeding with the planned Split-up and the
related Rights Offering. The second report on Form 8-K, dated and filed
September 17, 1998, pursuant to Items 5 and 7 (1) reported the initiation of an
offer by the Company to exchange shares of its
31
<PAGE> 32
Common Stock for subordinated debentures ("Exchange Offer"), and (2) filed as
exhibits to the Form 8-K the offering circular describing the Exchange Offer and
Ugly Duckling Corporation's press release dated September 17, 1998 titled "Ugly
Duckling Corporation Announces Exchange Offer." The third report on Form 8-K,
dated September 25, 1998 and filed September 29, 1998, pursuant to Items 5 and 7
(1) reported the termination of the Rights Offering and the Split-up, and (2)
filed as exhibits to the Form 8-K documents not previously filed by the Company
consisting of a Supplement dated September 28, 1998 to the Offering Circular for
the Exchange Offer regarding the termination of the Rights Offering and Ugly
Duckling Corporation's press release dated September 28, 1998 titled "Ugly
Duckling Corporation and Cygnet Financial Corporation Terminate Rights
Offering." After the third quarter 1998, the Company filed two reports on Form
8-K. The first report on Form 8-K, dated October 8, 1998 and filed on October
13, 1998, pursuant to Items 5 and 7 (1) reported an expected charge to
Discontinued Operations totaling approximately $4.8 million (net of income
taxes) in the third quarter ended September 30, 1998, and (2) filed as exhibits
to the Form 8-K a Supplement No. 2 dated October 9, 1998 to the Offering
Circular for the Exchange Offer regarding the third quarter charge and Ugly
Duckling Corporation's press release dated October 8, 1998 titled "Ugly Duckling
Corporation Announces Third Quarter Charges to Discontinued Operations." The
second report on Form 8-K, dated October 20, 1998 and filed on October 21, 1998,
pursuant to Items 5 and 7 (1) reported the events described in two press
releases, and (2) filed as exhibits to the Form 8-K said press releases dated
October 21, 1998 and October 20, 1998 titled "Ugly Duckling Corporation
Announces Third Quarter 1998 Results" and "Ugly Duckling Corporation Announces
Successful Completion of Exchange Offer," respectively.
32
<PAGE> 33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ugly Duckling Corporation
/s/ STEVEN T. DARAK
--------------------------------------------
Steven T. Darak
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 13, 1998
33
<PAGE> 34
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Loan Agreement by and among the Registrant, Kayne Anderson Non-Traditional
Investments, L.P. ("Kayne Anderson"), and certain other lenders (the
"Lenders"), dated July 20, 1998
10.2 Payment Guaranty by Registrant in favor of Kayne Anderson and the Lenders,
dated as of July 20, 1998
10.3 Servicing Agreement by and among Reliance Acceptance Corporation,
Registrant, and certain lenders
10.4 Agreement of Understanding by and among Reliance Acceptance Corporation,
Registrant and others
10.5 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and
among Cygnet Financial Services, Inc. and Mountain Parks Financial
Services, Inc.
10.6 1998 Executive Incentive Plan *
10.7 Amended and Restated Long Term Incentive Plan (as of January 15, 1998) *
10.8 Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract
Loan and Security Agreement between Registrant and General Electric
Capital Corporation dated September 9, 1998
11 Statement re Computation of Per Share Earnings (see Note 5 to Notes to
Condensed Consolidated Financial Statements)
27.1 Financial Data Schedule - 9 months ended 9/30/98
27.2 Financial Data Schedule - 9 months ended 9/30/97
27.3 Financial Data Schedule - 6 months ended 6/30/98
27.4 Financial Data Schedule - 6 months ended 6/30/97
99 Cautionary Statements Regarding Forward Looking Statements and Risk
Factors
- ----------
* Management contract or compensatory plan, contract or arrangement.
34
<PAGE> 1
Exhibit 10.1
LOAN AGREEMENT
This LOAN AGREEMENT is dated as of July 20, 1998, between CYGNET
FINANCIAL CORPORATION, a Delaware corporation (the "Company"); and each lender
signatory hereto (each a "Lender," and collectively the "Lenders").
WHEREAS, each Lender has agreed to make a loan to the Company in the
amount of its respective Commitment (as defined herein) upon the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
I.1 Defined Terms. In addition to the terms defined elsewhere in this
Agreement, the following terms have the following meanings:
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, by contract or otherwise.
"Aggregate Commitment" means the amount of Five Million
Dollars ($5,000,000).
"Agreement" means this Loan Agreement, as amended,
supplemented or modified from time to time in accordance with the terms
hereof.
"Assignee" has the meaning specified in Section 8.06(a).
"Attorney Costs" means and includes all fees and disbursements
of any other external or in-house counsel.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in Phoenix, Arizona, New York,
Chicago or Los Angeles are authorized or required by law to close.
"Capital Lease" has the meaning specified in the definition of
"Capital Lease Obligations."
"Capital Lease Obligations" means any rental obligation which,
in accordance with GAAP, is capitalized on the books of the Company (a
"Capital Lease"), taken at the amount thereof accounted for as
indebtedness (net of interest expense) in accordance with GAAP.
"Closing Date" means the date on which all conditions
precedent set forth in Section 3.01 are satisfied or waived by all
Lenders, which is anticipated to be on or before July 20, 1998.
1
<PAGE> 2
"Code" means the Internal Revenue Code of 1986 and any
regulations promulgated thereunder.
"Commitment" means with respect to each Lender, the amount set
forth opposite its name on the signature pages to this Agreement.
"Company Warrants" means the warrants issued to each of the
Lenders pursuant to the Company Warrant Agreement.
"Company Warrant Agreement" means either the Warrant Agreement
in the form of the Warrant Agreement Form, providing for the issuance
of Company Warrants to the Lenders to acquire 115,000 shares of the
Company's Common Stock on the terms in the Warrant Agreement Form and
the following additional terms:
<TABLE>
<S> <C>
Warrant Price $ 8.40
Redemption Amount $13.44
</TABLE>
"Company Warrant Event" means the occurrence of the Split-Up
prior to December 31, 1998.
"Debt" means any Obligation for borrowed money, including the
indebtedness portion of any Capitalized Lease Obligations.
"Debt to Tangible Net Worth Ratio" means the debt-to-equity
ratio of the Company (or UDC, if applicable), calculated in accordance
with GAAP by comparing total Debt to Tangible Net Worth.
"Default" means any event or circumstance which, with the
giving of notice, the lapse of time, or both, would (if not cured or
otherwise remedied) constitute an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and regulations promulgated
thereunder.
"Event of Default" means any of the events or circumstances
specified in Section 7.01.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the accounting profession), or
in such other statements by such other entity as may be in general use
by significant segments of the U.S. accounting profession, which are
applicable to the circumstances as of the date of determination.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
2
<PAGE> 3
"Insolvency Proceeding" means, with respect to any Person, (a)
any case, action or proceeding before any court or other Governmental
Authority relating to bankruptcy, reorganization, insolvency,
liquidation, receivership, dissolution, winding-up or relief of
debtors, or (b) any general assignment for the benefit of creditors,
composition, marshaling of assets for creditors or other, similar
arrangement in respect of its creditors generally or any substantial
portion of its creditors.
"Lender" and "Lenders" have the meanings specified in the
introductory clause hereto.
"Lien" means any mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance,
lien (statutory or other) or preference, priority or other security
interest or preferential arrangement of any kind or nature whatsoever
(including those created by, arising under, or evidenced by any
conditional sale or other title retention agreement, the interest of a
lessor under a Capital Lease Obligation, any financing lease having
substantially the same economic effect as any of the foregoing, or the
filing of any financing statement naming the owner of the asset to
which such lien relates as debtor, under the UCC or any comparable law)
and any contingent or other agreement to provide any of the foregoing,
but not including the interest of a lessor under an Operating Lease.
"Loan" means an individual term loan made by each Lender in
the amount of each Lender's respective Commitment pursuant to Article
II.
"Loans" mean all of the term loans by the Lenders to the
Company pursuant to Article II.
"Loan Documents" means this Agreement, the Notes, the UDC
Guaranty, the Company Warrant Agreement (or, in the alternative, if
applicable, the UDC Warrant Agreement), the Company Warrants (or, in
the alternative, if applicable, the UDC Warrants) and all other
documents delivered to any of the Lenders in connection therewith.
"Material Adverse Effect" means a material adverse change in,
or a material adverse effect upon, any of (a) the operations, business,
properties, condition (financial or otherwise) or prospects of the
Company (or UDC prior to the Split-Up) taken as a whole, (b) the
ability of the Company or UDC to perform under any Loan Document and
avoid any Event of Default, or (c) the legality, validity, binding
effect or enforceability of any Loan Document.
"Maturity Date" means July 20, 2001.
"Notes" shall mean the promissory notes, dated as of the
Closing Date, substantially in the form of Exhibit A annexed hereto,
issued by the Company to the order of the Lenders evidencing the
obligation of the Company to repay the Loans.
"Obligations" mean all Loans and other Debt, advances, debts,
liabilities, obligations, covenants and duties owing by the Company or
UDC to any Person, of any kind or nature, present or future, whether or
not evidenced by any note, guaranty or other instrument, arising under
this Agreement or under any other loan document, or out of any other
agreement or understanding, whether or not for the payment of money,
whether arising by reason of an extension of credit, loan, guaranty,
indemnification or in any other manner, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due
or to become due, now existing or hereafter arising and however
acquired.
3
<PAGE> 4
"Operating Lease" means, as applied to any Person, any lease
of property which is not a Capital Lease.
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association,
joint venture or governmental authority.
"Pro-Rata Basis" means pro-rata as to the Lenders based on the
unpaid principal balance of each Lender's Loan.
"Responsible Officer" means the chief executive officer or the
president of the Company, or any other officer having substantially the
same authority and responsibility or, with respect to financial
matters, the chief financial officer or the treasurer of the Company,
or any other officer having substantially the same authority and
responsibility.
"SEC" means the Securities and Exchange Commission, or any
successor thereto.
"Split-Up" means (i) the transfer and sale by UDC of the
assets and liabilities constituting its non-dealership operations
(i.e., substantially all third-party servicing, dealer finance and
insurance operations) to the Company (such assets and liabilities
having an anticipated appraised value of approximately $50 million) in
exchange for $40 million of the Company's Series A Preferred Stock and
the balance in cash, which shall be not less than $10 million; and (ii)
the further capitalization of the Company through the consummation of a
rights offering to UDC's shareholders raising not less than
$24,000,000.
"Subordinated Debt" means the unsecured Obligation which by
its express terms is subordinated in right of payment to any other
unsecured Obligation of the Company.
"Tangible Net Worth" means the total of the Company's
shareholders' equity (including capital stock (including preferred
stock), additional paid-in capital, and retained earnings), less (i)
the total amount of loans and debts due from Affiliates, excluding
wholly-owned subsidiaries, shareholders, officers, or employees of the
Company, and (ii) the total amount of any intangible assets and
goodwill as determined in accordance with GAAP.
"UCC" means the Uniform Commercial Code as in effect in any
jurisdiction.
"UDC" means Ugly Duckling Corporation, a Delaware corporation,
provided that any terms herein relevant to UDC shall terminate and be
deleted herefrom upon release of UDC from the UDC Guaranty pursuant to
Section 11 of the UDC Guaranty.
"UDC Guaranty" means the Payment Guaranty executed by UDC in
the form attached hereto as Exhibit B, provided that any terms herein
relevant to the UDC Guaranty shall terminate and be deleted herefrom
upon release of UDC from the UDC Guaranty pursuant to Section 11 of the
UDC Guaranty..
"UDC Market Price" means the average Daily Market Price (as
defined in Section 10(e) of the Warrant Agreement Form) per share of
the Common Stock of UDC for the twenty (20) consecutive trading days
prior to the Warrant Date.
"UDC Warrants" means the warrants issued to each of the
Lenders pursuant to the UDC Warrant Agreement.
4
<PAGE> 5
"UDC Warrant Agreement" means the Warrant Agreement in the
form of the Warrant Agreement Form, providing for the issuance of UDC
Warrants to the Lenders to acquire 115,000 shares of UDC's Common Stock
on the terms in the Warrant Agreement Form and the following additional
terms:
Warrant Price 120% of UDC Market Price
Redemption Amount 160% of Warrant Price Computed Above
"UDC Warrant Event" means December 31, 1998, but only if (i)
the Loans have not been paid in full; (ii) the Company Warrant Event
has not occurred; and (iii) the Company Warrants are not issued prior
to December 31, 1998.
"Warrant Agreement Form" means the form of Warrant Agreement
attached hereto as Exhibit C.
"Warrant Date" means the date of the applicable Company
Warrants or the UDC Warrants are issued in a timely manner pursuant to
Section 2.08 hereof.
I.2 Other Interpretive Provisions.
Defined Terms. Unless otherwise specified herein or therein,
all terms defined in this Agreement shall have the defined meanings when used in
any certificate or other document made or delivered pursuant hereto. The meaning
of defined terms shall be equally applicable to the singular and plural forms of
the defined terms. Terms (including uncapitalized terms) not otherwise defined
herein and that are defined in the UCC shall have the meanings therein
described.
(a) The Agreement. The words "hereof," "herein," "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement; and
section, schedule and exhibit references are to this Agreement unless otherwise
specified.
(b) Certain Common Terms.
(i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.
(ii) The term "including" is not limiting and means "including
without limitation".
(iii) The term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or".
(c) Performance; Time. Whenever any performance obligation
hereunder (other than a payment obligation) shall be stated to be due or
required to be satisfied on a day other than a Business Day, such performance
shall be made or satisfied on the next succeeding Business Day. In the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including," the words "to" and "until" each mean
"to but excluding," and the word "through" means "to and including." If any
provision of this Agreement refers to any action taken or to be taken by any
Person, or which such Person is prohibited from taking, such provision shall
5
<PAGE> 6
be interpreted to encompass any and all means, direct or indirect, of taking, or
not taking, such action.
(d) Contracts. Unless otherwise expressly provided herein,
references to agreements and other contractual instruments shall be deemed to
include all subsequent amendments and other modifications thereto, but only to
the extent such amendments and other modifications are not prohibited by the
terms of any Loan Document.
(e) Laws. References to any statute or regulation are to be
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, supplementing or interpreting the statute or regulation.
(f) Captions. The captions and headings of this Agreement are for
convenience of reference only and shall not affect the construction of this
Agreement.
(g) Independence of Provisions. The parties acknowledge that this
Agreement and other Loan Documents may use several different limitations, tests
or measurements to regulate the same or similar matters, and that such
limitations, tests and measurements are cumulative and must each be performed,
except as expressly stated to the contrary in this Agreement.
(h) Accounting Principles.
(i) Unless the context otherwise clearly requires, all
accounting terms not expressly defined herein shall be construed, and all
financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied.
(ii) References herein to "fiscal year" and "fiscal quarter"
refer to such fiscal periods of the Company or UDC, as applicable.
ARTICLE II.
THE LOAN
II.1 Amount and Notes.
Each Lender shall make its respective Loan to the Company in
the amount of its Commitment in a single advance to be disbursed on the Closing
Date. The Company has authorized the issuance of the Notes in the aggregate
principal amount of Five Million Dollars ($5,000,000). On the Closing Date, the
Company shall issue and deliver to each Lender a Note in the principal amount
equal to such Lender's Commitment, payable to the order of such Lender,
substantially in the form of Exhibit A to this Agreement. The Notes will
evidence the principal amount of each Loan together with interest accrued and
unpaid thereon.
II.2 Interest.
(a) Each Loan shall accrue interest on the outstanding
principal amount thereof for the period from and including the date of such Loan
to but excluding the date such Loan shall be paid in full at a rate per annum
equal to 12%.
(b) Accrued interest shall be paid quarterly in arrears on (i)
March 31, June 30, September 30 and December 31 of each year; and (ii) on the
Maturity Date. Accrued and unpaid
6
<PAGE> 7
interest shall also be paid on the date of any prepayment of the Loans pursuant
to Section 2.03 for the portion of the Loans so prepaid and upon prepayment in
full thereof.
(c) While any Event of Default exists and is continuing or
after acceleration, the Company shall pay interest (after as well as before
entry of judgment thereon to the extent permitted by law) on the principal
amount of the Loans then unpaid, at a rate per annum equal to 18%.
(d) The Company agrees to pay an effective contracted for rate
of interest equal to the rate of interest resulting from all interest payable as
provided herein, plus all other fees, charges and costs that may be deemed or
determined to be interest. Anything herein to the contrary notwithstanding, the
obligations of the Company hereunder shall be subject to the limitation that
payments of interest shall not be required, for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by the respective Lender would be contrary to the
provisions of any law applicable to such Lender limiting the highest rate of
interest which may be lawfully contracted for, charged or received by such
Lender, and in such event the Company shall pay such Lender interest at the
highest rate permitted by applicable law.
II.3 Optional Prepayments. The Company may, at any time or from
time to time, upon at least ten (10) Business Days' prior written notice to each
of the Lenders, prepay pro rata the Loans in whole or in part, without penalty
or premium. Such notice of prepayment shall specify the date and amount of such
prepayment. If such notice is given by the Company, the Company shall make such
prepayment on a Pro-Rata Basis and each Lender's pro-rata share thereof and the
payment amount specified in such notice shall be due and payable on the date
specified therein, together with accrued interest to each such date on the
amount prepaid.
II.4 Computation of Fees and Interest. All computations of fees
and interest under this Agreement shall be made on the basis of a 365-day year.
II.5 Payments by the Company.
(a) All payments (including prepayments) to be made by the
Company on account of principal, interest, fees and other amounts required
hereunder shall be made without set-off, deduction, recoupment or counterclaim
and shall, except as otherwise expressly provided herein, be made either (i) to
the Lenders at each of the Lender's respective offices as set forth on the
applicable signature pages hereof, or (ii) by wire transfer to each lender
pursuant to the wire instructions set forth on Schedule 2.01(a) or such other
wire instructions provided to the Company in writing, in U.S. dollars and in
immediately available funds, no later than 1:30 p.m. Phoenix, Arizona time on
the date specified herein. Any payment which is received by the applicable
Lender later than 1:30 p.m. (Phoenix, Arizona time) shall be deemed to have been
received on the immediately succeeding Business Day and any applicable interest
or fee shall continue to accrue.
(b) Whenever any payment hereunder shall be stated to be due
on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of interest or fees, as the case may be.
II.6 Sharing of Payments, Etc. All principal payments shall be
made to the Lenders on a Pro-Rata Basis.
II.7 Priority of Payments; Subordination. Notwithstanding anything
in this Agreement to the contrary, the payment of principal and interest under
this Agreement on the Loans is expressly
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subordinated for all purposes to any Obligations now in existence or later
incurred by the Company other than Subordinated Debt; and each of the Lenders
will, upon request of any institution or Person that is an obligee of any
Obligation now in existence or incurred by the Company in the future, execute
and deliver an agreement of subordination in form mutually satisfactory to each
of the Lenders and such institution or Person, the tenor of which shall be to
effectuate the terms of this Section.
II.8 Warrants. If the Company Warrant Event occurs prior to the UDC
Warrant Event, then the Company shall, not later than three (3) Business Days
after the Company Warrant Event, but in no event later than the UDC Warrant
Event, execute and deliver the Company Warrant Agreement and issue the Company
Warrants. If the UDC Warrant Event shall occur prior to the issuance of the
Company Warrants, then the Company Warrants shall not be issued and the Company
shall cause UDC to execute and deliver the UDC Warrant Agreement and issue the
UDC Warrants not later than January 5, 1999. The Lenders shall fully cooperate
in the Company's (and UDC's, pursuant to the UDC Guaranty) performance of this
Section 2.08.
ARTICLE III.
CONDITIONS PRECEDENT
III.1 Conditions of Loans to the Company. The obligation of each
Lender to fund its Loan to the Company hereunder is subject to the condition
that the Lenders shall have received on or before the Closing Date, in form and
substance satisfactory to each Lender and their respective counsel and in
sufficient copies for each Lender, all of the following:
(a) Loan Agreement. This Agreement executed by the
Company and each Lender;
(b) Resolutions: Incumbency - Company.
(i) Copies of the resolutions of the board of
directors of the Company approving and authorizing the execution,
delivery and performance by the Company of this Agreement and the other
Loan Documents to be delivered by the Company hereunder, and
authorizing the borrowing of the Loans, certified as of the Closing
Date by the Secretary or an Assistant Secretary of the Company; and
(ii) A certificate of the Secretary or Assistant
Secretary of the Company certifying the names and true signatures of
the officers of the Company authorized to execute, deliver and perform,
as applicable, this Agreement, and all other Loan Documents to be
delivered by the Company hereunder;
(c) Resolutions: Incumbency - UDC.
(i) Copies of the resolutions of the board of
directors of UDC approving and authorizing the execution, delivery and
performance by UDC of the UDC Guaranty, the UDC Warrant Agreement and
the UDC Warrants, certified as of the Closing Date by the Secretary or
an Assistant Secretary of UDC; and
(ii) A certificate of the Secretary or Assistant
Secretary of UDC certifying the names and true signatures of the
officers of UDC authorized to execute, deliver and perform, as
applicable, the UDC Guaranty, the UDC Warrant Agreement and the UDC
Warrants;
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(d) Articles of Incorporation: Bylaws and Good Standing.
Each of the following documents:
(i) the certificate of incorporation of each of the
Company and UDC as in effect on the Closing Date, certified by the
Secretary of State of the state of Delaware as of a recent date and by
the Secretary or Assistant Secretary of the Company, and UDC
respectively, as of the Closing Date, and the Bylaws of each of the
Company and UDC as in effect on the Closing Date, certified by the
Secretary or Assistant Secretary of the Company, and UDC respectively,
as of the Closing Date, and
(ii) a good standing certificate for each of the
Company and UDC from the Secretary of State of Delaware.
(e) Notes. The Notes, executed by the Company.
(f) UDC Guaranty. The UDC Guaranty, executed by UDC.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Lender as of the date
hereof and as of the Closing Date that:
IV.1 Organization. The Company is a corporation duly organized and
existing in good standing under the laws of the State of Delaware, the Company
has the corporate power to own its property and to carry on its business as now
being conducted, and the Company is duly qualified as a foreign corporation to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it makes such qualification necessary.
IV.2 Financial Statements. The Company has provided to the Lenders
copies of the following audited financial statements: a balance sheet of UDC as
of December 31, 1997 and March 31, 1998, and statements of income and cash flows
for the fiscal year ended December 31, 1997 and for the fiscal quarter ending
March 31, 1998. Such financial statements (including any related schedules
and/or notes) are true and correct in all material respects, have been prepared
in accordance with GAAP consistently followed throughout the periods involved
and show all liabilities, direct and contingent, of the Company required to be
shown in accordance with GAAP. The balance sheet fairly presents the condition
of the Company as at the date thereof, and the statements of income and cash
flows fairly present the results of the operations of the Company for the
periods indicated. There has been no change in the business, condition
(financial or otherwise) or operations of the Company since December 31, 1997 or
March 31, 1998, which could reasonably be expected to have a Material Adverse
Effect.
IV.3 Actions Pending. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Company or UDC, threatened
against the Company or UDC or any properties or rights of the Company or UDC, by
or before any court, arbitrator or administrative or governmental body which
could reasonably be expected to result in any Material Adverse Effect.
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IV.4 Outstanding Obligations. After giving effect to the transactions
contemplated hereby and Obligations incurred in the ordinary course of business,
neither the Company nor UDC have any Obligations outstanding except Obligations
disclosed in the financial statements provided pursuant to Section 4.02 and
except as disclosed in Schedule 4.04 attached hereto. There exists no default
(or, to the knowledge of the Company or UDC, any event or condition that, with
the passage of time, would constitute a default) under the provisions of any
instrument evidencing such Obligations or of any agreement relating thereto.
IV.5 Taxes. The Company and UDC have filed all Federal, State and other
income tax returns which, to the best knowledge of the officers of the Company
and UDC, are required to be filed, and has paid all taxes as shown on such
returns and on all assessments received by it to the extent that such taxes have
become due, except such taxes as are being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP.
IV.6 Conflicting Agreements and Other Matters. Neither the Company nor
UDC is a party to any contract or agreement or subject to any charter or other
corporate restriction which materially and adversely affects its business,
property or assets, or financial condition. Neither the execution nor delivery
of this Agreement or the other Loan Documents, nor fulfillment of nor compliance
with the terms and provisions hereof and of the other Loan Documents will
conflict with, or result in a breach of the terms, conditions or provisions of,
or constitute a default under, or result in any violation of, or result in the
creation of any Lien upon any of the properties or assets of either the Company
or UDC pursuant to, the Certificate of Incorporation or Bylaws of the Company or
UDC, any award of any arbitrator or any agreement (including any agreement with
stockholders), instrument, order, judgment, decree, statute, law, rule or
regulation to which the Company or UDC is subject. Neither the Company nor UDC
is a party to, or otherwise subject to any provision contained in, any
instrument evidencing indebtedness of the Company or UDC, any agreement relating
thereto or any other contract or agreement (including its charter) which limits
the amount of, or otherwise imposes restrictions on the incurring of, Debt of
the Company of the type to be evidenced by this Agreement or the Notes.
IV.7 ERISA. No accumulated funding deficiency (as defined in section
302 of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any plan (other than a multiemployer plan). No liability to the
Pension Benefit Guaranty Corporation has been or is expected by the Company or
UDC to be incurred with respect to any plan (other than a multiemployer plan) by
the Company or UDC which could reasonably be expected to have a Material Adverse
Effect. Neither the Company nor UDC has incurred or presently expects to incur
any withdrawal liability under Title IV of ERISA with respect to any
multiemployer plan which is or would be materially adverse to the Company or
UDC. The execution and delivery of this Agreement and the other Loan Documents
will not involve any transaction which is subject to the prohibitions of section
406 of ERISA or in connection with which a tax could be imposed pursuant to
section 4975 of the Code. For the purpose of this Section 4.09, the term "plan"
shall mean an "employee pension benefit plan" (as defined in section 3 of ERISA)
which is or has been established or maintained, or to which contributions are or
have been made, by the Company or UDC or by any trade or business, whether or
not incorporated, which, together with the Company or UDC, is under common
control, as described in section 414(b) or (c) of the Code; and the term
"multiemployer plan" shall mean any plan which is a "multiemployer plan" (as
such term is defined in section 4001(a)(3) of ERISA).
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IV.8 Governmental Consent. Neither the nature of the Company's nor
UDC's business, nor any of their respective properties, nor any relationship
between the Company or UDC and any other Person, nor any circumstance in
connection with the making of the Loans or delivery of the Notes is such as to
require any authorization, consent, approval, exemption or other action by or
notice to or filing with any Governmental Authority that has not previously been
made or taken and to which all applicable waiting periods have expired.
IV.9 Disclosure. Neither this Agreement nor any other document,
certificate or statement furnished to any Lender by or on behalf of the Company
or UDC in connection herewith contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading. There is no fact peculiar to the
Company or UDC which has had a Material Adverse Effect or in the future could
reasonably be expected to have a Material Adverse Effect that has not been set
forth in this Agreement or disclosed in the Company's filings with the SEC, or
in the other documents, certificates and statements furnished to any Lender by
or on behalf of the Company or UDC prior to the date hereof in connection with
the transactions contemplated hereby.
IV.10 Possession of Franchises, Licenses, etc. The Company and UDC
possess all franchises, certificates, licenses, permits and other authorizations
from governmental political subdivisions or regulatory authorities and all
patents, trademarks, service marks, trade names, copyrights, licenses and other
rights, free from burdensome restrictions, that are necessary in any material
respect for the ownership, maintenance and operation of its properties and
assets, and neither the Company nor UDC are in violation of any thereof in any
material respect.
ARTICLE V.
AFFIRMATIVE COVENANTS
The Company covenants and agrees that, so long as any Loan or other
Obligation hereunder shall remain unpaid or unsatisfied, unless the Lenders
waive compliance in writing:
V.1 Financial Statements. The Company shall deliver to each of the
Lenders in form and detail satisfactory to each of the Lenders:
(a) promptly upon transmission thereof, copies of all
financial statements, proxy statements, notices and reports as it shall send to
its stockholders and copies of all registration statements (without exhibits)
and all reports which it (or UDC) files with the SEC (or any governmental body
or agency succeeding to the functions of the SEC); and
(b) with reasonable promptness, such other financial data as
the Lenders may reasonably request, subject to the Company's right to maintain
confidentiality of any financial information to the extent necessary to comply
with applicable securities laws.
V.2 Certificates; Other Information. Within 60 days after the end
of each quarterly period (other than the fourth quarterly period) in each fiscal
year and within 105 days after the end of each fiscal year, the Company shall
deliver to each Lender a certificate of a Responsible Officer setting forth
(except to the extent specifically set forth in any financial statements filed
within such periods with the SEC):
(a) sufficient information (including detailed calculations
reasonably satisfactory to the Lenders) to establish whether the Company (or
UDC, if applicable) is in compliance with the requirements of Sections 6.01; and
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(b) a statement that there exists no Event of Default or
Default, or, if any such Event of Default or Default exists, specifying:
(i) the nature thereof;
(ii) the period of existence thereof; and
(iii) what action the Company proposes to take with
respect thereto.
V.3 Default Disclosure. The Company shall forthwith, upon a
Responsible Officer of the Company obtaining knowledge of an Event of Default or
Default, promptly deliver to each Lender a Certificate of a Responsible Officer
specifying the nature and period of existence thereof and what action the
Company proposes to take with respect thereto.
ARTICLE VI.
NEGATIVE COVENANTS
The Company hereby covenants and agrees that, so long as any Loan or
other Obligation hereunder shall remain unpaid or unsatisfied, unless the
Lenders waive compliance in writing:
VI.1 Debt to Tangible Net Worth Ratio. Prior to the Split-Up, UDC's
Debt to Tangible Net Worth Ratio shall not exceed 2.1 to 1.0, calculated as of
the end of each quarterly period in each fiscal year. After the Split-Up, the
Company shall not permit the Company's Debt to Tangible Net Worth Ratio to
exceed 3.0 to 1.0, calculated as of the end of each quarterly period in each
fiscal year.
VI.2 Terms of Subordinated Debt. The Company shall not enter into
any agreement (oral or written) which could in any way be construed as amending,
modifying, altering, changing or terminating any one or more provisions relating
to the Subordinated Debt to the extent that such amendment, modification,
alteration, change or termination would subordinate the payment of interest on
or principal of the Loans to the payment of principal and interest relating to
the Subordinated Debt.
ARTICLE VII.
EVENTS OF DEFAULT
VII.1 Event of Default. Any of the following shall constitute an
"Event of Default."
(a) The Company defaults in the payment of any principal of
the Loan when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(b) The Company defaults in the payment of any interest on the
Loan when the same shall become due and such default continues for a period of
five Business Days; or
(c) The Company fails to make any payment when due with
respect to any Obligation of the Company (other than an obligation payable
hereunder), or any breach, default or event of default shall occur, or any other
conditions shall exist under any instrument, agreement or indenture pertaining
to such Obligation, if the holder or holders of such Obligation accelerate the
maturity of any such Obligation or require a redemption or other repurchase of
such Obligation and
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such failure relates to the acceleration or redemption of an amount in excess of
$10 million and such acceleration continues for a period of five Business Days;
or
(d) Any representation or warranty made by the Company herein
or by the Company or any of its officers in any writing furnished in connection
with or pursuant to this Agreement shall be false in any material respect on the
date as of which made; or
(e) The Company fails to perform or observe any covenant or
agreement contained in Article VI hereof; or
(f) The Company fails to perform or observe any other
agreement, covenant, term or condition contained herein and such failure shall
not be remedied within 30 days after receipt of notice thereof from any Lender;
or
(g) The Company makes an assignment for the benefit of
creditors or is generally not paying its debts as such debts become due; or
(h) Any decree or order for relief in respect of the Company
is entered under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law,
whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any
jurisdiction; or
(i) The Company petitions or applies to any tribunal for, or
consents to, the appointment of, or taking possession by, a trustee, receiver,
custodian, liquidator or similar official of the Company, or of any substantial
part of the assets of the Company, or commences a voluntary case under the
Bankruptcy Law of the United States or any proceedings relating to the Company
under the Bankruptcy Law of any other jurisdiction; or
(j) Any such petition or application referenced in clause (i)
above is filed, or any such proceedings referenced in clause (i) above are
commenced against the Company, and the Company by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee, receiver, custodian, liquidator
or similar official, or approving the petition in any such proceedings, and such
order, judgment or decree remains unstayed and in effect for more than 30 days;
or
(k) Any order, judgment or decree is entered in any
proceedings against the Company decreeing the dissolution of the Company and
such order, judgment or decree remains unstayed and in effect for more than 60
days; or
(l) Any order, judgment or decree is entered in any
proceedings against the Company decreeing a split-up of the Company which
requires the divestiture of assets representing a substantial part, and such
order, judgment or decree remains unstayed and in effect for more than 60 days;
or
(m) Guarantor (i) is unable or admits in writing Guarantor's
inability to pay Guarantor's monetary obligations as they become due, (ii) makes
a general assignment for the benefit of creditors, (iii) applies for, consents
to, or acquiesces in, the appointment of a trustee, receiver or other custodian
for Guarantor or the property of Guarantor or any part thereof, or in the
absence of such application, consent or acquiescence, a trustee, receive or
other custodian is appointed for Guarantor or the property of Guarantor or any
part thereof, and such appointment is not discharged within 60 days, or (iv)
contests the validity or unenforceability of the UDC Guaranty.
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(n) The Occurrence of an Event of Default under the UDC
Guaranty.
then (a) if such event is an Event of Default specified in any of clauses (g)
through (l) of this Section 7.01 with respect to the Company or clauses (m) or
(n) of this Section 7.01 with respect to UDC, all of the Loans at the time
outstanding shall automatically become immediately due and payable at par
together with interest accrued thereon, without presentment, demand, protest or
notice of any kind, all of which are hereby waived by the Company, and (b) if
such event is any other Event of Default, any Lender may, by notice in writing
to the Company, declare all of such Lender's Loan to be, and all of such
Lender's Loan shall thereupon be and become, immediately due and payable
together with interest accrued thereon without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Company.
VII.2 Other Remedies. If any Event of Default or Default shall occur
and be continuing, each Lender may proceed to protect and enforce its rights
under this Agreement by exercising such remedies as are available to such Lender
in respect thereof under applicable law, either by suit in equity or by action
at law, or both, whether for specific performance of any covenant or other
agreement contained in this Agreement or in aid of the exercise of any power
granted in this Agreement. No remedy conferred in this Agreement upon the
Lenders is intended to be exclusive of any other remedy, and each and every such
remedy shall be cumulative and shall be in addition to every other remedy
conferred herein or now or hereafter existing at law or in equity or by statute
or otherwise.
ARTICLE VIII.
MISCELLANEOUS
VIII.1 Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by the Company therefrom, shall be effective unless the
same shall be in writing and signed by the Lenders and the Company, and then
such waiver shall be effective only in the specific instance and for the
specific purpose for which given.
VIII.2 Notices.
(a) All notices, requests and other communications provided
for hereunder shall be in writing (including, unless the context expressly
otherwise provides, by facsimile transmission, provided that, any matter
transmitted by the Company by facsimile (i) shall be immediately confirmed by a
telephone call to the recipient at the number specified on the applicable
signature page hereof, and (ii) shall be followed promptly by a hard copy
original thereof) and mailed, faxed, telecopied or delivered, to the address or
facsimile number specified for notices on the applicable signature page hereof;
or, as to the Company or each of the Lenders, to such other address as shall be
designated by such party in a written notice to the other parties, and as
directed to each other party, at such other address as shall be designated by
such party in a written notice to the Company and each of the Lenders.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery or faxed, be effective when delivered for
overnight (next day) delivery, transmitted by facsimile machine, respectively,
or if delivered, upon delivery.
VIII.3 No Waiver: Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of any Lender, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder
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preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege.
VIII.4 Costs and Expenses. The Company shall, following consummation
of the transactions contemplated hereby:
(a) pay or reimburse each Lender within ten (10) Business Days
after demand for all reasonable costs and expenses incurred by each Lender in
connection with any amendment, supplement, waiver or modification to this
Agreement, any other Loan Document and any other documents prepared in
connection therewith, including the reasonable Attorney Costs incurred by any
Lender with respect thereto; and
(b) pay or reimburse each Lender within ten (10) Business Days
after demand for all reasonable costs and expenses incurred by them in
connection with the enforcement, attempted enforcement, or preservation of any
rights or remedies (including in connection with any "workout" or restructuring
regarding the Loans, and including in any Insolvency Proceeding or appellate
proceeding) under this Agreement, any other Loan Document, and any such other
documents, including reasonable Attorney Costs incurred by any Lender.
VIII.5 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Company may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of each Lender.
VIII.6 Assignment, Participations, etc.
(a) Any Lender may, with the written consent of the Company
(which consent shall be obtained prior to such Lender's delivery of any
information (including financial information) to any Assignee (as hereinafter
defined) relating to an assignment of such Lender's rights and obligations under
the Loan Documents, at all times other than during the existence of an Event of
Default, which consent shall not be unreasonably withheld, at any time assign
and delegate to one or more person or entity (provided, that, no written consent
of the Company shall be required in connection with any assignment and
delegation by a Lender to a Lender Affiliate of such Lender) (each an
"Assignee") all (but no less than all) of its interest in the Loan and the other
rights and obligations of such Lender hereunder, provided, however, that, the
Company and each other Lender may continue to deal solely and directly with such
Lender in connection with the interest so assigned to an Assignee until written
notice of such assignment, together with payment instructions, addresses and
related information with respect to the Assignee shall have been given to the
Company by such Lender and the Assignee.
(b) From and after the date that such Lender notifies the
Company of such assignment and the Company consents to such assignment, (i) the
Assignee thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it by such Lender, shall have the
rights and obligations of such Lender under the Loan Documents, and (ii) the
assignor Lender shall, to the extent that rights and obligations hereunder have
been assigned by it pursuant to such assignment, relinquish its rights and be
released from its obligations under the Loan Documents.
(c) Immediately after compliance with the conditions contained
in Sections 8.06(a) and (b) with respect to any Lenders making an assignment or
delegation to an eligible Assignee, this Agreement shall be deemed to be amended
to the extent, but only to the extent,
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necessary to reflect the addition of the Assignee and the resulting adjustment
of the Loans arising therefrom.
VIII.7 Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement in any number of separate counterparts, each of
which, when so executed, shall be deemed an original, and all of said
counterparts taken together shall be deemed to constitute but one and the same
instrument. A set of the copies of this Agreement signed by all the parties
shall be lodged with the Company and the Lenders.
VIII.8 Severability. The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.
VIII.9 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of the Company and the Lenders,
and their permitted successors and assigns, and no other Person shall be a
direct or indirect legal beneficiary of, or have any direct or indirect cause of
action or claim in connection with, this Agreement or any of the other Loan
Documents. No Lender shall have any obligation to any Person not a party to this
Agreement or other Loan Documents.
VIII.10 Time. Time is of the essence as to each term or provision of
this Agreement and each of the other Loan Documents.
VIII.11 Governing Law.
THIS AGREEMENT AND THE NOTES SHALL BE DEEMED TO HAVE BEEN MADE
IN THE STATE OF CALIFORNIA; AND (B) THE VALIDITY OF THIS AGREEMENT AND THE
NOTES, AND THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF,
ALL CLAIMS MADE IN CONNECTION THEREWITH, AND THE RIGHTS OF THE PARTIES THERETO
SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA.
VIII.12 Waiver of Jury Trial.
THE COMPANY AND THE LENDERS HEREBY AGREE TO WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE
COMPANY AND THE LENDERS HEREBY AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT IN ANY WAY LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY
JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM, OR
OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS. A COPY OF THIS SECTION 8.12 MAY
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BE FILED WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL
BY JURY AND CONSENT TO TRIAL.
VIII.13 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire Agreement and understanding among the Company and
the Lenders and supersedes all prior or contemporaneous agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof and any prior arrangements made with respect to the
payment by the Company (or any indemnification for) any fees, costs or expenses
payable to or incurred (or to be incurred) by or on behalf of the Lenders
pursuant to the Loan Documents.
VIII.14 Interpretation. This Agreement is the result of negotiations
between and has been reviewed by counsel to the Lenders, the Company and other
parties, and is the product of all parties hereto. Accordingly, this Agreement
and the other Loan Documents shall not be construed against the Company merely
because of the Company's involvement in the preparation of such documents and
agreements.
[Balance of Page Intentionally Left Blank]
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<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
CYGNET FINANCIAL CORPORATION
By: /s/ Steven P. Johnson
-------------------------------
Steven P. Johnson
Senior Vice President and General Counsel
Address for notices:
Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attn: Steven P. Johnson, Esq., Senior Vice
President and General Counsel
Telephone: (602) 852-6605
Telecopy: (602) 852-6696
Commitment: $1,300,000 ARBCO ASSOCIATES, L.P.
By: KAIM Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ Robert V. Sinnott
-----------------------------------
Title: Vice President
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ___________________
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
18
<PAGE> 19
Commitment: $1,200,000 KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ Robert V. Sinnott
--------------------------------
Name: Robert V. Sinnott
------------------------------
Title: VP
-----------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
----------------------
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $1,200,000 OFFENSE GROUP ASSOCIATES, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ Robert V. Sinnott
-------------------------------
Name: Robert V. Sinnott
-----------------------------
Title:
----------------------------
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn:
--------------------
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
19
<PAGE> 20
Commitment: $600,000 OPPORTUNITY ASSOCIATES, LIMITED PARTNER-
SHIP
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By: /s/ Robert V. Sinnott
----------------------------
Name: Robert V. Sinnott
Title: Vice President
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _____________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $700,000 NORTH POINTE FINANCIAL SERVICES, INC.
By: /s/ John H. Berry
----------------------------
Name: John H. Berry
Title: Chief Financial Officer
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _____________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
20
<PAGE> 21
EXHIBIT A
FORM OF PROMISSORY NOTE
Original Face Amount: $____________
Maker: CYGNET FINANCIAL CORPORATION, a Delaware corporation
Dated as of: July 20, 1998
(a) PROMISE TO REPAY. FOR VALUE RECEIVED, CYGNET FINANCIAL
CORPORATION, a Delaware corporation ("Maker"), promises to pay to
_____________________ ("Payee"), or order, the principal sum of
_________________ Dollars ($________) or such lesser amount as shall equal the
outstanding amount of the loan (the "Loan") made by Payee to Maker, pursuant to
Section 2.01 of that certain Loan Agreement, dated as of July 20, 1998, entered
into between Maker and each of Payee and the other Lenders named therein (the
"Loan Agreement").
(b) DEFINED TERMS. Any and all initially capitalized terms
used herein shall have the meaning ascribed thereto in the Loan Agreement,
unless specifically defined herein. The term "or" as used in this Note has,
except where otherwise indicated, the inclusive meaning represented by the
phrase "and/or." This Promissory Note (this "Note") is one of the promissory
notes defined in the Loan Agreement as the "Notes" and is subject to, and
entitled to the benefits of, the terms and provisions of the Loan Agreement.
(c) PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Maker hereby promises to make payments of
principal and interest with respect to the Loan evidenced hereby at the rates
and times, and in the amounts, and in all other respects in the manner as
provided in the Loan Agreement.
(b) As more fully set forth in the Loan
Agreement, Maker shall not be obligated to pay, and the holder of this Note
shall not be obligated to charge, collect, receive, reserve, or take interest
(it being understood that interest shall be calculated as the aggregate of all
charges which constitute interest under applicable law that are contracted for,
charged, reserved, received, or paid) in excess of the maximum nonusurious
interest rate, as in effect from time to time, which may be charged, contracted
for, reserved, received, or collected by Payee in connection with the Loan
Agreement, this Note, the other Loan Documents, or any other documents executed
in connection herewith or therewith.
(d) PREPAYMENTS. Maker may prepay the principal balance due
under this Note, in whole or in part, without penalty or premium, only in
accordance with the provisions of the Loan Agreement.
(e) APPLICATION OF PAYMENTS. All payments (including
prepayments) made hereunder shall be applied first to accrued and unpaid
interest and then to principal.
(f) TIME AND PLACE OF PAYMENTS. All principal and interest due
hereunder is payable in U.S. Dollars in immediately available funds at either
(i) Payee's office located at 1800 Avenue of the Stars, Suite 200, Los Angeles,
California 90067 (or at such other office as may be
21
<PAGE> 22
designated from time to time by Payee), or (ii) by wire transfer pursuant to
Section 2.05(a) of the Loan Agreement, not later than 1:30 p.m., Phoenix,
Arizona time, on the date of payment.
(g) WAIVERS. Maker, for itself and its legal representatives,
successors, and assigns, expressly waives presentment, demand, protest, notice
(except as required by the Loan Agreement), and all other requirements of any
kind, in connection with the enforcement or collection of this Note.
(h) ACCELERATION AND WAIVER. IT IS EXPRESSLY AGREED THAT, UPON
THE OCCURRENCE OF AN EVENT OF DEFAULT AS SPECIFIED IN SECTIONS 7.01(g) THROUGH
(L) OF THE LOAN AGREEMENT, THE UNPAID PRINCIPAL BALANCE OF AND ANY ACCRUED AND
UNPAID INTEREST UNDER THIS NOTE SHALL AUTOMATICALLY BECOME IMMEDIATELY DUE AND
PAYABLE PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, AND, UPON THE OCCURRENCE OF
ANY OTHER EVENT OF DEFAULT SPECIFIED IN SECTION 7.01 OF THE LOAN AGREEMENT, THE
UNPAID PRINCIPAL BALANCE OF ANY ACCRUED AND UNPAID INTEREST UNDER THIS NOTE MAY,
BY NOTICE IN WRITING TO MAKER, BE DECLARED TO BE IMMEDIATELY DUE AND PAYABLE
PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, WITHOUT PRESENTMENT, DEMAND,
PROTEST, NOTICE (EXCEPT AS REQUIRED THE LOAN AGREEMENT), OR OTHER REQUIREMENTS
OF ANY KIND, ALL OF WHICH AR HEREBY EXPRESSLY WAIVED BY MAKER.
(i) ATTORNEYS' FEES. In the event it should become necessary
to employ counsel to collect or enforce this Note, Maker agrees to pay the
reasonable attorneys' fees and costs (including those of in-house counsel) of
the holder hereof, irrespective of whether suit is brought, to the extent and as
provided in the Loan Agreement.
(j) AMENDMENTS. This Note may not be changed, modified,
amended, or terminated except by a writing duly executed by Maker and the holder
hereof.
(k) HEADINGS. Section headings used in this Note are solely
for convenience of reference, shall not constitute a part of this Note for any
other purpose, and shall not affect the construction of this Note.
(l) GOVERNING LAW. EXCEPT AS OTHERWISE PROVIDED IN THE LOAN
AGREEMENT: (a) THIS NOTE SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF
CALIFORNIA; AND (b) THE VALIDITY OF THIS NOTE AND THE CONSTRUCTION,
INTERPRETATION AND ENFORCEMENT OF, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUCTED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA.
(m) WAIVER OF TRIAL BY JURY. MAKER, TO THE EXTENT IT MAY
LEGALLY DO SO, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO
THIS NOTE, OR IN ANY WAY CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO, THE
DEALINGS OF MAKER, AND PAYEE, WITH RESPECT TO THIS NOTE, OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE. TO THE EXTENT
IT MAY LEGALLY DO SO, MAKER HEREBY AGREES THAT ANY SUCH CLAIM, DEMAND, ACTION,
CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY
AND THAT PAYEE MAY FILE AN
22
<PAGE> 23
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF MAKER TO WAIVER OF ITS RIGHT TO TRIAL BY JURY.
Dated as of July 20, 1998.
CYGNET FINANCIAL CORPORATION,
a Delaware corporation
By:
Name: Steven P. Johnson
Title: Senior Vice President and
General Counsel
23
<PAGE> 24
EXHIBIT B
__________________ CORPORATION
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of [INSERT WARRANT
DATE], is between ___________________ CORPORATION, a Delaware corporation (the
"Company"), and each of the Lenders (as defined below).
WHEREAS, [CYGNET FINANCIAL CORPORATION/THE COMPANY] has entered into a
Loan Agreement dated as of July 20, 1998 (the "Loan Agreement"), by and among
[CYGNET FINANCIAL CORPORATION/THE COMPANY] and the lenders named therein (the
"Lenders"), pursuant to which the Lenders will make term loans to [CYGNET
FINANCIAL CORPORATION/THE COMPANY], all as set forth in, and subject to the
terms and conditions of, the Loan Agreement; and
WHEREAS, as a condition precedent to the execution and delivery of the
Loan Agreement, the Company has agreed, under certain circumstances, to issue to
the Lenders warrants (the "Warrants") to purchase shares of common stock, $.001
par value per share ("Common Stock"), of the Company, subject to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties agree as follows:
Section 1. ISSUANCE OF WARRANTS AND FORM OF WARRANTS.
(a) Subject to the terms and conditions hereof, the Company shall issue
to the Lenders and the Lenders shall accept from the Company, 115,000 Warrants
substantially in the form of Exhibit A hereto. Each Lender shall be issued the
number of Warrants set forth beside such Lender's name on the signature pages
hereto.
(b) Each Warrant shall entitle the registered holder of the certificate
representing such Warrant to purchase upon the exercise thereof one share of
Common Stock, subject to the adjustments provided for in Section 8 hereof, at
any time until the later of (i) 1:30 p.m., Phoenix, Arizona time, on [INSERT
THIRD ANNIVERSARY OF WARRANT DATE] or (ii) such time as the Notes issued
pursuant to the Loan Agreement have been paid in full, unless earlier redeemed
pursuant to Section 10 hereof.
(c) The Warrant certificates shall be in registered form only. Each
Warrant certificate shall be dated as of the date of issuance thereof (whether
upon initial issuance or upon transfer or exchange), and shall be executed on
behalf of the Company by the manual signature of its President or a Vice
President, and attested to by the manual signature of its Secretary or an
Assistant Secretary. In case any officer of the Company who shall have signed
any Warrant certificate shall cease to be such officer of the Company prior to
the issuance thereof, such Warrant certificate may nevertheless be issued and
delivered with the same force and effect as though the person who signed the
same had not ceased to be such officer of the Company.
Section 2. EXERCISE OF WARRANTS, DURATION AND WARRANT PRICE. Subject to
the provisions of this Agreement, each registered holder of one or more Warrant
certificates shall have the right, which may be exercised as provided in such
Warrant certificates, to purchase from the Company (and the Company shall issue
and sell to such registered holder) the number of shares
24
<PAGE> 25
of Common Stock or other securities to which the Warrants represented by such
certificates are at the time entitled hereunder.
(a) Each Warrant not exercised by its expiration date shall become
void, and all rights thereunder and all rights in respect thereof under this
Agreement shall cease on such date.
(b) A Warrant may be exercised by the surrender of the certificate
representing such Warrant to the Company with the subscription form set forth on
the reverse thereof duly executed and properly endorsed with the signatures
properly guaranteed, and upon payment in full to the Company of the Warrant
Price (as hereinafter defined) for the number of shares of Common Stock or other
securities as to which the Warrant is exercised. Such Warrant Price shall be
paid in full in cash, or by certified check or bank draft payable in United
States currency to the order of the Company.
(c) Subject to adjustment in accordance with Section 8 hereof, the
price per share of Common Stock at which each Warrant may be exercised (the
"Warrant Price") shall be [INSERT WARRANT PRICE].
(d) Subject to the further provisions of this Section 2 and of Section
5 hereof, upon surrender of Warrant certificates and payment of the Warrant
Price, the Company shall issue and cause to be delivered, as promptly as
practicable to or upon the written order of the registered holder of such
Warrants and in such name or names as such registered holder may designate,
subject to applicable securities laws, a certificate or certificates for the
number of securities so purchased upon the exercise of such Warrants, together
with cash, as provided in Section 9 of this Agreement, in respect of any
fraction of a share or security otherwise issuable upon such surrender. All
shares of Common Stock or other such securities issued upon the exercise of a
Warrant shall be duly authorized, validly issued, fully paid and nonassessable
and free and clear of all liens and other encumbrances.
(e) Certificates representing such securities shall be deemed to have
been issued and any person so designated to be named therein shall be deemed to
have become a holder of record of such securities as of the date of the
surrender of such Warrants and payment of the Warrant Price. The rights of
purchase represented by each Warrant certificate shall be exercisable, at the
election of the registered holder thereof, either as an entirety or from time to
time for part of the number of securities specified therein and, in the event
that any Warrant certificate is exercised in respect of less than all of the
securities specified therein at any time prior to the expiration date of the
Warrant certificate, a new Warrant certificate or certificates will be issued to
such registered holder for the remaining number of securities specified in the
Warrant certificate so surrendered.
Section 3. COUNTERSIGNATURE AND REGISTRATION.
(a) The Company shall maintain books (the "Warrant Register") for the
registration and the registration of transfer of the Warrants. Upon the initial
issuance of the Warrants, the Company shall issue and register the Warrants in
the names of the Lenders in accordance with Section 1 hereof.
(b) Prior to due presentment for registration of transfer of any
Warrant certificate, the Company may deem and treat the person in whose name
such Warrant certificate shall be registered upon the Warrant Register (the
"registered holder") as the absolute owner of such Warrant certificate and of
each Warrant represented thereby (notwithstanding any notation of ownership or
other writing on the Warrant certificate made by anyone other than the Company),
for
25
<PAGE> 26
the purpose of any exercise thereof, of any distribution or notice to the holder
thereof, and for all other purposes, and the Company shall not be affected by
any notice to the contrary.
Section 4. TRANSFER AND EXCHANGE OF WARRANTS.
(a) The Company shall register the transfer, from time to time, of any
outstanding Warrant or portion thereof upon the Warrant Register, upon surrender
of the certificate evidencing such Warrant for transfer, properly endorsed with
signatures properly guaranteed and accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant certificate representing an
equal aggregate number of Warrants so transferred shall be issued to the
transferee and the surrendered Warrant certificate shall be canceled by the
Company. In the event that only a portion of a Warrant is transferred at any
time, a new Warrant certificate representing the remaining portion of the
Warrant will also be issued to the transferring holder. Notwithstanding anything
to the contrary herein, no transfer or exchange may be made except in compliance
with applicable securities laws and Section 12 hereof.
(b) Warrant certificates may be surrendered to the Company, together
with a written request for exchange, and thereupon the Company shall issue in
exchange therefor one or more new Warrant certificates as requested by the
registered holder of the Warrant certificate or certificates so surrendered,
representing an equal aggregate number of Warrants.
(c) The Company shall not be required to effect any registration of
transfer or exchange which will result in the issuance of a Warrant certificate
for a fraction of a Warrant.
(d) No service charge shall be made for any exchange or registration of
transfer of Warrant certificates.
Section 5. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance or delivery of the shares of Common
Stock or other securities issuable upon the exercise of Warrants; provided,
however, the Company shall not be required to pay any tax or taxes which may be
payable in respect of any transfer of the Warrants or involved in the issuance
or delivery of any Warrant certificate or certificates for shares of Common
Stock in a name other than registered holder of Warrants in respect of which
such shares are issued, and in such case the Company shall not be required to
issue or deliver any certificate for shares of Common Stock or any Warrant
certificate until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid.
Section 6. MUTILATED OR MISSING WARRANTS. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant certificate, or in lieu of and substitution for the Warrant
certificate lost, stolen or destroyed, a new Warrant certificate representing an
equal aggregate number of Warrants, but only upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction of such Warrant
certificate and reasonable indemnity, if requested, also satisfactory to it.
Applicants for such substitute Warrant certificates shall also comply with such
other reasonable conditions and pay such reasonable charges as the Company may
prescribe.
Section 7. RESERVATION OF COMMON STOCK.
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<PAGE> 27
(a) There have been reserved, and the Company shall at all times keep
reserved, out of its authorized and unissued shares of Common Stock, a number of
shares sufficient to provide for the exercise of the rights of purchase
represented by the Warrants then outstanding or issuable upon exercise, and the
transfer agent for the Common Stock and every subsequent transfer agent for any
shares of the Company's capital stock issuable upon the exercise of any of the
rights of purchase aforesaid are hereby irrevocably authorized and directed at
all times to reserve such number of authorized and unissued shares as shall be
requisite for such purpose. The Company will keep a copy of this Agreement on
file with the transfer agent for the Common Stock and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants.
(b) The Company will supply such transfer agent with duly executed
certificates and will provide or otherwise make available any cash as provided
in Section 9 of this Agreement. All Warrant certificates surrendered in the
exercise thereby evidenced shall be canceled by the Company. After the
expiration date of the Warrants, no shares of Common Stock shall be subject to
reservation in respect of such Warrants.
Section 8. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON
STOCK. The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
8.1 ADJUSTMENTS. The number of shares of Common Stock or other
securities purchasable upon the exercise of each Warrant and the Warrant Price
shall be subject to adjustment as follows:
(a) If the Company (i) pays a dividend in Common Stock or
makes a distribution in Common Stock or shares convertible in Common Stock, (ii)
subdivides its outstanding Common Stock into a greater number of shares, (iii)
combines its outstanding Common Stock into a smaller number of shares, or (iv)
issues, by reclassification of its Common Stock, other securities of the
Company, then the number and kind of shares of Common Stock or other securities
purchasable upon exercise of a Warrant immediately prior thereto will be
adjusted so that the holder of a Warrant will be entitled to receive the kind
and number of shares of Common Stock or other securities of the Company that
such holder would have owned and would have been entitled to receive immediately
after the happening of any of the events described above, had the Warrant been
exercised immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this subsection 8.1(a)
will become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) If the Company issues or sell any shares of Common Stock
or any rights or warrants to purchase shares of Common Stock or securities
convertible into Common Stock at a price per share of Common Stock that is less
than 90% of the Daily Market Price (as defined in Section 10(e) hereof) of the
Common Stock as of the trading day immediately preceding (or the same day if
trading has been completed for such day) of such issuance or sale, the Warrant
Price shall be reduced by multiplying the Warrant Price in effect on the date of
issuance of such shares, warrants, rights or convertible securities by a
fraction, the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
shares, rights, warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase or issuable on
conversion, and the numerator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such shares, rights, warrants or convertible securities plus the number of
shares which the aggregate offering price of the total number of shares so
offered,
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<PAGE> 28
issued or issuable, or, with respect to convertible securities, the aggregate
consideration received or to be received by the Company for the convertible
securities, would purchase at such Daily Market Price. Such adjustment shall be
made successively whenever such shares, rights, warrants or convertible
securities are issued and shall become effective immediately after the date of
such issuance. However, upon the expiration of any right or warrant to purchase
Common Stock or conversion right, the issuance of which resulted in an
adjustment in the Warrant Price, if any such right, warrant or conversion right
shall expire and shall not have been exercised, the Warrant Price shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Warrant Price made pursuant to the
provisions of this Section 8.1(b) after the issuance of such rights, warrants or
convertible securities) had the adjustment of the Warrant Price upon the
issuance of such rights, warrants or convertible securities been made on the
basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised or the conversion of the convertible securities actually
converted.
(c) If the Company distributes to all holders of Common Stock
evidences of its indebtedness or assets (excluding cash dividends or cash
distributions paid out of earned surplus and made in the ordinary course of
business) or rights to subscribe for or purchase any security, then in each such
case the Warrant Price shall be determined by multiplying the Warrant Price in
effect prior to the record date fixed for determination of stockholders entitled
to receive such distribution by a fraction, the denominator of which shall be
the Daily Market Price of Common Stock determined as of the record date
mentioned above, and the numerator of which shall be such Daily Market Price of
the Common Stock, less the then fair market value (as determined by the Board of
Directors of the Company in good faith, whose determination shall be conclusive
if made in good faith; provided, however, that in the event of a distribution or
series of related distributions exceeding 10% of the net assets of the Company,
then such fair market value shall be determined by a nationally recognized or
major regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) selected in good faith by the
Board of Directors of the Company, and in either case shall be described in a
statement provided to Warrant holders) of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above. In the event such distribution is not made, the Warrant
Price shall again be adjusted to the number that was in effect immediately prior
to such record date.
(d) No adjustment in the number of shares or securities
purchasable pursuant to the Warrants shall be required unless such adjustment
would require an increase or decrease of at least one percent in the number of
shares or securities then purchasable upon the exercise of the Warrants,
provided, however, that any adjustment which by reason of this subsection 8.1(d)
is not required to be made shall be carried forward and taken into account in
any subsequent adjustments.
(e) The Company may, at its option, at any time during the
term of the Warrant, reduce the then current Warrant Price to any amount,
consistent with applicable law, deemed appropriate by the Board of Directors of
the Company.
(f) Whenever the number of shares or securities purchasable
upon the exercise of the Warrants is adjusted, as herein provided, the Warrant
Price for shares payable upon exercise of the Warrants shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by a
fraction, the numerator of which shall be the number of shares purchasable upon
28
<PAGE> 29
the exercise of the Warrant immediately prior to such adjustment, and the
denominator of which shall be the number of shares so purchasable immediately
thereafter.
(g) Whenever the number of shares or securities purchasable
upon the exercise of the Warrants and/or the Warrant Price is adjusted as herein
provided, the Company shall cause to be promptly mailed to each registered
holder of a Warrant by first class mail, postage prepaid, notice of such
adjustment and a certificate of the chief financial officer of the Company
setting forth the number of shares or securities purchasable upon the exercise
of the Warrants after such adjustment, the Warrant Price as adjusted, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
(h) For the purpose of this subsection 8.1, the term "Common
Stock" shall mean (i) the class of stock designated as the voting Common Stock
of the Company at the date of this Agreement, or (ii) any other class of stock
or securities resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to this Section 8, a registered holder
shall become entitled to purchase any securities of the Company other than
shares of Common Stock, thereafter the number of such other securities so
purchasable upon exercise of the Warrants shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the shares contained in this Section 8.
8.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection 8.1,
no adjustment in respect of any dividends or distributions shall be made during
the term of the Warrants or upon the exercise of the Warrants.
8.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments are required to be
made pursuant to Section 8 hereof in connection with the issuance of shares of
Common Stock or the Warrants (or the underlying shares of Common Stock) in the
transactions contemplated by this Agreement or the Split-Up (as defined in the
Loan Agreement).
8.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute an agreement with the
registered holders of the Warrants providing such holders with the right
thereafter, upon payment of the Warrant Price in effect immediately prior to
such action, to purchase, upon exercise of each Warrant, the kind and amount of
shares and other securities and property which it would have owned or have been
entitled to receive after the happening of such consolidation, merger, sale or
conveyance had each Warrant been exercised immediately prior to such action. Any
such agreements referred to in this subsection 8.4 shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 8 hereof. The provisions of this subsection
8.4 shall similarly apply to successive consolidations, mergers, sales, or
conveyances.
8.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action that
would cause an adjustment reducing the Warrant Price below the then par value of
the Common Stock issuable upon exercise of the Warrants, the Company will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Common Stock at such adjusted Warrant Price.
8.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may but shall not be
required to retain a firm of independent public accountants of recognized
regional or national standing (which
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may be any such firm regularly employed by the Company) to make any computation
required under this Section 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section 8 and the Company shall cause to be promptly mailed to each registered
holder of a Warrant by first class mail, postage prepaid, a copy of such
certificate.
8.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any adjustments
in the Warrant Price or the number of securities issuable upon exercise of
Warrants, Warrant certificates theretofore or thereafter issued may continue to
express the same price and number of securities as are stated in the similar
Warrant certificates initially issuable pursuant to this Agreement. However, the
Company may, at any time in its sole discretion (which shall be conclusive),
make any change in the form of Warrant certificate that it may deem appropriate
and that does not affect the substance thereof; and any Warrant certificate
thereafter issued, whether upon registration of, transfer of, or in exchange or
substitution for, an outstanding Warrant certificate, may be in the form so
changed.
8.8 NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS OF WARRANTS. If, at
any time prior to the expiration of a Warrant and prior to its exercise, any one
or more of the following events shall occur:
(a) any action that would require an adjustment pursuant to
subsection 8.1 or 8.4 hereof; or
(b) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed; then the Company must give notice in writing of such event to the
registered holders of the Warrants, as provided in Section 14 hereof, at least
20 days, to the extent practicable, prior to the date fixed as a record date or
the date of closing the transfer books for the determination of the stockholders
entitled to any relevant dividend, distribution, subscription rights or other
rights or for the determination of stockholders entitled to vote on such
proposed dissolution, liquidation or winding up. Such notice must specify such
record date or the date of closing the transfer books, as the case may be.
Failure to mail or receive such notice or any defect therein will not affect the
validity of any action taken with respect thereto.
Section 9. FRACTIONAL INTERESTS. The Company is not required to issue
fractional shares of Common Stock on the exercise of a Warrant. If any fraction
of a share of Common Stock would, except for the provisions of this Section 9,
be issuable on the exercise of a Warrant (or specified portion thereof), the
Company will in lieu thereof pay an amount in cash equal to the then Current
Market Price multiplied by such fraction. For purposes of this Agreement, the
term "Current Market Price" means (i) if the Common Stock is listed for
quotation on the Nasdaq National Market or the Nasdaq SmallCap Market or on a
national securities exchange, the average for the 10 consecutive trading days
immediately preceding the date in question of the daily per share closing prices
of the Common Stock as quoted by the Nasdaq National Market or the Nasdaq
SmallCap Market or on the principal stock exchange on which it is listed, as the
case may be, whichever is the higher, or (ii) if the Common Stock is traded in
the over-the-counter market and is not listed for quotation on the Nasdaq
National Market or the Nasdaq SmallCap Market nor on any national securities
exchange, the average of the per share closing bid prices of the Common Stock on
the 10 consecutive trading days immediately preceding the date in question, as
reported by Nasdaq or an equivalent generally accepted reporting service. The
closing price referred to in clause (i) above shall be the last reported sale
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case as quoted by the
Nasdaq National Market or the Nasdaq SmallCap Market or on the national
securities exchange on which the Common Stock is then listed. For purposes of
clause (ii) above, if trading in the Common Stock
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is not reported by Nasdaq, the bid price referred to in said clause shall be the
lowest bid price as reported on the OTC Bulletin Board or in the "pink sheets"
published by National Quotation Bureau, Incorporated.
Section 10. REDEMPTION.
(a) The then outstanding Warrants may be redeemed, at the option of the
Company, at $.10 per share of Common Stock purchasable upon exercise of such
Warrants, at any time after the average Daily Market Price per share of the
Common Stock for a period of at least 20 consecutive trading days ending not
more than fifteen (15) days prior to the date of the notice given pursuant to
Section 10(b) hereof has equaled or exceeded [INSERT REDEMPTION AMOUNT], and
prior to expiration of the Warrants. The Daily Market Price of the Common Stock
will be determined by the Company in the manner set forth in Section 10(e) as of
the end of each trading day (or, if no trading in the Common Stock occurred on
such day, as of the end of the immediately preceding trading day in which
trading occurred). All outstanding Warrants must be redeemed if any are
redeemed, and any right to exercise an outstanding Warrant shall terminate at
1:30 p.m. (Phoenix, Arizona time) on the date fixed for redemption. Trading day
means a day in which trading of securities occurred on the Nasdaq National
Market.
(b) The Company may exercise its right to redeem the Warrants only by
giving the notice set forth in the following sentence. If the Company exercises
its right to redeem, it shall give notice to the registered holders of the
outstanding Warrants by mailing to such registered holders a notice of
redemption, first class, postage prepaid, at their addresses as they shall
appear on the records of the Company. Any notice mailed in the manner provided
herein will be conclusively presumed to have been duly given whether or not the
registered holder actually receives such notice.
(c) The notice of redemption must specify the redemption price, the
date fixed for redemption (which must be at least 30 days after the date such
notice is mailed), the place where the Warrant certificates must be delivered
and the redemption price paid, and that the right to exercise the Warrant will
terminate at 1:30 P.M. (Phoenix, Arizona time) on the date fixed for redemption.
(d) Appropriate adjustment shall be made to the redemption price and to
the minimum Daily Market Price prerequisite to redemption set forth in Section
10(a) hereof, in each case on the same basis as provided in Section 8 hereof
with respect to adjustment of the Warrant Price.
(e) For purposes of this Agreement, the term "Daily Market Price" means
(i) if the Common Stock is quoted on the Nasdaq National Market or the Nasdaq
SmallCap Market or on a national securities exchange, the daily per share
closing price of the Common Stock as quoted on the Nasdaq National Market or the
Nasdaq SmallCap Market or on the principal stock exchange on which it is listed
on the trading day in question, as the case may be, whichever is the higher, or
(ii) if the Common Stock is traded in the over-the-counter market and not quoted
on the Nasdaq National Market or the Nasdaq SmallCap Market nor on any national
securities exchange, the closing bid price of the Common Stock on the trading
day in question, as reported by Nasdaq or an equivalent generally accepted
reporting service. The closing price referred to in clause (i) above shall be
the last reported sale price or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices, in either
case on the Nasdaq National Market or the Nasdaq SmallCap Market or on the
national securities exchange on which the Common Stock is then listed. For
purposes of clause (ii) above, if trading in the Common Stock is not reported by
Nasdaq, the bid price referred to in said clause shall be the lowest bid price
as quoted on the OTC Bulletin Board or reported in the "pink sheets" published
by National Quotation Bureau, Incorporated.
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(f) On the redemption date, each Warrant will be automatically
converted into the right to receive the redemption price and the Company will no
longer honor any purported exercise of a Warrant. On or before the redemption
date, the Company will deposit sufficient funds for the purpose of redeeming all
of the outstanding unexercised Warrants in an interest-bearing, segregated
account for payment to holders of Warrants upon surrender of Warrant
Certificates in exchange for the redemption price therefor. Funds remaining in
such account on the date three years from the redemption date will be returned
to the Company.
Section 11. RIGHTS AS WARRANTHOLDERS. Nothing contained in this
Agreement or in any of the Warrants shall be construed as conferring upon the
holders thereof, as such, any of the rights of stockholders of the Company,
including, without limitation, the right to receive dividends or other
distributions, to exercise any preemptive rights, to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or the
election of directors of the Company or any other matter.
Section 12. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
(a) Each holder of a Warrant agrees that prior to making any
disposition or transfer of the Warrants or shares issuable upon exercise of the
Warrants ("Shares"), unless a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), is in effect with regard thereto and
the disposition may be effected in accordance therewith and with applicable
state securities laws, the holder shall give written notice to the Company
describing briefly the manner in which any such proposed disposition or transfer
is to be made; and no such disposition shall be made except pursuant to an
exemption from the registration requirements of all applicable federal and state
securities laws.
(b) Each certificate evidencing the Warrants shall bear a legend in
substantially the following form, and each certificate evidencing Shares
issuable upon exercise of the Warrants shall bear such a legend until such time
as such Shares have been sold pursuant to a registration statement contemplated
in subsection (c) or (d) below or unless, in the opinion of legal counsel to the
Company, such legend is not required in order to establish compliance with any
provisions of applicable security laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE
WITH SECTION 12 OF THE WARRANT AGREEMENT DATED AS OF FEBRUARY
12, 1998, AS THE SAME MAY BE AMENDED FROM TIME TO TIME.
(c) Subject to the next sentence below, beginning on the date that the
Warrants are exercised, if the Company proposes to file with the Commission a
registration statement with respect to equity securities of the Company (other
than as to securities issued pursuant to an employee benefit plan or as to a
transaction subject to Rule 145 promulgated under the Securities Act or for
which a Form S-4 Registration Statement could be used), it shall, at least 30
days prior to such filing, give written notice of such proposed filing to the
holders of Warrants and Shares which bear a legend as contemplated in Section
12(b) above and which shall not have previously been included in a registration
statement filed under this Section 12(c) or Section 12(d), at their respective
addresses as they appear on the records of the Company or the Company, and shall
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<PAGE> 33
offer to include and shall include, subject to the provisions of this Section
12(c), in such filing any proposed disposition of such Shares upon receipt by
the Company, not less than 10 days prior to the proposed filing date, of a
request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to the holders of such Shares
requested to be included in such filing as shall be reasonably necessary to be
included in such Registration Statement. Notwithstanding the above, after such
time as the holders shall have been given two opportunities to include their
Shares in a Registration Statement of the Company pursuant to the immediately
preceding sentence, and all securities of holders who shall have requested such
inclusion in accordance herewith and who have not withdrawn such request prior
to the filing of such Registration Statement have been included in such a
Registration Statement which shall have become effective and such securities
shall have been effectively registered under the Securities Act, the Company
will have no further obligation to such holders under this Section 12(c) and the
Shares of such holders that have not been included previously in a Registration
Statement under this Section 12(c) will have no further registration rights
under Section 12(c) of this Agreement. In the event that (i) the managing
underwriter for any such offering advises the Company in writing that the
inclusion of such Shares in the offering would be detrimental to the offering or
(ii) in the event that there is no managing underwriter, if, in the good faith
judgment of the Board of Directors of the Company, inclusion of the Shares in
the registration would be seriously detrimental to the Company, then, such
Shares shall not be included in the Registration Statement, provided that no
other shares of the Company's Common Stock are included in the registration
pursuant to any other piggyback registration rights granted to others. In the
event that Shares requested to be included in an offering are not included in
accordance with the immediately preceding sentence, any notice given to holders
of Warrants and Shares hereunder with respect to such offering shall not be
counted against the limitation provided for in the second sentence of this
Section 12(c).
(d) In addition to any Registration Statement pursuant to Section 12(c)
hereof, after written notice upon exercise (the "Request") by the holders of at
least 50% of the shares of Common Stock which have been (or may be) issued upon
exercise of the Warrants, the Company will, as promptly as practicable (but in
any event within 60 days), prepare and file at its own expense a Registration
Statement with the Commission and appropriate Blue Sky authorities sufficient to
permit the public offering of the shares of Common Stock underlying the
Warrants, and will use reasonable efforts at its own expense through its
officers, directors, auditors and counsel, in all ways necessary or advisable,
to cause such Registration Statement to become effective as quickly as
practicable and to maintain such effectiveness so as to permit resale of the
shares of Common Stock covered by the Request until the earlier of the time that
all such shares of Common Stock has been sold or the expiration of 120 days from
the effective date of the Registration Statement; provided, however, that the
Company shall only be obligated to file one such Registration Statement under
this Section 12(d). The Company shall not be required to effect a registration
pursuant to this Section 12(d) if the Company shall furnish to holders
requesting a registration statement pursuant to this Section 12(d), a
certificate signed by the Chairman of the Board stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be effected at such time, in which event the Company shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the initiating holders; provided that such right to delay a
request shall be exercised by the Company not more than once in any twelve (12)
month period.
(e) All fees, disbursements, and out-of-pocket expenses incurred in
connection with the filing of any Registration Statement under Section 12(c)
hereof and in complying with applicable securities and Blue Sky laws shall be
borne by the Company, provided, however, that any expenses of the holders of the
Warrants or the Shares, including but not limited to attorneys' fees and
discounts and commissions, shall be borne by such holders. The Company at its
expense will supply the holders of the Shares included in a Registration
Statement with copies of such
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<PAGE> 34
Registration Statement and the prospectus or offering circular included therein
in such quantities as may be reasonably requested by such holders.
(f) Each holder of Shares to be included in a Registration Statement
pursuant to this Section 12 agrees to reasonably cooperate with the Company and
to provide the Company on its request with all information concerning such
holder and his Warrants and Shares that may reasonably be requested by the
Company in order for the Company to perform its obligations under this Section
12.
(g) The registration rights provided pursuant to Section 12(c) and
Section 12(d) above are subject to certain registration rights granted to
SunAmerica Life Insurance Company and its assignees pursuant to that certain
Amended and Restated Registration Rights Agreement entered into as of June 21,
1996 between the Company and SunAmerica Life Insurance Company. Specifically,
the Amended and Restated Registration Rights Agreement entered into as of June
21, 1996 provides that the holders of registrable securities under that
agreement shall have the right to have included in any piggyback registration by
the Company any registrable securities requested by them to be so included in
such piggyback registration prior to the inclusion of any securities requested
to be registered by any third parties entitled to any other registration rights,
including the registration rights granted hereunder.
Section 13. INDEMNIFICATION.
(a) In the event of the filing of any Registration Statement with
respect to the Shares pursuant to Section 12 above, the Company agrees to
indemnify and hold harmless the holders of such Shares (for purposes of this
Section 13, references to any holder of Shares shall refer only to such holders
who have agreed to be bound by this Section 13), and each person who controls
such holders within the meaning of the Securities Act and such holders'
officers, directors, managers, members, partners, and principle equity holders
(collectively, "Indemnitees") against all losses, claims, damages, expenses and
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees and expenses), to which such Indemnitees may become subject,
under the Securities Act or otherwise, insofar as such losses, claims, damages,
expenses or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in any such Registration Statement, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which they were made, not misleading; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage,
expenses, or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement, preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the Company by any such
holder specifically for use in the preparation thereof and, provided further,
that the indemnity agreement provided in this Section 13(a) with respect to any
preliminary prospectus shall not inure to the benefit of any holder of Warrants
or Shares from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of material fact or omission or alleged omission to state therein a
material fact purchased Warrants or Shares, if a copy of the prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Securities Act and the rules and regulations thereunder, unless
such failure is the result of non-compliance by the
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<PAGE> 35
Company with the last sentence of Section 12(f) hereof. This indemnity will be
in addition to any liability which the Company may otherwise have.
(b) Each holder of a Warrant and each holder of a Share agrees that he
will indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Securities Act in respect of
the Registration Statement, each officer of the Company, and each person who
controls the Company within the meaning of the Securities Act, against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such
director, officer or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any such
Registration Statement, or any related preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
such holder specifically for use in the preparation thereof. This indemnity will
be in addition to any liability which the holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
13 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 13, notify the indemnifying party of the commencement thereof. No
indemnification provided for in this Section 13 shall be available to any party
who shall fail to give the notice to the extent the party to whom such notice
was not given was materially prejudiced by the failure to give the notice, but
the omission so to notify the indemnifying party will not relieve the
indemnifying party or parties from any liability which it may have to any
indemnified party for contribution otherwise than as to the particular item as
to which indemnification is then being sought solely pursuant to this Section
13. In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, reasonably assume
the defense thereof, subject to the provisions herein stated and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 13 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation unless the indemnifying
party shall not pursue the action to its final conclusion. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party. No settlement of any
action against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnified party.
Section 14. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the holder of any Warrant certificate to or on the Company
shall be sufficiently given or made if sent by registered or certified mail,
addressed as follows (and shall be deemed given upon receipt):
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<PAGE> 36
________________________________
________________________________
________________________________
Phoenix, Arizona _______________
Attn: _______________________
With a copy to:
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attn: Timothy W. Moser, Esq.
Notices or demands authorized by this Agreement to be given or made by the
Company to the holder of any Warrant certificate shall be sufficiently given or
made if sent by first class mail, postage prepaid, addressed to such holder at
the address of such holder as shown in the Warrant Register.
Section 15. SUPPLEMENTS AND AMENDMENTS. This Agreement may be amended
by the Company and the holder or holders of a majority of the outstanding
Warrants representing a majority of the shares of Common Stock underlying such
Warrants; provided, however, that without the consent of each holder of a
Warrant, there can be no increase of the Warrant Price or reduction of the
exercise period for such holder's Warrants.
Section 16. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the registered holders of the
Warrants will bind and inure to the benefit of their respective successors and
assigns hereunder.
Section 17. GOVERNING LAW. This Agreement will be deemed to be a
contract made under the laws of the State of California and for all purposes
will be construed in accordance with the laws of said State.
Section 18. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement will
be construed to give to any person or corporation other than the Company and the
registered holders of the Warrants any legal or equitable right, remedy or claim
under this Agreement. This Agreement is for the sole and exclusive benefit of
the Company and the registered holders of the Warrants.
Section 19. COUNTERPARTS. This Agreement may be executed in
counterparts and each of such counterparts will for all purposes be deemed to be
an original, and all such counterparts will together constitute but one and the
same instrument.
Section 20. DESCRIPTIVE HEADINGS. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and do not
control or affect the meaning or construction of any of the provisions hereof.
(BALANCE OF PAGE INTENTIONALLY LEFT BLANK)
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<PAGE> 37
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
By:__________________________________
Name:_______________________________
Title:________________________________
29,900 Warrants ARBCO ASSOCIATES, L.P.
By: KAIM Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:_________________________________
Title:________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _________________________
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
27,600 Warrants KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:__________________________________
Name:_______________________________
Title:________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ___________________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
27,600 Warrants OFFENSE GROUP ASSOCIATES, L.P.
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<PAGE> 38
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:_________________________________
Name:______________________________
Title:________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: __________________________
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
13,800 Warrants OPPORTUNITY ASSOCIATES, LIMITED PARTNER-
SHIP
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:_____________________________
Name:__________________________
Title:____________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ______________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
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16,100 Warrants NORTH POINTE FINANCIAL SERVICES, INC.
By: ________________________________
Name:______________________________
Title: _______________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _________________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
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Warrant No. ____
WARRANT TO PURCHASE ________ SHARES OF COMMON STOCK
VOID AFTER 1:30 P.M.,
PHOENIX, ARIZONA TIME, ON [INSERT 3RD ANNIVERSARY OF WARRANT DATE]
OR SUCH LATER DATE SET FORTH HEREIN
____________________ CORPORATION
This certifies that, for value received ________________________, the
registered holder hereof or assigns (the "Holder"), is entitled to purchase from
_________________CORPORATION, a Delaware corporation (the "Company"), at any
time after [INSERT WARRANT DATE], and before the later of (i) 1:30 p.m.,
Phoenix, Arizona time, on [INSERT 3RD ANNIVERSARY OF WARRANT DATE] or (ii) such
time as the Company has repaid in full its Notes issued pursuant to that certain
Loan Agreement dated as of July 20, 1998 between the Company and each of the
Lenders named therein, at the purchase price per share of [INSERT WARRANT PRICE]
(the "Warrant Price"), the number of shares of Common Stock, par value $0.001
per share, of the Company set forth above (the "Shares"). The number of shares
of Common Stock purchasable upon exercise of the Warrant evidenced hereby and
the Warrant Price is subject to adjustment from time to time as set forth in the
Warrant Agreement referred to below.
This Warrant may be redeemed, at the option of the Company and as more
specifically provided in the Warrant Agreement, at $.10 per share of Common
Stock purchasable upon exercise hereof, at any time after the average Daily
Market Price (as defined in Section 10 of the Warrant Agreement) per share of
the Common Stock for a period of at least twenty (20) consecutive trading days
ending not more than fifteen days prior to the date of the notice given pursuant
to Section 10(b) thereof has equaled or exceeded [INSERT REDEMPTION PRICE], and
prior to expiration of this Warrant. The Holder's right to exercise this Warrant
terminates at 1:30 p.m. (Phoenix, Arizona time) on the date fixed for redemption
in the notice of redemption delivered by the Company in accordance with the
Warrant Agreement.
The Warrants evidenced hereby may be exercised during the period
referred to above, in whole or in part, by presentation of this Warrant
certificate with the Purchase Form attached hereto duly executed and guaranteed
and simultaneous payment of the Warrant Price (as defined in the Warrant
Agreement and subject to adjustment as provided therein) at the principal office
of the Company. Payment of such price may be made at the option of the Holder in
cash or by certified check or bank draft, all as provided in the Warrant
Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Warrants and are issued under and in accordance with the Warrant Agreement dated
as of [INSERT WARRANT DATE] between the Company and the Lenders party thereto,
and are subject to the terms and provisions contained in such Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference herein and made a
part hereof and is hereby referred to for a description of the rights,
limitations, duties and indemnities thereunder of the Company and the Holder of
the Warrants, and to all of which the Holder of this Warrant certificate by
acceptance hereof consents. A copy of the Warrant Agreement may be obtained for
inspection by the Holder hereof upon written request to the Company.
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<PAGE> 41
Upon any partial exercise of the Warrants evidenced hereby, there will
be issued to the Holder a new Warrant certificate in respect of the Shares
evidenced hereby that have not been exercised. This Warrant certificate may be
exchanged at the office of the Company by surrender of this Warrant certificate
properly endorsed either separately or in combination with one or more other
Warrants for one or more new Warrants to purchase the same aggregate number of
Shares as evidenced by the Warrant or Warrants exchanged. No fractional Shares
will be issued upon the exercise of rights to purchase hereunder, but the
Company will pay the cash value of any fraction upon the exercise of one or more
Warrants, as provided in the Warrant Agreement.
The Warrant Price and the number of shares of Common Stock issuable
upon exercise of this Warrant is subject to adjustment as provided in Section 8
of the Warrant Agreement. The Warrant Agreement may be amended by the Company
and the holder or holders of a majority of the outstanding Warrants representing
a majority of the shares of Common Stock underlying such Warrants; provided that
without the consent of each holder of a Warrant certain specified changes cannot
be made to such holder's Warrants.
Neither the Warrants nor the shares of Common Stock underlying the
Warrants may be sold, assigned, or otherwise transferred except in accordance
with the provisions of the Warrant Agreement.
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant certificate as the absolute owner hereof for all
purposes and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding, and until any transfer is entered on
such books, the Company may treat the Holder hereof as the owner for all
purposes. Notices and demands to be given to the Company must be given by
certified or registered mail at the addresses provided in the Warrant Agreement.
All terms used in the Warrant Certificate that are defined in the
Warrant Agreement shall have the respective meanings ascribed to such terms in
the Warrant Agreement.
Dated:_______________________________
By:_______________________________
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<PAGE> 42
___________________ CORPORATION
PURCHASE FORM
Mailing Address:
____________________________
____________________________
____________________________
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant certificate for, and to purchase
thereunder, _____________Shares of Common Stock provided for therein, and
requests that certificates for such Shares be issued in the name of:
________________________________________________________________________________
________________________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
and that such certificates be delivered to ____________________________________
whose address is _______________________________________________________________
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his or her Assignee as below indicated and delivered to the address
stated below.
Dated:__________________________________
Name of Holder or Assignee:
________________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
________________________________________________________________________________
Signature:
NOTE: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
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<PAGE> 43
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
________________________________________________________________________________
(Name and Address of Assignee Must Be Printed or Typewritten)
________________________________________________________________________________
______________ Warrants, hereby irrevocably constituting and appointing _______
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated:_______________________
___________________________________
Signature of Registered Holder
Note: The signature on this assignment
must correspond with the name as it
appears upon the face of the within
Warrant certificate in every
particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
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<PAGE> 44
SCHEDULE 2.05(a)
WIRE INSTRUCTIONS FOR EACH LENDER
LENDER WIRING INSTRUCTIONS
ARBCO Associates, LP Citibank, NA/Bear Stearns
20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: ARBCO Associates, LP
A/C No.: 103-01744
Kayne Anderson Non-Traditional Citibank, NA/Bear Stearns
Investments, LP 20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: Kayne Anderson Non-Traditional
Investments, LP
A/C No.: 103-02960
North Pointe Financial Services, Inc. Michigan National Bank
ABA No.: 0720-0080-5
FBO: North Pointe Financial
Services, Inc.
A/C No.: 1572033909
Offense Group Associates Citibank, NA/Bear Stearns
20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: Offense Group Associates
A/C No.: 103-02954
Opportunity Associates, LP Citibank, NA/Bear Stearns
20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: Opportunity Associates, LP
A/C No.: 103-02970
44
<PAGE> 45
SCHEDULE 4.04
OUTSTANDING OBLIGATIONS
None.
45
<PAGE> 1
Exhibit 10.2
PAYMENT GUARANTY
This PAYMENT GUARANTY ("Guaranty") is made as of July 20, 1998, by UGLY
DUCKLING CORPORATION, a Delaware corporation ("Guarantor") for the benefit of
ARBCO ASSOCIATES, L.P.; KAYNE ANDERSON NON-TRADITIONAL INVESTMENTS, L.P.;
OFFENSE GROUP ASSOCIATES, L.P.; OPPORTUNITY ASSOCIATES, LIMITED PARTNERSHIP; and
NORTH POINTE FINANCIAL SERVICES, INC. (individually, a "Lender," and
collectively, the "Lenders").
FACTUAL BACKGROUND
A. Guarantor is executing this Guaranty to induce each Lender to enter
into that certain Loan Agreement dated as of July 20, 1998, by and between
Cygnet Financial Corporation, a Delaware corporation ("Obligor"), and the
Lenders (the "Loan Agreement"). All capitalized terms used herein and not
otherwise defined shall have the meanings set forth in the Loan Agreement.
B. Under the terms and conditions of the Loan Agreement, Obligor has
agreed to repay to the Lenders the Loans as evidenced by the Notes.
GUARANTY
1. Guaranty of Notes. Guarantor unconditionally guarantees to each
Lender the full payment of their respective Note. This is a guaranty of payment,
not of collection. If Obligor defaults in the payment when due of the Notes or
any part of any Notes, Guarantor shall in lawful money of the United States pay
to each Lender or to its order, on demand, all sums due and owing on the
applicable Note, including all interest, charges, fees and other sums, costs and
expenses.
2. Rights of Each Lender. Guarantor authorizes each Lender to perform
any or all of the following acts at any time in its sole discretion, all without
notice to the Guarantor and without affecting Guarantor's obligations under this
Guaranty:
(a) Each Lender may alter any terms of any of its respective
Note or any part of it, including renewing, compromising, extending or
accelerating, or otherwise changing the time for payment of, or
increasing or decreasing the rate of interest on, its respective Note
or any part of it.
(b) Each Lender may take and hold security of the Notes or
this Guaranty, accept additional or substituted security for either,
and subordinate, exchange, enforce, waive, release, compromise, fail to
perfect and sell or otherwise dispose of any such security.
(c) Each Lender may direct the order and manner of any sale of
all or any part of any security later held for the Notes or this
Guaranty, and each Lender may also bid at any such sale.
(d) Each Lender may apply any payments or recoveries from
Obligor, Guarantor or any other source, and any proceeds of any
security, to Obligor's obligations under the Notes in such manner,
order and priority as each Lender may elect, whether or not those
obligations are guaranteed by this Guaranty or secured at the time of
the application.
<PAGE> 2
(e) Each Lender may release Obligor of its liability for any
of the Notes or any part of it.
(f) Each Lender may substitute, add or release any one or more
guarantors or endorsers.
3. Guaranty to be Absolute. Except as provided in Section 11 below,
Guarantor expressly agrees that until the Notes are paid in full and each and
every term, covenant and condition of this Guaranty is fully performed,
Guarantor shall not be released by or because of:
(a) Any act or event which might otherwise discharge, reduce,
limit or modify Guarantor's obligations under this Guaranty;
(b) Any waiver, extension, modification, forbearance, delay or
other act or omission of any Lender, or its failure to proceed promptly
or otherwise as against Obligor, Guarantor or any security;
(c) Any action, omission or circumstance which might increase
the likelihood that Guarantor may be called upon to perform under this
Guaranty or which might affect the rights or remedies of Guarantor as
against Obligor; or
(d) Any dealings occurring at any time between Obligor and
each Lender, whether relating to the Notes or otherwise.
Guarantor hereby expressly waives and surrenders any and all defenses to its
liability under this Guaranty based upon any of the foregoing acts, omissions,
agreements, waivers or matters. It is the purpose and intent of this Guaranty
that the obligations of Guarantor hereunder shall be absolute and unconditional
under any and all circumstances.
4. Guarantor Waivers. Guarantor waives:
(a) All statutes of limitations as a defense to any action or
proceeding brought against Guarantor by Lenders, to the fullest extent
permitted by law;
(b) Any right it may have to require Lenders to proceed
against Obligor, proceed against or exhaust any security held from
Obligor, or pursue any other remedy in each Lender's power to pursue;
(c) Any defense based on any claim that Guarantor's
obligations exceed or are more burdensome than those of Obligor;
(d) Any defense based on: (i) any legal disability of Obligor,
(ii) any release, discharge, modification, impairment or limitation of
the liability of Obligor to each Lender from any cause, whether
consented to by each Lender or arising by operation of law or from any
Bankruptcy or other voluntary or involuntary proceeding, in or out of
court, for the adjustment of debtor-creditor relationships ("Insolvency
Proceeding"), and (iii) any rejection or disaffirmance of any Note, or
any part of it, or any security held for it, in any such Insolvency
Proceeding;
2
<PAGE> 3
(e) Any defense based on any action taken or omitted by
Lenders in any insolvency Proceeding involving Obligor, including any
election to have Lenders' claim allowed as being secured, partially
secured or unsecured, any extension of credit by Lenders to Obligor in
any Insolvency Proceeding, and the taking and holding by Lenders of any
security for any such extension of credit; and
(f) All presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor,
notices of acceptance of this Guaranty and of the existence, creation,
or incurring of new or additional indebtedness, and demands and notices
of every kind except for any demand or notice by each Lender to
Guarantor expressly provided for in Section 1.
5. Waiver of Subrogation and Other Rights.
(a) Upon a default by Obligor on any Note, Lender in its sole
discretion, without prior notice to or consent of Guarantor, may elect
to: (i) compromise or adjust any Notes or any part of it or make any
other accommodation with Obligor or Guarantor, or (ii) exercise any
other remedy against Obligor or any security. No such action by Lender
shall release or limit the liability of Guarantor, whom shall remain
liable under this Guaranty after the action, even if the effect of the
action is to deprive Guarantor of any subrogation rights, rights of
indemnity, or other rights to collect reimbursement from Obligor for
any sums paid to Lender, whether contractual or arising by operation of
law or otherwise.
(b) Regardless of whether Guarantor may have made any payments
to each Lender, Guarantor forever waives: (i) all rights of
subrogation, all rights of indemnity, and any other rights to collect
reimbursement from Obligor for any sums paid to each Lender, whether
contractual or arising by operation of law (including the United States
Bankruptcy Code or any successor or similar statute) or otherwise, (ii)
all rights to enforce any remedy that each Lender may have against
Obligor, and (iii) all rights to participate in any security now or
later to be held by Lender for its respective Note.
6. Revival and Reinstatement. If any Lender is required to pay, return
or restore to Obligor or any other person any amounts previously paid on its
respective Note because of any Insolvency Proceeding of Obligor, any stop notice
or any other reason, the obligations of Guarantor shall be reinstated and
revived and the rights of each Lender shall continue with regard to such
amounts, all as though they had never been paid.
7. Events of Default. Each Lender may declare Guarantor to be in
default under this Guaranty upon the occurrence of any of the following events
("Events of Default"):
(a) Guarantor fails to perform any of its obligations under
this Guaranty; or
(b) Guarantor revokes its Guaranty or its Guaranty becomes
ineffective for any reason; or
(c) Guarantor becomes insolvent or the subject of any
Insolvency Proceeding; or
(d) Guarantor dissolves or liquidates; or
(e) Any representation or warranty as to Guarantor (UDC) in
the Loan Agreement is false in any material respect; or
3
<PAGE> 4
(f) Guarantor fails to execute and deliver the UDC Warrant
Agreement or to issue the UDC Warrants pursuant to Section 2.08 of the
Loan Agreement.
8. Authorization; No Violation. Guarantor is authorized to execute,
deliver and perform under this Guaranty, which is a valid and binding obligation
of such Guarantor. No provision or obligation of Guarantor contained in this
Guaranty violates any applicable law, regulation or ordinance, or any order or
ruling of any court or governmental agency. No such provision or obligation
conflicts with, or constitutes a breach or default under, any agreement to which
Guarantor is a party.
9. Additional and Independent Obligations. Guarantor agrees to perform
as required of it pursuant to Section 2.08 of the Loan Agreement for the
execution and delivery of the UDC Warrant Agreement and the issuance of the UDC
Warrants, which terms of such Section 2.08 are incorporated herein by this
reference. Guarantor's obligations under this Guaranty are independent of those
of Obligor on the Notes. Lender may bring a separate action, or commence a
separate reference or arbitration proceeding against Guarantor without first
proceeding against Obligor, any other person or any security that Lender may
hold, and without pursuing any other remedy. Lender's rights under this Guaranty
shall not be exhausted by any action by Lender until the Notes has been paid in
full.
10. No Waiver; Consents; Cumulative Remedies. Each waiver by Lender
must be in writing, and no waiver shall be construed as a continuing waiver. No
waiver shall be implied from Lender's delay in exercising or failure to exercise
any right or remedy against Obligor, Guarantor or any security. Consent by
Lender to any act or omission by Obligor or Guarantor shall not be construed as
a consent to any other or subsequent act or omission, or as a waiver of the
requirement for Lender's consent to be obtained in any future or other instance.
All remedies of Lender against Obligor and Guarantor are cumulative.
11. Release. Guarantor shall automatically (and without any further
action) be unconditionally and forever released from this Guaranty and its
obligations hereunder upon the occurrence of the later of (i) the Split-Up, and
(ii) the issuance of the Company Warrants pursuant to Section 2.08 of the Loan
Agreement.
12. Successors and Assigns; Participations. The terms of this Guaranty
shall bind and benefit the successors and assigns of Lender and Guarantor;
provided, however, that Guarantor may not assign this Guaranty, or assign or
delegate any of its rights or obligations under this Guaranty, without the prior
written consent of Lender in each instance. Lender in its sole discretion may
sell or assign participations or other interests in the Notes and this Guaranty,
in whole or in part, all without notice to or the consent of Guarantor and
without affecting Guarantor's obligations under this Guaranty, provided that the
assignment or transfer of the Notes shall be in compliance with and subject to
the terms and conditions of the Loan Purchase Agreement. Also without notice to
or the consent of Guarantor, Lender may disclose any and all information in its
possession concerning Guarantor, this Guaranty and any security for this
Guaranty to any actual or prospective purchaser of any securities issued or to
be issued by Lender, and to any actual or prospective purchaser or assignee of
any participation or other interest in the Notes and this Guaranty.
13. Notices. Any notice or other communication given hereunder shall be
in writing and shall be sent by certified mail, postage prepaid, overnight
courier or personally delivered or telecopied to Guarantor at the address set
forth on the signature pages hereto.
14. Rules of Construction. In this Guaranty, the word "Obligor"
includes both the named Obligor and any other person who at any time assumes or
otherwise becomes primarily liable for
4
<PAGE> 5
all or any part of the obligations of the named Obligor on the Notes. The word
"person'' includes any individual, company, trust or other legal entity of any
kind. The word "include(s)" means "include(s), without limitation," and the word
"including" means "including, but not limited to." When the context and
construction so require, all words used in the singular shall be deemed to have
been used in the plural and vice versa. Each reference to a Note shall be the
Note held by the applicable Lender. No listing of specific instances, items or
matters in any way limits the scope or generality of any language of this
Guaranty. All headings appearing in this Guaranty are for convenience only and
shall be disregarded in construing this Guaranty.
15. Governing Law. This Guaranty shall be governed by, and construed in
accordance with, the laws of the State of California.
16. Costs and Expenses. If any lawsuit, reference or arbitration is
commenced which arises out of, or which relates to this Guaranty or any of the
other Loan Documents, the prevailing party shall be entitled to recover from
each other party such sums as the court, referee or arbitrator may adjudge to be
reasonable attorneys' fees (including allocated costs for services of in-house
counsel) in the action or proceeding, in addition to costs and expenses
otherwise allowed by law. In all other situations, including any Insolvency
Proceeding, Guarantor agrees to pay all of Lender's costs and expenses,
including attorneys' fees (including allocated costs for services of Lender's
in-house counsel) which may be incurred in any effort to collect or enforce the
Notes or any part of it or any term of this Guaranty. From the time(s) incurred
until paid in full to each Lender, all sums shall bear interest at the rate set
forth in Section 2.02(c) of the Loan Agreement.
17. Consideration. Guarantor acknowledges that it expects to benefit
from the Loans to Obligor, and that it is executing this Guaranty in
consideration of that anticipated benefit.
18. Integration; Modifications. This Guaranty (a) integrates all the
terms and conditions mentioned in or incidental to this Guaranty; (b) supersedes
all oral negotiations and prior writings with respect to its subject matter; and
(c) is intended by Guarantor and Lender as the final expression of the agreement
with respect to the terms and condition set forth in this Guaranty and as the
complete and exclusive statement of the terms agreed to by Guarantor and
Lenders. No representation, understanding, promise or condition shall be
enforceable against any party unless it is contained in this Guaranty. This
Guaranty may not be modified except in a writing signed by Lenders and
Guarantor.
19. Miscellaneous. The illegality or unenforceability of one or more
provisions of this Guaranty shall not affect any other provision. Time is of the
essence in the performance of this Guaranty by Guarantor.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE> 6
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date
first above written.
UGLY DUCKLING CORPORATION, a
Delaware corporation
By: /s/ Steven P. Johnson
Name: Steven P. Johnson
Title: SR VP & Secretary
Address for Notices:
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attn: Steven P. Johnson, Esq.
6
<PAGE> 1
Exhibit 10.3
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.
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<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 9th day of February 1998.
UGLY DUCKLING CORPORATION, a Delaware
corporation
By: /s/ Ernest C. Garcia
----------------------------------------------
Its: CEO
---------------------------------------------
"Servicer"
RELIANCE ACCEPTANCE CORPORATION, a
Delaware corporation
By: /s/ James T. Moran
----------------------------------------------
Its: Pres & CEO
---------------------------------------------
"Client"
BANKAMERICA BUSINESS CREDIT, INC., a
Delaware corporation
By: /s/ G C Markowsky
----------------------------------------------
Its: Vice President
---------------------------------------------
"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>
<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
<PAGE> 47
EXHIBIT J
SENIOR MANAGEMENT EMPLOYEES
<PAGE> 48
EXHIBIT K
FORM OF EXPENSE REPORT
<PAGE> 1
EXHIBIT 10.4
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).
3
<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.
4
<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.
5
<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: James T. Moran
Title: President and Chief
Executive Officer
RELIANCE ACCEPTANCE CORPORATION
By: /s/ James T. Moran
-------------------------------
Name: James T. Moran
Title: President and Chief
Executive Officer
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: James T. Moran
Title: President and Chief
Executive Officer
6
<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 10.5
AGREEMENT OF
PURCHASE AND SALE OF ASSETS
BY AND AMONG
CYGNET FINANCIAL SERVICES, INC.
AND
MOUNTAIN PARKS FINANCIAL SERVICES, INC.
DATED AS OF
JULY 31, 1998
<PAGE> 2
TABLE OF CONTENTS
ARTICLE 1
PURCHASE AND SALE OF ASSETS..............................................1
1.1 Purchase and Sale of the Assets....................................1
1.2 Assets Not Being Acquired..........................................2
1.3 Assumed Liabilities................................................2
1.4 Liabilities Not Being Assumed......................................2
1.5 Purchase Price.....................................................2
1.6 Allocation of Purchase Price; Accounting Treatment.................2
1.7 Transfer Fees and Taxes............................................2
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF PURCHASER..............................3
2.1 Organization and Qualification.....................................3
2.2 Authority Relative to this Agreement...............................3
2.3 No Conflicts.......................................................3
2.4 No Consents........................................................3
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER.................................3
3.1 Organization and Qualification.....................................3
3.2 Authority Relative to this Agreement...............................4
3.3 No Conflicts.......................................................4
3.4 No Consents........................................................4
3.5 No Material Adverse Changes........................................4
3.6 Good Title to and Condition of Acquired Assets.....................4
3.7 Compliance with Laws...............................................4
3.8 Disclosure.........................................................5
ARTICLE 4
CONDUCT OF SELLER PENDING THE CLOSING....................................5
4.1 Conduct of Servicing Business Pending the Closing..................5
4.2 Servicing Business Relationships...................................5
4.3 Access to Information..............................................5
4.4 Notification of Certain Matters....................................5
4.5 Transfer of Permits................................................5
4.6 Closing............................................................6
ARTICLE 5
ADDITIONAL AGREEMENTS....................................................6
5.1 Employment.........................................................6
5.2 Expenses...........................................................6
5.3 Public Announcements...............................................6
5.4 Additional Agreements..............................................6
ARTICLE 6
CONDITIONS...............................................................7
6.1 Conditions to Obligations of Each Party............................7
6.2 Additional Conditions to Obligation of Seller......................7
6.3 Additional Conditions to Obligation of Purchaser...................8
i
<PAGE> 3
ARTICLE 7
THE CLOSING..............................................................8
7.1 Closing............................................................8
7.2 Seller's Obligations...............................................8
7.3 Purchaser's Obligations............................................9
ARTICLE 8
INDEMNITIES.............................................................10
8.1 Survival of Representations and Warranties........................10
8.2 Nature of Statements..............................................10
8.3 Indemnification of Purchaser by Seller............................10
8.4 Indemnification of Seller by Purchaser............................10
8.5 Procedure for Indemnification.....................................11
ARTICLE 9
TERMINATION.............................................................12
9.1 Termination.......................................................12
9.2 Effect of Termination.............................................12
ARTICLE 10
GENERAL PROVISIONS......................................................12
10.1 Notices...........................................................12
10.2 Counterparts......................................................13
10.3 Governing Law.....................................................13
10.4 Assignment........................................................13
10.5 Further Assurances................................................13
10.6 Gender and Number.................................................14
10.7 Schedules and Exhibits............................................14
10.8 Waiver of Provisions..............................................14
10.9 Litigation Costs..................................................14
10.10 Section and Paragraph Headings....................................14
10.11 Amendment.........................................................14
10.12 Transaction Expenses..............................................14
10.13 Severability......................................................14
10.14 Extent of Obligations.............................................14
ii
<PAGE> 4
INDEX OF SCHEDULES
Schedule 1.1(b) Acquired FFE
Schedule 1.1(c) Acquired Permits
Schedule 1.1(d) Acquired Intangible Property
Schedule 1.1(e) Assumed Agreements
Schedule 1.2 Assumed Liabilities
Schedule 3.5 No Material Adverse Changes
Schedule 3.7 Compliance with Law; Permits
iii
<PAGE> 5
AGREEMENT OF PURCHASE AND SALE OF ASSETS
This AGREEMENT OF PURCHASE AND SALE OF ASSETS (the "Agreement") is made as
of July 31, 1998, by and among CYGNET FINANCIAL SERVICES, INC., an Arizona
corporation ("Purchaser") and MOUNTAIN PARKS FINANCIAL SERVICES, INC., a
Colorado corporation ("Seller").
RECITALS
A. Seller engages in the business of purchasing and servicing motor
vehicle installment sales contracts.
B. Upon the terms and subject to the conditions set forth herein, Seller
desires to sell to Purchaser, and Purchaser desires to purchase from Seller,
selected assets of Seller related to the servicing operations of its business
(the "Servicing Business"), all to be completed on or before the date set forth
in Section 7.1 of this Agreement (the "Closing Date").
NOW, THEREFORE, in consideration of the covenants and mutual agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in reliance upon the
representations and warranties contained herein, the parties hereto do hereby
agree as follows:
ARTICLE 1.
PURCHASE AND SALE OF ASSETS
1.1 Purchase and Sale of the Assets. Upon the terms and subject to the
conditions set forth herein, and in reliance on the respective representations
and warranties of the parties, Seller agrees to sell, transfer, assign, and
deliver to Purchaser, and Purchaser agrees to purchase from Seller, all of
Seller's right, title, and interest in and to those assets, rights, and
properties of the Seller relating to the Servicing Business, as specified below
(the "Acquired Assets"):
(a) That certain [Lease] (the "Assumed Lease") dated January 29,
1997 by and between Cherry Creek Place III Associates, Limited, as Lessor,
and Seller, as Lessee, covering the property located at 3151 S. Vaughn
Way, Suite 610, Aurora, Colorado (the "Acquired Facility");
(b) Such furniture, leasehold improvements, fixtures, equipment,
supplies, other goods, and all other appurtenances in and to the premises
utilized by Seller in the operation of the Servicing Business at the
Acquired Facility ("Acquired FFE"), as specified on a Schedule 1.1(b) to
be prepared by Seller and delivered to Purchaser prior to the Closing;
(c) Such assignable title, claims, and rights under License and
Permits (as defined in Section 3.26), ("Acquired License and Permits"),
as specified on a Schedule 1.1(c) to be prepared by Seller and delivered
to Purchaser prior to the Closing;
(d) Certain additional items of intangible property used or owned by
Seller related to the Servicing Business, the Acquired Assets or the
Acquired Facility, that are identified on Schedule 1.1(d) ("Intangible
Property") to be prepared by Seller and delivered to Purchaser prior to
the Closing;
<PAGE> 6
(e) All agreements relating to the Servicing Business, the Acquired
Assets, or the Acquired Facility that Purchaser agrees to assume and that
are listed in a Schedule 1.1(e) ("Assumed Agreements"), to be prepared by
Seller and delivered to Purchaser prior to the Closing; and
(f) All books of account, records, files, supplier lists and
information, employee files (except items which may not be provided under
federal or state law) operating manuals, catalogs, technical information
sheets and other materials and data associated with, used, or employed by
Seller in the operation of the Servicing Business and ownership of the
Acquired Assets.
1.2 Assets Not Being Acquired. Anything contained herein to the contrary
notwithstanding, the Seller is not transferring any assets other than those
specifically identified in the Schedules to Section 1.1 above.
1.3 Assumed Liabilities. From and after the Closing Date, Purchaser shall
assume only those liabilities of Seller (the "Assumed Liabilities") as specified
in Schedule 1.3 hereto. It is expressly understood and agreed that Purchaser
shall not be liable for any of the obligations or liabilities of Seller of any
kind or nature other than those specifically assumed by Purchaser under this
Section 1.3.
1.4 Liabilities Not Being Assumed. Anything contained herein to the
contrary notwithstanding, the Purchaser is expressly not assuming any
liabilities or obligations, whether fixed or contingent, known or unknown,
matured or unmatured, executory or non-executory, of Seller (except as set forth
in Section 1.2 above), which liabilities and obligations shall at and after the
Closing remain the exclusive responsibility of Seller.
1.5 Purchase Price. At the Closing, upon the terms and subject to the
conditions set forth herein, Purchaser shall pay to Seller in consideration for
the Acquired Assets, by wire transfer of immediately available funds to an
account designated by Seller, the aggregate amount of Five Hundred Thousand
Dollars ($500,000) (the "Purchase Price").
1.6 Allocation of Purchase Price; Accounting Treatment. At Closing, the
Purchase Price will be allocated among the Acquired Assets by both Seller and
Purchaser in a manner proposed by Purchaser and consented to by Seller, which
consent shall not be unreasonably withheld or delayed (the "Purchase Price
Allocation"). Seller and Purchaser hereby agree to report this transaction for
federal tax purposes in accordance with the allocation of the Purchase Price
described above. Such allocation shall be reported by Purchaser and Seller on
Internal Revenue Service Form 8594, Asset Acquisition Statement, which will be
filed with Purchaser's and Seller's Federal Income Tax Return for the tax year
that includes the Closing Date. To the extent not specified above, the parties
further agree to coordinate their accounting for the transaction.
1.7 Transfer Fees and Taxes. Seller shall pay any and all transfer and
assumption fees and expenses and sales and use taxes arising out of the transfer
of the Acquired Assets and shall pay its portion, prorated as of the Closing
Date, of state and local real and personal property taxes relating to the
Acquired Assets. Purchaser shall not be responsible for any payroll, excise,
income, business, occupation, withholding, or similar tax, or any taxes of any
kind related to any period prior to the Closing Date.
2
<PAGE> 7
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As of the date hereof and as of the Closing Date, Purchaser hereby
represents and warrants to Seller each of the following:
2.1 Organization and Qualification. Purchaser is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, and has the requisite corporate power and authority to own and operate
its properties and to carry on its business as now conducted in every
jurisdiction where the failure to do so would have a material adverse effect on
its business, properties, or ability to conduct the business currently conducted
by it.
2.2 Authority Relative to this Agreement. Purchaser has the requisite
corporate power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement by Purchaser
and the consummation by Purchaser of the transactions contemplated hereby have
been duly authorized by the Board of Directors of Purchaser, and no other
corporate proceedings on the part of Purchaser are necessary to authorize this
Agreement and such transactions. This Agreement has been duly executed and
delivered by Purchaser and constitutes a valid and binding obligation of
Purchaser, enforceable in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency, reorganization,
or other similar laws relating to the enforcement of creditors' rights generally
and by general principles of equity.
2.3 No Conflicts. Purchaser is not subject to, or obligated under, any
provision of (a) its Certificate of Incorporation or Bylaws, (b) any material
agreement, arrangement, or understanding, (c) any material license, franchise,
or permit, or (d) any law, regulation, order, judgment, or decree, which would
be breached or violated, or in respect of which a right of termination or
acceleration would arise, or pursuant to which any encumbrance on any of its or
any of its subsidiaries' material assets would be created, by its execution,
delivery, and performance of this Agreement and the consummation by it of the
transactions contemplated hereby.
2.4 No Consents. Except for such filings to be made pursuant to federal or
state securities or other laws and regulations, including any required filing
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations thereunder (the "H-S-R Act") or for Permits necessary
to own the Acquired Assets or operate the Servicing Business, no authorization,
consent, or approval of, or filing with, any public body, court, or authority is
necessary on the part of Purchaser for the consummation by Purchaser of the
transactions contemplated by this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF SELLER
As of the date hereof and as of the Closing Date, the Seller, hereby
represents and warrants to Purchaser each of the following:
3.1 Organization and Qualification. Seller is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Colorado, and has the requisite corporate power and authority to own and operate
its properties and to carry on its business as now conducted in every
jurisdiction where the failure to be so qualified would have a material adverse
effect on its business, properties, or ability to conduct the business currently
conducted by it.
3
<PAGE> 8
3.2 Authority Relative to this Agreement. Seller has the requisite
corporate power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement by Seller
and the consummation by Seller of the transactions contemplated hereby have been
duly authorized by the Board of Directors of Seller and Seller's parent and no
other corporate proceedings on the part of Seller are necessary to authorize
this Agreement and such transactions. This Agreement has been duly executed and
delivered by Seller and constitutes a valid and binding obligation of Seller
enforceable in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency, reorganization, or other similar laws
relating to the enforcement of creditors' rights generally and by general
principles of equity.
3.3 No Conflicts. Seller is not subject to, or obligated under, any
provision of (a) its Articles of Incorporation or Bylaws, (b) any material
agreement, arrangement, or understanding, (c) any material license, franchise,
or permit or (d) any law, regulation, order, judgment, or decree, which would be
breached or violated, or in respect of which a right of termination or
acceleration would arise, or pursuant to which any encumbrance on any of the
Acquired Assets would be created, by its execution, delivery, and performance of
this Agreement and the consummation by it of the transactions contemplated
hereby and thereby.
3.4 No Consents. No authorization, consent, or approval of, or filing
with, any public body, court, or authority is necessary on the part of Seller or
any Lessor for the consummation by Seller or any Lessor of the transactions
contemplated by this Agreement.
3.5 No Material Adverse Changes. Except as set forth in Schedule 3.5
hereto, since the date of the Current Financial Statements, there has not been
any material adverse change in the assets, financial condition, or operating
results, customer, employee, or supplier relations, business condition or
prospects, or financing arrangements of Seller.
3.6 Good Title to and Condition of Acquired Assets. The Acquired Assets
that are tangible assets are in good condition and repair, ordinary wear and
tear excepted, and are usable in the ordinary course of business. Seller has
good and marketable title to all the Acquired Assets, free and clear of all
liens, interests of third parties (except the rights of any lessor identified on
Schedule 1.1(e)) encumbrances and security interests. Seller is not in default,
and no circumstances exist which could result in such default, under any
equipment leases, nor is any other party to any of such equipment leases in
default.
3.7 Compliance with Laws. Seller and its officers, directors, agents, and
employees have complied with all applicable laws and regulations of foreign,
federal, state, and local governments and all agencies thereof which affect the
Servicing Business or any of Seller's assets and to which Seller may be subject,
and no claims have been filed or threatened against Seller alleging a violation
of any such law or regulation, except (i) where the failure to so comply would
not have a material adverse effect upon Seller's business, property or ability
to conduct the business currently conducted by it or (ii) as set forth in
Schedule 3.7 hereto. Neither Seller nor any of the Shareholders has given or
agreed to give any money, gift, or similar benefit (other than incidental gifts
of articles of nominal value) to any actual or potential customer, supplier,
governmental employee, or any other person in a position to assist or hinder
Seller in connection with any actual or proposed transaction. Seller possesses
all approvals, authorizations, certificates, consents, registrations,
franchises, licenses, permits, rights, variances, and waivers necessary for the
lawful conduct of the Servicing Business and the ownership or operation of the
Acquired Assets and the Acquired Facility except (i) where the failure to so
comply would not have a material adverse effect upon Seller's business, property
or ability to conduct the business currently conducted by it or (ii) as set
forth in Schedule 3.7 hereto.
4
<PAGE> 9
3.8 Disclosure. Neither this Agreement nor any of the Schedules or
Exhibits hereto or documents or agreements to be delivered hereunder contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained herein or therein, in light of the
circumstances in which they were made, not misleading, and there is no fact
which has not been disclosed to Purchaser which materially adversely affects or
could reasonably be anticipated to materially adversely affect the assets,
including the Acquired Assets, financial condition or results of operations,
customer, employee or supplier relations, business condition, prospects, or
financing arrangements of Seller.
ARTICLE 4
CONDUCT OF SELLER PENDING THE CLOSING
Seller hereby covenants and agrees that from the date hereof to the
Closing Date, unless Purchaser shall otherwise agree in writing or except as
otherwise expressly contemplated or permitted by this Agreement:
4.1 Conduct of Servicing Business Pending the Closing. Except as
specifically contemplated in this Agreement, from the date hereof to the Closing
Date, the Servicing Business of Seller shall be conducted only in, and Seller
shall take no action except in the ordinary course, on an arm's length basis,
and in accordance with all applicable laws, rules, and regulations and past
custom and practice.
4.2 Servicing Business Relationships. Seller will preserve intact Seller's
business organization and goodwill, keep available the services of its officers
and employees as a group, and maintain satisfactory relationships with
suppliers, distributors, customers, and others having business relationships
with it.
4.3 Access to Information. Purchaser and its counsel, accountants, and
other representatives shall have the opportunity to make a complete due
diligence review of the books, records, business, and affairs of Seller,
including, without limitation, the Acquired Assets, Acquired Facility, and all
other matters relating thereto. In the event Purchaser, in its reasonable
business discretion, determines that prior to the Closing Date there has been
any material change in or material misrepresentation about the Servicing
Business, Acquired Assets, Acquired Facility or matters relating thereto,
Purchaser shall have no further obligation to proceed with the transaction, and
the parties shall have no further liability to one another, except as expressly
provided herein. To facilitate the due diligence review, Seller shall provide to
Purchaser and its agents reasonable access to all of Seller's records and
documents during customary business hours.
4.4 Notification of Certain Matters. Seller shall (i) confer on a regular
basis with representatives of Purchaser and report operational matters and the
general status of ongoing operations, (ii) notify Purchaser of any material
adverse change in the normal course of its business or in the operation of its
properties and of any governmental or third party complaints, investigations, or
hearings (or communications indicating that the same may be contemplated); (iii)
not take any action which would render, or which reasonably may be expected to
render, any representation or warranty made by it in this Agreement untrue at,
or at any time prior to, the Closing; and (v) promptly notify Purchaser if
Seller shall discover that any representation or warranty made by it in this
Agreement was when made, or has subsequently become, untrue.
4.5 Transfer of Permits. Seller will use its best efforts to assist
Purchaser to effect the assignment or other transfer of Permits from Seller to
Purchaser as of or as soon as practicable after the Closing Date.
5
<PAGE> 10
4.6 Closing. Seller shall use its best efforts to cause the conditions
specified in Section 6.3 hereof to be satisfied at or prior to the Closing Date
hereof.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 Employment. After the Closing Date Purchaser agrees to hire all or
substantially employees of Seller currently employed at the Acquired Facility
for a minimum of 90 days or on other terms and conditions acceptable to
Purchaser, and Seller will cooperate with Purchaser to that end. All employees
of Seller currently employed at the Acquired Facility to be hired by Purchaser
will be terminated by Seller on or before the Closing Date. Seller shall be
responsible for any severance and/or other payments, including, but not limited
to, accrued vacation and sick time, sick pay, and other compensation, benefits,
and perquisites, incurred in connection therewith and during the period prior to
the Closing Date. Seller agrees not to solicit any of the employees currently
employed at the Acquired Facility to be hired by Purchaser for a period of two
years after the Closing Date.
5.2 Expenses. Seller shall pay the costs and expenses of Seller and
Purchaser shall pay the costs and expenses of Purchaser, incurred in connection
with this Agreement and the transactions contemplated hereby. Notwithstanding
the foregoing, in the event any party breaches the terms of this Agreement prior
to the Closing, and the transactions contemplated hereby are not consummated,
the breaching party agrees to pay the non-breaching party an amount equal to all
of the expenses incurred by the non-breaching party in connection with this
Agreement, and otherwise related to the transactions contemplated hereby,
including, but not limited to, all fees and expenses incurred by the
non-breaching party to accountants, attorneys, and finders, brokers or
consultants. Nothing herein shall be deemed to limit the right or remedy of a
party in the event of a breach of this Agreement by the other party.
5.3 Public Announcements. The parties hereto shall not issue any press
release or public announcement, including announcements by any party for general
reception by or dissemination to employees, agents, or customers, with respect
to this Agreement and the other transactions contemplated by this Agreement
without the prior written consent of the other parties hereto (which consent
shall not be withheld unreasonably); provided, however, that Seller or Purchaser
may make any disclosure or announcement that, in the opinion of its counsel, it
is obligated to make pursuant to applicable law or regulation of the Nasdaq
Stock Market, Inc. or any national securities exchange, as applicable, in which
case the announcing party shall reasonably consult with the other party prior to
making such disclosure or announcement, and provided further that, upon
execution of this Agreement, Purchaser may make a public announcement of such
occurrence in a press release reviewed and reasonably approved by Seller prior
to publication.
5.4 Additional Agreements. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper, or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, including obtaining all necessary
waivers, consents, and approvals and effecting all necessary registrations and
filings and submissions of information requested by governmental authorities.
6
<PAGE> 11
ARTICLE 6
CONDITIONS
6.1 Conditions to Obligations of Each Party. The respective obligations of
each party to effect the transactions contemplated hereby shall be subject to
the fulfillment at or prior to the Closing of the following conditions:
(a) There shall not be threatened, instituted, or pending any action
or proceeding, before any court or governmental authority or agency,
domestic or foreign: (i) challenging or seeking to make illegal, or to
delay or otherwise directly or indirectly to restrain or prohibit, the
consummation of the transactions contemplated hereby, or seeking to obtain
damages in connection therewith; (ii) seeking to prohibit direct or
indirect ownership or operation by Purchaser or any of its subsidiaries of
all or a material portion of the Servicing Business or the Acquired Assets
of Seller, or to compel Purchaser or any of its subsidiaries to divest of
or to hold separately all or a material portion of the Servicing Business
or the Acquired Assets of Seller as a result of the transactions
contemplated hereby; (iii) seeking to impose or confirm limitations on the
ability of Purchaser effectively to exercise directly or indirectly full
rights of ownership of any of the Acquired Assets or properties of Seller;
(iv) seeking or causing any material diminution in the direct or indirect
benefits expected to be derived by Purchaser as a result of the
transactions contemplated by this Agreement; (v) invalidating or rendering
unenforceable any material provision of this Agreement (including without
limitation any of the documents or agreements to be delivered hereunder);
or (vi) which otherwise might materially adversely affect Purchaser or any
of its subsidiaries or the Acquired Assets or Servicing Business;
(b) There shall not be any action taken, or any statute, rule,
regulation, judgment, order, or injunction proposed, enacted, entered,
enforced, promulgated, issued, or deemed applicable to the transactions
contemplated hereby by any federal, state, or foreign court, government,
or governmental authority or agency, which may, directly or indirectly,
result in any of the consequences referred to in (a) above or otherwise
prohibit consummation of the transactions contemplated hereby;
(c) No party hereto shall have terminated this Agreement as
permitted herein; and
(d) There shall not have occurred any of the following events that
could have a material adverse effect on Purchaser or Seller: (i) a
declaration of a banking moratorium or any suspension of payments in
respect of banks in the United States or any limitation by United States
authorities on the extension of credit by lending institutions; (ii) a
commencement of war, armed hostilities, or other international or national
calamity directly or indirectly involving the United States; or (iii) in
the case of any of the foregoing existing at the date hereof, a material
acceleration or worsening thereof.
6.2 Additional Conditions to Obligation of Seller. The obligation of
Seller to effect the transactions contemplated hereby is also subject to the
fulfillment at or prior to the Closing of the following conditions:
(a) The representations and warranties of Purchaser set forth in
Article 2 shall be true and correct as of the Closing Date as if made at
and as of the Closing Date, and Purchaser shall in all material respects
have performed each obligation and agreement and complied with each
covenant to be performed and complied with by it hereunder at or prior to
the Closing; and
7
<PAGE> 12
(b) Purchaser shall have furnished to Seller: (i) a copy of the text
of the resolutions by which the corporate action on the part of Purchaser
necessary to approve this Agreement and the transactions contemplated
herein were taken; and (ii) a certificate executed on behalf of Purchaser
by its corporate secretary or one of its assistant corporate secretaries
certifying to Seller that such copy is a true, correct, and complete copy
of such resolutions and that such resolutions were duly adopted and have
not been amended or rescinded.
6.3 Additional Conditions to Obligation of Purchaser. The obligations of
Purchaser to effect the transactions contemplated herein are also subject to the
fulfillment at or prior to the Closing of the following conditions:
(a) The representations and warranties of Seller in this Agreement
shall be true and correct as of the Closing Date as if made at and as of
the Closing Date, and Seller shall in all material respects have performed
each obligation and agreement and complied with each covenant to be
performed and complied with by them hereunder at or prior to the Closing;
(b) Seller shall have furnished to Purchaser a certificate in which
it shall certify that the conditions set forth in Section 6.3(a) have been
fulfilled;
(c) Seller shall have furnished to Purchaser: (i) copies of the
texts of the resolutions by which the corporate action on the part of
Seller necessary to approve this Agreement and the transactions
contemplated hereby were taken; and (ii) certificates of Seller certifying
to Purchaser that such copies are true, correct, and complete copies of
such resolutions and that such resolutions were duly adopted and have not
been amended or rescinded;
(d) There shall have been no damage, destruction, or loss of or to
any property or properties owned or used by Seller, whether or not covered
by insurance, which in the aggregate may have a material adverse effect on
the Servicing Business;
(e) Receipt and approval of the Schedules to be prepared by Seller,
all updated as of the Closing Date, and preparation of and agreement as to
all closing documents, agreements and procedures required under this
Agreement; and
(f) The form and substance of all certificates, instruments, and
other documents delivered to Purchaser under this Agreement shall be
satisfactory in all respects to Purchaser and its counsel.
ARTICLE 7
THE CLOSING
7.1 Closing. The closing (the "Closing") of the transactions contemplated
herein shall be held on or before July 31, 1998 (the "Closing Date"), at a time
and place as the parties shall mutually agree.
7.2 Seller's Obligations. In addition to any other documents required to
be delivered by Seller at Closing, Seller, shall deliver to Purchaser at Closing
the following documents:
8
<PAGE> 13
(a) An executed Bill of Sale and Assignment of Lease and other
instruments of transfer, with such warranties of title as are set forth
herein, dated as of the Closing Date, conveying to Purchaser all of
Seller's right, title, and interest in and to the Acquired Assets, all in
form and substance satisfactory to Purchaser;
(b) The Assumed Lease contemplated by Section 1.1 and lease
assignments with respect to each item of personal property which is leased
by Seller and which is to be assumed by Purchaser hereunder, properly
executed and acknowledged by Seller, and accompanied by all consents of
lessors required by this Agreement and the leases being assigned, and such
subordination agreements, non-disturbance certificates and other documents
as Purchaser shall have reasonably requested;
(c) Executed assignments of all assignable Acquired License and
Permits and Intangibles and executed assignment and assumption agreements
with respect to all Assumed Agreements, with all necessary consents
thereto;
(d) All books, records, and other data relating to the Acquired
Assets and the Servicing Business (other than corporate records);
(e) The certificate(s) as provided for in Section 6.3(b) hereof;
(f) Certified resolutions and the certificates provided for in
Section 6.3(c) hereof; and
(g) Such other documents as Purchaser or its counsel or any lender
or lessor of Purchaser may reasonably request in order to effectuate the
transactions contemplated under this Agreement.
Seller at any time before or after the Closing, will execute, acknowledge, and
deliver any further deeds, assignments, conveyances, and other assurances,
documents, and instruments of transfer reasonably requested by Purchaser, and
will take any other action consistent with the terms of this Agreement that may
reasonably be requested by Purchaser, for the purpose of assigning,
transferring, granting, conveying, and confirming to Purchaser, or reducing to
possession, any or all property to be conveyed and transferred by this
Agreement.
7.3 Purchaser's Obligations. Purchaser shall deliver to Seller at Closing
the following documents:
(a) Wire transfer in the amount of the Purchase Price, payable as
provided in Section 1.4 hereof;
(b) Executed counterparts of such of the closing documents of Seller
as shall require acceptance by Purchaser; and
(c) Certified resolutions of the Board of Directors of Purchaser as
provided for in Section 6.2(b) hereof.
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<PAGE> 14
ARTICLE 8
INDEMNITIES
8.1 Survival of Representations and Warranties. Regardless of any
investigation at any time made by or on behalf of any party hereto, or of any
information any party may have in respect thereof, all covenants, agreements,
representations, and warranties made hereunder or pursuant hereto or in
connection with the transactions contemplated hereby shall survive the Closing.
8.2 Nature of Statements. All statements contained herein, in any Schedule
or Exhibit hereto, or in any certificate or other written instrument delivered
by or on behalf of Seller, or Purchaser pursuant to this Agreement, or in
connection with the transactions contemplated hereby, shall be deemed
representations and warranties by Seller, or Purchaser, as the case may be.
8.3 Indemnification of Purchaser by Seller. Seller shall indemnify,
defend, and hold harmless Purchaser from and against any and all costs,
expenses, losses, damages, fines, penalties, or liabilities (including, without
limitation, interest which may be imposed in connection therewith, court costs,
litigation expenses, and reasonable attorneys' and accounting fees) ("Actual
Loss") incurred by Purchaser, directly or indirectly, with respect to, in
connection with, arising from, or alleged to result from, arise out of, or be in
connection with:
(a) A breach by Seller of any representation or warranty made by
Seller and contained in this Agreement or in any certificate or other
document delivered by Seller to Purchaser hereunder or thereunder;
(b) A breach by Seller of any covenant, restriction, or agreement
made by or applicable to Seller and contained in this Agreement or in any
certificate or other document delivered by said party or affiliate to
Purchaser or any affiliate hereunder or thereunder; and
(c) Except for any Assumed Liabilities, any other liability,
obligation, claim, complaint, debt, suit, cause of action, investigation,
or proceeding of any kind whatsoever, against or relating to Seller, the
Servicing Business, the Acquired Assets, or the Acquired Facility, whether
instituted or commenced prior to or after the Closing Date and which
relates to or arises from the business or assets of Seller on or before
the Closing Date or, with respect to the continuing business activities of
Seller, after the Closing Date.
8.4 Indemnification of Seller by Purchaser. Purchaser shall indemnify,
defend, and hold Seller harmless from and against any Actual Losses incurred by
the Seller with respect to, in connection with, arising from, or alleged to
result from, arise out of, or be in connection with:
(a) A breach by Purchaser of any representation or warranty made by
Purchaser and contained in this Agreement or in any certificate or other
document delivered by Purchaser to the Seller hereunder or thereunder;
(b) A breach by Purchaser of any covenant, restriction, or agreement
made by or applicable to Purchaser and contained in this Agreement or in
any certificate or other document delivered by Purchaser to the Seller
hereunder or thereunder;
(c) All loss, expense, or damage suffered as the direct result of
Purchaser's failure to pay the Assumed Liabilities in accordance with the
terms of this Agreement; and
(d) Any other liability, obligation, claim, complaint, debt, suit,
cause of action, investigation, or proceeding of any kind whatsoever
instituted or commenced after the
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<PAGE> 15
Closing Date which relates to or arises from Purchaser's operation of its
separate and independent business after the Closing Date, except for any
claims arising out of Seller's liabilities to Purchaser or obligations to
Purchaser.
8.5 Procedure for Indemnification.
(a) The party which is entitled to be indemnified hereunder (the
"Indemnified Party") shall promptly give notice hereunder to the party
required to indemnify (the "Indemnifying Party") after obtaining written
notice of any claim as to which recovery may be sought against the
indemnifying party because of the indemnity in Section 8.3 and Section 8.4
hereof and, if such indemnity shall arise from the claim of a third party,
shall permit the Indemnifying Party to assume the defense of any such
claim and any litigation resulting from such claim. Notwithstanding the
foregoing, the right to indemnification hereunder shall not be affected by
any failure of an Indemnified Party to give such notice, or delay by an
Indemnified Party in giving such notice, unless, and then only to the
extent that, the rights and remedies of the Indemnifying Party shall have
been prejudiced as a result of the failure to give, or delay in giving,
such notice. Failure by an Indemnifying Party to notify an Indemnified
Party of its election to defend any such claim or action by a third party
within 15 days after notice thereof shall have been given to the
Indemnifying Party shall be deemed a waiver by the Indemnifying Party of
its right to defend such claim or action.
(b) If the Indemnifying Party assumes the defense of such claim or
litigation resulting therefrom, the obligations of the Indemnifying Party
hereunder as to such claim shall include taking all steps necessary in the
defense or settlement of such claim or litigation and holding the
Indemnified Party harmless from and against any and all damages caused by
or arising out of any settlement approved by the Indemnifying Party or any
judgment in connection with such claim or litigation. The Indemnifying
Party shall not, in the defense of such claim or any litigation resulting
therefrom, consent to entry of any judgment (other than a judgment of
dismissal on the merits without costs) except with the written consent of
the Indemnified Party, or enter into any settlement (except with the
written consent of the Indemnified Party) which does not include as an
unconditional term thereof the giving by the claimant or the plaintiff to
the Indemnified Party a release from all liability in respect of such
claim or litigation. Anything in this Section 8.5 to the contrary
notwithstanding, the Indemnified Party may, with counsel of its choice and
at its expense, participate in the defense of any such claim or
litigation.
(c) If the Indemnifying Party shall not assume the defense of any
such claim by a third party or litigation resulting therefrom after
receipt of notice from such Indemnified Party, the Indemnified Party may
defend against such claim or litigation in such manner as it deems
appropriate, and unless the Indemnifying Party shall deposit with the
Indemnified Party a sum equivalent to the total amount demanded in such
claim or litigation plus the Indemnified Party's estimate of the costs of
defending the same, the Indemnified Party may settle such claim or
litigation on such terms as it may deem appropriate and the Indemnifying
Party shall promptly reimburse the Indemnified Party for the amount of
such settlement and for all damages incurred by the Indemnified Party in
connection with the defense against or settlement of such claim or
litigation.
(d) The Indemnifying Party shall promptly reimburse the Indemnified
Party for the amount of any judgment rendered with respect to any claim by
a third party in such litigation and for all damage incurred by the
Indemnified Party in connection with the defense against such claim or
litigation, whether or not resulting from, arising out of, or incurred
with respect to, the act of a third party.
11
<PAGE> 16
ARTICLE 9
TERMINATION
9.1 Termination. This Agreement may be terminated at any time prior to the
Closing:
(a) By mutual written consent of duly authorized officers of
Purchaser and Seller;
(b) By Purchaser if, from the date of this Agreement to the Closing
Date there has been any material adverse change in or material
misrepresentation about the Servicing Business, Acquired Assets, Acquired
Facility or matters relating thereto;
(c) By either Purchaser or Seller if the other party breaches any of
its material representations, warranties, or covenants contained herein
and, if such breach is curable, such breach is not cured within five (5)
business days after notice thereof;
(d) By either Purchaser or Seller if the transactions contemplated
herein shall not have been consummated on or before August 15, 1998 or
such later date as may be mutually agreed upon by the parties; provided,
however, that no party shall have the right to terminate this Agreement
unilaterally if the event giving rise to such right is primarily
attributable to such party or to any affiliated party.
9.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 9.1, this Agreement shall become void and there shall be
no liability or further obligation hereunder on the part of Purchaser or Seller
or their respective shareholders, officers, or directors, except as set forth in
Article 10 and Sections 5.2 and 5.5 hereof, and except for liability arising
from a breach of this Agreement.
ARTICLE 10
GENERAL PROVISIONS
10.1 Notices. All notices, consents, and other communications hereunder
shall be in writing and deemed to have been duly given when (i) delivered by
hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is
mailed by registered mail, postage pre-paid return receipt requested, or (iii)
when received by the addressee, if sent by Express Mail, Federal Express, or
other express delivery service (postage pre-paid return receipt requested), in
each case to the appropriate addresses and telecopier numbers set forth below
(or to such other addresses and telecopier numbers as a party may designate as
to itself by notice to the other):
If to Purchaser: Cygnet Financial Services, Inc.
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Phone: (602) 852-6600
FAX: (602) 852-6656
Attn.: Steven P. Johnson, Esq.
12
<PAGE> 17
With a copy to: Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Phone: (602) 382-6252
FAX: (602) 382-6070
Attn.: Tim Moser, Esq.
If to Seller: Mountain Parks Financial Services, Inc.
3151 South Vaughn Way, Suite 610
Aurora, Colorado 80014
Phone: (303) 873-2201
Fax: (303) 873-2295
Attn.: Dennis Berglund
With a copy to: Community First Bankshare, Inc.
520 Main Avenue
Fargo, North Dakota 58124-0001
Phone: (701) 298-5649
FAX: (701) 235-6019
Attn.: Todd Richter
And a copy to: Lindquist & Vennum P.L.L.P.
4200 IDS Center
Minneapolis, Minnesota 55402-2205
Phone: (612) 371-3211
FAX: (612) 371-3207
Attn.: Steve J. Johnson, Esq.
10.2 Counterparts. This Agreement may be executed in any number of
counterparts, and each counterpart shall constitute an original instrument, but
all such separate counterparts shall constitute one and the same agreement.
10.3 Governing Law. The validity, construction, and enforceability of this
Agreement shall be governed in all respects by the laws of the State of Arizona,
without regard to its conflict of laws rules.
10.4 Assignment. This Agreement shall not be assigned by operation of law
or otherwise, except that Purchaser may assign all or any portion of its rights
under this Agreement to any wholly owned subsidiary, but no such assignment
shall relieve Purchaser of its obligations hereunder, and except that this
Agreement may be assigned by operation of law to any corporation or entity with
or into which Purchaser may be merged or consolidated or to which Purchaser
transfers all or substantially all of its assets, and such corporation or entity
assumes this Agreement and all obligations and undertakings of Purchaser
hereunder.
10.5 Further Assurances. At any time on or after the date hereof, the
parties hereto shall each perform such acts, execute and deliver such
instruments, assignments, endorsements and other documents and do all such other
things consistent with the terms of this Agreement as may be reasonably
necessary to accomplish the transaction contemplated in this Agreement or
otherwise carry out the purpose of this Agreement.
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<PAGE> 18
10.6 Gender and Number. The masculine, feminine, or neuter pronouns used
herein shall be interpreted without regard to gender, and the use of the
singular or plural shall be deemed to include the other whenever the context so
requires.
10.7 Schedules and Exhibits. The Schedules and Exhibits referred to herein
are incorporated herein by such reference as if fully set forth in the text
hereof. Any Schedules and Exhibits referred to herein that are not attached
hereto upon execution of this Agreement shall be prepared and attached to this
Agreement as soon as reasonably possible after execution of this Agreement and
on or before the Closing Date. All Schedules shall be updated as of the Closing
Date. All documents and agreements delivered to Purchaser in connection with its
investigation of Seller shall be complete and accurate and reflect all
amendments thereto.
10.8 Waiver of Provisions. The terms, covenants, representations,
warranties, and conditions of this Agreement may be waived only by a written
instrument executed by the party waiving compliance. The failure of any party at
any time to require performance of any provisions hereof shall, in no manner,
affect the right at a later date to enforce the same. No waiver by any party of
any condition, or breach of any provision, term, covenant, representation, or
warranty contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be or construed as a further or
continuing waiver of any such condition or of the breach of any other provision,
term, covenant, representation, or warranty of this Agreement.
10.9 Litigation Costs. If any legal action or any arbitration or other
proceeding is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any of
the provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees, accounting fees, and
other costs incurred in that action or proceeding, in addition to any other
relief to which it or they may be entitled.
10.10 Section and Paragraph Headings. The Article and Section headings in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
10.11 Amendment. This Agreement may not be amended except by an instrument
in writing approved by the parties to this Agreement and signed on behalf of
each of the parties hereto.
10.12 Transaction Expenses. Except as otherwise expressly provided herein,
each party shall bear its own expenses incident to this Agreement and the
transactions contemplated hereby, including without limitation, all fees of
counsel, consultants, and accountants.
10.13 Severability. If any term, provision, covenant, or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void,
or unenforceable, the remainder of the terms, provisions, covenants, and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired, or invalidated and the court shall modify this
Agreement or, in the absence thereof, the parties shall negotiate in good faith
to modify this Agreement to preserve each party's anticipated benefits under
this Agreement.
10.14 Extent of Obligations. All covenants, representations, warranties,
indemnities, and agreements made by Seller, Shareholders, and Lessors herein
shall be deemed joint and several as to each of them.
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<PAGE> 19
IN WITNESS WHEREOF, Purchaser and Seller have caused this Agreement to be
executed on the date first written above by their respective officers thereunder
duly authorized.
CYGNET FINANCIAL SERVICES, INC., an
Arizona corporation
By: /s/ Steven P. Johnson
------------------------------------
Name: Steven P. Johnson
Title: President
MOUNTAIN PARKS FINANCIAL SERVICES, INC., a
Colorado corporation
By: /s/ Dennis Berglund
------------------------------------
Name: Dennis Berglund
Title: CEO
15
<PAGE> 20
SCHEDULE 1.1(b)
SEE ATTACHED
[OMITTED]
<PAGE> 21
SCHEDULE 1.1(c)
NONE
<PAGE> 22
SCHEDULE 1.1(d)
NONE
<PAGE> 23
SCHEDULE 1.1(e)
1. Agreement with Finzer Business Systems (relating to two fax/copiers and
one copier).
2. US West Communications Digital Service Rate Stability Plan Agreement dated
September 17, 1997.
3. Voice Data Agreement with World Com, dated March 27, 1997.
4. Hardware and Operating System Maintenance Agreement, executed by Megasys,
Inc. on October 22, 1997.
5. Pitney Bowes Rental Agreement dated April 21, 1997.
<PAGE> 24
SCHEDULE 1.3
ASSUMED LIABILITIES
1. Any and all obligations owing to the Landlord of the Acquired Facility as
provided in that certain [Assumption Agreement] which arose after the
effective date of this Agreement.
2. Any and all obligations of Seller due and owing any other party to the
Assumed Agreements which arose after the effective date of this Agreement.
<PAGE> 25
SCHEDULE 3.5
NONE
<PAGE> 26
SCHEDULE 3.7
NONE
<PAGE> 1
Exhibit 10.6
UGLY DUCKLING CORPORATION
1998 EXECUTIVE INCENTIVE PLAN
ARTICLE 1 PURPOSE
1.1 GENERAL. The purpose of the Ugly Duckling Corporation 1998
Executive Incentive Plan (the "Plan") is to promote the success, and enhance the
value, of Ugly Duckling Corporation (the "Company") by linking the personal
interests of its employees, officers, and executives of, and consultants and
advisors to, the Company to those of Company stockholders and by providing such
individuals with an incentive for outstanding performance in order to generate
superior returns to shareholders of the Company. The Plan is further intended to
provide flexibility to the Company in its ability to motivate, attract, and
retain the services of employees, officers, and executives of, and consultants
and advisors to, the Company upon whose judgment, interest, and special effort
the successful conduct of the Company's operation is largely dependent.
ARTICLE 2 EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan is effective as of January 15, 1998, the
date the Plan is approved by the Company's shareholders (the "Effective Date").
ARTICLE 3 DEFINITIONS AND CONSTRUCTION.
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required
by the context. The following words and phrases shall have the following
meanings:
(a) "Award" means any Option, Stock Appreciation Right,
Restricted Stock Award, Performance Share Award, or Performance-Based
Award granted to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract,
or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means (except as otherwise provided in an Award
Agreement) if the Committee, in its reasonable and good faith
discretion, determines that the employee, consultant or advisor (i) has
developed or pursued interests substantially adverse to the Company,
(ii) materially breached any employment, engagement or confidentiality
agreement or otherwise failed to satisfactorily discharge his or her
duties, (iii) has not devoted all or substantially all of his or her
business time, effort and attention to the affairs of the Company (or
such lesser amount as has been agreed to in writing by the Company),
(iv) is convicted of a felony involving moral turpitude, or (v) has
engaged in activities or
1
<PAGE> 2
omissions that are detrimental to the well-being of the Company.
(e) "Change of Control" means any of the following:
(1) any merger of the Company in which the Company is
not the continuing or surviving entity, or pursuant to which Stock
would be converted into cash, securities or other property, other than
a merger of the Company in which the holders of the Company's Stock
immediately prior to the merger have the same proportionate ownership
of beneficial interest of common stock or other voting securities of
the surviving entity immediately after the merger;
(2) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of assets or
earning power aggregating more than 40% of the assets or earning power
of the Company and its subsidiaries (taken as a whole), other than
pursuant to a sale-leaseback, structured finance or other form of
financing transaction or pursuant to any separating of the Company's
assets into two or more publicly held companies as announced in the
Company's press release dated April 28, 1998;
(3) the shareholders of the Company shall approve any
plan or proposal for liquidation or dissolution of the Company;
(4) any person (as such term is used in Section 13(d)
and 14(d)(2) of the Exchange Act), other than any current shareholder
of the Company or affiliate thereof or any employee benefit plan of the
Company or any subsidiary of the Company or any entity holding shares
of capital stock of the Company for or pursuant to the terms of any
such employee benefit plan in its role as an agent or trustee for such
plan, shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 20% or more of the Company's
outstanding Stock; or
(5) during any period of two consecutive years,
individuals who at the beginning of such period shall fail to
constitute a majority thereof, unless the election, or the nomination
for election by the Company's shareholders, of each new director was
approved by a vote of at least two-thirds of the directors then still
in office who were directors at the beginning of the period.
(f) "Code" means the Internal Revenue Code of 1986, as
amended.
(g) "Committee" means the committee of the Board described in
Article 4.
(h) "Covered Employee" means an Employee who is a "covered
employee" within the meaning of Section 162(m) of the Code.
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<PAGE> 3
(i) "Disability" shall mean any illness or other physical or
mental condition of a Participant which renders the Participant
incapable of performing his customary and usual duties for the Company,
or any medically determinable illness or other physical or mental
condition resulting from a bodily injury, disease or mental disorder
which in the judgment of the Committee is permanent and continuous in
nature. The Committee may require such medical or other evidence as it
deems necessary to judge the nature and permanency of the Participant's
condition.
(j) "Effective Date Grant" means the Options granted to
selected covered Participants pursuant to Article 12. Each Effective
Date Grant is intended to qualify as "performance-based compensation"
under Code Section 162(m).
(k) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time.
(l) "Fair Market Value" means, as of any given date, the fair
market value of Stock or other property on a particular date determined
by such methods or procedures as may be established from time to time
by the Committee. Unless otherwise determined by the Committee, the
Fair Market Value of Stock as of any date shall be the closing price
for the Stock as reported on the NASDAQ National Market System (or on
any national securities exchange on which the Stock is then listed) for
that date or, if no closing price is so reported for that date, the
closing price on the next preceding date for which a closing price was
reported.
(m) "Incentive Stock Option" means an Option that is intended
to meet the requirements of Section 422 of the Code or any successor
provision thereto.
(n) "Non-Employee Director" means a member of the Board who
qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3)
of the Exchange Act, or any successor definition adopted by the Board.
(o) "Non-Qualified Stock Option" means an Option that is not
intended to be an Incentive Stock Option.
(p) "Option" means a right granted to a Participant under
Article 7 or Article 12 of the Plan to purchase Stock at a specified
price during specified time periods. An Option may be either an
Incentive Stock Option or a Non-Qualified Stock Option.
(q) "Participant" means a person who, as an executive of, or
other individual providing important services to, the Company or any
Subsidiary, has been granted an Award under the Plan.
(r) "Performance-Based Awards" means the Performance Share
Awards and Restricted Stock Awards granted to selected Covered
Employees pursuant to Articles 9 and 10, but which are subject to the
terms and conditions set forth in Article 11. All
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<PAGE> 4
Performance-Based Awards are intended to qualify as "performance-based
compensation" under Section 162(m) of the Code.
(s) "Performance Criteria" means the criteria that the
Committee selects for purposes of establishing the Performance Goal or
Performance Goals for a Participant for a Performance Period. The
Performance Criteria that will be used to establish Performance Goals
are limited to the following: pre- or after-tax net earnings, sales
growth, operating earnings, operating cash flow, return on net assets,
return on stockholders' equity, return on assets, return on capital,
Stock price growth, stockholder returns, gross or net profit margin,
earnings per share, price per share of Stock, and market share, any of
which may be measured either in absolute terms or as compared to any
incremental increase or as compared to results of a peer group. The
Committee shall, within the time prescribed by Section 162(m) of the
Code, define in an objective fashion the manner of calculating the
Performance Criteria it selects to use for such Performance Period for
such Participant.
(t) "Performance Goals" means, for a Performance Period, the
goals established in writing by the Committee for the Performance
Period based upon the Performance Criteria. Depending on the
Performance Criteria used to establish such Performance Goals, the
Performance Goals may be expressed in terms of overall Company
performance or the performance of a division, business unit or an
individual. The Committee, in its discretion, may, within the time
prescribed by Section 162(m) of the Code, adjust or modify the
calculation of Performance Goals for such Performance Period in order
to prevent the dilution or enlargement of the rights of Participants
(i) in the event of, or in anticipation of, any unusual or
extraordinary corporate item, transaction, event, or development, or
(ii) in recognition of, or in anticipation of, any other unusual or
nonrecurring events affecting the Company, or the financial statements
of the Company, or in response to, or in anticipation of, changes in
applicable laws, regulations, accounting principles, or business
conditions.
(u) "Performance Period" means the one or more periods of
time, which may be of varying and overlapping durations, as the
Committee may select, over which the attainment of one or more
Performance Goals will be measured for the purpose of determining a
Participant's right to, and the payment of, a Performance-Based Award.
(v) "Performance Share" means a right granted to a Participant
under Article 9, to receive cash, Stock, or other Awards, the payment
of which is contingent upon achieving certain performance goals
established by the Committee.
(w) "Plan" means the Ugly Duckling Corporation 1998 Executive
Incentive Plan, as amended from time to time.
(x) "Restricted Stock Award" means Stock granted to a
Participant under Article 10 that is subject to certain restrictions
and to risk of forfeiture.
(y) "Stock" means the common stock of the Company and such
other securities of the Company that may be substituted for Stock
pursuant to Article 12.
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<PAGE> 5
(z) "Stock Appreciation Right" or "SAR" means a right granted
to a Participant under Article 8 to receive a payment equal to the
difference between the Fair Market Value of a share of Stock as of the
date of exercise of the SAR over the grant price of the SAR, all as
determined pursuant to Article 8.
(aa) "Subsidiary" means any corporation of which a majority of
the outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.
ARTICLE 4 ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Board or a
Committee appointed by, and which serves at the discretion of, the Board. If the
Board appoints a Committee, the Committee shall consist of at least two
individuals, each of whom qualifies as (i) a Non-Employee Director, and (ii) an
"outside director" under Code Section 162(m) and the regulations issued
thereunder. Reference to the Committee shall refer to the Board if the Board
does not appoint a Committee.
4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall
constitute a quorum. The acts of a majority of the members present at any
meeting at which a quorum is present and acts approved in writing by a majority
of the Committee in lieu of a meeting shall be deemed the acts of the Committee.
Each member of the Committee is entitled to, in good faith, rely or act upon any
report or other information furnished to that member by any officer or other
employee of the Company or any Subsidiary, the Company's independent certified
public accountants, or any executive compensation consultant or other
professional retained by the Company to assist in the administration of the
Plan.
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards to be granted to
each Participant;
(c) Determine the number of Awards to be granted and the
number of shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted
under the Plan including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the Award,
any schedule for lapse of forfeiture restrictions or restrictions on
the exercisability of an Award, and accelerations or waivers thereof,
based in each case on such considerations as the Committee in its sole
discretion determines; provided, however, that the Committee shall not
have the authority to accelerate the vesting, or waive the forfeiture,
of any Performance-Based Awards;
(e) Amend, modify, or terminate any outstanding Award, with
the Participant's consent unless the Committee has the authority to
amend, modify or terminate an Award
5
<PAGE> 6
without the Participant's consent under any other provision of the
Plan.
(f) Determine whether, to what extent, and under what
circumstances an Award may be settled in, or the exercise price of an
Award may be paid in, cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(g) Prescribe the form of each Award Agreement, which need not
be identical for each Participant;
(h) Decide all other matters that must be determined in
connection with an Award;
(i) Establish, adopt or revise any rules and regulations as it
may deem necessary or advisable to administer the Plan; and
(j) Make all other decisions and determinations that may be
required under the Plan or as the Committee deems necessary or
advisable to administer the Plan.
4.4 DECISIONS BINDING. The Committee's interpretation of the Plan, any
Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5 SHARES SUBJECT TO THE PLAN
5.1 NUMBER OF SHARES. Subject to adjustment provided in Section 13.1,
the aggregate number of shares of Stock reserved and available for grant under
the Plan shall be 800,000.
5.2 LAPSED AWARDS. To the extent that an Award terminates, expires or
lapses for any reason, any shares of Stock subject to the Award will again be
available for the grant of an Award under the Plan and shares subject to SARs or
other Awards settled in cash will be available for the grant of an Award under
the Plan.
5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4 LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. Notwithstanding
any provision in the Plan to the contrary, and subject to the adjustment in
Section 13.1, the maximum number of shares of Stock with respect to one or more
Awards that may be granted to any one Participant during the Company's fiscal
year shall be 400,000.
ARTICLE 6 ELIGIBILITY AND PARTICIPATION
6.1 ELIGIBILITY.
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<PAGE> 7
(a) GENERAL. Persons eligible to participate in this Plan
include all employees, officers, and executives of, and consultants and advisors
to, the Company or a Subsidiary, as determined by the Committee, including such
individuals who are also members of the Board.
(b) FOREIGN PARTICIPANTS. In order to assure the viability of
Awards granted to Participants employed in foreign countries, the Committee may
provide for such special terms as it may consider necessary or appropriate to
accommodate differences in local law, tax policy, or custom. Moreover, the
Committee may approve such supplements to, or amendments, restatements, or
alternative versions of the Plan as it may consider necessary or appropriate for
such purposes without thereby affecting the terms of the Plan as in effect for
any other purpose; provided, however, that no such supplements, amendments,
restatements, or alternative versions shall increase the share limitations
contained in Section 5.1 of the Plan.
6.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the
Committee may, from time to time, select from among all eligible individuals,
those to whom Awards shall be granted and shall determine the nature and amount
of each Award. No individual shall have any right to be granted an Award under
this Plan.
ARTICLE 7 STOCK OPTIONS
7.1 GENERAL. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under an Option shall be determined by the Committee and set forth in the Award
Agreement. It is the intention under the Plan that the exercise price for any
Option shall not be less than the Fair Market Value as of the date of grant;
provided, however that the Committee may, in its discretion, grant Options
(other than Options that are intended to be Incentive Stock Options or Options
that are intended to qualify as performance-based compensation under Code
Section 162(m)) with an exercise price of less than Fair Market Value on the
date of grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall
determine the time or times at which an Option may be exercised in whole or in
part. The Committee shall also determine the performance or other conditions, if
any, that must be satisfied before all or part of an Option may be exercised.
(c) PAYMENT. The Committee shall determine the methods by
which the exercise price of an Option may be paid, the form of payment,
including, without limitation, cash, shares of Stock (through actual tender or
by attestation), or other property (including broker-assisted "cashless
exercise" arrangements), and the methods by which shares of Stock shall be
delivered or deemed to be delivered to Participants.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a
written Award Agreement between the Company and the Participant. The Award
Agreement shall include such additional provisions as may be specified by the
Committee.
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<PAGE> 8
7.2 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be granted
only to employees and the terms of any Incentive Stock Options granted under the
Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock
shall be set by the Committee, provided that the exercise price for
any Incentive Stock Option may not be less than the Fair Market Value
as of the date of the grant.
(b) EXERCISE. In no event, may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse
under the following circumstances:
(1) The Incentive Stock Option shall lapse ten years
from the date it is granted, unless an earlier time is set in
the Award Agreement.
(2) The Incentive Stock Option shall lapse upon
termination of employment for Cause or for any other reason,
other than the Participant's death or Disability, unless the
Committee determines in its discretion to extend the exercise
period for no more than ninety (90) days after the
Participant's termination of employment.
(3) If the Participant terminates employment on
account of Disability or death before the Option lapses
pursuant to paragraph (1) or (2) above, the Incentive Stock
Option shall lapse, unless it is previously exercised, on the
earlier of (i) the date on which the Option would have lapsed
had the Participant not become Disabled or lived and had his
employment status (i.e., whether the Participant was employed
by the Company on the date of his Disability or death or had
previously terminated employment) remained unchanged; or (ii)
12 months after the date of the Participant's termination of
employment on account of Disability or death. Upon the
Participant's Disability or death, any Incentive Stock Options
exercisable at the Participant's Disability or death may be
exercised by the Participant's legal representative or
representatives, by the person or persons entitled to do so
under the Participant's last will and testament, or, if the
Participant shall fail to make testamentary disposition of
such Incentive Stock Option or shall die intestate, by the
person or persons entitled to receive said Incentive Stock
Option under the applicable laws of descent and distribution.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market
Value (determined as of the time an Award is made) of all shares of
Stock with respect to which Incentive Stock Options are first
exercisable by a Participant in any calendar year may not exceed
$100,000.00 or such other limitation as imposed by Section 422(d) of
the Code, or any successor provision. To the extent that Incentive
Stock Options are first exercisable by a Participant in excess of such
limitation, the excess shall be considered Non-Qualified Stock Options.
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<PAGE> 9
(e) TEN PERCENT OWNERS. An Incentive Stock Option shall be
granted to any individual who, at the date of grant, owns stock
possessing more than ten percent of the total combined voting power of
all classes of Stock of the Company only if such Option is granted at a
price that is not less than 110% of Fair Market Value on the date of
grant and the Option is exercisable for no more than five years from
the date of grant.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an
Incentive Stock Option may be made pursuant to this Plan after the
tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant.
ARTICLE 8 STOCK APPRECIATION RIGHTS
8.1 GRANT OF SARs. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock
Appreciation Right, the Participant to whom it is granted has the right
to receive the excess, if any, of:
(1) The Fair Market Value of a share of Stock on the
date of exercise; over
(2) The grant price of the Stock Appreciation Right
as determined by the Committee, which shall not be less than
the Fair Market Value of a share of Stock on the date of grant
in the case of any SAR related to any Incentive Stock Option.
(b) OTHER TERMS. All awards of Stock Appreciation Rights shall
be evidenced by an Award Agreement. The terms, methods of exercise,
methods of settlement, form of consideration payable in settlement, and
any other terms and conditions of any Stock Appreciation Right shall be
determined by the Committee at the time of the grant of the Award and
shall be reflected in the Award Agreement.
ARTICLE 9 PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE SHARES. The Committee is authorized to grant
Performance Shares to Participants on such terms and conditions as may be
selected by the Committee. The Committee shall have the complete discretion to
determine the number of Performance Shares granted to each Participant. All
Awards of Performance Shares shall be evidenced by an Award Agreement.
9.2 RIGHT TO PAYMENT. A grant of Performance Shares gives the
Participant rights, valued as determined by the Committee, and payable to, or
exercisable by, the Participant to whom the Performance Shares are granted, in
whole or in part, as the Committee shall establish at grant or thereafter. The
Committee shall set performance goals and other terms or conditions to payment
of
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<PAGE> 10
the Performance Shares in its discretion which, depending on the extent to
which they are met, will determine the number and value of Performance Shares
that will be paid to the Participant.
9.3 OTHER TERMS. Performance Shares may be payable in cash, Stock, or
other property, and have such other terms and conditions as determined by the
Committee and reflected in the Award Agreement.
ARTICLE 10 RESTRICTED STOCK AWARDS
10.1 GRANT OF RESTRICTED STOCK. The Committee is authorized to make
Awards of Restricted Stock to Participants in such amounts and subject to such
terms and conditions as may be selected by the Committee. All Awards of
Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions as the Committee may
impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, or otherwise, as the Committee
determines at the time of the grant of the Award or thereafter.
10.3 FORFEITURE. Except as otherwise determined by the Committee at the
time of the grant of the Award or thereafter, upon termination of employment
during the applicable restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited, provided, however, that the
Committee may provide in any Restricted Stock Award Agreement that restrictions
or forfeiture conditions relating to Restricted Stock will be waived in whole or
in part in the event of terminations resulting from specified causes, and the
Committee may in other cases waive in whole or in part restrictions or
forfeiture conditions relating to Restricted Stock.
10.4 CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock, and
the Company may, at its discretion, retain physical possession of the
certificate until such time as all applicable restrictions lapse.
ARTICLE 11 PERFORMANCE-BASED AWARDS
11.1 PURPOSE. The purpose of this Article 11 is to provide the
Committee the ability to qualify the Performance Share Awards under Article 9
and the Restricted Stock Awards under Article 10 as "performance-based
compensation" under Section 162(m) of the Code. If the Committee, in its
discretion, decides to grant a Performance-Based Award to a Covered Employee,
the provisions of this Article 11 shall control over any contrary provision
contained in Articles 9 or 10.
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<PAGE> 11
11.2 APPLICABILITY. This Article 11 shall apply only to those Covered
Employees selected by the Committee to receive Performance-Based Awards. The
Committee may, in its discretion, grant Restricted Stock Awards or Performance
Share Awards to Covered Employees that do not satisfy the requirements of this
Article 11. The designation of a Covered Employee as a Participant for a
Performance Period shall not in any manner entitle the Participant to receive an
Award for the period. Moreover, designation of a Covered Employee as a
Participant for a particular Performance Period shall not require designation of
such Covered Employee as a Participant in any subsequent Performance Period and
designation of one Covered Employee as a Participant shall not require
designation of any other Covered Employees as a Participant in such period or in
any other period.
11.3 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE AWARDS. With
regard to a particular Performance Period, the Committee shall have full
discretion to select the length of such Performance Period, the type of
Performance-Based Awards to be issued, the kind and/or level of the Performance
Goal, and whether the Performance Goal is to apply to the Company, a Subsidiary
or any division or business unit thereof.
11.4 PAYMENT OF PERFORMANCE AWARDS. Unless otherwise provided in the
relevant Award Agreement, a Participant must be employed by the Company or a
Subsidiary on the last day of the Performance Period to be eligible for a
Performance Award for such Performance Period. Furthermore, a Participant shall
be eligible to receive payment under a Performance-Based Award for a Performance
Period only if the Performance Goals for such period are achieved.
In determining the actual size of an individual Performance-Based
Award, the Committee may reduce or eliminate the amount of the Performance-Based
Award earned for the Performance Period, if in its sole and absolute discretion,
such reduction or elimination is appropriate.
11.5 MAXIMUM AWARD PAYABLE. The maximum Performance-Based Award payable
to any one Participant under the Plan for a Performance Period is 400,000 shares
of Stock, or in the event the Performance-Based Award is paid in cash, such
maximum Performance-Based Award shall be determined by multiplying 400,000 by
the Fair Market Value of one share of Stock as of the date of grant of the
Performance-Based Award.
ARTICLE 12 EFFECTIVE DATE GRANTS
12.1 EFFECTIVE DATE GRANTS. The Effective Date Grants awarded to
Participants selected by the Committee shall be subject to the following terms
and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under the Effective Date Grants shall be the Fair Market Value as of the
Effective Date.
(b) TIME AND CONDITIONS OF EXERCISE. The Effective Date Grants
shall become exercisable on the last to occur of:
(1) the date the Effective Date Grants vests in
accordance with the schedule below; and
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<PAGE> 12
(2) the date the stock price hurdles with respect to
each Effective Date Grant for 10 consecutive trading days is
met in accordance with the schedule below, before, on, or
after the date such Grant vests.
<TABLE>
<CAPTION>
PERCENTAGE OF EFFECTIVE DATE EFFECTIVE DATE STOCK PRICE HURDLE, BEFORE, ON OR AFTER
DATE GRANT THAT VESTS GRANT VESTS VESTING DATE
<S> <C> <C>
First 20% First anniversary of Fair Market Value on
the Effective Date the Effective Date
plus 20%
- ---------------------------------------- ------------------------------------- --------------------------------------
Second 20% Second anniversary of Fair Market Value on
the Effective Date the Effective Date
plus 40%
- ---------------------------------------- ------------------------------------- --------------------------------------
Third 20% Third anniversary of Fair Market Value on
the Effective Date the Effective Date
plus 60%
- ---------------------------------------- ------------------------------------- --------------------------------------
Fourth 20% Fourth anniversary of Fair Market Value on
the Effective Date the Effective Date
plus 80%
- ---------------------------------------- ------------------------------------- --------------------------------------
Fifth 20% Fifth anniversary of Fair Market Value on
the Effective Date the Effective Date
plus 100%
- ---------------------------------------- ------------------------------------- --------------------------------------
</TABLE>
Notwithstanding the above schedule, the Effective Date Grants
shall become fully vested and exercisable on January 15, 2005, unless sooner
exercised or forfeited.
The following example illustrates how the vesting schedule is
intended to operate:
EXAMPLE: If at any time during the first year after the
Effective Date Grant, the traded price of Company's stock
appreciates 40% from the stock's Fair Market Value on the
Effective Date (and such price exceeds the stock price hurdle
for at least 10 consecutive trading days), the first two stock
price hurdles will be met, so that the Option will be 20% vested
after the first anniversary and 40% vested after the second
anniversary notwithstanding the Fair Market Value of the stock
at either anniversary date.
(c) PAYMENT. The Committee shall determine the methods
by which the exercise price of the Effective Date Grants may be paid, the form
of payment, including, without limitation, cash, shares of Stock (through actual
tender or by attestation), or other property (including broker-assisted
"cashless exercise" arrangements), and the methods by which shares of Stock
shall be delivered or deemed to be delivered to Participants.
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<PAGE> 13
(d) EVIDENCE OF GRANT. All Effective Date Grants shall
be evidenced by a written Award Agreement between the Company and the
Participant. The Award Agreement shall include such other provisions as may be
specified by the Committee.
ARTICLE 13 PROVISIONS APPLICABLE TO AWARDS
13.1 STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with, or in substitution for, any other Award
granted under the Plan. If an Award is granted in substitution for another
Award, the Committee may require the surrender of such other Award in
consideration of the grant of the new Award. Awards granted in addition to or in
tandem with other Awards may be granted either at the same time as or at a
different time from the grant of such other Awards.
13.2 EXCHANGE PROVISIONS. The Committee may at any time offer to
exchange or buy out any previously granted Award for a payment in cash, Stock,
or another Award (subject to Section 13.1), based on the terms and conditions
the Committee determines and communicates to the Participant at the time the
offer is made.
13.3 TERM OF AWARD. The term of each Award shall be for the
period as determined by the Committee, provided that in no event shall the term
of any Incentive Stock Option or a Stock Appreciation Right granted in tandem
with the Incentive Stock Option exceed a period of ten years from the date of
its grant.
13.4 FORM OF PAYMENT FOR AWARDS. Subject to the terms of the
Plan and any applicable law or Award Agreement, payments or transfers to be made
by the Company or a Subsidiary on the grant or exercise of an Award may be made
in such forms as the Committee determines at or after the time of grant,
including without limitation, cash, Stock, other Awards, or other property, or
any combination, and may be made in a single payment or transfer, in
installments, or on a deferred basis, in each case determined in accordance with
rules adopted by, and at the discretion of, the Committee.
13.5 LIMITS ON TRANSFER. No right or interest of a Participant
in any Award may be pledged, encumbered, or hypothecated to or in favor of any
party other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided by the Committee, no Award
shall be assignable or transferable by a Participant other than by will or the
laws of descent and distribution.
13.6 BENEFICIARIES. Notwithstanding Section 13.5, a Participant
may, in the manner determined by the Committee, designate a beneficiary to
exercise the rights of the Participant and to receive any distribution with
respect to any Award upon the Participant's death. A beneficiary, legal
guardian, legal representative, or other person claiming any rights under the
Plan is subject to all terms and conditions of the Plan and any Award Agreement
applicable to the Participant, except to the extent the Plan and Award Agreement
otherwise provide, and to any additional restrictions deemed necessary or
appropriate by the Committee. If the Participant is
13
<PAGE> 14
married, a designation of a person other than the Participant's spouse as his
beneficiary with respect to more than 50 percent of the Participant's interest
in the Award shall not be effective without the written consent of the
Participant's spouse. If no beneficiary has been designated or survives the
Participant, payment shall be made to the person entitled thereto under the
Participant's will or the laws of descent and distribution. Subject to the
foregoing, a beneficiary designation may be changed or revoked by a Participant
at any time provided the change or revocation is filed with the Committee.
13.7 STOCK CERTIFICATES. All Stock certificates delivered under
the Plan are subject to any stop-transfer orders and other restrictions as the
Committee deems necessary or advisable to comply with Federal or state
securities laws, rules and regulations and the rules of any national securities
exchange or automated quotation system on with the Stock is listed, quoted, or
traded. The Committee may place legends on any Stock certificate to reference
restrictions applicable to the Stock.
13.8 ACCELERATION UPON A CHANGE OF CONTROL. If a Change of
Control occurs, all outstanding Options, Stock Appreciation Rights, and other
Awards shall become fully exercisable and all restrictions on outstanding Awards
shall lapse, except in the event that the surviving or resulting entity agrees
to assume the Awards on terms and conditions that substantially preserve the
Participant's rights and benefits of the Award then outstanding. To the extent
that this provision causes Incentive Stock Options to exceed the dollar
limitation set forth in Section 7.2(d), the excess Options shall be deemed to be
Non-Qualified Stock Options. Upon, or in anticipation of, such an event, the
Committee may cause every Award outstanding hereunder to terminate at a specific
time in the future and shall give each Participant the right to exercise Awards
during a period of time as the Committee, in its sole and absolute discretion,
shall determine, except in the event that the surviving or resulting entity
agrees to assume the Awards on terms and conditions that substantially preserve
the Participant's rights and benefits of the Award then outstanding.
ARTICLE 14 CHANGES IN CAPITAL STRUCTURE
14.1 GENERAL. In the event a stock dividend is declared upon the
Stock, the shares of Stock then subject to each Award (and the number of shares
subject thereto) shall be increased proportionately without any change in the
aggregate purchase price therefor. In the event the Stock shall be changed into
or exchanged for a different number or class of shares of Stock or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, there shall be substituted for
each such share of Stock then subject to each Award the number and class of
shares of Stock into which each outstanding share of Stock shall be so
exchanged, all without any change in the aggregate purchase price for the shares
then subject to each Award.
14
<PAGE> 15
ARTICLE 15 AMENDMENT, MODIFICATION AND TERMINATION
15.1 AMENDMENT, MODIFICATION AND TERMINATION. With the approval
of the Board, at any time and from time to time, the Committee may terminate,
amend or modify the Plan; provided, however, that to the extent necessary and
desirable to comply with any applicable law, regulation, or stock exchange rule,
the Company shall obtain shareholder approval of any Plan amendment in such a
manner and to such a degree as required.
15.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 16 GENERAL PROVISIONS
16.1 NO RIGHTS TO AWARDS. No Participant , employee, or other
person shall have any claim to be granted any Award under the Plan, and neither
the Company nor the Committee is obligated to treat Participants, employees, and
other persons uniformly.
16.2 NO STOCKHOLDERS RIGHTS. No Award gives the Participant any
of the rights of a stockholder of the Company unless and until shares of Stock
are in fact issued to such person in connection with such Award.
16.3 WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of this Plan.
16.4 NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award
Agreement shall interfere with or limit in any way the right of the Company or
any Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary.
16.5 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an
"unfunded" plan for incentive compensation. With respect to any payments not yet
made to a Participant pursuant to an Award, nothing contained in the Plan or any
Award Agreement shall give the Participant any rights that are greater than
those of a general creditor of the Company or any Subsidiary.
16.6 INDEMNIFICATION. To the extent allowable under applicable
law, each member of the Committee or of the Board shall be indemnified and held
harmless by the Company from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by such member in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action or failure
to act under the Plan and against and from any and all amounts paid by him or
her in satisfaction of judgment in such action, suit, or proceeding against him
or her provided he or she gives the Company an opportunity, at its own expense,
to handle and defend the same before he or she
15
<PAGE> 16
undertakes to handle and defend it on his or her own behalf. The foregoing right
of indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Articles of
Incorporation or By-Laws, as a matter of law, or otherwise, or any power that
the Company may have to indemnify them or hold them harmless.
16.7 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan
shall be taken into account in determining any benefits under any pension,
retirement, savings, profit sharing, group insurance, welfare or other benefit
plan of the Company or any Subsidiary.
16.8 EXPENSES. The expenses of administering the Plan shall be
borne by the Company and its Subsidiaries.
16.9 TITLES AND HEADINGS. The titles and headings of the
Sections in the Plan are for convenience of reference only, and in the event of
any conflict, the text of the Plan, rather than such titles or headings, shall
control.
16.10 FRACTIONAL SHARES. No fractional shares of stock shall be
issued and the Committee shall determine, in its discretion, whether cash shall
be given in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up or down as appropriate.
16.11 SECURITIES LAW COMPLIANCE. With respect to any person who
is, on the relevant date, obligated to file reports under Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be void to the extent permitted by law and voidable as deemed
advisable by the Committee.
16.12 GOVERNMENT AND OTHER REGULATIONS. The obligation of the
Company to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended (the "1933 Act"), any of
the shares of Stock paid under the Plan. If the shares paid under the Plan may
in certain circumstances be exempt from registration under the 1933 Act, the
Company may restrict the transfer of such shares in such manner as it deems
advisable to ensure the availability of any such exemption.
16.13 GOVERNING LAW. The Plan and all Award Agreements shall be
construed in accordance with and governed by the laws of the State of Arizona.
16
<PAGE> 1
Exhibit 10.7
RESTATED
(As of January 15, 1998)
UGLY DUCKLING CORPORATION
LONG-TERM INCENTIVE PLAN
ARTICLE 1 PURPOSE
1.1. GENERAL. The purpose of the Ugly Duckling Corporation Long-Term
Incentive Plan (the "Plan") is to promote the success, and enhance the value, of
Ugly Duckling Corporation and its subsidiaries (collectively, the "Company") by
linking the personal interests of its employees, consultants and advisors to
those of Company shareholders and by providing its employees, consultants and
advisors with an incentive for outstanding performance. The Plan is further
intended to provide flexibility to the Company in its ability to motivate,
attract, and retain the services of employees, consultants and advisors upon
whose judgment, interest, and special effort the successful conduct of the
Company's operation is largely dependent. Accordingly, the Plan permits the
grant of incentive awards from time to time to selected employees, consultants
and advisors of the Company and any Subsidiary.
ARTICLE 2 EFFECTIVE DATE
2.1. EFFECTIVE DATE. The Plan is effective as of June 30, 1995 (the
"Effective Date). Within one year after the Effective Date, the Plan shall be
submitted to the shareholders of the Company for their approval. The Plan will
be deemed to be approved by the shareholders if it receives the affirmative vote
of the holders of a majority of the shares of stock of the Company present, or
represented, and entitled to vote at a meeting duly held (or by the written
consent of the holders of a majority of the shares of stock of the Company
entitled to vote) in accordance with the applicable provisions of the Arizona
General Corporation Law and the Company's Bylaws and Articles of Incorporation.
Any Awards granted under the Plan prior to shareholder approval are effective
when made (unless the Committee specifies otherwise at the time of grant), but
no Award may be exercised or settled and no restrictions relating to any Award
may lapse before shareholder approval. If the shareholders fail to approve the
Plan, any Award previously made shall be automatically canceled without any
further act.
ARTICLE 3 DEFINITIONS AND CONSTRUCTION.
3.1. DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Sections 1.1
<PAGE> 2
or 2.1 unless a clearly different meaning is required by the context. The
following words and phrases shall have the following meanings:
(a) "Award" means any option, Stock Appreciation Right,
Restricted Stock Award, Performance Share Award, Dividend Equivalent
Award, or Performance-Based Award, or any other right or interest
relating to Stock or cash, granted to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract,
or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company or a
Committee thereof formed under Section 4, as the case may be.
(d) "Cause" means (except as otherwise provided in an Award
Agreement) if the Board, in its reasonable and good faith discretion,
determines that the employee, consultant or advisor (i) has developed
or pursued interests substantially adverse to the Company, (ii)
materially breached any employment, engagement or confidentiality
agreement or otherwise failed to satisfactorily discharge his or her
duties, (iii) has not devoted all or substantially all of his or her
business time, effort and attention to the affairs of the Company (or
such lesser amount as has been agreed to in writing by the Company),
(iv) is convicted of a felony involving moral turpitude, or (v) has
engaged in activities or omissions that are detrimental to the
well-being of the Company.
(e) "Change of Control" means and includes each of the
following (except as otherwise provided in an Award Agreement):
(1) there shall be consummated any consolidation or
merger of the Company in which the Company is not the
continuing or surviving entity, or pursuant to which
Stock would be converted into cash, securities or
other property, other than a merger of the Company in
which the holders of the Company's Stock immediately
prior to the merger have the same proportionate
ownership of beneficial interest of common stock or
other voting securities of the surviving entity
immediately after the merger;
(2) there shall be consummated any sale, lease,
exchange or other transfer (in one transaction or a
series of related transactions) of assets or earning
power aggregating more than 40% of the assets or
earning power of the Company and its subsidiaries
(taken as a whole), other than pursuant to a
sale-leaseback, structured finance or other form of
financing transaction;
<PAGE> 3
(3) the shareholders of the Company shall approve any
plan or proposal for liquidation or dissolution of
the Company;
(4) any person (as such term is used in Section 13(d)
and 14(d)(2) of the Exchange Act), other than any
current shareholder of the Company or affiliate
thereof or any employee benefit plan of the Company
or any subsidiary of the Company or any entity
holding shares of capital stock of the Company for or
pursuant to the terms of any such employee benefit
plan in its role as an agent or trustee for such
plan, shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of 20%
or more of the Company's outstanding Stock; or
(5) during any period of two consecutive years,
individuals who at the beginning of such period shall
fail to constitute a majority thereof, unless the
election, or the nomination for election by the
Company's shareholders, of each new director was
approved by a vote of at least two-thirds of the
directors then still in office who were directors at
the beginning of the period.
(f) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(g) "Committee" means the committee of the Board described in
Article 4.
(h) "Covered Employee" means an Employee who is a "covered
employee" within the meaning of Section 162(m) of the Code.
(i) "Disability" shall mean any illness or other physical or
mental condition of a Participant which renders the Participant
incapable of performing his customary and usual duties for the Company,
or any medically determinable illness or other physical or mental
condition resulting from a bodily injury, disease or mental disorder
which in the judgment of the Committee is permanent and continuous in
nature. The Committee may require such medical or other evidence as it
deems necessary to judge the nature and permanency of the Participant's
condition.
(j) "Dividend Equivalent" means a right granted to a
Participant under Article 11.
(k) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(l) "Fair Market Value" means with respect to Stock or any
other property, the fair market value of such Stock or other property
as determined by the Board in
<PAGE> 4
its discretion, under one of the following methods: (i) the closing
price for the Stock as reported on any national securities exchange on
which the Stock is then listed (which shall include the Nasdaq National
Market) for that date or, if no price is so reported for that date,
such price on the next preceding date for which the closing price was
reported; or (ii) the price as determined by such methods or procedures
as may be established from time to time by the Board.
(m) "Incentive Stock Option" means an Option that is intended
to meet the requirements of Section 422 of the Code or any successor
provision thereto.
(n) "Non-Employee Director" means a member of the Board who
qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3)
of the Exchange Act, or any successor definition adopted by the Board.
(o) "Non-Qualified Stock Option" means an Option that is not
intended to be an Incentive Stock Option.
(p) "Option" means a right granted to a Participant under
Article 7 of the Plan to purchase Stock at a specified price during
specified time periods. An Option may be either an Incentive Stock
Option or a Non-Qualified Stock Option.
(q) "Participant" means a person who, as an employee of or
consultant or advisor to the Company or any Subsidiary, has been
granted an Award under the Plan. A "Participant" shall not include any
Director of the Company or any Subsidiary who is not also an employee
of or consultant to the Company or any Subsidiary.
(r) "Performance-Based Awards" means the Performance Share
Awards and Restricted Stock Awards granted to selected Covered
Employees pursuant to Articles 9 and 10, but which are subject to the
terms and conditions set forth in Article 12. All Performance-Based
Awards are intended to qualify as "performance-based compensation"
under Section 162(m) of the Code.
(s) "Performance Criteria" means the criteria that the
Committee selects for purposes of establishing the Performance Goal or
Performance Goals for a Participant for a Performance Period. The
Performance Criteria that will be used to establish Performance Goals
are limited to the following: pre- or after-tax net earnings, sales
growth, operating earnings, operating cash flow, return on net assets,
return on stockholders' equity, return on assets, return on capital,
Stock price growth, stockholder returns, gross or net profit margin,
earnings per share, price per share of Stock, and market share, any of
which may be measured either in absolute terms or as compared to any
incremental increase or as compared to results of a peer group. The
Committee shall, within the time prescribed by Section 162(m) of the
Code, define in an objective fashion the manner of calculating the
<PAGE> 5
Performance Criteria it selects to use for such Performance Period for
such Participant.
(t) "Performance Goals" means, for a Performance Period, the
goals established in writing by the Committee for the Performance
Period based upon the Performance Criteria. Depending on the
Performance Criteria used to establish such Performance Goals, the
Performance Goals may be expressed in terms of overall Company
performance or the performance of a division, business unit or an
individual. The Committee, in its discretion, may, within the time
prescribed by Section 162(m) of the Code, adjust or modify the
calculation of Performance Goals for such Performance Period in order
to prevent the dilution or enlargement of the rights of Participants,
(i) in the event of, or in anticipation of, any unusual or
extraordinary corporate item, transaction, event, or development; or
(ii) in recognition of, or in anticipation of, any other unusual or
nonrecurring events affecting the Company, or the financial statements
of the Company, or in response to, or in anticipation of, changes in
applicable laws, regulations, accounting principles, or business
conditions.
(u) "Performance Period" means the one or more periods of
time, which may be of varying and overlapping durations, as the
Committee may select, over which the attainment of one or more
Performance Goals will be measured for the purpose of determining a
Participant's right to, and the payment of, a Performance-Based Award.
(v) "Performance Share" means a right granted to a Participant
under Article 9, to receive cash, Stock, or other Awards, the payment
of which is contingent upon achieving certain performance goals
established by the Committee.
(w) "Plan" means the Ugly Duckling Corporation Long-Term
Incentive Plan, as amended from time to time.
(x) "Restricted Stock Award" means Stock granted to a
Participant under Article 10 that is subject to certain restrictions
and to risk of forfeiture.
(y) "Stock" means the common stock of the Company and such
other securities of the Company that may be substituted for Stock
pursuant to Article 13.
(z) "Stock Appreciation Right" or "SAR" means a right granted
to a Participant under Article 8 to receive a payment equal to the
difference between the Fair Market Value of a share of Stock as of the
date of exercise of the SAR over the grant price of the SAR, all as
determined pursuant to Article 8.
(aa) "Subsidiary" means any corporation, domestic or foreign,
of which a majority of the outstanding voting stock or voting power is
beneficially owned directly or indirectly by the Company.
<PAGE> 6
ARTICLE 4 ADMINISTRATION
4.1. BOARD/COMMITTEE. The Plan shall be administered by the Board of
Directors or a Committee that is appointed by, and serves at the discretion of,
the Board. Any Committee shall consist of at least two individuals, each of whom
qualifies as (i) a Non-Employee Director, and (ii) an "outside director" under
Code Section 162(m) and the regulations issued thereunder. For purposes of this
Plan, the "Board" shall mean the Board of Directors or the Committee, as the
case may be.
4.2. ACTION BY THE BOARD. A majority of the Board shall constitute a
quorum. The acts of a majority of the members present at any meeting at which a
quorum is present and acts approved in writing by a majority of the Board in
lieu of a meeting shall be deemed the acts of the Board. Each member of the
Board is entitled to, in good faith, rely or act upon any report or other
information furnished to that member by any officer or other employee of the
Company or any Subsidiary, the Company's independent certified public
accountants, or any executive compensation consultant or other professional
retained by the Company to assist in the administration of the Plan.
4.3. AUTHORITY OF BOARD. The Board shall have the full and, except as
otherwise provided below, exclusive power to interpret the Plan and to adopt
such rules, regulations, and guidelines for carrying out the Plan as may be
necessary or proper, all of which power shall be executed in the best interests
of the Company and in keeping with the objectives of the Plan. This power
includes, but is not limited to, the following:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to
each Participant;
(c) Determine the number of Awards to be granted and the
number of shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted
under the Plan including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the Award,
any schedule for lapse of forfeiture restrictions or restrictions on
the exercisability of an Award, and accelerations or waivers thereof,
based in each case on such considerations as the Board in its sole
discretion determines ; provided, however, that the Committee shall not
have the authority to accelerate the vesting, or waive the forfeiture,
of any Performance-Based Awards;
(e) Determine whether, to what extent, and under what
circumstances an Award may be settled in, or the exercise price of an
Award may be paid in, cash,
<PAGE> 7
Stock, other Awards, or other property, or an Award may be canceled,
forfeited, or surrendered;
(f) Prescribe the form of each Award Agreement, which need not
be identical for each Participant;
(g) Decide all other matters that must be determined in
connection with an Award;
(h) Establish, adopt or revise any rules and regulations as it
may deem necessary or advisable to administer the Plan; and
(i) Make all other decisions and determinations that may be
required under the Plan or as the Board deems necessary or advisable to
administer the Plan.
Notwithstanding the above or anything else in the Plan to the contrary, the
Chief Executive officer and the President of the Company, acting together, also
have the authority, subject to the terms, conditions, and parameters set forth
by the Board from time to time, to select Award recipients and establish the
terms and conditions of Awards, provided, however, that any such Award recipient
must not be a person who, at the time the Award is granted, is subject to the
restrictions imposed by Section 16 of the Exchange Act or a person who is a
Covered Employee.
4.4. DECISIONS BINDING. The Board's interpretation of the Plan, any
Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Board with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5 SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES. Subject to adjustment provided in Section 14.1,
the aggregate number of shares of Stock reserved and available for Awards or
which may be used to provide a basis of measurement for or to determine the
value of an Award (such as with a Stock Appreciation Right or Performance Share
Award) shall be 1,800,000.
5.2. LAPSED AWARDS. To the extent that an Award terminates, expires or
lapses for any reason, any shares of Stock subject to the Award will again be
available for the grant of an Award under the Plan and shares subject to SARs or
other Awards settled in cash will be available for the grant of an Award under
the Plan.
5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
<PAGE> 8
5.4. LIMITATIONS ON AWARDS TO ANY SINGLE PARTICIPANT. No single
Participant may receive Awards covering in the aggregate more than 250,000
shares of Stock during any single calendar year.
ARTICLE 6 ELIGIBILITY
6.1. GENERAL. Awards may be granted only to individuals who are
employees (including employees who also are directors or officers) of the
Company or a Subsidiary or to consultants or advisors thereto, as determined by
the Board.
ARTICLE 7 STOCK OPTIONS
7.1. GENERAL. The Board is authorized to grant Options to Participants
on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under an Option shall be determined by the Committee and set forth in
the Award Agreement. It is the intention under the Plan that the
exercise price for any Option shall not be less than the Fair Market
Value as of the date of grant; provided, however that the Committee
may, in its discretion, grant Options (other than Options that are
intended to be Incentive Stock Options or Options that are intended to
qualify as "performance-based compensation" under Code Section 162(m))
with an exercise price of less than Fair Market Value on the date of
grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Board shall determine
the time or times at which an Option may be exercised in whole or in
part. The Board also shall determine the performance or other
conditions, if any, that must be satisfied before all or part of an
Option may be exercised.
(c) PAYMENT. The Board shall determine the methods by which
the exercise price of an Option may be paid, the form of payment,
including, without limitation, cash, shares of Stock, or other property
(including broker-assisted "cashless exercise" arrangements), and the
methods by which shares of Stock shall be delivered or deemed to be
delivered to Participants.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a
written Award Agreement between the Company and the Participant. The
Award Agreement shall include such provisions as may be specified by
the Board.
7.2 INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options
granted under the Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock
shall be set by the Board, provided that the exercise price for any
Incentive Stock Option may not be less than the Fair Market Value as of
the date of the grant.
<PAGE> 9
(b) EXERCISE. In no event, may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse
under the following circumstances:
(1) The Incentive Stock Option shall lapse ten (10)
years after it is granted, unless an earlier time is set in the Award
Agreement.
(2) The Incentive Stock Option shall lapse upon
termination of employment for Cause or for any other reason, other than
the Participant's death or Disability, unless the Committee determines
in its discretion to extend the exercise period for no more than ninety
(90) days after the Participant's termination of employment.
(3) In the case of the Participant's termination of
employment due to Disability or death, the Incentive Stock Option shall
lapse upon termination of employment, unless the Committee determines
in its discretion to extend the exercise period of the Incentive Stock
Option for no more than twelve (12) months after the date the
Participant terminates employment. Upon the Participant's death, any
vested and otherwise exercisable Incentive Stock Options may be
exercised by the Participant's legal representative or representatives,
by the person or persons entitled to do so under the Participant's last
will and testament, or, if the Participant shall fail to make
testamentary disposition of such Incentive Stock Option or shall die
intestate, by the person or persons entitled to receive said Incentive
Stock Option under the applicable laws of descent and distribution.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market
Value (determined as of the time an Award is made) of all shares of
Stock with respect to which Incentive Stock Options are first
exercisable by a Participant in any calendar year may not exceed one
Hundred Thousand Dollars ($100,000.00).
(e) TEN PERCENT OWNERS. An Incentive Stock Option shall be
granted to any individual who, at the date of grant, owns stock
possessing more than ten percent (10%) of the total combined voting
power of all classes of Stock of the Company only if, at the time such
Option is granted, the Option price is at least one hundred ten percent
(110%) of the Fair Market Value of the Stock and such Option by its
terms is not exercisable after the expiration of five (5) years from
the date the Option is granted.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an
Incentive Stock Option may be made pursuant to this Plan after the
tenth anniversary of the Effective Date.
<PAGE> 10
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant.
(h) EMPLOYEES ONLY. Incentive Stock Options may be granted
only to Participants who are employees of the Company or any
Subsidiary.
ARTICLE 8 STOCK APPRECIATION RIGHTS
8.1. GRANT OF SARs. The Board is authorized to grant SARs to
Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock
Appreciation Right, the Participant to whom it is granted has the right
to receive the excess, if any, of:
(1) The Fair Market Value of one share of Stock on
the date of exercise; over
(2) The grant price of the Stock Appreciation Right
as determined by the Board, which shall not be less than the Fair
Market Value of one share of Stock on the date of grant in the case of
any SAR related to any Incentive Stock Option.
(b) OTHER TERMS. All awards of Stock Appreciation Rights shall
be evidenced by an Award Agreement. The terms, methods of exercise,
methods of settlement, form of consideration payable in settlement, and
any other terms and conditions of any Stock Appreciation Right shall be
determined by the Board at the time of the grant of the Award and shall
be reflected in the Award Agreement.
ARTICLE 9 PERFORMANCE SHARES
9.1. GRANT OF PERFORMANCE SHARES. The Board is authorized to grant
Performance Shares to Participants on such terms and conditions as may be
selected by the Board. The Board shall have the complete discretion to determine
the number of Performance Shares granted to each Participant. All Awards of
Performance Shares shall be evidenced by an Award Agreement.
9.2. RIGHT TO PAYMENT. A grant of Performance Shares gives the
Participant rights, valued as determined by the Board, and payable to, or
exercisable by, the Participant to whom the Performance Shares are granted, in
whole or in part, as the Board shall establish at grant or thereafter. The Board
shall set performance goals and other terms or conditions to payment of the
Performance Shares in its discretion which, depending on the extent to which
they are met, will determine the number and value of Performance Shares that
will be paid to the Participant.
<PAGE> 11
9.3. OTHER TERMS. Performance Shares may be payable in cash, Stock, or
other property, and have such other terms and conditions as determined by the
Board and reflected in the Award Agreement.
ARTICLE 10 RESTRICTED STOCK AWARDS
10.1. GRANT OF RESTRICTED STOCK. The Board is authorized to make Awards
of Restricted Stock to Participants in such amounts and subject to such terms
and conditions as may be selected by the Board. All Awards of Restricted Stock
shall be evidenced by an Award Agreement.
10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions as the Board may
impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such installments, or otherwise, as the Board determines
at the time of the grant of the Award or thereafter.
10.3. FORFEITURE. Except as otherwise determined by the Board at the
time of the grant of the Award or thereafter, upon termination of employment
during the applicable restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by the Company,
provided, however, that the Board may provide in any Award Agreement that
restrictions or forfeiture conditions relating to Restricted Stock will be
waived in whole or in part in the event of terminations resulting from specified
causes, and the Board may in other cases waive in whole or in part restrictions
or forfeiture conditions relating to Restricted Stock.
10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under
the Plan may be evidenced in such manner as the Board shall determine. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock, and
the Company may, at its sole and absolute discretion, retain physical possession
of the certificate until such time as all applicable restrictions lapse.
ARTICLE 11 DIVIDEND EQUIVALENTS
11.1. GRANT OF DIVIDEND EQUIVALENTS. The Board is authorized to grant
Dividend Equivalents to Participants subject to such terms and conditions as may
be selected by the Board. Dividend Equivalents shall entitle the Participant to
receive payments equal to dividends with respect to all or a portion of the
number of shares of Stock subject to an Option Award or SAR Award, as determined
by the Board. The Board may provide that Dividend Equivalents be paid or
distributed when accrued or be deemed to have been reinvested in additional
shares of Stock, or otherwise reinvested.
<PAGE> 12
ARTICLE 12 PERFORMANCE-BASED AWARDS
12.1. PURPOSE. The purpose of this Article 12 is to provide the
Committee the ability to qualify the Restricted Stock Awards under Article 10
and the Performance Share Awards under Article 9 as "performance-based
compensation" under Section 162(m) of the Code. If the Committee, in its
discretion, decides to grant a Performance-Based Award to a Covered Employee,
the provisions of this Article 12 shall control over any contrary provision
contained in Articles 9 or 10.
12.2. APPLICABILITY. This Article 12 shall apply only to those Covered
Employees selected by the Committee to receive Performance-Based Awards. The
Committee may, in its discretion, grant Restricted Stock Awards or Performance
Share Awards to Covered Employees that do not satisfy the requirements of this
Article 12. The designation of a Covered Employee as a Participant for a
Performance Period shall not in any manner entitle the Participant to receive an
Award for the period. Moreover, designation of a Covered Employee as a
Participant for a particular Performance Period shall not require designation of
such Covered Employee as a Participant in any subsequent Performance Period and
designation of one Covered Employee as a Participant shall not require
designation of any other Covered Employees as a Participant in such period or in
any other period.
12.3. DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE AWARDS. With
regard to a particular Performance Period, the Committee shall have full
discretion to select the length of such Performance Period, the type of
Performance-Based Awards to be issued, the kind and/or level of the Performance
Goal, and whether the Performance Goal is to apply to the Company, a Subsidiary
or any division or business unit thereof or the individual.
12.4. PAYMENT OF PERFORMANCE AWARDS. Unless otherwise provided in the
relevant Award Agreement, a Participant must be employed by the Company or a
Subsidiary on the last day of the Performance Period to be eligible for a
Performance Award for such Performance Period. Furthermore, a Participant shall
be eligible to receive payment under a Performance-Based Award for a Performance
Period only if the Performance Goals for such period are achieved.
In determining the actual size of an individual Performance-Based
Award, the Committee may reduce or eliminate the amount of the Performance-Based
Award earned for the Performance Period, if in its sole and absolute discretion,
such reduction or elimination is appropriate.
12.5. MAXIMUM AWARD PAYABLE. Notwithstanding any provision contained in
the Plan to the contrary, the maximum Performance-Based Award payable to any one
Participant under the Plan for a Performance Period is 250,000 shares of Stock,
or in the event the Performance-Based Award is paid in cash, such maximum
Performance-Based
<PAGE> 13
Award shall be determined by multiplying 250,000 by the Fair Market Value of one
share of Stock as of the date of grant of the Performance-Based Award.
ARTICLE 13 PROVISIONS APPLICABLE TO AWARDS
13.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under
the Plan may, in the discretion of the Board, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Award granted
under the Plan. If an Award is granted in substitution for another Award, the
Board may require the surrender of such other Award in consideration of the
grant of the new Award. Awards granted in addition to or in tandem with other
Awards may be granted either at the same time as or at a different time from the
grant of such other Awards.
13.2. EXCHANGE PROVISIONS. The Board may at any time offer to exchange
or buy out any previously granted Award for a payment in cash, Stock, or another
Award (subject to Section 13.1), based on the terms and conditions the Board
determines and communicates to the Participant at the time the offer is made.
13.3. TERM OF AWARD. The term of each Award shall be for the period as
determined by the Board, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with the
Incentive Stock Option exceed a period of ten years from the date of its grant.
13.4. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and
any applicable law or Award Agreement, payments or transfers to be made by the
Company or a Subsidiary on the grant or exercise of an Award may be made in such
forms as the Board determines at or after the time of grant, including without
limitation, cash, Stock, other Awards, or other property, or any combination,
and may be made in a single payment or transfer, in installments, or on a
deferred basis, in each case determined in accordance with rules adopted by, and
at the discretion of, the Board. The Board may also authorize payment in the
exercise of an Option by net issuance or other cashless exercise methods.
13.5. LIMITS ON TRANSFER. No right or interest of a Participant in any
Award may be pledged, encumbered, or hypothecated to or in favor of any party
other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided by the Board or the
Committee, no Award shall be assignable or transferable by a Participant other
than by will or the laws of descent and distribution.
13.6 BENEFICIARIES. Notwithstanding Section 13.5, a Participant may, in
the manner determined by the Board, designate a beneficiary to exercise the
rights of the Participant and to receive any distribution with respect to any
Award upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject to
all terms and conditions of the Plan and any Award
<PAGE> 14
Agreement applicable to the Participant, except to the extent the Plan and Award
Agreement otherwise provide, and to any additional restrictions deemed necessary
or appropriate by the Board. If the Participant is married and resides in a
jurisdiction in which community property laws apply, a designation of a person
other than the Participant's spouse as his beneficiary with respect to more than
50 percent of the Participant's interest in the Award shall not be effective
without the written consent of the Participant's spouse. If no beneficiary has
been designated or survives the Participant, payment shall be made to the person
entitled thereto under the Participant's will or the laws of descent and
distribution. Subject to the foregoing, a beneficiary designation may be changed
or revoked by a Participant at any time provided the change or revocation is
filed with the Board.
13.7. STOCK CERTIFICATES. All Stock certificates delivered under the
Plan are subject to any stop-transfer orders and other restrictions as the Board
deems necessary or advisable to comply with federal or state securities laws,
rules and regulations and the rules of any national securities exchange or
automated quotation system on which the Stock is listed, quoted, or traded. The
Board may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
13.8. TENDER OFFERS. In the event of a public tender for all or any
portion of the Stock, or in the event that a proposal to merge, consolidate, or
otherwise combine with another company is submitted for shareholder approval,
the Board may in its sole discretion declare previously granted Options to be
immediately exercisable. To the extent that this provision causes Incentive
Stock Options to exceed the dollar limitation set forth in Section 7.2(d), the
excess Options shall be deemed to be Non-Qualified Stock Options.
13.9. CHANGE OF CONTROL. A Change of Control shall, in the sole
discretion of the Board:
(a) Cause every Award outstanding hereunder to become fully
exercisable and all restrictions on outstanding Awards to lapse and
allow each Participant the right to exercise Awards prior to the
occurrence of the event otherwise terminating the Awards over such
period as the Board, in its sole and absolute discretion, shall
determine. To the extent that this provision causes Incentive Stock
Options to exceed the dollar limitation set forth in Section 7.2(d),
the excess Options shall be deemed to be Non-Qualified Stock Options;
or
(b) Cause every Award outstanding hereunder to terminate,
provided that the surviving or resulting corporation shall tender an
option or options to purchase its shares or exercise such rights on
terms and conditions, as to the number of shares, rights or otherwise,
which shall substantially preserve the rights and benefits of any Award
then outstanding hereunder.
ARTICLE 14 CHANGES IN CAPITAL STRUCTURE
<PAGE> 15
14.1. GENERAL. In the event a stock dividend is declared upon the
Stock, the shares of Stock then subject to each Award (and the number of shares
subject thereto) shall be increased proportionately without any change in the
aggregate purchase price therefor. Subject to Section 13.9, in the event the
Stock shall be changed into or exchanged for a different number or class of
shares of Stock or of shares of another corporation, whether through
reorganization, recapitalization, stock split-up or combination of shares, there
shall be substituted for each such share of Stock then subject to each Award
(and for each share of Stock then subject thereto) the number and class of
shares of Stock into which each outstanding share of Stock shall be so
exchanged, all without any change in the aggregate purchase price for the shares
then subject to each Award.
ARTICLE 15 AMENDMENT, MODIFICATION AND TERMINATION
15.1. AMENDMENT MODIFICATION AND TERMINATION. The Board may terminate,
amend or modify the Plan at any time and from time to time. However, the Board
may not amend, modify or terminate the Plan without shareholder approval if
shareholder approval is required under applicable law or by any national
securities exchange or system on which the Stock is then listed or reported.
15.2. AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 16 GENERAL PROVISIONS
16.1. NO RIGHTS TO AWARDS. No Participant or employee or consultant
shall have any claim to be granted any Award under the Plan, and neither the
Company nor the Board is obligated to treat Participants and employees or
consultants uniformly.
16.2. NO STOCKHOLDERS RIGHTS. No Award gives the Participant any of the
rights of a shareholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Award.
16.3. WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy United States Federal, state,
and local taxes (including the Participant's FICA obligation and any withholding
obligation imposed by any country other than the United States in which the
Participant resides) required by law to be withheld with respect to any taxable
event arising as a result of this Plan. With respect to withholding required
upon any taxable event under the Plan, Participants may elect, subject to the
Board's approval, to satisfy the withholding requirement, in whole or in part,
by having the Company or any Subsidiary withhold shares of Stock having a Fair
Market Value on the date of withholding equal to the amount to be withheld for
tax purposes in accordance with such procedures as the Board establishes. The
Board may, at the time any Award is
<PAGE> 16
granted, require that any and all applicable tax withholding requirements be
satisfied by the withholding of shares of Stock as set forth above.
16.4. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award
Agreement shall interfere with or limit in any way the right of the Company or
any Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary.
16.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award Agreement shall give the Participant any rights that
are greater than those of a general creditor of the Company or any Subsidiary.
16.6. INDEMNIFICATION. To the extent allowable under applicable law,
each member of the Committee or of the Board shall be indemnified and held
harmless by the Company from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by such member in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action or failure
to act under the Plan and against and from any and all amounts paid by him or
her in satisfaction of judgment in such action, suit, or proceeding against him
or her provided he or she gives the Company an opportunity, at its own expense,
to handle and defend the same before he or she undertakes to handle and defend
it on his or her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's Articles of Incorporation or By-Laws, as a matter
of law, or otherwise, or any power that the Company may have to indemnify them
or hold them harmless.
16.7. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall
be taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or other benefit plan of the
Company or any Subsidiary.
16.8. EXPENSES. The expenses of administering the Plan shall be borne
by the Company and its Subsidiaries.
16.9. TITLES AND HEADINGS. The titles and headings of the Sections in
the Plan are for convenience of reference only, and in the event of any
conflict, the text of the Plan, rather than such titles or headings, shall
control.
16.10. FRACTIONAL SHARES. No fractional shares of stock shall be issued
and the Board shall determine, in its discretion, whether cash shall be given in
lieu of fractional shares or whether such fractional shares shall be eliminated
by rounding up.
<PAGE> 17
16.11. SECURITIES LAW COMPLIANCE. With respect to any person who is, on
the relevant date, obligated to file reports under Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Board fails to so comply, it shall be
void to the extent permitted by law and voidable as deemed advisable by the
Board, and such provision or action shall be deemed to be modified so as to
comply with Rule 16b-3.
16.12. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company
to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended, any of the shares of
Stock paid under the Plan. If the shares paid under the Plan may in certain
circumstances be exempt from registration under such act, the Company may
restrict the transfer of such shares in such manner as it deems advisable to
ensure the availability of any such exemption.
16.13. GOVERNING LAW. The Plan and all Award Agreements shall be
construed in accordance with and governed by the laws of the State of Arizona.
<PAGE> 1
Exhibit 10.8
AMENDMENT NO. 2 TO AMENDED AND RESTATED MOTOR VEHICLE INSTALLMENT CONTRACT
LOAN AND SECURITY AGREEMENT
This Amendment is entered into this 9th day of September, 1998 by and
between General Electric Capital Corporation, a New York corporation ("Lender");
and Ugly Duckling Corporation, successor in interest to Ugly Duckling Holdings,
Inc. ("Ugly Duckling"), a Delaware corporation; Duck Ventures, Inc.
("Ventures"), an Arizona corporation; Champion Acceptance Corporation ("CAC")
formerly known as Ugly Duckling Credit Corporation; an Arizona corporation; Ugly
Duckling Car Sales, Inc. ("Sales"); an Arizona corporation; Champion Financial
Services, Inc. ("Champion"), an Arizona corporation; Ugly Duckling Car Sales
Florida, Inc. ("Car Sales Florida"), a Florida corporation; Ugly Duckling Car
Sales Texas, L.L.P. ("Car Sales Texas"), an Arizona limited liability
partnership; Ugly Duckling Car Sales New Mexico, Inc. ("Car Sales New Mexico"),
a New Mexico corporation; Ugly Duckling Car Sales California, Inc. ("Car Sales
California"), a California corporation; and Ugly Duckling Car Sales Georgia,
Inc. ("Car Sales Georgia"), a Georgia corporation (collectively referred to
herein as "Borrower").
RECITALS
A. Borrower and Lender entered into an Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement dated as of August 15, 1997, as
amended (the "Agreement") pursuant to which Lender agreed to make Advances to
Borrower on the terms and conditions set forth in the Agreement.
B. Borrower and Lender desire to amend certain provisions of the Agreement
pursuant to the terms set forth in this Amendment.
In consideration of the premises and other good and valuable
consideration, the receipt of which is hereby acknowledged by each of the
parties hereto, the parties agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized terms
used in this Amendment shall have the same meaning given to such term(s) in the
Agreement.
2. Amendments to Agreement. Effective as of the date hereof, the Agreement
is hereby amended as follows:
(a) Adjusted Pre-tax Income. The definition of "Adjusted Pre-tax Income" shall
be added in its proper alphabetical order in Section 16.0 of the Agreement as
follows:
"ADJUSTED PRE-TAX INCOME: Income before taxes minus non-cash gain-on-sale
of assets plus amortization of non-cash gain-on-sale of assets."
(b) Average Charge-Off Losses. The definition of "Average Charge-Off
Losses" in Section 16.0 of the Agreement is hereby amended in its entirety to
read as follows:
"AVERAGE CHARGED-OFF LOSSES: (A) with respect to all Contracts, the
Accounting Period average of the Charged-Off Losses of all Contracts for any
six (6) consecutive Accounting
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<PAGE> 2
Periods; provided that, until the first six (6) Accounting Periods have expired,
the Average Charged-Off Losses shall be the Accounting Period average of the
Charged-Off Losses for the Accounting Periods which have expired; and
(B) with respect to Managed Portfolio Contracts, the Accounting Period
average of the Charged-Off Losses of all Managed Portfolio Contracts for any
three (3) consecutive Accounting Periods; provided that, until the first three
(3) Accounting Periods have expired, the Average Charged-Off Losses shall be
the Accounting Period average of the Charged-Off Losses for the Accounting
Periods which have expired.
(c) Borrowing Base. The definition of "Borrowing Base" in Section 16.0 of
the Agreement is hereby amended in its entirety to read as follows:
"BORROWING BASE: the amount equal to the lesser of (i) One Hundred
Twenty-five Million Dollars ($125,000,000.00) minus the Guaranty Liability, or
(ii) an amount equal to (A) sixty five percent (65%) of the Outstanding
Principal Balance of all Originated Eligible Contracts (but not to exceed one
hundred fifteen percent (115%) of the NADA average wholesale Black Book value
for all such Contracts in the aggregate) during the time they are included in
the Borrowing Base pursuant to Section 3.1; plus (B) eighty-six percent (86%)
of the Outstanding Principal Balance of all Champion Eligible Contracts (but
not to exceed one hundred seven percent (107%) of wholesale Kelly Blue Book
for all such Contracts in the aggregate) during the time they are included in
the Borrowing Base pursuant to Section 3.1; plus (C) seventy-five percent
(75%) of the Outstanding Principal Balance of all Seminole Eligible Contracts
during the time they are included in the Borrowing Base pursuant to Section
3.1; plus (D) the Inventory Advance Value. At Lender's sole and absolute
discretion and Borrower's request, Lender may agree to include Bulk Purchase
Contracts as part of the Borrowing Base hereunder. The amount of advance
against Bulk Purchase Contracts, if any, shall be at Lender's sole and
absolute discretion. With respect to section (ii) (A) of this definition,
compliance with the parenthetical test based on Black Book values shall be
measured by Lender's sample of 100 or more Contracts and not on a
Contract-by-Contract basis."
(d) Cash Flow Based Interest Coverage Ratio. The definition of "Cash Flow
Based Interest Coverage Ratio" shall be added in its proper alphabetical order
in Section 16.0 of the Agreement as follows:
"CASH FLOW BASED INTEREST COVERAGE RATIO: Adjusted Pre-tax Income plus
interest expense minus taxes paid, divided by interest expense."
(e) Champion Eligible Contract: The definition of "Champion Eligible
Contract" shall be added in its proper alphabetical order in Section 16.0 of the
Agreement as follows:
"CHAMPION ELIGIBLE CONTRACT: an Eligible Contract which was purchased by
Champion Financial Services, Inc. from a Dealer who was not a Borrower entity or
an Affiliate of Borrower."
(f) Credit Line: The definition of Credit Line shall be hereby amended in
its entirety to read as follows:
"CREDIT LINE: One Hundred Twenty-five Million Dollars ($125,000,000.00)."
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<PAGE> 3
(g) Eligible Vehicle: The definition of "Eligible Vehicle" shall be added
in its proper alphabetical order in Section 16.0 of the Agreement as follows:
"ELIGIBLE VEHICLE: a Motor Vehicle (i) which Borrower has purchased for at
least $1,500 and not more than $6,000; (ii) which has been in Borrower's
possession for no more than 120 days; (iii) which has not been repossessed by
Borrower (unless subsequently re-purchased at auction); (iv) for which Borrower
holds in its possession the title and purchase documentation, provided, however,
that, if all other criteria for Eligible Vehicles is met, Motor Vehicles may be
held in Borrower's possession for 30 days without title documentation; and (v)
is not subject to any lien, encumbrance or security interest of any kind other
than the interest of Lender as granted hereunder or any other agreement with
Lender.
(h) Eligible Vehicle Advance Value: The definition of "Eligible Vehicle
Advance Value" shall be added in its proper alphabetical order in Section 16.0
of the Agreement as follows:
"ELIGIBLE VEHICLE ADVANCE VALUE: for each Eligible Vehicle in Borrower's
inventory, 58% of the purchase price paid by Borrower for the Motor Vehicle."
(i) Facility: The definition of "Facility" shall be added in its proper
alphabetical order in Section 16.0 of the Agreement as follows:
"FACILITY: the Installment Contract Facility or the Inventory Facility, as
applicable."
(j) Installment Contract Facility: The definition of "Installment Contract
Facility" shall be added in its proper alphabetical order in Section 16.0 of the
Agreement as follows:
"INSTALLMENT CONTRACT FACILITY: the loan Facility described in Section
2.1(A) herein."
(k) Inventory Advance Value: The definition of "Inventory Advance Value"
shall be added in its proper alphabetical order in Section 16.0 of the Agreement
as follows:
"INVENTORY ADVANCE VALUE: the lesser of (i) Twenty Million Dollars
($20,000,000.00); (ii) the cumulative Eligible Vehicle Advance Value for all
Eligible Vehicles in Borrower's inventory; (iii) an amount equal to the
Borrowing Base minus the amount outstanding under the Installment Contract
Facility or (iv) 65% of the cumulative NADA average wholesale Black Book value
for Borrower's inventory of Motor Vehicles (compliance with which shall be
measured by Lender's sample of 100 or more Contracts and not on a
Contract-by-Contract basis)."
(l) Inventory Facility: The definition of "Inventory Facility" shall be
added in its proper alphabetical order in Section 16.0 of the Agreement as
follows:
"INVENTORY FACILITY: the loan Facility described in Section 2.1(B)
herein."
(m) Line Fee. The definition of Line Fee is hereby amended in its entirety
to read as follows:
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<PAGE> 4
"LINE FEE: the fee payable annually by Borrower to Lender equal to one
quarter of one percent (.25%) times the Credit Line. The maximum amount of Line
Fee payable shall be Three Hundred Twelve Thousand Five Hundred Dollars
($312,500.00)."
(n) Loan Availability: The definition of "Loan Availability" in Section
16.0 of the Agreement is hereby amended in its entirety to read as follows:
"LOAN AVAILABILITY: as to the Installment Contract Facility, the amount by
which the Borrowing Base exceeds the Loan; as to the Inventory Facility, the
amount of the Inventory Advance Value."
(o) Managed Portfolio Contracts. The definition of "Managed Portfolio
Contracts" shall be added in its proper alphabetical order in Section 16.0 of
the Agreement as follows:
"MANAGED PORTFOLIO CONTRACTS: Installment contracts, serviced by Borrower,
which were originated or purchased by Borrower, including but not limited to
those contracts which have been subsequently sold to a third party, with the
servicing retained by Borrower and with a residual interest in the installment
contracts held by Borrower."
(p) Managed Portfolio Deferral Rate. The definition of "Managed Portfolio
Deferral Rate" shall be added in its proper alphabetical order in Section 16.0
of the Agreement as follows:
"MANAGED PORTFOLIO DEFERRAL RATE: The total number of any payment or due
date changes made to Managed Portfolio Contracts in a calendar month, which
increases the term of the installment loan obligation by up to 30 days, or
delays payment of a contractual payment by up to 30 days, divided by the number
of Managed Portfolio Contracts at the end of that calendar month. To the extent
that a payment or due date change increases the term of the installment loan by
more than 30 days but less than 60 days, it will be considered to be two (2)
changes."
(q) Managed Portfolio Leverage Ratio. The definition of "Managed Portfolio
Leverage Ratio" shall be added in its proper alphabetical order in Section 16.0
of the Agreement as follows:
"MANAGED PORTFOLIO LEVERAGE RATIO: Borrower's on-book liabilities which
are not unconditionally subordinated to Lender, plus amount owed by any
bankruptcy-remote subsidiary via associated securitization trusts to
unaffiliated bondholders or certificate holders which are not included in
Borrower's on-book liabilities (including amounts owed to any bondholders who
may not have any legal recourse to any non-bankruptcy remote subsidiaries),
divided by Net Worth of Borrower."
(r) Originated Eligible Contract: The definition of "Originated Eligible
Contract" shall be added in its proper alphabetical order in Section 16.0 of the
Agreement as follows:
"ORIGINATED ELIGIBLE CONTRACT: an Eligible Contract which was originated
by any Borrower entity which is a Dealer."
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<PAGE> 5
(s) Rolling Average Managed Portfolio Deferral Rate: The definition of
"Rolling Average Managed Portfolio Deferral Rate" shall be added in its proper
alphabetical order in Section 16.0 of the Agreement as follows:
"ROLLING AVERAGE MANAGED PORTFOLIO DEFERRAL RATE: the average of the
Managed Portfolio Deferral Rates for any three (3) consecutive Accounting
Periods; provided that, until the first three (3) Accounting Periods have
expired, the Rolling Average Managed Portfolio Deferral Rate shall be the
average of the Managed Portfolio Deferral Rate for the Accounting Periods
which have expired.
(t) Rolling Average Managed Portfolio Delinquency: The definition of
Rolling Average Managed Portfolio Delinquency shall be hereby amended in its
entirety to read as follows:
"ROLLING AVERAGE MANAGED PORTFOLIO DELINQUENCY: the average of the Managed
Portfolio Delinquency Measurements for any three (3) consecutive Accounting
Periods; provided that, until the first three (3) Accounting Periods have
expired, the Rolling Average Managed Portfolio Delinquency shall be the
average of the Managed Portfolio Delinquency Measurements for the Accounting
Periods which have expired."
(u) Seminole Eligible Contract: The definition of "Seminole Eligible
Contract" shall be added in its proper alphabetical order in Section 16.0 of the
Agreement as follows:
"SEMINOLE ELIGIBLE CONTRACT: an Eligible Contract which was purchased by
Borrower from Seminole Finance."
(v) Termination Fee. The definition of "Termination Fee" shall be added in
its proper alphabetical order in Section 16.0 of the Agreement as follows:
"TERMINATION FEE: Two Hundred Thousand Dollars ($200,000.00)."
(w) Year 2000 Compliant: The definition of "Year 2000 Compliant" shall be
added in its proper alphabetical order in Section 16.0 of the Agreement as
follows:
"YEAR 2000 COMPLIANT. With respect to each Borrower entity:
1. The operating systems for Borrower's computers, all software applications
that run on Borrower's computers, all Borrower's facilities, machinery and
equipment and Borrower's products and services (collectively, "Products and
Services") accurately process, provide and/or receive date/time data
(including without limitation events and data in the twentieth and the
twenty-first centuries and the years 1999 and 2000), including leap year
calculations, and
2. Neither the performance nor the functionality nor Borrower's supply of
Products and Services will be affected materially and adversely (as
determined in Lender's sole judgment) by dates/times prior to, on, after, or
spanning January 1, 2000. In particular, but without limitation, (1) the
design and performance of the Products and Services shall include, without
limitation, proper date/time data century recognition, proper recognition of
April 9, 1999, September 9, 1999, December 31, 1999, January 1, 2000, January
3, 2000, January 10,
Page 5
<PAGE> 6
2000, January 31, 2000, February 29, 2000, March 31, 2000, October 10, 2000,
December 31, 2000, January 1, 2001, and December 31, 2001, and proper
recognition of Leap Years calculations, proper same century and multi-century
formulae and date/time values before, on, after, and spanning January 1,
2000, and date/time data interface values that properly reflect the century,
1999, and 2000; and
3. No value for date/time will cause any materially adverse error (as determined
in Lender's sole judgment), interruption, or decreased performance in or for
such Products and Services; and
4. All manipulations of date and time related data (including, but not limited
to, calculating, comparing, sequencing, processing, and outputting) will
produce correct results for all valid dates and times, including when used in
combination with other products, services, and/or items; and
5. Date/time elements in interfaces and data storage will specify the century
and date/time data so as to eliminate date ambiguity without human
intervention, including Leap Year calculations/data, (5) where any date/time
element is represented without a century, the correct century will be
unambiguous for all manipulations involving that element; and
6. Authorization codes, passwords, and purge functions shall operate normally
and in the same manner in which they function with respect to expiration
dates and CPU serial numbers, and
7. Neither Borrower's supply of Products and Services nor Borrower's business,
Borrower's operations nor Borrower's financial condition into and out of
Borrower's company will not be interrupted, delayed, decreased, or otherwise
materially adversely affected (as determined in Lender's reasonable sole
judgment) by dates prior to, on, after, or spanning January 1, 2000."
(x) Single Loan. Section 2.0 of the Agreement is hereby amended in its
entirety to read as follows:
"Section 2.0. SINGLE LOAN. All Advances by Lender to Borrower
under Section 2.1(A) and 2.1(B) shall constitute one loan and all
indebtedness and obligations of Borrower to Lender under the Loan
Documents shall constitute an obligation secured by Lender's
security interest in all of the Collateral. In no event shall the
Loan exceed One Hundred Twenty-five Million ($125,000,000.00).
Borrower's obligation to pay the Loan is evidenced by this
Agreement. Borrower shall pay Lender when due all Indebtedness in
accordance with the terms of this Agreement whether or not Borrower
has executed a promissory note. The actual amount Borrower is
obligated to pay Lender hereunder shall be determined by this
Agreement and the records of Lender, regardless of the terms of any
promissory note. Any promissory note executed in connection with the
Indebtedness need not be amended to reflect changes made to this
Agreement."
(y) Loan Facilities. Section 2.1 of the Agreement is hereby amended in its
entirety to read as follows:
Page 6
<PAGE> 7
"Section 2.1. LOAN FACILITIES.
(A) INSTALLMENT CONTRACT FACILITY. Subject to all of the terms and
conditions of this Agreement, Lender agrees to loan funds up to
One Hundred Twenty-five Million ($125,000,000.00) to Borrower
against Eligible Contracts and Eligible Inventory from time to
time in a series of Advances during the term of this Agreement.
Funds may be borrowed, repaid and reborrowed on a revolving basis
subject to the terms and conditions set forth in this Agreement,
provided that the amount outstanding under the Installment
Contract Facility shall not at any time exceed the Borrowing
Base.
(B) INVENTORY FACILITY. Subject to all of the terms and conditions of
this Agreement, Lender agrees to loan funds up to Twenty Million
($20,000,000.00) to Borrower against Eligible Inventory from time
to time in a series of Advances during the term of this
Agreement. Funds may be borrowed, repaid and reborrowed on a
revolving basis subject to the terms and conditions set forth in
this Agreement, provided that the Loan shall not at any time
exceed the Inventory Advance Value."
(z) General Interest Rate and Fees. Section 2.2. of the Agreement is
hereby amended to add a new sub-section 2.2.(D) as follows:
"(D) Borrower shall pay to Lender the Termination Fee in the event
that Borrower prepays the Loan (other than as a result of Lender's
acceleration due to an Event of Default) in full prior to the end of the
Initial Term."
(aa) Loan Term: Right to Terminate. Section 2.3. of the Agreement is
hereby amended in its entirety to read as follows:
"LOAN TERM; RIGHT TO TERMINATE. Unless sooner terminated as
hereinafter provided, this Agreement shall terminate on June 30,
2000 (the "Initial Term") and may be renewed by agreement of the
parties for one additional year (if any, the "Renewal Term"). The
Agreement shall terminate without any notice requirement at the end
of the Renewal Term if not renewed or extended by written agreement
of all parties. Upon the occurrence of an Event of Default, Lender
may, without prior notice to Borrower, immediately terminate this
Agreement. A prepayment in full of the Loan shall be a termination
of this Agreement. Notwithstanding termination of this Agreement in
any manner, the Indebtedness shall be payable in accordance with
this Agreement, and all rights and remedies granted to Lender
hereunder or pursuant to applicable law shall continue until all
obligations of Borrower to Lender have been fully paid and
performed."
(bb) Procedure for Borrowing. Section 3.2.(A) of the Agreement is hereby
amended in its entirety to read as follows:
Page 7
<PAGE> 8
"Section 3.2. PROCEDURE FOR BORROWING. (A) Borrower shall designate
under which Facility it is requesting an Advance. If no Facility is
specified by Borrower at the time of the request, then Lender may, at its
option, (i) designate the Facility under which the Advance shall be made,
or (ii) request a designation from Borrower. The first Advance shall not
exceed the Borrowing Base. Subsequent Advances shall not be made more
frequently than daily. Each subsequent Advance shall not exceed the
applicable Loan Availability determined at Lender's election either as of
the end of the most recent Accounting Period for which Lender has received
the monthly reports required by Section 5.1 (C), or, as of such other date
thereafter designated by Lender. Lender is not obligated to make an
Advance if the amount available or requested is less than Twenty-Five
Thousand Dollars ($25,000.00). Lender is not obligated to make an Advance
unless Borrower provides Lender with sufficient information to calculate
the Loan Availability. Lender's use of the information provided by
Borrower to determine the amount available for Advances is not an
admission by Lender as to the accuracy of the information, and Lender
reserves the right to verify the information and redetermine the amount
available for Advances."
(cc) Financial Condition. Section 13.6 of the Agreement is amended in its
entirety to read as follows:
"FINANCIAL CONDITION. (A) Borrower shall not allow its Debt Ratio to
exceed 2.2:1.
(B) Borrower shall maintain a Net Worth of (i) One Hundred Million Dollars
($100,000,000.00) at all times prior to and including December 31, 1998;
(ii) One Hundred Ten Million Dollars ($110,000,000.00) from January 1, 1999
until December 31, 1999; and (iii) On Hundred Thirty Million Dollars
($130,000,000.00) from January 1, 2000 until January 1, 2001. If Borrower is
in default of any securitized tranche/trust, Net Worth shall be reduced by
the residual value associated with the defaulted securitization.
(C) Borrower shall maintain Interest Coverage of at least 1.5.
(D) Borrower shall maintain a Cash Flow Based Interest Coverage Ratio of at
least 1.75. (E) Borrower's Rolling Average Delinquency shall not exceed
8.5%.
(F) Borrower's three-month Rolling Average Managed Portfolio Delinquency shall
not exceed 10%.
(G) Borrower's Average Charged-Off Losses shall not exceed 1.75%.
(H) Borrower's Average Charged-Off Losses for all Managed Portfolio Contracts
shall not exceed 2.75%.
(I) Borrower's Managed Portfolio Leverage Ratio shall not exceed: (i) 3.5:1 from
the effective date of Amendment No. 2 until the 1-year anniversary of the
effective date of Amendment No. 2; and (ii) 4.0:1 thereafter.
(J) Borrower's Rolling Average Managed Portfolio Deferral Rate shall not exceed
2.25.
(K) Lender may, in its sole discretion, amend the Rolling Average Delinquency on
an annual basis.
(L) Borrower shall notify Lender in writing, promptly upon its learning thereof
of any material adverse change in the financial condition of Borrower,
Validity of Collateral Guarantor, or Guarantor.
(M) Borrower shall provide Lender a monthly report on Borrower's Motor Vehicle
inventory detailing Borrower's purchase price for all such inventory, which
shall be received by Lender by the 15th of each calendar month.
Page 8
<PAGE> 9
(dd) Year 2000 Compliant. A new Section 13.16 is added to the Agreement
as follows:
"Section 13.16. YEAR 2000 COMPLIANT. (A) Borrower shall provide Lender
with monthly reports, in form and substance reasonably acceptable to Lender,
detailing each Borrower entities progress in becoming Year 2000 Compliant; and
(B) Borrower shall be Year 2000 Compliant, as determined in Lender's
reasonable sole judgment, no later than March 31, 1999."
3. Condition Precedent To Effectiveness Of Certain Portions Of Amendment No. 2.
(A) Anything set forth herein notwithstanding, the modifications and
additions to the Agreement contained in Paragraph 2 (c), (f), (x), (y), (bb) of
this Amendment (the "Increase Amendments") shall not become effective as part of
the Agreement until (i) Lender receives proof acceptable to it in its sole
judgment, that all Post Office Boxes into which Remittances are received are
held in the name of Harris Bank, as agent or trustee for Lender; and (ii) The
Second Amendment to Master Depository Accounts and Post Office Boxes And Agency
Agreement dated August 28, 1998 (attached hereto as Exhibit A), has been
executed and remains in place.
(B) Prior to (i) the satisfaction of the condition set forth in Paragraph
3(A) above and (ii) October 15, 1998, and without limiting or modifying the
provisions of Paragraph 3(A) above except as expressly set forth herein, Lender
will advance up to a maximum of Ten Million Dollars ($10,000,00.00) against and
to the extent that Borrower's Motor Vehicle inventory would be considered
"Eligible Vehicles" as set forth in Amendment No. 2. Any amounts advanced by
Lender pursuant to this paragraph shall be Indebtedness under the Agreement and
shall be secured by all Collateral set forth therein without regard to any
nullification of any part Amendment No. 2 as set forth in paragraph 3(C) below.
(C) In the event that the conditions set forth in Paragraph 3(A) are not
satisfied by October 15, 1998, then (i) the Increase Amendments shall become
null and void and shall be deemed stricken from this Amendment No. 2; and (ii)
any amounts advanced by Lender pursuant to Paragraph 3(B) above shall become
immediately due and payable and the failure of Borrower to repay any such
Advances within two (2) Business Days of notice by Lender shall be an Event of
Default under the Agreement.
4. Incorporation of Amendment: The parties acknowledge and agree
that this Amendment is incorporated into and made a part of the Agreement, the
terms and provisions of which, unless expressly modified herein, or unless no
longer applicable by their terms, are hereby affirmed and ratified and remain in
full force and effect. To the extent that any term or provision of this
Amendment is or may be deemed expressly inconsistent with any term or provision
of the Agreement, the terms and provisions of this Amendment shall control. Each
reference to the Agreement shall be a reference to the Agreement as amended by
this Amendment. This Amendment, taken together with the unamended provisions of
the Agreement which are affirmed and ratified by Borrower, contains the entire
agreement among the parties
Page 9
<PAGE> 10
regarding the transactions described herein and supersedes all prior agreements,
written or oral, with respect thereto.
5. Borrower Remains Liable. Borrower hereby confirms that the Agreement
and each document executed by Borrower in connection therewith continue
unimpaired and in full force and effect and shall cover and secure all of
Borrower's existing and future obligations to Lender.
6. Headings. The paragraph headings contained in this Amendment are for
convenience of reference only and shall not be considered a part of this
Amendment in any respect.
7. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Arizona. Nothing herein shall preclude
Lender from bringing suit or taking other legal action in any jurisdiction.
8. Execution in Counterparts. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed and delivered shall be deemed to be an original and
all of which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of
September 9, 1998.
GENERAL ELECTRIC CAPITAL
CORPORATION UGLY DUCKLING CAR SALES, INC.
By: /s/ Farhaan Hassan By: /s/ Gregory B. Sullivan
--------------------------------- ------------------------------------
Title: Account Executive Title: President
------------------------------ ----------------------------------
UGLY DUCKLING CORPORATION UGLY DUCKLING CAR SALES NEW
MEXICO, INC.
By: /s/ Gregory B. Sullivan By: /s/ Gregory B. Sullivan
--------------------------------- ------------------------------------
Title: President Title: President
------------------------------ ----------------------------------
DUCK VENTURES, INC. CHAMPION FINANCIAL SERVICES, INC.
By: /s/ Gregory B. Sullivan By: /s/ Gregory B. Sullivan
--------------------------------- ------------------------------------
Title: President Title: President
------------------------------ ----------------------------------
CHAMPION ACCEPTANCE UGLY DUCKLING CAR SALES FLORIDA,
CORPORATION formerly known as UGLY INC.
DUCKLING CREDIT CORPORATION
By: /s/ Gregory B. Sullivan By: /s/ Gregory B. Sullivan
--------------------------------- ------------------------------------
Title: President Title: President
------------------------------ ----------------------------------
UGLY DUCKLING CAR SALES TEXAS, UGLY DUCKLING CAR SALES
L.L.P. CALIFORNIA, INC.
By: Ugly Duckling Car Sales, Inc.
Its: General Partner By: /s/ Gregory B. Sullivan
---------------------------------
Title: President
---------------------------------
By: /s/ Gregory B. Sullivan UGLY DUCKLING CAR SALES GEORGIA,
--------------------------------- INC.
Title: President
------------------------------ By: /s/ Gregory B. Sullivan
---------------------------------
Title: President
------------------------------
Page 10
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
This financial data schedule (which includes Exhibit 27.1 to 27.4) on form 10-Q
for the nine and six month periods ended September 30, 1998 and June 30, 1998,
respectively, and the restated nine and six month periods ended September 30,
1997 and June 30, 1997, respectively, contains summary financial information
which is incorporated by reference from the 1998 and 1997 quarterly reports and
extracted from the Condensed Consolidated Statements of Operations, and
Condensed Consolidated Statements of Cash Flows, and is qualified in its
entirety by reference to the financial statement within the report on form 10-Q
filing.
Any item provided in the schedule, in accordance with the rules governing the
schedule, will not be subject to liability under the federal securities laws,
except to the extent that the financial statements and other information from
which the data were extracted violate the federal securities laws. Also,
pursuant to item 601(c)(1)(iv) of Regulation S-K promulgated by the Securities
and Exchange Commission (SEC), the schedule shall not be deemed filed for
purposes of Section 11 of the of the Securities Act of 1933, Section 18 of the
Securities Exchange Act of 1934 and Section 323 of the Trust Indenture Act of
1939, or otherwise be subject to the liabilities of such sections, nor shall it
be deemed a part of any registration statement to which it relates.
</LEGEND>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 955
<SECURITIES> 20,076
<RECEIVABLES> 66,256
<ALLOWANCES> 5,572
<INVENTORY> 36,184
<CURRENT-ASSETS> 0<F1>
<PP&E> 32,190
<DEPRECIATION> 6,509
<TOTAL-ASSETS> 278,788
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 173,285
<OTHER-SE> 8,133
<TOTAL-LIABILITY-AND-EQUITY> 278,788
<SALES> 216,111
<TOTAL-REVENUES> 252,473
<CGS> 123,976
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 67,408
<LOSS-PROVISION> 45,053
<INTEREST-EXPENSE> 1,687
<INCOME-PRETAX> 14,349
<INCOME-TAX> 5,777
<INCOME-CONTINUING> 8,572
<DISCONTINUED> (9,591)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,019)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
</LEGEND>
<RESTATED>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 4,401
<SECURITIES> 10,421
<RECEIVABLES> 33,229
<ALLOWANCES> 3,309
<INVENTORY> 19,467
<CURRENT-ASSETS> 0<F1>
<PP&E> 39,903
<DEPRECIATION> 4,070
<TOTAL-ASSETS> 217,994
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 171,943
<OTHER-SE> 5,452
<TOTAL-LIABILITY-AND-EQUITY> 217,994
<SALES> 79,543
<TOTAL-REVENUES> 101,287
<CGS> 45,902
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 33,260
<LOSS-PROVISION> 14,193
<INTEREST-EXPENSE> 630
<INCOME-PRETAX> 7,302
<INCOME-TAX> 2,966
<INCOME-CONTINUING> 4,336
<DISCONTINUED> 1,409
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,745
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 41,149
<SECURITIES> 5,208
<RECEIVABLES> 55,019
<ALLOWANCES> 9,842
<INVENTORY> 15,782
<CURRENT-ASSETS> 0<F1>
<PP&E> 33,423
<DEPRECIATION> 3,443
<TOTAL-ASSETS> 215,475
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 171,317
<OTHER-SE> 7,280
<TOTAL-LIABILITY-AND-EQUITY> 215,475
<SALES> 46,013
<TOTAL-REVENUES> 58,443
<CGS> 25,890
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 19,112
<LOSS-PROVISION> 8,109
<INTEREST-EXPENSE> 440
<INCOME-PRETAX> 4,892
<INCOME-TAX> 1,987
<INCOME-CONTINUING> 2,905
<DISCONTINUED> 4,668
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,573
<EPS-PRIMARY> .44
<EPS-DILUTED> .43
<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, 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 that
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 nine month period ended September 30, 1998 of $1.0 million due
primarily to charges totaling $15.1 million (approximately $9.6 million, net of
income taxes) related to the disposal of the Branch Offices.
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; (vi) acquire used vehicles
for its inventory at acceptable prices; and (vii) properly execute its business
strategies. Outside factors, such as the economic, regulatory, and judicial
environments in which it operates, will also
<PAGE> 2
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, 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.
Management is currently evaluating the structure of its securitization
transactions and is considering altering the structure of future transactions to
recognize the interest income on the loans over the life of the contracts for
accounting purposes in lieu of recording gains on the sale of Finance
Receivables on the securitization transactions. Historically, gains on sales of
Finance Receivables have been material to the Company's reported revenues.
Altering the structure of such transactions whereby no gain is recognized at the
time of a securitization transaction, would have a material effect on the
Company's reported revenues until such time as the Company were to accumulate
Finance Receivables on its balance sheet sufficient to generate interest income
(net of interest expense) equivalent to the revenues the Company has
historically recognized on its securitization transactions.
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 $44.7 million and $23.4 million, respectively, at September 30, 1998,
which amounts would not be available to satisfy claims of creditors of the
Company.
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 $125.0
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,
up to 86.0% of the principal balance of eligible contracts previously originated
by the Branch Offices, and the lesser of $20 million or 65% of the National
Automobile Dealers Association average wholesale Black Book value for eligible
vehicle inventory. However, an amount up to $8.0 million of the borrowing
capacity under the Revolving Facility is not available at any time when the
guarantee of the Company to the Contract Purchaser (defined below under "Risks
to the Company Relating to the FMAC Transaction") 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
<PAGE> 3
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, other than the interest coverage ratio and cash flow
based interest coverage ratio for which the Company obtained a waiver, and such
other facilities, 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 $955,000 at September 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. 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.
On November 12, 1998, the Company borrowed $15 million for a term of 364 days
from Greenwich Capital with an interest rate equal to LIBOR plus 400 basis
points, and secured by the stock of the Company's Securitization Subsidiaries.
The Company is currently evaluating other longer term financing options. 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 automobile manufacturers. The Company has
established an Allowance for Credit Losses, which approximated 18.5% of contract
principal balances as of September 30, 1998, to cover anticipated credit losses
on the contracts currently in its portfolio. Further, the allowance for credit
losses imbedded in the Residuals in Finance Receivables sold as a percentage of
the remaining principal balances of the underlying contracts was approximately
24.3% as of September 30, 1998. 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.
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
Dealership loan portfolios as well as substantially all of the 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.
<PAGE> 4
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. Cygnet's loan servicing operations and the
Cygnet Dealer Program, both of which are included in Discontinued Operations,
are at different stages of converting to a single third party loan servicing
platform. Failure to successfully complete either 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 $1.5 to $2.0 million to modify or
replace its existing systems. 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.
LOSS OF DIVERSIFICATION AND EARNINGS FROM THE OPERATIONS OF CYGNET
The separation of Cygnet from the Company's operations would 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 businesses
operated by 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.
RISKS TO THE COMPANY RELATING TO THE FMAC TRANSACTION
During the pendency of the FMAC bankruptcy proceedings described in the Form
10-Q under the heading "Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Continuing Company Business --
Liquidity and Capital Resources -- Transactions Regarding First Merchants
Acceptance Corporation", the Company's Discontinued Operations 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 claims (collectively, the "Excess Cash").
One source of cash payments that may in the future be made to unsecured
creditors of FMAC is from recoveries on the contracts (the "Owned Contracts")
which originally secured the Senior Bank Debt and on certain residual interests
(the "B Pieces") in the various securitized loan pools of FMAC 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 (the "Excess Collection Split"), subject to
certain contingencies that may reduce or eliminate the Company'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 (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. 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.
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 right to the Additional
Consideration.
Additional risks relating to the FMAC transaction include the following:
-- The Company has continuing obligations under the DIP Facility. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition of the Continuing Company Businesses -- Liquidity and Capital
Resources -- Capital Expenditures and Commitments."
-- The Company has guaranteed a specified return on the Owned Contracts
sold to the Contract Purchaser, subject to a maximum guarantee amount of $10
million.
-- The Company has agreed in a contingent sharing agreement to pay 10%
of its share of the Excess Collections Split to Financial Security Assurance
("FSA"), the insurer of certain obligations to holders of the senior
certificates issued in FMAC's securitization transactions in exchange for
certain consents to amendments to documents governing servicing of securitized
contracts.
<PAGE> 5
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.
CYGNET DEALER PROGRAM
The Cygnet Dealer Program provides qualified Third Party Dealers with
financing options and revolving lines of credit primarily secured by such
dealers' finance receivable portfolios. While the Company will require dealers
to meet certain minimum net worth and operating history criteria to be
considered for inclusion in the Cygnet Dealer Program, it 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. Under the Cygnet Dealer Program, the dealer remains
responsible for collection of the contract payments and retains control of the
customer relationship. All cash collections, including regular monthly payments,
payoffs, and repurchases are deposited by the dealers into a bank account
maintained by the Company. Consequently, the Company will be subject to a high
risk of credit losses due to dealer defaults or fraudulent activities,
specifically related to the collection, depositing, and reporting of customer
payments, which could have a material adverse effect on the Company and on the
Company's ability to meet its own financing obligations.
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. In addition, the
Company may be required to issue additional warrants in the future as described
in the Form 10-Q under the heading "Management's Discussion and Analysis of
Results of Operations and Financial Condition of the Continuing Company
Businesses -- Liquidity and Capital Resources -- Reliance Transaction," and may
issue the Stock Option Shares in the FMAC transaction as described above under
"Risks to the Company Relating to the FMAC Transaction." 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 September 30, 1998, the Company had goodwill totaling
approximately $14.6 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
<PAGE> 6
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 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 Cygnet's
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.
<PAGE> 7
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 and certain other borrowings
bear 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 was unable to do so, the
Company's net interest margins would decrease, thereby adversely affecting the
Company's profitability.
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
<PAGE> 8
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.
CONTROL BY PRINCIPAL STOCKHOLDER
Mr. Ernest C. Garcia, II, the Company's Chairman, Chief Executive
Officer, and principal stockholder, holds approximately 29.4% of the outstanding
Common Stock (considering the effect of the exchange offer), 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.
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, 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.
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.
