================================================================================
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: March 31, 1999
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)
(602) 852-6600
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
---------------
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE:
At May 11, 1999, there were approximately 14,938,600 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 (Ugly Duckling) 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 Ugly
Duckling's Annual Report on Form 10-K, for the year ended December 31, 1998.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION
FORM 10-Q
TABLE OF CONTENTS
<S> <C>
Page
Part I. -- FINANCIAL STATEMENTS
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets-- March 31, 1999 and December 31, 1998.......................... 1
Condensed Consolidated Statements of Operations-- Three Months Ended March 31, 1999 and March 31, 1998 2
Condensed Consolidated Statements of Cash Flows-- Three Months Ended March 31, 1999 and March 31, 1998 3
Notes to Condensed Consolidated Financial Statements.................................................. 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......... 9
Part II.-- OTHER INFORMATION 28
Item 1. LEGAL PROCEEDINGS..............................................................................
Item 2. CHANGES IN SECURITIES.......................................................................... 28
Item 3. DEFAULTS UPON SENIOR SECURITIES................................................................ 28
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................ 28
Item 5. OTHER INFORMATION.............................................................................. 28
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... 28
SIGNATURES.............................................................................................. 30
Exhibit 10.1 Engagement Letter between Greenwich Capital Markets, Inc.
and Registrant dated March 16, 1999 for Greenwich to Act as Placement Agent
for not less than $300 Million of Securitized Loans
Exhibit 10.2 Commitment Letter between Greenwich Capital Markets, Inc.
and Registrant dated March 17, 1999 with Term Sheet for $100 Million
Revolving Credit Facility
Exhibit 10.3 $20 Million Loan agreement between Greenwich Capital
Financial Products, Inc. and Registrant dated March 18, 1999
Exhibit 10.3(a) Stock Pledge Agreement among Greenwich Capital Financial
Products, Inc., Registrant, and certain related parties, dated March 18,1999
Exhibit 10.4 Amendment to the Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement between
General Electric Capital Corporation and Registrant dated
March 25, 1999 regarding Year 2000 date change
Exhibit 11 Statement regarding computation per share earnings (see note 5
of Notes to Condensed Consolidated Financial Statements)
Exhibit 27 Financial Data Schedule
Exhibit 99 Statement Regarding Forward Looking Statements and Risk Factors
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 1.
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1999 1998
----------------- ---------------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 4,387 $ 2,751
Finance Recievables, net 237,928 163,209
Notes Receiveable, Net 21,670 28,257
Inventory 39,891 44,167
Property and Equipment, net 34,299 32,970
Intangible Assets, Net 15,256 15,530
Other Assets 22,880 20,575
Net Assets of Discontinued Operations 30,305 38,516
---------- ----------
$ 406,616 $ 345,975
========== ==========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Accounts Payable $ 5,678 $ 2,479
Accrued Expenses and Other Liabilities 30,329 19,694
Notes Payable 171,904 117,294
Subordinated Notes Payable 40,815 43,741
--------- ---------
Total Liabilities: 248,726 183,208
--------- ---------
Stockholders' Equity
Common Stock 19 19
Additional Paid in Capital 173,819 173,809
Retained Earnings 3,869 3,449
Treasury Stock (19,817) (14,510)
--------- ---------
Total Stockholders' Equity 157,890 162,767
--------- ---------
$ 406,616 $ 345,975
========= =========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 1
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
(In thousands, except earnings per share amounts)
1999 1998
---------- ----------
<S> <C> <C>
Sales of Used Cars $106,443 $ 72,973
Less:
Cost of Used Cars Sold 60,097 39,731
Provision for Credit Losses 28,561 15,362
-------- --------
17,785 17,880
-------- --------
Other Income:
Interest Income 14,003 6,205
Gain on Sale of Finance Receivables - 4,614
Servicing and Other Income 9,672 3,912
-------- --------
23,675 14,731
-------- --------
Income before Operating Expenses 41,460 32,611
Operating Expenses:
Selling and Marketing 6,416 4,921
General and Administrative 28,553 18,786
Depreciation and Amortization 2,135 1,173
-------- --------
37,104 24,880
-------- --------
Operating Income 4,356 7,731
Interest Expense 3,656 1,502
-------- --------
Earnings before Income Taxes 700 6,229
Income Taxes 280 2,500
-------- --------
Income from Continuing Operations 420 3,729
Discontinued Operations:
Loss from Operations of Discontinued Operations, net of income
tax benefit of $492 - (768)
Loss on Disposal of Discontinued Operations net of income tax
benefit of $3,024 - (4,827)
-------- --------
Net Earnings (Loss) $ 420 $ (1,866)
======== ========
Earnings per Common Share from Continuing Operations:
Basic $ 0.03 $ 0.20
======== ========
Diluted $ 0.03 $ 0.20
======== ========
Net Earnings (Loss) per Common Share:
Basic $ 0.03 $ (0.10)
======== ========
Diluted $ 0.03 $ (0.10)
======== ========
Shares Used in Computation:
Basic 15,650 18,557
======== ========
Diluted 15,785 19,093
======== ========
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
UGLY DUCKLING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998
(In thousands)
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss) $ 420 $ (1,866)
Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided
by Operating Activities:
Loss from Discontinued Operations - 5,595
Provision for Credit Losses 28,561 15,362
Purchase of Finance Receivables for Sale - (69,708)
Increase in Deferred Income Taxes (5,188) (2,205)
Depreciation and Amortization 2,135 1,173
Gain on Sale of Finance Receivables - (4,614)
Proceeds from Sale of Finance Receivables - 62,556
Collections of Finance Receivables - 5,935
Decrease in Inventory 4,276 6,914
Decrease in Other Assets 237 1,324
Increase in Accounts Payable, Accrued Expenses and Other 9,911 2,139
Increase in Income Taxes Payable 6,689 793
--------- ----------
Net Cash Provided by Operating Activities 47,041 23,398
--------- ----------
Cash Flows Used in Investing Activities:
Increase in Finance Receivable (137,358) (8,735)
Collections of Finance Receivables 36,319 4,741
Increase in Investments Held in Trust (2,116) (3,543)
Advances under Notes Receivable (3,109) (11,131)
Repayments of Notes Receivable 9,571 4,926
Purchase of Property and Equipment (3,190) (6,640)
--------- ----------
Net Cash Used in Investing Activities (99,883) (20,382)
--------- ----------
Cash Flows from Financing Activities:
Additions to Notes Payable 72,717 45,000
Repayment of Notes Payable (21,538) (31,867)
Proceeds from Issuance of Common Stock 32 202
Acquisition of Treasury Stock (5,307) -
Other, Net 363 223
--------- ----------
Net Cash Provided by Financing Activities 46,267 13,558
--------- ----------
Cash Provided by (Used in) Discontinued Operations 8,211 (19,597)
--------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 1,636 (3,023)
Cash and Cash Equivalents and Beginning of Period 2,751 3,537
--------- ----------
Cash and Cash Equivalents and End of Period $ 4,387 $ 514
========= ==========
Supplemental Statement of Cash Flows Information:
Interest Paid $ 5,934 $ 2,222
========= ==========
Income Taxes Paid $ - $ 408
========= ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
Page 3
<PAGE>
UGLY DUCKLING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
Our accompanying unaudited condensed consolidated financial statements 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 our opinion, such unaudited
interim information reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present our financial position and results
of operations for the periods presented. Our results of operations for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. Our Condensed Consolidated Balance Sheet as of December 31, 1998
was derived from our audited consolidated financial statements as of that date
but does not include all the information and footnotes required by generally
accepted accounting principles. We suggest that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements included in our Annual Report on Form 10-K, for the year
ended December 31, 1998.
Note 2. Summary of Finance Receivables
Following is a summary of our Finance Receivables, net, as of March 31, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------------------------- ----------------------------------------
Non Non
Dealership Dealership Dealership Dealership
Operations Operations Total Operations Operations Total
------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Installment Sales Contract Principal Balances $ 182,150 $ 69,053 $ 251,203 $ 93,936 $ 51,282 $ 145,218
Add: Accrued Interest 1,798 765 2,563 877 473 1,350
Loan Origination Costs 3,583 - 3,583 2,237 - 2,237
------------ ------------ ------------ ------------ ------------ ------------
Principal Balances, net 187,531 69,818 257,349 97,050 51,755 148,805
Residuals in Finance Receivables Sold 28,480 2,625 31,105 33,331 2,625 35,956
Investments Held in Trust 22,680 - 22,680 20,564 - 20,564
------------ ------------ ------------ ------------ ------------ ------------
238,691 72,443 311,134 150,945 54,380 205,325
Allowance for Credit Losses (48,628) (2,326) (50,954) (24,777) (2,024) (26,801)
Discount on Acquired Loans - (22,252) (22,252) - (15,315) (15,315)
------------ ------------ ------------ ------------ ------------ ------------
Finance Receivables, net $ 190,063 $ 47,865 $ 237,928 $ 126,168 $ 37,041 $ 163,209
============ ============ ============ ============ ============ ============
Classification:
Finance Receivables Held for Investment $ 123,787 $ 69,053 $ 192,840 $ 26,852 $ 51,282 $ 78,134
Finance Receivables Held as Collateral for
Securitization Note Payable 58,363 - 58,363 67,084 - 67,084
------------ ------------ ------------ ------------ ------------ ------------
$ 182,150 $ 69,053 $ 251,203 $ 93,936 $ 51,282 $ $145,218
============ ============ ============ ============ ============ ============
</TABLE>
Page 4
<PAGE>
As of March 31, 1999 and December 31, 1998, our Residuals in Finance Receivables
Sold from dealership operations were comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Retained interest in subordinated securities (B Certificates) $ 41,165 $ 51,243
Net interest spreads, less present value discount 19,837 25,838
Reduction for estimated credit losses (32,522) (43,750)
----------- ------------
Residuals in finance receivables sold $ 28,480 $ 33,331
=========== ============
Securitized principal balances outstanding $ 158,890 $ 198,747
=========== ============
Estimated credit losses as a % of securitized principal
balances outstanding 20.5% 22.0%
=========== ============
</TABLE>
The following table reflects a summary of activity for our Residuals in
Finance Receivables Sold from dealership operations for the three month periods
ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
Balance, Beginning of Period $ 33,331 $ 13,277
Additions - 13,858
Amortization (4,851) (2,394)
------------ ------------
Balance, End of Period $ 28,480 $ 24,741
============ ============
</TABLE>
Note 3. Notes Receivable
Our Cygnet dealer program has various notes receivable from used car
dealers. Under Cygnet's asset based loan program, our commitments for revolving
notes receivable totaled $10.2 million at March 31, 1999.
In July 1997, First Merchants Acceptance Corporation (First Merchants) filed
for bankruptcy. Immediately subsequent to the bankruptcy filing, we executed a
loan agreement to provide First Merchants with debtor in possession financing
(DIP facility). The maximum commitment under the DIP facility is $11.5 million
at March 31, 1999. The outstanding balance on the DIP facility totaled $11.1
million and $12.2 million at March 31, 1999 and December 31, 1998.
Following is a summary of Notes Receivable at March 31, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Notes Receivable under the asset based loan program, net of
allowance for doubtful accounts of $167, and $500, respectively $ 7,230 $ 8,311
First Merchants Debtor in Possession Note Receivable 11,062 12,228
First Merchants Bank Group Participation 2,331 6,856
Other Notes Receivable 1,047 862
-------------- ------------
Notes Receivable, net $ 21,670 $ 28,257
============== ============
</TABLE>
Page 5
<PAGE>
Note 4. Notes Payable
The following is a summary of Notes Payable at March 31, 1999 and December
31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Revolving Facility with GE Capital $ 75,606 $ 51,765
Securitization Note Payable 44,596 49,967
Note Payable Collateralized by the Common Stock of our Securitization Subsidiaries 19,999 12,234
Note Payable Collateralized by Finance Receivables Contracts 28,876 -
Mortgage Loan with Finance Company 3,386 3,386
Others 897 967
------------ ------------
Subtotal 173,360 118,319
Less: Unamortized Loan Fees 1,456 1,025
------------ ------------
Notes Payable $ 171,904 $ 117,294
============ ============
</TABLE>
Note 5. Common Stock Equivalents
Net Earnings (Loss) per common share amounts are based on the weighted
average number of common shares and common stock equivalents outstanding for the
three month periods ended March 31, 1999, and 1998 as follows (in thousands,
except for per share amounts):
<TABLE>
<CAPTION>
March 31, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Income from Continuing Operations $ 420 $ 3,729
================ ================
Net Earnings (Loss) $ 420 $ (1,866)
================ ================
Basic EPS-Weighted Average Shares Outstanding 15,650 18,557
================ ================
Basic Earnings (Loss) Per Share from:
Continuing Operations $ 0.03 $ 0.20
================ ================
Net Earnings (Loss) $ 0.03 $ (0.10)
================ ================
Basic EPS-Weighted Average Shares Outstanding 15,650 18,557
Effect of Diluted Securities:
Warrants - 87
Stock Options 135 449
---------------- ----------------
Dilutive EPS-Weighted Average Shared Outstanding 15,785 19,093
================ ================
Diluted Earnings (Loss) Per Share from:
Continuing Operations $ 0.03 $ 0.20
================ ================
Net Earnings (Loss) $ 0.03 $ (0.10)
================ ================
Warrants Not Included in Diluted EPS Since Antidilutive 1,556 715
================ ================
Stock Options Not Included in Diluted EPS since Antidilutive 1,153 603
================ ================
</TABLE>
Note 6. Business Segments
We have two divisions: dealership operations and non-dealership operations.
Within our divisions we have six distinct business segments. Within the
dealership operations division, the segments consist of retail car sales
operations (company dealerships), the income generated from the finance
receivables generated at the Ugly Duckling dealerships and corporate and other
operations. Under the non-dealership operations division, the segments consist
of the Cygnet dealer program, bulk purchasing and loan servicing, and corporate
and other operations.
Page 6
<PAGE>
A summary of operating activity by business segment for the three months
ended March 31, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Dealership Operations Non Dealership Operations
-------------------------------------------- ------------------------------------------
Company
Company Dealership Corporate Cygnet Cygnet Loan Corporate
Dealerships Receivables and Other Dealer Servicing and Other Total
----------- ----------- --------- ---------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999:
Sales of Used Cars $ 106,443 $ - $ - $ - $ - $ - $ 106,443
Less: Cost of Used Cars Sold 60,097 - - - - - 60,097
Provision for Credit Losses 21,893 5,871 - 797 - - 28,561
---------- ----------- --------- ----------- ------------ ------------- ------------
24,453 (5,871) - (797) - - 17,785
---------- ----------- --------- ----------- ------------ ------------- ------------
Interest Income - 10,312 61 3,317 313 - 14,003
Servicing and Other Income 6 2,883 45 47 6,691 - 9,672
---------- ----------- --------- ----------- ------------ ------------- ------------
Income before Operating Expenses 24,459 7,324 106 2,567 7,004 - 41,460
---------- ----------- --------- ----------- ------------ ------------- ------------
Operating Expenses:
Selling and Marketing 6,378 35 3 - 6,416
General and Administrative 11,102 4,590 5,332 963 5,821 745 28,553
Depreciation and Amortization 791 283 521 78 321 141 2,135
---------- ----------- --------- ----------- ------------ ------------- ------------
18,271 4,873 5,853 1,076 6,145 886 37,104
---------- ----------- --------- ----------- ------------ ------------- ------------
Operating Income $ 6,188 $ 2,451 $ (5,747)$ 1,491 $ 859 $ (886) $ 4,356
========== =========== ========= =========== ============ ============= ============
1998:
Sales of Used Cars $ 72,973 $ - $ - $ - $ - $ - $ 72,973
Less: Cost of Used Cars Sold 39,731 - - - - - 39,731
Provision for Credit Losses 15,034 - - 328 - - 15,362
---------- ----------- --------- ----------- ------------ ------------- ------------
18,208 - - (328) - - 17,880
---------- ----------- --------- ----------- ------------ ------------- ------------
Interest Income - 3,816 64 1,598 727 - 6,205
Gain on Sale of Loans - 4,614 - - - - 4,614
Servicing and Other Income 41 3,825 46 - - - 3,912
---------- ----------- --------- ----------- ------------ ------------- ------------
Income before Operating Expenses 18,249 12,255 110 1,270 727 - 32,611
---------- ----------- --------- ----------- ------------ ------------- ------------
Operating Expenses:
Selling and Marketing 4,878 - - 43 - - 4,921
General and Administrative 10,506 4,555 2,619 515 - 591 18,786
Depreciation and Amortization 613 337 201 22 - - 1,173
---------- ----------- --------- ----------- ------------ ------------- ------------
15,997 4,892 2,820 580 - 591 24,880
---------- ----------- --------- ----------- ------------ ------------- ------------
Operating Income $ 2,252 $ 7,363 $ 2,710) $ 690 $ 727 $ (591) $ 7,731
========== =========== ========= =========== ============ ============= ============
</TABLE>
Note 7. Discontinued Operations
In February 1998, we announced our intention to close our branch office
network, through which we purchased retail installment contracts from third
party dealers, and exit this line of business. We substantially completed the
branch office closure as of March 31, 1998. We are continuing to negotiate lease
settlements and terminations with respect to our branch office network closure.
As a result of the branch office network closure, we reclassified the results of
operations of the branch office network in the accompanying condensed
consolidated balance sheets and condensed consolidated statements of operations
to discontinued operations.
The components of Net Assets of Discontinued Operations as of March 31,
1999 and December 31, 1998 follow (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Finance Receivables, net $ 24,282 $ 30,649
Residuals in Finance Receivables Sold 6,052 7,875
Investments Held in Trust 2,971 3,665
Disposal Liability (3,000) (3,673)
---------------- ----------------
Net Assets of Discontinued Operations $ 30,305 $ 38,516
================ ================
</TABLE>
Page 7
<PAGE>
Note 8. Use of Estimates
The preparation of our consolidated financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement and the reported amounts of revenues and expenses during
the reporting period.
Actual results could differ from our estimates.
Note 9. Certain Bankruptcy Remote Entities
Ugly Duckling Receivables Corporation ("UDRC") and Ugly Duckling Receivables
Corporation II ("UDRC II") (collectively referred to as "Securitization
Subsidiaries"), are our wholly-owned special purpose "bankruptcy remote
entities." Their assets, including assets classified as Discontinued Operations,
include Residuals in Finance Receivables Sold and Investments Held In Trust, in
the amounts of approximately $34.5 million and $25.6 million, respectively, at
March 31, 1999. These amounts would not be available to satisfy claims of our
creditors on a consolidated basis.
Note 10. Reclassifications
We have made certain reclassifications to previously reported information to
conform to the current presentation.
Page 8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our Quarterly Report on Form 10-Q contains forward looking statements. We
may make additional written or oral forward looking statements 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 are not
limited to, projections of revenues, income, or loss, capital expenditures,
plans for future operations, financing needs or plans, and plans relating to our
products or services, 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. We
undertake 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
Financial Condition and Results of Operations," 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. We operate the largest chain of buy here-pay here used car
dealerships in the United States. We sell and finance our used vehicles to
customers within the sub-prime segment of the used car market. Our customers
will typically have limited credit histories, low incomes or past credit
problems. At March 31, 1999, we operated 58 dealerships located in several large
markets, including Los Angeles, Atlanta, Tampa, San Antonio, Phoenix and Dallas.
In addition to our dealership and financing operations, we also
o provide financing to other independent used car dealers through our
Cygnet dealer program,
o service and collect large portfolios of finance receivablesowned by
others, and
o manage selected financial assets that we acquire from financially
distressed third parties.
From 1994 through the first quarter of 1998, we maintained a national branch
office network that acquired and serviced retail installment contracts from
numerous independent third party dealers. We discontinued these operations in
1998.
Below is a summary of our businesses by division and their related segments:
[OBJECT OMITTED]
The chart above shows Ugly Duckling with two operating divisions. Dealership
operations is the first division. Dealership operations has three distinct
segments. Retail sales is its first segment. This is the segment that operates
our chain of Ugly Duckling Car Sales dealerships. Portfolio and loan servicing
is the second segment of dealership operations. This segment holds and services
the loan portfolios originated or acquired by our dealership operations.
Page 9
<PAGE>
Finally, dealership operations has an administration segment that provides
corporate administration to the division. Our non-dealership operations division
also contains three segments. The first non-dealership operations segment is the
bulk purchasing/loan servicing segment. In this segment, we acquire loan
portfolios from third parties and provide loan servicing for third parties. The
second segment of non-dealership operations is the Cygnet dealer program under
which we provide various credit facilities to independent used car dealers.
Finally, the non-dealership operations also have an administration segment that
provides corporate administration to the non-dealership operations. Last, the
chart shows our discontinued operations, which contains our branch office
network that we closed in February 1998 and the loans we acquired through that
network.
Company Dealership Operations
We commenced dealership operations in 1992 with the acquisition of two
dealerships in Arizona, and have expanded aggressively since then through a
combination of acquisitions and development of new stores. Our most significant
growth occurred in 1997, when
o we acquired from Seminole Finance, Inc. and related companies
(Seminole), four dealerships in Tampa/St. Petersburg and a contract
portfolio of approximately $31.1 million;
o we purchased from E-Z Plan, Inc. (E-Z Plan), seven dealerships in San
Antonio and a contract portfolio of approximately $24.3 million;
o we purchased from Kars-Yes Holdings, Inc. and related companies
(Kars), six dealerships in the Los Angeles market, two in the Miami
market, two in the Atlanta market, and two in the Dallas market; and
o we opened our first used car dealership in the Las Vegas market, two
additional dealerships in the Albuquerque market and one additional
dealership in the Phoenix market. We also closed a dealership in
Arizona.
We continued our aggressive growth in 1998, adding 17 new dealerships in our
existing markets. We opened one dealership in the Albuquerque market, four
dealerships in the Atlanta market, three dealerships in the Dallas market, two
dealerships in the Los Angeles market, two dealerships in the Phoenix market,
two dealerships in the San Antonio market, and three dealerships in the Tampa
market. We also closed two dealerships in Miami and exited that market. We had a
total of 56 dealerships in operation at December 31, 1998.
In the first quarter of 1999, we added a dealership in the Tampa and Dallas
markets, which brought our total number of dealerships to 58. The following
table summarizes the number of stores we had in operation by major market as of
March 31, 1999, and each of the last three years ended December 31, 1998:
<TABLE>
<CAPTION>
Number of Stores by Market
----------------------------------------------------------------
March 31, December 31,
--------------- -------------------------------
1999 1998 1997 1996
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Phoenix 9 9 7 5
San Antonio 9 9 7 -
Atlanta 9 9 5 -
Los Angeles 8 8 6 -
Tampa 9 8 5 -
Dallas 7 6 3 -
Tucson 3 3 3 3
Albuquerque 3 3 2 -
Las Vegas 1 1 1 -
Miami - - 2 -
--------- --------- --------- ---------
58 56 41 8
========= ========= ========= =========
</TABLE>
Non-Dealership Operations
Cygnet Dealer Program. In 1997 we began operating the Cygnet dealer program,
which provides qualified dealers with warehouse purchase facilities and
revolving lines of credit primarily secured by the dealers' finance receivable
portfolios. We extend credit facilities that are subject to various collateral
coverage ratios, maximum advance rates, and performance measurements, depending
on the financial condition of the dealer and the quality of the finance
receivables originated. The dealer remains responsible for collection of finance
receivable payments and retains control of the customer relationship. As a
condition to providing financing, each dealer is required to satisfy certain
criteria to qualify for the program, report collection activities to us on a
daily basis and provide us with periodic financial statements. In addition, our
dealers are "audited" by our audit department on a periodic basis.
Bulk Purchasing and Loan Servicing Operations. We have entered into several
large servicing and/or bulk purchasing transactions involving third party dealer
contract portfolios. Under these transactions, we have acquired loan portfolios
or participation interests in loan portfolios that we also service. During April
1999, we decided to close our loan servicing facility in Nashville, Tennessee,
and consolidate all of our loan servicing operations in our two remaining
facilities, which are located in Aurora, Colorado and Plano, Texas.
Page 10
<PAGE>
In April 1998, we announced that our Board of Directors had directed our
management team to separate our dealership operations and non-dealership
operations into separate, publicly held companies. Our stockholders approved a
proposal to split-up the company through a rights offering at the annual
stockholders meeting held in August 1998. Due to a lack of stockholder interest,
however, we canceled the rights offering. In the first quarter of 1999, we
discontinued efforts to sell or spin off the Cygnet dealer program and bulk
purchasing and loan servicing operations.
Discontinued Operations
In 1994, we acquired Champion Financial Services, Inc., an independent
automobile finance company. In April 1995, we initiated an aggressive plan to
expand Champion's branch office network and, by December 31, 1997, we operated
83 branch offices across the country. In February 1998, we announced our
intention to close the branch office network and exit this line of business in
the first quarter of 1998. We recorded a pre-tax charge to discontinued
operations totaling approximately $9.1 million (approximately $5.6 million, net
of income taxes) during the first quarter of 1998. In addition, a $6.0 million
charge (approximately $3.6 million, net of income taxes) was taken during the
third quarter of 1998 due primarily to higher than anticipated loan losses and
servicing expenses. The branch office closure was substantially complete by the
end of the first quarter of 1998.
In the following discussion and analysis we explain the general financial
condition and the results of operations of Ugly Duckling and its subsidiaries.
In particular, we analyze and explain the changes in the results of operations
of our various business segments for the first quarter of 1999 compared to the
first quarter of 1998.
Results of Operations for the Three Months Ended March 31, 1999 and 1998
Income items in our Statement of Operations consist of:
o Sales of Used Cars
less Cost of Used Cars Sold
less Provision for Credit Losses
o Interest Income
o Gain on Sale of Loans
o Servicing and Other Income
Page 11
<PAGE>
<TABLE>
<CAPTION>
Sales of Used Cars and Cost of Used Cars Sold
Three Months Ended March 31,
(dollars in thousands)
1999 1998
----------- ----------
<S> <C> <C>
Used Cars Sold (Units) 12,754 9,439
=========== ==========
Sales of Used Cars $ 106,443 $ 72,973
Cost of Used Cars Sold 60,097 39,731
----------- ----------
Gross Margin $ 46,346 $ 33,242
=========== ==========
Gross Margin % 43.5% 45.6%
=========== ==========
Per Unit Sold:
Sales of Used Cars $ 8,346 $ 7,731
Cost of Used Cars Sold 4,712 4,209
----------- ----------
Gross Margin $ 3,634 $ 3,522
=========== ==========
</TABLE>
The number of cars we sold (units) increased by 35.1% for the three months
ended March 31, 1999 over the same period in 1998. Same store unit sales for the
three months ended March 31, 1999 increased 5.0 % compared to the three month
period ended March 31, 1998. The increase in our same store unit sales was
primarily a result of the maturation of stores purchased or opened in late 1997.
We anticipate future revenue growth will come from increasing the number of our
dealerships and not from higher sales volumes at existing dealerships.
Our Used Car Sales revenues increased by 45.9% for the three ended March 31,
1999 over the same period ended March 31, 1998. The growth for these periods
reflects increases in the number of dealerships in operation and the average
unit sales price. The Cost of Used Cars Sold increased by 51.3% for the three
months ended March 31, 1999 over the same period ended March 31, 1998. The gross
margin on used car sales (Sales of Used Cars less Cost of Used Cars Sold
excluding Provision for Credit Losses) increased by 39.4% for the three months
ended March 31, 1999 over the same period ended March 31, 1998. The gross margin
per car sold for the first quarter of 1999 is comparable to the first quarter of
1998.
Our average sales price per car increased by 8.0% for the three months ended
March 31, 1999 over the three months ended March 31, 1998. The increase in the
average sales price was necessary to offset the increase in the Cost of Used
Cars Sold. On a per unit basis, the Cost of Used Cars Sold increased by 12.0%
for the three months ended March 31, 1999 over the three months ended March 31,
1998. The increase in our average cost per used car sold is primarily due to an
increase in the direct cost of the cars we acquire and re-sell.
Page 12
<PAGE>
Provision for Credit Losses
We record provisions for credit losses in our dealership operations and our
non-dealership operations.
Dealership Operations. Following is a summary of the Provision for Credit
Losses from our dealership operations:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------- ------------
<S> <C> <C>
Provision for Credit Losses (in thousands) $27,764 $15,034
============= ============
Provision per contact originated $2,198 $1,610
============= ============
Provision as a percentage of
principal balances originated 27.0% 21.6%
============= ============
</TABLE>
The Provision for Credit Losses in our dealership operations increased by
84.7% in the three months ended March 31, 1999 over the three months ended March
31, 1998. The Provision for Credit Losses per unit originated at our dealerships
increased by $588 or 36.5% in the three months ended March 31, 1999 over the
three months ended March 31, 1998. When we changed how we structure
securitizations for accounting purposes in the fourth quarter of 1998, we also
changed the timing of providing for credit losses. For periods prior to the
fourth quarter of 1998, we generally provided a Provision for Credit Losses of
approximately 21% of the loan principal balance at the time of origination to
record the loan at the lower of cost or market. However, as a consequence of our
revised securitization structure, we will now be retaining securitized loans on
our balance sheet for accounting purposes and recognizing income over the life
of the contracts. We record the provision for credit losses at 27% of the
principal balance at the time of origination.
Non-Dealership Operations. The provision for credit losses in our
non-dealership operations increased by 143.0% to $797,000 in the three months
ended March 31, 1999 from $328,000 in the three months ended March 31, 1998. The
increase was primarily due to the significant increase in loans under the Cygnet
dealer program.
See also "Allowance for Credit Losses" below.
Interest Income
We generate Interest Income from both our dealership operations and our
non-dealership operations.
Dealership Operations. Interest Income consists primarily of interest on
finance receivables from our dealership sales and income from Residuals in
Finance Receivables Sold from our Securitized Contract Sales (defined below).
Interest Income increased by 167.3% to $10.4 million for the three months ended
March 31, 1999 from $6.5 million for the three months ended March 31, 1998. The
increase was primarily due to the increase in the average finance receivables
retained on our balance sheet. Because we structured most of our securitizations
to recognize income as sales for accounting purposes prior to 1999, there were
fewer receivables retained on our balance sheet and Interest Income was lower in
these periods. See "Securitizations-Dealership Operations" below for additional
discussion of our securitization transactions and our on balance sheet
portfolio.
A primary element of our sales strategy is to provide financing to our
customers, almost all of whom are sub-prime borrowers. As summarized in the
following table, we continue to increase the percentage of sales revenue
financed, and the number of units sold and financed.
Three Months Ended March 31,
1999 1998
------------ ---------
Percentage of sales revenue financed 96.5% 95.5%
Percentage of sales units financed 99.1% 98.9%
Page 13
<PAGE>
As a result of our expansion into markets with interest rate limits,
the yield on our dealership receivable contracts has gone down. The average
effective yield on finance receivables from our dealerships was approximately
25.3% for the three months ended March 31, 1999 and 26.0% for the three months
ended March 31, 1998. Our policy is to charge 29.9% per year on our dealership
contracts. However, in those states that impose interest rate limits, such as
Texas and Florida, we charge the maximum interest rate permitted.
Non-Dealership Operations. In our non-dealership operations, we generate
interest income primarily from our Cygnet dealer program and from a loan we made
to First Merchants as part of its bankruptcy proceedings. Interest Income from
the First Merchants transaction decreased by 56.9% to $313,000 for the three
months ended March 31, 1999 from $727,000 for the three months ended March 31,
1998. Interest Income from the Cygnet dealer program increased by 107.6% to $3.3
million for the three months ended March 31, 1999 from $1.6 million for the
three months ended March 31, 1998. The increase in interest income in the Cygnet
dealer program reflects a significant increase in the amount of loans
outstanding during the three months ended March 31, 1999 compared to the three
months ended March 31, 1998.
Gain on Sale of Loans
Dealership Operations. The gain on sale of finance receivables we have
recorded prior to the fourth quarter of 1998 was generated from securitizations
that were structured as sale transactions (Securitization Contract Sales).
During the fourth quarter of 1998, we began structuring our securitization
transactions as Securitized Borrowings (defined below) for accounting purposes
instead of sales transactions and, therefore, we will not recognize gains on the
sale of loans from securitization transactions in the future. We recorded Gains
on Sale of Loans related to securitized contract sales of zero for the three
months ended March 31, 1999 and $4.6 million during the three months ended March
31, 1998. See "Securitizations-Dealership Operations" below for a summary of the
structure of our securitizations.
Servicing and Other Income
We generate Servicing and Other Income from both our dealership operations
and our non-dealership operations. A summary of Servicing and Other Income
follows for the three months ending March 31, 1999 and 1998 (in thousands):
Dealership Non-Dealership
Operations Operations Total
--------------- -------------- ------------
March 31, 1999 $ 2,934 $ 6,738 $ 9,672
=============== ============== ============
March 31, 1998 $ 3,912 $ - $ 3,912
=============== ============== ============
Dealership Operations. Servicing and Other Income decreased by 25.0% to
$2.9 million in the three months ended March 31, 1999 compared to the $3.9
million recognized in the three months ended March 31, 1998. We service the
securitized contracts that were included in the Securitized Contract Sales
transactions for monthly fees ranging from .25% to .33% of the beginning of
month principal balances (3.0% to 4.0% per year). We do not, however, recognize
service fee income on the contracts included in our Securitized Borrowings. The
significant decrease in Servicing and Other Income is primarily due to the
decrease in the principal balance of (1) contracts being serviced under the
previous securitization structure and (2) a portfolio we service on behalf of a
third party. We anticipate that our future Servicing and Other Income will
decline as the principal balance of the contracts serviced under the Securitized
Contract Sales agreements and the third party portfolio will continue to
decrease.
Page 14
<PAGE>
Non-Dealership Operations. Our Service Fee and Other Income in the first
quarter 1999 totaled $6.7 million. Our servicing fee is generally a percentage
of the portfolio balance (generally 3.25% to 4.0% per year) with a minimum fee
per loan serviced (generally $14 to $17 per month). Our service fee income is
tied to the contract principal dollars and units that we service and will
continue to decline, subject to the incentive compensation discussed below,
unless we increase the number and amount of contracts we are servicing. We have
not entered into any loan servicing agreements thus far in 1999 and expect that
our service fee income will continue to decline as the principal balances of the
portfolios that we are currently servicing decrease. We did not recognize any
servicing income in the first quarter 1998, as we did not begin servicing loans
in our non-dealership operations until April 1998.
Our non-dealership operations have entered into servicing agreements with
two companies that have filed and subsequently emerged from bankruptcy and
continue to operate under their approved plans of reorganization. Under the
terms of the respective servicing agreements and approved plans of
reorganization, once certain creditors of the bankrupt companies have been paid
in full, we are entitled to certain incentive compensation in excess of the
servicing fees that we have earned to date. As of March 31, 1999, we estimate
that the total incentive compensation from both agreements could range from $0
to $8.0 million. We have not accrued any fee income from these incentives.
Income before Operating Expenses
As a result of our continued expansion, Income before Operating Expenses
grew by 27.1% to $41.5 million for the three months ended March 31, 1999 from
$32.6 million for the three months ended March 31, 1998. Growth of Sales of Used
Cars, Interest Income, and Servicing and Other Income were the primary
contributors to the increase.
Operating Expenses
Operating Expenses consist of:
o Selling and Marketing Expenses,
o General and Administrative Expenses, and
o Depreciation and Amortization.
Page 15
<PAGE>
A summary of operating expenses for our business segments for the three
months ended March 31, 1999 and 1998 follows (in thousands):
<TABLE>
<CAPTION>
Dealership Operations Non-Dealership Operations
------------------------------------ -----------------------------------
Company
Company Dealership Corporate Cygnet Cygnet Loan Corporate
Dealerships Receivables and Other Dealer Servicing and Other Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999:
Selling and Marketing $ 6,378 $ - $ - $ 35 $ 3 $ - $ 6,416
General and Administrative 11,102 4,590 5,332 963 5,821 745 28,553
Depreciation and Amortization 791 283 521 78 321 141 2,135
========= ======== ======= ======= ======= ====== ========
$ 18,271 $ 4,873 $5,853 $1,076 $6,145 $ 886 $37,104
========= ======== ======= ======= ======= ====== ========
1998:
Selling and Marketing $ 4,878 $ - $ - $ 43 $ - $ - $ 4,921
General and Administrative 10,506 4,555 2,619 515 - 591 18,786
Depreciation and Amortization 613 337 201 22 - - 1,173
========= ======== ======= ======= ======= ====== ========
$ 15,997 $ 4,892 $2,820 $ 580 $ - $ 591 $24,880
========= ======== ======= ======= ======= ====== ========
</TABLE>
Selling and Marketing Expenses. A summary of Selling and Marketing
Expense as a percentage of Sales of Used Cars and Selling and Marketing Expense
per car sold from our dealership operations follows:
1999 1998
-------- -------
Selling and Marketing Expense as a
Percent of Sales of Used Cars 6.0% 6.7%
======== =======
Selling and Marketing Expense
per Car Sold $ 500 $ 517
======== =======
For the three months ended March 31, 1999 and 1998, Selling and Marketing
Expenses consisted almost entirely of advertising costs and commissions relating
to our dealership operations. Selling and Marketing Expenses increased by 30.8%
to $6.4 million for the three months ended March 31, 1999 from $4.9 million for
the three months ended March 31, 1998. The decrease in Selling and Marketing
Expense as a percentage of Sales of Used Cars and on a per unit basis from 1998
to 1999 is due to the significant increase in the number of cars sold in 1999
compared to 1998 and an increase in the selling price of units sold and
management's decision to reduce expenditures for advertising on a per car basis.
General and Administrative Expenses. General and Administrative Expenses
increased by 52.0% to $28.6 million for the three months ended March 31, 1999
from $18.8 million for the three months ended March 31, 1998. The increase in
General and Administrative Expenses was primarily a result of the addition of
our bulk purchasing and loan servicing operations, the expansion of
infrastructure to administer the increased number of used car dealerships in
operation, and the growth of the Cygnet dealer program.
Depreciation and Amortization. Depreciation and Amortization consists of
depreciation and amortization on our property and equipment and amortization of
goodwill and trademarks. Depreciation and amortization increased by 82.0% to
$2.1 million for the three months ended March 31, 1999 from $1.2 million for the
three months ended March 31, 1998. The increase in 1999 was primarily due to
depreciation from our non-dealership operations and an increase in software
amortization of our investment in our integrated car sales and loan servicing
system.
Interest Expense
Interest expense increased by 143.4% to $3.7 million for the three months
ended March 31, 1999 from $1.5 million for the three months ended March 31,
1998. The increase in the first quarter of 1999 was primarily due to increased
borrowings under our Securitization Note Payable, Notes Payable and Subordinated
Notes Payable. The increased borrowings were used primarily to fund the
increases in Finance Receivables in our dealership operations and Cygnet dealer.
Page 16
<PAGE>
Income Taxes
Income taxes totaled $280,000 for the three months ended March 31, 1999, and
$2.5 million for the three months ended March 31, 1998. Our effective tax rate
was 40.0% for the three months ended March 31, 1999 and 40.1% for the three
months ended March 31, 1998.
Discontinued Operations
We 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 related to the closure of our branch office
network. In addition, we recorded a $6.0 million charge (approximately $3.6
million, net of income taxes) during the third quarter of 1998 due primarily to
higher than anticipated loan losses and servicing expenses. The charges we
recorded to Discontinued Operations represent the total estimated net loss we
expect to realize from the branch office network closure. As a result, there was
no income or loss from Discontinued Operations for the three months ended March
31, 1999.
Financial Position
Total assets increased by 17.5% to $406.6 million at March 31, 1999 from
$346.0 million at December 31, 1998. The increase was due primarily to an
increase in Finance Receivables of $74.7 million to $237.9 million at March 31,
1999 from $163.2 million at December 31, 1998. Our dealership operations'
Finance Receivables increased approximately $63.9 million and our non-dealership
operations' Finance Receivables increased approximately $10.8 million primarily
as a result of growth of the Cygnet dealer program.
We financed the increases in assets primarily through additional borrowings,
represented by increases in Notes Payable. Notes Payable increased by $54.6
million to $171.9 million at March 31, 1999 from $117.3 million at December 31,
1998. We obtained a $30 million repurchase facility in the first quarter of
1999, which resulted in the increase in Collateralized Notes Payable. The
increase in our Notes Payable is attributable to an increase in the balance of
our revolving line of credit, which totaled approximately $75.6 million at March
31, 1999, compared to $51.8 million at December 31, 1998.
Growth in Finance Receivables. As a result of our continued expansion,
contract receivables managed by our dealership operations have continued to
increase. The following table reflects the growth in period end balances of our
dealership operations measured in terms of the principal amount and the number
of contracts outstanding.
<TABLE>
<CAPTION>
Total Contracts Outstanding - Dealership Operations
(In thousands, except number of contracts)
March 31, 1999 December 31, 1998
--------------------------------- ----------------------------------
Principal Number of Principal Number of
Amount Contracts Amount Contracts
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Managed Portfolio $ 341,040 56,333 $ 292,683 49,601
Less: Portfolios Securitized and Sold 158,890 28,409 198,747 37,186
--------------------------------- ----------------------------------
Total Retained Principal $ 182,150 27,924 $ 93,936 12,415
================================= ==================================
</TABLE>
In addition to the loan portfolio summarized above, the Company also
services loan portfolios totaling approximately $92.1 million ($36.1 million for
Kars and $56.0 million from branch office originations) as of March 31, 1999 and
$121.2 million ($47.9 million for Kars and $73.3 million from branch office
originations) as of December 31, 1998.
The following table reflects the growth in contract originations measured in
terms of the principal amount and the number of contracts.
Page 17
<PAGE>
Total Contracts Originated/Purchased - Dealership Operations:
(In Thousands, Except Number of Contracts and Average Principal)
Three Months Ending March 31,
1999 1998
--------------- ---------------------
Principal Amount $ 102,733 $ 69,708
Number of Contracts 12,634 9,339
Average Principal $ 8,131 $ 7,464
Finance Receivable principal balances generated or acquired by our
dealership operations during the three months ended March 31, 1999 increased by
47.4% to $102.7 million from $69.7 million for the three months ended March 31,
1998. The increase in average principal financed is due to the increase in our
average sales price per car sold.
Our non-dealership operations began servicing loans on behalf of First
Merchants in April 1998, and began servicing additional loan portfolios on
behalf of other third parties throughout 1998. At March 31, 1999 our
non-dealership bulk purchasing/loan servicing operations were servicing a total
of approximately $480.0 million in finance receivables (approximately 70,000
contracts) compared to $587.3 million in finance receivables (approximately
80,000 contracts) at December 31, 1998.
Cygnet dealer's net investment in finance receivables purchased from two
third party dealers totaled approximately $16.3 million representing
approximately 30.1% of Cygnet dealer's net finance receivables portfolio as of
March 31, 1999. We did not have any other third party dealer loans that exceeded
10% of our Cygnet dealer finance receivable portfolio as of March 31, 1999.
Allowance for Credit Losses
We have established an Allowance for Credit Losses (Allowance) to cover
inherent credit losses on the contracts currently in our portfolio. We
established the Allowance by recording an expense through the Provision for
Credit Losses.
For Finance Receivables generated at our dealerships, our policy is to
charge off a contract the earlier of:
o when we believe it is uncollectible, or
o when it is delinquent for more than 90 days.
The following table reflects activity in the Allowance of our dealership
operations, as well as information regarding charge off activity for the three
months ended March 31, 1999 and 1998, in thousands.
<TABLE>
<CAPTION>
1999 1998
------------------ -----------------
<S> <C> <C>
Allowance Activity:
Balance, Beginning of Period $ 24,777 $ 10,356
Provision for Credit Losses 27,764 15,034
Reduction Attributable to Loans Sold - (17,090)
Net Charge Offs (3,913) (2,147)
------------------ -----------------
Balance, End of Period $ 48,628 $ 6,153
================== =================
Allowance as a Percent of Period End Balances 26.7% 18.5%
================== =================
Charge off Activity:
Principal Balances $ 5,155 $ 3,197
Recoveries, Net (1,242) (1,050)
------------------ -----------------
Net Charge Offs $ (3,913) $ (2,147)
================== =================
Net Charge Offs as a Percent of Average Principal Outstanding 11.4% 13.1%
================== =================
Average Principal Balance Outstanding $ 137,669 $ 65,567
================== =================
</TABLE>
Page 18
<PAGE>
The Allowance on contracts from dealership operations was 26.7% of the
outstanding principal balances as of March 31, 1999 and 18.5% of outstanding
principal balances as of March 31, 1998. The increase is due to the change in
the structure to securitized borrowings, which resulted in us retaining the
securitized loans from our fourth quarter securitization on balance sheet. We
increased the provision for credit losses to 27% of the principal balance for
loans originated beginning in the fourth quarter of 1998 as we intend to hold
the balance sheet portfolio for investment and not for sale.
The Allowance on contracts from non-dealership operations was 3.5% of the
outstanding principal balances as of March 31, 1999 and 2.9% of outstanding
principal balances as of March 31, 1998. In addition, our non-dealership
operations held non-refundable discounts and security deposits from third party
dealers totaling $22.3 million, which represented 32.2% of outstanding principal
balances as of March 31, 1999. Our non-dealership operations held non-refundable
discounts and security deposits from third party dealers totaling $9.1 million,
which represented 27.6% of the outstanding principal balances as of March 31,
1998.
Even though a contract is charged off, we continue to attempt to collect the
contract. Recoveries as a percentage of principal balances charged off from
dealership operations averaged 24.1% for the three months ended March 31, 1999
compared to 32.8% for the three months ended March 31, 1998. Recoveries as a
percentage of principal balances charged off from non-dealership operations
averaged 52.4% for the year three months ended March 31, 1999 compared to 29.7%
for the three months ended March 31, 1998.
For Finance Receivables acquired by our non-dealership operations with
recourse to the seller, our general policy is to exercise the recourse
provisions in our agreements under the Cygnet dealer program when a contract is
delinquent for 45 days. For contracts not purchased with recourse, our policy is
similar to that of our dealership operations.
Static Pool Analysis
We use a "static pool" analysis to monitor performance for contracts we have
originated at our dealerships. In a static pool analysis, we assign each month's
originations to a unique pool and track the charge offs for each pool
separately. We calculate the cumulative net charge offs for each pool as a
percentage of that pool's original principal balances, based on the number of
complete payments made by the customer before charge off. The table below
displays the cumulative net charge offs of each pool as a percentage of original
contract cumulative balances, based on the quarter the loans were originated.
The table is further stratified by the number of payments made by our customers
prior to charge off. For periods denoted by "x", the pools have not seasoned
sufficiently to allow us to compute cumulative losses. For periods denoted by
"-", the pools have not yet reached the indicated cumulative age. While we
monitor static pools on a monthly basis, for presentation purposes, we are
presenting the information in the table below on a quarterly basis.
Currently reported cumulative losses may vary from those previously reported
for the reasons listed below, however, management believes that such variation
will not be material:
o ongoing collection efforts on charged off accounts, and
o the difference between final proceeds on the sale of repossessed
collateral versus our estimates of the sale proceeds.
The following table sets forth as of April 30, 1999, 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. The table also shows the
percent of principal reduction for each pool since inception and cumulative
total net losses incurred (TLI).
Page 19
<PAGE>
<TABLE>
<CAPTION>
POOL'S CUMULATIVE NET LOSSES AS PERCENTAGE OF POOL'S ORIGINAL
AGGREGATE PRINCIPAL BALANCE
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>
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 1.6% 9.1% 14.7% 20.4% 22.7% 23.6% 23.8% 100.0%
2nd Quarter $ 9,846 2.0% 8.5% 13.3% 18.1% 20.7% 22.2% 22.6% 99.9%
3rd Quarter $ 10,106 2.5% 7.9% 12.2% 18.8% 22.2% 23.6% 24.2% 99.5%
4th Quarter $ 8,426 1.5% 6.6% 11.7% 18.2% 22.6% 24.1% 24.7% 99.2%
1996:
1st Quarter $ 13,635 1.6% 8.0% 13.7% 20.7% 24.8% 26.2% 27.1% 97.8%
2nd Quarter $ 13,462 2.2% 9.2% 13.4% 22.1% 26.1% 27.7% 28.9% 95.4%
3rd Quarter $ 11,082 1.6% 6.9% 12.5% 21.5% 25.7% 28.0% 28.5% 91.8%
4th Quarter $ 10,817 0.6% 8.5% 16.0% 25.0% 29.3% 31.2% 31.2% 88.5%
1997:
1st Quarter $ 16,279 2.1% 10.6% 17.9% 24.6% 29.6% 30.9% 31.3% 83.8%
2nd Quarter $ 25,875 1.5% 9.9% 15.9% 22.8% 27.3% 27.5% 27.5% 75.9%
3rd Quarter $ 32,147 1.4% 8.4% 13.3% 22.6% 25.3% 26.4% 26.4% 68.7%
4th Quarter $ 42,529 1.5% 6.9% 12.7% 21.6% 23.4% X 23.4% 61.8%
1998:
1st Quarter $ 69,708 0.9% 6.9% 13.6% 22.0% X - 20.1% 53.6%
2nd Quarter $ 66,908 1.1% 8.1% 14.3% X - - 16.9% 40.5%
3rd Quarter $ 71,027 1.0% 8.1% X - - - 11.7% 27.7%
4th Quarter $ 69,583 1.0% X - - - - 4.7% 13.1%
1999:
1st Quarter $102,733 X - - - - - 0.3% 0.0%
</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
contract principal balances from dealership operations.
Retained Securitized Managed
------------------------------------
March 31, 1999:
31 to 60 days 2.3% 4.9% 3.5%
61 to 90 days 1.1% 2.8% 1.9%
December 31, 1998:
31 to 60 days 2.3% 5.2% 4.6%
61 to 90 days 0.5% 2.2% 1.9%
In accordance with our charge off policy, there are no accounts more than 90
days delinquent as of March 31, 1999 and December 31, 1998.
Securitizations--Dealership Operations
Structure of Securitizations. In the fourth quarter of 1998 we announced
that we were changing the way we structure transactions for accounting purposes
under our securitization program. Through September 30, 1998, we had structured
these transactions as sales for accounting purposes (Securitized Contract
Sales). However, beginning in the fourth quarter of 1998, we began structuring
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<PAGE>
securitizations for accounting purposes to retain the contract, and the related
Securitization Note Payable on our balance sheet and recognize the income over
the life of the contracts (Securitized Borrowings). This change will not affect
our prior securitizations. Historically, Gains on Sale of Loans have been
material to our reported revenues and net earnings. Altering the structure of
these transactions so that no gain is recognized at the time of a securitization
transaction will have a material effect on our reported revenues and net
earnings until such time as we accumulate Finance Receivables on our balance
sheet sufficient to generate interest income (net of interest, credit losses,
and other expenses) equivalent to the revenues that we had historically
recognized on our securitization transactions.
Under our securitization program, we transfer the securitized Finance
Receivables to our securitization subsidiaries who then assign and transfer the
Finance Receivables to separate trusts for either Securitized Contract Sales or
Securitized Borrowings. The trusts issue Class A certificates and subordinated
Class B certificates (Residuals in Finance Receivables Sold) to the
securitization subsidiaries. The securitization subsidiaries then sell the Class
A certificates to the investors and retain the Class B certificates. We continue
to service the securitized contracts.
Residuals in Finance Receivables Sold. The residuals are a component of
Finance Receivables and represent our retained interest (the Class B
certificates) in the Finance Receivables included in our Securitized Contract
Sales. We utilize a number of assumptions to determine the initial value of the
Residuals in Finance Receivables Sold. The Residuals in Finance Receivables Sold
represent the present value of the expected net cash flows of the securitization
trusts using the out of the trust method. The net cash flows out of the trusts
are the collections on the loans in the trust in excess of the Class A
certificate principal and interest payment and certain other trust expenses. The
assumptions used to compute the Residuals in Finance Receivables Sold include,
but are not limited to:
o charge off rates,
o repossession recovery rates,
o portfolio delinquency,
o prepayment rates, and
o trust expenses.
The Residuals in Finance Receivables Sold are adjusted monthly to
approximate the present value of the expected remaining net cash flows out of
the trusts. If actual cash flows on a securitization are below our original
estimates, and those differences appear to be other than temporary in nature, we
are required to revalue Residuals in Finance Receivables Sold and record a
charge to earnings based upon the reduction. The cumulative net loss at
origination assumption inherent in the securitization transactions we entered
into in 1996 and 1997 is approximately 27.5%. For the securitizations that we
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%. The remaining net charge offs in our Residuals in Finance
Receivables Sold as a percentage of the remaining principal balances of
securitized contracts was approximately 20.5% as of March 31, 1999, compared to
22.0% as of December 31, 1998. The balance of the Residuals in Finance
Receivables sold was $28.5 million at March 31, 1999 and $33.3 million as of
December 31, 1998. We classify the residuals as "held-to-maturity" securities in
accordance with SFAS No. 115.
Spread Account Requirements. We maintain a spread account under our
securitization agreements. The spread account is a reserve account that would be
used to repay the Class A certificates in the event collections on a particular
pool of finance receivables was insufficient to make the required payments. At
the time a securitization transaction is entered into, our securitization
subsidiary makes an initial cash deposit into the spread account, generally
equivalent to 4% of the initial underlying Finance Receivables principal
balance, and pledges this cash to the spread account agent. The trustee then
makes additional deposits to the spread account out of collections on the
securitized receivables as necessary to maintain the spread account to a
specified percentage, ranging from 6.0% to 10.5%, of the underlying Finance
Receivables' principal balance. The trustee will not make distributions to the
securitization subsidiaries on the Class B certificates unless:
o the spread account has the required balance,
o the required periodic payments to the Class A certificate holders are
current, and
o the trustee, servicer and other administrative costs are current.
At March 31, 1999, we met the targeted spread account balances under our
securitization agreements of $19.8 million. We also maintain spread accounts for
the securitization transactions that were consummated by our discontinued
operations. We had satisfied the spread account funding obligation of $3.0
million as of March 31, 1999 with respect to these securitization transactions.
Certain financial information regarding securitizations. During the first
quarter of 1998, we securitized $86.9 million in contracts, issuing $62.6
million in Class A certificates, and $24.3 million in Class B certificates. We
recorded the carrying value of the related Residuals in Finance Receivables Sold
at $14.7 million. We did not enter into a securitization transaction in the
first quarter of 1999.
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Liquidity and Capital Resources
In recent periods, our needs for additional capital resources have increased
in connection with the growth of our business. We require capital for:
o increases in our contract portfolio,
o expansion of our dealership network,
o our commitments under the First Merchants transaction,
o expansion of the Cygnet dealer program,
o common stock repurchases,
o the purchase of inventories,
o the purchase of property and equipment, and
o working capital and general corporate purposes.
We fund our capital requirements primarily through:
o operating cash flow,
o our revolving facility with General Electric Capital Corporation (GE
Capital),
o securitization transactions,
o supplemental borrowings, and
o in the past, equity offerings.
While to date we have met our liquidity requirements as needed, there can be
no assurance that we will be able to continue to do so in the future.
Operating Cash Flow
Net Cash Provided by Operating Activities increased by $23.6 million in the
three months ended March 31, 1999 to $47.0 million compared to the three months
ended March 31, 1998 of $23.4 million. The change in inventory and accounts
payable and accrued expenses contributed to the increase in operating cash flow
for the quarter.
Net Cash Used in Investing Activities increased by $79.5 million to $99.9
million in the three months ended March 31, 1999 compared to $20.4 million in
the three months ended March 31, 1998. The increase is primarily due to
increases in Cash Used in Investing Activities from purchases of Finance
Receivables, net decreases in Cash advanced under our Notes Receivable, which
were offset by increased collections of Finance Receivables and Notes
Receivable.
Net Cash Provided by Financing Activities increased by $32.7 million to
$46.3 million in the three months ended March 31, 1999 compared to $13.6 million
in the three months ended March 31, 1998. The increase is due to increases in
Notes Payable, net of increases in repayments of Notes Payable and the
acquisition of Treasury Stock.
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Financing Resources
Revolving Facility. The maximum commitment under our revolving credit
facility with GE Capital is $125.0 million. Under the revolving facility, we may
borrow:
o up to 65.0% of the principal balance of eligible contracts originated
from the sale of used cars,
o up to 86.0% of the principal balance of eligible contracts previously
originated by our branch office network,
o the lesser of $20 million or 58% of the direct vehicle costs for
eligible vehicle inventory, and
o the lesser of $15 million or 50% of eligible contracts or loans
originated under the Cygnet dealer program.
However, an amount up to $8.0 million of the borrowing capacity under the
revolving facility is not available at any time while our guarantee to the
purchaser of contracts acquired from First Merchants is outstanding. The
revolving facility expires in June 2000 and contains a provision that requires
us to pay GE Capital a termination fee of $200,000 if we terminate the revolving
facility prior to the expiration date. We secure the facility with substantially
all of our assets.
As of March 31, 1999, our borrowing capacity under the revolving facility
was $97.1 million, the aggregate principal amount outstanding under the
revolving facility was approximately $75.6 million, and the amount available to
be borrowed under the facility was $21.5 million. The revolving facility bears
interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 8.09% as
of March 31, 1999).
The revolving facility contains covenants that, among other things, limit
our ability to do the following without GE Capital's consent:
o incur additional indebtedness,
o make any change in our capital structure,
o 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, and
o make certain investments and capital expenditures.
The revolving facility also provides that an event of default will occur if
Mr. Ernest C. Garcia II owns less than 15.0% of our voting stock. Mr. Garcia
owned approximately 32.0% of our common stock at March 31, 1999.
In addition, we are also required to:
o be Year 2000 compliant no later than June 30, 1999 (see discussion
below under the Year 2000 Readiness Disclosure), and
o maintain specified financial ratios, including a debt to equity ratio
of 2.2 to 1 and a net worth of at least $110 million.
Under the terms of the revolving facility, we are required to maintain an
interest coverage ratio that we failed to satisfy during the three months ended
March 31, 1999. We failed to meet this covenant primarily due to the reduction
in earnings we recognized as a result of the change in our securitization
structure. GE Capital has waived the covenant violation as of March 31, 1999. In
May 1999, GE Capital amended the interest coverage ratio required by the
agreement to reflect the anticipated changes in our operating results due to the
change in securitization structure.
Securitizations. Our securitization program is a primary source of our
working capital. Since September 30, 1997, we have closed all of our
securitizations with private investors through Greenwich Capital Markets, Inc.
(Greenwich Capital). In March 1999, we executed a commitment letter with
Greenwich Capital to act as our exclusive agent in placing up to $300 million of
surety wrapped securities under our securitization program.
Securitizations generate cash flow for us from:
o the sale of Class A certificates,
o ongoing servicing fees, and
o excess cash flow distributions from collections on the contracts
securitized after:
o payments on the Class A certificates sold to third party
investors,
o payment of fees, expenses, and insurance premiums, and
o required deposits to the spread account.
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<PAGE>
In April 1999, we closed a securitization transaction through Greenwich
Capital. Under this transaction, we securitized approximately $120 million of
contracts and issued approximately $87 million of Class A certificates with an
annual interest rate of 5.7%. We received approximately $87 million in cash that
we used to repay our repurchase facility and pay down our revolving line of
credit.
Securitization also allows us to fix our cost of funds for a given contract
portfolio. Failure to regularly engage in securitization transactions will
adversely affect us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Securitizations--Dealership operations" for
a more complete description of our securitization program.
Supplemental Borrowings
Verde Debt. Prior to our public offering in September 1996, we historically
borrowed substantial amounts from Verde Investments, Inc. (Verde), which is
owned by our Chairman and Chief Executive Officer, Ernest C. Garcia II. The
Subordinated Notes Payable balances outstanding to Verde totaled $10.0 million
as of March 31, 1999 and as of December 31, 1998. Under the terms of this note,
we are required to make monthly payments of interest and annual payments of
principal in the amount of $2.0 million. These borrowings accrue interest at an
annual rate of 10.0%. Except for the debt incurred related to our exchange
offer, this debt is junior to all of our other indebtedness and we may suspend
interest and principal payments if we are in default on obligations to any other
creditors. In July 1997, our Board of Directors approved the prepayment of the
$10.0 million in subordinated debt after the earlier of the following:
o the completion of a debt offering,
o the First Merchants transactions have been completed or the cash
requirements for completion of the transaction are known, or
o we either have cash in excess of our current needs or have funds
available under our financing sources in excess of our current needs.
No such prepayment has been made as of the date of filing of this Form 10-Q.
Any prepayment would require the consent of certain of our lenders.
Exchange Offer. In the fourth quarter of 1998, we acquired approximately 2.7
million shares of our common stock in exchange for approximately $17.5 million
of subordinated debentures. The debentures are unsecured and are subordinate to
all of our existing and future indebtedness. We must pay interest on the
debentures twice a year at 12% per year. We are required to pay the principal
amount of the debentures on October 23, 2003.
We issued the debentures at a premium of approximately $3.9 million over the
market value of the shares of our common stock that were exchanged for the
debentures. Accordingly, the debt was recorded at $13.6 million on our balance
sheet. The premium will be amortized over the life of the debentures and results
in an effective annual interest rate of approximately 18.8%. We can redeem all
or part of the debentures at any time, subject to the subordination provision of
the debentures. The balance of the subordinated debentures was $13.8 million at
March 31, 1999.
Senior Subordinated Notes. In February 1998, we borrowed a total of $15.0
million of subordinated debt from unrelated third parties for a three year term.
We pay interest on this debt quarterly at 12% per annum. This debt is:
o senior to the Verde subordinated note (described above) and the
subordinated debentures issued in our exchange offer (also described
above), and
o subordinate to our other indebtedness.
We issued warrants to the lenders of this debt to purchase up to 500,000
shares of our common stock at an exercise price of $10.00 per share, exercisable
at any time until the later of February 2001, or when the debt is paid in full.
In July 1998, we borrowed a total of $5.0 million in subordinated debt from
unrelated third parties for a three-year term. Under the terms of the loan
agreement, we were required to issue warrants to purchase 115,000 shares of our
common stock by December 31, 1998 if the loan was not paid in full by that date.
The warrants were to have been issued at an exercise price of 120% of the
average trading price for our common stock for the 20 consecutive trading days
prior to the issuance of the warrants. In the first quarter of 1999, we prepaid
$3.0 million of the loans and the lenders waived their right to a proportionate
amount of the warrants. We have agreed to pay the remaining $2.0 million on June
30, 1999 and we anticipate not having to issue the remaining warrants if we
repay the loan by that date.
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<PAGE>
Additional Financing. On November 12, 1998, we borrowed $15.0 million for a
term of 364 days from Greenwich Capital. We pay interest on this loan at an
interest rate equal to LIBOR plus 400 basis points. We secured the loan with the
common stock of our securitization subsidiaries. In March 1999, we borrowed
$20.0 million for a term of 278 days from Greenwich Capital. $1.5 million was
used to repay the remaining balance of the $15.0 million Greenwich Capital loan.
The new loan was secured by the common stock of our securitization subsidiaries.
The interest rate is at LIBOR plus 500 basis points and we paid an origination
fee of 100 basis points.
On March 26, 1999, we borrowed approximately $28.9 million from Greenwich
Capital under a repurchase facility with a 62% advance rate, bearing interest at
8.5%, and maturing May 31, 1999. This repurchase facility was repaid subsequent
to March 31, 1999. In addition, in March 1999, we executed a commitment letter
with Greenwich Capital in which, subject to satisfaction of certain conditions,
Greenwich Capital agreed to provide us with a $100 million surety-wrapped
warehouse line of credit at a rate equal to LIBOR plus 110 basis points.
Debt Shelf Registration. In 1997, we registered up to $200 million of our
debt securities under the Securities Act of 1933. There can be no assurance that
we will be able to use this registration statement to sell debt securities, or
successfully register and sell other debt securities in the future.
Capital Expenditures and Commitments
During the three months ended March 31, 1999, we opened two new dealerships.
We also have 6 more dealerships under development. The direct cost of opening a
dealership is primarily a function of whether we lease a facility or construct a
facility. A leased facility costs approximately $650,000 to develop, while a
facility we construct costs approximately $1.7 million. In addition, we require
capital to finance the portfolio that we carry on our balance sheet for each
store. It takes approximately $2.2 million in cash to support a typical
stabilized store portfolio with our existing 65% advance rate under our GE
facility. Additionally, it takes approximately 30 months for a store portfolio
to reach a stabilized level.
On July 11, 1997, we entered into an agreement to provide debtor in
possession financing to First Merchants (DIP facility). As of March 31, 1999,
the maximum commitment on the DIP facility was $11.5 million and the outstanding
balance on the DIP facility totaled $11.1 million. We have obligations under our
debtor-in-possession credit facility. First Merchants is currently in default on
the DIP facility. We have negotiated a settlement with them that will increase
our funding obligation by $2.0 million, subject to satisfaction of certain
conditions.
We intend to finance the construction of new dealerships and the DIP
facility financing through operating cash flows and supplemental borrowings,
including amounts available under the revolving facility and the securitization
program.
Common Stock Repurchase Program. During the first quarter of 1999 we
repurchased approximately 928,000 shares of our common stock for $5.2 million
under our stock repurchase program. We have repurchased a total of one million
shares of our common stock under the program, which is the total number of
shares the Board of Directors authorized. In April 1999, our Board of Directors
authorized, subject to certain conditions, a second stock repurchase program
that would allow us to repurchase up to 2.5 million additional shares of our
common stock. Purchases may be made depending on market conditions, share price,
and other factors.
Year 2000 Readiness Disclosure
Many older computer programs refer to years only in terms of their final
two digits. Such programs may interpret the year 2000 to mean the year 1900
instead. The problem affects not only computer software, but also computer
hardware and other systems containing processors and embedded chips. Business
systems affected by this problem may not be able to accurately process date
related information before, during or after January 1, 2000. This is commonly
referred to as the Year 2000 problem. Failures of our own business systems due
to the Year 2000 problem as well as those of our suppliers and business partners
could materially adversely affect our business. We are in the process of
addressing these issues.
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Our Year 2000 compliance program consists of:
o identification and assessment of critical computer programs, hardware
and other business equipment and systems,
o remediation and testing,
o assessment of the Year 2000 readiness of our critical suppliers,
vendors and business partners, and o contingency planning.
Identification and Assessment
The first component of our Year 2000 compliance program is complete. We have
identified our critical computer programs, hardware, and other equipment to
determine which systems are compliant, or must be replaced or remediated.
Remediation and Testing
Dealership Operations. We have finished remediating the program code and
underlying data and regression testing on the program code modifications for our
integrated car sales and loan servicing system (CLASS System). We placed the
modified program code into production in April 1999 and have begun performing
future date testing on the modified code.
Non-Dealership Operations. Our non-dealership loan servicing operations
currently utilize several loan processing and collections programs provided
through third party service bureaus. Based upon certifications we have received
from the software vendors, and independent testing we have performed, we believe
that our loan processing and collections programs are Year 2000 compliant.
Our Cygnet dealer program utilizes one of the same loan processing and
collections programs used by our loan servicing operations. The service bureau
that provides the program has written a custom module for us and has stated the
custom module is Year 2000 compliant. We anticipate performing and completing
independent Year 2000 compliance testing in May 1999.
We believe the remediation of the critical business systems used by our
dealership and non-dealership operations will be substantially completed during
the second quarter of 1999.
Assessment of Business Partners
We have also identified critical suppliers, vendors, and other business
partners and we are taking steps to determine their Year 2000 readiness. These
steps include interviews, questionnaires, and other types of inquiries. Because
of the large number of business systems that our business partners use and their
varying levels of Year 2000 readiness, it is difficult to determine how any Year
2000 issues of our business partners will affect us. We are not currently aware
of any business relationships with third parties that we believe will likely
result in a significant disruption of our businesses. We believe that our
greatest risk is with our utility suppliers, banking and financial institution
partners, and suppliers of telecommunications services, all of which are
operating within the United States. Potential consequences if we, or our
business partners, are not Year 2000 compliant include:
o failure to operate from a lack of power,
o shortage of cash flow,
o disruption or errors in loan collection and processing efforts, and
o delays in receiving inventory, supplies, and services.
If any of these events occurred, the results could have a material adverse
impact on us and our operations.
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Contingency Plans
We are also developing contingency plans to mitigate the risks that could
occur in the event of a Year 2000 business disruption. Contingency plans may
include:
o increasing inventory levels,
o securing additional financing,
o relocating operations to unaffected sites,
o vendor/supplier replacement,
o utilizing temporary manual or spreadsheet-based processes, or
o other prudent actions.
Costs
We currently estimate that remediation and testing of our business systems
will cost between $2.2 million and $2.7 million. Most of these costs will be
expensed and funded by our operating line of credit. Costs to date approximate
$2.0 million, including approximately $140,000 of internal payroll costs,
substantially all of which have been charged to general and administrative
expense. Costs incurred in the three month period ended March 31, 1999
approximated $600,000. No such costs were incurred in the comparable period in
1998. We cannot currently estimate costs associated with developing and
implementing contingency measures. The scheduled completion dates and costs
associated with the various components of our Year 2000 compliance program
described above are estimates and are subject to change.
Accounting Matters
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 became
effective for us January 1, 1999. SFAS No. 132 establishes standards for the
information that public enterprises report in annual financial statements. The
adoption of SFAS No. 132 did not have a material impact on us.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133) which becomes effective for us July 1,
1999. We believe the adoption of SFAS No. 133 will not have a material impact on
us.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We sell our cars on an "as is" basis. We require all customers to
acknowledge in writing on the date of sale that we disclaim any obligation for
vehicle-related problems that subsequently occur. Although we believe that these
disclaimers are enforceable under applicable laws, there can be no assurance
that they will be upheld in every instance. Despite obtaining these disclaimers,
in the ordinary course of business, we receive complaints from customers
relating to vehicle condition problems as well as alleged violations of federal
and state consumer lending or other similar laws and regulations. Most of these
complaints are made directly to us or to various consumer protection
organizations and are subsequently resolved. However, customers occasionally
name us as a defendant in civil suits filed in state, local, or small claims
courts. Additionally, in the ordinary course of business, we are a defendant in
various other types of legal proceedings. Although we cannot determine at this
time the amount of the ultimate exposure from these lawsuits, if any, we, based
on the advice of counsel, do not expect the final outcome to have a material
adverse effect on our financial position.
Item 2. Changes in Securities and Use of Proceeds.
(a) None
(b) None
(c) None
(d) Not Applicable
Item 3. Defaults Upon Senior Securities.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and
Capital Resources -- Financing Resources
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
In April 1999, Mr. Garcia advised our Board of Directors that during 1999 he
intends to step down from his position as Chief Executive Officer of Ugly
Duckling. He will remain as our Chairman of the Board. Mr. Garcia plans to
transition his CEO duties to Gregory B. Sullivan, our current president and
Chief Operating Officer and one of our directors, in anticipation of Mr.
Sullivan being appointed as our Chief Executive Officer.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.1--Engagement Letter between Greenwich Capital Markets,
Inc. and Registrant dated March 16, 1999 for Greenwich to Act as
Placement Agent for not less than $300 Million of Securitized Loans
Exhibit 10.2--Commitment Letter between Greenwich Capital Markets,
Inc. and Registrant dated March 17, 1999 with Term Sheet for $100
Million Revolving Credit Facility
Exhibit 10.3--$20 Million Loan agreement between Greenwich Capital
Financial Products, Inc. and Registrant dated March 18, 1999
Exhibit 10.3(a)--Stock Pledge Agreement among Greenwich Capital
Financial Products, Inc., Registrant, and certain related parties,
dated March 18, 1999
Exhibit 10.4 -- Amendment to the Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement between General
Electric Capital Corporation and Registrant dated March 25, 1999
regarding year 2000 date change
Exhibit 11 -- Statement regarding computation per share earnings (see
note 5 of Notes to condensed consolidated Financial Statements)
Exhibit 27 -- Financial Data Schedule
Exhibit 99 --Statement Regarding Forward Looking Statements and Risk
Factors
(b) Reports on Form 8-K.
During the first quarter of 1999, the Company filed one report on Form 8-K.
The report on Form 8-K, dated and filed March 16, 1999, pursuant to Items 5 and
7 filed as an exhibit to the Form 8-K a press release dated March 16, 1999
titled "Ugly Duckling Corporation Announces Reclassification of Cygnet Dealer
Into Continuing Operations and Anticipated First Quarter Results." After the
first quarter of 1999, the Company has not filed a report on Form 8-K.
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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: May 13, 1999
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EXHIBIT INDEX
Exhibit
Number Description
- ------- ------------------
10.1 Engagement Letter between Greenwich Capital Markets, Inc. and
Registrant dated March 16, 1999 for Greenwich to Act as Placement
Agent for not less than $300 Million of Securitized Loans
10.2 Commitment Letter between Greenwich Capital Markets, Inc. and
Registrant dated March 17, 1999 with Term Sheet for $100 Million
Revolving Credit Facility
10.3 $20 Million Loan agreement between Greenwich Capital Financial
Products, Inc. and Registrant dated March 18, 1999
10.3(a) Stock Pledge Agreement among Greenwich Capital Financial Products,
Inc., Registrant, and certain related parties, dated March 18, 1999
10.4 Amendment to the Amended and Restated Motor Vehicle Installment
Contract Loan and Security Agreement between General Electric Capital
Corporation and Registrant dated March 25, 1999 regarding year 2000
date change
11 Statement regarding computation of per share earnings (see note 5 of
Notes to Condensed Consolidated Financial Statements)
27 Financial Data Schedule
99 Statement Regarding Forward Looking Statements and Risk Factors
Page 31
EXHIBIT 10.1
March 16, 1999
Proprietary and Confidential
Mr. Ernest Garcia
Chairman and Chief Executive Officer
Ugly Duckling Corporation
2625 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
Dear Ernie:
We are pleased to confirm the terms under which Ugly Duckling Corporation (the
"Company") proposes to engage Greenwich Capital Markets, Inc. ("Greenwich") as
its exclusive private placement agent in connection with future securitizations
of not less than $300 million of surety bonds secured by the Company's sub-prime
automobile finance receivables, subject to the terms and conditions set forth in
the attached Summary of Terms and in Greenwich's placement agent agreement (for
privately placed securities) (this "Engagement"). Each of the parties hereto
acknowledge that this Engagement is being executed in connection with a
Commitment Letter, dated March 12, 1999, between Greenwich and the Company in
which Greenwich committed to providing the Company with certain financing
facilities.
This Engagement sets forth the entire agreement of Greenwich and the Company
with respect to the subject matter hereof and supersedes all prior discussions
and correspondence. This Engagement will be governed by and construed in
accordance with New York law without regard to its conflicts of law provisions.
Any placement agent agreement entered into between Greenwich and the Company
will supersede the terms of this Engagement; provided, however, the obligation
to engage Greenwich as placement agent per the "Term of Engagement" in the
attached Summary of Terms shall survive.
If terms of this Engagement are acceptable to the Company, please indicate your
agreement to be bound by the provisions of this Engagement, by executing this
Engagement in the space provided below.
Very truly yours,
/S/ IRA PLATT
- -------------
Ira J. Platt
Vice President
Accepted and agreed:
By: /S/ ERNEST C. GARCIA
---------------------
Ernest C. Garcia
Chairman and Chief Executive Officer
<PAGE>
SUB-PRIME AUTOMOBILE FINANCE RECEIVABLES
SECURITIZATION ENGAGEMENT
Summary of Terms
Engagement: Greenwich is engaged to act as sole and exclusive
private placement agent for securitizations of the
Company's sub-prime automobile and light duty truck
receivables for the term of this Engagement.
Term of the
Engagement: Greenwich's Engagement is for all of the Company's
sub-prime automobile finance receivable
securitizations until not less than $300,000,000
aggregate amount of surety-enhanced securities have
been issued. In addition, the Engagement is to
encompass not less than three distinct securitization
transactions.
Placement Fees: The Company shall pay Greenwich a placement fee for
each securitization as follows:
Applicable Fees as a Percentage
of the Par Value of Type of
Type of Securities Securities Issued
------------------- ------------------
AAA-Rated 0.50%
A-Rated 0.75%
Greenwich will privately place the offered securities
on a best efforts basis at a market spread determined
as of the pricing date.
Conditions
Precedent: The placement by Greenwich of the Company's
securities will be conditioned upon the following:
(i) Execution of definitive documentation relating to the
issuance of the securities in form and substance
satisfactory to Greenwich;
(ii) Receipt of legal opinions customary in rated
asset-backed securities transactions which are
satisfactory to Greenwich;
(iii)The execution by the Company of Greenwich's standard
placement agency agreement, relating to Greenwich's
placement of the securities pursuant to the Engagement,
which agreements will provide, among other things, for
the indemnification by the Company of Greenwich, its
affiliates, directors, officers, employees, agents,
consultants and counsel for material misstatements or
omissions or alleged misstatements or omissions
contained in any offering document prepared by the
Company in connection with the offering of securities;
(iv) No change of control shall have occurred with respect
to the Company or any of its subsidiaries or
affiliates;
(v) No material adverse change shall have occurred in the
financial or operating condition, business or prospects
of the Company or any of its subsidiaries or
affiliates; and
(vi) The performance of the Company's outstanding
securitized transactions and the credit quality of the
receivables underlying the subject securitizations
shall not have materially deteriorated.
<PAGE>
In addition, Greenwich reserves the right to conduct
continuing due diligence of the Company, its affiliates,
directors, officers, employees and significant shareholders
and, to the extent Greenwich at any time discovers any new
or previously existing but undiscovered event or condition
which in Greenwich's sole discretion materially and
adversely affects (a) the expected performance of the
receivables, (b) the market for asset-backed securities of
this type, (c) the condition (financial or otherwise) of the
Company or its affiliates, or (d) the ability of the
Company, Greenwich or its affiliates to fulfill its or their
obligations under the Engagement, Greenwich shall have no
further obligation under the Engagement.
Representations
And Warranties: The Company will make, as of the cut-off date for the
Securitization, customary representations and
warranties in form and content as may be required by
Greenwich, rating agencies or a credit enhancement
provider.
Expenses: The Company shall reimburse Greenwich for all
out-of-pocket expenses (except for travel and related
expenses of Greenwich employees) associated with the
transactions, including without limitation legal and
rating agency costs and expenses incurred in
connection with the preparation and negotiation of
securitization-related documentation (including the
fees and expenses of Greenwich's counsel), up-front
and ongoing custodial and trustee fees and expenses,
bond insurer premiums, fees and expenses (if
applicable), due diligence contractors and
accountants' comfort letters, whether advanced by the
Company or by Greenwich as incurred. Where possible,
Greenwich will negotiate fee and/or expense caps on
behalf of the Company.
EXHIBIT 10.2
March 17, 1999
Proprietary and Confidential
Mr. Ernest C. Garcia II
Chairman and Chief Executive Officer
Ugly Duckling Corporation
2625 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
Dear Ernie:
Greenwich Capital Markets, Inc., together with its affiliate Greenwich Capital
Financial Products, Inc., (together "Greenwich") is pleased to provide Ugly
Duckling Corporation (the "Company") with a financing commitment in connection
with the Company's expressed desire for a surety-enhanced revolving credit
facility substantially upon the terms and conditions of the Term Sheet attached
as Exhibit A. The provisions and conditions of the Term Sheet set out in Exhibit
A form part of this letter as if they were fully set forth in this letter.
Our Commitment to enter into the Facilities is expressly conditioned upon the
following and upon any additional conditions precedent set forth in the attached
Summary of Terms: (i) execution of definitive documentation relating to the
Facilities in form and substance satisfactory to Greenwich and its legal
counsel; (ii) receipt of the legal opinions described in the attached Summary of
terms and such other opinions as may be reasonably requested by Greenwich or its
legal counsel; (iii) no change of control shall have occurred with respect to
the Company or any of its subsidiaries or affiliates; (iv) no material adverse
change shall have occurred in the financial or operating condition, business or
prospects of the Company or any of its subsidiaries or affiliates; and (v) the
entering into the transactions contemplated by this Commitment by GCFP will not
contravene any applicable rules or regulations.
In addition, Greenwich reserves the right to conduct continuing due diligence of
the Company, its affiliates, directors, officers, employees and significant
shareholders and, to the extent Greenwich at any time discovers any new or
previously existing but undiscovered event or condition that, in Greenwich's
sole discretion, materially and adversely effects (a) the expected performance
of the receivables, (b) the condition (financial or otherwise) of the Company or
its affiliates, or (c) the ability of the Company, Greenwich or its affiliates
to fulfill its or their obligations under this Commitment, Greenwich shall have
no further obligation under this Commitment.
This Commitment sets forth the entire agreement of Greenwich and the Company
with respect to the subject matter hereof and supersedes all prior discussions
and correspondence. This Commitment will be governed by and construed in
accordance with New York law without regard to its conflicts of law provisions.
Any underwriting or placement agent agreement entered into between Greenwich and
the Company will supersede the terms of this Commitment.
<PAGE>
If terms of this Commitment are acceptable to the Company, please indicate your
agreement to be bound by the provisions of this Commitment, by executing this
Commitment in the space provided below.
We appreciate the opportunity to be of service to you and look forward to
working with you.
Very truly yours,
/S/ IRA PLATT
- -------------
Ira J. Platt
Vice President
Accepted and agreed as of the date first written above:
By: /S/ ERNEST C. GARCIA
--------------------
Ernest C. Garcia
Chairman and Chief Executive Officer
<PAGE>
March 16, 1999
Proprietary & Confidential
Exhibit A
Ugly Duckling Corporation
$100,000,000 Surety-Enhanced Revolving Credit Facility
Facility Size: $100,000,000.
Facility Structure: Warehouse facility providing for the
issuance of Variable Funding Notes (collectively, the
"Note") secured by eligible sub-prime automobile
finance receivables originated and/or purchased by
UDC entities. The note will be 100% wrapped by the
Surety Provider.
Issuer: A bankruptcy-remote,special purpose subsidiary of UDC
acceptable to the Surety Provider will hold all
pledged loan collateral and issue the Note.
Note Purchaser: Greenwich Capital Markets, Inc. or one of its
affiliates ("GCM") will commit to purchase the Note.
Surety Provider: MBIA Insurance Corporation.
Term: 364-day term, renewable at the discretion of GCM /
MBIA.
Collateral Advance Rate: To be determined by the Surety Provider. Advance
should approximate the net advance rates for
surety-wrapped securities on recent UDC term
securitizations.
Interest Rate: One month LIBOR plus 1.10%, with an internally capped
rate of 10%.
Eligibility Criteria: To be determined by Surety Provider, though expected
to closely mirror those in existence for UDC term
securitizations.
Funding Frequency: Weekly, in increments of no less than $5mm.
Takedown Provision: 75% of the receivables sold into the Facility to be
securitized no less frequently than every 6 months.
Alternatively, a six month aging provision may be
required.
Commitment Fee: $100,000, due at closing.
Non-Use Fee: 10 bp on that portion of the Facility not utilized,
calculated and paid on a monthly basis. This fee is
to be waived in the event that the average funding
balance for the month exceeds $50mm.
MBIA Constraints: Standard MBIA credit provisions for
receivable pool performance, pool attribute
considerations and UDC financial statement covenants.
Standard MBIA Event of Default provisions, including
rapid amortization events.
Hedging Requirement: UDC will be responsible for either (a)
hedging the facility borrowing rate through the
purchase of an interest rate cap or (b) bearing the
implied enhancement cost associated with an internal
cap of 10%.
Origination Expenses: UDC to bear all legal and due diligence expenses of
GCM / MBIA in constructing the Facility.
EXHIBIT 10.3
EXECUTION COPY
LOAN AGREEMENT
Dated as of March 18, 1999
by and between
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
a Delaware corporation
("Lender")
and
UGLY DUCKLING CORPORATION,
a Delaware corporation
("Borrower")
$20,000,000 Collateralized Loan
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS...........................................................1
1.1 Defined Terms................................................1
1.2 Other Interpretive Provisions...............................10
1.3 Accounting Principles.......................................11
1.4 Times.......................................................11
ARTICLE II
THE LOAN............................................................11
2.1 The Loan....................................................11
2.2 Payment Upon Collections....................................12
2.3 Payment Upon Maturity.......................................12
2.4 Interest....................................................12
2.5 Voluntary Prepayments.......................................12
2.6 Application of Payments.....................................13
2.7 Prepayment..................................................13
2.8 Fees........................................................13
2.9 Fees and Interest...........................................13
2.10 Payments by Borrower........................................13
ARTICLE III
SECURITY AGREEMENT AND COLLATERAL..................................14
3.1 Security for Obligations....................................14
3.2 Security Documents..........................................14
3.3 Lender's Duty Regarding Collateral..........................14
3.4 Borrower's Duties Regarding Collateral......................15
3.5 Power of Attorney...........................................15
3.6 Collateral Inspections......................................16
ARTICLE IV
CONDITIONS PRECEDENT; TERM OF AGREEMENT.............................16
4.1 Conditions Precedent........................................16
4.2 Receipt of Documents. ......................................16
4.3 Term........................................................18
4.4 Effect of Termination.......................................18
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES.......................................18
5.1 No Encumbrances.............................................18
5.2 Location of Chief Executive Office; FEIN....................18
5.3 Due Organization and Qualification; Subsidiaries............19
5.4 Due Authorization: No Conflict..............................19
5.5 Litigation..................................................20
5.6 Financial Statements; No Material Adverse Change............20
5.7 Securitization Documents. .................................20
5.8 ERISA.......................................................20
5.9 Environmental and Safety Matters............................21
5.10 Tax Matters.................................................21
ARTICLE VI
AFFIRMATIVE COVENANTS...............................................21
6.1 Financial Statements and Other Documents....................21
6.2 Inspection of Property......................................22
6.3 Default Disclosure..........................................22
6.4 Notices to Lender...........................................23
6.5 Books and Records...........................................23
6.6 Compliance and Preservation.................................23
6.7 Perfection of Liens.........................................23
6.8 Cooperation.................................................23
6.9 Use of Proceeds.............................................23
6.10 Securitizations.............................................24
6.11 Compliance with Covenants...................................24
6.12 Payment of Indebtedness.....................................24
6.13 Tangible Net Worth..........................................24
6.14 Debt to Tangible Net Worth..................................24
ARTICLE VII
NEGATIVE COVENANTS.................................................24
7.1 Liens.......................................................24
7.2 Indebtedness................................................24
7.3 Restrictions on Fundamental Changes.........................24
7.4 Disposal of Collateral......................................25
7.5 Change Name.................................................25
<PAGE>
7.6 Amendments..................................................25
7.7 Change of Control...........................................25
7.8 Distributions...............................................25
7.9 Standing Dividend Resolutions...............................25
7.10 Change in Location of Chief Executive Office................25
7.11 No Prohibited Transactions Under ERISA......................25
7.12 Stock Buyback Program.......................................26
7.13 Verde Subordinated Debt.....................................26
ARTICLE VIII
EVENTS OF DEFAULT/REMEDIES........................................27
8.1 Event of Default............................................27
8.2 Lender's Rights and Remedies................................28
ARTICLE IX
MISCELLANEOUS......................................................29
9.1 Amendments and Waivers......................................29
9.2 Notices.....................................................29
9.3 No Waiver: Cumulative Remedies..............................30
9.4 Costs and Expenses..........................................31
9.5 Indemnity...................................................31
9.6 Marshaling: Payments Set Aside..............................32
9.7 Successors and Assigns......................................32
9.8 Set-off.....................................................32
9.9 Counterparts................................................32
9.10 Severability................................................32
9.11 No Third Parties Benefited..................................32
9.12 Time........................................................33
9.13 Governing Law and Jurisdiction..............................33
9.14 Entire Agreement............................................33
9.15 Interpretation..............................................33
9.16 Assignment..................................................34
9.17 Revival and Reinstatement of Obligations....................34
<PAGE>
SCHEDULES AND EXHIBITS
Schedule A Borrower's Subsidiaries
Schedule B Warrants, Options, etc.
Schedule C Litigation
Schedule D Exceptions to Financial Statements
Schedule E Permitted Liens
Schedule F Class B Certificates
Schedule G Subordinated Indebtedness
Exhibit A UDRC and UDRCII Securitization Documents
<PAGE>
LOAN AGREEMENT
This LOAN AGREEMENT (the "Agreement"), is entered into as of March 18,
1999, between GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation
("Lender"), with a place of business located at 600 Steamboat Road, Greenwich,
Connecticut 06830 and UGLY DUCKLING CORPORATION, a Delaware corporation
("Borrower"), with a place of business located at 2525 East Camelback Road,
Suite 500, Phoenix, Arizona 85016.
Lender has agreed to make to Borrower a collateralized loan (the "Loan")
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 I
DEFINITIONS
I.1 Defined Terms. In addition to the terms defined elsewhere in this
Agreement, the following terms have the following meanings:
"1998-D Spread Account Reduction Amount" means the amount (if any, but in
any event not to exceed 2.00% of the Pool Balance) that is released from the
Spread Account under the 1998-D PSA on a one-time basis (by means of a reduction
in the percentage specified in the definition of Specified Spread Account
Amount) with the consent of the Insurer. Capitalized terms used in this
definition and not otherwise defined in this Agreement shall have the meanings
they are given in the 1998-D PSA.
"1998-D PSA" means the Pooling and Servicing Agreement dated as of December
22, 1998 among UDRC II, UDCC and Harris Bank & Trust Company, as
trustee.
"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. Without
limitation, any director, executive officer or beneficial owner of twenty
percent (20%) or more of the equity of a Person shall for the purposes of this
Agreement, be deemed to control the other Person. In no event shall Lender be
deemed an "Affiliate" of Borrower.
Page 1
<PAGE>
"Agreement" means this Loan Agreement, as amended, supplemented or modified
from time to time in accordance with the terms hereof.
"Attorney Costs" means and includes all fees and disbursements of any law
firm or other external counsel.
"Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.ss.101
et seq.), as amended, and any successor statute.
"Bond Insurance Policy" shall mean a financial guaranty or financial
insurance policy issued by MBIA or any of its Affiliates or any other financial
guarantor in respect of one or more classes of investor certificates or other
interests issued by a Securitization Trust.
"Borrower's Books" means all of Borrower's books and records including:
ledgers, records indicating, summarizing, or evidencing Borrower's properties or
assets (including the Collateral and the assets of any Subsidiaries of Borrower)
or liabilities; all information relating to Borrower's business operations or
financial condition; and all computer programs, disk or tape files, printouts,
runs, or other computer prepared information.
"Business Day" means any day other than a Saturday, Sunday or national
holiday.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation
and Liability Act (49 U.S.C. Section 9601, et seq.).
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) becomes, after the date of this Agreement, the
"beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange
Act of 1934), directly or indirectly, of more than 25% of the total voting power
of all classes of stock then outstanding of Borrower entitled to vote in the
election of directors.
"Closing Date" means the date on which all conditions precedent set forth
in Section 4.1 are either satisfied or waived by Lender and Lender makes the
Loan.
"Code" means the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder.
"Collateral" means all of the outstanding capital stock of UDRC and UDRCII.
Page 2
<PAGE>
"Collections" means all proceeds of, payments or other distributions of
principal, interest or other amounts on, and other amounts received by or on
behalf of Borrower in respect of the Collateral, including all amounts paid to
Lender pursuant to the UDRC Dividend Direction Letter and the UDRC II Dividend
Direction Letter, but excluding (so long as no Default or Event of Default has
occurred and is continuing at the time it is paid to UDRC II) the 1998-D Spread
Account Reduction Amount, if any.
"Debt" or "Indebtedness" means (i) indebtedness for borrowed money, (ii)
obligations evidenced by bonds, debentures, notes, matured reimbursable
obligations under letters of credit or other similar instruments, (iii)
obligations to pay the deferred purchase price of property or services other
than trade payables incurred in the ordinary course of business, (iv)
obligations as lessee under leases that shall have been or should be, in
accordance with GAAP recorded as capital leases, (v) obligations under direct or
indirect guaranties in respect of, and obligations (contingent or otherwise) to
purchase or otherwise acquire, or otherwise to assure a creditor against loss in
respect of, indebtedness or obligations of others of the kinds referred to in
clauses (i) through (iv), and (vi) liabilities in respect of unfunded vested
benefits under Pension Plans covered by Title IV of ERISA.
"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.
"Dollars", "dollars" and "$" each mean lawful money of the United States.
"Environmental and Safety Laws" means all Federal, state and local laws,
regulations and ordinances, relating to the discharge, handling, disposition or
treatment of Hazardous Materials and other substances or the protection of the
environment or of employee health and safety, including CERCLA, the Hazardous
Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. Section 7401, et seq.), the Clean Air
Act (42 U.S.C. Section 7401, et seq.), the Toxic Substances Control Act (15
U.S.C. Section 2601, et seq.), the Occupational Safety and Health Act (29 U.S.C.
Section 651, et seq.) and the Emergency Planning and Community Right-To-Know Act
(42 U.S.C. Section 11001, et seq.), each as the same may be amended and
supplemented.
"Environmental Liabilities and Costs" means, as to any Person, all
liabilities, obligations, responsibilities, remedial actions, losses, damages,
punitive damages, consequential damages, treble damages, contribution, cost
recovery, costs and expenses (including all fees, disbursements and expenses of
counsel, expert and consulting fees, and costs of investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of any
claim or demand, by any Person, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, permit, order or
agreement with any Federal, state or local governmental authority or other
Person, arising from environmental, health or safety conditions, or the release
or threatened release of a contaminant, pollutant or Hazardous Material into the
environment, resulting from the operations of such Person or its subsidiaries,
or breach of any Environmental and Safety Law or for which such Person or its
subsidiaries is otherwise liable or responsible.
Page 3
<PAGE>
"Equity Interests" means, with respect to a Person, any common stock,
preferred stock, partnership interest (whether general or limited) or other
equity or participating interest in such Person.
"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 8.1.
"FEIN" means Federal Employer Identification Number.
"Financing Statements" means the Financing Statements on Form UCC-1
relating to the Collateral filed in connection with the Pledge Agreement, dated
as of November 12, 1998, between Pledgor and Lender.
"Fiscal Quarter" means a fiscal quarter of Borrower.
"Fiscal Year" means a fiscal year of Borrower.
"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.
"GECC" means General Electric Capital Corporation, a New York corporation.
"GECC Agreement" shall mean the Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement, dated as of August 15, 1997,
by and between Borrower, GECC and certain other parties thereto, as such
agreement may be amended from time to time.
"Governing Documents" means, with respect to Borrower, Borrower's
certificate of incorporation and bylaws.
Page 4
<PAGE>
"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, body, authority, bureau, department
or instrumentality 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.
"Hazardous Materials" means (a) any material or substance defined as or
included in the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials," "toxic substances" or any other formulations intended to
define, list or classify substances by reason of their deleterious properties,
(b) any oil, petroleum or petroleum derived substance, (c) any flammable
substances or explosives, (d) any radioactive materials, (e) asbestos in any
form, (f) electrical equipment that contains any oil or dielectric fluid
containing levels of polychlorinated biphenyls in excess of fifty parts per
million, (g) pesticides or (h) any other chemical, material or substance,
exposure to which is prohibited, limited or regulated by any governmental agency
or authority or which may or could pose a hazard to the health and safety of
persons in the vicinity thereof.
"Indemnified Liabilities" has the meaning specified in Section 9.5.
"Indemnified Person" has the meaning specified in Section 9.5.
"Initial Principal Amount" means the amount of Twenty Million Dollars
($20,000,000).
"Interest Accrual Period" shall mean the one-month period from and
including a Payment Date to the close of business on the day preceding the next
Payment Date, except that the first Interest Accrual Period shall commence on
the Closing Date and end at the close of business on the day preceding the
Payment Date.
"Lender Costs" or "Lender Expenses" means all: (a) costs or expenses
(including taxes and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by Lender; (b) reasonable
out-of-pocket fees or charges paid or incurred by Lender in connection with
Lender's transactions with Borrower, including, fees or charges for
photocopying, notarization, couriers and messengers, telecommunication, public
record searches (including tax lien, litigation and UCC searches and including
searches with the patent and trademark office, the copyright office or the
department of motor vehicles), filing, recording, publication, appraisals, due
diligence, actual out-of-pocket costs and expenses incurred by Lender in the
disbursement of funds to Borrower (by wire transfer or otherwise); (c) actual
out-of-pocket charges paid or incurred by Lender resulting from the dishonor of
checks; (d) reasonable out-of-pocket costs and expenses paid or incurred by
Lender to correct any default or enforce any provision of the Loan Documents, or
in gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale, or advertising to sell the Collateral, or any
Page 5
<PAGE>
portion thereof, irrespective of whether a sale is consummated; (e) reasonable
costs and expenses paid or incurred by Lender in examining Borrower's Books; (f)
reasonable out-of pocket costs and expenses of third party claims or any other
suit paid or incurred by Lender in enforcing or defending the Loan Documents or
in connection with the transactions contemplated by the Loan Documents or
Lender's relationship with Borrower; and (g) Lender's reasonable Attorney Costs
incurred in advising, structuring, drafting, reviewing, administering, amending,
terminating, enforcing, defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"LIBOR" shall mean, with respect to an Interest Accrual Period, the rate
per annum equal to the rate appearing on Bloomberg on the first day of such
Interest Accrual Period, for the one-month term corresponding to such Interest
Accrual Period, or if such rate shall not be so quoted then the applicable rate
appearing at page 3750 of the Telerate Screen on the first day of such Interest
Accrual Period, or if neither such rate shall be so quoted, the rate per annum
at which Lender is offered Dollar deposits at or about 11:00 a.m., New York City
time, on such date by prime banks in the interbank eurodollar market where the
eurodollar and foreign currency exchange operations of Lender are then being
conducted, for delivery on the first day of such Interest Accrual Period for the
number of days in such Interest Accrual Period, and in an amount comparable to
the amount of the Loan on such day.
"Lien or Encumbrance"or "Liens and Encumbrances" 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.
"Loan Documents" means this Agreement, the Stock Pledge Agreement, the UDRC
Dividend Direction Letter, the UDRC II Dividend Direction Letter, the Financing
Statements, and all documents delivered to Lender in connection therewith.
"Material Adverse Change" or "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
Borrower or an Affiliate of Borrower, (b) the ability of Borrower 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" shall mean December 15, 1999.
"MBIA" shall mean MBIA Insurance Corporation.
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"Obligations" means all Debt, advances, debts, liabilities, obligations,
covenants and duties owing by Borrower to Lender, 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, absolute or
contingent, due or to become due, now existing or hereafter arising and however
acquired.
"Outstanding Principal Amount" means the Initial Principal Amount minus all
amounts applied to the repayment of the Loan pursuant to Section 2.6(c).
"Payment Date" shall mean the 15th day of each month during the term of
this Agreement.
"Permitted Liens" means (a) Liens held by Lender and (b) each lien existing
at or prior to the date of this Agreement that is identified on Schedule E to
this Agreement.
"Person" means a natural person, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, limited liability
company, joint venture or Governmental Authority.
"Repayment Date" means the earlier of (i) the Maturity Date or (ii) the
date that the Outstanding Principal Amount of the Loan outstanding hereunder,
together with all accrued interest in respect thereof and all other Obligations,
has been reduced to zero.
"Requirement of Law" means, as to any Person, any law (statutory or
common), treaty, rule or regulation or determination of an arbitrator or of a
Governmental Authority, in each case applicable to or binding upon the Person or
any of its property or to which the Person or any of its property is subject.
"Responsible Officer" means the chief executive officer or the president of
Borrower, 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 Borrower, or any other officer having substantially
the same authority and responsibility.
"Security Documents" means the writings described in Article III hereof, as
they may hereafter be amended, modified and/or supplemented, and all other
writings now or hereafter executed to create, evidence and/or perfect any
Lien(s) to secure the Loan or any portion(s) thereof.
"Securitization Default" means any default or event of default, or event or
occurrence which, with the passage of time or the giving of notice or both,
would become a default or event of default, by UDRC, UDRC II or any seller to
UDRC or UDRC II in their respective obligations under the UDRC Securitization
Documents or the UDRC II Securitization Documents, which has not been cured
within any applicable period thereunder.
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"Securitization Trust" shall mean any trust formed pursuant to a purchasing
agreement or a pooling and servicing agreement specified on Exhibit A hereto or
contemplated in clause (iii) of the definitions of UDRC Securitization Documents
and UDRC II Securitization Documents.
"Stock Pledge Agreement" means that certain Stock Pledge Agreement, dated
as of the date hereof, among UDCS as Pledgor, Borrower and Lender, pursuant to
which UDCS grants Lender a security interest in one hundred percent (100%) of
the issued and outstanding capital stock of each of UDRC and UDRC II.
"Subordinated Debt" shall mean the Debt set forth on Schedule G and any
Debt incurred after the date hereof as to which the repayment of principal and
interest is subordinated to repayment of the Loan pursuant to subordination
provisions that have been approved in writing by Lender.
"Subsidiary" of a Person means a corporation, partnership, limited
liability partnership, limited liability company, or other entity in which that
Person directly or indirectly owns or controls the shares of stock or other
ownership interests having ordinary voting power to elect a majority of the
board of directors (or appoint other comparable managers) of such corporation,
partnership, limited liability partnership, limited liability company, or other
entity.
"Tangible Net Worth" of Borrower shall mean the total of Borrower's and its
consolidated Subsidiaries' shareholders' equity (including capital stock,
additional paid-in capital and retained earnings) plus Subordinated Debt of
Borrower and its consolidated Subsidiaries, less (i) the total amount of all
Indebtedness owing to Borrower from its consolidated Subsidiaries, Affiliates,
shareholders, officers or employees, and (ii) the total amount of any intangible
assets of Borrower and its consolidated Subsidiaries, including unamortized
discounts, deferred charges and goodwill.
"Tax" means any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs, duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, intangible, ad valorem, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated or other tax
or other governmental charge of any kind whatsoever, including any interest,
penalty or additions thereto.
"Trustee" means Harris Trust and Savings Bank.
"UCC" means the Uniform Commercial Code as in effect from time to time in
the State of Arizona, and in any and all other states in which Borrower and/or
any of its Subsidiaries conduct, or are authorized to conduct business.
"UDCC" means Ugly Duckling Credit Corp., an Arizona corporation formerly
known as Champion Acceptance Corporation.
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"UDCS" means Ugly Duckling Car Sales and Finance Corporation, an Arizona
corporation formerly known as Duck Ventures, Inc.
"UDRC" shall mean Ugly Duckling Receivables Corp., a Delaware corporation.
"UDRC II" shall means Ugly Duckling Receivable Corp. II, a Delaware
corporation.
"UDRC Class B Certificates" shall mean the issued and outstanding Class B
Certificates issued by each Securitization Trust with respect to which UDRC is
the seller, including those set forth on Schedule F, which constitute all of the
UDRC Class B Certificates in existence on the Closing Date.
"UDRC II Class B Certificates" shall mean the currently issued and
outstanding, and all further issued and then outstanding, Class B Certificates
issued by each of Securitization Trust with respect to which UDRC II is the
seller, including those set forth on Schedule F, which constitute all of the
UDRCII Class B Certificates in existence on the Closing Date.
"UDRC Dividend Direction Letter" means the letter dated March 18, 1999 in
which Lender, UDRC, UDCC and Trustee agree that Trustee shall pay all
distributions in respect of the UDRC Class B Certificates directly to Lender.
"UDRC II Dividend Direction Letter" means the letter dated March 18, 1999
in which Lender, UDRC II, UDCC and Trustee agree that Trustee shall pay all
distributions (other than the 1998-D Spread Account Reduction Amount, if any) in
respect of the UDRC II Class B Certificates directly to Lender.
"UDRC Securitization Documents" shall mean each of (i) the purchase
agreements listed on Exhibit A hereto, (ii) the pooling and servicing agreements
listed on Exhibit A hereto, (iii) any similar purchase agreements or pooling and
servicing agreements entered into or acknowledged by Borrower, UDCC, UDRC or any
Affiliate of any of them after the date hereof, and (iv) the other agreements,
instruments, certificates and documents entered into or acknowledged by
Borrower, UDCC, UDRC or any Affiliate of any of them or by a Securitization
Trust.
"UDRC II Securitization Documents" shall mean each of (i) the purchase
agreements listed on Exhibit A hereto, (ii) the pooling and servicing agreements
listed on Exhibit A hereto, (iii) any similar purchase agreements or pooling and
servicing agreements entered into or acknowledged by Borrower, UDCC, UDRC II or
any Affiliate of any of them after the date hereof, and (iv) the other
agreements, instruments, certificates and documents entered into or acknowledged
by Borrower, UDCC, UDRC II or any Affiliate of any of them or by a
Securitization Trust.
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"UDRC Standing Dividend Resolution" shall mean the resolution adopted on
January 27, 1998 by the board of directors of UDRC (formerly Champion
Receivables Corp.) to the effect that any amounts received as distributions on
the UDRC Class B Certificates should be promptly distributed to Lender.
"UDRC II Standing Dividend Resolution" shall mean the resolution adopted on
January 27, 1998 by the board of directors of UDRC II (formerly Champion
Receivables Corp. II) to the effect that any amounts received as distributions
on the UDRC II Class B Certificates should be promptly distributed to Lender.
"Ugly Duckling Collateral" shall mean any installment contracts or
conditional sales contracts, with any amendments thereto, originated by Borrower
or its Subsidiaries pursuant to which a person has: (i) purchased a new or used
motor vehicle, (ii) granted a security interest in the motor vehicle, and (iii)
agreed to pay the unpaid purchase price and a finance charge in periodic
installments.
"United States" and "U.S." each means the United States of America.
"Voidable Transfer" has the meaning set forth in Section 9.17.
I.2 Other Interpretive Provisions.
(a) 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.
(b) 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.
(c) 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".
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(d) 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 be interpreted to encompass any and
all means, direct or indirect, of taking, or not taking, such action.
(e) 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.
(f) 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.
(g) Captions. The captions and headings of this Agreement are for
convenience of reference only and shall not affect the construction of this
Agreement.
(h) 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.
I.3 Accounting Principles.
(a) 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. In the event that GAAP changes during the term of this
Agreement such that the covenants contained in Article VI would then be
calculated in a different manner or with different components, (i) Borrower and
Lender agree to amend this Agreement in such respects as are necessary to
conform those covenants as criteria for evaluating Borrower's financial
condition to substantially the same criteria as were effective prior to such
change in GAAP and (ii) Borrower shall be deemed to be in compliance with the
covenants contained in Article VI following any such change in GAAP if and to
the extent that Borrower would have been in compliance therewith under GAAP as
in effect immediately prior to such change.
(b) References herein to "fiscal year" and "fiscal quarter" refer to such
fiscal periods of Borrower.
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I.4 Times. All times of the day herein are New York City time.
ARTICLE II
THE LOAN
II.1 The Loan. Lender, on the terms and conditions hereinafter set forth
and the conditions precedent pursuant to Section 4.1 of this Agreement, agrees
to make the Loan to Borrower in the Initial Principal Amount. Lender shall
retain $1,520,888.86 of the Initial Principal Amount and shall apply it to repay
the sum of the outstanding principal amount and accrued interest thereon and any
other accrued and unpaid Obligations with respect thereto through the Closing
Date (such sum, the "1998 Remaining Amount"), of the loan made by Lender to
Borrower pursuant to the Loan Agreement dated as of November 12, 1998 between
Borrower and Lender, whereupon such Loan Agreement shall terminate.
II.2 Payment Upon Collections. Upon Borrower's receipt of any Collections,
Borrower shall promptly (and in any event within one (1) Business Day) pay such
Collections to Lender. Lender shall apply such Collections and any Collections
paid directly to Lender by Trustee in accordance with the procedures set forth
in Section 2.6.
II.3 Payment Upon Maturity. On the Maturity Date, Borrower will pay to
Lender an amount equal to the Outstanding Principal Amount of the Loan, together
with all accrued and unpaid interest on the Loan and any other accrued and
unpaid Obligations.
II.4 Interest.
(a) Interest Rate. Interest shall accrue on the Outstanding Principal
Amount of the Loan during each Interest Accrual Period at a rate per annum equal
to LIBOR for such Interest Accrual Period plus five hundred (500) basis points
(the "Initial Interest Rate"). In addition, after the occurrence of and during
the continuance of any Event of Default under Section 8.1 of this Agreement, the
Outstanding Principal Amount of the Loan together with all accrued and unpaid
interest on the Loan and any other accrued and unpaid Obligations due and
payable to Lender under this Agreement shall bear interest at a rate per annum
which shall be five hundred (500) basis points above the Initial Interest Rate.
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(b) Limitation on Interest Rate. The obligations of Borrower hereunder
shall be subject to the limitation that payments of interest, plus any other
amounts paid in connection herewith, shall not be required, to the extent (but
only to the extent) that contracting for or receiving such payment by Lender
would be contrary to the provisions of any law applicable to Lender limiting the
highest rate of interest which may be lawfully contracted for, charged or
received by Lender, and in such event Borrower shall pay Lender interest and
other amounts at the highest rate permitted by applicable law.
II.5 Voluntary Prepayments. Borrower shall have the right, at its option,
to prepay its obligations under the Loan in whole or in part at any time (in a
minimum amount of $100,000 and an integral multiple of $10,000, or such lesser
amount as is then outstanding). Borrower shall give Lender at least one Business
Day prior notice of its intention to prepay, specifying the date of payment, the
total amount and portion of the Loan to be paid on such date and the amount of
interest to be paid with such prepayment.
II.6 Application of Payments. All payments on the Loan shall be applied,
without duplication, in the following order:
(a) First, to Lender for application to overdue interest on the
Obligations;
(b) Second, to Lender for application to accrued interest on the
Obligations;
(c) Third, to Lender for application to the Outstanding Principal Amount;
(d) Fourth, to Lender for any and all sums advanced by Lender as are
reasonably necessary in order to preserve the Collateral or its security
interest in the Collateral and all reasonable expenses of taking, holding,
preparing for sale or lease, selling or otherwise disposing of or realizing on
the Collateral or of any exercise by Lender of its rights under this Agreement,
together with reasonable Attorney Costs; and
(e) Fifth, to all other accrued and unpaid Obligations.
II.7 Prepayment. Upon any prepayment of the Loan, Borrower shall pay to
Lender the principal amount to be prepaid, together with all accrued and unpaid
interest on the Loan through the date of prepayment. Notice of prepayment having
been given in accordance with Section 2.5, the amount specified to be prepaid
shall become due and payable on the date specified for prepayment.
II.8 Fees.
(a) Commitment Fee. Borrower has paid to Lender Two Hundred Thousand
Dollars ($200,000), of which amount Lender shall apply $184,791.11 as a
commitment fee. The balance of such amount shall be retained by Lender to pay
Lender Expenses and, if not used for such purposes, shall be remitted by Lender
to Borrower on the first Payment Date or, at the Borrower's election, netted
against the interest due on such Payment Date.
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(b) Late Payment Fee. In the event the Outstanding Principal Amount of the
Loan, together with all accrued and unpaid interest on the Loan and any other
accrued and unpaid Obligations are not paid in full on or prior to the second
business date following the Maturity Date, Borrower shall pay Lender Two Hundred
Fifty Thousand Dollars ($250,000) as a late payment fee.
II.9 Fees and Interest. All computations of fees and interest under this
Agreement shall be made on the basis of a 360-day year and actual days elapsed,
which results in more interest being paid than if computed on the basis of a
365-day year. Interest and fees shall accrue during each Interest Accrual Period
during which interest or such fees are computed from the first day thereof to
the last day thereof. Borrower shall pay to Lender all accrued and unpaid
interest on each Payment Date.
II.10 Payments by Borrower.
(a) All payments (including prepayments) to be made by Borrower 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 to Lender at Lender's office as set
forth in the preamble hereto, in dollars and in immediately available funds, no
later than 3:00 p.m. on the date specified herein. Any payment which is received
by Lender later than 3:00 p.m. 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.
(c) If any payment of interest or Lender Expenses is not received by
Lender, within ten (10) days of the date when the same is due, Borrower shall
pay to Lender a late charge in an amount equal to five percent (5%) of the
amount not so paid.
ARTICLE III
SECURITY AGREEMENT AND COLLATERAL
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III.1 Security for Obligations. As security for the payment and performance
of the Obligations under this Agreement and all other present and future debts,
obligations and liabilities of any nature whatsoever of Borrower to Lender, and
all modifications, renewals, replacements and extensions thereof, UDCS shall
grant Lender a security interest in the Collateral pursuant to the Stock Pledge
Agreement. Borrower shall cause UDCS to execute and deliver the Stock Pledge
Agreement and to perform its obligations thereunder. Borrower will execute, and
shall cause UDCS to execute, any security agreements, collateral assignments,
financing statements for filing and/or recording and any other Lien writings
reasonably required by Lender to evidence and perfect the Liens and security
interests of Lender. A carbon, photographic or other reproduced copy of this
Agreement and/or any financing statement relating hereto shall be sufficient for
filing and/or recording as a financing statement.
III.2 Security Documents. The Financing Statements shall remain on file in
the appropriate jurisdictions and Borrower shall promptly execute or cause to be
executed any other financing statements and notices as are necessary to properly
perfect Lender's security interest in the Collateral.
III.3 Lender's Duty Regarding Collateral. Lender shall have no duty or
obligation to protect, insure, collect or realize upon the Collateral or
preserve rights in it against prior parties. Borrower releases Lender from, and
shall indemnify Lender against, any liability for any act or omission relating
to the Collateral, except for any liability directly resulting from Lender's
gross negligence or willful misconduct.
III.4 Borrower's Duties Regarding Collateral. Borrower agrees as follows:
(a) General Maintenance of Collateral. Borrower: (i) shall keep the
Collateral free from all Liens (other than the Liens of ad valorem property
taxes which are not delinquent, any statutory landlords' liens which are covered
by lien waivers satisfactory to Lender, mechanic's liens, Permitted Liens, and
any Liens in favor of Lender); (ii) shall defend the Collateral against all
claims and legal proceedings by persons other than Lender; (iii) shall pay and
discharge when due all taxes, levies and other charges upon the Collateral; (iv)
shall cause UDCS not to sell, lease or otherwise dispose of the Collateral; and
(v) shall not permit the Collateral to be used in violation of any Requirement
of Law or any policy of insurance.
(b) Perfection and Priority. Borrower shall pay all Lender's Expenses and,
upon Lender's request, execute all writings and take all other actions
reasonably deemed advisable by Lender to preserve the Collateral or to
establish, and determine priority of, perfection, continued perfection or
enforce Lender's interest in the Collateral.
(c) Records and Inspections. Upon reasonable notice to Borrower, Lender may
examine and conduct audits of the Collateral, and Borrower's and UDCS's records
concerning it, wherever located, and make copies of such records, at any time
during normal business hours, and Borrower shall assist Lender in so doing.
Borrower shall keep accurate, complete and current records respecting the
Collateral. In addition to the specific requirements of Section 6.1, Borrower
shall, within ten (10) Business Days of any request by Lender, furnish to Lender
a detailed statement, certified as being substantially accurate by a Responsible
Officer, setting forth the current status, value and location of all or any
portion of the Collateral.
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III.5 Power of Attorney. Borrower hereby makes, constitutes and appoints
Lender the true and lawful attorney-in-fact of Borrower, in the name, place and
stead of Borrower, or otherwise, upon the occurrence of any Event of Default
which remains uncured following the receipt of a notice pursuant to Section 9.2:
(a) To take all actions and to execute, acknowledge, obtain and deliver any
and all writings necessary or deemed advisable by Lender in order to exercise
any rights of Borrower with respect to the Collateral or to receive and enforce
any payment or performance due to Borrower with respect to the Collateral;
(b) To give any notices, instructions or other communications to any person
or entity in connection with the Collateral;
(c) To demand and receive all performances due under or with respect to the
Collateral and to take all lawful steps to enforce such performances and to
compromise and settle any claim or cause of action of Borrower arising from or
related to the Collateral and give acquittances and other discharges relating
thereto; and
(d) To file any claim or proceeding or to take any other action, in the
name of Lender, Borrower or otherwise, to enforce performances due under or
related to the Collateral or to protect and preserve the right, title and
interest of Lender thereunder.
The foregoing power of attorney is a power coupled with an interest and
shall be irrevocable and unaffected by the disability of the principal so long
as any portion of the Obligations remains contingent, unmatured, unliquidated,
unpaid or unperformed. Lender shall have no obligation to exercise any of the
foregoing rights and powers in any event.
III.6 Collateral Inspections. Lender shall have the right (but not the
obligation) to do a physical on-site examination of the Collateral. All costs
and expenses associated therewith shall be included in Lender Expenses.
ARTICLE IV
CONDITIONS PRECEDENT; TERM OF AGREEMENT
IV.1 Conditions Precedent. Lender shall not make the Loan hereunder if
Borrower has not fulfilled to the satisfaction of Lender and its counsel, each
of the following conditions on or before the Closing Date; provided, however,
that Lender, in its sole and absolute discretion, may waive any of the following
conditions.
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IV.2 Receipt of Documents. Lender shall have received each of the
following documents, duly executed, and each such document shall be in full
force and effect:
(a) This Agreement executed by Borrower and Lender;
(b) The Stock Pledge Agreement;
(c) The UDRC Dividend Direction Letter;
(d) The UDRC II Dividend Direction Letter;
(e) The UDRC Standing Dividend Resolution certified by UDRC's Secretary;
(f) The UDRC II Standing Dividend Resolution certified by UDRC II's
Secretary;
(g) A consent and subordination from GECC consenting to the execution,
delivery and performance by Borrower and UDCS of the Loan Documents
and subordinating to Lender GECC's Lien on any assets constituting
Collateral;
(h) A consent by MBIA to the pledge of the Collateral to Lender;
(i) Certified copies of the resolutions of the board of directors of
Borrower approving and authorizing the execution, delivery and
performance by Borrower of this Agreement and the other Loan Documents
to be delivered hereunder, and authorizing the Loan, certified as of
the Closing Date by the Secretary or an Assistant Secretary of
Borrower;
(j) A certificate of the Secretary or Assistant Secretary of Borrower
certifying the names and true signatures of the officers of Borrower
authorized to execute, deliver and perform, as applicable, this
Agreement, the Stock Pledge Agreement and all other Loan Documents to
be delivered hereunder;
(k) Certified copies of the resolutions of the board of directors of UDCS
approving and authorizing the execution, delivery and performance by
UDCS of the applicable Loan Documents to be delivered hereunder,
certified as of the Closing Date by the Secretary or an Assistant
Secretary of UDCS;
(l) A certificate of the Secretary or Assistant Secretary of UDCS
certifying the names and true signatures of the officers of UDCS
authorized to execute, deliver and perform the Stock Pledge Agreement
and all other applicable Loan Documents to be delivered hereunder;
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(m) Copies of each of Borrower's, UDCS's, UDRC's and UDRC II's certificate
of incorporation certified by the Secretary of the State of their
respective jurisdictions of incorporation and bylaws certified by
their respective Secretaries or Assistant Secretaries;
(n) Good standing certificates for the jurisdiction of incorporation and
the jurisdiction in which the chief executive office is located for
each of Borrower, UDCS, UDRC and UDRC II;
(o) A copy of lien searches, completed as of a recent date, against
Borrower and UDCS, in such jurisdictions as shall be satisfactory to
Lender and its counsel;
(p) Legal opinions from counsel for Borrower with respect to the
transactions contemplated by the Loan Documents, which opinions shall
be in form and substance satisfactory to Lender and from counsel
satisfactory to Lender.
(q) An engagement letter executed by Borrower in which Borrower engages
Lender to act as an underwriter with respect to certain securitization
transactions.
(r) A commitment letter executed by Borrower in which Borrower agrees to
engage Lender as the initial purchaser of a surety-wrapped warehouse
note created pursuant to a revolving credit agreement between
Borrower, Lender and MBIA.
IV.3 Term. This Agreement shall become effective upon the execution and
delivery hereby by Borrower and Lender and shall continue in full force and
effect for a term ending on the earliest of (a) the Repayment Date, or (b) the
date of termination of this Agreement in accordance with its terms after the
occurrence and during the continuation of an Event of Default.
4.4 Effect of Termination. Upon termination of this Agreement, all
Obligations shall become due and payable immediately without notice or demand.
No termination of this Agreement, however, shall relieve or discharge Borrower
of Borrower's duties, Obligations, or covenants hereunder, and Lender's
continuing security interest in the Collateral shall remain in effect until all
Obligations have been fully and finally discharged.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
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In order to induce Lender to enter into this Agreement and make the Loan,
Borrower makes the following representations and warranties which shall be true,
correct, and complete in all respects as of the date hereof, and shall be true,
correct, and complete in all respects as of the Closing Date (except to the
extent that such representations and warranties relate solely to an earlier
date) and such representations and warranties shall survive the execution and
delivery of this Agreement:
V.1 No Encumbrances. UDCS has good and indefeasible title to the
Collateral, free and clear of Liens except for Permitted Liens.
V.2 Location of Chief Executive Office; FEIN. The chief executive office of
Borrower is located at the address indicated in the preamble to this Agreement
and Borrower's FEIN is 86-0721358.
V.3 Due Organization and Qualification; Subsidiaries.
(a) Borrower is duly organized and existing and in good standing under the
laws of the jurisdiction of its incorporation and qualified and licensed to do
business in, and in good standing in, any state where the failure to be so
licensed or qualified reasonably could be expected to have a Material Adverse
Effect.
(b) Set forth on Schedule A is a complete and accurate list of Borrower's
direct and indirect Subsidiaries, showing: (i) the jurisdiction of their
incorporation; (ii) the number of shares of each class of Equity Interests
authorized for each of such Subsidiaries; and (iii) the number and the
percentage of the outstanding shares of each such class owned directly or
indirectly by Borrower. All of the outstanding Equity Interests of each such
Subsidiary have been validly issued and are fully paid and non-assessable.
(c) Except as set forth on Schedule B, no Equity Interests (or any
securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for Equity Interests) of any direct or indirect Subsidiary of
Borrower is subject to the issuance of any security, instrument, warrant,
option, purchase right, conversion or exchange right, call, commitment or claim
of any right, title, or interest therein or thereto.
V.4 Due Authorization: No Conflict.
(a) The execution, delivery, and performance by Borrower of this Agreement
and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
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(b) The execution, delivery, and performance by Borrower of this Agreement
and the Loan Documents to which it is a party do not and will not (i)
violate any provision of federal, state, or local law or regulation
(including Regulations G, T, U, and X of the Federal Reserve Board)
applicable to Borrower, the Governing Documents of Borrower, or any
order, judgment, or decree of any court or other Governmental
Authority binding on Borrower, (ii) conflict with, result in a breach
of, or constitute (with due notice or lapse of time or both) a default
under any material contractual obligation or material lease of
Borrower, (iii) result in or require the creation or imposition of any
Lien of any nature whatsoever upon any properties or assets of such
Borrower, other than Permitted Liens, or (iv) require any approval of
stockholders or any approval or consent of any Person under any
material contractual obligation of Borrower.
(c) Other than the taking of any other action expressly required under
this Agreement and the Loan Documents, the execution, delivery, and
performance by Borrower of this Agreement and the Loan Documents to
which Borrower is a party do not and will not require any registration
with, consent, or approval of, or notice to, or other action with or
by, any federal, state, foreign, or other Governmental Authority or
other Person.
(d) This Agreement, the Loan Documents and all other documents
contemplated hereby and thereby, when executed and delivered by
Borrower, will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their
respective terms, except as enforcement may be limited by equitable
principles or by bankruptcy, insolvency, reorganization, moratorium,
or similar laws relating to or limiting creditors' rights generally.
(e) The Pledge Agreement and the Stock Powers, when executed and delivered
by UDCS, will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their
respective terms, except as enforcement may be limited by equitable
principles or by bankruptcy, insolvency, reorganization, moratorium,
or similar laws relating to or limiting creditors' rights generally.
(f) The Lien granted by UDCS on the Collateral is a validly created and
perfected Lien, subject to no other Liens other than Lien in favor of
Lender.
V.5 Litigation. Except as set forth in Schedule C, there are no actions or
proceedings pending by or against Borrower before any court or administrative
agency and Borrower does not have knowledge or belief of any pending,
threatened, or imminent litigation, governmental investigations, or claims,
complaints, actions, or prosecutions involving Borrower, except for: (a) ongoing
collection matters in which Borrower is the plaintiff and (b) matters that, if
decided adversely to Borrower, would not have a Material Adverse Effect.
V.6 Financial Statements; No Material Adverse Change. All financial
statements relating to Borrower, UDRC and UDRC II that have been delivered by
Borrower to Lender have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present the financial
condition as of the date thereof and the results of operations for the period
then ended for Borrower and its consolidated Subsidiaries, except as disclosed
on Schedule D. There has not been a Material Adverse Change with respect to
Borrower since the date of the latest financial statements submitted to Lender
on or before the Closing Date.
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V.7 Securitization Documents. Borrower, UDRC and UDRC II and each of their
Affiliates are in full compliance with their respective obligations under the
UDRC Securitization Documents and the UDRC II Securitization Documents, and no
Securitization Default exists.
V.8 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 Borrower to be incurred
with respect to any plan (other than a multiemployer plan) by Borrower which is
or would have a Material Adverse Effect. Borrower has not incurred or does not
presently expect to incur any withdrawal liability under Title IV of ERISA with
respect to any multiemployer plan which is or would be materially adverse to
Borrower. 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 5.8, 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 Borrower or by any trade or business,
whether or not incorporated, which, together with Borrower, 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). No plan providing welfare
benefits to retired former employees of Borrower has been established or is
maintained for which the present value of future benefits payable, in excess of
irrevocably designated funds for such purpose, is or would have a Material
Adverse Effect.
V.9 Environmental and Safety Matters. Borrower (a) has complied in all
material respects with all applicable material Environmental and Safety Laws,
and Borrower has not received (i) notice of any material failure so to comply,
(ii) any letter or request for information under Section 104 of CERCLA or
comparable state laws or (iii) any information that would lead it to believe
that it is the subject of any Federal or state investigation concerning
Environmental and Safety Laws; (b) does not manage, generate, discharge or store
any Hazardous Materials in material violation of any material Environmental and
Safety Laws; (c) does not own, operate or maintain any underground storage tanks
or surface impoundments; and (d) except as disclosed to Lender in writing, is
not aware of any conditions or circumstances associated with its currently or
previously owned or leased properties or operations (or those of its tenants)
which may give rise to any Environmental Liabilities and Costs which could have
a Material Adverse Effect.
V.10 Tax Matters. .....Each of Borrower and its Subsidiaries has filed all
tax returns that it was required to file. All such tax returns were correct and
complete in all material respects. All Taxes owed by any of Borrower and its
Subsidiaries have been paid.
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ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until full and final payment of the Obligations, and unless
Lender shall otherwise consent in writing, Borrower shall do all of the
following:
VI.1 Financial Statements and Other Documents. Borrower shall deliver to
Lender in form and detail satisfactory to Lender:
(a) Within 45 days of the end of each fiscal quarter, Borrower's unaudited
financial statements for such quarter, and, within 90 days of the end
of Borrower's fiscal year, Borrower's audited financial statements for
such period, certified by Borrower's Chief Financial Officer or
Treasurer as fairly presenting in all material respects, in accordance
with GAAP (subject, in the case of unaudited financial statements, to
ordinary, good faith year-end adjustments and to the absence of
footnote disclosure), the financial position and results of operations
of Borrower;
(b) Promptly upon receipt thereof, any financial statements of Borrower
distributed to other lenders or financing parties;
(c) Promptly upon preparation thereof, a copy of each other report, if
any, submitted to Borrower by independent accountants in connection
with any annual, interim or special audit made by them of the books of
Borrower;
(d) Promptly after its submission, copies of any other information or
documents regularly provided by Borrower to any of its other lenders
or holders of Borrower's Debt;
(e) Promptly upon receipt thereof, copies of any other information or
documents received by Borrower pursuant to the UDRC Securitization
Documents and the UDRC II Securitization Documents;
(f) With reasonable promptness, such other financial data as Lender may
reasonably request; and
(g) Promptly upon receipt thereof, (i) copies of any federal revenue
agent's reports (so called "thirty-day letter") issued by the IRS, and
copies of any equivalent documents from state or local tax
authorities; (ii) copies of any federal notice of deficiency
(so-called "ninety-day letters") issued by the IRS, and copies of any
equivalent documents from state or local tax authorities; and (iii)
copies of any information requests or document requests received from
federal, state or local tax authorities that are not in the ordinary
course of business.
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VI.2 Inspection of Property. Borrower shall permit any Person
designated by Lender in writing, to visit and inspect any of the properties of
Borrower, to examine the corporate books and financial records of Borrower and
make copies thereof or extracts therefrom and to discuss the affairs, finances
and accounts of any of such corporations with the principal officers of Borrower
and its independent public accountants, all at such reasonable times and as
often as Lender may reasonably request.
VI.3 Default Disclosure.
(a) Borrower shall forthwith, upon a Responsible Officer of Borrower
obtaining knowledge of an Event of Default or Default, promptly
deliver to Lender a certificate of a Responsible Officer specifying
the nature and period of existence thereof and what action Borrower
proposes to take with respect thereto.
(b) Borrower shall forthwith, upon a Responsible Officer of Borrower
obtaining knowledge of a Securitization Default, promptly deliver to
Lender a certificate of a Responsible Officer specifying the nature
and period of existence thereof, what action the defaulting party
proposes to take with respect thereto, and what action Borrower
proposes to take with respect thereto.
VI.4 Notices to Lender. Borrower shall promptly notify Lender in writing
of:
(a) Any lawsuit over One Hundred Thousand Dollars ($100,000) against
Borrower;
(b) Any substantial dispute between Borrower and any Governmental
Authority; or
(c) Any change in Borrower's name, address, or legal structure.
VI.5 Books and Records. Borrower shall maintain adequate books and records.
VI.6 Compliance and Preservation. Borrower shall:
(a) Comply with the laws (including any fictitious name statute),
regulations and orders of any government body with authority over
Borrower's business;
(b) Maintain and preserve all privileges and franchises Borrower now has;
and
(c) Make any repairs, renewals, or replacements reasonably necessary to
keep Borrower's properties in good working condition.
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VI.7 Perfection of Liens. Borrower shall help Lender perfect and
protect its security interests and liens.
VI.8 Cooperation. Borrower shall take any reasonable action requested
by Lender to carry out the intent of this Agreement.
VI.9 Use of Proceeds. Borrower shall use the proceeds of the Loan for
(i) repayment of the 1998 Remaining Amount, (ii) general working capital to
facilitate ongoing growth in Borrower's core operations and (iii) to the extent
permitted by Section 7.12, the repurchase of common stock of the Borrower.
VI.10 Securitizations. Any securitizations of Ugly Duckling Collateral
executed during the term of this Agreement shall be executed through either UDRC
II or a New Issuer (as defined in the Stock Pledge Agreement) that meets the
requirements of Section 7(c) of the Stock Pledge Agreement (and Borrower shall
ensure that Pledgor performs its obligations pursuant to the Stock Pledge
Agreement). Borrower shall continue to execute quarterly securitizations of the
Ugly Duckling Collateral during the term of this Agreement.
VI.11 Compliance with Covenants. Borrower shall perform, keep or
observe any term, provision, condition or covenant or agreement contained in
each Bond Insurance Policy, the GECC Agreement and any other agreement
evidencing Indebtedness.
VI.12 Payment of Indebtedness. Borrower shall timely pay and shall
cause its Subsidiaries to timely pay all Indebtedness which, if not paid, could
result in the imposition of a Lien on any of the assets of UDRC or UDRC II.
VI.13 Tangible Net Worth. Borrower shall maintain a consolidated Tangible
Net Worth of not less than $100,000,000.
VI.14 Debt to Tangible Net Worth. Borrower shall maintain a ratio of
(i) the principal amount of Debt of Borrower and its consolidated Subsidiaries
to (ii) Tangible Net Worth of no greater than 2.1 to 1.
ARTICLE VII
NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until full and final payment of the Obligations, Borrower will
not do any of the following without Lender's prior written consent:
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VII.1 Liens. Create, incur, assume, or permit to exist, directly or
indirectly, any lien on or with respect to any of the assets of UDRC and UDRC
II, including the UDRC Class B Certificates, the UDRC II Class B Certificates,
or any income or profits from any of the foregoing, except for Permitted Liens
listed on Schedule E or liens of Lender.
VII.2 Indebtedness. Permit UDRC or UDRC II to incur, assume, or permit
to exist, directly or indirectly any Indebtedness.
VII.3 Restrictions on Fundamental Changes. Enter into any merger,
consolidation, reorganization, or recapitalization, or reclassify its capital
stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or any substantial part of
its property or assets.
VII.4 Disposal of Collateral. Except as expressly consented to by
Lender in writing, sell, lease, assign, transfer, or otherwise dispose of any of
the Collateral.
VII.5 Change Name. Without giving thirty (30) days prior written
notification to Lender, change Borrower's name, FEIN, corporate structure
(within the meaning of Section 9402(7) of the Code), or identity, or add any new
fictitious name.
VII.6 Amendments. Except as expressly consented to by Lender in
writing, directly or indirectly, amend, modify, alter, increase, or change any
of the terms or conditions of the UDRC Securitization Documents or the UDRC II
Securitization Documents.
VII.7 Change of Control. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
VII.8 Distributions. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding, for cash, other than the buyback of
1,000,000 shares of Borrower's common stock previously approved by Borrower's
Board of Directors.
VII.9 Standing Dividend Resolutions. Permit UDRC to rescind, amend,
modify, revoke or alter the UDRC Standing Dividend Resolution or permit UDRC II
to rescind, amend, modify, revoke or alter the UDRC II Standing Dividend
Resolution.
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VII.10 Change in Location of Chief Executive Office. Relocate its chief
executive office to a new location without providing 30 days prior written
notification thereof to Lender and so long as, at the time of such written
notification, Borrower provides any financing statements or fixture filings
necessary to perfect and continue perfected Lender's security interests and also
provides to Lender a Collateral access agreement with respect to such new
location.
VII.11 No Prohibited Transactions Under ERISA. Directly or indirectly:
(a) Engage, or permit any Subsidiary of Borrower to engage, in any
prohibited transaction which is reasonably likely to result in a
civil penalty or excise tax described in Sections 406 of ERISA or
4975 of the Code for which a statutory or class exemption is not
available or a private exemption has not been previously obtained
from the Department of Labor;
(b Permit to exist with respect to any Benefit Plan any accumulated
funding deficiency (as defined in Sections 302 of ERISA and 412
of the Code), whether or not waived;
(c Fail, or permit any Subsidiary of Borrower to fail, to pay timely
required contributions or annual installments due with respect to
any waived funding deficiency to any Benefit Plan;
(d Terminate, or permit any Subsidiary of Borrower to terminate, any
Benefit Plan where such event would result in any liability of
Borrower or any of its Subsidiaries under Title IV of ERISA;
(e Fail, or permit any Subsidiary of Borrower to fail, to make any
required contribution or payment to any Multiemployer Plan;
(f Fail, or permit any Subsidiary of Borrower to fail, to pay any
required installment or any other payment required under Section
412 of the Code on or before the due date for such installment or
other payment;
(g Amend, or permit any Subsidiary of Borrower to amend, a
retirement plan resulting in an increase in current liability for
the plan year such that either of Borrower or any Subsidiary of
Borrower is required to provide security to such retirement plan
under Section 401 (a)(29) of the Code; or
(h Withdraw, or permit any Subsidiary of Borrower to withdraw, from
any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of
ERISA.
VII.12 Stock Buyback Program. Repurchase more than 928,000 shares of
common stock (adjusted, as appropriate, for any stock split, stock dividend or
other comparable issuance of shares) during the calendar year ending December
31, 1999, unless (i) Borrower has effected an offering of debt which is
subordinated to the Obligations (in a manner that is satisfactory in form and
substance to Lender) and (ii) such offering raises net proceeds to Borrower in
excess of $10,000,000.
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VII.13 Verde Subordinated Debt. Repay any portion of the $10 million loan
from Verde Investments without Lender's prior written consent.
ARTICLE VIII
EVENTS OF DEFAULT/REMEDIES
VIII.1 Event of Default. Any of the following shall constitute an "Event of
Default":
(a If Borrower fails to pay when due and payable or when declared
due and payable, any portion of the Obligations (whether of
principal, interest, fees and charges due Lender, reimbursement
of Lender Costs, or other amounts constituting Obligations);
(b If Borrower fails to perform, keep, or observe any term,
provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other future
agreement between Borrower and Lender;
(c If there is a Material Adverse Change with respect to Borrower,
UDRC or UDRC II (the occurrence or non-occurrence of which shall
be determined by Lender in the exercise of its reasonable
discretion);
(d If Borrower is enjoined or restrained, by court order from
continuing to conduct all or any material part of its business
affairs, unless such order is stayed;
(e If notices of any Lien, levy, or assessment in excess of $250,000
other than of Permitted Liens are filed of record with respect to
any of Borrower's properties or assets which have not been cured
within ten (10) days after the Lien has been filed;
(f If a judgment or other claim in excess of $250,000 becomes a Lien
or encumbrance upon any material portion of Borrower's properties
or assets and such judgment is not removed or released within 15
days of the entry of such judgment;
(g If Borrower makes any payment on account of Indebtedness that has
been contractually subordinated in right of payment to the
payment of the Obligations, except to the extent such payment is
permitted by the terms of the subordination provisions applicable
to such Indebtedness;
(h If any material misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report
made to Lender by Borrower or any officer, employee, agent, or
director of Borrower which has not been corrected to date, or if
any such warranty or representation is withdrawn;
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(i If Borrower rescinds, amends, alters, revokes or modifies (or
permits UDRC or UDRC II to rescind, amend, alter, revoke or
modify) the UDRC Standing Dividend Resolution or the UDRC II
Standing Dividend Resolution in any respect;
(j If a default or event of default occurs under the GECC Agreement
or under the terms of any other Indebtedness in excess of
$1,000,000 or there is a termination event under the terms of any
Bond Insurance Policy (or the policy of another bond insurer),
regardless of whether such default or termination event is waived
or amended; or
(k If Borrower or any of its Subsidiaries makes a general assignment
for the benefit of creditors, or an order, judgment or decree is
entered adjudicating the Company or any of its Subsidiaries
bankrupt or insolvent, or any order for relief with respect to
the Company is entered under the Federal Bankruptcy Code, or
Borrower or any of its Subsidiaries petitions or applies to any
tribunal for the appointment of a custodian, trustee, receiver or
liquidator of Borrower or any of its Subsidiaries or of any
substantial part of the assets of the Company or any of its
Subsidiaries, or commences any proceeding relating to the Company
or any of its Subsidiaries under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, or any such petition or
application is filed, or any such proceeding is commenced against
the Company or any of its Subsidiaries.
VIII.2 Lender's Rights and Remedies. Subject to the occurrence, and
during the continuation, of an Event of Default, Lender shall provide Borrower
with written notice thereof and the option to cure. If Borrower fails to cure
such Event of Default within ten (10) days after delivery of such written
notice, Lender may, at its sole and absolute discretion, without further notice,
do any one or more of the following, all of which are authorized by Borrower:
(a Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due
and payable;
(b Terminate this Agreement and any of the other Loan Documents as
to any future liability or obligation of Lender, but without
affecting Lender's rights and security interests in the
Collateral and without affecting the Obligations;
(c Without notice to or demand upon Borrower, make such payments and
do such acts as Lender considers necessary or reasonable to
protect its security interests in the Collateral;
(d Without notice to Borrower (such notice being expressly waived),
and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section
9-505 of the UCC), set off and apply to the Obligations any and
all (i) balances and deposits of Borrower held by Lender, or (ii)
indebtedness at any time owing to or for the credit or the
account of Borrower held by Lender; or
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(e Collect, receive, appropriate and realize upon the Collateral, on
such terms as Lender, in its sole and absolute discretion, deems
appropriate without any liability for any loss due a decrease in
the market value of the Collateral during the period held,
without demand of performance or other demand, advertisement or
notice of any kind, except as specified below, to or upon
Borrower or any other person (all and each of which demands,
advertisements and/or notices are hereby expressly waived to the
extent permitted by law). If any notification to Borrower of
intended disposition of the Collateral is required by law, such
notification shall be deemed reasonable and properly given if
mailed to Borrower, postage prepaid, at least ten (10) days
before any such disposition at the address indicated by
Borrower's signature. Any disposition of the Collateral or any
part thereof shall be free of any equity or right of redemption
in Borrower, which right of equity is, to the extent permitted by
applicable law, hereby expressly waived or released by Borrower.
Borrower further agrees that such sale or sales made under the
foregoing circumstances shall be deemed to have been made in a
commercially reasonable manner. Lender shall not be obligated to
make any sale or other disposition of the Collateral permitted
under this Loan Agreement, unless the terms thereof shall be
satisfactory to Lender.
Lender's rights and remedies under this Agreement, the Loan Documents, and all
other agreements shall be cumulative. No exercise by Lender of one right or
remedy shall be deemed an election, and no waiver by Lender of any Event of
Default shall be deemed a continuing waiver. No delay by Lender shall constitute
a waiver, election, or acquiescence by it.
ARTICLE IX
MISCELLANEOUS
IX.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 Borrower therefrom, shall be effective unless the same shall be in
writing and signed by Lender and Borrower, and then such waiver shall be
effective only in the specific instance and for the specific purpose for which
given.
IX.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 facsimile (i) shall be immediately confirmed by a
telephone call to the recipient, and (ii) shall be followed promptly
by a hard copy original thereof by over-night courier to the address
set forth below; or to such other address as shall be designated by
such party in a written notice to the other party, and as directed to
each other party, at such other address as shall be designated by
Lender or Borrower in a written notice to Borrower and Lender.
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If to Borrower:...Ugly Duckling Corporation
2525 East Camelback Road
Suite 500
Phoenix, Arizona 85016
Attn: Steven P. Johnson
Facsimile: (602) 552-3139
With a copy to:...Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attn: Timothy W. Moser
Facsimile: (602) 382-6070
If to Lender:.....Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attn: Ira J. Platt
Facsimile: (203) 622-2090
With a copy to:...Kirkland & Ellis
200 East Randolph
Chicago, Illinois 60601
Attn: Kenneth P. Morrison
Facsimile: (312) 861-2200
(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, except that notices
pursuant to Article II shall not be effective until actually received
by Lender.
(c Borrower acknowledges and agrees that any agreement of Lender to
receive certain notices by telephone and facsimile is solely for the
convenience and at the request of Borrower. Lender shall be entitled
to rely on the authority of any Person purporting to be a Person
authorized by Borrower to give such notice and Lender shall not have
any liability to Borrower or to other Person on account of any action
taken or not taken by Lender in reliance upon such telephonic or
facsimile notice. The obligations of Borrower hereunder shall not be
affected in any way or to any extent by any failure by Lender to
receive written confirmation of any telephonic or facsimile notice or
the receipt by Lender of a confirmation which is at variance with the
terms understood by Lender to be contained in the telephonic or
facsimile notice.
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IX.3 No Waiver: Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of 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 preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
IX.4 Costs and Expenses. Borrower shall, whether or not the
transactions contemplated hereby shall be consummated:
(a pay or reimburse Lender within ten (10) Business Days after demand for
all Lender Costs incurred by Lender in connection with the
development, preparation, delivery, administration and execution of
(and any amendment, supplement, waiver or modification to in each case
whether or not consummated), this Agreement, any Loan Document and any
other documents prepared in connection herewith, or therewith, and the
consummation of the transactions contemplated hereby and thereby,
including the reasonable Attorney Costs incurred by Lender with
respect thereto;
(b pay or reimburse Lender within ten (10) Business Days after demand for
all Lender Costs incurred by Lender in connection with the
enforcement, attempted enforcement, or preservation of any rights or
remedies under this Agreement, any other Loan Document, and any such
other documents, including reasonable Attorney Costs incurred by
Lender; and
(c pay or reimburse Lender within ten (10) Business Days after demand for
all reasonable appraisal (including the allocated cost of internal
appraisal services), audit, due diligence, monitoring review,
environmental inspection and review (including the allocated cost of
such internal services), search and filing costs, fees and expenses,
incurred or sustained by Lender in connection with the Loan, the Loan
Documents, any of the Obligations and the matters referred to under
(a) and (b) of this Section 9.4.
IX.5 Indemnity. Borrower shall pay, indemnify, and hold Lender, its
Affiliates and Subsidiaries, and their respective officers, directors,
employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person")
harmless from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, charges, expenses or disbursements
(including Attorney Costs) of any kind or nature whatsoever with respect to the
execution, delivery, enforcement, performance and administration of this
Agreement and any other Loan Documents, or the transactions contemplated hereby
and thereby, and with respect to any investigation, litigation or proceeding
related to this Agreement or the use of the proceeds thereof, whether or not any
Indemnified Person is a party thereto (all the foregoing, collectively, the
"Indemnified Liabilities"); provided, however, Borrower shall have no obligation
hereunder to any Indemnified Person with respect to Indemnified Liabilities
arising from the gross negligence, bad faith or willful misconduct of such
Indemnified Person or the breach by Lender of its obligations hereunder. The
agreements in this Section 9.5 shall survive payment of all other Obligations
and the termination of this Agreement.
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IX.6 Marshaling: Payments Set Aside. Lender shall not be under any
obligation to marshal any assets in favor of Borrower or any other Person or
against or in payment of any or all of the Obligations. To the extent that
Borrower makes a payment or payments to Lender, or to the extent Lender enforces
its Liens or exercises its rights of set-off, and such payment or payments or
the proceeds of such enforcement or set-off or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside or required to
be repaid to a trustee, receiver or any other party in connection with any
bankruptcy, or otherwise, then to the extent of such recovery the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or set-off had not occurred.
IX.7 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 Borrower may not assign or transfer any of
its rights or delegate obligations under this Agreement or any of the Loan
Documents without the prior written consent of Lender.
IX.8 Set-off. In addition to any rights and remedies of Lender provided
by law, if an Event of Default exists, and Borrower fails to cure such Event of
Default within five (5) days after delivery of written notice thereof, Lender is
authorized at any time and from time to time, without prior notice to Borrower,
any such notice being waived by Borrower to the fullest extent permitted by law,
to set off and apply any and all monies or deposits at any time held by, and
other indebtedness at any time owing by, Lender to or for the credit or the
account of Borrower against any and all Obligations owing to Lender, now or
hereafter existing, irrespective of whether or not Lender shall have made demand
under this Agreement or any Loan Document and although such Obligations may be
contingent or unmatured. Lender agrees promptly to notify Borrower after any
such set-off and application made by Lender; provided, however, that, the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of Lender under this Section 9.8 are in addition to the
other rights and remedies (including other rights of set-off) which Lender may
have.
IX.9 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 both parties shall be lodged with
Borrower and Lender.
IX.10 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.
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IX.11 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of Borrower and Lender, 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.
Lender shall have no obligation to any Person not a party to this Agreement or
other Loan Documents.
IX.12 Time. Time is of the essence as to each term or provision of this
Agreement and each of the other Loan Documents.
IX.13 Governing Law and Jurisdiction.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS,
THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE
RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING
HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER,
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
IT BEING THE INTENT OF THE PARTIES THAT THE LAW OF THE STATE OF NEW YORK SHALL
GOVERN THE RIGHTS AND DUTIES OF THE PARTIES HERETO WITHOUT REGARD TO CHOICE OR
CONFLICTS OF LAW PRINCIPLES; EXCEPT THAT THE PROVISIONS HEREIN THAT PERTAIN TO
THE PERFECTION OR THE EFFECT OF PERFECTION OF SECURITY INTERESTS IN COLLATERAL
SHALL BE GOVERNED BY THE LAWS OF SUCH STATE AS ARE SPECIFIED IN SECTION 9103 OF
THE UCC.
BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A
JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF
THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
IX.14 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire Agreement and understanding among Borrower and
Lender 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 Borrower
(or any indemnification for) any Lender Costs incurred (or to be incurred) by or
on behalf of Lender.
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IX.15 Interpretation. This Agreement is the result of negotiations
between and has been reviewed by counsel to Lender, Borrower and other parties,
and is the product of all parties hereto. Accordingly, this Agreement and the
other Loan Documents shall not be construed against Lender merely because of
Lender's involvement in the preparation of such documents and agreements.
IX.16 Assignment. Lender may assign its rights hereunder and under the
Loan Documents without the consent of Borrower. Borrower may not assign or
delegate any of its rights, interest or obligations hereunder or under any of
the Loan Documents.
IX.17 Revival and Reinstatement of Obligations. If the incurrence or
payment of the Obligations by Borrower or the transfer by Borrower to Lender of
any property of either or both of such parties should for any reason
subsequently be declared to be void or voidable under any state or federal law
relating to creditors' rights, including provisions of the Bankruptcy Code
relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property (collectively, a
"Voidable Transfer"), and if Lender is required to repay or restore, in whole or
in part, any such Voidable Transfer, or elects to do so upon the reasonable
advice of its counsel, then, as to any such Voidable Transfer, or the amount
thereof that Lender is required or elects to repay or restore, and as to all
reasonable costs, expenses, and Attorney Costs of Lender related thereto, the
liability of Borrower automatically shall be revived, reinstated, and restored
and shall exist as though such Voidable Transfer had never been made.
* * * * *
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[Signature Page to Loan Agreement]
IN WITNESS WHEREOF, the parties hereby have caused this
Agreement to be executed as of the date first written above.
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /S/ DONALD L. ADDINK
--------------------
Name: Donald L. Addink
Title: Senior Vice President
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.,
a Delaware corporation
By: /S/ IRA PLATT
-------------
Name: Ira Platt
Title: Vice President
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<PAGE>
SCHEDULES AND EXHIBITS OMITTED
EXHIBIT 10.3(a)
EXECUTION COPY
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT dated as of March 18, 1999 (the "Pledge
Agreement") among UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona
corporation formerly known as Duck Ventures, Inc. ("Pledgor"), as owner of all
of the outstanding capital stock in Ugly Duckling Receivables Corp. ("UDRC"), a
Delaware corporation, and Ugly Duckling Receivables Corp. II, a Delaware
corporation ("UDRC II"), UGLY DUCKLING CORPORATION, a Delaware corporation
("UDC") and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation
("Lender").
INTRODUCTORY STATEMENTS
Pledgor is the sole holder of fifty (50) shares of common stock, $.01 par
value per share in UDRC and fifty (50) shares of common stock, $.01 par value
per share, in UDRC II (collectively, the "Pledged Shares"). UDC, as debtor, has
on the date hereof entered into a Loan Agreement with Lender (the "Loan
Agreement") pursuant to which UDC has borrowed money from Lender. Pledgor, which
is wholly owned subsidiary of UDC, has agreed to pledge the Pledged Shares and
any proceeds thereof as further security for the Obligations (as defined in the
Loan Agreement). Accordingly, the Pledged Shares and any proceeds thereof will
secure Obligations of UDC and Pledgor to Lender. Terms used herein but not
defined herein shall have the meanings assigned to such terms in the Loan
Agreement.
In consideration of the premises and of the agreements herein contained,
Pledgor, Lender and UDC agree as follows:
Section 1. Definitions.
(a) Capitalized terms used but not otherwise defined in this Pledge
Agreement shall have the meanings specified therefor in the Loan
Agreement.
(b) As used herein, the term "Final Date" shall mean the date upon which
all of the Obligations as defined in the Loan Agreement and all
obligations under any other financing arrangement between UDC and
Lender, or any Affiliate of either, have been fully paid and performed
to the satisfaction of Lender. The term "Loan Documents" shall mean
the Loan Agreement, this Pledge Agreement and any and all documents,
instruments and agreements securing and/or relating to the Obligations
of UDC or Pledgor to Lender.
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Section 2. Pledge of Stock and Grant of Security Interest. As security for
the full and complete performance of all of the Obligations, Pledgor hereby
delivers, pledges and assigns to the Lender and grants in favor of Lender a
security interest in all of Pledgor's right, title and interest in and to the
Pledged Shares, together with all of Pledgor's rights and privileges with
respect thereto, all proceeds, income and profits thereof and all property
received in exchange thereof or in substitution therefor (the "Collateral").
Section 3. Dividends, Options, or Other Adjustments. Until the Final Date,
Pledgor shall deliver as Collateral to the Lender any and all additional shares
of stock or any other property of any kind distributable on or by reason of the
Collateral, whether in the form of or by way of stock dividends, warrants, total
or partial liquidation, conversion, prepayments, redemptions or otherwise,
including cash dividends and any cash interest payments (excluding, however, so
long as no Event of Default has occurred and is continuing, the 1998-D Spread
Account Reduction Amount, if any). If any such dividends, interest payments,
additional shares of capital stock, instruments, or other property, a security
interest in which can only be perfected by possession, which are distributable
on or by reason of the Collateral pledged hereunder, shall come into the
possession or control of Pledgor, Pledgor shall forthwith transfer and deliver
such property to Lender as Collateral hereunder.
Section 4. Delivery of Share Certificates; Stock Powers. Pledgor shall
promptly deliver to Lender, or cause UDRC or UDRC II or any other entity issuing
the Collateral to deliver directly to Lender, share certificates or other
instruments representing any Collateral issued to, acquired or received by
Pledgor after the date of this Pledge Agreement with a stock or bond power duly
executed by Pledgor. If, at any time Lender notifies Pledgor that it requires
additional stock powers endorsed in blank, Pledgor shall promptly execute in
blank and deliver the requested power to Lender.
Section 5. Power of Attorney. Pledgor hereby constitutes and irrevocably
appoints Lender as Pledgor's true and lawful attorney-in-fact, with the power,
after the occurrence of an "Event of Default" under and as defined in the Loan
Agreement, to the full extent permitted by law, to affix to any certificates and
documents representing the Collateral, the stock or bond powers delivered with
respect thereto, and to transfer or cause the transfer of Collateral, or any
part thereof, on the books of UDRC or UDRC II or any other entity issuing such
Collateral, to the name of Lender or any nominee of either, and thereafter to
exercise with respect to such Collateral all the rights, powers and remedies of
an owner. The power of attorney granted pursuant to this Pledge Agreement and
all authority hereby conferred are granted and conferred solely to protect
Lender's interest in the Collateral and shall not impose any duty upon Lender to
exercise any power. This power of attorney shall be irrevocable as one coupled
with an interest until the Final Date.
Section 6. Inducing Representations of Pledgor. Pledgor represents and
warrants to Lender that:
(a) The Pledged Shares are validly issued, fully paid for and
non-assessable.
(b) The Pledged Shares represent all of the issued and outstanding capital
stock of UDRC and UDRC II.
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(c) Pledgor is the sole legal and beneficial owner of, and has good and
marketable title to, the Pledged Shares, free and clear of all
pledges, liens, security interests and other encumbrances except the
security interest created by this Pledge Agreement, and Pledgor has
the unqualified right and authority to execute and perform this Pledge
Agreement.
(d) No options, warrants or other agreements with respect to the
Collateral are outstanding.
(e) Any consent, approval or authorization of or designation or filing
with any authority on the part of Pledgor which is required in
connection with the pledge and security interest granted under this
Pledge Agreement has been obtained or effected.
(f) Neither the execution and delivery of this Pledge Agreement by
Pledgor, the consummation of the transaction contemplated hereby nor
the satisfaction of the terms and conditions of this Pledge Agreement:
(i) conflicts with or results in any breach or violation of any
provision of the articles of incorporation or bylaws of Pledgor
or any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award currently in effect having
applicability to Pledgor or any of its properties, including
regulations issued by an administrative agency or other
governmental authority having supervisory powers over Pledgor;
(ii) conflicts with, constitutes a default (or an event which with the
giving of notice or the passage of time, or both, would
constitute a default) by Pledgor under, or a breach of or
contravenes any provision of, any agreement to which Pledgor or
any of its subsidiaries is a party or by which it or any of their
properties is or may be bound or affected, including without
limitation any loan agreement, mortgage, indenture or other
agreement or instrument; or
(iii)results in or requires the creation of any lien upon or in
respect of any of Pledgor's assets except the lien created by
this Pledge Agreement.
(g) With respect to all Pledged Shares heretofore delivered to and
currently held by Lender, and upon delivery to Lender of any Pledged
Shares hereafter issued to, acquired or received by Pledgor, Lender
will have a valid, perfected security interest in and to the
Collateral, enforceable as such against all other creditors of Pledgor
and against all persons purporting to purchase any of the Collateral
from Pledgor.
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(h) The board of directors of UDRC and UDRC II have duly adopted the
resolutions identified on Exhibits A-1 and A-2, respectively, attached
hereto (the "Standing Dividend Resolutions"), and such resolutions
remains in full force and effect and have not been rescinded, amended,
altered, revoked or modified in any respect. Pursuant to the Standing
Dividend Resolutions, Pledgor has delivered the UDRC Dividend
Direction Letter and the UDRC II Dividend Direction Letter to the
Trustee.
Section 7. Obligations of the UDC and Pledgor. Pledgor further represents,
warrants and covenants to Lender that:
(a) Pledgor will not sell, transfer or convey any interest in, or suffer
or permit any lien or encumbrance to be created upon or to exist with
respect to, any of the Collateral during the term of this Pledge
Agreement, other than the lien granted hereunder and the lien granted
to General Electric Capital Corporation ("GECC") pursuant to the
Amended and Restated Motor Vehicle Installment Contract Loan and
Security Agreement entered into as of August 15, 1997 among GECC, UDC,
Pledgor, and certain other entities.
(b) Pledgor will not cause or permit UDRC or UDRC II to enter into any
securitization agreement or arrangement other than as set forth in the
UDRC Securitization Documents or the UDRC II Securitization Documents,
or substantially similar agreements and arrangements in the future,
without the prior written consent of Lender.
(c) Pledgor will not effect any securitizations through any subsidiary or
affiliate other than UDRC II unless either (i) (A) Pledgor pledges to
Lender all of the capital stock of any such subsidiary or affiliate
(the "New Issuer") and Pledgor delivers to Lender a dividend direction
letter executed by New Issuer and supported by a standing dividend
resolution of the board of directors of New Issuer, which dividend
direction letter and standing dividend resolution are each
substantially similar to the UDRC II Dividend Direction Letter and the
UDRC II Standing Dividend Resolution, or (B) New Issuer pledges
directly to Lender all of its interests in any trust or other entity
which issues interests in a securitization, and (ii) all other matters
in connection with such securitization are reasonably satisfactory in
form and substance to Lender.
(d) Pledgor will, at Pledgor's expense, at any time and from time to time
at the request of Lender do, make, procure, execute and deliver all
acts, things, writings, assurances and other documents as may be
reasonably proposed by Lender to preserve, establish, demonstrate or
enforce the rights, interests and remedies of Lender as created by,
provided in, or emanating from this Pledge Agreement.
(e) Pledgor will not take any action which would cause UDRC or UDRC II to
issue any other capital stock without the prior written consent of
Lender.
(f) Pledgor will not consent to any amendment to the articles of
incorporation of UDRC or UDRC II without the prior written consent of
Lender.
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(g) Pledgor will not take any action which would cause, and will not
consent to, any transfer by UDRC or UDRC II of the UDRC Class B
Certificates or the UDRC II Class B Certificates.
Section 8. Dividends. Pledgor has not and will not permit UDRC or UDRC II
to, rescind, amend, alter, revoke or modify the Standing Dividend Resolutions,
the UDRC Dividend Direction Letter or the UDRC II Dividend Direction Letter, as
the case may be, in any respect without the prior written consent of Lender.
Section 9. Voting Proxy. Pledgor hereby grants to Lender an irrevocable
proxy to vote the Pledged Shares with respect to any matter permitted under the
Articles of Incorporation of UDRC and UDRC II, as the case may be, which proxy
shall continue until the Final Date. Pledgor represents and warrants that it has
directed UDRC and UDRC II, in accordance with Section 217 of the Delaware
General Corporation Law, to reflect on UDRC's and UDRC II's books, respectively,
the right of Lender to vote the Pledged Shares. Upon the request of Lender,
Pledgor shall deliver to Lender such further evidence of such irrevocable proxy
to vote the Collateral as Lender may request pursuant hereto.
Section 10. Rights of Lender. Lender may, at any time and without notice,
discharge any taxes, liens, security interests or other encumbrances levied or
placed on the Collateral, pay for the maintenance and preservation of the
Collateral, or pay for insurance on the Collateral; the amount of such payments,
plus any and all reasonable fees, costs and expenses of Lender (including
attorneys' fees and disbursements) in connection therewith, shall be reimbursed
by UDC within five (5) days of demand, with interest thereon from the date paid
at the rate provided in the Loan Agreement.
Section 11. Remedies Upon Event of Default under the Loan Agreement. Lender
may exercise any one or more of the following remedies:
(a) Upon the occurrence of an "Event of Default" pursuant to the Loan
Agreement, Lender may without notice to Pledgor:
(i) cause the Collateral to be transferred to Lender's name or to the
name of a nominee of Lender, and thereafter exercise as to such
Collateral all of the rights, powers and remedies of an owner;
(ii) collect by legal proceedings or otherwise all dividends,
interest, principal payments, capital distributions and other
sums now or hereafter payable on account of the Collateral, and
hold all such sums as part of the Collateral, or apply such sums
to the payment of the Obligations in such manner and order as
Lender may decide, in its sole discretion; or
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(iii)enter into any extension, subordination, reorganization,
deposit, merger, or consolidation agreement, or any other
agreement relating to or affecting the Collateral, and in
connection therewith deposit or surrender control of the
Collateral thereunder, and accept other property in exchange
therefor and hold and apply such property or money so received in
accordance with the provisions hereof.
(b) In addition to all the rights and remedies of a secured party under
the Uniform Commercial Code as in effect in any applicable
jurisdiction, upon the occurrence of an "Event of Default" pursuant to
the Loan Agreement, Lender shall have the right, without demand of
performance or other demand, advertisement or notice of any kind,
except as specified below, to or upon Pledgor or any other person (all
and each of which demands, advertisements and/or notices are hereby
expressly waived to the extent permitted by law), to proceed forthwith
to collect, receive, appropriate and realize upon the Collateral, or
any part thereof in one or more parcels in accordance with applicable
securities laws and in a manner designed to ensure that such sale will
not result in a distribution of the Pledged Shares in violation of
Section 5 of the Securities Act of 1933, as amended (the "Securities
Act") and on such terms (including a requirement that any purchaser of
all or any party of the Collateral shall be required to purchase any
securities constituting the Collateral solely for investment and
without any intention to make a distribution thereof) as Lender, in
its sole and absolute discretion, deems appropriate without any
liability for any loss due a decrease in the market value of the
Collateral during the period held. If any notification to Pledgor of
intended disposition of the Collateral is required by law, such
notification shall be deemed reasonable and properly given if mailed
to Pledgor, postage prepaid, at least ten (10) days before any such
disposition at the address indicated by Pledgor's signature. Any
disposition of the Collateral or any part thereof may be for cash or
on credit or for future delivery without assumption of any credit
risk, with the right of Lender to purchase all or any part of the
Collateral so sold at any such sale or sales, public or private, free
of any equity or right of redemption in Pledgor, which right of equity
is, to the extent permitted by applicable law, hereby expressly waived
or released by Pledgor; or
(c) Lender may elect to sell the Collateral on any credit terms which it
deems reasonable. The out-of-pocket costs and expenses of such sale
shall be for the account of Lender. The sale of any of the Collateral
on credit terms shall not relieve Pledgor of its liability with
respect to the Obligations. All payments received in respect of any
sale of the Collateral by Lender shall be applied to the Obligations
as and when such payments are received and any price received by the
Collateral Agreement in respect of such sale shall be conclusive and
binding upon Lender; or
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(d) Pledgor recognizes that it may not be feasible to effect a public sale
of all or a part of the Collateral by reason of certain prohibitions
contained in the Securities Act, and that it may be necessary to sell
privately to a restricted group of purchasers who will be obliged to
agree, among other things, to acquire the Collateral for their own
account, for investment and not with a view for the distribution or
resale thereof. Pledgor agrees that private sales may be at prices and
other terms less favorable to the Seller than if the Collateral were
sold at public sale, and that Lender has no obligation to delay the
sale of any Collateral for the period of time necessary to permit the
registration of the Collateral for public sale under the Securities
Act. Pledgor agrees that a private sale or sales made under the
foregoing circumstances shall be deemed to have been made in a
commercially reasonable manner; or
(e) If any consent, approval or authorization of any state, municipal or
other governmental department, agency or authority shall be necessary
to effectuate any sale or other disposition of the Collateral or any
partial disposition of the Collateral, Pledgor will execute all such
applications and other instruments as may be required in connection
with securing any such consent, approval or authorization, and will
otherwise use its best efforts to secure the same; or
(f) Lender shall have the right to deliver, assign and transfer to the
purchaser thereof the Collateral so sold or disposed of, free from any
other claim or right of whatever kind, including any equity or right
of redemption of Pledgor. Pledgor specifically waives, to the extent
permitted by applicable law, all rights of redemption, stay or
appraisal which it may have under any rule of law or statute now
existing or hereafter adopted; or
(g) Lender shall not be obligated to make any sale or other disposition of
the Collateral permitted under this Pledge Agreement, unless the terms
thereof shall be satisfactory to Lender. Lender may, without notice or
publication, adjourn any such private or public sale and, upon five
(5) days' prior notice to Pledgor, hold such sale at any time or place
to which the same may be so adjourned. In case of any such sale of all
or any part of the Collateral on credit or future delivery, the
Collateral so sold may be retained by Lender until the selling price
is paid by the purchaser thereof, but Lender shall not incur any
liability in case of the failure of such purchaser to take up and pay
for the property so sold and, in the case of any such failure, such
property may again be sold as herein provided.
(h) All of the rights and remedies granted to Lender, including but not
limited to the foregoing, shall be cumulative and not exclusive and
shall be enforceable alternatively, successively or concurrently as
Lender may deem expedient.
Section 12. Limitation on Liability.
(a) Neither Lender nor any of its respective directors, officers,
employers or agents shall be liable to Pledgor, UDC, UDRC or UDRC II
for any action taken or omitted to be taken by it or them hereunder,
or in connection herewith, except that Lender shall be liable for its
own gross negligence, bad faith or willful misconduct.
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(b) Lender shall be protected and shall incur no liability to any party in
relying upon the accuracy, acting in reliance upon the contents, and
assuming the genuineness of any notice, demand, certificate,
signature, instrument or other document Lender reasonably believes to
be genuine and to have been duly executed by the appropriate
signatory, and (absent actual knowledge to the contrary of any officer
of Lender) Lender shall not be required to make any independent
investigation with respect thereto. Lender shall at all times be free
independently to establish to its reasonable satisfaction, but shall
have no duty to independently verify, the existence or nonexistence of
facts that are a condition to the exercise or enforcement of any right
or remedy hereunder.
(c) Lender may consult with qualified counsel, financial advisors or
accountants and shall not be liable for any action taken or omitted to
be taken by it hereunder in good faith and in accordance with the
advice of such counsel, financial advisors or accountants.
Section 13. Indemnification. UDC and Pledgor jointly and severally agree to
indemnify each of Lender, its Affiliates and Subsidiaries (as such terms are
defined in the Loan Agreement) and their respective directors, officers,
employees and agents, for, and hold each of Lender, its Affiliates and
Subsidiaries and their respective directors, officers, employees and agents
harmless against, any loss, liability or expense (including the costs and
expenses of defending against any claim of liability) arising our of or in
connection with this Pledge Agreement and the transactions contemplated hereby,
except any such loss, liability or expense as shall result from the respective
gross negligence, bad faith or willful misconduct of each of Lender, its
Affiliates and Subsidiaries or their respective directors, officers, employees
or agents. The obligation of UDC and Pledgor under this Section shall survive
the termination of this Pledge Agreement.
Section 14. Termination. This Pledge Agreement shall continue in full force
and effect until the Final Date. Subject to any sale or other disposition of the
Collateral pursuant to and in accordance with this Pledge Agreement, the
Collateral shall be returned to Pledgor on the Final Date. The obligation of UDC
under Section 15 of this Pledge Agreement shall survive the termination of this
Pledge Agreement.
Section 15. Compensation and Reimbursement. UDC agrees for the benefit of
Lender and as part of the Obligations to reimburse Lender upon its request for
all reasonable expenses, disbursements and advances incurred or made by Lender
in accordance with any provision of, or carrying out its duties and obligations
under, this Pledge Agreement (including the reasonable compensation and fees and
the expenses and disbursements of its agents, any independent certified public
accounts and independent counsel), except any expense, disbursement or advances
as may be attributable to negligence, bad faith or willful misconduct on the
part of Lender.
Section 16. Foreclosure Expenses of Lender. All expenses (including
reasonable fees and disbursements of counsel) incurred in compliance with this
Pledge Agreement by Lender in connection with any actual or attempted sale,
exchange of, or any enforcement, collection, compromise or settlement respecting
this Pledge Agreement or the Collateral, or any other action taken in compliance
with this Pledge Agreement by Lender hereunder, whether directly or as
attorney-in-fact pursuant to a power of attorney or other authorization herein
conferred, for the purpose of satisfaction of the Obligation shall be deemed an
Obligation for all purposes of this Pledge Agreement and Lender may apply the
Collateral to payment of or reimbursement of itself for such liability.
Page 8
<PAGE>
Section 17. Notices. Any notice or other communication given hereunder
shall be in writing and shall be sent by registered mail, postage prepaid,
overnight courier or personally delivered or facsimiles to the recipient as
follows:
To Pledgor:
UGLY DUCKLING CAR SALES
AND FINANCE CORPORATION
2525 East Camelback Road
Suite 500
Phoenix, Arizona 85016
Attn: Jon D. Ehlinger
Facsimile: (602) 852-6637
with a copy to:
SNELL & WILMER, L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attention: Timothy W. Moser
Facsimile: (602) 382-6070
To Lender:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Ira J. Platt
Telephone: (203) 622-3882
Facsimile: (203) 622-2090
with a copy to:
OFFICE OF THE GENERAL COUNSEL
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
600 Steamboat Road
Greenwich, Connecticut 06830
Telephone: (203) 625-6065
Facsimile: (203) 629-4640
with a copy to:
Page 9
<PAGE>
KIRKLAND & ELLIS
200 East Randolph
Chicago, Illinois 60601
Attention: Kenneth P. Morrison
Telephone: (312) 861-2347
Facsimile: (312) 861-2200
To UDC:
UGLY DUCKLING CORPORATION
2525 East Camelback Road
Suite 500
Phoenix, Arizona 85016
Attn: Steven P. Johnson
Facsimile: (602) 852-6696
with a copy to:
SNELL & WILMER, L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attention: Timothy W. Moser
Facsimile: (602) 382-6070
Section 18. General Provisions.
(a) The failure of Lender to exercise or delay in exercising any right,
power or remedy hereunder, shall not operate as a waiver thereof, nor
shall any single or partial exercise by Lender of any right, power or
remedy hereunder preclude any other or future exercise thereof, or the
exercise of any other right, power or remedy. The remedies herein
provided are cumulative and are not exclusive of any remedies provided
by law or any other agreement.
(b) The representations, covenants and agreements of Pledgor herein
contained shall survive the date hereof; provided, however, that only
Section 13 shall survive after the Final Date.
Page 10
<PAGE>
(c) Neither this Pledge Agreement nor the provisions hereof can be
changed, waived or terminated unless any such change, waiver or
termination shall be in writing, signed by the parties hereto. This
Pledge Agreement shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors, legal representatives
and assigns. If any provision of this Pledge Agreement shall be
invalid or unenforceable in any respect or in any jurisdiction, the
remaining provisions shall remain in full force and effect and shall
be enforceable to the maximum extent permitted by law.
(d) This Pledge Agreement may be executed in counterparts, each of which
shall constitute an original but all of which, when taken together,
shall constitute one instrument.
(e) THE VALIDITY OF THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS,
THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF,
AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL
MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF NEW YORK.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION
WITH THIS PLEDGE AGREEMENT MAY BE TRIED AND LITIGATED IN THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. PLEDGOR, COLLATERAL AGENT
AND LENDER WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH
MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO
THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION.
THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN AGREEMENT
OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT
CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.
BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS PLEDGE AGREEMENT
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
Page 11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Pledge Agreement on the date first above written.
UGLY DUCKLING CAR SALES AND FINANCE
CORPORATION, an Arizona corporation
By: /S/ JON EHLINGER
----------------
Name: Jon Ehlinger
Title: Secretary
UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /S/ DONALD L. ADDINK
--------------------
Name: Donald L. Addink
Title: Senior Vice President
GREENWICH CAPITAL FINANCIAL PRODUCTS,INC.,
a Delaware corporation
By: /S/ IRA PLATT
-------------
Name: Ira Platt
Title: Vice President
Page 12
EXHIBIT 10.4
March 25, 1999
VIA FACSIMILE (847-277-6996, 847-277-5978)
& REGULAR MAIL
Mr. Jeff Batka
Mr. W. Jerome McDermott
Asset Based Financing
General Electric Capital Corporation
540 W Northwest Hwy
Barrington, Illinois 60010
Re: GE Approval of Y2K Date Change
Dear Jerry and Jeff:
The purpose of this letter is to obtain the approval of General
Electric Capital Corporation ("GE") to amend Section 13.16(B) of the Amended and
Restated Motor Vehicle Installment Contract Loan and Security Agreement. Section
13.16(B) currently provides that Ugly Duckling shall be year 2000 compliant by
no later than March 31, 1999. Ugly Duckling has requested an extension of the
March 31, 1999 date to June 30, 1999. I understand you have agreed to this
extension. The purpose of this letter is to confirm the agreement between GE and
Ugly Duckling to amend Section 13.16(B) of the Amended and Restated Loan and
Security Agreement to extend the year 2000 compliance date from March 31st to
June 30th, 1999. Please acknowledge your agreement to this amendment by signing
this letter and returning it to me at your convenience. If you have any
questions or instructions regarding this matter, please contact me at any time.
Your cooperation is appreciated.
Sincerely,
/S/ JON D. EHLINGER
-------------------
Jon D. Ehlinger
General Counsel
Ugly Duckling Car Sales
JDE:ag
UDH.GE:CWJM4.DOC
<PAGE>
Mr. Jeff Batka
Mr. W. Jerome McDermott
March 25, 1999
Page Two
Cc: Don Addink
Mike Kasten
GE's approval to extend Ugly Duckling "shall be year 2000 compliant by no later
than March 31, 1999" to June 30, 1999 is contingent upon Ugly Duckling
delivering to GE within five days after each month and starting March 31, 1999,
progress updates (memos, gnat charts, contingency strategy, etc.) which
highlight significant deadline misses and the impact of such misses.
Accepted and approved this 23 day of March, 1999.
General Electric Capital Corporation
By: /s/ JEFF BATKA
---------------
Name: Jeff Batka
Its: Account Executive
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information as of and
for the three months ended March 31, 1999, which is extracted from the Condensed
Consolidated Balance Sheets, Statements of Operations, and Statements of Cash
Flows, and is qualified in its entirety by reference to the financial statements
within the report of Form 10-Q filing.
</LEGEND>
<CIK> 0001012704
<NAME> UGLY DUCKLING CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> Mar-31-1999
<CASH> 4,387
<SECURITIES> 0
<RECEIVABLES> 332,971
<ALLOWANCES> 73,373
<INVENTORY> 39,891
<CURRENT-ASSETS> 0<F1>
<PP&E> 44,237
<DEPRECIATION> 9,938
<TOTAL-ASSETS> 406,616
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 157,871
<TOTAL-LIABILITY-AND-EQUITY> 406,616
<SALES> 106,443
<TOTAL-REVENUES> 130,118
<CGS> 60,097
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 37,104
<LOSS-PROVISION> 28,561
<INTEREST-EXPENSE> 3,656
<INCOME-PRETAX> 700
<INCOME-TAX> 280
<INCOME-CONTINUING> 420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 420
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<FN>
<F1>UNCLASSIFIED BALANCE SHEET</FN>
</TABLE>
Exhibit-99
STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND RISK FACTORS
Risk Factors
There are various risks in purchasing our securities or investing in our
business, including those described below. You should carefully consider these
risk factors together with all other information included in this Form 10-Q.
Capitalized terms not otherwise defined in this Exhibit 99 shall have the
meaning assigned to them in the Form 10-Q.
We make forward looking statements
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward looking statements. These
statements may include, but are not limited to, projections of revenues, income,
or loss, estimates of capital expenditures, plans for future operations,
products or services, and financing needs or plans, as well as assumptions
relating to these matters. Forward looking statements speak only as of the date
the statement was made. They are inherently subject to risks and uncertainties,
some of which we cannot predict or quantify. Future events and actual results
could differ materially from the forward looking statements. When considering
each forward looking statement, you should keep in mind the risk factors and
cautionary statements found throughout this Form 10-Q and specifically those
found below. We are not obligated to publicly update or revise any forward
looking statements, whether as a result of new information, future events, or
for any other reason.
We have incurred net losses in three of the last five years and could incur
additional net losses in future periods.
We began operations in 1992 and incurred significant operating losses in
1994 and 1995. Although we recorded net earnings in 1996, 1997 and in the first
quarter of 1999, we incurred a net loss of $5.7 million in 1998. A substantial
portion of our net earnings in 1997 and 1996 was attributable to the gains
recognized on our securitization transactions. The net loss in 1998 was due in
large part to:
o a charge of approximately $9.1 million ($5.6 million, net of income
taxes) to discontinued operations in the first quarter of 1998 for the
closure of the branch office network,
o a charge of approximately $6.0 million ($3.6 million, net of income
taxes) to discontinued operations during the third quarter of 1998 due
primarily to higher than anticipated loan losses and servicing
expenses in connection with the branch office loan portfolio and to
the writeoff of $2.0 million ($1.2 million, net of income taxes) in
costs incurred in our terminated rights offering, and
o a change in the fourth quarter of 1998 in the way we structure
securitization transactions for accounting purposes.
There can be no assurance that we will be profitable again in future
periods. Our failure to be profitable can adversely affect the value of our
outstanding securities.
Factors Determining Our Future Profitability. Our ability to achieve
profitability will depend primarily upon our ability to:
o expand our revenue generating operations while not proportionately
increasing our administrative overhead,
o maintain or increase the level of loans serviced by our bulk
purchasing and loan servicing segment,
o originate and purchase contracts with an acceptable level of credit
risk,
o effectively collect payments due on the contracts in our portfolio and
portfolios we service for others,
o locate sufficient financing, with acceptable terms, to fund and
maintain our operations, and o adapt to the increasingly competitive
market in which we operate.
Our inability to achieve or maintain any or all of these objectives could
have a material adverse effect on our business and the value of our outstanding
securities. Outside factors, such as the economic, regulatory, and judicial
environments in which we operate, will also have an effect on our business.
<PAGE>
Our operations depend significantly on external financing.
We have borrowed, and will continue to borrow, substantial amounts to fund
our operations. Our operations require large amounts of capital. If we cannot
obtain the financing we need on a timely basis and on favorable terms, our
business will be adversely affected. We currently obtain our financing through
three primary sources:
o a revolving credit facility with General Electric Capital Corporation;
o securitization transactions; and
o loans from other sources.
Revolving Credit Facility with GE Capital. Our revolving facility with GE
Capital is our primary source of operating capital. We have pledged
substantially all of our assets to GE Capital to secure the borrowings we make
under this facility. Although this facility has a maximum commitment of $125
million, the amount we can borrow is limited by the amount of certain types of
assets that we own. In addition, we cannot borrow approximately $8 million of
the capacity while our guarantee to the First Merchants Contract Purchaser is in
effect. As of March 31, 1999, we owed approximately $75.6 million under the
revolving facility, and had the ability to borrow an additional $21.5 million.
The revolving facility expires in June 2000. Even if we continue to satisfy the
terms and conditions of the revolving facility, we may not be able to extend its
term beyond the current expiration date.
Securitization Transactions. We can restore capacity under the GE facility
from time to time by securitizing portfolios of finance receivables. Our ability
to successfully complete securitizations in the future may be affected by
several factors, including:
o the condition of securities markets generally, o conditions in the
asset-backed securities markets specifically,
o the credit quality of our loan contract portfolio, and
o the performance of our servicing operations.
The securitization subsidiaries are wholly-owned "bankruptcy remote"
entities. Their assets, including the line items "Residuals in Finance
Receivables Sold" and "Investments Held in Trust," which are a component of
Finance Receivables on our balance sheet, are not available to satisfy the
claims of our creditors.
On November 17, 1998, we announced that we were changing the way that we
structure transactions under our securitization program. In the past, we
structured these transactions as sales for accounting purposes. In the fourth
quarter of 1998, however, we began to structure securitizations for accounting
purposes to retain the financed receivables and related debt on our balance
sheet and recognize the income over the life of the contracts. In the past, gain
on sales of loans in securitization transactions has been material to our
profitability. This change will cause a material adverse effect on our reported
earnings until the net interest earnings from new contracts added to our balance
sheet approximates those net revenues that we historically recognized on our
securitization sales.
Contractual Restrictions. The revolving facility, the securitization
program, and our other credit facilities contain various restrictive covenants
that limit our operations. Under these credit facilities, we must also meet
certain financial tests. As of March 31, 1999, we did not satisfy the interest
coverage ratio under the GE facility. GE Capital waived this default as of March
31, 1999. At the present time, we believe that we are in compliance with the
terms and conditions of the revolving facility and our other credit facilities.
Failure to satisfy the covenants in our credit facilities and/or our
securitization program could have a material adverse effect on our operations.
<PAGE>
We have a high risk of credit losses because of the poor creditworthiness of our
borrowers.
Substantially all of the sales financing that we extend and the contracts
that we service are with sub-prime borrowers. Sub-prime borrowers generally
cannot obtain credit from traditional financial institutions, such as banks,
savings and loans, credit unions, or captive finance companies owned by
automobile manufacturers, because of their poor credit histories and/or low
incomes. We have established an Allowance for Credit Losses approximating 26.7%
of contract principal balances as of March 31, 1999 to cover anticipated credit
losses on the contracts currently in our portfolio. Further, the Allowance for
Credit Losses embedded in the Residuals in Finance Receivables Sold as a
percentage of the remaining principal balances of the underlying contracts was
approximately 20.5% as of March 31, 1999. We believe that our current Allowance
for Credit Losses is adequate to cover anticipated credit losses. There is,
however, no assurance that we have adequately provided for, or will adequately
provide for, such credit risks. A significant variation in the timing of or
increase in credit losses on our portfolio would have a material adverse effect
on our net earnings.
We also operate our Cygnet dealer program, under which we provide third
party dealers who finance the sale of used cars to sub-prime borrowers with
warehouse purchase facilities and operating lines of credit primarily secured by
those dealers' retail installment contract portfolios and/or inventory. While we
require third party dealers to meet certain minimum net worth and operating
history criteria before we loan money to them, these dealers may not otherwise
be able to obtain debt financing from traditional lending institutions. Like our
other financing activities, these loans subject us to a high risk of credit
losses that could have a material adverse effect on our operations and ability
to meet our other financing obligations.
Various industry considerations and legal contingencies affect us.
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. Companies in the used vehicle
sales and financing market have also been named as defendants in an increasing
number of class action lawsuits brought by customers claiming violations of
various federal and state consumer credit and similar laws and regulations. In
addition, certain of these companies have filed for bankruptcy protection. These
events:
o have lowered the value of securities of sub-prime automobile finance
companies,
o have made it more difficult for sub-prime lenders to borrow money, and
o could cause more restrictive regulation of this industry.
Compliance with additional regulatory requirements may increase our
operating expenses and reduce our profitability.
Interest rates affect our profitability.
Interest Rate Spread. A substantial portion of our financing income results
from the difference between the rate of interest we pay on the funds we borrow
and the rate of interest we earn on the contracts in our portfolio. While we
earn interest on the contracts we own at a fixed rate, we pay interest on our
borrowings under our GE facility at a floating rate. When interest rates
increase, our interest expense increases and our net interest margins decrease.
Increases in our interest expense that we cannot offset by increases in interest
income will lower our profitability.
<PAGE>
Impact of Laws Limiting Interest Rates. Historically, we conducted a
significant portion of our used car sales activities in, and a significant
portion of the contracts we service were originated in states that did not
impose limits on the interest rate that a lender may charge. However, we have
expanded, and will continue to expand, into states that impose interest rate
limitations. When a state limits the amount of interest we can charge on our
installment sales contracts, we may not be able to offset any increased interest
expense caused by rising interest rates or greater levels of borrowings under
our credit facilities. Therefore, these interest rate limitations or additional
laws, rules, or regulations that may be adopted in the future can adversely
affect our profitability.
Our business is subject to federal and state regulation, supervision, and
licensing.
We are subject to ongoing regulation, supervision, and licensing under
various federal, state, and local statutes, ordinances, and regulations. Among
other things, these laws:
o require that we obtain and maintain certain licenses and
qualifications,
o limit or prescribe terms of the contracts that we originate and/or
purchase,
o require specified disclosures to customers,
o limit our right to repossess and sell collateral, and
o prohibit us from discriminating against certain customers.
We believe that we are currently in substantial compliance with all
applicable material federal, state, and local laws and regulations. We may not,
however, be able to remain in compliance with such laws. If we do not comply
with these laws, we could be fined or certain of our operations could be
interrupted or shut down. Failure to comply could, therefore, have a material
adverse effect on our operations. In addition, the adoption of additional
statutes and regulations, changes in the interpretation of existing statutes and
regulations, or our entry into jurisdictions with more stringent regulatory
requirements could also have a material adverse effect on our operations.
We are dependent on our data processing platforms and other technology. Our
computer systems may be subject to a Year 2000 date failure.
Conversion of Our Data Processing Platforms. We recently converted our chain
of dealerships and related loan servicing data processing operations to a single
computer system. These conversions can cause various implementation and
integration problems that can affect our servicing operations and result in
increases in contract delinquencies and charge-offs and decreases in our
servicing income. Failure to successfully complete our conversions could
materially affect our business and profitability.
Year 2000 Readiness. We have recently completed program modifications or
changes to our computer systems to allow them to properly process transactions
relating to the Year 2000 and beyond. We are currently performing future date
testing on our program code. We estimate that we will spend between $2.2 million
to $2.7 million for Year 2000 evaluation, remediation, testing, and replacement.
We have spent approximately $2.0 million to date. We can be adversely affected
by Year 2000 problems in the business systems of our suppliers, vendors, and
business partners, such as utility suppliers, banking partners and
telecommunication service providers. We can also be adversely affected if Year
2000 problems result in business disruptions or failures that impact our
customers' ability to make their loan payments. Failure to fully address and
resolve these Year 2000 issues could have a material adverse effect on our
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000 Readiness Disclosure."
<PAGE>
Our Current Contingency Plan is Being Revised. We depend on our loan
servicing and collection facilities and on long-distance and local
telecommunications access to transmit and process information among our various
facilities. We use a standard program to prepare and store off-site backup tapes
of our main system applications and data files on a routine basis. However, we
believe that we need to revise our current contingency plan because of our
recent system conversions and significant growth. Although we intend to update
our contingency plan during 1999, there could be a failure in the interim. In
addition, the plan as revised may not prevent a system failure or allow us to
timely resolve any systems failure. Also, a natural disaster, calamity, or other
significant event that causes long-term damage to any of these facilities or
that interrupts our telecommunications networks could have a material adverse
effect on our operations.
We have certain risks relating to the First Merchants transaction.
We have entered into several transactions in the bankruptcy proceedings of
First Merchants Acceptance Corporation (First Merchants). We purchased 78% of
First Merchants' senior bank debt at a 10% discount. We agreed to pay the
selling banks additional consideration up to the amount of this 10% discount (or
approximately $7.6 million) if First Merchants makes cash payments or issues
notes at market rates to its unsecured creditors and equity holders in excess of
10% of their allowed claims against First Merchants. First Merchants may make
future cash payments to its unsecured creditors and equity holders from
recoveries on the contracts which originally secured the senior bank debt and
from certain residual interests in First Merchants' securitized loan pools,
after First Merchants pays certain other amounts (Excess Collections). Under
First Merchants plan of reorganization, we will split these Excess Collections
with First Merchants.
If we satisfy certain requirements, we may be able to issue shares of our
common stock in exchange for all or part of First Merchants' share of the Excess
Collections. This would reduce the cash distributions that could be made to
First Merchants' unsecured creditors and/or equity holders. We would then be
entitled to receive First Merchants' share of the Excess Collections. Any shares
would be priced at 98% of the average closing price of our common stock for the
10 trading days prior to the date of issuance. This market price must be at
least $8.00 per share or we cannot exercise this option.
Even if we are able to issue common stock for this purpose:
o the number of shares that we issue may not be sufficient to prevent
First Merchants from paying unsecured creditors and equity holders more
than 10% of their claims against First Merchants. Should this happen,
we would be required to pay the selling banks additional consideration
for our purchase of 78% of First Merchants' senior bank debt, and
o the issuance of shares would cause dilution to our common stock.
We also have other risks in the First Merchants bankruptcy case:
<PAGE>
o we sold the contracts securing the bank claims at a profit to a third
party purchaser (the Contract Purchaser). We guaranteed the Contract
Purchaser a specified return on the contracts with a current maximum of
$8 million. Although we obtained a related guarantee from First
Merchants secured by certain assets, there is no assurance that the
First Merchants guarantee will cover all of our obligations under our
guarantee to the Contract Purchaser,
o we have made debtor-in-possession loans to First Merchants, secured by
certain assets. We have continuing obligations under our
debtor-in-possession credit facility (DIP facility). First Merchants is
currently in default on the DIP facility However, we have negotiated a
settlement with them that increases our funding obligation by $2.0
million subject to satisfaction of certain conditions.
o we entered into various agreements to service the contracts in the
securitized pools of First Merchants and the contracts sold to the
Contract Purchaser. If we lose our right to service these contracts,
our 17 1/2% share of the Excess Collections can be reduced or
eliminated.
Each of the First Merchants risks described in this section could have a
material adverse effect on our operations.
If we make additional acquisitions, there is no assurance they will be
successful.
In 1997, we completed three significant acquisitions (Seminole, E-Z Plan,
and Kars). We intend to consider additional acquisitions, alliances, and
transactions involving other companies that could complement our existing
business. We may not, however, be able to identify suitable acquisition parties,
joint venture candidates, or transaction counterparties. Additionally, even if
we can identify suitable parties, we may not be able to consummate these
transactions on terms that we find favorable.
Furthermore, we may not be able to successfully integrate any businesses
that we acquire into our existing operations. If we cannot successfully
integrate acquisitions, our operating expenses may increase in the short-term.
This increase would affect our net earnings, which could adversely affect the
value of our outstanding securities. Moreover, these types of transactions 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 our profitability. In addition to
the risks already mentioned, these transactions involve numerous other risks,
including the diversion of management attention from other business concerns,
entry into markets in which we have had no or only limited experience, and the
potential loss of key employees of acquired companies. Occurrence of any of
these risks could have a material adverse effect on us.
Our industry is highly competitive.
Although a large number of smaller companies have historically operated in
the used car sales industry, this industry has recently attracted significant
attention from a number of large companies. These large companies include
AutoNation, U.S.A., CarMax, and Driver's Mart. These companies have either
entered the used car sales business or announced plans to develop large used car
sales operations. Many franchised new car dealerships have also increased their
focus on the used car market. We believe 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 we do.
Among other things, increased competition could result in increased wholesale
costs for used cars, decreased retail sales prices, and lower margins.
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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. In recent years, several consumer finance
companies have completed public offerings. Through these public offerings, these
companies have been able to raise the capital necessary to fund expansion and
support increased purchases of contracts. These companies have increased the
competition for the purchase of contracts, in many cases purchasing contracts at
higher prices than we would be willing to pay.
There are numerous financial services companies serving, or capable of
serving, our market. These companies include traditional financial institutions
such as banks, savings and loans, credit unions, and captive finance companies
owned by automobile manufacturers, as well as other non-traditional consumer
finance companies, many of which have significantly greater financial and other
resources than our own. Increased competition may cause downward pressure on the
interest rates that we charge. This pressure could affect the interest rates we
charge on contracts originated by our dealerships or cause us to reduce or
eliminate the acquisition discount on the contracts we purchase from third party
dealers. Either change could have a material adverse effect on the value of our
securities.
The success of our operations depends on certain key personnel.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our senior
management team. The unexpected loss of the services of any of our key
management personnel or our inability to attract new management when necessary
could have a material adverse effect on our operations. Currently we do not
maintain any key person life insurance on any of our executive officers.
We may be required to issue stock in the future that will dilute the value
of our existing stock.
Issuance of any or all of the following securities may dilute the value of
the securities that our existing stockholders now hold:
o we have granted warrants to purchase a total of approximately 1.6
million shares of our common stock to various parties with exercise
prices ranging from $6.75 to $20.00 per share,
o we may be required to issue additional warrants in the future in
connection with certain transactions we have entered into, and
o we may issue common stock in the First Merchants transaction in
exchange for First Merchants portion of the Excess Collections.
A principal stockholder controls a significant percentage of our stock.
Mr. Ernest C. Garcia, II, our Chairman, Chief Executive Officer, and
principal stockholder, or his affiliates held approximately 4,774,500 shares or
32.0% of our outstanding common stock as of March 31, 1999. This percentage
includes 136,500 shares held by The Garcia Family Foundation, Inc., an Arizona
non-profit corporation, and 138,000 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 our activities as well as on all matters
requiring approval of our stockholders. These matters include electing or
removing members of our board of directors, engaging in transactions with
affiliated entities, causing or restricting our sale or merger, and changing our
dividend policy. The interests of Mr. Garcia may conflict with the interests of
our other stockholders.
There is a potential anti-takeover effect if we issue preferred stock.
Our Certificate of Incorporation authorizes us to issue "blank check"
preferred stock. Our Board of Directors may fix or change from time to time the
designation, number, voting powers, preferences, and rights of this stock. Such
issuances could make it more difficult for a third party to acquire us by
reducing the voting power or other rights of the holders of our common stock.
Although we have no present intention of issuing any shares of our authorized
preferred stock, we may do so in the future.
