<PAGE> 1
REGISTRATION NO. 333-57323
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CYGNET FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6141 86-0917503
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN P. JOHNSON, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
CYGNET FINANCIAL CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
(602) 852-6600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
STEVEN D. PIDGEON, ESQ.
RICHARD B. STAGG, ESQ.
ROSARIO A. RODRIGUEZ, ESQ.
SNELL & WILMER L.L.P.
ONE ARIZONA CENTER
PHOENIX, ARIZONA 85004-0001
(602) 382-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AMOUNT AGGREGATE OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rights...................................... 4,750,000 $0.00(1) $0.00(1)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value............... 5,678,572(2) $39,750,004 $11,726(3)
- ---------------------------------------------------------------------------------------------------------------------------
Total............................. $39,750,004 $11,726(3)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to Rule 457(g), no registration fee is payable because a fee is
paid for registration of the shares of Common Stock offered pursuant to the
Rights.
(2) Includes 714,286 shares of Common Stock that may be purchased by Ernest C.
Garcia, II pursuant to the Additional Purchase Right (as defined herein) and
214,286 shares of Common Stock that may be purchased by certain directors
and officers of the registrant pursuant to the D&O Purchase Right (as
defined herein).
(3) $11,520 previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION DATED JULY , 1998
[CYGNET FINANCE LOGO]
CYGNET FINANCIAL CORPORATION
5,678,572 SHARES OF COMMON STOCK
AND
4,750,000 COMMON STOCK PURCHASE RIGHTS
This Prospectus relates to a rights offering (the "Rights Offering"), which
includes (a) a distribution of transferable rights ("Rights") to subscribe for
shares of Common Stock, $.001 par value (the "Common Stock") of Cygnet Financial
Corporation ("Cygnet") to holders of Common Stock, par value $.001 per share
("UDC Common Stock") of Ugly Duckling Corporation ("UDC"), (b) the sale of
shares of Common Stock upon exercise of the Rights (the "Offered Shares"), (c)
the sale of shares of Common Stock pursuant to the Over-Subscription Privilege
(as defined herein), (d) the sale of shares of Common Stock to the Standby
Purchaser (as defined herein) pursuant to the terms of the Standby Purchase
Agreement (as defined herein), and (e) the sale of shares of Common Stock
pursuant to the Additional Purchase Right (as defined herein) and the D&O
Purchase Right (as defined herein). The holders of UDC Common Stock receiving
Rights (and their transferees) are referred to herein as "Rights Offering
Participants."
The Rights Offering is being effected as part of a plan to separate UDC and
its existing subsidiaries into two publicly-held companies (the "Split-up").
Pursuant to the Split-up, Cygnet, a newly-formed Delaware corporation and
wholly-owned subsidiary of UDC, and its subsidiaries will acquire UDC's bulk
purchasing and certain servicing operations, its third party dealer financing
operations (excluding the branch office network operations that UDC closed in
the first quarter of 1998), and substantially all of the assets and certain
liabilities acquired pursuant to the transactions between UDC and First
Merchants Acceptance Corporation and Reliance Acceptance Group, Inc. Cygnet may
also effect certain additional transactions prior to the Split-up as generally
described herein. See "Business -- Recent Developments." In exchange for these
assets, Cygnet will issue $40 million of its Preferred Stock (as defined herein)
and make a cash or equivalent payment as described herein, which Cygnet
estimates will range from $10 million to $20 million. The sum of the Preferred
Stock and the cash payment will be equivalent to the greater of the appraised
value or book value of the assets transferred (in each case net of assumed
liabilities) determined as of the closing of the transaction. The proceeds of
the Rights Offering will be used primarily to provide funds to Cygnet for
capital expenditures and working capital and to fund the cash portion of the
consideration as described herein.
After consummation of the Split-up, Cygnet and UDC will be owned, operated,
and managed as separate public companies with separate management. Cygnet will
operate substantially all of the third party dealer finance operations currently
conducted by UDC, including its bulk purchasing and certain servicing operations
and its collateralized dealer finance program. UDC will retain and continue to
operate its "buy here-pay here" dealerships and to service the finance
receivables generated by those dealerships.
Pursuant to the Rights Offering, each holder of record of UDC Common Stock
on August 17, 1998 (the "Record Date") will receive one (1) Right for every four
(4) shares of UDC Common Stock held on the Record Date. Each Right represents
the right to subscribe for one share of Common Stock (the "Primary
Subscription") at an exercise price of $7.00 (the "Subscription Price"). The
Rights will be exercisable for a limited period (the "Rights Offering Period")
beginning on the date of such distribution (the "Commencement Date") and ending
at 5:00 p.m. (Minnesota time) on the date that is 20 days following the
Commencement Date or such other later date to which the Rights Offering is
extended (the "Expiration Date"). The Rights will trade only during the Rights
Offering Period. Holders of Rights who exercise all of their Rights may
subscribe at the Subscription Price for additional shares of Common Stock out of
the pool of shares underlying unexercised Rights on the Expiration Date, if any,
equal to the number of shares of Common Stock purchased through Rights exercised
during the Rights Offering Period (the "Over-Subscription Privilege"), subject
to allocation as described herein. See "The Rights Offering."
The issuance of Common Stock following the Rights Offering and the transfer
of assets from UDC to Cygnet are contingent upon, among other things, the
approval of the Split-up by the stockholders of UDC and the purchase of at least
75% of the Offered Shares (the "Required Purchase Amount"). Ernest C. Garcia,
II, Cygnet's Chairman of the Board, Chief Executive Officer, and President, and
the holder of approximately 25.2% of the outstanding shares of UDC Common Stock,
has agreed to purchase his full pro rata share of the Offered Shares. In
addition, as Standby Purchaser (as described herein), Mr. Garcia has agreed,
subject to certain conditions, to purchase, through the exercise of his
Over-Subscription Privilege and his Standby Purchase Obligation (as defined
herein), the number of shares of Common Stock required to meet the Required
Purchase Amount. If the Rights Offering is not consummated, all funds tendered
for shares of Common Stock will be returned promptly, without interest,
following the termination of the Rights Offering.
To provide additional capital, Mr. Garcia may, at his election, purchase up
to an additional 714,286 shares of Common Stock at the Subscription Price, for
an aggregate price of approximately $5 million, over and above the Required
Purchase Amount, and directors and officers of Cygnet (other than Mr. Garcia)
will have the opportunity to purchase up to 214,286 shares of Common Stock at
the Subscription Price, for an aggregate price of approximately $1.5 million,
over and above any shares of Common Stock that such directors and officers have
the right to acquire through the Rights Offering.
Prior to this Rights Offering, there has been no public market for the
Rights or the Common Stock. The Rights and the Common Stock have been approved
for listing on the Nasdaq National Market under the symbols "CGNTR" and "CGNT,"
respectively, subject to notice of issuance.
The Information Agent for the Rights Offering is Corporate Investor
Communications, Inc. ("CIC"). Questions concerning the Rights Offering may be
addressed to CIC at 1-888-673-4478.
SEE "RISK FACTORS" AT PAGE 13 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PURCHASE PRICE COMMISSION PROCEEDS(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...................... $7.00 none $7.00
- ---------------------------------------------------------------------------------------------------------------------------------
Total................... $39,750,004(2) none $39,750,004(2)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by Cygnet estimated at $1,275,000
relating to the Rights Offering.
(2) Assumes full exercise of all Rights, the Additional Purchase Right, and
the D&O Purchase Right, and the corresponding sale of all 5,678,572
shares of Common Stock offered hereby at the Subscription Price.
------------------------
THE DATE OF THIS PROSPECTUS IS JULY , 1998
<PAGE> 3
THERE MAY BE CERTAIN TAX CONSEQUENCES TO YOU IF THE RIGHTS OFFERING DESCRIBED
HEREIN IS EFFECTED. TO AVOID THE POSSIBILITY OF THE RECOGNITION OF ORDINARY
INCOME AND THE CREATION OF A POTENTIALLY DEFERRED OR NONDEDUCTIBLE CAPITAL LOSS,
IT WILL, IN MANY INSTANCES, BE IN THE INTERESTS OF RIGHTS OFFERING PARTICIPANTS
TO EITHER EXERCISE OR SELL THE RIGHTS, RATHER THAN TO ALLOW THE RIGHTS TO LAPSE.
PLEASE READ THE ENCLOSED MATERIALS CONCERNING THE RIGHTS OFFERING CAREFULLY.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and combined financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors." Unless the context
otherwise requires, the term "Company" as used herein means Cygnet Financial
Corporation and all of its subsidiaries, including the assets and operations of
those entities both before and after the separation of such assets and
operations from UDC.
THE COMPANY
General. Assuming successful completion of the Rights Offering and
consummation of the Split-up, the Company will engage in the business of
providing various financial services primarily to the sub-prime segment of the
automobile financing industry, which focuses on selling and financing the sale
of new and used cars to persons who have limited credit histories, low incomes,
or past credit problems ("Sub-Prime Borrowers"). The Company will (i) engage in
the bulk purchase and servicing of pools of finance receivables generated from
the sale of new and used automobiles by independent third party dealers ("Third
Party Dealers"), including pools of charged-off receivables, deficient loans, or
other receivables; (ii) service pools of various types of finance receivables;
(iii) operate a collateralized dealer financing program (the "Cygnet Dealer
Program"), pursuant to which it will provide qualified Third Party Dealers with
warehouse purchase facilities and revolving lines of credit primarily secured by
the dealers' finance receivable portfolios; and (iv) pursue other opportunities
in the financial services market.
On the effective date of the Split-up (the "Effective Date"), the Company
will acquire the bulk purchasing and certain servicing operations and related
assets from UDC and substantially all of UDC's servicing and other rights and
certain obligations pursuant to transactions with First Merchants Acceptance
Corporation ("FMAC") and Reliance Acceptance Group, Inc. ("Reliance"). The
Company intends to consider the bulk purchase and servicing of other portfolios
of finance receivables, including instances in which the holders of the
portfolios are experiencing financial difficulties. For a description of the
Company's bulk purchase and servicing operations and the Company's rights and
obligations with respect to the FMAC and Reliance transactions, see
"Business -- Bulk Purchasing and Servicing Operations." The Company also may
enter into other transactions and acquire other assets prior to the Effective
Date similar to those described above.
The Company also will acquire the operations and related assets associated
with the Cygnet Dealer Program, which provides qualified Third Party Dealers
with warehouse purchase facilities and revolving lines of credit primarily
secured by the dealers' finance receivable portfolios. Unlike other typical
financing programs available to dealers, the Cygnet Dealer Program permits
participating dealers to retain servicing rights with respect to their finance
receivable portfolios, which enables dealers to generate servicing income and
maintain relationships with their customers, which dealers believe is a key
factor in generating referrals for additional sales and improving the chances of
repeat business. For a description of the Cygnet Dealer Program, see
"Business -- Cygnet Dealer Program."
In late 1997, UDC, which operates the largest publicly-held chain of "buy
here-pay here" used car dealerships in the United States, began a strategic
evaluation of its operations, ultimately determining to separate its dealership
operations from its non-dealership operations pursuant to the Split-up. Cygnet
is a Delaware corporation formed in June 1998 to acquire and operate the
non-dealership operations of UDC and will, upon successful completion of the
Rights Offering and consummation of the Split-up, be a separately-traded public
company. The Company's principal executive offices will be located at 2525 East
Camelback Road, Suite 1150, Phoenix, Arizona 85016 and its telephone number will
be (602) 852-6600.
Recent Developments. The Company and UDC have recently concluded or
currently are in the process of evaluating a number of transactions (and may
identify and pursue other transactions in the ordinary course
3
<PAGE> 5
of business) that, if concluded prior to the Split-up, would be assigned to, or
concluded directly by, the Company ("Interim Transactions"). Interim
Transactions under consideration include (i) the acquisition of and/or a
management arrangement with an operating insurance agency, which offers
insurance-related products and services designed to reduce the risk of loss to
holders of portfolios of automobile and residential mortgage loans, for a price
estimated by the Company of approximately $4.0 million, (ii) the acquisition of
a pool of charged-off automobile financial receivables for a price estimated by
the Company of approximately $400,000, (iii) the purchase of a bank's interest
in a credit facility secured by a pool of receivables and by a residual interest
in a securitized pool of receivables for approximately $7.8 million, and (iv) a
loan from the Company of $2 million to a company in exchange for servicing
rights, warrants, and certain additional investment rights. Interim Transactions
recently concluded include (i) a servicing arrangement relating to a $50 million
portfolio of automobile finance receivables, and (ii) the assumption of special
servicing arrangements relating to six pools of automobile finance receivables,
and the purchase of five pools of charged off receivables for approximately
$600,000. For a more detailed description of transactions currently under
consideration or recently concluded by the Company, see "Business -- Recent
Developments." The Company does not believe any of the Interim Transactions
recently concluded or currently under consideration are material to its
financial condition or results of operations, individually or in the aggregate,
or that any of such transactions would constitute the acquisition of a business
for which separate financial statements would be required to be publicly
disclosed by the Company. In addition, none of the Interim Transactions
described above require approval by the shareholders of the Company or UDC, nor
are any of such transactions with an affiliate of the Company or UDC. Interim
Transactions under consideration are subject to a number of contingencies, which
may include the negotiation and preparation of definitive agreements, the
completion of due diligence, and the receipt of required consents from any third
parties. As a result, there can be no assurance that these transactions will be
consummated or that if consummated will be profitable.
In addition to the transactions described above, the Company may purchase
or enter into servicing agreements with respect to portfolios of loan
receivables, may purchase debt secured by portfolios of receivables, may
purchase servicing or other assets, and may enter into other similar
transactions prior to the Effective Date. To effect any Interim Transactions,
the Company may borrow money from a third party lender ("Third Party Loans") or
from UDC ("Interim Company Loans"). Third Party Loans made to the Company prior
to the Effective Date may be guaranteed by UDC. UDC will seek to have any such
guarantee released as of the Effective Date with the Company likely providing a
replacement guarantee. Interim Company Loans may become due and payable on the
Effective Date. If any Interim Transactions are effected or the Company
otherwise has operations prior to the Effective Date, on the business day
immediately preceding the Effective Date, the Company will distribute to UDC all
earnings accrued to such date. In addition, the Company will pay to UDC the
excess, if any, of the aggregate appraised value of the assets and rights and
related liabilities acquired by the Company in Interim Transactions (the
"Interim Assets") as of the Effective Date over the aggregate book value of the
Interim Assets (the "Interim Consideration"). UDC and the Company may agree to
other terms with respect to how Interim Transactions will be structured or
treated. The purpose for the payment by the Company of the Interim Consideration
is to place both parties in substantially the same economic situation each would
be in if the Interim Transactions were effected by UDC rather than the Company
prior to the Effective Date and the resulting assets and liabilities were
transferred to the Company on the Effective Date.
THE RIGHTS OFFERING
General. The Rights Offering is being made as part of a plan pursuant to
which UDC and its existing subsidiaries will be separated into two publicly-held
companies (the "Split-up"). Pursuant to the Split-up, Cygnet, a newly-formed
Delaware corporation and wholly-owned subsidiary of UDC, and its subsidiaries,
will acquire UDC's bulk purchasing and certain servicing operations, its
third-party dealer financing operations (excluding the branch office network
operations that UDC closed in the first quarter of 1998), and substantially all
of UDC's assets and certain liabilities acquired pursuant to the FMAC and
Reliance transactions. In exchange for such assets, Cygnet will issue $40
million of its Preferred Stock (as defined below) and make a cash payment or
equivalent as described herein. The sum of the Preferred Stock and the
4
<PAGE> 6
cash or equivalent payment will be equal to the greater of the appraised value
or book value of the assets transferred (in each case net of assumed
liabilities) determined as of the Effective Date. The Company does not
anticipate that the appraised value of the assets transferred will be materially
different than their book value.
Description of Rights. In connection with the Split-up, Cygnet will issue
transferable rights ("Rights") to subscribe for shares of its Common Stock, par
value $.001 per share (the "Common Stock"), to UDC's stockholders of record as
of the Record Date pro rata in accordance with the ownership of UDC Common Stock
as of the Record Date. Each holder of record of UDC Common Stock on the Record
Date will receive one (1) Right for every four (4) shares of UDC Common Stock.
Each Right entitles the holder to purchase one (1) share of Common Stock (the
"Primary Subscription") at an exercise price of $7.00 (the "Subscription
Price"). The Rights are exercisable and transferable for a limited period (the
"Rights Offering Period") beginning on the date of such distribution (the
"Commencement Date") and ending at 5:00 p.m., Minnesota time, on the date that
is 20 days following the Commencement Date or such other later date to which the
Rights Offering is extended in the Company's sole discretion (the "Expiration
Date"). The Company may determine to extend the Rights Offering Period if the
Company believes a longer offering period is advisable in order to allow a more
diversified pool of holders to exercise the Rights or for any other reason. The
Company determined the Subscription Price based primarily upon two factors; (i)
the amount of cash the Company believes is necessary to satisfy its short-term
business plan and (ii) the number of shares of Common Stock that the Company
wanted to issue. The Company established a goal to issue between five and six
million shares of Common Stock, which resulted in the ratio of one Right for
every four shares of UDC Common Stock. In determining the amount of capital
required, the Company considered the potential for additional bulk purchasing
opportunities, the expected growth of the Cygnet Dealer Program, and the
development of corporate infrastructure to position the Company for acquisition
opportunities as well as the Company's ability to leverage the capital raised to
address these opportunities. The proceeds of the Rights Offering will be used
primarily to provide funds to the Company for capital expenditures and working
capital and to fund the cash portion of the consideration described herein.
Required Purchase Amount. The issuance of Common Stock following the
Rights Offering is contingent upon, among other things, approval of the Split-up
by the stockholders of UDC and the purchase of at least 75% of the Offered
Shares (the "Required Purchase Amount"). Mr. Garcia, Cygnet's Chairman of the
Board, Chief Executive Officer, and President, and the holder of approximately
25.2% of the outstanding shares of UDC Common Stock, has agreed to purchase his
full pro rata share of the Common Stock offered pursuant to the Rights Offering.
In addition, Mr. Garcia has agreed to purchase, subject to certain conditions,
through the exercise of his Over-Subscription Privilege (as described below),
and his Standby Purchase Obligation (as described below), the number of shares
of Common Stock required to meet the Required Purchase Amount.
Assets to be Transferred. If the Rights Offering is successfully
completed, on the Effective Date of the Split-up, UDC and its subsidiaries will
transfer to the Company certain assets and liabilities. In general, the Company
will acquire substantially all of UDC's assets and related liabilities required
to operate UDC's non-dealership operations, other than those assets and
liabilities related to UDC's branch office network, which UDC closed in the
first quarter of 1998. The transfer will include (i) UDC's bulk purchase and
certain servicing operations with respect to finance receivables originated by
Third Party Dealers, (ii) the assets and related liabilities of Cygnet Dealer
Finance, Inc., currently a wholly-owned subsidiary of UDC, through which the
Company will provide qualified Third Party Dealers with warehouse purchase
facilities and revolving lines of credit primarily secured by the dealers'
finance receivable portfolios under the Cygnet Dealer Program; (iii)
substantially all of UDC's rights and certain obligations pursuant to certain
transactions with FMAC, including the servicing platform and certain other
rights and residual interests, and the assumption by the Company of certain
funding obligations and guarantees of UDC in connection with the FMAC
transaction, but excluding certain rights and liabilities retained by UDC as
described under "Business -- Bulk Purchasing and Servicing Operations --
Transactions Regarding First Merchants Acceptance Corporation;" and (iv)
substantially all of UDC's rights and certain obligations pursuant to certain
transactions with Reliance, including the servicing platform and certain
servicing and transition servicing arrangements, as described
5
<PAGE> 7
under "Business -- Bulk Purchasing and Servicing Operations -- Transactions
Regarding Reliance Acceptance Group." The Transferred Assets will not include
cash received by UDC prior to the Effective Date. UDC also may enter into other
transactions and acquire other assets prior to the Effective Date similar to
those described above and may transfer to the Company the assets and related
liabilities so acquired. All transferred assets and related liabilities are
collectively referred to herein as the "Split-up Businesses" or the "Transferred
Assets." As of June 30, 1998, the Transferred Assets had a net book value of
approximately $54.7 million and a net appraised value of approximately $54.9
million. The Company will record the Transferred Assets at their historical
basis, as if they had been acquired in a transaction accounted for as a "pooling
of interests." The Company anticipates that the net book value of the
Transferred Assets will increase prior to the transfer contemplated herein as
additional finance receivables are acquired under warehouse purchase facilities
or additional advances are made under revolving lines of credit through the
Cygnet Dealer Program.
Consideration for Transferred Assets. As consideration for the Transferred
Assets, Cygnet will issue to UDC 40,000 shares of Cumulative Convertible
Preferred Stock, Series A, $.001 par value per share (the "Preferred Stock"),
with an aggregate liquidation preference of $40 million, and make a cash or
equivalent payment equal to the difference between the greater of the appraised
value or book value of the Transferred Assets (in each case net of assumed
liabilities) determined as of the Effective Date and the $40 million of
Preferred Stock (the "Cash Payment"), which the Company currently estimates will
range from $10 million to $20 million. The Company also may be required to repay
to UDC any Interim Company Loans, would pay to UDC any Interim Consideration,
and would distribute to UDC any earnings accrued prior to the Effective Date.
UDC also may require the release of any guarantee of Third Party Loans to the
Company. Alternatively, UDC and the Company may agree as to other treatment of
the Interim Transactions.
Holders of the Preferred Stock, in preference to the Common Stock, will be
entitled to receive cumulative cash dividends, from the Effective Date through
the first anniversary of such date, at the initial annual rate of 7% of the Base
Liquidation Amount (as defined below), and escalating 1% per annum on each
anniversary thereafter to a maximum rate of 11% per annum on the aggregate Base
Liquidation Amount, in each case payable quarterly in arrears on the first day
of March, June, September, and December of each year, beginning December 1,
1998, when and as declared by the Board of Directors of Cygnet out of funds
legally available for such payment. Holders of the Preferred Stock, in
preference to the holders of Common Stock, will be entitled to receive, in the
event of dissolution or liquidation of Cygnet, $1,000 per share (the "Base
Liquidation Amount") plus accrued and unpaid dividends thereon (the "Liquidation
Preference Amount").
The Preferred Stock will be redeemable at Cygnet's option at any time in
whole or in part at a redemption price equal to the Liquidation Preference
Amount as of the redemption date; provided, however, that no such redemption
will be authorized unless, in the reasonable judgment of the Company and UDC,
the redemption proceeds would be treated for federal income tax purposes as
proceeds from a sale of such stock and not as dividends paid with respect to
such stock. As a consequence, redemption of the Preferred Stock may be limited
and may be confined to a single redemption of all outstanding Preferred Stock.
The Company will be authorized to redeem shares of Common Stock held by holders
of the Preferred Stock to the extent necessary to assure that the proceeds from
a redemption of Preferred Stock will be treated as proceeds from a sale of such
stock and not as dividends paid with respect to such stock. The Preferred Stock
will be convertible at the option of UDC in whole or in part at any time after
the third anniversary following the date of issuance or prior thereto if an
amount equal to six quarterly dividend payments on the Preferred Stock has
accrued and is unpaid until payment in full thereof as described herein. In such
case, the Preferred Stock may be converted into that number of shares of Common
Stock determined by dividing the Liquidation Preference Amount of the shares of
Preferred Stock to be converted by the lower of (a) the Subscription Price or
(b) 80% of the average Market Price (as defined below) of the Common Stock for
the ten consecutive trading days ending two business days prior to the date
notice of conversion is given. For purposes of the conversion of the Preferred
Stock, "Market Price" means (i) if the Common Stock is quoted on the Nasdaq
National Market or the Nasdaq SmallCap Market or on a national securities
exchange, the daily per share closing price of the Common Stock as quoted on the
Nasdaq National Market or the Nasdaq SmallCap Market or on the principal stock
exchange on which it is listed on the trading day in question, as the case may
be, whichever is the higher, or (ii) if the Common Stock is traded in the
over-the-counter market and not quoted on the
6
<PAGE> 8
Nasdaq National Market or the Nasdaq SmallCap Market or on any national
securities exchange, the closing bid price of the Common Stock on the trading
day in question, as reported by Nasdaq or an equivalent generally accepted
reporting service.
The Preferred Stock and the Common Stock into which it is convertible are
not registered under the Securities Act of 1933, as amended (the "Securities
Act"), and may not be sold by UDC unless such securities are registered or
unless an exemption from registration is available. Upon request by UDC, Cygnet
will register the resale of the Common Stock issued upon conversion of the
Preferred Stock under the Securities Act at the expense of Cygnet. The Preferred
Stock will not have any pre-emptive or other subscription rights.
Over-Subscription Privilege. Any Rights Offering Participant who exercises
all of his Rights may subscribe at the Subscription Price for additional shares
of Common Stock out of the pool of shares underlying unexercised Rights on the
Expiration Date, if any (the "Unexercised Pool"), equal to the number of shares
of Common Stock such Rights Offering Participant purchased during the Rights
Offering Period (the "Over-Subscription Privilege"), subject to allocation as
described herein. Mr. Garcia, as the Standby Purchaser, may exercise his
Over-Subscription Privilege in partial satisfaction of his obligations under the
Standby Purchase Agreement as described below.
Subscription Price. The exercise price of the Rights ("Subscription
Price") is $7.00 per share. Upon exercise of a Right and the payment of the
Subscription Price, the holder thereof will be entitled to receive one share of
Common Stock following the Split-up. The Subscription Price will not necessarily
bear any relationship to the trading price of the Common Stock after completion
of the Rights Offering.
Fractional Shares. Only Rights to purchase whole shares of Common Stock
will be issued in the Rights Offering. If the number of shares of UDC Common
Stock held by a Rights Offering Participant on the Record Date is not divisible
by four, the number of Rights to be issued to such stockholder will be rounded
upward to the nearest whole Right. For further information, see "The Rights
Offering -- No Fractional Shares."
Directors and Executive Officers. If the Split-up is successfully
concluded, Mr. Garcia will remain Chairman of the Board, Chief Executive
Officer, and President of Cygnet. Mr. Garcia currently is Chairman of the Board
and Chief Executive Officer of UDC and will remain as Chairman of the Board of
UDC following the Split-up. In addition, certain existing UDC directors,
officers, and employees have or will become directors and officers of the
Company. See "Management."
Standby Purchaser Obligation. The Standby Purchaser is Ernest C. Garcia,
II, Cygnet's Chairman of the Board, Chief Executive Officer, and President, and
the holder of approximately 25.2% of the outstanding shares of UDC Common Stock.
In accordance with the Rights Exercise and Standby Purchase Agreement between
the Company and Mr. Garcia (the "Standby Purchase Agreement"), subject to
certain conditions, Mr. Garcia, as the Standby Purchaser, will purchase
additional shares of Common Stock at the Subscription Price up to the Required
Purchase Amount (the "Standby Purchase Obligation"). In consideration for the
obligations incurred by Mr. Garcia under the Standby Purchase Agreement, on the
Effective Date, Cygnet will grant to Mr. Garcia warrants (the "Standby
Warrants") entitling Mr. Garcia to purchase up to 500,000 additional shares of
Common Stock at an exercise price equal to 120% of the Subscription Price, or
$8.40 per share (the "Warrant Exercise Price") at any time within five years
following the Effective Date. Neither the Standby Warrants nor the underlying
Common Stock into which they are exercisable are registered under the Securities
Act and such securities may not be sold by Mr. Garcia unless such securities are
registered or unless an exemption from registration is available. The Company
has agreed to register at its expense the resale of the Common Stock issued upon
exercise of the Standby Warrants at the request of Mr. Garcia at any time after
one year following the Effective Date. Mr. Garcia's rights and obligations in
connection with the Rights Offering may be exercised through his affiliates.
Additional Purchase Right. In addition to his Rights, the
Over-Subscription Privilege, and his Standby Purchase Obligation, Mr. Garcia
also will have the right (the "Additional Purchase Right"), at his election, to
purchase up to an additional 714,286 shares of Common Stock at the Subscription
Price, or an aggregate of approximately $5 million, over and above the Required
Purchase Amount. Such Additional Purchase Right will be contingent on a
successful Rights Offering and must be exercised on or prior to the Effective
Date.
7
<PAGE> 9
D&O Purchase Right. In addition, directors and officers of the Company
(excluding Mr. Garcia) will have the right (the "D&O Purchase Right"), at their
election, to purchase in the aggregate up to 214,286 additional shares of Common
Stock at the Subscription Price over and above the number of shares of Common
Stock they could acquire pursuant to any Rights they may have. Such D&O Purchase
Right will be contingent on a successful Rights Offering and must be exercised
on or prior to the Effective Date.
Additional Capital. The Company has secured a subordinated loan of $5
million from a third-party lender for a three year term. The loan bears interest
at 12% per annum and is payable quarterly with the principal to be paid in full
on the third anniversary of the Effective Date. In consideration for providing
such financing, Cygnet will issue warrants to purchase up to 115,000 shares of
Common Stock with an exercise price of $8.40 per share, subject to a call
feature by the Company if the closing price of the Common Stock equals or
exceeds $13.44 per share for a period of 20 consecutive trading days. The loan
is guaranteed by UDC. On the Effective Date, UDC's guarantee will be released
and replaced with a guarantee of the Company.
Trading Market. The Rights and the Common Stock have been approved for
listing on the Nasdaq National Market under the symbols "CGNTR" and "CGNT,"
respectively, subject to notice of issuance. There is no assurance, however,
that a trading market in the Rights or the Common Stock will develop or, if
developed, can be maintained. Upon the Expiration Date, subject to certain
guaranteed delivery procedures, any unexercised Rights will lapse, and become
null and void.
Tax Consequences to Rights Offering Participants. In the opinion of Snell
& Wilmer L.L.P., Rights Offering Participants who receive Rights in the original
distribution will generally recognize dividend income (taxable as ordinary
income) in an amount equal to the fair market value, if any, of the Rights as of
the date of their distribution. In the opinion of Willamette Management
Associates, an independent appraisal firm engaged by UDC in connection with the
Rights Offering and the Split-up (the "Appraiser") dated July 21, 1998, the fair
market value of the Rights as of the date of their distribution should be zero.
However, the Appraiser's opinion is not binding on the Internal Revenue Service.
For example, the Internal Revenue Service may assert that the price at which the
Rights trade during the 20-day trading period of the Rights is indicative of the
fair market value of the Rights on the date of their distribution. Accordingly,
there can be no assurance as to the precise amount of dividend income, if any, a
Rights Offering Participant will recognize upon the receipt of the Rights. If
the Rights are trading for value on the date of their distribution, UDC may, in
its discretion, report to Rights Offering Participants who receive Rights in the
original distribution the receipt of dividend income in an amount equal to the
average of the high and low trading prices of the Rights on such date.
To avoid the possibility of the recognition of ordinary income and the
creation of a potentially deferred or nondeductible capital loss, it will, in
many instances, be in the interests of Rights Offering Participants who receive
Rights in the original distribution to either exercise or sell the Rights,
rather than to allow the Rights to lapse. See "Federal Income Tax Consequences."
Exercise. The Rights are exercisable from the Commencement Date until 5:00
p.m., Minnesota time, on the Expiration Date.
Information Agent. The Information Agent for the Rights Offering is
Corporate Investor Communications, Inc. ("CIC"). Questions concerning the Rights
Offering may be addressed to CIC at 1-888-673-4478.
USE OF PROCEEDS FROM THE RIGHTS OFFERING
The Company intends to use a portion of the proceeds of the Rights Offering
to make the Cash Payment to UDC as part of the consideration for the Transferred
Assets. The remaining proceeds of the Rights Offering will be used by the
Company for capital expenditures and as working capital.
EFFECT OF RIGHTS OFFERING
Cygnet currently is a wholly-owned subsidiary of UDC. Following the
transactions described in this Prospectus, Cygnet and UDC will be owned,
operated, and managed as separate public companies. Assuming
8
<PAGE> 10
all holders of the Rights elect to purchase shares of Common Stock pursuant to
the Rights Offering, and the Cygnet directors and officers exercise their D&O
Purchase Right in full, Mr. Garcia will own approximately 23.6% of the
outstanding shares of Common Stock (or 33.2% if he fully exercises the
Additional Purchase Right) and UDC will own 100% of the outstanding Preferred
Stock of Cygnet. If the Preferred Stock were converted to Common Stock at the
Subscription Price of $7.00 per share, UDC would obtain 5,714,286 shares, or
approximately 61.6% of the then outstanding shares of Common Stock, assuming the
sale by Cygnet pursuant to the Rights Offering of 3,562,500 shares of Common
Stock (the Required Purchase Amount) and that no additional shares of Common
Stock are issued either on the Effective Date of the Split-up or thereafter. If
the Preferred Stock were converted to Common Stock at the Subscription Price,
and assuming the sale by Cygnet of 4,750,000 shares of Common Stock pursuant to
the Rights Offering and the sale of 714,286 additional shares to Ernest C.
Garcia, II pursuant to the Additional Purchase Right and 214,286 shares
available for purchase by officers and directors of Cygnet (other than Mr.
Garcia) pursuant to the D&O Purchase Right, and that no additional shares of
Common Stock are then outstanding, UDC would obtain approximately 50.2% of the
then outstanding shares of Cygnet.
INTERESTED TRANSACTIONS
As described above, officers and directors of the Company have certain
significant interests in the Split-up, including (i) Mr. Garcia's rights and
obligations as Standby Purchaser, which may enable Mr. Garcia to purchase
significant amounts of Common Stock at the Subscription Price to the extent such
stock is not purchased upon exercise of the Rights or pursuant to the
Over-Subscription Privilege by holders of the Rights, (ii) Mr. Garcia's right to
purchase up to 714,286 additional shares of Common Stock at the Subscription
Price, (iii) the right of officers and directors of UDC who will be officers and
directors of the Company on the Effective Date to purchase up to 214,286
additional shares of Common Stock at the Subscription Price, (iv) the issuance
of the Standby Warrants to Mr. Garcia to purchase 500,000 shares of Common Stock
at $8.40 per share for a period of 5 years following the Effective Date in
consideration for his obligations as Standby Purchaser, and (v) the use of a
portion of the Cash Payment by UDC to repay certain indebtedness to a
corporation wholly-owned by Mr. Garcia. The Company will also assume the
employment agreements of and will replace UDC options with Company options for
certain executive officers of UDC who will become executive officers of the
Company. In addition, Messrs. Johnson, Splaver and Ciccolini, each of whom is an
executive officer of the Company, will receive a total of 36,429 shares of
Common Stock pursuant to restricted stock grants (with an estimated aggregate
value of $260,000 on the Effective Date) and new options to purchase a total of
50,000 shares of Common Stock at the Subscription Price.
RISK FACTORS AND FORWARD LOOKING STATEMENTS
Prospective purchasers of Common Stock pursuant to the Rights Offering
should carefully consider all of the information contained in this Prospectus,
particularly each of the factors set forth under "Risk Factors" beginning on
page 13. Factors that may affect the Company's business, results of operations
and financial condition, and the price and market for its securities, include,
among others, the following:
- The Company's ability to maintain profitability is related to its ability
to successfully complete bulk purchases of finance receivable contracts
or enter into servicing arrangements with respect to such contracts. For
example, the Company believes that in the near future, a significant
portion of its revenues will be attributable to the FMAC transaction (as
described herein), unless other significant bulk purchase or servicing
transactions are consummated. There can be no assurance that the Company
will be able to successfully negotiate additional bulk purchase or
servicing arrangements, or, if it were able to do so, that such
transactions would be profitable. In addition, the Company's results of
operations may fluctuate dramatically based upon transactions entered
into in any given period.
- The operations of the Company are significantly dependent on its
personnel, in particular Mr. Garcia. Without Mr. Garcia's expertise in
attracting and obtaining bulk purchase and servicing opportunities, the
Company's operations could be materially adversely affected.
9
<PAGE> 11
- The profitable realization of bulk purchase and servicing opportunities
requires management of significant transition activities, accomplished
within a very short time period. These transition activities include,
among others, converting the servicing platform and related computer
systems utilized by the existing holder/servicer to the loan servicing
platform and related computer systems utilized by the Company, rapidly
changing servicing capacity, arranging for transition of employees, and
arranging for facilities to facilitate servicing. There is no assurance
that the Company can successfully manage the transition of subsequent
transactions.
- The Company operates primarily in the sub-prime finance market, which is
characterized by borrowers that are generally unable to obtain financing
from traditional sources of credit and the companies that provide
financing to such borrowers. Accordingly, the Company's operations will
be subject to a high risk of credit losses due to dealer defaults or
fraudulent activities, specifically related to the collection, depositing
and reporting of customer payments, which could have a material adverse
effect on the Company and the Company's ability to meet its own financing
obligations.
- The Company is dependent upon its information systems to properly account
for and monitor its finance receivable portfolio, its loan servicing
operations, and the Cygnet Dealer Program loan portfolio. The Company is
in the process of converting its existing servicing platforms to systems
licensed from Affiliated Computer Services, Inc. ("ACS"). There can be no
assurance that the conversions will be completed in a timely manner or
that such conversions will be successful. The Company's failure to
successfully migrate and convert its existing systems to ACS systems on a
timely basis could have a material adverse effect on the Company. In
addition, only a portion of the ACS systems are fully year 2000 ("Year
2000") compliant in processing transactions of the Company without major
system failure or miscalculations. The Company bears risks related to the
Year 2000 issue and could be materially adversely affected if other
entities (e.g., vendors or customers) not affiliated with the Company do
not appropriately address their own Year 2000 compliance issues. Further,
certain of the Company's own applications are not Year 2000 compliant at
this time. The Company believes that resolution of all Year 2000 issues
will be significant to the Company's business, and there can be no
assurance that the Company will be able to completely resolve all Year
2000 issues in a timely fashion or that the ultimate impact of the Year
2000 issues will not be material to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
- Mr. Garcia, the Company's Chairman of the Board, Chief Executive Officer
and President, and who could acquire a controlling interest in the
Company in certain circumstances, has been the subject of certain legal
proceedings involving his participation in a real estate transaction
involving Lincoln Savings and Loan Association, a federally insured
savings and loan institution that later went into receivership
("Lincoln"). In connection with these proceedings, Mr. Garcia agreed to
plead guilty to one count of bank fraud, for which he was sentenced to
three years probation (which has expired), was fined $50, and, during the
period of his probation, which ended in 1996, was banned from becoming an
officer, director or employee of any federally insured financial
institution or a securities firm without government approval. In separate
actions arising out of this matter, Mr. Garcia filed for bankruptcy both
personally and with respect to certain affiliated entities, each of which
had been discharged by 1993. Following the takeover of Lincoln by the RTC
in 1989, Mr. Raymond C. Fidel, the President of Cygnet Dealer Finance,
Inc. and formerly President of Lincoln, was charged with fraud arising
out of the sale of bonds at Lincoln of its parent company, American
Continental Corporation. Without admitting or denying any of the
allegations against him, Mr. Fidel consented to the entry of a permanent
injunction against further violations of the securities laws. In 1991,
Mr. Fidel pled guilty to two counts of federal securities fraud and to
six counts in California State court arising out of this matter, for
which Mr. Fidel was sentenced to three years probation, which has
expired. See "Risk Factors -- Risks Relating to the Business -- Prior
Legal Actions Involving Certain Executive Officers."
- There currently exists no public market for the Rights or shares of
Common Stock being offered pursuant to this Prospectus. While the Rights
and the Common Stock have been approved for listing
10
<PAGE> 12
on the Nasdaq National Market, subject to notice of issuance, there is no
assurance that a trading market in the Rights or the shares of Common
Stock will develop, or, if developed, can be sustained. Even if a trading
market does develop, there can be no assurance that the market price or
shares of Common Stock will remain at or above the Subscription Price.
This Prospectus contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such
statements may include, but not be limited to, projections of revenues, income,
loss, capital expenditures, plans for future operations, financing needs or
plans, and plans relating to products or services of the Company, as well as
assumptions relating to the foregoing. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify forward
looking statements. Forward looking statements are inherently subject to risks
and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward looking statements. Statements in
this Prospectus, including those contained in the section entitled "Risk
Factors," in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and in the Notes to the
Company's Combined Financial Statements, describe factors, among others, that
could contribute to or cause such differences. The Company undertakes no
obligation to update any forward looking statements.
GLOSSARY
Certain terms used in this Prospectus regarding the Company's business are
defined below.
Bulk purchase -- The purchase of an existing pool of individual installment
contract receivables.
Buy-here, pay-here dealer -- A used car dealer that retains ownership of
the installment contract receivables generated from the sale of vehicles to
Sub-Prime Borrowers and continues to collect the loan payments and perform all
related loan servicing functions.
Charge-offs -- Loans that are written off due to delinquency, inability to
locate a delinquent borrower and/or the vehicle, bankruptcy, or casualty damage
to the vehicle which is not covered by insurance.
Kelley Blue Book wholesale value -- A monthly sampling average of wholesale
prices for various vehicles based upon mileage, age, condition, and options.
Loan servicing -- All functions related to collecting and reporting on
installment contract receivables, including payment processing, contacting
borrowers regarding delinquent payments, engaging third parties to foreclose
upon the collateral and monitoring the status of insurance policies insuring the
collateral.
Payoffs -- Loans that have been paid in full including principal and earned
interest.
Repo -- A vehicle that has been repossessed from the borrower due to
default.
Repurchases -- Under the Cygnet Dealer Program, dealers are required to
repurchase installment contracts from the Company that are 45 days delinquent or
are in default for other reasons.
Sub-Prime Borrower -- A borrower who has little or no credit history or a
credit history characterized by consistent late payments and sporadic
employment. In addition to having an unfavorable employment history, the
borrower also may have experienced debt charge-offs, foreclosures, or personal
bankruptcy.
Warehouse purchase facilities -- Contractual relationship between a dealer
and a finance company whereby the finance company agrees to purchase installment
contract receivables that meet certain guidelines and requirements.
11
<PAGE> 13
SUMMARY COMBINED FINANCIAL INFORMATION
The summary combined financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined financial statements of the Company
and the notes thereto included in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, 1997
----------------- -----------------
1998 1997
------- ------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues......................................... $12,550 $ 137 $15,959
Interest Income..................................... 6,382 137 7,472
Servicing Fees...................................... 4,937 -- --
Net Gain on Sale of Repossessed Collateral.......... 1,108 -- --
Gain on Sale of Notes Receivable.................... -- -- 8,132
Other Income........................................ 123 -- 355
Operating Expenses:
Provision for Credit Losses......................... 965 -- 691
Selling and Marketing Expense....................... 36 9 18
General and Administrative.......................... 9,001 1,008 3,766
Depreciation and Amortization....................... 230 62 153
------- ------ -------
Total Operating Expenses............................... 10,232 1,079 4,628
------- ------ -------
Earnings (Loss) Before Interest Expense................ 2,318 (942) 11,331
Interest Expense....................................... 1,714 37 2,067
------- ------ -------
Earnings (Loss) before Income Taxes.................... 604 (979) 9,264
Income Taxes (Benefit)................................. 244 (394) 3,728
------- ------ -------
Net Earnings (Loss).................................... $ 360 $ (585) $ 5,536
======= ====== =======
Basic Earnings (Loss) per Share........................ $ 360 $ (585) $ 5,536
======= ====== =======
Shares used in Computation............................. 1 1 1
======= ====== =======
Proforma Basic/Diluted Earnings (Loss) per Share(2).... $ (0.18) $(0.35) $ 0.48
======= ====== =======
Proforma Shares used in Computation(2)................. 5,679 5,679 5,683
======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED
--------------------------------------- DECEMBER 31, 1997
PRO FORMA -----------------
ACTUAL PRO FORMA(1) AS ADJUSTED(1) ACTUAL
------- ------------ -------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents................ $ 232 $16,389 $22,889 $ 1,225
Finance Receivables, Net................. 26,333 26,333 26,333 19,274
Notes Receivable, Net.................... 23,027 23,027 23,027 21,861
Total Assets............................. 58,580 74,737 81,237 50,034
Advances from Affiliate.................. 15,818 -- -- 9,106
Total Note Payable....................... 298 298 298 380
Total Stockholders' Equity............... 40,000 71,975 78,475 40,000
</TABLE>
- ---------------
(1) The table above sets forth (i) the combined capitalization of the Company as
of June 30, 1998; (ii) the pro forma capitalization of the Company to give
effect to the sale of 4,750,000 shares of Common Stock offered hereby at the
Subscription Price of $7.00 per share, after deducting estimated offering
expenses allocable to and payable by the Company, a purchase price for the
Transferred Assets equivalent to UDC's June 30, 1998 book value, which
totaled approximately $58.6 million, and payment in full of the Advance from
Affiliate, which totaled $15,818,000 at June 30, 1998; and (iii) the pro
forma as adjusted capitalization of the Company to give effect to the sale
of 4,750,000 shares of Common Stock offered hereby and the sale of 714,286
shares of Common Stock pursuant to the Additional Purchase Right and 214,286
shares of Common Stock pursuant to the D&O Purchase Right, assuming these
rights are exercised in full, in each case at the Subscription Price of
$7.00 per share, after deducting estimated offering expenses allocable to
and payable by the Company, a purchase price for the Transferred Assets
equivalent to UDC's June 30, 1998 book value, which totaled approximately
$58.6 million, and payment in full of the Advance from Affiliate, which
totaled $15,818,000 at June 30, 1998.
(2) For purposes of computing the proforma earnings per share for the periods
presented, the Company has assumed the maximum potential issuance of shares
of Common Stock totaling 5,678,572 shares pursuant to the planned Rights
Offering, the Additional Purchase Right, the D&O Purchase Right and for
dilutive stock options that will be granted on the Effective Date. See note
14 to the Company's audited financial statements included herein.
12
<PAGE> 14
RISK FACTORS
An investment in the Rights and the shares of Common Stock offered hereby
involves certain risks. In addition to the other information included elsewhere
in this Prospectus, prospective investors should give careful consideration to
the following factors before purchasing Rights or the shares of Common Stock
offered hereby upon exercise of the Rights.
RISKS RELATING TO THE BUSINESS
NO ASSURANCE OF PROFITABILITY
The Company's net earnings for the year ended December 31, 1997 were $5.5
million. For the six months ended June 30, 1998, the Company's net earnings were
$360,000. The Company has experienced, and in the future is expected to continue
to experience, substantial variations in its results of operations as a result
of a number of factors, many of which are outside the Company's control.
Substantially all of the net earnings of the Company for the year ended
December 31, 1997 were attributable to the FMAC transaction. For a description
of the FMAC transaction and the profits generated therefrom, see
"Business -- Bulk Purchasing and Servicing Operations -- Transactions Regarding
First Merchants Acceptance Corporation." The profitability and cash flows of the
Company in the future, at least in the near term, will be highly dependent on
its ability to successfully conclude additional large bulk purchase and
servicing transactions similar to the FMAC and Reliance transactions. For a
description of the Reliance transaction, see "Business -- Bulk Purchasing and
Servicing Operations -- Transactions Regarding Reliance Acceptance Group." UDC's
ability to effect both the FMAC and Reliance transactions on favorable terms was
enhanced by recent industry conditions and by the fact that these companies were
in bankruptcy proceedings. See "Risk Factors -- Risks Relating to the
Business -- Industry Considerations and Legal Contingencies." In recent months,
UDC has experienced increased competition from other companies in its
consideration of transactions similar to FMAC and Reliance. There can be no
assurance that the Company will be able to effect similar transactions in the
future on terms as favorable to the Company as the FMAC and Reliance
transactions. Any inability of the Company to locate and conclude other
profitable bulk purchase or servicing opportunities in the future could have a
material adverse impact on the Company. See "Risk Factors -- Risks Relating to
the Business -- Avoidance of Excess Servicing Capacity."
In addition, the Company believes that a significant portion of its net
earnings in future periods may be attributable to the FMAC and Reliance
transactions. However, the ability of the Company to generate earnings from
these two transactions is subject to significant contingencies. See "Risk
Factors -- Risks Relating to the Business -- Risks Related to the FMAC
Transaction" and "Risk Factors -- Risks Relating to the Business -- Risks
Related to the Reliance Transaction."
The Company's ability to sustain profitability also will depend upon its
ability to meet its general objectives including: (i) expanding its revenue
generating operations while not proportionately increasing its administrative
overhead; (ii) purchasing portfolios of finance receivables with an acceptable
level of credit risk; (iii) effectively collecting payments due on the finance
receivables in its portfolios and in third party portfolios; (iv) locating
sufficient financing, with acceptable terms, to fund the expansion of the Cygnet
Dealer Program and the bulk purchase of additional finance receivables; and (v)
adapting to the increasingly competitive markets in which it operates. Outside
factors, such as the economic, regulatory, and judicial environments in which
the Company operates, also will have an effect on the Company's business.
Any of these factors could result in the periodic inefficient or
underutilization of the Company's resources and could cause the Company's
operating results to fluctuate significantly from period to period, including on
a quarterly basis. There can be no assurance that the Cygnet Dealer Program or
the FMAC or Reliance transactions or similar transactions effected in the future
will be profitable, or if they are, that such profitability can be sustained.
The Company's inability to achieve or maintain any or all of its objectives
could have a material adverse effect on the Company's business, financial
condition, or results of operations.
13
<PAGE> 15
DEPENDENCE ON UNIQUE TRANSACTIONS; QUARTERLY FLUCTUATIONS
As noted above, the Company's profitability will depend significantly on
its ability to effect large bulk purchase and servicing transactions, including,
among others, transactions similar to the FMAC and Reliance transactions.
Because each potential opportunity typically presents a unique set of risks and
circumstances, each transaction must be separately structured, evaluated, and
negotiated. This process typically consumes substantial amounts of executive
management time and attention with no assurance of a successful conclusion.
Accordingly, there can be no assurance that future opportunities of this type
can be identified and concluded on terms favorable to the Company. The failure
to identify and conclude such transactions on a continual basis could have a
material adverse effect on the Company. See "Risk Factors -- Risks Relating to
the Business -- No Assurance of Profitability" "-- Dependence on Key Personnel"
and "-- Avoidance of Excess Servicing Capacity." In addition, the timing of
effectuation of future transactions may result in wide variation in financial
results on a quarterly basis. Moreover, the Company may evaluate opportunities
for favorable transactions in industries other than the sub-prime automobile
financing market. To the extent the Company purchases portfolios of loan
receivables in other industries, such transactions are likely to present a
different set of risks and challenges for which the Company may be less prepared
as a result of its relative lack of experience in that industry.
The Company currently is considering a number of potential transactions in
the ordinary course of its business, none of which the Company believes is
material to its financial condition or results of operations, individually or in
the aggregate. For a description of these potential transactions, see
"Business -- Recent Developments." The consummation of these transactions is
subject to a number of contingencies, which may include the negotiation and
preparation of definitive agreements, completion of due diligence, and the
receipt of required consents from third parties. As a result, there can be no
assurance that any of these potential transactions will be completed by the
Company. If the Company is unable to conclude these transactions, the Company
will be required to pursue other opportunities to acquire servicing rights,
receivables portfolios and other assets as described above.
DEPENDENCE UPON KEY PERSONNEL
The Company's success will depend upon the continued services of the
Company's senior management, particularly its Chief Executive Officer, Mr.
Ernest C. Garcia, II, as well as the Company's ability to attract additional
members to its management team with experience in the bulk purchasing and
servicing industry and the used car dealer financing industry. The unexpected
loss of the services of any of the Company's key management personnel, or its
inability to attract new management when necessary, could have a material
adverse effect upon the Company. The Company does not currently plan to maintain
any key person life insurance on any of its executive officers.
The continued services of Mr. Garcia are critical to the future success of
the Company. In particular, in the bulk purchasing and servicing line of
business, the Company's success depends significantly on Mr. Garcia's ability to
(i) purchase portfolios of finance receivables at discounts sufficient to
generate profits and (ii) secure servicing of finance receivable portfolios with
sufficient volume and fees to generate profits. In particular, it is expected
that the Company will rely heavily on Mr. Garcia's expertise in identifying
opportunities to purchase or service large portfolios of finance receivables.
Losing the services of Mr. Garcia could adversely impact the Company's ability
to attract profitable bulk purchasing and servicing opportunities and in turn
could have a material adverse effect on the Company.
PRIOR LEGAL ACTIONS INVOLVING CERTAIN EXECUTIVE OFFICERS
Prior to 1992, when he founded UDC, Mr. Garcia was involved in various real
estate, securities, and banking ventures. Arising out of two transactions in
1987 between Lincoln Savings & Loan Association ("Lincoln") and entities
controlled by Mr. Garcia, the Resolution Trust Corporation (the "RTC"), which
ultimately took over Lincoln, asserted that Lincoln improperly accounted for the
transactions and that Mr. Garcia's participation in the transactions facilitated
the improper accounting. Facing severe financial pressures, Mr. Garcia agreed to
plead guilty to one count of bank fraud, but, in light of his cooperation with
authorities both before and after he was charged, was sentenced to only three
years probation (which has
14
<PAGE> 16
expired), was fined $50 (the minimum fine the court could assess), and, during
the period of his probation, which ended in 1996, was banned from becoming an
officer, director or employee of any federally-insured financial institution or
a securities firm without governmental approval. Because Cygnet is not a
federally-insured financial institution and Mr. Garcia's probationary period has
expired, the ban does not apply to Mr. Garcia's activities on behalf of Cygnet.
In separate actions arising out of this matter, Mr. Garcia agreed not to violate
the securities laws, and filed for bankruptcy both personally and with respect
to certain entities he has controlled. The bankruptcies were discharged by 1993.
In certain circumstances, Mr. Garcia could acquire a controlling interest in the
Company. See "-- Risks Relating to the Rights Offering -- Ownership of Common
Stock by Mr. Garcia." As a result of his position as Chairman of the Board,
Chief Executive Officer, and President of Cygnet and by virtue of his ability to
acquire a significant percentage of the Common Stock after the Rights Offering,
Mr. Garcia will have significant influence over the Company's activities.
Mr. Raymond C. Fidel is the President of Cygnet Dealer Finance, Inc., a
wholly owned subsidiary of Cygnet. From February 1982 to April 1989, Lincoln
employed Mr. Fidel, between 1988 and 1989, as its President. Following the
takeover of Lincoln by the RTC in 1989, Mr. Fidel and others were charged with
fraud (the "Complaint") arising out of the sale of bonds at Lincoln of its
parent company, American Continental Corporation ("ACC"). With the filing of the
Complaint, Mr. Fidel, without admitting or denying any of the allegations in the
Complaint, consented to the entry of a permanent injunction against further
violations of the securities laws. Mr. Fidel pled guilty in 1991 to two counts
of federal securities fraud, and to six counts in California State court (five
relating to fraud and one relating to the sale of securities without
qualification) arising out of this matter. In light of Mr. Fidel's cooperation
with authorities in their prosecution of executives of ACC, including Charles H.
Keating, Jr., and Mr. Fidel's efforts in stopping bond sales at Lincoln, Mr.
Fidel was given three years of probation, which has expired.
CONVERSION TO NEW SERVICING PLATFORMS
The Company is dependent upon its information systems to properly account
for and monitor its finance receivables portfolio, its loan servicing operations
and the Cygnet Dealer Program loan portfolio. The Cygnet Dealer Program
portfolio is currently tracked on an internally developed custom software
system. However, the Company recently signed a service bureau agreement (the
"ACS Agreement") with ACS to process the loan portfolios owned or serviced by
the Company. Due to the unique characteristics of the Cygnet Dealer Program, ACS
will be required to make a number of custom software enhancements to enable the
Cygnet Dealer Program to run on the ACS system. The Company anticipates that
implementation of the custom software changes and conversion from the Company's
in-house system to the ACS system will be completed by December 31, 1998. In
addition to the ACS system, the Company is developing a custom loan underwriting
and funding software module to interface between the Third Party Dealers'
systems and the ACS system. During 1999, the Company intends to migrate the
dealers from their separate stand alone loan systems to the ACS system for
purposes of loan servicing and collections. An extended delay in the conversion
to the ACS system, in the development of the custom loan underwriting and
funding software module, or in migrating the dealers to the ACS system for loan
servicing and collections, could have a negative impact on the Company's ability
to efficiently collect, account for and monitor the Cygnet Dealer Program loan
portfolio. Only a portion of the ACS systems is fully Year 2000 compliant.
Further, the Company bears certain risks related to Year 2000 in connection with
applications and systems of other vendors, the Company's equipment, and the
Company's customers. See "Risk Factors -- Risks Relating to the Business -- Data
Processing and Technology and Year 2000" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000."
The FMAC loan portfolio, aggregating approximately $378 million as of May
31, 1998, is currently being serviced on a loan servicing platform provided
under contract with Alltel Financial Information Services, Inc. ("Alltel"),
which is scheduled to expire in December 1998. If the Company continues to use
the Alltel platform after December 1998, the contract provides for a substantial
premium to be paid by the Company in exchange for the extension. The Company is
in the process of converting from the Alltel system to a system licensed from
ACS. This conversion is expected to be completed by the end of the third quarter
of 1998. There can be no assurance, however, that the conversion will be
completed in a timely manner. If the conversion is
15
<PAGE> 17
not completed in a timely manner, the Company may be required to extend the
contract with Alltel beyond December 1998 and pay the required premium.
Accordingly, failure to successfully migrate and convert to the ACS system could
have a material adverse effect on the Company.
Pursuant to Reliance's confirmed plan of reorganization, on August 1, 1998,
UDC will begin to service the Reliance finance receivables portfolio, which
totaled approximately $157 million as of April 30, 1998. See "Business -- Bulk
Purchasing and Servicing Operations -- Transactions Regarding Reliance
Acceptance Group." UDC will purchase all of Reliance's furniture, fixtures, and
equipment, including the servicing platform utilized by Reliance. The servicing
operations and servicing platform will be transferred to the Company on the
Effective Date of the Split-up. The Company intends to use this servicing
platform (along with certain real property leases), at least through December
1998, to service the Reliance receivables. Thereafter, servicing of the Reliance
receivables will be converted to the ACS system. There can be no assurance that
UDC will be able to perform all necessary actions to effectively service the
Reliance finance receivables portfolio in the limited time available. Further,
disruption of servicing of the Reliance portfolio could result in UDC or the
Company being removed as the servicer and could have other serious adverse
consequences to the Company. See "Risk Factors -- Risks Relating to the
Business -- Risks Related to the Reliance Transaction."
The conversion of both the Cygnet Dealer Program and the FMAC servicing
functions to ACS and the assimilation of the Reliance portfolio and subsequent
conversion to the ACS platform may result in various implementation and
integration issues that could temporarily interrupt the Company's ability to
effectively collect, monitor and account for the Cygnet Dealer Program and to
service the FMAC and Reliance portfolios without serious disruption. Any such
issues or interruptions could result in an increase in contract delinquencies
and charge-offs in the FMAC and/or Reliance portfolios and in the Cygnet Dealer
Program, which, depending on the severity of the matter, could result in the
Company being removed as the servicer for the FMAC and Reliance transactions and
have other material adverse consequences to the Company. See "Risk
Factors -- Risks Relating to the Business -- Risks Relating to the FMAC
Transaction" and "Risk Factors -- Risks Relating to the Business -- Risks
Relating to the Reliance Transaction."
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
The success of any participant that engages in the financing and servicing
of loan receivables, particularly those with a focus on the sub-prime industry,
including the Company, depends in large part on its ability to continue to adapt
its technology, on a timely and cost-effective basis, to meet changing customer
and industry standards and requirements.
As noted above, it is anticipated that the existing Cygnet Dealer Program
and FMAC and Reliance loan servicing functions will be converted to the ACS
system in the latter half of 1998. Pursuant to the ACS Agreement, the ACS
systems must be fully Year 2000 compliant by January 1, 1999. However, the
Company's sole remedy if ACS does not comply with this requirement is to
terminate the ACS Agreement and convert to another system, which would be costly
and disruptive and could have a material adverse effect on the Company's
business.
In addition to the ACS Year 2000 issues, the Company also continues to bear
risks related to the Year 2000 issue and could be materially adversely affected
if other entities (e.g., vendors or customers) not affiliated with the Company
do not appropriately address their own Year 2000 compliance issues. Further,
certain of the Company's own applications are not Year 2000 compliant at this
time. The Company anticipates that resolution of all Year 2000 issues will be
significant to the Company's business and operations. There can be no assurance
that the Company will be able to completely resolve all Year 2000 issues in a
timely fashion or that the ultimate impact of the Year 2000 issues will not be
material to the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
Pursuant to the ACS Agreement, ACS has agreed to provide enhancements and
modifications to the base system that is licensed to ACS. Some of the
enhancements and modifications will remain proprietary to ACS and will not be
licensed to the Company. If ACS or the Company breaches the ACS Agreement, and
ACS no longer provides processing services, the Company may incur significant
costs in securing a
16
<PAGE> 18
replacement processing company that will be able to process the loans in the
same manner as ACS. Further, the Company's remaining computer applications would
not be sufficient to effectively manage the Cygnet Dealer Program or the loan
servicing of finance receivables portfolios.
The Company will be dependent on its loan servicing and collection
facilities as well as long-distance and local telecommunications access in order
to transmit and process information among its various facilities. The Company
maintains a standard program whereby it prepares and stores off site back ups of
its main system applications and data files on a routine basis. Following the
Split-up, the Company believes that it will be necessary to adopt a disaster
response plan. There can be no assurance that a failure will not occur in the
interim or that any plan adopted will prevent or enable timely resolution of any
systems failure. Further, a natural disaster, calamity, or other significant
event that causes long-term damage to any of these facilities or that interrupts
its telecommunications networks could have a material adverse effect on the
Company. With respect to the Company's servicing operations following conversion
to the ACS system, the Company will be required to rely on the disaster response
plan developed and utilized by ACS. ACS believes that its disaster response plan
is proprietary information and has not allowed the Company to fully evaluate
such plan. Therefore, if the disaster response plan of ACS is inadequate, the
occurrence of a disaster could have a material adverse effect on the Company's
business.
AVOIDANCE OF EXCESS SERVICING CAPACITY
On the Effective Date of the Split-up, the Company third party servicing
operations will be limited to the FMAC and Reliance portfolios and any Interim
Transactions effected prior to the Effective Date. Moreover, because of the
relatively short lives of automobile finance receivables, these portfolios are
expected to be reduced in the near future to a point at which, if not replaced
with additional finance receivables, the Company's servicing platform and
operations will have excess capacity. For the Company's servicing operations to
remain profitable, the Company must continually service a sufficient number of
finance receivables to generate servicing income in excess of fixed overhead
costs. For example, a significant portion of servicing overhead is based on
certain fixed costs for personnel salaries and other expenses as well as lease
or other facilities costs. If portfolios being serviced are not continually
replaced with new finance receivables, the Company will be required to reduce
the number of employees in its servicing operations, and then rehire such
employees as additional portfolios are obtained. Such practices can lead to low
employee morale and to disruptions and loss of efficiency in servicing functions
and can also result in substantial severance and facilities closure costs.
Therefore, in order to maintain the profitability of the Company's servicing
operations, it will be necessary for the Company to continue to identify and
secure servicing rights to significant portfolios of finance receivables. To an
extent, each bulk purchase and servicing transaction is a unique opportunity.
There can be no assurance that the Company will be able to identify and
successfully conclude sufficient bulk purchasing and servicing transactions to
maintain the profitability of these operations. See "Risk Factors -- Risks
Relating to the Business -- No Assurance of Profitability."
Although the Company is evaluating the possibility of expanding its
servicing operations to include receivables other than auto receivables, such as
mortgages or credit card receivables, in order to mitigate its excess capacity
issues, the Company has no experience in servicing such types of receivables and
may encounter other unanticipated problems. Moreover, there can be no assurance
that such receivables could be serviced on the existing and anticipated
servicing systems of the Company without substantial modification.
MANAGEMENT OF TRANSITION ACTIVITIES
The profitable realization of bulk purchase and servicing opportunities
requires effective management of significant transition activities, which must
be accomplished within a very short time period. These transition activities
include, among others, converting acquired or serviced loan portfolios from the
seller's or owner's servicing systems to the loan servicing systems utilized by
the Company, managing rapidly changing servicing capacity, arranging for
transition of employees, and arranging for facilities to allow servicing. These
issues are magnified as larger portfolios of the type the Company will seek to
purchase or service are transitioned into the Company's systems, and the
concurrent risks are greater if a transition is not smoothly implemented. There
can
17
<PAGE> 19
be no assurance that the Company can successfully manage the transition of its
current or subsequent transactions. See "Risk Factors -- Risks Relating to the
Business -- Conversion to New Servicing Platforms."
RISKS RELATED TO THE FMAC TRANSACTION
Although UDC's involvement in the FMAC bankruptcy proceedings has been
profitable, there can be no assurance that this transaction will continue to be
profitable in the future. Unless otherwise defined in this section, capitalized
terms utilized in this description of the risks inherent in the FMAC transaction
will have the meanings given in the detailed description of the FMAC transaction
under the heading "Business -- Bulk Purchasing and Servicing Operations --
Transactions Regarding First Merchants Acceptance Corporation."
On the Effective Date of the Split-up, UDC will transfer to the Company
substantially all of its rights and certain liabilities accruing on or after the
Effective Date in connection with the FMAC transaction (except cash received by
UDC prior to the Effective Date). The Company will assume UDC's guarantee to the
Contract Purchaser of a stated return, based in part on a 10.35% per annum
interest rate, on certain Owned Contracts acquired from FMAC and sold to the
Contract Purchaser, subject to a maximum guarantee of $10.0 million. Although
FMAC has provided a similar guarantee to UDC, which will be transferred to the
Company, payable out of certain distributions from residual interests held by
FMAC in securitization transactions, the guarantee in some circumstances may be
less than the guarantee given by UDC to the Contract Purchaser. There can be no
assurance that there will be sufficient distributions from the residual
interests to support the guarantee. In addition, the Company will assume the
funding obligations of UDC with respect to the DIP Facility. The DIP Facility
and certain fees payable to UDC that will be assigned to the Company are also
payable out of certain expected tax refunds of FMAC and/or distributions from
the same residual interests in FMAC's securitization transactions. Although the
Company anticipates collecting such items, there can be no assurance that these
loans or fees will be paid. Payments pursuant to the residual interests may not
be made until the senior certificates in the securitization transactions are
paid in full. The liabilities to be assumed by the Company relating to the FMAC
transaction are not conditioned on the profit ultimately achieved by the Company
from that transaction and such liabilities may exceed payments made to the
Company.
In addition, although it is contemplated that all of UDC's servicing rights
with respect to the FMAC transaction will be transferred to the Company in
conjunction with the Split-up, the ability of the Company to take over such
servicing rights is subject to the consents of certain parties that have not yet
been obtained. Moreover, if consent is not obtained or the Company does not
satisfy the conditions to be an "Authorized Servicer," the Company would lose
the right to significant benefits expected in the FMAC transaction, including
ongoing servicing fees and its right to certain distributions from residual
interests in FMAC's securitized pools, which could have a material adverse
effect on the Company. The Company believes, however, that it will satisfy the
required conditions to qualify as an "Authorized Servicer."
Moreover, the Company will be required to meet certain performance criteria
with respect to servicing of the FMAC and Owned Contract portfolios. The failure
to meet the required performance criteria could result from a number of factors,
including, among others, general economic conditions that cause increased
payment delinquencies by the obligors on the contracts in the pools being
serviced, and servicing interruptions and inefficiencies caused by the Company's
anticipated servicing platform conversions or any Year 2000 issues. See "Risk
Factors -- Risks Relating to the Business -- Conversion to New Servicing
Platforms" and "Risk Factors -- Risks Relating to the Business -- Data
Processing and Technology and Year 2000." The failure to meet such performance
criteria could result in "termination events" under the various servicing
agreements governing the FMAC and Owned Contract portfolios, and in such case
the Company could lose the right to service the receivables in such portfolios
and the related servicing fees. If for any reason the Company cannot continue to
service the FMAC portfolios, the Company would lose significant benefits
expected in the FMAC transaction, including ongoing servicing fees and its right
to certain distributions from residual interests in FMAC's securitized pools,
which could have a material adverse effect on the Company.
18
<PAGE> 20
RISKS RELATED TO THE RELIANCE TRANSACTION
On the Effective Date of the Split-up, UDC will transfer to the Company all
of its rights and substantially all of its obligations in connection with the
Reliance transaction (except cash received by UDC prior to the Effective Date).
For a detailed description of the Reliance transaction, see "Business -- Bulk
Purchasing and Servicing Operations -- Transactions Regarding Reliance
Acceptance Group." There can be no assurance that the servicing rights and
interests to be obtained by the Company in the Reliance transaction will prove
valuable or profitable. In addition, the Company's ability to assume the
servicing rights in the Reliance transaction on or after the Effective Date is
subject to consents of certain parties, including Reliance, that have not yet
been obtained. Substantially all of the benefits expected in the Reliance
transaction are contingent on the Company's acquiring and retaining servicing
rights to the Reliance portfolio.
Further, the Company's ability to profitably service the Reliance portfolio
is largely dependent on its ability to effectively manage the transition
activities associated with the assumption of such servicing. See "Risk
Factors -- Risks Relating to the Business -- Management of Transition
Activities" and "Risk Factors -- Risks Relating to the Business -- Conversion to
New Servicing Platforms."
Moreover, the Company will be required to meet certain performance criteria
with respect to servicing of the Reliance portfolio. A failure to meet the
required performance criteria could result from a number of factors, including,
among others, general economic conditions that cause increased payment
delinquencies by the obligors on the contracts in the pools being serviced, and
servicing interruptions and inefficiencies caused by the Company's anticipated
servicing platform conversions or any Year 2000 issues. See "Risk Factors --
Risks Relating to the Business -- Conversion to New Servicing Platforms" and
"Risk Factors -- Risks Relating to the Business -- Data Processing and
Technology and Year 2000." The failure to meet such performance criteria could
result in a "termination event" under the servicing agreement entered into by
the Company with Reliance and, in such case, the Company could lose the right to
service the Reliance portfolio.
CYGNET DEALER PROGRAM
The Cygnet Dealer Program provides qualified Third Party Dealers with
financing options and revolving lines of credit primarily secured by such
dealers' finance receivable portfolios. While the Company will require dealers
to meet certain minimum net worth and operating history criteria to be
considered for inclusion in the Cygnet Dealer Program, it will, nevertheless, be
extending credit to dealers who may not otherwise be able to obtain debt
financing from traditional lending institutions such as banks, credit unions,
and major finance companies. Under the Cygnet Dealer Program, the dealer remains
responsible for collection of the contract payments and retains control of the
customer relationship. All cash collections, including regular monthly payments,
payoffs, and repurchases are deposited by the dealers into a bank account
maintained by the Company. Consequently, the Company will be subject to a high
risk of credit losses due to dealer defaults or fraudulent activities,
specifically related to the collection, depositing, and reporting of customer
payments, which could have a material adverse effect on the Company and on the
Company's ability to meet its own financing obligations.
SENSITIVITY TO INTEREST RATES
The Company anticipates that a substantial portion of its borrowing
facilities will be on a floating rate basis. Conversely, the contracts that the
Company purchases under its Dealer Collection Program (as defined herein) and
the contracts that it purchases in bulk typically bear interest at fixed rates.
Therefore, increases in interest rates would effectively reduce the interest
rate spread the Company earns on the retail installment contracts in its
portfolios. The Company can attempt to mitigate any such reduction by reducing
the advance rate under its Dealer Collection Program, increasing the discount
rate on bulk purchases, or securitizing its portfolios in order to lock in a
fixed cost of funds. However, the Company may not be able to increase the
interest rate spread on future purchases of contracts due to market competition
or restrictions placed on interest rates by various states. Further, there can
be no assurance that the Company would be successful in the implementation of a
securitization program. See "Risk Factors -- Risks Relating to the Business --
Securitizations."
19
<PAGE> 21
DEPENDENCE ON EXTERNAL FINANCING
Because of the significant equity being invested in the Company, the
Company's capital structure will support substantial additional leverage, and
could become highly leveraged in the future. The Company has borrowed, and will
continue to borrow, substantial amounts required to fund its operations. In this
regard, the Company's operations are highly capital intensive. Although the
Company has had discussions with various lenders regarding a credit facility,
there can be no assurance that the Company will be able to secure financing when
and as needed in the future, or on terms acceptable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
SECURITIZATIONS
To date, the Company has not entered into any securitization transactions.
However, the Company may finance its operations in part through securitization
transactions. The Company's ability to successfully complete securitizations may
be affected by several factors, including the condition of securities markets
generally, conditions in the asset-backed securities markets specifically, and
the credit quality of the Company's portfolio.
The Company has yet to determine the accounting treatment for future
securitization transactions, if any. Should the Company structure a
securitization transaction in such a manner as to treat the securitization as a
sale, the securitized assets would be removed from the Company's balance sheet,
the Company would record a residual interest in the securitization, and gain on
sale would be recognized. However, the Company could structure a securitization
as a financing whereby the securitized assets would remain on the Company's
balance sheet and the Company would record a liability related to the issuance
of debt securities pursuant to the securitization. In this case, the Company
would continue to recognize revenue on the securitized assets as if they had not
been securitized, and would recognize interest expense on the related debt.
To the extent the Company were to record a gain on sale in connection with
securitizations, the gain would be based upon certain estimates and assumptions,
which may not subsequently be realized. The valuation of the residual interest
in securitization transactions is very subjective, and requires the use of many
assumptions about future events. To the extent that actual cash flows on a
securitization differ materially from the original securitization assumptions,
and in the opinion of management those differences appear to be other than
temporary in nature, the Company would be required to revalue its residual
interests in the finance receivable contracts that it has sold in the
securitization ("Residuals in Finance Receivables Sold"), and record a charge to
earnings based upon the reduction, which could be material and have a
significant effect on the Company. In addition, the Company would record ongoing
income based upon the cash flows on Residuals in Finance Receivables Sold. The
income recorded on the Residuals in Finance Receivables Sold would vary from
quarter to quarter based upon cash flows received in a given period. To the
extent that cash flows were deficient, charge-offs of finance receivables exceed
estimates, or assumptions applied to the underlying portfolio were not realized,
and in the opinion of management those differences were to appear to be other
than temporary in nature, the Company would be required to revalue the Residuals
in Finance Receivables Sold, and record a charge to earnings.
RISKS OF INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's expected borrowings would decrease the
profitability of the Company's existing portfolio. The Company has sought to
limit this risk by (i) maintaining a portion of its investment portfolio in a
floating rate program and (ii) limiting the maturity of finance receivable
contracts. If the Company's borrowing rates increase, then the Company will seek
to further limit the negative impact on earnings by increasing the purchase
discount at which the Company purchases finance receivables and/or require
higher stated annual percentage rates on finances receivables which are
purchased. To date, inflation has not had a significant impact on the Company's
operations.
20
<PAGE> 22
COMPETITION
The markets in which the Company competes are highly competitive. With
respect to its Cygnet Dealer Program and bulk purchasing and servicing
operations, the Company competes with a variety of finance companies, financial
institutions, and providers of financial services, many of whom have
significantly greater resources, including access to lower priced capital. In
addition, there are numerous financial services companies serving, or capable of
serving, these markets. While traditional financial institutions, such as
commercial banks, savings and loans, credit unions, and captive finance
companies of major automobile manufacturers, have not consistently served the
sub-prime markets, the relatively high yields that can be earned by companies
involved in sub-prime financing have encouraged certain of these traditional
institutions to enter, or contemplate entering, these markets. Increased
competition may adversely affect the Company under the Dealer Collection Program
(as described herein) by reducing the discount at which the Company purchases
contracts, may result in a decrease in the discounts at which the Company
purchases portfolios in bulk, or may result in downward pressure on the rates
charged for loan servicing, all of which could have an adverse effect on the
Company. Further, increased competition for the bulk purchase and servicing
transactions that the Company must effect to remain profitable could have a
material adverse effect on the Company's business.
NO ASSURANCE OF SUCCESSFUL ACQUISITIONS
The Company intends to consider additional acquisitions, alliances, and
transactions involving other companies that could complement the Company's
existing business. There can be no assurance that suitable acquisition parties,
joint venture candidates, or transaction counter parties can be identified, or
that, if identified, any such transactions will be consummated on terms
favorable to the Company, or at all. Furthermore, there can be no assurance that
the Company will be able to integrate successfully such acquired businesses into
its existing operations, which could increase the Company's operating expenses
in the short-term and materially adversely affect the Company. Moreover, these
types of transactions by the Company may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt, and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect the Company's profitability. These transactions involve
numerous risks, such as the diversion of the attention of the Company's
management from other business concerns, the entrance of the Company into
markets in which it has had no or only limited experience, and the potential
loss of key employees of the acquired company, all of which could have a
material adverse effect on the Company.
GENERAL ECONOMIC CONDITIONS; RISKS ASSOCIATED WITH SUB-PRIME MARKET
The Company's business is directly related to the ability of the obligors
on the finance receivables that the Company services, expects to purchase in
bulk, and that secure its Cygnet Dealer Program to continue to make the required
payments on such contracts, which is affected by employment rates, prevailing
interest rates, and other general economic conditions. While the Company
believes that current economic conditions favor continued growth in the markets
it serves and those in which it seeks to expand, a future economic slowdown or
recession could lead to increased delinquencies, repossessions, and credit
losses on the finance receivables that the Company services, expects to purchase
in bulk, or that secure the Cygnet Dealer Program. Moreover, substantially all
of the finance receivables that the Company services, expects to purchase in
bulk, or that secure the Cygnet Dealer Program are with Sub-Prime Borrowers, who
due to their poor credit histories and/or low incomes are generally unable to
obtain credit from traditional financial institutions, such as banks, savings
and loans, credit unions, or captive finance companies owned by automobile
manufacturers. Because of the Company's primary focus on the sub-prime segment
of the automobile financing industry, the actual rate of delinquencies,
repossessions, and credit losses on the finance receivables that the Company
services, expects to purchase in bulk, or that secure the Cygnet Dealer Program
could be higher under adverse conditions than those experienced in the used car
sales and finance industry in general. Moreover, adverse economic conditions
that result in decreased sales of used cars could adversely affect the dealers
that participate in the Cygnet Dealer Program, which could have a material
adverse effect on such program.
21
<PAGE> 23
INDUSTRY CONSIDERATIONS AND LEGAL CONTINGENCIES
In recent periods, several major used car finance companies have announced
major downward adjustments to their financial statements, violations of loan
covenants, related litigation, and other events. In addition, certain of these
companies have filed for bankruptcy protection. These announcements have had a
disruptive effect on the market for securities of sub-prime automobile finance
companies, have resulted in a tightening of credit to the sub-prime markets, and
could lead to enhanced regulatory oversight. Furthermore, companies in the used
vehicle financing market have been named as defendants in an increasing number
of class action lawsuits brought by customers alleging violations of various
federal and state consumer credit and similar laws and regulations. Although the
Company is not currently a named defendant in any such lawsuits, no assurance
can be given that such claims will not be asserted against the Company in the
future or that the Company's operations will not be subject to enhanced
regulatory oversight.
22
<PAGE> 24
RISKS RELATING TO THE RIGHTS OFFERING
NO PUBLIC MARKET; MARKET PERCEPTION ISSUES
There currently exists no public market for the Rights or shares of Common
Stock being offered pursuant to this Prospectus. While the Rights and the Common
Stock have been approved for listing on the Nasdaq National Market, subject to
notice of issuance, there is no assurance that a trading market in the Rights or
the shares of Common Stock will develop, or, if developed, can be sustained. In
addition, trading in the Rights will be limited by the relatively short 20 day
Rights Offering Period. Trading transactions must be effected early in such
period to ensure ample time for the purchaser to exercise his Rights.
Even if a trading market does develop, there can be no assurance that the
market price for shares of Common Stock will remain at or above the Subscription
Price. Prices at which the Common Stock may trade, either prior to the Split-up,
on a "when-issued" basis, or subsequent thereto, cannot be predicted. Until the
Common Stock is fully distributed and an orderly market develops, the prices at
which trading in such stock occurs may fluctuate significantly. In addition,
continued listing on the Nasdaq National Market is subject to compliance with
certain initial listing and maintenance criteria, including the presence of at
least 400 holders of the Common Stock. Failure to maintain compliance with such
listing and maintenance requirements could subject the Common Stock to possible
delisting from the Nasdaq National Market, which could have a material adverse
effect on trading of the Common Stock and consequently, its market price.
Further, the prices of common stock of many participants in the sub-prime
automobile financing industry have fluctuated significantly in recent periods.
The prices at which the Common Stock will trade will be determined by the
marketplace and may be influenced by many factors, including, among others, the
value of the Company's assets, its ability to generate cash flow, its
profitability or lack thereof or other measures of value, the depth and
liquidity of the market for such shares, investors' perceptions of the Company
and the industries in which its businesses participate, and general economic and
market conditions.
Rights distributed to UDC's stockholders in the Rights Offering and shares
of Common Stock distributed to holders who exercise the Rights will be freely
transferable, except for securities received by persons who may be deemed to be
"affiliates" of UDC or of the Company within the meaning of Rule 145 promulgated
under the Securities Act. Sales by persons who are affiliates of UDC or the
Company within the meaning of Rule 145 at the time of the Rights Offering may be
subject to certain restrictions.
Although one purpose of the Split-up is to allow investors, lenders, and
others to more easily evaluate the performance and investment characteristics of
the business of the Company as opposed to the business to be retained by UDC and
to enhance the likelihood that each business group will achieve appropriate
market recognition of its performance, there will, at least for a significant
period of time, continue to be material ties between the two companies that may
prove confusing to the market. There can be no assurance that the market will
regard the Split-up as a positive development. If the market perceives more
disadvantages than advantages resulting from the Split-up, the price of the
Common Stock is likely to suffer a decline.
OWNERSHIP OF COMMON STOCK BY MR. GARCIA
Ernest C. Garcia, II, will be Cygnet's Chairman of the Board, Chief
Executive Officer, and President. Mr. Garcia is also the holder of approximately
25.2% of UDC's outstanding Common Stock. Mr. Garcia will agree to exercise his
entire 25.2% pro rata share of the Rights. In addition, Mr. Garcia will agree
through his Over-Subscription Privilege and Standby Purchase Obligation to
purchase additional shares of Common Stock pursuant to the Rights Offering in an
amount sufficient to satisfy the Required Purchase Amount. See "The Rights
Offering" for a complete description of the Over-Subscription Privilege, the
Standby Purchase Obligation, and the Required Purchase Amount. Mr. Garcia also
has the right to purchase up to 714,286 additional shares of Common Stock at the
Subscription Price over and above the Required Purchase Amount and will be
issued warrants to purchase an additional 500,000 shares of Common Stock. These
transactions taken together will result in Mr. Garcia's ownership of a
significant percentage of the outstanding Common Stock following the Split-up.
In certain circumstances, Mr. Garcia could acquire a majority of the Company's
Common Stock, in which case Mr. Garcia would be in a position to control the
voting with respect to virtually
23
<PAGE> 25
all matters that affect the Company. As a result, Mr. Garcia will have
significant influence over the Company's activities, as well as on all matters
requiring approval of the Company's stockholders, including electing or removing
members of its Board of Directors, causing the Company to engage in transactions
with affiliated entities, causing or restricting the sale or merger of the
Company with other entities, and changing its dividend or other policies.
POTENTIAL FEDERAL INCOME TAX CONSEQUENCES OF THE RIGHTS OFFERING
In the opinion of Snell & Wilmer L.L.P., holders of UDC Common Stock who
receive Rights will generally recognize dividend income (taxable as ordinary
income) in an amount equal to the fair market value, if any, of the Rights as of
the date of their distribution. In the opinion of the Appraiser dated July 21,
1998, the fair market value of the Rights on the date of their distribution
should be zero. However, the opinion of the Appraiser is not binding on the
Internal Revenue Service. For example, the Internal Revenue Service may assert
that the price at which the Rights trade during the 20-day period of the Rights
will be indicative of the fair market value of the Rights on the date of their
distribution. Accordingly, there can be no assurance as to the exact amount of
dividend income, if any, a holder of UDC Common Stock who receives Rights will
recognize upon the receipt of Rights. If the Rights are trading for value on the
date of their distribution, UDC may, in its discretion, report to holders of UDC
Common Stock the receipt of dividend income in an amount equal to the average of
the high and low trading prices of the Rights on such date.
To avoid the possibility of the recognition of ordinary income and the
creation of a potentially deferred or nondeductible capital loss, it will, in
many instances, be in the interests of holders of UDC Common Stock receiving
Rights to either exercise or sell the Rights, rather than to allow the Rights to
lapse.
RISKS RELATING TO THE PREFERRED STOCK
The dividend rate for the Preferred Stock to be issued to UDC on the
Effective Date of the Split-up will be 7% per annum of the Base Liquidation
Amount for the period from the Effective Date to the first anniversary thereof.
Thereafter, the annual dividend rate will increase 1% per annum to a maximum
rate of 11% per annum of the Base Liquidation Amount. Although dividends on the
Preferred Stock are payable only out of funds legally available therefor when
and as declared by the Board of Directors, if dividends are not paid when due
for a period of two quarters, UDC will have the right to elect two members to
the Company's Board of Directors (in addition to the then existing number of
directors) at the next meeting of stockholders and thereafter until all accrued
dividends are paid in full. In addition, if dividends are not paid when due for
a period of six quarters, the Preferred Stock is convertible at UDC's option
into Common Stock as described herein. Moreover, accrued but unpaid dividends on
the Preferred Stock may adversely affect the market price for the Common Stock.
During the first three years following the Effective Date of the Split-up, the
Preferred Stock will not be convertible, except in certain circumstances
described above. Thereafter, the Preferred Stock will be convertible into Common
Stock at the lower of the Subscription Price or a discount to market of
approximately 20%. Thus, the Company will be motivated to redeem the Preferred
Stock during the first three years following the Effective Date. Redemptions of
Preferred Stock will not be authorized, however, unless, in the reasonable
judgment of the Company and UDC, the proceeds of such redemption will be treated
for federal income tax purposes as proceeds from a sale of such stock and not as
dividends paid with respect to such stock. As a consequence, redemptions of
Preferred Stock may be limited and may be confined to a single redemption of all
the outstanding shares of Preferred Stock. Further, it may be necessary to
contemporaneously redeem shares of Common Stock acquired by a holder of
Preferred Stock upon a prior conversion of Preferred Stock in order to assure
treatment of the proceeds of a redemption of Preferred Stock as proceeds from a
sale of such stock and not as dividends paid with respect to such stock. If the
Company is unable to redeem the Preferred Stock during such three year period,
whether because of financial circumstances, contractual restrictions, or
limitations inherent under the terms governing such stock, a conversion of the
Preferred Stock into Common Stock could have the effect of significantly
diluting the Company's Common Stock.
24
<PAGE> 26
POTENTIAL ANTI-TAKEOVER EFFECT OF PREFERRED STOCK, CHANGE OF CONTROL
ARRANGEMENTS AND DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and 1998
Stock Incentive Plan (as described herein) may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors may be willing to pay in the future for shares of
the Company's Common Stock. The Company's Certificate of Incorporation
authorizes the Company to issue "blank check" preferred stock in addition to the
Preferred Stock to be issued to UDC in connection with the Split-up, the
designation, number, voting powers, preferences, and rights of which may be
fixed or altered from time to time by the Board of Directors. Accordingly, the
Board of Directors will have the authority, without stockholder approval, to
issue additional shares of preferred stock with dividend, conversion,
redemption, liquidation, sinking fund, voting, and other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. The additional shares of preferred stock could be utilized, under certain
circumstances, to discourage, delay, or prevent a merger, tender offer, or
change in control of the Company that a stockholder might consider to be in its
best interests. Although the Company has no present intention of issuing any
additional shares of its authorized preferred stock, there can be no assurance
that the Company will not do so in the future. See "Description of Capital
Stock -- Preferred Stock." The Company's 1998 Stock Incentive Plan contains
certain provisions that provide that, in the event of a "Change of Control" of
the Company, (i) all options and other share-based awards granted under the 1998
Stock Incentive Plan will become immediately exercisable; (ii) any restriction
periods and restrictions imposed on restricted stock granted under the 1998
Stock Incentive Plan will lapse; and (iii) the target value attainable under all
performance units and other performance-based awards granted under the 1998
Stock Incentive Plan shall be deemed to have been fully earned, unless, in each
case, the surviving entity agrees to assume the awards in a manner that
substantially preserves the participants' rights and benefits. These provisions
may make it more difficult for stockholders to take certain corporate actions
and could have the effect of delaying or preventing a change in control of the
Company. In addition, certain provisions of Delaware law applicable to the
Company also could delay or make more difficult a merger, tender offer or proxy
contest involving the Company. See "Management" and "Description of Capital
Stock."
NO INTEREST ON SUBSCRIPTION FUNDS IN ESCROW
In order to exercise the Rights and the related Over-Subscription
Privilege, holders of Rights must pay the Subscription Price no later than the
Expiration Date, or if certain notice of guaranteed delivery procedures are
utilized, three business days thereafter. All subscription funds will be
deposited into an escrow account with an independent escrow agent. If the
Effective Date has not occurred by thirty days following the Expiration Date,
the escrow will be terminated and subscription monies will be returned to
subscribers without interest. While the Company believes that the Effective Date
will occur shortly following the Expiration Date, no interest will be paid to
subscribers for monies held in the escrow account even if the Effective Date
does not occur.
25
<PAGE> 27
THE RIGHTS OFFERING
PURPOSE OF THE RIGHTS OFFERING
The Company has agreed to make a Rights Offering to holders of UDC Common
Stock in connection with the Split-up. This Rights Offering represents the
Company's initial public offering of its securities, although unlike a
traditional public offering, the securities will be offered first to UDC's
stockholders before they are available to the general public. The Company
believes that the Rights Offering will provide an advantage over a traditional
initial public offering because this type of offering provides the Company with
the opportunity to offer its Common Stock to investors who, as UDC stockholders,
already have some knowledge of the Split-up Businesses, which have been operated
by UDC.
The Information Agent for the Rights Offering is Corporate Investor
Communications, Inc. ("CIC"). Questions concerning the Rights Offering may be
addressed to CIC at 1-888-673-4478.
DISTRIBUTION OF RIGHTS
In the event that UDC's stockholders approve the Split-up and all other
conditions thereto are satisfied, subject to UDC's Board of Directors exercising
its right, in its sole discretion without stockholder approval, to abandon,
defer (to a date certain or indefinitely), or modify the Rights Offering, the
Rights Offering will be made to UDC's stockholders of record as of August 17,
1998 (the "Record Date"). On the Commencement Date (as defined below) of the
Rights Offering, the Company will distribute the Rights to UDC's stockholders as
of the Record Date pro rata in accordance with the ownership of UDC Common Stock
on the Record Date. Each holder of record of UDC Common Stock as of the Record
Date will receive one (1) Right for every four (4) shares of UDC Common Stock.
Each Right will entitle the holder to acquire one (1) share of the Company's
Common Stock (the "Primary Subscription") at $7.00 per share (the "Subscription
Price"). The Subscription Price must be delivered to Norwest Bank Minnesota,
National Association, as distribution agent for the Company (the "Distribution
Agent"), and will be deposited by the Distribution Agent into an escrow account
(the "Escrow Account") established by the Company with Norwest Bank Minnesota,
National Association, as escrow agent (the "Escrow Agent"). Except as provided
in the next sentence below, in order to exercise the Rights, the full
Subscription Price for all exercised Rights must be paid on or prior to the
Expiration Date (defined below) or a notice of guaranteed delivery must be
received by the Distribution Agent by that date as described below under "The
Rights Offering Period" and "Method for Exercising Rights." Notwithstanding the
above, Mr. Garcia and his affiliates may exercise their Rights by payment of the
Subscription Price on or prior to the Effective Date. No interest will be paid
on Subscription Funds in the Escrow Account.
NO FRACTIONAL SHARES
If the number of shares of UDC Common Stock owned by a holder of record of
UDC Common Stock is not evenly divisible by four, the Company will round up to
the nearest whole number in calculating the number of Rights that such record
holder is entitled to receive. For example, if a record holder holds ten (10)
shares of UDC Common Stock, such holder will receive three (3) Rights. Holders
of record of UDC Common Stock as of the Rights Record Date will be instructed to
allocate the Rights received by them among any beneficial owners of UDC Common
Stock to which such Rights relate by rounding upward or downward to the nearest
whole Right. A record holder may request additional Rights from the Distribution
Agent if necessary to effect such an allocation among beneficial owners.
THE RIGHTS OFFERING PERIOD
Rights may be exercised at any time during the period beginning on the
commencement date of the Rights Offering (the "Commencement Date"), which is
expected to be on or about September 1, 1998, and ending at 5:00 p.m., Minnesota
time, on the date that is 20 days following the Commencement Date or such other
date to which the Rights Offering is extended (the "Expiration Date"). The
Company may determine to extend the Rights Offering Period in the event that the
Company believes a longer offering period is advisable
26
<PAGE> 28
in order to allow a more diversified pool of holders to exercise the Rights or
for any other reason. After that date, except pursuant to certain procedures for
guaranteed delivery described below, Rights Offering Participants will not be
able to exercise or transfer their Rights and such Rights will be worthless. The
Company does not intend to honor any Rights received for exercise by the
Distribution Agent after the Expiration Date, except pursuant to such procedures
for guaranteed delivery, regardless of when such Rights were sent to the
Distribution Agent for exercise. Holders may also exercise their Rights by
contacting a bank, trust company, New York Stock Exchange member firm, or other
financial institution that is a member of an approved stock exchange medallion
program which can deliver to the Distribution Agent, on behalf of the holder, on
or prior to the Expiration Date, a Notice of Guaranteed Delivery guaranteeing
delivery of a properly completed subscription certificate (a "Subscription
Certificate") and payment of required subscription funds on or before the third
business day following the Expiration Date.
TRANSFERRING RIGHTS
Rights Offering Participants may sell the Rights in the market. Rights will
be admitted for trading on the Nasdaq National Market, under the symbol "CGNTR,"
and may be purchased or sold through normal brokerage channels through the last
business day prior to the Expiration Date. Rights Offering Participants should
consult with their regular investment and tax advisors and carefully consider
their alternatives. See "Federal Income Tax Consequences."
Each Rights Offering Participant may transfer all or a portion of such
Participant's Rights by endorsing and delivering to the Distribution Agent (at
the addresses set forth below) his or her Subscription Certificate. The Rights
Offering Participant must properly endorse the certificate for transfer, his or
her signature must be guaranteed by a bank or securities broker, and his or her
certificate must be accompanied by instructions to reissue the Rights to be
transferred in the name of the person purchasing the Rights. The Distribution
Agent will reissue certificates for the transferred Rights to the purchaser, and
will reissue a certificate for the balance, if any, to the transferor if it is
able to do so before the Expiration Date. The transferor will be responsible for
the payment of any commissions, fees, and other expenses (including brokerage
commissions and any transfer taxes) incurred in connection with the purchase or
sale of the transferor's Rights. Any questions regarding the transfer of Rights
should be directed to the Information Agent at its telephone number or address
listed below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Telephone: (888) 673-4478
Because of the short Rights Offering Period, Rights Offering Participants
desiring to sell or transfer their Rights should do so early in the Rights
Offering Period to allow sufficient time for the transfer to be effected and the
transferee to exercise the Rights.
METHOD FOR EXERCISING RIGHTS
Rights may be exercised by completing and signing the purchase form that
appears on the back of each Subscription Certificate. To exercise Rights, a
Rights Offering Participant must send the completed and signed form, along with
payment in full of the Subscription Price for all shares of Common Stock to be
purchased, to the Distribution Agent. The Distribution Agent must receive these
documents and the payment not later than 5:00 p.m., Minnesota time, on the
Expiration Date. Rights may also be exercised by following the procedures for
guaranteed delivery described above under "The Rights Offering Period," in which
case the Notice of Guaranteed Delivery must be received by the Distribution
Agent by 5:00 p.m., Minnesota time, on the Expiration Date, and the properly
completed Subscription Certificate and payment of required subscription funds
must be received by the Distribution Agent by 5:00 p.m., Minnesota time, no
later than three business days following the Expiration Date. A Notice of
Guaranteed Delivery may be delivered by facsimile to the Distribution Agent at
612-450-4163, with delivery confirmed by telephone at 612-552-6995. Further
instructions for exercise of Rights and additional documentation that may be
required in certain cases will be contained in or included with the Subscription
Certificates.
27
<PAGE> 29
Rights Offering Participants whose Rights are held by a nominee, such as a
bank, broker or trustee, must contact that nominee to exercise their Rights. In
such case, the nominee will complete the Subscription Certificate on behalf of
the Rights Offering Participant and arrange for proper payment. Nominees who
receive Rights for the account of others should notify the beneficial owners of
such Rights as soon as possible to ascertain such beneficial owners' intentions
and to obtain instructions with respect to the Rights. If the beneficial owner
so instructs, the nominee should complete the Subscription Certificate and
submit it to the Distribution Agent with the proper payment therefor. The
Company does not intend to honor any exercise of Rights received by the
Distribution Agent after the Expiration Date, or three business days thereafter
if a Notice of Guaranteed Delivery is delivered by the Expiration Date, except
that Mr. Garcia and his affiliates may exercise their Rights by delivery of
subscription documents and payment of the Subscription Price directly to Cygnet
on or prior to the Effective Date.
The Company suggests, for the protection of the Rights Offering
Participants, that Rights be delivered to the Distribution Agent by overnight or
express mail courier. If Rights are mailed, the Company suggests that Rights
Offering Participants use registered mail. In any event, mail or delivery of
Rights and payment for the Subscription Price must be made to the Distribution
Agent as follows:
<TABLE>
<S> <C> <C>
BY MAIL: BY HAND: BY OVERNIGHT/EXPRESS MAIL
COURIER:
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Shareowner Services Shareowner Services Shareowner Services
Reorganization Department Reorganization Department Reorganization Department
P.O. Box 64858 161 North Concord Exchange 161 North Concord Exchange
St. Paul, MN 55164-0858 South St. Paul, MN 55075 South St. Paul, MN 55075
</TABLE>
The Subscription Price must be paid in U.S. dollars by certified check or
money order payable to "Norwest Bank Minnesota, National Association, as Escrow
Agent for Cygnet Financial Corporation," and will be deposited into escrow. The
Distribution Agent may also accept checks payable to "Norwest Bank Minnesota,
National Association," "Cygnet Financial Corporation," or similar designations,
although it will not be required to do so. No interest will be paid on
Subscription Funds in the Escrow Account.
The Escrow Agent will not deliver any funds to the Company until the
Split-up has been successfully completed and the shares of Common Stock have
been issued to the Rights Offering Participants. If for any reason the Rights
Offering is not successfully completed or the Split-up has not been effected
within 30 days following the Expiration Date, the Escrow Agent will return all
funds held in escrow as promptly as practicable to the Rights Offering
Participants, without interest.
The Company will decide all questions as to the validity, form and
eligibility (including times of receipt, beneficial ownership and compliance
with other procedural matters). The acceptance of subscription forms and the
Subscription Price also will be determined by the Company. Alternative,
conditional or contingent subscriptions will not be accepted. The Company
reserves the absolute right to reject any subscriptions not properly submitted.
In addition, the Company may reject any subscription if the acceptance of the
subscription would be unlawful. The Company in its sole discretion may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine. Subscriptions will not be deemed to have
been received or accepted until all irregularities have been waived or cured
within such time as the Company determines in its sole discretion. Neither the
Company nor the Distribution Agent will be under any duty to give notification
of any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification. If an
exercise is rejected, the related payment of the Subscription Price will be
promptly returned by the Escrow Agent.
28
<PAGE> 30
Any questions or requests for assistance concerning the method of
subscribing for shares of Common Stock or for additional copies of this
Prospectus or Subscription Certificates or Notices of Guaranteed Delivery may be
directed to the Information Agent at its telephone number and address listed
below:
Corporate Investor Communications, Inc.
111 Commerce Road
Carlstadt, New Jersey 07072-2586
Telephone: (888) 673-4478
Shareholders may also contact their brokers or nominees for information
with respect to the Rights.
THE OVER-SUBSCRIPTION PRIVILEGE
Each Rights Offering Participant who elects to exercise all of his or her
Rights may also subscribe for additional shares of Common Stock out of the pool
of shares underlying unexercised Rights on the Expiration Date, if any (the
"Unexercised Pool"), up to the number of shares purchased upon exercise of such
Participant's Rights (the "Over-Subscription Privilege"), subject to allocation
as described below. Shares purchased through the Over-Subscription Privilege
must be purchased at the Subscription Price. For example, if a Rights Offering
Participant holds and validly exercises 1,000 Rights, such Participant also may
subscribe for an additional 1,000 shares of Common Stock out of the Unexercised
Pool at the Subscription Price of $7.00 per share. If there are more shares
subscribed for pursuant to the Over-Subscription Privilege than are available in
the Unexercised Pool, each holder who elects to exercise his Over-Subscription
Election shall be authorized to purchase a pro rata portion of the Unexercised
Pool determined by calculating the product of (a) a fraction, the numerator of
which is equal to the number of shares of Common Stock as to which the
Over-Subscription Privilege of a holder is exercised and the denominator of
which is the total number of shares of Common Stock as to which the
Over-Subscription Privilege is exercised by all holders, and (b) the number of
shares available in the Unexercised Pool. The Escrow Agent will refund to
holders of Rights, without interest, all amounts paid for shares of Common Stock
subscribed for pursuant to the Over-Subscription Privilege and not issued or
sold to such holders due to the allocation described above. Except as described
in the next sentence below, the full amount of the Subscription Price for all
exercised Rights and shares subscribed for pursuant to the Over-Subscription
Privilege must be paid on or prior to the Expiration Date or a notice of
guaranteed delivery must be received by the Distribution Agent by that date in
order to validly exercise the Over-Subscription Privilege. Notwithstanding the
above, because of his obligations as Standby Purchaser, Mr. Garcia and his
affiliates may pay monies necessary to exercise the Over-Subscription Privilege
with respect to their Rights at the same time that they pay monies to fulfill
Mr. Garcia's Standby Purchase Obligation (described below). Such payments will
be made directly to the Company.
THE STANDBY PURCHASE OBLIGATION
Ernest C. Garcia, II, the Company's Chairman of the Board, Chief Executive
Officer, and President, and the holder of approximately 25.2% of the outstanding
shares of UDC Common Stock, will act as standby purchaser for the Rights
Offering (the "Standby Purchaser"). The successful conclusion of the Rights
Offering is contingent on the purchase of at least 75% of the Offered Shares
(the "Required Purchase Amount"). Mr. Garcia has agreed to purchase his full
25.2% pro rata share of the Offered Shares pursuant to the Rights Offering. In
addition, pursuant to that certain Rights Exercise and Standby Purchase
Agreement to be entered into between the Company and Mr. Garcia (the "Standby
Purchase Agreement"), through the Over-Subscription Privilege associated with
his Rights or pursuant to his Standby Purchase Obligation, Mr. Garcia will
purchase additional shares of Common Stock from the Unexercised Pool to the
extent necessary to satisfy the Required Purchase Amount. If, following the
Expiration Date, validly exercised Rights and the Over-Subscription Privilege do
not result in proper and valid subscriptions for the Required Purchase Amount,
then Mr. Garcia will be required to purchase additional shares of Common Stock
pursuant to the Standby Purchase Obligation in an amount necessary to achieve
the Required Purchase Amount. Mr. Garcia will pay any additional subscription
funds required pursuant to the Standby Purchase Obligation directly to the
Company on or prior to the Effective Date. In addition, Mr. Garcia's Standby
Purchase Obligation may be satisfied by any company or entity wholly-owned by
Mr. Garcia or any of his affiliates. As a result, Mr. Garcia
29
<PAGE> 31
(or his affiliates) is expected to acquire at least 25.2% of Cygnet's Common
Stock through the Rights Offering and may acquire a substantially greater
percentage in certain circumstances as described herein. UDC intends to utilize
a portion of the Cash Payment to repay in full its $10 million subordinated note
to Verde Investments, Inc. ("Verde"), an affiliate of UDC, wholly-owned by Mr.
Garcia (the "Verde Note"), subject to the receipt of certain required consents.
Alternatively, Verde may deposit the Verde Note or any part thereof with the
Company in payment of all or any portion of the Subscription Price for exercise
of Rights acquired by Verde from Mr. Garcia or otherwise, the related
Over-Subscription Privilege, and the Standby Purchase Obligation. In such case,
the Company would transfer the Verde Note to UDC for cancellation in lieu of the
payment of a portion of the Cash Payment.
FAILURE BY THE STANDBY PURCHASER TO MEET HIS OBLIGATIONS
If the Standby Purchaser fails to meet his obligations under the Standby
Purchase Agreement, the Rights Offering may be canceled. If the Rights Offering
is canceled, the Escrow Agent will promptly return to all Rights Offering
Participants who elected to exercise Rights, without interest, any payment
received in respect of the Subscription Price and no shares of Common Stock will
be distributed.
THE STANDBY WARRANTS
In consideration for the obligations incurred by Mr. Garcia under the
Standby Purchase Agreement, on the Effective Date, Cygnet will grant to Mr.
Garcia warrants (the "Standby Warrants") entitling Mr. Garcia to purchase up to
500,000 additional shares of Common Stock at an exercise price equal to 120% of
the Subscription Price, or $8.40 per share (the "Warrant Price"), at any time
within five years following the Effective Date. Neither the Standby Warrants nor
the underlying Common Stock into which they are exercisable are registered under
the Securities Act and such securities may not be resold by Mr. Garcia unless
such securities are registered or unless an exemption from registration is
available. The Company will register at its expense the resale of the Common
Stock issued upon exercise of the Standby Warrants at the request of Mr. Garcia
at any time after one year following the Effective Date.
ADDITIONAL PURCHASE RIGHT AND D&O PURCHASE RIGHT
In addition to the shares of Common Stock that Mr. Garcia will purchase
through exercise of his Rights, the Over-Subscription Privilege associated with
his Rights, and the Standby Purchase Obligation, on the Effective Date, Mr.
Garcia and his affiliates will have the right at his election to purchase up to
an additional 714,286 shares of Common Stock at the Subscription Price (the
"Additional Purchase Right"). In addition, on the Effective Date, certain
individuals who are or will become directors and officers of the Company on the
Effective Date will have the right to purchase 214,286 additional shares of
Common Stock for $7.00 per share (the "D&O Purchase Right").
THE LENDER WARRANTS
Cygnet will be required to issue warrants to a third party lender (the
"Lender Warrants") to purchase 115,000 shares of Common Stock at an exercise
price of $8.40 per share, subject to a call feature by the Company if the
closing price of the Common Stock equals or exceeds $13.44 per share for a
period of 20 consecutive trading days, as incentive for a loan made to the
Company by the third-party lender of $5 million in subordinated indebtedness for
a three year term. The Lender Warrants will have a term of three years from
their date of issuance. Neither the Lender Warrants nor the underlying Common
Stock into which they are exercisable are registered under the Securities Act
and such securities may not be resold unless they are registered or unless an
exemption from registration is available. The Company has agreed to register at
its expense the resale of the Common Stock underlying the Lender Warrants on
demand of the holder thereof at any time after one year following the Effective
Date.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
30
<PAGE> 32
PRINCIPAL AGREEMENTS RELATING TO THE RIGHTS OFFERING
In order to effectuate the Split-up, it is contemplated that at least the
following major agreements will be required. Each such agreement will be
executed in substantially the form described below. The descriptions of such
agreements contained herein are summaries only and are qualified in their
entirety by reference to the agreements which will be filed as exhibits to the
Registration Statement. Such agreements are expected to be substantially in the
forms so filed but may be revised prior to or following the effectuation of the
Split-up.
CAPITALIZATION AGREEMENT.
Prior to the Commencement Date, UDC and the Company will enter into the
Capitalization Agreement. The Capitalization Agreement sets forth, among other
things, and assuming the satisfaction or waiver of specified contingencies, (i)
the obligation of the Company to issue the Rights, (ii) the obligation of the
Company to issue the Common Stock on the Effective Date upon exercise of the
Rights, the Over-Subscription Privilege, and the Standby Purchase Obligation,
(iii) the obligation of UDC and its subsidiaries to transfer the Transferred
Assets to the Company on the Effective Date, (iv) the obligation of the Company
to issue the Preferred Stock to UDC and to make the Cash Payment, (v) the
obligation of the Company to issue other capital stock and warrants as described
herein, (vi) the operational arrangements and agreements between UDC and the
Company during a transition period, including arrangements for the sharing of
certain assets, leases, licenses, and employees, (vii) agreements between UDC
and the Company relating to employee matters, including the issuance or
adjustment of stock options under employee benefit plans, (viii) tax sharing and
indemnity matters, and (ix) certain agreements between UDC and the Company
relating to the FMAC and Reliance transactions and any Interim Transactions.
STANDBY PURCHASE AGREEMENT.
The Standby Purchase Agreement will be entered into between the Company and
Ernest C. Garcia, II prior to commencement of the Rights Offering. The Standby
Purchase Agreement sets forth the obligation of Mr. Garcia or his affiliates to
exercise their Rights and to purchase shares of Common Stock from the
Unexercised Pool of Rights either through the Over-Subscription Privilege
associated with their Rights or pursuant to the Standby Purchase Obligation. See
"The Standby Purchase Obligation" above. The Standby Purchase Agreement will
also require the issuance of the Standby Warrants to Mr. Garcia.
ESCROW AGREEMENT.
The Escrow Agreement will be entered into between the Company and Norwest
Bank Minnesota, National Association, as Escrow Agent prior to the commencement
of the Rights Offering and would govern the holding and distribution of the
subscription monies received from holders (other than Mr. Garcia) who elect to
exercise their Rights or the Over-Subscription Privilege.
TRANSFER OF ASSETS PURSUANT TO THE SPLIT-UP
If the Split-up Proposal is approved by the UDC shareholders and certain
other conditions are satisfied (see "Contingencies to the Split-up and the
Closing Thereof"), on the Effective Date, UDC and its subsidiaries will transfer
to the Company certain assets and liabilities (the "Transferred Assets.") The
Transferred Assets will include (i) UDC's bulk purchase and servicing operations
with respect to contracts originated by independent used car dealerships ("Third
Party Dealers"); (ii) the assets of Cygnet Finance, Inc., a wholly-owned
subsidiary of UDC through which UDC provides qualified Third Party Dealers with
warehouse purchase facilities and operating credit lines primarily secured by
the dealer's retail installment contract portfolios (the "Cygnet Dealer
Program"); (iii) substantially all of UDC's rights and obligations pursuant to
certain transactions with First Merchants Acceptance Corporation ("FMAC"),
including the servicing platform and rights and certain other rights and
residual interests, and the assumption by the Company of certain funding
obligations and guarantees of UDC in connection with the FMAC transaction,
certain of which are described under "Risk Factors -- Risks Relating to the
Business -- Risks Related to the FMAC Transaction" and in "Management's
Discussion and Analysis of Financial Condition and Results of
31
<PAGE> 33
Operations -- Liquidity and Capital Resources -- Transactions Regarding First
Merchants Acceptance Corporation"; and (iv) substantially all of the Company's
rights and obligations pursuant to certain transactions with Reliance Acceptance
Group, Inc. ("Reliance"), described generally above under "Risk Factors -- Risks
Relating to the Business -- Risks Related to the Reliance Transaction" and in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources -- Transactions Regarding Reliance
Acceptance Group" including the servicing platform and certain servicing and
transition servicing arrangements. The Transferred Assets will not include cash
received by UDC prior to the Effective Date. The Transferred Assets had a net
book value of approximately $54.7 million and a net appraised value of
approximately $54.9 million as of June 30, 1998. However, it is expected that
the book value of the Transferred Assets will increase prior to the transfer
contemplated herein as additional contracts are acquired under warehouse
purchase facilities or additional advances are made under operating credit lines
through the Cygnet Dealer Program.
The Company is currently evaluating a certain transaction for the
acquisition or management of an operating insurance agency. For a description of
certain additional transactions that recently have been or may be effected by
the Company prior to the Split-up ("Interim Transactions"), see
"Business -- Recent Developments."
UDC would retain its used car dealership operations, its securitization
program, the servicing rights and its interests in the bankruptcy remote
subsidiaries that own residual interests in all securitization transactions
previously effected by UDC, and its rent-a-car franchise business which is
generally inactive. UDC would continue to service, through its loan servicing
and collection facilities located in Phoenix, Arizona, San Antonio, Texas,
Dallas, Texas, and Tampa, Florida, the automobile receivables in its various
securitized pools, receivables purchased through its Branch Office network that
was closed in the first quarter of 1998 (whether securitized or retained), as
well as the receivables serviced pursuant to the transactions effected in
September 1997 with Kars-Yes Holdings, Inc. and related companies ("Kars"). In
September 1997, UDC purchased substantially all of the dealership and loan
servicing assets of Kars, including 12 dealerships. Although UDC did not acquire
the contract portfolio of Kars, it did acquire the Kars' loan servicing assets
and began servicing Kars' retained portfolio and portfolios previously
securitized by Kars, which aggregated approximately $98.8 million at March 31,
1998. UDC would also retain certain rights and direct obligations relating to
the FMAC and Reliance transactions.
CONSIDERATION FOR THE TRANSFERRED ASSETS
As consideration for the Transferred Assets, on the Effective Date, the
Company would issue to UDC 40,000 shares of Cumulative Convertible Preferred
Stock, Series A, $.001 par value per share (the "Preferred Stock"), with an
aggregate liquidation preference of $40 million and make a cash or equivalent
payment (the "Cash Payment") equal to the difference between the greater of the
appraised value or the book value of the Transferred Assets and the $40 million
of Preferred Stock (except with respect to one intangible asset, with a current
book value of approximately $575,000 as to which no value has been assigned by
the parties). The Company may also be required to repay to UDC any Interim
Company Loans, would pay the excess, if any, of the aggregate appraised value,
as of the Effective Date, of the assets and rights and related liabilities
acquired by the Company in such Interim Transactions ("Interim Assets") over the
aggregate book value of such Interim Assets (the "Interim Consideration"), and
would distribute to UDC any earnings accrued prior to the Effective Date. UDC
may also require the release of any guarantee of Third Party Loans to the
Company. Alternatively, UDC and the Company may agree as to other treatment of
the Interim Transactions if UDC believes that such other treatment results in
adequate consideration to UDC as the time of the Split-up with respect to the
Interim Assets. The purpose for the payment by the Company to UDC of the Interim
Consideration is to place both parties in substantially the same economic
position each would be in if the Interim Transactions were effected by UDC
rather than the Company and the resulting assets and liabilities were
transferred to Cygnet.
The Preferred Stock, in preference to the Common Stock, would be entitled
to receive cumulative cash dividends, from the Effective Date through the first
anniversary of such date, at the initial annual rate of 7% of the Base
Liquidation Amount (defined below), and escalating 1% per annum on each
anniversary thereafter to
32
<PAGE> 34
a maximum rate of 11% per annum on the aggregate Base Liquidation Amount, in
each case payable quarterly in arrears on the first day of March, June,
September, and December of each year, beginning December 1, 1998, when and as
declared by the Board of Directors of the Company out of funds legally available
for such payment. The Preferred Stock, in preference to the Common Stock, will
be entitled to receive, in the event of dissolution or liquidation of the
Company, $1,000 per share (the "Base Liquidation Amount") plus accrued and
unpaid dividends thereon (the "Liquidation Preference Amount").
The Preferred Stock will be redeemable at the Company's option in whole or
in part at any time at a redemption price of $1,000 per share, plus dividends
accrued and unpaid thereon to the redemption date; provided, however, that no
such redemption will be authorized unless, in the judgment of the Company and
UDC, the proceeds of such redemption would be treated for federal income tax
purposes as proceeds from a sale of such stock and not as dividends paid with
respect to such stock. The Preferred Stock will be convertible in whole or in
part at any time after the third anniversary following issuance at the option of
UDC into that number of shares of Common Stock determined by dividing the
Liquidation Preference Amount of the shares of Preferred Stock to be converted
by the lower of (a) the Subscription Price or (b) 80% of the average Market
Price (defined below) for the 10 consecutive trading days ending two business
days prior to the date notice of conversion is given, subject to adjustment upon
certain extraordinary events. In addition, the Preferred Stock will be
convertible during any period following the date that an amount equal to six
quarterly dividend payments on the Preferred Stock has accrued and is unpaid,
until the payment in full of all accrued dividends. For purposes of the
conversion of the Preferred Stock, "Market Price" means (i) if the Common Stock
is quoted on the Nasdaq National Market or the Nasdaq SmallCap Market or on a
national securities exchange, the daily per share closing price of the Common
Stock as quoted on the Nasdaq National Market or the Nasdaq SmallCap Market or
on the principal stock exchange on which it is listed on the trading day in
question, as the case may be, whichever is the higher, or (ii) if the Common
Stock is traded in the over-the-counter market and not quoted on the Nasdaq
National Market or the Nasdaq SmallCap Market or on any national securities
exchange, the closing bid price of the Common Stock on the trading day in
question, as reported by Nasdaq or an equivalent generally accepted reporting
service. The Preferred Stock will not have any pre-emptive or other subscription
rights.
Except as described below, holders of the Preferred Stock will not be
entitled to vote for the election of directors or for other matters on which
holders of the Common Stock are entitled to vote. In the event that an amount
equal to two quarterly dividend payments on the Preferred Stock shall have
accrued and be unpaid, the holders of the Preferred Stock will have the right,
voting separately as a class, to elect two members to the Board of Directors of
Cygnet (in addition to the then authorized number of directors) at the next
meeting of stockholders of Cygnet and thereafter until all accrued dividends on
the Preferred Stock have been paid in full. The Preferred Stock shall also have
voting rights on certain extraordinary matters as described herein. See
"Description of Capital Stock -- Preferred Stock." In such case, each share of
Preferred Stock shall have one vote per Base Liquidation Amount.
If the Preferred Stock were converted to Common Stock at the subscription
price of $7.00 per share, UDC would obtain 5,714,286 shares, or approximately
61.6% of the then outstanding shares of the Company, assuming the sale by the
Company pursuant to the Rights Offering of 3,562,500 shares of Common Stock (the
Required Purchase Amount) and that no additional shares of Common Stock are
issued either on the Effective Date of the Split-up or thereafter. If the
Preferred Stock were converted to Common Stock at the subscription price of
$7.00 per share, and assuming the sale by the Company of 4,750,000 shares of
Common Stock pursuant to the Rights Offering and the sale of 714,286 additional
shares to Ernest C. Garcia, II and 214,286 shares available for purchase by
officers and directors of the Company (other than Mr. Garcia) and that no
additional shares of Common Stock are then outstanding, UDC would obtain
approximately 50.2% of the then outstanding shares of UDC.
The Preferred Stock and the Common Stock into which it is convertible are
not registered under the Securities Act and may not be sold by UDC unless such
securities are registered or unless an exemption from registration is available.
The Company will register the resale of the Common Stock issued upon conversion
of the Preferred Stock under the Securities Act, at its expense, upon request of
the Company.
33
<PAGE> 35
For a description of certain risks relating to the Preferred Stock, see
"Risk Factors -- Risks Relating to the Rights Offering -- Risks Relating to the
Preferred Stock."
CONTINGENCIES TO THE SPLIT-UP AND THE CLOSING THEREOF
The making of the Rights Offering and the closing of the Split-up are
subject to certain contingencies in addition to approval of the Split-up
Proposal by UDC's stockholders and the requisite investment being made in the
Company either through the Rights Offering or otherwise, as described herein.
Various consents, waivers, and approvals are required to be obtained by UDC or
its subsidiaries prior to either the initiation of the Rights Offering or the
effectuation of the Split-up. These include, without limitation, (i) the consent
of certain parties that are required in order to allow a subsidiary of Cygnet to
service the contracts currently being serviced pursuant to the FMAC and Reliance
transactions, and (ii) the consent of General Electric Capital Corporation ("GE
Capital") as the primary lender to UDC under UDC's revolving credit facility. In
addition, the Company will be required to obtain certain regulatory approvals
and licenses. The Effective Date of the Split-up is expected to occur shortly
following the Expiration Date of the Rights Offering but may be delayed to a
date not later than 30 days following the Expiration Date. UDC has prepared or
is in the process of preparing such consents and has contacted or is contacting
various third parties to obtain such consents. UDC and the Company will attempt
to obtain all required consents before the Annual Meeting. However, there can be
no assurance that all required consents will be obtained by such date or at all.
More specifically, the issuance of the Rights following the requisite
approval by UDC's stockholders of the Split-up Proposal is conditioned upon,
among other things, (i) the execution and delivery of the Capitalization
Agreement described above under "Principal Agreements Relating to the Rights
Offering" and other required intercompany agreements; (ii) all required
authorizations, consents, approvals, and clearances of all federal, state,
local, and foreign governmental agencies and all other persons required therefor
having been obtained and in effect, without any conditions being imposed that
would have a material adverse effect; (iii) no preliminary or permanent
injunction or other order or decree, ruling issued in a court of competent
jurisdiction or by a governmental, regulatory, or administrative agency or
commission, and no statute, rule, regulation, or executive order promulgated or
enacted by any governmental authority, being in effect preventing the Rights
Offering; (iv) the satisfactory resolution of all legal and regulatory issues;
and (v) the Rights being deliverable in accordance with the applicable law. Even
if all of the above conditions are satisfied, the Rights Offering may be
abandoned or postponed, or conditions thereto waived, at any time prior to the
Commencement Date or thereafter for any reason in the sole discretion of UDC's
Board of Directors.
Similarly, the effectuation of the Split-up following the Rights Offering
and the achievement of the requisite investment in the Company is conditioned
upon, among other things, (i) certain transactions contemplated by the
Capitalization Agreement having been consummated in all material respects; (ii)
all required authorizations, consents, approvals, and clearances of all federal,
state, local, and foreign governmental agencies and all other persons required
to permit the valid consummation of the transactions contemplated by the
Capitalization Agreement having been obtained, without any conditions being
imposed that would have a material adverse effect; (iii) no preliminary or
permanent injunction or other order, decree, or ruling issued by a court of
competent jurisdiction or by a government, regulatory, or administrative agency
or commission, and no statute, rule, regulation, or executive order promulgated
or enacted by any governmental authority, being in effect preventing the
Split-up; (iv) the Common Stock being deliverable in accordance with applicable
law; (v) the execution and delivery of the required intercompany agreements; and
(vi) both UDC and the Company having in place separate financing facilities and
capital resources that will, in the judgment of the Board of Directors of each
such entity, be sufficient to allow the continuing operations of each such
entity without material disruption of business operations. These conditions may
be waived by the Board of Directors of UDC and/or Cygnet at any time. Even if
all the above conditions are satisfied, the Capitalization Agreement may be
amended or terminated, and the closing of the Split-up may be abandoned, or
conditions thereto may be waived, at any time prior to the Expiration Date or
thereafter for any reason in the sole discretion of UDC's Board of Directors.
UDC does not expect to effect the Split-up if the Rights Offering is not
consummated.
34
<PAGE> 36
OPINION OF APPRAISER
In connection with the Split-up, the Board of Directors of UDC engaged
Willamette Management Associates ("Willamette" or the "Appraiser") to estimate
the fair market value of the Transferred Assets, the Preferred Stock, and the
Rights and requested that Willamette render an appraisal (the "Appraisal")
regarding the fair market value of each. Willamette delivered its oral opinion
to the Boards of Directors of UDC and Cygnet on July 16, 1998, subsequently
confirmed in writing on July 21, 1998, to the effect that, based upon and
subject to the factors and assumptions set forth in such opinion, the fair
market value of the Transferred Assets, as of June 30, 1998, is $54.9 million,
the fair market value of the Preferred Stock on the date of its issuance will be
$40 million, and the Rights will have no value as of the date of their
distribution.
Willamette believes the Appraisal was prepared in conformity with the
Uniform Standards of Professional Appraisal Practice as promulgated by The
Appraisal Foundation and endorsed by the American Society of Appraisers. No
limitations were imposed by UDC or Cygnet with respect to the investigations
made or the procedures followed by Willamette in rendering its Appraisal.
Willamette's Appraisal indicates that it is provided for the use of UDC's and
Cygnet's Board of Directors in their determination of the consideration to be
paid by the Company for the Transferred Assets and for assessing the likely
consequences of the sale of the Transferred Assets for federal income tax
purposes, Willamette's Appraisal and presentation to the Boards of Directors of
UDC and Cygnet were among the many factors taken into consideration by the
Boards in making their determination to approve, and of the UDC Board to
recommend that UDC's stockholders approve, the Split-up. Willamette has
consented to inclusion of this summary in this Prospectus.
In making its Appraisal, Willamette reviewed certain information, including
drafts of this Prospectus and the Notice and Proxy Statement of UDC relating to
the Split-up, financial analyses of certain bulk portfolios of FMAC and
Reliance, and internal financial analyses and forecasts of UDC and the Company
prepared by the management. Willamette also had discussions with members of the
senior managements of the Company and UDC to discuss the Split-up and has
considered other matters deemed relevant to its inquiry. In performing its
analysis, Willamette made numerous assumptions with respect to industry
performance, general business and economic conditions, and the performance of
the Transferred Assets, such as the rate of industry growth, inflation, interest
rates, charge-off rates, and recovery rates, many of which are beyond the
control of UDC and the Company. The analyses performed by Willamette are not
necessarily indicative of actual values or actual future results which may be
significantly more or less favorable than those suggested by such analyses.
In connection with its analysis, Willamette assumed and relied upon the
accuracy and completeness of the foregoing information and did not assume any
responsibility for independent verification of such information. With respect to
portfolio forecasts, Willamette assumed that the forecasts and assumptions
provided to Willamette had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of UDC and the
Company, as the case may be, as to the future financial performance of the
respective portfolios, and that they provided a reasonable basis upon which
Willamette could form an opinion. The projections are based on numerous
variables and assumptions which are inherently unpredictable and must be
considered not certain of occurrence as projected. Accordingly, actual results
could vary significantly from those set forth in such projections. Willamette
also assumed that there had been no material changes to the Transferred Assets
since the respective dates of the last financial statement made available to
Willamette and that no material adverse change will subsequently occur to the
Transferred Assets. In addition, Willamette also assumed that the Split-up would
be consummated in accordance with the terms set forth in this Prospectus.
Willamette did not assume responsibility for making a physical inspection of the
Transferred Assets. Willamette will update its appraisal of the Transferred
Assets as of the Effective Date.
Transferred Assets. In the context of the appraisal of the Transferred
Assets, Willamette employed various valuation methodologies. For example,
Willamette used a discounted cash flow analysis with respect to the market value
of certain loan servicing contracts which contain back-end collection incentives
using a discounted cash flow analysis. This analysis involved (i) the projection
of future cash flows generated by the underlying portfolios of sub-prime
automobile finance receivables, (ii) the required distribution of projected
portfolio collections to creditors of the contract owners, (iii) the payment of
certain servicing, auditing, and
35
<PAGE> 37
insurance fees, and (iv) an allocation of any residual cash flows based on the
terms and conditions of the governing servicing agreement. Where possible,
Willamette based its discounted cash flow assumptions on the historical
financial activity of the loan portfolios underlying the loan servicing
contracts.
With respect to loans securitized by FMAC, Willamette calculated the range
of net residual cash flows, based on varying assumptions, including projected
charge-offs, recoveries, prepayments, loan servicing and collection costs, and
distributions, if any, of net cash flows to the creditors of FMAC (including
with respect to a credit facility to be transferred to the Company at the
Effective Date, which at June 30, 1998 had a balance of $9.8 million), to be
$12.9 to $34.4 million, with a most likely result of $17.2 million. Willamette
concluded that the net present value of the residual cash flows of the FMAC
portfolio allocable to the Company is $77,133 in excess of the book value.
With respect to contracts owned by FMAC, sold to a third party and in which
the Company maintains a residual interest, Willamette calculated the range of
net residual cash flows, based on varying assumptions, including projected
charge-offs, recoveries, prepayments, loan servicing and collection costs, and
distributions, if any, of net cash flows to the current owner, to be $5.5 to
$13.2 million, with a most likely result of $9.5 million. Willamette concluded
that the net present value of the residual cash flows allocable to the Company,
is $2,003 in excess of the book value of the Company's residual interest.
With respect to the Reliance loan portfolio, Willamette calculated the
range of net residual cash flows, based on varying assumptions including
projected charge-offs, recoveries, prepayments, loan servicing and collection
costs, and distributions, if any, of net cash flows to creditors of Reliance, to
be negative $12.5 to positive $15.9 million, with a most likely result of
$683,756. Willamette concluded that the net present value of the residual cash
flows of the Reliance portfolio allocable to the Company, less the value of the
warrants issued in connection with the Reliance transaction, is $143,713 in
excess of the book value.
With respect to assets of a short-term nature that have a book value on the
June 30, 1998 financial statements of the Company that represent a net cash
realizable value, Willamette relied on the opinion of management of UDC and the
Company that the companies have adequately provided for net credit losses on
such assets. Willamette estimated that the book value of such assets is
reasonably representative of fair market value.
The following table summarizes the book value and the appraised value of
the Transferred Assets as of June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
BOOK APPRAISED
VALUE VALUE DIFFERENCE
----- --------- ----------
<S> <C> <C> <C>
Assets:
Cash and Cash Equivalents............................ $ 232 $ 232 $ --
Finance Receivables.................................. 26,333 26,333 --
Notes Receivables.................................... 23,027 23,027 --
Property and Equipment............................... 2,335 2,335
Goodwill............................................. 1,138 1,138 --
Other Assets......................................... 4,338 4,560 222(1)
Assumed Liabilities:
Accrued Expenses and Other Liabilities............... 2,464 2,464 --
Note Payable......................................... 298 298 --
------- ------- ----
Transferred Assets......................... $54,641 $54,863 $222(1)
======= ======= ====
</TABLE>
- ---------------
(1) The difference between the appraised value and the book value of Other
Assets is due to an appraised value of $222,000 for incentive fees under
loan servicing agreements which have a book value of $0.
Preferred Stock. In the context of the appraisal of the Preferred Stock,
Willamette employed a dividend capitalization method, concluding that the most
important factor in the value of a preferred stock is the stock's dividend rate.
Willamette estimated the fair market value of the Preferred Stock by comparing
certain pro
36
<PAGE> 38
forma financial and market information for the Company with the corresponding
publicly available data and statistics of 77 publicly traded convertible
preferred stocks, such as dividend and interest coverage ratios, liquidation
coverage ratio, interest expense coverage ratio, fixed charged ratio, earnings
before interest, taxes and return on total capital. Based on this comparison,
Willamette selected an appropriate preferred dividend capitalization yield to
apply to the indicated annual dividend of the Preferred Stock.
Willamette reviewed a number of preferred stock issues rated by the Value
Line Convertible Survey and S&P Stock Guide in analyzing the Preferred Stock.
The selected preferred stock issues reviewed by Willamette had median before-tax
yields to investors of 3.61% (rated C and D by Value Line), 6.19% (rated E),
7.18% (rated F), 6.91 (rated G), and 7.90% (rated H and I), with an overall
median yield of 6.69%. The selected preferred stock issues had median dividend
and interest coverage ratios of 3.97% (rated C and D), 3.41% (rated E), 2.12%
(rated F), 2.52 (rated G), and 2.44% (rated H and I), with an overall median
ratio of 2.79%. In addition, the selected preferred stock issues had median
liquidation interest coverage ratios of 7.84% (rated C and D), 3.04% (rated E),
3.18% (rated F), 3.07 (rated G), and 1.37% (rated H and I), with an overall
median ratio of 4.25%. Willamette noted that, although the Preferred Stock to be
issued by the Company is not expected to be rated by any of the recognized U.S.
rating agencies, the characteristics of the Company and the Preferred Stock were
most similar to the preferred stock issues rated F and G.
Based on its analysis, Willamette estimated that an appropriate dividend
capitalization yield for the Preferred Stock is 7.0% and determined that the
fair market value of the Preferred Stock should equal $40 million on the
Effective Date based upon such analysis.
Rights. With respect to the valuation of the Rights, Willamette concluded
that although analysts commonly rely on a variety of option pricing models to
determine the value of rights and other instruments to purchase common stock,
such option pricing models were inappropriate in connection with the Rights. For
example, a standard option provides the option holder with the ability to
observe the current trading price of the underlying common stock before deciding
to exercise the option. If the exercise price of the option is greater than the
current trading price of the underlying common stock, the option is generally
regarded as "out-of-the-money" and the option holder will not exercise the
option. If, however, the current trading price of the underlying common stock is
greater than the exercise price of the option, the option is regarded as being
"in-the-money" and the option holder will exercise such option. In contrast,
holders of Rights will be unable to observe the underlying Common Stock price
before deciding whether to exercise Rights.
Willamette, therefore, determined that the Rights would be valuable only to
the extent that a Rights holder was able to acquire the underlying Common Stock
at a price below its market value. Taking into consideration the value of the
Transferred Assets, the purchase price payable therefor by the Company, and
taking into consideration the proceeds from the sale of the projected shares of
Common Stock, Willamette concluded that the Rights will merely provide the
Rights holders with the ability to acquire the Common Stock at its fair market
value. As a consequence, Willamette found the Rights to have no intrinsic value.
While the foregoing summary describes all analysis and examinations that
Willamette deems material to its Appraisal, it is not a comprehensive
description of all analyses and examinations actually conducted by Willamette.
The preparation of an appraisal necessarily is not susceptible to partial
analysis or summary description. Willamette believes that such analyses and the
summary set forth above must be considered as a whole and that selecting
portions of such analyses and of the factors considered without considering all
such analyses and factors would create an incomplete view of the process
underlying the analyses set forth in its presentation to the Boards of Directors
of UDC and Cygnet.
Willamette is a nationally recognized independent business valuation and
financial advisory firm regularly engaged in the valuation of publicly traded
and closely held investment securities in connection with mergers and
acquisitions, divestitures, employee stock ownership plans, public offerings,
gift and estate taxes, corporate and partnership recapitalizations, private
placements, and similar transactions. Willamette was selected by UDC to perform
the Appraisal because of its prior experience, reputation, and expertise in
valuation and corporate finance. Willamette has not provided any appraisal or
other services to UDC or the Company within the past two years, but could
provide such services to UDC, the Company, or affiliates in the future.
37
<PAGE> 39
In connection with Willamette's engagement, UDC will pay Willamette a fee
of $75,000. In addition, UDC has agreed to reimburse Willamette for all
reasonable out-of-pocket expenses incurred in connection with the services
provided by Willamette, and to indemnify and hold harmless Willamette to the
full extent lawful from and against certain liabilities, which may be construed
to include certain liabilities under the federal securities laws, in connections
with its engagement. Willamette is independent of the parties to the Split-up,
and its fee is not contingent in any way upon the completion or ultimate outcome
of the Split-up.
38
<PAGE> 40
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax consequences,
based upon current law, which is subject to prospective or retroactive change at
any time, of the distribution and ownership of Rights, the exercise of Rights,
the acquisition of Common Stock incident to the exercise of Rights, and the
transfer and lapse of Rights without exercise or transfer. These tax
consequences may vary depending upon a Rights Offering Participant's particular
situation. Certain Rights Offering Participants (including the Standby
Purchaser, insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) may be subject to special rules not
discussed below. THIS SUMMARY IS FOR GENERAL INFORMATION PURPOSES ONLY.
ACCORDINGLY, EACH RIGHTS OFFERING PARTICIPANT SHOULD CONSULT HIS OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OF THESE TRANSACTIONS, INCLUDING
THE APPLICABILITY AND EFFECT OF ALL FEDERAL, STATE, LOCAL, AND FOREIGN TAX LAWS.
The Company has been advised by Snell & Wilmer L.L.P. ("Tax Counsel") that
under current interpretations of case law, the Code, and applicable regulations,
all of which are subject to prospective or retroactive change at any time, it is
the opinion of Tax Counsel that the federal income tax consequences to holders
of UDC Common Stock with respect to the Rights will be as set forth below. No
rulings will be sought from the Internal Revenue Service with respect to the
treatment of the Rights. The opinion of Tax Counsel represents its best legal
judgment and has no binding effect or official status of any kind. The opinion
of Tax Counsel assumes that the Rights Offering will be effected in accordance
with the description thereof in this Prospectus and the applicable provisions of
the Capitalization Agreement. No assurance can be given that contrary positions
may not be taken by the Internal Revenue Service or by any court of law. Because
of the predominantly factual nature of the fair market value of the Rights, Tax
Counsel expresses no opinion with respect to the fair market value of the Rights
for purposes of the discussion below or elsewhere in this document.
Distribution of Rights to Holders of UDC Common Stock. The transfer from
Cygnet to the holders of UDC Common Stock of the Rights, representing the right
to acquire shares of Common Stock, will be treated, for federal income tax
purposes, as (1) a distribution of the Rights by Cygnet to UDC, followed by (2)
a distribution of the Rights from UDC to the holders of UDC Common Stock.
Holders of UDC Common Stock will recognize dividend income (taxable as ordinary
income) on the date of the distribution in an amount equal to the fair market
value, if any, of the Rights as of the date of distribution, but only to the
extent that the amount of the distribution is properly sourced in UDC's current
or accumulated earnings and profits (as determined for federal income tax
purposes) in its taxable year of the distribution. That portion, if any, by
which the fair market value of the Rights exceeded UDC's current or accumulated
earnings and profits would be treated as a return of capital to the extent of
the holder's tax basis in his UDC Common Stock and, then, as gain from the sale
of such stock to the extent of any remaining excess.
Corporate holders of UDC Common Stock (other than S corporations) receiving
Rights and recognizing dividend income would be entitled to the
dividends-received deduction for corporations (generally 70%, but 80% under
certain circumstances) with respect to such dividends, to the extent applicable,
taking into consideration all limitations on the claiming of the
dividends-received deduction. With respect to specific limitations on claiming
the dividends-received deduction, corporate holders of UDC Common Stock should
consider the effect of Code Section 246(c) which disallows the
dividends-received deduction with respect to any dividend on any share of stock
that is held for 45 days or less during the 90-day period beginning on the date
which is 45 days before the date on which such stock becomes ex-dividend with
respect to such dividend. Additionally, corporate holders of UDC Common Stock
that have incurred indebtedness directly attributable to an investment in UDC
Common Stock should consider the effect of Code Section 246A which reduces the
dividends-received deduction by a percentage generally computed based on the
amount of such indebtedness and the holder's total adjusted tax basis in the
shares.
The Appraiser has determined, pursuant to its opinion dated July 21, 1998,
that the value of the Rights as of the date of the distribution of the Rights
should be zero. However, the opinion of the Appraiser is not
39
<PAGE> 41
binding on the Internal Revenue Service. For example, the Internal Revenue
Service may assert that the price at which the Rights trade during the 20-day
trading period of the Rights is indicative of the fair market value of the
Rights on the date of their distribution. Accordingly, there can be no assurance
as to the exact amount of dividend income, if any, a holder of UDC Common Stock
will recognize upon the receipt of the Rights. If the Rights are trading for
value on the date of their distribution, UDC may, in its discretion, report to
holders of UDC Common Stock the receipt of dividend income in an amount equal to
the average of the high and low trading prices of the Rights on such date.
Ownership of Rights. Each Rights Offering Participant who receives Rights
will have a tax basis in the Rights equal to the fair market value thereof.
Further, each Rights Offering Participant who receives Rights will have a
holding period for his Rights that begins on the date of receipt of the Rights.
Exercise of Rights. Rights Offering Participants, whether corporate or
noncorporate, will recognize neither gain nor loss upon the exercise of Rights.
A Rights Offering Participant who receives shares of Common Stock upon exercise
of the Rights will acquire a tax basis in such shares equal to the sum of the
Subscription Price paid under the Rights Offering and the tax basis (if any) of
the Rights Offering Participant in the Rights.
Transfer of Rights. The transferable nature of the Rights will permit a
Rights Offering Participant to sell Rights prior to exercise. Pursuant to Code
Section 1234, a Rights Offering Participant who sells Rights prior to exercise
will be entitled to treat the difference between the amount received for the
Rights and the adjusted tax basis (if any) of the Rights Offering Participant in
the Rights as a short-term capital gain or capital loss, provided that the
shares of Common Stock subject to the Rights would have been a capital asset in
the hands of the Participant had it been acquired by such holder. The gain or
loss so recognized will be short-term since the Rights will have been held for
less than twelve months.
Non-Exercise of Rights. The federal income tax treatment applicable to
Rights Offering Participants who fail to exercise or transfer their Rights prior
to the Expiration Date also is set forth in Code Section 1234. Rights Offering
Participants who allow their Rights to lapse will be deemed under the Code to
have sold their Rights on the date on which the Rights expire. Since no
consideration will be received by Rights Offering Participants upon such lapse
and since the Rights will have been held for less than twelve months, a short-
term capital loss equal to the tax basis (if any) in the Rights will be
sustained by the holder on such lapse, provided that the shares of Common Stock
subject to the Rights would have been a capital asset in the hands of the
Participant had it been acquired by such holder.
Short-term capital losses incurred by non-corporate taxpayers may be used
to offset short-term or long-term capital gains realized, plus up to $3,000
($1,500 in the case of a married individual filing a separate return).
Non-corporate taxpayers may carry forward indefinitely, but may not carry back,
unused net capital losses. When carried forward by non-corporate taxpayers,
short-term capital losses retain their short-term character and are treated as
sustained in the taxable year to which they are carried forward. Short-term
capital losses incurred by corporations may be used only to offset short-term or
long-term capital gains. Unused capital losses, however, generally may be
carried back by corporate taxpayers to the three taxable years preceding the
loss year and carried forward to the five succeeding taxable years. When carried
back or carried forward, short-term capital losses retain their character as
short-term and are treated as sustained in the taxable year to which they are
carried. Accordingly, certain Rights Offering Participants who allow their
Rights to lapse may recognize ordinary income upon receipt of the Rights and a
potentially deferred or nondeductible capital loss upon the lapse of such
Rights. FOR THIS REASON, IN MOST INSTANCES, IT WILL BE IN A RIGHTS OFFERING
PARTICIPANT'S INTEREST TO EITHER EXERCISE OR SELL RIGHTS RATHER THAN TO ALLOW
RIGHTS TO LAPSE.
40
<PAGE> 42
USE OF PROCEEDS
The minimum net proceeds to the Company, assuming the sale of 75% of the
Offered Shares, the minimum necessary to satisfy the Required Purchase Amount
and complete the Rights Offering, are estimated to be approximately $23,662,500,
after deducting estimated offering expenses allocable to and payable by the
Company. If all of the Offered Shares (including shares available pursuant to
the Additional Purchase Right and D&O Purchase Right) are purchased pursuant to
the Rights Offering, the net proceeds to the Company, after deducting estimated
offering expenses allocable to and payable by the Company, are estimated to be
approximately $38,475,000.
The Company intends to use a portion of the net proceeds of this Rights
Offering to make the Cash Payment to UDC as partial consideration for the
transfer of the Transferred Assets from UDC to the Company. The Cash Payment
will be equal to the difference between the greater of the appraised value or
the book value (in each case net of assumed liabilities) of the Transferred
Assets and the $40 million of Preferred Stock. The Company does not believe that
the appraised value of the Transferred Assets will materially differ from their
book value and currently estimates that the Cash Payment will range from $10
million to $20 million. In lieu of cash, the Company may satisfy a portion of
the Cash Payment by delivering for cancellation an existing $10 million
subordinated note currently owed by UDC to Verde Investments, Inc. ("Verde"), an
affiliate of UDC wholly-owned by Mr. Garcia (the "Verde Note"), subject to the
receipt of certain required consents, but only if Verde elects to deposit the
Verde Note or any part thereof with the Company in payment of all or any portion
of the Subscription Price for exercise of Rights acquired by Verde from Mr.
Garcia or otherwise. The remainder of the net proceeds, which the Company
estimates will range (i) from $2.3 million to $12.3 million assuming the sale of
75% of the Offered Shares pursuant to the Rights Offering after deducting
offering expenses allocable to and payable by the Company, or (ii) from $27.2
million to $17.2 million assuming the sale of all of the Offered Shares
(including shares available pursuant to the Additional Purchase Right and D & O
Purchase Right) pursuant to the Rights Offering after deducting offering
expenses allocable to and payable by the Company, will be used for capital
expenditures of approximately $1.0 million for computer and telecommunication
equipment and the balance for working capital.
DIVIDEND POLICY
The Company does not anticipate paying cash dividends on the Common Stock
in the foreseeable future. Instead, the Company intends to retain any future
earnings to finance the operation and expansion of the Company's business. In
addition, the Company has secured a loan with a third party lender of $5 million
of subordinated debt, the terms of which require the Company to maintain a debt
to tangible equity ratio not greater than 3 to 1, calculated as of the end of
each quarterly period in each fiscal year. Accordingly, under the terms of the
subordinated debt, if a proposed payment of dividends would cause the Company to
exceed this ratio, the Company would be unable to pay such dividends even if it
were otherwise in a position to do so. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Pursuant to the terms of the
Preferred Stock, the Company will be required to pay cumulative cash dividends
to UDC, from the Effective Date through the first anniversary of such date, at
the initial annual rate of 7% of the Base Liquidation Amount (defined below),
and escalating 1% per annum on each anniversary thereafter to a maximum rate of
11% per annum on the aggregate Base Liquidation Amount, in each case payable
quarterly in arrears on the first day of March, June, September, and December of
each year, beginning December 1, 1998, when and as declared by the Board of
Directors of Cygnet out of funds legally available for such payment. The Company
intends to pay dividends on the Preferred Stock on a timely basis.
41
<PAGE> 43
CAPITALIZATION
The table sets forth below (i) the combined capitalization of the Company
as of June 30, 1998; (ii) the pro forma capitalization of the Company to give
effect to the sale of 4,750,000 shares of Common Stock offered hereby at the
Subscription Price of $7.00 per share, after deducting estimated offering
expenses allocable to and payable by the Company and payment in full of the
Advance from Affiliate; and (iii) the pro forma as adjusted capitalization of
the Company to give effect to the sale of 4,750,000 shares of Common Stock
offered hereby and the sale of 214,286 shares of Common Stock pursuant to the
D&O Purchase Right and 714,286 shares of Common Stock pursuant to the Additional
Purchase Right, in each case at the Subscription Price of $7.00 per share, after
deducting estimated offering expenses allocable to and payable by the Company
and payment in full of the Advance from Affiliate.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Debt................................................ $ 298,000 $ 298,000 $ 298,000
Advances from Affiliate............................. 15,818,000 -- --
Stockholders' equity
Preferred Stock, $.001 par value, 500,000 shares
authorized; none issued; 40,000 shares issued,
pro forma; 40,000 shares issued pro forma, as
adjusted....................................... -- 40,000,000 40,000,000
Common Stock, $.001 par value, 14,000,000 shares
authorized; 1 issued; 4,750,000 shares issued
pro forma; 5,679,000 shares issue pro forma, as
adjusted....................................... -- 4,750 5,679
Additional paid-in capital........................ 40,000,000 31,970,250 38,469,325
Retained earnings................................. -- -- --
----------- ----------- -----------
Total stockholders' equity................ 40,000,000 71,975,000 78,475,004
----------- ----------- -----------
Total capitalization...................... $56,116,000 $72,273,000 $78,773,004
=========== =========== ===========
</TABLE>
- ---------------
Excludes (i) approximately 284,000 shares of Common Stock issuable upon
exercise of stock options to be granted on the Effective Date, (ii) 115,000
shares of Common Stock issuable upon exercise of warrants anticipated to be
issued to the Company's subordinated debt lender, (iii) 500,000 shares of
Common Stock issuable upon exercise of the Standby Warrants, (iv) 41,429 shares
of Common Stock issuable upon the issuance of restricted stock grants to be
granted on the Effective Date, and (v) 28,571 shares of Common Stock issuable
upon exercise of stock options to be granted on the Effective Date.
42
<PAGE> 44
SELECTED COMBINED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of the year
ended December 31, 1997, are derived from the combined financial statements of
Cygnet Financial Corporation, which combined financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
combined financial statements as of December 31, 1997 and for the year then
ended, and the report thereon, are included elsewhere in this prospectus. The
selected data presented below for the six-month periods ended June 30, 1998 and
1997, and as of June 30, 1998, are derived from the unaudited condensed combined
financial statements of Cygnet Financial Corporation included elsewhere in this
prospectus. The results of operations of any interim period are not necessarily
indicative of results to be expected for a full fiscal year. For additional
information, see the combined financial statements and notes thereto of the
Company included elsewhere in this prospectus. The following table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, 1997
----------------- -----------------
1998 1997
------- ------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenues......................................... $12,550 $ 137 $15,959
Interest Income..................................... 6,382 137 7,472
Servicing Fees...................................... 4,937 -- --
Net Gain on Sale of Repossessed Collateral.......... 1,108 -- --
Gain on Sale of Notes Receivable.................... -- -- 8,132
Other Income........................................ 123 -- 355
Operating Expenses:
Provision for Credit Losses......................... 965 -- 691
Selling and Marketing Expense....................... 36 9 18
General and Administrative.......................... 9,001 1,008 3,766
Depreciation and Amortization....................... 230 62 153
------- ------ -------
Total Operating Expenses............................... 10,232 1,079 4,628
------- ------ -------
Earnings (Loss) Before Interest Expense................ 2,318 (942) 11,331
Interest Expense....................................... 1,714 37 2,067
------- ------ -------
Earnings (Loss) before Income Taxes.................... 604 (979) 9,264
Income Taxes (Benefit)................................. 244 (394) 3,728
------- ------ -------
Net Earnings (Loss).................................... $ 360 $ (585) $ 5,536
======= ====== =======
Proforma Basic/Diluted Earnings (Loss) per Share(2).... $ (0.18) $(0.35) $ 0.48
======= ====== =======
Shares used in Computation(2).......................... 5,679 5,679 5,683
======= ====== =======
</TABLE>
43
<PAGE> 45
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 YEAR ENDED
----------------------------------------- DECEMBER 31, 1997
PRO FORMA -----------------
ACTUAL PRO FORMA(1) AS ADJUSTED(1) ACTUAL
------- ------------ -------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents.......... $ 232 $16,389 $22,889 $ 1,225
Finance Receivables, Net........... 26,333 26,333 26,333 19,274
Notes Receivable, Net.............. 23,027 23,027 23,027 21,861
Total Assets....................... 58,580 74,737 81,237 50,034
Advances from Affiliate............ 15,818 -- -- 9,106
Total Note Payable................. 298 298 298 380
Total Stockholder's Equity......... 40,000 71,975 78,475 40,000
</TABLE>
- ---------------
(1) The table sets forth above (i) the combined capitalization of the Company as
of June 30, 1998; (ii) the pro forma capitalization of the Company to give
effect to the sale of 4,750,000 shares of Common Stock offered hereby at the
Subscription Price of $7.00 per share, after deducting estimated offering
expenses allocable to and payable by the Company, a purchase price for the
Transferred Assets equivalent to UDC's June 30, 1998 book value which
totaled approximately $58.6 million, and payment in full of the Advance from
Affiliate, which totaled $15,818,000 at June 30, 1998; and (iii) the pro
forma as adjusted capitalization of the Company to give effect to the sale
of 4,750,000 shares of Common Stock offered hereby and the sale of 214,286
shares of Common Stock pursuant to the D&O Purchase Right and 714,286 shares
of Common Stock pursuant to the Additional Purchase Right, assuming these
rights are exercised in full, in each case at the Subscription Price of
$7.00 per share, after deducting estimated offering expenses allocable to
and payable by the Company, a purchase price for the Transferred Assets
equivalent to UDC's June 30, 1998 book value which totaled approximately
$58.6 million, and payment in full of the Advance from Affiliate, which
totaled $15,818,000 at June 30, 1998.
(2) For purposes of computing the proforma earnings per share for the periods
presented, the Company has assumed the maximum potential issuance of shares
of Common Stock totaling 5,678,572 shares pursuant to the planned Rights
Offering, the D&O Purchase Right and the Additional Purchase Right and for
dilutive stock options that will be granted on the effective date. See note
14 to the Company's audited financial statements included herein.
44
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
General. Cygnet Financial Corporation (the Company), a wholly-owned
subsidiary of Ugly Duckling Corporation (Ugly Duckling), was formed on June 1,
1998 for the purpose of consummating a transaction whereby Ugly Duckling would
split-up its operations into two publicly-held companies (the split-up). The
Company will purchase from Ugly Duckling, substantially all of Ugly Duckling's
non-dealership operations including, the bulk purchasing and certain servicing
operations (excluding the branch office network), it's third party dealer
financing operations, and substantially all other non-dealership assets and
contract rights including those acquired in the First Merchants Acceptance
Corporation Transaction and assume the liabilities related thereto (collectively
referred to as the acquired assets). In exchange for the acquired assets, the
Company will issue $40.0 million of its cumulative, convertible preferred stock
and a cash payment equivalent to the greater of the appraised value or the book
value of the acquired assets (in each case net of assumed liabilities), which
the Company does not expect to materially differ. These combined financial
statements reflect the results of operations, financial position, changes in
stockholder's equity and cash flows of the Company, as if the Company were a
separate entity operating the acquired assets for all periods presented. The
combined financial statements have been prepared using the historical basis in
the assets and liabilities and historical results of operations of the Company.
The Company provides qualified independent used car dealers with warehouse
purchase facilities and operating credit lines pursuant to its Cygnet Dealer
Program. In addition, the Company purchases loan portfolios in bulk and services
loan portfolios on behalf of third parties. The Company targets its products and
services primarily to the sub-prime segment of the automobile financing
industry, which focuses on selling and financing the sale of used cars to
Sub-Prime Borrowers.
Bulk Purchasing and Loan Servicing. The Company believes bulk purchase and
large servicing transactions are efficient methods of purchasing or obtaining
servicing rights to sub-prime automobile finance receivables. In this regard,
the Company has effected certain transactions with FMAC, pursuant to which the
Company has acquired significant servicing and other rights from FMAC, and
Reliance, pursuant to which the Company has entered into a servicing agreement
with Reliance through its bankruptcy case that, pursuant to bankruptcy court
approval, entitles the Company to service Reliance's finance receivable
portfolio. See "-- Transactions Regarding First Merchants Acceptance
Corporation" and "-- Transactions Regarding Reliance Acceptance Group."
Cygnet Dealer Program. Through the Cygnet Dealer Program, the Company
either purchases finance receivables under its Dealer Collection Program or
provides traditional revolving lines of credit under its Asset-Based Loan
Program. Under the Dealer Collection Program, the Company generally purchases
finance receivables on a full recourse basis from Third Party Dealers for 60% to
75% of the principal amount of the respective contract. The Company's Asset
Based Loan Program is similar to traditional asset-based lending relationships.
The Company generally advances 65% of the principal amount of the contract.
Under both programs, the Third Party Dealer retains responsibility for servicing
the contracts. The Third Party Dealer is generally entitled to a fee of 20% to
25% of gross collections for servicing the contracts purchased under the Dealer
Collection Program; however, the Company does not pay a servicing fee to Third
Party Dealers for servicing contracts under the Asset Based Loan Program.
Acquisition. In August 1997, the Company acquired substantially all of the
assets of American National Acceptance Corporation ("ANAC") in exchange for
approximately $9.1 million in cash. The acquisition was recorded in accordance
with the "purchase method" of accounting, and, accordingly, the purchase price
has been allocated to the assets purchased and the liabilities assumed based
upon the estimated fair values at the date of acquisition. The excess of the
purchase price over the fair values of the net assets acquired was approximately
$1.2 million and has been recorded as goodwill, which is being amortized over a
period of 15 years. The results of operations of ANAC have been included in the
Company's combined statement of operations from the acquisition date.
45
<PAGE> 47
The following discussion and analysis provides information regarding the
Company's combined financial position as of December 31, 1997 and June 30, 1998,
and its results of operations for the year ended December 31, 1997, and the six
month periods ended June 30, 1998 and 1997.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Interest Income. Interest income consists of income recognized from the
Cygnet Dealer Program and interest income recognized from advances related to
the FMAC transaction.
Cygnet Dealer Program. Interest income from this category increased
by $5.2 million in the six month period ended June 30, 1998, from $137,000
in the six month period ended June 30, 1997. This increase is due to the
increase in finance receivables and advances under the Dealer Collection
and Asset Based Loan Programs, respectively, from the comparable period in
1997.
FMAC Transaction. Interest income for this category totaled $1.2
million in the six month period ended June 30, 1998 related to advances to
FMAC pursuant to various lending facilities. No such income was recognized
during the comparable period in 1997, as the Company did not begin
conducting business with FMAC until the third fiscal quarter of 1997.
Servicing Fees. The Company, which began it's third party loan servicing
operations in April 1998, generates servicing fees from the servicing of loan
portfolios. The fee is generally a percentage of the portfolio balance with a
minimum fee per loan serviced. Servicing fee revenue totaled $4.9 million in the
six month period ended June 30, 1998 compared to $0 in the comparable period in
1997.
Net Gain on Sale of Repossessed Collateral. In April 1998, the Company
purchased a pool of charged off loans from a third party. Future cash
collections are expected to come primarily from the repossession and sale of the
underlying collateral of the loans, and the amount and timing of such
collections cannot be reasonably estimated. Therefore, the Company is
recognizing revenue on the sale of the collateral using the cost-recovery
method. During the six month period ended June 30, 1998, the Company realized a
net gain on sale of repossessed collateral totaling $1.1 million compared to $0
in the comparable period in 1997.
Other Income. Other income generally represent revenues from services such
as periodic audits of borrowers and collateral monitoring and maintenance fees,
and loan commitment and processing fees. Other income increased from $0 in the
six month period ended June 30, 1997 to $123,000 in the six month period ended
June 30, 1998. This increase was due to the increase in finance receivables and
advances under the Dealer Collection and Asset Based Loan Programs,
respectively, from the comparable period in 1997.
Operating Expenses. Operating expenses consist of the provision for credit
losses, selling and marketing expenses, general and administrative expenses, and
depreciation and amortization.
Provision for Credit Losses. The provision for credit losses
increased from $0 in the six month period ended June 30, 1997 to $965,000
in the six month period ended June 30, 1998. This increase was due to the
increase in finance receivables and advances under the DCP and ABL
programs, respectively, from the comparable period in 1997.
General and Administrative Expenses. General and administrative
expenses increased by 793.0% during the six month period ended June 30,
1998 to $9.0 million from $1.0 million in the comparable period in 1997.
This increase was primarily due to overhead required to manage expansion of
the Cygnet Dealer Program, expansion of the Company's senior management
team, and costs of operating the bulk purchasing and loan servicing
businesses. In addition, during the six month period ended June 30, 1998,
pursuant to the Cygnet Dealer Program, the Company paid participating Third
Party Dealers loan servicing fees totaling $2.1 million.
Depreciation and Amortization. Depreciation and amortization expense
increased by 271.0% in the six month period ended June 30, 1998 to $230,000
from $62,000 for the comparable period in the prior year, due primarily to
depreciation of the Company's servicing platform and an increase in
amortization of goodwill related to the Company's acquisition of ANAC in
August 1997.
46
<PAGE> 48
Interest Expense. Interest expense increased from $37,000 in the six
month period ended June 30, 1997 to $1.7 million in the six month period
ended June 30, 1998. This increase was due to the increase in the carrying
costs of the assets under the Cygnet Dealer Program, as well as the
carrying cost of the Company's investment in the notes receivable and other
assets related to the FMAC transaction.
YEAR ENDED DECEMBER 31, 1997
Interest Income. Interest income consists of income recognized from the
Cygnet Dealer Program and FMAC transaction.
Cygnet Dealer Program. Interest income for this category during the
year ended December 31, 1997 totaled $3.7 million. This consisted of $3.2
million in interest income from finance receivables under the Dealer
Collection Program and $521,000 in interest income from notes receivable
under the Asset Based Loan Program. The effective average yield during
1997, net of loan servicing fees paid to Third Party Dealers, was 22.9% and
15.6% on the finance receivables and notes receivable portfolios,
respectively.
FMAC Transaction. Interest income from this category during the year
ended December 31, 1997 totaled $3.8 million. The Company recognized a
total of $3.6 million in interest income on the senior bank debt (the
"Senior Bank Debt") acquired from the FMAC bank group and $261,000 in
interest income on the "debtor-in-possession" financing made available to
FMAC (the "DIP Facility".) No future interest income will be realized on
the Senior Bank Debt, which was sold in the fourth quarter of 1997. See
"-- Transactions Regarding First Merchants Acceptance Corporation" below.
Gain on Sale of Notes Receivable. During the year ended December 31, 1997,
the Company acquired directly and indirectly 100% of FMAC's Senior Bank Debt. On
December 15, 1997, the bankruptcy court in the FMAC bankruptcy entered an order
approving a transfer, whereby the agent for the holders (at such time, the
Company) of the Senior Bank Debt credit bid this debt and purchased the
contracts which secured the debt (the "Owned Contracts"), and immediately sold
the Owned Contracts to a third party purchaser (the "Contract Purchaser"). The
Company recorded a one-time gain of approximately $8.1 million from this
transaction. See "-- Transactions Regarding First Merchants Acceptance
Corporation" below.
Other Income. Other income generally represent revenues from services such
as periodic audits of borrowers and collateral monitoring and maintenance fees,
and loan commitment and processing fees. Fee and other income totaled $355,000
during the year ended December 31, 1997.
Operating Expenses. Operating expenses consist of the provision for credit
losses, selling and marketing expenses, general and administrative expenses, and
depreciation and amortization.
Provision for Credit Losses. The provision for credit losses totaled
$691,000 for the year ended December 31, 1997. Of this amount, $200,000 was
allocated to the allowance for credit losses for notes receivable, with the
balance allocated to the allowance for credit losses for finance
receivables under DCP.
General and Administrative Expenses. General and administrative
expenses for the year ended December 31, 1997 totaled $3.8 million. The
largest component of general and administrative expenses was payroll and
benefits, which totaled $1.4 million, reflecting establishment of the
Company's management team and infrastructure to purchase finance
receivables and originate loans under its Cygnet Dealer Program as well as
the hiring of personnel to manage the bulk purchasing and loan servicing
business. In addition, pursuant to the Cygnet Dealer Program, the Company
paid participating Third Party Dealers loan servicing fees totaling $1.3
million.
Depreciation and Amortization. Depreciation and amortization consists
of depreciation and amortization on the Company's property and equipment
and amortization of the Company's goodwill. Depreciation and amortization
expense totaled $153,000 during 1997.
Interest Expense. Interest expense totaled $2.1 million in the year ended
December 31, 1997. Substantially all of the interest expense was incurred on the
loan that was carried back by the members of the FMAC senior bank group, which
financed 80% of the Company's purchase price related to the acquisition of
47
<PAGE> 49
the Senior Bank Debt. Interest expense on this loan totaled $1.4 million during
the year ended December 31, 1997. This loan was paid in full in conjunction with
the sale of the Senior Bank Debt in December 1997.
Income Taxes. Income taxes totaled $3.7 million in 1997, which is an
effective corporate tax rate of approximately 40.2%.
FINANCE RECEIVABLES AND NOTES RECEIVABLE
During the six months ended June 30, 1998 and the year ended December 31,
1997, the Company purchased finance receivable contracts with a total principal
balance of approximately $24.4 million and $36.8 million, respectively.
A summary of the Company's finance receivables follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Balance, Beginning of Period.................. $27,481 $ --
Purchases................................... 24,365 36,819
Principal Payments.......................... (6,293) (4,357)
Chargeoffs.................................. (1,281) (8)
Recourse to Seller.......................... (6,262) (4,973)
------- -------
Balance, End of Period........................ $38,010 $27,481
======= =======
</TABLE>
Finance receivables were comprised of the following as of June 30, 1998 and
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
<S> <C> <C>
Finance Receivable Contract Principal Balances........ $38,010 $27,481
Add: Accrued Interest Receivable...................... 209 147
------- -------
Principal Balances, Net............................... 38,219 27,628
Allowance for Credit Losses......................... (1,202) (485)
Acquired Allowance.................................. (10,394) (7,706)
Refundable Security Deposits........................ (290) (163)
------- -------
Finance Receivables, net.............................. $26,333 $19,274
======= =======
</TABLE>
As of June 30, 1998 and December 31, 1997, the Company maintained notes
receivable with 10 and 12 Third Party Dealers, respectively. The total balance
of notes receivables with Third Party Dealers totaled $6.8 million and $5.8
million as of June 30, 1998 and December 31, 1997, respectively.
The Company has established an allowance for credit losses ("Allowance") to
cover anticipated credit losses on the finance receivables and notes receivable
currently in its portfolio. The Allowance has been established through
nonrefundable acquisition discounts ("Acquired Allowance") and a provision for
credit losses. The Allowance as a percentage of the principal amounts
outstanding on the finance receivables was 30.5% and 29.8% at June 30, 1998 and
December 31, 1997, respectively.
48
<PAGE> 50
The following table reflects activity in the Allowance for the six months
ended June 30, 1998 and the year ended December 31, 1997 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
FINANCE NOTES FINANCE NOTES
RECEIVABLES RECEIVABLES RECEIVABLES RECEIVABLES
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance Activity:
Balance, Beginning of
Period................... $ 8,191 $200 $ -- $ --
Provision for Credit
Losses................... 935 30 491 200
Acquired Allowance.......... 3,410 -- 7,706 --
Net Charge Offs............. (940) -- (6) --
------- ---- ------ ----
Balance, End of Period........ $11,596 $230 $8,191 $200
======= ==== ====== ====
Allowance as % of Period Ended
Principal Balance........... 30.5% 1.0% 29.8% 0.9%
======= ==== ====== ====
</TABLE>
The Company's policy is to charge off contracts when they are deemed
uncollectible. Generally, contracts delinquent for 90 days are considered
uncollectible and are charged-off. There is no allowance related to the FMAC
transactions as, in the opinion of management, all amounts due under advances to
FMAC are believed to be collectible. However, there can be no assurance that the
allowance will prove adequate.
The following table sets forth the percentage of the principal amount
outstanding of finance receivables in the Company's portfolio that were 30 to 44
days delinquent and over 44 days delinquent, as of June 30, 1998 and December
31, 1997, respectively:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
DAYS DELINQUENT 1998 1997
- --------------- -------- ------------
<S> <C> <C>
30 to 44 days................................ 5.8% 8.0%
Over 44 days................................. 4.1% 5.3%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital to support lending activities under its Cygnet
Dealer Program, the purchase of bulk finance receivable portfolios, the purchase
of property and equipment, and for working capital and general corporate
purposes. The Company historically has funded its capital requirements through
equity contributions and advances by UDC and operating cash flow.
Cash Flows. The Company's Net Cash Provided by Operating Activities
totaled $6.7 million in the year ended 1997. Earnings of $5.5 million plus the
effect of the provision for credit losses and an increase in accrued expenses
and other liabilities offset deferred income taxes and cash used to purchase
other assets.
The Company's Net Cash Provided by Operating Activities increased by 687.3%
or $2.8 million to $2.4 million for the six month period ended June 30, 1998
from ($401,000) Used in Operating Activities for the six month period ended June
30, 1997. The increase was primarily due to a significant net loss for the six
month period ended June 30, 1997, the provision for credit losses, and an
increase in accrued expenses and other liabilities.
Net Cash Used in Investing Activities totaled $26.7 million in the year
ended 1997. The Company used cash to purchase finance receivables totaling $20.9
million, to make notes receivable advances aggregating $12.7 million, and to
fund the purchase of assets of $9.1 million. These uses were offset by the
collection of $9.3 million in finance receivables and the collection of $6.9
million in notes receivable.
The Net Cash Used in Investing Activities increased by 15.5% or $1.3
million to $9.6 million for the six month period ended June 30, 1998 from $8.3
million for the six month period ended June 30, 1997. The Company used cash for
the purchase of finance receivables totaling $17.2 million in the six month
period ended June 30, 1998, compared to the six month period ended June 30,
1997, when no such purchases took
49
<PAGE> 51
place. Additionally, the Company used cash for notes receivable advances
aggregating $16.9 million in the six month period ended June 30, 1998 compared
to $8.8 million in the six month period ended June 30, 1997. These uses were
offset by the collections of finance receivables of $9.2 million and collections
of notes receivables of $15.7 million in the six month period ended June 30,
1998, as compared to $504,000 of collections in the six month period ended June
30, 1997.
Net Cash Provided by Financing Activities for 1997 was $21.2 million, all
of which was provided by UDC.
The Company's Net Cash Provided by Financing Activities decreased by 28.6%
or $2.5 million to $6.3 million for the six month period ended June 30, 1998
from $8.8 million for the six month period ended June 30, 1997, due to a net
decrease in financing provided by UDC.
Capital Expenditures and Commitments. The Company intends to pursue an
aggressive growth strategy. During 1997, the Company acquired substantially all
of the assets of ANAC for $9.1 million in cash. Further, the Company increased
its finance receivables and notes receivable portfolios by approximately $41.1
million during 1997. In addition, the Company expects to acquire certain
computer and telecommunication equipment with a cost of approximately $1.0
million with proceeds from the Rights Offering.
On July 11, 1997, the Company entered into an agreement to provide a DIP
Facility to FMAC in an amount up to $10 million. On March 31, 1998, the
effective date of FMAC's plan of reorganization, the DIP Facility was amended to
increase the maximum commitment to $21.5 million, subject to future adjustment
downward by an amount not to exceed $10 million. As of June 30, 1998, the
maximum commitment had been reduced to $12.4 million. The Company had advanced
$9.8 million against this commitment as of June 30, 1998.
The Company has secured a credit facility with a third party lender
pursuant to which the lender has provided the Company $5 million in the form of
subordinated debt. The debt bears interest at 12% per annum, payable quarterly
in arrears, with the principal balance and all accrued but unpaid interest
payable in full on the third anniversary of the initial funding date. The debt
is subordinated in right of payment to all existing and future debt of the
Company. The Company is also required to maintain a debt to tangible equity
ratio not greater than 3 to 1, calculated as of the end of each quarterly
period. As additional consideration for the subordinated debt, on the Effective
Date the Company is required to issue warrants to acquire 115,000 shares of
Common Stock, exercisable for a period of three years at an exercise price of
$8.40 per share, subject to a call feature by the Company if the closing price
of the Common Stock equals or exceeds $13.44 per share for a period of 20
consecutive trading days. The loan is guaranteed by UDC, although the Company
anticipates UDC's guarantee will be released on the Effective Date. The lender
also will be granted certain registration rights with respect to the shares of
the Common Stock underlying the warrants.
The Company intends to finance its future capital requirements through the
proceeds of the Rights Offering, operating cash flows and supplemental
borrowings. The Company believes that these sources will be adequate to support
its anticipated financial requirements at least through the end of 1998.
Industry Considerations. In recent periods, several major used car finance
companies have announced major downward adjustments to their financial
statements, violations of loan covenants, related litigation, and other events.
In addition, certain of these companies have filed for bankruptcy protection.
These announcements have had a disruptive effect on the market for securities of
sub-prime automobile finance companies, have resulted in a tightening of credit
to the sub-prime markets, and could lead to enhanced regulatory oversight. A
reduction in access to the capital markets or to credit sources could have a
material adverse affect on the Company.
Transactions Regarding First Merchants Acceptance Corporation. UDC was
actively involved in the FMAC bankruptcy proceedings. FMAC was in the business
of purchasing and securitizing loans made primarily to sub-prime borrowers by
various Third Party Dealers. In various transactions relating to the FMAC
bankruptcy proceedings and by and through the FMAC plan of reorganization, UDC,
among other things, (1) purchased the beneficial interest in the Senior Bank
Debt held by certain creditors of FMAC, participated in the sale of the
contracts securing such claims at a profit to a third party purchaser,
guaranteed
50
<PAGE> 52
the purchaser a specified return on the contracts and obtained a related
guarantee from FMAC secured by, among other things, the stock of certain
entities holding residual interests and certain equity certificates in various
securitized loan pools of FMAC, and entered into servicing arrangements with
respect to such contracts; (2) made loans under the DIP Facility to FMAC, which
at July 1, 1998 carried a remaining maximum commitment of $12.4 million, of
which $9.8 million was outstanding on such date, and received interest income
therefrom; (3) entered into various servicing agreements with respect to
receivables in the securitized pools of FMAC; (4) obtained rights to receive
certain payments with respect to distributions on residual interests in such
securitized pools and obtained certain interests in charged off receivables in
such pools; (5) obtained rights to certain fees; (6) obtained the FMAC servicing
platform; and (7) issued certain warrants to purchase UDC Common Stock
consisting of (a) warrants issued to FMAC's bank group to purchase up to 389,800
shares of UDC's Common Stock at an exercise price of $20.00 per share at any
time through February 20, 2000, subject to a call feature by UDC if the closing
market price of UDC Common Stock equals or exceeds $27.00 per share for a period
of five consecutive trading days, and (b) warrants issued to FMAC to purchase
325,000 shares of UDC Common Stock at any time through April 1, 2001 at a price
of $20.00 per share, subject to a call feature by UDC if the closing market
price of the UDC Common Stock equals or exceeds $28.50 per share for a period of
10 consecutive trading days. UDC also contributed to FMAC all of its shares of
FMAC common stock as additional consideration for UDC's acquisition of the
assets constituting FMAC's servicing platform.
In connection with the Split-up, subject to receipt of any required
consents, UDC will transfer all of the rights and substantially all of the
liabilities related to the FMAC transaction accruing on or after the Effective
Date to the Company. However, UDC will remain liable with respect to certain
liabilities related to the FMAC transaction. For additional information
concerning the FMAC transaction and the rights and liabilities assumed by the
Company in connection with the Split-up, see "Business -- Bulk Purchase and
Servicing Operations -- Transactions Regarding First Merchants Acceptance
Corporation" and "Risk Factors -- Risks Relating to the Business -- Risks
Relating to the FMAC Transaction."
Transactions Regarding Reliance Acceptance Group. In February 1998, UDC
entered into receivables servicing and transition services arrangements with
Reliance, after Reliance had filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code the same month. Reliance confirmed its proposed plan
in open court on June 29, 1998. The bankruptcy court signed the order formally
confirming the plan on July 2, 1998. The effective date of the confirmed plan is
the close of business on July 31, 1998. Pursuant to the servicing agreement
entered into between UDC and Reliance (the "Servicing Agreement"), following the
effective date of Reliance's plan of reorganization, UDC will service certain
receivables of Reliance in exchange for (i) a monthly servicing fee of the
greater of four percent (4%) per annum of the aggregate outstanding principal
balance of all non-defaulted receivables computed monthly on the basis of the
declining balance of the receivables portfolio (consisting of Reliance's
portfolio of (A) prime receivables and (B) sub-prime receivables), or fifteen
dollars ($15.00) per receivable per month plus reimbursement of certain costs
and expenses; (ii) $1.3 million in proceeds realized from the sale of a pool of
charged-off receivables existing as of the Reliance petition date ("Charged-Off
Proceeds"); (iii) a total of (A) four percent (4%) of the outstanding principal
balance of each receivable (exclusive of defaulted and certain other
receivables) sold in any bulk sale to a person other than UDC or an affiliate of
UDC, and (B) $3.25 million in net collections, recovery, and sale proceeds from
the receivables portfolio and certain other cash receipts of Reliance reduced by
any amount previously paid under clause (A) above, following payment of
Reliance's primary bank debt and, if applicable, repayment to Reliance of any
proceeds of litigation, the Reliance Warrants (as defined below), and equity
proceeds used by Reliance to pay its primary bank debt ("Post-Bank Debt
Proceeds"); and (iv) following UDC's receipt of the Post-Bank Debt Proceeds,
fifteen percent (15%) of the net collections, recovery, and sale proceeds from
the receivables portfolio and certain other cash receipts of Reliance (the
"Incentive Fee"). Reliance, in consideration for entering into the Servicing
Agreement, will receive privately issued warrants ("Reliance Warrants") to
purchase shares of UDC Common Stock as follows: 50,000 Reliance Warrants will be
granted to Reliance upon UDC's receipt of the Charged-Off Proceeds; up to
100,000 Reliance Warrants will be granted to Reliance based upon UDC's receipt
of up to $3.25 million of Post-Bank Debt Proceeds; and Reliance will be granted
an additional 75,000 Reliance Warrants for every $1 million actually received by
UDC through the Incentive Fee. The Reliance Warrants will have a strike
51
<PAGE> 53
price of $12.50 for the first 150,000 Reliance Warrants and a strike price for
all other Reliance Warrants of the greater of $12.50 or 120% of the market price
of UDC Common Stock on the date of issuance of the Reliance Warrants. The
Reliance Warrants will be exercisable as follows: (i) the first 50,000 Reliance
Warrants will be exercisable for three years from the Reliance Petition Date and
(ii) all remaining Reliance Warrants will be exercisable for three years from
their date of issuance.
On the effective date of the plan, UDC will purchase Reliance's furniture,
fixtures, and equipment, including computer software and hardware related
licenses for $250,000, and will have a period of sixty days to require Reliance
to assume and assign to UDC any of the leases or other contracts not previously
rejected by Reliance.
Subject to receipt of any required consents, UDC will transfer all contract
rights and substantially all liabilities related to the Reliance transaction to
the Company on the Effective Date. However, UDC will remain liable as to certain
obligations in the Reliance transaction. See "Business -- Bulk Purchase and
Servicing Operations -- Transactions Regarding Reliance Acceptance Group" and
"Risk Factors -- Risks Relating to the Business -- Risks Relating to the
Reliance Transaction."
THIRD PARTY CONSENTS
The Company has prepared or is in the process of preparing consents and has
contacted or is contacting various third parties to obtain such consents in
connection with the transactions contemplated by the Split-up and the Rights
Offering. Based on a review of existing contractual arrangements between various
third parties and either UDC or the Company, the Company believes that any
required consents will be obtained before the Annual Meeting of UDC's
shareholders, although there can be no assurance that all required consents will
be obtained by such date or at all.
YEAR 2000
The Company has performed a preliminary study (review and assessment) of
its computer systems and third parties' (e.g. vendors and customers) computer
systems in order to evaluate its exposure to Year 2000 issues. The Company
continues to plan and evaluate appropriate courses of corrective action,
including replacement of certain systems whose associated costs would be
recorded as assets and amortized, or modification of its existing systems, which
costs would be expensed as incurred. The Company expects to make the necessary
replacements, modifications or changes to its computer information systems to
enable proper processing of transactions relating to the Year 2000 and beyond.
The Company also has had discussions with certain of its vendors and customers
regarding actions to be taken to resolve any Year 2000 issues arising from the
Company's dependence on third parties' computer systems. The amount expensed by
the Company on Year 2000 issues to date has not been material. In addition, the
Company does not believe that the costs of modifying or replacing its computer
information systems to enable proper processing of transactions relating to the
Year 2000 and beyond will be material to its financial position or results of
operations. The Company believes, however, that resolution of all Year 2000
issues will be significant to the Company's business and operations and there
can be no assurance that the Company will be able to completely resolve all Year
2000 issues in a timely fashion or that the ultimate impact of the Year 2000
issues will not be material to the Company. Accordingly, failure to resolve Year
2000 issues in a timely fashion could have a material adverse effect on the
Company's business, financial condition, and results of operations. See "Risk
Factors -- Risks Relating to the Business -- Data Processing and Technology and
Year 2000."
As discussed herein, the Company is in the process of converting its loan
processing and collections systems to ACS, a third party service bureau that
processes transactions using Shaw Systems Associates, Inc. ("Shaw") software and
other products ("Shaw Products"). Shaw has certified to ACS that a significant
portion of the Shaw Products that ACS uses to process the Company's transactions
are Year 2000 compliant. Based upon a Shaw certification and a representation
from ACS to the Company, the Company believes that Shaw has also undertaken to
provide additional Year 2000 compliant Shaw Products to ACS as such systems
become compliant. ACS would then make available for the Company's processing of
transactions these additional Year 2000 compliant Shaw Products. The ACS
Agreement requires that the ACS systems
52
<PAGE> 54
processing the Company's transaction be fully Year 2000 compliant by January 1,
1999. However, the Company's sole remedy if ACS does not comply with this
requirement is to terminate the ACS Agreement and convert to another system,
which would be costly and disruptive to operations and could have a material
adverse effect on the Company's business and operations. The Company's business
and operations also could be adversely affected if other entities (e.g., vendors
and customers) not affiliated with the Company do not appropriately address
their own Year 2000 compliance issues. Further, certain of the Company's own
applications are not Year 2000 compliant at this time.
INFLATION
Increases in inflation generally result in higher interest rates. Higher
interest rates on the Company's expected borrowings would decrease the
profitability of the Company's existing portfolio. The Company has sought to
limit this risk by (i) maintaining a portion of its investment portfolio in the
floating rate Asset Based Loan Program and (ii) limiting the maturity of finance
receivable contracts. If the Company's borrowing rates increase, then the
Company will seek to further limit the negative impact on earnings by increasing
the purchase discount at which the Company purchases finance receivables and/or
require higher stated annual percentage rates on finances receivables which are
purchased. To date, inflation has not had a significant impact on the Company's
operations.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130) which became effective for the Company on January 1, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements. The Company
had no comprehensive income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131), which became effective for
the Company on January 1, 1998. SFAS No. 131 establishes standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to stockholders.
Management does not expect the adoption of SFAS No. 131 to have a material
impact on the Company's disclosures.
FORWARD LOOKING STATEMENTS
This Prospectus contains forward looking statements. Additional written or
oral forward looking statements may be made by the Company from time to time in
filings with the Securities and Exchange Commission or otherwise. Such
statements may include, but not be 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 the foregoing. The words "believe," "expect," "anticipate,"
"estimate," "project," and similar expressions identify forward looking
statements, which speak only as of the date the statement was made. Forward
looking statements are inherently subject to risks and uncertainties, some of
which cannot be predicted or quantified. Future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward looking statements. The Company undertakes no obligation to publicly
update or revise any forward looking statements, whether as a result of new
information, future events, or otherwise. The following disclosures, as well as
other statements in this Prospectus, including those contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
in the Notes to the Company's Combined Financial Statements, describe factors,
among others, that could contribute to or cause such differences, or that could
affect the Company's stock price.
53
<PAGE> 55
BUSINESS
GENERAL
Assuming successful completion of the Rights Offering and consummation of
the Split-up, the Company will engage in the business of providing various
financial services primarily to the sub-prime segment of the automobile
financing industry, which focuses on selling and financing the sale of new and
used cars to persons who have limited credit histories, low incomes, or past
credit problems ("Sub-Prime Borrowers"). The Company will (i) engage in the bulk
purchase and servicing of pools of finance receivables generated from the sale
of new and used automobiles by independent third party dealers ("Third Party
Dealers"), including pools of charged-off receivables, deficient loans, or other
receivables; (ii) service pools of various types of finance receivables; (iii)
operate a collateralized dealer financing program (the "Cygnet Dealer Program"),
pursuant to which it will provide qualified Third Party Dealers with warehouse
purchase facilities and revolving lines of credit primarily secured by the
dealers' finance receivable portfolios; and (iv) pursue other opportunities in
the financial services market.
In connection with the Split-up, the Company will acquire the bulk
purchasing and certain servicing operations and related assets from UDC and
substantially all of UDC's servicing and other rights and obligations pursuant
to transactions with First Merchants Acceptance Corporation ("FMAC") and
Reliance Acceptance Corporation ("Reliance"). The Company intends to consider
the bulk purchase and servicing of other portfolios of finance receivables,
including instances in which the holders of the portfolios are experiencing
financial difficulties. For a description of the Company's bulk purchase and
servicing operations and the Company's rights and obligations with respect to
the FMAC and Reliance transactions, see "Business-Bulk Purchasing and Servicing
Operations."
The Company also will acquire the operations and related assets associated
with the Cygnet Dealer Program, which provides qualified Third Party Dealers
with warehouse purchase facilities and revolving lines of credit primarily
secured by the dealers' finance receivable portfolios. Unlike other typical
financing programs available to dealers, the Cygnet Dealer Program permits
participating dealers to retain servicing rights with respect to their finance
receivable portfolios, which enables dealers to generate servicing income and
maintain relationships with their customers, which dealers believe is a key
factor in generating referrals for additional sales and improving the chances of
repeat business. For a description of the Cygnet Dealer Program, see
"Business -- Cygnet Dealer Program."
In late 1997, UDC, which operates the largest publicly-held chain of "buy
here-pay here" used car dealerships in the United States, began a strategic
evaluation of its operations, determining to separate its dealership operations
from its non-dealership operations pursuant to the Split-up. Cygnet is a
Delaware corporation formed in June 1998 to acquire and operate the
non-dealership operations of UDC and will, upon successful completion of the
Rights Offering and consummation of the Split-up, be a separately-traded public
company.
RECENT DEVELOPMENTS
The Company and UDC are in the process of evaluating a number of ordinary
course transactions and may identify and pursue other transactions that, if
consummated prior to the Split-up, would be assigned to, or concluded by, the
Company ("Interim Transactions"). In addition, Cygnet has recently closed two
Interim Transactions. The Company does not believe any of the Interim
Transactions recently concluded or currently under consideration are material to
its financial condition or results of operations, individually or in the
aggregate, or that any of such transactions would constitute the acquisition of
a business for which separate financial statements would be required to be
publicly disclosed by the Company. None of the transactions described below
requires shareholder approval of the Company or UDC, nor are any of such
transactions with an affiliate of the Company or UDC. The consummation of any of
these transactions currently under consideration is subject to a number of
contingencies, which may include the negotiation and preparation of definitive
agreements, completion of due diligence, and the receipt of required consents
from third parties. As a result, there can be no assurance that any of these
potential transactions will be completed by the Company.
54
<PAGE> 56
To effect Interim Transactions, the Company may borrow money from a third
party lender ("Third Party Loans"), or from UDC ("Interim Company Loans"). Third
Party Loans made to the Company prior to the Effective Date may be guaranteed by
UDC, and the Company and UDC will seek to have any such guarantee released as of
the Effective Date, with the Company likely providing a replacement guarantee.
Interim Company Loans may become due and payable on the Effective Date.
Moreover, on the business day immediately preceding the Effective Date, the
Company will distribute to UDC all earnings accrued to such date. In addition,
the Company will pay to UDC on the Effective Date the excess, if any, of the
aggregate appraised value of the assets and rights and related liabilities
acquired by the Company in Interim Transactions (the "Interim Assets"), as of
the Effective Date, over the aggregate book value of the Interim Assets (the
"Interim Consideration"). UDC and the Company may agree to other terms with
respect to how Interim Transactions will be structured or treated if UDC
believes that such structure or treatment results in adequate consideration to
UDC at the time of the Split-up with respect to the Interim Assets. The purpose
for the payment by the Company to UDC of the Interim Consideration is to place
both parties as close as possible to the economic situation each would confront
if the Interim Transactions were effected by UDC rather than the Company.
Interim Transactions recently concluded include the following:
Servicing Agreement. On July 31, 1998, the Company recently closed a
transaction pursuant to which the Company will service a $50 million portfolio
of automobile finance receivables owned by a third party. The servicing
agreement provides that: (i) the Company will receive a servicing fee equal to
the greater of 3.75% of the outstanding principal balance or $17.50 for each
contract in the portfolio that is not a defaulted contract and 63.75% of all net
collections and proceeds on defaulted contracts, provided that if the net losses
of the portfolio do not exceed 7%, the Company will receive an additional
servicing fee of .25% on non-defaulted contracts, (ii) the Company will receive
all late fees and certain other fees and reimbursable expenses associated with
the servicing; and (iii) the servicing agreement can be terminated without cause
upon payment to the Company of 3 months of servicing fees. The Company also
purchased all assets utilized by the current owner in servicing the portfolio
including furniture, fixtures and equipment, for a purchase price of $500,000,
and will assume the existing lease of the service facility and all amounts due
thereunder from and after the closing date.
Until the Effective Date of the Split-up, UDC will provide subservicing of
the portfolio on the same terms as the servicing agreement described above.
Assumption of Special Servicing Agreements. On July 31, 1998, the Company
recently closed a transaction pursuant to which the Company will assume the
obligations of an existing special servicer of six pools of automobile finance
receivables, including four securitized pools. The Company will receive a
monthly servicing fee equal to the greater of 4% of the outstanding principal
balance of each contract or $14.00 per contract. The Company will also be paid
certain incentive fees, will be reimbursed for certain expenses, will be
permitted to collect and retain late fees, modification fees and extension fees,
and will be indemnified by the parent company of the existing special servicer
for certain obligations being assumed. During an interim period, which should
not exceed 60 days, while certain modifications are being made to the special
servicing agreements to be assumed by the Company and certain consents are being
obtained, the Company will act as special subservicer of the pools on the same
terms as outlined above, but will not be responsible for such indemnified
obligations. If such modifications are not effected or such consents obtained,
the Company can be removed as special subservicer following this interim period.
The Company has agreed upon the resignation or removal of the servicer of the
pools to assume the obligations of servicer for no additional compensation.
Until the Effective Date of the Split-up, UDC will provide subservicing of
these portfolios on the same terms as the servicing and related agreements.
The Company has also agreed to purchase the charged off receivables from
five of the pools for a purchase price of approximately $600,000.
55
<PAGE> 57
Interim Transactions under consideration include the following:
Insurance Agency. The Company is currently evaluating the acquisition of
or a management arrangement with an operating insurance agency, which offers
insurance-related products and services designed to reduce the risk of loss to
holders of portfolios of automobile finance receivables and residential mortgage
loans, including banks, savings and loan associations, finance companies, credit
unions, securitization participants and automobile dealers, among others. The
Company anticipates paying approximately $4 million for this business.
Charge-Offs. UDC is negotiating the purchase of a pool of charged-off
automobile finance receivables of approximately $33.3 million (as of February
28, 1998) for a purchase price based upon a formula. If purchased by UDC, the
pool would be transferred to the Company at the Effective Date.
Purchase of Bank Debt. The Company has agreed to purchase the interests of
a bank in a bank group credit facility. The purchased interest is 18% of the
approximately $48 million current outstanding principal balance of the facility
(or approximately $8.6 million). The purchase price for the interest equals
90.5% of the principal amount of the interest as of the closing date of the
purchase (expected to approximate $7.8 million). The purchase price will be paid
$3 million in cash, with the balance evidenced by a promissory note providing
for interest at a fixed rate based on LIBOR plus 150 basis points. This
promissory note will be guaranteed by UDC until the occurrence of both (i) the
Split-up and (ii) Cygnet having a total shareholders' equity of at least $50
million (which is expected to occur at the time of the Split-up). The credit
facility is secured by a pool of receivables and a residual interest in a
securitized pool of receivables.
Loan, Servicing Agreement and Investment. The Company is negotiating a
transaction in which the Company would make a loan to a third party entity
("Borrower") of $2 million (the "Loan") with interest payable at 12% per annum
and maturing on October 31, 1998; provided that if, prior to October 31, 1998,
Borrower either receives an equity investment from a third party of (i) not less
than $10 million or (ii) not less than $5 million and receives a loan of not
less than $5 million that is subordinate to the Loan and other existing credit
facilities of Borrower, then the maturity date of the Loan will be extended to
the second anniversary of the closing date of the Loan. The Loan is expected to
be secured by all of Borrower's assets, subject to a senior security interest
supporting Borrower's $35 million senior secured credit facility. In
consideration for the Loan, the Company would receive warrants to purchase up to
5% of Borrower's outstanding common stock as of the closing date exerciseable
for three years at an exercise price of $.01 per share. The Company would also
be granted certain additional investment rights in Borrower and would obtain the
right to service a portfolio of receivables for a fee equal to the greater of 4%
per annum of the outstanding principal balance of the receivables or $17.50 for
each contract in the portfolio, plus all collected late fees and modification
fees and reimbursement of costs and expenses. Borrower would have the right to
terminate the Company as servicer for cause or without cause after the later of
(i) six months after commencement of servicing and (ii) payment in full of the
Loan upon payment of a termination fee equal to three months servicing fees.
Until the Effective Date of the Split-up, UDC will provide subservicing of
the portfolio on the same terms as the servicing agreement described above.
OVERVIEW OF USED CAR FINANCE INDUSTRY
The automobile financing industry is the third-largest consumer finance
market in the country, after mortgage debt and credit card revolving debt. The
industry is served by such traditional lending sources as banks, savings and
loans, and captive finance subsidiaries of automobile manufacturers, as well as
by independent finance companies and "buy here-pay here" dealers. The Company's
servicing and financing services historically have been directed primarily to
the sub-prime segment of the market. The Company believes that traditional
providers of financing, servicing, and related services typically avoid this
market because of its high credit risk and the higher costs associated with
increased collection efforts.
Recently, a number of automobile financing companies have decided to exit
the market, sell a substantial portion of their receivables, or rely on an
outside servicer to service their portfolios. The primary factors for
56
<PAGE> 58
these changes in the market include the rapid growth and increased competition
in the sub-prime segment of the market, lowered underwriting standards,
increased credit losses, and a tightening of credit to participants in this
market. On the basis of its access to capital and experience in providing
financing and servicing to the sub-prime industry, the Company has taken
advantage of these market opportunities by bulk purchasing the loan receivables
in and servicing rights to certain large portfolios owned by FMAC and Reliance.
The Company intends to continue to pursue opportunities to purchase loan
portfolios in bulk and the servicing rights to those portfolios from companies
operating in the sub-prime automobile financing market.
Due to the risks involved in providing financing to the sub-prime segment
of the automobile financing industry, many independent used car dealers are
unable to obtain working capital from traditional lending sources such as banks,
credit unions, or major finance companies. These dealers typically finance their
operations through the sale of finance receivables at a substantial discount.
The Company believes that independent dealers prefer to finance their operations
through credit facilities that permit them to retain their receivables, which
enables such dealers to generate servicing income, and prefer to maintain their
relationships with their customers, which the Company, unlike traditional
providers of collateral financing, affords through its Cygnet Dealer Program.
Accordingly, the Company believes that there is a substantial opportunity for a
company capable of serving the needs of such dealers to make significant
penetration into this underdeveloped segment of the sub-prime market. The
Company's Cygnet Dealer Program is intended to fill this niche.
COMPETITIVE STRENGTHS AND BUSINESS STRATEGIES
The Company's goal is to become a leading provider of financing, servicing,
and other complementary services related to finance and other loan receivables,
particularly with respect to the sub-prime segment of the automobile financing
industry. In recent periods, the sub-prime automobile market has been
characterized by rapid growth and increased competition, which has led to
lowered underwriting standards, increased credit losses, and a tightening of
credit. The Company believes these conditions afford significant opportunities
for well-capitalized industry participants with experience in the bulk purchase,
servicing, and financing of receivables in this market segment.
The Company intends to pursue the following business strategies to achieve
its goal:
- Pursue Additional Bulk Purchasing and Servicing Opportunities. The
Company will leverage its financial strength, access to capital, and
experience in the industry to provide creative solutions to financing
companies that desire to sell their sub-prime portfolios in bulk or that
wish to outsource the servicing of their portfolios, including companies
that are experiencing financial difficulties. The Company plans to
continue to seek out opportunities such as its transactions with FMAC and
Reliance as described below.
- Expand the Cygnet Dealer Program. The Cygnet Dealer Program fulfills the
needs of buy here-pay here dealers by providing them working capital
while allowing them to retain their servicing rights and customer
relationships. The program enables the Company to earn finance income at
favorable rates through a diversified asset base. The Company intends to
expand this program in selected markets throughout the country, taking
advantage of the tightening of financing in the sub-prime market
generally.
- Pursue Opportunities to Provide Other Complementary Services. The
Company intends to pursue other opportunities to provide services that
complement its financing and servicing operations. The Company currently
is negotiating the acquisition of or a management arrangement with an
insurance agency that provides insurance-related products and services
designed to decrease the risk of loss to portfolios such as those the
Company currently owns and services. The Company believes that the
combination of its existing financing and servicing operations with other
complementary services will further enhance its ability to provide
turn-key solutions to independent used car dealers, financial
institutions, and other market participants.
57
<PAGE> 59
The Company believes it will possess the following competitive strengths
and intends to leverage these strengths to pursue its business strategies:
- Capitalized for Growth. Assuming the purchase of all of the Offered
Shares pursuant to the Rights Offering, the Company would have had, on a
pro forma basis on June 30, 1998, approximately $72.0 million (or $78.5
million if the Additional Purchase Right and the D&O Purchase Right are
exercised) in stockholders' equity to expand its operations following the
Rights Offering. The Company believes this level of equity will provide
it with the financial strength to take advantage of the opportunities
available in the sub-prime segment of the automobile financing industry
or other market opportunities identified by management.
- Established Track Record. The Company has significant experience in
handling large transactions involving companies operating in the
sub-prime vehicle financing industry. The Company intends to leverage the
experience it has gained in these transactions with additional bulk
purchases of pools of auto loan receivables and related servicing rights
from other market participants and others who desire to transfer these
operations to independent providers. The Company also has significant
experience in underwriting and purchasing sub-prime finance receivable
contracts and in providing credit facilities to independent dealers.
- Experienced Management. The Company's management has extensive
experience providing financing, servicing, and other complementary
services to third party participants in the sub-prime automobile market.
In addition, management has extensive experience in the car dealership
business. The Company intends to leverage its experience in the car
dealership, financing, and servicing businesses to continue to seek out
new opportunities through its bulk purchasing and servicing operations
and the Cygnet Dealer Program.
BULK PURCHASING AND SERVICING OPERATIONS
The Company will pursue opportunities to bulk purchase and acquire the
rights to service portfolios of finance receivables from third-party financing
companies, including companies that are experiencing financial difficulties. The
Company's current focus is on finance receivables in the sub-prime segment of
the vehicle financing market. The Company's access to capital, experience and
expertise in managing complex financial transactions involving distressed
companies, and approved servicing capabilities, particularly with respect to
loan receivables in the sub-prime vehicle financing market, enable the Company
to provide turn-key solutions to financial institutions that encounter
difficulties arising from the ownership and maintenance of large portfolios of
vehicle related loan receivables. As a result of the Company's experience in
managing and understanding the nature of the risks associated with holding and
servicing such portfolios, the Company is able to creatively structure
transactions in which it shares the risk associated with the portfolio in
exchange for a more substantial discount on the purchase price or an increased
share of the return from such portfolios arising from workout situations.
The Company maintains loan servicing facilities in Nashville, Tennessee,
Denver, Colorado and Dallas, Texas to support its bulk servicing operations. As
of May 31, 1998, these facilities employed approximately 260 employees, a number
that enables the Company to service large volumes of finance receivable
contracts. When the Company makes a bulk purchase, it typically employs the
collection personnel, system and software utilized by the existing servicer, and
migrates the collection processes to the Company's system as practicable.
The Company's collectors utilize collections software that provides the
Company with, among other things, up-to-date activity reports, allowing
immediate identification of customers whose accounts have become past due. In
accordance with the Company's policy, collections department personnel contact a
customer as soon as their account becomes delinquent to inquire as to the
reasons for such delinquency and to suggest ways in which the customer can
resolve the underlying problem, thereby enabling the customer to continue making
payments and retain the vehicle securing the finance receivable. The Company's
early detection of a customer's delinquent status, as well as its commitment to
work with borrowers, allows it to identify problems quickly, thereby reducing
the amount of credit losses incurred in the portfolios it services.
58
<PAGE> 60
If the Company's efforts to work with a customer are unsuccessful and the
customer becomes seriously delinquent, the Company will take the necessary steps
to protect the collateral securing the loan in default. Frequently, delinquent
customers will recognize their inability to honor their contractual obligations
and will work with the Company to coordinate "voluntary repossessions" of their
car. In the cases involving uncooperative customers the Company retains
independent firms to repossess the cars pursuant to prescribed legal procedures.
In recent periods, the Company has entered into several large servicing or
bulk purchasing transactions involving independent third party dealer finance
receivable portfolios and, in some cases, has sold or securitized these
portfolios, with servicing retained. The two most significant of such
transactions are described below.
Transactions Regarding First Merchants Acceptance Corporation. UDC was
actively involved in the bankruptcy proceedings of FMAC. On the Effective Date,
the Company will assume all rights and substantially all liabilities related to
the FMAC transaction accruing on or after the Effective Date from UDC, subject
to the consent of certain participants in the bankruptcy proceedings.
FMAC was in the business of purchasing and securitizing loans made
primarily to Sub-Prime Borrowers by various Third Party Dealers. On July 11,
1997 (the "FMAC Petition Date"), FMAC filed a voluntary petition for relief
under Title 11 of the United States Code (the "Bankruptcy Code"). FMAC emerged
from bankruptcy on March 31, 1998, the effective date of FMAC's plan of
reorganization (the "Plan of Reorganization").
During the pendency of the FMAC bankruptcy proceedings, UDC purchased
approximately 78% of FMAC's Senior Bank Debt held by seven members (the "Selling
Banks") of FMAC's original nine-member bank group for approximately $69 million,
which represented a discount of 10% of the outstanding principal amount of such
debt. In December 1997, UDC purchased the remaining 22% of FMAC's Senior Bank
Debt. The Senior Bank Debt was originally secured by (1) automobile receivables
directly owned by FMAC (the "Owned Contracts"), (2) all personal property of
FMAC, (3) accounts, accounts receivable, including tax refunds, contract rights
and other general intangibles, and (4) the common stock of FMARC and FMARC II
(defined below) (collectively, the "Collateral").
On December 15, 1997, LaSalle National Bank, as Agent (the "Agent") for
UDC, as the holder of the Senior Bank Debt, credit bid the entire amount of the
Senior Bank Debt plus certain interest and fees, costs and expenses relating to
the Owned Contracts (collectively, the "Credit Bid Purchase Price"), and the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court") approved the proposed purchase subject to execution by FMAC of
appropriate transfer documents. On December 18, 1997, FMAC executed the
necessary transfer documents assigning the Owned Contracts to the Agent (the
"Transfer"), and the Agent then sold the Owned Contracts on behalf of UDC to a
third party purchaser (the "Contract Purchaser") for 86% of the principal
balance of certain eligible Owned Contracts (approximately $78.9 million) (the
"Base Price") plus a residual interest in the Owned Contracts. In connection
with this transfer, UDC guaranteed to the Contract Purchaser a net return on the
Owned Contracts equal to the Base Price plus interest at the rate of 10.35% per
annum (the "Guaranteed Return"), subject to a maximum guarantee amount of $10
million. As between the Company and UDC, the Company has agreed to assume the
liabilities with respect to this guarantee. UDC, however, will remain directly
liable on the guarantee to the Contract Purchaser (the "UDC Retained
Guarantee"). UDC has the option to purchase the Owned Contracts from the
Contract Purchaser at certain times upon certain events, including at any time
after three years and if the principal balance on the remaining contracts is
less than 10% of the balance of the Owned Contracts on the date of purchase and
certain other conditions are satisfied, for a price to yield the Contact
Purchaser the Guaranteed Return. UDC will assign this repurchase right to the
Company on the Effective Date of the Split-up.
Concurrently with the Transfer, the Agent released the lien of UDC on the
Collateral, allowing FMAC to retain all assets constituting any part of the
Collateral other than the Owned Contracts (the "Retained Assets"), including but
not limited to uncollected state and federal income tax refunds for 1996 and
prior years (the "Tax Refunds"), certain receivables and related vehicles
pledged to Greenwich Capital (the "Greenwich Collateral"), and FMAC's furniture,
fixtures, equipment, general intangibles, and causes of
59
<PAGE> 61
action. In consideration for UDC's release of its lien on the Retained Assets,
FMAC subsequently (A) guaranteed on a non-recourse basis full and timely payment
to UDC of any shortfall between (i) the Credit Bid Purchase Price of the Owned
Contracts plus interest thereon at the rate of 11% per annum from December 15,
1997, plus an additional charge for servicing the Owned Contracts (the "Owned
Contracts Servicing Fee"), calculated on a monthly basis, of the greater of
1/12 of 3 1/4% of the outstanding principal balance of the Owned Contracts or
$15.00 per Owned Contract, applied only to Owned Contracts that are less than
120 days past due and for which the related vehicle has not been repossessed and
(ii) collections and proceeds (subject to certain limitations) with respect to
the Owned Contracts (collectively, the "Secured Claim Recovery Amount"), and (B)
granted a lien (the "Replacement Lien") to the Agent for the benefit of UDC on
the issued and outstanding stock of First Merchants Auto Receivables Corporation
("FMARC") and First Merchants Auto Receivables Corporation II ("FMARC II"), the
holders of the residual interests and certain equity certificates (collectively,
the "B Pieces") of the various securitized loan pools ("Securitized Pools") of
FMAC, to secure the Secured Claim Recovery Amount and the Modified UDC Fee
(defined below). The Replacement Lien is not a first priority lien and is junior
to a lien in favor of Greenwich Capital with respect to certain obligations of
FMAC to Greenwich Capital and UDC with respect to the DIP Facility. In the event
that the Owned Contracts are not being serviced by UDC, a wholly-owned
subsidiary of UDC or another affiliate or assignee of UDC that meets certain
qualifications and conditions (an "Authorized Servicer"), without the prior
written consent of FMAC (an "Owned Loan Servicing Change"), which consent will
not be unreasonably withheld, the Secured Claim Recovery Amount will be limited
to $10 million. Following the Split-up, UDC's rights described herein with
respect to FMAC's non-recourse guarantee of the Secured Claim Recovery Amount
and in the Replacement Lien will be assigned to the Company. The Company will
also begin servicing the Owned Contracts, subject to the consent of the Contract
Purchaser. The Company believes that it will qualify as an Authorized Servicer,
and therefore, FMAC's consent will not be required to avoid an Owned Loan
Servicing Charge.
Any recovery on the Owned Contracts in excess of the Secured Claim Recovery
Amount will be shared with FMAC on the basis of 82.5% for the benefit of FMAC
and 17 1/2% for the benefit of UDC (the "Excess Collections Split"). After
payment in full of the Secured Claim Recovery Amount, the DIP Facility, the
Modified UDC Fee (defined below), and certain other amounts, any further
distributions from the B Pieces will be shared between FMAC and UDC on the same
basis as the Excess Collections Split. In the event that an Owned Loan Servicing
Change occurs, the Excess Collections Split will change to 85% for the benefit
of FMAC and 15% to UDC with respect to the B Pieces and, subject to certain
adjustments, 100% for the benefit of FMAC and 0% to UDC with respect to the
Owned Contracts. UDC will not be entitled to receive any share of the Excess
Collections Split relating to a Securitized Pool for any period during which it
is not acting as servicer for such Securitized Pool. In addition, UDC has agreed
in a contingent sharing agreement to pay 10% of the Excess Collections Split
received by UDC to Financial Security Assurance ("FSA"), the insurer of certain
obligations to the holders of the senior certificates representing interests in
the Securitized Pools, in exchange for FSA's consent to amendments to documents
governing servicing of the Securitized Pools as described below. All of UDC's
rights and the Excess Collections Split and the obligations with respect thereto
under the Contingent Sharing Agreement with FSA will be assigned to the Company
on the Effective Date of the Split-up.
At the option of UDC, UDC may distribute shares of UDC Common Stock (the
"Stock Option Shares") to FMAC or, at the request of FMAC and pursuant to its
instructions, directly to the unsecured creditors of FMAC, in lieu of FMAC's
right to receive all or a portion of distributions under the Excess Collections
Split (including both recoveries under the Excess Collections Split from the
Owned Contracts and the B Pieces) in cash (the "Stock Option"). If UDC decides
to exercise the Stock Option, UDC must give FMAC at least 15 days advance
written notice (the "Option Notice") (and make a public announcement on the same
date as the giving of the notice) of the date on which UDC will exercise the
Stock Option (the "Exercise Date") and the number of Stock Option Shares that
UDC will issue on the Exercise Date. The number of shares of UDC Common Stock to
be issued will be based on the trading range of the shares prior to the exercise
date. In this regard, the Stock Option Shares would be valued at 98% of the
average of the closing prices for the previous 10 trading days of UDC Common
Stock on Nasdaq or such other market on which such stock may be traded (the
"Stock Option Value"). Pursuant to the Capitalization Agreement, the
60
<PAGE> 62
Company will be required to give notice to UDC at least a stated number of days
prior to the date when cash distributions of the Excess Cash Split to FMAC are
likely to begin and the Company's estimate of the amount and timing of such
distributions. If UDC issues the Stock Option Shares, the Company will be
required to pay over to UDC all of FMAC's share of cash distributions under the
Excess Collections Split up to the Stock Option Value.
At the commencement of FMAC's bankruptcy case, UDC agreed to provide a DIP
Facility to FMAC of up to $10 million. Borrowings under the DIP Facility
originally were to mature on February 28, 1998 and accrue interest at the rate
of 12% per annum. The DIP Facility was originally secured by super priority
liens on all of FMAC's assets then existing or thereafter acquired. The DIP
Facility was subsequently amended to provide for (i) additional advances to pay
administrative and post-plan confirmation operating expenses of FMAC, provided
that total advances under the DIP Facility could not exceed $21.5 million, (ii)
security in the form of the Retained Assets, including the Tax Refunds, (iii) a
reduction in the interest rate on borrowings outstanding under the DIP Facility
to 10% per annum; and (iv) a waiver of the February 28, 1998 maturity date of
the DIP Facility. The first $10 million of Tax Refunds was to be used to pay
down the DIP Facility and permanently reduced the amount of the DIP Facility. To
date, approximately $9.1 million of Tax Refunds have been used to pay down the
DIP Facility and the maximum amount available to be borrowed has been reduced
from $21.5 million to $12.4 million. After application of the Tax Refunds, the
DIP Facility will be permanently paid down from distributions on the B Pieces,
after payment of the Secured Claim Recovery Amount. Payments made from other
sources on the DIP Facility will not permanently reduce the amount thereof and
FMAC will be allowed to reborrow such amounts under the DIP Facility. Following
the Split-up, the Company will assume all of UDC's rights and liabilities with
respect to the DIP Facility and in the Tax Refunds and other collateral securing
the same. UDC, however, will remain directly liable on the DIP Facility.
The increase in the DIP Facility to $21.5 million was agreed to in exchange
for an agreement by the parties involved, among other things, to assign to UDC
the receivables in the Securitized Pools that were charged off prior to February
28, 1998. Pursuant to that agreement, UDC is entitled to retain a servicing fee
of 27.5% of every dollar collected on the charged off receivables. The remaining
72.5% out of every dollar collected will be accumulated in an interest bearing
escrow account ("Charged Off Receivable Funds"). The Charged Off Receivable
Funds will be held in the escrow account until an amount equal to the purchase
price, which was equal to one percent of the remaining principal amount of all
receivables charged off prior to or on November 30, 1997, and two percent of the
remaining principal amount of all receivables charged off from December 1, 1997
to and including February 28, 1998, has been deposited to the escrow account at
which time such amount shall be allocated and paid to Securitized Pools from
which the receivables were transferred and, thereafter if the securitized pools
have inadequate funds to satisfy certain payments and distributions with respect
to the senior certificates issued with respect to such pools, then future
deposits to the escrow account shall be withdrawn to satisfy such payments and
distributions. When the aggregate of the spread accounts in the Securitized
Pools reaches a certain coverage (the "Coverage Point"), to the extent
available, all monies previously transferred to the escrow account to satisfy
such payments and distributions will be deposited back into the escrow account
and the Charged Off Receivable Funds will be released from the escrow account
and paid to the Company. Any additional collections with respect to charged-off
receivables relating to a Securitized Pool that has reached the Coverage Point
would be retained by the Company. Following the Split-up, all rights and
obligations with respect to the Charged Off Receivable Funds will be assigned to
the Company.
FMAC has guaranteed to pay UDC $450,000 on a non-recourse basis prior to
any payments pursuant to the Excess Collections Split solely from collections of
the B Pieces, which obligation is secured by a pledge of the stock of FMARC and
FMARC II, subordinate only to the DIP Facility, the Secured Claim Recovery
Amount and prior pledges of the FMARC II stock (the "Modified UDC Fee").
Following the Split-up, the right to receive the Modified UDC Fee will be
assigned to the Company.
UDC entered into a Servicing Agreement dated December 18, 1997 (the "Owned
Contracts Servicing Agreement") between UDC and the Contract Purchaser, pursuant
to which the Owned Contracts would be serviced by UDC in the event that FMAC
ceased to service the Owned Contracts. UDC began servicing the
61
<PAGE> 63
Owned Contracts on April 1, 1998, and therefore is entitled to receive a
servicing fee under the Owned Contracts Servicing Agreement. On April 1, 1998,
UDC also entered into amendment(s) with FMAC and other parties to the existing
Pooling and Servicing Agreements and Sale and Servicing Agreements that
currently govern servicing of the receivables in the securitized pools of FMAC,
which amendments provide for UDC to service the receivables in such securitized
pools beginning April 1, 1998. Under these agreements, UDC will receive a
servicing fee equal to the greater of (i) 3.25% per annum of the aggregate
outstanding principal balance of the non-defaulted receivables computed monthly
on the basis of the declining balance of the receivables portfolio or (ii) $15
per receivable per month, plus, in either case, reimbursement of certain costs
and expenses. The Company's right to receive such servicing fee and
reimbursement will be in part contingent on the past and future collections on
each Securitized Pool and the monies available in the applicable spread account
of each such Securitized Pool. All rights and obligations under the Owned
Contracts Servicing Agreement, subject to the consent of the contract purchaser,
and with respect to servicing the arrangements on the Securitized Pools, subject
to the consent of FSA, will be assigned to the Company following the Split-up.
On March 31, 1998, UDC contributed to FMAC all of its shares of FMAC common
stock as additional consideration for UDC's acquisition of the furniture,
leasehold improvements and equipment constituting FMAC's servicing platform.
Following the Split-up, the FMAC servicing platform will be transferred to the
Company.
Following the Split-up, all of UDC's rights and substantially all of UDC's
obligations in connection with the FMAC transaction accruing on or after the
Effective Date will be assigned to the Company, except as described above.
Transactions Regarding Reliance Acceptance Group. On February 9, 1998, UDC
announced that it had agreed to enter into servicing and transition servicing
arrangements with Reliance. Reliance filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code on February 9, 1998. Reliance confirmed its
proposed plan in open court on June 29, 1998. The bankruptcy court signed the
order formally confirming the plan on July 2, 1998. The effective date of the
plan confirmed plan is the close of business on July 31, 1998. Reliance is a
national specialty finance company, primarily engaged in the business of
purchasing and servicing finance receivables for the purchase of new or used
automobiles, trucks, vans and sport utility vehicles by Sub-Prime Borrowers.
Pursuant to a servicing agreement entered into between UDC and Reliance
(the "Servicing Agreement"), as amended, on the effective date of the plan, UDC
will begin servicing certain receivables of Reliance in exchange for (i) a
monthly servicing fee of the greater of 4% per annum of the aggregate
outstanding principal balance of all non-defaulted receivables computed monthly
on the basis of the declining balance of the receivables portfolio (consisting
of Reliance's portfolio of (A) prime receivables and (B) sub-prime receivables),
or $15 per receivable per month plus reimbursement of certain costs and
expenses; (ii) $1.3 million in proceeds realized from the sale of a pool of
charged off receivables existing as of the Reliance Petition Date ("Charged-Off
Proceeds"); (iii) a total of (A) 4% of the outstanding principal balance of each
receivable (exclusive of defaulted and certain other receivables) sold in any
bulk sale to a person other than UDC or an affiliate of UDC, and (B) $3.25
million in net collections, recovery and sale proceeds from the receivables
portfolio and certain other cash receipts of Reliance reduced by any amount
previously paid under clause (A) above, following payment of Reliance's primary
bank debt and, if applicable, repayment to Reliance of any proceeds of
litigation, the Reliance Warrants (as defined below) and equity proceeds used by
Reliance to pay its primary bank debt ("Post-Bank Debt Proceeds"); and (iv)
following the Company's receipt of the Post-Bank Debt Proceeds, 15% of the net
collections, recovery and sale proceeds from the receivables portfolio and
certain other cash receipts of Reliance (the "Incentive Fee"). Reliance, in
consideration for entering into the Servicing Agreement, will receive privately
issued warrants (the "Reliance Warrants") to purchase shares of UDC Common Stock
as follows: 50,000 Reliance Warrants will be granted to Reliance upon the
Company's receipt of the Charged-Off Proceeds; up to 100,000 Reliance Warrants
will be granted to Reliance based upon the Company's receipt of up to $3.25
million of Post-Bank Debt Proceeds; and Reliance will be granted an additional
75,000 Reliance Warrants for every $1 million actually received by the Company
through the Incentive Fee. The Reliance Warrants have an exercise price of
$12.50 per share for
62
<PAGE> 64
the first 150,000 Reliance Warrants and an exercise price for all other Reliance
Warrants of the greater of $12.50 or 120% of the market price of the UDC Common
Stock on the date of issuance of the Reliance Warrants. The Reliance Warrants
will be exercisable as follows: (i) the first 50,000 Reliance Warrants will be
exercisable for three years from the Reliance Petition Date; and (ii) all
remaining Reliance Warrants will be exercisable for three years from their
respective dates of issuance. The Servicing Agreement has not yet been approved
by the Bankruptcy Court. The Company has agreed to pay to UDC consideration upon
the issuance of each Reliance Warrant equal to the fair value of the Reliance
Warrants (as determined by UDC for financial reporting purposes) on their date
of issuance.
Following the Split-up, all of UDC's rights and substantially all of UDC's
obligations in connection with the Reliance transaction accruing on or after the
Effective Date will be assigned to the Company, except that the Reliance
Warrants will be issued from time to time as required by UDC.
There can be no assurance that the Reliance transaction will be concluded
on the terms and conditions outlined above or at all, or if concluded, that such
transaction will prove profitable to the Company.
CYGNET DEALER PROGRAM
The Company believes that many independent used car dealers have difficulty
obtaining traditional working capital and, as a result, are forced to sell the
finance receivables that they originate from used car sales at significant
discounts in order to obtain the working capital necessary to operate their
businesses. In addition, most financing programs available to independent used
car dealers lessen or terminate the customer relationship between the dealer and
the buyer of the used car, which dealers would otherwise maintain in order to
generate referrals and/or repeat business. To capitalize on this opportunity,
the Company initiated the Cygnet Dealer Program, pursuant to which the Company
provides qualified dealers with warehouse purchase facilities and revolving
lines of credit primarily secured by the dealers' finance receivable portfolios.
Under both of these credit facilities, the dealer remains responsible for
collection of finance receivable payments and retains control of the customer
relationship. The credit facilities are for specified amounts and 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. As a condition to providing such
financing, each dealer is required to report its collection activities to the
Company on a daily basis and provide the Company with periodic financial
statements. In addition, the Company has initiated an internal audit program
whereby dealers are audited by its internal audit department on a periodic
basis. The goal of these controls is to allow the Company's account officers,
who oversee the operations of each dealer participating in the program, to
better ensure dealer compliance with program covenants and determine the
appropriateness of continued funding under the credit facilities.
The Company believes that the Cygnet Dealer Program fulfills the need of
independent used car dealers for working capital to expand their businesses
while enabling the Company to earn finance income at favorable rates and
diversify its earning asset base. The Company began full-scale marketing of the
program during the first quarter of 1997. As of March 31, 1998, the Company had
lending relationships with a total of 43 independent dealers with advances
totaling approximately $31 million.
Targeted Dealers. The Company provides credit facilities to qualified "buy
here-pay here" dealers primarily throughout the southeastern and western U.S.
through the Cygnet Dealer Program. To qualify for the Cygnet Dealer Program, a
dealer must generally meet the following minimum requirements:
- Monthly sales of at least 25 cars.
- Established management with "buy here-pay here" experience.
- Net worth of at least $150,000 to qualify for the Dealer Collection
Program and at least $500,000 for the Asset Based Loan Program.
- Computerized inventory, receivable and collection system.
- Satisfactory inventory and facilities.
63
<PAGE> 65
The Company's strategy is to establish active relationships with a select
group of qualified dealers to which it is a primary source of funding for their
finance receivables. The Company currently has made advances to dealers in 14
states, and intends to expand its operations in selected markets throughout the
country.
The independent dealer financing industry consists of a number of national
and regional finance companies, plus certain institutional lenders, that
typically fund finance receivables on behalf of dealers based upon either
"collection" or "point of sale" programs. Pursuant to the "collection" program,
the dealer submits finance receivables to a finance company for collection and
the dealer is advanced a portion of the finance receivables stream of payments
as an advance, which is non-recourse to the dealer. These finance receivables
are then placed into a pool for collection. The finance company performs all of
the collection activity on these accounts and retains 20% of each dollar
collected as a servicing fee. The remaining 80% of each dollar collected is paid
to the finance company until the up-front advance to the dealer plus accrued
interest is paid in full. If and when the advance to the dealer plus accrued
interest is paid in full, then 80% of the remaining payments collected are
remitted back to the dealer. Under the "point of sale" program, the dealer
submits credit applications to the finance company, and upon approval, the
finance receivable is forwarded to the finance company for funding. Finance
companies may or may not provide financing depending on their own internal
underwriting guidelines. Assuming financing is approved, finance receivables
typically are purchased at a discount with the finance company assuming all
responsibility for collection and servicing. The Company believes that its
Dealer Collection and Asset Based Loan Programs are preferred by many dealers
because they allow the dealers, rather than the finance company, to control
collection activity and thus allow the dealers to retain servicing income and
maintain the relationship with the purchaser of the automobile, which is
important for customer referrals and repeat business.
Dealer Collection Program. The Dealer Collection Program is the Company's
primary program offered to independent dealers. Pursuant to this program, the
Company purchases finance receivables from a qualified dealer on a full recourse
basis. The dealer remains responsible for the collection of the contract
payments and retains control of the customer relationship. The Company typically
purchases finance receivable contracts at 65% to 75% of the principal balance
subject to a maximum of 170% of the Kelly Blue Book wholesale price. All cash
collections, including regular monthly payments, payoffs and repurchases, are
deposited directly by the dealer into a bank account maintained by the Company.
The Company retains all regular monthly cash payments and payoffs, subject to
the payment of a servicing fee to the dealer generally equal to 20% to 25% of
the regular monthly cash payments collected, payable on the 10th day following
the month of collection. Finance receivables must have a minimum annual
percentage rate of 21% or the maximum allowed by applicable state usury law. If
the interest rate of finance receivables is less than 21%, then the purchase
price is lowered to increase the effective yield to the Company.
Generally, each dealer pays a nonrefundable initial audit fee plus a
processing fee per contract or provides a security deposit. The dealer is
required to repurchase all finance receivable contracts that are 45 days
delinquent at a price equal to the original purchase percentage multiplied by
the outstanding principal balance plus accrued and unpaid interest on that
contract. The Dealer Collection Program is full recourse to the dealer and
typically includes personal guarantees by the principal owners of the
dealership.
Asset Based Loan Program. The Company also provides the Asset Based Loan
Program to dealers pursuant to which the Company provides to qualified dealers a
secured revolving line of credit. Pursuant to the Asset Based Loan Program, the
Company advances to qualified dealers, on a full recourse basis, up to 65% of
the principal amount of finance receivables subject to a maximum of 170% of the
Kelly Blue Book wholesale price of the underlying collateral. The Company also
charges an annual commitment fee of 1% to 2% of the available line and interest
on any amounts outstanding at the rate of prime plus 5% to 9%. In addition, each
dealer generally pays a nonrefundable initial audit fee plus a processing fee
per contract.
Under the Asset Based Loan Program, the dealer is responsible for
collection of contract payments and maintaining the customer relationship. All
cash collections, including regular monthly payments, payoffs and repurchases,
are deposited directly into a bank account maintained by the Company. Finance
receivables that are 45 days delinquent are deemed to be ineligible collateral
and are excluded from the calculation of the
64
<PAGE> 66
amount available under the line of credit. If the exclusion of ineligible
collateral causes the line to become over funded, then the dealer must either
pay down the line or assign additional qualifying finance receivables to the
Company. Each line of credit provides for full recourse to the dealer, typically
with full guarantees by the principal owners of the dealership.
In certain instances when a dealer reaches the maximum commitment amount
under the credit facility, the Company will consider purchasing the finance
receivables from the dealer as part of the overall lending relationship. In such
event, the Company typically purchases the finance receivables for an amount
equal to between 70% to 85% of the net principal balance depending on the
interest rates on the finance receivables, the seasoning of the finance
receivables, and the extent of limited recourse to the dealer.
Qualification Process and Underwriting Guidelines. Each dealer that wishes
to qualify to participate in the Cygnet Dealer Program must provide a fully
completed application form and supporting documentation, including financial
statements, tax returns, contract receivable aging reports, and vehicle
inventory reports, among others. After review of the application form and
supporting documentation, assuming compliance with the Company's minimum
requirements, a proposal letter is sent to the dealer outlining the proposed
terms of the financing program. To participate in the program, the dealer then
must sign and deliver the proposal letter to the Company, together with a
non-refundable deposit of $2,500, after which an initial on-site audit is
performed by the Company's internal audit department. The audit consists of
reviewing and testing payments, inventory, down payments, repos/charge-offs,
systems, collections/servicing, and financial statements. In addition, a member
of the Company's Internal Credit Review Committee typically will visit the
dealer and meet with its owners and key personnel to review its operations.
Following the initial on-site audit, a formal written audit report is prepared
and presented to the Company's Internal Credit Review Committee for approval. A
unanimous vote of this committee is required for approval. After approval has
been received, the Company prepares legal documents, which must be signed and
delivered by the dealer prior to participating in the program.
Each dealer participant in the Cygnet Dealer Program must follow certain
guidelines with respect to originating finance receivables. These guidelines
include customer-related guidelines that focus on the customer's stability,
ability to pay, and willingness to pay, and term, vehicle and rate related
guidelines that deal specifically with the minimum requirements for the car's
mileage as related to the term of finance receivables, and the minimum annual
percentage rate of the finance receivables. Each dealer is required to package
originated finance receivables in accordance with guidelines established by the
Company, which require the dealer to provide certain documentation identified on
a checklist from each borrower. The dealer then sends the finance receivable
packages to the Company's processing center where the contents are reviewed to
ensure compliance with the Company's guidelines. After verification of certain
information by the Company's personnel, the information with respect to each
file is keyed into the Company's loan processing system. Typically, the time
from receipt of the finance receivable packages to actual funding takes from 48
to 72 hours.
The Company follows a variety of procedures to limit losses from defaults
under the Dealer Collection and Asset Based Loan Programs. Prior to making an
advance under one of its programs, the Company performs an initial review and
audit of each dealer, verifies finance receivables before funding (which
verification may include an interview of the borrower, verification of the
borrower's employment, residence, and a reference) to ensure compliance with
Cygnet Dealer Program credit guidelines, and obtains agreements and personal
guarantees from the dealer and its owners that provide a variety of remedies to
the Company in case of a default. After an advance has been made, the Company
maintains a loan tracking system that monitors collection activities by the
dealer and keeps track of delinquencies, collections, repurchases and quality of
finance receivables, conducts on-site audits of each dealer at least
semiannually, reviews dealer financial statements on a quarterly basis and, if
advances exceed $2.5 million for a single dealer, requires annual audits to be
performed by an independent certified public accounting firm. In the event of
default by a dealer, the Company is capable of assuming all collection efforts
with respect to the dealer's portfolio. In anticipation of such event, the
Company maintains updated computerized records on all finance receivables and
has the infrastructure in place to directly perform collections with respect to
the portfolio. The Company also may pursue other remedies involving the pursuit
of additional collateral, providing assistance to a dealer
65
<PAGE> 67
with respect to the collection of payments and workout related items, and
pursuing personal guarantees of the owners.
PURSUIT OF OPPORTUNITIES IN INSURANCE MARKET
The finance receivables that the Company purchases in bulk generally
require borrowers to obtain casualty insurance within 30 days of their vehicle
purchase. While all borrowers are free to obtain such coverage from an insurer
of their choice, if a borrower fails to obtain the required coverage, the
Company may purchase a policy on the borrower's behalf and charge back to the
customer the cost of the premiums and fees associated with such policy.
To facilitate its ability to force place mandated insurance coverage, and
to provide continual monitoring of the primary insurance status of each loan
within the Company's portfolio, the Company recently began negotiating the
acquisition of or a management agreement with an insurance agency that offers
insurance-related products and services primarily to holders of large portfolios
of vehicle and residential mortgage loans, including banks, savings and loan
associations, finance companies, credit unions, and automobile dealers, among
others. The Company anticipates that this transaction, if completed, would
enable the Company to more effectively manage the risk of loss related to its
portfolios of loan receivables and offer more a comprehensive set of products
and services to financial institutions and independent used car dealers
participating in the sub-prime segment of the automobile financing industry.
SERVICING SYSTEMS AND SOFTWARE
In its bulk purchase and servicing operations, the Company currently uses a
third party service bureau to process loan collection information. The agreement
with this service bureau expires at the end of December 1998, although the
Company may extend this arrangement on a month-to-month basis at increasing
rates. The Company has entered into an agreement with a new third party service
bureau, Affiliated Computer Services, Inc. ("ACS"), and expects to convert its
loan processing and collection systems by year-end 1998. The Company anticipates
that this service bureau will provide enhanced collection support. ACS will also
provide disaster recovery and Year 2000 compliance services. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
In its Cygnet Dealer Program, the Company currently utilizes a proprietary
loan collection system. Pursuant to this system, the Company inputs data on each
finance receivable independently of, but consistently with each dealer's system
in order to effectively monitor portfolio performance. The Company recently
signed a separate agreement with ACS to process the Cygnet Dealer Program. Due
to the unique characteristics of the Cygnet Dealer Program, ACS will make a
number of custom software enhancements to enable the program to run on the ACS
system. The custom software changes and conversion from the Company's in-house
system to ACS is scheduled for completion prior to year end 1998. In addition to
the ACS system, the Company is developing a custom loan underwriting and funding
software module that will also serve as an interface between the individual
dealers' systems and the ACS system. During 1999, the Company intends to migrate
the dealers from their separate, stand alone loan systems to the ACS system for
purposes of loan servicing and collections. Upon full implementation of the ACS
system, dealers will be able to enter transactions directly into the loan
system, eliminating the redundancy of Company input. This system will provide
the Company with real time access to information regarding each dealer's finance
receivable portfolio and allow the Company to audit more closely the activities
of each dealer. In addition, this system will enable the Company to promptly
assume servicing from dealers that go into default to help preserve the
Company's investment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
COMPETITION
The markets in which the Company competes are highly competitive. With
respect to its Cygnet Dealer Program and bulk purchasing and servicing
operations, the Company competes with a variety of finance companies, financial
institutions, and providers of financial services, many of whom have
significantly greater
66
<PAGE> 68
resources, including access to lower priced capital. In addition, there are
numerous financial services companies serving, or capable of serving, these
markets. While traditional financial institutions, such as commercial banks,
savings and loans, credit unions, and captive finance companies of major
automobile manufacturers, have not consistently served the sub-prime markets,
the yields earned by companies involved in sub-prime financing have encouraged
certain of these traditional institutions to enter, or contemplate entering,
these markets. Increased competition may adversely affect the rates earned under
the Cygnet Dealer Program and the Company's yields and fees under its bulk
purchasing and servicing arrangements.
REGULATION, SUPERVISION, AND LICENSING
The Company's operations are subject to ongoing regulation, supervision,
and licensing under various federal, state, and local statutes, ordinances, and
regulations. Among other things, these laws require that the Company obtain and
maintain certain licenses and qualifications, limit or prescribe terms of the
finance receivables that the Company bulk purchases, require specified
disclosures to customers, limit the Company's right to repossess and sell
collateral, and prohibit the Company from discriminating against certain
customers.
The Company believes that it is currently in substantial compliance with
all applicable federal, state, and local laws and regulations. There can be no
assurance, however, that the Company will be able to remain in compliance with
such laws, and such failure could have a material adverse effect on the
operations of the Company. In addition, the adoption of additional statutes and
regulations, changes in the interpretation of existing statutes and regulations,
or the Company's entrance into jurisdictions with more stringent regulatory
requirements could have a material adverse effect on the Company's business.
EMPLOYEES
As of the Effective Date, the Company expects to employ approximately 280
persons. None of the Company's employees are covered by a collective bargaining
agreement.
PROPERTIES
As of the Effective Date, the Company will assume leases, or sublease from
UDC, headquarters facilities located at Phoenix, Arizona and servicing
facilities at Nashville, Tennessee, Denver, Colorado, and Plano, Texas. These
leases have expiration dates ranging from September 30, 1998 to June 14, 2002.
The Company believes these facilities are sufficient for its present operations.
LEGAL PROCEEDINGS
The Company currently is not a party to any material pending legal
proceedings. Notwithstanding the foregoing, the Company, in the ordinary course
of business, expects to receive complaints from borrowers relating to alleged
violations of federal and state consumer lending or other similar laws and
regulations. While most of these complaints typically are made directly to the
lender or to various consumer protection organizations and are subsequently
resolved, the Company may be named occasionally as a defendant in civil suits
filed by borrowers in state, local or small claims courts. There can be no
assurance that the Company will not be a target of similar claims in the future.
67
<PAGE> 69
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the names, ages, terms, positions with the Company,
and business experience of those persons who will become the Company's directors
and executive officers on the Effective Date of the Split-up is set forth below
as of July 1, 1998.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- ---- --- -------- --------
<S> <C> <C> <C>
Ernest C. Garcia, II................. 41 Chairman of the Board, Chief 1999
Executive Officer, and President
Robert J. Abrahams(1)................ 71 Director 1999
Christopher D. Jennings(1)(2)........ 44 Director 1999
Gary L. Trujillo..................... 37 Director 1999
Frank P. Willey(2)................... 44 Director 1999
Steven P. Johnson.................... 38 Senior Vice President and General
Counsel
Donald L. Addink..................... 48 Senior Vice President and Senior
Analyst
Eric J. Splaver...................... 35 Chief Financial Officer
Raymond C. Fidel..................... 40 President -- Cygnet Dealer Finance,
Inc.
Gregory R. Ciccolini................. 42 Chief Information Officer
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Ernest C. Garcia II has served as the Chairman of the Board and Chief
Executive Officer of UDC since its founding in 1992, and served as President
from 1992 to 1996. Since 1991, Mr. Garcia has served as President of Verde
Investments, Inc. ("Verde"), a real estate investment corporation that is
wholly-owned by Mr. Garcia. Prior to 1992, when he founded UDC, Mr. Garcia was
involved in various real estate, securities, and banking ventures. Upon the
Effective Date Mr. Garcia will continue as the Chairman of the Board of UDC. Mr.
Garcia's sister is married to Mr. Johnson. See below, "Management -- Involvement
in Certain Legal Proceedings," "Principal Stockholders," and "Certain
Relationships and Related Transactions."
Robert J. Abrahams has served as a director of UDC since June 1996. Mr.
Abrahams has served since 1988 as a consultant to the financing industry,
including service as a consultant to UDC from 1994 to 1995. From 1960 to 1988,
Mr. Abrahams was an executive officer of Heller Financial, Inc., a finance
company. Prior to joining Heller Financial, Inc., Mr. Abrahams co-founded
Financial Acceptance Company in 1948. Upon the Effective Date Mr. Abrahams will
continue as a director of UDC. Mr. Abrahams is also a director of Smart Choice
Automotive Group, Inc., a retail automotive and finance company, and HMI
Industries, Inc., a manufacturing and direct selling company.
Christopher D. Jennings has served as a director of UDC since June 1996.
Mr. Jennings currently serves as Managing Director of Friedman, Billings, Ramsey
& Co., Inc., an investment banking firm. Mr. Jennings served as a managing
director of Cruttenden Roth Incorporated, an investment banking firm, from 1995
to April 1998. From 1992 to 1994, Mr. Jennings served as Managing Director of
investment banking at Sutro & Co., an investment banking firm. From 1989 to
1992, Mr. Jennings served as Senior Managing Director at Maiden Lane Associates,
Ltd., a private equity fund. Prior to 1989, Mr. Jennings served in various
positions with, among others, Dean Witter Reynolds, Inc., and Warburg Paribas
Becker, Inc., both of which are investment banking firms. Upon the Effective
Date Mr. Jennings will continue as a director of UDC. See "Certain Relationships
and Related Transactions" and "-- Principal Stockholders."
68
<PAGE> 70
Gary L. Trujillo is the founder of and has served as President and Chief
Executive Officer of Southwest Harvard Group, a privately held company engaged
in asset management and venture capital activities, since 1990. Prior to forming
Southwest Harvard Group, from 1983 to 1990 Mr. Trujillo was a Wall Street
investment banker working in New York City, initially with Salomon Brothers Inc.
Mr. Trujillo currently is a board member at Norwest Bank, N.A.
Frank P. Willey has served as a director of UDC since June 1996. Mr. Willey
has served as the President of Fidelity National Financial, Inc., one of the
nation's largest title insurance underwriters, since January 1995. From 1984 to
1995, Mr. Willey served as the Executive Vice President and General Counsel of
Fidelity National Title. Mr. Willey is also a director of Fidelity National
Financial, Inc., CKE Restaurants, Inc., an operator of various quick-service
restaurant chains, and Southern Pacific Funding Corporation, a specialty finance
company that originates, purchases, and sells high-yield, non-conforming
mortgage loans.
Steven P. Johnson has served as Senior Vice President, Secretary, and
General Counsel of UDC since its founding in 1992. Since 1991, Mr. Johnson has
also served as the Senior Vice President and General Counsel of Verde. Prior to
1991, Mr. Johnson practiced law in Tucson, Arizona. Mr. Johnson is licensed to
practice law in Arizona and Colorado and is married to the sister of Mr. Garcia.
Donald L. Addink has served as the Vice President -- Senior Analyst of UDC
since 1995 and also serves as the Vice President of Verde. From 1988 to 1995,
Mr. Addink served as Executive Vice President of Pima Capital Co., a life
insurance holding company. Prior to 1988, Mr. Addink served in various
capacities with a variety of insurance companies. Mr. Addink is a Fellow of the
Society of Actuaries and a Member of the American Academy of Actuaries.
Eric J. Splaver has served as Corporate Controller of UDC since May 1994.
From 1986 to 1994, Mr. Splaver worked as a certified public accountant with KPMG
Peat Marwick LLP.
Ray Fidel has served as President of Cygnet Dealer Finance, Inc., since
February 1997. On the Effective Date, Mr. Fidel will continue in his position
with Cygnet Dealer Finance, Inc. Prior to February 1997, Mr. Fidel served as
Managing Director of two financial corporations engaged in the asset-based
lending industry. Mr. Fidel was so employed from July 1995 to February 1997 with
Fidelity Funding Corporation and from March 1991 to June 1995 with DVI Business
Credit, a subsidiary of DVI, Inc., a New York Stock Exchange listed company. See
below "Management -- Involvement in Certain Legal Proceedings."
Gregory R. Ciccolini has served as Chief Information Officer since June
1998. From 1997 to 1998, Mr. Ciccolini was a Consulting Manager for SunGard
Planning Solutions, a company engaged in data center disaster recovery planning
and testing for Fortune 500 companies. From 1993 to 1997, Mr. Ciccolini served
as Vice President and Systems Director for Bank of America Arizona. Prior to
1993, Mr. Ciccolini served as Vice President and Information Systems Audit
Manager for several southwestern financial institutions.
Directors of the Company are elected for one year terms. Each director of
the Company serves until the following annual meeting of the Company, until his
successor is duly elected and qualified, or until retirement, resignation, or
removal. Executive officers of the Company serve at the discretion of the Board
of Directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Prior to 1992, when he founded UDC, Mr. Garcia was involved in various real
estate, securities, and banking ventures. Arising out of two transactions in
1987 between Lincoln Savings & Loan Association ("Lincoln") and entities
controlled by Mr. Garcia, the Resolution Trust Corporation (the "RTC"), which
ultimately took over Lincoln, asserted that Lincoln improperly accounted for the
transactions and that Mr. Garcia's participation in the transactions facilitated
the improper accounting. Facing severe financial pressures, Mr. Garcia agreed to
plead guilty to one count of bank fraud, but, in light of his cooperation with
authorities both before and after he was charged, was sentenced to only three
years probation (which has expired), was fined $50 (the minimum fine the court
could assess), and, during the period of his probation, which ended in 1996, was
banned from becoming an officer, director or employee of any federally-insured
financial institution or a securities firm without governmental approval.
Because Cygnet is not a federally-insured institution and Mr. Garcia's
probationary period has expired, this ban does not apply to Mr. Garcia's
69
<PAGE> 71
activities on behalf of Cygnet. In separate actions arising out of this matter,
Mr. Garcia agreed not to violate the securities laws, and filed for bankruptcy
both personally and with respect to certain entities he has controlled. The
bankruptcies were discharged by 1993. In certain circumstances, Mr. Garcia could
acquire a controlling interest in the Company. See "-- Risks Relating to the
Rights Offering -- Ownership of Common Stock by Mr. Garcia." As a result of his
position as Chairman of the Board, Chief Executive Officer, and President of
Cygnet and by virtue of his ability to acquire a significant percentage of the
Common Stock after the Rights Offering, Mr. Garcia will have significant
influence over the Company's activities.
From February 1982 to April 1989, Lincoln employed Mr. Fidel, between 1988
and 1989, as its President. Following the takeover of Lincoln by the RTC in
1989, Mr. Fidel and others were charged with fraud (the "Complaint") arising out
of the sale of bonds at Lincoln of its parent company, American Continental
Corporation ("ACC"). With the filing of the Complaint, Mr. Fidel, without
admitting or denying any of the allegations in the Complaint, consented to the
entry of a permanent injunction against further violations of the securities
laws. Mr. Fidel pled guilty in 1991 to two counts of federal securities fraud,
and to six counts in California State court (five relating to fraud and one
relating to the sale of securities without qualification) arising out of this
matter. In light of Mr. Fidel's cooperation with authorities in their
prosecution of executives of ACC, including Charles H. Keating, Jr., and Mr.
Fidel's efforts in stopping bond sales at Lincoln, Mr. Fidel was given three
years of probation, which has expired.
EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual and long-term
compensation for services rendered in all capacities to UDC during the three
fiscal years ended December 31, 1997, of those persons who will be, as of the
Effective Date: (i) the chief executive officer of the Company and (ii) the
three other executive officers of the Company whose compensation from UDC
exceeded $100,000 in the fiscal year ended December 31, 1997 (the "Named
Executive Officers"). The following information is provided in accordance with
SEC rules and regulations and is not necessarily indicative of the compensation
structure that will exist at the Company following the Split-up, although the
Company does not anticipate that such compensation structure will materially
differ from the information below.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) AWARDS(#)(1) ($)(2)
--------------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ernest C. Garcia, II................ 1997 $131,677 -- -- $ 3,935(3)
Chairman of the Board, Chief 1996 121,538 -- -- 3,873(3)
Executive Officer, and President 1995 100,000 -- -- 3,151(3)
Donald L. Addink.................... 1997 139,671 $10,000 -- 950
Senior Vice President -- Senior 1996 122,142 10,000 42,000 485
Analyst 1995 71,026 10,000 58,000 984
Steven P. Johnson................... 1997 131,677 -- 20,000 820
Senior Vice President and General 1996 121,538 -- 25,000 566
Counsel 1995 100,000 -- -- 177
Raymond C. Fidel.................... 1997 132,692 -- 75,000 11,000(4)
President -- Cygnet Dealer
Finance, 1996 -- -- -- --
Inc. 1995 -- -- -- --
</TABLE>
- ---------------
(1) The amounts shown in this column represent stock options granted pursuant to
UDC's Long-Term Incentive Plan. Generally, options are subject to vesting
over a five-year period, with 20.0% of the options becoming exercisable on
each successive anniversary of the date of grant.
(2) The amounts shown in this column include the dollar value of 401(k) plan
contributions made by UDC for the benefit of the Named Executive Officers.
(3) This amount includes a $2,985 car allowance during 1997, and a $2,950 car
allowance during both 1996 and 1995, respectively, for Mr. Garcia.
(4) This amount represents a car allowance for Mr. Fidel during 1997.
70
<PAGE> 72
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth information with respect to UDC options granted
during the fiscal year ended December 31, 1997 to the Named Executive Officers.
As set forth in the Capitalization Agreement between UDC and the Company,
generally, on the Effective Date, each stock option for UDC Common Stock held by
a Cygnet employee will be surrendered and, in exchange therefor, a new option
will be granted under the Cygnet Financial Corporation 1998 Stock Incentive Plan
(the "1998 Plan") for a number of shares of Cygnet Common Stock, and at an
exercise price, intended to preserve for such Cygnet employee the economic value
of the shares subject to the UDC option, including the spread between the
exercise price and the fair market value of the shares subject to the UDC
option. See "-- Cygnet Financial Corporation 1998 Stock Incentive Plan."
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENT
NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/ ASSUMED ANNUAL RATE OF
UNDERLYING SARS STOCK APPRECIATION FOR
OPTIONS/ GRANTED TO EXERCISE OPTION TERM
SARS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR (PER SHARE) DATE 5% 10%
---- ---------- ------------ ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia, II........ -- -- -- -- -- --
Donald L. Addink(1)......... -- -- -- -- -- --
Steven P. Johnson(2)........ 20,000 3.4% $15.75 5/27/03 $107,130 $ 243,042
Raymond C. Fidel(3)......... 75,000 12.9% 18.75 2/07/07 893,389 2,250,200
</TABLE>
- ---------------
(1) During January 1998, Mr. Addink was granted options to purchase 25,000
shares of UDC Common Stock under the UDC 1998 Executive Incentive Plan (the
"UDC Executive Plan") at an exercise price of $8.25 per share. Such options
will be converted, on the Effective Date, to options to purchase 25,000
shares of Common Stock under the 1998 Plan at an exercise price of $7.00 per
share.
(2) During January 1998, Mr. Johnson was granted options to purchase 25,000
shares of UDC Common Stock under the UDC Executive Plan at an exercise price
of $8.25 per share. Such options will be converted, on the Effective Date,
to options to purchase 25,000 shares of Common Stock under the 1998 Plan at
an exercise price of $7.00 per share. In addition, Mr. Johnson's remaining
options to purchase UDC Common Stock will be cancelled as of the Effective
Date, and in consideration Mr. Johnson will be granted, on the Effective
Date, 15,000 shares of restricted Common Stock vesting over a specified
period of time from the Effective Date. See "-- Contracts with Directors and
Executive Officers."
(3) On the Effective Date, Mr. Fidel's options listed above will be converted to
options to purchase 84,000 shares of Common Stock under the 1998 Plan at an
exercise price of $7.00 per share. In addition, during January 1998 these
UDC Long Term-Incentive Plan options were repriced at an exercise price of
$9.75 per share.
71
<PAGE> 73
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND OPTION VALUES AS OF DECEMBER
31, 1997 OF NAMED EXECUTIVE OFFICERS
The table below sets forth information with respect to UDC Common Stock
options exercised during fiscal year 1997 and held as of December 31, 1997 by
the Named Executive Officers. UDC has never issued any other forms of stock
based awards to its Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR END(#)(1) FISCAL YEAR END($)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ernest C. Garcia, II... -- -- -- -- -- --
Donald L. Addink....... 63,000 $622,490(3) 17,000 20,000 -- $35,000
Steven P. Johnson(4)... -- -- 5,000 40,000 $3,500 $14,000
Raymond C. Fidel....... -- -- -- -- -- --
</TABLE>
- ---------------
(1) Generally, UDC options are subject to vesting over a five-year period, with
20.0% of the options becoming exercisable on each successive anniversary of
the date of grant under UDC's Long-Term Incentive Plan.
(2) In-the-money UDC options are options for which the option exercise price
(the fair market value on the date of grant) was lower than the market price
of UDC's Common Stock on December 31, 1997, which market price of $8.50 per
share was based on the closing price of UDC's Common Stock on that date as
reported by Nasdaq. The values in the last two columns have not been, and
may never be, received by the Named Executive Officers. Actual gains, if
any, on option exercises will depend on the value of UDC's Common Stock as
applicable on the exercise dates. Accordingly, there can be no assurance
that the values shown in the last two columns will be realized. The closing
price of UDC's Common Stock on July 28, 1998 was $7.6875 per share.
(3) The value realized represents the value of stock options exercised by Mr.
Addink during the last fiscal year. During this period, he exercised options
to acquire 63,000 shares of UDC's Common Stock. The value realized was
calculated by subtracting the exercise price of Mr. Addink's options from
the fair market value of UDC's Common Stock underlying the options as of the
exercise date. The fair market value of UDC's Common Stock was based on the
closing price of the stock on the date of exercise as reported by Nasdaq.
Pursuant to UDC's Long-Term Incentive Plan documents, the exercise date was
the date Mr. Addink provided notice of his exercise to the Company and
method of payment.
(4) Does not include $105,000 worth of restricted Common Stock at the $7.00
Subscription Price (15,000 shares) to be issued to Mr. Johnson upon the
Effective Date of the Split-up. The restricted stock will vest over a
specified period from the Effective Date. See "-- Contracts with Directors
and Executive Officers."
CYGNET FINANCIAL CORPORATION 1998 STOCK INCENTIVE PLAN
The Compensation Committee of the Company's Board of Directors will
administer the 1998 Plan. Under the 1998 Plan, the Company may grant incentive
stock options, non-qualified stock options, stock appreciation rights,
performance shares, restricted stock, and performance-based awards to employees,
consultants, independent directors, and advisors of the Company. The Company
believes that the 1998 Plan will promote the success and enhance the value of
the Company by linking the personal interests of participants to those of the
Company's stockholders and providing participants with an incentive for
outstanding performance. Upon the Effective Date, the total number of shares of
Common Stock available for awards under the 1998 Plan will be 1,050,000, subject
to a proportionate increase or decrease in the event of a stock split, reverse
stock split, stock dividend, or other adjustment to the Company's total number
of issued and outstanding shares of Common Stock. Except with respect to options
to purchase UDC Common Stock held by Mr. Splaver and another employee, each
option to purchase UDC Common Stock held by each employee of UDC who will become
an employee of the Company will be cancelled as of the Effective Date and new
options to purchase Common Stock will be issued under the 1998 Plan
("Replacement Options").
72
<PAGE> 74
Thus, it is expected that as of the Effective Date, Replacement Options to
purchase approximately 284,000 shares of Common Stock will be outstanding under
the 1998 Plan. For additional information concerning the Replacement Options,
see "-- Aggregated Option Exercises in the Last Fiscal Year and Option Values as
of December 31, 1997 of Named Executive Officers."
The 1998 Plan is administered by the Board of Directors or a committee of
the Board who qualify as non-employee directors and outside directors, which has
the authority to administer the 1998 Plan, including the power to determine
eligibility, the type and number of awards to be granted, and the terms and
conditions of any award granted, including the price and timing of awards,
vesting, and acceleration of such awards (other than performance-based awards).
The 1998 Plan limits the awards that can be granted to a single participant to
no more than 250,000 shares of Common Stock during any single calendar year. The
exercise price of options granted under the 1998 Plan will generally equal the
fair market value of the Common Stock on the date of grant except that the
committee is permitted to grant options at below fair market value. However, the
Replacement Options will be granted with exercise prices designed to approximate
the value of the UDC options previously held by the optionees. The committee
may, with the Board's approval, terminate, amend, or modify the 1998 Plan at any
time but no such termination, amendment, or modification may affect any stock
options, SARs, or restricted stock awards then outstanding under the 1998 Plan
without the participant's consent. Also, any such termination, amendment, or
modification is subject to any stockholder approval required under applicable
law or by any national securities exchange or association on which the Common
Stock is then listed or reported. The committee may amend the term of any award
or option theretofore granted, retroactively or prospectively, but no such
amendment shall adversely affect any such award or option without the holder's
consent.
401(k) PLAN
The Company anticipates that it will adopt a 401(k) plan, under which
eligible employees may direct that a portion of their compensation, up to a
legally established maximum, be withheld by the Company and contributed to their
account. All 401(k) plan contributions will be placed in a trust fund to be
invested by the 401(k) plan's trustee, although the 401(k) plan will permit
participants to direct the investment of their account balances among mutual or
investment funds available under the plan. The 401(k) plan will provide a
matching contribution of 10% of a participant's contributions and discretionary
additional matchings if authorized by the Company.
CHANGE OF CONTROL ARRANGEMENTS
In the event of a "Change of Control" of the Company: (i) all options and
other share-based awards granted under the 1998 Plan will become immediately
exercisable; (ii) any restriction periods and restrictions imposed on restricted
stock granted under the 1998 Plan will lapse; and (iii) the target value
attainable under all performance units and other performance-based awards
granted under the 1998 Plan shall be deemed to have been fully earned, unless,
in each case, the surviving entity agrees to assume the awards in a manner that
substantially preserves the participants' rights and benefits. Under the 1998
Plan, a Change in Control occurs upon any of the following events: (a) any
person (other than a current stockholder or any employee benefit plan) becoming
the beneficial owner of 20% or more of the Company's Common Stock; (b) during
any two-year period, the persons who are on the Company's Board of Directors at
the beginning of such period and any new person elected by two-thirds of such
directors cease to constitute a majority of the persons serving on the Board of
Directors; or (c) the Company's stockholders approve (1) a merger or
consolidation of the Company with another corporation where the Company is not
the surviving entity other than a merger in which the Company's stockholders
before the merger have the same proportionate ownership after the merger, (2) a
plan of complete liquidation or dissolution, or (3) any sale, lease, or other
transfer of 40% or more of the Company's assets, other than pursuant to a
sale-leaseback, structured finance, or other form of financing transaction. See
also additional change of control arrangements at "Management -- Contracts with
Directors and Executive Officers."
73
<PAGE> 75
CONTRACTS WITH DIRECTORS AND EXECUTIVE OFFICERS
On January 1, 1996, UDC entered into a three-year employment agreement with
Mr. Ernest C. Garcia II. The agreement establishes Mr. Garcia's base salary for
1997 at $132,000 per year and provides a minimum 10.0% increase in the base
salary each year throughout the term of the agreement. In addition, the
agreement provides for the continuation of Mr. Garcia's base salary and certain
benefits for a period of one year in the event Mr. Garcia is terminated by UDC
without cause prior to the expiration of that agreement. The agreement also
contains confidentiality and non-compete covenants. On the Effective Date, Mr.
Garcia's employment agreement will be assigned to and assumed by the Company.
On June 1, 1995, UDC entered into a five-year employment agreement with Mr.
Donald L. Addink, which was amended and restated effective August 1, 1997. The
restated agreement establishes Mr. Addink's base salary at $165,000 per year
beginning on or around the effective date of the restated employment agreement,
a $10,000 bonus payment upon execution of the restated employment agreement,
certain benefits, and the continuation of Mr. Addink's base salary and certain
benefits for a period of one year in the event Mr. Addink is terminated by UDC
without cause prior to expiration of the restated employment agreement. The
restated employment agreement also contains confidentiality and non-compete
covenants. On the Effective Date, Mr. Addink's employment agreement will be
assigned to and assumed by the Company.
On May 14, 1998, the Company entered into an employment agreement with Mr.
Gregory R. Ciccolini, the Company's chief information officer. The agreement
establishes Mr. Ciccolini's base salary at $120,000 per year, beginning on or
around the effective date of the agreement and other benefits. The agreement
also provides for a stock option grant of 20,000 shares of Common Stock, and a
grant of 7,143 shares (estimated value of $50,000) of restricted Common Stock,
both effective as of the Effective Date. The option grant and restricted stock
grant were made at the $7.00 Subscription Price. The initial option grant
consisted of a NQSO under the 1998 Plan, with terms and conditions consistent
with the plan's general terms. The restricted stock award consisted of Common
Stock of the Company, which vests on June 1, 2002, provided Mr. Ciccolini is
then employed by the Company. The agreement provides for the continuation of Mr.
Ciccolini's base salary for a six month period in the event Mr. Ciccolini is
terminated by the Company without cause prior to his one year anniversary date
with the Company (i.e., prior to June 1, 1999) ("Severance Benefit"). The
agreement contains a "Change of Control" provision that provides that upon such
an event occurring and either (a) Mr. Ciccolini himself terminates his
employment with the Company within 12 months after the change of control; or (b)
the Company terminates Mr. Ciccolini without cause within 90 days prior to the
change of control or within 12 months after the change of control, then in any
such event, Mr. Ciccolini's initial NQSO award and restricted stock grant under
the agreement will automatically fully vest. If this automatic vesting occurs,
no Severance Benefit shall be due to Mr. Ciccolini. The agreement provides for a
definition of a "Change of Control" substantially similar to the 1998 Plan's
definition, but adds an additional change of control event if Ernest C. Garcia,
II is removed and/or resigns as Chairman of the Board of the Company. See
"Management -- Change of Control Arrangements."
In June 1998, the Company agreed, subject to certain conditions, to grant
Mr. Johnson 15,000 shares (estimated value of $105,000) of restricted Company
Common Stock on or around the Effective Date at the $7.00 Subscription Price.
On June 16, 1998, the Company entered into an employment agreement with Mr.
Eric J. Splaver, the Company's chief financial officer. The agreement
establishes Mr. Splaver's base salary at $120,000 per year, beginning on or
around the Effective Date and other benefits. The agreement also provides for a
stock option grant of 30,000 shares of Common Stock and a grant of 14,286 shares
(estimated value of $100,000) of restricted Common Stock, both effective as of
the Effective Date. The option grant and restricted stock grant were made at the
$7.00 Subscription Price. The initial option grant is made under the 1998 Plan,
with terms and conditions consistent with the plan's general terms. The
restricted stock award consisted of Common Stock of the Company, which vests pro
rata over a four-year period. The agreement provides for the continuation of Mr.
Splaver's base salary and certain benefits for one year in the event Mr. Splaver
is terminated by the Company without cause prior to the third anniversary of the
Effective Date. The agreement contains a "Change of Control" provision that
provides that upon such an event occurring and either
74
<PAGE> 76
(a) Mr. Splaver himself terminates his employment with the Company within 12
months after the change of control; or (b) the Company terminates Mr. Splaver
without cause within 90 days prior to the change of control or within 12 months
after the change of control, then in any such event all stock option and
restricted stock granted under the agreement and thereafter, which are not yet
vested, shall automatically be fully vested. The agreement provides for a
definition of a "Change of Control" substantially similar to the 1998 Plan's
definition, but adds an additional change of control event if Ernest C. Garcia,
II is removed and/or resigns as Chairman of the Board of the Company. See
"Management -- Change of Control Arrangements."
COMMITTEES OF THE BOARD OF DIRECTORS
The Company will establish a Compensation Committee and an Audit Committee.
The Compensation Committee will consist of Messrs. Jennings and Willey, and will
review executive salaries and administer any bonus, incentive compensation, and
stock option plans of the Company, including the 1998 Plan. In addition, the
Compensation Committee will consult with management of the Company regarding
compensation policies and practices of the Company. The Audit Committee will
consist of Messrs. Abrahams and Jennings, and will review the professional
services provided by the Company's independent auditors, the annual financial
statements of the Company, and the Company's system of internal controls.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There will be no compensation committee interlocks and no Company officer
or former officer will be a member of the Company's Compensation Committee.
COMPENSATION OF DIRECTORS
The Company's independent directors will be compensated $1,000 for physical
attendance at meetings of the Board of Directors and at meetings of committees
of the Board of Directors of which they are members, and will be reimbursed for
reasonable travel expenses incurred in connection with attendance at each Board
and committee meeting. Board and committee members will not be compensated for
their telephonic attendance at meetings. If a Board and committee meeting are
held on the same day, a member who attends both meetings will receive combined
total compensation of only $1,000. In addition, pursuant to the 1998 Plan
expected to be adopted by the Company, upon initial appointment or initial
election to the Board of Directors, each independent director of the Company
will receive Company Common Stock valued at $50,000, which will be subject to
vesting in equal annual increments over a three-year period as provided for
under the 1998 Plan. Directors who are also officers of the Company will not be
compensated for their services as directors and will not be entitled to
participate in the directors' portion of the 1998 Plan.
75
<PAGE> 77
PRINCIPAL STOCKHOLDERS
UDC currently owns all of the outstanding shares of the Company's Common
Stock. The following table sets forth the estimated beneficial ownership of the
Company's Common Stock immediately following the Effective Date, based on
beneficial ownership of UDC Common Stock on July 1, 1998 (unless another date is
indicated), by: (1) each director of the Company; (2) the Named Executive
Officers of the Company; (3) all directors and executive officers of the Company
as a group; and (4) each anticipated beneficial owner of more than 5% of the
outstanding Common Stock immediately following the completion of the Rights
Offering. To the knowledge of the Company, each person listed below has sole
voting and investment power with respect to his share of UDC Common Stock,
except (a) to the extent that authority is shared by his spouse under applicable
law, or (b) as otherwise indicated below. The estimated number of shares
beneficially owned and the percentage of ownership each assume the sale of
4,750,000 shares of Common Stock in the Rights Offering, 714,286 shares of
Common Stock to Mr. Garcia pursuant to the Additional Purchase Right, 500,000
additional shares of Common Stock that Mr. Garcia has the right to purchase
pursuant to the exercise of the Standby Warrants, and the issuance of 36,429
restricted shares of Common Stock to certain officers of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
NAME OF BENEFICIAL OWNER(2)(3) BENEFICIALLY OWNED(1) OWNERSHIP(1)
- ------------------------------ --------------------- -------------
<S> <C> <C>
Ernest C. Garcia II(4)(5)................................... 2,386,161 39.6%
Robert J. Abrahams(6)....................................... 7,143 *
Christopher D. Jennings(6).................................. 7,143 *
Gary L. Trujillo(6)......................................... 7,143 *
Frank P. Willey(6).......................................... 7,143 *
Steven P. Johnson........................................... 77,750 1.3%
Donald L. Addink............................................ 24,500 *
Raymond C. Fidel............................................ 2,500 *
Harris Associates L.P.(5)(7)................................ 456,250 9.9%
Wellington Management Company, LLP(5)(8).................... 416,125 9.0%
Merrill Lynch & Co., Inc.(5)(9)............................. 403,750 8.8%
FMR Corp.(5)(10)............................................ 321,000 6.9%
All directors and executive officers as a group (10
persons).................................................. 2,532,833 42.0%
</TABLE>
- ---------------
* Represents less than one percent of the outstanding Common Stock.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days following July 1, 1998 through the exercise of any
option, warrant, or right. Shares of Common Stock subject to options,
warrants, or rights that are currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options, warrants, or rights, but are not deemed outstanding
for computing the percentage of any other person. As described above, the
amounts and percentages are based upon an estimate of 6,029,287 shares of
Common Stock outstanding immediately following the completion of the Rights
Offering, including 500,000 shares of the Company's Common Stock that Mr.
Garcia has the right to purchase pursuant to the Standby Warrants.
(2) Unless otherwise noted, the address of each of the listed stockholders is
2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016.
(3) Excludes 214,286 shares of Common Stock that may be purchased pursuant to
the D&O Purchase Right as described herein. Also excludes certain
restricted Common Stock of the Company held by its officers, which has not
vested and will not vest within 60 days following July 1, 1998.
(4) Includes 714,286 shares of Common Stock that Mr. Garcia has the right to
purchase at the Subscription Price and 500,000 additional shares of Common
Stock that Mr. Garcia has the right to purchase pursuant to the exercise of
the Standby Warrants. Also includes shares of Common Stock held indirectly
by Mr. Garcia through a nonprofit corporation and Verde Investments, Inc.
("Verde"), an
76
<PAGE> 78
affiliate of Mr. Garcia. Mr. Garcia has sole voting and dispositive power
over these shares of Common Stock.
(5) The Company knows of no other person who would beneficially own more than
five percent of the Common Stock as of the Effective Date based upon
beneficial ownership of UDC Common Stock as of July 1, 1998 (unless another
date is indicated).
(6) The total for each independent Board of Director member includes 7,143
shares of Common Stock granted under the Company's 1998 Plan. Shares having
a total value of $50,000 on or about the date of grant (i.e., approximately
7,143 shares of Common Stock) will be granted and issued to each
independent Board member upon his appointment or election to the Board of
Directors as of the Effective Date. Pursuant to the 1998 Plan, these shares
generally vest over a three-year period at an annual rate of 33%, beginning
on the first anniversary date after the date of grant.
(7) Beneficial ownership was estimated based on Schedule 13G filings reporting
beneficial ownership of UDC Common Stock as of December 31, 1997, by Harris
Associates L.P. ("Harris") and an affiliate of Harris, Harris Associates
Investment Trust and related funds ("Harris Trust"), all located at Two
North LaSalle Street, Suite 500, Chicago, Illinois 60602. According to
these Schedule 13Gs, Harris has shared voting and dispositive power over
1,825,000 shares of UDC Common Stock (including 1,750,000 shares
attributable to Harris Trust) and Harris Trust has shared voting and
dispositive power over 1,750,000 shares of UDC Common Stock. The Company
makes no representation as to the accuracy or completeness of the
information provided in this footnote or the above beneficial ownership
table related to the same, which is based solely on the Schedule 13G
filings of Harris and Harris Trust.
(8) Beneficial ownership was estimated based on Schedule 13G filings reporting
beneficial ownership of UDC Common Stock as of December 31, 1997, by
Wellington Management Company, LLP, at 75 State Street, Boston,
Massachusetts 02109. According to the Schedule 13G filings, Wellington
Management Company, LLP has shared voting power over 767,100 shares of UDC
Common Stock and shared dispositive power over 1,664,500 shares of UDC
Common Stock. The Company makes no representation as to the accuracy or
completeness of the information provided in this footnote or the above
beneficial ownership table related to the same, which is based solely on
Wellington Management Company, LLP's Schedule 13G filing.
(9) Beneficial ownership was estimated based on Schedule 13G filings reporting
beneficial ownership of UDC Common Stock as of December 31, 1997, by
Merrill Lynch & Co., Inc. ("Merrill Parent") and four (4) of its
subsidiaries and/or affiliates, including Merrill Lynch Global Allocation
Fund, Inc. ("Merrill Global"). Merrill Parent and one of its
subsidiary/affiliates that is included within this Merrill Schedule 13G
filing are located at 250 Vesey Street, New York, New York 10281. Merrill
Global and the other two (2) subsidiaries/affiliates that are included
within this Merrill Schedule 13G filing are located at 800 Scudders Mill
Rd., Plainsboro, New Jersey 08536. According to the Schedule 13G, Merrill
Global has shared voting and dispositive power over 1,530,000 shares of UDC
Common Stock and Merrill Parent along with each of its other three
subsidiaries and/or affiliates have shared voting and dispositive power
over 1,615,000 shares of UDC Common Stock. The Company makes no
representation as to the accuracy or completeness of the information
provided in this footnote or the above beneficial ownership table related
to the same, which is based solely on Merrill's Schedule 13G filing.
(10) Beneficial ownership was estimated based on Schedule 13G filings reporting
beneficial ownership of UDC Common Stock as of December 31, 1997, by FMR
Corp., along with certain of its affiliates ("FMR"), at 82 Devonshire
Street, Boston, Massachusetts 02019. According to the Schedule 13G, FMR has
no voting power over shares and has sole dispositive power over 1,284,000
shares of UDC Common Stock. The Company makes no representation as to the
accuracy or completeness of the information provided in this footnote or
the above beneficial ownership table related to the same, which is based
solely on FMR's Schedule 13G filing.
77
<PAGE> 79
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company will engage in certain transactions with the affiliated parties
described below. Any future transactions between the Company and its affiliated
entities, executive officers, directors, or significant stockholders will
require the approval of a majority of the independent directors of the Company
and will be on terms no less favorable to the Company than the Company could
obtain from non-affiliated parties.
Ernest C. Garcia, II, the Chairman of the Board, Chief Executive Officer,
and President of Cygnet, will be granted on the Effective Date, in consideration
for the Standby Purchase Obligation, the Standby Warrants, which will entitle
Mr. Garcia to purchase up to 500,000 additional shares of Common Stock at an
exercise price equal to 120% of the Subscription Price, or $8.40 per share. In
addition, on the Effective Date, Mr. Garcia will have the Additional Purchase
Right, which gives him the right, at his election, to purchase up to an
additional 714,286 shares of Common Stock at the Subscription Price. As the
Standby Purchaser, Mr. Garcia may be able to purchase significant amounts of
Common Stock at the Subscription Price to the extent such stock is not purchased
upon exercise of the Rights or pursuant to the Over-Subscription Privilege by
holders of the Rights, which could result in Mr. Garcia's acquiring a
controlling interest in the Company. In addition, the Cash Payment by the
Company to UDC may be used in whole or in part to repay the Verde Note currently
held by a corporation wholly owned by Mr. Garcia.
On the Effective Date, certain directors and officers of the Company
(excluding Mr. Garcia) will be able to exercise the D&O Purchase Right which
will give them the right, at their election, to purchase in the aggregate
214,286 shares of Common Stock at the Subscription Price.
Prior to the Effective Date, the Company and UDC will enter into the
Capitalization Agreement. The Capitalization Agreement sets forth, among other
things, and assuming the satisfaction or waiver of specified contingencies, (i)
the obligation of the Company to issue the Rights, (ii) the obligation of the
Company to issue the Common Stock on the Effective Date upon exercise of the
Rights, the Over-Subscription Privilege, and the Standby Purchase Obligation,
(iii) the obligation of UDC and its subsidiaries to transfer the Transferred
Assets to the Company on the Effective Date, (iv) the obligation of the Company
to issue the Preferred Stock to UDC and to make the Cash Payment, (v) the
obligation of the Company to issue other capital stock and warrants as described
herein, (vi) the operational arrangements and agreements between the Company and
UDC during a transition period, including arrangements for the sharing of
certain assets, leases, licenses, and employees, (vii) agreements between the
Company and UDC relating to employee matters, including the issuance or
adjustment of stock options under employee benefit plans, (viii) tax sharing and
indemnity matters, and (ix) certain agreements between the Company and UDC
relating to the FMAC and Reliance transactions.
The Company currently is a wholly-owned subsidiary of UDC. After the
successful completion of the Rights Offering, UDC will hold $40 million of the
Company's Preferred Stock. In connection with the Split-up, UDC will transfer
substantially all of the rights and liabilities related to the FMAC and Reliance
transactions. However, UDC will remain liable with respect to certain
liabilities related to these transactions. As consideration for retaining these
liabilities, UDC will be entitled to certain rights from the Company. For a
description of the respective rights and liabilities of UDC and the Company as
they relate to the FMAC and Reliance transactions, see "Business -- Bulk
Purchasing and Servicing Operations -- Transactions Regarding First Merchants
Acceptance Corporation" and "-- Transactions Regarding Reliance Acceptance
Group."
78
<PAGE> 80
DESCRIPTION OF CAPITAL STOCK
The Company is a Delaware corporation and its affairs are governed by its
Certificate of Incorporation and Bylaws and the Arizona Revised Statutes. The
following description of the Company's capital stock, which is complete in all
material respects, is qualified in its entirety by reference to the provisions
of the Company's Certificate of Incorporation and Bylaws.
The authorized capital stock of the Company consists of 14,000,000 shares
of Common Stock, par value $.001 per share, and 500,000 shares of Preferred
Stock, par value $.001 per share. At July 29, 1998, one share of Common Stock
(issued to UDC) and no shares of Preferred Stock were issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy." In the event of liquidation,
dissolution, or winding up of the Company, the holders of Common Stock are
entitled to share ratably in any corporate assets remaining after payment of all
debts, subject to any preferential rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
If the Rights Offering is successfully concluded, Cygnet will issue to UDC
40,000 shares of Cumulative Convertible Preferred Stock, Series A, $.001 par
value per share (the "Preferred Stock") with an aggregate liquidation preference
of $40 million. The Preferred Stock, in preference to the Common Stock, will be
entitled to receive cumulative cash dividends, from the Effective Date through
the first anniversary of such date, at the initial annual rate of 7% of the Base
Liquidation Amount (defined below), and escalating 1% per annum on each
anniversary thereafter to a maximum rate of 11% per annum on the aggregate Base
Liquidation Amount, in each case payable quarterly in arrears on the first day
of March, June, September, and December of each year, beginning December 1,
1998, when and as declared by the Board of Directors of Cygnet out of funds
legally available for such payment. The Preferred Stock, in preference to the
Common Stock, will be entitled to receive, in the event of dissolution or
liquidation of Cygnet, $1,000 per share (the "Base Liquidation Amount") plus
accrued and unpaid dividends thereon (the "Liquidation Preference Amount").
The Preferred Stock will be redeemable at Cygnet's option in whole or in
part at a redemption price of $1,000 per share, plus dividends accrued and
unpaid thereon to the redemption date; provided, however, that no such
redemption will be authorized unless, in the judgment of the Company and UDC,
the proceeds of such redemption will be treated for federal income tax purposes
as proceeds from a sale of such stock and not as dividends paid with respect to
such stock. As a consequence, redemptions of the Preferred Stock may be limited
and may be confined to a single redemption of all outstanding Preferred Stock.
The Company will be authorized to redeem shares of Common Stock held by holders
of Preferred Stock to the extent necessary to assure that the proceeds from a
redemption of Preferred Stock will receive favorable income tax treatment.
The Preferred Stock will be convertible in whole or in part at any time
after the third anniversary following issuance at the option of UDC into that
number of shares of Common Stock determined by dividing the Liquidation
Preference Amount of the shares of Preferred Stock to be converted by the lower
of (a) the Subscription Price or (b) 80% of the average Market Price (defined
below) for the 10 consecutive trading days ending two business days prior to the
date notice of conversion is given, subject to adjustment upon
79
<PAGE> 81
certain extraordinary events. In addition, the Preferred Stock will be
convertible during any period following the date that an amount equal to six
quarterly dividend payments on the Preferred Stock has accrued and is unpaid,
until the payment in full of all accrued dividends. For purposes of the
conversion of the Preferred Stock, "Market Price" means (i) if the Common Stock
is quoted on the Nasdaq National Market or the Nasdaq SmallCap Market or on a
national securities exchange, the daily per share closing price of the Common
Stock as quoted on the Nasdaq National Market or the Nasdaq SmallCap Market or
on the principal stock exchange on which it is listed on the trading day in
question, as the case may be, whichever is the higher, or (ii) if the Common
Stock is traded in the over-the-counter market and not quoted on the Nasdaq
National Market or the Nasdaq SmallCap Market or on any national securities
exchange, the closing bid price of the Common Stock on the trading day in
question, as reported by Nasdaq or an equivalent generally accepted reporting
service. The Preferred Stock will not have any pre-emptive or other subscription
rights.
Except as described below, holders of the Preferred Stock will not be
entitled to vote for the election of directors or for other matters on which
holders of the Common Stock are entitled to vote. In the event that an amount
equal to two quarterly dividend payments on the Preferred Stock shall have
accrued and be unpaid, the holders of the Preferred Stock will have the right,
voting separately as a class, to elect two members to the Board of Directors of
Cygnet (in addition to the then authorized number of directors) at the next
meeting of stockholders of Cygnet and thereafter until all accrued dividends on
the Preferred Stock have been paid in full. The Preferred Stock shall also have
voting rights on certain extraordinary matters including: (i) the authorization,
creation, or issuance, or the increase in the authorized or issued amount, of
any class or series of stock senior to the Preferred Stock as to the payment of
dividends and distribution of assets upon dissolution, liquidation, or winding
up of the Company; or (ii) the amendment, alteration, or repeal of the
Certificate of Incorporation or the certificate of designation through which the
Preferred Stock will be issued, that would materially and adversely change the
voting powers, rights or preferences of the Preferred Stock. In such case, each
share of Preferred Stock shall have one vote per Base Liquidation Amount.
If the Preferred Stock were converted to Common Stock at the Subscription
Price of $7.00 per share, UDC would obtain 5,714,286 shares, or approximately
61.6% of the then outstanding shares of the Company, assuming the sale by the
Company pursuant to the Rights Offering of 3,562,500 shares of Common Stock (the
Required Purchase Amount) and that no additional shares of Common Stock are
issued either on the Effective Date of the Split-up or thereafter. If the
Preferred Stock were converted to Common Stock at the Subscription Price of
$7.00 per share, and assuming the sale by the Company of 4,750,000 shares of
Common Stock pursuant to the Rights Offering and the sale of 714,286 additional
shares to Ernest C. Garcia, II and 214,286 additional shares available for
purchase by officers and directors of Cygnet (other than Mr. Garcia) and that no
additional shares of Common Stock are then outstanding, UDC would obtain
approximately 50.2% of the then outstanding shares of the Company.
The Preferred Stock and the Common Stock into which it is convertible are
not registered under the Securities Act and may not be sold by UDC unless such
securities are registered or unless an exemption from registration is available.
The Company has agreed to register the resale of the Common Stock issued upon
conversion of the Preferred Stock under the Securities Act, at its expense upon
request of UDC.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of such director's fiduciary duty, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases; and (iv) for any
transaction from which the director derives an improper benefit. The effect of
the provision of the Company's Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders (through stockholders' derivative
suits on behalf of the Company) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior), except in the
situations described in
80
<PAGE> 82
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek nonmonetary relief such as an
injunction or recision in the event of a breach of a director's duty of care. In
addition, the Company's Certificate of Incorporation provides that the Company
shall indemnify any person who is or was a director or officer of the Company,
or who is or was serving at the request of the Company as a director, officer,
employee, or agent of another corporation or entity, against expenses,
liabilities, and losses incurred by any such person by reason of the fact that
such person is or was acting in such capacity. The Company will obtain insurance
on behalf of its directors and officers for any liability arising out of such
person's actions in such capacity.
The Company will enter into agreements to indemnify its directors and
officers. These agreements, among other things, will indemnify the Company's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines, and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company, or any other company or enterprise to which such
person provides services at the request of the Company. To the extent that the
Board of Directors or the stockholders of the Company may in the future wish to
limit or repeal the ability of the Company to provide indemnification as set
forth in the Company's Certificate of Incorporation, such repeal or limitation
may not be effective as to directors or officers who are parties to the
indemnification agreements because their rights to full protection would be
contractually assured by such agreements. It is anticipated that similar
contracts may be entered into, from time to time, with future directors of the
Company. The Company believes that the indemnification provisions in its
Certificate of Incorporation and in the indemnification agreements are necessary
to attract and retain qualified persons as directors and officers.
CERTAIN BYLAW PROVISIONS
The Company's Bylaws, as amended, contain several provisions that regulate
the nomination of directors and the submission of proposals in connection with
stockholder meetings. The Company's Bylaws require that, subject to certain
exceptions, any stockholder desiring to propose business or nominate a person to
the Board of Directors at a stockholders meeting must give notice of any
proposals not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting of stockholders. Such notice is
required to contain certain information as set forth in the Bylaws. No business
matter shall be transacted nor shall any person be eligible for election as a
director of the Company unless proposed or nominated, as the case may be, in
strict accordance with this procedure set forth in the Company's Bylaws.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove of stockholder nominations for the election of directors or of any
other business desired by stockholders to be conducted at an annual or any other
meeting, the Bylaws may have the effect of precluding a nomination for the
election of directors or the conduct of business at a particular annual meeting
if the proper procedures are not followed or may discourage or deter a third
party from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company, even if the
conduct of such solicitation or such attempt might be beneficial to the Company
and its stockholders. The Company's procedures with respect to all stockholder
proposals and the nomination of directors will be conducted in accordance with
Section 14 of the Exchange Act and the rules promulgated thereunder.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
Norwest Bank Minnesota, National Association.
SHARES ELIGIBLE FOR FUTURE SALE
Assuming the maximum potential issuance of shares of Common Stock pursuant
to the Rights Offering (and no purchase of shares pursuant to the Standby
Purchase Obligation), the Additional Purchase Right, and the D&O Purchase Right,
the Company will have 5,678,573 shares of Common Stock outstanding as of the
Effective Date. Of these shares, 1,863,025 will be freely tradeable without
restriction or further registration under the Act and 3,815,547 shares of Common
Stock (the "Control Shares") will be subject to certain restrictions as on
resale under Rule 144 as described below. Certain restrictions apply to any
shares of
81
<PAGE> 83
Common Stock purchased pursuant to the Rights Offering by affiliates of the
Company, which may generally only be sold in compliance with the limitations of
Rule 144, except for the holding period requirements thereunder.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the date of acquisition of restricted securities from the Company
or any affiliate and the acquiror or subsequent holder is not deemed to have
been an affiliate of the Company for at least 90 days prior to a proposed
transaction, such person would be entitled to sell such shares under Rule 144(k)
without regard to the limitations described below. If one year has elapsed since
the date of acquisition of restricted securities from the Company or any
affiliate, the acquiror or subsequent holder thereof (including persons who may
be deemed affiliates of the Company) is entitled to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then-
outstanding shares of Common Stock or the average weekly trading volume in the
Common Stock an exchange during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain provisions regarding the manner
of sale, notice requirements and the availability of current public information
about the Company. Approximately 3,815,547 Control Shares will be eligible for
future sale subject to the holding period and other conditions imposed by Rule
144. In addition, as of the Effective Date, up to 969,000 additional shares of
Common Stock will be issued pursuant to restricted stock grants or will be
subject to issuance upon the exercise of certain options and warrants.
Substantially all of the shares of Common Stock to be issued pursuant to the
restricted stock grants, options and warrants are subject to certain
registration rights agreements that will enable the holders thereof to resell
the shares without restriction or will be covered by a registration statement on
Form S-8 enabling resale without restriction.
Rule 144A under the Act provides a nonexclusive safe harbor exemption from
the registration requirements of the Act of specified resales of restricted
securities to certain institutional investors. In general, Rule 144A allows
unregistered resales of restricted securities to a "qualified institutional
buyer," which generally includes an entity, acting for its own account or for
the account of other qualified institutional buyers, that in the aggregate owns
or invests on a discretionary basis at least $100 million in securities of
issuers that are not affiliated with the entity, as long as these securities
when issued were not of the same class as securities listed on a national
securities exchange or quoted on the Nasdaq National Market or Nasdaq SmallCap
Market. The shares of Common Stock outstanding as of the date of this Prospectus
would be eligible for resale under Rule 144A because such shares, when issued,
were not of the same class as any listed or quoted securities.
LEGAL MATTERS
The validity of the securities offered hereby is being passed upon for the
Company by Snell & Wilmer L.L.P., Phoenix, Arizona.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the Rights and shares of
Common Stock offered hereby. This Prospectus constitutes a part of the
Registration Statement and does not contain all of the information set forth
therein and in the exhibits thereto, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Rights and shares of Common
Stock offered hereby, reference is hereby made to such Registration Statement
and exhibits. Statements contained in this Prospectus as to the contents of any
document are not necessarily complete and in each instance are qualified in
their entirety by reference to the copy of the appropriate document filed with
the Commission. The Registration Statement, including the exhibits thereto, may
be examined without charge at the Commission's public reference facility at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, copies of all or any part of the Registration Statement, including
such exhibits thereto, may be obtained from the Commission at its principal
office in Washington, D.C., upon payment of the fees prescribed by the
Commission.
82
<PAGE> 84
EXPERTS
The combined financial statements of the Company as of December 31, 1997
and for the year then ended, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Prospectus
Summary -- The Rights Offering," "The Rights Offering -- Opinion of Appraiser,"
and "Federal Income Tax Consequences," insofar as they relate to the Appraisal,
have been reviewed and approved by Willamette Management Associates, as experts
in such matters, and are included herein in reliance on such review and
approval.
83
<PAGE> 85
CYGNET FINANCIAL CORPORATION
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Combined Financial Statements:
Combined Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997.................................. F-3
Combined Statements of Operations for the six months ended
June 30, 1998 (unaudited) and 1997 (unaudited) and the
year ended December 31, 1997........................... F-4
Combined Statements of Stockholder's Equity for the year
ended December 31, 1997, and the six months ended June
30, 1998 (unaudited)................................... F-5
Combined Statements of Cash Flows for the six months ended
June 30, 1998 (unaudited) and 1997 (unaudited) and the
year ended December 31, 1997........................... F-6
Notes to Combined Financial Statements.................... F-7
</TABLE>
F-1
<PAGE> 86
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Cygnet Financial Corporation:
We have audited the accompanying combined balance sheet of Cygnet Financial
Corporation as of December 31, 1997, and the related combined statements of
operations, stockholder's equity, and cash flows for the year ended December 31,
1997. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Cygnet Financial
Corporation as of December 31, 1997, and the results of their operations and
their cash flows for the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
June 5, 1998
F-2
<PAGE> 87
CYGNET FINANCIAL CORPORATION
COMBINED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and Cash Equivalents................................. $ 232 $ 1,225
Finance Receivables, Net.................................. 26,333 19,274
Notes Receivable, Net..................................... 23,027 21,861
Property and Equipment, Net............................... 2,335 646
Goodwill, Net............................................. 1,138 1,178
Other Assets.............................................. 5,515 5,850
------- -------
$58,580 $50,034
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accrued Expenses and Other Liabilities................. $ 2,464 $ 548
Advances from Affiliate................................ 15,818 9,106
Note Payable........................................... 298 380
------- -------
Total Liabilities................................. 18,580 10,034
------- -------
Stockholder's Equity:
Preferred Stock; $.001 par value, 500,000 shares
authorized, none issued and outstanding............... -- --
Common Stock; $.001 par value, 14,000,000 shares
authorized, one share issued and outstanding.......... -- --
Additional Paid-in Capital............................. 40,000 40,000
Retained Earnings...................................... -- --
------- -------
Total Stockholder's Equity........................ 40,000 40,000
------- -------
Commitments and Contingencies............................. -- --
------- -------
$58,580 $50,034
======= =======
</TABLE>
See accompanying notes to Combined Financial Statements.
F-3
<PAGE> 88
CYGNET FINANCIAL CORPORATION
COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR
JUNE 30, ENDED
---------------- DECEMBER 31,
1998 1997 1997
------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Interest Income........................................... $6,382 $ 137 $ 7,472
Servicing Fees............................................ 4,937 -- --
Net Gain on Sale of Repossessed Collateral................ 1,108 -- --
Gain on Sale of Notes Receivable.......................... -- -- 8,132
Other Income.............................................. 123 -- 355
------ ------ -------
12,550 137 15,959
------ ------ -------
Operating Expenses:
Provision for Credit Losses............................... 965 -- 691
Selling and Marketing..................................... 36 9 18
General and Administrative................................ 9,001 1,008 3,766
Depreciation and Amortization............................. 230 62 153
------ ------ -------
10,232 1,079 4,628
------ ------ -------
Earnings (Loss) before Interest Expense..................... 2,318 (942) 11,331
Interest Expense............................................ 1,714 37 2,067
------ ------ -------
Earnings (Loss) before Income Taxes......................... 604 (979) 9,264
Income Taxes (Benefit)...................................... 244 (394) 3,728
------ ------ -------
Net Earnings (Loss)......................................... $ 360 $ (585) $ 5,536
====== ====== =======
Basic/Diluted Earnings per share............................ $ 360 $ (585) $ 5,536
====== ====== =======
Shares used in computation.................................. 1 1 1
====== ====== =======
Pro Forma Basic Earnings per Share (unaudited).............. $(0.18) $(0.35) $0.48
====== ====== =======
Pro Forma Diluted Earnings per Share (unaudited)............ $(0.18) $(0.35) $0.48
====== ====== =======
Pro Forma Shares used in computation - basic (unaudited).... 5,679 5,679 5,679
===== ===== =====
Pro Forma Shares used in computation - diluted
(unaudited)............................................... 5,679 5,679 5,683
===== ===== =====
</TABLE>
See accompanying notes to Combined Financial Statements.
F-4
<PAGE> 89
CYGNET FINANCIAL CORPORATION
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996............ -- $-- $ -- $ -- $ --
Issuance of Common Stock................. 1 -- -- -- --
Contributed Capital...................... -- -- 40,000 -- 40,000
Distributions to Ugly Duckling
Corporation............................ -- -- -- (5,536) (5,536)
Net Earnings for the Year................ -- -- -- 5,536 5,536
-- -- ------- ------ -------
Balances at December 31, 1997............ 1 -- 40,000 -- 40,000
Six Months Ended June 30, 1998
(unaudited)
Distributions to Ugly Duckling
Corporation (unaudited)................ -- -- -- (360) (360)
Net Earnings for the Period
(unaudited)............................ -- -- -- 360 360
-- -- ------- ------ -------
Balances at June 30, 1998 (unaudited).... 1 $-- $40,000 $ -- $40,000
== == ======= ====== =======
</TABLE>
See accompanying notes to Combined Financial Statements.
F-5
<PAGE> 90
CYGNET FINANCIAL CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------- DECEMBER 31,
1998 1997 1997
-------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Earnings (Loss)..................................... $ 360 $ (585) $ 5,536
Adjustments to Reconcile Net Earnings (Loss) to Net
Cash Provided by Operating Activities:
Provision for Credit Losses.......................... 965 -- 691
Depreciation and Amortization........................ 230 62 153
Increase in Other Assets............................. (1,116) (7) (87)
Increase in Accrued Expenses and Other Liabilities... 1,916 129 396
-------- ------- --------
Net Cash Provided by (Used In) Operating
Activities.................................... 2,355 (401) 6,689
-------- ------- --------
Cash Flows from Investing Activities:
Increase in Finance Receivables......................... (17,213) -- (20,941)
Collections of Finance Receivables...................... 9,219 -- 9,330
Increase in Notes Receivable............................ (16,937) (8,829) (12,700)
Collections of Notes Receivable......................... 15,741 504 6,900
Purchase of Property and Equipment...................... (428) -- (146)
Payment for Acquisition of Assets....................... -- -- (9,098)
-------- ------- --------
Net Cash Used in Investing Activities........... (9,618) (8,325) (26,655)
-------- ------- --------
Cash Flows from Financing Activities:
Payment of note payable................................. (82) (120) (120)
Advances from Affiliate................................. 6,352 8,900 9,106
Contribution of Additional Paid-in Capital.............. -- -- 12,205
-------- ------- --------
Net Cash Provided by Financing Activities....... 6,270 8,780 21,191
-------- ------- --------
Net Increase (Decrease) in Cash and Cash Equivalents...... (993) 54 1,225
Cash and Cash Equivalents at Beginning of Period.......... 1,225 -- --
-------- ------- --------
Cash and Cash Equivalents at End of Period................ $ 232 $ 54 $ 1,225
======== ======= ========
Supplemental Statement of Cash Flows Information:
Contribution of certain assets to the Company........... $ -- $ 601 $ 27,795
======== ======= ========
Assumption of note payable.............................. $ -- $ 500 $ 500
======== ======= ========
</TABLE>
See accompanying notes to Combined Financial Statements.
F-6
<PAGE> 91
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1998 AND DECEMBER 31, 1997
(1) ORGANIZATION, PURPOSE, BASIS OF PRESENTATION AND ACQUISITION
Cygnet Financial Corporation (the Company), a wholly-owned subsidiary of
Ugly Duckling Corporation (Ugly Duckling), was formed on June 1, 1998 for the
purpose of consummating a transaction whereby Ugly Duckling would split-up its
operations into two publicly-held companies (the split-up). The Company will
purchase from Ugly Duckling, substantially all of Ugly Duckling's non-dealership
operations including, the bulk purchasing and certain servicing operations
(excluding the branch office network), it's third party dealer financing
operations, and substantially all other non-dealership assets and contract
rights including those acquired in the First Merchants Acceptance Corporation
Transaction and assume the liabilities related thereto (collectively referred to
as the acquired assets). In exchange for the acquired assets, the Company will
issue $40.0 million of its cumulative, convertible preferred stock and a cash
payment equivalent to the greater of the appraised value or the book value of
the acquired assets, which the Company does not expect to materially differ.
These combined financial statements reflect the results of operations, financial
position, changes in stockholder's equity and cash flows of the Company, as if
the Company were a separate entity operating the acquired assets for all periods
presented. The combined financial statements have been prepared using the
historical basis in the assets and liabilities and historical results of
operations of the Company. In connection with the split-up, the Company intends,
through a rights offering to Ugly Duckling stockholders, to issue up to 5.6
million shares of common stock at an offering price of $7.00 per share.
The accompanying unaudited combined financial statements of the Company as
of June 30, 1998 and for the six month periods ended June 30, 1998 and 1997,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for a complete financial statement presentation. In the opinion of management,
such unaudited interim information reflects all adjustments, consisting only of
normal recurring adjustments, necessary to present the Company's financial
position and results of operations for the periods presented. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for a full fiscal year.
General corporate overhead related to the Company's corporate headquarters
and common support functions has been allocated to the Company, to the extent
such amounts are applicable to the Company. However, the costs of these services
charged to the Company are not necessarily indicative of the costs that would
have been incurred if the Company had performed these functions as a stand-alone
entity. As a result of the split-up, the Company will be required to perform
these functions using its own resources or purchased services and will be
responsible for the costs and expenses associated with the management of a
public corporation. The financial information included herein may not
necessarily reflect the combined results of operations, financial position,
changes in stockholder's equity and cash flows of the Company in the future or
amounts that would have been reported had it been a separate, stand-alone entity
during the periods presented.
The Company operates various business segments. The Company operates it's
Cygnet Dealer Program, whereby the Company provides independent used car dealers
(Third Party Dealers) with warehouse purchase facilities and operating credit
lines primarily secured by the dealers' retail installment contract portfolio.
In addition, the Company operates a bulk purchasing business segment in which
the Company acquires via bulk purchase large portfolios of retail installment
contract loan portfolios. Further, in conjunction with acquisition of the
contributed assets, the Company received certain rights to service the finance
receivable portfolios of various parties. The Third Party Dealers' retail
installment contract portfolios are substantially comprised of loans to persons
who have limited credit histories, low incomes, or past credit problems.
In August 1997, the Company acquired substantially all of the assets of
American National Acceptance Corporation (ANAC) in exchange for approximately
$9.1 million in cash. The acquisition was recorded in accordance with the
"purchase method" of accounting, and, accordingly, the purchase price has been
F-7
<PAGE> 92
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
allocated to the assets purchased and the liabilities assumed based upon the
estimated fair values at the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired was approximately $1.2
million and has been recorded as goodwill, which is being amortized over a
period of 15 years. The results of operations of ANAC have been included in the
accompanying statement of operations from the acquisition date.
The following summary, prepared on a pro forma basis, combines the results
of operations (unaudited) as if the acquisition had taken place on January 1,
1997. Such pro forma amounts are not necessarily indicative of what the actual
results of operations might have been if the acquisition had been effective on
January 1, 1997, (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Interest Income............................................. $ 10,920
Fee Income.................................................. $ 861
Other Income................................................ $ 8,198
Total Revenues.............................................. $ 19,979
Net Earnings................................................ $ 4,210
Basic/Diluted Earnings Per Share............................ $ 4,210
Proforma Basic Earnings Per Share........................... $ 0.25
Proforma Diluted Earnings Per Share......................... $ 0.25
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
As of December 31, 1997, the Company had warehouse purchase facilities and
revolving lines of credit with a total of 42 Third Party Dealers. The finance
receivables balance of loans the Company had purchased from one third party
dealer totaled $7,756,000, representing approximately 28.1% of the Company's
total finance receivables portfolio as of December 31, 1997. There were no other
Third Party Dealer's loans which exceeded 10% of the Company's total finance
receivables portfolio as of December 31, 1997.
Periodically during the year, the Company maintains cash in financial
institutions in excess of the amounts insured by the federal government.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents. Cash equivalents
generally consist of interest bearing money market accounts.
Revenue Recognition
Interest income is recognized using the interest method. Direct loan
origination costs are deferred and charged against finance income over the life
of the related installment sales contract as an adjustment of yield
F-8
<PAGE> 93
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
using the interest method. The accrual of interest is suspended if collection
becomes doubtful, generally 90 days past due, and is resumed when the loan
becomes current.
Fee income generally represents revenues from services such as periodic
audits of borrowers, collateral monitoring and maintenance fees and is
recognized when the services have been performed.
Servicing income is recognized when earned. Servicing costs are charged to
expense as incurred. In the event delinquencies and/or losses on the respective
serviced portfolios exceed specified levels, the Company may be required to
transfer the servicing of the portfolio to another servicer.
Net gain on sale of repossessed collateral is recognized using the cost
recovery method.
Finance Receivables and Allowance for Credit Losses
The largest portion of the Company's business is with Third Party Dealers
who participate in the "Dealer Collection Program." Under this program, the
Company purchases retail installment sales contracts from Third Party Dealers on
a full recourse basis. The dealer retains servicing rights and collects the
contract on behalf of the Company. The purchase price of the contracts is
generally 65% to 75% of the principal balance of the respective contracts. The
difference between the par value of the purchased contracts and the amount paid
by the Company is nonrefundable acquisition discount (the "acquired allowance").
The acquired allowance is allocated between acquired allowance available for
credit losses and acquired allowance available for accretion to interest income.
The portion of acquired allowance allocated to the allowance for credit losses
is based upon historical performance and write-offs of contracts acquired from
Third Party Dealers, as well as the general credit worthiness of the borrowers
and the wholesale value of the vehicle. The remaining acquired allowance, if
any, is deferred and accreted to income using the interest method.
Finance receivables consist of contractually scheduled payments from the
installment sales contracts net of unearned finance charges, accrued interest
receivable, direct loan origination costs, and an allowance for credit losses,
including acquired allowances.
Notes Receivable
Notes receivable are recorded at cost, less related allowance for impaired
notes receivable. Management, considering information and events regarding the
borrowers ability to repay their obligations, including an evaluation of the
estimated value of the related collateral, considers a note to be impaired when
it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the note agreement. When a loan is
considered to be impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the note's effective
interest rate. Impairment losses are included in the allowance for credit losses
through a charge to provision for credit losses. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such notes until the
principal has been received and are recognized as interest income, thereafter.
The Company follows the provisions of Statement of Financial Accounting
Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases". Accordingly,
direct loan origination costs are offset against loan origination fees with the
difference capitalized and amortized to finance income using a method.
Property and Equipment
Property and Equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets which range from three to ten years for equipment. Leasehold improvements
are amortized using straight-line and accelerated methods over the shorter of
the lease term or the estimated useful lives of the related improvements.
F-9
<PAGE> 94
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally fifteen years.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company has recognized income taxes pursuant to a Tax Sharing Agreement
between the Company and its parent. Under the terms of the agreement, the
Company is obligated to pay to its parent, amounts approximating the federal and
state income taxes incurred by the parent as a result of the Company's actual
contribution to the consolidated income taxes of its parent.
Stock Option Plan
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and pro
forma earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
The Company uses one of the most widely used option pricing models, the
Black-Scholes model (the Model), for purposes of valuing its stock option
grants. The Model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In
addition, it requires the input of highly subjective assumptions, including the
expected stock price volatility, expected dividend yields, the risk free
interest rate, and the expected life. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the value determined by the Model is
not necessarily indicative of the ultimate value of the granted options.
Earnings Per Share
Basic earnings per share is computed by dividing income available to the
common stockholder by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. For purposes of computing the pro
forma earnings per share for the periods presented, the Company has assumed the
maximum potential issuance of shares of common stock pursuant to its planned
rights offering, and the payment of dividends at a rate of 7.0% per annum as if
preferred stock totaling $40.0 million was outstanding for the periods
presented.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable.
F-10
<PAGE> 95
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(3) FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
A summary of finance receivables as of June 30, 1998 and December 31, 1997
follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Installment Sales Contract Principal Balances....... $38,010 $27,481
Add: Accrued Interest Receivable.................... 209 147
------- -------
Principal Balances, Net............................. 38,219 27,628
Allowance for Credit Losses:
Finance Receivables............................... (1,202) (485)
Acquired Allowance................................ (10,394) (7,706)
Refundable Security Deposits...................... (290) (163)
------- -------
Finance Receivables, Net............................ $26,333 $19,274
======= =======
</TABLE>
A summary of allowance for credit losses on finance receivables for the
periods ended June 30, 1998 and December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Balance, Beginning of Period......................... $ 8,191 $ --
Provision for Credit Losses........................ 935 491
Acquired Allowance................................. 3,410 7,706
Net Charge Offs.................................... (940) (6)
------- ------
Balance, End of Period............................... $11,596 $8,191
======= ======
</TABLE>
(4) NOTES RECEIVABLE
In July 1997, First Merchants Acceptance Corporation (FMAC) filed for
bankruptcy. Immediately subsequent to the bankruptcy filing, the Company
executed a loan agreement with FMAC to provide FMAC with up to $10.0 million in
debtor in possession (the DIP facility) financing. The DIP facility accrues
interest at 12.0%, was initially scheduled to mature on February 28, 1998, and
is secured by substantially all of FMAC's assets. The Company and FMAC
subsequently amended the DIP facility to increase the maximum commitment to
$21.5 million, decrease the interest rate to 10.0% per annum, and extend the
maturity date indefinitely. In connection with the amendment, FMAC pledged the
first $10.0 million of income tax refunds receivable, which FMAC anticipates
collecting in 1998, to the Company. The maximum commitment under the DIP
facility had been reduced to $12.4 million (unaudited) at June 30, 1998. Once
the proceeds from the income tax refunds are remitted to the Company, such
amounts permanently reduce the maximum commitment under the DIP facility.
Thereafter, the Company anticipates collecting the balance of the DIP facility
from distributions to FMAC from FMAC's residual interests in certain
securitization transactions. The outstanding balance on the DIP facility totaled
$10,312,000 (unaudited) and $10,868,000 at June 30, 1998 and December 31, 1997,
respectively.
F-11
<PAGE> 96
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During the third and fourth fiscal quarters of 1997, the Company acquired
the senior bank debt of FMAC from the bank group members holding such debt. In
December 1997, a credit bid for the outstanding balance of the senior bank debt
plus certain fees and expenses (the "credit bid purchase price") was entered and
approved in the bankruptcy court resulting in the transfer of the senior bank
debt for the loan portfolio which secured the senior bank debt (the "owned
loans"). Simultaneous with the transfer to the Company, General Electric Capital
Corporation purchased the owned loans for 86% of the principal balance of the
loan portfolio, and the Company retained a 14% participation in the loan
portfolio (See note 7). FMAC has guaranteed that the Company will receive an
11.0% return on the credit bid purchase price from the cash flows generated by
the owned loans, and further collateralized by FMAC's residual interests in
certain securitization transactions. The balance of the participation totaled
$6,155,000 (unaudited) and $5,399,000 at June 30, 1998 and December 31, 1997,
respectively.
Various revolving notes receivable from used car dealers with a total
commitment of $11,700,000 (unaudited) and $8,750,000 at June 30, 1998 and
December 31, 1997, respectively, expiring through September 1999 with interest
rates ranging from prime plus 5.50% to prime plus 9.75% per annum (14% to 18.25%
at December 31, 1997), interest payable monthly. The respective revolving notes
subject the borrower to borrowing base requirements with advances on eligible
collateral (retail installment contracts) of sixty-five percent of the par value
of the underlying collateral. The balance outstanding on these revolving notes
receivable totaled $6,560,000 (unaudited), net of allowance for credit losses of
$230,000 (unaudited), at June 30, 1998 and $5,594,000, net of an allowance for
credit losses of $200,000, at December 31, 1997.
A summary of the allowance for credit losses for notes receivable for the
periods ended June 30, 1998 and December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Balance, Beginning of Period...... $200 $ --
Provision for Credit Losses....... 30 200
Net Charge Offs................... -- --
---- ----
Balance, End of Period............ $230 $200
==== ====
</TABLE>
(5) PROPERTY AND EQUIPMENT
A summary of Property and Equipment as of June 30, 1998 and December 31,
1997 follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Furniture and Equipment (note
7).............................. $2,545 $ 666
Leasehold Improvements............ 44 44
Vehicles.......................... 63 63
------ ------
2,652 773
Less Accumulated Depreciation and
Amortization.................... (317) (127)
------ ------
Property and Equipment, Net....... $2,335 $ 646
====== ======
</TABLE>
Depreciation expense relating to property and equipment totaled $190,000
(unaudited) and $127,000 for the periods ended June 30, 1998 and December 31,
1997, respectively.
F-12
<PAGE> 97
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) GOODWILL
A summary of goodwill as of June 30, 1998 and December 31, 1997 follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Goodwill.......................... $1,204 $1,204
Accumulated Amortization.......... (66) (26)
------ ------
Goodwill, Net..................... $1,138 $1,178
====== ======
</TABLE>
Amortization expense relating to goodwill totaled $40,000 (unaudited) and
$26,000 for the periods ended June 30, 1998 and December 31 1997, respectively.
(7) OTHER ASSETS
A summary of Other Assets as of June 30, 1998 and December 31, 1997 follows
(in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
Servicing Fees Receivable...... $2,983 $ --
Due from GE Capital
Corporation.................. 700 3,000
Offering Costs................. 601 --
Investment in Marketable
Securities (note 5).......... -- 1,451
Due from First Merchants
Acceptance Corp.............. -- 971
Other Assets................... 1,231 428
------ ------
$5,515 $5,850
====== ======
</TABLE>
In connection with the GE Capital Corporation purchase of the owned loans,
a sum of $3,000,000 was held in escrow pending completion of certain conditions
precedent. Such conditions were substantially satisfied subsequent to December
31, 1997 and $2.3 million of the funds were remitted to the Company. The Company
expects to begin collecting the remaining balance in December 1998.
During March 1998, the Bankruptcy Court handling the bankruptcy of FMAC
(note 4) approved the exchange of the $1,451,000 investment in common stock of
FMAC held by the Company for the property and equipment that constitute FMAC's
loan servicing platform.
(8) ADVANCES FROM AFFILIATE
Advances from Affiliate represent balances due to Ugly Duckling to fund the
Company's bulk purchase, servicing and third party dealer financing operations.
The balance will be paid in full at such time that the Company consummates the
split-up. The Advances to Affiliate balance outstanding to Ugly Duckling totaled
$15,818,000 (unaudited) and $9,106,000 at June 30, 1998 and December 31, 1997,
respectively.
The Company recorded interest expense totaling $1,696,000 (unaudited)
during the six month period ended June 30, 1998 and $2,017,000 during the year
ended December 31, 1997 related to this advance.
(9) NOTE PAYABLE
The Company has executed a note payable with an unrelated party which calls
for annual payments of $120,000. Interest has been imputed at 10%. The note
which matures in May 2000 is secured by certain
F-13
<PAGE> 98
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
furniture and equipment. The balance related to this note payable totaled
$298,000 (unaudited) and $380,000 at June 30, 1998 and at December 31, 1997,
respectively.
(10) INCOME TAXES
Income taxes amounted to $3,728,000, for the year ended December 31, 1997
(an effective corporate income tax rate of 40.2%). A reconciliation between
taxes computed at the federal statutory rate of 34% in 1997 (the "Expected"
income taxes) and the Company's effective taxes follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Computed "Expected" Income Taxes.................... $3,150
State Income Taxes, Net of Federal Effect........... 585
Other, Net.......................................... (7)
------
$3,728
======
</TABLE>
Components of income taxes (benefit) for the year ended December 31, 1997
follows (in thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal.................................................. $2,841 $ -- $2,841
State.................................................... 887 -- 887
------ ----- ------
$3,728 $ -- $3,728
====== ===== ======
</TABLE>
(11) LEASE COMMITMENTS
The Company leases certain office space and equipment from unrelated
entities under various operating leases which expire through August 2001. The
leases require monthly rental payments aggregating approximately $30,000 and
contain various renewal options from one to ten years. The Company is also
responsible for occupancy and maintenance costs, including real estate taxes,
insurance, and utility costs. Rent expense totaled $315,000 (unaudited) for the
six months ended June 30, 1998 and $270,000 for the year ended December 31,
1997.
A summary of future minimum lease payments required under noncancelable
operating leases with remaining lease terms in excess of one year as of December
31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
- ------------ ------
<S> <C>
1998................................................ $ 293
1999................................................ 302
2000................................................ 320
2001................................................ 213
------
Total..................................... $1,128
======
</TABLE>
(12) STOCKHOLDER'S EQUITY
The Company has authorized 14,000,000 shares of $.001 par value common
stock. There was one share issued and outstanding at December 31, 1997. However,
in connection with the proposed split-up, the Company expects to issue up to a
maximum number of shares of common stock totaling approximately 5,679,000 upon
closure of the proposed rights offering. The accompanying proforma earnings per
share
F-14
<PAGE> 99
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amounts included in these combined financial statements have been presented to
reflect the expected issuance of these shares.
The Company has authorized 500,000 shares of $.001 par value preferred
stock. There were no shares issued and outstanding at June 30, 1998 or at
December 31, 1997.
(13) STOCK OPTION PLAN
Concurrent with the split-up of Ugly Duckling, the Company will adopt a
long-term incentive plan (stock option plan). The stock option plan will set
aside 1,050,000 shares of common stock to be granted to employees at a price of
not less than fair market value of the stock at the date of grant. Options are
to vest over a period to be determined by the Board of Directors upon grant and
will generally expire ten years after the date of grant. The options generally
vest over a period of five years.
Concurrent with the establishment of the plan, the Company's Board of
Directors intend to approve the grant of certain options to employees of the
Company who had formerly received stock option grants under the Ugly Duckling
long-term incentive plan. These employees forfeited their Ugly Duckling stock
options in exchange for the grants they received under this plan. In the opinion
of management, the value of these grants approximates the value of the options
forfeited by the respective employees.
The Company applies APB Opinion 25 in accounting for its Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the combined financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS No.
123, the Company's net earnings and earnings per share for the year ended
December 31, 1997, as if the options granted by Ugly Duckling had been granted
by the Company, would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C> <C>
Net Earnings As reported.......................... $5,536,000
Pro forma............................ $5,397,000
Basic/Diluted Earnings As reported.......................... $5,536,000
per share Pro forma............................ $5,397,000
Proforma Basic Earnings As reported.......................... $ 0.48
per Share Pro forma as adjusted................ $ 0.46
Proforma Diluted Earnings As reported.......................... $ 0.48
per Share Pro forma as adjusted................ $ 0.46
</TABLE>
F-15
<PAGE> 100
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(14) EARNINGS (LOSS) PER SHARE
A reconciliation from basic earnings per share to diluted earnings per
share for the periods ended June 30, 1998, June 30 1997 and December 31, 1997
follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Net Earnings........................ $ 360,000 $ (585,000) $5,536,000
=========== =========== ==========
Income available to Common
Stockholders...................... $ 360,000 $ (585,000) $5,536,000
=========== =========== ==========
Basic EPS -- Weighted Average Shares
Outstanding....................... 1 1 1
=========== =========== ==========
Basic EPS -- Proforma Weighted
Average Shares Outstanding........ 5,679,000 5,679,000 5,679,000
=========== =========== ==========
Basic/Diluted EPS -- Weighted
Average Shares Outstanding........ 5,679,000 5,679,000 5,679,000
Effect of Dilutive Securities:
Stock Options..................... -- -- 4,000
----------- ----------- ----------
Diluted EPS -- Proforma Weighted
Average Shares Outstanding........ 5,679,000 5,679,000 5,683,000
=========== =========== ==========
Basic/Diluted Earnings Per Share.... $ 360,000 $ (580,000) $5,536,000
=========== =========== ==========
Net Earnings........................ $ 360,000 $ (580,000) $5,536,000
Proforma Dividends on Preferred
Stock............................. (1,400,000) (1,400,000) (2,800,000)
----------- ----------- ----------
Proforma Net Earnings Available to
Common Stockholders............... $(1,040,000) $(1,980,000) $2,736,000
=========== =========== ==========
Proforma Basic Earnings Per Share... $(0.18) $(0.35) $0.48
====== ====== =====
Proforma Diluted Earnings Per
Share............................. $(0.18) $(0.35) $0.48
====== ====== =====
</TABLE>
(15) COMMITMENTS AND CONTINGENCIES
The Company has commenced a study of its computer systems in order to
assess its exposure to year 2000 issues. The Company expects to make the
necessary modifications or changes to its computer information systems to enable
proper processing of transactions relating to the year 2000 and beyond. The
Company will evaluate appropriate courses of action, including replacement of
certain systems whose associated costs would be recorded as assets and
subsequently amortized, or modification of its existing systems which costs
would be expensed as incurred.
The Company is involved in various claims and actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company. No provision has been made in the
accompanying combined financial statements for losses, if any, that might result
from the ultimate disposition of these matters.
During 1997, the Company acquired certain notes receivable collateralized
by a loan portfolio. Thereafter, the Company exchanged the notes receivable for
the underlying collateral (the acquired collateral) and received a guarantee
from the borrower of an 11.0% return on the acquired collateral. General
Electric Capital
F-16
<PAGE> 101
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Corporation purchased the acquired collateral, and Ugly Duckling guaranteed to
General Electric Capital Corporation a return of 10.35%, not to exceed
$10,000,000. The Company has agreed to indemnify Ugly Duckling related to this
guarantee.
During 1997, the Company acquired approximately 2.5% of the outstanding
common stock of FMAC with a cost of approximately $1,450,000. In connection with
FMAC's proposed plan of reorganization, and subject to bankruptcy court
approval, the Company and FMAC have agreed to exchange the Company's common
stock in FMAC for the property and equipment that constitute FMAC's servicing
platform. The Company received bankruptcy court approval for the plan of
reorganization during the first fiscal quarter of 1998 and exchanged the common
stock in FMAC for the servicing platform immediately thereafter.
The Company has executed agreements with FMAC and other interested parties
whereby the Company has agreed to replace FMAC as servicer on loan portfolios
which totaled approximately $525 million at December 31, 1997. The agreements
were approved by the bankruptcy court and the Company began servicing the loan
portfolios on April 1, 1998.
(16) RETIREMENT PLAN
During 1995, Ugly Duckling established a qualified 401(k) retirement plan
(defined contribution plan) which became effective on October 1, 1995. Under the
terms of the plan, employees of the Company are eligible to participate in the
plan subject to the eligibility criteria of the plan. The plan, as amended,
covers substantially all employees having no less than three months of service,
have attained the age of 21, and work at least 1,000 hours per year.
Participants may voluntarily contribute to the plan up to the maximum limits
established by Internal Revenue Service regulations. The Company will match 10%
of the participants' contributions. Participants are immediately vested in the
amount of their direct contributions and vest over a five-year period, as
defined by the plan, with respect to the Company's contribution. Pension expense
for the six months ended June 30, 1998 and year ended December 31, 1997 was
immaterial. Concurrent with the completion of the planned split-up of Ugly
Duckling, the Company expects to adopt a separate plan which will be similar in
all material respects to the plan described herein.
(17) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The following summary
presents a description of the methodologies and assumptions used to determine
such amounts.
Limitations
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties, matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.
Since the fair value is estimated as of December 31, 1997, the amounts that
will actually be realized or paid in settlement of the instruments could be
significantly different.
Cash and Cash Equivalents
The carrying amount is estimated to be the fair value because of the
liquidity of these instruments.
F-17
<PAGE> 102
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Finance Receivables and Notes Receivable
The carrying amount is estimated to be the fair value because of the
relative short maturity and repayment terms of the portfolio as compared to
similar instruments.
Accrued Expenses and Other Liabilities and Note Payable
The carrying amount approximates fair value because of the short maturity
of these instruments. The terms of the Company's note payable approximate the
terms in the market place at which it could be replaced. Therefore, the fair
market value approximates the carrying value of these financial instruments.
(18) BUSINESS SEGMENTS
Operating results and other financial data are presented for the principal
business segments of the Company for the year ended December 31, 1997. The
Company has three distinct business segments. These consist of finance income
generated from third party finance receivables, bulk purchasing operations, and
corporate and other operations.
In computing operating profit by business segment, the following items were
considered in the Corporate and Other category: portions of administrative
expenses, interest expense and other items not considered direct operating
expenses. Identifiable assets by business segment are those assets used in each
segment of Company operations.
<TABLE>
<CAPTION>
CYGNET BULK CORPORATE
PROGRAM PURCHASING AND OTHER TOTAL
------- ---------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income................................... $ 3,654 $ 3,818 $ -- $ 7,472
Gain on Sale of Loans............................. -- 8,132 -- 8,132
Other Income...................................... 355 -- -- 355
------- ------- --------- -------
4,009 11,950 -- 15,959
------- ------- --------- -------
Operating Expenses:
Provision for Credit Losses..................... 691 -- -- 691
Selling and Marketing........................... 18 -- -- 18
General and Administrative...................... 2,194 437 1,135 3,766
Depreciation and Amortization................... 28 -- 125 153
------- ------- --------- -------
2,931 437 1,260 4,628
------- ------- --------- -------
Earnings (Loss) before Interest Expense........... $ 1,078 $11,513 $ (1,260) $11,331
======= ======= ========= =======
Capital Expenditures.............................. $ 17 $ -- $ 129 $ 146
======= ======= ========= =======
Identifiable Assets............................... $27,539 $21,525 $ 970 $50,034
======= ======= ========= =======
</TABLE>
F-18
<PAGE> 103
CYGNET FINANCIAL CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(19) QUARTERLY FINANCIAL DATA -- UNAUDITED
A summary of the quarterly data for the year ended December 31, 1997
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total Revenue............................... $ 5 $ 132 $3,337 $12,485 $15,959
====== ====== ====== ======= =======
Operating Expenses.......................... 509 570 1,332 2,217 4,628
====== ====== ====== ======= =======
Earnings (Loss) before Interest Expense..... (504) (438) 2,005 10,268 11,331
====== ====== ====== ======= =======
Net Earnings (Loss)......................... $ (306) $ (279) $ 757 $ 5,364 $ 5,536
====== ====== ====== ======= =======
Basic/Diluted Earnings (Loss) Per Share..... $ (306) $ (279) $ 757 $ 5,364 $ 5,536
====== ====== ====== ======= =======
Proforma Basic Earnings (Loss) Per Share.... $(0.18) $(0.17) $0.01 $0.82 $0.48
====== ====== ====== ======= =======
Proforma Diluted Earnings (Loss) Per
Share..................................... $(0.18) $(0.17) $0.01 $0.82 $0.48
====== ====== ====== ======= =======
</TABLE>
A summary of the quarterly data for the six months ended June 30, 1998
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total Revenue............................... $3,382 $9,168 $ -- $ -- $12,550
====== ====== ====== ======= =======
Operating Expenses.......................... 2,526 7,706 -- -- 10,232
====== ====== ====== ======= =======
Earnings (Loss) before Interest Expense..... 856 1,462 -- -- 2,318
====== ====== ====== ======= =======
Net Earnings (Loss)......................... $ 2 $ 358 $ -- $ -- $ 360
====== ====== ====== ======= =======
Basic/Diluted Earnings (Loss) Per Share..... $ 2 $ 358 $ -- $ -- $ 360
====== ====== ====== ======= =======
Proforma Basic Earnings (Loss) Per Share.... $(0.12) $(0.06) $ -- $ -- $ (0.18)
====== ====== ====== ======= =======
Proforma Diluted Earnings (Loss) Per
Share..................................... $(0.12) $(0.06) $ -- $ -- $ (0.18)
====== ====== ====== ======= =======
</TABLE>
F-19
<PAGE> 104
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSONS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF
ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN
OFFER OR SOLICITATION WOULD BE UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 13
The Rights Offering................... 26
Federal Income Tax Consequences....... 39
Use of Proceeds....................... 41
Dividend Policy....................... 41
Capitalization........................ 42
Selected Combined Financial Data...... 43
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 45
Business.............................. 54
Management............................ 68
Principal Stockholders................ 76
Certain Relationships and Related
Transactions........................ 78
Description of Capital Stock.......... 79
Shares Eligible for Future Sale....... 81
Legal Matters......................... 82
Available Information................. 82
Experts............................... 83
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
5,678,572
SHARES OF COMMON STOCK
AND
4,750,000
RIGHTS TO PURCHASE COMMON STOCK
[CYGNET FINANCIAL CORP. LOGO]
------------------------
PROSPECTUS
------------------------
July , 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 105
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- ----------
<S> <C>
SEC Registration Fee........................................ $ 11,726
*Exchange Filing Fee........................................ 58,725
*Blue Sky Fees and Expenses (including legal fees).......... 10,000
*Accounting Fees and Expenses............................... 75,000
*Legal Fees and Expenses.................................... 250,000
*Printing and Engraving..................................... 200,000
*Registrar and Transfer Agent's Fees........................ 10,000
*Investment Banker and Appraisal Fees....................... 610,000
*Miscellaneous Expenses..................................... 49,549
----------
Total............................................. $1,275,000
==========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by Delaware law, a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of such director's fiduciary duty except (i) for any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law; (iii) for payments of dividends or stock purchases or
redemptions in violation of Section 174 of the Delaware General Corporation Law;
or (iv) for any transaction from which the director derived an improper personal
benefit. In addition, the Company's Certificate of Incorporation provides that
the Company shall to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than such law permitted
the corporation to provide prior to such amendment), indemnify and hold harmless
any person who was or is a party, or is threatened to be made a party to or is
otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative by reason
of the fact that such person is or was a director or officer of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnitee") against expenses, liabilities and losses
(including attorneys' fees, judgments, fines, excise taxes or penalties paid in
connection with the Employee Retirement Income Security Act of 1974, as amended,
and amounts paid in settlement) reasonably incurred or suffered by such
Indemnitee in connection therewith; provided, however, that except as otherwise
provided with respect to proceedings to enforce rights to indemnification, the
Company shall indemnify any such Indemnitee in connection with a proceeding (or
part thereof) initiated by such Indemnitee only if such proceeding or part
thereof was authorized by the board of directors of the Company.
The right to indemnification set forth above includes the right to be paid
by the Company the expenses (including attorneys' fees) incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an Indemnitee in his capacity as a director or officer (and
not in any other capacity in which
II-1
<PAGE> 106
service was or is rendered by such Indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
Company of an undertaking, by or on behalf of such Indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is not further right to appeal that such Indemnitee is
not entitled to be indemnified for such expenses under this section or
otherwise. The rights to indemnification and to the advancement of expenses
described above are contract rights and continue as to an Indemnitee who has
ceased to be a director, officer, employee or agent and inure to the benefit of
the Indemnitee's heirs, executors and administrators.
The Delaware General Corporation Law provides that indemnification is
permissible only when the director, officer, employee, or agent acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the conduct was unlawful. The
Delaware General Corporation Law also precludes indemnification in respect of
any claim, issue, or matter as to which an officer, director, employee, or agent
shall have been adjudged to be liable to the Company unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine that, despite such adjudication of liability but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
For information regarding the Company's undertaking to submit to
adjudication the issue of indemnification for violation of the securities laws,
see Item 17 hereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued one share of Common Stock to UDC in consideration for
which UDC will pay $10,000. Exemption from registration for this transaction was
claimed pursuant to Section 4(2) of the Securities Act regarding transactions by
an issuer not involving any public offering. The Company believes that the sale
of the single share of Common Stock to UDC was a transaction not involving a
public offering because UDC was the sole purchaser, purchased the share without
a view to further distribution, and is uniquely positioned to understand the
merits and risks of the business to be conducted by the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant
3.1(b) Certificate of Amendment to the Certificate of Incorporation
of the Registrant
3.2 Bylaws of the Registrant (previously filed)
4.1(a) Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.1(a))
4.1(b) Certificate of Amendment to the Certificate of Incorporation
of the Registrant (filed as Exhibit 3.1(b))
4.2 Form of Certificate representing Common Stock
4.3 Form of Certificate representing Rights and correspondence
regarding same
4.4 Form of Certificate representing Preferred Stock
4.5 Form of Preferred Stock Certificate of Designations
4.6 Form of Warrant Agreement, by and between the Registrant and
Ernest C. Garcia II (previously filed)
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of
the securities being registered (previously filed)
8 Opinion of Snell & Wilmer L.L.P. regarding tax matters
10.1(a) Assignment of Loan and Bank Claim dated as of August 20,
1997 among Ugly Duckling Corporation ("UDC") and certain
banks, as assignors(1)
10.1(b) Security Agreement dated as of August 20, 1997 among UDC, as
obligor, and certain banks(1)
10.1(c) Payment Guaranty dated as of August 20, 1997 of certain
affiliates of UDC, as guarantors(1)
10.2 Cygnet Financial Corporation 1998 Stock Incentive Plan
10.3 Restricted Stock Grant from the Registrant to S. Johnson
</TABLE>
II-2
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.4 Employment Agreement between UDC and Ernest C. Garcia II
(previously filed)
10.5 Amended and Restated Employment Agreement between Duck
Ventures, Inc. and Donald L. Addink (previously filed)
10.6 Employment Agreement between the Registrant and Eric J.
Splaver (previously filed)
10.7 Employment Agreement between the Registrant and Gregory R.
Ciccolini (previously filed)
10.8 Binding Agreement to Propose and Support Modified Plan
Agreement dated as of December 15, 1997 among UDC, FMAC and
the Official Committee of Unsecured Creditors of FMAC(2)
10.9 Purchase Agreement dated as of December 18, 1997 by and
among the Contract Purchaser, UDC and LaSalle National Bank,
as Agent(2)
10.10 Guaranty dated as of December 18, 1997 by UDC in favor of
the Contract Purchaser(2)
10.11 Servicing Agreement dated as of December 18, 1997 between
UDC and the Contract Purchaser(2)
10.12 FMAC Guaranty and Stock Pledge Agreement among FMAC, UDC and
certain banks(3)
10.13 Contribution Agreement between UDC and FMAC(4)
10.14 Building Lease Agreement for property located at the
Principal Executive Offices
10.15 Building Sublease Agreement #1 with Consent to Sublease, for
property located at Principal Executive Offices
10.16 Building Sublease Agreement #2 with Consent to Sublease, for
property located at Principal Executive Offices
10.17 Credit and Security Agreement between UDC and First
Merchants Acceptance Corp. ("FMAC"), dated as of July 17,
1997(5)
10.18(a) First Amendment to Credit and Security Agreement between UDC
and FMAC, dated as of January 21, 1998(5)
10.18(b) Second Amendment to Credit and Security Agreement between
UDC and FMAC, dated as of April 1, 1998(5)
10.19 Loan Agreement by and among the Registrant, Kayne Anderson
Non-Traditional Investments, L.P. ("Kayne Anderson"), and
certain other lenders (the "Lenders"), dated July 20, 1998
10.20 Payment Guaranty by UDC in favor of Kayne Anderson and the
Lenders, dated as of July 20, 1998
10.21 Servicing Agreement by and among Reliance Acceptance
Corporation, UDC, and certain lenders
10.22 Agreement of Understanding by and among Reliance Acceptance
Corporation, UDC and others
10.23 Form of Capitalization Agreement relating to the Split-up,
by and among the Registrant, UDC and certain of their
affiliates
10.24 Form of Escrow Agreement relating to the Rights Offering, by
and between the Registrant and Norwest Bank Minnesota,
National Association, as Escrow Agent
10.25 Form of Rights Exercise and Standby Purchase Agreement, by
and between the Registrant and Ernest C. Garcia II
11 Earnings (Loss) per Share Computation (see Note 14 to Notes
to Consolidated Financial Statements)
21 List of subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
23.3 Consent of Willamette Management Associates
24 Power of Attorney (included in signature pages)
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to UDC's Current Report on Form 8-K, filed
September 5, 1997.
(2) Incorporated by reference to UDC's Current Report on Form 8-K, filed January
2, 1998.
(3) Incorporated by reference to UDC's Annual Report on Form 10-K, filed March
1, 1998.
(4) Incorporated by reference to UDC's Registration Statement on Form S-1
(Registration No. 333-42973) effective February 11, 1998.
(5) Incorporated by reference to UDC's Quarterly Report on Form 10-Q, filed May
15, 1998.
II-3
<PAGE> 108
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by the
underwriters, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of the prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
The undersigned registration hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly
II-4
<PAGE> 109
report that is specifically incorporated by reference in the prospectus to
provide such interim financial information.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Phoenix, State of Arizona, on , 1998.
Cygnet Financial Corporation
By: /s/ ERNEST C. GARCIA, II
------------------------------------
Ernest C. Garcia, II
Chairman of the Board,
Chief Executive Officer, and
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Ernest C. Garcia, II and Steven P. Johnson, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Form
S-1 Registration Statement and to sign any registration statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) of the
Securities Act, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents, and each of them, in full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person hereby ratifying and confirming that all said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<C> <S> <C>
/s/ ERNEST C. GARCIA, II Chairman of the Board, Chief , 1998
- --------------------------------------------------- Executive Officer, and President
Ernest C. Garcia, II (Principal executive officer)
* Director , 1998
- ---------------------------------------------------
Robert J. Abrahams
* Director , 1998
- ---------------------------------------------------
Christopher D. Jennings
* Director , 1998
- ---------------------------------------------------
Gary L. Trujillo
* Director , 1998
- ---------------------------------------------------
Frank P. Willey
* Chief Financial Officer (Principal , 1998
- --------------------------------------------------- financial officer and principal
Eric J. Splaver accounting officer)
By: /s/ ERNEST C. GARCIA, II
---------------------------------------------
*Ernest C. Garcia, II
(Attorney-in-fact)
</TABLE>
II-6
<PAGE> 111
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
3.1(a) Amended and Restated Certificate of Incorporation of the
Registrant
3.1(b) Certificate of Amendment to the Certificate of Incorporation
of the Registrant
3.2 Bylaws of the Registrant (previously filed)
4.1(a) Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 3.1(a))
4.1(b) Certificate of Amendment to the Certificate of Incorporation
of the Registrant (filed as Exhibit 3.1(b))
4.2 Form of Certificate representing Common Stock
4.3 Form of Certificate representing Rights and correspondence
regarding same
4.4 Form of Certificate representing Preferred Stock
4.5 Form of Preferred Stock Certificate of Designations
4.6 Form of Warrant Agreement, by and between the Registrant and
Ernest C. Garcia II (previously filed)
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of
the securities being registered (previously filed)
8 Opinion of Snell & Wilmer L.L.P. regarding tax matters
10.1(a) Assignment of Loan and Bank Claim dated as of August 20,
1997 among Ugly Duckling Corporation ("UDC") and certain
banks, as assignors(1)
10.1(b) Security Agreement dated as of August 20, 1997 among UDC, as
obligor, and certain banks(1)
10.1(c) Payment Guaranty dated as of August 20, 1997 of certain
affiliates of UDC, as guarantors(1)
10.2 Cygnet Financial Corporation 1998 Stock Incentive Plan
10.3 Restricted Stock Grant from the Registrant to S. Johnson
10.4 Employment Agreement between UDC and Ernest C. Garcia II
(previously filed)
10.5 Amended and Restated Employment Agreement between Duck
Ventures, Inc. and Donald L. Addink (previously filed)
10.6 Employment Agreement between the Registrant and Eric J.
Splaver (previously filed)
10.7 Employment Agreement between the Registrant and Gregory R.
Ciccolini (previously filed)
10.8 Binding Agreement to Propose and Support Modified Plan
Agreement dated as of December 15, 1997 among UDC, FMAC and
the Official Committee of Unsecured Creditors of FMAC(2)
10.9 Purchase Agreement dated as of December 18, 1997 by and
among the Contract Purchaser, UDC and LaSalle National Bank,
as Agent(2)
10.10 Guaranty dated as of December 18, 1997 by UDC in favor of
the Contract Purchaser(2)
10.11 Servicing Agreement dated as of December 18, 1997 between
UDC and the Contract Purchaser(2)
10.12 FMAC Guaranty and Stock Pledge Agreement among FMAC, UDC and
certain banks(3)
10.13 Contribution Agreement between UDC and FMAC(4)
10.14 Building Lease Agreement for property located at the
Principal Executive Offices
10.15 Building Sublease Agreement #1 with Consent to Sublease, for
property located at Principal Executive Offices
10.16 Building Sublease Agreement #2 with Consent to Sublease, for
property located at Principal Executive Offices
10.17 Credit and Security Agreement between UDC and First
Merchants Acceptance Corp. ("FMAC"), dated as of July 17,
1997(5)
10.18(a) First Amendment to Credit and Security Agreement between UDC
and FMAC, dated as of January 21, 1998(5)
10.18(b) Second Amendment to Credit and Security Agreement between
UDC and FMAC, dated as of April 1, 1998(5)
10.19 Loan Agreement by and among the Registrant, Kayne Anderson
Non-Traditional Investments, L.P. ("Kayne Anderson"), and
certain other lenders (the "Lenders"), dated July 20, 1998
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.20 Payment Guaranty by UDC in favor of Kayne Anderson and the
Lenders, dated as of July 20, 1998
10.21 Servicing Agreement by and among Reliance Acceptance
Corporation, UDC, and certain lenders
10.22 Agreement of Understanding by and among Reliance Acceptance
Corporation, UDC and others
10.23 Form of Capitalization Agreement relating to the Split-up,
by and among the Registrant, UDC and certain of their
affiliates
10.24 Form of Escrow Agreement relating to the Rights Offering, by
and between the Registrant and Norwest Bank Minnesota,
National Association, as Escrow Agent
10.25 Form of Rights Exercise and Standby Purchase Agreement, by
and between the Registrant and Ernest C. Garcia II
11 Earnings (Loss) per Share Computation (see Note 14 to Notes
to Consolidated Financial Statements)
21 List of subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
23.3 Consent of Willamette Management Associates
24 Power of Attorney (included in signature pages)
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to UDC's Current Report on Form 8-K, filed
September 5, 1997.
(2) Incorporated by reference to UDC's Current Report on Form 8-K, filed January
2, 1998.
(3) Incorporated by reference to UDC's Annual Report on Form 10-K, filed March
1, 1998.
(4) Incorporated by reference to UDC's Registration Statement on Form S-1
(Registration No. 333-42973) effective February 11, 1998.
(5) Incorporated by reference to UDC's Quarterly Report on Form 10-Q, filed May
15, 1998.
<PAGE> 1
EXHIBIT 3.1(a)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CYGNET FINANCIAL CORPORATION
ARTICLE ONE
The name of the corporation is CYGNET FINANCIAL CORPORATION.
ARTICLE TWO
The address of the corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE THREE
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE FOUR
The Corporation shall have perpetual existence.
ARTICLE FIVE
A. The corporation shall be authorized to issue two classes of shares
of stock to be designated, respectively, "Common Stock" and "Preferred Stock";
the total number of shares of Common Stock that the corporation shall have
authority to issue shall be 14,000,000, and each of such shares shall have a par
value of $.001; and the total number of shares of Preferred Stock that the
corporation shall have the authority to issue shall be 500,000, and each of such
shares shall have a par value of $.001.
B. Shares of Preferred Stock may be issued from time to time in one
or more series as may from time to time be determined by the Board of Directors
of the corporation, each of said series to be distinctly designated. The voting
powers, preferences and relative, participating, optional, and other special
rights, and the qualifications, limitations, or restrictions thereof, if any, of
each such series may differ from those of any and all other series of Preferred
Stock at any time outstanding, and the Board of Directors
<PAGE> 2
is hereby expressly granted authority to fix or alter, by resolution or
resolutions, the designation, number, voting powers, preferences, and relative,
participating, optional, and other special rights, and the qualifications,
limitations, and restrictions thereof, of each such series.
ARTICLE SIX
The power to adopt, amend, and repeal any or all of the Bylaws of the
corporation is reserved to the Board of Directors of the corporation.
ARTICLE SEVEN
Election of members to the Board of Directors need not be by written
ballot unless the Bylaws of the corporation shall so provide.
Meetings of the stockholders of the corporation may be held within or
without the State of Delaware, as the Bylaws may provide. The books of the
corporation may be kept (subject to any provision contained in the Delaware
General Corporation Law) outside the State of Delaware at such place or places
as may be designated from time to time by the Board of Directors or in the
Bylaws of the corporation.
ARTICLE EIGHT
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the Delaware General Corporation
Law; or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended. Any repeal or modification of this
provision shall not adversely affect any right or protection of a director of
the corporation existing at the time of such repeal or modification. The
limitation of liability provided herein shall continue after a director has
ceased to occupy such position as to acts or omissions occurring during such
director's term or terms of office.
ARTICLE NINE
A. The corporation shall to the fullest extent authorized by the
Delaware
-2-
<PAGE> 3
General Corporation Law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the corporation to provide broader indemnification rights than such law
permitted the corporation to provide prior to such amendment), indemnify and
hold harmless any person who was or is a party, or is threatened to be made a
party to or is otherwise involved in any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a director or
officer of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including service with
respect to an employee benefit plan (hereinafter an "Indemnitee") against
expenses, liabilities and losses (including attorneys' fees, judgments, fines,
excise taxes or penalties paid in connection with the Employee Retirement Income
Security Act of 1974, as amended, and amounts paid in settlement) reasonably
incurred or suffered by such Indemnitee in connection therewith; provided,
however, that except as provided in this section with respect to proceedings to
enforce rights to indemnification, the corporation shall indemnify any such
Indemnitee in connection with a proceeding (or part thereof) initiated by such
Indemnitee only if such proceeding or part thereof was authorized by the board
of directors of this corporation.
B. The right to indemnification conferred in this section shall
include the right to be paid by the corporation the expenses (including
attorneys' fees) incurred in defending any such proceeding in advance of its
final disposition; provided, however, that, if the Delaware General Corporation
Law requires, an advancement of expenses incurred by an Indemnitee in his
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such Indemnitee, including, without limitation,
service to an employee benefit plan) shall be made only upon delivery to the
corporation of an undertaking, by or on behalf of such Indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is not further right to appeal that such Indemnitee is
not entitled to be indemnified for such expenses under this section or
otherwise. The rights to indemnification and to the advancement of expenses
conferred in this section shall be contract rights and such rights shall
continue as to an Indemnitee who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the Indemnitee's heirs, executors and
administrators.
C. If a claim under the two preceding paragraphs of this section is
not paid in full by the corporation within sixty (60) days after a written claim
has been received by the corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
(20) days, the Indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Indemnitee
shall be
-3-
<PAGE> 4
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the Indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the Indemnitee to enforce a right to an
advancement of expenses) and (ii) in any suit brought by the corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
corporation shall be entitled to recover such expenses upon a final adjudication
that the Indemnitee has not met any applicable standard for indemnification set
forth in the Delaware General Corporation Law. Neither the failure of the
corporation (including its board of directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the Indemnitee is proper in the circumstances
because the Indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
corporation (including its board of directors, independent legal counsel, or its
stockholders) that the Indemnitee has not met such applicable standard of
conduct, shall create a presumption that the Indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or brought by the corporation to recover an advancement of expenses pursuant to
the terms of an undertaking, the burden of proving that the Indemnitee is not
entitled to be indemnified, or to such advancement of expenses under this
section or otherwise shall be on the corporation.
D. The rights to indemnification and advancement of expenses
conferred in this section shall not be exclusive of any other rights which any
person may have or hereafter acquire under any statute, the corporation's
certificate of incorporation, as it may be amended or restated from
time-to-time, any agreement, vote of stockholders or disinterested directors, or
otherwise. No amendment or repeal of this Article Nine shall apply to or have
any effect on any right to indemnification provided hereunder with respect to
any acts or omissions occurring prior to such amendment or repeal.
E. The corporation shall have the power to purchase and maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the corporation or another corporation, partnership, joint venture,
trust or other enterprise (including an employee benefit plan) against any
expense, liability or loss, whether or not the corporation would have the power
to indemnify such person against such expense, liability or loss under the
Delaware General Corporation Law. The corporation may also create a trust fund,
grant a security interest and/or use other means (including, but not limited to
letters of credit, surety bonds and/or similar arrangements), as well as enter
into contracts providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to any or
all of the foregoing, to ensure the payment of such amounts as may become
necessary to effect indemnification as provided therein, or elsewhere.
-4-
<PAGE> 5
F. For purposes of this section, references to the "corporation"
shall include any subsidiary of this corporation from and after the acquisition
thereof by this corporation, so that any person who is a director, officer,
employee or agent of such subsidiary after the acquisition thereof by this
corporation shall stand in the same position under the provisions of this
section as such person would have had such person served in such position for
this corporation.
G. The corporation may, to the extent authorized from time to time by
the board of directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the corporation to the fullest extent of
the provisions of this section with respect to the indemnification and
advancement of expenses of directors and officers of the corporation.
ARTICLE TEN
The name and mailing address of the incorporator is Steven P.
Johnson, 2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016.
ARTICLE ELEVEN
The number of directors constituting the initial Board of Directors
of the corporation is one (1). The size of the Board of Directors may be
increased or decreased in the manner provided in the Bylaws of the corporation.
All corporate powers of the corporation shall be exercised by or under the
direction of the Board of Directors except as otherwise provided herein or by
law. The name and address of the persons who are to serve as directors until the
first annual meeting of stockholders or until their successors are elected and
qualified are:
-5-
<PAGE> 6
Name Address
---- -------
Ernest C. Garcia, II 2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
ARTICLE TWELVE
Subject to any conditions imposed by law, the corporation expressly
denies the application of the Arizona Corporate Takeover Laws, Arizona Revised
Statutes Sections 10-2701 et seq., or any successor thereto.
ARTICLE THIRTEEN
The Corporation hereby elects not to be governed by Section 203
(Business Combinations with Interested Stockholders) of the Delaware General
Corporation Law.
ARTICLE FOURTEEN
The corporation reserves the right to amend, alter, change, or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by the Delaware General Corporation Law.
I, THE UNDERSIGNED, for the purposes of forming a corporation under
the laws of the State of Delaware, do make, file and record this Certificate,
and do certify that the facts herein stated are true.
DATED this 27th day of July, 1998.
/s/ STEVEN P. JOHNSON
-----------------------------------
Steven P. Johnson
Incorporator
-6-
<PAGE> 1
Exhibit 3.1(b)
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF INCORPORATION OF
CYGNET FINANCIAL CORPORATION
Cygnet Financial Corporation, a corporation organized and existing
under the General Corporation Law of Delaware ("Corporation"), DOES HEREBY
CERTIFY pursuant to Section 242 of the General Corporation Law of the State of
Delaware:
FIRST: That the following resolutions were duly adopted by the Board of
Directors on July 27, 1998, in accordance with the Bylaws and the General
Corporation Law of Delaware setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation:
WHEREAS, the Board of Directors believes it is in the best
interests of the Corporation to amend the Certificate of
Incorporation to elect not to be governed by Section 203 of
the Delaware General Corporation Law.
NOW, THEREFORE, BE IT RESOLVED, that the Corporation amend its
Certificate of Incorporation to elect not to be governed by
Section 203 of the Delaware General Corporation Law; and
RESOLVED FURTHER, that Article Thirteen of the Certificate of
Incorporation is hereby renumbered as Article Fourteen; and
RESOLVED FURTHER, that a new Article Thirteen is hereby added
to read as follows:
"The Corporation hereby elects not to be governed by
Section 203 (Business Combinations with Interested
Stockholders) of the Delaware General Corporation
Law."
RESOLVED FURTHER, that the foregoing amendment to the
Certificate of Incorporation be submitted for approval by the
stockholders of the Corporation.
SECOND: The foregoing proposed amendment to the Certificate of
Incorporation was duly adopted in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware and has been duly
approved by the stockholders in accordance with said Section 242.
THIRD: All the other Articles of the Certificate of Incorporation
remain unchanged.
<PAGE> 2
IN WITNESS WHEREOF, Cygnet Financial Corporation has caused this
Certificate of Amendment to the Certificate of Incorporation to be signed by
Ernest C. Garcia II, its Chief Executive Officer/President, and Steven P.
Johnson, its Senior Vice President/Secretary, who declare under penalty of
perjury that the matters set forth in the foregoing Certificate of Amendment are
true and correct to their knowledge, executed at Phoenix, Arizona, as of this
27th day of July 1998.
/s/ Ernest C. Garcia II
-----------------------------
By: Ernest C. Garcia II
Its: Chief Executive Officer/President
Attest:
/s/ Steven P. Johnson
- -------------------------------------
By: Steven P. Johnson
Its: Senior Vice President/Secretary
<PAGE> 1
EXHIBIT 4.2
[Form of Cover]
CERTIFICATE
NO.
FOR ** SHARES
Issued to
SPECIMEN
Dated ________ 1998
FROM WHOM TRANSFERRED
Original Issue
Dated 19
NO. ORIGINAL NO. ORIGINAL NO. OF SHARES
CERTIFICATE SHARES TRANSFERRED
Received CERTIFICATE NO. **
For ** Shares
this ___ day of ____ 1998
NUMBER SHARES
** **
INCORPORATED UNDER THE LAWS OF THE
STATE OF DELAWARE
CYGNET FINANCIAL CORPORATION
Authorized 14,000,000 Common Shares
500,000 Preferred Shares
THIS CERTIFIES THAT SPECIMEN is the owner of __________ Shares of the Capital
Stock of CYGNET FINANCIAL CORPORATION fully paid and nonassessable transferable
only on the books of the Corporation by the holder hereof in person or by
Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ___ day of ____ A.D. 1998
- -------------------------------- ----------------------------------
President Secretary
SHARES $.001 EACH
<PAGE> 2
[Form of Reverse]
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE LAW, AND NO INTEREST
THEREIN MAY BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION AND QUALIFICATION WITHOUT AN OPINION OF LEGAL
COUNSEL FOR THE HOLDER ACCEPTABLE TO LEGAL COUNSEL FOR THE COMPANY THAT SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
[SPECIMEN]
CERTIFICATE
FOR
**
SHARES
of the
Capital Stock
CYGNET FINANCIAL CORPORATION
ISSUED TO
SPECIMEN
DATE
________, 1998
For Value Received, _______ hereby sell, assign and transfer unto
_________________________________________________________________
_______ Shares of the Capital Stock represented by the within Certificate and
do hereby irrevocably constitute and appoint _____________________ Attorney
to transfer the said Stock on the books of the within named Company with full
power of substitution in the premises.
Dated _________________ 19__
In presence of
_______________________________
_____________________________________
<PAGE> 1
Exhibit 4.3
VOID IF NOT RECEIVED BY THE DISTRIBUTION AGENT BEFORE 5:00 P.M., MINNESOTA TIME,
ON __________ ____, 1998, UNLESS EXTENDED.
SUBSCRIPTION CERTIFICATE
RIGHTS TO PURCHASE
____ shares of Common Stock, $.001 par value
of
CYGNET FINANCIAL CORPORATION
CUSIP NO. _____________
Cygnet Financial Corporation, a Delaware corporation (the "Company"), has issued
rights (the "Rights") to purchase an aggregate of ___________ shares (the
"Offered Shares") of its common stock, $.001 par value (the "Common Stock"),
pursuant to the Rights offering (the "Rights Offering") described in the
Company's Prospectus dated _____ ___, 1998 (the "Prospectus"). Holders of Rights
may elect to purchase Common Stock pursuant to exercise of the Rights (the
"Primary Subscriptions") and, if Offered Shares remain available after exercise
of Rights pursuant to the Primary Subscriptions of all holders of Rights, each
holder who has exercised his full Primary Subscription may also elect to
purchase additional Offered Shares, subject to allocation and proration, up to
the total number of shares of Common Stock purchased pursuant to such holder's
Primary Subscription (the "Over-Subscription Election"). The purchase rights
evidenced hereby are contingent on the occurrence of the Split-up, as described
in the Prospectus. If the Split-up does not occur, no Company Common Stock will
be issued pursuant to the Rights evidenced hereby and the subscription price
paid upon exercise of the Rights or any Over-Subscription Election with respect
thereto will be returned to the holder hereof.
PRIMARY SUBSCRIPTION
________________________________________________________________________________
(Name of Registered Owner)
________________________________________________________________________________
(Address of Registered Owner)
the registered owner hereof or assigns (the "Holder"), is entitled to purchase
from the Company, at the purchase price per share of $7.00 (the "Subscription
Price"), the number of shares of Common Stock of the Company set forth above or
any portion thereof pursuant to the Primary Subscription of such Holder.
<PAGE> 2
OVER-SUBSCRIPTION ELECTION
If the Holder hereof has exercised all of the Holder's Primary Subscription, the
Holder is also entitled to purchase from the Company at the Subscription Price
an additional number of Offered Shares, if any, pursuant to the
Over-Subscription Election of such Holder, up to the number of shares purchased
pursuant to such Holder's Primary Subscription, subject to allocation and
proration as described in the Prospectus.
METHOD OF EXERCISE OF RIGHTS
In order to exercise your rights, you must either (i) complete and sign this
subscription certificate on the back and return it together with payment of the
subscription price for the shares, or (ii) present a properly completed Notice
of Guaranteed Delivery, in either case to the Distribution Agent, Norwest Bank
Minnesota, National Association, before 5:00 p.m., Minnesota Time, on
_____________, 1998, unless extended (the "Expiration Date") at one of the
addresses listed below:
<TABLE>
<CAPTION>
By First Class Mail By Express Mail or Overnight Courier By Hand
- ------------------- ------------------------------------ -------
<S> <C> <C>
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Shareowner Services Reorganization Shareowner Services Reorganization Shareowner Services Reorganization
Department Department Department
P.O. Box 64858 161 North Concord Exchange 161 North Concord Exchange
St. Paul, MN 55164-0858 South St. Paul, MN 55075 South St. Paul, MN 55075
</TABLE>
*DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.
FULL PAYMENT OF THE SUBSCRIPTION PRICE PER SHARE FOR ALL SHARES SUBSCRIBED FOR
PURSUANT TO BOTH THE PRIMARY SUBSCRIPTION AND OVER-SUBSCRIPTION ELECTION MUST
ACCOMPANY THIS SUBSCRIPTION CERTIFICATE AND MUST BE MADE PAYABLE IN UNITED
STATES DOLLARS BY MONEY ORDER OR CERTIFIED CHECK TO NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, AS ESCROW AGENT FOR CYGNET FINANCIAL CORPORATION. IF A
NOTICE OF GUARANTEED DELIVERY IS USED, A PROPERLY COMPLETED AND EXECUTED
SUBSCRIPTION CERTIFICATE, AND FULL PAYMENT, AS DESCRIBED IN SUCH NOTICE, MUST BE
RECEIVED BY THE DISTRIBUTION AGENT NO LATER THAN THE CLOSE OF BUSINESS ON THE
THIRD BUSINESS DAY AFTER THE EXPIRATION DATE. SUCH FUNDS WILL BE HELD IN AN
ESCROW ACCOUNT ESTABLISHED WITH THE ESCROW AGENT. NO INTEREST WILL BE EARNED BY
SUBSCRIBERS ON SUCH FUNDS WHILE HELD IN ESCROW. FOR ADDITIONAL INFORMATION, SEE
THE PROSPECTUS.
If the aggregate Subscription Price paid by the Holder is insufficient to
purchase the aggregate number of shares subscribed for, then such Holder will be
deemed to have exercised first, the Primary Subscription and second, the
Over-Subscription Election to the full extent of the payment tendered. If the
aggregate Subscription Price paid by the Holder exceeds the amount necessary to
purchase the number of shares for which the Holder has indicated an intention to
subscribe, then the Holder will be deemed to have exercised first, the Primary
Subscription and second, the Over-Subscription Election to the full extent of
the excess payment tendered.
THESE SUBSCRIPTION RIGHTS ARE TRANSFERABLE AND MAY BE COMBINED
OR DIVIDED (BUT ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE
NUMBER OF RIGHTS) AT THE OFFICE OF THE DISTRIBUTION AGENT.
2
<PAGE> 3
Any questions regarding this Subscription Certificate and the Rights
Offering may be directed to the Information Agent, Corporate Investor
Communications, Inc., toll-free at 1-888-673- 4478.
3
<PAGE> 4
CYGNET FINANCIAL CORPORATION
PURCHASE FORM
PLEASE PRINT ALL INFORMATION CLEARLY AND LEGIBLY. PLEASE FILL IN ALL APPLICABLE
INFORMATION.
Expiration Date: __________ ____, 1998 (unless extended)
SECTION I. TO SUBSCRIBE:
IF YOU WISH TO SUBSCRIBE FOR YOUR FULL ENTITLEMENT:
A. Primary Subscription
x $ 7.00 = $
__________________________ _______________ ________________
(No. of New Shares) (price per share) (Amount Enclosed)
B. I apply for the Over-Subscription Election
(You can only subscribe if you have fully exercised your Primary
Subscription rights. A record holder who holds as nominee for a
beneficial owner may subscribe if the beneficial owner has exercised
such owner's full Primary Subscription rights and a Nominee Holder
Certification in the form accompanying this Subscription Certificate is
completed as to such beneficial owner.)
x $ 7.00 = $
__________________________ _______________ ________________
(No. of New Shares) (price per share) (Amount Enclosed)
IF YOU WISH TO APPLY FOR LESS THAN YOUR FULL ENTITLEMENT:
C. I apply for less than the full entitlement
x $ 7.00 = $
__________________________ _______________ ________________
(No. of New Shares) (price per share) (Amount Enclosed)
I acknowledge that I have received the Prospectus for the Rights
Offering and I hereby irrevocably subscribe for the number of shares indicated
above as a total of A and B or C above, on
4
<PAGE> 5
the terms and conditions specified in the Prospectus relating to the Primary
Subscription and the Over-Subscription Election.
Signature of subscriber(s)______________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Telephone number (including area code) ( )___________________________
________________________________________________________________________________
________________________________________________________________________________
*Signature Guaranteed By:
_______________________________
*If you wish to have your shares and refund check (if any) delivered to
an address other than that listed on this Subscription Certificate, you must
have your signature guaranteed by an eligible guarantor institution (banks,
stock brokers, savings and loan associations, and credit unions) with membership
in an approved signature guarantee medallion program pursuant to SEC Rule
17Ad-15. Please provide the delivery address below and note if it is a permanent
change.
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
SECTION II. TO TRANSFER RIGHTS:
For value received, ______________________ of the Rights represented by this
Subscription Certificate are assigned to:
________________________________________________________________________________
(Print Full Name of Assignee)
________________________________________________________________________________
(Print Full Address of Assignee)
________________________________________________________________________________
(Social Security or Tax ID Number of Assignee)
________________________________________________________________________________
(Signature(s) of Assignor(s))
The signature(s) must correspond with the name(s) as written upon the face of
this Subscription Certificate, in every particular, without alteration.
5
<PAGE> 6
IMPORTANT: For Transfer, a Signature Guarantee must be provided by an eligible
guarantor institution (banks, stock brokers, savings and loan associations, and
credit unions) with membership in an approved signature guarantee medallion
program pursuant to SEC Rule 17Ad-15.
*Signature Guaranteed By:
_______________________________
Proceeds from the sale of rights may be subject to withholding of U.S. Taxes
unless the Seller's Certified U.S. Taxpayer Identification Number (or
certification regarding foreign status) is on file with the Distribution Agent
and the Seller is not otherwise subject to U.S. Backup Withholding.
[ ] Check here if rights are being exercised pursuant to a Notice of
Guaranteed Delivery to the Distribution Agent prior to the date hereof
and complete the following:
Name(s) of Registered Owner(s): ________________________________________________
Window Ticket Number (if any): _________________________________________________
Date of Execution of Notice of
Guaranteed Delivery: ___________________________________________________________
Name of Institution which
Guaranteed Delivery: ___________________________________________________________
6
<PAGE> 7
CYGNET FINANCIAL CORPORATION
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
____________ ___, 1998
To Broker/Dealers:
Cygnet Financial Corporation, a Delaware corporation (the "Company"),
is commencing an offering (the "Offering") to stockholders of record of Ugly
Duckling Corporation, a Delaware corporation ("UDC"), as of the close of
business on August 17, 1998 of rights (the "Rights") to purchase common stock,
$.001 par value (the "Common Stock") of the Company at a subscription price of
$7.00 per share. Each stockholder of record of UDC on August 17, 1998 will
receive one (1) Right for each four (4) shares of UDC common stock, $.001 par
value ("UDC Common Stock"), held. When the number of shares of UDC Common Stock
held by a record holder is not divisible by four, the number of Rights to be
issued to such stockholder will be rounded upward to the nearest whole Right.
You are instructed to allocate the Rights issued to you among the beneficial
owners of UDC Common Stock registered in your name or the name of your nominee
by rounding upward or downward to the nearest whole Right. If additional Rights
are required to effect this allocation, please utilize the enclosed form of
Certification and Request for Additional Rights. Such request must be received
by the Distribution Agent by close of business on , 1998, and may be
sent by facsimile to . The Rights are transferrable and are
exercisable only for a limited period as described below.
The Rights entitle the holder to subscribe for shares of Common Stock
at the rate of one (1) share of Common Stock for each Right held, with an
over-subscription privilege exercisable in certain events. The Rights are more
fully described in the Prospectus.
We are asking you to contact your clients for whom you hold UDC Common
Stock registered in your name (or in the name of your nominee) to obtain
instructions with respect to the Rights. You will be reimbursed for customary
mailing and handling expenses incurred by you in forwarding any of the enclosed
materials to your clients. The Company will not pay any fees or commissions to
any broker or dealer or other person for soliciting exercises of Rights.
Enclosed please find copies of:
1. The Company's Prospectus, dated _________ __, 1998;
2. The Company's letter to beneficial holders;
3. The Company's letter to registered holders;
4. A Notice of Guaranteed Delivery;
5. A Certification and Request for Additional Rights;
and
6. A Beneficial Owner Certification.
Please note that the Offering expires on ________ ___, 1998 (unless
extended by the Company), and that the final date on which Rights may be sold
(unless extended) is ________ ___, 1998.
<PAGE> 8
If you have questions relating to the Offering, or wish to acquire
additional copies of the Prospectus or other materials, please contact the
Company's Information Agent, Corporate Investor Communications, Inc., toll free
at 1-888-673-4478.
Very truly yours,
CYGNET FINANCIAL CORPORATION
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE ANY PERSON AS AN
AGENT OF THE COMPANY OR OF UDC, THE SUBSCRIPTION AGENT OR ANY OTHER PERSON
MAKING OR DEEMED TO BE MAKING OFFERS OF THE SHARES, OR AUTHORIZE YOU OR ANY
OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE
OFFERING, EXCEPT FOR STATEMENTS MADE IN THE PROSPECTUS.
2
<PAGE> 9
NOTICE OF GUARANTEED DELIVERY
FOR SHARES OF COMMON STOCK
OF
CYGNET FINANCIAL CORPORATION
___________________
As set forth in the Prospectus under "The Rights Offering - The Rights Offering
Period," this form or one substantially equivalent hereto, may be used as a
means of effecting the subscription and payment for all shares of Common Stock
(the "Shares") of Cygnet Financial Corporation (the "Company") subscribed for
pursuant to the Primary Subscription and the Over-Subscription Privilege, as
such terms are defined in the Prospectus. This form may be delivered by hand or
sent by facsimile transmission, overnight courier or mail to the Distribution
Agent.
The Distribution Agent Is:
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
<TABLE>
<CAPTION>
By First Class Mail By Express Mail or Overnight Courier By Hand
<S> <C> <C>
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Shareowner Service Reorganization Shareowner Services Reorganization Shareowner Services Reorganization
Department Department Department
P.O. Box 64858 161 North Concord Exchange 161 North Concord Exchange
St. Paul, MN 55164-0858 South St. Paul, MN 55075 South St. Paul, MN 55075
By Facsimile
(612) 450-4163
Confirmed by telephone to:
(612) 552-6995
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY.
The bank, trust company, New York Stock Exchange member firm, or other
financial institution which completes this form must communicate the guarantee
and the number of shares subscribed for (pursuant to both the Primary
Subscription and the Over-Subscription Privilege) to the Distribution Agent and
must deliver this Notice of Guaranteed Delivery to the Distribution Agent prior
to 5:00 p.m., Minnesota time, on the Expiration Date (________ ___, 1998 unless
extended). This Notice of Guaranteed Delivery guarantees delivery to the
Distribution Agent of (i) a properly completed and executed Subscription
Certificate and (ii) delivery of payment in full for all subscribed shares, in
each case by the close of business on the third business day after the
Expiration Date. Failure to so deliver this Notice or to make the delivery
guaranteed herein will result in a forfeiture of the Rights.
GUARANTEE
The undersigned hereby guarantees delivery to the Distribution Agent by
5:00 p.m., Minnesota time, on the third business day after the Expiration Date
of (i) a properly completed and executed Subscription Certificate and (ii)
payment of the full Subscription Price for all shares subscribed for pursuant to
the Primary Subscription and, if applicable, the Over-Subscription Privilege, as
such subscription for shares is indicated herein and in the Subscription
Certificate.
3
<PAGE> 10
Broker Assigned Control # _______
CYGNET FINANCIAL CORPORATION
<TABLE>
<S> <C> <C> <C>
1. Primary Subscription Number of Rights to Number of shares Payment to be made in
be exercised subscribed for pursuant to connection with shares
the Primary Subscription subscribed for pursuant
for which you are to the Primary
guaranteeing delivery of Subscription
Rights and Payment
_______ Rights ________ Shares $________________
2. Over_Subscription Number of shares Payment to be made in
subscribed for pursuant to connection with shares
the Over-Subscription subscribed for pursuant
Privilege for which you are to the Over-Subscription
guaranteeing delivery of Privilege
payment
________ Shares $________________
3. Totals Total Number of Total number of Shares Total Payment
Rights to be requested
Delivered
_______ Rights _______ Shares $_______________
</TABLE>
Method of delivery (circle one)
A. Through The Depository Trust Company ("DTC")
B. Direct to Norwest Bank Minnesota, National Association, as Distribution
Agent. Please reference below the certificate numbers and registered
holders of the Rights to be delivered.
_____________________________
_____________________________
_____________________________
4
<PAGE> 11
PLEASE ASSIGN A UNIQUE CONTROL NUMBER FOR EACH GUARANTEE SUBMITTED. This number
needs to be referenced on any direct delivery of Rights or any delivery through
DTC. In addition, please note that if you are guaranteeing for shares subscribed
for pursuant to the Over-Subscription Privilege and are a DTC participant, you
must also execute and forward to Norwest Bank Minnesota, National Association, a
Nominee Holder Certification Form.
__________________________________________ __________________________________
Name of Firm Authorized Signature
__________________________________________ __________________________________
DTC Participant Number Title
__________________________________________ __________________________________
Address Name (Please type or Print)
__________________________________________ __________________________________
Zip Code Phone Number
__________________________________________ __________________________________
Contact Name Date
__________________________________________
Name of Registered Holder (If Applicable)
5
<PAGE> 12
INSTRUCTIONS FOR COMPLETING THE SUBSCRIPTION CERTIFICATE
CYGNET FINANCIAL CORPORATION
The enclosed Subscription Certificate represents the number of Rights,
as set forth on the Subscription Certificate, held by the registered holder
thereof (the "Holder"). The Holder is entitled to acquire one (1) share of the
Common Stock of Cygnet Financial Corporation (the "Company") for each Right
held.
To subscribe for shares of Common Stock, the Holder must present to
Norwest Bank Minnesota, National Association (the "Distribution Agent"), prior
to 5:00 p.m., Minnesota time, on or prior to the Expiration Date, either:
(1) a properly completed and executed Subscription Certificate and a
money order or certified check drawn on a bank located in the United States of
America and payable to Norwest Bank Minnesota, National Association, as Escrow
Agent for Cygnet Financial Corporation, for an amount equal to the number of
shares subscribed for under the Primary Subscription (and, if such Holder is
electing to exercise an Over-Subscription Election, under the Over-Subscription
Election) multiplied by the Subscription Price; or
(2) a Notice of Guaranteed Delivery guaranteeing delivery of (i) a
properly completed and executed Subscription Certificate and (ii) a money order
or certified check drawn on a bank located in the United States of America and
payable to Norwest Bank Minnesota, National Association, as Escrow Agent for
Cygnet Financial Corporation, for an amount equal to the number of shares
subscribed for under the Primary Subscription (and, if such Holder is electing
to exercise an Over-Subscription Election, under the Over-Subscription Election)
multiplied by the Subscription Price (which certificate and money order or
certified check must then be delivered on or before the third business day after
the Expiration Date).
If the Holder of the Subscription Certificate desires to subscribe for
additional shares pursuant to an Over-Subscription Election, the Subscription
Certificate must be completed to indicate the maximum number of shares for which
such privilege is being exercised and, if the Over-Subscription Election is
being made by a nominee on behalf of a beneficial owner, a Nominee Holder
Certification must also be included.
On a date within seven (7) business days following the Expiration Date
(the "Confirmation Date"), subscribers will be sent notification as to (i) the
number of shares subscribed for under the Primary Subscription and, if
applicable, an Over-Subscription Election, (ii) any reduction of the number of
shares subscribed for pursuant to the Over-Subscription Election due to
allocation and proration, and (iii) any amount of the Subscription Price paid
that is refundable to such subscriber as a result of any such allocation and
proration.
The Subscription Certificate may be transferred, in the same manner and
with the same effect as in the case of a negotiable instrument payable to
specific persons, by duly completing and signing the transfer section of the
Subscription Certificate.
ANY QUESTIONS REGARDING THE SUBSCRIPTION CERTIFICATE AND THE RIGHTS
OFFERING MAY BE DIRECTED TO THE COMPANY'S INFORMATION AGENT, CORPORATE INVESTOR
COMMUNICATIONS, INC., TOLL FREE AT 1-888-673-4478.
6
<PAGE> 13
CYGNET FINANCIAL CORPORATION
NOMINEE HOLDER CERTIFICATION
The undersigned, a bank, broker or other nominee holder of common
stock, $.001 par value ("Common Stock"), of Cygnet Financial Corporation (the
"Company"), hereby certifies to the Company and to Norwest Bank Minnesota,
National Association, as Distribution Agent pursuant to the Rights Offering
described and provided for in the Company's Prospectus dated ___________ ___,
1998 (the "Prospectus"), that (1) the undersigned has exercised, on behalf of
beneficial owners of Common Stock (which may include the undersigned), rights to
subscribe for the number of shares of Common Stock specified below pursuant to
their Rights under the Primary Subscription (as defined in the Prospectus),
listing separately below for each beneficial owner the number of shares
beneficially owned by such beneficial owner, the number of Rights granted to
such beneficial owner, the number of shares subscribed for pursuant to its
Rights under the Primary Subscription and the corresponding amount of shares
subscribed for pursuant to the Over-Subscription Privilege (as defined in the
Prospectus) (without identifying any such beneficial owner) and (2) the Rights
under the Primary Subscription of each beneficial owner exercising the
Over-Subscription Privilege have been exercised in full. The undersigned has
attached additional sheets if more space is required.
RECORD DATE POSITIONS
<TABLE>
<CAPTION>
Number of Shares
Number of Shares Subscribed for
Number of Shares Subscribed for Pursuant to
Beneficially Owned Number of Rights Pursuant to Rights Over-Subscription Privilege
<S> <C>
1.
2.
3.
4.
5.
NON-RECORD DATE POSITIONS
1.
2.
3.
4.
5.
</TABLE>
7
<PAGE> 14
Provide the following information ________________________________
if applicable: Name of Nominee Holder
________________________________
Address
By: ____________________________
Depository Trust Company ("DTC") Name:
Participant Number Title:
Dated: ___________________, 1998
DTC Primary Subscription
Confirmation Number(s)
8
<PAGE> 15
CERTIFICATION AND REQUEST
FOR ADDITIONAL RIGHTS
Pursuant to the rights offering (the "Rights Offering") described in the
Prospectus dated , 1998 (the "Prospectus") of Cygnet Financial
Corporation ("Cygnet"), rights (the "Rights") to purchase common stock, $.001
par value ("Cygnet Common Stock"), of Cygnet are being distributed to holders of
record ("Record Holders") of the common stock, $.001 par value ("UDC Common
Stock"), of Ugly Duckling Corporation ("UDC") as of the close of business on
August 17, 1998 (the "Record Date"). Each Record Holder is entitled to receive
one (1) Right for each four (4) shares of UDC Common Stock held on the Record
Date. If a Record Holder holds a number of shares of UDC Common Stock not
divisible by four, such holder will receive a number of Rights rounded upward to
the nearest whole Right. Record Holders are instructed to allocate the Rights
received by them among any beneficial owners for whom such Record Holders hold
UDC Common Stock by rounding upward or downward to the nearest whole Right.
To: Norwest Bank Minnesota, National Association
The undersigned bank, broker or other nominee Record Holder hereby
certifies as follows:
1. The undersigned is the Record Holder of shares of UDC Common Stock
for beneficial owners allocated as follows (without naming such beneficial
owners);
Beneficial Owner Number of Shares
- ----------------------------------------------------------------------------
A. A
B. B
C. C
D. D
E.
F.
- ----------------------------------------------------------------------------
(attach additional sheets if needed)
3. In order to allocate the Rights among the beneficial owners listed
above, the undersigned requires additional Rights.
4. The undersigned has received a copy of the Prospectus.
5. Each such beneficial owner is a bona fide beneficial owner of UDC Common
Stock; such beneficial ownership is reflected on the undersigned's records and
all shares of UDC Common Stock which, to the undersigned's knowledge, are
beneficially owned by any such beneficial owner through the undersigned have
been aggregated in calculating the foregoing. The undersigned agrees to provide
Cygnet or its designee with such additional information as Cygnet deems
necessary to verify the foregoing, provided that the information requested does
not violate the request of confidentiality of any client.
The latest date for providing this information to Cygnet will be the close
of business on .
Name of Record Holder
By:
---------------------------------
Name:
Title:
Address:
Telephone Number:
Participant Number:
<PAGE> 16
[Use for Beneficial Holders]
CYGNET FINANCIAL CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
Dear Stockholder: _____________ ____, 1998
On behalf of the Board of Directors of Cygnet Financial Corporation
(the "Company"), we are pleased to provide details on the Company's recently
announced Common Stock Rights Offering (the "Offering"). The Offering is being
made to record holders of common stock, $.001 par value ("UDC Common Stock"), of
Ugly Duckling Corporation ("UDC"), the sole stockholder of the Company, as of
August 17, 1998 (the "Record Date"), in connection with a split-up of the
operations of UDC into two publicly-held corporate groups. The new shares are
being offered at $7.00 per share (the "Subscription Price").
Your attention is directed to the following:
- Issuance of Rights: Stockholders of record as of August 17,
1998 (the "Record Date") of UDC will receive one (1)
transferable Right for each four (4) shares of UDC Common
Stock held on the Record Date. The broker or other nominee
holding your shares of UDC Common Stock will allocate rights
to you by rounding upward or downward to the nearest whole
Right.
- Expiration of the Offering: The Expiration Date of the
Offering is 5:00 p.m., Minnesota time, on _________ ___, 1998,
unless extended by the Company. RIGHTS NOT EXERCISED OR SOLD
PRIOR TO THE EXPIRATION DATE WILL EXPIRE AND BECOME WORTHLESS.
- Transferability of Rights: Rights will be admitted for trading
on the Nasdaq National Market, under the symbol "CGNTR," and
may be purchased or sold through normal brokerage channels
through ____________ ____, 1998 (the last business day before
the Expiration Date).
- Primary Subscription: Each Right will entitle the holder to
acquire one (1) share of the Company's Common Stock at the
Subscription Price.
- Over-Subscription Privilege: Holders of Rights who fully
exercise all their Rights are entitled to subscribe at the
Subscription Price for shares that were not otherwise
subscribed for during the Primary Subscription. However, if
such over-subscriptions exceed the number of shares available,
the shares available are subject to allotment, as more fully
described in the Prospectus.
- Payment for Shares: Payment (which will be the Subscription
Price multiplied by the number of shares subscribed for) for
shares purchased under both the Primary and Over-Subscriptions
must be received by the Expiration Date.
The enclosed Prospectus describes the Rights and the procedures to
follow if you choose to exercise or sell your Rights. Please read the Prospectus
and other enclosed materials carefully. The broker or other nominee holding your
shares of UDC Common Stock has received your transferable Rights. You must
contact your broker or such nominee if you wish to participate in the Offering.
Sincerely,
________________________
Any questions regarding the Offering should be directed to (a) your broker or
other nominee or (b) the Company's Information Agent, Corporate Investor
Communications, Inc. toll free at 1-888-673-4478.
9
<PAGE> 17
[Use for Registered Holders]
CYGNET FINANCIAL CORPORATION
2525 EAST CAMELBACK ROAD, SUITE 1150
PHOENIX, ARIZONA 85016
Dear Stockholder: _____________ ____, 1998
On behalf of the Board of Directors of Cygnet Financial Corporation
(the "Company"), we are pleased to provide details on the Company's recently
announced Common Stock Rights Offering (the "Offering"). The Offering is being
made to record holders of common stock, $.001 par value ("UDC Common Stock"), of
Ugly Duckling Corporation ("UDC"), the sole stockholder of the Company, as of
August 17, 1998 (the "Record Date"), in connection with a split-up of the
operations of UDC into two publicly-held corporate groups. The new shares are
being offered at $7.00 per share (the "Subscription Price").
Your attention is directed to the following:
- Issuance of Rights: Stockholders of record as of August 17,
1998 (the Record Date) of UDC will receive one (1)
transferable Right for each four (4) shares of UDC Common
Stock held on the Record Date. ATTENTION NOMINEE HOLDERS --
When the number of shares of UDC Common Stock held by a UDC
stockholder of record is not divisible by four, the number of
Rights to be issued to such stockholder will be rounded upward
to the nearest whole Right. When the number of shares of UDC
Common Stock allocable to a UDC beneficial owner is not
divisible by four, the number of Rights to be allocated to
such stockholder will be rounded upward or downward to the
nearest whole Right. If additional Rights are required to
effect this allocation, please utilize the enclosed form of
Certification and Request for Additional Rights. Such request
must be received by the Distribution Agent by close of
business on , 1998 and may be sent by facsimile to
the Distribution Agent at .
- Expiration of the Offering: The Expiration Date of the
Offering is 5:00 p.m., Minnesota time, on _________ ___, 1998,
unless extended by the Company. SUBJECT TO THE PROCEDURES FOR
EXERCISE BY NOTICE OF GUARANTEED DELIVERY, RIGHTS NOT
EXERCISED OR SOLD PRIOR TO THE EXPIRATION DATE WILL EXPIRE AND
BECOME WORTHLESS.
- Transferability of Rights: Rights will be admitted for trading
on the Nasdaq National Market, under the symbol "CGNTR," and
may be purchased or sold through normal brokerage channels
through ____________ ____, 1998 (the last business day before
the Expiration Date).
- Primary Subscription: Each Right will entitle the holder to
acquire one (1) share of the Company's Common Stock at the
Subscription Price.
- Over-Subscription Privilege: Holders of Rights who fully
exercise all their Rights are entitled to subscribe at the
Subscription Price for shares that were not otherwise
subscribed for during the Primary Subscription. However, if
such over-subscriptions exceed the number of shares available,
the shares available are subject to allotment, as more fully
described in the Prospectus.
- Payment for Shares: Subject to the procedures for exercise by
Notice of Guaranteed Delivery, payment (which will be the
Subscription Price multiplied by the number of shares
subscribed for) for shares purchased under both the Primary
and Over-Subscriptions must be received by the Expiration
Date.
The enclosed Prospectus describes the Rights and the procedures to
follow if you choose to exercise or sell your Rights. Please read the Prospectus
and other enclosed materials carefully.
Sincerely,
_____________________
Any questions regarding the Offering should be directed to the Company's
Information Agent, Corporate Investor Communications, Inc. toll free at
1-888-673-4478.
10
<PAGE> 1
Exhibit 4.4
[Form of Cover]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACTS OF 1933 OR ANY STATE SECURITIES LAWS AND MAY
NOT BE SOLD, EXCHANGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN ANY
MANNER EXCEPT IN COMPLIANCE WITH SECTION OF THE CAPITALIZATION
AGREEMENT DATED AS OF , 1998 BETWEEN UGLY DUCKLING
CORPORATION AND CYGNET FINANCIAL CORPORATION, AS THE SAME MAY BE
AMENDED FROM TIME TO TIME.
CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
NUMBER CYGNET FINANCIAL CORPORATION SHARES
P
This is to Certify that SPECIMEN
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE CUMULATIVE
CONVERTIBLE PREFERRED STOCK, SERIES A, PAR VALUE $.001 PER SHARE OF,
CYGNET FINANCIAL CORPORATION
issued under and subject to the Amended and Restated Certificate of
Incorporation of the Corporation and a Certificate of Designations (copies of
which are on file at the office of the Transfer Agent of the Corporation), to
all the terms and conditions of which the said owner by accepting this
Certificate expressly assents and agrees to be bound.
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
Dated:
Secretary President
<PAGE> 2
[Form of Reverse]
CYGNET FINANCIAL CORPORATION
The Corporation is authorized to issue shares of common stock and shares of
preferred stock, each with a par value of $.001. The preferred shares may be
issued in one or more series. The Board of Directors is authorized to fix or
alter the number of shares in each such series, and while each such series is
wholly unissued, to fix or alter the dividend rights, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions);
redemption price or prices, liquidation preferences, and the designation
thereof.
<PAGE> 3
[Form of Reverse]
CYGNET FINANCIAL CORPORATION
The Corporation is authorized to issue shares of common stock and shares of
preferred stock, each with a par value of $.001. The preferred shares may be
issued in one or more series. The Board of Directors is authorized to fix or
alter the number of shares in each such series, and while each such series is
wholly unissued, to fix or alter the dividend rights, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions);
redemption price or prices, liquidation preferences, and the designation
thereof.
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes of series of shares and upon the
holders thereof as established, from time to time, by the Certificate of
Incorporation of the Corporation and by the Certificate of Designations, the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and without
charge from the Secretary of the Corporation at its principal executive offices.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ____________________Custodian________________________
(Cust) (Minor)
Act_______________________________________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________
______________________________
_____________________________________________
________________________________________________________________________________
Please print or typewrite name and address including postal zip code of assignee
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Preferred Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________________
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated: ________________________
____________________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate, in every
particular, without alteration or
enlargement, or any change whatever.
<PAGE> 1
Exhibit 4.5
CERTIFICATE OF DESIGNATIONS
OF THE
CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
(Par Value $ .001 Per Share)
OF
CYGNET FINANCIAL CORPORATION
---------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
---------------------------
The undersigned duly authorized officer of Cygnet Financial
Corporation, corporation organized and existing under the General Corporation
Law of the State of Delaware (the "Company"), in accordance with the provisions
of Section 103 thereof, and pursuant to Section 151 thereof, DOES HEREBY
CERTIFY:
That the Certificate of Incorporation of the Company authorizes the
creation of up to five hundred thousand (500,000) shares of the Company's
preferred stock, par value $.001 per share (such preferred stock, together with
all other preferred stock of the Company the creation of which is in the future
authorized by the Certificate of Incorporation, the "Preferred Stock"; and
That pursuant to the authority conferred upon the Board of Directors
(the "Board") by the Certificate of Incorporation of the Company, as amended
(the "Certificate of Incorporation"), the Board on July 16, 1998 adopted the
following resolution creating a series of 40,000 shares of Preferred Stock
designated as set forth below:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board by provisions of the Certificate of Incorporation and the
General Corporation Law of the State of Delaware, the issuance of a series of
Preferred Stock, which shall consist of 40,000 shares of the five hundred
thousand (500,000) shares of Preferred Stock which the Company now has authority
to issue, and has not been previously issued, be, and the same hereby is,
authorized, and this Board hereby fixes the powers, designations, preferences
and relative, participating, options or other special rights, and the
qualifications, limitations or restrictions, of the shares of such series
authorized by this resolution as follows:
1. Designation and Rank. The designation of such series of Preferred
Stock authorized by this resolution shall be Cumulative Convertible Preferred
Stock, Series A (the "Series A Preferred Stock"). The maximum number of shares
of Series A Preferred Stock shall be 40,000. The Series A Preferred Stock, in
preference to the Company's Common Stock, $.001 par value ("Common Stock"), will
be entitled to receive, in the
<PAGE> 2
event of dissolution or liquidation of the Company, $1,000 per share (the "Base
Liquidation Amount") plus accrued and unpaid dividends thereon (the "Liquidation
Preference Amount"). The Series A Preferred Stock shall rank prior to the
Company's Common Stock and to all other classes and series of equity securities
of the Company now or hereafter authorized, issued or outstanding (the Common
Stock and such other classes and series of equity securities collectively may be
referred to herein as the "Junior Stock"), other than any other series of
Preferred Stock of the Company [, which may be junior to or on a parity with the
Series A Preferred Stock but shall not be senior to the Series A Preferred Stock
without approval required by Section 4(c) hereof,] ranking on a parity with (the
"Parity Stock") the Series A Preferred Stock as to dividend rights and rights
upon liquidation, winding up or dissolution of the Company. The Series A
Preferred Stock shall be junior to all outstanding debt of the Company. The
Series A Preferred Stock shall be subject to creation of any other series of
equity securities of the Company to the extent not expressly prohibited hereby.
2. Cumulative Dividends; Priority.
(a) Payment of Dividends. The holders of record of shares of
Series A Preferred Stock shall be entitled to receive, when, as, and if declared
by the Board, out of funds legally available therefor, cumulative cash dividends
from the date of initial issuance of the Series A Preferred Stock through the
first anniversary of such date, at the initial annual rate of 7% of the Base
Liquidation Amount, and escalating 1% per annum on each anniversary date
thereafter to a maximum rate of 11% per annum of the aggregate Base Liquidation
Amount, which shall accrue from the date of initial Issuance of the Series A
Preferred Stock and be payable quarterly in arrears on the 1st day of March,
June, September and December in each year, commencing on December 1, 1998, or,
if such day is a non- business day, on the next business day, but without
interest (each of such dates, a "Dividend Payment Date"). Each declared dividend
shall be payable to holders of record as they appear on the stock books of the
Company at the close of business on such record dates, not more than 60 nor less
than 10 calendar days preceding the payment dates therefor, as are determined by
the Board or a duly authorized committee thereof (each of such dates, a "Record
Date"). Quarterly dividend periods (each a "Dividend Period") shall commence on
and include the 1st day of March, June, September and December of each year and
shall end on and include the date next preceding the next following Dividend
Payment Date. Accrued and unpaid dividends for any prior Dividend Periods may be
declared and paid at any time, without reference to any regular Dividend Payment
Date, to holders of record on such date, not exceeding 45 days preceding the
payment date thereof, as may be fixed by the Board of Directors.
Holders of the shares of the Series A Preferred Stock shall
not be entitled to any dividends, whether payable in cash, property or
securities, in excess of the dividends declared by the Board of Directors as set
forth herein. No interest, or sum of money in lieu of interest, shall be payable
in respect to any dividend payment or payments on the Series A Preferred Stock
that may be in arrears.
The amount of dividends payable per share for each full
Dividend Period shall be computed by dividing by four the amount determined by
applying the then applicable annual
2
<PAGE> 3
dividend rate to the $1,000.00 liquidation preference of such share. Dividends
on the Series A Preferred Stock shall accrue day by day. The initial quarterly
dividend payable on December 1, 1998 and the amount of any dividend payable for
any other period shorter than a full Dividend Period shall be computed on the
basis of a 360-day year composed of twelve 30-day months and the actual number
of days elapsed in the Dividend Period.
(b) Priority as to Dividends. No full dividends shall be
declared or paid or set apart for payment on Preferred Stock of any series
ranking, as to dividends, on a parity with or junior to the Series A Preferred
Stock for any period unless full dividends for the immediately preceding
Dividend Period on the Series A Preferred Stock (including any accumulation in
respect of unpaid dividends from prior Dividend Periods) have been or
contemporaneously are declared and paid (or declared and a sum sufficient for
the payment thereof set apart for such payment). When dividends are not paid in
full (or declared and a sum sufficient for such full payment is not so set
apart) upon the Series A Preferred Stock and any other Preferred Stock ranking
on a parity as to dividends with the Series A Preferred Stock, dividends
declared upon shares of Series A Preferred Stock and such other Preferred Stock
ranking on a parity as to dividends shall be declared pro rata, so that the
amount of dividends declared per share on the Series A Preferred Stock and such
other Preferred Stock shall bear in all cases to each other the same ratio that
accrued dividends on the shares of Series A Preferred Stock and accrued
dividends on such other Preferred Stock bear to each other as of their
respective immediately preceding dividend periods.
Unless full dividends on the Series A Preferred Stock and any
Parity Stock have been declared and paid or set apart for payment for their
respective immediately preceding dividend periods (including any accumulation in
respect of unpaid dividends for prior dividend periods) (i) no cash dividend or
distribution (other than in shares of Junior Stock) shall be declared or paid or
set aside for payment on the Junior Stock, (ii) the Company may not, directly or
indirectly, repurchase, redeem or otherwise acquire any shares of its Junior
Stock (or pay any moneys into a sinking fund for the redemption of any shares)
except by conversion into or exchange for Junior Stock or except in connection
with any benefit plan or arrangement, and (iii) the Company may not, directly or
indirectly, repurchase, redeem or otherwise acquire any shares of Series A
Preferred Stock or Parity Stock (or pay any moneys into a sinking fund for the
redemption of any shares of any such stock) otherwise than pursuant to a pro
rata offer to purchase or a concurrent redemption of all, or a pro rata portion,
of the outstanding shares of Series A Preferred Stock and Parity Stock, except
by conversion into or exchange for Junior Stock or except in connection with any
benefit plan or arrangement.
The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company if, under the preceding paragraph, the Company would be prohibited from
purchasing or otherwise acquiring such shares at such time and in such manner.
3
<PAGE> 4
3. Optional Redemption.
(a) General. Except as described in Section 3(d) hereof, the
shares of the Series A Preferred Stock may be redeemed, in whole or in part, at
the election of the Company, upon notice as provided in Section 3(b) hereof, by
resolution of its Board of Directors, at any time or from time to time, at a
redemption price of $1,000 per share, plus, in each case, an amount equal to all
accrued and unpaid dividends to the date fixed for redemption.
If fewer than all the outstanding shares of Series A Preferred
Stock are to be redeemed, the Company will select those to be redeemed pro rata,
by lot or by other method deemed equitable by the Company in its sole
discretion.
On and after the redemption date, dividends shall cease to
accrue on the shares of Series A Preferred Stock called for redemption, and they
shall be deemed to cease to be outstanding, provided that the redemption price
(including any accrued and unpaid dividends to the date fixed for redemption)
has been duly paid or provided for. If the redemption date falls after a
dividend payment Record Date and prior to the corresponding Dividend Payment
Date, then each holder of Series A Preferred Stock at the close of business on
such Record Date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding the redemption of such
shares before such Dividend Payment Date. Except as provided above, the Company
shall make no payment or allowance for unpaid dividends, whether or not in
arrears, on shares of Series A Preferred Stock called for redemption.
(b) Notice of Redemption. Notice of any redemption, setting
forth (i) the date and place fixed for said redemption, (ii) the redemption
price, (iii) a statement that dividends on the shares of Series A Preferred
Stock to be redeemed will cease to accrue on such redemption date, and (iv) a
statement of or reference to the conversion right set forth in Section 5 hereof
(including that the right to give a notice of conversion in respect of any
shares to be redeemed shall terminate at the close of business on the date prior
to the redemption date), shall be mailed, postage prepaid, at least ____ days
but not more than 60 days prior to said redemption date to each holder of record
of the Series A Preferred Stock to be redeemed at his or her address as the same
shall appear on the books of the Company. If fewer than all the shares of the
Series A Preferred Stock owned by such holder are then to be redeemed, the
notice shall specify the number of shares thereof that are to be redeemed and,
if practicable, the numbers of the certificates representing such shares.
If such notice of redemption shall have been so mailed, and if on or
before the redemption date specified in such notice all funds necessary for such
redemption shall have been set aside by the Company separate and apart from its
other funds in trust for the account of the holders of the shares of the Series
A Preferred Stock so to be redeemed (so as to be and continue to be available
therefor), then, on and after said redemption date, notwithstanding that any
certificate for shares of the Series A Preferred Stock so called for redemption
shall not have been surrendered for cancellation, the shares of the Series A
Preferred Stock so called for redemption shall be deemed to be no longer
outstanding, the dividends thereon shall cease to accrue, and all rights with
respect to such shares
4
<PAGE> 5
of the Series A Preferred Stock so called for redemption shall forthwith cease
and terminate, including the right to convert such shares pursuant to Section 5
below, except only the right of the holders thereof to receive out of the funds
so set aside in trust the amount payable on redemption thereof, but without
interest, upon surrender (and endorsement or assignment for transfer, if
required by the Company) of their certificates.
In case the holders of shares of the Series A Preferred Stock that
shall have been redeemed shall not within two years (or any longer period if
required by law) after the redemption date claim any amount so deposited in
trust for the redemption of such shares, such bank or trust company that shall
then be holding such redemption funds shall, upon demand and if permitted by
applicable law, pay over to the Company any such unclaimed amount so deposited
with it, and shall thereupon be relieved of all responsibility in respect
thereof, and thereafter the holders of such shares shall, subject to applicable
escheat laws, look only to the Company for payment of the redemption price
thereof, but without interest from the date of redemption.
(c) Retired Shares. Shares of Series A Preferred Stock
redeemed, purchased or otherwise acquired for value by the Company, including by
conversion in accordance with Section 5 hereof, shall, after such acquisition,
have the status of authorized and unissued shares of Preferred Stock and may be
reissued by the Company at any time as shares of any series of Preferred Stock
other than as shares of Series A Preferred Stock.
(d) Limitation on Optional Redemption
No redemption of all or a portion of the outstanding shares
of Series A Preferred Stock shall be authorized unless in the reasonable
judgment of the Company (plus the reasonable judgment of Ugly Duckling
Corporation, a Delaware corporation ("UDC") if UDC holds shares of the Series A
Preferred Stock at the time of the proposed redemption), the proceeds from such
redemption will not be treated as a distribution of property to which Section
301 of the Internal Revenue Code of 1986, as amended, (the "Code") applies. In
exercising such judgment, it shall be assumed that the holders of Series A
Preferred Stock hold no other equity interests in the Company at the time of the
proposed redemption save and except (i) shares of the Series A Preferred Stock
actually held, (ii) shares of Common Stock issued prior to [September 30, 1998],
if any, actually held, and (iii) shares of Common Stock acquired as a
consequence of the conversion of the Series A Preferred Stock, if any, actually
held. The Company shall be authorized to redeem all or a portion of the Common
Stock described in clauses (ii) and (iii) of the preceding sentence at their
respective "Market Prices" (as defined below) in conjunction with the proposed
redemption of the Series A Preferred Stock if the collective proceeds from such
redemptions (including the proposed redemption of the Series A Preferred Stock)
would not be treated as distributions of property to which Code Section 301
apply. Further, in exercising such judgment, consideration may be given to other
dispositions of equity interests in the Company by the holders of the Series A
Preferred Stock which are part of an integral plan by the holders thereof for
the disposition of all equity interests in the Company held by such holders and
with respect to which the Company has knowledge. For purposes of this Section
3(d), the "Market Price" of the shares of Common Stock referred to in clause
(ii) above shall mean the purchase price paid therefor and the "Market Price" of
the shares of Common Stock referred to in clause (iii) above shall mean the
average of the "trading price" of the Common Stock for the 10 consecutive
trading days ending on the second business day preceding the redemption thereof.
For purposes of the preceding sentence, the term "trading price" means (i) if
the Common Stock is quoted on the Nasdaq National Market or the Nasdaq SmallCap
Market or on a national securities exchange, the daily per share closing price
of the Common Stock as quoted on the Nasdaq National Market or the Nasdaq
SmallCap Market or on the principal stock exchange on which it is listed on the
trading day in question, as the case may be, whichever is the higher, or (ii) if
the Common Stock is traded in the over-the-counter market and not quoted on the
Nasdaq National Market or the Nasdaq SmallCap Market or on any national
securities exchange, the closing bid price of the Common Stock on the trading
day in question, as reported by Nasdaq or an equivalent generally accepted
reporting service. In no event will acquisitions of capital stock by UDC
subsequent to [September 30, 1998] (other than through a conversion of the
Series A Preferred Stock) restrict the ability of the Company to redeem the
Series A Preferred Stock in whole or in part.
4. Voting Rights.
(a) No General Voting Rights. Except as expressly provided
hereinafter in this Section, or as otherwise from time to time required by
applicable law, the Series A Preferred Stock shall have no voting rights.
(b) Voting Rights Upon Dividend Arrears.
(i) Right to Elect Directors. In the event that an
amount equal to two quarterly dividend payments on the Series A Preferred Stock
shall have accrued and be unpaid, the holders of the Series A Preferred Stock
shall have the right, voting separately as a class, to elect two members to the
Board of Directors, each member to be in addition to the then authorized number
of directors, at the next meeting of stockholders and thereafter until all
accrued dividends on the Series A Preferred Stock have been paid in full
(including any accumulation of unpaid dividends).
(ii) Stockholder Meetings. Whenever such right shall
vest, it may be exercised initially by the vote of the holders of a plurality of
the shares of the Series A Preferred Stock present and voting, in person or by
proxy, at the next annual meeting of stockholders or at a special meeting of
holders of the Series A Preferred Stock. A special meeting for the exercise of
such right shall be called by the Secretary of the Company as promptly as
possible and in any event within 20 days after receipt of a written request
signed by the holders of record of at least 25% of the outstanding shares of the
Series A Preferred Stock, subject to any applicable notice requirements
5
<PAGE> 6
imposed by law or regulation. Notwithstanding the provisions of this paragraph,
no such special meeting shall be required to be held during the 90-day period
preceding the date fixed for the annual meeting of stockholders.
(iii) Term of Office of Directors. Any director who
shall have been elected by holders of the Series A Preferred Stock entitled to
vote in accordance with this subparagraph (b) shall hold office for a term
expiring (subject to the earlier payment in full, or declaration and setting
aside for payment in full, of dividends on the Series A Preferred Stock as
contemplated below) at the next annual meeting of stockholders, notwithstanding
that the term of other directors may extend beyond such meeting. During such
term any such director may be removed at any time, either for or without cause,
by, and only by, the affirmative vote of the holders of record of a majority of
the shares of the Series A Preferred Stock present and voting, in person or by
proxy, at a special meeting of such stockholders called for such purpose, and
any vacancy created by such removal may also be filled at such meeting. A
meeting for the removal of a director elected by the holders of the Series A
Preferred Stock and the filling of the vacancy created thereby shall be called
by the Secretary of the Company, as promptly as possible and in any event within
20 days after receipt of a request therefor signed by the holders of not less
than 25% of the outstanding shares of the Series A Preferred Stock, subject to
any applicable notice requirements imposed by law or regulation. Such meeting
shall be held at the earliest practicable date thereafter, provided that no such
meeting shall be required to be held during the 90-day period preceding the date
fixed for the annual meeting of stockholders.
Upon payment in full, or declaration and setting aside for
payment in full, of accrued dividends on the Series A Preferred, the terms of
office of all directors elected by the holders of the shares of the Series A
Preferred Stock pursuant thereto then in office shall, without further action,
thereupon immediately terminate unless otherwise required by law. Upon such
termination the number of directors constituting the Board of Directors of the
Company shall, without further action, be reduced by the number of directors so
terminated, subject always to the future right of holders of the shares of the
Series A Preferred Stock to elect additional directors as provided above.
(iv) Vacancies. Any vacancy caused by the death or
resignation of a director who shall have been elected in accordance with this
subparagraph (b) may be filled by the remaining director so elected or, if not
so filled, by a vote of holders of a plurality of the shares of the Series A
Preferred Stock present and voting, in person or by proxy, at a meeting called
for such purpose. Unless such vacancy shall have been filled by the remaining
director as aforesaid, such meeting shall be called by the Secretary of the
Company at the earliest practicable date after such death or resignation and in
any event within 20 days after receipt of a written request signed by the
holders of record of at least 25% of the outstanding shares of the Series A
Preferred Stock, subject to any applicable notice requirements imposed by law or
regulation. Notwithstanding the provisions of this paragraph, no such special
meeting shall be required to be held during the 90-day period preceding the date
fixed for the annual meeting of stockholders.
6
<PAGE> 7
(v) Stockholders' Right to Call Meeting. If any
meeting of the holders of the Series A Preferred Stock required by this
subparagraph (b) to be called shall not have been called within 30 days after
personal service of a written request therefor upon the Secretary of the Company
or within 30 days after mailing the same within the United States of America by
registered mail addressed to the Secretary of the Company at its principal
executive offices, subject to any applicable notice requirements imposed by law
or regulation, then the holders of record of at least 25% of the outstanding
shares of the Series A Preferred Stock may designate in writing one of their
number to call such meeting at the expense of the Company, and such meeting may
be called by such person so designated upon the notice required for annual
meetings of stockholders or such shorter notice (but in no event shorter than
permitted by law or regulation) as may be acceptable to the holders of a
majority of the total number of shares of the Series A Preferred Stock. Any
holder of the Series A Preferred Stock so designated shall have access to the
stock books of the Company related to the Series A Preferred Stock for the
purpose of causing such meeting to be called pursuant to these provisions.
(vi) Quorum. At any meeting of the holders of the
Series A Preferred Stock called in accordance with the provisions of this
subparagraph (b) for the election or removal of directors, the presence in
person or by proxy of the holders of a majority of the total number of shares of
the Series A Preferred Stock shall be required to constitute a quorum; in the
absence of a quorum, a majority of the holders present in person or by proxy
shall have power to adjourn the meeting from time to time without notice other
than an announcement at the meeting, until a quorum shall be present.
(c) Voting Rights on Extraordinary Matters. So long as any
shares of the Series A Preferred Stock shall be outstanding and unless the
consent or approval of a greater number of shares shall then be required by law,
without first obtaining the approval of the holders of at least two-thirds of
the number of shares of the Series A Preferred Stock at the time outstanding
(voting separately as a class given in person or by proxy at a meeting at which
the holders of such shares shall be entitled to vote separately as a class, the
Company shall not either directly or indirectly or through merger or
consolidation with any other company, (1) authorize, create or issue, or
increase the authorized or issued amount of, any class or series of stock
ranking senior to the shares of the Series A Preferred Stock as to the payment
of dividends and distribution of assets upon dissolution, liquidation or winding
up of the Company, or (ii) approve any amendment to (or otherwise alter or
repeal) its Certificate of Incorporation or this Certificate of Designations
that would materially and adversely change the voting powers, rights or
preferences of the Series A Preferred Stock, provided, however, no vote of the
holders of Series A Preferred Stock shall be required if, at or prior to the
time when such amendment, alteration or repeal is to take effect, or when the
issuance of any such senior shares is to be made, as the case may be, provision
is made for the redemption of all shares of Series A Preferred Stock at the time
outstanding. An amendment that increases the number of authorized shares of any
class or series of Preferred Stock or authorizes the creation or issuance of
other classes or series of Preferred Stock, in each case ranking junior to or on
a parity with the Series A Preferred Stock with respect to the payment of
dividends and distribution of assets upon liquidation, dissolution or winding
up, or substitutes the surviving entity in a merger or
7
<PAGE> 8
consolidation, reorganization or other business combination for the Company,
shall not be considered to be an adverse change requiring the approval of the
Series A Preferred Stock.
(d) Vote Per Share. Each share of Series A Preferred Stock
shall have one vote per $1,000.00 of stated liquidation preference.
5. Conversion. Shares of the Series A Preferred Stock shall be
convertible into Common Stock on the following terms and conditions:
(a) Conversion Right. The Series A Preferred Stock will not be
convertible during the period from the initial date of its issuance through the
third anniversary of such date, except as described in the next sentence below.
Subject to and upon compliance with the provisions of this Section 5, the holder
of any shares of Series A Preferred Stock may at such holder's option, at any
time or from time to time, (i) following the third anniversary of the date of
initial issuance of the Series A Preferred Stock or (ii) during any period
following the date that an amount equal to six quarterly dividend payments on
the Series A Preferred Stock shall have accrued and be unpaid until payment in
full of all accrued dividends, convert any such shares into fully paid and
non-assessable shares (calculated to the nearest 1/1000 of a share) of Common
Stock at the rate of conversion (the "Conversion Rate") in effect on the
Conversion Date. The Conversion Rate shall be initially determined by dividing
the Liquidation Preference Amount with respect to each share of Series A
Preferred Stock to be converted by the lower of (a) $7.00 or (b) 80% of the
average Market Price for the 10 consecutive trading days ending two business
days prior to the date notice of conversion is given. For purposes of this
Section 5(a), "Market Price" means (i) if the Common Stock is quoted on the
Nasdaq National Market or the Nasdaq SmallCap Market or on a national securities
exchange, the daily per share closing price of the Common Stock as quoted on the
Nasdaq National Market or the Nasdaq SmallCap Market or on the principal stock
exchange on which it is listed on the trading day in question, as the case may
be, whichever is the higher, or (ii) if the Common Stock is traded in the
over-the-counter market and not quoted on the Nasdaq National Market or the
Nasdaq SmallCap Market or on any national securities exchange, the closing bid
price of the Common Stock on the trading day in question, as reported by Nasdaq
or an equivalent generally accepted reporting service. The Conversion Rate is
subject to adjustment as set forth in paragraph (d) of this Section 5.
(b) Dividend Upon Conversion. Holders of shares of Series A
Preferred Stock at the close of business on a dividend payment Record Date shall
be entitled to receive the dividend payable on such shares on the corresponding
Dividend Payment Date notwithstanding the conversion thereof following such
dividend payment Record Date and prior to such Dividend Payment Date. However,
shares of Series A Preferred Stock surrendered for conversion during the period
between the close of business on any dividend payment Record Date and the
opening of business on the corresponding Dividend Payment Date must be
accompanied by payment of an amount equal to the dividend payable on such shares
on such Dividend Payment Date. A holder of shares of Series A Preferred Stock on
a dividend payment Record Date who (or whose transferee) tenders any such shares
for conversion into shares of Common Stock on such Dividend Payment Date will
receive
8
<PAGE> 9
the dividend payable by the Company on such shares of Series A Preferred Stock
on such date, and the converting holder need not include payment of the amount
of such dividend upon surrender of shares of Series A Preferred Stock for
conversion. Except as provided above, the Company shall make no payment or
allowance for unpaid dividends, whether or not in arrears, on converted shares
or for dividends on the shares of Common Stock issued upon such conversion.
(c) Method of Conversion.
(i) The surrender of any shares of Series A Preferred
Stock for conversion shall be made by the holder thereof by delivering the
certificate or certificates evidencing ownership of such shares with proper
endorsement or instruments of transfer to the Company at the office or agency to
be maintained by the Company for that purpose, and such holder shall give
written notice to the Company at the office or agency that he or she elects to
convert such shares of Series A Preferred Stock in accordance with the
provisions thereof and of this Section 5. Such notice shall also state the
number of whole shares of Series A Preferred Stock and the name or names (with
addresses) in which the certificate or certificates evidencing ownership of
Common Stock to be issued on such conversion shall be issued. In the case of
lost or destroyed certificates evidencing ownership of shares of Series A
Preferred Stock to be surrendered for conversion, the holder shall submit proof
of loss or destruction, and such indemnity as shall be required by the Company.
(ii) Every notice of election to convert shall
constitute a contract between the holder of such shares of Series A Preferred
Stock and the Company, whereby such holder shall be deemed to subscribe for the
amount of the Common Stock that he or she will be entitled to receive upon such
conversion and, in payment and satisfaction of such subscription, to surrender
such shares of Series A Preferred Stock (and to accompany such surrender with
the payment, if any, contemplated by Section 5(b)) and to release the Company
from all obligations thereon (subject to the payment of accrued dividends in
accordance with Section 5(b) hereof), and the Company shall be deemed to agree
that the surrender of such shares of Series A Preferred Stock (and such payment,
if any) and the extinguishment of its obligation thereon (except as aforesaid),
shall, constitute full payment for the Common Stock so subscribed for and to be
issued upon such conversion.
(iii) As soon as practicable after its receipt of
such notice and the certificate or certificates evidencing ownership of such
shares of Series A Preferred Stock (and the payment contemplated by Section
5(b)), the Company shall issue and shall deliver at the office or agency
maintained therefor to the person for whose account such shares of Series A
Preferred Stock were so surrendered, or on his or her written order, a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such shares of Series A Preferred Stock and a
check or cash payment (if any) to which such holder is entitled with respect to
fractional shares as determined by the Company, in accordance with Section 5(e)
hereof, at the close of business on the date of conversion.
(iv) Such conversion shall be deemed to have been
effected on the date on which the Company shall have received such notice and
the certificate or certificates for such shares
9
<PAGE> 10
of Series A Preferred Stock (and the payment contemplated by Section 5(b)); and
the person or persons in whose name or names any certificate or certificates for
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares represented thereby on such
date; provided, however, that any such surrender on any date when the stock
transfer books of the Company shall be closed shall become effective for all
purposes on the next succeeding day on which such stock transfer books are open,
but such conversion shall be at the Conversion Rate in effect on the date upon
which such surrender occurs.
(d) Adjustments to Conversion Rate. The Conversion Rate shall
be subject to adjustment from time to time as follows:
(i) In case the Company shall at any time (A) pay a
dividend or make a distribution on any class of its capital stock in shares of
Common Stock, (B) subdivide the Common Stock, (C) combine the outstanding Common
Stock into a smaller number of shares, or (D) issue any shares of its capital
stock by reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the surviving company), the Conversion Rate shall be adjusted subject
to the limitations contained in subparagraph (vi) of this paragraph (d)) by
multiplying the Conversion Rate in effect immediately prior to the record date
for such dividend or distribution or the effective date of such subdivision,
combination or reclassification by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately after the record
date or the effective date, as the case may be, and the denominator of which
shall be the number of shares of Common Stock outstanding immediately before the
record date or effective date, as the case may be. Such adjustment shall become
effective at the close of business on such record date or effective date. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(ii) In case the Company shall distribute to all
holders of Common Stock (including any such distribution made in connection with
consolidation or merger in which the Company is the surviving company) evidences
of its indebtedness or assets (including securities, but excluding any dividend,
distribution, rights or warrants described in subparagraph (i) of this paragraph
(d) above and excluding any dividend or distribution payable solely in cash),
the Conversion Rate shall be adjusted (subject to the limitations contained in
subparagraph (vi) of this paragraph (d)) by multiplying the Conversion Rate in
effect immediately prior to the record date for determination of stockholders
entitled to receive such distribution by a fraction, the numerator of which
shall be the current market price per share of Common Stock (as defined in
subparagraph (iii) of this paragraph (d)) on such record date and the
denominator of which shall be such current market price per share of Common
Stock, less the fair market value (as determined by the Board of Directors,
whose determination shall be conclusive) of the portion of the evidences of
indebtedness or assets or securities so to be distributed that are applicable to
one share of Common Stock. Such adjustment shall become effective at the close
of business on such record date.
(iii) For the purpose of any computation under
subparagraph (ii) of this paragraph (d) (except as otherwise contemplated
therein), the current market price per share of
10
<PAGE> 11
Common Stock on any record date shall be deemed to be the average of the daily
closing prices for the five consecutive business days selected by the Board of
Directors commencing not more than 20 trading days before, and ending not later
than, the earlier of the day in question and the day before the "ex" date with
respect to the issuance or distribution requiring such computation. The term
"ex" date, when used with respect to any issuance or distribution, shall mean
the first date on which the Common Stock trades regular way on the applicable
exchange or on the applicable market without the right to receive such issuance
or distribution. The term "trading day" shall mean each Monday through Friday,
other than any day on which securities are not traded in the system or on the
exchange that is the principal market for the Common Stock, as determined by the
Board of Directors of the Company. The closing price for each date shall be the
reported last sale price regular way (or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices
regular way) on the National Association of Securities Dealers Automated
Quotations ("NASDAQ") National Market System or, if the Common Stock is not
listed or admitted to trading on such system, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or, if not listed or admitted to trading on any national securities exchange,
the last quoted price or, if not quoted, the average of the closing bid and
asked prices as reported by NASDAQ, or such other system then in use, or if the
Common Stock is not quoted by any such organization, the average of the closing
bid and asked prices in the over the-counter market as furnished by any NASDAQ
member firm selected from time to time by the Company for that purpose.
(iv) In the case of any (i) consolidation or merger
of the Company with or into any entity (other than a consolidation or merger
that does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock of the Company), (ii) sale,
transfer, lease or conveyance of all or substantially all of the assets of the
Company as an entirety or substantially as an entirety, or (iii)
reclassification, capital reorganization or change of the Common Stock (other
than solely a change in par value, or from par value to no par value), in each
case as a result of which shares of Common Stock shall be converted into the
right to receive stock, securities or other property (including cash or any
combination thereof), each holder of a share of Series A Preferred Stock then
outstanding shall have the right thereafter to convert such share (at such time
as the Series A Preferred Stock is convertible) only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale, transfer, capital reorganization or reclassification by a holder of the
number of shares of Common Stock of the Company into which such shares of Series
A Preferred Stock could have been converted immediately prior to such
consolidation, merger, sale, transfer, capital reorganization or
reclassification (if the Series A Preferred Stock were convertible at such
time), assuming such holder of Common Stock of the Company (A) is not an entity
with which the Company consolidated or into which the Company merged or which
merged into the Company or to which such sale or transfer was made, as the case
may be ("constituent entity"), or an affiliate of a constituent entity, and (B)
failed to exercise his or her rights of election, if any, as to the kind or
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer (provided that if the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer is not the same for each share of Common Stock of the Company
held immediately prior
11
<PAGE> 12
to such consolidation, merger, sale or transfer by other than a constituent
entity or an affiliate thereof and in respect of which such rights or election
shall not have been exercised ("non-electing share"), then for the purpose of
this subparagraph (iv) the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares). If necessary, appropriate
adjustment shall be made in the application of the provisions set forth herein
with respect to the rights and interests thereafter of the holders of shares of
Series A Preferred Stock to the end that the provisions set forth herein shall
thereafter correspondingly be made applicable, as nearly as may reasonably be,
in relation to any shares of stock or other securities or property thereafter
deliverable on the conversion of the shares. The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers, capital
reorganizations and reclassifications. The Company shall not effect any such
consolidation, merger, sale or transfer unless prior to or simultaneously with
the consummation thereof the successor company or entity (if other than the
Company) resulting from such consolidation, merger, sale or transfer shall
assume, by written instrument, the obligation to deliver to the holder of each
share of Series A Preferred Stock such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such holder may be entitled to
receive under this Section 5(d).
(v) No adjustment will be required to be made in the
Conversion Rate until cumulative adjustments require an adjustment of at least
1% of such Conversion Rate. If an adjustment to the Conversion Rate is made
pursuant to this paragraph (d) as of a record date and the dividend,
distribution or other event triggering such adjustment is not made or does not
occur, the Conversion Rate shall be readjusted to the Conversion Rate that would
then be in effect had such adjustment not been made.
(vi) If the Company shall take any action affecting
the Common Stock, other than action described in this Section 5, that in the
sole discretion of the Board of Directors would materially adversely affect the
conversion rights of the holders of the shares of Series A Preferred Stock, the
Company may, but shall not be obligated to, adjust the Conversion Rate for the
Series A Preferred Stock, to the extent permitted by law, in such manner, and at
such time, as the Board of Directors, in its sole discretion, may determine to
be equitable in the circumstances.
(e) Fractional Shares. No fractional shares or scrip
representing fractional shares shall be issued upon the conversion of any shares
of Series A Preferred Stock, but the holder thereof will receive in cash an
amount equal to the value of such fractional share of Common Stock based on the
current market price (as defined in subparagraph (iii) of Section 5(d)). If more
than one share of Series A Preferred Stock shall be surrendered for conversion
at one time by the same holder, the number of full shares issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
such shares so surrendered.
(f) Payment of Taxes. The Company shall pay any tax in respect
of the issuance of stock certificates on conversion of shares of Series A
Preferred Stock. The Company shall not, however, be required to pay any tax that
may be payable in respect of any transfer involved in the
12
<PAGE> 13
issuance and delivery of stock in any name other than that of the holder of the
shares converted, and the Company shall not be required to issue or deliver any
such stock certificate unless and until the person or persons requesting the
issuance hereof shall have paid to the Company the amount of any such tax or
shall have established to the satisfaction of the Company that such tax has been
paid.
(g) Common Stock Reserved for Conversion. The Company shall at
all times reserve and keep available out of its authorized and unissued Common
Stock the full number of shares of Common Stock deliverable upon the conversion
of all outstanding shares of Series A Preferred Stock and shall take all such
action as may be required from time to time in order than it may validly and
legally issue fully paid and non-assessable shares of Common Stock upon
conversion of the Series A Preferred Stock.
(h) Notice. In the event:
(i) The Company shall declare a dividend (or any
other distribution) on its Common Stock (other than in cash); or
(ii) of any reclassification of the Common Stock of
the Company (other than a subdivision or combination of its outstanding Common
Stock, or a change in par value, or from par value to no par value, or from no
par value to par value) or of any consolidation or merger to which the Company
is a party or of the sale or transfer of all or substantially all of the assets
of the Company as an entirety or substantially as an entirety and for which
approval of any stockholders of the Company is required; or
(iii) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, and in each such event, the Company shall cause to be mailed to each
holder of Series A Preferred Stock, at his or her address as the same shall
appear on the books of the Company, as promptly as possible but in any event at
least 15 days prior to the applicable date hereinafter specified, a notice
stating (A) the date on which a record is to be taken for the purpose of such
dividend or distribution or, if a record is not to be taken, the date as of
which the holders of Common Stock of record to be entitled to such dividend or
distribution are to be determined, and the nature and amount of such dividend or
distribution or (B) the date on which such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reclassification, consolidation, merger,
sale, transfer, dissolution, liquidation or winding up.
[(i) "Common Stock". For the purposes of this Section
5, "Common Stock" means stock of the Company of any class, whether now or
hereafter authorized, that has the right to participate in the distribution of
either earnings or assets of the Company without limit as to the amount or
percentage. In case by reason of the operation of paragraph (d) of this Section
5,
13
<PAGE> 14
the shares of Series A Preferred Stock shall be convertible into any other
shares of stock or other securities or property of the Company or of any other
company, any reference herein to the conversion of shares of Series A Preferred
Stock pursuant to this Section 5 shall be deemed to refer to and include the
conversion of shares of Series A Preferred Stock into such other shares of stock
or other securities or property.]
6. No Sinking Fund. No sinking fund will be established for the
retirement or redemption of shares of Series A Preferred Stock.
7. Liquidation Rights; Priority.
(a) In the event of any liquidation, dissolution or winding up
of the affairs of the Company, whether voluntary or involuntary, after payment
or provision for payment of the debts and other liabilities of the Company, the
holders of shares of the Series A Preferred Stock shall be entitled to receive,
out of the assets of the Company, whether such assets are capital or surplus and
whether or not any dividends as such are declared, the Liquidation Preference
Amount and no more, before any distribution shall be made to the holders of the
Common Stock or any other class of stock or series thereof ranking Junior to the
Series A Preferred Stock with respect to the distribution of assets. Unless
specifically designated as junior or senior to the Series A Preferred Stock with
respect to the distribution of assets, all other series or classes of Preferred
Stock of the Company shall rank on a parity with the Series A Preferred Stock
with respect to the distribution of assets. After payment of the full
Liquidation Preference Amount, the holders of shares of the Series A Preferred
Stock shall not be entitled to any further participation.
(b) Nothing contained in this Section 7 shall be deemed to
prevent redemption of shares of the Series A Preferred Stock by the Company in
the manner provided in Section 3. Neither the merger nor consolidation of the
Company into or with any other company, nor the merger or consolidation of any
other company into or with the Company, nor a sale, transfer or lease of all or
any part of the assets of the Company, shall be deemed to be a liquidation,
dissolution or winding up of the Company within the meaning of this Section 7.
(c) Written notice of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, stating a
payment date and the place where the distributable amounts shall be payable and
containing a statement of or reference to the conversion right set forth in
Section 5 hereof, shall be given by mail, postage prepaid, no less than 30 days
prior to the payment date stated therein, to the holders of record of the Series
A preferred Stock at their respective addresses as the same shall appear on the
books of the Company.
(d) If the amounts available for distribution with respect to
the Series A Preferred Stock and all other outstanding stock of the Company
ranking on a parity with the Series A Preferred Stock upon liquidation are
not-sufficient to satisfy the full liquidation rights of all the outstanding
Series A Preferred Stock and stock ranking on a parity therewith, then the
holders of each series of such stock will share ratably in any such distribution
of assets in proportion to the full respective
14
<PAGE> 15
preferential amount (which in the case of Preferred Stock may include
accumulated dividends) to which they are entitled.
IN WITNESS WHEREOF, Cygnet Financial Corporation has caused this
Certificate to be signed by _____________________, its
__________________________, and attested by _________________________, its
_____________________ this ___ day of ____________, 1998.
CYGNET FINANCIAL CORPORATION
By
____________________________________
Name:
_________________________________
Title:
_________________________________
Attest:
___________________________________
Name:
____________________________________
Title:
____________________________________
15
<PAGE> 1
Exhibit 8
July 31, 1998
Cygnet Financial Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Re: Offering of Rights to Purchase Shares of Common Stock
of Cygnet Financial Corporation
Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax
consequences associated with the issuance to holders of common stock of Ugly
Duckling Corporation, a Delaware corporation ("UDC"), by Cygnet Financial
Corporation, a Delaware corporation ("Cygnet"), of rights to acquire shares of
Cygnet common stock ("Rights") pursuant to the terms of that certain offering of
rights ("Rights Offering") more particularly described in Amendment No. 2 to the
Registration Statement on Form S-1 (File No. 333-57323) filed by Cygnet with the
Securities and Exchange Commission on July 31, 1998 (the "Registration
Statement") and in that certain Capitalization Agreement attached as an exhibit
to the Registration Statement, by and among parties including UDC and Cygnet
(the "Capitalization Agreement").
For purposes hereof, we have assumed that the Rights Offering will take
place in accordance with the description thereof in the Registration Statement
and the applicable provisions of the Capitalization Agreement.
Based on the foregoing and on the Internal Revenue Code of 1986, as
amended, the regulations promulgated thereunder, and judicial and administrative
interpretations thereof, all as in effect on the date hereof, we hereby confirm
that the statements of law and the conclusions of law contained in the
Registration Statement under the caption "Federal Income Tax Consequences"
constitute our opinion. It is expressly provided that no opinion is expressed
regarding any statement, assumption, or opinion regarding factual matters
(including, without limitation, the value of the Rights) contained in the
Registration Statement or elsewhere.
<PAGE> 2
July 31, 1998
In addition to the assumptions and limitations set forth above, this
opinion is subject to the exceptions, limitations, and qualifications set forth
below:
1. This opinion represents and is based upon our best judgment regarding
the application of federal income tax laws arising under the Code, existing
judicial decisions, administrative regulations, and published rulings and
procedures. Our opinion is not binding upon the Internal Revenue Service or the
courts, and there is no assurance that the Internal Revenue Service will not
successfully assert a contrary position. Furthermore, no assurance can be given
that future legislative, judicial, or administrative changes, on either a
prospective or retroactive basis, would not adversely affect the accuracy of the
conclusions stated herein. Nevertheless, we undertake no responsibility to
advise you of any new developments in the application or interpretation of the
federal income tax laws.
2. This opinion addresses only the federal income tax consequences to
holders of Rights in connection with issues relating to the Rights Offering and
does not address any other federal or any state, local, or foreign tax
consequences.
3. No opinion is expressed if the Rights Offering is not consummated in
accordance with the description thereof in the Registration Statement and the
applicable provisions of the Capitalization Agreement.
4. We understand that this opinion is to be used in connection with the
registration of the Rights and the common stock of Cygnet pursuant to the
Securities Act of 1933 (the "Act"), as amended. We hereby consent to the filing
of this opinion in connection with and as a part of the Registration Statement
on Form S-1. We also hereby consent to the reference to our firm as "Tax
Counsel" as used in the Registration Statement; provided, however, that the
discussion relating thereto is subject to the assumptions, limitations,
exceptions, and qualifications set forth herein and in the Registration
Statement. Except as set forth above, this opinion may not be relied upon for
any other purpose.
Yours truly,
/s/ Snell & Wilmer L.L.P.
<PAGE> 1
EXHIBIT 10.2
CYGNET FINANCIAL CORPORATION
1998 STOCK INCENTIVE PLAN
ARTICLE 1 PURPOSE
1.1 GENERAL. The purpose of the Cygnet Financial Corporation 1998
Stock Incentive Plan (the "Plan") is to promote the success, and enhance the
value, of Cygnet Financial Corporation (the "Company") by linking the personal
interests of its employees, officers, executives, and nonemployee directors of,
and consultants and advisors to, the Company to those of Company stockholders
and by providing such individuals with an incentive for outstanding performance
in order to generate superior returns to shareholders of the Company. The Plan
is further intended to provide flexibility to the Company in its ability to
motivate, attract, and retain the services of employees, officers, executives,
and nonemployee directors of, and consultants and advisors to, the Company upon
whose judgment, interest, and special effort the successful conduct of the
Company's operation is largely dependent.
ARTICLE 2 EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan is effective as of the date the Plan is
approved by the Company's shareholders (the "Effective Date").
ARTICLE 3 DEFINITIONS AND CONSTRUCTION.
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Sections 1.1 or 2.1 unless a clearly different meaning is required
by the context. The following words and phrases shall have the following
meanings:
(a) "Award" means any Option, Stock Appreciation Right,
Restricted Stock Award, Performance Share Award, Performance-Based
Award, or Non-Employee Director Restricted Stock Grant granted to a
Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract,
or other instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means (except as otherwise provided in an Award
Agreement) if the Committee, in its reasonable and good faith
discretion, determines that the employee, consultant or advisor (I) has
developed or pursued interests substantially adverse to the Company,
(ii) materially breached any employment, engagement or confidentiality
agreement or otherwise failed to
<PAGE> 2
satisfactorily discharge his or her duties, (iii) has not devoted all
or substantially all of his or her business time, effort and attention
to the affairs of the Company (or such lesser amount as has been agreed
to in writing by the Company), (iv) is convicted of a felony involving
moral turpitude, or (v) has engaged in activities or omissions that are
detrimental to the well-being of the Company.
(e) "Change of Control" means any of the following:
(1) any merger of the Company in which the Company is
not the continuing or surviving entity, or pursuant to which Stock
would be converted into cash, securities or other property, other than
a merger of the Company in which the holders of the Company's Stock
immediately prior to the merger have the same proportionate ownership
of beneficial interest of common stock or other voting securities of
the surviving entity immediately after the merger;
(2) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of assets or
earning power aggregating more than 40% of the assets or earning power
of the Company and its subsidiaries (taken as a whole), other than
pursuant to a sale-leaseback, structured finance or other form of
financing transaction;
(3) the shareholders of the Company shall approve any
plan or proposal for liquidation or dissolution of the Company;
(4) any person (as such term is used in Section 13(d)
and 14(d)(2) of the Exchange Act), other than any current shareholder
of the Company or affiliate thereof or any employee benefit plan of the
Company or any subsidiary of the Company or any entity holding shares
of capital stock of the Company for or pursuant to the terms of any
such employee benefit plan in its role as an agent or trustee for such
plan, shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 20% or more of the Company's
outstanding Stock; or
(5) during any period of two consecutive years,
individuals who at the beginning of such period shall fail to
constitute a majority thereof, unless the election, or the nomination
for election by the Company's shareholders, of each new director was
approved by a vote of at least two-thirds of the directors then still
in office who were directors at the beginning of the period.
(f) "Code" means the Internal Revenue Code of 1986, as
amended.
(g) "Committee" means the committee of the Board described
in Article 4.
(h) "Covered Employee" means an Employee who is a "covered
employee" within the meaning of Section 162(m) of the Code.
2
<PAGE> 3
(i) "Disability" shall mean any illness or other physical or
mental condition of a Participant which renders the Participant
incapable of performing his customary and usual duties for the Company,
or any medically determinable illness or other physical or mental
condition resulting from a bodily injury, disease or mental disorder
which in the judgment of the Committee is permanent and continuous in
nature. The Committee may require such medical or other evidence as it
deems necessary to judge the nature and permanency of the Participant's
condition.
(j) "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time.
(k) "Fair Market Value" means, as of any given date, the
fair market value of Stock or other property on a particular date
determined by such methods or procedures as may be established from
time to time by the Committee. Unless otherwise determined by the
Committee, the Fair Market Value of Stock as of any date shall be the
closing price for the Stock as reported on the NASDAQ National Market
System (or on any national securities exchange on which the Stock is
then listed) for that date or, if no closing price is so reported for
that date, the closing price on the next preceding date for which a
closing price was reported.
(l) "Grant Date" means, with respect to Initial Grants of
Restricted Stock under Section 12.1, the effective date of the
Company's initial registration statement with the Securities Exchange
Commission. Grant Date means, with respect to Subsequent Grants of
Restricted Stock under Section 12.2, the date on which an individual
first becomes a member of the Board.
(m) "Incentive Stock Option" means an Option that is
intended to meet the requirements of Section 422 of the Code or any
successor provision thereto.
(n) "Non-Employee Director" means a member of the Board who
qualifies as a "Non-Employee Director" as defined in Rule 16b-3(b)(3)
of the Exchange Act, or any successor definition adopted by the Board.
For purposes of grants under Article 12, a Non-Employee Director shall
mean any member of the Board who is not otherwise an employee of the
Company or any Subsidiary.
(o) "Non-Employee Director Restricted Stock Grants" means
Stock granted to Non-Employee Directors under Article 12 that is
subject to certain restrictions and to risk of forfeiture.
(p) "Non-Qualified Stock Option" means an Option that is not
intended to be an Incentive Stock Option.
3
<PAGE> 4
(q) "Option" means a right granted to a Participant under
Article 7 to purchase Stock at a specified price during specified time
periods. An Option may be either an Incentive Stock Option or a
Non-Qualified Stock Option.
(r) "Participant" means an individual who has been granted
an Award under the Plan.
(s) "Performance-Based Awards" means the Performance Share
Awards and Restricted Stock Awards granted to selected Covered
Employees pursuant to Articles 9 and 10, but which are subject to the
terms and conditions set forth in Article 11. All Performance-Based
Awards are intended to qualify as "performance-based compensation"
under Section 162(m) of the Code.
(t) "Performance Criteria" means the criteria that the
Committee selects for purposes of establishing the Performance Goal or
Performance Goals for a Participant for a Performance Period. The
Performance Criteria that will be used to establish Performance Goals
are limited to the following: pre- or after-tax net earnings, sales
growth, operating earnings, operating cash flow, return on net assets,
return on stockholders' equity, return on assets, return on capital,
Stock price growth, stockholder returns, gross or net profit margin,
earnings per share, price per share of Stock, and market share, any of
which may be measured either in absolute terms or as compared to any
incremental increase or as compared to results of a peer group. The
Committee shall, within the time prescribed by Section 162(m) of the
Code, define in an objective fashion the manner of calculating the
Performance Criteria it selects to use for such Performance Period for
such Participant.
(u) "Performance Goals" means, for a Performance Period, the
goals established in writing by the Committee for the Performance
Period based upon the Performance Criteria. Depending on the
Performance Criteria used to establish such Performance Goals, the
Performance Goals may be expressed in terms of overall Company
performance or the performance of a division, business unit or an
individual. The Committee, in its discretion, may, within the time
prescribed by Section 162(m) of the Code, adjust or modify the
calculation of Performance Goals for such Performance Period in order
to prevent the dilution or enlargement of the rights of Participants
(i) in the event of, or in anticipation of, any unusual or
extraordinary corporate item, transaction, event, or development, or
(ii) in recognition of, or in anticipation of, any other unusual or
nonrecurring events affecting the Company, or the financial statements
of the Company, or in response to, or in anticipation of, changes in
applicable laws, regulations, accounting principles, or business
conditions.
(v) "Performance Period" means the one or more periods of
time, which may be of varying and overlapping durations, as the
Committee may select, over
4
<PAGE> 5
which the attainment of one or more Performance Goals will be measured
for the purpose of determining a Participant's right to, and the
payment of, a Performance-Based Award.
(w) "Performance Share" means a right granted to a
Participant under Article 9, to receive cash, Stock, or other Awards,
the payment of which is contingent upon achieving certain performance
goals established by the Committee.
(x) "Plan" means the Cygnet Financial Corporation 1998 Stock
Incentive Plan, as amended from time to time.
(y) "Restricted Stock Award" means Stock granted to a
Participant other than a Non-Employee Director under Article 10 that is
subject to certain restrictions and to risk of forfeiture.
(z) "Stock" means the common stock of the Company and such
other securities of the Company that may be substituted for Stock
pursuant to Article 13.
(aa) "Stock Appreciation Right" or "SAR" means a right
granted to a Participant under Article 8 to receive a payment equal to
the difference between the Fair Market Value of a share of Stock as of
the date of exercise of the SAR over the grant price of the SAR, all as
determined pursuant to Article 8.
(bb) "Subsidiary" means any corporation of which a majority
of the outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.
ARTICLE 4 ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Board or a
Committee appointed by, and which serves at the discretion of, the Board. If the
Board appoints a Committee, the Committee shall consist of at least two
individuals, each of whom qualifies as (i) a Non-Employee Director, and (ii) an
"outside director" under Code Section 162(m) and the regulations issued
thereunder. Reference to the Committee shall refer to the Board if the Board
does not appoint a Committee.
4.2 ACTION BY THE COMMITTEE. A majority of the Committee shall
constitute a quorum. The acts of a majority of the members present at any
meeting at which a quorum is present and acts approved in writing by a majority
of the Committee in lieu of a meeting shall be deemed the acts of the Committee.
Each member of the Committee is entitled to, in good faith, rely or act upon any
report or other information furnished to that member by any officer or other
employee of the Company or any Subsidiary, the Company's independent certified
public accountants, or any executive compensation consultant or other
professional retained by the Company to assist in the administration of the
Plan.
5
<PAGE> 6
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants to receive Awards;
(b) Determine the type or types of Awards to be granted to
each Participant;
(c) Determine the number of Awards to be granted and the
number of shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted
under the Plan including but not limited to, the exercise price, grant
price, or purchase price, any restrictions or limitations on the Award,
any schedule for lapse of forfeiture restrictions or restrictions on
the exercisability of an Award, and accelerations or waivers thereof,
based in each case on such considerations as the Committee in its sole
discretion determines; provided, however, that the Committee shall not
have the authority to accelerate the vesting, or waive the forfeiture,
of any Performance-Based Awards and provided further that the Committee
shall not take any actions that would result in the Non-Employee
Director Restricted Stock Grants under Section 12 not being treated as
formula grants within the meaning of Rule 16b-3 of the Exchange Act;
(e) Amend, modify, or terminate any outstanding Award, with
the Participant's consent unless the Committee has the authority to
amend, modify or terminate an Award without the Participant's consent
under any other provision of the Plan.
(f) Determine whether, to what extent, and under what
circumstances an Award may be settled in, or the exercise price of an
Award may be paid in, cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(g) Prescribe the form of each Award Agreement, which need
not be identical for each Participant;
(h) Decide all other matters that must be determined in
connection with an Award;
(i) Establish, adopt or revise any rules and regulations as
it may deem necessary or advisable to administer the Plan; and
(j) Make all other decisions and determinations that may be
required under the Plan or as the Committee deems necessary or
advisable to administer the Plan.
6
<PAGE> 7
4.4 DECISIONS BINDING. The Committee's interpretation of the
Plan, any Awards granted under the Plan, any Award Agreement and all decisions
and determinations by the Committee with respect to the Plan are final, binding,
and conclusive on all parties.
ARTICLE 5 SHARES SUBJECT TO THE PLAN
5.1 NUMBER OF SHARES. Subject to adjustment provided in
Section 14.1, the aggregate number of shares of Stock reserved and available for
grant under the Plan shall be 1,050,000.
5.2 LAPSED AWARDS. To the extent that an Award terminates,
expires or lapses for any reason, any shares of Stock subject to the Award will
again be available for the grant of an Award under the Plan and shares subject
to SARs or other Awards settled in cash will be available for the grant of an
Award under the Plan.
5.3 STOCK DISTRIBUTED. Any Stock distributed pursuant to an
Award may consist, in whole or in part, of authorized and unissued Stock,
treasury Stock or Stock purchased on the open market.
5.4 LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS.
Notwithstanding any provision in the Plan to the contrary, and subject to the
adjustment in Section 14.1, the maximum number of shares of Stock with respect
to one or more Awards that may be granted to any one Participant during the
Company's fiscal year shall be 600,000.
ARTICLE 6 ELIGIBILITY AND PARTICIPATION
6.1 ELIGIBILITY.
(a) GENERAL. Persons eligible to participate in this Plan
include all employees, officers, executives and nonemployee directors
of, and consultants and advisors to, the Company or a Subsidiary, as
determined by the Committee, including such individuals who are also
members of the Board.
(b) FOREIGN PARTICIPANTS. In order to assure the viability of
Awards granted to Participants employed in foreign countries, the
Committee may provide for such special terms as it may consider
necessary or appropriate to accommodate differences in local law, tax
policy, or custom. Moreover, the Committee may approve such supplements
to, or amendments, restatements, or alternative versions of the Plan as
it may consider necessary or appropriate for such purposes without
thereby affecting the terms of the Plan as in effect for any other
purpose; provided, however, that no such
7
<PAGE> 8
supplements, amendments, restatements, or alternative versions shall
increase the share limitations contained in Section 5.1 of the Plan.
6.2 ACTUAL PARTICIPATION. Subject to the provisions of the
Plan, the Committee may, from time to time, select from among all eligible
individuals, those to whom Awards shall be granted and shall determine the
nature and amount of each Award. No individual shall have any right to be
granted an Award under this Plan.
ARTICLE 7 STOCK OPTIONS
7.1 GENERAL. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock
under an Option shall be determined by the Committee and set forth in
the Award Agreement. It is the intention under the Plan that the
exercise price for any Option shall not be less than the Fair Market
Value as of the date of grant; provided, however that the Committee
may, in its discretion, grant Options (other than Options that are
intended to be Incentive Stock Options or Options that are intended to
qualify as performance-based compensation under Code Section 162(m))
with an exercise price of less than Fair Market Value on the date of
grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part. The Committee shall also determine the performance or
other conditions, if any, that must be satisfied before all or part of
an Option may be exercised.
(c) PAYMENT. The Committee shall determine the methods by
which the exercise price of an Option may be paid, the form of payment,
including, without limitation, cash, shares of Stock (through actual
tender or by attestation), or other property (including broker-assisted
"cashless exercise" arrangements), and the methods by which shares of
Stock shall be delivered or deemed to be delivered to Participants.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a
written Award Agreement between the Company and the Participant. The
Award Agreement shall include such additional provisions as may be
specified by the Committee.
7.2 INCENTIVE STOCK OPTIONS. Incentive Stock Options shall be
granted only to employees and the terms of any Incentive Stock Options granted
under the Plan must comply with the following additional rules:
(a) EXERCISE PRICE. The exercise price per share of Stock
shall be set by the Committee, provided that the exercise price for any
Incentive Stock Option may not be less than the Fair Market Value as of
the date of the grant.
8
<PAGE> 9
(b) EXERCISE. In no event, may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(c) LAPSE OF OPTION. An Incentive Stock Option shall lapse
under the following circumstances:
(1) The Incentive Stock Option shall lapse
ten years from the date it is granted, unless an earlier time is
set in the Award Agreement.
(2) The Incentive Stock Option shall lapse
upon termination of employment for Cause or for any other
reason, other than the Participant's death or Disability, unless
the Committee determines in its discretion to extend the
exercise period for no more than ninety (90) days after the
Participant's termination of employment.
(3) If the Participant terminates employment
on account of Disability or death before the Option lapses
pursuant to paragraph (1) or (2) above, the Incentive Stock
Option shall lapse, unless it is previously exercised, on the
earlier of (i) the date on which the Option would have lapsed
had the Participant not become Disabled or lived and had his
employment status (i.e., whether the Participant was employed by
the Company on the date of his Disability or death or had
previously terminated employment) remained unchanged; or (ii) 12
months after the date of the Participant's termination of
employment on account of Disability or death. Upon the
Participant's Disability or death, any Incentive Stock Options
exercisable at the Participant's Disability or death may be
exercised by the Participant's legal representative or
representatives, by the person or persons entitled to do so
under the Participant's last will and testament, or, if the
Participant shall fail to make testamentary disposition of such
Incentive Stock Option or shall die intestate, by the person or
persons entitled to receive said Incentive Stock Option under
the applicable laws of descent and distribution.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market
Value (determined as of the time an Award is made) of all shares of
Stock with respect to which Incentive Stock Options are first
exercisable by a Participant in any calendar year may not exceed
$100,000.00 or such other limitation as imposed by Section 422(d) of
the Code, or any successor provision. To the extent that Incentive
Stock Options are first exercisable by a Participant in excess of such
limitation, the excess shall be considered Non-Qualified Stock Options.
(e) TEN PERCENT OWNERS. An Incentive Stock Option shall be
granted to any individual who, at the date of grant, owns stock
possessing more than ten percent of the total combined voting power of
all classes of Stock of the Company only if such Option is granted at a
price that is not less
9
<PAGE> 10
than 110% of Fair Market Value on the date of grant and the Option is
exercisable for no more than five years from the date of grant.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an
Incentive Stock Option may be made pursuant to this Plan after the
tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant.
ARTICLE 8 STOCK APPRECIATION RIGHTS
8.1 GRANT OF SARs. The Committee is authorized to grant SARs
to Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock
Appreciation Right, the Participant to whom it is granted has the right
to receive the excess, if any, of:
(1) The Fair Market Value of a share of Stock on the
date of exercise; over
(2) The grant price of the Stock Appreciation Right
as determined by the Committee, which shall not be less than
the Fair Market Value of a share of Stock on the date of grant
in the case of any SAR related to any Incentive Stock Option.
(b) OTHER TERMS. All awards of Stock Appreciation Rights shall
be evidenced by an Award Agreement. The terms, methods of exercise,
methods of settlement, form of consideration payable in settlement, and
any other terms and conditions of any Stock Appreciation Right shall be
determined by the Committee at the time of the grant of the Award and
shall be reflected in the Award Agreement.
ARTICLE 9 PERFORMANCE SHARES
9.1 GRANT OF PERFORMANCE SHARES. The Committee is authorized
to grant Performance Shares to Participants on such terms and conditions as may
be selected by the Committee. The Committee shall have the complete discretion
to determine the number of Performance Shares granted to each Participant. All
Awards of Performance Shares shall be evidenced by an Award Agreement.
9.2 RIGHT TO PAYMENT. A grant of Performance Shares gives the
Participant rights, valued as determined by the Committee, and payable to, or
exercisable
10
<PAGE> 11
by, the Participant to whom the Performance Shares are granted, in whole or in
part, as the Committee shall establish at grant or thereafter. The Committee
shall set performance goals and other terms or conditions to payment of the
Performance Shares in its discretion which, depending on the extent to which
they are met, will determine the number and value of Performance Shares that
will be paid to the Participant.
9.3 OTHER TERMS. Performance Shares may be payable in cash,
Stock, or other property, and have such other terms and conditions as determined
by the Committee and reflected in the Award Agreement.
ARTICLE 10 RESTRICTED STOCK AWARDS
10.1 GRANT OF RESTRICTED STOCK. The Committee is authorized to
make Awards of Restricted Stock to Participants in such amounts and subject to
such terms and conditions as may be selected by the Committee. All Awards of
Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2 ISSUANCE AND RESTRICTIONS. Restricted Stock shall be
subject to such restrictions on transferability and other restrictions as the
Committee may impose (including, without limitation, limitations on the right to
vote Restricted Stock or the right to receive dividends on the Restricted
Stock). These restrictions may lapse separately or in combination at such times,
under such circumstances, in such installments, or otherwise, as the Committee
determines at the time of the grant of the Award or thereafter.
10.3 FORFEITURE. Except as otherwise determined by the
Committee at the time of the grant of the Award or thereafter, upon termination
of employment during the applicable restriction period, Restricted Stock that is
at that time subject to restrictions shall be forfeited, provided, however, that
the Committee may provide in any Restricted Stock Award Agreement that
restrictions or forfeiture conditions relating to Restricted Stock will be
waived in whole or in part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or in part
restrictions or forfeiture conditions relating to Restricted Stock.
10.4 CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock
granted under the Plan may be evidenced in such manner as the Committee shall
determine. If certificates representing shares of Restricted Stock are
registered in the name of the Participant, certificates must bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to such
Restricted Stock, and the Company may, at its discretion, retain physical
possession of the certificate until such time as all applicable restrictions
lapse.
11
<PAGE> 12
ARTICLE 11 PERFORMANCE-BASED AWARDS
11.1 PURPOSE. The purpose of this Article 11 is to provide the
Committee the ability to qualify the Performance Share Awards under Article 9
and the Restricted Stock Awards under Article 10 as "performance-based
compensation" under Section 162(m) of the Code. If the Committee, in its
discretion, decides to grant a Performance-Based Award to a Covered Employee,
the provisions of this Article 11 shall control over any contrary provision
contained in Articles 9 or 10.
11.2 APPLICABILITY. This Article 11 shall apply only to those
Covered Employees selected by the Committee to receive Performance-Based Awards.
The Committee may, in its discretion, grant Restricted Stock Awards or
Performance Share Awards to Covered Employees that do not satisfy the
requirements of this Article 11. The designation of a Covered Employee as a
Participant for a Performance Period shall not in any manner entitle the
Participant to receive an Award for the period. Moreover, designation of a
Covered Employee as a Participant for a particular Performance Period shall not
require designation of such Covered Employee as a Participant in any subsequent
Performance Period and designation of one Covered Employee as a Participant
shall not require designation of any other Covered Employees as a Participant in
such period or in any other period.
11.3 DISCRETION OF COMMITTEE WITH RESPECT TO PERFORMANCE
AWARDS. With regard to a particular Performance Period, the Committee shall have
full discretion to select the length of such Performance Period, the type of
Performance-Based Awards to be issued, the kind and/or level of the Performance
Goal, and whether the Performance Goal is to apply to the Company, a Subsidiary
or any division or business unit thereof.
11.4 PAYMENT OF PERFORMANCE AWARDS. Unless otherwise provided
in the relevant Award Agreement, a Participant must be employed by the Company
or a Subsidiary on the last day of the Performance Period to be eligible for a
Performance Award for such Performance Period. Furthermore, a Participant shall
be eligible to receive payment under a Performance-Based Award for a Performance
Period only if the Performance Goals for such period are achieved.
In determining the actual size of an individual
Performance-Based Award, the Committee may reduce or eliminate the amount of the
Performance-Based Award earned for the Performance Period, if in its sole and
absolute discretion, such reduction or elimination is appropriate.
11.5 MAXIMUM AWARD PAYABLE. The maximum Performance-Based
Award payable to any one Participant under the Plan for a Performance Period is
600,000 shares of Stock, or in the event the Performance-Based Award is paid in
cash, such maximum Performance-Based Award shall be determined by multiplying
600,000 by the
12
<PAGE> 13
Fair Market Value of one share of Stock as of the date of grant of the
Performance-Based Award.
ARTICLE 12 NONEMPLOYEE DIRECTOR RESTRICTED STOCK GRANTS
12.1 INITIAL GRANT OF RESTRICTED STOCK. Each individual who is
a Nonemployee Director on the Grant Date shall be granted that number of shares
of restricted stock equal to the number derived by dividing 50,000 by the Fair
Market Value per share of Stock on such Grant Date.
12.2 SUBSEQUENT GRANTS OF RESTRICTED STOCK. Each individual
who, after the Effective Date, first becomes a Nonemployee Director shall be
granted that number of shares of restricted stock equal to the number derived by
dividing 50,000 by the Fair Market Value per share of Stock on the Grant Date.
12.3 RESTRICTED STOCK AGREEMENT. Each Non-Employee Director
Restricted Stock Grant shall be evidenced by an Award Agreement that will not
include any terms or conditions that are inconsistent with the terms and
conditions of the Plan.
12.4 NONTRANSFERABILITY OF RESTRICTED STOCK. The shares of
restricted stock granted under this Article 12 may not be sold, transferred,
pledged, assigned, or otherwise alienated until the end of the applicable period
of restriction.
12.5 PERIOD OF RESTRICTION. Restricted stock granted at each
Grant Date shall be deemed a separate grant. The period of restriction for each
grant of shares of restricted stock under this Article 12 shall expire on the
date the Non-Employee Director Restricted Stock Grant vests in accordance with
the schedule below.
<TABLE>
<CAPTION>
================================================================================
PERCENTAGE OF SHARES IN GRANT BECOME DATE RESTRICTED STOCK
UNRESTRICTED GRANT VESTS
- --------------------------------------------------------------------------------
<S> <C>
First 34% First anniversary of the
Grant Date
Second 33% Second anniversary of the
Grant Date
Third 33% Third anniversary of the
Grant Date
</TABLE>
12.6 CERTIFICATE LEGEND. Any certificate representing shares
of restricted stock granted pursuant to the Plan shall bear a legend
substantially in the form that follows:
13
<PAGE> 14
"The sale or other transfer of the shares of Stock
represented by this certificate, whether voluntary,
involuntary, or by operation of law, is subject to
certain restrictions on transfer as set forth in the
Cygnet Financial Corporation 1998 Stock Incentive Plan,
and the corresponding Award Agreement. A copy of the
Plan and the Agreement may be obtained from the
Secretary of Cygnet Financial Corporation."
12.7 REMOVAL OF RESTRICTIONS. Except as otherwise provided in
the Plan, shares of restricted stock covered by each Non-Employee Director
Restricted Stock Grant made under the Plan shall become freely transferable by
the director after the last day of the period of restriction. Once the shares
are released from the restrictions, the director shall be entitled to have the
legend required by Section 12.6 removed from his or her Stock certificate. All
rights with respect to the restricted stock granted to a director under the Plan
shall be available during his or her lifetime only to such director.
12.8 VOTING RIGHTS. During the period of restriction,
directors holding shares of restricted stock granted hereunder shall have voting
rights with respect to those shares of Stock.
12.9 DIVIDENDS AND OTHER DISTRIBUTIONS. During the period of
restriction, directors holding shares of restricted stock granted hereunder
shall be entitled to receive any dividend or other distribution paid with
respect to those shares while they are so held.
12.10 TERMINATION OF SERVICE ON BOARD. If a Participant's
service on the Board terminates for any reason before the end of a period of
restriction with respect to any Non-Employee Director Restricted Stock Grant,
the restricted stock that is subject to a period of restriction shall be
forfeited (and will be again available for grant under the Plan).
ARTICLE 13 PROVISIONS APPLICABLE TO AWARDS
13.1 STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution for, any
other Award granted under the Plan. If an Award is granted in substitution for
another Award, the Committee may require the surrender of such other Award in
consideration of the grant of the new Award. Awards granted in addition to or in
tandem with other Awards may be granted either at the same time as or at a
different time from the grant of such other Awards.
14
<PAGE> 15
13.2 EXCHANGE PROVISIONS. The Committee may at any time offer
to exchange or buy out any previously granted Award for a payment in cash,
Stock, or another Award (subject to Section 13.1), based on the terms and
conditions the Committee determines and communicates to the Participant at the
time the offer is made.
13.3 TERM OF AWARD. The term of each Award shall be for the
period as determined by the Committee, provided that in no event shall the term
of any Incentive Stock Option or a Stock Appreciation Right granted in tandem
with the Incentive Stock Option exceed a period of ten years from the date of
its grant.
13.4 FORM OF PAYMENT FOR AWARDS. Subject to the terms of the
Plan and any applicable law or Award Agreement, payments or transfers to be made
by the Company or a Subsidiary on the grant or exercise of an Award may be made
in such forms as the Committee determines at or after the time of grant,
including without limitation, cash, Stock, other Awards, or other property, or
any combination, and may be made in a single payment or transfer, in
installments, or on a deferred basis, in each case determined in accordance with
rules adopted by, and at the discretion of, the Committee.
13.5 LIMITS ON TRANSFER. No right or interest of a Participant
in any Award may be pledged, encumbered, or hypothecated to or in favor of any
party other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided by the Committee, no Award
shall be assignable or transferable by a Participant other than by will or the
laws of descent and distribution.
13.6 BENEFICIARIES. Notwithstanding Section 13.5, a
Participant may, in the manner determined by the Committee, designate a
beneficiary to exercise the rights of the Participant and to receive any
distribution with respect to any Award upon the Participant's death. A
beneficiary, legal guardian, legal representative, or other person claiming any
rights under the Plan is subject to all terms and conditions of the Plan and any
Award Agreement applicable to the Participant, except to the extent the Plan and
Award Agreement otherwise provide, and to any additional restrictions deemed
necessary or appropriate by the Committee. If the Participant is married, a
designation of a person other than the Participant's spouse as his beneficiary
with respect to more than 50 percent of the Participant's interest in the Award
shall not be effective without the written consent of the Participant's spouse.
If no beneficiary has been designated or survives the Participant, payment shall
be made to the person entitled thereto under the Participant's will or the laws
of descent and distribution. Subject to the foregoing, a beneficiary designation
may be changed or revoked by a Participant at any time provided the change or
revocation is filed with the Committee.
13.7 STOCK CERTIFICATES. All Stock certificates delivered
under the Plan are subject to any stop-transfer orders and other restrictions as
the Committee deems necessary or advisable to comply with Federal or state
securities laws, rules and regulations and the rules of any national securities
exchange or automated quotation
15
<PAGE> 16
system on with the Stock is listed, quoted, or traded. The Committee may place
legends on any Stock certificate to reference restrictions applicable to the
Stock.
13.8 ACCELERATION UPON A CHANGE OF CONTROL. If a Change of
Control occurs, all outstanding Options, Stock Appreciation Rights, and other
Awards shall become fully exercisable and all restrictions on outstanding Awards
shall lapse, except in the event that the surviving or resulting entity agrees
to assume the Awards on terms and conditions that substantially preserve the
Participant's rights and benefits of the Award then outstanding. To the extent
that this provision causes Incentive Stock Options to exceed the dollar
limitation set forth in Section 7.2(d), the excess Options shall be deemed to be
Non-Qualified Stock Options. Upon, or in anticipation of, such an event, the
Committee may cause every Award outstanding hereunder to terminate at a specific
time in the future and shall give each Participant the right to exercise Awards
during a period of time as the Committee, in its sole and absolute discretion,
shall determine, except in the event that the surviving or resulting entity
agrees to assume the Awards on terms and conditions that substantially preserve
the Participant's rights and benefits of the Award then outstanding.
ARTICLE 14 CHANGES IN CAPITAL STRUCTURE
14.1 GENERAL. In the event a stock dividend is declared upon
the Stock, the shares of Stock then subject to each Award (and the number of
shares subject thereto) shall be increased proportionately without any change in
the aggregate purchase price therefor. In the event the Stock shall be changed
into or exchanged for a different number or class of shares of Stock or of
another corporation, whether through reorganization, recapitalization, stock
split-up, combination of shares, merger or consolidation, there shall be
substituted for each such share of Stock then subject to each Award the number
and class of shares of Stock into which each outstanding share of Stock shall be
so exchanged, all without any change in the aggregate purchase price for the
shares then subject to each Award.
ARTICLE 15 AMENDMENT, MODIFICATION AND TERMINATION
15.1 AMENDMENT, MODIFICATION AND TERMINATION. With the
approval of the Board, at any time and from time to time, the Committee may
terminate, amend or modify the Plan; provided, however, that to the extent
necessary and desirable to comply with any applicable law, regulation, or stock
exchange rule, the Company shall obtain shareholder approval of any Plan
amendment in such a manner and to such a degree as required.
15.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant.
16
<PAGE> 17
ARTICLE 16 GENERAL PROVISIONS
16.1 NO RIGHTS TO AWARDS. No Participant , employee, or other
person shall have any claim to be granted any Award under the Plan, and neither
the Company nor the Committee is obligated to treat Participants, employees, and
other persons uniformly.
16.2 NO STOCKHOLDERS RIGHTS. No Award gives the Participant
any of the rights of a stockholder of the Company unless and until shares of
Stock are in fact issued to such person in connection with such Award.
16.3 WITHHOLDING. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy Federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of this Plan.
16.4 NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award
Agreement shall interfere with or limit in any way the right of the Company or
any Subsidiary to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Company or any
Subsidiary.
16.5 UNFUNDED STATUS OF AWARDS. The Plan is intended to be an
"unfunded" plan for incentive compensation. With respect to any payments not yet
made to a Participant pursuant to an Award, nothing contained in the Plan or any
Award Agreement shall give the Participant any rights that are greater than
those of a general creditor of the Company or any Subsidiary.
16.6 INDEMNIFICATION. To the extent allowable under applicable
law, each member of the Committee or of the Board shall be indemnified and held
harmless by the Company from any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by such member in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action or failure
to act under the Plan and against and from any and all amounts paid by him or
her in satisfaction of judgment in such action, suit, or proceeding against him
or her provided he or she gives the Company an opportunity, at its own expense,
to handle and defend the same before he or she undertakes to handle and defend
it on his or her own behalf. The foregoing right of indemnification shall not be
exclusive of any other rights of indemnification to which such persons may be
entitled under the Company's Articles of Incorporation or By-Laws, as a matter
of law, or otherwise, or any power that the Company may have to indemnify them
or hold them harmless.
16.7 RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan
shall be taken into account in determining any benefits under any pension,
retirement,
17
<PAGE> 18
savings, profit sharing, group insurance, welfare or other benefit plan of the
Company or any Subsidiary.
16.8 EXPENSES. The expenses of administering the Plan shall be
borne by the Company and its Subsidiaries.
16.9 TITLES AND HEADINGS. The titles and headings of the
Sections in the Plan are for convenience of reference only, and in the event of
any conflict, the text of the Plan, rather than such titles or headings, shall
control.
16.10 FRACTIONAL SHARES. No fractional shares of stock shall
be issued and the Committee shall determine, in its discretion, whether cash
shall be given in lieu of fractional shares or whether such fractional shares
shall be eliminated by rounding up or down as deemed appropriate by the
Committee.
16.11 SECURITIES LAW COMPLIANCE. With respect to any person
who is, on the relevant date, obligated to file reports under Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To
the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be void to the extent permitted by law and voidable as deemed
advisable by the Committee.
16.12 GOVERNMENT AND OTHER REGULATIONS. The obligation of the
Company to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Company shall be under no obligation to
register under the Securities Act of 1933, as amended (the "1933 Act"), any of
the shares of Stock paid under the Plan. If the shares paid under the Plan may
in certain circumstances be exempt from registration under the 1933 Act, the
Company may restrict the transfer of such shares in such manner as it deems
advisable to ensure the availability of any such exemption.
16.13 GOVERNING LAW. The Plan and all Award Agreements shall
be construed in accordance with and governed by the laws of the State of
Arizona.
18
<PAGE> 1
EXHIBIT 10.3
RESTRICTED STOCK GRANT FROM
THE REGISTRANT TO S. JOHNSON
During June 1998, Cygnet agreed to grant Steven P. Johnson 15,000 shares of
restricted common stock of Cygnet on or about the effective date of the split-up
transaction, subject to certain conditions.
<PAGE> 1
EXHIBIT 10.14
ESPLANADE
LEASE AGREEMENT
(Office)
PARCEL 1B
OFFICE LEASE SUMMARY
THIS OFFICE LEASE (hereinafter referred to as the "Lease") is entered
into by Landlord and Tenant as described in the following Basic Lease
Information on the Date which is set forth for reference only in the following
Basic Lease Information.
Landlord and Tenant agree:
Basic Lease Information. In addition to the terms that are defined elsewhere in
this Lease, the following defined terms are used in this Lease:
(a) Date: June 22, 1994
(b) Landlord: Esplanade Office Limited Partnership, a Delaware
limited partnership
(c) Landlord's Address: Esplanade Office Limited Partnership
c/o CORE Properties Incorporated
2425 East Camelback Road, Suite 390
Phoenix, Arizona 85016
with a copy at the same time to:
Aldrich Eastman Waltch
225 Franklin Street
Boston, MA 02110
Attention: General Counsel
(d) Tenant: Envirotest Systems Corp.,
a Delaware corporation.
(e) Tenant's Address: Prior to Occupancy:
2002 North Forbes Boulevard
Tucson, Arizona 85745-1448
Attention: William J. Beckham, Jr.
Following Occupancy:
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
(f) Building Address: 2525 East Camelback Road
Phoenix, Arizona 85016
(g) Premises: The Premises shown on Exhibit A to this
Lease, located on the eleventh (11th) floor
of the Building.
(h) Rentable Area of the Premises: 13,324 square feet.
(i) Rentable Area of the Building Office Space: 234,658 square feet.
(j) Scheduled Completion Date: September 1, 1994.
(k) Term: 84 months, beginning on the Commencement
Date and expiring at midnight on the
Expiration Date.
(l) Commencement Date: The earlier to occur of (i) the date that
Tenant first occupies the Premises for the
conduct of its business or (ii)
September 1, 1994.
(m) Expiration Date: August 31, 2001 or as extended pursuant to
Article 6.
<PAGE> 2
Page Two
(n) Security Deposit: N/A,
(o) Monthly Base Rent: One-twelfth (1/12) of the amount obtained
by multiplying the annual base rental rate for the Premises by the
number of square feet of Rentable Area of the Premises, as set forth
more specifically below:
$22,206.66 per month for Lease Years 1-3 ($20.00 x 13,324
square feet x 1/12)
$24,427.33 per month for Lease Years 4-5 ($22.00 x 13,324
square feet x 1/12)
$26,648.00 per month for Lease Years 6-7 ($24.00 x 13,3224
square feet x 1/12)
[***]
(q) Tenant's Proportionate Share of Building Direct Expenses: 5.68%
(determined by dividing the Rentable Area of the Premises by the
Rentable Area of the Building Office Space and multiplying the
resulting quotient to the fourth decimal place by one hundred).
(r) Tenant's Proportionate Share of Project Direct Expenses: 1.21%
(which percentage equals the ratio between the gross building area in
the Premises and the gross building area in the Project (other than the
hotel) if the Project were fully constructed and which percentage
shall be modified if there is any increase or decrease in the size
of the actual gross building area of the fully constructed Project
over that which Landlord anticipates on the date hereof).
(s) Base Year: 1994.
(t) Scheduled Space Plan and Construction Plan Information Delivery Date:
June 15, 1994, The date by which Tenant shall supply Landlord with the
information required in Article 6(a) for completion of space and
construction plans.
(u) Parking Charge: $25.00 per parking space per month for reserved
parking and $20.00 per parking space per month for
non-reserved parking for years one through five.
$35.00 per parking space per month for reserved
parking and $30.00 per parking space per month for
non-reserved parking for years six and seven.
(v) Parking Spaces: Tenant shall have the right to rent up to thirteen
(13) reserved parking spaces and twenty-six (26)
non-reserved parking spaces.
(w) Brokers: CORE Properties Incorporated
2200 East Camelback Road
Suite 110
Phoenix, Arizona 85016
and
CB Commercial
2346 North Central Avenue
Suite 100
Phoenix, Arizona 85004
Attention: Mike McQuaid
[*** INFORMATION REDACTED]
<PAGE> 3
ESPLANADE LEASE AGREEMENT
TABLE OF CONTENTS
ARTICLE PAGE
------- ----
1. PREMISES 1
2. TERM 1
3. RENT;[***] 1
[***]
5. ESCALATION 2
6. COMPLETION OF PREMISES 4
7. POSSESSION 5
8. USE OF PREMISES 5
9. COMPLIANCE WITH LAW 6
10. RULES AND REGULATIONS 6
11. ALTERATIONS 6
12. REPAIRS 7
13. ABANDONMENT 7
14. LIENS 7
15 ASSIGNMENT AND SUBLETTING 7
16. INDEMNIFICATION OF LANDLORD; INSURANCE 7
17. DENIAL OF SUBROGATION RIGHTS 8
18. SERVICES 8
19. HOLDING OVER 9
20. ENTRY BY LANDLORD 9
21. DEFAULT 9
22. REMEDIES 10
23. DAMAGE OR DESTRUCTION 10
24. EMINENT DOMAIN 11
25. SUBORDINATION; ATTORNMENT 12
26. NOTICES 12
27. LANDLORD'S RIGHT TO CURE DEFAULTS 12
28. DELAYS; DEFAULT BY LANDLORD 12
29. LIMITATIONS ON LANDLORD'S LIABILITY 14
30. TRANSFER OF LANDLORD'S INTEREST 15
31. SUCCESSORS AND ASSIGNS 15
32. ATTORNEYS' FEES 15
33. SUBSTITUTED PREMISES 15
34, SURRENDER OF PREMISES 16
35. WAIVER 16
36. GOVERNING LAW 16
37. DEFINITIONS AND MARGINAL HEADINGS 16
38. TIME OF ESSENCE 16
39. PARKING 16
40. COVENANTS AND CONDITIONS 17
41. RECORDING 17
42. INTEREST ON PAST DUE OBLIGATIONS 17
43. SEVERABILITY 17
44. PERSONAL PROPERTY TAXES 17
45. ENTIRE AGREEMENT 17
[***]
47. ENVIRONMENTAL PROVISIONS 18
48. BROKER 19
49. OPTION TO RENEW 19
50. CANCELLATION RIGHT 20
51. SIGNAGE 20
52 RIGHT OF FIRST REFUSAL 20
EXHIBIT "A"- THE PREMISES
EXHIBIT "B"- SITE PLAN
EXHIBIT "B-1"-PROJECT SITE PLAN
EXHIBIT "C"- SPACE PLAN
EXHIBIT "D"- STANDARD BUILDING TENANT IMPROVEMENTS
EXHIBIT "E"- OFFICE BUILDING RULES AND REGULATIONS
[***] - INFORMATION REDACTED
<PAGE> 4
1.
PREMISES
Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord, on the terms and conditions herein set forth, the Premises which are
located in the eleven (11) story office tower known as Office Building B (the
"Building") at the approximately twenty (20) acre Camelback Esplanade (the
"Project") on the southeast corner of 24th Street and Camelback Road, Phoenix,
Arizona. The Building was constructed on that portion of the Project ("Parcel
IB) which is more particularly described on the Phase Two site plan attached
hereto as Exhibit B and made a part hereof by this reference (the "Site Plan").
The location of the Building is crosshatched on the Site Plan. Attached hereto
as Exhibit B-1 and made a part hereof by this reference is the site plan for the
entire Project (the "Project Site Plan").
The Project Site Plan sets forth the proposed general layout
of the Project but shall not be a warranty, representation or agreement on the
part of Landlord that the Project will be constructed exactly as indicated.
Tenant understands and agrees that the Project will be built in phases.
Landlord or the owners of the balance of the Project may increase, reduce or
change the numbers, dimensions, use or location of the buildings, walkways,
parking areas and access roads in the Project in any manner whatsoever as
Landlord or such owners shall deem proper, and Landlord and such owners reserve
the right to make alterations, reductions or additions to, or to build
additional stories on, the buildings in the Project, to add or delete buildings
in the Project, and to change the phasing pattern of the Project.
2.
TERM
The Term of this Lease shall be the period commencing on the
Commencement Date and expiring on the Expiration Date.
3.
RENT;[***]
(a) Tenant shall pay to Landlord, as rent for the Premises
during the Term of this Lease, the Monthly Base Rent payable on or before the
first day of each calendar month, commencing on the Commencement Date; provided,
however, the first month's rent shall be paid by Tenant upon execution of this
Lease. The Monthly Base Rent due for a period of less than a full month shall be
prorated on the basis of a thirty-day month. The Monthly Base Rent shall be paid
to Landlord, without deduction or offset, in lawful money of the United States
of America at the address designated herein or at such other place as Landlord
may, from time to time, designate. Tenant shall also pay to Landlord with the
Monthly Base Rent, as additional rent, any privilege, excise, sales, gross
proceeds, rent or other tax now or hereafter levied, assessed or imposed,
directly or indirectly, by any governmental authority upon any rent or other
payments required by this Lease.
Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amounts of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any mortgage or deed of trust covering Parcel IB or any part thereof.
Accordingly, if any such payments due from Tenant shall not be received by
Landlord within five (5) days following the due date, Tenant shall pay to
Landlord a late charge equal to five percent (5%) of such overdue amount plus
any attorneys' fees incurred by Landlord by reason of Tenant's failure to pay
such rent and/or other charges when due hereunder. The parties hereby agree that
such late charge represents a fair and reasonable estimate of the costs Landlord
will incur by reason of late payment by Tenant. Acceptance of such late charge
by Landlord shall in no event constitute a waiver of Tenant's default with
respect to such overdue amount, nor prevent Landlord from exercising any of the
other rights and remedies granted hereunder.
[*** Information Redacted]
<PAGE> 5
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[*** INFORMATION REDACTED]
-2-
<PAGE> 6
5.
ESCALATION
For the purpose of this Article the terms herein are defined as
follows:
Expense Statement: An annual statement from Landlord setting
forth (i) the Direct Expenses for the Building and Project (excluding all
above-ground levels of any parking garage) for the calendar year ending on the
prior December 31; (ii) Tenant's Proportionate Share thereof; (iii) the
estimated Direct Expenses that will be incurred by Landlord for the Building and
the Project during the current calendar year ending on the next following
December 31; and (iv) Tenant's Proportionate Share thereof. Landlord shall
allocate to the Building all Direct Expenses which are incurred exclusively in
connection with or for the exclusive benefit of the Building, such as
insurance, maintenance expenses, utility charges, and all expenses relating to
those portions of the underground parking garage and any surface parking which
are designated for the exclusive use of Building tenants and their guests,
invitees, agents and visitors, and the Expense Statement shall designate such
expenses as Building Direct Expenses ("Building Direct Expenses"). All other
Direct Expenses (defined below) shall be designated as Project Direct Expenses
("Project Direct Expenses") except that the Project Direct Expenses shall also
exclude those Direct Expenses which Landlord or others have designated will be
paid only by the hotel or only by the tenants of other office or retail space.
Tenant's Proportionate Share of Building Direct Expenses: Tenant
reimbursement in an amount equal to the percentage shown in the Basic Lease
Information of the Lease of the Building Direct Expenses.
Tenant's Proportionate Share of Project Direct Expenses: Tenant
reimbursement in an amount equal to the percentage shown in the Basic Lease
Information of the Lease of the Project Direct Expenses.
Direct Expenses: All direct costs of operation and maintenance
of the Building and Project (excluding all above-ground levels of any parking
garage), including, but not limited to, the following costs: real property taxes
and assessments, personal property taxes levied on equipment, fixtures and other
property of Landlord located in the Project and used in connection with the
operation thereof, and any other taxes imposed by any federal, state, county,
municipal or other governmental entity, whether assessed against Landlord and/or
Tenant (except any tax payable by Tenant pursuant to Articles 3(a) and 44 and
any net income tax or estate, inheritance or succession tax payable by
Landlord); water and sewer charges; insurance premiums or any type, including,
but not limited to, fire and other casualty insurance and public liability
insurance; utility expenses, including, without limitation, expenses for gas,
electricity and telephone; janitorial expenses; expenses for landscaping and
other services; costs incurred directly in the management of the Project,
including, without limitation, management fees, air conditioning maintenance and
repair and elevator maintenance and repair, the costs of supplies, materials,
equipment and tools used in the operation of the Project, the wages and
salaries of employees used in the management, operation and maintenance of the
Project and taxes (other than net income taxes) or assessments of any type,
whether or not now customary or within the contemplation of the parties hereto,
including expenditures for improvements normally designated as capital
improvements (but excluding expenditures for additional capital improvements not
included in the original construction of the Building or Project), and including
expenditures for capital improvements which are imposed or required by or result
from statutes or regulations, or interpretations thereof, promulgated by any
Federal, state, county, municipal or other governmental body or agency of any
type performing any governmental or other function (including, but not limited
to, the Environmental Protection Agency and the authority administering the
Occupational Safety and Health Act, or any successor agencies performing the
same or similar functions); provided, however, the cost of any capital
improvements made necessary by the actions of any governmental authority shall
be amortized over the useful life to Landlord of such improvement according to
sound accounting practice, and only the portion of such amortization applicable
to any calendar year or, if applicable, any partial calendar year, shall be
included as a Direct Expense for such calendar year or partial calendar year.
Except as above provided, Direct Expenses shall not include
depreciation of the Project, interest on mortgages or other loans to Landlord,
real estate brokers' commissions or expenses related to Landlord's operation as
a business enterprise, as the same are distinguished from the expenses of
operating the Building or Project.
If, during any calendar year or fraction thereof within the
Term, the Building is less than 95% occupied, the amount of the Building Direct
Expenses for purposes of calculating the Expense Statement shall be adjusted to
the amount of Landlord's good faith estimate of what the Building Direct
Expenses would have been, as determined under generally accepted accounting
principles, had the Building been 95% occupied for the entire calendar year.
Beginning with the calendar year following the Base Year and
for each calendar year thereafter ("Comparison Year") Tenant shall pay Landlord
an amount equal to Tenant's Proportionate Share of Building Direct Expenses and
Project Direct Expenses incurred by Landlord in the Comparison Year which
-3-
<PAGE> 7
exceeds the total amount of Building and Project Direct Expenses payable by
Landlord for the Base Year. Any Comparison Year having less than 365 days shall
be appropriately prorated.
Notwithstanding anything contained herein to the contrary,
Tenant's share of Prorated Charges (excluding real estate taxes, insurance and
utility charges) shall not increase by more than six percent (6%) per year.
Landlord shall use its best efforts to give to Tenant on or
before April 1 of each calendar year throughout the Term an Expense Statement as
set forth herein, but Landlord's failure to provide Tenant with an Expense
Statement by said date shall not constitute a waiver by Landlord of its right to
require payment by Tenant or Tenant's Proportionate Share of estimated or actual
Building and Project Direct Expenses. Until receipt of the Expense Statement,
Tenant shall continue to pay Tenant's Proportionate Share of Building and
Project Direct Expenses currently being paid in accordance with the prior
Expense Statement, if any, and shall pay any adjusted amount following receipt
or the Expense Statement. Expense Statements shall be prepared in accordance
with generally recognized and established accounting practices, and each such
annual determination and statement, certified by Landlord, subject to reasonable
review by Tenant, shall be final and conclusive on both parties.
Tenant's Proportionate Share of estimated Building and Project
Direct Expenses for the calendar year in which the Expense Statement is received
shall be paid in twelve (12) equal installments concurrently with payment of the
Monthly Base Rent. In addition, Tenant shall pay in full concurrently with the
first Monthly Base Rent payment due following receipt of the Expense Statement
an amount equal to the excess of the monthly installment required to be paid by
Tenant under the most current Expense Statement over the monthly installment
made under the preceding Expense Statement (if any) multiplied by the number of
months from January through the month in which the Expense Statement is received
by Tenant.
If Tenant's Proportionate Share of actual Building and Project
Direct Expenses for the past calendar year as shown on the Expense Statement is
greater than the payments made by Tenant for that calendar year, then,
concurrently with the first Monthly Base Rent payment due following receipt by
Tenant of the Expense Statement, Tenant shall pay in full an amount equal to
such excess. It Tenant's Proportionate Share of actual Building and Project
Direct Expenses for the post calendar year as, shown on the Expense Statement is
less than the payments made by Tenant for that calendar year, the amount of such
overpayment shall first be credited against any past due charges and then
credited against the next monthly installment(s) to be paid by Tenant under the
most current Expense Statement.
Even though the Term will have expired and Tenant will have
vacated the Premises when the Final determination is made of Tenant's
Proportionate Share of actual Building and Project Direct Expenses for the
calendar year fit which the Lease expires, Tenant shall immediately pay the
excess of Tenant's Proportionate Share of actual Building and Project Direct
Expenses for the portion of such year in which Tenant was in occupancy over the
estimated payments made by Tenant for that calendar year and, conversely, any
overpayment made shall be rebated promptly by Landlord to Tenant.
Notwithstanding anything contained in the Lease to the
contrary, Tenant shall have the right to audit Landlord's books relevant to the
Direct Expenses set forth in Article 5 or the Lease within sixty (60) days
following receipt of any invoice or accounting showing additional rent due
hereunder. Tenant's right to audit the books and records of Landlord shall be
limited to one time per calendar year. If any such audit reveals an overpayment
of Direct Expenses for the period covered by such annual statement, then the
amount of such overpayment shall be credited against the next installment(s) of
rent and all other sums due under the Lease from Tenant. If such audit reveals
an underpayment of Direct Expenses for the period covered, then Tenant shall pay
the same with its next monthly rent payment, or if the Term has expired, then
within thirty (30) days after receipt of the audit results. The fees and
expenses of said audit shall be borne (a) entirely by Landlord if the audit
reveals a discrepancy which is detrimental to Tenant of greater than five
percent (5%) from Landlord's Expense Statement, or (b) entirely by Tenant if
such audit reveals a discrepancy of five percent (5%) or less.
6.
COMPLETION OF PREMISES
The parties acknowledge that tenant improvements will need to
be installed in the Premises and that tenant improvement work will be
constructed in accordance with the following terms and conditions:
(a) Tenant shall furnish to Landlord in writing on or before
the date set forth in the Basic Lease Information such full and complete
information as will be required for Landlord to complete the space and
construction plans for the Premises. Said full and complete information shall
include, without limitation, the following details:
(i) Exact location of telephone and electrical outlets.
-4-
<PAGE> 8
(ii) Interior wall finish specifications.
(iii) Detailed plans and specifications of all
non-standard construction work to be accomplished within the Premises by
Landlord's general contractor or other contractor employed by Landlord.
Landlord shall cause such space and construction plans to be
prepared within sixty (60) days after Landlord's receipt from Tenant of all of
such information required above, and Tenant shall either approve or disapprove
such plans within seven (7) working days after Tenant's receipt of such plans
and the cost breakdown of the tenant improvements, which approval shall not be
unreasonably withheld. If Tenant disapproves such plans, Tenant shall specify
its objections in writing and Landlord shall, within a reasonable time
thereafter, submit revised plans to Tenant. After Tenant has approved the plans,
such plans may thereafter be changed front time to time so long as all changes
are approved by both Landlord and Tenant, which approvals shall not be
unreasonably withheld.
(b) Landlord shall, at its sole cost and expense, furnish and
install within the Premises, substantially in accordance with Exhibit C attached
hereto and made a part hereof by this reference, standard building tenant
improvements listed on Exhibit D attached hereto and made a part hereof by this
reference.
Any additional interior improvements, additions or alterations
required by Tenant and approved by Landlord shall be furnished and installed at
Tenant's sole cost and expense. Any such additional work shall be furnished and
installed either by Landlord's general contractor or other contractor employed
by Landlord at such cost and on such terms as shall have been agreed to between
Landlord and Tenant.
All work to be performed on the Premises which is not within
the scope of work shown on Exhibit C and Exhibit D shall be performed by Tenant
at Tenant's expense. Agents, contractors and employees obtained by Tenant to
perform such work shall be subject to Landlord's approval, which approval shall
not be unreasonably withheld, and to the administrative supervision of
Landlord's general contractor, said supervision at Landlord's expense. Landlord
shall allow access to the Premises during construction of the Premises to
Tenant's agents, contractors and employees for the purpose of enabling Tenant to
prepare the Premises for Tenant's use and occupancy. All such construction work
performed by Tenant's agents, contractors or employees shall be accomplished in
such a manner as not to unreasonably interfere with or delay the work of
Landlord's general contractor in the completion of the Premises.
Tenant agrees that in the event Tenant shall have failed to
furnish Landlord with the necessary information to complete the space plans for
the Premises by the time hereinabove specified or should Tenant, its agents,
contractors or employees otherwise cause delay in Landlord's preparation of the
Premises or should any changes in the space plans requested by Tenant and
approved by Landlord cause delay in Landlord's preparation of the Premises,
thereby delaying Tenant's occupancy of the Premises beyond the Scheduled
Completion Date and provided that Landlord would have completed the preparation
of the Premises by the Scheduled Completion Date were it not for Tenant's delay,
then Landlord may at its option require Tenant to commence payment of rental on
the Scheduled Completion date or on the date on which the Premises would have
been Ready for Occupancy (its defined below) as reasonably determined by
Landlord if the necessary information had been supplied or if the changes in the
plans had not been requested or if Tenant or its agents, contractors or
employees had not caused such delay.
(c) Landlord shall complete the tenant improvements and the
Premises shall be Ready for Occupancy (as defined in subparagraph (d) below) by
Tenant not later than the Scheduled Completion Date. Notwithstanding the
foregoing, the aforesaid date shall be extended for such periods as Landlord is
prevented from completing such construction requirements due to governmental
restrictions or orders of any governmental authority beyond the reasonable
control of Landlord, strikes, labor disputes, lockouts, shortages of material or
labor, riots, acts of God, enemy action, delays caused by Tenant, civil
commotion, fire, casualty, inclement weather, and the like, or any other causes
beyond the reasonable control of Landlord (which events or causes are
hereinafter referred to as "force majeure events"). In addition, Landlord may
also automatically extend the aforesaid date for a period of sixty (60) days
upon giving written notice to Tenant. If Landlord shall not have completed such
construction by the aforesaid date, as said date may be extended as hereinbefore
provided, then Tenant shall have the right to terminate this Lease at any time
within thirty (30) days thereafter by giving written notice of such termination,
within such time, to Landlord. If within said thirty-day period Tenant shall not
elect to terminate, the time for completion shall be extended for another period
of sixty (60) days from the end of the thirty (30) day notice period, and if
completion has not been accomplished within said additional sixty (60) day
period, Tenant shall again have the right to terminate this Lease at any time
within thirty (30) days thereafter by giving written notice of such termination,
within said time, to Landlord. Upon the giving of such notice of termination,
the Term of this Lease shall cease and come to an end as if such date were the
date originally fixed for the termination hereof, and thereupon there shall be
no further liability or obligation upon either party by reason hereof. Landlord
shall incur no liability to Tenant for failure to complete construction by the
Scheduled Completion Date. Landlord shall use good faith efforts to have all
such work of improvement performed promptly and diligently in a first class and
workmanlike manner.
-5-
<PAGE> 9
(d) The Premises shall be deemed ready for occupancy ("Ready
for Occupancy") when (1) Landlord's architect or engineer in charge of the
tenant improvement construction work certifies (i) that the tenant improvement
construction work in the Premises has been substantially completed in accordance
with the construction plans and (ii) the date of such completion, and (2) the
City of Phoenix has issued a final certificate of occupancy on the entire
improved Premises. Landlord shall diligently complete, as soon as reasonably
possible, any "punchlist" items of work and adjustments not completed when the
Premises are Ready for Occupancy.
(e) During the construction and until the Commencement Date of
this Lease, the Building shall be insured against loss or damage by fire and
other risks under standard policies for fire, extended coverage, and "builder's
risk" procured and paid for by Landlord. Tenant shall have no interest in any
such policy or policies or any proceeds thereof.
7.
POSSESSION
If Landlord, for any reason whatsoever, cannot deliver
possession of the Premises to Tenant on the Scheduled Completion Date, this
lease shall not be void or voidable (except as hereinafter provided or as
provided in Article 6(c) above) nor shall Tenant have a claim for any loss or
damage resulting therefrom. If Landlord shall not have delivered possession of
the Premises to Tenant within six (6) months after the Scheduled Completion
Date, except for delays caused by Tenant its agents, contractors or employees,
either party shall have the option to cancel this Lease by giving ten (10) days'
written notice to the other, in which event this Lease shall be null and void
and of no further force or effect and neither Landlord nor Tenant shall have
further liability or obligation to the other hereunder.
8.
USE OF PREMISES
The Premises are to be used for GENERAL OFFICE USE (the
"Permitted Use") and for no other purpose without the prior written consent of
Landlord.
Tenant shall not do nor permit anything to be done in or about
the Premises which will in any way increase the risk of fire to the Premises
beyond that inherent or reasonably necessary to the Permitted Use, nor keep or
bring anything therein which will in any way increase the existing rate of or
affect any policy of fire, extended coverage or any other insurance covering the
Building or Project or any of its contents, or cause a cancellation of any of
the same. Tenant shall not do nor permit anything to be done in or about the
Premises which will in any way obstruct or interfere with the rights of other
tenants or occupants of the Project or injure them, nor use nor allow the
Premises to be used for any unlawful purpose, nor maintain nor permit any
nuisance in, on or about the Premises or permit anything to be done which may
injure or damage the Premises. Tenant shall not damage, deface or commit or
suffer to be committed any waste in or upon the Premises, normal wear and tear
excepted.
9.
COMPLIANCE WITH LAW
Landlord hereby represents and warrants to Tenant that to the
best of Landlord's actual knowledge, the Permitted Use set forth above is in
compliance with and is permitted by all zoning and other governmental laws,
ordinances, regulations and requirements now in force. Tenant shall not permit
anything to be done in or about the Premises which will in any way conflict with
any law, statute, ordinance or governmental rule or regulation now in force or
which may hereafter be enacted or promulgated. Tenant shall at its sole cost and
expense promptly comply with all such laws, statutes, ordinances and
governmental rules, regulations or requirements now in force or which may
hereafter be in force, including, without limitations the Americans with
Disabilities Act of 1990 (42 U.S.L Sections 12101 et. seq.) (the "ADA") and with
the requirements of any board of fire underwriters or other similar body
relating to or affecting the condition, use or occupancy of the Premises,
excluding structural changes not related to or affected by Tenant's
improvements or acts.
10.
RULES AND REGULATIONS
Tenant agrees to comply with (and cause its agent,
contractors, employees and invitees to comply with) the Office Building Rules
and Regulations attached hereto as Exhibit E. Landlord may from time to time
make such modifications, additions and deletions in the Office Building Rules
and Regulations as in the sole judgment of Landlord are necessary or convenient
for the management and operation of Parcel IB. Landlord shall notify Tenant from
time to time of modifications, additions, or deletions in the Office
-6-
<PAGE> 10
Building Rules and Regulations, and any such modification, addition, or deletion
shall be effective after Landlord gives five days' written notice thereof to
Tenant; provided, however, if an emergency arises which in the sole judgment of
Landlord makes it impracticable to give five days' written notice, such
modification, addition, or deletion shall become effective immediately upon
implementation by Landlord, with the written notice to be subsequently given.
Tenant agrees to faithfully observe and comply with the Office Building Rules
and Regulations and all modifications, additions or deletions thereto, and the
breach of any Office Building Rule and Regulation by Tenant shall constitute a
material breach of this Lease. Landlord shall not be responsible to Tenant for
the nonperformance by any other tenant or occupant of the Project of any such
Office Building Rules and Regulations, but the Office Building Rules and
Regulations from time to time in effect shall be uniformly applicable to all
tenants and occupants similarly situated. Tenant shall be obligated to comply
with such Office Building Rules and Regulations only to the extent that such
Office Building Rules and Regulations do not unreasonably interfere with or
preclude Tenant's use of the Premises in the manner permitted by this Lease.
11.
ALTERATIONS
Tenant shall not make nor permit to be made any alterations,
additions, improvements, or installations to or of the Premises or any part
thereof, except moveable furniture and trade fixtures, without the prior written
consent of Landlord, which consent shall not be unreasonably withheld.
Notwithstanding anything contained herein to the contrary, Tenant shall have the
right to make any alterations to the Premises, without Landlord's consent, which
do not exceed $10,000.00 in cost, do not Impact the Building's systems or
structure, are not visible from the exterior of the Premises, and are of a
cosmetic nature such as painting, wallpapering, hanging pictures, or the
installation of furniture. Any alterations, additions, improvements, or
installations to or of the Premises, except moveable furniture and trade
fixtures, shall be completed in compliance with all laws and ordinances,
including, without limitation, the ADA, and all rules and regulations of all
governmental authorities having jurisdiction of or over the Premises. All such
alterations, additions, improvements and installations shall at once become a
part of the realty and belong to Landlord. In the event Landlord consents to
alterations, additions, improvements, or installations pursuant to this Article,
the same shall be made by Tenant at Tenant's sole cost and expense, and
selection by Tenant of any person or entity to construct or install the same
shall be subject to the prior written consent of Landlord, which consent may be
conditioned upon (1) Tenant providing Landlord, at Tenant's sole cost and
expense, a lien and completion bond in an amount equal to one and one-half times
the estimated cost of all of such alterations, additions, improvements or
Installations and (2) acquisition by Tenant of all permits needed to authorize
such alterations, additions, improvements or installations from the appropriate
governmental agencies, furnishing a copy thereof to Landlord at least ten (10)
days prior to the commencement of such work and complying with all of the
conditions of such permits in a prompt manner. It shall be a material breach
hereof for Tenant to make any alterations, additions, improvements or
installations without the prior consent of Landlord, and in addition to any
other remedies Landlord may have, Landlord may require that Tenant remove any or
all of the same within thirty (30) days of receipt by Tenant of a notice
demanding such removal. Upon the expiration or sooner termination of the Term
hereof and upon demand by Landlord, Tenant, at Tenant's sole cost and expense,
shall forthwith and with all due diligence remove any such alterations,
additions, improvements, or installations designated by Landlord to be removed
and repair any damage to the Premises caused by such removal.
12.
REPAIRS
Tenant and its agents shall have been given full opportunity
to inspect and examine the Premises prior to occupancy and, by entry hereunder,
Tenant accepts the Premises in its present "as is" condition, except for latent
defects, and without any warranty as to the condition of the Premises or the
Building; provided, however, Landlord warrants that all tenant improvements
constructed by Landlord in the Premises shall be free from material defects for
a period of one (1) year from the date the Premises are delivered to Tenant by
Landlord. Except as required by Landlord in the next paragraph below, Tenant
shall, at Tenant's sole cost and expense, keep the Premises and every part
thereof in good condition and repair, ordinary wear and tear and damage thereto
by fire, earthquake, act of God or the elements excepted. If Tenant does not
make such repairs, Landlord may, after reasonable notice to Tenant, make such
repairs and Tenant shall pay (the costs thereof and any accrued interest thereon
upon demand. In the event Tenant makes any repairs to the Premises or Building
at the expense of Landlord as provided by any law, statute or ordinance now or
hereafter in effect, Tenant shall do so only after having given reasonable
notice to Landlord and Tenant shall only incur reasonable costs in making such
repairs and shall make only such repairs as are reasonable, necessary and
prudent under the prevailing circumstances.
Landlord shall, at Landlord's expense subject to the
provisions of Article 5, keep the structural portion including the HVAC,
plumbing and electrical systems of the Building in good order, condi-
-7-
<PAGE> 11
tion and repair; provided, however, that in the event any damage to the
structural portion including the HVAC, plumbing and electrical systems of the
Building is caused by the acts or omissions of Tenant, its agents, contractors,
invitees or employees, Landlord shall, at Tenant's sole cost and expense,
complete the repairs necessary to place the Building in good order, condition
and repair and Tenant shall pay the costs thereof upon demand.
Upon the expiration or sooner termination of the Term hereof,
Tenant shall surrender the Premises to Landlord in the same condition as when
received, ordinary wear and tear and damage thereto by fire, earthquake, act of
God or the elements excepted.
13.
ABANDONMENT
Tenant shall not abandon the Premises at any time prior to the
expiration or earlier termination of the Term hereof. In the event Tenant shall
abandon, vacate or surrender the Premises, or be dispossessed by process of law,
or otherwise, any personal property belonging to Tenant and left on the Premises
shall be deemed to have been abandoned.
14.
LIENS
Tenant shall keep the Premises and Parcel IB free from any
vendor's, mechanic's, materialmen's or like liens arising out of any work
performed, materials furnished or obligations incurred by Tenant. Landlord shall
have the right at all times to post notices of non-responsibility on the
Premises and record verified copies thereof in connection with all work of any
kind upon the Premises.
15.
ASSIGNMENT AND SUBLETTING
Tenant shall not sublet the whole or any part of the Premises,
nor assign this Lease or any interest therein (nor may this Lease be assigned by
operation of law) to any person whomsoever, without the prior written consent of
Landlord, which consent may be withheld in Landlord's sole discretion for any
reason, and any attempted or purported assignment or subletting without
Landlord's prior written consent shall constitute a breach of this Lease and
shall at Landlord's election be void. If Tenant is a corporation or is an
unincorporated association or partnership, the transfer, assignment or
hypothecation of any stock or interest in such corporation, association, or
partnership in the aggregate in excess of fifty percent (50%) shall be deemed an
assignment within the meaning and provisions of this Article. Notwithstanding
the foregoing provisions of this Article 15, it shall not constitute an
assignment or subletting for purposes of this Article 15 for Tenant to assign
this Lease or sublet the Premises without Landlord's consent to any corporation
or business entity which controls, is controlled by, or is under common control
with Tenant, or to any corporation or other business entity resulting from a
merger or consolidation with Tenant, or to any person or entity which acquires
all of the assets of Tenant's business as a going concern, provided that the
assignee or sublessee assumes in full the obligations of Tenant under the Lease,
that Tenant remains fully liable under the Lease, no use of the Premises is made
which is not allowed for by the permitted purposes, and Tenant provided prompt
written notice to Landlord of such assignment or sublease and the circumstances
thereof.
Any consent given by Landlord to Tenant to sublet the
Premises, or any portion thereof, or to assign this Lease shall not be construed
as a consent to any other assignment or subletting, or waiver of Landlord's
right to object to or declare void any assignment or sublease to which
landlord's consent in writing has not been obtained. Any assignment or
subletting of Tenant's interest permitted or consented to by Landlord shall not
in any way release Tenant from any liability or obligation assumed under the
terms of this Lease.
Any sums or other economic consideration received by Tenant as
a result of such assignment or subletting, however denominated under the
assignment or sublease, which exceed, in the aggregate, (i) the total sums which
Tenant is obligated to pay Landlord under this Lease (prorated to reflect
obligations allocable to any portion of the Premises subleased), plus (ii) any
real estate brokerage commissions or fees payable in connection with such
assignment or subletting, shall be paid to Landlord as additional rent under
this Lease without affecting or reducing any other obligations of Tenant
hereunder. The sums payable hereunder shall be paid to Landlord as and when
payable by the assignee or subtenant to Tenant.
-8-
<PAGE> 12
16.
INDEMNIFICATION OF LANDLORD INSURANCE
Tenant agrees to indemnify Landlord and hold Landlord, the
Premises and Parcel IB free and harmless for, from, and against any and all
penalties, costs, expenses (including reasonable attorneys' fees), claims,
demands and causes of action, including claims based upon imputed negligence due
to ownership of the Building arising out of or in connection with (a) any
accident or other occurrence in or on the facilities (including, without
limiting the generality of the term "facilities", stairways, passageways or
hallways), the use of which Tenant may have in conjunction with other tenants of
the Project, when such injury or damage shall be caused in part or in whole by
tile act or omission of Tenant, its agents, contractors, servants, employees,
licensees, invitees, permittees, customers, clients or guests, (b) the condition
of, or any defect in, the Premises or any part thereof or any improvements
thereof, (c) the condition of, or any defect in, Tenant's fixtures or equipment
or any part thereof, or (d) the use or occupancy of the Premises by Tenant or
any tenant of Tenant.
If any action or proceeding be brought against Landlord for
any of the foregoing reasons, Tenant, upon notice from Landlord, shall defend
the same at Tenant's expense by counsel satisfactory to Landlord.
Tenant shall at its own cost and expense procure and maintain
during the entire Term and any extensions thereof workmen's compensation
insurance as required by statute as well as comprehensive public liability
insurance covering the Premises and their surrounding areas and naming Landlord
as an additional insured in such amounts as Landlord may from time to time
require. The initial liability coverage under such comprehensive public
liability insurance shall not be less than $1,000,000 combined single limit,
together with excess liability coverage of not less than $5,000,000, including
fire damage legal liability coverage in an amount adequate to cover the cost or
replacement of the Premises. Said comprehensive public liability insurance shall
be an occurrence type policy and shall also contain cross liability endorsements
and insure performance by Tenant of the indemnity provisions provided above. The
limits of said insurance shall not, however, limit the liability of Tenant under
the first paragraph of this Article. The originals of all policies shall remain
in possession of Tenant; provided, however, Tenant shall provide Landlord a
certificate of insurance confirming the coverage prior to the commencement of
this Lease and at each subsequent insurance renewal. Tenant shall also maintain
in full force and effect throughout the Term all risks insurance coverage in an
amount adequate to cover the cost of replacement of all personal property
(including inventory) and contents in the Premises. All policies of insurance
shall name Landlord and Landlord's property manager as additional insureds and
shall provide that such insurance will not be canceled or subject to reduction
or coverage or other modification except after thirty (30) days written notice
to Landlord. Tenant shall furnish policy renewals or binders to Landlord not
less than ten (10) days prior to the expiration of any policy required
hereunder. All insurance policies procured shall be issued by a responsible
company or companies authorized to do business in the State of Arizona with a
Best's rating of at least A-/VII and reasonably satisfactory to Landlord.
Landlord shall maintain at all times during the Term of this
Lease the following insurance:
(a) Comprehensive general liability insurance against
claims for bodily injury, death, or property damage occurring
in, upon, or about the Building in an amount not less than the
greater of (1) $1,000,000.00 combined single limit, (ii) the
amount required by Landlord's lender, or (iii) the amount
which a reasonably prudent landlord would carry on a
comparable multi-use project, less any deductible which
Landlord may reasonably determine; and
(b) "All risk broad form" insurance covering the
Building in an amount not less than the greater of (1) the
amount required by Landlord's lender or (ii) the amount which
a reasonably prudent landlord would carry on a comparable
multi-use project, less any deductible which Landlord may
reasonably determine.
17.
DENIAL OF SUBROGATION RIGHTS
Neither Landlord nor Tenant shall be liable to the other for
any business interruption or any loss or damage to property or injury to or
death of persons occurring on the Premises, or in any manner growing out of or
connected with Tenant's use and occupation of the Premises or the condition
thereof, whether or not caused by the negligence or other fault of Landlord or
Tenant, or of their respective agents, employees, subtenants, licensees, or
assignees. This release shall apply only to the extent that such business
interruption, loss or damage to property, or injury to or death of persons, is
covered by insurance, regardless of whether such insurance is payable to or
protects Landlord or Tenant or both. Nothing in this Article shall be construed
to impose any other or greater liability upon either Landlord or tenant than
would have existed in the absence of this Article. This release shall be in
effect only so long as the applicable insurance policies contain a clause to the
effect that this release shall not affect the right of the insured to recover
under such
-9-
<PAGE> 13
policies. Such clauses shall be obtained by Landlord and Tenant in the policies
of insurance required to be provided by either hereunder.
18.
SERVICES
Landlord agrees to furnish to the Premises water and
electricity suitable for the use of the Premises. Landlord further agrees to
furnish to the Premises during the hours of 7 a.m. to 7 p.m., Monday through
Friday, and 7 a.m. to 3 p.m. Saturday, excluding Christmas, Thanksgiving and
other Federal holidays, subject to the Office Building Rules and Regulations,
heating and air conditioning suitable for the use of the Premises; provided,
however, Tenant shall pay to Landlord upon receipt of a statement therefor
Landlord's charge for heating and air conditioning furnished to the Premises
during any Federal holiday, any weekday from 7 p.m. to 7 a.m., and on any
week-end day except between the hours of 7 a.m. and 3 p.m. on Saturday. Landlord
shall provide five-day janitorial service. Landlord shall maintain the common
stairs, corridors, entries, and restrooms in the Project in a safe, neat and
clean condition. The services to be provided by Landlord shall be consistent
with comparable first class office buildings located in Phoenix, Arizona.
Landlord shall not be liable for, and Tenant shall not be entitled to, any
abatement or reduction of rent by reason of Landlord's failure to furnish any of
the foregoing when such failure is caused by accidents, breakage, repairs,
strikes, labor disturbances of any character, governmental order, material
shortages, energy or fuel shortages, or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord, or when Landlord acts
with reasonable diligence to correct the failure to furnish such service after
receiving written notice or the absence of such service. Landlord shall not be
liable under any circumstances for loss of or injury to property occurring
through or in connection with or incidental to Landlord's or Landlord's agents',
contractors' or employees' failure to furnish any of the foregoing services.
Wherever heat generating machines or equipment are used in the Premises which
materially affect the temperature otherwise maintained by the air conditioning
systems, Landlord reserves the right to install supplementary air conditioning
units in the Premises or Building and the cost thereof, including the cost of
installation and the cost of operation and maintenance thereof, shall be paid by
Tenant to Landlord as additional rent upon demand by Landlord.
In the event Landlord should neglect or fall to furnish any of
the utilities or services required to be furnished by Landlord in this Lease and
such failure should continue for two (2) business days after receipt of written
notice of such failure from Tenant, Tenant shall be entitled to an abatement of
all of the rent payable hereunder with respect to that portion of the Premises
so affected by such failure for the period beginning on the day that such
portion of the Premises is unusable and continuing until the use of such portion
of the Premises is restored to Tenant.
Tenant will not, without the prior written consent of
Landlord, use any apparatus or device in the Premises, including, without
limitation, machines using current in excess of 110 volts, e.g., electronic data
processing machines and punch card machines, mainframe computers or
mini-computers, which will in any way increase the amount of electricity or
water usually furnished or supplied for use in the Premises as general office
space; nor shall Tenant connect with electric current, except through existing
electrical outlets in the Premises, any apparatus, water pipe or other device
for the purposes of using electric current or water. If Tenant shall require
water or electric current in excess of that usually furnished or supplied for
use of the Premises as general office space and shall have obtained the consent
of Landlord for such excess use, Landlord may cause a water meter or electric
current meter to be installed in the Premises to measure the amount of such
excess water or electric current consumed. The cost of any such meters and of
installation, maintenance and repair thereof shall be paid by Tenant, and Tenant
agrees to pay to Landlord as additional rent promptly upon demand therefor the
cost of all such water and electric current consumed as shown by said meters, at
the rates charged for such services by the local public utility furnishing the
some, plus any additional bookkeeping expense in connection therewith.
Tenant and its employees shall have access to the Premises,
subject to established security procedures, on a twenty-four (24) hour per day,
fifty-two (52) weeks per year basis.
19.
HOLDING OVER
Tenant shall not hold over after the termination or expiration
of this Lease without Landlord's written consent. If Tenant holds possession of
the Premises after the Term or this Lease with Landlord's consent, Tenant shall
become a tenant from month to month upon the terms herein specified except at a
rental rate to be determined by Landlord. In no event shall such rental rate be
less than 150% or the rental rate in effect immediately prior to the expiration
of the Term of this Lease. The rent shall be payable in advance on or before the
first day of each month. Tenant shall continue in possession until such tenancy
shall be terminated by either Landlord or Tenant giving written notice of
termination to the other party at least thirty (30) days prior to the effective
date of termination.
-10-
<PAGE> 14
20.
ENTRY BY LANDLORD
Landlord shall have the right to enter the Premises at any
time to inspect the same or to cure any default (including a breach of the
Office Building Rules and Regulations), to supply any service to be provided by
Landlord hereunder, to submit the Premises to prospective purchasers, tenants or
mortgagees, to post notices of non-responsibility, and to alter, improve or
repair the Premises and any portion of the Building without abatement of rent,
and may for the purposes of repair and alteration erect scaffolding and other
necessary structures where reasonably required by the character of the work to
be performed, providing that the business of Tenant shall not be interfered with
unreasonably. Unless caused by the negligent or willful acts of Landlord, Tenant
hereby waives any claim for damages for any injury or inconvenience to or
interference with Tenant's business, any loss of occupancy or quiet enjoyment of
the Premises, and any other loss occasioned by Landlord's entry for any of the
aforesaid purposes.
For each of the aforesaid purposes, Landlord at all times
shall have and retain a key with which to unlock all of the doors upon the
Premises, excluding Tenant's vaults, and Landlord shall have the right to use
any and all means to open said doors in an emergency in order to obtain entry to
the Premises, and any such entry to the Premises obtained by Landlord shall not
under any circumstances constitute forcible or unlawful entry into or a detainer
of the Premises or an eviction of Tenant from the Premises or any portion
thereof. Landlord shall not be liable for the consequences of admitting by
passkey or refusing to admit to the Premises Tenant or any agent or employee of
Tenant.
21.
DEFAULT
In addition to any events defined elsewhere in this Lease as
constituting a default of Tenant, any of the following shall be considered an
event of default by Tenant hereunder: (a) the failure of Tenant to pay rent
(including additional rent) or any part thereof or any other sums payable
pursuant to this Lease as and when due hereunder where such failure shall
continue for three (3) days after written notice from Landlord; (b) the failure
or Tenant to observe or perform any of the covenants or agreements contained in
this Lease to be observed or performed by Tenant, other than those described in
Article 22(a) hereof, where such failure shall continue for twenty (20) days
after written notice of such failure from Landlord; provided, however, if such
failure is of a type that can be cured or corrected but not reasonably within a
twenty (20) day period and Tenant has, during the twenty (20) day period,
commenced the cure or correction of such failure and thereafter diligently
purses such cure or correction, then no default shall exist unless Tenant ceases
the diligent curing or correcting of such failure; (c)(i) the making by Tenant
of any general assignment or general arrangement for the benefit of creditors;
(ii) the filing by or against Tenant of a petition to have Tenant adjudged
bankrupt or a petition for reorganization or arrangement under any law relating
to bankruptcy (unless, in the case of a petition filed against Tenant, the same
is dismissed within ninety (90) days); (iii) the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets or of
Tenant's interest in this Lease where possession is not restored to Tenant
within ninety (90) days; or (iv) the attachment, execution or judicial seizure
of substantially all of Tenant's assets or of Tenant's interest in this Lease,
where such seizure is not discharged within ninety (90) days; (d) the default by
Tenant under any other lease agreement between Landlord and Tenant pertaining to
premises within the Project; (e) the passage or other devolution of Tenant's
interest in this Lease to any person or entity except that named as Tenant
herein, by law or otherwise, without the prior written consent of Landlord
except as provided in Article 15 of this Lease; (f) the abandoning of the
Premises by Tenant; or (g) the discovery by Landlord that any financial
statement given to Landlord by Tenant, any assignee of Tenant, any subtenant of
Tenant, or any successor in interest of Tenant, or any of them, was materially
false.
22.
REMEDIES
In the event of any such material default or breach by Tenant,
Landlord may at any time thereafter, with or without notice or demand and
without limiting Landlord in the exercise of any right or remedy which Landlord
may have by reason of such default or breach:
(a) terminate Tenant's right to possession of the Premises
by any lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's breach or default, including, but not limited
to: the cost of recovering possession of the Premises; expenses of reletting,
including the cost of necessary renovation and alteration of the Premises,
reasonable attorneys' fees, and any real estate commissions actually paid; the
amount by which the total of the unpaid rent and other sums due hereunder for
the balance of the Term hereof exceeds the total amount
-11-
<PAGE> 15
of any payments of like character to be received by Landlord from any
subsequent tenant or tenants during the same period; and that portion
applicable to the unexpired Term of any tenant improvements and or any
commission paid by Landlord to a real estate broker or agent as a result of
this Lease;
[***]
(c) re-enter the Premises without terminating this Lease
and relet the Premises or any part thereof for such term or terms and at
such rental or rentals and upon such other terms and conditions
as Landlord in its sole discretion may deem advisable, with the right to make
alterations and repairs to said Premises. Rentals received by Landlord from
such reletting shall be applied as follows: first, to the payment of the cost
of such reletting as more specifically set forth in subsection (a) above;
second, to the payment of the cost of any alterations and repairs to the
Premises; third, to the payment of any indebtedness, other than rent, due
hereunder, and the residue, if any, to be held by Landlord and applied in
payment of future rent as the same may become due and payable hereunder.
Should such rentals received from such reletting during any month be less than
that agreed to be paid during that month by Tenant hereunder, then Tenant
shall pay such deficiency to Landlord. Such deficiency shall be calculated and
paid monthly. Tenant shall also pay to Landlord, as so on as ascertained, the
costs and expenses incurred by Landlord in such reletting or in making such
alterations and repairs. No such re-entry or taking possession of the Premises
by Landlord shall be construed as an election on its part to terminate this
Lease unless a written notice of such intention be given to Tenant or unless
the termination thereof be decreed by a court of competent jurisdiction.
Notwithstanding any such reletting, without termination, Landlord may at any
time thereafter elect to terminate this Lease for such previous breach; and
(d) pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the State of Arizona.
23.
DAMAGE OR DESTRUCTION
Except as otherwise provided in this Lease, in the event the
Premises or the Building are damaged by fire or other casualty covered by
Landlord's insurance, such damage shall be repaired by and at the expense of
Landlord and this Lease shall remain in full force and effect, except that
Tenant shall be entitled to a proportionate reduction of rent while such
repairs are being made, such proportionate reduction to be based upon the
extent to which the making of such repairs shall materially interfere with
Tenant's business.
In the event such repairs cannot, in the reasonable opinion
of Landlord, be substantially completed within sixty (60) days after the
occurrence of such damage (without the payment of overtime or other premiums),
Landlord may, at its option, exercisable by giving written notice to
Tenant within thirty (30) days after the occurrence of such damage, make such
repairs within a reasonable time and Landlord shall proceed to make such
repairs with reasonable dispatch. In such event, this Lease shall continue in
full force and effect and the rent payable by Tenant hereunder shall be
determined as provided in the first paragraph of this Article. In the event
Landlord does not elect to repair the damage, as provided above, either
Landlord or Tenant, by written notice given to the other within ten (10)
additional days, may terminate this Lease effective as of the date of the
occurrence of such damage. In the event Landlord terminates this Lease
pursuant to this Article, all proceeds of Landlord's insurance shall belong to
and become the sole property of Landlord.
In the event of damage to or destruction of all or any
portion of the Premises or Building to the extent of five percent (5%) or
more of the then insurable replacement value of the Premises or the Building,
as applicable, from any cause not covered by insurance, or in the event of a
declaration of any governmental authority that the Premises or the Building
are unsafe or unfit for occupancy and would require repairs exceeding five
percent (5%) or more of the then insurable replacement value or the Building,
Landlord shall have the right to terminate this Lease by written notice to
Tenant given within thirty (30) days after the date of such damage,
destruction or declaration. Upon the giving of any such notice, this Lease
shall terminate. In the event of damage to or destruction or all or any
portion of the Premises or the Building to an extent less than five percent
(5%) of the then insurable replacement value of the Premises or the Building,
as applicable, from any cause not covered by insurance, or in the event
Landlord does not elect to terminate this lease in accordance with this
paragraph, the Lease shall remain in full force and effect except that rent
shall be proportionally reduced as provided above and the Premises shall be
repaired and rebuilt by Landlord at Landlord's cost with reasonable
dispatch; provided, however, Tenant shall bear the cost of all fixtures,
equipment, furnishings, draperies and other items that were not contemplated
by Exhibit D hereto.
Notwithstanding anything to the contrary contained herein,
in the event the Premises or the Building shall be damaged by fire or other
casualty due to the negligent or willful acts of Tenant, its agents,
-12-
<PAGE> 16
officers, employees, contractors, servants, invitees, licensees or guests and
the Lease is not terminated as herein above provided, then, without prejudice to
any other rights and remedies of Landlord, there shall be no abatement of rent.
With respect to any damage which Landlord is obligated to
repair or elects to repair, Tenant waives the provisions of Arizona Revised
Statutes Section 33-343 (which Section deals with Tenant's right to termination
in the event of damage to or destruction of the Premises).
Landlord shall not be required under any circumstances to make
any repairs to or replacements of any paneling, decoration, office fixtures,
railings, ceilings or floor coverings, partitions or any other property
installed in the Premises by Tenant.
24.
EMINENT DOMAIN
If at any time during the Term of this Lease the entire
Premises or any part thereof shall be taken as a result of the exercise of the
power of eminent domain or sold under threat of the exercise of such power (a
"taking"), this Lease shall terminate as to the part so taken as of the date the
condemning authority takes possession or title, whichever occurs first.
If all or any substantial portion of the Premises, or any
portion of the Project other than the Premises, shall be taken, Landlord may
terminate this Lease, at its option, by giving Tenant written notice of such
termination within thirty (30) days of such taking. If all or a portion of the
Premises in excess of twenty percent (20%) of the floor area thereof shall be
taken with the result that Tenant's use of the Premises is substantially
impaired, Tenant may terminate this Lease at its option by giving Landlord
written notice of such termination within thirty (30) days of such taking. If
neither party terminates this Lease pursuant to this Article, this Lease shall
remain in full force and effect except that the rent payable by Tenant hereunder
shall be reduced in the same proportion as the floor area taken in the Premises
bears to the total floor area in the Premises.
Landlord shall be entitled to and Tenant hereby assigns to
Landlord the entire amount of any award or payment made in connection with a
taking; provided, however, that Tenant shall be entitled to any payment or award
attributable to the taking of removable personal property or trade fixtures
belonging to Tenant or Tenant's moving expenses or any award for the value of
tenant's leasehold interest except to the extent that such award would reduce or
otherwise diminish the condemnation award to Landlord for the Property.
25.
SUBORDINATION; ATTORNMENT
This Lease shall be subordinate to any ground lease, mortgage,
deed of trust, or any other hypothecation for security now or hereafter placed
upon Parcel IB or any part thereof and to any and all advances made on the
security thereof and to all renewals, modifications, increases and extensions
thereof. If any mortgagee, trustee or ground lessor shall elect to have this
Lease prior to the lien of its mortgage, deed of trust or ground lease, and
shall give written notice thereof to Tenant, this Lease shall be deemed prior to
such mortgage, deed of trust, or ground lease regardless of whether this Lease
is dated prior or subsequent to the date of said mortgage, deed of trust or
ground lease or the date of recording thereof. Tenant agrees to execute any
documents required to effectuate such subordination or to make this Lease prior
to the lien or any mortgage, deed of trust or ground lease, as the case may be,
and by failing to do so within ten (10) days after written demand therefor shall
automatically make, constitute and irrevocably appoint Landlord as Tenant's
attorney-in-fact and in Tenant's name, place and stead, to do so.
Tenant agrees that in the event any proceedings are brought
for the foreclosure of the Premises, or in the event of exercise of the power of
sale under any mortgage or deed of trust affecting the Premises, whether or not
the Lease is terminated by such foreclosure or sale, Tenant will, upon request
by the purchaser, attorn to the purchaser under any such foreclosure or sale and
recognize such purchaser as Landlord under this Lease.
26.
NOTICES
All notices, demands, consents and statements which may or are
required to be given by either party to the other hereunder shall be in writing.
All notices and demands by Landlord to Tenant shall be personally delivered,
delivered by a nationally utilized overnight delivery service or sent by United
States certified or registered mail, postage prepaid and addressed to Tenant at
Tenant's Address. All notices and
-13-
<PAGE> 17
demands by Tenant to Landlord shall be personally delivered, delivered by a
nationally utilized overnight delivery service or sent by United States
certified or registered mail, postage prepaid, addressed to Landlord at the
Landlord's Address. Either party may change its address by notice given to the
other in the manner set forth in this paragraph. Notices, demands, and
statements shall be deemed given and received when personally delivered or two
(2) days after they are mailed as above provided.
27.
LANDLORD'S RIGHT TO CURE DEFAULTS
All covenants and agreements to be performed by Tenant under
any of the terms of this Lease shall be at its sole cost and expense and, except
as otherwise specifically provided herein, without any abatement of rent. If
Tenant shall fail to pay any sum of money owing to a party other than Landlord
and required to be paid by it hereunder or shall fail to perform any other act
on its part to be performed hereunder, Landlord may, but shall not be obligated
to and without waiving any rights of Landlord or releasing Tenant from any
obligations of Tenant hereunder, make such payment or perform such other act to
be made or performed by Tenant hereunder. Tenant covenants to reimburse Landlord
for such sums and Landlord shall have (in addition to any other right or remedy
of Landlord) the same rights and remedies in the event of the nonpayment thereof
by Tenant as in the case of default by Tenant in the payment of any sums due
Landlord hereunder. All sums so paid or expenses Incurred by Landlord and all
necessary incidental costs together with interest thereon at the lesser of the
rate of the Bank One prime rate plus 5% or the highest rate permitted by
applicable law from the date of such payment by Landlord until paid shall be
considered as rent owing hereunder and shall be payable to Landlord on demand
or, at the option of Landlord, may be added to any rent then due or thereafter
becoming due under this Lease. Notwithstanding the foregoing, Landlord shall
not, except in the case of an emergency, cure any alleged default of Tenant in
the performance of any covenant herein contained until after the expiration of
five (5) days after the delivery of written notice to Tenant.
28.
DELAYS; DEFAULT BY LANDLORD
Landlord shall not be responsible for any delay or failure in
the observance or performance of any term or condition of this Lease to be
observed or performed by Landlord to the extent that such delays result from
action or order of governmental authorities; civil commotions; strikes, fires,
acts of God or the public enemy; act or default of any tenant in the
Project; inability to procure labor, material, fuel, electricity, or other forms
of energy; or any other cause beyond the reasonable control of Landlord, whether
or not similar to the matters herein specifically enumerated. Any delay shall
extend by like time any period of performance by Landlord and shall not be
deemed a breach of or failure to perform this Lease or any provisions hereof.
In the event of any default under this Lease by Landlord,
Tenant, before exercising any rights that it may have at law to cancel this
Lease, shall have given notice of such default to Landlord and shall have
offered Landlord thirty (30) days to correct and cure the default, or if the
default is of a nature that cannot reasonably be cured within said thirty
(30)-day period, then Tenant shall not exercise any remedies for such default if
Landlord has commenced the cure within such thirty (30)-day period and
thereafter diligently prosecutes the cure. Tenant also agrees to give the
holders of any mortgages or deeds of trust ("mortgagees") by registered mail a
copy of any notice of default served upon the Landlord, provided that prior to
such notice Tenant has been notified in writing (by way of Notice of Assignment
of Rents and Leases, or otherwise) of the addresses of such mortgagees. Tenant
further agrees that if Landlord shall have failed to cure or commence to cure
such default within the aforesaid time limit, then the mortgagees shall have an
additional thirty (30) days within which to cure such default or if such default
cannot be cured within that time, then such additional time as may be necessary
if within thirty (30) days any mortgagee has commenced and is diligently
pursuing the remedies necessary to cure such default (including, but not
limited to, commencement of foreclosure proceedings if necessary to effect such
cure) in which event this Lease shall not be terminated while such remedies are
being so diligently pursued.
29.
LIMITATIONS ON LANDLORD'S LIABILITY
The obligations of Landlord under this Lease do not
constitute personal obligations of the partners in Landlord or of the directors,
officers or shareholders of any of the partners in Landlord, and Tenant shall
look solely to Landlord's interest in the real estate that is the subject of
this Lease and to no other assets of Landlord for satisfaction of any liability
in respect of this Lease and will not seek recourse against the partners in
Landlord or the directors, officers or shareholders of any of the partners in
Landlord or any of their personal assets for such satisfaction.
-14-
<PAGE> 18
30.
TRANSFER OF LANDLORD'S INTEREST
In the event Landlord transfers its interest in the Premises or
Parcel IB (other than a transfer for security purposes only), Landlord shall be
relieved of all obligations accruing hereunder after the effective date of such
transfer, including, but not limited to, the return of the Security Deposit or
other funds held by Landlord, provided that such obligations have been expressly
assumed in writing by the transferee.
Tenant agrees at any time and from time to time upon ten (10)
days' prior request by Landlord, to execute, acknowledge and deliver to Landlord
a statement in writing certifying to Landlord, any mortgagee, prospective
purchaser or other party designated by Landlord: (a) that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), (b) the dates to which the rent and any other charges have been
paid in advance, if any, (c) that there are not any uncured defaults on the part
of Landlord hereunder, or specifying such defaults if any are claimed, (d)
whether or not there are then any existing defenses against enforcement of any
provision of the Lease, (e) the Lease Commencement Date and Lease Expiration
Date and (f) any other information which may be reasonably requested by
Landlord. Any such statement delivered pursuant to this paragraph may be
conclusively relied upon by any prospective purchaser, mortgagee or assignee of
any mortgage of the Premises or Parcel IB.
If Tenant fails to deliver such statement within such time, any
prospective purchaser or encumbrancer may conclusively assume: (i) that this
Lease is in full force and effect, without modification except as may be
represented by Landlord, (ii) that there are no uncured defaults in Landlord's
performance, (iii) that not more than one month's rent and no other charges have
been paid in advance, (iv) that there are no existing defenses against
enforcement of any provision of the Lease, and (v) that the Commencement Date
and Expiration Date are as stated by Landlord. Such failure by Tenant to deliver
such statement shall constitute a material default by Tenant under this Lease.
If Landlord desires to finance, refinance or sell Parcel IB or
any part thereof, Tenant hereby agrees to deliver to any prospective lender or
purchaser designated by Landlord such financial statements of Tenant as may be
reasonably required by such prospective lender or purchaser. Such statements
shall include the past three years' financial statements of Tenant that are made
available to the public in the normal course of business. All such financial
statements shall be received in confidence, shall be used only for the purposes
herein set forth and shall be furnished by Tenant promptly upon request therefor
by Landlord.
31.
SUCCESSORS AND ASSIGNS
Subject to all limitations on assignment and subletting set forth
herein, all of the terms and provisions of this Lease shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties hereto.
32.
ATTORNEYS' FEES
Should either party be required to commence legal proceedings
relating to this Lease, the prevailing party shall be entitled to receive
reimbursement for its reasonable attorneys' fees and costs of suit both in
connection with the litigation and in enforcing a judgement in its favor.
33.
SUBSTITUTED PREMISES
Landlord reserves the right on thirty (30) days written notice to
Tenant to substitute other premises within the Project for the Premises
described herein. The substituted premises shall be equal size to the Premises
(subject to a variation of ten percent) and shall contain comparable tenant
improvements. The unadjusted rental for the substituted premises shall be at the
then current rate for such space but shall not exceed the unadjusted rental
specified in Article 3. All other provisions of this Lease shall remain in full
force and effect with respect to the substituted premises, except that Tenant's
Proportionate Share of Building and Project Direct Expenses shall be
proportionately reduced if the rentable area of the substituted premises is less
than the rentable area of the original Premises. Landlord shall pay all
reasonable moving expenses of Tenant incidental to such substitution of
premises. This Article 33 shall only apply to any Additional Space (as defined
in Article 52) leased by Tenant in accordance with Article 52.
-15-
<PAGE> 19
34.
SURRENDER OF PREMISES
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subtenancies, or may, at the option of
Landlord, operate as an assignment to it of any or all such subtenancies.
35.
WAIVER
No waiver of any term, covenant, condition, or obligation of this Lease, or
any breach thereof, shall be effective unless granted in writing. The waiver by
Landlord of any term, covenant, condition or obligation herein contained or any
breach thereof shall not be deemed to be a waiver of any other term, covenant,
condition or obligation herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not constitute a waiver of any preceding breach by
Tenant, regardless of Landlord's knowledge of such preceding breach at the time
of acceptance of such rent.
36.
GOVERNING LAW
This Lease shall be governed by and construed in accordance with Arizona
law, and the invalidity or un-enforceability of any provision of this Lease
shall not affect or impair the validity of any other provision hereof.
37.
DEFINITIONS AND MARGINAL HEADINGS
The term "Tenant" as used herein shall include the plural as well as the
singular and shall include the masculine, feminine and neuter. If there is more
than one Tenant, the obligations of Tenant hereunder shall be joint and several.
Article headings in this Lease are for convenience only and shall not define or
limit the scope or intent of any provision hereof.
38.
TIME OF ESSENCE
Time is of the essence of this Lease and each and every provision hereof.
39.
PARKING
Tenant hereby also rents the Parking Spaces referred to in the Basic Lease
Information of the Lease in the garage parking area located substantially
beneath the Building on such terms and conditions as may be established by
Landlord from time to time during the Term; provided, however, the rent for such
Parking Spaces during the initial Term shall be equal to the Parking Charge and
said rents shall never be less than these charges during the remainder of the
Term of this Lease. Landlord shall have the right to designate where such
parking spaces shall be located and to relocate such parking spaces within the
underground garage parking area from time to time, but shall not, except for
reserved spaces, be required to mark specific spaces. Landlord shall have the
further right to relocate or eliminate any surface parking areas from time to
time during the Term of this Lease. If additional underground garage parking is
requested by Tenant during the Term of this Lease, Landlord shall make such
space available to Tenant, on the terms, conditions and rates then applicable to
the other underground garage parking spaces, if in Landlord's sole discretion
adequate underground garage parking is available to the other tenants in the
Building. All parking spaces rented by Tenant shall be considered part of the
Premises for the purposes of Tenant's obligations and Landlord's rights under
Articles 8, 9, 10, 14, 16 and 17 hereof, and the rental owing for such spaces
shall be considered additional rent under the Lease. The parking areas referred
to herein, except for reserved spaces during normal business hours, shall be
used on a non-exclusive basis with occupants of the Building and Parcel IB.
Tenant also acknowledges that there are parking spaces in uncovered surface
parking areas within the Project. Tenant and visitors of the Building may not
park in such spaces unless expressly authorized in writing by Landlord. Such
permitted parking may or may not be without charge; provided, however, at such
time as validated parking becomes, in the opinion of Landlord, common practice
among similar offices in the immediate vicinity of the Project, Tenant shall
participate in such validated parking on
-16-
<PAGE> 20
the same basis as other tenants in the Project and Landlord shall charge a
competitive parking charge for such spaces.
Tenant's use of all parking areas shall be subject to any rules and
regulations relating thereto, including regulations governing the designation of
specific parking spaces for use by Tenant and its guests and invitees, the hours
during which such parking spaces may be used, the size of such parking spaces,
and the traffic flow in the parking areas. Landlord shall not be responsible for
any vandalism or other damages from any cause occurring to automobiles or their
contents while located in such parking spaces or moving in the parking area.
40.
COVENANTS AND CONDITIONS
Each provision of this Lease performable by Tenant shall be deemed both a
covenant and a condition.
41.
RECORDING
Tenant shall not record this Lease without Landlord's prior written
consent, and such recordation shall, at the option of Landlord, constitute a
non-curable default by Tenant. Tenant shall, upon request of Landlord, execute,
acknowledge and deliver to Landlord a "short form" memorandum of this Lease for
recording purposes. Any costs or taxes associated with such recording shall be
at the sole cost and expense of the party requesting that this Lease be
recorded.
42.
INTEREST ON PAST DUE OBLIGATIONS
Any amount due Landlord not paid when due shall bear interest at the Bank
One prime rate plus 5% per annum from the date due or, if said rate is not a
lawful one, the highest rate permitted by law. Payment of such interest shall
not excuse or cure any default by Tenant under this Lease; provided, however,
that interest shall not be payable on late charges assessed against Tenant.
43.
SEVERABILTY
The invalidity of any provision of this Lease as determined by a court of
competent jurisdiction shall in no way affect the validity of any other
provision hereof.
44.
PERSONAL PROPERTY TAXES
Tenant shall pay when due all taxes assessed against and levied upon tenant
alterations, tenant improvements, and any property of Tenant contained in, on or
about the Premises or any part thereof. When possible, Tenant shall cause all
such taxes to be levied and assessed separately from taxes upon the Premises.
45.
ENTIRE AGREEMENT
This Lease, the Office Building Rules and Regulations, and any addendum
attached hereto and executed by the parties, constitute the entire agreement of
the parties and supersede all prior agreements or understandings between the
parties with respect to the subject matter hereof. No prior agreement or
understanding shall be effective. This Lease may not be modified or amended
except by written agreement of the parties.
[***]
[*** Information Redacted]
-17-
<PAGE> 21
[***]
47.
ENVIRONMENTAL PROVISIONS
(a) Tenant represents and warrants to Landlord that Tenant will not
generate, store, treat, use, release, or dispose of any hazardous materials on
or about the Premises or the Project except in compliance with all environmental
laws and any additional conditions reasonably imposed by Landlord. Tenant will
not release or dispose of any hazardous materials in or on the Premises or the
Project without the express written approval of Landlord. Tenant shall obtain,
comply with and provide Landlord with copies of all permits required in
connection with the generation, storage, treatment, use, release, or disposal of
any hazardous materials.
(b) Tenant shall not install nor permit to be installed on or in the
Premises any substance containing asbestos and determined to be hazardous by any
governmental authority or any friable asbestos. If any such substance or any
friable asbestos is determined to be in or on the Premises as a result of the
actions of Tenant, Tenant shall promptly comply with any applicable
environmental laws (which may or may not require removal of the material), at
Tenant's expense.
(c) In the event Tenant fails to perform any of its obligations under this
Article 46 within thirty (30) days after the giving to Tenant by Landlord of
written notice of such failure, or within a reasonable period of time not to
exceed ninety (90) days after the giving to Tenant by Landlord of written notice
of such failure if, due to the nature of such failure, such failure cannot be
cured within a 30-day period but is otherwise susceptible to cure within a
reasonable period of time not exceeding ninety (90) days, or within a shorter
period of time if prescribed by any environmental law, then, after expiration of
such applicable period of time, Landlord may enter upon the Premises and remove
or cause to be removed such hazardous material or otherwise cause compliance
with any applicable environmental law, provided, however, that Landlord may
enter upon the Premises and remove of cause to be removed such hazardous
material or otherwise cause compliance with any applicable environmental law
upon written notice to Tenant but prior to the expiration of the applicable time
period, if Landlord determines that such action is necessary prior to the
expiration of the applicable time period (i) for the preservation or safety of
the Project or the tenants in the Project, or other persons, (ii) to avoid
suspension of a necessary service in, or with respect to, the Project, (iii) for
the preservation or the lien, and grant of any deed of trust granted to any
lender with respect to the Project or the priority of such lien and grant, or
(iv) to assure the continued operation of the Project. The cost of any such
removal or compliance shall be immediately due to Landlord upon demand as
additional rent.
(d) Tenant shall, at Tenant's own expense, comply with all present and
hereinafter enacted environmental laws affecting Tenant's activities on the
Premises or the Project. Tenant shall keep the Premises free of any lien imposed
pursuant to any environmental laws, except for any liens being contested by
Tenant in good faith and at its own expense by appropriate action or legal
proceedings, provided that such actions or proceedings operate to prevent
collection thereunder or realization thereon and the sale or forfeiture of the
Premises or Parcel IB to satisfy the same, and provided further that during such
contest Tenant shall, at the option of Landlord, provide security reasonably
satisfactory to Landlord assuring the discharge of Tenant's obligations in
respect of the lien being contested and any additional interest, charge,
penalty, or expense arising from or incurred as a result of such contest.
(e) As used herein, the term "hazardous materials" means materials defined
as "hazardous waste or substances" under the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq.,
Resource Conservation and Recovery Act, 42 U.S.C. Section 6903 et seq., or the
Arizona Environmental Quality Act of 1986, A.R.S. Section 49-201(16), including
without limitation asbestos, urea formaldehyde foam insulation, and any fluid
containing polychlorinated biphenyls.
(f) As used herein, the term "environmental laws" means any one or all of
the following, as they may be amended from time to time: the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Sections
9601 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.
Sections 6901 et seq.), the Safe Drinking Water Act (42 U.S.C.
Sections 300f et seq.), the Clean Water Act (33 U.S.C. Sections
12151 et seq.), the Clean Air Act (42 U.S.C. Sections 7401 et seq.), the
Toxic Substances Control Act (15 U.S.C. Sections 136 et seq.), the Solid
Waste Disposal Act (42 U.S.C. Sections 3251 et seq,), and the Arizona
Environmental Quality Act, including provisions on water quality control (A.R.S.
Sections 49-210 et seq,), air quality (A.R.S. Sections 49-401 et
seq.), solid waste management (A.R.S. Sections 49-701. et seq.),
hazardous waste disposal (A.R.S. Sections 49-901 et seq.), and underground
storage tank regulation (A.R.S. Sections 49-1001 et seq.); and
regulations thereunder and any other laws and regulations now in effect or
hereinafter enacted that deal with the regulation or protection of the
environment, including the ambient air, ground water, surface water, and land
use, including sub-strata land.
(g) Tenant shall be responsible for removing from the Premises any
hazardous materials put there by Tenant or its agents which either Tenant or
Landlord is required by law to remove. In addition, Tenant shall be responsible
for restoring the Premises to their condition immediately prior to the time of
such
[*** Information Redacted]
-18-
<PAGE> 22
required removal. If Landlord is so required to remove any such hazardous
materials put there by Tenant or its agents, Landlord shall promptly give notice
thereof to Tenant.
(h) Tenant shall immediately notify Landlord, both orally and in
writing, of any of the following:
(i) Any emission, spill, release, or discharge into the
environment of any hazardous materials.
(ii) Any correspondence or communication to Tenant or its agents
regarding the presence or suspected presence of hazardous materials on the
Premises or the Project or regarding the application of environmental laws to
the Premises, the Project or Tenant's activities on the Premises.
(iii) Tenant's knowledge of any circumstances which could give
rise to a claim that Tenant, Landlord, the Premises, or the Project may be in
violation of environmental laws.
(iv) Any change in Tenant's activities on the Premises that will
change or has the potential to change Tenant's or Landlord's obligations or
liabilities under environmental laws.
(i) Tenant shall indemnify and hold harmless Landlord, its employees, and
agents for, from and against any of the following which result from or are
related to any activity or operation of Tenant or its agents, contractors,
employees, or invitees on the Premises or the Project during the Term of this
Lease: any and all loss, damage, obligation, penalty, liability, litigation,
demand, defense, judgment, suit, proceeding, cost, disbursement, and expense
(including, but not limited to, reasonable investigation, remediation, removal,
and legal fees and expenses) resulting from or arising from or in connection
with, or alleged to have resulted or arisen from or in connection with,
contamination of or adverse effects on the environment, the Premises, or the
Project, or violation of any environmental law or other statute, ordinance,
rule, regulation, judgment, or order of any government or judicial entity.
Tenant's obligations and liabilities under this paragraph shall continue after
the expiration or termination of this Lease so long as Landlord bears any
liability or responsibility under the environmental laws for any action by
Tenant or its agents, contractors, or invitees that occurred on the Premises or
the Project during the Term of this Lease. Tenant's failure to abide by the
terms of this paragraph shall be restrainable by injunction.
(j) If any claim is brought against Tenant, its officers, directors,
employees, agents or representatives, by any third party relating in any way to
hazardous or toxic materials as defined under the Lease, Landlord shall
indemnify and hold Tenant harmless for, from and against all liabilities,
claims, demands, losses, costs, damages, actions, suits, including reasonable
attorneys' fees and costs, to the extent that such loss or expense is caused by
the negligence of Landlord or its employees, agents or contractors.
48.
BROKERS
Tenant represents that it has had no dealing with any real estate brokers
or agents in connection with this Lease other than Brokers, whose commission, if
any is due, shall be paid by Landlord in accordance with a separate agreement
between Landlord and such Brokers. Tenant shall indemnify and hold Landlord
harmless from any and all claims.
49.
OPTION TO RENEW
(a) Tenant shall have the option to extend the term or the Lease for two
(2) consecutive periods of five (5) years, (the "Extended Term"), subject to the
further provisions of this paragraph; provided, however, should Tenant fail to
exercise its right to extend the term of the Lease for the first option term,
Tenant's right to extend the term of the Lease for a second option term shall
automatically terminate. Tenant must exercise its option with respect to the
Extended Term by giving written notice of exercise to Landlord on or before the
date that is six (6) months prior to the Expiration Date of the Term. Any notice
of extension to be given by Tenant pursuant to this subparagraph (a) shall be
called "Tenant's Notice".
(b) In the event an option to extend is exercised in a timely manner, the
Lease shall be extended for the period of the applicable Extended Term upon all
of the terms and conditions of the Lease, provided that the Monthly Base Rent
shall be (i) ninety-five percent (95%) of the fair market rental value of the
Premises, as of the commencement date of the Extended Term for the first option
period, and (ii) the fair market rental value of the Premises, as of the
commencement date of the Extended Term for the second option period.
-19-
<PAGE> 23
(c) Tenant shall have no right to extend the term of the Lease if Tenant's
Notice is not delivered in a timely manner or if there is an Event of Default
under this Lease at the time Tenant's Notice is delivered or on the expiration
date of the then current term of the Lease.
(d) Tenant shall have no right to extend the term beyond the Extended Term.
(e) If during the initial Term of the Lease Tenant has exercised its Right
of First Refusal to lease additional space in accordance with Article 52 of the
Lease, Tenant shall have the option to extend the term of the Lease in
accordance with this Article 49 for the additional space leased; provided,
however, the Monthly Base Rent for any additional space shall be at the fair
market rental value of said additional space for both the first and second
option periods. Should Tenant fail to exercise its right to extend the term of
the Lease for the first option term, Tenant's right to extend the term of the
Lease for a second option term shall automatically terminate.
(f) The option granted to Tenant in this Article 48 is personal to
Envirotest Systems Corp. and shall not be transferable, except for an assignment
or sublease which does not require Landlord's consent in accordance with the
provisions of Article 15.
50.
CANCELLATION RIGHT
If Tenant is not then in default hereunder beyond any applicable cure
period and Tenant is in possession of the Premises and has not assigned its
rights under this Lease (unless the assignment was in accordance with the
provisions of Article 15), Tenant shall have the one (1) time right to cancel
this Lease as to all of the Premises, effective as of the fifth anniversary of
the Commencement Date, if, and only if, (a) Tenant has given Landlord written
notice of such cancellation at least six (6) months before the fifth anniversary
of the Commencement Date, and (b) within fifteen (15) days of the delivery of
such notice to Landlord, Tenant has delivered to Landlord a cash cancellation
fee which shall be equal to (i) the unamortized cost at the effective date of
termination of (A) all tenant improvements for the Premises, and (B) all leasing
commissions paid by Landlord with respect to this Lease, and (ii) $39,972.00.
Amortization shall be on a straight line basis over seven (7) years with no
interest penalty being charged. If Tenant fails to deliver such cancellation
notice and cancellation fee at least six (6) months prior to the fifth
anniversary of the Commencement Date, Tenant's cancellation right shall
automatically terminate.
51.
SIGNAGE
Landlord shall permit Tenant, at Tenant's sole cost and expense, to install
Tenant's name on the existing monument sign for the Building in either the
location currently occupied by Texas Instruments or the location currently
occupied by Equitable Home Mortgage should either of said spaces become vacant
as the result of the expiration or termination of the lease with either tenant.
No sign shall be installed until the design, size, content, structure and
location of the sign have been approved by the Landlord, which consent shall not
be unreasonably withheld, and the City of Phoenix.
52.
RIGHT OF FIRST REFUSAL
(a) During the initial Term, and so long as an event of default has not
occurred, Landlord shall, before entering into a lease with any third party for
any contiguous space located on the 11th floor of the Building (the "Additional
11th Floor Space"), notify Tenant in writing or the monthly rent, rental
increases, and other economic provisions (the "Rental Terms") upon which
Landlord would be willing to lease the Additional 11th Floor Space to Tenant.
This Right of First Refusal shall not be applicable unless and until the
Additional 11th Floor Space is vacated by the existing tenant (Unisys
Corporation), its successors or assigns.
(b) Commencing with the beginning of the thirtieth month following the
Commencement Date and terminating with the end of the forty-second month
following the Commencement Date, and so long as an event of default has not
occurred, Landlord shall, before entering into a lease with any third party for
any two (2) spaces ranging in size between approximately 1,800 rentable square
feet and approximately 3,000 rentable square feet located either in the Building
or located in the building at 2425 East Camelback Road (the "Additional Space"),
notify Tenant in writing of the monthly rent, rental increases, and other
economic provisions (the "Rental Terms") upon which Landlord would be willing to
lease the Additional Space to Tenant. This Right of First Refusal shall not be
applicable unless and until the Additional Space is vacated by any existing
tenants and any rights with respect to the Additional Space have been satisfied.
-20-
<PAGE> 24
(c) If, within five (5) business days after receipt of Landlord's notice,
Tenant shall deliver to Landlord a written notice of Tenant's intent to lease
the Additional 11th Floor Space or the Additional Space on the Rental Terms, for
a term not to exceed the then remaining Term of the Lease (including any then
exercised options), Landlord and Tenant shall proceed to negotiate a lease for
the Additional 11th Floor Space or the Additional Space on the same terms as
contained in the Lease, except for the Rental Terms and other matters dependent
upon the size of the premises, such as Tenant's Share. If Tenant does not
deliver its notice of intent to lease the Additional 11th Floor Space or the
Additional Space in a timely manner, or if Landlord and Tenant are unable to
agree on the terms of a lease for the Additional 11th Floor Space or the
Additional Space within ten (10) days following Tenant's delivery of its notice
of intent, Tenant's Right of First Refusal for the Additional 11th Floor Space
or the Additional Space shall terminate and Landlord shall have the right to
lease the Additional 11th Floor Space or the Additional Space or any portion of
the Additional 11th Floor Space or the Additional Space to a third party on the
same or any other terms and conditions, provided that such terms and conditions
do not result in an effective rental (taking into account the stated monthly
rent, rental increases, tenant improvement allowance and other economic
provisions or concessions), more than five percent (5%) lower than the effective
rental resulting from the Rental Terms previously offered to Tenant.
(d) This right of first refusal to lease the Additional 11th Floor Space or
the Additional Space is a one time right that is personal to Envirotest Systems
Corp. and shall not be transferrable, except for an assignment or sublease which
does not require Landlord's consent in accordance with the provisions of Article
15.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
date first above written.
LANDLORD:
Esplanade Office Limited Partnership, a Delaware limited partnership,
By: Eastrion No. 143, L.L.C.,
a Delaware limited liability company,
its general partner
By: /s/ Illegible Signature
Its: Vice President
TENANT:
ENVIROTEST SYSTEMS CORP.,
a Delaware corporation
2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
By: /s/ Illegible Signature
Its: Executive Vice President
/s/ Chester C. Davenport
- ---------------------------------
Chester C. Davenport
Chairman
-21-
<PAGE> 25
FLOOR PLATE BUILDING B
Eleventh Floor
[FLOOR PLATE]
EXHIBIT "A"
<PAGE> 26
[MAP]
EXHIBIT "B"
<PAGE> 27
[MAP]
EXHIBIT "B-1"
<PAGE> 28
5-13-94 REV.
DAVIS FREDRIKSON DAVIS
ARCHITECTURE PLANNING DESIGN
4201 NORTH 24TH STREET SUITE 100 PHOENIX, ARIZONA 85016
11TH FLOOR
1/8" = 1'-0"
[ARROW POINTING NORTH]
NORTH
EXHIBIT "C"
<PAGE> 29
[TICORE LOGO]
DATE: 5/31/94
BUILDING: ESPLANADE "B"
TENANT: ENVIROTEST
SUITE: 1150
USABLE SQ FT: 12118
RENTABLE SQ. FT. 13324
PLAN DATE: 5/13/94
REVISED: 5/24/94
<TABLE>
<CAPTION>
BUILDING PLAN BLD. STD UNIT UNIT TOTAL TENANT
ITEMS QUANTITY ALLOW. MEASURE COST COST OVERAGE
<S> <C> <C> <C> <C> <C> <C>
DEMOLITION OF WALLS 60 60 LIN FT 10.00 600.00 0.00
DEMISING PARTITION 1ST SIDE 0 0 LIN FT 18.75 0.00 0.00
DEMISING PARTITION 2ND SIDE 64 64 LIN FT 13.00 832.00 0.00
CORRIDOR PARTITION 1ST SIDE 3 3 LIN FT 15.25 45.75 0.00
CORRIDOR PARTITION TENANT SIDE 45 45 LIN FT 8.50 382.50 0.00
INTERIOR PARTITION 1406 1156 LIN FT 21.00 29,526.00 5,254.20
SOUND INSULATION 6160 0 SQ FT 0.23 1,416.80 1,416.80
FURR & SHEETROCK 132 0 LIN FT 11.25 1,485.00 1,485.00
FINISH SHEETROCK BELOW WINDOWS 450 450 LIN FT 2.25 1,012.50 0.00
FINISH SHEETROCK FULL HEIGHT 44 44 LIN FT 7.76 341.44 0.00
SHEETROCK COLUMNS 20 20 EACH 100.00 2,000.00 0.00
COFFERED SHEETROCK CEILING 221 0 SQ FT 4.50 994,50 994.50
DOUBLE SINGLE LITE FRENCH ENTRY 1 0 EACH 4,500.00 4,500.00 4,500.00
TENANT ENTRY (SECONDARY) 2 0 EACH 1,230.00 2,460.00 2,460.00
INTERIOR DOOR 44 36 EACH 750.00 33,000.00 5,734.50
SINGLE LITE FRENCH DOORS 1 0 EACH 1,150.00 1,150.00 1,150.00
BI-FOLD DOORS (3'-0") 1 0 EACH 750.00 750.00 750.00
BI-FOLD DOORS (6'-0") 2 0 EACH 1,250.00 2,500.00 2,500.00
RELOCATE PATIO DOORS 1 0 LUMP 7,500.00 7,500.00 7,500.00
WINDOW WALL FULL HEIGHT 18 0 LIN FT 181.25 3,262.50 3,262.50
SIDELIGHT (3'-0") 34 0 LIN FT 543.75 18,487.50 18,487.50
UPPER & LOWER CABINETS (P-LAM) 50 0 LIN FT 250.00 12,500.00 12,500.00
RECEPTION DESK ALLOWANCE 1 0 EACH 4,000.00 4,000.00 4,000.00
SHELF & POLE 24 0 LIN FT 15.00 360.00 360.00
TELEPHONE BOARD 1 1 EACH 100.00 100.00 0.00
PAINT WALLS 29054 29054 SQ FT 0.25 7,263.50 0.00
WALLCOVERING ALLOWANCE 220 0 LIN YDS 35.00 7,700.00 7,700.00
FLOAT FLOOR @ PERIMETER 450 450 LIN FT 10.00 4,500.00 0.00
FLOORCOVERING (BLD. STD.) 1481 1481 SQ YD 15.85 23,475.26 0.00
</TABLE>
[LETTERHEAD]
EXHIBIT "D"
1 of 2
<PAGE> 30
[TICORE LOGO]
<TABLE>
<CAPTION>
BUILDING PLAN BLD. STD UNIT UNIT TOTAL TENANT
ITEMS QUANTITY ALLOW. MEASURE COST COST OVERAGE
<S> <C> <C> <C> <C> <C> <C>
RUBBER BASE 3216 3706 LIN FT 0.78 2,508.48 -382.20
WOOD BASE (2-1/2") 490 0 LIN FT 5.40 2,646.00 2,646.00
CEILING GRID & TILE 12118 12118 SQ FT 0.55 6,664.90 0.00
MINI-BLINDS 5 0 EACH 85.00 425.00 425.00
DUPLEX OUTLET (NEW WALL) 130 81 EACH 33.00 4,290.00 1,624.04
FOUR-PLEX OUTLET (NEW WALL) 15 0 EACH 42.00 630.00 630.00
TELEPHONE / DATA (NEW WALL) 58 48 EACH 15.00 870.00 142.92
CONDUIT & GROUND FOR T.M.B. 1 1 EACH 62.00 62.00 0.00
INCANDESCENT DOWN LIGHTS 22 0 EACH 125.00 2,750.00 2,750.00
INSTALL 2X4 LIGHT FIXTURE 151 151 EACH 43.00 6,493.00 -20.42
SINGLE POLE SWITCH 48 48 EACH 35.00 1,680.00 -16.52
3-WAY SWITCH 4 0 EACH 65.00 260.00 260.00
DIMMER SWITCH 6 0 EACH 85.00 510.00 510.00
LIGHT ON EMERGENCY CIRCUIT 14 14 EACH 40.00 560.00 0.00
EXIT LIGHT 12 12 EACH 125.00 1,500.00 0.00
TENANT SIGN LIGHT FIXTURE 1 1 EACH 231.00 231.00 0.00
HOT TAP HOOK UP 3 0 EACH 235.00 705.00 705.00
GROUND FAULT CIRCUIT 3 0 EACH 42.50 127.50 127.50
A/C HOOK UP 3 0 EACH 375.00 1,125.00 1,125.00
FIRE ALARM (HORN STROBE) 12 12 EACH 168.00 2,016.00 0.00
FIRE ALARM (PERMIT & SUPERVISION) 2 2 LOT 525.00 1,050.00 O.O0
H.V.A.C. TENANT CONSTRUCTION 12118 12118 SQ FT 1.65 19,994.70 0.00
H.V.A.C. NEW HEATPUMP 3 0 EACH 2,500.00 7,500.00 7,500.00
PLUMBING 1 0 LOT 6,500.00 6,500.00 6,500.00
HOT TAP 3 0 EACH 375.00 1,125.00 1,125.00
X-RAY FLOOR 3 0 LOT 350.00 1,050.00 1,050.00
ENERGY MANAGEMENT SYSTEM 12118 12118 SQ FT 0.35 4,241.30 0.00
FIRE SPRINKLERS 126 126 EACH 80.00 10,080.00 0.00
NOTE THIS PROPOSAL EXCLUDES COSTS SUBTOTAL 259,740.13 106,756.32
FOR NOTES #13, #14, #15 PROGRESS & FINAL CLEAN UP (1.5%) 3,896.10 0.00
SUPERVISION (4%) 10,545.45 0.00
RESPECTFULLY SUBMITTED, PLAN CHECK & PERMIT FEE 6,795.00 0.00
TICORE CONSTRUCTION INCORPORATED INSURANCE (.5%) 140.49 53.38
CONTRACTORS FEE (7%) 19,678.20 7,476.68
/s/ Charles P. Hernandez TAX 13,295.16 5,051.46
- -------------------------------- TOTAL $314,090.53 $119,337.83
CHARLES P. HERNANDEZ COST PER USABLE SQ. FT. $25.92 $9.85
PRESIDENT COST PER RENTABLE SQ. FT. $23.57 $8.96
</TABLE>
EXHIBIT "D"
2 of 2
<PAGE> 31
OFFICE BUILDING RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be
Inscribed, displayed, printed or affixed on or to any part of the outside or
inside of the Project, the Premises, or the surrounding area without the written
consent of the Landlord being first obtained. If such consent is given by
Landlord, Landlord may regulate the manner of display of the sign, placard,
picture, advertisement, name or notice. Landlord shall have the right to remove
any sign, placard, picture, advertisement, or name or notice which has not been
approved by Landlord or is being displayed in a non-approved manner without
notice to, and at the expense of the Tenant. All approved signs or lettering on
doors and/or windows shall be printed, painted, affixed or inscribed at the
expense of Tenant by a person approved by Landlord.
Tenant shall not place anything or allow anything to be placed near
the glass of any window, door partition or wall which may appear unsightly from
outside of the Premises. Landlord shall have the right to control all internal
lighting that way be visible from the Project's exterior.
2. The directory of the Project will be provided exclusively for the
display of the name and location of tenants only, and Landlord reserves the
right to exclude any other names therefrom and to charge a reasonable fee for
each name other than the tenant's name, placed upon the directory.
3. The sidewalks, halls, passages, toilets, exits, entrances, parking
areas, elevators and stairways shall not be obstructed by tenant, its customers,
invitees, licensees and guests, or to be used (except toilets) by them for any
purpose other than for ingress to and egress from their respective premises. The
halls, passages, toilets, balconies and roof are not for the use of the general
public and Landlord shall in all cases retain the right to control thereof and
prevent access thereto by all persons whose presence in the judgement of the
Landlord shall be prejudicial to the safety, character, reputation and interests
of the Project or its tenants; provided, however, that nothing herein contained
shall be construed to prevent access by persons with whom Tenant normally deals
to the ordinary course of Tenant's business unless such persons are engaged in
illegal activities. No tenant, no employees or invitees of any tenant shall not
go upon the roof of the Project. Further, Tenant shall not install any radio,
television or satellite antenna, loudspeaker or other device on the roof or
entrance walls without the prior written permission of Landlord. In any case,
the Tenant shall not keep or display any merchandise or otherwise obstruct the
sidewalks, malls or other areas adjacent to the Leased Premises.
4. Tenant shall not alter any lock or install any new additional locks
or any bolts on any door of the Premises without the written consent of
Landlord.
5. The toilet rooms, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein. The expense of
any breakage, stoppage or damage resulting from a violation of this rule shall
be borne by the tenant who, or whose employees or invitees, shall have caused
it.
6. Tenant shall not overload any floor of the Lease Premises in excess
of one hundred (100) pounds per square foot, nor shall it hang or suspend from
any wall or ceiling or roof, or any other part of the Building, any equipment,
displays, fixtures, or signs which are not authorized by the Landlord.
7. No furniture, freight or equipment of any kind shall be bought into
the Project without the consent of Landlord, and all moving of the same into or
out of the Project shall be done at such time and in such manner as Landlord may
designate. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy equipment brought into the Project and
also the times and manner of moving the same in and out of the Project. Safes or
other heavy objects shall, if considered necessary by Landlord, stand on wood
strips of such thickness as shall be necessary to properly distribute the
weight. Landlord will not be responsible for loss of or damage to any such safe
or property from any cause and all damage done to the Project by moving or
maintaining any such safe or other property shall be repaired at the expense of
Tenant. There shall not be used in any Premises, or in the public halls of the
Project, either by any tenant or other, any hand trucks except those equipped
with soft rubber tires and side guards or other such material handling equipment
the Landlord may approve.
8. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation or good order and cleanliness.
Landlord shall in no way be responsible to any Tenant for any loss or property
on the Premises, however occurring, or for any damage done to the effects of any
Tenant, by or as a result or the acts or any employee or contractor or Landlord,
or any other person. Window cleaning shall be done only by Landlord at Intervals
it deems appropriate.
EXHIBIT "E"
(1 OF 3)
<PAGE> 32
OFFICE BUILDING RULES AND REGULATIONS
Revised March, 1994
Page Two
9. Tenant shall not use, keep or permit to be used or kept any noxious
gas or substance in the Premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to the Landlord or other
occupants of the Project by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business in the Project.
No skateboards or similar vehicles, animals or birds shall be brought in or kept
in or about the Premises or the Project. No tenant shall make or permit to be
made any disturbing noises or disturb or interfere with occupants of this or
neighboring buildings or premises, or with those having business with such
occupants, by the use of any musical instrument, radio, phonograph, unusual
noise, or in any other way. No Tenant shall throw anything out of doors or down
the passageways.
10. The Premises shall not be used for manufacturing without the
express written permission of Landlord. No Tenant shall occupy or permit any
portion of this Premises to be occupied for the manufacture or sale of liquor,
narcotics or tobacco in any form, or as a medical office, or as a barber shop or
manicure shop except with prior written consent of Landlord. No Tenant shall
advertise for laborers giving an address at the Premises. The Premises shall not
be used for lodging or sleeping or for illegal purposes.
11. Tenant shall not use or keep in the Premises or the Project any
kerosene, gasoline or inflammable or combustible fluid or material or use any
method of heating or air conditioning other than that supplied or approved by
Landlord.
12. Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for, or stringing of
wire will be allowed without the consent of Landlord. The location of
telephones, call boxes and other office equipment affixed to the Premises shall
be subject to the approval of Landlord.
13. All keys to the Project, offices, rooms and toilet rooms shall be
obtained from Landlord's office and Tenant shall not from any other source
duplicate or obtain keys or have keys made. Additional or duplicate keys will be
provided by Landlord at a reasonable charge to Tenant. Tenant, upon termination
to the tenancy, shall deliver to Landlord the keys to the Project, offices,
rooms, and toilet rooms which shall have been furnished and shall pay Landlord
the cost of replacing any lost key or of changing the lock or locks opened by
such lost key if Landlord deems it necessary to make such a charge.
14. No Tenant shall lay linoleum, tile, carpet or other similar floor
coverings so that the same shall be affixed to the floor of the Premises in any
manner except as approved by Landlord. The expense of repairing any damage
resulting from a violation of this rule or removal of any floor covering shall
be borne by the Tenant by whom, or by whose contractors, employees or invitees,
the floor covering shall have been laid.
15. On Sundays and legal holidays, and on other days during certain
hours for which the Building may be closed after Normal Business Hours, access
to the Building or to the halls, corridors, or stairways in the Building, or to
the Premises or Project may be controlled through the use of security personnel
and/or security devices. Such personnel will have the right to demand of any and
all persons seeking access to the Project proper identification to determine if
they have right of access to the Premises. Landlord shall in no case be liable
for damages for any error with regard to the admission to or exclusion from the
Project of any person. In cases of invasion, mob, riot, public excitement or
other commotion, Landlord reserves the right to prevent access to the Project
during the continuance of the same, by closing the doors or otherwise, for the
safety of all tenants and protection of the Project and property located
therein. The foregoing notwithstanding, Landlord shall have no duty to provide
security protection for the Project at any time or to monitor access thereto.
16. Tenant shall see that the doors of the Premises are closed and
securely locked before leaving the Building and that all water faucets, water
apparatus and electricity are entirely shut off before Tenant or Tenant's
employees leave the Building. Tenant shall be responsible for any damage to the
Project or other tenants caused by a failure to comply with this rule.
17. Landlord reserves the right to exclude or expel from the Project
any person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of the rules and regulations of the Project.
18. No vending machine shall be installed, maintained or operated upon
the Premises or the Project without the prior written consent of Landlord.
EXHIBIT "E"
(2 OF 3)
<PAGE> 33
OFFICE BUILDING RULES AND REGULATIONS
Revised March, 1994
Page Three
19. Landlord shall have the right, exercisable without notice and
without liability to Tenant, to change the street address of the Project of
which the premises are a part.
20. Tenant agrees that it shall comply with all fire regulations that
may be issued from time to time by Landlord, and Tenant also shall provide
Landlord with the name of a designated responsible employee to represent Tenant
in all matters pertaining to fire regulations. Tenant, at tenant's sole expense
will provide such reasonable fire retarding devices as required by the City of
Phoenix Fire Code or Landlord's insurance carrier, separate from the building
fire sprinkler. Tenant shall be responsible for the routine maintenance of the
aforementioned equipment.
21. Landlord reserved the right by written notice to Tenant to rescind,
alter or waive any rules or regulations at any time prescribed for the Project
when, in Landlord's judgment, it is necessary, desirable or proper for the best
interest of the Project or its tenants.
22. Tenant shall not disturb, solicit, or canvass any occupant of the
Building and shall cooperate to prevent the same. Peddlers, solicitors and
beggars shall be reported to Landlord.
23. Without the written consent or Landlord, Tenant shall not use the
name of the Project in connection with or in promotion or advertising the
business of Tenant except as Tenant's address.
24. Tenant shall be entitled to use parking spaces during working
hours, the exact location of which shall be designated by Landlord. Tenant shall
not park in driveways or loading areas nor reserved parking spaces of other
tenants. Landlord or its agents shall have the right to cause to be removed any
car of Tenant, its employees, agents, invitees, licensees, contractors or guests
that may be parked in unauthorized areas, and Tenant agrees to save and hold
harmless Landlord, its agents and employees from any and all claims, losses,
damages and demands asserted or arising in respect to or in connection with the
removal of any such vehicle and for all expenses incurred by Landlord in
connection with such removal. Tenant will from time to time, upon request of
Landlord, supply Landlord with a list or license plate numbers of vehicles owned
or operated by its employees and agents.
25. All interior window coverings must be approved by Landlord and
Tenant may not install any awnings or other exterior window shades or coverings.
26. Tenant shall not waste electricity or water and agrees to cooperate
fully with Landlord to assure the most effective operation of the Building's
heating and air conditioning equipment.
27. Tenant assumes full responsibility for protecting, at all times,
the Premises and all personal effects of Tenant, its employees, agents and
invitees from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed and secured, and Landlord shall
have no liability with respect thereto.
28. Tenant shall not install or operate machinery, equipment or any
mechanical or electrical device of a nature not directly related to Tenant's
ordinary use of the Premises, without the written permission of Landlord.
29. Tenant shall not be entitled, by virtue of this Lease, to use or
patronize any service, business or facility in the Project, but may become
entitled to use or patronize the same by satisfactory arrangements with the
operator of such business or facility.
30. Tenant shall provide to Landlord, and update as necessary, the
names, addresses and telephone numbers of three authorized employees of the
Tenant who may be contacted by Landlord in the event of an emergency relative to
the Leased Premises.
31. Tenant shall store all its trash and garbage within its Leased
Premises. Tenant shall not place in any trash box, receptacle or compactor, any
material which cannot be disposed of in the ordinary and customary manner of
trash and garbage disposal. All garbage and refuse disposal shall be made at
such times and in such a manner as may be directed by Landlord from time to
time.
32. All delivery vehicles shall use designated loading docks or loading
zones which may be established from time to time by Landlord. Deliveries to
individual suites shall be made using the rear entrance of suites where
applicable, and in cases where the front of courtyard entrance is used,
deliveries will be made in such manner and at such time as to not interfere with
pedestrian traffic. Tenant shall be responsible for the actions and control of
their delivery vendors.
EXHIBIT "E"
(3 OF 3)
<PAGE> 1
Exhibit 10.15
ESPLANADE SUBLEASE
AGREEMENT
(ENVIROTEST/UGLY DUCKLING - SUITE 1150)
This Esplanade Sublease Agreement (Envirotest/Ugly Duckling - Suite
1150) is entered into as of April 15, 1996 (the "Sublease Date") between the
undersigned Subtenant and Sublandlord.
BACKGROUND
A. Landlord and Tenant are parties to the Master Lease covering
the Premises generally described as Suite 1150 located at 2525 East Camelback
Road, Phoenix, Arizona. The Rentable Area of the Premises 13,324 square feet.
B. Tenant, as the Sublandlord, desires to sublease the Premises
to Subtenant upon the terms and conditions of this Sublease.
C. As of the Consent Date, Landlord has executed the Consent
authorizing the execution of this Sublease.
For valuable consideration, Sublandlord and Subtenant agree as follows:
AGREEMENT
1. Incorporation and Defined Terms. This Sublease incorporates by
reference all of the terms and conditions of the Master Lease, and initially
capitalized terms that are used in this Sublease but not defined in this
Sublease will have the meanings ascribed to them in the Master Lease. In
addition to those terms defined elsewhere in this Sublease or in the Master
Lease, the following defined terms are used in this Sublease:
a. "Consent" means the attached Landlord Consent to
Sublease.
b. "Landlord" means Esplanade Office Limited
Partnership, a Delaware limited partnership, and its
successors and assigns under the Master Lease.
c. "Master Lease" means the Esplanade Lease Agreement
(Office) Parcel 1B, dated June 22, 1994, between
Landlord and Tenant, covering the 13,324 square feet
known as Suite 1150 located on the 11th Floor of the
Building.
<PAGE> 2
d. "Obligations" means all duties, obligations,
covenants, liabilities, indemnities and the like of
the applicable party under the Master Lease or this
Sublease, as indicated in the text of this Sublease,
throughout the Sublease Term.
e. "Occupancy Date" means April 27, 1996.
f. "Rentable Sublease Square Feet" means the rentable
square footage of the Sublease Space as confirmed and
approved by Subtenant and Sublandlord under Paragraph
9 below.
g. "Sublandlord" means Envirotest Systems Corp., a
Delaware corporation. Sublandlord is referred to as
the "Tenant" under the Master Lease, and is likewise
sometimes referred to as the Tenant in this Sublease.
h. "Sublease" means this Esplanade Sublease Agreement
(Envirotest/Ugly Duckling - Suite 1150) and the
attached Consent, as either or both are amended from
time to time during the Sublease Term.
i. "Sublease Base Rent" means the following base rents
to be paid by Subtenant under this Sublease:
- From the Sublease Rent Commencement Date of
April 27, 1996 through August 31, 1997,
$20.00 per Rentable Sublease Square Foot per
annum ($20.00 X 13,324 X 1/12 = $22,206.67
per month).
- From September 1, 1997 through August 31,
1999, $22.00 per Rentable Sublease Square
Foot per annum ($22.00 X 13,324 X 1/12 =
$24,427.33 per month).
- From September 1, 1999 through August 31,
2001, $24.00 per Rentable Sublease Square
Foot per annum ($24.00 X 13,324 X 1/12 =
$26,648.00 per month).
j. "Sublease Expiration Date" means the expiration date
of the Sublease Term, as defined below.
-2-
<PAGE> 3
k. "Sublease Rent Commencement Date" means April 27,
1996.
l. "Sublease Space" means the entire Premises described
in the Master Lease.
m. "Sublease Term" means the Original Sublease Term as
may be extended by any Extension Term established in
this Sublease. The "Original Sublease Term" means the
term commencing on the Sublease Date and expiring on
August 31, 2001.
n. "Subtenant" means Ugly Duckling Holdings, Inc., an
Arizona corporation.
o. "Subtenant's Proportionate Share of Building Direct
Expense" means 5 and 68/100 percent (5.68%) which was
obtained by dividing the Rentable Space Square Feet
by the Rental Area and the Building Office Space
(i.e., 234,658 square feet), as set forth in the
Master Lease, and multiplying the resulting quotient
to the fourth decimal place by one hundred (100).
p. "Subtenant's Proportionate Share of Project Direct
Expense" means 1 and 21/100 percent (1.21%).
2. Incorporation of Master Lease. The Master Lease, a copy of
which is attached as Exhibit "A" to this Sublease, is incorporated into and made
a part of this Sublease by this reference.
a. Subtenant assumes, agrees to perform, and agrees to
be bound by each and every one of the Obligations of
the Tenant stated in the Master Lease accruing on and
after the Sublease Date (as if Subtenant were the
Tenant, and Sublandlord were the Landlord, under the
Master Lease) throughout the end of the Sublease
Term. In the event of any conflict between the terms
of this Sublease and those stated in the Master
Lease, the terms of this Sublease shall govern for
the purposes of resolving conflicts between the
Subtenant and Sublandlord only.
b. Because Sublandlord and Subtenant have agreed to
incorporate the Master Lease by reference, the
provisions stated in the Master Lease shall be deemed
modified as they apply to the Sublandlord-Subtenant
relationship, to the extent reasonably necessary, so
that application of
-3-
<PAGE> 4
the Master Lease provisions will be consistent with
the purpose and intentions of the parties in entering
into this Sublease. Except as otherwise provided in
this Sublease, in any case where a grace period would
be granted to the Tenant under the Master Lease with
respect to the performance or observance of any
covenant, condition, or obligation, the Subtenant
shall be deemed to be in default under this Sublease
if it has not performed or observed the covenant,
condition, or obligation within a grace period of the
same length as that stated in the Master Lease. In
any case where the Master Lease would require or
permit the Tenant to notify the Landlord of any
matter, the Subtenant shall give to Sublandlord and
Landlord any corresponding required or permitted
notice in writing on or before the date by which the
Tenant under the Master Lease would be required or
permitted to give the notice.
3. Sublease. Subtenant agrees to sublease from Sublandlord, and
Sublandlord agrees to sublease to Subtenant, the Sublease Space for the Sublease
Term upon the terms and conditions in this Sublease. The Sublease Space
constitutes the entire Premises leased to Sublandlord by Landlord under the
Master Lease. This Sublease will not be valid and binding on Sublandlord and
Subtenant until Landlord has executed the Consent.
4. Continued Partial Occupancy by Sublandlord. Subtenant agrees
to permit Sublandlord to occupy that portion of the Sublease Space designated as
Rooms 3 through 17, inclusive (which is located to the northwest of the
reception area), and to store one wire rack of computer equipment and a floor
standing PBX telephone system in the Sublease Space, until May 31, 1996, without
any compensation or other consideration paid or payable by Sublandlord to
Subtenant.
5. Subtenant Covenants. Subtenant covenants to Sublandlord that:
a. Subtenant will perform in a timely and complete
manner all Obligations of Subtenant under this
Sublease.
b. Subtenant will perform in a timely and complete
manner all Obligations of Tenant under the Master
Lease to the extent the Obligations relate to the
Sublease Space.
c. Subtenant has reviewed and understands the terms of
the Master Lease and this Sublease.
-4-
<PAGE> 5
d. Subtenant will not perform any act or fail to perform
any act with respect to the Sublease Space that would
constitute a default under the Master Lease.
6. Sublandlord Covenants, Sublandlord covenants to Subtenant
that:
a. Sublandlord will perform in a timely and complete
manner all Obligations of Sublandlord under this
Sublease.
b. Sublandlord will perform in a timely and complete
manner all Obligations of Tenant under the Master
Lease, to the extent they are not performed by
Subtenant, including: (i) the payment of all Monthly
Base Rent at the per square foot rental rate
enumerated in the Master Lease; (ii) the payment of
Tenant's Proportionate Share of Building Direct
Expenses and Tenants Proportionate Share of Project
Direct Expenses enumerated in the Master Lease; and
(iii) the payment of any other additional rent due
under the Master Lease.
c. Sublandlord has reviewed and understands the terms of
the Master Lease and this Sublease.
7. Direct Payments to Landlord. During the Sublease Term,
Subtenant agrees to pay the Sublease Base Rent, Subtenant's Proportionate Share
of Project Direct Expense, and any and all other additional rent and other
payments (including late charges, interest, and fees) corresponding to the
Sublease Space and due under the Master Lease, directly to Landlord at the times
and in the manner required under this Sublease or under the Master Lease, as
appropriate.
8. Other Compensation. Sublandlord and Subtenant acknowledge that
Article 15 of the Master Lease contains a provision that obligates Sublandlord
to pay to Landlord certain fees, rent, or other compensation collected on any
Sublease Agreement over and above stated rent due under the Master Lease.
Sublandlord and Subtenant acknowledge that Landlord has not waived this
provision. As consideration for Landlord's consent to this Sublease Agreement,
Sublandlord and Subtenant represent to Landlord that there are no oral or
written agreements for fees, rent, or other compensation to Sublandlord between
Sublandlord and Subtenant regarding the Sublease of the Premises other than
those set forth in the Sublease. Landlord acknowledges that Subtenant, pursuant
to an Equipment Sale Agreement, has agreed to purchase from Sublandlord certain
furniture, equipment, and other personal property currently located in the
Sublease Space, and Landlord acknowledges that the proceeds of this sale are
separate and distinct from this Sublease of the Sublease Space and do not
constitute additional rent due Landlord for purposes of Article 15 of the Master
Lease.
-5-
<PAGE> 6
9. Sublease Space Confirmations. Sublandlord and Subtenant agree
that they, respectively, have had ample opportunity to review and measure the
Rentable Sublease Square Feet and agree that the Rentable Area of the Premises
is conclusively deemed to be 13,324 square feet for all purposes under this
Sublease and the Master Lease. Recognizing that different methods of measuring
the square footage of the Premises may lead to different results, Sublandlord
and Subtenant agree that 13,324 square feet in an accurate and agreeable
measurement of the square footage of the Premises and each agrees not to claim
any error or discrepancy in the measurement for any purpose under this Sublease
and the Master Lease.
10. Use. Subtenant agrees to use the Sublease Space for general
office use only and no other use without the prior consent of the Landlord under
the terms and conditions of the Master Lease. Subtenant further agrees to be
bound by all use restrictions in the Master Lease.
11. Compliance with Office Building Rules and Regulations. A copy
of the Office Building Rules and Regulations pertaining to the Premises is
attached as "Exhibit "E" to the Master Lease. Subtenant has reviewed and
understands the Office Building Rules and Regulations. Subtenant agrees to
observe and comply with the terms and provisions of such Office Building Rules
and Regulations, as they may be amended or modified from time to time under the
terms of the Master Lease.
12. Signage. Subtenant understands that Article 51 of the Master
Lease specifically provides signage rights to Sublandlord. By its execution of
this Sublease, Sublandlord intends to transfer all signage rights available to
Sublandlord under the Master Lease to Subtenant. Any additional signage rights
available to Subtenant will be solely those made available by Landlord to
Subtenant under the Consent.
13. Parking. Subtenant is entitled to utilize up to thirteen (13)
reserved and up to twenty-six (26) non-reserved parking spaces available under
the terms of the Master Lease. Commencing with the Sublease Rent Commencement
Date, Subtenant agrees to pay directly to Landlord the Parking Charge specified
in the Master Lease for the maximum number of parking spaces available to
Subtenant.
14. Cancellation Right. Sublandlord and Subtenant agree that
neither will retain any cancellation rights under Article 50 of the Master Lease
with respect to the Sublease Space, and Article 50 of the Master Lease will be
deleted in its entirety.
15. Option to Renew. Sublandlord and Subtenant agree that neither
will retain any renewal options contained in Article 49 of the Master Lease with
respect to the Sublease Space, and Article 49 of the Master Lease will be
deleted in its entirety. Notwithstanding the foregoing, Subtenant, and only
Subtenant, will have the following renewal option:
-6-
<PAGE> 7
a. The Original Sublease Term may be extended only by
Subtenant for one (1) additional five (5) year term ("Extension Term") only if
the following conditions are satisfied: (i) Subtenant delivers written notice to
Landlord of Subtenant's extension election at least ninety (90) days and no
earlier than one hundred eighty (180) days before the expiration of the Original
Sublease Term; (ii) Subtenant has fully and faithfully performed its obligations
under the Master Lease and Sublease through the Original Sublease Term; and
(iii) neither Subtenant nor Tenant are in default under the Master Lease or the
Sublease and no event has occurred or fact exists which, but for the passage of
time or the giving of notice, would constitute a default under the Master Lease
or the Sublease. If any of these conditions are not satisfied at the time of the
delivery of the extension election by Subtenant, the extension election will be
deemed ineffective and not valid. This ability to extend will be a right
personal only to Ugly Duckling Holdings, Inc. and may not be assigned to any
other subsequent tenant, unless Landlord otherwise agrees specifically in
writing at the time of the assignment, in Landlord's sole discretion.
b. During the Extension Term, all terms and provisions
of the Master Lease and Sublease will remain in full force and effect, except
that the Monthly Base Rent will be established in the manner set forth below,
Landlord will not be obligated to construct any tenant improvements or make or
pay any tenant improvement allowance during the Extension Term or to make any
rent or other concessions, and no options to extend will be available or
enforceable.
c. The Monthly Base Rent payable by Subtenant under this
Lease during the Extension Term will be determined in accordance with the
following procedures. During the twenty (20) day period following Subtenant's
extension election, Landlord and Subtenant will negotiate in good faith to
establish the rent to be paid for the Sublease Space throughout the Extension
Term based on the fair rental value of the Sublease Space at the expiration of
the Original Sublease Term, taking into consideration length of lease, tenant
improvement allowances, parking charges, differing base years, rent concessions,
and other relevant economic factors. If an agreement establishing the rent for
the Extension Term is reached, the parties immediately will evidence the
agreement in a written instrument signed by both parties.
d. If the parties are unable to agree upon a fair rental
value for the Leased Premises within the twenty (20) day negotiation period and
Subtenant, by written notice to Landlord delivered prior to expiration of the
twenty (20) day negotiation period described above, notifies Landlord that
Subtenant still wishes to exercise its option to renew (with Subtenant's written
notice being referred to as the "Tenant Extension Confirmation"), Landlord and
Subtenant will each select a qualified and independent MAI appraiser of its
choice with at least five (5) years' experience in appraising office projects in
the Phoenix area and will each notify the other party in writing within ten (10)
days after the expiration of the twenty (20) day negotiation period of their
selected appraiser.
e. By no later than thirty (30) days after the selection
of both appraisers, the appraisers will determine the fair rental value of the
Sublease Space. If the fair rental value determined by the two (2) appraisers
differs by less than five percent (as determined by dividing (i)
-7-
<PAGE> 8
the difference between the higher fair rental value and the lower fair rental
value applicable to the first year of the Extension Term by (ii) the lower fair
rental value applicable to the first year of the Extension Term), the fair
rental value for the Sublease Space will be the higher of the two fair rental
values.
f. If the two (2) appraisals differ by five percent (5%)
or more, as determined above, the appraisers that are selected will each select
a third independent MAI appraiser with similar qualifications. The third
appraiser will be selected within a period of ten (10) days after preparation
of the later of the two (2) appraisals described above. By no later than thirty
(30) days after selection of the third appraiser, the three (3) appraisers will
make a unanimous determination of the fair rental value for the Sublease Space
at the expiration of the Original Sublease Term and will send a copy of their
determination to Landlord and Subtenant. If the three appraisers cannot agree
upon a fair rental value of the Sublease Space at the expiration of the Original
Sublease Term, the joint decision of any two of the appraisers will establish
the fair rental value for the Extension Term.
g. If either party fails to select an appraiser and to
notify the other party within the time period described above of the identity of
that appraiser, the other party will notify the non-selecting party of the
non-selecting party's failure to select an appraiser, and the non-selecting
party will have an additional period of five (5) business days after the receipt
of the additional notice to select an appraiser. If the non-selecting party
again fails to select a MAI appraiser during the additional five (5) business
day period, the appraiser selected by the other party will determine the fair
rental value of the Sublease Spaces and the determination will be binding on
both parties.
h. Landlord and Subtenant will each bear the full
expense of the appraiser each selects, and the expense of the third appraiser
will be shared equally by Landlord and Subtenant.
i. To memorialize Subtenant's election to exercise its
extension options and the agreement of Landlord and Subtenant as to the new
Monthly Base Rent during any Extension Term, Landlord may require Subtenant to
execute a "Lease Extension Agreement" or similar document.
16. Right of First Refusal. Sublandlord and Subtenant, agree that
neither will retain any right to exercise the rights of first refusal under
Article 52 of the Master Lease and Article 52 of the Master Lease will be
deleted in its entirety. Notwithstanding the foregoing, Subtenant, and only
Subtenant, will have the following first right of refusal:
a. During the Sublease Term, and so long as the
Subtenant is not in default under the Master Lease or the Sublease and no event
has occurred or fact exists which, but for the passage of time or the giving of
notice, would constitute a default under the Master Lease or
-8-
<PAGE> 9
the Sublease, Landlord, before entering into a lease with any third party for
the contiguous space described on Exhibit "B" to this Sublease and located on
the 11th floor of the Building ("Additional 11th Floor Space"), will notify
Subtenant in writing of the monthly rent, rental increases, and other economic
provisions ("Rental Terms") upon which Landlord would be willing to lease the
Additional 11th Floor Space directly to Subtenant, and Subtenant will have the
first right of refusal ("FRR") to lease the Additional 11th Floor Space. This
first right of refusal is not applicable unless and until the Additional 11th
Floor Space is vacated by the existing tenant (Unisys Corporation) or its
successors and assigns.
b. If, within five (5) business days after receipt of
Landlord's notice, Subtenant delivers to Landlord a written notice of
Subtenant's intent to lease the Additional 11th Floor Space for a lease term not
to exceed the Sublease Term (including any then exercised lease renewal
options), Landlord will proceed to negotiate directly with Subtenant for a lease
of the Additional 11th Floor Space on the same terms as contained in the Master
Lease and the Sublease, except: (i) the Rental Terms will be incorporated into a
new lease or an amendment to the Master Lease and Sublease; (ii) if a new lease
is utilized, the new lease and the Master Lease and Sublease will be
cross-defaulted; and (iii) lease terms that are dependent upon the size of the
premises, such as Subtenant's proportionate share of expenses, will be modified
accordingly. If the lease renewal option available under Paragraph 15 of the
Sublease has not been exercised, the new lease or lease amendment also will
contain a renewal option similar to that contained in the Sublease at the fair
rental value for the Additional 11th Floor Space. If Subtenant does not deliver
its notice of intent to lease the Additional 11th Floor Space in a timely
manner, or if Landlord and Subtenant are unable to agree on the terms of a lease
for the Additional 11th Floor Space within ten (10) days following Subtenant's
delivery of its written notice of intent, Subtenant's FRR for the Additional
11th Floor Space will terminate, and Landlord will have the right to lease the
Additional 11th Floor Space or any portion of the Additional 11th Floor Space to
a third party on the same or substantially similar Rental Terms.
c. This first right of refusal to lease the Additional
11th Floor Space is a one time right that is personal only to Ugly Duckling
Holdings, Inc. and is not transferrable or assignable and is not exercisable by
the Sublandlord under the Sublease,
17. Alterations. Subtenant agrees to take possession of the
Sublease Space in an "AS IS - WHERE IS" condition.
18. Termination. Sublandlord and Subtenant agree that, if either
receives a default or termination notice from Landlord under the Master Lease or
this Sublease, they will deliver a copy of the notice immediately to the other
party. No additional grace or notice and cure periods will apply to this
Sublease beyond the grace or notice and cure periods described in the Master
Lease.
-9-
<PAGE> 10
19. Default by Subtenant - Sublandlord Remedy. In the event of any
material default or breach by Subtenant under the terms of this Sublease or
under Article 21 of the Master Lease, Sublandlord shall have all of the rights
and remedies against Subtenant that Landlord would have against Sublandlord
under Article 22 of the Master Lease if Sublandlord was in default or breach
under the Master Lease.
20. Representations and Warranties of Subtenant.
a. Organization, Corporate Power and Good Standing.
Subtenant represents and warrants to Sublandlord and
Landlord that it is duly incorporated, validly
existing and in good standing under the laws of
Arizona.
b. Authority. Subtenant represents and warrants to
Sublandlord and Landlord that Subtenant has all
requisite corporate power and authority to enter into
this Sublease.
c. Compliance with Applicable Laws. Subtenant
represents, warrants, and covenants to Sublandlord
and Landlord that it is presently in compliance, and
that it will continue throughout the Sublease Term to
remain in compliance, with all applicable laws,
rules, and regulations relating to or otherwise
affecting its business operations.
d. No Conflicts. Subtenant represents and warrants to
Sublandlord and Landlord that this Sublease does not
create any default, breach, or other conflict with or
under any other contract, agreement or obligation to
which Subtenant is a party or by which any of
Subtenant's assets are bound.
e. Financial Condition. Subtenant represents and
warrants that Subtenant has delivered to Sublandlord
financial statements that fairly present the
financial condition of Subtenant as of December 31,
1995 in accordance with generally accepted accounting
procedures.
21. Representations and Warranties of Sublandlord.
a. Organization, Corporate Power and Good Standing.
Sublandlord represents and warrants to Subtenant and
Landlord that it is duly incorporated, validly
existing and in good standing under the laws of
Delaware, and that it is authorized to do business in
Arizona.
-10-
<PAGE> 11
b. Authority. Sublandlord represents and warrants to
Subtenant and Landlord that Sublandlord has all
requisite corporate power and authority to enter into
this Sublease.
c. Compliance with Applicable Laws. Sublandlord
represents, warrants, and covenants to Subtenant and
Landlord that it is presently in compliance, and that
it will continue throughout the Sublease Term to
remain in compliance, with all applicable laws,
rules, and regulations relating to or otherwise
affecting its business operations pertaining to the
Sublease Space.
d. No Conflicts. Sublandlord represents and warrants to
Subtenant and Landlord that this Sublease does not
create any default, breach, or other conflict with or
under any other contract, agreement, or obligation to
which Sublandlord is a party or by which any of
Sublandlord's assets are bound.
22. Indemnification of Sublandlord. Subtenant agrees to indemnify
Sublandlord and hold Sublandlord harmless from and against any and all
penalties, costs, expenses (including reasonable attorneys' fees), claims,
demands, and causes of action arising out of or pertaining to any acts, events
or omissions occurring on or after the Sublease Date, including claims based
upon imputed negligence, that arise out of or in connection with: (a) any
accident or other occurrence in or on the facilities (including, without
limitation, stairways passageways or hallways), the use of which Subtenant may
have in conjunction with other tenants of the Building, when such injury or
damage is caused in part or in whole by the act or omission of Subtenant, its
agents, contractors, servants, employees, licensees, invitees, permittees,
customers, clients or guests; (b) the condition of, or any defect in, the
Sublease Space or any part of the Sublease Space or any improvements of the
Sublease Space; (c) the condition of, or any defect in, all or any part of
Subtenant's fixtures or equipment; or (d) the use or occupancy of the Sublease
Space by Subtenant. If any action or proceeding is brought against Sublandlord
for any of the foregoing reasons, Subtenant, upon notice from Sublandlord, shall
defend the same at Subtenant's expense by counsel satisfactory to Sublandlord.
23. Insurance. Subtenant shall at is own cost and expense procure and
maintain during the entire Sublease Term and any extensions of this Sublease
workmen's compensation insurance as required by statute as well as comprehensive
public liability insurance covering the Sublease Space and their surrounding
areas and naming Sublandlord as an additional insured in such amounts as
Sublandlord may from time to time require. The initial liability coverage under
such comprehensive public liability insurance shall not be less than $1,000,000
combined single limit, together with excess liability coverage of not less than
$5,000,000, including fire damage legal liability coverage in an amount adequate
to cover the cost of replacement of the Sublease Space. The comprehensive public
liability insurance shall be an occurrence type policy and also shall contain
-11-
<PAGE> 12
cross liability endorsements and insure performance by Subtenant of the
indemnity provisions provided in Paragraph 22. The limits of the insurance shall
not, however, limit the liability of Subtenant under Paragraph 22. The originals
of all policies shall remain in possession of Subtenant; however, Subtenant
shall provide Sublandlord a certificate of insurance confirming the coverage
prior to the commencement of this Sublease and at each subsequent insurance
renewal. Subtenant also shall maintain in full force and effect throughout the
Sublease Term all risks insurance coverage in an amount adequate to cover the
cost of replacement of all personal property (including inventory) and contents
in the Sublease Space. All policies of insurance shall name Sublandlord as an
additional insured and shall provide that such insurance will not be cancelled
or subject to reduction of coverage or other modification except after thirty
(30) days written notice to Sublandlord. Subtenant shall furnish policy renewals
or binders to Sublandlord not less than ten (1O) days prior to the expiration of
any policy required under this Sublease. All insurance policies procured shall
be issued by a responsible company or companies authorized to do business in the
State of Arizona and reasonably satisfactory to Sublandlord.
24. Third-Party Beneficiary. Except for Landlord, which is an express
beneficiary of this Sublease, Sublandlord and Subtenant do not intend that this
Sublease benefit any third party.
25. Amendments. No amendments to this Sublease will be valid unless in
writing, signed by Sublandlord and Subtenant, and consented to by Landlord.
26. Notices. All notices between Sublandlord and Subtenant under this
Sublease will be delivered in the manner required under Article 26 of the Master
Lease to the addresses set forth below.
Envirotest Systems, Inc.
246 Sobranty Way
Sunnyvale, California 94086
Attention: General Counsel
and
Ugly Duckling Holdings, Inc.
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
27. Governing Law. The terms of this Sublease are governed by the
procedural and substantive laws of the State of Arizona.
28. Counterparts. This Sublease may be executed in any number of
original or telecopy counterparts, each of which, when executed and delivered,
will constitute one binding contract and instrument.
-12-
<PAGE> 13
This Sublease is executed and effective as of the Sublease Date.
"Sublandlord"
Envirotest Systems Corp., a
Delaware corporation
By: (Illegible)
Its: Vice President
Address: 246 Sobranty Way
Sunnyvale, California 94086
Attention: General Counsel
"Subtenant"
Ugly Duckling Holdings, Inc.
an Arizona corporation
By: (Illegible)
Its: Senior Vice President
Address: 2525 East Camelback Road
Suite 1150
Phoenix, Arizona 85016
-13-
<PAGE> 14
EXHIBIT"A"
TO
ESPLANADE SUBLEASE AGREEMENT
(Master Lease, Paragraph 2)
<PAGE> 15
EXHIBIT"B"
TO
ESPLANADE SUBLEASE AGREEMENT
(Additional 11th Floor Space, Paragraph 16.a.)
<PAGE> 16
FLOOR PLATE BUILDING B
Eleventh Floor
[FLOOR PLATE]
Approximate Square Feet
6,978 Useable
872 Common Area
-----
7,850 Rentable
EXHIBIT "B"
<PAGE> 17
LANDLORD CONSENT TO SUBLEASE
This Landlord Consent to Sublease ("Consent") is given as of the date
set forth below Landlord's signature ("Consent Date"), by Esplanade Office
Limited Partnership, a Delaware limited partnership, as "Landlord" under the
Master Lease described in the Esplanade Sublease Agreement (Office - Parcel 1B)
dated as of April 15, 1996 ("Sublease"), by and between Envirotest Systems
Corp., a Delaware corporation, as Sublandlord, and Ugly Duckling Holdings, Inc.,
an Arizona corporation, as Subtenant. Landlord consents to the Sublease subject
to the following terms and conditions:
A. All initially capitalized terms used in this Consent shall have the
meanings given them in the Sublease or Master Lease, as applicable, unless
expressly superseded by the terms of this Consent.
B. Nothing contained in this Consent or in the Sublease shall be
construed to:
i. modify, waive, or affect: (1) any of the terms or
conditions of the Master Lease; (ii) any of the
Tenant's Obligations under the Master Lease; or (iii)
any rights or remedies of the Landlord under the
Master Lease or otherwise;
ii. waive any present or future breach or default on the
part of the Tenant under the Master Lease (provided,
however, that Landlord acknowledges that, to the best
of its actual knowledge, there are no existing or
uncured defaults under the Master Lease); or
iii. release or discharge the Tenant from any of its
Obligations under the Master Lease.
C. In case of any conflict between the provisions of this Consent and
the provisions of the text of the Sublease, the provisions of this Consent will
prevail over those contained in the text of the Sublease. Except as provided in
the Sublease and this Consent, the Master Lease and all of its terms and
conditions will remain in full force and effect.
D. Landlord does not intend to release or discharge Tenant from its
Obligations under the Master Lease or Sublease, and Tenant shall remain liable
and responsible for the full performance and observation of all of the
Obligations under the Master Lease or Sublease to be performed and observed by
Tenant, including the payment of all rent and late charges due under the Master
Lease.
E. This Consent is not assignable.
F. This Consent shall be effective with respect to the Sublease only,
and shall not be construed as a consent to further subletting or assigning by
Tenant or Subtenant or as a waiver of Landlord's right to object to or declare
void any other assignment or sublease under the Master Lease.
<PAGE> 18
G. Landlord may directly enforce the Obligations of Subtenant under the
Sublease, and Landlord may exercise all rights and remedies available under the
Master Lease directly against Subtenant in the event of Subtenant's breach or
default under the Sublease or Master Lease. Landlord agrees to provide Subtenant
with copies of any notice to Sublandlord of any material breach or default under
the terms of the Master Lease.
H. Landlord agrees that, so long as Subtenant continues to timely
perform its Obligations under the Master Lease and Sublease and is not in
default or breach of the Master Lease or Sublease, Landlord will permit
Subtenant's continued use and occupancy of the Sublease Space under the Sublease
notwithstanding any default or breach by Sublandlord under the Master Lease.
I. Landlord, at Subtenant's sole cost and expense, agrees to provide
building standard Tenant signage for the Sublease Space and Tenant
identification on all lobby directories for the Building identifying the name of
the Subtenant.
J. Landlord specifically advises Sublandlord and Subtenant that, as of
the Consent Date, Landlord has not approved any Subtenant improvements or
alterations and that all Landlord approvals for Subtenant improvements or
alterations must be obtained through the separate consent of Landlord under the
terms of the Master Lease. Any occupancy of the Premises during the performance
of any improvements or alterations by the Sublandlord or Subtenant will be at
the sole risk of the occupant, notwithstanding Landlord's consent to the
improvements or alterations.
K. Sublandlord and Subtenant have represented to Landlord that there
are no oral or written agreements for fees, rent, or other compensation to
Sublandlord between Sublandlord and Subtenant regarding the Sublease of the
Premises other than those set forth in the Sublease. Landlord acknowledges the
existence of the Equipment Sale Agreement through which Subtenant has agreed to
purchase from Sublandlord certain furniture, equipment, and other personal
property currently located in the Sublease Space. Landlord acknowledges that the
proceeds of this sale are separate and distinct from the Sublease of the
Premises and do not constitute additional rent due Landlord for purposes
of Article 15 of the Master Lease. Landlord's acknowledgement of the Equipment
Sale Agreement is not, however, an agreement on its part to subordinate any
statutory or contractual liens arising out of the lease of the Premises, and the
Subtenant's payment and performance under the Equipment Sale Agreement will not
be a condition to (and will not give Sublandlord the ability to terminate)
Subtenant's occupancy of the Sublease Space.
L. Landlord grants to Subtenant the renewal rights described in
Paragraph 15 of the Sublease and agrees to the deletion of Article 49 of the
Master Lease.
M. Landlord grants to Subtenant the first right of refusal described in
Paragraph 16 of the Sublease and agrees to the deletion of Article 52 of the
Master Lease.
N. Landlord agrees to the deletion of Article 50 of the Master Lease.
O. Nothing in this Consent will be deemed a waiver by Landlord of the
indemnification obligations, insurance requirements, and liability limitations
outlined in the Master
<PAGE> 19
Lease, and Paragraphs 22 and 23 of the Sublease will not apply to Landlord and
are solely agreements between Subtenant and Sublandlord.
P. Notwithstanding anything to the contrary in the Sublease (including
Paragraph 4), Landlord has not agreed to waive any payments of rent under the
Master Lease.
Q. Nothing in this Consent will be deemed an undertaking by Landlord of
any Obligations under the Sublease other than those Obligations of the Landlord
to the Tenant under the Master Lease and under the Sublease.
Landlord has executed this Consent as of the Consent Date.
"Landlord"
Esplanade Office Limited
Partnership, a Delaware limited
partnership
By: Easterly No. 143, L.L.C., a
Delaware limited liability
company, its general partner
By: [Illegible signature]
Its: Vice President
Consent Date: 4/29/96
<PAGE> 1
EXHIBIT 10.16
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "Sublease") is made and entered into this 31st day
of March, 1997, by and between Ugly Duckling Corporation, a Delaware corporation
(the "Sublessee") and Unisys Corporation, a Delaware corporation, (the
"Sublessor").
WHEREAS, by lease dated January 21, 1994 (the "Lease") Sublessor leased from
Camelback Esplanade Limited Partnership No. 3, an Arizona limited partnership
(the "Lessor") certain premises consisting of approximately seven thousand eight
hundred fifty (7,850) square feet (the "Premises") in the building located at
2525 East Camelback Road, Phoenix, Arizona (the "Building"); and
WHEREAS, effective March 10, 1997, Camelback Esplanade Limited Partnership No. 3
conveyed its interest as Lessor to Property Arizona OBJLW One Corporation; and
WHEREAS, Sublessor has agreed to sublease a portion of the Premises, consisting
of approximately one thousand nine hundred forty (1,940) square feet as depicted
on Exhibit "A" (the "Subleased Premises") to Sublessee on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the rents, covenants, agreements,
stipulations and provisions contained herein to be paid, kept and performed by
both Sublessee and Sublessor, the parties do hereby agree as follows:
1. TERM: Sublessor does hereby demise and sublease the Subleased Premises to
Sublessee and Sublessee does hereby sublease the Subleased Premises from
Sublessor for a period of approximately thirty-five (35) months commencing
on the 21st day of April, 1997 (the "Commencement Date") and ending on the
24th day of February, 2000 unless sooner terminated pursuant to any
provision hereof (the "Term").
2. USE: The Subleased Premises shall be used for Sublessee's office use, and
for no other use whatsoever.
3. RENT: Sublessee covenants and agrees to pay to Sublessor, without deduction
or set off, minimum rental for the Term (the "Minimum Rent") as follows:
<TABLE>
<CAPTION>
Period Minimum Monthly Rent
<S> <C>
April, May, June 1997 Free
July 1997 $3,168.15
August 1997 - February 2000 $3,637.50
</TABLE>
In the event any payment of Minimum Rent or Additional Rent (as defined
below) is not paid within five (5) days following the date due, Sublessee
shall pay to Sublessor, upon demand, a late charge equal to five cents for
each dollar overdue.
4. SECURITY DEPOSIT: Concurrently with the execution hereof, Sublessee shall
deposit with Sublessor the sum of Three Thousand Six Hundred Thirty-Seven
and 50/Dollars ($3,637.50) (the "Security Deposit") to ensure the timely
and faithful performance of each of the terms and conditions hereof by
Sublessee. Sublessor shall have the right to commingle said funds with
other funds of Sublessor. Sublessor shall hold the
<PAGE> 2
Security Deposit and shall have the right, but not the obligation, to use
the same to cure any default by Sublessee hereunder or to repair any damage
to the Subleased Premises caused by Sublessee, its employees, agents or
invitees. In the absence of any default or damage to the Subleased
Premises, Sublessor shall repay said sum, without interest, to Sublessee
within thirty (30) days following the end of the Term, as the same may be
extended. In the event Sublessor applies the Security Deposit or any
portion thereof in accordance with this Paragraph 4, Sublessee shall be
obligated immediately to pay to Sublessor the amount required to restore
the Security Deposit to its original amount.
5. TIME AND PLACE OF PAYMENT: With the exception of the payment of the first
month's Minimum Rent which shall be delivered by Sublessee to Sublessor
upon Sublessee's execution of this Sublease, all payments of Minimum and
Additional Rent (collectively, the "Rent") shall be made, in advance,
without notice, on the first (1st) day of each month during the Term,
payable to the order of "UNISYS CORPORATION" and addressed to Unisys
Corporation, P.O. Box 5585, Bismarck, North Dakota 58502-5585 ATTN: Lease
Administration or to such other person or at such other place as Sublessor
may from time to time designate in writing.
6. OPERATING EXPENSE AND REAL PROPERTY TAX REIMBURSEMENT AND METHOD OF
PAYMENT: On and after the date Sublessee is required to pay Minimum Rent,
utilizing 1996 as the base year, Sublessee shall be obligated to reimburse
Sublessor for Sublessee's Proportionate Share (as defined below) of any
rent escalation assessed by Lessor under the terms of the Lease including,
without limitation, escalations with respect to real property taxes and
operating expenses. Rent escalation amounts and all other sums, except
Minimum Rent, which Sublessee is obligated to pay to Sublessor hereunder
are collectively "Additional Rent".
Sublessee's reimbursement to Sublessor for rent escalations shall be made
in the same manner in which payment is to be made by Sublessor to Lessor
under the Lease, either by lump sum payment or by adjustment of the monthly
Rent payment provided, however, that notwithstanding the terms of the Lease
and the method of payment by Sublessor thereunder, in the event Sublessee
fails to pay its Proportionate Share of rent escalations when due,
Sublessor shall have the right thereafter to require Sublessee to pay to
Sublessor one-twelfth (1/12th) of the estimated annual rent escalation
concurrently with the payment of each monthly payment of Minimum Rent due
hereunder. In either case, Sublessor shall support its reimbursement
request or rental adjustment notice with a copy of the escalation
notification received from Lessor. Furthermore, in the event Sublessor
exercises its right to require the payment of rent escalations each month
on an estimated basis, promptly upon receipt of actual rent escalation
figures for the calendar year, Sublessor shall, in the case of any
overpayment by Sublessee, credit such overpayment to the next due
installment(s) of rent escalation payments. In the case of any underpayment
by Sublessee, Sublessee shall pay such sums to Sublessor upon receipt of an
invoice from Sublessor setting forth the amount due. As used herein,
Sublessee's Proportionate Share shall mean twenty-four and 71/100 percent
(24.71%).
7. BUSINESS PRIVILEGE TAXES, BUSINESS USE TAXES AND OCCUPANCY TAXES: Sublessee
agrees to pay any rental tax, revenue tax or charge, occupancy tax,
business privilege tax, business use tax or any other tax that may be
levied against the Subleased Premises or Sublessee's use or occupancy
thereof during the Term.
-2-
<PAGE> 3
8. RIGHT OF ENTRY: Following the date of this Sublease and prior to the
Commencement Date, Sublessee shall have access to the Subleased Premises,
upon reasonable prior notice to Sublessor, for the purpose of evaluating
what alterations, repairs or improvements are needed to modify the
Subleased Premises for its use. Sublessee may not commence any such
alteration, repair or improvement until Sublessor and Lessor shall have
consented thereto pursuant to Paragraph 10 and Lessor shall have consented
to this Sublease. Sublessee's access to the Subleased Premises prior to the
Commencement Date shall be subject to all of the terms and conditions of
this Sublease, except for the payment of Rent. Sublessee hereby agrees to
indemnify and hold harmless Sublessor and Lessor from any and all
liability, claims, demands, expenses, damages and judgments arising as a
result of Sublessee's access to the Subleased Premises pursuant to this
Paragraph 8.
9. ACCEPTANCE AND SURRENDER OF SUBLEASED PREMISES: Sublessee agrees to accept
the Subleased Premises in its present "as is" condition at the date of this
Sublease, it being both parties intent that Sublessee shall bear the full
cost and expense of modifying or renovating the Subleased Premises for its
use.
Sublessee shall, at the end of the Term or upon sooner termination of this
Sublease pursuant to the terms hereof, promptly surrender the Subleased
Premises in good order and condition and in conformity with the applicable
provisions of this Sublease and the Lease, excepting only reasonable wear
and tear.
10. ALTERATIONS AND MODIFICATIONS: Sublessee agrees to obtain Sublessor's and
Lessor's prior written approval of alterations, modifications, repairs or
renovations made to the Subleased Premises. Sublessor agrees that it shall
promptly review plans and drawings submitted and that it will not
unreasonably delay or deny approval with respect to non-structural
alterations. Notwithstanding the foregoing, Sublessor's consent to such
alterations shall be subject to Lessor's consent thereto. Any alterations,
modifications or renovations of or to the Subleased Premises shall be
limited to partition changes (non-bearing walls), electrical and mechanical
alterations, telephone relocations, and decorating. The structural
integrity of the Building will not be disturbed in any way. Sublessee shall
provide Sublessor with a waiver of liens prior to the commencement of any
alterations or modifications to the Subleased Premises and a release of
liens at the completion of any alterations or modifications to the
Subleased Premises executed by all contractors who performed such
alterations or modifications. In addition, Sublessee agrees that all work
performed upon the Subleased Premises shall be done in a good and
workmanlike manner and shall be in accordance with all applicable law. All
alterations, modifications and renovations, upon completion of construction
thereof, shall become part of the Subleased Premises and the property of
Sublessor without payment therefore by Sublessor and shall be surrendered
to Sublessor at the end of the Term or upon sooner termination of this
Sublease pursuant to the terms hereof; provided, however, that, if
requested by Sublessor, Sublessee shall, at Sublessee's sole cost and
expense, remove all such alterations, modifications and renovations, or any
part or parts thereof specified by Sublessor, from the Subleased Premises
and shall repair all damage caused by installation and removal.
-3-
<PAGE> 4
l1. REPAIRS/MAINTENANCE: Sublessee shall, throughout the Term, at its sole cost
and expense, keep the Subleased Premises clean, remove all refuse, trash
and debris therefrom, keep waste and drain pipes open and generally
maintain the Subleased Premises and the improvements now or hereafter
comprising all or any part of the Subleased Premises and the fixtures and
appurtenances thereto in good order, repair and condition normal wear and
tear only excepted. Sublessee shall promptly, at Sublessee's own cost and
expense, make all repairs necessary to maintain such good order, repair and
condition. In addition, Sublessee shall, at its sole cost and expense,
promptly repair all damage or injury to the Subleased Premises, making
replacements, if necessary, caused by (a) the negligence or willful
misconduct of Sublessee or its employees, agents, invitees, licensees,
subtenants or contractors; (b) the act of moving in or out of the Subleased
Premises; and/or (c) the installation and/or removal of any furniture,
fixtures or other property.
12. LEASE CONTROLLING: Except as herein provided, Sublessee agrees to comply
with all of the terms and conditions set forth in the Lease (a copy of
which is attached hereto as Exhibit "B" and made a part hereof) as are to
be performed by Sublessor as Lessee thereunder. All of the terms and
conditions of the Lease shall apply in the same manner to Sublessee as they
are expressed therein to apply to Sublessor as Lessee thereunder except as
modified or deleted pursuant to the terms of this Sublease.
13. LEASE IN EFFECT: Sublessor warrants and represents, to the best of
Sublessor's knowledge, information and belief, that the Lease is subsisting
and is in full force and effect, Sublessor is not in default thereunder,
and all rents, additional rents and charges due thereunder are and will be
paid.
14. SUBLETTING OR ASSIGNMENT: Sublessee covenants that it will not assign its
interest in this Sublease, in whole or in part, or permit the subletting of
the Subleased Premises or any part thereof without the prior written
consent of Sublessor and Lessor which consent shall not be unreasonably
withheld or delayed.
15. INSURANCE AND INDEMNITY: Sublessee agrees to indemnify and hold harmless
both Sublessor and Lessor from and against all liability, claims, demands,
expenses, damages and judgments arising from property damage or injury to
third parties (including wrongful death) upon the Subleased Premises during
the Term or any extension thereof, unless due to the gross negligence or
willful misconduct of Sublessor. Sublessee agrees, at its own cost and
expense, to keep the Subleased Premises insured under a public liability
policy against claims for property damage and personal injury to third
parties (including wrongful death). The minimum amounts of such insurance
coverage shall not be less than the amounts required by the Lease. Upon
execution of this Sublease by Sublessee and at least thirty (30) days prior
to the expiration date of such policies, Sublessee shall furnish to Lessor
and Sublessor a certificate or certificates of insurance confirming that
the required insurance is in full force and effect with all premiums paid
current. Sublessee further agrees to indemnify and hold harmless Sublessor
and Lessor from all liability arising out of the filing of any mechanic's
or materialman's lien against the Subleased Premises by reason of any act
or omission of Sublessee.
-4-
<PAGE> 5
16. PERSONAL PROPERTY: Sublessee agrees to assume full responsibility for its
personal property located at the Subleased Premises, and to indemnify and
hold harmless Sublessor and Lessor against damage sustained by fire, theft
or other casualty loss.
17. NOTICES: All notices required shall be given by registered or certified
mail, postage prepaid, return receipt requested. Notice to the Sublessee
shall be addressed to:
- Ugly Duckling Corporation
- 2525 East Camelback Road, Suite 1150
- Phoenix, AZ 85016
- ATTN: Steven Johnson, General Counsel
Notice to Sublessor shall be addressed to:
- Unisys Corporation
- Township Line & Union Meeting Roads
- Blue Bell, PA 19424
- ATTN: Real Estate Administration
All notices shall be deemed received two (2) days after mailing.
18. HOLD OVER: Notwithstanding any provision of law or any judicial decision to
the contrary, no notice shall be required to terminate the Term on the date
herein specified as the end of the Term, and the Term shall expire on the
date herein mentioned without notice being required from either party. In
the event that Sublessee remains beyond the expiration date of the Term, it
is the intention of the parties and it is hereby agreed that a tenancy at
sufferance shall arise at a monthly rent equal to twice the monthly Minimum
Rent in effect at the expiration of the Term plus any amounts charged
against Sublessor as Lessee under the Lease for holdover rent or penalty.
It is further agreed that Sublessee shall indemnify and hold harmless
Sublessor from and against any and all liability, claims, demands,
expenses, damages and judgments incurred by Sublessor as a result of
Sublessee's retaining possession.
19. SUBLESSEE DEFAULT: The occurrence of any one or more of the following
events shall constitute a default under this Sublease by Sublessee:
a. The vacation or abandonment of the Subleased Premises by Sublessee.
b. The failure by Sublessee to make any payment of Minimum Rent,
Additional Rent or any other payment required to be made by Sublessee
hereunder on the date due where such failure shall continue for a
period of five (5) days after the same shall become due and payable.
c. The failure by Sublessee to observe or perform any of the covenants,
conditions or provisions of this Sublease other than as described in
the immediately preceding paragraph and/or the failure by Sublessee to
observe or perform any of the covenants, conditions or provisions of
the Lease to which Sublessee has agreed to be bound pursuant to the
terms of this Sublease, where such failure shall continue for a period
of fifteen (15) days after written notice thereof from Sublessor to
Sublessee.
-5-
<PAGE> 6
d. The making by Sublessee of any general arrangement or assignment for
the benefit of creditors; Sublessee becomes a "debtor" as defined in
11 U.S.C. 101 or any successor statute thereto (unless, in the case of
a petition filed against Sublessee, the same be dismissed within sixty
(60) days); the appointment of a trustee or receiver to take
possession of all or substantially all of Sublessee's assets or of
Sublessee's interest in this Sublease, where possession is not
restored to Sublessee within thirty (30) days; or the attachment,
execution or other judicial seizure of all or substantially all of
Sublessee's assets or of Sublessee's interest in this Sublease, where
such seizure is not discharged within thirty (30) days.
20. REMEDIES: In the event of any such default by Sublessee, Sublessor may at
any time thereafter, without limiting Sublessor in the exercise of any
right or remedy which Sublessor may have by reason of such default or
breach:
a. Terminate Sublessee's right to possession of the Subleased Premises by
any lawful means, in which case this Sublease shall terminate and
Sublessee shall immediately surrender possession of the Subleased
Premises to Sublessor. In such event, Sublessor shall be entitled to
recover from Sublessee all damages permitted to be recovered by a
landlord pursuant to the laws of the jurisdiction
where the Subleased Premises are located, together with all damages
incurred by Sublessor by reason of Sublessee's default, including, but
not limited to, the cost of recovering possession of the Subleased
Premises, reasonable attorneys fees, and any real estate commission
actually paid.
b. Maintain Sublessee's right to possession in which case this Sublease
shall continue in effect whether or not Sublessee shall have vacated
or abandoned the Subleased Premises. In such event, Sublessor shall be
entitled to enforce all of Sublessor's rights and remedies under this
Sublease, under the laws of the jurisdiction where the Subleased
Premises are located at law and equity, including the right to recover
the Minimum Rent, Additional Rent, and all other sums due hereunder as
the same become due.
c. Declare the entire balance of Minimum Rent, Additional Rent and all
other sums payable hereunder during the remaining Term of this
Sublease to be immediately due, payable and in arrears as if by the
terms and provisions of this Sublease said balance of Minimum Rent,
Additional Rent and other sums were on that date payable in advance.
Any such acceleration by Sublessor shall not constitute a waiver of
any right or remedy of Sublessor.
d. Pursue any other remedy now or hereafter available to Sublessor under
the laws of the jurisdiction where the Subleased Premises are located
or in equity.
e. Pursue any remedy enforceable by Lessor under the Lease.
All remedies available to Sublessor hereunder shall be cumulative and
concurrent. No waiver or delay in enforcement by Sublessor of any breach of
Sublessee's obligations hereunder shall constitute a waiver of any such
breach or any subsequent breach.
-6-
<PAGE> 7
21. INTEREST: In the event that any sums due and payable to Sublessor
pursuant to the terms of this Sublease are not paid when due, such sums
shall bear interest at the rate of twelve percent (12%) per year, from
the due date until actually paid, unless that rate is usurious as
applied to Sublessee in which event the rate shall be reduced to the
highest non-usurious rate. Neither the accrual nor the payment of
interest shall cure any default by Sublessee under this Sublease.
22. BROKERS: Sublessor and Sublessee represent, warrant and agree that each
has not dealt with any broker, agent, finder or other intermediary in
connection with the subletting of the Subleased Premises except Baylor
Investment Group (the "Listing Broker"). Sublessor shall be solely
liable for any commission due to the Listing Broker. Sublessor and
Sublessee agree to indemnify, defend and hold the other harmless from
and against any claims against the other resulting from a breach or
inaccuracy of the foregoing representation, warranty and agreement
which shall survive expiration, cancellation or other termination of
this Sublease.
23. COMPLIANCE WITH LAWS: Sublessee shall, throughout the Term of this
Sublease, observe and comply with all statutes, laws, ordinances,
notices, orders, rules, regulations and requirements of all federal,
state and municipal governments and appropriate departments,
commissions, boards and officers thereof, and notices, orders, rules
and regulations of the National Board of Fire Underwriters, or any
other body now or hereafter constituted exercising similar functions,
relating to the Subleased Premises, foreseen or unforeseen, ordinary as
well as extraordinary, or to the use or manner of use of the Subleased
Premises, or to the fixtures and equipment thereof.
24. AUTHORITY: The parties executing this Sublease represent and warrant
that they have the full right and lawful authority to execute this
Sublease for the Term, in the manner and upon the conditions and
provisions herein contained.
25. FURTHER DOCUMENTS: Each party agrees to execute and deliver to the
other all instruments which may reasonably be required to carry out all
terms and provisions of this Sublease.
26. RECOVERY OF FEES: If either party is successful in enforcing against
the other any legal or equitable remedy for a breach of any provision
of this Sublease, the successful party shall be entitled to recover its
expenses and reasonable attorney's fees as determined by the court as
part of the judgment or decree.
27. BINDING EFFECT: This Sublease shall be binding upon the successors and
permitted assigns of Sublessee and Sublessor.
28. INTEGRATED DOCUMENT: This instrument embodies all of the agreements
between the parties with respect to the Subleased Premises, and no oral
agreements, prior correspondence or other prior writings shall be held
to vary the provisions hereof. Any subsequent changes or modifications
shall become effective only by a written instrument duly executed by
Sublessee and Sublessor.
-7-
<PAGE> 8
29. LESSOR'S CONSENT: This Sublease is contingent upon, and shall have no
force or effect until receipt of, the Lessor's written consent hereto.
30. PARKING: Sublessee shall have the nonexclusive right to use eight (8)
unreserved parking spaces located in the parking structure of the
Building. Sublessee shall pay directly to Sublessor Sublessor's then
prevailing rates per the Lease for the eight (8) parking spaces.
IN WITNESS WHEREOF, the parties hereto have executed this Sublease Agreement as
of the day and year first above written.
WITNESS: SUBLESSEE:
UGLY DUCKLING CORPORATION
By: /s/ Mary E. Reiner By: Steven P. Johnson
----------------------- ----------------------
Steven P. Johnson
Title: Sr. V.P.
WITNESS: SUBLESSOR:
UNISYS CORPORATION
By: /s/ Illegible By:/s/ Harold S. Barron
---------------------------
Harold S. Barron
Sr. Vice President
General Counsel & Secretary
-8-
<PAGE> 9
[GRAPHIC OF FLOOR PLAN]
7/25/96
EXISTING DESIGN
PHOENIX AZ
NORTH
EXHIBIT A
<PAGE> 10
EXHIBIT "B"
[INSERT COPY OF PRIME LEASE]
<PAGE> 11
11th Floor
CONSENT TO SUBLEASE
THIS CONSENT TO SUBLEASE is entered into as of the 28th day of April _,
1997, by and among PROPERTY ARIZONA OBJLW ONE CORPORATION, an Oregon corporation
("Landlord"), UNISYS CORPORATION, a Delaware corporation ("Sublessor"), and UGLY
DUCKLING CORPORATION, a Delaware corporation "Sublessee").
WITNESSETH:
WHEREAS, Camelback Esplanade Limited Partnership No. 3, an Arizona
limited partnership ("Former Landlord"), entered into a written lease agreement
with Sublessor, dated January 21, 1994 (the "Master Lease"), whereby Former
Landlord leased to Sublessor certain premises in the building known as 2525 E.
Camelback Road, Phoenix, Arizona (the "Building") consisting of all of
approximately 7,850 rentable square feet of space on the 11th floor of the
Building (the "Premises"); and
WHEREAS, Landlord is the owner of the Building and has succeeded to all
of the rights of Former Landlord under the Master Lease; and
WHEREAS, Sublessor desires to sublet a portion of the Premises
containing approximately 1,940 rentable square feet (the "Subleased Premises")
to Sublessee and Sublessee desires to lease the Subleased Premises from
Sublessor; and,
WHEREAS, the terms of the Master Lease require the consent of Landlord
to any such subletting and Landlord has agreed to grant such consent pursuant to
the terms of this agreement.
NOW, THEREFORE, Landlord hereby consents to the sublease of the
Subleased Premises between Sublessor and Sublessee dated as of March 31, 1997
(the "Sublease"), a copy of which Sublease is attached hereto and made a part
hereof as Exhibit "A", subject to the following terms and conditions:
1. The Sublease shall be subject and subordinate at all times to all of
the covenants, agreements, terms, provisions and conditions of the Master Lease
(as appropriately amended by the Sublease) and of this Consent. Neither
Sublessor nor Sublessee shall do or permit anything to be done in connection
with the Sublease or Sublessee's occupancy of the Subleased Premises as defined
in the Sublease which will violate the Master Lease or this Consent.
2. Sublessee will not, without prior written consent of Landlord in
each instance, assign the Sublease or sublet the Subleased Premises or any part
thereof.
1 - CONSENT TO SUBLEASE
<PAGE> 12
3. Sublessee agrees that no alterations, additions or physical changes
will be made in the Subleased Premises or any part thereof without Landlord's
prior written consent in each instance.
4. This Consent by Landlord shall not be deemed in any way or manner a
release of Sublessor from any and all obligations to be performed by Sublessor
as the Tenant under the Master Lease. The parties hereto agree that Landlord
may, after a default by Sublessor under the Master Lease, collect all rents due
and owing from Sublessee, and such collection thereof shall not be deemed a
waiver of any rights and remedies of Landlord against Sublessor as the Tenant
under the Master Lease.
5. Notwithstanding anything to the contrary contained in the Sublease,
nothing therein, or contained in this Consent, shall enlarge or increase
Landlord's obligations or liability under the Master Lease or otherwise, and in
the event of a default in the Master Lease which results in a termination
thereof, the Sublease and Sublessee's rights in the Subleased Premises shall
also be terminated.
6. Upon the effective date of the Sublease, Sublessee agrees to be
fully bound and obligated under all the terms and conditions of the Master
Lease. This Consent by Landlord shall not act to bind Landlord to perform any of
the obligations of Sublessor as may be provided in the Sublease.
7. Landlord hereby certifies that, to the best of its actual knowledge,
as of the date of this Consent, Sublessor is not in default under any of the
terms of the Master Lease, nor is there any condition which, with notice or the
passage of time or both, would constitute a default by Sublessor,
8. Pursuant to Paragraph 15 of the Master Lease, Sublessor shall pay
Landlord upon execution of this agreement the sum of Two Hundred Fifty and
no/100ths Dollars ($250.00) to reimburse Landlord for its reasonable attorney's
fees and costs incurred in preparing this Consent to Sublease.
9. This Consent to Sublease constitutes the entire and complete
agreement of the parties with respect to the subject matter hereof, and
supersedes all prior or contemporaneous agreements, statements, promises,
understandings, arrangements, and commitments, all of which, whether oral or
written, are merged herein.
10. Each party represents that the person executing this Consent for
such party is acting on behalf of such party and is duly authorized to execute
this Consent for such party.
11. This Consent may be executed in counterparts, each of which shall
be deemed an original, and all of which when executed and delivered shall
together constitute one and the same instrument.
2 - CONSENT TO SUBLEASE
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this Consent to
Sublease to be duly executed as of the day and year first above written.
LANDLORD: PROPERTY ARIZONA OBJLW ONE CORPORATION,
an Oregon corporation
By: Jones Lang Wootton Realty Advisors
a New York limited partnership]
Its Authorized Agent
By: Jones Lang Wootton Realty Advisors, Inc.
a New York corporation
Its General Partner
By:/s/ Bruce G. Morrison
---------------------------------
Name: Bruce G. Morrison
Title: Vice President
SUBLESSOR: UNISYS CORPORATION,
a Delaware corporation
By: /s/ Richard J. L'Eccyer
------------------------------
Name: Richard J. L'Eccyer
Title: Corporate Director
SUBLESSEE: UGLY DUCKLING CORPORATION,
a Delaware corporation
By: /s/ Steven P. Johnson
-------------------------
Name: Steven P. Johnson
Title: Sr. V.P.
3 - CONSENT TO SUBLEASE
<PAGE> 1
Exhibit 10.19
LOAN AGREEMENT
This LOAN AGREEMENT is dated as of July 20, 1998, between CYGNET
FINANCIAL CORPORATION, a Delaware corporation (the "Company"); and each lender
signatory hereto (each a "Lender," and collectively the "Lenders").
WHEREAS, each Lender has agreed to make a loan to the Company in the
amount of its respective Commitment (as defined herein) upon the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
I.1 Defined Terms. In addition to the terms defined elsewhere in this
Agreement, the following terms have the following meanings:
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, by contract or otherwise.
"Aggregate Commitment" means the amount of Five Million
Dollars ($5,000,000).
"Agreement" means this Loan Agreement, as amended,
supplemented or modified from time to time in accordance with the terms
hereof.
"Assignee" has the meaning specified in Section 8.06(a).
"Attorney Costs" means and includes all fees and disbursements
of any other external or in-house counsel.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in Phoenix, Arizona, New York,
Chicago or Los Angeles are authorized or required by law to close.
"Capital Lease" has the meaning specified in the definition of
"Capital Lease Obligations."
"Capital Lease Obligations" means any rental obligation which,
in accordance with GAAP, is capitalized on the books of the Company (a
"Capital Lease"), taken at the amount thereof accounted for as
indebtedness (net of interest expense) in accordance with GAAP.
"Closing Date" means the date on which all conditions
precedent set forth in Section 3.01 are satisfied or waived by all
Lenders, which is anticipated to be on or before July 20, 1998.
1
<PAGE> 2
"Code" means the Internal Revenue Code of 1986 and any
regulations promulgated thereunder.
"Commitment" means with respect to each Lender, the amount set
forth opposite its name on the signature pages to this Agreement.
"Company Warrants" means the warrants issued to each of the
Lenders pursuant to the Company Warrant Agreement.
"Company Warrant Agreement" means either the Warrant Agreement
in the form of the Warrant Agreement Form, providing for the issuance
of Company Warrants to the Lenders to acquire 115,000 shares of the
Company's Common Stock on the terms in the Warrant Agreement Form and
the following additional terms:
<TABLE>
<S> <C>
Warrant Price $ 8.40
Redemption Amount $13.44
</TABLE>
"Company Warrant Event" means the occurrence of the Split-Up
prior to December 31, 1998.
"Debt" means any Obligation for borrowed money, including the
indebtedness portion of any Capitalized Lease Obligations.
"Debt to Tangible Net Worth Ratio" means the debt-to-equity
ratio of the Company (or UDC, if applicable), calculated in accordance
with GAAP by comparing total Debt to Tangible Net Worth.
"Default" means any event or circumstance which, with the
giving of notice, the lapse of time, or both, would (if not cured or
otherwise remedied) constitute an Event of Default.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and regulations promulgated
thereunder.
"Event of Default" means any of the events or circumstances
specified in Section 7.01.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the accounting profession), or
in such other statements by such other entity as may be in general use
by significant segments of the U.S. accounting profession, which are
applicable to the circumstances as of the date of determination.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
2
<PAGE> 3
"Insolvency Proceeding" means, with respect to any Person, (a)
any case, action or proceeding before any court or other Governmental
Authority relating to bankruptcy, reorganization, insolvency,
liquidation, receivership, dissolution, winding-up or relief of
debtors, or (b) any general assignment for the benefit of creditors,
composition, marshaling of assets for creditors or other, similar
arrangement in respect of its creditors generally or any substantial
portion of its creditors.
"Lender" and "Lenders" have the meanings specified in the
introductory clause hereto.
"Lien" means any mortgage, deed of trust, pledge,
hypothecation, assignment, charge or deposit arrangement, encumbrance,
lien (statutory or other) or preference, priority or other security
interest or preferential arrangement of any kind or nature whatsoever
(including those created by, arising under, or evidenced by any
conditional sale or other title retention agreement, the interest of a
lessor under a Capital Lease Obligation, any financing lease having
substantially the same economic effect as any of the foregoing, or the
filing of any financing statement naming the owner of the asset to
which such lien relates as debtor, under the UCC or any comparable law)
and any contingent or other agreement to provide any of the foregoing,
but not including the interest of a lessor under an Operating Lease.
"Loan" means an individual term loan made by each Lender in
the amount of each Lender's respective Commitment pursuant to Article
II.
"Loans" mean all of the term loans by the Lenders to the
Company pursuant to Article II.
"Loan Documents" means this Agreement, the Notes, the UDC
Guaranty, the Company Warrant Agreement (or, in the alternative, if
applicable, the UDC Warrant Agreement), the Company Warrants (or, in
the alternative, if applicable, the UDC Warrants) and all other
documents delivered to any of the Lenders in connection therewith.
"Material Adverse Effect" means a material adverse change in,
or a material adverse effect upon, any of (a) the operations, business,
properties, condition (financial or otherwise) or prospects of the
Company (or UDC prior to the Split-Up) taken as a whole, (b) the
ability of the Company or UDC to perform under any Loan Document and
avoid any Event of Default, or (c) the legality, validity, binding
effect or enforceability of any Loan Document.
"Maturity Date" means July 20, 2001.
"Notes" shall mean the promissory notes, dated as of the
Closing Date, substantially in the form of Exhibit A annexed hereto,
issued by the Company to the order of the Lenders evidencing the
obligation of the Company to repay the Loans.
"Obligations" mean all Loans and other Debt, advances, debts,
liabilities, obligations, covenants and duties owing by the Company or
UDC to any Person, of any kind or nature, present or future, whether or
not evidenced by any note, guaranty or other instrument, arising under
this Agreement or under any other loan document, or out of any other
agreement or understanding, whether or not for the payment of money,
whether arising by reason of an extension of credit, loan, guaranty,
indemnification or in any other manner, whether direct or indirect
(including those acquired by assignment), absolute or contingent, due
or to become due, now existing or hereafter arising and however
acquired.
3
<PAGE> 4
"Operating Lease" means, as applied to any Person, any lease
of property which is not a Capital Lease.
"Person" means an individual, partnership, corporation,
business trust, joint stock company, trust, unincorporated association,
joint venture or governmental authority.
"Pro-Rata Basis" means pro-rata as to the Lenders based on the
unpaid principal balance of each Lender's Loan.
"Responsible Officer" means the chief executive officer or the
president of the Company, or any other officer having substantially the
same authority and responsibility or, with respect to financial
matters, the chief financial officer or the treasurer of the Company,
or any other officer having substantially the same authority and
responsibility.
"SEC" means the Securities and Exchange Commission, or any
successor thereto.
"Split-Up" means (i) the transfer and sale by UDC of the
assets and liabilities constituting its non-dealership operations
(i.e., substantially all third-party servicing, dealer finance and
insurance operations) to the Company (such assets and liabilities
having an anticipated appraised value of approximately $50 million) in
exchange for $40 million of the Company's Series A Preferred Stock and
the balance in cash, which shall be not less than $10 million; and (ii)
the further capitalization of the Company through the consummation of a
rights offering to UDC's shareholders raising not less than
$24,000,000.
"Subordinated Debt" means the unsecured Obligation which by
its express terms is subordinated in right of payment to any other
unsecured Obligation of the Company.
"Tangible Net Worth" means the total of the Company's
shareholders' equity (including capital stock (including preferred
stock), additional paid-in capital, and retained earnings), less (i)
the total amount of loans and debts due from Affiliates, excluding
wholly-owned subsidiaries, shareholders, officers, or employees of the
Company, and (ii) the total amount of any intangible assets and
goodwill as determined in accordance with GAAP.
"UCC" means the Uniform Commercial Code as in effect in any
jurisdiction.
"UDC" means Ugly Duckling Corporation, a Delaware corporation,
provided that any terms herein relevant to UDC shall terminate and be
deleted herefrom upon release of UDC from the UDC Guaranty pursuant to
Section 11 of the UDC Guaranty.
"UDC Guaranty" means the Payment Guaranty executed by UDC in
the form attached hereto as Exhibit B, provided that any terms herein
relevant to the UDC Guaranty shall terminate and be deleted herefrom
upon release of UDC from the UDC Guaranty pursuant to Section 11 of the
UDC Guaranty..
"UDC Market Price" means the average Daily Market Price (as
defined in Section 10(e) of the Warrant Agreement Form) per share of
the Common Stock of UDC for the twenty (20) consecutive trading days
prior to the Warrant Date.
"UDC Warrants" means the warrants issued to each of the
Lenders pursuant to the UDC Warrant Agreement.
4
<PAGE> 5
"UDC Warrant Agreement" means the Warrant Agreement in the
form of the Warrant Agreement Form, providing for the issuance of UDC
Warrants to the Lenders to acquire 115,000 shares of UDC's Common Stock
on the terms in the Warrant Agreement Form and the following additional
terms:
Warrant Price 120% of UDC Market Price
Redemption Amount 160% of Warrant Price Computed Above
"UDC Warrant Event" means December 31, 1998, but only if (i)
the Loans have not been paid in full; (ii) the Company Warrant Event
has not occurred; and (iii) the Company Warrants are not issued prior
to December 31, 1998.
"Warrant Agreement Form" means the form of Warrant Agreement
attached hereto as Exhibit C.
"Warrant Date" means the date of the applicable Company
Warrants or the UDC Warrants are issued in a timely manner pursuant to
Section 2.08 hereof.
I.2 Other Interpretive Provisions.
Defined Terms. Unless otherwise specified herein or therein,
all terms defined in this Agreement shall have the defined meanings when used in
any certificate or other document made or delivered pursuant hereto. The meaning
of defined terms shall be equally applicable to the singular and plural forms of
the defined terms. Terms (including uncapitalized terms) not otherwise defined
herein and that are defined in the UCC shall have the meanings therein
described.
(a) The Agreement. The words "hereof," "herein," "hereunder" and
words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement; and
section, schedule and exhibit references are to this Agreement unless otherwise
specified.
(b) Certain Common Terms.
(i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.
(ii) The term "including" is not limiting and means "including
without limitation".
(iii) The term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or".
(c) Performance; Time. Whenever any performance obligation
hereunder (other than a payment obligation) shall be stated to be due or
required to be satisfied on a day other than a Business Day, such performance
shall be made or satisfied on the next succeeding Business Day. In the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including," the words "to" and "until" each mean
"to but excluding," and the word "through" means "to and including." If any
provision of this Agreement refers to any action taken or to be taken by any
Person, or which such Person is prohibited from taking, such provision shall
5
<PAGE> 6
be interpreted to encompass any and all means, direct or indirect, of taking, or
not taking, such action.
(d) Contracts. Unless otherwise expressly provided herein,
references to agreements and other contractual instruments shall be deemed to
include all subsequent amendments and other modifications thereto, but only to
the extent such amendments and other modifications are not prohibited by the
terms of any Loan Document.
(e) Laws. References to any statute or regulation are to be
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, supplementing or interpreting the statute or regulation.
(f) Captions. The captions and headings of this Agreement are for
convenience of reference only and shall not affect the construction of this
Agreement.
(g) Independence of Provisions. The parties acknowledge that this
Agreement and other Loan Documents may use several different limitations, tests
or measurements to regulate the same or similar matters, and that such
limitations, tests and measurements are cumulative and must each be performed,
except as expressly stated to the contrary in this Agreement.
(h) Accounting Principles.
(i) Unless the context otherwise clearly requires, all
accounting terms not expressly defined herein shall be construed, and all
financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied.
(ii) References herein to "fiscal year" and "fiscal quarter"
refer to such fiscal periods of the Company or UDC, as applicable.
ARTICLE II.
THE LOAN
II.1 Amount and Notes.
Each Lender shall make its respective Loan to the Company in
the amount of its Commitment in a single advance to be disbursed on the Closing
Date. The Company has authorized the issuance of the Notes in the aggregate
principal amount of Five Million Dollars ($5,000,000). On the Closing Date, the
Company shall issue and deliver to each Lender a Note in the principal amount
equal to such Lender's Commitment, payable to the order of such Lender,
substantially in the form of Exhibit A to this Agreement. The Notes will
evidence the principal amount of each Loan together with interest accrued and
unpaid thereon.
II.2 Interest.
(a) Each Loan shall accrue interest on the outstanding
principal amount thereof for the period from and including the date of such Loan
to but excluding the date such Loan shall be paid in full at a rate per annum
equal to 12%.
(b) Accrued interest shall be paid quarterly in arrears on (i)
March 31, June 30, September 30 and December 31 of each year; and (ii) on the
Maturity Date. Accrued and unpaid
6
<PAGE> 7
interest shall also be paid on the date of any prepayment of the Loans pursuant
to Section 2.03 for the portion of the Loans so prepaid and upon prepayment in
full thereof.
(c) While any Event of Default exists and is continuing or
after acceleration, the Company shall pay interest (after as well as before
entry of judgment thereon to the extent permitted by law) on the principal
amount of the Loans then unpaid, at a rate per annum equal to 18%.
(d) The Company agrees to pay an effective contracted for rate
of interest equal to the rate of interest resulting from all interest payable as
provided herein, plus all other fees, charges and costs that may be deemed or
determined to be interest. Anything herein to the contrary notwithstanding, the
obligations of the Company hereunder shall be subject to the limitation that
payments of interest shall not be required, for any period for which interest is
computed hereunder, to the extent (but only to the extent) that contracting for
or receiving such payment by the respective Lender would be contrary to the
provisions of any law applicable to such Lender limiting the highest rate of
interest which may be lawfully contracted for, charged or received by such
Lender, and in such event the Company shall pay such Lender interest at the
highest rate permitted by applicable law.
II.3 Optional Prepayments. The Company may, at any time or from
time to time, upon at least ten (10) Business Days' prior written notice to each
of the Lenders, prepay pro rata the Loans in whole or in part, without penalty
or premium. Such notice of prepayment shall specify the date and amount of such
prepayment. If such notice is given by the Company, the Company shall make such
prepayment on a Pro-Rata Basis and each Lender's pro-rata share thereof and the
payment amount specified in such notice shall be due and payable on the date
specified therein, together with accrued interest to each such date on the
amount prepaid.
II.4 Computation of Fees and Interest. All computations of fees
and interest under this Agreement shall be made on the basis of a 365-day year.
II.5 Payments by the Company.
(a) All payments (including prepayments) to be made by the
Company on account of principal, interest, fees and other amounts required
hereunder shall be made without set-off, deduction, recoupment or counterclaim
and shall, except as otherwise expressly provided herein, be made either (i) to
the Lenders at each of the Lender's respective offices as set forth on the
applicable signature pages hereof, or (ii) by wire transfer to each lender
pursuant to the wire instructions set forth on Schedule 2.01(a) or such other
wire instructions provided to the Company in writing, in U.S. dollars and in
immediately available funds, no later than 1:30 p.m. Phoenix, Arizona time on
the date specified herein. Any payment which is received by the applicable
Lender later than 1:30 p.m. (Phoenix, Arizona time) shall be deemed to have been
received on the immediately succeeding Business Day and any applicable interest
or fee shall continue to accrue.
(b) Whenever any payment hereunder shall be stated to be due
on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in the computation of interest or fees, as the case may be.
II.6 Sharing of Payments, Etc. All principal payments shall be
made to the Lenders on a Pro-Rata Basis.
II.7 Priority of Payments; Subordination. Notwithstanding anything
in this Agreement to the contrary, the payment of principal and interest under
this Agreement on the Loans is expressly
7
<PAGE> 8
subordinated for all purposes to any Obligations now in existence or later
incurred by the Company other than Subordinated Debt; and each of the Lenders
will, upon request of any institution or Person that is an obligee of any
Obligation now in existence or incurred by the Company in the future, execute
and deliver an agreement of subordination in form mutually satisfactory to each
of the Lenders and such institution or Person, the tenor of which shall be to
effectuate the terms of this Section.
II.8 Warrants. If the Company Warrant Event occurs prior to the UDC
Warrant Event, then the Company shall, not later than three (3) Business Days
after the Company Warrant Event, but in no event later than the UDC Warrant
Event, execute and deliver the Company Warrant Agreement and issue the Company
Warrants. If the UDC Warrant Event shall occur prior to the issuance of the
Company Warrants, then the Company Warrants shall not be issued and the Company
shall cause UDC to execute and deliver the UDC Warrant Agreement and issue the
UDC Warrants not later than January 5, 1999. The Lenders shall fully cooperate
in the Company's (and UDC's, pursuant to the UDC Guaranty) performance of this
Section 2.08.
ARTICLE III.
CONDITIONS PRECEDENT
III.1 Conditions of Loans to the Company. The obligation of each
Lender to fund its Loan to the Company hereunder is subject to the condition
that the Lenders shall have received on or before the Closing Date, in form and
substance satisfactory to each Lender and their respective counsel and in
sufficient copies for each Lender, all of the following:
(a) Loan Agreement. This Agreement executed by the
Company and each Lender;
(b) Resolutions: Incumbency - Company.
(i) Copies of the resolutions of the board of
directors of the Company approving and authorizing the execution,
delivery and performance by the Company of this Agreement and the other
Loan Documents to be delivered by the Company hereunder, and
authorizing the borrowing of the Loans, certified as of the Closing
Date by the Secretary or an Assistant Secretary of the Company; and
(ii) A certificate of the Secretary or Assistant
Secretary of the Company certifying the names and true signatures of
the officers of the Company authorized to execute, deliver and perform,
as applicable, this Agreement, and all other Loan Documents to be
delivered by the Company hereunder;
(c) Resolutions: Incumbency - UDC.
(i) Copies of the resolutions of the board of
directors of UDC approving and authorizing the execution, delivery and
performance by UDC of the UDC Guaranty, the UDC Warrant Agreement and
the UDC Warrants, certified as of the Closing Date by the Secretary or
an Assistant Secretary of UDC; and
(ii) A certificate of the Secretary or Assistant
Secretary of UDC certifying the names and true signatures of the
officers of UDC authorized to execute, deliver and perform, as
applicable, the UDC Guaranty, the UDC Warrant Agreement and the UDC
Warrants;
8
<PAGE> 9
(d) Articles of Incorporation: Bylaws and Good Standing.
Each of the following documents:
(i) the certificate of incorporation of each of the
Company and UDC as in effect on the Closing Date, certified by the
Secretary of State of the state of Delaware as of a recent date and by
the Secretary or Assistant Secretary of the Company, and UDC
respectively, as of the Closing Date, and the Bylaws of each of the
Company and UDC as in effect on the Closing Date, certified by the
Secretary or Assistant Secretary of the Company, and UDC respectively,
as of the Closing Date, and
(ii) a good standing certificate for each of the
Company and UDC from the Secretary of State of Delaware.
(e) Notes. The Notes, executed by the Company.
(f) UDC Guaranty. The UDC Guaranty, executed by UDC.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to each Lender as of the date
hereof and as of the Closing Date that:
IV.1 Organization. The Company is a corporation duly organized and
existing in good standing under the laws of the State of Delaware, the Company
has the corporate power to own its property and to carry on its business as now
being conducted, and the Company is duly qualified as a foreign corporation to
do business and is in good standing in each jurisdiction in which the nature of
the business conducted by it makes such qualification necessary.
IV.2 Financial Statements. The Company has provided to the Lenders
copies of the following audited financial statements: a balance sheet of UDC as
of December 31, 1997 and March 31, 1998, and statements of income and cash flows
for the fiscal year ended December 31, 1997 and for the fiscal quarter ending
March 31, 1998. Such financial statements (including any related schedules
and/or notes) are true and correct in all material respects, have been prepared
in accordance with GAAP consistently followed throughout the periods involved
and show all liabilities, direct and contingent, of the Company required to be
shown in accordance with GAAP. The balance sheet fairly presents the condition
of the Company as at the date thereof, and the statements of income and cash
flows fairly present the results of the operations of the Company for the
periods indicated. There has been no change in the business, condition
(financial or otherwise) or operations of the Company since December 31, 1997 or
March 31, 1998, which could reasonably be expected to have a Material Adverse
Effect.
IV.3 Actions Pending. There is no action, suit, investigation or
proceeding pending or, to the knowledge of the Company or UDC, threatened
against the Company or UDC or any properties or rights of the Company or UDC, by
or before any court, arbitrator or administrative or governmental body which
could reasonably be expected to result in any Material Adverse Effect.
9
<PAGE> 10
IV.4 Outstanding Obligations. After giving effect to the transactions
contemplated hereby and Obligations incurred in the ordinary course of business,
neither the Company nor UDC have any Obligations outstanding except Obligations
disclosed in the financial statements provided pursuant to Section 4.02 and
except as disclosed in Schedule 4.04 attached hereto. There exists no default
(or, to the knowledge of the Company or UDC, any event or condition that, with
the passage of time, would constitute a default) under the provisions of any
instrument evidencing such Obligations or of any agreement relating thereto.
IV.5 Taxes. The Company and UDC have filed all Federal, State and other
income tax returns which, to the best knowledge of the officers of the Company
and UDC, are required to be filed, and has paid all taxes as shown on such
returns and on all assessments received by it to the extent that such taxes have
become due, except such taxes as are being contested in good faith by
appropriate proceedings for which adequate reserves have been established in
accordance with GAAP.
IV.6 Conflicting Agreements and Other Matters. Neither the Company nor
UDC is a party to any contract or agreement or subject to any charter or other
corporate restriction which materially and adversely affects its business,
property or assets, or financial condition. Neither the execution nor delivery
of this Agreement or the other Loan Documents, nor fulfillment of nor compliance
with the terms and provisions hereof and of the other Loan Documents will
conflict with, or result in a breach of the terms, conditions or provisions of,
or constitute a default under, or result in any violation of, or result in the
creation of any Lien upon any of the properties or assets of either the Company
or UDC pursuant to, the Certificate of Incorporation or Bylaws of the Company or
UDC, any award of any arbitrator or any agreement (including any agreement with
stockholders), instrument, order, judgment, decree, statute, law, rule or
regulation to which the Company or UDC is subject. Neither the Company nor UDC
is a party to, or otherwise subject to any provision contained in, any
instrument evidencing indebtedness of the Company or UDC, any agreement relating
thereto or any other contract or agreement (including its charter) which limits
the amount of, or otherwise imposes restrictions on the incurring of, Debt of
the Company of the type to be evidenced by this Agreement or the Notes.
IV.7 ERISA. No accumulated funding deficiency (as defined in section
302 of ERISA and section 412 of the Code), whether or not waived, exists with
respect to any plan (other than a multiemployer plan). No liability to the
Pension Benefit Guaranty Corporation has been or is expected by the Company or
UDC to be incurred with respect to any plan (other than a multiemployer plan) by
the Company or UDC which could reasonably be expected to have a Material Adverse
Effect. Neither the Company nor UDC has incurred or presently expects to incur
any withdrawal liability under Title IV of ERISA with respect to any
multiemployer plan which is or would be materially adverse to the Company or
UDC. The execution and delivery of this Agreement and the other Loan Documents
will not involve any transaction which is subject to the prohibitions of section
406 of ERISA or in connection with which a tax could be imposed pursuant to
section 4975 of the Code. For the purpose of this Section 4.09, the term "plan"
shall mean an "employee pension benefit plan" (as defined in section 3 of ERISA)
which is or has been established or maintained, or to which contributions are or
have been made, by the Company or UDC or by any trade or business, whether or
not incorporated, which, together with the Company or UDC, is under common
control, as described in section 414(b) or (c) of the Code; and the term
"multiemployer plan" shall mean any plan which is a "multiemployer plan" (as
such term is defined in section 4001(a)(3) of ERISA).
10
<PAGE> 11
IV.8 Governmental Consent. Neither the nature of the Company's nor
UDC's business, nor any of their respective properties, nor any relationship
between the Company or UDC and any other Person, nor any circumstance in
connection with the making of the Loans or delivery of the Notes is such as to
require any authorization, consent, approval, exemption or other action by or
notice to or filing with any Governmental Authority that has not previously been
made or taken and to which all applicable waiting periods have expired.
IV.9 Disclosure. Neither this Agreement nor any other document,
certificate or statement furnished to any Lender by or on behalf of the Company
or UDC in connection herewith contains any untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements
contained herein and therein not misleading. There is no fact peculiar to the
Company or UDC which has had a Material Adverse Effect or in the future could
reasonably be expected to have a Material Adverse Effect that has not been set
forth in this Agreement or disclosed in the Company's filings with the SEC, or
in the other documents, certificates and statements furnished to any Lender by
or on behalf of the Company or UDC prior to the date hereof in connection with
the transactions contemplated hereby.
IV.10 Possession of Franchises, Licenses, etc. The Company and UDC
possess all franchises, certificates, licenses, permits and other authorizations
from governmental political subdivisions or regulatory authorities and all
patents, trademarks, service marks, trade names, copyrights, licenses and other
rights, free from burdensome restrictions, that are necessary in any material
respect for the ownership, maintenance and operation of its properties and
assets, and neither the Company nor UDC are in violation of any thereof in any
material respect.
ARTICLE V.
AFFIRMATIVE COVENANTS
The Company covenants and agrees that, so long as any Loan or other
Obligation hereunder shall remain unpaid or unsatisfied, unless the Lenders
waive compliance in writing:
V.1 Financial Statements. The Company shall deliver to each of the
Lenders in form and detail satisfactory to each of the Lenders:
(a) promptly upon transmission thereof, copies of all
financial statements, proxy statements, notices and reports as it shall send to
its stockholders and copies of all registration statements (without exhibits)
and all reports which it (or UDC) files with the SEC (or any governmental body
or agency succeeding to the functions of the SEC); and
(b) with reasonable promptness, such other financial data as
the Lenders may reasonably request, subject to the Company's right to maintain
confidentiality of any financial information to the extent necessary to comply
with applicable securities laws.
V.2 Certificates; Other Information. Within 60 days after the end
of each quarterly period (other than the fourth quarterly period) in each fiscal
year and within 105 days after the end of each fiscal year, the Company shall
deliver to each Lender a certificate of a Responsible Officer setting forth
(except to the extent specifically set forth in any financial statements filed
within such periods with the SEC):
(a) sufficient information (including detailed calculations
reasonably satisfactory to the Lenders) to establish whether the Company (or
UDC, if applicable) is in compliance with the requirements of Sections 6.01; and
11
<PAGE> 12
(b) a statement that there exists no Event of Default or
Default, or, if any such Event of Default or Default exists, specifying:
(i) the nature thereof;
(ii) the period of existence thereof; and
(iii) what action the Company proposes to take with
respect thereto.
V.3 Default Disclosure. The Company shall forthwith, upon a
Responsible Officer of the Company obtaining knowledge of an Event of Default or
Default, promptly deliver to each Lender a Certificate of a Responsible Officer
specifying the nature and period of existence thereof and what action the
Company proposes to take with respect thereto.
ARTICLE VI.
NEGATIVE COVENANTS
The Company hereby covenants and agrees that, so long as any Loan or
other Obligation hereunder shall remain unpaid or unsatisfied, unless the
Lenders waive compliance in writing:
VI.1 Debt to Tangible Net Worth Ratio. Prior to the Split-Up, UDC's
Debt to Tangible Net Worth Ratio shall not exceed 2.1 to 1.0, calculated as of
the end of each quarterly period in each fiscal year. After the Split-Up, the
Company shall not permit the Company's Debt to Tangible Net Worth Ratio to
exceed 3.0 to 1.0, calculated as of the end of each quarterly period in each
fiscal year.
VI.2 Terms of Subordinated Debt. The Company shall not enter into
any agreement (oral or written) which could in any way be construed as amending,
modifying, altering, changing or terminating any one or more provisions relating
to the Subordinated Debt to the extent that such amendment, modification,
alteration, change or termination would subordinate the payment of interest on
or principal of the Loans to the payment of principal and interest relating to
the Subordinated Debt.
ARTICLE VII.
EVENTS OF DEFAULT
VII.1 Event of Default. Any of the following shall constitute an
"Event of Default."
(a) The Company defaults in the payment of any principal of
the Loan when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(b) The Company defaults in the payment of any interest on the
Loan when the same shall become due and such default continues for a period of
five Business Days; or
(c) The Company fails to make any payment when due with
respect to any Obligation of the Company (other than an obligation payable
hereunder), or any breach, default or event of default shall occur, or any other
conditions shall exist under any instrument, agreement or indenture pertaining
to such Obligation, if the holder or holders of such Obligation accelerate the
maturity of any such Obligation or require a redemption or other repurchase of
such Obligation and
12
<PAGE> 13
such failure relates to the acceleration or redemption of an amount in excess of
$10 million and such acceleration continues for a period of five Business Days;
or
(d) Any representation or warranty made by the Company herein
or by the Company or any of its officers in any writing furnished in connection
with or pursuant to this Agreement shall be false in any material respect on the
date as of which made; or
(e) The Company fails to perform or observe any covenant or
agreement contained in Article VI hereof; or
(f) The Company fails to perform or observe any other
agreement, covenant, term or condition contained herein and such failure shall
not be remedied within 30 days after receipt of notice thereof from any Lender;
or
(g) The Company makes an assignment for the benefit of
creditors or is generally not paying its debts as such debts become due; or
(h) Any decree or order for relief in respect of the Company
is entered under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law,
whether now or hereafter in effect (herein called the "Bankruptcy Law"), of any
jurisdiction; or
(i) The Company petitions or applies to any tribunal for, or
consents to, the appointment of, or taking possession by, a trustee, receiver,
custodian, liquidator or similar official of the Company, or of any substantial
part of the assets of the Company, or commences a voluntary case under the
Bankruptcy Law of the United States or any proceedings relating to the Company
under the Bankruptcy Law of any other jurisdiction; or
(j) Any such petition or application referenced in clause (i)
above is filed, or any such proceedings referenced in clause (i) above are
commenced against the Company, and the Company by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee, receiver, custodian, liquidator
or similar official, or approving the petition in any such proceedings, and such
order, judgment or decree remains unstayed and in effect for more than 30 days;
or
(k) Any order, judgment or decree is entered in any
proceedings against the Company decreeing the dissolution of the Company and
such order, judgment or decree remains unstayed and in effect for more than 60
days; or
(l) Any order, judgment or decree is entered in any
proceedings against the Company decreeing a split-up of the Company which
requires the divestiture of assets representing a substantial part, and such
order, judgment or decree remains unstayed and in effect for more than 60 days;
or
(m) Guarantor (i) is unable or admits in writing Guarantor's
inability to pay Guarantor's monetary obligations as they become due, (ii) makes
a general assignment for the benefit of creditors, (iii) applies for, consents
to, or acquiesces in, the appointment of a trustee, receiver or other custodian
for Guarantor or the property of Guarantor or any part thereof, or in the
absence of such application, consent or acquiescence, a trustee, receive or
other custodian is appointed for Guarantor or the property of Guarantor or any
part thereof, and such appointment is not discharged within 60 days, or (iv)
contests the validity or unenforceability of the UDC Guaranty.
13
<PAGE> 14
(n) The Occurrence of an Event of Default under the UDC
Guaranty.
then (a) if such event is an Event of Default specified in any of clauses (g)
through (l) of this Section 7.01 with respect to the Company or clauses (m) or
(n) of this Section 7.01 with respect to UDC, all of the Loans at the time
outstanding shall automatically become immediately due and payable at par
together with interest accrued thereon, without presentment, demand, protest or
notice of any kind, all of which are hereby waived by the Company, and (b) if
such event is any other Event of Default, any Lender may, by notice in writing
to the Company, declare all of such Lender's Loan to be, and all of such
Lender's Loan shall thereupon be and become, immediately due and payable
together with interest accrued thereon without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Company.
VII.2 Other Remedies. If any Event of Default or Default shall occur
and be continuing, each Lender may proceed to protect and enforce its rights
under this Agreement by exercising such remedies as are available to such Lender
in respect thereof under applicable law, either by suit in equity or by action
at law, or both, whether for specific performance of any covenant or other
agreement contained in this Agreement or in aid of the exercise of any power
granted in this Agreement. No remedy conferred in this Agreement upon the
Lenders is intended to be exclusive of any other remedy, and each and every such
remedy shall be cumulative and shall be in addition to every other remedy
conferred herein or now or hereafter existing at law or in equity or by statute
or otherwise.
ARTICLE VIII.
MISCELLANEOUS
VIII.1 Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or any other Loan Document, and no consent with
respect to any departure by the Company therefrom, shall be effective unless the
same shall be in writing and signed by the Lenders and the Company, and then
such waiver shall be effective only in the specific instance and for the
specific purpose for which given.
VIII.2 Notices.
(a) All notices, requests and other communications provided
for hereunder shall be in writing (including, unless the context expressly
otherwise provides, by facsimile transmission, provided that, any matter
transmitted by the Company by facsimile (i) shall be immediately confirmed by a
telephone call to the recipient at the number specified on the applicable
signature page hereof, and (ii) shall be followed promptly by a hard copy
original thereof) and mailed, faxed, telecopied or delivered, to the address or
facsimile number specified for notices on the applicable signature page hereof;
or, as to the Company or each of the Lenders, to such other address as shall be
designated by such party in a written notice to the other parties, and as
directed to each other party, at such other address as shall be designated by
such party in a written notice to the Company and each of the Lenders.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery or faxed, be effective when delivered for
overnight (next day) delivery, transmitted by facsimile machine, respectively,
or if delivered, upon delivery.
VIII.3 No Waiver: Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of any Lender, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder
14
<PAGE> 15
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege.
VIII.4 Costs and Expenses. The Company shall, following consummation
of the transactions contemplated hereby:
(a) pay or reimburse each Lender within ten (10) Business Days
after demand for all reasonable costs and expenses incurred by each Lender in
connection with any amendment, supplement, waiver or modification to this
Agreement, any other Loan Document and any other documents prepared in
connection therewith, including the reasonable Attorney Costs incurred by any
Lender with respect thereto; and
(b) pay or reimburse each Lender within ten (10) Business Days
after demand for all reasonable costs and expenses incurred by them in
connection with the enforcement, attempted enforcement, or preservation of any
rights or remedies (including in connection with any "workout" or restructuring
regarding the Loans, and including in any Insolvency Proceeding or appellate
proceeding) under this Agreement, any other Loan Document, and any such other
documents, including reasonable Attorney Costs incurred by any Lender.
VIII.5 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that the Company may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of each Lender.
VIII.6 Assignment, Participations, etc.
(a) Any Lender may, with the written consent of the Company
(which consent shall be obtained prior to such Lender's delivery of any
information (including financial information) to any Assignee (as hereinafter
defined) relating to an assignment of such Lender's rights and obligations under
the Loan Documents, at all times other than during the existence of an Event of
Default, which consent shall not be unreasonably withheld, at any time assign
and delegate to one or more person or entity (provided, that, no written consent
of the Company shall be required in connection with any assignment and
delegation by a Lender to a Lender Affiliate of such Lender) (each an
"Assignee") all (but no less than all) of its interest in the Loan and the other
rights and obligations of such Lender hereunder, provided, however, that, the
Company and each other Lender may continue to deal solely and directly with such
Lender in connection with the interest so assigned to an Assignee until written
notice of such assignment, together with payment instructions, addresses and
related information with respect to the Assignee shall have been given to the
Company by such Lender and the Assignee.
(b) From and after the date that such Lender notifies the
Company of such assignment and the Company consents to such assignment, (i) the
Assignee thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it by such Lender, shall have the
rights and obligations of such Lender under the Loan Documents, and (ii) the
assignor Lender shall, to the extent that rights and obligations hereunder have
been assigned by it pursuant to such assignment, relinquish its rights and be
released from its obligations under the Loan Documents.
(c) Immediately after compliance with the conditions contained
in Sections 8.06(a) and (b) with respect to any Lenders making an assignment or
delegation to an eligible Assignee, this Agreement shall be deemed to be amended
to the extent, but only to the extent,
15
<PAGE> 16
necessary to reflect the addition of the Assignee and the resulting adjustment
of the Loans arising therefrom.
VIII.7 Counterparts. This Agreement may be executed by one or more of
the parties to this Agreement in any number of separate counterparts, each of
which, when so executed, shall be deemed an original, and all of said
counterparts taken together shall be deemed to constitute but one and the same
instrument. A set of the copies of this Agreement signed by all the parties
shall be lodged with the Company and the Lenders.
VIII.8 Severability. The illegality or unenforceability of any
provision of this Agreement or any instrument or agreement required hereunder
shall not in any way affect or impair the legality or enforceability of the
remaining provisions of this Agreement or any instrument or agreement required
hereunder.
VIII.9 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of the Company and the Lenders,
and their permitted successors and assigns, and no other Person shall be a
direct or indirect legal beneficiary of, or have any direct or indirect cause of
action or claim in connection with, this Agreement or any of the other Loan
Documents. No Lender shall have any obligation to any Person not a party to this
Agreement or other Loan Documents.
VIII.10 Time. Time is of the essence as to each term or provision of
this Agreement and each of the other Loan Documents.
VIII.11 Governing Law.
THIS AGREEMENT AND THE NOTES SHALL BE DEEMED TO HAVE BEEN MADE
IN THE STATE OF CALIFORNIA; AND (B) THE VALIDITY OF THIS AGREEMENT AND THE
NOTES, AND THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF,
ALL CLAIMS MADE IN CONNECTION THEREWITH, AND THE RIGHTS OF THE PARTIES THERETO
SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA.
VIII.12 Waiver of Jury Trial.
THE COMPANY AND THE LENDERS HEREBY AGREE TO WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE
COMPANY AND THE LENDERS HEREBY AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT IN ANY WAY LIMITING THE
FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY
JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM, OR
OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS. A COPY OF THIS SECTION 8.12 MAY
16
<PAGE> 17
BE FILED WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL
BY JURY AND CONSENT TO TRIAL.
VIII.13 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire Agreement and understanding among the Company and
the Lenders and supersedes all prior or contemporaneous agreements and
understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof and any prior arrangements made with respect to the
payment by the Company (or any indemnification for) any fees, costs or expenses
payable to or incurred (or to be incurred) by or on behalf of the Lenders
pursuant to the Loan Documents.
VIII.14 Interpretation. This Agreement is the result of negotiations
between and has been reviewed by counsel to the Lenders, the Company and other
parties, and is the product of all parties hereto. Accordingly, this Agreement
and the other Loan Documents shall not be construed against the Company merely
because of the Company's involvement in the preparation of such documents and
agreements.
[Balance of Page Intentionally Left Blank]
17
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
CYGNET FINANCIAL CORPORATION
By:________________________________
Steven P. Johnson
Senior Vice President and General Counsel
Address for notices:
Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attn: Steven P. Johnson, Esq., Senior Vice
President and General Counsel
Telephone: (602) 852-6605
Telecopy: (602) 852-6696
Commitment: $1,300,000 ARBCO ASSOCIATES, L.P.
By: KAIM Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:___________________________________
Title:________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ___________________
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
18
<PAGE> 19
Commitment: $1,200,000 KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:__________________________________
Name:________________________________
Title:_______________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ___________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $1,200,000 OFFENSE GROUP ASSOCIATES, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:________________________________
Name:______________________________
Title:_____________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ______________________
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
19
<PAGE> 20
Commitment: $600,000 OPPORTUNITY ASSOCIATES, LIMITED PARTNER-
SHIP
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:____________________________
Name:__________________________
Title:_________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _____________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
Commitment: $700,000 NORTH POINTE FINANCIAL SERVICES, INC.
By: ___________________________
Name:__________________________
Title: ________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _____________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
20
<PAGE> 21
EXHIBIT A
FORM OF PROMISSORY NOTE
Original Face Amount: $____________
Maker: CYGNET FINANCIAL CORPORATION, a Delaware corporation
Dated as of: July 20, 1998
(a) PROMISE TO REPAY. FOR VALUE RECEIVED, CYGNET FINANCIAL
CORPORATION, a Delaware corporation ("Maker"), promises to pay to
_____________________ ("Payee"), or order, the principal sum of
_________________ Dollars ($________) or such lesser amount as shall equal the
outstanding amount of the loan (the "Loan") made by Payee to Maker, pursuant to
Section 2.01 of that certain Loan Agreement, dated as of July 20, 1998, entered
into between Maker and each of Payee and the other Lenders named therein (the
"Loan Agreement").
(b) DEFINED TERMS. Any and all initially capitalized terms
used herein shall have the meaning ascribed thereto in the Loan Agreement,
unless specifically defined herein. The term "or" as used in this Note has,
except where otherwise indicated, the inclusive meaning represented by the
phrase "and/or." This Promissory Note (this "Note") is one of the promissory
notes defined in the Loan Agreement as the "Notes" and is subject to, and
entitled to the benefits of, the terms and provisions of the Loan Agreement.
(c) PAYMENTS OF PRINCIPAL AND INTEREST.
(a) Maker hereby promises to make payments of
principal and interest with respect to the Loan evidenced hereby at the rates
and times, and in the amounts, and in all other respects in the manner as
provided in the Loan Agreement.
(b) As more fully set forth in the Loan
Agreement, Maker shall not be obligated to pay, and the holder of this Note
shall not be obligated to charge, collect, receive, reserve, or take interest
(it being understood that interest shall be calculated as the aggregate of all
charges which constitute interest under applicable law that are contracted for,
charged, reserved, received, or paid) in excess of the maximum nonusurious
interest rate, as in effect from time to time, which may be charged, contracted
for, reserved, received, or collected by Payee in connection with the Loan
Agreement, this Note, the other Loan Documents, or any other documents executed
in connection herewith or therewith.
(d) PREPAYMENTS. Maker may prepay the principal balance due
under this Note, in whole or in part, without penalty or premium, only in
accordance with the provisions of the Loan Agreement.
(e) APPLICATION OF PAYMENTS. All payments (including
prepayments) made hereunder shall be applied first to accrued and unpaid
interest and then to principal.
(f) TIME AND PLACE OF PAYMENTS. All principal and interest due
hereunder is payable in U.S. Dollars in immediately available funds at either
(i) Payee's office located at 1800 Avenue of the Stars, Suite 200, Los Angeles,
California 90067 (or at such other office as may be
21
<PAGE> 22
designated from time to time by Payee), or (ii) by wire transfer pursuant to
Section 2.05(a) of the Loan Agreement, not later than 1:30 p.m., Phoenix,
Arizona time, on the date of payment.
(g) WAIVERS. Maker, for itself and its legal representatives,
successors, and assigns, expressly waives presentment, demand, protest, notice
(except as required by the Loan Agreement), and all other requirements of any
kind, in connection with the enforcement or collection of this Note.
(h) ACCELERATION AND WAIVER. IT IS EXPRESSLY AGREED THAT, UPON
THE OCCURRENCE OF AN EVENT OF DEFAULT AS SPECIFIED IN SECTIONS 7.01(g) THROUGH
(L) OF THE LOAN AGREEMENT, THE UNPAID PRINCIPAL BALANCE OF AND ANY ACCRUED AND
UNPAID INTEREST UNDER THIS NOTE SHALL AUTOMATICALLY BECOME IMMEDIATELY DUE AND
PAYABLE PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, AND, UPON THE OCCURRENCE OF
ANY OTHER EVENT OF DEFAULT SPECIFIED IN SECTION 7.01 OF THE LOAN AGREEMENT, THE
UNPAID PRINCIPAL BALANCE OF ANY ACCRUED AND UNPAID INTEREST UNDER THIS NOTE MAY,
BY NOTICE IN WRITING TO MAKER, BE DECLARED TO BE IMMEDIATELY DUE AND PAYABLE
PURSUANT TO THE TERMS OF THE LOAN AGREEMENT, WITHOUT PRESENTMENT, DEMAND,
PROTEST, NOTICE (EXCEPT AS REQUIRED THE LOAN AGREEMENT), OR OTHER REQUIREMENTS
OF ANY KIND, ALL OF WHICH AR HEREBY EXPRESSLY WAIVED BY MAKER.
(i) ATTORNEYS' FEES. In the event it should become necessary
to employ counsel to collect or enforce this Note, Maker agrees to pay the
reasonable attorneys' fees and costs (including those of in-house counsel) of
the holder hereof, irrespective of whether suit is brought, to the extent and as
provided in the Loan Agreement.
(j) AMENDMENTS. This Note may not be changed, modified,
amended, or terminated except by a writing duly executed by Maker and the holder
hereof.
(k) HEADINGS. Section headings used in this Note are solely
for convenience of reference, shall not constitute a part of this Note for any
other purpose, and shall not affect the construction of this Note.
(l) GOVERNING LAW. EXCEPT AS OTHERWISE PROVIDED IN THE LOAN
AGREEMENT: (a) THIS NOTE SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF
CALIFORNIA; AND (b) THE VALIDITY OF THIS NOTE AND THE CONSTRUCTION,
INTERPRETATION AND ENFORCEMENT OF, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUCTED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF CALIFORNIA.
(m) WAIVER OF TRIAL BY JURY. MAKER, TO THE EXTENT IT MAY
LEGALLY DO SO, HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION, CAUSE OF ACTION, OR PROCEEDING ARISING UNDER OR WITH RESPECT TO
THIS NOTE, OR IN ANY WAY CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO, THE
DEALINGS OF MAKER, AND PAYEE, WITH RESPECT TO THIS NOTE, OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE. TO THE EXTENT
IT MAY LEGALLY DO SO, MAKER HEREBY AGREES THAT ANY SUCH CLAIM, DEMAND, ACTION,
CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY
AND THAT PAYEE MAY FILE AN
22
<PAGE> 23
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF MAKER TO WAIVER OF ITS RIGHT TO TRIAL BY JURY.
Dated as of July 20, 1998.
CYGNET FINANCIAL CORPORATION,
a Delaware corporation
By:
Name: Steven P. Johnson
Title: Senior Vice President and
General Counsel
23
<PAGE> 24
EXHIBIT B
__________________ CORPORATION
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (the "Agreement"), dated as of [INSERT WARRANT
DATE], is between ___________________ CORPORATION, a Delaware corporation (the
"Company"), and each of the Lenders (as defined below).
WHEREAS, [CYGNET FINANCIAL CORPORATION/THE COMPANY] has entered into a
Loan Agreement dated as of July 20, 1998 (the "Loan Agreement"), by and among
[CYGNET FINANCIAL CORPORATION/THE COMPANY] and the lenders named therein (the
"Lenders"), pursuant to which the Lenders will make term loans to [CYGNET
FINANCIAL CORPORATION/THE COMPANY], all as set forth in, and subject to the
terms and conditions of, the Loan Agreement; and
WHEREAS, as a condition precedent to the execution and delivery of the
Loan Agreement, the Company has agreed, under certain circumstances, to issue to
the Lenders warrants (the "Warrants") to purchase shares of common stock, $.001
par value per share ("Common Stock"), of the Company, subject to the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties agree as follows:
Section 1. ISSUANCE OF WARRANTS AND FORM OF WARRANTS.
(a) Subject to the terms and conditions hereof, the Company shall issue
to the Lenders and the Lenders shall accept from the Company, 115,000 Warrants
substantially in the form of Exhibit A hereto. Each Lender shall be issued the
number of Warrants set forth beside such Lender's name on the signature pages
hereto.
(b) Each Warrant shall entitle the registered holder of the certificate
representing such Warrant to purchase upon the exercise thereof one share of
Common Stock, subject to the adjustments provided for in Section 8 hereof, at
any time until the later of (i) 1:30 p.m., Phoenix, Arizona time, on [INSERT
THIRD ANNIVERSARY OF WARRANT DATE] or (ii) such time as the Notes issued
pursuant to the Loan Agreement have been paid in full, unless earlier redeemed
pursuant to Section 10 hereof.
(c) The Warrant certificates shall be in registered form only. Each
Warrant certificate shall be dated as of the date of issuance thereof (whether
upon initial issuance or upon transfer or exchange), and shall be executed on
behalf of the Company by the manual signature of its President or a Vice
President, and attested to by the manual signature of its Secretary or an
Assistant Secretary. In case any officer of the Company who shall have signed
any Warrant certificate shall cease to be such officer of the Company prior to
the issuance thereof, such Warrant certificate may nevertheless be issued and
delivered with the same force and effect as though the person who signed the
same had not ceased to be such officer of the Company.
Section 2. EXERCISE OF WARRANTS, DURATION AND WARRANT PRICE. Subject to
the provisions of this Agreement, each registered holder of one or more Warrant
certificates shall have the right, which may be exercised as provided in such
Warrant certificates, to purchase from the Company (and the Company shall issue
and sell to such registered holder) the number of shares
24
<PAGE> 25
of Common Stock or other securities to which the Warrants represented by such
certificates are at the time entitled hereunder.
(a) Each Warrant not exercised by its expiration date shall become
void, and all rights thereunder and all rights in respect thereof under this
Agreement shall cease on such date.
(b) A Warrant may be exercised by the surrender of the certificate
representing such Warrant to the Company with the subscription form set forth on
the reverse thereof duly executed and properly endorsed with the signatures
properly guaranteed, and upon payment in full to the Company of the Warrant
Price (as hereinafter defined) for the number of shares of Common Stock or other
securities as to which the Warrant is exercised. Such Warrant Price shall be
paid in full in cash, or by certified check or bank draft payable in United
States currency to the order of the Company.
(c) Subject to adjustment in accordance with Section 8 hereof, the
price per share of Common Stock at which each Warrant may be exercised (the
"Warrant Price") shall be [INSERT WARRANT PRICE].
(d) Subject to the further provisions of this Section 2 and of Section
5 hereof, upon surrender of Warrant certificates and payment of the Warrant
Price, the Company shall issue and cause to be delivered, as promptly as
practicable to or upon the written order of the registered holder of such
Warrants and in such name or names as such registered holder may designate,
subject to applicable securities laws, a certificate or certificates for the
number of securities so purchased upon the exercise of such Warrants, together
with cash, as provided in Section 9 of this Agreement, in respect of any
fraction of a share or security otherwise issuable upon such surrender. All
shares of Common Stock or other such securities issued upon the exercise of a
Warrant shall be duly authorized, validly issued, fully paid and nonassessable
and free and clear of all liens and other encumbrances.
(e) Certificates representing such securities shall be deemed to have
been issued and any person so designated to be named therein shall be deemed to
have become a holder of record of such securities as of the date of the
surrender of such Warrants and payment of the Warrant Price. The rights of
purchase represented by each Warrant certificate shall be exercisable, at the
election of the registered holder thereof, either as an entirety or from time to
time for part of the number of securities specified therein and, in the event
that any Warrant certificate is exercised in respect of less than all of the
securities specified therein at any time prior to the expiration date of the
Warrant certificate, a new Warrant certificate or certificates will be issued to
such registered holder for the remaining number of securities specified in the
Warrant certificate so surrendered.
Section 3. COUNTERSIGNATURE AND REGISTRATION.
(a) The Company shall maintain books (the "Warrant Register") for the
registration and the registration of transfer of the Warrants. Upon the initial
issuance of the Warrants, the Company shall issue and register the Warrants in
the names of the Lenders in accordance with Section 1 hereof.
(b) Prior to due presentment for registration of transfer of any
Warrant certificate, the Company may deem and treat the person in whose name
such Warrant certificate shall be registered upon the Warrant Register (the
"registered holder") as the absolute owner of such Warrant certificate and of
each Warrant represented thereby (notwithstanding any notation of ownership or
other writing on the Warrant certificate made by anyone other than the Company),
for
25
<PAGE> 26
the purpose of any exercise thereof, of any distribution or notice to the holder
thereof, and for all other purposes, and the Company shall not be affected by
any notice to the contrary.
Section 4. TRANSFER AND EXCHANGE OF WARRANTS.
(a) The Company shall register the transfer, from time to time, of any
outstanding Warrant or portion thereof upon the Warrant Register, upon surrender
of the certificate evidencing such Warrant for transfer, properly endorsed with
signatures properly guaranteed and accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant certificate representing an
equal aggregate number of Warrants so transferred shall be issued to the
transferee and the surrendered Warrant certificate shall be canceled by the
Company. In the event that only a portion of a Warrant is transferred at any
time, a new Warrant certificate representing the remaining portion of the
Warrant will also be issued to the transferring holder. Notwithstanding anything
to the contrary herein, no transfer or exchange may be made except in compliance
with applicable securities laws and Section 12 hereof.
(b) Warrant certificates may be surrendered to the Company, together
with a written request for exchange, and thereupon the Company shall issue in
exchange therefor one or more new Warrant certificates as requested by the
registered holder of the Warrant certificate or certificates so surrendered,
representing an equal aggregate number of Warrants.
(c) The Company shall not be required to effect any registration of
transfer or exchange which will result in the issuance of a Warrant certificate
for a fraction of a Warrant.
(d) No service charge shall be made for any exchange or registration of
transfer of Warrant certificates.
Section 5. PAYMENT OF TAXES. The Company will pay any documentary stamp
taxes attributable to the initial issuance or delivery of the shares of Common
Stock or other securities issuable upon the exercise of Warrants; provided,
however, the Company shall not be required to pay any tax or taxes which may be
payable in respect of any transfer of the Warrants or involved in the issuance
or delivery of any Warrant certificate or certificates for shares of Common
Stock in a name other than registered holder of Warrants in respect of which
such shares are issued, and in such case the Company shall not be required to
issue or deliver any certificate for shares of Common Stock or any Warrant
certificate until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid.
Section 6. MUTILATED OR MISSING WARRANTS. In case any of the Warrant
certificates shall be mutilated, lost, stolen or destroyed, the Company may
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant certificate, or in lieu of and substitution for the Warrant
certificate lost, stolen or destroyed, a new Warrant certificate representing an
equal aggregate number of Warrants, but only upon receipt of evidence
satisfactory to the Company of such loss, theft or destruction of such Warrant
certificate and reasonable indemnity, if requested, also satisfactory to it.
Applicants for such substitute Warrant certificates shall also comply with such
other reasonable conditions and pay such reasonable charges as the Company may
prescribe.
Section 7. RESERVATION OF COMMON STOCK.
26
<PAGE> 27
(a) There have been reserved, and the Company shall at all times keep
reserved, out of its authorized and unissued shares of Common Stock, a number of
shares sufficient to provide for the exercise of the rights of purchase
represented by the Warrants then outstanding or issuable upon exercise, and the
transfer agent for the Common Stock and every subsequent transfer agent for any
shares of the Company's capital stock issuable upon the exercise of any of the
rights of purchase aforesaid are hereby irrevocably authorized and directed at
all times to reserve such number of authorized and unissued shares as shall be
requisite for such purpose. The Company will keep a copy of this Agreement on
file with the transfer agent for the Common Stock and with every subsequent
transfer agent for any shares of the Company's capital stock issuable upon the
exercise of the rights of purchase represented by the Warrants.
(b) The Company will supply such transfer agent with duly executed
certificates and will provide or otherwise make available any cash as provided
in Section 9 of this Agreement. All Warrant certificates surrendered in the
exercise thereby evidenced shall be canceled by the Company. After the
expiration date of the Warrants, no shares of Common Stock shall be subject to
reservation in respect of such Warrants.
Section 8. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES OF COMMON
STOCK. The number and kind of securities purchasable upon the exercise of the
Warrants and the Warrant Price shall be subject to adjustment from time to time
upon the happening of certain events, as follows:
8.1 ADJUSTMENTS. The number of shares of Common Stock or other
securities purchasable upon the exercise of each Warrant and the Warrant Price
shall be subject to adjustment as follows:
(a) If the Company (i) pays a dividend in Common Stock or
makes a distribution in Common Stock or shares convertible in Common Stock, (ii)
subdivides its outstanding Common Stock into a greater number of shares, (iii)
combines its outstanding Common Stock into a smaller number of shares, or (iv)
issues, by reclassification of its Common Stock, other securities of the
Company, then the number and kind of shares of Common Stock or other securities
purchasable upon exercise of a Warrant immediately prior thereto will be
adjusted so that the holder of a Warrant will be entitled to receive the kind
and number of shares of Common Stock or other securities of the Company that
such holder would have owned and would have been entitled to receive immediately
after the happening of any of the events described above, had the Warrant been
exercised immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this subsection 8.1(a)
will become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) If the Company issues or sell any shares of Common Stock
or any rights or warrants to purchase shares of Common Stock or securities
convertible into Common Stock at a price per share of Common Stock that is less
than 90% of the Daily Market Price (as defined in Section 10(e) hereof) of the
Common Stock as of the trading day immediately preceding (or the same day if
trading has been completed for such day) of such issuance or sale, the Warrant
Price shall be reduced by multiplying the Warrant Price in effect on the date of
issuance of such shares, warrants, rights or convertible securities by a
fraction, the denominator of which shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding on the date of issuance of such
shares, rights, warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase or issuable on
conversion, and the numerator of which shall be the number of shares of Common
Stock (excluding treasury shares, if any) outstanding on the date of issuance of
such shares, rights, warrants or convertible securities plus the number of
shares which the aggregate offering price of the total number of shares so
offered,
27
<PAGE> 28
issued or issuable, or, with respect to convertible securities, the aggregate
consideration received or to be received by the Company for the convertible
securities, would purchase at such Daily Market Price. Such adjustment shall be
made successively whenever such shares, rights, warrants or convertible
securities are issued and shall become effective immediately after the date of
such issuance. However, upon the expiration of any right or warrant to purchase
Common Stock or conversion right, the issuance of which resulted in an
adjustment in the Warrant Price, if any such right, warrant or conversion right
shall expire and shall not have been exercised, the Warrant Price shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Warrant Price made pursuant to the
provisions of this Section 8.1(b) after the issuance of such rights, warrants or
convertible securities) had the adjustment of the Warrant Price upon the
issuance of such rights, warrants or convertible securities been made on the
basis of offering for subscription or purchase only that number of shares of
Common Stock actually purchased upon the exercise of such rights or warrants
actually exercised or the conversion of the convertible securities actually
converted.
(c) If the Company distributes to all holders of Common Stock
evidences of its indebtedness or assets (excluding cash dividends or cash
distributions paid out of earned surplus and made in the ordinary course of
business) or rights to subscribe for or purchase any security, then in each such
case the Warrant Price shall be determined by multiplying the Warrant Price in
effect prior to the record date fixed for determination of stockholders entitled
to receive such distribution by a fraction, the denominator of which shall be
the Daily Market Price of Common Stock determined as of the record date
mentioned above, and the numerator of which shall be such Daily Market Price of
the Common Stock, less the then fair market value (as determined by the Board of
Directors of the Company in good faith, whose determination shall be conclusive
if made in good faith; provided, however, that in the event of a distribution or
series of related distributions exceeding 10% of the net assets of the Company,
then such fair market value shall be determined by a nationally recognized or
major regional investment banking firm or firm of independent certified public
accountants of recognized standing (which may be the firm that regularly
examines the financial statements of the Company) selected in good faith by the
Board of Directors of the Company, and in either case shall be described in a
statement provided to Warrant holders) of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one share
of Common Stock. Such adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above. In the event such distribution is not made, the Warrant
Price shall again be adjusted to the number that was in effect immediately prior
to such record date.
(d) No adjustment in the number of shares or securities
purchasable pursuant to the Warrants shall be required unless such adjustment
would require an increase or decrease of at least one percent in the number of
shares or securities then purchasable upon the exercise of the Warrants,
provided, however, that any adjustment which by reason of this subsection 8.1(d)
is not required to be made shall be carried forward and taken into account in
any subsequent adjustments.
(e) The Company may, at its option, at any time during the
term of the Warrant, reduce the then current Warrant Price to any amount,
consistent with applicable law, deemed appropriate by the Board of Directors of
the Company.
(f) Whenever the number of shares or securities purchasable
upon the exercise of the Warrants is adjusted, as herein provided, the Warrant
Price for shares payable upon exercise of the Warrants shall be adjusted by
multiplying such Warrant Price immediately prior to such adjustment by a
fraction, the numerator of which shall be the number of shares purchasable upon
28
<PAGE> 29
the exercise of the Warrant immediately prior to such adjustment, and the
denominator of which shall be the number of shares so purchasable immediately
thereafter.
(g) Whenever the number of shares or securities purchasable
upon the exercise of the Warrants and/or the Warrant Price is adjusted as herein
provided, the Company shall cause to be promptly mailed to each registered
holder of a Warrant by first class mail, postage prepaid, notice of such
adjustment and a certificate of the chief financial officer of the Company
setting forth the number of shares or securities purchasable upon the exercise
of the Warrants after such adjustment, the Warrant Price as adjusted, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.
(h) For the purpose of this subsection 8.1, the term "Common
Stock" shall mean (i) the class of stock designated as the voting Common Stock
of the Company at the date of this Agreement, or (ii) any other class of stock
or securities resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par value to no
par value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to this Section 8, a registered holder
shall become entitled to purchase any securities of the Company other than
shares of Common Stock, thereafter the number of such other securities so
purchasable upon exercise of the Warrants shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the shares contained in this Section 8.
8.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection 8.1,
no adjustment in respect of any dividends or distributions shall be made during
the term of the Warrants or upon the exercise of the Warrants.
8.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments are required to be
made pursuant to Section 8 hereof in connection with the issuance of shares of
Common Stock or the Warrants (or the underlying shares of Common Stock) in the
transactions contemplated by this Agreement or the Split-Up (as defined in the
Loan Agreement).
8.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute an agreement with the
registered holders of the Warrants providing such holders with the right
thereafter, upon payment of the Warrant Price in effect immediately prior to
such action, to purchase, upon exercise of each Warrant, the kind and amount of
shares and other securities and property which it would have owned or have been
entitled to receive after the happening of such consolidation, merger, sale or
conveyance had each Warrant been exercised immediately prior to such action. Any
such agreements referred to in this subsection 8.4 shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 8 hereof. The provisions of this subsection
8.4 shall similarly apply to successive consolidations, mergers, sales, or
conveyances.
8.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action that
would cause an adjustment reducing the Warrant Price below the then par value of
the Common Stock issuable upon exercise of the Warrants, the Company will take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable Common Stock at such adjusted Warrant Price.
8.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may but shall not be
required to retain a firm of independent public accountants of recognized
regional or national standing (which
29
<PAGE> 30
may be any such firm regularly employed by the Company) to make any computation
required under this Section 8, and a certificate signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section 8 and the Company shall cause to be promptly mailed to each registered
holder of a Warrant by first class mail, postage prepaid, a copy of such
certificate.
8.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any adjustments
in the Warrant Price or the number of securities issuable upon exercise of
Warrants, Warrant certificates theretofore or thereafter issued may continue to
express the same price and number of securities as are stated in the similar
Warrant certificates initially issuable pursuant to this Agreement. However, the
Company may, at any time in its sole discretion (which shall be conclusive),
make any change in the form of Warrant certificate that it may deem appropriate
and that does not affect the substance thereof; and any Warrant certificate
thereafter issued, whether upon registration of, transfer of, or in exchange or
substitution for, an outstanding Warrant certificate, may be in the form so
changed.
8.8 NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS OF WARRANTS. If, at
any time prior to the expiration of a Warrant and prior to its exercise, any one
or more of the following events shall occur:
(a) any action that would require an adjustment pursuant to
subsection 8.1 or 8.4 hereof; or
(b) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed; then the Company must give notice in writing of such event to the
registered holders of the Warrants, as provided in Section 14 hereof, at least
20 days, to the extent practicable, prior to the date fixed as a record date or
the date of closing the transfer books for the determination of the stockholders
entitled to any relevant dividend, distribution, subscription rights or other
rights or for the determination of stockholders entitled to vote on such
proposed dissolution, liquidation or winding up. Such notice must specify such
record date or the date of closing the transfer books, as the case may be.
Failure to mail or receive such notice or any defect therein will not affect the
validity of any action taken with respect thereto.
Section 9. FRACTIONAL INTERESTS. The Company is not required to issue
fractional shares of Common Stock on the exercise of a Warrant. If any fraction
of a share of Common Stock would, except for the provisions of this Section 9,
be issuable on the exercise of a Warrant (or specified portion thereof), the
Company will in lieu thereof pay an amount in cash equal to the then Current
Market Price multiplied by such fraction. For purposes of this Agreement, the
term "Current Market Price" means (i) if the Common Stock is listed for
quotation on the Nasdaq National Market or the Nasdaq SmallCap Market or on a
national securities exchange, the average for the 10 consecutive trading days
immediately preceding the date in question of the daily per share closing prices
of the Common Stock as quoted by the Nasdaq National Market or the Nasdaq
SmallCap Market or on the principal stock exchange on which it is listed, as the
case may be, whichever is the higher, or (ii) if the Common Stock is traded in
the over-the-counter market and is not listed for quotation on the Nasdaq
National Market or the Nasdaq SmallCap Market nor on any national securities
exchange, the average of the per share closing bid prices of the Common Stock on
the 10 consecutive trading days immediately preceding the date in question, as
reported by Nasdaq or an equivalent generally accepted reporting service. The
closing price referred to in clause (i) above shall be the last reported sale
price or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices, in either case as quoted by the
Nasdaq National Market or the Nasdaq SmallCap Market or on the national
securities exchange on which the Common Stock is then listed. For purposes of
clause (ii) above, if trading in the Common Stock
30
<PAGE> 31
is not reported by Nasdaq, the bid price referred to in said clause shall be the
lowest bid price as reported on the OTC Bulletin Board or in the "pink sheets"
published by National Quotation Bureau, Incorporated.
Section 10. REDEMPTION.
(a) The then outstanding Warrants may be redeemed, at the option of the
Company, at $.10 per share of Common Stock purchasable upon exercise of such
Warrants, at any time after the average Daily Market Price per share of the
Common Stock for a period of at least 20 consecutive trading days ending not
more than fifteen (15) days prior to the date of the notice given pursuant to
Section 10(b) hereof has equaled or exceeded [INSERT REDEMPTION AMOUNT], and
prior to expiration of the Warrants. The Daily Market Price of the Common Stock
will be determined by the Company in the manner set forth in Section 10(e) as of
the end of each trading day (or, if no trading in the Common Stock occurred on
such day, as of the end of the immediately preceding trading day in which
trading occurred). All outstanding Warrants must be redeemed if any are
redeemed, and any right to exercise an outstanding Warrant shall terminate at
1:30 p.m. (Phoenix, Arizona time) on the date fixed for redemption. Trading day
means a day in which trading of securities occurred on the Nasdaq National
Market.
(b) The Company may exercise its right to redeem the Warrants only by
giving the notice set forth in the following sentence. If the Company exercises
its right to redeem, it shall give notice to the registered holders of the
outstanding Warrants by mailing to such registered holders a notice of
redemption, first class, postage prepaid, at their addresses as they shall
appear on the records of the Company. Any notice mailed in the manner provided
herein will be conclusively presumed to have been duly given whether or not the
registered holder actually receives such notice.
(c) The notice of redemption must specify the redemption price, the
date fixed for redemption (which must be at least 30 days after the date such
notice is mailed), the place where the Warrant certificates must be delivered
and the redemption price paid, and that the right to exercise the Warrant will
terminate at 1:30 P.M. (Phoenix, Arizona time) on the date fixed for redemption.
(d) Appropriate adjustment shall be made to the redemption price and to
the minimum Daily Market Price prerequisite to redemption set forth in Section
10(a) hereof, in each case on the same basis as provided in Section 8 hereof
with respect to adjustment of the Warrant Price.
(e) For purposes of this Agreement, the term "Daily Market Price" means
(i) if the Common Stock is quoted on the Nasdaq National Market or the Nasdaq
SmallCap Market or on a national securities exchange, the daily per share
closing price of the Common Stock as quoted on the Nasdaq National Market or the
Nasdaq SmallCap Market or on the principal stock exchange on which it is listed
on the trading day in question, as the case may be, whichever is the higher, or
(ii) if the Common Stock is traded in the over-the-counter market and not quoted
on the Nasdaq National Market or the Nasdaq SmallCap Market nor on any national
securities exchange, the closing bid price of the Common Stock on the trading
day in question, as reported by Nasdaq or an equivalent generally accepted
reporting service. The closing price referred to in clause (i) above shall be
the last reported sale price or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices, in either
case on the Nasdaq National Market or the Nasdaq SmallCap Market or on the
national securities exchange on which the Common Stock is then listed. For
purposes of clause (ii) above, if trading in the Common Stock is not reported by
Nasdaq, the bid price referred to in said clause shall be the lowest bid price
as quoted on the OTC Bulletin Board or reported in the "pink sheets" published
by National Quotation Bureau, Incorporated.
31
<PAGE> 32
(f) On the redemption date, each Warrant will be automatically
converted into the right to receive the redemption price and the Company will no
longer honor any purported exercise of a Warrant. On or before the redemption
date, the Company will deposit sufficient funds for the purpose of redeeming all
of the outstanding unexercised Warrants in an interest-bearing, segregated
account for payment to holders of Warrants upon surrender of Warrant
Certificates in exchange for the redemption price therefor. Funds remaining in
such account on the date three years from the redemption date will be returned
to the Company.
Section 11. RIGHTS AS WARRANTHOLDERS. Nothing contained in this
Agreement or in any of the Warrants shall be construed as conferring upon the
holders thereof, as such, any of the rights of stockholders of the Company,
including, without limitation, the right to receive dividends or other
distributions, to exercise any preemptive rights, to vote or to consent or to
receive notice as stockholders in respect of the meetings of stockholders or the
election of directors of the Company or any other matter.
Section 12. RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS.
(a) Each holder of a Warrant agrees that prior to making any
disposition or transfer of the Warrants or shares issuable upon exercise of the
Warrants ("Shares"), unless a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), is in effect with regard thereto and
the disposition may be effected in accordance therewith and with applicable
state securities laws, the holder shall give written notice to the Company
describing briefly the manner in which any such proposed disposition or transfer
is to be made; and no such disposition shall be made except pursuant to an
exemption from the registration requirements of all applicable federal and state
securities laws.
(b) Each certificate evidencing the Warrants shall bear a legend in
substantially the following form, and each certificate evidencing Shares
issuable upon exercise of the Warrants shall bear such a legend until such time
as such Shares have been sold pursuant to a registration statement contemplated
in subsection (c) or (d) below or unless, in the opinion of legal counsel to the
Company, such legend is not required in order to establish compliance with any
provisions of applicable security laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE
WITH SECTION 12 OF THE WARRANT AGREEMENT DATED AS OF FEBRUARY
12, 1998, AS THE SAME MAY BE AMENDED FROM TIME TO TIME.
(c) Subject to the next sentence below, beginning on the date that the
Warrants are exercised, if the Company proposes to file with the Commission a
registration statement with respect to equity securities of the Company (other
than as to securities issued pursuant to an employee benefit plan or as to a
transaction subject to Rule 145 promulgated under the Securities Act or for
which a Form S-4 Registration Statement could be used), it shall, at least 30
days prior to such filing, give written notice of such proposed filing to the
holders of Warrants and Shares which bear a legend as contemplated in Section
12(b) above and which shall not have previously been included in a registration
statement filed under this Section 12(c) or Section 12(d), at their respective
addresses as they appear on the records of the Company or the Company, and shall
32
<PAGE> 33
offer to include and shall include, subject to the provisions of this Section
12(c), in such filing any proposed disposition of such Shares upon receipt by
the Company, not less than 10 days prior to the proposed filing date, of a
request therefor setting forth the facts with respect to such proposed
disposition and all other information with respect to the holders of such Shares
requested to be included in such filing as shall be reasonably necessary to be
included in such Registration Statement. Notwithstanding the above, after such
time as the holders shall have been given two opportunities to include their
Shares in a Registration Statement of the Company pursuant to the immediately
preceding sentence, and all securities of holders who shall have requested such
inclusion in accordance herewith and who have not withdrawn such request prior
to the filing of such Registration Statement have been included in such a
Registration Statement which shall have become effective and such securities
shall have been effectively registered under the Securities Act, the Company
will have no further obligation to such holders under this Section 12(c) and the
Shares of such holders that have not been included previously in a Registration
Statement under this Section 12(c) will have no further registration rights
under Section 12(c) of this Agreement. In the event that (i) the managing
underwriter for any such offering advises the Company in writing that the
inclusion of such Shares in the offering would be detrimental to the offering or
(ii) in the event that there is no managing underwriter, if, in the good faith
judgment of the Board of Directors of the Company, inclusion of the Shares in
the registration would be seriously detrimental to the Company, then, such
Shares shall not be included in the Registration Statement, provided that no
other shares of the Company's Common Stock are included in the registration
pursuant to any other piggyback registration rights granted to others. In the
event that Shares requested to be included in an offering are not included in
accordance with the immediately preceding sentence, any notice given to holders
of Warrants and Shares hereunder with respect to such offering shall not be
counted against the limitation provided for in the second sentence of this
Section 12(c).
(d) In addition to any Registration Statement pursuant to Section 12(c)
hereof, after written notice upon exercise (the "Request") by the holders of at
least 50% of the shares of Common Stock which have been (or may be) issued upon
exercise of the Warrants, the Company will, as promptly as practicable (but in
any event within 60 days), prepare and file at its own expense a Registration
Statement with the Commission and appropriate Blue Sky authorities sufficient to
permit the public offering of the shares of Common Stock underlying the
Warrants, and will use reasonable efforts at its own expense through its
officers, directors, auditors and counsel, in all ways necessary or advisable,
to cause such Registration Statement to become effective as quickly as
practicable and to maintain such effectiveness so as to permit resale of the
shares of Common Stock covered by the Request until the earlier of the time that
all such shares of Common Stock has been sold or the expiration of 120 days from
the effective date of the Registration Statement; provided, however, that the
Company shall only be obligated to file one such Registration Statement under
this Section 12(d). The Company shall not be required to effect a registration
pursuant to this Section 12(d) if the Company shall furnish to holders
requesting a registration statement pursuant to this Section 12(d), a
certificate signed by the Chairman of the Board stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its shareholders for such registration statement
to be effected at such time, in which event the Company shall have the right to
defer such filing for a period of not more than ninety (90) days after receipt
of the request of the initiating holders; provided that such right to delay a
request shall be exercised by the Company not more than once in any twelve (12)
month period.
(e) All fees, disbursements, and out-of-pocket expenses incurred in
connection with the filing of any Registration Statement under Section 12(c)
hereof and in complying with applicable securities and Blue Sky laws shall be
borne by the Company, provided, however, that any expenses of the holders of the
Warrants or the Shares, including but not limited to attorneys' fees and
discounts and commissions, shall be borne by such holders. The Company at its
expense will supply the holders of the Shares included in a Registration
Statement with copies of such
33
<PAGE> 34
Registration Statement and the prospectus or offering circular included therein
in such quantities as may be reasonably requested by such holders.
(f) Each holder of Shares to be included in a Registration Statement
pursuant to this Section 12 agrees to reasonably cooperate with the Company and
to provide the Company on its request with all information concerning such
holder and his Warrants and Shares that may reasonably be requested by the
Company in order for the Company to perform its obligations under this Section
12.
(g) The registration rights provided pursuant to Section 12(c) and
Section 12(d) above are subject to certain registration rights granted to
SunAmerica Life Insurance Company and its assignees pursuant to that certain
Amended and Restated Registration Rights Agreement entered into as of June 21,
1996 between the Company and SunAmerica Life Insurance Company. Specifically,
the Amended and Restated Registration Rights Agreement entered into as of June
21, 1996 provides that the holders of registrable securities under that
agreement shall have the right to have included in any piggyback registration by
the Company any registrable securities requested by them to be so included in
such piggyback registration prior to the inclusion of any securities requested
to be registered by any third parties entitled to any other registration rights,
including the registration rights granted hereunder.
Section 13. INDEMNIFICATION.
(a) In the event of the filing of any Registration Statement with
respect to the Shares pursuant to Section 12 above, the Company agrees to
indemnify and hold harmless the holders of such Shares (for purposes of this
Section 13, references to any holder of Shares shall refer only to such holders
who have agreed to be bound by this Section 13), and each person who controls
such holders within the meaning of the Securities Act and such holders'
officers, directors, managers, members, partners, and principle equity holders
(collectively, "Indemnitees") against all losses, claims, damages, expenses and
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees and expenses), to which such Indemnitees may become subject,
under the Securities Act or otherwise, insofar as such losses, claims, damages,
expenses or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in any such Registration Statement, or any related preliminary
prospectus, final prospectus, offering circular, notification or amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in
which they were made, not misleading; provided, however, that the Company will
not be liable in any such case to the extent that any such loss, claim, damage,
expenses, or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement, preliminary prospectus, final prospectus, offering
circular, notification or amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the Company by any such
holder specifically for use in the preparation thereof and, provided further,
that the indemnity agreement provided in this Section 13(a) with respect to any
preliminary prospectus shall not inure to the benefit of any holder of Warrants
or Shares from whom the person asserting any losses, claims, damages,
liabilities or actions based upon any untrue statement or alleged untrue
statement of material fact or omission or alleged omission to state therein a
material fact purchased Warrants or Shares, if a copy of the prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Securities Act and the rules and regulations thereunder, unless
such failure is the result of non-compliance by the
34
<PAGE> 35
Company with the last sentence of Section 12(f) hereof. This indemnity will be
in addition to any liability which the Company may otherwise have.
(b) Each holder of a Warrant and each holder of a Share agrees that he
will indemnify and hold harmless the Company, each other person referred to in
subparts (1), (2) and (3) of Section 11(a) of the Securities Act in respect of
the Registration Statement, each officer of the Company, and each person who
controls the Company within the meaning of the Securities Act, against any
losses, claims, damages or liabilities (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such
director, officer or controlling person may become subject under the Securities
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any such
Registration Statement, or any related preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
such holder specifically for use in the preparation thereof. This indemnity will
be in addition to any liability which the holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
13 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section 13, notify the indemnifying party of the commencement thereof. No
indemnification provided for in this Section 13 shall be available to any party
who shall fail to give the notice to the extent the party to whom such notice
was not given was materially prejudiced by the failure to give the notice, but
the omission so to notify the indemnifying party will not relieve the
indemnifying party or parties from any liability which it may have to any
indemnified party for contribution otherwise than as to the particular item as
to which indemnification is then being sought solely pursuant to this Section
13. In case any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, reasonably assume
the defense thereof, subject to the provisions herein stated and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 13 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation unless the indemnifying
party shall not pursue the action to its final conclusion. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party. No settlement of any
action against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnified party.
Section 14. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the holder of any Warrant certificate to or on the Company
shall be sufficiently given or made if sent by registered or certified mail,
addressed as follows (and shall be deemed given upon receipt):
35
<PAGE> 36
________________________________
________________________________
________________________________
Phoenix, Arizona _______________
Attn: _______________________
With a copy to:
Snell & Wilmer L.L.P.
One Arizona Center
Phoenix, Arizona 85004-0001
Attn: Timothy W. Moser, Esq.
Notices or demands authorized by this Agreement to be given or made by the
Company to the holder of any Warrant certificate shall be sufficiently given or
made if sent by first class mail, postage prepaid, addressed to such holder at
the address of such holder as shown in the Warrant Register.
Section 15. SUPPLEMENTS AND AMENDMENTS. This Agreement may be amended
by the Company and the holder or holders of a majority of the outstanding
Warrants representing a majority of the shares of Common Stock underlying such
Warrants; provided, however, that without the consent of each holder of a
Warrant, there can be no increase of the Warrant Price or reduction of the
exercise period for such holder's Warrants.
Section 16. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the registered holders of the
Warrants will bind and inure to the benefit of their respective successors and
assigns hereunder.
Section 17. GOVERNING LAW. This Agreement will be deemed to be a
contract made under the laws of the State of California and for all purposes
will be construed in accordance with the laws of said State.
Section 18. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement will
be construed to give to any person or corporation other than the Company and the
registered holders of the Warrants any legal or equitable right, remedy or claim
under this Agreement. This Agreement is for the sole and exclusive benefit of
the Company and the registered holders of the Warrants.
Section 19. COUNTERPARTS. This Agreement may be executed in
counterparts and each of such counterparts will for all purposes be deemed to be
an original, and all such counterparts will together constitute but one and the
same instrument.
Section 20. DESCRIPTIVE HEADINGS. The descriptive headings of the
several Sections of this Agreement are inserted for convenience only and do not
control or affect the meaning or construction of any of the provisions hereof.
(BALANCE OF PAGE INTENTIONALLY LEFT BLANK)
36
<PAGE> 37
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, as of the day and year first above written.
By:__________________________________
Name:_______________________________
Title:________________________________
29,900 Warrants ARBCO ASSOCIATES, L.P.
By: KAIM Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:_________________________________
Title:________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _________________________
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
27,600 Warrants KAYNE ANDERSON NON-TRADITIONAL
INVESTMENTS, L.P.
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:__________________________________
Name:_______________________________
Title:________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ___________________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
27,600 Warrants OFFENSE GROUP ASSOCIATES, L.P.
37
<PAGE> 38
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:_________________________________
Name:______________________________
Title:________________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: __________________________
Telephone: (310) 284-6483
Telecopy : (310) 284-6444
13,800 Warrants OPPORTUNITY ASSOCIATES, LIMITED PARTNER-
SHIP
By: Kayne Anderson Non-Traditional, L.P.
Its: General Partner
By: Kayne Anderson Investment Management, Inc.
Its: General Partner
By:_____________________________
Name:__________________________
Title:____________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: ______________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
38
<PAGE> 39
16,100 Warrants NORTH POINTE FINANCIAL SERVICES, INC.
By: ________________________________
Name:______________________________
Title: _______________________________
Address for notices:
1800 Avenue of the Stars, Suite 200
Los Angeles, CA 90067
Attn: _________________________
Telephone: (310) 284-6438
Telecopy: (310) 284-6444
39
<PAGE> 40
Warrant No. ____
WARRANT TO PURCHASE ________ SHARES OF COMMON STOCK
VOID AFTER 1:30 P.M.,
PHOENIX, ARIZONA TIME, ON [INSERT 3RD ANNIVERSARY OF WARRANT DATE]
OR SUCH LATER DATE SET FORTH HEREIN
____________________ CORPORATION
This certifies that, for value received ________________________, the
registered holder hereof or assigns (the "Holder"), is entitled to purchase from
_________________CORPORATION, a Delaware corporation (the "Company"), at any
time after [INSERT WARRANT DATE], and before the later of (i) 1:30 p.m.,
Phoenix, Arizona time, on [INSERT 3RD ANNIVERSARY OF WARRANT DATE] or (ii) such
time as the Company has repaid in full its Notes issued pursuant to that certain
Loan Agreement dated as of July 20, 1998 between the Company and each of the
Lenders named therein, at the purchase price per share of [INSERT WARRANT PRICE]
(the "Warrant Price"), the number of shares of Common Stock, par value $0.001
per share, of the Company set forth above (the "Shares"). The number of shares
of Common Stock purchasable upon exercise of the Warrant evidenced hereby and
the Warrant Price is subject to adjustment from time to time as set forth in the
Warrant Agreement referred to below.
This Warrant may be redeemed, at the option of the Company and as more
specifically provided in the Warrant Agreement, at $.10 per share of Common
Stock purchasable upon exercise hereof, at any time after the average Daily
Market Price (as defined in Section 10 of the Warrant Agreement) per share of
the Common Stock for a period of at least twenty (20) consecutive trading days
ending not more than fifteen days prior to the date of the notice given pursuant
to Section 10(b) thereof has equaled or exceeded [INSERT REDEMPTION PRICE], and
prior to expiration of this Warrant. The Holder's right to exercise this Warrant
terminates at 1:30 p.m. (Phoenix, Arizona time) on the date fixed for redemption
in the notice of redemption delivered by the Company in accordance with the
Warrant Agreement.
The Warrants evidenced hereby may be exercised during the period
referred to above, in whole or in part, by presentation of this Warrant
certificate with the Purchase Form attached hereto duly executed and guaranteed
and simultaneous payment of the Warrant Price (as defined in the Warrant
Agreement and subject to adjustment as provided therein) at the principal office
of the Company. Payment of such price may be made at the option of the Holder in
cash or by certified check or bank draft, all as provided in the Warrant
Agreement.
The Warrants evidenced hereby are part of a duly authorized issue of
Warrants and are issued under and in accordance with the Warrant Agreement dated
as of [INSERT WARRANT DATE] between the Company and the Lenders party thereto,
and are subject to the terms and provisions contained in such Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference herein and made a
part hereof and is hereby referred to for a description of the rights,
limitations, duties and indemnities thereunder of the Company and the Holder of
the Warrants, and to all of which the Holder of this Warrant certificate by
acceptance hereof consents. A copy of the Warrant Agreement may be obtained for
inspection by the Holder hereof upon written request to the Company.
40
<PAGE> 41
Upon any partial exercise of the Warrants evidenced hereby, there will
be issued to the Holder a new Warrant certificate in respect of the Shares
evidenced hereby that have not been exercised. This Warrant certificate may be
exchanged at the office of the Company by surrender of this Warrant certificate
properly endorsed either separately or in combination with one or more other
Warrants for one or more new Warrants to purchase the same aggregate number of
Shares as evidenced by the Warrant or Warrants exchanged. No fractional Shares
will be issued upon the exercise of rights to purchase hereunder, but the
Company will pay the cash value of any fraction upon the exercise of one or more
Warrants, as provided in the Warrant Agreement.
The Warrant Price and the number of shares of Common Stock issuable
upon exercise of this Warrant is subject to adjustment as provided in Section 8
of the Warrant Agreement. The Warrant Agreement may be amended by the Company
and the holder or holders of a majority of the outstanding Warrants representing
a majority of the shares of Common Stock underlying such Warrants; provided that
without the consent of each holder of a Warrant certain specified changes cannot
be made to such holder's Warrants.
Neither the Warrants nor the shares of Common Stock underlying the
Warrants may be sold, assigned, or otherwise transferred except in accordance
with the provisions of the Warrant Agreement.
The Holder hereof may be treated by the Company and all other persons
dealing with this Warrant certificate as the absolute owner hereof for all
purposes and as the person entitled to exercise the rights represented hereby,
any notice to the contrary notwithstanding, and until any transfer is entered on
such books, the Company may treat the Holder hereof as the owner for all
purposes. Notices and demands to be given to the Company must be given by
certified or registered mail at the addresses provided in the Warrant Agreement.
All terms used in the Warrant Certificate that are defined in the
Warrant Agreement shall have the respective meanings ascribed to such terms in
the Warrant Agreement.
Dated:_______________________________
By:_______________________________
41
<PAGE> 42
___________________ CORPORATION
PURCHASE FORM
Mailing Address:
____________________________
____________________________
____________________________
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant certificate for, and to purchase
thereunder, _____________Shares of Common Stock provided for therein, and
requests that certificates for such Shares be issued in the name of:
________________________________________________________________________________
________________________________________________________________________________
(Please Print or Type Name, Address and Social Security Number)
and that such certificates be delivered to ____________________________________
whose address is _______________________________________________________________
and, if said number of Shares shall not be all the Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or his or her Assignee as below indicated and delivered to the address
stated below.
Dated:__________________________________
Name of Holder or Assignee:
________________________________________________________________________________
(Please Print)
Address:________________________________________________________________________
________________________________________________________________________________
Signature:
NOTE: The above signature must correspond with the name as it appears upon the
face of the within Warrant certificate in every particular, without alteration
or enlargement or any change whatever, unless these Warrants have been assigned.
Signature Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
42
<PAGE> 43
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
________________________________________________________________________________
(Name and Address of Assignee Must Be Printed or Typewritten)
________________________________________________________________________________
______________ Warrants, hereby irrevocably constituting and appointing _______
Attorney to transfer said Warrants on the books of the Company, with full power
of substitution in the premises.
Dated:_______________________
___________________________________
Signature of Registered Holder
Note: The signature on this assignment
must correspond with the name as it
appears upon the face of the within
Warrant certificate in every
particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(Banks, Stock Brokers, Savings and Loan Association, and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM PURSUANT TO
S.E.C. RULE 17Ad-15.
43
<PAGE> 44
SCHEDULE 2.05(a)
WIRE INSTRUCTIONS FOR EACH LENDER
LENDER WIRING INSTRUCTIONS
ARBCO Associates, LP Citibank, NA/Bear Stearns
20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: ARBCO Associates, LP
A/C No.: 103-01744
Kayne Anderson Non-Traditional Citibank, NA/Bear Stearns
Investments, LP 20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: Kayne Anderson Non-Traditional
Investments, LP
A/C No.: 103-02960
North Pointe Financial Services, Inc. Michigan National Bank
ABA No.: 0720-0080-5
FBO: North Pointe Financial
Services, Inc.
A/C No.: 1572033909
Offense Group Associates Citibank, NA/Bear Stearns
20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: Offense Group Associates
A/C No.: 103-02954
Opportunity Associates, LP Citibank, NA/Bear Stearns
20 Exchange Place
New York, NY 10005
ABA No.: 021000089
A/C No.: 0925-3186
FBO: Opportunity Associates, LP
A/C No.: 103-02970
44
<PAGE> 45
SCHEDULE 4.04
OUTSTANDING OBLIGATIONS
None.
45
<PAGE> 1
Exhibit 10.20
PAYMENT GUARANTY
This PAYMENT GUARANTY ("Guaranty") is made as of July 20, 1998, by UGLY
DUCKLING CORPORATION, a Delaware corporation ("Guarantor") for the benefit of
ARBCO ASSOCIATES, L.P.; KAYNE ANDERSON NON-TRADITIONAL INVESTMENTS, L.P.;
OFFENSE GROUP ASSOCIATES, L.P.; OPPORTUNITY ASSOCIATES, LIMITED PARTNERSHIP; and
NORTH POINTE FINANCIAL SERVICES, INC. (individually, a "Lender," and
collectively, the "Lenders").
FACTUAL BACKGROUND
A. Guarantor is executing this Guaranty to induce each Lender to enter
into that certain Loan Agreement dated as of July 20, 1998, by and between
Cygnet Financial Corporation, a Delaware corporation ("Obligor"), and the
Lenders (the "Loan Agreement"). All capitalized terms used herein and not
otherwise defined shall have the meanings set forth in the Loan Agreement.
B. Under the terms and conditions of the Loan Agreement, Obligor has
agreed to repay to the Lenders the Loans as evidenced by the Notes.
GUARANTY
1. Guaranty of Notes. Guarantor unconditionally guarantees to each
Lender the full payment of their respective Note. This is a guaranty of payment,
not of collection. If Obligor defaults in the payment when due of the Notes or
any part of any Notes, Guarantor shall in lawful money of the United States pay
to each Lender or to its order, on demand, all sums due and owing on the
applicable Note, including all interest, charges, fees and other sums, costs and
expenses.
2. Rights of Each Lender. Guarantor authorizes each Lender to perform
any or all of the following acts at any time in its sole discretion, all without
notice to the Guarantor and without affecting Guarantor's obligations under this
Guaranty:
(a) Each Lender may alter any terms of any of its respective
Note or any part of it, including renewing, compromising, extending or
accelerating, or otherwise changing the time for payment of, or
increasing or decreasing the rate of interest on, its respective Note
or any part of it.
(b) Each Lender may take and hold security of the Notes or
this Guaranty, accept additional or substituted security for either,
and subordinate, exchange, enforce, waive, release, compromise, fail to
perfect and sell or otherwise dispose of any such security.
(c) Each Lender may direct the order and manner of any sale of
all or any part of any security later held for the Notes or this
Guaranty, and each Lender may also bid at any such sale.
(d) Each Lender may apply any payments or recoveries from
Obligor, Guarantor or any other source, and any proceeds of any
security, to Obligor's obligations under the Notes in such manner,
order and priority as each Lender may elect, whether or not those
obligations are guaranteed by this Guaranty or secured at the time of
the application.
<PAGE> 2
(e) Each Lender may release Obligor of its liability for any
of the Notes or any part of it.
(f) Each Lender may substitute, add or release any one or more
guarantors or endorsers.
3. Guaranty to be Absolute. Except as provided in Section 11 below,
Guarantor expressly agrees that until the Notes are paid in full and each and
every term, covenant and condition of this Guaranty is fully performed,
Guarantor shall not be released by or because of:
(a) Any act or event which might otherwise discharge, reduce,
limit or modify Guarantor's obligations under this Guaranty;
(b) Any waiver, extension, modification, forbearance, delay or
other act or omission of any Lender, or its failure to proceed promptly
or otherwise as against Obligor, Guarantor or any security;
(c) Any action, omission or circumstance which might increase
the likelihood that Guarantor may be called upon to perform under this
Guaranty or which might affect the rights or remedies of Guarantor as
against Obligor; or
(d) Any dealings occurring at any time between Obligor and
each Lender, whether relating to the Notes or otherwise.
Guarantor hereby expressly waives and surrenders any and all defenses to its
liability under this Guaranty based upon any of the foregoing acts, omissions,
agreements, waivers or matters. It is the purpose and intent of this Guaranty
that the obligations of Guarantor hereunder shall be absolute and unconditional
under any and all circumstances.
4. Guarantor Waivers. Guarantor waives:
(a) All statutes of limitations as a defense to any action or
proceeding brought against Guarantor by Lenders, to the fullest extent
permitted by law;
(b) Any right it may have to require Lenders to proceed
against Obligor, proceed against or exhaust any security held from
Obligor, or pursue any other remedy in each Lender's power to pursue;
(c) Any defense based on any claim that Guarantor's
obligations exceed or are more burdensome than those of Obligor;
(d) Any defense based on: (i) any legal disability of Obligor,
(ii) any release, discharge, modification, impairment or limitation of
the liability of Obligor to each Lender from any cause, whether
consented to by each Lender or arising by operation of law or from any
Bankruptcy or other voluntary or involuntary proceeding, in or out of
court, for the adjustment of debtor-creditor relationships ("Insolvency
Proceeding"), and (iii) any rejection or disaffirmance of any Note, or
any part of it, or any security held for it, in any such Insolvency
Proceeding;
2
<PAGE> 3
(e) Any defense based on any action taken or omitted by
Lenders in any insolvency Proceeding involving Obligor, including any
election to have Lenders' claim allowed as being secured, partially
secured or unsecured, any extension of credit by Lenders to Obligor in
any Insolvency Proceeding, and the taking and holding by Lenders of any
security for any such extension of credit; and
(f) All presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor,
notices of acceptance of this Guaranty and of the existence, creation,
or incurring of new or additional indebtedness, and demands and notices
of every kind except for any demand or notice by each Lender to
Guarantor expressly provided for in Section 1.
5. Waiver of Subrogation and Other Rights.
(a) Upon a default by Obligor on any Note, Lender in its sole
discretion, without prior notice to or consent of Guarantor, may elect
to: (i) compromise or adjust any Notes or any part of it or make any
other accommodation with Obligor or Guarantor, or (ii) exercise any
other remedy against Obligor or any security. No such action by Lender
shall release or limit the liability of Guarantor, whom shall remain
liable under this Guaranty after the action, even if the effect of the
action is to deprive Guarantor of any subrogation rights, rights of
indemnity, or other rights to collect reimbursement from Obligor for
any sums paid to Lender, whether contractual or arising by operation of
law or otherwise.
(b) Regardless of whether Guarantor may have made any payments
to each Lender, Guarantor forever waives: (i) all rights of
subrogation, all rights of indemnity, and any other rights to collect
reimbursement from Obligor for any sums paid to each Lender, whether
contractual or arising by operation of law (including the United States
Bankruptcy Code or any successor or similar statute) or otherwise, (ii)
all rights to enforce any remedy that each Lender may have against
Obligor, and (iii) all rights to participate in any security now or
later to be held by Lender for its respective Note.
6. Revival and Reinstatement. If any Lender is required to pay, return
or restore to Obligor or any other person any amounts previously paid on its
respective Note because of any Insolvency Proceeding of Obligor, any stop notice
or any other reason, the obligations of Guarantor shall be reinstated and
revived and the rights of each Lender shall continue with regard to such
amounts, all as though they had never been paid.
7. Events of Default. Each Lender may declare Guarantor to be in
default under this Guaranty upon the occurrence of any of the following events
("Events of Default"):
(a) Guarantor fails to perform any of its obligations under
this Guaranty; or
(b) Guarantor revokes its Guaranty or its Guaranty becomes
ineffective for any reason; or
(c) Guarantor becomes insolvent or the subject of any
Insolvency Proceeding; or
(d) Guarantor dissolves or liquidates; or
(e) Any representation or warranty as to Guarantor (UDC) in
the Loan Agreement is false in any material respect; or
3
<PAGE> 4
(f) Guarantor fails to execute and deliver the UDC Warrant
Agreement or to issue the UDC Warrants pursuant to Section 2.08 of the
Loan Agreement.
8. Authorization; No Violation. Guarantor is authorized to execute,
deliver and perform under this Guaranty, which is a valid and binding obligation
of such Guarantor. No provision or obligation of Guarantor contained in this
Guaranty violates any applicable law, regulation or ordinance, or any order or
ruling of any court or governmental agency. No such provision or obligation
conflicts with, or constitutes a breach or default under, any agreement to which
Guarantor is a party.
9. Additional and Independent Obligations. Guarantor agrees to perform
as required of it pursuant to Section 2.08 of the Loan Agreement for the
execution and delivery of the UDC Warrant Agreement and the issuance of the UDC
Warrants, which terms of such Section 2.08 are incorporated herein by this
reference. Guarantor's obligations under this Guaranty are independent of those
of Obligor on the Notes. Lender may bring a separate action, or commence a
separate reference or arbitration proceeding against Guarantor without first
proceeding against Obligor, any other person or any security that Lender may
hold, and without pursuing any other remedy. Lender's rights under this Guaranty
shall not be exhausted by any action by Lender until the Notes has been paid in
full.
10. No Waiver; Consents; Cumulative Remedies. Each waiver by Lender
must be in writing, and no waiver shall be construed as a continuing waiver. No
waiver shall be implied from Lender's delay in exercising or failure to exercise
any right or remedy against Obligor, Guarantor or any security. Consent by
Lender to any act or omission by Obligor or Guarantor shall not be construed as
a consent to any other or subsequent act or omission, or as a waiver of the
requirement for Lender's consent to be obtained in any future or other instance.
All remedies of Lender against Obligor and Guarantor are cumulative.
11. Release. Guarantor shall automatically (and without any further
action) be unconditionally and forever released from this Guaranty and its
obligations hereunder upon the occurrence of the later of (i) the Split-Up, and
(ii) the issuance of the Company Warrants pursuant to Section 2.08 of the Loan
Agreement.
12. Successors and Assigns; Participations. The terms of this Guaranty
shall bind and benefit the successors and assigns of Lender and Guarantor;
provided, however, that Guarantor may not assign this Guaranty, or assign or
delegate any of its rights or obligations under this Guaranty, without the prior
written consent of Lender in each instance. Lender in its sole discretion may
sell or assign participations or other interests in the Notes and this Guaranty,
in whole or in part, all without notice to or the consent of Guarantor and
without affecting Guarantor's obligations under this Guaranty, provided that the
assignment or transfer of the Notes shall be in compliance with and subject to
the terms and conditions of the Loan Purchase Agreement. Also without notice to
or the consent of Guarantor, Lender may disclose any and all information in its
possession concerning Guarantor, this Guaranty and any security for this
Guaranty to any actual or prospective purchaser of any securities issued or to
be issued by Lender, and to any actual or prospective purchaser or assignee of
any participation or other interest in the Notes and this Guaranty.
13. Notices. Any notice or other communication given hereunder shall be
in writing and shall be sent by certified mail, postage prepaid, overnight
courier or personally delivered or telecopied to Guarantor at the address set
forth on the signature pages hereto.
14. Rules of Construction. In this Guaranty, the word "Obligor"
includes both the named Obligor and any other person who at any time assumes or
otherwise becomes primarily liable for
4
<PAGE> 5
all or any part of the obligations of the named Obligor on the Notes. The word
"person'' includes any individual, company, trust or other legal entity of any
kind. The word "include(s)" means "include(s), without limitation," and the word
"including" means "including, but not limited to." When the context and
construction so require, all words used in the singular shall be deemed to have
been used in the plural and vice versa. Each reference to a Note shall be the
Note held by the applicable Lender. No listing of specific instances, items or
matters in any way limits the scope or generality of any language of this
Guaranty. All headings appearing in this Guaranty are for convenience only and
shall be disregarded in construing this Guaranty.
15. Governing Law. This Guaranty shall be governed by, and construed in
accordance with, the laws of the State of California.
16. Costs and Expenses. If any lawsuit, reference or arbitration is
commenced which arises out of, or which relates to this Guaranty or any of the
other Loan Documents, the prevailing party shall be entitled to recover from
each other party such sums as the court, referee or arbitrator may adjudge to be
reasonable attorneys' fees (including allocated costs for services of in-house
counsel) in the action or proceeding, in addition to costs and expenses
otherwise allowed by law. In all other situations, including any Insolvency
Proceeding, Guarantor agrees to pay all of Lender's costs and expenses,
including attorneys' fees (including allocated costs for services of Lender's
in-house counsel) which may be incurred in any effort to collect or enforce the
Notes or any part of it or any term of this Guaranty. From the time(s) incurred
until paid in full to each Lender, all sums shall bear interest at the rate set
forth in Section 2.02(c) of the Loan Agreement.
17. Consideration. Guarantor acknowledges that it expects to benefit
from the Loans to Obligor, and that it is executing this Guaranty in
consideration of that anticipated benefit.
18. Integration; Modifications. This Guaranty (a) integrates all the
terms and conditions mentioned in or incidental to this Guaranty; (b) supersedes
all oral negotiations and prior writings with respect to its subject matter; and
(c) is intended by Guarantor and Lender as the final expression of the agreement
with respect to the terms and condition set forth in this Guaranty and as the
complete and exclusive statement of the terms agreed to by Guarantor and
Lenders. No representation, understanding, promise or condition shall be
enforceable against any party unless it is contained in this Guaranty. This
Guaranty may not be modified except in a writing signed by Lenders and
Guarantor.
19. Miscellaneous. The illegality or unenforceability of one or more
provisions of this Guaranty shall not affect any other provision. Time is of the
essence in the performance of this Guaranty by Guarantor.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE> 6
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date
first above written.
UGLY DUCKLING CORPORATION, a
Delaware corporation
By:___________________________________
Name:_________________________________
Title:__________________________________
Address for Notices:
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attn: Steven P. Johnson, Esq.
6
<PAGE> 1
Exhibit 10.21
SERVICING AGREEMENT
This SERVICING AGREEMENT ("Servicing Agreement") is made as of February
9, 1998 by and between RELIANCE ACCEPTANCE CORPORATION, a Delaware corporation
("RAC"), on behalf of itself and all of its subsidiaries with the exception of
Reliance Auto Receivables Corporation (collectively, the "Subsidiaries" and
together with RAC, the "Client"), UGLY DUCKLING CORPORATION, a Delaware
corporation ("UDC"), acting by or through one or more of its subsidiaries or
Affiliates as designated in writing by UDC prior to the Effective Date of this
Servicing Agreement (the "Servicer"), and BANKAMERICA BUSINESS CREDIT, INC., a
Delaware corporation ("Agent"), as agent on behalf of itself and the other
lenders (including Agent, the "Lenders") who are parties to that certain Amended
and Restated Loan and Security Agreement dated October 7, 1997 among the Agent,
the Lenders, RAC, and certain subsidiaries of RAC (as amended from time to time,
the "Loan and Security Agreement").
RECITALS
A. Client and Agent have entered into the Loan and Security
Agreement, pursuant to which the Lenders made certain loans and other financial
accommodations to the Client. To secure the obligations of the Client
thereunder, the Client granted to the Agent and Lenders a security interest in,
among other things, substantially all of its "Receivables" (as defined herein).
B. On February 9, 1998, RAC and the Subsidiaries, as debtors in
possession in the Bankruptcy Case as defined below, filed Chapter 11 petitions
under the provisions of Title 11, United States Code, as amended (the
"Bankruptcy Code"), in the United States District Court for the State of
Delaware (the "Court") and such petitions are currently pending as a
jointly-administered case (the "Bankruptcy Case"). As part of the Bankruptcy
Case, the Lenders have provided debtor-in-possession financing to Client
pursuant to which they have obtained liens and security interests on, among
other things, all of Client's "Receivables" (as defined herein).
C. RAC desires to enter into an agreement with the Servicer
pursuant to which the Servicer shall manage, administer, service, make
collection calls and liquidate vehicles with respect to certain motor vehicle
retail installment sale contracts of Client secured by new or used automobiles,
sport utility vehicles and/or light-duty trucks and the accessions thereto,
("Sale Contracts", which Sale Contracts are either identified on Schedule 1
hereto as of the Effective Date or added to Schedule 1 after the Effective Date
pursuant to the provisions of Section 2.01 (such Sale Contracts, together with
the "Documents" (as defined herein) and the "Insurance Policies" (as defined
herein), are referred to herein as the "Receivables").
D. Pursuant to the Consulting Agreement, as defined herein, the
Servicer is to provide consulting services to Client regarding Client's
servicing of the Receivables prior to the time Servicer begins servicing the
Receivables pursuant to this Servicing Agreement.
E. The Servicer has agreed to commence servicing the Receivables
pursuant to this Servicing Agreement upon the "Effective Date" (as defined
herein).
NOW THEREFORE, in consideration of the covenants and conditions
contained in this Servicing Agreement, the parties, intending to be legally
bound, hereby agree as follows:
1
<PAGE> 2
ARTICLE 1
DEFINED TERMS
Section 1.01. Defined Terms. Capitalized and defined terms contained in
this Servicing Agreement without definitions have the following meanings, and
the definitions of such terms are equally applicable to both the singular and
plural forms of such terms and to the masculine, feminine and neuter genders of
such terms.
"Advisors" shall mean the accountants, auditors and attorneys of a
Person.
"Affiliate" of any Person means any Person who directly or indirectly
controls, is controlled by, or is under direct or indirect common control with
such Person. For purposes of this definition of "Affiliate," the term "control"
(including the terms "controlling," "controlled by" and "under common control
with") means the possession, directly or indirectly, of the power to direct or
cause a direction of the management and policies of a Person, whether through
the ownership of voting securities, by contract or otherwise.
"Backup Servicer" shall mean any backup servicer appointed pursuant to
Section 2.01(c).
"Bank Portfolio" shall mean a portfolio of Client's Receivables
constituting (with a book value of $28.4 million as of January 31, 1998) finance
contracts originated and serviced from the Client's Northbrook, Illinois Branch
commonly referred to as the Auto Sub, Inc., a subsidiary of Cole Taylor Bank,
which was merged into Reliance Acceptance Corporation in the spinoff transaction
which became effective on February 12, 1998.
"Business Day" shall mean any day other than (i) a Saturday or Sunday,
or (ii) another day on which banking institutions in the State of Arizona are
authorized or obligated by law to be closed.
"Certificate of Title" shall mean with respect to any Financed Vehicle,
the certificate of title (or other evidence of ownership) issued by the
department of motor vehicles, or other appropriate governmental body, of the
state in which the Financed Vehicle is registered or is to be registered,
showing the Obligor as owner with either notation of the first lien of any party
who is a Client, or such other status indicated thereon which is necessary to
perfect the security interest of Client or, if applicable, Agent, in the
Financed Vehicle as a first priority interest, and showing no other actual or
possible ownership or lien interests.
"Client" means, collectively, RAC and the Subsidiaries, and upon being
reorganized pursuant to the Bankruptcy Case, shall mean all such entities as
reorganized.
"Collateral" means a Financed Vehicle and any other property in which a
lien has been created in favor of any party which is a Client or the Agent.
"Collection Account" shall mean such bank account designated to Servicer
in writing as the Collection Account by the Interested Party.
"Collection Period" means a calendar month.
"Collection Policy" means the Ugly Duckling Holdings, Inc. (n/k/a Ugly
Duckling Corporation) Collections Department Policy and Procedures Manual
revised as of October 27, 1995 and attached hereto as Exhibit A, as such may be
subsequently modified by the Servicer with the consent of the Interested Party.
2
<PAGE> 3
"Collections" shall have the meaning set forth in Section 3.01(a).
"Controlled Servicer" shall mean any Servicer for which UDC has the
ability, by ownership of securities or otherwise, to direct the policies or
operations.
"Credit Application" shall mean the credit application completed by the
Obligor in order to request financing for the Obligor's purchase of the Financed
Vehicle.
"Deboarding Charge" shall mean the lesser of (1) $200,000, and (2) all
(i) capital expenditures of Servicer related to this Servicing Agreement, plus
(ii) lease and contract termination fees and costs related to the termination of
the Servicer pursuant to Section 6.03(a) of this Servicing Agreement.
"Defaulted Receivable" means any Receivable with respect to which (i)
except for Receivables for which the Servicer has repossessed, in compliance
with the Collection Policy, the related Financed Vehicle as provided in (ii)
below, at least 10% of a Scheduled Payment is 120 days or more delinquent on a
contractual basis (not paid by the due date); (ii) notwithstanding (i) above,
the Servicer has, in compliance with the Collection Policy, (A) repossessed the
related Financed Vehicle prior to the expiration of the 120 days in (i) above
and thereafter, (B) any applicable redemption period has expired, and thereafter
(C) the Servicer has liquidated the Financed Vehicle; (iii) there has commenced
an Insolvency Proceeding by or against an Obligor, and any Scheduled Payment is
delinquent (not paid by the due date) more than 90 days; (iv) the Financed
Vehicle is missing, has been damaged beyond ordinary means of repair, or has
been leased or disposed of by sale or other transfer of title; or (v) a Skip
Loss Investigation was initiated and not satisfactorily resolved within the
earlier of (A) 90 days, or (B) the date when at least 10% of a Scheduled Payment
on the Receivable is 120 days or more delinquent on a contractual basis (not
paid by the due date).
"Depository Accounts" are such bank accounts subject to the Master
Agency Agreement in the name of the Servicer set forth in Exhibit B attached
hereto and such other or different bank accounts subject to the Master Agency
Agreement in the name of the Servicer designated by the Servicer as Depository
Accounts pursuant to the Master Agency Agreement.
"Documentation" shall have the meaning set forth in Section 7.16.
"Documents" shall mean with respect to each Receivable, (i) the original
Certificate of Title or proof of lien perfection; (ii) the executed Original
Purchased Contract with original signatures; (iii) if available or unless
electronically stored, a copy of the dealer invoice and invoices for any
additional equipment included in such contract, (iv) a copy of the original
signed Credit Application; (v) verification that any party who is a Client was
the loss payee, additional insured, or lienholder with respect to the Insurance
Policies (including policy number); (vi) if available, a copy of the "Report of
Sale," "Guaranty of Title" or other comparable document executed by the seller
dealer which has been forwarded to the appropriate department of motor vehicles;
(vii) if available or unless electronically stored, copies of: (a) credit bureau
reports, (b) the completed credit investigation form, (c) the completed
verification of employment and income forms, (d) Obligor references, and (e) the
credit scoring sheet; (viii) the applicable funds disbursement invoice or
listing; (ix) a certificate for each type of Insurance Policy purchased by
Obligor; (x) if available, Client's loan process or "deal structure" sheet; (xi)
if available, a "fact sheet" from the dealer, (xii) a copy of the "Credit Life
Insurance Policy", if any, and the "Credit Disability Insurance Policy", if any,
on the Obligor relating to the Financed Vehicle; (xiii) a copy of the "Vehicle
Invoice", if applicable; (xiv) if available, other documents, or copies, as
applicable, that may be reasonably required in the ordinary course of business
with respect to the enforceability of the Obligor's obligations, and (xv) all
other records, files, and documents, whether consisting of paper or computerized
or in some other
3
<PAGE> 4
form, which relate specifically to the applicable Receivable, Obligor, or the
Financed Vehicle or associated rights under the Receivable, including, without
limitation, instruments, documents, correspondence and memoranda generated by or
coming into the possession of the Servicer (including, but not limited to,
insurance premium receipts, ledger sheets, payment records, insurance claim
files, correspondence and current and historical computer data files) that are
required to document or service any Receivable.
"Effective Date" means the effective date of a plan of reorganization or
liquidation for Client in the Bankruptcy Case that ratifies this Servicing
Agreement, provided such plan has been accepted by the class containing the
Agent and the Lenders and has not been modified pursuant to Section 1127 of the
Bankruptcy Code or otherwise without the necessary votes or consents of the
Agent and the Lenders.
"Expiration Date" shall have the meaning set forth in Section 6.01.
"Financed Vehicle" means a new or used automobile, sport utility
vehicles or light-duty trucks and all accessions thereto comprising the
Collateral, securing an Obligor's indebtedness under a Receivable that is being
serviced by the Servicer hereunder.
"Indebtedness" means, as applied to any Person at any time, (a) all
indebtedness, monetary obligations or other monetary liabilities of such Person
(i) for borrowed money or evidenced by debt securities, debentures, acceptances,
notes or other similar instruments, and any accrued interest, fees and charges
relating thereto, (ii) with respect to letters of credit issued for such
Person's account, (iii) to pay the deferred purchase price of property or
services, except accounts payable and accrued expenses arising in the ordinary
course of business, (iv) in respect of capital leases or (v) in respect of
guaranties in connection with any of the foregoing; (b) all indebtedness,
monetary obligations or other monetary liabilities of such Person secured by a
lien on any property of such Person whether or not such indebtedness, monetary
obligations or monetary liabilities are assumed by such Person; (c) all
preferred stock subject to mandatory redemptions; (d) all indebtedness, monetary
obligations or other monetary liabilities of such Person under, in connection
with or relating to a securitization facility; and (e) all contingent
contractual monetary obligations with respect to any of the foregoing.
"lnsolvency Proceeding" means (i) the commencement by a person as debtor
of any case or proceeding under any bankruptcy, insolvency, reorganization,
liquidation, dissolution or similar law, or the filing of a motion or other
pleading seeking the appointment of a receiver, trustee, custodian or similar
official for such person or any substantial part of such person's property, or
(ii) the commencement of any such case or proceeding against such person which
(x) is consented to by such person, (y) results in the entry of such order or
appointment, the issuance of such a protective decree or the entry of an order
having similar effect or (z) is not dismissed within 30 days, or (iii) the
making by a person of a general assignment for the benefit of creditors or (iv)
the admission in writing by a person of such person's inability to pay such
person's debts as they become due.
"Insurance Policies" means any credit life, disability or warranty
policy, or any collision or comprehensive insurance policy that insures a
Financed Vehicle and shall include any Required Borrower Insurance.
"Interested Party" means the Agent until such time as (i) all
obligations to the Agent and the Lenders of (A) any entities which are a Client,
and (B) Reliance Acceptance Group, Inc. shall have been irrevocably paid in full
in cash and, (ii) the Servicer has received written notice from the Agent
4
<PAGE> 5
that (i) has occurred at which time the Servicer may unconditionally rely and
act on such notice and thereafter the Interested Party shall be the Client.
"Lien" shall mean a security interest, lien, charge, pledge or
encumbrance of any kind.
"Liquidation Proceeds" means, with respect to any Defaulted Receivable,
all funds, collections and proceeds collected from whatever source in respect
thereof or on the related Financed Vehicle (including, but not limited to, all
proceeds of sale or other disposition, collections, insurance proceeds, dealer
recourse and third party originator recourse).
"Management Employees" shall mean employees, other than Senior Management
Employees of the Servicer or its Affiliates with the titles (or comparable
titles) set forth on Exhibit I.
"Master Agency Agreement" shall mean that Master Depository Accounts and
Post-Office Boxes and Agency Agreement, a copy of which is appended hereto as
Exhibit H, which agreement as it pertains to any of the Depository Accounts may
not be amended or supplemented except pursuant to the terms thereof.
"Obligor" means, with respect to a Receivable, the purchaser of the
Financed Vehicle, each co-purchaser, co-signer and guarantor, or any other
person responsible or potentially responsible for payments under the Receivable.
"Original Purchased Contract" shall mean with respect to each
Receivable, the original contract, together with the original of any and all
modifications, amendments or assignments with respect thereto.
"Other Materials" shall have the meaning set forth in Section 7.16.
"Outstanding Principal Balance" means the unpaid principal balance of a
Receivable as of a certain date, which amount shall (1) include accrued but
unpaid premiums for any Insurance Policies with respect to the Receivable, (2)
include earned but uncollected finance charges related to the Receivable, but
(3) not include any unearned finance charges related to the Receivable.
"Performance Event" means the occurrence and continuation of one of the
events set forth on Exhibit C hereto.
"Person" means any individual, corporation, estate, partnership, joint
venture, limited liability company, association, joint stock company, trust,
unincorporated organization, or government or any agency or political
subdivision thereof, or other entity.
"Receivable" has the meaning set forth in Recital C.
"Reimbursable Expenses" are the costs and expenses of the Servicer set
forth in Section 2.10(b).
"Required Borrower Insurance" shall mean any casualty insurance an
Obligor is required to obtain pursuant to the terms of a Receivable.
"Sale Contracts" shall have the meaning set forth in Recital C.
5
<PAGE> 6
"Schedule of Payments" means the schedule of periodic payments disclosed
on a Receivable, as modified or extended pursuant to and consistent with the
Collection Policy or this Servicing Agreement.
"Scheduled Payment" means, with respect to any date, the payment amount
indicated as due on that date on the Schedule of Payments.
"Senior Management Employees" of a Person shall mean the titled officers
(or comparable titles) employed by the Servicer or its Affiliates set forth on
Exhibit J.
"Service Provider" shall mean any Person who provides Servicer with any
of the services to be provided pursuant to this Servicing Agreement.
"Servicer" means, as of the Effective Date, one or more of UDC's
Affiliates as designated in writing to Client and Agent by UDC prior to the
Effective Date, or, thereafter, any entity which becomes the servicer pursuant
to this Servicing Agreement in compliance with the terms of Section 6.05.
"Skip Loss Investigation" means an investigation of the whereabouts of a
Financed Vehicle or Obligor which has been initiated by Servicer.
"Spin-Off" shall mean, with respect to a Person, an entity with
shareholders that include at least all of the same shareholders or interest
holders as that Person.
"Substituted Financed Vehicle" shall have the meaning set forth in
Section 2.19.
"Transition Agreement" is the Transition Services Agreement dated as of
February 9, 1998, by and between the Servicer and Client pursuant to which the
Servicer shall provide Client with transition services with respect to Client's
servicing of the Receivables.
"UDC" means Ugly Duckling Corporation, a Delaware corporation.
ARTICLE II
ADMINISTRATION AND SERVICING OF RECEIVABLES
Section 2.01. Appointment and Backup Servicer.
(a) Client hereby appoints, effective on the Effective Date, the
Servicer to manage, administer, service and make collections on the Receivables
as specified herein and to otherwise perform the duties of the Servicer. On the
Effective Date, Client, Agent and Servicer shall modify Schedule 1 (as appended
to this Servicing Agreement on or about the date of this Servicing Agreement) to
delete the Sale Contracts that are either Defaulted Receivables or no longer
owned by Client as of the Effective Date. In addition, on the Effective Date and
at any time thereafter, Schedule 1 shall be amended, upon receipt by Servicer of
written notice from Client and Agent indicating as such, to include any Sale
Contracts of Client existing on or prior to the Effective Date (other than a
contract relating to a Defaulted Receivable) which were not previously on
Schedule 1, provided, however, that Servicer shall have no obligation to service
any Receivable until such time as it is deemed listed on Schedule 1. Servicer
accepts such appointment effective as of the Effective Date on the terms and
conditions of this Servicing Agreement. In performing its duties hereunder, the
Servicer shall have full power and authority to do or cause to be done any and
all things in connection with such servicing and administration which it may
deem necessary or
6
<PAGE> 7
desirable, within the terms of this Servicing Agreement or the Collection
Policy. In the performance of its duties hereunder, the Servicer shall be an
independent contractor acting on its own behalf in its own name and for its own
account. It shall have no authority, express or implied, to act in any manner or
by any means for or on behalf of Client or Agent in any capacity other than as
an independent contractor. Neither this Servicing Agreement nor any of the
activities contemplated hereby shall be deemed to create any partnership, joint
venture, agency or employer/employee relationship between the Servicer, Client
or Agent. Notwithstanding the foregoing provisions of this Section 2.01,
pursuant to express provisions of this Servicing Agreement, the Servicer may be
authorized or directed to take certain actions on behalf of or for the direct
benefit of Client and Agent, provided that, in the taking of such actions, the
Servicer shall continue to be acting as an independent contractor. Except as set
forth in Section 2.10(b) of this Servicing Agreement, Servicer shall perform all
of its obligations under this Servicing Agreement at its own expense.
(b) The appointment of Servicer pursuant to Section 2.01 shall be for a
term commencing on the Effective Date and ending, unless earlier terminated
pursuant to the provisions of Section 5.03, 5.04, or 6.03, on the Expiration
Date (as defined in Section 6.01).
(c) The Interested Party reserves the right to appoint a backup servicer
for the Receivables (the "Backup Servicer"). Upon notice to Servicer and UDC of
such appointment, Servicer shall deliver to the Backup Servicer copies of all
notices, reports and computer diskettes required to be delivered by Servicer to
Client or Agent under this Servicing Agreement. The additional cost of providing
such notices, reports and computer diskettes to Backup Servicer shall be borne
by the Servicer, but any charges, costs or expenses of Backup Servicer shall be
borne by Client.
Section 2.02. Collection of Receivable Payments; Sale of or
Subcontracting for Defaulted Receivables.
(a) The Servicer shall be responsible for collection of payments called
for under the terms and provisions of the Receivables, as and when the same
shall become due, and shall follow the Collection Policy. Consistent with this
Section 2.02 and the Collection Policy, the Servicer may grant at its discretion
extensions, rebates or adjustments on a Receivable, or modify the original due
date of a Receivable if such extensions are limited to two (2) one (1) month
extensions in any consecutive twelve (12) month period. Servicer will exercise
care in offering extensions and modifications so as not to defer losses likely
to occur. During the life of a Receivable, extensions and modifications shall
not (i) be granted more than six (6) times, or (ii) except as provided below,
reduce the Obligor's Outstanding Principal Balance. Servicer shall not permit
any due date changes in a Receivable other than in the same month. The Servicer
may in its discretion waive any late payment charge or any other fees that may
be collected in the ordinary course of servicing a Receivable. In no event shall
the Outstanding Principal Balance of a Receivable be reduced, except in
connection with a settlement in full of a Defaulted Receivable as provided in
the following sentence. The Servicer shall have the ability to settle any
account in full that does not result in a charge-off of greater than the lesser
of (i) $500, or (ii) 20% of the then Outstanding Principal Balance of the
applicable Receivable. Any amount over such limit will require that the Servicer
notify Client and Agent of such request in writing, and that the Interested
Party respond to such request pursuant to the procedures set forth in Section
7.10.
(b) Servicer shall provide sufficient staffing and telephone lines to:
(1) quote payoffs to requesting Obligors verbally and in writing, (2) record
changes in garaging and billing addresses for Obligors, (3) record name changes,
(4) answer billing questions and (5) respond to any other reasonable written or
telephonic inquiries by Obligors, Agent or Client relating to the Receivables.
If the full amount of a Scheduled Payment due under a Receivable is not received
within three (3)
7
<PAGE> 8
Business Days after its due date, the Servicer will make reasonable and
customary efforts to contact the Obligor by telephone to inquire as to the
status of such payment.
(c) Notwithstanding any provision in this Servicing Agreement, the
Servicer shall not be responsible for servicing any Defaulted Receivable and
shall only be required to take such actions with respect thereto as set forth in
Sections 2.02(d) below.
(d) At the expense of Client, the Servicer shall sell or contract for
the collection of any or all Defaulted Receivables with the consent of the
Client and Agent. Each sale or contract for collection shall be (i) for all
Receivables that become Defaulted Receivables during not less than a six (6)
month period, and (ii) (if a sale,) by a bid procedure acceptable to the
Servicer and the Interested Party, and the Servicer and the Agent shall be
permitted to be bidders in such sale. All sales shall be for cash. If the
Defaulted Receivables are contracted for collection, each bidder, together with
its Affiliates, must have not less than 7,500 auto Receivables, other than the
Client's Defaulted Receivables, which it and its Affiliates are servicing.
Neither the Servicer, nor its employees or their relatives, shall be allowed to
purchase Defaulted Receivables except through an open auction procedure.
Section 2.03. Realization Upon Receivables. In the event a Receivable
becomes or is reasonably anticipated to become a Defaulted Receivable, the
Servicer (either directly or through the use of independent contractors or
agents) shall use its reasonable best efforts, consistent with the Collection
Policy, to repossess or otherwise convert the ownership of the Financed Vehicle
securing such Receivable. None of the Servicer, nor its employees or their
relatives, shall be allowed to purchase Financed Vehicles being foreclosed upon,
except through an open auction procedure. In any case in which the Financed
Vehicle shall have suffered damage, the Servicer shall not expend funds for
repair or repossession of such Financed Vehicle unless the Servicer shall
determine that such repair or repossession should increase the value of the
Liquidation Proceeds by an amount greater than the amount of such expenses.
Section 2.04. Maintenance of Security Interests in Financed Vehicles and
Receivables.
(a) Provided that Servicer or any Service Provider is aware of facts
which indicate a need to take such actions as described below, Servicer shall,
consistent with the standard set forth in Section 2.15, take such actions as are
necessary to maintain the continuing perfection and priority of Client's and
Agent's right, title and interest in the Receivables and the Collateral,
including, but not limited to, obtaining the execution and the registering,
re-registering, recording, re-recording, filing, and refiling of all security
agreements, Certificates of Title, cautionary financing statements, continuation
statements or other instruments as are necessary to maintain the security
interests granted by the Obligors under the respective Receivables. Client and
Agent authorize Servicer to re-perfect or cause the re-perfection of such
security interests on their behalf.
(b) Subject to Section 2.10(b) and 2.10(e), all expenses paid by
Servicer pursuant to this Section 2.04(b) shall be borne by Client. In addition,
in the event the Interested Party directs Servicer in writing to reissue in
Client's or Agent's name the Certificate of Title related to a Receivable,
Client shall reimburse Servicer for the reasonable time spent by Servicer's
Management Employees at a rate of $200 per hour and other employees at a rate
agreed to by the Servicer and the Interested Party in effecting such reissuance.
Section 2.05. Additional Covenants of Servicer.
(a) Except as otherwise provided in the Collection Policy, the Servicer
shall (i) not release any Financed Vehicle securing any Receivable from the
security interest granted by such
8
<PAGE> 9
Receivable in whole or in part except in the event of payment in full by the
Obligor thereunder (or settlement pursuant to Section 2.02) or upon transfer of
the Financed Vehicle to a successor purchaser of the vehicle following
repossession by the Servicer, (ii) not materially impair the rights of Client or
Agent in the Receivables or the Collateral, (iii) not increase the number of
scheduled payments due under a Receivable except as permitted herein, (iv)
except as provided in Section 2.02(d), not sell, pledge, assign, or transfer to
any other Person, or grant, create, incur, assume, or suffer to exist any Lien
on any Receivable, the Collateral, or any interest therein, (v) upon obtaining
or a Service Provider obtaining actual knowledge thereof, immediately notify
Client and Agent of the existence of any Lien on any such Receivable with an
Outstanding Principal Balance in excess of $2,000.00, (vi) defend the right,
title, and interest of Client and Agent in, to and under such Receivables and
Collateral, against all claims of third parties claiming through or under the
Servicer, (vii) deposit into the Depository Accounts and to the Collection
Account all payments received by Servicer with respect to the Receivables in
accordance with this Servicing Agreement, (viii) promptly notify Client and
Agent of the occurrence of any Event of Default and any breach by Servicer or
UDC of any of their covenants or representations and warranties contained
herein, and (ix) upon the discovery of the relocation out of state of a Financed
Vehicle, promptly notify Client and Agent of the occurrence of any event which,
to the knowledge of the Servicer or a Service Provider, would require that
Client or Agent make or cause to be made any filings, reports, notices, or
applications or seek any consents or authorizations from any and all government
agencies, tribunals, or authorities to create, maintain, and protect a
first-priority security interest of Client or Agent in, to and on the Financed
Vehicles and a first-priority security interest of Agent in, to, and on the
Receivables (unless such actions are being taken by the Servicer pursuant to
Section 2.04(a) above). Subject to Section 2.10(b) and 2.10(e), all expenses
paid by Servicer pursuant to this Section 2.05(a) shall be borne by Client.
(b) The Servicer will promptly advise Client and Agent of any inquiry
received from an Obligor which contemplates the consent of Client or Agent.
Inquiries contemplating the consent of Client or Agent shall include, but not be
limited to, inquiries about settlement of any unasserted claim or defense, or
compromise of any amount an Obligor owes, in an amount in excess of the amounts
set forth in Section 2.02(a), or any other matters the Servicer should
reasonably understand are not within the Servicer's authority under this
Servicing Agreement or the Collection Policy.
(c) Within two (2) Business Days of receipt, Servicer shall provide
Client and Agent with copies of all correspondence, written notices, and legal
and administrative documents which specifically allege that Servicer committed a
wrongful act with regard to a Receivable, Obligor, or any Collateral and which
specifically allege claims, damages or loss in excess of $20,000 per occurrence
or $100,000 in the aggregate (collectively, the "Notice Items"). Within two (2)
Business Days of receipt, Servicer shall inform Client and Agent in writing of
the following:
(1) the receipt of any written claim or the initiation of any
legal process, litigation or administrative or judicial investigation regarding
the Notice Items involving an uninsured amount in excess of $20,000 in any one
instance or $100,000 in the aggregate;
(2) the receipt of a written notice from any agency or
governmental body having authority over the conduct of its business that (i) it
is being placed under regulatory supervision, (ii) any license, permit, charter,
membership or registration needed to perform this Servicing Agreement or
material to the conduct of its business is to be suspended or revoked, or (iii)
it is to cease and desist any practice, procedure or policy employed by it in
the conduct of its business, and such cessation will materially adversely affect
the conduct of its business or materially adversely affect its financial affairs
or adversely affect its ability to perform this Servicing Agreement; or
9
<PAGE> 10
(3) the receipt of any written claim or the receipt of a written
notice of the initiation of any legal process, litigation or administrative of
juridical investigation against it which may materially and adversely affect the
operations, financial condition or business of Servicer or Servicer's ability to
perform this Servicing Agreement or which in any way involves Client's or
Agent's security interest in the Receivables or related Collateral or other
rights therein or under this Servicing Agreement.
(d) The Servicer will reasonably cooperate with Client and Agent in
audits, review and special reports as may be required by the Court; provided
that the Servicer is reimbursed by Client for all reasonable costs and expenses
associated therewith and such does not unreasonably interfere with the
Servicer's business activities. For purposes of this Section 2.05(d) the term
special reports shall not include any reports noted on Exhibit D hereto and the
term audits does not include the audits referenced in Section 2.17.
Section 2.06. Reports Provided by Servicer. The Servicer will provide to
Client, Agent, and, if requested in writing by the Interested Party, Backup
Servicer such reports relating to the Receivables as noted in Exhibit D in the
form specified therein. Servicer shall also provide such parties such additional
reports as may be requested in writing by the Interested Party within the time
set forth in such request (such time not to be less than five (5) Business
Days), but any increase in number of reports or reporting frequency requested
from that provided on Exhibit D will require an additional fee to be agreed to
by the Servicer, Client, and Agent based on the specific requests of the
Interested Party. Requests for such additional reports will be billed to Client
on a time and materials basis. All reports provided to Client or Agent shall be
certified by an officer of Servicer as being true and correct in all material
respects. All reports provided by Servicer to Client and Agent shall have at
least a line item setting forth the cumulative total for the relevant category
in the report during the term of the Servicing Agreement.
Section 2.07. Servicing Fee.
(a) The Servicer shall be paid by Client a base monthly Servicing Fee
equal to the greater, for a given calendar month, of (A) 4% divided by twelve
(12) on the Outstanding Principal Balance of the Receivables, other than
Defaulted Receivables, as of the first day of such calendar month; or (B) $15.00
per Receivable, other than Defaulted Receivables, serviced pursuant to this
Servicing Agreement, as of the first day of such calendar month. Additionally,
the Servicer shall be paid (i) the reimbursable expenses pursuant to Section
2.10(b) below, (ii) all third party charges paid for not-sufficient fund checks
and returned checks, and (iii) if earned, the amounts set forth on Schedule 2
attached hereto. Servicer shall be permitted to collect and retain late fees,
modification fees and extension fees actually paid by Obligors. The Servicer
shall commence earning fees and have the right to reimbursement for costs and
expenses as of the Effective Date. The base monthly fee shall be prorated for
any calendar month for which the appointment of the Servicer was not effective
for all days in that calendar month (based upon the number of days for which
such appointment was effective).
(b) Each Collection Period, the base monthly Servicing Fee pursuant to
this Section 2.07 with respect to the immediately preceding Collection Period,
and reimbursable expenses pursuant to Section 2.10(b) incurred during the
immediately preceding Collection Period, shall be paid by Client not later than
the fifth (5th) Business Day after the Servicer delivers (i) the applicable
Servicer Certificate to Client and Agent pursuant to Section 2.08 below, (ii)
the reconciliation of accounts required pursuant to C.2. of Exhibit D, and (iii)
the summary report of all reimbursements, expenses and costs pursuant to Section
2.10(b) in the form of Exhibit K (the "Servicer Payment Date"). Amounts earned
by Servicer described on Schedule 2 shall be paid as provided in Schedule 2.
10
<PAGE> 11
Section 2.08. Servicer Certificates. The Servicer shall deliver to
Client and Agent, on or prior to the fifteenth (15th) day of each month, a
Servicer Certificate substantially in the form provided in Exhibit E hereto (the
"Servicer Certificate").
Section 2.09. [Reserved]
Section 2.10. Costs and Expenses.
(a) Except as set forth in Section 2.10(b) below, all costs and expenses
paid by the Servicer in carrying out its duties hereunder shall be paid or
caused to be paid by the Servicer out of the compensation to be paid to or
retained by the Servicer pursuant to this Servicing Agreement.
(b) Subject to Section 2.10(e), during the term of this Servicing
Agreement, the Servicer shall be reimbursed by Client for the following actual
third-party costs and expenses not constituting normal overhead which Servicer
has incurred in connection with the performance of its duties hereunder:
(i) Compensation paid to outside legal counsel to protect the
interests of Client or Agent, or if Client or Agent is not the owner of the
Receivables, the owner's interest in assets administered under this Servicing
Agreement;
(ii) Compensation paid to professional accountants retained at
Client's or Agent's direction to review the assets administered under this
Servicing Agreement;
(iii) Compensation paid to independent repossessors and direct
out-of-pocket expenses arising from or related to realization of Receivables of
Client administered under the Servicing Agreement, including, but not limited
to, repossession fees and charges, auction fees, towing charges, storage fees,
repair expenses and detailing expenses;
(iv) Sales, franchise, income, excise, personal property or other
taxes arising from or related to any Receivables administered under the
Servicing Agreement (provided, however, nothing in this Servicing Agreement
shall obligate Client or Agent to pay any income or other taxes of Servicer or
UDC);
(v) Parking or other fines, insurance, title or other such fees
arising from or related to any Receivables administered under the Servicing
Agreement;
(vi) Costs for retitling the Financed Vehicles after a request
therefor from the Interested Party;
(vii) Costs associated with cooperating with or providing any
audits, reviews or special reports related to Agent or Client in the Case (but
not the reports set forth on Exhibit D or the audits set forth in Section 2.17),
including Client as a reorganized entity; and
(viii) Expenses and costs associated with the sale or contracting
for collection of Defaulted Receivables pursuant to Section 2.02(d).
Other requested services will be quoted on a time and materials basis utilizing
the Servicer's current pricing schedule. With respect to such other requested
services, the Servicer shall only be reimbursed to the extent it receives prior
written approval from the Interested Party pursuant to the procedures set forth
in Section 7.10. In the event Servicer seeks but does not obtain in a specific
instance written approval to incur expenses of those stated herein, Servicer
shall not be obligated
11
<PAGE> 12
to proceed with the recommended activity as to which such approval is sought.
Services requested of Servicer by the Interested Party which require the
services of Management Employees shall be billed at the rate of $200 per hour
for the services of such Management Employees identified by the Servicer and
approved by the Interested Party.
(c) Servicer's rights to reimbursement of expenses shall not be
contingent upon success in a Skip Loss Investigation, repossession, litigation
or similar activity.
(d) In furtherance of its performance hereunder, the Servicer may, with
the prior written consent of the Interested Party pursuant to the procedures set
forth in Section 7.10, contract for goods or services with Affiliates of
Servicer. To the extent such goods or services give rise to an expense
reimbursable pursuant to Section 2.10(b) above, the costs or expenses for such
goods or services must be upon costs, terms and conditions that are market
rates, terms and conditions found in arms' length transactions in the relevant
geographic area.
(e) Notwithstanding anything to the contrary in this Servicing
Agreement, Servicer shall not be entitled to reimbursement of any fees, costs,
or expenses which (i) are not ultimately paid by Servicer, (ii) are incurred by
Servicer in connection with services rendered beyond the scope of this Servicing
Agreement or contrary to the Collection Policy, or (iii) arise from the gross
negligence or wilful misconduct of Servicer or any Service Provider.
Reimbursement of any fees, costs, or expenses to Servicer shall not foreclose
Client or Agent from disputing Client's obligation to reimburse such fees,
costs, or expenses, nor act as an admission of the propriety of such fees,
costs, or expenses. All backup documentation for costs and expenses shall be
available at the offices of Servicer for inspection and audit by Client and
Agent at the cost of the Client. In the event any fee, cost, or expense
obligation for which Servicer seeks reimbursement is disputed by Client or
Agent, Servicer, Client and Agent shall each use their best efforts to resolve
such dispute. If Client, Agent and Servicer cannot agree on a disputed
obligation, such obligation shall not be the subject of reimbursement to
Servicer until such dispute has been reviewed pursuant to the Payment
Reimbursement Dispute Resolution Policy, a copy of which is attached to this
Servicing Agreement as Exhibit F. Any expense which is paid to Servicer and
which is subsequently disputed by Client or Agent and which has not been placed
in escrow by the Servicer pursuant to the provisions of the Payment
Reimbursement Dispute Resolution Policy set forth on Exhibit F hereto may be
deducted from any subsequent reimbursable expenses or any fees to be paid to
Servicer, without prejudice to the right of Servicer to place the disputed
amount in escrow from collections in conformity with the provisions of the
Payment Reimbursement Dispute Resolution Policy set forth on Exhibit F hereto.
Upon resolution of any disputed amounts, any amounts owing to the Servicer,
Client, or Agent, along with interest earned thereon in escrow, shall be paid to
the party entitled to such funds.
Section 2.11. Responsibility for Insurance Policies: Processing of
Claims Under Insurance Policies.
(a) The Servicer, on behalf of Client and Agent, will administer and
enforce all rights and responsibilities of the holder of the Receivables
provided for in any applicable Insurance Policy, provided, however, that the
Servicer shall not be required to pay any premiums on the Insurance Policies
except from collections of Receivables.
(b) If directed by the Interested Party, and at Client's expense, the
Servicer shall obtain Required Borrower Insurance with respect to any
Receivable.
12
<PAGE> 13
Section 2.12. Records Maintenance.
(a) The Servicer shall maintain copies or originals of the Documents in
its files with respect to each Receivable and the Financed Vehicle related
thereto, provided that they were given to the Servicer by the Client. The
Servicer shall keep satisfactory books and records pertaining to each Receivable
and shall make periodic reports in accordance with this Servicing Agreement.
Such records may not be destroyed or otherwise disposed of except as provided
herein and as allowed by applicable laws, regulations or decrees. All documents,
whether developed or originated by the Servicer or not, reasonably required to
document or to properly administer any Receivable shall remain at all times the
property of Client (unless transferred by Client). The Servicer shall not
acquire any property rights with respect to any Receivables or any Documents
(including, without limitation, any possessory Lien with respect to any
Receivable or any Documents), and shall not have the right to possession of them
except pursuant to the terms of this Servicing Agreement. The Servicer shall
bear the entire cost of restoration in the event any Documents shall become
damaged, lost or destroyed while in the Servicer's possession or under the
Servicer's control.
(b) The Servicer hereby agrees that the computer files and other
physical records of the Receivables maintained by the Servicer will bear an
indication reflecting that the Receivables are owned by Client and are subject
to a Lien in favor of Agent.
Section 2.13. Possession and Ownership of Documents. Unless otherwise
specified herein, the Servicer shall maintain physical possession of good and
legible copies of the Documents and shall hold all Documents in trust for the
benefit of Client and Agent, and all Documents, as between Servicer and Client,
shall remain the property of Client. The Servicer shall respond to all third
party inquiries concerning ownership of the Receivables by indicating that the
Receivables are the property of Client, and, if applicable, subject to a Lien in
favor of the Agent. The Servicer hereby agrees that the computer files and other
physical records of the Receivables maintained by the Servicer will bear an
indication reflecting that the Receivables are owned by Client and are subject
to a Lien in favor of the Agent.
Section 2.14. Warranties, Representations and Indemnity With Respect to
Documents. As to each Document generated by Client, the Client warrants and
represents that such Document is free of illegal or prohibited powers or
provisions, and that the enforcement thereof by the Servicer will not subject
the Servicer to liability under any federal, state or local law, provided such
enforcement by the Servicer is conducted in accordance with the provisions of
this Servicing Agreement and the Collection Policy. Subject to Section 2.10(e),
Client will indemnify Servicer, pursuant to the provisions of Section 5.05(a),
from all liability and costs, including reasonable attorneys' fees, paid as a
result of the presence of any such illegal or prohibited provision, but,
notwithstanding anything to the contrary in this Servicing Agreement, the
presence of any such illegal or prohibited provision shall not, pursuant to
Section 5.02 or 5.04 or otherwise, permit Servicer to terminate its appointment
pursuant to this Servicing Agreement.
Section 2.15. Standard of Care. In performing its duties and obligations
hereunder and in making its judgments, determinations and decisions pursuant to
this Servicing Agreement, the Servicer will comply with all applicable state and
federal laws, rules, and regulations and will exercise that degree of skill and
care consistent with the degree of skill and care that the Servicer exercises
with respect to similar motor vehicle retail installment sales contracts or
loans owned and/or serviced by the Servicer and that is consistent with prudent
industry standards, and will apply, in performing such duties and obligations,
those standards, policies and procedures consistent with the standards, policies
and procedures the Servicer applies with respect to similar motor vehicle retail
installment contracts or loans owned or serviced by it; provided, however, that
notwithstanding the foregoing, the Servicer shall not, except pursuant to a
judicial order from a court of competent
13
<PAGE> 14
jurisdiction, or as otherwise required by applicable law or regulation, release
or waive the right to collect the unpaid balance on any Receivable. In
performing its duties and obligations hereunder, the Servicer shall maintain all
state and federal licenses and franchises necessary for it to perform its
responsibilities hereunder, and shall not impair the rights of Client or Agent
(and, if applicable, any escrow agent) in the Receivables and any other property
in which Client or Agent has an interest. Notwithstanding any provision to the
contrary herein, and even to the extent that compliance requires the exercise of
a higher standard of care than set forth above, the Servicer shall (i) comply
with the Collection Policy, and (ii) the standard of care set forth in Section
5.05 of this Servicing Agreement. Notwithstanding any provision to the contrary
in this Servicing Agreement, the Servicer shall not be responsible or liable to
Client, Agent or any other person for any act done in compliance with this
Servicing Agreement, absent willful misconduct or gross negligence.
Notwithstanding any provision in any Receivable, if the Servicer determines that
any provision in any Receivable is either illegal or unenforceable, then
Servicer may elect, without liability to Client or Agent, not to enforce or
follow such provision.
Section 2.16. Records. The Servicer shall maintain or cause to be
maintained such books of account and other records as will enable Client and
Agent to determine the status of each Receivable.
Section 2.17. Inspection.
(a) At all times during the term hereof, the Servicer shall afford
Client and Agent, their authorized agents, and any escrow agent, if applicable,
upon not less than 24 hours notice, reasonable access during normal business
hours to the all records relating to the Receivables. The examination referred
to in this Section 2.17 will be conducted in a manner which does not
unreasonably interfere with the Servicer's normal operations or customer or
employee relations. Without otherwise limiting the scope of the examination,
Client, Agent, or any applicable escrow agent may, using generally accepted
audit procedures, verify (1) the status of each Receivable and review the
Documents and other records relating thereto for conformity to reports prepared
pursuant to Section 2.06 or otherwise, and (2) Servicer's compliance with this
Servicing Agreement. Nothing in this section shall affect the obligation of the
Servicer to observe any applicable law prohibiting disclosure of information
regarding Obligors, and the failure of the Servicer to provide access to
information as a result of such obligation shall not constitute a breach of this
Section 2.17. The Servicer's obligations under this Section 2.17 shall be to
provide access to records related to the Receivables, ensure that such records
are in reasonable order, and to respond to questions related to such records.
The Servicer shall not be compensated for providing such services and for
otherwise facilitating any such reasonable inspections. Any other expense
incident to the exercise by Client or Agent of any right under this Section 2.17
(including without limitation copying costs and third party fees and costs)
shall be borne by Client, provided, however, that, upon request, Servicer agrees
to provide such services to Client and Agent at Servicer's actual cost.
(b) At no additional charge, not more frequently than monthly, Servicer
will, at the Interested Party's request, provide Client, Agent, and Backup
Servicer, as applicable, with a data extract disk, in a format mutually
agreeable to Client, Agent, and Servicer, containing records relating to the
Receivables.
Section 2.18. Enforcement.
(a) The Servicer will, consistent with the standard of care required by
this Servicing Agreement and the Collection Policy, act with respect to the
Receivables and the Collateral in such manner as will, in the reasonable
judgment of the Servicer, maximize the benefits to be received by Client and
Agent with respect thereto. Servicer may disregard instructions or demands from
14
<PAGE> 15
other parties which, in Servicer's reasonable judgment, have not been authorized
by the Interested Party, or conflict with Client's or Agent's interest, written
instructions or approvals.
(b) The Servicer may and shall, at the direction of the Interested
Party, sue to enforce or collect upon the Receivables and the Insurance Policies
(including unpaid claims), in its own name, if possible, or as agent for Client.
If the Servicer commences a legal proceeding to enforce a Receivable or an
Insurance Policy, the act of commencement shall be deemed to be an automatic
assignment of the Receivable and the related rights under the Insurance Policies
by Client to the Servicer for purposes of collection only. If, however, in any
enforcement suit or legal proceeding it is held that the Servicer may not
enforce a Receivable or an Insurance Policy on the grounds that it is not a real
party in interest or a holder entitled to enforce the Receivable or the
Insurance Policy, Client shall, at Servicer's request, assign the Receivable or
the Insurance Policy to Servicer for the limited extent necessary to enforce the
Receivable or the Insurance Policy, or take such steps as the Interested Party
deems necessary to enforce the Receivable or the Insurance Policy, including
bringing suit in Client's name. Pursuant to the terms of Section 2.10(b) and
2.10(e), the Servicer shall be entitled to reimbursement for expenses paid in
connection with enforcement or collection activities with respect to the
Receivables pursuant to this Section 2.18(b).
(c) The Servicer shall exercise any rights of recourse against third
persons that exist with respect to any Receivable in accordance with the
Collection Policy, the Servicer's usual practice and the standard of care
required by Section 2.15 hereof. In exercising such recourse rights, the
Servicer is hereby authorized on Client's and Agent's behalf to reassign the
Receivable and to deliver the Certificate of Title to the Financed Vehicle to
the person against whom recourse exists at the price set forth in the document
creating the recourse. The provisions of Section 2.18(b) above, including
Servicer's right to reimbursement of expenses, shall similarly apply to this
Section.
(d) The Servicer may grant to the Obligor on any Receivable any rebate,
refund or adjustment that the Servicer in the exercise of its reasonable
judgment and consistent with the Collection Policy believes is required because
of prepayment in full of the Receivable, and may deduct the amount of any such
rebate, refund or adjustment from the amount otherwise payable by the Servicer.
The Servicer may not permit any rescission or cancellation of any Receivable nor
may it take any action with respect to any Receivable or Collateral which would
materially impair the rights of Client or Agent therein or in the proceeds
thereof.
(e) The Servicer may not increase or reduce the amount of any Scheduled
Payments, change any Receivable annual percentage rate, or extend or rewrite any
Receivable; provided, however, that the Servicer may extend any Receivable
pursuant to Section 2.02(a).
Section 2.19. Substitution of Collateral. In the event a Financed
Vehicle sustains significant physical damage such that the insurance company
carrying the physical damage insurance covering such Financed Vehicle determines
that the Financed Vehicle is not repairable, the Servicer may permit the Obligor
to pledge a vehicle of equal or greater market value than that of the Financed
Vehicle immediately prior to sustaining the physical damage. The second vehicle
shall be substituted as the collateral ("Substituted Financed Vehicle") for the
Receivable and the terms of the Receivable shall not be amended or modified
except to reflect the substituted collateral. The Servicer shall, within 180
days of the acceptance of the Substituted Financed Vehicle, cause the
certificate of title for the Substituted Financed Vehicle to be delivered to
Client or the Servicer for the benefit of Client or the escrow agent, as
applicable. The Servicer shall make appropriate notation in its records of the
substitution of the collateral.
Section 2.20. Sale of Receivables. (a) The Servicer agrees to cooperate
with the Client and Agent, and to provide information reasonably required by the
Client or Agent, in connection with a
15
<PAGE> 16
proposed sale by Client or Agent of all or a portion of the Receivables. If
requested by the Client or Agent and given at least ten (10) Business Days
advance written notice, the Servicer shall: (i) arrange for representatives of
the Servicer to meet with prospective purchasers, (ii) arrange for
representatives of the Servicer to provide information reasonably requested by
any such prospective purchaser with respect to Receivables and the servicing
thereof, (iii) arrange for representatives of the Servicer to meet with rating
agencies, credit enhancement providers and such other similar parties as the
Client or Agent shall designate and to provide information with respect to
Receivables and the servicing thereof, (iv) provide information reasonably
requested for the preparation of any offering materials required in connection
with a sale by Client or Agent of the Receivables, including, without
limitation, information relating to the servicing of the Receivables by the
Servicer, (v) assist the Client and the Agent in reviews of the Servicer's
reporting, collection, servicing and recovery management systems in respect of
the Receivables; and (vi) provide any other information or services reasonably
requested by Client or Agent to assist in the potential or actual sale of all or
a portion of the Receivables. The above services will be charged to Client at a
rate of $200 per hour for Servicer's Management Employees, and $300 per hour for
Servicer's Senior Management Employees. The Servicer shall identify all
Management Employees and Senior Management Employees to be used for such
services, prior to their commencement of services. Subject to Section 2.10(e),
Client will reimburse Servicer for the reasonable expenses paid for printing,
copying and postage, audit or accountant expense, legal fees, or other
out-of-pocket costs paid to respond to Client's or Agent's requests regarding
any such prospective sale by Client and Agent. Except for actions or inactions
of Servicer which constitute gross negligence or willful misconduct, Servicer
shall have no liability to Client, Agent or the potential purchaser under this
Section 2.20 for the failure of Servicer to provide such purchaser with accurate
information or the failure for any reason for the sale not to close,
(b) Servicer recognizes that the Client intends to sell the Bank
Portfolio. Servicer agrees that (1) until such sale, and for the fees and
expenses set forth in Section 2.07 and 2.10, it shall provide all services as to
the Bank Portfolio required under this Servicing Agreement as to any other
Receivable, (2) it shall cooperate with Client and Agent in the sale of the Bank
Portfolio pursuant to the provisions of Section 2.20(a), and (3) upon sale of
the Bank Portfolio, it shall not be entitled to any additional fees or expenses
with respect to the Bank Portfolio, except such fees, costs and expenses accrued
as of the date of sale.
(c) Notwithstanding any other provision in this Servicing Agreement, if
the Client or Agent sells any or all of the Receivables other than the Bank
Portfolio, or Defaulted Receivables, to any person or entity other than the
Servicer or an Affiliate of Servicer, the Servicer shall be paid a fee equal to
4% of the Outstanding Principal Balance of such sold Receivables calculated on
the date of such sale (the "Exit Sale Proceeds"), provided that, the Base Amount
shall be reduced by the lesser of (i) the amount of Exit Sale Proceeds received
by the Servicer from such sale and (ii) the remaining Base Amount on the date
that such Exit Sale Proceeds are calculated. The Servicer may retain possession
of all Documents for such sold Receivables until receipt of such amount.
Section 2.21. Directions of Interested Party. The Servicer may follow
any and all instructions, directions or decisions by the Interested Party as are
to be given or made by the Interested Party without any liability of the
Servicer to Agent or Client which is not the Interested Party for following such
instructions, directions, or decisions.
16
<PAGE> 17
ARTICLE III
COLLECTIONS AND INSURANCE COVERAGE
Section 3.01 Collections.
(a) Subject to Section 3.01(b) below, Servicer shall deposit into one of
the Depository Accounts on or prior to each Business Day, and shall remit to the
Collection Account, and to no other account, on the third (3rd) Business Day
after receipt thereof, all available funds for payments made by or on behalf of
the Obligor and received by or on behalf of the Servicer, including all actual
payments, insurance proceeds, recoveries, collections, all proceeds relating to
the repossession or disposition of the Financed Vehicles, and all payments or
other amounts, if any, made by or on behalf of an Obligor and received by the
Servicer with respect to any Receivable (the "Collections"). Servicer shall give
to Agent all notices required to be given to Client pursuant to the Master
Agency Agreement simultaneously upon giving such notices to Client. In addition,
notwithstanding anything to the contrary in the Master Agency Agreement,
Servicer agrees that all funds transferred or retransferred pursuant to the
Master Agency Agreement shall be transferred directly to the Collection Account
after transfer to the Consolidating Depository Accounts.
(b) Notwithstanding Section 3.01(a) above, if, in any calendar month,
Client does not timely pay to Servicer all amounts required to be paid to
Servicer pursuant to Sections 2.07 and 2.10, the Servicer may, commencing on the
second (2nd) Business Day after written notice to Client and Agent of such
nonpayment, from the Collections to be remitted to the Collection Account, place
into an escrow, in conformity with the provisions of the Payment Reimbursement
Dispute Resolution Policy set forth on Exhibit F hereto, an amount equal to such
unpaid amounts.
Section 3.02 Insurance Coverage. Servicer shall maintain, at its own
expense, a crime insurance policy, with broad coverage with responsible
companies on all officers, employees or other Persons acting on behalf of
Servicer in any capacity with regard to the Receivables to handle funds, money,
documents and papers relating to the Receivables. Any such insurance shall
protect and insure Servicer against losses for dishonest acts of such Persons
and shall be maintained in a form that would meet the requirements of prudent
institutional auto loan servicers and in an amount of not less than $10,000 per
occurrence with no deductible. Client and Agent shall be named as loss payee and
as an additional named insured on such policy.
ARTICLE IV
REPRESENTATIONS, WARRANTIES, AND COVENANTS
Section 4.01. Representations and Warranties of the Servicer. The
Servicer and UDC hereby make the following representations and warranties to
Client and Agent only as to itself, provided that with respect to any Controlled
Servicer, UDC shall make such representations and warranties as to itself and
such Servicer. These representations and warranties are made as of the execution
of this Servicing Agreement by Servicer or UDC as being true and correct at that
time and at all times thereafter while either Servicer or UDC has obligations
pursuant to this Servicing Agreement.
(a) Due Organization and Good Standing. The Servicer and UDC are
corporations duly organized, validly existing, and in good standing under the
laws of the State of their incorporation, with power and authority to own their
properties and to conduct their businesses as such properties are owned and such
businesses are presently conducted. Servicer and UDC are qualified to do
17
<PAGE> 18
business as foreign corporations and are in good standing in each jurisdiction
where the character of their properties or the nature of their activities makes
such qualification necessary.
(b) Power and Authority. The Servicer and UDC have the power and
authority to execute and deliver this Servicing Agreement and to carry out its
terms; and the execution, delivery, and performance of this Servicing Agreement
have been duly authorized by the Servicer and UDC by all necessary corporate
action.
(c) Binding Obligations. This Servicing Agreement shall constitute a
legal, valid, and binding obligation of the Servicer and UDC enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or other similar laws affecting the
enforcement of creditors' rights in general and by general principles of equity,
regardless of whether such enforceability shall be considered in a proceeding in
equity or at law.
(d) No Violation. The consummation of the transactions contemplated by
this Servicing Agreement and the fulfillment of the terms thereof shall not
conflict with, result in any breach of any of the terms, and the provisions of,
nor constitute (with or without notice or lapse of time) a default under, the
articles of organization or by-laws of the Servicer or UDC, or to the best of
the Servicer's or UDC's knowledge, after reasonable investigation, any
indenture, agreement, or other instrument to which the Servicer or UDC is a
party or by which either of them shall be bound; nor result in the creation or
imposition of any lien upon any of their properties pursuant to the terms of any
such indenture, agreement, or other instrument (other than this Servicing
Agreement); nor violate any law or, to the best of the Servicer's or UDC's
knowledge, any order, rule, or regulation applicable to the Servicer or UDC of
any court or of any federal or state regulatory body, administrative agency, or
other governmental instrumentality having jurisdiction over the Servicer, UDC,
or any of their properties.
(e) No Proceedings. There are no proceedings or investigations pending
or, to the Servicer's or UDC's best knowledge, threatened before any court,
regulatory body, administrative agency, or other governmental instrumentality
having jurisdiction over the Servicer or UDC or any of their properties (a)
asserting the invalidity of this Servicing Agreement, (b) seeking to prevent the
consummation of any of the transactions contemplated by this Servicing
Agreement, or (c) seeking any determination or ruling that might materially and
adversely affect the performance by the Servicer or UDC of either of their
obligations under, or the validity or enforceability of, this Servicing
Agreement.
(f) Permits and Licenses. Servicer and UDC have all necessary permits,
licenses, consents, approvals, waivers, registrations, and notifications
necessary for the execution and performance by Servicer and UDC pursuant to this
Servicing Agreement (including, without limitation, all permits, licenses,
consents, approvals, waivers, registrations, and notifications relating to any
hardware, software, or other intellectual property utilized or to be utilized by
Servicer or UDC pursuant to this Servicing Agreement) and there has not been any
revocation, withdrawal, termination, modification, cancellation, suspension, or
similar limitation of such permits, licenses, consents, approvals, waivers,
registrations, and notifications.
Section 4.02. Representations and Warranties of RAC. RAC hereby makes
the following representations, warranties and covenants to Servicer, UDC, and
Agent. These representations, warranties, and covenants are made as of the
execution of this Servicing Agreement by RAC as being true and correct at that
time and at all times thereafter while Client has any obligations pursuant to
this Servicing Agreement.
18
<PAGE> 19
(a) Due Organization and Good Standing. RAC is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, with power and authority to own its properties and to conduct its
business as such properties are owned and such business is presently conducted.
RAC is qualified to do business as a foreign corporation and is in good standing
in each jurisdiction where the character of its properties or the nature of its
activities makes such qualification necessary.
(b) Power and Authority. RAC has the power and authority to execute and
deliver this Servicing Agreement and to carry out its terms; and the execution,
delivery, and performance of this Servicing Agreement have been duly authorized
by the Client by all necessary corporate action.
(c) Binding Obligations. This Servicing Agreement shall constitute a
legal, valid, and binding obligation of RAC enforceable in accordance with its
terms.
(d) No Violation. The consummation of the transactions contemplated by
this Servicing Agreement and the fulfillment of the terms thereof shall not
conflict with, result in any breach of any of the terms, and the provisions of,
nor constitute (with or without notice or lapse of time) a default under, the
articles of organization or by-laws of RAC, or to the best of the RAC's
knowledge, after reasonable investigation, any indenture, agreement, or other
instrument to which RAC is a party or by which it shall be bound; nor result in
the creation or imposition of any lien upon any of its properties pursuant to
the terms of any such indenture, agreement, or other instrument (other than this
Servicing Agreement); nor violate any law or, to the best of the RAC's
knowledge, any order, rule, or regulation applicable to RAC of any court or of
any federal or state regulatory body, administrative agency, or other
governmental instrumentality having jurisdiction over RAC or its properties.
(e) No Proceedings. Other than the Bankruptcy Case, there are no
proceedings or investigations pending or, to RAC's best knowledge, threatened
before any court, regulatory body, administrative agency, or other governmental
instrumentality having jurisdiction over RAC or its properties (a) asserting the
invalidity of this Servicing Agreement, (b) seeking to prevent the consummation
of any of the transactions contemplated by this Servicing Agreement, or (c)
seeking any determination or ruling that might materially and adversely affect
the performance by RAC of its obligations under, or the validity or
enforceability of, this Servicing Agreement.
(f) Permits and Licenses. RAC has all necessary permits, licenses,
consents, approvals, waivers, registrations, and notifications necessary for the
execution and performance by RAC pursuant to this Servicing Agreement
(including, without limitation, all permits, licenses, consents, approvals,
waivers, registrations, and notifications relating to any hardware, software, or
other intellectual property utilized or to be utilized by RAC pursuant to this
Servicing Agreement) and there has not been any revocation, withdrawal,
termination, modification, cancellation, suspension, or similar limitation of
such permits, licenses, consents, approvals, waivers, registrations, and
notifications.
Section 4.03. Representations and Warranties of the Agent. Agent hereby
makes the following representations, warranties and covenants to Servicer, UDC,
and Client. These representations, warranties, and covenants are made as of the
execution of this Servicing Agreement by Agent as being true and correct at that
time and at all times thereafter while Agent has rights pursuant to this
Servicing Agreement.
(a) Due Organization and Good Standing. Agent is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware, with power and authority to own its properties and to conduct its
business as such properties are owned and such business
19
<PAGE> 20
is presently conducted. Agent is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the character of
its properties or the nature of its activities makes such qualification
necessary.
(b) Power and Authority. Agent has the power and authority to execute
and deliver this Servicing Agreement and to carry out its terms; and the
execution, delivery, and performance of this Servicing Agreement have been duly
authorized by the Agent by all necessary corporate action.
(c) Binding Obligations. This Servicing Agreement shall constitute a
legal, valid, and binding obligation of Agent enforceable in accordance with its
terms.
(d) No Violation. The consummation of the transactions contemplated by
this Servicing Agreement and the fulfillment of the terms thereof shall not
conflict with, result in any breach of any of the terms, and the provisions of,
nor constitute (with or without notice or lapse of time) a default under, the
articles of organization or by-laws of Agent or to the best of the Agent's
knowledge, after reasonable investigation, any indenture, agreement, or other
instrument to which Agent is a party or by which it shall be bound; nor result
in the creation or imposition of any lien upon any of its properties pursuant to
the terms of any such indenture, agreement, or other instrument (other than this
Servicing Agreement); nor violate any law or, to the best of the Agent's
knowledge, any order, rule, or regulation applicable to Agent of any court or of
any federal or state regulatory body, administrative agency, or other
governmental instrumentality having jurisdiction over Agent or its properties.
(e) No Proceedings. There are no proceedings or investigations pending
or, to Agent's best knowledge, threatened before any court, regulatory body,
administrative agency, or other governmental instrumentality having jurisdiction
over Agent or its properties (a) asserting the invalidity of this Servicing
Agreement, (b) seeking to prevent the consummation of any of the transactions
contemplated by this Servicing Agreement, or (c) seeking any determination or
ruling that might materially and adversely affect the performance by Agent of
its obligations under, or the validity or enforceability of, this Servicing
Agreement.
Section 4.04. Survival of Representations and Warranties. The
representations and warranties set forth in this Article IV are continuous and
shall survive the termination of this Servicing Agreement, with respect to any
Servicer, shall survive the termination of the appointment of such Servicer, and
with respect to any Controlled Servicer, shall survive the termination of the
appointment of such Controlled Servicer. Upon discovery by either Client,
Servicer, UDC, or Agent of a breach of any of the foregoing representations and
warranties, the party discovering such breach shall give prompt written notice
to the other parties.
Section 4.05. Covenants of the Servicer and UDC. Servicer and UDC hereby
covenant to Client and Agent for so long as Servicer shall continue to act as
Servicer hereunder:
(a) All payments received by Servicer with respect to the Receivables
will be received in trust by Servicer for the benefit of Client and Agent and
will be deposited into Depository Accounts which are not subject to any Lien in
favor of any other Person.
(b) Contemporaneously with the execution and delivery of this Servicing
Agreement and on the Effective Date, Servicer shall deliver to Client and Agent
a list of the servicing locations of Servicer and the officers involved in, or
responsible for, the administration and servicing of the Receivables, which list
shall be promptly updated in writing by the Servicer to Client and Agent as
changes are made. From and after the Effective Date, Servicer shall not change a
location where it administers or services the Receivables unless it first gives
Client and Agent sixty (60) days written
20
<PAGE> 21
notice and takes what action Client and Agent reasonably request in order to
protect Client and Agent's interest in the Receivables and Documents at the new
location.
(c) The Servicer acknowledges that: (i) the Agent has advised it that
the Agent has a first priority security interest in the Receivables and the
proceeds therefrom, and (ii) Servicer has no interest, except as provided in
Section 3.01(b) for the payment and reimbursement of amounts pursuant to this
Servicing Agreement, in the Receivables and the proceeds therefrom deposited in
the Depository Accounts. Except as otherwise provided in this Servicing
Agreement, the Servicer agrees to hold the Receivables and the proceeds
therefrom in its possession as agent for the Agent for the purpose of perfecting
the security interest granted by the Client to the Agent therein.
(d) The Servicer and UDC agree to give written notice to Client and
Agent within two (2) Business Days of the occurrence of any Event of Default by
Servicer or UDC of which it has knowledge.
(e) From the date of this Agreement, if the Servicer is not part of the
consolidated group of UDC and its subsidiaries, the Servicer shall provide
Client and Agent with quarterly financial statements for Servicer within sixty
(60) days of the end of each of Servicer's fiscal quarters, and with annual
audited financial statements within one hundred twenty (120) days of the fiscal
year-end. The annual financial statements shall be audited by a public
accounting firm acceptable to Client and Agent. So long as Servicer is a
Controlled Servicer, UDC shall provide Client and Agent with UDC's and
Servicer's quarterly and audited annual financial statements within ten (10)
Business Days after such statements are first made available by UDC to third
parties.
ARTICLE V
DEFAULT, REMEDIES AND LIABILITY
Section 5.01. Events of Default by Servicer or UDC. Any of the following
acts or occurrences shall constitute an Event of Default by Servicer or UDC
under this Servicing Agreement:
(a) The intentional failure of Servicer to make any payment, transfer,
or deposit of monies required to be made under the terms of this Servicing
Agreement on the date such payment, transfer, or deposit of monies is required
to be made;
(b) The failure of Servicer (other than an intentional failure) to make
any payment, transfer, or deposit of monies required to be made under the terms
of this Servicing Agreement on the date such payment, transfer, or deposit is
required to be made, which failure continues unremedied for a period of two (2)
Business Days after the date when originally due, provided, however, that such
grace period shall no longer apply upon the failure of Servicer to make, in any
given rolling ninety (90) day period, more than three (3) failures in excess of
$50,000 of payments, transfers, or deposits of monies each required to be made
under the terms of this Servicing Agreement on the date such payments,
transfers, or deposits were required to be made;
(c) The failure of Servicer or UDC to observe or perform in any material
respect any other covenant or agreement required to be performed under this
Servicing Agreement which failure continues unremedied for a period of five (5)
Business Days after written notice of such failure shall have been given to the
breaching party, provided that, if such failure cannot be cured by diligent
efforts of the breaching party within such five (5) Business Day period, then
such time period shall be extended by the Interested Party for the shorter of
(i) the period reasonably required to cure such failure using the diligent
efforts of the breaching party, and (ii) thirty (30) days;
21
<PAGE> 22
(d) The entry with respect to Servicer or UDC of a decree or order for
relief by a court or agency or supervisory authority having jurisdiction under
any present or future federal or state bankruptcy, insolvency or similar law;
(e) UDC or the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations;
(f) An involuntary case shall be commenced against UDC or Servicer and
the petition shall not be dismissed, stayed, bonded or discharged within sixty
(60) days after commencement of the case; or a court having jurisdiction in the
premises shall enter a decree or order for relief in respect of UDC or the
Servicer in an involuntary case, under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect; or any other similar relief shall
be granted under any applicable federal, state, local or foreign law; or the
board of directors of UDC or the Servicer adopts any resolution or otherwise
authorizes any action to approve any of the foregoing. A decree or order of a
court having jurisdiction in the premises for the appointment of a receiver,
liquidator, sequestrator, trustee, custodian or other officer having similar
powers over UDC or the Servicer or over all or a substantial part of the assets
of UDC or the Servicer shall be entered; or an interim receiver, trustee or
other custodian of UDC or the Servicer or of all or a substantial part of the
assets of UDC or the Servicer shall be appointed or a warrant of attachment,
execution or similar process against any substantial part of the assets of UDC
or the Servicer shall be issued and any such event shall not be stayed,
dismissed, bonded or discharged within sixty (60) days after entry, appointment
or issuance; or the board of directors of UDC or the Servicer adopts any
resolution or otherwise authorizes any action to approve any of the foregoing;
(g) UDC or the Servicer shall fail to make any payment when due with
respect to any Indebtedness of UDC or the Servicer (other than an obligation
payable hereunder), or any breach, default or event of default shall occur, or
any other condition shall exist under any instrument, agreement or indenture
pertaining to any such Indebtedness, if the holder or holders of such
Indebtedness accelerate the maturity of any such Indebtedness or require a
redemption or other repurchase of such Indebtedness and such failure relates to
the acceleration or redemption of an amount in excess of $10,000,000, in the
case of UDC and $2,000,000 in the case of Servicer, and such acceleration shall
continue for a period of five (5) Business Days;
(h) There shall have occurred any event which materially adversely
affects the ability of the Servicer or UDC to perform its obligations hereunder,
or there is a material adverse change in the financial condition or operations
of the Servicer or UDC;
(i) Except with the written consent of the Interested Party, which shall
not be unreasonably withheld, there shall occur a "Change of Control of
Servicer" or a "Change of Control of UDC." For purposes of the preceding
sentence and subject to Section 6.05(a), a "Change of Control of Servicer" shall
mean the occurrence of any event following which at least fifty percent (50%) of
the outstanding voting securities of Servicer shall not at such time be
beneficially owned by UDC or a direct or indirect subsidiary of UDC. A "Change
of Control of UDC" shall mean any one or more of the following events:
(1) A change of control of UDC of a nature that would be
required to be reported in response to Item 6(e) of
Schedule 14A of the Securities Exchange Act of 1934, as
amended ("1934 Act");
(2) A change of control of UDC through a transaction or series
of transactions, such that any person (as that term is
used in Section 13(d) and 14(d)(2) of
22
<PAGE> 23
the 1934 Act), excluding affiliates of UDC as of the date
hereof, is or becomes the beneficial owner (as that term
is used in Section 13(d) of the 1934 Act), directly or
indirectly, of securities of UDC representing eighty
percent (80%) or more of the combined voting power of
UDC's then outstanding securities;
(3) Any consolidation or merger of UDC in which UDC is not the
continuing or surviving company or pursuant to which stock
would be converted into cash, securities or other
property, other than a merger of UDC in which the holders
of the shares of stock immediately before the merger have
at least fifty percent (50%) of the ownership of common
stock of the surviving company immediately after the
merger;
(4) The shareholders of UDC approve any plan or proposal for
the liquidation or dissolution of UDC; or
(5) Substantially all of the assets of UDC (equal to at least
75% of the total assets of UDC as shown on its most recent
balance sheet prepared prior to the sale or transfer) are
sold or otherwise transferred to parties that are not
within a "controlled group of corporations" (as defined in
Section 1563 of the Internal Revenue Code of 1986, as
amended) in which UDC is a member.
Notwithstanding anything to the contrary above, this provision shall not apply
to any "Change of Control of UDC" if the person obtaining such control has a net
worth equal to or greater than the net worth of UDC as of the date of such
Change of Control.
(j) At any time, for any reason, any Depository Account is subject to a
Lien;
(k) The Master Agency Agreement is amended without the consent of the
Interested Party; and
(l) Any representation, warranty or statement made by Servicer or UDC in
this Servicing Agreement or in any certificate, report or other writing
delivered pursuant hereto shall prove to be incorrect in any material respect as
of the time when the same shall have been made
Section 5.02. Events of Default by Client. Any of the following acts or
occurrences shall constitute an Event of Default by Client under this Servicing
Agreement:
(a) Failure of Client (or any party on Client's behalf) to make any
payment required to be made under the terms of this Servicing Agreement which
failure continues unremedied for a period of fifteen (15) days after written
notice of such failure shall have been given by Servicer to the Client and
Agent;
(b) The failure of Client (or any party on Client's behalf) to observe
or perform in any material respect any other covenant or agreement required to
be performed under this Servicing Agreement which failure continues unremedied
for a period of five (5) Business Days after written notice of such failure
shall have been given to Client and Agent; provided that, if such failure cannot
be cured by diligent efforts of or for Client within such five (5) Business Day
period, then such time period shall be extended by the shorter of (i) the period
required to cure such failure using the diligent efforts of Client, and (ii)
thirty (30) days;
23
<PAGE> 24
(c) The entry with respect to Client of a decree or order for relief by
a court or agency or supervisory authority having jurisdiction under any present
or future federal or state bankruptcy, insolvency or similar law;
(d) Client shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations;
(e) An involuntary case shall be commenced against Client and the
petition shall not be dismissed, stayed, bonded or discharged within sixty (60)
days after commencement of the case; or a court having jurisdiction in the
premises shall enter a decree or order for relief in respect of Client in an
involuntary case, under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect; or any other similar relief shall be granted
under any applicable federal, state, local or foreign law; or the board of
directors of Client adopts any resolution or otherwise authorizes any action to
approve any of the foregoing. A decree or order of a court having jurisdiction
in the premises for the appointment of a receiver, liquidator, sequestrator,
trustee, custodian or other officer having similar powers over Client or over
all or a substantial part of the assets of Client shall be entered; or an
interim receiver, trustee or other custodian of Client or of all or a
substantial part of the assets of Client shall be appointed or a warrant of
attachment, execution or similar process against any substantial part of the
assets of Client shall be issued and any such event shall not be stayed,
dismissed, bonded or discharged within sixty (60) days after entry, appointment
or issuance; or the board of directors of Client adopts any resolution or
otherwise authorizes any action to approve any of the foregoing;
(f) Client shall fail to make any payment when due with respect to any
Indebtedness of Client (other than an obligation payable hereunder), or any
breach, default or event of default shall occur, or any other condition shall
exist under any instrument, agreement or indenture pertaining to any such
Indebtedness, if the holder or holders of such Indebtedness accelerate the
maturity of any such Indebtedness or require a redemption or other repurchase of
such Indebtedness and such failure relates to the acceleration or redemption of
an amount in excess of $10,000,000, and such acceleration shall continue for a
period of five (5) Business Days.
(g) Any representation, warranty or statement made by Client in this
Servicing Agreement or in any report or other writing delivered pursuant hereto
shall prove to be incorrect in any material respect as of the time when the same
shall have been made.
Notwithstanding (c), (d), (e), and (f) above, the Bankruptcy Case, or any
actions or lack of actions as a result of the Bankruptcy Case or Bankruptcy
Code, shall not by itself be an Event of Default as to Client.
Section 5.03. Remedies of Client and Agent.
(a) If an Event of Default as described in Section 5.01 shall have
occurred and be then continuing, the Interested Party may exercise any right or
remedy available to Client or Agent under this Servicing Agreement or under
applicable law and, in addition, may terminate the appointment of Servicer under
this Servicing Agreement by giving sixty (60) days prior written notice of such
termination to Servicer and UDC. Such termination of the appointment of Servicer
shall be without prejudice to any claims of Client or Agent resulting from an
Event of Default by Servicer or UDC. If an Event of Default occurs as described
in Section 5.01(d) through (f) above as to the Servicer, the appointment of
Servicer under this Servicing Agreement may be terminated effective immediately
by the Interested Party upon written notice to the Servicer and UDC.
24
<PAGE> 25
(b) Notwithstanding any termination of Servicer pursuant to this Section
5.03, Servicer agrees, at Servicer's expense, to cooperate with Client and Agent
during such sixty (60) day period with respect to the transition of all or part
the duties and obligations of Servicer hereunder to another party as set forth
in Section 6.04 to this Servicing Agreement.
Section 5.04. Remedies of Servicer.
(a) If an Event of Default as described in Section 5.02 shall have
occurred and be then continuing, Servicer may exercise any right or remedy
available to it under this Servicing Agreement or under applicable law,
including termination of Servicer's appointment under this Servicing Agreement
(but not termination of this Servicing Agreement itself) by giving sixty (60)
days prior written notice of such termination to Client and Agent. Such
termination of the appointment of Servicer shall be without prejudice to any
claims of Servicer or UDC resulting from an Event of Default by Client,
provided, however, that Servicer and UDC agree and acknowledge that so long as
Agent does not own any of the Receivables, Agent shall have no liability to
Servicer or UDC pursuant to this Servicing Agreement other than resulting (i)
from a breach of representation or warranty of Agent hereunder or (ii)
instructions given by the Agent as the Interested Party. If an Event of Default
occurs as described in Section 5.02(c) through (e) above as to RAC, Servicer's
appointment under this Servicing Agreement may be terminated effective
immediately by Servicer and UDC upon written notice to the Agent and Client.
(b) Notwithstanding any termination of Servicer pursuant to this Section
5.04, Servicer agrees to cooperate with Client and Agent during such sixty (60)
day period with respect to the transition of all or part the duties and
obligations of Servicer hereunder to another party as set forth in Section 6.04
to this Servicing Agreement; provided that such transition shall be at Client's
expense, and the Servicer shall be entitled to compensation for the services of
Management Employees at a rate of $200 per hour for services related to the
transition.
Section 5.05. Liability and Indemnity.
(a) The Servicer and UDC shall be strictly accountable to Client and
Agent for all payments actually received by it (or any party with which it has
contracted) on Receivables and shall be liable for any actual damages resulting
from its breach of such obligation. However, in no event shall any party to this
Servicing Agreement be liable for any consequential, incidental or special
damages.
(b) Servicer and UDC hereby indemnify Client and Agent from any and all
losses, damages, costs, good faith settlements, expenses, taxes, reasonably
attorneys' and paralegals' fees, and all other liabilities of any kind or nature
whatsoever, resulting, directly or indirectly, in whole or in part, from any
claim, demand or suit by any third party against Client or Agent arising from an
action or omission by the Servicer under this Servicing Agreement or from the
action or inaction of any Servicer Provider.
(c) The following procedures shall apply with respect to any indemnity
obligation pursuant to this Servicing Agreement:
(1) Any party seeking indemnification pursuant to this Servicing
Agreement (the "Indemnified Party") shall give to the party obligated to provide
indemnification to such Indemnified Party (the "Indemnitor") a notice (a "Claim
Notice") describing in reasonable detail the facts giving rise to any claim for
indemnification and shall include in such Claim Notice (if then known) the
amount or the method of computation of the amount of such claim, and a reference
to the provision of this Servicing Agreement or any other agreement, document or
instrument executed hereunder
25
<PAGE> 26
or in connection herewith upon which such claim is based; provided, that a Claim
Notice in respect of any action at law or suit in equity by or against a third
Person as to which indemnification will be sought shall be given promptly after
the action or suit is commenced; provided further that failure to give such
notice shall not relieve the Indemnitor of its obligations hereunder except to
the extent it shall have been prejudiced by such failure.
(2) In calculating any amount claimed pursuant to a Claim Notice,
there shall be deducted (i) any insurance recovery in respect thereof (and no
right of subrogation shall accrue hereunder to any insurer), and (ii) the amount
of any tax benefit to the Indemnified Party (or any of its Affiliates) with
respect to such amount (after giving effect to the tax effect of receipt of the
indemnification payments).
(3) After the giving of any Claim Notice pursuant hereto, the
amount of indemnification to which an Indemnified Party shall be entitled shall
be determined: (i) by the written agreement between the Indemnified Party and
the Indemnitor; (ii) by a final judgment or decree of any court of competent
jurisdiction; or (iii) by any other means to which the Indemnified Party and the
Indemnitor shall agree. The judgment or decree of a court shall be deemed final
when the time for appeal, if any, shall have expired and no appeal shall have
been taken or when all appeals taken shall have been finally determined. The
Indemnified Party shall have the burden of proof in establishing the amount
sought through indemnification.
(4) The Indemnified Party shall have the right to conduct and
control, through counsel of its choosing, the defense, compromise or settlement
of any third Person claim, action or suit against such Indemnified Party as to
which indemnification will be sought by any Indemnified Party from any
Indemnitor hereunder, and in any such case the Indemnitor shall cooperate in
connection therewith and shall furnish, at its own expense, such records,
information and testimony and attend such conferences, discovery proceedings,
hearings, trials and appeals as may be reasonably requested by the Indemnified
Party in connection therewith; provided, that the Indemnitor may participate,
through counsel chosen by it and at its own expense, in the defense of any such
claim, action or suit as to which the Indemnified Party has so elected to
conduct and control the defense thereof; and provided, further, that the
Indemnified Party shall not, without the written consent of the Indemnitor
(which written consent shall not be unreasonably withheld), pay, compromise or
settle any such claim, action or suit, except that no such consent shall be
required if, following a written request from the Indemnified Party, the
Indemnitor shall fail, within 14 days after the making of such request, to
acknowledge and agree in writing that, if such claim, action or suit shall be
adversely determined, such Indemnitor has an obligation to provide
indemnification hereunder to such Indemnified Party. Notwithstanding the
foregoing, the Indemnified Party shall have the right to pay, settle or
compromise any such claim, action or suit without such consent, provided that in
such event the Indemnified Party shall waive any right to indemnity therefor
hereunder unless such consent is unreasonably withheld.
(d) UDC, until such time as it has transferred all of its rights and
obligations pursuant to this Servicing Agreement to a Spin-Off or another entity
which is not an Affiliate in compliance with Section 6.05, shall be liable to
Client and Agent for any and all liability of Servicer to Client or Agent.
Thereafter, (i) UDC shall not be liable for the liability of Servicer except for
claims against Servicer arising before the effective date of the Spin-Off or
assignment to such other non-Affiliate entity, and (ii) the events of default
listed in Section 5.01 shall not apply to UDC, except for defaults occurring
prior to the effective date of the Spin-Off or such assignment to such other
non-Affiliate entity.
Section 5.06. Force Majeure. Notwithstanding anything herein to the
contrary, no party to this Servicing Agreement shall be considered in default
hereunder or have any liability to any party
26
<PAGE> 27
for any failure to perform if such failure arises out of the following causes
beyond the control of such party: acts of God or a public enemy, fire, flood or
war.
ARTICLE VI
TERMINATION
Section 6.01. Term of Agreement. The term of this Servicing Agreement
shall begin on the Effective Date as set forth above and shall continue until
the sixtieth (60th) day after the last Scheduled Payment of the last unpaid
Receivable that is then being serviced by the Servicer (such 60th day, the
"Expiration Date").
Section 6.02. Effect of Termination of Agreement. Upon termination of
this Servicing Agreement, the Servicer shall, at the direction and expense of
the Interested Party, promptly return all Documents and any related files and
correspondence in its possession as are related to the management of the
Receivables and the services provided hereunder.
Section 6.03. Termination of Appointment of Servicer Without Cause.
(a) The Interested Party may terminate the Servicer upon sixty (60) days
written notice to Servicer upon the occurrence of a Performance Event. Upon such
termination, Servicer shall be entitled to receive (i) the accrued and unpaid
servicer fee pursuant to Section 2.07(a)(i), the accrued and unpaid costs and
expenses pursuant to Section 2.10(b), plus (iii) the Deboarding Charge from
Client, but shall not have any other claim resulting from such termination.
(b) Notwithstanding the lack of an Event of Default by Client pursuant
to this Servicing Agreement, Servicer may, so long as there exists no Event of
Default by Servicer or UDC, terminate its appointment as Servicer pursuant to
this Servicing Agreement at any time (1) at least upon at least ninety (90) days
prior written notice to the Client and Agent, and (2) payment of $2 million to
Client as a transition fee (but not as a penalty), which funds will be subject
to the Agent's lien pursuant to the Loan and Security Agreement or any other
documents granting a lien in favor of Agent and Lenders.
(c) Notwithstanding the lack of an Event of Default or a Performance
Event by the Servicer or UDC pursuant to this Servicing Agreement, the
Interested Party may terminate the appointment of Servicer pursuant to this
Servicing Agreement at any time (1) at least upon at least ninety (90) days
prior written notice to the Servicer, and (2) payment by Client of (i) the
accrued and unpaid servicer fee pursuant to Section 2.07(a)(i), the accrued and
unpaid costs and expenses pursuant to Section 2.10(b), plus (iii) $2,000,000 to
the Servicer.
Section 6.04. Transfer of Servicing. Upon termination of the appointment
of Servicer, the Servicer shall cooperate, at the expense of Client (unless such
termination results from an Event of Default by Servicer or UDC or as a result
of Section 6.03(b), in which case at the expense of Servicer), in the transfer
of the Receivables (including any Documents) to such party or parties designated
by the Interested Party in writing. Any matters pending at the effective
termination date will continue to be processed in an orderly and timely fashion;
it being intended, however, that responsibility for the Receivables shall
transfer as quickly as practicable and in any event no later than ninety (90)
days after the giving of notice of termination. After the effective date of the
termination of the appointment of Servicer until such transfer of servicing,
and, if requested, for one hundred twenty (120) days thereafter, the Servicer
shall provide consulting services pursuant to the terms of the Transition
Agreement.
27
<PAGE> 28
Section 6.05. Merger or Consolidation of, or Assumption of the
Obligations of, Servicer. (a) Servicer may assign all (but not less than all) of
its rights and obligations pursuant to this Servicing Agreement to any Affiliate
of UDC so long as (1) such Affiliate upon assignment has executed an agreement
of assumption to perform every obligation of the Servicer hereunder, and (2)
immediately after giving effect to such transaction, no Event of Default (as
defined in Section 5.01), and no event which, after notice or lapse of time, or
both, would become an Event of Default as to Servicer or UDC, shall have
happened and be continuing. Such assignment shall not affect UDC's liability to
Client or Agent for any liability of Servicer. In addition, Servicer may assign
all (but not less than all) of its rights and obligations pursuant to this
Servicing Agreement to any Spin-Off of UDC at the time of assignment so long as
such Spin-Off (1) upon assignment has executed an agreement of assumption to
perform every obligation of the Servicer hereunder, and (2) has a tangible net
worth of not less than $20,000,000 at the time it becomes the Servicer, and
agrees in writing not to have less than one (1) full-time collector for every
350 Receivables being serviced under this Servicing Agreement at all future
times when it has obligations pursuant to this Servicing Agreement, and
provided, that immediately after giving effect to such transaction, no Event of
Default (as defined in Section 5.01), and no event which, after notice or lapse
of time, or both, would become an Event of Default as to Servicer or UDC shall
have happened and be continuing. Upon such assignment, UDC shall no longer be
liable to Client or Agent for any liability of Servicer arising after the
effective date of such assignment, but UDC shall remain liable to Client and
Agent for any liability of UDC or Servicer arising on or prior to such date.
(b) Any Person (i) into which the Servicer may be merged or
consolidated, (ii) which may result from any merger or consolidation to which
the Servicer shall be a party, or (iii) which may succeed to the properties and
assets of the Servicer substantially as a whole, which Person, if not an
Affiliate of UDC, has, at the time of such merger or consolidation, (x) a
tangible net worth of not less than $20,000,000, and (y) not less than one (1)
full-time collector for every 350 Receivables being serviced under this
Servicing Agreement, shall be the successor to the Servicer or under this
Servicing Agreement upon execution of an agreement of assumption to perform
every obligation of the Servicer hereunder (which agreement shall require such
Person If not an Affiliate of UDC, to maintain such net worth and ratio of
collectors at all time when it has any obligation pursuant to this Servicing
Agreement) so long as immediately after giving effect to such transaction, no
Event of Default (as defined in Section 5.01), and no event which, after notice
or lapse of time, or both, would become an Event of Default as to Servicer or
UDC shall have happened and be continuing.
(c) Notwithstanding anything to the contrary in this Servicing
Agreement, UDC and Servicer shall be liable to Client and Agent for all actions
and inactions of any Service Provider, and the delegation to a Servicer Provider
of any obligations of UDC or Servicer under this Servicing Agreement shall not
relieve UDC or Servicer of such obligations.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.01. Amendment. This Servicing Agreement may only be amended by
mutual written consent of the parties hereto.
Section 7.02. Waivers. The provisions of this Servicing Agreement may
only be waived by written consent of the party making the waiver. The failure of
either party at any time to require performance by the other of any provision of
this Servicing Agreement shall in no way affect that party's right to enforce
such provision, nor shall the waiver by either party of any breach of any
28
<PAGE> 29
provision of this Servicing Agreement be taken or held to be a waiver of any
further breach of the same provision or any other provision.
Section 7.03. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be delivered personally
or mailed by first-class registered or certified mail, postage prepaid, or by
telephonic facsimile transmission and overnight delivery service, postage
prepaid, in any case addressed as follows:
To the Servicer:
Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attn: Steven P. Johnson, Esq.
Fax: (602) 852-6696
With a copy to:
Snell & Wilmer L.L.P.
One Arizona Center
400 East Van Buren
Phoenix, Arizona 85004-0001
Attn: Timothy W. Moser, Esq.
Fax: (602) 382-6070
To Client:
Reliance Acceptance Group, Inc.
400 North Loop
1604 East Suite 210
San Antonio, Texas 87232
Attn: James T. Moran
Fax: (210) 402-0761
With a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attn: James Stempel, Esq.
Fax: (312) 861-2200
To Agent:
BankAmerica Business Credit, Inc.
40 E. 52nd St.
New York, NY 10022
Attn: Richard Gennario
Fax: (212) 836-5169
29
<PAGE> 30
With a copy to:
Sidley & Austin
One First National Plaza
Chicago, IL 60603
Attn: Larry J. Nyhan, Esq.
Fax: (312) 853-7036
Such notice, request, consent or other communication shall be deemed given when
so delivered, or if mailed two days after deposit with the U.S. Postal Service.
Section 7.04. Severability of Provisions. If one or more of the
provisions of this Servicing Agreement shall be held invalid for any reason,
such provisions shall be deemed severable from the remaining provisions of this
Servicing Agreement and shall in no way affect the validity or enforceability of
such remaining provisions. To the extent permitted by law, the parties hereto
hereby waive any law which renders any provision of this Servicing Agreement
prohibited or unenforceable.
Section 7.05. Rights Cumulative. All rights and remedies under this
Servicing Agreement are cumulative, and none is intended to be exclusive of
another. No delay or omission in insisting upon the strict observance or
performance of any provision of this Servicing Agreement, or in exercising any
right or remedy, shall be construed as a waiver or relinquishment of such
provision, nor shall it impair such right or remedy. Every right and remedy may
be exercised from time to time and as often as deemed expedient.
Section 7.06. Servicer and UDC Offset. The obligations of Servicer and
UDC pursuant to this Servicing Agreement shall be subject to any defense,
counterclaim or right of offset which Servicer or UDC may have against any other
party to this Servicing Agreement, any Receivable or otherwise except to the
extent provided in the Payment Reimbursement Dispute Resolution Policy, a copy
of which is attached to this Servicing Agreement as Exhibit F.
Section 7.07. Client and Agent Offset. The obligations of Client
pursuant to this Servicing Agreement shall be subject to any defense,
counterclaim or right of offset which Client may have against UDC or Servicer
pursuant to this Servicing Agreement, any Receivable or otherwise except to the
extent provided in the Payment Reimbursement Dispute Resolution Policy, a copy
of which is attached to this Servicing Agreement as Exhibit F.
Section 7.08. Powers of Attorney. Servicer is made Client's
attorney-in-fact for the limited purpose of signing documents necessary to
maintain perfection of the liens and security interests in the Financed
Vehicles, release a lien upon full payment of a Receivable, to transfer title to
the buyer of a Financed Vehicle at a sale foreclosing such security interest
following repossession, file insurance claims and endorse checks for deposit to
the Client's lock box account. With respect to other matters, Client shall, from
time to time, provide to the employees of the Servicer limited, revocable powers
of attorney or other such written authorizations as may be appropriate to enable
the Servicer to perform its obligations under this Servicing Agreement; provided
however, that Client shall not be required to provide such powers with respect
to any matter for which Client does not have authority to perform itself.
Section 7.09. Captions. The article, paragraph and other headings
contained in this Servicing Agreement are for reference purposes only, and shall
not limit or otherwise affect the meaning hereof.
30
<PAGE> 31
Section 7.10. Decisions and Direction. Notwithstanding anything to the
contrary in this Servicing Agreement, when the Servicer shall be required to
submit a matter in writing for approval or consent of the Interested Party, the
following procedures shall apply:
(a) So long as the Agent is the Interested Party, the Servicer shall
submit such request simultaneously to both the Client and Agent with all
relevant information necessary to permit Client and Agent to make an informed
decision on such request. If, by 3:00 p.m. (Phoenix time) on the fourth (4th)
Business Day after the submission of such request and information to Client and
Agent (the "Initial Response Date"), Client shall not have informed Servicer in
writing of its response to such request, Client shall be deemed to have accepted
such request. If Client does respond to such request, it shall submit such
response in writing to Servicer by 3:00 p.m. (Phoenix time) on the Initial
Response Date. After receiving a written response to its request from Client,
Servicer shall cause Agent to receive such written response promptly, but no
later than 5:00 p.m. (Phoenix time) on the Initial Response Date. If Servicer
has not received a written response to its request by 3:00 p.m. (Phoenix time)
on the Initial Response Date, it shall inform Agent in writing by 5:00 p.m.
(Phoenix time) on the Initial Response Date of such lack of response. So long as
Agent, by 5:00 p.m. (Phoenix time) on the Initial Response Date, shall have
received from Servicer Client's written response or notice in writing that
Client has not responded, Agent shall respond in writing to Servicer, by 5:00
p.m. (Phoenix time) on the third Business Day after it receives from Servicer
either Client's written response or notice in writing that Client has not
responded (the "Second Response Date"), as to whether it agrees with Client's
response. If Agent does not agree with Client's response, Agent's response shall
control and the Servicer may act accordingly. So long as Agent shall have
received the proper written notice from Servicer by 5:00 p.m. (Phoenix time) on
the Initial Response Date, if Agent does not respond by 5:00 p.m. (Phoenix time)
on the Second Response Date, Agent shall be deemed to have accepted (1) Client's
response, if one has been give by Client, or (2) Servicer's request, if Client
did not respond to such request by 3:00 p.m. (Phoenix time) on the Initial
Response Date and the Servicer may act accordingly.
(b) So long as Client is the Interested Party, the Servicer shall submit
such request to Client with all relevant information necessary to permit Client
to make an informed decision on such request. If, by 5:00 p.m. (Phoenix time) on
the Initial Response Date, Client shall not have informed Servicer in writing of
its response to such request, Client shall be deemed to have accepted such
request. If Client does respond to such request, it shall submit such response
in writing to Servicer by 5:00 p.m. (Phoenix time) on the Initial Response Date.
All decisions to be made by Servicer pursuant to this Agreement shall be made by
the Servicer in its sole discretion using the Standard of Care set forth in
Section 2.15 of this Servicing Agreement.
Section 7.11. Assignment and Binding Effect. Except as provided in this
Servicing Agreement, no party to this Servicing Agreement other than the Agent
may assign any of its rights or obligations pursuant to this Servicing Agreement
without the consent of the other parties hereto, provided, however, that
Servicer and UDC acknowledge that Client's rights under this Servicing Agreement
may be assigned to Agent with the prior notice to them but without their prior
consent, and Servicer and UDC agree, upon such assignment, to recognize Agent as
having all rights of Client under this Servicing Agreement.
Section 7.12. Legal Holidays. In the case where the date on which any
action required to be taken, document required to be delivered or payment
required to be made is not a Business Day, such action, delivery or payment need
not be made on that date, but may be made on the next succeeding Business Day.
31
<PAGE> 32
Section 7.13. Counterparts. This Servicing Agreement may be executed
simultaneously in any number of counterparts, each of which counterparts shall
be deemed to be an original, and such counterparts shall constitute but one and
the same instrument.
Section 7.14. Governing Law. This Servicing Agreement shall be deemed
entered into with and shall be governed by and interpreted in accordance with
the laws (except for the conflict of law principles) of the State of Arizona,
except to the extent that it is mandatory that the laws of some other
jurisdiction apply.
Section 7.15. Parties. This Servicing Agreement shall inure solely to
the benefit of and shall be binding upon the parties hereto, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any equitable right, remedy or claim under or
in respect of or by virtue of this Servicing Agreement or any provision
contained herein.
Section 7.16. Confidentiality of Servicer's Proprietary Information.
Client and Agent acknowledge that the designs, specifications, manuals,
documentation and other materials produced by Servicer and related to the
services performed and the products provided hereunder (collectively
"Documentation"), and all other systems, programs, designs, specifications,
manuals, documentation and other materials which are developed by the Servicer
in connection with this Servicing Agreement (collectively "Other Materials") are
the confidential property and information of the Servicer and shall remain as
such property and information of the Servicer, both before and after the term of
this Servicing Agreement. Client and Agent shall not copy, sell, assign,
transfer, distribute or disclose all or any part of the Documentation or Other
Materials to any other person, partnership, corporation or other entity, except
its Advisors or as otherwise permitted herein. Client and Agent shall confine
the knowledge and use of the Documentation and Other Materials only to their
employees and Advisors who require such knowledge and use in the ordinary course
and scope of their employment, and Client and Agent and such employees shall use
such Documentation and Other Materials solely in connection with Client's and
Agent's own purposes under this Servicing Agreement. Further, employees and
Advisors of Client or Agent shall be advised of the confidential nature of the
Documentation and Other Materials and be directed by Client and Agent to keep
such information confidential. Notwithstanding the foregoing, the Client and
Agent may disclose such Documents and Other Materials to Persons in addition to
Advisors provided that Client and Agent give the Servicer ten (10) days prior
written notice of such disclosure and, if required by the Servicer in its sole
discretion, such person(s) signs a Confidentiality Letter in the form attached
hereto as Exhibit G.
Section 7.17. No Solicitation of Employees. During the term of this
Servicing Agreement, Client and Agent shall not directly or indirectly solicit
employees to leave the employ of the Servicer.
Section 7.18. Attorneys' Fees. In the event of any action at law or suit
in equity or a claim in bankruptcy or other proceeding to enforce this Servicing
Agreement, the prevailing party shall be entitled to receive, in addition to any
other sums which it is awarded, all costs and expenses of such action or suit,
including reasonable attorneys fees paid.
Section 7.19 Entire Agreement. This Servicing Agreement, the Transition
Agreement, the documents incorporated by reference herein and therein, express
the entire agreement of the parties hereto, and supersede all prior promises,
representations, understandings, arrangements and agreements between the parties
with respect to the subject matter contained herein. The parties hereto further
acknowledge and agree that neither of them has made any representations to
induce the execution and delivery of this Servicing Agreement except those
expressly set forth herein.
32
<PAGE> 33
IN WITNESS WHEREOF, the parties have caused this Servicing
Agreement to be duly executed by their respective authorized representatives on
the ________ day of February 1998.
UGLY DUCKLING CORPORATION, a Delaware
corporation
By:______________________________________________
Its:_____________________________________________
"Servicer"
RELIANCE ACCEPTANCE CORPORATION, a
Delaware corporation
By:______________________________________________
Its:_____________________________________________
"Client"
BANKAMERICA BUSINESS CREDIT, INC., a
Delaware corporation
By:______________________________________________
Its:_____________________________________________
"Agent"
33
<PAGE> 34
Schedule 1 Receivables
Schedule 2 Bonus Fees
Exhibit A Collection Policy
Exhibit B Depository Accounts
Exhibit C Performance Events
Exhibit D Receivable Reports
Exhibit E Servicer Certificates
Exhibit F Payment Reimbursement Dispute Resolution Policy
Exhibit G Confidentiality Letter
Exhibit H Master Agency Agreement
Exhibit I Management Employees
Exhibit J Senior Management Employees
Exhibit K Form of Expense Report
34
<PAGE> 35
SCHEDULE 1
RECEIVABLES
<TABLE>
<CAPTION>
Name Account No. Principal Balance
---- ----------- -----------------
<S> <C> <C>
</TABLE>
<PAGE> 36
SCHEDULE 2
BONUS FEES
As additional consideration for agreeing to service the
Receivables, the Servicer shall receive:
1. The first One Million Three Hundred Thousand Dollars
($1,300,000.00) in proceeds realized by Client from the sale of the pool of
Defaulted Receivables existing as of the date Client files its petitions for
relief under Chapter 11 of the Bankruptcy Code (including any sale to UDC or an
Affiliate that bids at least $1.3 million) so long as UDC or an Affiliate has
bid at least $1.3M in cash upon sale for such Receivables; and
2. After all claims of the Lenders (the "Bank Debt") have been
paid (i) in cash in full, or (ii) in other than cash in full, with the consent
of Lenders in full and final satisfaction;
(A) without the use of any Litigation Proceeds, Warrant
Proceeds or Equity Proceeds (collectively, the
"Excluded Proceeds"), (I) the first amount equal to
Base Amount (as defined below) of Cash Flow (as
defined below); and (II) after payment of such
amount in (I), thereafter, 25% of the Cash Flow (as
defined below), or
(B) with the use of Excluded Proceeds, then
additionally after net collections on the
Receivables in an amount equal to such Excluded
Proceeds applied to the Bank Debt (which such
Excluded Proceeds shall remain the property of the
Client) (I) the first amount equal to Base Amount
(as defined below) of Cash Flow (as defined below);
and (II) after payment of such amount in (I),
thereafter, 25% of the Cash Flow (as defined
below).
The amounts payable pursuant to Items 1 or 2 shall be payable immediately upon
Client's receipt of the relevant proceeds or Cash Flow.
The term "Base Amount" shall mean $4,700,000, minus any and all
Exit Sale Proceeds previously paid to the Servicer pursuant to Section 2.20(c).
The term "Cash Flow" shall mean any and all cash proceeds of
Client's (including Client, as reorganized) assets, including, without
limitation, collections with respect to the Receivables, the Bank Portfolio,
disposition and recovery proceeds from Defaulted Receivables and other
Receivables, proceeds from the sale of other miscellaneous assets previously or
currently owned by Client, including, without limitation, any securitization
transactions and tax refunds. "Cash Flow" shall not include any proceeds from
claims and causes of action of Client.
The terms "Litigation Proceeds," "Warrant Proceeds" and "Equity
Proceeds" shall have the meaning set forth in the Plan of Reorganization of the
Client as originally filed, without amendment, on February 9, 1998.
<PAGE> 37
EXHIBIT A
COLLECTION POLICY
[Full copy of Collection Manual to be attached]
<PAGE> 38
EXHIBIT B
DEPOSITORY ACCOUNTS
Bank One, Arizona, N.A.
201 North Central Avenue, 26th Floor
Phoenix, Arizona 85004
Attn: Mr. Russ Gunderson
Phone: (602) 221-1033
Acct: 0987-4687 (Collection)
Acct: 0987-4628 (ARD)
Bank One, Texas, N.A.
PO Box 655415
Dallas, Texas 75265-5415
Attn: Ms. Kim Spencer
Phone: (214) 290-2533
Acct: 1826339630
Barnett Bank, Inc.
1 Progress Plaza, Suite 290
St. Petersburg, Florida 33701
Attn: Mr. Jeff McRae
Phone: (813) 892-1559
Acct: 1266693164 (Collection)
Acct: 1266692930 (ARD)
Las Vegas Business Bank
PO Box 82503
Las Vegas, Nevada 89180
Attn: Ms. Mary Gould
Phone: (702) 794-0070
Acct: 1008625
NationsBank
PO Box 25500
Albuquerque, New Mexico 87125
Attn: Ms. Claire Dobbins
Phone: (505) 282-4361
Acct: 2864323730
<PAGE> 39
EXHIBIT C
PERFORMANCE EVENTS
The occurrence of either of the following shall constitute a
Performance Event:
1. The percentage (computed on the Outstanding Principal Balance)
of Receivables other than Defaulted Receivables that are Delinquent Receivables
but not Defaulted Receivables (computed on the Outstanding Principal Balance) as
of the end of any two consecutive Collection Periods shall exceed the aggregate
of the Effective Date Delinquency Rate plus 300 basis points.
2. The Annualized Defaulted Receivable Loss shall exceed:
For any of the first 4 full Collection Periods
after the Effective Date 33%
For any of the 5th through the 8th, inclusive, full
Collection Periods after the Effective Date 30%
Thereafter for any Collection Period 27%
For purposes of the Performance Events, the following words and
phrases shall have the following meaning:
A. "Annualized Defaulted Receivable Loss" shall mean (i) the
Outstanding Principal Balance of all Receivables that first became a Defaulted
Receivable during a Collection Period divided by the Outstanding Principal
Balance of all Receivables (other than Receivables that previously became
Defaulted Receivables) as of the first day of the same Collection Period, (ii)
multiplied by 12.
B. "Delinquent Receivables" shall mean any Receivables that are
not Defaulted Receivables for which at least 10% of the Scheduled Payment is 30
days or more delinquent on a contractual basis.
C. "Effective Date Delinquency Rate" shall mean the percentage
(computed on the Outstanding Principal Balance) of Receivables that are not
Defaulted Receivables which were Delinquent Receivables but not Defaulted
Receivables as of the last day of the Collection Period immediately preceding
the Effective Date.
<PAGE> 40
EXHIBIT D
SERVICER REPORTS
A. Daily Reports (to be provided by 3:00 P.M. (New York time) the next
Business Day)
1. Daily cash collection report by branch and by source (e.g. A/R
cash, repossession cash, refund cash, fee cash, N.S.F. checks,
etc.).
2. Total amount wired to Agent each day.
B. Weekly Reports (to be provide within three (3) Business Days of the end
of the week)
1. Balance in the cash collection account as of the end of the week
C. Monthly Reports (to be provide within fifteen (15) Days of the end of
the calendar month)
1. Aging of accounts receivable to 120 days
2. Defaulted Receivable Report showing (i) the deficient balance of
each account charged-off and the status of such account (e.g. in
litigation, skipped account, etc.), and (ii) the aggregate
balance of all charged-off accounts by category (e.g. in
litigation, skipped account, etc.), with a separate listing for
charge-offs occurring during the month.
3. Reconciliation of accounts receivable showing (i) all additions
and subtractions by category to the balance of each Receivable
during the month (e.g. additions or subtractions by way of
collections, fees, late charges, write downs, charge-offs,
returned checks, etc.), and (ii) by such categories, the
aggregate additions and subtractions for all Receivables, with
separate listings for additions and subtractions during the
month.
4. Deferment and Extensions Report listing (i) any deferment or
extension granted, and its duration, for each Receivable, and
(ii) the aggregate number of deferments or extensions granted for
all Receivables with a separate listing for deferments and
extensions granted during the month.
5. Due Date Change Report listing (i) the current due date for each
Receivable and any change to the due date, and (ii) any change to
the balance for each future day made during the current month,
with a separate listing for changes made to individual
Receivables during the current month and all due date changes
made during the life of the Receivable, including the current
month.
6. Bankruptcy Report listing each account in bankruptcy and the
aggregate balance of all accounts in bankruptcy, including a
separate listing showing each account which has entered or exited
bankruptcy during the current month and the aggregate balance of
all such accounts.
7. Repossession Report, in detail acceptable to the Client and
Agent, detailing separately (i) each account in repossession and
the aggregate balance of all
<PAGE> 41
accounts in repossession, (ii) all vehicles sold at auction
during the current month, the loan balance for each such account
and the aggregate balance for all such accounts, the value of
each vehicle and the aggregate value of all vehicles at the time
of repossession, and the individual and aggregate gross and net
amounts received from auction, and (iii) all fees by category for
repossessing vehicles both by account and in the aggregate (for
the current month and during the term of the Servicing
Agreement).
<PAGE> 42
EXHIBIT E
SERVICER CERTIFICATE
The undersigned, ____________________________, the _____________ of
_____________________________ ("Company") does hereby certify on behalf of
Company pursuant to that certain Servicing Agreement dated February _____, 1998,
between UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC"), RELIANCE
ACCEPTANCE CORPORATION, a Delaware corporation ("Client') and BANKAMERICA
BUSINESS CREDIT, INC., a Delaware corporation ("Agent") (the "Servicing
Agreement") that (i) all reports and data, regardless of the form or medium in
which delivered to Client or Agent, prior to or contemporaneously with this
Certificate, are accurate and complete, (ii) the representations and warranties
of the undersigned and UDC contained in the Servicing Agreement and made as of
the execution thereof are true and correct on and as of the date of this
Certificate, (iii) Servicer is entitled pursuant to the Servicing Agreement to
reimbursement of all expenses for which Servicer seeks reimbursement hereunder
and Servicer has incurred such expenses prior to the date hereof; and (iv) the
undersigned and UDC are not in default of the Servicing Agreement as of the date
of this Certificate.
Date: __________________, ____ ___________________________________________
a ___________ corporation
By:______________________________________
Its:_____________________________________
<PAGE> 43
EXHIBIT F
PAYMENT REIMBURSEMENT DISPUTE RESOLUTION POLICY
(a) In the event of a dispute between the parties hereto regarding the
subject matter hereof, the parties hereto agree to explore resolution of the
dispute through negotiation or alternative dispute resolution techniques
including, but not limited to, the appointment of unrelated third parties who
may act as an independent arbitration panel.
(b) Should the Servicer and Interested Party agree to arbitration, the
number of arbitrators shall be three (3) and shall be appointed as follows:
within ten (10) days of written agreement to arbitrate, Servicer and Interested
Party shall each designate one (1) arbitrator who has knowledge and experience
in commercial matters, and the (2) arbitrators so designated shall jointly
appoint a third arbitrator within ten (10) days of their respective
appointments. The arbitrators so selected shall schedule a hearing on the
disputed issues within forty-five (45) days after the last appointment. The
decision of a majority of the arbitrators shall become binding on the parties,
and the arbitrator shall deliver their written decision to the parties as
expeditiously as possible. The arbitration shall be conducted either in Phoenix,
Arizona or in Chicago, Illinois, and shall be governed by the law of the state
where the arbitration is held. The cost of the arbitration, including reasonable
attorneys' fees, shall be charged against the non-prevailing party. A default
judgment may be entered against any party who fails to appear at the arbitration
hearing. The decision of the arbitrators shall be final and unappealable and
shall be filed as a judgment of record in the appropriate jurisdiction and shall
be grounds for dismissal of any court action commenced by any party with respect
to a dispute arising out of the issues submitted for arbitration.
(c) In the event that Servicer in good faith believes that it is owed
any amounts pursuant to Section 2.07 or 2.10(b) after the applicable due date
for payment, it shall notify the other parties to this Servicing Agreement, and
the parties shall in good faith attempt to resolve such claim. To the extent
that the claim cannot be resolved by the parties within five (5) Business Days,
then the parties hereby agree to determine, within ten (10) Business Days
thereafter, whether the claim will be resolved by arbitration as provided above.
The amount in dispute may be deposited by Servicer from Collections into a joint
order, interest bearing account at a mutually acceptable depository institution
no earlier than three (3) Business Days after the expiration of the initial five
(5) Business Day period. The prevailing party in any dispute over such amounts
shall be entitled to all funds placed in such escrow, plus all accrued interest
thereon.
<PAGE> 44
EXHIBIT G
CONFIDENTIALITY LETTER
[DATE]
[NAME AND ADDRESS OF COMPANY/
PERSON BOUND BY LETTER]
RE: CONFIDENTIALITY LETTER -- ACCEPTANCE OF CONFIDENTIALITY
PROVISIONS TO PROTECT CONFIDENTIAL PROPERTY AND INFORMATION
Ladies and Gentlemen:
__________________ ("Company") hereby acknowledges the
confidentiality provisions ("Confidentiality Provisions") to protect
Confidential Information (as defined below) to which this letter relates, made
by Reliance Acceptance Corporation ("RAC") and BankAmerica Business Credit,
Inc., as agent for a lending group ("BABCI"), for the benefit of Ugly Duckling
Corporation ("UDC") and one or more of its subsidiaries or affiliates
("Servicer"), found in the Servicing Agreement by and between the preceding
parties, dated as of _______________, 1998, ("Servicing Agreement"). Company
hereby agrees to be bound by the terms and conditions of the Confidentiality
Provisions found at Section 7.16 of the Servicing Agreement with respect to all
Confidential Information provided by RAC, BABCI, UDC and/or Servicer to Company.
Company also acknowledges that the Confidential Information includes property
and information of the Servicer both before and after the term of the Servicing
Agreement. Company shall not copy, sell, assign, transfer, distribute or
disclose all or any part of the Confidential Information to any other person,
partnership, corporation or other entity, without the prior written consent of
Servicer. Company shall confine the knowledge and use of the Confidential
Information only to its employees who require such knowledge and use in the
ordinary course and scope of their employment, and Company and its employees
shall use such Confidential Information solely in connection with assisting
RAC's and/or BABCI's purposes under the Servicing Agreement. Further, employees
of Company shall be advised of the confidential nature of the Confidential
Information and be directed by Company to keep such information confidential.
Upon any expiration or termination of the Servicing Agreement or earlier if
appropriate, Company shall promptly return to the Servicer all property or
information that is covered by this confidentiality letter and which is not
required by Company to service its "Receivables" or to realize upon its
"Collateral" (each as defined in the Servicing Agreement).
"Confidential Information" shall mean the designs,
specifications, manuals, documentation and other materials produced by Servicer
and related to the services performed and the products provided hereunder, and
all other systems, programs, designs, specifications ,manuals, documentation and
other materials which are developed by the Servicer in connection with the
Servicing Agreement.
Date: __________________, 1998 [NAME OF COMPANY OR PERSON]
By:____________________________________
Name:__________________________________
Its:___________________________________
<PAGE> 45
EXHIBIT H
MASTER AGENCY AGREEMENT
[To be provided by Ugly Duckling]
<PAGE> 46
EXHIBIT I
MANAGEMENT EMPLOYEES
<PAGE> 47
EXHIBIT J
SENIOR MANAGEMENT EMPLOYEES
<PAGE> 48
EXHIBIT K
FORM OF EXPENSE REPORT
<PAGE> 1
EXHIBIT 10.22
EXECUTION COPY
AGREEMENT OF UNDERSTANDING
This AGREEMENT OF UNDERSTANDING (this "Agreement") is made and entered into
as of February 9, 1998 by and among Reliance Acceptance Group, Inc., a Delaware
corporation ("RAG"), Reliance Acceptance Corporation, a Delaware corporation
("RAC"), the wholly-owned subsidiaries of RAC listed on the signature page
hereto (the "Subsidiaries"), and Ugly Duckling Corporation, a Delaware
corporation ("UDC"), by and through one of its subsidiaries or affiliates. RAG,
RAC, the Subsidiaries and UDC are collectively referred to herein as the
"Parties" and individually as a "Party".
RECITALS
WHEREAS, RAG and UDC entered into a letter of intent dated December 19,
1997 (as amended pursuant to a letter agreement dated January 15, 1998, the
"Letter of Intent") (Capitalized terms used herein but not otherwise defined
herein shall have the meanings given such terms in the Letter of Intent);
WHEREAS, pursuant to the Letter of Intent, RAG and UDC agreed to negotiate
and execute definitive agreements, including, without limitation, the
Transition Services Agreement dated as of February 9, 1998 (the "Transition
Agreement") between UDC, by and through one of its subsidiaries or affiliates,
and RAG, the Warrant Agreement and the Servicing Agreement (the "Transaction
Agreements");
WHEREAS, the Transaction Agreements contemplate the filing of chapter 11
petitions by RAG, RAC and the Subsidiaries (collectively, the "Reliance
Entities") and the preparation, filing, confirmation and consummation of a
joint plan of reorganization in the chapter 11 cases of such entities;
WHEREAS, the Reliance Entities are currently negotiating the terms and
conditions of a plan of reorganization with their respective senior secured
lenders and other creditors and parties in interest;
WHEREAS, the Reliance Entities believe that it is in the best interest of
the Reliance Entities and their creditors for such Entities to seek relief under
chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") and,
concurrently therewith, file a proposed plan of reorganization incorporating the
terms of the Transaction Agreements as substantially embodied in the draft joint
plan attached hereto as Exhibit A (the "Draft Plan") and a related disclosure
statement (the "Disclosure Statement"); and
WHEREAS, the parties hereto desire to set forth their agreement regarding
the preparation, execution and delivery of the Transaction Agreements, the
Consensual Plan (as defined below) and the Disclosure Statement and the
consummation of the transactions contemplated thereby;
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and the terms and
conditions herein contained, the adequacy and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:
1. Preparation of the Plan and other Materials. Promptly upon execution of
this Agreement, the Reliance Entities shall instruct its counsel to (a)
negotiate with its lenders and file a plan of reorganization incorporating the
terms and provisions of the Draft Plan (the "Consensual Plan"); and (b) prepare
(i) petitions (the "Petitions") for relief under chapter 11 of the Bankruptcy
Code; (ii) all schedules, motions, pleadings and other papers necessary in
connection with the filing of the Petitions (including, without limitation, the
Section 363 Sale Motion); and (iii) a Disclosure Statement describing the
Reliance Entities and the Consensual Plan and seeking the consent of each class
of impaired claims and interests identified in the Draft Plan. The Reliance
Entities' counsel shall consult with counsel to UDC with respect to such
documents and provide UDC and its counsel reasonable opportunity to review and
comment on drafts thereof.
2. Timetable for Plan of Reorganization and Solicitation and Filing. The
Reliance Entities shall use their respective good faith efforts to (a) file the
Petitions on or before February 10, 1998; (b) file the Disclosure Statement on
or before March 9, 1998; and (c) obtain Bankruptcy Court approval of the
adequacy of the Disclosure Statement by April 20, 1998. Not later than five
business days after such Bankruptcy Court approval (or such other date as the
Bankruptcy Court orders), the Reliance Entities shall distribute the Disclosure
Statement to all known members of each class of impaired claims or interests
identified in the Consensual Plan and shall solicit the consent of each such
class of claims and interests in compliance with the Bankruptcy Code and Federal
Rules of Bankruptcy Procedure. The solicitation period shall remain open for 35
calendar days (or such longer period as the Bankruptcy Court orders). The
Reliance Entities shall use their respective good faith efforts to notice a
hearing on confirmation of the Consensual Plan, to convene not more than 45 days
after the date the Disclosure Statement is approved and to conclude not more
than 60 days after such approval.
3. Timetable for Consummation of Transactions. The Parties shall use their
respective good faith efforts to consummate the transactions contemplated by the
Transaction Agreements (the "Closing") on the later of (a) the eleventh day
after the entry by the Bankruptcy Court of the Confirmation Order, unless after
the entry of the Confirmation Order, UDC elects in its sole discretion to
proceed with the closing prior to such eleventh day; (b) the first business day
subsequent to the entry by the Bankruptcy Court of the Confirmation Order on
which there is no stay of the Confirmation Order or the closing in effect; or
(c) such other time as the parties mutually agree, but in no event later than
August 1, 1998. The Parties agree that time is of the essence with respect to
the transactions contemplated hereby. At the Closing, the Transition Agreement
shall terminate in accordance with its terms; UDC (or the applicable affiliate
thereof) and RAG shall execute and deliver the Servicing Agreement in the form
attached hereto as Exhibit C, and UDC and RAG shall execute and deliver a
Warrant Agreement with terms and conditions consistent with those described in
the Letter of Intent (the "Warrant Agreement").
4. Support of the Consensual Plan. Each Party will use its reasonable best
efforts to obtain approval of the motions for approval of the Transition
Agreement and the Break-
2
<PAGE> 3
Up Fee (as defined in paragraph 5 below) and confirmation of the Consensual Plan
in accordance with the Bankruptcy Code and the timetables set forth in Sections
2 and 3, respectively. Each Party will use its reasonably best efforts to
achieve confirmation including recommending to the holders of impaired claims
and interests that the Consensual Plan be confirmed. No Party shall (a) object
to confirmation of the Consensual Plan or otherwise commence any proceeding to
oppose or alter the Consensual Plan or any other reorganization documents
containing terms and conditions consistent with those contained in the Draft
Plan (the "Plan Documents"), (b) vote for, consent to, support or participate in
the formulation of any other plan of reorganization or liquidation proposed or
filed or to be proposed or filed in any chapter 11 or chapter 7 case commenced
in respect of any Reliance Entity, (c) directly or indirectly seek, solicit,
support or encourage any other plan, proposal or offer of dissolution, winding
up, liquidation, reorganization, merger or restructuring of the Reliance
Entities that could reasonably be expected to prevent, delay or impede the
successful reorganization of the Reliance Entities as contemplated by the Draft
Plan, (d) object to the Disclosure Statement or the compliance of the
solicitation of consents to the Consensual Plan with Bankruptcy Code Section
1126 or (e) take any other action that is inconsistent with, or that would delay
confirmation of the Consensual Plan; provided, however, that no Party shall be
barred from taking any action with respect to any matter which action is not
inconsistent with the Transaction Agreements and/or the Consensual Plan.
5. Break-Up Fee. On the date the Petitions are filed (the "Petition
Date"), RAG shall file a motion (after consulting with and obtaining the input
from counsel to UDC) seeking a hearing date on approval of the Transition
Agreement in the form attached hereto as Exhibit B, and the Break-Up Fee (as
defined below) on or before the tenth day following the Petition Date. Such
motion shall request the UDC's claim for the Break-Up Fee be afforded status as
a superpriority administrative claim secured by a lien on the Reliance Entities'
assets. The Bankruptcy Court order approving the Transition Agreement and the
Break-Up Fee shall be reasonably satisfactory in form and substance to each
Party hereto (the "Break-Up Fee Order"). The Reliance Entities shall pay to UDC
a $2,000,000 fee (the "Break-Up Fee") in the event that after the Bankruptcy
Court has entered the Break-Up Fee Order, (a) RAG and UDC execute and deliver
the Warrant Agreement and (b)(i) UDC terminates the Transition Agreement, the
Servicing Agreement or this Agreement by written notice after the Reliance
Entities materially breach the Transition Agreement or this Agreement at any
time or the Servicing Agreement prior to the effective date of the Consensual
Plan, as applicable (provided that at such time UDC is not then in breach of any
of such Agreements); or (ii) the Transactions are not consummated solely as a
result of the Reliance Entities' entering into an alternative transaction with a
counterparty other than UDC; it being understood that the conditions described
in clauses (a) and (b) shall not be satisfied if the Transactions are not
consummated due to the failure of a condition to Closing set forth in paragraph
6 below to have been satisfied. UDC shall pay to the Reliance Entities a
$2,000,000 fee (the "Reliance Break-Up Fee") in the event that after the
Bankruptcy Court has entered the Break-Up Fee Order, the Reliance Entities
terminate the Transition Agreement, the Servicing Agreement or this Agreement by
written notice after UDC materially breaches the Transition Agreement or this
Agreement at any time or the Servicing Agreement prior to the effective date of
the Consensual Plan, as applicable (provided that at such time the Reliance
Entities are not then in breach of any of such Agreements).
3
<PAGE> 4
6. Conditions to Closing of the Transactions. The Parties
obligations to consummate the transactions contemplated by the Transaction
Agreements are subject to the satisfaction of the following conditions:
(a) The Break-Up Fee Order shall have been entered by the Bankruptcy
Court on or before the twentieth day after the Petition Date;
(b) The Bankruptcy Court shall have entered an order approving the
Disclosure Statement on or before May 29, 1998 in form and substance
satisfactory to the Reliance Entities;
(c) The Reliance Entities shall have obtained the acceptance of the
Consensual Plan from the requisite classes of claims and equity interests;
(d) The Bankruptcy Court shall have entered the Confirmation Order
approving, among other things, the Consensual Plan (as the same may have been
modified or amended, so long as such modification and/or amendment does not
adversely affect UDC's rights as set forth in the Transaction Documents and the
Consensual Plan) on or before July 10, 1998 in form and substance satisfactory
to the Reliance Entities;
(e) UDC and the Reliance Entities shall have executed and delivered
the Servicing Agreement;
(f) UDC and RAG shall have executed and delivered the Warrant
Agreement; and
(g) The Reliance Entities and their senior secured lenders shall have
executed and delivered the post-confirmation loan agreement referred to in the
Consensual Plan.
7. Representations and Warranties. Each Party represents and
warrants to the other Parties that (a) it has full power and authority, and has
taken all action necessary to execute, deliver and perform this Agreement and
all documents required to be executed and delivered by it in connection
herewith, to fulfill its obligations hereunder and thereunder, and to
consummate the transactions contemplated hereby and thereby, subject to the
entry of any and all required Bankruptcy Court orders; (b) the making and
performance by it of this Agreement and all documents required to be executed
and delivered by it in connection herewith, and fulfillment of its obligations
hereunder and thereunder, do not violate any law or regulation of the
jurisdiction under which it exists, any other law or regulation applicable to
it or constitute a breach or default of any material agreement to which it is a
party or by which it is bound, or contravene any provision of any document
under which it was organized; and (c) this Agreement and all documents required
to be executed hereunder have been duly executed and delivered by it and
constitute its legal, valid and binding obligation, enforceable (subject to any
bankruptcy, insolvency, reorganization, restructuring, moratorium or similar
laws affecting creditors' rights generally) against it in accordance with the
respective terms hereof and thereof.
4
<PAGE> 5
8. Miscellaneous.
(a) This Agreement, together with the Exhibits hereto, constitute the
complete agreement of the Parties with respect to the subject matters referred
to herein and supersede all prior or contemporaneous negotiations, promises,
covenants, agreements or representations of every nature whatsoever with respect
thereto, all of which have become merged finally integrated into this Agreement.
This Agreement cannot be amended, modified or supplemented except by an
instrument in writing executed by the Parties.
(b) Except as otherwise provided in the Transaction Agreements, each Party
agrees, at its cost and expense, to execute and deliver, or to cause to be
executed and delivered, all such instruments and to take all such action as any
other Party may reasonably request in order to effectuate the intent and
purposes of, and to carry out the terms of this Agreement.
(c) It is acknowledged and agreed by the Parties that (except as otherwise
set forth herein) money damages would not be a sufficient remedy for any breach
of this Agreement by any Party and each non-breaching Party shall be entitled to
specific performance and injunctive or other equitable relief as a remedy of
such breach, and each Party agrees to waive any requirement for the securing or
posting of a bond in connection with such remedy.
(d) Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
(e) This Agreement shall become effective upon the execution and delivery
of counterparts hereof by each of the parties listed on the signature pages
hereof. This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors and permitted. Neither this Agreement
nor any rights or obligations of any Party hereto can be assigned or otherwise
transferred without the prior written consent of the other Parties hereto.
(f) This Agreement may be executed in counterparts, each of which when so
executed shall be an original, but all such counterparts shall together
constitute but one and the same instrument. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT
REGARD TO ANY CONFLICTS OF LAWS PROVISIONS THEREOF.
5
<PAGE> 6
IN WITNESS WHEREOF, the due execution hereof by the respective duly
authorized general partner or officer of the undersigned as of the date first
written above.
RELIANCE ACCEPTANCE GROUP, INC.
By: /s/ James T. Moran
-------------------------------
Name:
Title:
RELIANCE ACCEPTANCE CORPORATION
By: /s/ James T. Moran
-------------------------------
Name:
Title:
RELIANCE ACCEPTANCE CORP. OF ARIZONA,
RELIANCE ACCEPTANCE CORP. OF COLORADO,
RELIANCE ACCEPTANCE CORP. OF FLORIDA,
RELIANCE ACCEPTANCE CORP. OF GEORGIA,
RELIANCE ACCEPTANCE CORP. OF ILLINOIS,
RELIANCE ACCEPTANCE CORP. OF INDIANA,
RELIANCE ACCEPTANCE CORP. OF IOWA,
RELIANCE ACCEPTANCE CORP. OF KENTUCKY,
RELIANCE ACCEPTANCE CORP. OF MINNESOTA,
RELIANCE ACCEPTANCE CORP. OF MISSOURI,
RELIANCE ACCEPTANCE CORP. OF NEVADA,
RELIANCE ACCEPTANCE CORP. OF NEW MEXICO,
RELIANCE ACCEPTANCE CORP. OF NORTH
CAROLINA, RELIANCE ACCEPTANCE CORP. OF
OHIO, RELIANCE ACCEPTANCE CORP. OF
OREGON, RELIANCE ACCEPTANCE CORP. OF
SOUTH CAROLINA, RELIANCE ACCEPTANCE
CORP. OF TENNESSEE, RELIANCE ACCEPTANCE
CORP. OF TEXAS, RELIANCE ACCEPTANCE
CORP. OF UTAH, RELIANCE ACCEPTANCE CORP.
OF WASHINGTON
By: /s/ James T. Moran
-------------------------------
Name:
Title:
6
<PAGE> 7
IN WITNESS WHEREOF, the due execution hereof by the respective duly
authorized general partner or officer of the undersigned as of the date first
written above.
UGLY DUCKLING CORPORATION
By: /s/ Ernest C. Garcia II
--------------------------------------
Name: Ernest C. Garcia II
Title: CEO
7
<PAGE> 1
Exhibit 10.23
CAPITALIZATION AGREEMENT
THIS CAPITALIZATION AGREEMENT (this "Agreement") is dated the ____ day
of ______, 1998 and made by and among Ugly Duckling Corporation, a Delaware
corporation (the "Company"), Cygnet Finance, Inc., an Arizona corporation ("Old
Cygnet"), Cygnet Finance Alabama, Inc., an Alabama corporation ("Old Cygnet
Alabama"), Champion Acceptance Corporation, an Arizona corporation ("CAC"), and
Cygnet Financial Corporation, a Delaware corporation (including any wholly-owned
subsidiary "Cygnet").
RECITALS
WHEREAS, the Company's Board of Directors has determined that the
separation of the operations of the Company and its subsidiaries into two
separate publicly-traded corporate groups will promote the growth of each
separate business group and enhance aggregate shareholder value; and
WHEREAS, subject to approval by the Company's shareholders, the
Company's Board of Directors has proposed that there be transferred and/or
delegated to Cygnet or its subsidiaries various assets including (a) the
Company's bulk purchase and servicing operations with respect to contracts
originated by independent used car dealerships, (b) the assets of Old Cygnet and
Old Cygnet Alabama through which the Company provides independent automobile
dealerships with warehouse purchase facilities and operating credit lines, (c)
substantially all of the Company's rights and obligations with respect to
certain transactions entered into in respect of the bankruptcy proceedings of
First Merchants Acceptance Corporation, as described in Article Six hereof, and
(d) substantially all of the Company's rights and obligations with respect to
certain transactions entered into in respect of the bankruptcy proceedings of
Reliance Acceptance Corporation, as described in Article Six hereof
(collectively, the "Third Party Dealer Assets"), following which Cygnet and its
subsidiaries will own and operate the Third Party Dealer Assets and related
liabilities as well as any and all additional assets and liabilities they may
acquire in one publicly-traded corporate group and the Company will own and
operate the remaining assets currently held by the Company and its subsidiaries
in a separate publicly-traded corporate group (the "Split-up"); and
WHEREAS, prior to the Split-up, Cygnet may enter into certain
additional transactions effected as contemplated in Article Four hereof; and
WHEREAS, it is proposed that Cygnet be capitalized through a
combination of transactions involving (a) the issuance of stock by Cygnet for
cash following the issuance by Cygnet of rights to acquire such stock and the
issuance by Cygnet of stock and warrants to purchase stock pursuant to certain
other transactions and (b) the acquisition by Cygnet and its subsidiaries of the
Third Party Dealer Assets in exchange for cash and preferred stock; and
WHEREAS, this Agreement is intended to set forth the details governing
the capitalization of the Company and matters ancillary thereto as a part of a
single integrated plan relating to the capitalization of Cygnet and matters
ancillary thereto;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
<PAGE> 2
ARTICLE ONE
DEFINITIONS
1.1 General. As used in this Agreement, and except as otherwise
defined in Articles Seven and Eight hereof, the terms below shall have the
following meanings:
"Action" shall mean any action, order, writ, injunction,
judgment, ruling, decree outstanding, any statute, rule, regulation, or
executive order, or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, government audit or investigation.
"Affiliate" shall mean any corporation or other entity
directly or indirectly controlled by Garcia.
"B Pieces" shall mean the residual interests in the
Securitized Pools of FMAC represented by the B-Certificates, all of which are
held by FMARC and FMARC II.
"Break-Up Fee" shall have the meaning given in paragraph 5 of
the Agreement of Understanding dated as of February 9, 1998 as between the
Company and Reliance.
"Business Day" shall mean a day of the year on which banks are
not required or authorized to close in Minneapolis, Minnesota or Phoenix,
Arizona.
"Closing Date" shall have the meaning given in Section 3.1.
"Commencement Date" shall mean the date on which the Rights
are first mailed or delivered to stockholders of the Company pursuant to the
Rights Offering.
"Company" shall mean Ugly Duckling Corporation, a Delaware
corporation.
"Company Common Stock" shall mean the common stock of the
Company, $.001 par value.
"Company Subsidiary" shall mean a corporation, limited
liability company, partnership or other entity, all of the shares or interests
in which are owned by the Company.
"Company Transferor Subsidiary" shall mean a Company
Subsidiary transferring a portion of the Third Party Dealer Assets to Cygnet or
a Cygnet Subsidiary in accordance with Article Four.
"Consultants" shall have the meaning given in Section 5.4.
"Contract Purchaser" shall mean General Electric Capital
Corporation.
"Contract Purchaser Guaranty" shall mean that certain Guaranty
dated as of December 18, 1997 by the Company in favor of the Contract Purchaser.
2
<PAGE> 3
"Contribution Agreement" shall mean that certain Contribution
Agreement, dated as of December 15, 1998, by and between FMAC and the Company.
"Corporate Headquarters Building" shall mean the building
located at 2525 E. Camelback Road.
"Corporate Headquarters Lease" shall mean that certain lease
between the Company and Landlord and relating to the Corporate Headquarters
Building.
"Credit Bid Purchase Price" shall mean the entire amount of
the senior bank debt plus interest, fees, costs and expenses credit bid for the
Owned Contracts prior to the transfer thereof to the Contract Purchaser.
"Cutoff Date" shall mean one (1) year following the Closing
Date or such later date as is agreed to by Company and Cygnet.
"Cygnet" shall mean Cygnet Financial Corporation, a Delaware
corporation.
"Cygnet Common Stock" shall mean the $.001 par value common
stock of Cygnet.
"Cygnet Preferred Stock" shall mean $.001 par value Series A
Cumulative Convertible Preferred Stock of Cygnet with an aggregate liquidation
preference of $40 million.
"Cygnet Registration Statement" shall mean that certain
registration statement on Form S-1 pursuant to which the Rights and shares of
Cygnet Common Stock issuable pursuant to the Rights Offering are registered
under the Securities Act.
"Cygnet Subsidiary" shall mean a subsidiary or limited
liability company all of the shares or interests in which are owned by Cygnet.
"DIP Facility" shall mean that certain Credit and Security
Agreement dated as of July 17, 1997 by and between the Company and FMAC, as
amended or modified.
"Distribution Agent" shall mean Norwest Bank Minnesota,
National Association, as distribution agent for the Rights Offering.
"Electing Employee" shall have the meaning given in Section
3.4.b.
"Employee Shares" shall have the meaning given in Section
3.4.b.
"Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"Escrow Account" shall have the meaning given in Section 2.5.
3
<PAGE> 4
"Escrow Agent" shall have the meaning given in Section 2.5.
"Escrow Agreement" shall mean that certain Escrow Agreement
between Cygnet and the Escrow Agent in substantially the form of Exhibit A
hereto.
"Escrowed Subscription Funds" shall mean the aggregate
Subscription Price paid by all holders of Rights who elect to purchase shares of
Cygnet Common Stock pursuant to the Rights Offering either upon exercise of
their Rights and/or the related Over-Subscription Election, but excluding monies
payable by Garcia or his Affiliates whether upon exercise of their Rights,
Over-Subscription Election and/or Standby Purchase Obligation.
"Excess Collection Split" shall mean any recovery on the Owned
Contracts in excess of the Secured Claim Recovery Amount and any distributions
on the B Pieces after payment in full of the Secured Claim Recovery Amount, the
DIP Facility, the Modified UDC Fee [and certain other amounts], to be shared
between FMAC and the Company on the basis of 82 1/2% for the benefit of FMAC and
17 1/2% for the benefit of the Company, subject to adjustment in certain cases.
"Expiration Date" shall mean the date that is [twenty-one
(21)] days following the Commencement Date or such other date to which the
Rights Offering shall be extended.
"FMAC" shall mean First Merchants Acceptance Corporation.
"FMAC Excluded Obligations" shall mean (a) all of the
Company's obligations remaining due and owing to certain Sellers as defined in
that certain Loan Purchase Agreement, dated August 20, 1997 by and among Ugly
Duckling Corporation, LaSalle National Bank and certain other lenders and (b)
all of the Company's obligations under these certain Warrant Agreements, dated
August 21, 1998 and April 1, 1998, between Ugly Duckling Corporation and Harris
Trust Company of California.
"FMAC Plan" shall mean that certain Plan of Reorganization
confirmed by the United States Bankruptcy Court for the District of Delaware on
March 16, 1998.
"FMARC" shall mean First Merchants Auto Receivables
Corporation.
"FMARC II" shall mean First Merchants Auto Receivables
Corporation II.
"FSA" shall mean Financial Security Assurance, Inc.
"Garcia" shall mean Ernest C. Garcia, II.
"Garcia Additional Shares" shall have the meaning given in
Section 3.4.a.
"Garcia Payment Obligation" shall have the meaning given in
Section 2.9.
"Garcia Warrants" shall have the meaning given in Section 3.3.
"Headquarters Sublease" shall have the meaning given in
Section 4.3.
"Interim Assets" shall have the meaning given in Section 4.13.
4
<PAGE> 5
"Interim Consideration" shall have the meaning given in
Section 4.13.
"Interim Earnings" shall have the meaning given in Section
4.13.
"Interim Loan" shall mean any loan made by the Company to
Cygnet or its related subsidiaries and which is necessary to consummate any
Interim Transaction.
"Interim Transaction" shall have the meaning given in Section
4.13.
"Landlord" shall mean Property Arizona ABJLW One Corp.
"Lender Warrants" shall have the meaning given in Section
3.4.c.
"Material Adverse Effect" shall mean, with respect to the
Third Party Dealer Business or the Third Party Dealer Assets, any significant
and substantial adverse effect in the condition (financial or other), business,
results of operations, prospects, assets, liabilities, customer, supplier or
employee relations or operations of the Third Party Dealer Business and/or the
Third Party Dealer Assets or on the ability of the Company to consummate the
transactions contemplated by Article Four hereof, or any event or condition
which would, with the passage of time, constitute a "Material Adverse Effect."
"Modified UDC Fee" shall mean a fee of $450,000 payable prior
to any payments pursuant to the Excess Collection Split solely from collections
on the B Pieces, and secured by a pledge of the stock of FMARC and FMARC II,
subordinate only to the DIP Facility, the Secured Claim Recovery Amount and
prior pledges of FMARC II stock.
"Nasdaq" shall mean the National Association of Securities
Dealers, Inc. Automated Quotation System (National Market System).
"Net Appraised Value" shall mean the fair market value of the
Third Party Dealer Assets as determined by the Company's appraiser, Willamette
Management Associates, and advised to the Company in writing less book
liabilities of the Third Party Dealer Assets.
"Net Book Value" of the Third Party Dealer Assets shall mean
the book value less book liabilities of the Third Party Dealer Assets, as
reflected in the Company's Third Party Dealer Asset Balance Sheet.
"Offered Shares" shall mean the aggregate number of shares of
Cygnet Common Stock offered for purchase pursuant to the Rights.
"Over-Subscription Election" shall mean the election described
in Section 2.8 pursuant to which a Rights Holder may purchase additional shares
of Cygnet Common Stock in connection with the Rights Offering.
"Owned Contract Purchase Agreement" means that certain
Purchase Agreement dated as of December 18, 1997 by and among the Company, the
Contract Purchaser, and LaSalle National Bank, as Agent.
"Owned Contracts" shall mean the receivables for the purchase
of new or used automobiles, trucks, vans, and sport utility vehicles that
originally secured the senior bank debt of FMAC and were purchased by credit bid
of the agent for the holders of the senior bank debt and then sold to the
Contract Purchaser.
5
<PAGE> 6
"Permits" shall mean all licenses, permits, franchises,
approvals, authorizations, consents or orders of, or filings with, any
governmental authority, whether foreign, federal, state or local, or any other
person, necessary or desirable for the past, present or anticipated conduct of,
or relating to the operation of, the Third Party Dealer Business.
"Purchase Notice" shall have the meaning given in Section
3.4.b.
"Record Holder" shall mean a holder of record of Company
Common Stock on the Rights Record Date.
"Reliance" shall mean Reliance Acceptance Corporation and/or
Reliance Acceptance Group, Inc.
"Reliance Assets" shall mean those assets conveyed to the
Company by Reliance pursuant to the Reliance Bill of Sale.
"Reliance Bill of Sale" shall mean that certain Bill of Sale,
made as of July 31, 1998, by and between Reliance and the Company.
"Reliance Leases" shall have the meaning given in Section
6.2.c.
"Reliance Note" shall mean that certain promissory note,
executed by the Company and dated July 31, 1998 in the original principal amount
of $250,000.00.
"Reliance Subleases" shall have the meaning given in Section
6.2.c.
"Reliance Warrants" shall have the meaning given in Section
6.2.a.
"Required Agreements" shall mean (i) the Escrow Agreement and
(ii) the Standby Purchase Agreement described in Section 3.2.
"Retained Reliance Obligation" shall have the meaning given in
Section 6.2.a.
"Rights" shall mean the rights to purchase shares of Cygnet
Common Stock described in Article Two of this Agreement.
"Rights Certificates" shall have the meaning given in Section
2.2.
"Rights Exercise and Standby Purchase Agreement" shall mean
that certain agreement executed by Cygnet, the Company and Garcia and
substantially in the form attached hereto as Exhibit B.
"Rights Holder" shall have the meaning given in Section 2.8.
"Rights Offering" shall mean the offering of Rights to
purchase shares of Cygnet Common Stock pursuant to Article Two hereof.
"Rights Record Date" shall mean August 17, 1998.
"Secured Claim Recovery Amount" shall mean any shortfall
between (a) the Credit Bid Purchase Price of the Owned Contracts plus interest
thereon at the rate of 11% per annum from December 15, 1997, plus an additional
charge for servicing the Owned Contracts, calculated on a monthly basis, of the
greater of 1/12 of 3-1/4% of the outstanding principal balance of the Owned
Contracts of $15.00 per Owned Contract, applied only to Owned Contracts that are
less than 120 days past due and for which the related vehicle has not been
repossessed and (b) collections and proceeds of the Owned Contracts.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Securitized Pools" shall mean the various securitized loan
pools of FMAC.
"Shares" shall have the meaning given in Section 4.6.b.
"Split-up" shall have the meaning given in the second WHEREAS
clause in the Recitals hereof.
6
<PAGE> 7
"Split Up Proposal" shall mean the proposal of the Board of
Directors to separate the Company and its subsidiaries into two separate
publicly-traded corporate groups as approved by the Board at its meeting of July
16, 1998 and as revised by the Board from time to time.
"Standby Purchase Obligation" shall mean the obligation of
Garcia to purchase shares of Cygnet Common Stock described in Section 3.2.
"Stock Option Shares" shall mean Company Common Stock that may
be issued by the Company to FMAC or its unsecured creditors at the election of
the Company as described in Section 6.1.e.
"Stock Option Value" shall mean the aggregate value of the
Stock Option Shares on the date of their issuance determined by multiplying the
Stock Option Shares by 98% of the average of the closing prices for the previous
ten trading days of Company Common Stock on Nasdaq or such other market on which
such stock may then be traded.
"Subscription Price" shall have the meaning given in Section
2.1.
"Third Party Agreements" shall have the meaning given in
Section 4.5.
"Third Party Dealer Asset Balance Sheet" shall mean the
balance sheet of the Company, dated as of the last day of the calendar month
preceding the Closing Date (the "Preliminary Third Part Asset Balance Sheet")
and updated as of the Closing Date as soon as practicable thereafter (the "Final
Third Party Asset Balance Sheet"), relating to the Third Party Dealer Business.
"Third Party Dealer Assets" shall have the meaning given in
the second WHEREAS clause in the Recitals hereof and shall include the assets
described on Schedule 4.1.
"Third Party Dealer Business" shall mean the business
conducted by the Company and its subsidiaries with respect to the Third Party
Dealer Assets.
"Third Party Dealer Liabilities" shall have the meaning given
in Section 4.2.
"Transfer Agent" shall mean Norwest Bank Minnesota, National
Association, as transfer agent for the Cygnet Common Stock.
"Transition Period" shall mean the time period commencing on
the Closing Date and ending on the Cutoff Date.
"Unpurchased Allotment" shall have the meaning given in
Section 2.8.
"Verde Note" shall mean that certain 10% Subordinated
Debenture dated June 21, 1996, as amended, from the Company, as Payor, to Verde
Investments, Inc., an Arizona corporation, as Payee.
1.2 Other Defined Terms. The following terms shall have the
meanings defined for such terms in the Sections set forth below:
7
<PAGE> 8
CAC Introductory Paragraph
Old Cygnet Alabama Introductory Paragraph
Old Cygnet Introductory Paragraph
ARTICLE TWO
ISSUANCE OF RIGHTS TO PURCHASE CYGNET COMMON STOCK
2.1 General. Provided that the conditions to the Rights Offering
provided in Section 2.11 are satisfied or waived, and unless the Company's Board
of Directors exercises its right in its sole discretion to abandon the Split-Up
Proposal, Cygnet shall, on the Commencement Date, issue Rights directly to each
holder of Company Common Stock as of the Rights Record Date. Subject to Section
2.3 hereof, each Record Holder would be entitled to receive one (1) Right for
every four (4) shares of Company Common Stock owned. Except as otherwise
provided in Sections 2.3 and 2.8 hereof, each Right shall entitle the Record
Holder thereof to purchase one share of Cygnet Common Stock at the price of
$7.00 per share (the "Subscription Price"). The Rights shall be transferable,
and shall be exercisable through the Expiration Date.
2.2 Form of Certificate; Transmittal. The Rights shall be
evidenced by certificates ("Rights Certificates"). The Right Certificates (and
the forms of election to purchase Cygnet Common Stock and of transfer or other
assignment to be incorporated therein) shall have such marks of identification
or designation and such legends, summaries or endorsements printed thereon as
Cygnet may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any applicable law or with
any rule or regulation made pursuant thereto or with any rule or regulation of
any stock exchange or association on which the Rights may from time to time be
listed, or to conform to usage. The Rights Certificates shall be sent on the
Commencement Date by or on behalf of Cygnet to holders of Company Common Stock
as of the Rights Record Date by first class, insured, postage pre-paid mail or
such other method of delivery as shall be satisfactory to Cygnet as soon as
practicable after satisfaction of the conditions to the Rights Offering set
forth in Section 2.11.
2.3 No Fractional Rights. The Company shall not issue fractions of
Rights or issue Right Certificates which evidence fractional Rights. Instead, in
the event that the number of shares of Company Common Stock held by any Record
Holder as of the Rights Record Date shall not be divisible by four (4), the
number of Rights to be issued to such holder shall be rounded upward to the
nearest whole Right. Record Holders will be instructed to allocate the Rights
among beneficial owners for whom the Record Holders hold such Rights by rounding
upward or downward to the nearest whole Right.
2.4 Trading Market for Rights. Cygnet shall be obligated to
utilize all reasonable efforts to cause the Rights to be tradable on an
established securities market for the entire period during which the Rights may
be exercised. To the extent that the assistance of the Company is required or is
requested by Cygnet in this regard, such assistance shall be furnished by the
Company.
2.5 Agents. Cygnet shall be obligated to engage an agent (the
"Escrow Agent") to establish an account (the "Escrow Account") in which the
Subscription Price payable upon the exercise of the Rights, the
Over-Subscription Election, and the Standby Purchase Obligation, except as
provided in Section 2.9, would be deposited pending the Closing Date. Each of
Cygnet and/or
8
<PAGE> 9
the Company shall be authorized to engage the Escrow Agent and one
or more other agents to assist it in connection with all additional procedural
matters relating to the issuance, delivery and exercise of the Rights.
2.6 Exercise of Rights. Except as provided in Section 2.9 below, a
Rights Holder shall be authorized to exercise his Rights in whole or in part at
any time on or after the Commencement Date and before the close of business
(5:00 p.m. Minnesota time) on the Expiration Date upon surrender of the Rights
Certificates evidencing such Rights, with the form of election to purchase duly
executed, to the Distribution Agent at the principal office of the Distribution
Agent, together with payment of the Subscription Price in lawful money of the
United States by certified check or money order payable to the Escrow Agent for
each share of Cygnet Common Stock as to which the Rights are exercised, on or
prior to the Expiration Date. Notwithstanding anything to the contrary herein,
the Company or Cygnet may agree to allow certain guaranteed delivery procedures
in connection with exercises of the Rights and related Over-Subscription
Elections, whereby if a notice of guaranteed delivery is deposited with the
Distribution Agent by close of business on the Expiration Date, subscribers may
subsequently deposit executed Rights Certificates and subscription monies in
accordance with such procedures.
2.7 Recordkeeping. Following the Commencement Date, Cygnet shall
keep or cause to be kept, at its principal office or at the office of the
Transfer Agent for the Cygnet Common Stock, books for registration and transfer
or other assignment of the Rights Certificates issued hereunder. Such books
shall reflect the names and addresses of the Rights Holders and the number of
Rights evidenced on its face by each of the Rights Certificates and the date of
each of the Rights Certificates.
2.8 Over-Subscription Election. The terms governing the issuance
of Rights shall authorize each holder of Rights (a "Rights Holder") who elects
to exercise all of his Rights to elect to purchase an additional number of
shares of Cygnet Common Stock up to the number of shares of Cygnet Common Stock
purchased upon exercise of such holder's Rights. Exercise of such an
Over-Subscription Election by a Rights Holder shall enable such holder to
purchase additional shares of Cygnet Common Stock in connection with the Rights
Offering in the event that fewer than all of the Offered Shares are purchased.
If the number of shares elected for purchase pursuant to all Over-Subscription
Elections by Rights Holders shall exceed the excess of (a) the number of Offered
Shares over (b) the number of shares purchased pursuant to the terms of the
Rights Offering excluding shares of Cygnet Common Stock designated for purchase
pursuant to any Over-Subscription Election (such excess hereafter referred to as
the "Unpurchased Allotment"), each holder who makes an Over-Subscription
Election shall be authorized to purchase a pro rata portion of the Unpurchased
Allotment as described in the Escrow Agreement. Each Rights Certificate shall
contain a form of Over-Subscription Election incorporated therein. Except as
provided in Section 2.9 below and except in accordance with any guaranteed
delivery procedures as described in Section 2.6 above, a Rights Holder shall be
authorized to exercise the Over-Subscription Election concurrently with the
exercise of the related Rights by duly executing the form of Over-Subscription
Election thereon, together with payment in full of the Subscription Price in
lawful money of the United States by certified check or money order payable to
the Escrow Agent for all shares of Cygnet Common Stock subject to such election,
on or prior to the Expiration Date.
2.9 Garcia Exercises. Notwithstanding anything to the contrary
herein, Garcia and his Affiliates may validly exercise their Rights (including
any Rights purchased by Garcia or his Affiliates) and the Over-Subscription
Elections related thereto, by surrender of their Rights Certificates with the
form of election to purchase and, if applicable, the form of Over- Subscription
Election thereon duly executed to the Distribution Agent or Cygnet, together
with payment of the Subscription Price therefor in accordance with the next
sentence below concurrently with the satisfaction of the
9
<PAGE> 10
Standby Purchase Obligation as provided in Section 3.2, on or prior to the
Closing Date. Garcia and his Affiliates may pay all or any portion of the monies
required to exercise their Rights, related Over-Subscription Elections and
Standby Purchase Obligation (the "Garcia Payment Obligation") directly to
Cygnet, including, at their election, by delivery of the Verde Note or an
assignment of any portion thereof, and such delivery shall be deemed to satisfy
the Garcia Payment Obligation in the full face amount of the Verde Note or
assigned portion thereof.
2.10 Deposit of Subscription Funds. Cygnet shall require the
Distribution Agent to deposit all subscription funds into the Escrow Account
within one Business Day of receipt thereof. In the event that the Closing Date
does not occur within the time period provided in the Escrow Agreement, the
Escrow Agent shall return all Escrowed Subscription Funds to the exercising
Rights Holders, without interest.
2.11 Conditions to the Rights Offering. The obligation of the
Company and Cygnet to consummate the transactions contemplated in this Article
Two are subject to the satisfaction or waiver on or prior to the Commencement
Date, of each of the following conditions:
a. The stockholders of the Company shall have approved
the Split-up Proposal.
b. The Company's Board of Directors shall not have
exercised its right in its sole discretion to abandon the Split-Up Proposal.
c. The Rights and Cygnet Common Stock shall have been
approved for listing on Nasdaq or on such other trading exchange or electronic
medium as is acceptable to the Boards of Directors of the Company and Cygnet,
subject to official notice of issuance.
d. The Cygnet Registration Statement shall have been
filed with the Securities and Exchange Commission and shall have become
effective with no stop order being in effect with respect thereto.
e. The Company shall have received the opinion by an
independent third party engaged by the Company customarily furnishing opinions
of a similar nature, opining as to the fairness to the Company's shareholders of
certain aspects of the Split-up and such opinion shall be in full force and
effect.
f. The Company shall have received the opinion of
Willamette Management Associates as to the Net Appraised Value of the Third
Party Dealer Assets, the fair market value of the Rights, and the fair market
value of the Cygnet Preferred Stock and such opinion shall be in full force and
effect.
g. The Required Agreements shall have been validly
executed and delivered and shall be in full force and effect.
h. All authorizations, consents, approvals, waivers and
clearances of all federal, state, local and foreign governmental agencies and
all other persons required therefor shall have been obtained and shall be in
full force and effect, without any conditions being imposed that would have a
material adverse effect on the Company or Cygnet.
i. No Action by any governmental authority or other
person shall have been instituted or threatened which questions the validity or
legality of the Rights Offering or the Split-up.
10
<PAGE> 11
j. All legal and regulatory issues relating to the
Rights Offering and the Split-up shall have been resolved to the satisfaction
of the Boards of Directors of the Company and Cygnet.
ARTICLE THREE
ISSUANCE OF CYGNET STOCK AND WARRANTS
3.1 Payment from Escrow Account. Provided that the Company's Board
of Directors does not exercise its right in its sole discretion to abandon the
Split-Up Proposal and all other conditions thereto are satisfied or waived, not
later than the date following the Expiration Date that is notified to the Escrow
Agent by the Company upon at least three (3) Business Day's notice as the
closing date for the Rights Offering unless the Escrow Agent shall accept a
shorter period (the "Closing Date"), the Escrow Agent shall be required,
pursuant to and on conditions stated in the Escrow Agreement, to deliver or
cause to be delivered to Cygnet the Escrowed Subscription Funds. Cygnet shall
promptly thereafter requisition Cygnet's transfer agent to deliver certificates
evidencing ownership of the Cygnet Company Stock to all purchasers of Cygnet
Common Stock pursuant to the Rights Offering.
3.2 Standby Purchase. If fewer than seventy-five percent (75%) of
the Offered Shares shall have been subscribed for in connection with the Rights
Offering (including any Offered Shares subscribed for pursuant to
Over-Subscription Elections), Garcia shall be required to purchase, not later
than the Closing Date, such number of shares of Cygnet Common Stock as shall be
required to result in the aggregate purchase of seventy-five percent (75%) of
the Offered Shares (the "Standby Purchase Obligation"). The subscription price
per share for the shares of Cygnet Common Stock required to be purchased by
Garcia pursuant to the Standby Purchase Obligation shall be identical to the
Subscription Price per share of Cygnet Common Stock payable in connection with
the Rights Offering and shall be payable directly to Cygnet pursuant to Section
2.9 hereof. Garcia's Standby Purchase Obligation may be satisfied by any
Affiliate of Garcia. The Standby Purchase Obligation shall be governed by a
Rights Exercise and Standby Purchase Agreement in substantially the form
attached hereto as Exhibit B.
3.3 Garcia Warrants. On the Closing Date, Cygnet shall, in
consideration for the obligation incurred by Garcia pursuant to Section 3.2,
grant to Garcia warrants to acquire Cygnet Common Stock ("Garcia Warrants"),
entitling Garcia to purchase, at any time during the period commencing on the
Closing Date and ending five (5) years following the Closing Date, up to 500,000
shares of Cygnet Common Stock at an exercise price per share equal to
one-hundred twenty percent (120%) of the Subscription Price per share of Cygnet
Common Stock payable under the Rights Offering. Notwithstanding the foregoing,
the Garcia Warrants shall be delivered to Garcia only if, on the Closing Date,
Garcia has fully satisfied his Standby Purchase Obligation pursuant to Section
3.2. Cygnet shall enter into a warrant agreement relating to the Garcia Warrants
either with Garcia or, at his request, with a warrant agent acceptable to Cygnet
and Garcia, and shall agree to register the Cygnet Common Stock issuable upon
exercise of the Garcia Warrants pursuant to the Securities Act on terms mutually
acceptable to Cygnet and Garcia but no such registration shall be required prior
to one year following the Closing Date.
3.4 Additional Stock and Warrant Issuances. Provided that the
Board of Directors of the Company has not exercised its right to abandon the
Split-Up Proposal and all other conditions thereto have been satisfied or
waived, and provided that at least seventy-five percent (75%) of the Offered
Shares shall have been purchased in accordance with the Rights Offering and the
Standby Purchase Obligation, on the Closing Date:
11
<PAGE> 12
a. Garcia shall be authorized to purchase from Cygnet up
to an additional 714,285 shares of Cygnet Common Stock ("Garcia Additional
Shares") at a price per share equal to the Subscription Price. Garcia must give
notice to Cygnet and the Transfer Agent of his election to purchase all or any
portion of the Garcia Additional Shares no later than one (1) Business Day prior
to the Closing Date. The subscription price payable upon purchase of the Garcia
Additional Shares must be paid not later than the Closing Date directly to
Cygnet.
b. Directors and employees of the Company and/or the
Company Subsidiaries who will become directors or employees of Cygnet or any of
its subsidiaries as of the Closing Date (other than Garcia) shall be authorized
to purchase from Cygnet an aggregate of 214,285 shares of Cygnet Common Stock
(the "Employee Shares") at a price equal to the Subscription Price. Each such
director or employee who elects to purchase shares of Cygnet Common Stock
pursuant to this Section 3.4.b (an "Electing Employee") must give notice (a
"Purchase Notice") to Cygnet and the Transfer Agent of his election so to
purchase and of the number of shares he elects to purchase not later than three
(3) Business Days prior to the Closing Date. If all Purchase Notices received
evidence subscription to the Employee Shares in excess of the number of Employee
Shares available for purchase each Electing Employee will be authorized to
purchase a pro rata portion of the Employee Shares determined by calculating the
product of (i) a fraction, the numerator of which is equal to the number of
Employee Shares as to which the Purchase Notice of the Electing Employee is
given and the denominator of which is the total number of Employee Shares as to
which all Purchase Notices are given and (ii) 214,285. Cygnet will give notice
to each Electing Employee no later than one (1) Business Day prior to the
Closing Date of the number of Employee Shares that each Electing Employee may
purchase (with a copy to the Transfer Agent). The subscription price payable
upon purchase of the Employee Shares must be paid not later than the Closing
Date directly to Cygnet.
c. Cygnet shall be authorized to issue to one or more
lenders furnishing Cygnet up to $5 million of indebtedness, as additional
consideration for the furnishing of such indebtedness, warrants to purchase up
to 115,000 shares of Cygnet Common Stock ("Lender Warrants") at an exercise
price per share equal to one hundred twenty percent (120%) of the Subscription
Price per share of Cygnet Common Stock payable under the Rights Offering and on
such other terms and conditions as shall be acceptable to Cygnet, and to enter
into a registration rights agreement with respect to the resale of the Cygnet
Common Stock underlying the Lender Warrants.
3.5 Availability of Cygnet Common Stock; Restriction on Issuance
of Additional Cygnet Common Stock. Cygnet covenants that it shall cause to be
reserved and kept available out of its authorized and unissued shares of Cygnet
Common Stock the number of shares of Cygnet Common Stock that will be sufficient
to permit the exercise in full of all Rights issued pursuant to the Rights
Offering, as well as the issuance of (a) the Cygnet Common Stock underlying the
Garcia Warrants and the Lender Warrants, as they may be adjusted from time to
time, (b) the Garcia Additional Shares, and (c) the Employee Shares. Cygnet also
covenants and agrees that prior to the Closing Date it will not agree or bind
itself to issue any additional shares of Cygnet Common Stock without the prior
written approval of the Company.
12
<PAGE> 13
ARTICLE FOUR
ACQUISITION OF ASSETS FROM COMPANY AND SUBSIDIARIES,
ASSUMPTION OF LIABILITIES
4.1 Transfer of Assets. Upon the terms and subject to the
conditions contained herein, the Company shall, on the Closing Date, transfer
(or cause to be transferred from one or more Company Transferor Subsidiaries) to
Cygnet or one or more Cygnet Subsidiaries (as designated in writing by Cygnet)
the Third Party Dealer Assets, including but not limited to the assets described
in Schedule 4.1 hereof. The Third Party Dealer Assets shall also include all of
the assets to be transferred pursuant to Article Six hereof relating to FMAC and
Reliance matters, and all of the assets described in Sections 4.3, 4.4, and 4.5
hereof. Nothing in this Agreement is intended to preclude any Company
Subsidiary from transferring to the Company any Third Party Dealer Assets
preliminary to the transfer of such assets to Cygnet or one or more Cygnet
Subsidiaries.
4.2 Assumption of Liabilities. Upon the terms and subject to the
conditions contained herein, Cygnet shall, on the Closing Date, assume or cause
to be assumed by one or more Cygnet Subsidiaries (as designated in writing by
Cygnet) from the Company or any Company Subsidiary those certain liabilities
described in Schedule 4.2 (the "Third Party Dealer Liabilities"). The Third
Party Dealer Liabilities shall also include all of the liabilities to be
transferred pursuant to Article Six hereof relating to FMAC and Reliance
matters, Article Eight hereof relating to employee matters, and all of the
liabilities described in Sections 4.3, 4.4, and 4.5 hereof. Nothing in this
Agreement is intended to preclude the Company from transferring to any Company
Subsidiary any Third Party Dealer Liabilities or to preclude such Company
Subsidiary from assuming any such Third Party Dealer Liabilities preliminary to
the assumption of such liabilities by Cygnet or a Cygnet Subsidiary pursuant to
the first two sentences of this Section 4.2.
4.3 Corporate Headquarters Lease. On the Closing Date, Cygnet
shall acquire all of the Company's right, title and interest in the real
property listed on Schedule 4.3. Specifically, the Company is the lessee under
the Corporate Headquarters Lease and occupies the 2nd, 5th and 11th floors of
the Corporate Headquarters Building. Subject to the terms of the Corporate
Headquarters Lease, Cygnet shall, on the Closing Date, assume the Company's
obligations under the Corporate Headquarters Lease, sublease from the Company
(the "Headquarters Sublease"), or enter into a direct lease with Landlord for,
the 11th floor of the Corporate Headquarters Building. The terms of the
Headquarters Sublease, if any, including the remaining term and rental rate,
shall be substantially identical to both the monetary and non-monetary terms and
conditions of the Corporate Headquarters Lease. Cygnet agrees that it will be
primarily liable to the Landlord for the obligations accruing with respect to
the 11th floor under the Corporate Headquarters Lease from and after the Closing
Date until termination of such lease and agrees to hold the Company harmless
from any liability arising from any actions or inactions of Cygnet.
4.4 Personal Property to Be Acquired By Cygnet. On the Closing
Date, and subject to the terms of any applicable equipment lease, Cygnet shall
sublease from the Company, or enter into a direct lease from the applicable
equipment lessor with respect to, the personal property set forth on Schedule
4.4 hereto. The terms of any sublease entered into under this subsection with
the Company, including any remaining term and rental rate, shall be
substantially identical to both the monetary and non-monetary terms and
conditions of the applicable lease with such equipment lessor, except that the
Company shall be named as sub- lessor and Cygnet shall be named as sub-lessee.
Cygnet shall use its best efforts to obtain from each lessor an agreement
releasing the Company from any and all liability under the applicable lease. To
the extent that any lessor does
13
<PAGE> 14
not agree to release the Company from its obligations under a lease, Cygnet
agrees that it will be primarily liable to the lessor for the obligations
accruing under such lease from and after the Closing Date until the termination
of such lease and agrees to hold the Company harmless from any liability arising
from any actions or inactions of Cygnet.
4.5 Licenses and Other Executory Contracts. On the Closing Date,
and subject to the terms of any applicable third party agreement, the Company
shall assign the licenses and other executory contracts ("Third Party
Agreements") set forth on Schedule 4.5 to Cygnet. Cygnet shall use its best
efforts to obtain from the applicable third parties to such Third Party
Agreements an agreement releasing the Company from any and all liability under
such Third Party Agreements. To the extent that any third party does not agree
to release the Company from its obligations under any Third Party Agreement,
Cygnet agrees that it shall be primarily liable for the obligations accruing
under the applicable Third Party Agreement from and after the Closing Date until
termination of such agreement and agrees to hold the Company harmless from any
liability arising from any actions or inactions of Cygnet.
4.6 Consideration.
a. Consideration for Transferred Assets. In exchange for
the transfer of the Third Party Dealer Assets to Cygnet pursuant to this Article
Four and the assumption by Cygnet of the Third Party Dealer Liabilities pursuant
to this Article Four, Cygnet shall transfer to the Company or the applicable
Company Transferor Subsidiaries (as designated in writing by the Company on or
before the Closing Date) consideration in an aggregate amount equal to the
greater of the Net Appraised Value and the Net Book Value of the Third Party
Dealer Assets. The Net Appraised Value shall be determined based on an interim
appraisal as of June 30, 1998, which shall be updated to the Closing Date as
soon as practicable thereafter. The Net Book Value shall be determined based on
the Preliminary Third Party Asset Balance Sheet and shall be updated as of the
Closing Date as soon as practicable thereafter based on the Final Third Party
Asset Balance Sheet. Consideration shall be payable by Cygnet to the Company
based on the principles outlined above. As soon as practicable following the
Closing Date, the parties shall finalize the calculation of the Net Appraised
Value and the Net Book Value and of the consideration payable pursuant to this
Article Four. Cygnet shall pay any additional consideration required to be paid
and the Company shall reimburse to Cygnet any consideration paid by Cygnet in
excess of the consideration required. With respect to such consideration, $40
million shall be paid in the form of Cygnet Preferred Stock and the balance
shall be payable in the form of cash or a combination of cash and surrender of
the Verde Note or any portion thereof assigned to Cygnet. If the Company
designates that all or a portion of the consideration for the Third Party Dealer
Assets be paid to one or more Company Transferor Subsidiaries, the Company shall
designate in writing to Cygnet on or before the Closing Date the amount and
medium of consideration payable by Cygnet to each such Company Transferor
Subsidiary. The Cygnet Preferred Stock shall be issued pursuant to a Certificate
of Designations in substantially the form of Exhibit C hereto.
b. Private Sale of Cygnet Preferred Stock. The Company
represents and warrants that it is acquiring the Cygnet Preferred Stock for
investment and not with a view to the distribution thereof. Each holder of the
Cygnet Preferred Stock agrees that prior to making any
14
<PAGE> 15
disposition or transfer of the Cygnet Preferred Stock or shares of Cygnet Common
Stock issuable upon exercise of the Cygnet Preferred Stock ("Shares"), unless a
registration statement under the Securities Act is in effect with regard thereto
and the disposition may be effected in accordance therewith and with applicable
state securities laws, the holder shall give written notice to Cygnet describing
briefly the manner in which any such proposed disposition or transfer is to be
made; and no such disposition shall be made except pursuant to an exemption from
the registration requirements of all applicable federal and state securities
laws, which exemption shall be proved to the satisfaction of Cygnet and its
counsel prior to the effectuation of any such disposition or transfer.
Each certificate evidencing the Cygnet Preferred Stock and
Shares issuable upon exercise of the Cygnet Preferred Stock shall bear a legend
in substantially the following form, until such time as such Cygnet Preferred
Stock or such Shares have been sold pursuant to a registration statement or
unless, in the opinion of legal counsel to Cygnet, such legend is not required
in order to establish compliance with any provisions of applicable security
laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACTS OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED
OR OTHERWISE TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE
WITH SECTION ____ OF THE CAPITALIZATION AGREEMENT DATED AS OF
___________, 1998 BETWEEN UGLY DUCKLING CORPORATION AND CYGNET
FINANCIAL CORPORATION, AS THE SAME MAY BE AMENDED FROM TIME TO
TIME.
c. Registration Rights. The Company and Cygnet agree to
negotiate and enter into a registration rights agreement with respect to
registration of the Shares underlying the Cygnet Preferred Stock under the
Securities Act for resale following any conversion of the Cygnet Preferred
Stock. Such registration would be effected at the expense of Cygnet at the
request of the Company upon the terms and conditions specified in such
registration rights agreement.
4.7 Company Conveyances at Closing. To effect the transfers and
related assumptions referred to in Sections 4.1 and 4.2, the Company and/or each
Company Transferor Subsidiary, as the case may be, shall execute or cause to be
executed and deliver or cause to be delivered (a) one or more bills of sale,
conveying in the aggregate all of the Third Party Dealer Assets free and clear
of all Encumbrances except as otherwise set forth in Schedule 4.2, (b) all
assignable Permits and any other third party consents required for the valid
transfer and operation of the Third Party Dealer Assets as contemplated by this
Agreement; and (c) such other instruments as shall be requested by Cygnet to
vest in Cygnet or the Cygnet Subsidiaries title in and to the Third Party Dealer
Assets in accordance with the provisions hereof, including estoppel certificates
and subordination agreements.
4.8 No Company Representations. Cygnet and the Cygnet Subsidiaries
understand and agree that neither the Company nor any Company Transferor
Subsidiary is, in this Agreement or in any other agreement or document,
representing or warranting to Cygnet or to the Cygnet Subsidiaries in any way as
to the Third Party Dealer Assets, the Third Party Dealer Business or the Third
Party Dealer Liabilities or as to any consents or approvals required in
connection with the consummation of the transactions contemplated by Article
Four of this Agreement, it being agreed and understood that Cygnet and the
Cygnet Subsidiaries shall take all of the Third Party Dealer Assets "as is,
where is" and that, except as otherwise expressly provided in this Agreement,
Cygnet and the Cygnet Subsidiaries shall bear the economic and legal risk that
conveyances of the Third
15
<PAGE> 16
Party Dealer Assets shall prove to be insufficient or that the title of the
Company or any Company Transferor Subsidiary shall be other than good and
marketable and free from Encumbrances.
4.9 Covenants of Company and Cygnet. The Company and Cygnet each
covenant with the other that, upon the terms and subject to the conditions
contained herein, each of the parties hereto agrees, both before and after the
Closing Date, (a) to use all reasonable efforts to take, or cause to be taken,
all actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, (b) to execute any documents, instruments or conveyances of any kind
which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder, and (c) to cooperate with each other in
connection with the foregoing.
4.10. Conditions to Company's Obligations. The obligations of the
Company to consummate the transactions contemplated hereby are subject to the
satisfaction or waiver on or prior to the Closing Date, of each of the following
conditions:
a. At least seventy-five percent (75%) of the Offered
Shares shall have been purchased pursuant to the Rights Offering and the Standby
Purchase Obligation.
b. The Company's Board of Directors shall not have
exercised its right in its sole discretion to abandon the Split-Up Proposal.
c. No Action by any governmental authority or other
person shall have been instituted or threatened which questions the validity or
legality of the transactions contemplated hereby and which could reasonably be
expected to materially damage the Company.
d. There shall not be any statute, rule or regulation
that makes the transfer of the Third Party Dealer Assets contemplated hereby
illegal or otherwise prohibited.
e. Each of the Company Transferor Subsidiaries (to the
extent applicable) shall have received the consent of its Board of Directors to
consummate the transactions, subject to the terms and conditions set forth
herein.
f. The Company shall have received the opinion of an
independent third party engaged by the Company customarily furnishing opinions
of a similar nature, opining as to the fairness to the Company's shareholders of
certain aspects of the Split-up and such opinion shall be in full force and
effect.
g. The Company shall have received the opinion of
Willamette Management Associates as to the Net Appraised Value of the Third
Party Dealer Assets, the fair market value of the Rights, and the fair market
value of the Cygnet Preferred Stock and such opinion shall be in full force and
effect.
h. The Required Agreements shall have been validly
executed and delivered and shall be in full force and effect.
i. All authorizations, consents, approvals, waivers and
clearances of all federal, state, local and foreign governmental agencies and
all other persons required therefor shall have been obtained and shall be in
full force and effect, without any conditions being imposed that would have a
material adverse effect on the Company.
16
<PAGE> 17
j. All legal and regulatory issues relating to the
Rights Offering and the Split-up shall have been resolved to the satisfaction
of the Board of Directors of the Company.
k. The Company shall have such financing facilities and
capital resources available to it that shall, in the judgment of the Board of
Directors of the Company, be sufficient to allow the continuing operations of
the Company without material disruption.
4.11 Conditions to Cygnet's Obligations. The obligations of Cygnet
to consummate the transactions provided for hereby are subject to the
satisfaction or waiver, on or prior to the Closing Date, of each of the
following conditions:
a. The Cygnet Common Stock shall have been approved for
listing on the Nasdaq or on such other trading exchange or electronic medium as
is acceptable to Cygnet, subject to official notice of issuance.
b. The Cygnet Registration Statement shall have been
filed with the Securities and Exchange Commission and shall have become
effective with no stop order being in effect with respect thereto.
c. All Permits and waivers necessary to the consummation
of the transactions contemplated hereby and for the operation of the Third Party
Dealer Business shall have been obtained, including, without limitation, all
required third party consents.
d. Each of Cygnet and the Cygnet Subsidiaries (to the
extent applicable) shall have received the consent of its Board of Directors to
consummate the transactions, subject to the terms and conditions set forth
herein.
e. No Action by any governmental authority or other
person shall have been instituted or threatened which questions the validity or
legality of the transactions contemplated hereby and which could reasonably be
expected to materially damage Cygnet or the Cygnet Subsidiaries if the
transactions contemplated hereby are consummated, including without limitation
any Material Adverse Effect on the right or ability of Cygnet and the Cygnet
Subsidiaries to own, operate, possess or transfer the Third Party Dealer Assets
after the Closing Date. There shall not be any statute, rule or regulation that
makes the purchase and sale of the Third Party Dealer Assets contemplated hereby
illegal or otherwise prohibited.
f. The Company shall have executed and delivered each of
documents described in this Article Four so as to effect the transfer and
assignment to Cygnet (and the Cygnet Subsidiaries to the extent applicable) of
all right, title and interest in and to the Third Party Dealer Assets.
g. All authorizations, consents, approvals, waivers and
clearances of all federal, state, local and foreign governmental agencies and
all other persons required therefor shall have been obtained and shall be in
full force and effect, without any conditions being imposed that would have a
material adverse effect on Cygnet.
h. All legal and regulatory issues relating to the
Rights Offering and the Split-up shall have been resolved to the satisfaction
of the Board of Directors of Cygnet.
i. Cygnet shall have such financing facilities and
capital resources available to it that shall, in the judgment of Cygnet's Board
of Directors, be sufficient to allow the continuing operations of Cygnet without
material disruption.
17
<PAGE> 18
4.12 Conduct by Company Pending Closing of Third Party Dealer Asset
Transfers. Following the date of this Agreement, the Company shall not sell,
transfer, or otherwise dispose of any of the Third Party Dealer Assets outside
the ordinary course of business of the Third Party Dealer Business without
furnishing written notice thereof to Cygnet. In the event of any such sale,
appropriate modification shall be made to Schedule 4.1 and other applicable
schedules hereto and the consideration payable by Cygnet pursuant to this
Agreement.
4.13 Interim Transactions. Prior to the Closing Date, Cygnet may
enter into one or more transactions identified by the Company as transactions to
be effected by or assigned to Cygnet on or before the Closing Date, including,
without limitation, (a) acquisitions of automobile retail installment sale
contracts, or interests therein, from any third party; (b) acquisitions of
assets from third parties to be utilized in the servicing of such contracts; (c)
purchases of certain interests or rights in bank participations secured by
automobile retail installment sale contracts; (d) agreements to service or
assume the servicing obligations regarding portfolios of automobile retail
installment sales contracts; and (e) the making of loans, obtaining warrants or
investment rights in any third party. Certain contemplated transactions are
identified on Schedule 4.13 attached hereto and shall be updated as of the
Closing Date (the "Interim Transactions"). The assets and rights and related
liabilities acquired pursuant to the Interim Transactions are referred to as
"Interim Assets." If any such Interim Transactions are effected or Cygnet
otherwise has operations prior to the Closing Date, on the business day
immediately preceding the Closing Date, Cygnet will distribute to the Company
all earnings accrued to such date ("Interim Earnings"). In addition, Cygnet will
pay to the Company the excess, if any, of the aggregate appraised value of the
Interim Assets, as of the Effective Date, over the aggregate book value of the
Interim Assets (the "Interim Consideration"). The Company may agree to other
terms with respect to how Interim Transactions will be structured or treated if
the Company believes that such structure or treatment results in adequate
consideration to the Company at the time of the Split-up with respect to Interim
Assets.
ARTICLE FIVE
TRANSITIONAL MATTERS
5.1 General. The Company and Cygnet acknowledge and agree that
during the Transition Period, Cygnet shall require the use of certain premises,
equipment, services, licenses, software and data processing which are currently
owned or leased by the Company and its subsidiaries, and which shall be retained
by the Company and its subsidiaries following the Closing Date. The Company and
Cygnet also anticipate that the Company shall require the consultation and
assistance services of several former employees who will become, as of the
Closing Date, employees of Cygnet. Further, during the Transition Period, the
Company and its agents shall provide Cygnet and its agents the physical access
to and availability to utilize services necessary for Cygnet to acquire or
develop, as applicable, suitable or replacement premises, equipment, services,
licenses, software and data processing prior to the Cutoff Date as set forth in
this Article Five. Neither the Company nor Cygnet shall have any further
obligation to render the services, or provide access to the property referenced
herein from and after the Cutoff Date unless the Company and Cygnet so mutually
agree or contract.
5.2 [intentionally left blank].
18
<PAGE> 19
5.3 Computing Services and Other Related Functions. During the
Transition Period, the Company shall license to Cygnet the software listed on
Schedule 5.3(b) attached hereto. On the Cutoff Date, any license created
hereunder in favor of Cygnet shall terminate unless renewed or extended in
writing by the parties hereto. No fees will be payable by Cygnet to the Company
for the licenses described in this Section 5.3.
5.4 Consultation Services During the Transition Period, the
Company may need to obtain consultation and advice from Donald A. Addink, Eric
J. Splaver and certain other former Company employees and Cygnet may need to
obtain consultation and advice from Steven J. Tesdahl, Linda Hamilton and
certain other Company employees (all such employees of the Company or Cygnet, as
the case may be, the "Consultants") with respect to various matters. Each of
Cygnet and the Company agrees to make the Consultants available to the other on
a reasonable basis and on the following terms:
a. Description of Services to Be Rendered. Each of the
Consultants may be requested by the Company or Cygnet, as the case may be, to
consult and provide assistance to the Company or Cygnet, as the case may be, and
its employees with respect to the matters included in their job descriptions (i)
in the case of Cygnet employees, while each such Consultant was employed by the
Company and (ii) in the case of Company employees, as employees of the Company.
b. Time Commitment. The Consultants shall not be
required to provide more than eight hours of consultation during any one
[week][month] period. The Consultants shall not be required to provide the
consultation or assistance services requested in the event that such services
would materially affect such Consultant's employment obligations to Cygnet or
the Company, as the case may be.
c. Compensation. As compensation for the services to be
rendered hereunder by the Consultants, the Company or Cygnet, as the case may
be, shall pay the other a fee per hour equal to the sum of (a) the Consultant's
actual hourly rate (calculated by dividing such Consultant's annual fixed salary
by 2080 hours) and (b) an amount equal to 20% of such hourly rate. The Company
or Cygnet, as the case may be, shall also promptly reimburse [the other or each
Consultant] for any and all expenses related to services rendered hereunder.
d. Independence of Consultants. For all purposes of this
Agreement, each Consultant shall be an independent contractor and expressly not
an employee of the Company or Cygnet, as the case may be. Unless authorized
separately in writing by the Company or Cygnet, as the case may be, none of the
Consultants shall have any authority to act for, represent or bind
19
<PAGE> 20
the Company or Cygnet, as the case may be, and shall not otherwise be deemed an
agent of the Company or Cygnet, as the case may be.
e. Access to Records and Confidentiality. The parties
hereto and the Consultants recognize that the Company or Cygnet, as the case may
be, may, during the Transition Period, be required to provide to the Consultants
certain confidential material or records. The Company or Cygnet, as the case may
be, agrees to take and to cause the Consultants to take appropriate precautions
and measures to ensure that such information remains confidential.
5.5 Not a Joint Venture. Cygnet and the Company acknowledge and
agree that nothing in this Article Five or this Agreement (a) shall constitute
or create among the parties a partnership, joint venture, association,
syndicate, unincorporated business or other separate entity or (b) be deemed to
confer on any of them any express, implied or apparent authority to incur any
obligation or liability on behalf of the other party hereto.
5.6 Other Costs; Cooperation. The parties shall give each other
all reasonable cooperation during the Transition Period with a view to making
the transition of the Third Party Dealer Business to Cygnet as smooth as
possible and costs for any assistance or services rendered shall be allocated in
a reasonable manner as the parties shall mutually agree.
ARTICLE SIX
FMAC AND RELIANCE MATTERS
6.1 FMAC Rights and Obligations Generally. On the Closing Date,
all of the Company's right, title and interest in and to the assets, rights
(including, but not limited to, security interests, liens or other interests)
claims and remedies sold by, created or granted under or by (except cash
received by the Company prior to the Closing Date) and all obligations,
liabilities, responsibilities and duties of the Company (except the FMAC
Excluded Obligations), the agreements and documents entered into in connection
with the Chapter 11 reorganization of FMAC, including, but not limited to, the
agreements and documents listed on Schedule 6.1, shall be shall be assigned,
conveyed, transferred and delegated to Cygnet.
a. FMAC Servicing Platform. By way of illustration, and
not by limitation of the provisions of Section 6.1 hereof, the Company shall
assign, convey and transfer to Cygnet all assets, leases (real and personal) and
contracts in which the Company received an interest pursuant to the FMAC Plan,
including, but not limited to, those assets set forth in Exhibit B to the FMAC
Plan. Any such lease or contract shall, subject to the terms of any such lease
or contract, be assigned to Cygnet from the Company. To the extent the Company
is unable to assign its rights under any such lease or contract, the Company
shall enter into a sublease with Cygnet on substantially identical terms as such
related lease or contract except that the Company shall be named as sublessor
and Cygnet shall be named as sublessee. In connection with any such assignment,
Cygnet shall use its best efforts to obtain from the applicable lessor or other
third party an agreement releasing the Company from any further liability under
the applicable lease or contract, and in the event such release cannot be
obtained, Cygnet agrees to hold the Company harmless from, and indemnify the
Company against, any liability arising from any actions or inactions of Cygnet.
b. Cygnet Responsibility For DIP Facility.
Notwithstanding that the Company will remain primarily liable to FMAC to perform
any obligations due and owing FMAC under the DIP Facility, from and after the
Closing Date, Cygnet hereby agrees to satisfy and fund any draw or request of
monies made by FMAC under the DIP Facility. Cygnet agrees to indemnify and hold
the Company harmless from any failure of Cygnet to satisfy the Company's
obligations under the DIP Facility and, in the event the Company is required to
fund any draw request of FMAC, Cygnet hereby agrees to immediately reimburse the
Company in an amount equal to such advance.
20
<PAGE> 21
c. Cygnet Responsibility For Contract Purchaser
Guaranty. Notwithstanding that the Company will remain primarily liable to
Contract Purchaser to perform any obligations due and owing the Contract
Purchaser under the Owned Contract Purchase Agreement and Contract Purchaser
Guaranty, from and after the Closing Date, Cygnet hereby agrees to indemnify and
hold the Company harmless from any failure of Cygnet to satisfy the Company's
obligations under the Owned Contract Purchase Agreement and Contract Purchaser
Guaranty and, in the event the Company is required to pay to Contract Purchaser
any amounts under such documents, Cygnet hereby agrees to immediately reimburse
the Company in an amount equal to such payment.
d. Cygnet Responsibility For Security for Assignment
Agreement. Notwithstanding that the Company will remain primarily liable to FSA
to pay the amounts due and owing to FSA under that certain Contribution Sharing
Agreement, dated as of March 31, 1998, by and between the Company and FSA, Inc.,
from and after the Closing Date, Cygnet hereby agrees to indemnify and hold the
Company harmless from any failure of Cygnet to satisfy the Company's obligations
under such agreement and, in the event the Company is required to pay to FSA any
amount under such agreement, Cygnet hereby agrees to immediately reimburse the
Company in an amount equal to such payment.
e. Stock Option Shares. Pursuant to the FMAC Plan, at
the option of the Company and subject to certain conditions, the Company may
distribute the Stock Option Shares to FMAC or at the request of FMAC and
pursuant to its instructions directly to the unsecured creditors of FMAC, in
lieu of FMAC's right to receive all or a portion of distributions under the
Excess Collections Split (including both recoveries under the Excess Collections
Split from the Owned Contracts and the B Pieces) in cash. In the event that
Cygnet is then servicing the Owned Contracts and the Securitized Pools, Cygnet
agrees to advise the Company at least 20 days prior to the date upon which cash
distributions under the Excess Collections Split are likely to begin and to
provide the Company with an estimate as to the likely amount and timing of such
cash distributions. Cygnet further agrees to give the Company reasonable access
to Cygnet's books and records to allow the Company to verify such estimate of
the timing and amount of distributions, and to cooperate with the Company in
determining the amount and timing of the Company's issuance
21
<PAGE> 22
of Stock Option Shares. In the event the Company issues the Stock Option Shares,
Cygnet will thereafter pay over to the Company all of FMAC's share of the cash
distributions under the Excess Collections Split up to the Stock Option Value.
6.2 Reliance Generally. On the Closing Date, all of the Company's
right, title and interest in and to the assets, rights (including, but not
limited to, security interests, liens or other interests) and remedies sold by,
created or granted under or by (except cash received by the Company prior to the
Closing Date), and all obligations, responsibilities and duties of the Company
(except Retained Reliance Obligations) under the agreements and documents listed
on Schedule 6.2 and any and all assets, rights, claims and remedies arising from
or relating thereto shall be assigned, conveyed, delegated and transferred to
Cygnet.
a. Retained Reliance Obligations. The Company shall
retain its obligation ("Retained Reliance Obligations") under that certain
Warrant Agreement dated February 9, 1998 between the Company and Reliance
Acceptance Corporation ("Reliance") to issue warrants to Reliance from time to
time (the "Reliance Warrants"). The Company shall use its best efforts to issue
the Reliance Warrants at the request of Cygnet from time to time when required,
and Cygnet will pay to the Company an amount of consideration upon each such
issuance equal to the fair value of the Reliance Warrants (as reasonably
determined by the Company for financial accounting purposes) on the date of
issuance of the Reliance Warrants.
b. Break-Up Fee. On or about the Closing Date, the
Company shall transfer and delegate to, and Cygnet shall accept, all rights,
duties and responsibilities under that certain Agreement of Understanding
entered into as of February 9, 1998 between the Company and Reliance. Cygnet
agrees that if its actions or inactions triggers an obligation to pay the
Break-Up Fee, Cygnet shall immediately make such payment on the Company's
behalf. If the Break-Up Fee becomes payable by Reliance for any reason, Cygnet
shall be entitled to receive the distribution of any Break-Up Fee.
c. Reliance Real Property Leases. The Company possesses
the ability to acquire interests in additional real property leases should
Reliance assume and assign such leases through the plan confirmation process
(the "Reliance Leases"). In the event the Company acquires an interest by
assignment of such Reliance Leases, subject to the terms of such leases, the
Reliance Leases shall be assigned by the Company to Cygnet on or about the
Closing Date. In the event the Company shall be unable to assign its interest in
any Reliance Lease, the Company shall sublease to Cygnet the premises which are
the subject of such leases (such subleases, the "Reliance Subleases"). The terms
of the Reliance Subleases shall be on substantially identical terms as the
Reliance Leases except that the Company shall be named as sublessor and Cygnet
named as sublessee.
d. Cygnet Responsibility for Reliance Note. The Company
shall assign, convey and transfer to Cygnet all Reliance Assets including, but
not limited to, the Reliance Bill of Sale. Notwithstanding that the Company will
remain primarily liable to reliance under the Reliance Note, Cygnet agrees
hereby to assume all of the Company's obligation, liability and duties under the
Reliance Note and agrees to pay the Reliance Note in full in accordance with its
terms and conditions. Cygnet agrees to indemnify and hold the Company harmless
from any failure of Cygnet to satisfy the Company's obligations under the
Reliance Note and, in the event the Company is required to pay to Reliance any
amounts under such note, Cygnet hereby agrees to immediately reimburse the
Company in an amount equal to such payment.
ARTICLE SEVEN
TAX MATTERS
7.1 Definitions . As used in this Article Seven, the terms below
shall have the following meanings:
"Affiliate" shall mean any Person that directly or indirectly
controls, is under the control of, or is under common control with, the Person
in question. Except as otherwise provided in this Agreement, the term
"Affiliate" shall refer to Affiliates of a Person determined immediately after
the Asset Closing Date. Further, except as otherwise provided in this Agreement,
in no event shall Cygnet or any Affiliate of Cygnet be deemed to constitute an
Affiliate of the Company and,
22
<PAGE> 23
similarly, in no event shall the Company or any Affiliate of the Company be
deemed to constitute an Affiliate of Cygnet.
"Carryover" and "Carryback" shall mean any net operating loss,
net capital loss, excess tax credit, or other similar Tax item which may or must
be carried forward or back, respectively, from one Tax Period to another under
the Code or other applicable Laws.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company Group" shall mean the Company and its Affiliates.
"Company Tax Reduction" shall mean as defined at Section
7.11.b.
"Compromising Party" shall mean as defined at Section
7.20.b.
"Control" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, whether through ownership or voting securities, by
contract or otherwise.
"Cutoff Date" shall mean as defined at Section 7.7.
"Cygnet Carryback" shall mean as defined at Section 7.11.a.
"Cygnet Group" shall mean Cygnet and its Affiliates.
"Deemed Tax Reduction" shall mean as defined at Section
7.11.c.
"Group" shall mean each of the Company Group and the Cygnet
Group whenever no distinction is otherwise required between them.
"Indemnification Payment"shall mean as defined at Section
7.15.
"Indemnified Party" shall mean as defined at Section 7.15.a.
"Indemnifying Party" shall mean as defined at Section
7.15.a.
"IRS" shall mean the United States Internal Revenue Service.
"Joint Contest" shall mean any Tax Contest seeking a
redetermination of Taxes which involves or could involve one or more members of
both the Company Group and the Cygnet Group.
"Law" shall mean the law of any governmental entity or
political subdivision thereof, other than the Code, relating to any Tax.
"Liable Party" shall mean as defined at Section 7.26.c.
"Non-Compromising Party" shall mean as defined at Section
7.20.b.
"Person" shall mean any individual and any partnership, joint
venture, corporation, limited liability company, trust, unincorporated
organization or other business entity formed or operating under United States or
foreign law.
23
<PAGE> 24
"Pre-Closing Period" shall mean any Tax Period ending on or
before the Asset Closing Date, and, in the case of any Tax Period that begins
before and ends after the Asset Closing Date, the portion of such Tax Period
ending on the Asset Closing Date.
"Preparing Party" shall mean as defined at Section 7.8.
"Prime Rate"shall mean the prime interest rate published in
The Wall Street Journal from time to time.
"Post-Closing Period" shall mean any Tax Period beginning
after the Asset Closing Date, and in the case of any Tax Period that begins
before and ends after the Asset Closing Date, the portion of such Tax Period
ending after the Asset Closing Date.
"Return" shall mean any report of Taxes due, any information
return with respect to Taxes, or any other similar report, statement,
declaration, or document required to be filed under the Code or other laws, any
claims for refund of Taxes paid, and any amendments or supplements to any of the
foregoing.
"Separate Contest" shall mean a Tax Contest which involves (a)
only the Company and members of the Company Group, or (b) only Cygnet and
members of the Cygnet Group.
"Straddle Period" shall mean (a) any Tax Period that begins
before and ends after the Asset Closing Date, (b) any Short Period that ends on
the Asset Closing Date and (c) any Short Period that begins on the first day
following the Asset Closing Date. The term "Short Period" shall mean any Tax
Period which is based on an accounting period which is shorter than the normal
accounting period used for determining such Tax (e.g., in the case of the United
States federal income Tax, any Tax Period of less than one year).
"Taxes" shall mean all federal, state, territorial, local,
foreign and other net income, gross income, gross receipts, sales, use, value
added, ad valorem, transfer, franchise, profits, license, lease, service,
service use, withholding, payroll, employment, unemployment insurance, workers
compensation, social security, excise, severance, stamp, business license,
occupation, premium, property, environmental, windfall profits, customs, duties,
alternative minimum, estimated or other taxes, fees, premiums, assessments or
charges of any kind whatever imposed or collected by any governmental entity or
political subdivision thereof, which any member of the Company Group or the
Cygnet Group is required to pay, collect or withhold, together with any interest
and any penalties, additions to Tax or additional amounts with respect thereto,
and the term "Tax" means any one of the foregoing Taxes.
"Tax Adjustment" shall mean as defined at Section 7.26.a.
"Tax Authority" shall mean, with respect to any Tax, the
governmental entity or political subdivision thereof that imposes such Tax and
the agency (if any) charged with the determination or collection of such Taxes
for such entity or subdivision.
"Tax Benefit" shall mean any refund, credit, Carryover,
Carryback or other reduction in otherwise required Tax payments. Except as
otherwise provided in this Agreement, such term does not include a decrease in
any Tax in one Tax Period that results from a Tax Adjustment in another Tax
Period, such as an increase in a deduction for depreciation that results from a
determination that, in a previous Tax Period, an expenditure is capitalized and
not deducted, or an item of gain is recognized.
24
<PAGE> 25
"Tax Contest" shall mean means an audit, review, examination,
or any other administrative or judicial proceeding (including any determination
with respect to a claim for refund) with the purpose or effect of redetermining
Taxes of any member of either the Company Group or the Cygnet Group for (a) any
Pre-Closing Period, (b) any Straddle Period, or (c) any Post-Closing Period, if
such proceeding could result in any Tax Adjustment or Tax Benefit for any
Pre-Closing Period or Straddle Period (without regard to whether such matter was
initiated by an appropriate Tax Authority or in response to a claim for a refund
of Taxes).
"Tax Period" shall mean, with respect to any Tax, the period
for which the Tax is reported as provided under the Code or other applicable
Laws.
"Tax Records" shall mean as defined at Section 7.16.a.
"Taxes" shall mean all federal, state, territorial, local,
foreign and other net income, gross income, gross receipts, sales, use, value
added, ad valorem, transfer, franchise, profits, license, lease, service,
service use, withholding, payroll, employment, unemployment insurance, workers
compensation, social security, excise, severance, stamp, business license,
occupation, premium, property, environmental, windfall profits, customs, duties,
alternative minimum, estimated or other taxes, fees, premiums, assessments or
charges of any kind whatever imposed or collected by any governmental entity or
political subdivision thereof, which any member of the Company Group or the
Cygnet Group is required to pay, collect or withhold, together with any interest
and any penalties, additions to Tax or additional amounts with respect thereto,
and the term "Tax" means any one of the foregoing Taxes.
"Transaction" shall mean, collectively, the Rights Offering,
the transfer of the Third Party Dealer Assets, and all other transactions
related thereto.
7.2 Allocation of Tax Liabilities - General.
a. Subject to Sections 7.3 and 7.4, Cygnet shall be
liable for, and shall indemnify and hold the Company and the Company Group
harmless from all Taxes imposed on or with respect to Cygnet and the Cygnet
Group for any Post-Closing Period.
b. Subject to Sections 7.3 and 7.4, the Company shall be
liable for, and shall indemnify and hold Cygnet and the Cygnet Group harmless
from:
(i) all Taxes for any Pre-Closing Period imposed
on or with respect to the Company, the Company Group, Cygnet, or the Cygnet
Group; and
(ii) all Taxes imposed on or with respect to the
Company and the Company Group for any Post-Closing Period.
7.3 Transaction Taxes.
a. The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of or otherwise attributable to the Transaction which are imposed on
or with respect to the Company or the Company Group under Code Section 311(b) or
the corresponding provision of state, local or foreign law, including, without
limitation, Taxes imposed under Code Section 311(b) or the corresponding
provision of state, local or foreign law by reason of the distribution of the
Rights.
b. The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of or otherwise attributable to the Transaction which are imposed on
or with respect to the Company or the Company Group under Code Section 1001 or
the corresponding provisions of state, local or foreign law, including without
limitation, Taxes imposed under Code Section 1001 or the corresponding provision
of state, local or foreign law by reason of the transfer of the Third Party
Dealer Assets in exchange for the consideration paid by Cygnet therefor.
c. The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of or otherwise attributable to the Transaction which are imposed on
or with respect to the Company or the Company Group by reason of the triggering
of deferred intercompany gain under Treasury Regulations Section 1,1502-13
25
<PAGE> 26
or the corresponding provision of state, local or foreign law, including
without limitation, deferred intercompany gain created in connection with the
Transaction.
d. The Company shall be liable for, and shall indemnify
and hold Cygnet and the Cygnet Group harmless from, all Taxes arising as a
consequence of the payment by Cygnet to the Company of the Interim Earnings and
the Interim Consideration.
e. Except as otherwise provided in the preceding
provisions of this Section 7.3, Cygnet shall be liable for, and shall indemnify
and hold the Company and the Company Group harmless from, any and all Taxes
arising as a consequence of or otherwise attributable to the Transaction, but
only to the extent that Cygnet or the Cygnet Group derives or will derive a Tax
Benefit which it would not otherwise derive in the absence of the circumstances
triggering such Taxes. Accordingly, by way of illustration and not by way of
limitation, if any Taxes not otherwise encompassed within the preceding
provisions of this Section 7.3 arising as a consequence of or otherwise
attributable to the Transaction are imposed on or with respect to the Company or
the Company Group by reason of the transfer of the Transferred Assets and the
bases of the Transferred Assets acquired by Cygnet or any member of the Cygnet
Group in the Transaction are increased in excess of the bases that the
transferee would otherwise derive by an amount corresponding to the amount of
gain triggering such Taxes thereby providing a Tax Benefit to Cygnet or the
Cygnet Group at a subsequent time in connection with a disposition of the
Transferred Assets or the liquidation of Cygnet or any Affiliate thereof, Cygnet
shall be liable for, and shall hold the Company and the Company Group harmless
from, such Taxes to the extent of such Tax Benefit.
f. Except as otherwise provided in the preceding
provisions of this Section 7.3, the Company shall be liable for, and shall
indemnify and hold Cygnet and the Cygnet Group harmless from, any and all
additional Taxes arising as a consequence of or otherwise attributable to the
Transaction, but only to the extent that Cygnet or the Cygnet Group does not or
will not derive a Tax Benefit which it would not otherwise derive in the absence
of circumstances triggering such Taxes.
g. Anything in this Section 7.3 and 7.4 to the contrary
notwithstanding, if (i) any portion of the consideration paid by Cygnet for the
Transferred Assets shall be treated as a contribution to the capital of the
Company, whether under Code Section 118 or otherwise, and (ii) if as a
consequence thereof (A) the Company's liability for Taxes in connection with
its sale of the Transferred Assets (the "Reduced Tax Liability") shall be
lesser than the liability for Taxes otherwise incurred by the Company on the
sale of the Transferred Assets but for treatment of a portion of the purported
consideration as a contribution to the capital of the Company (the "General Tax
Liability") and (B) Cygnet's aggregate tax basis in the Transferred Assets
shall be lesser than the aggregate tax basis in the Transferred Assets
otherwise derived by Cygnet on the acquisition of the Transferred Assets but
for the treatment of a portion of the purported consideration as a contribution
to the capital of the Company, then the Company shall pay to Cygnet an amount
equal to the excess of the General Tax Liability over the Reduced Tax Liability.
7.4 Limited Liability of Cygnet for Pre-Closing Period Tax
Liabilities Attributable to Third Party Dealer Assets . Cygnet shall be liable
for, and shall indemnify and hold the Company and the Company Group harmless
from, all Taxes attributable to Tax Adjustments relating to the Pre-Closing
Period which are imposed on or with respect to the Company or the Company Group,
but only to the extent that (a) such Taxes arise from the income, profits, or
transactions of, or are otherwise attributable to Old Cygnet, Old Cygnet
Alabama, the Third Party Dealer Assets, or the Third Party Dealer Business for
taxable periods ending prior to the date of this Agreement (b) Cygnet or the
Cygnet Group derives or will derive a Tax Benefit during the Post-Closing Period
by reason of such Tax Adjustment. Accordingly, by way of illustration and not by
way of limitation, if a Tax Adjustment relating to the Company Group's 1996
consolidated federal income tax return arises as a consequence of a denial of a
deduction to the Company Group for such taxable year (the "1996 Tax Adjustment")
and the Cygnet Group may claim a corresponding deduction in the Cygnet Group's
1999 consolidated federal income tax return, Cygnet shall be liable for, and
shall indemnify and harmless the Company and the Company Group from, the Taxes
attributable to the 1996 Tax Adjustment; however, if a Tax Adjustment relating
to the Company Group's 1996 consolidated federal income tax return relating to
the Third Party Dealer Assets arises as a consequence of a denial of a deduction
to the Company Group for such taxable year but the Company Group may claim a
corresponding in the Company Group's 1997 consolidated federal income tax
return, Cygnet shall not be liable for, and shall not be obligated to indemnify
and hold harmless the Company and the Company Group for the Taxes attributable
to the 1996 Tax Adjustment.
26
<PAGE> 27
7.5 Preparation and Filing of Tax Returns - General. Except as
otherwise provided in this Agreement, Tax Returns shall be prepared and filed by
the Person liable for the Tax reported on such Tax Return, or otherwise
obligated to file such Return, under the Code or other applicable Laws. Without
limiting the foregoing, the party responsible for filing such a Return shall
also be responsible for filing and/or responding to any revenue agent request or
any other formal or informal request for information or otherwise relating to
such Return by the IRS or any other applicable Tax Authority. The parties shall
assist and cooperate with one another in accordance with Section 7.17 with
respect to the preparation and filing of Tax Returns.
7.6 Joint Returns. Any Tax Returns for Taxes imposed for any
Pre-Closing Period which reflect Taxes for which one or more members of both the
Company Group and the Cygnet Group have liability under Sections 7.2 through 7.4
(including, without limitation, the Company's consolidated federal income Tax
Return for the Tax Period or Tax Periods in which the Transaction occurs) shall
be prepared by and filed by the Company.
7.7 Method of Pro Ration For Straddle Periods. In the case of any
Straddle Period relating to the Company, Cygnet or their respective Affiliates,
unless the books of such Person are closed on the Asset Closing Date, Taxes
shall be apportioned for purposes of Sections 7.2 through 7.4 between
Pre-Closing and Post-Closing Periods, as follows: First, Taxes for Tax Periods
or portions thereof ending on the last day of the calendar month preceding the
Asset Closing Date (such date is hereinafter referred to as the "Cutoff Date")
shall be based on actual events and activities through the Cutoff Date and in
accordance with past accounting practices if any. Second, Taxes for the Tax
Period from the Cutoff Date through the Asset Closing Date shall be computed by
prorating the activities of the calendar month which includes the Asset Closing
Date on a daily pro rata basis. Notwithstanding the foregoing provisions of this
Section 7.7, (a) depreciation, amortization and depletion for any Straddle
Period shall be apportioned on a daily pro rata basis and (b) extraordinary
items not arising in the ordinary course of business shall be apportioned to the
Tax Period in which the event giving rise to such item occurs. To the extent
applicable, with respect to any consolidated or similar Tax Return, the Taxes of
Cygnet and any Affiliate thereof for purposes hereof shall be determined as if
the Cygnet Group were a separate group of companies filing a consolidated or
similar Tax Return.
7.8 Tax Accounting Practices. Any Straddle Period Returns prepared
by one or more members of the Company Group or the Cygnet Group, as the case may
be (the "Preparing Party"), shall be prepared in accordance with past Tax
accounting practices used with respect to the Returns in question (unless such
past practices are no longer permissible under the Code or other applicable
Laws), and to the extent any items are not covered by past practices (or in the
event such past practices are no longer permissible under the Code or other
applicable Laws), in accordance with reasonable Tax accounting practices
selected by the Preparing Party (except that accounting elections and
determinations shall be made, where reasonably possible, in a manner that
minimizes the net Tax incurred by the other party and its Affiliates). In the
event the Preparing Party files Tax Returns for Straddle Periods inconsistently
with such past Tax accounting practices, then, notwithstanding any provision of
this Agreement to the contrary, in addition to any other remedies available, the
other party and its Affiliates shall only be responsible for the amount of Taxes
they would owe if such Tax Returns had been filed consistently with such past
Tax accounting practices.
7.9 Right to Review Returns. Upon the request of either party, the
other party shall make available for inspection and copying all Tax Returns (and
related workpapers) with respect to Taxes to the extent that (a) such Return
relates to Taxes for which the requesting party may be liable under this
Agreement, (b) such Return relates to Taxes for which the requesting party may
have a claim for Tax Benefits hereunder, or (c) the requesting party reasonably
determines that it must inspect
27
<PAGE> 28
such Return to confirm compliance with the terms of this Agreement. The Company
and Cygnet shall attempt in good faith to resolve any issues arising out of the
review of such Returns.
7.10 Refunds.
a. In the case of any separate Tax Return filed by the
Company, Cygnet, or their respective Affiliates for a Pre-Closing Period, the
Company shall be entitled to any refund of Taxes with respect to such Return.
b. Subject to Section 7.11, any refund of Taxes with
respect to a joint, combined, consolidated or unitary Tax Return for any
Pre-Closing Period shall be allocated to the Company.
c. If any amounts become payable under this Section
7.10, the Person obligated to make such payment shall notify the Person entitled
to receive such payment within thirty (30) days after receipt of the refund or
credit for overpayment and shall remit the amount of the refund to such Person
within thirty (30) days after such receipt.
7.11 Carrybacks.
a. In the event Cygnet or any member of the Cygnet Group
desires to carry back a loss or other Tax attribute arising after the Asset
Closing Date (the "Cygnet Carryback") to a Pre-Closing Period with respect to a
joint, combined, consolidated or unitary Tax Return, Cygnet shall notify the
Company in writing of its intent to carry back such item (and to forego any
election to waive such Carryback). Such notification shall include a
certification by an appropriate officer of Cygnet setting forth Cygnet's belief,
based on a thorough examination of the facts and law relating to the tax
treatment of such item, that the tax treatment of such item is supported by
"substantial authority" within the meaning of Code Section 6662 (and the
Treasury Regulations promulgated thereunder). Promptly upon its receipt of such
notification, the Company shall notify Cygnet, in writing, as to whether the
Company believes that the filing of the Cygnet Carryback will result in any
Deemed Tax Reduction under Section 7.11.c and if so, the Company shall provide
information to Cygnet pertaining to the amount of such Deemed Tax Reduction and
the computation thereof. The Company shall cooperate with Cygnet in connection
with the filing and processing of any Cygnet Carryback and shall provide Cygnet
with copies of all correspondence in connection therewith.
b. Subject to Section 7.11.c, if, pursuant to the terms
of Section 7.11.a, Cygnet elects to carryback a loss or other Tax attribute to
a Pre-Closing Period, the Company shall be obligated to make a payment to Cygnet
equal to the amount by which the Taxes imposed on the Company Group for such
Pre-Closing Period have been reduced as a result of utilization of the Cygnet
Carryback (the "Company Tax Reduction").
c. For purposes of computing the amount of the Company
Tax Reduction, if, in the absence of the Cygnet Carryback, losses or other Tax
attributes of the Company or its Affiliates would have resulted in a reduction
of Taxes of the Company Group for such Period (the "Deemed Tax Reduction"), the
amount of the Company Tax Reduction shall be reduced by the amount of the Deemed
Tax Reduction. In the event any losses or other Tax attributes of the Company
which are taken into account in computing a Deemed Tax Reduction are
subsequently utilized by the Company Group to reduce Taxes in a future Tax
Period, the Company shall be obligated to pay to Cygnet the amount of such
subsequent Tax reduction (provided that the aggregate amount of payments to
Cygnet with respect to any Cygnet Carryback shall not exceed the Company Tax
Reduction computed without regard to the first sentence of this Section
7.11.c).
28
<PAGE> 29
d. If the Company is required to make a payment to
Cygnet with respect to any Cygnet Carryback under Section 7.11.b, the Company
shall have the option, in its sole discretion, of (i) making such payment within
30 days of receiving the Tax refund attributable to such Cygnet Carryback, or
(ii) making such payment not later than 30 days of the date on which the
statutory period (under the Code of other applicable law) for examining the
Return on which such Cygnet Carryback was claimed has expired (provided, such
payment shall bear interest at the Prime Rate for the period commencing 30 days
from the date of receipt of such refund and ending on the date of such payment).
7.12 Payment of Consolidated Return Taxes for Pre-Closing Periods.
The Company shall pay to the IRS all Taxes due (or shall receive all refunds) in
connection with the filing of the Company's consolidated federal income Tax
Return for any and all Company fiscal years which begin before the Asset Closing
Date and with respect to which Cygnet or an Affiliate of Cygnet was a member of
the Company's federal consolidated group for all or a portion of such year.
Immediately before the due date for filing such Tax Return (taking into account
any extension of time for filing that the Company requests and is granted), or
immediately after receipt of any refund of Taxes relating thereto, the Company
and Cygnet shall compute, based on the information contained in the federal
consolidated income Tax Return for such year and subject to Sections 7.2 through
7.4, 7.7 through 7.8, and the remaining provisions of this Agreement, to the
extent applicable, Cygnet's share of the consolidated federal income Tax
liability for such year, if any, (the "Cygnet Tax Liability") as if the Cygnet
Group were a separate group of companies filing a consolidated federal income
Tax Return. Cygnet shall make pay to the Company the Cygnet Tax Liability
immediately before the due date for filing the Company's consolidated federal
income Tax Return for such fiscal year. In the case of any refund, the Company
shall make payments to Cygnet to the extent applicable immediately following the
receipt of such refund.
7.13 Payment of State, Local and Foreign Taxes for Pre-Closing
Period for Which The Company has Filing Responsibility. The Company shall pay to
the appropriate Tax Authority all state, local and foreign Taxes for Tax Returns
with respect to which the Company (or another member of the Company Group) has
filing responsibility pursuant to Sections 7.5 and 7.6. Immediately before the
time such Return is due (taking into account any extension of time for filing
that the Company requests and is granted), or immediately after receipt of any
refund, Cygnet shall make payments to the Company (or the Company shall make
payments to Cygnet) of amounts which shall, in each case, be determined in
accordance with the principles, applied mutatis mutandis, set forth in Section
7.12.
7.14 Payment of State, Local and Foreign Taxes for Which Cygnet has
Filing Responsibility. Cygnet shall pay to the appropriate Tax Authority all
state, local, and foreign Taxes for Tax Returns with respect to which Cygnet (or
another member of the Cygnet Group) has filing responsibility pursuant to
Sections 7.5 and 7.6. Immediately before the due date such Return is due (taking
into account any extension of time for filing that Cygnet requests and is
granted), or immediately after receipt of any refund, the Company shall make
payments to Cygnet (or Cygnet shall make payments to the Company) of amounts
which shall, in each case, be determined in accordance with the principles,
applied mutatis mutandis, set forth in Section 7.12.
7.15 Indemnification Payments.
a. Upon payment of any Taxes with respect to which a
party is entitled to receive indemnification hereunder, such party (the
"Indemnified Party") shall send the other party (the "Indemnifying Party") an
invoice accompanied by evidence of payment and a statement detailing the Taxes
paid and describing in reasonable detail the particulars relating thereto. The
Indemnifying Party (or such one or more members of the Indemnifying Party's
Group as it shall nominate) shall
29
<PAGE> 30
remit payment for Taxes for which the Indemnifying Party is liable for
indemnification hereunder to the Indemnified Party (or such one or more members
of the Indemnified Party's Group as it shall nominate) within 30 days of receipt
of such invoice, evidence of payment and statement, or at any earlier time
identified by the Indemnifying Party.
b. If any Indemnified Party realizes a Tax Benefit or a
Tax detriment in one or more Tax Periods by reason of having, incurred any Tax
for which such Indemnified Party receives indemnification hereunder, then such
Indemnified Party shall pay to such Indemnifying Party an amount equal to the
Tax Benefit or such Indemnifying Party shall pay to such Indemnified Party an
additional amount equal to the Tax detriment (taking into account any Tax
detriment resulting from the receipt of such additional amounts), as the case
may be. The amount of any Tax Benefit or any Tax detriment for a Tax Period
realized by an Indemnified Party by reason of having incurred a Tax for which
such Indemnified Party received indemnification hereunder shall be deemed to
equal the product obtained by multiplying (i) the amount of any deduction or
inclusion in income for such period resulting from such Tax or the payment
thereof, as the case may be, by (ii) the highest applicable marginal Tax rate
for such Period. Any payment due under this Section 7.15.b with respect to a
Tax benefit or Tax detriment realized by an Indemnified Party in a Tax Period
shall be due and payable within 30 days from the time the Return for such Tax
Period is due, without taking into account any extension of time granted to the
party filing such Return.
7.16 Tax Records.
a. The Company and Cygnet (and their respective
Affiliates) shall keep in their possession all Tax Records relating to Taxes for
which the other party may have liability under this Agreement, until the
expiration of any applicable statute of limitations and as otherwise required by
law. Notwithstanding the foregoing, Cygnet shall retain all Tax Records relating
to Pre-Closing Periods until such time as the Company shall consent to the
disposition of such Tax Records, which consent shall not be unreasonably
withheld. For purposes of this Section 7.16, "Tax Records" shall include, inter
alia, journal vouchers, cash vouchers, general ledgers, material contracts and
authorizations for expenditures.
b. The Company and Cygnet (and their respective
Affiliates) shall make available to each other for inspection and copying during
normal business hours all Tax Records in their possession, to the extent such
Tax Records are reasonably required by the other party in connection with the
preparation of Tax Returns, audits, litigation or the resolution of items under
this Agreement.
c. Notwithstanding anything in this Agreement to the
contrary, if either the Company or Cygnet fails to comply with the requirements
of this Section 7.16, the party failing so to comply shall be liable for, and
shall hold the other party harmless from, any Taxes (including penalties for
failure to comply with the record retention requirements of the Code) and other
costs resulting from such party's failure to comply.
7.17 Cooperation. The Company and Cygnet shall each provide the
other with such assistance as may reasonably be requested in connection with the
preparation of any Tax Return, audit or other examination by any Tax Authority
or judicial or administrative proceedings relating to liability for any Taxes.
Further, the Company and Cygnet shall cooperate in connection with satisfaction
of all reporting requirements associated with the transfer of the Third Party
Dealer Assets and the assumption of the Third Party Dealer Liabilities, whether
pursuant to Code Section 1060, Code Section 351, or otherwise. Additionally, the
Company and Cygnet agree, upon reasonable request by the other, to use their
reasonable best efforts to obtain any certificate or other document from any Tax
Authority or any other person or entity as may be necessary to mitigate,
30
<PAGE> 31
reduce, or eliminate any Tax imposed with respect to any transaction
contemplated by this Agreement, including without limitation, any sales or use
Tax imposed with respect to the transfer of the Third Party Dealer Assets and
the Third Party Dealer Liabilities.
7.18 Notice of Tax Contest. The Company and Cygnet shall provide
prompt notice to the other party of any pending or threatened Tax Contest that
it becomes aware of relating to Taxes for Tax Periods for which it is
indemnified by, or is to indemnify, the other party hereunder. Such notice shall
contain factual information (to the extent known) describing any asserted Tax
liability in reasonable detail and shall be accompanied by copies of any notice
or other document received from any Tax Authority in respect of any such matter.
If any party has knowledge of an asserted Tax liability with respect to a matter
for which it is to be indemnified hereunder and such party fails to give the
indemnifying party notice of such asserted Tax liability within 30 days after it
has received written notice thereof, then, unless such failure has no material
adverse effect upon the indemnifying party's ability to participate in the Tax
Contest, the indemnifying party shall have no obligation to indemnify the
indemnified party for any Taxes arising out of such asserted Tax liability.
7.19 Control of Audits and Appeals.
a Separate Contests. Any Separate Contest shall be
controlled solely by the party involved in the Tax Contest.
b Joint Contests.
i. The Company shall control any Joint Contest.
The personnel and outside advisers (including counsel) of Cygnet may
participate, at Cygnet's expense, in the proceeding to the extent such
proceeding relates to items or adjustments for which Cygnet may incur indemnity
liability under this Agreement. Such participation shall include: (A)
participation in all conferences, meetings or proceedings with any Tax
Authority; (B) participation in all appearances before any court; (C) with
respect to matters described in the preceding clauses (A) and (B), participation
in the submission and determination of content of documentation, protests,
memoranda of fact and law and briefs, the conduct of oral arguments or
presentations, the selection of witnesses and the negotiation of stipulations of
fact in such matters. If Cygnet fails to timely and fully participate in any
proceeding to the extent to which such proceeding relates to items or
adjustments for which Cygnet has indemnity liability under this Article Seven,
Cygnet shall be liable for, in addition to all Taxes for which Cygnet shall be
liable under this Article Seven, any and all costs imposed on, or incurred by,
the Company as a result of Cygnet's failure to participate.
ii. Each of the Company and Cygnet agrees to
cooperate in seeking an agreement with the IRS or any other Tax Authority under
which such Authority would conduct separate audits of the Company and Cygnet
with respect to returns including both parties. To the extent permitted by such
an Agreement, each party would control its separate audits in accordance with
the terms thereof, and the procedures provided in the remainder of this Section
7.19.b and in Section 7.20 shall not apply.
7.20 Consent to Settlements in Joint Contests.
a. With respect to any Joint Contest, neither party
shall have the right to accept or enter into the settlement of any Tax
liability, or compromise any Tax claim to the extent such liability or claim
relates to an item for which the other party has indemnity liability hereunder,
without the prior written consent of the other party (which consent shall not be
unreasonably withheld).
31
<PAGE> 32
b. In the case of any Joint Contest, either party (the
"Compromising Party"), without the consent or permission of the other party (the
"Non-Compromising Party"), may, if permitted by the appropriate agency or
tribunal, accept or enter into the settlement of any Tax liability to the extent
such liability relates solely to items for which such party has indemnity
liability hereunder. In the event the Non-Compromising Party's refusal to settle
its portion of the contest prevents the Compromising Party from reaching a
settlement as to its portion of the contest, the Non-Compromising Party shall
indemnify the Compromising Party from and against any outcome less favorable
than the settlement which the Compromising Party was willing to accept. With
respect to any Joint Contest, each of Cygnet and the Company hereby agrees that
it shall not participate in the negotiation, settlement or other resolution of
any item at issue in such Joint Contest in a manner discriminating against the
other party's interests in such contest.
c. Notwithstanding anything to the contrary in the
foregoing, in the event the judgment of the United States Tax Court or other
court of competent jurisdiction results in an adverse determination with respect
to the liability of either party hereunder, such party shall have the right (at
its own expense) to appeal such adverse determination; provided, however, that
the second sentence of Section 7.20.b shall apply for purposes of determining
the liability of any non-appealing party hereunder.
7.21 Expenses.
a. With respect to any Separate Contest, the party
involved in such contest shall bear all expenses related thereto.
b. With respect to any Joint Contest, except as
otherwise provided herein, the parties shall share any and all costs and
expenses incurred in connection with such contest based on each party's
potential liability with respect to such contest as agreed to by the parties at
the outset of such contest.
7.22 Tax Allocation Agreements. Immediately prior to the Asset
Closing Date, the Company shall cause any and all tax allocation, tax sharing
and similar agreements or arrangements existing between the Company (including
its Affiliates) and Cygnet (including its Affiliates) to be terminated with
respect to the Cygnet Group, as of an effective date agreed to by the parties
prior to the Asset Closing Date, and shall cause any amounts due under such
agreements or arrangements to be settled in the manner agreed to by the parties
prior to the Asset Closing Date. Upon such termination and settlement, no
further payments made by one party to the other with respect to such agreements
or arrangements shall be made, and all other rights and obligations resulting
from such agreements or arrangements between the parties shall cease as of such
time.
7.23 Affiliate Obligations. To the extent that the provisions of
this Agreement pertain to an Affiliate of the Company or Cygnet, the Company and
Cygnet hereby respectively agree that they will cause such Affiliate to carry
out the terms of this Agreement.
7.24 Further Action. The parties shall execute and deliver all
documents, provide all information, and take or refrain from taking any action
as may be necessary or appropriate to achieve the purposes of this Agreement.
Without limiting the preceding sentence, and subject to Section 7.19(b), each
party and its Affiliates shall provide the other party and its Affiliates with
such powers of attorney or other authorizing documentation as is reasonably
necessary to empower them to execute and file Tax Returns, refunds and
equivalent claims for Taxes for which they are responsible hereunder, and
contest, settle and resolve any Tax Contests that they control pursuant to this
Agreement.
32
<PAGE> 33
7.25 Form of Payments and Late Payments. Any payments owed by one
party to another under this Agreement shall be made in the currency in which the
Tax to which such payment relates is assessed by the Tax Authority, and shall be
paid in immediately available funds and in such other manner as the party to
whom such payment is owed may reasonably request. Any payments required by this
Agreement that are not made when due shall bear interest at the Prime Rate plus
six percent from the due date of the payment to the date paid.
7.26 Tax Adjustments. For purposes of Section 7.2, if, as a result
of any Tax Contest, there is any redetermination of Taxes on a consolidated
basis for any Pre-Closing Period, the determination of whether additional United
States federal Taxes imposed on the Company or Cygnet (or their respective
Affiliates) for any Pre-Closing Period shall be deemed to arise from the income,
profits or transactions of, or are otherwise attributable to, the Company or
Cygnet (or their respective Affiliates) to the extent relevant shall be made
pursuant to the following principles:
a. Each party shall compute the difference between (i)
the recomputed consolidated federal tax liability for each Pre-Closing Period
affected, taking into account solely those adjustments which relate to or arise
out of the income, profits or activities of such party or its Affiliates, and
(ii) the consolidated federal tax liability of the consolidated group for such
Tax Period based on the Tax Return as originally filed (the difference between
(i) and (ii) shall be referred to herein as a party's "Tax Adjustment").
b. If one party's Tax Adjustment for the Tax Period is
greater than or equal to zero, that party shall then be liable for that portion
of additional Taxes equal to the amount obtained by multiplying the additional
Taxes by a percentage equal to such party's Tax Adjustment divided by the
aggregate Tax Adjustment of the parties.
c. If one party's Tax Adjustment for the Tax Period is
greater than zero (the "Liable Party") and the other party's Tax Adjustment for
the Tax Period is less than zero (the "Other Party"), the Liable Party shall be
responsible for all of the additional Taxes owed for such Tax Period. In
addition, the Liable Party shall make an Indemnification Payment to the Other
Party equal to the Other Party's Tax Adjustment for such Tax Period (for this
purpose, the Tax Adjustment of the Other Party shall be deemed to be positive);
provided, however, that such Indemnification Payment shall not exceed the amount
by which the Liable Party's Tax Adjustment exceeds the additional Taxes for the
Tax Period. Further, the Other Party shall be entitled to any refund received in
respect of such Tax Period.
d. If each party's Tax Adjustment for the Tax Period is
less than or equal to zero, each party shall be entitled to that portion of any
refund received in respect of such Tax Period equal to the amount obtained by
multiplying the amount of the refund by a percentage equal to such party's Tax
Adjustment divided by the aggregate Tax Adjustment of the parties.
e. Similar principles shall be applied in the context of
state, local or foreign Taxes to the extent applicable and the term Tax
Adjustment for all purposes of this Agreement shall not be confined to federal
income Tax liabilities.
ARTICLE EIGHT
EMPLOYEE BENEFITS; LABOR MATTERS
8.1 Definitions. As used in this Article Eight, the terms below
shall have the following meanings:
33
<PAGE> 34
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company Affiliate" shall mean any member of a "controlled
group of corporations" (within the meaning of Section 414(b) of the Code) that
includes the Company as a member of the group; any member of an "affiliated
service group" (within the meaning of Section 414(m)(2) of the Code) that
includes the Company as a member of the group; any member of a group of trades
or businesses under common control (within the meaning of Section 414(c) of the
Code) that includes the Company as a member of the group; and any other entity
required to be aggregated with the Company pursuant to regulations issued by the
United States Treasury Department pursuant to Section 414(o) of the Code.
"Company Employees" shall mean those persons who, prior to the
Closing Date, are employed by Company or any Company Affiliate and whose
employment relationship is not transferred to Cygnet after the Closing Date.
"Company Plan" shall mean the Ugly Duckling Corporation
Retirement Savings Plan maintained by the Company.
"Cygnet Affiliate" shall mean any member of a "controlled
group of corporations" (within the meaning of Section 414(b) of the Code) that
includes Cygnet as a member of the group; any member of an "affiliated service
group" (within the meaning of Section 414(m)(2) of the Code) that includes
Cygnet as a member of the group; any member of a group of trades or businesses
under common control (within the meaning of Section 414(c) of the Code) that
includes Cygnet as a member of the group; and any other entity required to be
aggregated with Cygnet pursuant to regulations issued by the United States
Treasury Department pursuant to Section 414(o) of the Code.
"Cygnet Employees" shall mean those persons who, immediately
after the Closing Date are employed by Cygnet or any Cygnet Affiliate.
"Cygnet Plan" shall mean the Cygnet Financial Corporation
Retirement Savings Plan established by Cygnet as set forth in Section 8.4.a
below.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended.
"Welfare Plan" shall mean any employee welfare benefit plan as
defined in Section 3(1) of ERISA.
8.2 Welfare Benefit Arrangements.
a. Cygnet to Establish Comparable Welfare Arrangements.
Cygnet shall take all actions necessary or appropriate to establish, on or
before the Closing Date, Welfare Plans to provide Cygnet Employees with benefits
that are substantially similar to the benefits provided to him or her under the
Welfare Plans sponsored by the Company.
b. Liabilities. The Company shall be responsible for and
shall pay all liabilities arising in connection with claims incurred on or prior
to the Closing Date with respect to both the Company Employees and Cygnet
Employees under each Welfare Plan in which such Employees participate,
including, but not limited to all incurred but not reported claims. Cygnet shall
be responsible for and shall pay all liabilities arising in connection with
claims incurred after the Closing Date by Cygnet Employees under each Welfare
Plan in which Cygnet Employees participate after
34
<PAGE> 35
the Closing Date. For purposes of this Section, a claim shall be considered
incurred on the date treatment is rendered or a service performed.
Notwithstanding the above, Cygnet agrees to assume the liabilities related to
Cygnet Employees with respect to vacation and sick pay accrued prior to the
Closing Date and Cygnet and the Company acknowledge that these liabilities will
be deemed to be Third Party Dealer Liabilities.
Worker's compensation claims of any Company Employee
or Cygnet Employee shall be the responsibility and liability of the Company if
the event giving rise to such claim occurred on or prior to the Closing Date.
Worker's compensation claims of any Cygnet Employee shall be the responsibility
and liability of Cygnet if the event giving rise to the claim occurs after the
Closing Date.
8.3 COBRA. The Company and Cygnet agree that the transfer of
employment relationship of Cygnet Employees as of the Closing Date shall not be
a "qualifying event" as set forth in Section 4980B(f) of the Code or Section 603
of ERISA. Consequently, Cygnet Employees shall not be entitled to elect to
continue their COBRA coverage under the Company's group health plan under Code
Section 4980B(f) and Part 6 of Title I of Subtitle B of ERISA ("COBRA"). The
Company shall retain the liability to provide COBRA coverage for those qualified
beneficiaries who incurred a qualifying event prior to the Closing Date. Cygnet
shall be responsible for providing COBRA coverage for those Cygnet Employees and
their qualified beneficiaries who incur a qualifying event after the Closing
Date.
8.4 Retirement Savings Plan.
a. Establishment of Cygnet Plan. On or prior to the
Closing Date, Cygnet shall establish the Cygnet Plan and related trust, it being
the intention that such plan and trust will satisfy the requirements under
Section 401(a) and 501(a) of the Code.
b. Transfer of Assets from Company Plan to Cygnet Plan.
After the Closing and within the time frame set forth below, the Company shall
cause assets and liabilities in the amount determined herein to be transferred
from the Company Plan to the Cygnet Plan. The Cygnet Plan shall preserve all
accrued benefits and optional forms of benefits and other rights within the
scope of Section 411(d)(6) of the Code. The transfer shall occur as soon as
practicable following the Closing Date or such later date as required by law
(the "Transfer Date").
The Company Plan shall retain all benefit obligations
and liabilities that relate to Company Employees. As of the Transfer Date, the
Company Plan shall transfer, and the Cygnet Plan shall assume, all benefit
obligations and liabilities under the Cygnet Plan that relate to Cygnet
Employees (such amount to be adjusted to reflect benefit payments, expenses, and
other activity of the Company Plan (including but not limited to interest or
investment income) which is directly attributable period prior to the Closing
but which is not properly reflected in the reported asset value on the Closing
Date).
The transfer contemplated herein shall comply with
all requirements of Sections 414(l) and 401(a)(12) of the Code
Upon such transfer, neither the Company, any Company
Affiliate, nor the Company Plan shall have any liability or obligation to the
Cygnet Employees for benefits previously accrued under the Company Plan.
Additionally, upon such transfer, neither Cygnet, any Cygnet Affiliate nor the
Cygnet Plan shall have any liability or obligation to the Company Employees for
benefits accrued under the Company Plan.
35
<PAGE> 36
8.5 Stock Options. Except as disclosed on Schedule 8.5 of this
Agreement, the Company and Cygnet shall take all action necessary or appropriate
so that each Company option held by a Cygnet Employee that has not been
exercised as of the Closing Date shall be replaced with an option to purchase
Cygnet stock under the Cygnet Financial Corporation 1998 Incentive Stock Plan.
The option to purchase Cygnet stock shall be adjusted with respect to the
number of shares subject to the option and the option exercise price all in
accordance with EITF 90-9. Such Cygnet options shall otherwise have the same
terms and conditions as the corresponding Company options.
8.6 Recognition of Service with the Company. The Cygnet Plan and
any Welfare Plan adopted by Cygnet and all other employee benefit plans,
programs and policies of Cygnet shall recognize service before the Closing Date
with the Company and any Company Affiliate. Each Cygnet Welfare Plan shall
provide benefits to Cygnet Employees without interruption or change solely as a
result of the transition from the corresponding Company Welfare Plans and
without limiting the generality of the foregoing: (a) shall, to the extent
applicable, recognize all amounts applied to deductibles, out-of-pocket maximums
and lifetime maximum benefits with respect to Cygnet Employees under the
corresponding Company Welfare Plan for the plan year that includes the Closing
Date and prior periods (if applicable); (b) shall, to the extent applicable, not
impose any limitations on coverage or pre-existing conditions of Cygnet
Employees, except to the extent such limitations applied to such Cygnet
Employees under the corresponding Company Welfare Plans immediately before such
Cygnet Welfare Plan became effective; and (c) shall not impose any other
conditions (such as proof of good health, evidence of insurability or a
requirement of a physical examination) upon the participation by Cygnet
Employees who were participating in the corresponding Company Welfare Plan
immediately before such Cygnet Welfare Plan became effective.
8.7 Assumption of Employment Contracts. Cygnet shall assume all
obligations arising on and after the Closing Date under employment contracts
between the Company and any of its employees who become Cygnet Employees on the
Closing Date.
ARTICLE NINE
MISCELLANEOUS
9.1 Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by any party without the prior written
consent of the other parties; except that Cygnet may assign its rights to
receive the Third Party Dealer Assets to one or more Cygnet Subsidiaries and the
Company may assign its rights to receive the consideration therefor to one or
more Company Subsidiaries. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and no other person shall have any right,
benefit or obligation under this Agreement as a third party beneficiary or
otherwise.
9.2 Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given when received if
personally delivered; when transmitted if transmitted by telecopy, electronic or
digital transmission method; the day after it is sent, if sent for next day
delivery to a domestic address by recognized overnight delivery service (e.g.,
Federal Express); and upon receipt, if sent by certified or registered mail,
return receipt requested. In each case notice shall be sent to:
36
<PAGE> 37
If to the Company, addressed to:
Ugly Duckling Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attention: John Ehlinger
If to Cygnet, addressed to:
Cygnet Financial Corporation
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Attention: Steven P. Johnson
or to such other place and with such other copies as either party may designate
as to itself by written notice to the others.
9.3 Choice of Law. This Agreement shall be construed, interpreted
and the rights of the parties determined in accordance with the laws of the
State of Arizona (without reference to the choice of law provisions thereof),
except with respect to matters of law concerning the internal corporate affairs
of any corporate entity which is a party to or the subject of this Agreement,
and as to those matters the law of the jurisdiction under which the respective
entity derives its powers shall govern.
9.4 Entire Agreement; Amendments and Waivers. This Agreement,
together with all exhibits and schedules hereto constitutes the entire agreement
among the parties pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto. No
amendment, supplement, modification or waiver of this Agreement shall be binding
unless executed in writing by the party to be bound thereby. No waiver of any of
the provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
9.5 Additional Capitalization. Nothing in this Agreement is
intended to preclude the Company from capitalizing Cygnet with cash preliminary
to the delivery by the Escrow Agent to Cygnet of the Escrowed Subscription Funds
pursuant to Section 3.1 or Cygnet from issuing stock, including common stock, in
exchange therefor. To the extent not prohibited by law, Cygnet shall, at the
request of the Company, redeem shares of Cygnet common stock acquired as a
consequence of the capitalization of Cygnet by the Company at any time following
the Closing Date but not later than 90 days following request by the Company
therefor. Additionally, Cygnet shall be authorized to redeem such shares of
Cygnet common stock held by the Company to the extent authorized pursuant to the
terms of the Certificate of Designations attached as Exhibit C hereto. Further,
nothing in this Agreement is
37
<PAGE> 38
intended to preclude the Company from loaning amounts to Cygnet at any time or
Cygnet from entering into agreements at any time for the repayment of any such
loaned amounts.
9.6 Transfers of Stock, Other Consideration. Nothing in this
Agreement is intended to preclude:
a. Any Company Subsidiary from transferring to the
Company or any other Company Subsidiary all or any portion of the consideration
received by such Company Subsidiary from Cygnet pursuant to Section 4.6 in
exchange for the transfer to Cygnet or a Cygnet Subsidiary by such Company
Subsidiary of all or a portion of the Third Party Dealer Assets, or received by
such Company Subsidiary pursuant to this Section 9.6;
b. The Company from transferring to one or more Company
Subsidiaries all or any portion of the consideration received by the Company
pursuant to Section 4.6 or this Section 9.6;
c. Except as provided in Section 4.6 the Company from
transferring any stock or debt of Cygnet received by the Company pursuant to
Section 9.5; or
d. Except as expressly stated herein, the Company or any
Company Subsidiary from transferring to any third party stock or debt of Cygnet
received by the Company or such Company Subsidiary pursuant to this Agreement or
in any other transaction.
9.7 Cooperation. The Company and Cygnet shall each provide the
other with such assistance as may reasonably be requested in connection with any
audit or examination by any governmental body or authority, judicial or
administrative proceedings, litigation, investigation or other similar matter
relating to any period prior to the Closing Date. Further, the Company and
Cygnet shall cooperate in connection with satisfaction of all reporting
requirements associated with the transfer and ownership of the Third Party
Dealer Assets and the assumption of the Third Party Dealer Liabilities.
9.8 Multiple Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
9.9 Expenses. Except as otherwise specified in this Agreement,
each party hereto shall pay its own legal, accounting, out-of-pocket and other
expenses incident to this Agreement and to any action taken by such party in
preparation for carrying this Agreement into effect.
9.10 Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
9.11 Titles. The titles, captions or headings of the Articles,
Sections and subsections herein are inserted for convenience of reference only
and are not intended to be a part of or to affect the meaning or interpretation
of this Agreement.
9.12 Cygnet and its Subsidiaries. Except as the context otherwise
indicates, reference in this Agreement to "Cygnet" shall encompass Cygnet and
each of its subsidiaries.
9.13 Update of Schedules. To the extent applicable, each of the
schedules to this Agreement shall be appropriately updated as of the Closing
Date.
38
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed or caused
this Agreement to be duly executed on their respective behalf, by their
respective officers thereunto duly authorized, all as of the day and year first
above written.
UGLY DUCKLING CORPORATION
By_______________________________________
Its______________________________________
CYGNET FINANCE, INC.
By_______________________________________
Its______________________________________
CYGNET FINANCE ALABAMA, INC.
By_______________________________________
Its______________________________________
CYGNET FINANCIAL CORPORATION
By_______________________________________
Its______________________________________
39
<PAGE> 40
SCHEDULE 4.1
CYGNET FINANCIAL CORPORATION
Summary of Transferred Assets(1)
<TABLE>
<CAPTION>
BOOK
VALUE
-----
(000's)
<S> <C>
Assets:
Cash and Cash Equivalents.................. 232
Finance Receivables........................ 26,333
Notes Receivable........................... 23,027
Property and Equipment..................... 2,335
Goodwill................................... 1,138
Other Assets............................... 4,338
Assumed Liabilities:
Accrued Expenses and Other Liabilities..... 2,464
Note Payable-Envirotest.................... 298
------
Net Transferred Assets..................... 54,641
======
</TABLE>
(1) Supporting schedules to be provided.
<PAGE> 41
SCHEDULE 4.2
Cygnet Financial Corporation
Summary of Liabilities and Liens
For liabilities being assumed by Cygnet, see Schedule 4.1.
1) Lien on furniture and fixtures purchased by Ugly Duckling from
Envirotest Systems, Inc.
<PAGE> 42
SCHEDULE 4.3
REAL PROPERTY LEASES
<TABLE>
<CAPTION>
Location Agreement Landlord
<S> <C> <C>
1. Corporate Office Esplanade Sublease Agreement LANDLORD:
2525 E. Camelback Road, dated April 15, 1996. Property Arizona ABJLW One Corp.
Suite 1150 c/o Clarion Partners
Phoenix, Arizona 85016 335 Madison Avenue
New York, NY 10017
Attention: Portfolio Manager
Copy to:
Clarion Realty Services
Camelback Esplanade - Tower B
2425 East Camelback Road,
Suite 640
Phoenix, Arizona 85016
Attention: General Manager
SUBLANDLORD:
Envirotest Systems Corp.
246 Sobranty Way
Sunnyvale, California 94086
Attention: General Counsel
First Expansion Sublease Agreement dated LANDLORD:
March 31, 1997 (See above)
SUBLESSOR:
Unisys Corporation
Township Line & Union Meeting Roads
Blue Bell, PA 19424
2. Denver Servicing Center Leasing Agreement dated January LANDLORD:
6795 East Tennessee Ave., 10, 1995, as thereafter amended Leetsdale Limited Liability Company
Suite 162 and assigned to Ugly Duckling c/o Matrix Group, Inc.
Denver, Colorado 80224 Corporation pursuant to Order 2121 South Oneida Street, #600
Pursuant to 11 U.S.C. Section 365 Denver, Colorado 80224
of the Bankruptcy Code Authorizing
the Debtor to Assume And Assign
Certain Unexpired Leases of
Nonresidential Real Property.
</TABLE>
<PAGE> 43
<TABLE>
<S> <C> <C>
3. Nashville Servicing Center Lease commencing May 1, LANDLORD:
441 Donelson Pike, Suite 310 1996. Crocker Realty Trust
Nashville, TN 37214 433 Plaza Real, Suite 335
Boca Raton, FL 33432
MANAGING AGENT:
Trammell Crow
Susan Hunsberger
155 Franklin Road
Brentwood, TN 37027
4. Dallas Servicing Center Lease Agreement dated LANDLORD:
1600 Plano Parkway, Suite 175 March 25, 1996. 1600 Plano Parkway, LTD
Dallas, TX 222 West Colinas Blvd., #1440
Irving, TX 75039
PROPERTY MANAGER:
Fobare Commercial, Inc.
3939 Beltline Road
Dallas, TX 75244
</TABLE>
<PAGE> 44
SCHEDULE 4.4
PERSONAL PROPERTY LEASES
None. All leases for personal property used by Cygnet are or will be entered
into directly by Cygnet.
<PAGE> 45
SCHEDULE 4.5
CONTRACTS
(FMAC and Reliance Transactions-- see Article Six)
(Employment Contracts -- see Section 8.7)
(Leases described in Schedule 4.3)
<PAGE> 46
SCHEDULE 4.13
Interim Transactions described in the Amendment No. 2 to Form S-1 Registration
Statement No. 333-57323
<PAGE> 47
SCHEDULE 5.3
SOFTWARE LICENSES
That certain loan servicing system originated by Wendel Rosenbaum and acquired
by the Company from Seminole Finance in January 1997 referred to as
"Wendelware."
<PAGE> 48
SCHEDULE 6.1
<TABLE>
<CAPTION>
Document Date
<S> <C> <C>
1. Second Amended Joint Plan of First Merchants Acceptance Corporation and First 03/16/98
Merchants Residential Credit Corporation
2. Servicing Agreement, by and between First Merchants Auto Receivables Corporation II as
Client and Champion Acceptance Corporation as Servicer, as amended
3. Guaranty and Pledge Agreement (Stock), by and between First Merchants Acceptance 12/15/97
Corporation as Pledgor, LaSalle National Bank as Agent under the Warehouse Facility,
Ugly Duckling Corporation, and Harris Trust and Savings Bank as Collateral Agent
4. Contribution Agreement, by and between First Merchants Acceptance Corporation and 12/15/97
Ugly Duckling Corporation
5. Credit and Security Agreement, by and between Ugly Duckling Corporation as Lender and 07/17/97
First Merchants Acceptance Corporation as Borrower
6. First Amendment to Credit and Security Agreement, by and between Ugly Duckling 01/21/98
Corporation as Lender and First Merchants Acceptance Corporation as Borrower
7. Second Amendment to Credit and Security Agreement, by and between Ugly Duckling 04/01/98
Corporation as Lender and First Merchants Acceptance Corporation as Borrower
8. Side Letter from Financial Security Assurance Inc. to First Merchants Acceptance 03/31/98
Corporation re First Amendment to Sale and Servicing Agreement, by and between Ugly
Duckling Corporation and First Merchants Acceptance Corporation
9. Side Letter from Financial Security Assurance Inc. to Champion Acceptance Corporation 03/31/98
re Servicing Fee Supplement
10. Sale and Servicing Agreement (1995-A) by and among First Merchants Auto Receivables 11/17/95
Corporation, Purchaser, Champion Acceptance Corporation, as successor Servicer, and
Harris Trust and Savings Bank, Backup Servicer, as amended by that certain First
Amendment to Sale and Servicing Agreement (1995-A) dated as of March 31, 1998
11. Pooling and Servicing Agreement (1996-1) by and among First Merchants Auto 03/01/96
Receivables Corporation II, Depositor, Champion Acceptance Corporation, as Successor
Servicer, and Harris Trust and Savings Bank, Trustee and Backup Servicer, as amended by
that certain First Amendment to Pooling and Servicing Agreement (1996-1) dated as of
March 30, 1998, and as further amended by that certain Second Amendment to Pooling
and Servicing Agreement (1996-1) dated as of March 31, 1998
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
Document Date
<S> <C> <C>
12. Sale and Servicing Agreement (1996-A) by and among First Merchants Auto Trust 1996-A, 05/01/96
Issuer, First Merchants Auto Receivables Corporation II, Seller, Champion Acceptance
Corporation, as Successor Servicer, and Harris Trust and Savings Bank, Indenture Trustee
and Backup Servicer, as amended by that certain First Amendment to Sale and Servicing
Agreement (1996-A) dated as of March 30, 1998, and as further amended by that certain
Second Amendment to Sale and Servicing Agreement (1996-A) dated as of March 31,
1998
13. Pooling and Servicing Agreement (1996-2) by and among First Merchants Auto 06/01/96
Receivables Corporation II, Depositor, Champion Acceptance Corporation, as Successor
Servicer, and Harris Trust and Savings Bank, Trustee and Backup Servicer, as amended by
that certain First Amendment to Pooling and Servicing Agreement (1996-2) dated as of
March 30, 1998, and as further amended by that certain Second Amendment to Pooling
and Servicing Agreement (1996-2) dated as of March 31, 1998
14. Sale and Servicing Agreement (1996-B) by and among First Merchants Auto Trust 1996-B 09/01/96
as Issuer, First Merchants Auto Receivables Corporation II, Seller, Champion
Acceptance Corporation, as successor Servicer, and Harris Trust and Savings Bank,
Indenture Trustee, Collateral Agent and Backup Servicer, as amended by that certain First
Amendment to Sale and Servicing Agreement (1996-B) dated as of March 31, 1998
15. Sale and Servicing Agreement (1996-C) by and among First Merchants Auto Trust 1996-C 12/01/96
as Issuer, First Merchants Auto Receivables Corporation II, Seller, Champion
Acceptance Corporation, as successor Servicer, and Harris Trust and Savings Bank,
Indenture Trustee, Collateral Agent and Backup Servicer, as amended by that certain First
Amendment to Sale and Servicing Agreement (1996-C) dated as of March 31, 1998
16. Sale and Servicing Agreement (1997-1)by and among First Merchants Auto Trust 1997-1 03/01/97
as Issuer, First Merchants Auto Receivables Corporation II, Seller, Champion Acceptance
Corporation, as Successor Servicer, and Harris Trust and Savings Bank, Indenture Trustee
and Backup Servicer as amended by that certain First Amendment to Sale and Servicing
Agreement (1997-1) dated as of March 30, 1998, and as further amended by that certain
Second Amendment to Sale and Servicing Agreement (1997-1) dated as of March 31,
1998
17. First Supplemental Indenture (1995-A)
18. Instrument of Termination, Appointment and Acceptance by and among Financial 03/31/98
Security Assurance Inc. as Insurer, First Merchants Acceptance Corporation, and
Champion Acceptance Corporation re Sale and Servicing Agreement dated as of
November 17, 1995
19. Instrument of Termination, Appointment and Acceptance by and among Financial 03/31/98
Security Assurance Inc. as Insurer, First Merchants Acceptance Corporation, and
Champion Acceptance Corporation re Pooling and Servicing Agreement dated as of
March 1, 1996, as amended by the First Amendment to Pooling and Servicing Agreement
dated as of March 30, 1998
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
Document Date
<S> <C> <C>
20. Instrument of Termination, Appointment and Acceptance by and among Financial 03/31/98
Security Assurance Inc. as Insurer, First Merchants Acceptance Corporation, and
Champion Acceptance Corporation re Sale and Servicing Agreement dated as of May 1,
1996, as amended by the First Amendment to Sale and Servicing Agreement dated as of
March 30, 1998
21. Instrument of Termination, Appointment and Acceptance by and among Financial 03/31/98
Security Assurance Inc. as Insurer, First Merchants Acceptance Corporation, and
Champion Acceptance Corporation re Pooling and Servicing Agreement dated as of June
1, 1996, as amended by the First Amendment to Pooling and Servicing Agreement dated
as of March 30, 1998
22. Instrument of Termination, Appointment and Acceptance by and among Financial 03/31/98
Security Assurance Inc. as Insurer, First Merchants Acceptance Corporation, and
Champion Acceptance Corporation re Sale and Servicing Agreement dated as of
September 1, 1996
23. Instrument of Termination, Appointment and Acceptance by and among Financial 03/31/98
Security Assurance Inc. as Insurer, First Merchants Acceptance Corporation, and
Champion Acceptance Corporation re Sale and Servicing Agreement dated as of
December 1, 1996
24. Instrument of Termination, Appointment and Acceptance by and among Financial 03/31/98
Security Assurance Inc. as Insurer, First Merchants Acceptance Corporation, and
Champion Acceptance Corporation re Sale and Servicing Agreement dated as of March
30, 1998
25. Master Spread Account Agreement, dated March 1, 1996, as amended by that certain 03/01/96
amendment dated March __, 1998
26. Master Depository Accounts and Post Office Boxes and Agency Agreement by and among 03/31/98
Champion Acceptance Corporation, Harris Trust and Savings Bank, General Electric
Capital Corporation, First Merchants Auto Receivables Corporation
27. Escrow Agreement by and among Champion Acceptance Corporation, First Merchants 03/31/98
Acceptance Corporation, Financial Security Assurance Inc., and Harris Trust and Savings
Bank
28. Assignment Agreement by and among Champion Acceptance Corporation as
Assignee, First Merchants Acceptance Corporation as Servicer,
and Financial Security Assurance, Inc. as Insurer 03/31/98
29. Sale and Purchase Agreement, by and among Champion Acceptance Corporation and ?
General Electric Capital Corporation
30. Servicing Agreement, by and between Champion Acceptance Corporation and General 12/15/97
Electric Capital Corporation
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
Document Date
<S> <C> <C>
31. Purchase Agreement, by and among Ugly Duckling Corporation, General Electric Capital 12/18/97
Corporation and LaSalle National Bank
32. Guaranty of Ugly Duckling Corporation in favor of General Electric Capital Corporation 12/18/97
33. Contribution Sharing Agreement, between the Company and Financial Security Assurance 3/31/98
Inc.
</TABLE>
<PAGE> 52
SCHEDULE 6.2
<TABLE>
<CAPTION>
<S> <C> <C>
1. Transition Services Agreement, by and between Ugly Duckling 02/09/98
Corporation and Reliance Acceptance Group, Inc.
2. Servicing Agreement, by and between Reliance Acceptance Corporation, 02/09/98
Ugly Duckling Corporation and BankAmerica Business Credit, Inc.
3. Agreement of Understanding, between Reliance Acceptance Group, Inc., 02/09/98
Reliance Acceptance Corporation and Ugly Duckling Corporation
4. Warrant Agreement, by and between Ugly Duckling Corporation and 02/09/98
Reliance Acceptance Group, Inc.
</TABLE>
<PAGE> 53
SCHEDULE 8.5
Company options held by the following individuals will not be replaced with
Cygnet options:
Eric J. Splaver (June 30, 1995 grants)
Mary Reiner (June 30, 1995 grants)
<PAGE> 1
Exhibit 10.24
ESCROW AGREEMENT
----------------
This ESCROW AGREEMENT (the "Agreement") is made as of ___________, 1998, by
and between Cygnet Financial Corporation, a Delaware corporation ("Cygnet") and
Norwest Bank Minnesota, National Association ("Escrow Agent").
RECITALS
A. At a meeting held on August 31, 1998, the shareholders of Ugly
Duckling Corporation, a Delaware corporation ("UDC"), approved the separation of
UDC and its existing subsidiaries into two publicly-held corporate groups (the
"Split-up").
B. In connection with the Split-up, UDC and Cygnet have executed a
Capitalization Agreement, dated as of ___________, 1998 (the "Capitalization
Agreement"), which sets forth the terms and conditions of certain major aspects
of the Split-up.
C. Pursuant to the Capitalization Agreement, Cygnet will make a rights
offering (the "Rights Offering") to the existing shareholders of UDC and will
distribute to such shareholders transferable rights (the "Rights") to purchase
shares of the common stock, $.001 par value of Cygnet (the "Cygnet Common
Stock"), for a subscription price of $7.00 per share (the "Subscription Price").
Each stockholder of record on the record date for the Rights Offering will
receive one (1) Right for every four (4) shares of UDC common stock, $.001 par
value, held.
D. Pursuant to the Rights Offering, the holders of the Rights will have
[twenty (20)] days, unless extended (the "Exercise Period") after commencement
of the Rights Offering to exercise such Rights.
E. The Rights Offering will commence when all conditions thereto have
been satisfied and Cygnet mails the certificates representing the Rights (the
"Rights Certificates") to shareholders of UDC (the "Commencement Date"), and the
Exercise Period will expire at 5:00 p.m. Minnesota time on the [20th] day
following the Commencement Date or such later date to which the Rights offering
is extended (the "Expiration Date").
F. In order to exercise the Rights, holders of the Rights, other than
Ernest C. Garcia, II ("Garcia") or any corporation or other entity controlled by
Garcia (an "Affiliate"), must surrender the Rights Certificates evidencing the
Rights to be exercised, with the form of election to purchase thereon duly
executed to Norwest Bank Minnesota, National Association, the distribution agent
for the Rights Offering (the "Distribution Agent"), at the principal office of
the Distribution Agent, together with payment of the Subscription Price in
lawful money of the United States by certified check or money order payable to
the Escrow Agent for each share of Cygnet Common Stock as to which the Rights
are exercised, on or prior to the Expiration Date or thereafter pursuant to a
Notice of Guaranteed Delivery in the form approved by the Company (a "Notice of
Guaranteed Delivery") and received on or prior to the Expiration Date.
<PAGE> 2
G. Each Rights holder who elects to exercise all of his Rights may elect
to purchase an additional number of shares of Cygnet Common Stock up to the
number of shares of Cygnet Common Stock purchased upon exercise of such
holder's Rights, out of the pool of Cygnet Common Stock offered pursuant to the
Rights Offering ("Offered Shares") and not purchased upon exercise of the
Rights (the "Over-Subscription Election"). The Over-Subscription Election may be
exercised concurrently with the exercise of the related Rights by a holder
(other than Garcia or his Affiliates) duly executing the form of
Over-Subscription Election contained in the Rights Certificate, together with
payment in full of the Subscription Price in lawful money of the United States
by certified check or money order payable to the Escrow Agent for all shares of
Cygnet Common Stock for which the Over-Subscription Election is exercised, on
or prior to the Expiration Date or thereafter pursuant to a Notice of
Guaranteed Delivery received on or prior to the Expiration Date.
H. If the number of shares of Cygnet Common Stock elected for purchase
pursuant to all Over-Subscription Elections properly effected by holders of the
Rights (including the Over-Subscription Election, if any, of Garcia and his
Affiliates ("Garcia Over-Subscription Elections") advised to the Escrow Agent
pursuant to Section 4.A(iv) of this Agreement) shall exceed the excess of (a)
the number of Offered Shares over (b) the number of shares purchased pursuant to
the Rights (assuming that Garcia and his Affiliates will exercise all Garcia
Rights (defined below) held by them as advised to the Escrow Agent pursuant to
Section 4.A(iv) of this Agreement and excluding shares designated for purchase
pursuant to Over-Subscription Elections) (such excess being the "Unpurchased
Allotment"), each holder who makes an Over-Subscription Election (including
Garcia and his Affiliates) shall be authorized to purchase a pro rata portion of
the Unpurchased Allotment determined by calculating the product of (a) a
fraction, the numerator of which is equal to the number of shares of Cygnet
Common Stock as to which the Over-Subscription Election of a holder is exercised
or, in the case of Garcia or his Affiliates, will be exercised, as advised to
the Escrow Agent pursuant to Section 4.A(iv) of this Agreement, and the
denominator of which is the total number of shares of Cygnet Common Stock as to
which all Over-Subscription Elections are exercised or, in the case of Garcia or
his Affiliates, will be exercised, as advised to the Escrow Agent pursuant to
Section 4.A(iv) of this Agreement, and (b) the Unpurchased Allotment (the "Pro
Rata Allocation").
I. If a Rights holder who has made an Over-Subscription Election is
unable to purchase the full number of shares subscribed for pursuant to such
Over-Subscription Election due to the Pro Rata Allocation, the Subscription
Price paid with respect to the shares such holder is unable to purchase (the
"Overpaid Funds") will be returned to the electing Rights holder.
J. Successful completion of the Rights Offering is contingent upon,
among other things, the purchase of at least 75% of the Offered Shares (the
"Required Purchase Amount").
K. Garcia has agreed to exercise all of his Rights and to cause his
Affiliates to exercise all of their Rights, and through the Over-Subscription
Election related to his or their Rights and/or a standby purchase obligation
(the "Standby Purchase Obligation"), Garcia or his Affiliates will purchase
additional shares of Cygnet Common Stock available pursuant to the Rights
Offering sufficient to satisfy the Required Purchase Amount.
2
<PAGE> 3
L. All Rights held by Garcia or his Affiliates immediately following the
Expiration Date may be referred to herein as the "Garcia Rights". Garcia or his
Affiliates will exercise the Garcia Rights and any Garcia Over-Subscription
Elections concurrently with the satisfaction of the Standby Purchase Obligation
on the closing date of the Split-up (the "Closing Date") and will pay the
subscription funds therefor ("Garcia Funds") directly to Cygnet on the Closing
Date pursuant to procedures established in the Capitalization Agreement.
M. Certified checks and money orders constituting the Subscription Price
for all Cygnet Common Stock offered pursuant to the Rights Offering upon
exercise of the Rights and related Over-Subscription Elections by all holders of
Rights other than Garcia and his Affiliates are herein referred to as the
"Subscription Funds."
N. Pursuant to this Agreement, Cygnet desires to establish an escrow
account maintained with the Escrow Agent in which the Subscription Funds will
be deposited pending the Closing Date.
O. The purpose of this Agreement is to comply with the provisions of
Rules 10b-9 and 15c2-4 promulgated under the Securities Exchange Act of 1934,
as amended, and with the applicable securities laws of all states in which the
Rights Offering is made.
NOW, THEREFORE, in consideration of the mutual covenants, agreements,
representations and warranties contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby covenant and agree as follows:
1. Establishment of Escrow. Effective as of the date of this Agreement,
Cygnet hereby establishes an escrow account with the Escrow Agent (the "Escrow
Account"). Escrow Agent, by its signature hereon, accepts the escrow agency
created by this Agreement, and agrees to carry out its duties as Escrow Agent
hereunder pursuant to the terms and conditions contained herein.
2. Deposits into the Escrow Account. All Subscription Funds received
by the Distribution Agent from subscribers to the Cygnet Common Stock pursuant
to the Rights Offering on or prior to the Expiration Date or thereafter pursuant
to a Notice of Guaranteed Delivery delivered on or prior to the Expiration Date
will be deposited with the Escrow Agent by three o'clock of the next business
day after receipt of said monies, together with or followed promptly by a
written account of each subscription (each a "Subscription Account"), which
Subscription Accounts shall set forth, among other things, the subscriber's name
and address, Social Security or taxpayer identification number, the number of
shares purchased, the amount paid therefor, the form of subscription payment
(which must be either a certified check or money order), the date of said check
or money order, and the date received and delivered to the Escrow Agent. There
shall also be deposited with the Escrow Agent a copy of each Over-Subscription
Election executed by a Rights holder (other than Garcia or his Affiliates). All
monies so deposited in the Escrow Account are hereinafter referred to as the
"Escrow Amount." Cygnet will instruct subscribers to Cygnet Common Stock to make
subscription payments directly to the Distribution Agent by
3
<PAGE> 4
certified check or money order payable to "NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, AS ESCROW AGENT FOR CYGNET FINANCIAL CORPORATION." Subscription
Funds received that are payable to "Norwest Bank Minnesota, National
Association, as Escrow Agent," or to "Cygnet Financial Corporation," or similar
designations are also acceptable. Any Subscription Funds received that are made
payable to a party other than the Escrow Agent or Cygnet shall be promptly
returned by the Escrow Agent to the subscriber who submitted the payment. The
Escrow Agent will promptly deposit all Subscription Funds received by it into
the Escrow Account.
If the aggregate Subscription Price paid by the holder is insufficient to
purchase the aggregate number of shares subscribed for, then such holder will
be deemed to have exercised first, the Rights and second, the Over-Subscription
Election to the full extent of the payment tendered. If the aggregate
Subscription Price paid by the holder exceeds the amount necessary to purchase
the number of shares for which the holder has indicated an intention to
subscribe, then the holder will be deemed to have exercised first, the Rights
and second, the Over-Subscription Election to the full extent of the excess
payment tendered.
Subscriptions made after the expiration of the Exercise Period except
pursuant to a Notice of Guaranteed Delivery delivered prior to the expiration
of the Exercise Period shall be returned to the subscriber.
Unless and until the Exercise Period has expired and the Required Purchase
Amount has been achieved and the Escrow Amount is disbursed to Cygnet hereunder
on the Closing Date, such funds shall not be, nor shall such funds be
considered to be, assets or property of Cygnet, UDC, or any of their
affiliates, or be subject to the debts of Cygnet, UDC or any of their
affiliates.
3. Escrow Period. The period for the existence of the escrow (the
"Escrow Period") shall begin on the Commencement Date of the Rights Offering
and shall terminate upon Escrow Agent's disbursement of all funds in the Escrow
Account in accordance with Section 5 hereof, following the earlier to occur of
the following dates:
A. The Closing Date;
B. Thirty (30) days following expiration of the Exercise Period
(the "Drop Dead Date"); or
C. The date upon which a determination is made by Cygnet and UDC to
withdraw or terminate the Rights Offering and/or the Split-up with notice of
such determination being given to Escrow Agent (the "Termination Date").
4. Report and Notices.
A. Cygnet shall advise the Escrow Agent in writing of (i) the
Commencement Date no later than one business day following the Commencement
Date; (ii) the Expiration Date and any extension thereof no later than one
business day following (x) the Commencement Date or (y)
4
<PAGE> 5
each extension of the Expiration Date; (iii) the Closing Date no later than
three business days prior thereto unless the Escrow Agent shall accept a shorter
notice period; (iv) the number of Garcia Rights and the amount of any Garcia
Over-Subscription Elections no later than one business day following the
Expiration Date; (v) the acceptance or rejection of all subscriptions as soon as
possible following the receipt by Cygnet of documentation evidencing such
subscriptions; and (vi) its receipt on the Closing Date of the Garcia Funds and
of the satisfaction of all conditions to the Split-up, along with instructions
to the Escrow Agent to disburse the Escrow Amount to Cygnet in accordance with
Section 5.C. hereof.
B. Within one business day following the Expiration Date, Escrow
Agent will advise Cygnet of (i) the number of Rights exercised and of the amount
of Over-Subscription Elections, (ii) the number of Rights and Over-Subscription
Elections subject to Notices of Guaranteed Delivery, and (iii) the amount of
Subscription Funds held in the Escrow Account and of any amounts therein that
are not then in the form of collected funds. For purposes of this Agreement, the
term "collected funds" shall mean all funds received by the Escrow Agent which
have cleared normal banking channels and are in the form of cash. Based on the
subscription funds so held and assuming (i) the exercise by Garcia and his
Affiliates of 100% of the Garcia Rights and Garcia Over-Subscription Elections
and the delivery and payment of all subscription certificates and monies
required to be delivered and paid pursuant to Notices of Guaranteed Delivery, no
later than two business days following the Expiration Date the Escrow Agent
shall determine the amount of additional subscription monies required to satisfy
the Required Purchase Amount and shall so advise Cygnet.
C. No later than two business days following the Expiration Date,
the Escrow Agent shall calculate and shall advise Cygnet of the total
Unpurchased Allotment and of the Pro Rata Allocation, if any, to each holder of
Rights who shall have exercised an Over-Subscription Election, including any
exercise of the Garcia Over-Subscription Elections, and of the Overpaid Funds
due to each holder from the Escrow Account. This calculation shall be
reconfirmed by Cygnet and the Escrow Agent on the date following the third
business day after the Expiration Date when all funds held in the Escrow Account
are held in the form of collected funds (the "Over-Subscription Determination
Date").
5. Disbursements from the Escrow Account. Escrow Agent will disburse
monies from the Escrow Account as follows:
A. Not later than two business days following the Over-Subscription
Determination Date, the Escrow Agent shall refund any Overpaid Funds to each
holder entitled thereto, without interest thereon, and the Escrow Agent shall
notify Cygnet of its distribution of such funds.
B. Not later than two business days following the Termination Date
or the Drop Dead Date, the Escrow Agent shall promptly notify each subscriber of
such fact and refund to each subscriber the amount received from such
subscriber, without deduction, penalty, or expense to the
5
<PAGE> 6
subscriber, and without interest, and the Escrow Agent shall notify Cygnet of
its distribution of the funds.
C. On the Closing Date, following the notice and instructions to
the Escrow Agent by Cygnet required pursuant to Section 4.A(vi) hereof, the
Escrow Agent shall disburse the Escrow Amount (after any prior disbursements
pursuant to Section 5.A and Section 6 hereof) to Cygnet. In no event will the
Escrow Amount be released to Cygnet until such amount is received by the Escrow
Agent in collected funds.
D. Escrow Agent shall also make any disbursements required by
Section 6 and Section 9 hereof.
E. All funds returned to a subscriber pursuant to this Agreement
shall be free and clear of any and all claims of Cygnet, UDC or any of their
affiliates or creditors.
6. Collection Procedure; Acceptance and Rejection of Subscriptions. The
Escrow Agent is hereby authorized to deposit all Subscription Funds in the
Escrow Account and to forward each certified check and money order for
collection and, upon collection of the proceeds of each, deposit the collected
proceeds in the Escrow Account. Any check returned unpaid to the Escrow Agent
shall be returned to the subscriber. In such cases, the Escrow Agent will
promptly notify Cygnet of such return and Escrow Agent will be reimbursed by
Cygnet for any expenses so incurred.
Cygnet shall have the ability to reject the subscription of any person in
whole or in part if it shall determine that such subscription is not in proper
form, and each such determination shall be final and binding on all parties.
Cygnet will certify in writing to the Escrow Agent the fact of any rejection of
any subscription, including the name of the subscriber whose subscription is
rejected in whole or in part, the amount of funds submitted by the subscriber
and the portion thereof that has been rejected. If Cygnet rejects any
subscription or portion thereof for which the Escrow Agent has already
collected funds, the Escrow Agent shall promptly issue a refund check to the
rejected subscriber for the portion of his subscription so rejected. If Cygnet
rejects any subscription or portion thereof for which the Escrow Agent has not
yet collected funds but has submitted the subscriber's check or money order for
collection, the Escrow Agent shall promptly issue a check in the amount of the
subscriber's check, or portion thereof so rejected, to the rejected subscriber
after the Escrow Agent has cleared such funds. If the Escrow Agent has not yet
submitted a rejected subscriber's check or money order for collection and the
subscription is rejected in whole, the Escrow Agent shall promptly remit the
subscriber's check directly to the subscriber. If the Escrow Agent has not yet
submitted a rejected subscriber's check or money order for collection and the
subscription is rejected in part only, the Escrow Agent will submit the
subscriber's check or money order for collection and will promptly issue a
check for the rejected portion of the subscriber's subscription to the rejected
subscriber after the Escrow Agent has cleared such funds. All funds returned to
a rejected subscriber shall be without interest.
6
<PAGE> 7
7. Termination of the Rights Offering. In the absence of any notification
by Cygnet of the Termination Date in accordance with Section 3.C hereof, Escrow
Agent shall assume the Rights Offering and Split-up have not been terminated.
8. Instructions to the Escrow Agent. Escrow Agent shall not accept
instructions regarding the funds in the Escrow Account or the Rights Offering
other than from an authorized representative of Cygnet. Ernest C. Garcia, II,
Eric J. Splaver and Steven P. Johnson are currently the authorized
representatives of Cygnet. Cygnet may notify Escrow Agent in writing of the
designation of any substitute or additional authorized representative. Escrow
Agent shall be entitled to rely on the written instructions of any authorized
representative or of any substitute.
9. Investment of Escrow Amount. Unless otherwise agreed by Cygnet and
the Escrow Agent, the Escrow Agent will invest the Escrow Amount in .
Following the termination of the Escrow Period, Escrow Agent shall deliver to
Cygnet in a single, lump-sum payment all interest earned on funds in the Escrow
Account. The amount of interest earned shall be calculated by the Escrow Agent
and provided to Cygnet at the closing of the Escrow Account.
10. Compensation of Escrow Agent. Cygnet shall pay the Escrow Agent a fee
for its escrow services as previously agreed to by the parties in a transfer
agent agreement. However, no such fee or any monies whatsoever shall be paid out
of or chargeable to the funds on deposit in the Escrow Account.
11. Resignation of Escrow Agent. Escrow Agent may resign at any time and
be discharged from its duties as escrow agent hereunder by giving Cygnet at
least thirty (30) days' notice in accordance with Section 14.A. If a successor
escrow agent is not appointed within the 30-day period following such notice,
Escrow Agent may petition any court of competent jurisdiction to name a
successor escrow agent. As soon as practicable after its resignation, Escrow
Agent shall turn over to a successor escrow agent appointed by Cygnet all monies
and property held hereunder upon presentation to Escrow Agent of the document
appointing the new escrow agent and its acceptance of such appointment and will
be released from any further responsibility or obligation in connection with the
Escrow Account on this Agreement.
12. Duty and Liability of the Escrow Agent; Indemnification. The sole duty
of the Escrow Agent, other than as herein specified, shall be to receive funds
hereunder and hold them subject to release, in accordance herewith, and the
Escrow Agent shall be under no duty to determine whether Cygnet is complying
with the requirements of this Agreement. The Escrow Agent may conclusively rely
upon and shall be protected in acting upon any statement, certificate, notice,
request, consent, order, or other document believed by it to be genuine and to
have been signed or presented by the proper party or parties. The Escrow Agent
shall have no duty or liability to verify any such statement, certificate,
notice, request, consent, order, or other document, and its sole
7
<PAGE> 8
responsibility shall be to act only as expressly set forth in this Agreement.
The Escrow Agent shall be under no obligation to institute or defend any
action, suit, or proceeding in connection with this Agreement unless first
indemnified to its satisfaction. The Escrow Agent may consult with counsel in
respect of any question arising under this Agreement and the Escrow Agent shall
not be liable for any action taken or omitted in good faith upon advice of such
counsel.
Cygnet hereby indemnifies and holds harmless the Escrow Agent from and
against, any and all loss, liability, cost, damage, and expense, including,
without limitation, reasonable counsel fees, which the Escrow Agent may suffer
or incur by reason of any action, claim, or proceeding brought against the
Escrow Agent arising out of or relating in any way to this Agreement or any
transaction to which this Agreement relates unless such action, claim, or
proceeding is the result of the negligence or willful misconduct of the Escrow
Agent. Within fifteen (15) days following the receipt by Escrow Agent of notice
of any demand or claim or the commencement of any action, suit, or proceeding
relating to this Agreement for which indemnification will be claimed hereunder,
the Escrow Agent shall notify the Company in writing in accordance with the
notification provisions of this Agreement. The Company may defend Escrow Agent
with counsel reasonably satisfactory to it against any such demand or claim if
it so notifies Escrow Agent within fifteen (15) days following receipt of a
notice from Escrow Agent as described above.
13. Maintenance of Records. The Escrow Agent shall maintain the
Subscription Accounts provided to the Escrow Agent pursuant to Section 2 hereof
and a record of all payments returned and disbursements made from the Escrow
Account as provided in this Agreement. Cygnet and the Escrow Agent shall agree
from time to time on the regular reports and the timing thereof that shall be
made by the Escrow Agent regarding the Escrow Account. The Escrow Agent shall
also provide Cygnet on reasonable request, from time to time in accordance with
its normal procedures, such other information as shall be in the possession of
the Escrow Agent as a result of its duties hereunder.
14. Miscellaneous.
A. Notices. All notices, reports, instructions, requests, and other
communications given under this Agreement ("Notices") shall be in writing,
delivered by hand, by facsimile with confirmation of receipt, by receipted
mail, or by delivery service, and shall be deemed given when received. Notices
shall be addressed to the parties hereto at their addresses or facsimile
numbers listed on the signature pages hereof. A party may change its address or
numbers for Notices by giving notice to the other party in accordance with this
paragraph.
B. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with the laws of the State of Arizona
(without taking into consideration its choice of law provisions).
C. Entire Agreement. This Agreement, together with any exhibits
and/or schedules referred to herein, constitutes the entire agreement among the
parties pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements and undertakings of the parties in connection
herewith.
8
<PAGE> 9
D. Assignment. All of the terms, covenants, conditions, and provisions
of this Agreement shall bind and inure to the benefit of the parties hereto
and to their respective representatives, successors, and assigns.
E. Captions; Headings. The captions and paragraph headings included in
this Agreement are for convenience of reference only and do not constitute a
part of this Agreement.
F. Recitals. The recitals herein are made by Cygnet only.
G. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which shall constitute one and
the same document.
H. Amendments; Waivers. This Agreement may be amended or modified, and
any of the terms, covenants, representations, warranties, or conditions hereof
may be waived, only by a written instrument executed by the parties hereto, or
in the case of a waiver, by the party waiving compliance. Any waiver by any
party of any condition, or of the breach of any provision, term, covenant,
representation, or warranty contained in this Agreement, in any one or more
instances, shall not be deemed to be nor construed as a further or continuing
waiver of any such condition, or of the breach of any other provision, term,
covenant, representation, or warranty of this Agreement.
I. Severability. The invalidity of any provision hereof shall in no way
affect the validity of any other provision hereof. Each of the parties shall at
the request of the other party, deliver to the requesting party all further
documents or other assurances as may reasonably be necessary or desirable in
connection with this Agreement.
IN WITNESS WHEREOF, Cygnet and the Escrow Agent have entered into this
Agreement on the date first set forth above.
CYGNET FINANCIAL CORPORATION
By:_____________________________________
Name:___________________________________
Title:__________________________________
Address for Notices:
2525 East Camelback Road, Suite 1150
Phoenix, Arizona 85016
Facsimile: (602)____________________
9
<PAGE> 10
NORWEST BANK, MINNESOTA, NATIONAL
ASSOCIATION, AS ESCROW AGENT
By:____________________________________
Name:__________________________________
Title:_________________________________
Address for Notices:
_______________________________________
_______________________________________
Facsimile:_____________________________
10
<PAGE> 1
EXHIBIT 10.25
RIGHTS EXERCISE AND
STANDBY PURCHASE AGREEMENT
_______________ Shares of Common Stock
(Par Value $.001 Per Share)
of
CYGNET FINANCIAL CORPORATION
This Standby Purchase Agreement dated as of ______________, 1998, is
among CYGNET FINANCIAL CORPORATION, a Delaware corporation ("Cygnet"), and
ERNEST C. GARCIA, II ("Garcia").
RECITALS
WHEREAS, UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC"), has
determined to present to the stockholders of UDC for approval at the annual
meeting of stockholders to be held on August 31, 1998 (the "Annual Meeting"), a
proposal for the separation of UDC and its subsidiaries into two publicly-held
corporate groups (the "Split-up"), pursuant to a proposal (the "Split-up
Proposal") described in the definitive proxy of UDC for such Annual Meeting
filed with the Securities and Exchange Commission (the "SEC") on ___________
____, 1998 (the "Proxy");
WHEREAS, if the Split-up Proposal is approved by the stockholders at
the Annual Meeting, subject to certain contingencies described in the Proxy,
transferrable rights (the "Rights") to purchase common stock, $.001 par value
("Cygnet Common Stock"), of Cygnet will be distributed to stockholders of UDC
(the "Rights Offering"), as described in the Proxy;
WHEREAS, each stockholder of record of UDC (a "Record Holder") as of
August 17, 1998, the record date for the Rights Offering, will receive one (1)
Right for every four (4) shares of UDC common stock, $.001 par value ("UDC
Common Stock"), held by such Record Holder, with a total of __________ Rights
being distributed;
WHEREAS, each Right will entitle the holder thereof (a "Rights Holder")
to purchase one (1) share of Cygnet Common Stock, for a total of _________
shares of Cygnet Common Stock being offered pursuant to all Rights (the "Offered
Shares"), during a period (the "Offering Period") commencing on the date the
certificates for the Rights are mailed to Record Holders (the "Commencement
Date") and terminating at 5:00 p.m. Minnesota time [twenty (20)] days
thereafter, unless extended (the "Expiration Date"), except that Garcia and any
corporations or other entities controlled directly or indirectly by him
("Affiliates") may exercise their Rights and the over- subscription election
relating thereto as described herein;
<PAGE> 2
WHEREAS, each holder of Rights who elects to exercise all of his Rights
may also subscribe for an additional number of shares of Cygnet Common Stock out
of the pool of Offered Shares underlying unexercised Rights on the Expiration
Date, if any (the "Unexercised Pool"), equal to the number of shares purchased
upon exercise of such holder's Rights (the "Over-Subscription Election"),
subject to allocation in the event that there are more shares subscribed for
pursuant to all Over-Subscription Elections than are available in the
Unexercised Pool;
WHEREAS, the successful conclusion of the Split-up is contingent on the
purchase of at least 75% of the Offered Shares (the "Required Purchase Amount");
WHEREAS, Garcia and his Affiliates presently hold ______ shares of UDC
Common Stock, constituting approximately 25.2% of the outstanding UDC Common
Stock;
WHEREAS, to ensure the purchase of the Required Purchase Amount, Garcia
has agreed to act as standby purchaser for the Rights Offering (the "Standby
Purchaser"); and
WHEREAS, Cygnet and Garcia desire to memorialize certain obligations of
Garcia with respect to the exercise of his Rights and his obligations as Standby
Purchaser.
NOW, THEREFORE, Garcia hereby agrees with Cygnet as follows:
1. Exercise of Rights. Garcia agrees to exercise and to cause his
Affiliates to exercise all Rights held by them on the effective date of the
Split-up. All such exercises may be effected in accordance with procedures
therefor established in the Escrow Agreement dated as of ________, 1998 between
Cygnet and Norwest Bank Minnesota, National Association, as Escrow Agent (the
"Escrow Agent"), and in the Capitalization Agreement dated as of ___________,
1998 between UDC and Cygnet (the "Capitalization Agreement").
2. Standby Purchase Obligation. On the closing date for the Rights
Offering (the "Closing Date") after determination of the number of Offered
Shares sold pursuant to exercise of the Rights (including Rights held by Garcia
and his Affiliates) and all Over-Subscription Elections (including any such
elections by Garcia and his Affiliates), Garcia agrees to purchase or to cause
his Affiliates to purchase any additional Offered Shares necessary to achieve
the Required Purchase Amount, such purchases to be effected in accordance with
procedures established in the Escrow Agreement and the Capitalization Agreement.
3. Warrants. In consideration for Garcia's obligations as Standby
Purchaser hereunder, on the Closing Date, Cygnet will grant to Garcia warrants
(the "Warrants") to purchase 500,000 shares of Cygnet Common Stock at an
exercise price of $8.40 per share, for a period of five years after the date of
initial issuance thereof, and upon such other terms and conditions as are
established pursuant to a warrant agreement between Cygnet and Garcia, such
warrant agreement to be in substantially the form of Exhibit A hereto.
2
<PAGE> 3
IN WITNESS WHEREOF the parties have caused this Agreement to
be duly executed, on the day and year first above written.
CYGNET FINANCIAL CORPORATION
By:
----------------------------------------
Its:
----------------------------------------
ERNEST C. GARCIA, II
----------------------------------------
3
<PAGE> 1
Exhibit 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Cygnet Financial Services, Inc. Arizona
Cygent Dealer Finance, Inc. Arizona
Cygnet Finance Alabama, Inc. Arizona
Cygnet Support Services, Inc. Arizona
Cygnet Financial Portfolio, Inc. Arizona
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Cygnet Financial Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Experts" and "Selected Combined Financial Data" in
the prospectus.
/s/ KPMG PEAT MARWICK LLP
Phoenix, Arizona
July 30, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT APPRAISER'S CONSENT
The Boards of Directors of
Ugly Duckling Corporation and
Cygnet Financial Corporation:
We have reviewed and approved the summary of our appraisal report referred
to in the Cygnet Financial Corporation ("Cygnet") prospectus found within
Cygnet's Amendment No. 2 to Form S-1 and to the reference to our firm under the
headings "Experts," "Prospectus Summary -- The Rights Offering," "The Rights
Offering -- Opinion of Appraiser," "Federal Income Tax Consequences," and
elsewhere therein.
/s/ WILLAMETTE MANAGEMENT
ASSOCIATES
San Francisco, California
July 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEETS OF CYGNET FINANCIAL CORPORATION AT JUNE 30, 1998 AND DECEMBER
31, 1997 AND THE COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 232 1,225
<SECURITIES> 0 0
<RECEIVABLES> 61,186 49,526
<ALLOWANCES> 11,596 8,191
<INVENTORY> 0 0
<CURRENT-ASSETS> 0<F1> 0<F1>
<PP&E> 2,335 646
<DEPRECIATION> (317) (127)
<TOTAL-ASSETS> 58,580 50,034
<CURRENT-LIABILITIES> 0<F1> 0<F1>
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 40,000 40,000
<TOTAL-LIABILITY-AND-EQUITY> 58,580 50,034
<SALES> 0 0
<TOTAL-REVENUES> 12,550 15,959
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 9,267 3,937
<LOSS-PROVISION> 965 691
<INTEREST-EXPENSE> 1,714 2,067
<INCOME-PRETAX> 604 9,264
<INCOME-TAX> 244 3,728
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 360 5,536
<EPS-PRIMARY> (0.18) 0.48
<EPS-DILUTED> (0.18) 0.48
<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
