-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ghfv6p+0jj8m8wSiKem1P9FNJe1nPSccaiY5dx3d0ZAwkfsiorRdTQ0ezzD4cwkL ddc5IoXmTZ5woY3OqEKL3g== 0001012704-01-000023.txt : 20010418 0001012704-01-000023.hdr.sgml : 20010418 ACCESSION NUMBER: 0001012704-01-000023 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 28 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UGLY DUCKLING CORP CENTRAL INDEX KEY: 0001012704 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 860721358 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14759 FILM NUMBER: 1604614 BUSINESS ADDRESS: STREET 1: 2525 E CAMELBACK ROAD STREET 2: STE 500 CITY: PHOENIX STATE: AZ ZIP: 85016 BUSINESS PHONE: 6028526600 MAIL ADDRESS: STREET 1: 2525 E CAMELBACK RD STREET 2: STE 1150 CITY: PHOENIX STATE: AZ ZIP: 85016 10-K 1 0001.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________. Commission File Number 0-20841 UGLY DUCKLING CORPORATION (Exact name of registrant as specified in its charter) Delaware 86-0721358 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2525 E. Camelback Road, Suite 500, Phoenix, Arizona 85016 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (602) 852-6600 Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each Exchange on which registered ------------------------------------ ----------------------------------------- 12% Subordinated Debentures Due 2003 American Stock Exchange 11% Subordinated Debentures Due 2007 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of each Exchange on which registered ------------------------------------ ----------------------------------------- Common Stock, $.001 par value The Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of common stock held by non-affiliates of the registrant was approximately $18,025,000 as of March 30, 2001 based on the closing market price of the Registrants common stock on Nasdaq on that date. Applicable Only to Registrants Involved in Bankruptcy Proceedings During the Preceding Five Years: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] (Applicable Only to Corporate Registrants) As of March 30, 2001, there were 12,291,909 shares of common stock of the Registrant outstanding. ================================================================================
Ugly Duckling Corporation TABLE OF CONTENTS For the fiscal year ended December 31, 2000 PART I PAGE Item 1 Business..................................................................................... 1 Item 2 Properties................................................................................... 5 Item 3 Legal Proceedings............................................................................ 5 Item 4 Submission Of Matters To A Vote Of Security Holders.......................................... 5 Item 4A Executive Officers Of The Registrant......................................................... 6 PART II Item 5 Market For The Registrant's Common Equity Securities And Related Stockholder Matters.......................................................................... 7 Item 6 Selected Consolidated Financial Data......................................................... 8 Item 7 Management's Discussion And Analysis Of Financial Condition And Results Of Operations........................................................................ 10 Item 7A Quantitative And Qualitative Disclosures About Market Risk................................... 29 Item 8 Consolidated Financial Statements And Supplementary Data..................................... 30 Item 9 Changes In And Disagreements With Accountants On Accounting And Financial Disclosures........................................................................ 53 PART III Item 10 Directors And Executive Officers Of The Registrant........................................... 54 Item 11 Executive Compensation....................................................................... 55 Item 12 Security Ownership Of Certain Beneficial Owners And Management............................... 60 Item 13 Certain Relationships And Related Transactions............................................... 62 PART IV Item 14 Exhibits, Consolidated Financial Statement Schedules, And Reports On Form 8-K..................................................................................... 63 Signatures........................................................................................................... 68
PART I ITEM 1 -- BUSINESS Principal Line of Business We operate the largest chain of buy here-pay here car dealerships in the United States. At December 31, 2000, we operated 77 dealerships located in eleven large markets from coast to coast. We have one primary line of business: to sell and finance quality used vehicles exclusively to customers within the sub-prime segment of the used car market. Our business is divided into three operating segments. Information about our operating segments can be found in Note (189) of the Notes to Consolidated Financial Statements. Operating segment information is also included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Business Segment Information". We commenced operations through various entities beginning in 1989. Ugly Duckling Corporation was formed in Arizona in 1992 and was reincorporated in Delaware in 1996. Overview of Used Car Sales and Finance Industry Used Car Sales and Financing Used car retail sales typically occur through either manufacturer's franchised new car dealerships that sell used cars or through independent used car dealerships. The market for used car sales is significant and has approximately 19,000 franchised and 54,000 independent used car dealers in the United States. The automobile financing industry is the third-largest consumer finance market in the country, after mortgage debt and credit card revolving debt. This 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. In general, the industry is categorized according to the type of car sold (new versus used) and the credit characteristics of the borrower. Based on these credit characteristics, credit worthiness classifications have evolved generally ranging from A through D, with the D classification representing those customers being the least credit worthy. The C and D, or sub-prime segment, is comprised of customers who typically have limited credit histories, low incomes or past credit problems. This sub-prime market segment alone is estimated to produce $136 billion in year 2001 retail sales. Of the C and D total market, independent used car dealerships provide approximately $58 billion of total retail sales, or 42.6%. We are a buy here-pay here dealer and participate in the sub-prime segment of the independent used car sales and finance market. Buy here-pay here dealers typically offer their customers certain advantages over more traditional financing sources, including: expanded credit opportunities; flexible payment terms, including structuring loan payment due dates as weekly or biweekly, often coinciding with a customer's payday; and the ability to make payments in person at the dealerships. This is an important feature to many sub-prime borrowers who may not have checking accounts or are otherwise unable to make payments by the due date through use of the mail due to the timing of paydays. The industry statistical information presented in this section from information provided to us by CNW Marketing/Research of Bandon, Oregon. Page 1 Company Dealership (Retail) Operations Growth in Dealership Sites We commenced dealership operations in 1992 with the acquisition of two dealerships in Arizona. At December 31, 1996, we had expanded to 8 dealerships, all in Arizona. Beginning in 1997, we expanded through a combination of de novo dealership developments and acquisitions. Acquisitions in 1997 and 1999 added 38 dealerships in ten new markets outside of Arizona. Since 1996, we have also developed a total of 26 de novo sites in existing markets. We have since decided to slow our growth to allow us to integrate and build up the previously acquired and constructed dealerships. In addition, we felt that our stock price did not reflect the true value of our outstanding common stock and that repurchases of our common stock was a better use of our capital than expansion, so we used excess capital to repurchase our common stock in an effort to increase shareholder value by decreasing dilution of the stock. See Note (12) of the Notes to Consolidated Financial Statements for a further discussion of our stock purchases. Currently, we are limited in our ability to grow or purchase additional stock by capital constraints. As new capital is secured, we will consider whether to resume our growth. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Risk Factors". The following table summarizes the number of dealerships in operation by market for the last three years: Dealerships by Market ------------------------------------
2000 1999 1998 ------ ------ ------ Los Angeles............. 13 12 8 Phoenix................. 9 9 9 San Antonio............. 9 9 9 Atlanta................. 9 9 9 Tampa................... 9 9 8 Dallas.................. 8 7 6 Richmond................ 5 5 -- Orlando................. 7 4 -- Tucson.................. 3 3 3 Albuquerque............. 3 3 3 Las Vegas............... 2 2 1 ------ ------ ------ 77 72 56 ====== ====== ======
Retail Car Sales We distinguish our retail operations from those of typical buy here-pay here dealers through our: dedication to customer service, advertising and marketing programs, larger inventories of used cars, upgraded facilities, and network of multiple locations, centralized purchasing. Our dealerships are generally located in high visibility, high traffic commercial areas, and tend to be newer and cleaner in appearance than other buy here-pay here dealerships. These characteristics help promote our image as a friendly and reputable business. We believe this image, coupled with our widespread brand name recognition, enables us to attract customers who might otherwise visit another buy here-pay here dealer. Each dealership is run by a general manager who has responsibility for the operations of the dealership facility, including: underwriting and approval of sales and loan originations, profitability of the dealership, hiring, training, and performance of dealership employees, post-sale customer relations, and o inventory maintenance, the appearance and condition of the facility. Our dealerships generally maintain an average inventory of 50 to 150 used cars and feature a wide selection of makes and models (with ages generally ranging from 4 to 9 years) and a range of sale prices. This inventory allows us to meet the tastes and budgets of a broad range of potential customers. We acquire our inventory from new or late-model used car dealers, used car wholesalers, used car auctions, and customer trade-ins. In making purchases, we take into account each car's retail value, longevity, and the costs of buying, reconditioning, and delivering the car for resale. After purchase, cars are generally delivered to one of our 15 inspection centers, where they are inspected and reconditioned for sale. Page 2 Used Car Financing We finance substantially all of the used cars that we sell at our dealerships through retail installment loan contracts. Subject to the discretion of our dealership or sales managers, potential customers must meet our formal underwriting guidelines before we will agree to finance the purchase of a car. In connection with each sale, we require our customers to complete a credit application. Our employees then analyze and verify the customer application information, which contains employment and residence histories, income information, references, and other information regarding the customer's credit history. Our credit underwriting process takes into account the ability of our managers to make sound judgments regarding the extension of credit to sub-prime borrowers and to personalize financing terms to meet the needs of individual customers. For example, we may schedule loan payments to coincide with the customer's paydays, whether weekly, biweekly, semi-monthly, or monthly. During 2000, we developed a risk management department, which is currently focusing on credit risk modeling techniques. As a result of the establishment of this function, we have already begun to make significant business adjustments in our underwriting policies. We anticipate that these will have a positive impact in lowering loan losses on new originations. In 2001, we are planning to develop and implement our first generation of statistically derived scorecards. We believe the development and implementation of these tools will improve our ability to assess and manage underwriting quality. Monitoring and Collections One of our goals is to minimize credit losses through close monitoring of loans in our portfolio. When a car sale is completed, the loan is automatically added to our loan servicing database. Our monitoring and collections staff then use our collection software to monitor the performance of the loans. The collection software provides us with, among other capabilities, up-to-date activity reports, allowing prompt identification of customers whose accounts have become past due. Our early detection of a customer's delinquent status, as well as our commitment to working directly with our customers, allows us to identify and address payment problems quickly, and reduce the chance of credit loss. Unlike most other used car dealership chains or automobile finance companies, we permit our customers to make payments on their loans in person at any of our dealerships or at any of our collection facilities. When a past due customer arrives to make a payment, the Office Coordinator processing the payment will notify the in-store account representative. This allows the account representative to speak with the customer in person and reinforce the importance of making payments on time. Payments received at our dealerships currently account for more than 70% of monthly loan receipts. Integrated Computer System We manage all the operations of our inspection centers, dealerships, loan service centers, and our accounting and reporting functions with a single integrated computer system. When we purchase a used car, the system automatically adds the car to inventory and records the appropriate entries in our accounting system. Reconditioning costs also are subsequently tracked for each car. With the generation of a sales contract, the system automatically adds the loan to our loan servicing and collections database and records the sale, cost of sale, inventory, loan and all related entries in our accounting system. We use both local and wide-area data and voice communication networks that allow us to account for all purchase and sale activity centrally and to service large volumes of loans from one of our centralized servicing facilities. At the same time, we retain the capability and flexibility that allows our customer to make payments at any of our dealership locations. We also have developed comprehensive databases and sophisticated management tools, including static pool analysis, to analyze customer payment history and loan performance, and to monitor underwriting effectiveness. Primarily as a result of acquisitions, for substantially all of 1998, we managed our operations on four different computer systems. In September and October 1998 and February 1999, we converted operations to our single integrated computer system. Advertising and Marketing In general, our advertising campaigns emphasize our ability to provide financing to most sub-prime borrowers, our multiple locations, and our wide selection of quality used cars. We believe that our marketing approach creates brand name recognition and promotes our image as a professional, yet approachable, business. We use television, radio, billboard, and print advertising, as well as an Internet site at www.uglyduckling.com to market our dealerships. We also operate a loan-by-phone program using our toll-free telephone number of 1-800-THE-DUCK. Substantially all our marketing materials are produced in both English and Spanish. Page 3 A primary focus of our marketing strategy is our ability to finance consumers with poor credit histories. Consequently, we have initiated innovative marketing programs designed to attract sub-prime borrowers, assist these customers in establishing good credit, reward those customers who pay on time, develop customer loyalty, and increase referral and repeat business. Internet Activity In 1999, we began to accept credit inquiries via the Internet on our web site at www.uglyduckling.com. Credit inquiries received over the web are reviewed by our employees, who then contact the customers and schedule appointments. This "clicks and mortar" approach has increased our internet sales dramatically since inception in 1999, with internet based applications spawning sales totaling $36.9 million during 2000, up from $8.0 million in 1999. Thus far in 2001, this trend has continued. We are in the process of developing new strategies to increase internet application levels and enhance closing ratios, and believe sales activity via the internet will increasingly become a complimentary method of expanding our base of operations. Securitization Program We periodically securitize our loan portfolio as a significant source of capital to finance our business. Historically we have applied two methods in structuring these transactions. For the quarter ended September 30, 1998 and for prior periods, we structured and recorded securitization transactions for accounting purposes using what we refer to as the "gain on sale" method. After September 30, 1998, we changed the way we structured and recorded securitization transactions for accounting purposes to what we refer to as the "collateralized borrowing" method. The application of these two methods in structuring and recording securitization transactions result in materially different accounting entries on our books and our results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Other Significant Items." Discontinued Operations In December 1999, we sold our Cygnet Dealer Finance (CDF) subsidiary to an entity controlled by Ernest C. Garcia II, our Chairman and principal shareholder, for approximately $37.5 million, the book value of our investment in CDF. As a result of the sale, CDF has been reclassified as discontinued operations for 1999 and all preceding years. See Note (2) and Note (6) of the Notes to Consolidated Financial Statements for further discussion of the sale of CDF. Effective December 31, 1999, we adopted a formal plan to abandon any efforts to acquire third party loans or servicing rights to additional third party portfolios. Accordingly, our Cygnet Servicing and the associated Cygnet Corporate segment are reported as components of discontinued operations. We plan to complete servicing the portfolios that we currently service. In 1994, we acquired Champion Financial Services, Inc., an independent automobile finance company. In April 1995, we initiated an aggressive plan to expand Champion's branch office network and, by December 31, 1997, we operated 83 branch offices across the country. In February 1998, we announced our plan to close the branch office network and exited this line of business in the first quarter of 1998. See Note (2) of the Notes to Consolidated Financial Statements for further discussion of our discontinued operations. Trademarks and Proprietary Rights We have an ongoing program under which we evaluate our intellectual property and consider appropriate federal and state intellectual property related filings. We believe that there is significant value in our trademarks, but that our business as a whole is not materially dependent on our trademarks. We believe we have taken appropriate measures to protect our proprietary rights. However, there can be no assurance that such efforts have been successful. Employees At February 28, 2001, we employed approximately 2,600 persons, with 1,750, 650 and 200 employed in the operation of our retail, portfolio and corporate segments, respectively. None of our employees are covered by a collective bargaining agreement. Page 4 Seasonality Historically, we have experienced higher same store revenues in the first two quarters of the year than in the latter half of the year. We believe that these results are due to seasonal buying patterns resulting in part because many of our customers receive income tax refunds during the first half of the year, which are a primary source of down payments on used car purchases. ITEM 2 -- PROPERTIES As of December 31, 2000, we leased substantially all of our facilities. For a description of our major leases, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - - Supplemental Borrowings - Sale-Leaseback of Real Property" and "-Liquidity and Capital Resources - Capital Expenditures and Commitments." Facilities operated currently include 77 dealerships, 15 inspection centers, 4 loan administration and collection facilities that service our loan portfolio, and our corporate office. However, by May 2001, we expect to have closed two of our four loan administration and collection facilities. See Note (18)of the Notes to Consolidated Financial Statements for further discussion of these closings. Our corporate administrative office is located in Phoenix, Arizona. ITEM 3 -- LEGAL PROCEEDINGS We sell our cars on an "as is" basis. We require all customers to acknowledge in writing on the date of sale that we disclaim any obligation for vehicle-related problems that subsequently occur. Although we believe that these disclaimers are enforceable under applicable laws, there can be no assurance that they will be upheld in every instance. Despite obtaining these disclaimers, in the ordinary course of business, we receive complaints from customers relating to vehicle condition problems as well as alleged violations of federal and state consumer lending or other similar laws and regulations. Most of these complaints are made directly to us or to various consumer protection organizations and are subsequently resolved. However, customers occasionally name us as a defendant in civil suits filed in state, local, or small claims courts. Additionally, in the ordinary course of business, we are a defendant in various other types of legal proceedings. Although we cannot determine at this time the amount of the ultimate exposure from these lawsuits, if any, based on the advice of counsel we do not expect the final outcome to have a material adverse effect on the Company. On October 3, 2000, Mr. Ernest C. Garcia II, made an offer to the board of directors to purchase all of the outstanding shares of our common stock not already held by him. Our board of directors established a special transaction committee to evaluate and make a recommendation to the full board. Several lawsuits were filed in Delaware against us and the members of our board of directors as a result of this offer, alleging breach of fiduciary duty and seeking an injunction against proceeding with the transaction. On October 27, 2000, Mr. Garcia withdrew his offer. These lawsuits have since been dismissed without prejudice. In his filing with the Securities and Exchange Commission, Mr. Garcia has expressed a continuing interest in acquiring all of our outstanding common stock. On March 20, 2001, a shareholder derivative action was filed, purportedly on behalf of Ugly Duckling Corporation, in the Court of Chancery for the State of Delaware in New Castle County, captioned Berger v. Garcia, et al., No. 18746NC. The complaint alleges our current directors breached fiduciary duties owed to us in connection with certain transactions between us and Mr. Garcia and various entities controlled by Mr. Garcia. We are named as a nominal defendant in the action. The action seeks a recovery by us of alleged compensatory damages sustained as a result of the transactions. The defendants intend to vigorously defend the allegations and believe the action is without merit. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during the fourth quarter of 2000. Page 5 ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information Concerning our Chairman of the Board and our Executive Officers as of March 2001.
Name Age Position ---------------------------- --- ----------------------------------- Ernest C. Garcia II......... 43 Chairman of the Board Gregory B. Sullivan......... 42 President, Chief Executive Officer and Director Steven T. Darak............. 53 Senior Vice President and Chief Financial Officer Steven A. Tesdahl........... 41 Senior Vice President and Chief Information Officer Jon D. Ehlinger............. 43 Vice President, General Counsel and Secretary C. Robert Fulton............ 35 Treasurer
Ernest C. Garcia II has served as our Chairman of the Board since 1992. Mr. Garcia served as Chief Executive Officer from 1992 to 1999, and served as President from 1992 to 1996. Mr. Garcia is also a significant stockholder of Ugly Duckling, owning approximately 55.9% of our stock as of March 30, 2001. Mr. Garcia is President of Verde Investments, Inc. (Verde), a real estate investment corporation that is also an affiliate of ours. See below "Involvement in Certain Legal Proceedings by Directors and Executive Officers." Gregory B. Sullivan was appointed Chief Executive Officer in July 1999. Mr. Sullivan has served as our President since March 1996. In 1998, Mr. Sullivan was elected to our Board of Directors. Mr. Sullivan has also served as President of Ugly Duckling Car Sales, Inc. since December 1996. From 1995 through February 1996, Mr. Sullivan was a consultant to us. Mr. Sullivan formerly served as President and principal stockholder of an amusement game manufacturing company that he co-founded in 1989 and sold in 1994. Prior to 1989, Mr. Sullivan was involved in the securities industry and practiced law with a large Arizona firm. He is an inactive member of the State Bar of Arizona. Mr. Sullivan's sister is married to John N. MacDonough, another member of our Board of Directors. Steven T. Darak has served as our Senior Vice President and Chief Financial Officer since February 1994. From June 1993 through January 1994, Mr. Darak was a consultant to us. From 1989 to January 1994, Mr. Darak owned and operated Champion Financial Services, Inc., a used car finance company we acquired in early 1994. Prior to 1989, Mr. Darak served in various positions in the banking industry and in public accounting. Steven A. Tesdahl has served as our Senior Vice President and Chief Information Officer since September of 1997. From 1993 to 1997, Mr. Tesdahl was a partner with Andersen Consulting, a leading global provider of business integration consulting services. Prior to 1993, Mr. Tesdahl was an Associate Partner with Andersen Consulting. Jon D. Ehlinger has served as our Vice President, General Counsel and Secretary since July 1999, joining us in 1998 as the General Counsel for Ugly Duckling Car Sales and Finance Corporation. Prior to 1998, Mr. Ehlinger was in-house counsel for almost thirteen years for a major financial institution. Mr. Ehlinger is licensed to practice law in Arizona and has also worked for two Arizona law firms. Robert Fulton was appointed as our Treasurer in February 2001. Mr. Fulton joined us in November 2000. From April 1998 to November 2000, Mr. Fulton served as the Director of Investor Relations/Assistant Treasurer at The Dial Corporation. Prior to that time, Mr. Fulton held various industry positions in corporate treasury and banking. Our officers are elected each year at the first meeting of our Board of Directors subsequent to our annual meeting of shareholders, which we currently expect to schedule for no later than July of this year. Our officers hold office until their successors are chosen and qualified or until their earlier retirement, resignation, or removal. Except as summarized above, there is no family relationship among any of our officers and directors. (b) Involvement in Certain Legal Proceedings by Directors and Executive Officers. Prior to 1992, when he founded Ugly Duckling, Mr. Garcia was involved in various real estate, securities, and banking ventures. Arising out of two transactions in 1987 between Lincoln Savings and 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 institutions or a securities firms without governmental approval. 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 controlled. The bankruptcies were discharged by 1993. Page 6 PART II ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY SECURITIES AND RELATED STOCKHOLDER MATTERS Our common stock trades on the NASDAQ Stock Market under the symbol "UGLY." The high and low closing sales prices of the common stock, as reported by NASDAQ for the two most recent fiscal years are reported below. Market Price ================================
High Low ======== ======== Fiscal Year 2000: First Quarter................................................... $ 8.50 $ 6.69 Second Quarter.................................................. $ 8.13 $ 6.84 Third Quarter................................................... $ 7.50 $ 5.81 Fourth Quarter.................................................. $ 5.88 $ 3.94 Fiscal Year 1999: First Quarter................................................... $ 6.50 $ 4.25 Second Quarter.................................................. $ 7.69 $ 5.13 Third Quarter................................................... $ 9.00 $ 6.88 Fourth Quarter.................................................. $ 8.88 $ 6.81
On March 30, 2001, the last reported sale price of the common stock on NASDAQ was $3.50 per share. On March 30, 2001, there were approximately 75 record owners of our common stock. We estimate that as of such date there were approximately 2,000 beneficial owners of our common stock. Dividend Policy. We have never paid dividends on our common stock and do not anticipate doing so in the foreseeable future. It is the current policy of our Board of Directors to retain any earnings to finance the operations and expansion of our business. In addition, the terms of our primary revolving credit facility prevent us from declaring or paying dividends without consent of the lender. From time to time, our other financings may also include restrictions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Financing Resources - Revolving Facility." 1998 Exchange Offer. In the fourth quarter of 1998, we issued a total of approximately $17.5 million of our 12% subordinated debentures due 2003 in exchange for approximately 2.7 million shares of our common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Supplemental Borrowings -- 1998 Exchange Offer." Beginning on March 2, 1999, the debentures became listed and traded on the American Stock Exchange under the ticker symbol UGY. 2000 Exchange Offer. In the second quarter of 2000, we issued a total of approximately $11.9 million of our 11% subordinated debentures due 2007 in exchange for approximately 1.1 million shares of our common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Supplemental Borrowings -- 2000 Exchange Offer." Beginning on April 15, 2000, the debentures became listed and traded on the American Stock Exchange under the ticker symbol UGY. Page 7 ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth our selected historical consolidated financial data for each of the years in the five-year period ended December 31, 2000. The selected annual historical consolidated financial data for 2000, 1999, 1998, 1997, and 1996 are derived in part from our consolidated financial statements audited by KPMG LLP, independent auditors. For additional information, see our consolidated financial statements included in this report. The following table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations." Certain information presented below under the captions: "Other Operating Data", "Segment Operating Expense Data", "Balance Sheet Data" and "Loan Portfolio Data" is unaudited. UGLY DUCKLING CORPORATION Consolidated Operating Results ($ In thousands, except per share amounts) Years Ended December 31, ---------------------------------------------------------------- ----------------------------------------------------------------
2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Cars Sold................................... 56,870 46,120 35,964 16,636 7,565 ============ ============ ============ ============ ============ Total Revenues ............................. $ 604,856 $ 465,954 $ 332,479 $ 155,419 $ 68,827 ============ ============ ============ ============ ============ Sales of Used Cars.......................... $ 483,282 $ 389,908 $ 287,618 $ 123,814 $ 53,768 Less: ...................................... Cost of Used Cars Sold ..................... 268,248 219,037 165,262 72,358 29,890 Provision for Credit Losses ................ 141,971 102,955 65,318 22,354 9,657 ------------ ------------ ------------ ------------ ------------ 73,063 67,916 57,018 29,102 14,221 ------------ ------------ ------------ ------------ ------------ Other Income/Expense: Interest Income ............................ 119,719 68,574 17,287 12,559 8,597 Portfolio Interest Expense ................. 26,698 14,597 2,860 175 - ------------ ------------ ------------ ------------ ------------ Net Interest Income ........................ 93,021 53,977 14,427 12,384 8,597 Gain on Sale of Loans ...................... - - 12,093 6,721 3,925 Servicing and Other Income ................. 1,855 7,472 15,481 12,325 2,537 ------------ ------------ ------------ ------------ ------------ Total Other Income ......................... 94,876 61,449 42,001 31,430 15,059 ------------ ------------ ------------ ------------ ------------ Income before Operating Expenses ........... 167,939 129,365 99,019 60,532 29,280 Operating Expenses: Selling and Marketing ...................... 28,756 23,123 18,246 10,538 3,585 General and Administrative ................. 105,387 81,570 69,894 39,414 14,210 Depreciation and Amortization .............. 9,065 6,948 4,912 3,148 1,382 ------------ ------------ ------------ ------------ ------------ Operating Expenses ......................... 143,208 111,650 93,052 53,100 19,177 ------------ ------------ ------------ ------------ ------------ Income before Other Interest Expense ....... 24,731 17,715 5,967 7,432 10,103 Other Interest Expense ..................... 9,463 3,028 161 531 2,429 ------------ ------------ ------------ ------------ ------------ Earnings before Income Taxes ............... 15,268 14,687 5,806 6,901 7,674 Income Taxes ............................... 6,205 6,000 2,351 2,820 694 ------------ ------------ ------------ ------------ ------------ Earnings from Continuing Operations ........ $ 9,063 $ 8,687 $ 3,455 $ 4,081 $ 6,980 ============ ============ ============ ============ ============ Earnings per Common Share - Continuing Operations: Basic ...................................... $ 0.67 $ 0.58 $ 0.19 $ 0.23 $ 0.89 ============ ============ ============ ============ ============ Diluted .................................... $ 0.67 $ 0.57 $ 0.19 $ 0.22 $ 0.84 ============ ============ ============ ============ ============ Shares Used in Computation: Basic Weighted Avg. Shares Outstanding ..... 13,481 15,093 18,082 17,832 7,887 ============ ============ ============ ============ ============ Diluted Weighted Avg. Shares Outstanding.... 13,627 15,329 18,405 18,234 8,298 ============ ============ ============ ============ ============
Page 8 ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA - Continued Years Ended December 31, ---------------------------------------------------------------- ----------------------------------------------------------------
2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Other Operating Data: Total Revenues............................... $ 604,856 $ 465,954 $ 332,479 $ 155,419 $ 68,827 Sales of Used Cars .......................... $ 483,282 $ 389,908 $ 287,618 $ 123,814 $ 53,768 Diluted Earnings per Share - Continuing Operations $ 0.67 $ 0.57 $ 0.19 $ 0.22 $ 0.84 EBITDA ...................................... $ 60,494 $ 39,260 $ 13,739 $ 10,755 $ 11,485 E-Commerce Revenue as % of Used Car Sales.... 7.6% 2.1% -- -- -- Number of Dealerships in Operation........... 77 72 56 41 8 Average Sales per Dealership per Month....... 62 64 63 79 78 Number of Used Cars Sold .................... 56,870 46,120 35,964 16,636 7,565 Sales price - Per Car Sold................... $ 8,498 $ 8,454 $ 7,997 $ 7,443 $ 7,107 Cost of Sales - Per Car Sold................. $ 4,717 $ 4,749 $ 4,595 $ 4,349 $ 3,951 Gross Margin - Per Car Sold.................. $ 3,781 $ 3,705 $ 3,402 $ 3,094 $ 3,156 Provision - Per Car Sold..................... $ 2,496 $ 2,232 $ 1,816 $ 1,344 $ 1,276 Total Operating Expense - Per Car Sold....... $ 2,518 $ 2,420 $ 2,587 $ 3,192 $ 2,535 Total Operating Income - Per Car Sold........ $ 435 $ 384 $ 166 $ 447 $ 1,335 Total Operating Income....................... $ 24,731 $ 17,715 $ 5,967 $ 7,432 $ 10,103 Earnings before Income Taxes................. $ 15,268 $ 14,687 $ 5,806 $ 6,901 $ 7,674 Cost of Used Cars as Percent of Sales........ 55.5% 56.2% 57.5% 58.4% 55.6% Gross Margin as Percent of Sales............. 44.5% 43.8% 42.5% 41.6% 44.4% Provision as % of Originations............... 30.1% 26.9% 23.6% 19.1% 19.7% Total Operating Exp. - % of Total Revenue.... 23.7% 24.0% 28.0% 34.2% 27.9% Segment Operating Expense Data: Retail Operating Expense - Per Car Sold...... $ 1,579 $ 1,550 $ 1,574 $ 1,760 $ 1,347 Retail Operating Expense - % of Used Car Sales 18.6% 18.3% 19.7% 23.7% 19.0% Corporate/Other Expense - Per Car Sold....... $ 412 $ 417 $ 462 $ 625 $ 564 Corporate/Other Expense - % of Total Revenue. 3.9% 4.1% 5.0% 6.7% 4.9% Portfolio Expense Annualized - % Managed Principal 5.8% 4.9% 6.8% 4.6% 6.2% Balance Sheet Data: Finance Receivables, Net..................... $ 500,469 $ 365,586 $ 126,168 $ 60,778 $ 14,186 Inventory.................................... $ 63,742 $ 62,865 $ 44,145 $ 32,372 $ 5,464 Total Assets................................. $ 652,121 $ 536,711 $ 337,281 $ 275,633 $ 117,629 Notes Payable - Portfolio.................... $ 406,551 $ 275,774 $ 101,732 $ 65,171 $ 12,904 Subordinated Notes Payable................... $ 34,522 $ 28,611 $ 37,980 $ 12,000 $ 14,000 Total Debt................................... $ 457,652 $ 340,941 $ 155,611 $ 77,171 $ 26,904 Common Stock................................. $ 173,742 $ 173,292 $ 173,828 $ 172,622 $ 82,612 Treasury Stock............................... $ (40,114) $ (20,321) $ (14,510) -- -- Total Stockholders' Equity................... $ 155,400 $ 165,680 $ 162,767 $ 181,774 $ 82,319 Common Shares Outstanding - End of Year ..... 12,292 14,888 15,841 18,521 13,327 Book Value per Share......................... $ 12.64 $ 11.13 $ 10.28 $ 9.81 $ 6.18 Tangible Book Value per Share................ $ 11.62 $ 10.17 $ 9.35 $ 8.93 $ 6.02 Total Debt to Equity......................... 2.9 2.1 1.0 0.4 0.3 Loan Portfolio Data: Interest Income.............................. $ 119,719 $ 68,574 $ 17,287 $ 12,559 $ 8,597 Average Yield on Portfolio................... 26.3% 26.0% 25.8% 26.7% 29.2% Principal Balances Originated................ $ 472,091 $ 382,335 $ 277,226 $ 116,830 $ 48,996 Principal Balances Originated as % of Sales . 97.7% 98.1% 96.4% 94.4% 91.1% Number of Loans Originated................... 56,666 45,756 35,560 16,001 6,929 Average Original Amount Financed............. $ 8,331 $ 8,356 $ 7,796 $ 7,301 $ 7,071 # of Loans Originated as % of Units Sold..... 99.6% 99.2% 98.9% 96.2% 91.6% Managed Portfolio Delinquencies: Current...................................... 66.1% 63.2% 59.7% * * 1 to 30 days................................. 26.1% 27.8% 31.6% * * 31 to 60 days................................ 4.7% 5.9% 4.6% * * Over 60 days................................. 3.1% 3.1% 2.1% * * Principal Outstanding - Managed.............. $ 519,005 $ 424,480 $ 292,683 $ 183,321 $ 49,066 Principal Outstanding - Retained............. $ 514,946 $ 358,818 $ 93,936 $ 55,965 $ 7,068 Number of Loans Outstanding - Managed........ 84,864 70,450 49,601 35,762 9,615 Number of Loans Outstanding - Retained....... 82,598 53,081 12,415 7,993 1,045 * Information not available
Page 9 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this discussion and analysis we explain our general financial condition and results of operations. In particular, we analyze and explain the significant annual changes in the consolidated results of operations as well as significant annual changes for our retail, portfolio and corporate segments. As you read this discussion, you should refer to our Consolidated Financial Statements beginning on page ##, which contain our financial condition at December 31, 2000 and 1999 and the results of our operations for years ended December 31, 2000, 1999, and 1998. Overview We have experienced a number of significant events during the past three years. Some of the more important events follow: During 1998 we: closed our branch office network, resulting in two significant charges to discontinued operations totaling $15.1 million, approximately $9.2 million, net of income taxes (an additional charge of $1.5 million net of income taxes was taken in the fourth quarter of 1999), completed the conversion of our retail operations to a single computer system, developed 15 new dealerships to increase our total number of dealerships in operation from 41 at December 31, 1997 to 56 at December 31, 1998, and completed an exchange offer whereby we issued $17.5 million in subordinated debentures and repurchased approximately 2.7 million shares of our common stock. During 1999 we: completed the conversion of loan portfolio administration, accounting and financial reporting, and collections to a single computer system, completed two acquisitions and developed new dealerships to increase our total number of dealerships in operation from 56 at December 31, 1998 to 72 at December 31, 1999, completed the sale of Cygnet Dealer Finance, Inc. to Cygnet Capital Corporation, an affiliate of Mr. Garcia, and adopted aformal plan to discontinue the operations of our Cygnet Servicing subsidiary operations. During 2000 we: implemented In Store collectors in all 77 dealerships, developed 5 new dealerships to increase our total number of dealerships in operation from 72 at December 31, 1999 to 77 at December 31, 2000, completed an exchange offer through which we acquired approximately 1.1 million shares of our common stock in exchange for $11.9 million of subordinated debentures, repurchased an additional 1.6 million shares of our common stock at an average price of $7.19 per share, increased the amount charged to current operations for our provision for credit losses to 29% of originations, beginning in the third quarter of 2000, an increase from the amount previously charged of 27%, and incurred a $5.9 million after tax charge to earnings during the fourth quarter to increase our effective Allowance for Credit Losses to approximately 30% of loan originations. Other Significant Items - We securitize our loan portfolio as a significant source of capital to finance our business. Historically we have applied two methods in structuring these transactions that result in materially different accounting entries on our books. Our financial results reported herein include periods where both securitization structures were utilized, we will describe these structures and the material impact they have had on financial results. Subsequent to September 30, 1998 - Beginning in the fourth quarter of 1998, we changed the way we structure securitization transactions for accounting purposes to what we refer to as the "collateralized borrowing" method and accordingly recognize the income and associated costs over the life of the loan. The change in structure beginning in the fourth quarter of 1998 did not affect our prior securitizations. Page 10 Collateralized Borrowing Method - Under the collateralized borrowing method, we retain the securitized loans on our balance sheet, and we record a note payable known as Class A obligations for the amount loaned to us by the Class A note holders. As additional collateral for the borrowers, at closing, cash is deposited into a restricted cash "reserve" account (reported herein as Investments Held in Trust). Under this accounting method, our financial statements include interest income, interest expense, servicing costs and the other costs generally associated with loan portfolio accounting and are recognized over the life of the loan. September 30, 1998 and prior. For the securitization transactions closed in the third quarter of 1998 and prior, we structured and recorded these transactions for accounting purposes using what we refer to as the "gain on sale" method. The computation of amounts reported as Gain on Sale income is equal to the difference between the sales proceeds for the Finance Receivables sold and our recorded investment in the Finance Receivables sold. Our investment in Finance Receivables consisted of the principal balance of the Finance Receivables securitized net of the Allowance for Credit Losses related to the securitized receivables. We then reduced our Allowance for Credit Losses by the amount of Allowance for Credit Losses attributable to the loans securitized. We allocated the recorded investment in the Finance Receivables between the portion of the Finance Receivables sold and the portion retained based on the relative fair values on the date of sale. Gain on Sale Method - Under the gain on sale method, we transferred the securitized loans off of our balance sheet, and recorded a residual interest (reported herein as Residual Interest in Finance Receivables Sold) and a Gain on Sale of Loans. Subsequent to a sale we did not record traditional financial statement elements generally associated with loan portfolios such as interest income, interest expense, servicing costs and other costs, but rather we estimated them at the time of sale and recorded them as an element of the gain computation. With this overview and background information, the following is management's discussion and analysis of financial condition and results of operations. Sales of Used Cars and Cost of Used Cars Sold
2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ($ in thousands) ------------ ------------ ------------ ------------ ------------ Number of Used Cars Sold ........... 56,870 46,120 35,964 23.3% 28.2% ============ ============ ============ ============ ============ Sales of Used Cars ................. $ 483,282 $ 389,908 $ 287,618 23.9% 35.6% Cost of Used Cars Sold ............. $ 268,248 $ 219,037 $ 165,282 22.5% 32.5% ------------ ------------ ------------ ------------ ------------ Gross Margin ....................... $ 215,034 $ 170,871 $ 122,336 25.8% 39.7% ============ ============ ============ ============ ============ Gross Margin % ..................... 44.5% 43.8% 42.5% Per Car Sold: Sales .............................. $ 8,498 $ 8,454 $ 7,997 0.5% 5.7% Cost of Used Cars Sold ............. $ 4,717 $ 4,749 $ 4,595 -0.7% 3.4% ------------ ------------ ------------ ------------ ------------ Gross Margin ....................... $ 3,781 $ 3,705 $ 3,402 2.1% 8.9% ============ ============ ============ ============ ============
The number of Used Cars Sold, Sales of Used Cars, and Cost of Used Cars Sold has steadily increased from 1998 through 2000. Same store revenues and unit sales remained comparable for the years ended December 31, 2000, 1999 and 1998. However, the growth from 56 dealerships in 1998 to 77 in 2000 has had a significant impact on our revenues, coupled with an increase year over year in the sales price per car sold. The gross margin percentage has also continued to improve, as we have been successful in increasing our sales prices by more than the increase in the cost of used cars sold, along with initiatives in process to more tightly control the costs we are paying for our vehicles. We anticipate future revenue streams to level off as we focus on improving the quality of the loans we write and slow our dealership expansion efforts. Page 11 The Company finances substantially all of its sales. The percentage of sales revenue financed for 2000 has decreased as a result of initiatives put in place to increase the minimum amount of down payment required from $500 to $600, which began in May 2000. The following table indicates the percentage of sales units and revenue financed:
2000 1999 1998 ------------ ------------ ------------ Percentage of used cars sold financed....... 99.6% 99.2% 98.9% ============ ============ ============ Percentage of sales revenue financed........ 97.7% 98.1% 96.4% ============= ============ ============ Provision for Credit Losses 2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ------------ ------------ ------------ ------------ ------------ Provision for Credit Losses (in thousands).. $ 141,971 $ 102,955 $ 65,318 37.9% 57.6% ============ ============ ============ Provision per loan originated............... $ 2,513 $ 2,250 $ 1,837 11.7% 22.5% ============ ============ ============ Provision as a percentage of principal balances originated............... 30.1% 26.9% 23.6% ============ ============ ============
Provision for Credit Losses is the amount we charge to current operations on each car sold to establish an allowance for credit losses. The Provision for Credit Losses in total, per loan originated and as a percent of principal balances originated increased in both 2000 and 1999. The increases in 2000 can be attributed to an overall increase in the provision charged to current operations increased from 27% of loans originated in 1999 to approximately 30% of originations for 2000. The increase was obtained by raising the amount charged to current operations to 29% of loan originations beginning in the third quarter of 2000, as well as recording an additional $5.9 million provision, net of income taxes, during the fourth quarter of 2000. This increase and the charge were the result of continued review of the adequacy of the Allowance for Credit Losses balance. The additional provision during 2000 is estimated to bring the allowance balance to a level anticipated to be adequate to cover the net charge offs for the targeted range of 12 to 15 months. The increase in 1999 was primarily due to an increase in the average amount financed to $8,356 per unit in the year ended December 31, 1999 from $7,796 per unit in the year ended December 31, 1998. The increase from 1998 to 1999 was also a result of the change in our securitization structure as discussed in the following paragraph. When we changed the way we structured securitizations for accounting purposes in the fourth quarter of 1998, we also changed the amount we provided for credit losses. For periods prior to the fourth quarter of 1998, we generally provided a Provision for Credit Losses of approximately 20% of the loan principal balance at the time of origination. Upon securitization, using the gain on sale method, losses for the life of the loans were estimated and recorded as an element of the gain computation. Beginning in the fourth quarter of 1998, we increased the provision for credit losses to 27% of the initial amount financed and subsequently to 29% beginning in the third quarter of 2000. The additional charge during the fourth quarter of 2000 brought the total provision to approximately 30% of loan originations. Net Interest Income
2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ($ in thousands) ------------ ------------ ------------ ------------ ------------ Interest Income....................... $ 119,719 $ 68,574 $ 17,287 74.6% 296.7% Portfolio Interest Expense............ 26,698 14,597 2,860 82.9% 410.4% ------------ ------------ ------------ Net Interest Income..................... $ 93,021 $ 53,977 $ 14,427 72.3% 274.1% ============ ============ ============ Average Effective Yield.............. 26.3% 26.0% 25.8% ============ ============ ============ Average Borrowing Cost................ 8.7% 8.0% 9.5% ============ ============ ============
Page 12 Interest Income for 2000 and 1999 consists primarily of interest on finance receivable principal balances retained on our balance sheet. Retained principal balances grew from $93.9 million at December 31, 1998 to $358.8 million at December 31, 1999 to $514.9 million at December 31, 2000 primarily as a result of the change in our securitization structure, coupled with the year over year growth in revenues. Interest income in 1998 consists primarily of interest income from Residuals in Finance Receivables Sold retained under our securitization structure using the gain on sale method. Residuals in Finance Receivables Sold were $33.3 million December 31, 1998. Both retained principal balances and Residuals in Finance Receivables Sold are components of Finance Receivables, Net. See "Growth in Finance Receivables, Net" beginning on page ##. Interest Expense for 2000 consists primarily of interest on our revolving facility and the Class A obligations issued in our securitization transactions arising from the collateralized borrowings on the retained portfolio. The increase in interest expense year over year from 1998 to 2000 is in direct correlation to the increase in retained principal balances noted above. The increase in average borrowing cost from 1999 to 2000 is attributable to a rise in interest rates on our variable rate debt, additional higher rate debt incurred in our exchange offers and an increase in the interest rate on our senior subordinated note payable. Interest expense in 1998 relates solely to expense on our revolving facility for the period between origination and securtization, which generally averaged three months. Gain on Sale of Loans We recorded no gain on sale transactions in 2000 or 1999. Gains on the sale of loans from securitization transactions were $12.1 million in 1998. Servicing Income We generate Servicing Income primarily from servicing loan portfolios securitized under the gain on sale method. As we have had no gain on sale transactions since the fourth quarter of 1998, our Servicing Income has decreased significantly year over year and was $1.9 million, $7.5 million and $15.5 million for the years ended December 31, 2000, 1999 and 1998, respectively. We service loans for monthly fees ranging from .25% to .33% of the beginning of month principal balances (3.0% to 4.0% per year). The decrease in Servicing Income in 2000 and 1999 is due to the decrease in remaining principal balances securitized and serviced under the gain on sale method from $65.7 million at December 31, 1999 to $4.1 million at December 31, 2000. The decrease in 1999 from 1998 is due to the decrease in such principal balances from $198.7 million at December 31, 1998 to $65.7 million at December 31, 1999. The decrease in Servicing Income is expected to continue as principal balances associated with loans securitized under the gain on sale method continue to decline. Income before Operating Expenses As a result of our growth, Income before Operating Expenses grew from 1998 through 2000.
2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ------------ ------------ ------------ ------------ ------------ Income before Operating Expenses.................. $ 167,939 $ 129,365 $ 99,019 29.8% 30.6% ============ ============ ============ ============ ============ Growth of Sales of Used Cars and Net Interest Income, partially offset by a decrease in Gain on Sale of Loans and Servicing and Other Income, were the primary contributors to year over year increases.
Operating Expenses
2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ------------ ------------ ------------ ------------ ------------ Operating Expenses (in thousands)................. $ 143,208 $ 111,650 $ 93,052 28.3% 20.0% ============ ============ ============ ============ ============ Per Car Sold...................................... $ 2,518 $ 2,420 $ 2,587 4.1% (6.5)% ============ ============ ============ ============ ============ As % of Total Revenue............................. 23.7% 24.0% 28.0% ============ ============ ============
Page 13 Operating expenses, which consist of selling, marketing, general and administrative and depreciation/amortization expenses increased due to overall growth in the operations of the Company. Increases in operating expenses on a per car sold basis is a result of increases in salary and salary related expenses. See additional discussion of operating expenses in the Business Segment section beginning on page ##. Other Interest Expense Interest expenses arising from our subordinated debt totaled $9.5 million and $3.0 million for the years ended December 31, 2000 and 1999, respectively. The increase is partially due to the additional debt incurred in our stock exchange offer completed during the second quarter of 2000 as well as a full year of interest expense on our $38 million senior secured loan facility that we entered into midyear 1999. While we have additional interest expenses arising from subordinated notes payable, a portion of this interest expense was attributed to the financing of assets and activities reported as discontinued operations. As the assets and activities of discontinued operations diminish, we do not expect to retire the subordinated notes payable but rather use these borrowings to fund our operations. Subordinated debt carries interest rates generally higher than those charged on our collateralized borrowings or unsecured senior note. Interest expense for the year ended December 31, 1998, other than interest expense associated with our retained portfolios, was not material to results of operations. Income Taxes Income taxes totaled $6.2 million for the year ended December 31, 2000, $6.0 million for the year ended December 31, 1999, and $2.4 million for the year ended December 31, 1998. Our effective tax rate was 40.6% for the year ended December 31, 2000, 40.9% for the year ended December 31, 1999 and 40.5% for the year ended December 31, 1998. Earnings from Continuing Operations Earnings from Continuing Operations totaled $9.1 million, $8.7 million and $3.5 million for 2000, 1999 and 1998, respectively. The increases in 2000 and 1999 resulted from an increase in the number of used cars sold, an increase in gross margin on used cars sold, and an increase in net interest income from the growth of our retained portfolio while maintaining or decreasing operating expenses as a percent of total revenues. The increase in 2000 versus 1999 was offset by an increase in the provision for credit losses charged to current operations from 27% in 1999 to approximately 30% in 2000 as previously mentioned. The increase in 1999 over 1998 was also partially offset by an increase in the provision charged for credit losses due to a change in the way we recorded our securitization transactions, a reduction in servicing income and the elimination of gain on sale income in 1999. In 1998, securitization transactions for the first three-quarters were completed using the gain on sale method, with the fourth quarter transaction being completed using the collateralized borrowings method, thus recording no gain. Additionally, beginning in the fourth quarter of 1998, the provision for credit losses was increased to 27% of the original amount financed from the 20% level used in the first three-quarters of 1998. Discontinued Operations Earnings from Discontinued Operations, net of income tax benefits, was break even in 2000, $.6 million in 1999 and a loss of $9.2 million in 1998. See Note (2) to the Consolidated Financial Statements. Business Segment Information We report our operations based on three operating segments. These segments are reported as Retail, Portfolio and Corporate. These segments were previously reported as Company Dealership, Company Dealership Receivables and Corporate and Other, respectively. Operating Expenses for our business segments, along with a description of the included activities, for the years ended December 31, 2000, 1999 and 1998 follows: Retail Operations. Operating expenses for our retail segment consist of our marketing efforts, maintenance and development of dealership and inspection center sites, and direct management of used car purchases, reconditioning and sales activities. A summary of retail operating expenses follows ($ in thousands except per car sold amounts): Page 14
2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ------------ ------------ ------------ ------------ ------------ Retail Operations...................... Selling and Marketing.................. $ 28,756 $ 23,132 $ 18,246 24.3% 26.8% General and Administrative............. 56,373 44,770 35,765 25.9% 25.2% Depreciation and Amortization.......... 4,677 3,588 2,582 30.4% 39.0% ------------ ------------ ------------ ------------ ------------ Retail Expense......................... $ 89,806 $ 71,490 $ 56,593 25.6% 26.3% ============ ============ ============ ============ ============ Per Car Sold: Selling and Marketing.................. $ 506 $ 502 $ 50 0.8% (.1)% General and Administrative............. 991 970 99 2.2% (2.5)% Depreciation and Amortization.......... 82 78 7 5.1% 8.3% ------------ ------------ ------------ ------------ ------------ Total.................................. $ 1,579 $ 1,550 $ 1,574 1.9% (1.5)% ============ ============ ============ ============ ============
Selling and marketing expenses as a percent of revenue and on a per car sold basis has remained relatively constant since 1998. Additional dealerships in existing markets have increased units sold and revenues to support the increased selling and marketing costs. General and Administrative expenses increased year over year as a result of our growth in the number of operating dealerships. On a per car sold basis, these expenses have increased primarily due to a rise in salary and related costs. As a percent of used car sales revenue, 2000, 1999 and 1998 remained relatively stable, primarily as a result of an increase in average selling price. Portfolio Operations. Operating expenses for our portfolio segment consist of loan servicing and collection efforts, securitization activities, and other operations pertaining directly to the administration and collection of the loan portfolio. A summary of portfolio operating expenses follows ($ in thousands except expense per month per loan serviced):
2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ------------ ------------ ------------ ------------ ------------ Portfolio Expense: General and Administrative............. $ 28,860 $ 19,809 $ 18,519 45.7% 7.0% Depreciation and Amortization.......... 1,128 1,141 1,333 (1.1)% (14.4)% ------------ ------------ ------------ ------------ ------------ Portfolio Expense...................... $ 29,988 $ 20,950 $ 19,852 43.1% 5.5% ============ ============ ============ ============ ============ Expense per Month per Loan Serviced.... $ 28.72 $ 21.70 $ 20.34 ============ ============ ============ Annualized Expense as % of EOP Managed Principal Balances..................... 5.8% 4.8% 6.1% ============ ============ ============
The increase in operating expenses for our portfolio segment year over year is primarily a result of the increasing number of loans in our portfolio. Expenses per loan serviced and as a percent of average managed portfolio has increased year over year. The increase in 2000 is attributable to the rollout of many of our collectors from the collection centers into the dealerships. These collectors focus on the 1-30 day delinquent accounts and are now located in all 77 of our dealerships. The increase from 1998 to 1999 was primarily due to personnel related issues. In the last half of 1999, we experienced loan servicing inefficiencies, including the loss of a large number of experienced collectors to other financial services entities. Our loan servicing costs increased significantly in the fourth quarter of 1999. As part of our resolution, we made market adjustments to collection staff wages and also decreased the number of delinquent accounts serviced per collector. Page 15 Corporate Operations. Operating expenses for our corporate segment consist of costs to provide managerial oversight and reporting for Ugly Duckling, develop and implement policies and procedures, and provide expertise to Ugly Duckling in areas such as finance, legal, human resources and information technology. A summary of corporate expenses follows ($ in thousands except per car sold amounts):
2000 1999 1998 % Change ------------ ------------ ------------ ------------------------- 2000 1999 ------------ ------------ ------------ ------------ ------------ Corporate Expense: General and Administrative........................ $ 20,154 $ 16,991 $ 15,610 18.6% 8.9% Depreciation and Amortization..................... 3,260 2,219 997 46.9% 122.6% ------------ ------------ ------------ ------------ ------------ Corporate Expense................................. $ 23,414 $ 19,210 $ 16,607 21.9% 15.7% ------------ ------------ ------------ ------------ ------------ Per Car Sold...................................... $ 412 $ 417 $ 462 ============ ============ ============ As % of Total Revenues ........................ 3.9% 4.1% 5.0% ============ ============ ============
Operating expenses related to our corporate segment remained relatively stable on both a per car sold basis and as a percent of total revenue for 2000 and decreased during 1999. The decrease in 1999 is primarily as a result of various operating efficiencies. These efficiencies include those gained by the consolidation of all accounting and management information to a single computer system in early 1999. Further, as new dealerships opened in existing markets, revenue and units sold increased while expenditures related to infrastructure deployment and support, human resources activities and regulatory compliance increased at a lesser rate. Finally, as our retained portfolio increased, there is a proportionate increase in net interest income thereby significantly improving the ratio of corporate expenses to total revenues. Financial Position The following table represents key components of our financial position ($in thousands):
December 31, % Change ------------ ------------ ------------ 2000 1999 2000 ------------ ------------ ------------ Total Assets......................... $ 652,121 $ 536,711 21.5% Inventory............................ 63,742 62,865 1.4% Finance Receivables, Net............. 500,469 365,586 36.9% Net Assets of Discontinued Operations 4,175 33,880 -87.7% Total Debt........................... 457,652 340,941 34.2% Notes Payable - Portfolio............ 406,551 275,774 Other Notes Payable.................. 16,579 36,556 (54.6)% Subordinated Notes Payable........... 34,522 28,611 20.7% Stockholders' Equity................. $ 155,400 $ 165,680 -6.2%
Total Assets. The growth in total assets from 1999 to 2000 was primarily due to an increase in Finance Receivables, Net and Inventory, offset by a decrease in Net Assets of Discontinued Operations. Inventory. Inventory represents the acquisition and reconditioning costs of used cars located at our dealerships and our inspection centers. Inventory levels are typically higher at year end in preparation for the strong seasonal sale period during the first and second quarters of the year. Management estimates that for each car it has at a dealership location, it must have a car in the reconditioning process at an inspection center to maintain a stable supply of cars for sale. We generally acquire our used car inventory from three sources: approximately 50% from auctions, 30% from wholesalers and 20% from new car dealerships. Page 16 Growth in Finance Receivables, Net. As a result of our expansion, Finance Receivables, Net increased significantly during the past two years. Components of Finance Receivables, Net follows:
December 31, ------------ ------------ 2000 1999 ------------ ------------ Contractually Scheduled Payments.................. $ 696,220 $ 492,937 Unearned Finance Charges.......................... (181,274) (134,119) ------------ ------------ Principal Balances, net........................... 514,946 358,818 Accrued Interest.................................. 5,655 3,741 Loan Origination Costs............................ 7,293 5,079 ------------ ------------ Principal Balances, net........................... 527,894 367,638 Investments Held in Trust......................... 71,139 56,716 Residuals in Finance Receivables Sold............. 1,136 17,382 ------------ ------------ Finance Receivables............................... 600,169 441,736 Allowance for Credit Losses....................... (99,700) (76,150) ------------ ------------ Finance Receivables, net.......................... $ 500,469 $ 365,586 ============ ============ Allowance as % of Ending Principal Balances, net 19.4% 21.2% ============ ============
The following table reflects the growth in year end principal balances retained on our balance sheet measured in terms of the principal amount ($ in thousands) and the number of loans outstanding.
Managed Loans Outstanding - December 31, --------------------------------------------------- Principal Balances Number of Loans ------------------------- ------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Principal Balances - Managed................... $ 519,005 $ 424,480 $ 84,864 $ 70,450 Less: Principal - Securitized and Sold........... 4,059 65,662 2,266 17,369 ------------ ------------ ------------ ------------ Principal Balances - Retained.................. $ 514,946 $ 358,818 $ 82,598 $ 53,081 ============ ============ ============ ============
The increase in Principal Balances - Retained on Balance Sheet was primarily due to the growth of used car sales and financing from growth in the number of dealerships, partially offset by the principal balance runoff of loans originated in prior periods. Our dealership network increased from 56 at the beginning of 1999 to 77 dealerships at December 31, 2000. Investments Held in Trust represent funds held by trustees on behalf of our securitization lenders. The increase in 2000 is attributable to additional securitizations closed during 2000. Residuals in Finance Receivables Sold represent the Company's subordinated interest in loans sold under the gain on sale method. The decrease in 2000 is attributable to no additional loans securitized under the gain on sale method, as well as the runoff of portfolios securitized and sold during prior periods. The following table reflects activity in the Allowance for Credit Losses, as well as information regarding charge off activity, for the years ended December 31, 2000 and 1999 ($ in thousands):
Years Ended December 31, ------------ ------------ 2000 1999 ------------ ------------ Allowance Activity: Balance, Beginning of Period...................... $ 76,150 $ 24,777 Provision for Credit Losses....................... 141,971 102,955 Other Allowance Activity.......................... (2,666) (6,424) Net Charge Offs................................... (115,755) (58,006) ------------ ------------ Balance, End of Period............................ $ 99,700 $ 76,150 ============ ============ Allowance as % Ending Principal Balances.......... 19.4% 21.2% ============ ============ Charge off Activity: Principal Balances................................ $(149,734) $ (71,277) Recoveries, Net................................... 33,979 13,271 ------------ ------------ Net Charge Offs................................... $(115,755) $ (58,006) ============ ================
Page 17 Even though a loan is charged off, we continue with collection efforts on the loan. Recoveries as a percentage of principal balances charged off from dealership operations averaged 22.7% for the year ended December 31, 2000 compared to 18.6% for the year ended December 31, 1999. The change from 1999 to 2000 can be attributed to inefficiencies in our loan service operations during the latter half of 1999, as previously mentioned. As we focused on the resolution of these inefficiencies, our recovery rate returned to expected levels. The Allowance for Credit Losses is maintained at a level that in management's judgment is adequate to provide for estimated probable credit losses inherent in our retail portfolio and is reviewed on an ongoing basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Static Pool Analysis" below. Net Assets of Discontinued Operations. See Note (2) to the Consolidated Financial Statements included herein. Total Debt. Total Debt is comprised of Notes Payable - Portfolio, Other Notes Payable and Subordinated Notes Payable. We finance the increases in our loan portfolio and other assets primarily through additional borrowings through our line of credit and additional securitizations, represented by increases in Notes Payable - Portfolio. The increase in Notes Payable - Portfolio in 2000 was primarily due to the growth in our finance receivables, which result in additional securitizations. The increase in Subordinated Notes Payable was primarily due to the issuance of approximately $11.9 million of subordinated debentures in connection with a stock exchange offer completed in the second quarter of 2000, partially offset by principal payments made on our senior subordinated note payable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Expense." Stockholders' Equity. See the Consolidated Financial Statements included herein - Consolidated Statement of Stockholders' Equity. Static Pool Analysis We use a "static pool" analysis to monitor performance for loans we have originated at our dealerships. In a static pool analysis, we assign each month's originations to a unique pool and track the charge offs for each pool separately. We calculate the cumulative net charge offs for each pool as a percentage of that pool's original principal balances, based on the number of complete payments made by the customer before charge off. The table below displays the cumulative net charge offs of each pool as a percentage of original loan cumulative balances, based on the quarter the loans were originated. The table is further stratified by the number of payments made by our customers prior to charge off. For periods denoted by "x", the pools have not seasoned sufficiently to allow us to compute cumulative losses. For periods denoted by "-", the pools have not yet reached the indicated cumulative age. While we monitor static pools on a monthly basis, for presentation purposes we are presenting the information in the table below on a quarterly basis. Currently reported cumulative losses may vary from those previously reported for the reasons listed below; however, management believes that such variation will not be material: ongoing collection efforts on charged off accounts, and the difference between final proceeds on the sale of repossessed collateral versus our estimates of the sale of proceeds. Page 18 The following table sets forth as of March 31, 2001, the cumulative net charge offs as a percentage of original loan cumulative (pool) balances, based on the quarter of origination and segmented by the number of monthly payments completed by customers before charge off. The table also shows the percent of principal reduction for each pool since inception and cumulative total net losses incurred (TLI). Pool's Cumulative Net Losses as Percentage of Pool's Original Aggregate Principal Balance (dollars in thousands)
Monthly Payments Completed by Customer Before Charge Off -------------------------------------------------------------------- Orig. 0 3 6 12 18 24 TLI Reduced ----------- -------- ----- ----- ----- ----- ----- ----- -------- 1993 $ 12,984 8.8% 22.1% 28.5% 33.8% 35.9% 36.5% 36.8% 100.0% 1994 $ 23,589 5.3% 14.8% 19.9% 25.6% 28.0% 28.7% 28.8% 100.0% 1995 $ 36,569 1.9% 8.1% 13.1% 19.0% 22.2% 23.5% 24.1% 100.0% 1996: 1st Quarter $ 13,635 1.6% 8.1% 13.8% 20.7% 24.8% 26.1% 27.0% 100.0% 2nd Quarter $ 13,462 2.2% 9.2% 13.3% 21.8% 25.7% 27.4% 28.8% 100.0% 3rd Quarter $ 11,082 1.7% 6.8% 12.5% 21.2% 25.3% 27.4% 28.5% 100.0% 4th Quarter $ 10,817 0.7% 8.4% 15.9% 24.8% 29.0% 30.8% 31.9% 100.0% 1997: 1st Quarter $ 16,279 2.1% 10.7% 18.2% 24.8% 29.8% 32.0% 33.5% 100.0% 2nd Quarter $ 25,875 1.5% 9.9% 15.8% 22.7% 27.4% 29.5% 30.6% 99.9% 3rd Quarter $ 32,147 1.4% 8.3% 13.2% 22.4% 26.9% 29.1% 30.6% 99.7% 4th Quarter $ 42,529 1.4% 6.8% 12.6% 21.8% 26.1% 28.8% 30.0% 99.3% 1998: 1st Quarter $ 69,708 0.9% 6.9% 13.4% 20.9% 26.4% 28.8% 29.9% 98.8% 2nd Quarter $ 66,908 1.1% 8.1% 14.2% 21.7% 27.3% 29.2% 30.2% 97.7% 3rd Quarter $ 71,027 1.0% 7.9% 13.3% 23.0% 27.8% 30.3% 30.9% 96.9% 4th Quarter $ 69,583 0.9% 6.6% 13.1% 24.3% 29.1% x 31.7% 92.8% 1999: 1st Quarter $ 103,068 0.8% 7.5% 15.1% 23.6% 29.6% -- 31.3% 87.3% 2nd Quarter $ 95,768 1.1% 9.9% 16.7% 25.5% x -- 32.1% 80.4% 3rd Quarter $ 102,585 1.0% 8.3% 14.2% 25.4% -- -- 29.7% 73.0% 4th Quarter $ 80,641 0.7% 5.9% 12.8% x -- -- 25.0% 62.9% 2000: 1st Quarter $ 128,123 0.3% 6.6% 14.8% -- -- -- 22.0% 53.1% 2nd Quarter $ 118,778 0.6% 8.6% x -- -- -- 17.9% 41.1% 3rd Quarter $ 124,367 0.7% x -- -- -- -- 10.3% 26.6% 4th Quarter $ 100,823 x -- -- -- -- -- 3.0% 12.2%
Page 19 The following table sets forth the principal balances delinquent as a percentage of total outstanding loan principal balances from dealership operations.
Years Ended December 31, ------------ ------------ 2000 1999 ------------ ------------ Days Delinquent: Current................................ 66.1% 63.2% 1-30 Days.............................. 26.1% 27.8% 31-60 Days............................. 4.7% 5.9% 61-90 Days............................. 3.1% 3.1% ------------ ------------ Total Portfolio........................ 100.0% 100.0% ============ ============
In accordance with our charge off policy, no accounts were more than 90 days delinquent as of December 31, 2000 and 1999. As a result of our initiative to put in store collectors in all of our dealerships servicing our 1-30 day delinquent accounts, we continue to see improvements in our 0-30 day delinquent account percentages. The accounts in this category have grown from 91.0% in 1999 to 92.2% in 2000. Due to this success, we are in the process of adding in store collectors to service our 1-60 day delinquent accounts at the dealerships. Although loan losses on recently originated loan pools indicate improved loan performance over those loan pools originated in prior years, based on an extensive review of delinquency trends, historical loan losses and projected charge offs for the entire on balance sheet portfolio, we increased our provision for credit losses, effective with loans originated during the third quarter of 2000, to 29% of loan originations and took an additional charge, net of income tax, of $5.9 million during the fourth quarter of 2000. The additional charge increased the overall provision as a percentage of originations to 30%. The additional provision was primarily necessary as a result of poor loan performance of our loans originated in 1999. The increases provide an allowance for credit loss at December 31, 2000 that is estimated to be adequate to cover the targeted range for estimated net charge offs for the entire on balance sheet portfolio for the next 12 to 15 months. We will continue to monitor the on balance sheet loan portfolio performance to evaluate the on going adequacy of our provision for credit losses. Securitizations Under the current legal structure of our securitization program, we sell loans to our subsidiaries that then securitize the loans by transferring them to separate trusts that issue several classes of notes and certificates collateralized by the loans. The securitization subsidiaries then sell Class A notes or certificates (Class A obligations or Notes Payable) to investors. The subordinate classes are retained by us or our subsidiaries. We continue to service the securitized loans. The Class A obligations have historically received investment grade ratings. To secure the payment of the Class A obligations, the securitization subsidiaries obtain an insurance policy from MBIA Insurance Corporation that guarantees payment of amounts to the holders of the Class A obligations. Additionally, we also establish a cash "reserve" account for the benefit of the Class A obligation holders. The reserve accounts are classified in our consolidated financial statements as Investments Held in Trust and are a component of Finance Receivables, Net. Reserve Account Requirements. Under our current securitization structure, we make an initial cash deposit into a reserve account, generally equivalent to 3.0% - 6.0 % of the initial underlying Finance Receivables principal balance and pledge this cash to the reserve account agent. The trustee then makes additional deposits to the reserve account out of collections on the securitized receivables as necessary to fund the reserve account to a specified percentage, ranging from 8.0% to 11.0%, of the underlying Finance Receivables' principal balance. The trustee makes distributions to us when: the reserve account balance exceeds the specified percentage, the required periodic payments to the Class A certificate holders are current, and the trustee, servicer and other administrative costs are current. Page 20 During 2000, we made initial reserve account deposits totaling approximately $20.6 million. The required aggregate reserve balance for these accounts, based upon the targeted percentages, was approximately $55.9 million at December 31, 2000, with balances in the reserve accounts totaling approximately $50.6 million. As of December 31, 2000, the amount remaining to be funded out of portfolio collections to meet the required aggregate balance was approximately $5.3 million. Certain Financial Information Regarding Our Securitizations
The following table summarizes certain financial information and attributes of our securitizations: ($ in thousands) 2000 1999 1998 -------------- -------------- -------------- Number of Securitizations Completed 3 3 4 Principal Balances Securitized - Retained by Company and Recorded as Finance Receivables.............................. $ 443,000 $ 359,700 $ 69,300 Class A Obligations Issued - Retained by Company and Recorded Recorded as Notes Payable.................................... 314,500 257,800 50,600 Principal Balances Securitized - Recorded as Sales, Transferred off Company Books Recognizing Gain on Sale....... --- --- 222,800 Class A Obligations Issued - Transferred off Company Books Recognize Gain on Sale....................................... --- --- 161,100 Subordinate Certificates - Retained by Company and Recorded Recorded as Residuals in Finance Receivables Sold............ --- --- 61,700 Weighted Average Yield of Class A Obligations ................. 7.1% 6.3% 5.9% Range of Yields for Class A Obligations........................ 6.8% - 7.3% 5.7% - 6.8% 5.6% - 6.1% Average Net Spreads (after fees and expenses).................. 16.9% 17.6% 17.6% Range of Net Spreads (after fees and expenses)................. 16.7% - 17.1% 17.1% - 18.2% 17.0% - 18.1%
Liquidity and Capital Resources In recent periods, our needs for additional capital resources have increased in connection with the growth of our business. We require capital for: increases in our loan portfolio, common stock repurchases, expansion of our dealership network, the purchase of inventories, and working capital and general corporate purposes, the purchase of property and equipment. We fund our capital requirements primarily through: operating cash flow, our revolving facility, and securitization transactions, supplemental borrowings. Cash Flow Net Cash Provided by Operating Activities increased by $61.3 million in the year ended December 31, 2000 to $189.5 million from cash provided in the year ended December 31, 1999 of $128.1 million. The increase in 2000 was due primarily to consistent inventory levels at the end of 2000 and 1999, an increase in the provision for credit losses, and an increase in accrued liabilities, offset by a decrease in the net current and deferred income taxes payable. Net Cash Provided by Operating Activities increased by $105.6 million in the year ended December 31, 1999 to $128.1 million from cash used in the year ended December 31, 1998 of $22.5 million. The increase in 1999 was due primarily to an increase in net earnings, an increase in the provision for credit losses and decreases in activity associated with the elimination of gain on sale recognition of finance receivables, offset by an increase in inventory resulting from management's decision to increase inventory levels at year end in preparation for strong seasonal sales in the first and second quarters of the year. Page 21 Net Cash Used in Investing Activities decreased by $70.3 million to $282.6 million in the year ended December 31, 2000 compared to $352.9 million in 1999. The decrease is due in part to an increase in collections on finance receivables, a decrease in Investments Held in Trust, and a decrease in cash advanced under notes receivable, partially offset by an increase in finance receivables due to growth in revenues and an increase in the purchase of property and equipments. Net Cash Used in Investing Activities increased by $272.6 million to $352.9 million in the year ended December 31, 1999 compared to $80.3 million in 1998. The increase is primarily due to an increase in Finance Receivables resulting from a change in the way we structured our securitizations in late 1998, which allows the Finance Receivables to remain on balance sheet. Net Cash Provided by Financing Activities decreased by $82.4 million to $69.8 million in the year ended December 31, 2000 compared to $152.2 million in 1999. The decrease is primarily due to increases in payments on Portfolio Notes Payable, and a decrease in funds received from Other Notes Payable, offset by an increase in funds received from Portfolio Notes Payable due to additional securitizations in 2000. Net Cash Provided by Financing Activities increased by $81.2 million to $152.2 million in the year ended December 31, 1999 compared to $71.0 million in 1998. The increase is due to increases in Portfolio Notes Payable, net of increases in repayments on Portfolio Notes Payable, resulting from additional securitization transactions in 1999. Financing Resources Revolving Facility. For 2000, under our $125 million revolving facility with GE Capital, our borrowing base consisted of up to 65.0% of the principal balance of eligible loans originated from the sale of used cars and the lesser of $25 million or 58% of the direct vehicle costs for eligible vehicle inventory. We secured the facility with substantially all of our assets. As of December 31, 2000, our borrowing capacity under the revolving facility was $58.4 million, the aggregate principal amount outstanding under the revolving facility was approximately $53.3 million, and the amount available to be borrowed under the facility was $5.1 million. The revolving facility bore interest at the 30-day LIBOR plus 3.15%, payable daily (total rate of 9.78% as of December 31, 2000). As of December 31, 2000, we were in compliance with the covenants in this agreement. As previously reported, as part of a global decision to exit the automobile finance market, GE Capital advised us that it did not intend to renew our existing warehouse line, which terminates on June 30, 2001. In April 2001, we replaced the warehouse receivables line of credit and we are still in the process of replacing the inventory line of credit. However, we did receive the right to extend the maturity date of our current inventory line of credit to December 31, 2001 subject to certain conditions including the payment of certain fees and a 50 basis point increase in the interest rate to LIBOR plus 3.65% after June 30, 2001. Our new revolving credit facility with Greenwich Capital Financial Products, Inc., replaces the portion of the GE Capital facility lending on the automobile loan contracts. The facility allows for maximum borrowings of $75 million during the period from May 1 through November 30 and increases to $100 million during the period from December 1 through April 30. The term of the facility is 364 days with a renewal option, upon mutual consent, for an additional 364-day period. The borrowing base consists of up to 65% of the principal balance of eligible loans originated from the sale of used cars. Greenwich has an option to adjust the advance rate on the principal to reflect changes in market conditions or portfolio performance. The interest rate on the facility is LIBOR plus 2.80%. The facility is secured with substantially all of our assets. The line is subject to several covenants, including certain financial and loan portfolio related covenants. The facility also contains certain conditions that must be met if our chairman of the board is to purchase the remaining outstanding shares of our stock and take the Company private. Additional covenants would apply were this transaction to take place. We also entered into a commitment with Greenwich which provides them with exclusive underwriting rights for the term of the revolving credit facility for all receivables financed, whether originated or acquired by us, with certain limited exceptions. We will remain with our current lender on our inventory credit line until the facility expires at the end of December 2001 or until a new inventory lender can be found. We are currently in the process of evaluating proposals from inventory lenders and believe that a replacement lender will be found prior to the expiration date of our current line of credit. Securitizations. Our securitization program is a primary source of our working capital. Securitizations generate cash flow for us from the sale of Class A obligations, ongoing servicing fees, and excess cash flow distributions from collections on the loans securitized after payments on the Class A obligations, payment of fees, expenses, and insurance premiums, and required deposits to the reserve account. Securitization also allows us to fix our cost of funds for a given loan portfolio. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Securitizations" for a more complete description of our securitization program. Page 22 Supplemental Borrowings Senior Subordinated Notes. In February 1998, we borrowed a total of $15.0 million of subordinated debt from unrelated third parties for a three-year term. We issued warrants to the lenders of this debt to purchase up to 500,000 shares of our common stock at an exercise price of $10.00 per share, exercisable at any time until the later of February 2001, or when the debt is paid in full. On September 30, 2000, the Loan Agreement, Warrants and Warrant Agreements between us and certain Lenders under this Loan Agreement, were amended to: reduce the outstanding principal balance under the Loan Agreement from $15 million to $13.5 million; require us to take out one of the lenders in the facility by paying off that lender's $1.5 million share of the loan (which occurred), and cancel the number of outstanding warrants attributable to that portion of the loan; increase the interest rate under the Loan Agreement to 15%; extend the term of the Loan Agreement to February 12, 2003; and provide for the repayment of principal and the corresponding reduction of warrants under certain terms and conditions. This debt is senior to the subordinated debentures issued in our exchange offers (described below), subordinate to our other indebtedness, and had a $11.5 million balance at December 31, 2000. In May 1999, we borrowed approximately $38.0 million from an unrelated party for a term of two years maturing on May 1, 2001 (Residual Loan). The note called for monthly principal payments of generally not less than $800,000 through May 2000 and not less than $1.7 million thereafter, plus interest at a rate equal to LIBOR plus 550 basis points. The loan balance was $11.1 million at December 31, 2000. This loan agreement was replaced in January 2001. The new agreement has a $35 million principal due February 2003 with interest payable monthly at LIBOR plus 600 basis points. The new loan, like the previous loan, is secured by our Residuals in Finance Receivables Sold and certain Finance Receivables. As a condition to the $35 million senior secured loan agreement, Verde Investments, Inc., an affiliate of Mr. Garcia, was required to invest $7 million in us through a subordinated loan. The funds were placed in escrow as additional collateral for the $35 million senior secured loan. The funds will be released in July 2001 if, among other conditions, we have at least $7 million in pre-tax income through June of 2001 and, at that time, Mr. Garcia guarantees 33.3% of the $35 million facility. If the loan with Verde and the guarantee of the $35 million senior secured loan are not removed by July 25, 2001, Mr. Garcia will receive warrants from us for 1.5 million shares of stock, vesting over a one-year period, at an exercise price of $4.50. Also as consideration for the loan, we released all options to purchase real estate that is currently owned by Verde and leased to us. We also granted Verde the option to purchase, at book value, any or all properties currently owned by us, or acquired by us prior to the earlier of December 31, 2001, or the date the loan is repaid. Verde agreed to lease the properties back to us, on terms similar to our current leases, if it exercises its option to purchase any of the properties. The loan is secured by residual interests in our securitization transactions but is subordinate to the senior secured loan facility. The loan requires quarterly interest payments at LIBOR plus 600 basis points and is subject to pro rata reductions if certain conditions are met. An independent committee of our board reviewed and negotiated terms of this subordinated loan and we also received an opinion from an investment banker which deemed the loan fair from a financial point of view both to our shareholders and us. Sale-Leaseback of Real Property. In March 1998, we executed an agreement with an unrelated investment company for the sale and leaseback of up to $37.0 million in real property. We sold certain real property to the investment company for its original cost and leased back the properties for an initial term of twenty years. We have the right to extend the leases for up to an additional 20 years. We pay monthly rents of approximately one-twelfth of 10.75% of the purchase price plus all occupancy costs and taxes. The agreement calls for annual increases in monthly rent to 11.0% of the purchase price in 1999 and thereafter in accordance with increases in the Consumer Price Index. As of December 31, 2000, we had sold 17 properties for a total price of approximately $27.4 million under this arrangement. For the reason discussed in the following paragraph, we do not anticipate closing any additional transactions under this agreement. We used substantially all of the proceeds from the sales to pay down debt. Page 23 In December 1999, Verde acquired at a 10% discount, all 17 sale-leaseback properties sold to the unrelated investment company in 1998. We acquired the option to purchase these properties at Verde's purchase price at anytime through December 31, 2000. We relinquished this option as part of the consideration for the $7 million Verde loan described under "Supplemental Borrowings - Senior Subordination Notes" above. 1998 Exchange Offer. In the fourth quarter of 1998, we acquired approximately 2.7 million shares of our common stock in exchange for approximately $17.5 million of subordinated debentures. We issued the debentures at a premium of approximately $3.9 million over the market value of the shares of our common stock that were exchanged for the debentures. Accordingly, the debt was recorded at $13.6 million on our balance sheet. The premium will be amortized over the life of the debentures and results in an effective annual interest rate of approximately 18.8%. The debentures are unsecured and are subordinate to all of our existing and future indebtedness. We must pay interest on the debentures twice a year at 12% per year. We are required to pay the principal amount of the debentures on October 23, 2003. We can redeem all or part of the debentures at any time. 2000 Exchange Offer. In April 2000, we completed an exchange offer in which we acquired approximately 1.1 million shares of our common stock in exchange for $11.9 million of subordinated debentures. We issued the debentures at a premium of approximately $3.9 million over the market value of the exchanged shares of our common stock. Accordingly, the debt was recorded at $8.0 million. The premium will be amortized over the life of the debentures and results in an effective annual interest rate of approximately 19.9%. The debentures are unsecured and are subordinate to all of our existing and future indebtedness. We must pay interest on the debentures biannually at 11% per year. We are required to pay the principal amount of the debentures on April 15, 2007. We can redeem all or part of the debentures at any time. Debt Shelf Registration. In 1997, we registered up to $200 million of our debt securities under the Securities Act of 1933. There can be no assurance that we will be able to use this registration statement to sell debt securities, or successfully register and sell other debt securities in the future. Capital Expenditures and Commitments On November 9, 2000, Verde Investments, Inc. ("Verde"), an affiliate of Mr. Ernest Garcia II, our chairman, purchased a certain property located in Phoenix, Arizona and simultaneously leased the property to us pursuant to among other terms the following: 20 year term which expires December 31, 2020; rent payable monthly with 5% annual rent adjustments; triple net lease; four five-year options to renew; and an option to purchase the property upon prior notice and at Verde's cost. We intend to build a new headquarters at this location over the next several months. Subsequently, we surrendered this option as part of the $7 million subordinated loan with Verde. Common Stock Repurchase Program. In April 1999, our Board of Directors authorized a stock repurchase program allowing us to repurchase up to 2.5 million shares of our common stock from time to time. Purchases may be made depending on market conditions, share price, lender approval and other factors. During July 2000, we repurchased approximately 1.5 million shares at an average price of $7.21 pursuant to the stock repurchase program. Since inception of teh program, we have repurchased approximately 1.6 million shares under this program. Since January 1, 1998, we have repurchased a total of approximately 3.8 million shares of our common stock under our stock repurchase program and the exchange offers described above at an average cost of approximately $5.40 per share. In October 1997, our Board of Directors authorized a stock repurchase program, allowing us to purchase up to one million shares of our common stock from time to time. Purchases may be made depending on market conditions, share price and other factors. Our Board of Directors extended the stock repurchase program in February 1999, to December 31, 1999. During 1999 and 1998, we repurchased 1,004,000 and 75,000 shares, respectively, of common stock pursuant to the stock repurchase program. In September 1997, our Board of Directors approved a director and senior officer stock purchase loan program. We may make loans of up to $1.0 million in total to the directors and senior officers under the program to assist directors' and officers' purchases of common stock on the open market. These unsecured loans bear interest at 10% per year. Since 1997, we have made loans under similar terms and conditions to senior officers totaling $893,000 for the purchase of 90,000 shares of our common stock. During 2000 and 1999, no additional loans under this program were made to senior officers. Page 24 Inflation Increases in inflation generally result in higher interest rates. Higher interest rates on our borrowings would decrease the profitability of our existing portfolio. To date, inflation has not had a significant impact on our operations. We seek to limit this risk: through our securitization program, which allows us to fix our borrowing costs, by increasing the interest rate charged for loans originated at our dealerships (if allowed under applicable law), or by increasing the profit margin on the cars sold. Accounting Matters In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 140). SFAS No. 140 replaces SFAS No. 125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management does not expect the adoption of SFAS No. 140 to have a material impact on us. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS No. 138). SFAS No. 138 amends a limited number of issues causing implementation difficulties for entities that apply SFAS No. 133. SFAS No. 138 is effective for fiscal years beginning after June 15, 2000. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) required all derivatives to be recorded on the balance sheet at fair value and establishes new accounting rules for hedging instruments. The adoption of SFAS No. 138 or No. 133 will not have a material effect on us. Risk Factors There are various risks in purchasing our securities and investing in our business, including those described below. You should carefully consider these risk factors together with all other information included in this Form 10-K. We make forward looking statements. This Report includes statements that constitute forward-looking statements within the meaning of the safe harbor provisions of the Private and Securities Litigation Reform Act of 1995. We claim the protection of the safe-harbor for our forward looking statements. Forward-looking statements are often characterized by the words "may," "anticipates," "believes," "estimates," "projects," "expects" or similar expressions and do not reflect historical facts. Forward-looking statements in this report relate, among other matters, to: anticipated financial results, such as continuing growth of sales, other revenues and loan portfolios, improvements in underwriting adequacy of the allowance for credit losses, and improvements in loan performance, including delinquencies and charge offs; roll-out of collectors to our dealerships; anticipated repurchases of our stock and the level of growth in our dealerships through acquisitions and de novo dealership openings; and e-commerce related growth and loan performance. Forward looking statements include risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward looking statements, some of which we cannot predict or quantify. Factors that could affect our results and cause or contribute to differences from these forward-looking statements include, but are not limited to: any decline in consumer acceptance of our car sales strategies or marketing campaigns; any inability to finance our operations in light of a tight credit market for the sub-prime industry and our current financial circumstances; any deterioration in the used car finance industry or increased competition in the used car sales and finance industry; any inability to monitor and improve our underwriting and collection processes; any changes in estimates and assumptions in, and the ongoing adequacy of, our allowance for credit losses; any inability to continue to reduce operating expenses as a percentage of sales; any material litigation against us or material, unexpected developments in existing litigation; and any new or revised accounting, tax or legal guidance that adversely affect used car sales or financing. Forward-looking statements speak only as of the date the statement was made. Future events and actual results could differ materially from the forward-looking statements. When considering each forward-looking statement, you should keep in mind the risk factors and cautionary statements found throughout this Form 10-K and specifically those found below. We are not obligated to publicly update or revise any forward looking statements, whether as a result of new information, future events, or for any other reason. References to Ugly Duckling Corporation as the largest chain of buy-here pay-here used car dealerships in the United States is management's belief based upon the knowledge of the industry and not on any current independent third party study. Page 25 Our majority stockholder can control substantially all matters put to a vote of stockholders. Ernest C. Garcia II, our Chairman, is the beneficial owner of a majority of our outstanding common stock. Mr. Garcia is now in a position to control the election of our directors or the approval of any merger, reorganization or other business combination transaction submitted to a vote of our shareholders or other extraordinary transaction. Mr. Garcia could vote to approve such a transaction on terms, which might be considered more favorable to Mr. Garcia than to unaffiliated stockholders. The terms of any such transaction could require stockholders other than Mr. Garcia to dispose of their shares of common stock for cash or other consideration even if the stockholders would prefer to continue to hold their shares of our common stock for investment. Any such transaction could also result in Ugly Duckling's common stock being delisted from the Nasdaq National Market or being held of record by fewer than 300 persons and, therefore, eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934. Our majority stockholder can control substantially all matters put to a vote of stockholders. Ernest C. Garcia II, our Chairman, is the beneficial owner of a majority of our outstanding common stock. The remaining shareholders of our common stock are already minority holders and cannot, as a collective group, vote more shares of common stock than Mr. Garcia beneficially owns. Mr. Garcia is now in a position to control the election of our directors or the approval of any merger, reorganization or other business combination transaction submitted to a vote of our shareholders or other extraordinary transaction. Mr. Garcia could vote to approve such a transaction on terms, which might be considered more favorable to Mr. Garcia than to unaffiliated stockholders. The terms of any such transaction could require stockholders other than Mr. Garcia to dispose of their shares of common stock for cash or other consideration even if the stockholders would prefer to continue to hold their shares of our common stock for investment. Any such transaction could also result in Ugly Duckling's common stock being delisted from the Nasdaq National Market or being held of record by fewer than 300 persons and, therefore, eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934. In filings with the Security Exchange Commission, Mr. Garcia has expressed a continuing interest in taking us private. For a description of his most recent offer to purchase our outstanding common stock, see Footnote (18) of Notes to Consolidated Financial statements included herein. Future losses could impair our ability to raise capital or borrow money and consequently affect our stock price. Although we recorded earnings from continuing operations of $9.1 million for the twelve months ended December 31, 2000, $8.7 million for the twelve months ended December 31, 1999 and $3.5 million in 1998, we cannot assure you that we will be profitable in future periods. Losses in future periods could impair our ability to raise additional capital or borrow money as needed and could affect our stock price. We may not be able to continue to obtain the financing we need to fund our operations and, as a result, our business and profitability could be materially adversely affected. Our operations require large amounts of capital. We have borrowed, and will continue to borrow, substantial amounts to fund our operations. If we cannot obtain the financing we need on a timely basis and on favorable terms, our business and profitability could be materially adversely affected. As a result of our primary lender, GE Capital Corporation, exiting the automobile finance business, our portfolio performance, and a general tightening in the credit markets, we have recently experienced a less favorable borrowing environment than in the past. We currently obtain financing through three primary sources: a warehouse facility with Greenwich Capital Financial Products, Inc. ("Greenwich"); securitization transactions; and loans from other sources. Warehouse Facility with Greenwich. When our prior warehouse lender, GE Capital Corporation, announced that it was exiting the automobile finance market, we had to replace our GE credit facility with a new facility. Our new warehouse facility with Greenwich is now our primary source of operating capital. This facility contains numerous restrictive covenants and financial tests. Failure to satisfy these could result in a default, which could preclude us from further borrowing under the warehouse facility; could cause cross defaults to our other debt and securitizations, and could prevent us from securing alternate sources of funds necessary to operate our business. Any of these events would have a material adverse effect on our business and profitability. Securitization Transactions. We restore capacity under the warehouse facility from time to time by securitizing portfolios of finance receivables. Our ability to successfully and efficiently complete securitizations may be affected by several factors, including: the condition of securities markets generally; conditions in the asset-backed securities markets specifically; the credit quality of our loan portfolio; and the performance of our servicing operations. Page 26 In recent periods, we have experienced a tightening of the restrictive covenants in our securitization transactions as well as increases in the credit enhancements required to close our securitizations. High delinquency levels and charge offs or other events, such as our failure to have a warehouse facility acceptable to the insurer of our securitization transactions in place on April 30 of each year, can also cause a "termination event" under our securitization transactions, which could result in our being replaced as servicer under those securitizations or in a liquidation and sale of the securitized portfolios. These types of occurrences could also cause a "portfolio performance event," which could result in all cash flow from the securitized receivables otherwise distributable on the junior obligations held by us being retained in the trust as additional security for senior securities. Any of these consequences could have a material adverse effect on our business and financial condition. Recent Waivers. From time to time, we incur technical or other breaches under our material credit facilities, and we have obtained waivers from the applicable lenders. There can be no assurance we will continue to receive waivers and our inability to obtain these waivers may have a material impact on our ability to obtain or retain operating capital. We have a high risk of credit losses because of the poor creditworthiness of our borrowers. Substantially all the sales financing we extend and the loans that we service are with "sub-prime" borrowers. Sub-prime borrowers generally cannot borrow money from traditional lending institutions, such as banks, savings and loans, credit unions, and captive finance companies owned by automobile manufacturers, because of their poor credit histories and/or low incomes. Loans to sub-prime borrowers are difficult to collect and are subject to a high risk of loss. We have established an allowance for credit losses to cover our anticipated credit losses. We periodically review and may make upward or downward adjustments to the allowance based upon whether we believe the allowance is adequate to cover our anticipated credit losses. Based upon such review, and due to worse than expected loan performance, we have taken an additional charge, net of income tax effect, of approximately $5.9 million during the fourth quarter of 2000. With the charge, the effective provision for credit losses for 2000 as a percentage of originations was 30.0%. We believe this charge will increase the allowance balance as of December 31, 2000 to a level that we estimate to be adequate to cover net charge offs for the next 12 to 15 months. However, our allowance may not be sufficient to cover our credit losses and we may need to increase our provision or allowance if certain adverse factors arise, including material increases in delinquencies or charge-offs. A significant variation in the timing of or increase in credit losses in our portfolio or a substantial increase in our allowance or provision for credit losses, would have a material adverse effect on our net earnings. We could have a system failure if our current contingency plan is not adequate, which could adversely affect our ability to collect on loans and comply with statutory requirements. We depend on our loan servicing and collection facilities and on long-distance and local telecommunications access to transmit and process information among our various facilities. We use a standard program to prepare and store off-site backup tapes of our main system applications and data files on a routine basis. We regularly revise our contingency plan. However, the plan as revised may not prevent a systems failure or allow us to timely resolve any systems failures. Also, a natural disaster, calamity, or other significant event that causes long-term damage to any of these facilities or that interrupts our telecommunications networks could have a material adverse effect on our operations and profitability. We have slowed our growth, which, eventually, could negatively affect our earnings and profitability. Since 1999, we have slowed our growth in favor of an accelerated stock buy back program. Our ability to continue our growth is now limited by our access to capital. We are also committed to slowing our growth until we improve our loan loss experience. As additional capital is secured, we will consider whether to resume or accelerate our expansion plans or to continue repurchasing our stock. We do not expect a slowdown in growth to adversely impact revenues or earnings in 2001. Thereafter, we expect that a failure to grow could eventually affect our earnings and/or profitability. Even if we make acquisitions, such acquisitions may be unsuccessful or strain or divert our resources from more profitable operations. Although we have decided to slow our growth during the foreseeable future, we intend to consider additional acquisitions, alliances, and transactions involving other companies that could complement our existing business if we can do so with little or no capital or if we can raise capital sufficient for any such transaction. However, we may not be able to identify suitable acquisition parties, joint venture candidates, or transaction counterparties. Even if we can identify suitable parties, we may not be able to consummate these transactions on terms that we find favorable. We may also not be able to successfully integrate any businesses that we acquire into our existing operations. If we cannot successfully integrate any future acquisitions, our operating expenses may increase, which would affect our net earnings. Moreover, these types of transactions may result in the incurrence of additional debt and amortization of expenses related to goodwill and intangible assets, all of which could adversely affect our profitability. These transactions also involve numerous other risks, including the diversion of management attention from other business concerns, entry into markets in which we have had no or only limited experience, and the potential loss of key employees of acquired companies. Occurrence of any of these risks could have a material adverse effect on us. Page 27 We have continuing risks relating to the First Merchants transactions. We have entered into several transactions in the bankruptcy proceedings of First Merchants Acceptance Corporation. We have the right to 17.5% of recoveries on First Merchants' residual interests in certain securitized loan pools and other loans. However, if we lose our right to service these loans, our share of these residual interests could be reduced or eliminated. This could affect our future cash flow and profitability. Interest rates affect our profitability. Much of our financing income results from the difference between the rate of interest that we pay on the funds we borrow and the rate of interest that we earn on the loans in our portfolio. While we earn interest on the loans that we own at a fixed rate, we pay interest on our borrowings under our warehouse facility at a floating rate. When interest rates increase, our interest expense increases and our net interest margins decrease. Increases in our interest expense that we cannot offset by increases in interest income will lower our profitability. Laws that limit the interest rates that we can charge can adversely affect our profitability. We operate in many states that impose limits on the interest rate that a lender may charge. When a state limits the amount of interest that we can charge on our installment sales loans, we may not be able to offset any increased interest expense caused by rising interest rates or greater levels of borrowings under our credit facilities. Therefore, these interest rate limitations can adversely affect our profitability. Government regulations may limit our ability to recover and enforce receivables or to repossess and sell collateral. We are subject to ongoing regulation, supervision, and licensing under various federal, state, and local statutes, ordinances, and regulations. If we do not comply with these laws, we could be fined or certain of our operations could be interrupted or shut down. Failure to comply could, therefore, have a material adverse effect on our operations. We believe that we are currently in substantial compliance with all applicable material federal, state, and local laws and regulations. We may not, however, be able to remain in compliance with such laws. In addition, the adoption of additional statutes and regulations, changes in the interpretation of existing statutes and regulations, or our entry into jurisdictions with more stringent regulatory requirements could also have a material adverse effect on our operations. We are subject to pending actions and investigations relating to our compliance with various laws and regulations. While we do not believe that ultimate resolution of these matters will result in a material adverse effect on our business or financial condition (such as fines, injunctions or damages), there can be no assurance in this regard. Increased competition could adversely affect our operations and profitability. Our primary competitors are the numerous small buy-her pay-here used car dealers that operate in the sub-prime segment of the used car sales industry. We attempt to distinguish ourselves from our competitors through name recognition and other factors. However, the advertising and infrastructure required by these efforts increase our operating expenses. There is no assurance that we can successfully distinguish ourselves and compete in this industry. In addition, in recent years, a number of larger companies with significant financial and other resources have entered or announced plans to enter the used car sales industry. Although these companies do not currently compete with us in the sub-prime segment of the market, they compete with us in the purchase of inventory, which can result in increased wholesale costs for used cars and lower margins. They could also enter the sub-prime segment of the market at any time. Increased competition may cause downward pressure on the interest rates that we charge on loans originated by our dealerships. Either change could have a material effect on the value of our securities. The success of our operations depends on certain key personnel. We believe that our ability to successfully implement our business strategy and to operate profitably depends on the continued employment of our senior management team. The unexpected loss of the services of any of our key management personnel or our inability to attract new management when necessary could have a material adverse effect on our operations. We do not currently maintain key person life insurance on any member of our senior management team other than Gregory B. Sullivan, our President and Chief Executive Officer. Page 28 We may issue stock in the future that will dilute the value of our existing stock. We have the ability to issue common stock or securities exercisable for or convertible into common stock, which may dilute the securities our existing stockholders now hold. In particular, issuance of none or all of the following securities may dilute the value of the securities that our existing stockholders now hold: we have granted warrants to purchase a total of approximately 1.2 million shares of our common stock to various parties, with exercise prices ranging from $6.75 to $20.00 per share; we may issue additional warrants in connection with future transactions; we may issue common stock under our various stock option plans; and we may issue common stock in the First Merchants transaction in exchange for an increased share of collections on certain loans that we service for First Merchants. There is a potential anti-takeover or dilutive effect if we issue preferred stock. Our certificate of incorporation authorizes us to issue "blank check" preferred stock. Our board of directors may fix or change from time to time the designation, number, voting powers, preferences, and rights of this stock. Such issuances could make it more difficult for a third party to acquire us by reducing the voting power or other rights of the holders of our common stock. Preferred stock can also reduce the market value of the common stock. There may be adverse consequences from issuing blank check common stock, including a potential anti-takeover or dilutive effect. Our certificate of incorporation authorizes us to issue additional series of common stock, which we refer to as "blank check" common stock. Our board of directors may create new series of common stock from time to time in addition to the existing common stock and may fix: the designation, voting powers, liquidation rights, conversion rights, redemption rights, dividends and distributions, preferences and relative, participating, optional and other rights, if any, of each such series; the qualifications, limitations or restrictions, if any, of each such series; and the number of shares constituting each such series. Blank check common stock could also: negatively affect shareholder rights and the value of existing common stock; have rights that are preferential or superior to the existing common stock; track the performance of certain assets, groups of assets, businesses or subsidiaries of the company; increase the complexity and administrative costs of our capital structure, which could negatively impact our financial condition and the value of our common stock; create potential conflicts of interest and our board of directors could make decisions that adversely affect holders of our existing common stock; and/or give rise to occasions when the interests of holders of one series might diverge or appear to diverge from the interests of holders of another series. Blank check common stock also may be viewed as being an "anti-takeover" device. Our board could create and issue series of common stock with terms that could make a takeover attempt by a third party more difficult to complete and such stock may also be used in connection with the issuance of a stockholder rights plan, sometimes called a "poison pill." ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk We are exposed to market risk on our financial instruments from changes in interest rates. We do not use financial instruments for trading purposes or to manage interest rate risk. Our earnings are substantially affected by our net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest bearing notes payable. Increases in market interest rates could have an adverse effect on profitability. Page 29 Our financial instruments consist primarily of fixed rate finance receivables, residual interests in pools of fixed rate finance receivables, short term variable rate revolving Notes Receivable, and variable and fixed rate Notes Payable. Our finance receivables are classified as subprime loans and generally bear interest at the lower of 29.9% or the maximum interest rate allowed in states that impose interest rate limits. At December 31, 2000, the scheduled maturities on our finance receivables ranged from one to 48 months, with a weighted average maturity of 18.1 months. The interest rates we charge our customers on finance receivables has not changed as a result of fluctuations in market interest rates, although we may increase the interest rates we charge in the future if market interest rates increase. A large component of our debt at December 31, 2000 is the Collateralized Notes Payable (Class A obligations) issued under our securitization program. Issuing debt through our securitization program allows us to mitigate our interest rate risk by reducing the balance of the variable revolving line of credit and replacing it with a lower fixed rate note payable. We are subject to interest rate risk on fixed rate Notes Payable to the extent that future interest rates are lower than the interest rates on our existing Notes Payable. The table below illustrates the impact that hypothetical changes in interest rates could have on our earnings before income taxes over a twelve month period. We compute the impact on earnings for the period by first computing the baseline net interest income on our financial instruments with interest rate risk, which are the variable rate revolving credit lines and the variable rate notes payable. We then determine the net interest income based on each of the interest rate changes listed below and compare the results to the baseline net interest income to determine the estimated change in pretax earnings. The table does not give effect to our fixed rate receivables and borrowings.
Change in Interest Rates Change in Pretax Earnings ($ in thousands) ------------------------ ------------------------- + 2% $ (2,020) + 1% $ (1,010) - 1% $ 2,020 - 2% $ 1,010
In computing the effect of hypothetical changes in interest rates, we have assumed that: interest rates used for the baseline and hypothetical net interest income amounts are in effect for the entire twelve month period, interest for the period is calculated on financial instruments held at December 31, 2000 less contractually scheduled payments and maturities, and there is no change in prepayment rates as a result of the interest rate changes. Our sensitivity to interest rate changes could be significantly different if actual experience differs from the assumptions used to compute the estimates. ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA UGLY DUCKLING CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................................ 31 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2000 and 1999.............. 32 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998........................................ 33 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998........................................ 34 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, 1998........................................... 35 Notes to Consolidated Financial Statements................................ 36 Page 30 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Ugly Duckling Corporation: We have audited the accompanying consolidated balance sheets of Ugly Duckling Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ugly Duckling Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in accordance with accounting principles generally accepted in the United States of America. KPMG LLP Phoenix, Arizona February 16, 2001, except as to the third and fourth paragraphs of Note (8) and the second paragraph of Note (18) to the Consolidated Financial Statements, which are as of April 12, 2001. Page 31 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets ($ in thousands except per share amounts)
December 31, ------------------------------------ 2000 1999 ----------------- ----------------- ASSETS Cash and Cash Equivalents $ 8,805 $ 3,683 Finance Receivables, Net 500,469 365,586 Note Receivable from Related Party 12,000 12,000 Inventory 63,742 62,865 Property and Equipment, Net 38,679 31,752 Intangible Assets, Net 12,527 14,618 Other Assets 11,724 12,327 Net Assets of Discontinued Operations 4,175 33,880 ----------------- ----------------- $ 652,121 $ 536,711 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts Payable $ 2,239 $ 3,185 Accrued Expenses and Other Liabilities 36,830 26,905 Notes Payable - Portfolio 406,551 275,774 Other Notes Payable 16,579 36,556 Subordinated Notes Payable 34,522 28,611 ----------------- ----------------- Total Liabilities 496,721 371,031 ----------------- ----------------- Stockholders' Equity: Preferred Stock $.001 par value, 10,000,000 shares authorized none issued and outstanding Common Stock $.001 par value, 100,000,000 shares authorized, 18,764,000 and 18,656,000 issued, respectively, and 12,292,000 and 14,888,000 outstanding, respectively 19 19 Additional Paid-in Capital 173,273 173,273 Retained Earnings 21,772 12,709 Treasury Stock, at cost (40,114) (20,321) ----------------- ------------------ Total Stockholders' Equity 155,400 165,680 Commitments and Contingencies - - ----------------- ------------------ $ 652,121 $ 536,711 ================= ================== See accompanying notes to Consolidated Financial Statements.
Page 32 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations ($ in thousands, except share amounts)
December 31, ------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- Sales of Used Cars $ 483,282 $ 389,908 $ 287,618 Less: Cost of Used Cars Sold 268,248 219,037 165,282 Provision for Credit Losses 141,971 102,955 63,318 ----------------- ----------------- ----------------- 73,063 67,916 57,018 ----------------- ----------------- ----------------- Other Income/Expense: Interest Income 119,719 68,574 17,287 Portfolio Interest Expense 26,698 14,597 2,860 ----------------- ----------------- ----------------- Net Interest Income 93,021 53,977 14,427 Gain on Sale of Loans - - 12,093 Servicing and Other Income 1,855 7,472 15,481 ----------------- ----------------- ----------------- Total Other Income 94,876 61,449 42,001 ----------------- ----------------- ----------------- Income before Operating Expenses 167,939 129,365 99,019 Operating Expenses: Selling and Marketing 28,756 23,132 18,246 General and Administrative 105,387 81,570 69,894 Depreciation and Amortization 9,065 6,948 4,912 ----------------- ----------------- ----------------- Operating Expenses 143,208 111,650 93,052 ----------------- ----------------- ----------------- Income before Other Interest Expense 24,731 17,715 5,967 Other Interest Expense 9,463 3,028 161 ----------------- ----------------- ----------------- Earnings before Income Taxes 15,268 14,687 5,806 Income Taxes 6,205 6,000 2,351 ----------------- ----------------- ----------------- Earnings from Continuing Operations 9,063 8,687 3,455 ----------------- ----------------- ----------------- Discontinued Operations: Earnings (Loss) from Operations of Discontinued Operations, net - 248 (703) Earnings (Loss) from Disposal of Discontinued Operations, net - 325 (8,455) ----------------- ----------------- ----------------- Net Earnings (Loss) $ 9,063 $ 9,260 $ (5,703) ================= ================= ================= Earnings per Common Share - Continuing Operations: Basic $ 0.67 $ 0.58 $ 0.19 ================= ================= ================= Diluted $ 0.67 $ 0.57 $ 0.19 ================= ================= ================= Net Earnings (Loss) per Common Share: Basic $ 0.67 $ 0.61 $ (0.32) ================= ================= ================= Diluted $ 0.67 $ 0.60 $ (0.31) ================= ================= ================= Shares Used in Computation: Basic Weighted Avg. Shares Outstanding 13,481 15,093 18,082 ================= ================= ================= Diluted Weighted Avg. Shares Outstanding 13,627 15,329 18,405 ================= ================= ================= See accompanying notes to Consolidated Financial Statements.
Page 33 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years Ended December 31, 2000, 1999, and 1998 (in thousands)
Total Number of Shares Retained Stockholders' Common Treasury Common Earnings Treasury Equity ------- -------- --------- --------- --------- ---------- Balances at December 31, 1997........... 18,521 -- $ 172,622 $ 9,152 $ -- $ 181,774 Issuance of Common Stock for Cash...... 84 -- 306 -- -- 306 Issuance of Common Stock Warrants...... -- -- 900 -- -- 900 Purchase of Treasury Stock for Cash..... -- (75) -- -- (535) (535) Acquisition of Treasury Stock for Net Loss for the Year................... -- -- -- (5,703) -- (5,703) ------- -------- --------- --------- --------- ---------- Balances at December 31, 1998........... 18,605 (2,764) 173,828 3,449 (14,510) 162,767 Issuance of Common Stock for Cash...... 51 -- 364 -- -- 364 Repurchase of Common Stock Warrants..... -- (900) -- -- (900) Purchase of Treasury Stock for Cash..... -- (1,004) -- -- (5,811) (5,811) Net Earnings for the Year............... -- -- -- 9,260 -- 9,260 ------- -------- --------- --------- --------- ---------- Balances at December 31, 1999........... 18,656 (3,768) 173,292 12,709 165,680 ------- -------- --------- --------- --------- ---------- Issuance of Common Stock for Cash...... 108 -- 450 -- -- 450 Purchase of Treasury Stock for Cash..... (1,619) -- -- (11,788) (11,788) Acquisition of Treasury Stock for Subordinated Debentures................. -- (1,085) -- -- (8,005) (8,005) Net Earnings for the Year............... -- -- -- 9,063 -- 9,063 ------- -------- --------- --------- --------- ---------- Balances at December 31, 2000........... 18,764 (6,472) $ 173,742 $ 21,772 $ (40,114) $ 155,400 ======= ======== ========= ========= ========= ========== See accompanying notes to Consolidated Financial Statements.
Page 34 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows ($ in thousands)
December 31, ------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- Cash Flows from Operating Activities: Net Earnings (Loss) $ 9,063 $ 9,260 $ (5,703) Adjustments to Reconcile Net Earnings (Loss) to Net Cash Provided by Operating Activities: Provision for Credit Losses 141,971 102,955 65,318 Gain on Sale of Loans - - (12,093) Purchase of Finance Receivables for Sale - - (207,085) Proceeds from Sale of Finance Receivables - - 159,498 Depreciation and Amortization 14,244 7,579 5,071 Loss from Disposal of Property and Equipment (Gain) Loss from Discontinued Operations 14 43 903 Deferred Income Taxes 5,356 (3,078) (2,759) Collections from Residuals in Finance Receivables Sold 15,551 15,949 22,000 Increase in Goodwill from Acquisitions - (1,217) (528) Increase in Inventory (877) (18,720) (11,773) (Increase) Decrease in Other Assets (4,753) 1,415 (967) Increase in Accounts Payable, Accrued Expenses and Other liabilities 16,653 7,751 2,715 Increase (Decrease) in Income Taxes Payable (7,765) 6,772 (1,233) ---------------- ----------------- ----------------- Net Cash Provided by Operating Activities 189,457 128,136 22,522 ---------------- ----------------- ----------------- Cash Flows Used in Investing Activities: Increase in Finance Receivables (490,301) (403,742) (111,467) Collections on Finance Receivables 212,319 81,572 40,112 (Increase) Decrease in Investments Held in Trust on Finance 8,996 (10,393) (14,864) Advances under Notes Receivable - (12,000) - Repayments of Notes Receivable - 763 149 Proceeds from Disposal of Property and Equipment 3,772 77 28,563 Purchase of Property and Equipment (17,390) (8,974) (22,825) Increase in Intangible Assets from Acquisitions - (169) - ---------------- ----------------- ----------------- Net Cash Used in Investing Activities (282,604) (352,866) (80,332) ---------------- ----------------- ----------------- Cash Flows from Financing Activities: Initial Deposits at Securitization into Investments Held in Trust (20,610) (21,427) (13,071) Additional Deposits into Investments Held in Trust (35,463) (22,701) (9,473) Collections from Investments Held in Trust 32,654 18,369 28,481 Additions to Notes Payable Portfolio 791,606 751,070 49,967 Repayment of Notes Payable Portfolio (663,285) (577,028) (5,185) Additions to Other Notes Payable 5,674 59,180 21,825 Repayment of Other Notes Payable (25,960) (38,523) (13,502) Issuance of Subordinated Notes Payable - - 15,000 Repayment of Subordinated Notes Payable (3,456) (10,000) (2,000) Proceeds from Issuance of Common Stock 450 364 306 Acquisition of Treasury Stock (11,788) (5,811) (535) Other, Net - (1,324) (862) ---------------- ----------------- ----------------- Net Cash Provided by Financing Activities 69,822 152,169 70,951 ---------------- ----------------- ----------------- Net Cash Provided by Discontinued Operations 28,447 73,700 (14,134) ---------------- ----------------- ----------------- Net Increase (Decrease) in Cash and Cash Equivalents 5,122 1,139 (993) Cash and Cash Equivalents at Beginning of Year 3,683 2,544 3,537 ---------------- ----------------- ----------------- Cash and Cash Equivalents at End of Year $ 8,805 $ 3,683 $ 2,544 ================ ================= ================= Supplemental Statement of Cash Flows Information: Interest Paid $ 31,796 $ 17,580 $ 10,483 ================ ================= ================= Income Taxes Paid $ 13,968 $ 2,154 $ 1,633 ================ ================= ================= Acquisition of Treasury Stock with Subordinated Debt $ 8,005 $ - $ 13,975 ================ ================= ================= Purchase of Property and Equipment with Note Payable $ - $ - $ 825 ================ ================= ================= Repurchase of Warrants for Subordinated Note Payable $ - $ (900) $ 900 ================ ================= ================= See accompanying notes to Consolidated Financial Statements.
Page 35 UGLY DUCKLING CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Organization, Operations and Acquisitions Ugly Duckling Corporation, a Delaware corporation (the Company), was incorporated in April 1996 as the successor to Ugly Duckling Holdings, Inc. (UDH), an Arizona corporation formed in 1992. The Company, through wholly owned subsidiaries, operates 77 used car sales dealerships, 15 inspection centers, and four loan-servicing facilities (two of which will be closed in May 2001). Three additional wholly owned special purpose securitization subsidiaries are Ugly Duckling Receivables Corporation, Ugly Duckling Receivables Corporation II and III, all of which are "bankruptcy remote subsidiaries". Their assets at December 31, 2000 and 1999 include both continuing and discontinued residuals in finance receivables sold and investments held in trust in the amounts of $72.3 million and $76.4 million, respectively. The assets of these two special purpose securitization subsidiaries generally would not be available to satisfy claims of creditors of the Company. During 1999 and 1997 the Company completed a total of five acquisitions. These acquisitions were 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 has been recorded as goodwill, which is being amortized over periods ranging from fifteen to twenty years. The results of operations of the acquired entities have been included in the accompanying statements of operations from the respective acquisition dates. During 1999, the Company completed two acquisitions of two portfolios and nine car sales locations. In August, 1999, the Company acquired certain assets of DCT of Ocala Corporation, including four dealerships in Orlando, Florida and a loan portfolio of approximately $15 million in exchange for approximately $12.1 million in cash. In November 1999, the Company acquired certain assets of Virginia Auto Mart, including five dealerships in Richmond, Virginia and a loan portfolio of approximately $6.8 million in exchange for approximately $3.9 million in cash and $2.7 million in debt provided by the sellers. The debt balance was zero as of December 31, 2000. The excess of the purchase price over the fair values of the net assets acquired was approximately $1.1 million. (2) Discontinued Operations During the first quarter of 1998, the Company closed its branch office network (the "Branch Offices") through which the Company purchased retail installment loans, and exited this line of business. The Company plans to complete servicing its existing portfolio. The Company recorded a pre-tax charge to discontinued operations of $15.1 million (approximately $9.2 million, net of income taxes) in 1998 for branch closing costs, loan losses and related loan servicing expenses. Loan losses and related loan servicing expenses exceeded amounts originally provided for such activities and in the fourth quarter of 1999 the Company recorded an additional charge of $2.5 million ($1.5 million net of income tax) for costs and loan losses associated with the remaining portfolio servicing activities. The Company has reclassified the accompanying consolidated balance sheets and consolidated statements of operations of the Branch Offices to Discontinued Operations. The Company's Cygnet Dealer program provided qualified used car dealers with warehouse purchase facilities and revolving lines of credit primarily secured by the dealers finance receivable portfolios. In December 1999, the Company sold its Cygnet Dealer Finance (CDF) subsidiary to an entity controlled by Ernest C. Garcia II, Chairman and principal shareholder of the Company, for approximately $37.5 million, the estimated book value of the Company's investment in CDF. As a result of the sale, CDF has been reclassified as discontinued operations for 1999 and all preceding years. The purchase price of CDF was paid through the assumption by the buyer of approximately $8.0 million of outstanding debt owed by the Company to Verde Investments Inc. (Verde), an affiliate of Mr. Garcia, a $12 million, and 10-year promissory note from the buyer to the Company that is guaranteed by Verde, and the remainder in cash. The note is subordinate to the initial financing obtained by Cygnet Dealer. Effective December 31, 1999, the Company adopted a formal plan to abandon any effort for its third party dealer operations to acquire loans or servicing rights to additional portfolios. Accordingly, the Company's Cygnet Servicing and the associated Cygnet Corporate segment also are reported as components of discontinued operations. The Company plans to complete servicing the portfolios that it currently services. No gain or loss has been recorded on the disposal of Cygnet Servicing as the Company anticipates that over the servicing period, expected to be approximately 30 months, it will realize a net gain. Page 36 The components of Net Assets of Discontinued Operations as of December31, 2000 and December 31, 1999 follow ($ in thousands): December 31,
December 31, ------------------------- 2000 1999 ------------ ------------ Finance Receivables, net........................................... $ 4,386 $ 14,837 Residuals in Finance Receivables Sold.............................. 922 3,742 Investments Held in Trust.......................................... - 1,545 Property and Equipment............................................. 364 2,114 Notes Receivable, net of Subordinated Notes Payable................ - 6,697 Servicing Receivable............................................... 3,666 6,125 Other Assets, net of Accounts Payable and Accrued Liabilities...... (5,163) (1,180) ------------------------- Net Assets of Discontinued Operations.............................. $ 4,175 $ 33,880 =========================
Following is a summary of the operating results of the Discontinued Operations for the years ended December 31, 2000, 1999, and 1998 ($ in thousands):
December 31, -------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Revenues............................................................. $ 11,161 $ 46,705 $ 33,193 Operating Expenses................................................... 10,113 38,056 40,508 Interest Expense..................................................... 1,048 7,673 7,676 ------------ ------------ ------------ Gain (Loss) before Income Tax (Benefit).............................. - 976 (14,991) Income Tax (Benefit)................................................. - 403 (5,833) ------------ ------------ ------------ Earnings (Loss) from Discontinued Operations......................... $ - $ 573 $ (9,158) ============ ============ ============
(3) Summary of Significant Accounting Policies Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 The Company provides sales finance services in connection with the sales of used cars to individuals residing in numerous metropolitan areas. The Company operated a total of 77, 72, and 56 used car dealerships (Company dealerships) at December 31, 2000, 1999, and 1998, respectively in eleven metropolitan markets in 2000 and 1999 and nine metropolitan markets in 1998. 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 Revenue from the sales of used cars is recognized upon delivery, when the sales contract is signed and the agreed-upon down payment has been received. Page 37 Interest income is recognized using the interest method. Direct loan origination costs related to loans originated at Company dealerships are deferred and charged against finance income over the life of the related installment sales loan as an adjustment of yield. The accrual of interest for accounting purposes is suspended if collection becomes doubtful, generally 90 days past due, and is resumed when the loan becomes current. Interest income also includes income on the Company's residual interests from its securitization program. Residuals in Finance Receivables Sold, Investments Held in Trust, and Gain on Sale of Loans Under the current legal structure of the securitization program, the Company sells loans to Company subsidiaries that then securitize the loans by transferring them to separate trusts that issue several classes of notes and certificates collateralized by the loans. The securitization subsidiaries then sell Class A notes or certificates (Class A obligations) to investors, and subordinate classes are retained by the Company. The Company continues to service the securitized loans. The Class A obligations have historically received investment grade ratings. To secure the payment of the Class A obligations, the securitization subsidiaries obtain an insurance policy from MBIA Insurance Corporation that guarantees payment of amounts to the holders of the Class A obligations. Additionally, a cash "reserve" account is established for the benefit of the Class A obligations holders. The reserve accounts are classified in the financial statements as Investments Held in Trust and are a component of Finance Receivables, Net. For securitization transactions closed during the third quarter of 1998 and prior, gains on sale were computed based upon the difference between the sales proceeds for the portion of finance receivables sold and the Company's recorded investment in the finance receivables sold. The Company allocated the recorded investment in the finance receivables between the portion of the finance receivables sold and the portion retained based on the relative fair values on the date of sale. The retained portion is reported as Residuals in Finance Receivables Sold and is a component of Finance Receivables, Net. Residuals in Finance Receivables Sold represents the present value of future cash flows from the underlying trust portfolios. These securitization transactions were discounted with a rate of 12% using the "cash out method". To the extent that actual cash flows on a securitization are below original estimates and differ materially from the original securitization assumptions and, in the opinion of management, those differences appear to be other than temporary in nature, the Company's residual will be adjusted, with corresponding charges against income in the period in which the adjustment is made. Such evaluations are performed on a security by security basis, for each residual interest retained by the Company. Residuals in Finance Receivables are classified as "held-to-maturity" securities in accordance with SFAS No. 115. Securtization transactions closed subsequent to September 30, 1998 have been accounted for as a collateralized borrowing in accordance with SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities "(SFAS No. 125). The loan contracts included in the transaction remain in Finance Receivables and the Class A obligations are reflected in Notes Payable. Servicing Income Under servicing agreements for all Company securitizations, servicing fees are earned and paid monthly. Servicing Income is recognized when earned for securitization transactions structured as sales. Servicing Income earned on securitization transactions structured as borrowings is eliminated in consolidation. All servicing costs are charged to expense as incurred. In the event delinquencies and/or losses on any portfolio serviced exceed specified levels, the Company may be required to transfer the servicing of the portfolio to another servicer. Finance Receivables and Allowance for Credit Losses Finance Receivables consist of contractually scheduled payments from installment sales contracts (loans) net of unearned finance charges, plus accrued interest receivable, direct loan origination costs, residuals in finance receivables sold, investments held in trust, and allowance for credit losses. 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." Direct loan origination costs represent the unamortized balance of costs incurred in the origination of loans. Page 38 An allowance for credit losses (allowance) is established by charging the provision for credit losses and the allocation of acquired allowances. For loans generated by the Company dealerships, the allowance is established by charging the provision for credit losses. To the extent that the allowance is considered insufficient to absorb anticipated credit losses, additions to the allowance are established through a charge to the provision for credit losses. The evaluation of the allowance considers such factors as the performance of each dealership's loan portfolio, the Company's historical credit losses, the overall portfolio quality and delinquency status, the value of underlying collateral, and current economic conditions that may affect the borrowers' ability to pay. Inventory Inventory consists of used vehicles held for sale, which is valued at the lower of cost or market, and repossessed vehicles, which are valued at market value. Vehicle reconditioning costs are capitalized as a component of inventory cost. The cost of used vehicles sold is determined on a specific identification basis. 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 and thirty years for buildings. Leasehold and land 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. The Company has capitalized costs related to the development of software products for internal use. Capitalization of costs begins when technological feasibility has been established and ends when the software is available for general use. Amortization is computed using the straight-line method over the estimated economic life of five years. 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 to twenty years. Post-Sale Customer Support Programs A liability for the estimated cost of post sale customer support, including car repairs and the Company's down payment back and credit card programs, is established at the time the used car is sold by charging Cost of Used Cars Sold. The liability is evaluated for adequacy through a separate analysis of the various programs' historical performance. Advertising All costs related to production and advertising are expensed in the period incurred. The company had no advertising sosts capitalized as of December 31, 2000 and 1999. Interest Expense The Company allocates interest expense to discontinued operations in accordance with guidance under EITF 87-24: "Allocation of Interest to Discontinued Operations." Thereunder, interest expense charged to discontinued operations is limited to the total of interest on debt assumed by the discontinued operations and an allocation of other consolidated interest that is not directly attributable to other continuing operations of the Company. Other consolidated interest that cannot be allocated to operations of the Company is allocated based on a uniform ratio of consolidated debt to equity. 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. Page 39 Stock Option Plan The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and subsequent years as if the fair-value-based method as defined in SFAS No. 123 had been applied. The Company uses one of the most widely used option pricing models, the Black-Scholes model (Model), for purposes of valuing its stock option grants. The Model was developed for use in estimating the fair value of traded options that 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 common stockholders 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. Impairment of Long-Lived Assets Long-Lived Assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. 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 exceeds 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. Reclassifications Certain reclassifications have been made to the prior years' consolidated financial statement amounts to conform to the current year presentation. Page 40 (4) Finance Receivables, Net A summary of Finance Receivables, Net follows ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ Contractually Scheduled Payments.................. $ 696,220 $ 492,937 Unearned Interest Income.......................... (181,274) (134,119) ------------ ------------ Principal Balances, net........................... 514,946 358,818 Accrued Interest.................................. 5,655 3,741 Loan Origination Costs............................ 7,293 5,079 ------------ ------------ Principal Balances, net........................... 527,894 367,638 Investments Held in Trust......................... 71,139 56,716 Residuals in Finance Receivables Sold............. 1,136 17,382 ------------ ------------ Finance Receivables............................... 600,169 441,736 Allowance for Credit Losses....................... (99,700) (76,150) ------------ ------------ Finance Receivables, net.......................... $ 500,469 $ 365,586 ============ ============ Allowance as % of Ending Principal Balances, net 19.4% 21.2% ============ ============
A summary of Residuals in Finance Receivables Sold follows ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ Retained Interest in Subordinated Securities (B Certificates) $ 1,097 $ 17,335 Net Interest Spreads, less Present Value Discount............ 114 6,113 Reduction for Estimated Credit Loss.......................... (75) (6,066) ------------ ------------ Residuals in Finance Receivables Sold........................ $ 1,136 $ 17,382 ============ ============ Securitized Principal Balances Outstanding................... $ 4,059 $ 65,662 ============ ============ Estimated Credit Losses as a % of Securitized Principal Balances Outstanding............... 1.8% 10.2% ============ ============
A summary of activity for the Residuals in Finance Receivables Sold follows ($ in thousands):
December 31, -------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Balance, Beginning of Year................................... $ 17,382 $ 33,331 $ 13,277 Additions.................................................... -- -- 35,435 Amortization and write-down.................................. (16,246) (15,949) (15,381) ------------ ------------ ------------ Balance, End of Year......................................... $ 1,136 $ 17,382 $ 33,331 ============ ============ ============
For securitization transactions completed during the nine month period ended September 30, 1998, net losses were estimated using total expected cumulative net losses at loan origination of approximately 29.0%, adjusted for actual cumulative net losses prior to securitization. Prepayment rates were estimated to be 1% per month of the beginning of month balance. A summary of activity for Investments Held in Trust follows ($ in thousands):
December 31, -------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Balance, Beginning of Year................................... $ 56,716 $ 20,564 $ 11,637 Initial Deposits at Securitization........................... 20,610 21,427 13,071 Additional Deposits from Trust collections................... 11,717 7,217 5,879 Collections in 23,746 15,484 3,594 Disbursements to the Company................................. (41,650) (7,976) (13,617) ------------ ------------ ------------ Balance, End of Year......................................... $ 71,139 $ 56,716 $ 20,564 ============ ============ ============
Page 41 In connection with its securitization transactions, the Company provides a credit enhancement to the investor. The Company makes an initial cash deposit, generally 4% of the initial underlying finance receivables principal balance, into an account held by the trustee (reserve account) and pledges this cash to the trust to which the finance receivables were transferred. Additional deposits from the residual cash flow (through the trustee) are made to the reserve account as necessary to attain and maintain the reserve account at a specified percentage, ranging from 8.0% to 11.0%, of the underlying finance receivables principal balances. During 2000, we made initial reserve account deposits totaling approximately $20.6 million. The required aggregate reserve account balance, based upon the targeted percentages, was approximately $55.9 million at December 31, 2000, with balances in the reserve accounts totaling approximately $50.6 million. As of December 31, 2000, the amount remaining to be funded to meet the required aggregate balance was approximately $5.3 million. (5) Allowance for Credit Losses A summary of the activity for the allowance for credit losses on finance receivables follows ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ Allowance Activity: Balance, Beginning of Period......................... $ 76,150 $ 24,777 Provision for Credit Losses.......................... 141,971 102,955 Other Allowance Activity............................. (2,666) 6,424 Net Charge Offs...................................... (115,755) (58,006) ------------ ------------ Balance, End of Period............................... $ 99,700 $ 76,150 ============ ============
(6) Note Receivable - Related Party The Note Receivable - Related Party originated from the Company's December 1999 sale of its Cygnet Dealer Finance subsidiary to Cygnet Capital Corporation, an entity controlled by Ernest C. Garcia II, Chairman and principal shareholder of the Company. The $12.0 million note from Cygnet Capital Corporation has a 10 year term, with interest payable quarterly at 9%, due December 2009, is secured by capital stock of Cygnet Capital Corporation and is guaranteed by Verde. Under the terms of the agreement, Mr. Garcia will be allowed to pay down the principal balance up to a maximum of $8 million through the redemption of Ugly Duckling common stock (valued at 98% of the average of the closing prices of the stock on NASDAQ for the ten trading days prior to the redemption) as long as Mr. Garcia's ownership interest of voting stock does not fall below 15% or result in a breach of a covenant. The balance of this loan at December 31, 2000 and 1999 was $12.0 million. (7) Property and Equipment A summary of Property and Equipment as of December 31, 2000 and 1999 follows ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ Land......................................................... $ 6,010 $ 5,431 Buildings and Leasehold Improvements......................... 19,979 14,751 Furniture and Equipment...................................... 31,920 24,086 Construction in Process...................................... 2,897 538 ------------ ------------ 60,806 44,806 Less Accumulated Depreciation and Amortization............... (22,127) (13,054) ------------ ------------ Property and Equipment, Net.................................. $ 38,679 $ 31,752 ============ ============
Page 42 (8) Notes Payable Notes Payable, Portfolio A summary of Notes Payable, Portfolio at December 31, 2000 and 1999 follows ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ Revolving Facility for $125.0 million with GE Capital, secured by substantially all assets of the Company, including $48.3 million in finance receivables $ 53,326 $ 41,717 Class A obligations issued pursuant to the Company's Securitization Program, secured by underlying pools of finance receivables and investments held in trust totaling $538.9 million at December 31, 2000 355,972 236,555 ------------ ------------ Subtotal 409,298 278,272 Less: Unamortized Loan Fees 2,747 2,498 ------------ ------------ Total $ 406,551 $ 275,774 ============ ============
The revolving facility note payable has interest payable daily at 30 day LIBOR plus 3.15% (9.78% at December 31, 2000) through June 2001. The revolving facility agreement contains various reporting and performance covenants, including the maintenance of certain ratios, limitations on additional borrowings from other sources, restrictions on certain operating activities, and a restriction on the payment of dividends under certain circumstances. At December 31, 2000, the Company was in compliance with these covenants. As part of a global decision to exit the automobile finance market, the lender supporting this revolving facility does not intend to renew the agreement, which terminates June 30, 2001. The Company has replaced the warehouse receivables portion of this facility and has received non-binding proposals for alternative financing for the inventory line of credit. The new revolving facility allows for maximum borrowings of $75 million during the period May 1 through November 30 and increases to $100 million during the period December 1 through April 30. The term of the facility is 364 days with a renewal option, upon mutual consent, for an additional 364-day period. The borrowing base consists of up to 65% of the principal balance of eligible loans originated from the sale of used cars. The lender maintains an option to adjust the advance rate on the principal to reflect changes in market conditions or portfolio performance. The interest rate on the facility is LIBOR plus 2.80%. The facility is secured with substantially all Company assets. The line is subject to several covenants, including certain financial and loan portfolio related covenants. Class A obligations have interest payable monthly at rates ranging from 5.7% to 7.3%. Monthly principal reductions on Class A obligations approximate 70% of the principal reductions on the underlying pool of finance receivable loans. Other Notes Payable A summary of Other Notes Payable at December 31, 2000 and 1999 follows ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ Note payable, secured by the capital stock of UDRC and UDRC II and certain other receivables 11,141 33,900 Othernotes payable bearing interest at rates ranging from 7.5% to 11% due through July 2003, secured by certain real property and certain property and equipment. 5,637 2,939 ------------ ------------ Subtotal 16,778 36,839 Less: Unamortized Loan Fees 199 283 ------------ ------------ Total $ 16,579 $ 36,556 ============ ============
Page 43 In 1999, the Company borrowed approximately $38.0 million from an unrelated party for a term of two years. The note called for monthly principal payments of not less than $800,000 through May 2000 and $1.7 million per month thereafter plus interest at a rate equal to LIBOR (6.64% at December 31, 2000) plus 550 basis points. The balance of this loan was $11.1 million at December 31, 2000. This loan agreement was replaced in January 2001. The new agreement has $35 million in principal due February 2003 with interest payable monthly at LIBOR plus 600 basis points and is secured by our Residuals in Finance Receivables Sold and certain Finance Receivables. As a condition to this agreement, Mr. Garcia was required to invest $7 million in the Company through a subordinated loan, which was placed in escrow as additional collateral for the $35 million senior secured loan. The $7 million is subject to pro rata reductions if certain conditions are met. Future minimum principal payments required under this note payable are $9.0 million in 2001 and $18.0 million in 2002 and the remaining $8.0 million in 2003. Future minimum principal payments required under other notes payable secured by certain real property and certain property and equipment are $0.6 million in 2001 and 2002, $0.4 million in 2003, $0.2 million in 2004, $1.5 million in 2004 and $2.4 million thereafter. Subordinated Notes Payable A summary of Subordinated Notes Payable at December 31, 2000 and 1999 follows ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ $13.5 million senior subordinated notes payable to unrelated parties, bearing interest at 15% per annum payable quarterly, principal due February 2003 and is senior to subordinated debentures $ 11,500 $15,000 $17.5 million subordinated debentures, interest at 12% per annum (approximately 18.8% effective rate) payable semi-annually, principal balance due October 23, 2003 17,479 17,479 $11.9 million subordinated debentures, interest at 11% per annum (approximately 19.7% effective rate) payable semi-annually, principal balance due April 15, 2007 11,940 - ------------ ----------- Subtotal 40,919 32,479 Less: Unamortized Loan Fees 915 605 Unamortized Discount - subordinated debentures 5,482 3,263 ------------ ----------- Total $ 34,522 $28,611 ============ ===========
In connection with the 1998 issuance of the $15 million senior subordinated notes payable, the Company issued warrants to the lenders to purchase up to 500,000 shares of the Company's common stock. The warrants were valued at approximately $900,000, have an exercise price of $10.00 per share and are exercisable at any time until the later of February 2001, or such time as the notes have been paid in full. In September 2000, the Loan Agreement, Warrants and Warrant Agreements between the Company and certain lenders under this Loan Agreement were amended to: reduce the outstanding principal balance under the Loan Agreement from $15 million to $13.5 million; require us to take out one of the lenders in the facility by paying off that lender's $1.5 million share of the loan (which occurred), and cancel the number of outstanding warrants attributable to that portion of the loan; increase the interest rate under the Loan Agreement to 15%, extend the term of the Loan Agreement to February 12, 2003; and provide for the repayment of principal and the corresponding reduction of warrants under certain terms and conditions. During 2000 the Company issued $11.9 million of subordinated debentures in exchange for 1.1 million shares of Company common stock valued at $8.0 million ("Exchange Offer"), and $114,000 of costs incurred for the Exchange Offer. The debentures are subordinate to all other Company indebtedness and contain certain call provisions at the option of the Company. The debentures were issued at a premium of approximately $3.9 million in excess of the market value of the shares tendered, which will be amortized as interest expense over the life of the debentures. In connection with this exchange offer, Mr. Garcia and entities affiliated with Mr. Garcia exchanged 294,500 shares and owns approximately $3,020,000 in 2000 Exchange Debt. During 1998 the Company issued $17.5 million of subordinated debentures in exchange for 2.7 million shares of Company common stock valued at $14.0 million ("Exchange Offer"), including $370,000 of costs incurred for the Exchange Offer. The debentures are subordinate to all other Company indebtedness and contain certain call provisions at the option of the Company. The debentures were issued at a premium of approximately $3.9 million in excess of the market value of the shares tendered, which will be amortized as interest expense over the life of the debentures. Page 44 Interest expense related to the subordinated note payable with Verde totaled zero, $.9 million and $1.1 million during the years ended December 31, 2000, 1999 and 1998, respectively. As the Verde note was assumed by CDF, interest expense for all three years is reclassified as a component of interest expense within operating results of Discontinued Operations. (9) Income Taxes Income taxes from continuing operations totaled $6.2 million, $6.0 million, and $2.4 million for years ended December 31, 2000, 1999 and 1998, respectively (an effective tax rate of 40.6%, 40.9%, and 40.5%, respectively). Reconciliation between taxes computed at the federal statutory rate of 35% for 2000 and 1999 and 34% in 1998 respectively at the effective tax rate on earnings before income taxes are as follows ($ in thousands):
December 31, ---------------------------------- 2000 1999 1998 -------- -------- -------- Computed "Expected" Income Taxes ............................... $ 5,344 $ 5,140 $ 1,974 State Income Taxes, Net of Federal Effect....................... 758 785 385 Other, Net...................................................... 103 75 (8) -------- -------- -------- $ 6,205 $ 6,000 $ 2,351 ======== ======== ========
Components of income taxes (benefit) for the years ended December 31, 2000, 1999 and 1998 follow ($ in thousands):
Current Deferred Total 2000: Federal..................................................... $ 4,979 $ 40 $ 5,039 State....................................................... 990 176 1,166 -------- -------- -------- 5,969 216 6,205 Discontinued operations..................................... (583) 583 -- --------- -------- -------- $ 5,406 $ 799 $ 6,205 ========= ======== ======== 1999: Federal..................................................... $ 2,839 $ 1,953 $ 4,792 State....................................................... 1,403 (195) 1,208 --------- -------- -------- 4,242 1,758 6,000 Discontinued operations..................................... 683 (280) 403 --------- -------- -------- $ 4,925 $ 1,478 $ 6,403 ========= ======== ======== 1998: Federal..................................................... $ (188) $ 1,955 $ 1,767 State....................................................... 29 555 584 -------- -------- -------- (159) 2,510 2,351 Discontinued operations..................................... 21 (5,854) (5,833) -------- -------- -------- $ (138) $ (3,344) $ (3,482) ======== ======== ========
Page 45 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2000 and 1999 are presented below ($ in thousands):
December 31, ------------------------- 2000 1999 ------------ ------------ Deferred Tax Assets: Finance Receivables, Principally Due to the Allowance for Credit Losses.. $ 4,981 $ 2,655 Inventory................................................................ (1,922) 1,413 Federal and State Income Tax Net Operating Loss Carryforwards............ 1,244 979 Discontinued Operations Liability........................................ -- 583 Accrued Post Sale Support................................................ 864 949 Deferred Rent............................................................ 600 312 Other.................................................................... 1,527 741 -------- -------- Total Gross Deferred Tax Assets.......................................... 7,294 7,632 Less: Valuation Allowance................................................ (1,000) (735) -------- -------- Net Deferred Tax Assets............................................... 6,294 6,897 -------- -------- Deferred Tax Liabilities: Software Development Costs............................................... (2,218) (2,607) Loan Origination Fees.................................................... (2,979) (2,075) 401K..................................................................... (449) (449) Other.................................................................... (300) (619) -------- -------- Total Gross Deferred Tax Liabilities..........,.......................... (5,946) (5,750) -------- -------- Net Deferred Tax Asset (Liability).................................... $ 348 $ 1,147 ======== ========
There was an increase of $265,000 in the Valuation Allowance for the year ended December 31, 2000 and no change for 1999. In assessing the ability to realize the Deferred Tax Assets, management considers whether it is more likely than not that some portion or all of the Deferred Tax Assets will not be realized. The ultimate realization of Deferred Tax Assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the reversal of Deferred Tax Liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the Deferred Tax Assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the established valuation allowance at December 31, 2000. Page 46 (10) Servicing Pursuant to the Company's securitization program that began in 1996, the Company securitizes loan portfolios with servicing retained. The Company services the securitized portfolios for a monthly fee ranging from .25% to .33% (generally, 3.0% to 4.0% per annum) of the beginning of month principal balance of the serviced portfolios. The Company recognized servicing income of $1.9 million, $7.5 million, and $15.5 million in the years ended December 31, 2000, 1999 and 1998, respectively. Servicing income is primarily a result of fees earned on Company securitizations where the loan portfolios were sold with servicing retained. As the Company currently structures its securitization transactions as borrowings, it is expected that servicing income will reduce to zero in future periods. The Company has not established any servicing assets or liabilities in connection with its securitizations as the revenues from contractually specified servicing fees and other ancillary sources have been just adequate to compensate the Company for its servicing responsibilities. Pursuant to the terms of the various servicing agreements, the serviced portfolios are subject to certain performance criteria. In the event the serviced portfolios do not satisfy such criteria, the servicing agreements contain various remedies up to and including the removal of servicing rights from the Company. (11) Lease Commitments The Company leases used car sales facilities, loan servicing centers, offices, and certain office equipment generally from unrelated entities under various operating leases that expire through December 2020. The leases require monthly rental payments and contain various renewal options from one to ten years. In certain instances, the Company is also responsible for occupancy and maintenance costs, including real estate taxes, insurance, and utility costs. Rent expense totaled $14.2 million, $13.0 million and $11.4 million for the years ended December 31, 2000, 1999, and 1998, respectively. A summary of future minimum lease payments required under noncancelable operating leases with remaining lease terms in excess of one year as of December 31, 2000 follows ($ in thousands): Total 2000.......................................$11,972 2001.........................................9,548 2002.........................................7,686 2003.........................................6,091 2004.........................................5,284 Thereafter..................................48,583 ------- Total......................................$89,164 ======= In 1998 the Company sold 17 properties to an unrelated investment company under a sale-leaseback agreement. In December 1999, Verde acquired these 17 properties at a 10.0% discount for approximately $24.6 million. The total amount paid to Verde under these leases in 2000 was $3.3 million. The Company had previously acquired the option to purchase these properties at Verde's purchase price under certain conditions. As consideration for the $7 million subordinated loan from Verde, the Company released these purchase options. (12) Stockholders' Equity In January 2001, as consideration for the $7 million loan from Verde, the Company agreed to issue to Verde, the right to acquire warrants on July 25, 2001 subject to certain conditions. The warrants would allow for the purchase of up to 1,500,000 shares of the Company's common stock. The warrants are exercisable at $4.50 per share through July 25, 2011. During 2000, the Company acquired approximately 1.5 million shares of Treasury Stock for approximately $11.0 million under its Stock Repurchase Program. During 2000, the Company acquired approximately 1.1 million shares of Company Common Stock with a value of approximately $8.0 million in the Exchange Offer. During 1999, the Company acquired approximately 1.0 million shares of Treasury Stock for approximately $5.8 million under its Stock Repurchase Program. During 1998, the Company acquired approximately 2.7 million shares of Company Common Stock with a value of approximately $14.0 million in the Exchange Offer. The Company also acquired 75,000 shares of Treasury Stock for approximately $535,000 under its Stock Repurchase Program. Page 47 During 1998, the Company issued 50,000 warrants to a third party to purchase Company common stock at $12.50 per share. The warrants expired February 2001. During 1998, the Company issued warrants, valued at approximately $900,000, to purchase 500,000 shares of Company common stock at $10 per share in connection with senior subordinated note payable agreements. The warrants are exercisable at any time until the later of (1) February 2001, or (2) when the notes are paid in full. During 1998, the Company issued 325,000 warrants to a third party to purchase Company common stock at $20.00 per share. The warrants expired April 1, 2001. During 1997, the Company issued warrants for the right to purchase 389,800 shares of the Company's common stock for $20.00 per share exercisable through February 2000. The warrants were valued at approximately $612,000. These warrants remained outstanding at December 31, 1998 but were subsequently repurchased during 1999. In addition, warrants to acquire 121,023 shares of the Company's common stock at $6.75 per share and 174,000 shares of the Company's common stock at $9.45 per share were outstanding at December 31, 2000. During 1997, the Company completed a private placement of 5,075,500 shares of common stock for a total of approximately $88.7 million cash, net of stock issuance costs. The registration of the shares sold in the private placement was effective in April 1997. During 1996, the Company completed two public offerings in which it issued a total of 7,245,000 shares of common stock for approximately $79.4 million cash, net of stock issuance costs. (13) Earnings (Loss) Per Share The Company paid no preferred stock dividends in 2000, 1999 or 1998. A summary of the reconciliation from basic earnings (loss) per share to diluted earnings (loss) per share for the years ended December 31, 2000, 1999, and 1998 follows ($ in thousands except for per share amounts):
---------------------------------- 2000 1999 1998 -------- -------- -------- Earnings from Continuing Operations $ 9,063 $ 8,687 $ 3,455 ======== ======== ======== Net Earnings (Loss) 9,063 9,260 (5,703) ======== ======== ======== Basic Earnings Per Share From Continuing Operations 0.67 0.58 0.19 ======== ======== ======== Diluted Earnings Per Share From Continuing Operations 0.67 0.57 0.19 ======== ======== ======== Basic Earnings (Loss) Per Share 0.67 0.61 (0.32) ======== ======== ======== Diluted Earnings (Loss) Per Share 0.67 0.60 (0.31) ======== ======== ======== Basic EPS-Weighted Average Shares Outstanding 13,481 15,093 18,082 Effect of Diluted Securities: Warrants - 7 41 Stock Options 146 229 282 -------- -------- -------- Dilutive EPS-Weighted Average Shares Outstanding 13,627 15,329 18,405 ======== ======== ======== Warrants Not Included in Diluted EPS Since Antidilutive 1,245 1,049 1,389 ======== ======== ======== Stock Options Not Included in Diluted EPS Since Antidilutive 843 610 1,470 ======== ======== ========
(14) Stock Option Plan In June, 1995, the Company adopted a long-term incentive plan (Stock Option Plan) under which it has set aside 1,800,000 shares of common stock to be granted to employees. Options are to vest over a period to be determined by the Board of Directors upon grant and will generally expire 6 to 10 years after the date of grant. The options generally vest over a period of 5 years. In August 1998, the Company's stockholders approved an executive incentive stock option plan (Executive Plan). The Company has reserved 800,000 shares of its common stock for issuance. Options granted under the plan expire ten years after the grant date and vest 20% per year upon completion of each year of service after the date of grant (beginning 1 year after the grant date) subject to meeting additional vesting hurdles that are based on the trading price of the Company's stock and/or the achievement of certain internal performance measures. Even if these additional vesting hurdles are not met, the options will fully vest 7 years after the date of grant. Page 48 A summary of the aforementioned stock plan activity including the number and weighted average price per share(Average Price)follows:
Stock Option Plan Executive Plan ========================================================= Average Average Number Price Number Price ------------ ------------ ------------ ------------ Balance, December 31, 1998............. 1,075,000 $ 6.80 500,000 $ 8.25 Granted............................. 312,000 6.81 300,000 5.56 Forfeited........................... (178,000) 9.25 (120,000) 7.35 Exercised........................... (50,000) 1.56 -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1999............. 1,159,000 6.56 680,000 7.22 ------------ ------------ ------------ ------------ Granted............................. 113,000 6.35 -- -- Forfeited........................... (196,000) 6.73 (70,000) 8.25 Exercised........................... (108,000) 4.20 -- -- ------------ ------------ ------------ ------------ Balance, December 31, 2000............. 968,000 $ 6.50 610,000 $ 7.10 ============ ============ ============ ============ Number of shares exercisable........... 454,000 160,000 ============ ============ ============ ============
At December 31, 2000, there were 439,000 and 190,000 additional shares available for grant under the Stock Option Plan and Executive Plan, respectively. The per share weighted-average fair value of stock options granted during 2000, 1999 and 1998 was $3.09, $3.88 and $3.22, respectively, on the date of grant using the Black-Scholes option-pricing model. The following are the weighted-average assumptions: 2000 -- expected dividend yield 0%, risk-free interest rate of 4.64%, expected volatility of 48.9%, and an expected life of 5 years; 1999 -- expected dividend yield 0%, risk-free interest rate of 5.67%, expected volatility of 41.2%, and an expected life of 5 years; 1998 -- expected dividend yield 0%, risk-free interest rate of 5.25%, expected volatility of 50.0%, and an expected life of 5 years During 1998, the Board of Directors approved separate plans to reprice the Company's outstanding stock options under the Stock Option Plan, one in January 1998 and a second in November 1998. The forfeited options had exercise prices ranging from $9.75 to $20.75 and were repriced at $9.75 or $5.13 per share, the fair market value on the date of the respective repricings. Approximately 391,000 options were issued under the repricing program. The vesting period was not affected for the options repriced under the January 1998 repricing plan. However, the vesting period started over on the repricing date for the options issued under the November 1998 repricing plan. The Company applies APB Opinion 25 in accounting for its Plans, and accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below ($ in thousands except per share data):
2000 1999 1998 ---------- ---------- ---------- Pro Forma Earnings from Continuing Operations Available to Common Stockholders................ $ 8,345 $ 7,603 $ 2,468 Pro forma Net Earnings (Loss) Available to Earnings (Loss) per Share-- Basic: Continuing Operations Pro Forma................. $ 0.62 $ 0.50 $ 0.14 Net Earnings (Loss) Pro Forma................... $ 0.62 $ 0.54 $ (0.37) Earnings (Loss) per Share-- Diluted: Continuing Operations Pro Forma................. $ 0.61 $ 0.50 $ 0.14 Net Earnings (Loss) Pro Forma................... $ 0.61 $ 0.53 $ (0.36)
Page 49 A summary of stock options granted at December 31, 2000 follows:
Options Outstanding Options Exercisable ========================================================================================= Number Weighted-Avg Weighted-Avg Number Weighted-Avg Range of Outstanding Remaining Exercise Exercisable Exercise Exercise Prices at 12/31/00 Contractual Life Price at 12/31/00 Price - ------------------------------ ----------- ---------------- ------------ ----------- ------------ $1.72 to $4.94................ 159,000 2.1 years $ 2.94 141,000 $ 2.69 $5.00 to $6.75................ 613,000 6.9 years 5.61 162,000 5.90 $7.25 to $8.25................ 757,000 7.3 years 8.21 290,000 8.20 $8.44 to $18.63............... 49,000 6.9 years 10.18 21,000 11.16 - ------------------------------ ----------- ---------------- ------------ ----------- ------------ 1,578,000 $ 6.73 614,000 $ 6.43 =========== ============ =========== ============
(15) Commitments and Contingencies In connection with its securitization transactions, the Company provides a credit enhancement to the investor. The Company maintains reserve accounts at a specified percentage, ranging from 8.0% to 11.0%, of the underlying finance receivables' principal balance. In the event that the cash flows generated by the finance receivables are insufficient to pay obligations of the trust, including principal or interest due to certificate holders or expenses of the trust, the trustee will draw funds from the reserve account as necessary to pay the obligations of the trust. The reserve account must be maintained at a specified percentage of the principal balances of the finance receivables held by the trust, which can be increased in the event delinquencies or losses exceed specified levels. If the reserve account exceeds the specified percentage, the trustee will release the excess cash to the Company from the pledged reserve account. Except for releases in this manner, the cash in the reserve account is restricted from use by the Company. The Company's discontinued operations have entered into servicing agreements with two companies that have filed and subsequently emerged from bankruptcy and continue to operate under their approved plans of reorganization. Under the terms of the respective servicing agreements and approved plans of reorganization, once certain creditors of the bankrupt companies have been paid in full, the Company is entitled to certain incentive compensation in excess of the servicing fees earned to date. Under the terms of one of the agreements, the Company is scheduled to receive 17.5% of all collections of the serviced portfolio once the specified creditors have been paid in full. Under the terms of the second agreement, the Company is scheduled to receive the first $3.25 million in collections once the specified creditors have been paid in full and 15% thereafter. The Company is required to issue up to 150,000 warrants to the extent the Company receives the $3.25 million and in addition will be required to issue 75,000 warrants for each $1.0 million in incentive fee income after collection of the $3.25 million. As of December 31, 2000, management estimates that the incentive compensation could range from $7.0 to $8.0 million under these agreements. For the year ended December 31, 2000, results of operations for discontinued operations include $6.1 million in fee income with regard to these incentives. On July 18, 1997, the Company filed a Form S-3 registration statement for the purpose of registering up to $200 million of its debt securities in one or more series at prices and on terms to be determined at the time of sale. The registration statement has been declared effective by the Securities and Exchange Commission and may be available for future debt offerings. There can be no assurance, however, that the Company will be able to use this registration statement to sell debt or other securities. 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 consolidated financial statements for losses, if any, that might result from the ultimate disposition of these matters. (16) Retirement Plan The Company has established qualified 401(k) retirement plans (defined contribution plans) which became effective on October 1, 1995. The plans, as amended, cover 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. Page 50 The Company will match from 10% to 25% of the participants' contributions with Company common stock. 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. Compensation expense related to these plans totaled $566,000, $194,000, and $121,000 during the years ended December 31, 2000, 1999, and 1998, respectively. (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, 2000 and 1999, 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 due to the liquidity of these instruments. Finance Receivables, Residuals in Finance Receivables Sold, Investments Held in Trust, and Notes Receivable - The carrying amount is estimated to be the fair value due to the relatively short maturity and repayment terms of the portfolio as compared to similar instruments. Accounts Payable, Accrued Expenses, and Notes Payable - The carrying amount approximates fair value because of the short maturity of these instruments. The terms of the Company's notes payable approximate the terms in the market place at which they could be replaced. Therefore, the fair market value approximates the carrying value of these financial instruments. Subordinated Notes Payable - The terms of the Company's subordinated notes payable approximate the terms in the market place at which they could be replaced. Therefore, the fair value approximates the carrying value of these financial instruments. (18) Subsequent Events Subsequent to year-end, the Company decided to close two of its collection centers in an effort to reduce operating expenses and improve the effectiveness of the collection process. As part of this move, the 31-60 day collection process, previously located at the collection centers, will be transferred to the dealerships. The cost of payroll and severance related expenses is estimated to be approximately $600,000. Additional costs related to the remaining lease obligations of the properties is estimated be between $500,000 and $1 million. On April 11, 2001, as previously announced, Mr. Ernest Garcia, II, made an offer to the board of directors to purchase all of the outstanding shares of the Company's common stock not already held by him. Under the terms of the offer, the holders of the outstanding shares of common stock would receive $7.00 per share, $2.00 in cash and $5.00 in subordinated debentures from the acquiring company. The subordinated debentures would have interest payable at 10%, interest only payments semiannually until maturity and a ten year term. Mr. Garcia's offer also states that Greg Sullivan, chief executive officer and president of the Company, would receive an option to purchase a 20% interest in the acquiring company. The Company anticipates that the board of directors will establish a special transaction committee, composed of disinterested directors, to evaluate and make a recommendation to the full board. (19) Business Segments Operating results and other financial data are presented for the principal business segments of the Company for the years ended December 31, 2000, 1999, and 1998, respectively. The Company has three distinct business segments. These consist of retail car sales operations (Retail Operations), the income generated from the finance receivables generated at the Company dealerships (Portfolio Operations), and corporate and other operations (Corporate Operations). In computing operating profit by business segment, the following items were considered in the Corporate Operations category: portions of administrative expenses, interest expense and other items not considered direct operating expenses. Identifiable assets by business segment are those assets used in each segment of Company operations. Page 51 A summary of operating results and other information, by business segment, for years ended December 31, 2000, 1999 and 1998 follows ($ in thousands):
Retail Portfolio Corporate Total --------- ---------- --------- --------- December 31, 2000: Sales of Used Cars $ 483,282 $ - $ - $ 483,282 Less: Cost of Cars Sold 268,248 - - 268,248 Provision for Credit Losses 99,356 42,615 - 141,971 --------- ---------- --------- --------- 115,678 (42,615) - 73,063 --------- ---------- --------- --------- Net Interest Income - 92,587 434 93,021 Servicing and Other Income - 1,855 - 1,855 Income before Operating Expenses 115,678 51,827 434 167,939 Operating Expenses: Selling and Marketing 28,756 - - 28,756 General and Administrative 56,373 28,860 20,154 105,387 Depreciation and Amortization 4,677 1,128 3,260 9,065 --------- ---------- --------- --------- 89,806 29,988 23,414 143,208 --------- ---------- --------- --------- Income (loss) before Other Interest Expense $ 25,872 $ 21,839 $ (22,980) $ 24,731 ========= ========== ========= ========= Capital Expenditures $ 9,751 $ 1,227 $ 8,663 $ 19,641 Identifiable Assets $ 104,743 $ 514,614 $ 28,589 $ 647,946 December 31, 1999: Sales of Used Cars $ 389,908 $ - $ - $ 389,908 Less: Cost of Cars Sold 219,037 - - 219,037 Provision for Credit Losses 80,627 22,328 - 102,955 --------- ---------- --------- --------- 90,244 (22,328) - 67,916 Net Interest Income - 53,521 456 53,977 Servicing and Other Income - 7,472 - 7,472 --------- ---------- --------- --------- Income before Operating Expenses 90,244 38,665 456 129,365 --------- ---------- --------- --------- Operating Expenses: Selling and Marketing 23,132 - - 23,132 General and Administrative 44,770 19,809 16,991 81,570 Depreciation and Amortization 3,588 1,141 2,219 6,948 --------- ---------- --------- --------- 71,490 20,950 19,210 111,650 --------- ---------- --------- --------- Income (loss) before Other Interest Expense $ 18,754 $ 17,715 $ (18,754) $ 17,715 ========= ========== ========= ========= Capital Expenditures $ 5,175 $ 897 $ 2,902 $ 8,974 Identifiable Assets $ 100,183 $ 398,437 $ 4,211 $ 502,831 December 31, 1998: Sales of Used Cars $ 287,618 $ - $ - $ 287,618 Less: Cost of Cars Sold 165,282 - - 165,282 Provision for Credit Losses 59,770 5,548 - 65,318 --------- ---------- --------- --------- 62,566 (5,548 - 57,018 --------- ---------- --------- --------- Net Interest Income - 14,086 341 14,427 Gain on Sale of Loans - 12,093 - 12,093 Servicing and Other Income - 15,481 - 15,481 Income before Operating Expenses 62,566 36,112 341 99,019 Operating Expenses: Selling and Marketing 18,246 - - 18,246 General and Administrative 35,765 18,519 15,610 69,894 Depreciation and Amortization 2,582 1,333 997 4,912 --------- ---------- --------- --------- 56,593 19,852 16,607 93,052 --------- ---------- --------- --------- Income (loss) before Other Interest Expense $ 5,973 $ 16,260 (16,266) $ 5,967 ========= ========== ========= ========= Capital Expenditures $ 19,176 $ 1,297 $ 2,352 $ 22,825 Identifiable Assets $ 75,366 $ 145,880 $ 9,038 $ 230,284
Page 52 (19) Quarterly Financial Data -- unaudited A summary of the quarterly data for the years ended December 31, 2000, and 1999 follows ($ in thousands):
First Second Third Fourth Quarter Quarter Quarter Quarter Total --------------- --------------- --------------- --------------- --------------- 2000: Total Revenue $ 159,124 $ 151,984 $ 158,380 $ 135,368 $ 604,856 ========= ========= ========= ========= ========= Income before Operating Expenses 46,580 45,358 44,210 31,791 167,939 ========= ========= ========= ========= ========= Operating Expenses 36,688 35,435 37,303 33,782 143,208 ========= ========= ========= ========= ========= Income (Loss) before Other Interest Expense 9,892 9,923 6,907 (1,991) 24,731 ========= ========= ========= ========= ========= Earnings (Loss) from Continuing Operations $ 4,483 $ 4,348 $ 2,683 $ (2,451) $ 9,063 ========= ========= ========= ========= ========= Net Earnings (Loss) $ 4,483 $ 4,348 $ 2,683 $ (2,451) $ 9,063 ========= ========= ========= ========= ========= Basic Earnings (Loss) Per Share from Continuing Operations $ 0.30 $ 0.31 $ 0.21 $ (0.20) $ 0.67 ========= ========= ========= ========= ========= Diluted Earnings (Loss) Per Share from Continuing Operations $ 0.30 $ 0.31 $ 0.21 $ (0.20) $ 0.67 ========= ========= ========= ========= ========= Basic Earnings (Loss) Per Share $ 0.30 $ 0.31 $ 0.21 $ (0.20) $ 0.67 ========= ========= ========= ========= ========= Diluted Earnings (Loss) Per Share $ 0.30 $ 0.31 $ 0.21 $ (0.20) $ 0.67 ========= ========= ========= ========= ========= 1999: Total Revenue $ 119,715 $ 115,927 $ 124,883 $ 105,429 $ 465,954 ========= ========= ========= ========= ========= Income before Operating Expenses 29,869 31,377 35,516 32,603 129,365 ========= ========= ========= ========= ========= Operating Expenses 28,970 27,708 28,080 26,892 111,650 ========= ========= ========= ========= ========= Income before Other Interest Expense 899 3,669 7,436 5,711 ========= ========= ========= ========= ========= Earnings from Continuing Operations $ 619 $ 1,792 $ 3,657 $ 2,619 $ 8,687 ========= ========= ========= ========= ========= Earnings (Loss) from Discontinued Operations (196) (324) 525 568 573 ========= ========= ========= ========= ========= Net Earnings $ 423 $ 1,468 $ 4,182 $ 3,187 $ 9,260 ========= ========= ========= ========= ========= Basic Earnings Per Share from Continuing Operations $ 0.04 $ 0.12 $ 0.24 $ 0.18 $ 0.58 ========= ========= ========= ========= ========= Diluted Earnings Per Share from Continuing Operations $ 0.04 $ 0.12 $ 0.24 $ 0.17 $ 0.57 ========= ========= ========= ========= ========= Basic Earnings Per Share $ 0.03 $ 0.10 $ 0.28 $ 0.21 $ 0.61 ========= ========= ========= ========= ========= Diluted Earnings Per Share $ 0.03 $ 0.10 $ 0.28 $ 0.21 $ 0.60 ========= ========= ========= ========= =========
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Company has had no disagreements with its independent certified public accountants in regard to accounting and financial disclosure and has not changed its independent accountants during the two most recent fiscal years. Page 53 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item pertaining to executive officers of Ugly Duckling is set forth above in Part I of this Form 10-K under the caption, "Executive Officers of the Registrant," and is incorporated by reference into this Item. Information concerning directors of the registrant and persons nominated to become directors is included in the following table. The table gives the name, age, principal occupation and business experience of our directors. Also, included for each director is the year in which he became a director for us, his positions and offices with us, family relationships, other directorships and certain other biographical information. ==========================================================================================================================
Director Name Age Business Experience Since - ---------------------------------- -------- ------------------------------------------------------------------ ----------- Ernest C. Garcia II 43 Chairman of the Board of Ugly Duckling since its founding in 1996 1992. Mr. Garcia also served as Chief Executive Officer until July 1999 and as President from 1992 to 1996. Since 1991, Mr. Garcia has served as President of Verde Investments, Inc. (Verde), a real estate investment corporation wholly owned by Mr. Garcia. See "Change of Control Arrangements," and "Certain Relationships and Related Transactions." - ---------------------------------- -------- ------------------------------------------------------------------ ----------- Christopher D. Jennings 47 Co-Chief Executive Officer of GlobalEuroNet Group, Inc., a 1996 company focused on investment and merchant banking opportunities in technology, life sciences and other knowledge based industries, beginning in May 2000. From April 1998 until May 2000, he was a Managing Director of Friedman, Billings, Ramsey & Co., Inc., an investment banking firm. Mr. Jennings served as a Managing Director of Cruttenden Roth Incorporated (Cruttenden Roth), also an investment banking firm, from 1995 to April 1998. From 1992 to 1994, Mr. Jennings served as a Managing Director at the investment banking firm, Sutro & Co. From 1989 to 1992, Mr. Jennings served as a 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. Mr. Jennings is also a director of Global Netfinancial.com, Inc. Mr. Jennings is a member of the Compensation and Audit Committees of the board. See "Certain Relationships and Related Transactions" and "Security Ownership of Certain Beneficial Owners and Management." - ---------------------------------- -------- ----------------------------------------------------------------- ----------- John N. MacDonough 57 Former Chairman and Chief Executive Officer of Miller Brewing 1996 Company, a brewer and marketer of beer, from 1993 until April of 1999. Mr. MacDonough previously served from 1992 to 1993 as Miller Brewing's President and Chief Operating Officer. Prior to 1992, he was employed in various positions at Anheuser Busch, Inc., also a brewer and marketer of beer. Mr. MacDonough is a director of FSbuy.com, a company offering an e-commerce solution for the foodservice industry. Mr. MacDonough is also a director of Marshall & Ilsley Bank. He is married to the sister of Mr. Sullivan. - ---------------------------------- -------- ----------------------------------------------------------------- ----------- Gregory B. Sullivan 42 Ugly Duckling Corporation's President since March 1996 and 1998 Chief Executive Officer since July 1999. From 1995 through February 1996, Mr. Sullivan was a consultant for us. He is an inactive member of the State Bar of Arizona. Mr. Sullivan's sister is married to Mr. MacDonough. - ---------------------------------- -------- ----------------------------------------------------------------- ----------- Frank P. Willey 47 President of Fidelity National Financial, Inc., a title 1996 insurance underwriter, since 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. and CKE Restaurants, Inc., an operator of various quick-service restaurant chains. He is a member of the Compensation and Audit Committees of the board. - ---------------------------------- -------- ----------------------------------------------------------------- ----------- Gregory S. Kilfoyle 54 Founder and Managing Member of Kilfoyle, Bruner & Kettell, 2001 LLC (dba KBK Real Estate Advisors), a real estate brokerage and consulting firm, since 1996. From 1986 to 1996, Mr. Kilfoyle was a Senior Vice President of Marketing at Colliers Iliff Thorn, a commercial real estate brokerage firm. Prior to his real estate career, Mr. Kilfoyle also spent ten (10) years in the computer industry as a financial and sales executive managing a closely held corporation based in California. He is a member of the Audit Committee of the board. =========================================================================================================================
Page 54 ITEM 11 -- EXECUTIVE COMPENSATION The table below sets forth information concerning the annual and long-term compensation for services rendered in all capacities for us during the three fiscal years ended December 31, 2000 of individuals serving as our Executive Officers during 2000.
============================================================================================================================= Annual Compensation Long-Term Compensation Awards ------------ ------------ Securities Other Restricted Under- Annual Stock Lying All Other Year Salary Bonus Compensation Award(s) Options Compensation Name and Principal Position ($) ($) ($) (#)(1) ($)(2) ========================================= ======== =========== =========== ============ ============ ============ ========== Gregory B. Sullivan 2000 $250,000 $74,580 $8,896 (3) -- -- $2,124 Presiden and Chief Executive Officer -------- ----------- ----------- ------------ ------------ ------------ ---------- 1999 $200,000 $60,000 $4,850 (3) -- 125,000 $688 -------- ----------- ----------- ------------ ------------ ------------ ---------- 1998 $208,308 -- $1,156 (3) -- 500,000 $833 -------- ----------- ----------- ------------ ------------ ------------ ---------- - ----------------------------------------- -------- ----------- ----------- ------------ ------------ ------------ ---------- Steven T. Darak 2000 $197,308 $52,294 $4,141 (4) -- -- -- Senior Vice President, and -------- ----------- ----------- ------------ ------------ ------------ ---------- Chief Financial Officer 1999 $175,000 $49,950 $870 (4) -- 35,000 -- -------- ----------- ----------- ------------ ------------ ------------ ---------- 1998 $180,961 -- $1,750 (4) -- 65,001(5) -- -------- ----------- ----------- ------------ ------------ ------------ ---------- - ----------------------------------------- -------- ----------- ----------- ------------ ------------ ------------ ---------- Steven A. Tesdahl (6) 2000 $226,816 $18,536 -- -- -- $1,438 Senior Vice President, and -------- ----------- ----------- ------------ ------------ ------------ ---------- Chief Information Officer 1999 $198,941 $11,658 -- -- -- $220 -------- ----------- ----------- ------------ ------------ ------------ ---------- 1998 $187,115 -- -- -- 75,000 (7) $1,000 -------- ----------- ----------- ------------ ------------ ------------ ---------- - ----------------------------------------- -------- ----------- ----------- ------------ ------------ ------------ ---------- Jon Ehlinger 2000 $147,462 $33,363 -- -- -- $1,879 Vice President, -------- ----------- ----------- ------------ ------------ ------------ ---------- General Counsel and Secretary 1999 $135,076 $17,081 -- -- 10,000 $172 -------- ----------- ----------- ------------ ------------ ------------ ---------- 1998 $56,307 -- -- -- 10,000 -- ============================================================================================================================ (1) The amounts shown in this column represent stock options granted either pursuant to the Incentive Plan or the Executive Plan. For the Incentive Plan, options generally vest over a 5-year period, with 20% of the options becoming exercisable on each successive anniversary of the date of grant. For the Executive Plan, options vest over a 5-year period, with 20% becoming exercisable on each successive anniversary of the date of grant, but subject to additional vesting hurdles based on the market price of our common stock as traded on Nasdaq and /or internal financial performance targets. Regardless of the preceding vesting schedule being met for the Executive Plan options, such options also fully vest at a set date in the future (i.e., "cliff vest"). See "Compensation of Executive Officers, Benefits and Related Matters - Long Term Incentive Plan" and " --- 1998 Executive Incentive Plan" for a discussion of the Incentive Plan and Executive Plan, respectively. (2) The amounts shown in this column include the dollar value of 401(k) plan contributions in Ugly Duckling common stock made by Ugly Duckling for the benefit of our Named Executive Officers. The stock related portion of this amount only includes vested stock as of December 31, 2000 and the value is calculated with a share price of $3.94, the closing price of the stock as of December 31, 2000 (as reported by Nasdaq). (3) These amounts include $8,896 for Mr. Sullivan's personal use of a company car for 2000, $4,850 for 1999 and $1,156 for a portion of 1998. (4) These amounts include an $4,141 for Mr. Darak's personal use of an auto for 2000, $870 for car allowance in 1999 and a $1,750 car allowance during 1998. Page 55 (5) Includes 15,001 options that were cancelled and reissued on November 17, 1998. (6) Mr. Tesdahl received a grant of restricted stock upon his initial hiring in September 1997. The grant was pursuant to his employment agreement with us and was made outside of the Incentive Plan and the Executive Plan. The award was for approximately 7,692 shares at $13.00 per share (based on the closing price of our stock on the grant date as reported by Nasdaq). Under Mr. Tesdahl's employment agreement, these shares vested 100% in January 1998. At December 31, 2000, Mr. Tesdahl retained 4,565 shares from the restricted stock award, valued at $31,407 (based on the December 31, 2000 closing price of our stock of $3.94 per share as reported by Nasdaq). (7) Includes 50,000 options that were cancelled and reissued on November 17, 1998.
OPTION GRANTS IN LAST FISCAL YEAR There were no option grants for the fiscal year ended December 31, 2000 to any of our Named Executive Officers. RECENT OPTION GRANTS IN 2001 On February 19, 2001, the Board and Compensation Committee approved a grant of 5,000 options under the Long Term Incentive Plan to each independent director at an exercise price of $4.03 per share. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The table below sets forth information with respect to option exercises and the number and value of options outstanding at December 31, 2000 held by our Named Executive Officers. Generally, we have not issued any other forms of stock based awards. =========================== ================ ================= ================================== ==================================
Number of Securities Value Of Unexercised Underlying Options At In-The-Money Options At Fiscal Year End (#)(1) Fiscal Year End ($)(2) ---------------------------------- ---------------------------------- ----------------- ---------------- ----------------- ---------------- Shares Acquired On Value Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ---------------- - --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ---------------- Ernest C. Garcia II -- -- 20,000 80,000 -- -- - --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ---------------- Gregory B. Sullivan -- -- 336,000 430,000 $156,600.00 -- - --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ---------------- Steven T. Darak -- -- 33,998 76,003 -- -- - --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ---------------- Jon D. Ehlinger -- -- 6,000 14,000 -- -- - --------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- ---------------- Steven A. Tesdahl -- -- 30,000 45,000 -- -- =========================== ================ ================= ================= ================ ================= ================ Page 56 (1) For the Incentive Plan, generally options vest over a 5-year period, with 20% of the options becoming exercisable on each successive anniversary of the date of grant. Under the Executive Plan, options vest over a 5-year period, with 20% of the options becoming exercisable on each successive anniversary of the date of grant, but subject to additional vesting hurdles based on the market price of our common stock as traded on Nasdaq and/or certain internal target financial performance measures. In any event, such options fully vest on January 15, 2005 or March 2, 2006 (i.e., "cliff vesting"), depending upon their issuance date. See "Compensation of Executive Officers, Benefits and Related Matters- Long Term Incentive Plan" and " --- 1998 Executive Incentive Plan" for additional information on the Incentive Plan and Executive Plan, respectively. (2) In-the-money 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 our common stock on December 31, 2000. The market price of our common stock on December 31, 2000 was $3.94 per share based on the closing price of our 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 the common stock 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 our common stock on March 30, 2001 was $43.50 per share.
LONG TERM INCENTIVE PLAN In June 1995, our stockholders approved the Long Term Incentive Plan (Incentive Plan). We believe that our Incentive Plan promotes the success and enhances the value of Ugly Duckling by (1) linking the personal interests of participants to those of our stockholders, and (2) providing participants with an incentive for outstanding performance. Under the Incentive Plan, we may grant various types of awards to our employees, consultants and advisors, including: incentive stock options (ISOs), nonqualified stock options (NQSOs), performance shares, restricted stock, and performance-based awards. The Incentive Plan is administered by our board or a board committee (i.e., Compensation Committee), whose members qualify as non-employee directors and outside directors. The Compensation Committee has the authority to administer the plan, including the power to determine - eligibility, type and number of awards to be granted, and 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). Thus far, we have only granted ISOs and NQSOs under this plan. Generally, these stock options have been subject to vesting over a 5-year period, with 20% of the options becoming exercisable by the holder on each successive anniversary date of the grant. The options generally expire 10 years after the grant date. The total number of shares of our common stock initially available for awards under the Incentive Plan was 1,800,000. The exercise price of all options granted under the plan in the past has equaled or exceeded the fair market value of our common stock on the date of grant. The plan has a "change of control" provision that is summarized below. See "Compensation of Executive Officers, Benefits and Related Matters -- Change of Control Arrangements." In 2000, the Compensation Committee granted, subject to certain conditions, approximately 113,000 options under the Incentive Plan. At March 15, 2001, we had granted options under the plan to purchase approximately 1,381,624 shares of our common stock (net of canceled and lapsed grants) to several of our employees, advisors and consultants, of which approximately 967,721 were outstanding. Also at March 15, 2001, there were approximately 468,376 of our shares that remained available for grant under the plan. Page 57 1998 EXECUTIVE INCENTIVE PLAN The 1998 Executive Incentive Plan (Executive Plan) was approved by our stockholders at our 1998 annual meeting. The plan became effective as of January 1998. Under the Executive Plan, Ugly Duckling may grant ISOs, NQSOs, SARs, performance shares, restricted stock, and performance-based awards to its employees, consultants and advisors. Although the Executive Plan allows broad based awards to be granted and thus is similar to the Incentive Plan, we currently intend to utilize the Executive Plan primarily for performance-based awards to our executives and key employees as noted previously. The total number of shares of our common stock initially available for awards under the Executive Plan was 800,000. The exercise price of all options granted under the Executive Plan in the past has been equal to the fair market value of our common stock on the date of grant. The plan is administered by the Compensation Committee and has a "change of control" provision that is summarized below. See "-- Change of Control Arrangements." At March 15, 2001, we had granted options under the plan to purchase 610,000 shares of our common stock (net of canceled and lapsed grants) to various officers of Ugly Duckling, of which 610,000 are still outstanding. There were 190,000 shares that remained available for grant under the plan as of March 15, 2001. Other than as summarized and noted above, the Executive Plan is similar to the Incentive Plan as described herein. 401 (K) PLANS Under our 401(k) plan, eligible employees may direct that we withhold a portion of their compensation, up to a legally established maximum, and contribute this amount to their accounts. We place all 401(k) plan contributions in our 401(k) plan funds. Participants may direct the investment of their account balances among mutual or investment funds available under the plan. The 401(k) plan provides a matching contribution of Ugly Duckling stock of up to 50% for up to the first six percent of a participant's pre-tax contributions. The matching contribution vesting and percentage match are based upon years of service with one hundred percent vesting and fifty percent matching at five years. Amounts contributed to participant accounts under the 401(k) plan and any earnings or interest accrued on the participant accounts are generally not subject to federal income tax until distributed to the participant and, except in limited cases, the participant may not withdraw such amounts until death, retirement or termination of employment. CONTRACTS WITH DIRECTORS AND EXECUTIVE OFFICERS AND SEVERANCE ARRANGEMENTS Steven A. Tesdahl On August 6, 1997, we entered into an employment agreement with Mr. Tesdahl that was amended as of May 21, 1998 and March 1, 2001. Mr. Tesdahl is Senior Vice President and Chief Information Officer of Ugly Duckling. The agreement, as amended, provides for no minimum or maximum term of employment. But it does provide for: (1) beginning in 2001, an annual base salary of $215,000 per year, subject to annual review by our Chief Executive Officer; (2) eligibility for bonuses each year as determined by our Chief Executive Officer/President and subject to Compensation Committee approval, but beginning in 2001 in no event will the bonus be less than $20,000; (3) an initial stock option grant to acquire 100,000 shares of our common stock under the Incentive Plan, with terms and conditions consistent with the plan's general terms; (3) a grant of restricted stock valued at $100,000 on the approximate effective date of Mr. Tesdahl's employment with us, which fully vested as of January 15, 1998; and (4) certain other benefits. The agreement has a "change of control" provision that provides for certain rights and benefits to Mr. Tesdahl upon such an event occurring and either: he terminates his employment with us within 12 months after the change of control; or we terminate him without cause within 90 days prior to the change of control or within 12 months after the event. If these events occur, Mr. Tesdahl will receive a termination fee equal to 200% of his then current salary, and at the time of the change of control, his initial option will fully vest. The agreement adopts the Incentive Plan's definition of a "change of control" and adds an additional change of control event if neither Ernest C. Garcia II nor Gregory B. Sullivan is Chief Executive Officer of Ugly Duckling. See " -- Change of Control Arrangements." Page 58 CHANGE OF CONTROL ARRANGEMENTS Long Term Incentive Plan The term "change of control" is defined in the Incentive Plan and is summarized in the next paragraph. Upon a change of control of Ugly Duckling the Compensation Committee, in its discretion, will either -- cause all outstanding options and awards to be fully vested and exercisable and all restrictions to lapse, allowing participants the right to exercise options and awards before the change of control occurs (which event would otherwise terminate participants' options and awards); or cause all outstanding options and awards to terminate, if the surviving or resulting corporation agrees to assume the options and awards on terms that substantially preserve the rights and benefits of outstanding options and awards. Under the Incentive Plan, a "change of control" occurs upon any of the following events: a merger or consolidation of Ugly Duckling with another corporation where we are not the surviving entity or where our stock would be converted into cash, securities or other property, other than a merger in which our stockholders before the merger have the same proportionate ownership after the merger; with certain exceptions, any sale, lease, or other transfer of more than 40% of our assets or our earning power; our stockholders approve a plan of complete liquidation or dissolution; any person (other than a current stockholder or any employee benefit plan) becoming the beneficial owner of 20% or more of our common stock; or during any 2-year period, the persons who are on our board at the beginning of such period and any new person whose election or nomination was approved by two-thirds of such directors cease to constitute a majority of the persons serving on our board. 1998 Executive Incentive Plan The Executive Plan provides that in the event of a "change of control" of Ugly Duckling, all outstanding options and awards will be fully vested and exercisable and all restrictions will lapse unless the surviving or resulting corporation agrees to assume the options and awards on terms that substantially preserve the rights and benefits of outstanding options and awards. The Executive Plan and the Incentive Plan have the same definition for the term "change of control." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION There are no compensation committee interlocks and no officer or former officer of ours has ever been a member of our board's Compensation Committee. See "Certain Relationships and Related Transactions." COMPENSATION OF OUR DIRECTORS AND THE DIRECTOR INCENTIVE PLAN During 2000, we paid our independent directors: an annual retainer of $7,500 per year; beginning with the April 2000 meeting, $2,000 for physical attendance at meetings of the board and $1,000 for physical attendance at meetings of committees of the board, and beginning with the April 2000 meeting, $1,000 for their attendance by telephone at meetings of the board and $500 for telephonic attendance at committee meetings. We also reimburse these directors for reasonable travel expenses for their attendance at these meetings. In addition, under Ugly Ducklings' Director Incentive Plan (Director Plan), upon initial appointment or initial election to the board, each of our independent directors receives Ugly Duckling common stock valued at $30,000 (Director Stock). Director Stock generally vests in increments of 1/3 over a three-year period. In 2000 and 2001, each of our independent directors was also granted 5,000 options under the Long Term Incentive Plan. These options were 100% vested upon issuance. We do not compensate Mr. Garcia or directors who are also officers of Ugly Duckling for their service as directors and such directors are not eligible to participate in our Director Plan. The board's compensation will remain the same in 2001, except for an increase in the annual retainer to $20,000. Page 59 ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning ownership of common stock of the Company by certain beneficial owners and management is incorporated in the table below. The table gives information as of March 15, 2001, unless another date is indicated, concerning: each beneficial owner of more than 5% of our common stock; beneficial ownership by all our directors and all our Named Executive Officers; and beneficial ownership by all our directors and executive officers as a group. The number of shares beneficially owned by each entity, person, director or executive officer is determined under rules of the Securities and Exchange Commission, and the information does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power and also any shares which the individual has the right to acquire as of May 30, 2001 (60 days after March 30, 2001) through the exercise of any stock option, warrant or other right. Unless otherwise indicated, each person has sole investment and voting power (or shares these powers with his spouse) with respect to the shares set forth in the following table. Other than as set forth below, we know of no other 5% owner of our common stock as of March 30, 2001. BENEFICIAL OWNERSHIP TABLE ==================================================================================================================================
Amount and Nature of Percent of Title of Class Name of Beneficial Owner, Address and Other Information(1) Beneficial Ownership(#)(2)(3)(4) Class(2)(3)(4) - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Ernest C. Garcia II, Chairman of the Board and 5% Owner, 4,500,000 Direct indirect ownerships consists of 2,003,500 shares held by 2,367,100 Indirect Verde, 18,800 shares held by Verde Reinsurance Corporation, 40,000 Vested Options and 344,800 shares held by Cygnet Capital Corporation, all ---------- corporations wholly owned by Mr. Garcia. 6,907,100 Total 56.01% - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Dimensional Fund Advisors, Inc., 5% owner based on a 903,900 Direct schedule 13G filing made February 2, 2001. According to 0 Indirect this schedule 13G, Dimensional has sole voting and 0 Vested Options dispositive power over 903,900 shares of our common stock. ---------- 1299 Ocean Avenue, 11th Floor 903,300 Total 7.35% Santa Monica, CA 90401 - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Gregory B. Sullivan, Director, President and Chief Executive 59,800 Direct Officer 0 Indirect 386,000 Vested Options 3.52% ---------- 445,800 Total - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Steven T. Darak, Senior Vice President and Chief Financial 140,000 Direct Officer 0 Indirect 33,998 Vested Options 1.41% ---------- 173,998 Total - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Steven A. Tesdahl, Senior Vice President and Chief 14,565 Direct Information Officer 0 Indirect 30,000 Vested Options * ---------- 44,565 Total - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Christopher D. Jennings, (5) Director, indirect ownership 6,444 Direct consists of a warrant to purchase 19,833 shares of our 19,833 Indirect common stock held on behalf of Mr. Jennings by Cruttenden 15,000 Vested Options * Roth, an investment banking firm and previous employer of ---------- Mr. Jennings. The warrants are convertible into our common 41,277 Total stock at any time through June 21, 2001 at an exercise price of $9.45 per share and are fully vested - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Page 60 Common Stock John N. MacDonough, (5) Director, indirect ownership 4,444 Direct consists of shares of our common stock acquired by Mr. 100 Indirect MacDonough's son. 15,000 Vested Options * ---------- 19,544 Total - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Frank P. Willey, (5)(6) Director 27,144 Direct 0 Indirect 15,000 Vested Options 1.54% ---------- 42,144 Total - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Jon D. Ehlinger, Vice President, Secretary and General 2,000 Direct Counsel 0 Indirect 7,500 Vested Options * ---------- 9,500 Total - ------------------ -------------------------------------------------------------- -------------------------------- -------------- Common Stock Gregory Kilfoyle, Director, indirect ownership consists of 0 Direct shares held in the G.S. Kilfoyle P.C. Defined Benefit 600 Indirect Pension Plan, Mr. and Mrs. Kilfoyle, co-trustees. 5,000 Vested Options * ---------- 5,600 Total - ------------------ -------------------------------------------------------------- -------------------------------- -------------- - ------------------ -------------------------------------------------------------- -------------------------------- -------------- All directors and executive officers as a group (9 persons) 7,689,528 62.56% ================================================================================================================================== * Represents less than one percent of the outstanding common stock. (1) Unless otherwise noted, the address of each of the listed beneficial owners of our common stock is 2525 East Camelback Road, Suite 500, Phoenix, Arizona 85016. (2) "Vested Options" are options that the holder can exercise as of May 30, 2001. These options were issued under either the Incentive Plan or the Executive Plan and their related terms and conditions, including vesting schedules. See "Compensation of Executive Officers, Benefits and Related Matters - Long Term Incentive Plan" and " - 1998 Executive Incentive Plan." (3) Shares of our common stock that are subject to options, warrants or other rights which are currently exercisable or exercisable within 60 days (i.e., as of May 30, 2001) are treated as outstanding for purposes of computing the percentage of the person holding the option, warrant or other right, but are not treated as outstanding for computing the percentage of any other person. Except as indicated in footnote (4) below, the amounts and percentages are based upon 12,291,909 shares of our common stock outstanding as of March 30, 2001, net of shares we hold in our treasury. (4) Information in the table that is described as based on Schedule 13G and/or amendment filings was provided to us by the beneficial owner effective as of December 31, 2000, including the amount of securities beneficially owned, but not including the percentage of class, which has been recalculated based on the number of shares outstanding as of March 30, 2001. We make no representation as to the accuracy or completeness of the information provided in these Schedule 13Gs and/or amendments or the information in the beneficial ownership table, which is based solely on the filings. (5) The total and direct ownership for these independent board members includes 4,444 shares of our common stock that we granted under the Director Plan. We granted and issued shares having a value of $30,000 on or about the date of grant (i.e., 4,444 shares of our common stock) to each independent board member upon his appointment or election to our board in June 1996. Under the Director Plan, these shares generally vest over a 3-year period at an annual rate of 33%, beginning on the first anniversary date after the grant date (June 1996). (6) Possible indirect ownership of shares of Ugly Duckling acquired by Fidelity National Financial, Inc. Mr. Willey disclaims beneficial ownership of such shares.
Page 61 CHAIRMAN'S INTEREST IN TAKING US PRIVATE On October 3, 2000, our chairman, Mr. Garcia, made an offer to the board of directors to purchase all of the outstanding shares of our common stock not already held by him. Under the terms of the offer, the holders of our outstanding shares of common stock would have received $8.50 per share, $2.50 in cash and $6.00 in subordinated indebtedness of the acquiring company. Greg Sullivan, our Chief Executive Officer and President, had an arrangement with Mr. Garcia under which he would purchase or receive an option to purchase a 20% interest in the acquiring company. On October 27th, after discussions with us, our board of directors and the special transaction committee of the board, Mr. Garcia withdrew his offer. In his subsequent filings with the Securities and Exchange Commission, Mr. Garcia has expressed a continuing interest in acquiring all of our outstanding common stock. On April 16, 2001, Mr. Garcia made an additional offer to purchase our outstanding common stock. See Footnote (18) of Notes to Consolidated Financial Statements included herin for a description of this offer. Since November 1, 2000, Mr. Garcia, or affiliates of Mr. Garcia, have purchased 2,367,100 shares of our common stock and now Mr. Garcia owns, directly and indirectly, over 56% of our outstanding shares of common stock. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In the most recent fiscal year, we have maintained business relationships and engaged in certain transactions with the affiliated companies and parties described below. Our plan is that any significant future transactions between us and our affiliated entities, executive officers, directors, or significant stockholders will receive approval of a majority of our independent directors, will be fair and generally will be on terms no less favorable to us than we could obtain from non-affiliated parties. On December 30, 1999, we sold our Cygnet Dealer Finance division (CDF) to an entity controlled by Mr. Garcia, for an amount equal to the book value of CDF, approximately $37.5 million. This transaction occurred after several attempts by us to sell or finance CDF, including the retention and effort of an investment banking firm to sell CDF in the first quarter of 1999. The purchase price of CDF was paid through the assumption by the buyer of approximately $8 million of outstanding debt owed by us to Verde; a $12 million, ten-year promissory note from the buyer to us that is guaranteed by Verde; and the remainder in cash. We also received warrants to acquire up to 50% of the buyer for $1, exercisable beginning two years from close through five years after the note is paid in full. The warrants would be forfeited in the event that the $12 million note is repaid in full within one year. The percentage of the buyer purchasable under the warrants would be reduced to 25% if the note were reduced to $4 million within two years and to 10% if the warrant were paid in full within two years. As part of the transaction, our board of directors requested and received a fairness opinion from an investment banking firm and the transaction was reviewed by the special transaction committee of our board. As of the date hereof, the full $12 million note is still outstanding. In April of 2000, we completed an exchange offer under which we offered to our shareholders the exchange of our 11% Subordinated Debentures due in 2007 ("2000 Exchange Debt") for common stock at $11 per share (our common stock was trading at or around $7.37 per share on the closing date of the exchange offer, April 13, 2000). In connection with this exchange offer, Mr. Garcia made a commitment to us to exchange a minimum number of his shares for the subordinated debt issued by us. The following entities affiliated with Mr. Garcia participated in the exchange offer and received 2000 Exchange Debt: The Garcia Family Foundation tendered 136,500 shares and owns $1,501,500 of 2000 Exchange Debt and Verde Investments, Inc. tendered 158,000 shares and owns $1,518,000 of 2000 Exchange Debt. Beginning in March of 1998, we sold 17 properties for a total price approximately $27.4 million to an unrelated investment company, and leased back the properties for an additional term of 20 years. We have the right to extend the leases for up to an additional 20 years. In December of 1999, Verde acquired these properties at a 10% discount (approximately $24.6 million). We pay monthly rents of approximately one-twelfth of 11% of the purchase price plus all occupancy costs and taxes. The agreement calls for annual increases in monthly rent in accordance with increases in the Consumer Price Index. In November 2000, Verde purchased a certain property located in Phoenix, Arizona for approximately $2.25 million, and simultaneously leased the property to us pursuant to among other terms the following: 20 year term which expires December 31, 2020; rent payable monthly with 5% annual rent adjustments; triple net lease; and four five-year options to renew. We intend to build a new headquarters at this location over the next several months, and obtain permanent financing upon completion of construction. The total amount paid to Verde under these leases in 2000 was $3,271,089. Although we originally had the right to repurchase these properties from Verde at its cost, we relinquished this right as part of the consideration for the $7 million Verde Loan to us described below. Page 62 In January 2001, Verde made a $7 million loan to us pursuant to, among other terms, the following: loan matures on December 31, 2003; interest at LIBOR plus 600 basis points; issuance of 1,500,000 warrants subject to certain conditions and a vesting schedule; secured by a second lien position on our residual interests in our securitizations; grant of options to purchase certain of our real estate; and the release of our options to buy real estate leased to us by Verde. In addition, see the discussion on page __ relative to Mr. Garcia's offer to take us private in 2000 and his continuing interest in doing so. Since November of 2000, Mr. Garcia has acquired indirectly through affiliated entities 2,367,100 shares of our outstanding common stock and now holds approximately 56% of our outstanding common stock. We believe that it is important for our directors and officers to be stakeholders in Ugly Duckling. With this in mind, in September 1997, our board approved a directors' and officers' stock repurchase program (D&O Stock Purchase Program). The program provided loans of up to $1.0 million in total to our directors and senior officers to assist them in purchasing our common stock on the open market from time-to-time. The D&O Stock Purchase Program provides for unsecured loans, with interest at 10% per year, and interest and principal payments due at the end of each loan term. These loans were amended to make them due on demand by Ugly Duckling effective in 1999. During 1997, senior officers purchased 50,000 shares of common stock under the program and we advanced $500,000 for these purchases. During 1998, senior officers purchased an additional 40,000 shares of common stock under the program and we advanced approximately $400,000 for these purchases. Through March 30, 2001, there were no additional purchases of common stock under the program. In addition, there have been no principal payments or minimal interest payments made to Ugly Duckling since the program began. The table that follows provides additional information on the D&O Stock Purchase Program for each of our executive officers through March 30, 2001. During December 2000 and January 2001, we made loans to Mr. Darak, our Senior Vice President and Chief Financial Officer. The loans were employee advances. The indebtedness is secured by Mr. Darak's Ugly Duckling Corporation common stock, with interest at 10% per year, and principal and interest due upon demand. There have been no principal or interest payments made by Mr. Darak to us since the inception of these loans, or on the August 1999, September 1998 or October 1998 loans made to Mr. Darak. The table that follows provides additional information on outstanding loans to our Named Executive Officers. =============================================== ==================== ============= =========================== ================
Date debt Principal Balance Of Debt Number of Shares Name & Title of Executive Officer Nature of Debt incurred At 12/31/00 Purchased (#) - ----------------------------------------------- -------------------- ------------- --------------------------- ---------------- - ----------------------------------------------- -------------------- ------------- --------------------------- ---------------- Gregory B. Sullivan, CEO, President, D&O Stock Purchase 11/97 & 5/98 $198,126 20,000 & Director Program - ----------------------------------------------- -------------------- ------------- --------------------------- ---------------- Steven T. Darak, Sr. VP & CFO D&O Stock Purchase 11/97 $100,000 10,000 Program - ----------------------------------------------- -------------------- ------------- --------------------------- ---------------- Steven A. Tesdahl, Sr. VP & CIO of Ugly D&O Stock Purchase 5/98 $98,126 10,000 Duckling Program Car Sales - ----------------------------------------------- -------------------- ------------- --------------------------- ---------------- - ----------------------------------------------- -------------------- ------------- --------------------------- ---------------- TOTAL for D&O Stock Purchase Program D&O Stock Purchase 11/97 & 5/98 $696,252 70,000 Program - ----------------------------------------------- -------------------- ------------- --------------------------- ---------------- Steven T. Darak, Sr. VP & CFO Employee Advances 9/98, 10/98 $747,940 -- 8/99, 12/00, 01/01 =============================================== ==================== ============= =========================== ================
From April 1998 to May 2000, Mr. Jennings, one of our directors, was a managing director of Friedman, Billings, Ramsey & Co., Inc., which makes a market in our common stock and from time to time may provide investment banking and other services to us. PART IV ITEM 14 -- EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Consolidated Financial Statements. The following consolidated financial statements of Ugly Duckling Corporation are filed as part of this Form 10-K. Page Independent Auditors' Report................................................. 31 Consolidated Financial Statements and Notes thereto of Ugly Duckling Corporation: Consolidated Balance Sheets December 31, 2000 and 1999................................................. 32 Consolidated Statements of Operations-- for the years ended December 31, 2000, 1999, 1998.............................................. 33 Consolidated Statements of Stockholders' Equity-- for the years ended December 31, 2000, 1999 and 1998........................................... 34 Consolidated Statements of Cash Flows-- for the years ended December 31, 2000, 1999 and 1998........................................... 35 Notes to Consolidated Financial Statements................................... 36 All schedules have been omitted because they are not applicable, not required, or the information has been disclosed in the consolidated financial statements and related notes thereto or otherwise in this Form 10-K Report. (b) Reports on Form 8-K. During the fourth quarter of 2000, the Company filed two reports on Form 8-K. The first report on Form 8-K, dated October 5, 2000 and filed October 10, 2000, reported Ugly Duckling's receipt of the offer to purchase the Company by Mr. Ernest C. Garcia II, the Company's Chairman and largest shareholder and filed as an exhibit to the Form 8-K, a press release dated October 5, 2000 entitled "Ugly Duckling Confirms Receipt of Offer to Purchase Company from Chairman/Largest Shareholder". The second report on Form 8-K dated and filed October 30, 2000, reported the withdrawal of the offer to purchase the Company from Mr. Ernest C. Garcia, II, the Company's Chairman and largest shareholder. Filed as an exhibit to the Form 8-K was a press release dated October 27, 2000 entitled "Ugly Duckling Reports Withdrawal of the Chairman's Offer to Purchase Outstanding Common Stock". (c) Exhibits. EXHIBIT NUMBER DESCRIPTION 3.1 Certificate of Incorporation of the Registrant Amended and Restated as of May 15, 1997(11) 3.2 Bylaws of the Registrant (20) 4.1 Certificate of Incorporation of the Registrant (filed as Exhibit 3.1) 4.2 Form of Certificate representing Common Stock (1) 4.3 Form of Warrant issued to Cruttenden Roth Incorporated as Representative of the several underwriters (1) 4.4 Form of Warrant issued to SunAmerica Life Insurance Company (1) 4.5 Form of 12% Senior Subordinated Note between Registrant and Kayne Anderson related entities, each as a lender, executed in February 1998 (7) 4.6 Warrant Agreement dated as of February 12, 1998 between Registrant and each of the Kayne Anderson related lenders named therein (7) 4.7 Form of Warrant issued to Kayne Anderson related entities issued in February 1998 (7) 4.7(a) Form of Amendment to Warrant Agreement dated June 5, 2000 and Warrant Agreements between the Registrant and Foremost Insurance Company, Glacier Water Servies, Inc., Kayne Anderson Non-Traditional Investments, L.P., dated as of June 5, 2000, (w/ form of warrant agreement attached as Exhibit A, thereto) (23) 4.7(b) Second Amendment to Warrant Agreement dated February 12, 1998 between Registrant and each of the Kayne Anderson related lenders named therein, dated as of September 30, 2000. (24) 4.8 Warrant Agreement between the Registrant and Reliance Acceptance Corporation and Harris Trust Company of California, as warrant agent, dated as of February 9, 1998 (w/form of warrant attached as Exhibit A thereto) (10) 4.9 Certificate of Designation of the Preferred Stock (par value $.001 per share) (filed as part of Exhibit 3.1) (11) 4.10 Indenture dated as of October 15, 1998 between Registrant and Harris Trust and Savings Bank, as Trustee ("Harris")("Indenture") (13) 4.10(a) First Supplemental Indenture dated as of October 15, 1998 between Registrant and Harris (13) 4.10(b) Form of 12% Subordinated Debenture due 2003 (14) 4.10(c) Second Supplemental Indenture dated April 15, 2000 between Registrant and Harris** 4.10(d) Form of 11% Subordinated Debenture due 2007.(filed as part of Exhibit 4.10(c)). 4.11 Form of Warrant Agreement between the Registrant and Verde Investments, Inc., in relation to the $7 million Loan Agreement between the Registrant and Verde Investments Inc., dated as of January 11, 2001.** 10.1 Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and General Electric Capital Corporation ("GECC") (5) 10.1(a) Assumption and Amendment Agreement between the Registrant and GECC (2) 10.1(b) Amendment No. 1 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and GECC dated December 22, 1997 (8) 10.1(c) Letter Agreement to amend the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and GECC dated as of October 20, 1997(10) 10.1(d) Letter agreement to amend the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and GECC, dated as of March 25, 1998 (10) 10.1(e) Amendment No. 2 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and GECC (12) 10.1(f) Amendment No. 3 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between Registrant and GECC (14) 10.1(g) Amendment to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated March 25, 1999 regarding Year 2000 Date Change (15) 10.1(h) Amendment No. 4 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated June 30, 1999 (17) 10.1(i) Amendment No. 5 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated August 16, 1999 (18) 10.1(j) Amendment No. 6 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated August 27, 1999 (18) 10.1(k) Amendment No. 7 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated as of November 30, 1999 (21) 10.1(l) Amendment No. 8 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated as of December 7, 1999 (21) 10.1(m) Amendment No. 9 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated as of December 8, 1999 (21) 10.1(n) Amendment No. 10 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated as of March 6, 2000 (21) 10.1(o) Amendment No. 11 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated as of June 30, 2000.** 10.1(p) Amendment No. 12 to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement between GECC and Registrant dated as of April 13, 2001.** 10.2 Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(a) First Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(b) Second Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(c) Third Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(d) Fourth Amendment to Note Purchase Agreement between the Registrant and SunAmerica Life Insurance Company (1) 10.2(e) Commitment Letter entered into between the Registrant and SunAmerica Life Insurance Company (1) 10.2(f) Letter Agreement regarding Note Conversion between the Registrant and SunAmerica Life Insurance Company (1) 10.3 Amended and Restated Registration Rights Agreement between the Registrant and SunAmerica Life Insurance Company(1) 10.4* Restated (as of March 14, 1997) Ugly Duckling Corporation Long-Term Incentive Plan (3) 10.4(a)*Amended and Restated Long Term Incentive Plan (as of January 15, 1998) (12) 10.5* Employment Agreement between the Registrant and Ernest C. Garcia II (1) 10.5(a)*Amendment to Employment Agreement between the Registrant and Ernest C. Garcia II (14) 10.6* Employment Agreement between the Registrant and Steven A. Tesdahl (5) 10.6(a)*Modification of Terms of Employment between Registrant and Steven A. Tesdahl (11) 10.7 Form of Indemnity Agreement between the Registrant and its directors and officers (16) 10.8* Ugly Duckling Corporation 1996 Director Incentive Plan (1) 10.9 Portfolio Servicing Agreement among Registrant, Kars-Yes Financial, Inc. and certain other parties, dated as of September 15, 1997 (4) 10.9(a) Subservicing Agreement among Registrant, Kars-Yes Financial, Inc., and certain other parties, dated as of September 15, 1997 (4) 10.10 Binding Agreement to Propose and Support Modified Plan Agreement dated as of December 15, 1997 among the Registrant, FMAC and the Official Committee of Unsecured Creditors of FMAC (6) 10.11 FMAC Guaranty and Stock Pledge Agreement among FMAC, Registrant and certain banks (9) 10.12 Contribution Agreement between Registrant and FMAC (8) 10.13 Indemnification Agreement between the Company and FMAC (9)) 10.14 Loan Agreement dated as of February 12, 1998 between the Registrant and each of the Kayne Anderson related Lenders named therein (7) 10.14(a)Amendment to Loan Agreement between the Registrant and each of the Kayne Anderson related lenders named therein, dated September 30, 1999 (18) 10.15 Credit and Security Agreement between Registrant and First Merchants Acceptance Corp., dated as of July 17, 1997 (10) 10.15(a)First Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of January 21, 1998 (10) 10.15(b)Second Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of April 1, 1998 (10) 10.15(c)Third Amendment to Credit and Security Agreement between Registrant and FMAC, dated as of August 2, 1999 (18) 10.16 Service Agreement among Reliance Acceptance Corporation, Registrant, Bank America Business Credit, Inc. and certain other parties dated as of February 9, 1998 (12) 10.17 Agreement of Understanding among Reliance Acceptance Group, Inc., Reliance Acceptance Corporation and Registrant, dated as of February 9, 1998 (12) 10.18 Purchase and Sale-Leaseback Agreement and Joint Escrow Instructions between Champion Acceptance Corporation, Ugly Duckling Car Sales, Inc., Ugly Duckling Car Sales New Mexico, Inc., Ugly Duckling Car Sales Florida, Inc. and Ugly Duckling Car Sales Texas, LLP, date as of May 13, 1998 (11) 10.19 Agreement of Purchase and Sale of Assets made as of July 31, 1998, by and among Cygnet Financial Services, Inc. and Mountain Parks Financial Services, Inc. (12) 10.20* 1998 Executive Incentive Plan (12) 10.21 $38 Million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated May 14, 1999 (w/form of note and guaranty attached) (16) 10.21(a)First Amendment to $38 million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated November 12, 1999. (22) 10.21(b)Second Amendment to $38 million Senior Secured Loan Agreement between CIBC Inc., SunAmerica, etc. and the Registrant dated February 15, 2000. (22) 10.21(c)Amendment and waiver letter agreement to Senior Secured Loan Agreement dated May 14, 1999 between CIBC Inc., SunAmerica, etc. and the Registrant dated October 12, 2000. (24) 10.21(d)Stock Pledge Agreement among certain lenders, Harris and the Registrant dated May 14, 1999 (16) 10.22 Stock Purchase Agreement, by and among Ugly Duckling Car Sales & Finance Corporation, Ugly Duckling Finance Corporation ("UDFC"), Cygnet Dealer Finance, Inc.("CDF"), and Cygnet Capital Corporation ("CCC"), dated as of December 30, 1999 (19) 10.22(a)Promissory Note dated December 30, 1999 from CCC to UDFC (19) 10.22(b)Pledge Agreement dated December 30, 1999 from CCC to UDFC (19) 10.22(c)Verde Guaranty dated December 30, 1999 (19) 10.22(d)CDF Guaranty dated December 30, 1999 (19) 10.22(e)Warrant dated December 30, 1999 from CCC to UDFC (19) 10.23 Letter agreement between the beneficiaries and/or representatives of the estate of Don Addink and the Registrant dated as of September 14, 2000. (24) 10.24 Property lease agreement, by and among the Registrant and Verde Investments, Inc., dated as of November, 2000.** 10.24(a)Form of Lease Agreement, by and among the Registrant and Verde Investments, Inc.(25)** 10.24(b)Schedule of Lease Agreements, by and among the Registrant and Verde Investments, Inc.** 10.25 Options agreement for purchase and sale of commercial property, by and among the Registrant and Verde Investments, Inc., dated as of November XX, 2000.** 10.26 $35 million Senior Secured Loan Agreement between the Registrant and BNY Midwest Trust Company, dated as of January 11, 2001.** 10.26(a)Cash Collateral Agreement between the Registrant and BYN Midwest Trust Company, dated as of January 11, 2001.** 10.26(b)$7 million Loan Agreement between the Registrant and Verde Investments Inc., dated as of January 11, 2001.** 10.26(c)$7 million Promissory Note between the Registrant and Verde Investments Inc., dated as of January 11, 2001.** 10.26(d)Subordination and Standstill Agreement between the Registrant, Verde Investments Inc., and BYN Midwest Trust Company, dated as of January 11, 2001.** 10.26(e)Stock Pledge Agreement between the Registrant and Verde Investments, Inc dated as of January 11, 2001.** 10.26(f)Stock Pledge Agreement between the Registrant and BNY Midwest Trust Company dated as of January 11, 2001.** 10.27 Offer Letter to Purchase All Registrant Outstanding Stock by Ernest Garcia II, dated as of April 16, 2001.** 10.28 Master Loan and Security Agreement between the Registrant and Greenwich Capital Financial Products, Inc., dated as of April 13, 2001.** 10.28(a)Intercreditor Agreement between the Registrant, Greenwich Capital Financial Products, Inc. and General Electric Capital Corporation, dated as of April 13, 2001.** 10.28(b)Custodial Agreement between the Registrant and Greenwich Capital Financial Products, Inc., dated as of April 13, 2001.** 11 Earnings (Loss) per Share Computation (see Note 13 to Notes to Consolidated Financial Statements) 21 List of Subsidiaries (Filed as Schedule 4 to Exhibit 10.28) 23.1 Consent of KPMG LLP** 24.1 Special Power of Attorney for Ernest C. Garcia II ** 24.2 Special Power of Attorney for C. Jennings** 24.3 Special Power of Attorney for J. MacDonough** 24.4 Special Power of Attorney for F. Willey** 24.5 Special Power of Attorney for Gregory Sullivan** 24.6 Special Power of Attorney for Gregory S. Kilfoyle** 27 Financial Data Schedules for the year ending December 31, 2000** - --------------------------- [FN] * Management contract or compensatory plan, contract or arrangement. ** Filed with this Form 10-K. (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-3998), effective June 18, 1996. (2) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-13755), effective October 30, 1996. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 14, 1997. (4) Incorporated by reference to the Company's Current Report on Form 8-K, filed October 3, 1997. (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 1997. (6) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 2, 1998. (7) Incorporated by reference to the Company's Current Report on Form 8-K, filed February 20, 1998. (8) Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-42973) effective February 11, 1998. (9) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 31, 1998. (10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 15, 1998. (11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 10, 1998. (12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 13, 1998. (13) Incorporated by reference to the Company's Form T-3 Application for Qualification of Indenture under the Trust Indenture Act of 1939, filed November 20, 1998 (File No. 022-22415) effective December 21, 1998. (14) Incorporated by reference to the Company's Annual Report on Form 10-K, filed March 30, 1999. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 14, 1999. (16) Incorporated by reference to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-42973) filed July 9, 1999, effective August 2, 1999. (17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 16, 1999. (18) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 15, 1999. (19) Incorporated by reference to the Company's Current Report on Form 8-K, filed January 5, 2000. (20) Incorporated by reference to the Company's Form T-3 Application for Qualification of Indenture under the Trust Indenture Act of 1939, filed February 23, 2000 (File No. 022-22463). (21) Incorporated by reference to the Company's Annual Report on Form 10-K, filed April 3, 2000. (22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed May 12, 2000. (23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed August 14, 2000. (24) Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed November 14, 2000. (25) Ugly Duckling has entered into 17 sale and leaseback transactions substantially in the form of Exhibit 10.24(a), but with differing terms, including property description, dates of execution, purchase amount and rental payment amount. Schedule 1 to Exhibit 10.24(b lists the major transactions and the principal differing terms of each such transaction. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UGLY DUCKLING CORPORATION, a Delaware corporation By: /s/ GREGORY B. SULLIVAN ----------------------- Gregory B. Sullivan Its: Chief Executive Officer Date: March 29, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME AND SIGNATURE TITLE DATE /s/ ERNEST C. GARCIA II Chairman of the Board of Directors April 16, 2001 - ----------------------------- /s/ GREGORY B. SULLIVAN President, Chief Executive Officer April 16, 2001 - ----------------------------- and Director (Principal Executive Gregory B. Sullivan Officer and Director) /s/ STEVEN T. DARAK Senior Vice President and Chief April 16, 2001 - ----------------------------- Financial Officer (Principal Steven T. Darak Financial and Accounting Officer) * Director April 16, 2001 - ----------------------------- Christopher D. Jennings * Director April 16, 2001 - ----------------------------- John N. MacDonough * Director April 16, 2001 - ----------------------------- Frank P. Willey * Director April 16, 2001 - ----------------------------- Gregory S. Kilfoyle *By: /s/ JON D. EHLINGER ------------------- Jon D. Ehlinger Attorney-in-Fact EX-4.10(C) 2 0002.txt SECOND SUPPLEMENTAL INDENTURE UGLY DUCKLING CORPORATION TO HARRIS TRUST AND SAVINGS BANK Trustee Second Supplemental Indenture Dated as of April 15, 2000 To Indenture Dated as of October 15, 1998 11% Subordinated Debentures due 2007 SECOND SUPPLEMENTAL INDENTURE, dated as of April 15, 2000, between Ugly Duckling Corporation, a corporation duly organized and existing under the laws of the State of Arizona (herein called the "Company"), having its principal office at 2525 East Camelback Road, Suite 500, Phoenix, Arizona 85016, and Harris Trust and Savings Bank, an Illinois banking corporation, as Trustee (herein called the "Trustee") under the Indenture dated as of October 15, 1998 between the Company and the Trustee (as amended from time to time, the "Indenture"). Recitals of the Company The Company has executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the "Securities"), said Securities to be issued in one or more series as in the Indenture provided. Pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Securities to be known as its 11% Subordinated Debentures due 2007 (herein called the "Debentures"), the form and substance of such Debentures and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this Second Supplemental Indenture. All things necessary to make this Second Supplemental Indenture a valid agreement of the Company, and to make the Debentures, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been done. Now, Therefore, This Second Supplemental Indenture Witnesseth: For and in consideration of the premises and the purchase of the Debentures by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Debentures and the terms, provisions and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Debentures, as follows: ARTICLE ONE General Terms and Conditions of the Debentures Section 101. There shall be and is hereby authorized a series of Securities designated the "11% Subordinated Debentures due 2007", limited in aggregate principal amount to $27,500,000, which amount shall be as set forth in any written order of the Company for the authentication and delivery of Debentures. The Debentures shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon on April 15, 2007, and shall be issued in the form of registered Debentures without coupons in denominations of $1.00 and any integral multiple thereof. Section 102. Except as provided in Section 103 herein, the Debentures shall be issued in certificated form. Principal and interest on the Debentures issued in certificated form will be payable, the transfer of such Debentures will be registrable and such Debentures will be exchangeable for the Debentures bearing identical terms and provisions at the Corporate Trust Office of the Trustee from time to time, which is initially in Chicago, Illinois; provided, however, that payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Security Register. Section 103. Each Debenture will bear interest at the rate of 11% per annum from the original date of issuance until the principal thereof becomes due and payable, and on any overdue principal, payable semiannually on April 15 and October 15 of each calendar year (each, an "Interest Payment Date"), commencing on October 15, 2000, to the person in whose name such Debenture or any predecessor Debenture is registered, at the close of business on each April 1 and October 1 next preceding such Interest Payment Date. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such Regular Record Date, and may be paid to the person in whose name the Debenture (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debentures not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Interest will accrue from the date of original issuance to, but not including, the relevant payment date. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), in each case with the same force and effect as if made on such date. Section 104. The Debentures shall be defeasible pursuant to Section 1302 and Section 1303 of the Indenture. ARTICLE TWO Redemption of the Debentures Section 201. The Debentures will be redeemable at any time and from time to time prior to maturity at the option of the Company, as a whole or in part, upon not less than 30 nor more than 60 days' notice, at the principal amount to be redeemed, together with accrued interest to the date fixed for redemption. ARTICLE THREE Additional Covenants Section 301. Definitions. For purposes of this Article Three, except as otherwise expressly provided or unless the context otherwise requires: "Consolidated Net Worth" as of any date of determination means the consolidated stockholders' equity of the Company and its consolidated Subsidiaries, as determined in accordance with GAAP, plus all Junior Subordinated Obligations of the Company and its consolidated Subsidiaries. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time. "Junior Subordinated Obligation" means any indebtedness of the Company or its Subsidiaries that by its terms is expressly subordinated in right of payment to the Debentures. Section 302. Minimum Equity. The Company shall, at all times while any of the Debentures remain Outstanding, maintain Consolidated Net Worth of at least $100,000,000. ARTICLE FOUR Form of Debentures Section 401. The Debentures and the Trustee's certificate of authentication to be endorsed thereon are to be substantially in the following form: [INSERT OID LEGEND] UGLY DUCKLING CORPORATION No. $ --------------------------------- ------------------------ CUSIP NO. Date of Original Issuance: __________ __, 2000 ----------------- Ugly Duckling Corporation, a corporation duly organized and existing under the laws of Delaware (herein called the "Company," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ______________, or registered assigns, the principal sum of ___________ Dollars on April 15, 2007, and to pay interest thereon from the original date of issuance or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on April 15 and October 15 in each year, commencing October 15, 2000, at the rate of 11% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the April 1 or October 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and any such interest on this Security will be made at the office or agency of the Company maintained for that purpose in Chicago, Illinois, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. In Witness Whereof, the Company has caused this instrument to be duly executed. UGLY DUCKLING CORPORATION By ------------------------------ Attest: - --------------------------- Form of Reverse of Security. This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under an Indenture, dated as of October 15, 1998 (herein called the "Indenture", which term shall have the meaning assigned to it in such instrument), between the Company and Harris Trust and Savings Bank, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $27,500,000. The Securities of this series are subject to redemption upon not less than 30 days' notice by mail, at any time, as a whole or in part, at the election of the Company, at a Redemption Price equal to 100% of the principal amount, together with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof for such interest installments, all as provided in the Indenture. The Indenture provides that a notice of redemption may be given that is conditional upon the receipt by the Trustee on or prior to the Redemption Date of amounts sufficient to pay principal of, and premium, if any, and interest on, the Securities to be redeemed, and that if such amounts shall not have been so received, said notice shall be of no force and effect, the Securities to be redeemed will not become due and payable on the Redemption Date, and the Company will not be required to redeem such Securities on such date. In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The Securities of this series are subordinate in right of payment, in the manner and to the extent set forth in the Indenture, to the prior payment in full of all Senior Indebtedness of the Company. To the extent and in the manner provided in the Indenture, Senior Indebtedness must be paid before any payment may be made to any Holder of this Security. Any Holder by accepting this Security agrees to the subordination and authorizes the Trustee to give it effect. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Security or certain restrictive covenants and Events of Default with respect to this Security, in each case upon compliance with certain conditions set forth in the Indenture. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee without the consent of any Holders in certain limited cases, and with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected subject to certain exceptions. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver shall be conclusive and binding upon the Holder of this Security and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1.00 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. ARTICLE FIVE Original Issue of Debentures Section 501. Debentures in the aggregate principal amount of $27,500,000, may, upon execution of this Second Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Debentures to or upon the written order of the Company, signed by its Chairman, its President, or any Vice President and its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, without any further action by the Company. ARTICLE SIX Application of Article Fourteen Section 601. The Debentures will be subject to the subordination provisions of Article Fourteen of the Indenture. The Debentures will be pari passu with the 12% Subordinated Debentures due 2003 previously issued under the Indenture. The indebtedness under the Senior Secured Loan Agreement, dated as of May 14, 1999, as amended from time to time, by and among the Company, the Lenders party thereto, and the Trustee will be Designated Senior Indebtedness. ARTICLE SEVEN Paying Agent and Registrar Section 701. The Trustee will be the Paying Agent, transfer agent, and Registrar for the Debentures. ARTICLE EIGHT Interest and Original Issue Discount Reporting, Backup Withholding Section 801. On or before January 31 following each calendar year with respect to which there are Outstanding Debentures or such other due date prescribed therefor, as advised to the Trustee by the Company, the Trustee will prepare and mail to each Holder of Outstanding Debentures at any time during the preceding calendar year Forms 1099-INT and 1099-OID or such other forms prescribed therefor by the Internal Revenue Service, as advised to the Trustee by the Company, containing such information as instructed by the Company, including the information contained in Section 1009 of the Indenture, together with any letter prepared by the Company explaining tax issues relating thereto to the extent not otherwise prohibited by law. Further, on or before February 28 following each calendar year with respect to which there are Outstanding Debentures or such other due date prescribed therefor, as advised to the Trustee by the Company, the Trustee will prepare and file with the Internal Revenue Service or any other relevant taxing authority, as advised to the Trustee by the Company, by magnetic tape or other required transmission source, as advised to the Trustee by the Company, containing the aforementioned information furnished by the Company. Section 802. During each calendar year with respect to which there are Outstanding Debentures, the Trustee will satisfy all applicable backup withholding rules in connection with payments made or deemed made with respect to the Debentures including, without limitation, payments of interest, accruals of original issue discount, and payments associated with redemptions and other dispositions of Debentures. ARTICLE NINE Sundry Provisions Section 901. Except as otherwise expressly provided in this Second Supplemental Indenture or in the form of Debentures or otherwise clearly required by the context hereof or thereof, all terms used herein or in said form of Debentures that are defined in the Indenture shall have the several meanings respectively assigned to them thereby. Section 902. The Indenture, as previously supplemented and as supplemented by this Second Supplemental Indenture, is in all respects ratified and confirmed, and this Second Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. In Witness Whereof, the parties hereto have caused this Second Supplemental Indenture to be duly executed all as of the day and year first above written. UGLY DUCKLING CORPORATION By ------------------------------ Attest: - --------------------------- HARRIS TRUST AND SAVINGS BANK, As Trustee By ------------------------------ Attest: - --------------------------- State of Arizona ) ) ss: County of Maricopa ) On the ____ day of April, 2000, before me personally came _____________________________, to me known, who being by me duly sworn, did depose and say that she/he is the ________________ of Ugly Duckling Corporation, one of the corporations described in and which executed the foregoing instrument; and that she/he signed her/his name thereto by the authority of the Board of Directors of said Corporation. ------------------------ Notary Public Official Seal State of ___________ ) )ss: County of _________ ) On the ____ day of April, 2000, before me personally came _____________________________, to me known, who being by me duly sworn, did depose and say that she/he is the ________________ of Harris Trust and Savings Bank, one of the corporations described in and which executed the foregoing instrument; that she/he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation; and that she/he signed her/his name thereto by like authority. ------------------------ Notary Public Official Seal EX-4.11 3 0003.txt FORM OF WARRANT AGREEMENT UGLY DUCKLING CORPORATION WARRANT AGREEMENT THIS WARRANT AGREEMENT (the "Agreement"), dated as of July 25, 2001, is between UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"), and VERDE INVESTMENTS, INC. (the "Lender"). WHEREAS, the Company has entered into a Loan Agreement dated as of January 11, 2001 (the "Loan Agreement"), by and among the Company and the Lender, pursuant to which the Lender will make a term loan to the Company, 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 to execute this Agreement pursuant to which the Company shall on July 25, 2001, subject to the terms set forth herein, issue to the Lender 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 Lender on July 25, 2001 and the Lender shall accept from the Company on such date, 1,500,000 Warrants substantially in the form of Exhibit A 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 vesting schedule provided for in Section 2 and the adjustments provided for in Section 8 hereof, between July 25, 2001 and 1:30 p.m., Phoenix, Arizona time, on July 25, 2011, 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, Senior Vice 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 of Common Stock or other securities to which the Warrants represented by such certificates are at the time entitled hereunder. (a) The registered holder shall be entitled to exercise 500,000 Warrants on July 25, 2001, and an additional 250,000 Warrants upon the expiration of each successive three month period thereafter (i.e., October 25, 2001, January 25, 2002, April 25, 2002, and July 25, 2002) until the registered holder has the right to exercise all 1,500,000 Warrants; provided, however, that this Warrant Agreement and the registered holder's right to exercise any of the Warrants shall terminate immediately if the Note issued pursuant to the Loan Agreement has been paid in full on or prior to July 25, 2001. (b) Each Warrant not exercised by the expiration date of July 25, 2011 shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall cease on such date. (c) 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 or by surrender of this Warrant to the Company together with a notice of cashless exercise, in which event the Company shall issue to the registered holder the number of shares of Common Stock determined as follows: X = Y x (A-B)/A X = the number of shares of Common Stock to be issued to the registered holder. Y = the number of shares of Common Stock with respect to which the Warrant is being exercised. A = the Current Market Price determined as of the date of exercise. B = the Warrant Price. (d) 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 at a price per share equal to the last sales price of the Common Stock on the Nasdaq National Market on the date of the closing of the Loan Agreement. (e) 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. (f) 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 name of the Lender 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 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. (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, 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 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. 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 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 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 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 [July 25, 2006] if 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 [$12.00], 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. (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 JULY 25, 2001, 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 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 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 any other registration rights previously granted by the Company. 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 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): Ugly Duckling Corporation 2525 East Camelback Road Suite 1150 Phoenix, Arizona 85016 Attention: Jon D. Ehlinger Vice President, General Counsel and Secretary With a copy to: Steven D. Pidgeon Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 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 Arizona 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. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, as of the day and year first above written. UGLY DUCKLING CORPORATION By: Name: Its: VERDE INVESTMENTS, INC. By: Name: Ernest C. Garcia II Its: President Address for notices: 2575 East Camelback Road, Suite 700 Phoenix, Arizona 85016 Attn: Steven P. Johnson FAX: (602) 778-5025 EXHIBIT A Warrant No. ____ WARRANT TO PURCHASE 1,500,000 SHARES OF COMMON STOCK VOID AFTER 1:30 P.M. PHOENIX, ARIZONA TIME, ON JULY 25, 2011 OR SUCH EARLIER DATE SET FORTH HEREIN UGLY DUCKLING CORPORATION This certifies that, for value received, VERDE INVESTMENTS, INC., an Arizona corporation, the registered holder hereof or its assigns (the "Holder"), is entitled, pursuant to the vesting schedule detailed below, to purchase from UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"), until 1:30 p.m., Phoenix, Arizona time, on July 25, 2011 unless earlier redeemed by the Company, at the purchase price per share of $_____ (the "Warrant Price"), the aggregate number of shares of Common Stock, par value $0.001 per share, of the Company set forth above (the "Shares"). The Holder shall have the right to purchase 500,000 Shares as of the date hereof, and an additional 250,000 Shares for each successive three month period thereafter, until the Holder has the right to purchase all of the Shares. The number of Shares 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 July 25, 2006 if 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 $12.00, 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 July 25, 2001, between the Company and the Lender, 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. 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: July 25, 2001 UGLY DUCKLING CORPORATION By: Jon D. Ehlinger Vice President, General Counsel and Secretary UGLY DUCKLING CORPORATION PURCHASE FORM Mailing Address: UGLY DUCKLING CORPORATION 2525 East Camelback Road Suite 1150 Phoenix, Arizona 85016 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. 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 manner, 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. EX-10.1(O) 4 0004.txt GECC AMENDMENT NO. 11 Amendment No. 11 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement This Amendment is entered into by and between Ugly Duckling Corporation, successor in interest to Ugly Duckling Holdings, Inc. ("Ugly Duckling"), a Delaware corporation; Ugly Duckling Car Sales and Finance Corporation ("UDCSFC"), an Arizona corporation formerly known as Duck Ventures, Inc.; Ugly Duckling Credit Corporation ("UDCC") formerly known as Champion Acceptance Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc. ("Sales"); an Arizona corporation; Champion Financial Services, Inc. ("Champion"), an Arizona corporation; Ugly Duckling Car Sales Florida, Inc. ("Car Sales Florida"), a Florida corporation; Cygnet Financial Corporation ("Cygnet"), a Delaware corporation; Cygnet Support Services, Inc. ("Services"), an Arizona corporation; Cygnet Financial Services, Inc. ("Cygnet Services"), an Arizona corporation; Cygnet Financial Portfolio, Inc. ("Cygnet Portfolio"), an Arizona corporation; Ugly Duckling Portfolio Partnership, L.L.P. ("UDPP"), an Arizona limited liability partnership; Ugly Duckling Finance Corporation ("UDFC"), an Arizona corporation; and Ugly Duckling Portfolio Corporation ("UDPC") an Arizona corporation formerly known as Champion Portfolio Corporation (all of the foregoing entities collectively referred to herein as "Borrower"); and General Electric Capital Corporation, a New York corporation ("Lender"). RECITALS A. Borrower and Lender are parties to an Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement dated as of August 15, 1997, as amended by an Assumption and Amendment Agreement dated October 23, 1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated September 9, 1998, Amendment No. 3 dated January 18, 1999, Amendment No. 4 dated as of July 19, 1999, Amendment No. 5 dated August 16, 1999, Amendment No. 6 dated August 27, 1999, Amendment No. 7 dated November 30, 1999, Amendment No. 8 dated December 7, 1999, Amendment No. 9 dated December 8, 1999, and Amendment No. 10 dated March 6, 2000 (the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement as so amended is referred to herein as the "Agreement") pursuant to which Lender agreed to make Advances to Borrower on the terms and conditions set forth in the Agreement. B. Borrower and Lender desire to amend certain provisions of the Agreement pursuant to the terms set forth in this Amendment. In consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: 1. Defined Terms. Unless otherwise specified herein, all capitalized terms used in this Amendment shall have the same meaning given to such term(s) in the Agreement. 2. Amendments to Agreement. Effective as of the date hereof, the Agreement is hereby amended as follows. a.) Loan Term: Right to Terminate. Section 2.3 of the Agreement is hereby amended in its entirety to read as follows: "Loan Term; Right to Terminate. Unless sooner terminated as hereinafter provided, this Agreement shall terminate without any notice requirement on June 30, 2001 if not renewed or extended by a mutual written agreement. Upon the occurrence of an Event of Default, Lender may, without prior notice to Borrower, immediately terminate this Agreement. A prepayment in full of the Loan shall be a termination of this Agreement. Notwithstanding termination of this Agreement in any manner, the Indebtedness shall be payable in accordance with this Agreement, and all rights and remedies granted to Lender hereunder or pursuant to applicable law shall continue until all obligations of Borrower to Lender have been fully paid and performed." b.) Borrowing Base. The definition of Borrowing Base in Section 16.0 of the Agreement is deleted and replaced in its entirety as follows: Borrowing Base: the amount equal to the lesser of (i) One Hundred Twenty-five Million Dollars ($125,000,000.00) minus the Loan Availability Cap, or (ii) an amount equal to (A) the lesser of the Securitization Net Proceeds Percentage or sixty five percent (65%) of the Outstanding Principal Balance of all Originated Eligible Contracts (but not to exceed one hundred fifteen percent (115%) of the NADA average wholesale Black Book value for all such Contracts in the aggregate) during the time they are included in the Borrowing Base pursuant to Section 3.1; plus (B) eighty-six percent (86%) of the Outstanding Principal Balance of all Champion Eligible Contracts (but not to exceed one hundred seven percent (107%) of wholesale Kelly Blue Book for all such Contracts in the aggregate) during the time they are included in the Borrowing Base pursuant to Section 3.1; plus (C) seventy-five percent (75%) of the Outstanding Principal Balance of all Seminole Eligible Contracts during the time they are included in the Borrowing Base pursuant to Section 3.1; plus (D) the Inventory Advance Value; plus (E) during the term of the Dealer Contract Facility, the Dealer Contract Advance Value; plus (F) fifty percent (50%) of the Outstanding Principal Balance of all DCT Eligible Contracts during the time the DCT Eligible Contracts are included in the Borrowing Base pursuant to Section 3.1. (G) forty and one-half percent (40.5%) of the Outstanding Principal Balance of all VAM Eligible Contracts during the time the VAM Eligible Contracts are included in the Borrowing Base pursuant to Section 3.1. At Lender's sole and absolute discretion following Borrower's request, Lender may agree to include Bulk Purchase Contracts as part of the Borrowing Base hereunder. The amount of advance against Bulk Purchase Contracts, if any, shall be at Lender's sole and absolute discretion. With respect to section (ii) (A) of this definition, compliance with the parenthetical test based on Black Book values shall be measured by Lender's sample of 100 or more Contracts and not on a Contract-by-Contract basis. c.) Securitization Net Proceeds Percentage. The following definition is added to Section 16.0 of the Agreement in proper alphabetical order: Securitization Net Proceeds Percentage: determined solely by Lender according to the following formula: The aggregate of [(Total Securitized Pool less any Securitization Reductions) divided by Total Securitized Pool] minus [75 basis points (.75%)], with the resulting number rounded to the nearest 1/100th of a percent. d.) Securitization Reductions. The following definition is added to Section 16.0 of the Agreement in proper alphabetical order: Securitization Reductions: Reductions from the Total Securitized Pool including but not limited to reductions for credit enhancement certificates or notes, initial deposits to spread accounts, plus to the extent the following "Fees" deducted from the closing proceeds are greater the one percent (1.00%) of the Total Securitized Pool, placement agent fees, legal fees, insurer fees, and accounting fees. e.) Total Securitized Pool. The following definition is added to Section 16.0 of the Agreement in proper alphabetical order: Total Securitized Pool: The total dollar amount of the most recently closed securitization by Borrower. 4. Incorporation of Amendment. The parties acknowledge and agree that this Amendment is incorporated into and made a part of the Agreement, the terms and provisions of which, unless expressly modified herein, or unless no longer applicable by their terms, are hereby affirmed and ratified and remain in full force and effect. To the extent that any term or provision of this Amendment is or may be deemed expressly inconsistent with any term or provision of the Agreement, the terms and provisions of this Amendment shall control. Each reference to the Agreement shall be a reference to the Agreement as amended by this Amendment. This Amendment, taken together with the unamended provisions of the Agreement which are affirmed and ratified by Borrower, contains the entire agreement among the parties regarding the transactions described herein and supersedes all prior agreements, written or oral, with respect thereto. 5. Borrower Remains Liable. Borrower hereby confirms that the Agreement and each document executed by Borrower in connection therewith continue unimpaired and in full force and effect and shall cover and secure all of Borrower's existing and future obligations to Lender. Nothing contained herein is intended, nor shall be construed, to be a novation or an accord and satisfaction of the outstanding liabilities or any of Borrower's other obligations to Lender. 6. Headings. The paragraph headings contained in this Amendment are for convenience of reference only and shall not be considered a part of this Amendment in any respect. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Arizona. ------------- Nothing herein shall preclude Lender from bringing suit or taking other legal action in any jurisdiction. 8. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of June 30, 2000. GENERAL ELECTRIC CAPITAL CORPORATION UGLY DUCKLING CAR SALES, INC. By: ________________________________ By: ______________________________ Title: ____________________________ Title: ___________________________ UGLY DUCKLING CORPORATION By: _______________________________ Title: _____________________________ UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES, INC. FINANCE CORPORATION By: ____________________________ By: ________________________________ Title: ____________________________ Title: _____________________________ UGLY DUCKLING CAR SALES FLORIDA, UGLY DUCKLING CREDIT INC. CORPORATION By: _____________________________ By: _____________________________ Title: ____________________________ Title: _____________________________ CYGNET FINANCIAL CORPORATION By: ________________________________ Title: _____________________________ CYGNET SUPPORT SERVICES, INC. By: ________________________________ Title: _____________________________ CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOILIO, INC. By: ________________________________ By: ________________________________ Title: _____________________________ Title: _____________________________ UGLY DUCKLING PORTFOLIO UGLY DUCKLING FINANCE CORPORATION PARTNERSHIP, L.L.P. By: ________________________________ By: ________________________________ Title: _____________________________ Title: _____________________________ UGLY DUCKLING PORTFOLIO CORPORATION By: ________________________________ Title: _____________________________ EX-10.1(P) 5 0005.txt GECC AMENDMENT NO. 12 Amendment No. 12 to Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement This Amendment is entered into by and between Ugly Duckling Corporation, successor in interest to Ugly Duckling Holdings, Inc. ("Ugly Duckling"), a Delaware corporation; Ugly Duckling Car Sales and Finance Corporation ("UDCSFC"), an Arizona corporation formerly known as Duck Ventures, Inc.; Ugly Duckling Credit Corporation ("UDCC") formerly known as Champion Acceptance Corporation, an Arizona corporation; Ugly Duckling Car Sales, Inc. ("Sales"), an Arizona corporation; Champion Financial Services, Inc. ("Champion"), an Arizona corporation; Ugly Duckling Car Sales Florida, Inc. ("Car Sales Florida"), a Florida corporation; Cygnet Financial Corporation ("Cygnet"), a Delaware corporation; Cygnet Support Services, Inc. ("Services"), an Arizona corporation; Cygnet Financial Services, Inc. ("Cygnet Services"), an Arizona corporation; Cygnet Financial Portfolio, Inc. ("Cygnet Portfolio"), an Arizona corporation; Ugly Duckling Portfolio Partnership, L.L.P. ("UDPP"), an Arizona limited liability partnership; Ugly Duckling Finance Corporation ("UDFC"), an Arizona corporation; and Ugly Duckling Portfolio Corporation ("UDPC"), an Arizona corporation formerly known as Champion Portfolio Corporation (all of the foregoing entities collectively referred to herein as "Borrower"); and General Electric Capital Corporation, a New York corporation ("Lender"). RECITALS A. Borrower and Lender are parties to an Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement dated as of August 15, 1997, as amended by an Assumption and Amendment Agreement dated October 23, 1997, Amendment No. 1 dated December 22, 1997, Amendment No. 2 dated September 9, 1998, Amendment No. 3 dated January 18, 1999, Amendment No. 4 dated as of July 19, 1999, Amendment No. 5 dated August 16, 1999, Amendment No. 6 dated August 27, 1999, Amendment No. 7 dated November 30, 1999, Amendment No. 8 dated December 7, 1999, Amendment No. 9 dated December 8, 1999, Amendment No. 10 dated March 6, 2000 and Amendment No. 11 dated June 30, 2000 (the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement as so amended is referred to herein as the "Agreement") pursuant to which Lender agreed to make Advances to Borrower on the terms and conditions set forth in the Agreement. B. Borrower and Lender desire to amend certain provisions of the Agreement pursuant to the terms set forth in this Amendment in order to eliminate all Loan Facilities other than the Inventory Facility and make certain other changes. In consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged by each of the parties hereto, the parties agree as follows: 1. Defined Terms. Unless otherwise specified herein, all capitalized terms used in this Amendment shall have the same meaning given to such term(s) in the Agreement. As used herein, "Effective Date" shall mean the date of the initial advance of loan funds pursuant to that certain Master Loan and Security Agreement dated as of April ___, 2001 among UDC, UDCSFC, UDCC, Car Sales Florida, UDFC, Sales and Greenwich Capital Financial Products, Inc. 2. Amendments to Agreement. Effective as of the Effective Date, the Agreement is hereby amended as follows. (a) Loan Facilities. Section 2.1 of the Agreement is hereby amended in its entirety to read as follows: "Section 2.1. Loan Facilities. The only Loan Facility is the following Inventory Facility: (A) Inventory Facility. Subject to all of the terms and conditions of this Agreement, Lender agrees to loan funds up to Twenty Five Million Dollars ($25,000,000.00) to Borrower against Eligible Inventory from time to time in a series of Advances during the term of this Agreement. Funds may be borrowed, repaid and reborrowed on a revolving basis subject to the terms and conditions set forth in this Agreement, provided that the amount outstanding under the Inventory Facility shall not at any time exceed the Inventory Advance Value." (b) General Interest Rate and Fees. Section 2.2(A) of the Agreement is hereby amended in its entirety to read as follows: "(A) Except as modified by Sections 2.4 and 15.1, the average daily balance of the Loan shall bear interest, calculated daily on the basis of a 365-day year, at a per annum rate equal to the LIBOR Rate plus (i) Three Hundred Fifteen (315) basis points through June 30, 2001 and (ii) Three Hundred Sixty-Five (365) basis points beginning on July 1, 2001." (c) Loan Term; Right to Terminate. Section 2.3 of the Agreement is hereby amended in its entirety to read as follows: Section 2.3. "Loan Term; Right to Terminate. Unless sooner terminated as hereinafter provided, this Agreement shall terminate without prior notice on the later of June 30, 2001 or the end of the extension period elected by Borrower pursuant to the following sentence. Unless sooner terminated as hereinafter provided, (i) Borrower may extend the expiration of the term of this Agreement from June 30, 2001 to September 30, 2001 by providing Lender before June 1, 2001 with written notice of its election to so extend and a payment of $31,250, and (ii) if Borrower so extends the expiration then Borrower may further extend the expiration from September 30, 2001 to December 31, 2001 by providing Lender before September 1, 2001 with written notice of its election to so extend and a payment of $31,250; provided, however, that neither extension will be effective if at the time of the expiration elected to be extended the Borrower is not in full compliance with all of the terms and conditions of this Agreement. Upon the occurrence of an Event of Default, Lender may, without prior notice to Borrower, immediately terminate this Agreement. A prepayment in full of the Loan shall be a termination of this Agreement. Notwithstanding termination of this Agreement in any manner, the Indebtedness shall be payable in accordance with this Agreement, and all rights and remedies granted to Lender hereunder or pursuant to applicable law shall continue until all obligations of Borrower to Lender have been fully paid and performed." (d) Interest Payments. Section 4.0(C) of the Agreement is hereby amended in its entirety to read as follows: "(C) Interest shall accrue on the Loan daily and all accrued interest shall be due and payable on the last day of each month, provided that if such last day is not a Business Day, such accrued interest shall be payable on the next following Business Day. Accrued interest shall not be added to the Loan balance and bear interest, unless the interest is past due and paid with an Advance requested by Borrower and approved by Lender; provided that, such an approval by Lender shall not constitute a waiver of the Event of Default consisting of the failure to pay the interest except to the extent provided in Section 16.9." (e) Contract Payments. Section 4.1 of the Agreement is hereby amended in its entirety to read as follows: "Section 4.1. Contract Payments. Borrower shall direct all Contract Debtors for Pledged Contracts, and all other Persons (including Contract Rights Payors) who make payments to Borrower relating to Pledged Contracts, to make, when paying by mail, all payments directly to the Post Office Box." (f) Security Interest. The description of Collateral in Section 6.0 of the Agreement is amended to include the following: "Section 6.0. Stock Pledge Collateral. The capital stock owned by UDCSFC, whether now owned or hereafter acquired, and the rights to receive dividends and other distributions of every nature, now existing or hereafter created and wherever located, of Ugly Duckling Receivables Corporation II, Ugly Duckling Receivables Corporation III, and any other bankruptcy remote entity created for the purpose of a securitization transaction." (g) Remittances. Notwithstanding any other provision of the Agreement, Lender shall no longer receive Remittances which are instead being paid as described in the Intercreditor Agreement (hereinafter defined). Borrower shall no longer be obligated to provide the notices described in Sections 7.0(A) or (B). (h) Certificates of Title. Section 13.11 of the Agreement is hereby amended in its entirety to read as follows: "Section 13.11. Certificates of Title. Borrower shall promptly apply for and obtain Certificates of Title for all Financed Vehicles." (i) Unencumbered Inventory. Section 13.13 of the Agreement is hereby deleted in its entirety. (j) Borrowing Base. The definition of Borrowing Base in Section 16.0 of the Agreement is deleted and replaced in its entirety as follows: Borrowing Base: the amount equal to the lesser of (i) Twenty-five Million Dollars ($25,000,000.00) minus the Loan Availability Cap, or (ii) the Inventory Advance Value. (k) Underutilization Fee. The definition of Underutilization Fee in Section 16.0 of the Agreement is deleted and replaced in its entirety as follows: Underutilization Fee: the fee equal to (i) .000959% (35 basis points per annum) times (ii) the amount by which the Advances outstanding under the Inventory Facility are less than Fifteen Million Dollars ($15,000,000), for each day during the Accounting Period that such Advances are less than Fifteen Million Dollars ($15,000,000). 3. Intercreditor Agreement. Lender has entered into that certain Greenwich/GECC/SunAmerica Intercreditor Agreement dated as of April ___, 2001 (the "Intercreditor Agreement") pursuant to which Lender has agreed, in addition to other matters, that certain of the liens and security interests granted to Lender will be subordinate to liens and security interests granted to other persons pursuant to the Intercreditor Agreement. In the event of any conflict between the Agreement and the Intercreditor Agreement, the Intercreditor Agreement will control. 4. Incorporation of Amendment. The parties acknowledge and agree that this Amendment is incorporated into and made a part of the Agreement, the terms and provisions of which, unless expressly modified herein, or unless no longer applicable by their terms, are hereby affirmed and ratified and remain in full force and effect. To the extent that any term or provision of this Amendment is or may be deemed expressly inconsistent with any term or provision of the Agreement, the terms and provisions of this Amendment shall control. Each reference to the Agreement shall be a reference to the Agreement as amended by this Amendment. This Amendment, taken together with the unamended provisions of the Agreement which are affirmed and ratified by Borrower, contains the entire agreement among the parties regarding the transactions described herein and supersedes all prior agreements, written or oral, with respect thereto. 5. Borrower Remains Liable. Borrower hereby confirms that the Agreement and each document executed by Borrower in connection therewith continue unimpaired and in full force and effect and shall cover and secure all of Borrower's existing and future obligations to Lender. Nothing contained herein is intended, nor shall be construed, to be a novation or an accord and satisfaction of the outstanding liabilities or any of Borrower's other obligations to Lender. 6. Headings. The paragraph headings contained in this Amendment are for convenience of reference only and shall not be considered a part of this Amendment in any respect. 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Arizona. Nothing herein shall preclude Lender from bringing suit or taking other legal action in any jurisdiction. 8. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the undersigned have entered into this Amendment as of April , 2001. GENERAL ELECTRIC CAPITAL CORPORATION UGLY DUCKLING CAR SALES, INC. By: By: --------------------------- ----------------------------- Title: Title: ------------------------ -------------------------- UGLY DUCKLING CORPORATION By: --------------------------- Title: ------------------------ UGLY DUCKLING CAR SALES AND CHAMPION FINANCIAL SERVICES,INC. FINANCE CORPORATION By: By: --------------------------- ----------------------------- Title: Title: ------------------------ -------------------------- UGLY DUCKLING CAR SALES FLORIDA, UGLY DUCKLING CREDIT CORPORATION INC. By: By: --------------------------- ----------------------------- Title: Title: ------------------------ -------------------------- CYGNET FINANCIAL CORPORATION By: --------------------------- Title: ------------------------ CYGNET SUPPORT SERVICES, INC. By: --------------------------- Title: ------------------------ CYGNET FINANCIAL SERVICES, INC. CYGNET FINANCIAL PORTFOLIO, INC. By: By: --------------------------- ----------------------------- Title: Title: ------------------------ -------------------------- UGLY DUCKLING PORTFOLIO UGLY DUCKLING FINANCE PARTNERSHIP, L.L.P. CORPORATION By: By: --------------------------- ----------------------------- Title: Title: ------------------------ -------------------------- UGLY DUCKLING PORTFOLIO CORPORATION By: --------------------------- Title: ------------------------ EX-10.24 6 0006.txt PROPERTY LEASE AGREEMENT LEASE THIS LEASE (this "Lease") is entered into as of the ____ day of November, 2000 (the "Commencement Date"), by and between Verde Investments, Inc., an Arizona corporation (the "Landlord"), whose address for purposes of notice hereunder is 2575 East Camelback Road, Suite 700, Phoenix, Arizona, 85016, and Ugly Duckling Car Sales And Finance Corporation, an Arizona corporation (the "Tenant"), whose address for purposes of notice hereunder is Attn.: General Counsel, 2525 East Camelback Road, Suite 500, Phoenix, Arizona 85016. R E C I T A L S This Lease is made with reference to the following facts and objectives: Landlord is the owner of the following: (i) certain tract(s) or parcel(s) of land located in Phoenix, Arizona, and more particularly described on the attached and incorporated Exhibit "A" (the land described above, together with all rights, interests, easements, rights of way and appurtenances related thereto, shall hereinafter be referred to as the "Land"); and (ii) a building located on the Land and all other structures and improvements existing or to be constructed on the Land, together with all fixtures and equipment therein owned by Landlord and used in the operation of the same (collectively, the "Improvements"). The Land and Improvements are hereinafter collectively referred to as the "Premises." No easement for light, air or view is included with or appurtenant to the Premises. Pursuant to all of the terms, conditions, covenants and provisions of this Lease, Tenant desires to lease the Premises from Landlord, and Landlord desires to lease the Premises to Tenant, for the rents and during the terms hereinafter set forth. Tenant has examined the title of the Premises, the physical condition of the Premises, environmental studies and reports of the Premises, and the economic feasibility of conducting its business in and from the Premises. Tenant has determined that the same are satisfactory to Tenant, and Tenant accepts the Premises on an "AS IS - WHERE IS" basis. TENANT ACKNOWLEDGES THAT LANDLORD (WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES, INCLUDING ANY WARRANTY OR REPRESENTATION AS TO ITS FITNESS FOR USE OR PURPOSE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, AS TO LANDLORD'S TITLE THERETO, OR AS TO VALUE, COMPLIANCE WITH SPECIFICATIONS, LOCATION, USE, CONDITION, MERCHANTABILITY, QUALITY, DESCRIPTION, DURABILITY OR OPERATION, IT BEING AGREED THAT ALL RISKS INCIDENT THERETO ARE TO BE BORNE BY TENANT. Tenant acknowledges that the Premises are of its selection and to its specifications, and that the Premises have been inspected by Tenant and are satisfactory to it. In the event of any defect or deficiency in the Premises of any nature, whether patent or latent, Landlord shall not have any responsibility or liability with respect thereto or for any incidental or consequential damages (including strict liability in tort). It is the parties' objective to provide for an absolute "bond equivalent" net net net lease to Landlord; the Basic Rent (as hereinafter defined) payable by Tenant hereunder shall be an absolute "bond equivalent" net net net return to Landlord and Tenant shall pay all costs and expenses relating to the Premises and Tenant's operations thereon. Landlord would not have entered into this Lease if it did not meet the aforesaid criteria. NOW, THEREFORE, IN CONSIDERATION of the aforesaid Recitals, and in consideration of the Premises leased by Landlord to Tenant hereby, and in consideration of the rents and covenants to be paid and performed by Tenant hereunder, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties covenant and agree as follows: 1. LEASE. 1.1. Demise of Premises Landlord hereby demises the Premises to Tenant, and Tenant hereby lets and accepts the Premises from Landlord, for the term herein described. 1.2. Title and Condition The Premises are demised and let "AS IS" subject to all matters of record and all other title exceptions, including but not limited to (a) the rights of any parties in possession and the existing state of the title as of the commencement of the term of this Lease, (b) any state of facts which an accurate survey or physical inspection thereof might show, (c) all zoning regulations, restrictions, rules and ordinances, building restrictions and other laws and regulations now in effect or hereafter adopted by any governmental authority having jurisdiction over the condition of any buildings, structures and other improvements located thereon, all as of the commencement of the term of this Lease, without representation or warranty by Landlord. Tenant represents that it has examined the title to and the condition of the Premises and has found the same to be satisfactory to it. 1.3. Use of Leased Premises (a) Tenant shall use the Premises for the purpose of commercial offices and activities incidental and related thereto (the "Intended Use"). Tenant agrees to remain open for business and to operate the Intended Use in all or substantially all of the Premises during the Term. Tenant may occupy and use the Premises for no use other than the Intended Use without Landlord's consent, which shall not be unreasonably withheld conditioned or delayed. In no event, however, shall the Premises be used for a use which would (i) have a permanent and material adverse effect on the value of the Premises, (ii) increase (when compared to use as the Intended Use) the likelihood that Tenant, Landlord or Lender would incur liability under any provisions of any Environmental Laws, or (iii) result in or give rise to any material environmental deterioration or degradation of the Premises. Tenant shall not create or suffer to exist any public or private nuisance, hazardous or illegal condition or waste on or with respect to the Premises. Tenant shall not use, occupy or permit any of the Premises to be used or occupied, nor do or permit anything to be done in or on any of the Premises, in a manner which would (A) make void or voidable any insurance which Tenant is required hereunder to maintain then in force with respect to any of the Premises, or (B) affect the ability of Tenant to obtain any insurance which Tenant is required to furnish hereunder, (C) impair Landlord's title to the Premises, or in such manner as might reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or third Persons, or of implied dedication of the Premises or any portion thereof, or (D) conflict with the terms or conditions of any instrument or agreement between Landlord and Tenant. Nothing contained in this Lease and no action by Landlord shall be construed to mean that Landlord has granted to Tenant any authority to do any act or make any agreement that may create any such third party or public right, title, interest, lien, charge or other encumbrance upon the estate of the Landlord in the Premises. (b) Tenant shall not conduct its business operation in the Premises unless and until (and only during such time as) all necessary certificates of occupancy, permits, licenses and consents from any and all appropriate governmental authorities have been obtained by Tenant and are in full force and effect. 1.4. Quiet Enjoyment For so long as no Event of Default (as hereinafter defined) has occurred and is continuing hereunder, Landlord warrants peaceful and quiet enjoyment of the Premises by Tenant against acts of Landlord or anyone claiming through Landlord, provided that Landlord and its agents may enter upon and examine the Premises at reasonable times. Exercise by Landlord of its rights to come upon the Premises as set forth in this Lease shall not constitute a violation of this Section. 2. TERM. 2.1. Term Subject to the terms and conditions hereof, Tenant shall have and hold the Premises for a primary term (herein called the "Primary Term") commencing on the Commencement Date and ending at midnight on December 31, 2020 unless this Lease shall be sooner terminated or extended. Tenant shall have the right and option to extend this Lease for four (4) consecutive extended terms, of five (5) years each (herein, collectively called the "Extended Terms" and individually, an "Extended Term" and together with the Primary Term, sometimes hereinafter called the "Term" "term of this Lease" or "term hereof"). If no Event of Default shall exist at the time of exercise of such option, each Extended Term shall commence on the day immediately succeeding the expiration date of the Primary Term or the preceding Extended Term and shall end at midnight on the day immediately preceding the fifth anniversary of the first day of such Extended Term. Provided no Event of Default shall exist at the time of exercise of such option, Tenant may exercise each said option to extend this Lease for an Extended Term by giving written notice to that effect at least six (6) months prior to the expiration of the then existing term. If Tenant fails to exercise an option to extend the Term six (6) months or more prior to the expiration of the then current Term, Tenant's option to extend the Term shall not be terminated and this Lease shall not expire unless Landlord delivers to Tenant written notice of Tenant's failure to exercise its option to extend the Term of this Lease and Tenant then fails to exercise the option within fifteen (15) days after receipt of the written notice from Landlord. If Tenant does not exercise any such option in a timely manner, then Landlord shall have the right during the remainder of the Term of this Lease to advertise the availability of the Premises for reletting and to erect upon the Premises signs appropriate for the purpose of indicating such availability. The term "Lease Year" shall mean a calendar year, except that the first partial "Lease Year" (the "First Lease Year") shall commence on the "Commencement Date and expire on December 31, 2000. 3. BASIC RENT; ADDITIONAL RENT 3.1. Basic Rent Tenant covenants to pay to Landlord as and for the rental of the Premises the amounts set forth below (the ---------- "Basic Rent"): (a) For and with respect to the First Lease Year the amount of $18,750.00 per calendar month (but if the Commencement Date does not occur on the first day of a calendar month, the installment for the period from the Commencement Date to the end of the calendar month in which the Commencement Date occurs shall be paid on the Commencement Date and shall be prorated based on a thirty (30) day month). (b) For and with respect to the second Lease Year (i.e., calendar year 2001), the amount of $ 225,000.00, payable in equal monthly installments of $18,750.00 . (c) Basic Rent shall be adjusted commencing with the first (1st) day of the third Lease Year and as of the first (1st) day of each Lease Year thereafter (each such date being referred to herein as an "BR Adjustment Date" and each such Lease Year commencing with the third Lease Year being referred to herein as a "BR Period"). Basic Rent for the first BR Period and for each subsequent BR Period, including each BR Period during any Extended Terms, will be adjusted on the first BR Adjustment Date by an amount calculated by multiplying the Basic Rent then in effect by five percent (5%). (d) If an option to extend the Term is exercised, for and with respect to the applicable Extended Term, at the rate equal to ninety-five percent (95%) of fair market rental value, but in no event less than the Basic Rent payable in the last year of the prior portion of the Term ("Extended Term Basic Rent"). Fair market rental value will be determined as of the first day of the applicable Extended Term but at the time and on the basis set forth in Section 11.3 hereof. Tenant unconditionally and irrevocably agrees to make the Basic Rent payments directly to Landlord or Landlord's designee and to pay the same on the first day of each month, commencing on the Commencement Date. After any Event of Default, Landlord shall have the right to require that such payments be made in immediately available funds. 3.2 Lease Security On or before the Commencement Date, Tenant shall pay to Landlord the sum of $375,000.00 as and for a security deposit (the "Security Deposit"). The Security Deposit shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the Lease Term. Landlord is not required to hold the Security Deposit in trust and may hold and commingle the Security Deposit with other funds of Landlord. Landlord shall not be required to pay to Tenant any interest on the Security Deposit at any time. If Tenant defaults with respect to any provision of this Lease, Landlord may, but shall not be required to, use, apply or retain all or any part of this Security Deposit for the payment of any Rent or any other amount payable by Tenant, or for the payment of any amount which Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Security Deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount and Tenant's failure to do so shall be a material breach of this Lease. If Landlord terminates this Lease as a result of any default of Tenant, then the Security Deposit shall be applied to the damages suffered by. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant or, at Landlord's option, to the last assignee of Tenant's interest hereunder, no earlier than thirty (30) days after the expiration of the Lease Term. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer the Security Deposit to Landlord's successor in interest and Landlord shall be discharged from all liability in regard thereto. No successor-in-interest to Landlord shall be liable for the return of all or any portion of the Security Deposit to Tenant except to the extent the Security Deposit transferred to such successor-in-interest. Performance of Tenant's obligations under this Lease shall also be secured by the Tenant's interests in and possession of the Premises. Upon the occurrence of any event of default by Tenant, Landlord may terminate Tenant's interests in and possession of the Premises in accordance with Section 10 hereof. Performance of Tenant's obligations under this Lease shall also be secured by a statutory lien on all personal property of Tenant at any time located on or at the Premises and Tenant shall execute any and all security agreements and financing statements as Landlord may require from time to time to evidence and perfect the statutory lien. Neither the Security Deposit, Tenant's interest in and possession of the Premises, Landlord's statutory lien or any other security for Tenant's obligations under this Lease shall limit or reduce Landlord's exercise of any or all of its rights and remedies under this Lease. 3.3. Additional Rent Tenant shall pay and discharge before the imposition of any fine, lien, interest or penalty may be added thereto for late payment thereof, as Additional Rent, all other amounts and obligations which Tenant assumes or agrees to pay or discharge pursuant to this Lease, together with every fine, penalty, interest and cost which may be added by the party to whom such payment is due for nonpayment or late payment thereof. All references in this Lease to Basic Rent shall include the Additional Rent payable by Tenant pursuant to this Lease. In the event of any failure by Tenant to pay or discharge any of the foregoing, Landlord shall have all rights, powers and remedies provided herein, by law or otherwise, in the event of nonpayment of Basic Rent. 3.4. Late Charge If any installment of Basic Rent is not paid within five (5) days after notice that the same is due and not paid, Tenant shall pay to Landlord or Lender, as the case may be, on demand, as Additional Rent, a late charge equal to three percent (3%) (the "Late Charge") on such overdue installment of Basic Rent. Such payment shall be in addition to, and not in lieu of, the interest payable pursuant to Section 11.17. 3.5. True Lease Landlord and Tenant agree that this Lease is a true lease and does not represent a financing arrangement. Each party shall reflect the transactions represented by this Lease in all applicable books, records and reports (including, without limitation, income tax filings) in a manner consistent with "true lease" treatment rather than "financing" treatment. 3.6. Net Lease; Non-Terminability (a) This is an absolutely net lease to Landlord. It is the intent of the parties hereto that the Basic Rent payable under this Lease shall be an absolutely net return to Landlord and that Tenant shall pay all costs and expenses relating to the Premises and operations carried on therein, including but not limited to costs and expenses relating to any period prior to the Commencement Date. Any amount or obligation herein relating to the Premises which is not expressly declared to be that of Landlord shall be deemed to be an obligation of Tenant to be timely performed by Tenant at Tenant's expense. Basic Rent, Additional Rent and all other sums payable hereunder by Tenant, shall be paid without notice, demand, set-off, counterclaim, abatement, suspension, deduction or defense. (b) This Lease shall not terminate nor shall Tenant have any right to terminate this Lease, nor shall Tenant be entitled to any abatement or reduction of rent hereunder, nor shall the obligations of Tenant under this Lease be affected by reason of: (i) any damage to or destruction of all or any part of the Premises from whatever cause; (ii) the taking in whole or in part of the Premises or any portion thereof by condemnation, requisition or otherwise except as provided in Article 7; (iii) the prohibition, limitation or restriction of Tenant's use of all or any part of the Premises, or any interference with such use; (iv) any eviction by paramount title or otherwise; (v) Tenant's acquisition or ownership of all or any of the Premises otherwise than as expressly provided herein; (vi) any default on the part of Landlord under this Lease, or under any other agreement to which Landlord and Tenant may be parties; (vii) any abandonment of the Premises by Tenant or (viii) any other cause whether similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent covenants and agreements, that the Basic Rent, the Additional Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to Article 7 of this Lease. (c) Tenant agrees that it will remain obligated under this Lease in accordance with its terms, and it will not take any action to terminate, rescind or avoid this Lease because of: (i) any readjustment, liquidation, dissolution, or winding-up or other proceeding affecting Landlord or its successors-in-interest or (ii) any action with respect to this Lease which may be taken by any trustee or receiver of Landlord or its successors-in-interest or by any court in any such proceeding. (d) To the extent permitted by applicable law, Tenant waives all rights which may now or hereafter be conferred by law (i) to quit, terminate or surrender this Lease or the Premises or any part thereof, or (ii) to any abatement, suspension, deferment or reduction of the Basic Rent, Additional Rent or any other sums payable under this Lease. 4. PAYMENT OF IMPOSITIONS, TAXES AND ASSESSMENTS; COMPLIANCE WITH LAW; ENVIRONMENTAL MATTERS 4.1. Payment of Impositions Tenant shall pay or discharge all Impositions (as hereinafter defined) when due, including but not limited to Impositions relating to any period prior to the Commencement Date. Notwithstanding the foregoing provision of this Section 4.1, Tenant shall not be required to pay any franchise, corporate, estate, inheritance, succession, transfer (other than transfer taxes, recording fees, or similar charges payable in connection with a conveyance hereunder to Tenant), income or excess profits taxes of Landlord hereunder. Tenant agrees to furnish to Landlord and Lender, evidence of the payment of the taxes described in Section 11.12(a)(i) within thirty (30) days after payment thereof. Tenant agrees to furnish evidence of payment of other Impositions with fifteen (15) days of Landlord's request therefor. In the event that any Imposition levied or assessed against the Premises becomes due and payable during the term hereof and may be legally paid in installments, Tenant shall have the option to pay such Imposition in installments. In such event, Tenant shall be liable only for those installments which become due and payable during the term hereof or which were due and payable prior to the term hereof. 4.2. Compliance with Laws Tenant shall, at its expense, comply with and shall cause the Premises to comply with all governmental statutes, laws, rules, orders, regulations and ordinances, including without limitation, the Americans with Disabilities Act of 1990, as the same may be amended from time to time, all fire regulations, occupational health and safety laws, applicable point of sale laws, building codes, Environmental Laws, zoning and land use laws and regulations, and any other law the failure to comply with which at any time would materially affect Landlord or the Premises or any part thereof, or the use thereof, including those which require the making of any structural, unforeseen or extraordinary changes, whether or not any of the same involve a change of policy on the part of the body enacting the same. Tenant shall, at its expense, comply with all changes required in order to obtain the Required Insurance (as hereinafter defined), and with the provisions of all contracts, agreements, instruments and restrictions existing at the commencement of this Lease or thereafter suffered or permitted by Tenant affecting the Premises or any part thereof or the ownership, occupancy or use thereof. 4.3. Permitted Contests Provided that Tenant shall have complied with, and shall continue to comply with, its obligations under Section 4.2, Tenant may contest, in good faith and at its expense and in accordance with all laws and governmental requirements, the existence, the amount or the validity of the requirements imposed pursuant to Section 4.2, or the extent of its liability therefor, by appropriate proceedings. At least thirty (30) days prior to any such contest, and as a condition thereto, Tenant shall notify Landlord as to the proposed contest in reasonable detail, and Landlord shall have the right to require Tenant to post security in amount and form reasonably required by Landlord. No such contest or proceedings shall in any way eliminate or otherwise interfere with Tenant's obligation to make timely payments of Basic Rent and Additional Rent under this Lease. Tenant further agrees that each such contest shall be promptly prosecuted to a final conclusion. Tenant shall pay, indemnify and save Landlord harmless against, any and all losses, judgments, decrees and costs (including all attorneys' fees, appearance costs and expenses) incurred by Landlord during the Lease Term in connection with any such contest and shall, promptly after the final settlement, compromise or determination of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein or in connection therewith, together with all penalties, fines, interests, costs and expenses thereof or in connection therewith, and perform all acts, the performance of which shall be ordered or decreed as a result thereof. No such contest shall subject Landlord to the risk of any criminal liability or shall subject the Premises to the risk of foreclosure. 4.4. Hazardous Materials Tenant shall: (a) not cause, or permit any Hazardous Material (as defined below) to exist on or discharge from the Premises (except for items sold or used in the ordinary course of Tenant's business and for which any required licenses and permits are issued and in any event in accordance with Environmental Laws), and shall promptly: (i) pay any claim against Tenant, Landlord, Lender or the Premises; (ii) remove any charge or lien upon any of the Premises; and (iii) defend, indemnify and hold Landlord and Lender harmless from any and all claims, expenses, liability, loss or damage (including reasonable attorneys' fees) resulting from any Hazardous Material that at any time exists on or is discharged from the Premises except to the extent it is the direct result of the actual gross negligence or willful misconduct of Landlord; (b) not cause or permit any Hazardous Material to exist on or discharge from any property owned or used by Tenant which would result in any charge or lien upon the Premises and shall promptly: (i) pay any claim against Tenant, Landlord, Lender or the Premises; (ii) remove any charge or lien upon the Premises; and (iii) defend, indemnify and hold Landlord and Lender harmless from any and all claims, expenses, liability, loss or damage (including reasonable attorneys' fees) resulting from the existence or discharge of any such Hazardous Material except to the extent it is the direct result of the actual gross negligence or willful misconduct of Landlord; (c) notify Landlord and Lender within ten (10) days after Tenant first has knowledge of any of the following: (i) that Hazardous Material exists on or has been discharged from or onto the Premises (whether originating thereon or migrating to the Premises from other property); (ii) that Tenant is subject to investigation by any governmental authority evaluating whether any remedial action is needed to respond to the release or threatened release of any Hazardous Material into the environment from the Premises; (iii) notice or claim to the effect that Tenant is or may be liable to any person as a result of the release or threatened release of any Hazardous Material into the environment from the Premises; (iv) notice that the Premises are subject to an environmental lien; (v) notice of violation to Tenant or awareness by Tenant of a condition which might reasonably result in a notice of violation of any applicable Environmental Law. (d) comply, and cause the Premises to comply, with all statutes, laws, ordinances, rules and regulations of all local, state or federal authorities having authority over the Premises or any portion thereof or their use, including without limitation, relative to any Hazardous Material, petroleum products, asbestos containing materials or PCB's. (e) comply with all provisions of that certain Prospective Purchaser Agreement with the Arizona Department of Environmental Quality dated on or about May 28, 1999. (f) "Hazardous Material" means any hazardous or toxic material, substance or waste which is defined by those or similar terms or is regulated as such under any Environmental Laws. "Environmental Laws" means any statute, law, ordinance, rule or regulation of any local, county, state or federal authority having jurisdiction over the Property or any portion thereof or its use as the same may be amended from time to time, including but not limited to: (i) the Federal Water Pollution Control Act (33 U.S.C. Section 1317) as amended; (ii) the Federal Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) as amended; (iii) the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) as amended; (iv) the Toxic Substance Control Act (15 U.S.C. Section 2601) as amended; and (v) the Clean Air Act (42 U.S.C. Section 7401) as amended. (g) The Tenant's obligations and liabilities under this Section 4.4 shall survive the expiration or termination of this Lease and shall include, without limitation, matters arising prior to the Commencement Date. 5. MAINTENANCE AND REPAIR; ALTERATIONS 5.1. Maintenance and Repair Tenant acknowledges that it has received the Premises in good condition, repair and appearance. Tenant agrees that, at its expense, it will keep and maintain the Premises, including any altered, rebuilt, additional or substituted buildings, structures and other improvements thereto, in good condition and repair. It will make promptly, all structural and nonstructural, foreseen and unforeseen, ordinary and extraordinary changes and repairs or replacements of every kind which may be required to be made to keep and maintain the Premises in such good condition, repair and appearance and it will keep the Premises orderly and free and clear of rubbish. Tenant covenants not to install any underground storage tanks on the Premises. Tenant agrees that its obligation to maintain and repair the Premises as set forth in this Section 5.1 benefit both Landlord and Tenant, are the sole responsibility of Tenant, and may not be delegated. Tenant further covenants to perform or observe all terms, covenants or conditions of any reciprocal easement or maintenance agreement to which it may at any time be a party or to which the Premises are currently subject. Tenant shall, at its expense, use its best efforts to enforce compliance with any reciprocal easement or maintenance agreement benefiting the Premises by any other person subject to such agreement. Landlord shall not be required to maintain, repair or rebuild, or to make any Alterations of any nature to the Premises, or any part thereof, whether ordinary or extraordinary, structural or nonstructural, foreseen or not foreseen, or to maintain the Premises or any part thereof in any way. Tenant hereby expressly waives the right to make repairs at the expense of Landlord which may be provided for in any law in effect at the time of the commencement of the term of this Lease or which may thereafter be enacted. If Tenant shall abandon the Premises, it shall give Landlord and Lender immediate notice thereof. The obligations of the Tenant to pay Basic Rent and Additional Rent shall not be eliminated, reduced, suspended, or otherwise impaired by reason of such abandonment of the Premises. In the event that the Premises shall violate any law and as a result of such violation an enforcement action is threatened or commenced against Tenant or with respect to the Premises, then Tenant shall either (i) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such violation, whether the same shall affect Landlord, Tenant or both, or (ii) take such action as shall be necessary to remove such violation, including, if necessary, making any necessary repairs or replacements, structural or otherwise. 5.2. Engineering Report Beginning the Sixth Lease Year, and every five (5) years thereafter, Tenant shall provide Landlord, upon Landlord's written request, with an engineering study of the Premises ("Engineering Report") addressed to Landlord, in form, content and scope reasonably acceptable to Landlord, prepared by a qualified engineering firm. The Engineering Report shall include, without limitation, a study or analysis of (a) all structural components of the Premises, (b) all mechanical, electrical, plumbing, HVAC, sprinkler, fire suppression, elevators, and other building systems and equipment designated by Landlord, and (c) the roof of all buildings. 5.3. Encroachments If any Improvements situated on the Premises at any time during the Term of this Lease shall encroach upon any property, street or right-of-way adjoining or adjacent to the Premises, or shall violate the agreements or conditions contained in any restrictive covenant affecting the Premises or any part thereof, or shall impair the rights of others under or hinder or obstruct any easement or right-of-way to which the Premises are subject, then, promptly after the written request of Landlord or any person affected by any such encroachment, violation, impairment, hindrance or obstruction, Tenant shall, at its expense, either (i) obtain effective waivers, or settlements of all claims, liabilities and damages resulting from each such encroachment, violation, impairment, hindrance or obstruction whether the same shall affect Landlord, Tenant or both, or (ii) make such changes in the improvements on the Premises and take such other action as shall be necessary to remove such encroachments, hindrances or obstructions and to end such violations or impairments, including, if necessary, the alteration or removal of any improvement on the Premises. Any such alteration or removal shall be made in conformity with the requirements of Section 5.4 hereof to the same extent as if such alteration or removal were an Alteration under the provisions of Section 5.4. 5.4. Alterations Tenant may, at its expense, make additions to and alterations of the Improvements to the Premises and make substitutions and replacements thereto (sometimes hereinafter collectively referred to as "Alterations"), provided that: (i) Landlord approves, which approval shall not be unreasonably withheld, conditioned or delayed, any Alterations to the Premises before such alterations are commenced, after having received from Tenant a complete set of plans and specifications for the proposed work, (ii) in Landlord's reasonable judgment, the market value of the Premises and the Intended Use shall not thereby be reduced or impaired and the appearance of the Property will not be adversely affected; (iii) the Alterations are architecturally consistent with existing Improvements; (iv) the Alterations shall be performed in a good and workmanlike manner; (v) such work shall not violate any term of any restriction to which the Premises are subject or the requirements of any insurance policy required to be maintained by Tenant hereunder, and shall be expeditiously completed in compliance with all laws, ordinances, rules, regulations and requirements applicable thereto, including without limitation, the Americans with Disabilities Act of 1990 and all regulations issued thereunder, as the same may be amended from time to time; and (vi) no Improvements shall be demolished unless Tenant shall have first furnished Landlord with such surety bonds or other security acceptable to Landlord as shall be necessary to assure rebuilding of such Improvements. Tenant shall promptly pay all costs and expenses of each such Alteration, discharge all liens arising therefrom and procure and pay for all permits and licenses required in connection therewith. All such Alterations shall be and remain part of the realty and the property of Landlord and shall be subject to this Lease. Tenant may place upon the Premises any inventory, trade fixtures, machinery or equipment belonging to Tenant or third parties and may remove the same at any time during the Term. Tenant shall repair any damage to the Premises or any portion thereof (including all Improvements thereon) caused by such removal. 5.5. No Liens Tenant will not, directly or indirectly, create or permit to be created or to remain, and shall within thirty (30) days of filing of any, mechanics, contractors or other liens, discharge or bond, at its expense, any liens with respect to, the Premises or any part thereof or Tenant's interest therein or the Basic Rent, Additional Rent or other sums payable by Tenant under this Lease, other than the lien for real estate taxes which are not yet due and payable. Nothing contained in this Lease shall be construed as constituting the consent or request, expressed or implied, by Landlord to the performance of any labor or services or of the furnishing of any materials for any Alterations, repair or demolition of or to the Premises or any part thereof by any contractor, subcontractor, laborer, materialman or vendor. Notice is hereby given that Landlord will not be liable for any labor, services or materials furnished or to be furnished to Tenant, or to anyone holding the Premises or any part thereof, and that no mechanic's or other liens for any such labor services or materials shall attach to or affect the interest of Landlord in and to the Premises. 6. INSURANCE; INDEMNIFICATION 6.1. Insurance Tenant shall maintain, or cause to be maintained, at its sole expense, the following insurance on the Premises --------- (herein called the "Required Insurance"): (a) Insurance against loss or damage to the Improvements (the "Improvements Insurance") under a fire and broad form of all risk extended coverage insurance policy (which shall include flood insurance if the Premises is located within a flood hazard area), together with an agreed value endorsement. Such insurance shall be in amounts sufficient to prevent Landlord or Tenant from becoming a co-insurer under the applicable policies, and not less than the full replacement cost of the Improvements (excluding footings and foundations and other parts of the Improvements which are not insurable) as reasonably determined from time to time by Landlord but not more frequently than once in any 12-month period. Such insurance policies may contain reasonable exclusions and deductible amounts as are common to properties similar to the Premises. (b) General public liability insurance for the benefit of Landlord, Tenant and Lender against claims for damages to person or property occurring on, in or about the Premises and the adjoining streets, sidewalks, gutters, curbs, passageways and other areas adjacent thereto, if any, with a combined single limit of at least Five Million Dollars ($5,000,000.00) for personal injury and property damage, such insurance to include full coverage of the indemnity set forth in Section 6.10. Policies for such insurance shall be for the mutual benefit of Landlord, Tenant and Lender, as their respective interests may appear. (c) Workers' compensation insurance to the extent necessary to protect Landlord, Tenant and the Premises against workers' compensation claims, covering all persons employed in connection with any work done on or about the Premises with respect to which claims for death or bodily injury could be asserted against Landlord, Tenant or the Premises. Such policy of workers' compensation insurance shall comply with all of the requirements of applicable state law. (d) At any time when any portion of the Premises are being constructed, altered or replaced, builder's risk insurance (in completed value non-reporting form) in an amount no less than the actual replacement value of the Improvements, exclusive of foundations and excavations. 6.2. Permitted Insurers The Required Insurance shall be written by companies of recognized financial standing authorized to do insurance business in the state in which the Premises are located and have Bests ratings of A X or better. The Required Insurance shall name as the insured parties thereunder Landlord and Tenant, as their interests may appear, and Lender as an additional insured under a standard "mortgagee" endorsement or its equivalent satisfactory to Landlord. Landlord shall not be required to prosecute any claim against, or to contest any settlement proposed by, an insurer. Tenant may, at its expense, prosecute any such claim or contest any such settlement in the name of Landlord, Tenant or both with the consent of Landlord, and Landlord will join therein at Tenant's written request upon the receipt by Landlord of an indemnity from Tenant against all costs, liabilities and expenses in connection therewith. 6.3. Insurance Claims Insurance claims by reason of damage to or destruction of any portion of the Premises shall be primarily adjusted by Tenant, but both Landlord and Lender shall have the right to join with Tenant in adjusting any such loss and approve any adjustment proposed by Tenant. 6.4. Insured Parties Any loss under any such policy shall be made payable to Landlord (or, if Landlord so elects, to Lender), subject to the requirements of Section 6.9. Every policy of Required Insurance shall contain an agreement that the insurer will not cancel such policy except after thirty (30) days' written notice to Landlord and Lender and that any loss otherwise payable thereunder shall be payable notwithstanding any act or negligence of Landlord, Tenant or Lender which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding (i) any foreclosure or other action taken by a creditor pursuant to any provision of any Mortgage or other Loan Document upon the happening of a default or Event of Default thereunder or (ii) any change in ownership of the Premises. 6.5. Delivery of Policies Tenant shall deliver to Landlord promptly after the delivery of this Lease, the original or duplicate policies or Accord-27 form certificates of insurers, satisfactory to Lender, evidencing all of the Required Insurance. Tenant shall, prior to the expiration of any such policy, deliver to Landlord another original or duplicate of such policy or certificates evidencing the renewal of any such policy. If Tenant fails to maintain or renew any Required Insurance, or to pay the premium therefor, or to deliver such certificate, then Landlord, at its option, but without obligation to do so, procure such insurance. Any sums so expended by Landlord shall be Additional Rent hereunder and shall be repaid by Tenant within five (5) days after notice to Tenant of such expenditure and the amount thereof. together with interest thereon at the Interest Rate. 6.6. No Double Coverage Tenant shall not obtain or carry separate insurance covering the same risks as any Required Insurance unless Tenant, Landlord and Lender are included therein as named insured, with loss payable as provided in this Lease and the policy contains a first mortgagee endorsement in favor of the Lender. Tenant shall immediately notify Landlord whenever any such separate insurance is obtained and shall deliver to Landlord the policies or certificates evidencing the same. Any insurance which Landlord may elect to carry shall be excess and not primary coverage. 6.7. Blanket Insurance Anything contained in this Article 6 to the contrary notwithstanding, all Required Insurance may be carried under a "blanket" or "umbrella" policy or policies covering other property or liabilities of Tenant, provided that such policies otherwise comply with the provisions of this Lease and specify the coverage and amounts thereof with respect to the Premises. 6.8. Damages for Tenant's Failure to Properly Insure Landlord or Lender shall not be limited in the proof of any damages which Landlord or Lender may claim against Tenant arising out of or by reason of Tenant's failure to provide and keep in force insurance, as provided above, to the amount of the insurance premium or premiums not paid or incurred by Tenant and which would have been payable under such insurance; but Landlord and Lender shall also be entitled to recover as damages for such breach, the uninsured amount of any loss, to the extent of any deficiency in the Required Insurance and damages, costs and expenses of suit suffered or incurred by reason of or damage to, or destruction of, the Premises, occurring during any period when Tenant shall have failed to provide the Required Insurance. Tenant shall indemnify, defend and hold harmless Landlord and Lender for any liability incurred by Landlord or Lender arising out of any deductibles for Required Insurance. 6.9. Casualty If all or any part of the Premises shall be damaged or destroyed by casualty which is insured or required to be insured under this Lease, or by any other casualty if the cost to repair such other casualty does not exceed twenty percent (20%) of the total replacement cost of the Improvements, Tenant shall promptly notify the Landlord thereof, and shall, with reasonable promptness and diligence, rebuild, replace and repair any damage or destruction to the Premises, at its expense, in conformity with the requirements of Section 5.4(a) hereof, in such manner as to restore the same to the same or better condition as existed prior to such casualty, using materials of the same or better grade than that of the materials being replaced, and there shall be no abatement of Basic Rent or Additional Rent. Proceeds of casualty insurance of $100,000.00 or less shall be paid to Tenant. Proceeds in excess of $100,000.00 shall be held by Landlord or a proceeds trustee (which may be Lender, an escrow or title company, or a bank or trust company designated by Landlord) and paid to Tenant, but only against certificates of Tenant, appropriate lien waivers and such other information reasonably required by Landlord or the proceeds trustee delivered to Landlord from time to time, but not more frequently than once per calendar month, as such work or repair progresses. Each such certificate shall describe the work or repair for which Tenant is requesting payment and the cost incurred by Tenant in connection therewith and stating that Tenant has not theretofore received payment for such work and has sufficient funds remaining to complete the work free of liens or claims. Any proceeds remaining after Tenant has repaired the Premises shall be delivered to Tenant No payment shall be made to Tenant if there exists any Event of Default under this Lease. If Tenant is not required to restore after a casualty, this Lease shall nevertheless remain in full force and effect, with no abatement of Basic Rent or Additional Rent, except that Landlord shall have the right to terminate this Lease by notice to Tenant if Tenant does not agree to restore within sixty (60) days after the casualty, or if Tenant agrees to restore but does not diligently proceed to do so. 6.10. Indemnification (a) Tenant agrees to pay, and to protect, defend, indemnify and save harmless Landlord, Lender and their agents from and against any and all actual liabilities, losses, damages, costs, expenses (including all reasonable attorneys' fees and expenses of Landlord but excluding lost profits and all other indirect or consequential damages), causes of action, suits, claims, demands or judgments of any nature whatsoever (i) arising from any injury to, or the death of, any person or damage to property (including property of employees and invitees of Tenant) on the Premises or upon adjoining sidewalks, streets or ways, to the extent not occasioned by the actual gross negligence or willful misconduct of Landlord, (ii) arising from the use, non-use, condition, maintenance, repair or occupation of the Premises or any part thereof or adjoining sidewalks, streets or ways, to the extent not occasioned by the actual gross negligence or willful misconduct of Landlord, (iii) arising from violation by Tenant of any agreement or condition of this Lease or any sublease (including without limitation the failure to pay Impositions), or any contract or agreement to which Tenant is a party, or any restriction, law, ordinance or regulation (including without limitation, the Americans With Disabilities Act of 1990 and all regulations issued thereunder) affecting the Premises or any part thereof or the ownership, occupancy or use thereof, to the extent not occasioned by the actual gross negligence or willful misconduct of Landlord; or (iv) arising out of any permitted contest referred to in Section 4.3 (collectively, "Indemnified Matters"). Without limiting the generality of the foregoing, the Indemnified Matters shall include matters arising prior to the Commencement Date. If Landlord, Lender or any agent of Landlord or Lender shall be made a party to any such litigation commenced against Tenant, and if Tenant, at its expense, shall fail to provide Landlord, Lender or their agents with counsel (upon Landlord's request) reasonably approved by Landlord, Tenant shall pay all costs and attorneys' fees and expenses incurred or paid by Landlord, Lender or their agents in connection with such litigation. Tenant's obligations and liabilities under this Section 6.10 shall survive the expiration of this Lease. Tenant waives all claims against Landlord arising from any liability described in this Section 6.10 (a), except to the extent caused by the actual gross negligence or willful misconduct of Landlord. The waiver and indemnity provisions in this paragraph are intended to exculpate and indemnify Landlord (i) from and against the direct consequences of its own negligence or fault when Landlord is solely negligent or contributorily, partially, jointly, comparatively or concurrently negligent with Tenant or any other person (but is not grossly negligent and has not committed willful misconduct) and (ii) from and against any liability of Landlord based on any applicable doctrine of strict liability unless resulting from the gross negligence or willful misconduct of Landlord. (b) Should any claim be made against Landlord by a person not a party to this Lease with respect to any Indemnified Matter, Landlord shall promptly give Tenant written notice of any such claim, and Tenant shall thereafter defend or settle any such claim, at its sole expense, on its own behalf and with counsel of its selection; provided, however, that Tenant's counsel shall be competent counsel experienced in the type of litigation or claim at issue and shall be acceptable to Landlord, acting reasonably. Upon Tenant's assumption of the defense of any claim against Landlord pursuant to Tenant's indemnity, Landlord shall have the right to participate in the defense or settlement of the claim with counsel retained and paid by it and Tenant shall cause the attorneys retained by it to consult and cooperate fully with counsel for Landlord. In such defense or settlement of any claims, Landlord shall provide Tenant with originals or copies of all relevant documents and shall cooperate with and assist Tenant, at no expense to Landlord. Notwithstanding any provision of this Section 6.10 to the contrary, Tenant shall not enter into any settlement or agreement in connection with any Indemnified Matters binding upon or adversely affecting either Landlord or Lender, or admit any liability or fact in controversy binding upon or adversely affecting either Landlord or Lender, without the prior written consent of Landlord or Lender, as the case may be, in such party's sole discretion. (c) Landlord agrees to pay, and to protect, defend, indemnify and save harmless Tenant and its agents from and against any and all liabilities, losses, damages (actual and consequential), costs, expenses (including all reasonable attorneys' fees and expenses of Tenant), causes of action, suits, claims, demands or judgments of any nature whatsoever arising from the actual gross negligence or willful misconduct of Landlord in connection with the Premises. 7. CONDEMNATION. 7.1. Assignment of Award Subject to the rights of Tenant set forth in this Article 7, Tenant hereby irrevocably assigns to Landlord any award or payment to which Tenant may be or become entitled with respect to Complete, Partial or Temporary Taking of the Premises or any part thereof, by condemnation or other eminent domain proceedings pursuant to any law, general or special, by any governmental authority, whether the same shall be paid or payable in respect of Tenant's leasehold interest hereunder or otherwise. Notwithstanding the foregoing, Tenant may recover the value of its personal property at the Premises, including leasehold improvements if taken, so long as the amount of the Net Award received by Landlord is at least equal to the net book value of the Premises as reflected on Landlord's financial statements. Landlord and Lender shall be entitled to participate in any such proceeding. 7.2. Definitions for Article 7 (a) "Complete Taking" shall mean the occurrence of any actual or threatened condemnation or other eminent domain proceeding pursuant to any general or special law, or any agreement with an authority having the power of eminent domain, which results in the taking or conveyance of (i) the entire Premises or (ii) such a significant portion of the Premises that, in the good faith judgment of either Tenant or Landlord, it is uneconomic to rebuild or restore the remaining portion of the Premises for the continued operation of the business. (b) "Partial Taking" shall mean the occurrence of any taking of a portion of the Premises by condemnation or other eminent domain proceedings, or any agreement with an authority having the power of eminent domain, which does not result in the taking or conveyance of such a significant portion of the Premises that, in the good faith judgment of either Tenant or Landlord, it is uneconomic to rebuild or restore the remaining portion of the Premises for the continued operation of the business. (c) "Temporary Taking" shall mean the occurrence of a temporary taking of the use or occupancy of the Premises or any part thereof by any governmental authority. (d) "Net Award" shall mean all amounts payable as a result of any condemnation or other eminent domain proceeding and all amounts payable pursuant to any agreement with any condemning authority (which agreement shall be deemed to be a taking) which has been made in settlement of or under threat of any condemnation or other eminent domain proceeding affecting the Premises, less all expenses incurred as a result thereof not otherwise paid by Tenant and the collection of such amounts. (e) "Purchase Offer" shall mean a purchase offer as described in this Article 7. 7.3. Complete Taking Upon the occurrence of a Complete Taking Landlord or Tenant may elect to terminate this Lease by delivering a notice of termination specifying a Termination Date occurring not less than sixty (60) days after the delivery of such notice, and this Lease shall continue in full force and effect without abatement of rent until the Termination Date. 7.4. Partial Taking Upon the occurrence of any Partial Taking, this Lease shall continue in full effect without abatement or reduction of Basic Rent, Additional Rent or other sums payable by Tenant. In the event Landlord receives a Net Award in connection with any such Partial Taking Landlord shall, provided there is no Event of Default hereunder, make the Net Award available to Tenant, and Tenant shall, regardless of the adequacy of the award, make repairs in accordance with the requirements of Section 5.4(a) hereof so that, thereafter, the Premises shall be, as nearly as possible, in a condition as good as the condition thereof immediately prior to such Taking, but, if such Net Award shall be in excess of One Hundred Thousand Dollars ($100,000), the proceeds shall be held by Landlord or a proceeds trustee (which may be Lender or Lender's designee, or a bank or trust company designated by Landlord), and paid only upon delivery to Landlord of (i) certificates of Tenant identifying the repair work for which Tenant is requesting payment and the cost incurred by Tenant in connection therewith and stating that Tenant has not theretofore received payment for such work; (ii) appropriate lien waivers; and (iii) such other information as may be reasonably required by the proceeds trustee. Any Net Award remaining after such repairs have been made shall be delivered to Tenant if no Event of Default exists; otherwise, the excess shall be paid to Landlord. 7.5. Temporary Taking Upon the occurrence of any Temporary Taking, Tenant shall, promptly after any such Temporary Taking ceases, at its expense, repair any damage caused thereby in conformity with the requirements of Section 5.4(a) hereof so that, thereafter, the Premises shall be, as nearly as possible, in a condition as good as the condition thereof immediately prior to such Temporary Taking. In the event of such Temporary Taking, Tenant shall be entitled to receive the entire Net Award payable by reason of such Temporary Taking, less any costs incurred by the Landlord in connection therewith. If the cost of any repairs required to be made by Tenant pursuant to this Section 7.5 shall exceed the amount of the Net Award, the deficiency shall be paid by Tenant. No payments shall be made to Tenant pursuant to this Section 7.5, if any Event of Default shall exist under this Lease. No Basic Rent or Additional Rent shall abate through the duration of such Temporary Taking. 8. ASSIGNMENT AND SUBLETTING. 8.1. Power to Assign and Sublet With Landlord's prior written consent, which shall not be unreasonably withheld, conditioned or delayed, Tenant may sublet all of the Premises and may assign all its rights and interests under this Lease (provided that each such sublease or assignment shall expressly be made subject to all of the provisions, including the use provisions of Section 1.3 of this Lease). Tenant shall, within ten (10) days after the execution and delivery of any such assignment or the sublease of all of the Premises, deliver a conformed copy thereof to Landlord. 8.2. Assumption by Assignee; Tenant Remains Liable If Tenant assigns its rights and interests under this Lease, the assignee under such assignment shall expressly assume all the obligations of Tenant hereunder in an instrument delivered to Landlord at the time of such assignment. No assignment or sublease made as permitted by this Article 8 shall affect or reduce any of the obligations of Tenant hereunder or the obligations of any guarantor of Tenant, and all such obligations shall continue in full force and effect as obligations of a principal and not as obligations of a guarantor or surety, to the same extent as though no assignment or subletting had been made, provided that performance by any such assignee or sublessee of any of the obligations of Tenant under this Lease shall be deemed to be performance by Tenant. No sublease or assignment made as permitted by this Article 8 shall impose any obligations on Landlord or otherwise affect any of the rights of Landlord under this Lease. Tenant hereby grants a security interest to Landlord in all subleases and all rents, issues and profits derived and to be derived therefrom, to secure performance of Tenant's obligations under this Lease. Landlord hereby grants to Tenant a license to collect all rents payable under any sublease (up to one month in advance), but upon any Event of Default, Landlord may in its sole discretion revoke such license and collect the rents directly from any sublessee and retain the same. 8.3. Other Transfers Void Neither this Lease nor the Term hereby demised shall be mortgaged by Tenant, nor shall Tenant mortgage or pledge the interest of Tenant in and to any sublease of the Premises or the rentals payable thereunder. Any mortgage, pledge, sublease or assignment made in violation of this Article 8 shall be void. 9. FINANCIAL INFORMATION. Tenant will furnish to Landlord and Lender (i) Tenant's annual audited financial statements within ninety (90) days after the end of Tenant's fiscal year, and (ii) Tenant's unaudited quarterly financial statements within forty-five (45) days after the end of each quarter. 10. DEFAULT. 10.1. Events of Default Any of the following occurrences or acts shall constitute an event of default (herein called an "Event of Default") under this Lease: (a) If Tenant, at any time during the continuance of this Lease (and regardless of the pendency of any bankruptcy, reorganization, receivership, insolvency or other proceedings at law, in equity, or before any administrative tribunal, which have or might have the effect of preventing Tenant from complying with the terms of this Lease), shall (i) fail to make any payment when due of Basic Rent, Additional Rent or other sum herein required to be paid by Tenant hereunder for ten (10) days after written notice of such failure; (ii) fail to continuously operate the Premises for the Intended Use in accordance with the terms and conditions of Section 1.3 of this Lease for thirty (30) days after written notice of such failure; or (iii) fail to observe or perform any other provision hereof for thirty (30) days after written notice of such failure to observe or perform; or (b) If any representation or warranty of Tenant hereunder or set forth in any notice, certificate, demand, request or other instrument delivered pursuant to, or in connection with this Lease or in connection with the acquisition of the Premises by Landlord, shall either prove to be false or misleading in any material respect as of the time when the same shall have been made and Landlord actually suffers damages as a proximate cause thereof which are not paid by Tenant; or (c) If Tenant shall file a petition commencing a voluntary case under the Federal Bankruptcy Code or any federal or state law (as now or hereafter in effect) relating bankruptcy, insolvency, reorganization, winding-up or adjustment of debts (hereinafter collectively called "Bankruptcy Law") or if Tenant shall: (i) apply for or consent to the appointment of, or the taking of possession by, any receiver, custodian, trustee, United States Trustee or liquidator (or other similar official) of the Premises or any part thereof or of any substantial portion of Tenant's property; or (ii) generally not pay its debts as they become due, or admit in writing its inability to pay its debts generally as they become due; or (iii) make a general assignment for the benefit of its creditors; or (iv) file a petition commencing a voluntary case under or seeking to take advantage of any Bankruptcy Law; or (v) fail to controvert in timely and appropriate manner, or in writing acquiesce to, any petition commencing an involuntary case against Tenant or otherwise filed against Tenant pursuant to any Bankruptcy Law; or (vi) take any action in furtherance of any of the foregoing; or (d) If an order for relief against Tenant shall be entered in any involuntary case under the Federal Bankruptcy Code or any similar order against Tenant shall be entered pursuant to any other Bankruptcy Law, or if a petition commencing an involuntary case against Tenant or proposing the reorganization of Tenant under any Bankruptcy Law shall be filed and not be discharged or denied within ninety (90)) days after such filing, or if a proceeding or case shall be commenced in any court of competent jurisdiction seeking: (i) the liquidation, reorganization, dissolution, winding-up or adjustment of debts of Tenant; or (ii) the appointment of a receiver, custodian, trustee, United States Trustee or liquidator (or any similar official) of the Premises or any part thereof or of Tenant or of any substantial portion of Tenant's property; (iii) the attachment of the Premises or any portion thereof, or (iv) any similar relief as to Tenant pursuant to any Bankruptcy Law, and any such proceeding or case shall continue undismissed for ninety (90) days after such relief is granted; or (e) If the Premises shall be left both unattended and without maintenance as provided herein, for a period of thirty (30) consecutive days or more; or (f) If there occurs an "Event of Default" (as defined therein) under any of the leases listed on Exhibit "C" and the Event of Default is not cured within the applicable cure period and as a result thereof Landlord either terminates the other lease or recovers possession of the premises leased pursuant to the other lease. 10.2. Landlord's Remedies (a) In the event of an Event of Default and Tenant's failure to cure the Event of Default within the applicable cure period, Landlord shall have the right at its election to give Tenant ten (10) days' written notice of Landlord's intention to terminate the term of this Lease on a date specified in such notice. Thereupon, the term of this Lease and the estate hereby granted shall terminate on such date as completely and with the same effect as if such date were the date fixed herein for the expiration of the term of this Lease, and all rights of Tenant hereunder shall terminate, but Tenant shall remain liable as provided herein. (b) In the event of an Event of Default and Tenant's failure to cure the Event of Default within the applicable cure period, Landlord shall have the immediate right, whether or not the term of this Lease shall have been terminated pursuant to Section 10.2(a), to (i) re-enter and repossess the Premises or any part thereof by force, summary proceedings, ejection or otherwise, and (ii) remove all persons and property therefrom, Tenant hereby expressly waiving any and all notices to quit, cure or vacate provided by current or any future law. Landlord shall be under no liability by reason of any such re-entry, repossession or removal. No such re-entry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate the term of this Lease unless a written notice of such intention to be given to Tenant pursuant to Section 10.2(a). (c) At any time or from time to time after the repossession of the Premises or any part thereof pursuant to Section 10.2(b), whether or not the term of this Lease shall have been terminated pursuant to Section 10.2(a), Landlord may (but shall be under no obligation to) relet the Premises or any part thereof for the account of Tenant, in the name of Tenant or Landlord or otherwise, without notice to Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on such reasonable conditions (which may include concessions or free rent) and for such uses as Landlord may reasonably determine, and Landlord may collect and receive any rents payable by reason of such reletting. Landlord shall not be responsible or liable for any failure to relet the Premises or any part thereof or for any failure to collect any rent due upon any such reletting. (d) No termination of the term of this Lease pursuant to Section 10.2(a), by operation of law or otherwise, and no repossession of the Premises or any part thereof pursuant to Section 10.2(b) or otherwise, and no reletting of the Premises or any part thereof pursuant to Section 10.2(c), shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination, repossession or reletting. (e) In the event of any such termination or repossession, Tenant will pay to Landlord the Basic Rent, Additional Rent and other sums required to be paid by Tenant to and including the date of such termination or repossession (together with interest at the Interest Rate on past due amounts); and, thereafter, Tenant shall, until the end of what would have been the term of this Lease in the absence of such termination or repossession, and whether or not the Premises or any part thereof shall have been relet, be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed current damages: (i) the Basic Rent, Additional Rent and other sums which would be payable under this Lease by Tenant in the absence of such termination or repossession, less (ii) the net proceeds, if any, of any reletting effected for the account of Tenant pursuant to Section 10.2(c), after deducting from such proceeds all of Landlord's reasonable out-of-pocket expenses incurred in connection with such reletting (including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, employees' expenses, and expenses of preparation for such reletting). Tenant will pay such current damages on the days on which the Basic Rent would have been payable under this Lease in the absence of such termination or repossession, and Landlord shall be entitled to recover the same from Tenant on each such day. (f) At any time after such termination or repossession by reason of the occurrence of any Event of Default, whether or not Landlord shall have collected any current damages pursuant to Section 10.2(e), Landlord shall be entitled to recover from Tenant, and Tenant will pay to Landlord on demand, as and for liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the present value of all rent payable under the Lease beyond the date of such demand over the then present value of the then fair market rental for the Premises, at the date of such demand for what would be the unexpired term of the Lease, which present value shall in each case be determined by the application of a discount factor of ten percent (10%) per annum. If any law shall be construed to limit the amount of such liquidated final damages to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such statute or rule of law. (g) Notwithstanding anything to the contrary stated herein, if an Event of Default shall have happened and be continuing, whether or not Tenant shall have abandoned the Premises, Landlord may elect to continue this Lease in effect for so long as the Landlord does not terminate Tenant's right to possession of the Premises and Landlord may enforce all of its rights and remedies hereunder including, without limitation, the right to recover all Basic Rent, Additional Rent and other sums payable hereunder as the same become due. 10.3. Additional Rights of Landlord No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. The failure of Landlord to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power or remedy contained in this Lease shall not be construed as waiver or a relinquishment thereof for the future. A receipt by Landlord of any Basic Rent, any Additional Rent or any other sum payable hereunder with knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease, or to a decree compelling performance of any of the covenants, agreements, conditions or provisions of this Lease, including but not limited to the provisions of this Lease setting forth Tenant's operating covenant, or to any other remedy allowed to Landlord at law or in equity. 10.4. Waivers by Tenant To the extent permitted by applicable law, Tenant hereby waives and surrenders for itself and all those claiming under it, including creditors of all kinds, (i) any right or privilege which it or any of them may have under any present or future construction, statute or rule of law to redeem the Premises or to have a continuance of this Lease for the term hereby demised after termination of Tenant's right of occupancy by order or judgment of any court or by any legal process or writ, or under the terms of this Lease or after the termination of the term of this Lease as herein provided, and (ii) the benefits of any present or future constitution, statute or rule of law which exempts property from liability for debt or for distress for rent. 10.5. Attorneys' Fees In the event of an Event of Default and Tenant's failure to cure the Event of Default within the applicable cure period, if an action shall be brought by Landlord for the enforcement of any right set forth herein in connection with, and subject to, the indemnification provisions contained in Section 6.10 hereof, Tenant shall be liable for all of the reasonable out-of-pocket expenses incurred by Landlord in connection therewith, including without limitation, attorneys' fees. However, should Tenant prevail in an action for violation of quiet enjoyment under this Lease, then and only in such event shall Landlord be liable for reasonable out-of-pocket expenses incurred by Tenant in connection therewith, including attorneys' fees. 11. MISCELLANEOUS. 11.1. Notices, Demands and Other Instruments All notices, demands, requests, consents, approvals and other instruments required or permitted to be given pursuant to the terms of this Lease shall be in writing and shall be deemed to have been properly given if (a) with respect to Tenant, sent by registered or certified mail with a return receipt requested, postage prepaid, or sent by facsimile, nationally recognized overnight express carrier or delivered by hand, in each case addressed to Tenant at its notice address first above set forth, and (b) with respect to Landlord, sent by registered or certified mail with a return receipt request, postage prepaid, or sent by facsimile, nationally recognized overnight express courier or delivered by hand in each case, addressed to the Landlord at its address first above set forth along with a copy to the Lender (if Tenant shall have been given Lender's address). Landlord and Tenant shall each have the right from time to time to specify as its address for purposes of this Lease any other address in the United States of America upon giving fifteen (15) days written notice thereof, similarly given, to the other party. Notices shall be deemed communicated upon the earlier of receipt, or seventy-two (72) hours from the time of mailing if mailed as provided in this Section 11.1. 11.2. Estoppel Certificates and Consents (a) Tenant will, from time to time, upon not less than twenty (20) days prior written request by Landlord or by Lender, execute, acknowledge and deliver a certificate certifying: (i) that this Lease is unmodified and in full effect (or setting forth any modifications along with the statement that this Lease as modified is in full effect ); (ii) that the Basic Rent and Additional Rent payable and the dates to which the Basic Rent, Additional Rent and other sums payable hereunder have been paid; (iii) that to the best knowledge of Tenant, Landlord is not in any default of the Lease; (iv) the commencement and expiration dates of the Lease; (v) the amount of any security or other deposits; (vi) that either Tenant is in possession of the Premises or who is in possession; (vii) any concessions or other rights that Tenant (including first refusal, option or other occupancy claims) or Landlord may have; and (viii) such other matters as may reasonably be required by the requesting party. Any such certificate may be relied upon by any Lender, prospective purchaser, or prospective Lender of the Premises. Tenant further agrees to reasonably cooperate with Lender and its affiliates in the preparation of disclosure documents which may be issued in connection with a secondary market transaction involving a sale or securitization of its loan. (b) From time to time during the term of this Lease, Landlord expects to secure financing of its interest in the Premises by assigning Landlord's interest in this Lease and the sums payable hereunder. In the event of any such assignment to the Lender, Tenant will, upon not less than twenty (20) days prior written request by Landlord, execute, acknowledge and deliver to Landlord a consent clearly indicating (i) that Tenant is to make Basic Rent payments or portions thereof directly to Lender if required by Lender, and (ii) consent to such assignment addressed to such Lender in a form satisfactory to Lender; and Tenant will produce, at Tenant's expense, such certificates and other documents as may be reasonably requested by the Lender. Tenant acknowledges that, by execution hereof, it has agreed to make payments of Basic Rent or portions thereof directly to Lender, without further notice or direction if required by Lender, and Landlord consents to said payments by Tenant to Landlord. 11.3. Determination of Fair Market Rental Value Fair market rental value for purposes of setting Extended Term Basic Rent shall be determined by an appraisal, which shall be performed by an appraiser selected by Landlord within thirty (30) days after notice to Landlord of Tenant's exercise of the option for the applicable Extended Term and paid one half by Tenant and one half by Landlord. Any appraiser selected by Landlord shall have qualifications that include a minimum of five (5) years of experience in the appraisal of commercial real estate in the State in which the Premises are located. Such appraiser shall be disinterested, and shall be a member of a nationally recognized appraisal association. Further, any such appraiser shall comply with any licensing law then in effect for appraisers authorized to perform general appraisals within such State. If there are then any existing Federal laws governing appraisers, said appraiser shall be in compliance with the then applicable Federal laws for appraisers performing appraisals of commercial real estate. In the event that Tenant disputes the appraised fair market rental value determined by an appraiser (hereinafter the "First Appraiser"), who performed an appraisal pursuant to this Section 11.3, it shall so notify Landlord within fifteen (15) days after receipt of such written determination by the First Appraiser, and the disagreement shall be resolved as follows: (a) Within five (5) days after the service of such notice by Tenant to Landlord, Tenant shall designate a second appraiser (the "Second Appraiser"), who shall appraise the fair market rental value of the Premises. This Second Appraiser shall render its opinion of the fair market rental value no later than thirty (30) days after the service of notice by Tenant stated above. In the event that the higher of the two appraised fair market rental values rendered herein is not more than ten percent (10%) greater than the lower of the two appraised fair market rental values, then the mean between the two appraised values shall be utilized to fix the appraised fair market rental value. (b) In the event that the higher of the two appraised fair rental values is more than ten percent (10%) higher than the lower of the two appraised fair market rental values, then the First Appraiser and the Second Appraiser will meet within fifteen (15) days after receipt and acceptance of the Second Appraisal by Tenant, to attempt to agree upon the appraised fair market rental value. If the First Appraiser and Second Appraiser do not agree upon the appraised fair rental value after such meeting, then they shall appoint a third appraiser (the "Third Appraiser"). (c) If the First and Second Appraiser shall be unable to agree upon the appointment of the Third Appraiser within fifteen (15) days after receipt and acceptance of the Second Appraisal by Tenant, then the Third Appraiser shall be selected by the Tenant and Landlord themselves. If Tenant and Landlord cannot agree on the third appraiser, within a further period of five (5) days, then either, on behalf of both, may apply to the United States District Court for the District of where the Premises are located, for the selection of the Third Appraiser. The fees and costs of the Second Appraiser will be borne by Tenant, and the fees and costs of the Third Appraiser, will be divided equally between Tenant and Landlord. The cost of application to the United States District Court shall be divided equally between Tenant and Landlord. In the event of the failure, refusal or inability of any appraiser to act, a new appraiser shall be appointed in its stead, which appointment shall be made in the same manner as provided herein; e.g., if the Second Appraiser must be replaced, then Tenant will have the right to designate its replacement. In the event that a Third Appraiser is selected in the manner aforesaid, it shall perform an appraisal of the fair market rental value of the Premises in accordance with the terms of this Section 11.3 within thirty (30) days after its appointment. In the event that the appraised fair market rental value rendered by the Third Appraiser is higher than the lower appraised fair market rental value, but lower than the higher appraised fair market rental value, as rendered by the First Appraiser and the Second Appraiser, then the appraised fair market rental value rendered by the Third Appraiser shall become the appraised value. In the event that the appraised value rendered by the Third Appraiser is lower than the lower appraised value or higher than the higher appraised fair rental value, as rendered by the First Appraiser and Second Appraiser, than an Appraisal Panel shall be convened. The "Appraisal Panel," consisting of the First, Second and Third Appraiser, shall convene within fifteen (15) days after submission of a written appraisal to Landlord and Tenant by the Third Appraiser (which Third Appraisal does not resolve the appraised fair market value question in accordance with this Section 11.3). The purpose of the formation of the Appraisal Panel will be to attempt to reach a decision by two members of the Appraisal Panel on the appraised fair rental value. A decision joined in by any two of the appraisers of the Appraisal Panel shall be the decision of the Appraisal Panel, and shall be binding upon the parties hereto following written notice thereof, which notice shall state the appraised fair rental value of the Premises. If no two members of the Appraisal Panel can concur in a decision of the appraised fair rental value within fifteen (15) days after the submission of the appraisal by the Third Appraiser to the parties, then the parties shall go to a neutral mediator for mediation. If the parties are unable to agree upon a fair rental value through mediation, the matter will be submitted to binding arbitration under the rules of the American Arbitration Association. (d) Each appraiser shall be instructed to assume that the provisions of this Lease (excluding the Basic Rent provision) would govern for a five (5) year term, that the Premises may be used for any lawful commercial use (regardless of their actual use), and that, as set forth in the Recitals to this Lease, the Premises being leased (and the fair market rent applicable thereto) includes the Land and the Improvements. 11.4. No Merger There shall be no merger of this Lease or the leasehold estate hereby created with the fee estate in the Premises or any part thereof by reason of the same person acquiring or holding, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the Premises or any portion thereof. 11.5. Surrender Upon the termination of this Lease, Tenant shall peaceably surrender the Premises to Landlord in the same condition in which they were received from Landlord at the commencement of this Lease, except as altered as permitted or required by this Lease and except for normal wear and tear. Tenant shall remove from the Premises prior to or within a reasonable time after such termination (not to exceed thirty (30) days) all its personal property that is capable of removal without causing damage to the Premises, and, at Tenant's expense, shall at such times of removal, repair any damage caused by such removal. Property not so removed shall become the property of Landlord. Landlord may thereafter cause such property to be removed and disposition of and the cost of repairing any damage caused by such removal shall be borne by Tenant. Any holding over by Tenant of the Premises after the expiration or earlier termination of the term of this Lease or any extensions thereof, with the consent of Landlord, shall operate and be construed as a tenancy from month to month only, at one hundred ten (110%) of the Basic Rent reserved herein and upon the same terms and conditions as contained in this Lease. Notwithstanding the foregoing, any holding over without Landlord's consent shall entitle Landlord, in addition to collecting Basic Rent at a rate of one hundred ten percent (110%) thereof, to exercise all rights and remedies provided by law or in equity. 11.6. Separability Each and every covenant and agreement contained in this Lease is separate and independent, and the breach of any thereof by Landlord other than the covenant of quiet enjoyment in Section 1.4, shall not discharge or relieve Tenant from any obligation hereunder. If any term or provision of this Lease or the application thereof to any person or circumstances or at any time to any extent be invalid and unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances or at any time other than those to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and shall be enforced to the extent permitted by law. 11.7. Merger, Consolidation or Sale of Assets It shall be a condition precedent to the merger of Tenant into another corporation, to the consolidation of Tenant with one or more other corporations and to the sale or other disposition of all or substantially all the assets of Tenant to one or more other entities that the surviving entity or transferee of assets, as the case may be, shall deliver to Landlord and to Lender an acknowledged instrument in recordable form assuming all obligations, covenants and responsibilities of Tenant hereunder and under any instrument executed by Tenant consenting to the assignment of Landlord's interest in this Lease to the Lender as security for indebtedness. Tenant covenants that it will not merge or consolidate or sell or otherwise dispose of all or substantially all of its assets unless such an instrument shall have been so delivered and unless the entity with which it intends to merge, consolidate, sell or otherwise transfer its assets to has a credit rating at least equal to Tenant's then current credit rating. 11.8. Savings Clause No provision contained in this Lease which purports to obligate Tenant to pay any amount of interest or any fees, costs or expenses which are in excess of the maximum permitted by applicable law, shall be effective to the extent that it calls for payment of any interest or other sums in excess of such maximum. 11.9. Binding Effect; Limitation of Liability All of the covenants, conditions and obligations contained in this Lease shall be binding upon and inure to the benefit of the respective successors and assigns of Landlord and Tenant to the same extent as if each successor and assign were in each case named, except that a successor and assign of Landlord shall only be bound as to covenants, conditions and obligations arising after the transfer. Notwithstanding anything to the contrary set forth in this Lease, if Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord's part to be performed, and if as a consequence of such default Tenant shall recover a judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levy thereon against the right, title and interest of Landlord in the Premises, and Landlord shall not be personally liable therefor, provided Landlord then owns the Premises and such limitation of liability shall not apply if Landlord does not then own the Premises. 11.10. Table of Contents and Headings The table of contents and headings used in this Lease are for convenience of reference only and shall not to any extent have the effect of modifying, amending or changing the provisions of this Lease. 11.11. Governing Law This Lease shall be governed by and interpreted under the laws of the state in which the Premises is located, but not including such state's conflict of laws rules. 11.12. Certain Definitions (a) The term "Imposition" means: (i) All real estate taxes imposed by governmental authorities of any kind; (ii) All other taxes and any payments in lieu thereof, assessments (including assessments for benefits from public works or improvements, whether or not begun or completed prior to the commencement of the term of this Lease and whether or not to be completed within said term), levies, fees, water and sewer rents and charges, and all other governmental charges of every kind, general and special, ordinary and extraordinary, whether or not the same shall have been within the express contemplation of the parties hereto, together with any interest and penalties thereon, which are, , imposed or levied upon or assessed against: (A) the Premises or any part thereof; (B) any Basic Rent, any Additional Rent reserved or payable hereunder; and/or (C) this Lease or the leasehold estate created hereby or which arise in respect of the operation, possession, occupancy or use of the Premises, to the extent payable during the Lease Term. (iii) Any gross receipts or similar taxes imposed or levied upon, assessed against or measured by the Basic Rent, Additional Rent or any other sums payable by Tenant hereunder or levied upon or assessed against the Premises to the extent payable during the Lease Term; (iv) All sales and use taxes which may be levied or assessed against or payable by Landlord and Tenant on account of the acquisition, leasing or use of the Premises or any portion thereof including but not limited to any taxes levied on the rental payable hereunder to the extent payable during the Lease Term; and (v) All charges for water, gas, light, heat, telephone, electricity, power and other utilities and communications services rendered or used on or about the Premises during the Lease Term. (b) The term "Landlord" means the owner, for the time being, of the rights of the lessor under this Lease, and its successors and assigns, and upon any assignment or transfer of such rights, except an assignment or transfer made as security for an obligation, the assignor or transferor shall be relieved of all future duties and obligations under this Lease, provided the assignee or transferee assumes in writing in recordable form all such future duties and obligations of Landlord and such written assumption is delivered to Tenant. (c) The term "Lease" means this Lease as amended and modified from time to time together with any memorandum or short form of lease entered into for the purpose of recording. (d) The term "Lender" means the holder of a mortgage or deed of trust ("Mortgage") or other security agreement encumbering Landlord's interest in the Premises and its successors and assigns. The documents, including but not limited to the Mortgage, evidencing and securing any loan encumbering Landlord's interest in the Premises are herein called "Loan Documents". (e) The term "Tenant's Certificate" means a written certificate signed by the Chairman of the Board, the Chief Executive Officer, the President, any Vice President or the Secretary of Tenant. (f) The term "Termination Date" means the date on which this Lease terminates in accordance with its terms, and shall be any business day and not a Saturday, Sunday or legal holiday. 11.13. Exhibits The exhibits to this Lease are hereby incorporated by reference herein and made a part hereof. The Guaranty attached hereto as Exhibit B is being executed and delivered on the Commencement Date, and such execution and delivery, at the election of Landlord, shall be a condition to the effectiveness of this Lease. 11.14. Integration This Lease, the exhibits hereto and the memorandum, if any, hereof, constitute the entire agreement between the parties hereto with regard to the subject matter hereof, and supersede any prior understandings, agreements or negotiations. This Lease may not be amended or modified except by a writing executed by Tenant and Landlord, with the consent of any Lender. 11.15. Lease Memorandum Each of Landlord and Tenant shall execute, acknowledge and deliver to the other a written memorandum of this Lease ("Memorandum") to be recorded in the appropriate land records of the jurisdiction in which the Premises is located, in order to give public notice and protect the validity of this Lease. In the event of any discrepancy between the provisions of the recorded Memorandum and the provisions of this Lease, the provisions of this Lease shall prevail. 11.16. Subordination to Landlord Financing (a) (i) Subject to the provisions of Section 11.16(a)(ii) below, Tenant agrees that this Lease shall at all times be subject and subordinate to the lien of any Mortgage, provided the original principal amount of the Mortgage does not exceed 90% of the fair market value of the Premises at the time of origination of the Mortgage and Tenant agrees, upon demand, without cost, to execute instruments as may be reasonably required to further effectuate or confirm such subordination. (ii) Tenant's agreement to subordinate set forth in Section 11.16(a)(ii) above is conditioned upon the Lender agreeing that: Tenant's tenancy and Tenant's rights under this Lease shall not be disturbed, terminated or otherwise adversely affected, nor shall this Lease be affected, by any default under any Mortgage, and in the event of a foreclosure or other enforcement of any Mortgage, or sale in lieu thereof, the purchaser at such foreclosure sale shall be bound to Tenant for the Term of this Lease, the rights of Tenant under this Lease shall expressly survive, and this Lease shall in all respects continue in full force and effect so long as no Event of Default has occurred and is continuing; provided, however, that such purchaser shall not: (A) be liable for any prior act or omission of Landlord; (B) be subject to any defense, counterclaim, set-off or offset which Tenant may then have against Landlord; (C) be bound by any payment of rent that Tenant may have made to Landlord more than thirty (30) days before the date such rent was first due and payable under this Lease with respect to any period after the date of attornment other than, and only to the extent that, this Lease expressly required such a prepayment; (D) be bound by any obligation to make any payment to Tenant which was required to be made prior to the time such successor landlord succeeded to Landlord's interest; (E) be bound by any obligation to perform any work or to make improvements to the Premises; or (b) Notwithstanding the provisions of Section 11.16(a), the holder of any Mortgage to which this Lease is subject and subordinate shall have the right, at its sole option, at any time, to subordinate and subject the Mortgage, in whole or in part, to this Lease by recording a unilateral declaration to such effect. (c) At any time prior to the expiration of the Term, Tenant agrees, at the election and upon demand of any owner of the Leased Premises, or of a Lender who has granted non-disturbance to Tenant pursuant to Section 11.16(a) above, to attorn, from time to time, to any such owner or lender, upon the terms and conditions of this Lease, for the remainder of the Term. The provisions of this Section 11.16(c) shall inure to the benefit of any such owner or Lender, shall apply notwithstanding that, as a matter of law, this Lease may terminate upon the foreclosure of the Mortgage, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. (d) Each of Tenant, Landlord and Lender, however, upon written demand of the other, hereby agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of Sections 11.16(a) and 11.16(c), in the form customarily used by such Lender to the extent consistent with the requirements of such Sections, acknowledging such subordination, non-disturbance and attornment as are provided in such Sections and setting forth the terms and conditions of its tenancy. 11.17 Waiver of Statutory Liens Landlord hereby forever waives and releases any and all liens, security interests and rights of Landlord created, granted or imposed by statute, law or regulation ("Statutory Liens") on, in or to any tangible personal property of Tenant located at any time at the Premises (the "Tenant Personalty"). Landlord acknowledges and agrees that Tenant may convey the Tenant Personalty, including granting security interests in the Tenant Personalty, from time to time free and clear of all Statutory Liens. Landlord and Lender shall, upon written demand of Tenant from time to time, execute and deliver to Tenant such documents as may reasonably be required to evidence and confirm Landlord's waiver of the Statutory Liens. 11.18 Interest Rate Any amount due from either party to the other under this Lease which is not paid within ten (10) days after written notice that such amount was not received when due (including, without limitation, amounts due as reimbursement for costs incurred in performing obligations of such party hereunder upon its failure to so perform) shall bear interest at the prime rate of Bank of America NA ("Interest Rate") from the date due until paid, unless otherwise specifically provided herein, but the payment of such interest shall not excuse or cure any default by Tenant under this Lease. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above set forth. LANDLORD: Verde Investments, Inc., an Arizona corporation By: Title: TENANT: Ugly Duckling Car Sales and Finance Corporation, a Delaware corporation By: Title: By: Title: EX-10.24(A) 7 0007.txt FORM OF LEASE AGREEMENT LEASE THIS LEASE (this "Lease") is entered into as of the ____ day of _______________, 1998 (the "Commencement Date"), by and between [ICCMIC entity], a_______________ (the "Landlord"), whose address for purposes of notice hereunder is ______________, and [Ugly Duckling Car Sales, Inc.], an Arizona corporation (the "Tenant"), whose address for purposes of notice hereunder is Attn.: General Counsel, 2525 East Camelback Road, Suite 1150, Phoenix, Arizona 85016. R E C I T A L S This Lease is made with reference to the following facts and objectives: Landlord is the owner of the following: (i) certain tract(s) or parcel(s) of land located in , and more particularly described on the attached and incorporated Exhibit "A" (the land described above, together with all rights, interests, easements, rights of way and appurtenances related thereto, shall hereinafter be referred to as the "Land"); and (ii) a building or buildings located or to be located on the Land and all other structures and improvements existing or to be constructed on the Land, together with all fixtures and equipment therein owned by Landlord and used in the operation of the same (collectively, the "Improvements"). The Land and Improvements are hereinafter collectively referred to as the "Premises." No easement for light, air or view is included with or appurtenant to the Premises. Pursuant to all of the terms, conditions, covenants and provisions of this Lease, Tenant desires to lease the Premises from Landlord, and Landlord desires to lease the Premises to Tenant, for the rents and during the terms hereinafter set forth. Landlord acquired the Premises on the Commencement Date and for the period of at least _________ years prior to the Commencement Date, Tenant owned, occupied and operated the Premises. Tenant has examined the title of the Premises, the physical condition of the Premises, environmental studies and reports of the Premises, and the economic feasibility of conducting its business in and from the Premises. Tenant has determined that the same are satisfactory to Tenant, and Tenant accepts the Premises on an "AS IS - WHERE IS" basis. TENANT ACKNOWLEDGES THAT LANDLORD (WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PREMISES, INCLUDING ANY WARRANTY OR REPRESENTATION AS TO ITS FITNESS FOR USE OR PURPOSE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, AS TO LANDLORD'S TITLE THERETO, OR AS TO VALUE, COMPLIANCE WITH SPECIFICATIONS, LOCATION, USE, CONDITION, MERCHANTABILITY, QUALITY, DESCRIPTION, DURABILITY OR OPERATION, IT BEING AGREED THAT ALL RISKS INCIDENT THERETO ARE TO BE BORNE BY TENANT. Tenant acknowledges that the Premises are of its selection and to its specifications, and that the Premises have been inspected by Tenant and are satisfactory to it. In the event of any defect or deficiency in the Premises of any nature, whether patent or latent, Landlord shall not have any responsibility or liability with respect thereto or for any incidental or consequential damages (including strict liability in tort). It is the parties' objective to provide for an absolute "bond equivalent" net net net lease to Landlord; the Basic Rent (as hereinafter defined) payable by Tenant hereunder shall be an absolute "bond equivalent" net net net return to Landlord and Tenant shall pay all costs and expenses relating to the Premises and Tenant's operations thereon. Landlord would not have entered into this Lease if it did not meet the aforesaid criteria. NOW, THEREFORE, IN CONSIDERATION of the aforesaid Recitals, and in consideration of the Premises leased by Landlord to Tenant hereby, and in consideration of the rents and covenants to be paid and performed by Tenant hereunder, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties covenant and agree as follows: I. LEASE. 1.1. Demise of Premises. Landlord hereby demises the Premises to Tenant, and Tenant hereby lets and accepts the Premises from Landlord, for the term herein described. 1.2. Title and Condition. The Premises are demised and let "as is" subject to all matters of record and all other title exceptions, including but not limited to (a) the rights of any parties in possession and the existing state of the title as of the commencement of the term of this Lease, (b) any state of facts which an accurate survey or physical inspection thereof might show, (c) all zoning regulations, restrictions, rules and ordinances, building restrictions and other laws and regulations now in effect or hereafter adopted by any governmental authority having jurisdiction over the condition of any buildings, structures and other improvements located thereon, all as of the commencement of the term of this Lease, without representation or warranty by Landlord. Tenant represents that it has examined the title to and the condition of the Premises and has found the same to be satisfactory to it. 1.3. Use of Leased Premises. (a) Tenant is currently operating the Premises for the purpose of used car sales and activities incidental and related thereto (the "Intended Use"). Tenant agrees to remain open for business and to operate the Intended Use in all or substantially all of the Premises during the Term. Tenant may occupy and use the Premises for no use other than the Intended Use without Landlord's consent, which shall not be unreasonably withheld conditioned or delayed. In no event, however, shall the Premises be used for a use which would (i) have a permanent and material adverse effect on the value of the Premises, (ii) increase (when compared to use as the Intended Use) the likelihood that Tenant, Landlord or Lender would incur liability under any provisions of any Environmental Laws, or (iii) result in or give rise to any material environmental deterioration or degradation of the Premises. Tenant shall not create or suffer to exist any public or private nuisance, hazardous or illegal condition or waste on or with respect to the Premises. Tenant shall not use, occupy or permit any of the Premises to be used or occupied, nor do or permit anything to be done in or on any of the Premises, in a manner which would (A) make void or voidable any insurance which Tenant is required hereunder to maintain then in force with respect to any of the Premises, or (B) affect the ability of Tenant to obtain any insurance which Tenant is required to furnish hereunder, (C) impair Landlord's title to the Premises, or in such manner as might reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or third Persons, or of implied dedication of the Premises or any portion thereof, or (D) conflict with the terms or conditions of any instrument or agreement between Landlord and Tenant. Nothing contained in this Lease and no action by Landlord shall be construed to mean that Landlord has granted to Tenant any authority to do any act or make any agreement that may create any such third party or public right, title, interest, lien, charge or other encumbrance upon the estate of the Landlord in the Premises. (b) Tenant shall not conduct its business operation in the Premises unless and until (and only during such time as) all necessary certificates of occupancy, permits, licenses and consents from any and all appropriate governmental authorities have been obtained by Tenant and are in full force and effect. 1.4. Quiet Enjoyment. For so long as no Event of Default (as hereinafter defined) has occurred and is continuing hereunder, Landlord warrants peaceful and quiet enjoyment of the Premises by Tenant against acts of Landlord or anyone claiming through Landlord, provided that Landlord and its agents may enter upon and examine the Premises at reasonable times. Exercise by Landlord of its rights to come upon the Premises as set forth in this Lease shall not constitute a violation of this Section. II. TERM. 2.1. Term. Subject to the terms and conditions hereof, Tenant shall have and hold the Premises for a primary term (herein called the "Primary Term") commencing on the Commencement Date and ending at midnight on _______________, 2013, unless this Lease shall be sooner terminated or extended. Tenant shall have the right and option to extend this Lease for four (4) consecutive extended terms, of five (5) years each (herein, collectively called the "Extended Terms" and individually, an "Extended Term" and together with the Primary Term, sometimes hereinafter called the "Term" "term of this Lease" or "term hereof"). If no Event of Default shall exist at the time of exercise of such option, each Extended Term shall commence on the day immediately succeeding the expiration date of the Primary Term or the preceding Extended Term and shall end at midnight on the day immediately preceding the fifth anniversary of the first day of such Extended Term. Provided no Event of Default shall exist at the time of exercise of such option, Tenant may exercise each said option to extend this Lease for an Extended Term by giving written notice to that effect at least six (6) months prior to the expiration of the then existing term. If Tenant fails to exercise an option to extend the Term six (6) months or more prior to the expiration of the then current Term, Tenant's option to extend the Term shall not be terminated and this Lease shall not expire unless Landlord delivers to Tenant written notice of Tenant's failure to exercise its option to extend the Term of this Lease and Tenant then fails to exercise the option within fifteen (15) days after receipt of the written notice from Landlord. If Tenant does not exercise any such option in a timely manner, then Landlord shall have the right during the remainder of the Term of this Lease to advertise the availability of the Premises for reletting and to erect upon the Premises signs appropriate for the purpose of indicating such availability. The term "Lease Year" shall mean a calendar year, except that the first partial "Lease Year" (the "First Lease Year") shall commence on the "Commencement Date and expire on December 31, 1998. III. BASIC RENT; ADDITIONAL RENT. 3.1. Basic Rent. Tenant covenants to pay to Landlord as and for the rental of the Premises the amounts set forth below (which amounts, as increased by the amounts provided for in Section 3.2 hereof, is together called the "Basic Rent"): (a) For and with respect to the First Lease Year the amount of $ ___________, payable in equal monthly installments of $____________ (but if the Commencement Date does not occur on the first day of a calendar month, the installment for the period from the Commencement Date to the end of the calendar month in which the Commencement Date occurs shall be paid on the Commencement Date and shall be prorated based on a thirty (30) day month). (b) For and with respect to the second Lease Year (i.e., calendar year 1999), the amount of $ ___________, payable in equal monthly installments of $____________ . (c) Basic Rent shall be adjusted commencing with the first (1st) day of the third Lease Year and as of the first (1st) day of each Lease Year thereafter (each such date being referred to herein as an "BR Adjustment Date" and each such Lease Year commencing with the third Lease Year being referred to herein as a "BR Period"). Basic Rent for the first BR Period will be adjusted on the first BR Adjustment Date by an amount calculated by multiplying the Basic Rent then in effect by the percentage increase, if any, in the "CPI", as defined below in this paragraph, from the month immediately preceding the BR Adjustment Date over the CPI for the month immediately preceding the second Lease Year. Basic Rent for each subsequent BR Period will be adjusted on each subsequent BR Adjustment Date by an amount calculated by multiplying the Basic Rent then in effect, by the percentage increase, if any, in the CPI from the last month of the BR Period then ending over the CPI for the last month of the most recent prior BR Adjustment Date. Notwithstanding the foregoing to the contrary, in no event shall the percentage increase for any such Lease Year exceed four percent (4%) or be less than two percent (2%). The "CPI" shall mean (and charges subject to adjustment pursuant to the CPI under this Lease shall mean adjustment pursuant to changes in) the "Consumer Price Index For All Urban Consumers (1982-84=100), published by the Bureau of Labor Statistics of the U.S. Department of Labor. If no CPI is published for the month for which CPI is to be utilized pursuant to this Lease, the most recent prior month shall be utilized. In the event the CPI is not published by the Bureau of Labor Statistics or another governmental agency at any time during the Term, the most comparable statistics on the purchasing power of the consumer dollar as published by a responsible financial authority and as selected by Landlord shall be used for making such computation. (d) If an option to extend the Term is exercised, for and with respect to the applicable Extended Term, at the rate equal to ninety-five percent (95%) of fair market rental value, but in no event less than the Basic Rent payable in the last year of the prior portion of the Term ("Extended Term Basic Rent"). Fair market rental value will be determined as of the first day of the applicable Extended Term but at the time and on the basis set forth in Section 11.3 hereof. Tenant unconditionally and irrevocably agrees to make the Basic Rent payments directly to Landlord or Landlord's designee and to pay the same on the first day of each month, commencing on the Commencement Date. After any Event of Default, Landlord shall have the right to require that such payments be made in immediately available funds. 3.2. Additional Rent. Tenant shall pay and discharge before the imposition of any fine, lien, interest or penalty may be added thereto for late payment thereof, as Additional Rent, all other amounts and obligations which Tenant assumes or agrees to pay or discharge pursuant to this Lease, together with every fine, penalty, interest and cost which may be added by the party to whom such payment is due for nonpayment or late payment thereof. In the event of any failure by Tenant to pay or discharge any of the foregoing, Landlord shall have all rights, powers and remedies provided herein, by law or otherwise, in the event of nonpayment of Basic Rent. 3.3. Late Charge. If any installment of Basic Rent is not paid within five (5) days after notice that the same is due and not paid, Tenant shall pay to Landlord or Lender, as the case may be, on demand, as Additional Rent, a late charge equal to three percent (3%) (the "Late Charge") on such overdue installment of Basic Rent. Such payment shall be in addition to, and not in lieu of, the interest payable pursuant to Section 11.17. 3.4. True Lease. Landlord and Tenant agree that this Lease is a true lease and does not represent a financing arrangement. Each party shall reflect the transactions represented by this Lease in all applicable books, records and reports (including, without limitation, income tax filings) in a manner consistent with "true lease" treatment rather than "financing" treatment. 3.5. Net Lease; Non-Terminability. (a) This is an absolutely net lease to Landlord. It is the intent of the parties hereto that the Basic Rent payable under this Lease shall be an absolutely net return to Landlord and that Tenant shall pay all costs and expenses relating to the Premises and operations carried on therein, including but not limited to costs and expenses relating to any period prior to the Commencement Date. Any amount or obligation herein relating to the Premises which is not expressly declared to be that of Landlord shall be deemed to be an obligation of Tenant to be timely performed by Tenant at Tenant's expense. Basic Rent, Additional Rent and all other sums payable hereunder by Tenant, shall be paid without notice, demand, set-off, counterclaim, abatement, suspension, deduction or defense. (b) This Lease shall not terminate nor shall Tenant have any right to terminate this Lease, nor shall Tenant be entitled to any abatement or reduction of rent hereunder, nor shall the obligations of Tenant under this Lease be affected by reason of: (i) any damage to or destruction of all or any part of the Premises from whatever cause; (ii) the taking in whole or in part of the Premises or any portion thereof by condemnation, requisition or otherwise except as provided in Article VII; (iii) the prohibition, limitation or restriction of Tenant's use of all or any part of the Premises, or any interference with such use; (iv) any eviction by paramount title or otherwise; (v) Tenant's acquisition or ownership of all or any of the Premises otherwise than as expressly provided herein; (vi) any default on the part of Landlord under this Lease, or under any other agreement to which Landlord and Tenant may be parties; (vii) any abandonment of the Premises by Tenant or (viii) any other cause whether similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent covenants and agreements, that the Basic Rent, the Additional Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to Articles VII or XI (Section 11.18) of this Lease. (c) Tenant agrees that it will remain obligated under this Lease in accordance with its terms, and it will not take any action to terminate, rescind or avoid this Lease because of: (i) any readjustment, liquidation, dissolution, or winding-up or other proceeding affecting Landlord or its successors-in-interest or (ii) any action with respect to this Lease which may be taken by any trustee or receiver of Landlord or its successors-in-interest or by any court in any such proceeding. (d) To the extent permitted by applicable law, Tenant waives all rights which may now or hereafter be conferred by law (i) to quit, terminate or surrender this Lease or the Premises or any part thereof, or (ii) to any abatement, suspension, deferment or reduction of the Basic Rent, Additional Rent or any other sums payable under this Lease. IV. PAYMENT OF IMPOSITIONS, TAXES AND ASSESSMENTS; COMPLIANCE WITH LAW;ENVIRONMENTAL MATTERS. 4.1. Payment of Impositions. Tenant shall pay or discharge all Impositions (as hereinafter defined) when due, including but not limited to Impositions relating to any period prior to the Commencement Date. Notwithstanding the foregoing provision of this Section 4.1, Tenant shall not be required to pay any franchise, corporate, estate, inheritance, succession, transfer (other than transfer taxes, recording fees, or similar charges payable in connection with a conveyance hereunder to Tenant), income or excess profits taxes of Landlord hereunder. Tenant agrees to furnish to Landlord and Lender, evidence of the payment of the taxes described in Section 11.12(a)(i) within thirty (30) days after payment thereof. Tenant agrees to furnish evidence of payment of other Impositions with fifteen (15) days of Landlord's request therefor. In the event that any Imposition levied or assessed against the Premises becomes due and payable during the term hereof and may be legally paid in installments, Tenant shall have the option to pay such Imposition in installments. In such event, Tenant shall be liable only for those installments which become due and payable during the term hereof or which were due and payable prior to the term hereof. 4.2. Compliance with Laws. Tenant shall, at its expense, comply with and shall cause the Premises to comply with all governmental statutes, laws, rules, orders, regulations and ordinances, including without limitation, the Americans with Disabilities Act of 1990, as the same may be amended from time to time, all fire regulations, occupational health and safety laws, applicable point of sale laws, building codes, Environmental Laws, zoning and land use laws and regulations, and any other law the failure to comply with which at any time would materially affect Landlord or the Premises or any part thereof, or the use thereof, including those which require the making of any structural, unforeseen or extraordinary changes, whether or not any of the same involve a change of policy on the part of the body enacting the same. Tenant shall, at its expense, comply with all changes required in order to obtain the Required Insurance (as hereinafter defined), and with the provisions of all contracts, agreements, instruments and restrictions existing at the commencement of this Lease or thereafter suffered or permitted by Tenant affecting the Premises or any part thereof or the ownership, occupancy or use thereof. 4.3. Permitted Contests. Provided that Tenant shall have complied with, and shall continue to comply with, its obligations under Section 4.2, Tenant may contest, in good faith and at its expense and in accordance with all laws and governmental requirements, the existence, the amount or the validity of the requirements imposed pursuant to Section 4.2, or the extent of its liability therefor, by appropriate proceedings. At least thirty (30) days prior to any such contest, and as a condition thereto, Tenant shall notify Landlord as to the proposed contest in reasonable detail, and Landlord shall have the right to require Tenant to post security in amount and form reasonably required by Landlord. No such contest or proceedings shall in any way eliminate or otherwise interfere with Tenant's obligation to make timely payments of Basic Rent and Additional Rent under this Lease. Tenant further agrees that each such contest shall be promptly prosecuted to a final conclusion. Tenant shall pay, indemnify and save Landlord harmless against, any and all losses, judgments, decrees and costs (including all attorneys' fees, appearance costs and expenses) incurred by Landlord during the Lease Term in connection with any such contest and shall, promptly after the final settlement, compromise or determination of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein or in connection therewith, together with all penalties, fines, interests, costs and expenses thereof or in connection therewith, and perform all acts, the performance of which shall be ordered or decreed as a result thereof. No such contest shall subject Landlord to the risk of any criminal liability or shall subject the Premises to the risk of foreclosure. 4.4. Hazardous Materials. Tenant shall: (a) not cause, or permit any Hazardous Material (as defined below) to exist on or discharge from the Premises (except for items sold or used in the ordinary course of Tenant's business and for which any required licenses and permits are issued and in any event in accordance with Environmental Laws), and shall promptly: (i) pay any claim against Tenant, Landlord, Lender or the Premises; (ii) remove any charge or lien upon any of the Premises; and (iii) defend, indemnify and hold Landlord and Lender harmless from any and all claims, expenses, liability, loss or damage (including reasonable attorneys' fees) resulting from any Hazardous Material that at any time exists on or is discharged from the Premises except to the extent it is the direct result of the actual gross negligence or willful misconduct of Landlord; (b) not cause or permit any Hazardous Material to exist on or discharge from any property owned or used by Tenant which would result in any charge or lien upon the Premises and shall promptly: (i) pay any claim against Tenant, Landlord, Lender or the Premises; (ii) remove any charge or lien upon the Premises; and (iii) defend, indemnify and hold Landlord and Lender harmless from any and all claims, expenses, liability, loss or damage (including reasonable attorneys' fees) resulting from the existence or discharge of any such Hazardous Material except to the extent it is the direct result of the actual gross negligence or willful misconduct of Landlord; (c) notify Landlord and Lender within ten (10) days after Tenant first has knowledge of any of the following: (i) that Hazardous Material exists on or has been discharged from or onto the Premises (whether originating thereon or migrating to the Premises from other property); (ii) that Tenant is subject to investigation by any governmental authority evaluating whether any remedial action is needed to respond to the release or threatened release of any Hazardous Material into the environment from the Premises; (iii)notice or claim to the effect that Tenant is or may be liable to any person as a result of the release or threatened release of any Hazardous Material into the environment from the Premises; (iv) notice that the Premises are subject to an environmental lien; (v) notice of violation to Tenant or awareness by Tenant of a condition which might reasonably result in a notice of violation of any applicable Environmental Law. (d) comply, and cause the Premises to comply, with all statutes, laws, ordinances, rules and regulations of all local, state or federal authorities having authority over the Premises or any portion thereof or their use, including without limitation, relative to any Hazardous Material, petroleum products, asbestos containing materials or PCB's. (e) "Hazardous Material" means any hazardous or toxic material, substance or waste which is defined by those or similar terms or is regulated as such under any Environmental Laws. "Environmental Laws" means any statute, law, ordinance, rule or regulation of any local, county, state or federal authority having jurisdiction over the Property or any portion thereof or its use as the same may be amended from time to time, including but not limited to: (i) the Federal Water Pollution Control Act (33 U.S.C. Section 1317) as amended; (ii) the Federal Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.) as amended; (iii) the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) as amended; (iv) the Toxic Substance Control Act (15 U.S.C. Section 2601) as amended; and (v) the Clean Air Act (42 U.S.C. Section 7401) as amended. (f) The Tenant's obligations and liabilities under this Section 4.4 shall survive the expiration or termination of this Lease and shall include, without limitation, matters arising prior to the Commencement Date. [Note: Additional covenants, etc. may be required to deal with recommendations included in, or issues raised by, the environmental audits.] V. MAINTENANCE AND REPAIR; ALTERATIONS. 5.1. Maintenance and Repair. Tenant acknowledges that it has received the Premises in good condition, repair and appearance. Tenant agrees that, at its expense, it will keep and maintain the Premises, including any altered, rebuilt, additional or substituted buildings, structures and other improvements thereto, in good condition and repair. It will make promptly, all structural and nonstructural, foreseen and unforeseen, ordinary and extraordinary changes and repairs or replacements of every kind which may be required to be made to keep and maintain the Premises in such good condition, repair and appearance and it will keep the Premises orderly and free and clear of rubbish. Tenant covenants not to install any underground storage tanks on the Premises. [Note: depending on the results of the environmental audits, we may need to include language regarding remediation of any existing tanks.] Tenant agrees that its obligation to maintain and repair the Premises as set forth in this Section 5.1 benefit both Landlord and Tenant, are the sole responsibility of Tenant, and may not be delegated. Tenant further covenants to perform or observe all terms, covenants or conditions of any reciprocal easement or maintenance agreement to which it may at any time be a party or to which the Premises are currently subject. Tenant shall, at its expense, use its best efforts to enforce compliance with any reciprocal easement or maintenance agreement benefiting the Premises by any other person subject to such agreement. Landlord shall not be required to maintain, repair or rebuild, or to make any Alterations of any nature to the Premises, or any part thereof, whether ordinary or extraordinary, structural or nonstructural, foreseen or not foreseen, or to maintain the Premises or any part thereof in any way. Tenant hereby expressly waives the right to make repairs at the expense of Landlord which may be provided for in any law in effect at the time of the commencement of the term of this Lease or which may thereafter be enacted. If Tenant shall abandon the Premises, it shall give Landlord and Lender immediate notice thereof. The obligations of the Tenant to pay Basic Rent and Additional Rent shall not be eliminated, reduced, suspended, or otherwise impaired by reason of such abandonment of the Premises. In the event that the Premises shall violate any law and as a result of such violation an enforcement action is threatened or commenced against Tenant or with respect to the Premises, then Tenant shall either (i) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such violation, whether the same shall affect Landlord, Tenant or both, or (ii) take such action as shall be necessary to remove such violation, including, if necessary, making any necessary repairs or replacements, structural or otherwise. 5.2. Engineering Report. Beginning the Sixth Lease Year, and every five (5) years thereafter, Tenant shall provide Landlord, upon Landlord's written request, with an engineering study of the Premises ("Engineering Report") addressed to Landlord, in form, content and scope reasonably acceptable to Landlord, prepared by a qualified engineering firm. The Engineering Report shall include, without limitation, a study or analysis of (a) all structural components of the Premises, (b) all mechanical, electrical, plumbing, HVAC, sprinkler, fire suppression, elevators, and other building systems and equipment designated by Landlord, and (c) the roof of all buildings. 5.3. Encroachments. If any Improvements situated on the Premises at any time during the Term of this Lease shall encroach upon any property, street or right-of-way adjoining or adjacent to the Premises, or shall violate the agreements or conditions contained in any restrictive covenant affecting the Premises or any part thereof, or shall impair the rights of others under or hinder or obstruct any easement or right-of-way to which the Premises are subject, then, promptly after the written request of Landlord or any person affected by any such encroachment, violation, impairment, hindrance or obstruction, Tenant shall, at its expense, either (i) obtain effective waivers, or settlements of all claims, liabilities and damages resulting from each such encroachment, violation, impairment, hindrance or obstruction whether the same shall affect Landlord, Tenant or both, or (ii) make such changes in the improvements on the Premises and take such other action as shall be necessary to remove such encroachments, hindrances or obstructions and to end such violations or impairments, including, if necessary, the alteration or removal of any improvement on the Premises. Any such alteration or removal shall be made in conformity with the requirements of Section 5.4 hereof to the same extent as if such alteration or removal were an Alteration under the provisions of Section 5.4. 5.4. Alterations. (a) Tenant may, at its expense, make additions to and alterations of the Improvements to the Premises and make substitutions and replacements thereto (sometimes hereinafter collectively referred to as "Alterations"), provided that: (i) Landlord approves, which approval shall not be unreasonably withheld, conditioned or delayed, any Alterations to the Premises before such alterations are commenced, after having received from Tenant a complete set of plans and specifications for the proposed work, (ii) in Landlord's reasonable judgment, the market value of the Premises and the Intended Use shall not thereby be reduced or impaired and the appearance of the Property will not be adversely affected; (iii) the Alterations are architecturally consistent with existing Improvements; (iv) the Alterations shall be performed in a good and workmanlike manner; (v) such work shall not violate any term of any restriction to which the Premises are subject or the requirements of any insurance policy required to be maintained by Tenant hereunder, and shall be expeditiously completed in compliance with all laws, ordinances, rules, regulations and requirements applicable thereto, including without limitation, the Americans with Disabilities Act of 1990 and all regulations issued thereunder, as the same may be amended from time to time; and (vi) no Improvements shall be demolished unless Tenant shall have first furnished Landlord with such surety bonds or other security acceptable to Landlord as shall be necessary to assure rebuilding of such Improvements. Tenant shall promptly pay all costs and expenses of each such Alteration, discharge all liens arising therefrom and procure and pay for all permits and licenses required in connection therewith. All such Alterations shall be and remain part of the realty and the property of Landlord and shall be subject to this Lease. Tenant may place upon the Premises any inventory, trade fixtures, machinery or equipment belonging to Tenant or third parties and may remove the same at any time during the Term. Tenant shall repair any damage to the Premises or any portion thereof (including all Improvements thereon) caused by such removal. 5.5. No Liens. Tenant will not, directly or indirectly, create or permit to be created or to remain, and shall within thirty (30) days of filing of any, mechanics, contractors or other liens, discharge or bond, at its expense, any liens with respect to, the Premises or any part thereof or Tenant's interest therein or the Basic Rent, Additional Rent or other sums payable by Tenant under this Lease, other than the lien for real estate taxes which are not yet due and payable. Nothing contained in this Lease shall be construed as constituting the consent or request, expressed or implied, by Landlord to the performance of any labor or services or of the furnishing of any materials for any Alterations, repair or demolition of or to the Premises or any part thereof by any contractor, subcontractor, laborer, materialman or vendor. Notice is hereby given that Landlord will not be liable for any labor, services or materials furnished or to be furnished to Tenant, or to anyone holding the Premises or any part thereof, and that no mechanic's or other liens for any such labor services or materials shall attach to or affect the interest of Landlord in and to the Premises. VI. INSURANCE; INDEMNIFICATION. 6.1. Insurance. Tenant shall maintain, or cause to be maintained, at its sole expense, the following insurance on the Premises (herein called the "Required Insurance"): (a) Insurance against loss or damage to the Improvements (the "Improvements Insurance") under a fire and broad form of all risk extended coverage insurance policy (which shall include flood insurance if the Premises is located within a flood hazard area, and earthquake insurance) together with an agreed value endorsement. Such insurance shall be in amounts sufficient to prevent Landlord or Tenant from becoming a co-insurer under the applicable policies, and not less than the full replacement cost of the Improvements (excluding footings and foundations and other parts of the Improvements which are not insurable) as reasonably determined from time to time by Landlord but not more frequently than once in any 12-month period. Such insurance policies may contain reasonable exclusions and deductible amounts as are common to properties similar to the Premises. (b) General public liability insurance for the benefit of Landlord, Tenant and Lender against claims for damages to person or property occurring on, in or about the Premises and the adjoining streets, sidewalks, gutters, curbs, passageways and other areas adjacent thereto, if any, with a combined single limit of at least Five Million Dollars ($5,000,000.00) for personal injury and property damage, such insurance to include full coverage of the indemnity set forth in Section 6.10. Policies for such insurance shall be for the mutual benefit of Landlord, Tenant and Lender, as their respective interests may appear. (c) Workers' compensation insurance to the extent necessary to protect Landlord, Tenant and the Premises against workers' compensation claims, covering all persons employed in connection with any work done on or about the Premises with respect to which claims for death or bodily injury could be asserted against Landlord, Tenant or the Premises. Such policy of workers' compensation insurance shall comply with all of the requirements of applicable state law. (d) At any time when any portion of the Premises are being constructed, altered or replaced, builder's risk insurance (in completed value non-reporting form) in an amount no less than the actual replacement value of the Improvements, exclusive of foundations and excavations. 6.2. Permitted Insurers. The Required Insurance shall be written by companies of recognized financial standing authorized to do insurance business in the state in which the Premises are located and have Bests ratings of A X or better. The Required Insurance shall name as the insured parties thereunder Landlord and Tenant, as their interests may appear, and Lender as an additional insured under a standard "mortgagee" endorsement or its equivalent satisfactory to Landlord. Landlord shall not be required to prosecute any claim against, or to contest any settlement proposed by, an insurer. Tenant may, at its expense, prosecute any such claim or contest any such settlement in the name of Landlord, Tenant or both with the consent of Landlord, and Landlord will join therein at Tenant's written request upon the receipt by Landlord of an indemnity from Tenant against all costs, liabilities and expenses in connection therewith. 6.3. Insurance Claims. Insurance claims by reason of damage to or destruction of any portion of the Premises shall be primarily adjusted by Tenant, but both Landlord and Lender shall have the right to join with Tenant in adjusting any such loss and approve any adjustment proposed by Tenant. 6.4. Insured Parties. Any loss under any such policy shall be made payable to Landlord (or, if Landlord so elects, to Lender), subject to the requirements of Section 6.9. Every policy of Required Insurance shall contain an agreement that the insurer will not cancel such policy except after thirty (30) days' written notice to Landlord and Lender and that any loss otherwise payable thereunder shall be payable notwithstanding any act or negligence of Landlord, Tenant or Lender which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding (i) any foreclosure or other action taken by a creditor pursuant to any provision of any Mortgage or other Loan Document upon the happening of a default or Event of Default thereunder or (ii) any change in ownership of the Premises. 6.5. Delivery of Policies. Tenant shall deliver to Landlord promptly after the delivery of this Lease, the original or duplicate policies or Accord-27 form certificates of insurers, satisfactory to Lender, evidencing all of the Required Insurance. Tenant shall, prior to the expiration of any such policy, deliver to Landlord another original or duplicate of such policy or certificates evidencing the renewal of any such policy. If Tenant fails to maintain or renew any Required Insurance, or to pay the premium therefor, or to deliver such certificate, then Landlord, at its option, but without obligation to do so, procure such insurance. Any sums so expended by Landlord shall be Additional Rent hereunder and shall be repaid by Tenant within five (5) days after notice to Tenant of such expenditure and the amount thereof. together with interest thereon at the Interest Rate. 6.6. No Double Coverage. Tenant shall not obtain or carry separate insurance covering the same risks as any Required Insurance unless Tenant, Landlord and Lender are included therein as named insured, with loss payable as provided in this Lease and the policy contains a first mortgagee endorsement in favor of the Lender. Tenant shall immediately notify Landlord whenever any such separate insurance is obtained and shall deliver to Landlord the policies or certificates evidencing the same. Any insurance which Landlord may elect to carry shall be excess and not primary coverage. 6.7. Blanket Insurance. Anything contained in this Article VI to the contrary notwithstanding, all Required Insurance may be carried under a "blanket" or "umbrella" policy or policies covering other property or liabilities of Tenant, provided that such policies otherwise comply with the provisions of this Lease and specify the coverage and amounts thereof with respect to the Premises. 6.8. Damages for Tenant's Failure to Properly Insure. Landlord or Lender shall not be limited in the proof of any damages which Landlord or Lender may claim against Tenant arising out of or by reason of Tenant's failure to provide and keep in force insurance, as provided above, to the amount of the insurance premium or premiums not paid or incurred by Tenant and which would have been payable under such insurance; but Landlord and Lender shall also be entitled to recover as damages for such breach, the uninsured amount of any loss, to the extent of any deficiency in the Required Insurance and damages, costs and expenses of suit suffered or incurred by reason of or damage to, or destruction of, the Premises, occurring during any period when Tenant shall have failed to provide the Required Insurance. Tenant shall indemnify, defend and hold harmless Landlord and Lender for any liability incurred by Landlord or Lender arising out of any deductibles for Required Insurance. 6.9. Casualty. If all or any part of the Premises shall be damaged or destroyed by casualty which is insured or required to be insured under this Lease, or by any other casualty if the cost to repair such other casualty does not exceed twenty percent (20%) of the total replacement cost of the Improvements, Tenant shall promptly notify the Landlord thereof, and shall, with reasonable promptness and diligence, rebuild, replace and repair any damage or destruction to the Premises, at its expense, in conformity with the requirements of Section 5.4(a) hereof, in such manner as to restore the same to the same or better condition as existed prior to such casualty, using materials of the same or better grade than that of the materials being replaced, and there shall be no abatement of Basic Rent or Additional Rent. Proceeds of casualty insurance of $100,000.00 or less shall be paid to Tenant. Proceeds in excess of $100,000.00 shall be held by Landlord or a proceeds trustee (which may be Lender, an escrow or title company, or a bank or trust company designated by Landlord) and paid to Tenant, but only against certificates of Tenant, appropriate lien waivers and such other information reasonably required by Landlord or the proceeds trustee delivered to Landlord from time to time, but not more frequently than once per calendar month, as such work or repair progresses. Each such certificate shall describe the work or repair for which Tenant is requesting payment and the cost incurred by Tenant in connection therewith and stating that Tenant has not theretofore received payment for such work and has sufficient funds remaining to complete the work free of liens or claims. Any proceeds remaining after Tenant has repaired the Premises shall be delivered to Tenant No payment shall be made to Tenant if there exists any Event of Default under this Lease. If Tenant is not required to restore after a casualty, this Lease shall nevertheless remain in full force and effect, with no abatement of Basic Rent or Additional Rent, except that Landlord shall have the right to terminate this Lease by notice to Tenant if Tenant does not agree to restore within sixty (60) days after the casualty, or if Tenant agrees to restore but does not diligently proceed to do so. 6.10. Indemnification. (a) Tenant agrees to pay, and to protect, defend, indemnify and save harmless Landlord, Lender and their agents from and against any and all actual liabilities, losses, damages, costs, expenses (including all reasonable attorneys' fees and expenses of Landlord but excluding lost profits and all other indirect or consequential damages), causes of action, suits, claims, demands or judgments of any nature whatsoever (i) arising from any injury to, or the death of, any person or damage to property (including property of employees and invitees of Tenant) on the Premises or upon adjoining sidewalks, streets or ways, to the extent not occasioned by the actual gross negligence or willful misconduct of Landlord, (ii) arising from the use, non-use, condition, maintenance, repair or occupation of the Premises or any part thereof or adjoining sidewalks, streets or ways, to the extent not occasioned by the actual gross negligence or willful misconduct of Landlord, (iii) arising from violation by Tenant of any agreement or condition of this Lease or any sublease (including without limitation the failure to pay Impositions), or any contract or agreement to which Tenant is a party, or any restriction, law, ordinance or regulation (including without limitation, the Americans With Disabilities Act of 1990 and all regulations issued thereunder) affecting the Premises or any part thereof or the ownership, occupancy or use thereof, to the extent not occasioned by the actual gross negligence or willful misconduct of Landlord; or (iv) arising out of any permitted contest referred to in Section 4.3 (collectively, "Indemnified Matters"). Without limiting the generality of the foregoing, the Indemnified Matters shall include matters arising prior to the Commencement Date. If Landlord, Lender or any agent of Landlord or Lender shall be made a party to any such litigation commenced against Tenant, and if Tenant, at its expense, shall fail to provide Landlord, Lender or their agents with counsel (upon Landlord's request) reasonably approved by Landlord, Tenant shall pay all costs and attorneys' fees and expenses incurred or paid by Landlord, Lender or their agents in connection with such litigation. Tenant's obligations and liabilities under this Section 6.10 shall survive the expiration of this Lease. Tenant waives all claims against Landlord arising from any liability described in this Section 6.10 (a), except to the extent caused by the actual gross negligence or willful misconduct of Landlord. The waiver and indemnity provisions in this paragraph are intended to exculpate and indemnify Landlord (i) from and against the direct consequences of its own negligence or fault when Landlord is solely negligent or contributorily, partially, jointly, comparatively or concurrently negligent with Tenant or any other person (but is not grossly negligent and has not committed willful misconduct) and (ii) from and against any liability of Landlord based on any applicable doctrine of strict liability unless resulting from the gross negligence or willful misconduct of Landlord. (b) Should any claim be made against Landlord by a person not a party to this Lease with respect to any Indemnified Matter, Landlord shall promptly give Tenant written notice of any such claim, and Tenant shall thereafter defend or settle any such claim, at its sole expense, on its own behalf and with counsel of its selection; provided, however, that Tenant's counsel shall be competent counsel experienced in the type of litigation or claim at issue and shall be acceptable to Landlord, acting reasonably. Upon Tenant's assumption of the defense of any claim against Landlord pursuant to Tenant's indemnity, Landlord shall have the right to participate in the defense or settlement of the claim with counsel retained and paid by it and Tenant shall cause the attorneys retained by it to consult and cooperate fully with counsel for Landlord. In such defense or settlement of any claims, Landlord shall provide Tenant with originals or copies of all relevant documents and shall cooperate with and assist Tenant, at no expense to Landlord. Notwithstanding any provision of this Section 6.10 to the contrary, Tenant shall not enter into any settlement or agreement in connection with any Indemnified Matters binding upon or adversely affecting either Landlord or Lender, or admit any liability or fact in controversy binding upon or adversely affecting either Landlord or Lender, without the prior written consent of Landlord or Lender, as the case may be, in such party's sole discretion. (c) Landlord agrees to pay, and to protect, defend, indemnify and save harmless Tenant and its agents from and against any and all liabilities, losses, damages (actual and consequential), costs, expenses (including all reasonable attorneys' fees and expenses of Tenant), causes of action, suits, claims, demands or judgments of any nature whatsoever arising from the actual gross negligence or willful misconduct of Landlord in connection with the Premises. VII. CONDEMNATION. 7.1. Assignment of Award. Subject to the rights of Tenant set forth in this Article VII, Tenant hereby irrevocably assigns to Landlord any award or payment to which Tenant may be or become entitled with respect to Complete, Partial or Temporary Taking of the Premises or any part thereof, by condemnation or other eminent domain proceedings pursuant to any law, general or special, by any governmental authority, whether the same shall be paid or payable in respect of Tenant's leasehold interest hereunder or otherwise. Notwithstanding the foregoing, Tenant may recover the value of its personal property at the Premises, if taken, so long as the amount of the Net Award received by Landlord is at least equal to the higher of (a) the net book value of the Premises as reflected on Landlord's financial statements, or (b) the fair market value of the Premises, on the date of the Complete, Partial or Temporary Taking. Landlord and Lender shall be entitled to participate in any such proceeding. 7.2. Definitions for Article VII. (a) "Complete Taking" shall mean the occurrence of any actual or threatened condemnation or other eminent domain proceeding pursuant to any general or special law, or any agreement with an authority having the power of eminent domain, which results in the taking or conveyance of (i) the entire Premises or (ii) such a significant portion of the Premises that, in the good faith judgment of either Tenant or Landlord, it is uneconomic to rebuild or restore the remaining portion of the Premises for the continued operation of the business. (b) "Partial Taking" shall mean the occurrence of any taking of a portion of the Premises by condemnation or other eminent domain proceedings, or any agreement with an authority having the power of eminent domain, which does not result in the taking or conveyance of such a significant portion of the Premises that, in the good faith judgment of either Tenant or Landlord, it is uneconomic to rebuild or restore the remaining portion of the Premises for the continued operation of the business. (c) "Temporary Taking" shall mean the occurrence of a temporary taking of the use or occupancy of the Premises or any part thereof by any governmental authority. (d) "Net Award" shall mean all amounts payable as a result of any condemnation or other eminent domain proceeding and all amounts payable pursuant to any agreement with any condemning authority (which agreement shall be deemed to be a taking) which has been made in settlement of or under threat of any condemnation or other eminent domain proceeding affecting the Premises, less all expenses incurred as a result thereof not otherwise paid by Tenant and the collection of such amounts. (e) "Purchase Offer" shall mean a purchase offer as described in this Article VII. 7.3. Complete Taking. Upon the occurrence of a Complete Taking Landlord or Tenant may elect to terminate this Lease by delivering a notice of termination specifying a Termination Date occurring not less than sixty (60) days after the delivery of such notice, and this Lease shall continue in full force and effect without abatement of rent until the Termination Date. 7.4. Partial Taking. Upon the occurrence of any Partial Taking, this Lease shall continue in full effect without abatement or reduction of Basic Rent, Additional Rent or other sums payable by Tenant. In the event Landlord receives a Net Award in connection with any such Partial Taking Landlord shall, provided there is no Event of Default hereunder, make the Net Award available to Tenant, and Tenant shall, regardless of the adequacy of the award, make repairs in accordance with the requirements of Section 5.4(a) hereof so that, thereafter, the Premises shall be, as nearly as possible, in a condition as good as the condition thereof immediately prior to such Taking, but, if such Net Award shall be in excess of One Hundred Thousand Dollars ($100,000), the proceeds shall be held by Landlord or a proceeds trustee (which may be Lender or Lender's designee, or a bank or trust company designated by Landlord), and paid only upon delivery to Landlord of (i) certificates of Tenant identifying the repair work for which Tenant is requesting payment and the cost incurred by Tenant in connection therewith and stating that Tenant has not theretofore received payment for such work; (ii) appropriate lien waivers; and (iii) such other information as may be reasonably required by the proceeds trustee. Any Net Award remaining after such repairs have been made shall be delivered to Tenant if no Event of Default exists; otherwise, the excess shall be paid to Landlord. 7.5. Temporary Taking. Upon the occurrence of any Temporary Taking, Tenant shall, promptly after any such Temporary Taking ceases, at its expense, repair any damage caused thereby in conformity with the requirements of Section 5.4(a) hereof so that, thereafter, the Premises shall be, as nearly as possible, in a condition as good as the condition thereof immediately prior to such Temporary Taking. In the event of such Temporary Taking, Tenant shall be entitled to receive the entire Net Award payable by reason of such Temporary Taking, less any costs incurred by the Landlord in connection therewith. If the cost of any repairs required to be made by Tenant pursuant to this Section 7.5 shall exceed the amount of the Net Award, the deficiency shall be paid by Tenant. No payments shall be made to Tenant pursuant to this Section 7.5, if any Event of Default shall exist under this Lease. No Basic Rent or Additional Rent shall abate through the duration of such Temporary Taking. VIII. ASSIGNMENT AND SUBLETTING. 8.1. Power to Assign and Sublet. With Landlord's prior written consent, which shall not be unreasonably withheld, conditioned or delayed, Tenant may sublet all of the Premises and may assign all its rights and interests under this Lease (provided that each such sublease or assignment shall expressly be made subject to all of the provisions, including the use provisions of Section 1.3 of this Lease). Tenant shall, within ten (10) days after the execution and delivery of any such assignment or the sublease of all of the Premises, deliver a conformed copy thereof to Landlord. 8.2. Assumption by Assignee; Tenant Remains Liable. If Tenant assigns its rights and interests under this Lease, the assignee under such assignment shall expressly assume all the obligations of Tenant hereunder in an instrument delivered to Landlord at the time of such assignment. No assignment or sublease made as permitted by this Article VIII shall affect or reduce any of the obligations of Tenant hereunder or the obligations of any guarantor of Tenant, and all such obligations shall continue in full force and effect as obligations of a principal and not as obligations of a guarantor or surety, to the same extent as though no assignment or subletting had been made, provided that performance by any such assignee or sublessee of any of the obligations of Tenant under this Lease shall be deemed to be performance by Tenant. No sublease or assignment made as permitted by this Article VIII shall impose any obligations on Landlord or otherwise affect any of the rights of Landlord under this Lease. Tenant hereby grants a security interest to Landlord in all subleases and all rents, issues and profits derived and to be derived therefrom, to secure performance of Tenant's obligations under this Lease. Landlord hereby grants to Tenant a license to collect all rents payable under any sublease (up to one month in advance), but upon any Event of Default, Landlord may in its sole discretion revoke such license and collect the rents directly from any sublessee and retain the same. 8.3. Other Transfers Void. Neither this Lease nor the Term hereby demised shall be mortgaged by Tenant, nor shall Tenant mortgage or pledge the interest of Tenant in and to any sublease of the Premises or the rentals payable thereunder. Any mortgage, pledge, sublease or assignment made in violation of this Article VIII shall be void. IX. FINANCIAL INFORMATION. 9.1. Financial Statements. Tenant will furnish to Landlord and Lender (i) Tenant's annual audited financial statements within ninety (90) days after the end of Tenant's fiscal year, and (ii) Tenant's unaudited quarterly financial statements within forty-five (45) days after the end of each quarter. X. DEFAULT. 10.1. Events of Default. Any of the following occurrences or acts shall constitute an event of default (herein called an "Event of Default") under this Lease: (a) If Tenant, at any time during the continuance of this Lease (and regardless of the pendency of any bankruptcy, reorganization, receivership, insolvency or other proceedings at law, in equity, or before any administrative tribunal, which have or might have the effect of preventing Tenant from complying with the terms of this Lease), shall (i) fail to make any payment when due of Basic Rent, Additional Rent or other sum herein required to be paid by Tenant hereunder for ten (10) days after written notice of such failure; (ii) fail to continuously operate the Premises for the Intended Use in accordance with the terms and conditions of Section 1.3 of this Lease for thirty (30) days after written notice of such failure; or (iii) fail to observe or perform any other provision hereof for thirty (30) days after written notice of such failure to observe or perform; or (b) If any representation or warranty of Tenant hereunder or set forth in any notice, certificate, demand, request or other instrument delivered pursuant to, or in connection with this Lease or in connection with the acquisition of the Premises by Landlord, shall either prove to be false or misleading in any material respect as of the time when the same shall have been made and Landlord actually suffers damages as a proximate cause thereof which are not paid by Tenant; or (c) If Tenant shall file a petition commencing a voluntary case under the Federal Bankruptcy Code or any federal or state law (as now or hereafter in effect) relating bankruptcy, insolvency, reorganization, winding-up or adjustment of debts (hereinafter collectively called "Bankruptcy Law") or if Tenant shall: (i) apply for or consent to the appointment of, or the taking of possession by, any receiver, custodian, trustee, United States Trustee or liquidator (or other similar official) of the Premises or any part thereof or of any substantial portion of Tenant's property; or (ii) generally not pay its debts as they become due, or admit in writing its inability to pay its debts generally as they become due; or (iii) make a general assignment for the benefit of its creditors; or (iv) file a petition commencing a voluntary case under or seeking to take advantage of any Bankruptcy Law; or (v) fail to controvert in timely and appropriate manner, or in writing acquiesce to, any petition commencing an involuntary case against Tenant or otherwise filed against Tenant pursuant to any Bankruptcy Law; or (vi) take any action in furtherance of any of the foregoing; or (d) If an order for relief against Tenant shall be entered in any involuntary case under the Federal Bankruptcy Code or any similar order against Tenant shall be entered pursuant to any other Bankruptcy Law, or if a petition commencing an involuntary case against Tenant or proposing the reorganization of Tenant under any Bankruptcy Law shall be filed and not be discharged or denied within ninety (90)) days after such filing, or if a proceeding or case shall be commenced in any court of competent jurisdiction seeking: (i) the liquidation, reorganization, dissolution, winding-up or adjustment of debts of Tenant; or (ii) the appointment of a receiver, custodian, trustee, United States Trustee or liquidator (or any similar official) of the Premises or any part thereof or of Tenant or of any substantial portion of Tenant's property; (iii) the attachment of the Premises or any portion thereof, or (iv) any similar relief as to Tenant pursuant to any Bankruptcy Law, and any such proceeding or case shall continue undismissed for ninety (90) days after such relief is granted; or (e) If the Premises shall be left both unattended and without maintenance as provided herein, for a period of thirty (30) consecutive days or more; or (f) If there occurs an "Event of Default" (as defined therein) under any of the leases listed on Exhibit "C" and the Event of Default is not cured within the applicable cure period and as a result thereof Landlord either terminates the other lease or recovers possession of the premises leased pursuant to the other lease. 10.2. Landlord's Remedies. (a) In the event of an Event of Default and Tenant's failure to cure the Event of Default within the applicable cure period, Landlord shall have the right at its election to give Tenant ten (10) days' written notice of Landlord's intention to terminate the term of this Lease on a date specified in such notice. Thereupon, the term of this Lease and the estate hereby granted shall terminate on such date as completely and with the same effect as if such date were the date fixed herein for the expiration of the term of this Lease, and all rights of Tenant hereunder shall terminate, but Tenant shall remain liable as provided herein. (b) In the event of an Event of Default and Tenant's failure to cure the Event of Default within the applicable cure period, Landlord shall have the immediate right, whether or not the term of this Lease shall have been terminated pursuant to Section 10.2(a), to (i) re-enter and repossess the Premises or any part thereof by force, summary proceedings, ejection or otherwise, and (ii) remove all persons and property therefrom, Tenant hereby expressly waiving any and all notices to quit, cure or vacate provided by current or any future law. Landlord shall be under no liability by reason of any such re-entry, repossession or removal. No such re-entry or taking of possession of the Premises by Landlord shall be construed as an election on Landlord's part to terminate the term of this Lease unless a written notice of such intention to be given to Tenant pursuant to Section 10.2(a). (c) At any time or from time to time after the repossession of the Premises or any part thereof pursuant to Section 10.2(b), whether or not the term of this Lease shall have been terminated pursuant to Section 10.2(a), Landlord may (but shall be under no obligation to) relet the Premises or any part thereof for the account of Tenant, in the name of Tenant or Landlord or otherwise, without notice to Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on such reasonable conditions (which may include concessions or free rent) and for such uses as Landlord may reasonably determine, and Landlord may collect and receive any rents payable by reason of such reletting. Landlord shall not be responsible or liable for any failure to relet the Premises or any part thereof or for any failure to collect any rent due upon any such reletting. (d) No termination of the term of this Lease pursuant to Section 10.2(a), by operation of law or otherwise, and no repossession of the Premises or any part thereof pursuant to Section 10.2(b) or otherwise, and no reletting of the Premises or any part thereof pursuant to Section 10.2(c), shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination, repossession or reletting. (e) In the event of any such termination or repossession, Tenant will pay to Landlord the Basic Rent, Additional Rent and other sums required to be paid by Tenant to and including the date of such termination or repossession (together with interest at the Interest Rate on past due amounts); and, thereafter, Tenant shall, until the end of what would have been the term of this Lease in the absence of such termination or repossession, and whether or not the Premises or any part thereof shall have been relet, be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed current damages: (i) the Basic Rent, Additional Rent and other sums which would be payable under this Lease by Tenant in the absence of such termination or repossession, less (ii) the net proceeds, if any, of any reletting effected for the account of Tenant pursuant to Section 10.2(c), after deducting from such proceeds all of Landlord's reasonable out-of-pocket expenses incurred in connection with such reletting (including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, employees' expenses, and expenses of preparation for such reletting). Tenant will pay such current damages on the days on which the Basic Rent would have been payable under this Lease in the absence of such termination or repossession, and Landlord shall be entitled to recover the same from Tenant on each such day. (f) At any time after such termination or repossession by reason of the occurrence of any Event of Default, whether or not Landlord shall have collected any current damages pursuant to Section 10.2(e), Landlord shall be entitled to recover from Tenant, and Tenant will pay to Landlord on demand, as and for liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the present value of all rent payable under the Lease beyond the date of such demand over the then present value of the then fair market rental for the Premises, at the date of such demand for what would be the unexpired term of the Lease, which present value shall in each case be determined by the application of a discount factor of ten percent (10%) per annum. If any law, [including without limitation, California Civil Code Section 1951.2 or its successor,] shall be construed to limit the amount of such liquidated final damages to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such statute or rule of law. (g) Notwithstanding anything to the contrary stated herein, if an Event of Default shall have happened and be continuing, whether or not Tenant shall have abandoned the Premises, Landlord may elect to continue this Lease in effect for so long as the Landlord does not terminate Tenant's right to possession of the Premises and Landlord may enforce all of its rights and remedies hereunder including, without limitation, the right to recover all Basic Rent, Additional Rent and other sums payable hereunder as the same become due. [In connection therewith, Landlord shall have all of its rights under California Civil Code Section 1951.4 or its successor.] 10.3. Additional Rights of Landlord. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity or by statute. The failure of Landlord to insist at any time upon the strict performance of any covenant or agreement or to exercise any option, right, power or remedy contained in this Lease shall not be construed as waiver or a relinquishment thereof for the future. A receipt by Landlord of any Basic Rent, any Additional Rent or any other sum payable hereunder with knowledge of the breach of any covenant or agreement contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. In addition to other remedies provided in this Lease, Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief in case of the violation, or attempted or threatened violation, of any of the covenants, agreements, conditions or provisions of this Lease, or to a decree compelling performance of any of the covenants, agreements, conditions or provisions of this Lease, including but not limited to the provisions of this Lease setting forth Tenant's operating covenant, or to any other remedy allowed to Landlord at law or in equity. 10.4. Waivers by Tenant. To the extent permitted by applicable law, Tenant hereby waives and surrenders for itself and all those claiming under it, including creditors of all kinds, (i) any right or privilege which it or any of them may have under any present or future construction, statute or rule of law to redeem the Premises or to have a continuance of this Lease for the term hereby demised after termination of Tenant's right of occupancy by order or judgment of any court or by any legal process or writ, or under the terms of this Lease or after the termination of the term of this Lease as herein provided, and (ii) the benefits of any present or future constitution, statute or rule of law which exempts property from liability for debt or for distress for rent. 10.5. Attorneys' Fees. In the event of an Event of Default and Tenant's failure to cure the Event of Default within the applicable cure period, if an action shall be brought by Landlord for the enforcement of any right set forth herein in connection with, and subject to, the indemnification provisions contained in Section 6.10 hereof, Tenant shall be liable for all of the reasonable out-of-pocket expenses incurred by Landlord in connection therewith, including without limitation, attorneys' fees. However, should Tenant prevail in an action for violation of quiet enjoyment under this Lease, then and only in such event shall Landlord be liable for reasonable out-of-pocket expenses incurred by Tenant in connection therewith, including attorneys' fees. XI. MISCELLANEOUS. 11.1. Notices, Demands and Other Instruments. All notices, demands, requests, consents, approvals and other instruments required or permitted to be given pursuant to the terms of this Lease shall be in writing and shall be deemed to have been properly given if (a) with respect to Tenant, sent by registered or certified mail with a return receipt requested, postage prepaid, or sent by facsimile, nationally recognized overnight express carrier or delivered by hand, in each case addressed to Tenant at its notice address first above set forth, and (b) with respect to Landlord, sent by registered or certified mail with a return receipt request, postage prepaid, or sent by facsimile, nationally recognized overnight express courier or delivered by hand in each case, addressed to the Landlord at its address first above set forth along with a copy to the Lender (if Tenant shall have been given Lender's address). Landlord and Tenant shall each have the right from time to time to specify as its address for purposes of this Lease any other address in the United States of America upon giving fifteen (15) days written notice thereof, similarly given, to the other party. Notices shall be deemed communicated upon the earlier of receipt, or seventy-two (72) hours from the time of mailing if mailed as provided in this Section 11.1. 11.2. Estoppel Certificates and Consents. (a) Tenant will, from time to time, upon not less than twenty (20) days prior written request by Landlord or by Lender, execute, acknowledge and deliver a certificate certifying: (i) that this Lease is unmodified and in full effect (or setting forth any modifications along with the statement that this Lease as modified is in full effect ); (ii) that the Basic Rent and Additional Rent payable and the dates to which the Basic Rent, Additional Rent and other sums payable hereunder have been paid; (iii) that to the best knowledge of Tenant, Landlord is not in any default of the Lease; (iv) the commencement and expiration dates of the Lease; (v) the amount of any security or other deposits; (vi) that either Tenant is in possession of the Premises or who is in possession; (vii) any concessions or other rights that Tenant (including first refusal, option or other occupancy claims) or Landlord may have; and (viii) such other matters as may reasonably be required by the requesting party. Any such certificate may be relied upon by any Lender, prospective purchaser, or prospective Lender of the Premises. Tenant further agrees to reasonably cooperate with Lender and its affiliates in the preparation of disclosure documents which may be issued in connection with a secondary market transaction involving a sale or securitization of its loan. (b) From time to time during the term of this Lease, Landlord expects to secure financing of its interest in the Premises by assigning Landlord's interest in this Lease and the sums payable hereunder. In the event of any such assignment to the Lender, Tenant will, upon not less than twenty (20) days prior written request by Landlord, execute, acknowledge and deliver to Landlord a consent clearly indicating (i) that Tenant is to make Basic Rent payments or portions thereof directly to Lender if required by Lender, and (ii) consent to such assignment addressed to such Lender in a form satisfactory to Lender; and Tenant will produce, at Tenant's expense, such certificates and other documents as may be reasonably requested by the Lender. Tenant acknowledges that, by execution hereof, it has agreed to make payments of Basic Rent or portions thereof directly to Lender, without further notice or direction if required by Lender, and Landlord consents to said payments by Tenant to Landlord. 11.3. Determination of Fair Market Rental Value. Fair market rental value for purposes of setting Extended Term Basic Rent shall be determined by an appraisal, which shall be performed by an appraiser selected by Landlord within thirty (30) days after notice to Landlord of Tenant's exercise of the option for the applicable Extended Term and paid one half by Tenant and one half by Landlord. Any appraiser selected by Landlord shall have qualifications that include a minimum of five (5) years of experience in the appraisal of commercial real estate in the State in which the Premises are located. Such appraiser shall be disinterested, and shall be a member of a nationally recognized appraisal association. Further, any such appraiser shall comply with any licensing law then in effect for appraisers authorized to perform general appraisals within such State. If there are then any existing Federal laws governing appraisers, said appraiser shall be in compliance with the then applicable Federal laws for appraisers performing appraisals of commercial real estate. In the event that Tenant disputes the appraised fair market rental value determined by an appraiser (hereinafter the "First Appraiser"), who performed an appraisal pursuant to this Section 11.3, it shall so notify Landlord within fifteen (15) days after receipt of such written determination by the First Appraiser, and the disagreement shall be resolved as follows: (a) Within five (5) days after the service of such notice by Tenant to Landlord, Tenant shall designate a second appraiser (the "Second Appraiser"), who shall appraise the fair market rental value of the Premises. This Second Appraiser shall render its opinion of the fair market rental value no later than thirty (30) days after the service of notice by Tenant stated above. In the event that the higher of the two appraised fair market rental values rendered herein is not more than ten percent (10%) greater than the lower of the two appraised fair market rental values, then the mean between the two appraised values shall be utilized to fix the appraised fair market rental value. (b) In the event that the higher of the two appraised fair rental values is more than ten percent (10%) higher than the lower of the two appraised fair market rental values, then the First Appraiser and the Second Appraiser will meet within fifteen (15) days after receipt and acceptance of the Second Appraisal by Tenant, to attempt to agree upon the appraised fair market rental value. If the First Appraiser and Second Appraiser do not agree upon the appraised fair rental value after such meeting, then they shall appoint a third appraiser (the "Third Appraiser"). (c) If the First and Second Appraiser shall be unable to agree upon the appointment of the Third Appraiser within fifteen (15) days after receipt and acceptance of the Second Appraisal by Tenant, then the Third Appraiser shall be selected by the Tenant and Landlord themselves. If Tenant and Landlord cannot agree on the third appraiser, within a further period of five (5) days, then either, on behalf of both, may apply to the United States District Court for the District of where the Premises are located, for the selection of the Third Appraiser. The fees and costs of the Second Appraiser will be borne by Tenant, and the fees and costs of the Third Appraiser, will be divided equally between Tenant and Landlord. The cost of application to the United States District Court shall be divided equally between Tenant and Landlord. In the event of the failure, refusal or inability of any appraiser to act, a new appraiser shall be appointed in its stead, which appointment shall be made in the same manner as provided herein; e.g., if the Second Appraiser must be replaced, then Tenant will have the right to designate its replacement. In the event that a Third Appraiser is selected in the manner aforesaid, it shall perform an appraisal of the fair market rental value of the Premises in accordance with the terms of this Section 11.3 within thirty (30) days after its appointment. In the event that the appraised fair market rental value rendered by the Third Appraiser is higher than the lower appraised fair market rental value, but lower than the higher appraised fair market rental value, as rendered by the First Appraiser and the Second Appraiser, then the appraised fair market rental value rendered by the Third Appraiser shall become the appraised value. In the event that the appraised value rendered by the Third Appraiser is lower than the lower appraised value or higher than the higher appraised fair rental value, as rendered by the First Appraiser and Second Appraiser, than an Appraisal Panel shall be convened. The "Appraisal Panel," consisting of the First, Second and Third Appraiser, shall convene within fifteen (15) days after submission of a written appraisal to Landlord and Tenant by the Third Appraiser (which Third Appraisal does not resolve the appraised fair market value question in accordance with this Section 11.3). The purpose of the formation of the Appraisal Panel will be to attempt to reach a decision by two members of the Appraisal Panel on the appraised fair rental value. A decision joined in by any two of the appraisers of the Appraisal Panel shall be the decision of the Appraisal Panel, and shall be binding upon the parties hereto following written notice thereof, which notice shall state the appraised fair rental value of the Premises. If no two members of the Appraisal Panel can concur in a decision of the appraised fair rental value within fifteen (15) days after the submission of the appraisal by the Third Appraiser to the parties, then the parties shall go to a neutral mediator for mediation. If the parties are unable to agree upon a fair rental value through mediation, the matter will be submitted to binding arbitration under the rules of the American Arbitration Association. (d) Each appraiser shall be instructed to assume that the provisions of this Lease (excluding the Basic Rent provision) would govern for a five (5) year term, that the Premises may be used for any lawful commercial use (regardless of their actual use), and that, as set forth in the Recitals to this Lease, the Premises being leased (and the fair market rent applicable thereto) includes the Land and the Improvements. 11.4. No Merger. There shall be no merger of this Lease or the leasehold estate hereby created with the fee estate in the Premises or any part thereof by reason of the same person acquiring or holding, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the Premises or any portion thereof. 11.5. Surrender. Upon the termination of this Lease, Tenant shall peaceably surrender the Premises to Landlord in the same condition in which they were received from Landlord at the commencement of this Lease, except as altered as permitted or required by this Lease and except for normal wear and tear. Tenant shall remove from the Premises prior to or within a reasonable time after such termination (not to exceed thirty (30) days) all its personal property that is capable of removal without causing damage to the Premises, and, at Tenant's expense, shall at such times of removal, repair any damage caused by such removal. Property not so removed shall become the property of Landlord. Landlord may thereafter cause such property to be removed and disposition of and the cost of repairing any damage caused by such removal shall be borne by Tenant. Any holding over by Tenant of the Premises after the expiration or earlier termination of the term of this Lease or any extensions thereof, with the consent of Landlord, shall operate and be construed as a tenancy from month to month only, at one hundred ten (110%) of the Basic Rent reserved herein and upon the same terms and conditions as contained in this Lease. Notwithstanding the foregoing, any holding over without Landlord's consent shall entitle Landlord, in addition to collecting Basic Rent at a rate of one hundred ten percent (110%) thereof, to exercise all rights and remedies provided by law or in equity. 11.6. Separability. Each and every covenant and agreement contained in this Lease is separate and independent, and the breach of any thereof by Landlord other than the covenant of quiet enjoyment in Section 1.4, shall not discharge or relieve Tenant from any obligation hereunder. If any term or provision of this Lease or the application thereof to any person or circumstances or at any time to any extent be invalid and unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances or at any time other than those to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and shall be enforced to the extent permitted by law. 11.7. Merger, Consolidation or Sale of Assets. It shall be a condition precedent to the merger of Tenant into another corporation, to the consolidation of Tenant with one or more other corporations and to the sale or other disposition of all or substantially all the assets of Tenant to one or more other entities that the surviving entity or transferee of assets, as the case may be, shall deliver to Landlord and to Lender an acknowledged instrument in recordable form assuming all obligations, covenants and responsibilities of Tenant hereunder and under any instrument executed by Tenant consenting to the assignment of Landlord's interest in this Lease to the Lender as security for indebtedness. Tenant covenants that it will not merge or consolidate or sell or otherwise dispose of all or substantially all of its assets unless such an instrument shall have been so delivered and unless the entity with which it intends to merge, consolidate, sell or otherwise transfer its assets to has a credit rating at least equal to Tenant's then current credit rating. 11.8. Savings Clause. No provision contained in this Lease which purports to obligate Tenant to pay any amount of interest or any fees, costs or expenses which are in excess of the maximum permitted by applicable law, shall be effective to the extent that it calls for payment of any interest or other sums in excess of such maximum. 11.9. Binding Effect; Limitation of Liability. All of the covenants, conditions and obligations contained in this Lease shall be binding upon and inure to the benefit of the respective successors and assigns of Landlord and Tenant to the same extent as if each successor and assign were in each case named, except that a successor and assign of Landlord shall only be bound as to covenants, conditions and obligations arising after the transfer. Notwithstanding anything to the contrary set forth in this Lease, if Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord's part to be performed, and if as a consequence of such default Tenant shall recover a judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levy thereon against the right, title and interest of Landlord in the Premises, and Landlord shall not be personally liable therefor, provided Landlord then owns the Premises and such limitation of liability shall not apply if Landlord does not then own the Premises. 11.10. Table of Contents and Headings. The table of contents and headings used in this Lease are for convenience of reference only and shall not to any extent have the effect of modifying, amending or changing the provisions of this Lease. 11.11. Governing Law. This Lease shall be governed by and interpreted under the laws of the state in which the Premises is located, but not including such state's conflict of laws rules. 11.12. Certain Definitions. (a) The term "Imposition" means: (i) All real estate taxes imposed by governmental authorities of any kind; (ii) All other taxes and any payments in lieu thereof, assessments (including assessments for benefits from public works or improvements, whether or not begun or completed prior to the commencement of the term of this Lease and whether or not to be completed within said term), levies, fees, water and sewer rents and charges, and all other governmental charges of every kind, general and special, ordinary and extraordinary, whether or not the same shall have been within the express contemplation of the parties hereto, together with any interest and penalties thereon, which are, , imposed or levied upon or assessed against: (A) the Premises or any part thereof; (B) any Basic Rent, any Additional Rent reserved or payable hereunder; and/or (C) this Lease or the leasehold estate created hereby or which arise in respect of the operation, possession, occupancy or use of the Premises, to the extent payable during the Lease Term. (iii)Any gross receipts or similar taxes imposed or levied upon, assessed against or measured by the Basic Rent, Additional Rent or any other sums payable by Tenant hereunder or levied upon or assessed against the Premises to the extent payable during the Lease Term; (iv) All sales and use taxes which may be levied or assessed against or payable by Landlord and Tenant on account of the acquisition, leasing or use of the Premises or any portion thereof including but not limited to any taxes levied on the rental payable hereunder to the extent payable during the Lease Term; and (v) All charges for water, gas, light, heat, telephone, electricity, power and other utilities and communications services rendered or used on or about the Premises during the Lease Term. (b) The term "Landlord" means the owner, for the time being, of the rights of the lessor under this Lease, and its successors and assigns, and upon any assignment or transfer of such rights, except an assignment or transfer made as security for an obligation, the assignor or transferor shall be relieved of all future duties and obligations under this Lease, provided the assignee or transferee assumes in writing in recordable form all such future duties and obligations of Landlord and such written assumption is delivered to Tenant. (c) The term "Lease" means this Lease as amended and modified from time to time together with any memorandum or short form of lease entered into for the purpose of recording. (d) The term "Lender" means the holder of a mortgage or deed of trust ("Mortgage") or other security agreement encumbering Landlord's interest in the Premises and its successors and assigns. The documents, including but not limited to the Mortgage, evidencing and securing any loan encumbering Landlord's interest in the Premises are herein called "Loan Documents". (e) The term "Tenant's Certificate" means a written certificate signed by the Chairman of the Board, the Chief Executive Officer, the President, any Vice President or the Secretary of Tenant. (f) The term "Termination Date" means the date on which this Lease terminates in accordance with its terms, and shall be any business day and not a Saturday, Sunday or legal holiday. 11.13. Exhibits. The exhibits to this Lease are hereby incorporated by reference herein and made a part hereof. The Guaranty attached hereto as Exhibit B is being executed and delivered on the Commencement Date, and such execution and delivery, at the election of Landlord, shall be a condition to the effectiveness of this Lease. 11.14. Integration. This Lease, the exhibits hereto and the memorandum, if any, hereof, constitute the entire agreement between the parties hereto with regard to the subject matter hereof, and supersede any prior understandings, agreements or negotiations. This Lease may not be amended or modified except by a writing executed by Tenant and Landlord, with the consent of any Lender. 11.15. Lease Memorandum. Each of Landlord and Tenant shall execute, acknowledge and deliver to the other a written memorandum of this Lease ("Memorandum") to be recorded in the appropriate land records of the jurisdiction in which the Premises is located, in order to give public notice and protect the validity of this Lease. In the event of any discrepancy between the provisions of the recorded Memorandum and the provisions of this Lease, the provisions of this Lease shall prevail. 11.16. Subordination to Landlord Financing. (a) (i) Subject to the provisions of Section 11.16(a)(ii) below, Tenant agrees that this Lease shall at all times be subject and subordinate to the lien of any Mortgage, provided the original principal amount of the Mortgage does not exceed 90% of the fair market value of the Premises at the time of origination of the Mortgage and Tenant agrees, upon demand, without cost, to execute instruments as may be reasonably required to further effectuate or confirm such subordination. (ii) Tenant's agreement to subordinate set forth in Section 11.16(a)(ii) above is conditioned upon the Lender agreeing that: Tenant's tenancy and Tenant's rights under this Lease shall not be disturbed, terminated or otherwise adversely affected, nor shall this Lease be affected, by any default under any Mortgage, and in the event of a foreclosure or other enforcement of any Mortgage, or sale in lieu thereof, the purchaser at such foreclosure sale shall be bound to Tenant for the Term of this Lease, the rights of Tenant under this Lease shall expressly survive, and this Lease shall in all respects continue in full force and effect so long as no Event of Default has occurred and is continuing; provided, however, that such purchaser shall not: (A) be liable for any prior act or omission of Landlord; (B) be subject to any defense, counterclaim, set-off or offset which Tenant may then have against Landlord; (C) be bound by any payment of rent that Tenant may have made to Landlord more than thirty (30) days before the date such rent was first due and payable under this Lease with respect to any period after the date of attornment other than, and only to the extent that, this Lease expressly required such a prepayment; (D) be bound by any obligation to make any payment to Tenant which was required to be made prior to the time such successor landlord succeeded to Landlord's interest; (E) be bound by any obligation to perform any work or to make improvements to the Premises; or (b) Notwithstanding the provisions of Section 11.16(a), the holder of any Mortgage to which this Lease is subject and subordinate shall have the right, at its sole option, at any time, to subordinate and subject the Mortgage, in whole or in part, to this Lease by recording a unilateral declaration to such effect. (c) At any time prior to the expiration of the Term, Tenant agrees, at the election and upon demand of any owner of the Leased Premises, or of a Lender who has granted non-disturbance to Tenant pursuant to Section 11.16(a) above, to attorn, from time to time, to any such owner or lender, upon the terms and conditions of this Lease, for the remainder of the Term. The provisions of this Section 11.16(c) shall inure to the benefit of any such owner or Lender, shall apply notwithstanding that, as a matter of law, this Lease may terminate upon the foreclosure of the Mortgage, shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions. (d) Each of Tenant, Landlord and Lender, however, upon written demand of the other, hereby agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of Sections 11.16(a) and 11.16(c), in the form customarily used by such Lender to the extent consistent with the requirements of such Sections, acknowledging such subordination, non-disturbance and attornment as are provided in such Sections and setting forth the terms and conditions of its tenancy. 11.17 Waiver of Statutory Liens.Landlord hereby forever waives and releases any and all liens, security interests and rights of Landlord created, granted or imposed by statute, law or regulation ("Statutory Liens") on, in or to any tangible personal property of Tenant located at any time at the Premises (the "Tenant Personalty"). Landlord acknowledges and agrees that Tenant may convey the Tenant Personalty, including granting security interests in the Tenant Personalty, from time to time free and clear of all Statutory Liens. Landlord and Lender shall, upon written demand of Tenant from time to time, execute and deliver to Tenant such documents as may reasonably be required to evidence and confirm Landlord's waiver of the Statutory Liens. 11.18 Interest Rate. Any amount due from either party to the other under this Lease which is not paid within ten (10) days after written notice that such amount was not received when due (including, without limitation, amounts due as reimbursement for costs incurred in performing obligations of such party hereunder upon its failure to so perform) shall bear interest at the prime rate of Bank of America NA ("Interest Rate") from the date due until paid, unless otherwise specifically provided herein, but the payment of such interest shall not excuse or cure any default by Tenant under this Lease. 11.19. Right of First Offer and First Refusal. [Provision to be inserted if not in a separate document.] IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above set forth. "LANDLORD" __________________________ a ________________________ By:_______________________ Title:____________________ "TENANT" [UGLY DUCKLING CAR SALES, INC.], an Arizona corporation By:_______________________ Title:____________________ By:_______________________ Title:____________________ GUARANTY THIS GUARANTY, dated as of ________, 1998, (together with all amendments and supplements hereto, referred to as this "Guaranty"), is from UGLY DUCKLING CORPORATION, a corporation organized and existing under the laws of Delaware (herein, together with its successors and assigns, including, without limitation, any entity succeeding thereto by merger, consolidation or acquisition of its assets substantially as an entirety, referred to as "Guarantor"), to _______, a _________ (herein, together with its successors and assigns, referred to as "Lessor"). WHEREAS, Ugly Duckling Car Sales, Inc., an Arizona corporation herein, together with any entity succeeding thereto by merger, consolidation or acquisition of its assets substantially as an entirety, referred to as "Lessee"), a subsidiary [describe relationship] of Guarantor, leased from Lessor and Lessor has leased to Lessee a certain parcel of real property together with the building and improvements located thereon, and as described in Exhibit A attached hereto (the "Premises") pursuant to a Lease dated as of even date herewith, between Lessor and Lessee (the "Lease") (capitalized terms not defined herein shall have the meanings given in the Lease); and WHEREAS, the execution and delivery of this Guaranty by Guarantor is an inducement to Lessor to enter into the Lease and Lessor has advised Guarantor that it is not willing to enter into the Lease unless this Guaranty is executed and delivered (the Lease and the other documents executed and delivered at or prior to the closing by Lessee, other documents related to the Lease made by Lessee to or with Lessor and all modifications and amendments to the foregoing, made by Lessee to or with Lessor being, collectively, the "Lease Documents"); NOW, THEREFORE, in consideration of the premises, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor agrees with Lessor as follows: 1. Guarantor unconditionally and irrevocably guarantees (i) the payment and performance by Lessee of all its obligations, covenants, agreements, terms and conditions under the Lease Documents and (ii) the prompt payment of all sums which may become payable by Lessee pursuant to any of the Lease Documents in full when due in accordance with the provisions thereof. This Guaranty is irrevocable, unconditional and absolute. If for any reason any sums shall not be paid by Lessee promptly when due (after any notice required by the Lease Documents and prior to the expiration of any applicable period of grace provided for in the Lease Documents), or any such agreement, covenant, term or condition is not performed or observed by Lessee in accordance with the Lease Documents, Guarantor promptly, after notice thereof, will pay the same to the person entitled thereto pursuant to the provisions of any such Lease Document and will promptly perform and observe the same or cause the same promptly to be performed or observed, in any case regardless of (a) any defenses or rights of setoff or counterclaims which Lessee or Guarantor may have or assert, (b) whether Lessor shall have taken any steps to enforce any rights against Lessee or any other remedy thereunder as a result of the default of Lessee thereunder and (c) any other condition, contingency, thing or matter whatsoever. Guarantor also agrees to pay to Lessor such further reasonable and actual amounts as shall be sufficient to cover the cost and expense actually incurred in collecting such sums, or any part thereof, or of otherwise enforcing this Guaranty, including without limitation, in any case, reasonable attorneys' fees and disbursements. 2. The obligations, covenants, agreements and duties of Guarantor under this Guaranty shall in no way be affected or impaired by reason of the happening from time to time of any of the following, although without notice to or the further consent of Guarantor: (a) the extension, in whole or in part, of the time for payment by Lessee or Guarantor of any sums owing or payable under any of the Lease Documents (provided, however, that if any such extension is expressly granted by Lessor, then Guarantor shall be entitled to the benefit of such extension); (b) any assignment or reassignment of the Lease or subletting of the Premises or any part thereof but only during the Lease Term and not any Extended Term resulting from an assignee's exercise of an extension of the Lease Term; (c) the modification or amendment of any of the obligations of Lessee under the Lease Documents, whether the same be in the form of a new agreement or the modification or amendment of an existing Document (any of the foregoing being a "Modification"), or of Guarantor under this Guaranty; (d) the doing or the omission of any of the acts (including, without limitation, the giving of any consent referred to therein) referred to in the Lease Documents or this Guaranty; (e) any failure, omission or delay on the part of Lessor to enforce, assert or exercise any right, power or remedy conferred on or available to Lessor in or by any of the Lease Documents or this Guaranty, or any action on the part of Lessor granting indulgence or extension in any form whatsoever (except to the extent, if any, that such indulgence shall have been expressly granted by Lessor); (f) the voluntary or involuntary liquidation, dissolution, sale of all or substantially all of the assets, marshalling of assets and liabilities, receivership, conservatorship, custodianship, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceeding affecting Lessee or Guarantor or any of their assets; (g) the inability of Lessor or Lessee, respectively, to enforce any provision of the Lease Documents or this Guaranty, for any reason; (h) any change in the relationship between Lessee and Guarantor or any termination of such relationship; (i) the inability of Lessee to perform, or, to the extent permitted by applicable law, the release of Lessee or Guarantor from the performance of any obligation, agreement, covenant, term or condition of Lessee under any of the Lease Documents by reason of any law, regulation or decree, now or hereafter in effect; or (j) any action or inaction by Lessor which results in any impairment or destruction of any subrogation rights of Guarantor or any rights of Guarantor to proceed against Lessee for reimbursement. 3. In the event of the rejection or disaffirmance of the Lease by Lessee or Lessee's receiver pursuant to any law affecting creditor's rights, Guarantor will, and does hereby (without the necessity of any further agreement or act) assume all obligations and liabilities of Lessee under or arising out of the Lease, to the same extent as if Guarantor had been originally named the lessee under the Lease, and there had been no such rejection or disaffirmance; Guarantor will confirm such assumption in writing at the request of Lessor, upon or after such rejection or disaffirmance. Guarantor, upon such assumption, shall have all rights of Lessee under the Lease and shall be entitled to a new lease on all of the terms and conditions of the Lease with respect to the unexpired portion of the Lease (to the extent permitted by law). Guarantor will execute and deliver such documents as Lessor may from time to time reasonably require to evidence such assumption, to confirm this Guaranty and to certify that Guarantor is not in default hereunder. 4. Notice of acceptance of this Guaranty and notice of any obligations or liabilities contracted or incurred by Lessee under any of the Lease Documents are hereby waived by Guarantor. 5. This Guaranty shall be construed in accordance with the laws of the state in which the Premises are located. 6. This Guaranty may not be modified or amended except by written agreement duly executed by Guarantor with the consent in writing of Lessor and any Lender. 7. [Guarantor is a company required to file certain reports with the Securities and Exchange Commission ("SEC"). Guarantor will deliver to Lessor within 30 days of filing with the SEC (other than on a confidential basis) or otherwise making public, copies of all financial statements, 8-K, 10-K and 10-Q reports, and notices and proxy statements sent by Guarantor to its stockholders.] 8. Guarantor waives any right it may have (a) to require Lessor to proceed against Lessee or against any other party or (b) to require Lessor to pursue any remedy within the power of the Lessor and Guarantor agrees that all of Guarantor's obligations under this Guaranty are independent of the obligations of Lessee under the Lease Documents or under any other instrument or agreement, and that a separate action may be brought against Guarantor whether or not an action is commenced against Lessee under any thereof. 9. All notices given pursuant to this Guaranty shall be in writing and shall be validly given when sent by a courier or express service guaranteeing overnight delivery and which will upon request provide a receipt of such delivery or by certified letter return receipt requested, and all other notices shall be validly given when addressed as set forth below. If this Guaranty provides for a designated period after notice within which to perform any act, such period shall commence on the date of receipt or refusal of such notice. If this Guaranty requires the exercise of a right by notice on or before a certain date or within a designated period, such right shall be deemed exercised on the date of receipt or refusal of receipt of such notice pursuant to which such right is exercised. Notices shall be addressed as follows: If to Lessor: If to Guarantor: Ugly Duckling Corporation Attention: General Counsel 2525 East Camelback Road, Suite 1150 Phoenix, Arizona 85016 Lessor and Lessee each may from time to time specify, by giving 15 days' notice to each other party, (i) any other address in the United States as its address for purposes of this Guaranty and (ii) any other person or entity in the United States that is to receive copies of notices, offers, consents and other instruments hereunder. 10. Guarantor hereby consents to, and no further consent by Guarantor shall be required for, (i) any assignment of rights of Lessor hereunder, in whole or in part, either as collateral security for obligations of Lessor secured by a lien on the Premises or in connection with the sale of the Premises or any interest therein or (ii) any assignment of the rights of Lessor under the Lease. Lessor will give notice to Guarantor of any such assignment, but a failure to do so will not result in any liability on Lessor, affect in any manner the enforceability of this Guaranty, the rights and remedies of Lessor hereunder or the obligations of Guarantor hereunder. 11. In case any one or more of the provisions hereof or of the Lease Documents shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof and this Guaranty shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 12. Guarantor shall not, directly or indirectly, without the express prior written consent of Lessor, which may be withheld by Lessor in its sole and absolute discretion, (i) merge into or consolidate with any other corporation, partnership or any other entity ("Person") or permit any other Person to merge into or consolidate with Guarantor; (ii) sell, lease, transfer, abandon or otherwise dispose of all or substantially all of Guarantor's properties or assets; or (iii) sell or offer for sale any shares of capital stock or any securities convertible into, or any rights to acquire, shares of capital stock, unless in each case, of each of (i), (ii) or (iii) above, Guarantor' s ability to perform all of its obligations under this Guaranty (in Landlord's opinion) will not be impaired after giving effect to such transaction. Within 10 days following the merger of Guarantor into another corporation, or the consolidation of Guarantor with one or more other corporations or the sale or other disposition of all or substantially all the assets of Guarantor to one or more other entities, the surviving entity or transferee of assets, as the case may be, shall deliver to Lessor an acknowledged instrument in recordable form assuming all obligations, covenants and responsibilities of Guarantor hereunder and under this Guaranty. 13. Lessor will accept performance by Guarantor of any of the obligations guaranteed under the Lease Documents as if such performance had been made by Lessee; provided, however, that the foregoing shall not be deemed to be an agreement by Lessor to allow access to the Premises in order to cure any default, it being acknowledged that any such right of access shall be obtained by Guarantor pursuant to a separate agreement with Lessee (and Lessor agrees to recognize any such rights of access which are so granted, provided that Lessor shall have received appropriate written notice thereof). 14. This Guaranty shall be binding upon, and inure to the benefit of and be enforceable by, the Guarantor, the Lessor, the Lessee, any Lender, and their respective successors and assigns. 15. Guarantor further agrees that, to the extent that the Lessee or Guarantor makes a payment or payments to the Lessor, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to the Lessee or the Guarantor or their respective estate trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable laws, then to the extent of such payment or repayment, this Guaranty and the advances or part thereof which have been paid, reduced or satisfied shall be reinstated and continued in full force and effect as of the date such initial payment reduction, or satisfaction occurred. 16. Guarantor shall have no rights (direct or indirect) of subrogation, contribution, reimbursement, indemnification or other right of payment or recovery from any person or entity (including, without limitation, the Lessee) for any payments made by the Guarantor hereunder, and Guarantor hereby waives and releases, absolutely and unconditionally, any such right of subrogation, contribution, reimbursement, indemnification and other rights or recovery which it may nor or hereafter acquire. Ugly Duckling Corporation, a Delaware corporation By: Title: By: Title: EX-10.24(B) 8 0008.txt SCHEDULE OF LEASES
Property Address Lease Term "Monthly Rent as of 1/1/01" Bell Road Dealership May 13, 1998 - May 31, 2018 $18,465.63 1515 E. Bell Rd. 4 5-Year Extensions Phoenix, AZ 85022 24th St. & Van Buren Dealership May 13, 1998 - May 31, 2018 $15,157.76 330 N. 24th St. 4 5-Year Extensions Phoenix, AZ 85006 Mesa Dealership May 13, 1998 - May 31, 2018 $24,919.46 333 S. Alma School Rd. 4 5-Year Extensions Mesa, AZ 85210 Glendale Dealership May 13, 1998 - May 31, 2018 $13,886.42 5104 W. Glendale Ave. 4 5-Year Extensions Glendale, AZ 85301 19th Ave. Dealership May 13, 1998 - May 31, 2018 $8,702.74 9650 N. 19th Ave. 4 5-Year Extensions Phoenix, AZ 85021 Gilbert Credit Office May 13, 1998 - May 31, 2018 $33,841.83 1030 N. Colorado St. 4 5-Year Extensions Gilbert, AZ 85233 Chandler Dealership May 13, 1998 - May 31, 2018 $7,834.99 400 N. Arizona Ave. 4 5-Year Extensions Chandler, AZ 85224 South Central Dealership May 13, 1998 - May 31, 2018 $6,257.72 4121 S. Central Ave. 4 5-Year Extensions Phoenix, AZ 85040 Phoenix Recon May 13, 1998 - May 31, 2018 $24,765.17 4515 E. Miami St. 4 5-Year Extensions Phoenix, AZ 85034 Future Corp/Admin Office 20 Year Lease $18,750.00 4020 E. Indian School Rd. 4 5-Year Extensions Phoenix, AZ 85018 Grant & Oracle Dealership May 13, 1998 - May 31, 2018 $13,585.26 2301 N. Oracle 4 5-Year Extensions Tucson, AZ 85705 Tucson Recon May 13, 1998 - May 31, 2018 $6,098.47 1901 W. Copper 4 5-Year Extensions Tucson, AZ 85745 Tucson Credit Office May 13, 1998 - May 31, 2018 $12,395.59 3434 E. Broadway 4 5-Year Extensions Tucson, AZ Griegos Dealership May 13, 1998 - May 31, 2018 $14,345.85 4700 4th Street NE 4 5-Year Extensions Albuquerque, NM 87107 Wyoming Dealership August 1998 - July 31, 2018 $28,528.73 700 Wyoming Blvd., NE 4 5-Year Extensions Albuquerque, NM 87123 Garden Grove Dealership* 20 Year Lease 11% adjusted by CPI annually 13650 Harbor Blvd. 4 5-Year Extensions Garden Grove, CA 92843 Garland Road Dealership* 20 Year Lease 11% adjusted by CPI annually 12180 Garland Road 4 5-Year Extensions Dallas, TX 75218 Harry Hines Dealership* 20 Year Lease 11% adjusted by CPI annually 10501 Harry Hines Blvd. 4 5-Year Extensions Dallas, TX 75220 Brandon Dealership* 20 Year Lease 11% adjusted by CPI annually 8805 E. Adamo Drive. 4 5-Year Extensions Tampa, FL 33619 Florida Avenue Dealership* 20 Year Lease 11% adjusted by CPI annually 11704 N. Florida Avenue 4 5-Year Extensions Tampa, FL 33612 Grand Prairie Dealership* 20 Year Lease 11% adjusted by CPI annually 1018 E. Main Street 4 5-Year Extensions Grand Prairie, TX 75050 Arlington Dealership* 20 Year Lease 11% adjusted by CPI annually 821 E. Division 4 5-Year Extensions Arlington, TX 76011 Douglasville Dealership* 20 Year Lease 11% adjusted by CPI annually 5669 Fairburn Road 4 5-Year Extensions Douglasville, GA 30134 Petersburg Dealership* 20 Year Lease 11% adjusted by CPI annually 2535 South Crater Road 4 5-Year Extensions Petersburg, VA 23805 Orlando Inspection Center* 20 Year Lease 11% adjusted by CPI annually 2451 McCraken Road 4 5-Year Extensions Sanford, FL 32773
EX-10.25 9 0009.txt OPTIONS AGREEMENT FOR PURCHASE AND SALE OPTION AGREEMENT FOR PURCHASE AND SALE OF COMMERCIAL PROPERTY Agreement Date: ______________________________ Seller: Verde Investments, Inc. 2575 East Camelback Road, Suite 700 Phoenix, Arizona 85016 Phone: (602) 778-5000 Fax: (602) 778-5025 Buyer: Ugly Duckling Corporation 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Phone: (602) 852-6600 Fax: (602) 852-6696 Property: Real property situated in Maricopa County, Arizona, commonly known as 4020 East Indian School Road, Phoenix, Arizona, and legally described on Exhibit "A" attached hereto. Option Agreement For Purchase And Sale Of Commercial Property This Option Agreement For Purchase And Sale Of Commercial Property (this "Agreement") is made by and between Verde Investments, Inc., an Arizona corporation ("Seller") and Ugly Duckling Corporation, a Delaware corporation ("Buyer"), effective as of November ___, 2000 (the "Agreement Date"). Recitals The parties acknowledge that the following recitals are correct statements of fact, are relied upon by the parties and are a material part of this Agreement: A. Seller owns the real property situated in Maricopa County, Arizona, commonly known as 4020 East Indian School Road, Phoenix, Arizona, and legally described on Exhibit "A" attached hereto, together with all improvements located thereon (the "Property"). B. Seller leases the Property to Buyer's subsidiary pursuant to a long-term lease (the "Lease") and the Lease is guaranteed by Buyer. C. Buyer seeks an option to purchase the Property and Seller is willing to grant to Buyer an option to purchase the Property, all under the terms of this Agreement. NOW, THEREFORE, in consideration of the covenants, representations and warranties of the parties stated herein, the performances of the parties required hereby and the benefits accruing to the parties hereunder, Seller and Buyer mutually agree and expressly intend to be legally bound as follows: Section 1. Option Grant, Exercise and Conveyance 1.1 Option Grant. Under the terms and conditions stated in this Agreement, Seller hereby to Buyer an option to purchase the Property (the "Option"). The Option is granted in consideration of Buyer's guaranty of the Lease. 1.2 Option Exercise. The term of the Option (the "Option Term") shall commence as of the Agreement Date and shall expire on December 31, 2002. The Option may be exercised by Buyer at any time during the Option Term by Buyer's delivery to Seller of written notice of exercise of the Option (the "Option Notice"). If Buyer fails to exercise the Option by delivery of the Option Notice during the Option Term, then upon expiration of the Option Term, the Option shall automatically expire and may not be exercised thereafter. 1.3 Conveyance. The Property shall be conveyed within 30 days after delivery of the Option Notice (the "Closing Date") by Seller's execution, delivery and recordation of a Quit Claim Deed in the form of Exhibit B attached hereto and incorporated herein (the "Deed"). Section 2. Purchase Price and Payment. Buyer shall pay to Seller as the total price for all of Seller's right, title and interest in the Property $__________________ (the "Purchase Price"). The Purchase Price shall be paid in full on the Closing Date in immediately available funds. Section 3. Closing Matters. 3.1 Closing Date. The Closing Date shall occur within 30 days after Buyer's exercise of the Option. The parties shall complete the purchase and sale of the Property on or before the Closing Date and neither party is required to consent to any extension of the Closing Date. 3.2 Escrow Agent. Upon Buyer's exercise of the Option, Seller and Buyer shall retain a mutually acceptable escrow agent as their mutual agent for closing the conveyance of the Property pursuant to this Agreement (the "Escrow Agent"). This Agreement shall constitute the mutual instructions of the parties to the Escrow Agent and such instructions cannot be modified without the written consent of both parties. The Escrow Agent shall prepare statements of the closing of the transactions described herein for review and approval by the parties prior to the Closing Date (the "Closing Statements"). Escrow Agent shall also insure the transfer of the Property by the issuance of the Owner's Title Policy and the senior priority of the Buyer Deed of Trust by issuance of the Lender's Title Policy. Escrow Agent shall prepare and file all informational returns, including without limitation, IRS Form 1099-S and shall otherwise comply with the provisions of Internal Revenue Code Section 6045(e). Escrow Agent shall indemnify, protect, hold harmless and defend Seller, Buyer and their respective attorneys for, from and against any and all claims, actions, costs, loss liability or expense arising out of or in connection with the failure of Escrow Agent to comply with the provisions of this Section 3.2. 3.3. Seller's Closing Documents. On or before the Closing Date, Seller shall deliver to Escrow Agent the following, duly executed and acknowledged by Seller as required: 3.3.1 The Deed. 3.3.2 All other documents reasonably required for Seller and/or Escrow Agent to perform their respective obligations hereunder. 3.4. Buyer's Closing Documents. On or before the Closing Date, Buyer shall deliver to Escrow Agent the following, duly executed and acknowledged by Buyer as required: 3.4.1 All documents reasonably required for Buyer and/or Escrow Agent to perform their respective obligations hereunder. 3.5 Prorations. All real property taxes, assessments and association dues on the Property and all expenses of operation of the Property shall not be prorated but are paid by Buyer's subsidiary pursuant to the Lease. 3.6 Costs. 3.6.1 Buyer. Buyer shall pay all premiums for any title insurance requested by Buyer. Buyer shall also pay all charges of Escrow Agent for performing the services required by this Agreement, including recording and filing fees. All costs payable by Buyer shall be identified in the Closing Statements. Buyer shall also pay all costs of Buyer's performance of its obligations hereunder. 3.6.2 Seller. Seller shall not be required to pay any costs. 3.6.3 Commissions. Neither Seller nor Buyer have dealt with any real estate brokers that may claim any brokerage fee relating to this transaction and each party shall indemnify the other for any claims for brokerage commissions by any such real estate brokers 3.7 1031 Exchanges. If either Seller or Buyer seeks to sell or purchase the Property or any part thereof as an exchange of like-kind Property pursuant to Internal Revenue Code Section 1031, the other party shall cooperate therein, provided such exchange does not change the terms and conditions of this Agreement and does not impose any additional expense or liability on the other party. Section 4. Representations, Warranties and Indemnification by Seller. On the Agreement Date and on the Closing Date, Seller makes the following representations, warranties and covenants to Buyer but to no other person or entity: 4.1 Authority. Seller is duly organized, validly existing and in good standing under the laws of the State of Arizona, and Seller has full power, authority and legal right to enter into this Agreement and to perform all covenants, obligations and agreements of Seller hereunder. Seller has taken all necessary action to authorize the execution, delivery and performance by Seller of this Agreement and all other documents or instruments required in connection with this Agreement, and upon execution and delivery of this Agreement and such other documents and instruments by Seller and the other parties thereto, this Agreement and each of such documents and instruments will have been duly authorized, executed and delivered by Seller and will constitute the legal, valid and binding obligation of Seller enforceable in accordance with its terms. Seller is not a foreign entity and no withholdings of the proceeds of the sale of the Property is required under Section 1445 of the Internal Revenue Code. 4.2 Contracts and Liens. Seller has not entered into any other contracts for the sale of the Property which would affect Seller's ability to convey the Property to Buyer. Seller will not, without the prior written consent of Buyer, subject the Property to any additional liens, encumbrances, covenants, conditions, easements, rights-of-way, or similar matters after the Agreement Date which will not be either approved by Buyer or eliminated on or prior to the Closing Date. 4.3 Legal Actions. There are, and on the Closing Date there shall be, no pending or threatened legal proceedings against Seller that would adversely affect, restrict or prohibit Seller's performance of this Agreement. 4.3 No Fraudulent Conveyance. Seller is not entering into the transactions described in this Agreement with an intent to defraud any creditor or to prefer the rights of one creditor over any other. Seller and Buyer have negotiated this Agreement at arms length and the consideration paid represents fair value for the assets to be transferred. 4.5 Pre-Closing Obligations. Seller shall perform all obligations and pay all amounts required of the owner of the Property prior to the Closing Date, subject to Buyer's obligations under the Lease. 4.6 Indemnification. The representations, warranties and covenants of Seller stated in this Agreement shall survive the Closing Date and the recordation of the Deed for one year only. Seller shall indemnify Buyer for all costs, direct damages and liabilities, including reasonable attorney's fees, incurred by Buyer as a result of any material breach by Seller of any of the representations, warranties or covenants of Seller stated in this Agreement and none other, provided a claim therefor is filed in a court of competent jurisdiction and served on Seller within one year after the Closing Date. Section 5. Representations, Warranties and Indemnification by Buyer. On the Agreement Date and on the Closing Date, Buyer makes the following representations, warranties and covenants to Seller: 5.1 Authority. Buyer is duly organized, validly existing and in good standing under the laws of the State of Delaware and Buyer has full power, authority and legal right to enter into this Agreement and to perform all covenants, obligations and agreements of Buyer hereunder. Buyer has taken all necessary action to authorize the execution, delivery and performance by Buyer of this agreement and all other documents or instruments required in connection with this Agreement, and upon execution and delivery of this Agreement and such other documents and instruments by Buyer and the other parties thereto, this Agreement and each of such documents and instruments will have been duly authorized, executed and delivered by Buyer and will constitute the legal, valid and binding obligation of Buyer enforceable in accordance with its terms. 5.2 Legal Actions. There are, and on the Closing Date there shall be, no pending or threatened legal proceedings against Buyer that would adversely affect, restrict or prohibit Buyer's performance of this Agreement. 5.3 Post Closing Obligations. Buyer shall perform all obligations and pay all amounts required of the owner of the Property from and after the Closing Date. 5.4 Property Taken As-Is. Except for the representations, warranties and covenants of Seller stated expressly in this Agreement, the Property is being conveyed AS-IS and Seller does not make any representations, warranties or covenants with respect to the Property. Buyer hereby assumes all risks, obligations and liability of any and all direct, indirect, consequential, special or other damages of any kind which are or may be associated with or arise out of the Property and agrees that Seller shall not be liable to Buyer for any direct, indirect, consequential, special or other damages of any kind which are or may be associated with or arise out of the Property. 5.5 Indemnification. The representations, warranties and covenants of Buyer stated in this Agreement shall survive the Closing Date and the recordation of the Deed. Buyer shall indemnify Seller for all costs, damages and liabilities, including reasonable attorney's fees, incurred by Seller as a result of any material breach by Buyer of any of the representations, warranties or covenants of Buyer stated in this Agreement and none other. Section 6. Remedies for not Closing. 6.1 Seller. If Buyer has exercised the Option and on the Closing Date this Agreement is in full force and effect, and if Buyer has tendered full performance but Seller fails to convey the Property to Buyer in accordance with this Agreement, then in such event, Buyer may elect one of the following two remedies as its exclusive remedy: (a) terminate this Agreement; or (b) continue this Agreement and immediately prosecute a claim for specific performance of this Agreement. 6.2 Buyer. If Buyer has exercised the Option and on the Closing Date this Agreement is in full force and effect, and if Seller has tendered full performance but Buyer fails to purchase the Property in accordance with this Agreement, then in such event, Seller shall be entitled to terminate this Agreement as its exclusive remedy. Section 7. General Provisions. 7.1 Notice. All notices and communications hereunder shall be in writing and shall be given by personal delivery, overnight delivery, facsimile telephonic transmission or mailed first class, registered or certified mail, postage prepaid, and shall be deemed given and received upon the earlier of actual delivery or three days after deposit in the United States Mail as aforesaid. Notices shall be delivered or mailed to the addresses stated in Page 1 of this Agreement. 7.2 Negotiation and Integration. The terms and provisions of this Agreement represent the results of negotiations between the parties, each of which has been represented by counsel or other representative of its own choosing and neither of which have acted under duress or compulsion, whether legal, economic or otherwise. This Agreement is entered into after full investigation, neither party relying upon any statements or representations made by the other not embodied in this Agreement. All prior and contemporaneous statements, representations, implications, understandings and agreements between the parties are superseded by and merged in this Agreement, which alone fully and completely expresses their entire agreement. There are no other agreements between the parties regarding the conveyance of the Property. 7.3 Assignment and Modification. This Agreement shall be binding upon the successors and assigns of the parties. This Agreement may not be assigned by Buyer to any person or entity without the prior written consent of Seller, which consent shall not be unreasonably withheld. However, Buyer may assign this Agreement to any entity the majority of which is owned by Buyer and such assignment does not require the prior written consent of Seller. The assignment of this Agreement by Buyer shall not release Buyer of any obligations hereunder. Notwithstanding the foregoing restrictions on assignment, Seller and Buyer may assign this Agreement to a qualified intermediary in an exchange of the Property, or any portion thereof, pursuant to Internal Revenue Code Section 1031. This Agreement may not be changed orally, but only by an agreement in writing, signed by the parties. 7.4 Severability. If any provision of this Agreement is held by a court to be void or unenforceable, the balance of the Agreement shall remain valid and enforceable. 7.5 Other Agreements. Except in the ordinary course, Seller shall not enter into any contracts, leases, agreements or amendments to existing agreements or encumbrances affecting the Property while this Agreement remains in force without the express prior written consent of Buyer, which consent shall not be unreasonably withheld. 7.6 No Agency. It is expressly agreed and understood by the parties hereto that neither party is the agent, partner nor joint venture partner of the other. It is also expressly agreed and understood that neither Seller nor Buyer has any obligations or duties to the other regarding the purchase and sale of the Property except as specifically provided for in this Agreement. 7.7 Attorney's Fees. In the event any party hereto finds it necessary to bring an action at law or other proceeding against the other party to enforce this Agreement or any instrument executed pursuant to this Agreement, or by reason of any breach hereunder, the party prevailing in any such action or other proceeding shall be paid all costs and reasonable attorney's fees by the defaulting party, and in the event any judgment is secured by such prevailing party all such costs and attorneys' fees shall be included in any such judgment, attorney's fees to be set by the court. 7.8 Time. Time is of the essence of this Agreement. However, if any action is required to be taken on a Saturday, Sunday, or legal holiday, the action shall be deemed timely if it is taken on the next regular business day. 7.9 State Law and Jurisdiction. This Agreement shall be governed by the laws of the State of Arizona. Any judicial action relating to this Agreement shall be prosecuted in a court of competent jurisdiction in Maricopa County, Arizona as the court of exclusive jurisdiction and proper venue and the parties hereby consent to the jurisdiction and venue of said court. The parties jointly waive trial by jury in any action relating to this Agreement. All parties hereby irrevocably waive all rights to trial by jury in any and all actions relating to this Agreement. 7.10 Counterparts. This Agreement may be executed in counterparts, and the signature of any person required by this Agreement shall be effective if signed on any and or all counterparts. All counterparts together shall be considered one and the same Agreement. Signatures produced by facsimile telephonic transmission shall be accepted as originals. IN WITNESS WHEREOF, the parties have entered into this Agreement effective as of the Agreement Date. Seller: Verde Investments, Inc., an Arizona corporation By: ___________________________________ Name: _________________________________ Its: __________________________________ Buyer: Ugly Duckling Corporation, a Delaware corporation By: ___________________________________ Gregory B. Sullivan, President and CEO By: ___________________________________ Jon D. Ehlinger, Secretary EXHIBITS A. Description of Property B. Quit Claim Deed EXHIBIT A Description of Property EXHIBIT B Quit Claim Deed WHEN RECORDED, RETURN TO: Ugly Duckling Corporation Attention: General Counsel 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 QUIT-CLAIM DEED For the consideration of Ten and 00/100 Dollars, and other valuable consideration, Verde Investments, Inc. ("Grantor") hereby quit-claims to Ugly Duckling Corporation, a Delaware corporation ("Grantee") the interest of Grantor, if any, in the real property situated in Maricopa County, State of Arizona and legally described in Exhibit A attached hereto. Dated: ___________________. Verde Investments, Inc., an Arizona corporation By: __________________________________ Name: ________________________________ Its: _________________________________ STATE OF ARIZONA ) )ss COUNTY OF MARICOPA ) The foregoing instrument was acknowledged before me, the undersigned Notary Public, this ___ day of _____________, 20___ by ___________________, as ________________ of Verde Investments, Inc., an Arizona corporation. My commission expires: ____________________ _____________________________ Notary Public EX-10.26 10 0010.txt LOAN AGREEMENT-BNY MIDWEST $35 MILLION SENIOR SECURED LOAN AGREEMENT Dated as of January 11, 2001 by and among UGLY DUCKLING CORPORATION, a Delaware corporation ("Borrower") THE LENDERS FROM TIME TO TIME PARTY HERETO and BNY MIDWEST TRUST COMPANY, as Collateral Agent $35,000,000 Senior Secured Loan
ARTICLE I. DEFINITIONS 1 1.1 Defined Terms.................................................................................1 1.2 Other Interpretive Provisions................................................................17 1.3 Accounting Principles........................................................................18 1.4 Times........................................................................................19 ARTICLE II. THE LOAN 19 2.1 The Loan.....................................................................................19 2.2 Payment Upon Collection; Monthly Amortization................................................19 2.3 Payment Upon Maturity........................................................................19 2.4 Interest.....................................................................................19 2.5 Voluntary Prepayments; Deposits to Collateral Account........................................20 2.6 Application of Payments......................................................................21 2.7 Prepayment...................................................................................22 2.8 Fees.........................................................................................22 2.9 Fees and Interest............................................................................22 2.10 Payments by Borrower; Payments by Collateral Agent...........................................22 2.11 Taxes........................................................................................23 2.12 Sharing of Payments, Etc.....................................................................24 2.13 Suspension of LIBOR..........................................................................25 2.14 Increased Costs, Etc.........................................................................25 2.15 Promissory Notes.............................................................................26 ARTICLE III. SECURITY AGREEMENT AND COLLATERAL...................................................................26 3.1 Security for Obligations.....................................................................26 3.2 Security Documents...........................................................................27 3.3 Duties Regarding Collateral..................................................................27 3.4 Borrower's Duties Regarding Collateral.......................................................27 3.5 Power of Attorney............................................................................28 3.6 Collateral Inspections.......................................................................28 ARTICLE IV. CONDITIONS PRECEDENT; TERM OF AGREEMENT..............................................................28 4.1 Conditions Precedent.........................................................................29 4.2 Receipt of Documents.........................................................................29 4.3 Term.........................................................................................30 4.4 Effect of Termination........................................................................31 ARTICLE V. REPRESENTATIONS AND WARRANTIES........................................................................31 5.1 No Encumbrances..............................................................................31 5.2 Location of Chief Executive Office; FEIN.....................................................31 5.3 Due Organization and Qualification; Subsidiaries.............................................31 5.4 Due Authorization: No Conflict..............................................................32 5.5 Litigation...................................................................................33 5.6 Financial Statements; No Material Adverse Change.............................................33 5.7 Securitization Documents.....................................................................33 5.8 ERISA........................................................................................33 5.9 Environmental and Safety Matters.............................................................34 5.10 Tax Matters..................................................................................34 5.11 [Reserved]...................................................................................34 5.12 Ownership of Properties......................................................................34 5.13 Investment Company Status....................................................................34 5.14 Solvency.....................................................................................34 ARTICLE VI. AFFIRMATIVE COVENANTS................................................................................35 6.1 Financial Statements and Other Documents.....................................................35 6.2 Inspection of Property.......................................................................36 6.3 Default Disclosure...........................................................................36 6.4 Notices to Lenders and the Collateral Agent..................................................36 6.5 Books and Records............................................................................37 6.6 Compliance and Preservation..................................................................37 6.7 Perfection of Liens..........................................................................37 6.8 Cooperation..................................................................................37 6.9 Use of Proceeds..............................................................................37 6.10 Securitizations..............................................................................37 6.11 Compliance with Covenants....................................................................38 6.12 Payment of Indebtedness......................................................................38 6.13 Tangible Net Worth...........................................................................38 6.14 Consolidated EBITDA to Consolidated Interest Expense.........................................38 6.15 Consolidated Senior Debt to Consolidated Total Capitalization................................38 6.16 Minimum Residual Certificate Cash Flows......................................................38 6.17 Minimum Capital Base.........................................................................39 6.18 Minimum Other Interest Coverage..............................................................39 6.19 Cash Collateral..............................................................................39 6.20 Collateral Account...........................................................................39 6.21 Back-up Servicer.............................................................................39 6.22 Maintenance of Properties....................................................................39 6.23 Maintenance of Insurance.....................................................................39 6.24 Approved Replacement Warehouse Agreement.....................................................39 6.25 Designated Senior Indebtedness...............................................................40 ARTICLE VII. NEGATIVE COVENANTS..................................................................................40 7.1 Liens........................................................................................40 7.2 Indebtedness.................................................................................40 7.3 Restrictions on Fundamental Changes..........................................................40 7.4 Disposal of Collateral, Residual Certificates, Additional Residual Certificates..............40 7.5 Change Name..................................................................................41 7.6 Amendments...................................................................................41 7.7 Change of Control............................................................................41 7.8 Distributions; Prepayments of Subordinated Debt..............................................41 7.9 Standing Dividend Resolutions................................................................41 7.10 Change in Location of Chief Executive Office.................................................41 7.11 No Prohibited Transactions Under ERISA.......................................................41 7.12 Changes in Nature of Business................................................................42 7.13 Transactions with Affiliates.................................................................42 ARTICLE VIII. EVENTS OF DEFAULT/REMEDIES.........................................................................42 8.1 Event of Default.............................................................................42 8.2 Rights and Remedies..........................................................................44 ARTICLE IX. THE COLLATERAL AGENT.................................................................................45 9.1 Authorization and Action.....................................................................45 9.2 Collateral Agent's Reliance, Etc.............................................................46 9.3 BNY Midwest Trust Company and Affiliates.....................................................46 9.4 Lender Credit Decision.......................................................................46 9.5 Indemnification..............................................................................47 9.6 Successor Collateral Agents..................................................................47 9.7 Monthly Verification Duties of Collateral Agent..............................................47 ARTICLE X. MISCELLANEOUS.........................................................................................48 10.1 Amendments and Waivers.......................................................................48 10.2 Notices......................................................................................48 10.3 No Waiver: Cumulative Remedies..............................................................49 10.4 Costs and Expenses...........................................................................50 10.5 Indemnity....................................................................................50 10.6 Marshaling: Payments Set Aside..............................................................51 10.7 Successors and Assigns.......................................................................51 10.8 Set-off......................................................................................51 10.9 Counterparts.................................................................................52 10.10 Severability.................................................................................52 10.11 No Third Parties Benefited...................................................................52 10.12 Time.........................................................................................52 10.13 Governing Law and Jurisdiction...............................................................52 10.14 Entire Agreement.............................................................................53 10.15 Interpretation...............................................................................53 10.16 Assignment; Register.........................................................................54 10.17 Revival and Reinstatement of Obligations.....................................................54 10.18 Survival.....................................................................................55 10.19 Confidentiality..............................................................................55 10.20 Actions by Portfolio Advisor.................................................................55
SCHEDULES AND EXHIBITS Schedule A Borrower's Subsidiaries Schedule B Warrants, Options, etc. Schedule C Litigation Schedule D Exceptions to Financial Statements Schedule E Permitted Liens Schedule F Residual Certificates Schedule G Subordinated Indebtedness Schedule H Collateral Agent Fees Schedule I Administrative Forms Exhibit A UDRC II and UDRC III Securitization Documents Exhibit B Form of Collateral Account Agreement Exhibit C Form of Assignment and Acceptance Exhibit D Form of Promissory Note Exhibit E Form of Guaranty SENIOR SECURED LOAN AGREEMENT This SENIOR SECURED LOAN AGREEMENT (the "Agreement"), is entered into as of January 11, 2001, among UGLY DUCKLING CORPORATION, a Delaware corporation ("Borrower"), with a place of business located at 2525 East Camelback Road, Suite 500, Phoenix, Arizona 85016, the Lenders party hereto (together with their respective successors and assigns, "Lenders") and BNY MIDWEST TRUST COMPANY, as Collateral Agent (together with its successors and assigns in such capacity, "Collateral Agent"). Lenders have agreed to make to Borrower a senior secured loan (the "Loan") upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. In addition to the terms defined elsewhere in this Agreement, the following terms have the following meanings: "Additional Residual Certificates" shall mean all Class B Notes, Class C Certificates (other than Excluded Class C Certificates) and Class D Certificates or similar interests which both (i) are issued by a Securitization Trust or other similar entity with respect to which UDRC II, UDRC III or any other Affiliate of UDC or UDCC is the seller or issuer (or equivalent), and (ii) represent the securitization of Ugly Duckling Collateral. "Administrative Form" means an administrative details form delivered by the Collateral Agent and any Lender to Collateral Agent and Borrower. The initial Administrative Forms are attached hereto as Schedule I. The Collateral Agent and each Lender may change its Administrative Form at any time by delivering a new Administrative Form to the Collateral Agent and Borrower. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract or otherwise. Without limitation, any director, executive officer or beneficial owner of twenty percent (20%) or more of the equity of a Person shall for the purposes of this Agreement, be deemed to control the other Person. In no event shall any Lender be deemed an "Affiliate" of Borrower. "Agreement" means this Senior Secured Loan Agreement, as amended, supplemented or modified from time to time in accordance with the terms hereof. "Approved Replacement Warehouse Agreement" means one or more warehouse financing agreements providing replacement financing for the indebtedness and commitments outstanding under the GECC Agreement (and in any event providing for financing in an amount not less than $75,000,000) on terms and conditions satisfactory to the Required Lenders. "Assignment and Acceptance" means an assignment and acceptance in substantially the form of Exhibit C. "Attorney Costs" means and includes all fees and disbursements of any law firm or other external or internal counsel. "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the highest of: (a) either (1) the "prime rate" published in the "Money Rates" section of the Wall Street Journal, as such "prime rate" may change from time to time or, if such rate ceases to be published, (2) the rate of interest announced publicly by The Bank of New York from time to time as The Bank of New York's prime rate; and (b) 1/2 of one percent per annum above the Federal Funds Rate. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C.ss. 101 et seq.), as amended, and any successor statute. "Bond Insurance Policy" shall mean a financial guaranty or financial insurance policy issued by MBIA or any of its Affiliates or any other financial guarantor in respect of one or more classes of investor certificates or other interests issued by a Securitization Trust. "Borrower Taxes" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, intangible, ad valorem, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax or other governmental charge of any kind whatsoever, including any interest, penalty or additions thereto. "Borrower's Books" means all of Borrower's books and records including: ledgers, records indicating, summarizing or evidencing Borrower's properties or assets (including the Collateral and the assets of any Subsidiaries of Borrower) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs or other computer prepared information. "Borrowing Base" means, as of any date of determination, the sum of the products obtained by multiplying the Residual Certificate Value of each Residual Certificate as of the most recent Calculation Date by the Advance Rate (as set forth below) applicable to such Residual Certificate as of such Calculation Date:
Complete Months of Seasoning Since Securitization Cut-Off Date Advance Rate -------------------------------------------------------- ------------ 0 - 3 months 15% 4 - 5 months 30% 6 - 9 months 35% 10 - 12 months 40% 13 - 18 months 45% 19 - 23 months 55% Greater than or equal to 24 months 60%
Notwithstanding the foregoing or any other provision hereof or of any other Loan Document to the contrary, (i) no Additional Residual Certificates shall be included in the calculation of the Borrowing Base unless and until the provisions of Section 3.1 have been complied with with respect to such Additional Residual Certificates, (ii) Lenders shall be entitled to exclude from the Borrowing Base any Residual Certificate (or any portion thereof) as to which (A) Required Lenders determine that the Collateral Agent does not have a perfected first priority, valid and enforceable security interest either in such Residual Certificate directly or in 100% of the capital stock of the holder of such Residual Certificate, or (B) a Securitization Default exists and (iii) to the extent that the Residual Certificates under any 3 Securitizations represent in excess of 50% of the Borrowing Base, the amount of such excess shall be excluded from the Borrowing Base. "Business Day" means a day of the year on which banks are not required or authorized by law to close in Los Angeles, California or Chicago, Illinois and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Calculation Date" means the second Business Day prior to the 15th day of each month. "Capital Base" means, at any time of determination, the sum of (i) Borrower's Tangible Net Worth at such time plus (ii) the aggregate outstanding principal amount of all Subordinated Debt of Borrower and its Subsidiaries at such time (other than any such Subordinated Debt that is due within 12 months from such date of determination). "Cash Collateral Release Date" means the first date on or after July 25, 2001 on which each of the following conditions is simultaneously satisfied: (i) the Borrower has pre-tax income in excess of $7,000,000 in the aggregate for the period commencing January 1, 2001 and ending June 30, 2001; (ii) the Borrower has entered into an Approved Replacement Warehouse Agreement; (iii) the Borrower has completed two securitizations of Ugly Duckling Collateral after the date hereof and prior to December 31, 2001, each of which results in the creation of Additional Residual Certificates; (iv) Ernest C. Garcia shall have executed in favor of Collateral Agent and the Lenders a guaranty, in form and substance reasonably satisfactory to the Required Lenders, guaranteeing payment of a principal amount of the Loan equal to 33% of the aggregate principal amount outstanding on the Cash Collateral Release Date; (v) Ernest C. Garcia shall have provided evidence satisfactory to the Required Lenders of a personal net worth of at least $20,000,000 and liquid assets of not less than $7,000,000; and (vi) no Material Adverse Change has occurred or could, in the reasonable discretion of the Required Lenders, be expected to occur. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation and Liability Act (49 U.S.C. Section 9601, et seq.). "Change of Control" shall be deemed to have occurred at such time as (i) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) other than Ernest C. Garcia (or an entity under the control of Ernest C. Garcia) becomes, after the date of this Agreement, the "beneficial owner" (as defined in Rule 13(d)(3) under the Securities Exchange Act of 1934), directly or indirectly, of more than 25% of the total voting power of all classes of stock then outstanding of Borrower entitled to vote in the election of directors or (ii) Ernest C. Garcia (or an entity under the control of Ernest C. Garcia) shall cease to be the record and beneficial owner of at least 15% of the capital stock of Borrower, entitled, in the absence of contingencies (whether or not any of such contingencies has occurred), to vote in the election of directors of Borrower or (iii) Borrower ceases to own 100% of the capital stock of UDCSFC, or (iv) UDCSFC ceases to own 100% of the capital stock of UDRC II and UDRC III. An entity shall be deemed to be under the control of Ernest C. Garcia if Ernest C. Garcia possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract or otherwise. "Closing Date" means the date on which all conditions precedent set forth in Section 4.1 are either satisfied or waived by each Lender and each Lender makes its ratable portion of the Loan. "Code" means the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder. "Collateral" means all "Collateral" referred to in the Security Documents and all other property that is subject to any Lien in favor of the Collateral Agent or any Lender. "Collateral Account" means the collateral account or accounts established and maintained pursuant to Section 6.20 or pursuant to the Collateral Account Agreement. "Collateral Account Agreement" means the cash collateral account agreement in substantially the form of Exhibit B. "Collateral Agent" has the meaning set forth in the preamble to this Agreement. "Collateral Servicing Report" means a report of the Borrower with respect to the Residual Certificate Values, Residual Certificate Cash Flows and Borrowing Base and such other information as Required Lenders may request in form and detail acceptable to Required Lenders. "Collections" means all proceeds of, payments or other distributions of principal, interest or other amounts on, and other amounts received by or on behalf of Borrower or any of its Affiliates in respect of any Residual Certificate or any Collateral, including all amounts paid to Collateral Agent or any Lender pursuant to any Dividend Direction Letter. "Consolidated" refers to the consolidation of accounts in accordance with GAAP. "Consolidated EBITDA" means for any period, net income (or net loss) plus, to the extent deducted in determining such net income (or net loss), the sum of (a) interest expense, (b) income tax expense, (c) depreciation expense and (d) amortization expense, in each case determined for the Borrower and its Subsidiaries on a Consolidated basis for such period in conformity with GAAP. "Consolidated Interest Expense" means, for any period, total interest expense (including the interest component of capitalized leases) of the Borrower and its Subsidiaries on a Consolidated basis for such period in conformity with GAAP, including, without limitation, all commissions, discounts and other fees and charges owed with respect to any financings or letters of credit and net costs under hedge agreements. "Consolidated Net Worth" means the excess of (i) the total assets of the Borrower and its Subsidiaries determined on a Consolidated basis in conformity with GAAP, over (ii) all liabilities of the Borrower and its Subsidiaries determined on a Consolidated basis in conformity with GAAP. "Consolidated Senior Debt" means, at any time of determination, Consolidated Total Debt minus Subordinated Debt and Non-Recourse Debt. "Consolidated Total Capitalization" means, at any time of determination, the sum of (i) Consolidated Total Debt, and (ii) Consolidated Net Worth, in each case, as of such time. "Consolidated Total Debt" means, at any time of determination, all indebtedness for borrowed money (including capitalized leases), in each case of the Borrower and its Subsidiaries at such time determined on a Consolidated basis. "Debt" or "Indebtedness" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes, matured reimbursable obligations under letters of credit or other similar instruments, (iii) obligations to pay the deferred purchase price of property or services other than trade payables incurred in the ordinary course of business, (iv) obligations as lessee under leases that shall have been or should be, in accordance with GAAP recorded as capital leases, (v) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv), and (vi) liabilities in respect of unfunded vested benefits under Pension Plans covered by Title IV of ERISA. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied) constitute an Event of Default. "Dividend Direction Letter" means (i) the UDRC II Dividend Direction Letter, (ii) the UDRC III Dividend Direction Letter, and (iii) each letter agreement or other agreement entered into after the date hereof with respect to any Additional Residual Certificates providing for payment of distributions in respect of such Additional Residual Certificates (or payments and distributions in respect of the stock or other equity interests of the holder of such Additional Residual Certificates) to be made directly to the Collateral Account for application to the Obligations and/or release to Borrower in accordance with the Collateral Account Agreement and Section 2.6. "Dollars," "dollars" and "$" each mean lawful money of the United States. "Environmental and Safety Laws" means all Federal, state and local laws, regulations and ordinances, relating to the discharge, handling, disposition or treatment of Hazardous Materials and other substances or the protection of the environment or of employee health and safety, including CERCLA, the Hazardous Materials Transportation Act (49 U.S.C. Section 1801, et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 7401, et seq.), the Clean Air Act (42 U.S.C. Section 7401, et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601, et seq.), the Occupational Safety and Health Act (29 U.S.C. Section 651, et seq.) and the Emergency Planning and Community Right-To-Know Act (42 U.S.C. Section 11001, et seq.), each as the same may be amended and supplemented. "Environmental Liabilities and Costs" means, as to any Person, all liabilities, obligations, responsibilities, remedial actions, losses, damages, punitive damages, consequential damages, treble damages, contribution, cost recovery, costs and expenses (including all fees, disbursements and expenses of counsel, expert and consulting fees, and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, permit, order or agreement with any Federal, state or local governmental authority or other Person, arising from environmental, health or safety conditions, or the release or threatened release of a contaminant, pollutant or Hazardous Material into the environment, resulting from the operations of such Person or its subsidiaries, or breach of any Environmental and Safety Law or for which such Person or its subsidiaries is otherwise liable or responsible. "Equity Interests" means, with respect to a Person, any common stock, preferred stock, partnership interest (whether general or limited), membership interest or other equity or participating interest in such Person. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and regulations promulgated thereunder. "ERISA Affiliate" of any Person means any other Person that for purposes of Title IV of ERISA is a member of such Person's controlled group, or under common control with such Person, within the meaning of Section 414 of the Internal Revenue Code. "ERISA Event" with respect to any Person means (a) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan of such Person or any of its ERISA Affiliates unless the 30-day notice requirement with respect to such event has been waived by the PBGC; (b) the provision by the administrator of any Plan of such Person or any of its ERISA Affiliates of a notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (c) the cessation of operations at a facility of such Person or any of its ERISA Affiliates in the circumstances described in Section 4062(e) of ERISA; (d) the withdrawal by such Person or any of its ERISA Affiliates from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (e) the failure by such Person or any of its ERISA Affiliates to make a payment to a Plan required under Section 302(f)(1) of ERISA; (f) the adoption of an amendment to a Plan of such Person or any of its ERISA Affiliates requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (g) the institution by the PBGC of proceedings to terminate a Plan of such Person or any of its ERISA Affiliates, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that could constitute grounds for the termination of, or the appointment of a trustee to administer, such Plan. "Event of Default" means any of the events or circumstances specified in Section 8.1. "Excluded Class C Certificate" means Class C Certificates issued to UDFC in connection with any securitization of Ugly Duckling Collateral but only to the extent the value of such Class C Certificates does not exceed 2% of the face amount of all notes and certificates issued with respect to the applicable securitization. "Existing Loan Agreement" means the Senior Secured Loan Agreement dated as of May 14, 1999 by and among the Borrower, the Collateral Agent (as successor to Harris Trust and Savings Bank) and the Lenders party thereto as amended to the date hereof. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve BNY Midwest Trust Company, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by Collateral Agent from three Federal funds brokers of recognized standing selected by it. "FEIN" means Federal Employer Identification Number. "Financing Statements" means the Financing Statements on Form UCC-1 relating to and filed in connection with the Collateral and naming the Collateral Agent as secured party. "Fiscal Quarter" means a fiscal quarter of Borrower. "Fiscal Year" means a fiscal year of Borrower. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the accounting profession), or in such other statements by such other entity as may be in general use by significant segments of the U.S. accounting profession, which are applicable to the circumstances as of the date of determination. "GECC" means General Electric Capital Corporation, a New York corporation. "GECC Agreement" shall mean the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement, dated as of August 15, 1997, by and between Borrower, GECC and certain other parties thereto, as such agreement may be amended from time to time. "Governing Documents" means, with respect to Borrower, Borrower's certificate of incorporation and bylaws. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity, body, authority, bureau, department or instrumentality exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guaranty" means the guaranty executed by UDCSFC on the date hereof in substantially the form of Exhibit E. "Guarantor" means (i) UDCSFC and (ii) each other Subsidiary of the Borrower that, after the date hereof, becomes a party to the Guaranty. "Hazardous Materials" means (a) any material or substance defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "toxic substances" or any other formulations intended to define, list or classify substances by reason of their deleterious properties, (b) any oil, petroleum or petroleum derived substance, (c) any flammable substances or explosives, (d) any radioactive materials, (e) asbestos in any form, (f) electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million, (g) pesticides or (h) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental agency or authority or which may or could pose a hazard to the health and safety of persons in the vicinity thereof. "Indebtedness" see "Debt". "Indemnified Liabilities" has the meaning specified in Section 10.5. "Indemnified Person" has the meaning specified in Section 10.5. "Initial Funding Amount" means the amount of Thirty Four Million Thirty Seven Thousand Five Hundred Dollars ($34,037,500). "Initial Principal Amount" means the amount of Thirty Five Million Dollars ($35,000,000). "Interest Accrual Period" shall mean the one-month period from and including a Payment Date to the close of business on the day preceding the next Payment Date, except that the first Interest Accrual Period shall commence on the Closing Date and end at the close of business on the day preceding the Payment Date. "Lender Costs" or "Lender Expenses" means all: (a) costs or expenses (including taxes and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by Collateral Agent, any Lender or any of their respective affiliates; (b) reasonable out-of-pocket fees or charges paid or incurred by Collateral Agent or any Lender in connection with Lenders' transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation and UCC searches and including searches with the patent and trademark office, the copyright office or the department of motor vehicles), filing, recording, publication, appraisals, due diligence, actual out-of-pocket costs and expenses incurred by Collateral Agent or any Lender in the disbursement of funds to Borrower (by wire transfer or otherwise); (c) actual out-of-pocket charges paid or incurred by Collateral Agent or any Lender resulting from the dishonor of checks; (d) reasonable out-of-pocket costs and expenses paid or incurred by Collateral Agent or any Lender to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; (e) reasonable costs and expenses paid or incurred by Collateral Agent or any Lender in examining Borrower's Books; (f) reasonable out-of pocket costs and expenses of third party claims or any other suit paid or incurred by Collateral Agent or any Lender in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Collateral Agent or any Lender's relationship with Borrower; and (g) Collateral Agent's, any Lender's or any of their respective Affiliate's reasonable Attorney Costs incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing, defending, or concerning the Loan Documents, irrespective of whether suit is brought (including, without limitation, any negotiations in the nature of a work-out). For purposes of this definition, the term "Lender" shall include any portfolio advisor or collateral manager (including, without limitation, SunAmerica Investment Advisor, Inc.) acting on behalf of any Lender or in connection with such Lender's Loan hereunder. "LIBOR" shall mean, with respect to an Interest Accrual Period, the rate per annum equal to the rate appearing at page 3750 of the Telerate Screen two LIBOR Business Days prior to the beginning of such Interest Accrual Period, for the one-month term corresponding to such Interest Accrual Period, or if such rate shall not be so quoted then the applicable rate appearing on Bloomberg on the day two LIBOR Business Days prior to the beginning of such Interest Accrual Period, or if neither such rate shall be so quoted, the "London Interbank Offered Rates (LIBOR)" (one month) published in the "Money Rates" section of the Wall Street Journal two LIBOR Business Days prior to the beginning of such Interest Accrual Period. "LIBOR Business Day" shall mean any day which is a Business Day and which is also a day on which dealings in U.S. Dollars are carried on in the London interbank market. "Lien or Encumbrance" or "Liens and Encumbrances" means any mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease obligation, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the UCC or any comparable law) and any contingent or other agreement to provide any of the foregoing. "Loan Documents" means this Agreement, each Note, the Guaranty, the Security Documents, the Stock Pledge Agreement, the Collateral Account Agreement, each Dividend Direction Letter, the Financing Statements, and all documents delivered to Collateral Agent or any Lender in connection therewith. "Loan Party" means Borrower, UDCSFC and each other Affiliate of Borrower that is a party to any Loan Document. "Material Adverse Change" or "Material Adverse Effect" means a material adverse change in, or a material adverse effect upon, any of (a) the operations, performance, business, properties, condition (financial or otherwise) or prospects of any Loan Party or of Borrower and its Subsidiaries taken as a whole, (b) the ability of Borrower or any other Loan Party 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 or the perfection or priority of any Lien created or purported to be created thereunder. "Maturity Date" shall mean February 11, 2003. "MBIA" shall mean MBIA Insurance Corporation. "Monthly Amortization Amount" means: (i) with respect to any Payment Date occurring prior to October 15, 2002, the greater of (A) $1,000,000.00, and (B) the amount, if any, by which the then Outstanding Principal Amount of the Loan exceeds the Borrowing Base as of such date as set forth in the Collateral Servicing Report required to be delivered with respect to such Payment Date; and (ii) with respect to any Payment Date occurring on or after October 15, 2002, the greatest of (A) $3,000,000, (B) 50% of the aggregate Residual Certificate Cash Flows for the then most recently ended monthly period as set forth in the Collateral Servicing Report required to be delivered with respect to such Payment Date, and (C) the amount, if any, by which the then Outstanding Principal Amount of the Loan exceeds the Borrowing Base as of such date as set forth in the Collateral Servicing Report required to be delivered with respect to such Payment Date. "Multiemployer Plan" of any Person means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which such Person or any of its ERISA Affiliates is making or accruing an obligation to make contributions, or has within any of the preceding six plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" of any Person means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of such Person or any of its ERISA Affiliates and at least one Person other than such Person and its ERISA Affiliates or (b) was so maintained and in respect of which such Person or any of its ERISA Affiliates could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Non-Recourse Debt" means (i) the Securitizations identified on Exhibit A, (ii) Debt under one or more warehouse facilities or securitizations of a Subsidiary of Borrower that is a bankruptcy remote or other similar special purpose entity so long as such Debt satisfies each of the following requirements: (a) the sole collateral for such Debt are loan receivables purchased by such bankruptcy remote or other special purpose entity and the recourse of the lenders under such warehouse facility is limited to such collateral, (b) no Loan Party (1) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Debt), (2) is directly or indirectly liable as a guarantor or otherwise, or (3) constitutes the lender (provided that a Loan Party may be the Servicer of the collateral securing such warehouse facility or securitization and in such capacity may provide customary indemnification or incur customary repurchase obligations with respect to breach of representations regarding such collateral); (b) the lenders with respect to such Debt have been notified, and have acknowledged in writing or pursuant to the terms of the instruments and agreements governing such Debt, in each case prior to the incurrence of such Debt, that they will not have any recourse to the stock or assets of any Loan Party, and (c) the Lenders have received notice of the amount and principal terms of such Debt prior to its incurrence, and (iii) other Debt approved by the Required Lenders as Non-Recourse Debt. "Note" means a promissory note of the Borrower in favor of a Lender in substantially the form of Exhibit D evidencing the Borrower's obligations to such Lender in respect of the principal amount of the Loan made by or otherwise owing to such Lender. "Obligations" means all Debt, advances, debts, liabilities, obligations, covenants and duties owing by Borrower to Collateral Agent or any Lender, of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement, any Note or under any other Loan Document, absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. "Outstanding Principal Amount" means the Initial Principal Amount minus all amounts applied to the repayment of the Loan pursuant to Section 2.6(d). "Payment Date" shall mean the 15th day of each month during the term of this Agreement commencing on April 15, 2001. "PBGC" means the Pension Benefit Guaranty Corporation. "Permitted Liens" means (a) Liens held by Collateral Agent or any Lender and (b) each lien existing at or prior to the date of this Agreement that is identified on Schedule E to this Agreement. "Permitted Subsidiary Indebtedness" means (a) Indebtedness outstanding under the Principal Warehouse Agreement as such agreements may be amended, supplemented or modified from time to time but without any increase in the aggregate commitments or Indebtedness available to be borrowed (or other credit available to be extended) thereunder, (b) Non-Recourse Debt, (c) other Indebtedness in an aggregate principal amount not to exceed $15,000,000 at any time outstanding and (d) indebtedness to finance the purchase of inventory in an aggregate principal amount not to exceed $35,000,000 at any time outstanding. For purposes of calculating the amount of Indebtedness outstanding under the foregoing clause (c), obligations in respect of capitalized leases (as described in clause (iv) of the definition of "Debt") shall be excluded to the extent the aggregate principal amount of all such obligations (determined in accordance with GAAP) does not exceed $4,000,000. "Person" means a natural person, partnership, corporation, business trust, joint stock company, trust, unincorporated association, limited liability company, joint venture or Governmental Authority. "Plan" means a Single Employer Plan or a Multiple Employer Plan. "Principal Warehouse Agreement" means (i) the GECC Agreement and (ii) each Approved Replacement Warehouse Agreement. "Required Cash Collateral Amount" means (i) as of any date of determination on or prior to May 15, 2001, $7,000,000, and (ii) as of any date of determination after May 15, 2001, $7,000,000 minus the product of (A) 0.20 and (B) the sum of (1) all Monthly Amortization Amounts (but only to the extent actually paid) for each Payment Date occurring on or after May 15, 2001 and (2) all prepayments made pursuant to Section 2.5(a); provided that the Required Cash Collateral Amount shall remain at $7,000,000 if there is a default in payment of the Monthly Amortization Amount due with respect to the Payment Date occurring on April 15, 2001. "Ratings Completion Date" means the first date on which the Lenders have received written confirmation from (i) Fitch IBCA, Inc. that the obligations hereunder shall be rated by them no lower than B+, (ii) Standard & Poor's Ratings Services that the obligations hereunder shall be rated by them no lower than B- and (iii) Moody's Investors Service, Inc. that the obligations hereunder shall be rated by them no lower than B3. "Repayment Date" means the earlier of (i) the Maturity Date or (ii) the date that the Outstanding Principal Amount of the Loan outstanding hereunder, together with all accrued interest in respect thereof and all other Obligations, has been reduced to zero. "Required Lenders" means Lenders holding greater than fifty percent (50%) of the aggregate principal amount of the Loan. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Residual Certificate" means the UDRC II Residual Certificates, the UDRC III Residual Certificates and all Additional Residual Certificates. "Residual Certificate Cash Flows" means, for any period, all cash distributions with respect to a Residual Certificate and Excluded Class C Certificates together with all related spread account or reserve account distributions, in each case to the extent received by the Collateral Agent and deposited to the Collateral Account, during such period; provided, however, upon termination of a Securitization Trust at recapture or the exercise of an optional repurchase right, the Residual Certificate Cash Flows for such Securitization Trust in the month of such termination shall be (i) the Residual Certificate Value of such Securitization Trust as of the Calculation Date immediately preceding the date of termination multiplied by (ii) the Advance Rate (as set forth in the definition of "Borrowing Base") applicable to such Securitization Trust on such preceding Calculation Date. "Residual Certificate Value" means, as of any date of determination with respect to the Residual Certificates for a securitization, the amount of the entire cash balance in the spread account or reserve account relating to such Residual Certificates plus the difference between (a) the outstanding principal balance of auto loans in the pool of collateral securing such securitization and (b) the outstanding principal balance of all certificates and other interests or rights to payment in respect of such securitization senior in priority to such Residual Certificates, in each case as set forth in the then most recently delivered Collateral Servicing Report (subject to confirmation of the calculations set forth in such Collateral Servicing Report by the Collateral Agent). "Responsible Officer" means the chief executive officer or the president of Borrower, or any other officer having substantially the same authority and responsibility or, with respect to financial matters, the chief financial officer or the treasurer of Borrower, or any other officer having substantially the same authority and responsibility. "SAI" means SAI Investment Advisor, Inc., and its successors and assigns. "Security Documents" means the writings described in Article III hereof (including, without limitation, the Stock Pledge Agreement, the Collateral Account Agreement and each other document, agreement or instrument creating, or purporting to create a security interest in favor of the Collateral Agent in any Residual Certificate or any other Collateral or proceeds thereof), as they may hereafter be amended, modified and/or supplemented, and all other writings now or hereafter executed to create, evidence and/or perfect any Lien(s) to secure the Loan or any portion(s) thereof. "Securitization Default" means any termination event, default or event of default, or event or occurrence which, with the passage of time or the giving of notice or both, would become a termination event, default or event of default under any Securitization Document, which has not been cured within any applicable period thereunder. "Securitization Documents" shall mean (i) each UDRC II Securitization Document, (ii) each UDRC III Securitization Document, (iii) each purchase agreement and/or pooling and servicing agreement (or comparable document) entered into or acknowledged by Borrower, UDCC, UDRC II, UDRC III or any Affiliate of any of them after the date hereof with respect to any Additional Residual Certificates, and (iv) the other agreements, instruments, certificates and documents entered into or acknowledged by Borrower, UDCC, or any Affiliate of any of them or by a Securitization Trust (or comparable vehicle) with respect to any Additional Residual Certificates. "Securitization Trust" shall mean any trust formed pursuant to a purchasing agreement or a pooling and servicing agreement specified on Exhibit A hereto or contemplated in clause iii of the definition of Securitization Documents. "Single Employer Plan" of any Person means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of such Person or any of its ERISA Affiliates and no Person other than such Person and its ERISA Affiliates or (b) was so maintained and in respect of which such Person or any of its ERISA Affiliates could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Standing Dividend Resolutions" shall mean (i) the UDRC II Standing Dividend Resolution, (ii) the UDRC III Standing Dividend Resolution and (iii) all other resolutions adopted by the board of directors of Borrower or any of its Affiliates or Subsidiaries to the effect that any amounts received as distributions on any Additional Residual Certificates or in respect of spread accounts (or the like) will be promptly distributed to Collateral Agent for the ratable account of the Lenders. "Stock Pledge Agreement" means that certain Stock Pledge Agreement, dated as of the date hereof, among UDCSFC as Pledgor, Borrower and Collateral Agent, pursuant to which UDCSFC grants to Collateral Agent a security interest in one hundred percent (100%) of the issued and outstanding capital stock of each of UDRC II and UDRC III. "Subordinated Debt" shall mean the Debt set forth on Schedule G and any Debt incurred after the date hereof as to which the repayment of principal and interest is subordinated to repayment of the Loan pursuant to subordination provisions that have been approved in writing by Required Lenders. "Subsidiary" of a Person means a corporation, partnership, limited liability partnership, limited liability company or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability partnership, limited liability company or other entity. "Tangible Net Worth" of Borrower shall mean the total of Borrower's and its consolidated Subsidiaries' shareholders' equity (including capital stock, additional paid-in capital and retained earnings), less (i) the total amount of all Indebtedness owing to Borrower from its consolidated Subsidiaries, Affiliates, shareholders, officers or employees, and (ii) the total amount of any intangible assets of Borrower and its consolidated Subsidiaries, including unamortized discounts, deferred charges and goodwill. For purposes of clause (i) in the immediately preceding sentence, the $12,000,000 promissory note from Cygnet Capital Corporation ("CCC") payable to Ugly Duckling Finance Corporation in connection with the sale of 100% of the outstanding common stock of Cygnet Dealer Finance, Inc. to CCC, shall not be considered Indebtedness owing to Borrower from Affiliates, shareholders, officers or employees, and shall not be deducted in determining Tangible Net Worth. "Trustee" means BNY Midwest Trust Company, in its capacity as trustee under the Securitization Documents and its successors and assigns in such capacity. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of New York, and in any and all other states in which Borrower and/or any of its Subsidiaries conduct, or are authorized to conduct business. "UDCC" means Ugly Duckling Credit Corp., an Arizona corporation formerly known as Champion Acceptance Corporation. "UDCSFC" means Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation formerly known as Duck Ventures, Inc. "UDRC II" shall mean Ugly Duckling Receivables Corp. II, a Delaware corporation. "UDFC" means Ugly Duckling Finance Corporation an Arizona corporation. "UDRC III" shall mean Ugly Duckling Receivables Corp. III, a Delaware corporation. "UDRC II Residual Certificates" shall mean the currently issued and outstanding, and all further issued and then outstanding, Class B Certificates or with respect to any securitization occurring after August 1, 1999, the issued and outstanding Class B Notes, Class C Certificates (other than the Excluded Class C Certificates) and the Class D Certificates issued by each Securitization Trust with respect to which UDRC II or an owner trust is the seller, including those set forth on Schedule F, which constitute all of the UDRC II Residual Certificates in existence on the Closing Date. "UDRC III Residual Certificates" shall mean the currently issued and outstanding, and all further issued and then outstanding, the issued and outstanding Class B Notes, Class C Certificates (other than the Excluded Class C Certificates) and the Class D Certificates issued by each Securitization Trust with respect to which UDRC III or an owner trust is the seller, including those set forth on Schedule F, which constitute all of the UDRC III Residual Certificates in existence on the Closing Date. "UDRC II Dividend Direction Letter" means the letter dated January 11, 2001 in which Collateral Agent, Lender, UDRC II, UDCC and Trustee agree that Trustee shall pay all distributions in respect of the UDRC II Residual Certificates and Excluded Class C Certificates directly to the Collateral Account for application to the Obligations and/or release to Borrower in accordance with the Collateral Account Agreement and Section 2.6. "UDRC III Dividend Direction Letter" means the letter dated January 11, 2001 in which Collateral Agent, Lender, UDRC III, UDCC and Trustee agree that Trustee shall pay all distributions in respect of the UDRC III Residual Certificates and Excluded Class C Certificates directly to the Collateral Account for application to the Obligations and/or release to Borrower in accordance with the Collateral Account Agreement and Section 2.6. "UDRC II Securitization Documents" shall mean each of (i) the purchase agreements listed on Exhibit A hereto, (ii) the pooling and servicing or sale and servicing agreements listed on Exhibit A hereto, and (iii) the other agreements, instruments, certificates and documents entered into or acknowledged by Borrower, UDCC, UDRC II or any Affiliate of any of them or by a Securitization Trust. "UDRC III Securitization Documents" shall mean each of (i) the purchase agreements listed on Exhibit A hereto, (ii) the pooling and servicing or sale and servicing agreements listed on Exhibit A hereto, and (iii) the other agreements, instruments, certificates and documents entered into or acknowledged by Borrower, UDCC, UDRC III or any Affiliate of any of them or by a Securitization Trust. "UDRC II Standing Dividend Resolution" shall mean the resolution adopted on September 30, 1999 by the board of directors of UDRC II (formerly Champion Receivables Corp. II) to the effect that any amounts received as distributions on the UDRC II Residual Certificates should be distributed as dividends to UDCSFC or any other holder or assignee of the Common Stock of UDRC II. "UDRC III Standing Dividend Resolution" shall mean the resolution adopted on December 18, 2000 by the board of directors of UDRC III to the effect that any amounts received as distributions on the UDRC III Residual Certificates should be distributed as dividends to UDCSFC or any other holder or assignee of the Common Stock of UDRC III. "Ugly Duckling Collateral" shall mean any installment contracts or conditional sales contracts, with any amendments thereto, originated by Borrower or its Subsidiaries pursuant to which a person has: (i) purchased a new or used motor vehicle, (ii) granted a security interest in the motor vehicle, and (iii) agreed to pay the unpaid purchase price and a finance charge in periodic installments. "United States" and "U.S." each means the United States of America. "Verde Loan Agreement" means the Loan Agreement dated as of January 11, 2001 between Borrower and Verde Investments, Inc., as amended, supplemented or modified from time to time. "Verde Stock Pledge Agreement" means the Stock Pledge Agreement dated as of January 11, 2001 among UDCSF, UDRC II, UDRC III and Verde Investments, Inc., as amended supplemented or modified from time to time. "Verde Subordinated Debt Documents" means the Verde Loan Agreement, the Verde Subordinated Note, the Verde Subordination Agreement, the Verde Stock Pledge Agreement and all other instruments and agreements relating thereto. "Verde Subordination Agreement" means the Subordination and Standstill Agreement dated as of January 11, 2001 among Borrower, UDCSF, Verde Investments, Inc., and Collateral Agent, as amended, supplemented or modified from time to time. "Verde Subordinated Note" means the Subordinated Promissory Note dated as of January 11, 2001 issued by the Borrower to Verde Investments, Inc. in the original principal amount of $7,000,000. "Voidable Transfer" has the meaning set forth in Section 10.17. 1.2 Other Interpretive Provisions. (a) Defined Terms. Unless otherwise specified herein or therein, all terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. Terms (including uncapitalized terms) not otherwise defined herein, and that are defined in the UCC shall have the meanings therein described. (b) The Agreement. The words "hereof," "herein," "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and section, schedule and exhibit references are to this Agreement unless otherwise specified. (c) Certain Common Terms. (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii)The term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." (d) Performance; Time. Whenever any performance obligation hereunder or under any Note (other than a payment obligation) shall be stated to be due or required to be satisfied on a day other than a Business Day, such performance shall be made or satisfied on the next succeeding Business Day. In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding"; and the word "through" means "to and including." If any provision of this Agreement refers to any action taken or to be taken by any Person, or which such Person is prohibited from taking, such provision shall be interpreted to encompass any and all means, direct or indirect, of taking, or not taking, such action. (e) Contracts. Unless otherwise expressly provided herein, references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document. (f) Laws. References to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (g) Captions. The captions and headings of this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. (h) Independence of Provisions. The parties acknowledge that this Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters, and that such limitations, tests and measurements are cumulative and must each be performed, except as expressly stated to the contrary in this Agreement. 1.3 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. In the event that GAAP changes during the term of this Agreement such that the covenants contained in Article VI would then be calculated in a different manner or with different components, (i) Borrower and Lenders agree to amend this Agreement in such respects as are necessary to conform those covenants as criteria for evaluating Borrower's financial condition to substantially the same criteria as were effective prior to such change in GAAP and (ii) Borrower shall be deemed to be in compliance with the covenants contained in Article VI following any such change in GAAP if and to the extent that Borrower would have been (and would continue to be) in compliance therewith under GAAP as in effect immediately prior to such change. (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of Borrower. 1.4 Times. All times of the day herein are Los Angeles, California time. ARTICLE II. THE LOAN 2.1 The Loan. Each Lender, on the terms and conditions hereinafter set forth and subject to the conditions precedent pursuant to Section 4.1 of this Agreement, severally agrees to make the Loan to Borrower in the ratable portion of the Initial Funding Amount set forth opposite such Lender's name on the signature pages hereto. The Borrower acknowledges and agrees that the Loan is being funded on a discounted basis and that immediately following the funding of the Initial Funding Amount, the Loan shall be outstanding, and payable in accordance with the terms hereof, in the full principal amount of the Initial Principal Amount. 2.2 Payment Upon Collection; Monthly Amortization. Upon receipt by Borrower or any of its Affiliates of any Collections, Borrower shall promptly (and in any event within one (1) Business Day) pay (or cause to be paid) such Collections to Collateral Agent for deposit in the Collateral Account. Subject to Section 2.6, Borrower shall, on each Payment Date, repay the Outstanding Principal Amount in an amount equal to the Monthly Amortization Amount for such Payment Date. Each Lender shall, upon receipt of any such Collections, apply such Collections and any Collections paid directly to Lender by Trustee or Collateral Agent in accordance with the procedures set forth in Section 2.6 (but subject to Section 2.12). 2.3 Payment Upon Maturity. On the Maturity Date, Borrower will pay to each Lender an amount equal to the Outstanding Principal Amount of the Loan then owing to such Lender, together with all accrued and unpaid interest on such Outstanding Principal Amount and any other accrued and unpaid Obligations then owing to such Lender. 2.4 Interest. (a) Interest Rate. Interest shall accrue on the Outstanding Principal Amount of the Loan during each Interest Accrual Period at a rate per annum equal to LIBOR for such Interest Accrual Period plus (i) at all times prior to the Ratings Completion Date, nine hundred (900) basis points, and (ii) at all times on and after the Ratings Completion Date, six hundred (600) basis points. In addition, after the occurrence of and during the continuance of any Event of Default under Section 8.1 of this Agreement, the Outstanding Principal Amount of the Loan together with all accrued and unpaid interest on the Loan and any other accrued and unpaid Obligations due and payable to Lender under this Agreement shall bear interest during each Interest Accrual Period at a rate per annum equal to (I) LIBOR for such Interest Accrual Period plus (i) at all times prior to the Ratings Completion Date, one thousand four hundred (1400) basis points, and (ii) at all times on and after the Ratings Completion Date one thousand one hundred (1,100) basis points or (II) if LIBOR pricing has been suspended pursuant to Section 2.13(a), the Base Rate plus (i) at all times prior to the Ratings Completion Date, one thousand three hundred (1300) basis points, and (ii) at all times on and after the Ratings Completion Date, one thousand (1000) basis points. Upon determining LIBOR for each Interest Accrual Period, the Collateral Agent shall notify the Lenders and Borrower of such LIBOR determination and the rate thereof. (b) Limitation on Interest Rate. The obligations of Borrower hereunder and under the Notes shall be subject to the limitation that payments of interest to any Lender, plus any other amounts paid to such Lender in connection herewith and therewith, shall not be required, to the extent (but only to the extent) that contracting for or receiving such payment by such 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 Borrower shall pay such Lender interest and other amounts at the highest rate permitted by applicable law. 2.5 Voluntary Prepayments; Deposits to Collateral Account. (a) Voluntary Prepayments. Borrower shall have the right, at its option, to prepay its obligations under the Loan in whole or in part at any time (in a minimum amount of $100,000 and an integral multiple of $10,000, or such lesser amount as is then outstanding); provided, however, that (i) each such voluntary prepayment shall be applied ratably among the Lenders and shall be accompanied by payment of any amounts owing under Section 10.4(d) with respect to such prepayment, (ii) except as set forth in the following clause (iii), any such voluntary prepayment on or prior to January 11, 2002 shall be accompanied by a prepayment premium in the amount of 1.0% of the amount prepaid, and (iii) no prepayment premium under the foregoing clause (ii) shall be required (a) with respect to the first $15,000,000 of principal prepayments or (b) in the event of a prepayment in full of the Obligations within 30 days after the Required Lenders have refused to consent (after a reasonable period for review) to additional Indebtedness of a Subsidiary of the Borrower (to the extent such consent is required under Section 7.2(b)) in respect of a bona fide proposal from a non-affiliated third party financial institution to provide additional Indebtedness that is otherwise permitted hereunder (and the proceeds of which would not be used directly or indirectly to refinance amounts outstanding hereunder) or in the event amounts outstanding hereunder are refinanced by the Lenders. After January 11, 2002 there shall be no prepayment premium. Borrower shall give each Lender at least ten Business Days prior notice of its intention to prepay, specifying the date of payment, the total amount and portion of the Loan of such Lender to be paid on such date and the amount of interest to be paid with such prepayment. (b) Deposits to Collateral Account. In the event the Outstanding Principal Amount shall at any time exceed the sum of the Borrowing Base plus the amount then on deposit in the Collateral Account, the Borrower shall immediately deposit cash in the amount of such excess to the Collateral Account. 2.6 Application of Payments. All payments on the Loan shall be applied, without duplication, in the following order: (a) First, to Collateral Agent and each Lender for any and all sums advanced by Collateral Agent or such Lender as are reasonably necessary in order to preserve the Collateral or the security interests in the Collateral and all reasonable expenses of taking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral or of any exercise by Collateral Agent or any Lender (or any portfolio advisor for any Lender) of its rights under this Agreement or any other Loan Document, together with reasonable Attorney Costs and unpaid fees and expenses; and (b) Second, ratably to each Lender for application to overdue interest on the Obligations; (c) Third, ratably to each Lender for application to accrued interest on the Obligations; (d) Fourth, ratably to each Lender for application to the Outstanding Principal Amount in an amount equal to such Lender's ratable portion of any Monthly Amortization Amount then due and payable; (e) Fifth, ratably to each Lender in payment of all other accrued and unpaid Obligations owing to such Lender. Any provision hereof or of the Collateral Account Agreement to the contrary notwithstanding, any amounts held by Collateral Agent pursuant to the Collateral Account Agreement and not otherwise required to be applied to the Obligations shall, at the written direction of Borrower, be applied to repay Obligations hereunder (to be applied as set forth in this Section 2.6) or, if the Borrowing Base plus such amount on deposit in the Collateral Account exceeds the sum of (i) the Outstanding Principal Amount plus (ii) the Required Cash Collateral Amount at such time and no Default has occurred and is continuing, such amounts held in the Collateral Account shall, upon written request by Borrower to Collateral Agent, be released to Borrower up to the amount of such excess; provided, however, that (a) any release to Borrower of amounts on deposit in the Collateral Account shall only be made on a Payment Date and only after giving effect to the payment of all amounts due hereunder and under the other Loan Documents on such Payment Date, and (b) no release shall result in the amount on deposit in the Collateral Account being less than the Required Cash Collateral Amount at such time. 2.7 Prepayment. Upon any prepayment of the Loan, Borrower shall pay to each Lender such Lender's ratable share of the principal amount to be prepaid, together with all accrued and unpaid interest thereon through the date of prepayment and any applicable premium payable pursuant to Section 2.5. Notice of prepayment having been given in accordance with Section 2.5, the amount specified to be prepaid shall become due and payable on the date specified for prepayment. 2.8 Fees. (a) Reserved. (b) Collateral Agent Fees. Borrower shall pay to the Collateral Agent, as and when due, the non-refundable fees set forth on Schedule H. 2.9 Fees and Interest. All computations of fees and interest under this Agreement shall be made on the basis of a 360-day year and actual days elapsed, which results in more interest being paid than if computed on the basis of a 365-day year. Interest and fees shall accrue during each Interest Accrual Period during which interest or such fees are computed from the first day thereof to the last day thereof. Borrower shall pay to Lenders all accrued and unpaid interest on February 15, 2001, March 15, 2001 and thereafter, on each Payment Date. 2.10 Payments by Borrower; Payments by Collateral Agent. (a) All payments (including prepayments) to be made by or on behalf of Borrower on account of principal, interest, fees and other amounts required hereunder or under any Note shall be made without set-off, deduction, recoupment or counterclaim and shall, except as otherwise expressly provided herein, be made to Collateral Agent at Collateral Agent's office as set forth on its Administrative Form or as otherwise directed in writing by the Collateral Agent, in dollars and in immediately available funds, no later than 11:00 a.m. on the date specified herein. Any payment which is received by Collateral Agent later than 11:00 a.m. shall be deemed to have been received on the immediately succeeding Business Day and any applicable interest or fee shall continue to accrue. The Collateral Agent will promptly after receipt of each payment cause to be distributed like funds relating to the payment of principal and interest ratably to each Lender, and like funds relating to the payment of any other amount payable to any Lender to such Lender, in each case to be applied in accordance with, and subject to, the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 10.16, from and after the effective date specified in such Assignment and Acceptance, the Collateral Agent shall make all payments hereunder, under any Note and under any other Loan Document in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) Whenever any payment hereunder or under any Note 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. 2.11 Taxes. (a) Withholding Taxes. Any and all payments by the Borrower hereunder and under any Note shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Collateral Agent, net income taxes that are imposed by the United States and franchise taxes and net income taxes that are imposed on such Lender or the Collateral Agent by the state or foreign jurisdiction under the laws of which such Lender or the Collateral Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, franchise taxes and net income taxes that are imposed on such Lender by the state or foreign jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder (or under any Note) to any Lender or the Collateral Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.11(a)) such Lender Party or the Collateral Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Other Taxes. In addition, the Borrower shall pay any present or future stamp, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or under any Note or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) Indemnification. The Borrower shall indemnify each Lender and the Collateral Agent for the full amount of Taxes and Other Taxes, and for the full amount of taxes imposed by any jurisdiction on amounts payable under this Section 2.11 paid by such Lender or the Collateral Agent (as the case may be) and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Lender or the Collateral Agent (as the case may be) makes written demand therefor. (d) Evidence of Payment. Within 30 days after the date of any payment of Taxes, the Borrower shall furnish to the each Lender the original receipt of payment thereof or a certified copy of such receipt. In the case of any payment hereunder or under any Note by the Borrower through an account or branch outside the United States or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no Taxes are payable in respect thereof, the Borrower shall furnish, or shall cause such payor to furnish, to each Lender an opinion of counsel acceptable to such Lender stating that such payment is exempt from Taxes. For purposes of this subsection (d) and subsection (e), the terms "United States" and "United States person" shall have the meanings specified in Section 7701 of the Internal Revenue Code. (e) Foreign Lenders and Issuing Banks. Each Lender organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of it becomes a party to this Agreement, and from time to time thereafter upon the reasonable request in writing by the Borrower or the Collateral Agent (but only so long thereafter as such Lender remains lawfully able to do so), provide the Collateral Agent and the Borrower with Internal Revenue Service Form 1001 or 4224 (or other appropriate form), as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or is entitled to a reduced rate of United States withholding tax on payments under this Agreement. If the form provided by a Lender at the time such Lender first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate form certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such form; provided, however, that, if at the date of the assignment pursuant to which a Lender assignee becomes a party to this Agreement, the Lender assignor was entitled to payments under subsection (a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. (f) Failure to Provide Forms. For any period with respect to which a Lender has failed to provide the Borrower with the appropriate form described in Section 2.11(e) (other than if such failure is due to a change in law occurring after the date on which a form originally was required to be provided or if such form otherwise is not required under Section 2.11(e)), such Lender Party shall not be entitled to indemnification under Section 2.11(a) or Section 2.11(c) with respect to Taxes imposed by the United States; provided, however, that should a Lender become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes. 2.12 Sharing of Payments, Etc.. If any Lender shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) (a) on account of Obligations due and payable to such Lender hereunder or under any Note at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Lender at such time to (ii) the aggregate amount of the Obligations due and payable to all Lenders hereunder and under the Notes at such time) of payments on account of the Obligations due and payable to all Lenders hereunder and under the Notes at such time obtained by all the Lenders at such time or (b) on account of Obligations owing (but not due and payable) to such Lender hereunder or under any Note at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations owing to such Lender at such time to (ii) the aggregate amount of the Obligations owing (but not due and payable) to all Lenders hereunder and under the Notes at such time) of payments on account of the Obligations owing (but not due and payable) to all Lenders hereunder and under the Notes at such time obtained by all the Lenders at such time, such Lender shall forthwith purchase from the other Lenders such participations in the Obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each other Lender shall be rescinded and such other Lender shall repay to the purchasing Lender the purchase price to the extent of such other Lender's ratable share (according to the proportion of (i) the purchase price paid to such Lender to (ii) the aggregate purchase price paid to all Lenders) of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such other Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.12 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. 2.13 Suspension of LIBOR. (a) Illegality. Notwithstanding any other provision of this Agreement, if the introduction of or any change in or in the interpretation of any law or regulation shall make it unlawful, or any central bank or other governmental authority shall assert that it is unlawful, for any Lender to perform its obligations hereunder to make, fund or maintain its portion of the Loan as a LIBOR based obligation, then, on notice thereof and demand therefor by such Lender to the Borrower, the interest rate applicable to the Loan pursuant to Section 2.4 shall thereafter be the Base Rate plus (i) at all times prior to the Ratings Completion Date, eight hundred (800) basis points, and (ii) at all times on and after the Ratings Completion Date, five hundred (500) basis points until such Lender shall notify the Borrower that such Lender has determined that the circumstances causing such suspension no longer exist. (b) Other Circumstances. If any Lender shall determine in good faith (which determination shall be conclusive) that (A) LIBOR cannot be determined in accordance with the definition thereof, or (B) LIBOR for any Interest Accrual Period will not adequately reflect the cost to such Lender of making, funding or maintaining such Lender's ratable portion of the Loan for such Interest Period, such Lender shall forthwith so notify the Borrower and the other Lenders, whereupon the interest rate applicable to the Loan pursuant to Section 2.4 for such Lender shall thereafter be the Base Rate plus 5.0%. 2.14 Increased Costs, Etc.. (a) Increased Costs. If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or of making, funding or maintaining its portion of the Loan based on LIBOR, then the Borrower shall from time to time, upon demand by such Lender pay to such Lender additional amounts sufficient to compensate such Lender for such increased cost A certificate as to the amount of such increased cost, submitted to the Borrower by such Lender, shall be conclusive and binding for all purposes, absent manifest error. (b) Capital Requirements. If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender as a result of or based upon the existence of such Lender's commitment to lend hereunder, then, upon demand by such Lender, the Borrower shall pay to such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder. A certificate as to such amounts submitted to the Borrower by such Lender, shall be conclusive and binding for all purposes, absent manifest error. 2.15 Promissory Notes. The Borrower hereby agrees that if, in the opinion of any Lender, a promissory note or other evidence of debt is required, appropriate or desirable to reflect or enforce the indebtedness of the Borrower resulting from the Loan made by or otherwise owing to such Lender, then upon request of such Lender, the Borrower shall (in the case of any such request by a Lender that is not an initial party hereto, in accordance with Section 10.16) promptly execute and deliver to such Lender, a promissory note substantially in the form of Exhibit D, payable to the order of such Lender in an amount equal to the principal amount of the Loan made by or otherwise owing to such Lender. ARTICLE III. SECURITY AGREEMENT AND COLLATERAL 3.1 Security for Obligations. As security for the payment and performance of the Obligations under this Agreement and the other Loan Documents and all other present and future debts, obligations and liabilities of any nature whatsoever of Borrower to Collateral Agent or any Lender in respect of this Agreement and the other Loan Documents, and all modifications, renewals, replacements and extensions thereof, UDCSFC shall grant Collateral Agent (for Collateral Agent's benefit and the ratable benefit of the Lenders) a security interest in the Collateral pursuant to the Stock Pledge Agreement, the Collateral Account Agreement and such other agreements, documents and instruments as Required Lenders may reasonably require. Borrower shall cause UDCSFC to execute and deliver the Stock Pledge Agreement and to perform its obligations thereunder. Borrower will, prior to the creation of any Additional Residual Certificates, take and cause its Affiliates and Subsidiaries to take, such actions and execute such agreements, documents and instruments (and deliver such opinions of counsel) as may be necessary or as Collateral Agent or Required Lenders may reasonably request in order to create a perfected first priority security interest securing the Obligations in favor of Collateral Agent (for Collateral Agent's benefit and the ratable benefit of the Lenders) in such Additional Residual Certificates or in 100% of the capital stock or other equity interests of the entity owning such Additional Residual Certificates, including, without limitation, compliance with Section 7(c) of the Stock Pledge Agreement. Borrower will execute, and shall cause UDCSFC and Borrower's other Affiliates and Subsidiaries, to execute, any security agreements, collateral assignments, financing statements for filing and/or recording and any other agreements, documents or instruments reasonably required by Collateral Agent or Required Lenders to evidence and perfect the Liens and security interests of Collateral Agent. A carbon, photographic or other reproduced copy of this Agreement and/or any financing statement relating hereto shall be sufficient for filing and/or recording as a financing statement. 3.2 Security Documents. The Financing Statements shall remain on file in the appropriate jurisdictions and Borrower shall promptly execute or cause to be executed any other financing statements and notices as are necessary to properly perfect Collateral Agent's security interest in the Collateral. 3.3 Duties Regarding Collateral. Neither Collateral Agent nor any Lender (nor any portfolio advisor for any Lender) shall have any duty or obligation to protect, insure, collect or realize upon the Collateral or preserve rights in it against prior parties. Borrower releases Collateral Agent and each Lender (and each portfolio advisor) from, and shall indemnify Collateral Agent and each Lender (and each portfolio advisor) against, any liability for any act or omission relating to the Collateral, except with respect to any such Person for any liability directly resulting from such Person's gross negligence or willful misconduct. 3.4 Borrower's Duties Regarding Collateral. Borrower agrees as follows: (a) General Maintenance of Collateral. Borrower: (i) shall keep the Collateral free from all Liens (other than the Liens of ad valorem property taxes which are not delinquent, any statutory landlords' liens which are covered by lien waivers satisfactory to Required Lenders, mechanic's liens, Permitted Liens, and any Liens in favor of Collateral Agent for the benefit of the Lenders); (ii) shall defend the Collateral against all claims and legal proceedings by persons other than Collateral Agent and Lenders; (iii) shall pay and discharge when due all taxes, levies and other charges upon the Collateral; (iv) shall cause UDCSFC and Borrower's other Affiliates and Subsidiaries not to sell, lease or otherwise dispose of the Collateral; and (v) shall not permit the Collateral to be used in violation of any Requirement of Law or any policy of insurance. (b) Perfection and Priority. Borrower shall pay all Lender's Expenses necessary to, take all actions necessary to, and, upon Collateral Agent's or any Lender's request, execute all writings and take and cause Borrower's Affiliates and Subsidiaries to take all other actions reasonably deemed advisable by Collateral Agent or any Lender to, preserve the Collateral or to establish, and determine priority of, perfection, continued perfection or enforce Collateral Agent's interest in the Collateral. (c) Records and Inspections. Upon reasonable notice to Borrower, any Lender may examine and conduct audits of the Collateral, and Borrower's and UDCSFC's and Borrower's other Affiliates' and Subsidiaries' records concerning it, wherever located, and make copies of such records, at any time during normal business hours, and Borrower shall assist such Lender in so doing. Borrower shall keep accurate, complete and current records respecting the Collateral. In addition to the specific requirements of Section 6.1, Borrower shall, within ten (10) Business Days of any request by any Lender, furnish to such Lender a detailed statement, certified as being substantially accurate by a Responsible Officer, setting forth the current status, value and location of all or any portion of the Collateral. 3.5 Power of Attorney. Borrower hereby makes, constitutes and appoints Collateral Agent and each Lender and its portfolio advisor the true and lawful attorney-in-fact of Borrower, in the name, place and stead of Borrower, or otherwise, upon the occurrence of any Event of Default which remains uncured following the receipt of a notice pursuant to Section 10.2: (a) To take all actions and to execute, acknowledge, obtain and deliver any and all writings necessary or deemed advisable by Collateral Agent or such Lender in order to exercise any rights of Borrower with respect to the Collateral or to receive and enforce any payment or performance due to Borrower with respect to the Collateral; (b) To give any notices, instructions or other communications to any person or entity in connection with the Collateral; (c) To demand and receive all performances due under or with respect to the Collateral and to take all lawful steps to enforce such performances and to compromise and settle any claim or cause of action of Borrower arising from or related to the Collateral and give acquittances and other discharges relating thereto; and (d) To file any claim or proceeding or to take any other action, in the name of Collateral Agent or such Lender, Borrower or otherwise, to enforce performances due under or related to the Collateral or to protect and preserve the right, title and interest of Collateral Agent or such Lender thereunder. The foregoing power of attorney is a power coupled with an interest and shall be irrevocable and unaffected by the disability of the principal so long as any portion of the Obligations remains contingent, unmatured, unliquidated, unpaid or unperformed. Lender shall have no obligation to exercise any of the foregoing rights and powers in any event. 3.6 Collateral Inspections. Collateral Agent and each Lender shall have the right (but not the obligation) to do a physical on-site examination of the Collateral. All costs and expenses associated therewith shall be included in Lender Expenses. ARTICLE IV. CONDITIONS PRECEDENT; TERM OF AGREEMENT 4.1 Conditions Precedent. No Lender shall be required to make the Loan to be made by it hereunder if Borrower has not fulfilled to the satisfaction of such Lender and its counsel, each of the following conditions on or before the Closing Date; provided, however, that each Lender, in its sole and absolute discretion, may waive any of the following conditions. 4.2 Receipt of Documents. Each Lender shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (a) This Agreement executed by Borrower, Collateral Agent and each Lender; (b) The Notes duly executed, the Guaranty duly executed, the Collateral Account Agreement duly executed and the Stock Pledge Agreement duly executed together with the certificates representing 100% of the capital stock of UDRC II and UDRC III and undated stock powers relating thereto duly endorsed in blank; (c) the Lenders shall have received (i) evidence satisfactory to them that Borrower has received not less than $7,000,000 in proceeds of the Verde Subordinated Note, and (ii) a certified copy of the Verde Subordinated Note and all documents and instruments relating thereto, each of which shall be on terms and conditions satisfactory to the Lenders; (d) The UDRC II Dividend Direction Letter; (e) the UDRC III Dividend Direction Letter; (f) The UDRC II Standing Dividend Resolution certified by UDRC II's Secretary; (g) the UDRC III Standing Dividend Resolution certified by UDRC III's Secretary; (h) A consent and subordination from GECC consenting to the execution, delivery and performance by Borrower and UDCSFC of the Loan Documents and subordinating to Collateral Agent GECC's Lien on any assets constituting Collateral; (i) A consent by MBIA to the pledge of the Collateral to Collateral Agent; (j) Certified copies of the resolutions of the board of directors of Borrower approving and authorizing the execution, delivery and performance by Borrower of this Agreement and the other Loan Documents to be delivered hereunder, and authorizing the Loan, certified as of the Closing Date by the Secretary or an Assistant Secretary of Borrower; (k) A certificate of the Secretary or Assistant Secretary of Borrower certifying the names and true signatures of the officers of Borrower authorized to execute, deliver and perform, as applicable, this Agreement, the Stock Pledge Agreement and all other Loan Documents to be delivered hereunder; (l) Certified copies of the resolutions of the board of directors of UDCSFC approving and authorizing the execution, delivery and performance by UDCSFC of the applicable Loan Documents to be delivered hereunder, certified as of the Closing Date by the Secretary or an Assistant Secretary of UDCSFC; (m) A certificate of the Secretary or Assistant Secretary of UDCSFC certifying the names and true signatures of the officers of UDCSFC authorized to execute, deliver and perform the Stock Pledge Agreement and all other applicable Loan Documents to be delivered hereunder; (n) Copies of each of Borrower's, UDCSFC's, UDRC II's and UDRC III's certificate of incorporation certified by the Secretary of the State of their respective jurisdictions of incorporation and bylaws certified by their respective Secretaries or Assistant Secretaries; (o) Good standing certificates for the jurisdiction of incorporation and the jurisdiction in which the chief executive office is located for each of Borrower, UDCSFC, UDRC II and UDRC III; (p) A copy of lien searches, completed as of a recent date, against Borrower and UDCSFC, UDRC II and UDRC III, in such jurisdictions as shall be satisfactory to Lenders and its counsel; (q) Legal opinions from counsel for Borrower with respect to the transactions contemplated by the Loan Documents, which opinions shall be in form and substance satisfactory to Lenders and from counsel satisfactory to Lenders; and (r) The obligations hereunder shall have been rated "B" or above by a rating agency acceptable to the Required Lenders. (s) There shall have occurred since December 31, 1999, no Material Adverse Change. For purposes of this Section 4.2(r), the requirement to refinance the GECC Agreement shall not constitute a Material Adverse Change. (t) Lenders shall have received Borrower's audited financial statements for the fiscal year ended December 31, 1999 and unaudited financial statements for the 9 month period ended September 30, 2000. (u) Officers Certificate as to no default and truth of representations and warranties. (v) Completion of December 2000 MBIA - wrapped securitization of Ugly Duckling Collateral. 4.3 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower, Collateral Agent and Lenders and shall continue in full force and effect for a term ending on the earliest of (a) the Repayment Date, or (b) the date of termination of this Agreement in accordance with its terms after the occurrence and during the continuation of an Event of Default. 4.4 Effect of Termination. Upon termination of this Agreement, all Obligations shall become due and payable immediately without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, and Collateral Agent's continuing security interest in the Collateral shall remain in effect until all Obligations have been fully and finally discharged. ARTICLE V. REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Agreement and make the Loan, Borrower makes the following representations and warranties which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. UDCSFC has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. 5.2 Location of Chief Executive Office; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Borrower's FEIN is 86-0721358. The chief executive office of UDCSFC is located at the address of Borrower indicated in the preamble to this Agreement and UDCSFC's FEIN is 86-0657074. 5.3 Due Organization and Qualification; Subsidiaries. (a) Each Loan Party is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to have a Material Adverse Effect. (b) Set forth on Schedule A is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of Equity Interests authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding Equity Interests of each such Subsidiary have been validly issued and are fully paid and non-assessable. (c) Except as set forth on Schedule B, no Equity Interests (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for Equity Interests) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. 5.4 Due Authorization: No Conflict. (a) The execution, delivery, and performance by each Loan Party of each of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by each Loan Party of each of the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations T, U, and X of the Federal Reserve Board) applicable to such Loan Party, the Governing Documents of such Loan Party, or any order, judgment, or decree of any court or other Governmental Authority binding on any Loan Party, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of any Loan Party, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of any Loan Party, other than pursuant to the Security Documents, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of any Loan Party. No Loan Party or any of its Subsidiaries is in violation of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which could have a Material Adverse Effect. (c) Other than the taking of any other action expressly required under this Agreement or any of the other Loan Documents, the execution, delivery, and performance by each Loan Party of this Agreement and the other Loan Documents to which such Loan Party is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement, the other Loan Documents and all other documents contemplated hereby and thereby, when executed and delivered by any Loan Party party thereto, will be the legally valid and binding obligations of such Loan Party, enforceable against such Loan Party in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Stock Pledge Agreement and the stock powers delivered in connection therewith, and the Collateral Account Agreement when executed and delivered by UDCSFC and UDC, will be the legally valid and binding obligations of UDCSFC and UDC, enforceable against each of UDCSFC and UDC in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (f) The Lien granted by UDCSFC and UDC on the Collateral is a validly created and perfected first priority Lien, and the Collateral is subject to no other Liens other than Liens in favor of Collateral Agent and the Liens referred to in item 1 on Schedule E. 5.5 Litigation. Except as set forth in Schedule C, there are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower, except for: (a) ongoing collection matters in which Borrower is the plaintiff, (b) matters that, if decided adversely to Borrower, would not have a Material Adverse Effect and (c) matters as to which Borrower has provided notice to the Lenders and which could not reasonably be expected to be decided adversely to Borrower. 5.6 Financial Statements; No Material Adverse Change. All financial statements relating to Borrower, UDRC II and UDRC III that have been delivered by Borrower to Lenders have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present the financial condition as of the date thereof and the results of operations for the period then ended for Borrower and its consolidated Subsidiaries, except as disclosed on Schedule D. No information, exhibit or report furnished by Borrower or any other Loan Party to the Collateral Agent or any Lender in connection with the negotiation of the Loan Documents or pursuant to the terms of the Loan Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein not misleading. There has not been a Material Adverse Change with respect to Borrower since December 31, 1999. For purposes of this Section 5.6, so long as Borrower has not failed to comply with Section 6.24 hereof, the requirement to refinance the GECC Agreement shall not constitute a Material Adverse Change. 5.7 Securitization Documents. Borrower, UDRC II and UDRC III and each of their Affiliates are in full compliance with their respective obligations under the Securitization Documents, and no Securitization Default exists. 5.8 ERISA. No accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, exists with respect to any plan (other than a multiemployer plan). No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrower to be incurred with respect to any plan (other than a multiemployer plan) by Borrower which is or would have a Material Adverse Effect. Borrower has not incurred and does not presently expect to incur any withdrawal liability under Title IV of ERISA with respect to any multiemployer plan which is or would be materially adverse to Borrower. The execution and delivery of this Agreement and the other Loan Documents will not involve any transaction which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975 of the Code. For the purpose of this Section 5.8, the term "plan" shall mean an "employee pension benefit plan" (as defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by Borrower or by any trade or business, whether or not incorporated, which, together with Borrower, is under common control, as described in Section 414(b) or (c) of the Code; and the term "multiemployer plan" shall mean any plan which is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). No plan providing welfare benefits to retired former employees of Borrower has been established or is maintained for which the present value of future benefits payable, in excess of irrevocably designated funds for such purpose, is or would have a Material Adverse Effect. 5.9 Environmental and Safety Matters. Borrower (a) has complied in all material respects with all applicable material Environmental and Safety Laws, and Borrower has not received (i) notice of any material failure so to comply, (ii) any letter or request for information under Section 104 of CERCLA or comparable state laws or (iii) any information that would lead it to believe that it is the subject of any Federal or state investigation concerning Environmental and Safety Laws; (b) does not manage, generate, discharge or store any Hazardous Materials in material violation of any material Environmental and Safety Laws; (c) does not own, operate or maintain any underground storage tanks or surface impoundments; and (d) except as disclosed to Lenders in writing prior to the date hereof, is not aware of any conditions or circumstances associated with its currently or previously owned or leased properties or operations (or those of its tenants) which may give rise to any Environmental Liabilities and Costs which could have a Material Adverse Effect. 5.10 Tax Matters. Each of Borrower and its Subsidiaries has filed all tax returns that it was required to file. All such tax returns were correct and complete in all material respects. All Borrower Taxes owed by any of Borrower and its Subsidiaries have been paid. 5.11 [Reserved]. 5.12 Ownership of Properties. Each Loan Party and its Subsidiaries has good, marketable and insurable title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other Property. 5.13 Investment Company Status. Neither any Loan Party nor any of its Subsidiaries is an "investment company," or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. Neither the making of the Loan nor the application of the proceeds or repayment thereof by Borrower, nor the consummation of the other transactions contemplated hereby, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder. 5.14 Solvency. Each Loan Party is, individually and together with its Subsidiaries, Solvent. For purposes hereof, the term "Solvent" means, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute an unreasonably small capital. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. ARTICLE VI. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless Required Lenders shall otherwise consent in writing, Borrower shall do all of the following: 6.1 Financial Statements and Other Documents. Borrower shall deliver to Lenders in form and detail satisfactory to Required Lenders: (a) Within 45 days of the end of each fiscal quarter (except the last fiscal quarter of each fiscal year), Borrower's consolidated unaudited financial statements for such quarter, and, within 90 days of the end of Borrower's fiscal year, Borrower's consolidated audited financial statements for such period, certified by Borrower's Chief Financial Officer or Treasurer as fairly presenting in all material respects, in accordance with GAAP (subject, in the case of unaudited financial statements, to ordinary, good faith year-end adjustments and to the absence of footnote disclosure), the financial position and results of operations of Borrower and together, in each case, with a certificate of the Chief Financial Officer of Borrower stating that the representations and warranties herein are true and correct in all material respects as of the date of such certificate and that no Default has occurred and is continuing or, if a default has occurred and is continuing, a statement as to the nature thereof and the action that Borrower has taken and proposes to take with respect thereto and setting forth in reasonable detail satisfactory to Required Lenders the calculations demonstrating compliance with Sections 6.13 through 6.16; (b) Promptly upon receipt thereof, any financial statements of Borrower distributed to other lenders or financing parties; (c) On or prior to each Calculation Date, a Collateral Servicing Report certified as true and correct by an officer of Borrower and including the calculation of the Borrowing Base as of such Calculation Date and certifying such calculation as true and correct. (d) Promptly upon preparation thereof, a copy of each other report, if any, submitted to Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of Borrower; (e) Promptly after its submission, copies of any other information or documents regularly provided by Borrower to any of its other lenders or holders of Borrower's Debt; (f) Promptly upon receipt thereof, copies of any other information or documents received by Borrower pursuant to any Securitization Document (including, without limitation, monthly servicing reports with respect to each Securitization); (g) With reasonable promptness, such other financial data and information as any Lender may reasonably request; and (h) Promptly upon receipt thereof, (i) copies of any federal revenue agent's reports (so called "thirty-day letter") issued by the IRS, and copies of any equivalent documents from state or local tax authorities; (ii) copies of any federal notice of deficiency (so-called "ninety-day letters") issued by the IRS, and copies of any equivalent documents from state or local tax authorities; and (iii) copies of any information requests or document requests received from federal, state or local tax authorities that are not in the ordinary course of business. 6.2 Inspection of Property. Borrower shall permit any Person designated by any Lender in writing, to visit and inspect any of the properties of Borrower, to examine the corporate books and financial records of Borrower and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of Borrower and its independent public accountants, all at such reasonable times and as often as any Lender may reasonably request. 6.3 Default Disclosure. (a) Borrower shall forthwith, upon a Responsible Officer of Borrower obtaining knowledge of an Event of Default or Default, promptly deliver to each Lender a certificate of a Responsible Officer specifying the nature and period of existence thereof and what action Borrower proposes to take with respect thereto. (b) Borrower shall forthwith, upon a Responsible Officer of Borrower obtaining knowledge of a Securitization Default, deliver to each Lender a certificate of a Responsible Officer specifying the nature and period of existence thereof, what action the defaulting party proposes to take with respect thereto, and what action Borrower proposes to take with respect thereto. 6.4 Notices to Lenders and the Collateral Agent. Borrower shall promptly notify each Lender and the Collateral Agent in writing of: (a) Any lawsuit over Five Hundred Thousand Dollars ($500,000) against Borrower or any of its Subsidiaries; (b) Any substantial dispute between Borrower or any of its subsidiaries and any Governmental Authority; or (c) Any change in any Loan Party's name, address, or legal structure. 6.5 Books and Records. Borrower shall maintain adequate books and records in accordance with generally accepted accounting principles. 6.6 Compliance and Preservation. Borrower shall and shall cause its Subsidiaries to: (a) Comply with the laws (including any fictitious name statute), regulations and orders of any government body with authority over its business; (b) Maintain and preserve all privileges and franchises such Person now has provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to preserve any privilege or franchise (other than the corporate existence of each Loan Party, UDCC, UDRC II and UDRC III) if the Board of Directors of the Borrower shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Borrower, such Subsidiary or the Lenders; and (c) Make any repairs, renewals, or replacements reasonably necessary to keep such Person's properties in good working condition. 6.7 Perfection of Liens. Borrower shall take such actions as may be necessary or as Collateral Agent or any Lender may request in order to perfect and protect Collateral Agent's security interests and liens. 6.8 Cooperation. Borrower shall take any reasonable action requested by Collateral Agent or any Lender to carry out the intent of this Agreement. 6.9 Use of Proceeds. Borrower shall use the proceeds of the Loan for (i) repayment of all amounts outstanding under the Existing Loan Agreement (and Borrower agrees that a net funding of the Initial Funding Amount may be used to effect such repayment) and repayment of other indebtedness of the Borrower (other than Subordinated Debt), (ii) general working capital to facilitate ongoing growth in Borrower's core operations and (iii)to the extent permitted by Section 7.8 and by the documents and instruments governing other indebtedness of the Borrower, the repurchase of common stock of the Borrower. 6.10 Securitizations. Any securitizations of Ugly Duckling Collateral shall be executed through UDRC II, UDRC III or a New Issuer (as defined in the Stock Pledge Agreement) that meets the requirements of Section 7(c) of the Stock Pledge Agreement (and Borrower shall ensure that Pledgor performs its obligations pursuant to the Stock Pledge Agreement) or by a person or entity otherwise able to satisfy the requirements of Section 3.1 with respect to the related Additional Residual Certificates. Borrower shall continue to execute periodic securitizations (in an amount of not less than $75,000,000 in any period of six consecutive months) of the Ugly Duckling Collateral and each such securitization shall include Residual Certificates constituting Additional Residual Certificates which grant an affiliate of UDCC acceptable to the Required Lenders a 100% interest in all securitization assets (other than Excluded Class C Certificates and Class A interests sold to senior third party investors) and with respect to which the provisions of Section 3.1 have been complied with. The Borrowing Base shall at all times include no less than 7 separate securitizations. Compliance with Covenants. Borrower shall perform, keep and observe each term, provision, condition or covenant or agreement contained in each Bond Insurance Policy, the Principal Warehouse Agreement and any other agreement evidencing Indebtedness. 6.11 Payment of Indebtedness. Borrower shall timely pay and shall cause its Subsidiaries to timely pay all Indebtedness which, if not paid, could result in the imposition of a Lien on any of the assets of UDRC II or UDRC III or any holder of Additional Residual Certificates. 6.12 Tangible Net Worth. Borrower shall maintain a consolidated Tangible Net Worth of not less than the sum of (i) $130,000,000, plus (ii) 75% of the cumulative net earnings (but only to the extent positive) after taxes of the Borrower and its Subsidiaries on a consolidated basis determined in accordance with generally accepted accounting principles for each period ending on or after December 31, 2000 plus (iii) 60% of the cumulative net proceeds of the issuance of any additional shares of capital stock of Borrower after February 15, 2000, and minus (iv) the cumulative amount of payments received by Borrower pursuant to that Promissory Note, dated December 30, 1999 made by Cygnet Capital Corporation to Ugly Duckling Finance Corporation in the original principal amount of $12,000,000 through the retirement of stock in Borrower held by Ernest C. Garcia II. As used in this Section 6.13, "net proceeds" of the issuance of capital stock shall mean the gross cash proceeds of such issuance less reasonable and customary fees and expenses actually incurred in connection therewith, including, without limitation, underwriting fees, investment banking fees, attorneys' and accountant's fees, regulatory and listing fees and due diligence costs and expenses. 6.13 Consolidated EBITDA to Consolidated Interest Expense. Maintain a ratio of Consolidated EBITDA to Consolidated Interest Expense of not less than 1.25 to 1.0. 6.14 Consolidated Senior Debt to Consolidated Total Capitalization. Not permit at any time Consolidated Senior Debt of the Borrower and its Subsidiaries on a consolidated basis to exceed 40% of Consolidated Total Capitalization less Non-Recourse Debt. 6.15 Minimum Residual Certificate Cash Flows. Not permit aggregate Residual Certificate Cash Flows deposited to the Collateral Account with respect to any month to be less than the following amounts determined as of the applicable Payment Date or other date specified below (it being understood that for purposes of determining compliance with this Section 6.16 the amount deemed deposited with respect to any Residual Certificate may not exceed the Residual Certificate Cash Flow with respect to such Residual Certificate): (a) For the one month periods ending February 15, 2001 and March 15, 2001 (which represent Residual Certificate Cash Flows with respect to months of January 2001 and February 2001, respectively), $900,000. (b) For the Payment Date on April 15, 2001, and for each Payment Date thereafter, $2,000,000. 6.16 Minimum Capital Base. Borrower shall maintain a Capital Base of not less than $165,000,000. 6.17 Minimum Other Interest Coverage. Maintain a ratio of operating income to "interest expense, other" (as set forth on Borrower's publicly filed financial statements for each fiscal quarter) of not less than 2.50 to 1.0. 6.18 Cash Collateral. At all times prior to the Cash Collateral Release Date, the Borrower shall (i) maintain with the Collateral Agent pursuant to the Cash Collateral Agreement, or with such other institution and pursuant to such other cash collateral arrangements as may be satisfactory to the Required Lenders, cash collateral in an amount not less than the Required Cash Collateral Amount to secure the obligations hereunder, and (ii) cause the Lenders to have a first priority perfected security interest in such cash collateral. The approval by the Required Lenders of such other cash collateral arrangements will not be unreasonably withheld so long as the Lenders continue to receive a perfected first priority lien in such amounts and investments of such amounts is limited to cash equivalents substantially similar to those permitted pursuant to the Cash Collateral Agreement. 6.19 Collateral Account. Borrower shall establish and maintain one or more collateral accounts as may be requested by the Collateral Agent or the Required Lenders. Each such collateral account shall be free and clear of all liens other than liens in favor of the Collateral Agent pursuant to the Loan Documents and shall be on terms and conditions satisfactory to the Collateral Agent and the Required Lenders. 6.20 Back-up Servicer. At all times on and after March 1, 2001, Borrower shall maintain back-up service arrangements with respect to each securitization of Ugly Duckling Collateral, on terms and conditions satisfactory to the Required Lenders, and with OSI or another back-up servicer satisfactory to the Required Lenders. 6.21 Maintenance of Properties. Borrower shall maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted and excepting replacement in the ordinary course of business. 6.22 Maintenance of Insurance. Borrower shall maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by prudent companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates. 6.23 Approved Replacement Warehouse Agreement. Not later than March 31, 2001, Borrower shall have entered into a binding commitment with a Lender or Lenders acceptable to the Required Lenders with respect to an Approved Replacement Warehouse Agreement and not later than April 15, 2001 such Agreement shall have been entered into and in full force and effect on terms and conditions satisfactory to the Required Lenders (including, without limitation, terms and conditions relating to intercreditor and subordination provisions). 6.24 Designated Senior Indebtedness. Borrower hereby designates the Loan as "Designated Senior Indebtedness" pursuant to the Indenture, dated October 15, 1998 (the "Indenture"), from Borrower to BNY Midwest Trust Company, as successor in interest to Harris Trust and Savings Bank, as trustee (pursuant to which existing Subordinated Debt described on Exhibit G was issued and agrees to maintain such designation at all times. Borrower will promptly notify the trustee under the Indenture of such designation and in connection with each supplemental indenture hereafter entered into in connection with the Indenture, Borrower will cause such supplemental indenture to provide that the Loan is included as "Designated Senior Indebtedness." ARTICLE VII. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following without Required Lender's prior written consent: 7.1 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any lien on or with respect to any of the assets of UDRC II or UDRC III or any holder of Additional Residual Certificates, including the UDRC II Residual Certificates, the UDRC III Residual Certificates or any Additional Residual Certificates, or any income or profits from any of the foregoing, except for Permitted Liens listed on Schedule E or liens of Collateral Agent for the benefit of Lenders. 7.2 Indebtedness. (a) Permit UDRC II or UDRC III or any holder of Additional Residual Certificates to incur, assume, or permit to exist, directly or indirectly any Indebtedness; or (b) permit any other Subsidiary of the Borrower to incur, assume, or permit to exist, directly or indirectly any Indebtedness other than Permitted Subsidiary Indebtedness without the prior written consent of the Required Lenders. 7.3 Restrictions on Fundamental Changes. Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets or permit UDCSFC, UDCC, UDRC II or UDRC III to do any of the foregoing). 7.4 Disposal of Collateral, Residual Certificates, Additional Residual Certificates. Except as expressly consented to by Required Lenders in writing, sell, lease, assign, transfer, or otherwise dispose of any of the Collateral or permit any of its Affiliates to do any of the foregoing or permit UDRC II to sell, lease, assign, transfer or otherwise dispose of any UDRC II Residual Certificates, or permit UDRC III to sell, lease, assign, transfer or otherwise dispose of any UDRC III Residual Certificates, or permit the Person or entity that is the holder of any Additional Residual Certificates at the time such Additional Residual Certificates are first included in the Borrowing Base to sell, lease, assign, transfer or otherwise dispose of any such Additional Residual Certificates. 7.5 Change Name. Without giving thirty (30) days prior written notification to Collateral Agent and each Lender, change Borrower's or any other Loan Party's name, FEIN, corporate structure (within the meaning of Section 9402(7) of the Code), or identity, or add any new fictitious name. 7.6 Amendments. Except as expressly consented to by Required Lenders in writing, directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any Securitization Document or any Verde Subordinated Debt Document; provided, however, the provisions of Warrant Agreement issued in connection with the Verde Subordinated Debt Documents may be amended without the consent of the Lenders provided that such amendment does not affect the terms of the Verde Subordination Agreement. 7.7 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.8 Distributions; Prepayments of Subordinated Debt. Make any distribution or declare or pay any dividends (in cash or other property, other than capital stock) on, or purchase, acquire, redeem, or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding, for cash or prepay, redeem or otherwise retire any amount in respect of any obligation under the Verde Subordinated Debt Documents except (i) regularly scheduled payments of interest to the extent expressly permitted by the Verde Subordination Agreement, (ii) Borrower may make payments and prepayments of principal outstanding under the Verde Subordinated Debt Documents to the extent of, and in the same amount as, reductions of the Required Cash Collateral Amount and corresponding releases of cash from the Collateral Account, and (iii) the obligations under the Verde Subordinated Debt Documents may be paid in full upon the Cash Collateral Release Date. 7.9 Standing Dividend Resolutions. Permit any Standing Dividend Resolution to be rescinded, amended, modified, revoked or altered in any manner. 7.10 Change in Location of Chief Executive Office. Relocate, or permit any other Loan Party to relocate, any Loan Party's chief executive office to a new location without providing 30 days prior written notification thereof to Collateral Agent and each Lender and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Collateral Agent's security interests and also provides to Collateral Agent a Collateral access agreement with respect to such new location. 7.11 No Prohibited Transactions Under ERISA. Directly or indirectly: (a) Engage, or permit any Subsidiary of Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) Permit to exist with respect to any Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Code), whether or not waived; (c) Fail, or permit any Subsidiary of Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Plan; (d) Terminate, or permit any Subsidiary of Borrower to terminate, any Plan where such event would result in any liability of Borrower or any of its Subsidiaries under Title IV of ERISA; (e) Fail, or permit any Subsidiary of Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) Fail, or permit any Subsidiary of Borrower to fail, to pay any required installment or any other payment required under Section 412 of the Code on or before the due date for such installment or other payment; (g) Amend, or permit any Subsidiary of Borrower to amend, a retirement plan resulting in an increase in current liability for the plan year such that either of Borrower or any Subsidiary of Borrower is required to provide security to such retirement plan under Section 401 (a)(29) of the Code; or (h) Withdraw, or permit any Subsidiary of Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA. 7.12 Changes in Nature of Business. Make, or permit any of its Subsidiaries to make, any material change in the nature of its business as carried on at the date hereof. 7.13 Transactions with Affiliates. Not engage, and not permit any of its Subsidiaries to engage, in any transaction with any Affiliate of Borrower or such Subsidiary except on terms that are fair and reasonable and no less favorable to the Borrower or such Subsidiary than it would obtain in a comparable arm's-length transaction with a Person not an Affiliate (it being understood that the foregoing shall not prohibit any transaction otherwise permitted hereunder among the Borrower and any of its wholly owned Subsidiaries). ARTICLE VIII. EVENTS OF DEFAULT/REMEDIES 8.1 Event of Default. Any of the following shall constitute an "Event of Default": (a) If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest, fees and charges due Collateral Agent or any Lender, reimbursement of Lender Costs, or other amounts constituting Obligations) or if Borrower fails to make when due any deposit to the Collateral Account required pursuant to Section 2.5(b); (b) If Borrower fails to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other future agreement between Borrower and any Lender; (c) If there is a Material Adverse Change with respect to Borrower, UDCSFC, UDRC II or UDRC III or any holder of Additional Residual Certificates (the occurrence or non-occurrence of which shall be determined by the Required Lenders in the exercise of reasonable discretion); (d) If Borrower is enjoined or restrained, by court order from continuing to conduct all or any material part of its business affairs, unless such order is stayed; (e) If notices of any Lien, levy, or assessment in excess of $250,000 other than of Permitted Liens are filed of record with respect to any of Borrower's properties or assets which have not been cured within ten (10) days after the Lien has been filed; (f) Any judgment or order for the payment of money in excess of $1,000,000 not covered by insurance as to which the insurer has acknowledged liability shall be rendered against any Loan Party or UDRC II or UDRC III and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order and are not stayed or dismissed within 45 days or (ii) there shall be any period of 45 consecutive days during which such judgment remains unpaid or unbonded and a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) If Borrower makes any payment on account of Indebtedness that is contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; (h) If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report (including, without limitation, any Collateral Servicing Report) made to Collateral Agent, any Lender by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn; (i) If any Standing Dividend Resolution is rescinded, amended, altered, revoked or modified in any manner; (j) If a default or event of default occurs under the Principal Warehouse Agreement or under the terms of any other Indebtedness aggregating in excess of $3,000,000 (with respect to any particular item of Indebtedness or in the aggregate and in each case after any applicable cure or grace period) or there is a termination event under the terms of any Bond Insurance Policy (or the policy of another bond insurer), regardless of whether such default or termination event is waived or amended; (k) If Borrower or any of its Subsidiaries makes a general assignment for the benefit of creditors, or an order, judgment or decree is entered adjudicating the Borrower or any of its Subsidiaries bankrupt or insolvent, or any order for relief with respect to the Borrower or any of its Subsidiaries is entered under the Federal Bankruptcy Code, or Borrower or any of its Subsidiaries petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of Borrower or any of its Subsidiaries or of any substantial part of the assets of the Borrower or any of its Subsidiaries, or commences any proceeding relating to the Borrower or any of its Subsidiaries under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, or any such petition or application is filed, or any such proceeding is commenced against the Borrower or any of its Subsidiaries; or (l) Any ERISA Event shall have occurred with respect to a Plan of any Loan Party or any of its ERISA Affiliates and the liability of the Loan Parties and their ERISA Affiliates related to such ERISA Event and any and all other ERISA Events which shall have occurred and then exist with respect to any Plans of the Loan Parties and their ERISA Affiliates exceeds $1,000,000; or (m) any provision of any Loan Document shall for any reason cease to be valid and binding on or enforceable against any Loan Party party to it, or any such Loan Party shall so state in writing; or (n) any Security Document shall for any reason (other than pursuant to the terms thereof) cease to create a valid and perfected first priority Lien on the Collateral purported to be covered thereby. 8.2 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, Required Lenders may (and may direct the Collateral Agent to, and upon such direction the Collateral Agent shall), at their sole and absolute discretion, without further notice, do any one or more of the following, all of which are authorized by Borrower: (a) declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (and upon the occurrence of any Event of Default described in Section 8.1(k) all Obligations shall automatically and without action by Collateral Agent or any Lender be and become immediately due and payable); (b) terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of each Lender, but without affecting any Lender's or the Collateral Agent's rights and security interests in the Collateral and without affecting the Obligations; (c) without notice to or demand upon Borrower, make such payments and do such acts as Required Lenders consider necessary or reasonable to protect the security interests of the Collateral Agent in the Collateral; (d) without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9-505 of the UCC) (or any successor provision), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by any Lender, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by any Lender; or (e) direct the Collateral Agent to collect, receive, appropriate and realize upon the Collateral, on such terms as Required Lenders, in their sole and absolute discretion, deem appropriate without any liability for any loss due to a decrease in the market value of the Collateral during the period held, without demand of performance or other demand, advertisement or notice of any kind, except as specified below, to or upon Borrower or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law). If any notification to Borrower of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed to Borrower, postage prepaid, at least ten (10) days before any such disposition at the address indicated by Borrower's signature. Any disposition of the Collateral or any part thereof shall be free of any equity or right of redemption in Borrower, which right of equity is, to the extent permitted by applicable law, hereby expressly waived or released by Borrower. Borrower further agrees that such sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. Neither Collateral Agent nor any Lender shall be obligated to make any sale or other disposition of the Collateral permitted under this Loan Agreement, unless the terms thereof shall be satisfactory to Required Lenders. The rights and remedies of Collateral Agent and each Lender under this Agreement, the Loan Documents, and all other agreements shall be cumulative. No exercise by Collateral Agent or any Lender of one right or remedy shall be deemed an election, and no waiver by Collateral Agent or any Lender of any Event of Default shall be deemed a continuing waiver. No delay by Collateral Agent or any Lender shall constitute a waiver, election, or acquiescence by it. ARTICLE IX. THE COLLATERAL AGENT 9.1 Authorization and Action. Each Lender hereby appoints and authorizes the Collateral Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Loan Documents as are delegated to the Collateral Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. Except as specifically provided for by the Loan Documents, the Collateral Agent shall not be required to exercise any discretion or take any action under any of the Loan Documents, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders and the Collateral Agent shall not be liable to the Borrower or any Lender for any action taken or omitted at the direction of the Required Lenders; provided, however, that the Collateral Agent shall not be required to take any action that exposes the Collateral Agent, in its sole judgment, to personal liability or that is contrary to this Agreement or applicable law. The Collateral Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. 9.2 Collateral Agent's Reliance, Etc.. Neither the Collateral Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Collateral Agent: (i) may treat the Lender that made any portion of the Loan as the holder of the debt resulting therefrom until the Collateral Agent receives notice of an assignment by such Lender; (ii) may consult with legal counsel (including counsel for any Loan Party), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made by any Person other than the Collateral Agent in or in connection with the Loan Documents; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of any Loan Party or to inspect the property (including the books and records) of any Loan Party; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document or any other instrument or document furnished pursuant hereto or thereto; and (vi) shall incur no liability under or in respect of any Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram, telecopy, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. 9.3 BNY Midwest Trust Company and Affiliates.. BNY Midwest Trust Company and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, any Loan Party, any of its Subsidiaries and any Person who may do business with or own securities of any Loan Party or any such Subsidiary, all as if BNY Midwest Trust Company were not the Collateral Agent and without any duty to account therefor to the Lender Parties. 9.4 Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Collateral Agent or any other Lender and based on the financial statements referred to herein and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Collateral Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. 9.5 Indemnification. Each Lender severally agrees to indemnify the Collateral Agent (to the extent not promptly reimbursed by the Borrower) from and against such Lender's ratable share of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Collateral Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Collateral Agent under the Loan Documents; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Collateral Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Collateral Agent promptly upon demand for its ratable share of any costs and expenses payable by the Borrower under Section 10.4, to the extent that the Collateral Agent is not promptly reimbursed for such costs and expenses by the Borrower. 9.6 Successor Collateral Agents. The Collateral Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Collateral Agent. If no successor Collateral Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Collateral Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Collateral Agent, then the retiring Collateral Agent may, on behalf of the Lender Parties, appoint a successor Collateral Agent, which shall be a commercial bank organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent and upon the execution and filing or recording of such financing statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Required Lenders may request, in order to continue the perfection of the liens granted or purported to be granted by the Security Documents, such successor Collateral Agent shall succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations under the Loan Documents. After any retiring Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Article IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Collateral Agent under this Agreement. 9.7 Monthly Verification Duties of Collateral Agent. Upon receipt of each Collateral Servicing Report and in no event later than the Calculation Date in respect thereof, the Collateral Agent shall verify the following items in such Collateral Servicing Report against the monthly servicing reports with respect to each Securitization: (a) the outstanding principal balance of auto loans in the pool of collateral securing the related securitization; (b) the outstanding principal balance of all certificates and other interests or rights to payment in respect of such securitization senior in priority to such Residual Certificate; (c) the amount of the cash balance in the spread account relating to such Residual Certificate; and (d) the Residual Certificate Cash Flows. The Collateral Agent shall also verify the following rates and amounts on the Collateral Servicing Report: (y) LIBOR; and (z) the pro rata payments of interest and Monthly Amortization Amount made to each Lender. ARTICLE X. MISCELLANEOUS 10.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by Required Lenders and Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that (a) no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following at any time: (i) change the percentage of the aggregate unpaid principal amount of the Loan that shall be required for the Lenders or any of them to take any action hereunder, (ii) permit the creation, incurrence, assumption or existence of any Lien on any item of Collateral to secure any obligations other than Obligations owing to the Lenders and Collateral Agent under the Loan Documents, (iii) amend this Section 10.1, (iv) increase the outstanding principal amount of the Loan, (v) reduce the principal of, or interest on, the Loan or any fees or other amounts payable hereunder or (vi) postpone any date fixed for any payment of principal of, or interest on, the Loan or any fees or other amounts payable hereunder; and provided further that no amendment, waiver or consent shall, unless in writing and signed by the Collateral Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Collateral Agent under this Agreement or any other Loan Document. 10.2 Notices. (a) All notices, requests and other communications provided for hereunder shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided, that, any matter transmitted by facsimile (i) shall be immediately confirmed by a telephone call to the recipient, and (ii) shall be followed promptly by a hard copy original thereof by over-night courier to the address set forth below; or to such other address as shall be designated by such party in a written notice to the other party, and as directed to each other party, at such other address as shall be designated by Lender or Borrower in a written notice to Borrower and Lender. If to Borrower: Ugly Duckling Corporation 2525 East Camelback Road Suite 500 Phoenix, Arizona 85016 Attn: Jon Ehlinger Facsimile: (602) 852-6686 With a copy to: Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attn: David A. Sprentall Facsimile: (602) 382-6070 If to any Lender: As set forth on the Administrative Form of such Lender If to Collateral Agent: BNY Midwest Trust Company 2 North LaSalle Street Suite 1020 Chicago, Illinois 60602 Attn: Megan Carmody Telephone: (312) 827-8572 Facsimile: (312) 827-8563 (b) All such notices, requests and communications shall, when transmitted by overnight delivery or faxed, be effective when delivered for overnight (next day) delivery, transmitted by facsimile machine, respectively, or if delivered, upon delivery, except that notices pursuant to Article II shall not be effective until actually received by each Lender. (c) Borrower acknowledges and agrees that any agreement of Collateral Agent or any Lender to receive certain notices by telephone and facsimile is solely for the convenience and at the request of Borrower. Each of Collateral Agent and each Lender shall be entitled to rely on the authority of any Person purporting to be a Person authorized by Borrower to give such notice and neither Collateral Agent nor any Lender shall have any liability to Borrower or to other Person on account of any action taken or not taken by Collateral Agent or any Lender in reliance upon such telephonic or facsimile notice. The obligations of Borrower hereunder shall not be affected in any way or to any extent by any failure by Collateral Agent or any Lender to receive written confirmation of any telephonic or facsimile notice or the receipt by Collateral Agent or any Lender of a confirmation which is at variance with the terms understood by Collateral Agent or such Lender to be contained in the telephonic or facsimile notice. 10.3 No Waiver: Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Collateral Agent or Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.4 Costs and Expenses. Borrower shall, whether or not the transactions contemplated hereby shall be consummated: (a) pay or reimburse Collateral Agent and each Lender and each portfolio advisor within ten (10) Business Days after demand for all Lender Costs incurred by Collateral Agent or such Lender or such portfolio advisor in connection with the development, preparation, delivery, administration and execution of (and any amendment, supplement, waiver or modification to (in each case whether or not consummated)), this Agreement, any other Loan Document and any other documents prepared in connection herewith, or therewith, and the consummation of the transactions contemplated hereby and thereby, including the reasonable Attorney Costs incurred by Collateral Agent or any Lender or any portfolio advisor with respect thereto; (b) pay or reimburse Collateral Agent and each Lender and each portfolio advisor within ten (10) Business Days after demand for all Lender Costs incurred by Collateral Agent or such Lender or such portfolio advisor in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement, any other Loan Document, and any such other documents, including reasonable Attorney Costs incurred by Collateral Agent or any Lender or any portfolio advisor; and (c) pay or reimburse Collateral Agent and each Lender and each portfolio advisor within ten (10) Business Days after demand for all reasonable appraisal (including the allocated cost of internal appraisal services), audit, due diligence, monitoring review, syndication, environmental inspection and review (including the allocated cost of such internal services and the allocated costs of services of SAI or its Affiliates and Trustee), search and filing costs, fees and expenses, rating agency costs, fees and expenses, transportation costs and other out-of-pocket expenses incurred or sustained by Collateral Agent, any Lender or any portfolio advisor, SAI or any of their respective affiliates in connection with the Loan, the Loan Documents, any of the Obligations and the matters referred to under (a) and (b) of this Section 10.4. (d) In addition to the foregoing, if any payment of principal on the Loan is made by the Borrower to or for the account of a Lender other than on the last day of the then current Interest Accrual Period, as a result of a payment, acceleration or for any other reason, Borrower shall, upon demand by such Lender, pay to such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain the Loan or any portion thereof. 10.5 Indemnity. Borrower shall pay, indemnify, and hold Collateral Agent, each Lender, SAI, Trustee and each of their respective Affiliates and Subsidiaries, and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any environmental liabilities and obligations of Borrower, any of its Subsidiaries or any of their properties and from and against any and all claims, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses or disbursements (including Attorney Costs) of any kind or nature whatsoever with respect to or in connection with the execution, delivery, enforcement, performance and administration of this Agreement and any other Loan Documents, or the transactions contemplated hereby and thereby, and with respect to any investigation, litigation or proceeding related to this Agreement or the use of the proceeds thereof or any Residual Certificate, Securitization Document or Securitization Trust, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, however, Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnified Person or the breach by such Indemnified Person of its obligations hereunder. The agreements in this Section 10.5 shall survive payment of all other Obligations and the termination of this Agreement. 10.6 Marshaling: Payments Set Aside. Neither Collateral Agent nor any Lender shall be under any obligation to marshal any assets in favor of Borrower or any other Person or against or in payment of any or all of the Obligations. To the extent that Borrower makes a payment or payments to Collateral Agent or any Lender, or to the extent Collateral Agent or any Lender enforces its Liens or exercises its rights of set-off, and such payment or payments or the proceeds of such enforcement or set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party in connection with any bankruptcy, or otherwise, then to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred. 10.7 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or delegate obligations under this Agreement or any of the Loan Documents without the prior written consent of each Lender. 10.8 Set-off. In addition to any rights and remedies of Lenders provided by law, if an Event of Default exists, each Lender is authorized at any time and from time to time, without prior notice to Borrower, any such notice being waived by Borrower to the fullest extent permitted by law, to set off and apply any and all monies or deposits at any time held by, and other indebtedness at any time owing by, such Lender to or for the credit or the account of Borrower against any and all Obligations owing to such Lender, now or hereafter existing, irrespective of whether or not such Lender shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify Borrower after any such set-off and application made by such Lender; provided, however, that, the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 10.8 are in addition to the other rights and remedies (including other rights of set-off) which such Lender may have. 10.9 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.10 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.11 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of Borrower, Collateral Agent and each Lender (and its portfolio advisor), 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. Neither Collateral Agent nor any Lender shall have any obligation to any Person not a party to this Agreement or other Loan Documents. 10.12 Time. Time is of the essence as to each term or provision of this Agreement and each of the other Loan Documents. 10.13 Governing Law and Jurisdiction. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, IT BEING THE INTENT OF THE PARTIES THAT THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE RIGHTS AND DUTIES OF THE PARTIES HERETO WITHOUT REGARD TO CHOICE OR CONFLICTS OF LAW PRINCIPLES; EXCEPT THAT THE PROVISIONS HEREIN THAT PERTAIN TO THE PERFECTION OR THE EFFECT OF PERFECTION OF SECURITY INTERESTS IN COLLATERAL SHALL BE GOVERNED BY THE LAWS OF SUCH STATE AS ARE SPECIFIED IN SECTION 9103 OF THE UCC. THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF ANY NEW YORK STATE COURT OR FEDERAL COURT OF THE UNITED STATES OF AMERICA SITTING IN NEW YORK CITY, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS TO WHICH IT IS OR IS TO BE A PARTY, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH NEW YORK STATE COURT OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. THE BORROWER AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS TO WHICH IT IS OR IS TO BE A PARTY IN THE COURTS OF ANY JURISDICTION. THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS TO WHICH IT IS OR IS TO BE A PARTY IN ANY NEW YORK STATE OR FEDERAL COURT. THE BORROWER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. BORROWER AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 10.14 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire Agreement and understanding among Borrower, Collateral Agent and 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 Borrower (or any indemnification for) any Lender Costs incurred (or to be incurred) by or on behalf of Collateral Agent or any Lender. 10.15 Interpretation. This Agreement is the result of negotiations between and has been reviewed by counsel to Collateral Agent, Lenders, Borrower and other parties, and is the product of all parties hereto. Accordingly, this Agreement and the other Loan Documents shall not be construed against Collateral Agent or any Lender merely because of Lenders' involvement in the preparation of such documents and agreements. 10.16 Assignment; Register. Each Lender may assign, sell participations in or pledge its rights hereunder and under the Loan Documents without the consent of Borrower; provided, however, that no such assignment shall be effective until the parties thereto shall have executed and delivered to the Collateral Agent for acceptance and recording in the Register (as defined below) an Assignment and Acceptance. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in such Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). Borrower may not assign or delegate any of its rights, interest or obligations hereunder or under any of the Loan Documents. The Collateral Agent, on behalf of the Borrower, shall maintain at the Collateral Agent's address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the principal amount of the Loan owing to each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Collateral Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee, the Collateral Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of written request therefor, the Borrower, at its own expense, shall execute and deliver to the Collateral Agent in exchange for any Note surrendered in connection with an assignment hereunder, a new Note to the order of the assignee in an amount equal to the principal amount of the Loan assumed by it and, if the assigning Lender has retained a portion of the Loan hereunder, a new Note to the order of the assigning Lender in an amount equal to such portion retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note, shall be dated the effective date of the applicable Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit D. 10.17 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or the transfer by Borrower to Collateral Agent or any Lender of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Collateral Agent or any Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Lender is required or elects to repay or restore, and as to all reasonable costs, expenses, and Attorney Costs of Lender related thereto, the liability of Borrower automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 10.18 Survival. Notwithstanding any provision of this agreement or any other Loan Document to the contrary, the provisions of Sections 2.11, 2.12, 2.13, 2.14, 9.4, 9.5, 10.4 and 10.5 shall survive payment of all other Obligations and the termination of this Agreement. 10.19 Confidentiality. Each Lender and Collateral Agent agrees to hold any confidential information that it may receive from Borrower pursuant to this Agreement in confidence, except for disclosure: (a) to other Lenders, rating agencies, trustees, reference lenders, portfolio advisors, any direct or indirect contractual counterparty in swap agreements or such contractual counterparty's professional advisor, and any other parties relevant to any investment vehicle managed by SAI Investment Adviser, Inc.; (b) to legal counsel and accountants for Borrower, Collateral Agent or any Lender or prospective Lender; (c) to other professional advisors to Borrower, Collateral Agent or any Lender or prospective Lender; (d) to regulatory officials; (e) as required by law or legal process; and (f) to another proposed Lender in connection with a proposed assignment permitted hereunder provided that the recipient has accepted such information subject to a confidentiality agreement substantially similar to this Section 10.19. For purposes of the foregoing "confidential information" shall mean any information respecting Borrower, its Subsidiaries or Affiliates delivered to Lenders and marked confidential, other than (i) information previously filed with any governmental agency and available to the public, (ii) information previously published in any public medium from a source other than directly or indirectly, that Lender, (iii) information previously disclosed by Borrower to any Person not associated with Borrower without a confidentiality agreement or obligation substantially similar to this Section 10.19, and (iv) any such information that is or becomes generally available to the public other than as a result of a breach by Collateral Agent or any Lender of its obligations hereunder or that is or becomes available to Collateral Agent or such Lender from a source other than Borrower. 10.20 Actions by Portfolio Advisor. Any rights of a Lender hereunder or under any other Loan Document may be exercised by such Lender's portfolio advisor or collateral manager upon delivery to the Collateral Agent of evidence in writing, reasonably satisfactory to the Collateral Agent, setting forth such authority (which may be in the form of a written confirmation of such authority from the applicable Lender). * * * * * [Signature Page to Loan Agreement] IN WITNESS WHEREOF, the parties hereby have caused this Agreement to be executed as of the date first written above. UGLY DUCKLING CORPORATION, a Delaware corporation By: Name: Title: Lenders: GALAXY CLO 1999-1, LTD. By: SAI Investment Advisers, Inc. its Collateral Manager By: Name: Title: Portion of Initial Principal Amount :$17,000,000 Ratable Share: 48.571429% Address for notices in respect of payment: ------------------------------ ------------------------------ Los Angeles, CA 90067-6022 Attn: ________________________ Facsimile: ___________________ Address for all other notices: ------------------------------ ------------------------------ Los Angeles, CA 90067-6022 Attn: ________________________ Facsimile: ___________________ SUNAMERICA LIFE INSURANCE COMPANY By: Name: Title: Portion of Initial Principal Amount :$6,000,000 Ratable Share: 17.142857% Address for notices in respect of payment: SunAmerica Investments 1 SunAmerica Center Los Angeles, CA 90067-6022 Attn: Investment Accounting, 36th Floor Facsimile: (310) 772-6596 Address for all other notices: SunAmerica Corporate Finance 1 SunAmerica Center Los Angeles, CA 90067-6022 Attn: John Lapham Facsimile: (310) 772-6078 KZH SOLEIL-2 LLC By: Name: Title: Portion of Initial Principal Amount:$12,000,000 Ratable Share: 34.285714% Address for Notice: c/o The Chase Manhattan Bank 140 East 45th Street, 11th Floor New York, NY 10017 Facsimile: (212) 622-0123 Attn: Virginia Conway Collateral Agent: BNY MIDWEST TRUST COMPANY, as Collateral Agent By: Name: Title: SCHEDULE H BNY MIDWEST TRUST COMPANY SCHEDULE OF FEES AS COLLATERAL AGENT FOR UGLY DUCKLING CORPORATION $38 MILLION SENIOR SECURED LOAN FACILITY
1. Acceptance Fees.........................................................................$[1,500] To include: - examination and administrative review of the Senior Secured Loan Agreement and all related documents - establishment of all appropriate accounts - participation in pre-closing and closing 2. Annual Administration Fee...............................................................$[6,000 per annum] To include: - administration of covenants of the Senior Secured Loan Agreement and all related documents - compliance monitoring - collection and application (investment) of collected funds - payment of principal and interest to Lenders - maintenance of certificateholder records (maximum of 5 Lenders) - transfer and assignment of Lender's beneficial interest (maximum 2 transfers per life of facility) - safekeeping of pledged stock certificates Additional Lender - $[1,000 per annum per Lender] Additional Transfer - $[3,500 per transfer] 3. Miscellaneous Fees: I. Wires...............................................................................$[20.00] II. Investment Charges (each)...........................................................$[35.00]* *If balances are invested in selected mutual funds, the above investment fees will be waived.
BNY MIDWEST TRUST COMPANY SCHEDULE OF FEES AS COLLATERAL AGENT FOR UGLY DUCKLING CORPORATION $38 MILLION SENIOR SECURED LOAN FACILITY (continued) NOTE: Additionally, the cost of extraordinary items that can be directly allocated, such as legal fees and expenses (if any), travel expenses, etc., will be billed separately. The foregoing schedule has been designed to apply to collateral agent duties requiring the usual amount of responsibility, time and attention. All fees are subject to our review and acceptance of the governing documentation, and to reasonable adjustment as changes in laws, procedures or costs of doing business demand. Fees for services not specifically covered in this schedule will be assessed in an amount commensurate with the services rendered. The acceptance fee will be billed upon acceptance. The annual administration fee will be billed annually in advance. All other activity-based fees will be billed annually, as incurred. December [___], 2000 EX-10.26(A) 11 0011.txt CASH COLLATERAL AGREEMENT CASH COLLATERAL ACCOUNT AGREEMENT This CASH COLLATERAL ACCOUNT AGREEMENT (this "Agreement") is dated as of January 11, 2001, and made by and among UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC") and UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation ("UDCSFC" and, together with UDC, each a "Grantor" and, collectively, the "Grantors"), and BNY MIDWEST TRUST COMPANY, as Collateral Agent for itself and the Lenders party to the Loan Agreement referred to below (in such capacity, "Agent" and referred to herein as "Secured Party"). RECITALS WHEREAS, UDC, certain Lenders and Secured Party are parties to that certain Senior Secured Loan Agreement dated as of January 11, 2001 (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement"; capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Loan Agreement); and WHEREAS, in connection with the Loan Agreement, UDCSFC has executed the Stock Pledge Agreement; and WHEREAS, Secured Party has established a cash collateral account in which all Collections in respect of all Residual Certificates are to be deposited; and WHEREAS, it is a condition precedent to the effectiveness of the Loan Agreement that the Grantors shall have executed and delivered to Secured Party and Lenders this Agreement. NOW, THEREFORE, in consideration of the foregoing and the agreements, provisions and covenants contained herein, the Grantors and Secured Party hereby agree as follows: AGREEMENT SECTION 1. Definitions. The following terms used in this Agreement shall have the following meanings: "Cash Equivalents" means any of the following, so long as Secured Party has a perfected security interest therein: (i) securities issued, guarantied or insured by the United States or any of its agencies and having maturities of not more than thirty days; (ii) certificates of deposit or bankers' acceptances having maturities of not more than thirty days issued by (a) Secured Party, (b) any Lender or (c) a U.S. federal or state chartered commercial bank of recognized standing whose capital and unimpaired surplus is in excess of $200,000,000 and whose short-term commercial paper rating, or that of its parent holding company, is at least A-1 or the equivalent by Standard & Poor's Corporation ("S&P") and at least P-1 or the equivalent by Moody's Investors Services, Inc. ("Moody's"); (iii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within thirty days from the date of acquisition thereof and, at the time of acquisition, having the highest rating from either S&P or Moody's; (iv) certificates of deposit maturing within thirty days of the date of acquisition thereof in an amount less than or equal to $100,000 in the aggregate issued by any bank insured by the Federal Deposit Insurance Corporation; (v) eurodollar time deposits having a maturity of not more than thirty days purchased directly from any Lender (whether such deposit is with such Lender (or its Affiliates) or any other Lender (or its Affiliates)); (vi) commercial paper rated at least A-1 by S&P or P-1 by Moody's and, in either case, having a tenor of not more than thirty days; and (vii) money market funds invested in one or more of the foregoing. "Collateral" means (a) the Collateral Account and all funds and monies and investment property from time to time on deposit in or credited to the Collateral Account, (b) all Permitted Investments, including all investment property, certificates, instruments and securities from time to time representing or evidencing such Permitted Investments and any account or accounts in which such Permitted Investments may be held by, or in the name of, Secured Party for or on behalf of Grantors, (c) all interest, dividends, cash, instruments, investment property and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of the Collateral, and (d) to the extent not covered by clauses (a) through (c) above, all proceeds of any or all of the foregoing. "Collateral Account" means the cash collateral account established and maintained pursuant to Section 2 hereof. "Permitted Investments" means those investments made by Secured Party in Cash Equivalents for the account of Grantors pursuant to Section 5. SECTION 2. Collateral Account (i) Secured Party shall establish and maintain at BNY Midwest Trust Company at Chicago, Illinois, in the name of, and under the sole dominion and control of, Secured Party, a special cash collateral account (account number 197869 designated as "Ugly Duckling Corporation Collateral Account.") (ii) Upon Secured Party's receipt of any Collections pursuant to any Standing Dividend Resolution, Section 2.2 of the Loan Agreement or otherwise, Secured Party shall promptly deposit such Collections into the Collateral Account. (iii) Anything contained in this Agreement to the contrary notwithstanding, any interest received in respect of any Permitted Investment of any amounts deposited in the Collateral Account shall be deemed Collateral, subject to release to Grantors only pursuant to Section 3 hereof. (iv) In addition to the deposits of Collections in the Collateral Account pursuant to Section 2(ii), on or about the date hereof the Grantors have deposited to the Cash Collateral Account additional cash collateral in an amount equal to the Required Cash Collateral Amount. Such additional cash collateral shall be held separate from Collections and shall be released from time to time as provided in Section 3(ii) hereof. Such additional cash collateral may be invested in Cash Equivalents in accordance with the provisions of this Agreement and shall otherwise constitute security for the Obligations pursuant to this Agreement. [Interest earned on such amount will be distributed to Grantors from time to time as requested by Grantors.] SECTION 3. Release of Collateral; Payment of Loans. (i) Secured Party shall, on each Payment Date, repay the Outstanding Principal Amount in an amount equal to the Monthly Amortization Amount for such Payment Date, together with all accrued and unpaid interest and all other amounts then due and payable under the Loan Documents from funds (and only from funds) on deposit in the Collateral Account. (ii) Any provision of the Loan Agreement to the contrary notwithstanding, any amounts held by Secured Party in the Collateral Account and not otherwise required to be applied to the Obligations shall, at the written direction of UDC, be applied to repay Obligations under the Loan Agreement (to be applied as set forth in Section 2.6 thereof) or, if the Borrowing Base plus such amount on deposit in the Collateral Account exceeds the sum of (1) the Outstanding Principal Amount plus (2) the Required Cash Collateral Amount at such time and no Default has occurred and is continuing, such amounts held in the Collateral Account shall, upon written request by Borrower to Collateral Agent, be released to Borrower up to the amount of such excess; provided, however, that (a) any release to Borrower of amounts on deposit in the Collateral Account shall only be made on a Payment Date and only after giving effect to the payment of all amounts due under the Loan Documents on such Payment Date and (b) no release shall result in the amount on deposit in the Collateral Account being less than the Required Cash Collateral Amount at such time. SECTION 4. Pledge; Security for Obligations. Each Grantor hereby assigns to Secured Party, for the benefit of Secured Party and the ratable benefit of the Lenders, and hereby grants to Secured Party for the benefit of Secured Party and the ratable benefit of the Lenders a continuing security interest in, all of such Grantor's right, title and interest in the Collateral to secure the payment and performance of all the Secured Obligations (as defined below). This Agreement secures, and the Collateral is collateral security for, the prompt payment and performance in full when due, whether at stated maturity, by declaration, acceleration or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a), or any successor provision thereto, whether or not an allowed claim), of all obligations or liabilities of every nature now or hereafter existing under this Agreement, the Loan Agreement, the Notes or any other Loan Document and all amendments, extensions or renewals thereof, whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy with respect to any Grantor, would accrue on such obligations, whether or not an allowed claim), indemnities, fees, expenses or otherwise, whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time deceased or extinguished and later increased, created or incurred, and all obligations or liabilities of every nature of such Grantor now or hereafter existing under this Agreement, the Loan Agreement, the Notes or any other Loan Document (all such obligations being the "Secured Obligations"). SECTION 5. Investment of Amounts in Collateral Account. Cash held by Secured Party in the Collateral Account shall not be invested or reinvested except as provided in this Section 5. Secured Party may invest funds on deposit in the Collateral Account in Cash Equivalents and, provided no Event of Default has occurred and is continuing, shall invest in such Cash Equivalents as may be specified from time to time in a written request from UDC. SECTION 6. Application of Collateral. Notwithstanding any other provision of this Agreement, the Loan Agreement or any other Loan Document, each Grantor agrees that if any Secured Obligation becomes due and remains unpaid, Secured Party may, at any time and from time to time, without notice to or demand of Grantors, set off and apply any and all of the Collateral then or thereafter on deposit in the Collateral Account against, and/or continue to hold such balances, monies and proceeds as security for, the payment of any and all Secured Obligations as the same may become due, all as the Lenders may elect and whether or not any default shall have occurred hereunder. Each Grantor hereby agrees that the pledge and security interest provided above shall be a continuing security for the payment of the Secured Obligations until the termination of this Agreement. SECTION 7. Representations and Warranties. Each Grantor represents and warrants to Secured Party that the following statements are true, correct and complete: (i) Each Grantor is a corporation duly organized, validly, existing and in good standing under the laws of its state of incorporation and is duly qualified and in good standing in each jurisdiction where the nature of its business or properties requires such qualification. (ii) The execution, delivery and performance by each Grantor of this Agreement are within the power of such Grantor and have been duly authorized by all necessary actions on the part of such Grantor or its shareholders. (iii) This Agreement has been duly executed and delivered by each Grantor and constitutes a legally valid and binding obligation of such Grantor, enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights generally. (iv) The execution, delivery and performance of this Agreement do not (a) violate any provisions of law or any order of any court or other agency of government, (b) contravene any provision of any Grantor's Articles or Certificate of Incorporation, Bylaws or any material contract or agreement to which any Grantor is a party or by which any Grantor or any Grantor's assets are bound, or (c) result in the creation or imposition of any lien, charge or encumbrance of any nature upon any property, asset or revenue of any Grantor except pursuant to this Agreement. (v) Each Grantor is the legal and beneficial owner of the Collateral free and clear of any Lien except for the lien and security interest created by this Agreement and/or the Loan Documents. (vi) The pledge and assignment of the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Obligations. (vii) The chief place of business and chief executive office of each Grantor and the office where each Grantor keeps its records concerning the Collateral is located at 2525 East Camelback Road, Suite 500, Phoenix, Arizona 85016. SECTION 8. Further Assurances. Grantors agree that at any time and from time to time, at the expense of Grantors, they will promptly execute and deliver to Secured Party any further instruments and documents, and take any further actions, that may be necessary or that Secured Party or Required Lenders may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder and with respect to any Collateral, including without limitation, (i) the execution and filing of such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary, or as Secured Party or Required Lenders may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's or Required Lenders' request, appear and defend any action or proceeding that may affect Grantors' title to or Secured Party's security interest in all or any part of the Collateral. SECTION 9. Acknowledgment of Risks. Each Grantor specifically understands, acknowledges and agrees that this Agreement and the agreements, obligations and liabilities of such Grantor hereunder shall not be discharged or otherwise affected by any bankruptcy, reorganization or similar proceeding commenced by or against Grantors or any subsidiary of the Grantors. Each Grantor understands and acknowledges that by virtue of this Agreement, it has specifically assumed any and all risks of any such proceeding with respect to any other Grantor or any subsidiary of any Grantor. SECTION 10. Transfers and Other Liens. Each Grantor agrees that it will not sell or otherwise dispose of any of the Collateral or create or permit to exist any Lien upon or with respect to any of the Collateral, except for the lien and security interest created by this Agreement or any other Loan Document. SECTION 11. Additional Agreements. Grantors agree not to take or consent or agree to any action which would impair or otherwise adversely impact Secured Party's interest or ability to exercise remedies with respect to the Collateral (as defined in the Loan Agreement), except as otherwise permitted under the Loan Agreement or any other Loan Document. SECTION 12. Secured Party Appointed Attorney-in-Fact. Each Grantor hereby appoints Secured Party as each Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time, at any time in Secured Party's reasonable discretion to take any action and to execute any instrument which Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Agreement. SECTION 13. Secured Party May Perform. If any Grantor fails to perform any agreement contained herein, after notice to each Grantor, Secured Party may itself perform, or cause performance of, such agreement and the expenses of Secured Party, incurred in connection therewith shall be payable by Grantors under Section 16 hereof. SECTION 14. Standard of Care. The powers conferred on Secured Party hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Except as provided hereunder and except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for monies actually received by it hereunder, Secured Party shall have no duty as to any Collateral, it being understood that Secured Party shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Collateral) to preserve rights against any parties with respect to any Collateral, (c) initiating any action to protect the Collateral against the possibility of a decline in market value, or (d) any loss resulting from Permitted Investments made pursuant to Section 5. The Secured Party shall not be required to exercise any discretion or take any action under this Agreement, but shall be required to act or refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders, and the Secured Party shall not be liable to the Grantors or any Lender with respect to any action taken or omitted at the direction of the Required Lenders, provided that the Secured Party shall not be required to taken any action that exposes the Secured Party in its sole judgment to personal liability or that is contrary to this Agreement or applicable law. SECTION 15. Remedies upon Default. If any default shall have occurred and be continuing hereunder Secured Party may exercise in respect of the Collateral, in addition to any and all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a Secured Party on default under the Uniform Commercial Code (the "Code") as in effect in the State of Illinois at that time. SECTION 16. Expenses. Grantors agree to promptly pay to Secured Party all the actual costs and expenses which Secured Party may incur in connection with (a) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, (b) the exercise or enforcement of any of the rights of Secured Party hereunder, or (c) the failure by any Grantor to perform or observe any of the provisions hereof. SECTION 17. No Waiver. No failure on the part of Secured Party to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by Secured Party of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are to the fullest extent permitted by law cumulative and are not exclusive of any remedies provided by law. SECTION 18. Amendments, Etc. No amendment, modification, termination or waiver of any provision of this Agreement, or consent to any departure by any Grantor therefrom, shall in any event be effective without the written concurrence of Secured Party. SECTION 19. Notices. Except as otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by mail and shall be deemed to have been given when delivered in person, upon receipt of telecopy or telex or four (4) Business Days after deposit in the mail, registered or certified, with postage prepaid and properly addressed. For the purposes hereof, the address of each of the parties hereto (until notice of a change thereof is delivered in the manner provided herein) shall be as specified in the Loan Agreement. SECTION 20. Continuing Security Interest; Termination. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until indefeasible payment in full of all Obligations; (b) be binding upon each Grantor, its permitted successors and assigns; and (c) inure to the benefit of Secured Party and its respective successors, transferees and assigns. Upon indefeasible payment in full of the Obligations, Grantors shall be entitled to the return, upon its request and at its expense, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 21. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF ILLINOIS. Unless otherwise defined herein or in the Loan Agreement, terms defined in Article 9 of the Uniform Commercial Code in the State of Illinois are used herein as therein defined. IN WITNESS WHEREOF, Grantors and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. GRANTORS: UGLY DUCKLING CORPORATION, a Delaware corporation By: ___________________________________________________________________________ Title: ________________________________________________________________________ UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation By: ___________________________________________________________________________ Title: ________________________________________________________________________ SECURED PARTY: BNY MIDWEST TRUST COMPANY, as Collateral Agent By: ___________________________________________________________________________ Title: ________________________________________________________________________ EX-10.26(B) 12 0012.txt LOAN AGREEMENT-VERDE $7 MILLION LOAN AGREEMENT Dated as of January 11, 2001 between UGLY DUCKLING CORPORATION and VERDE INVESTMENTS, INC. $7,000,000 Senior Subordinated Loan TABLE OF CONTENTS ARTICLE I DEFINITIONS.........................................................1 1.1 Defined Terms.............................................................1 1.2 Other Interpretive Provisions.............................................4 ARTICLE II THE LOAN...........................................................6 2.1 Amount and Notes..........................................................6 2.2 Interest..................................................................6 2.3 Optional Prepayments......................................................7 2.4 Computation of Fees and Interest..........................................7 2.5 Payments by the Company...................................................7 2.6 Priority of Payments; Subordination.......................................7 ARTICLE III ADDITIONAL AGREEMENTS.............................................7 3.1 Junior Lien...............................................................7 3.2 Release of Real Estate Purchase Options...................................8 3.3 Option to Purchase Property...............................................8 ARTICLE IV CONDITIONS PRECEDENT...............................................8 4.1 Conditions of Loans to the Company........................................8 ARTICLE V REPRESENTATIONS AND WARRANTIES......................................9 5.1 Organization..............................................................9 5.2 Financial Statements......................................................9 5.3 Actions Pending...........................................................9 5.4 Outstanding Obligations..................................................10 5.5 Taxes....................................................................10 5.6 Conflicting Agreements and Other Matters.................................10 5.7 ERISA....................................................................10 5.8 Governmental Consent.....................................................10 5.9 Disclosure...............................................................11 5.10 Possession of Franchises, Licenses, etc.................................11 ARTICLE VI AFFIRMATIVE COVENANTS.............................................11 6.1 Financial Statements.....................................................11 6.2 Certificates; Other Information..........................................11 6.3 Default Disclosure.......................................................12 ARTICLE VII NEGATIVE COVENANTS...............................................12 7.1 Debt to Tangible Equity Ratio............................................12 7.2 Terms of Subordinated Debt...............................................12 ARTICLE VIII EVENTS OF DEFAULT...............................................12 8.1 Event of Default.........................................................12 8.2 Other Remedies...........................................................14 ARTICLE IX MISCELLANEOUS.....................................................14 9.1 Amendments and Waivers...................................................14 9.2 Notices..................................................................14 9.3 No Waiver: Cumulative Remedies...........................................14 9.4 Costs and Expenses.......................................................14 9.5 Successors and Assigns...................................................15 9.6 Assignment, Participations, etc..........................................15 9.7 Counterparts.............................................................15 9.8 Severability.............................................................16 9.9 No Third Parties Benefited...............................................16 9.10 Time....................................................................16 9.11 Governing Law...........................................................16 9.12 Waiver of Jury Trial....................................................16 9.13 Entire Agreement........................................................16 9.14 Interpretation..........................................................17 EXHIBITS Exhibit A Form of Promissory Note Exhibit B Form of Warrant Agreement SCHEDULES Schedule 3.2 Leases Schedule 3.3 Company Properties LOAN AGREEMENT This LOAN AGREEMENT is dated as of January 11, 2001, between UGLY DUCKLING CORPORATION, a Delaware corporation (the "Company"); and Verde Investments, Inc., an Arizona corporation ("Lender"). WHEREAS, Lender has agreed to make a loan to the Company in the amount of its 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 I DEFINITIONS 1.1 Defined Terms. In addition to the terms defined elsewhere in this Agreement, the following terms have the following meanings: "Advance" means an advance by Lender to Company hereunder. "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. "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 9.6(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 or will be required to be 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 4.1 are satisfied or waived by all Lenders, which is expected to be on or prior to January 11, 2001. "Code" means the Internal Revenue Code of 1986 and any regulations promulgated thereunder. "Commitment" means the amount of Seven Million Dollars ($7,000,000). "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, 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 8.1. "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. "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. "Interest Accrual Period" shall mean the three-month period from and including a Payment Date to the close of business on the day preceding the next Payment Date, except that the first Interest Accrual Period shall commence on the Closing Date and end at the close of business on the day preceding the Payment Date. "Lender" has the meaning specified in the introductory clause hereto. "LIBOR" means the rate per annum equal to the rate appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two LIBOR Business Days prior to the beginning of such Interest Accrual Period, for the three-month term corresponding to such Interest Accrual Period, or if such rate shall not be so quoted then the applicable rate appearing on Bloomberg on the day two LIBOR Business Days prior to the beginning of such Interest Accrual Period, or if neither such rate shall be so quoted, the "London Interbank Offered Rates (LIBOR)" (three month) published in the "Money Rates" section of the Wall Street Journal two LIBOR Business Days prior to the beginning of such Interest Accrual Period. "LIBOR Business Day" means any day which is a Business Day and which is also a day on which dealings in U.S. Dollars are carried on in the London interbank market. "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 Lender in the amount of Lender's Commitment pursuant to Article II. "Loan Documents" means this Agreement, the Note, the Warrant Agreement, the Warrant, and all other documents delivered to the Lender 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 taken as a whole, (b) the ability of the Company 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 the earlier to occur of (a) December 31, 2003, or (b) the date the Loan is repaid in full. "Note" shall mean a promissory note, dated as of the Closing Date, substantially in the form of Exhibit A annexed hereto, issued by the Company to the order of the Lender evidencing the obligation of the Company to repay the Loan. "Obligations" mean all Loans and other Debt, advances, debts, liabilities, obligations, covenants and duties owing by the Company 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. "Operating Lease" means, as applied to any Person, any lease of property which is not a Capital Lease. "Ordinary Course of Business" means, in respect of any transaction involving the Company, the ordinary course of the Company's business, substantially as conducted by the Company prior to or as of the Closing Date, and undertaken by the Company in good faith and not for purposes of evading any covenant or restriction in any Loan Document. "Payment Date" means March 31, June 30, September 30, and December 31 of each year during the term of this Agreement. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture or governmental authority. "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. "Subordinated Debt" means any 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, additional paid-in capital, and retained earnings), less (i) the total amount of loans and debts due from Affiliates, shareholders, officers, or employees of the Company, and (ii) the total amount of any intangible assets, including without limitation unamortized discounts, deferred charges, and goodwill as determined in accordance with GAAP. "UCC" means the Uniform Commercial Code as in effect in any jurisdiction. "Warrant" means the warrant issued to the Lender pursuant to the Warrant Agreement substantially in the form of Exhibit B to this Agreement. "Warrant Agreement" means the Warrant Agreement dated as of July 25, 2001 among the Company and the Lender providing for the issuance of warrants to the Lender to acquire up to 1,500,000 shares of the Company's Common Stock, exercisable at a price per share equal to the last sales price of the Company's Common Stock on the date hereof, for a period of ten years. 1.2 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 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. ARTICLE II THE LOAN 2.1 Amount and Notes. The Lender shall make the Loan to the Company in a single or multiple advances of not less than $1,000,000. The Company has authorized the issuance of the Note or Notes in the aggregate principal amount of Seven Million Dollars ($7,000,000). On the Closing Date, the Lender shall issue and deliver to Lender a Note in the principal amount of $7,000,000, payable to the order of Lender. All Notes shall be substantially in the form of Exhibit A to this Agreement. The outstanding Notes together will evidence the outstanding principal amount of the Loan, together with interest accrued but unpaid thereon. The Loan is a non-revolving loan and principal paid prior to the Maturity Date may not be re-borrowed. 2.2 Interest. (a) Interest shall accrue on the outstanding principal amount of the Loan during each Interest Accrual Period at a rate per annum equal to LIBOR for such Interest Accrual Period plus six hundred (600) basis points. Upon determining LIBOR for each Interest Accrual Period, the Lender shall notify the Company of such LIBOR determination and the rate thereof. (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 interest shall also be paid on the date of any prepayment of the Loan pursuant to Section 2.3 for the portion of the Loan 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 Loan then unpaid, at a rate per annum equal to LIBOR plus 1200 basis points. (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 Lender would be contrary to the provisions of any law applicable to Lender limiting the highest rate of interest which may be lawfully contracted for, charged or received by such Lender, and in such event the Company shall pay Lender interest at the highest rate permitted by applicable law. 2.3 Optional Prepayments. The Company may, at any time or from time to time, upon at least 10 Business Days notice to the Lender, prepay the Loan 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 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. 2.4 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. 2.5 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 to Lender at each of the Lender's office as set forth on the signature page hereof, 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. 2.6 Priority of Payments; Subordination. The payment of principal and interest under this Agreement on the Loan shall be pari passu with: (i) the $17,478,680 of 12% Subordinated Debentures due 2003 issued under that certain Indenture dated as of October 15, 1998 (as amended the "Indenture"), (ii) the $11,939,565 of 11% Subordinated Debentures due 2007 issued under the Indenture, and (iii) the $15,000,000 12% Senior Subordinated Loan between the Company and Kayne Anderson Investment Management, Inc., dated as of February 12, 1998, as amended. Except for the preceding sentence, and notwithstanding anything else in this Agreement to the contrary, the payment of principal and interest under this Agreement on the Loan is expressly subordinated for all purposes to any secured Obligations now in existence or later incurred by the Company other than Subordinated Debt; and the Lender 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 the Lender and such institution or Person, the tenor of which shall be to effectuate the terms of this Section. ARTICLE III ADDITIONAL AGREEMENTS 3.1 Junior Lien. The Company will use commercially-reasonable efforts to grant to Lender a lien on the Pledged Shares as referenced in that Stock Pledge Agreement of even date herewith by and among the Company, Ugly Duckling Car Sales and Finance Corporation, and BNY Midwest Trust Company, which lien shall be junior to the lien granted under such agreement. 3.2 Release of Real Estate Purchase Options. The Company, its Affiliates and subsidiaries, hereby release all options to purchase real estate currently owned by Lender and leased to the Company, its Affiliates and subsidiaries, as set forth on Schedule 3.2. 3.3 Option to Purchase Property. The Company, its Affiliates and subsidiaries, hereby grant Lender and its Affiliates the option to purchase, at book value, any or all properties owned by the Company, its Affiliates and subsidiaries, as set forth on Schedule 3.3, as well as any or all properties acquired by the Company, its affiliates and subsidiaries prior to the Maturity Date, and Lender agrees that if it exercises any such option, it will lease such properties back to the Company on terms similar to the leases set forth on Schedule 3.2. 3.4 Warrants. The Company agrees to enter into the Warrant Agreement with the Lender and issue Warrants to the Lender in accordance with the terms thereof in the event the Loan is not repaid on or before July 25, 2001 and any guarantee from Lender to SunAmerica Life Insurance Company remains outstanding, provided that: (a) any necessary approval of the Company's shareholders to the issuance or exercise of the Warrants has been obtained; (b) Company and Lender have obtained any necessary approvals and made any necessary filings, including, if required, under Sections 13 and 16 of the Securities Exchange Act of 1934, and under the Hart-Scott Rodino Antitrust Improvements Act of 1976; and (c) if the Company or its board (or a committee of the board) elects to obtain a fairness opinion, the Company has received a fairness opinion in form and substance reasonably satisfactory to it, provided that no such opinion shall be required if shareholder approval is required and has been obtained. In the event a fairness opinion cannot be obtained based upon the amount or terms of the Warrants to be issued hereunder, the parties agree to use commercially reasonably efforts to modify the amount and/or terms of the Warrant Agreement such that a fairness opinion can be rendered. Each of the parties shall use commercially reasonable efforts to satisfy the covenants and agreements set forth above. If despite the commercially reasonable efforts of the parties, the Warrants are for any reason not issued on or before July 25, 2001, except for the inability to obtain a fairness opinion, then at the option of the Lender, upon notice to the Company, the Loan shall become immediately due and payable in full. ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions of Loans to the Company. The obligation of Lender to fund its Loan to the Company hereunder is subject to the condition that the Lender shall have received on or before January 11, 2001, in form and substance satisfactory to Lender and Lender's counsel and in sufficient copies for Lender, all of the following: (a) Loan Agreement. This Agreement executed by the Company and Lender; (b) Resolutions: Incumbency. (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 hereunder, and authorizing the borrowing of the Loan, 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 hereunder; 4.2 Articles of Incorporation: Bylaws and Good Standing. [Intentionally omitted.] (a) Notes. The Note, executed by the Company. (b) Warrants. The Warrant Agreement, executed by the Company and the Lender, together with the Warrant. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company represents and warrants to Lender that, except for such matters as are known to Lender or would not have a Material Adverse Effect: 5.1 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. 5.2 Financial Statements. The Company has provided to the Lender copies of the following audited financial statements: a balance sheet of the Company as of September 30, 2000, and statements of income and cash flows for the nine months ended September 30, 2000. 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 September 30, 2000, which could reasonably be expected to have a Material Adverse Effect. 5.3 Actions Pending. There is no action, suit, investigation or proceeding pending or, to the knowledge of the Company, threatened against the Company or any properties or rights of the Company, by or before any court, arbitrator or administrative or governmental body which could reasonably be expected to result in any Material Adverse Effect. 5.4 Outstanding Obligations. After giving effect to the transactions contemplated hereby, the Company does not have any Obligations outstanding except Obligations disclosed in the financial statements provided pursuant to Section 5.2. There exists no default (or, to the knowledge of the Company, 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. 5.5 Taxes. The Company has filed all Federal, State and other income tax returns which, to the best knowledge of the officers of the Company, 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. 5.6 Conflicting Agreements and Other Matters. The Company is not 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 the Company pursuant to, the Certificate of Incorporation or Bylaws of the Company, 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 is subject. The Company is not a party to, or otherwise subject to any provision contained in, any instrument evidencing indebtedness of the Company, 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. 5.7 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 to be incurred with respect to any plan (other than a multiemployer plan) by the Company which could reasonably be expected to have a Material Adverse Effect. The Company has not incurred or does not presently expect to incur any withdrawal liability under Title IV of ERISA with respect to any multiemployer plan which is or would be materially adverse to the Company. The execution and delivery of this Agreement and the other Loan Documents will not involve any transaction which is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975 of the Code. For the purpose of this Section 5.9, 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 by any trade or business, whether or not incorporated, which, together with the Company, 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). 5.8 Governmental Consent. Neither the nature of the Company's business, nor any of its respective properties, nor any relationship between the Company and any other Person, nor any circumstance in connection with the making of the Loan or delivery of the Note 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. 5.9 Disclosure. Neither this Agreement nor any other document, certificate or statement furnished to Lender by or on behalf of the Company 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 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 Lender by or on behalf of the Company prior to the date hereof in connection with the transactions contemplated hereby. 5.10 Possession of Franchises, Licenses, etc. The Company possesses 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 the Company is not in violation of any thereof in any material respect. ARTICLE VI AFFIRMATIVE COVENANTS The Company covenants and agrees that, so long as any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, unless the Lender waives compliance in writing: 6.1 Financial Statements. The Company shall deliver to the Lender in form and detail satisfactory to the Lender: (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 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 Lender 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. 6.2 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 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 Lender) to establish whether the Company is in compliance with the requirements of Sections 6.1; and (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. 6.3 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 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 VII 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 Lender waives compliance in writing: 7.1 Debt to Tangible Equity Ratio. The Company shall not permit the Company's Debt to Tangible Equity Ratio to exceed 2.1 to 1, calculated as of the end of each quarterly period in each fiscal year. 7.2 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 Loan to the payment of principal and interest relating to the Subordinated Debt. ARTICLE VIII EVENTS OF DEFAULT 8.1 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 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 Articles III or 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 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. then (a) if such event is an Event of Default specified in any of clauses (g) through (l) of this Section 8.1 with respect to the Company, the Loan 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, Lender may, by notice in writing to the Company, declare all of Lender's Loan to be, and all of 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. 8.2 Other Remedies. If any Event of Default or Default shall occur and be continuing, Lender may proceed to protect and enforce its rights under this Agreement by exercising such remedies as are available to 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 Lender 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 IX MISCELLANEOUS 9.1 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 Lender and the Company, and then such waiver shall be effective only in the specific instance and for the specific purpose for which given. 9.2 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 the Lender, to such other address as shall be designated by such party in a written notice to the other party, at such other address as shall be designated by such party in a written notice to the Company and the Lender. (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. 9.3 No Waiver: Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 9.4 Costs and Expenses. The Company shall, following consummation of the transactions contemplated hereby: (a) pay or reimburse Lender within 10 Business Days after demand for all reasonable costs and expenses incurred by 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 Lender with respect thereto; and (b) pay or reimburse Lender within 10 Business Days after demand for all reasonable costs and expenses incurred by Lender in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies (including in connection with any "workout" or restructuring regarding the Loan, 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 Lender. 9.5 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 Lender. 9.6 Assignment, Participations, etc. (a) Lender may, with the written consent of the Company (which consent shall be obtained prior to Lender's delivery of any information (including financial information) to any Assignee (as hereinafter defined) relating to an assignment of 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 Lender to an Affiliate of Lender) (each an "Assignee") all (but no less than all) of its interest in the Loan and the other rights and obligations of Lender hereunder, provided, however, that, the Company may continue to deal solely and directly with 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 Lender and the Assignee. (b) From and after the date that 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 Lender, shall have the rights and obligations of Lender under the Loan Documents, and (ii) the 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 9.6(a) and (b) with respect to Lender 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, necessary to reflect the addition of the Assignee and the resulting adjustment of the Loan arising therefrom. 9.7 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 Lender. 9.8 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. 9.9 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company and the Lender, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Lender shall not have any obligation to any Person not a party to this Agreement or other Loan Documents. 9.10 Time. Time is of the essence as to each term or provision of this Agreement and each of the other Loan Documents. 9.11 Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF ARIZONA AND 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 ARIZONA. 9.12 Waiver of Jury Trial. THE COMPANY AND THE LENDER 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 LENDER 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 9.12 MAY BE FILED WITH ANY COURT AS WRITTEN EVIDENCE OF THE WAIVER OF THE RIGHT TO TRIAL BY JURY AND CONSENT TO TRIAL. 9.13 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire Agreement and understanding among the Company and the Lender and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof and any prior arrangements made with respect to the payment by 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 Lender pursuant to the Loan Documents. 9.14 Interpretation. This Agreement is the result of negotiations between and has been reviewed by counsel to the Lender, 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. 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. UGLY DUCKLING CORPORATION By:________________________________ Jon D. Ehlinger Vice President, General Counsel, and Secretary Address for notices: Ugly Duckling Corporation 2525 East Camelback Road Suite 1150 Phoenix, Arizona 85016 Attn: Jon D. Ehlinger Vice President, General Counsel and Secretary Telephone: 602-852-6637 Telecopy: 602-852-6686 VERDE INVESTMENTS, INC. By:_________________________________ Name: Title: Address for notices: 2575 East Camelback, Suite 700 Phoenix, Arizona 85016 Attn: Steven P. Johnson Telephone: (602) 778-5003 Telecopy : (602) 778-5025 Exhibit A FORM OF PROMISSORY NOTE Exhibit B FORM OF WARRANT AGREEMENT Schedule 3.2 Leases Bell Road 1515 E. Bell Rd. Phoenix, AZ 85022 24th Street & Van Buren 330 N. 24th St. Phoenix, AZ 85006 Mesa 333 S. Alma School Rd. Mesa, AZ 85210 Glendale 5104 W. Glendale Ave. Glendale, AZ 85301 19th Ave. 9650 N. 19th Ave. Phoenix, AZ 85021 Gilbert Credit Corp. 1030 N. Colorado St. Gilbert, AZ 85233 Chandler 400 N. Arizona Ave. Chandler, AZ 85224 South Central 4121 S. Central Ave. Phoenix, AZ 85040 Phoenix Recon 4515 E. Miami St. Phoenix, AZ 85034 Grant & Oracle 2301 N. Oracle Tucson, AZ 85705 Tucson Recon 1901 W. Copper Tucson, AZ 85745 Tucson 3434 E. Broadway Tucson, AZ Griegos 4700 4th Street NE Albuquerque, NM 87107 Wyoming 700 Wyoming Blvd., NE Albuquerque, NM 87123 Bandera 1511 Bandera Road San Antonio, TX 78209 WW White 414 S. WW White Road San Antonio, TX 78219 Southside Inspection Center 1219 SE Military Drive San Antonio, TX 78214 40th & Indian School 4020 E. Indian School Road Phoenix, AZ 85018 Schedule 3.3 Company Properties Garden Grove 13650 Harbor Boulevard Garden Grove, CA 92843 Garland Road 12180 Garland Road Dallas, TX 75218 Harry Hines 10501 Harry Hines Boulevard Dallas, TX 75220 Brandon 8805 E. Adamo Drive Tampa, FL 33619 Florida Avenue 11704 N. Florida Avenue Tampa, FL 33612 Grand Prairie 1018 E. Main Street Grand Prairie, TX 75050 Arlington 310 N. Collins Street Arlington, TX 76011 Douglasville 5669 Fairburn Road Douglasville, GA 30134 Petersburg 2535 S. Crater Road Petersburg, VA 23805 Orlando Insp. Ctr. 2451 McCraken Road Sanford, FL 32773 EX-10.26(C) 13 0013.txt PROMISSORY NOTE-VERDE $7 MILLION ALL RIGHTS AND INDEBTEDNESS OF PAYEE CREATED UNDER THIS NOTE AND THAT CERTAIN LOAN AGREEMENT DATED AS OF EVEN DATE HEREWITH BETWEEN PAYEE AND MAKER ARE SUBORDINATE TO THE INTERESTS OF THE SENIOR LENDERS AS EVIDENCED BY THAT CERTAIN SUBORDINATION AND STANDSTILL AGREEMENT BY AND AMONG PAYEE, MAKER, UGLY DUCKLING CAR SALES AND FINANCE CORPORATION AND BNY MIDWEST TRUST COMPANY, DATED JANUARY 11, 2001. PROMISSORY NOTE Original Face Amount: $7,000,000 Maker: UGLY DUCKLING CORPORATION, a Delaware corporation Dated as of: January 11, 2001 1. Promise to Repay. FOR VALUE RECEIVED, UGLY DUCKLING CORPORATION, a Delaware corporation ("Maker"), promises to pay to VERDE INVESTMENTS, INC., an Arizona corporation ("Payee"), or order, the principal sum of Seven Million Dollars ($7,000,000) or such lesser amount as shall equal the outstanding amount of the loan (the "Loan") made by Payee to Maker, pursuant to Section 2.1 of that certain Loan Agreement, dated as of January 11, 2001, entered into between Maker and Payee (the "Loan Agreement"). 2. 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 the promissory note defined in the Loan Agreement as the "Note" and is subject to, and entitled to the benefits of, the terms and provisions of the Loan Agreement. 3. 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. 4. 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. 5. Application of Payments. All payments (including prepayments) made hereunder shall be applied first to accrued and unpaid interest and then to principal. 6. Time and Place of Payments. All principal and interest due hereunder is payable in U.S. Dollars in immediately available funds at Payee's office located at 2575 East Camelback, Suite 700, Phoenix, Arizona 85016 (or at such other office as may be designated from time to time by Payee), not later than 1:30 p.m., Phoenix, Arizona time, on the date of payment. 7. 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. 8. Acceleration and Waiver. IT IS EXPRESSLY AGREED THAT, UPON THE OCCURRENCE OF AN EVENT OF DEFAULT AS SPECIFIED IN SECTIONS 8.1(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 8.1 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. 9. 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. 10. Amendments. This Note may not be changed, modified, amended, or terminated except by a writing duly executed by Maker and the holder hereof. 11. 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. 12. GOVERNING LAW. EXCEPT AS OTHERWISE PROVIDED IN THE LOAN AGREEMENT: (a) THIS NOTE SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF ARIZONA; 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 ARIZONA. 13. 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 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 January 11, 2001. UGLY DUCKLING CORPORATION, a Delaware corporation By:/s/ JON D. EHLINGER Name: Jon D. Ehlinger Title: Vice President, General Counsel and Secretary EX-10.26(D) 14 0014.txt SUBORDINATION AND STANDSTILL AGREEMENT SUBORDINATION AND STANDSTILL AGREEMENT THIS SUBORDINATION AND STANDSTILL AGREEMENT ("Agreement") is entered into by and among UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC"), UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation ("UDCSFC"), VERDE INVESTMENTS, INC., an Arizona corporation ("Verde") and BNY MIDWEST TRUST COMPANY, as Collateral Agent ("Collateral Agent") for the Lenders ("Senior Lenders") under that certain Senior Secured Loan Agreement dated January 11, 2001. RECITALS A. UDC is or will be borrowing money and obtaining credit from Verde pursuant to that certain Loan Agreement dated January 11, 2001 among UDC and Verde ("Junior Loan Agreement"); B. UDC is also in the process of obtaining a loan from the Senior Lenders pursuant to the Senior Loan Agreement (as defined below); and C. The Senior Lenders have indicated that they will enter into the Senior Loan Agreement if certain conditions are met, including, without limitation, the requirement that Verde execute this Agreement. NOW, THEREFORE, as an inducement to the Senior Lenders to enter into the Senior Loan Agreement and for other valuable consideration, the parties hereto agree as follows: 1. INDEBTEDNESS AND LIENS SUBORDINATED. Verde subordinates (i) all indebtedness and other obligations of every type and nature created under or in connection with the Junior Loan Agreement, including any amendments or modifications thereto, and now or at any time hereafter owing from UDC to Verde pursuant to the Junior Loan Agreement (including, without limitation, interest thereon which may accrue subsequent to UDC becoming subject to any state or federal debtor-relief statute) ("Junior Debt") and (ii) all liens and/or security interests held by Verde in any Collateral ("Junior Liens") to the prior payment in full in cash of all Senior Debt (as defined below) and all liens and/or security interests held by the Senior Lenders in the Collateral ("Senior Liens"). Subject to the provisions of Section 3, Verde irrevocably agrees and directs that all Senior Debt shall be paid in full in cash prior to UDC making any payment on any Junior Debt, unless the Senior Lenders authorize such payments on the Junior Debt. Verde will, and the Collateral Agent is authorized in the name of Verde from time to time to, execute and file such financing statements and other documents as the Collateral Agent may require in order to give notice to other persons and entities of the terms and provisions of this Agreement. For purposes hereof, the term "Senior Debt" means the "Obligations" (as such term is defined in the Senior Loan Agreement), together with (a) any partial or complete refinancing of the Obligations, (b) any amendments, restatements, modifications, renewals or extensions of any of the foregoing, and (c) any interest accruing on any of the foregoing before or after the commencement of any bankruptcy, insolvency, reorganization or similar proceeding, without regard to whether or not such interest is an allowed claim. For purposes hereof, the term "Senior Loan Agreement" means that certain Senior Secured Loan Agreement dated as of January 11, 2001 by and among UDC, certain Lenders and Collateral Agent, as the same may be amended, supplemented or otherwise modified from time to time. For purposes hereof, the term "Senior Debt Documents" means the Senior Loan Agreement and all other documents, instruments and agreements evidencing, pertaining to or securing all or any portion of the Senior Debt. 2. COLLATERAL. The word "Collateral" shall have the same meaning as specified in the Senior Loan Agreement. If share certificates or other instruments representing the Collateral were delivered to the Collateral Agent to effect perfection of the Senior Liens as provided under the terms of that certain Stock Pledge Agreement dated January 11, 2001 among UDC, UDCSFC, Ugly Duckling Receivables II, Ugly Duckling Receivables Corp. III and the Collateral Agent (as the same may be amended, modified or replaced, the "Senior Stock Pledge Agreement") and Senior Lenders, the Collateral Agent acknowledges and agrees, that in addition to holding such certificates to perfect the Senior Lien, it is holding the share certificates or other instruments representing the Collateral on behalf of Verde to perfect Verde's Junior Liens. Further, the Collateral Agent agrees that it will not deliver or return to UDC, UDCSFC or, except pursuant to foreclosure or similar proceedings under the Senior Stock Pledge Agreement, any other party and UDC and UDCSFC agree that they will not accept or receive the share certificates or other instruments representing the Collateral. Instead, except pursuant to foreclosure or similar proceeding under the Senior Stock Pledge Agreement, the same shall be returned only to Verde according to the terms of that certain Stock Pledge Agreement dated January 11, 2001 among UDC, UDCSFC and Verde, unless otherwise agreed in writing by Verde. Except for the obligation to deliver the share certificates or other instruments representing the Collateral to Verde as provided herein, the Collateral Agent owes no further duty and has no other obligation to Verde with respect to the share certificates or other instruments and shall have no liability to Verde unless Collateral Agent's actions or omissions with respect to the same constitute gross negligence or willful misconduct. 3. RESTRICTION OF PAYMENT OF JUNIOR DEBT; DISPOSITION OF PAYMENTS RECEIVED BY VERDE. UDC will not make, and Verde will not accept or receive, any payment or benefit in cash or otherwise (or exercise any right of, or permit any set-off with respect to, the Junior Debt), directly or indirectly, on account of any amounts owing on the Junior Debt. However, UDC may make, and Verde may accept, (i) payments of interest only owing in accordance with the terms of the Junior Debt and (ii) payments of principal to the extent permitted under the Senior Loan Agreement, in each case provided that (a) at the time of such payment and after giving effect thereto, no Event of Default under the Senior Loan Agreement shall have occurred and be continuing, and (b) both before and after giving effect to such payments, UDC will remain in compliance with the covenants set forth in Sections 6.13 to 6.18 of the Senior Loan Agreement. In the event payment is made in violation of this Paragraph, Verde shall promptly deliver the same to the Collateral Agent in the form received, with any endorsement or assignment necessary for the transfer of such payment from Verde to the Collateral Agent, to be either (in the Collateral Agent's sole discretion) held as cash collateral securing the Senior Debt or applied in reduction of the Senior Debt in such order as the Collateral Agent shall determine, and until so delivered, Verde shall hold such payment in trust for and on behalf of, and as the property of, the Collateral Agent for the benefit of the holders of the Senior Debt. In the event that Verde shall exercise any right of set-off which Verde is not permitted to exercise under the provisions of this Agreement, Verde shall promptly pay over to the Collateral Agent, in immediately available funds, an amount equal to the amount of the claims or obligations offset. If Verde fails to make any endorsement required under this Agreement, the Collateral Agent is hereby irrevocably appointed as the attorney in-fact (which appointment is coupled with an interest) for Verde to make such endorsement in Verde's name. 4. ACTION ON SUBORDINATED DEBT. As long as this Agreement is in effect, Verde will not take any action or initiate any proceedings, judicial or otherwise, to enforce Verde's rights or remedies with respect to any Junior Debt and/or Junior Liens, including, without limitation, any action to enforce remedies with respect to any Collateral or to obtain any judgment or prejudgment remedy against UDC or any of its Subsidiaries or any such Collateral. Further, Verde will not commence any action or proceeding against UDC or any of its Subsidiaries to recover all or any part of the Junior Debt, or join with any other creditor (unless the Collateral Agent shall so join) in bringing any proceeding against UDC or any of its Subsidiaries under any bankruptcy, reorganization, readjustment of debt, arrangement of debt receivership, liquidation or insolvency law or statute of the federal or any state government, or take possession of, sell, or dispose of any Collateral, or exercise or enforce any right or remedy available to Verde with respect to any such Collateral, unless and until the Senior Debt has been paid in full in cash. Nothing in this Agreement restricts Verde in giving any notice of default and/or acceleration of payment of the Junior Debt or taking any other action to preserve and enforce its rights under the Junior Loan Agreement, provided such actions do not result in any payment on the Junior Debt not expressly permitted hereunder prior to payment of the Senior Debt in full in cash. Nothing in this Agreement restricts Verde and/or its affiliates in enforcing any rights and remedies against UDC and/or its affiliates under any other agreements between Verde and/or its affiliates and UDC and/or its affiliates to the extent such other agreements do not relate to, and do not have the effect, directly or indirectly, of repaying the Junior Debt. 5. DISPOSITION OF EVIDENCE OF INDEBTEDNESS. If there is any existing promissory note or other evidence of any Junior Debt, or if any promissory note or other evidence of the Junior Debt is executed at any time hereafter with respect thereto, then UDC and Verde will mark the same with a legend stating that it is subject to this Agreement. Verde shall not, without the Collateral Agent's prior written consent, assign, transfer, hypothecate or otherwise dispose of any claim it now has or may at any time hereafter have against UDC at any time that any Senior Debt remains outstanding and/or the Senior Lenders remain committed to extend any credit to UDC. 6. CONTINUING EFFECT. This Agreement shall constitute a continuing agreement of subordination, and the Senior Lenders may, without notice to or consent by Verde, modify any term of the Senior Debt in reliance upon this Agreement. Without limiting the generality of the foregoing, the Collateral Agent and Senior Lenders may, at any time and from time to time, without the consent of or notice to Verde and without incurring responsibility to Verde or impairing or releasing any of the Senior Lenders' or Collateral Agent's rights or any of Verde's obligations hereunder: (a) change the interest rate, change the amount of payment, make further advances to UDC under the Senior Debt, extend the time for payment or renew or otherwise alter the terms of the Senior Debt or any instrument evidencing the same in any manner; (b) sell, exchange, release or otherwise deal with any property at any time securing payment of the Senior Debt or any part thereof; (c) release anyone liable in any manner for the payment or collection of the Senior Debt or any part thereof; (d) exercise or refrain from exercising any right against UDC or any other person (including Verde); (e) and apply any sums received by the Collateral Agent, by whomsoever paid and however realized, to the Senior Debt in such manner as the Collateral Agent shall deem appropriate. 7. ADDITIONAL WAIVERS BY VERDE. Verde hereby waives notice of the creation, existence, renewal, or modification or extension of the time of payment, of the Senior Debt. Verde agrees that the Senior Lenders, at any time and from time to time, either before or after revocation of this Agreement, may enter into such agreement or agreements with UDC and its affiliates, as the Senior Lenders may deem proper, extending the time of payment or renewing or otherwise altering the terms of all or any of the obligations of UDC to the Senior Lenders, or affecting the Senior Liens, or may exchange, sell or surrender or otherwise deal with any such security, or may release any balance of funds of UDC with the Senior Lenders, without notice to Verde and without in any way impairing or affecting this Agreement. 8. FORECLOSURE OF COLLATERAL. Notwithstanding the Junior Liens, any other provision hereof or any security interest hereafter acquired by Verde, the Collateral Agent may take possession of, sell, dispose of, and otherwise deal with all or any part of the Collateral, and may enforce any right or remedy available to it with respect to the Collateral, all without notice to or consent of Verde except as specifically required by applicable law. Except as provided in Section 2, the Collateral Agent shall have no duty to preserve, protect, care for, insure, take possession of, collect, dispose of, or otherwise realize upon any of the Collateral, and in no event shall the Collateral Agent be deemed Verde's agent with respect to the Collateral. All proceeds received by the Collateral Agent with respect to any Collateral may be applied, first, to pay or reimburse the Collateral Agent for all costs and expenses (including reasonable attorneys' fees and costs) incurred by the Collateral Agent in connection with the collection of such proceeds, and, second, to any indebtedness secured by the Senior Liens in any order that it may choose. 9. INFORMATION. Verde has established adequate, independent means of obtaining from UDC on a continuing basis financial and other information pertaining to UDC's financial condition. Verde agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Verde's risks hereunder, and Verde agrees that the Senior Lenders and the Collateral Agent shall have no obligation to disclose to Verde information or material about UDC which is acquired by the Senior Lenders or Collateral Agent in any manner. The Senior Lenders and the Collateral Agent may, at their sole option and without obligation to do so, disclose to Verde any information or material relating to UDC which is acquired by them by any means, and UDC hereby agrees to and authorizes any such disclosure. 10. TRANSFER OF ASSETS OR REORGANIZATION OF UDC. In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of UDC or any of its Subsidiaries, or the proceeds thereof, to creditors of UDC or any of its Subsidiaries, by reason of the liquidation, dissolution, or other winding up of UDC's or any of its Subsidiaries' business, or in the event of any sale, receivership, insolvency or bankruptcy proceedings by or against UDC or any of its Subsidiaries, or assignment for the benefit of creditors, or of any proceedings by or against UDC or any of its Subsidiaries for any relief under any bankruptcy or insolvency laws, or relating to the relief of debtors, readjustment of indebtedness, reorganizations, arrangements, compositions or extensions, or of any other event whereby it becomes necessary or desirable to file or present claims against UDC or any of its Subsidiaries for the purpose of receiving payment thereof, or on account thereof, then and in any such event, any payment or distribution of any kind or character, either in cash or other property, which shall thereafter be made or shall thereafter be payable with respect to any Junior Debt shall be paid over to Collateral Agent for application to the payment of the Senior Debt, whether due or not due, and no payments shall be made upon or in respect of Junior Debt unless and until the Senior Debt shall have been paid and satisfied in full in cash. In any such event, all claims of the Collateral Agent and all claims of Verde shall, at the option of the Senior Lenders, forthwith become due and payable without demand or notice. 11. REPRESENTATIONS AND WARRANTIES. Verde hereby represents and warrants: (a) Verde owns the Junior Debt and Junior Liens free and clear of any lien, security interest or other encumbrance; (b) Verde has all requisite power and authority to execute, deliver and perform this Agreement; (c) The execution, delivery and performance by Verde of this Agreement is not and will not contravene any law or governmental regulation or any contractual restriction binding on or effecting Verde; (d) No authorization or approval or other action by, or notice to, or filing with any governmental authority or other regulatory body or consent of any other person is required for the due execution, delivery and performance by Verde of this Agreement; and (e) This Agreement constitutes the legal, valid and binding obligation of Verde, enforceable against it in accordance with its terms. 12. POWER OF ATTORNEY. Verde irrevocably authorizes and empowers Collateral Agent, or any person Collateral Agent may designate, to act as attorney for Verde with full power and authority in the name of Verde, or otherwise, to make and present such claims or proofs of claims against UDC on account of the Junior Debt as Collateral Agent, or its appointee, may deem expedient and proper and, if necessary, to vote such claims in any proceedings and to receive and collect any and all dividends or other payments and disbursements made thereon in whatever form they may be paid or issued, and to give acquittance therefor and to apply same to the Senior Debt, and Verde hereby agrees, from time to time and upon request, to make, execute and deliver to Collateral Agent such powers of attorney, assignments, endorsements, proofs of claim, pleadings, verifications, affidavits, consents, agreements or other instruments as may be reasonably requested by Collateral Agent in order to enable the Collateral Agent to enforce any and all claims upon, or with respect to, the Junior Debt, and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or with respect to the Junior Debt. 13. OTHER AGREEMENTS; NO THIRD PARTY BENEFICIARIES. Verde understands that there may be various agreements between the Senior Lenders and UDC evidencing and governing the Senior Debt, and Verde acknowledges and agrees that such agreements are not intended to confer any benefits on Verde. Verde further acknowledges that the Collateral Agent may administer the Senior Debt and any of the Senior Lenders' agreements with UDC in any way the Collateral Agent may deem appropriate, without regard to Verde or the Junior Debt, except as may be required by applicable law. Verde waives any right Verde might otherwise have to require a marshalling of any security held by the Collateral Agent for all or any part of the Senior Debt or to direct or affect the manner or timing with which the Collateral Agent enforces any of their security. 14. BREACH OF AGREEMENT BY UDC OR VERDE. In the event of any breach of this Agreement by UDC or Verde, then and at any time thereafter the Collateral Agent shall have the right to declare immediately due and payable all or any portion of the Senior Debt without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by UDC and Verde. No delay, failure or discontinuance of the Collateral Agent in exercising any right, privilege, power or remedy hereunder shall be deemed a waiver of such right, privilege, power or remedy; nor shall any single or partial exercise of any such right, privilege, power or remedy preclude, waive or otherwise affect the further exercise thereof or the exercise of any other right, privilege, power or remedy. Any waiver, permit, consent or approval of any kind by the Collateral Agent with respect to this Agreement must be in writing and shall be effective only to the extent set forth in such writing. 15. DISCLOSURE OF SUBORDINATION. Verde and UDC agree to make and maintain in their books of account notations reasonably satisfactory to the Collateral Agent of the rights and priorities of the Senior Lenders hereunder, and from time to time, upon request, to furnish the Collateral Agent with sworn financial statements. Collateral Agent may inspect the books of account and any records of the UDC at any time during business hours. Verde and UDC agree that any instrument evidencing the Junior Debt shall be marked with a specific statement that the indebtedness thereby evidenced is subject to the provisions of this Subordination Agreement. 16. SENIOR LENDERS' RELIANCE. Verde consents and agrees that all Senior Debt shall be deemed to have been made or incurred at the request of Verde and in reliance upon this Agreement; provided, however, that neither the foregoing provision, nor any other provision contained in this Agreement, shall be deemed or construed to constitute, either directly or by implication, a guaranty by Verde of any debts, obligations or liabilities incurred by UDC to the Senior Lenders. 17. MISCELLANEOUS. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties. All words used herein in the singular shall be deemed to have been used in the plural where the context so requires. 18. COSTS, EXPENSES AND ATTORNEYS' FEES. If any party hereto institutes any judicial or administrative action or proceeding to enforce any provisions of this Agreement, or alleging any breach of any provision hereof or seeking damages or any other judicial or administrative remedy, the prevailing party or parties in such action or proceeding shall be entitled to receive from the losing party or parties all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of such party's in-house counsel), incurred in connection with such action or proceeding. 19. CONFLICT IN AGREEMENTS. If the subordination provisions of any instrument evidencing the Junior Debt conflict with the terms of this Agreement, the terms of this Agreement shall govern the relationship between the Senior Lenders and Verde 20. NO WAIVER. No waiver shall be deemed to be made by the Senior Lenders of any of its rights hereunder unless the same shall be in writing signed on behalf of the Senior Lenders, and each such waiver, if any, shall be a waiver only with respect to the specific matter or matters to which the waiver relates and shall in no way impair the rights of the Senior Lenders or the obligations of Verde to the Senior Lenders in any other respect at any time. 21. BINDING EFFECT; ACCEPTANCE. This Agreement shall be binding upon Verde and its heirs, legal representatives, successors and assigns and shall inure to the benefit of the Senior Lenders and their participants, successors and assigns irrespective of whether this or any similar agreement is executed by any other creditor of the UDC. Notice of acceptance by the Senior Lenders of this Agreement or of reliance by the Senior Lenders upon this Agreement is hereby waived by Verde. 22. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Arizona. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of January 11, 2001. UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation By: Name: Title: UGLY DUCKLING CORPORATION, a Delaware corporation By: Name: Title: VERDE INVESTMENTS, INC., an Arizona corporation By: Name: Title: BNY MIDWEST TRUST COMPANY By: Name: Title: EX-10.26(E) 15 0015.txt STOCK PLEDGE AGREEMENT STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT dated as of January 11, 2001 (the "Pledge Agreement") among UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation formerly known as Duck Ventures, Inc. ("Pledgor"), as owner of all of the outstanding capital stock in Ugly Duckling Receivables Corp. II ("UDRCII"), a Delaware corporation, and Ugly Duckling Receivables Corp. III, a Delaware corporation ("UDRC III"), UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC") and VERDE INVESTMENTS, INC., an Arizona corporation (the "Lender"). INTRODUCTORY STATEMENTS Pledgor is the sole holder of fifty (50) shares of common stock, $.01 par value per share in UDRC II and one thousand (1000) shares of common stock, $.01 par value per share, in UDRC III (collectively, together with the capital stock of each New Issuer (as defined below) pledged or required to be pledged hereunder, the "Pledged Shares"). UDC, as borrower, has on the date hereof entered into a Loan Agreement with Lender (as such agreement may be amended, supplemented or otherwise modified from time to time, the "Loan Agreement") pursuant to which UDC has or will borrow money from the Lender. Pledgor, which is a wholly owned subsidiary of UDC, will receive substantial direct and indirect benefits from the loans made to UDC under the Loan Agreement and Pledgor has agreed to pledge the Pledged Shares and any proceeds thereof as security for Pledgor's obligations under the Loan Agreement. Accordingly, the Pledged Shares and any proceeds thereof will secure obligations of UDC to Lender. Terms used herein but not defined herein shall have the meanings assigned to such terms in the Loan Agreement. UDC has or will enter into a Senior Secured Loan Agreement with certain lenders and the collateral agent as defined therein ("Senior Lenders"), which shall be dated on or about January 11, 2001 ("Senior Secured Loan Agreement"). As a condition of the Senior Secured Loan Agreement and as security for the obligations thereunder, Pledgor has or will enter into a Stock Pledge Agreement among Pledgor, UDC and BNY Midwest Trust Company ("Senior Pledge Agreement"). Pursuant to the terms of the Senior Pledge Agreement, Pledgor pledged or will pledge a first priority security interest in the Pledged Shares and additional collateral as identified therein. Further, pursuant to the Senior Pledge Agreement, Pledgor delivered or will deliver to the collateral agent thereunder all share certificates or other instruments representing the Pledged Shares and collateral. As a condition precedent to entering into the Senior Secured Loan Agreement, the Senior Lenders require that Lender subordinate the liens of the Loan Agreement and this Pledge Agreement to the liens of the Senior Secured Loan Agreement and Senior Pledge Agreement and to subordinate Lender's rights and remedies, including, without limitation, its rights to receive any payments, pursuant to the Loan Agreement to the Senior Lenders' rights and remedies including, without limitation, their rights to receive payments pursuant to the Senior Secured Loan Agreement, as more particularly provided in a separate agreement of subordination of even date herewith ("Subordination Agreement"). In consideration of the premises and of the agreements herein contained, Pledgor, Lender and UDC agree as follows: Section 1. Definitions. (a) Capitalized terms used but not otherwise defined in this Pledge Agreement shall have the meanings specified therefor in the Loan Agreement. (b) As used herein, the term "Final Date" shall mean the date upon which all of the Obligations as defined in the Loan Agreement have been fully paid and performed to the satisfaction of Lender. The term "Loan Documents" shall mean the Loan Agreement, the Promissory Note, the Warrants, this Pledge Agreement and any and all documents, instruments and agreements securing and/or relating to the Obligations of UDC or Pledgor to Lender. Section 2. Pledge of Stock and Grant of Security Interest. As security for the prompt payment and performance in full when due of the Secured Obligations (as defined below), Pledgor hereby delivers, pledges and assigns to Lender and grants in favor of Lender, a security interest in all of Pledgor's right, title and interest in and to the Pledged Shares (which represent all capital stock of each issuer of Pledged Shares) and all capital stock of each New Issuer (as defined below), together with all of Pledgor's rights and privileges with respect thereto, all proceeds, income and profits thereof, all dividends and other distributions in respect thereof (including, without limitation, any and all investment property distributed in respect thereof) and all property (including, without limitation, all investment property) received in exchange thereof or in substitution therefor (the "Collateral"). This Agreement secures, and the Collateral is collateral security for, the prompt payment and performance in full when due, whether on a specified payment date, at stated maturity, by acceleration or otherwise (including, without limitation, the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code or any similar law) of all obligations of UDC and all obligations of Pledgor, in each case of every type and nature, now or hereafter existing under the Loan Documents, whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy would accrue on such obligations), fees, expenses, indemnities or otherwise (all such obligations being the "Secured Obligations"). Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts that constitute part of the Secured Obligations and would be owed to the Lender under the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding. Section 3. Subordination. As more particularly provided in the Subordination Agreement, Lender agrees that the liens and security interests created hereunder and all other right, title and interest of the Lender in the Collateral are and will be at all times subordinate to the liens and security interests created by the Senior Secured Loan Agreement and Senior Pledge Agreement and all other right, title and interest of the Senior Lenders in and to the Collateral. In the event of any inconsistency between this Pledge Agreement and the Subordination Agreement, the Subordination Agreement shall control. Section 4. Dividends, Options, or Other Adjustments. Until the Final Date, Pledgor shall deliver as Collateral to the Lender, and, as security for the full and complete payment and performance of all of the Secured Obligations hereby grants to the Lender a continuing security interest in, any and all additional shares of stock or any other property (including, without limitation, investment property) of any kind distributable on or by reason of the Collateral, whether in the form of or by way of stock dividends, warrants, total or partial liquidation, conversion, prepayments, redemptions or otherwise, including cash dividends and any cash interest payments. Section 5. Delivery of Share Certificates: Stock Powers. Unless delivered to the Senior Lenders pursuant to the Senior Secured Loan Agreement, Pledgor shall promptly deliver to Lender, or cause UDRC II or UDRC III or any other entity issuing the Collateral to deliver directly to Lender, share certificates or other instruments representing any Collateral issued to, acquired or received by Pledgor after the date of this Pledge Agreement with a stock or bond power duly executed in blank by Pledgor. If, at any time the Lender notifies Pledgor that it requires additional stock powers endorsed in blank, Pledgor shall promptly execute in blank and deliver the requested power to the Lender. If the share certificates or other instruments representing any Collateral is held by the Senior Lenders or by a third party on their behalf, such party shall be deemed to be holding the same on behalf of Lender for the purpose of perfection of a second lien on the Collateral. Further, if the share certificates or other instruments are held by the Senior lenders or third party on their behalf, Pledgor agrees that it shall not accept return of the same back from the Senior Lenders without the prior consent of Lender. Section 6. Power of Attorney. Subject to the Subordination Agreement, Pledgor hereby constitutes and irrevocably appoints the Lender as Pledgor's true and lawful attorney-in-fact, with the power, after the occurrence of an "Event of Default" under and as defined in the Loan Agreement, to the full extent permitted by law, to affix to any certificates and documents representing the Collateral, the stock or bond powers delivered with respect thereto, and to transfer or cause the transfer of Collateral, or any part thereof, on the books of UDRC II or UDRC III or any other entity issuing such Collateral, to the name of the Lender or any nominee thereof, and thereafter to exercise with respect to such Collateral all the rights, powers and remedies of an owner. The power of attorney granted pursuant to this Pledge Agreement and all authority hereby conferred are granted and conferred solely to protect the Lender's interest in the Collateral and shall not impose any duty upon the Lender to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest until the Final Date. Section 7. Inducing Representations of Pledgor. Pledgor represents and warrants to the Lender that: (a) The Pledged Shares are validly issued, fully paid for and non-assessable. (b) The Pledged Shares of UDRC II and UDRC III represent all of the issued and outstanding capital stock of UDRC II and UDRC III, respectively. (c) Except for the interests of the Senior Lenders under the Senior Secured Loan Agreement and the liens created by the Senior Pledge Agreement, Pledgor is the sole legal and beneficial owner of, and has good and marketable title to, the Pledged Shares, free and clear of all pledges, liens, security interests and other encumbrances except the security interest created by this Pledge Agreement, and Pledgor has the unqualified right and authority to execute and perform this Pledge Agreement. (d) No options, warrants or other agreements with respect to the Collateral are outstanding. (e) Any consent, approval or authorization of or designation or filing with any authority on the part of Pledgor which is required in connection with the pledge and security interest granted under this Pledge Agreement has been obtained or effected. (f) Neither the execution and delivery of this Pledge Agreement by Pledgor, the consummation of the transaction contemplated hereby nor the satisfaction of the terms and conditions of this Pledge Agreement: (i) conflicts with or results in any breach or violation of any provision of the articles of incorporation or bylaws of Pledgor or any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to Pledgor or any of its properties, including regulations issued by an administrative agency or other governmental authority having supervisory powers over Pledgor; (ii) conflicts with, constitutes a default (or an event which with the giving of notice or the passage of time, or both, would constitute a default) by Pledgor under, or a breach of or contravenes any provision of, any agreement to which Pledgor or any of its subsidiaries is a party or by which it or any of their properties is or may be bound or affected, including without limitation any loan agreement, mortgage, indenture or other agreement or instrument; or (iii)results in or requires the creation of any lien upon or in respect of any of Pledgor's assets except the lien created by this Pledge Agreement. (g) With respect to all Pledged Shares, and upon issuance of any additional Pledged Shares hereafter issued to, acquired or received by Pledgor, the Lender has (and, with respect to Pledged Shares hereafter issued, will have) a valid, perfected second priority security interest (subordinate only to the Senior Lenders) in and to the Collateral, enforceable as such against all other creditors of Pledgor and against all persons purporting to purchase any of the Collateral from Pledgor. (h) The board of directors of UDRC II and UDRC III have duly adopted the resolutions identified on Exhibits A-1 and A-2, respectively, attached hereto (the "Standing Dividend Resolutions"), and such resolutions remain in full force and effect and have not been rescinded, amended, altered, revoked or modified in any respect. Subject to the rights of the Senior Lenders and so long as there is no Event of Default existing under the Loan Agreement, all distributions made in respect of the Pledged Shares shall be paid to Pledgor. If an Event of Default under the Loan Agreement is in existence, subject to the rights of the Senior Lenders, all such distributions shall be paid to Lender. Section 8. Obligations of UDC and Pledgor. Pledgor further represents, warrants and covenants to the Lender that, subject to the Subordination Agreement: (a) Pledgor will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or to exist with respect to, any of the Collateral during the term of this Pledge Agreement, other than the lien granted hereunder, the lien granted pursuant to the Senior Pledge Agreement and the lien granted to General Electric Capital Corporation ("GECC") pursuant to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement entered into as of August 15, 1997 among GECC, UDC, Pledgor, and certain other entities, as such Agreement may be amended from time to time, which lien of GECC is subordinate to the lien granted hereunder. (b) Pledgor will not effect any securitizations through any subsidiary or affiliate other than UDRC III unless (i) either (A) Pledgor pledges to Lender all of the capital stock of any such subsidiary or affiliate (the "New Issuer") and Pledgor delivers to Lender a standing dividend resolution of the board of directors of New Issuer, which standing dividend resolution is substantially similar to the UDRC III Standing Dividend Resolution, or (B) the New Issuer pledges directly to Lender all of its interests in any trust or other entity which issues interests in a securitization. (c) Pledgor will, at Pledgor's expense, at any time and from time to time at the request of the Lender do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be reasonably proposed by Lender to preserve, establish, demonstrate or enforce the rights, interests and remedies of the Lender as created by, provided in, or emanating from this Pledge Agreement. (d) Pledgor will not take any action which would cause UDRC II or UDRC III or any New Issuer to issue any other capital stock without the prior written consent of the Lender. (e) Pledgor will not consent to any amendment to the articles of incorporation of UDRC II or UDRC III or any New Issuer without the prior written consent of the Lender. (f) Pledgor will not take any action which would cause, and will not consent to, any transfer by UDRC II or UDRC III or any New Issuer of the Class B Notes, Class C Certificates (other than the Excluded Class C Certificates, as defined in the Senior Secured Loan Agreement) and the Class D Certificates, as each are defined under the Senior Secured Loan Agreement, of UDRC II, UDRC III or any New Issuer. Section 9. Dividends. Pledgor has not and will not permit UDRC II or UDRC III or any New Issuer to, rescind, amend, alter, revoke or modify any Standing Dividend Resolutions in any respect without the prior written consent of the Lender. Section 10. Voting Right. Subject to the rights of the Senior Lenders and the Subordination Agreement, and so long as no Event of Default exists under the Loan Agreement, Pledgor shall retain the right to vote the Pledged Shares with respect to any matter permitted under the Articles of Incorporation of UDRC II and UDRC III and each New Issuer, as the case may be. However, Pledgor may not vote the Pledged Shares in a manner that would violate this Pledge Agreement or impair the rights of Lender. If an Event of Default under the Loan Agreement exists, subject to the rights of the Senior Lenders and the Subordination Agreement, Pledgor shall be deemed to have granted Lender a proxy to vote the Pledged Shares. Subject to the rights of the Senior Lenders and the Subordination Agreement, upon the request of Lender, Pledgor shall deliver to Lender such further evidence of such proxy to vote the Pledged Shares as Lender may request pursuant hereto. Section 11. Rights of the Lender. The Lender may, at any time and without notice, discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, pay for the maintenance and preservation of the Collateral, or pay for insurance on the Collateral; the amount of such payments, plus any and all reasonable fees, costs and expenses of the Lender (including attorneys' fees and disbursements) in connection therewith, shall be reimbursed by UDC within five (5) days of demand, with interest thereon from the date paid at the rate provided in the Loan Agreement. Section 12. Remedies Upon Event of Default under the Loan Agreement. Subject to the Subordination Agreement, Lender may exercise any one or more of the following remedies: (a) Upon the occurrence of an "Event of Default" pursuant to the Loan Agreement, the Lender may, without notice to Pledgor: (i) cause the Collateral to be transferred to the Lender's name or to the name of a nominee of the Lender, and thereafter exercise as to such Collateral all of the rights, powers and remedies of an owner; (ii) collect by legal proceedings or otherwise all dividends, interest, principal payments, capital distributions and other sums now or hereafter payable on account of the Collateral, and hold all such sums as part of the Collateral, or apply such sums to the payment of the Secured Obligations in such manner and order as the Lender shall decide; or (iii)enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof. (b) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code as in effect in any applicable jurisdiction, upon the occurrence of an "Event of Default" pursuant to the Loan Agreement, the Lender shall have the right, without demand of performance or other demand, advertisement or notice of any kind, except as specified below, to or upon Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith to collect, receive, appropriate and realize upon the Collateral, or any part thereof in one or more parcels in accordance with applicable securities laws and in a manner designed to ensure that such sale will not result in a distribution of the Pledged Shares in violation of Section 5 of the Securities Act of 1933, as amended (the "Securities Act") and on such terms (including a requirement that any purchaser of all or any part of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as the Lender deems appropriate without any liability for any loss due to a decrease in the market value of the Collateral during the period held. If any notification to Pledgor of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed to Pledgor, postage prepaid, at least ten (10) days before any such disposition at the address indicated by Pledgor's signature. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right of the Lender to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in Pledgor, which right of equity is, to the extent permitted by applicable law, hereby expressly waived or released by Pledgor. (c) The Lender shall sell the Collateral on any credit terms which it deems reasonable. The out-of- pocket costs and expenses of such sale shall be for the account of Pledgor. The sale of any of the Collateral on credit terms shall not relieve Pledgor of its liability with respect to the Secured Obligations. All payments received in respect of any sale of the Collateral by the Lender shall be applied to the Secured Obligations as and when such payments are received and any price received by the Lender in respect of such sale shall be conclusive and binding upon Pledgor. (d) Pledgor recognizes that it may not be feasible to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in the Securities Act, and that it may be necessary to sell privately to a restricted group of purchasers who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales may be at prices and other terms less favorable to the Seller than if the Collateral were sold at public sale, and that the Collateral Agent has no obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Securities Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority shall be necessary to effectuate any sale or other disposition of the Collateral or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same. (f) The Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of, free from any other claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives, to the extent permitted by applicable law, all rights of redemption, stay or appraisal which it may have under any rule of law or statute now existing or hereafter adopted. (g) The Lender shall not be obligated to make any sale or other disposition of the Collateral permitted under this Pledge Agreement, unless the terms thereof shall be satisfactory to the Lender. The Lender may, without notice or publication, adjourn any such private or public sale and, upon five (5) days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any such sale of all or any part of the Collateral on credit or future delivery, the Collateral so sold may be retained by the Lender until the selling price is paid by the purchaser thereof, but the Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the property so sold and, in the case of any such failure, such property may again be sold as herein provided. (h) All of the rights and remedies granted to the Lender, including but not limited to the foregoing, shall be cumulative and not exclusive and shall be enforceable alternatively, successively or concurrently as the Lender may deem expedient. Section 13. Limitation on Liability. (a) The Lender, any of its directors, officers, employers or agents shall not be liable to Pledgor, UDC, UDRC II, UDRC III or any New Issuer for any action taken or omitted to be taken by it or them hereunder, or in connection herewith, except that the Lender shall be liable for its own (and only for its own) gross negligence, bad faith or willful misconduct. (b) The Lender shall be protected and shall incur no liability to any party in relying upon the accuracy, acting in reliance upon the contents, and assuming the genuineness of any notice, demand, certificate, signature, instrument or other document the Lender reasonably believes to be genuine and to have been duly executed by the appropriate signatory, and (absent actual knowledge to the contrary of any officer of the Lender) the Lender shall not be required to make any independent investigation with respect thereto. The Lender shall at all times be free independently to establish to its reasonable satisfaction, but shall have no duty to independently verify, the existence or nonexistence of facts that are a condition to the exercise or enforcement of any right or remedy hereunder. (c) The Lender may consult with qualified counsel, financial advisors or accountants and shall not be liable for any action taken or omitted to be taken by it hereunder in good faith and in accordance with the advice of such counsel, financial advisors or accountants. Section 14. Indemnification. UDC and Pledgor jointly and severally agree to indemnify Lender and its directors, officers, employees and agents, for, and hold Lender and its directors, officers, employees and agents harmless against, any loss, liability or expense (including the costs and expenses of defending against any claim of liability) arising out of or in connection with this Pledge Agreement and the transactions contemplated hereby, except that no indemnitee shall be entitled to indemnification to the extent any such loss, liability or expense results from the gross negligence, bad faith or willful misconduct of such indemnitee. The obligation of UDC and Pledgor under this Section shall survive the termination of this Pledge Agreement. Section 15. Termination. This Pledge Agreement shall continue in full force and effect until the Final Date. Subject to any sale or other disposition of the Collateral pursuant to and in accordance with this Pledge Agreement, any Collateral held by Lender shall be returned to Pledgor on the Final Date. The obligations of UDC under Section 14 and Section 16 of this Pledge Agreement shall survive the termination of this Pledge Agreement. Section 16. Compensation and Reimbursement. UDC agrees for the benefit of the Lender and as part of the Secured Obligations to reimburse the Lender upon its request for all reasonable expenses, disbursements and advances incurred or made by the Lender in accordance with any provision of, or carrying out its duties and obligations under, this Pledge Agreement (including the reasonable compensation and fees and the expenses and disbursements of its agents, any independent certified public accounts and independent counsel), except Lender shall not be entitled to reimbursement for any expense, disbursement or advances as may be attributable to gross negligence, bad faith or willful misconduct on the part of Lender. Section 17. Foreclosure Expenses. All expenses (including reasonable fees and disbursements of counsel) incurred in compliance with this Pledge Agreement by the Lender in connection with any actual or attempted sale, exchange of, or any enforcement, collection, compromise or settlement respecting this Pledge Agreement or the Collateral, or any other action taken in compliance with this Pledge Agreement by the Lender hereunder, whether directly or as attorney-in-fact pursuant to a power of attorney or other authorization herein conferred, for the purpose of satisfaction of the Secured Obligations shall be deemed a Secured Obligation for all purposes of this Pledge Agreement and the Lender may apply the Collateral to payment of or reimbursement of itself for such liability. Section 18. Obligations Absolute. The obligations of Pledgor under this Pledge Agreement are independent of the Obligations or any other obligations of any other party under the Loan Documents, and a separate action or actions may be brought and prosecuted against Pledgor to enforce this Pledge Agreement, irrespective of whether any action is brought against the Borrower or any other party or whether the Borrower or any other party is joined in any such action or actions. The liability of Pledgor under this Pledge Agreement is joint and several and shall be irrevocable, absolute and unconditional irrespective of, and Pledgor hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document or any agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations or any other obligations of any other party under the Loan Documents, or any other amendment or waiver of or any consent to departure from any Loan Document, including, without limitation, any increase in the obligations resulting from the extension of additional credit to the Borrower or any of its Subsidiaries or otherwise; (c) any taking, exchange, release or non-perfection of any Collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Obligations; (d) any manner of application of collateral, or proceeds thereof, to all or any of the Obligations, or any manner of sale or other disposition of any collateral for all or any of the Obligations or any other obligations of any other party under the Loan Documents or any other assets of the Borrower or any of its Subsidiaries; (e) any change, restructuring or termination of the corporate structure or existence of the Borrower or any of its Subsidiaries; (f) any failure of the Lender to disclose to the Borrower or any other party any information relating to the financial condition, operations, properties or prospects of any other party now or in the future known to the Lender (Pledgor hereby waiving any duty on the part of the Lender to disclose such information); or (g) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by the Lender that might otherwise constitute a defense available to, or a discharge of, the Borrower, Pledgor, any other party or any other guarantor or surety. This Pledge Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must otherwise be returned by the Lender or any other Person upon the insolvency, bankruptcy or reorganization of the Borrower or any other party or otherwise, all as though such payment had not been made. Section 19. Waivers and Acknowledgments. (a) Pledgor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Secured Obligations and this Pledge Agreement and any requirement that the Lender protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against the Borrower or any other person or any collateral. (b) Pledgor hereby waives any right to revoke this Pledge Agreement, and acknowledges that this Agreement is continuing in nature and applies to all Secured Obligations, whether existing now or in the future. Section 20. Notices. Any notice or other communication given hereunder shall be in writing and shall be sent by registered mail, postage prepaid, overnight courier or personally delivered or facsimiles to the recipient as follows: To Pledgor: UGLY DUCKLING CAR SALES AND FINANCE CORPORATION 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attn: Jon D. Ehlinger Facsimile: (602) 852-6686 with a copy to: SNELL & WILMER, L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attention: David A. Sprentall Facsimile: (602) 382-6070 To Lender: VERDE INVESTMENTS, INC. 2575 East Camelback, Suite 700 Phoenix, Arizona 85016 Attention: Stephen P. Johnson Telephone: (602) 778-5003 Facsimile: (602) 778-5025 To UDC: UGLY DUCKLING CORPORATION 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attn: Jon D. Ehlinger Facsimile: (602) 852-6686 with a copy to: SNELL & WILMER, L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attention: David A. Sprentall Facsimile: (602) 382-6070 Section 21. General Provisions. (a) The failure of the Lender to exercise, or any delay in exercising, any right, power or remedy hereunder, shall not operate as a waiver thereof, nor shall any single or partial exercise by the Lender of any right, power or remedy hereunder preclude any other or future exercise thereof, or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law or any other agreement. (b) The representations, covenants and agreements of Pledgor herein contained shall survive the date hereof; provided, however that only Section 14 and Section 16 shall survive after the Final Date. (c) Neither this Pledge Agreement nor the provisions hereof can be changed, waived or terminated unless any such change, waiver or termination shall be in writing, signed by the parties hereto. This Pledge Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors, legal representatives and assigns. If any provision of this Pledge Agreement shall be invalid or unenforceable in any respect or in any jurisdiction, the remaining provisions shall remain in full force and effect and shall be enforceable to the maximum extent permitted by law. (d) This Pledge Agreement may be executed in counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute one instrument. (e) THE VALIDITY OF THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF ARIZONA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS PLEDGE AGREEMENT MAY BE TRIED AND LITIGATED IN THE UNITED STATES DISTRICT COURT FOR ARIZONA. PLEDGOR AND LENDER WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. UDC AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS PLEDGE AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Pledge Agreement on the date first above written. [Remainder of Page Left Intentionally Blank] UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation By: Name: Title: UGLY DUCKLING CORPORATION, a Delaware corporation By: Name: Title: VERDE INVESTMENTS, INC., an Arizona corporation By: Name: Title: EX-10.26(F) 16 0016.txt STOCK PLEDGE AGREEMENT - BNY STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT dated as of January 11, 2001 (the "Pledge Agreement") among UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation formerly known as Duck Ventures, Inc. ("Pledgor"), as owner of all of the outstanding capital stock in Ugly Duckling Receivables Corp. II ("UDRC II"), a Delaware corporation, and Ugly Duckling Receivables Corp. III, a Delaware corporation ("UDRC III"), UGLY DUCKLING CORPORATION, a Delaware corporation ("UDC") and BNY MIDWEST TRUST COMPANY, as collateral agent (in such capacity, together with its successors in such capacity, the "Collateral Agent") for the Lenders from time to time party to the Loan Agreement referred to below. INTRODUCTORY STATEMENTS Pledgor is the sole holder of fifty (50) shares of common stock, $.01 par value per share in UDRC II and one thousand (1,000) shares of common stock, $.01 par value per share, in UDRC III (collectively, together with the capital stock of each New Issuer (as defined below) pledged or required to be pledged hereunder, the "Pledged Shares"). UDC, as borrower, has on the date hereof entered into a Senior Secured Loan Agreement with certain lenders (such lenders, together with their successors and assigns, the "Lenders") and the Collateral Agent (as such agreement may be amended, supplemented or otherwise modified from time to time, the "Loan Agreement") pursuant to which UDC has borrowed money from the Lenders. Pledgor, which is a wholly owned subsidiary of UDC, will receive substantial direct and indirect benefits from the loans made to UDC under the Loan Agreement and Pledgor has agreed to (i) guarantee the Obligations (as defined in the Loan Agreement) pursuant to the Guaranty (as defined in the Loan Agreement), and (ii) pledge the Pledged Shares and any proceeds thereof as security for Pledgor's obligations under the Guaranty. Accordingly, the Pledged Shares and any proceeds thereof will secure obligations of Pledgor to Lenders. Terms used herein but not defined herein shall have the meanings assigned to such terms in the Loan Agreement. In consideration of the premises and of the agreements herein contained, Pledgor, Lenders and UDC agree as follows: SECTION 1. Definitions. (a) Capitalized terms used but not otherwise defined in this Pledge Agreement shall have the meanings specified therefor in the Loan Agreement. (b) As used herein, the term "Final Date" shall mean the date upon which all of the Obligations as defined in the Loan Agreement have been fully paid and performed to the satisfaction of each Lender. The term "Loan Documents" shall mean the Loan Agreement, the Notes, the Guaranty, the Collateral Account Agreement, this Pledge Agreement and any and all documents, instruments and agreements securing and/or relating to the Obligations of UDC or Pledgor to any Lender. SECTION 2. Pledge of Stock and Grant of Security Interest. As security for the prompt payment and performance in full when due of the Secured Obligations (as defined below), Pledgor hereby delivers, pledges and assigns to the Collateral Agent, for the benefit of the Collateral Agent and the ratable benefit of the Lenders and grants in favor of the Collateral Agent, for the benefit of the Collateral Agent and the ratable benefit of the Lenders, a first priority security interest in all of Pledgor's right, title and interest in and to the Pledged Shares (which represent all capital stock of each issuer of Pledged Shares) and all capital stock of each New Issuer (as defined below), together with all of Pledgor's rights and privileges with respect thereto, all proceeds, income and profits thereof, all dividends and other distributions in respect thereof (including, without limitation, any and all investment property distributed in respect thereof) and all property (including, without limitation, all investment property) received in exchange thereof or in substitution therefor (the "Collateral"). SECTION 3. This Agreement secures, and the Collateral is collateral security for, the prompt payment and performance in full when due, whether on a specified payment date, at stated maturity, by acceleration or otherwise (including, without limitation, the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code or any similar law) of all obligations of UDC and all obligations of Pledgor, in each case of every type and nature, now or hereafter existing under the Loan Documents (including, without limitation, the Guaranty), whether for principal, interest (including, without limitation, interest that, but for the filing of a petition in bankruptcy would accrue on such obligations), fees, expenses, indemnities or otherwise (all such obligations being the "Secured Obligations"). Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts that constitute part of the Secured Obligations and would be owed to the Collateral Agent or any Lender under the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding. SECTION 4. Dividends, Options, or Other Adjustments. Until the Final Date, Pledgor shall deliver as Collateral to the Collateral Agent, and, as security for the full and complete payment and performance of all of the Secured Obligations hereby grants to the Collateral Agent a continuing security interest in, any and all additional shares of stock or any other property (including, without limitation, investment property) of any kind distributable on or by reason of the Collateral, whether in the form of or by way of stock dividends, warrants, total or partial liquidation, conversion, prepayments, redemptions or otherwise, including cash dividends and any cash interest payments. If any such dividends, interest payments, additional shares of capital stock, instruments, or other property, a security interest in which can only be perfected by possession, which are distributable on or by reason of the Collateral pledged hereunder, shall come into the possession or control of Pledgor, Pledgor shall forthwith transfer and deliver such property to the Collateral Agent as Collateral hereunder. SECTION 5. Delivery of Share Certificates; Stock Powers. Pledgor shall promptly deliver to the Collateral Agent, or cause UDRC II or UDRC III or any other entity issuing the Collateral to deliver directly to Lender, share certificates or other instruments representing any Collateral issued to, acquired or received by Pledgor after the date of this Pledge Agreement with a stock or bond power duly executed in blank by Pledgor. If, at any time the Collateral Agent notifies Pledgor that it requires additional stock powers endorsed in blank, Pledgor shall promptly execute in blank and deliver the requested power to the Collateral Agent. SECTION 6. Power of Attorney. Pledgor hereby constitutes and irrevocably appoints the Collateral Agent as Pledgor's true and lawful attorney-in-fact, with the power, after the occurrence of an "Event of Default" under and as defined in the Loan Agreement, to the full extent permitted by law, to affix to any certificates and documents representing the Collateral, the stock or bond powers delivered with respect thereto, and to transfer or cause the transfer of Collateral, or any part thereof, on the books of UDRC II or UDRC III or any other entity issuing such Collateral, to the name of the Collateral Agent or any nominee of either, and thereafter to exercise with respect to such Collateral all the rights, powers and remedies of an owner. The power of attorney granted pursuant to this Pledge Agreement and all authority hereby conferred are granted and conferred solely to protect the Collateral Agent's interest in the Collateral and shall not impose any duty upon the Collateral Agent to exercise any power. This power of attorney shall be irrevocable as one coupled with an interest until the Final Date. SECTION 7. Inducing Representations of Pledgor. Pledgor represents and warrants to the Collateral Agent and each Lender that: (a) The Pledged Shares are validly issued, fully paid for and non-assessable. (b) The Pledged Shares of UDRC II and UDRC III represent all of the issued and outstanding capital stock of UDRC II and UDRC III, respectively. (c) Pledgor is the sole legal and beneficial owner of, and has good and marketable title to, the Pledged Shares, free and clear of all pledges, liens, security interests and other encumbrances except the security interest created by this Pledge Agreement, and Pledgor has the unqualified right and authority to execute and perform this Pledge Agreement. (d) No options, warrants or other agreements with respect to the Collateral are outstanding. (e) Any consent, approval or authorization of or designation or filing with any authority on the part of Pledgor which is required in connection with the pledge and security interest granted under this Pledge Agreement has been obtained or effected. (f) Neither the execution and delivery of this Pledge Agreement by Pledgor, the consummation of the transaction contemplated hereby nor the satisfaction of the terms and conditions of this Pledge Agreement: (i) conflicts with or results in any breach or violation of any provision of the articles of incorporation or bylaws of Pledgor or any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to Pledgor or any of its properties, including regulations issued by an administrative agency or other governmental authority having supervisory powers over Pledgor; (ii) conflicts with, constitutes a default (or an event which with the giving of notice or the passage of time, or both, would constitute a default) by Pledgor under, or a breach of or contravenes any provision of, any agreement to which Pledgor or any of its subsidiaries is a party or by which it or any of their properties is or may be bound or affected, including without limitation any loan agreement, mortgage, indenture or other agreement or instrument; or (iii)results in or requires the creation of any lien upon or in respect of any of Pledgor's assets except the lien created by this Pledge Agreement. (g) With respect to all Pledged Shares heretofore delivered to and currently held by Lender, and upon delivery to the Collateral Agent of any Pledged Shares hereafter issued to, acquired or received by Pledgor, the Collateral Agent has (and, with respect to Pledged Shares hereafter delivered, will have) a valid, perfected first priority security interest in and to the Collateral, enforceable as such against all other creditors of Pledgor and against all persons purporting to purchase any of the Collateral from Pledgor. (h) The board of directors of UDRC II and UDRC III have duly adopted the resolutions identified on Exhibits A-1 and A-2, respectively, attached hereto (the "Standing Dividend Resolutions"), and such resolutions remain in full force and effect and have not been rescinded, amended, altered, revoked or modified in any respect. Pursuant to the Standing Dividend Resolutions, Pledgor has delivered the UDRC II Dividend Direction Letter and the UDRC III Dividend Direction Letter to the Trustee. (i) The chief place of business and chief executive office of Pledgor and the office where Pledgor keeps its records concerning the Collateral are located at the address specified below for Pledgor. SECTION 8. Obligations of UDC and Pledgor. Pledgor further represents, warrants and covenants to the Collateral Agent and each Lender that: (a) Pledgor will not sell, transfer or convey any interest in, or suffer or permit any lien or encumbrance to be created upon or to exist with respect to, any of the Collateral during the term of this Pledge Agreement, other than the lien granted hereunder and the lien granted to General Electric Capital Corporation ("GECC") pursuant to the Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement entered into as of August 15, 1997 among GECC, UDC, Pledgor, and certain other entities, as such Agreement may be amended from time to time. (b) During the Securitization Period, Pledgor will not cause or permit UDRC II or UDRC III to enter into any securitization agreement or arrangement other than as set forth in the UDRC II Securitization Documents or the UDRC III Securitization Documents, or substantially similar agreements and arrangements in the future, without the prior written consent of Lender. (c) Pledgor will not effect any securitizations through any subsidiary or affiliate other than UDRC II or UDRC III unless (i) either (A) Pledgor pledges to Lender all of the capital stock of any such subsidiary or affiliate (the "New Issuer") and Pledgor delivers to Lender a dividend direction letter executed by the New Issuer and supported by a standing dividend resolution of the board of directors of New Issuer, which dividend direction letter and standing dividend resolution are each substantially similar to the UDRC II Dividend Direction Letter and the UDRC III Dividend Direction Letter or the UDRC II Standing Dividend Resolution and the UDRC III Standing Dividend Resolution, as applicable, or (B) the New Issuer pledges directly to Lender all of its interests in any trust or other entity which issues interests in a securitization, or (C) UDC or Pledgor otherwise complies with the provisions of Section 3.1 of the Loan Agreement, and (ii) all other matters in connection with such securitization are reasonably satisfactory in form and substance to the Required Lenders. (d) Pledgor will, at Pledgor's expense, at any time and from time to time at the request of the Collateral Agent or the Required Lenders do, make, procure, execute and deliver all acts, things, writings, assurances and other documents as may be reasonably proposed by Lender to preserve, establish, demonstrate or enforce the rights, interests and remedies of the Collateral Agent and the Lenders as created by, provided in, or emanating from this Pledge Agreement. (e) Pledgor will not take any action which would cause UDRC II or UDRC III or any New Issuer to issue any other capital stock without the prior written consent of the Required Lenders. (f) Pledgor will not consent to any amendment to the articles of incorporation of UDRC II or UDRC III or any New Issuer without the prior written consent of the Required Lenders. (g) Pledgor will not take any action which would cause, and will not consent to, any transfer by UDRC II or UDRC III or any New Issuer of the UDRC II Residual Certificates, the UDRC III Residual Certificates or any Additional Residual Certificates. SECTION 9. Dividends. Pledgor has not and will not permit UDRC II or UDRC III or any New Issuer to, rescind, amend, alter, revoke or modify any Standing Dividend Resolutions, the UDRC II Dividend Direction Letter or the UDRC III Dividend Direction Letter, as the case may be, in any respect without the prior written consent of the Required Lenders. SECTION 10. Voting Proxy. Pledgor hereby grants to the Collateral Agent an irrevocable proxy to vote the Pledged Shares at the direction of the Required Lenders with respect to any matter permitted under the Articles of Incorporation of UDRC II and UDRC III and each New Issuer, as the case may be, which proxy shall continue until the Final Date. Pledgor represents and warrants that it has directed UDRC II and UDRC III and each New Issuer, in accordance with Section 217 of the Delaware General Corporation Law, to reflect on UDRC II's and UDRC III's and such New Issuer's books, respectively, the right of the Collateral Agent to vote the Pledged Shares at the direction of the Required Lenders. Upon the request of the Collateral Agent or the Required Lenders, Pledgor shall deliver to the Collateral Agent and the Lenders such further evidence of such irrevocable proxy to vote the Collateral as Collateral Agent or Required Lenders may request pursuant hereto. SECTION 11. Rights of the Collateral Agent and the Lenders. The Collateral Agent or any Lender may, at any time and without notice, discharge any taxes, liens, security interests or other encumbrances levied or placed on the Collateral, pay for the maintenance and preservation of the Collateral, or pay for insurance on the Collateral; the amount of such payments, plus any and all reasonable fees, costs and expenses of the Collateral Agent and each such Lender (including attorneys' fees and disbursements) in connection therewith, shall be reimbursed by UDC within five (5) days of demand, with interest thereon from the date paid at the rate provided in the Loan Agreement. SECTION 12. Remedies Upon Event of Default under the Loan Agreement. The Collateral Agent may exercise any one or more of the following remedies: (a) Upon the occurrence of an "Event of Default" pursuant to the Loan Agreement, the Collateral Agent may, without notice to Pledgor: (i) cause the Collateral to be transferred to the Collateral Agent's name or to the name of a nominee of the Collateral Agent, and thereafter exercise as to such Collateral all of the rights, powers and remedies of an owner; (ii) collect by legal proceedings or otherwise all dividends, interest, principal payments, capital distributions and other sums now or hereafter payable on account of the Collateral, and hold all such sums as part of the Collateral, or apply such sums to the payment of the Secured Obligations in such manner and order as the Collateral Agent shall decide at the direction of the Required Lenders; or (iii)enter into any extension, subordination, reorganization, deposit, merger, or consolidation agreement, or any other agreement relating to or affecting the Collateral, and in connection therewith deposit or surrender control of the Collateral thereunder, and accept other property in exchange therefor and hold and apply such property or money so received in accordance with the provisions hereof. (b) In addition to all the rights and remedies of a secured party under the Uniform Commercial Code as in effect in any applicable jurisdiction, upon the occurrence of an "Event of Default" pursuant to the Loan Agreement, the Collateral Agent shall have the right, without demand of performance or other demand, advertisement or notice of any kind, except as specified below, to or upon Pledgor or any other person (all and each of which demands, advertisements and/or notices are hereby expressly waived to the extent permitted by law), to proceed forthwith to collect, receive, appropriate and realize upon the Collateral, or any part thereof in one or more parcels in accordance with applicable securities laws and in a manner designed to ensure that such sale will not result in a distribution of the Pledged Shares in violation of Section 5 of the Securities Act of 1933, as amended (the "Securities Act") and on such terms (including a requirement that any purchaser of all or any part of the Collateral shall be required to purchase any securities constituting the Collateral solely for investment and without any intention to make a distribution thereof) as the Collateral Agent, at the direction of the Required Lenders, deems appropriate without any liability for any loss due to a decrease in the market value of the Collateral during the period held. If any notification to Pledgor of intended disposition of the Collateral is required by law, such notification shall be deemed reasonable and properly given if mailed to Pledgor, postage prepaid, at least ten (10) days before any such disposition at the address indicated by Pledgor's signature. Any disposition of the Collateral or any part thereof may be for cash or on credit or for future delivery without assumption of any credit risk, with the right of the Collateral Agent to purchase all or any part of the Collateral so sold at any such sale or sales, public or private, free of any equity or right of redemption in Pledgor, which right of equity is, to the extent permitted by applicable law, hereby expressly waived or released by Pledgor. (c) At the direction of the Required Lenders, the Collateral Agent shall sell the Collateral on any credit terms which the Required Lenders deem reasonable. The out-of-pocket costs and expenses of such sale shall be for the account of Pledgor. The sale of any of the Collateral on credit terms shall not relieve Pledgor of its liability with respect to the Secured Obligations. All payments received in respect of any sale of the Collateral by the Collateral Agent or any Lender shall be applied to the Secured Obligations as and when such payments are received and any price received by the Collateral Agent or any Lender in respect of such sale shall be conclusive and binding upon Pledgor. (d) Pledgor recognizes that it may not be feasible to effect a public sale of all or a part of the Collateral by reason of certain prohibitions contained in the Securities Act, and that it may be necessary to sell privately to a restricted group of purchasers who will be obliged to agree, among other things, to acquire the Collateral for their own account, for investment and not with a view for the distribution or resale thereof. Pledgor agrees that private sales may be at prices and other terms less favorable to the Seller than if the Collateral were sold at public sale, and that the Collateral Agent has no obligation to delay the sale of any Collateral for the period of time necessary to permit the registration of the Collateral for public sale under the Securities Act. Pledgor agrees that a private sale or sales made under the foregoing circumstances shall be deemed to have been made in a commercially reasonable manner. (e) If any consent, approval or authorization of any state, municipal or other governmental department, agency or authority shall be necessary to effectuate any sale or other disposition of the Collateral or any partial disposition of the Collateral, Pledgor will execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization, and will otherwise use its best efforts to secure the same. (f) The Collateral Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold or disposed of, free from any other claim or right of whatever kind, including any equity or right of redemption of Pledgor. Pledgor specifically waives, to the extent permitted by applicable law, all rights of redemption, stay or appraisal which it may have under any rule of law or statute now existing or hereafter adopted. (g) The Collateral Agent shall not be obligated to make any sale or other disposition of the Collateral permitted under this Pledge Agreement, unless the terms thereof shall be satisfactory to the Collateral Agent. The Collateral Agent may, without notice or publication, adjourn any such private or public sale and, upon five (5) days' prior notice to Pledgor, hold such sale at any time or place to which the same may be so adjourned. In case of any such sale of all or any part of the Collateral on credit or future delivery, the Collateral so sold may be retained by the Collateral Agent or any Lender until the selling price is paid by the purchaser thereof, but neither the Collateral Agent nor any Lender shall incur any liability in case of the failure of such purchaser to take up and pay for the property so sold and, in the case of any such failure, such property may again be sold as herein provided. (h) All of the rights and remedies granted to the Collateral Agent and the Lenders, including but not limited to the foregoing, shall be cumulative and not exclusive and shall be enforceable alternatively, successively or concurrently as the Collateral Agent or such Lender may deem expedient. SECTION 13. Limitation on Liability. (a) None of the Collateral Agent, any Lender nor any of their respective directors, officers, employers or agents shall be liable to Pledgor, UDC, UDRC II, UDRC III or any New Issuer for any action taken or omitted to be taken by it or them hereunder, or in connection herewith, except that each of the Collateral Agent and each Lender shall be liable for its own (and only for its own) gross negligence, bad faith or willful misconduct. (b) The Collateral Agent and each Lender shall be protected and shall incur no liability to any party in relying upon the accuracy, acting in reliance upon the contents, and assuming the genuineness of any notice, demand, certificate, signature, instrument or other document the Collateral Agent or such Lender, as the case may be, reasonably believes to be genuine and to have been duly executed by the appropriate signatory, and (absent actual knowledge to the contrary of any officer of the Collateral Agent or such Lender, as the case may be) neither the Collateral Agent nor any Lender shall be required to make any independent investigation with respect thereto. The Collateral Agent and each Lender shall at all times be free independently to establish to its reasonable satisfaction, but shall have no duty to independently verify, the existence or nonexistence of facts that are a condition to the exercise or enforcement of any right or remedy hereunder. (c) The Collateral Agent and each Lender may consult with qualified counsel, financial advisors or accountants and shall not be liable for any action taken or omitted to be taken by it hereunder in good faith and in accordance with the advice of such counsel, financial advisors or accountants. (d) The Collateral Agent shall not be required to exercise any discretion or take any action under this Pledge Agreement, but shall be required to act or refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders, and the Collateral Agent shall not be liable to the Pledgor or any Lender with respect to any action taken or omitted at the direction of the Required Lenders, provided that the Collateral Agent shall not be required to take any action that exposes the Collateral Agent in its sole judgment to personal liability or that is contrary to this Pledge Agreement or applicable law. SECTION 14. Indemnification. UDC and Pledgor jointly and severally agree to indemnify each of the Collateral Agent, each Lender, each of their respective Affiliates and Subsidiaries (as such terms are defined in the Loan Agreement) and their respective directors, officers, employees and agents, for, and hold each of the Collateral Agent, each Lender, each of their respective Affiliates and Subsidiaries and all of their respective directors, officers, employees and agents harmless against, any loss, liability or expense (including the costs and expenses of defending against any claim of liability) arising out of or in connection with this Pledge Agreement and the transactions contemplated hereby, except that no indemnitee shall be entitled to indemnification to the extent any such loss, liability or expense results from the gross negligence, bad faith or willful misconduct of such indemnitee. The obligation of UDC and Pledgor under this Section shall survive the termination of this Pledge Agreement. SECTION 15. Termination. This Pledge Agreement shall continue in full force and effect until the Final Date. Subject to any sale or other disposition of the Collateral pursuant to and in accordance with this Pledge Agreement, the Collateral shall be returned to Pledgor on the Final Date. The obligation of UDC under Sections 13 and 15 of this Pledge Agreement shall survive the termination of this Pledge Agreement. SECTION 16. Compensation and Reimbursement. UDC agrees for the benefit of each Lender and the Collateral Agent and as part of the Secured Obligations to reimburse each Lender and the Collateral Agent upon its request for all reasonable expenses, disbursements and advances incurred or made by such Lender or the Collateral Agent in accordance with any provision of, or carrying out its duties and obligations under, this Pledge Agreement (including the reasonable compensation and fees and the expenses and disbursements of its agents, any independent certified public accounts and independent counsel), except no Person shall be entitled to reimbursement for any expense, disbursement or advances as may be attributable to gross negligence, bad faith or willful misconduct on the part of such Person. SECTION 17. Foreclosure Expenses. All expenses (including reasonable fees and disbursements of counsel) incurred in compliance with this Pledge Agreement by the Collateral Agent or any Lender in connection with any actual or attempted sale, exchange of, or any enforcement, collection, compromise or settlement respecting this Pledge Agreement or the Collateral, or any other action taken in compliance with this Pledge Agreement by the Collateral Agent or any Lender hereunder, whether directly or as attorney-in-fact pursuant to a power of attorney or other authorization herein conferred, for the purpose of satisfaction of the Secured Obligations shall be deemed an Secured Obligation for all purposes of this Pledge Agreement and each of the Collateral Agent and each Lender may apply the Collateral to payment of or reimbursement of itself for such liability. SECTION 18. Obligations Absolute. The obligations of Pledgor under this Pledge Agreement are independent of the Obligations or any other obligations of any other Loan Party under the Loan Documents, and a separate action or actions may be brought and prosecuted against Pledgor to enforce this Pledge Agreement, irrespective of whether any action is brought against the Borrower or any other Loan Party or whether the Borrower or any other Loan Party is joined in any such action or actions. The liability of Pledgor under this Pledge Agreement is joint and several and shall be irrevocable, absolute and unconditional irrespective of, and Pledgor hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, any or all of the following: (a) any lack of validity or enforceability of any Loan Document or any agreement or instrument relating thereto; (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations or any other obligations of any other Loan Party under the Loan Documents, or any other amendment or waiver of or any consent to departure from any Loan Document, including, without limitation, any increase in the obligations resulting from the extension of additional credit to the Borrower or any of its Subsidiaries or otherwise; (c) any taking, exchange, release or non-perfection of any Collateral, or any taking, release or amendment or waiver of or consent to departure from any other guaranty, for all or any of the Obligations; (d) any manner of application of collateral, or proceeds thereof, to all or any of the Obligations, or any manner of sale or other disposition of any collateral for all or any of the Obligations or any other obligations of any other Loan Party under the Loan Documents or any other assets of the Borrower or any of its Subsidiaries; (e) any change, restructuring or termination of the corporate structure or existence of the Borrower or any of its Subsidiaries; (f) any failure of the Collateral Agent or any Lender to disclose to the Borrower or any other Loan Party any information relating to the financial condition, operations, properties or prospects of any other Loan Party now or in the future known to any the Collateral Agent or any Lender (Pledgor hereby waiving any duty on the part of the Collateral Agent or any Lender to disclose such information); or (g) any other circumstance (including, without limitation, any statute of limitations) or any existence of or reliance on any representation by the Collateral Agent or any Lender that might otherwise constitute a defense available to, or a discharge of, the Borrower, Pledgor, any other Loan Party or any other guarantor or surety. SECTION 19. This Pledge Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must otherwise be returned by the Collateral Agent or any Lender or any other Person upon the insolvency, bankruptcy or reorganization of the Borrower or any other Loan Party or otherwise, all as though such payment had not been made. SECTION 20. Waivers and Acknowledgments. (a) Pledgor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Secured Obligations and this Pledge Agreement and any requirement that the Collateral Agent or any Lender protect, secure, perfect or insure any Lien or any property subject thereto or exhaust any right or take any action against the Borrower or any other Person or any collateral. (b) Pledgor hereby waives any right to revoke this Pledge Agreement, and acknowledges that this Agreement is continuing in nature and applies to all Secured Obligations, whether existing now or in the future. SECTION 21. Notices. Any notice or other communication given hereunder shall be in writing and shall be sent by registered mail, postage prepaid, overnight courier or personally delivered or facsimiles to the recipient as follows: To Pledgor: UGLY DUCKLING CAR SALES AND FINANCE CORPORATION 2525 East Camelback Road Suite 500 Phoenix, Arizona 85016 Attn: Jon D. Ehlinger Facsimile: (602) 852-6637 with a copy to: SNELL & WILMER, L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attention: David A. Sprentall Facsimile: (602) 382-6070 To Collateral Agent: BNY MIDWEST TRUST COMPANY 2 North LaSalle Street Chicago, Illinois 60602 Attention: Megan Carmody Telephone: (312) 827-8572 Facsimile: (312) 827-8563 To UDC: UGLY DUCKLING CORPORATION 2525 East Camelback Road Suite 500 Phoenix, Arizona 85016 Attn: Jon D. Ehlinger Facsimile: (602) 852-6696 with a copy to: SNELL & WILMER, L.L.P. One Arizona Center Phoenix, Arizona 85004-0001 Attention: David A. Sprentall Facsimile: (602) 382-6070 SECTION 22. General Provisions. (a) The failure of the Collateral Agent or any Lender to exercise, or any delay in exercising, any right, power or remedy hereunder, shall not operate as a waiver thereof, nor shall any single or partial exercise by the Collateral Agent or any Lender of any right, power or remedy hereunder preclude any other or future exercise thereof, or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided by law or any other agreement. (b) The representations, covenants and agreements of Pledgor herein contained shall survive the date hereof; provided, however, that only Sections 13 and 15 shall survive after the Final Date. (c) Neither this Pledge Agreement nor the provisions hereof can be changed, waived or terminated unless any such change, waiver or termination shall be in writing, signed by the parties hereto. This Pledge Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors, legal representatives and assigns. If any provision of this Pledge Agreement shall be invalid or unenforceable in any respect or in any jurisdiction, the remaining provisions shall remain in full force and effect and shall be enforceable to the maximum extent permitted by law. (d) This Pledge Agreement may be executed in counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute one instrument. (e) THE VALIDITY OF THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS PLEDGE AGREEMENT MAY BE TRIED AND LITIGATED IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. PLEDGOR, COLLATERAL AGENT AND LENDER WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS PLEDGE AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Pledge Agreement on the date first above written. UGLY DUCKLING CAR SALES AND FINANCE CORPORATION, an Arizona corporation By: _____________________________ Name: ___________________________ Title: __________________________ UGLY DUCKLING CORPORATION, a Delaware corporation By: _____________________________ Name: ___________________________ Title: __________________________ BNY MIDWEST TRUST COMPANY By: _____________________________ Name: ___________________________ Title: __________________________ EX-10.27 17 0017.txt OFFER LETTER TO PURCHASE OUTSTANDING STOCK April 16, 2001 Board of Directors Ugly Duckling Corporation 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Re: Merger Proposal Gentlemen: The purpose of this letter is to propose the principal terms of the acquisition of all outstanding common stock of Ugly Duckling Corporation not already owned by me through a merger with Ugly Duckling Corporation. Merger: Ugly Duckling Corporation ("UDC") shall merge with a new corporation owned by me ("UDC Acquisition Corp.") in a merger transaction where UDC Acquisition Corp. will be the surviving entity (the "Merger"). Greg Sullivan will have an option to acquire up to a 20% interest in UDC Acquisition Corp. and will continue to operate UDC's business as Chief Executive Officer. I do not expect that any personnel of UDC will be terminated as a result of the merger and I will continue UDC's business. UDC Shares: As part of the Merger, the holders of all outstanding shares of common stock of UDC not held by me (the "UDC Shares") shall receive $7.00 per UDC Share (the "Merger Price"). The Merger Price represents a premium of nearly 100% over the current market price of the UDC Shares. The Merger Price shall be paid partially in cash in the amount of $2.00 per UDC Share and the balance of $5.00 per UDC Share shall be paid by the promissory notes of UDC to the holders of the UDC Shares (the "Merger Notes"). The Merger Notes shall accrue interest at 10%, be payable in semi-annual installments of interest only and mature in 10 years. The Merger Notes shall be unsecured and subordinate to all other existing indebtedness of UDC. Page 2 of 2 Board of Directors April 16, 2001 Conditions: The Merger is conditioned upon satisfaction of the following primary contingencies: UDC Board Approval. Approval of the Merger by the Board of Directors of UDC. I understand that the Board of Directors of UDC may require a fairness opinion before granting approval. UDC Shareholder Approval. Approval of the Merger by the holders of the required number of UDC Shares. If the holders of 5% or more of the UDC Shares exercise statutory appraisal rights, then I may elect to terminate the Merger. Creditor Approval. Approval of the Merger by all creditors of UDC that may have a right to object to the Merger. Regulatory Approvals. The receipt of any approvals required of any applicable governmental agencies. Disclosure: I intend to revise the Schedule 13D and the Schedule 13E-3 I filed with the Securities Exchange Commission regarding my possible intention to acquire additional UDC Shares to disclose this proposal. Each party agrees that it will not issue any press release or other disclosure relating to the proposed transaction without the prior approval of the other, which shall not be unreasonably withheld or delayed, unless such disclosure is required by applicable securities laws (in which event prior notice of the contents of the proposed disclosure shall be furnished). Documentation: This proposal of the principal terms of the Merger is not an offer and does not create any legally binding obligation (except that the last sentence of the preceding paragraph shall be binding upon the parties). However, we agree to use good faith efforts to prepare and execute mutually acceptable merger documents and neither party shall have any legally binding obligation to complete the proposed transaction unless and until mutually acceptable Merger Documents are executed. Please respond by April 25, 2001, 2000. You may contact me at 602-778-5001 if you any questions or comments regarding the proposed Merger. Very truly yours, Ernest C. Garcia, II EX-10.28 18 0018.txt LOAN AND SECURITY AGREEMENT - GREENWICH ================================================================================ MASTER LOAN AND SECURITY AGREEMENT - -------------------------------------------------------------------------------- Dated as of April 13, 2001 - -------------------------------------------------------------------------------- UGLY DUCKLING CORPORATION, UGLY DUCKLING CAR SALES & FINANCE CORPORATION, UGLY DUCKLING CREDIT CORPORATION, UGLY DUCKLING CAR SALES, INC., UGLY DUCKLING CAR SALES FLORIDA, INC., and UGLY DUCKLING FINANCE CORPORATION, as the Borrower and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. as the Lender ================================================================================
TABLE OF CONTENTS Page Section 1 Definitions and Accounting Matters...................................................................1 1.01 Certain Defined Terms...................................................................................1 1.02 Accounting Terms and Determinations....................................................................22 1.03 UCC Terms and Determinations...........................................................................22 Section 2 Advances, Note and Prepayments......................................................................22 2.01 Advances...............................................................................................22 2.02 Notes..................................................................................................22 2.03 Procedure for Borrowing................................................................................23 2.04 Limitation on Types of Advances; Illegality............................................................24 2.05 Repayment of Advances; Interest........................................................................24 2.06 Mandatory Prepayments or Pledge........................................................................26 2.07 Optional Prepayments...................................................................................26 2.08 Requirements of Law....................................................................................26 2.09 Extension of Termination Date..........................................................................27 2.10 Power of Attorney......................................................................................27 Section 3 Payments; Computations; Taxes; Commitment Fee.......................................................27 3.01 Payments...............................................................................................27 3.02 Computations...........................................................................................28 3.03 U.S. Taxes.............................................................................................28 3.04 Commitment Fee.........................................................................................29 Section 4 Collateral Security.................................................................................29 4.01 Collateral; Security Interest..........................................................................29 4.02 Further Documentation..................................................................................32 4.03 Changes in Locations, Name, etc........................................................................32 4.04 Lender's Appointment as Attorney-in-Fact...............................................................32 4.05 Performance by Lender of Borrower's Obligations........................................................34 4.06 Proceeds...............................................................................................34 4.07 Remedies...............................................................................................34 4.08 Limitation on Duties Regarding Presentation of Collateral..............................................35 4.09 Powers Coupled with an Interest........................................................................35 4.10 Release of Security Interest...........................................................................35 Section 5 Conditions Precedent................................................................................35 5.01 Initial Advance........................................................................................35 5.02 Initial and Subsequent Advances........................................................................38 Section 6 Representations and Warranties......................................................................39 6.01 Existence..............................................................................................39 6.02 Financial Condition....................................................................................39 6.03 Litigation.............................................................................................39 6.04 No Breach..............................................................................................39 6.05 Action.................................................................................................40 6.06 Approvals..............................................................................................40 6.07 Margin Regulations.....................................................................................40 6.08 Taxes..................................................................................................40 6.09 Investment Company Act.................................................................................40 6.10 No Default.............................................................................................40 6.11 Collateral; Collateral Security........................................................................41 6.12 Chief Executive Office; Chief Operating Office; State of Incorporation.................................41 6.13 Location of Books and Records..........................................................................41 6.14 True and Complete Disclosure...........................................................................41 6.15 ERISA..................................................................................................42 6.16 Licenses...............................................................................................42 6.17 No Burdensome Restrictions.............................................................................42 6.18 Subsidiaries...........................................................................................42 6.19 Origination of Contract Loans..........................................................................42 6.20 Borrower Solvent; Fraudulent Conveyance................................................................43 6.21 Master Agency Agreement................................................................................43 6.22 Exchange Debt..........................................................................................43 6.23 Senior Secured Loan....................................................................................43 6.24 Designated Senior Indebtedness.........................................................................43 Section 7 Covenants of the Borrower...........................................................................44 7.01 Financial Statements...................................................................................44 7.02 Litigation.............................................................................................46 7.03 Existence, Compliance, Records, Inspection.............................................................46 7.04 Prohibition of Fundamental Changes.....................................................................47 7.05 Borrowing Base Deficiency..............................................................................47 7.06 Duty to Notify Lender..................................................................................47 7.07 Servicing..............................................................................................47 7.08 Privatization Covenants................................................................................49 7.09 Underwriting Guidelines................................................................................50 7.10 Lines of Business......................................................................................50 7.11 Transactions with Affiliates...........................................................................50 7.12 Limitation on Liens....................................................................................51 7.13 Limitation on Sale of Assets...........................................................................51 7.14 Limitation on Distributions............................................................................51 7.15 Financial Covenants....................................................................................51 7.16 Restricted Payments....................................................................................52 7.17 Servicing Transmission.................................................................................52 7.18 No Amendment or Waiver.................................................................................52 7.19 Insurance..............................................................................................52 7.20 Further Identification of Collateral...................................................................53 7.21 Certificate of a Responsible Officer of the Borrower...................................................53 7.22 Backup Servicer........................................................................................53 7.23 Inventory Facility.....................................................................................53 7.24 Master Agency Agreement................................................................................53 7.25 Stock Pledge Collateral................................................................................53 7.26 Exchange Debt Documents................................................................................53 7.27 Exclusive Source of Financing..........................................................................54 Section 8 Events of Default...................................................................................54 Section 9 Remedies Upon Default...............................................................................56 Section 10 No Duty on Lender's Part............................................................................57 Section 11 Miscellaneous.......................................................................................57 11.01 Waiver.................................................................................................57 11.02 Notices................................................................................................57 11.03 Indemnification and Expenses...........................................................................58 11.04 Amendments.............................................................................................58 11.05 Successors and Assigns.................................................................................58 11.06 Survival...............................................................................................59 11.07 Captions...............................................................................................59 11.08 Counterparts...........................................................................................59 11.09 Loan Agreement Constitutes Security Agreement; Governing Law...........................................59 11.10 SUBMISSION TO JURISDICTION; WAIVERS....................................................................59 11.11 WAIVER OF JURY TRIAL...................................................................................60 11.12 Acknowledgments........................................................................................60 11.13 Hypothecation or Pledge of Collateral..................................................................60 11.14 Assignments; Participations............................................................................60 11.15 Periodic Due Diligence Review..........................................................................61 11.16 Set-Off................................................................................................62 11.17 Intent.................................................................................................62 11.18 Entire Agreement.......................................................................................62 11.19 Confidentiality........................................................................................62
SCHEDULES SCHEDULE 1 Representations and Warranties re: Pledged Contracts that are Not Acquired Contracts SCHEDULE 2 Filing Jurisdictions and Offices SCHEDULE 3 Relevant States SCHEDULE 4 Subsidiaries SCHEDULE 5 Contract Debtor Documents SCHEDULE 6 Representations and Warranties re: Pledged Contracts that are Acquired Contracts SCHEDULE 7 Permitted Liens SCHEDULE 8 Required Insurance SCHEDULE 9 Exchange Debt Documents SCHEDULE 10 Senior Loan Documents
EXHIBITS EXHIBIT A Form of Promissory Note EXHIBIT B Form of Custodial Agreement EXHIBIT C Form of Opinion of Counsel to the Borrower EXHIBIT D Form of Notice of Borrowing and Pledge EXHIBIT E Underwriting Guidelines EXHIBIT F Required Fields for Servicing Transmission EXHIBIT G Form of Borrowing Base Certificate EXHIBIT H Form of Confidentiality Agreement EXHIBIT I Form of Contract EXHIBIT J Master Agency Agreement EXHIBIT K Form of Subordination Agreement EXHIBIT L Collection Policies and Procedures EXHIBIT M Form of Power of Attorney
MASTER LOAN AND SECURITY AGREEMENT This MASTER LOAN AND SECURITY AGREEMENT (as amended from time to time, this "Loan Agreement") dated as of April 13, 2001 is entered into by and between Ugly Duckling Corporation, a Delaware corporation ("UDC"), Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation ("UDCSFC"), Ugly Duckling Credit Corporation, an Arizona corporation ("UDCC"), Ugly Duckling Car Sales, Inc., an Arizona corporation ("Car Sales"), Ugly Duckling Car Sales Florida, Inc., a Florida corporation ("Car Sales Florida") and Ugly Duckling Finance Corporation, an Arizona corporation ("UDFC") (each of the foregoing entities is individually sometimes referred to herein as a "Duck Entity"; all of the Duck Entities are collectively referred to herein as the "Borrower"; UDCC is sometimes referred to herein as the "Servicer"; and Car Sales and Car Sales Florida are sometimes referred to herein as the "Originators"), and Greenwich Capital Financial Products, Inc., a Delaware corporation (hereinafter referred to as the "Lender"). The obligations of the Borrower to the Lender under this Loan Agreement are the joint and several liability of each Duck Entity. RECITALS The Borrower wishes to obtain financing from time to time to provide funding for the origination of Eligible Contracts (as defined herein), which Eligible Contracts are to be sold or contributed from time to time by the Borrower to one or more trusts or other entities to be sponsored by the Borrower or an Affiliate (as defined herein) thereof, or to third-parties, and which Eligible Contracts shall secure Advances (as defined herein) to be made by the Lender hereunder. The Lender has agreed, subject to the terms and conditions of this Loan Agreement (as defined herein), to provide such financing to the Borrower. Accordingly, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1 Definitions and Accounting Matters. 1.01 Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Loan Agreement in the singular to have the same meanings when used in the plural and vice versa): "Accepted Servicing Practices" means, with respect to any Contract, the servicing practices of the Borrower described in the Collection Policies and Procedures attached hereto as Exhibit L, as amended from time to time. "Accounting Period" means a calendar month, beginning with the month during which this Loan Agreement is executed and ending with the calendar month during which the Secured Obligations has been paid in full following termination of this Loan Agreement. "Acquired Contracts" means Champion Contracts, Seminole Contracts, DCT Contracts, VAM Contracts and Contracts acquired by the Borrower from third parties after the date hereof. Page 1 "Advance" has the meaning specified in Section 2.01(a) hereof. "Affiliate" means, with respect to any Person, any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" (together with the correlative meanings of "controlled by" and "under common control with") means possession, directly or indirectly, of the power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the directors or managing general partners (or their equivalent) or such Person, or (b) to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. "Alternate Base Rate" means the rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City, New York. "Applicable Margin" means 2.80%. "Assigned In-Transit Contract Value" means for any Contract, the value that would be assigned to such In-Transit Contract if such In-Transit Contract constituted an Eligible Contract and was included in the Borrowing Base. "Assignment" shall mean, with respect to a Contract, any assignment, including any assignment by an Originator, an originator of Acquired Contracts, or a Dealer other than an Originator to Borrower, and any intervening assignment of such Contract. "Available Liquidity" means, with respect to the Borrower at any date, the aggregate for such date of (i) all cash of the Borrower, (ii) all Cash Equivalents then held by the Borrower, (iii) the unused portion of available commitments under the Inventory Facility and under this Loan Agreement, (iv) the value that would be assigned to all other Eligible Contracts that could be included in the Borrowing Base for purposes of Advances but for the limitation of the Maximum Credit, and (v) the Assigned In-Transit Contract Value. "Average Charged-Off Losses Ratio (Pledged Contracts)," as of any date, means with respect to all Pledged Contracts, the Accounting Period average of the Charged-Off Losses Ratio of all Pledged Contracts for the three (3) consecutive Accounting Periods most recently ended prior to such date; provided that, until the June 2001 Accounting Period has expired, the Average Charged-Off Losses Ratio shall be the average of the Charged-Off Losses Ratio for all Pledged Contracts for the Accounting Periods which have expired. "Average Charged-Off Losses Ratio (Managed Portfolio Contracts)" means, with respect to Managed Portfolio Contracts, the Accounting Period average of the Charged-Off Losses Ratio for all Managed Portfolio Contracts for three (3) consecutive Accounting Periods most recently ended prior to such date; provided that, until the June 2001 Accounting Period has expired, the Average Charged-Off Losses Ratio for all Managed Portfolio Contracts shall be the Accounting Period average of such Charged-Off Losses Ratio for the Accounting Periods which have expired. Page 2 "Backup Servicer" means Wells Fargo Financial Corporation, in its capacity as Backup Servicer pursuant to a backup servicing agreement or such other Backup Servicer as may be requested by Borrower and approved by Lender in Lender's reasonable discretion. "Bankruptcy Code" means the United States Bankruptcy Code of 1978, as amended from time to time. "Borrower" has the meaning provided in the heading hereof. "Borrowing Base" shall equal the lesser of: (X) the sum of (A) the Borrowing Base (UDC Contracts), (B) the Borrowing Base (Existing Non-UDC Contracts) and (C) the Borrowing Base (New Non-UDC Contracts) and (Y) the Market Value of the Eligible Contracts; provided, however, that the Borrowing Base in respect of Eligible Contracts which have been originated prior to the cut-off date of the most recently closed Securitization Transaction shall not exceed the greater of (i) $12,500,000 and (ii) 20% of the outstanding Advances;. "Borrowing Base (Existing Non-UDC Contracts)" means, with respect to all Eligible Contracts owned by Borrower as of the date hereof that were not originated by any present or past Duck Entity, the amount equal to (A) eighty-six percent (86%) of the Principal Balance of all Champion Contracts that the Lender determines are Eligible Contracts; plus (B) seventy-five percent (75%) of the Principal Balance of all Seminole Contracts that the Lender determines are Eligible Contracts; plus (C) fifty percent (50%) of the Principal Balance of all DCT Contracts that the Lender determines are Eligible Contracts; plus (D) forty and one-half percent (40.5%) of the Principal Balance of all VAM Contracts that the Lender determines are Eligible Contracts. "Borrowing Base (New Non-UDC Contracts)" means, with respect to all Eligible Contracts acquired by the Borrower from any third party after the date hereof, an amount as determined by Lender in its sole discretion and agreed to by Borrower. "Borrowing Base (UDC Contracts)" means, with respect to all Eligible Contracts originated by the Originators or any other predecessor Duck Entity at any date, the amount equal to (A) the aggregate Principal Balance thereof multiplied by (B) the least of (i) the Effective Securitization Net Proceeds Percentage, (ii) the Weighted Average Securitization Net Proceeds Percentage as of such date, or (iii) 65%. "Borrowing Base Certificate" means the certificate and accompanying computer file (in a format acceptable to Lender) prepared by the Borrower substantially in the form of Exhibit G attached hereto. "Borrowing Base Deficiency" has the meaning provided in Section 2.06 hereof. "Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day in which the New York Stock Exchange, the Federal Reserve Bank of New York or the Custodian is authorized or obligated by law or executive order to be closed. Page 3 "Capitalized Lease" means a lease of (or other agreement conveying the right to use) real or personal property with respect to which at least a portion of the rent or other amounts thereon constitute Capital Lease Obligations. "Capital Lease Obligations" means, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Loan Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP. "Car Sales" has the meaning set forth in the first paragraph of this Loan Agreement. "Car Sales Florida" has the meaning set forth in the first paragraph of this Loan Agreement. "Cash Collateral Account" means the cash collateral account established pursuant to the Cash Collateral Account Agreement and the collections and other amounts from time to time deposited therein as contemplated by the Cash Collateral Account Agreement. "Cash Collateral Account Agreement" means that certain agreement dated as of January 11, 2001 by and between UDC, Car Sales, UDFC and BNY Midwest Trust Company as in effect on the date hereto, and as such agreement may be amended, modified, renewed and replaced from time to time in connection with the refinancings permitted pursuant to Section 7.25; provided, however, that any such replacement agreement shall not create a Lien on collateral other than the collateral of the type described in the original Cash Collateral Account Agreement. "Cash Equivalents" means (a) securities with maturities of 90 days or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of 90 days or less from the date of acquisition and overnight bank deposits of any commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase obligations of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than seven days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-1 or the equivalent thereof by Standard and Poor's Ratings Services ("S&P") or P-1 or the equivalent thereof by Moody's Investors Service, Inc. ("Moody's") and in either case maturing within 90 days after the day of acquisition, (e) securities with maturities of 90 days or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A2 by Moody's, (f) securities with maturities of 90 days or less from the date of acquisition backed by standby letters of credit issued by any commercial bank satisfying the requirements of clause (b) of this definition or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition. Page 4 "Cashflow Interest Coverage Ratio" means, for UDC and its consolidated subsidiaries as of any Quarterly Measurement Date, the ratio computed by dividing (i) the sum of (x) Net Income during the related Cumulative Quarterly Measurement Period and (y) Interest Expense during the related Cumulative Quarterly Measurement Period by (ii) Interest Expense during the related Cumulative Quarterly Measurement Period. "Certificate of Title" means with respect to each 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 to be registered showing the Contract Debtor as owner, with a notation of the Borrower's first lien or such other status indicated thereon which is necessary to perfect Borrower's security interest in the Financed Vehicle as a first priority security interest, and showing no other actual or possible lien interest in the Financed Vehicle. "Champion Contract" means a Contract which was purchased in a True Sale by Champion Financial Services, Inc. from a Dealer who was not a Borrower entity or an Affiliate of Borrower. "Change of Control" means, except with respect to a Privatization Transaction that satisfies the conditions set forth in Section 7.08 below, the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of outstanding shares of voting stock of the Borrower at any time, if after giving effect to such acquisition (i) such Person or Persons (other than Ernest C. Garcia or Greg Sullivan) owns twenty-five percent (25%) or more of such outstanding voting stock, (ii) Ernest C. Garcia and Greg Sullivan collectively do not own more than fifty percent (50%) of such outstanding shares of voting stock or (iii) Greg Sullivan ceases to be employed by the Borrower in his respective current capacity (or a more senior capacity) for any reason and Ernest C. Garcia cease to be Chairman of the Board of UDC, unless a satisfactory replacement for Greg Sullivan and/or Ernest C. Garcia is approved by Lender in its reasonable discretion. "Charged-Off Contract" means the earliest to occur with respect to a Contract (i) for which all, or any part in excess of 10%, of any Scheduled Payment is due and unpaid ninety (90) days after the due date for such Scheduled Payment; (ii) for which the Financed Vehicle has been surrendered or repossessed and the redemption period granted the Contract Debtor or required by applicable law has expired, or is to be repossessed but is unable to be located or is otherwise subject to being repossessed; (iii) which has been settled for less than the Principal Balance; (iv) which has been liquidated by the Servicer through the sale of the Financed Vehicle; (v) for which proceeds have been received which in the Servicer's judgment, constitute the final amounts recoverable in respect of such Contract; (vi) which has been charged-off (or should have been charged-off) in accordance with the Credit and Collection Policy; or (vii) for which the Contract Debtor is a party to a proceeding under any Debtor Relief Law which arose after the creation of such Contract (other than as a creditor or claimant). Page 5 "Charged-Off Losses Ratio" means as of the end of an Accounting Period with respect to any group of Contracts, the percentage equivalent of a fraction the numerator of which is the Principal Balance of such Contracts which became Charged-Off Contracts during such Accounting Period minus amounts received by Borrower during the Accounting Period and applied to any such Contracts which became Charged-Off Contracts during a previous Accounting Period, and the denominator of which is the Principal Balance of all such Contracts which are not Charged-Off Contracts. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" has the meaning assigned to such term in Section 4.01(b) hereof. "Collections" means all proceeds of, Scheduled Payments or other payments or distributions of principal, interest or other amounts on, Insurance Proceeds, payments from Contract Rights Payors and any other amounts received by or on behalf of the Borrower in respect of the Pledged Contracts. "Commitment Fee" has the meaning assigned to such term in Section 3.04 hereof. "Confidential Information" means confidential and proprietary information of the Borrower that is identified in writing to Lender as being either confidential or proprietary; provided that Confidential Information shall not include (i) the Loan Documents or (ii) any information which (A) at the time of disclosure or thereafter is generally known by the public (other than as a result of disclosure by Lender), (B) was or becomes known to Lender from a person that, to the knowledge of Lender, is not prohibited from transmitting the information to Lender, and (iii) any such information described in clauses (i) or (ii) above that is currently in Lender's possession. "Consent and Subordination Agreement" means that certain consent and subordination agreement dated January 11, 2001 among the Borrower, BNY Midwest Trust Company and GECC. "Consolidating Depository Account" has the meaning set forth in the Master Agency Agreement. "Contract" means a retail installment or conditional sale contract, with any Modifications, originated or acquired by Borrower at any time pursuant to which a Contract Debtor has (i) purchased a new or used Motor Vehicle, (ii) granted a security interest in the Motor Vehicle to secure the Contract Debtor's payment obligations, and (iii) agreed to pay the unpaid purchase price and a finance charge in periodic installments no less frequently than monthly. "Contract Collateral" has the meaning assigned thereto in Section 4.01(b)(i) hereof. Page 6 "Contract Debtor" means, with respect to a Contract, the Person that has executed the Contract as a purchaser, and any guarantor, co-signer or other Person obligated to make payments under the Contract. "Contract Debtor Documents" means, with respect to a Contract, those documents that are identified on Schedule 5 attached hereto and made a part hereof. "Contract Delivery Documents" means, with respect to a Contract, the original Certificate of Title (or, to the extent provided in Section 2(b) of the Custodial Agreement, evidence of application for a Certificate of Title) and the original executed Contract with original Contract Debtor signatures. "Contract Rights" means, with respect to a Contract, (i) Borrower's interest in the Financed Vehicle; (ii) all rights of Borrower regarding the Contract and Financed Vehicle, including but not limited to rights to electronic funds transfers and rights under all dealer agreements and purchase agreements pursuant to which the Contract was acquired by Borrower; (iii) all rights of Borrower with respect to Optional Contract Debtor Insurance, Required Contract Debtor Insurance, and any other policies of fire, theft or comprehensive insurance, collision insurance, public liability insurance or property damage insurance maintained with respect to the Financed Vehicle, the Contract, or the Contract Debtor; (iv) all rights of Borrower, if any, to prepaid dealer rate participation in connection with the Contract; (v) Collections, and (vi) all rights of Borrower to the originals of all books, records (including electronic data), reports, files, and documents relating to the Contracts, including, but not limited to, Contract Debtor Documents, financial statements of Contract Debtors, and all payment reports or records relating to the Contracts. "Contract Rights Payors" means Persons, other than Contract Debtors, against whom Contract Rights may be asserted. "Contractual Obligation" means as to any Person, any material provision of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound or any material provision of any security issued by such Person. "Cumulative Custodial Report" has the meaning set forth in the Custodial Agreement. "Cumulative Quarterly Measurement Period" means, for UDC and its consolidated subsidiaries as of any Quarterly Measurement Date, the period from the beginning of the fiscal year of UDC and its consolidated subsidiaries through and including such Quarterly Measurement Date. "Custodial Agreement" means the Custodial Agreement, dated as of the date hereof, among the Borrower, BNY Midwest Trust Company and the Lender, substantially in the form of Exhibit B hereto, as the same shall be modified and supplemented and in effect from time to time. Page 7 "Custodian" means The Bank of New York, its successors and permitted assigns under the Custodial Agreement. "Cygnet Dealer Loan" means the $12,000,000 promissory note from Cygnet Capital Corporation ("CCC") dated December 20, 1999 payable to UDFC in connection with the sale of 100% of the stock of Cygnet Dealer Finance, Inc. to CCC. "DCT Contract" means a Contract which was purchased in a True Sale by Borrower from DCT of Ocala Corporation (d/b/a Best Chance) on August 25, 1999. "Dealer" means a merchant in the business of selling Motor Vehicles to the public in the retail market. "Debt to EBITDA Ratio" means, for UDC and its consolidated subsidiaries as of the last day of any Accounting Period, the ratio computed by dividing (i) Total Debt as of such Measurement Date minus Securitized Borrowings by (ii) EBITDA for the twelve-month period ending on such Measurement Date. "Debtor Relief Laws" means the Bankruptcy Code (Title 11 of the United States Code) of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization, suspension of payments, readjustment of debt, marshaling of assets or similar debtor relief laws of the United States or any State of the United States from time to time in effect affecting the rights of creditors generally. "Default" means an Event of Default or an event that with notice or lapse of time or both would become an Event of Default. "Deferral Rate" means as of the last day of an Accounting Period with respect to the Managed Portfolio Contracts, the quotient of (i) the total number of any payment or due date changes made to Managed Portfolio Contracts during the Accounting Period, which increases the term of the installment loan obligation or delays a Scheduled Payment by up to thirty (30) days, divided by (ii) the number of Managed Portfolio Contracts at the end of such Accounting Period, which quotient shall be expressed as a percentage. For the purposes of the foregoing, with respect to Managed Portfolio Contracts for which more than one scheduled payment is required in each month, the extension of multiple payments due in any such month shall be considered as a single extension for purposes of determining such total number of payment or due date changes. "Delinquency Measurement Ratio" means as of the last day of an Accounting Period and with respect to a group of Contracts, the quotient of (i) the Principal Balance of all such Contracts which are Delinquency Measurement Contracts and that as of the end of any Accounting Period have Scheduled Payments for which all or any part of excess of 10.00% of any such Scheduled Payment is due and unpaid for more than thirty (30) days from the due date of such Scheduled Payments, divided by (ii) the aggregate Principal Balance of all such Delinquency Measurement Contracts as of the end of such Accounting Period, which quotient shall be expressed as a percentage. Page 8 "Delinquency Measurement Contracts" means, with respect to a group of Contracts, all such Contracts which are not Charged-Off Contracts or not paid in full. "Depository Account" has the meaning set forth in the Master Agency Agreement. "Dollars" and "$" means lawful money of the United States of America. "Duck Entity" has the meaning set forth in the first paragraph of this Agreement. "Due Date" means, with respect to a Contract, the day of the month on which a Scheduled Payment is due on the Contract, exclusive of any days of grace. "Due Diligence Review" means the performance by the Lender of any or all of the reviews permitted under Section 11.16 hereof with respect to any or all of the Contracts or the Borrower or related parties, as desired by the Lender from time to time. "EBITDA" means, for UDC and its consolidated subsidiaries for any period, without duplication, the sum of the amounts for such period of (i) Net Income, (ii) Interest Expense (excluding any Interest Expense with respect to any Indebtedness arising out of a Securitization Transaction), (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense, in each case determined for UDC and its consolidated subsidiaries on a consolidated basis in accordance with GAAP. "Effective Date" means the date upon which the conditions precedent set forth in Section 5.01 shall have been satisfied. "Effective Securitization Net Proceeds Percentage" means, as of any date, the Securitization Net Proceeds Percentage based on the Securitization Transaction most recently closed on or prior to such date. "Eligible Contract" means (X) with respect to each Pledged Contract other than the Acquired Contracts, each such Contract (i) which satisfies each requirement set forth in Schedule 1 attached hereto and made a part hereof at the time of delivery of such Pledged Contract to the Custodian and thereafter, except to the extent expressly stated in Schedule 1 to apply only at delivery or only thereafter, (ii) which is included in the aggregate numbers reported in Trust Receipt Exhibit A, (iii) which is not listed as having an Exception on the Cumulative Custodial Report, and (iv) for which the original Contract has not been delivered to the Borrower or Servicer pursuant to a Request for Release; and (Y) with respect to each Pledged Contract which is an Acquired Contract, each such Contract (i) which satisfies each requirement set forth in Schedule 6 attached hereto and made a part hereof at the time of delivery of such Pledged Contract to the Custodian and thereafter, except to the extent expressly stated in Schedule 6 to apply only at delivery or only thereafter, (ii) which is included in the aggregate numbers reported in Trust Receipt Exhibit A, (iii) which is not listed as having an Exception on the Cumulative Custodial Report, and (iv) for which the original Contract has not been delivered to the Borrower or Servicer pursuant to a Request for Release. Page 9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which Borrower is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which Borrower is a member. "Event of Default" has the meaning provided in Section 8 hereof. "Exception" has the meaning set forth in the Custodial Agreement. "Exception Report" has the meaning set forth in the Custodial Agreement. "Exchange Debt" means the Indebtedness of the Borrower pursuant to (i) that certain indenture dated October 15, 1998 between UDC and Harris Trust and Savings Bank, as Trustee, (ii) that certain First Supplemental Indenture dated October 15, 1998 between UDC and Harris Trust and Savings Bank, as Trustee, whereby UDC issued 12% Subordinated Debentures and (iii) that certain Second Supplemental Indenture dated April 15, 2000 between UDC and Harris Trust and Savings Bank, as Trustee, whereby UDC issued 11% Subordinated Debentures. "Exchange Debt Documents" means those documents described on Schedule 9 attached hereto. "Federal Funds Rate" means, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Lender from three primary dealers (other than an affiliate of the Lender). "Financed Vehicle" means the new or used Motor Vehicle purchased by a Contract Debtor pursuant to a Contract, or any substituted vehicle which is properly documented and approved by Lender. "Funding Date" means a date on which an Advance is made hereunder. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "GECC" means General Electric Capital Corporation, a New York Corporation. "GECC Agreement" means the Amended and Restated Motor Vehicle Installment Contract dated August 15, 1997, as amended, by and among GECC and the Duck Entities. Page 10 "GECC Inventory Facility" means the Inventory Facility under (and as defined in) the GECC Agreement. "GECC Security Interest" means the security interest in assets of the Borrower granted to GECC pursuant to the GECC Agreement, as modified by the Intercreditor Agreement. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over the Borrower, any of its Subsidiaries or any of its properties. "Gross Margin Ratio" shall mean, with respect to all Motor Vehicles sold by the Borrower during any Accounting Period, the ratio obtained by dividing (i) the aggregate sales price of such Motor Vehicles minus the aggregate cost of such Motor Vehicles (including purchase costs and any reconditioning or repair costs) by (ii) the aggregate sales price of such Motor Vehicles. "Guarantee" means, as to any Person, any obligation of such person directly or indirectly guaranteeing any Indebtedness of any other Person in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, by agreement to keep well, to purchase assets, goods, securities or services, or take or pay or otherwise). The amount of any Guarantee of a Person shall be deemed to be an amount equal to the stated or determinable about of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. The terms "Guarantee" and "Guaranteed" used as verbs shall have correlative meanings. "Indebtedness" means, for any Person: (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within 90 days of the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) accrued obligations of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; (f) obligations of such Person under repurchase agreements or like arrangements; (g) Indebtedness of others Guaranteed by such Person; and (h) any other obligation of such Person by a note, bond, debenture or similar instrument that would be classified as indebtedness on a balance sheet prepared in accordance with GAAP. "Insurance Proceeds" means with respect to each Contract, proceeds of the Optional Contract Debtor Insurance and/or the Required Contract Debtor Insurance. Page 11 "Intercreditor Agreement" means that certain intercreditor agreement among Lender, GECC and BNY Midwest Trust Company (on behalf of the lenders under the Senior Secured Loan) dated as of the date hereof. "Interest Expense" means, for UDC and its consolidated subsidiaries for any period, total interest expense (net of interest income) (including that portion attributable to Capitalized Leases in accordance with GAAP and capitalized interest) of UDC and its consolidated subsidiaries with respect to all outstanding Indebtedness of UDC and its consolidated subsidiaries, including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under interest rate agreements, but excluding, however, the amortization of deferred financing fees. "In-Transit Contract" means, as of any date, any Pledged Contract which has been originated by Borrower within 30 days proceeding such date, but for which the Custodian has not provided to the Lender the deliveries required by the Custodial Agreement confirming that the Custodian is in physical possession of the Contract Delivery Documents. "Inventory Property" shall mean all inventory held by Car Sales and Car Sales Florida in the ordinary course of business, all Certificates of Title with respect thereto, and all proceeds of the foregoing (other than proceeds which constitute Contracts or Contract Collateral). "Kayne Anderson" means Kayne Anderson Investment Management, Inc "Kayne Anderson Loan Agreement" means that certain loan agreement dated as of February 12, 1998, as amended, between UDC and certain affiliates of Kayne Anderson. "Lender" has the meaning assigned thereto in the heading hereto. "Lender Account" means the following account (or such other account as Lender may designate from time to time) maintained by the Lender at The Chase Manhattan Bank: Account Number 140095961, For the A/C of Greenwich Capital Financial Products, Inc., ABA# 021000021, Attn: Brett Kibbe. Servicer shall deposit all Collections into such account pursuant to the terms of Section 2.05(c) hereof. "LIBO Base Rate" means with respect to each day an Advance is outstanding (or if such day is not a Business Day, the next succeeding Business Day), the rate per annum equal to the rate published by Bloomberg or if such rate is not available, the rate appearing at page 3750 of the Telerate Screen as one-month LIBOR on such date, and if such rate shall not be so quoted, the rate per annum at which the Lender is offered Dollar deposits at or about 11:00 A.M., eastern time, on such date by prime banks in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations are then being conducted for delivery on such day for a period of one month and in an amount comparable to the amount of the Advances to be outstanding on such day. "LIBO Rate" means as of the tenth day of each calendar month (or the next Business Day), a rate per annum determined by the Lender in its sole discretion in accordance with the following formula (rounded upwards to the nearest l/100th of one percent), which rate as determined by the Lender shall be conclusive absent manifest error by the Lender: Page 12 LIBO Rate = (LIBO Base Rate) / (1.00 - LIBO Reserve Requirements) The LIBO Rate shall be calculated on the date of this Loan Agreement and shall be reset effective on the first day of each month thereafter. "LIBO Reserve Requirements" means as of the tenth day of each calendar month (or the next Business Day), the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements applicable to the Lender in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto), dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such Governmental Authority. As of the Effective Date, the LIBO Reserve Requirements shall be deemed to be zero. "Lien" means any mortgage, lien, pledge, charge, security interest or similar encumbrance. "Loan Agreement" means this Master Loan and Security Agreement, as may be amended, supplemented or otherwise modified from time to time as mutually agreed by the parties in writing. "Loan Documents" means collectively, this Loan Agreement, the Note, and the Custodial Agreement, and upon its execution and delivery as required by Section 7.22, the backup servicing agreement described therein and any other document or agreement contemplated thereby or executed and delivered thereunder. "Managed Portfolio Contracts" means Contracts, serviced by Borrower, which were originated or purchased by Borrower, including but not limited to those contracts which have been subsequently sold to a third party, with the servicing retained by Borrower and with a residual interest in the installment contracts held by Borrower. "Market Value" shall mean the value, determined by the Lender in its sole reasonable discretion, of the Eligible Contracts if sold in their entirety to a single third-party purchaser. The Lender's determination of Market Value shall be conclusive upon the parties, absent manifest error on the part of the Lender. The Lender shall have the right to mark to market the Eligible Contracts on a daily basis which Market Value may be determined to be zero. The Borrower acknowledges that the Lender's determination of Market Value is for the limited purpose of determining the amount of the Borrowing Base for lending purposes hereunder without the ability to perform customary purchaser's due diligence and is not necessarily equivalent to a determination of the fair market value of the Eligible Contracts achieved by obtaining competing bids in an orderly market in which the originator/servicer is not in default under a revolving debt facility and the bidders have adequate opportunity to perform customary loan and servicing due diligence. Page 13 "Master Agency Agreement" means that certain Master Depository Accounts and Post Office Boxes and Agency Agreement dated as of September 29, 1997 among UDCC, BNY Midwest Trust Company, in its individual capacity and as Trustee, and certain other parties, as amended, modified or supplemented from time to time, together with any acknowledgement and agreement. "Master Custodial Report" means the report delivered pursuant to the Custodial Agreement to Lender by the Custodian on and as of each Funding Date which: (i) identifies each of the Pledged Contracts by account number and the name of the Contract Debtor, and (ii) indicates whether the Custodian then holds all Contract Delivery Documents for such Pledged Contract. "Material Adverse Effect" means a material adverse effect on (a) the property, business, operations, financial condition or prospects of the Borrower or any Affiliate of the Borrower, (b) the ability of the Borrower to perform in all material respects its obligations under any of the Loan Documents to which it is a party, (c) the validity or enforceability in all material respects of any of the Loan Documents, (d) the rights and remedies of the Lender under any of the Loan Documents, (e) the timely payment of the principal of or interest on the Advances or other amounts payable in connection therewith or (f) the Collateral. "Maximum Credit" means, during any calendar year, (i) from May 1 through November 30, the aggregate amount of $75,000,000.00 and (ii) at other times, the aggregate amount of $100,000,000.00. "MBIA" means the MBIA Insurance Corporation. "MBIA Event of Default" means, with respect to an MBIA-Wrapped Securitization, an "Insurance Agreement Event of Default" under and as defined in the related insurance and indemnity agreement. "MBIA Performance Trigger" means, with respect to an MBIA-Wrapped Securitization, a "Portfolio Performance Event" under and as defined in the related pooling and servicing agreement. "MBIA-Wrapped Securitization" means a Securitization Transaction in which MBIA has guaranteed the repayment of one or more senior classes of issued securities. "Measurement Date" means, for UDC and its consolidated subsidiaries, the last day of an Accounting Period. "Minimum Net Worth" shall mean as of the date of determination for UDC and its consolidated subsidiaries, the number computed as (i) the sum of (x) Net Equity plus (y) Subordinated Debt minus (ii) the sum of (x) the aggregate amount of all advances to employees plus (y) the aggregate amount of the principal balance on the Cygnet Dealer Loan plus (z) the aggregate value of Intangible Assets in each case determined in accordance with GAAP for UDC and its consolidated subsidiaries. Page 14 "Modification" shall mean, with respect to a Contract, any amendment or agreement modifying such Contract made in accordance with Accepted Servicing Practices. "Motor Vehicle" means a passenger motor vehicle, van, or light duty truck which is not manufactured for a particular commercial purpose and which can be registered for use on public highways, and is not a vehicle that is not titled in the United States or has not been previously titled in the United States. "Multiemployer Plan" means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been or are required to be made by Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA. "Net Equity" means the excess of the book value of the assets of UDC and its consolidated subsidiaries over the book value of the liabilities of UDC and its consolidated subsidiaries, in each case determined in accordance with GAAP. "Net Income" means, for any period for UDC and its consolidated subsidiaries, the net income (or loss) of UDC and its consolidated subsidiaries for such period taken as a single accounting period determined in conformity with GAAP; provided that there shall be excluded (i) the income (or loss) of any Person (other than UDC and its consolidated subsidiaries) in which any other Person (other than UDC and its consolidated subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to UDC and its consolidated subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a consolidated subsidiary or is merged into or consolidated with UDC or a consolidated subsidiary or that Person's assets are acquired by UDC or a consolidated subsidiary, (iii) the income of any subsidiary to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of their charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary, (iv) any after-tax gains or losses attributable to asset sales permitted under Section 7.13 or returned surplus assets of any pension plan, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains or net non-cash extraordinary losses. "Non-Contract Collateral" has the meaning assigned thereto in Section 4.01(b)(ii)(H) hereof. "Note" means the promissory note provided for by Section 2.02(a) hereof for Advances and any promissory note delivered in substitution or exchange therefor, in each case as the same shall be modified and supplemented and in effect from time to time. "Notice of Borrowing and Pledge" has the meaning assigned to such term in Section 2.03(d) hereof. "Optional Contract Debtor Insurance" means any insurance, other than Required Contract Debtor Insurance, which insures a Financed Vehicle or a Contract Debtor's obligations under a Contract, including but not limited to credit life, credit health, credit disability, unemployment insurance, and any service contract, mechanical breakdown coverage, warranty, or extended warranty for a Financed Vehicle. Page 15 "Originated Eligible Contract" means an Eligible Contract which was originated by an Originator. "Originator" means Car Sales or Car Sales Florida. "Outside Financing" has the meaning assigned to such term in Section 4.01(d) hereof. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means those liens on any asset of any Duck Entity as of the date hereof as set forth on Schedule 7 attached hereto. "Person" means any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Plan" means an employee benefit or other plan established or maintained by the Borrower or any ERISA Affiliate and that is covered by Title IV of ERISA, other than a Multiemployer Plan. "Pledged Contract" means, at any date, each Contract owned by the Borrower on such date, whether or not such Contract is an Eligible Contract, excluding any Contract released pursuant to Section 4.01(d) and 4.01(e) hereof, and any Terminated Contracts. "Post-Default Rate" means, in respect of any principal of any Advance or any other amount under this Loan Agreement, the Note or any other Loan Document that is not paid when due to the Lender (whether at stated maturity, by acceleration or mandatory prepayment or otherwise), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to 5% per annum, plus (a) LIBO Rate plus (b) the Applicable Margin. "Power of Attorney" means the irrevocable power of attorney executed by each Duck Entity in favor of the Lender in the form attached hereto as Exhibit M. "Principal Balance" means, with respect to any Contract as of any date, the amount financed minus the sum of the following amounts without duplication: (i) that portion of all Scheduled Payments actually received on or prior to such day allocable to principal using the Simple Interest Method; (ii) any payment of the amount financed with respect to the Contract allocable to principal; and (iii) any prepayment in full or any partial prepayments applied to reduce the amount financed. "Privatization Transaction" means any transaction or series of transactions whereby Ernest C. Garcia or any Affiliate of Ernest C. Garcia acquires or seeks to acquire any of outstanding capital stock of UDC and which is intended to result in UDC stock no longer being registered under the Securities Exchange Act of 1934 and UDC not being subject to the reporting requirements of Section 13 or Section 15d or such Act, whether by tender offer, open market purchase, stock buy-back program, merger, exchange offer or other means. Notwithstanding the foregoing, Privatization Transaction shall not include the issuance of warrants to purchase up to 1.5 million shares of UDC in accordance with the Verde Loan Agreement, or the issuance of common stock upon the exercise of such warrants. Page 16 "Property" means any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible. "Quarterly Measurement Date" means, for UDC and its consolidated subsidiaries with respect to any fiscal year, the last day of the March, June, September and December Accounting Periods. "Regulations T, U and X" means Regulations T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time. "Replacement Inventory Facility" means an inventory facility entered into by Borrower that satisfies each of the following criteria: (i) provides Borrower with at least $25,000,000 in inventory financing; (ii) is in form and content satisfactory to Lender; (iii) includes an intercreditor agreement between the inventory lender and Lender, in form and content satisfactory to Lender; and (iv) does not grant the inventory lender a security interest in the Stock Pledge Collateral. "Request for Release" has the meaning set forth in the Custodial Agreement. "Required Contract Debtor Insurance" means the insurance coverage required pursuant to the Underwriting Guidelines. "Requirement of Law" means as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer" means, as to any Person, the chief executive officer or, with respect to financial matters, the chief financial officer of such Person; provided, that in the event any such officer is unavailable at any time he or she is required to take any action hereunder, Responsible Officer means any officer authorized to act on such officer's behalf as demonstrated by a certificate of corporate resolution. "Restricted Payments" means with respect to any Person, (i) collectively, all dividends or other distributions of any nature (cash, securities, assets or otherwise), and all payments, by virtue of redemption or otherwise, on any class of equity securities (including, without limitation, warrants, options or rights therefor) issued by such Person, whether such securities are now or may hereafter be authorized or outstanding and any distribution in respect of any of the foregoing, whether directly or indirectly and (ii) any payment on account of, or set apart assets for a sinking or other analogous fund for the purchase, defeasance, retirement or other acquisition of any subordinate debt of the Borrower, whether now or hereafter outstanding, or any other distributions in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower. Page 17 "Rolling Average Managed Portfolio Contracts Deferral Rate" means, with respect to all Managed Portfolio Contracts as of the last day of an Accounting Period, the average of the Deferral Rates for all Managed Portfolio Contracts for the three (3) consecutive Accounting Periods most recently ended; provided that, until the June 2001 Accounting Period has expired, the Rolling Average Deferral Rate shall be the average of the Deferral Rates for the Accounting Periods which have expired since the date of this Loan Agreement. "Rolling Average Delinquency Ratio (Pledged Contracts)" means, with respect to all Pledged Contracts as of the last day of an Accounting Period, the average of the Delinquency Measurement Ratios for all Pledged Contracts for the three (3) consecutive Accounting Periods most recently ended; provided that, until the June 2001 Accounting Period has expired, the Rolling Average Delinquency Ratio (Pledged Contracts) shall be the average of the Delinquency Measurement Ratios for the Accounting Periods which have expired since the date of this Loan Agreement. "Rolling Averaged Delinquency Ratio (Managed Portfolio Contracts)" means, with respect to all Managed Portfolio Contracts of the last day of an Accounting Period, the average of the Delinquency Measurement Ratios for all Managed Portfolio Contracts for the three (3) consecutive Accounting Periods most recently ended; provided that, until June 2001 Accounting Period has expired, the Rolling Average Delinquency Ratio (Managed Portfolio Contracts) shall be the average of the Delinquency Measurement Ratios for all Managed Portfolio Contracts for the Accounting Periods which have expired since the date of this Loan Agreement. "Schedule of Payments" means the schedule of payments disclosed on a Contract. "Scheduled Payments" means the periodic installment payment amount disclosed in the Schedule of Payments for the Contract. "Secured Obligations" has the meaning assigned thereto in Section 4.01(c) hereof. "Securitization Letter" means that certain letter agreement by and between Borrower and Lender dated the date hereof, outlining rights and obligations with respect to securitizations and whole loan sales of Contracts subject to this Loan Agreement from time to time. "Securitization Net Proceeds Percentage" means, with respect to a Securitization Transaction, the percentage as determined solely by Lender according to the following formula (with the result rounded to the nearest 1/100th of a percent): Page 18 [(Total Securitized Pool - Securitization Reductions) / Total Securitized Pool] - 4.00% "Securitization Reductions" means with respect to any Securitization Transaction, an amount equal to the sum of (i) all credit enhancement, including but not limited to the amount of any cash deposit to reserve funds or spread accounts as of the closing date of the Securitization Transaction, and the amount of overcollateralization of the collateral included in such Securitization Transaction, and (ii) certificates or notes issued in connection with such Securitization Transaction that are not Securitized Borrowings. "Securitization Transaction" means any transaction entered into by the Borrower or an Affiliate of the Borrower from time to time involving the securitization of Contracts subject to this Loan Agreement. "Securitized Borrowings" means the aggregate outstanding principal balance of all of the investment grade securities issued and sold in a Securitization Transaction to any Person who is not a Duck Entity or an Affiliate of any Duck Entity. "Seminole Contract" means a Contract which was originally purchased in a True Sale by Borrower from Seminole Finance; provided, however, that any such Contract that has been sold or securitized by Borrower and then subsequently repurchased by Borrower and that remains owned by Borrower shall not be deemed to be a Seminole Contract. "Senior Secured Loan" means the Indebtedness of the Borrower pursuant to that certain Senior Secured Loan Agreement dated as of January 11, 2001 among UDC, BNY Midwest Trust Company as Collateral Agent, and the lenders who are party thereto from time to time. "Senior Secured Loan Documents" means those documents set forth on Schedule 10 attached hereto. "Servicer" means UDCC. "Servicing Records" has the meaning set forth in Section 11.15(b). "Servicing Transmission" means a report delivered to the Lender by the Borrower which, on a Contract-by-Contract basis and in the aggregate, with respect to the Contracts serviced hereunder by the Servicer which were included in the Borrowing Base prior to the first day of the month in which Servicing Transmission is delivered, (i) summarizes the Borrower's delinquency and loss experience with respect to Contracts serviced by the Servicer (including, in the case of the Contracts, the following categories: current, 1-30, 31-60, 61-90 and defaulted), (ii) contains a complete written calculation or analysis of each covenant in Section 7, (iii) contains the information displayed on Exhibit F and (iv) contains any other information reasonably requested by the Lender with respect to the Contracts. "Simple Interest Method" means the method of allocating a generally fixed level payment between principal and interest, pursuant to which the portion of such payment that is allocated to interest is equal to the product of the APR multiplied by the unpaid balance multiplied by the period of time (expressed as a fraction of a year, based on the actual number of days in the calendar month and the actual number of days in the calendar year) elapsed since the date through which interest was last paid and the remainder of such payment is allocable to principal. Page 19 "Stock Pledge Collateral" means the capital stock owned by the Borrower, whether now owned or hereafter acquired, and rights to receive dividends and other distributions of every nature, now existing or hereafter created and wherever located, of Ugly Duckling Receivables Corporation II, Ugly Duckling Receivables Corporation III, or any other bankruptcy remote entity created for the purpose of a Securitization Transaction. "Subordinated Debt" means a debt obligation of the Borrower which is subordinated to Lender pursuant to a subordination agreement which is in the form of Exhibit K or pursuant to some other agreement approved in writing by Lender; or in the case of the Exchange Debt pursuant to the terms and conditions thereof including without limitation, the Exchange Debt, the indebtedness pursuant to the Verde Loan Agreement, and the indebtedness pursuant to the Kayne Anderson Loan Agreement. "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. "SunAmerica Security Interest" means the security interest in the Contract Collateral granted to the Senior Secured Loan lenders pursuant to the Intercreditor Agreement and a security agreement of even date herewith. "Tax" or "Taxes" means any federal, state, local, provincial, or foreign income, gross receipts, license, payroll, employment, excise, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding, unemployment, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, or other tax, fee, assessment or charge of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Terminated Contract" has the meaning set forth in the Custodial Agreement. "Termination Date" means April 12, 2002, or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law as same may be extended pursuant to Section 2.09 hereof. Page 20 "Total Debt" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of UDC and its consolidated subsidiaries, determined on a consolidated basis in accordance with GAAP. "Total Securitized Pool" means the aggregate Principal Balance of Contracts securitized in a Securitization Transaction by Borrower. "True Sale" means any sale, transfer, conveyance or assignment of a Contract whereby any and all interest of the originator in, to and under any Contract funded in the name of or acquired by such originator or seller has been sold, transferred, conveyed and assigned to the Borrower pursuant to a legal sale and such originator retains no interest in such Contract, and if so requested by the Lender, is covered by an opinion of counsel to such effect in form and substance acceptable to the Lender. "Trust Receipt Exhibit A" has the meaning set forth in the Custodial Agreement. "UCC" means the Uniform Commercial Code. "UDC" has the meaning set forth in the first paragraph of this Loan Agreement. "UDCC" has the meaning set forth in the first paragraph of this Loan Agreement. "UDCSFC" has the meaning set forth in the first paragraph of this Loan Agreement. "UDFC" has the meaning set forth in the first paragraph of this Loan Agreement. "Underwriting Guidelines" means collectively, the underwriting guidelines attached as Exhibit E hereto as amended from time to time in accordance with Section 7.09. "Uniform Commercial Code" means the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "Uniform Commercial Code" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. "VAM Contract" means Contract which was purchased in a True Sale by Borrower from Virginia Auto Mart, Virginia Auto Mart II and Fresh Start Credit Corporation on November 8, 1999. "Verde" means Verde Investments, Inc. and any of its Affiliates, successors or assigns. "Verde Loan Agreement" means that certain loan agreement dated as of January 11, 2001 between UDC and Verde whereby UDC issued to Verde subordinated debt in the principal amount of $7,000,000 and warrants to purchase common stock of UDC. Page 21 "Weighted Average Securitization Net Proceeds Percentage" means, at any date, the average of the Securitization Net Proceeds Percentage (weighted by the original amount of each Total Securitized Pool) obtained in the three Securitization Transactions most recently closed on or before such date. 1.02 Accounting Terms and Determinations. Any accounting term used in this Loan Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP consistently applied. That certain terms or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. Financial statements and other information furnished pursuant to this Loan Agreement shall be prepared in accordance with GAAP as in effect at the time of such preparation. 1.03 UCC Terms and Determinations. Except as otherwise expressly provided herein, all terms used herein which are defined in the Uniform Commercial Code as in effect in the applicable jurisdiction from time to time shall have the meanings which they are given in such Uniform Commercial Code. Section 2 Advances, Note and Prepayments. 2.01 Advances. (a) Subject to fulfillment of the conditions precedent set forth in Sections 5.01 and 5.02 hereof, and provided that no Default shall have occurred and be continuing hereunder, the Lender agrees from time to time, on the terms and conditions of this Loan Agreement, to make loans (individually, an "Advance"; collectively, the "Advances") to the Borrower in Dollars, on any Business Day from and including the Effective Date to but excluding the Termination Date in an aggregate principal amount at any one time outstanding up to but not exceeding the lesser of (i) the Maximum Credit and (ii) the Borrowing Base as in effect from time to time. (b) Subject to the terms and conditions of this Loan Agreement, during such period the Borrower may borrow, repay and reborrow hereunder. (c) In no event shall an Advance be made when any Default or Event of Default has occurred and is continuing. 2.02 Notes. (a) The Advances made by the Lender shall be evidenced by a single promissory note of the Borrower substantially in the form of Exhibit A hereto (the "Note"), dated the date hereof, payable to the Lender in a principal amount equal to the amount of the Maximum Credit as originally in effect and otherwise duly completed. The Lender shall have the right to have its Note subdivided, by exchange for promissory notes of lesser denominations or otherwise, provided that no such promissory note shall be in a denomination of less than $5,000,000. Page 22 (b) The date, amount and interest rate of each Advance made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of the Note, noted by the Lender on the grid attached to the Note or any continuation thereof; provided, that the failure of the Lender to make any such recordation or notation shall not affect the obligations of the Borrower to make a payment when due of any amount owing hereunder or under the Note in respect of the Advances. (c) The Note may be signed by UDC, or UDC acting on behalf of all of the Duck Entities pursuant to Section 2.10 below. 2.03 Procedure for Borrowing. (a) Allowable Time and Amount of Advances. During the term of this Loan Agreement, the Borrower, or UDC acting on behalf of all of the Duck Entities pursuant to Section 2.10 below, may request an Advance in a minimum principal amount of $500,000 on any Business Day during the period from and including the Effective Date to but excluding the Termination Date. (b) Notice of Borrowing and Pledge. Any request for an Advance by the Borrower shall be made by delivering to the Lender, with a copy to the Custodian, an irrevocable notice of borrowing and pledge substantially in the form of Exhibit D hereto (a "Notice of Borrowing and Pledge"), which must be received no later than 12:00 noon (eastern time) on the requested Funding Date. Any such delivery may be made by facsimile or email delivered to the individual designated by the Lender to receive such notice. (c) Additional Deliveries. It shall be a condition precedent to the making of an Advance on a Funding Date that each of the following shall have occurred: (i) Estimate of Advance. If the estimated amount of the Advance to be requested exceeds $5,000,000, then not later than 5:00 p.m. (eastern time) on the Business Day prior to the Funding Date, the Borrower shall deliver to the Lender an estimate of the amount of such Advance to be requested on such Funding Date. (ii) Borrower's Deliveries Under the Custodial Agreement. The Borrower shall have timely made all of the deliveries under Sections 2.01, 2.02 and 2.03 of the Custodial Agreement; (iii)Custodian's Deliveries Under the Custodial Agreement. The Custodian shall have timely made all of the deliveries under Sections 3.01, 3.02, 3.03 and 3.04 of the Custodial Agreement; and (iv) Borrowing Base Certificate. Not later than 10:00 a.m. (eastern time) on the Funding Date, the Borrower shall have delivered to the Lender a Borrowing Base Certificate which reflects all Eligible Contracts as of the close of business on the day preceding the Funding Date. Page 23 (d) Advance by Lender. Upon the Borrower's request for a borrowing pursuant to Section 2.03(b) above, the Lender shall, assuming all conditions precedent set forth in this Section 2.03 and in Section 5.01 and 5.02 have been met, and provided no Default shall have occurred and be continuing, not later than 2:00 p.m. (eastern time) on the requested Funding Date make an Advance in an amount which would not cause the aggregate amount of Advances then outstanding (including the requested Advance) to exceed the lesser of (i) the Maximum Credit or (ii) the Borrowing Base. Subject to the foregoing, such Advance will be made available to the Borrower by the Lender transferring, via wire transfer (pursuant to wire transfer instructions provided by the Borrower on or prior to such Funding Date), the aggregate amount of such Advance in funds immediately available to the Borrower. (e) Market Value of Eligible Contracts. The Lender may calculate the Market Value of all of the Eligible Contracts at any time and from time to time. To assist the Lender in such determination, the Borrower shall promptly deliver to Lender such information as the Lender may reasonably request. Any such calculation of Market Value will be made by Lender in its sole discretion, and any such calculation made in good faith by the Lender shall be conclusive. 2.04 Limitation on Types of Advances; Illegality. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any LIBO Rate: (a) the Lender determines, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of "LIBO Base Rate" in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining rates of interest for Advances as provided herein; or (b) the Lender determines, which determination shall be conclusive, that the Applicable Margin plus the relevant rate of interest referred to in the definition of "LIBO Rate" in Section 1.01 hereof upon the basis of which the rate of interest for Advances is to be determined is not likely adequately to cover the cost to the Lender of making or maintaining Advances; or (c) it becomes unlawful for the Lender to honor its obligation to make or maintain Advances hereunder using a LIBO Rate; then the Lender shall give the Borrower prompt notice thereof and, so long as such condition remains in effect, the Lender shall be under no obligation to make additional Advances, and the Borrower shall, at its option, either prepay such Advances or pay interest on such Advances at the Alternative Base Rate. 2.05 Repayment of Advances; Interest. (a) The Borrower shall repay in full on the Termination Date the then aggregate outstanding principal amount of the Advances (as evidenced by the Note). (b) Except as provided in Section 2.04 above, the Borrower shall pay to the Lender interest on the unpaid principal amount of each Advance for the period from and including the date of such Advance to but excluding the date such Advance shall be paid in full, at a rate per annum equal to the LIBO Rate plus the Applicable Margin. Notwithstanding the foregoing, the Borrower shall pay to the Lender interest at the applicable Post-Default Rate on any principal of any Advance and on any other amount payable by the Borrower hereunder or under the Note, that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory prepayment or otherwise), for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued interest on each Advance as calculated in this Section 2.05(b) shall be payable as provided in Section 2.05(c) and (e). Any accrued and unpaid interest shall be due and payable on the Termination Date, except that interest payable at the Post-Default Rate shall accrue daily and shall be payable promptly upon receipt of invoice. Promptly after the determination of any interest rate provided for herein or any change therein, the Lender shall give written notice thereof to the Borrower. Page 24 (c) The Borrower shall cause the Servicer to, and the Servicer shall: (i) within 24 hours of the receipt by the Borrower or the Servicer of any Collections, deposit such Collections into a Depository Account; (ii) on a daily basis, cause all amounts representing Collections which constitute available funds in any such Depository Account (other than the Consolidating Depository Account) to be deposited into such Consolidating Depository Account; and (iii) as soon as any collections received by the Borrower or the Servicer are identified as Collections with respect to a Pledged Contract, but in any event within three days of the receipt of such Collections by the Borrower or the Servicer, cause such Collections to be deposited into the Lender's Account. Funds in the Lender Account shall be applied by Lender, without duplication, in the following order: (i) First, for application to overdue interest on the Advances; (ii) Second, for application to accrued interest on the Advances; (iii) Third, for application to any fees due to Lender; (iv) Fourth, for application to any expenses incurred by Lender which are to be paid by Borrower under the Loan Documents; (v) Fifth, for application to the unpaid principal balance of the Advances; (vi) Sixth, to all other accrued and unpaid Secured Obligations; and (vii) Seventh, the remainder to the Borrower. (d) No later than the fifteenth (15th) day of each month (or the next Business Day), the Servicer shall provide the Lender with a report which shall summarize the transactions described in Section 2.05(c) above for the prior month. (e) No later than one (1) Business Day after receipt of notice from Lender, which notice shall be delivered after receipt by Lender of the report described in Section 2.05(d) above, the Borrower shall pay Lender the full amount of any accrued and unpaid interest on the Advances for the prior month which has not been paid theretofore pursuant to Section 2.05(c). Page 25 2.06 Mandatory Prepayments or Pledge. Before 10:00 a.m. (eastern time) on each Business Day, the Borrower shall deliver to the Lender a Borrowing Base Certificate, the calculation in such certificate to be made as of the close of business on the prior Business Day. In the event that such Borrowing Base Certificate indicates or if at any time the aggregate outstanding principal amount of Advances exceeds, or if at any time Lender shall notify Borrower that the aggregate outstanding principal amount of Advances exceeds the Borrowing Base (a "Borrowing Base Deficiency"), the Borrower shall no later than the close of business on the next Business Day either prepay the Advances in part or in whole or pledge additional Eligible Contracts (which Collateral shall be in all respects acceptable to the Lender) to the Lender, such that after giving effect to such prepayment or pledge the aggregate outstanding principal amount of the Advances does not exceed the Borrowing Base. 2.07 Optional Prepayments. The Advances are prepayable without premium or penalty, in whole or in part, at any time. Any amounts prepaid shall be applied in the order set forth in Section 2.05(c). Amounts repaid may be reborrowed in accordance with the terms of this Loan Agreement. 2.08 Requirements of Law. (a) If any Requirement of Law (other than with respect to any amendment made to the Lender's certificate of incorporation and by-laws or other organizational or governing documents) or any change in the interpretation or application thereof or compliance by the Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject the Lender to any tax of any kind whatsoever with respect to this Loan Agreement, the Note or any Advance made by it (excluding net income or franchise taxes) or change the basis of taxation of payments to the Lender in respect thereof; (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory Advance or similar requirement against assets held by deposits or other liabilities in or for the account of advances. Advances or other extensions of credit by, or any other acquisition of funds by any office of the Lender which is not otherwise included in the determination of the LIBO Rate hereunder; (iii) shall impose on the Lender any other condition; and the result of any of the foregoing is to increase the cost to the Lender, by an amount which the Lender deems to be material, of making, continuing or maintaining any Advance or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay the Lender such additional amount or amounts as will compensate the Lender for such increased cost or reduced amount receivable thereafter incurred. Page 26 (b) If the Lender shall have determined that the adoption of or any change in any Requirement of Law (other than with respect to any amendment made to the Lender's certificate of incorporation and by-laws or other organizational or governing documents) regarding capital adequacy or in the interpretation or application thereof or compliance by the Lender or any corporation controlling the Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on the Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which the Lender or such corporation (taking into consideration the Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by the Lender to be material, then from time to time, the Borrower shall promptly pay to the Lender such additional amount or amounts as will thereafter compensate the Lender for such reduction. (c) If the Lender becomes entitled to claim any additional amounts pursuant to this subsection, it shall promptly notify the Borrower of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this subsection submitted by the Lender to the Borrower shall be conclusive in the absence of manifest error. 2.09 Extension of Termination Date. Upon the mutual agreement of Lender and Borrower, Termination Date will be extended for a period at 364 days by giving written notice thereof to Borrower at least 30 days prior to the Termination Date. If the Termination Date is so extended, Borrower shall pay Lender a renewal fee of $250,000, in immediately available funds by wire transfer to an account designated by Lender, no later than the date which is the first anniversary hereof. 2.10 Power of Attorney. Each Duck Entity hereby irrevocably authorizes UDC at any time and from time to time in the sole discretion of UDC and appoints UDC as its attorney-in-fact, to act on behalf of such Duck Entity (i) to execute the Notice of Borrowing and Pledge and the Note on behalf of such Duck Entity as debtor and to file financing statements necessary or desirable in the sole discretion of UDC to perfect and to maintain the perfection and priority of the interest of the Lender in the Collateral, (ii) to file a carbon, photographic or other reproduction of this Loan Agreement or any financing statement with respect to the Collateral as a financing statement in such offices as UDC in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the interests of the Lender in the Collateral and (iii) to take any other action that UDC deems necessary in its sole discretion to fulfill the Borrower's obligations under this Loan Agreement. This appointment is coupled with an interest and is irrevocable. Section 3 Payments; Computations; Taxes; Commitment Fee. 3.01 Payments. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrower under this Loan Agreement and the Note, shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Lender at the Lender Account, not later than 1:00 p.m., eastern time, on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The Borrower acknowledges that it has no rights of withdrawal from the foregoing account. Page 27 3.02 Computations. Interest on the Advances shall be computed on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. 3.03 U.S. Taxes. (a) The Borrower agrees to pay to the Lender such additional amounts as are necessary in order that the payment of any amount due to the Lender hereunder after deduction for or withholding in respect of any U.S. Tax (as defined below) imposed with respect to such payment (or in lieu thereof, payment of such U.S. Tax by the Lender), will not be less than the amount stated herein to be then due and payable; provided, that, if the Lender is not a U.S. Person (as defined in Code Section 7701(a)(30)), the foregoing obligation to pay such additional amounts shall not apply: (i) to any payment to the Lender hereunder unless the Lender is entitled to submit a Form W-8BEN (relating to the Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Advances) or Form W-8ECI (relating to all interest to be received by the Lender hereunder in respect of the Advances), or (ii) to any U.S. Tax imposed solely by reason of the failure by the Lender to comply with applicable certification, information, documentation or other reporting requirements concerning the nationality, residence, identity or connections with the United States of America of the Lender if such compliance is required by statute or regulation of the United States of America as a precondition to relief or exemption from such U.S. Tax. For the purposes of this Section 3.03, (w) "Form W-8BEN" means Form W-8BEN of the Department of the Treasury of the United States of America, (x) "Form W-8ECI" means Form W-8ECI of the Department of the Treasury of the United States of America (or in relation to either such Form such successor and related forms as may from time to time be adopted by the relevant taxing authorities of the United States of America to document a claim to which such Form relates), and (y) "U.S. Taxes" means any present or future tax, assessment or other charge or levy imposed by or on behalf of the United States of America or any taxing authority thereof or therein. (b) Within thirty (30) days after paying any such amount to the Lender, and within thirty (30) days after it is required by law to remit such deduction or withholding to any relevant taxing or other authority, the Borrower shall deliver to the Lender evidence satisfactory to the Lender of such deduction, withholding or payment (as the case may be). (c) The Lender represents and warrants to the Borrower that on the date hereof the Lender is either incorporated under the laws of the United States or a State thereof or is entitled to submit a Form W-8BEN (relating to the Lender and entitling it to a complete exemption from withholding on all interest to be received by it hereunder in respect of the Advances) or Form W-8ECI (relating to all interest to be received by the Lender hereunder in respect of the Advances). Page 28 3.04 Commitment Fee. The Borrower agrees to pay to the Lender, on the date hereof a commitment fee equal to $750,000 (the "Commitment Fee"), such payment to be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim. Section 4 Collateral Security. 4.01 Collateral; Security Interest. (a) Pursuant to the Custodial Agreement, the Custodian shall hold the Contract Delivery Documents as exclusive bailee and agent for the Lender pursuant to the terms of the Custodial Agreement and shall deliver to the Lender the deliveries required under the Custodial Agreement, confirming that it has reviewed such Contract Delivery Documents in the manner required by the Custodial Agreement and identifying any deficiencies in such Contract Delivery Documents as so reviewed. (b) Each of the following items or types of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter referred to as the "Collateral": (i) each Contract owned by the Borrower and each of the following items with respect to such Contract: (A) the Contract Debtor Documents; (B) the Contract Rights; (C) any payments from a bank account of, and any electronic funds transfers from, any Contract Debtor or Contract Rights Payor (subject to the terms and conditions of the Master Agency Agreement); (D) any associated chattel paper, lease, instrument, installment sale contract or installment loan contract; (E) all rights of the Borrower in and to the related Financed Vehicle, including any repossessed Financed Vehicle, and in and to any other collateral securing such Contract, including any security deposit; (F) any contract purchase discount; (G) any rights of Borrower to dealer reserves or rate participation with respect to such Contract, if any; Page 29 (H) any money, payments or proceeds of any insurance policies with respect to any or all Contracts or any Financed Vehicles with respect to which Borrower is solely or jointly the owner or is insured or is the loss payee or is a beneficiary, including any Insurance Proceeds; (I) all books and records of the Borrower (including financial statements, accounting records, customer lists, credit files, computer programs, electronic data print-outs and other computer materials and records) with respect to such Contract; (J) all accessions to, substitutions for and all replacements and products of, any of the foregoing property; and (K) all moneys, instruments and other proceeds of the foregoing (all of the foregoing items in this Section 4.01(b)(i) with respect to all Pledged Contracts being the "Contract Collateral"); and (ii) all of the following items owned by the Borrower, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, except to the extent the same constitutes (x) the Contract Collateral or (y) the Cash Collateral Account and amounts on deposit therein, and (z) the Class C Certificates issued to UDFC in connection with any Securitization Transaction, but only to the extent the value of such Class C Certificates does not exceed 2% of the face amount of all notes and certificates issued with respect to the applicable Securitization Transaction: (A) all chattel paper, accounts, leases, instruments, installment sales contracts, installment payment contracts, general intangibles, payment intangibles, and promissory notes; (B) all deposit accounts and other bank accounts or securities accounts (subject to the terms and conditions of the Master Agency Agreement); (C) all Inventory Property; (D) any collateral securing any of the foregoing; (E) the proceeds under any insurance policies of the Borrower; (F) all investment property of the Borrower; (G) all books and records of the Borrower; and (H) all monies, instruments and other proceeds of the foregoing (all of the foregoing items in this Section 4.01(b)(ii) being the "Non-Contract Collateral"); and (I) the Stock Pledge Collateral. Page 30 (c) The Borrower hereby assigns, pledges and grants a security interest to the Lender in all of its right, title and interest in, to and under all the Collateral, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, to secure the repayment of principal of and interest on all Advances and all other amounts owing to the Lender hereunder, under the Note and under the other Loan Documents (collectively, the "Secured Obligations"). The Borrower agrees to mark its computer records and tapes to evidence the security interests granted to the Lender hereunder. (d) If (i) the Lender makes a determination of Market Value pursuant to Section 2.03(e) that results in the Borrowing Base being less than the amount calculated pursuant to clause (X) of the definition of Borrowing Base or (ii) the Borrower in good faith does not agree with the Lender's initial determination of the Borrowing Base (New Non-UDC Contracts), then the Borrower may seek to finance and securitize or otherwise sell Pledged Contracts through another financing source (any such financing, securitization or sale, an "Outside Financing"); provided, that in the case of clause (ii) of this Section 4.01(d), the Borrower may only seek to finance and securitize or otherwise sell such Pledged Contracts as were proposed to be included in the Borrowing Base (New Non-UDC Contracts) that were subject to the Lender's determination pursuant to clause (ii). The Lender will execute such documents and instruments as may be necessary to release and terminate its security interest in such Pledged Contracts and the related Contract Collateral described in Section 4.01(b)(i) (such release to be effective on the closing date for such Outside Financing) if, and only if, each and all of the following conditions are satisfied: (i) no Default or Event of Default has occurred and is continuing or would result from such release or such Outside Financing; (ii) the Borrower has entered into a firm commitment in form and content satisfactory to Lender to finance, securitize or otherwise sell the Pledged Contracts in such Outside Financing; (iii)the Borrower pays the Lender all fees due pursuant to the Securitization Letter in connection with such Outside Financing; and (iv) on the date of such release, the Borrower pays the Lender such amount as is necessary to ensure that no Borrowing Base Deficiency will exist on such date (after giving effect to such Outside Financing) and that the Borrower has paid all accrued and unpaid interest on the Advances and all other amounts which are then due and owing hereunder. (e) In addition to the release provisions pursuant to Section 4.01(d) above, upon the occurrence of each Securitization Transaction that is in accordance with the Securitization Letter, the Lender will execute such documents and instruments as may be necessary to release and terminate its security interest in the Pledged Contracts and related Contract Collateral being included in such Securitization Transaction if, and only if, each and all of the following conditions are satisfied: Page 31 (i) no Default or Event of Default has occurred and is continuing or would result from such release; (ii) the Borrower pays the Lender all fees due pursuant to the Securitization Letter in connection with such Securitization Transaction; and (iii)on the date of such release, the Borrower pays the Lender such amount as is necessary to ensure that no Borrowing Base Deficiency will exist on such date (after giving effect to such Securitization Transaction) and that the Borrower has paid all accrued and unpaid interest on the Advances and all other amounts which are then due and owing hereunder. 4.02 Further Documentation. At any time and from time to time, upon the written request of the Lender, and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments and documents and take such further action as the Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Loan Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. The Borrower also hereby authorizes the Lender to file any such financing or continuation statement without the signature of the Borrower to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Loan Agreement shall be sufficient as a financing statement for filing in any jurisdiction. 4.03 Changes in Locations, Name, etc. No Duck Entity shall (i) change the location of its chief executive office, its chief place of business or its jurisdiction of incorporation from that specified in Section 6 hereof or (ii) change its name, identity or corporate structure (or the equivalent) or change the location where it maintains its records with respect to the Collateral unless it shall have given the Lender at least thirty (30) days prior written notice thereof and shall have delivered to the Lender all Uniform Commercial Code financing statements and amendments thereto as the Lender shall request and taken all other actions deemed reasonably necessary by the Lender to continue its perfected status in the Collateral with the same or better priority. 4.04 Lender's Appointment as Attorney-in-Fact. (a) The Borrower hereby irrevocably constitutes and appoints the Lender and any officer or agent thereof, with full power of substitution, effective during the continuation of any Event of Default, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Borrower and in the name of the Borrower or in its own name, from time to time in the Lender's discretion, for the purpose of carrying out the terms of this Loan Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Loan Agreement, and, without limiting the generality of the foregoing, the Borrower hereby gives the Lender the power and right, on behalf of the Borrower, without assent by, but with notice to, the Borrower, if an Event of Default shall have occurred and be continuing, to do the following: Page 32 (i) in the name of the Borrower or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Optional Contract Debtor Insurance or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Lender for the purpose of collecting any and all such moneys due under any such Optional Contract Debtor Insurance or with respect to any other Collateral whenever payable; (ii) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; and (iii)(A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to the Lender or as the Lender shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Borrower with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Lender may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Lender were the absolute owner thereof for all purposes, and to do, at the Lender's option and the Borrower's expense, at any time, or from time to time, all acts and things which the Lender deems necessary to protect, preserve or realize upon the Collateral and the Lender's Liens thereon and to effect the intent of this Loan Agreement, all as fully and effectively as the Borrower might do. The Borrower hereby ratifies all that such attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until payment in full of all Secured Obligations. (b) The Borrower also authorizes the Lender, at any time and from time to time, to execute, in connection with the sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on the Lender are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon the Lender to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither the Lender nor any of its officers, directors, or employees shall be responsible to the Borrower for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. Page 33 4.05 Performance by Lender of Borrower's Obligations. If the Borrower fails to perform or comply with any of its material agreements contained in the Loan Documents and the Lender may itself perform or comply, or otherwise cause performance or compliance, with such agreement, the reasonable out-of-pocket expenses of the Lender incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Post-Default Rate, shall be payable by the Borrower to the Lender on demand and shall constitute Secured Obligations. 4.06 Proceeds. If an Event of Default shall occur and be continuing, subject to the Master Agency Agreement, (a) all proceeds of Collateral received by the Borrower consisting of cash, checks and other near-cash items shall be held by the Borrower in trust for the Lender, segregated from other funds of the Borrower, and shall forthwith upon receipt by the Borrower be turned over to the Lender in the exact form received by the Borrower (duly endorsed by the Borrower to the Lender, if required) and (b) any and all such proceeds received by the Lender will be applied by the Lender against, the Secured Obligations. Any balance of such proceeds remaining after the Secured Obligations shall have been paid in full and this Loan Agreement shall have been terminated shall be promptly paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, sale proceeds, and any other income and all other amounts received with respect to the Collateral. 4.07 Remedies. If an Event of Default shall occur and be continuing, the Lender may exercise, in addition to all other rights and remedies granted to it in this Loan Agreement and in any other instrument or agreement securing, evidencing or relating to the Secured Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, the Lender without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Borrower or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), at public or private sale or sales, at any exchange, auction or office of the Lender or elsewhere upon such terms and conditions and at prices that are consistent with the prevailing market for similar collateral as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Lender shall act in good faith to obtain the best execution possible under prevailing market conditions. The Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby waived or released. The Borrower further agrees, at the Lender's request, to assemble the Collateral and make it available to the Lender at places which the Lender shall reasonably select, whether at the Borrower's premises or elsewhere. The Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Lender hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Secured Obligations, in such order as the Lender may elect, and only after such application and after the payment by the Lender of any other amount required or permitted by any provision of law, including, without limitation, Section 9-504(1)(c) of the Uniform Commercial Code, need the Lender account for the surplus, if any, to the Borrower. To the extent permitted by applicable law, the Borrower waives all claims, damages and demands it may acquire against the Lender arising out of the exercise by the Lender of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of the Lender. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 Business Days before such sale or other disposition. The Borrower shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 2.05(b) hereof) if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Secured Obligations and the reasonable fees and disbursements of any attorneys employed by the Lender to collect such deficiency. Page 34 4.08 Limitation on Duties Regarding Presentation of Collateral. The Lender's duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Lender deals with similar property for its own account. Neither the Lender nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Borrower or otherwise. 4.09 Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 4.10 Release of Security Interest. Upon termination of this Loan Agreement and repayment to the Lender of all Secured Obligations and the performance of all obligations under the Loan Documents the Lender shall release its security interest in any remaining Collateral; provided that if any payment, or any part thereof, of any of the Secured Obligations is rescinded or must otherwise be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or a trustee or similar officer for the Borrower or any substantial part of its Property, or otherwise, this Loan Agreement, all rights hereunder and the Liens created hereby shall continue to be effective, or be reinstated, until such payments have been made. Section 5 Conditions Precedent. 5.01 Initial Advance. The obligation of the Lender to make its initial Advance hereunder is subject to the satisfaction, immediately prior to or concurrently with the making of such Advance, of the following conditions precedent: Page 35 (a) Loan Agreement. The Lender shall have received this Loan Agreement, executed and delivered by a duly authorized officer of each Duck Entity. (b) Loan Documents. The Lender shall have received the following documents, each of which shall be satisfactory to the Lender in form and substance: (i) Note. The Note, duly completed and executed. (ii) Custodial Agreement. The Custodial Agreement, duly executed and delivered by each Duck Entity, the Lender and the Custodian. In addition, each Duck Entity shall have filed all Uniform Commercial Code and related filings and performed all actions under the Custodial Agreement and taken such other action as the Lender shall have requested in order to perfect the security interests created pursuant to this Loan Agreement. (iii)Intercreditor Agreement. The Intercreditor Agreement, duly executed and delivered by each of GECC and BNY Midwest Trust Company and acceptable to Lender in its sole discretion. (iv) Master Depository Account. The Lender shall have approved and become a party to the Master Agency Agreement pursuant to Section 12 therein, and shall have received a certified copy of the Master Agency Agreement as in effect or the date hereof. (v) Amendment of GECC Agreement. GECC and the Borrower shall have duly executed and delivered an amendment to the GECC Agreement terminating the Warehouse Facility (as such term is defined in the GECC Agreement), in form and content satisfactory to Lender, including but not limited to a provision providing for the extension at Borrower's option of the Inventory Facility. (vi) Amendment of GECC UCC-1 Filings. The GECC UCC-1 filings shall have been amended to provide notice of the GECC Intercreditor Agreement. (vii)Perfected Liens. The Duck Entities shall have taken all steps necessary to ensure that the security interest granted hereunder in the Collateral shall constitute a fully perfected security interest under the Uniform Commercial Code in all right, title and interest of the Duck Entities in, to and under such Collateral, which can be perfected by filing under the Uniform Commercial Code, subject only to the Liens described in Section 6.11(d). (viii) Power of Attorney. A Power of Attorney shall have been duly executed and delivered by each Duck Entity to the Lender. (c) Organizational Documents. A good standing certificate and certified copies of the charter and by-laws (or equivalent documents) of each Duck Entity and of all corporate or other authority for each Duck Entity with respect to the execution, delivery and performance of the Loan Documents and each other document to be delivered by each Duck Entity from time to time in connection herewith (and the Lender may conclusively rely on such documents until it receives notice in writing from the Borrower to the contrary). Page 36 (d) Legal Opinion. A legal opinion of counsel to the Borrower, substantially in the form attached hereto as Exhibit C. (e) Securitization Letter. The Lender shall have received the Securitization Letter, in form and substance satisfactory to the Lender and executed by a duly authorized officer of the Borrower. (f) Filings, Registrations, Recordings. Any documents (including, without limitation, financing statements) required to be filed, registered or recorded in order to create, in favor of the Lender, a perfected security interest in the Collateral, subject to no Liens other than those created hereunder, shall have been properly prepared and executed for filing (including the applicable county(ies) if the Lender determines such filings are necessary in its reasonable discretion), registration or recording in each office in each jurisdiction in which such filings, registrations and recordations are required to perfect such security interest. (g) Fees and Expenses. The Lender shall have received all fees and expenses required to be paid by the Borrower on or prior to the initial Funding Date pursuant to Section 11.03(b) and such fees and expenses may be netted out of any Advance made by the Lender hereunder. (h) Financial Statements. The Lender shall have received the financial statements referenced in Section 7.01(a). (i) Underwriting Guidelines. The Lender and the Borrower shall have agreed upon the Borrower's current Underwriting Guidelines for Contracts and the Lender shall have received a copy thereof. (j) Consents, Licenses, Approvals, etc. The Lender shall have received a list certified by the Borrower of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by the Borrower of, and the validity and enforceability of, the Loan Documents, which consents, licenses and approvals shall be in full force and effect. (k) Insurance. The Lender shall have received evidence in form and substance satisfactory to the Lender showing compliance by the Borrower as of such initial Funding Date with Section 7.19 hereof. (l) Exchange Debt Documents. The Lender shall have received certified copies of the Exchange Debt Documents. (m) Senior Secured Loan Documents. The Lender shall have received certified copies of the Senior Secured Loan Documents. (n) Other Documents. The Lender shall have received such other documents as the Lender or its counsel may reasonably request. Page 37 5.02 Initial and Subsequent Advances. The making of each Advance to the Borrower (including the initial Advance) on any Business Day is subject to the following further conditions precedent, both immediately prior to the making of such Advance and also after giving effect thereto and to the intended use thereof: (a) no Default or Event of Default shall have occurred and be continuing; (b) both immediately prior to the making of such Advance and also after giving effect thereto and to the intended use thereof, the representations and warranties made by the Borrower in Section 6 hereof, and in each of the other Loan Documents, shall be true and complete on and as of the date of the making of such Advance and on and as of each date thereafter until the Termination Date in all material respects (in the case of the representations and warranties in Schedule 1 and Schedule 6, solely with respect to Eligible Contracts included in the Borrowing Base) with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date). At the request of the Lender, the Lender shall have received an officer's certificate signed by a Responsible Officer of the Borrower certifying as to the truth and accuracy of the above, which certificate shall specifically include a statement that the Borrower is in compliance with all governmental licenses and authorizations and is qualified to do business and in good standing in all required jurisdictions; (c) the Servicer shall have delivered the Borrowing Base Certificate for such Funding Date to the Lender pursuant to Section 2.03(c)(iv) of this Loan Agreement; (d) the aggregate outstanding principal amount of the Advances shall not exceed the Borrowing Base; (e) subject to the Lender's right to perform one or more Due Diligence Reviews pursuant to Section 11.15 hereof, the Custodian shall have completed its due diligence view of the Contract Delivery Documents for each Advance and such other documents, records, agreements, instruments Financed Vehicles or information relating to such Advances as the Custodian in its reasonable discretion deems appropriate to review and such review shall be satisfactory to the Lender in its reasonable discretion; (f) the Lender shall have received the Notice of Borrowing Base and Pledge from the Borrower, and the Borrower shall have timely made all of the deliveries under Sections 2.01, 2.02 and 2.03 of the Custodial Agreement; (g) the Custodian shall have timely made all of the deliveries under Sections 3.01, 3.02, 3.03 and 3.04 of the Custodial Agreement; and (h) if any Pledged Contracts were acquired by the Borrower from third parties, such Contracts shall conform to the Borrower's Underwriting Guidelines or the Lender shall have received Underwriting Guidelines for such Contracts acceptable to the Lender in its sole discretion. Page 38 Each request for a borrowing by the Borrower hereunder shall constitute a certification by the Borrower to the effect set forth in this Section (both as of the date of such notice, request or confirmation and as of the date of such borrowing). Section 6 Representations and Warranties. The Borrower represents and warrants to the Lender that as of the date hereof, each other date upon which representations and warranties are made or renewed pursuant to the Loan Documents and, in each case, on and as of each date thereafter until the Termination Date: 6.01 Existence. Each Duck Entity (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite corporate or other power, and has all governmental licenses, authorizations, consents and approvals, necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the lack of such licenses, authorizations, consents and approvals would not be reasonably likely to have a material adverse effect on its property, business or financial condition, or prospects; and (c) is qualified to do business and is in good standing in all other jurisdictions in which the nature of the business conducted by it makes such qualification necessary, except where failure so to qualify would not be reasonably likely (either individually or in the aggregate) to have a material adverse effect on its property, business or financial condition, or prospects and (d) is in compliance in all material respects with all Requirements of Law. 6.02 Financial Condition. UDC has heretofore furnished to the Lender a copy of the unaudited balance sheet, of UDC and its consolidated Subsidiaries, dated as of December 31, 2000. UDC has also heretofore furnished to the Lender the related consolidated statements of income and retained earnings and of cash flows for UDC and its consolidated subsidiaries for the year ended December 31, 2000, setting forth comparative form the figures for the previous year. All such financial statements are and, upon delivery, all financial statements described in Section 7.01(a) will be, materially complete and correct and fairly present the consolidated financial condition of UDC and its subsidiaries and the consolidated results of their operations for the applicable fiscal period, all in accordance with GAAP applied on a consistent basis. Since December 31, 2000 there has been no development or event nor any prospective development or event which has had or should reasonably be expected to have a Material Adverse Effect. 6.03 Litigation. There are no actions, suits, arbitrations, investigations or proceedings pending or, to its knowledge, threatened against any Duck Entity or any of its respective Subsidiaries or affecting any of the property thereof before any Governmental Authority, (i) as to which individually or in the aggregate there is a reasonable likelihood of an adverse decision which would have a Material Adverse Effect on the property, business or financial condition, or prospects of UDC and its consolidated subsidiaries taken as a whole or (ii) which questions the validity or enforceability of any of the Loan Documents or any action to be taken in connection with the transactions contemplated hereby. 6.04 No Breach. Neither (a) the execution and delivery of the Loan Documents or (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the charter or by-laws of any Duck Entity, or any applicable law, rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or other material agreement or instrument to which any Duck Entity, or any of its Subsidiaries, is a party or by which any of them or any of their property is bound or to which any of them is subject, or constitute a default under any such material agreement or instrument, or (except for the Liens created pursuant to this Loan Agreement) result in the creation or imposition of any Lien upon any property of any Duck Entity or any of its Subsidiaries, pursuant to the terms of any such agreement or instrument. Page 39 6.05 Action. Each Duck Entity has all necessary corporate or other power, authority and legal right to execute, deliver and perform its obligations under each of the Loan Documents to which it is a party; the execution, delivery and performance by each Duck Entity of each of the Loan Documents to which it is a party has been duly authorized by all necessary corporate or other action on its part; and each Loan Document has been duly and validly executed and delivered by each Duck Entity and constitutes a legal, valid and binding obligation of each Duck Entity, enforceable against each Duck Entity in accordance with its terms. 6.06 Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority, or any other Person, are necessary for the execution, delivery or performance by any Duck Entity of the Loan Documents to which it is a party or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to this Loan Agreement. 6.07 Margin Regulations. Neither the making of any Advance hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulation T, U or X. 6.08 Taxes. UDC and its consolidated Subsidiaries have filed all Federal income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except for any such taxes, if any, that are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of UDC and its consolidated Subsidiaries in respect of taxes and other governmental charges are, in the opinion of UDC, adequate. 6.09 Investment Company Act. None of the Duck Entities nor any of their Subsidiaries is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Duck Entity is subject to any Federal or state statute or regulation which limits its ability to incur indebtedness. 6.10 No Default. No Duck Entity nor any of their Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which should reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. Page 40 6.11 Collateral; Collateral Security. (a) Except for (i) Pledged Contracts released pursuant to Section 4.01(d) above and (ii) transfers from one Duck Entity to another Duck Entity, (iii) the GECC Security Interest and (iv) the SunAmerica Security Interest, no Duck Entity has assigned, pledged, or otherwise conveyed or encumbered any Contract or other Contract Collateral to any other Person other than another Duck Entity, and immediately prior to the pledge of any such Contract or other Contract Collateral, a Duck Entity was the sole owner of such Contract or other Contract Collateral and had good and marketable title thereto, free and clear of all Liens, in each case except for Liens to be released simultaneously with the Liens granted in favor of the Lender hereunder and no Person other than a Duck Entity has any Lien on any Contract or other Contract Collateral. (b) The provisions of this Loan Agreement are effective to create in favor of the Lender a valid security interest in all right, title and interest of the Duck Entities in, to and under the Collateral. (c) Upon receipt by the Custodian of the Contract Delivery Documents, the Lender shall have a fully perfected first priority security interest in the Contract Collateral. (d) Upon the filing of financing statements on Form UCC-1 naming the Lender as "Secured Party" and the Duck Entities as "Debtor", and describing the Collateral, in the jurisdictions and recording offices listed on Schedule 2 attached hereto, the security interests granted hereunder in the Collateral will constitute fully perfected security interests under the Uniform Commercial Code in all right, title and interest of the Duck Entities in, to and under such Collateral, which can be perfected by filing under the Uniform Commercial Code. Upon the effectiveness of the Intercreditor Agreement, Lender will have a fully perfected security interest in the Stock Pledge Collateral. Lender's security interests in: (i) the Contract Collateral shall be subject to no prior Liens upon the effectiveness of the Intercreditor Agreement, (ii) the Non-Contract Collateral shall be subject to no prior Liens other than the Lien of the lender under the GECC Inventory Facility or the Replacement Inventory Facility, and (iii) the Stock Pledge Collateral shall be subject to no prior Liens other than the Lien of the lenders under the Senior Secured Loan, any refinancing of the Senior Secured Loan, the Lien of GECC under the Consent and Subordination Agreement and the Verde Loan Agreement. 6.12 Chief Executive Office; Chief Operating Office; State of Incorporation. Each Duck Entity's chief executive office on the Effective Date is located at 2525 East Camelback Road, Suite 500, Phoenix AZ 85016, and the chief operating office is located at the same address. UDC is a Delaware corporation; UDCSFC is an Arizona corporation; UDCC is an Arizona corporation; Car Sales is an Arizona corporation; Car Sales Florida is a Florida corporation; and UDFC is an Arizona corporation. 6.13 Location of Books and Records. The location where each Duck Entity keeps it books and records including all computer tapes and records relating to the Collateral is its chief executive office or chief operating office or the offices of the Custodian. 6.14 True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Duck Entities to the Lender in connection with the negotiation, preparation or delivery of this Loan Agreement and the other Loan Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of the Duck Entities to the Lender in connection with this Loan Agreement and the other Loan Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to a Responsible Officer that, after due inquiry, could reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Loan Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Lender for use in connection with the transactions contemplated hereby or thereby. Page 41 6.15 ERISA. Each Plan to which the Duck Entities make direct contributions, and, to the knowledge of each Duck Entity, each other Plan and each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other Federal or State law. No event or condition has occurred and is continuing as to which any Duck Entity would be under an obligation to furnish a report to the Lender under Section 7.01(d) hereof. 6.16 Licenses. The Lender will not be required as a result of financing or taking a pledge of the Contracts to be licensed, registered or approved or to obtain permits or otherwise qualify (i) to do business in any state in which it currently so required or (ii) under any state consumer lending, fair debt collection or other applicable state statute or regulation. 6.17 No Burdensome Restrictions. No Requirement of Law or Contractual Obligation of the Duck Entities or any of their Subsidiaries has a Material Adverse Effect. 6.18 Subsidiaries. All of the Subsidiaries of UDC at the date hereof are listed on Schedule 4 to this Loan Agreement. 6.19 Origination of Contract Loans. (a) The origination and collection practices used by the Duck Entities, the Servicer or an Originator, as applicable, with respect to the Contracts that are not Acquired Contracts have been in all material respects legal, proper, prudent and customary in the used Motor Vehicle loan origination and servicing business, and in accordance with the Underwriting Guidelines. Each of the Contracts that are not Acquired Contracts represented on any notice, list or certificate of Borrower to be an Eligible Contract complies with the representations and warranties listed in Schedule 1 hereto. (b) To Borrower's knowledge, the origination practices used by the originators of the Acquired Contracts with respect to the Acquired Contracts have been in all material respects legal, proper, prudent and customary in the used Motor Vehicle loan origination business. The collection practices used by the Duck Entities or the Servicer, as applicable, with respect to the Acquired Contracts have been in all material respects legal, proper, prudent and customary in the used Motor Vehicle servicing business. Each of the Acquired Contracts represented on any notice, list or certificate of Borrower to be an Eligible Contract complies with the representations and warranties listed in Schedule 6 hereto. Page 43 6.20 Borrower Solvent; Fraudulent Conveyance As of the date hereof and immediately after giving effect to each Advance, the fair value of the assets of UDC and its consolidated Subsidiaries taken as a whole are greater than the fair value of the liability (including, without limitation, contingent liabilities if and to the extent required to be recorded as a liability on the financial statements of the UDC and its consolidated Subsidiaries in accordance with GAAP) of UDC and its consolidated Subsidiaries taken as a whole, and UDC and its consolidated Subsidiaries taken as a whole are and will be solvent, are and will be able to pay their debts as they mature and do not and will not have an unreasonably small capital to engage in the business in which they are engaged and proposes to engage. No Duck Entity intends to incur, or believes that it has incurred, debt beyond its ability to pay such debts as they mature. No Duck Entity is contemplating the commencement of insolvency, bankruptcy, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, conservator, trustee or similar official in respect of such Duck Entity or any of its assets. No Duck Entity is transferring any Contracts with any intent to hinder, delay or defraud any of its creditors. 6.21 Master Agency Agreement. Exhibit J hereto is a full, complete and correct copy of the Master Agency Agreement and such agreement has not been modified and is in full force and effect. There are no agreements or understandings relating to the Master Agency Agreement that are not fully and accurately described in Exhibit J. 6.22 Exchange Debt. Schedule 9 hereto lists all of the Exchange Debt Documents. The set of documents delivered to Lender pursuant to Section 5.01(m) is a full, complete and correct copy of the Exchange Debt Documents and such documents have not been modified and are in full force and effect. There are no agreements or understandings relating to the Exchange Debt that are not fully and accurately described in the documents delivered to Lender. 6.23 Senior Secured Loan. Schedule 10 hereto lists all of the Senior Secured Loan Documents. The set of documents delivered to Lender pursuant to Section 5.01(n) is a full, complete and correct copy of the Senior Secured Loan Documents and such documents have not been modified and are in full force and effect. There are no agreements or understandings relating to the Senior Secured Loan that are not fully and accurately described in the documents delivered to Lender. 6.24 Designated Senior Indebtedness. Borrower hereby designates the Loan Agreement as "Designated Senior Indebtedness" pursuant to the Indenture, dated October 5, 1998 (the "Indenture"), from Borrower to BNY Midwest Trust Company, as successor in interest to Harris Trust and Savings Bank, as trustee (pursuant to which the Exchange Debt described on Schedule 9 was issued). Borrower agrees to maintain such designation at all times. Borrower will promptly notify the trustee under the Indenture of such designation and in connection with the Indenture, Borrower will cause to be issued and delivered to Lender such supplemental indenture as is required to provide that the amounts owing under this Agreement constitute "Designated Senior Indebtedness". Page 43 Section 7 Covenants of the Borrower. The Borrower covenants and agrees with the Lender that, so long as any Advance is outstanding and until payment in full of all Secured Obligations: 7.01 Financial Statements. The Borrower shall deliver to the Lender: (a) (i) as soon as available and in any event within fifteen (15) days after the end of each month, the consolidated balance sheets of UDC and its consolidated subsidiaries as at the end of such month and the related unaudited consolidated statements of income and retained earnings and of cash flows for UDC and its consolidated subsidiaries for such month and the portion of the fiscal year through the end of such month, setting forth in each case in comparative form the figures for the previous year, accompanied by a certificate of a Responsible Officer of UDC, which certificate shall state that such consolidated financial statements fairly present the consolidated financial condition and results of operations of UDC and its subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such month (subject to normal year-end audit adjustments); (ii) as soon as available and in any event within sixty (60) days after the end of each of the first three quarterly fiscal periods of each fiscal year of UDC, the consolidated balance sheets of UDC and its consolidated subsidiaries as at the end of such period and the related unaudited consolidated statements of income and retained earnings and of cash flows for UDC and its consolidated subsidiaries for such period and the portion of the fiscal year through the end of such period, setting forth in each case in comparative form the figures for the previous year, accompanied by a certificate of a Responsible Officer of UDC, which certificate shall state that such consolidated financial statements fairly present the consolidated financial condition and results of operations of UDC and its Subsidiaries in accordance with GAAP, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within one hundred and five (105) days after the end of each fiscal year of UDC (except with respect to the fiscal year ended December 31, 2000, for which such delivery shall be made no later than April 30, 2001), the consolidated balance sheets of UDC and its consolidated subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for UDC and its consolidated subsidiaries for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of UDC and its consolidated subsidiaries at the end of, and for, such fiscal year in accordance with GAAP, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default; notwithstanding that such financial statements may be delivered within the time period set forth in Section 7.01(a)(ii) and this Section 7.01(b), Borrower agrees to cause all 10-Q and 10-K filings to be made within the periods of time required pursuant to applicable law; Page 44 (c) from time to time such other information regarding the financial condition, operations, or business of any Duck Entity as the Lender may reasonably request; and (d) as soon as reasonably possible, and in any event within thirty (30) days after a Responsible Officer knows, or with respect to any Plan or Multiemployer Plan to which any Duck Entity or any of its Subsidiaries makes direct contributions, has reason to believe, that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of such Duck Entity setting forth details respecting such event or condition and the action, if any, that any Duck Entity or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by such Duck Entity or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation or otherwise waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) days of the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution under Section 4041(c) of ERISA of a notice of intent to terminate any Plan or any action taken by such Duck Entity or an ERISA Affiliate to terminate any Plan; (iii)the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by such Duck Entity or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by such Duck Entity or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by such Duck Entity or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against such Duck Entity or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if such Duck Entity or an ERISA Affiliate fails to timely provide security to such Plan in accordance with the provisions of said Sections. Page 45 UDC will furnish to the Lender, at the time it furnishes each set of financial statements pursuant to paragraphs (a) and (b) above, (i) detailed calculations for each financial covenant required pursuant to Section 7.18 herein and (ii) a certificate of a Responsible Officer of UDC to the effect that, to the best of such Responsible Officer's knowledge, each Duck Entity during such fiscal period or year has observed or performed all of its covenants and other agreements, and satisfied every material condition, contained in this Loan Agreement and the other Loan Documents to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate (and, if any Default or Event of Default has occurred and is continuing, describing the same in reasonable detail and describing the action the Duck Entity has taken or proposes to take with respect thereto). 7.02 Litigation. UDC will immediately, but in any event within one (1) Business Day after service of process on UDC or any of its Subsidiaries, give to the Lender notice of all legal or arbitrable proceedings affecting UDC or any of its Subsidiaries that (a) questions or challenges the validity or enforceability of any of the Loan Documents, (b) seek damages from UDC or any of its Subsidiaries equal to or greater than $250,000, or (c) as to which there is a reasonable likelihood of an adverse determination that would result in damages paid by any Duck Entity equal to or greater than $250,000 or otherwise have a Material Adverse Effect. 7.03 Existence, Compliance, Records, Inspection. Each of UDC and its Subsidiaries will: (a) except for fundamental changes permitted pursuant to Section 7.04, preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises and not change its name or its jurisdiction of incorporation; (b) comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, truth in lending and all environmental laws) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect; (c) keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied; (d) not move its chief executive office or chief operating office from the addresses referred to in Section 6.13 unless it shall have provided the Lender thirty (30) days prior written notice of such change; (e) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and Page 46 (f) permit representatives of the Lender, during normal business hours upon three (3) Business Days' prior written notice at a mutually desirable time, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by the Lender. 7.04 Prohibition of Fundamental Changes. Except in connection with a Privatization Transaction permitted under Section 7.08, no Duck Entity shall enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or dissolution) or sell all or substantially all of its assets; provided, that any Duck Entity may merge or consolidate with (a) any wholly owned subsidiary of such Duck Entity, or (b) any other Person if such Duck Entity is the surviving corporation, or (c) any other Duck Entity if, after giving effect thereto, no Default or Event of Default would exist hereunder. 7.05 Borrowing Base Deficiency. If at any time there exists a Borrowing Base Deficiency the Borrower shall cure same in accordance with Section 2.06 hereof. 7.06 Duty to Notify Lender. The Borrower shall give prompt notice in accordance with the requirements of this Section 7.06 to the Lender as set forth in Section 11.02 below: (a) upon the Borrower becoming aware of, and in any event within one (1) Business Day after, the occurrence of any Default or Event of Default or any event of default or default under any other material agreement of the Borrower; (b) upon the Borrower becoming aware of any default related to any Collateral, any Material Adverse Effect and any event or change in circumstances which should reasonably be expected to have a Material Adverse Effect; (c) upon the entry of a judgment or decree in an amount in excess of $250,000. Each notice pursuant to this Section 7.06 shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken or proposes to take with respect thereto. 7.07 Servicing. (a) Lender Administration. Lender shall have no liability to Borrower with respect to Collections received by Lender, or the Lender Account, other than to: (i) apply the Collections pursuant to Section 4.2 of this Loan Agreement and (ii) upon termination of this Loan Agreement and Borrower's satisfaction of all of its obligations under this Loan Agreement, to transfer the amounts described in Section 2.05(c)(vii) to Borrower. Lender shall have no liability to Borrower with respect to any interest or other earnings which are earned, or could have been earned, on the Collections while they are in the Lender Account. Page 47 (b) Borrower Administration. (i) Borrower shall perform all aspects of servicing, administering, collecting, liquidating, accounting for and managing (collectively, "administering", "administer", or "administration") the Pledged Contracts it customarily performs in accordance with the Accepted Servicing Practices, which practices are in accordance with applicable law and have been disclosed to Lender prior to the date hereof. Borrower shall provide such administration in a reasonable and prudent way that does not, in Lender's determination, adversely affect the value of the Collateral to Lender. If in Lender's opinion, Borrower fails to administer the Pledged Contracts in accordance with Borrower's practices disclosed to Lender prior to the date hereof, Lender shall notify Borrower of the deficiencies in Borrower's administration and Borrower shall have ten (10) Business Days to cure any such deficiencies. The administration provided by Borrower shall include but not be limited to all servicing currently provided by Borrower, and Financed Vehicle titling and lien perfection, customer service, insurance claim tracking and collection, insurance maintenance, Contract enforcement, Contract billing, payment processing, portfolio and Contract accounting, portfolio management, delinquency collection, repossession, foreclosure, resale, and maintaining current Contract Debtor and Financed Vehicle location information (name, address and phone number). Borrower shall maintain current, accurate, and complete records of activity and comments regarding collection, insurance, payments, and other material events. The records regarding collection history, payments, Contract accounting, customer service notes, Contract Debtor names and addresses and Principal Balance shall be computerized. Borrower shall require Contract Debtors to maintain Required Contract Debtor Insurance. Borrower shall administer and otherwise deal with the Contracts in compliance with all applicable laws. Borrower shall conduct foreclosure sales in a commercially reasonable manner and take the steps necessary to preserve the deficiency liability of the Contract Debtors. (ii) Borrower shall administer the Pledged Contracts at its existing service centers in Arizona, Florida and Texas or at such other locations that Borrower provides prior notice of to Lender and Lender approves for Contract administration. (iii)Borrower shall furnish to Lender such reports in such form that Lender reasonably determines are necessary for it to track and monitor the Pledged Contracts, Collections, Financed Vehicles, and insurance. Such reports shall be in a format and on a medium readable by Lender's computer software, or such other format or medium acceptable to Lender. (iv) Notwithstanding anything herein to the contrary, (A) Borrower shall remain liable under all Contracts, and any other contracts and agreements with Contract Rights Payors or otherwise included in or related to the Collateral, to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Loan Agreement had not been executed, and (B) the exercise by Lender of any rights under any of the Loan Documents shall not release Borrower from any of its duties or obligations under the Contracts, or the other contracts and agreements, and (C) Lender shall not have any obligation or liability under the Contracts, or the other contracts and agreements, nor shall Lender be obligated to perform any of the obligations or duties of Borrower thereunder or to take any action to collect or enforce any rights thereunder. Page 48 (v) Borrower shall administer the Contracts at its own expense. In the event that Borrower fails to administer the Contracts in accordance with Section 7.07(b)(i), or there is Default or Event of Default, Lender may cause the Backup Servicer take over all or part of the Contract administration or, if the Backup Servicer fails or refuses to so act, Lender may do so. If Lender takes over all or part of such administration, Borrower shall pay to Lender on demand all out-of-pocket costs incurred by Lender in the performance of Borrower's administration obligations, and Borrower shall pay Lender for the administration performed by Lender an administration fee (exclusive of out-of-pocket costs) established by Lender, and until so paid such costs and fee shall be part of the Loan. Nothing herein shall be deemed to permit Lender to take over servicing of any Contract that is not a Pledged Contract. 7.08 Privatization Covenants. (a) UDC shall not commence or consummate any Privatization Transaction unless and until each of the following conditions are satisfied. (i) The Borrower will have entered into the Replacement Inventory Facility; (ii) Borrower shall have provided evidence reasonably acceptable to Lender that MBIA has consented to the Privatization Transaction and is willing to continue as surety provider for the Borrower's future Securitization Transactions notwithstanding the Privatization Transaction on substantially similar terms and conditions as prior Securitization Transactions; (iii)Kayne Anderson shall have committed in writing to receive not more than $4 million per annum (in installments of not more than $1 million per calendar quarter) in repayment of its outstanding subordinated debt until such debt is retired; provided that Kayne Anderson may receive greater payments than permitted by the foregoing, but only to the extent that such payments are made directly by a Person other than UDC or any of its Subsidiaries, including by Ernest Garcia or Verde; (iv) At the time that such Privatization Transaction is being effected, no MBIA Performance Trigger or MBIA Event of Default shall have occurred and be continuing under any outstanding MBIA-Wrapped Securitization. (b) In connection with any Privatization Transaction, the Borrower agrees as follows: (i) UDC will not expend a cumulative amount of more than $10 million, measured from the date of this Loan Agreement, in connection with all Privatization Transactions, without the prior written approval of Lender; Page 49 (ii) No Duck Entity or other Subsidiary of UDC will incur any subordinated debt which has a stated maturity of less than five years or which has an aggregate principal amount greater than $32 million; and (iii)If the Privatization Transaction is effected by or on behalf of Ernest Garcia, neither Ernest Garcia nor Greg Sullivan shall sell any capital stock owned directly or beneficially by them or any of their Affiliates in any Privatization Transaction. (c) After the consummation of any Privatization Transaction that satisfies all of the conditions set forth in Section 7.08(a) and (b), the Borrower shall satisfy the following covenants in addition to all of the other covenants and conditions in this Loan Agreement: (i) UDC shall not sell any common stock or other equity security to any third party without the Lender's prior written consent; (ii) If the Privatization Transaction is effected by or on behalf of Ernest Garcia, provided no Event of Default has occurred and is continuing hereunder, the Borrower may pay up to $2 million per year of Verde's corporate expenses, to be applied in level monthly payments of not more than $166,666.67 per month. (iii)If the Privatization Transaction is effected by or on behalf of Ernest Garcia, the amount or formula for payment of any bonus, dividend or other distribution by any Duck Entity to Ernest C. Garcia shall be subject to (1) Lender's prior approval in its sole discretion, including but not limited to Lender's prior approval of pro-forma financial projections for the twelve-month period during which such bonus, dividend or distribution will be paid, which projections demonstrate that the Borrower will have not less than $10 million of Available Liquidity at all times during such period, and (2) Ernest C. Garcia executing and delivering an agreement in form and content reasonably satisfactory to Lender implementing the provisions of Section 9(b) hereof. No such bonus, dividend or other distribution shall be paid the Available Liquidity is ------------ less than $10 million, or if there exists an Event of Default hereunder. (iv) No Duck Entity may convert into a subchapter S corporation without the prior written consent of the Lender. 7.09 Underwriting Guidelines. The Borrower shall notify the Lender in writing of any material modifications to the Underwriting Guidelines prior to implementation of such change, and unless the Lender objects in writing within three (3) Business Days of receipt of notice, the proposed modifications shall be deemed acceptable. 7.10 Lines of Business. The Borrower will not engage to any substantial extent in any line or lines of business activity other than the businesses generally carried on by it as of the Effective Date. 7.11 Transactions with Affiliates. The Borrower will not enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate unless such transaction (a) is otherwise permitted under this Loan Agreement, (b) other than as expressly permitted by Section 7.08 hereof, is in the ordinary course of the Borrower's business and (c) upon fair and reasonable terms no less favorable to the Borrower than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate, or make a payment that is not otherwise permitted by this Section 7.11 to any Affiliate. Page 50 7.12 Limitation on Liens. The Borrower will not, nor will it permit or allow others to, create, incur or permit to exist any Lien, security interest or claim on or to any of the Collateral without the consent of the Lender, except for Permitted Liens, provided that such Permitted Liens are not Liens on Contracts, the GECC Security Interest, the SunAmerica Security Interest or Liens created pursuant to an inventory financing facility approved by the Lender in its sole discretion and the Liens on the Stock Pledge Collateral described in Section 6.11(d)(iii). The Borrower will defend the Collateral against, and will take such other action as is necessary to remove, any Lien, security interest or claim on or to the Collateral, other than the security interests created under this Loan Agreement and the other Liens described in the preceding sentence, and the Borrower will defend the right, title and interest of the Lender in and to any of the Collateral against the claims and demands of all persons whomsoever. 7.13 Limitation on Sale of Assets. The Borrower shall not convey, sell, lease, assign, transfer or otherwise dispose of (collectively, "Transfer"), all or substantially all of its Property, business or assets (including, without limitation, receivables and leasehold interests) whether now owned or hereafter acquired or allow any Subsidiary to Transfer substantially all of its assets to any Person; provided, that the Borrower may after prior written notice to the Lender allow such action with respect to any Subsidiary which is not a material part of the Borrower's overall business operations. 7.14 Limitation on Distributions. The Borrower shall not make any payment on account of, or set apart assets for a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of, any stock of the Borrower, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower, except (a) as contemplated by and provided for in this Loan Agreement, or (b) with the prior written consent of Lender. 7.15 Financial Covenants. So long as any Advances are outstanding, the Borrower will comply with all of the provisions of this Section 7.17: (a) Minimum Net Worth. At all times, Minimum Net Worth shall be not less than $150 million until the successful completion of a Privatization Transaction; thereafter, at all times Minimum Net Worth shall be not less than $170 million. (b) Maintenance of Liquidity. The Borrower shall insure that it has Available Liquidity at all times in an amount of not less than $7.5 million. (c) Cashflow Interest Coverage Ratio. The Cashflow Interest Coverage Ratio, as of each Quarterly Measurement Date specified below, shall be not less than the ratio specified below: Quarterly Measurement Date Ratio Three months ending March 31, 2001 1.1:1.0 Six months ending June 30, 2001 1.1:1.0 Nine months ending September 30, 2001 1.25:1.0 Twelve months ending December 31, 2001 1.25:1.0 (and any Quarterly Measurement Date thereafter) Page 51 (d) Debt to EBITDA Ratio. The Debt to EBITDA Ratio, as of any Quarterly Measurement Date shall be not greater than 5.0:1.0. (e) Gross Margin Ratio. The average Gross Margin Ratio achieved on all vehicle sales during any Accounting Period shall not be less than 0.415. (f) Borrower's Rolling Average Delinquency Ratio (Pledged Contracts) shall not exceed 8.5% as of the last day of any Accounting Period. (g) Borrower's Rolling Average Delinquency Ratio (Managed Portfolio Contracts) shall not exceed ten percent (10%) as of the last day of any Accounting Period. (h) Borrower's Average Charged-Off Losses Ratio (Pledged Contracts) shall not exceed 1.75% as of the last day of any Accounting Period. (i) Borrower's Average Charged-Off Losses Ratio (Managed Portfolio Contracts) shall not exceed two and three quarters percent (2.75%) as of the last day of any Accounting Period. (j) Borrower's Rolling Average Managed Portfolio Contracts Deferral Rate shall not exceed 2.00%. 7.16 Restricted Payments The Borrower shall not make any Restricted Payments following an Event of Default. 7.17 Servicing Transmission. The Borrower shall provide to the Lender on a monthly basis no later than 10:00 a.m. eastern time on the fifteenth (15th) day of any calendar month (or the next Business Day) (or such other day requested by Lender) the Servicing Transmission. 7.18 No Amendment or Waiver. The Borrower will not, nor will it permit or allow others to amend, modify, terminate or waive any provision of any Contracts to which the Borrower is a party in any manner which shall reasonably expected to materially and adversely affect the value of such Contracts as Collateral. 7.19 Insurance. Borrower shall maintain the insurance set forth on Schedule 8 hereto with coverage limits that are reasonable and customary for an entity of Borrower's size and business. Borrower shall pay all insurance premiums payable for such coverage and upon request of Lender shall deliver a copy of the policies of such insurance to Lender, together with evidence of payment of all premiums therefor. Page 52 7.20 Further Identification of Collateral. The Borrower will furnish to the Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Lender or any Lender may reasonably request, all in reasonable detail. 7.21 Certificate of a Responsible Officer of the Borrower. At the time that the Borrower delivers financial statements to the Lender in accordance with Section 7.01 hereof, the Borrower shall forward to the Lender a certificate of a Responsible Officer of the Borrower which demonstrates that the Borrower is in compliance with the covenants set forth in Sections 7.12, 7.13 and 7.15 above. 7.22 Backup Servicer. The Borrower, the Lender and the Backup Servicer shall have entered into a backup servicing agreement which is satisfactory in form and substance to the Lender no later than June 30, 2001. 7.23 Inventory Facility. On or before each of June 1, 2001 and September 1, 2001, Borrower shall have either exercised its option to renew the GECC Inventory Facility pursuant to the amendment to the GECC Agreement described in Section 5.01(b)(v), or entered into the Replacement Inventory Facility. If by October 31, 2001 the Borrower has not entered into the Replacement Inventory Facility, then the Borrower shall enter into a Securitization Transaction (pursuant to the terms of the Securitization Letter), which Securitization Transaction shall close before December 31, 2001 and shall have a cut-off date of December 1, 2001. 7.24 Master Agency Agreement. The Borrower shall not modify, amend or waive any provision of the Master Agency Agreement without the prior written consent of the Lender. 7.25 Stock Pledge Collateral. The Borrower shall not grant a Lien on the Stock Pledge Collateral to any Person other than a Lien granted pursuant to the Senior Secured Loan or any refinancing of the Senior Secured Loan or other loan permitted under the last sentence of this Section 7.25; provided, that such subordination shall be no more adverse to the Lender than the subordination of the Lender to the holder of the Senior Secured Loan (assuming for this purpose that the Verde Loan Agreement has been terminated and its Lien on the Stock Pledge Collateral has been released). Lender agrees to subordinate its Lien on the Stock Pledge Collateral in connection with (i) any refinancing of the Senior Secured Loan or (ii) any other financing secured by the Stock Pledge Collateral, provided that (x) after giving effect on a pro forma basis to such other financing the Borrower shall not be in violation of any of the financial covenants contained in Section 7.15. 7.26 Exchange Debt Documents. The Borrower shall not modify, amend or waive any provision of the Exchange Debt Documents without the prior written consent of the Lender. Page 53 7.27 Exclusive Source of Financing. Except as permitted by the terms and conditions of Section 4.01(d) hereof, the Borrower shall not sell, securitize or otherwise finance any of its Contracts through any Person other than the Lender. 7.28 Depository Accounts. Within sixty (60) days of the date of this Loan Agreement, the Borrower shall give irrevocable instructions to banks with whom the Borrower has established Depository Accounts to deposit all funds in the Depository Accounts into the Consolidating Depository Account on a daily basis. Section 8 Events of Default. Each of the following events shall constitute an event of default (an "Event of Default") hereunder: (a) the Borrower shall default in the payment of any principal of or interest on any Advance when due (whether at stated maturity, upon acceleration or at mandatory prepayment); or (b) the Borrower shall default in the payment of any other amount payable by it hereunder or under any other Loan Document after notification by the Lender of such default, and such default shall have continued unremedied for three Business Days; or (c) any representation, warranty or certification made or deemed made herein or in any other Loan Document by the Borrower or any certificate furnished to the Lender pursuant to the provisions thereof, shall prove to have been false or misleading in any material respect as of the time made or furnished (other than the representations and warranties set forth in Schedule 1 and Schedule 6 unless Borrower shall have made any such representations and warranties with knowledge that they were materially false or misleading at the time made); or (d) the Borrower shall fail to comply with the requirements of Section 2.05(c), Section 2.06, Section 7.03(a), Section 7.04, Section 7.06, Section 7.08, Sections 7.12 through 7.17, Section 7.20, Section 7.22 or Section 7.23 hereof; or the Borrower shall otherwise fail to observe or perform any other agreement contained in this Loan Agreement or any other Loan Document and such failure to observe or perform shall continue unremedied for a period of five (5) Business Days; or (e) the Borrower fails to cure any deficiencies in its administration of the Pledged Contracts after notice from Lender within the period set forth in Section 7.07(b)(i) hereunder; or (f) a final judgment or judgments for the payment of money in excess of $500,000 in the aggregate (to the extent that it is, in the reasonable determination of the Lender, uninsured and provided that any insurance or other credit posted in connection with an appeal shall not be deemed insurance for these purposes) shall be rendered against the Borrower or any of its Subsidiaries by one or more courts, administrative tribunals or other bodies having jurisdiction over them and the same shall not be discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within sixty (60) days from the date of entry thereof and the Borrower or any such Subsidiary shall not, within said period of sixty (60) days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal; or Page 54 (g) any Duck Entity shall admit in writing its inability to pay its debts as such debts become due; or (h) UDC or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or (i) a proceeding or case shall be commenced, without the application or consent of the Borrower or any of its Subsidiaries, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a receiver, custodian, trustee, examiner, liquidator or the like of the Borrower or any such Subsidiary or of all or any substantial part of its property, or (iii) similar relief in respect of the Borrower or any such Subsidiary under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of sixty (60) or more days; or an order for relief against the Borrower or any such Subsidiary shall be entered in an involuntary case under the Bankruptcy Code; or (j) the Custodial Agreement or any Loan Document shall for whatever reason (including an event of default thereunder) be terminated or the lien on the Collateral created by this Loan Agreement or Borrower's material obligations hereunder shall cease to be in full force and effect, or the enforceability thereof shall be contested by the Borrower; or (k) any event or series of events that have had, or any circumstance which is reasonably likely to have, a Material Adverse Effect, in each case as determined by the Lender in its sole discretion, or the existence of any other condition which, in the Lender's sole discretion, constitutes a material impairment of the Borrower's ability to perform its obligations under this Loan Agreement, the Note or any other Loan Document; or (l) (i) any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Lenders is likely to, incur any liability in connection with a withdrawal from, or the insolvency or reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or Page 55 (m) any Change of Control of the Borrower shall have occurred without the prior consent of the Lender; or (n) if a default or event of default occurs under Indebtedness of any Duck Entity with a principal amount in excess of $500,000 (with respect to any particular item of Indebtedness or in the aggregate) or under any agreement with the Lender or its Affiliates, and in each case after any applicable cure period has expired; or (o) the Lender reasonably requests, specifying the reasons for such request, information and/or written responses to such requests regarding the financial well-being of the Borrower, and the Borrower does not provide such information or responses within three (3) Business Days of such request; provided that no such Event of Default shall be deemed to have occurred if after receiving such request the Borrower promptly notifies the Lender that the allotted time period is not sufficient to satisfy the request for information and the Lender agrees in writing to a longer period; or (p) Borrower fails to enter into the Replacement Inventory Facility before December 31, 2001. Section 9 Remedies Upon Default. (a) Upon the occurrence of one or more Events of Default (subject to the expiration of the applicable cure period contained therein) other than those referred to in Section 8(h) or (i), the Lender may immediately declare the principal amount of the Advances then outstanding under the Note to be immediately due and payable, together with all interest thereon and reasonable fees and out-of-pocket expenses accruing under this Loan Agreement; provided that upon the occurrence of an Event of Default referred to in Section 8(h) or (i), such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding on the Note shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower and may thereupon exercise any remedies available to it at law and pursuant to the Loan Documents. (b) Upon the occurrence of an Event of Default involving the breach of any covenant set forth in Section 7.15 hereof, the aggregate cumulative amount any bonuses, dividends and other distributions described in Section 7.08(c)(iii) (net of the amount of any income taxes previously paid thereon) shall, upon notice from Lender, be contributed to the capital of UDC by Ernest C. Garcia within five (5) Business Days of such notice. Page 56 (c) Upon the occurrence of one or more Events of Default, the Lender shall have the right to obtain physical possession of the Servicing Records and all other files of the Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come in to the possession of the Borrower or any third party acting for the Borrower and the Borrower shall deliver to the Lender such assignments as the Lender shall request. The Lender shall be entitled to specific performance of all agreements of the Borrower contained in this Loan Agreement. (d) Upon the occurrence of one or more Events of Default, the Lender shall have the right to transfer the rights and obligations of the Servicer to the Back-up Servicer pursuant to the provisions of the agreement with the Back-up Servicer. (e) Upon the occurrence of one or more Events of Default, the Lender shall have the right to cause any and all payments to Verde with respect to the Verde corporate expenses to be terminated. Section 10 No Duty on Lender's Part. The powers conferred on the Lender hereunder are solely to protect the Lender's interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Borrower for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct. Section 11 Miscellaneous. 11.01 Waiver. No failure on the part of the Lender or the Borrower to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11.02 Notices. Except as otherwise expressly permitted by this Loan Agreement, all notices, requests and other communications provided for herein and under the Custodial Agreement (including, without limitation, any modifications of, or waivers, requests or consents under, this Loan Agreement) shall be given or made in writing (including, without limitation, by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Loan Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. Page 57 11.03 Indemnification and Expenses. (a) The Borrower agrees to hold the Lender harmless from and indemnify the Lender against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by, or asserted against the Lender, relating to or arising out of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than the Lender's gross negligence or willful misconduct. In any suit, proceeding or action brought by the Lender in connection with any Contract for any sum owing thereunder, or to enforce any provisions of any Contract, the Borrower will save, indemnify and hold the Lender harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by the Borrower of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from the Borrower. The Borrower also agrees to reimburse the Lender as and when billed by the Lender for all the Lender's reasonable out-of-pocket costs and expenses incurred in connection with the enforcement or the preservation of the Lender's rights under this Loan Agreement, the Note, any other Loan Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. The Borrower hereby acknowledges that, notwithstanding the fact that the Note is secured by the Collateral, the obligation of the Borrower under the Note is a recourse obligation of the Borrower. (b) The Borrower agrees to pay within 15 days of being billed by the Lender all of the out-of pocket costs and expenses incurred by the Lender in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Loan Agreement, the Note, any other Loan Document or any other documents prepared in connection herewith or therewith. The Borrower agrees to pay within 15 days of being billed by the Lender all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including, without limitation, (i) all the reasonable fees, disbursements and expenses of counsel to the Lender and (ii) all the due diligence, inspection, testing and review costs and expenses incurred by the Lender with respect to Collateral under this Loan Agreement, including, but not limited to, those costs and expenses incurred by the Lender pursuant to Sections 11.03(a), 11.14 and 11.16 hereof other than any costs and expenses incurred in connection with the Lender's rehypothecation of the Contracts prior to an Event of Default. 11.04 Amendments. Except as otherwise expressly provided in this Loan Agreement, any provision of this Loan Agreement may be modified or supplemented only by an instrument in writing signed by the Borrower and the Lender and any provision of this Loan Agreement may be waived by the Lender. 11.05 Successors and Assigns. This Loan Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Page 58 11.06 Survival. The obligations of the Borrower under Sections 3.03 and 11.03 hereof shall survive the repayment of the Advances and the termination of this Loan Agreement. In addition, each representation and warranty made, or deemed to be made by a request for a borrowing, herein or pursuant hereto shall survive the making of such representation and warranty, and the Lender shall not be deemed to have waived, by reason of making any Advance, any Default that may arise by reason of such representation or warranty proving to have been false or misleading, notwithstanding that the Lender may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Advance was made. 11.07 Captions. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement. 11.08 Counterparts. This Loan Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Loan Agreement by signing any such counterpart. This Loan Agreement and the other Loan Documents may be signed and delivered through facsimile signatures which shall operate as true and effective signatures of the persons sending the facsimile transmission. 11.09 Loan Agreement Constitutes Security Agreement; Governing Law. This Loan Agreement shall be governed by New York law without reference to choice of law doctrine (but with reference to Section 5-1401 of the New York General Obligations Law, which by its terms applies to this Loan Agreement), and shall constitute a security agreement within the meaning of the Uniform Commercial Code. 11.10 SUBMISSION TO JURISDICTION; WAIVERS. EACH LOAN PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY: (a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; AND Page 59 (c) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 11.12 Acknowledgments. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Loan Agreement, the Note and the other Loan Documents to which it is a party; (b) the Lender has no fiduciary relationship to the Borrower, and the relationship between the Borrower and the Lender is solely that of debtor and creditor; and (c) no joint venture exists among or between the Lender and the Borrower. 11.13 Hypothecation or Pledge of Collateral. Nothing in this Loan Agreement shall preclude the Lender from engaging in repurchase transactions with the Collateral or otherwise pledging, repledging, transferring, hypothecating, or rehypothecating the Collateral; provided, however, that the Contract Delivery Documents shall remain in the possession of the Custodian. Nothing contained in this Loan Agreement shall obligate the Lender to segregate any Collateral delivered to the Lender by the Borrower; provided, however, that nothing in this Section 11.13 shall relieve Lender of its obligation to release Collateral pursuant to the terms of this Loan Agreement. 11.14 Assignments; Participations.The Borrower may assign any of its rights or obligations hereunder or under the Note with the prior written consent of the Lender which consent shall not be unreasonably withheld. The Lender may assign or transfer to any bank or other financial institution that makes or invests in loans or any Affiliate of the Lender all or any of its rights or obligations under this Loan Agreement and the other Loan Documents, subject to the following conditions: (i) unless otherwise agreed to in writing by the Lender and the Borrower, each such assignment shall be in an amount not less than $5,000,000; (ii) the Lender shall be the administrative agent under this Loan Agreement; (iii)each assignee shall have an investment grade rating of not less than BBB- from S&P or Baa3 from Moody's; and (iv) the assignee shall not be a competitor of any Duck Entity. Page 60 (b) The Lender may, in accordance with applicable law, at any time sell to one or more lenders or other entities ("Participants") participating interests in any Advance, the Note, its commitment to make Advances, or any other interest of the Lender hereunder and under the other Loan Documents. In the event of any such sale by the Lender of participating interests to a Participant, the Lender's obligations under this Loan Agreement to the Borrower shall remain unchanged, the Lender shall remain solely responsible for the performance thereof, the Lender shall remain the holder of the Note for all purposes under this Loan Agreement and the other Loan Documents, and the Borrower and the Lender shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Loan Agreement and the other Loan Documents. The Borrower agrees that if amounts outstanding under this Loan Agreement and the Note are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Loan Agreement and the Note to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Loan Agreement or the Note; provided, that such Participant shall only be entitled to such right of set-off if it shall have agreed in the agreement pursuant to which it shall have acquired its participating interest to share with the Lender the proceeds thereof. The Lender also agrees that each Participant shall be entitled to the benefits of Sections 2.07 and 11.03 with respect to its participation in the Advances outstanding from time to time; provided, that the Lender and all Participants shall be entitled to receive no greater amount in the aggregate pursuant to such Sections than the Lender would have been entitled to receive had no such transfer occurred. (c) The Lender may furnish any information concerning the Borrower or any of its Subsidiaries in the possession of such Lender from time to time to assignees and participants (including prospective assignees and participants) only after notifying the Borrower in writing and securing signed confidentiality statements (a form of which is attached hereto as Exhibit H) and only for the sole purpose of evaluating participations and for no other purpose. (d) The Borrower agrees to cooperate with the Lender in connection with any such assignment and/or participation, to execute and deliver such replacement notes, and to enter into such restatements of, and amendments, supplements and other modifications to, this Loan Agreement and the other Loan Documents in order to give effect to such assignment and/or participation. The Borrower further agrees to furnish to any Participant identified by the Lender to the Borrower copies of all reports and certificates to be delivered by the Borrower to the Lender hereunder, as and when delivered to the Lender. 11.15 Periodic Due Diligence Review. The Borrower acknowledges that the Lender has the right to perform continuing due diligence reviews with respect to the Contracts, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and the Borrower agrees that upon reasonable (but no less than one (1) Business Day's) prior notice to the Borrower, the Lender or its authorized representatives will be permitted during normal business hours to examine, inspect, make copies of, and make extracts of, the Contract Delivery Documents and any and all documents, records, agreements, instruments or information relating to such Contracts in the possession, or under the control, of the Borrower and/or the Custodian. The Borrower also shall make available to the Lender a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Contract Delivery Documents and the Contracts. Without limiting the generality of the foregoing, the Borrower acknowledges that the Lender shall make Advances to the Borrower based solely upon the information provided by the Borrower to the Lender in the Master Custodial Report and the representations, warranties and covenants contained herein, and that the Lender, at its option, has the right, at any time to conduct a partial or complete due diligence review on some or all of the Contracts securing such Advance, including, without limitation, ordering new credit reports and otherwise re-generating the information used to originate such Contract. In addition, the Lender has the right to perform continuing Due Diligence Reviews of the Borrower and its Affiliates, directors, officers, employees and significant shareholders. The Borrower and Lender further agree that all out-of-pocket costs and expenses incurred by the Lender in connection with the Lender's activities pursuant to this Section 11.16 shall be paid for as agreed by such parties. Page 61 11.16 Set-Off. In addition to any rights and remedies of the Lender provided by this Loan Agreement and by law, the Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all Property and deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Lender or any Affiliate thereof to or for the credit or the account of the Borrower. The Lender agrees promptly to notify the Borrower after any such set-off and application made by the Lender; provided that the failure to give such notice shall not affect the validity of such set-off and application. 11.17 Intent. The parties recognize that each Advance is a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. 11.18 Entire Agreement. This Loan Agreement embodies the entire agreement and understanding of the parties hereto and supersedes any and all prior agreements, arrangements and understandings relating to the matters provided for herein. No alteration, waiver, amendments, or change or supplement hereto shall be binding or effective unless the same is set forth in writing by a duly authorized representative of each party hereto. 11.19 Confidentiality. Lender acknowledges that in implementing, maintaining and enforcing this Loan Agreement Lender will obtain access to Confidential Information. Except as otherwise required by law or court order, the Lender shall keep all such Confidential Information confidential and shall not (a) disclose the Confidential Information to any third party, other than Lender's employees, officers, directors, agents, attorneys, accountants and representatives (whom Lender shall direct to keep such Confidential Information confidential in accordance with the terms of this Section 11.19); or (b) use the Confidential Information for any purpose other than in connection with the implementation, maintenance and enforcement of this Loan Agreement. * * * * * Page 62 IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. Lender: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Ira J. Platt Telecopier No.: (203) 618-2135 Telephone No.: (203) 625-2700 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower: UGLY DUCKLING CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 With a copy to: -------------------- Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-2202 Attention: David A. Sprentall Telecopier No.: (602) 382-6070 Telephone No.: (602) 382-6260 Page 63 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower: UGLY DUCKLING CAR SALES & FINANCE CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 With a copy to: -------------------- Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-2202 Attention: David A. Sprentall Telecopier No.: (602) 382-6070 Telephone No.: (602) 382-6260 Page 64 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower and Servicer: UGLY DUCKLING CREDIT CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 With a copy to: -------------------- Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-2202 Attention: David A. Sprentall Telecopier No.: (602) 382-6070 Telephone No.: (602) 382-6260 Page 65 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower: UGLY DUCKLING CAR SALES, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 With a copy to: -------------------- Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-2202 Attention: David A. Sprentall Telecopier No.: (602) 382-6070 Telephone No.: (602) 382-6260 Page 66 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower: UGLY DUCKLING CAR SALES FLORIDA, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 With a copy to: -------------------- Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-2202 Attention: David A. Sprentall Telecopier No.: (602) 382-6070 Telephone No.: (602) 382-6260 Page 67 [Continuation of Master Loan and Security Agreement Signature Pages] UGLY DUCKLING FINANCE CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 With a copy to: -------------------- Snell & Wilmer L.L.P. One Arizona Center Phoenix, Arizona 85004-2202 Attention: David A. Sprentall Telecopier No.: (602) 382-6070 Telephone No.: (602) 382-6260 Page 68 Schedule 1 REPRESENTATIONS AND WARRANTIES RE: ELIGIBLE CONTRACTS THAT ARE NOT ACQUIRED CONTRACTS Eligible Contracts As to each Eligible Contract, other than an Acquired Contract, that forms part of the Collateral hereunder (and the related Contract Delivery Documents), the Borrower shall be deemed to make the following representations and warranties to the Lender as of such date and as of each day thereafter: (a) The information set forth in the Master Custodial Report with respect to the Pledged Contracts is complete, true and correct in all material respects. (b) Each Contract is in the form of Exhibit I, or a different form was consented to in writing by Lender as acceptable for Eligible Contracts. (c) The first Scheduled Payment is due within forty-five (45) days after the date of the Contract. (d) Not more than three (3) Scheduled Payments are due and unpaid in whole or in part at the time it is delivered to Lender or thereafter. (e) The Contract Debtor is not more than sixty (60) days delinquent on payments, and the Servicer has not designated the Contract as out for or in repossession. (f) Any right of rescission arising out of the Contract of the Contract Debtor shall have expired. (g) The Contract is not a Charged-off Contract. (h) If the Contract was originated after 1998, the Contract is a Simple Interest Method loan and has a fixed "APR" and the "Finance Charge" was computed using a fixed rate. (i) The initial term of the Contract does not exceed forty-eight (48) months and the Schedule of Payments has equal periodic payments except for payments due during the first 90 days of the term of the Contract and except for the final payment which may be less than the other equal payments, and the payment obligation is in United States dollars. In the event such Contract is pre-paid, the prepayment shall fully pay the Principal Balance and unpaid interest, including interest in the month of prepayment to the date of prepayment, at the APR. (j) The Contract is for the absolute sale of the Financed Vehicle to the Contract Debtor, and the Financed Vehicle is not on approval or subject to any agreement between the Contract Debtor and the Dealer for the repurchase or return of the Financed Vehicle. (k) The Contract does not present a credit, collateral or documentation risk which is material and unacceptable to Lender. (l) The Contract was originated by an originator in a Permitted State. (m) If the Contract Debtor is an employee, officer, agent, director, stockholder, supplier or creditor of Borrower or an Affiliate, the Contract does not contain terms more favorable than those available to an unrelated Person. (n) The Contract contains the original signature of the Contract Debtor and the Dealer. (o) The Contract is the only unsatisfied original executed Contract for the purchase of the Financed Vehicle and accurately reflects all of the actual terms and conditions of the Contract Debtor's purchase of the Financed Vehicle. Neither Borrower nor an Affiliate has made any agreement with the Contract Debtor to reduce the amount owed on the Contract. Neither Borrower nor an Affiliate is required to perform any additional service for, or perform or incur any additional obligation to, the Contract Debtor in order for Borrower to enforce the Contract. (p) The Contract, at the time Borrower purchased it, met Borrower's creditworthiness and other advance criteria in the Underwriting Guidelines, or the Contract does not meet such criteria and Lender approved in writing the deviation for that Contract. (q) The Contract Debtor's obligations under the Contract are secured by a validly perfected first priority security interest in the Financed Vehicle in favor of Borrower or Lender as secured party. (r) The Contract has not been, nor is it designated to be, terminated, satisfied, canceled, subordinated or rescinded in whole or in part; nor has the Financed Vehicle been released, or designated for release, from the security interest granted by the Contract; and all of the holder's obligations under the Contract have been performed except those which first arise subsequent to the delivery to Lender. (s) No provision of the Contract has been waived, extended, altered or modified in any respect except for (i) routine payment extensions for no more than (1) month which were done no more frequently than two (2) times every twelve (12) months and (ii) routine term extensions not exceeding two (2) months which were done no more frequently than one (1) time every twelve (12) months unless consented to by lender. The day of the month that Scheduled payments are due has not been changed from the original Schedule of Payments except for no more than one change which did not change the due date in a manner such that there was more than a thirty (30) day period for which no Scheduled Payment was due. In the event a Contract is removed from the Borrowing Base, Borrower may grant an additional two (2) extensions or Modifications during the term of the contract. Borrower shall identify these Contracts as being removed from the Borrowing Base, Borrower may grant an additional two (2) extensions or Modifications during the term of the Contract. Borrower shall identify these Contracts as being removed form the Borrowing Base in Borrower's data processing records. (t) No claims of rescission, setoff, counterclaim, defense or other material disputes have been asserted with respect to the Contract or Financed Vehicle. (u) There are no unsatisfied liens or claims for taxes, labor, materials, fines, confiscation, or replevin relating to the Contract or Financed Vehicle. There is no unsatisfied claim against the Contract Debtor based on the operation or use of the Financed Vehicle. All taxes due for the purchase, use and ownership of the Financed Vehicle have been paid. All taxes due on the transfer or the Contract to the Borrower and Lender have been paid. (v) The Contract requires Required Contract Debtor Insurance. Borrower is a loss payee or insured under the Required Contract Debtor Insurance. (w) Borrower has not repossessed the Financed Vehicle or commenced a replevin action or other lawsuit, against the Contract Debtor or Financed Vehicle. (x) The model year of the Financed Vehicle is not more than twelve (12) years earlier than the model year in effect at the time the Contract is delivered to Lender. (y) The obligation of the original Contract Debtor has not been released or assumed by another Person unless the release or assumption was properly documented and Lender consents in writing to it for purposes of the Contract being an Eligible Contract. (z) The cash down payment has been paid in full by the Contract Debtor and not loaned to the Contractor Debtor by the Borrower or an Affiliate, and any trade-in has been delivered to the Dealer with an endorsed Certificate of Title. The average cash down payment for the portfolio of Contracts is equal to at least $600. (aa) The Lender has received from the Custodian the deliveries required under the Custodial Agreement serving as confirmation that the Custodian is in physical possession of the Contract Delivery Documents. (bb) The Contract Debtor is not thirty-one (31) or more days contractually delinquent in payments, and, when taken together with all other Contracts which are thirty-one (31) or more days contractually delinquent, all such Contracts so not exceed 3% of the aggregate Principal Balance of all Eligible Contracts. (cc) Each Contract, the sale of the Financed Vehicle and the sale of any Required Contract Debtor Insurance and Optional Contract Debtor Insurance complied at the time the related Contract was originated or made, and shall continue to comply in all material respects with all requirements of applicable Federal, State and local laws, and regulations thereunder including, without limitation, usury laws, the Federal Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z, the Soldier's and Sailors' Civil Relief Act of 1940, the Texas Finance Code and other State adaptations of the Uniform Consumer Credit Code, and other consumer credit laws and equal credit opportunity and disclosure laws. The form of each Contract and the manner in which it was completed and executed and all documents delivered and disclosures made in connection therewith are in compliance with all requirements of applicable Federal, State and local laws, and all applicable regulations thereunder, except to the extent a failure to so comply would not have an adverse effect on (i) the collection and payment of the Contract, or (ii) the interests in such Contract of the Borrower. (dd) None of the Contracts Debtors is the United States of America, or any State, or any agency, department, or instrumentality of the United States of America, any State or municipality. (ee) No Contract has been originated in, or is subject to the laws of, any jurisdiction under which the sale, transfer, and assignment of such Contract, or the assignment and grant of a security interest pursuant to this Loan Agreement, shall be unlawful, void or voidable. The Borrower has not entered into any agreement with any Contract Debtor or any other Person that prohibits, restricts or conditions the sale, assignment, or grant of security interest in any portion of the Contracts. No consent of any Contract Debtor or other Person is required for the sale and assignment of or grant of security interest in the Contract. (ff) Each Contract constitutes "chattel paper" under the UCC. (gg) (A) If the Contract was originated in a State in which notation of security interest on the title document of the related Financed Vehicle is required or permitted to perfect such security interest, the title document for such Financed Vehicle shows the Borrower named as the original and only secured party under the related Contract as the holder of a first priority security interest in such Financed Vehicle; provided that any assumed name, designation or trade name may be used by the Borrower on the title document; provided further that the use of any such assumed name, designation or trade name by the Borrower shall result in a fully perfected first priority security interest in favor of Borrower and a legal opinion has been delivered to Lender by Borrower's legal counsel stating the foregoing, and (B) if the Contract was originated in a State in which the filing of a financing statement under the UCC is required to perfect a security interest in motor vehicles, such filings or recordings have been duly made and show the Borrower named as the secured party under the Contract. With respect to each Contract for which the title document has not yet been returned from the Registrar of Titles, the Seller has received and delivered to the custodian written evidence that such title document showing the Borrower as first lienholder has been applied for. (hh) Each Contract represents the genuine, legal, valid and binding obligation of the Contract Debtor thereunder and is enforceable by the holder thereof in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally, and all parties to such contract had full legal capacity to execute and deliver such contract and all other documents related thereto and to grant the security interest purported to be granted thereby. (ii) Each Contract Debtor is and continues to be domiciled in the United States. (jj) No Financed Vehicle has suffered a casualty and no Financed Vehicle has been materially damaged and not repaired, and no Financed Vehicle is located outside of the United States. (kk) The Financed Vehicle is customarily used and garaged in the state issuing the Certificate of Title. (ll) Each Financed Vehicle was properly delivered to the related Contract Debtor in good repair, without material defects and in satisfactory order. Each Financed Vehicle was accepted by the Contract Debtor after reasonable opportunity to inspect and test same and, at the time of such delivery and acceptance, no Contract Debtor informed the Borrower of any material defect therein. (mm) No Contract Debtor is involved in the business of leasing or selling any Financed Vehicles. (nn) No Contract constitutes a "consumer lease" under either (A) the UCC as in effect in the jurisdiction whose law governs the Contract, or (B) the Consumer Leasing Act, 15 U.S.C. 1667. Schedule 2 - -------------------------------------------------------------------------- FILING JURISDICTIONS AND OFFICES - -------------------------------------------------------------------------- - -------------------------------- ------------------------------------ Arizona Nevada - -------------------------------- ------------------------------------ Arizona Secretary of State Nevada Secretary of State 1700 W. Washington State Capitol Phoenix, Arizona 85007 200 North Carson Street Carson City, Nevada 89701 - -------------------------------- ------------------------------------ California New Mexico - -------------------------------- ------------------------------------ California Secretary of State New Mexico Secretary of State 1500 11th Street, 2nd Floor 325 Don Gasper Street Room #255 Room 300 Sacramento, California 95814 Santa Fe, New Mexico 87503 - -------------------------------- ------------------------------------ Delaware Texas - -------------------------------- ------------------------------------ Delaware Secretary of State Texas Secretary of State Townsend Building 1019 Brazos Street Loockerman & Federal Street Austin, Texas 78701 Dover, Delaware 19901 - -------------------------------- ------------------------------------ Florida Virginia - -------------------------------- ------------------------------------ Department of State Virginia State Corporation Commission 409 East Gaines Street 1300 E. Main Street Tallahassee, Florida 32399 Richmond, Virginia 23219 - -------------------------------- ------------------------------------ Georgia - -------------------------------- ------------------------------------ a. Fulton County Clerk 136 Pryor Street Atlanta, Georgia 30303 b. De Kalb County Clerk 556 North McDonogh Street Decatur, Georgia 30030 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Schedule 3 RELEVANT STATES Arizona Nevada California New Mexico Texas Florida Georgia Virginia Schedule 4
SUBSIDIARIES ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- NAME: FEDERAL TAX ID ACRONYM: dba, IF APPLICABLE: JURISDICTION OF NUMBER: INCORPORATION: ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Car Sales and 86-0657074 UDCSFC Arizona Finance Corporation (formerly Duck Ventures, Inc.) ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Credit Corporation 86-0677984 UDCC Arizona (formerly Champion Acceptance Corporation) ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Champion Financial Services, Inc. 86-0644768 CFS Arizona ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Car Sales, Inc. 86-0683232 UDCS Ugly Duckling Autos, Arizona Ugly Duckling Processing Center, Ugly Duckling Car Sales, Ugly Duckling City of Cars, Ugly Duckling Autorama, Ugly Duckling Glendale Motors, Ugly Duckling-Blue Chip Motors ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Car Sales Florida, 86-0846806 UDCSFL Ugly Duckling Autos Florida Inc. Champion Acceptance, Ugly Duckling Car Sales ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Finance Corporation 86-0956631 UDFC Arizona ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Funding Corporation UDFUND Delaware ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Receivables Corp. 86-0891975 UDRCII Delaware II ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Ducking Receivables Corp. 86-1013833 UDRCIII Delaware III ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Portfolio 86-0967702 UDPP Arizona Partnership, LLP ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Drake Insurance Services, Inc. 86-0797820 DRAKE Arizona ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Drake Insurance Agency, Inc. 86-0800750 DIAI Arizona ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Drake Property & Casualty 86-0838815 DPCI Turks & Caicos Islands Insurance Co. ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Drake Life Insurance Co. 86-0838816 DLIC Turks & Caicos Islands ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Dealer Finance, UDDFI Arizona Inc. ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- Ugly Duckling Dealer Finance UDDF Arizona Alabama, Inc. ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- UDRAC, Inc. 86-0673460 UDRAC Ugly Duckling Arizona Rent-A-Car ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- UDRAC Rentals, Inc. 86-0721359 UD-RENT Ugly Duckling Arizona Rent-A-Car ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Cygnet Financial Corporation 86-0917503 CFC Delaware ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Cygnet Financial Services, Inc. 86-0906271 CYFS Arizona ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Cygnet Financial Portfolio, Inc. 86-0923532 CFP Arizona ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Cygnet Support Services, Inc. 86-0923096 CSS Arizona ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Fidelity Funding Auto FFARC Delaware Receivables Corp. ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Fidelity Funding Auto FFARCII Delaware Receivables Corp. II ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Fidelity Funding Auto FFARCIII Delaware Receivables Corp. III ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- ---------------------------------- ------------------ ------------------------- ------------------- --------------------------- Fidelity Funding Receivables, FFR Delaware L.L.C. ---------------------------------- ------------------ ------------------------- ------------------- ---------------------------
SECURITIZATION TRUSTS ---------------------------------- ------------------- ------------------ ----------------------- ----------------------------- NAME: FEDERAL TAX ID ABBREVIATION: dba, IF JURISDICTION OF NUMBER: APPLICABLE: INCORPORATION: ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust CAG 1996-B 1996-B ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust CAG 1996-C 1996-C ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust CAG 1997-A 1997-A ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust CAG 1997-B 1997-B ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust CAG 1997-C 1997-C ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust CAG 1997-D 1997-D ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust CAG 1997-E 1997-E ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Champion Auto Grantor Trust 91-6484838 CAG 1998-A 1998-A ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Ugly Duckling Auto Grantor 91-6484839 DUCK 1998-B Trust 1998-B ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Ugly Duckling Auto Grantor 91-6484840 DUCK 1998-C Trust 1998-C ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Ugly Duckling Auto Grantor 91-6484841 DUCK 1998-D Trust 1998-D ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Duck Auto Grantor Trust 1999-A 91-6503800 DUCK 1999-A ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Duck Auto Owner Trust 1999-B 91-6503799 DUCK 1999-B ------------------------------- --------------------- ------------------------- ------------------- --------------------------- ------------------------------- --------------------- ------------------------- ------------------- --------------------------- Duck Auto Owner Trust 1999-C 91-6503801 DUCK 1999-C ------------------------------- --------------------- ------------------------- ------------------- ---------------------------
Schedule 5 CONTRACT DEBTOR DOCUMENTS Each of the following documents constitute the Contract Debtor Documents: 1. The Contract Delivery Documents; 2. The dealer invoice and invoices for any additional equipment included in the Contract, if applicable; 3. Each of the following: (a) the original signed completed credit application, (b) the credit bureau reports, (c) the completed credit investigation form, (d) the completed verification of employment and income forms, and (e) Contract Debtor references; 4. Verification of Required Contract Debtor Insurance showing Borrower as loss payee, additional insured, or lienholder; 5. Borrower's funds disbursement listing, if applicable; 6. A certificate for each type of Optional Contract Debtor Insurance purchased by Contract Debtor; 7. Borrower's "deal structure" sheet; 8. The military pay allotment form if the Contract Debtor is in military service and if such allotment has been made; and 9. The payment history and accounting for the Contract. Schedule 6 REPRESENTATIONS AND WARRANTIES RE: ELIGIBLE CONTRACTS THAT ARE ACQUIRED CONTRACTS As to each Acquired Contract that is an Eligible Contract and forms part of the Collateral hereunder (and the related Contract Delivery Documents), the Borrower shall be deemed to make the following representations and warranties to the Lender as of such date and as of each date thereafter: (a) The information set forth in the Master Custodial Report with respect to the Eligible Contracts is complete, true and correct in all material respects. (b) Each Contract is in the form consented to in writing by Lender as acceptable for Eligible Contracts; provided, that Lender hereby consents to the form of the Acquired Contracts in existence as of the Effective Date, unless such Contracts are in violation of law or are in breach of any other representation and warranty in this Schedule 6. (c) The first Scheduled Payment is or was due within sixty (60) days after the date of the Contract. (d) The Contract Debtor is not more than sixty (60) days delinquent on payments, and the Servicer has not designated the Contract as out for or in repossession. (e) Any right of rescission arising out of the Contract of the Contract Debtor shall have expired. (f) The Contract is not a Charged-off Contract. (g) The Contract has a fixed "APR" and the "Finance Charge" was computed using a fixed rate. (h) The initial term of the Contract does not exceed sixty (60) months and the Schedule of Payments has equal periodic payments except for payments due during the first 90 days of the term of the Contract and except for the final payment which may be less than the other equal payments, and the payment obligation is in United States dollars. In the event such Contract is pre-paid, the prepayment shall fully pay the Principal Balance and unpaid interest, including interest in the month of prepayment to the date of prepayment, at the APR. (i) The Contract is for the absolute sale of the Financed Vehicle to the Contract Debtor, and the Financed Vehicle is not on approval or subject to any agreement between the Contract Debtor and the Dealer for the repurchase or return of the Financed Vehicle. (j) The Contract does not present credit, collateral or documentation risk which is material and unacceptable to Lender. (k) The Contract was originated by a Dealer that is not an Originator in a Permitted State. (l) If the Contract Debtor is an employee, officer, agent, director, stockholder, supplier or creditor of Borrower or an Affiliate, the Contract does not contain terms more favorable than those available to an unrelated Person. (m) The Dealer has been paid all amounts due for the purchase of the Contract from the Dealer, as applicable. (n) The Contract contains the original signature of the Contract Debtor and the Dealer. (o) The Contract is the only unsatisfied original executed Contract for the purchase of the Financed Vehicle and accurately reflects all of the actual terms and conditions of the Contract Debtor's purchase of the Financed Vehicle. Neither Borrower nor an Affiliate has made any agreement with the Contract Debtor to reduce the amount owed on the Contract. Neither Borrower nor an Affiliate is required to perform any additional service for, or perform or incur any additional obligation to, the Contract Debtor in order for Borrower to enforce the Contract. (p) The Contract, at the time Borrower purchased it, met Borrower's creditworthiness and other advance criteria in the related underwriting guidelines, or the Contract does not meet such criteria and Lender approved in writing the deviation for that Contract. (q) The Contract Debtor's obligations under the Contract are secured by a validly perfected first priority security interest in the Financed Vehicle in favor of Borrower or Lender as secured party. (r) The Contract has not been, nor is it designated to be, terminated, satisfied, canceled, subordinated or rescinded in whole or in part; nor has the Financed Vehicle been released, or designated for release, from the security interest granted by the Contract; and all of the holder's obligations under the Contract have been performed except those which first arise subsequent to the delivery to Lender. (s) The Contract Debtor's obligations under the Contract are secured by a validly perfected first priority security interest in the Financed Vehicle. (t) The Contract has not been, nor is it designated to be, terminated, satisfied, canceled, subordinated or rescinded in whole or in part; nor has the Financed Vehicle been released, or designated for release, from the security interest granted by the Contract; and all of the holder's obligations under the Contract have been performed except those which first arise subsequent to the delivery to Lender. (u) No provision of the Contract has been waived, extended, altered or modified in any respect except for routine payment extensions made in accordance with the related servicer's then-existing servicing guidelines. (v) No claims of rescission, setoff, counterclaim, defense or other material disputes have been asserted with respect to the Contract or Financed Vehicle. (w) There are no unsatisfied liens or claims for taxes, labor, materials, fines, confiscation, or replevin relating to the Contract or Financed Vehicle; there is no unsatisfied claim against the Contract Debtor based on the operation or use of the Financed Vehicle; all taxes due for the purchase, use and ownership of the Financed Vehicle have been paid; and all taxes due on the transfer of the Contract have been paid. (x) Borrower has not repossessed the Financed Vehicle or commenced a replevin action or other lawsuit, against the Contract Debtor or Financed Vehicle. (y) The model year of the Financed Vehicle is not more than twelve (12) years earlier than the model year in effect at the time the Contract is delivered to Lender. (z) The obligation of the original Contract Debtor has not been released or assumed by another Person unless the release or assumption was properly documented and Lender consents in writing to it for purposes of the Contract being an Eligible Contract. (aa) The Lender has received from the Custodian the deliveries required under the Custodial Agreement serving as confirmation that the Custodian is in physical possession of the Contract Delivery Documents. (bb) The Contract Debtor is not thirty-one (31) or more days contractually delinquent in payments, and, when taken together with all other Contracts which are thirty-one (31) or more days contractually delinquent, all such Contracts so not exceed 3% of the aggregate Principal Balance of all Eligible Contracts. (cc) Each Contract and the sale of the Financed Vehicle complied at the time the related Contract was originated or made, and shall continue to comply in all material respects with all requirements of applicable Federal, State and local laws, and regulations thereunder including, without limitation, usury laws, the Federal Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations B and Z, the Soldier's and Sailors' Civil Relief Act of 1940, the Texas Finance Code and other State adaptations of the Uniform Consumer Credit Code, and other consumer credit laws and equal credit opportunity and disclosure laws. To Borrower's knowledge, the form of each Contract and the manner in which it was completed and executed and all documents delivered and disclosures made in connection therewith are in compliance with all requirements of applicable Federal, State and local laws, and all applicable regulations thereunder, except to the extent a failure to so comply would not have an adverse effect on (i) the collection and payment of the Contract, or (ii) the interests in such Contract of the Borrower. (dd) None of the Contracts Debtors is the United States of America, or any State, or any agency, department, or instrumentality of the United States of America, any State or municipality. (ee) No Contract has been originated in, or is subject to the laws of, any jurisdiction under which the sale, transfer, and assignment of such Contract, or the assignment and grant of a security interest pursuant to this Loan Agreement, shall be unlawful, void or voidable. The Borrower has not entered into any agreement with any Contract Debtor or any other Person that prohibits, restricts or conditions the sale, assignment, or grant of security interest in any portion of the Contracts. No consent of any Contract Debtor or other Person is required for the sale and assignment of or grant of security interest in the Contract. (ff) Each Contract constitutes "chattel paper" under the UCC. (gg) (A) If the Contract was originated in a State in which notation of security interest on the title document of the related Financed Vehicle is required or permitted to perfect such security interest, the title document for such Financed Vehicle shows the Borrower named as the original and only secured party under the related Contract as the holder of a first priority security interest in such Financed Vehicle; provided that any assumed name, designation or trade name may be used by the Borrower on the title document; provided further that the use of any such assumed name, designation or trade name by the Borrower shall result in a fully perfected first priority security interest in favor of Borrower and a legal opinion has been delivered to Lender by Borrower's legal counsel stating the foregoing, and (B) if the Contract was originated in a State in which the filing of a financing statement under the UCC is required to perfect a security interest in motor vehicles, such filings or recordings have been duly made and show the Borrower named as the secured party under the Contract. With respect to each Contract for which the title document has not yet been returned from the Registrar of Titles, the Seller has received and delivered to the custodian written evidence that such title document showing the Borrower as first lienholder has been applied for. (hh) Borrower has an executed power of attorney from the lawful owner of the Contract that authorizes Borrower or any third party so authorized by Borrower to execute any title related documents in connection with the servicing and collection of the Contract. (ii) Each Contract represents the genuine, legal, valid and binding obligation of the Contract Debtor thereunder and is enforceable by the holder thereof in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally, and all parties to such contract had full legal capacity to execute and deliver such contract and all other documents related thereto and to grant the security interest purported to be granted thereby. (jj) Each Contract Debtor is and continues to be domiciled in the United States, unless serving abroad in the United States armed forces. (kk) No Financed Vehicle has suffered a casualty and no Financed Vehicle has been materially damaged and not repaired, and no Financed Vehicle is located outside of the United States. (ll) The Financed Vehicle is customarily used and garaged in the state issuing the Certificate of Title. (mm) Financed Vehicle was properly delivered to the related Contract Debtor in good repair, without material defects and in satisfactory order. Each Financed Vehicle was accepted by the Contract Debtor after reasonable opportunity to inspect and test same and, at the time of such delivery and acceptance, no Contract Debtor informed the Borrower of any material defect therein. (nn) No Contract Debtor is involved in the business of leasing or selling any Financed Vehicles. (oo) No Contract constitutes a "consumer lease" under either (A) the UCC as in effect in the jurisdiction whose law governs the Contract, or (B) the Consumer Leasing Act, 15 U.S.C. 1667. (pp) Such other additional representations and warranties as the Lender at its sole discretion shall require with respect to Acquired Contracts that are acquired by the Borrower after the Effective Date. Schedule 7 PERMITTED LIENS 1. Rights of set off of banks and securities intermediaries with respect to deposit or securities accounts (other than any account subject to the Master Agency Agreement) maintained with such banks or securities intermediaries. 2. Liens arising in cash, deposit accounts, securities or investment property by reason of such property constituting proceeds of other assets of Borrower that do not constitute Collateral, including, without limitation, proceeds of casualty insurance on assets that do not constitute Collateral. 3. Pledges or deposits made to secure worker's compensation insurance (or to participate in any fund in connection with worker's compensation insurance), unemployment insurance, pensions or social security programs. 4. Liens imposed by mandatory provisions of law as for materialmen, mechanics, warehousemen and other like liens arising in the ordinary course of business, securing indebtedness whose payment is not yet due. 5. Inchoate Liens for taxes, assessments and governmental charges or levies imposed upon a Person or upon such Person's income or profits or property, if the same are not yet due and payable and no demand for payment made by the applicable governmental unit. 6. Liens arising from good faith deposits in connection with tenders, leases, real estate bids or contracts (other than contracts involving the borrowing of money), pledges or deposits to secure public or statutory obligations and deposits to secure (or in lieu of) surety, stay, appeal or customs bonds and deposits to secure payment of taxes, assessments, customs duties or other similar charges. Schedule 8 REQUIRED INSURANCE Policy Type Commercial Property Insurance Commercial General Liability Coverage Business Automobile Coverage Garage Policy - Garage Liability Garage Policy - Garage Keepers Comprehensive Crime - Crime and Employee Dishonesty Coverage D&O Insurance - Directors, Officers and Corporate Liability Insurance Workers' Compensation Insurance Schedule 9 SCHEDULE OF EXCHANGE DEBT DOCUMENTS 1. Indenture dated as of October 15, 1998 between Ugly Duckling Corporation ("UDC") and Harris Trust and Savings Bank --- ("Trustee") 2. First Supplemental Indenture dated as of October 15, 1998 between UDC and Trustee 3. Second Supplemental Indenture dated as of April 15, 2000 between UDC and Trustee Schedule 10 SCHEDULE OF SENIOR SECURED LOAN DOCUMENTS 1. Senior Secured Loan Agreement dated as of January 11, 2001 between Ugly Duckling Corporation ("UDC") and the lenders that become party thereto (collectively, the "Lenders"), and BNY Midwest Trust Company ("Trustee") 2. Promissory Note dated as of January 11, 2001 by UDC and made payable to KZH Soleil-2 LLC in the principal amount of Twelve Million and No/100 Dollars ($12,000,000.00) 3. Promissory Note dated as of January 11, 2001 by UDC and made payable to SunAmerica Life Insurance Company in the principal amount of Six Million and No/100 Dollars ($6,000,000.00) 4. Promissory Note dated as of January 11, 2001 by UDC and made payable to Galaxy CLO in the principal amount of Seventeen Million and No/100 Dollars ($17,000,000.00) 5. Guaranty dated as of January 11, 2001 by Ugly Duckling Car Sales and Finance Corporation ("UDCSFC"), and any future subsidiary of UDC, in favor of the Lenders and Trustee, as the collateral agent 6. Cash Collateral Account Agreement dated as of January 11, 2001 by UDC and UDCSFC, as guarantors, and Trustee, as collateral agent for itself and the Lenders 7. Stock Pledge Agreement dated as of January 11, 2001 by UDCSFC, UDC and Trustee, as collateral agent for the Lenders 8. Letter Agreement Re: Distribution of Certain Residual Certificate Payments dated January 11, 2001 by Trustee and agreed to and accepted by Ugly Duckling Receivables Corp. II, Ugly Duckling Credit Corp., and UDCSFC 9. Letter Agreement Re: Distribution of Certain Residual Certificate Payments dated January 11, 2001 by Trustee and agreed to and accepted by Ugly Duckling Receivables Corp. III, Ugly Duckling Credit Corp., and UDCSFC 10. Consent and Subordination Agreement dated as of January 11, 2001 by UDC, UDCSFC, Trustee, as collateral agent, and General Electric Capital Corporation 11. Letter Consent Agreement dated as of January 11, 2001 by MBIA Insurance Corporation, and acknowledged by and agreed to by Trustee, and UDCSFC 12. Letter Agreement dated as of April 13, 2001 by UDC, UDCSFC and Trustee EXHIBIT A FORM OF PROMISSORY NOTE $------------- April 13, 2001 New York, New York FOR VALUE RECEIVED, each of Ugly Duckling Corporation, Ugly Duckling (as Sales and Finance Corporation, Ugly Duckling Credit Corporation, Ugly Duckling Car Sales, Inc., and Ugly Duckling Car Sales Florida, Inc. (collectively, the "Borrower"), hereby jointly and severally promises to pay to the order of GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. (the "Lender"), at the principal office of the Lender at 600 Steamboat Road, Greenwich, Connecticut 06830, in lawful money of the United States, and in immediately available funds, the principal sum of [_____________________________] ($___________) (or such lesser amount as shall equal the aggregate unpaid principal amount of the Advances made by the Lender to the Borrower under the Loan Agreement), on the dates and in the principal amounts provided in the Loan Agreement, and to pay interest on the unpaid principal amount of each such Advance, at such office, in like money and funds, for the period commencing on the date of such Advance until such Advance shall be paid in full, at the rates per annum and on the dates provided in the Loan Agreement. The date, amount and interest rate of each Advance made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof; provided, that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Loan Agreement or hereunder in respect of the Advances made by the Lender. This Note is the Note referred to in the Master Loan and Security Agreement dated as of April 13, 2001 (as amended, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement") between the Borrower, and the Lender, and evidences Advances made by the Lender thereunder. Terms used but not defined in this Note have the respective meanings assigned to them in the Loan Agreement. The Borrower agrees to pay all the Lender's costs of collection and enforcement (including reasonable attorneys' fees and disbursements of Lender's counsel) in respect of this Note when incurred, including, without limitation, reasonable attorneys' fees through appellate proceedings. Notwithstanding the pledge of the Collateral, the Borrower hereby acknowledges, admits and agrees that the Borrower's obligations under this Note are recourse obligations of the Borrower to which the Borrower pledges its full faith and credit. The Borrower, and any endorsers or guarantors hereof, (a) severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayments of this Note, (b) expressly agree that this Note, or any payment hereunder, may be extended from time to time, and consent to the acceptance of further Collateral, the release of any Collateral for this Note, the release of any party primarily or secondarily liable hereon, and (c) expressly agree that it will not be necessary for the Lender, in order to enforce payment of this Note, to first institute or exhaust the Lender's remedies against the Borrower or any other party liable hereon or against any Collateral for this Note. No extension of time for the payment of this Note, or any installment hereof, made by agreement by the Lender with any person now or hereafter liable for the payment of this Note, shall affect the liability under this Note of the Borrower, even if the Borrower is not a party to such agreement; provided, however, that the Lender and the Borrower, by written agreement between them, may affect the liability of the Borrower. Any reference herein to the Lender shall be deemed to include and apply to every subsequent holder of this Note. Reference is made to the Loan Agreement for provisions concerning optional and mandatory prepayments, Collateral, acceleration and other material terms affecting this Note. Any enforcement action relating to this Note may be brought by motion for summary judgment in lieu of a complaint pursuant to Section 3213 of the New York Civil Practice Law and Rules. The Borrower hereby submits to New York jurisdiction with respect to any action brought with respect to this Note and waives any right with respect to the doctrine of forum non conveniens with respect to such transactions. This Note shall be governed by and construed under the laws of the State of New York (without reference to choice of law doctrine but with reference to Section 5-1401 of the New York General Obligations Law, which by its terms applies to this Note) whose laws the Borrower expressly elects to apply to this Note. The Borrower agrees that any action or proceeding brought to enforce or arising out of this Note may be commenced in the Supreme Court of the State of New York, Borough of Manhattan, or in the District Court of the United States for the Southern District of New York. By: _________________________________________ Name: _______________________________________ Title: ______________________________________
SCHEDULE OF LOANS This Note evidences Advances made under the within-described Loan Agreement to the Borrower, on the dates, in the principal amounts and bearing interest at the rates set forth below, and subject to the payments and prepayments of principal set forth below: - --------------------- ----------------------- --------------------- ----------------------- ------------------------ Principal Amount of Amount Paid Unpaid Principal Notation Date Made Loan or Prepaid Amount Made by - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------ - --------------------- ----------------------- --------------------- ----------------------- ------------------------
EXHIBIT B FORM OF CUSTODIAL AGREEMENT EXHIBIT C [FORM OF OPINION OF COUNSEL TO THE BORROWER] (date) Greenwich Capital Financial Products, Inc. 600 Steamboat Road Greenwich, Connecticut 06830 Dear Sirs and Mesdames: You have requested [our] [my] opinion, as counsel to _______________, a ________ corporation, (the "Borrower"), with respect to certain matters in connection with that certain Master Loan and Security Agreement, dated as of [Month] __, 2001 (the "Loan and Security Agreement"), by and between the Borrower and Greenwich Capital Financial Products, Inc. (the "Lender"), being executed contemporaneously with a Promissory Note dated ____ _, ____ from the Borrower to the Lender (the "Note"), a Custodial Agreement, dated as of [Month] __, 1998 (the "Custodial Agreement"), by and among the Borrower, ________________ (the "Custodian"), and the Lender. Capitalized terms not otherwise defined herein have the meanings set forth in the Loan and Security Agreement. [We] [I] have examined the following documents: the Loan and Security Agreement; the Note; Custodial Agreement; unfiled copies of the financing statements listed on Schedule 1 (collectively, the "Financing Statements") naming the Borrower as Debtor and the Lender as Secured Party and describing the Collateral (as defined in the Loan and Security Agreement) as to which security interests may be perfected by filing under the Uniform Commercial Code of the States listed on Schedule 1 (the "Filing Collateral"), which I understand will be filed in the filing offices listed on Schedule 1 (the "Filing Offices"); the reports listed on Schedule 2 as to UCC financing statements (collectively, the "UCC Search Report"); and such other documents, records and papers as we have deemed necessary and relevant as a basis for this opinion. To the extent [we] [I] have deemed necessary and proper, [we] [I] have relied upon the representations and warranties of the Borrower contained in the Loan and Security Agreement. [We] [I] have assumed the authenticity of all documents submitted to me as originals, the genuineness of all signatures, the legal capacity of natural persons and the conformity to the originals of all documents. Based upon the foregoing, it is [our] [my] opinion that: The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of [state] and is qualified to transact business in, duly licensed and is in good standing under, the laws of each state in which any Contract is originated to the extent necessary to ensure the enforceability of each Contract and the servicing of each Contract pursuant to the Loan and Security Agreement. The Borrower has the corporate power to engage in the transactions contemplated by the Loan and Security Agreement, the Note, and the Custodial Agreement and all requisite corporate power, authority and legal right to execute and deliver the Loan and Security Agreement, the Note, and the Custodial Agreement and observe the terms and conditions of such instruments. The Borrower has all requisite corporate power to borrow under the Loan and Security Agreement and to grant a security interest in the Collateral pursuant to the Loan and Security Agreement. The execution, delivery and performance by the Borrower of the Loan and Security Agreement, the Note, and the Custodial Agreement, and the borrowings by the Borrower and the pledge of the Collateral under the Loan and Security Agreement have been duly authorized by all necessary corporate action on the part of the Borrower. Each of the Loan and Security Agreement, the Note and the Custodial Agreement have been executed and delivered by the Borrower and are legal, valid and binding agreements enforceable in accordance with their respective terms against the Borrower, subject to bankruptcy laws and other similar laws of general application affecting rights of creditors and subject to the application of the rules of equity, including those respecting the availability of specific performance, none of which will materially interfere with the realization of the benefits provided thereunder or with the Lender's security interest in the Contracts. No consent, approval, authorization or order of, and no filing or registration with, any court or governmental agency or regulatory body is required on the part of the Borrower for the execution, delivery or performance by the Borrower of the Advance and Security Agreement, the Note and the Custodial Agreement or for the borrowings by the Borrower under the Loan and Security Agreement or the granting of a security interest to the Lender in the Collateral, pursuant to the Loan and Security Agreement. The execution, delivery and performance by the Borrower of, and the consummation of the transactions contemplated by, the Loan and Security Agreement, the Note and the Custodial Agreement do not and will not (a) violate any provision of the Borrower's charter or by-laws, (b) violate any applicable law, rule or regulation, (c) violate any order, writ, injunction or decree of any court or governmental authority or agency or any arbitral award applicable to the Borrower of which I have knowledge (after due inquiry) or (d) result in a breach of, constitute a default under, require any consent under, or result in the acceleration or required prepayment of any indebtedness pursuant to the terms of, any agreement or instrument of which I have knowledge (after due inquiry) to which the Borrower is a party or by which it is bound or to which it is subject, or (except for the Liens created pursuant to the Loan and Security Agreement) result in the creation or imposition of any Lien upon any Property of the Borrower pursuant to the terms of any such agreement or instrument. There is no action, suit, proceeding or investigation pending or, to the best of [our] [my] knowledge, threatened against the Borrower which, in [our] [my] judgment, either in any one instance or in the aggregate, would be reasonably likely to have a Material Adverse Effect on the properties, business or financial condition, or prospects of the Borrower or in any material impairment of the right or ability of the Borrower to carry on its business substantially as now conducted or in any material liability on the part of the Borrower or which would draw into question the validity of the Loan and Security Agreement, the Note, the Custodial Agreement or the Contracts or of any action taken or to be taken in connection with the transactions contemplated thereby, or which would be reasonably likely to impair materially the ability of the Borrower to perform under the terms of the Loan and Security Agreement, the Note, the Custodial Agreement or the Contracts. The Loan and Security Agreement is effective to create, in favor of the Lender, a valid security interest under the Uniform Commercial Code in all of the right, title and interest of the Borrower in, to and under the Collateral as collateral security for the payment of the Secured Obligations (as defined in the Loan and Security Agreement), except that (a) such security interests will continue in Collateral after its sale, exchange or other disposition only to the extent provided in Section 9-306 of the Uniform Commercial Code, (b) the security interests in Collateral in which the Borrower acquires rights after the commencement of a case under the Bankruptcy Code in respect of the Borrower may be limited by Section 552 of the Bankruptcy Code. When the Contracts are delivered to the Custodian, the security interest referred to in paragraph 7 above in the Contracts will constitute a fully perfected first priority security interest in all right, title and interest of the Borrower therein, in the Contracts evidenced thereby and in the Borrower's interest in the related Financed Vehicle. Upon the filing of financing statements on Form UCC-1 naming the Lender as "Secured Party" and the Borrower as "Debtor", and describing the Collateral, in the jurisdictions and recording offices listed on Schedule 1 attached hereto, the security interests referred to in paragraph 8 above will constitute fully perfected security interests under the Uniform Commercial Code in all right, title and interest of the Borrower in, to and under such Collateral, which can be perfected by filing under the Uniform Commercial Code. The UCC Search Report sets forth the proper filing offices and the proper debtors necessary to identify those Persons who have on file in the jurisdictions listed on Schedule 1 financing statements covering the Filing Collateral as of the dates and times specified on Schedule 2. Except for the matters listed on Schedule 2, the UCC Search Report identifies no Person who has filed in any Filing Office a financing statement describing the Filing Collateral prior to the effective dates of the UCC Search Report. The Borrower is duly registered as a [____________] in each state in which Contracts were originated to the extent such registration is required by applicable law, and has obtained all other licenses and governmental approvals in each jurisdiction to the extent that the failure to obtain such licenses and approvals would render any Contract unenforceable or would materially and adversely affect the ability of the Borrower to perform any of its obligations under, or the enforceability of, the Loan Documents. Assuming that all other elements necessary to render a Contract legal, valid, binding and enforceable were present in connection with the execution, delivery and performance of each Contract (including completion of the entire Contract fully, accurately and in compliance with all applicable laws, rules and regulations) and assuming further that no action was taken in connection with the execution, delivery and performance of each Contract (including in connection with the sale of the related Financed Vehicle) that would give rise to a defense to the legality, validity, binding effect and enforceability of such Contract, nothing in the forms of such Contracts, as attached hereto as Exhibit A, would render such Contracts other than legal, valid, binding and enforceable. Assuming their validity, binding effect and enforceability in all other respects (including completion of the entire Contract fully, accurately and in compliance with all applicable laws, rules and regulations), the forms of Contracts attached hereto as Exhibit A are in sufficient compliance with ________ law and Federal consumer protection laws so as not to be rendered void or voidable at the election of the Contract Debtor thereunder. Very truly yours, EXHIBIT D FORM OF NOTICE OF BORROWING AND PLEDGE [insert date] Greenwich Capital Financial Products, Inc. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: _______________________ Notice of Borrowing and Pledge No.:_____________________ Ladies/Gentlemen: Reference is made to (i) that certain Custodial Agreement, dated as of April 13, 2001 (as amended from time to time, the "Custodial Agreement") by and between BNY Midwest Trust Company (the "Custodian") and Greenwich Capital Financial Products, Inc. (the "Lender") and Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling"), Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation ("UDCSFC"), Ugly Duckling Credit Corporation, an Arizona corporation ("UDCC"), Ugly Duckling Car Sales, Inc., an Arizona corporation ("Car Sales"), Ugly Duckling Car Sales Florida, Inc., a Florida corporation ("Car Sales Florida") and Ugly Duckling Finance Corporation, an Arizona corporation ("UDFC") (Ugly Duckling, UDCSFC, UDCC, Car Sales and Car Sales Florida are collectively referred to therein as the "Borrower"; UDCC is sometimes referred to therein as the "Servicer") and to (ii) that certain Loan and Security Agreement dated as of April 13, 2001 by and between the Borrower and the Lender (as amended from time to time, the "Loan Agreement"). Capitalized terms used herein but not otherwise defined herein shall have the meaning assigned to such terms in the Loan Agreement and the Custodial Agreement. In accordance with Section 2.03(a) of the Loan Agreement, the undersigned Borrower hereby requests that you, the Lender, make Advances to us in connection with our delivery of Contracts on ____________________ (the requested Funding Date), in connection with which we have pledged to you as Collateral the Contracts. The Eligible Contracts that are subject to this Notice of Borrowing and Pledge are set forth on the Contract Schedule attached hereto. The Borrower hereby certifies, as of such Funding Date, that: (a) no Default or Event of Default has occurred and is continuing on the date hereof nor will occur after giving effect to such Advance as a result of such Advance; (b) each of the representations and warranties made by the Borrower in or pursuant to the Loan Documents is true and correct in all material respects on and as of such date as if made on and as of the date hereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); (c) the Borrower has satisfied all conditions precedent in Section 5.02 of the Loan Agreement and all other requirements of the Loan Agreement. The undersigned is a duly authorized officer of the Borrower. The undersigned further represents and warrants that (1) the documents constituting the Contract Delivery Documents with respect to the Contracts that are the subject of the Advance requested herein and more specifically identified on the Contract Delivery Schedule delivered to both the Lender and the Custodian in connection herewith have been delivered to Custodian and such Contract Delivery Documents are to be held by the Custodian subject to Lender's first priority security interest thereon, (2) all other documents related to such Contracts (including, but not limited to, insurance policies, loan applications and appraisals) have been or will be created and held by Borrower in trust for Lender, (3) all documents related to such Receipted Contracts withdrawn from the Custodian pursuant to the Custodial Agreement shall be held in trust by Borrower for Lender, and Borrower will not attempt to pledge, hypothecate or otherwise transfer such Receipted Contracts to any other party until (A) the Advance to which such Contracts are related has been paid in full by Borrower and (B) an officer's certificate has been delivered to the Custodian by the Servicer pursuant to the requirements of the Custodial Agreement and (4) Borrower has granted a first priority perfected security interest in and Lien on the Receipted Contracts. Borrower hereby represents and warrants that (x) the Contracts delivered pursuant to this Notice of Borrowing and Pledge have an unpaid principal balance as of the date hereof of $__________ and (y) the total number of such Contracts is ______. Very truly yours, By: _____________________________ Name: _____________________________ Title: _____________________________ Schedule I to Notice of Borrowing and Pledge [CONTRACTS PROPOSED TO BE PLEDGED TO LENDER ON FUNDING DATE] [attach Contract Schedule] EXHIBIT E UNDERWRITING GUIDELINES [TO BE PROVIDED BY BORROWER] EXHIBIT F REQUIRED FIELDS FOR SERVICING TRANSMISSION SERVICING REPORT CASH COLLECTIONS SUBSTANTIALLY IN THE FORM OF BLANK IN EXCEL SPREAD SHEET EXHIBIT G FORM OF BORROWING BASE CERTIFICATE [TO BE PROVIDED BY LENDER ] EXHIBIT H FORM OF CONFIDENTIALITY AGREEMENT In connection with your consideration of a possible or actual acquisition of a participating interest (the "Transaction") in an advance, note or commitment of Greenwich Capital Financial Products, Inc. ("Greenwich") pursuant to a Master Loan and Security Agreement between Greenwich and ____________________ (the "Borrower"") dated _____________, 2001, you have requested the right to review certain non-public information regarding the Borrower that is in the possession of Greenwich. In consideration of, and as a condition to, furnishing you with such information and any other information (whether communicated in writing or communicated orally) delivered to you by Greenwich or its affiliates, directors, officers, employees, advisors, agents or "controlling persons" (within the meaning of the Securities Exchange Act of 1934, as amended (the "1934 Act")) (such affiliates and other persons being herein referred to collectively as Greenwich "Representatives") in connection with the consideration of a Transaction (such information being herein referred to as "Evaluation Material"), Greenwich hereby requests your agreement as follows: The Evaluation Material will be used solely for the purpose of evaluating a possible Transaction with Greenwich involving you or your affiliates, and unless and until you have completed such Transaction pursuant to a definitive agreement between you or any such affiliate and Greenwich, such Evaluation Material will be kept strictly confidential by you and your affiliates, directors, officers, employees, advisors, agents or controlling persons (such affiliates and other persons being herein referred to collectively as "your Representatives"), except that the Evaluation Material or portions thereof may be disclosed to those of your Representatives who need to know such information for the purpose of evaluating a possible Transaction with Greenwich (it being understood that prior to such disclosure your Representatives will be informed of the confidential nature of the Evaluation Material and shall agree to be bound by this Agreement). You agree to be responsible for any breach of this Agreement by your Representatives. The term "Evaluation Material" does not include any information which (i) at the time of disclosure or thereafter is generally known by the public (other than as a result of its disclosure by you or your Representatives), (ii) was or becomes available to you from a person that, to your knowledge, is not prohibited from transmitting the information to you, or (iii) information that meets the requirements described in clauses (i) and (ii) above that is currently in your possession. As used in this Agreement, the term "person" shall be broadly interpreted to include, without limitation, any corporation, company, joint venture, partnership or individual. In the event that you receive a request to disclose all or any part of the information contained in the Evaluation Material under the terms of a valid and effective subpoena or order issued by a court of competent jurisdiction, you agree to (i) immediately notify Greenwich and the Borrower of the existence, terms and circumstances surrounding such a request, (ii) consult with the Borrower on the advisability of taking legally available steps to resist or narrow such request, and (iii) if disclosure of such information is required, exercise your best efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such information. Unless otherwise required by law in the opinion of your counsel, neither you nor your Representative will, without our prior written consent, disclose to any person the fact that the Evaluation Material has been made available to you. You agree not to initiate or maintain contact (except for those contacts made in the ordinary course of business) with any officer, director or employee of the Borrower regarding the business, operations, prospects or finances of the Borrower or the employment of such officer, director or employee, except with the express written permission of the Borrower. You understand and acknowledge that the Borrower is not making any representation or warranty, express or implied, as to the accuracy or completeness of the Evaluation Material or any other information provided to you by Greenwich. Neither the Borrower, its respective affiliates or Representatives, nor any of its respective officers, directors, employees, agents or controlling persons (within the meaning of the 1934 Act) shall have any liability to you or any other person (including, without limitation, any of your Representatives) resulting from your use of the Evaluation Material. You represent and agree that you will not use any Evaluation Material to trade in any securities of Borrower. You agree that neither Greenwich or the Borrower has not granted you any license, copyright, or similar right with respect to any of the Evaluation Material or any other information provided to you by Greenwich. If you determine that you do not wish to proceed with the Transaction, you will promptly deliver to Greenwich all of the Evaluation Material, including all copies and reproductions thereof in your possession or in the possession of any of your Representatives. Without prejudice to the rights and remedies otherwise available to the Borrower, the Borrower shall be entitled to equitable relief by way of injunction if you or any of your Representatives breach or threaten to breach any of the provisions of this Agreement. You agree to waive, and to cause your Representatives to waive, any requirement for the securing or posting of any bond in connection with such remedy. You agree to pay all costs and expenses of the Borrower in enforcing this Agreement. The validity and interpretation of this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York applicable to agreements made and to be fully performed therein (excluding the conflicts of law rules). You submit to the jurisdiction of any court of the State of New York or the United States District Court for the Southern District of the State of New York for the purpose of any suit, action, or other proceeding arising out of this Agreement. The benefits of this Agreement shall inure to the respective successors and assigns of the parties hereto, and the obligations and liabilities assumed in this Agreement by the parties hereto shall be binding upon the respective successors and assigns; provided that the foregoing shall not be deemed to allow you to transfer or assign any of the Evaluation Materials. If it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that any term or provision hereof is invalid or unenforceable, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision. This Agreement embodies the entire agreement and understanding of the parties hereto and supersedes any and all prior agreements, arrangements and understandings relating to the matters provided for herein. No alteration, waiver, amendments, or change or supplement hereto shall be binding or effective unless the same is set forth in writing by a duly authorized representative of each party and may be modified or waived only by a separate letter executed by the Borrower and you expressly so modifying or waiving such Agreement. For the convenience of the parties, any number of counterparts of this Agreement may be executed by the parties hereto. Each such counterpart shall be, and shall be deemed to be, an original instrument, but all such counterparts taken together shall constitute one and the same Agreement. The Borrower is an express third party beneficiary of this Agreement and this Agreement may not be modified or waived in any respect without the prior express written consent of the Borrower. Kindly execute and return one copy of this letter which will constitute our Agreement with respect to the subject matter of this letter. By: ____________________________________ Greenwich Capital Financial Products, Inc. Confirmed and agreed to this _____ day of ___________________, ______. By: _________________________ Name: ________________________ Title: _______________________ EXHIBIT I FORM OF CONTRACT [TO BE PROVIDED BY BORROWER] EXHIBIT J MASTER AGENCY AGREEMENT EXHIBIT K FORM OF SUBORDINATION AGREEMENT [TO BE PROVIDED BY LENDER] EXHIBIT L COLLECTION POLICIES AND PROCEDURES EXHIBIT M FORM OF POWER OF ATTORNEY EX-10.28(A) 19 0019.txt INTERCREDITOR AGREEMENT-GREENWICH/GECC/BNY GREENWICH/GECC/BNY INTERCREDITOR AGREEMENT This Greenwich/GECC/BNY Intercreditor Agreement (this "Agreement") is entered into on this 13th day of April 2001 by and between General Electric Capital Corporation, a New York corporation ("Inventory Lender"), Greenwich Capital Financial Products, Inc., a Delaware corporation ("Receivable Lender"), and BNY Midwest Trust Company, an Illinois corporation, as Collateral Agent ("Collateral Agent" and collectively with Inventory Lender and Receivable Lender, the "Parties" and each a "Party") on behalf of the Stock Lenders under the Stock Loan Agreement (each defined below). Recitals: 1. Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling"), Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation ("UDCSFC"), Ugly Duckling Credit Corporation, an Arizona corporation ("UDCC"), Ugly Duckling Car Sales, Inc., an Arizona corporation ("Car Sales"), Ugly Duckling Car Sales Florida, Inc., a Florida corporation ("Car Sales Florida") and Ugly Duckling Finance Corporation, an Arizona corporation ("UDFC") (Ugly Duckling, UDCSFC, UDCC, Car Sales, Car Sales Florida and UDFC are collectively referred to herein as the "Debtor") have entered into that certain Master Loan and Security Agreement of even date herewith, by and between Debtor and Receivable Lender (as the same may be renewed, extended, modified, amended or replaced from time to time, the "Receivables Loan Agreement"). 2. Debtor and Inventory Lender are parties to that certain Amended and Restated Motor Vehicle Installment Contract Loan and Security Agreement dated as of August 15, 1997, by and between Debtor and Inventory Lender (as the same may be renewed, extended, modified, amended or replaced from time to time, the "Inventory Loan Agreement"). 3. UDC, UDCSFC and Collateral Agent are parties to that certain Senior Secured Loan Agreement dated as of January 11, 2001 among UDC, the lenders party thereto (each, a "Stock Lender"), and Collateral Agent (as the same may be renewed, extended, modified, amended or replaced from time to time, the "Stock Loan Agreement"). In connection with the Stock Loan Agreement, a Consent and Subordination Agreement dated as of January 11, 2001 (as the same may be renewed, extended, modified, amended or replaced from time to time, the "GECC/SunAmerica Subordination Agreement") was entered into by the parties to the Stock Loan Agreement and the Inventory Lender. 4. Receivable Lender acknowledges that the extension of credit and other financial accommodations granted to Debtor by Inventory Lender and Stock Lender are of value to Receivable Lender. 5. Inventory Lender acknowledges that the extension of credit and other financial accommodations granted to Debtor by Receivable Lender and Stock Lender are of value to Inventory Lender. 6. Collateral Agent and Stock Lender acknowledge that the extension of credit and other financial accommodations granted to Debtor by Receivable Lender and Inventory Lender are of value to Stock Lender. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows: 1. Definitions. Certain capitalized terms are used in this Agreement with the specific meanings defined in this Section 1 or in other provisions of this Agreement. All terms defined in this Section 1 or in other provisions of this Agreement in the singular shall have the same meanings when used in the plural and vice versa. "Agreement" shall have the meaning set forth in the preamble hereto. "Business Day" means any day other than (i) a Saturday or Sunday, or (ii) a day in which the New York Stock Exchange or the Federal Reserve Bank of New York is authorized or obligated by law or executive order to be closed. "Collateral Agent" shall have the meaning assigned to such term in the preamble hereto. "Contract Collateral" shall have the meaning ascribed to such term in the Receivables Loan Agreement on the date of this Agreement, except to the extent specified in Section 6(d) hereof, and provided that, notwithstanding any contrary provision herein, such term shall not include any Stock Pledge Collateral. "Custodian" shall have the meaning ascribed to such term in the Receivables Loan Agreement. "Debtor" shall have the meaning set forth in the recitals hereto. "GECC/SunAmerica Subordination Agreement" shall have the meaning assigned to such term in the recitals hereto. "Inventory Collateral" shall have the meaning ascribed to "Non-Contract Collateral" in the Receivables Loan Agreement on the date of this Agreement, except that any proceeds of Inventory Collateral which constitute Contracts or other Contract Collateral shall not constitute Inventory Collateral or Proceeds of Inventory Collateral unless so specified in Section 6(d) hereof, and provided that, notwithstanding any contrary provision herein, such term shall not include any Stock Pledge Collateral. "Inventory Lender" shall have the meaning set forth in the preamble hereto. "Inventory Lender Debt" shall mean any and all obligations, liabilities and indebtedness of Debtor or any successor or assign of Debtor, including without limitation, a receiver, trustee or debtor in possession to Inventory Lender, arising under, or incurred in connection with the Inventory Loan Documents, whether now existing or hereafter arising, whether direct, indirect, contingent, joint, several or independent, whether created directly or acquired by assignment or otherwise, whether evidenced by a written instrument or not and whether such obligations, liabilities and indebtedness (including, but not limited to, interest on any such obligations, liabilities and indebtedness) arise or accrue before or after the commencement of any bankruptcy, insolvency or receivership proceeding. The Inventory Lender Debt shall be entitled to the benefits of this Agreement and shall continue to constitute Inventory Lender Debt for all purposes of this Agreement, notwithstanding the fact that such Inventory Lender Debt or any claim in respect thereof shall be disallowed, avoided or subordinated pursuant to the provisions of Title 11 of the United Stated Code, as amended from time to time, or other applicable law. "Inventory Lender Payoff" shall occur upon the full and irrevocable payment in cash of the Inventory Lender Debt and termination of the Inventory Lender Documents. "Inventory Loan Agreement" shall have the meaning set forth in the recitals hereto. "Inventory Loan Default Notice" means a notice delivered in accordance with the requirements of Section 9 herein which states that an event of default under any provision of the Inventory Loan Agreement has occurred. "Inventory Loan Documents" shall mean the Inventory Loan Agreement and the other "Loan Documents", as such term is defined in the Inventory Loan Agreement. "Inventory Loan Payments" shall mean payments of principal, interest, fees, expenses, collection costs, unreimbursed obligations and indemnification obligations due and owing to the Inventory Lender pursuant to the terms of the Inventory Loan Documents. "Loan Documents" shall mean, collectively, the Receivables Loan Documents, the Inventory Loan Documents and the Stock Loan Documents. "Market Value" shall have the meaning ascribed to such term in the Receivables Loan Agreement. "Parties" shall have the meaning set forth in the preamble hereto. "Proceeding" shall mean any bankruptcy, insolvency, or receivership proceeding. "Proceeds" shall have the meaning assigned to it under the Uniform Commercial Code, shall also include "products" (as defined in the Uniform Commercial Code), and, in any event, shall include, but not be limited to (a) any and all proceeds of any insurance, indemnity, warranty, letter of credit or guaranty or collateral security payable to or on behalf of any grantor from time to time with respect to any of the Contract Collateral, the Inventory Collateral or the Stock Pledge Collateral, as applicable, (b) any and all payments (in any form whatsoever) made or due and payable to or on behalf of the owner of the Contract Collateral, the Inventory Collateral or the Stock Pledge Collateral, as applicable, from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Contract Collateral, the Inventory Collateral or the Stock Pledge Collateral, as applicable, by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority) and (c) any and all other amounts from time to time paid or payable under or in connection with any of the Contract Collateral, the Inventory Collateral or the Stock Pledge Collateral, as applicable. Contract Collateral shall not constitute Proceeds of Inventory Collateral, except to the extent so provided in Section 6(d) herein. "Receivable Lender" shall have the meaning set forth in the preamble hereto. "Recievable Lender Payoff" shall occur upon the full and irrevocable payment in cash of the Receivables Obligations and termination of the Receivable Loan Documents. "Receivables Loan Agreement" shall have the meaning set forth in the recitals hereto. "Receivables Loan Documents" shall mean the Receivables Loan Agreement, the GECC/SunAmerica Subordination Agreement and the other "Loan Documents" as such term is defined in the Receivables Loan Agreement. "Receivables Obligations" shall mean any and all obligations, liabilities and indebtedness of Debtor or any successor or assign of Debtor, including without limitation, a receiver, trustee or debtor in possession to Receivable Lender, arising under, or incurred in connection with, the Receivables Loan Documents, whether now existing or hereafter arising, whether direct, indirect, contingent, joint, several or independent, whether created directly or acquired by assignment or otherwise, whether evidenced by a written instrument or not and whether such obligations, liabilities and indebtedness (including, but not limited to, interest on any such obligations, liabilities and indebtedness) arises or accrues before or after the commencement of any bankruptcy, insolvency or receivership proceeding. The Receivables Obligations shall be entitled to the benefits of this Agreement and shall continue to constitute Receivables Obligations for all purposes of this Agreement, notwithstanding the fact that such Receivables Obligations or any claim in respect thereof shall be disallowed, avoided or subordinated pursuant to the provisions of Title 11 of the United Stated Code, as amended from time to time, or other applicable law. "Stock Lender" shall have the meaning set forth in the recitals hereto. "Stock Lender Debt" shall mean any and all obligations, liabilities and indebtedness of Debtor or any successor or assign of Debtor, including without limitation, a receiver, trustee or debtor in possession to Stock Lender, arising under, or incurred in connection with the Stock Loan Documents, whether now existing or hereafter arising, whether direct, indirect, contingent, joint, several or independent, whether created directly or acquired by assignment or otherwise, whether evidenced by a written instrument or not and whether such obligations, liabilities and indebtedness (including, but not limited to, interest on any such obligations, liabilities and indebtedness) arise or accrue before or after the commencement of any bankruptcy, insolvency or receivership proceeding. The Stock Lender Debt shall be entitled to the benefits of this Agreement and shall continue to constitute Stock Lender Debt for all purposes of this Agreement, notwithstanding the fact that such Stock Lender Debt or any claim in respect thereof shall be disallowed, avoided or subordinated pursuant to the provisions of Title 11 of the United Stated Code, as amended from time to time, or other applicable law. "Stock Lender Payoff" shall occur upon the full and irrevocable payment in cash of the Stock Lender Debt and termination of the Stock Loan Documents. "Stock Loan Agreement" shall have the meaning set forth in the recitals hereto. "Stock Loan Documents" shall mean the Stock Loan Agreement, the GECC/SunAmerica Subordination Agreement and the other "Loan Documents", as such term is defined in the Stock Loan Agreement. "Stock Pledge Collateral" means the capital stock owned by UDCSFC or UDC or any of its subsidiaries, and the right to receive thereupon dividends and other distributions of every nature, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, of Ugly Duckling Receivables Corporation II, Ugly Duckling Receivables Corporation III, and any other bankruptcy remote entity created for the purpose of a securitization transaction. 2. Mutual Recognition and Consent. (a) Inventory Lender acknowledges and consents to the existence of (i) the Receivables Loan Documents and the liens and security interests granted in connection therewith and the transactions contemplated thereby and (ii) the Stock Loan Documents and the liens and security interests granted in connection therewith and the transactions contemplated thereby. (b) Receivable Lender acknowledges and consents to the existence of (i) the Inventory Loan Documents, the liens and security interests granted in connection therewith and the transactions contemplated thereby and (ii) the Stock Loan Documents and the liens and security interests granted in connection therewith and the transactions contemplated thereby. (c) Collateral Agent acknowledges and consents to the existence of (i) the Inventory Loan Documents, the liens and security interests granted in connection therewith and the transactions contemplated thereby and (ii) the Receivables Loan Documents and the liens and security interests granted in connection therewith and the transactions contemplated thereby. (d) The provisions of this Agreement are intended by the parties hereto to control any conflicting provisions, including, without limitation, any covenants prohibiting any further encumbrances of the property of Debtor, which are contained in the Loan Documents. 3. Lien Subordination. Subject to the conditions set forth herein: (a) Contract Collateral. (i) Collateral Agent's liens and security interests in and upon the Contract Collateral, whether now existing or hereafter arising pursuant to operation of law or otherwise, are hereby subordinated to Inventory Lender's and Receivable Lender's liens and security interests in the Contract Collateral and each holder of Stock Lender Debt, whether upon original issuance, transfer, assignment or exchange, agrees to be bound by the provisions of this Agreement. (ii) Inventory Lender's liens and security interests in and upon the Contract Collateral, whether now existing or hereafter arising pursuant to operation of law or otherwise, are hereby subordinated to Receivable Lender's liens and security interests in the Contract Collateral, and each holder of Inventory Lender Debt, by acceptance of all or any portion of the Inventory Lender Debt, whether upon original issuance, transfer, assignment or exchange, agrees to be bound by the provisions of this Agreement. (b) Inventory Collateral. Receivable Lender's liens and security interests in the Inventory Collateral, whether now existing or hereafter arising pursuant to operation of law or otherwise, shall be subordinated to Inventory Lender's liens and security interests in the Inventory Collateral, and each holder of the Receivables Obligations, by acceptance of all or any portion of the Receivables Obligations, whether upon original issuance, transfer, assignment or exchange, agrees to be bound by the provisions of this Agreement. (c) Stock Pledge Collateral. (i) Receivable Lender's liens and security interests in the Stock Pledge Collateral, whether now existing or hereafter arising pursuant to operation of law or otherwise, shall be subordinated to Collateral Agent's and Inventory Lender's liens and security interests in the Stock Pledge Collateral, and each holder of the Receivables Obligations, by acceptance of all or any portion of the Receivables Obligations, whether upon original issuance, transfer, assignment or exchange, agrees to be bound by the provisions of this Agreement. (ii) The subordination of Inventory Lender's liens and security interests in the Stock Pledge Collateral and certain related collateral is set forth in the GECC/SunAmerica Subordination Agreement, and nothing contained in this Agreement is intended, as between the parties to such agreement, to affect such subordination. (d) Lien Priorities. The lien priorities established by this Section 3 shall be effective as among Receivable Lender, Inventory Lender and Collateral Agent notwithstanding the order of filing of any financing statements or any other instruments by any party with respect to the Contract Collateral, the Inventory Collateral and the Stock Pledge Collateral or the possession by any party of any such collateral. The lien priorities established by this Section 3 shall also be effective as between Inventory Lender, Receivable Lender and Collateral Agent notwithstanding, and shall have precedence over, any offset or setoff rights Inventory Lender, Receivable Lender or Collateral Agent may otherwise have under applicable law as to property of Debtor. 4. Agreement Not Conditioned Upon Validity and Perfection. The subordinations and relative priority agreements specified in this Agreement shall not be affected by the avoidability or perfection or non-perfection of the security interests to which another security interest is subordinated; accordingly, if a security interest as to which another security interest is subordinated herein is not perfected or is voidable for any reason, then the subordination provided for in this Agreement shall remain in full force and effect among the parties as to the particular collateral which is the subject of the unperfected or avoidable security interest; provided, however, that regardless of the effectiveness of this Agreement (or any provision hereof) or any party's undertaking hereunder, (a) Inventory Lender hereby agrees that it will not challenge or contest (i) any provision, or the effect of any provision, of this Agreement, (ii) the perfection, priority, validity or enforceability of Receivable Lender's liens and security interests in the Contract Collateral (or any Proceeds thereof whether or not in the possession of such Party) or (iii) the perfection, priority, validity or enforceability of Collateral Agent's liens and security interests in the Stock Pledge Collateral (or any Proceeds thereof whether or not in the possession of such Party); (b) Receivable Lender hereby agrees that it will not challenge or contest (i) any provision, or the effect of any provision, of this Agreement, (ii) the perfection, priority, validity or enforceability of Inventory Lender's liens and security interests in the Inventory Collateral or the Stock Pledge Collateral (or any Proceeds thereof whether or not in the possession of such Party) or (iii) the perfection, priority, validity or enforceability of Collateral Agent's liens and security interests in the Stock Pledge Collateral (or any Proceeds thereof whether or not in the possession of such Party); and (c) Collateral Agent hereby agrees that it will not challenge or contest (i) any provision, or the effect of any provision, of this Agreement, (ii) the perfection, priority, validity or enforceability of Receivable Lender's liens and security interests in the Contract Collateral or (or any Proceeds thereof whether or not in the possession of such Party) (iii) the perfection, priority, validity or enforceability of Inventory Lender's liens and security interests in the Inventory Collateral (or any Proceeds thereof whether or not in the possession of such Party). 5. Priority of Indebtedness. The indebtedness and payment obligations of Debtor with respect to the Inventory Loan Agreement, the Receivables Loan Agreement and the Stock Loan Agreement shall be of equal priority, with none having a priority of payment over or subordinate to the other. 6. Management of Collateral. (a) Contract Collateral. Subject to Section 6(d) below, until payment in full of the Receivables Obligations, Receivable Lender shall have the exclusive right (i) to manage, perform and enforce the terms of the Receivables Loan Documents with respect to the Contract Collateral, (ii) to exercise and enforce all privileges and rights thereunder according to its discretion and the exercise of its business judgment including, but not limited to, the exclusive right to take or retake possession of the Contract Collateral and (iii) to hold, prepare for sale, process, sell, lease, dispose of, or liquidate the Contract Collateral, pursuant to a foreclosure or otherwise. Notwithstanding anything to the contrary contained in any document, instrument or agreement evidencing, securing or otherwise executed in connection with the incurrence of the Inventory Lender Debt or Stock Lender Debt, until payment in full of the Receivables Obligations the Receivable Lender alone shall have the right to restrict or permit, or approve or disapprove, the sale, transfer or other disposition of Contract Collateral. Accordingly, should Receivable Lender elect to exercise its rights and remedies with respect to any of the Contract Collateral, Receivable Lender may proceed to do so without regard to any interest of Inventory Lender or Collateral Agent, and each of Inventory Lender and Collateral Agent waives any claims that it may have against Receivable Lender for any disposition of the Contract Collateral made in good faith. Each of Inventory Lender and Collateral Agent agrees, whether or not a default has occurred in the payment of the Inventory Lender Debt or the performance of any other obligations to either of them, that any liens on and security interests in any portion of the Contract Collateral transferred or otherwise disposed of by Receivable Lender and/or its agents that Inventory Lender or Collateral Agent might have or acquire shall automatically be fully released ipso facto as to all indebtedness and other obligations secured thereby owing to Inventory Lender or Collateral Agent if and when Receivable Lender releases its lien in and security interest on such portion of the Contract Collateral that is transferred or otherwise disposed of by Receivable Lender and/or its agents. (b) Inventory Collateral. Until payment in full of the Inventory Lender Debt, Inventory Lender shall have the exclusive right (i) to manage, perform and enforce the terms of the Inventory Loan Documents with respect to the Inventory Collateral, (ii) to exercise and enforce all privileges and rights thereunder with respect to the Inventory Collateral according to its discretion and the exercise of its business judgment including, but not limited to, the exclusive right to take or retake possession of the Inventory Collateral and (iii) to hold, prepare for sale, process, sell, lease, dispose of, or liquidate the Inventory Collateral, pursuant to a foreclosure or otherwise. Notwithstanding anything to the contrary contained in any document, instrument or agreement evidencing, securing or otherwise executed in connection with the incurrence of the Receivables Obligations, until payment in full of the Inventory Lender Debt the Inventory Lender alone shall have the right to restrict or permit, or approve or disapprove, the sale, transfer or other disposition of Inventory Collateral. Accordingly, subject to Section 6(d) below, should Inventory Lender elect to exercise its rights and remedies with respect to any of the Inventory Collateral, Inventory Lender may proceed to do so without regard to any interest of Receivable Lender, and Receivable Lender waives any claims that it may have against Inventory Lender for any disposition of the Inventory Collateral made in good faith. Subject to Section 6(d), Receivable Lender agrees, whether or not a default has occurred in the payment of the Receivables Obligations or the performance of any other obligations to it, that any liens on and security interests in any portion of the Inventory Collateral transferred or otherwise disposed of by Inventory Lender and/or its agents that Receivable Lender might have or acquire shall automatically be fully released ipso facto as to all indebtedness and other obligations secured thereby owing to Receivable Lender if and when Inventory Lender releases its lien in and security interest on such portion of the Inventory Collateral. (c) Stock Pledge Collateral. Until payment in full of the Stock Lender Debt, Collateral Agent shall have the exclusive right (i) to manage, perform and enforce the terms of the Stock Loan Documents with respect to the Stock Pledge Collateral, (ii) to exercise and enforce all privileges and rights thereunder with respect to the Stock Pledge Collateral according to its discretion and the exercise of its business judgment including, but not limited to, the exclusive right to take or retake possession of the Stock Pledge Collateral and (iii) to hold, prepare for sale, process, sell, lease, dispose of, or liquidate the Stock Pledge Collateral, pursuant to a foreclosure or otherwise. Notwithstanding anything to the contrary contained in any document, instrument or agreement evidencing, securing or otherwise executed in connection with the incurrence of the Receivables Obligations, until payment in full of the Stock Lender Debt, the Collateral Agent alone shall have the right to restrict or permit, or approve or disapprove, the sale, transfer or other disposition of Stock Pledge Collateral. Accordingly, should Collateral Agent elect to exercise its rights and remedies with respect to any of the Stock Pledge Collateral, Collateral Agent may proceed to do so without regard to any interest of Receivable Lender, and Receivable Lender waives any claims that it may have against Collateral Agent for any disposition of the Stock Pledge Collateral made in good faith. Receivable Lender agrees, whether or not a default has occurred in the payment of the Receivables Obligations or the performance of any other obligations to it, that any liens on and security interests in any portion of the Stock Pledge Collateral transferred or otherwise disposed of by Collateral Agent and/or its agents that Receivable Lender might have or acquire shall automatically be fully released ipso facto as to all indebtedness and other obligations secured thereby owing to Receivable Lender if and when Collateral Agent releases its lien in and security interest on such portion of the Stock Pledge Collateral. (d) Inventory Lender Collateral Retention Notice. At any time following the occurrence and during the continuance of an Event of Default (as defined in the Inventory Loan Agreement) pursuant to the Inventory Loan Agreement, Inventory Lender shall be entitled to deliver a notice (an "Inventory Lender Collateral Retention Notice") to Receivable Lender with a copy to Collateral Agent. If Inventory Lender delivers an Inventory Lender Collateral Retention Notice, then all proceeds of Inventory Collateral which consist of Contracts which are created on or after the opening of business on the first Business Day following Receivable Lender's receipt of an Inventory Lender Collateral Retention Notice (and all proceeds of such Contracts) shall not constitute Contract Collateral, but shall instead constitute Inventory Collateral (including Proceeds of Inventory Collateral) for all purposes of this Agreement; provided that if the Receivable Lender, in Receivable Lender's sole discretion, elects to pay to the Inventory Lender an amount of money (the "Cash-out Amount") mutually agreed upon by the Inventory Lender, the Receivable Lender and the Borrower, then, notwithstanding the provisions of this Section 6(d), upon payment of the Cash-out Amount to the Inventory Lender, such Contracts (and all proceeds of such Contracts) shall constitute Contract Collateral (and shall not constitute Inventory Collateral or Proceeds of Inventory Collateral). 7. Representations and Warranties Regarding Loans. (a) Inventory Lender represents and warrants that (i) all of the Inventory Lender Debt outstanding on the date hereof is evidenced by the Inventory Loan Documents, (ii) Inventory Lender has not previously assigned any interest in the Inventory Lender Debt or granted any security interest therein, (iii) no other party owns any interest in the Inventory Lender Debt other than Inventory Lender (whether as joint holders of the Inventory Lender Debt, participants or otherwise), other than any such interest arising by operation of law, and (iv) the entire Inventory Lender Debt is owing only to Inventory Lender. (b) Receivable Lender represents and warrants that (i) all of the Receivable Obligations outstanding on the date hereof is evidenced by the Receivables Loan Documents, (ii) Receivable Lender has not previously assigned any interest in the Receivable Obligations or granted any security interest therein, (iii) no other party owns any interest in the Receivable Obligations other than Receivable Lender (whether as joint holders of the Receivable Obligations, participants or otherwise), other than any such interest arising by operation of law, and (iv) the entire Receivable Obligations is owing only to Receivable Lender. (c) Collateral Agent represents and warrants that (i) all of the Stock Lender Debt outstanding on the date hereof is evidenced by the Stock Loan Documents, (ii) neither the Collateral Agent nor any Stock Lender has previously assigned any interest in the Stock Lender Debt or granted any security interest therein, (iii) no other party owns any interest in the Stock Lender Debt other than Collateral Agent and the Stock Lenders (whether as joint holders of the Stock Lender Debt, participants or otherwise), other than any such interest arising by operation of law, (iv) the entire Stock Lender Debt is owing only to the Stock Lenders, and (v) Collateral Agent has full authority to act as the Stock Lenders' agent in connection with the execution, delivery and performance of this Agreement, and that upon execution and delivery of this Agreement by Collateral Agent this Agreement will constitute a valid and binding agreement of the Stock Lenders, enforceable according to its terms. 8. Notice of Default. (a) Debtor agrees to promptly, but in any event within one (1) Business Day after receipt of (i) any Inventory Loan default notice sent to Debtor and (ii) any notice sent by Inventory Lender to Debtor in the exercise any of its rights and remedies under the Inventory Loan Documents in connection with an event of default, send to Receivable Lender and Collateral Agent a copy of each such notice. (b) Debtor agrees to promptly, but in any event within one (1) Business Day after receipt of (i) any Receivable Loan default notice sent to Debtor and (ii) any notice sent by Receivable Lender to Debtor in the exercise any of its rights and remedies under the Receivable Loan Documents in connection with an event of default, send to Inventory Lender and Collateral Agent a copy of each such notice. (c) Debtor agrees to promptly, but in any event within one (1) Business Day after receipt of (i) any Stock Loan default notice sent to Debtor and (ii) any notice sent by Collateral Agent to Debtor in the exercise any of its rights and remedies under the Stock Loan Documents in connection with an event of default, send to Inventory Lender and Receivable Lender a copy of each such notice. 9. Standstill. (a) Inventory Lender Standstill. Inventory Lender agrees that it shall not take any enforcement action against the Contract Collateral available upon the occurrence of a default or an event of default or otherwise under the Inventory Loan Documents until the Receivables Obligations shall have been paid in full and all of the commitments of Receivable Lender to Debtor under the Receivables Loan Documents shall have expired or terminated. (b) Receivable Lender Standstill. (i) Receivable Lender agrees that it shall not take any enforcement action against the Inventory Collateral available upon the occurrence of a default or an event of default or otherwise under the Receivables Loan Documents until the Inventory Lender Debt shall have been paid in full and all of the commitments of Inventory Lender to Debtor under the Inventory Loan Documents shall have expired or terminated. (ii) Receivable Lender agrees that it shall not take any enforcement action against the Stock Pledge Collateral available upon the occurrence of a default or an event of default or otherwise under the Receivables Loan Documents until the Stock Lender Debt and the Inventory Lender Debt shall have been paid in full and all of the commitments of Collateral Agent to Debtor under the Stock Loan Documents and of the Inventory Lender to Debtor under the Inventory Loan Documents shall have expired or terminated. (c) Collateral Agent Standstill. Collateral Agent agrees that it shall not take any enforcement action against the Contract Collateral available upon the occurrence of a default or an event of default or otherwise under the Stock Loan Documents until the Receivables Obligations and the Inventory Lender Debt shall have been paid in full and all of the commitments of Receivable Lender to Debtor under the Receivable Loan Documents and of the Inventory Lender to Debtor under the Inventory Loan Documents shall have expired or terminated. 10. Turnover Obligations. (a) Payments Received by Inventory Lender. (i) Contract Collateral. (A) If any Proceeds of the Contract Collateral are received by Inventory Lender prior its receipt of notice of the Receivable Lender Payoff, Inventory Lender shall receive and hold the same for the benefit of Receivable Lender and shall forthwith deliver the same to Receivable Lender in precisely the form received (except for the endorsement or assignment of Inventory Lender, without recourse, where necessary), for application on the Receivables Obligations, due or not due, and, until so delivered, the same shall be held by Inventory Lender as the property of Receivable Lender. In the event of the failure of Inventory Lender to make any such endorsement or assignment to Receivable Lender, Receivable Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (B) If any Proceeds or payment in respect of the Contract Collateral is received by Inventory Lender after the Inventory Lender Payoff and after its receipt of notice of the Receivable Lender Payoff, Inventory Lender shall receive and hold the same for the benefit of Collateral Agent and shall forthwith deliver the same to Collateral Agent in precisely the form received (except for the endorsement or assignment of Inventory Lender, without recourse, where necessary), for application on the Stock Lender Debt, due or not due, and, until so delivered, the same shall be held by Inventory Lender as the property of Collateral Agent. In event of the failure of Inventory Lender to make any such endorsement or assignment to Collateral Agent, Collateral Agent, or any of its officers or employees, is hereby irrevocably authorized to make the same. (ii) Inventory Collateral. If any Proceeds or payment in respect of the Inventory Collateral is received by Inventory Lender after the Inventory Lender Payoff, Inventory Lender shall receive and hold the same for the benefit of Receivable Lender and shall forthwith deliver the same to Receivable Lender in precisely the form received (except for the endorsement or assignment of Inventory Lender, without recourse, where necessary), for application on the Receivable Obligations, due or not due, and, until so delivered, the same shall be held by Inventory Lender as the property of Receivable Lender. In event of the failure of Inventory Lender to make any such endorsement or assignment to Receivable Lender, Receivable Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (iii) Stock Pledge Collateral. (A) If any Proceeds of the Stock Pledge Collateral are received by Inventory Lender prior its receipt of notice of the Stock Lender Payoff, Inventory Lender shall receive and hold the same for the benefit of Collateral Agent and shall forthwith deliver the same to Collateral Agent in precisely the form received (except for the endorsement or assignment of Inventory Lender, without recourse, where necessary), for application on the Stock Lender Debt, due or not due, and, until so delivered, the same shall be held by Inventory Lender as the property of Collateral Agent. In the event of the failure of Inventory Lender to make any such endorsement or assignment to Collateral Agent, Collateral Agent, or any of its officers or employees, is hereby irrevocably authorized to make the same. (B) If any Proceeds or payment in respect of the Stock Pledge Collateral is received by Inventory Lender after the Inventory Lender Payoff and after its receipt of notice of the Stock Lender Payoff, Inventory Lender shall receive and hold the same for the benefit of Receivable Lender and shall forthwith deliver the same to Receivable Lender in precisely the form received (except for the endorsement or assignment of Inventory Lender, without recourse, where necessary), for application on the Receivable Obligations, due or not due, and, until so delivered, the same shall be held by Inventory Lender as the property of Receivable Lender. In event of the failure of Inventory Lender to make any such endorsement or assignment to Receivable Lender, Receivable Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (b) Payments Received by Receivable Lender. (i) Contract Collateral. (A) If any Proceeds or payment in respect of the Contract Collateral is received by Receivable Lender after the Receivable Lender Payoff and prior to its receipt of notice of the Inventory Lender Payoff, Receivable Lender shall receive and hold the same for the benefit of Inventory Lender and shall forthwith deliver the same to Inventory Lender in precisely the form received (except for the endorsement or assignment of Receivable Lender, without recourse, where necessary), for application on the Inventory Lender Debt, due or not due, and, until so delivered, the same shall be held by Receivable Lender as the property of Inventory Lender. In event of the failure of Receivable Lender to make any such endorsement or assignment to Inventory Lender, Inventory Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (B) If any Proceeds or payment in respect of the Contract Collateral is received by Receivable Lender after the Receivable Lender Payoff and after its receipt of notice of the Inventory Lender Payoff, Receivable Lender shall receive and hold the same for the benefit of Collateral Agent and shall forthwith deliver the same to Collateral Agent in precisely the form received (except for the endorsement or assignment of Receivable Lender, without recourse, where necessary), for application on the Stock Lender Debt, due or not due, and, until so delivered, the same shall be held by Receivable Lender as the property of Collateral Agent. In event of the failure of Receivable Lender to make any such endorsement or assignment to Collateral Agent, Collateral Agent, or any of its officers or employees, is hereby irrevocably authorized to make the same. (ii) Inventory Collateral. If any Proceeds or payment in respect of the Inventory Collateral are received by Receivable Lender prior to its receipt of notice of the Inventory Lender Payoff, Receivable Lender shall receive and hold the same for the benefit of Inventory Lender and shall forthwith deliver the same to Inventory Lender in precisely the form received (except for the endorsement or assignment of Receivable Lender, without recourse, where necessary), for application on the Inventory Lender Debt, due or not due, and, until so delivered, the same shall be held by Receivable Lender as the property of Inventory Lender. In the event of the failure of Receivable Lender to make any such endorsement or assignment to Inventory Lender, Inventory Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (iii)Stock Pledge Collateral. (A) If any Proceeds of the Stock Pledge Collateral are received by Receivable Lender prior its receipt of notice of the Stock Lender Payoff, Receivable Lender shall receive and hold the same for the benefit of Collateral Agent and shall forthwith deliver the same to Collateral Agent in precisely the form received (except for the endorsement or assignment of Receivable Lender, without recourse, where necessary), for application on the Stock Lender Debt, due or not due, and, until so delivered, the same shall be held by Receivable Lender as the property of Collateral Agent. In the event of the failure of Receivable Lender to make any such endorsement or assignment to Collateral Agent, Collateral Agent, or any of its officers or employees, is hereby irrevocably authorized to make the same. (B) If any Proceeds of the Stock Pledge Collateral are received by Receivable Lender after its receipt of notice of the Stock Lender Payoff and prior to is receipt of notice of the Inventory Lender Payoff, Receivable Lender shall receive and hold the same for the benefit of Inventory Lender and shall forthwith deliver the same to Inventory Lender in precisely the form received (except for the endorsement or assignment of Receivable Lender, without recourse, where necessary), for application on the Inventory Lender Debt, due or not due, and, until so delivered, the same shall be held by Receivable Lender as the property of Inventory Lender. In the event of the failure of Receivable Lender to make any such endorsement or assignment to Inventory Lender, Inventory Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (c) Payments Received by Collateral Agent. (i) Contract Collateral. (A) If any Proceeds of the Contract Collateral are received by Collateral Agent prior its receipt of notice of the Receivable Lender Payoff, Collateral Agent shall receive and hold the same for the benefit of Receivable Lender and shall forthwith deliver the same to Receivable Lender in precisely the form received (except for the endorsement or assignment of Collateral Agent, without recourse, where necessary), for application on the Receivable Obligations, due or not due, and, until so delivered, the same shall be held by Collateral Agent as the property of Receivable Lender. In the event of the failure of Collateral Agent to make any such endorsement or assignment to Receivable Lender, Receivable Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (B) If any Proceeds of the Contract Collateral are received by Collateral Agent after its receipt of notice of the Receivable Lender Payoff and prior to its receipt of notice of the Inventory Lender Payoff, Collateral Agent shall receive and hold the same for the benefit of Inventory Lender and shall forthwith deliver the same to Inventory Lender in precisely the form received (except for the endorsement or assignment of Collateral Agent, without recourse, where necessary), for application on the Inventory Lender Debt, due or not due, and, until so delivered, the same shall be held by Collateral Agent as the property of Inventory Lender. In the event of the failure of Collateral Agent to make any such endorsement or assignment to Inventory Lender, Inventory Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (ii) Stock Pledge Collateral. (A) If any Proceeds or payment in respect of the Stock Pledge Collateral is received by Collateral Agent after the Stock Lender Payoff and prior to its receipt of notice of the Inventory Lender Payoff, Collateral Agent shall receive and hold the same for the benefit of Inventory Lender and shall forthwith deliver the same to Inventory Lender in precisely the form received (except for the endorsement or assignment of Collateral Agent, without recourse, where necessary), for application on the Inventory Lender Debt, due or not due, and, until so delivered, the same shall be held by Collateral Agent as the property of Inventory Lender. In event of the failure of Collateral Agent to make any such endorsement or assignment to Inventory Lender, Inventory Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. (B) If any Proceeds or payment in respect of the Stock Pledge Collateral is received by Collateral Agent after the Stock Lender Payoff and after its receipt of notice of the Inventory Lender Payoff, Collateral Agent shall receive and hold the same for the benefit of Receivable Lender and shall forthwith deliver the same to Receivable Lender in precisely the form received (except for the endorsement or assignment of Collateral Agent, without recourse, where necessary), for application on the Receivable Obligations, due or not due, and, until so delivered, the same shall be held by Collateral Agent as the property of Receivable Lender. In event of the failure of Collateral Agent to make any such endorsement or assignment to Receivable Lender, Receivable Lender, or any of its officers or employees, is hereby irrevocably authorized to make the same. 11. Provisions to Apply After Bankruptcy. The provisions of this Agreement shall continue in full force and effect, notwithstanding the commencement of a Proceeding by or against Debtor or any of its property. 12. Waivers. No waiver shall be deemed to be made by any Party of any of its respective rights hereunder, unless the same shall be in writing signed on their behalf, and each waiver, if any, shall be a waiver only with respect to the specific instance involved and shall in no way impair their rights or their obligations to the other in any other respect at any other time. 13. Information Concerning Financial Condition of Debtor. Each Party hereby assumes responsibility for keeping itself informed of the financial condition of Debtor and of all other circumstances bearing upon the risk of nonpayment of the Receivables Obligations, the Inventory Lender Debt or the Stock Lender Debt, as applicable, and each Party hereby agrees that each Party shall have no duty to advise the other Party of information known to such Party regarding such condition or any such circumstances. In the event any Party, in its sole discretion, provides any such information to the other Party, such Party shall be under no obligation (i) to provide any such information to the other Party on any subsequent occasion or (ii) to update or correct such information. 14. Notice. Any notice or request required or permitted to be given under or in connection with this Agreement (except as may otherwise be expressly required herein) shall be in writing and shall be mailed by first class or express mail or overnight messenger, postage prepaid, or sent by telex, telegram, facsimile or other similar form of rapid transmission, confirmed by mailing (by first class or express mail, postage prepaid) written confirmation at substantially the same time as such rapid transmission, or personally delivered to an officer of the receiving party. All such communications shall be mailed, sent or delivered to the parties hereto at their respective addresses set forth below: Inventory Lender: General Electric Capital Corporation 540 NW Highway Barrington, IL 60010 Attention: Manager - Commercial Facsimile: (847) 277-5978 With a copy to: -------------- General Counsel 540 NW Highway Barrington, IL 60010 Facsimile: (847) 277-5983 Receivable Lender: Greenwich Capital Financial Products, Inc. 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Ira J. Platt Facsimile: (203) 618-2135 With a copy to: -------------- General Counsel 600 Steamboat Road Greenwich, Connecticut 06830 Facsimile: (203) 618-2132 Collateral Agent: BNY Midwest Trust Company 2 North LaSalle, Lower Level Chicago, Illinois 60602 Attention: Diane Moser Facsimile: (312) 827-8588 Debtor: Ugly Duckling Corporation 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Facsimile: (602) 852-6696 With a copy to: -------------- General Counsel 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Facsimile: (602) 852-6686 or at such other addresses or to such individual's or department's attention as any party may have furnished the other party in writing. Any communication so addressed and mailed by first class mail shall be deemed to have been given on the third business day following the day it is mailed, any communication sent by rapid transmission shall be deemed to be given when receipt of such transmission is confirmed, and any communication delivered in person shall be deemed to be given when receipted for by, or actually received by, an officer of the receiving party. 15. Further Assurances. From time to time, as and when requested by any party in writing hereto and at such party's expense, any other party shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions as such other party may reasonably deem necessary or desirable to evidence and effectuate the transactions contemplated by this Agreement. 16. Governing Law. This Agreement shall be deemed to have been made in New York, New York and shall be interpreted, and the rights and obligations of the parties hereto determined, in accordance with the laws and decisions of the State of New York without reference to choice of law doctrine. 17. Binding Obligations; Successors and Assigns. At the time that Receivable Lender makes a Receivable Advance to Debtor pursuant to the Receivables Loan Agreement, this Agreement shall be immediately binding upon Inventory Lender, Receivable Lender, Collateral Agent and their respective successors and assigns. Inventory Lender will not assign or transfer all or any part of the Inventory Lender Debt unless it first advises any such transferee that the Inventory Lender Debt is subject in all respects to the terms of this Agreement. This Agreement may be assigned by Inventory Lender in connection with any assignment or transfer of the Inventory Lender Debt. Receivable Lender will not assign or transfer its commitment under the Receivables Loan Agreement unless it first advises any such transferee that the Receivables Obligations are subject in all respects to the terms of this Agreement. This Agreement may be assigned by Receivable Lender in connection with any assignment or transfer of the Receivables Obligations. Collateral Agent will not assign or transfer all or any part of the Stock Lender Debt unless it first advises any such transferee that the Stock Lender Debt is subject in all respects to the terms of this Agreement. This Agreement may be assigned by Collateral Agent in connection with any assignment, transfer or refinancing of the Stock Lender Debt, and each assignee and refinancing lender shall be subject to all obligations and entitled to all benefits accruing to the Collateral Agent and the Stock Lenders hereunder. 18. No Prejudice or Impairment. The provisions of this Agreement are solely for the purposes of defining the relative rights of each of Receivable Lender, Inventory Lender and Collateral Agent. The Receivable Lender shall not be prejudiced in its right to enforce subordination of the Inventory Lender's or the Collateral Agent's security interest in the Contract Collateral by any act or failure to act by Debtor or anyone in custody of its assets or property. The Inventory Lender shall not be prejudiced in its right to enforce subordination of the Receivable Lender's security interest in the Inventory Collateral by any act or failure to act by Debtor or anyone in custody of its assets or property. The Collateral Agent shall not be prejudiced in its right to enforce subordination of the Receivable Lender's security interest in the Stock Pledge Collateral by any act or failure to act by Debtor or anyone in custody of its assets or property. Nothing herein shall impair, as between Debtor and the Inventory Lender, the obligation of Debtor, which is unconditional and absolute, to pay to the Inventory Lender the principal of and interest on the Inventory Lender Debt as and when the same shall become due in accordance with their terms, nor shall anything herein prevent the Inventory Lender from exercising all remedies otherwise permitted by applicable law upon default under the Inventory Loan Documents, subject, however, to the provisions of this Agreement and the rights of the Receivable Lender in the Contract Collateral to the extent provided herein. Nothing herein shall impair, as between Debtor and the Stock Lenders, the obligation of Debtor, which is unconditional and absolute, to pay to the Stock Lenders the principal of and interest on the Stock Lender Debt as and when the same shall become due in accordance with their terms, nor shall anything herein prevent the Collateral Agent from exercising all remedies otherwise permitted by applicable law upon default under the Stock Loan Documents, subject, however, to the provisions of this Agreement and the rights of the Receivable Lender in the Contract Collateral to the extent provided herein. 19. No Third Party Beneficiaries, This Agreement and the terms and provisions hereof are solely for the benefit of the Parties and shall not benefit in any way any person not specifically a party to this Agreement, including, but not limited to, the Debtor or any guarantors. Nothing in this Agreement is intended to affect, limit, or in any way diminish the security interest which the Parties claim in the collateral insofar as the rights of Debtor and third parties are concerned. The parties hereto specifically reserve any and all of their respective rights, security interest and right to assert security interests against the Debtor and any third parties, including guarantors. 20. Section Titles. The section titles contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 21. Entire Agreement. This Agreement embodies the entire agreement between the parties and supersedes any and all prior agreements, arrangements and understandings relating to the matters provided for herein. No alteration, waiver, amendment, or change or supplement hereto shall be binding or effective unless the same is set forth in writing by a duly authorized representative of each party hereto. 22. 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. This Agreement may be signed and delivered through facsimile signatures which shall operate as true and effective signatures of the person signing the original signature transmitted by such facsimile transmission. * * * * * IN WITNESS WHEREOF, the Receivable Lender, the Inventory Lender and the Collateral Agent have caused their names to be duly signed to this Greenwich/GECC/BNY Intercreditor Agreement by their respective officers thereunto duly authorized, all as of the date first above written. GENERAL ELECTRIC CAPITAL CORPORATION By: Name: Title: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. By: Name: Title: BNY MIDWEST TRUST COMPANY By: Name: Title: [Consent of Debtor Follows this Page] CONSENT OF DEBTOR Debtor hereby acknowledges receipt of a copy of the foregoing Greenwich/GECC/BNY Intercreditor Agreement. Debtor confirms that (i) the Inventory Loan Agreement comprises all of Debtor's existing indebtedness and obligations to Inventory Lender, (ii) the Receivables Loan Agreement comprises all of Debtor's existing indebtedness and obligations to the Receivable Lender. Debtor consents to the Greenwich/GECC/BNY Intercreditor Agreement and agrees that it will observe and comply with the terms and provisions of the Greenwich/GECC/BNY Intercreditor Agreement. Debtor hereby agrees to deliver to (a) Receivable Lender copies of any notices received by it from Inventory Lender or the Collateral Agent claiming that any default or event of default has occurred under the Inventory Loan Documents or Stock Loan Documents respectively, (b) Inventory Lender copies of any notices received by it from Receivable Lender or Collateral Agent claiming any default or event of default has occurred under the Receivable Loan Documents or the Stock Loan Documents respectively, (c) Collateral Agent copies of any notices received by it from Receivable Lender or Inventory Lender claiming that any default or event of default has occurred under the Receivable Loan Documents or the Inventory Loan Documents respectively, and (d) each of the Parties notice of any amendment, modification, refinancing, or other change with respect the Receivable Lender Debt, the Inventory Lender Debt and/or the Stock Lender Debt. UGLY DUCKLING CORPORATION By: Name: Title: UGLY DUCKLING CAR SALES & FINANCE CORPORATION By: Name: Title: UGLY DUCKLING CREDIT CORPORATION By: Name: Title: UGLY DUCKLING CAR SALES, INC. By: Name: Title: UGLY DUCKLING CAR SALES FLORIDA, INC. By: Name: Title: UGLY DUCKLING FINANCE CORPORATION By: Name: Title: EX-10.28(B) 20 0020.txt CUSTODIAL AGREEMENT - GREENWICH ================================================================================ CUSTODIAL AGREEMENT --------------------------- Dated as of April ___, 2001 --------------------------- BNY MIDWEST TRUST COMPANY as Custodian UGLY DUCKLING CORPORATION, UGLY DUCKLING CAR SALES & FINANCE CORPORATION, UGLY DUCKLING CREDIT CORPORATION, UGLY DUCKLING CAR SALES, INC., UGLY DUCKLING CAR SALES FLORIDA, INC., and UGLY DUCKLING FINANCE CORPORATION as Borrower and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. as Lender ================================================================================
TABLE OF CONTENTS PAGE Section 1 Definitions and Accounting Matters.................................................................1 1.01 Certain Defined Terms.................................................................................1 1.02 Construction..........................................................................................6 Section 2 Delivery of Contract Delivery Documents by Borrower................................................6 2.01 Delivery of Contract Delivery Documents...............................................................6 2.02 Electronic Transmission of Contract Delivery Schedule.................................................7 2.03 Limited Exception for Applications for Title..........................................................7 Section 3 Trust Receipts and Exception Reports Issued by Custodian...........................................7 3.01 Receipt and Inspection of Contract Delivery Documents.................................................7 3.02 Delivery of Trust Receipt.............................................................................8 3.03 Delivery of Contract Summary Report...................................................................8 3.04 Cumulative Custodial Report...........................................................................8 3.05 Master Custodial Report and Master Exception Report...................................................8 3.06 Reliance by Lender Generally..........................................................................9 Section 4 Obligations of the Custodian.......................................................................9 Section 5 Release to Lender..................................................................................9 Section 6 Delivery to Servicer or Borrower...................................................................9 6.01 Copies of Contract Delivery Documents.................................................................9 6.02 Original Contract Delivery Documents.................................................................10 6.03 Lender Approval......................................................................................11 6.04 Return of Contract Delivery Documents................................................................11 6.05 Responsibility for Lost or Damaged Documents.........................................................11 Section 7 Fees of Custodian.................................................................................11 Section 8 Examination of Custodial Contract Files...........................................................11 Section 9 No Adverse Interest of Custodian..................................................................12 Section 10 Certain Matters Affecting the Custodian...........................................................12 10.01 Limitations on Duties................................................................................12 10.02 Acknowledgement of Sun Loan Agreement................................................................12 10.03 Limitations on Liability.............................................................................12 10.04 Reliance on Information..............................................................................12 10.05 Certification of Factual Matters.....................................................................13 10.06 Opinion of Counsel...................................................................................13 10.07 Indemnification by Borrower..........................................................................13 10.08 Not Required to Risk Funds...........................................................................13 10.09 Agents and Representatives...........................................................................14 10.10 Mergers and Consolidations...........................................................................14 Section 11 Termination.......................................................................................14 11.01 Termination by Lender or Custodian...................................................................14 11.02 Court Ordered Sale...................................................................................14 11.03 Custodial Agreement Termination......................................................................15 11.04 Failure to Appoint Successor Custodian...............................................................15 Section 12 Miscellaneous.....................................................................................15 12.01 Waiver...............................................................................................15 12.02 Counterparts.........................................................................................15 12.03 Governing Law........................................................................................15 12.04 Notices..............................................................................................15 12.05 Further Assurances...................................................................................16 12.06 Successors and Assigns...............................................................................16 12.07 Amendments...........................................................................................16 12.08 Headings.............................................................................................16
EXHIBITS Exhibit A.........Custodian Fee Schedule Exhibit B-1.......Request for Release and Receipt Exhibit B-2.......Schedule of Documents Exhibit C-1.......Officer's Certificate and Request for Release Exhibit B-2.......Schedule of Terminated Contracts Exhibit E.........Trust Receipt Exhibit E.........Review Criteria for Custodian Exhibit F.........Data Fields for Master Custodial Report Exhibit G.........Contract Summary Report Exhibit H.........Loan Agreement CUSTODIAL AGREEMENT This CUSTODIAL AGREEMENT ("Custodial Agreement") is entered into as of this __ day of April 2001, by and between BNY Midwest Trust Company, an Illinois corporation (the "Custodian"), Greenwich Capital Financial Products, Inc., a Delaware corporation (the "Lender"), Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling"), Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation ("UDCSFC"), Ugly Duckling Credit Corporation, an Arizona corporation ("UDCC"), Ugly Duckling Car Sales, Inc., an Arizona corporation ("Car Sales"), Ugly Duckling Car Sales Florida, Inc., a Florida corporation ("Car Sales Florida") and Ugly Duckling Finance Corporation, an Arizona corporation ("UDFC") (Ugly Duckling, UDCSFC, UDCC, Car Sales, Car Sales Florida and UDFC are collectively referred to herein as the "Borrower"; UDCC is sometimes referred to herein as the "Servicer"; and Car Sales and Car Sales Florida are sometimes referred to herein as the "Originators"). RECITALS The Borrower and the Lender are parties to that certain Master Loan and Security Agreement, dated as of April , 2001 (the "Loan Agreement"), a copy of which is attached hereto as Exhibit H. Pursuant to the Loan Agreement, the Lender will make loans to Borrower which loans will be secured by, among other things, Contract Delivery Documents. The Lender desires to have the Custodian take possession on behalf of and for the sole benefit of the Lender's security interest pursuant to the Loan Agreement, of the Contract Delivery Documents listed on the Contract Delivery Schedule delivered under this Custodial Agreement. AGREEMENT NOW, THEREFORE, in consideration of the mutual undertakings herein expressed, the parties hereto hereby agree as follows: Section 1 Definitions and Accounting Matters 1.01 Certain Defined Terms. Certain capitalized terms are used in this Custodial Agreement with the specific meanings defined below in this Section 1 or in other provisions of this Custodial Agreement. Capitalized terms used and not defined herein shall have the meanings assigned to such term in the Loan Agreement attached hereto as Exhibit G. All terms defined in this Section 1 or in other provisions of this Custodial Agreement in the singular shall have the same meanings when used in the plural and vice versa. "Acquired Contracts" shall have the meaning ascribed to such term in the Loan Agreement. "Affiliate" shall have the meaning ascribed to such term in the Loan Agreement. Page 1 "Application for Title" shall mean with respect to each Financed Vehicle, the application for a title submitted by the Originator (or in the case of Acquired Contracts, the selling Dealer) to the department of motor vehicles, or other appropriate government body of the state in which the Financed Vehicle is to be registered showing the Contract Debtor as owner, with either notation of the Borrower's first lien or such other status indicated thereon which is necessary to perfect Borrower's security interest in the Financed Vehicle as a first priority interest, and showing no other actual or possible lien interest in the Financed Vehicle. "Assignment" shall have the meaning ascribed to such term in the Loan Agreement. "Authorized Representative" shall mean each of one or more individuals so designated by the Lender in a written certificate signed by a Responsible Officer and delivered to the Custodian and setting forth such individuals specimen signature. From time to time, the Lender may, by delivering to the Custodian a written certificate signed by a Responsible Officer, change the individuals designated as Authorized Representatives, and the Custodian shall be entitled to rely conclusively on the then current certificate until receipt of a superseding certificate. The Authorized Representatives on the date hereof and until changed pursuant to this Custodial Agreement are set forth on Schedule 1 attached hereto. "Borrowing Base Inclusion Date" shall mean, with respect to a Pledged Contract, the first date on which the Borrower wishes to obtain an Advance from the Lender based on a Borrowing Base Certificate which includes such Pledged Contract as an Eligible Contract. "Business Day" shall mean any day other than (i) a Saturday or Sunday, or (ii) a day in which the New York Stock Exchange, the Federal Reserve Bank of New York or the Custodian is authorized or obligated by law or executive order to be closed. "Certificate of Title" shall have the meaning ascribed to such term in the Loan Agreement. "Charged-Off Contract" shall have the meaning ascribed to such term in the Loan Agreement. "Chase" shall have the meaning assigned to such term in Section 3.02 herein. "Contract" shall have the meaning ascribed to such term in the Loan Agreement. "Contract Debtor" shall have the meaning ascribed to such term in the Loan Agreement. "Contract Delivery Documents" shall mean the Contract and the Certificate of Title (or, to the extent provided in Section 2.03 hereof, a copy of an Application for Title) with respect to a certain Financed Vehicle. Page 2 "Contract Delivery Schedule" shall mean the list delivered to Custodian by Borrower with each group of Contract Delivery Documents delivered pursuant to Section 2.01 hereof, or delivered via facsimile or electronic mail pursuant to Section 2.02 hereof, which: (i) identifies each Contract Delivery Document and its constituent parts (e.g., Contract, Modification, Assignment, Certificate of Title or Application for Title if applicable); (ii) provides the following information with respect to each Contract in such group: the Contract or account number, the name of the Contract Debtor, the Contract date, the Principal Balance (determined with respect to each Contract as of the date on which such Contract was originated), the interest rate and the year, make, model (if available) and VIN of the Financed Vehicle, and (iii) shows the total number of Contracts being delivered. "Contract Summary Report" shall mean a certificate in the form of Exhibit G attached hereto signed by an officer of the Custodian and delivered to Chase and Lender pursuant to Section 3.03. Such certificate shall upon issuance become Exhibit A to the Trust Receipt and shall (i) state the total number of Pledged Contracts with respect to which the original Contract is in the possession of the Custodian or is outstanding pursuant to a Release Request and (ii) state the aggregate Principal Balance (determined with respect to each Contract as of the date on which such Contract was originated) of all Pledged Contracts in the possession of the Custodian, in each case, accurate as of 9:00 p.m. (eastern time) on the Business Day preceding the date of delivery and based on the information contained in the Cumulative Custodial Report as of such time on such preceding Business Day. "Cumulative Custodial Report" shall mean a listing maintained as current on a daily basis by the Custodian of all Pledged Contracts with respect to which any Contract Delivery Documents are then (w) in the possession of the Custodian pursuant to this Custodial Agreement, or (x) in the temporary possession of the Servicer or Borrower pursuant to Section 6 below, (y) including all of the fields set forth in Exhibit F for a Master Custodial Report and (z) a field that will indicate the absence of any Exception without further descriptive information (e.g., "Yes", indicating there are no Exceptions, or "No", indicating there are Exceptions). "Custodial Agreement" shall mean this Custodial Agreement as amended from time to time. "Custodial Contract Files" shall mean, with respect to a Contract, the Contract Delivery Documents and records pertaining thereto that are delivered to the Custodian. A "Custodial Delivery Failure" shall have arisen in the event that the Custodian fails to produce any Contract Delivery Document or any other document related to a Pledged Contract that was in the Custodian's possession pursuant to Section 2 and Section 3 within two (2) Business Days after delivery of a written request therefor by Lender in accordance with the terms and conditions of this Custodial Agreement and (i) the Custodian previously delivered to the Lender a Master Custodial Report and a Master Exception Report which did not list such document as an Exception and (ii) such document is not outstanding pursuant to a Release Request. "Dealer" shall have the meaning ascribed to such term in the Loan Agreement. Page 3 "Dollars" or "$" mean United States funds. An "Exception" shall have arisen with respect to a Pledged Contract and the related Contract Delivery Documents if, after the Custodian has performed its review procedures with respect to such Pledged Contract pursuant to Section 3.01 or Section 6.04, it has determined that (i) with respect to Pledged Contracts that were delivered as part of the Initial Pool, one or more of the statements specified in Part I of Exhibit E to this Custodial Agreement is not correct or (ii) with respect to all other Pledged Contracts, one or more of the statements specified in Part II of Exhibit E to this Custodial Agreement, is not correct or the Certificate of Title has not been delivered by the Title Delivery Date. With respect to a Pledged Contract, each incorrect statement or undelivered Certificate of Title shall be a separate Exception. "Event of Default" shall have the meaning ascribed to such term in the Loan Agreement. "Financed Vehicle" shall have the meaning ascribed to such term in the Loan Agreement. "GECC Custodian" shall have the meaning ascribed to "Custodian" in the GECC Custodian Agreement. "GECC Custodian Agreement" shall mean that certain Custodian Agreement dated as of May 29, 1998 by and among Ugly Duckling Corporation, a Delaware corporation, Duck Ventures, Inc., an Arizona corporation, Champion Acceptance Corporation, an Arizona corporation, Ugly Duckling Car Sales, Inc., an Arizona corporation, Champion Financial Services, Inc., an Arizona corporation, Ugly Duckling Car Sales Florida, Inc., a Florida corporation, Ugly Duckling Car Sales Texas, L.L.P., an Arizona limited liability partnership, Ugly Duckling Car Sales New Mexico, Inc., a New Mexico corporation, Ugly Duckling Car Sales Georgia, Inc., a Georgia corporation and Ugly Duckling Car Sales California, Inc., a California corporation and Harris Trust and Savings Bank, an Illinois corporation and General Electric Capital Corporation, a New York corporation. "Initial Pool" shall mean all Pledged Contracts previously in the possession of the GECC Custodian pursuant to the GECC Custodian Agreement and delivered to the Custodian by the GECC Custodian or the Borrower prior to the date of this Agreement. "Lender" shall have the meaning assigned thereto in the preamble hereto. "Loan Agreement" shall have the meaning assigned thereto in the recitals hereto. "Master Custodial Report" shall mean a listing maintained by the Custodian of all Pledged Contracts with respect to which (A) any Contract Delivery Documents are then (x) in the possession of the Custodian pursuant to this Custodial Agreement, or (y) in the temporary possession of the Servicer or Borrower pursuant to Section 6, which listing includes all Contract Delivery Documents delivered to date by the Borrower to the Custodian. Each Master Custodial Report shall be presented in computer-readable magnetic or other electronic format acceptable to Lender and shall incorporate fields for and displays for each Contract the information described in Exhibit F to this Custodial Agreement. Page 4 "Master Exception Report" shall mean, with respect to the Contracts listed on a Master Custodial Report, a report that identifies each Exception. "Modification" shall have the meaning ascribed to such term in the Loan Agreement. "Officer's Certificate re Terminated Contracts" shall have the meaning assigned to such term in Section 6.02(c) herein. "Originator" shall have the meaning ascribed to such term in the Loan Agreement. "Person" shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof). "Pledged Contract" shall have the meaning ascribed to such term in the Loan Agreement. "Principal Balance" shall have the meaning ascribed to such term in the Loan Agreement. "Proceeding" shall mean any bankruptcy, insolvency, or receivership proceeding. "Release Request" shall have the meaning assigned to such term in Section 6.02(b) herein. "Relevant Report" means each of the Master Custodial Report, the Master Exception Report and the Cumulative Custodial Report. "Responsible Officer" shall mean, as to any Person, the chief executive officer, any vice president, the chief financial officer or treasurer of such Person; provided, that in the event any such officer is unavailable at any time he or she is required to take any action hereunder, Responsible Officer shall mean any officer authorized to act on such officer's behalf as demonstrated by a certificate of corporate resolution. "Servicer" shall mean UDCC. "Subsidiary" shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person. Page 5 "Sun Loan Agreement" means that certain Senior Secured Loan Agreement dated as of January 11, 2001 among UDC, BNY Midwest Trust Company as Collateral Agent, and the lenders who are party thereto from time to time. "Terminated Contracts" shall mean a Contract that (i) is a Charged-Off Contract, (ii) has been paid in full, (iii) has been rescinded, (iv) is a Modification (reissued with a new Contract number), (v) has been cancelled due to a trade-in resulting in a new Contract, or (vi) for any other reason has terminated. "Title Delivery Date" shall have the meaning assigned to such term in Section 2.03. "Trust Receipt" shall mean, with respect to Pledged Contracts in the possession of the Custodian, a trust receipt in the form of Exhibit D to this Custodian Agreement. "Trust Receipt Exhibit A" shall have the meaning assigned to such term in Section 3.02. "VIN" shall mean vehicle identification number. 1.02 Construction. Except as otherwise explicitly specified to the contrary or unless the context clearly requires otherwise, (a) the capitalized term "Section" refers to sections of this Custodial Agreement, (b) the capitalized term "Exhibit" refers to exhibits to this Custodial Agreement, (c) references to a particular Section include all subsections thereof, (d) the word "including" shall be construed as "including without limitation", (e) references to a particular statute or regulation include all rules and regulations thereunder and any successor statute, regulation or rules, in each case as from time to time in effect, (f) references to a particular Person include such Person's successors and assigns to the extent not prohibited by this Custodial Agreement and the Loan Agreement, (g) references to "the date hereof" mean the date first set forth above. Section 2 Delivery of Contract Delivery Documents by Borrower. 2.01 Delivery of Contract Delivery Documents. The Borrower or the GECC Custodian, as applicable, shall deliver to the Custodian (i) prior to the initial Funding Date, all of the Contract Delivery Documents for the Initial Pool and all other Pledged Contracts that currently exist and (ii) from time to time, as Pledged Contracts are originated, the Contract Delivery Documents for Pledged Contracts originated after the initial delivery of Contract Delivery Documents, in each case to be held by the Custodian in accordance with the terms of this Custodial Agreement. With respect to any Pledged Contract delivered pursuant to clause (ii) above, the Borrower shall deliver the Contract Delivery Documents and a Contract Delivery Schedule to the Custodian via reputable overnight courier promptly after such Pledged Contract is originated, but in no event later than 11:00 a.m. (eastern time) on the date that is at least one (1) Business Day prior to the Borrowing Base Inclusion Date for such Pledged Contract. Page 6 2.02 Electronic Transmission of Contract Delivery Schedule. Not later than 10:00 p.m. (eastern time) on the date on which any Contract Delivery Documents are deposited with a reputable overnight courier for delivery to the Custodian, the Borrower shall transmit to the Custodian, via facsimile transmission or via electronic mail in an electronic format acceptable to the Custodian, a Contract Delivery Schedule itemizing each such Contract Delivery Document being so delivered, including any constituent parts thereof. 2.03 Limited Exception for Applications for Title. Without limitation of Section 2.01 hereof, with respect to each Pledged Contract, the Borrower shall deliver to the Custodian each of the related Contract Delivery Documents; provided, that if a Certificate of Title has not been issued with respect to a Financed Vehicle, then (i) Borrower shall provide the Custodian with a copy of an Application for Title and (ii) not later than the date (the "Title Delivery Date") that is 120 days after the origination date of such Pledged Contract, Borrower shall provide Custodian with such Certificate of Title. Section 3 Trust Receipts and Exception Reports Issued by Custodian. 3.01 Receipt and Inspection of Contract Delivery Documents. (a) Initial Pool. Upon receipt of the Initial Pool, the Custodian shall (i) establish a Custodial Contract File for each such Contract and (ii) promptly review the documents in each such Custodial Contract File in sufficient detail in order to (x) confirm receipt of each Contract Delivery Document, (y) make the certifications contained in the form of Trust Receipt and (z) determine whether each of the statements contained in Part I of Exhibit E to this Custodial Agreement with respect to each such Pledged Contract is correct. (b) Pledged Contracts not in Initial Pool. Upon receipt of Contract Delivery Documents from the Borrower with respect to any Pledged Contracts, the Custodian shall (i) establish a Custodial Contract File for each such Contract and (ii) promptly review the documents in each such Custodial Contract File in sufficient detail in order to (x) confirm receipt of each Contract Delivery Document listed on the Contract Delivery Schedule, (y) make the certifications contained in the form of Trust Receipt and (z) determine whether each of the statements contained in Part II of Exhibit E to this Custodial Agreement with respect to each such Pledged Contract is correct. (c) On the Title Delivery Date with respect to any Pledged Contract described in the proviso to Section 2.03, the Custodian shall determine whether it has received the related Certificate of Title and shall indicate or describe, as applicable, an Exception, if any, on the Relevant Reports. (d) Any Exception with respect to the Contract Delivery Documents, including without limitation an Exception pursuant to clause (z) of Sections 3.01(a) and 3.01(b) above, shall be described on the Master Exception Report and indicated, but not described, on the Cumulative Custodial Report and the Master Custodial Report as an Exception. Each Exception shall be indicated or described, as applicable, on each Relevant Report not later than 9:00 p.m. (eastern time) on the date on which the Custodian is required to perform the relevant review procedure under this Custodial Agreement. Page 7 3.02 Delivery of Trust Receipt. No later than 12 noon (eastern time) on the initial Funding Date, the Custodian shall deliver via facsimile or electronic mail transmission (i) to the Lender (telecopier number (203-618-2148) and the Borrower (telecopier number (602-852-6696) the Trust Receipt and a Master Exception Report with respect to such Pledged Contracts and (ii) to Chase Manhattan Bank, as agent for the Lender ("Chase"), (telecopier number (212-623-7299) a copy of the Trust Receipt. The original Trust Receipt shall be delivered to Chase at Four New York Plaza, Ground Floor, Outsourcing Department, New York, New York 10004, Attention: Jennifer John (telephone number 212-623-5953) for the account of Greenwich Capital Markets by overnight delivery using a nationally recognized insured overnight delivery service. The Trust Receipt shall at all times remain valid and in full force, and shall include as Exhibit A thereto the most current version of the Contract Summary Report theretofore delivered by the Custodian ("Trust Receipt Exhibit A"). The Custodian hereby authorizes Lender and its designees, including without limitation, Chase, to replace Trust Receipt Exhibit A from time to time with any Contract Summary Report delivered by Custodian after the date hereof, in accordance with Section 3.03. Upon replacement of Trust Receipt Exhibit A with an updated Contract Summary Report delivered pursuant to Section 3.03 by Lender or its designee, and without the need for any further action or authorization by Custodian, the Trust Receipt shall be deemed to include such updated Contract Summary Report and any other previously delivered Contract Summary Report shall be superceded. 3.03 Delivery of Contract Summary Report. On a daily basis not later than 10:00 a.m. (eastern time), the Custodian shall deliver via facsimile or electronic mail transmission to Chase (telecopier number (212-623-7299) and the Lender a Contract Summary Report. 3.04 Cumulative Custodial Report. The Cumulative Custodial Report shall be maintained at all times on a secured internet site to which the Lender and the Borrower have secure access and from which the Lender and the Borrower may print or download relevant information. The required information for each Contract for which Contract Delivery Documents are received pursuant to Section 3 or Section 6.04 herein or released pursuant to Section 6 herein by the Custodian shall be posted to the Cumulative Custodial Report not later than 9:00 p.m. (eastern time) on the day such Contract Delivery Documents are received by the Custodian. The Lender shall at all times be entitled to rely upon, and shall have the right, but not obligation, to confirm the accuracy of any information contained in the Cumulative Custodial Report, including without limitation by request of a Master Exception Report. The Custodian acknowledges that Lender will rely upon the Cumulative Custodial Report to confirm the Borrowing Base and to make Advances thereby, and hereby represents and warrants that the Cumulative Custodial Report shall at all times be accurate. 3.05 Master Custodial Report and Master Exception Report. (a) The Custodian shall generate and at all times maintain a Master Custodial Report and a Master Exception Report. Any and all Pledged Contracts delivered to the Custodian shall be included in the Master Custodial Report and the Master Exception Report. Page 8 (b) Within two (2) Business Days after (i) the end of each calendar month or (ii) any reasonable written request by the Lender, the Custodian shall deliver to the Lender and the Borrower a Master Custodial Report and a Master Exception Report. (c) The Custodian shall, on a daily basis and upon its receipt of any item listed on a Master Exception Report or otherwise missing from the Custodial Contract Files, update the Relevant Reports. 3.06 Reliance by Lender Generally. The Lender shall be entitled to rely upon, and shall have the right but not obligation to confirm, the accuracy of any Relevant Report or data file transmitted to Lender pursuant to this Section 3. Section 4 Obligations of the Custodian. With respect to all Contract Delivery Documents which are delivered to the Custodian or which come into the possession of the Custodian, the Custodian is the custodian for the Lender exclusively. Except as specifically provided in Section 5 and Section 6 hereof, the Custodian shall hold all Contract Delivery Documents received by it for the exclusive use and benefit of the Lender, and shall make disposition thereof only in accordance with this Custodial Agreement or otherwise pursuant to written instructions furnished by the Lender. The Custodian shall segregate and maintain continuous custody of all Contract Delivery Documents in secure and fireproof facilities in accordance with customary standards for such custody. The Custodian shall, at its own expense, maintain in full force and effect at all times during the existence of this Custodial Agreement (1) a fidelity bond, (2) theft of documents insurance, (3) forgery insurance, and (4) errors and omission insurance. All such insurance shall be with coverage and subject to deductibles as is standard and customary for insurance typically maintained by money center banks which act as custodians. The Custodian shall verify the existence of the Contract Delivery Documents and the information and the requirements set forth on Exhibit E and shall maintain such information current in each Relevant Report. The Custodian shall not be responsible to verify (i) the validity, legality, enforceability, sufficiency, due authorization or genuineness of any Contract Delivery Document, or (ii) the collectability, insurability, effectiveness or suitability of any Contract. Section 5 Release to Lender. Upon the written direction of an Authorized Representative of the Lender, and at the cost and expense of the Borrower, the Custodian shall, within two (2) Business Days of receipt of such written notice, deliver the specified Contract Delivery Documents to such person or other party designated by the Authorized Representative in such written direction, and to the place indicated in any such written direction; provided that originals of the Contract Delivery Documents will only be delivered to Lender after the occurrence of and during the continuation of an Event of Default or if Custodian has not performed its obligations hereunder. Section 6 Delivery to Servicer or Borrower. 6.01 Copies of Contract Delivery Documents. Upon the request of the Borrower, and at the cost and expense of the Borrower, the Custodian shall, within two (2) Business Days of the receipt of such request, provide Borrower with copies of any Contract Delivery Documents from the Custodial Contract Files which Borrower may request. Page 9 6.02 Original Contract Delivery Documents. (a) The Servicer or the Borrower may from time to time request delivery of any of the Contract Delivery Documents (i) to enforce or otherwise service and administer the Contracts on behalf of the Borrower and for the benefit of the Lender or (ii) to take such actions as are necessary or appropriate for Terminated Contracts. Subject to the provisions of Section 6.03 below, the Custodian shall, within two (2) Business Days of the receipt of such written request pursuant to Section 6.02(b) or Section 6.02(c) (including Lender approval if required pursuant to Section 6.03), deliver to the requestor the requested Contract Delivery Documents. (b) If the Servicer or the Borrower requested possession of any Contract Delivery Documents pursuant to clause (i) of Section 6.02(a), then the Servicer or the Borrower so requesting possession of the Contract Delivery Documents shall provide the Custodian with a written request describing the Contract Delivery Documents requested and the reason for the request. Such written request shall be in the form of the Request for Release and Receipt (the "Release Request") attached hereto as Exhibit B-1. If the Contract Delivery Documents requested by the Servicer or the Borrower pursuant to this Section 6.02(b) on any given date involves an aggregate number of Pledged Contracts which exceeds fifty (50) Pledged Contracts, the approval of the Lender pursuant to Section 6.03 below is required. Subject to the provisions of Section 6.03 below, the Custodian shall, within two (2) Business Days of the receipt of such Release Request (including Lender approval if required), deliver to the requestor the requested Contract Delivery Documents set forth on the Schedule of Documents, in the form attached hereto as Exhibit B-2, which shall be attached to the Release Request. The requestor, upon release by the Custodian of the requested Contract Delivery Documents, shall hold such documents in trust for the benefit of the Lender and shall return such Contract Documents to the Custodian pursuant to the requirements of Section 6.04. (c) If Contract Delivery Documents are being requested by the Servicer or the Borrower pursuant to clause (ii) of Section 6.02(a) because such Contracts are Terminated Contracts, such request shall be made on the Officer's Certificate re Terminated Contracts (the "Officer's Certificate re Terminated Contracts") in the form of Exhibit C-1 attached hereto, certifying that all amounts required to be paid and delivered to the Lender pursuant to the Loan Agreement with respect to such Contract have been paid and delivered and listing the Terminated Contracts so requested on the Schedule of Terminated Contracts in the form attached hereto as Exhibit C-2. Subject to the provisions of Section 6.03 below, the Custodian shall, within two (2) Business Days of the receipt of such Officer's Certificate re Terminated Contracts (which must include Lender approval of such request), deliver to the requestor the requested Contract Delivery Documents for the Contracts set forth on the Schedule of Terminated Contracts, which shall be attached to the Officer's Certificate re Terminated Contracts. The Officer's Certificate re Terminated Contracts shall be subject to approval of the Lender pursuant to Section 6.03. (d) If Contract Delivery Documents that are released pursuant to Section 6.02(b) above become Terminated Contracts while in the possession of the Servicer or the Borrower, the Servicer or Borrower, as applicable, shall within one (1) Business Day of such Contract becoming a Terminated Contract transmit an Officer's Certificate re Terminated Contracts to the Lender for approval pursuant to Section 6.03. Page 10 6.03 Lender Approval. If the approval of the Lender is required pursuant to Section 6.02(b), Section 6.02(c) or Section 6.02(d), Lender shall review, and if Lender shall approve such request, execute and return to the Custodian such Release Request or Officer's Certificate re Terminated Contracts, as applicable, within one (1) Business Day of receipt thereof. If such Release Request or Officer's Certificate re Terminated Contracts, as applicable, is not approved for any reason in Lender's sole discretion, the Lender shall promptly notify the requestor. The Custodian shall not release any such documents until such time as the Lender shall have delivered to the Custodian the Release Request or Officer's Certificate re Terminated Contracts, as applicable, approved by the Lender. Nothing in this Section 6 or in the approval by the Lender for the Custodian to release any Contact Delivery Document, including without limitation the Terminated Contracts that are the subject of any Officer's Certificate re Terminated Contracts, shall be interpreted or construed to be, (i) a waiver of any rights the Lender may have pursuant to this Custodial Agreement or the Loan Agreement, (ii) an acknowledgement that any or all amounts that are required to be paid to the Lender with respect to such Contracts pursuant to the Loan Agreement have been paid or (iii) an accord and satisfaction of any debt or obligation of the Borrower pursuant to the Loan Agreement. 6.04 Return of Contract Delivery Documents. The Servicer or Borrower, as applicable, shall return each Contract Delivery Document which it has received pursuant to a Release Request to the Custodian promptly after the need for such Contract Delivery Document has abated, but in no event more than (A) for original Contracts, ten (10) days or (B) for Certificates of Title or Applications for Title, ninety (90) days, in each case, after the date such Contract Delivery Document is released to the requestor. The Custodian shall promptly review such returned Contract Delivery Documents to confirm the Contract Delivery Document (i) has been physically returned, (ii) is not damaged and (iii) has no new Exceptions. If satisfied that the Contract Delivery Documents have been physically returned in undamaged condition and without new Exceptions, the Custodian shall deliver to the Servicer or Borrower, as applicable, (with a copy to the Lender) the counter-signed Release Request for such documents indicating receipt. If new Exceptions have been created, the Custodian shall so annotate the Request for Release accordingly and shall (i) promptly notify the Lender of the Exception, (ii) prior to 9:00 p.m. (eastern time) on the return date update the Relevant Reports to include such Exception. 6.05 Responsibility for Lost or Damaged Documents. The Borrower or Servicer requesting the release of Contract Delivery Documents shall be responsible for such Contract Delivery Documents from the time such documents are deposited by the Custodian with a nationally recognized insured overnight delivery service for delivery to the requestor until the documents are returned to the Custodian, verified as physically returned in undamaged condition and without new Exceptions pursuant to Section 6.04, and receipted as received by the Custodian. Section 7 Fees of Custodian. The Custodian shall charge such fees for its services under this Custodial Agreement as are set forth in the schedule attached hereto as Exhibit A, the payment of which fees, together with the Custodian's reasonable and customary expenses (including legal fees and expenses) in connection herewith, shall be the obligation of the Borrower. Section 8 Examination of Custodial Contract Files. Upon two (2) Business Days prior written notice to the Custodian, the Borrower and Lender and their respective agents, accountants, attorneys and auditors shall be permitted during normal business hours to examine the Custodial Contract Files and any documents, records and other papers in the possession of or under the control of the Custodian relating to any or all of the Contract Delivery Documents, which are, or were at any time, subject to this Custodial Agreement. Page 11 Section 9 No Adverse Interest of Custodian. By execution of this Custodial Agreement, the Custodian, in its capacity as custodian and not in its individual capacity, represents, warrants and covenants that it currently holds, and during the existence of this Custodial Agreement shall hold, no interest adverse to the Lender or to any Borrower by way of security or otherwise, in any Contract Delivery Documents held by it as of the date hereof or to be held by it pursuant to this Custodial Agreement. The Custodian, in its capacity as custodian under the terms of this Custodial Agreement and not in its individual capacity, also agrees that it will not, and hereby waives any right to, exercise any right of setoff or counterclaim in respect of any lien, statutory or otherwise, against the Lender, its parent, Subsidiaries, or Affiliates, or against any Borrower, its Subsidiaries or Affiliates. Section 10 Certain Matters Affecting the Custodian. 10.01 Limitations on Duties. The Custodian undertakes to perform such duties and only such duties as are specifically set forth in this Custodial Agreement. The Custodian shall not have any duties or responsibilities except those expressly set forth in this Custodial Agreement or be a trustee for or have any fiduciary obligation to any party hereto. 10.02 Acknowledgement of Sun Loan Agreement. The Custodian acknowledges that, in addition to holding the Contract Delivery Documents for the exclusive benefit of Lender and to perfect Lender's security interest therein, Custodian is also holding the Contract Delivery Documents, subject to the perfected first priority security interest of the Lender in such Contract Delivery Documents, in the capacity of the Collateral Agent (as defined in the Sun Loan Agreement) on behalf of the lenders party to and pursuant to the Sun Loan Agreement to perfect such Collateral Agent's and lenders' junior subordinated security interest in the Contract Delivery Documents. The Custodian agrees that it shall act at the sole direction of and for the exclusive benefit of the Lender, and shall take no action pursuant to the direction of the junior lenders or pursuant to the Custodian's duty as Collateral Agent without the written consent of the Lender, until such time as this Custodial Agreement is terminated (i) pursuant to Section 11.01 (A) by the Lender, or (B) by the Custodian with the Lender's consent, or (ii) pursuant to Section 11.03. 10.03 Limitations on Liability. Neither the Custodian nor any of its directors, officers, agents or employees, shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith in good faith and believed by it or them to be within the purview of this Custodial Agreement, except for its or their own negligence, lack of good faith or willful misconduct. The Custodian acknowledges and agrees that a Custodian Delivery Failure shall be prima facie evidence of negligence. 10.04 Reliance on Information. In the absence of bad faith on the part of the Custodian, the Custodian may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any request, instruction, certificate, opinion or other document furnished to the Custodian, reasonably believed by the Custodian to be genuine and to have been signed or presented by the proper party or parties and conforming to the requirements of this Custodial Agreement, but in the case of any loan document or other written request, instruction, document or certificate which by any provision hereof is specifically required to be furnished to the Custodian, the Custodian shall be under a duty to examine the same to determine whether or not it conforms to the requirements of this Custodial Agreement. Page 12 10.05 Certification of Factual Matters. Whenever in the administration of the provisions of this Custodial Agreement the Custodian shall deem it necessary or desirable that a factual matter (e.g., date of contract origination, or loss or damage to a document released pursuant to Section 6 above) be proved or established prior to taking or suffering any action to be taken hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or a lack of good faith on the part of the Custodian, be deemed to be conclusively proved and established by a certificate signed by one of the Borrower or the Lender's officers, as the case may be, and delivered to the Custodian, and such certificate, in the absence of negligence or a lack of good faith on the part of the Custodian, shall be full warrant to the Custodian for any action taken, suffered or omitted by it under the provisions of this Custodial Agreement upon the faith thereof; provided that nothing in any such certificate signed by an officer of the Borrower or Lender and delivered pursuant to this Section 10.05 shall (i) modify, amend or supplement, and shall not be interpreted or construed to modify, amend or supplement, any provision of this Custodial Agreement or (ii) provide, or be interpreted or construed to provide, authorization to act in contravention of any provision of this Custodial Agreement. 10.06 Opinion of Counsel. The Custodian may consult with outside legal counsel and the advice given in any written legal opinion of such outside legal counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such written legal opinion of outside legal counsel. 10.07 Indemnification by Borrower. Except to the extent the Custodian has been indemnified by another party and except to the extent provided for in Section 7 hereof, the Borrower agrees to indemnify and hold the Custodian, and its officers, directors, employees and agents harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, payments, costs or expenses (including reasonable legal fees and costs) of any kind or nature whatsoever (except losses arising out of or from its pricing for the services to be rendered for the fees described in Section 7) that may be imposed on, incurred or asserted against the Custodian in any way relating to or arising out of this Custodial Agreement; provided, however, that the Custodian shall not be entitled to indemnification for any portion of any such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, payments, costs or expenses due to the willful misconduct, lack of good faith or negligence of the Custodian. 10.08 Not Required to Risk Funds. None of the provisions of this Custodial Agreement shall require the Custodian to risk its own funds or otherwise to incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or indemnity satisfactory to the Custodian against such risk or liability is not assured to the Custodian; provided that the Custodian shall provide Lender with prompt written notice when the Custodian reasonably believes the Custodian is about to be at risk pursuant to this Section 10.08; and provided further that in the event of Proceedings by the Borrower, the Custodian shall not be relieved of its obligations or responsibilities pursuant to this Custodial Agreement. Page 13 10.09 Agents and Representatives. The Custodian may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees appointed with due care; provided, however, the Custodian shall at all times retain liability for the acts of its agents, attorneys, custodians or nominees so appointed as though the Custodian had performed such duties. 10.10 Mergers and Consolidations. Any corporation into which the Custodian may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Custodian shall be a party, or any corporation succeeding to the business of the Custodian shall be the successor of the Custodian hereunder without the execution or filing or any paper with any party hereto or any further act on the part of any of the parties hereto except where an instrument of transfer or assignment is required by law to effect such succession; provided, that the Custodian shall provide the Lender and the Borrower with prior notice of such merger, conversion or consolidation. Section 11 Termination. 11.01 Termination by Lender or Custodian. The Lender, with or without cause, may upon at least thirty (30) days' notice, remove and discharge the Custodian from the performance of its duties under this Custodial Agreement by written notice from the Lender to the Custodian, with a copy to Borrower. The Custodian may terminate its obligations under this Custodial Agreement upon at least one-hundred and twenty (120) days' prior written notice to the Lender. In the event of any such termination by the Custodian or the Lender, other than a termination of this Custodial Agreement by the Lender pursuant to a court ordered sale of the Contract Delivery Documents, the Lender shall appoint a successor custodian; provided that if and only if the Borrower is not in Default and no Event of Default shall have occurred and be continuing, such successor Custodian shall be subject to approval by the Borrower, which approval shall not be unreasonably withheld. Upon such appointment, the Custodian shall promptly transfer to the successor custodian, as directed in writing by the Lender, all Custodial Contract Files being held under this Custodial Agreement, together with a copy of its records with respect to all Custodial Contract Files at any time held by the Custodian pursuant to this Custodial Agreement, and shall cooperate with the successor custodian in connection with such transfer. In the event of any such appointment, the Borrowers shall be responsible for the reasonable and customary fees and expenses of any successor custodian. 11.02 Court Ordered Sale. In the event of the termination of this Custodial Agreement by the Lender pursuant to a court ordered sale of the Contract Delivery Documents, the Custodian shall promptly deliver, as directed by the Lender in writing, all Custodial Contract Files being held pursuant to this Custodial Agreement, together with a copy of its records with respect to all Custodial Contract Files at any time held by the Custodian pursuant to this Custodial Agreement. The termination of the Custodian's obligations under this Custodial Agreement shall not be effective unless and until the Custodian has completed the transfer to the successor custodian, or as directed by the Lender pursuant to this Section 11.02, of all Custodial Contract Files being held by the Custodian pursuant to this Custodial Agreement. Page 14 11.03 Custodial Agreement Termination. Unless otherwise terminated in accordance with this Section 11, this Custodial Agreement shall terminate upon certification by the Lender to the Custodian of (i) the payment of all amounts owing pursuant to the Loan Agreement or (ii) in the event of any Borrower's default under the Loan Agreement, the final payment or other liquidation of the last Contract Delivery Document outstanding or the disposition of all property acquired upon repossession of property relating to any Contract Delivery Document, and the final remittance of all funds due the Lender under any agreement entered into with respect to any Contract Delivery Document. In such event, all documents remaining in the Custodial Contract Files shall be released in accordance with the written instructions of the Lender. 11.04 Failure to Appoint Successor Custodian. In the event that (i) this Custodial Agreement is terminated by the Lender or the Custodian pursuant to Section 11.01 and (ii) the Lender shall fail to (a) appoint a successor custodian, and (b) notify the Custodian in writing of such appointment within sixty (60) days of such termination, the Custodian may, at Lender's expense, petition a court of competent jurisdiction for its removal as custodian and for the termination of its obligations hereunder. Section 12 Miscellaneous. 12.01 Waiver. No failure on the part of the any party hereto to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Loan Document (as defined in the Loan Agreement) or this Custodial Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Loan Document or this Custodial Agreement preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 12.02 Counterparts. This Custodial Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Custodial Agreement by signing any such counterpart. This Custodial Agreement may be signed and delivered through facsimile signatures which shall operate as true and effective signatures of the person who executed the original of the facsimile transmission 12.03 Governing Law. This Custodial Agreement shall be construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereto shall be determined in accordance with such laws. 12.04 Notices. Except as otherwise expressly permitted by this Custodial Agreement, all notices, requests and other communications provided for herein (including, without limitation, any modifications of, or waivers, requests or consents under, this Custodial Agreement) shall be given or made in writing (including, without limitation, by telex or telecopy) delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party. Except as otherwise provided in this Custodial Agreement (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex or telecopier or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. Page 15 12.05 Further Assurances. From time to time, as and when requested in writing by any party hereto and at such party's expense, any other party shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions as such other party may reasonably deem necessary or desirable to evidence and effectuate the transactions contemplated by this Custodial Agreement. 12.06 Successors and Assigns. This Custodial Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided, however, that the Custodian shall not assign its rights or obligations hereunder without the prior written consent of the Lender and the Borrower. 12.07 Amendments. Except as otherwise expressly provided in this Custodial Agreement, any provision of this Custodial Agreement may be amended, modified or supplemented only by an instrument in writing signed by the Custodian, the Borrower, the Servicer and the Lender; provided that no certificate or other document delivered pursuant to Section 10.05 shall modify, amend or supplement, and shall not be interpreted or construed to modify, amend or supplement, any provision of this Custodial Agreement. 12.08 Headings. The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Loan Agreement. * * * * * Page 16 IN WITNESS WHEREOF, the Custodian, the Lender, the Borrower and the Servicer have caused their names to be duly signed hereto by their respective officers thereunto duly authorized, all as of the date first above written. Custodian: BNY MIDWEST TRUST COMPANY By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: ------------------- BNY Midwest Trust Company 2 North LaSalle, Lower Level Chicago, Illinois 60602 Attention: Diane Moser Telecopier No.: (312) 827-8588 Telephone No.: (312) 827-8680 Lender GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Ira J. Platt Telecopier No.: (203) 618-2135 Telephone No.: (203) 625-2700 With a copy to: -------------------- 600 Steamboat Road Greenwich, Connecticut 06830 Attention: General Counsel Telecopier No.: (203) 618-2132 Telephone No.: (203) 625-2700 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower: UGLY DUCKLING CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 Borrower: UGLY DUCKLING CAR SALES & FINANCE CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower and Servicer: UGLY DUCKLING CREDIT CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 Borrower: UGLY DUCKLING CAR SALES, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 [Continuation of Master Loan and Security Agreement Signature Pages] Borrower: UGLY DUCKLING CAR SALES FLORIDA, INC. By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 UGLY DUCKLING FINANCE CORPORATION By: _________________________________ Name: _______________________________ Title: ______________________________ Address for Notices: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: Treasurer Telecopier No.: (602) 852-6696 Telephone No.: (602) 852-6600 With a copy to: -------------------- 2525 East Camelback Road, Suite 500 Phoenix, Arizona 85016 Attention: General Counsel Telecopier No.: (602) 852-6686 Telephone No.: (602) 852-6000 SCHEDULE 1 AUTHORIZED REPRESENTATIVES Name of Authorized Representative Specimen Signature 1. Joseph Bartolotta 1. ____________________________ 2. David Katze 2. ____________________________ 3. Brett Kibbe 3. ____________________________ 4. Kathleen O'Connor 4. ____________________________ EXHIBIT A Custodian Fee Schedule Dated March 26, 2001 1. One-Time Acceptance Fee:............................. $2,000.00 2. Review Fee:.......................................... $2.00 per file 3. Release Fee:......................................... $2.50 per file 4. Annual Safekeeping Fee:.............................. $1.00 per file 5. File Redeposits:..................................... $0.50 per file 6. Trailing Documents:.................................. $0.50 per occurrence 7. Photocopying of Documents:........................... $0.20 per page 8. File Organization/Resorting:......................... $0.25 per file 9. Preparation of File Folders:......................... $0.50 per file 10. Facilities Used by Third Party:...................... $25.00 per hour (1) [FN] (1) This fee is per hour, and per person. There is a maximum of 6 persons including Auditors, Attorneys, Bond Insurers, Servicers, etc. Out of Pocket Expenses Fees quoted do not include any out-of-pocket expenses including, but not limited to travel, overnight courier, and messenger costs. These expenses will be billed, at the Custodian's cost, when incurred. In the event the transaction terminates before closing, all out-of-pocket expenses incurred, including the Custodian's counsel fees, if applicable will be billed to the Borrower. External Counsel Fees Fees quoted do not include external counsel fees. A bill for counsel fees incurred up to closing will be presented for payment on the closing date. Miscellaneous Services The charges for performing services not contemplated at the time of the execution of the Custodial Agreement and not specifically covered elsewhere in this Exhibit A will be reasonable and customary charges determined by the Custodian and the Borrower at the time of the service. Files reviewed under this schedule which are subsequently securitized will only be charged a subsequent review fee of $0.50 per file. EXHIBIT B-1 REQUEST FOR RELEASE AND RECEIPT Date: ______________________________ Reference is made to (i) that certain Custodial Agreement, dated as of April ___, 2001 (as amended from time to time, the "Custodial Agreement") by and between BNY Midwest Trust Company (the "Custodian") and Greenwich Capital Financial Products, Inc. (the "Lender") and Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling"), Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation ("UDCSFC"), Ugly Duckling Credit Corporation, an Arizona corporation ("UDCC"), Ugly Duckling Car Sales, Inc., an Arizona corporation ("Car Sales"), Ugly Duckling Car Sales Florida, Inc., a Florida corporation ("Car Sales Florida") and Ugly Duckling Finance Corporation, an Arizona corporation ("UDFC") (Ugly Duckling, UDCSFC, UDCC, Car Sales, Car Sales Florida and UDFC are collectively referred to therein as the "Borrower"; UDCC is sometimes referred to therein as the "Servicer") and to (ii) that certain Loan and Security Agreement dated as of April ___, 2001 by and between the Borrower and the Lender (as amended from time to time, the "Loan Agreement"). Capitalized terms used but not defined herein shall have the meaning ascribed to such term in the Custodial Agreement, or if not defined in the Custodial Agreement, the Loan Agreement. The undersigned is a Person authorized pursuant to Section 6 of the Custodial Agreement to receive Contract Delivery Documents in trust from the Custodian and hereby acknowledges receipt from the Custodian of the Contract Delivery Documents set forth on the attached Schedule of Documents. The undersigned acknowledges that possession of such Contract Delivery Documents is entrusted to the Borrower solely for the purpose described on the Schedule of Documents or an attachment thereto. The total number of Contracts for which Contract Delivery Documents are being requested is __________________ and Lender approval [is / is not] required. The undersigned hereby acknowledges that a first priority security interest pursuant to the Uniform Commercial Code in the Collateral described and in the proceeds of such Collateral has been granted to the Lender pursuant to the Loan Agreement. In consideration of the aforesaid delivery by the Custodian, the Borrower hereby agrees to hold said Collateral in trust for the Lender as provided under and in accordance with all provisions of the Custodial Agreement and the Loan Agreement and to return said Collateral to the Custodian no later than the close of business (6:00 p.m. eastern time) on the tenth day following the date hereof or, if such date is not a Business Day, on the immediately succeeding Business Day. NAME OF DUCK ENTITY: By: Name: Title: [Lender approval, if required, and Custodian return receipt are on the following page] This page contains the Lender Approval (if required) and Custodian receipt for the Request for Release dated _______________ ____, 200__. If more than 50 Contracts, release approved by: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. By: Name: Title: Date: Documents returned to Custodian: -------------------------------- Date: BNY MIDWEST TRUST COMPANY Received By: Name: Title: EXHIBIT B-2
SCHEDULE OF DOCUMENTS TO REQUEST FOR RELEASE AND RECEIPT Page ___ of ___ - ---------- --------- ---------------------- ---------------- -------------- ----------------------------------------- Reason Contract or Principal Contract Delivery Document Requested No. Code Contract Debtor Loan Balance at (See Name Number origination below) of Contract - ---------- --------- ---------------------- ---------------- -------------- ----------------------------------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- Pledged Certificate Application Contract of Title for Title - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - 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---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- - ---------- --------- ---------------------- ---------------- -------------- -------------- ------------ ------------- Reason for Requesting File (insert one in the "Reason Code" box above) "C"......Correction of Contract Delivery Document deficiencies. "S"......Contract Delivery Document required for servicing or administration. "O"......Other (attach written explanation).
EXHIBIT C-1 OFFICER'S CERTIFICATE RE TERMINATED CONTRACTS Reference is made to (i) that certain Custodial Agreement, dated as of April ___, 2001 (as amended from time to time, the "Custodial Agreement") by and between BNY Midwest Trust Company (the "Custodian") and Greenwich Capital Financial Products, Inc. (the "Lender") and Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling"), Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation ("UDCSFC"), Ugly Duckling Credit Corporation, an Arizona corporation ("UDCC"), Ugly Duckling Car Sales, Inc., an Arizona corporation ("Car Sales"), Ugly Duckling Car Sales Florida, Inc., a Florida corporation ("Car Sales Florida") and Ugly Duckling Finance Corporation, an Arizona corporation ("UDFC") (Ugly Duckling, UDCSFC, UDCC, Car Sales, Car Sales Florida and UDFC are collectively referred to therein as the "Borrower"; UDCC is sometimes referred to therein as the "Servicer") and to (ii) that certain Loan and Security Agreement dated as of April ___, 2001 by and between the Borrower and the Lender (as amended from time to time, the "Loan Agreement"). Capitalized terms used but not defined herein shall have the meaning ascribed to such term in the Custodial Agreement, or if not defined in the Custodial Agreement, the Loan Agreement. The undersigned, ___________________________, hereby certifies that he is a duly-elected and qualified officer of the Servicer, and hereby further certifies as follows: Each of the Contracts described on the attached Schedule of Terminated Contracts is a Contract that (i) is a Charged-Off Contract, (ii) has been paid in full, (iii) has been rescinded, (iv) is a Modification (reissued with a new Contract number), (v) cancelled due to a trade-in resulting in a new Contract, (vi) for any other reason results in the termination of the Contract or the creation of a new Contract, and in each case all amounts that are required to be paid to the Lender pursuant to the Loan Agreement with respect to each such Contract have been so paid. IN WITNESS WHEREOF, I have hereunto set my hand on and as of this _____ day of _______________________ 200_. UGLY DUCKLING CREDIT CORPORATION, an Arizona corporation, as Servicer By: Name: Title: [Lender approval is on the following page] This page contains the Lender approval for the Officer's Certificate re Terminated Contracts dated as of _______________ ____, 200___. Release of Contract Delivery Documents approved, without acknowledgement of payment, by: GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. By: Name: Title: Date:
EXHIBIT C-2 SCHEDULE OF TERMINATED CONTRACTS TO OFFICER'S CERTIFICATE re TERMINATED CONTRACTS DATED __________ __, 200_ Page ___ of ___ --------- -------- ------------------------------- ----------------------------- ------------------------------ Reason No. Code Contract Debtor Contract or Loan Principal Balance at (See Name Number origination of Contract below) --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ --------- -------- ------------------------------- ----------------------------- ------------------------------ Reason for Terminated Contract (insert one in the "Reason Code" box above) "CO" Charged-Off Contract. "PF" Paid in full. "RS" Rescission. "M" Modified and reissued. "T" Trade-in. "O" Other (attach written explanation).
EXHIBIT D TRUST RECEIPT April __, 2001 Greenwich Capital Financial Products, Inc. 600 Steamboat Road Greenwich, CT 06830 Attention: Asset-Backed Operations Re: Custodial Agreement dated as of April ___, 2001 by and between BNY Midwest Trust Company, as Custodian, Ugly Duckling Corporation, Ugly Duckling Car Sales & Finance Corporation, Ugly Duckling Credit Corporation, Ugly Duckling Car Sales, Inc., Ugly Duckling Car Sales Florida, Inc., and Ugly Duckling Finance Corporation, as Borrower and Greenwich Capital Financial Products, Inc., as Lender Ladies and Gentlemen: In accordance with the provisions of Section 3.02 of the above-referenced Custodial Agreement (capitalized terms used and not defined herein shall have the meaning they are given therein), the undersigned, as Custodian, hereby certifies that it has received and will maintain possession of, for the sole and exclusive benefit of Lender, Custodial Contract Files with respect to (i) the number of Contracts and (ii) having an aggregate Principal Balance (determined with respect to each Contract as of the date on which such Contract was originated), in each case, as set forth in the Contract Summary Report attached hereto as Trust Receipt Exhibit A. The Custodian hereby authorizes Lender and its designees, including without limitation, The Chase Manhattan Bank ("Chase"), from time to time to replace the Contract Summary Report theretofore attached hereto as Trust Receipt Exhibit A with the most recent Contract Summary Report delivered by Custodian, in accordance with Section 3.02 and Section 3.03 of the Custodial Agreement. Upon replacement of Exhibit A with an updated Contract Summary Report by Custodian, and without the need for any further action or authorization by Custodian, this Trust Receipt shall be deemed to include such updated Contract Summary Report. BNY Midwest Trust Company, as Custodian, makes no representations as to (i) the validity, legality, enforceability, sufficiency, due authorization or genuineness of any of the Custodial Contract Files, or (ii) the collectibility, insurability, effectiveness or suitability of any such Custodial Contract Files. BNY MIDWEST TRUST COMPANY, as Custodian By:_________________________________ Name:_______________________________ Title:______________________________ EXHIBIT E REVIEW CRITERIA FOR CUSTODIAN PART I With respect to each Pledged Contract that is part of the Initial Pool, the Custodian shall review the documents and files described below to confirm that each of the following statements is true: 1. The related Custodial Contract File includes each of the following documents: a. the original Contract b. the original or a copy of the Assignment (if applicable) c. the original or a copy of the Modification (if applicable) d. on the date of initial delivery of such Custodial Contract File, either the original Certificate of Title or a copy of the Application for Title 2. All Contract Delivery Documents have been reviewed by the Custodian and appear regular on their face. 3. The Contract bears an original manual ink signature of the Contract Debtor. 4. Each Pledged Contract: a. has the Regulation Z Box fully completed b. bears the assignment to Lender stamped on its face (if applicable) 5. Verify the obligor's name and loan number in the Pledged Contract against the related Contract Delivery Schedule. PART II With respect to each Pledged Contract that is not part of the Initial Pool, the Custodian shall review the documents and files described below to confirm whether or not each of the following statements is true: 1. The related Custodial Contract File includes each of the following documents: a. the original Contract b. the original or a copy of the Assignment (if applicable) c. the original or a copy of the Modification (if applicable) d. on the date of initial delivery of such Custodial Contract File, either the original Certificate of Title or a copy of the Application for Title e. on and after the date which is 120 days from the Contract origination date, the original Certificate of Title 2. All Contract Delivery Documents have been reviewed by the Custodian and appear regular on their face. 3. The following items set forth in the original executed Contract agree with the data fields contained in the applicable Contract Delivery Schedule: a. Contract Debtor name b. Contract or account number c. Contract date d. VIN e. year f. make g. model (where model is available on the applicable Contract Delivery Schedule) h. Principal Balance (determined with respect to each Contract as of the date on which such Contract was originated) i. interest rate (within an accepted variance of plus or minus 0.01%) 4. The Contract bears an original manual ink signature of the Contract Debtor. 5. The Modification, if any, bears an original manual ink signature or a facsimile transmitted signature of the Contract Debtor. 6. The Modification, if any, conforms to the data fields contained in the Contract Delivery Schedule: a. Contract Debtor name b. Contract or account number c. Contract date 7. The Certificate of Title, at such time as received by the Custodian, agrees with the following data fields specified in the applicable Contract Delivery Schedule: a. Contract Debtor name b. VIN c. year d. make e. model (where model is available on the data file) f. Lender g. Lien position 8. The Application of Title, if delivered in lieu of the Certificate of Title, agrees with the following data fields specified in the applicable Contract Delivery Schedule: a. Contract Debtor name b. VIN c. year d. make e. model (where model is available on the data file) f. Lender EXHIBIT F DATA FIELDS FOR MASTER CUSTODIAL REPORT 1. Contract account number; 2. name of the Contract Debtor; 3. Principal Balance (determined with respect to each Contract as of the date on which such Contract was originated); 4. indication as to the delivery status of the Contract and Certificate of Title (or if applicable the Application for Title); 5. any other information reasonably requested by the Lender. EXHIBIT G CONTRACT SUMMARY REPORT _______________, 200__ TRANSMITTED VIA TELECOPIER Chase Manhattan Bank (as Agent for Lender) Greenwich Capital Financial Products Attention: Jennifer John Inc., (Lender) Four New York Plaza, Ground Floor 600 Steamboat Road Outsourcing Department Greenwich, CT 06830 New York, New York 10004 Attention: ____________________ Telephone number: 203-623-5953 Telephone number: 212-618-2700 Telecopier number: 203-623-5953 Telecopier number: 212-623-2135 Ladies and Gentlemen: Reference is made to (i) that certain Custodial Agreement, dated as of April ___, 2001 (as amended from time to time, the "Custodial Agreement") by and between BNY Midwest Trust Company (the "Custodian") and Greenwich Capital Financial Products, Inc. (the "Lender") and Ugly Duckling Corporation, a Delaware corporation ("Ugly Duckling"), Ugly Duckling Car Sales and Finance Corporation, an Arizona corporation ("UDCSFC"), Ugly Duckling Credit Corporation, an Arizona corporation ("UDCC"), Ugly Duckling Car Sales, Inc., an Arizona corporation ("Car Sales"), Ugly Duckling Car Sales Florida, Inc., a Florida corporation ("Car Sales Florida") and Ugly Duckling Finance Corporation, an Arizona corporation ("UDFC") (Ugly Duckling, UDCSFC, UDCC, Car Sales, Car Sales Florida and UDFC are collectively referred to therein as the "Borrower"; UDCC is sometimes referred to therein as the "Servicer") and to (ii) that certain Loan and Security Agreement dated as of April ___, 2001 by and between the Borrower and the Lender (as amended from time to time, the "Loan Agreement"). Capitalized terms used but not defined herein shall have the meaning ascribed to such term in the Custodial Agreement, or if not defined in the Custodial Agreement, the Loan Agreement. The undersigned, ___________________________, hereby certifies that he or she is a duly-elected and qualified officer of the Custodian, and hereby further certifies as follows: The total number of Pledged Contracts in the possession of the Custodian is __________. The aggregate Principal Balance (determined with respect to each Contract as of the date on which such Contract was originated) of all Pledged Contracts in the possession of the Custodian is $-----------------------------. BNY Midwest Trust Company, as Custodian, represents and warrants to the addressees that the above information is current as of 9:00 p.m. (eastern time) on the Business Day prior to the delivery of this Contract Summary Report. BNY MIDWEST TRUST COMPANY, as Custodian By:________________________________________ Name: Title: EXHIBIT H A COPY OF THE LOAN AGREEMENT FOLLOWS THIS PAGE. EX-23.1 21 0021.txt CONSENT OF KPMG LLP INDEPENDENT AUDITORS' CONSENT The Board of Directors Ugly Duckling Corporation: We consent to the incorporation by reference in the registration statements of Ugly Duckling Corporation and Subsidiaries on Form S-3 (File No. 333-90041) filed as of November 1, 1999; Form S-3 (File No. 333-31531) filed as of July 18, 1997, as amended by pre-effective amendment No. 1 to Form S-3 filed as of July 30, 1997; Form S-3 (File No. 333-22237) filed as post-effective amendment No. 2 to Form S-3 as of July 18, 1997; Form S-8 (File No. 333-32313) for Ugly Duckling Corporation Long-Term Incentive Plan filed as of July 29, 1997; Form S-8 (File No. 333-08457) for Ugly Duckling Corporation Long-Term Incentive Plan filed as of July 19, 1996; Form S-8 (File No. 333-06615) for Ugly Duckling Corporation Director Incentive Plan filed as of June 21, 1996; and Form S-8 (File No. 333-72717) for Ugly Duckling Corporation 1998 Executive Incentive Plan filed as of February 22, 1999, of our report dated February 16, 2001, except as to the third and fourth paragraphs of Note (8) and the second paragraph of Note (18) to the Consolidated Financial Statements which are as of April 12, 2001, relating to the consolidated balance sheets of Ugly Duckling Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000, annual report on Form 10-K of Ugly Duckling Corporation and Subsidiaries. /s/ KPMG LLP ---------------------------------- Phoenix, Arizona April 17, 2001 EX-24.1 22 0022.txt SPECIAL POWER OF ATTORNEY - ERNEST GARCIA II SPECIAL POWER OF ATTORNEY The undersigned constitutes and appoints Jon Ehlinger his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, for filing with the Securities and Exchange Commission by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, 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 all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATED: March 30, 2001 /S/ ERNEST C. GARCIA II -------------------------------- Ernest C. Garcia II STATE OF _______________ ) ) County of ______________ ) On this ____ day of _________, 2001, before me, the undersigned Notary Public, personally appeared Ernest C. Garcia II, known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. -------------------------------- Notary Public My commission expires: EX-24.2 23 0023.txt SPECIAL POWER OF ATTORNEY SPECIAL POWER OF ATTORNEY The undersigned constitutes and appoints Jon Ehlinger his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, for filing with the Securities and Exchange Commission by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, 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 all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATED: , 2001 /S/ CHRISTOPHER JENNINGS -------------------------------- Christopher D. Jennings STATE OF _______________ ) ) County of ______________ ) On this ____ day of _________, 2001, before me, the undersigned Notary Public, personally appeared Christopher D. Jennings, known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. -------------------------------- Notary Public My commission expires: EX-24.3 24 0024.txt SPECIAL POWER OF ATTORNEY-JOHN MACDONOUGH SPECIAL POWER OF ATTORNEY The undersigned constitutes and appoints Jon Ehlinger his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, for filing with the Securities and Exchange Commission by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, 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 all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATED: April 16, 2001 /S/ JOHN N. MACDONOUGH -------------------------------- John N. MacDonough STATE OF _______________ ) ) County of ______________ ) On this ____ day of _________, 2001, before me, the undersigned Notary Public, personally appeared John N. MacDonough, known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. -------------------------------- Notary Public My commission expires: EX-24.4 25 0025.txt SPECIAL POWER OF ATTORNEY - FRANK WILLEY SPECIAL POWER OF ATTORNEY The undersigned constitutes and appoints Jon Ehlinger his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, for filing with the Securities and Exchange Commission by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, 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 all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATED: March 29, 2001 /S/ FRANK P. WILLEY -------------------------------- Frank P. Willey STATE OF _______________ ) ) County of ______________ ) On this ____ day of _________, 2001, before me, the undersigned Notary Public, personally appeared Frank P. Willey, known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. -------------------------------- Notary Public My commission expires: EX-24.5 26 0026.txt SPECIAL POWER OF ATTORNEY - GREGORY SULLIVAN SPECIAL POWER OF ATTORNEY The undersigned constitutes and appoints Jon Ehlinger his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, for filing with the Securities and Exchange Commission by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, 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 all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATED: April 05, 2001 /S/ GREGORY B. SULLIVAN -------------------------------- Gregory B. Sullivan STATE OF _______________ ) ) County of ______________ ) On this ____ day of _________, 2001, before me, the undersigned Notary Public, personally appeared Gregory B. Sullivan , known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. -------------------------------- Notary Public My commission expires: EX-24.6 27 0027.txt SPECIAL POWER OF ATTORNEY - GREGORY KILFOYLE SPECIAL POWER OF ATTORNEY The undersigned constitutes and appoints Jon Ehlinger his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the fiscal year ended December 31, 2000, for filing with the Securities and Exchange Commission by Ugly Duckling Corporation, a Delaware corporation, together with any and all amendments to such Form 10-K, and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting to such attorneys-in-fact and agents, and each of them, 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 all that such attorneys-in-fact and agents, or each of them, may lawfully do or cause to be done by virtue hereof. DATED: March 29, 2001 /S/ GREGORY S. KILFOYLE -------------------------------- Gregory S. Kilfoyle STATE OF _______________ ) ) County of ______________ ) On this ____ day of _________, 2001, before me, the undersigned Notary Public, personally appeared Gregory S. Kilfoyle, known to me to be the person whose name is subscribed to the within instrument and acknowledged that he executed the same for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. -------------------------------- Notary Public My commission expires: EX-27 28 0028.txt FINANCIAL DATA SCHEDULE
5 0001012704 Ugly Duckling Corp. 1,000 12-MOS DEC-31-2000 JAN-1-2000 DEC-31-2000 8,805 0 600,169 99,700 63,742 0 60,806 22,127 652,121 496,721 0 0 0 133,628 21,772 652,121 483,282 604,856 268,248 0 143,208 141,971 36,161 15,268 6,205 9,063 0 0 0 9,063 0.67 0.67
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